Monday, May 30, 2011

- Anthony's Weiner?

I've described Anthony Weiner as the biggest Jerk in congress. That's a bold statement given the running, but I'm convinced he deserves it. This past week, the twitter account of the congressman from NY sent a lewd photo of male genitalia to a young college coed.

The congressman's reaction when the photo became public was to declare it a hacker who sent the photo, and to lawyer up instantly. Hardly a position that inspires confidence if you ask me... especially from an erected elected official. Next we'll probably be hearing about his wide stance.

When I originally learned that the congressman was a heterosexual, I was genuinely surprised. This would certainly seem to confirm it. And with just a little luck, this sordid story will play out in a way that spares the rest of us having to put up with the pecker-head in congress. No one this obnoxious should ever be in a position of authority.

Thursday, May 26, 2011

- Making Financial Collapse Mandatory

I had a very interesting discussion yesterday with the head of risk management at a major international investment bank. Among the various things we talked about was the foolhardiness of how the new banking regulations are being structured. In one particularly noteworthy example, he was explaining to me the Fed’s plan for regulating ‘Sharpe ratios’ for all registered money managers and bank prop trading units.

For those of you who don’t know, a Sharpe ratio is supposed to describe a portfolio’s market risk in a standardized way. It is essentially the returns of the portfolio over time, minus a risk free rate, divided by the standard deviation of the return series. What you get is a metric which is supposed to describe the ‘unit risk’ of a portfolio, and over time, of the strategy by which it was generated.

That’s all very wonky so let me abbreviate it. If your P&L goes up every single day and doesn’t wiggle around very much, then you’ll have a low standard deviation, and a high Sharpe ratio. If it goes up two days and then down one day in a repeating pattern, the standard deviation will be higher, and the Sharpe ratio lower. If it goes down 2 days of every three, then your return will be low, and your Sharpe even lower.

The conventional wisdom has been that if you have a Sharpe ratio above one, then you are providing a higher return for each unit of risk and are ‘outperforming’ the market on a risk adjusted basis. But if you have a Sharpe ratio below one, then you are underperforming. And the Fed in its infinite wisdom, is planning to limit risk by examining Sharpe ratios. Their thinking is people with high Sharpe ratios are less risky, and therefore justify more leverage.

But there is a serious problem with this. You can artificially increase your Sharpe ratio by selling ‘implied optionally’. In fact, for strategies with a holding period longer than 1 day (it’s a little different for High Frequency strategies) virtually every strategy with a Sharpe ratio above 2.5 or so will almost certainly be using implied optionally. And what’s even worse – since you don’t actually have to trade options to embed implied optionally, it’s very likely that the managers involved don’t even realize it.

The technical term is ‘selling volatility’. When you sell volatility, you’re getting paid a tiny bit every day in exchange for what may amount to a much steeper than average loss on very rare occasions. The classic analogy for this is ‘picking up pennies in front of the steam roller’. Strategies which have very high Sharpe ratios will almost always be engaging in that practice, and it always ends the same way. Things will be going fine - making a lot of money, and then one day the loss will be 150% (or more… maybe MUCH more) of all the money that’s been made to date, in a single catastrophic loss.

So if the Fed is planning to grant more risk and more leverage to those strategies with high Sharpe ratios, they are doing the exact opposite of what they should be. They are using the new ‘rush to regulate’ and a lack of understanding of how the statistics of finance really work to make the next catastrophic market collapse absolutely certain.

It’s as if they’re building a house, and rather than using sand to lay the foundation they’re using something more solid and less likely to shift around…. they’re using TNT. This is the pure pretense of knowledge. Regulators believe that the Sharpe ratio tells them something about risk that it doesn’t actually tell them, and in response they do exactly the wrong thing.

What’s worse, there is only so much information in the market, and all professional investors look at that same information. So you can bet that whether they realize it or not, they’re almost certainly all investing in the same sorts of things. That greatly increases the odds that a catastrophic loss for one will be very likely be a catastrophic loss for all.

The Stat Arb collapse in 2007 was an excellent example of that. Statistical Arbitrage had demonstrated huge returns over the prior decade greatly outperforming the market. The standard deviation of their returns was tiny and their Sharpe ratios very high. Then on three days in September 2007, virtually every Stat Arb unit in the world began taking massive losses – some giving back an entire decade’s worth of gains in a single day.

The problem was that there was an implied correlation between these strategies. Every firm with a Stat Arb unit hired the same geniuses, trained in the same schools and in the same disciplines. They all performed similar analysis, or at least an analysis which led them to the same conclusions. And when it fell apart for one, it fell apart for all of them.

If the Fed is going to regulate Sharpe ratios in the manner that was described to me, then this is what they should expect going forward. Everything will seem fine until the next crisis occurs, and then the dominoes they’ve set up with this new regulation will bring everything down around us. Regulation like this won’t prevent the next crisis, it will be absolutely ensuring it.

Tuesday, May 24, 2011

- Limosine Liberalism At Work

As a metaphor for government central planning, it's hard to get better than this.

(For the record - I posted this 4 hours before 'The Derb' posted it in the corner. I'm not above stealing content - but in this case I didn't. )

Monday, May 23, 2011

- What do you call 5 million Jews...

What do you call 5 million Jews living inside Arab artillery range? If you're Barak Obama, you apparently call it 'a good start'. That's what a return to the 'pre-67' borders would mean to Israel, and it's also why they won't consider it - no matter who demands it. Bibi Netanyahu (thankfully) is no Barak Obama. And he'll see to it that Israelis remain as safe as he can make them. No delusional 'talk' from Obama is going to change that.

Obama is an academic, and I mean that with all the inherent incompetence, self congratulation, and delusional arrogance that it implies. The academic leftist view has always been that the reason there is no peace in the middle east is because of the Jews. Israel has adopted a winning strategy, so according to the leftist worldview, it's they who must be willing to sacrifice to make things whole. Personally, I think that's nuts.

My dad reminded me of a story recently that happened when I was 13 years old. I came home one day all banged up and bruised. When he demanded to know what happened, I told him that a bunch of kids were making fun of my friend Mark for being Jewish, so I got in a fight. The fight was a draw as I recall, but that didn't matter to my dad.

According to my dad's value system, winning or losing the fight didn't matter nearly as much as the willingness to get into it in the first place. In his view, nothing was more important than a willingness to put yourself in harms way for people you care about. It meant that you honor them and deserve their affection - that you're worthy of it. So in the intervening 30 (something) years, he's told that story with great pride to hundreds of people.

So if I'm typical of free market conservatives (and in many ways I think I am) then how can American Jewry support Barak Obama? On one hand they have friends who will be willing to place themselves in harms way for the sake of their friendship, and on the other hand they have an academic who seems to believe that the problem with Israel, is that it's full of Jews.

I hope they remember all this come the election.


you know it's bad when Democrat activists have to come out and say stuff like this:

"We cannot allow Israel to become a wedge issue that divides our community and dilutes its strength"

Yes - American Jews should never allow the fact that one of our two political parties is demanding that Israel return to totally indefensible borders in exchange for absolutely nothing from a group that has Israel's abolition as it's founding principle, be a wedge issue.

"We cannot allow the politics of the moment to distract us and to interfere with our success," warned Solow.

This is the global politics version of the Timothy Treadwell story. Over time, you would think guys like this would simply be eaten by the bears.

Saturday, May 21, 2011

- Not Quite The End...

I haven't checked with any of my evangelical friends yet so I'm not absolutely sure... but it looks like the reports of the rapture due today were slightly exaggerated.

I guess I had better pay that cell phone bill after all.

Friday, May 20, 2011

- Don't Raise The Debt Ceiling: Part 2

More and more I like the idea of not raising the debt ceiling. I like it financially and I like it politically. If congress leaves the debt ceiling where it is, then assuming that Obama is responsible enough to continue to make debt payments, we’re talking about roughly a 29% across the board cut in spending. That’s steep and would no doubt hurt, but it wouldn’t be the end of us.

So long as Obama gives every indication that he is going to continue to make our debt payments, the markets will probably like it. It would put a real floor under Treasuries and very likely push rates lower as supply rolls off. But even more important, it would then be a real rate, not the ‘pretend rate’ we’ve been seeing since the start of QE. And with that, prudent companies will show better results than imprudent ones and the market can begin to reward winners and punsh losers - instead of the other way around.

Since the start of QE, equity implied correlation has been at historic levels, and credit upgrades and downgrades have been ignored completely by the market. That means the the difference between a good company, and a bad one was considered irrelevant and the market treated all of them the same. The only thing that mattered was their relationship to the S&P index, and how much money they could get from Washington. It made the value of the dollar the principle risk in stocks, and that overshadowed any difference between companies.

But capping the supply of Treasures would increase the effectiveness of every dollar printed by the Fed. They could get more accomplished with less - substantially reducing the risk of hyperinflation.

It would in effect turn off the treadmill, so the markets can begin to act rationally again. The need for further QE will be greatly diminished, and even if it is needed again, the amount required would be a fraction of what it is now to achieve the same effect. In fact, the effect of a Treasury supply freeze that would come with keeping the debt ceiling might be so pronounced, that the fed may be able to keep the same target rate while actually removing liquidity. Market volatility will go up a little, but so long as Obama acts like an adult, it won’t be enough to cause concern. In short, the markets will be healthier.

Meanwhile down in ‘rainbow and unicorn land’ in DC, Obama will be the one who is forced to decide what is cut and what isn’t. This will give a real window into what actually is an ‘essential’ government service and what is not. Maybe that means the Whitehouse will try to cut all of the money out of the defense department, but there will be serious political consequences to something as irresponsible as that. And DC republicans can simply stand back and say that they trust Democrats to act responsibly and make these decisions on their own - and then force them to live with it at election time.

Keep in mind, I’m not some breathless activist with ammo and MRE’s in my basement hoping the reports of the rapture are true. I’m a professional investor with 21 years experience. I don’t get my ideas from talk radio; the guys on talk radio get their economic ideas from guys like me. And if I'm not seriously worried about a default then the rest of the market won't be either. The more I think about what will happen if the debt ceiling isn’t raised the more I like the idea.

It won’t solve all out problems, and it will create quite a few. But the problems it will create are the same as those that are created for a college kid when their parents cut up their credit card. And I think Washington Democrats can do with a few problems like those. They’ll survive it, and so will we. It won’t be the end of everything.

And the markets will not react as badly as the folks in the media and the Democrat pitch men would have you believe. Until Obama and the Democrats decide that it's more important to provide a windmill subsidy than it is to keep our triple A credit rating, the markets will not rebel at this. Unless you believe that Obama and the Democrats are prepared to blow it all up, (and take 100% of the blame for it) you should support the idea of leaving the debt ceiling where it is.

I really think we should do it. Let’s leave the debt ceiling where it is, and watch the squirming as Democrats try to figure out how to find the money. Lets see how many Muslim outreach programs, illegal alien healthcare proposals, and rodeo cowboy festivals are essential then.

So long as you believe that DC Democrats are both competent enough and responsible enough, then you should support leaving the debt ceiling where it is.

Thursday, May 19, 2011

- NRO Is Now "Anti - Gun" ??!!!

Frankly I’m speechless. I feel like I’ve stepped through the looking glass into an alternate universe. In this world (apparently) Rush Limbaugh is arguing for massively increased entitlements, Mark Levin is known for his soft spoken sweetness and National Review is a publication that supports using regulatory loopholes to abolish our constitutionally protected rights.

Today, Clifford D. May is offering an endorsement of a piece of anti-gun legislation that Frank Lautenberg has been shopping around for years.
As you can imagine – this has blown me away.

Lautenberg, as you almost certainly know, is one of the most reliably anti-gun legislators in Washington. He’s a big proponent of restricting the right to keep and bear arms whenever and wherever it’s possible. And his latest gimmick for meeting that goal has been a bill that will deny the right to purchase a firearm for anyone on the ‘terrorist watch list’. There will be no due process involved. If you are so much as ‘suspected’ of being a terrorist, you are put on the list and your rights will be immediately suspended.

In anti-gun states we are very much accustomed to using the bureaucracy to restrict rights. The procedural ban on concealed carry permits in NJ (Frank Lautenberg’s home state) is an excellent example. There is no law against concealed carry in NJ… that would be unconstitutional. But NJ hasn’t issued even a single permit to a private citizen in over 25 years. Anti-gun pols have arranged the process for issuing permits around a procedural loophole that achieves the goal they want without having to endure the burdensome process of doing so under the law.

If this bill were enacted, I have little doubt that the number of suspected Terrorists in NJ and other anti-gun states will skyrocket. Even me, a married, middle aged, prosperous, professional, Irish American from a family with a long military history, will no doubt be suspected of something. I have several guns after all – and if you ask my more liberal neighbors, that alone should make me immediately suspect. It won't matter if I'm a terrorist, only that I'm 'suspected'. So when they lob an accusation my way and my name is put on the list, my rights will be immediately forfeit.

That Lautenberg offers an idea like this should surprise no one. He’s anti gun now, he has been anti-gun in the past and he will no doubt remain devoutly anti-gun in the future. It’s never really been about public safety for a guy like Lautenberg. The latest data says that his regulatory ideas don’t increase public safety anyway. For him, it’s always been about control. A disarmed populace can be commanded, while an armed populace cannot. That was always his real agenda.

But that National Review could sign on to such an idea is absolutely shocking to me.

No one is perfect. Errors in critical thinking do occur sometimes, and being journalists – the staff at NRO is certainly not exempt from them. But this seems like a big one to me. It’s equivalent would be supporting Nancy Pelosi’s defense department proposals, or Maxine Water’s economic ideas. Given Lautenberg’s long and unapologetic anti-gun history, you would think they’d see this coming.

It’s certainly not the job of the NRO staff to keep someone like me happy. I’m an NRA member, but I don’t work for any political organization at all. I’m just a guy who lives in a radically anti-gun state, who enjoys sport shooting and hunting as a hobby. So although I may not be ‘important’ I think I am typical of a portion of NRO and National Review readers. And having them come out in favor of restricting the second amendment absent due process feels like a real betrayal to me.

The world will still turn on it’s axis I suppose. But that they produce a piece like this totally unchallenged will definitely color my views of the publication going forward.

- An Argument For Not Raising The Debt Ceiling

I’ve been very busy the last few days so I haven’t been able to research these numbers, but if you’ll forgive the unconfirmed ‘back of the envelope’ estimates, I have an interesting idea to put up.

There is no doubt whatsoever that federal tax revenues for next year will be more than enough to cover all of our interest payments on our federal debt. There will also be enough left afterward to cover a substantial portion of our federal operating budget for 2012. How much? I’m not sure. A number I heard in conversation yesterday was something like 72% of the operating budget.

Frankly that sounds high to me – but if it’s true, (maybe one of you guys can research this) then that means that a failure to increase the debt ceiling would amount to an immediate across the board spending cut of 28% for every portion of the federal government. It would then be up to the Whitehouse to decide whether they would like to ‘risk the full faith and credit’ of the United States by defaulting on a debt payment, or live within it’s means and cope with the cuts.

Since the Democrats want to spend considerably MORE next year than they did this year, this will be presented as the end of civilization as we know it – in fact it already is. But to me a 28% cut, while dramatic, does not seem catastrophic at all. Mind you – this is a REAL cut, not a reduction in projected increases which is what they typically refer to as ‘savings’ in Washington.

So the question then is not whether the republicans are willing to risk the ‘full faith and credit’ of the US where the debt ceiling is concerned, but whether Obama and the Democrats are willing to do so. Obama wants to reinvent America as a top down, command and control bastion of federally mandated fairness regulation. So to him a default might be just the thing to usher in a new era. But if it goes that way, there won’t be any question of who is to blame.

Like I said, these numbers may be way off. But even if it's only enough to cover 50% of the operating budget, that seems like a harsh but survivable number to me. (Maybe not for the SEIU - but certainly for the rest of us.)

And when I think of it that way, I think Republicans can starch their shorts and stand a little tougher. The base assumption that the federal government is not only entitled to a huge slice of GDP in the form of taxes today, but is also entitled an even bigger slice of future GDP in the form of an annual debt increase, is just ridiculous.


After getting a little feedback I can see that I really need to restate this a bit more clearly. This isn't a complex thing. It doesn't include projections that extend out into the far future, or estimates from the heritage foundation. It doesn't include debates about tax policy, entitlements, medicare or demographics.

In fact, it's really quite simple. If our debt ceiling is not raised, then the changes that MUST then take place will amount to the same as (roughly) a 28% cut in real federal spending. If Obama and his team will not agree to something in advance then we can compel them by law. The gun in this debate is against the Democrat skull - not the other way around.

That's it. That's the worst case. There will be no debt default. There will be no collapse. There will be no apocalypse, no Thunderdome, no dogs and cats living together. Our federal spending will be cut, but civilization will not end.

Obama and the Democrat party are nothing if not irresponsible, so in theory they could cut 28% of the budget from the defense department. But there will be real consequences to actions like that, and in my opinion, they won't survive it.

That's it. That's my whole point. Making it any more complex than that only advances the interests of the Democrats.

Wednesday, May 18, 2011

- Thin Skinned Obama, Part: 274,462,311,011

This story blows me away.
In my lifetime no candidate has been more coddled and supported by the media than Barak H. Obama. I think you can make the case that the only reason he was elected at all was because of the refusal of the news media to properly report on his radical background, or if they did, to misrepresent it as moderate and centrist. In my opinion, no elected official has gained more of a benefit from media bias than Obama, so naturally it's he who is complaining most loudly about it.

I had my issues with George Bush like most of the people I know. But he absolutely handled the unrepentant abuse he recieved from the mainstream media with the kind of grace befitting the office of the president. In the meantime Obama starts acting petulant every time the press acts like anything buy bobby-soxers at an Elvis concert.

What a thin skinned loser.

Tuesday, May 17, 2011

- That Sure Didn't Take Long...

After his attack on what he saw as 'right wing social engineering' of Paul Ryan's medicare proposals, New Gignrich has his Howard Dean-esque 'EAAYYAAHHGG' moment.

After this rattles around a bit and becomes the prevailing wisdom, I think it will be the end of Newt as a candidate. He wasn't going to win anyway. Now I think there is a real question about how much he can influence the debate as well.

- Where The Money Is...

Another Thomas Sowell Interview. I was going to wait until they released the whole series, but this section is simply too good to wait. I'll repost it all together after.

The TV series Free To Choose changed America because it educated tons of people about how the Economy really works. I always thought it would be great if Tom Sowell did a similar TV piece on Racism and race relation in America. He may lack Milton Friedman's elven charm, but his depth of knowledge on the topic is really beyond dispute.

In a format similar to FTC he can do a little demonstration of how racism has really worked historically, and then he and Walter Williams can smack around people like Spike Lee, Jesse Jackson, and whatever rapper du jour is making the headlines baling 'the man'.

You can't tell me that wouldn't be a ratings grabber for PBS. Unfortunately it will never happen because it would tear apart one of (if not 'the') central premise of liberalism - that the winners have won only because of systemic unfairness, and the losers must have more government to 'fix' things.

It's a shame though. It would make great TV and maybe change American for the better. Too bad that's not what TV news is about.

Sunday, May 15, 2011

- Newt Out-Unicorn's Obama

Newt Gingrich is not going to be the next President, but don’t try telling him that. Just as you would expect from a stalwart Republican, he’s tacking hard to the left because he thinks they’ll be some advantage to him personally in going that direction. On meet the press Sunday he took the position that the best way to prevent Medicare form collapsing under its own ridiculously bloated weight (and taking the rest of the country with it) is to ‘begin a national conversation’ on the subject.

This is just the type of empty platitude that the press loves repeating when Obama says it, so I’m sure they’ll love that he and Newt are on the same page. But all that ‘national conversation’ really is, is a way for Newt to evade the same tough questions that Obama has been evading for three years now. This shameful display is really just a reminder that the people who brought you John McCain as the Republican Party candidate, are still very much alive, well, and pulling strings in Washington.

In my mind the Tea Party is the last best hope for America. And they represent the only vision for the future where America can really survive over the long term. The Democrat plan of free rainbows and unicorns for everyone has already been demonstrated as a disaster. And the classic Republican plan of subsidized Rainbows and low priced unicorns won’t work either.

They have a chance to make elections about principle again… but they had better get to it. More and more this looks to me like the same old D.C. song and dance. They say Cortez burned his boats in the new world to ensure his people fought for victory instead of focusing on retreat. Well if Newt is any indication, the Tea Party folks better get to setting a few Republican boats alight because as soon as the Republican party tacks to the left this election is lost, and America may very well be lost with it. I'm not sure we can survive another 4 years of Obama. (We might not survive anyway - but that certainly won't help.)

The Republican party will not be able to out-unicorn Obama, and if they try, they’ll lose. That’s what McCain did, and it looks like exactly what Newt is trying to do.

- The Shining City Grows Dark...

I’ve recently been thinking that we aren’t going over a fiscal waterfall after all; that is to say, we won’t end up with the Western world in ashes all around us while Tina Turner and her cohorts make us duke it out for fresh water and dog stew in the thunderdome. But I’d be lying if I didn’t notice that we’re at least going in that direction. And one very important way that the west is falling apart is what I think is best described by the way we are prepared to ignore the rule of law.

Eminent domain is an excellent example of this. The law was interpreted carefully and with regard to all prior statutes, but it still resulted in the destruction of the sanctity of private property. Now we can only own real estate so long as there is no one else with better political connections who wants to own it too. If there is, then they simply use the government to seize the property, and out the door you go.

Another good example of this would be the [fictitious if you ask me] debt ceiling. Congress passed the law limiting the amount of debt the federal government can issue. But when we hit that limit, the Treasury kept right on issuing debt anyway. There is no punishment for it and no penalty. The law is simply ignored – at least until congress can get together on a plan to raise the limit again.

The Obamacare waivers being issued to every Tom, Dick And Harry with a union card is another excellent example. The law applies to 100% of the people - except those people who have strong union ties and can get their reps to DC to beg for a waiver. And an even worse example is the story of how the NLRB is trying to prevent Boeing from creating thousands of new jobs in 'union - unfriendly" South Carolina and to force them to move their factory to Washington State instead, where the unions can use the local law to greater increase their roles.

Over and over again, the politically connected are subject to one set of laws and regulation, and the private citizen is forced to endure a much harsher brand of justice.

Now there is this:
Overturning a common law dating back to the English Magna Carta of 1215, the Indiana Supreme Court ruled Thursday that Hoosiers have no right to resist unlawful police entry into their homes.

In a 3-2 decision, Justice Steven David writing for the court said if a police officer wants to enter a home for any reason or no reason at all, a homeowner cannot do anything to block the officer's entry.

"We believe ... a right to resist an unlawful police entry into a home is against public policy and is incompatible with modern Fourth Amendment jurisprudence," David said.

The constitution is the highest law in the land, and it used to be that it restricted what government can do to its citizens not the other way around. But these days ‘simplistic’ ideas like that are being tossed out for what academics would call a more ‘nuanced’ view of the authority of government.

To me, it just looks like a light going out and the darkness descending. So much for the shining city on the hill.

Thursday, May 12, 2011

- My Problem With Romney

The thing that Mitt Romney's health-care position reminds me of the most,
is Rudy Giuliani's position on guns. When he was running for President, Rudy said that the strictest gun control laws in the nation were a great idea as far as New York was concerned, but he would never support those ideas for the broader nation. This was obvious pandering to an electorate who wasn't nearly as stupid as he thought they were.

Romney is doing the same thing with Romneycare - his Obamacare like health-care system that was enacted in Massachusetts while he was governor. Some consultant somewhere told him that he doesn't dare admit he was wrong about it, and he's listening because he wants to be President. He really wants it. He can feel it in his bones. He imagines what he'd look like being sworn in. He see's his portrait hanging on the wall beside Reagan and Kennedy. More than anything else, he desperately wants to write his name in the ledger of history.

What this tells me about a man is that his highest principle is to tell the public exactly what he thinks they want to hear. In effect, it means that he wants power and he's prepared to say (and probably do) anything he has to in order to get it. No one who demonstrates such craven-ness should ever be allowed to serve in public office. We shouldn't be electing men like that, we should be shunning them from public life - regardless of the party they say the represent. They really only represent themselves. And I don't think this country can afford that kind of populist egotism right now.

I don't know Mitt Romney personally, but I know many people who do. And they all say that he's not really like that. Fair enough, but I have to trust my own lying eyes before the assessment of others. If he quacks like a duck....etc. And it sure seems like he's quacking to me.

Personally, I think the only thing the political right can do to lose this election is offer America another milquetoast liberal in a conservative suit like John McCain. To my eyes, Romney would meet that test. I'd rather see almost anyone else as the candidate. And if you ask me, I think I'm going to get my wish.

- Be Prepared...

Stock up on that 7.62x39 ammo, because it's Zombie awareness Month.

- Until The End Of The World

I had dinner Tuesday with a good friend – a titan of the energy trading business who I've known since those ancient days when we were on the JPMorgan commodities desk together. Commodity guys are a pessimistic bunch, and he’s as convinced as ever that the whole thing is going to go pear shaped. So he was making the argument that we (personally) need to come up with solutions today to address our needs of the future.

He was suggesting that he and I go in together on a tenant farm. We’ll buy a few hundred acres of central Pennsylvania or Virginia or the Carolinas, build a few small houses on one corner, and lease the rest out to a local farmer to make it productive. This is one of the better ideas I’ve heard for the ‘bolt hole’ as “the Derb” put it. But I don’t think it’s a genuinely workable plan.

Sure we can buy a farm, and maybe even find someone to farm it. But if things go the way he imagines and we have to flee suburbia for our lives, who’s to say our ‘tenant’ will give a hoot what we claim we own? More than likely he’ll meet us at the gates with a few dozen of his buddys and their father’s duck hunting guns to tell us to scram. But even if he didn’t, it’s tough to imagine he’ll continue to pay us for the privilege of performing the world’s one truly indispensable service.

I’m no farmer, and neither is my buddy. I know a fair amount about animal husbandry, and might make a middling rancher. But there isn’t a lot of very productive ranch land in the mid-Atlantic area. I can do carpentry, and can make a pretty clean weld – but these are hardly unique skills in rural America. I know a fair amount about gunsmithing too, but to do that right you need a well put together machine shop. So unless the need for commodity traders skyrockets after the collapse – I can’t see how being in a rural area where no one knows us will help us keep body and soul together.

Besides, the fact of the matter is, I’m not at all sure the world will end. There is that old joke about how Economists have successfully predicted 8 of the last 5 market crashes. Well I think we’re all expecting a failure of the west, when the west is actually much more durable than it seems. Our living standard will fall in the US – it’s hard to see how that can be avoided. And the people running our government are as fiscally and economically inept as any ever have been. They waste money at an astounding rate and all of that hurts us. But even that doesn’t mean we’re going over the waterfall.

Japan had a 9.5 earthquake followed by a Tsunami that left tens of thousands of dead and even more homeless. Quickly after that came a nuclear meltdown of unprecedented scope. When the earthquake hit, they already had a debt to GDP ratio of about 200%, and while their economy is not unaffected by all this, things have mostly continued on there, the same as usual. Some argue that this is as a result of the ‘special character’ of the Japanese people, but I don’t think so. I think the real issue is that Japan is a rich country, and the rich don’t riot. That overstates it just a little, but I think it gets the main point. Without a breakdown of civil society there is no collapse of the broader system.

The people that talk about our system falling apart (I think) are underestimating the kind of incentives there are in the world for keeping things going more or less as they are. The Saudis, the Swiss, the South Africans, the Koreans, the Swedes, the British, the Turkish and everyone else in the world all have more reasons to want the current system to continue than they do in having it fail. And at the end of the day that means that they’ll do what they must to support it – even when they don’t like it.

Make no mistake, the US financial system falling apart would be a complete global reboot. No institution would survive it untouched. But because that’s so, I’m convinced that it won’t happen until all those people with all their disparate interests, start to see a new system as having more promise for the future than the old one does. I don’t see that happening in the foreseeable future.

Barak Obama and his academic ilk say that they want to reshape America, but if it’s really true (I doubt that it is) then they’re the only ones. Winners outnumber losers under the current system, and the losers are the only ones who are ready to risk it all to see the system collapse. Open revolt can change that. But without a complete breakdown of civil society, there are more things supporting the current system than threatening to tear it down. Life will get worse in the coming years, and we’ll all get poorer. But the system won’t fall apart until it’s in the interest of enough people to have it do so.

I don’t think we’re approaching a waterfall anymore, I think it’s just the rapids. They’ll leave us all battered and broken, but we’ll survive it.

Wednesday, May 11, 2011

- Obama's Moat

I personally would love a moat, but I don’t think I could get it past the town planning board. Alligators would be a bit much. Besides, I don’t think they’d take to the coastal NJ climate. Maybe a snapping turtle or three would be better. Those things can be pretty nasty, and seeing a prehistoric looking monster with huge spiked jaws sunning itself on a rock would certainly discourage uninvited swimmers.

I’d love a 15 foot high stone wall around my property as well; maybe something with parapets. You don’t see enough of that sort of thing in upper middle class suburban neighborhoods if you ask me. And this is New Jersey after all. Maybe the planning boards can be as ‘accommodating’ as the eminent domain judges if you make the right kind of campaign contribution. Well… I probably can’t afford it anyway.

So there you go president Obama, here I am… a conservative who really would like a moat. I’d like it at the end of my driveway not the Texas border – but I think that qualifies as eliminating a straw man.

You know that the President has gone into campaign mode when perfectly reasonable government policies begin to be shamelessly caricatured as if he’s running for office against Daffy Duck. This week it’s a moat with Alligators at the Texas border, next week it will be murdering old people by taking away their ‘right’ to free healthcare, and returning blacks to slavery by getting rid of affirmative action.

It’s always one long cartoon with Democrats – and Republicans are always the villains.

Monday, May 9, 2011

- Minimum Wage Idiocy

Here's a pretty good piece on the minimum wage.
It contains a lot of the standard liberal BS about 'disadvantaged' black youth, but at least it doesn't pretend that one more minimum wage law is the only thing standing between us and a prosperous society.

To tell the truth, I spend more time thinking about 'what liberals are thinking', than I probably should. But this is a good example of how perplexing their world view is. They (apparently) believe that if they issue a command for businesses to pay people more, employers will simply obey and let the difference be taken from their vast 'profits'.

Unions support this idea, because their contracts are so often tied to the minimum wage. Increase the minimum wage and you automatically pass an increase in wages to all unionized labor with contracts tied to it. But that doesn't mean they think it's a good thing for everyone, only for them. It takes a special breed of fool to believe that the only thing we need to make our economy healthy is one more command to ensure 'fairness'.

It's such an upside down worldview that I find it difficult to explain it's wrongheadedness without starting all the way from the big bang. There is so much background data required, that it's easier to just let the people who believe such nonsense sound stupid. But the problem is, a lot of people ARE those idiots.

So since brevity is the soul of wit, let me say it this way. The people who believe an increased minimum wage helps the economy fall into two categories:

1. Vote buying pols who know better but don't care.
2. Idiots.

Saturday, May 7, 2011

- The Post QE2 Financial Markets

The end of QE2 is upon us. In slightly more than a month the Fed will end its program of purchasing vast quantities of treasury bonds, and interest rates will begin to rise. No one knows how much they’ll rise exactly or when precisely that they’ll do it. But everyone … EVERYONE… who does this sort of thing for a living knows that rates will be higher after QE2 ends than they were before. The only people who claim anything else are those people who are hired specifically to pretend it isn’t so.

The reason for this is actually quite simple. Over the last year, the Federal Reserve was a buyer of over a trillion dollars in treasury debt, and the pace of federal borrowing isn’t going to change (well… it won’t be reduced anyway) so supply will remain constant. But without the Fed acting as the world’s largest purchaser, demand for that debt will be greatly reduced. The law of supply and demand will not be ignored – so prices for those bonds will fall and rates will rise.

But like most things in economics, there will be enough ambiguity in the reaction of the markets to muddy the waters a little. Instead of being direct and simple with cause and effect both clearly identifiable, it will be vague with enough volatility to leave any clear trend hidden for a while at least. This will empower the people whose job is to pretend that supply and demand are irrelevant when it comes to Treasury debt, and it will fill their quiver with what seem to be perfectly rational talking points to back that up. They’ll only be distorting things, not making them more clear – but that’s their job. So let me tell you what to expect to hear from them. First, some real world context.

The money that the Fed has spent on Treasury debt, hasn’t stayed in treasury debt. The financial institutions who’ve been buying up treasuries have used them as assets to borrow against. They then took that borrowed money and bought other riskier assets with them. In the quest to gain enhanced yield, they bought stocks, commodities, and other corporate and municipal debt. So when the Fed stops buying Treasuries the first thing we’ll see sell off will not be treasuries at all but the ‘risky assets’ they been used to finance.

Stocks will sell off first I suspect, since they are highly liquid. Then the commodity sector will begin to sell off too. This will probably lend relative strength to the dollar, giving liberals an important talking point. Then municipal and corporate debt will sell off causing those rates to rise relative to treasuries. This is referred to in the industry as ‘a widening of the credit spread’. That’s the watch word you’ll want to listen for.

Treasury debt will begin to sell off too – but it’s not going to do it right away or all at once. When you buy a Treasury bond you’re actually buying the expectation that the US government will be able to extract money from someone by force. That the US government can do that isn't really in doubt yet, so it's considered as sure a bet as it gets. This why treasuries are referred to as 'risk free'. It doesn’t actually mean that there is no risk associated with Treasury debt, only that it’s as close to it as anyone can manage.

So when other risky assets begin to sell off, if they do so rapidly, some of the money leaving those assets could very well flow into Treasury debt as a means of temporary protection. In fact, if the pace is high enough, we may even see rates fall temporarily. The empty headed media will say something like “QE2 ended X weeks ago, and over the last X days rates have actually fallen.” If you're listing for BS, you’d do well to notice the mismatch in relative time lines.

But a temporary reprieve won’t change the fact that the US government needs to borrow far more money than the capital markets can provide at current interest rates. Over time, rates will absolutely rise.

So what will change that? It will be one of two things. The first is that the Congress and the Whitehouse come to an agreement to slash federal spending. This would cause the supply of Treasuries to fall, and with demand unchanged, this will stabilizing interest rates. But with generations of pols having made their way in the world by taking tax money from the productive classes and using to buy votes, most people would call that scenario ‘unlikely’.

The second thing that might change this is if rising interest rates begin to inhibit economic growth. Since this is the practice the Fed uses if it WANTS to inhibit economic growth, there isn’t a lot of doubt about it. And as growth slows, it will cause economic statistics to soften and unemployment to rise. This will inevitably act as justification for a new policy of quantitative easing – or QE3. Then, as the Fed returns as the biggest buyer of Treasury debt, rates will once again stabilize.

Right now the political opposition for QE3 is very strong. But if the economy begins to point toward a new recession (one that Obama won’t be able to blame on George Bush) that will reverse in a heartbeat. The media will be more than happy to comply, and they’ll dredge up the talking points I mentioned above as a rationalization. There will be a diminishing return on QE3 relative to QE1 or 2, and you’ll hear talk of ‘running on a treadmill’ or hyperinflation from the opposition. But these are easy charges to ignore as ‘extreme’ and the media will be happy to do so.

Besides, with both Democrat and Republican presidential candidates out there promising more cake and circuses in exchange for votes, there will be lots of people with an interest in pointing at libertarians and calling them ‘crazy’. It will once again be portrayed as Democrats and reasonable ‘centrist’ DC insider Republicans standing up to the ‘extremist’ (and racist) wing of the ‘Tea Party’ right. It will be portrayed as rational insider DC policies vs. slash and burn fanaticism.

So the post QE world will involve the sell off of all assets, not just Treasury debt, and it won’t happen all at once. It may include the dollar strengthening against other currencies as well as against commodities like gold and silver, and will involve a widening of ‘credit spreads’. There may even be short periods where interest rates fall due to ‘risk off’ momentum trading. Much of this will be portrayed by the brain dead media and the hired guns of the left as evidence that everything is fine. But it won’t be. Over time, rates MUST rise.

And when they do, it will set off the next round of QE... and the next, and the next and the next. Our economy isn’t growing nearly fast enough to get us off this treadmill. And the further we go down this road, the harder it will be to do so in the future. Eventually it will become mathematically impossible to do so.

But this will continue for the time being anyway…until either the federal government gets its fiscal house in order, or the whole thing falls apart. Those are the only two long term options.

Thursday, May 5, 2011

- Scientism Not Science

My buddy Gary is a physicist with an interest in economics. He and I have had multiple discussions at some length about it, and nothing I ever said makes as much sense as this guy does.

Personally I think Markets and economics are the same as everything else - those who can do, those who can't teach. But for some reason when it comes to economics, the people like Krugman who "can't" is still revered in the press. I guess it's because they can't either.

Tuesday, May 3, 2011

- Shouldn't This Feature A Broken Clock?

Osama Got Obama T-Shirt Goes On Sale

Actually, it's "Obama Got Osama." I didn't notice the error until the Mrs. pointed it out. Call it a Freudian slip.

I predict this will never sell. It's too "pro-American" for the American left who are the only people who wouldn't be embarrassed to wear it.

Monday, May 2, 2011

- Who Could Have Seen This Coming...

Arabs Riot in Jerusalem Over Bin Laden's Demise, Hamas Angry

- Good...That's One Less Thing

What... no lawyer... no miranda warning or televised civilian trial? Just kidding. As much as the military would have probably liked to put this guy's feat to the fire for a few months (or years), I just don't see any way the non-com on the ground was going to let Bin Laden be handed over to Eric Holder and his 'unique' idea of American justice.

When my wife woke me to give me the news, I seriously asked if he died of diabetes. But my lack of confidence in the civilian leaders of our military notwithstanding, it's a triumph for that great war time President Barak H. Obama. Obama, as you know, loves war... and this should free up some of the military to get involved in Burkina Faso, Liberia, Sudan, Togo, and anywhere else that people are slaughtering each other, and there are no American interests at stake whatsoever.

I don't mean to be too political about it. This is certainly a triumph. It's the kind of victory for the American military and American foreign policy interests that even the American left can support. I personally think it's more a product of momentum than some directed initiative by Obama - but he has to deal with all the failures so he should get credit for the victories as well.

Lots of people are making comparisons between Bin Laden and Qaddafi and saying that Qaddafi should step down immediately or follow Bin Laden's fate. Personally I'm dubious. Bin Laden was a private citizen running an underground organization. He had no artillery or anti-aircraft guns or tanks... just a kid with an AK at the gate.

That's the kind of enemy that cowardly liberals (and cowardly UN bureaucrats) love because once they find him, there is no doubt of victory. But we know where Qaddafi is. Qaddafi really is still 'leading parades'. So I don't think it's the same thing.

I'm pleased (and surprised) this didn't turn out like Jimmy Carter's little foray into covert operations, the disastrous Iranian Hostage rescue. But Al Qaueda isn't what it used to be. So as great as this is psychologically for Americans, I don't think it really changes all that much looking forward. It's still nice to not have to worry about him anymore.

Like that great American baby Boomer Forest Gump once said "That's one less thing."

Sunday, May 1, 2011

- The Next Birther Issue

The basis of all liberal policy making is the ability to sound literate while rationalizing away reality. The left is accusing Ryan of 'changing Medicare as we know it" as if that were a bad thing, but the medicare we know will be broke soon and will take the rest of the country with it. Obamacare will make that worse not better. And all the left can talk about is how 'women and minorities are hardest hit'.

It's like watching mental patients in an insane asylum get all worked up because someone said that the sun rises in the east. They can scream all they like but that won't change reality. To those of us who see the issue for what it is, they literally seem that deranged.