Archive - Sep 2010

The recent surge in the prominence of Austrian economics is no surprise: with Hayek's Road to Serfdom recently becoming Amazon's most popular book, it is more than evident that more and more Americans are, if not converting away from Keynesianism (because it truly is far more a religion, and a flawed one at that, than an economic theory - after all any 'theory' that has been disproved as many times as John M. Keynes' mutated Frankenstein monster would have long been set to rest on the trash heap of failed social inventions) then certainly looking at far more plausible alternatives. Of which the Austrian school of economics is certainly one. For all those who are still confused about the far more rational and sensible approach of Austrian theory and Capital-based macroeconomics, the attached 50 minute presentation by Robert Garrison is a must watch.

A couple of insightful interviews, brought to you by King World News. In the first one Art Cashin goes off on a astrological tangent, discussing how the autumnal equinox may or may not impact the critical 1,130 resistance level. According to the cocktail napkins things may get heated... or not. In other words prepare for a market that may surge... or plunge. Elsewhere, Eric King discusses the drop in the NAV premium on the PHYS (quite relevant in light of the recent second follow on offering for the physical gold ETF), gold common stocks, and the imminent rush for M&A in gold small and mid cap companies. Indeed, all that borbadment about cash on the sidelines in other sectors leading to a renaissance in acquisitions is more than relevant for the gold sector: look for some material moves higher as expectations of consolidation in the precious metal space spread like wildfire through the market.

With the sentiment indicators turning neutral, stocks will no longer have short covering to propel them higher. This puts the onus on the bulls - it is time to put up.

The United States is facing both a structural and demand problem - it is not the cyclical recessionary business cycle or the fallout of a credit supply crisis which the Washington spin would have you believe. It is my opinion that the Washington political machine is being forced to take this position, because it simply does not know what to do about the real dilemma associated with the implications of the massive structural debt and deficits facing the US. This is a politically dangerous predicament because the reality is we are on the cusp of an imminent and significant collapse in the standard of living for most Americans.

Another sovereign bankruptcy, another stick save by the ECB. The FT has confirmed Friday's rumors that it was just the ECB's intervention that prevented domino number two - Ireland - from toppling, and taking with it all of Europe. "The European Central Bank intervened to stabilise the Irish bond markets on Friday after a report by a leading UK bank triggered investor fears that the country might turn to the international community for a multibillion-euro bail-out." As readers will recall, the half a percent spike in Irish bond yields was precipitated by a Barclays report that the IMF would be needed to rescue the Emerald Isle, coupled with confirmation that the Irish government was negotiating with AIB bondholders about an imminent bankruptcy. At least now it is doubtless that domino #2 is now on a ventilator, in the critical condition ward, and should Doctor ECB's attention be diverted elsewhere, say to quell riotous mutiny in Greece, that the house of cards will finally fall.

My other passion. Like markets, this is not predictable.

You don't have to be an actuary to know that this pension plan will end badly. The technical phrase is "trending toward insolvency."

Like a junkie looking for "one last score", the entire country has sold out our future to try to keep the artificial high going a little longer...

The aim of this paper is to show that the essential problem of the current monetary regime is the mismatch of durations of financial assets and liabilities. The shorter mismatch of durations presents perennial problems for the monetary system. Combined with perpetual debt the problem is exponentially amplified. This outcome is a direct consequence of abandoning that physical substance, which has the propensity for its utility at the margin to decline the least, as the monetary unit of account.

Must Read

For centuries, the relationship between China and Japan may be best described as tense to turbulent with two Sino-Japanese wars all within the last century or so. However, the fuse was lit again this month when Japan seized a Chinese fishing boat near a disputed border. The Third Sino-Japanese War could be brewing, but with brand new battle formation this time around.

A funny thing happened on the way to American central planning: normal distributions became abnormal. To wit - the classical, Gaussian distribution chart, which lies at the  basis of all modern statistics and offshoots thereof, such as quant theory, apparently is not good enough for the wonderful data aggregators and distributors at the all important Bureau of Labor Statistics, which is in charge of such key economic metrics as the unemployment rate, CPI, PPI, home sales, and virtually everything that tends to have a huge headline impact on stock futures (because let's face it, nobody trades during regular hours anymore). Curiously of the 25 or so data items tracked by the BLS, the vast majority have been revised over 50% of the time over the past decade. All, that is, expect for the most important, and politically critical ones: the unemployment rate (easily the only number the vast majority of the population understands), and consumer prices (which is the only number to direct impact the federal budget). In other words, as the chart below demonstrates, while the BLS has the track record of a blind and retarded monkey throwing a dart at a wall full of numbers when presenting initial economic data, something which Gaussian distributions would say is perfectly normal when running a $13 trillion economy, it has perfected confidence intervals and data estimates when dealing with the most economically sensitive and critical data. Whether the BLS has hired the same oracular prop traders that allowed Goldman to lose money on zero days in Q1 when calculating some numbers (but not others), or whether the BLS just spews forth what some excel model dictates (possibly the same used by Moody's that would crash upon imputing negative growth assumptions), while pretending to use traditional "ecostat" sampling, estimating and adjustments may be worthy of far more debate than currently afforded. Because the last thing an increasingly more cynical American public would want to believe is that the government is, gasp, lying to it.

Has the outcome of Japanese elections signaled the end of the great bull markets in the yen and the JGB?

By now everyone 'knows' that the US consumer is hunkering down, paying down debt and performing other mythological tasks. Alas, as the WSJ points out today, this is not exactly true... In fact not true one bit. The reality is that over the past two years, US consumers have not been deleveraging as a voluntary act of eliminating debt, but have been actually aggressively leveraging more and more until the bank providing them credit puts them into involuntary bankruptcy, cutting off the money spigot. This is a startling realization, confirming that the average American is actually hyperleveraging to the point where all available credit is forcefully eliminated by a lender institution!

The difficulty with modeling markets in a dynamical way is that their essence is free human choice, while
the central core of dynamical systems is determinism. “Determinism” means that the past determines
the future and as will be demonstrated, vice versa. This implies that zero topological entropy is a
requirement for predictability. This will take some unpacking.

Is Oracle the canary in the collapsing coalmine? Or is it just the best lagging indicator in the tech space...