Thursday, December 3, 2009

On Tiger Woods

I am quoted about Tiger Woods' recent indiscretions:

TIGER WOODS, IMAGE, AND INFIDELITY. Is infidelity an external force, something that “takes down” a man? And Tiger may be only human, “but wasn’t Tiger Woods perceived as a special god-like man? And isn’t that key to the most lucrative aspect of his career, endorsements?”

UPDATE: Reader Michael Newton writes: “Tiger was respected and admired not just for winning golf tournaments, but for his discipline and concentration. So many of his ads play up the ‘mental’ part of his golf game. Now we find out he lacks discipline away from the golf course and he looks like a charlatan selling us a bill of goods.” Everybody’s human, and nobody’s without flaws. But those who let themselves be built up into something more than human tend to find that people are disappointed when they turn out to be human after all.

Wednesday, December 2, 2009

The Path To Tyranny

The website for my new book, The Path To Tyranny: A History of Free Society's Descent Into Tyranny is now up and running. It is still under construction though.

Thursday, September 3, 2009

We can't buy everybody health care

I keep seeing people write and hearing people say that everybody should have the right to health care.

Here are some numbers:

World Gross Domestic Product: $61 trillion (
World population: 6.8 billion (

GDP per person: $8,971

Do you think everybody can get health care on just $8,970/year income with much of that first going to pay for food, shelter, and clothing, which take priority over health care?

Friday, August 7, 2009

Economic recovery?

Recent economic data shows that things are not as bad as they once were or that we are actually recovering. I am not too sure. The Fed and Treasury have put a lot of new dollars into the system and the the Democrats in Congress along with President Obama are well on their way to spending the $787 billion in "stimulus."

The stimulus will temporarily push forward demand. Keynes argued that the government should increase spending during a recession and decrease during the good times. Unfortunately, we forget to decrease it during the expansions. Nevertheless, this stimulus is temporarily boosting the economy, but will result in lower economic output in the future, simply shifting demand from the future to the present.

Meanwhile, the sudden injection of tons of money into the system makes all economic calculation impossible. If you add a trillion dollars into the system, it appears like we are richer, spending more money, and companies increase their production. But it is all a smoke screen. It is simply new money devaluing old money, the basic financial situation has not changed. The "real" amount being produced and earned has not changed, though it has appeared to.

So it is impossible to know whether the economy really recovering or if we are simply shifting demand and creating an illusion.

Friday, July 31, 2009

President Obama had beer at the White House yesterday with police officer Jim Crowley and Professor Henry. Using all his famous personality and charm, Obama got the two of them to "agree to disagree."

Now we just need Obama to get Israel and the Palestinians or North and South Korea to have beer with him at the White House. Maybe they too can agree to disagree!

Thursday, June 4, 2009

Nuclear for Iran, but not for US

Obama said in his Cairo speech: "And any nation -- including Iran -- should have the right to access peaceful nuclear power if it complies with its responsibilities under the nuclear Non-Proliferation Treaty."

The US last built a nuclear power plant thirty years ago. Why should Iran be allowed to build nuclear power plants while the US's electric companies are not?

Wednesday, May 27, 2009

No posts in a while

I'm sure you've noticed I haven't posted anything new in a while. I started writing a book and haven't paid as much attention to the blog. Sorry to disappoint.

Thursday, April 23, 2009

Misdirected outrage

It has now been revealed that:

Bank of America Chief Executive Ken Lewis said that the Treasury and the Federal Reserve threatened to remove him and the firm's board of directors if the company did not go through with a planned acquisition of Merrill Lynch late last year. According to the minutes of a December 22 meeting, which were released Thursday by New York Attorney General Andrew Cuomo, the government made the threat when the bank was considering invoking a "material adverse change" clause to quash the deal after it became clear Merrill's finances were collapsing. According to the minutes, Lewis, told the board that, "the Treasury and Fed stated strongly that were the corporation to invoke the material adverse change clause in the merger agreement with Merrill Lynch and fail to close the transaction, the Treasury and Fed would remove the board and management of the corporation."

I've heard that a number of major shareholders will try to oust Lewis, claiming that he was looking out for his own job instead of the interest of the shareholders. Why am I not hearing more people blame the Paulson and Bernanke?

I want to see the shareholders of Bank of America sue the Fed and Treasury, which committed at least two crimes: covering up the material information and blackmailing Bank of America's management.

But I am going to excuse Mr. Lewis even though he "should have" released the information to shareholders. He was probably worried about more than just losing his job. When the federal government tells you do something or else, you really have to worry. We have seen many businessmen thrown in jail recently on trumped on charges. Remember Martha Stewart, who was found guilty of lying to investigators about insider trading for which she was found not guilty. I am sure that when Mr. Lewis was told that he has to keep the information quiet and continue the merger with Merrill Lynch, the Feds also told him that breaking off the merger would crash the stock market and financial system and they would hold him responsible. Mr. Lewis was probably worried about more than just losing his job.

Monday, April 20, 2009

Efficient Market?

While I am no firm believer in the efficient market hypothesis, I do question whether it is worth the time and effort to try beating the market. If only mutual fund managers would stop trying:

Over the five year market cycle from 2004 to 2008, the SPIVA scorecard shows that the S&P 500 outperformed 71.9% of actively managed large cap funds, the S&P MidCap 400 outperformed 75.9% of mid cap funds, and the S&P SmallCap 600 outperformed 85.5% of small cap funds. These results are similar to that of the previous five year cycle from 1999 to 2003.

For the vast majority of people who don't have the time or patience to try to beat the market, low cost index funds are obviously the way to go.

And for those who think they can beat the market: good luck. When you take into account the costs of trading (commission, spreads), you are starting from a losing position. Add to that the opportunity cost (how much money could you make or how much fun would you have if you didn't spend th time trading) and trading doesn't seem to be a profitable venture.

Sunday, April 19, 2009

Chauncey Gardner for President

I said many times during the election that Barack Obama ran as a modern day Chauncey Gardner.

Now, Obama senior adviser David Axelrod said: "You plant, you cultivate, you harvest. Over time, the seeds that were planted here are going to be very, very valuable."

David Axelrod's statement could have easily been said by Chauncey Gardner. If you have not yet seen Being There, I highly recommend it.

Friday, April 3, 2009

President Obama is black?

EUGENE ROBINSON: "Not even three months have passed since President Obama's historic inauguration, and already it tends to slip the nation's collective mind that the first black president of the United States is, in fact, black."

I don't know about everybody else, but I never cared about Barack Obama's race. I based my vote on the candidates' positions, character, qualifications, and experience. It made me sick to listen to all those people talk about the "historic" election and inauguration. What was so historic about it? We've been electing Presidents for over 200 years and this election was little different from those that preceded it. The only thing "historic" about it was that many people voted for a candidate to prove to the world, the country, and themselves that they are not racist. I already knew I was not racist and didn't feel the need to prove it. I am glad to see those on the left will finally "focus on Obama's ability, not his color," though I am not too sure how able he is based on his performance so far.

Monday, March 30, 2009

GM bankruptcy?

The Obama's administration's leading plan to fix General Motors Corp. and Chrysler LLC would use bankruptcy filings to purge the ailing companies of their biggest problems, including bondholder debt and retiree health-care costs, according to people familiar with the matter.

For months, we libertarians have been saying to let GM go bankrupt. The lefties called us crazy and talked about all the jobs that will be lost. Somehow, I doubt they will attack President Obama with the same level of anger, if at all. In the mean time, the taxpayers could have saved tens of billions of dollars had we let them go bankrupt.

Sunday, March 29, 2009

The government solution

Geithner on the Sunday talk shows: "The market will not solve this."

Yes, of course the market will not solve this economic crisis because it is not being given a chance. Except for the deregulation or Reagan in the early 1980s, the market hasn't been allowed to work us out of a recession, depression, or panic in over nearly a hundred years (the last time was in 1921).

Geithner added: "And the great risk for us is we do too little, not that we do too much."

SARCASM ALERT: I totally agree! Federal government spending has gone from 19% to 28% of GDP, but that is not nearly enough. I think it should go to 40 or even 50%. Heck, why not 100%? Remember, "the great risk for us is we do too little, not that we do too much." So government spending accounting for 100% of GDP should alleviate that concern.

Thursday, March 26, 2009

French workers on Thursday freed the manager of a factory run by U.S. company 3M held hostage in his office for more than 24 hours in a labor dispute over terms for laid-off staff.

French workers have every right to protest and express their grievances. But to hold a person hostage is clearly a violation of his liberty. How often do we hear these "liberals" (socialists really) go on about the government violating civil rights, yet here they have no problem doing so themselves?

We are seeing the same problem with AIG here in the US. Not only do we hear Senators, ACORN, and protesters attack AIG executives and their big bonuses, their spouses and children are afraid of being attacked.

Over in England, Fred Goodwin, CEO of Royal Bank of Scotland, had his house vandalized his kids bullied, and wife shouted at in the street.

The intolerant left is bringing back Liberal Fascism.

Thursday, March 19, 2009

Who will buy the rest?

The Treasury bond market went wild yesterday after the Fed announced it will buy $300 billion of Treasury bonds. The 10-year Treasury rate fell from 3.00% to 2.53%, the biggest decline in years.

While $300 billion is a lot of money, the expected deficit this year is $1.75 trillion. So after the Fed buys their chunk, who will be buying the other $1.45 billion? The market got excited about yesterday's news, but the fundamentals are still working against Treasury bonds.

AIG bonuses

"The bill would apply to bonuses of people making more than $250,000 a year, and would apply only to payments from companies getting more than $5 billion from the federal government."

So now, everybody making more than $250,000 and getting bonuses at AIG will quit and find a job elsewhere. For example, if a trader makes tens of millions in profit for the company or a salesman brings in hundreds of millions in new client funds, that person will quit and find work for somebody willing to pay for his talents. In the end, the good employees, the ones earning big bonuses as a result of making huge profits for the company, will quit. And the bad employees who don't do well enough to earn a bonus will stay.

Wednesday, March 18, 2009

AIG distraction

I am a bit confused why everybody is an uproar about the $160 million of bonuses given to AIG executives. AIG has received $173 billion from the government so far, so the bonuses make up just 0.09% of the total. Maybe we should be focusing on the other 99.91%?

By comparison, the recent budget bill included $8 billion in earmarks. Congress porks up 50 times as much money as the AIG execs, but Congress distracts us with AIG's "greed" and wants us to ignore Congress's waste and corruption.

Why aren't we hearing about the huge bonuses that Lehman executive are getting? Oh yea, because the government let Lehman go bankrupt and now we don't have to reward their incompetence.

UPDATE: We must not forget that the federal government will get back 35% of those bonuses through the income tax. So the bonuses account for just 0.06% of the total money given to AIG.

Friday, March 13, 2009

Preference to American Workers?

Recently, Senator Charles Grassley of Iowa said that Microsoft should give preference to American workers instead of foreigners when laying off employees. He said it was Microsoft's moral obligation.

Disregarding the argument about whether a company can have morals (they certainly should have ethics, but morals?), the question arises of whether this should apply to all US corporations.

How about Exxon Mobil, for example? Shouldn't Exxon give preference to American workers? Shouldn't Exxon expand production in the US with US workers rather than venture overseas? As such, shouldn't the US government make available all area with drillable petroleum, such as ANWR and the continental shelf, to help employ US workers? Isn't it a "moral obligation" to do so?

(Yes, I know Mr Grassley is in favor of increased oil production and drilling in ANWR. I'd like to hear him lecture his fellow Senators about their moral obligations instead of lecturing a company that has already created millions of new jobs.)

Gordon Gekko lives!

Lawrence H. Summers, the White House economic adviser: "Before, we had too much greed and too little fear. Now, we have too much fear and too little greed."

Monday, March 9, 2009

The Death of Capitalism

It is often hard to precisely date a transition from one era to another. In a previous post, I argue that the current crisis stems from the LTCM crisis in 1998 and the moral hazard and low interest rate that followed, but that is certainly up for argument.

These days, one often hears the refrain that capitalism in the US is dying. But in fact, America left free market capitalism way back in 1913.

The year 1913 is best known in the US as the year Woodrow Wilson became President. Woodrow Wilson, of course, was the US's first "modern liberal" President. Two other events, which the Progressives from both parties had been working on for years, finally occurred in 1913 that marked the end of American capitalism: the income tax and the Federal Reserve.

The Sixteenth American, giving Congress the "power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration" was ratified by the required number of states in 1913. As promised, the income tax at first affected very few people. From 1913 to 1915, most people paid no income tax, and the top income tax rate was a low 7% on incomes above $500,000 (a huge sum in those days). But then came World War I and the top tax rate jumped tenfold to 73%. The top tax rate would eventually fall back to 24% under President Coolidge, but the government had proven that it can and will increase taxes significantly if it "needs" to. Under FDR, the top tax rate would hit a whopping 94% and even the lowest rate was at 23%, about as high as the top tax rate under Coolidge.

The second act, which Progressives had been working on for years, was the Federal Reserve System, which was enacted by the Federal Reserve Act of 1913. Like the income tax, this act appeared to have little significance at first. The purpose of a Federal Reserve was to provide an "elastic currency," which would in theory help prevent panics like that of 1907. The obvious initial problem with the Federal Reserve System is incompetence. With such a system, we rely on the Federal Reserve member to decide when and by how much to expand or contract the money supply. Herein lies the fatal conceit that government agents can know what market participants do not know. Market participants take their cues from price signals to determine supply and demand (in the case of money, they look to interest rates). In order to be more effective than the market system, government agents must have some other vast source of knowledge to replace price signals. History and logic prove that they do not.

While the Federal Reserve System is certainly a statist system, it was initially constricted by the gold standard. The Federal Reserve could expand and contract money supply in the short term, but the long term money supply was determined by the amount of gold in the system As long as we had the gold standard, the Fed was limited in its inflationary abilities. The gold standard stayed around much longer than low income taxes. While England and most other countries left the gold standard in World War I, the US managed to maintain it until 1933, when gold coins were confiscated and the conversion rate was changed from $20.67 per ounce of gold to $35 per ounce. This standard, more or less, was maintained until 1971 when the US left the gold standard once and for all.

Not surprisingly, if one looks at the long term trend of inflation in the US, one sees a big spike during WWI, when Britain left the gold standard and the world's gold came into the US, another increase in inflation starting in 1933 and through WWII, when the US changed the dollar to gold ratio and made gold coin ownership illegal, and after 1971 when the US permanently left the gold standard.

These two acts spelled the death of the United States' long history as a capitalist country. With the income tax, and more so with income tax withholding, a person's income no long belonged to himself. Yes, the government is kind enough to let us keep 70% of our income. If you believe your income belong to you and you give the government a share, try not paying your taxes. Furthermore, the government can raise taxes to extreme levels (94% under FDR) and even do so retroactively (under Clinton). When the government can take as much of your future or even past income with threat of garnished wages and imprisonment, obviously your income no longer belongs to you.

While the income tax takes away your income, Federal Reserve induced inflation takes away your wealth. Since the creation of the Fed, the value of a dollar has declined to 5 cents. Of course, we all expect inflation and it is built into bond rates and expected returns for stocks. In "normal" times, the constant 2-3% rate of inflation is discounted and does not affect the value of our assets. But not all times are normal. In the late 70s and early 80s, inflation shot up to double digit rates. The government can easily run the printing press, pushing inflation higher to devalue US government debt, either on purpose or through incompetence. Now, anybody who has US dollar denominated assets, such as Treasury bonds, US bank or money market accounts, or US equities, will see their net worth shrink dramatically.

Starting in 1913, the government has the power to take away your US dollar denominated wealth through inflation and to take away your income through income taxes. All of a sudden, the US government, not the American citizen, became the economic judge, jury, and executioner. As a result, 1913 goes down in history as the year capitalism died in the United States.

BTW, 1913 also marked the death of states rights with the ratification of the Seventeenth Amendment, transferring Senator selection from each state's legislature to popular election by the people of each state. Prior to 1913, the state legislatures chose Senators, giving the states a powerful check on the federal government. But after 1913, with direct election of Senators, the Senate became little different than the House of Representatives and Senators became more interested in "national" legislation and no longer had to follow the advice of the state legislature to get re-elected. As U.S. Senator Zell Miller of Georgia said: "Direct elections of Senators … allowed Washington’s special interests to call the shots, whether it is filling judicial vacancies, passing laws, or issuing regulations." In 1913, the states lost their last check on federal power and the federalist system officially died.

Thursday, March 5, 2009

Banking moral hazard

Federal Deposit Insurance Corp. Chairman Sheila Bair said the fund it uses to protect customer deposits at U.S. banks could dry up amid a surge in bank failures. “Without these assessments, the deposit insurance fund could become insolvent this year,” Bair wrote in a March 2 letter to the industry. U.S. community banks plan to flood the FDIC with about 5,000 letters in protest of the fees, according to a trade group.

Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk.

When banks and their executives and insulated from the risks they are taking, yet they receive the rewards, they take on more risk than they would have in a free market environment. The government's "insurance" through the FDIC enabled banks to risk our deposits in by lending to high-risk businesses and home-owners or, even worse, by buying high yielding mortgage backed securities. Instead of acting prudently, banks gambled with our money.

Banks became like an option. Risk was limited (to the option holder) but reward was still huge. In reality, that risk was not limited, it was just shifted onto the government and the taxpayers.

Another successful government program...

UPDATE: Senate Banking Committee Chairman Christopher Dodd is moving to allow the Federal Deposit Insurance Corp. to temporarily borrow as much as $500 billion from the Treasury Department.

Now we have the government bailing out other parts of the government.

Tuesday, March 3, 2009

Geithner versus tax evaders

President Barack Obama's Treasury secretary says the administration will unveil a series of rules and measures in the coming months to limit the ability of international companies to avoid U.S. taxes. Treasury Secretary Timothy Geithner told the House Ways and Means Committee on Tuesday that Obama will propose legislation to limit U.S. companies' ability to shelter foreign earnings from taxation in the U.S. He also said the administration will try to limit wealthy Americans' ability to use tax havens to avoid taxation.

Geithner the tax evader will head up the attack on tax avoiders. As the old insult goes, it takes one to know one.

Trader Obama

President Barack Obama said Tuesday he's "absolutely confident" that the global economy will recover, and suggested that stocks might be a good buy now that prices have fallen so hard. "Profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal if you've got a long-term perspective on it," Obama told reporters.

Maybe Obama should have become a trader or market analyst instead of President.
The European Union's top economy official said Tuesday that the 16 euro nations have a solution to rescue any member that risks economic collapse. EU Monetary Affairs Commissioner Joaquin Almunia said it would not be clever to give out details in public "but the solution exists." "Don't fear, we are equipped intellectually, politically, economically to face this crisis scenario," he said in a speech at an event organized by the European Policy Centre think tank. "But by definition this kind of things should not be explained in public."

I can rest easier now knowing that they have a super-secret solution to all our problems. I'll just ignore all their previous screw-ups, all the stuff they did to get us where we are today, and all the previous "solutions" that didn't work. This time, they have it figured it for sure!

Friday, February 27, 2009

Government solutions are killing us

Citigroup Inc. said Friday it reached a deal that will give the government up to a 36 percent stake in the struggling bank.

As a result of the government's help, Citigroup is down 43% in pre-market trading.

I am reminded of a famous sports cliche. When a great player on a losing team requests a larger salary, the owner replies "If we can lose with you, we can certainly lose without you."

Thursday, February 26, 2009

Bye bye health care

Today's headline: Obama Wants $634 Billion for Health, Says More Needed

The result: XLV (health care ETF) down 5.0% today
Big losers include:
Abbott Labs (ABT) -5.7%
Amgen (AMGN) -9.4%
Bristol-Myers (BMY) -5.2%
Gilead Sciences (GILD) -5.0%
Medtronic (MDT) -6.1%
Merck (MRK) -6.7%

I must ask, is this man totally inept or is he trying to crash the stock market?

UPDATE: XLV down another 4.0% today. Financials (XLF) down 6.5% as Citigroup falls 39.0% thanks to the government giving them more help. With friends like these, who needs enemies.


The other day when talking to a friend about the stimulus bill, another friend interrupted saying that we can't do nothing like Hoover did. I quickly replied that Hoover raised taxes and started a trade war (I didn't get into Hoover's pro-union pro-minimum wage stance since it is a bit more complicated entire books have been written on that subject). I am amazed that people still don't understand that important part of our history.

This reminds me of what Ronald Reagan said: "The trouble with our liberal friends is not that they're ignorant: It's just that they know so much that isn't so."

I just read this on Wikipedia: "Franklin D. Roosevelt blasted the Republican incumbent for spending and taxing too much, increasing national debt, raising tariffs and blocking trade, as well as placing millions on the dole of the government. Roosevelt attacked Hoover for "reckless and extravagant" spending, of thinking "that we ought to center control of everything in Washington as rapidly as possible," and of leading "the greatest spending administration in peacetime in all of history." Roosevelt's running mate, John Nance Garner, accused the Republican of "leading the country down the path of socialism"."

We are repeating history here. The Democrats, led by Barack Obama, attacked Bush and the Republican for spending too much and increasing the deficit and debt (which is true). Immediately upon taking power, just like FDR and the Democrats of those, Obama and the Democrats drastically increase spending and the size of the deficit, making Bush and the Republicans look "conservative" next to them.

Why Government Stimulus Doesn't Work

Everybody is talking about the government stimulus plan. When asked about it, I normally respond "I hope it doesn't do too much damage." While the vast majority of people oppose the stimulus, they do so because they see the costs outweighing the benefits. On the other hand, I see no benefits and only costs.

In a private business transactions, both the buyer and seller benefit. If I go to the store and purchase a product, I the customer receive something I value more greatly than the money I spend, otherwise I would not enter the transaction. Even though I end up with no money, which really represents units of labor I have already performed, I actually profit from the transaction since, to me, the value of what I receive exceeds the value of what I give away. And the seller also books a profit, obviously, since that is a business's purpose for existing and his revenue exceeds his expenses. With both the buyer and seller profiting from the transaction, wealth increases.

On the other hand, government transactions have no profit motive for either the buyer or the seller. The government stimulus plan is really a government spending plan with a very small amount of tax cuts. When the government spends money, neither the government nor the taxpayers profits. The government generally spends taxpayer money on projects that would not otherwise get done. But why wouldn't these projects get done without the government? Because they are not profitable, of course! If the government does a project at a profit (where benefits outweigh costs), maybe a road or a stadium, that means that a project that would have been done privately has been usurped by the government, where the government will most likely execute the project much less profitably than private business. And to do these projects, the government amasses huge deficits each year, which a private business would call a loss. Without any motive for profits, which modern liberals claim to be a good thing, taxpayers lose money with each dollar they send to the government and the government makes losses on top of that instead of profits. With losses accrued by both the buyer (taxpayer) and seller (government), wealth is being destroyed.

As Winston Churchill said, "It is a socialist idea that making profits is a vice; I consider the real vice is making losses." As this "stimulus" package takes hard earned money from taxpayers and government bureaucrats waste the money away on unprofitable projects, remember that any plan which destroys wealth, as this plan does, is full of costs and has no benefits.

Wednesday, February 25, 2009


First Obama gets his $787 billion stimulus bill. Then he adds $250 billion for his foreclosure plan. After spending all that money, he promises to halve the deficit. But then today, Obama announces a 10-year, $634 billion health-care plan.

My calculator must be broken. It tells me that Obama is raising the deficit, not reducing it.

In this deep recession, how many people believe that our current government is too small and taxes are too low?

Sunday, February 22, 2009

Corporate Bond Deception Point

I never really understood the allure of corporate bonds. To me, it seems that corporate are simply a hybrid of equity and Treasury bonds. If Treasuries yield 6% and stocks grow at a 10% rate, corporates will yield something in between. Where in between depended on how much extra risk you were taking.

For years, corporate performed fabulously well. Investors got their above Treasury rate return with very few defaults. But this false sense of security did not last long. In the 18 months, many highly rated companies, such as the major financial institutions have seen their bond value sink as the risk of default surges. As a result, corporate bonds acted more like equities than Treasuries.

Let us look at LQD, the iShares iBoxx Investment Grade Corporate Bond ETF. The LQD has an effective duration of 7.16. By comparison, the IEF, which is the iShares Barclays 7-10 Year Treasury ETF, has an effective duration of 6.98. Nearly the same so a very good comparison.

Let's start by looking at the chart since LQD started trading 2002.

As you see, LQD rises pretty steadily for the first five years, outpacing the steady rise in the IEF, as expected. But when the stock market starts falling in late 2007, the LQD stops rising while the Treasury rally picks up steam. In the fall of 2008, corporate bonds crash nearly 20% before recovering most of the losses whereas Treasuries surged higher. All of a sudden, corporate bonds were acting more like stocks than Treasury bonds.

I think we can break this up into two periods. The first, July 2002 to June 2007, the LQD tracked the IEF very closely. In this period, LQD has a 93% correlation with the IEF but a negative 10% correlation to the SPY.

But from July 2007 to January 2009, the LQD shifted away from tracking Treasuries and towards stocks. In this second period, the correlation between LQD and IEF dropped to 56% while the correlation with the SPY rose to 38%.

Looking at that first period, we see that IEF had a total return of 32% while the IEF returned 21% and SPY rose 79%. To mimic the LQD, one could have put 80% of their portfolio in the IEF and 20% in the SPY. In the second period, the LQD fell 0.7%, not bad at all. But the 80/20 portfolio would have actually gained 9.3%.

During the entire period, LQD had an average annual return of 4.7% with a 9.3% standard deviation. On the other hand, the 80/20 portfolio returned a larger 5.3% with a standard deviation of just 5.9%.

Seems to me, that corporates are a bad deal for long term investors or for people relying on them for retirement income. The LQD though may be a great trading device for those who can predict when and how the correlations will change.

Friday, February 20, 2009

The Lost Decade

Everybody is trying to figure out what caused our current financial crisis. There are in fact many factors that led us to this place, including lack of private savings, high government spending and debt, and loose monetary policy.

But those factors have been around quite a while before we fell off the edge of this cliff. Many will argue that those factors alone are enough given enough time. While I agree with that, we did in fact have a moment in our recent history which led to the acceleration of our wasteful ways and made our current crisis a reality.

In 1998, Long Term Capital Management was sitting on top of the world. That is, until they got hit by huge losses. To avoid a total market collapse, or so we were told, the Fed organized the major banks to put in billions of dollars (now considered pocket change) and take over LTCM. To help the financial system and the new owners of LTCM, the Fed dramatically lowered interest rates, even though the economy was performing well and did not justify lower rates. It also created a moral hazard, whereby failing companies will get bailed out, encouraging risky bets knowing that the rewards will be huge but the risks will be limited as the government eventually bails out those that are "too big to fail." This combination of monetary inflation and moral hazard led to a rampant wave of speculation, first in the stock market with Internet stocks creating a bubble that ended in 2000, followed by a bubble in real estate, followed by yet another bubble in commodities.

Thanks to the government's loose money and the moral hazard, the economy over-leveraged itself and speculated on get rich quick schemes (options on Internet stocks, buying multiple houses with nothing down no interest loans) instead of saving and investing in solid profitable business ventures.

Today, the Dow hit its lowest point since October 1997. Back in 1998, the government supposedly saved the day with its actions. But the wave of speculation, bubbles, and crashes that resulted have created a lost decade for American equity investors.

Tuesday, February 17, 2009

The five political economic systems

Since so many are confused by what are the different economic systems, here are my five political economic systems based on the three factors of production: land, labor, and capital.

Aristocratic: The economic system favoring land owners is one I call the aristocratic system. In this system, the legal system and government are created and administered by the land-owners. The laws are obviously crafted to benefit them and used to keep the vast majority of people working the land for a very small share of the production. One example, from which the name is derived, is pre-Revolution France where land owners were exceeding wealthy and granted titles while the general populous were peasants living to work the aristocrat's land. The early 19th century Southern US economy with the plantation owners and slave is another example, as it Czarist Russia with the lord-serf relationship.

Socialism: Socialism is the economic system where all factors of production are controlled by "the people," thus eliminating any specific land or capital owners and, therefore, all economic benefit goes to the labor component. Additionally, since all land and capital are now owned by everybody and everybody, in theory, works to their full ability, all production is split evenly between the people regardless of the job or effort put in.

Mercantilism: When the government creates laws benefiting owners of capital, such as factories, this is called mercantilism. Mercantilist systems have protective tariffs to discourage cheaper imports from competing with local production. They will also have export duties on raw materials to keep manufacturing costs low. Obviously helping producers, it hurts consumers through higher prices for goods.

Capitalism: Capitalism is the system whereby the government avoids any economic intervention and allows the three factors to compete freely. The term capitalism implies that this system benefits capitalists, exactly what Marx wanted when he invented the term. Now, we often call it laissez faire or free market capitalism to ensure that the listener understands that what is meant is a government that does not interfere with the economy.

Interventionism: Sometimes, the government will interfere in the economy with the goal of maintaining equilibrium between the three factors. This can come about in one of two ways. In the first way, political parties will each push their programs which counter each other. Party A passes a law benefiting land owners while Party B passes a law benefiting workers, thus offsetting each other. The second way is through sudden action. In the early 20th century, in order to combat socialism, the fascists gained control of many government. They created big government, not necessarily to benefit one party over another, but to stop the socialists from benefiting labor over all others. With intervention, we get a complicated system that generally evens out, though the result is a big cumbersome government. The government bureaucracy makes the economy less productive and the people worse off.

Look at the violence inherent in the system

Unfortunately, four of these political economic system lead to violence, as we have seen throughout history.

The aristocratic system creates an environment where land-owners fight for control over more land. More land equals more wealth and more production, so the competition to own as much land as possible is intense. Furthermore, if a land-owner gains enough land, he can become a lord or king, ruling over both the land in his possession and the people who live and work on it. Eventually, two or more kings will fight to create their own empire.

Socialism results in war wherever it appears. Right from the start, socialism requires the confiscation of land and capital from their owners. The owners of land and capital, not willing to give up their possessions, are thrown in jail, banished, or killed. Furthermore, this oppressive system must be maintained forever to prevent an intelligent and industrious worker from saving money and starting his own business. History has proven that socialism also results in international wars. Given that socialism requires internal violence, it is no stretch for that violence to applied internationally. The goal of socialism is the overthrow of the capitalists and to impose shared ownership of property by the working class. This goal knows no borders. Polish workers have just as much right to equality as the Russians and the Russian socialists will use their strength to help the Poles achieve that goal, whether they want to or not.

Most of the wars fought between the early 16th century and mid 19th century were fought over mercantilist policies, including the imperialist desire for colonies. The Spanish empire established colonies in the new world to get their precious natural resources, especially gold and silver. But more common, such as with the British and Dutch empires, was to establish colonies for which to trade. The colonies were forced to trade only with the home country, thus benefiting the home country. The famous war between England and the Spanish armada was fought over trade. Most of the wars between England and France were as well. The Spanish-American war was fought for the right to trade with the Philippines and West Indies. But mercantilist wars are not just between two competing countries. In the mid-1800s, the North outgrew the South in both population and economy. Gaining seats in Congress and the Presidency, the North imposed high protective tariffs on finished good imports and duties on raw material exports. Thus, the North made finished goods more expensive for the South and Southern crops, such as cotton and tobacco, went down in price. The result was the Civil War.

Interventionism, being a mix of the previous three systems, can cause wars in any of the above mentioned way. But interventionism also creates an ongoing internal war for control of the government. With a large government precariously balanced evenly between the three factors, a single party gaining enough power can quickly change the laws to its own benefit. In the US, the political system was designed to make it extremely difficult for any single faction to gain complete control. When the mercantilists gained control in the mid-1800s, full scale civil war broke out. Most of the time, people live peacefully in the interventionist system, but it must always result in war when one faction eventually gains too much control. Obviously, when a single faction gains majority control of government, international war also becomes more likely as they advance their policies. As mentioned above, the mercantilist wants to conquer colonies, the socialist wants to spread socialism, and aristocrats want more land. And each will pursue that through war if they gain control of the government. In fact, it is not necessarily required for one faction to gain total control. If two factions agree, even if for different reasons, that the invasion of a foreign country is beneficial and those two factions combine make up a majority, the war will occur as those two factions will outvote the third faction and any capitalists in government.

Capitalism is the only system designed to bring lasting peace. In a capitalist system, the government has just four goals: to protect our life, liberty, property, and peace. Without a government that influences everything we do, political factions have little reason to exist. Gaining control of the government will not enable one faction to benefit themselves as the government has very limited power. There will still be crime, as there is in any system, but two capitalist countries simply want to trade freely with each other and have no reason to fight each other. In fact, the capitalist country has no desire to make war on any country, even socialist, mercantilist, interventionist, or aristocratic countries. The capitalist realizes that free trade is the best method, but also that a war to open up trade with an unfree country is unproductive. Not only will the war most likely cost more than the benefits accrued, the capitalist country must in fact give up capitalism to fight this "pro-capitalist" war. In order to fight a war, the government must raise taxes to pay for it, employ soldiers to fight, and buy equipment. Thus, any war requires the government to infringe upon the people's life (dead soldiers), liberty (draft, taxes), property (taxes, military equipment), and peace (war). War is therefore impossible in a truly capitalist system.

However, countries based on the other economic systems may attempt to conquer the capitalist country to benefit themselves. As mentioned above, one of the four goals of the capitalist system is peace. Capitalist countries need some method of defending their life, liberty, and property from foreign attack in order to maintain peace. Primarily, having a method of defense acts a deterrent, causing enemies to think twice before breaking the peace. Secondly, the defense must be used to repel any attack that would make the conquered less free.

Friday, February 13, 2009

Laws and sausages

As Congress votes on the stimulus bill today, without even having read it, I am reminded of this quote disputedly attributed to Otto von Bismarck: "If you like laws and sausages, you should never watch either one being made."

Wednesday, February 11, 2009

Open immigration in a welfare state

Ludwig von Mises has a brilliant argument for open immigration policies in a section called "Freedom of Movement" in his book Liberalism. While open immigration in a liberal world is definitely something to fight for, we unfortunately don't live in that world yet.

Our country and the world would benefit from increased immigration, but not if we extend free health care and other benefits to immigrants. In our current welfare state, each immigrant becomes a burden instead of an advantage. Furthermore, those most likely to immigrate are not the hard workers who wish to take advantage of America's freedom and economic opportunities. Instead, it is those looking for a free ride on America's generosity.

In an ideal world, in Mises's liberal world, open immigration would make us all better off. But in our current welfare state, allowing open immigration would bankrupt our country.

Tuesday, February 10, 2009

Only the government can save us now

In yesterday's nationally televised speech (I missed Chuck because of this, damn them!), President Obama said "the federal government is the only entity left with the resources to jolt our economy back to life."

What resources does the federal government have exactly? The government is in debt to the tune of trillions of dollars and expected to run a more than one trillion dollar deficit before this "stimulus" plan is added to it. The government has no resources to use. But it does have the power to tax, borrow, and inflate. Regardless of which method it uses to pay for its grandiose schemes, it is the American people who will pay for this, whether we want to or not.

If the American people will bear the burden, the government should just let us keep our money and spend/invest it as we see fit. But the government has other ideas. The government will spend our money and then take credit for fixing the problem. And if the problem doesn't go away, they just say that they didn't spend enough and propose a new even larger stimulus plan.

Monday, February 9, 2009

Mises on public works

"It is obviously futile to attempt to eliminate unemployment by embarking upon a program of public works that would otherwise not have been undertaken. The necessary resources for such projects must be withdrawn by taxes or loans from the application they would otherwise have found. Unemployment in one industry can, in this way, be mitigated only to the extent that it is increased in another. From whichever side we consider interventionism, it becomes evident that this system leads to a result that its originators and advocates did not intend and that, even from their standpoint, it must appear as a senseless, self-defeating, absurd policy."
Liberalism, Ludwig von Mises

Sorry, but not really

Today, Alex Rodriguez admitted to steroids use from the period 2001-2003. My problem with this is that we've been talking about steroids for years and he kept quiet hoping nobody would find out he was doing them as well. Now that he's been outed, he admits his guilt and says he is sorry.

This reminds me a lot of President Obama's cabinet picks. They "forget" to pay their taxes until they are caught. Then they finally admit their mistakes and hope everybody will forgive them.

A-Rod and these cabinet nominees are not sorry they broke the law/rules. They are only sorry that they got caught.

Kerry: Government knows best

John Kerry: If you put a tax cut into the hands of a business or family, there's no guarantee that they're going to invest that or invest it in America. They're free to go invest anywhere that they want if they choose to invest.

This is the perfect illustration of the difference between individualism and collectivism, private property and government. If the government allows us to use our money as we see fit, we obviously will seek to maximize our returns. Each individual will determine whether he should spend that money, pay down debt, invest the money in the stock market, or invest it overseas. In this way, each person will maximize his own happiness.

The government thinks it is smarter than the citizens it rules over (Hayek's fatal conceit). Thinking it knows what is good for the people, the politicians and bureaucrats decide what to do with our money. But their "one size fits all" solution is guaranteed to make only some people happy. Politicians, unlike individuals, try to maximize the happiness of "society" and not of each individual. In reality, a good politician will please just over 50% of the people in order to get reelected. And that's the good politician. The bad politician will actually make the majority of people worse off.

In this "financial crisis," the government should stop trying to help the people, which is guaranteed to hurt a large percentage of the population. Give us our money back and let us decide how best to spend or invest it.

PS This is from a purely economic standpoint. Even if the government were able to help each individual to the maximum effect, we are still ignoring the loss of liberty we have suffered as the government takes our money and decides how to use it. How many of us would sell our freedom for a few dollars? We sacrifice our freedom in exchange for the government's programs that the promise will help us. If the government delivers, what we have lost, our freedom, far outweighs what we gain. But since the government consistently overpromises and underdelivers, we in fact sacrifice our freedom for government programs that make us worse off.

Wednesday, February 4, 2009

Subsidized Housing

AP: "The Senate voted Wednesday night to give a tax break of up to $15,000 to homebuyers in hopes of revitalizing the housing industry, a victory for Republicans eager to leave their mark on a mammoth economic stimulus bill at the heart of President Barack Obama's recovery plan."

We got into our current financial crisis because the government created too many incentives for home ownership, such as the mortgage interest deduction, subsidized interest rates, the Community Reinvestment Act, and others. These subsidies and incentives created a real-estate bubble which inevitably burst, bringing down the entire world economy with it.

Instead of letting house prices fall to their real value, the government wants to prop them up. They are simply repeating the same mistake that caused this problem.

"Insanity: doing the same thing over and over again and expecting different results." Albert Einstein

Losing our high paying jobs?

I have something to add to my previous post.

Not only will executives leave the public financial industry due to these wage caps, many will move overseas where they can work at Swiss, Japanese, Chinese, or tax-haven banks at much higher wages.

President Obama wants to save the taxpayers a few dollars, though the salaries of these executives are nothing compared to the two trillion dollar deficit he is creating. But the costs will outweight the benefit as these high paying jobs move overseas.

Capping wages has negative effects

From AP: "President Barack Obama on Wednesday imposed $500,000 caps on senior executive pay for the most distressed financial institutions receiving federal bailout money, saying Americans are upset with "executives being rewarded for failure.""

While this might sound like good news for taxpayers, it is worrying. Why would a qualified executive go to work for one of these financial firms instead of working at a hedge fund, private firm, or industrial company where he can earn much more? As a result, financials firms will have trouble recruiting the executives they need.

"There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen." Frederic Bastiat

Obama sees the money taxpayers will save in the short-term. He is a bad economist. A good economist also sees the negative long-term effect of this market distortion.

Tuesday, February 3, 2009

Cycle of Economic Violence

"The Senate voted Tuesday to give a tax break to new car buyers, setting aside bipartisan concerns over the size of an economic stimulus bill with a price tag edging above $900 billion."

Why are the Democrats in Congress trying to help sell more cars? Don't they know that these are pollution machines? I thought the Democrats would rather use the money on "green" projects. When you are throwing around money, I guess you can do both.

As all Austrians know, every government solution creates a new problem for the government to solve. This mass transit vs. automobile argument is the pinnacle of government problem creation and solving. First the government builds roads and gives a tax break to encourage car purchases. Then some people complain about the pollution and "urban sprawl" that the subsidized roads and cars helped create. To fix this problem, they fund mass transit projects and restrict oil production to cut back on pollution. This discourages driving and auto purchases, especially when oil spikes up to four dollars a gallon because no new refineries or oil fields have been opened in decades, requiring the government to help the auto companies through tax breaks, loans, bailouts, and increased gas production. All of a sudden, people start driving again, hurting mass transit and increasing pollution, starting the cycle over again.

People complain about the "cycle of violence" in wars. This subsidizing of both automobiles and mass transit is a cycle of economic violence that destroys billions in wealth.

Monday, February 2, 2009

More tax evasion

First Secretary of the Treasury Timothy Geithner. Now, Health and Human Services nominee and former Senate Democratic Minority Leader Tim Daschle failed to pay more than $120,000 in taxes.

Somebody please explain to me why I shouldn't evade a hundred or a thousand dollars worth of taxes when our "leaders" evade ten or a hundred times as much.

Why Trading Systems Don't Work

Years ago, I built a trading system. For years, it worked very well, beating the market by significant amounts before the current market turmoil which began in late 2007. In 2008, the system stopped working and I lost a lot of money (though I didn't fully "blow up"). As a result of losses greater than any period I had back-tested or forward-tested, I no longer have confidence in my system.

Even when my system was generating big profits, I often questioned how one can be sure that his system will continue to work. Unfortunately, I ignored these doubts. But now that these doubts have been confirmed, I believe that it is either impossible or extremely unlikely to develop a winning trading system.

I won't be looking at problems with trading systems, such as curve fitting, but "problems" with the market that kill trading systems

Backtest Period

I used to laugh at people who backtested just 10 years. I had backtested my systems 50+ years so I could include a number of bulls and bears. But the decline of 2008 was nothing like anything in the past 50 years, though the 1973-74 bear market is a close similarity. And the double dip of 2000-2003 and 2008, where the market fell 50%, recovered the losses, and immediately lost 50% again is definitely something we hadn't seen since 1929-37. But even if I backtested back that far, that would only include one such period. In order to model the market, I'd need multiple similar periods to create rules to trade by. To include many market panics, bears, and depression, I'd have to backtest well into the 1800s. But economic and financial data from that period is sparse, making it impossible to develop a trading model that will work in the long run.

Survivorship Bias

My trading system was based on the US stock and bond markets. Why? Because that's where I live and that's the biggest market. But what if I had lived in England in 1914? England was still the financial capital of the world at that point, but was about to lose that status. Or what if I lived in Japan in 1989 which was growing like crazy but about to stagnate for an entire generation. Or Argentina or Southeast Asia before they blew up? You can't select one country that happened to thrive and ignore the losers because you don't know which will thrive and which will die in the future.

This problem could be solved by trading in many countries around the world. If your system is correct and goes long the best and short the worst, you would actually benefit from the fact that many countries don't survive. But trading foreign markets was not really possible until modern telecommunications became affordable a couple of decades ago. Even so, trading overseas is often expensive, difficult, or impossible if the country restricts foreign ownership of stock. Over the past 20 years, China has certainly been the top performing country, but for many years foreign ownership was illegal and even now it is restricted.

Changing Rules

Creating a trading system based on the last 50 years of data implies that the rules of the last 50 years would stay the same. That is obviously not true. Over the last 50 years, interest rates never went negative, until they hit zero and actually went negative in 2008.

Statistical probability states a market is so unlikely to move 10 standard deviation that we should simply ignore that possibility. At least, that is what we were told. But then the market did exactly that in 1987. Long Term Capital Management also suffered one of those "hundred year events" in 1998. The "black swans" occur much more frequently than standard statistics assumes.

Besides market rule changes, there are also legal changes. In 1933, FDR confiscated Americans' gold bullion and broke any contract based on gold instead of the dollar. After World War II, the dollar was again fixed to gold until Nixon took us off that quasi-gold standard. As a result, currencies floated against each other and currency trading boomed. These legal changes had great impact on how markets acted and how trader could profit. Old systems stopped working and new ones must be developed.

Maybe the biggest rule change of all was the closure of the stock market for 4 months after the breakout of World War I in 1914. A profitable trader would have lost four months of income and had his capital tied up. How many traders today would be able to survive an extended market closure, even though that possibility is so unlikely with electronic trading.

And then there is government manipulation. The power to set interest rates, most often lower than they should be. The power to print money. Selling gold from our reserves in order to push down its price. Wars to gain control of natural resources. Repurchase Agreements and Reverse Repurchase Agreement to temporarily move the stock market.

What is to stop the government from shutting down the stock market or making gold bullion or any other investment illegal? How will the government manipulate the market today or this year? Your system, which is always correct, could say one thing and that thing would have occurred if the government didn't manipulate the market against you.

When one looks at 2008, the rules have certainly changed. Interest rates are being set at artificially low rates of 0% for the Treasury Bill and about 2% for the Bond. Banks are being nationalized. The federal government's spending and budget deficit is rising to record peace-time levels. No trading system could have predicted these events and the effect they would have on the market.


Long-term statistical trading systems don't work. As Jesse Livermore/Larry Livingston says in Edwin Lefevre's Reminiscences Of A Stock Operator, "A man may beat a stock or a group at a certain time, but no man living can beat the stock market! A man may make money out of individual deals in cotton or grain, but no man can beat the cotton market or the grain market." A trading system may make money for a while, but no system can "beat" the market. As a result, long term systems are a waste of time and short term system must be kept on a short leash, trading them while they work but being prepared for them to stop working at a moment's notice.

Frank Shostak concludes his "What is Wrong With Econometrics?" with: "Rather than viewing econometric models as a sophisticated technique that can discover the hidden truth about the economy, we should regard them as clumsy and expensive extrapolative devices, which have nothing in common with reality. Anyone who decides to use models as an analytical tool or a forecasting device runs the risk of seriously confusing himself." In the same article, he cites Mises, "As a method of economic analysis econometrics is a childish play with figures that does not contribute anything to the elucidation of the problems of economic reality." The same, I believe, would be true about trading systems.


If you want to trade the market, you have to look beyond the statistics and throw out what has worked in the recent past. You need to study history going much further back. Study the Great Depression and its causes. The Panic of 1907. The many panics of the 1800s. The history of previous empires and their falls. Most importantly, study Austrian economics. With Austrian economics, you will see how the government caused our current crisis. And you will learn how the current government intervention is doing more harm than good. And you will learn how capitalism, if it is allowed to work, will lead to further prosperity.

Friday, January 30, 2009

Stocks and profits

From Bloomberg: "The S&P 500 is down 7.8 percent this month, eclipsing the 7.6 percent drop at the start of 1970 and adding to last year’s 38 percent plunge. Profits decreased 38 percent for the 208 companies in the S&P 500 that released fourth-quarter results since Jan. 12. Last quarter is projected to mark the sixth- straight period of decreasing profits, the longest streak on record."

The market was down 38% last year and profits reported so far have declined 38%. Coincidence?

Thursday, January 29, 2009

Legalizing Tax Evasion

I already wrote how Geithner's tax evasion may encourage others to do the same.

Press release about Rep. John Carter's, a Texas Republican, new bill:

"Rangel Rule"

All U.S. taxpayers would enjoy the same immunity from IRS penalties and interest as House Ways and Means Chairman Charles Rangel (D-NY) and Obama Administration Treasury Secretary Timothy Geithner, if a bill introduced today by Congressman John Carter (R-TX) becomes law.

Carter, a former longtime Texas judge, today introduced the Rangel Rule Act of 2009, HR 735, which would prohibit the Internal Revenue Service from charging penalties and interest on back taxes against U.S. citizens. Under the proposed law, any taxpayer who wrote “Rangel Rule” on their return when paying back taxes would be immune from penalties and interest.

Wednesday, January 28, 2009

Socialist business cycle

One of the goals of socialism is to eliminate the business cycle:
"The unfettered competition of capitalists is replaced by cooperation and the business cycle by planned stability."

I agree that socialism would indeed eliminate the business cycle. But instead of "planned stability," you get perpetual recession. As occurred in Cuba, the Soviet Union, and Maoist China, the economy declines year after year. I prefer instability to their kind of stability.

US government buying bonds from the US government

From today's FOMC meeting:
"Specifically, the Fed said it is "prepared" to buy longer-term Treasury securities if the circumstances warrant such action."

The Fed and Treasury of course are both part of the US government. One federal agency buying debts from another federal agency? They are simply taking money out of one pocket and putting it into another.

Tuesday, January 27, 2009

Up on the news, but also down on the news 12:08 pm EST
Dollar rises after low consumer confidence report

AP 11:47 am EST
Dollar lower as consumer confidence hits new low

So which one is it?

FDIC: No extra return for extra risk

FDIC proposes rate caps for troubled banks

"Struggling banks would be banned from hiking interest rates above a national average under new government regulations proposed Tuesday that aim to halt such risky behavior. The Federal Deposit Insurance Corp. wants to change the way it calculates limits on deposit interest rates for banks that are having financial problems. Banks that are trying to stay afloat often raise their interest rates far above national levels in an attempt to attract new money."

If these banks don't compensate depositors for the higher risk, they will quickly go out of business. Yes, these deposits are FDIC insured so the risk is supposed to be the same as more stable banks. However, depositors still have the risk of loss of access to funds while the bank is taken over, the inconvenience of the closest bank branch being farther away, and having to redo any automatic deposits or withdrawals.

Previously, I might have opened an account with the riskier bank to collect the higher interest rate. As a result of the new law, I would definitely choose the safer bank since there is no advantage in using the riskier bank. The riskier bank is now guaranteed to go out of business as it is unable to get new deposits.

My stimulus idea

While the President and Congress bicker over how much to spend and which taxes should be cut to stimulate the economy, here is one idea they are totally ignoring:


A cut in the capital gains tax automatically increases the value of any future corporate earnings and, therefore, will increase the stock price of any company expected to make profits in the future. This country has lost at least $20 trillion of paper wealth and this will help recover some of it. Spending money and going into debt isn't going to make us wealthier. But cutting the capital gains tax will.

But what about all that lost revenue to the government? First, I love it when the government collects less revenue. But more important, with the huge losses in the stock market, I am sure the government will be collecting little to nothing from the capital gains tax. So the cost to the government is very low.

Will this single handedly solve the economic problem? Definitely not. Will it help? Probably. But very important, even it has no economic benefit, the cost of eliminating the capital gains tax is very low.

A side benefit, taxpayers save millions of hours no longer having to fill out Schedule D.

Oil prices are the symptom

I watched Larry Kudlow and Peter Schiff go at it on CNBC. Larry Kudlow asked about the huge "tax cut" as a result of lower oil prices. Mr. Schiff replied that low oil prices are only temporary and will go higher.

I'm not sure if Mr. Schiff is correct in his prediction, but I know that, while we are benefiting from low oil prices, it is wrong to count our blessings. Low oil prices are the symptom, not the cause.

As the world economy enters a deep recession, demand has fallen sharply and oil prices have crashed. As long as the economy remains weak, oil will stay low. And when the economy recovers, so will oil prices.

So let's not hope for continued low oil prices caused by weak demand. Let us instead hope for higher oil prices caused by an economic recover. Or better yet, low oil prices caused by increased supply and alternatives, coinciding with an economic recovery.

Monday, January 26, 2009

Chief Tax Evader

Timothy Geithner is expected to be confirmed today as Secretary of Tax Evasion… I mean Secretary of the Treasury. I wonder how much tax evasion will increase in the near future. With Americans struggling to make ends meet and losing their jobs and taxes sure to increase, the benefit of evading taxes go up. Many people must be asking themselves, "If the Treasury Secretary can evade his taxes, why can't I?"

UPDATE: Timothy Geithner was confirmed as Treasury Secretary. There really was little doubt he would be confirmed, despite his tax evasion. But did we really expect Senators like Charlie Rangel, who is also being investigated for tax evasion, to vote against Geithner for that reason?

Bank lending down, but not enough

The front page of today's Wall Street Journal reports "Lending drops at big U.S. banks." The opening line reads "Lending at many of the nation's largest banks fell in recent months, even after they received $148 billion in taxpayer capital that was intended to help the economy by making loans more readily available. Ten of the 13 big beneficiaries of the Treasury Department's Troubled Asset Relief Program, or TARP, saw their outstanding loan balances decline by a total of about $46 billion, or 1.4%, between the third and fourth quarters of 2008, according to a Wall Street Journal analysis of banks that recently announced their quarterly results."

I too am shocked, but for the exact opposite reason. The banks are starving for capital, profits are non-existent, revenue has dropped dramatically, and they are going bankrupt, getting taken over, or being nationalized. They should be dramatically cutting back their lending, preserving capital, and reducing risk. And considering the riskiness of lending in this economy, where the corporations they lend to are also going bankrupt left and right, a 1.4% decline in lending is not nearly enough.

Friday, January 23, 2009

Efficient Market Austrian Investment Advice

Most Austrians argue that because of the US's huge budget and trade deficits and low savings rate, the US dollar will decline against foreign currencies and the US stock market will underperform. But most Americans, investing through their 401(k)s or IRAs, buy equities through a generic mutual fund which invests zero or ten percent in international stocks. Those few who have read the research know that 70% US and 30% international is the "optimum" reward versus risk allocation. But even that allocation invests too little in international.

According to Vanguard, the US accounts for 44% of the world's market capitalization with 56% being international. This 44-56 allocation should be the "optimum" allocation. Efficient market theory claims you cannot beat the market. This allocation does not attempt to beat the market. In fact, the standard 70-30 allocation tries to beat the market by speculating that the US market and dollar will outperform foreign markets. This allocation should also satisfy Austrians, like myself, who believe that foreign markets offer better investment opportunities and that most Americans need to increase their international investments.

Speculators can deviate from this baseline, but the average investor does not want to have to do research, place trades, or monitor their investments too closely. This 44-56 allocation is a good allocation for investors and a good baseline to start from for speculators.

Vanguard Total World Stock Index Fund Investor Shares (VTWSX) has this exact allocation, but has a 0.25% up front fee and a 0.45% expense ratio. It is actually cheaper to do it yourself with Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) which has no up front fee and a low 0.15% expense ratio and Vanguard FTSE All-World ex-US Index Fund Investor Shares (VFWIX) which also has no up front fee and a 0.40% expense ratio. In total, you'll have worldwide exposure at a cost of just 0.29% per year. You can also trade the ETFs which are VT for the world, VTI for the US, and VEU for the world excluding the US.

Incentivize Jury Duty

Sixty of my fellow citizens and I were called in for jury duty to Phoenix Municipal Court at eight in the morning. There were seven cases on the docket, all misdemeanors. Misdemeanor cases require only 6 jurors and 1 alternate, so 49 jurists were required if they all went to trial. Fortunately, there is a monitor that shows the number of cases remaining. All morning long, as we sat there reading books and watching a movie they put on, we watched the number tick down. By lunch time, there were just two cases remaining. The other five cases must have been settled, dropped, or delayed. So they let half the people go. The other thirty of us stayed until 3:30 pm, by which time there was just one case remaining and would be doing jury selection the next day. We were all happy to get out of there, but disappointed the government had wasted our time.

This would never have occurred in a private legal system. In a private system, jurists would demand payment for their time. Sixty people times eight hours is four hundred eighty hours. The average hourly wage in Arizona is about $18/hour, not including benefits. The government wasted $8,640 of our time, which a private system would have to reimburse.

In our current system, a set number of people are called in for jury duty each day. The evening before, you call in and check if you are excused or have to appear. The number of people told to appear is based on the number of cases on the docket. When a case is scheduled, the judge, lawyers, and defendant meet in the morning and go through motions. Oftentimes, a settlement is reached that morning. A case scheduled for Monday morning will rarely go to trial before the afternoon. Why can't the lawyers meet Monday morning or even afternoon and then jury selection can begin Tuesday morning if needed? Only call in jurists based on the number of cases going to trial, not just on the docket.

Lawyers and judges will not like this solution. If the lawyers decide to go to trial right away, they want to be able to choose jurors immediately. If they finish settlement talks on Monday but have to wait until the next day for the trial to begin, they will have nothing to do the rest of the day. For them, time is money. And as long as jurists' time is not worth anything, the government has no incentive to stop wasting its citizens' time.