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I think it's about time. We're near our 8 year blogiversary and I just don't have the juice anymore, and neither do my co-bloggers. Thank you to all who read, and all who commented over the years.
I'll leave the site up. Please keep us in your RSS in case in some future time, we revive it.
Remember my co-worker who walked away from his mortgage after buying at the peak? I talked to him recently and he says he knows "a guy" who can hook him up with Apple stock. No kidding.
This guy is the poster boy for the uninformed investor who gets in at the peak, sells at the trough, and then plays victim. He's not alone--Apple has achieved social transcendence. It's no longer just a company; it's something bigger. It's Americana.
A lot of people are going to be hurt by Apple's stock.
Many things about economics are counter-intuitive. People see industries break down in their own country only to sprout up overseas, leaving native workers unemployed. It's very counter-intuitive for anyone to believe "supporting" these industries harms the country.
Another counter-intuitive idea in economics is that failure is essential to a prosperous economy. When an enterprise fails, there is pain, uncertainty, and dislocation. Sometimes failure happens in bunches, magnifying the downside.
So we have the entire economics establishment trying to avoid failure at all cost.
- "If the big banks hadn't been bailed out, we'd have had 30% unemployment. Those bailouts and quantitative easing and ZIRP saved us from a depression."
- "A gold standard would nullify monetary policy, thereby allowing no tools to aid employment."
- "The gold standard resulted in frequent recessions."
All of these arguments imply failure is almost always something to avoid. I'm not sure economics has ever shown that the alternatives to these examples of failure are preferable over the long term.
Ron Paul on CNBC:
What I find amazing about the clip is that Ron Paul briefly discusses what is essentially a free banking monetary system, and he is taken seriously--this on the leading financial news network in the world. Even as recently has two years ago, the idea that this could happen was a pipe dream.
It truly was no problem. In the past year, I've written roughly 5,000 pages of scholarly literature, most on very tight deadlines. But you won't find my name on a single paper.
I've written toward a master's degree in cognitive psychology, a Ph.D. in sociology, and a handful of postgraduate credits in international diplomacy. I've worked on bachelor's degrees in hospitality, business administration, and accounting. I've written for courses in history, cinema, labor relations, pharmacology, theology, sports management, maritime security, airline services, sustainability, municipal budgeting, marketing, philosophy, ethics, Eastern religion, postmodern architecture, anthropology, literature, and public administration. I've attended three dozen online universities. I've completed 12 graduate theses of 50 pages or more. All for someone else.
What does it say about graduate work when someone with no background in the field can write a thesis?
I recently realized something I'm sure you all already know.
The goal of both Google and Facebook is to increase the signal-to-noise ratio of the internet. Google does this algorithmically. They get their engineers to model the signal and write code to filter out the noise. Facebook, instead, uses the evolved human social instinct to achieve something similar.
Meredith Whitney made a famously bearish call on the municipal bond market. Now our Congresscritters really really want her to testify before them.
Apparently the controversial analyst has so far "rebuffed the committee's attempts" to have her testify on February 9 at a hearing, and they might resort to subpoenaing her and her controversial report if she continues to refuse.
When Whitney said on national television that between 50 and 100 major muni bond defaults will probably happen over the next year, investors panicked and withdrew billions of dollars from muni bond funds.
As usual, short sellers and "speculators" get blamed for providing information to the market. This doesn't, of course, change the fact that most major cities are bankrupt.
Fragility: easily damaged by insults
Robustness: able to withstand insults
Evolution has designed the human body with robustness. The liver and spleen, both somewhat delicate organs, are protected behind the bottom of our ribcage. Peripheral nerves can regenerate. The most vital organ in the body--the brain--is encased in hard bone. The organs that probably suffer the greatest violent insults--bones--can heal to near baseline strength after breaking. The peripheral arteries are located very deep within the tissue of our limbs.
Another way the human body achieves robustness is via redundancy. We have two kidneys. Should you receive a spear to one kidney (and somehow manage to survive the insult), your other kidney will take up the slack. In modern times, this is how people can donate a kidney and do just fine. There's redundancy.
We also have two lungs, two eyes, two ears, two testicles/ovaries, etc. One of the most redundant systems in the body is the superficial venous system. You can knock off lots and lots of superficial veins and other veins will take over the return of blood flow to the heart, which is the basis of the treatment of varicose veins.
Consider a person who has donated a kidney. Now that system no longer has redundancy. If that one kidney fails, he's in deep trouble. So he has to really watch his health--monitor his blood pressure, avoid getting Type II diabetes, and avoid major trauma. His body is now more fragile.
Consider a person whose kidneys no longer work. Now he's on dialysis. His body is extremely fragile. He's dependent on an artificial kidney (dialysis machine) which only approximates the real thing to an imperfect degree. Patients can sometimes live a long time on dialysis, but in general, their life expectancy is limited compared to someone with one or two kidneys.
Let's consider that you have $100,000 saved up. Divide that into ten portions, or "aliquots", of $10,000. Let's say you invest one of those $10,000 portions. If that investment fails, you still have nine more portions--$90,000--left. This strategy of only investing one out of ten portions is not that risky. Why? Because it's redundant. Just like you have two kidneys, you have ten portions.
Let's say you invest five of those portions, i.e., $50,000. If that investment fails, you still have $50,000 left. Still pretty good, but potentially half of your savings could be wiped out. That would be analogous to losing one kidney. The system, initially redundant and hence robust, is now fragile.
Perhaps we can assign a "redundancy factor" of 9 to the first scenario (nine portions saved to one portion invested). That would mean a redundancy factor of 1 to the second scenario (five portions saved to five portions invested).
Let's say you invest nine of those portions, i.e., $90,000. If that investment fails, you only have $10,000 left. Our redundancy factor would be 0.11 (one portion saved to nine portions invested). You're getting more and more risky with your money. If your investment fails, you only have a little bit of savings left. Your net worth is fragile.
Now let's consider that you don't have any savings. Instead you borrow some "portions" from other people. Let's say you borrow $10,000 from someone else. If your investment goes bad, that borrowed portion goes bad, and you owe another $10,000 to the person you borrowed from. You'd probably have to sell your other possessions in order to pay it back.
This is a very precarious situation. The redundancy factor is now negative. I'm not sure the proper way to calculate it-- perhaps -1 (one portion borrowed against one portion needed to be liquidated in case of investment failure). Regardless, I don't want to get into any argument about this redundancy factor that I made up. It's simply a conceptual exercise.
As we move along the various scenarios, one thing becomes clear: the less redundancy you have, and the more debt you take on, the more it becomes paramount that your investment is a success. You have to get it right. You have to make a sound judgment about the economy, your competition, people's preferences, your enterprise, etc. You have to get it right. The more you borrow, the more vital it is that you perform. This is fragility. Any small mistake can ruin the whole thing.
In an economy in which people, corporations, and the govt are taking on massive amounts of debt, you have fragility. Everyone taking on debt has to be extremely accurate about the future or else they're in deep, deep trouble.
The amount of debt has increased since 2008. We now have greater fragility in the system than 2008. Going into more debt is no solution--it's throwing gasoline on the fire.
This post was inspired by the writings and interviews of Nassim Nicholas Taleb, though I'm not sure he'd agree with all of it.
The previous post was inspired the writings and public statements of Nassim Nicholas Taleb. I've read his books and watched pretty much every interview he's given that's available on the internet. I like to try to express other's ideas in my own way, so that's what I'm trying to do here.
In many interviews he gives, especially on CNBC, the questioner inevitably asks him, "So what's the next Black Swan?" I'm not sure how he holds back his rage every single time, but Taleb politely responds that by definition, a Black Swan is something that is not predictable by most people, and if a lot of people predict it before it comes true, it's not a Black Swan. He usually adds something along the lines of, "I can't predict when and in what form the next Black Swan event will take place. What I can tell you is that financial system is extremely fragile right now."
Tying this into the prior post, the interviewer is asking a question about kinetics--when, and how? Taleb, though, responds with an answer about thermodynamics. The current state of the economy is fragile-- that's probably a better word than "unstable", but means something very similar. The system is extremely susceptible to insults, and by extension, a Black Swan event. If such an event were to occur, the economy would suffer tremendously. Taleb doesn't know when such an event might occur; it could be tomorrow, a year from now, or ten years from now.
He mentions in this interview that he wrote a new section in the 2nd edition of The Black Swan just to explain this point--the relevant part is about four minutes in.
"Fragility" and "robustness"--the latter being the ability to withstand Black Swans--are thermodynamic concepts.
I hate suburbia and the bour-geoi-sie...
I have to say... this commercial is downright genius in so many ways:
- the eyeliner
- the producer mouthing along to the lyrics
- "it's not really raging"
- hating suburbia but loving your bank
- intense drummer
- random guy in the back wearing funny hat saying, "It sucks!" (not in the TV version)
Ally Bank is slowly entering the pantheon of great ad wizards.
Suppose there was a treehouse that was shoddily built. There weren't enough wooden planks, and the ones that were there were held in place by rusty nails. Further, the tree on which it was built was old and rotting, and located in an area prone to wind gusts.
You could justifiably make a statement as to the current state of the treehouse relative to a possible future state. Namely, its current state is up in a tree, but some time in the future, the pieces of wood would be lying on the ground, along with any unlucky children that might be atop it at the wrong moment.
You might say that the current state of the treehouse is unstable. In the future, it will be in a more stable, though also more disordered, state. You might even say that there's a force pulling the treehouse from its current unstable state to its future more stable state.
Remembering back to my chemical engineering days, one of the concepts that seemed to transcend the field is difference between thermodynamics and kinetics. What I've described above is a statement of thermodynamics: how stable the current state of affairs is relative to some other state, which way the arrow of causality wants to move between the states, how strongly the pull is between one state and another.
Kinetics, on the other hand, would describe how fast the treehouse would move from its current state to the future state, what path it would take, what factors would speed up or slow down that change, etc. A kinetic analysis might involve the equation d=1/2gt^2.
Thermodynamics speaks simply to the stability of a system. It doesn't say how quickly or in what exact manner any change might happen; that's what kinetics is for.
Right now, the worldwide monetary system is in an extremely unstable state of affairs. The instability is caused by debt, fiat currency, and monetary inflation. We have ample thermodynamic knowledge of that fact. A more stable state of affairs lies at some point in the future: a world with much less debt, an end to fiat currencies, and lack of central monetary policy. What we don't have is kinetic knowledge: when that future world will come about, how quickly, and in what manner.
All we can do is try our best to protect ourselves from the current instability, and even those means are not obvious.
To be continued...
Growing up in Virginia, a "toboggan" was a knit hat. Only when I left the nest did I find out that to most people, a toboggan is a sled. A little googling revealed a discussion about this very discrepancy.
How very bizarre that this relatively long, unique word can mean two very different things! I'd like the linguists to explain this one.
A Google image search illustrates the double meaning as 95% of pictures show a sled and the remainder, a knit hat.
Peter Schiff, an "inflationist" interviewed Robert Prechter, a "deflationist". Both are libertarians and largely agree on most things except how the dollar-price of assets will perform over the long term.
The interview is somewhat difficult to listen to because Schiff is an annoying interviewer, constantly interrupting Prechter, and often, not really listening to his arguments. As I've said before, my personal view is that the structure of the economy is "deflating", i.e., deleveraging, but this is happening in terms of gold, not dollars. In addition, the Fed's actions are causing in a debasement of the dollar which will eventually result in hyperinflation of dollar-prices. These two processes are happening simultaneously.
So if I had to side with either one, I believe my views more closely match Schiff's. Having said that, I think Schiff too easily brushes aside the following arguments from Prechter:
* The last time people were talking about inflation was in 2008 when oil prices were acting bubbly. That was precisely just before the onset of a massive acute deflationary wave. Similarly, only over the last month have people started talking about inflation again. Personally, with the way the silver market recently had a parabolic rise and reversal, I think there's a good chance that another deflationary wave has begun. Prechter's point is a good one: just because everyone is talking about inflation doesn't mean inflation is going to happen.
It just as likely means inflation is a crowded trade and a reversal is imminent. Schiff has made this argument himself when he reminds everyone that back in 2006, as real estate was rising parabolically, everyone thought he was an idiot, but he doesn't seem to recognize Prechter's argument that we may be at a similar inflation peak today.
* Inflationists have to answer certain questions. Why are stock prices lower than their 2007 peaks? Why are interest rates low? Sure the rise of commodity prices and precious metals prices seem to point to inflation, but those are not the only data worth evaluating.
My personal view is that we will have periodic waves of inflation and deflation. 2008 was the prior inflation peak. Sept 2008-March 2009 was a great deflationary wave. March 2009-now has been an inflationary wave. As I said above, I think there's a good chance the next deflationary wave has begun. My disagreement with Precther is that I believe one of these days, the inflationary wave will take off and go to infinity. However, I take seriously the view that this may not happen and the forces of dollar-deflation will rule.
* Social mood changes. The public was largely against the prior bailouts, TARP, QE, stimulus, etc, and in their eyes, those measures have not really worked as unemployment remains high and standards of living continue to erode. Just because TPTB had the political capital to enact a bailout last time doesn't mean they will have it the next time. The environment has already changed drastically since 2008 and 2009. Republicans control the House. Obama is a lame duck. Tea Party movement exists. Keynesians like Krugman are ever-more unpopular. Jim Grant even has an opinion in the NY Times arguing for a new gold standard. A static analysis of what politicians can pull off is foolish.
As I said above, I come down on Schiff's side, but I think Schiff brushes aside Prechter's arguments too quickly.
One big takeway: There's one strategy that will work no matter which one of them is proven correct: physical gold. Everything else is up in the air.
I've been putting off writing my Grand Unified Theory of the Coming Monetary State Change post for a long time, and I've given up. So I'll do a short summary post instead.
Forget the words "inflation" and "deflation" for a moment. These are meaningless concepts. Think instead about "debasement" and "deleveraging."
What we've had over the last 30 years (100 years?) is a massive build-up of debt. Debt is a form of leverage. The way excess debt is resolved is deleveraging. In deleveraging, capital has to be sold off to pay back debts. Defaults happen. Personal bankruptcies occur. Value transitions from capital goods to value's most liquid form: money. Nature's money is gold.
Summary: The coming deleveraging will transfer value from capital to gold. Now, back to the popular price-level words. Deleveraging is essentially deflation in terms of money (gold).
In our fiat system, the powers that be are intent on preventing falling prices and paying off debts with useless dollars. Thus, they have the printing presses running day and night. They think they can control the amount of debasement that occurs, but like any central planner, they underestimate their limitations. Value is subjective, and the value of dollars is dependent not just on how many are in circulation, but how much the rest of us desire them.
Summary: The dollar will be debased nearly completely.
Super summary: The future involves a deleveraging carried out with respect to gold and a debasement of the dollar. In the parlance of the times, deflation in terms of gold, and hyperinflation in terms of dollars.
SuperDuper summary: The price of most things in dollars should increase. The price of most things in gold will decrease, or said another way, gold will increase in value faster than pretty much everything else.
Corollary: The prevailing disagreement among people who follow this stuff seems to be inflation vs deflation. So which is it?
This is the wrong framework. They're both correct. The underlying structural change to the economy involves a deflation, but it's deflation priced in gold, not dollars. At the same time, the Fed's money printing will cause a hyperinflation priced in dollars. The dollar price of gold will rise faster than the dollar price of anything else.