Monthly Archives: October 2016

The End of Reason

The most important event of the week involved neither the FBI or Billy Bush. The Bundy case was ended with a stunning unanimous "Not Guilty" verdict. It is important to remember that verdicts are rendered as to the charges and not necessarily the realities. The results can be summed up like this:

A militant, armed militia group took over a Federal Game Land, occupied it for an extended period of time, made it dangerous for the workers to go to their jobs and recruited hundreds of armed civilians from across the country to come help them - but committed no crime and were merely exercising their Constitutional rights..

Americans, on both sides of the aisle have deeply twisted the concepts of "rights" and "privileges." Rights cannot be revoked but still carry consequences when acted out. Privileges are granted and revoked in regular process. Essentially, a militant group could now over take a Federal building and have precedent as to its legality. Understandably, the charge of "Conspiracy" played directly into the verdict and the conspiratorial Pynchon mindset of the public. The defendants were known to be followers of fringe fanatic groups such as The Oath Keepers, The Tenther Movement and The Praetorian Guards.

Trump's rhetoric and Clinton's resume play into the militant response "rights" narrative. These groups and their views will be emboldened not just by the jury verdict but by both/either a Trump victory or defeat. Emotion precedes the end of reason.

As the great Sen. Warren Rudman said of Ollie North's Iran/Contra scheming, "The Constitution gives the American people the right to be wrong about things." And that right has consequences.

The Slow Growth Meme

The pre-determination of slow growth for the US and other developed nations took another step forward with a WSJ cover story on "Learning to Live with Slow Growth." The finger-pointing centered on productivity, or it lack there of. Even the chart posted shows a sideways path from the 80s to the crash, damaging the base premise.

In reality, the productivity miracle, heralded by the Greenspan Fed, never really took place. Innovation (computerization) in a service economy was exciting but hardly the Holy Grail. Consider Lawyer X, cheap computing power and innovative software boosted his and the firm's efficiency. Labor intensive work became easier and more streamlined. The quicker he embraced and implemented the tools, the potential profit margin of his work increased. But what about his work relative to other lawyers? Weren't they rolling into these new technologies also? Once all firms had updated their systems, was Lawyer X, or the entire Law community any more productive from an economic standpoint?

The financial system is a perfect example of the productivity meme myth. Everyone chased technological innovations right down to suing each other over lines of code. It is too easy to call this chase productivity increases. If one used to take 10 seconds to buy 10000 shares and now it takes 400 milliseconds..is the trader more productive? Once everyone has the same platforms, is the system? Essentially, 17% of the economy became quicker, not "better" and certainly not more productive. (Who had time to read Twitter?)

The production, availability and use of credit has a much more accurate effect on growth than the always cited productivity. Since the Industrial Revolution, and even centuries earlier in the Mediterranean, individuals, groups and societies that rejected the Puritanical notions equating austerity with morality, grew faster and out prospered their neighbors. Big government, small government, balanced budgets, raising taxes, lowering taxes, privatization, regulation, reform or deregulation all failed to deliver the productivity nirvana. Credit, however, made the multitude of Crusades for the cause possible.

But don't take my word for it, take James Burke's:

Enter Voldemort

In the early days of the Bill Clinton administration, James Carville had a melt down about the new POTUS' quick abandonment of his campaign agenda. As outlined in Bob Woodward's outstanding The Agenda, the "Ragin' Cagun" was pointing to a napkin with 4 top issues, all tossed aside because Treasury Secretary Bob Rubin had convinced the new President that "the bond market would not permit it." To which Carville famously replied, "I used to think if there was reincarnation,  I wanted to come back as the president, or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody."

Now is the time to start imagining what a Clinton 2.0 agenda might look like. Central bank bond purchases were considered desperation 3rd world Hail Mary's as recently as POTUS 42. The deficit was public enemy No. 1, as it was with Obama and the "sequester." The destructive force of inflation remains a feared ghost, the Valdemort of economic old timers. I do not get the sense that Hillary will be so quick, or politically able, to throw her agenda aside for the now 1.75% 10 year. Compare to the ankle shackling 6.50% that so constrained Bill and Bob. (interesting sidebar- the 2/10 curve is about 40bp steeper today than 1997 !)

I think a change is coming. I don't think the bond market, having been tamed for so long, scares Mrs. Clinton. I don't think, even with her many Wall St. lectures, she seeks the council of FI grey- hairs who recall the power of falling bond prices. I think the re-incarnation is beginning.

We’re All Rooting For You

My dog opined about the TLT back on Sept 15. after 10 points of downside in the Ultra Bond contract. As markets tend to do, the bond then rallied into the end of the quarter aided by some D-Bank FTQ. But, low and behold, despite moderate data and continued international issues...The UB is back to making new lows and hasn't had an up day in Oct.

We are just glad no one is getting hurt, as always.

The Dog Weighs In

Issue #1: D-Bank

And so it goes, as Kilgore Trout may have summed it up. A story, a punishment, a trial balloon is "leaked" to the WSJ about a $14 B fine for Deutsche's now nearly decade old mortgage backed shenanigans and a "panic" quakes up in the bank's credit default swaps. Despite negative interest rates and heavy ECB bond buying the ancient institution continues to hemorrhage billions in losses annually. As said trial balloon melted more  capital away from the bank - already nearly halved for the year  - a more "palatable" $4 or 5 B number circulated through the water carrying press.

This game of governmental support and flogging has allowed for outrage on both the left and the right. A week ago we were enthralled with the public dressing down of John Stumpf for Wells Fargo's low brow fleecing of its customers. Others will argue that it is government oversight and regulations that are pushing banks into these unsavory activities. The truth is banking is and always has been a boring little business. National support for the industry was followed by massive fines for illegal and unethical behavior of systemic scale, paid for with electronically generated balances. (This international reach out, some believe, is tit-for-tat slapping after Apple. )  It's a self-perpetuating "There ALL Twix" ,circle jerk ,incestuous waste of time. Which leads us to

Issue #2

The Shallows. If you haven't read the WSJ Weekend page A11 opinion by Peggy Noonan, take 5 and do so. You don't have to subscribe to Noonan's world view to appreciate the truth behind "life in the shallows." The term comes from Nicholas Carr's book of same name. The notion comes close to one I've promulgated here, long ago, the internet makes us all dumber. Noonan and Carr see a direct link between the internet and media news cycle reporting. It's not just the election that has us wading in the shallows. The ability to deal with complex structural issues like the one described above is impaired by the thin emotional responses that are passed off as intelligent discourse. Which leads us to

Issue #3

Who is this Paul Volcker Senior Fellow for International Economics at the Council on Foreign Relations Sabastian Mallaby ? Mr. Mallaby has penned a new bird cage liner on Alan Greenspan called, are you sitting down?, The Man Who Knew.! Trotting out the usual genuflections to Ayn Rand and mysterious missing doctoral thesis, Mallaby constructs a revisionist history glowing portrait of the "Maestro." Reading this amazingly distorted view of recent history caused my soul to throw up in its mouth a little more than a few times. The sub-title is the "Life and Times of Alan Greenspan" but could easily be " Because He Made It Happen." From quid pro quo rate cuts for deficit reduction, GSE balance sheet pump ups to supply "AAA" debt , to self regulating financial innovations, Greenspan oversaw the mudslide. An ex-Randian leaving a decades long trail of activist tinkering that germinated the 3T monetary pornography we now call modern central banking. Long live Lincoln Savings #GIK.

And so it goes, indeed.