Friday, October 31, 2008

Not Since Joseph Kennedy ...

First, some good news. I was checking the short interest on several stocks. Now that the presidential election is in the bag, short sellers have started backing out big time. We have not seen such skillful manipulation of the markets since the days of Joseph Kennedy's legendary stock manipulations.

Unfortunately, short sellers pulling back from the market does not restore stability. The short interest has dropped from the stocks I follow from around 80% to a more reasonable 7%. Wary investors now know that the street know that short sellers can essentially double the number of shares floating on the market of any stock at any given moment. This means, short sellers have a greater effect on a stock than the performance of the company.

As our communication technology gives us the ability to trade stocks in real time. There is zero value to shorting. The argument that shorting makes the market more efficient is moot because you can't get more inefficient than instantaneous.

On the down side, Patrick Byrne has a piece on how naked short selling destroyed an alternative energy company called VeraSun.

Alternative Energy is precisely the industry that requires mechanisms of shared equity financing to survive. Alternative energy requires huge upfront investments of capital. Since the price of energy fluctuates, alternative energy firms have a balance sheet that slams back and forth. Naked short sellers can use this volatility to destroy any publicly traded alternative energy company in down quarters (which are inevitable).

The practice of short selling allows the big oil cartels to collude with any rogue on Wall Street to wipe such firms out of existence.

The regulations that allow people to sell stock they do not own sits among the lamest regulation ever conceived.

Wednesday, October 29, 2008

Pay As You Go Thinking

Barack's infomercial was well produced. Unfortunately, the message didn't move me.

I really disliked Obama's plan to repeat Jimmy Carter's folly of trying to make the government the primary investor in alternative energy. The spike in fuel prices was sufficient to spur the investment our economy needs.

Obama's claim to nationalize the alternative energy sector is likely to decrease the overall investment in altnerative industry.

The free market is the best avenue for developing alternative energy.

Think about it. The goal of alternative energy is to maximize the returns on the investment of resources. This is what the free market does. Unfortunately, plans to make the Federal government the primary investor in the sector will result in a false economy where business compete on gaining political influence rather than competing on the efficient use of energy. Companies with viable plans will wane, while those with political ties will dominate. When the government manna dries up, the country will be in a worse energy position than before the plan.

This is exactly what happened in the Carter era.

Nationalizing the alternative energy sector was just a minor part of the infomercial.

The main thrust of the infomercial was to highlight individuals who are being crunched by the economy and gave hope that the President could solve their personal problems. This is the part that ripped at my heart as I hate to see the little guy crunched.

The infomercial highlighted the fate of a retiree who lost the bulk of his pension when his former employer bellied up.

Clearly, it should be illegal for a company to go broke or for an investment to lose value. It makes me angry that an employer went broke without government approval. But I am not sure how a president sitting in an oval office is going to arrange it so all investments go up at an equal rate.

There was a really touching picture of a women driving through neighborhoods filled with nice looking houses who was feeling all harried. Of course, there were the stories of people with illnesses that led to outrageous medical expenses ... there is also a legion of people who are underserved by employer based health care.

With just a pinch of audacity, there is hope that a president with a highly skilled production staff that tells such stories in heart-filled ways must have the ability to solve our individual problems.

Unfortunately, I am a jaded person. I fail to see how a person 3000 miles away is going to solve any of my problems.

It seems to me that our problems lay with the sad fact that most of us are trying to live our lives on a pay-as-you-go plan instead of a save-and-play plan. I want a leader who leads us back to a day where people saved their money and built equity in their community.

This problem isn't limited to government.

Employeee based insurance is a private effort to fund health care on a pay-as-you-go scheme. The structure gives us comfort in economic booms. In times of economic uncertainty, we find the system suffering a dip in our ability to pay.

I've written a number of gripes about mortgage lending. Mortgage brokers and real estate agents try to coax people to buying based on the monthy payment rather than matching the size of one's house to one's needs.

The great fault in our economy is that we are all taught to see our income as something that is fixed, when, in truth, it is something that is fluid and that we must be prepared for hard times. With this present mindset, Americans systematically build up a big load of fixed expenses on the belief they have a fixed income that will increase at a rate higher than inflation. Even worse, many people borrow on the assumption that they have a fixed income that will steadily increase.

It is the failure to realize that the economy is fluid that leads us to ruin.

BTW, the same mindset affects business. The system calcifies American businesses with fixed costs. The business seems stable in times of economic growth. But, even a small puff of economic uncertainty can topple a business made brittle by fixed expenses.

Rather than accepting the obvious truth that the economy is fluid, we fall for the ploys of insurance agents and hedge fund managers that say we can shelter ourselves from risk with complex financial instruments like government backed reinsurance or by wrapping our entire financial system in credit default swaps.

Both private and government efforts to create a regulated market are doomed to failure. Prices will always fluctuate in relation to eachother. The path to prosperity is to give up both the private and government efforts to create a regulated market, and to encourage a mindset where individual people own and build real equity ... and have the expectation that prices fluctuate.

I was not happy with Obama's infomercial as the presentation had the government being the primary source of investment, while Americans at large would be continue the destructive path of living pay-as-you-go lives in a nation marching on the road to serfdom.

Tuesday, October 28, 2008

Rich Peasants

In the first Marxist revolutions, the agitators railed against a group called the bourgeoisie (the middle class). Today, the left claims to love the middle class. People are flocking to the Democratic party for "protection of the middle class."

So, what happened?

The big difference is that the hated bourgeoisie of the past owned the means of production. These people generally saved alot and built equity. The hated bourgeoisie would save and pay for their health care, education and retirement

The American middle class is a totally different beast.

The American middle class is a group of people who are deeply in debt and are dependent on their employer for their fixed incomes. They are dependent on the government for education, and for the bulk of their retirement. Some depend on the largess of their employer for health care, the reat depend on government.

The American middle class is now little more than rich peasants.

Anyway, what has me most upset with the Republicans is that they failed to turn the tide on the political process that reduced our nation into peasantry. Rather than rebuilding a real middle class that owned production, they tried playing the game of compassionate, bipartisan conservatives. The result is that they let the financial system be captured by rogues. The mortgages system to be come corrupt by government backed re-insurance schemes.

There is nothing in Obama's slate of goods that will restore ownership of production to the middle class. We might have the illusion of wealth created by debt financed tax cuts on taxes never paid, but nothing that actually increases the wealth of the people.

Unfortunately, no matter how one goes about it, a people can't remain rich peasants for long.

Thursday, October 23, 2008

Those Anti-American Marxists

The goal of sound byte journalism is simply to get negative labels attached to one's partisan opponents. Many left wing journalist work to get the label "bigot" attached to Republicans and the label "open minded" to their candidates.

Chris Matthews scored a home run in an interview with a naive Rep. Michelle Bachmann of Minn. He framed a question using the term "Anti-Americanism" and Ms. Bachmann fell into the trap and used the words from the question in the answer.

In my web wanderings and listening to Public Radio and other liberal sources, I've come across fifty plus references to the interview below. The left is promoting the piece as they believe they can use it to frame Republicans as bigotted. Reports say that Democrats have now given over $1.3 million to her opponent who might well win the seat from a person they've successfully labeled a bigot.

Chris Matthew's set up is simple. He asks a question with a politically charged catch phase in it. If his mark answers the question using words from the question (which is our natural behavior) then he wins one for his party.

I went to bed angry that our press has been taken over by second rate scum like Mr. Matthews.

I woke up in the middle of the night fuming about the interview for a much deeper reason.

As you see. We actually need to be able to talk about things such as "anti-americanism."

The assumption I made when listening to the piece was that Ms. Bachmann was playing the labeling game. We all read into Ms. Bachmann's using the word forced into her mouth by an attack reporter as some sort of evil plot conceived in the Skull and Bones sanctom of the Republican Party to associate the lable Anti-American with Obaman.

Ten thousand or so liberal bloggers and radio attack jocks took their marching orders and went with the talking points.

Obviously, this is what the Republicans were trying to do; It is the way we were taught to think in school.

The person trained in classical thinking would look at the discussion and notice that Ms. Bachmann was simply engaged in open discourse with the words on the table. The Republican from Minnesota wanted a way that says she sees negative things in the Chicago Political system. She tried expressing the thought with the words given by the moderator.

This is the way that talking works.

What has me most furious with the left is that they have this systematic way of destroying our basic ability to communicate. Currently, there is a whole slew of "Voldemort" style words that no-one is allowed to speak. We can't say the word "unamerican" we can't say the word "Marxist." When you do, the left accuses you of labeling people.

But, wait a second, with the possible exception of Kant and Hegel, Marx was the most important philospher of the modern age.

It is a diabolical trick. Marxist thought permeates the academic community, but the left has encaseed their saint in a "He-Who-Must-Not-Be-Named" aura.

To the Point

Now, I agree that slapping people with labels diverts from quality discourse. However, I believe that people should be able to use words without being attacked in the way the left attacked Ms. Bachmann.

For example, the term American and Unamerican are extremely important in helping us define our national identity.

First thing one should note is that definitions might change with time. For example there was a period in the 1800s when Mormons were extremely Anti-American. This is verified by the fact that they marched out of the United States and had military units that harrassed American soldiers as the soldiers moved into Utah to stop what they saw as the Mormon Rebellion.

Today Mormons go to parades and wave the American flag.

Are Marxists Anti-American

It is nice having words that we can use in discussions. The question "Are Marxists Anti-American?" is an interesting question from a logical perspective. A Marxist is a person who holds the cause of the revolution above all other issues. Clearly, when America is the primary obstacle to the cause, then the Marxist is anti-American and seeks to find ways to pull down the obstacle to the cause. If America were itself to become a Marxist state, then Marxists would be pro America as they use America as a launching pad for the next phase of the revolution.

This is a very simple and clean example of the way that things change.

There are many on the far left and a few on the far right whose patriotism is conditional on their group being in power.

This brings up the next question if a person's patriotism is conditional, is it really patriotism? A group that has the attitude "If I am not in power; I will agitate against you," is somewhat dangerous. Unfortunately, it is impossible to look inside a person's head and see their intent.

In conclusion, I agree wholeheartedly with attempts to avoid the small minded politics that comes when people toss about labels. However, I think the game where we place words in the "He-who-must-not-be-named" category is even more distructive than the appearance of words we don't like.

Regardless, this gotcha interview on MSNBC and the large number of blogs featuring the interview in their talking points stand out as a prime example of the dismal state of the American media.

Six Months from Now???

This quote is all of the net: (I copied it from Purple People Vote):
Speaking at a fundraiser in Seattle on Sunday night, Mr Biden said: “Mark my words, it will not be six months before the world tests Barack Obama like they did John Kennedy. The world is looking. We’re about to elect a brilliant 47-year-old senator president of the United States of America. Remember I said it standing here . . . we’re gonna have an international crisis, a generated crisis, to test the mettle of this guy.”

What's this "six months from now" stuff?

The US market has already fallen into a 70s style market where the press openly colludes with the miscreants of the world to manufacture discontent and financial crisis.

Look at the market. This type of game is playing out right now. The press will get together with hedge funds, plan an attack and short a company out of existence, just for some muscle flexing fun.

This year we saw international groups collude to drive the price of oil into the stratosphere. The gas price spike did wonders in elevating the miscreant's candidate of choice in the polls.

We are seeing unprecedented naked short attacks against companies, and short attacks against the American dollar, along with childish tricks to erode confidence in the election process.

There is no waiting six months for this funk to come down. It is happening as we speak. We had a solid two years of the press screaming Recession and Depression with hopes that if you repeat something long enough, it happens.

Our intellectual community is adept

I have no doubt that the international left will manufacture even worse things in the years ahead. In Marxist theory, an event designed to create chaos and move a society toward the left is called a praxis.

Tuesday, October 21, 2008

Definition v. Regulation

I wish I had finished the "Rich Theory" project. One of the themes I wanted to develop in the project was the distinction between definition and regulation.

By "definition" I mean that the government works to make sure that the rules are well defined and understood by the players in the game. By "regulation" I refer to situations where the bureaucrats themselves become players in the game and actively play the role of deciding who can do what and when.

IMHO, the government needs to take an active role in defining the financial instruments that are on the market, but should avoid situations where politicians play the role of deciding who can do what and when. When bureaucrats actively play in the market, they often end up making decisions for political reasons.

There are many things in the current market that scream out for greater regulation. The prime examples are short selling and credit default swaps. The fact that these financial instruments are screaming out for regulation tells me that either they need better defintion, or they should be excluded altogether.

Credit default swaps are essentially a side bet placed on a loan. The justification for the financial instrument is that they help save banks the risk of loans. The actual results of the financial instrument is that they externalized and consequentially magnified risks.

Short selling was a creation of regulators. Short selling allows brokerages to artificially increase the float of a stock when there is insufficient stock on hand in the exchange to meet demand. Modern communication technology has pretty much eliminated all of the blocks that would have once stiffled the ability to trade shares on the market. Today short selling exists primarily as a tool for hedging risks or for taking wild speculative gambles.

The fact that short selling is screaming out for regulation tells me that perhaps we should be thinking of defining the process out of existance.

As traders are adamant that shorting be allowed to continue, an alternative approach to the market would be to create a real time exchange which accounted for every share on the market. In this exchange a person could trade stock for an IOU from a short seller. They would not be allowed to sell themselves until after the short seller replaced the stock.

Such as system would not require a regulation from a bureaucrat because the actual material regulates the actions of the short seller.

In other words, when ever we feel that there is a compelling need for regulators in the market, we probably could find a way to define the market in ways that is inherently self regulating.

NOTE, I joined a site called Fotolia which has a decent prices on stock images for use on blogs and web sites. This is my first shot at buying stock. The image below put me back $1.00.

Monday, October 20, 2008

Maple Leaves

Texture of LeavesI have a strange desire to run out tommorrow and take pictures of the Fall folliage. During my walk with Coco, I popped some maple leaves off several trees and shrubs, then took pictures backed by various backgrounds. The best is to the right.

Sunday, October 19, 2008

Spreading the Wealth Around

Republicans are missing the boat on the Joe the Plumber conversation.

The problem isn't that Obama wishes to spread the wealth around. The problem is that centralization of the economy fails to do what its proponents claim. Yes, there is a brief spit of economic activity during the planned wealth redistribution. When the redistribution is over, the people on the outside of the new world order find themselves burdened by the yoke of an new power regime.

The best way to spread wealth around is the expansion of freedom and not the centralization of government.

What we have in the United States is a government that alternates between crony capitalism and socialism. With each tightening of the screw, the lot of the common man gets worse.

The equitable distribution of prospeerity will not come with the switching from one centralized party to the next. It can only come when the people realize that the answer does not lay with a central government or central market far removed from our primary concern, our local communities and families.

The Fake Economy

I agreed with John McCain earlier this year that the foundations of the real economy were fairly strong.

Pretty much all of our financial problems seem to originate with a bizarre fake economy created by banks, hedge funds and well intentioned but systemically unstable federal bureaucracies.

William Engdahl wrote on interesting article on one part of the fake economy called Credit Default Swaps. The CDS are relatively new creation which ballooned into a $62 Trillion dollar quaqmire in relatively no time. Apparently, the swaps are made secretly between banks and hedge funds.

Credit Default Swaps are a derivative designed with the intent of protecting the portfolios of super rich investors from risk. The mechanisms were designed to concentrate the benefit of financial stability on the super rich, while distributing the cost of financial risk on society at large. Sure enough, we are all being thrashed about by the externalized risk.
Warren Buffett once described derivatives bought speculatively as "financial weapons of mass destruction."

There isn't really much original thought centered around Credit Default Swaps. The credit default swaps involve the typical mix of derivatives and short selling of loans.

It is essentially the business model of Enron done on a global scale without consent of the billions affected.

Many reports attribute the creation of Credit Default Swaps to a Ms. Blythe Masters at JP Morgan Chase Bank. Ms. Masters graduated from Cambridge. Judging from her reported 2008 political contributions, Ms. Masters appears to be a left-leaning Democrat.

I contend that both the educational history and political leanings of Ms. Masters are relevant to understanding the current global economic crisis.

The market is a creation of our minds. What we are taught in school affects our minds and therefore affects the market.

If we were taught to value the building of equity, Americans would be spending their lives building equity, instead of this self destructive behavior where people take on onerous loans putting the vast majority of citizens in our nation in a form of debtors prison.

My experience is that left leaning professors are obsessed with abstract tools that can be used to concentrate benefits and distribute costs.

This has been true since Marx. If you ever bother reading Marx, you will find that he does not define communism. What he does is provide a perverted view of the free market (capitalism). A free market is simply a simply a system where people are free to engage in commerce as they please. Capitalism is a system where man is ruled by money.

The central feature of the left's view of capitalism are tools that concentrate benefit on political classes.

So, in my opinion, the way out of this mess is to create new financial tools designed to promote the building equity.

But such systems could not last long in a world where people are taught the negative way of thinking in the school system.

For example, I believe that a free society would have more than one type of financial exchange. The NYSE allows short selling. I think there should be exchanges for small equities that achieve market efficiency through exchanging the stock in real time, and that don't allow short selling.

The problem is that there will be libertarian wanks who will claim that the right to sell property you don't own is more fundamental than the right to actually own property, and the ability to have a vibrant market with different types of exchanges would be crushed under the weight of the ignorance imparted by our schools.

Saturday, October 18, 2008

Free Speech for Teachers

Republicans are really doing themselves a disservice in trying to ban teachers from wearing political pens (Washington Post).

The rational for the ban is that people in public service should not be using publicly funded facilities for campaigns to determine their boss. This rationale applies to small local offices. I don't think it should apply to schools.

I think it would be good if teachers wore pins declaring their allegiance to The Party. If teachers wore political pins, students would notice that all of their teachers belong to the same party. Such information would help students come to grips with how wildly unbalance and partisan their education actually is.

Students might even start to realize that the source of the partisanship ripping our nation apart is our one-sided public school system.

Thursday, October 16, 2008

The Wealth Envy Tax

Enough with the Joe the Plumber nonesense.

Would you like to see a list of the people targetted by the wealth envy tax:

Here it is:

The Inc. 5000.

You can browse the list by category, location and other cool features.

I read the list from top to bottom every year because it happens to list the companies I like the best ... small innovative firms that are doing well in their targetted market.

Obama notes that the vast majority of small businesses make under $250k a year. That is true because most small businesses are things like lawn mowing services, dog petting services and other side businesses.

Companies that provide higher paying jobs require a great deal of capital and require a revenue stream to cover materials, labor and high capital cost. It is possible for pure service jobs to have a low revenue per employee. The small tech and manufacturing firms that really drive the economy require substantial revenue per employee. You often find that a company would need $500,000 in revenue to pay the salary of a $75,000 a year engineer.

The people who create the innovations that spawn high paying jobs often go years in the red before they crest and have a brief revenue stream that triggers wealth envy at $250,000.

The debate about Joe the Plumber is silly. You can always pay plumbers under the table to avoid the high taxes. It is the Inc. 5000 that is the real target of the tax.

Wednesday, October 15, 2008

Infiltration and Capture

The media portrays Bill Ayers as a person who erred as a youth when he committed terrorist acts. The story goes that Ayers later vindicated himself with years of public service as a well paid muckety muck with the Annenberg Foundation.

Even worse, in the convoluted reasoning of the press, many have concluded that since Annenberg was a conservative, and he hired Ayers, then Ayers must now be a bipartisan.

I contend that the real story of Ayers is not his radical past, but the story of how all of our precious institutions are systemically being infiltrated and radicalized.

Anyway, I sat through the October 15th debate and found it depressing.

The part of the debate that turned my stomach most came when Obama said that he would require all students seeking scholarships to volunteer time with groups like Acorn or Ayers' project.

When I was a student I volunteered for such programs and came away deeply disappointed.

So many of these government sponsored organizations are driven by political agenda and are often more interested in indoctrinating students than in the community service that they wear on their sleeves. Students would do better dedicating themselves to their studies, or working a real job.

BTW, what I said is true of many of the religious groups on campus. As a non-Mormon in Utah, I see elements of indoctrination in the Missionary Training Center. This system has students in the impressionable years of 19-20 focused on expanding the political power of a central authority with which I disagree.

On the note of capture, the LDS Church was a commune and favored free love in the form of polygamy in its inception. The power base was captured by the right, making Utah the most Republican state. It is possible for the power base to be captured and transformed in other unexpected ways in the future.

The MTC, of course, is a private self funded effort. If this is how people chose to spend their time and money; then, so be it. A system where one throws the coercive power of government subsidized by taxpayers' dollars into an indoctrination effort, then the results are likely to be akin to the East German Stasi.

When people are inside organizations like the MTC or Acorn, they see it as something that is wonderful in every way. People on the inside of a powerbase tend to see it as righteous. People on the outside, however, see the efforts as something which is concentrating excessive power in a very small number of hands.

Anyway, Obama's plan to use scholarships to coerce students into volunteering for groups like Acorn does not suit my temperament.

Back to the debate ...

IMHO, the moderator spent too much time talking about issues where the president really should not be involved.

Remember, we are all supposed to be filled with hatred of the "Bush Imperial Presidency." The sins of the hated Bush all revolve around George Bush's usurping power that should not belong to the president.

However, the moderator kept asking questions that fall outside of the presidency.

For example, the moderator asked questions about how each candidate would balance the budget. The Constitution places the purse strings of the government in the hands of Congress.

IMHO, all of the questions about the economy, health care and education were also out of bounds. Our highly centralized government has the president doing too much.

The president is simply too far removed from these areas to be the decider on these issues. Doesn't anyone remember the ridicule Bush received when he said he was "The Decider?"

The president shouldn't be the person coming up with the plans. The president should be working to build consensus around the plans initiated by others.

In the limited form of government conceived by the founders, most of the decisions involving our personal lives (like health care and education) should be made locally, and not in Washington.

Oddly, McCain did okay with the few questions related to my view of what a president should be doing. He should have pointed out the questions in the debate were not relevant to the duties of the president.

I think too much of our minds are taken up with the big centralized machines of the big stock market, the big federal government, big education, and big medicine.

The great market collapse happened because big federal agencies (FannieMae and FreddieMac) centralized the mortgage industry. The mechanism was captured by groups seeking quick bucks on commissions for bad loans, and community organizers who pressured banks into making risky loans for political ends.

We will not find security in these big centralized systems because the rogues of the world are skilled at infilitrating and capturing the system.

This brings us back full circle to Bill Ayers. Billionaire Annenberg created a big fund to help improve public education. It was infiltrated and captured by people who seek to radicalize education.

Real security comes in the form of a limited government that focuses on doing what it is supposed to do well, and with smaller distributed organizations focusing on doing their jobs well.

The world falls apart when we depend on big markets, big government or big education.

Manipulators Vote Obama

8y million shares traded hands in the last minutes of 10/15/2008.

The great underlying problem with the market is that all of our securities have been so far removed from the equities and risks that they represent that the whole system is subject to epic manipulation.

The report that is supposed to have caused the sell off was a report that sales at stores had their sharpest decline in THREE years.

That is non-news if I had ever heard non news.

I repeat my belief that shorting, as it is practiced today, is very much a part of the problem. It increases volatility and makes the trading climate hopelessly removed from reality.

True to form, Obama joined the market manipulators and attacked the American economy during the debate. This process is so sickening.

Tuesday, October 14, 2008

Dogs and Bikes Don't Mix

I needed to shuffle some bikes around today. I also needed to take Coco on a walk.

The smart course of action would have been to place the bike atop a car and the dog in the back seat. Alas, I fear that most bikes in Utah travel more atop cars than on the road.

Rather than following the wise course of action, I did the foolish act of trying to take the dog for a bike ride.

I had a few hundred yards of bike riding with Coco trotting at my side. For most of the ride, however, Coco would try biting at the tires or jumping up on the seat. Realizing that spokes and tails are a bad mix, I ended up walking the bike for most of the trip.

Fortunately, most of the bike swapping involved just plain walking. Coco excels at just plain walking.

I am sad. I didn't ride my bike at all this summer. I did not even inflate the tires. My recreation time is spent walking a hyperactive dog.

BTW, people in Galveston suffered a hurricane of late. I realize they are less equal than the good folks of New Orleans, but Texans are in need. There is a bipartisan thing called the Bush Clinton Coastal Fund raising money to help with the relief. I am sure other organizations specializing in disaster relief are also engaged in helping with the recovery.

I wonder if the flooding of New Orleans would have had as deep an effect on our nation's psyche if it did not lend itself so well to partisan attack. A bipartisan effort for disaster relief receives a yawn.

People imagine that socialism will be a wonderful world where government helps all who are in need equally, while in actuality government aid is made in relation to expediency and not need.

Sunday, October 12, 2008

Staggard Horizon

I consider the short ban on short selling a failure. The ban created an event horizon and that event horizon dominated trading for several days.

This post lists two elements needed to make a short ban work.

The biggest problem with the 2008 ban is that it created an event horizon. Everyone knew that the ban would end at a given time. This softened buying prior to the event horizon. It also created an opportunity for manipulators to hit the stock with twice the venom after the ban.

To stop the creation of an event horizon, the end of the ban must be staggard.

The reason for the ban is to prevent stock manipulation. Manipulation happens in the absence of real data about a company. Manipulation tends to happen in the ladder half of a quarter and tends to stop just prior to a company's quarter report. The 2008 ban ended a good two weeks before quarterly reporting started to hit the scene.

The second step to making a short ban work is to time the end of the ban with the quarterly report.

As quarterly reports tend to be staggard, you could pretty much stagger the end of the ban with the reporting cycle.

Fitness Clubs

Fitness Clubs and spas, which most people consider a luxury, are generally the first businesses to suffer during an economic slow down. This is a well known phenomena.

Derreck read my last snide post as a defense of AIG, when it was meant as a defense of AIG's sending execs to a spa after the bailout.

The reasoning behind a bailout is that it reduces the hardships of all the businesses in a supply chain. Apparently, AIG had been sending execs on junkets on a regular basis. Resorts hosting these junkets were part of AIG's supply chain. The Monarch Beach resort is likely to have a lousy fourth quarter as people cut their spa expenses.

I don't get this thing where we are supposed to be filled with rage about a bailout doing what a bailout is supposed to do.

If we are mad, we should be mad at the bailout in general, and not the fact that AIG sent some execs to a spa.

On the wealth envy side of the equation, has anyone else noticed how Democrats lavish themselves with bath houses? That God-Awfully ugly structure at Kimball Junction is county owned health club. I suspect that 90% of the patrons of the club are socialist leaning Democrats. The fitness facilities at new public high schools put Gold's Gym to shame.

If you add together all of the publicly owned golf courses, fitness facilities, aquatic centers, etc.; you would find that the public sector outspends corporations on spa type perks several fold. Yet we have been trained by the intelligentsia to ooze with wealth envy when private business spend money on fitness related services, even despite the fact that such money is a drop in a bucket compared to what the state spends on its publicly owned facilities.

Saturday, October 11, 2008

Fire 'em all

During the last presidential debate, Barrack Obama demanded that the AIG execs involved in a junket to a spa be fired!!!!!!!!!

I would be all wealth-enviously angry about the AIG Junket thingy, except for the fact that their junket provides jobs for all the new age spa worker type people. New age types would not exist if not for the fabulously wealthy who fund people to flutter like butterflies around the spa.

BTW, have you noticed that everytime a Republican is involved in firing an executive or lawyer it is a scandal?

Democrats and union types are always jumping up and down demanding their enemies be fired.

Do you remember the grief Bush got for (gasp) firing lawyers. You can't fire lawyers. Lawyers are above the common man and deserve adulation.

Well, I was kind of angry with Bush about the lawyer thing. It should have been 900 and not just 9. I thought that the RIF of 9 lawyers was a test to see if he could save taxpayer's money by a larger RIF.

BTW, has anyone else noticed that the price of gas seems to have dropped a bit. I know it is not news. News, after all, is something that can be framed as such to help secure the Democratic Party's victory.

Friday, October 10, 2008

Byrne's Regulatory Regime

Hmmm, my entry in the Crack the Capture essay contest has three votes. The reason it is so high is because I cheated. I told people about it, and was annoying to the point that they voted for me.

Patrick Byrne's Deep Capture project simply seeks strong regulation to assure that shorts borrow stock before they sell. In disciplined shorts, I contend that, to prevent Failure to Delivers, one must also prevent the people who've loaned their stock to short sellers from borrowing until they get their shares back.

I contend that one final element is needed to make a short regime feasible. Brokers and mutual funds must report to investors when shares are shorted.

The vast majority of people who think they own stock today don't own stock. Their broker lent their shares to a short seller. Most of the people who think they own stock are simply creditors to short sellers. People want to be invested in the market. They do not want to be creditors of short sellers.

A disciplined regulatory structure for shorts would dramatically reduce abuses of short sales, but it would all but eliminate the number of people willing to lend their shares to short sellers.

The question is if a disciplined regulatory regime is tenable.

I contend that it is not.

The first problem is that a large number of hedge funds and investors have taken to investment formulas where 30+ percent of their portfolio is short at any given moment. (NOTE I see this systematic shorting as problematic as it diverts trillions of dollars from investments into paper fluff). Regardless the formulas exists and there is now a massive demand for short positions that outstrip the demand.

Because the demand for short paper outstrips the market, a disciplined shorting regime lends itself to manipulation. The first problem is that the restricted supply of short paper will be gobbled up by hedge funds making it neigh impossible for independent investors to short.

The second problem is that it simply adds one more layer to stocks for manipulation. Since the demand for short stocks would be insatiable, hedge funds will be able to manipulate the price of stock by making short paper available or by removing it at a critical time in the buying process. For example, a hedge fund would make all of their shares in a stock available for shorting preceeding a large buy, then they would clam up after the buy.

Disciplined shorting does not prevent hedge funds from being able to artificially increase the float of a stock. For example, a firm could buy 1M shares of stock in a sector, lend that stock to themselves and short. They could then role the IOUs and the short sales into two separate instruments. The hedge fund could then sell these instruments to their customers. Their customers would think they were invested in the market, but were just invested in fluff.

The disciplined short regime would reduce problems, but at every turn regulators will find market players doing reindeer games to manipulate the market by manipulating shares poised for shorts.

Any attempt to create a disciplined short regime will fall as the rogues of the world recapture the regulatory mechanism that enforces discipline.

Thursday, October 09, 2008

Regulators Short on Common Sense

A few weeks back, the Feds placed a temporary freeze on short orders for a select group of financial equities. The short term order expired between the trading session on 10/8 and 10/9/2008. Not surprisingly both days saw massive drops in the market.

The stock market is driven by anticipation. It was apparent to all that the end of the short ban would result in record shorting activity. Before the end of the expiration, people were hesitant to buy and quick to sell. The day after the ban expiration was another massacre. Why would you buy when you knew that shorts were going to artificially inflate the float on the market by several hundred million shares?

The defenders of shorting are pointing to the fact that investors behaved like lemmings in light of the short ban as proof that shorting is good.

My observation is that the lemming cliff dive taken by investors on the last days of the shorting ban shows that attempts to regulate shorting will have unanticipated consequences.

The very fact that several days of trading were dominated by the anticipation and manifestation of the end of the short ban shows that shorting has the affect of diverting attention from the underlying value of securities. Short selling and all the regulations around the activity around the anti-market activity draws attentional away from the actual value of securities and into destructive day trading and power games.

To me the events are further evidence than we can never have a happy middle ground where shorts are regulated. We will either have a market with completely unrestricted shorting where short sellers routinely short multiples of the float of securities, or shorting must be disallowed altogether.

The point I want to drive is that shorts are an artificial creation designed to regulate stocks. Selling something that belongs to someone else is the ultimate violation or property rights. Short selling is a regulatory tool that is antithetical to the free market.

Elimating short selling is not the matter of adding regulations. It is the matter of removing regulations that were designed by elitists who believed that the market was incapable of pricing equities on its own. The design of short selling is based on the premise that elitist brokers had perfect knowledge and that they would altruistically short overpriced stock.

The temerity of this assumption is astounding.

The short sell is the creation of regulations. Like most such regulations, history has shown that shorting have done substantially more harm than good.

Short selling is the creation of regulators.

Short selling is the creation of regulators.

Short selling is the creation of regulators.

Short selling is the creation of regulators.

Short selling is the creation of regulators.

Get the point?

Banning short selling is not a regulation. It is the removal of one of the most idiotic regulations conceived by anti-market regulators. The regulation has done nothing but transfer massive amounts of equity from productive segments of the economy into the hands of traders.

Shorting was designed by regulators as a tool for regulating the market. It exists so that brokerages can increase the float of a the market if they feel an equity is overpriced.

Like most regulations it has failed. The regulatory tool of shorting has proven itself to add to market volatility. Shorting makes it exponentially more difficult to value assets.

We can file the temporary short ban as another fiasco in the long line of fiascos created by this absurd regulator tool--the short sell.

Shared Equity and Low Income Housing

There has been a great deal of criticism of community organizers for encouraging low income families to take out subprime loans to buy houses in an overvalued market.

I commend the efforts to help low income families secure housing.

The problem is not with the intention of community organizers but that the community organizers used financing tools that exposed low income families to financials risks that they were not able to handle.

With shared equity financing, the community organization could work out financing where the low income family received a loan for a set portion of a house. The community organization would own a lien against the property for a set portion of its final sale price.

With shared equity financing, the low income family would end up with clear ownership of their portion of the house.

The community organization would own a lien against the house. This lien is a valuable thing that could be bundled with other liens and traded on the open market.

Unlike subprime loans, which investors treat as toxic, shares in community housing would actually be an attractive investment as they would be relatively secure (tracking the local real estate market) and they would carry a positive press of being an investment in the community.

NOTE, the reason for this post is to emphasize shared equity financing as the solution to low income housing. When a person has a big mortgage against the value of their property, they never have a clear idea what their actual equity is. Equity is the sale price of the property minus the mortgage. In shared equity financing the homeowner's equity is a set portion of the home value.

In the scheme of things, I had been thinking about this as a solution to low income housing. My previous posts talking about how it is the solution to the mortgage mess was an attempt to raise interest in the idea.

I've emailed this proposal to a number of groups. So far, interest is zero.

Wednesday, October 08, 2008

We Need Decentralization

Neither candidate seemed to have a good grasp of the economy. Obama is a skilled at attacking Bush and attacking the US economy. That is political strategy not economic expertise.

The partisan view is that all bad is the result of the opposition and all good the result of partisan loyalty.

It appears true that there has been regulatory capture in the mortgage and stock markets by the likes of George Soros and worse. This capture was made possible by the excessive centralization of the US economy.

The best path forward is to break the centralized regulatory regime and seek to re-established distibuted markets thoughout the US.

Neither candidate shows that they have what it takes to break the centralized regulatory regime. Obama wants to increase the centralization of the economy, McCain is good at building consensus, but seems to have no clear direction on where he would take the consensus.

America is suffering under the yoke of centralized planning. Through re-insurance, Freddie and Fannie centralized the mortgage market.

Unfortunately, the independent exchanges disappeared some years ago and the Stock market is run by a division of the mafia called the DTCC that allows organized crime in the form of hedge funds and foreign governments artificially inflate the stock on the market through failures to deliver (naked shorting).

Centralized economies are prone to catastrophic failure regardless of which band of crooks own the central regulatory regime (private crooks, or government crooks). The answer is decentralization.

The market did not decentralize under Bush's deregulation. Possibly the answer we need at this point of time in government aid in decentralization.

To get out of our mess, we need decentralization, and we need to replace the securities on the market which are too far removed from real equity with securities that better reflect actual equity, as mentioned in the last post (divorced from reality).

Tuesday, October 07, 2008

Divorced from Reality

The UN joins the call for greater regulation of the market.


The problem with our financial system is not with the lack of regulation. The problem is that the paper traded on the market is divorced from reality.

The mortgage backed securities don't reflect the value of the housing stock. They reflect loans backed by real estate ... they are a degree removed from the actual item. This degree of separation from reality allowed people to slip bad loans in the systems.

The stock market was brought to its knees by comic book regulations that allow unlimited shorting of stock. The market movers can inflate the number of shares on the market overloading the system with fantom shares. The short interest on the stocks I follow jumped from under 5% to up around 60%.

I suspect that half of the decline in the market this year can be attributed to brokers and hedge funds flooding the market with fake paper.

To fix the system, we need eliminate the regulations that allow insiders to inject fake paper into the system.

Common sense things solve the problem. For example, shorts must actually borrow the stock before they sell it. People who lend to shorts can't sell or vote in corporate elections until the shorter returns the stock.

As the real estate market is local, we need to get the grubby fat hands of the Federal Government and now the United Nations out of loans. Each and every effort made by the federal government to reinsure the mortgage market have failed. So, the feds need to stop that insanity.

The Feds and UN are too distant from the equities traded. Regulations at these high levels simply create a stage for catastrophic economic failure.

When local banks have to bear the risk of the loan, they don't make stupid loans.

It is possible that mortgages were a bad idea in the first place.

We also need new instruments to allow the people in a community to share in the development of equities in their community.

The last thing we need is more regulations. It was the capture of the regulatory regimes that allowed the ne'er-do-wells of the financial world inject their toxic paper into the system.

The market doesn't need more fluff from regulators. The market needs more of the hard fiber that only natural diet lends.

NOTE: On the page Shared Equity, I examine the difference between equity in businesses and equity in real goods and argue that while there may be a place for shorting in the business world, shorting a real estate equity would be poison.

Thursday, October 02, 2008

Captured Regulators and Retirement

I went to Patrick Byrne's Deep Capture presentation at the University of Utah. Sadly, there wasn't a very big crowd. Considering that the financial crisis is the defining event of 2008, I was students lined up to learn about the problems in the market.

The part of the presentation that got the biggest approval came when Mr. Byrne voiced his opposition to privatizing Social Security. Patrick had a sound argument: He recognized that the capture of the regulatory regime puts all investments in jeopardy. Privatizing Social Security would have done little more than to let the theives running brokerage firms and hedge funds steal the retirement investments of the masses.

The audience applauded thinking that this was proof of the soundness of the Social Security system.

The audience failed to realize that, with the markets captured, the social security system doesn't have much of a future either. Our retirement is held by a dysfunctional government with $10 trillion in debt.

While I agree that we should not privatize Social Security while the regulatory regime is captured by brokers and hedge funds, I wish to point out that capture of the regulatory system does not justify social security. Nor does it mean that Social Security is somehow secure cradled in the arms of a corruptible Federal Government.

Social Security depends on taxing the market. The capture of the regulatory regime of the market puts its funding at risk, just as every company foolish enough to trade in bank securities or that allow their shares traded through the NYSE, AMEX or NASDAQ is at risk.

Quite frankly, I think one can make the reverse argument. It was the creation of social security and the massive government reinsurance like FannieMae and FreddieMac in the New Deal that created a regulatory regime susceptible to capture. While creating these government backed reinsurance schemes and safety nets, the Feds systematically swept aside all of the independent efforts made by investors to protect their assets from corrupt brokers and banks.

The big alphabet soup of massive regulatory agencies created by FDR set up our nation for one massive regulatory capture. The question simply which group will walk away with the totalitarian prize, a fascist style Skull and Bones (AKA GW) type group, or a populist Chicago Mob (AKA BO).

The combination of safety net and re-insurance created a cultural climate where most Americans think that small businesses and small investors deserve to lose in the market ... and that government will step in and save the deserving people every so often when the playing of corporate thugs gets too rough.

Mr. Byrne is correct that we should not privatize social security when the market is captured by rogue brokerages, a broken exchange system and regulatory thugs. This observation in and of itself does not justify Social Security. The horrific damage done through the capture of the mortgage and brokerage segment show that this whole game of gigantic quasi government programs to dominate the market create a systemic fault in the economy. The Feds are some $10 trillion in debt. The day China calls in its loans and says no more, the precious social security checks will stop.

Short Sighted Totalitarian Thinking

NOTE, I reworked this post on 10/3, putting the conclusion at the top and my opinion of Beyers' analsys below

Yesterday, I read an article by Tim Beyers titled "First, Lets Kill All the Short Sellers. I was disappointed to find out he was being sarcastic.

The debate around short selling tends to be shrill.

I think that a primary reason for the shrillness of the debate is we've grown accustomed to totalitarian thinking. People want to force their ideas on how the system should work on everybody in the market.

People seem to be driven by some sort of illusion that there can be only one set of rules that control all exchanges. Even worse, people feel that the rules come in the form of absolutes.

People speak as if the options are that shorting should be absolutely prohibited, or that it should be absolutely ubiquitous, and done with no restrictions ... not even the restriction that one most borrow the stock, or the restriction that the total shares short must be less than the number of shares in existence.

I really dislike the affects of shorting. As it is possible for short sellers to massively inflate the float of any stock on the market, I no longer feel comfortable having any money invested in firms trading on the major exchanges. I also no longer feel comfortable having money in mutual funds and find money market accounts suspect.

Now, there are people who are absolutely sold on shorting. I simply do not want to trade any of my labor or effort on an exhange where shorting is allowed.

I suspect that many other people share the same opinion.

Rather than my trying to force my world view on the short sellers of the world. I think the better option would be to have multiple exchanges with different rule sets.

Quite frankly, I think our economy would be stronger if we had multiple exchanges. Perhaps banks trading on an exchange that excluded shorting would be more prone to collapse during a bubble. They would be less prone to collapse during market downturns when shorting becomes rampant. Having a mix of exchanges would mean that only one set of banks collapses during a given market crisis.

A truly free and robust market would have a bunch of different things going on concurrently.

I would really like to push for an open source, real time system that excludes short selling. With a second exchange on the market, people who want to trade equities but don't want the equities devalued by short sellers would have a place to go.

In the Equity Project, I argue that the exchange should preclude shorts. It would do by creating real time stock transfers and by requiring that only the owner of the stock can sell the stock.

I am not arguing the point that my distaste of shorting should be imposed on others. I argue this point from a belief that people who want to share equities in a market where shorting is banned should be allowed to do so.

Having multiple systems with different regulatory regimes is the opposite of short sighted totalitarian thinking that rules the market and discourse about the market these days.

BTW, Tim Beyers article was rather absurd. Mr. Beyers claims that shorting saves us from stock bubbles, and reminds us of all the pain we felt with the burst of the dotcom bubble. I point out that the very fact that the dotcom bubble happened in a regulatory regime that allowed widespread shorting indicates that shorting does not stop bubbles!

My observation was that people who shorted on the upside of the bubble were all squeezed. My one and only attempt at short selling happened on the upside of the dotcom bubble and it was a dreadful fright. The company I shorted at $50 a share jumped to $74 a share! I ended up covering at a loss. Needless to say, my assessment of the company was correct. The stock fell to $3.00 a share within months of my covering the short.

The claims of the short sellers works only if the short seller is altruistic and has perfect knowledge.

People shorting on the upside of the bubble were squeezed. The squeeze added artificial pressure to the absurdly high prices.

The major shorting that happened during the dotcom bubble happened on the downside of the bubble. This leads to the argument that short selling simply magnified the hurt of dotbust. If my observation is true (people shorting on the upside got squeezed, while short positions increae on the downside), then shorting simply adds to market instability.

In the 2008 crisis, shorters added to their position with each down tick in the market. If the short sellers had started buying back big time a month ago and saved us from the bank failures and government bailout, then I would be standing on the highest tower exalting the benevolence of the short seller.

It appears that shorts are not altruistic and have the same irrationally exhuberant mantality as the herd of longs. They keep increasing their position until crisis occurs.

Now, when a long bubble pops, the long investors are the hardest hit. When a short bubble pops, the economy at large suffers.

Wednesday, October 01, 2008

Marking to a Brittle Market

There has been a great deal of critism of the Mark to Market principle.

My observation is that Mark to Market is a good idea. The problem is that, to make mark to market work, one would have to redesign accounting and regulatory principles from the ground up to make Mark to Market work.

The problem we have is that currently regulatory regime piles rigid liabilities on firms. Having a system where a company must mark its assets to market creates a situation where a company must report a brittle set of liabilities and a fluid set of assets. This system where liabilities are fixed and assets liquid create a economic where businesses are not able to sway within the turmoil of the market.

Mark to Market in the present system simple creates a system where one side of the books is brittle and the other side fluid. Market turmoils causes businesses in such a climate to snap.

Mark to Market is a good idea. For the system to work, both the liabilities and assets must be designed to fluctuate with economic winds. For example, in a fluid system, the payroll might automatically contract in a down cycle. There also has to be a realization that the contraction of liabilities often trail the contraction of assets.

For example, sales commissions contract in a down cycle. However, since the payment of sales commissions tend to follow sales by a month or so, the actual contracting of commissions might show up on the next report.

Speaking of tools. I just added a page on redesigning financial tools. The article claims that much of the current instability is the direct result of the tools on the market.