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.

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.

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.

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.

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).

Divorced from Reality

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

Arrgggghhhhh!!!!!!!

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.

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 OSRTX.com 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.

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.