guido, part iii

This chart was offered up as further evidence of a deflationary cycle.

This data being used displays a fundamental misunderstanding of capital and the role that it plays within the productive structure. The argument guido is advancing goes something like this: there exists a great deal of unused capacity [productive capacity] thus should consumer demand rise, there is plenty of capacity that can be brought back to create supply.

Unfortunately, that’s simply incorrect.

Capital can take predominantly two forms, fixed and mobile, or otherwise known as specific and general. Mobile or general capital can be moved, and will be moved, based on the natural rate of interest. Fixed, or specific capital, cannot be adapted, it is productive to specific goods/services.

It is the natural rate of interest that determines the allocation of capital. The natural rate of interest is determined by individual time preferences.

The government, via manipulation of interest rates, QE/money printing, fiscal policy, seeks to influence individual time preference choices, shifting them towards consumption.

If they succeed, the natural rate of interest rises in industries that are closest to consumption, and falls in higher stages. The result is that capital flows to lower stages from higher stages.

The chart data depicts higher stages of production. It also implies that this is sitting idle, that capital is eternal. This is incorrect. The capital is flowing, due to the natural rate of interest, or pure interest, to lower stages, thus increased demand, that raises the natural rate, creates even further liquidation of capital in higher stages. Thus we see increased demand is increasingly meeting impaired supply.

The result of falling supply and rising [steady] demand = inflation.

 

Peter Schiff’s flawed analysis

Peter Schiff has an analysis of the Chinese currency peg here. There are some problems with his analysis.

The common understanding is both incomplete and naive. Most analysts simply see the peg as China’s principal weapon in an economic struggle for global ascendancy. The peg, they argue, offers China a competitive advantage by making its products cheaper in U.S. markets, thus allowing Chinese firms to gobble up market share and steal jobs from U.S. manufacturers. The thought is that were China to allow its currency to rise, American manufactures would regain their lost edge, and both manufacturing firms and the jobs formerly associated with them would return. In this narrative, the struggle centers on the United States’ diminishing leverage in persuading the Chinese to lay down their unfair weaponry. It’s a sympathetic picture, but it tells the wrong story.

Actually this conventional view is quite accurate.

Contrary to the conventional wisdom, when China drops the peg, the immediate benefits will flow to the Chinese, not to Americans. Yes, prices for Chinese goods will rise in the United States – but so will prices for domestic goods. As a corollary, the Chinese will see falling prices across the board. As anyone who has ever been shopping can explain, low prices are a good thing.

Our short-term loss will be in sharp contrast to the gain felt by foreigners, who will be rewarded with falling consumer prices and a more abundant supply of investment capital. In other words, the American standard of living will fall while that of our trading partners will rise.

First let’s actually examine how China performs their economic miracle.

* Chinese goods manufactured
*Sold to US for US$
*US$ transferred back to China
*Chinese government prints YUAN
*Pays Yuan to Chinese manufacturers
*Takes US$ and purchases US Securities [Treasury & MBS, etc]

Essentially then China simply inflates, on a massive scale, far larger than even the US. The miracle of Chinese growth, is in large part, simply inflation.

Therefore as in any inflation, the created money is inequally distributed. Thus to sell the now increased supply of goods, due to falling US demand, the price must fall. This is not a good outcome for the Chinese, and the opposite of the conclusion arrived at by Peter Schiff.

It is not good for the Chinese because their productive stages arranged their mix of capital and productive factors on existing consumer spending [gross revenues] When this falls, a capital loss occurs. Capital is consumed.

The reason for this is that the current state of Chinese [wealth] development, is far behind that of the US. This in practical terms means that the ordinal utilities of the Chinese are likely to be very different than that of the US consumer. This means simply that the stock of goods might not command a utility at any price in China. Chinese manufacturers, from manufacturing with only an export mindset, may have to liquidate capital entirely, as demand is in effect non-existent.

This is a classic outcome of inflation. The inefficient allocation of capital. China has, in following massive inflationary policies, placed themselves in the same boom-bust cycle that the US finds itself embroiled.

Not actually touched upon, is the effect of a Yuan revaluation within the currency speculation market. Would a rising Yuan, spark a speculative frenzy that would reinforce this trend, actually taking the Yuan past any fundamental trade based valuation?

 

Market might be near a top

Essentially my thesis ran as follows: while the Federal Reserve and Treasury were committed to money creation via debt/printing, the market would run higher.

The money created has been astronomical.

These supports to the market, look to be ending.

The Treasury Department is expected to begin winding down a temporary program created at the height of the financial crisis to address a new problem — the government’s rapidly expanding debt.

According to people familiar with the matter, the step is being taken to help the Treasury avoid hitting the $12.1 trillion debt ceiling that was expected to be reached by mid-October. The decision could also be controversial, since the program was put in place to help blunt any inflationary impact from emergency actions taken by the Federal Reserve.

Time to play defense again. With the stimulus being blunted or removed, the impetus to the market might evaporate, and the bear return with a vengeance. I’ll be exiting all long positions Monday morning.

Confirmation will likely appear in rising Yields through longer dated Treasuries and MBS securities. With a lot of attention currently focused upon the Commercial Real Estate market, rising Yields may accelerate problems in this segment of the market.

 

Another one

 

One of the fundamental problems with US Health Care

The US want more of their citizens covered by Medical insurance, various ploys have been thought up to defray the costs from the lower incomes.

One of the fundamental problems is that a diagnosis is just so expensive, and it’s totally unnecessary. As a clinician, I start with a thorough medical history, which will mandate any clinical testing required. At this point a diagnosis is made. Further investigations, which are your myriad blood tests, MRI scans, CT scans, etc are not required to make a diagnosis, only to try and confirm a diagnosis.

In the US, doctors run every test imaginable, and they are very expensive, needlessly, and primarily to escape any medical lawsuits. The quality of their diagnosis does not improve, in fact I’d guess it actually falls off.

It is the cost of paying for these myriad tests that push medical insurance premiums so high. Lose the tests, unless required to confirm an existing diagnosis, and your medical insurance costs will drop significantly.

 

Interest Rates – part iv

The next step is to “calibrate” the model, which involves tweaking some key numbers in the equations until the model produces results that match actual data. Some examples of these key numbers—parameters, in economists’ jargon—for the time series side are numbers describing things like how variable and persistent short-term real rates and inflation expectations, and how large the price of risk is for both real rates and inflation. The calibration is done through a statistical analysis (in a rather complicated way we won’t go into here). It’s like calibrating a speedometer: once you measure the readings on a course you know, you can trust the reading in other situations.

So the model will be optimised. Essentially the model will find a best fit to the historical data and assume the future will be the same as the past. The tighter the fit to the historical data, the more the future needs to repeat the past.

Obviously this is just total nonsense.

Complicated statistical analysis will be performed. Statistical analysis, if it involves standard distributions, is totally inappropriate for using in models that purport to calculate probabilities for future data.

 

guido, part ii

This second chart of Fed data identifies that the commercial banks are not lending.

While certainly true, small businesses are finding financing difficult, it is not true that credit expansion is not taking place.

Consumer Credit in Total
2004…………..$2191.5 billion
2008…………..$2578.3 billion [high point]
2009…………..$2455.8 billion

State Government Total Outstanding
2006………….$389,540 million
2009………….$1,470637.0 million

US Corporations
2006…………$2,500,770.0 million
2009…………$6,273,973.0 million

Mortgage Debt
2005…………….$12,090,031.0 million
2009 Q2………..$14,483,202.0 million

US Government Debt
2005……………$8,100.0 billion
2009……………$11,985.0 billion

Consumer debt is not really moving. I agree that consumers are unlikely to borrow, even if they could, employment fears are still too high. However, consumers will still consume. This is present value demand. As we shall see, present value demand will cause many problems as we look at further data.

 

guido, part i

I linked to this post a couple of days ago, but just to save you hunting for it I have relinked it.

Essentially he posits that there will be civil unrest and that the government will fall. I actually don’t disagree that there may well be civil unrest, deep recessions cause civil unrest. Also that the government will fall. If he means that Obama will not be re-elected, sure, I have no problems with that. If he means revolution – no not yet, that’s just a bit too extreme.

My problem with the post is that he claims the data provides evidence of his thesis. He uses Fed data to make his various points.

As government is unable to expand credit markets and as most tax revenue is going towards debt service despite the lowest interest rates in history, public service must be curtailed.

Curtail enough public services (police, fire fighting, refuse disposal… health care…… pensions) in an environment where unemployment is rising at the same time that the power and business elites are implicated in scandal after scandal and you got yourself the ideal conditions for civil unrest.

http://money.cnn.com/2009/11/16/news/companies/US_postal_service/index.htm

Civil unrest means government will fall.

The first exhibit is the Money Multiplier

This is being presented as evidence for the inability of debt to expand the GDP. That $100 of debt creates less than $100 of GDP. Note that this is currency that is being measured. Thus it is not even measuring the expansion of credit. The entire data series is invalid for drawing the conclusions that he does from the series. It is useful however to continue the analysis of the multiplier anyway.

What exactly is the multiplier?

The multiplier is a Keynesian economic theory. According to Keynes, the greater the marginal propensity to consume, the more an increase in investment will boost national income. The multiplier indicates that any increase in credit expansion will cause a rise in real national income equal to the reciprocal of the marginal propensity to consume.

This mathematical automatism which underlies the multiplier, bears no relation to the actual processes within markets. Expansion of credit, particularly via Bank expansions, flow to the structure of production, which through increased money bid up the costs of production, which, eventually flow through to consumer prices. This is an inflationary process.

Consequently the multiplier masks the widespread malinvestment process. The credit expansion is currently not a banking expansion, rather a governmental expansion. The flow of credit is not being aimed at the productive structure, quite the opposite, it is being aimed and directed to the consumer.

The how and why of the multiplier are contained on the flip-side of the coin. We move directly to the Accelerator Theory. The accelerator theory goes something like this: a rise in the demand for consumer goods creates a proportional increase in the capital goods required to manufacture the consumer goods.

So as a brief example: a manufacturing company has an output of 100 units, utilising 10 machines. Each year, one machine is replaced due to wear.

Consumer demand is increased via deficit spending by 20%. The now required output is 120 units. The manufacturer, to meet this new demand, increases capital goods by 2 machines, for a total of 3 new machines, or a 200% increase in capital spending.

Thus Keynesian theory [again] asserts that via government deficit spending, the economy, and particularly the productive structure, is enabled.

So you may say, essentially you are agreeing with guido’s analysis? The multiplier is presented as exhibit #1. From this data, several erroneous conclusions are drawn. It is important to define the multiplier as it is quite a complex data series that does not intuitively impart its message.

 

How to double your portfolio in a day

I haven’t had anything from ChartAddict for a while.

That’s right. Chilling the F*** out. After making 2 trades today, I realized that today was just gonna be “one of those doji days”. In fact, that’s what happened. I was in the city (DC) for the afternoon, realizing that my time is best suited elsewhere. There’s no point in wasting your time on a day where you know you will not make big-d**ked gains. (I am making an effort to stop cussing on the internets).

Realizing when to take the day off is just as important as realizing when you have to be 100% committed to a day. Do not waste your time. Maximize your opportunities. Think about it – my mantra is “to make the most amount of money in the shortest period of time”. I cannot do that in this environment, especially with the lack of follow-through that I have been stressing for weeks now. The thing is, you never know when you will get that huge, epic day. It just comes, and BAM! you take home a double-digit total portfolio gain. Just like that.

I have yet to see the intra-daytrading environment improve. Therefore, I will continue to test out certain trades until the moment is imminent. It will improve when you least expect it and the question is, “Are you ready and prepared for it?” Stay vigilant, traders. Never lose focus toward your goal in making a F***ing killing. That’s how we roll.

Bottom line: don’t trade like a clueless idiot

So using winning trades, something that he hasn’t seen much of in the last few days, most trades having been losers, let’s check out todays winner.

The Chart Addict says:
November 19, 2009 at 9:52 am
Bought $NLST 5.53/54

Reply
The Chart Addict says:
November 19, 2009 at 9:57 am
Sold half $NLST 5.61/62

Reply
The Chart Addict says:
November 19, 2009 at 10:03 am
Sold 1/4 $NLST 5.73/72

The Chart Addict says:
November 19, 2009 at 10:07 am
Sold last 1/4 $NLST 5.8101

The Chart Addict says:
November 19, 2009 at 10:16 am
Bought small $NLST 5.83

Reply
The Chart Addict says:
November 19, 2009 at 10:21 am
Sold $NLST 5.75 – exhausted

Gross gain on trade = 1%

Now unless 100% of his account is in this trade, and even if it is, he’s got a very long way to go for double digit gains on his portfolio.

 

flippe-floppe-flye on winning

My main man wins, even when he loses. Jog on my son.

There Are Hidden Wins Everywhere
Tuesday, November 17, 2009 at at 4:05 pm 58
You grizzled bastards are rejoicing today. I know it. I can smell it. But before you go about, all gay and stupid, just know: I am still winning.

An exercise in simple mathematics, shall we?

We shall.

Investor A steps into the market and buys $100k worth of Idiot Corp., @ $2.35. Much to Investor A’s chagrin, Idiot Corp. misses estimates (shocker), sending shares spiraling lower, down to $1.22. Unfortunately, because of the decline, Investor A lost—on paper—$48,081 for the day. The good news, it only represented 6% of his overall holdings. Away from the world of Idiot Corp., Investor A has $1.7 million in the market and his other stocks were up about 1% for the day. In total, he lost a mere 2% for the day.

Always remember, I am not as stupid as you and I do not hang out with the morons that you think are “smart.” My losses make me harder and stronger, which ultimately leads to bigger and better wins.

Life is all about winning, even in terribly dire losing situations, good Sirs.