Brice Timmons

George Soros, Reflexivity and Market Reversals

The initial statement that "the underlying basis of almost every economic theory is that markets search for prices that create a balance between supply and demand," is true and consistent with reflexivity.

The problem with the thesis is the statement "Consequently, when all participants act rationally, free markets and the economy are stable."

This subsequent statement is missing a fundamental premise. The economy would only be stable where investors act rationally based on perfect information. In an imperfect information environment investors may act rationally in response to their subjective view of an economic situation while still acting irrationally if an objective and omniscient view were available.

Thus, transparency and policing of price manipulation are key to maintaining a stable market. They are also virtually impossible to achieve. There will always be an Enron and those best able to spot price manipulation will always have incentives to do it themselves. Worse still, markets will still be plagued with irrational behavior which will influence actual outcomes and, through them, rational behavior.

Soros makes money because he understands that economics is not about math, but about the behavior of a group of mammals who happen to do some math.

Who Says We're Not in a 'Real' Recession?

Anecdotal evidence is all fine and good, but this is absurd. "The grocery store sells food. I see people in the grocery store, therefore everyone must be well fed," is hardly a valid syllogism.

Be Very Afraid of Deflation

Oh the drama. A month ago the SA blogs were abuzz with talk of hyperinflation. Now the fear of deflationary spirals is loosed. Prices are adjusting to come into line with utility value. The past bubble has been the most speculative market in the history of the world. Average people were engaging in leveraged speculation in real property. That's an absurd state of affairs. Thank God that the real estate and oil price bubbles are deflating. Without that we would be seeing hyperinflation pretty soon. The significant deflation in the market that isn't coming from a correction specific to speculative investments is coming from falling oil prices impacting transport costs.

The Pivot Point Will Likely Be Election-Based

I'd like to see some support for this assertion. I'm going to avoid the more vs. less regulation argument. It's silly. We do not need *more* regulation. We need *effective* regulation. Reining in the debt:equity ratio would be smart. We've been operating with a 2.44% margin of error on heavily leveraged investments. Couple that with the post-Volker fed funds rates and you get overreach. That's absurd, and it ensures that credit markets will eventually contract sharply. Further, it virtually guarantees that the longer the period between contractions, the nastier they'll be.

Increasing burdens on directors and CEOs while simultaneously decreasing their ability to assert the business judgment rule as a defense in shareholder derivative suits seems like government trying to tell officers and directors how to run a company. That's heavy-handed and requires massive government oversight. Foolish.

We know from recent experience that Republicans will not regulate smart. We believe that the Democrats are as bad at business as they were in the 70's and 80's. Maybe they are, but maybe they can learn to regulate smart instead of regulating more.

Welcome to the Google Economy

Good analysis, but not entirely correct with regard to "stuff" being bad. The problem with manufacturing, real estate, etc. is the paradigm for viewing what is being sold. Manufacturers should shift into a view of selling the utility of the stuff rather than the stuff itself. Large networks are in a better position to extract residual value from an asset (car, computer, etc.) than individuals. Not to mention, owning stuff doesn't always guarantee you the utility that you need. A car, for example, is generally useful, but many individuals have periodic need of an SUV, truck, van, or some other vehicle that they probably decided to forgo buying when they bought a car. The car retailer that solves this problem by leasing an electric car that comes with the periodic use of an SUV, van, truck, etc. shared among a large network, will boost their sales numbers and be in a position to extract residual value from the car after the lease is up.

Networks of pure information have the bonus of being exceptionally flexible, but there is still a hardware infrastructure underlying every scrap of code in the world. "Stuff" isn't bad, but the centralized, unwieldy networks that disseminate its true value (utility) are inefficient monsters. Franchising everything, possibly even down to manufacturing, (like the note on "linking" above) is the way to go.

Making networks that are able to shed parts and extract residual value after the consumer gets his maximum utility from a product, that's the future of "stuff."

Home Ownership: The Ideal That Refuses to Die

Hmmm... my gut reaction is that this is the wrong place to lay blame, but I can see the validity of this point. Were I the central planner of the universe, I might think that home ownership was always a universal good *where it inversely correlated to mobility*.

Where persons are stable and have no tendency towards moving, home ownership seems to be an ideal situation. In this situation the utility value of the home combined with costs of moving and intangible personal value will tend to outstrip market value. Thus, there is less tendency toward speculation. Of course, how to determine this is the question.

It's the Capital, Not Liquidity, Stupid

Bravo! First truly sensible analysis I've seen here.

Current Financial Crisis Is a Black Swan

I usually post relatively thoughtful commentary here, but this is simply a foolish article.

A black swan is caused by a truly random series of unpredictable events leading to some consequence. Some economists have been warning about this since the Federal Reserve Act, more since the fall of Bretton-Woods, many more since Volker left his post, and a large minority since housing prices started to look like a logarithmic scale. Black swan my ass.

Barney Frank's Money Quote

I usually have something aspiring to analysis here, but:

F
The Bailout

Congress: Please, Don't Rush the Bailout Plan

User 118015: "visa visa" is spelled "vis-á-vis," meaning "face to face" in French.

I've been emailing a friend in Congress all week with this precise sentiment. Unfortunately, he doesn't sit on any of the relevant committees. :-(

My fear is that there is little understanding of this issue on the hill. People often expect that lawmakers are usually intelligent and at least have intelligent people working under them. This is a) not always true, and b) even if true does not guarantee understanding of a specific discipline. Congress is particularly susceptible to panic when people like Paulson and Bernanke yell "Fire!".

These two are behaving like brokers cold calling Congress for a "once in a lifetime opportunity." Treasury should be presenting specific findings and a specific plan, not this absurd power grab.

I especially like one point in this article: foreign investors and private equity. Let's take advantage of the preposterously low dollar and get some foreign capital infused into the market. Private equity firms of late have demonstrated a drive to turn around companies and look for long-term solvency and profitability. We could use some focused, hands-on ownership on Wall St. right now.

What Effect Will Hyperinflation Have?

Hmm... I'm not going to get all the way on board with this analysis. Some poor analogies are drawn between the status of Wiemar Germany and the U.S. at present. Further, there is an underlying assumption that the economy generally is the same or similar. I think we're already seeing the first signs of hyperinflation, but not Wiemar-like hyperinflation. I would definitely go for hard assets over dollar-based paper, though. Heck, I'd convert dollars into RMB in a heartbeat. China's coastal middle-class will continue to increase their domestic consumption, thus making up for our decreasing consumption and protecting the Chinese economy. I suspect that this will allow them to hold more reserves in RMB, deflating their currency a bit as their diversification undercuts ours.

Financial Crisis: This Is the Real Deal

This is, actually, quite bad. No, it is not 1929. We have significantly more wealth than we did in 1929, but the collective drop could be as bad in relative terms. If it is not, and we delay the impact of institutional collapse through deficit spending and nationalization of debt, then we will merely be setting up the next crisis. The debt must be serviced either through actual tax hikes (bad for business) or inflation (bad for business). The market will punish bad decisions, period. We can do it now, perhaps in a controlled fashion, or we can do it later, perhaps in a more violent fashion.

The Election's Impact on the Market

I have one major criticism of the structure of this article. After detailing the myriad reasons why presidents cannot deliver on their promises, the author details what would happen were their promises to come to fruition. Problematic at best, but given the strong critique of intellectual dishonesty leveled at Democrats, it smacks of both dishonesty and hypocrisy.

Are Central Banks Out of Their Minds?

Correction from line 4:

...and complex economic collapse [is overly generous to our central banker friends.]

Are Central Banks Out of Their Minds?

I'm in with the real capitalists on this one, but it's hard to sort out who here is one. Miss Lien has an excellent point regarding the aims of the Fed, however, the idea that it isn't futile (and thus somewhat insane) to attempt to moderate such a large and complex economic collapse. (I use the term "collapse" somewhat loosely as "recession" simply doesn't capture the nature of the multiple and interwoven market meltdowns that we're experiencing now.) Icandoitdon's point regarding the effects of running the tap to keep the leaky tub full is on point. You end up with more water on the floor. Whether central banks create the "business cycle" or merely exacerbate a natural ebb and flow within the market is largely irrelevant. The necessity of dealing in information-based currencies in the modern world has the effect of rendering any commodity currency untenable. Some entity must govern money (whether pegged to a commodity or created by fiat), and that entity or group of entities will, even if not created by the government, become governmental in nature. We must learn, however, not to rely on that entity to stabilize markets when the finance sector becomes gluttonous and overexposes itself. There correction will occur, and staving it off until tomorrow with cheap money and risk-assumption merely creates new problem areas in the market and mortgages tomorrow for the sake of today. To me it invokes the image of an adjustable-rate home equity loan on our entire system. Good luck, everybody!