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  • Basel I, II And III: Culprit Of The Financial Meltdown [View article]
    Basel also gave zero risk weight to all developed-world sovereign debt, I believe, setting up the European banks for the disaster they're currently in.

    The effect of Basel is worse than that of the ratings agencies. The latter are antiquated and merely several years behind the curve. The former practically mandated a certain mix of credit assets, regardless of up-to-date (or even not-up-to-date) credit analysis, and now the future has arrived.

    (The cure for the ratings agencies is just to open up ratings to competitions and let in upstarts like Egan Jones -- governments won't let go of the cartel, however, because the results will be ugly -- for said governments and their banks. EJ has already been subject to groundless harassment by the SEC.)
    Jun 29, 2012. 04:58 PM | 1 Like Like |Link to Comment
  • Is The U.S. Healthcare System An Economic Bubble? [View article]
    No, I don't think so. There will be large popular resistance to ObamaCare for years to come, even if it can't be fully repealed. It was opposed by a majority of Americans when it was passed, and more Americans now oppose it than in 2010. Once people see the full cost, the rationing and tax increases involved, the burdens on small businesses, and the perennial threat of fiscal crises (like in Massachusetts), the opposition will grow even more. Our system was already heavily biased against the young and immigrant; this forces them to pay even more, a fact that is slowly sinking into the millions of younger voters who foolishly voted for Obama in 2008.

    Unlike the 1930s, we're not at the beginning of the cycle of the expansion of the welfare state. Rather, we're near the end of the road of the whole idea as the Western world has known it since the late 19th century. The socialized systems in Europe, except in northern Europe (and it's fragile there), are bankrupt and will soon be out of business. Voters here are aware of what's happening over there and know that we're not far behind.

    Even though the law can't be fully repealed (unless there's a political revolution), it will never be fully implemented either. The looming threat of bankruptcy and new legal challenges will prevent that. (Remember, it's now honestly labeled a "tax," dishonestly passed.) ObamaCare is a disaster for the rule of law in the US, because, like Dodd-Frank, it opens an endless uncertainty about what the law really is. It's a health care board that will decide. It will lead, and has already led, to corruption and backroom deals, as such systems always do, with individual choice and competition squeezed out. It's a nightmare.

    Civil disobedience will probably run into the 100s of thousands, minimum. I wish I could be one of them, but I've got job-based insurance already, so it's irrelevant. If the system continues to expand as it has, and without the ability to impose serious rationing, it will bankrupt the federal government and many state governments in another decade -- that'll produce a revolution, no doubt.

    Only once our system is kaput will everyone see what ObamaCare really is, the last gasp of a bad idea who's time has come and gone.

    P.S. BTW, Social Security will have to be reformed before the end of the next decade, and Medicare before the end of the this one, to keep them from bankruptcy. The inherited pay-as-you-go systems we have left over from the 20th century are dying, although many don't want to admit it.
    Jun 28, 2012. 06:14 PM | Likes Like |Link to Comment
  • 'We Wish You A Long Life' - Is A Hyper-Volatility Event Coming? [View article]
    Exactly, and it also threatens the credit ratings of the surplus countries, starting with Germany. No one in Europe has sufficient money to bail out the whole system.
    Jun 28, 2012. 03:48 PM | Likes Like |Link to Comment
  • Is The U.S. Healthcare System An Economic Bubble? [View article]
    The ACA just expands the bubble of health care subsidies further and will be unaffordable before the end of this decade. The remedy to ACA will have to be political, that is, repealing it. It's now clear to everyone that it's a huge tax increase, but conveniently set for 2014 (convenient for Obama).

    The decision to force citizens to subsidize private interests (health insurance companies) is similar to another misguided decision a few years ago, to uphold eminent domain in cases where private interests benefited. That provoked a large reaction in most states to restrict eminent domain to its original scope. The same will happen with this. Most Americans were opposed to the ACA when it passed; even more are opposed now.

    I also suspect that another part of the remedy to Obamacare will be states refusing to spend the mandated money, when it becomes clear that they can't balance their budgets. When austerity hits the US finally, Obamacare will have to be scraped.

    The final remedy is likely also to involve mass civil disobedience; that is, many people refusing to pay the tax. It's still not clear the IRS has the power to enforce it.

    The SCOTUS decision will be remembered as a bad day for the US, accelerating the delegitimization of the political system.
    Jun 28, 2012. 11:05 AM | Likes Like |Link to Comment
  • Non-Financial Preferreds: Delivering Portfolio Defense and Unique Trading Opportunities [View article]
    I own two bank preferreds, but also own a Ford preferred. For the next one, non-financial again. Keep financials at arm's length.

    Excellent article.
    Jun 25, 2012. 04:21 PM | Likes Like |Link to Comment
  • Cheap or value trap? The market cap of the entire European financial sector ($360B) drops below that of Canada ($377B). Total EU GDP is about 8.5X greater than Canada's.  [View news story]
    The entire European financial sector's market cap should be < 0.
    Jun 25, 2012. 01:41 PM | 1 Like Like |Link to Comment
  • Silver: Time To Fish Or Cut Bait? [View article]
    Excellent article. One should note that silver is different from gold in its recent behavior. Like gold it rises on the prospect and reality of net monetary expansion. But gold holds up better during the neutral Twist-type monetary rearrangement.

    During "naked" crisis (like last summer), gold has been performing better than silver. Gold is an inflation hedge, a deflation hedge, a crisis hedge, etc., more so than silver.

    The silver price is also strongly affected by its industrial use. The monetary and speculative character of silver is new and surprising.
    Jun 22, 2012. 04:17 PM | 6 Likes Like |Link to Comment
  • Here Comes The Next Big Leg Down In Equities [View article]
    Don't have a cow, but the S&P is probably headed toward low 1100s again before it bottoms. Here's a more comprehensive chart from ZeroHedge:
    Jun 18, 2012. 10:36 PM | 1 Like Like |Link to Comment
  • The New And Improved Real Estate Investment Model [View article]
    Yes, there's demand, but the sizes of the houses are often still too big. With singles, couples, and smaller families, Americans need to scale back the big postwar dream house. It's a waste of money.
    Jun 14, 2012. 05:17 PM | 2 Likes Like |Link to Comment
  • Stocks Edging Closer To Financial Cliff [View article]
    Since 2000, stocks have been in a secular bear market, defined by a range, rather than strong upward movement. The operative range now on the S&P500 is roughly 1100 to 1450. Secular bear markets end with a gradually quieting, oscillating relaxation to somewhere within a narrowing range. When we see that, we'll know that the secular bear is leaving.

    While an admirer of Biderman's truth-telling, I don't think stocks are all that out of line with incomes. Using the early 80s as a starting point is starting at the wrong place. That period was a generational low (in real terms) after all financial assets were punished in the 70s by high inflation. The 1982-90 bull run was (in real terms) simply a recovery from that low.

    What is striking is the rise in stocks in the 90s, while income growth was slowing. But stocks' behavior since 2000 does track the even slower growth in income since the 90s. That matches Biderman's logic well.
    Jun 13, 2012. 05:33 PM | Likes Like |Link to Comment
  • Is The Austrian School Wrong About Inflation? [View article]
    The problem isn't data. It's faulty concepts. While an admirer of Austrian economics, as its main proponents state it, the Austrians seem to not understand the concept of money velocity.

    Even if the classical quantity theory of money is simplistic, there has to be a "rate" or "speed" to connect the stock of money (a static quantity) to the rate of spending in an economy (national income). That's the role of the money velocity, or velocities.

    In deflationary-debt destruction cycles (like 2007-now, or 1929-1945), extra credit created by the central bank mostly doesn't show up as circulating money (with a nonzero velocity). Instead, it just goes to canceling old bad debt. That's what QE is; what it isn't, is "money printing." Many, many people (including those who should know better) are responsible for spreading this misconception.

    However, there's no guarantee that all the extra new credit created won't get at least partially monetized at some consequential level. Some general price inflation can result, over longer periods. It did in the late 40s and early 50s.

    P.S. This is the source of Ron Paul's famous confusion over "inflation," which he uses to mean "expansion of the supply of money and credit," while everyone else means "rise in the general price level." This confusion can be traced right back to Mises and thence to the nineteenth century.

    There's no excuse for it, even if you think that monetarism is a simplistic cartoon of how money and credit actually work.
    Jun 11, 2012. 04:54 PM | 2 Likes Like |Link to Comment
  • Safe No More: The Impending Collapse Of The Treasury Bond Bubble [View article]
    Tack is correct: ZIRP suppresses real economic activity, although it does stimulate speculation. Historical proof: the US in the 1930s, Japan in the last 20 years, the US today.

    The reason is simple: when a central bank sets rates artificially low, at first, the result is to cause a boom in speculative assets financed by debt (stocks, housing, commodities, in that order, as we've seen in the last 16 years or so). These asset bubbles eventually collapse when the debt level rises to an unsustainable level. Then the borrowers are left with debt that has to be paid off, written down, or written off -- all doing damage to their ability to grow future economic activity. This process -- deleveraging -- is what's happening to us now, and accelerating in Europe.

    The continued holding of interest rate at too-low levels -- long after the emergency of a crisis has passed -- simply gives lenders no incentive to lend to marginally riskier borrowers. Instead, only good-credit governments, banks, and large corporations (all issuing bonds, not borrowing from banks) can borrow in significant amounts, scooping up the impaired stream of savings. There's little left to lend for anyone else. The consequences are what you see around you -- credit rationing and financial repression (negative real interest rates punishing savers, insurance companies, pensions, etc.).

    The fallacy behind the push by central banks for ever-lower rates is that many people (including the deluded central bankers) think they can stimulate *borrowing* by continuing to lower rates. What they forget is that, before there's a borrower, there's a lender. Lending is stymied with too-low rates, apart from the limited number of actors mentioned above. Just draw supply and demand curves for savings-to-be-lent. A too-low interest rate (the price of borrowing) limits the amount supplied by lenders.
    Jun 11, 2012. 01:17 PM | 1 Like Like |Link to Comment
  • Inflation: The Next Crisis, And How To Protect Your Investments [View article]
    Even better is Gollum's take on "precious" :)
    Jun 5, 2012. 01:16 PM | 1 Like Like |Link to Comment
  • Inflation: The Next Crisis, And How To Protect Your Investments [View article]
    In an environment like this, shorting/buying puts is largely a losing game. There's too much uncertainty and volatility.

    Better: just find and buy those investments that will do well under inflation. Don't bother trying to short things that will do poorly.
    Jun 5, 2012. 12:41 PM | 1 Like Like |Link to Comment
  • A Lehman-Like Market Collapse Might Be In The Works [View article]
    The Germans aren't conquering Europe -- they're just an economic powerhouse overwhelming everyone else. They're doing well with non-eurozone exports and seem rather oblivious to what's going on the periphery. They're sort of like the US in the 50s and early 60s (without strategic orientation) or China these days. It's not that they have a grand strategy; they don't. They're just a powerhouse.

    Once the periphery realizes this, it will be game up for the current eurozone -- they'll start to leave. But Italy has to be defended at all costs to keep the euro alive.
    Jun 3, 2012. 01:24 AM | 1 Like Like |Link to Comment