Lawrence J. Kramer

Why There Will Be No Recovery and Markets Will Trend Lower

Excellent article, and you get the problem perfectly. I would say, though, that what is making our deficit so large is not China's trade policy but its comparative advantage in increasingly skilled labor. We have nothing important to offer a country that has such an advantage, and free trade with such a country can only drive down wages (or employment) here.

I agree that we need to get off the oil teat - and export our own production - but we also need to import less from China, using trade barriers if necessary. Smoot and Hawley be damned, in this time and place, if we could sell to ourselves, we wouldn't need to sell to anyone else whose workers work for so much less than ours. (And the day will come when the Chinese do consume enough of their own outputs to make us superfluous as a market. Note, for example, their statement that they will be using their rare earth production domestically.)

If we put on trade barriers, a trade war is a possibility, but only a possibility. And if it results in our producing our own electronics, steel, and solar cells, it will have been worth it. Because you are right about the alternative.

Why Do Equity Markets Disagree with the Data?

People are rebuilding their savings. They have to put the money SOMEWHERE. Look at how expensive Treasuries are despite a trillion dollar deficit.

We have inflation in financial instruments - too much money chasing too little paper. So everything "goes up," and stays up until supply catches up. But supply won't catch up; no one wants to issue paper when no one will buy the goods the issuer would use the proceeds to produce. (When else has a bull market produced so little IPO activity?)

Restricting Access to Leveraged ETFs - Are Brokerages Outlawing Products or Strategies?

The investor needs to pass a simple, one question test: If the relative index goes up 5% on Monday and returns to base on Tuesday, where does you ETF end up ? If he says "where I started," he can't buy the thing. Since that test is impractical to administer, and something like 90% (my guess) of retail investors would fail it, maybe pessimists should just be limited to buying puts.

Jobless Recovery: Fasten Your Seatbelts

Imagine that one state in the union was not subject to the Federal wage and hours laws or labor laws and had none of its own. What would wages there be? How well would its workers live? What social pressures would exist to boycott its goods? How is that hypothetical any different from what is happening in our globalized world?

How $30/Barrel Oil Could Save the World

The only solution to the high price of oil is to stop using it by imposing an annually increasing tax on its use. That will encourage alternatives and reduce demand. And even if it doesn't lower the price, what matters to us is the cost of energy, not the cost of oil, so if we've moved to alternative fuels, the price of oil won't matter as much.

Unfortunately, the Chinese and Indians will have to reduce their oil consumption, too, if there is to be real impact on the flow of cash to bad actors. The Chinese, at least, for all their efforts to acquire oil, are moving forward on alternative energy as well. But it's such a big country with so many people emerging from poverty, that it's hard to say that the oil export business will ever wane.

Movie Sheds Light on Sirius Naked Shorts

Naked short selling is counterfeiting. If you have to find shares to sell, the float limits the activity. Without that discipline, the "currency" inflates and becomes worthless. Why this practice is not a diligently prosecuted crime is beyond me.

Exchange-Traded Derivatives: Why Stop at CDS?

CDS contracts should not be traded on an exchange. Quite the opposite - the transfer of CDS contracts, and all naked derivatives - should be banned.

The problem with CDS contracts is not transparency; it's moral hazard. A CDS on a company in which the holder has no significant stake is, in effect, a life insurance contract on that company, unsupported by an insurable interest. The holder benefits from the collapse of the company, and that's always bad public policy. Since the whole point of an exchange would be to make CDS contracts transferrable from those who need them as hedges to those who want them as speculations (or worse), an exchange for them is a terrible idea.

The law has long prohibited people from taking out life insurance policies on people in whose lives they have no insurable interest. Such a policy gives its buyer a motive for murder and provides no competing social benefit.

Imagine that John Doe wants to borrow $1,000,000 without collateral from XYZ Bank. The bank examines his credit and says "Ok, but you'll need to provide us with a life insurance contract that will pay off your debt to us if you die." Joe, who is in excellent health, easily obtains the contract from CDS Life Insurance Company. Then, unbeknownst to Joe, CDS puts this ad in the newspaper:

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Life Insurance on John Doe

We have recently underwritten the life of John Doe and have found him to be in excellent health (depsite his severe peanut allergy). To amortize the cost of underwriting Joe's policy, we are offering identical policies on Joe's life to anyone who wants one, no questions asked. Joe lives at 10 Maple Lane, Somewhere, USA, and likes to buy his lunch from passing vendors.
----------------------...

Is that offer any different from what AIG FP proposed with respect to various American corporations? And if not, is there any reason to believe that transparent pricing of this toxic product would do anything to remove the moral hazard it creates?

Naked CDS contracts are a terrible idea, and better price discovery won't make them any less so.

ZAGG: Market Leader, Breakthrough Product

Should we expect to see sales/installation kiosks at malls or expansion to other surfaces (e.g., vehicles)? Would either be economic?

Why Our Credit Crunch Mirrors the Weimar Hyperinflation from 1919-1923

I think the numbered paragraphs are excellent and important, but much of the preamble is paranoid nonsense. There has been no transfer of wealth. The bankers who have been "helped" have seen their personal fortunes decimated. All they have left are their jobs. That puts them ahead of a lot of people, but "transfer of wealth"? Ask Hank Greenberg or Dick Fuld or Lloyd Blankfein or Jamie Dimon how much wealth has been transferred to them. Short-sellers have cleaned up, but not on bail-out money. Everyone else has been beaten up pretty badly.

None of this makes the historical lessons of Weimar inapposite. It's just sad to see the matter wrapped in the sort of conspiratorial silliness that makes people stop reading before they get to the stuff that matters.

Stripped of unimportant talk about what motivates individual actors, the material problem is that we bought more than we could pay for and now have to default on our bills. We have to. There is no choice, as we don't have anything to sell to pay what we owe. We tried pretending that our real estate was worth more than it is, but that didn't work. Dollar-denominated obligations will be settled at less than par in real terms because there isn't enough of value to settle them in full. Inflation is merely the mechanism by which that default occurs naturally.

If there were no stimulus, no "runaway spending," the trade deficit would still be there, and the debts would still be coming due and we would not be able to pay them except by printing dollars. Without the stimulus, though, the Chinese and OPEC would simply stop taking our dollars sooner, as they would have less business to lose. They wil continue to supply us for so long as they can pretend they are getting paid. If we don't buy, the music stops now. If we do buy, it stops later. In the scheme of things, there's not much difference.

Our standard of living has long been subsidized by the poverty of others. That may or may not have to be the case, but foreign suppliers seem no more eager to elevate their workers and consumers than we are to demand that they do so. In a globalized world, the economies of the U.S. and India should be as much alike as those of New York and Iowa - different, but not very different. Is there enough productive capacity for that to be the case? If yes, can we get there? If the answer - to either question - is "no," then what? I mean, if our hyperinflated currency won't employ those call centers, what will?

Not the Tax Clawback I Had in Mind

Chris Butler has it exactly right. There is no such thing as a good "tax" clawback, because a clawback isn't a tax; it's a forfeiture. The Congress can tax income retroactively, and it can impose excise taxes on behavior it wishes to deter. But it cannot impose excise taxes retroactively. And a special, confiscatory tax on a particular kind of income received by a particular kind of person - "When they came for the AIGers, I said nothing, because I was not an AIGer" - is a tyrant's ploy. Fortunately, the Founding Fathers had words for that sort of thing, words like "attainder" and "ex post facto."

TARP Surtax Bill Could Create Millionaires

I think there's a decent chance this bill does not become law. The real reason is that it's unconsitutional and bad policy, but neither of those reasons are politically acceptable to the torch and pitchfork crowd, so some other pretext for scuttling the bill will have to be found.

It's all theater anyway, as the courts won't let the IRS collect a retroactive, confiscatory excise tax. Well, maybe not ALL theatre: the courts may strike down only the retroactive part, leaving the bad policy in place to tie the hands of managers going forward.

Fears on Gold: Declining Supply, Increasing Demand

My problem with gold as an investment is that gold is intrinsically worthless - there is very little demand for it to make things that people need. The use of gold as a store of value, however long-standing the practice may be, is wholly arbitrary. Anyone can decline gold as a medium of exhange at any time. If things really get bad, I expect that the currency of choice will be the bullet.

Ultrashort ETFs Can Work if You Trade Them Correctly

Damn. I quit. I apologize to readers. I don't seem able to proof my ups and downs. Seriously, I'm sorry. But if you do the math right, you'll get the results I was trying to show.

Ultrashort ETFs Can Work if You Trade Them Correctly

SB-Tiger: The math on inverse funds makes clear that daily inverse percentage moves will leave an inverse fund below the tracked index over periods of market fluctuation. Because this result is algebraically inevitable, one should not expect accurate tracking and so should not be surprised - or even angry except at oneself - when it doesn't track..

The math is simple. Suppose the index and the etf are both at 100 on Day 0. On Day 1, the market goes up 5% to 105 and your etf goes down 5% to 95. On Day 2, the market returns to 100. What does your inverse do? It goes down 5/95 (the inverse of the 5/95 increase in the index). But 90/95 of 105 is only 99.47, less than 100. Poof, you're tracking is off. Compound that result over several fluctuations, and of course the inverse does not "track."

2x inverse funds are even worse. Same 5% drop in the index produces a 10% gain in the fund. Return to 100 produces a drop of 10/95 from a level of 110, leaving 98.42. That means the index hasn't moved, but you're down 1.58%. Compound that.

The only way out is to trade for a daily burst, or adjust your holdings frequently so that the value of your etf holding as a percentage of your portfolio stays constant.

Ultrashort ETFs Can Work if You Trade Them Correctly

Sorry, I screwed up my example.

Trading, per se, may not the be the key to using Ultrashorts. Balancing one's holdings may be sufficient. For example, if you buy an ultrashort and the index moves down 5%, your ETF should move up 10%. Now ask yourself what would a move in the index back to the day before's level mean to your ETF. The answer is that it would fall by more than it went up the day before, and you'd be out money. If, on the other hand, you sold a carefully computed chunk of the ETF, you could expect that a gain of 5.26% in the index (about what it would take to get back down to the original level), and the resulting 10.52% loss in the ETF, would lose a dollar amount equal to the previous day's gain. My arithmetic says you need to unload about 13.6% of your ETF holding so that the 5.26% gain in the index will lose the same amount of dollars as you made the day before. I may be wrong about this, but It seems to me that balancing one's holdings on a daily basis would give you a pretty good chance of having the ETF do over the long haul what it is designed to do on a daily basis.