Free Markets or Bureaucratic Dictatorship

Much of the political debate today is simply a question of whether one thinks capitalism is a good idea or not.  Many westerners seem to believe that the profit motive is fundamentally evil. Defenders of free enterprise are often thought to be morally suspect.  This is where the real struggle is being waged in today's politics.

The discussion about Bain Capital brings into sharp focus the debate on the merits of capitalism.  Should people risk their own capital to make money or should, instead, the government take people's wealth and 'make investments' with it.  That is what this debate is really all about.

A similar debate about free markets rages about health care.  Should a panel of educated and enlightened people appointed by polticians decide on your health care or should you purchase the health care and the insurance that you need and make such decisions yourself with consultation with health care professionals?  That some people are poor seems to weigh heavy in this debate.  But, this argument applies to everything, not just health care.

At the end of the day, this is an argument about whether free markets are going to survive.  Obamacare tosses out what is left of free market health care for a mandated system that forces every American to do what Obama wants or else.  Making your own health decisions is not an option under Obamacare.

The idea is that there is an enlightened elite that knows what all of us should be doing, what we should buying, what should be our energy sources, our health care providers, our bankers, and on and on.  That enlightened elite can do this better than the free market is the argument.

Has this been tried before?  Yes.  The Soviet Union, the China of the twentieth century, modern Cuba, modern Venezuela, modern Argentina are excellent examples of how an enlightened elite can perform.  Except for the governing elite, these societies were free of inequality (and greed, one supposes).  The governing elite, of course, lived (and lives) in palaces.  After all, the enlightened who guide us, should live well and they do.  As for the rest of us, we should be comforted that everyone else is as miserable as we are.  That seemed to be the ethos of the old Soviet Union.

How do people get to this bizarre idea?  Poor people are almost never in the vanguard of the movement to eradicate capitalism.  Friedrich Engels and Karl Marx lived luxurious life styles, certainly compared to the mass of their contemporaries.  Only from the rarified environment of the London Museum could Marx have concocted the absurd idea that a 'dictatorship of the proletariat' could bring anything worth having to anyone.  Real folks in the real world know that this is ridiculous.

Rich folks, movie stars and academics can engage in the luxury of dreaming that by imposing their views on everyone and substituting their views for individual freedom and free markets, the world will be a better place.  Everyone else is too busy trying to find a job and support their families to indulge in such nonsense.

The mismeasure of inequality

Kip Hagopian and Lee Ohanian have a wonderful new policy review titled "the mismeasurement of inequality."  Calmly, and with careful grounding in facts and review of research, it destroys most of the current liberal myths about the amount of inequality and its importance. The promise:

We will show that much of what has been reported about income inequality is misleading, factually incorrect, or of little or no consequence to our economic well-being. We will also show that middle-class incomes are not stagnating; in fact, middle-class incomes have risen significantly over the 29 years covered by the cbo study. Lastly, we will address assertions that the rich are not paying their “fair share” of taxes

"Address" should be "destroy", but they're being careful. Some nuggets:


Standard measures of inequality are based on pretax cash income, ignoring transfer payments from the government, goods provided directly (housing), benefits (health insurance, retirement contributions), all home-produced goods, and focus on income rather than consumption, which is often suspiciously higher than reported income.  Kip and Lee do their best. When done, the increase in inequality disappears.

Looking at consumption (though still imperfect, as it leaves out home production) yields surprising results:

In 1960–61 consumption expenditures in the lowest quartile were 112 percent of reported income, rising to 140 percent (in the lowest quintile) in 1972–73, and 198 percent (in the lowest quintile) in 2005. Thus, a family claiming $22,300 in income in 2005 would have reported about $44,000 in expenditures in that year. ... the gap between reported income and consumption is filled by various categories of government transfer payments (including Medicaid, food stamps, subsidized housing, the Earned Income Tax Credit, Temporary Assistance for Needy Families, etc.), family savings, imputed income from owner-occupied housing, barter, support from family and friends, and income from the underground economy.

The poor did not get poorer, or stagnate.

..on average America’s poor live in housing that totals 515 square feet per person, about 40 percent more per person than the living quarters of the average European household. (The average American household lives in about 845 square feet per person, or 2.3 times the average European household.)

In addition to food, clothing, and shelter, some of the most meaningful indicators of well-being are the properties and amenities that make life more comfortable or enjoyable. Based on data from the 2009 “American Housing Survey,” Rector and Sheffield report that 42 percent of poor households own a home (median price: $100,000); 80 percent have air conditioning; 98 percent have a color tv (65 percent have two or more); 99.6 percent have a refrigerator; 98 percent have a stove and oven; 75 percent have a car or truck (31 percent have two or more); 81 percent have a microwave oven; 78 percent have a dvd or vcr; 64 percent have a satellite connection; and 25 percent have a dishwasher. 

Our purpose is not to make light of the deprivations the poor suffer every day. [My emphasis. Liberals always try to say "you don't care" because you don't want to swallow the latest scheme.]  There is no doubt that the poorest Americans struggle mightily, and that too many Americans are poor. But these data are useful in understanding the difficulties in defining poverty, and for constructing effective policies aimed at helping those in need

Since "are we becoming Europe?" and "how bad is that really?" are often in the news, a fact based comparison is interesting

...the U.S. has a significantly higher standard of living than almost all of the most advanced economies. According to “The Luxembourg Wealth Study,” the data source used by the oecd for international comparisons, in 2002 (the latest year for which results were available), median disposable personal income in the U.S., adjusted to reflect purchasing power parity, was 19.3 percent higher than in Canada; 68 percent higher than in Finland; 45 percent higher than in Germany; 59 percent higher than in Italy; 31 percent higher than in Norway; 73 percent higher than in Sweden; and 31 percent higher than in the United Kingdom.

 Europe doesn't look so bad when you go visit? Answer: averages matter. Not every body lives on the Via Veneto, dear tourist.

The figures for gdp per capita and median income understate America’s economic performance advantage because the median age of the U.S. population (36.8 years) is about four years lower than the average median age in the European Union and almost eight years lower than in Japan. Age, as a proxy for experience, is a significant contributor to income until individual earnings peak sometime between age 50 and 55. 

A good point I hadn't thought of.

Taxes, and "fair share"?

The U.S. income tax system is, by any measure, quite progressive. In fact, according to a study released in 2008 by the oecd, the U.S. federal income tax system is the most progressive of any of the 24 countries in the “oecd-24,” which includes Canada, Japan, Australia, and all of the richest European nations: Germany, France, the United Kingdom, Italy, the Netherlands, Norway, Switzerland, Luxembourg, and Sweden. In fact, the U.S. progressivity index is 22 percent higher than the average for the 24 countries...

In addition to economic efficiency considerations, we believe that taxing any income from savings and investment is inequitable. Here’s why: Assume two people, Angelina and Brad, have exactly the same lifetime earned income, but Angelina saves ten percent of her after-tax income and Brad saves nothing. In this hypothetical, if income from savings is taxed, Angelina will pay more lifetime tax than Brad, simply because Angelina saved. We believe this is clearly inequitable.

Angelina will also get a lot fewer government benefits. She'll pay more college tuition, get less out of social security, have all her subsequent income taxed at higher marginal rates, and so on. (Investment income may not be taxed that highly iteslf, but it pushes you into a high adjusted gross income bracket and then makes your other income subject to more taxation.)

So what is a “fair share”? The U.S. tax system is more progressive than that of any other advanced economy. Higher-income workers already pay a substantially disproportionate amount of the income tax relative to their share of income. The top five percent pay 44 percent more in taxes than the bottom 95 percent, while 47 percent of tax filers pay no tax at all. The bottom 50 percent of filers pay only 2.3 percent of taxes, and the bottom quintile gets money back. Based on these facts, how does one make a case that the rich are not paying their fair share?

OK, as they admit, nobody has defined "fair," still well written.

I prefer cause and effect, positive analysis. Will redistribution through taxation make us better off, or consign us to egaliatrian misery? I want to raise the living standards of less well off Americans every bit as much as my lefty colleagues. Will redistribution help them or leave them worse off?

We are unaware of persuasive evidence that reducing income inequality will increase economic well-being for the majority of citizens; in fact, America’s superior standard of living and economic growth relative to other advanced economies is evidence to the contrary. 

For arguably the most commonly used measure of inequality and for the Census Bureau’s most comprehensive definition of income, inequality has not risen since 1993. Moreover, the rise in income inequality that occurred before that year appears to have been, at least in part, a byproduct of the remarkable success of a group of entrepreneurs who in the past few decades created countless jobs and contributed substantially to the higher living standards we all currently enjoy. ..

A final cheer:

Rather than focusing on income inequality, policymakers should address the very real impediments to achieving equality of opportunity, particularly for the youngest and least-skilled workers among us. We believe such efforts should begin with fixing our k-12 education system, which is failing to train many young Americans to be competitive in today’s global labor market. If we can solve this problem, we will enable future generations of young people to climb the economic ladder and achieve the economic success that has long made the United States the world’s leading economy

Yes. What the public education system in this country has done to the poor and less well off is a scandal (I don't like the term "middle class," as I reject the idea that we are a class-based society).

I'm not doing justice to the careful argument in the report. Go read the original

The Grind Continues.

So it does. BTFD crowd are unable to push it convincingly to the orbit beyond the gravity and the sellers have gone on strike. Possibly everyone is on vacation and the juniors do not want to rock the boat too much.   In many ways this current rally does seem like the one of March when it just kept grinding higher. But that was then. Conditions are different. Then it was LTRO driven rally. Now it is hope driven. That things are so bad, some one or other, either in China or in Europe, will intervene with money. If none else, then the dragon slayer Ben! Jackson Hole is round the corner and who can forget the QE2, which came out of JH.

It does not matter that things are about to go kaput. O & B team will provide free money to every one in America. O to the voters and B to the Banksters. Then everyone is happy.
We just can't stop salivating.

But we will leave the Economorons with the task of lifting the heavy duty discussion about economics. And just keep the common sense functioning in this mine field. We all have some quantifiable edge in dealing with stock market. Some use TA, some use Elliot wave, I depend mainly on cycle analysis and understanding of the criminal psychology of the TBTF bankers and Oligarchy. In fact if you read history, you will find that the criminal behaviour pattern of this group has not really changed over centuries. Thus a study of the financiers of middle age Venice will give you some behavioural clue of the financiers of modern age. They are more dangerous than a Mexican gang.

Coming back to market, my cycle top was around August 13 -14. So we will see what tomorrow brings. If SPX closes below 1385, I will add to my short positions. The existing short positions are in red but not by much. It was like buying a lottery ticket with higher odds not an investment decision. I still recommend everyone not to front run and manage the risks. The market is not going to move aimlessly like this and a definite trend will soon develop. So lets wait patiently for the definite trend. The movement of AUD is hinting that the storm is brewing and we just have wait a bot longer. My COT indicators are definitely bearish.

I am still tied up with other work and now a days I hardly get time to monitor the market. But that's not a big deal because I am not a day trader anyway. The posts are getting later than usual and not much discussion in depth. So please bear with me for a month or so.

Thanks for sharing my thoughts. Please invite others to join the gang and follow me twitter.( @ BBFinanceblog).

Some Quick Scribblings.

Hi Friends. I am still working and did not have much time for the market. But I guess nothing much happened anyway. It seems no body wants to sell and VIX is down below 14. My short positions are bleeding red but my position is small and the pain is bearable. Some of you asked about VIX and whether it has bottomed yet. I have the right post for you. Bill Luby is a very smart guy who writes only on VIX. He is a consultant for CBOE and he is long VIX at this time.
http://vixandmore.blogspot.ca/2012/08/how-can-vix-be-14-and-lower-than-vin.html
I see many smart guys are bullish and buying in equities. May be I am dumb to doubt the rally but I still think time is not right yet for going long. I think this is a hope rally where everyone is waiting for Central bank liquidity injection. I think the markets will reach the highs of 2007 by the end of the year but it is still little early for that and we need one correction before the final upswing. And that time is awfully close as per my calculation. So I am not really worried that VIX is down along with SPX. It does not really matter if the SPX goes up a bit tomorrow or day after because the bigger trend is that of a trap. At least that is what I think.
The market action is grinding folks and forcing them to take positions which are risky.
My advice, just don't do anything silly and wait. It is not going to hurt to wait for a definite break out or breakdown.
If you are long, keep your stop loss limits tight. If you are short, keep a close watch and decide when you should cut your losses. Because, despite all indicators, market can remain irrational longer than we can anticipate.
That's it for today. I will have to get back to work. I will try to update with interesting stuff but for now I see just a grind.
Thanks for sharing my thoughts. GLTA.

Illusion In The Wonderland.

1^st , let me apologies for my absence for the last few days. I was hoping that I will get some respite after 8^thAugust but now it seems my pressure situation will continue till mid-Sept. But that’s life, so no point cribbing.

Coming back to market, I would like to start with some interesting COT data. We would do well to remember that COT report does not result in immediate action. It just shows what smart money is doing well in advance behind the scene while the retail is distracted. The 1^st  chart is the S&P Emini contracts. 

The smart money has gone short from last week while retail is long.

The 2^nd chart is more dramatic and it is a chart of Nasdaq.

The short interest in Nasdaq by the smart money is huge and is a real concern. It seems that at any point of time, retail will be left holding the bag full of crap.

The whole of last week the markets have struggled to move higher and have made multiple tops. It may still make one more break out on Monday or Tuesday, which is also the top as per my cycle analysis. Again, this is not an exact science, but it has proven to be fairly accurate in the past with few days variation. Looking for top is of course a fool’s errand and front running is a bad idea. The reason is not to time the market exactly, but to reduce risk by reducing any long exposure. I am short but in a very limited way and would not increase the short position unless I get the confirmation of the breakdown.

I do not buy the bull logic because I think fundamentally, the world is in a recession and Europe is just taking a rest with everyone in vacation. Nothing has been solved for the stock market to go up. I think the only way it can go up any further is through central bank liquidity, be it Mario or Bernanke. One chart from Mr. Dominic Cimino of PPC tells an interesting story.

The green line is the ratio of XRT to XLP. XRT is the retail sector ETF where as XLP is the consumer staples ETF. When the ratio is rising, it means retail sector is doing well. Retail sector does well when consumers are spending money. And we all know that 70% of American economy runs on consumer spending. When the ratio is going down, it means consumer staples are doing better and retail is going south. Which also means the economy is not really doing well. So when the green line is moving up, SPX should move up and when the green line is moving down, SPX should move down. Simple but powerful concept and it had indicated both the downmove of 2008 and upmove of 2009. Now we see a divergence with green line moving down while SPX moving up. This definitely calls for caution and I do not think there is much to be bullish about unless of course, and again, Ben shows us the colour of the money.

There are many technical divergences which is calling for a top but all these divergences take time to work out. In a way, that’s how the smart money plays with the muppets. While they are busy selling at the top, they create an illusion of new prosperity. And with the markets being manipulated like never before, volume at extreme low level, their job is not that difficult. I think higher the market goes from here, harder it will fall.

Also let us not forget that if the markets continue at this level, there will be no free money coming from Ben. That is not exactly helpful to the Banksters. So be prepared for some action in the coming weeks. In all possibilities, volatility will spike from next week and a crescendo will be reached by end of the Month. It has taken longer than I anticipated but by not front running we have avoided all the whipsaw and mental agony. As I always say, in this present environment, return of capital is more important than return on capital. So be safe out there.

Hope you are having fun in this beautiful weekend. Stay sharp and filter the noise. Thanks for reading http://bbfinance.blogspot.com/ . Please forward / re-tweet / post it on your wall and join me in twitter. (Twitter @ BBFinanceblog) 

Romney Shows His Serious Side

By picking Paul Ryan, Mitt Romney has elevated the national debate.  Whether one agrees or disagrees with the Ryan budget plan, it is the only serious plan put forth by any elected official in the US.  Ryan is courageous and smart.  This has to change Romney's image with his conservative base.

One wonders if the Democrats will continue to look for irrelevant issues -- Bain, for example, or Romney tax returns for another -- or will the Democrats finally engage on the real issues of our times.

This election will become a true test for the American electorate.  I suspect Americans will rise to the occasion.

Debt Isn't The Only Problem

Even if there was zero sovereign debt in Europe, Europe's economic troubles would not be over.  Unemployment would still be high and the Euro-economy would still be mired in stagnation.  It is very hard to start a business in Europe and hiring workers is just plain stupid.  Since you cannot legally fire employees in most countries in Europe (as a practical matter), there will always be very, very high unemployment across the European plain.  Unemployment is a way of life in Europe and is becoming a way of life in the United States for pretty much the same reason.

It is very expensive in Europe and in the US to hire an employee even if the employee were willing to return every dime of their take home pay back to the employer.  The mandated costs and potential litigation make an employee, especially those of relatively low income, uneconomic.  This fact will be a persistent and continual drain on the economy of the US and Europe.  The antidote for this, according to most politicians, is bigger government which further sucks the life out of free markets and makes the body politic more and more beholden to government and less interested in promoting free enterprise.  What you end up with is modern day Greece. 

Few Greeks today believe in free enterprise.  Instead most Greeks believe that somehow magically by taxing the rich they can live a life of leisure with high per capita income and little or no work effort.  Why not? It has worked that way for the last two generations.   If only the rich would pay higher taxes!  So, the Greeks vote for increasingly polarized political parties of the far left and far right.  Either a neo-nazi or neo-communist regime is likely the political future of Greece.  Democracy hasn't much of a shot because it cannot deliver an economy that works.  So voters look for someone else who can deliver the good life and there are plenty out there who claim that they can do just that.

It is very difficult for free markets to survive in an open society.  People see problems and they want to fix them.  The fix is always bigger government, more regulations, less freedom.  Eventually, free enterprise is simply overwhelmed and economic stagnation takes over.  That's where we are.

So, debt is one thing but by no means the biggest thing.  People go bankrupt and live to rise again and so do countries.  But snuffing out hope for the future through big government, through excessive regulation and taxation can keep a country from returning to true prosperity.  That's where we are.  If all the US and Europe suffered from was excessive debt, then the future would be bright indeed.  Unfortunately overwhelming sovereign debt is not even remotely the biggest issue that is bedeviling the economies of the western world.