See if you can spot the neoconservative .....

Democrats want to implement windfall profit taxes, which ultimately will be passed on to the consumer at the gas pump and raise prices ever higher – significantly higher. The outcome is a foregone conclusion, i.e., politicians cynically win, having found a way to take even more of your money, and citizens lose. Republicans, i.e., neoconservatives, knowing that raising taxes would be a national economic disaster, want instead to punish the speculators who they choose to scapegoat for the rising prices. The similarity between the Democrats and Republicans (neither of whom are conservatives) is their propensity for shifting the blame for their own congressional malfeasance to anyone but themselves, refusing defiantly to take responsibility for the on-going energy debacle. ‘Shifting the blame’ is the single most common character trait of a liberal – every liberal. They, being the typical congressmen they are, would sacrifice their relatives before accepting accountability, even their grandmother.

The energy crisis we face as a nation due to lack of oil, nuclear, coal, refineries, and absence of exploration will never be their fault, just as the loss of jobs and outsourcing of entire industries is not their fault, just as the drunken overspending with earmarks and entitlements is not their fault, just as the abysmal failure of our nation’s public schools is not their fault, nor the open borders, nor the failing Social Security and Medicare systems.

Here is everything you need to know in two articles. The first appeared in the Wall Street Journal in February, 1989 and the second in Investor’s Business Daily on June 23, 2008

Red State Patriot
----------------

The Speculator as Hero
Wall Street Journal
February 10, 1989

This is not a good time for speculators. Last month the FBI and the Chicago U.S. Attorney's office accused more than 100 traders on the Chicago commodities exchanges of systematically cheating investors and the government out of millions of dollars. Lawyers in Chicago have been besieged by floor traders wishing to plead guilty to the charges.

Coming on the heels of the October 1987 stock market crash, popularly thought to be the fault of program traders and portfolio insurers, and amid the popular furor over insider trading, the speculator's stock may be at an all-time low. Even fictional speculators are in trouble. In Tom Wolfe's best seller "Bonfire of the Vanities," bond trader Sherman McCoy is ridiculed by his wife, and is unable to explain what he does for a living to his young daughter. In real life, noted currency trader Andy Krieger, in a widely reported incident in 1987, quit his job after he found himself unable to supply a satisfactory answer to his eight-year-old son's question about what good his job did.

Like Sherman McCoy and Andy Krieger, I am a speculator. I own seats on the Chicago Board of Trade and Chicago Mercantile Exchange. But when my daughters ask me if my job is as important as the butcher's, the doctor's or the scientist's, I answer that the speculator is a hero, and has been throughout history.

Some speculators are discoverers like Christopher Columbus, creators like Henry Ford, or inventors like Thomas Edison. Their job is easy to place on a high plane. My role in the grander order is indirect, relatively invisible and unplanned. The only discoveries I make are the routes that prices will travel. Like hundreds of thousands of other traders, I try to predict the prices of common goods a day or two or a few months in the future. If I think the price of an item will go up, I buy today and sell later. If I think the price is going down, I'll sell at today's higher price. The miracle is that in taking care of ourselves, we speculators somehow ensure that producers all over the world will provide the right quantity and quality of goods at the proper time, without undue waste, and that this meshes with what people want and the money they have available.

Politicians eager to "do something" about high prices often make laws to punish the speculator. A representative incident occurred during the reign of Emperor Diocletian in Rome in A.D. 300. Speculators were withholding scarce provisions from the hordes, hoping to unload when the demand was even more intense. To remedy this, Diocletian set the highest price for beef, grains, clothing and several hundred other items. Anyone who sold at a higher price would be put to death.

The result? As reported by Lactantius in A.D. 314: "Much blood was shed upon slight and trifling accounts. The people brought no more provisions to the markets, since they could not get a reasonable price for them, and this increased the dearth so much that at last after many had died by it, the law itself was laid aside."

Another representative incident occurred during the siege of Antwerp by the Spanish in 1585. Antwerp was then the leading commercial town of Europe. The Spanish decided to blockade the port to force surrender when supplies gave out. Knowing this, Antwerp farmers and bakers produced large amounts of bread. Privateers ran the blockade at great peril to provide needed supplies. Prices began to rise. Speculators, guessing that bread was going to be scarce, contributed to further price rises through shrewd purchases.

But Antwerp politicians thought it wrong for greedy speculators to profit from war. The politicians fixed a very low maximum price to everything that could be eaten, and prescribed severe penalties for violators. The consequence was inevitable. Privateers stopped running the blockades and the supply of grain dried up. Consumers had no incentive to economize. The citizens ran out of all their provisions after six months of the siege and the Antwerpers starved. They surrendered and were quickly annexed.
Let's consider some of the principles that explain the causes of shortages and surpluses and the role of speculators.

When a harvest is too small to satisfy consumption at its normal rate, speculators come in, hoping to profit from the scarcity by buying. Their purchases raise the price, thereby checking consumption so that the smaller supply will last longer. Producers encouraged by the high price further lessen the shortage by growing or importing to reduce the shortage. On the other side, when the price is higher than the speculators think the facts warrant, they sell. This reduces prices, encouraging consumption and exports and helping to reduce the surplus.

Of course, speculators aren't always correct. When they are wrong, their actions contribute to shortages or gluts. Manias such as the Tulipmania, the South Sea Bubble, the Mississippi Bubble, gold panics, stock market crashes, and violent swings in the value of the dollar are frequently cited as examples of occasions when speculators contributed to instability and imbalance. But who could do the job better?

Bureaucrats have little incentive to improve, invest or innovate. When speculators are wrong, however, they are punished severely for their mistakes by losses of their own money. If left unchecked, the tendencies of our modern kings (read: government – emphasis added) to interfere with the natural working of the marketplace would lead to destruction. But speculators, searching for profit, send signals to producers and consumers as to the forces of destruction and good.

Traders sent such a signal on October 19, 1987, when they dropped the wealth of the non-Japanese-speaking world by 10% in one day when a modern-day king tried to interfere with the natural order by driving the dollar down one last 5% or so.

Perhaps the most positive impact of our current-day speculators is to check at inception governmental activities that would have an inflationary impact. Governments are prone to spend more money on their activities than they take in through taxes. The consequence often has been substantial inflation, followed by war, revolution and destruction of civilization. Nowadays, however, bond traders are so alert to the long-term consequences of such activities that they immediately send debt yields up significantly at the first sign of inflation.

The increased yields have such a negative and immediate impact on government revenue, business activity, and consumer spending that governments have all but given up trying to sneak increased spending past the market. As a result, the rate of inflation slowed markedly throughout the Western world during the 1980s. At the end of last year the long-term yield on a 30-year U.S. Treasury bond was 8.8% vs. 14.4% on the day after President Reagan was first elected. The great era of prosperity that has accompanied this reduced inflation adds a feather to the speculator's cap.

Granted, speculators are not angels; many are motivated by gambling and greed, and when given the chance will take advantage of the public as much as the next person.
What is the net effect of such evilness? Consider the purchase of one Treasury bond futures contract, the most actively traded futures contract. This is where the U.S. Attorney apparently focused his investigation after the undercover agents suffered huge losses for the government's account in stock market futures during the October 1987 crash.

To buy the equivalent of $100,000 in bonds, an average customer might pay $17.50 in commission (half of a typical $35 commission for one contract's purchase and sale) and $31.25 (one "tick"), the usual spread between the bid price and the ask price. This adds up to a $48.75 transaction cost for each $100,000 purchase.

Compare this with the "gentlemanly" New York Stock Exchange, where market-making speculators have a monopoly on trading in individual stocks. To purchase $100,000 of IBM stock (about 800 shares), the most actively traded Big Board issue, an average customer might pay 40 cents a share in commission costs and a 25-cent-a-share bid-ask spread. This $520 transaction cost is more than 10 times the cost to trade the same dollar amount of futures contracts.

Much of the suspected wrongdoing in Chicago apparently involved unscrupulous futures brokers who misreported customer transactions or gave customers unfavorable prices. But even if a bond-futures broker, for example, stole an additional $31.25 tick on every customer order, the liquidity of the market would still be far greater than that of the less-competitive Big Board. The customer would still be paying only one-sixth of the cost of the same trade in IBM stock.

This example serves not to exonerate crooked futures brokers, but to demonstrate the efficiency of a competitive market. Despite the overwhelming evidence that the speculator gets the job done, governments have attempted to bypass speculators in the name of a higher good.

The intellectual raises his eyebrows at the economic and historical analysis and contemptuously says, "Man cannot live by bread alone." To this I respond that without us, there would be no bread.

I am proud to be a speculator. I am proud that my humble attempts to predict Tuesday's prices on Monday are an indispensable component of our society. By buying low and selling high, I create harmony and freedom.

Mr. Niederhoffer is chairman of NCZ Commodities. This article appeared in the February 10, 1989, issue of The Wall Street Journal. Dow Jones and Co., Inc., 1989.

---------------

Just Speculating
Investor's Business Daily
June 23, 2008

Energy: Democrats, in their never-ending search for scapegoats, have had a go at oil company CEOs, industry profits and now oil "speculators." They've looked everywhere but where they should — in the mirror.

The congressional hearings that kicked off Monday to look into speculative behavior in the markets produced all the usual finger-pointing about the doubling in oil prices over the past year to nearly $137 a barrel.

Meanwhile, Barack Obama, seeking to catch a political wave he can ride all the way to the presidency, has announced he'll "crack down" on oil speculation by imposing new limits and regulations on oil traders in the futures markets.

But as emotionally satisfying as going after speculators sounds, this will only make our current oil problem much worse.

Its true there's speculation in the oil market. But then again, there's speculation in virtually every exchange-traded good — from oil and gold to corn and pork bellies. This isn't just acceptable, it's healthy.

Speculators aren't evil. They ensure a liquid market for the commodities we need most. They make money by buying low, when the product is in low demand, and selling high, when demand has grown.

It has been pretty easy for them to make money recently, because speculation in oil has become a one-way bet.

Global oil demand has been growing by about a million barrels a day each year — thanks to surging use in fast-growing China, India, the Middle East and parts of Eastern Europe. Supply hasn't kept pace. In fact, it's falling at key suppliers including Mexico, Venezuela, Nigeria and Russia. So the price rises.

The logical answer to any question about speculation in a market is: What are you doing to boost supply? In the case of Congress and the solution offered by Obama, the answer is nothing.

They would punish people who do economically useful work, but wouldn't add a drop to our oil supply. If they really wanted to break the back of speculation, they should signal that they intend to use every means at their disposal to bring energy markets back in line.

High prices already have curbed demand here in the U.S., the latest data show. What's left is to drill for the literally hundreds of billions of barrels of oil we have here in this country locked up offshore, in Alaska and in vast shale-oil reserves.

Instead, the Democrat-led Congress has pursued foolish energy policies that lead inevitably to higher prices, less supply and declining standards of living for all Americans.

As for speculation, one tell-tale sign of market manipulation is a buildup of inventories kept off the market to keep prices high. That is, as the price runs up, the speculators pull supply off the market.

Is that happening? No. Oil inventories, in the most recent data, are down year over year. No one's hoarding oil.

Claims of surging speculation likewise fall apart on closer examination. It's true that speculative positions in oil have jumped from 37% of all oil traded in 2000 to 70% now. But much of that trading involves commercial hedging and risk-management — not speculation by people out to make a killing.

As the Commodity Futures Trading Commission notes: "There are almost as many short speculative positions as there are long positions." In other words, speculators are betting as much that prices will drop as they will rise.

In short, there's no real evidence that speculators are driving energy prices up. But there's plenty of evidence that Congress' refusal to permit drilling is a big factor keeping supplies down.

By INVESTOR'S BUSINESS DAILY
June 23, 2008

Comments are welcome at redstatepatriot@hughes.net. Please include the title of the article as your subject line. Selected responses, in whole or part, may be published (appended to the article).

« Close It

I'm here to urge you not to feel sheepish. This may not be entirely comforting, but your confusion is shared by many people who are in the middle of the crisis.

''We're exposing parts of the capital markets that most of us had never heard of,'' Ethan Harris, a top Lehman Brothers economist, said last week. Robert Rubin, the former Treasury secretary and current Citigroup executive, has said that he hadn't heard of ''liquidity puts,'' an obscure kind of financial contract, until they started causing big problems for Citigroup.

I spent a good part of the last few days calling people on Wall Street and in the government to ask one question, ''Can you try to explain this to me?'' When they finished, I often had a highly sophisticated follow-up question: ''Can you try again?''

I emerged thinking that all the uncertainty has created a panic that is partly unfounded. That said, the crisis isn't close to ending, either. Ben Bernanke, the Federal Reserve chairman, won't be able to wave a magic wand and make everything better, no matter how many more times he cuts rates. As Mr. Bernanke himself has suggested, the only thing that will end the crisis is the end of the housing bust.

So let's go back to the beginning of the boom.

It really started in 1998, when large numbers of people decided that real estate, which still hadn't recovered from the early 1990s slump, had become a bargain. At the same time, Wall Street was making it easier for buyers to get loans. It was transforming the mortgage business from a local one, centered around banks, to a global one, in which investors from almost anywhere could pool money to lend.

The new competition brought down mortgage fees and spurred some useful innovation. Why, after all, should someone who knows that she's going to move after just a few years have no choice but to take out a 30-year fixed-rate mortgage?

As is often the case with innovations, though, there was soon too much of a good thing. Those same global investors, flush with cash from Asia's boom or rising oil prices, demanded good returns. Wall Street had an answer: subprime mortgages.

Because these loans go to people stretching to afford a house, they come with higher interest rates -- even if they're disguised by low initial rates -- and thus higher returns. The mortgages were then sliced into pieces and bundled into investments, often known as collateralized debt obligations, or C.D.O.'s (a term that appeared in this newspaper only three times before 2005, but almost every week since last summer). Once bundled, different types of mortgages could be sold to different groups of investors.

Investors then goosed their returns through leverage, the oldest strategy around. They made $100 million bets with only $1 million of their own money and $99 million in debt. If the value of the investment rose to just $101 million, the investors would double their money. Home buyers did the same thing, by putting little money down on new houses, notes Mark Zandi of Moody'sEconomy.com. The Fed under Alan Greenspan helped make it all possible, sharply reducing interest rates, to prevent a double-dip recession after the technology bust of 2000, and then keeping them low for several years.

All these investments, of course, were highly risky. Higher returns almost always come with greater risk. But people -- by ''people,'' I'm referring here to Mr. Greenspan, Mr. Bernanke, the top executives of almost every Wall Street firm and a majority of American homeowners -- decided that the usual rules didn't apply because home prices nationwide had never fallen before. Based on that idea, prices rose ever higher -- so high, says Robert Barbera of ITG, an investment firm, that they were destined to fall. It was a self-defeating prophecy.

And it largely explains why the mortgage mess has had such ripple effects. The American home seemed like such a sure bet that a huge portion of the global financial system ended up owning a piece of it. Last summer, many policy makers were hoping that the crisis wouldn't spread to traditional banks, like Citibank, because they had sold off the underlying mortgages to investors. But it turned out that many banks had also sold complex insurance policies on the mortgage debt. That left them on the hook when homeowners who had taken out a wishful-thinking mortgage could no longer get out of it by flipping their house for a profit.

Many of these bets were not huge, but were so highly leveraged that any losses became magnified. If that $100 million investment I described above were to lose just $1 million of its value, the investor who put up only $1 million would lose everything. That's why a hedge fund associated with the prestigious Carlyle Group collapsed last week.

''If anything goes awry, these dominos fall very fast,'' said Charles R. Morris, a former banker who tells the story of the crisis in a new book, ''The Trillion Dollar Meltdown.''

This toxic combination -- the ubiquity of bad investments and their potential to mushroom -- has shocked Wall Street into a state of deep conservatism. The soundness of any investment firm depends largely on other firms having confidence that it has real assets standing behind its bets. So firms are now hoarding cash instead of lending it, until they understand how bad the housing crash will become and how exposed to it they are. Any institution that seems to have a high-risk portfolio, regardless of whether it has enough assets to support the portfolio, faces the double whammy of investors demanding their money back and lenders shutting the door in their face. Goodbye, Bear Stearns.

The conservatism has gone so far that it's affecting many solid would-be borrowers, which, in turn, is hurting the broader economy and aggravating Wall Streets fears. A recession could cause credit card loans and other forms of debt, some of which were also based on overexuberance, to start going bad as well.

Many economists, on the right and the left, now argue that the only solution is for the federal government to step in and buy some of the unwanted debt, as the Fed began doing last weekend. This is called a bailout, and there is no doubt that giving a handout to Wall Street lenders or foolish home buyers -- as opposed to, say, laid-off factory workers -- is deeply distasteful. At this point, though, the alternative may be worse.

Bubbles lead to busts. Busts lead to panics. And panics can lead to long, deep economic downturns, which is why the Fed has been taking unprecedented actions to restore confidence.

''You say, my goodness, how could subprime mortgage loans take out the whole global financial system?'' Mr. Zandi said. ''That's how.''

March 19, 2008, Wednesday Late Edition - Final

Hat tip: Dave Cogburn

Comments are welcome at redstatepatriot@hughes.net. Please include the title of the article as your subject line. Selected responses, in whole or part, may be published (appended to the article).

« Close It

The Fed, as an institution, is lost. They are not hawks. They are chicken hawks.

But God bless Cramer, by the way. The man has a right to his opinion. And I love it when opinions are expressed passionately. Lord knows I get a little animated myself from time to time. But I disagree with him wholeheartedly.

What is the role of the Fed? Easy - inflation and employment. That is what it says in black and white. But the one thing that separates us from a banana republic is the Fed's independent authority in protecting the purchasing power of the currency in your wallet. That unspoken doctrine is the one link between today's economy and the past.

What does a Fed-free world look like? You have panics. The panic of 1819. The panic of 1873. The panic of 1907. Some people lose everything. Some other people, prudent people, do not. Panics are good. They punish the losers and reward the winners. But somewhere, in the interest of the collective, the idea permeated that one could prevent financial panics by, simplistically, printing more money.

In the movie "Dave," Kevin Kline, as President, announces that, by fiat, all Americans will have a job. There is a cost to providing everyone with a job. And there is a cost with providing everyone with a market safety net. It does not come out of nowhere. It comes out of your wallet and mine. Building more and more houses makes existing houses worth less. Printing more and more dollars makes existing dollars worth less. Am I some wild-eyed Libertarian gold bug? Yes, I want to buy gold more than ever, though I try to resist classification.

Without losers, there can be no winners. If you keep bailing out jerks, then it should not surprise you if you breed more jerks. If you keep administering drugs, it should not surprise you if your patient twitches uncontrollably.

Bring back "debtor's prison" and see how many credit problems you have.

A Market Professional
August 20, 2007

Red State Patriot commentary: Without winners, there can be no losers - the central thesis of liberalism, and the antithesis of liberty and a market economy.

« Close It

First cell phones in cars. Fine. Then trans fats. I read one yesterday about criminalizing not going to parent-teacher conferences. Now this.

We know what a totalitarian society look like because we have Charles Jenkins. In 1965, as an American soldier, he walked across the border to North Korea and defected. He was young and impetuous. He spent 40 years there. As an old man, he was released and now we have his stories to help us understand what pure Statism looks like. He was told what to eat, when to sleep, and when to perform an intimate act (twice a month). Albany is slouching toward Pyongyang.

Most people think their politics lies along a Democratic-Republican axis. This has absolutely nothing to do with Democrats and Republicans. There is another axis, the Statist-Libertarian axis that currencies care about, that the dollar cares about, that markets care about. Democrats and Republicans both have elements of Statism and Libertarianism. But since September 2001, both political parties have abandoned any libertarian thought and have embraced the idea that only government can save us all. People don’t flee countries to escape liberals or conservatives – they flee to escape Statists.

If you make it illegal to listen to IPODs outside, you make it more likely that entrepreneurial people like me are going to get fed up and try to get out of the country before the barbed-wire fences and watch towers go up. For the people that are left behind (including the Mexicans who foolishly thought coming to the USA was a good idea), they will have little ability, incentive or desire to produce anything.

The Dollar is intrinsically worth nothing now, so it is a paper promise of value. U.S. Treasury debt instruments are promises to pay you back in more paper. Underlying the whole system is confidence that the dollar actually means something. Not just that the United States is productive today, but that it will be productive tomorrow - that its educated people won’t pull the ripcord – that people will still have incentive to innovate and work.

The U.S. Dollar is toast.

By a Market Professional

« Close It

On the way in the Columbia River (Passing Cape Disappointment) the water was flat calm, but there was a ton of fog. This complicated the maneuver, because we had to back down on the buoy tender to pass the tow line. We had a shoulder-fired line-throwing gun for the purpose, but we had to get so close just to see the vessel that in the end we wound up passing the bridle and line by hand.

Once we had the wire bridle hooked up we started heading out, paying out the towing hawser as we went. First 100 feet. Then 200 feet. We had 1200 feet of towing hawser on deck and the goal was to get it out to about 1000 feet. I was on the fantail with most of the Deck Force. We had greased the rail with Crisco to prevent chafing and we put a piece of leather in the towing bitt so that any metal burrs or imperfections on the bitt didn’t damage the hawser.

Halfway out the river the fog started to lift. Sun started beating down on all of us and in our “float coats” we were getting a little warm. I was starting to relax – the tough part of the evolution seemed over, so my attention started to wander a little.

Then I noticed that the leather we put in the towing bitt was starting to work its way out. I figured, “Oh well, the towing hawser has to bet banged up eventually someday.” The problem was, once the leather was free, the tow line started to “run.” My guys were leaping away, trying not to step in the bight of the line. If they had been, they would have been sucked with the towing hawser through a space about the size of a volleyball in a split-second.

It was chaos. Actually, pandemonium. Then, to my horror, I noticed that nobody had secured the bitter end of the towing hawser to anything. The towline could fly right overboard and we could lose the tow. If we lost the tow in the Columbia River, surely the buoy tender would drift onto the shoals within minutes and go aground. I would be responsible for sinking a decommissioned Coast Guard Cutter. All this passed through my mind in those split-seconds.

The First Class Petty Officer noticed it too, and just before he would have been pulled overboard, he threw the line around one of the mooring bitts. At 1200 feet, the line shock-loaded, tensed, but held. If we had lost the tow, I would not be sitting here tapping out this story out to you. I would be flipping burgers (not that there is anything wrong that), or even worse, turning big rocks into little rocks at a vacation destination called Leavenworth. But I am blessed to have had this happen, and grateful that nobody was hurt, and because I learned at a young age a couple very important things about life, markets and trading - before I ever got to the trading job.

#1. Things can and will happen a lot faster, and with a lot more force, than you can even conceive.
#2. Therefore, you always need to secure the bitter end of that line, and have a “stop.”

An Investment Professional

« Close It

The best example of this is today’s housing market. It is not a housing bear market (yet). Prices are not significantly going down (yet). They are mostly going sideways, having leveled off after a remarkable price appreciation. There is, however, way more sellers than buyers if you believe the inventory numbers, and length of time on the market, of unsold properties. Since home owners are not motivated sellers (yet), they are staying on their offer and the price has stayed relatively unchanged – a few reductions here and there. Often such conditions can work themselves out over time if buyers gradually take up the excess supply (even if it takes years).

This is still a nightmare scenario for the homebuilding industry, but there’s no escape for them anyway. The big question for the economy is what makes people content with “hanging out” on their offer, without feeling the need to hit the “sell now button?”

As long as there is no perceived urgency to turn the house or property into cash, which can then be turned into food, or fund other perceived necessities that refinancing will no longer accomplish, most people will keep their hands away from the “sell now button.”

If consumers start having liquidity problems, then it could be lights out for second home prices, which in turn would be damaging to primary residence prices and slam the door on land speculation – not to mention a lot of other things associated with the “wealth effect.” I don’t know what would tip us in that direction, but I’m not excited to find out.

Keep in mind that a large portion of the current economic recovery has been funded by “found money” from mortgage refinancing - money (untaxed disposable income) that was not earned. With interest rates rising, flat-to-slightly declining real estate prices, speculators less confident of their ability to “flip” properties, and mortgage refinancing reduced to a trickle, personal consumption expenditures should begin to slow measurably by the end of the year and through 2007. There is even a chance that real estate speculators will become the first domino to fall as they hit the “sell now button” in order to cover their leveraged indebtedness.

We may be in the final three minutes of the fourth quarter of the championship game. I’m glad I’m in the bleachers and not betting on the outcome.

Red State Patriot

« Close It