Goodell’s description leads me to think professional sports  may be the only situation in USA where having a union is better than none! The reason: professional sports leagues most benefit from close games among roughly matched teams. So the owners’ intention is to maximize the probability any team can beat any other, which of course means the league desires equality of outcome and competes heavily for the inputs (players). This system is contrary to life and business, in which society seeks equality of opportunity, and supports competition to produce winners who achieve the best outcomes in that opportunity space. (We thank Dr. Ruth Fisher for her pointing out that this situation is treated in the economic theory of “clubs”, in which there is strong homogeneity among members).

We’ve Become a Nation of Takers, Not Makers

He lays out some facts about the size of government relative to the private sector, to show why so many states and the federal government are nearing the point of financial collapse. In the case of states, which cannot print money as can the federal government, such collapse occurs when the state cannot pay its bills because revenues are dwarfed by its obligations. His article provoked our thinking about the limits, if any, to the size of government.

Government continually grows bigger. But how big, ultimately, can it get? What happens if every citizen becomes a government worker? What if  government collect 100% of all private income? Under what conditions will the electorate become furious at the governments it installed and from which they enjoyed so many “free lunches”? At what point does the electorate realize the government has become dangerously large, intrusive and grasping, and no longer legitimate? In other words, is there a tipping point at which voters switch from active annoyance with their government to rage and the urge to destroy it? We believe their is such a point, and it will occur if the Government takes too much of the voters’ money.

We think there’s a way to roughly analyze when the tipping point will occur. At this point, voters will become so infuriated that they elect radical reformers or even demonstrate violently.

In the last regard, fury is clearly possible when people feel personally threatened. For example, we can see how violence is rearing its head in Wisconsin, as unionists, desperately fearful their government union monopoly and their taxpayer-paid pensions will end, are formally threatening the livelihoods of small business owners throughout the state. The threats are intended to induce the owners to post signs in their stores supporting unions. Here are two links to the news reports:

(Wisconsin Unions Get Ugly, WSJ, 1 APRIL 2011)

Are Union Boycott Threats in Wisconsin Legal?

To understand the analytical framework, we turn to empirical economics, in which stylized games are played with real people and the results measured and compared to the initial theory. In the “Ultimatum Game” (UG), there are two players and a Referee. The Referee gives a sum of money (the Amount) to Player 1 who is told he can retain all the money for himself after an amount of Player 1′s choosing is offered to Player 2 and accepted. The catch is that if Player 2 rejects the offer, both Players get nothing.

In theory, Player 2 should accept an offer of any amount, even $.01, since the amount is better than nothing. Well, that’s theory. In real life experiments, it turns out that almost all Player 2′s require between 20% and 50% of the total to be offered before Player 2 accepts. There seems to be an innate concept of fairness or ego (pride) involved.

Note that if Player 2 rejects an offer from Player 1, it means Player 2 is making himself tangibly worse off on purpose, because the offer fails to satisfy an emotional need in Player 2′s own judgment. We claim that in this case, Player 2 reached his personal tipping point, at which emotion dominates rationality.

(A good summary of this game and its research results is given in Wikipedia.)

Now, consider the game in reverse: Player 1 gets all the money initially, as before, but now Player 2 makes the offer. Player 1 can keep only the amount remaining after Player 2 takes some for himself. In this Reverse Ultimatum Game (RUG), if Player 1 decides to accept the remainder, he keeps it, but if he rejects the remainder, both players get nothing. The RUG is essentially the same as the UG. We imagine if our analysis is correct, Player 1 in the RUG would need to retain 50% to 80% of the initial Amount.

Here is the leap to our tipping point problem: Label Player 1 the Electorate, and Player 2 the Government. The Amount is the total income earned in the country. Call the portion the Government takes taxes. When the Electorate refuses to accept the remainder after the Government takes taxes, then both Players get nothing. This is the tipping Point.  We say that this Tipping Point occurs when government takes between 20% and 50% of total income. Notice in this situation, since the Electorate cannot simply avoid taxes, their only response at their tipping point may well be rage leading to very strong outcomes. No one likes the RUG pulled out from under him!

Of course, we have applied a result in a one-time game between two individuals to a composite of a game played among millions of people with a single Player 2. Yes, this is a stretch, but it does illuminate that people really have inherent limits to what they can tolerate when shares are apportioned. These limits are experienced in a specific dimension, in this case, the amount of money the Government allows them to keep.

Given the fractional requirements illustrated above, we are at the tipping point of taxation.

So are the Democrats just stupid as a group, unable to see reality or recklessly uncaring? I say they are not stupid, but they are so ideological as to be blind, and they suffer power lust. Even worse, as Charles Krauthammer writes, they are also deeply cynical. He says the Democrats want to pander to Americans and cut spending only minimally, in hopes such false largess will gain victory for The OBAMA! on 2012.

As Krauthammer writes below, The OBAMA! actually is denying there is any budget problem, hoping this Big Lie will help Him get re-elected!

“On Tuesday, Democratic Sen. Joe Manchin of West Virginia denounced Obama for lack of leadership on the debt. It’s worse than that. Obama is showing leadership. With Lew’s preposterous claim that Social Security is solvent for 26 years, Obama is preparing to lead the charge against entitlement reform as his ticket to reelection.”

Read the whole article here:

Charles Krauthammer: “Et Tu, Jack Lew?”

Most current market analyses and commentary fail to take this huge fact into account in any serious way.

I believe the idea of a “new normal”, meaning a very slowly growing US economy, will be valid for many years to come. Unfortunately, the current pack of malignant bureaucrats and politicians always choose pandering or ideology over actual problem solving, so the exactly wrong regulatory frameworks are usually installed (e.g., “healthcare reform” laws, “financial reform” laws, “net neutrality”, making Fannie/Freddie even more supportive of people who cannot afford to buy a house, …). Thus, we will be stuck with the New Normal or a similar scenario, unless at least one or both of these possible events occur:

1. The current Regime becomes paralyzed and unable to pass any more dangerous laws affecting the economy, e.g., after 2 NOV 10 (an obvious speculation is available around this idea!)
2. Technology proceeds apace and radical innovations take hold….but this is a 5 to 10 year event horizon before the economy could be affected (consider the WWW was launched c1993 by Netscape and while its future impact was widely acknowledged then, it’s taken until roughly 2003 to become transformative in the economy).

Consider this figure:

Correlations among global securities

The first 14 securities are indexes and ETFs of various segments of the USA equity market. These are followed by a European and a Chinese equity ETF. The last  five are currency, fixed income or anti-inflation securities.

Note how the equity indexes are very highly correlated with each other (with most correlations over 0.8 and thus green in the matrix), but very uncorelated with the non-equity securities. GLD, the gold ETF, is truly uncorrelated with both equity and the 30 year T-Bond ^TYX.  Interestingly, GLD  and TIP (the anti-inflation US treasury security) are moderately correlated at 0.4. We would expect this since they both are used to protect against inflation, but are not equivalent in their structure.

The two rows above the matrix show the returns and volatility of each security. Note that the highest volatility is for VGK (41%/yr) and the lowest is for TIP at 5%/YR. On the other hand, only 7 of 21 securities measured have positive returns for the last 45 days. The highest return was China (FXI at 50%/YR) and the lowest was Dow Jones US Industrials (IYJ at -38%/YR).

We say this matrix, derived from the last 45 days of price action, indicates securities can best be picked based upon estimates of returns, assuming most securities will continue their very high correlations. Only asset classes, broadly categorized as equity/fixed income/anti-inflation, have negative or zero correlations for diversification.

Thus, we see yet again how the asset allocation task requires the asset class be picked before individual securities.

Not really. Consider this excerpt from the article:

Prohibitions on insider trading prevent the market from adjusting as quickly as possible to changes in the demand for, and supply of, corporate assets. The result is prices that lie.

And when prices lie, market participants are misled into behaving in ways that harm not only themselves but also the economy writ large.

Remember the 1970s-era price ceiling on gasoline? By causing prices at the pump to lie about the scarcity of oil, that price ceiling led Americans to waste untold hours waiting in lines to fuel their cars. Similar wastes occur when corporate assets are mispriced.

Suppose that unscrupulous management drives Acme Inc. to the verge of bankruptcy. Being unscrupulous, Acme’s managers succeed for a time in hiding its perilous financial condition from the public. During this lying time, Acme’s share price will be too high. Investors will buy Acme shares at prices that conceal the company’s imminent doom. Creditors will extend financing to Acme on terms that do not compensate those creditors for the true risks that they are unknowingly undertaking. Perhaps some of Acme’s employees will turn down good job offers at other firms in order to remain at what they are misled to believe is a financially solid Acme Inc.

Eventually, of course, those misled investors, creditors and workers will suffer financial losses. But the economy as a whole loses, too. Capital that would otherwise have been invested in firms more productive than Acme Inc. never gets to those firms. So compared with what would have happened had people not been misled by Acme’s deceitfully high share price, those better-run firms don’t enhance their efficiencies as much. They don’t expand their operations as much. They don’t create as many good jobs. Consumers don’t enjoy the increased outputs, improved product qualities and lower prices that would otherwise have resulted.

In short, overall economic efficiency is reduced.

You can read the whole article here.

Almost every page of the health care bill HR3200 from the House of Representatives has at least one statement that can alter your life. When those 1017 pages interact, they will produce effects not imagined by the bureaucrats and politicians who wrote this thing. The odds those unpredictable Black Swans are good for you are nil. They will hurt you.

As an example, consider this from the New York Times of 1 OCT 09 in regard to the current Medicare:

Medicare is putting in place a new policy that may sharply curtail the use of the cancer drug Avastin as a treatment for eye diseases.

But the way the bureaucratic gears mesh in this case, the move could end up costing Medicare itself hundreds of millions of dollars a year, and individual patients thousands of dollars.

What happened is that Medicare added a new reimbursement category for doctors to use for very small doses of an existing expensive drug. As the Times writes:

But Medicare has now introduced a special reimbursement code just for the smaller doses of Avastin. And starting Thursday, the reimbursement of Avastin dropped to about $7.20 for the dose typically used in the eye.

That would mean eye doctors — who purchase Avastin and then are reimbursed when using it on patients — would lose money administering the drug.

The new policy would give eye doctors a financial incentive to switch to Lucentis, for which they would be fully reimbursed even though that drug is significantly more expensive.

If doctors do shift to Lucentis, “this will have a huge economic impact on Medicare, in the range of hundreds of millions of dollars,” said Dr. David W. Parke II, chief executive of the American Academy of Ophthalmology. “Members view this as a bureaucratic decision that is maybe necessary, based on statutes, but highly short-sighted.”

This illustrates the obscenity the Congress is creating by rushing to a new, vast bureaucratic system with enormous perverse incentives and deep complexities that can only make life worse for everyone.

Read Full Article

Here’s the answer, in beautiful brevity:

Professor Bolster stated his overall conclusion: “He has an alpha of 0; he could do worse. He’s harmless.”

This means you would have gained nothing and lost nothing for the risk level of Cramer’s recommendations over the time horizon analyzed (July 2005 to the end of 2007). For details, see the full results described here:

Paul J. Bolster and Emery A. Trahan, “Investing in Mad Money: Price and Style Effects,” Financial Services Review, Vol.18 (2009), pp. 69–86.

You also can read a summary here.

“There is the strong possibility that policy makers in the US and UK will not time the transition from the current quantitative easing to a more tightened monetary policy. That is not because they are no competent. It is because the task is very tricky and there is no play book outlining the steps. This is not Tom Landry (former Dallas Cowboy coach) pacing the field with a play for every situation already planned and practiced well in advance.

The odds favor they will either be too late or too early. Getting it “just right.” The Goldilocks play, would be more than fortunate. In fact, there may be no right play to call. They may be forced to choose between a slower economy and/or inflation/deflation. And as this week’s Outside the Box authors note, there is also the possibility of yet another asset bubble, making the choices even more risky.”

See full text here

Of course, we have written about this looming disaster, and proposed some specific ways investors can prepare for it. See, for example:

http://www.rocketcap.com/portfolios-for-deflation-inflation-and-good-luck/

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