Deflation or Inflation

Source:Comstock Funds

Borrowed the above from the boys at Comstock. Look around, look at the chart. You figure it out.

Classic End of Month Window Dressing

Today is the last day of August and a jam job is in progress. You can't tell who, but this occurs regularly at month-end and is generally believed to be the result of the funds jamming the stocks they own, to make themselves look as good as possible.

No it isn't legal, but they probably figure they won't get caught or they simply don't care.

The Broken Window Fallacy

After Hurricane Charley, and doubtless after Hurricane Frances should it prove destructive, we will be told in the press about the economic benefits of the damage, in that spending on repairs is considered an economic stimulus.

This is, of course, nonsense - the destruction creates great economic loss for society as a whole, although of course the repair industry benefits. This chestnut continues to reappear time after time, despite its continued rebuttal. The most famous essay on this subject is by Frederic Bastiat, dating from 1850. Enjoy. That Which is Seen, and That Which is Not Seen

Employment Roulette

The market declined today on extremely light volume. The combined influence of the Republican convention, it being the last weekof summer vacations before Labor Day, and the prospect of the monthly employment numbers on Friday, has made the markets very quiet. Friday's numbers are being looked to by the bulls to confirm that the "soft spot" is over, and of course vice-versa by the bears. Both sides have taken their positions; the chips are down. All eyes are on the croupier as the wheel is spun. As statistician Jim Willie says "However, the reality is that within the US Economy, jobs are produced by statistical models far more than from employers. Over 1.1 million new jobs show up on the Birth-Death model from the Bureau of Labor Statistics, which accounts for over 75% of claimed job growth. On the news, one can see proud claims of job growth, when they are mere estimates from questionable sources. .... The B-D model probably is worthless; it is surely indefensible."

Of course this makes it very hard to predict what Friday's number will be. There is ample opportunity for the administration to massage the numbers. Doubtless they will make the most of it, so I would expect a relatively strong number courtesy of the Birth-Death model. This will satisfy everyone and no-one, of course.

Tax Lien Certificates

I've been asked if tax lien certificates, which carry quite high interest rates, sometimes as high as 30%, are a good investment.

Tax lien certificates represent the last attempt by the 'crats to collect the taxes due on a piece of property. When all else fails, the 'crats encumber the property with a lien in the amount of the unpaid taxes. They then sell the lien and the right to collect the unpaid taxes to a third party investor. This means the 'crats get at least some money and no further hassle trying to collect. Basically the third party investor is now a collection agency. Most counties in the US offer them, usually by auction, at which you have to be physically present. Anyone who wants to buy the property from the owner must clear the tax lien by paying off the certificate plus accrued interest at whatever rate was set. Of course, you have to wonder why the owner didn't pay the taxes or sell the property. These rates are set high so the certificates look good, but actually collecting it is another matter. If no-one buys the property (and the owner doesn't pay up), after a set period (like three years) you may own the property after payment of a title fee. If the owner is in bankruptcy then you are probably out of luck as the IRS and other creditors take priority over property tax liens. Like any other credit, you should research and inspect the property before you invest. These issues generally limit these deals to folks who are knowledgeable and located not too far from the property. You can be sure that any good deals will be snapped up by the local insiders and out-of-town folks will only get junk.

So the short answer is, probably not, unless you are well-connected local who has done his/her homework and knows exactly what the deal is with a particular piece of property. If that's you, you didn't need to read this anyway.

The Stupid Investment of the Week

On Friday I closed out my positions in the American Century 2030 Trust (ACTAX) which had been opened in late April. This mutual fund is a zero-coupon unit trust of Treasury strips maturing in 2030. It therefore has a 26-year duration, making it very sensitive to interest rate swings.

Immediately upon my entering this trade, to my surprise this fund was featured on CBS Marketwatch as "The Stupid Investment of the Week". The conventional wisdom at the time was that interest rates were going steadily higher. This of course was not the case and I was fortunate enough to close this trade at an 8.2% profit in four months. Approximately 27% annualized. I need more stupid trades, please.

The moral of the story is that taking advice from financial journalists, whether print or television, is not wise. By the way, I switched into the American Century International Bond Fund (BEGBX) because I think the dollar rally is just about done. Comme dîner.

Beanie Babies

Another 90's Bad Dream.

"It was just an online classified ad, under Collectibles for Sale, but it sounded like a cry from the heart: "I'm tired of these things now. Please save me from them."

Kelly Cabral of Tracy, Calif., placed the ad recently after coming across a box in her garage crammed with dozens and dozens of Beanie Babies, the floppy little stuffed animals that sparked an international trading frenzy in the late 1990s.

Years earlier, there were days when Kelly and her husband, Dan, would join the early-morning crowds laying siege to gift shops that were expecting shipments of Beanies.

There were times when the Cabrals would post themselves at different McDonald's outlets to buy stacks of Happy Meals in hopes of scoring a few of the promotional Teenie Beanie Babies they didn't already own.

"I don't want the food," Kelly would say when she reached the counter. "I just want the Beanie Babies."

Now, she says, "My husband's like, 'Where did we get all these?' Then you realize you spent way too much time on this insanity."

The Crude Oil thing...

TheUBend on capitalstool.com: "re the crude oil thing..anecdotally, spans (which are inquiries for bunkers - the fuel oil for ships ) are an excellent insight into the insiders view of energy prices. A week before the current snapback in crude, spans in Fujairah (gulf ) and Singapore ( centre of the biggest freight demand - far east ) fell back. Well here's the new one. Spans are picking up sharply again. And for good reason; we are about to enter the period when fixtures are made for the winter season, and demand ALWAYS increases.. Again, purely anecdotally, the tanker community ( and I know a couple of the big Greek tanker operators ) for them $50 crude in the short term is yesterday's news.

The laughable thing is the way that the weaker ( highly leveraged ) specs are shaken out by news from a mosque in Iraq. So I'll regurgitate what the CFO of one of the world's biggest tanker operators told me last week - "keep your eye on the big picture"."

Where's the POR

The POR, or Point of Realization, should be getting close. The flow of data is starting to be compelling. Jobless claims up, help-wanted advertising down this morning.

"Overall economic momentum is no longer firing on all cylinders," said Conference Board Economist Ken Goldstein, "and hiring intentions this summer are suggestive that companies may not increase hiring until the economy regains more solid footing."

No kidding. But the bullhorning from the administration - "Just a soft spot, nothing to see, move along, please" - is nearly continuous. A stream of fed governors - Easy Al himself tomorrow, no doubt - and of course the overwhelming interest by the Bush camp in maintaining the illusion - are providing a continuous propaganda assault on the masses. Can they keep it going until the election? Not at all clear to me. Depends on the employment report next week. My guess is that the fix is in, though, this data will be a flat lie or Ms. Chao will be out of a job next year. If the truth is told there will be a loss of jobs.

All you really need to know

The housing market, which is the main source of bubble financing, is finally rolling over:

"NEW YORK (Reuters) - ... The Mortgage Bankers Association said its seasonally adjusted market index, a measure of mortgage activity, declined for the week ending Aug. 20 by 6.3 percent to 646.3 from the previous week's 689.4....The Washington trade group's purchase index, a gauge of new loan requests for home purchases, fell last week by 5 percent to 443.7 from 467.1 in the prior week. The purchase index was still well above its year-ago level of 375.5.... Meanwhile, the Washington trade group's seasonally adjusted refinancing index decreased last week by 8 percent to 1,824.9 from the previous week's 1,982.7."

"WASHINGTON (CBS.MW) - ...Sales of new homes in the United States fell 6.4 percent in July to a seasonally adjusted annualized rate of 1.13 million, the Commerce Department estimated Wednesday.... There was also a large downward revision to June sales.... The department said sales fell a revised 5.6 percent in June to 1.21 million units, compared with the initial estimate of a 0.8 percent drop to 1.31 million units.... The number of new homes for sale on the market rose about 4.2 percent to 393,000, representing 4.2-months of sales at the July pace.... The median sales price rose 9.0 percent year-over-year to $207,400, but was down 2.6 percent from June.... The National Association of Realtors reported earlier this week that sales of previously owned homes fell 2.9 percent in July."

And one more data point (anecdotal, but...) Las Vegas cools off

This means liquidity generation from housing is declining rapidly (6.3 percent in a week is rapid). This means the economy will be heading south because it is only new liquidity (debt) generation which drives it, in the absence of savings and investment. While price action today was less than satisfactory to this bear, the economic news is encouraging. All is evolving as expected.

Steve Roach Explains It All

"There is a worrisome precedent for this shifting mix of foreign capital inflows from private to official funding. The last time it happened in the context of a US current account problem was in the months leading up to the stock market crash in October 1987. During the pre-crash period, private foreign buying of US securities started to falter as America’s external adjustment put further downward pressure on the dollar....

....As this earlier episode reveals, official support for currencies of economies that have large current account deficits turned out to be a last-gasp, losing effort. The lesson: For economies in disequilibrium, the venting function of financial markets ultimately cannot be denied."

Morgan Stanley - The Funding of America

Wal-Martians catch cold

"NEW YORK (CBS.MW) -- Wal-Mart Stores said Monday it expects August same-store sales to range between flat to 2 percent higher, a reduction from the retailer's week-ago forecast of 2 to 4 percent growth and well off the year-ago growth figure of 6.9 percent.

The Bentonville, Ark.-based company cited the impact of Hurricane Charley, which forced 75 stores to close and affected a total of 200 stores. Back-to-school sales are tracking below management's plan.

In its weekly sales update, Wal-Mart said Labor Day falling later on this year's calendar also has hurt sales, as has reduced clearance merchandise and later child-care tax credit checks.

The strongest categories in the past week were food, household paper goods and pet supplies; also back to school uniforms, and athletic shoes. The Midwest and South were the strongest regions for the week."

Saudi speak with forked tongue?

In its latest report, the Paris-based Petrologistics said OPEC's output of crude oil in July averaged slightly below 29.5 million barrels a day, down slightly from June's 29.6 million barrels a day, mainly because of a decline in output from Saudi Arabia.

Petrologistics had previously expected the OPEC to pump more than 30 million barrels a day in July.

Despite pledges to increase its output, Saudi Arabia, OPEC's largest producer and exporter, produced about 9.13 million barrels a day of oil in July, down from 9.52 million barrels a day in June, according to Petrologistics.

E-Commerce Times

Parallel Universes

There seem to be two parallel universes. One of them, let's call it the Greenspan Universe after its leading prophet, is a financial Garden of Eden. The other, let's name it in the same way the Prechter Universe, is more of a financial Armageddon.

Who lives in the Greenspan Universe? Well, nearly everyone, it seems. Certainly the financial press, the analysts, Wall Street, the government and most politicians of all stripes except for Ron Paul.

This universe has a strong global economic expansion underway, thanks to a Fed Chairman with an outsize ego and a talent for obfuscation, supported by miracles of structured finance and derivatives. Inflation is non-existent, job growth is strong, equity markets expect a continuing bull market despite historically high valuations, and debt markets are buoyant. The U.S. currency is strong because of hinted-at rate increases. U.S. consumers, having sustained the economy throughout the mini downturn, continue to spend and spend. Housing seems to throw off the talk of rate increases as starts and sales seem immune to any slowdown, rising to new records in sales.

Who lives in the Prechter Universe? Some of the greatest (and wealthiest) investors of all time; Warren Buffett, Sir John Templeton, Jim Rogers, Jeremy Grantham, Michael O'Higgins, Bill Fleckenstein, Ron Paul, Steve Roach. Austrian economists, the disciples of von Mises.

In this universe, the US is a nation living beyond its means, with a net international deficit position as of 3/31 to $5.2 trillion. In this other universe the reported inflation numbers in the U.S. are regarded as fictitious and “real” numbers in the 5-7% range are bandied about. For example, Sysco, the largest supplier to the hospitality industry, measures an 8% inflation rate in the cost of their product mix, which is a good proxy for household non-durables. The "measured" future rise in rates from the current 1.25% will never bring about the “neutral” position the Fed talks about, but simply aggravates an already serious inflation problem. Many argue that the expansion is flawed by malinvestment, particularly in residential real estate. A few see potential for a massive increase in bad loans, particularly in the consumer arena, which mught not be fun given that domestic banks now have over 75% of their assets in consumer-related loans, i.e. morgages, mortgage-backed securities, consumer direct and credit-card loans.

There is no communication between the two universes. Neither listens to the other.

The universes are superposed. In quantum physics, superpositions disappear when a measurement is made. This process is called decoherence. In financial market situations like this, the superposition disappears at the "Point of Realization" (POR).

Armageddon is a metaphor for the final conflict between good and evil. In this case, it is the final conflict between Keynesian economics and Austrian economics. One view or the other will have a POR.

Thanks for the original idea, and some of the text, to Edmund M. McCarthy, President and CEO of Financial Risk Management Advisors Company

Alan Greenspan's Great Experiment

Follow the link History of the Federal Reserve for a self-congratulatory history of the Fed.

Charged with maintaining the stability of the currency (which was stable as a rock for the preceding century), the Fed has proceeded to devalue the dollar by 95% since its inception in 1913. Used to the steady ravages of inflation, we don't notice any more that the government steadily steals away the value of our money, just as governments have done throughout history by debasing the coinage.

It seems to be true that the incidence of panics, crashes and depressions has lessened since the institution of the Fed. Not that they have gone away, there are just fewer of them. Many argue that although they are fewer, they are much longer-lasting and so there has been little real change. But anyway, that's not the point.

Over the years, Fed Chairmen have mostly tried to regulate both interest rates and money supply. Money supply, or credit supply, is used to stimulate the economy by making it easier and cheaper for people to borrow money. Keynesian theory basically says that if you put money in people's hands through direct borrowing, or by indirect borrowing through government deficits, they will consume more and therefore stimulate economic activity. In Keynesian theory, this growth process will become self-sustaining and the stimulus can then be removed. However, the risk is that, if there is too much money and credit floating around, chasing a limited supply of goods and services, then prices are bid up and the general price level increases. (Technically, this increase is not "inflation," which is actually the increase in money supply, although most people don't make the distinction because they seem to go hand-in-hand). As a result, Fed chairmen have tried to juggle interest rates and money supply at the same time. Some Fed chairmen (Paul Volcker, for example, who broke the 1970s "stagflation") have focused almost entirely on the money supply, allowing interest rates to go where they will.

Greenspan's innovation or experiment has been to completely ignore any regulation of the money supply but instead to fix interest rates, supplying whatever quantity of credit is need to keep the price of credit (interest rates) at the targetted level. The result has been a huge expansion in money and credit. Total debt in the US now amounts to 3210% of GDP. The previous record (264%) was only reached during the 1930s Great Depression after GDP had fallen by half. The following chart graphically shows the explosion in credit.


Greenspan's Credit Explosion 

Interest rates in Austrian theory are an expression of time preference; at some price I am willing to defer my consumption and lend you my money so that you can consume or invest now rather than later. If my time preference is weak, then I ask a low rate of interest, and vice-versa. Greenspan's continuous use of artificially low interest rates to stimulate the economy has distorted people's behavior. Time preferences are distorted and as a result non-productive investment - malinvestment - occurs. A bubble, in other words. Greenspan's response to incipient collapse of his bubble has been to pump more credit into it. This defers the collapse, but the Austrian theory believes that the ultimate collapse is aggravated because there is that much more distortion that has to be purged from the economy.

We'll see.

Cooling Housing Market ?

From today's SF Chronicle - this may be a big deal: "The median price for a home in the nine Bay Area counties in July was $514,000, down 0.4 percent from July's median of $516,000. On a month-to-month basis, sales declined 8.8 percent."

When the housing bubble bursts, then Alan Greenspan's huge experiment is all over. Too early to say for sure, this may be a blip. We'll only know in the rear-view distance if it was the beginning or not. M2 and M3 are declining, though, and that is bearish considering the amount of Fed pumping that is ongoing.

"This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning" -- Sir Winston Churchill.

Gold Glittering

Gold is currently trading around $412.50 an ounce, up $5.60 on the day. Gold is typically fairly highly correlated with oil, but has been lagging through the recent rise. Maybe we are due for some fireworks here. Crude seeming to settle in at $48-$49 today.

Drillers and pumpers are doing well today, as one might expect given the price of oil. However, many of these issues still seem to be discounting an imminent fall in energy prices that, so far at least, seems to be slow to materialize. So one might imagine that there is more upside in these names.

Equities in general are quiet and flat so far today. Semiconductor equipment book-to-bill was announced last night and declined (again), slightly, to 1.05.

"NEW YORK, Aug 20 (Reuters) - Higher mortgage applications and lower jobless claims mostly offset by declines in money supply helped a leading index of the U.S. economy inch up, a report said on Friday.

The Economic Cycle Research Institute, an independent forecasting group, said its weekly leading index (WLI) crawled up to 131.7 in the week ended Aug. 13 compared with a downwardly revised reading of 131.4 in the previous week.

The index's annualized growth rate, which smoothes out weekly fluctuations, rose marginally to 0.0 percent, from -0.1 percent in the previous period.

"Back in the spring the WLI gave us early warning of the slowdown that we are now in, and despite the general eagerness to declare that the soft patch is behind, the return to robust growth is nowhere in sight," said Anirvan Banerji, director of research."

Now 10:15 PT. Market has spiked from a huge program trade. +1357 TICK. No manipulation here. No, none. Did I mention options expire today?

Plus ça change....

Plus c'est la même chose. Read this excellent description of today's investment climate and then weep when you see who wrote it and when...

"The actual, private object of the most skilled investment to-day is “to beat the gun”, to outwit the crowd, and to pass the bad, or depreciating, halfcrown to the other fellow.

This battle of wits to anticipate the basis of conventional valuation a few months hence, rather than the prospective yield of an investment over a long term of years, does not even require gulls amongst the public to feed the maws of the professional; — it can be played by professionals amongst themselves. Nor is it necessary that anyone should keep his simple faith in the conventional basis of valuation having any genuine long-term validity. For it is, so to speak, a game of Snap, of Old Maid, of Musical Chairs — a pastime in which he is victor who says Snap neither too soon nor too late, who passes the Old Maid to his neighbour before the game is over, who secures a chair for himself when the music stops. These games can be played with zest and enjoyment, though all the players know that it is the Old Maid which is circulating, or that when the music stops some of the players will find themselves unseated.

Or, to change the metaphor slightly, professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees.

If the reader interjects that there must surely be large profits to be gained from the other players in the long run by a skilled individual who, unperturbed by the prevailing pastime, continues to purchase investments on the best genuine long-term expectations he can frame, he must be answered, first of all, that there are, indeed, such serious-minded individuals and that it makes a vast difference to an investment market whether or not they predominate in their influence over the gameplayers. But we must also add that there are several factors which jeopardise the predominance of such individuals in modern investment markets. Investment based on genuine long-term expectation is so difficult to-day as to be scarcely practicable."

John Maynard Keynes, Chapter 12, General Theory of Employment, Interest, and Money, (1935) p155-6

Semi Slowdown

Synopsys CEO Aart de Geus on conference call:

"First, I don't want to be the person here calling the downturn of the semi cycle. What we're reporting is a degree of caution where people are looking forward with question marks. At the same time, there are a number of people that are looking for 2H to still be okay from a semiconductor point of view."

"In terms of the spending environment, in July our customers became markedly more cautious about extending commitments and spending cash. This caution was triggered by some inventory buildup and a lack of visibility. Since then, a number of our customers have announced earnings below expectations or reduced forecasts."

"With greater uncertainty around the spending environment, we are no longer counting on the recovery expected in the second half of the calendar year."

"I think the biggest change really occurred in July, where we saw that the customer base became markedly more nervous about the future, maybe triggered by some sense of inventory buildup, some uncertainty and non visibility of '05. But definitely much more cautious in terms of making longer-term commitments."

Oil shock

Crude futures touched a new high just short of $48 overnight.

No reaction from other markets. Yet.

Update as of 10:30 ET. Now through $48 to $48.20. Crude averages 42.6% of gasoline price, so this implies $2.70 gas. Higher in California, of course.

Leading economic indicators reported this morning showed an 0.3% decline. This is consistent with the ECRI index, which has fallen to zero growth. It seems likely that the economy is finally responding. The real bellwether, housing, is starting to roll over. There are reports of a jump in inventories and a decline in prices in Los Angeles and San Diego. While spun positively, these are the first real signs of weakness in the hottest markets. California's laws, which basically allow a borrower to turn the keys over to the lender and walk away without liability ("bricks and sticks"), foster real estate speculation. The Silicon Valley crash and already high prices have dampened speculation in the San Francisco Bay Area, but Southern California has been on fire, up 27% in the last year, thanks to wacky financing such as negative-amortization mortgages. A special case is the Los Altos/Palo Alto/Mountain View area in Silicon Valley, where hundreds of newly minted millionaires from the Google IPO are expected to drive up prices in high-end property.

Shares are expensive

Mark Hulbert in the Atlanta Journal-Constitution

Apropos of the above, a presumably somewhat chastened Google priced its IPO at $85, the bottom end of its reduced range. A P/E of only 121.

Freddie Mac getting a tug on the reins

In other news, Freddie Mac, the main generator of the refi bubble, got a Wells notice from the SEC.

" MCLEAN, Va., Aug. 18 /PRNewswire-FirstCall/ -- Freddie Mac (NYSE: FRE - News) today announced that it has received a "Wells Notice" from the staff of the Securities and Exchange Commission ("SEC"). The Wells Notice advises the company that the SEC staff is considering a recommendation that the SEC initiate a civil injunctive action against the company for possible violations of the federal securities laws, including Section 10(b) of the Securities Exchange Act of 1934 and the SEC's Rule 10b-5, as well as Sections 17(a)(1), (2) and (3) of the Securities Act of 1933. The Wells Notice indicates that in connection with the contemplated action, the SEC staff may seek a permanent injunction and a civil money penalty."

The quoted sections cover securities fraud. "Use of interstate commerce for purpose of fraud or deceit"

If Freddie Mac has to slow down the growth engine, that could have huge implications because of the massive derivatives tower which it has built to hedge its portfolio. Believed by many to be flawed, this tower could topple if growth cannot paper over the cracks.

De Bellis

"Naturally the common people don't want war: Neither in Russia, nor in England, nor for that matter in Germany. That is understood. But, after all, it is the leaders of the country who determine the policy and it is always a simple matter to drag the people along, whether it is a democracy, or a fascist dictatorship, or a parliament, or a communist dictatorship. Voice or no voice, the people can always be brought to the bidding of the leaders. That is easy. All you have to do is tell them they are being attacked, and denounce the peacemakers for lack of patriotism and exposing the country to danger. It works the same in any country." -- Hermann Goering as he was interviewed in his jail cell by a German speaking U.S. Army intelligence officer, Gustave Gilbert, during the Nuremberg trials.

Refi Madness Part Deux

" The Mortgage Bankers Association (MBA) said its seasonally adjusted market index, a measure of mortgage activity, rose for the week ending August 13 by 11.9 percent to 689.4 from the previous week's 616.1.

The Washington trade group's seasonally adjusted refinancing index jumped by 20.9 percent to 1,982.7 in the week ended August 13 from the previous week's 1,640.5.

....

The Washington trade group's purchase index, a gauge of new loan requests for home purchases, rose last week by 6.2 percent to 467.1 from 440.0 in the prior week." (Reuters)

This is where the money comes from. The economy is being driven by the flood of new credit from refinancing home mortgages. The MBA index is the most important measure of money creation. Mortgage rates are dropping as the economy slows, so refinancing is increasing again. Will refis increase enough to give the economy and the concomitant debt bubble another pump?

Canadian Oil Sands

I've been asked about investment ideas for the Canadian oil sands. These huge deposits of bituminous crude oil are thought to contain more oil than Saudi Arabia's massive reservoirs. However, the oil is locked up in tarry sand and shale, requiring expensive and energy-intensive processes to separate the oil from the matrix. Rising oil prices make this extraction more attractive and economic. The top players are Syncrude (a joint venture of several oil companies), Shell, Canadian Natural Resources, Esso and Suncor.

I own shares in Canadian Natural Resources and Suncor. This is not a recommendation, do your own diligence. As of today, crude oil is up 35% approximately since the recent low of $35.20 on June 29 2004.

The Bay Area Bridge Trolls

This morning's Chron notes that the Democratic leader, Burton, announced that he is O.K. with $4 bridge tolls for the San Francisco Bay Area, adding another dollar to pay for the cost over-runs on the Bay Bridge upgrade.

Tolls have just gone up from $2 to $3 to fund a new transit scam. Mass transit is, of course, highly favored by the governing liberal elite and wanna-be elite in the Bay Area. Well, not for themselves, of course, just so the folks who are clogging up the highways take transit and get out of the way of the superior classes. The bureaucrats were therefore able to get voters to approve a bridge toll increase to fund transit improvements. Blithely ignoring the transit white elephants in the area, such as the San Jose light rail, more money is poured into the transit sinkhole. Bay Area transit ridership has not increased in 20 years, I guess there are too many elites and not enough peasants who can be forced into cattle cars.

Mass transit has an average cost per passenger mile four times that of private cars (DoT) and is, of course, also slower and less reliable. In the South Bay, for example, VTA (the local transit authority) can only recoup 15% of its expenses at the farebox. We would be better off if they simply handed out free cab charge slips. But that would mean fewer union jobs and fewer bureaucrats - can't have that. See "Basic Business Models".

So every commuter will be charged another $200 -$250 per year. No problem. Hah. Take a commuting employee making, say, $70,000. With both Federal and California taxes - 37.3% - the two increases this year amount to a $750+ salary decrease, or more than 1% just from bridge tolls. Of course, he's just a peasant in an area where a member of the public service union elite such as a firefighter can expect to make $150,000 a year (and retire on almost full salary at 50). This is the way economies get killed.

Bubblin' Crude

"SAN FRANCISCO (CBS.MW) -- Crude futures rose to a fresh high above $47 a barrel in New York after the Energy Department said crude stocks fell by 1.3 million barrels to total 293 million barrels for the week ended August 13."

Defining an "oil shock" as a price increase rather than an absolute value, analysis by Morgan Stanley has shown that $50 crude or thereabouts should provide a sufficient "oil shock" to cause a recession, based on historical precedent. Bonds seem to agree with this - the 10 year yield is in a solid downtrend, reflecting a lack of concern about future inflation - but equities seem to be ignoring the likely consequences of this pressure on the economy. The public spin is that oil prices don't matter any more because gas is a smaller proportion of household expenditures than in the past. Don't kid yourself - energy costs are in everything.

Note also that the price of natural gas has fallen - but not far. The problem here is declining production and increasing consumption. Not complicated.

Program Trading Manipulation

Typical day. markets open lower for perfectly legitimate reasons - record oil price which will hurt the economy, the Google IPO is floundering - and then the program traders start moving the price. This is done by simultaneous trades that absorb all the offers on hundreds of issues - "sweeping". It shows up as high TICK readings. Just now we have seen nearly half an hour of continuous buy programs and all the indexes are in the green as a result.

Who is buying and why? Can't tell. Is is actual buying or just ETF arbitrage - buy the shares and sell the corresponding ETF, later delivering the shares to cover the ETF short? Ot is it simply an options scam - it is expiration week and the options sellers are manipulating price so as not to pay out on puts they are short? Who knows. But with mutual fund cash levels so low, actual buying is the least likely explanation.

Google sucker shortage

Google reduced the size and price range for its IPO today. Still ludicrously expensive for a business unlikely to ever return a nickel to investors, between the dilution from heavy use of stock compensation and the inevitable dissipation of the profits from the primary business into failing new lines of business, as competitors catch up with Google's innovation.

Having said all the above, looks like a generous payday for the VCs and founders at this point.

Since there is no prospect of a dividend, buying the IPO would be a speculation. And a very unlikely and risky one at that, IMO.

Speculation and Investment

We often hear the terms "Investment" and "Speculation" used interchangeably and casually. "Speculation" is often used as a derogatory term for activities considered somehow wrong or extreme. But both these words have relatively well-defined meanings. An "Investment" is a transaction which is entered into primarily to yield an ongoing income stream. While in many cases capital gains may also be a hoped-for result, they are secondary. A "Speculation" is a transaction which is entered into for the primary purpose of a capital gain on sale. Income, if it exists at all, is a secondary consideration and often will be negative, a "carrying cost".

So if I buy an apartment building for rental income, believing that the rents will yield a net return on my capital after expenses, then that is an investment. If I buy a house with the intention of "flipping" for a higher price as soon as possible, then that is a speculation.

It is important to define the terms because they will be used frequently, but carefully, for their particular meanings.

Basic Business Models

There are three basic business models which underpin the US economy today. These are the private business model, the non-profit business model and the government business model. All business models extract revenue and deliver benefits to various groups. These business models are elemental; most real organizations are a combination, for example a non-profit organization that is partially funded by tax revenue distributed by government is a combination of the non-profit and government models.

Model	Revenue Extraction	Beneficiaries
		Primary	Secondary	Tertiary
Private	Voluntary purchases by Customers	Customers receive goods and services	Employees receive pay and benefits	Shareholders receive money dividends
Non-Profit	Voluntary payments by Contributors	Employees receive pay and benefits	Clients receive goods and services	Contributors receive social dividends
Government	Involuntary payments by Taxpayers	Employees receive pay and benefits	Clients receive transfer payments or favorable treatment	Taxpayers receive services

The beneficiaries are ordered by priority. In the case of a private business, if the customers don't receive satisfactory products, then revenue will stop. Salaries may be reduced but deliveries cannot be. It is obvious that shareholders are lower in priority - they will only receive dividends if profits are created. Employees will be paid even if the company is losing money.

In the other cases, the feedback link between revenue and the goods and services delivered is broken. Non-profit contributors do not see the goods and services delivered to the client and so the quality control "loop" is non-existent. The same is true in the government case, where the primary clients, the recipients of transfer payments or government preferences, contribute little or nothing to revenue, but supply their votes.

The important point to note in this table is that if you are a shareholder, contributor or taxpayer you are way down on the priority list.

Introduction

A blog of thoughts about financial and economic issues, in the hope that someone might find them useful. Or at least give me a record of my attempts to understand the world around me. I'm an independent investor whose only source of income is the investment returns on my assets. As a result, I care about truth and reality, not the smoke screens put up by the self-interest of the investment industry and the government. That doesn't mean I won't trade along with a lie, but it does mean I want to know that I am doing so. There is a famous saying from George Soros, the well-known hedge fund operator:

"Economic history is a never-ending series of episodes based on falsehoods and lies, not truths. It represents the path to big money. The object is to recognize the trend whose premise is false, ride that trend, and step off before it is discredited."

Words to heed. This blog will contain my thoughts on what's fact and what's fiction along with editorial asides and rants that will no doubt have a decidedly libertarian and Austrian (economics) bent. Nothing in this blog should be taken as investment advice of any kind.