Murder a job, make a buck.

My father was an attorney.  He knew what he was doing, he understood the law business, and until the very end of his career, each day looked very similar to the next.  As a result of seeing the same day, over and over again, his years of experience were an asset to him. When someone had a problem, they would come to him and he would know the solution.  Ultimately this resulted in him managing the firm and led to a very successful career which allowed him to live a good life and retire quite comfortably.

Flash forward to me.  I was a market maker, and a pretty good one.  I got to know the markets, I learned how to take risk, and I learned the business of trading.  From 1993-2000, each day looked the same as the prior day.  And, like my father, I was moving up in my company because I had become an expert in something, and that was my value.

Unfortunately, I was only able to enjoy a quarter of a career.  Unlike the traders at the firm who retired comfortably, beginning in the 1990's technology and regulation effectively ended trading as a profession.  To combat it, I started a hedge fund.  That worked for a while, but because I was shanked in the back by an evil partner after the financial crisis, I find myself starting over at age 50 and classify myself as an "unemployable expert".

How many unemployable experts are there in the world?  Who knows.  But the list of industries producing unemployable experts is growing.  Retail is currently under attack.  Next will come truck drivers.  Then Accountants.  Probably lawyers.  Doctors?

The way to succeed in this crazy world is to become a murderer.  A murderer of jobs.  The only people/businesses I see that are really doing well are those that are exterminating someone else's jobs.

This is sad, but true.

The World is on Alert

I have finally had enough.  I am getting fucked financially, professionally, and by extension, anally.

The world is on notice.  I have been quiet long enough.

I will be quiet no longer.

More later.

The Interest Rate Conondrum

Everyone who has assets is beholden to interest rates. As rates fall, asset prices go up. Finance 101.  

When you discount a future cash flow, the cash flow is in the numerator and the discount factor is in the denominator.  The more subtle takeaway from this formula is that a change in cash flows  (numerator) has a smaller difference on the value of an investment than a change in the discount factor (denominator).  The denominator has a much greater impact on the value of the investment.  

This being the case, when interest rates are at zero, money and cash flows have greater value than they do when they are at, say, 8%.  This is because at 8% your money doubles every nine years and at 0% it never doubles at all.  In order to get your money to grow, you have to find an investment that provides you a growing or stable cash flow at a price that affords you a yield. Today, bonds do not provide this.  Stocks might, if you have a long enough timeframe (like twenty years), and real estate still does in a lot of cases because of the massive inflation in rents we are seeing. 

But in all cases, what this means is in order to find yield you have to take on riskier investments.

The problem is that interest rates (and yields) are a function of the likelihood of getting your money back.  

Today, the ability of sovereign governments, companies and people to pay back their debts in fiat currency that holds its value in the future is nil.  There is simply too much debt.  Sovereign borrowers will not be able to pay it all back unless they print money, and if they print money the value of the currency you get back in the future will be further weakened.  

Said another way, every day there are more and more debts backed by unproductive money and if they are to return that capital to shareholders, money will have to be printed which will lead to inflation.

Flash forward to today:  Bonds are at their highest risk ever, yet paying their holders the  lowest returns ever.  Because stocks and real estate get dragged along, they both  are also at their highest risk ever.  At some point, some country or large bank is going to default, which will either bring down a  Central Bank, or, to save itself, the Central Bank will fight it tooth and nail with their printing presses and there will be massive inflation.  

It is like the old margarine commercial, "It isn't nice to mess with Mother Nature".

The Parable of Saltwater



This is something I came up with for the Money and Banking class I teach to illustrate why artificially low interest rates distort the economy by misallocating assets.

Picture a beautiful ridge, perhaps in California.  On the left there were beautiful views and an easy path down to the ocean, and on the right, there is a rockier slope that leads to a crystal clear bubbling brook.  All day long hikers walk along this ridge taking in the beautiful scenery.  Part of the local culture of this ridge is that two old men, no one knows their names, sit at the top and play cards on an old wooden table.  Occasionally, they stop a hiker and ask him to go down to the bubbling brook and fetch some water to drink.  The hiker selected not only received a dollar for their troubles, but being asked to fetch water was widely considered to be good luck.

One day, one of the card players said to the other, "Guess what?  My uncle Ben Bernanke died last night and left me 4.5 trillion dollars."

The other card player says, "Wow.  That is fantastic.  What are you going to do with all of that money?"

The heir to the money replied, "Well, as you know, I have always wanted a saltwater pond.  You see this ravine behind me?  I am going to get these hikers to fill it up by paying them $5 for every bucket of saltwater they retrieve."

Shortly a hiker passed and the heir offered him $5 for a bucket of saltwater.  He gladly complied and the first bucket was dumped in the ravine.  He asked if he could bring another bucket under the same arrangement, and the heir nodded.  This went on all day, and the hiker walked down the ridge that evening with $180 in his pocket.

The next day the hiker showed up with two buckets.  The day after that the hiker showed up with two friends, each with two buckets of their own.  And word spread.  It was not long before others showed up and the ridge became a hive of people moving buckets of saltwater.  Within a couple of weeks one of the hikers devised a pulley system which allowed him to move more buckets than his competitors.  Another hiker with bad knees, realized that all of the new people on the hill built up a hunger running buckets of water all day long, so he set up a restaurant.  His food was good and lines were long, so it was not long before three other restaurants opened to handle the overflow. 

More ambitious people asked the heir if they could work later into the evening, and soon a market for temporary housing developed. A news station did a story on the miracle economy on the hill, and it was not long before economists were writing articles featuring charts and graphs of how monetary stimulus creates opportunity for all. This brought in more development by those hoping to cash in on this windfall.

Of course it was not all positive. Because a bucket of saltwater paid $5 and was an easier climb, the cost of freshwater skyrocketed to $7. Similarly, food was scarce, but everyone had money in their pockets, so the restaurateurs were able to continuously increase their food prices.   Fewer hikers came to the ridge because it was no longer sparsely populated and beautiful.  Billboards for the restaurant and hotel now dotted the hillsides, and there was litter everywhere. But the indisputable fact was, the hillside entrepreneurs were flourishing. 

After 18 months, the heir looked behind him and noticed the ravine was nearly full.  In fact, if one more bucket of water was dumped into it, it would overflow and the two men would no longer have a place to play cards. And so, just like that, all of the free money stopped.  The heir stopped paying $5 for saltwater. 

The very next day, the economy on the hillside crashed.  What had appeared to be a vibrant economy just the day before, seized.  The smartest waterfetcher on the hill and the dullest waterfetcher on the hill realized simultaneously that their investments and labors over the prior eighteen months contributed no real value.  They sickeningly came to the realization that the only reason they were asked to fetch saltwater at all was because the Heir had too much money and did not care if he used it wisely or poorly.

Within days, the number of people on the hill was down by half.  By the end of the week, the number was halved again. The only people still making the trek were those who had investments in lodging and eateries. But soon they realized without customers, there was no reason for them to come to the ridge, and they boarded up their establishments in very short order.  Perhaps most sadly, because the hillside was now spoiled with abandoned buildings and remnants from the "Saltwater Rush", hikers did not even come by anymore. Within a month, the hill was an empty, littered ghost town.

The two men had the hillside to themselves to play cards, but after "investing" $4.5 trillion dollars filling the ravine with saltwater, they no longer had anyone to get themselves any water to drink, so ultimately they disbanded their card game, and the culture and value of the ridge was finally and terminally decimated.

The DUI Task Force

A friend of mine got pulled over for a DUI last week driving my drunk ass home from a Kentucky Derby Party.  Over the course of five hours she had a gin and tonic and three smallish glasses of wine. I know this because at this dinner party we were all drinking out of our own bottle and she still had a quarter bottle left at the end of the night.

Out of nowhere the blue lights were behind us...two cars and a "DUI TASK FORCE" vehicle.  They said they pulled my friend over because she "pulled too far into an intersection at a stoplight" (meaning the hood of her car was on the white line).  

They asked if she was drinking.  She told them what she had.  They said the car smelled of liquor (neither of us were drinking liquor.)

They made her take the field sobriety test.  I got out to try to watch but they forcibly made me get back in my car threatening me with prison for obstructing justice.

I tried to watch out the back window.  The cop saw and pulled the DUI wagon over to intentionally obstruct my view (really??).

They told me she did poorly on the sobriety test.  (The video shows otherwise).

The took her to the detention center where she was interviewed.  The official statement determined she appeared inebriated. (The video shows otherwise).

She submitted to a breathalyzer.  The results showed no alcohol, and were deemed inconclusive, so she did it again.  Again the results were inconclusive, so after taking the breathalyzer twice, they marked her down as "UNWILLING" to take a breathalyzer.  In our state this means you lose your license automatically for six months.

They kept her in jail overnight and released her on her own recognizance and she is awaiting trial.

How did this country reach the point where policing like this is viewed as a service to the community?  

1.  She was not drunk (statutorily or otherwise)

2.  She passed her sobriety test according to our attorney after viewing the videotape

3. She was sober and cooperative in her interview also evidenced on videotape

4. She took and passed two breathalyzers, because of which she is now unable to drive to work.

The attorney assured us this is an open and shut case, nothing will go on her record, but that we will probably be on the hook for $15,000 or so.  

Please tell me how we let this happen to our country?

Why Monetary Policy Will Not Work

It is not an original thought to say that asset prices are simply too high.  They are.  Nor is it original to ask why. When you make increasing amounts of free money available by forcing it into the economy through asset purchases, the price of assets are bound to go up.  

The original thought I bring to the table today is why this additional inflow of money has not created "inflation".  The reality is that it has created inflation.  A lot of it.  But the inflation it has created is in assets, not necessarily in goods, as they are traditionally measured.   

Why is this?  Wealth inequality.  Think about it.  If you have a billion dollars, how much crap do you actually need?  I suspect for billionaires even though the toys get bigger, they do not necessarily buy more toys.  

So...follow this logic:

IF

inflation is caused by too much money chasing too few goods,

AND

The Monetary transmission mechanism is putting money exclusively in the hands of wealthy people who are not buying goods, but investable assets

AND 

The same monetary transmission mechanism is starving the larger mass of people who are buying progressively fewer goods and services (in favor of higher rent, higher health care, and higher education costs)

THEN

Developing sustainable price inflation is nearly impossible, because the market of people who are willing and able to buy products is shrinking.  To those who are finding that money is being sprayed on them like a fire hose, they have no choice but to buy ever inflating assets with their excess funds because they do not need another iPhone.

The problem is, that like a company that buys back its stock at stupidly high prices, the moment that the Leaning Tower of Pisa tips over, all of this wealth evaporates.  Meaning them no malice, if I could buy puts on billionaires net worth, I would.  This imbalance is reaching the tipping point.