San Juan Mountains

San Juan Mountains
San Juan Mountains: Grenadier Range

Friday, July 27, 2012

Argentina Legalizes Envy

I was reading an article in The Freeman (June 2012 issue, "Argentina's Way to Decadence", pg 35) last night in which the author, Ariel Barbero, describes a situation in Argentina that is most disconcerting.  I was not aware of the rich economic history of Argentina.  In 1900 Argentina was the twelfth most prosperous nation in the world.  In fact, Argentina had a GDP that was higher than Sweden, Ireland, Spain, Norway, Italy and what is now South Korea.  By 1928 Argentina had risen to become the sixth most prosperous nation on earth and was roughly equivalent to Germany in economic standards. 
There were good reasons for this prosperity.  The Argentinian Constitution had been largely copied from the US Constitution, with some notable exceptions.  The Argentinians decided to add some additional clauses that had been left out of the US Constitution by  what they called "ignorant hands".  In particular, they added a clause that declared private property to be "inviolable".  The Constitution was written in 1860 and over the years a Civil Code developed in support of the original document and the inviolable right to private property.  It is not surprising that under those conditions Argentina would flourish.  The country experienced heavy immigration from Spain, Italy, Denmark and Wales.  Economic growth was strong and the future looked bright.
Enter the socialists.  As the citizens of Argentina prospered, the socialists began to exploit the envy that  lurks in the heart of every man due to original sin.  As all people attained higher levels of wealth, the socialists began to convince those who had attained a somewhat lower level of greater wealth that they were being victimized by the evil capitalists.  Income disparities were pointed out.  The envy mongering socialists found fertile ground in the evil hearts of those who would rather steal from their neighbors than work to earn an honest living.  The stage was set for economic disintegration.
Barbero describes the intellectual situation beautifully when he says that "Argentine constitutional scholars adhere to what they call social constitutionalism.  The teach that the evolution of rights is similar to technical progress:  You have first generation rights (property and free speech), second generation rights (right to a job and a salary), and third generation rights (right to a sustainable environment and to the enjoyment of culture)."  We are all very much aware that the moment individual rights are expanded beyond the simple rights to life, freedom, and property, disaster is lurking.  The "right" to a job only exists when government can force my neighbor to hire me .  The "right" to a salary only exists when I have the force of the state behind me to plunder my neighbor.  The "right" to the enjoyment of culture (whatever that is) only exists because I have elected a politician who has promised to steal money from my neighbor and give it to me so I can use it on tickets to the soccer game or the Julio Iglesias concert.  This expansion of "rights" has resulted in the demise of the Argentine economy.
To further exacerbate the situation, Argentinian President Cristina Kirchner has instituted a new Civil Code that redefines the nature of tort.  Tort no longer involves the necessity of proving harm due to illegal action.  Under her new code, tort is defined as harm, for any reason.  The impact of this new Civil Code is predictable and devastating.  Under common law, a tort is committed when you harm me or my property via actions that the law forbids.  When you burn down my corn field you have committed a tort against me.  Under the new law, if my corn field burns down I can claim a tort against you simply because I suffered a loss, even though you had nothing to do with the actual burning. As you might expect, the lawyers love the new Civil Code.  So do the judges who have been given unprecedented powers to decide each tort case "on its merits".  The opportunities for bribery and corruption are rampant.
Today Argentina has dropped to the world's 28th most prosperous nation, and expected to continue sinking fast.  Looking at what has happened in Argentina I am forced to wonder, is this our future?

Thursday, July 26, 2012

Observations On The Aurora Movie Massacre

I have purposefully been holding off on posting anything about the Aurora movie massacre.  I wanted to see how the media outlets handled the situation prior to making any observations of my own.  Most of my observations have more to do with the observations of others than they do with the massacre itself.  What can I say about the massacre?  It happened.  A man took several guns into a crowded movie theater and, for reasons known only to him, opened fire, killing 12 and wounding another 50 or so.  He has been captured and he should be speedily executed.   Those are the facts.  The opinions about the event are a different matter entirely.
In the aftermath of the massacre there are the usual strident calls for more gun control laws.  One prominent politician made the statement that "no law could have prevented" this massacre.  He is probably right.  People intent on killing others usually do not pay much attention to existing laws about guns and killing others.  More laws are rarely the solution to any problem.  That has proven true time and time again in other instances, including crimes not related to the gun control debate.  Passing additional laws may get people elected and make others feel good about themselves but they will have no impact upon a massacre that has already taken place and little impact upon what might happen in the future.
As a result of the intense media coverage, I am increasingly being pushed to the conclusion that we have become a nation of voyeurs.  We seem to get a real kick out of things like movie massacres.  Nobody will admit that, of course, but it gives us opportunity to voice our opinions on a wide range of topics.  It gives us an opportunity to judge others who do not react to the event in the way we believe they should.  I was especially intrigued by one pastor who preached a sermon in which he argued that anybody who was not in "mourning" about the massacre was somehow in sin.  His proof text was the biblical verse about how if one "member of the body suffers, the other members suffer with it".  Since the families of the twelve victims were suffering, we should be as well.  That really bothers me.  Here is why.
Over the past ten years Denver has averaged around 50 murders per year.  I have never known anybody who was murdered.  I have never known anybody who knows anybody who was murdered.  I have never had an emotional reaction to somebody being murdered since I have never known any of them.  I find it very difficult to have a genuine emotional reaction to someone I do not know.  I suspect that is true of most human beings.  How many of you mourned for the Jews that were killed by the suicide bomber last week?  How many of you mourned for the Christians that were killed in South Sudan last month?  How many of you mourned for the Norwegians who were killed last year?  How many of you mourned for the students who were killed in Virginia a couple of years ago?  I must confess that I have not mourned over any of those murders.  So, here is the question?  Why am I in sin for not mourning about these 12 murders?  What makes these murders different than any of the others I mentioned?  Do I have a duty to find out who the 50 people per year who are murdered in Denver are, so I can mourn for them?  That seems a bit ridiculous to me.  Yet, there is a fair degree of social pressure being put upon folks in this area to walk around looking sad.  I do not see how any of this is my business.  I also do not see why I should be sad about this and not about every other murder that takes place in the world.  Just because a murder takes place in my backyard does not make it special or more significant than the murder that takes place elsewhere.  Respect for the human victims of murder dictates that to be true.
I was somewhat surprised by how many times the massacre was described as "one of the worst in US history".  I had the definite impression that there was some sort of competition or civic pride associated with being back at the top of the list for murderous rampages.  Belly button gazing article after belly button gazing article dissected the collective psyche of Colorado citizens trying to discover what makes us different and prone to murderous rampages.  It is all nonsense, of course.  There is no such thing as the collective.  We are just a bunch of individuals.  Still it was somewhat disturbing to sense that there seemed to be a sense of pride that, after so many other massacres had taken place in other states,  this massacre had happened back in good, old Colorado.
Now that several days have transpired since the massacre, the usual and very predictable line of media reports is showing up.  The 12 people who were killed are being given eulogies that describe all of them as the most wonderful, beautiful, kind, generous, outstanding, intelligent, and loving people who ever walked the earth.  Now I suppose that is possible.  I do not know any of them.  Nor do I consider their character to be any of my business.  But it strikes me as odd that when I read "Dear Amy" every day I am forced to come to the conclusion that most people in the world are lazy, insolent, selfish, abusive, drunken jerks who don't give a rip about anybody around them.  In fact, reading the stories in the rest of the paper only further reinforces that perspective on humanity.  However, whenever somebody is killed in a massacre, those people are all the greatest citizens who ever lived.  It is difficult for me to believe that the reporters are being objective.  Furthermore, I do not see why any of that is our business.  Shouldn't we just leave those families alone?
I wondered how long it would take before the lawyers got involved.  Today's paper had the first article about how the families who were injured are looking into the possibility of suing the movie theater owner.  Obviously there is no point in suing the killer, unless he is hiding vast sums of money that nobody knows about.  So it is the American way to seek out the "deep pockets" and figure out some way to assign blame to them so they can be sued.  The article described how the lawyers will have to figure out some way to argue that the theater owner should have been able to know in advanced that the killer was going to show up and murder people.  Given what I have seen of lawyers over the years, I am sure they are already hard at work devising some legal scheme to prove that point.  I suspect the future will hold another unnecessary tragedy....the bankruptcy of the theater owner under a deluge of massacre related lawsuits.
I suspect that, just like Columbine before, we will never be allowed to forget this event.  A banner in the Colorado Rockies dugout the day after the massacre said, "Never Forget".  Why not?  Shouldn't terrible things be forgotten?  Contrary to popular opinion, forgetting terrible things that have happened in the past and that we cannot possibly learn anything from does not make them more likely to happen in the future.  Conversely, remembering Columbine or the Aurora Movie massacre will not make a future massacre less likely.  So why should we be forced to remember?  Why would we want to remember, unless we have all become a nation of voyeurs?  Why do we insist upon sticking our noses into business that is not ours?  There was a time in this country when people had the common sense and good courtesy to turn their heads away and allow their neighbors to mourn in private.  Those are the days I will remember.

Wednesday, July 25, 2012

Fed Arrogance And Ignorance Are Boundless

On Wednesday, July 11th, the New York branch of the Federal Reserve Bank published an article, paid for by the taxpayers by the way, in which it alleges that the Fed is singly responsible for all positive returns in the stock market over the past two decades.  You read that right.  According to the Fed, the Fed is responsible for positive stock market returns over the past twenty years.  Although the Fed does not tell us who is responsible for the negative returns during this period, I believe it is fair to conclude that evil, profit seeking corporations would be held responsible for the negative returns.  So there you have it.  When the stock market goes up, praise the government.  When the stock market goes down, blame business.
According to the report, "The FOMC (Fed Open Market Committee) has released eight announcements a year at 2:15 ET since 1994. The study took the gains in the S&P 500 from 2 pm the day before the announcement to 2 pm the day of the statement and subtracted that market move from the S&P 500’s total return over that time span. Without the gains in anticipation of a positive Fed action, the S&P 500 would stand at just 600 today, rather than above 1300."  I have not checked the data to see if what the Fed reports here is accurate.  I will assume that it is.  What is missing from this study is an accurate economic understanding and interpretation of what is going on with the relationship between the Fed and the stock market.  But first, let's set the record straight.
The Federal Reserve Board, along with the Clinton Administration, the Bush Administration, the Obama Administration, the Treasury of the United States and the United States Congress all conspired to create the previous housing bubble.  The collapse in the stock market that took place in the last quarter of 2008 and the first quarter of 2009 is entirely attributable to the actions of these government entities.  Mark to market accounting practices, mandated by the Federal Accounting Standards Board (FASB), were largely responsible for the panic that was seen in the banking industry as more and more investors came to realize that mortgage backed securities could be trading a values much higher than they deserved.  Regardless of which direction the finger of blame points, it always points to some sort of government entity.  That truth must never be forgotten.
Nevertheless, it is undeniable that the stock market reacts to Fed announcements.  Why would this be?  Is it because the Fed is the savior of the stock market, as the Fed article would suggest?  Is it because without the actions of a beneficent Fed the stock market would be doomed to lose massive amounts of money for all who are foolish enough to participate in it?  Is it because we desperately need a government bank to regulate and control the crazed actions of the free market?  Hardly.  The simple truth is a simple truth.  
The Fed exists to do one thing.....inflate the money supply so that government can have more money to spend.  The Fed exists because Congress is smart enough to know that constantly raising taxes will cost Congressmen their jobs.  So, they created the Fed and gave it the mandate of continually inflating the supply of money.  Continuous inflation is the equivalent of a hidden tax.  It devalues the dollar, thus enriching those who issue government debt.  The incessant devaluation of the dollar is the same thing as an incessant increase in the prices of goods and services in the economy.  The dollar goes down and prices go up.  That is inflation and that is the business of the Fed.
It is easy to see why the stock market would react to Fed actions.  The Fed says, in essence, we are going to inflate again. The Fed says, we are going to devalue the dollar again.  The Fed says, we are going to raise prices again.  So, what do stock prices do?  They rise.  It does not take a rocket scientist to figure this stuff out. But, and this is very important, the increase in prices due to Fed inflation is not a good thing.  The Fed should not be taking credit for it!  It is very telling that the Fed study did not assign credit to the Fed for the fact that automobiles now cost twice as much as they did ten years ago.  The study did not praise the Fed for the fact that rental rates are double what they were twenty years ago.  The article did not issue a glowing report about how Fed inflationary actions have caused the prices of everything to double over the past twenty years.  No, the Fed will not take credit for the inflation it has caused.  But it will take credit for the increase in the stock market.  Amazing.
During periods of inflation (which is all the time these days), hard assets such as stocks will respond positively to increases in the supply of money.  That is why hard assets such as stocks are known to be inflation hedges.  That is why investors should keep their money in hard assets and avoid debt securities (bonds, CD's, fixed annuities) like the plague.  But we must all recognize that some of the price appreciation that takes place in stocks is due to the fact of inflation, and nothing else.  The Fed does not create real wealth.  Only entrepreneurs involved in capital creation and voluntary trade are able to create real wealth.  The increase in stock market indices witnessed due to Fed inflation is nothing more than the value of the dollar treading water.  For the Fed to take credit for this price increase is the moral equivalent of an armed robber shooting you in the arm and then taking credit for putting a tourniquet on you.  There seems to be no limit to the amazing arrogance and economic ignorance of the Fed.

Tuesday, July 24, 2012

The Conflict Of Interest Inherent In FINRA

Yesterday I posted a letter from an investment professional about the shenanigans going on at FINRA.  FINRA (Financial Industry Regulatory Authority) is known as a Self-Regulatory Organization (SRO).  SROs are in cahoots with other branches of the government bureaucracy but function, technically, as independent organizations.  These are additional levels of bureaucracy that employ thousands of bureaucrats and inflict untold financial damage upon the economy.  In this particular case the SRO known as FINRA theoretically  exists as a buffer between investment professionals and the Securities and Exchange Commission (SEC).
As yesterday's posting pointed out, FINRA derives its revenue from its members.  I have no idea how it is calculated but members of the SRO have to pay the big dogs at the top some sort of annual fee that is then used to pay for the "services" provided to the members.  This is where things get very strange.  The "services" provided to the members, according to the FINRA website, consist almost exclusively of making sure that the members comply with all of the rules and regulations issued by the SEC.  In order to make sure that FINRA member firms comply with all of the SEC regulations, FINRA has a rule book that contains literally thousands of additional rules each FINRA member is expected to be in compliance with.  In essence, FINRA is nothing more than an additional level of government harassment being imposed upon any firm that wishes to conduct a business in investment securities.  Although the theory is that FINRA will represent the interests of its members to the SEC, the painful truth of the matter is that FINRA represents the interests of the SEC against its own members.  For that privilege, the members get to pay an annual fee.
There is a gross conflict of interest inherent in the activities of the FINRA authorities.  I took a few minutes to flip through the corporate report for FINRA available on its website and discovered some amazing things.  A substantial, although still minority, amount of revenue is derived from fines assessed against members.  Does it seem strange to anybody but me that an independent organization representing a group of people would exist for the purpose of fining its own members for rules violations?  Apparently, when FINRA conducts examinations of its members for compliance with its rules it is not uncommon for the SRO to fine its own members for non-compliance with many of the thousands of individual rules they they are all expected to live by.  This stream of income is crucial for the operation of FINRA.  Herein lies the problem.  Ostensibly FINRA exists to promote obedience to SEC rules and regulations.  However, FINRA derives a substantial income by fining members for not complying with FINRA rules.  The more rules violations FINRA can find, the more it justifies its existence.  The more rules violations FINRA can find, the more it can expand its bureaucratic operations.  The more rules violations FINRA can find, the more it can promote its importance and significance to the government as an independent financial regulator.
At the same time FINRA is highly motivated to find as many violations of the rules as possible, it, in theory, exists to make sure that as few rule violations as possible actually take place.  Remember, the purpose of an SRO is to make sure that the government rules are not violated.  So FINRA finds itself in the untenable position of both wanting and not wanting to find violations of the rules.  This massive conflict of interest would be sufficient to drive any non-government corporation out of business.  However, because FINRA is essentially a government organization, it can continue to operate despite this inherent conflict.  Under normal market conditions the members of FINRA would simply leave and operate independently or start up another voluntary self regulatory organization.  Think "Good Housekeeping" here.  SEC rules, however, do not permit any person, partnership, or corporation to operate a securities business if it is not a member of either a stock exchange or FINRA.  In other words, FINRA has monopoly power.  That is how it can get away with abusive behavior.
So, if somebody wants to become a financial professional, he must become a member of an organization that exists for the purpose of not only enforcing government rules against him, but also for enforcing a slew of additional rules against him.  He must, by law, join an organization that is highly motivated, indeed, extremely motivated, to find a never ending list of rules violations.  Yet, at the same time, he is told that this organization is working for and representing him!  Only in the SDA (Socialist Democracy of America) could this type of conflict of interest exist.  What a country.

Monday, July 23, 2012

FINRA: Another Example Of Government Tyranny

The following quotation was sent to me by a friend who is in the investment business.  It is a copy of a letter that he received that is written by a man who is running for office in a government organization called "FINRA".  FINRA stands for the Financial Industry Regulatory Authority and it is the organization that is responsible for the regulatory oversight of most of the country's investment companies. It is so good I have reproduced it in its entirety.   This is another fantastic example of the disconnect between the people in government who rule over us and the average person out trying to make a living.  This type of thing goes on everywhere, everyday, in the world of government.  This was originally published as an op-ed piece in a magazine called Investment News (7-22-12).  

"You just received the news that you lost $84 million last year.
The losses are mainly attributable to exorbitant employee benefits and compensation expenses that represent 65% of your total operating expenses. You are one of the few employers left that can pay for full medical, dental and supplemental insurance benefits for full- and part-time employees. You also can afford to match up to 4% of employee contributions to their 401(k) plans while providing a defined-benefit pension plan. The average compensation per employee equates to $174,000.  (I did some checking and FINRA employs 3200 people. MW)
During the global economic crisis, you decided to continue to expand your business, even though between 2007 and 2011 the customers that you serve underwent a serious contraction, with a significant portion of them going out of business or being shut down.
In fact, in the same period over which you expanded your business, you saw your customer base shrink to 4,456 last year, from 5,005 in 2007. During that period, in which your customer base declined by 11%, you have hired additional staff to serve your shrinking market and increased your total compensation expense by almost $100 million.
You argue to your remaining customers, who will be forced to pay more for your services, that you need to expand and that they should pay. Your customers respond that they can barely afford to pay for your services now, much less after any proposed price increases.
Fortunately for you, you have a government-sanctioned monopoly. Your customers can't go to a competitor or discontinue using your services, because the government says they can't. Also fortunately for you: Your customers have no say in what you can charge.
The government, without any regard for the impact on your customers, has recently approved the largest price increase in history. No doubt the price increase will have a substantial negative effect on all your customers and probably will result in an acceleration of the decline in the number of customers, with more of them going out of business.
And just to be sure that your customers have no alternative but to continue to pay, you ask the government to extend your monopoly to another related business that has no requirement to use your services. With a government-sanctioned increase in your customer base, the assurance of a continued monopoly and no limits on the price that you can charge, you are confident that you can continue to charge whatever you want to help pay for the lavish compensation and benefits for you and your growing staff.
In any effort to rein in this activity, your customers have no recourse because the government has extended immunity for any activities you engage in with regard to them. Of course, just to be sure, any attempt to have the government limit or restrict your activities will be quickly silenced by your spending hundreds of thousands of dollars lobbying Congress to ensure your continued good fortune. And your customers will pay for the lobbying to ensure their own extinction.
All this sums up how the Financial Industry Regulatory Authority Inc. operates.
If advisers ran their businesses this way, in all likelihood, they would face significant regulatory and legal action for a host of issues, including a lack of transparency, excessive charges and unfair trade practices. They could be assured that Finra, the Securities and Exchange Commission and state regulators would be screaming about their activities and the significant conflicts of interests.
Running a business in this manner doesn't serve the best interests of your customers, a lesson that Finra would do well to study and learn from."

3,200 government employees making an average compensation package of $174,000, while regulating a section of the US economy that has seen a significant downturn over the past ten years is unconscionable.   Any profit seeking business would be forced to contract during a market downturn.  Only a government bureau is able to expand during a time when the body of people it is regulating is contracting.  Only a government bureau can increase its fees when the customers it "serves" are making less money.  Only a government monopoly can get away with this.  Only a populace of people filled with envy can approve of a government that behaves this way.  After all, this FINRA group is only regulating a bunch of fat-cat investment brokers who are probably almost as bad as the bankers.