The Twisted "Logic" of the Street

Posted On Jun 19, 2012 By Dave Gonigam

Dave Gonigam – June 19, 2012

  • When Freakonomics meets Fooled by Randomness… Could an all-too-common accident inspire “Rodney’s Law”?
  • Traders sniffing the QE glue again: Two charts that say they’ll be disappointed with the Fed’s announcement tomorrow
  • After taking profits last year, Byron King says it’s time to jump back into this asset class
  • Russian who pioneered the Internet as a medium for dissent turns his attention to paper money
  • Postcard from Mongolia… Reader picks a fight over the Fed (we won’t play along)… more travel/bureaucracy tales of woe… and more!

   “It turns out,” wrote Stephen Dubner years ago, “that far more children die each year in swimming pool accidents than in gun incidents.”

This insight — one of the more famous take-aways from Dubner and Steven Levitt’s book Freakonomics — comes to mind anew with the passing of Rodney King.

While the rest of the world reflects on how King’s story altered U.S. race relations, we’re struck more this morning by Nassim Nicholas Taleb’s Fooled by Randomness thesis.

“Here’s a guy,” muses Addison via IM, “beaten senseless by the cops, later on crashes his car into a brick wall, later still is shot in the face… and what does him in? A swimming pool.”

Random events, however, have an unfortunate way of spurring the world-improvers into action. “What might the government response be?” suggests Addison. “A ban on swimming pools?”

Exactly. And when it comes before Congress or the California legislature, they’ll call it “Rodney’s Law.” Ugh…

   The “hopium” rally in U.S. stocks — interrupted yesterday by the realization that Europe still isn’t fixed yet (imagine that!) — is back on today.

At 12,850, the Dow is at a six-week high. This, according to financial media forever in search of “reasons” the market moves one way or another, is driven by a Spanish debt auction that went all right… and a respectable number from the housing sector.

   The number of permits issued for new U.S. homes jumped in May to its highest since September 2008, according to the Commerce Department.

The month-over-month increase was 7.9%. Meanwhile, new construction was down… but the previous months’ figures were revised up. All in all, not great, but not bad.

This is the final economic number to come in before the poobahs at the Federal Reserve begin their two-day meeting today.

Given the recent logic of the Street, stocks should be tanking: A semi-decent housing number, in theory, makes another round of easy money less likely. But who said anything approaching “logic” was at work here? Heh…

Anyway, traders hope that tomorrow at 12:15 p.m. EDT white smoke will emerge from atop the Marriner Eccles building — confirming a new round of quantitative easing, or something approximating it.

   The problem for said traders is that stocks might not have tanked enough this spring to spur the Fed into action.

Remember, stock prices are what it’s all about for the Fed: “Higher stock prices,” wrote Ben Bernanke in The Washington Post heralding the launch of QE2, “will boost consumer wealth and help increase confidence, which can also spur spending.”

In 2010, the S&P dropped 15.5% peak to trough… spurring QE2. In 2011, the drop was a slightly sharper 17.8%… spurring “Operation Twist.”

This year? The S&P’s peak came on April 2, at 1,419. The trough came two months later on June 1, at 1,278.

That’s a drop of 9.9% — not even enough to reach the conventional definition of a “correction.” And the index has recovered more than half of that loss since.

Never mind that Operation Twist isn’t even over yet — that comes at the end of the month.

   Nor does a new easy-money operation appear in the cards by this measure.

This is the Fed’s “five-year forward break-even inflation rate.” Fed statisticians run a formula involving the rate on Treasury Inflation-Protected Securities (TIPS)… and then try to guess where investors believe inflation will be five years down the road.

As Jonas Elmerraji pointed out in our virtual pages last month, every major easing move the Fed has made since 2008 has coincided with this indicator falling to 2.2%.

The current reading? Nearly 2.5%.

Understand we don’t pretend to read the minds of Fed governors. Jan Hatzius, the chief economist at Goldman Sachs, predicts they will announce something tomorrow. Seeing as his predecessor was current New York Fed chief William Dudley, he might be on to something. Too, the makeup of the Federal Open Market Committee is more “dovish” this year than in 2010-11.

But… if the Fed doesn’t deliver whatever the hopium crowd is looking for… and the S&P is knocked down 20 handles in an afternoon… you shouldn’t be surprised.

   Once again, precious metals traders aren’t taking a hit from the hopium pipe. Gold sits near where it has most of the last week, at $1,623.

Silver’s off a bit, to $28.52.

   “Silver seems to have found a bottom in the range of $29 per ounce,” says Byron King.

“Could silver prices fall further? Yes, everything can go down. But despite the overall market sell-off, and despite an utter wipeout in some parts of the resource sector, silver has been holding its own.”

Byron bailed out of a couple of silver plays a year ago for gains of 43% and 100%. Both subsequently tanked as silver retreated from a dizzying $48 an ounce.

Now it’s time, he says, to get back in. “Looking at the problems that plague the world’s monetary systems, I believe it’s time to refocus on silver.” He recently recommended a play that has a hand in no less than 20 silver mines to readers of Outstanding Investments.

[Ed. Note: Byron is less than one week away from convening a conference call covering three revolutionary “technology metals” that The Guardian says will “revolutionize everything from nanosurgery to homebuilding.”

“I believe,” says Byron, “we’re on the verge of a wealth-building opportunity that will make the energy boom seem like child’s play.” The call takes place next Monday, June 25. To make sure you have access, follow this link.]

   “There is opportunity everywhere really, if only you look,” says Chris Mayer, back from his trip scouting out Mongolia.

“I’ve met with three of the four largest banks, the largest beverage company, the largest cement company, the largest broker, three different real estate companies, a really hairy coal company, several investors and even a former member of parliament.”

Under the circumstances, it’s no surprise Chris spent most of his time in the capital Ulaanbaatar. But he also ventured with a couple of other investors into the countryside. “I have lots of pictures, but none seems to really do it justice.”

“There are stunning rock formations, expansive grasslands, picturesque streams, gentle hills and forests of larch and pine — all under a big blue sky full of white fluffy clouds. We also ran into grazing herds of yak and horses.”

Wide open spaces

“Of course,” he goes on, “the source of all the new wealth in Mongolia comes not from what’s in UB, but what lies under the ground in Mongolia’s open spaces. Mining is the big engine driving the economy today.”

“But the country also has a rich supply of livestock. There are some 32 million livestock animals in Mongolia; about half of them are goats for making cashmere wool.” Indeed, Mongolia supplies more than a quarter of the world’s cashmere.

Chris is still poring over the extensive notes he took from his trip, highlights from his visit to the stock exchange later in the week.

   Finally, someone has figured out a way to make fiat currency genuinely useful — as a means of protest.

Russian blogger and activist Alexei Navalny is one of the most visible opponents of President Vladimir Putin’s United Russia. He’s one of Time magazine’s “100 Most Influential People” of 2012. While he’s made a name for himself using the Internet, his newest expression of dissent is a decidedly old-school rubber stamp.

A viral protest, retro style

It says simply “United Russia: Party of Crooks and Thieves”. Navalny figures the average bank note changes hands up to three times a day during a useful life of at least seven months. So a slogan on a single note could reach up to 700 people.

We like Navalny’s way of thinking… not least because his slogan laughs at the powers that be.

Here in the States, it appears the best we can get is Ben Cohen of Ben & Jerry’s ice cream fame encouraging people to stamp dollar bills with “Money is not speech”… to spread the word about that most useless of do-gooder causes, campaign finance reform.

Good lord… You can do better than that, right? If you had a pithy rubber-stamp protest to slap on a dollar bill, what would it be? Suggestions here.

   “The Federal Reserve is not the bureaucracy of a government agency,” writes an indignant reader who takes issue with our labeling it yesterday as a “nefarious bureaucracy run amok.”

“It is a cartel,” he goes on, “made up of the largest private banking entities in the United States. They can, and do, manipulate the currency and interest rates!”

The 5: Easy there, partner. Governments don’t have a monopoly on bureaucracy — as any number of charities and universities can attest.

Elsewhere in these virtual pages, we’ve labeled central banking a “peculiar public-private mongrel” — a view backed up by Rep. Ron Paul in his book End the Fed.

“The Fed is a public-private partnership,” he wrote, “a coalition of large banks that are the owners working with the blessing of the government, which appoints its managers. In some way, it is the worst of both the corporate and the government worlds.”

Amen. There’s an earlier volume of Dr. Paul’s, by the way, that we heartily recommend. It was written 30 years ago, but its warnings are equally prescient today. Around here we’ve taken to calling it his “lost” gold bible.

We like it so much we’re making it ridiculously easy to get a copy of your own.

   “Returning to Phoenix from a vacation in Georgia,” writes a reader as we pivot from foreign travel nightmares in recent days to domestic ones, “we checked our golf bags in Atlanta.”

“When we unpacked at home, we found my wife’s golf bag to be upside down inside the carrying case; golf shoes were out of place and have permanent creases in them.”

“I was, obviously, upset, but the real tragedy here is not the material damage but that I actually fear escalating the issue to anyone — fear that if I complained, I would be on some sort of permanent ‘screw’ list in future travels.”

“Boy, have we come a long way where an honest citizen has to fear Big Government! That used to be the trademark of dictatorial or communist countries. But no longer.”

   “Just thought this would add to the very long list of government duplication and waste listings that you’ve posted,” writes a reader whose son works for the Defense Department.

“I have at least four offices,” the Pentagon employee says, “and six different people in the chain for acquisition of my travel itinerary. Not to mention they screwed up my flight because the last step (authorization, aka to click submit) is done by one guy who dropped the ball on my original flight, so I couldn’t board, because there’s no assistance on the weekend).”

“I could eliminate six jobs by going back to the old system where I look up my own flights, submit my government travel card and purchase a rate that’s regulated by a simple policy determining the max amount of cost authorized. If the traveler screws it up and overpays, they pay the balance.”

“I could simply go work at GSA and spend hundreds of thousands of dollars on Vegas conventions and I wouldn’t have travel problems….”

   “Lived in North Carolina for almost 15 years,” writes a reader compelled to chime in about the one-day, one-county change to the Tar Heel state’s liquor laws… the better to accommodate the Democratic National Convention.

“The little stunt they are about to pull (again) with Sunday liquor sales is nothing new! Flashback to April 1994… Mecklenburg County (read: Charlotte), April… NCAA Final Four… alcohol sales permitted that Sunday only… HMMMM!”

“Thought all that hypocrisy would have died with that crazy old curmudgeon Jesse Helms, but…….”

“Love my 5!”

The 5: Is it hypocrisy… or is it more like a full-employment act for lawmakers? If they didn’t have to pass these one-day exceptions all the time, they’d have nothing to do!


Dave Gonigam
The 5 Min. Forecast

P.S. It’s enough to make you wonder if rubber-stamped dollar bills will soon be the only available means of protest: “Google reports it has seen an ‘alarming’ incidence in government requests to censor Internet content in the past six months,” according to CNET.

During that time, Google says it got more than 1,000 such requests from governments around the world. “It’s alarming,” says the company’s senior policy analyst Dorothy Chou, “not only because free expression is at risk, but because some of these requests come from countries you might not suspect — Western democracies not typically associated with censorship.”

“U.S. agencies,” according to CNN, “asked Google to remove 6,192 individual pieces of content from its search results, blog posts or archives of online videos, according to the report. That’s up 718% compared with the 757 such items that U.S. agencies asked Google to remove in the six months prior.”

There’s one haven for dissent that’s never received a “take-down” notice. It’s accepting new members right now.

P.P.S. Addison will be the guest of money manager and radio host Gabe Wisdom tonight at 7:30 p.m. EDT on the Business Talk Radio Network.

The network’s homepage is here and there’s a “listen live” link right beneath the masthead.

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