Henry Dampier

On the outer right side of history

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“Believers In Markets Out-of-Step With Markets”

Jim Grant has always offered a good balance between a theoretical understanding of economics and a practical experience in working the markets. Last month, he gave a keynote speech at the Cato Institute about the post-bailout monetary era.

In the speech, he notices an apparent contradiction in markets and public opinion: people who are advocates of markets tend to believe that asset prices are currently over-valued, whereas people who oppose the market system tend to think that company fundamentals are not terribly relevant to asset prices. As Grant says in his speech, “…they distrust the resiliency of the price system.”

For the ordinary person, what the time since the financial crisis has meant is that people who have been able to attach their personal wealth to asset markets have done quite well, whereas people who have been less connected to the monetary spigot have done poorly (as in most laborers who are not bringing in money from a pension of some kind).

This is actually a common historical progress seen in other paper money regimes: enterprise suffers, while paper speculators thrive. This is because of the real process of inflation, which differs from the bureaucratic definition as a ‘general increase in prices’ as defined by a committee at the Federal Reserve.

The disconnect happens for a simple reason: there are choices about how you allocate your funds.

You can buy a stock, or you can buy products and services with that same money. That money is staying in the asset markets. You give your cash to the broker, who handles the exchange, delivering that money to the seller, and taking it as a cut. The money might eventually go into the real economy circuitously, but as more money piles into the asset markets, it tends to stay there, or get recycled into the asset markets after a brief detour into the ‘real’ economy.

In the corporate sense, the companies can do stock buybacks or they can invest into expanding operations by hiring new people, building new facilities, or giving raises to existing employees. In the case of governments, increasingly state governments have to allocate funds into the asset markets to pay past employees, while having to cut payrolls for existing employees. Apple spent $17B last quarter on share buybacks instead of spending that $17B on hiring, as an example.

One market is subsidized in infinite amounts by the Fed, and the other gets the deferred trickle-down, and even then only in certain markets.

We see this sort of time-displaced asset jump in markets like the SF-Bay, where pension money goes into the hands of venture capitalists, and is then deployed into money-losing companies and then into the hands of real estate developers & hipster hackers spending $5,500 a month on rat-infested apartments with water damage. The money gets deployed to the SF-Bay first because the people who manage the assets allocated to them don’t want to fly to the cooler markets, and the entrepreneurs aren’t either, because the point isn’t to allocate capital intelligently into profit-making structures, but to allocate capital from the asset markets into their pockets.

When you reward people for pumping up asset prices as high as possible without regard to the fundamentals, entrepreneurs will do things like fill a company with useless employees because the companies are valued based on technical headcount rather than fundamentals. If you value the company based on a compelling investor story, you get fraudulent stories that are more common to mafia-run pink sheet scams than they are to brand name venture capital firms.

Or, at a larger scale, you’ll get executives who borrow tons of money on the bond market, and then use it to build out sham product lines that never sell, or otherwise just use it to push up the stock, which they then sell, and recycle into some other investment. To people who primarily work in the asset markets, it seems like a boom, because it is, whereas the people who don’t will tend to see it as depression conditions.

If earnings are not a primary determinant of stock prices, then employees who grow earnings will be under-valued compared to how they have been in the past, because what matters most is boosting the stock price instead of the fundamentals that are conventionally supposed to be driving that price.

Because markets seek equilibrium, eventually, the disconnect corrects, with a convergence between the pumped-up asset market and the liquidity-starved market for the underlying assets.

Update

Charles Hughes Smith covers the corporate bond issuance & stock buyback trend.

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You laughed, but the Amero is back!

Let’s go back to 2007, when the establishment took some time out of the presidential campaign season to collectively chortle at warnings about efforts behind the scenes to break down the border between Mexico and the United States:

SINCE HE BEGAN his presidential campaign, Republican candidate Mitt Romney has held more than 125 “Ask Mitt Anything” town hall forums, and the people who have shown up for them have done their best to make the events live up to their name. There have been questions about medical marijuana, about abolishing the income tax, about Romney’s Mormonism and his potential vice president.

Of course, certain topics come up more than others. One is healthcare. Another is Iraq. A third is the North American Union.

The North American Union is a supranational organization, modeled on the European Union, that will soon fuse Canada, the United States, and Mexico into a single economic and political unit. The details are still being worked out by the countries’ leaders, but the NAU’s central governing body will have the power to nullify the laws of its member states. Goods and people will flow among the three countries unimpeded, aided by a network of continent-girdling superhighways. The US and Canadian dollars, along with the peso, will be phased out and replaced by a common North American currency called the amero.

If you haven’t heard about the NAU, that may be because its plotters have succeeded in keeping it secret. Or, more likely, because there is no such thing. Government officials say a continental union is out of the question, and economists and political analysts overwhelmingly agree that there will not be a North American Union in our lifetimes. But belief in the NAU – that the plans are very real, and that the nation is poised to lose its independence – has been spreading from its origins in the conservative fringe, coloring political press conferences and candidate question-and-answer sessions, and reaching a kind of critical mass on the campaign trail. Republican presidential candidate and Texas congressman Ron Paul has made the North American Union one of his central issues.

As fears of the mythical NAU grow, they appear to be subtly shaping more mainstream debates about immigration and trade. Paul’s fellow Republican congressman Virgil Goode introduced a congressional resolution early this year to block the creation of the NAU and the “NAFTA Superhighway System.” Similar resolutions have been introduced in several state legislatures – in Montana’s case, the resolution passed nearly unanimously. And back in July, the US House of Representatives easily approved a measure that would cut off federal funds for an existing trade group set up by the three countries.

The NAU may be the quintessential conspiracy theory for our time, according to scholars studying what the historian Richard Hofstadter famously called the “paranoid style” in American politics. The theory elegantly weaves old fears and new realities into one coherent and all-encompassing plan, and gives a glimpse of where, politically, many Americans are right now: alarmed over immigration, worried about globalization, and – on both sides of the partisan divide – suspicious of the Bush administration’s expansive understanding of executive power.

Is this as funny now as it was then, considering the president’s executive action to declare amnesty for many immigrants from Mexico and Central America?

What we have to consider is the triumph of marketing the union, of being patient about the timetable, and about figuring out a legal construct that met the objectives of the conspirators without raising too many hackles in the general public. Something as dramatic as a North American union would not have flown, executive order or no. Legalizing existing migrants and framing it in humanitarian terms was much more sensible, seemed like a more natural transition, and was less of a dramatic change.

Collapsing the border informally has proven more feasible than doing so formally. The concerns of the rubes get swept away, and there isn’t that much daylight between one president and another — it’s more about the team of bureaucrats behind both of them.

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Kill Whitey: Silicon Valley Edition

From the propaganda offices at Bloomberg News:

That can be part of the bargain for high-tech minorities, the female, black and Hispanic engineers in a business that’s been one of the greatest wealth-creation machines ever for white and Asian males. Medina got the advice Lloyd Carney always gives to newcomers. “I tell women and people of color directly, ‘Don’t you dare advocate for diversity,” says Carney, who’s 52, black and chief executive officer of Brocade Communications Systems Inc. “‘Your career would be over.’”

…

The diversity issue is being dissected and debated as never before, and industry leaders have been broadcasting their dedication to making pluralism a priority. Tim Cook was Apple Inc. (AAPL)’s CEO for three years before coming out as gay two weeks ago. Microsoft Corp. CEO Satya Nadella fanned the discussion last month when he suggested women not ask for raises.

The men and women solving the problem — by getting hired and promoted — can be the least comfortable talking about it.

Problem? What problem?

If Silicon Valley is seen as a suddenly new center of nasty science-based racism, this view is incorrect. HBD was widely promoted and discussed by Silicon Valley’s founders.

For the last few years, the unprincipled exceptions granted to Silicon Valley to practice illegal meritocratic hiring procedures have begun to be rolled back.

Meritocracy is actually illegal. Although social justice warriors advocating for equality in hiring may seem to be attacking a plutocratic power center from a position of weakness, they’re actually just agitating for the enforcement of laws that have been on the books and tested by ample precedent in other industries.

We can say that part of the reason why Silicon Valley has succeeded so much relative to the rest of the country is because of this set of unprincipled exceptions, particularly that of using proxy tests for IQ as hiring filters. The rest of the country has to deal with highly regulated hiring procedures that require an enormous HR bureaucracy, and prizes official educational certifications over more direct measures of general intelligence.

As you’ll commonly hear said by executives, Silicon Valley is a big vacuum for all the smart people in the United States and around the world. One of the reasons why it has such strong pull is because of the various exceptions previously granted to it from on high in the Federal government.

When SJWs succeed in cracking the “greatest wealth-creation machines ever for white and Asian males,” it will cease to be a wealth-creation machine. It will become a broken ex-machine; a pile of semi-functioning parts that may blink and whirr, but which no longer generate surplus.

With those legal exceptions revoked, Silicon Valley has no future in California. But something like it might emerge in another place, unlikely within the United States.

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