Ted Auch

Mayor Michael Bloomberg:

“I’m a great believer in the wisdom I learned in my first Wall Street job: In God we trust…Everyone else, bring data.”

From The Economist January 14th 2010

“Liberal democratic governments can make all manner of blunders, but they are less likely to commit mass murder. Amartya Sen, a Nobel prize-winning economist, has famously argued that no country with a free press and fair elections has ever had a large famine. And research by those three CFR scholars found that poor autocracies were at least twice as likely as democracies to suffer an economic disaster (defined as a decline of 10% or more in GDP in a year). With no noisy legislatures or robust courts to hold things up, autocracies may be faster and bolder. They are also more accident-prone.”

I wonder how someone who states that “…no country with a free press and fair elections has ever had a large famine.” wins a Nobel in anything let alone theology…..I mean economics. This is the argument you attributed to the economist Amartya Sen. Does Mr. Sen and The Economist for that matter not understand the dangers associated with conflating causation and correlation? Large famines are largely functions of climate, external demand, and agricultural subsidies. Are they related to free press? Doubtful if there is a linear connection. Are they related to fair elections? Probably but this is a correlation that I would not get passed peer-review.

This is architecture on viagra.

I can’t help but wonder if something more long-lasting or as the U.K.’s Adair Turner (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aKeO6gsaeQ_M#) would most likely say “socially useful” could have been done with the materials used to build these phallic symbols of excess and upper 1-2% decoupling from the rest of society? I am sure the folks in Malaysia could think of a couple of things and those that have been displaced from the lower 9th Ward of New Orleans would most assuredly have some ideas for what could be done with the $3.2 billion being spent on NYC’s rising symbol of patriotism 1 Word Trade Center.

Given the recent announcement by President Obama that he will be upping the ante by 30,000 troops in Afghanistan I was left to ponder for what seemed to me a logical question: Mr. President what in your portfolio of beliefs and objectives is worth losing an election for? Do you not have any ideologies that you feel so passionate about that you are willing to sacrifice all or most of your political capital to steward such beliefs across the finish line? I voted for you sir and I am not sure at this point whether you have any convictions you feel so strongly about that you would put your political neck on the line for. That is quite disheartening to me because when I saw you speak on the steps of the Ira Allen Chapel here in Burlington, Vermont in March of 2006 I was convinced that you were a man with a spine, conscience, and an intellect unsurpassed in modern day politics. I still believe that the latter is true but as for your spine and to a lesser degree your conscience I am left wondering what you stand for and what you will fight for to the very end, whether it means political suicide or not.

Show us some fight sir! Show us that the issues you campaigned on are part of your very fiber and not simply the populist rhetoric you knew would get the vote of people like myself. It is beginning to feel like you are ashamed that the left supported you and your “progressive” agenda. That is not the man I saw speak in 2006. That is not the man I promptly told my friend Dennis Ailor would win the presidency in 2008. And that is most assuredly not the man I thought was capable of thinking through some of the most complex issues ever to face an incoming president. Sure you were handed a mess but are you going to continue to compare your administration to the one that preceded you? I would caution against such comparisons given that the bar could not have been set any lower.

Sir you know that the right would gladly fall on their sword for issues like abortion, the sanctity of marriage, gun rights, and the military industrial complex. That is a given and that for better or worse is one thing I respect about the neoclassical and neoconservative movement. When they give speeches in Portland or Corpus Christi you know what you’re gonna get and they make absolutely no apologies for their beliefs. It is time you get a little neocon in you Mr. Obama and by that I mean pick an issue any issue, whether it be health care, climate change, FISA, bank reform, or torture and go to the wall for it. Own the issue sir. Take back any one of these issues from those in your party that are self-hating Democrats. Just like Iraq and Katrina will define George W Bush (and no one else!!) one of these issues will define you and it would be a shame if you let the spineless wing of your party co-opt your presidency.

I and many like me – and I would hasten to guess those on the right – are anxiously or should I say nervously waiting and wondering if you will ever stand up and be accounted for with respect to some of the aforementioned issues. I would suggest firing Geithner, Summers, et al as a start. The left rightly sees them as an extension of the Greenspan-Rubin virus that has infected the nation’s financial services regulations for far too long now and the right won’t support them because….well who cares they just won’t because you do and that is reason enough for them.

Apologizing for our hegemonic history and bowing to Emperor Akihito shows that you are sensitive to our fragile status as a global power and more importantly the proper way in which you interact with others when on their turf. However, tacitly apologizing for being liberal or in any way concerned with the appalling trend in wealth, health, and education distribution in this country makes those of us on the left wonder if we were sold a bill of goods and those on the right question your leadership capabilities, both from a foreign and domestic perspective.

You may be wondering at this point why we don’t have your back on some of these crucial issues? Well all is not lost and believe me if we see fight emanating from 1600 Pennsylvania Avenue we will most assuredly get in the ring with you but until then you’ll have to rely on the likes of the Blue Dog Democrats. BTW how’s that working out so far?

There is alot of talk right now about Tea Party Revolution and Socialism via the Obama administration. However, the thing that these people that are not seeing is that most of what is happening is being inflicted on them via both parties in concert with the banks, health care industry, and the Military Industrial Complex (MIC). I used to be very skeptical of the socialist ideologues and remain skeptical of those that invest all their emotional and intellectual capital in one school of thought or religion for that matter. Such philosophies remove the individual’s personal responsibility. They also allow themselves to be easily manipulated through advertising. The fact is that when you look at two long-term sets of data – income disparity and the MIC – you see the true problem AND to those that blame Obama as a fascist or whatever I say a trend does not 9 months or 1 adminstration make. This guy is clearly overwhelmed but based on the data I will present he is facing an inertia whose depth and scope is quite daunting.

As you can see from the figure to the right when plotting the returns on 10 of the largest military industrial contractors it is clear that they are rapidly overtaking this country’s production sector.

What we are seeing is that those firms with a long-term presence on the Dow Jones Industrial Average (DJIA) have done quite well for themselves from the 94,171% increase in share price of General Dynamics since it’s initial offering in January of 1977. The MIC giants Boeing and United Technologies have since their share prices increase by 21,788 and 18,633%, respectively. Interestingly two new players in the MIC industry KBR a spin-off of Dick Cheney’s Halliburton and DynCorp a leading competitor of Blackwater (now called Xe Services LLC) have declined by 105 and 119% since their arrival on the DJIA in 2006. In summary the MIB has on averaged gained 15,448% relative to the 823% increase on the DJIA.

So, while the economy suffers and jobs are lost at the rate of 250-750,000 per month in the last 2.5 years the MIB is operating at a profit ratio of 15:1 relative to the DJIA. This type of ratio would usually raise red flags, but since these companies are True Patriots their profligacy is viewed as an inevitable result of the War on Terror and the Spread of Democracy. I wonder if these companies are also Too Big To Fail?

The other contention is that Obama is a looking to redistribute wealth at the expense of most Americans. Hand in hand with this argument is the idea that all citizens have access to the American Dream. Well if you look at data from the Census Bureau you will see that redistribution is absolutely happening but it is occurring in the opposite direction. Two correlated trends are quite evident from the data:

1. Every year the Upper 5% of this country increases it’s average income by $2,049, while the income of the lower 2 Quartiles increases by $93-164. This seems unfair yet the common concern amongst those that are benefiting the least is accruing enough wealth to realign themselves with those that benefit the most form the Efficient Capitalist Market. However, those that benefit the most are doing their darndest to insure that they and only they benefit from this increasing disparity.

They are doing this by promoting war in the hopes of keeping this country divided and invoking patriotism as a means to encourage those with nothing to fight for those with everything.

2. The data also demonstrates that the share of this country’s income allocated to the Top 5 Percent has risen from 43% in 1965 to 50% in 2008. If this trend continues this sector of society will account for 60% of this country’s wealth by 2050.

It seems that we may be hitting the point the Romans and many others inevitably approached and violently surpasses. It is the point at which our cumulative GDP growth has flattened out while population growth continues to grow albeit at a mild rate.

To the right you see a graph of the ratio of Cumulative Annual US GDP to Population Growth from 1930 to 2008.

This ratio did not become positive until 1940 on the eve of WW II and spiked at the war’s conclusion in 1944-45. At this point this ratio began a steady decline to a low of 4.52 in 1963. While it experienced a bump between the 60s and late 90s it has remained relatively flat between 1950 and 2008 deviating very little from it’s ~60 yr average of 5.43.

Another way of looking at this “Economic Ceiling” is from an agricultural perspective. I have plotted the Yield to Nitrogen (N) Applied ratio for Corn here in the US from 1943-2007. On the Primary Y- and X-Axis the relationship for the raw data is shown, while the Secondary Y- and X-Axis depicts the relationship on a log scale. We see two things here: 1) the shape of the relationship is dependent on how the data is presented and 2) the raw data demonstrates quite conclusively that we have reached a similar asymptote to that described above for our economy relative to population growth. This is a disturbing trend given our over reliance on corn here in the US. GMOs and fertilizer technology will only be able to do so much in fighting this apparent biological inertia. The rest of the quagmire will require a new paradigm if it is to be fixed. That should include a gradual transition to a more diverse produce and dry goods food economy in keeping the the proselytizing of Michael Pollan. However, alot of this will involve tough medicine, which should start with decreasing national obesity from it’s current rate of 33% to 15% or what it was in 1980. This may sound quixotic but really it is a necessity and weening ourselves off our addiction to High Fructose Corn Syrup would probably put a 5-7% dent in our national obesity on it’s own.

It is high time we start to seriously discuss the idea that Eugene Fama’s “Efficient Market Hypothesis”, Adam Smith’s “Invisible Hand”, and Milton Friedman’s “Shock Doctrine” are a thing of the past designed solely to benefit the top 0.1-0.5% of the G20, G8, or OECD. We must turn our attention to what I will call an Asymptotic Economic Hypothesis or the Steady State Economy (http://www.steadystate.org/) acknowledging the ubiquitous influence of Keynes’s “Animal Spirits” and the fact that nothing grows forever.

It would be absolutely acceptable if we didn’t shift towards an economy with strict ceiling and floor constraints BUT if we do our children will be very mad at us!

I for one do not? Does that make me an advocate of Big Brother type big government advocate? Nope. I don’t want government to be looking in our bedrooms or bookshelves or email or tapping our phones. Rather I want them to do with our precious tax dollars what they should be doing…..fixing stuff, supporting those in need, and fueling innovation. You may ask what does it mean to starve the beast? (bartlett_starve-the-beast)

Well “starving the beast” is a term originally coined in a WSJ article by Paul Blustein (http://www.wordspy.com/words/starvethebeast.asp) and adamantly preached by the neoconservative wunderkind. This theory reduces taxes on the upper 2% via reduced capital gains, estate, and income taxes, primarily by allowing the elite to declare income as capital gains, which reduces taxable income from 34-38% to 15%. A classic example of this is Warren Buffet noting his personal assistant coughs up a greater percentage of her annual income in taxes than he does, because most of his income is declared as capital gains.

The starve the beast argument foments outright hatred of government by conflating taxes with socialism and the near and dear gun rights of this nations many cowboys. Of course this plays to the underlying fears of an already petrified nation. The last thing this country needs is another thing to be afraid of as we now have climate change, Iran, the Taliban, North Korea, China, Russia, lawyers, unemployment, diabetes, etc. Yet, given all this neocons feel the best remedy is adding to rather than ameliorating these fears. What a bunch of great folks? They must be true patriots.

However, I ask of those interested in an anorexic beast: Do you drive a car or better yet do you like smooth drivable roads? You do? Of course you do we all enjoy our asphalt alleys winding their way through urban centers and rural outposts alike. Well there is a price associated with that privilege and it is a privilege when compared to developed and undeveloped nations alike. Congress has been forced to bailout the fund that pays for the various interstate transportation projects this country takes on every year. Don’t worry its just $7 billion which pales in comparison to things like defense spending (http://www.nytimes.com/2009/07/31/us/31brfs-TRANSPORTATI_BRF.html?ref=todayspaper).

Starving the beast is a convenient and short-term method of consolidating wealth, is completely counter intuitive, and a theory that we should hope is entering the twilight of its relevance.

Take a guess what this quote was referencing:

“It is a threat to the foundations of our free society when government officials, acting in the midst of a crisis, use dire predictions of imminent disaster to justify their encroachment on our individual liberty and the rule of law,” said Darrell Issa (R) Congressman from San Diego, CA.

No it isn’t Iraq, it isn’t Afghanistan, or WMD or anything related to killing lots of folks for no reason.

Give up? This is congressman Issa lambasting Hank Paulson last week (http://www.commondreams.org/headline/2009/07/16-10) as he appeared before a committee investigating the nefarious actions underlying the mega bailout of Merrill Lynch by Bank of America…..and BofA by the US Government………and the US Government by us the taxpayer.

I find it hard to lend any credibility to the congressman’s concern given that such a quote could easily be attributed to Dennis Kucinich or Russ Feingold during the lead-up to and subsequent complete disaster that was/is the Iraq and Afghanistan Wars. Does he not see that it is his party (primarily but not completely!) that gave way to this kinda hubris on the part of regulators, bankers, Defense Secretaries, Vice Presidents, and Presidents?

This is nothing new and I find it amazing that San Diego is dumb enough to vote for a guy who is just now realizing what he so eloquently stated last week. Jesus I mean these words are the very same words we could use when describing the motives for Iraq, torture, warrantless wiretapping, mass ousters of states Attorneys Generals, WMD, etc etc. Come on we are asked to pretend like we were born yesterday and it is quite insulting.

I am reading Malcolm Gladwell’s “Outliers: The Story of Success” and couldn’t help but recall that the U.S. itself is an outlier. Below I have wrapped up where it is we sit on the outlier gradient across a variety of not so complimentary indices relative to other G8 or G20 nations.

1. 20 sq. ft. of retail space per person Vs 13 for Canadians, 6.5 for Australia, 3 in Sweden (http://www.nytimes.com/2009/06/14/magazine/14FOB-Consumed-t.html?ref=todayspaper).

2. 9 of 10 people own a cell phone Vs 4 of 10 in China

3. 19.4 tons of CO2 per person Vs 11.8 in Russia, 8.6 in EU, 5.1 in China, and 1.8 in India

4. 5% of the world’s population and 25% of the world’s prisoners not to mention along with 3% of the world’s resources while consuming 25% of the world’s  $69.70 trillion in GDP.

5. US debt will be 78% of GDP by the end of 2009 Vs 67% in France, 63% in Germany and Canada, 52% in Norway, 38% in Spain, 20% in Mexico, 16% in China, 7% in Russia (http://natereport.com/wp-content/uploads/2009/06/country_debt1.png)

6. $6,102 spent on Health Care per person in 2004 Vs $3,165 in Canada, 3,150 in France, 3,043 in Germany, and 2,508 in Russia.

7. #29 for infant mortality Vs #3 for Japan, 4 for Sweden, #7 Spain, #9 France, #11 Germany and Italy, # 27 Cuba. Furthermore, we have fallen from #12 in 1960.

So there you have it. We are the global outlier on many fronts and will only be allowed to regain the head of the table a/o be taken seriously by the BRIC nations (Brazil, Russia, India, China) when we accept our faults, heavily modify them, and emerge stronger and more cooperative.

The Dow Jones Industrial Average (DJIA) a group of 30 companies that are supposedly an adequate proxy of Capitalism’s Temperature is under a great deal of flux. Recently we saw the removal of Citi and GM replaced by Travelers Corp. and Cisco Systems. GM had been on the Big Board for 83yrs, with only General Electric (November 1907) having a longer tenure. General Motors was one of “…the original 12-company Dow index created by Charles H. Dow in 1896. (GE has been in and out of the index three times.)” All the more reason to be disturbed given that Citi only joined the club in 1997 only to merge with Travelers, which was later spun off in 2002 (http://blogs.wsj.com/marketbeat/2009/06/08/gm-citi-officially-get-boot-from-dow-industrials-at-bell/). This comes on the heals of AIG’s removal from the DJIA in September (http://www.nytimes.com/2009/06/02/business/02dow.html?ref=business). Oh yeah and the other shoe has yet to drop given that Bank of America, which only joined the DJIA in February of 2008.

It used to be that the S & P 500 a more holistic index was well correlated with the DJIA and was approximately 12% of the DJIA.

As both have expanded in volume we see the ability of the DJIA to account for the S & P’s variability remains at 99% when plotting the annual relationship from 1950 to 2009.

However, if we hone in on 1997 to the present, the point at which futures – universally acknowledged as precursors to the toxic instruments we all now know and love (ie CDOs and CDSs) – began to be publicly traded (See “The day the signal died!”, May 18,2009) we see that while the S & P remains 12% of the DJIA the latter now only accounts for 82% of the former, which means the signal:noise ratio has essentially declined by 17% in 12 years. This roughly translates to an increase of 1.38% year over year.

While on the surface this value appears trivial it gains import when compared to annual Global GDP in the last ten years, which has hovered around 3.04-3.97% per year or more locally here in the US 5.02% per year between 1999-2008. In other words US and Global macro- and micro-economic markets are embedded with variance factors equal to 27.5 and  39.3% of US and Global GDP, respectively.

So, if the developed world continues to grow at a rate of 2.46% per year and the Dow Jones/S & P 500 decoupling continues to propagate we will see noise accounting for 52-56% of actual statistics, which even for the non-statistician has to be unsettling. What we are seeing is a decoupling of High & Low Finance, To Big To Fail & To Small To Matter, and a shift from an onus on Goods to Services here in America and the developed world. We are also seeing that once robust predictors of corporate growth are being usurped by associated noise. As we see goods being replaced with services and bank assets climbing as a % of GDP, which presumably will result in higher fractions of the DJIA being allocated to financial services, it can safely be assumed the days of a 99% DJIA Vs S & P relationship are safely in the rear view mirror. Consider for a minute the fact that US commerical bank assets stand at 70% of GDP a whopping $9.69 trillion, which doesn’t speak at all to the proliferation of hedge funds ($1.6 trillion, 12% of GDP),  investment banks OR for that matter the graying of the line(s) between commerical and investment entities following Senator Phil Gramm (R-TX) and Representatives Jim Leach (R-IA) and Thomas J. Bliley’s (R-VA) gift to the folks on Wall Street in 1999 (http://www.nytimes.com/1999/11/05/business/congress-passes-wide-ranging-bill-easing-bank-laws.html?scp=4&sq=Gramm-Leach-Bliley%20Act%20November%201999&st=cse; http://topics.nytimes.com/top/news/business/series/the_reckoning/index.html).

This basically means that in the past if investment banks sneezed commercial banks would be there with chicken soup and offer to drive them to the emergency room. Now however if those same investment bankers sneeze commercial banks (i.e. US) will most assuredly catch a cold. Not sure if 1500mg of Vitamin C will help though! Some might say we should look towards or European brothers and sisters. Well think again! Swiss bank assets equal 6.8 times GDP and the banks of the once robust Celtic Tiger were as of late 2008 approximately 9.5 times Ireland’s GDP (http://www.nytimes.com/2009/03/05/business/worldbusiness/05swiss.html?scp=1&sq=Ireland%20Switzerland%20GDP&st=cse). Scary thought I know and a long way out most certainly, but inconceivable I doubt it!

Are there ways to reverse this inertia? Of course there are but it will require engineers of capitalism and society as a whole to embrace the “Scorched Earth” principal. We need look no further than the field of ecology for examples of how this principal has done wonders for certain ecosystems, most notably the native grasslands the US and Russia, the savannahs of South America and Africa, and the pinelands of the Southeastern US. It has been shown quite conclusively at this point that these systems require periodic fire and subsequently reset to a vigorous stages of early succession. However, fire can be grouped into 2 broad categories: i) infrequent, intense, and spatially expansive or ii) frequent, mild, and spatially discrete or patchy. The former tend to not only reset biological clocks but also hinder initial succession, while the latter simply tidy up the joint a little.

The economic analog would the S & P requiring category 2 and the DJIA category 1. Many will be hurt under either scenario, but the long-term health of our economy and more importantly (to some!) capitalism hinges on successful implementation of a Scorched Earth paradigm along with political discipline in the face of irrational rhetoric reflecting the irrational exuberance we all languished in during the good times. It seems at least qualitatively that macro-economic forces de facto subject the S & P to mild and infrequent resets, however, it also seems these same forces are determined to protect those in the DJIA from a category 1 type of disturbance. The results will be a complete divergence of the two indices and the apparent creation of 2 sets of rules. This type of contrived and against-the-grain muscling will blow up in the faces of all it’s proponents, including the politicians that champion(ed) it.

The globalisation of our economy is resulting in more nuanced and noisy data. Simply bailing out the To Big at the expense of the To Small will only exacerbate the problem. As it stands we are choosing cosmetic over structural/functional surgery. I for one would much rather look under the hood than take the word of the salesman wouldn’t you?