1-2 Knockout

Lake Wobegon Tax Policy

Presented with minimal comment.  From Rasmussen Reports.

The latest Rasmussen Reports national telephone survey found that 47% believe it's most important for tax policy to support economic growth. Nearly as many--44%--believe it's more important to establish a policy in which everyone pays their fair share (ed. best definition of "fair" left in comments wins lunch on me). Most Democrats favor an emphasis on fairness while most Republicans prefer a focus on economic growth. Unaffiliated voters are evenly divided.

The survey also found results reminiscent of Garrison Keillor's world where everyone is above average--most voters believe they already pay more than their fair share of the tax burden. Fifty-three percent (53%) hold that view while 30% say they're not paying more than they should. Voters who earn more than $60,000 annually are more likely than other voters to believe they're paying too much.

Just 45% of voters under 30 or over 65 think they're paying more than their fair share of the tax burden. A solid majority of those aged 40-64 think they're paying too much.

Fifty-nine percent (59%) of voters believe that tax cuts help the economy while just 15% believe they hurt. Looked at from the other perspective, 50% believe that increasing taxes will harm the economy while just 19% disagree.(ed. define cognitive dissonance)

Despite this, 48% would vote for a candidate who promised to raise taxes only on the rich while 41% would vote for a candidate who opposed all tax increases. This clearly reflects the importance of tax fairness rather than a simple focus on economic growth. Voters believe taxes are far more likely to go up with a President Obama rather than a President McCain . However, Obama continuously repeats his claim that he would not raise taxes on anybody making less than $250,000 annually. As a result, neither candidate has a significant advantage when it comes to voter trust on the tax issue.

I do love this idea of "tax fairness", especially since everyone thinks they know how everyone else should be taxed: my legitimate deductions are your tax shields.  You received tax breaks because you're politically well connected and gaming the system; I need the tax breaks to live.

There will never be a rational tax policy now that <50% of Americans pay income taxes.

I'm Moving to Guatemala

Not that this is news to anyone who, uh, actually reads the news, but the two men running for President of the U.S. are, how to put this gingerly, economically retarded.

Karl Rove did a piece in the WSJ yesterday, calling out these two pandering politicos on their blatant b.s., the most painful example of which may be the idea of taxing "windfall" profits (of course, avoiding any discussion of what, exactly, constitutes said "windfall".  Not to go off on a rant here, but wtf is up with the wind references, "windfall", "headwinds", etc?) 

Rove accurately points out that margins for the current corporate pariah du jour, oil/energy companies such as Exxon Mobil, are amongst the slimmest in any industry.  So, if these populism-promoting politicians aren't defining windfall profits by margins, they must mean by sheer size, right? 

Wrong. 

It's not the profit margin, but the total number of dollars earned that is the problem, Mr. Obama might say. But if that were the case, why isn't he targeting other industries? Oil and gas companies made $86.5 billion in profits last year. At the same time, the financial services industry took in $498.5 billion in profits, the retail industry walked away with $137.5 billion, and information technology companies made off with $103.4 billion. What kind of special outrage does Mr. Obama have for these companies?

It's one thing when the most liberal senator on Capitol Hill blabbers incoherently about things which he clearly does not understand (as a matter of fact, its pretty much par for the course, no?), but when a so-called "Regan Republican" like John MCcain allows himself to sound similar ignorant, its a sign that we're all in serious trouble.

This past Thursday, Mr. McCain came close to advocating a form of industrial policy, saying, "I'm very angry, frankly, at the oil companies not only because of the obscene profits they've made, but their failure to invest in alternate energy."

So yea, about the title of this post.  I'm not kidding.  When the next leaders of the free world (ha!) not only say stupid things, but I fear, will actually follow their rhetoric with action, bad things will happen.  Very bad things.

Said Nextel, "Let Them Eat Cake"

Over at tech uber-blog Engadget, there is an interesting story that Sprint/Nextel waived early-termination fees (the other ETF) for Government employees/agencies.  This is especially interesting, since Chris Cox, chairman of the FCC is trying to push the mobile carriers to come to some sort of agreement to chill out with the ridiculous ETFs.

Thats all well-and-good, and I'm sure theres some yet-to-be-explored angle there, but I'm more interested in the discussion that followed in the comments section on Engadget.  As could be expected, many decried the CRAZY early termination fees as usurious extortion by the carriers.  Some tried (and failed) to kind-of explain, but even the most 1/2 hearted attempts fell on deaf ears.  I also tried (and failed) to lend some reason to the debate, but the kind folks at Engadget refuse to recognize my logon/password, even though I copied it directly off the automated confirm sent to my email when I first signed up.  Alas, I shall not be ignored!

I put together a quick & dirty (spreadsheet ) to illustrate a simple example of the cell phone retail business model, but to summarize, it goes something like this: 

• Step 1. Subsidize cost of phone (i.e. sell as loss-leader)
• Step 2. Amortize the loss/make $$ by locking customers into long-term contracts.
  • Step 2.5. Charge mucho dinero to customers for walking away from said contracts.

Now, some people have a hard time with these fees, which can be as much as $250 (if not more).  My first reaction is generally somewhere along the lines of, "READ THE CONTRACT BEFORE YOU SIGN (idiot)."  Of course, we all know the average person's ability to read (nay, comprehend) contracts is not so good ("hey, who wants a no-doc, stated-income jumbo option arm mortgage?"), so this response is pretty much a waste of breath. 

In reality, people need to understand that they simply cannot have their cake (i.e. affordable handsets) and eat it too (no/low early termination fees). Thats just how the world works.  Deal with it.

In this example, I assumed a 2-year contract period, on which the carrier takes a loss (subsidy) of $200 on the handset at purchase, a contract costing $50 monthly, and an annual interest rate of 9% (semi-arbitrary).  The NPV to the carrier over the life of the contract is about $900.  However, if there we assume a hypothetical situation where there is no early-termination fee and the customer were to cancel after only 12 months, the NPV drops down to about $375, almost a 60% drop in profit.  To the layman, this may seem silly, as the company is still 'making a profit', but that only captures a small part of the picture, running a mobile communications company is an awfully expensive proposition.  Thus, the "profit" generated by long-term mobile contracts enables the company to conduct business, that is, it doesn't simply trickle down to the bottom line uninterrupted.

We'd be delusional, of course, to expect every Joe and Jane Doe understand the complex business model of a wireless carrier, and we'd be similarly delusional to expect the fervor surrounding early-termination fees to die down any time soon. 

Lets assume that the FCC and the carriers come to some sort of agreement limiting the ETFs, avoiding the possibility that Cox & Crew will bow to the anti-capitalist cries from the masses and mandate they be eliminated entirely.  How, then, will the carriers account for the increased uncertainty of future cash flows from service contracts?  One thing is certain:  The carriers are absolutely not going to roll over and play dead.  I'd imagine they'll play ball, so-to-speak, and give up some restrictions on early-termination, but where they're losing money (and the attendant certainty of that money) they'll make up for it elsewhere.  I'd expect they'll keep up with the practice of heavily subsidizing handsets as their main sales driver, and reducing ETFs should definitely increase sales, as people can upgrade their phones more often. 

Its important to keep in mind that not only are the carriers losing out on previously-certain future cash flows, but they'll also suffer a hit to their gross margins as higher handset sales directly increase their CoGS.  To offset this, I'd expect the carriers will increase the cost of service contracts to even-out the PV calculation, and changing the structure (i.e. tenor) of the service contracts they offer.  I think the most obvious solution is that there will be a shift towards 1-year contracts, reducing the likelihood that a customer will switch carriers or upgrade their phone before the contract expires. 

Of course, the trade off is that the shorter-duration contracts will most likely cost more per month than the traditional 2-year variety, but as I said, you can't have your cake, and eat it too.

NYT: Land for the Rich to Roam a National Crisis

So, over the weekend I resolved to be more positive and not turn all my posts into rants deriding others' failed poli-economic principles.  Then I came across this piece of hogwash in the NYT Monday:

For years, officials in New Jersey have talked about the need for more affordable housing and then done almost nothing. The need is pressing, and the state may finally be ready to move. Unfortunately, this newfound resolve carries serious risks. Unless the state changes its current plan, some of the new housing will be built on the few parcels of undeveloped land that still remain. That must not be allowed to happen.

The conflict between two competing and legitimate needs — low- and moderate-income housing and breathing room — is a national problem. Anyone who drives into rural areas of Pennsylvania, New York and other northeastern states is struck by the number of houses mushrooming on what just a few years ago were huge stretches of farmland...

...Under New Jersey’s plan, which could take effect in October, one unit of affordable housing would have to be built for every five units of market-rate housing. The current required ratio is one for every eight. Commercial developers, meanwhile, would be required to provide one new affordable housing unit for every 16 jobs generated by commercial development. Both requirements could go a long way toward meeting the state’s need for at least 115,000 new affordable housing units...

...The plan [to assign "obligations" to small communities mandating non-market priced housing] will also make it difficult for remote communities to shift their obligations to cities and suburbs that want more housing and can also provide jobs.

The logical fallacies (as well as insane assumptions) contained in the op-ed are egregious:

• The NYT (implicitly) admits that land-use restrictions drive up the cost of housing.  A cursery review of any economics textbook (or, for a better description see Thomas Sowell's Applied Economics) clearly shows that by limiting the supply of housing (in the name of "necessary space" or "green laws") you will drive up the price.  Study after study (below) shows that home prices are highest in the areas with the most stringent "open space" regulations.  These are the same restrictions--those that "protect" our "breathing room"--that are helping drive energy prices higher, and are being met with similar responses from politicians attempting to mandate market prices.  "Open space" laws protect the status quo, who used to be called "landed", and raise prices for the low-income people the NYT claims to protect.  This is simple economics.  You can restrict building, or you can encourage low prices by increasing supply, but you can't have it both ways.  Anyone who tells you differently is selling you their votes and hoping you're too dumb to notice.
  • Seattle Times: Between 1989 and 2006, the median inflation-adjusted price of a Seattle house rose from $221,000 to $447,800. Fully $200,000 of that increase was the result of land-use regulations, says Theo Eicher — twice the financial impact that regulation has had on other major U.S. cities....A key regulation is the state's Growth Management Act, enacted in 1990 in response to widespread public concern that sprawl could destroy the area's unique character. To preserve it, the act promoted restrictions on where housing can be built. The result is artificial density that has driven up home prices by limiting supply, Eicher says.
  • SFGate: Most people know that the San Francisco Bay Area has one of the most expensive housing markets in the nation. However, not everyone realizes that, as recently as 1970, Bay Area housing was as affordable as housing in many other parts of the country...What happened in the 1970s to make Bay Area housing so unaffordable? In a nutshell: land-use planning. During the 1970s, Bay Area cities and counties imposed a variety of land-use restrictions intended to make the region more livable.
  • Cato: Under the mantra of "stopping sprawl," urban planners have crammed nearly 95 percent of Californians into just 5.1 percent of the state's land area. The nation's three densest urban areas, and 11 of the 20 densest urban areas, are all in California. Thanks to urban-growth boundaries, greenbelts and other planning restrictions, the average California urbanite lives in communities that are 80 percent denser than in the rest of the country.

• The very idea that "breathing room" is a "national problem" is, in and of itself, insane.  America  ranks 180th in population density (out of 240 countries listed).  Now, and this is the crux, the NYT doesn't want that land.  They want the pretty land.  They want the scenic land.  They want their views to be unobstructed so that the land they currently own is worth more.  Putting their central argument into contra-form, the NYT editorial board "doesn't want poor people to live in pretty places".   As they so eloquently put it: "Anyone who drives into rural areas of Pennsylvania, New York and other northeastern states is struck by the number of houses mushrooming on what just a few years ago were huge stretches of farmland".  The fallacy is that there shouldn't be houses on that land, and there should be farms.  Farms are pretty, new tracts of suburbia aren't.  If the pretty land is developed the value of their "farm houses" decreases--and we can't stand for that.  If land is most valuable as used for housing, then it should be housing, not farming or "preservation".  But, being limousine liberals, they then must call for "low cost" non-market based housing without ever suggesting where it goes.

• Even the NJ legislature has been drinking the Jaeger Bombs (click the link, trust me).  By mandating that 1/5 or 1/8 houses be built for sale at non-market rates they are raising the cost for all non-low income housing.  Unlike Wal-Mart's low prices through efficiency, legistlating low-prices raises the price for everyone not pre-ordained worthy by the politicos.  This has a negative feedback loop effect: housing restrictions are enacted => housing divided into "low cost" and "market rate" units => low-cost unit prices kept at artificially low prices => market-based units rise in price in response to inefficient capital flow and underinvestment => more people "priced out" of homes => legislature demands more low-cost housing be built with higher income ceiling for the pre-ordained =>  cycle repeats.

• Since when did commercial developers become responsible for housing potential lease-holders' employees?

• In the closing paragraph the NYT makes a classic static-phase mistake.  They assume that the "jobs" are in cities, and that low income people are being forced into rural areas (which the NYT doesn't like).  Well, as the bank robber said when asked why he chose banks to pillage, "because that's where the money is", so too will employers venture out into the rural areas if there is a workforce there ready to work at below-city rates (because the cost of living is lower).  To say that cities "want more housing" is equally infuriating.  Sure they want more housing, but, well, there's a city there!  It costs more money to build where there are already buildings, and cities have higher costs of living for numerous reasons: one of which is open-land restrictions in cities like SF.   

All in all this whole editorial infuriates me.  To say that we need low cost housing, but only where it's not economical to build (existing cities) or not where we think it's "pretty" is heretical for a paper espousing to be populist.  Of course, we could just let the over-supplied housing market push prices lower. That would make sense. But we also have remember to "protect current homeowners" by adding artificial floors, to the detriment of poor potential home buyers. 

As long as our home prices have floors and ceilings you can guarantee that the poor won't.

Oil's a Witch: Burn Her!

Sir Bedevere: There are ways of telling whether she is a witch.
Peasant 1: Are there? Oh well, tell us.
Sir Bedevere: Tell me. What do you do with witches?
Peasant 1: Burn them.
Sir Bedevere: And what do you burn, apart from witches?
Peasant 1: More witches.
Peasant 2: Wood.
Sir Bedevere: Good. Now, why do witches burn?
Peasant 3: ...because they're made of... wood?
Sir Bedevere: Good. So how do you tell whether she is made of wood?
Peasant 1: Build a bridge out of her.
Sir Bedevere: But can you not also build bridges out of stone?
Peasant 1: Oh yeah.
Sir Bedevere: Does wood sink in water?
Peasant 1: No, no, it floats!... It floats! Throw her into the pond!
Sir Bedevere: No, no. What else floats in water?
Peasant 1: Bread.
Peasant 2: Apples.
Peasant 3: Very small rocks.
Peasant 1: Cider.
Peasant 2: Gravy.
Peasant 3: Cherries.
Peasant 1: Mud.
Peasant 2: Churches.
Peasant 3: Lead! Lead!
King Arthur: A Duck.
Sir Bedevere: ...Exactly. So, logically...
Peasant 1: If she weighed the same as a duck... she's made of wood.
Sir Bedevere: And therefore...
Peasant 2: ...A witch!

Today's congressional witch hunt against "Big Oil" (framing issues 101: if you want a group to be hated name them "Big X", people hate anything "Big") once again proves that congressmen are either willfully ignorant, liars, or sheer idiots.  Following the same logic as Sir Bedevere, and the rest of the Monty Python crew, congress has determined that Big Oil is a witch...now they have to defend their logic ex post facto. 

Some of the highlights below:

Patrick Leahy, D-Vt., told the executives there's "a disconnect" between normal supply and demand and the skyrocketing price of oil — surpassing $130 a barrel even as the oil leaders testified — that the industry has yet to explain.

Well, Pat, why don't you then explain what the disconnect is...and remember, you need evidence from primary sources (wikipedia doesn't count) for this paper.  I would begin by looking at your own closure of almost all new sources of oil production in this country (continental shelf, ANWR, etc). 

J. Stephen Simon, executive vice president of Exxon Mobil Corp., said profits have been huge "in absolute terms" but must be viewed in the context of the massive scale of the industry." He also said high earnings are needed "in the current up cycle" to pay for investments in the long term when profits will be down.

"'Current up cycle,' that's a nice term," replied Leahy with sarcasm, "when people can't afford to go to work" because gasoline is costing close to $4 a gallon.

Pat, love the cynicism.  However, this actually is an "up cycle", and people can't not (hate double negatives) get to work because of oil prices alone.  People chose to live outside urban areas for what they believed were non-economic reasons ("honey, isn't it just breathtaking out here instead of in the city"), unfortunately now they must realize no choice is completely non-economic.  Just because you could afford to live 30 miles away from work when gas was $1.50/gl doesn't mean you should be subsidized when the price rises.  Whether you realize it or not, you made a decision to be short energy.  By this logic, congress should be yelling about how SUV owners are getting hosed by the oil companies, because it costs so much to fill up their tank (someone challenge me on this one...please!).

[Leahy] asked Simon what his total compensation was at Exxon, a company that made $40 billion last year. Simon replied it was $12.5 million annually.

He obviously went on to link the oil companies' record profits, and executive compensation, to the price of oil.  I hate to break it to Senator Leahy, but, short of anti-competitive tactics (none of which have been successfully pinned on the oil companies) commodity-based corporations are price takers, not setters (again with the econ 101).  You could mandate that all oil executives could be paid nothing and the price of oil wouldn't fall a dime...in fact it may rise because incompetent CEOs would make worse investment decisions for future production.

Sen. Arlen Specter, R-Pa., said Exxon's annual profits increased from $11.5 billion to $40.6 billion in the past five years and there was no explanation for "why profits have gone up so high when the consumer is suffering so much."

Not even worth a comment.  Go back to torturing the NFL, Specter.

Senate Democrats recently announced an energy package that would tax "windfall" profits of the five companies. That might have public appeal, Lowe told the senators, but oil companies should not be viewed as "a scapegoat" for high prices.

That was not what many senators wanted to hear.

You have "just a litany of complaints that you're all just hapless victims of a system," Sen. Dianne Feinstein, D-Calif., told the executives. "Yet you rack up record profits ... quarter after quarter after quarter."

Ahh, Diane, I was wondering where you were hiding.  Apparently your net worth of between $60-90m doesn't qualify for "Big" status.  I would like to personally thank you for donating your money to the poor who can't support themselves.  As you and your cohorts love to tell us, "the rich don't need the money anyways".  Ok, back on topic.  This idea of a "windfall profits tax" is ludicrous on a multitude of planes.  Where to begin:

• 1) As Senator Leahy (sarcastically) noted, commodities are a cyclical business, and, perhaps more importantly, commodities are fungible goods.  Anyone who has taken Econ 101 knows that suppliers of fungible goods are price takers, not price setters.  I don't know if you've noticed, but the oil companies don't get to set their prices--the market does.  Their profits are a function of aggregate supply/demand, level and yield of prior investments (ie, firm-specific quantity), and substitution costs (ability for consumers to switch to another, similar good).  We are not talking about the finance department of a company picking their prices, the oil industry has to take what the market is giving them.
• 2) If you are going to tax "windfall" profits, then you will need to subsidize "windfall" losses.  Where was congress when oil was $10.76 in 1998?  Did they go and offer subsidies then?  Did they guarantee payments regardless of output/prices, like they do with farms (more on that in a later post)?  No.  Of course not. Obviously, though, if you go with a tax/subsidy system whenever the price hits a tail you create a massive disincentive to manage a company correctly--and production would fall precipitously--leading to, say it with me now, higher prices.
• 3) However, the biggest question mark is how do you define "windfall" profits.  Gross dollar value? Margins? Delta price over delta time?  Each of these metrics provides its own set of complications. 
  • Sure the dollar value of the profits is high, but not auspiciously so when you realize that oil may be the most important single commodity in the world.  In our current global set-up, without oil there would be no electricity, cars, plastics, etc.  Just like GE has exceptionally high revenues because it produces so much "stuff", oil companies produce a lot of the most vital "thing" in the global economy. 
  • So you want to define windfall profits by margins? Well XOM's operating margin was only 19% last quarter; far from "high".  And this is at the peak oil prices ever. If we chose to tax exorbitant margins we should probably impose even higher levies on GOOG (30%), MSFT (31%), POT (44%), etc.  Even at the highest prices ever oil is by no means a massively profitable business.  They don't make a lot on each barrel, but make up for it in volume...and the world has asked them to provide a lot of volume.
  • Delta P / Delta T (or price increases that seem too deviate too far too quickly from "normal"), well then why don't we haul in ADM, MON, et al (the farmers) for "making food so expense at the expense of the poor".  If we are looking for "equitable" profits (ie, whatever Leahy wants them to be) that "appear" to be from "fundamentals" and not "speculation", then we need look no further than our own grain belt for extortionist, profiteering, no gooders: farmers! 

In closing, Pat commented:

"The issue is simple," said Leahy. "People we represent are hurting, the companies you represent are profiting."

Ah, yes, I love the "companies aren't people" argument. Please, Pat, tell me what is the difference between a constituency and a company?  Both are aggregated populations aiming to maximize their own utility. 

But you're right Mr. Leahy, we should: defend people but hate those that employ them; encourage risk-taking, but penalize when it pays off; decrie corporate mismanagement, but confiscate any profits accumulated through wise decision-making; and push consumers to consume less oil, but not allow the very mechanism that would do so to work--that should put us right on track!

A closing thought: with all the rhetoric about "getting off of oil" these price increases should be the hallelujah moment for congress.  People are beginning to drive less, purchase more efficient vehicles, and investing in alternative energy sources because it now makes economic sense to do so.  While it would be nice to live in a world where we could just tell everyone to "drive less" and they would, they don't.  High oil prices are facilitating the move to energy efficiency.  I thought that was the whole point.

UPDATE: In the latest example of congressional rocking-chair legislature (rocking chair=looks like you're doing something when you're not) the House passed a bill allowing government agencies to sue OPEC.

WASHINGTON (Reuters) - The House of Representatives overwhelmingly approved legislation on Tuesday allowing the Justice Department to sue OPEC members for limiting oil supplies and working together to set crude prices, but the White House threatened to veto the measure...

..."This bill guarantees that oil prices will reflect supply and demand economic rules, instead of wildly speculative and perhaps illegal activities," said Democratic Rep. Steve Kagen of Wisconsin, who sponsored the legislation.

Rep. Kagen, it would "guarantee supply and demand reflect economic rules" you clearly don't understand the difference between speculation, investment, and trans-national litigation.  First, prove that the price is not reflective of supply/deman.  Second, if we sue OPEC where does our oil come from (they're a cartel, remember)? Third, in what jurisdiction can you sue sovereign nations?  I've watched enough Law and Order to know that Briscoe and Green can't just go arresting people in Jersey...wish they could though.

Ma'am, Step Away From the BigMac

From Reuters:

"NEW YORK, April 16 (Reuters) - New York City can require fast-food restaurants to post signs telling customers how many calories are in their meals, a federal judge ruled on Wednesday.  U.S. District Judge Richard Howell found that "the required disclosure of calorie information is reasonably related to the government's interest in providing consumers with accurate nutritional information ..." in his ruling filed in the federal court in lower Manhattan. (Reporting by Leslie Gevirtz; Editing by Brian Moss)"

So lets get this straight:

A bacon-wrapped Filet, smothered in Bearnaise sauce, accompanied by a side of potatoes drizzled with a lush cream-based gravy, finished off with a luscious home-made ice cream fritter and chocolate mousse (a delicious, albeit arbitrary example) that I get at a "fancy" sit-down restaurant doesn't have to give any nutritional information, but fast food places do?  On what convoluted logic was this idea based?  People who are still (routinely) eating at fast food places, despite knowing damn well how unhealthy much of the food is, are too stupid/dense to realize it and need to be constantly reminded?  "Rich" people who can afford to go out to eat at sit-down restaurants though are somehow above this sort of cognitive dissonance, and are perfectly aware that the bacon-wrapped filet is a heart attack waiting to happen, yet consume anyway? 

I'm not suggesting - not by any stretch of the imagination - that we just throw ALL restaurants under these new regulations; I'm merely questioning the logic behind making ANY restaurants post the specific caloric information of their products, the idea of which (beyond the already generous information already out there) is just ridiculous.  Its like putting warnings on vodka bottles that read "WARNING: CONSUMPTION OF THIS PRODUCT WILL CAUSE EXTREME DRUNKEDNESS", or warnings on cigarettes that say "SUCKING TAILPIPE WILL CAUSE LUNG DISEASE". 

Lets get real: its 2000-freaking-8.  If you're over the age of 7 and don't know that gorging on Big Macs will eventually lead to heart attacks, pounding Jack all day will get you cirrhosis, and sucking down a pack of Marlboros will cause emphysema, than you sir or Madame, have gone out of your way to deserve, nay, EARN, the consequences of your astounding ignorance.  Period.  End of story. 

Of course, this is all really about a little thing called personal responsibility; about accepting the consequences of one's actions. Unfortunately this is the sorry state of things in this country (and the World in general) where these ideas are so foreign to us they might as well be Martian.

The hypocrisy of the whole game though is that we whine about government intervention into all of our affairs, but at the same time cry for help whenever something happens for which we don't want to accept responsibility.  Legislators, eager to stay in office (read: power) are all-too-happy to appease our complaints, further strengthening the regulatory grip on our ability to conduct our lives as we see fit.  On the grand scale, its a massive, dysfunctional game of shifting/assigning blame and actors avoiding responsibility for their decisions, a game which in the ultimate analysis, cannot possibly end well for any parties involved. 

That is, of course, unless we step up to the plate and start accepting responsibility for our actions, both the good, and slightly less-than.

Disclosure: Anal_yst may enjoy some or all of the products mentioned in this post, either in moderation or extreme excess.  Consult your financial advisor.

1-2Knockout Derivative & Structured Products Desk: Meat Belly Futures

Today, CNN/Turner creator Ted Turner declared that global warming will "cause the temperatures to rise, killing all the crops, and creating cannibals" or something to that effect.  With such bold predictions, 1-2Knockout Finance has created the latest in our series of derivative contracts: man bellies.  Similar to pork bellies ("which are used to make bacon, which you might find on a bacon, lettuce and tomato sandwich"), man bellies are a claim to the right to own a predetermined contract weight (200lbs) in human flesh at a settlement date.  We believe the market opportunities are numerous, and the government, having shown its commitment to production by fiat of ethanol will surely be subsidizing new factories soon. 

Just think of the underutilized, cheap input costs!  These are going straight to the moon!  Buy now before these really catch on.

Contracts will begin trading at CBOT open on April 9th at a to be determined price of not less than $25USD and not more than $28USD.  For ETF inquiries, please contact your local sales adviser, or the site administrators (look right).   

Disclosure: Having just purchased a scale it has become apparent that 1-2 holds a very long position in prime, USDA Choice man bellies. 

Media Myths, Economics, and Politics

By 1-2

As someone who grew up in an intimate relationship with the media--both familial and professional--I must admit they (the media) are not evil, deceptive, barons sitting around plotting the fall of the Republican party; ok some are, but only in as much as their counters on the left.  They are however liberal in nature, and bias is difficult to remove from ones psyche. 

Behavioral finance tells us that biases (systematic ways we absorb, retain, recall, and use information) affect nearly all decisions individuals make.  We have these biases to simplify the world we live in to manageable chunks of data in a sea of information. I will be posting on specific psychological biases on this blog in the future, but you can get a brief introduction here, and an in depth portal here.  However, I digress.

The reason I mention systemic biases in information coding is to explain what I believe the liberal media are.  As a general rule, we have a strong aversion to cognitive dissonance. We incorporate and remember data and ideas that are similar to what we believe, and disregard information that is contra to our pre-existing concepts of the world.  It is not intentional.  It is simply a way we keep from having to deal with internal conflict, which would lead to angst, discomfort (unless you're goth), and an inability to make decisions easily.   Media reporters are generally liberal in nature going into their profession, and they stay that way by subconsciously remembering only information that fits your liberal dogma.  It's not evil--it's evolution. 

All of this is a really long winded way of segueing into a recent post by John Lott, which is certainly worth a read.  The opening says it all:

During the 2000 election, with Bill Clinton as president, the economy was viewed through rose-colored glasses. According to polls, voters didn’t realize that the country was in a recession. Although the economy started shrinking in July 2000, most Americans through the entire year thought that the economy was fine.

But over the last half-year, the media and politicians have said we were in a recession even while the economy was still growing.

John Lott pontificates more here. 

Sorry for wasting your time in the open.

Barneynomics Part Deux

Apparently Barney Frank didn't get my memo this morning about Barneynomics.   According to Reuters/DJ he has asked Chris Cox to expand the SEC probe into the final days of Bear Stearns to find those meddling short sellers who obviously manipulated the market, forced Bear to the edge of bankruptcy, and profitted unfairly. 

Barneynomics can be easily summed up as "Chairman Barney should control the economy".  If housing is expensive Barneynomics says that more subsidies are needed to help the poor; if prices decline then subsidies are necessary to keep home prices "stable". 

Pretty much Rep. Frank is doing nothing more than greenmailing companies with threats of litigation in an effort to divert finite resources wherever he wants themm regardless of actual economic impact.  This is typical rent-seeking behavior.   

Today's call to Cox for action highlights Mr. Frank's mastery of Barneynomics, and the blatant disregard for accepted economic principles.  First, he calls the "unusual" level of short sales "manipulation".  While he is not the first person to claim "the short sellers did it" (see Patrick Byrne) he is certainly the most prominant in recent memory.  This line of reasoning rears its ugly head almost any time a company goes under, or simply doesn't perform.  It is frought with holes though:

In any market transaction there is both a buyer and a seller.  In short sales there is also a lender, but that's not important now.  What is important is that there was someone willing to buy shares at the levels shorters were selling them at.  The short sellers can't just flood the market with shares to depress their value (there are a finite number) without somone willing to take the opposite side of the trade.  Furthermore, the short sellers have to cover at some point, which will reflate the share price back to 'normal' levels if (as is insinuated) it was mass collusion.  People have tried to corner markets before and it generally doesn't work out well.  You have to replace what you purchased/borrowed at some point thereby returning share prices to their original level.

In the release Rep Frank states there are "strong indications of similar market activity in the stocks of other major investment banks," and allegations by some of a coordinated effort by market participants who spread rumors that the banks were in trouble in an effort to drive down share prices.  So what happened at the other banks?  If all the banks were shorting all the other banks then why is LEH, C, or ML still around?  Also, I hate to break it to Barney, but the banks actually were/are in trouble--those weren't rumors.  BSC didn't go under because its share price was low, its share price was low because it wasn't going to be able to continue as an ongoing concern.  One could make the argument that their depressed equity base made it more difficultfor BSC to find or extend financing, but when they got to $2 it was too little too late.

Where was Barney when the banks share prices were running through the roof a year ago.  No one ever blames increasing share prices on rumors or manipulation.  I haven't  seen anyone go after investors who melted the market up through manipulation (keep in mind "manipulation" is nothing more than buying or selling shares).  It's only when the tide goes out that you see who's swimming without board shorts.

Lastly, the short sellers didn't: leverage BSC 30:1; sell trillions of dollars (notional) of derivatives; blow up two in-house hedge funds; hurt BSCs prime brokerage; or anything of the like.  They just profitted from a poorly managed company that was run into the ground.

OK...this was a last minute rant.  I apologize for any typos or poor grammar.  I'm out of here...enjoy the weekend.

Disclaimer: 1-2  was short BSC at $144 and covered at $145 after a BS analyst convinced him everything was great going into 2Q07 numbers.  F!

Mugabe? Mugabyou! (worst title ever)

By 1-2 & TheUnrepentantGunner

This Saturday Zimbabwe will be holding a much more exciting election than the ones we hold. How can it be more exciting than the Obama v. Hillary fight Sunday Sunday Sunday?  Well, we at 1-2 will be holding a contest of sorts to up the ante.

Zimbabwe, as you have no doubt read by now, has launched a revolutionary economic policy.  It is so revolutionary that no one has ever implemented it before; certainly not in Germany, Chile, or Venezuela (although Chavez’s “Nuevo Bolivar” concept is brilliant, to cure hyperinflation all you have to do is remove the ‘0’s from the end of your currency). As a quick refresher you should read Long or Short Capital’s fine analysis on President Mugabe’s economic stimulus plan here.

These are troubled times for the bold pioneer of such a policy that Helicopter Ben can hardly dream of–not only helicopters dropping money, but rickshaws and horses too. You see, Mugabe is in potential danger of not getting to see his vision through to completion. He is being challenged by two candidates who lack the foresight to just print infinite amounts of money. As a result, Mugabe may have to get creative, and possibly print an infinite amount of ballots with his name already marked on them.

Whoever can come closet to the percentage of votes Mugabe will receive will win a prize. You can go to the nearest tenth of a percent, and Bobby Barker rules always apply, you cant ever ever go over.  It should be noted that your prize will be valued at 50USD on April 1.  The prize will then be tied to Zimbabwe’s inflation rate, and distributed on June 1st. We’re actually serious about both the prize and inflation-link.

Put your guesses in the comment fields; we will contact the winner. Keep in mind that the results may take a few days, as most of Zimbabwe's computing power is being occupied trying to find deserving Westerners a chance to hold onto $50 million dollars, and store it for them in exchange for a small one time fee of $10,000.

For those who don't trust their gut about the Mugabe efficiency theory, you can read a contrarian guide to handicapping the elections here (The Economist).