Still Life: Piece of Beef - Claude Monet, 1864

So, equities have continued their slow but steady march upward since I last wrote about the economy. Inflation hasn’t really made an appearance as some forcasters would have had you believe. I found myself almost agreeing with David Brooks today:

Here’s one way to look at the politics of our era: We’ve moved from The Age of Leverage to The Great Unwinding.

For about a generation, the U.S. surfed on a growing wave of debt. The ratio of debt-to-personal-disposable income was 55 percent in 1960. Since then, it has more than doubled, reaching 133 percent in 2007. Total credit market debt — throwing in corporate, financial and other borrowing — has risen apace, surging from 143 percent of G.D.P. in 1951 to 350 percent of G.D.P. last year.

Charts that mark these trends are truly horrifying. There is a steady level of debt through most of the 20th century, until the mid-1980s. Then there is a steep accelerating rise to today’s epic levels.

Of course, I don’t agree with his assertion that the “crisis response more or less worked” – and even if it did, the crass immorality of the entire operation makes it impossible for me to say it was a good thing, even if TARP turned out to be less of a disaster than it could have been.

This article from New York Magazine about the “Downturnaround” is full of insights.

Like Gary Shilling, I think that (monetary) deflation is going to be the state of affairs over the coming years.

But Shilling has long understood deflation as the basic and mostly benign operating condition of the highly competitive, technologically innovative U.S. economy, alleviated only by “shooting wars,” like Vietnam, when government spending tips the economy into inflation. We shouldn’t be so frightened of deflation, he says; it merely requires us to recalibrate our ideas about certain things, like that real estate automatically appreciates in value. The recent market collapse has certainly helped many of us understand that.

Mish from Global Economic Analysis rebutted Peter Schiff’s inflationary thesis in detail in 2007:

Ultimately the Fed will be constrained by ZIRP (Zero Interest Rate Policy), just as Japan was. Given massive overcapacity in housing, commercial real estate, restaurants, nails salons, etc there is simply no reason for businesses to want to expand business. Nor is there any reason for banks to be willing to extend credit to all but the most credit worthy borrowers. Rising defaults may even impair capacity to the point many banks are unwilling or unable to lend at all. The only reason expansion got as carried away as it did is the psychology at the time suggested residential and commercial property would forever rise. That psychology changed. More on psychology in a bit as it is a key factor.

Liquidity from the Fed is in reality nothing more than a loan. Liquidity is not the same as free money and the Fed will not be giving away the latter. Furthermore, liquidity is a coward. In the face of rising defaults spreading to commercial real estate, home equity loans, and even credit cards, the Fed’s attempts to add liquidity will go straight down the drain.

…

Although Japan was rapidly printing money, a destruction of credit was happening at a far greater pace. There was an overall contraction of credit in Japan for close to 5 consecutive years. Property values plunged for 18 consecutive years. The stock market plunged from 40,000 to 7,000. Cash was hoarded and the velocity of money collapsed. Those are classic symptoms of deflation that a proper definition incorporating both money supply and credit would readily catch. Those looking at consumer prices or monetary injections by the bank of Japan were far off the mark.

I don’t think that the consumption-based economy is ever going to recover. I feel irritated whenever I hear or read commentary complaining about housing prices dropping or remaining stagnant. The entire crazed HELOC-and-credit-card financed boom is not coming back, and I suppose that’s bad news for the commercial banks that make their bones on mortgages. Despite this, I don’t believe that companies and people will just sit around twiddling their thumbs over the next few years.

It mostly comes down to how much the governmenet fucks things up. So far, the promised regulations of the securities industry have not gone through. I doubt they will, if only because the Democrats are going to need those campaign contributions going forward.

At some point, the Federal government is going to come to a California-style crossroads. Although ideas for new taxes have been floated, I doubt many of them will stick – especially the VAT proposal. Any new taxes that are imposed will just provide a massive boost to the Republicans, especially as jobs-creation programs prove to be hilarious failures over time.

Instead, federal programs and pay will be shaved like cheese on a grater. Either that, or the US goes to crazy town and defaults or hyper-inflates – but I really doubt either will happen. Nothing else makes sense, barring a shocking technological breakthrough followed by abnormally high growth.

William Bliss Baker - Hiding in the Haycocks, 1881

Peak oil has become a popular meme over the past several years, its popularity bolstered by websites like The Oil Drum, Energy Bulletin, Daily Reckoning and others. The mainstream media has also amplified the message of the oil scare, especially during the massive run-up in oil prices that ended with the financial crash last year. I myself believed that peak oil would lead to a collapse in living standards in civilized countries from 2005 until mid-2008, when I began to understand free market economics better.

The vast majority of global oil production is controlled by government-run corporations, like Saudi Aramco and PEMEX from Mexico. These organizations own approximately 80% of the world’s oil reserves, according to Stanford University’s Mark Thurber. Instead of plowing the entirety of their profits into the company, they bloat the government. This is largely why these companies have severe capital equipment maintenance problems. The profits aren’t going back into oil production, but into growing their parent states.

When capital equipment decays and lack of new exploration puts a damper on oil production – as it is currently worldwide, but particularly in Mexico and Russsia – these national companies begin contracting with outside help internationally. The process is already beginning in Mexico, probably because the production declines there have been particularly severe.

This could get screwed up if oil runs up all the way to $100 and beyond again, however, as governments will be able to put off capital improvements and exploration for longer.

These are political problems, not geological ones, as the peak oilers contend. There is so much more of the planet to be explored – and some of it kept restricted – that the geological issues cannot be accurately considered the major cause of declining oil production in certain countries.

This, of course, doesn’t stop the price of oil from trending upwards. The problems that the national oil companies face are likely to only get worse as time goes on, until they are forced to privatize components of their operations. Some countries are simply doomed to have declining production for the forseeable future because of geological conditions in their largest fields, such as Cantarell in Mexico or Ghawar in Saudi Arabia. Outside companies can help, but they can’t un-do depletion.

I don’t know what the hell is going to happen with oil prices. If equities continue their run-up, the money that has been going into commidities as a safe-haven might start flooding out of them. If not, then rising oil prices could squash stocks easily.

Egon Schiele - (Couldn't Find More Information About Painting)

Today, I felt preternaturally pissed off as I was working out at the gym watching CNBC cover the last hour of today’s market rally. I couldn’t figure out why I felt angry. It was interspersed with some happiness due to the knowledge that higher stock prices, at least in the short run. After some more thought on the way back from the gym, I started thinking about all of the economic news and analysis that I have gotten into the habit of ingesting lately and how it’s been making me feeling.

Doom-cheering is not terribly helpful to me. It does not add value to my day, but I feel a compulsion to obsess over it anyway. There is nothing that I can do to change the economy as a whole. I have no assets to protect aside from some clothes, a laptop and a Kindle. I’m thinking about a career that will involve finance, but the way that I consume information now will doubtlessly be different than the way that I do now.

I also feel uncertainty about the pronouncements of market gurus favored by libertarians – like Jim Rogers, Marc Faber, Peter Schiff, Gary North – and the writers at the Ludwig Von Mises Institute. I haven’t read much of the Austrian literature, but I have a sense that if its predictive powers were as powerful as its partisans make it out to be, it would be pulling in a lot more money than it is now, and its scholars would be poached quickly. I know that’s not an airtight argument against it – after all, conventional economics is largely gobbledygook, and it’s still taught world-wide.

I know that psychology is what drives both individuals and groups. Furthermore, I am not so willing to block out the unforeseeable effects that technological advancement might have. For example, the cost savings of cloud computing alone to businesses large and small could be massive.

As far as I can tell, the real crisis is centered on government finances. The “financial system” could have easily survived a few major firms being blown up. Markets work. I’m no longer so sure that the government is going to blow up. It has major fiscal problems, but perhaps with more pressure from major bond-holders, programs will be slashed and perhaps a recovery will take place. The alternatives are, as I mentioned in an old post, hyperinflation or default.

I know that the people running the government are, in some special cases, very smart, and they understand this. I doubt that they’ll let it happen

Then again, perhaps I will believe whatever Erin Burnett wants me to.

I was first introduced to Michael Lewis by an article of his in the now-defunct Portfolio entitled The End of Wall Street’s Boom. Despite being published last December, it’s still the second-most viewed article. Liar’s Poker is a memoir about investment banking in the late 1980s, an era of rapid financial innovation not too dissimilar to our own. Lewis chronicles the birth of the CMO (Collatoralized Mortgage Obligations) and touches on Michael Milken and the junk bond craze without diluting the narrative with incomprehensible jargon.

What stands out the most throughout the book is the dysfunctional work environment at Salomon Brothers, the firm where the young Lewis works. Traders and managers are continually heaping abuse on trainees and one another, making it a minor miracle that any money was made at all. You can thank the Fed and Congress for that. Salomon Brothers was also one of the first investment banks to go public, so its losses accrued to shareholders rather than partners. This naturally increased the boundaries for reckless behavior.

Lewis has a dry wit and an eye for colorful characters to highlight that keep the story engaging. While it’s not a technical manual for getting into banking (at least in the 80s) it’s at least a human, well-written story of how one inexperienced young person found himself responsible for tens of millions of dollars in institutional investor’s cash. 

I have no idea if Wall Street is still as brutal a place to work as it was back then. I sincerely doubt it, but I have little first hand experience to work on. Government subsidies of all kinds have an inevitable way of destroying discipline and introducing calculation errors.

Financial reporting is generally brain-scrambling because it focuses on tracking concepts - like corporations. Lewis enlivens his reporting by writing about actual human beings and what they do to change the world. Thanks to Lewis, I have a good idea of what went on at Salomon Brothers, who the most important characters were, and what the overall context of what was happening at similar firms around the world.

Anathem by Neal Stephenson is the most dense novel released to my knowledge. The characters frequently break into what is called Dialog on Arbre, the world in which the book is set. In those Dialogs, learned characters discuss complex issues of science, epistemology and so on. On Arbre, the world has been split into (essentially) two main factions: the intellectual, monk-like avout and the often boorish inhabitants of the so-called Saecular world. If you’re already feeling annoyed by the neologisms, there’s a glossary at the back that can ease your pain.

Stephenson is one of the most popular modern science fiction authors, and I’ve been an avid reader of his since I was a pre-teen. Some of his followers only enjoy the easy-to-digest cyberpunk epic Snow Crash, even though (or perhaps because) it is juvenile in retrospect. The novel takes some time to pick up, but once it does, it takes on some of the fast pace and swashbuckling adventure that made The Baroque Cycle, his earlier historical fiction trilogy, such a delight.

The avout are largely corralled atheistic, disciplinarian monastaries called maths, where they apply themselves expressly to the pursuit of “pure” knowledge. They are forbidden from applying much of it by ancienct treaties designed to ward off attacks from the outside. They are largely isolated, aside from a once-per-decade opening of the gates and intermingling with the general population.

I liked it, but felt irritated by some of the Dialog about quantum mechanics and how it applies to philosophy – it reminded me too much of some of my PoMo schooling. Anathem has its own complex intellectual history with many parallels to our own – it can be a fun activity to spot some of them. For example, our Plato is Protas on Arbre. My irritation was largely erased by the end of the book as some of the theories (referred to as “theorics” in the book) were applied to the plot.

For all of Anathem’s sophistication, the plot is ultimately simplistic. The relationships between the characters never become as interesting, engaging or enticing as that between Jack Shaftoe and Eliza in The Baroque Cycle. For the most part, the monk-like avout remain a little too serious throughout, although there are some funny bits sprinkled throughout the tome. The heavy gas of all the heavy concepts being bandied about chokes out some of the character development.

Despite these caveats, I enjoyed it, but feel uncertain about actually reccommending it to people who aren’t already familiar with Stephenson already.

I’d been looking forward to reading Blink for years but had always balked at the high cover price for such an old book. The Kindle price is more affordable. It was a pleasant read throughout, without the annoyance that I felt about the end of Outliers – which I didn’t take the time to write about. 

Blink is about rapid cognition, how it works, its benefits and its pratfalls. He uses multiple examples of how it can both be highly effective and how it can trip people up. For example, it’s common to make decisions about romantic partners based solely on appearance, but it’s not the best way to choose a mate. In one section of the book, Gladwell discusses a researcher who can read whether or not a married couple will stay together just based on a few seconds of video subjected to heavy analysis for emotional facial expressions and gestures.

In another chapter, Gladwell writes about how an poorly funded Chicago medical ward increased its effectiveness by encouraging doctors to take less data in their diagnoses.

Thin-slicing – making an observation based on very little information in a short period of time – isn’t just used for saving cardiac patients and identifying sculptures as forgeries. It can also amplify prejudice, as unconsciously-held biases (like the belief that African-Americans are less intelligent) to influence decision making. In the case of government agents licensed to kill, it can have deadly results.

Police and Military are well-aware of the psychological research contained in Blink. In order to make the decision to kill thin-sliced rather than thick-sliced, modern armed forces are trained to decide to pull the trigger on a reflex. How this is accomplished is explained in On Killing by David Grossman, a fascinating and chilling work by an US Army psychologist, David Grossman. Thin-slicing is why the American military has such high kill ratios – and such terrifically high PTSD rates.

Values, education, life experience and personal taste all affect what happens in the first two seconds of an encounter. Ideally, one wants to train the subconscious to be able to make exquisitely accurate observations, but it takes courage to trust them. When it comes to emotions and relationships, no special expertise is required – just an ability to be open to one’s own emotional responses. The initial emotional response to an encounter with someone tells an essential truth about the relationship.

At the start of this year, I resolved to write about every book that I read. Partly, I motivated by a desire to stimulate more discussion about books among my friends, selfishly looking for more reading material. For the rest, I wanted to motivate myself to read more often and to retain more. I’ve been blocked from reading and writing as much as I might have wanted to by lack of money, lack of access to a decent library and miscellaneous incapacitation.

I have some of those licked, and the library problem should be fixed by autumn. 

I don’t reference any book reviews for this reason – that and to avoid mental pollution, ensuring that my opinions are my own. It also makes it more challenging. Particularly in the case of older books, it ensures that I can generate a fresh perspective.

I usually mark up the books that I read, but I fell out of the habit recently. I underline passages that picque my interest and then flip to the cover and write a word or phrase that conveys what is worth flipping back to. The system works for me – and I annotate similarly with my new Kindle.

I’ve read a few of Sedaris’ essay collections before, so Engulfed in Flames wasn’t entirely fresh. His schtick is to write humorous essays about his family, a clan from Raleigh, North Carolina, and his boyfriend.

I laughed frequently, but not too hard. Sedaris elicits New Yorker-style laughs, not belly guffaws. The remarkable thing about some of his essays about his childhood is just how much he remembers – in large part aided by diaries that he kept regularly throughout his life. Everything is an on-ramp to some  ironic quip with Sedaris, but so long as it works, why not? His eye for detail is among the best.

I’d feel as if I should write more about this book, but there just wasn’t much in this book for my brain to chew on. Intellectually, this went down like a smoothie.

I picked up this book last month during a rain storm from the Barnes and Noble accross the street from one of the apartments I lived in during High School. I’d been looking around for it for a while, and the fact that they had it in stock was a happy coincidence. I’ve liked just about everything that I’ve picked up from Branden, and seeing how love is just about my favorite topic, I figured that nothing could go wrong.

I felt shocked to find it a  slow read relative to his self-esteem series and some of his others. For those looking for actionable advice on relationships, Stefan Molyneux’s Real Time Relationships remains the best volume on the topic.

Unlike most of his other books, there are no actionable exercises to perform either for single people or couples. This doesn’t make it a useless book by any means, but it did disappoint me. The most attractive aspect of the work is its dogged insistance on defining romance as a heroic adventure requiring extreme courage from both parties. This begs the question of Branden of where that courage is supposed to come from.

Branden doesn’t get too into it, but in most cases, it can only be found after each individual at least achieving a partial resolution of primary relationships. I know that he knows this – self-esteem cannot just be bootstrapped into existance, but it can be built through learning and action.

Dear Readers,

I’m going to shift to writing one post a week.

I’m not going to write about my personal life anymore. Sharing that much about myself felt like the right thing to do at the time, but now I find it far too stressful. I enjoyed sharing the details of my life with my friends and the occasional wanderer onto my small corner of the web. At the same time, I know that my candor and tone alienated many readers that I might have otherwise reached. 

Right now, I want my privacy back. I’m not going to delete or move away any of my past posts because Google archives everything. 

I also know that some of the ideas and topics that I write about are rather anxiety-provoking for the general public. I’m going to write about business, economics, relationships and politics with a humorous slant.

I’m not sure when I’m going to start, but it will be soon.

Kindly,

JC Hewitt