Commentary for the Week of March 8

Index futures were wafting higher Tuesday night, presumably made buoyant by the absence of volume and an apparent dearth of sellers. For DaBoyz who run this nightly carny game, such rallies present an opportunity to induce a short-covering panic -- just the thing to distribute shares to widows and pensioners who still don’t suspect stocks may have entered a bear market. At the moment, however, the missing ingredient to produce the wished-for buying panic is some mote of news that might support Wall Street’s cherished mirage of a world in which troubles melt like lemon drops. Not in Europe, though, and not tonight. Usually, when we see the Mini-S&Ps up more than 10 points late at night, as is currently the case, it means that delusions about Europe getting its financial act together are waxing rather than waning. This evening, however, we are seeing a bizarre inversion of the usual dynamic:  Stocks are rising in Asia not on speculation that Europe has resolved some aspect of its dilemma, but because it can’t, and won’t. Specifically, it is Spain that is getting pummeled today, shunned by the credit markets and worried that it won’t be able to meet payroll if it doesn’t receive a fresh infusion of credit, pronto. Years of Claptrap In a financial world not run by crooks, sociopaths and imbeciles, this would be taken for bad news. But the markets are in fact controlled by such types and worse, and so we see shares rallying tonight on hopes that Spain’s increasingly dire plight will call forth yet new and vast sums of stimulus money – and not just for Spain, but for all of Europe. It is an affront to civilization itself that this kind of thinking should rule global markets and therefore, in some fashion, our daily

Although we have come to expect every program created, touched or tweaked by the fine hand of government to eventually bog down in  scandal, waste and bureaucratic inertia, the Obama administration has outdone itself with the student loan program.  Recently it came to light that this trillion-dollar boondoggle is producing more and more borrowers who fail to graduate.  Not only are they deeply in hock when they leave, they also lack the college degree that might enable them to land the jobs needed to pay off their loans. Fully 30% are dropping out these days, compared to less than 25% a decade ago, according to think tank Education Sector. Even worse news for taxpayers is that dropouts are far more likely to default on their loans, falling behind at four times the rate of graduates. Over the years, the Federal Government has become increasingly immersed in the student loan program, slowly pushing private lenders out of the picture. Loan rates are now set by politicians who in an election year have been tripping over themselves in their eagerness to pander to students and their financially strapped parents. Still worse is that Obama has promised to loosen the terms of repayment to the vanishing point, and to forgive debt so generously as to all but encourage borrowers to skip out on their loans.  There is also an election-year-stimulus factor at work, since few conduits for pushing money into the economy are as efficient as those that funnel cash to the “customers” of colleges and universities.  The schools have responded as we might have expected, adding country-club amenities for students while ignoring dramatic shifts in the job market that have made the humanities degrees they churn out all but worthless. The schools have also worked diligently to weaken for-profit competitors such as

[Rick’s Picks once again goes off the beaten path with a guest commentary on patents from forum regular Ben Rositas. For reasons that he makes clear, patents and free markets go hand in hand. Moreover, to the extent tariffs support this, they are justified. RA] Today I hope to illustrate -- by explaining what they are not-- why patents allow free markets to exist at all. Consequently, the link between patent and tariff will be revealed, in turn revealing the inextricable link among patent, tariff, and free market. I will begin with two interpretations of the U.S. Constitution, Article I , section 8, cls 8. Brackets denote separations that aren't readily apparent. "To promote the progress of science and useful arts, by securing [for limited times] to authors and inventors the exclusive right to their respective writings and discoveries." Here, exclusive right belongs to someone, thus granting monopoly for the patent duration. And since it doesn't say "for a limited time," it is infinitely renewable. Conflicting with founding and framing principles, that interpretation is surely invalid. But if the brackets are expanded to include "to authors and inventors" the innovators are instead given limited, renewable durations, while exclusive right is secured to the patented thing. In the broader context of Article I, section eight -- Congressional powers in foreign/domestic matters -- the exclusive right is in the domestic market (otherwise it contradicts founding principles). Taken this way, competitive economic freedom is neither hindered nor obliterated. Free People Want Patents Exclusive right by patent means that foreign copies are infringement via smuggling. Ideas can be traded, explored, modified, reproduced, and patented, even if these are already done in multiple countries. And since domestic copies aren't infringement, nor domestic competitors barred from discovering or importing new ideas, improvement is actually encouraged. Copies

[We recently featured a guest commentary from Gary Leibowitz, a frequent contributor to the Rick’s Picks forum. In the essay below, he explains why, despite Europe’s financial troubles and signs of a global economic slowdown, a perfect storm of positive factors is likely to produce a final hurrah for stocks. Don’t hold onto them for too long, though, says Gary, because 2013 is going to bring disaster for most investors. RA] Whatever happened to all that money Helicopter Ben printed? Surprisingly not very much. Between late 2008 and the end of 2011, the Fed injected almost $2 trillion in the financial system. Most of it, however, is parked in banks as reserves. At the same time, the Fed announced it would pay interest on those reserves. They paid $2 billion in 2009 alone. Since the Fed created an incentive for banks to hold that cash, 88 percent of it was still being held as of December 31.  There goes the theory that we could inflate our way out of this mess!  In fact, the Fed has done exactly the opposite, creating a system that pumps banks full of interest-free money while keeping that money from circulating. How ingenious! M2 velocity, which measures the frequency with which a unit of money is used, then re-used, to buy goods and services, has been contracting since 1999.  In fact, it is near an all-time low. At least, it was up until a few months ago.  The recent announcement of a huge borrowing frenzy last month could  be an anomaly, or a breakout of all that zero-velocity cash.  But up until recently, the money has not been lent, or spent. It seems that high commodity prices may have been caused by the huge monetary spike.  Not that the money actually fed into the system

[We go off the beaten track this morning with some reassuring scientific news about the aging brain. Merely staying mentally active, as those who post regularly in the Rick’s Picks forum are wont to do, is enough to keep the circuits firing and the brain supple enough, even, to learn new tricks.  This guest commentary was written by my Chocorua, New Hampshire host Mary Peaco Todd.  She is a cartoonist whose work can be found here. RA] I remember when my fifty-some-year-old husband wandered into the kitchen after an evening of cramming.  He was the oldest student in his law school program and, although he had graduated cum laude, the dreaded Massachusetts Bar Exam loomed. “I have a problem,” he said.  “My brain is full.” “Full?” “Full. And I still have Contracts and Constitutional Law to review.” “Well,” I replied, “what are you going to do?” He shrugged.  “I have no choice.  Something’s gotta go.  I’m going to have to delete childhood.” Judith McDaniel, a colleague in the Union Institute and University program where I teach, recently posted a blog about her own experience entering law school at an age when some folks are not thinking much beyond the next early bird special.  She accurately accessed her strengths – fast reader, good at retaining information, able to identify and communicate the main points in a text – and her weaknesses – memorizing and short term memory – but beneath all of her deliberations nagged one fundamental question: Was her sixty-year-old brain simply too old for school? Happily, for Judith and for the rest of us, the answer is no.  The latest research indicates that aging brains not only continue to develop but even have some advantages over brains that are younger. In a recent article in the New York Times,

With the Dow down almost 200 points yesterday, we were kicking ourselves for having scratched a bearish “strangle” position in the QQQs the day before. We’d been long the June 65 calls and June 62 puts in a slightly bearish ratio, having paid a relatively whopping $444 for this high-leverage bet on volatility. We say “a whopping $444” because it is only on very occasions that Rick’s Picks has recommended taking positions with puts and/or calls that risked more than theoretical nickels and dimes. Usually, we try to leg into vertical spreads or butterflies so that risk has been reduced in theory to zero (or less, if possible, since one can sometimes leg into vertical bull or bear spreads so that they are carried, effectively, for a net credit). Just this once however, we’d justified entering the trade on the prospect of an avalanche in stocks to kick off what is looking increasingly like a nascent bear market. But straddle bets are expensive, akin to betting on longshots at the race track. And with June expiration stealing up on option-premium buyers  -- essentially, retail suckers -- there was risk that the remaining time premium would implode if the broad averages noodled around for more than another day or two.  Friday would come, and it would dawn on the rubes that expiration lay just three weeks down the road – on the 15th of the month, the earliest expiration date possible, since June 1 falls on a Friday. We Remain Skeptical And so, bearish as we were – still are – we decided to cut and run.  The decision looked like perfectly bad timing yesterday around mid-morning, when stocks were getting schmeissed. Fortunately, however, the decision to exit the strangle with neither a gain nor a loss proved to have been

Observing Facebook’s price action on its IPO day earlier this week, one might have thought that fear, greed and stupidity had taken the day off.  How could the over-hyped, socko-boffo stock of the year – of the decade – have failed to double within minutes of the opening bell?  In fact, pumped to a $38 initial-offering price, FB shares achieved only a pathetic $45 on the opening bar before detumescing back to $38 by day’s end.  Even more dispiriting to those on the retail end of Thursday’s relatively unfrenzied buying was that, on day two, the stock collapsed to $33 in the early minutes of the session, there to languish for six grueling, armpit-staining hours.  Retail suckers…er, buyers were bound to have been disappointed, and some, more than a little churlish about it, labeled the IPO a flop. Had the guys on Sand Hill road and their sleazy confederates on the Wall Street Midway simply overpriced the stock, as some suggested? Or was GM perhaps to blame for pulling its advertising from Facebook days before the Big Event because of poor results?  Some observers even speculated that investors had finally wised up to the fact that companies with relatively modest revenues deserve relatively modest earnings multiples. That last notion, that investors have finally wised up, is so absolutely outlandish that we were impelled to seek a better explanation. Since when has a price/earnings multiple of 108 ever deterred buyers salivating with greed from the certitude that a greater fool would take them out of the stock at even richer prices? Why No Moon Shot? Our take is that speculators failed to achieve the expected moon shot, not because they were at long last thinking rationally about the IPO market in general, and Facebook in particular, but because they were weighed

I’m in Gotham (photo below) for the annual spring dinner of the CMRE, the Committee for Monetary Research and Education.  The members come mostly from the financial community, although they are hardly what one would call Wall Street types.  More like libertarian firebrands, deeply committed to sound money, truth and accuracy in journalism, free enterprise and muscular capitalism.  Herewith, as promised, some  highlights from the CMRE's annual spring dinner, held recently at the Union League Club: Edwin Vieira Jr.:  Google this guy if you don’t know who he is.  A renowned Constitutional lawyer with a gift for oratory, he brings crowds to their feet. Economically and politically speaking, says Vieira, the stage has been set for a “catastrophic” event. The Fed, meanwhile, has usurped a degree of power that is unknown to America’s system of laws. But take heart, all ye who think a gold standard has only a remote chance of being re-instituted. In fact, says Vieira, under the provisions of Article 1, Section 10 of the Constitution, a growing number of U.S. states are opening the door to bullion as payment for private transactions.  On the (very) scary side, Vieira averred that an American firm has been awarded a contract by Homeland Security to provide 750 million rounds of .40 caliber hollow-point ammunition to the U.S. Army. This type of bullet is designed for just one purpose, warns Vieira: killing civilians. Paul Brodksy: a money manager with QB Asset Management, he says a U.S. hyperinflation would require only an edict from the Fed stating that, effective immediately, the new price of an ounce of gold will be $10,000. Devaluation is the only way out for an America drowning in debt, Brodsky asserts.  And don’t think it would hurt the banks; they would love it, he says, for they

[In the Rick’s Picks forum, where he is a regular contributor, Mark Uzick is a stickler for getting definitions right, especially when it is libertarian ideas that are under discussion. He describes himself as someone who hates to write but loves to argue. In the guest essay below, he overcomes his distaste for the former to mount a spirited defense of economic freedom, which unfortunately has never been more desperately in need of friends. RA] Of all the depredations of economic interventionism, one of the most disturbing is protectionism, which is nothing less than a declaration of war on life and liberty. When trading partners are treated as adversaries or exploiters, the next steps are inevitably envy, xenophobia, threats and violent conflict. When someone says, “There’s not enough wealth to go around,”what he really means is, “There’s not enough wealth to be looted.” That's especially the case when wealth creators are treated as marginally tolerable misfits and criminals; wealth doesn't "go around" - it's created and it belongs to those who create it to be traded for other forms of wealth from other creators. Some people confuse wealth with resources: Resources are only of value to those who put them to creative/productive use. Our society has little use for creative/productive people or enterprises, viewing them as exploiters/parasites of the poor and ruling classes; whenever possible, we make sure that resources are put off-limits to these "evildoers" - these "exploiters of the environment." In their Malthusian wisdom they believe that we were robbed of our wealth and resources by nations emerging from tyranny and moving toward market based reform - that their liberty equals our enslavement and that their creativity/productivity equals our destitution. But this is a perverse perspective because: If we all are free, then there is not only competition