Confusing Alarms of Struggle and Flight

In times when the bedrock principles of the nation are eroding and a darkling peril destroys the indeterminate future, some Americans find solace and threads of comprehension in poetry.

After the 9.11 attacks on the Twin Towers, W.H. Auden's poem "September 1, 1939 " was rediscovered. It reflects upon the slakeless insanity let slip upon the world. Good men had done nothing. The worst, given license in the shade cast by a tyrant, now may thieve with meretricious euphoria.

In 1939 the world was enveloped by insanity and the US on a deferment to be counted in days.

So it is at our gates again.

Here is the poem "Dover Beach" written by Matthew Arnold in 1867,  about one hundred fifty years ago.

The sea is calm tonight.
The tide is full, the moon lies fair
Upon the straits; on the French coast, the light
Gleams and is gone; the cliffs of England stand,
Glimmering and vast, out in the tranquil bay.
Come to the window, sweet is the night-air!
Only, from the long line of spray
Where the sea meets the moon-blanched land,

Listen! you hear the grating roar
Of pebbles which the waves draw back, and fling,
At their return, up the high strand,
Begin, and cease, and then again begin, 
With tremulous cadence slow, and bring 
The eternal note of sadness in.

Sophocles long ago
Heard it on the Aegean, and it brought
Into his mind the turbid ebb and flow
Of human misery; we
Find also in the sound a thought,
Hearing it by this distant northern sea.

The Sea of Faith
Was once, too, at the full, and round earth’s shore
Lay like the folds of a bright girdle furled.
But now I only hear
Its melancholy, long, withdrawing roar,
Retreating, to the breath
Of the night-wind, down the vast edges drear
And naked shingles of the world.

Ah, love, let us be true
To one another! for the world, which seems
To lie before us like a land of dreams,
So various, so beautiful, so new,
Hath really neither joy, nor love, nor light,
Nor certitude, nor peace, nor help for pain;
And we are here as on a darkling plain
Swept with confused alarms of struggle and flight,
Where ignorant armies clash by night.

Merry Christmas from a day not unlike December 25th, 1941. 

The Fuhrer Finds out that no "Beavis and Butthead do Christmas" is, uh, huh, huh is coming. Uh, huh, huh, he said...

Rituals are important in the Christmas season. TV cartoons,  North Pole narratives and for the socially challenged, watching the Beavis and Butt-Head do Christmas. Beavis and Butt-Head do Christmas features the idiot savants parodying two Christmas Classics, The Christmas Carol and It's a Wonderful Life.

Unknown to everyone except Hitler's inner circle, the Furher cherished his yuletide viewing of Beavis and Butt-Head Do Christmas. But there is just one problem...

https://www.youtube.com/watch?v=4fHN7CuY6_Q



The title of this Blog, “Desert of the Real Economics”, comes from the 1998 film “The Matrix”. The world in the Matrix is a Simulacrum, a computer–generated illusion. It only “looks” and “feels” like the late 20th century. Instead, human beings are enslaved in tanks of fluid, wired to the Matrix. Humans are the ultimate wetware, the Meatmen of the Matrix. Also, readers steeped in post-structuralist philosophy may recognize the title as a paraphrase of a quote in Jean Baudrilliard’s 1981 book, “Simulacra and Simulacrum.” 

CAN LIFE EXIST WITHOUT OPTIONS?

FINANCIAL GENIUS IS LEVERAGE IN A RISING MARKET

“FINANCIAL GENIUS IS LEVERAGE IN A RISING MARKET”, John Kenneth Galbraith

Who can argue with that statement? But how can we make leverage work?

There are many ways to leverage investments. Margin trading accounts, Rydex index leveraged funds, and options, for example. Some readers have seen examples of how options can leverage an investment and provide a greater return than ownership of the underlying stock. Let’s review how options can make leverage work:

We have $8,000 to invest. Our research shows that DUC stock is likely to rise in price after its good earnings report is released in next week. DUC is currently selling for $80 per share and we predict it will rise to $84 after the earnings report comes out. To profit from this increase in price, we have a couple of choices:

Buy 100 shares of DUC at $80 per share. If DUC rises to $84 next week, we will do well, making a $400 gain, or a 5% return in a week. ($84 per share-$80 per share = $4 per share * 100 shares = 400. 4/80 = 5% return.)

Buy 40 option call contracts at $200 per 100 share contract. These call options on DUC have a strike price[i] of $80. Our research into this DUC call option tells us that with each increase of $1.00 in the price of DUC stock, the call option will also rise $1.00, or $100 per 100 share contract.[ii]

So when DUC stock rises to $84 per share, each call option contract will rise from $200 per contract to $600 per contact. ($4 per share call * 100 share per contract = $400.) But it gets better, much better. Since we bought 40 contracts with our $8,000, our contracts are worth $16,000, for a return of 100%.

This is an extreme example, to be sure. Over the next few weeks the Author will examine uses of options and option strategies. They have many uses in a portfolio and we will explore some ways that you can make options work for you.

YOUR CHOICES ARE YOUR OWN IN THE DESERT OF THE REAL!

[i] There are three major features to an options contract. The underlying stock, the strike price and the expiration date. DUC is the underlying stock. The strike price is the exercise price of the option. In this case, the call gives us the right to buy $ DUC at $80, regardless of the market price. Finally, all option contracts are limited in time. They expire on a fixed date.
[ii] Because this call rises $1.00 per call as the underlying stock rises $1.00 per share, the stock is said to have a delta of 1.00. Delta is a measure of the rate of change. In the option universe, delta compares movement in an option to movement of the underlying stock. If the call moved $.75 for each $1.00 movement of the underlying DUC stock, then the delta would be .75. .75/1.00 = .75. If the call moved 2.00 for each $1.00 movement of the DUC stock, then the option would have a delta of 2.00.

OLDIES BUT GOODIES-THE DESERT OF THE REAL ECONOMICS STANDARDS

In mid-August of 2008, the World Economy almost melted down. The Great Recession could have been the Pretty Darn Bad Depression. Not as bad as 1929, but still bad.

Never Submit. Always Resist. Never Forget.

http://desertoftherealecononomicanalysis.blogspot.com/2010/10/repost-from-9202008-how-soon-we-forget.html

Sage Words from An Idiot Savant who has got the Idiot part down pretty well.

All week the Author has been asking the question: "What crashed the financial markets so fast. "Through which gate did the Vandals enter?”

The financial decline has been festering for a long time. Real estate reeling, mortgages in meltdown. Liquidity lacking. But what changed so quickly and so ominously?

Or what, as the New York Times article “Congressional Leaders Stunned by Warnings,“ spooked the Senators speechless?

From the NYT article of today (9.20.2008):

It was a room full of people who rarely hold their tongues. But as the Fed chairman, Ben S. Bernanke, laid out the potentially devastating ramifications of the financial crisis before congressional leaders on Thursday night, there was a stunned silence at first.

Mr. Bernanke and Treasury Secretary Henry M. Paulson Jr. had made an urgent and unusual evening visit to Capitol Hill, and they were gathered around a conference table in the offices of House Speaker Nancy Pelosi.

“When you listened to him describe it you gulped," said Senator Charles E. Schumer, Democrat of New York.

As Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Banking, Housing and Urban Affairs Committee, put it Friday morning on the ABC program “Good Morning America,” the congressional leaders were told “that we’re literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally.”

TO QUOTE FRED WILLIARD, “WHA’ HAPPENED?”

John Mauldin publishes several investment newsletters. In September 19th’s Newsletter entitled “Betting on Financial Armageddon”, Mauldin swings the spotlight onto the padlocked commercial paper market. (Commercial paper is a short-term unsecured promissory note that large institutions use to borrow and lend cash to other institutions.)

Want to see in graph form how bad it got and what spooked Paulson, Bernanke and company to act so quickly? Look at these graphs from my friends at Casey Research. 30day commercial paper went to 5% from 3% a week ago. The market was literally freezing. And the amount of paper issued is in free fall. Commercial paper is the life blood of the financial and business world. Without it commerce will soon grind to a halt.

Two charts posted above this article demonstrate the precipitous decline in the commercial paper market.

The Congressional leaders quoted in the New York Times above make similar reference to a strangling credit market:

Although Mr. Schumer, Mr. Dodd and other participants declined to repeat precisely what they were told by Mr. Bernanke and Mr. Paulson, they said the two men described the financial system as effectively bound in a knot that was being pulled tighter and tighter by the day.

“You have the credit lines in America, which are the lifeblood of the economy, frozen.” Mr. Schumer said. “That hasn’t happened before. It’s a brave new world. You are in uncharted territory, but the one thing you do know is you can’t leave them frozen or the economy will just head south at a rapid rate.”

GOLDEN PARACHUTING INTO THE ABYSS

Currently, and over the next few days, the Congress and the outgoing administration will be negotiating over the terms of a financial “rescue” plan that has an undetermined chance of indeterminate success over an undefined time frame.

As the damage appears and the plan develops, the Author will continue to post, analyze, and prognosticate.

WE HOPED THAT IT WOULD NOT HAVE COME TO THIS IN THE DESERT OF THE REAL!

THE AUTHOR THOUGHT OF THIS WHEN THROWING THE JACK O' LANTERNS AWAY

THAT ELDRICH DAY OF ECONOMIC MAYHEM THIS WAY COMES...NOT ELECTION DAY, HALLOWEEN!

Below is a reprint of a personal favorite of the Author's from October of 2007.

[AUTHOR'S NOTE: Where but in the Desert of the Real could the Dismal Science of Economics combine with the Hollowing Heart of Evil that Hosts that Most Horrific of Harvest Festivals?]

HALLOWEEN ECONOMICS 201

Halloween 2007 is a fading memory, unlike the candy left in dishes and the decorations that are still to be removed from offices and homes in all corners of the nation.

Halloween Economics 101 goes something like this. “Halloween Scares Up Business”. This story in the Lawrence Kansas World-Journal informs us that Halloween is a retail mainstay in the American Economy.

Candy and costume sales peak. Decorations of all sorts fly, crawl or lumber down retail aisles. And alcohol sales rise with the ubiquitous Halloween parties.

And except for some Christian fundamentalists, everybody loves Halloween. Everybody, it appears, but some economists. The truth is, Halloween challenges some economic truths right down to their skeletal essence.

Halloween, like its less macabre cousin, Christmas, is economically “inefficient”. And it reveals that the economic uber-man, the foot soldier and general of microeconomics, the flesh and bones that manipulate the invisible hand, the “Rational Economic Actor”, is as peckish as a poltergeist.

PUTRID PROSE AND CLICHÉ ALERT. IF YOU WEREN’T SCARED OFF ALREADY.

Kevin Hassett is an economist at the conservative American Enterprise Institute. Likely a fine fellow most of the time, while in his economist trance, Hassett is both Great Pumpkin smasher and the Grinch’s meaner brother.

Hassett’s howlings start like this:

Holidays are a time when Americans kick back and engage in activities that make no economic sense whatsoever. Of all the terrors lurking in the streets and alleys across the U.S. tomorrow night, the economics of Halloween may be the most horrific.

EVILLY INEFFICENT IS THE HALLOWEEN HOLIDAY.

Economists haven't adopted the vainglorious practice of physicists and applied numbers to their laws, but if they did, the first law of economics would be that lump-sum transfers are more economically efficient than in-kind transfers. If you are going to give a gift to somebody, you should just give them the money. They will be a better judge of the best way to spend it.

This is chapter and verse of microeconomic theory. Individual actors, in best possession of their perception of needs and wants, and being best able to value goods and services to maximize the utility of their choices, make the most rational and efficient economic decisions.

‘Twas ever thus.

NIGHT OF THE LIVING DEAD-WEIGHT LOSS.

Hassett continues:

This is no laughing matter. The scale of the problem is immense. The National Confectioners Association estimates that 2005 Halloween sales were $2.1 billion, easily making Halloween the biggest candy season. This year, sales will certainly be higher.

What percentage of those sales end up providing candy that individuals don't really like? If my own careful scientific study of Halloween bags is any guide, perhaps about 75 percent.

It's not the dead that concern me about Halloween. And it is not the impact of all that sugar on the weight of our kids. No, it's the dead-weight loss, or pointless lost utility of the entire enterprise. That likely has a dollar value that exceeds $1.5 billion annually. American citizens squander more than a billion and a half dollars a year on an economically inefficient holiday.

BRAIN DEAD YET?

Here’s the bat’s-eve view: Hassett, in the quote above, describes Halloween as an enterprise. In other words, think of Halloween as a gigantic wealth transfer mechanism. Preening and wretchedly wistful adults transfer many millions of dollars (in bite-sized increments) to marauding and mooching children.

But the kids would rather have money, computer gaming gift certificates, or text-messaging credits. As they say in the Mafia and on the middle-school playground, “cash makes no enemies.”

A PHANTASMIGORIC FIX OR A FUTILE FANTASY??

Hassett proposes an economic solution, a pumkintudious “patch”, if you will.

Many schools prohibit children from taking Halloween candy onto the premises. That is exactly the wrong policy. Schools should encourage all children to bring their entire haul to school, and allow them a lengthy period to trade candies among themselves. That way, the Take 5s and the 100 Grand bars will find their way to individuals who cherish them.

And if that doesn’t work, he raises the foreboding specter of the brutish hand of the ghouls of government.

A final measure would be to take on inefficient candy-giving at the source. As a conservative, I usually oppose heavy-handed regulation, but in this case, the stakes are too high. Perhaps confectioners should be required to only sell their Halloween candy in bags that mix many different types. That way, when families put the candy out for the trick-or-treaters, bowls will be filled with a wide variety of different types of candy, and each new child will be able to pick the confection that suits his or her fancy.

HMM. FEDERAL FIAT PROMOTING GREATER CHOICE AND MORE EFFICIENT ECONOMIC EXCHANGES? SOMEWHERE IN THERE COULD BE A HORRIBLY HEALTHY HEALTHCARE FINANCING SOLUTION.

WE APPEAR TO HAVE TOO MUCH TIME TODAY IN THE DESERT OF THE REAL! 

The title of this Blog, “Welcome to the Desert of the Real”, comes from the 1998 film “The Matrix”. The world in the Matrix is a Simulacrum, a computer–generated "illusion". It only “looks” and “feels” like the late 20th century. Instead, human beings are enslaved in tanks of fluid, wired to the Matrix. Humans are the ultimate wetware, the Meatmen of the Matrix. Also, readers steeped in post-structuralist philosophy may recognize the title as a paraphrase of a quote in Jean Baudrilliard’s 1981 book, “Simulacra and Simulacrum.”