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Is the Human Capital Bubble a failure of the free market or a failure of government mismanagement? 

In his article on Yahoo Finance, Charles Wheelan makes the claim that the market sent out faulty signals.

While I agree with the premise of the article since I share Wheelan’s sense of disappointment that some of the brightest minds in the world clicking green and red buttons in front of monitors rather than building alternative energies and infrastructures, I strongly disagree with the notion that this phenomenon is solely the result of free-market forces.

The human capital bubble is not a reaction to free market forces, but rather the reaction to government influence on market forces.  Can anyone honestly claim we have a free market when:

The government controls the money supply by buying and selling securities in the open market?

Legal tender laws prohibit competing currencies?

The former CEO of an investment bank becomes the watchdog of the very organization he used to run?

A government literally creates money out of thin air to attempt to CONTROL the expansion of the economy?

Supposed regulators are asleep at the wheel… Harry Markopoplous tipped off the United States Securities and Exchange Commission repeatedly both verbally and in writing starting in 1999, when he argued that it was not legally possible for Madoff to deliver the returns he’d claimed to deliver.  The SEC took no action.

The government sets short term interest rates via committee?

The government jawbones to strengthen or devalue its currency at the whim of whoever is in charge?

Banks leveraged 30:1 borrow from the government at below market interest rates?

A POPULIST PRESIDENT ALLOWS TEN DIFFERENT CORPORATE WELFARE PROGRAMS DESIGNED TO BAILOUT THE FINANCIAL INDUSTRY?

The message Mr. Wheelan neglects to mention is that an economic system which is constantly manipulated cannot possibly send out accurate signals.  If we want to avoid bubbles and misallocation of resources, we need a truly free market.  This means a private money system, a private banking system, competing currencies and a government that cannot obfuscate economic reality with accounting tricks.

This bubble was a perfectly natural outcome from the market responding to supply and demand.  When there is massive demand (for housing, caused by low interest rates), you can be sure that profiteers/businessmen/entrepreneurs will do everything they can to satisfy that demand by providing plenty of supply.

Markets are unavoidable since humans are always seeking to maximize their happiness and maximize their resources; it is for this reason that markets exists in prisons, elementary school cafeterias and even amongst people that don’t speak the same languages.

The genius of the free market is that it converts greed into consumer-satisfying productivity – Gary North

Takeaway:  Those of us that believe in individualism, freedom, liberty and no corporate welfare need to enunciate that the human capital bubble is not the result of free market forces, but the market reacting perfectly to politicians/economists meddling unnecessarily with interest rates.

Let us hope that as our economy contracts, the power government exerts on our economy will contract as well.

The market rallied in the face of some awful news today and my level of discomfort has never been higher.

A plethora of disturbing news:

In a nauseating display of government worship and corporate welfare, CNBC anchors act positively indignant that Bernanke could be fired over his handling of the Merrill Lynch/Bank of America (cough) merger.  Fast forward to 3:20 to hear the insanity.  Have they forgotten Bernanke’s record?

More auto fallout – Lear will soon file for bankruptcy protection.

California, eigth largest economy in the world, days away from bankruptcy is downgraded by Fitch, I have CNBC on all day at work and this was not mentioned even once.  I guess we are supposed to believe it wasn’t as important as the manipulated 7-year note auction (see below).

From Karl Denninger:  (paraphrased)  The sudden increase in demand by foreign buyers for Treasurys, hailed as proof that the world’s central banks are still willing to help absorb the avalanche of supply, mightn’t be all that it seems.  Iin a little-noticed switch on June 1, the Treasury changed the way it accounts for indirect bids, putting more buyers under that umbrella and boosting the portion of recent Treasury sales that the market perceived were being bought by foreigners…..  The change involves buyers who place orders through primary dealers. Those had been counted as direct buyers, but as of June 1 they were classified as indirect buyers, making that group larger than before.  Because investors view that group as being dominated by foreign buyers, they assumed foreign demand was higher.

My eyes and ears – The amount of people reliant on government aid is staggering.  I am all for helping the poor and underprivileged, but is free breakfast and lunch year round (courtesy of the Federal Gov’t, last paragraph) lifting people out of poverty or creating a serious dependency?

Valuations are through the roof with a puffy P/E ratio of 60, yet no one seems to care.

This sense of complacency, level of deceit and crumbling fundamentals are setting the stage for another crash.  I hope and pray that this dislocation in the market unwinds in an orderly fashion, rather than a painful drop which would lead to mass irrationality.

The only reason I am hopeful that Barack Obama is President is because he seems to be the only human on Earth eloquent enough and seemingly genuine enough to talk people through a crisis and deliver the truth to people, even if they don’t want to hear it.

So far, he’s shown no interest in changing things up from Bush, but maybe a crash will force his hand in the right direction.

As we approach the end of June, take some time aside and see how the year has gone thus far.

This time to reflect is important since if we are working hard,  but not smart, all our effort is for naught.

There is nothing so useless as doing efficiently that which should not be done at all. – Peter Drucker

Likewise, it is important to take a step back and think about our everyday habits and behaviors and scrutinize whether or not those daily actions are bringing us closer to or farther from where we would like to be.

If we are dissatisfied with our direction in life, we must CHANGE something to achieve different results.

If you always do what you’ve always done, you’ll always get what you’ve always gotten.

Growth only comes from exiting our comfort zone.  As men, we should always seek to improve ourselves:  on the job, at home, wherever you have a prescence.

Coasting, resting on your laurels, counting your chickens are all forms of cancer which will kill even the most talented among us.

Complacency Kills

With that, I am displaying a very simple goal exercise which takes a few minutes, which can shed light on your progress.

Simply list in plain English that which IS working and that which IS NOT working.

Things that have been working

  • My relationship is healthy; I proposed to my girlfriend, now my fiancee.
  • I created and expanded my website, inthon.com
  • I am still exercising regularly and I have increased my strength dramatically
  • I am continuing to feed my brain healthy, positive, life-affirming messages and doing my best to avoid negative thinking.

Things that have not been working

  • I still read too much, write too little.
  • I do not take as much time as I should to be reflective and journal.
  • There is room for improvement at work.
  • My sleep patterns have been off since December due to late nights and napping.

This is a very rudimentary exercise, but it forces you to be honest and assess what is working and what isn’t.

Takeaway: Growth does not happen until we exit our comfort zone.  This simple exercise can give you a good idea of where you are progressing and where you are stagnating.  Please give it a try.

Executives at U.S. companies are taking advantage of the biggest stock-market rally in 71 years to sell their shares at the fastest pace since credit markets started to seize up two years ago. (emphasis mine)

The data about employment, overcapacity, too many homes on the market, too much corporate welfare and too many jobs in the FIRE economy without producing anything of value point to deep, structural problems that cannot be solved or eliminated without pain.

This pain will come in the form of job losses and restructuring since it is only a matter of time before we cannot simply roll over our debt and expect perpetually rising asset prices.

It seems to me this March rally has been based on speculation of recovery rather than *tangible improvements* in the actual economy.  It looks like a lot of insiders feel the same way.

I called this site Inthon since it comes from the phrase Intellectual Honesty.  There are plenty of reasons to believe that this market has legs and there are plenty of reason to believe that this market is toast.  I’ve found it helpful to read the strongest, most opinionated sides of an argument before making up my mind.

Politics and increasingly, economics, are a confidence game.  The pieces of green paper in your wallet are only worth something since the person who accepts those pieces of paper has confidence in the fact that they have value.  When a system relies on confidence, it is imperative to those in power that the facade of confidence be maintained.

As Buddha has said

Believe nothing, no matter where you read it, or who said it, no matter if I have said it, unless it agrees with your own reason and your own common sense.

Thanks for reading.

A special guest post from my friend, Matt M.

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My morning bus rides invariably begin with a visit to the Bloomberg app on my iPhone. I find their journalism to be second to none in the financial space, thanks to Bloomberg’s worldwide focus and very informed opinion writers. However, I was taken aback when I came across the following headline and attached article last Thursday:  Citigroup Rescue Earns Three Times as Much as S&P 500

It is important to note the new title was modified from the original titleCiti pays taxpayers 3 times as much as S&P“.

Regardless of the title, this article contains blatant propaganda that is designed to mislead and deceive the Average Joe.  The general tone of the article suggests that the entire Citigroup “situation” is now a complete piece of historical fact to be analyzed as such.

Logic leads the reader to conclude that we (the taxpayers) have locked in some sort of gain, thus proving the Citi bailout was a good idea since we’ve collected a couple billion in dividends.

Nothing could be further from the truth, and there are many examples of how this logic is an inappropriate way to analyze any investment.

First, the author of this article is only talking about one government department, the Treasury.  Let’s review what happened here:  The Fed has purchased some $2-5 trillion in assets (depending on who you ask, and don’t you dare ask the Fed what they’ve purchased) from U.S. banks. This is the most important aspect of the multi-faceted bank bailout, for without these purchases, most major U.S. banks would be out of business.

What’s relevant here is that the Fed and the Treasury are completely separate government entities. The Fed is directly responsible for bidding up toxic assets and exposing taxpayers to massive, unknown, impossible to define amounts of credit risk. This socialization of losses is what saved Citi, but it didn’t cost the Treasury a dime.  To suggest that the taxpayers somehow made out like bandits is untrue, amateur reporting.

By stepping in and literally becoming THE market in many segments of the credit market, the Fed has so far done a fantastic job of propping up the assets on their balance sheet. That’s not to say they’re showing a gain, that’s not to say the Fed is showing a loss. Once again: no one knows.

What we do know is that the eventual value of most of these assets is going to be dependent on cash flows from mortgage payments, rather than current marks. Right now, these cash flows are a monumental risk, a subject which is completely ignored by this Bloomberg article.

Perhaps most important, the Fed is desperate to see these investments work out. Ultimately, this will corrupt what’s left to be corrupted in the political process. No wonder the Fed recently hired Linda Robertson, former lobbyist for Enron. They need to convince Congress to bailout everyone who can’t pay their mortgage.

Finally, this article represents a shift in attitudes towards government intervention since the March lows in the markets.  I have been complaining about this for months and it really bothers me.

When governments around the world intervened and markets still fell off a cliff, I felt like everyday people were finally thinking critically about the futility and backward logic of government.  When S&P went from 1575 to 900, people were really freaking out. When we went from 900 to 666, people got to talking about genuine reform. They expressed anger about how the government incentivizes bad behavior and excessive use of leverage.  Now that markets have bounced from 666 back to 900, people have turned back into mindless cheerleaders.

Talk of genuine reform has stalled as our problems have been bandaged by trillions of borrowed dollars.

The government has declared victory and the media keeps churning out propaganda, as evidenced by the article discussed above.

Aren’t we better than this?