Keep Inflation Unchained

Inflation

President Obama’s latest budget indexes cost-of-living-adjusted benefits like social security against chained-CPI, rather than the regular CPI that has been used case previously.

This is undoubtedly a cost-cutting measureaccording to the numbers used, the measure “will reduce deficits by at least $230 billion over the next 10 years”.

But is Obama using the right numbers? Chained CPI is by definition not an apples-to-apples index. It tries to correct for what is called substitution bias, the idea that if prices are rising in apples, the basket of goods used to calculate inflation should be adjusted to include more of a substitute rising less fast. A truer measure of inflation would count the increase in the price of apples based on how many apples people were eating prior to the price increase, not just assume away the increase based on the assumption that people will switch to oranges. I like oranges. But if the price of apples is soaring, inflation figures should reflect this.

So chained CPI is a fudge, and a slippery slope. Taken to its logical conclusion  if the price of steak is soaring, but the price of pink slime (or, to give it its euphemistic name “lean finely-textured beef”) remains cheap then consumers may be assumed to substitute pink slime for steaks. That isn’t measuring the cost of living. That’s just an austerity fantasy.

Trying to appease the Washington Post editorial board is no substitute for sound economic principles. When we measure inflation, we should use the best data available. As far as I can tell, that’s MIT Billion Prices Project which indexes by far the largest range of prices. More data means more accuracy.

According to their methodology, the CPI is very slightly underestimating the level of inflation, not overestimating it:

BPP

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The High Frequency Trading Debate

A Senate panel is looking into the phenomenon of High Frequency Trading.

Here’s the infamous and hypnotic graphic from Nanex showing just how the practice has grown, showing quote volume by the hour every day since 2007 on various exchanges:

It is a relief that the issue is finally being discussed in wider venues, because we are witnessing a stunning exodus from markets as markets mutate into what we see above, a rampaging tempestuous casino of robotic arbitrageurs operating in millisecond timescales.

The conundrum is simple: how can any retail investor trust markets where billions of dollars of securities are bought and sold faster than they can click my mouse and open my browser, or pick up the phone to call their broker?

And the first day of hearings brought some thoughtful testimony.

The Washington Post notes:

David Lauer, who left his job at a high-frequency trading firm in Chicago last year, told a Senate panel that the ultra-fast trades that now dominate the stock market have contributed to frequent market disruptions and alienated retail investors.

“U.S. equity markets are in dire straits,” Lauer said in his written testimony.

One man who I think should be testifying in front of Congress is Charles Hugh Smith, who has made some very interesting recommendations on this topic:

Here are some common-sense rules for such a “new market”:

1. Every offer and bid will be left up for 15 minutes and cannot be withdrawn until 15 minutes has passed.

2. Every security–stock or option–must be held for a minimum of one hour.

3. Every trade must be placed by a human being.

4. No equivalent of the ES/E-Mini contract–the futures contract for the S&P 500 — will be allowed. The E-Mini contract is the favorite tool of the Federal Reserve’s proxies, the Plunge Protection Team and other offically sanctioned manipulators, as a relatively modest sum of money can buy a boatload of contracts that ramp up the market.

5. All bids, offers and trades will be transparently displayed in a form and media freely available to all traders with a standard PC and Internet connection.

6. Any violation of #3 will cause the trader and the firm he/she works for to be banned from trading on the exchange for life–one strike, you’re out.

However, I doubt that any of Smith’s suggestions will even be considered by Congress (let alone by the marketplace which seems likely to continue to gamble rampantly so long as they have a bailout line). Why? Money. Jack Reed, the Democratic Senator chairing the hearings, is funded almost solely by big banks and investment firms:

It seems more than probable that once again Congress will come down on the side of big finance, and leave retail investors out in the cold. Jack Reed opened a recent exchange on Bloomberg with these words:

Well I believe high frequency trading has provided benefits to the marketplace, to retail investors, etcetera.

Yet retail investors do not seem to agree about these supposed benefits.

Retail investors just keep pulling funds:

Reed failed to really answer this question posed by the host:

Senator, US equity markets are supposed to be a level playing field for all kinds of investors; big companies, small companies and even individuals. That said, how is it possible for an individual investor ever to compete with high frequency traders who buy and sell in milliseconds. Aren’t individuals always going to be second in line essentially to robots who can enter these orders faster than any human possibly can?

The reality is that unless regulators and markets can create an environment where individual investors can participate on a level playing field, they will look for alternative venues to put their money. It is in the market’s interest to create an environment where investors can invest on a level playing field. But I think the big banks are largely blinded by the quick and leverage-driven levitation provided by high frequency trading.

Iran Did 9/11?

From the Washington Post:

NEW YORK — A federal judge has signed a default judgment finding Iran, the Taliban and al-Qaida liable in the Sept. 11 terrorist attacks.

Judge George Daniels in Manhattan signed the judgment Thursday, a week after hearing testimony in the 10-year-old case. The signed ruling, which he promised last week, came in a $100 billion lawsuit brought by family members of victims of the attacks. He directed a magistrate judge to preside over remaining issues, including fixing compensatory and punitive damages.

But I thought Iraq was culpable for it!

Suck on this!

We hit Iraq because we could!

Of course, war hawks (the same war hawks who wanted to hit Iraq — and succeeded in spending trillions of dollars on an expensive and fragilising conflict that did nothing whatever for national security) are always looking for compelling and emotive justifications for their war-mongering.

And in Iranian President Mahmoud Ahmadinejad, hawks like Friedman have found a man who is in many ways their shadow. Flamboyant, provocative, over-the-top and fiercely combative Ahmadinejad gladly engages in anything that will piss the West off — holocaust revisionism, 9/11 trutherism, and now war games around a major international shipping lane.

“Suck on this!”, as Tom Friedman put it.

From Zero Hedge:

Iran is launching a “massive” 10 day war games naval exercise right in the belly of the beast.

Iranian Navy Commander Rear Admiral Habibollah Sayyari on Thursday announced the upcoming launch of ten-day massive naval exercises in the international waters.

“This is the first time that Iran’s Navy carries out naval drills in such a vast area”, he was quoted as saying. “The exercises will manifest Iran’s military prowess and defense capabilities in the international waters, convey a message of peace and friendship to regional countries and test the newest military equipment among other objectives”. He added that “the newest missile systems and torpedoes will be employed in the maneuvers, adding that the most recent tactics used in subsurface battles will also be demonstrated. Iranian destroyers, missile-launching vessels, logistic vessels, drones and coastal missiles will also be tested.

There can be no question that this “exercise” may well be a cover for seizing and closing the Strait of Hormuz.

The real question is how America will respond.

From the National Post:

The Strait is a 50-kilometre wide passageway through which about a third of the world’s oil tanker traffic sails. Whoever controls this crucial choke-point virtually controls Middle East oil exports.

“The importance of this waterway to both American military and economic interests is difficult to overstate,” said a report by geopolitical analysts at the global intelligence firm Stratfor.

“Considering Washington’s more general — and fundamental — interest in securing freedom of the seas, the U.S. Navy would almost be forced to respond aggressively to any attempt to close the Strait of Hormuz.”

“Iran has built up a large mix of unconventional forces in the Gulf that can challenge its neighbours in a wide variety of asymmetric wars, including low-level wars of attrition,” said Anthony Cordesman of the Center for Strategic & International Studies in Washington.