Of Butterflys and Bubbles

Butterfly Effect: The name of the effect, coined by Edward Lorenz, is derived from the theoretical example of a hurricane's formation being contingent on whether or not a distant butterfly had flapped its wings several weeks before.


In investing discussion circles, most people talk about bubbles.  I look for butterflys.

Example: Shinzō Abe, the current Prime Minister of Japan. in 2012 introduces "abenomics" or the massive creation of Japanese Yen to fix Japanese overall economy.  This was the butterfly flapping its wings (as opposed to flapping lips - the distinction is important).  In currency war parlance, massive quantitative easing devalues the currency of the country thus making their exports more attractive.  As exports grow, stocks in exporting companies increases due to increased earnings.  In addition, cheap Yen, with no where to go because real interest rates are negative, also goes into the stockmarket driving Japan stocks higher. A double boost!  So if you bought EWJ in December and sold it in May when Japan topped, you would have cleared a >20% return or more 6 months.

What you need to look for is a situation where there is a sensitive dependence on initial conditions, where a small change at one place in a deterministic nonlinear system can result in large differences to a later state.

Let me know if you detect a butterfly.  Help us all make some money. Don't waste your time looking for bubbles and listening to people talk about bubbles-- they can't be saved.

As invetor of the Bulldog method of investing, I now add the Butterfly theorem.  So for your listening pleasure here is a youtube video of "Dog and Butterfly".

Thelma, Louise, & Chloe's Cliff

Meet Chloe:

Single Mom- resident of US state of Pennsylvania

Chloe has two children, ages 1 and 4 who attend daycare so Chloe can work

Chloe works as a digital print operator with a gross salary of $29K/year.

Happy Story:

Hard to raise two children on only $29K.  However, tax payers help by providing health care assistance (CHIP), childcare subsidy, housing assistance, food stamps, and an earned income tax credit from the US Federal Government.  Chloe receives $28K in tax payer funded assistance.

Total Disposable Income = $57K  ($29K salary + $28K in welfare). 

Chloe’s Cliff  #1 (A $1,000 bonus costs her $9,000):

The store where Chloe works beat all its sales goals.  She is a really talented worker and shared in her store’s success by being awarded a $1,000 bonus just before Christmas.   This made for some extra nice presents under the tree.

The next year, when Chloe reapplied for tax payer funded assistance, she got the bad news-  Chloe’s benefits were going to be reduced because she made $30K ($29K salary plus $1K bonus).   Her food stamp subsidy was significantly reduced and she lost all her housing assistance. 

In total, Chloe now only could receive $19K in tax payer funded assistance.

Total Disposable Income = $48K  ($29K salary and $19K in subsidies).

Chloe’s Cliff #2: (Please don't promote me, I can't afford it):

As we said, Chloe is a good very good employee who has bettered herself by night school.  Her boss got promoted to run a regional network of print shops and Chole was tapped to take over as store manager- a big promotion and $8,500 per year raise.

But Chloe is smart and still hurting from the $9K financial hit she took last year.  She knows that at $37,500/year (Her original base of $29K/year plus $8,500 promotion), she will lose all her government assistance except the health care subsidy for her children which is about $7,500/year.

Total Disposable Income = $46K as compared to her happy story (above) where she had $57,000 a year!

Like Thelma & Louise:

The more Chloe works to better herself the lower her disposable income.  She feels a little bit like the two accidental outlaws in the movie.  But she has to protect herself and her family and therefore needs to take money from other citizens.  

And the bureaucrats that created these cliffs did so because they thought they were doing something good.  Chloe is stuck in her dead end job no matter how much she wants to better herself because the entitlement system keeps her there.  It is not about Chloe- it is the system.

Or did the bureaucrats create these cliffs to make their needy constituents reliant on them so they can hold power?  After all, the people in power are there because they understand how to exploit human nature.

Chloe’s self esteem is not important to the cliff creators.  In fact, Chloe is just an unfortunate casualty; a minority.  A vote that they won’t lose no matter how imprisoned they make her feel.

Addendum:

This posting is not anti-welfare programs.  I believe that social safety nets are important for a well ordered society.

The point is- a well tuned support system smooths the phase out of entitlements as the person’s after tax income grows.  But that would take some work by the cliff creators who will receive no personal benefit if they fix the problem.  The political incentive system is broken.

Here is the data:

The full report can be found here.

 

 

 

 

 

 

 

 

 

 

 

Modern Day Sharecroppers

Have you been watching the Student Loan bubble in the US? According to the WSJ, more than 12% are now delinquent. If you look at each borrower’s situation (financial condition and amount borrowed) a growing number of Student Loans are sub-prime. Interesting parallels between housing loans and student loans exist.


Housing: loans were made to people who couldn’t pay the mortgage who bought homes they never really could afford. The financial industry made all the money and everyone else paid. The government nationalized the mortgage reinsurance industry through Fannie Mae and Freddie Mac with the US taxpayer to foot the bill for all defaults. With the banks made whole there was no need to force foreclosures. After all, if the bank takes over the house then they have to maintain it! Why not just leave the delinquent borrowers in the house- rent/mortgage free- so they can do the up keep. Sort of like tenant farming.

Education: loans were made to prospective students who got degrees in fields with no jobs. The loans propped up the university system allowing them to raise tuition faster than inflation making institutional elites (professors, administrators, etc.) rich or get paid full time for very part time work. The government nationalized the student loan industry through the takeover of Sallie Mae leaving the defaults to be paid for by the US taxpayer. Also, student loans can’t be discharged in bankruptcy so you will be owned by the state until you pay off your debt. But you do get to keep your diploma and 15% or more garnished from your wages for at least the next 20 years. How’s that for a modern day sharecropper?



The best businesses in America are those where you can personalize your gains and socialize your losses. Or for the gamblers among you… like always playing with the House’s money.

Taxing Your Brain With A Trillion Dollar Coin

What is it?  The trillion dollar coin is a concept which emerged during the United States debt ceiling crisis in 2011, as a proposed way to bypass any necessity for the US Congress to raise the country's borrowing limit, through the minting of very high value platinum coins. The concept gained more mainstream attention by late 2012 during the debates over the United States fiscal cliff negotiations and renewed debt-ceiling discussions.  (Yes it is legal)

How does it work?  The US Government mints at coin with a face value of $1T and deposits it with the Federal Reserve.  The Fed then gives the US Government $1T to spend. 

Will it work?  YES!  The same thing happens today except the US Government creates treasury bonds which the Federal Reserve buys and in turn, gives dollars (Federal Reserve Notes) to the US Government to spend.  Reducing the task to the simple mint and deposit of a tiny coin saves a lot time and effort.  There is no difference between treasury bonds and trillion dollar coins to the Federal Reserve and that is why it will work.

Why Won't the Government Do It?   If they did this, then someone would want the government to not just mint one coin but how about 4 coins each year to cover all of our spending needs.  Then we wouldn't have to collect any taxes.  Governments rarely give up their taxing power.

Stop and really think about this for a moment. 

Now let me ask you... If a government can create its own money, why does it take money from its citizens?  If no one had to pay taxes, don't you think consumption would skyrocket?  If consumption increases would the economy expand as more and more people created more and more products and services to meet the increased spending power of the people?  If so, then taking people's money collapses the economy.