You don’t have to follow this blog very closely to know I’m a big fan of Barry Ritholtz and his blog The Big Picture.  Over the weekend he gave the following presentation, Romancing Alpha, Forsaking Beta at the Trustee Leadership Forum for Retirement Security.

It’s a great presentation that shows how our wetware (to borrow a term from Barry) leads to poor investment decisions – particularly when it comes to the mythical creatures of Wall Street: alpha generating hedge funds.  Check it out:

If you can’t laugh at the subversion of our basic liberties what can you laugh at?  The recent leak of the NSA’s secret PRISM program has elicited quite a response – especially the poor presentation value of their “pitch” slides.  Seriously, if you’re asking for $20M a year of taxpayer money at least jazz up your powerpoint a bit.

 

In every stage of these Oppressions We have Petitioned for Redress in the most humble terms: Our repeated Petitions have been answered only by repeated injury. A Prince whose character is thus marked by every act which may define a Tyrant, is unfit to be the ruler of a free people.

Declaration of Independence In Congress, July 4, 1776

I think the news breaking about the NSA’s PRISM program is pretty scary.  This type of abuse is truly the biggest threat to the country and the liberties we hold dear that I can think of.  It seems like everyone kind of expected this type of surveillance was taking place but now that we’ve been confronted with some hard evidence it becomes harder to just write it off.  This is truly an Orwellian nightmare come true.

Obama – what part of “The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized” do you not understand?

I was thinking about this yesterday and I was trying to come up with an analogous 1776 version of this story.  It would basically involve the British having a central processing center for all written communications and papers (kind of like the postal service but you can’t avoid it).  But instead of just receiving and distributing the mail it made a copy of every document that passed through and kept that document on file forever – for the king or his agents to review at their pleasure.  Images of red coats sitting in a row reading and transcribing letters with their feather pens should be coming to mind.  Wouldn’t that have been outrageous?  Do you think the founding fathers would have listed that as one of their grievances in the Declaration of Independence?  I digress…

There is a great op-ed piece in the Guardian by Daniel Ellsberg that is worth a read – below is an excerpt.  It’s also worth nothing that Ellsberg thinks this is the most important leak in American history; even more important than the Pentagon Papers that were leaked 40 years ago.  (side note: at least the UK’s free press is looking out for our rights and liberties – thanks, we owe you one)

“But what is not legitimate is to use a secrecy system to hide programs that are blatantly unconstitutional in their breadth and potential abuse. Neither the president nor Congress as a whole may by themselves revoke the fourth amendment – and that’s why what Snowden has revealed so far was secret from the American people.

In 1975, Senator Frank Church spoke of the National Security Agency in these terms:

“I know the capacity that is there to make tyranny total in America, and we must see to it that this agency and all agencies that possess this technology operate within the law and under proper supervision, so that we never cross over that abyss. That is the abyss from which there is no return.”

The dangerous prospect of which he warned was that America’s intelligence gathering capability – which is today beyond any comparison with what existed in his pre-digital era – “at any time could be turned around on the American people and no American would have any privacy left.”

That has now happened. That is what Snowden has exposed, with official, secret documents. The NSAFBI and CIA have, with the new digital technology, surveillance powers over our own citizens that the Stasi – the secret police in the former “democratic republic” of East Germany – could scarcely have dreamed of. Snowden reveals that the so-called intelligence community has become the United Stasi of America.”

Scary stuff indeed.  Hang on… someone’s at the door.

745px-Into_the_Jaws_of_Death_23-0455M_edit

Today is June 6, 2013 – sixty nine years ago today the Allied Forces stormed the beaches of Normandy in what was perhaps the boldest military invasion in history.  160,000 American, British, and Canadian soldiers landed on the beaches of France to begin the long, bloody battle to liberate France and the rest of Nazi occupied Europe.

On this day I find myself reflecting on the daunting task they faced.  Reflecting on their courage, their strength, and their ultimate accomplishment.  Reflecting on the uncertainty they faced and what must have been going through their minds as they waded through that water.  Reflecting on the perspective their situation, their efforts, and their triumph provides.  

I find their strength inspires strength in me; for I know my problems are trivial compared to not only theirs, but anyone living through that period.  It makes today’s problems seem small and conquerable.  And it reminds me that we have some very big shoes to fill.

Really nasty market sell offs are notoriously hard to predict.  But one factor that can propel a healthy sell off into a nasty sell off is margin debt.  When investors become especially bullish they like to increase the size of their bets by borrowing money from their broker and using the stock they’re buying as collateral.  This has the effect of magnifying the gains and the losses.  When those bets go sour, investors have to raise cash to meet margin requirements (i.e. you have to post a certain level of cash or securities in proportion to what you borrowed) – if they’re already over extended and using borrowed money to buy stocks then they have to sell their stock in order to raise that cash.  This is known as forced selling and it is something you never, ever want to do.

The SEC actually has a nice little summary of how margin works and highlights the following risks:

  • You can lose more money than you have invested;
  • You may have to deposit additional cash or securities in your account on short notice to cover market losses;
  • You may be forced to sell some or all of your securities when falling stock prices reduce the value of your securities; and
  • Your brokerage firm may sell some or all of your securities without consulting you to pay off the loan it made to you.

A recent NYT article highlights the margin debt “danger zone” at 2.25% of GDP.  According to their research, when that threshold is breached, bad things generally happen – see charts below.

Between high corporate profit margins, the threat of QE being dialed back, and high levels of margin debt – it seems the seeds for a considerable market correction have been sewn.  Buyer beware.

Margin Debt - 6.3.13