The Fallacy of Treasury Inflation Protected Securities (TIPS)

I was watching the Communism Channel, and the comedians said "If you are concerned about inflation, you should buy Treasury Inflation Protected Securities (TIPS)!"

A TIPS bond contains an adjustment, based on CPI-inflation. The interest paid increases at the rate of CPI-inflation. Similarly, the principal due at maturity increases.

The problem is that the CPI is a biased measure of inflation. It severely understates the true inflation rate.

Further, the expected return on a TIPS bond is *EXACTLY THE SAME* as the expected return on a regular Treasury bond. If the expected yield were different, then traders at a bank or hedge fund would buy one and short sell the other!

Investing in a TIPS bond, you have the illusion of protection from inflation, while the State steals your savings.

The Myth of $1 CEO Pay

A lot of times, I hear the following story on the Communism Channel. A CEO of a struggling corporation agrees to work for a salary of $1. Isn't he such an awesome guy!

What the story neglects to mention is that the CEO is getting paid in the form of options and restricted stock (usually options).

A pro-State troll says "So what? Options are only valuable if the corporation's stock price increases!" The fallacy is that, due to inflation, all stocks rise over time.

Suppose that the CEO does a bad job, but the overall stock market doubles in 2 years. Suppose that corporation's stock price rises by "only" 80%. The CEO still gets a huge windfall when he cashes out his options, even though his corporation's stock underperformed the rest of the market.

Recently, CEO option grants are charged as an expense, according to the Black-Scholes price. The fallacy is that the true value of the option is greater than the Black-Scholes price, because the expected gain in the stock market is much greater than the risk-free interest rate. The cost of option grants are paid by other shareholders, as their ownership is diluted.

Another fallacy of option-based CEO compensation is that the CEO is not really taking any risk at all. If the share price rises, then the CEO gets a windfall. This is true even if the increase in share price is due to inflation and overall market movement, rather than anything the CEO does. If the share price falls, then the CEO gets his options repriced with a lower strike. As long as the stock price changes, the CEO benefits.

Sometimes, a profitable corporation will spend money repurchasing shares. If the CEO grants himself 1M shares of options, the corporation may repurchase 1.5M shares. The fallacy is that the money spent on share repurchases is otherwise unavailable for dividends or reinvesting for future growth. The corporation may decide to repurchase shares at the same time that the CEO is cashing out his options!

When the CEO is paid via equity grants, the other shareholders pay for it. The ownership interests of other shareholders are diluted. Just like your slave points lose their value when new money is printed, shares of stock lose their value when the CEO prints new shares and gives them to himself. This is one big reason why the stock market underperforms true inflation over time.

The "CEO working for $1!" story is a common evil fnord. It makes the CEO seem like a swell guy working for free, rather than someone lining his pockets at the expense of shareholders. Even though the CEO is working for only $1 cash, the CEO is still getting paid via option and equity grants.

Celebrity Death Fnord

I noticed another new type of fnord. It's the media hype that surrounds the death of a celebrity. As a practical matter, unless you personally knew the celebrity, it doesn't really affect you personally.

The reason this hype is important is that it replaces discussion of other issues. People think "I care about current events! I know that Michael Jackson died!" More important stories, such as the collapse of the economy, are not mentioned.

I also noticed that the news cycle follows a predictable pattern. There's intense coverage for about a week. Then, people move on to other things.

I noticed something else interesting. It's been a couple of weeks since I last heard a mainstream media outlet mention the swine flu! If "OMFG! Swine flu!" were a real serious problem a few weeks ago, I don't see why it would be hardly mentioned at all now.

Do you remember how people were rushing out to buy high-grade surgical masks, to prevent themselves from the swine flu? In the local drugstore, they bought a huge stockpile of surgical masks. Now, they can't sell them and they're just sitting there. I found that hilarious.

The cycle of swine flu hype illustrates how these media scares are entirely fabricated. They are designed to keep the cattle scared, rather than giving genuinely useful information. The media hype regarding Michael Jackson's death follows a similar cycle.

I noticed this new fnord type, because it totally affected my mother. She never was interested in Michael Jackson at all. Now, she's interested in every tidbit of information regarding his death. It was interesting to notice the effectiveness of the State propaganda engine.

People have a genuine need for useful news. Information like "Taxation is theft!" is never publicly discussed in a mainstream media outlet. Irrelevant stories are hyped instead.

Gold Outperformed the S&P 500 in the First Half of 2009

For those of you keeping score at home, gold continued to trounce the S&P 500 in the first half of 2009.

I'm using Vanguard's S&P 500 index fund, with reinvested dividends, as my source (via Yahoo Finance). At the end of December, the closing price was $82.51. At the end of June, the closing price was $84.72, for a gain of 2.67%.

I use this page as my source for the price of gold. At the end of December, gold was at $869.75/ounce. At the end of June, gold was at $938.25/ounce. The gain was 7.88%. This corresponds to an annual inflation rate of 16%.

Gold outperformed the S&P 500 by 5.2% in the first half of 2009. This is an annualized rate of 10.5%, which is very close to the average difference of 12.2% from 1998-2008.

The return on the stock market is less than true inflation. If you believe "Gold is money!", then the price of gold is a fair measure of inflation. When the stock market underperforms gold, that really means that the stock market underperforms true inflation.

On the Communism Channel, the comedians say "Hooray! The stock market is rising!" A lot of new money has been printed to bail out the banksters and other insiders. New money continues to be created. When you print new money, prices go up! Professional comedians can't tell the difference between gains due to economic growth, and gains that are merely inadequate compensation for true inflation. The CPI is a biased measure of inflation. It is far less than the true inflation rate.

On the Communism Channel, the comedians also frequently say "Gold investors are idiots!" The fact that gold has trounced the stock market over the past 10 years, and continues to do so, is an indication of the desirability of a gold investment.

The advantage of gold is that it can't be counterfeited like paper investments. If you invest in a money market account or Treasury bonds or other bonds, your savings are stolen via inflation. If you invest in shares of stock, you can't prevent the CEO from dilution your ownership by printing new shares and giving them to himself and his friends. As a small shareholder, you can't prevent the CEO from squandering the corporation's resources. There are "fiduciary responsibility" laws, but those only are invoked for the most egregious theft.

If you own gold and take physical delivery, then parasites with a printing press can't steal your savings. For this reason, the State propaganda engine always promotes other investments over gold. For this reason, State enforcers make it very hard for people to invest in gold. Gold dealers are heavily regulated, increasing transaction costs. Operating a gold warehouse receipt bank is illegal or regulated to the extent that it's unprofitable. This gives small gold investors no safe place to store their metal, except keeping it concealed in your home.

It is possible that in a 6-24 month period, the stock market may outperform gold. The price of gold is manipulated, which means that there may be short-term periods where gold performs poorly compared to other assets. Over an extended period of time, the price of gold should track true inflation closely. There should be another inflationary bubble forming soon, and it may be in the stock market. However, the long-term trend is that gold should continue to outperform the stock market by a wide margin. As the collapse of the State gets closer, the disparity should increase.

Gold outperforms the stock market because with a gold investment, you get full allodial title. A stock pays a dividend and earns profits due to the State-backed monopoly/oligopoly. A pro-State troll says "Don't buy gold! You don't get a dividend and you have to pay storage costs." However, a stock also has friction costs. The insiders who control the corporation line their pockets at the expense of shareholders. This is an inevitable consequence of the Principal-Agent problem, when someone controls resources that they don't technically own.

State enforcers make it hard for people to invest in gold, because the bad guys don't want people to be able to protect their savings from theft via inflation. The State propaganda engine criticizes gold investors at every opportunity. This is strong evidence of the value of a gold investment.

Is Ben Bernanke Being Scapegoated and Replaced?

I noticed an interesting shift in mainstream media coverage of Ben Bernanke. Instead of saying "He's a brilliant leader managing the economy!", they're now saying "Maybe he isn't doing such a great job."

I saw some coverage of Congress grilling Ben Bernanke on the Bank of America buyout of Merill Lynch. Instead of the usual ****job, Congress asked relatively hard questions, regarding the Federal Reserve pressuring Bank of America to buyout Merill Lynch. It's still frustrating, because they don't ask any questions of real substance like "Is having a central bank credit monopoly a good idea? Isn't the Federal Reserve just a huge price fixing cartel?"

Is Ben Bernanke being set up as a scapegoat for the current recession/depression? His 4 year term as Federal Reserve chairman expires soon, and Obama will probably nominate someone else.

Is Ben Bernanke consciously aware that the Federal Reserve is one huge scam? Or, is he a fool who is doing the best he can to manage a fundamentally corrupt system? When the Federal Reserve was first created, the insiders who controlled it knew that their true purpose was to loot and pillage the American people. In the present, the people who publicly control the State are not consciously aware that their actions are evil. If you sincerely believe you're trying to do a good job, then you're a more effective liar in public.

Either way, it's irrelevant if Ben Bernanke knows if the Federal Reserve is a scam or not. Adults are responsible for what they do, even if they were tricked or are just plain stupid. The Federal Reserve is immoral and needs to be eliminated. The correct solution is to boycott the Federal Reserve and income tax, and to use real money instead of slave points.

Replacing Ben Bernanke with another figurehead accomplishes nothing. One politically connected insider will be replaced with another politically connected insider. One brainwashed pro-State troll is replaced with another brainwashed pro-State troll.

That is one key evil of the State. Whenever there is a problem, a different figurehead is chosen to lead things. The fundamental flaws of a corrupt system are never addressed. "Changing the leaders solves the problem! A corrupt system has no flaws!" is a common evil fnord.

"Fire Ben Bernanke and replace him with someone else!" is an evil fnord. It provides the illusion of change, while changing nothing. The correct solution is to fire the entire Federal Reserve and financial industry.

You should not wait for Congress to initiate reform. The banksters receive massive State subsidies, and can always profitably lobby to block reform. If you want freedom, you should grab it directly yourself. As an individual, the best way to do this is via agorism.

Bernard Madoff Sentencing Fnord

I was watching the comedians on the Communism Channel, and they said "Hooray! Bernard Madoff was sentenced to 150 years in jail!"

The fnord is "Bernard Madoff did something wrong and was punished. Therefore, everyone who does something wrong gets caught and punished. Therefore, there are no structural flaws in the economic system."

The mainstream media also focuses on punishment-based justice instead of compensation-based justice. "Bernard Madoff spends the rest of his life in jail!" is completely separate from "Restitution must be paid to the victims!" In the criminal trial, it's "State vs. Madoff" and not "victims vs. Madoff".

Who should be responsible for reimbursing the victims?

1. the accountants who worked for Bernard Madoff (Some of them did get arrested and charged with fraud.)
2. all the people who worked for Bernard Madoff
3. all the brokers and hedge fund managers who invested in Madoff's fund, or advised people to invest in Madoff's fund
4. all the people working at the SEC, who are responsible for overseeing security industry fraud
5. Madoff's relatives; Madoff gave them property over the course of his life, and allegedly he sent them a bunch of property just before he turned himself in (That's a tough calculation. If you're one of Bernard Madoff's children, then how much of your personal property was directly received from your father?)
   

If all of the above people had their personal assets confiscated, and were required to work the rest of their lives to repay the loss, then the victims would receive much greater compensation. In the present, there is no incentive for a financial advisor to notice a fraud, collecting huge commissions in the meantime.

People can claim "I was just working for Bernard Madoff! I was tricked also! I shouldn't be responsible!" That is false. Whether a broker knew (or should have suspected) that Madoff's fund was a fraud, or if he was just plain stupid, he should be responsible either way. If "I was stupid!" is a valid defense, then what incentive is there for anyone to behave intelligently?

There are simple precautions that would have uncovered the fraud. A statistical analysis of returns would have shown very high returns with very low volatility, which is a fraud tip-off. An SEC investigor could have requesting trading records, and would have noticed the fraud.

The SEC and Federal government have a monopoly for enforcing the security industry. Whenever the State fails, via "Problem! Reaction! Solution!", the end result usually is that State bureaucrats are given more power and more resources. Via SIPC insurance, some victims are being partially repaid. However, the SIPC money comes from other tax revenue collected. Due to this huge payout, SIPC insurance fees were raised. Anyone with a brokerage account or mutual fund or 401(k) pays higher commissions and fees to pay for the reimbursement to Madoff's victims.

There is no requirement that the SEC investigators personally reimburse the victims. They get to keep their cushy jobs and high salaries, even though they failed miserably. They can say "I was tricked!" as a valid defense.

Based on what I read, Bernard Madoff had the parasitic personality type, and was very skilled. I can't prove it, since I'm not a parasite, but skilled parasites usually are consciously aware of what they're doing. Very skilled parasites are usually aware of their manipulations. It's too well coordinated for it to be an accident. Most likely, Bernard Madoff isn't sorry that he did something wrong; he's only sorry that he got caught.

Bernard Madoff was a skilled parasite. If an SEC investigator started asking tough questions, then Madoff could have used his evil jedi mind tricks and said "There's nothing to see here!", and it would have worked. If necessary, Madoff could have used his political connections at the SEC to get an honest investigator fired. The SEC investigators were consciously or subconsciously aware of this, and refrained from asking tough questions.

Whenever an investor started asking Madoff tough questions, he merely gave them their money and forced them out of the fund. A skilled parasite refuses to deal with people who can see through his manipulations. Many people thought that they were lucky to be allowed to invest with a genius like Madoff, and eagerly handed over their money. If you have the abused productive personality type, it's easy to be manipulated by someone like Madoff. If you have the parasitic personality type, you'll just read Madoff's emotional state, which said "I am super-awesome!"

Politicians and banksters and CEOs and hedge fund managers are criminals as much as Bernard Madoff. They just aren't as flagrant as Bernard Madoff. The key point is the Principal-Agent problem or the "other people's money" problem. Whenever you control resources that you don't own, the incentive is to line your pockets at the expense of the people who are trusting you with their property. Bernard Madoff went too far and crossed the line. Most members of the parasite class only loot a couple of percent a year. Bernard Madoff had a 100% looting rate. When a CEO grants himself and his friends equity in the corporation, diluting shareholders, he's stealing as much as Bernard Madoff; the only difference is the rate of the theft.

In a true free market, it'd be unlikely for someone to build up a huge $50B+ investment fund. There would be no barriers to entry, and there would be many small funds. If someone was running a dishonest fund, then the incentive would be for their competition to say "That guy is running a fraudulent business!" A private police agency would probably pay a fee to someone who uncovered a fraud, for helping to protect their customers' property. In the present, libel laws prevented anyone who suspected Madoff from publicly criticizing him. If I wrote a "Madoff is running a dishonest fund!" post before his fraud was uncovered, then I probably would have been sued for libel. Also in a true free market, all of Madoff's accountants and employees and brokers would be personally liable. There would be no incentive for them to look the other way and ignore the fraud. If Madoff's books were backed by the reputation of an accounting association, then *EVERY* member of the accounting association would be personally liable. A private police agency would probably also sell insurance in the event of investment fraud; they would have an incentive to notice problems.

In the present, it's impossible to buy insurance against the possibility that you will be ****ed over by your investments. I bought shares of Citigroup and Bank of America, and suffered a huge loss. I'm the victim of fraud as much as Bernard Madoff's victims. Now I know better. In the future, I'm planning to invest more of my savings in physical gold and silver. For *ANY* State-licensed paper investment, you will lose your savings to theft/fees/fraud/waste/inflation.

Whenever an insider is caught doing something wrong, there's an evil fnord. "This person did something wrong and got caught. There are no structural flaws in the economic system that need to be addressed!" A common evil fnord is "Blame the evildoer, and not the corrupt system that enabled him." Whenever there's a big disaster, blame is deflected from the corrupt system and focused on the individual who was exploiting a corrupt system for his personal benefit.

Inflation vs. Reflation

When I watch the comedians on the Communism Channel, they like to talk about efforts by the Federal Reserve to "reflate the economy".

A pro-State troll says "New money must be printed to replace money that was destroyed during the recession!" The reality is that a massive amount of new money has been printed. Look at objective inflation measures like M2, reconstructed M3, or the price of gold. By those measures, the rate of inflation is high.

The new money is used to bail out the banksters and insiders. They are profiting at the expense of everyone else. Printing and spending brand new money is a very valuable perk.

By saying "reflation" instead of "inflation", the comedians are spreading an evil fnord. When they say "We're merely replacing money that was destroyed!", then it sounds like they're doing something heroic. The reality is that, by any objective inflation measure, there is massive inflation.