“If you can heal the symptoms, but not affect the cause….

Posted on 07/08/2011

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….it’s quite a bit like trying to heal a gunshot wound with gauze”.

Recently I’ve been re watching Seasons 4 and 5 of David Simon’s incredible brainchild, ‘The Wire’. I’ve also been reading Malcolm Gladwell’s collection of essays in ‘What the Dog Saw’ and I’m finding some interesting comparisons to the seemingly intransigent state of economic discourse.

For example, watching an episode early in Season 5, ‘Bubbles’ (Andre Royo) shares a bit about his addiction experience. In his unique, self-deprecating way he speaks of his ‘junkie lean’. He would be in and out of consciousness on the streets of Baltimore and from time to time he was ‘reawakened’ by neighborhood kids hanging ornaments on him (around Christmas) or looking like a scarecrow in summer. For years, he walked around in a zombie-like opiate induced daze.

In Gladwell’s missive entitled ‘Million Dollar Murray’ he addresses the costs/ills associated with the semi-permanent homeless in inner cities and questions the effectiveness with which they are ‘treated’. Gladwell calls to task the traditional thinking by pointing out that the issue is not as prevalent as we are led to believe. He does so in a way that resonated with me, as a long time option trader, by speaking in terms of ‘normal distribution’ and ‘fat tails’.

In short, the average length of homelessness is between 1 and 2 days or just long enough to know you never want to be there again. There is, however, a collection of outliers that become a tremendous drain on city infrastructure/resources because they are constantly in and out of shelters, hospitals, and jail. The shelter, frequent medical treatment and incarceration are wildly expensive, but public policy/legislation seems to just reinforce the cycle. Chronic homeless falls into a power law distribution as opposed to normal distribution curve but our thinking on the issue conforms to standard normal procedure.

Gladwell goes on to point out that Philip Mangano, a Bush (43) appointee to head the US Interagency Council on Homelessness and ‘history buff’, has worked tirelessly to try to address the root problem with some outside the box thinking. Mangano is quoted as saying, “I’m an abolitionist. My office in Boston was opposite the monument to the 54th Regiment on the Boston Common, up the street from the Park Street Church, where William Lloyd Garrison called for immediate abolition, and around the corner from where Frederick Douglass gave the famous speech at Tremont Temple. It is very much ingrained in me that you do not manage a social wrong. You should be ending it“.

Here is where bells go off in my head. I’m of the opinion that politically we continue to MANAGE a social wrong (growing structural unemployment) with ineffective solutions that (best case) temporarily disguise the problem and (at worst) may serve to exacerbate the ill.

I’m of the opinion that the patient, in this case the domestic economy (and by virtue of fading hegemony – the global malaise) is  like the chronically homeless or a down and out dope fiend. Frankly, this isn’t like a Reagan recession and Bernanke is doing quite the opposite of Volker. An S&L scandal seems quaint by comparison. Read MY lips…….this isn’t like George H.W. Bush’s recession. It’s not a Nixon recession nor is it a Kennedy recession. There is but one comparable situation and I think the most of the Depression Era similarities have been discussed ad nauseam.

The Non Farm Payroll numbers released this morning (7/8) only serve to bolster my conviction. The US economy has been dabbling in opiates for many years and our stimulant laden shock treatment has not and likely will not be effective. We’ve got a speedball addict that would put John Belushi to shame and the implications are far less humorous than he was.

Statistically speaking, the income distribution in the US looks increasingly like a power law dispersion, but the fat tails in this case are not in and out of homeless shelters, they are lobbying for more effective tax shelters.

I could go on and on….brevity is not necessarily my strong suit, and over the course of the coming weeks and months, I hope to do a better job explaining why I feel strongly about the current state of affairs as well as what may be done to turn the corner. I also would like to point out some potential ways to profit from them as well. I want to dive into numbers, many of them misleading – like the Employment data (let’s talk Labor Participation rate and Birth/Death adjustments) and see where there is money to be made.

Going back two/three days I said that implied vols rarely trade at a discount to historicals and as such the VIX looked cheap to me. On the heels of a very disappointing jobs number, vol has firmed a bit but I still believe there is much more room on the upside there. The debt ceiling negotiations have been fitful and apparently less than fruitful.

I’ll end with one other insightful nugget from Gladwell.

“Power law solutions have little appeal to the right, because they involve special treatment for people who do not deserve special treatment; and they have little appeal to the left, because their emphasis on efficiency over fairness suggests the cold number-crunching of Chicago school cost-benefit analysis”.

The debt issue is a symptom, unacceptable levels of unemployment is a symptom and from my perspective we keep enabling the offenders (zombie banks with veins loaded with toxic assets and monster derivative risk) with periodic stimulus and sending them on their way. Gladwell estimated that Murray Barr cost the taxpayers in Reno, NV over a million dollars in ‘services’, but he thrived when in a very structured environment. Well, to this point the Fed has pumped roughly $2.3 TRILLION dollars worth of stimulus into it’s patient. Fed funds are parked between 0 and 25 basis points and the financial services are laying people off again.

It is time for some outside the box thinking. Perhaps David Simon or Philip Mangano could replace Geithner?

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