35 Minute Read

Environmental Hedging: Distribution of Wealth

November 14, 2017

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Tally-Ho Tackle Traders!

Last go around we had the infamous Franco Coria from Argentina on board as well as touched base with Josh Van Alystine from Utah. This week, well, I am still in Utah…decompressing and really putting in some serious work into the soon to be released Personal Gold System. To submit an update on it: The Personal Gold System is first and foremost wrapping up to be a fantastic work—you will be very happy with the results for those of you who know what it is. And for those readers who have not heard of the system, Personal Gold is a trading system and comprehensive analysis on Gold and Silver—which dives into economics, history, and philosophy—and gives it’s practitioner an 85% chance of cash-flowing off of commodity related products and will be able to use said cash flow to purchase physical Gold, Silver, and Bitcoin on a monthly basis with. So yeah, free gold, Silver, and Bitcoin, folks. Tackle is shooting for a release date of January, 2018. T.B.A.

In other news, as you may or may not know, I began my adventure in Puerto Rico around 7 months ago. And as I am sure all of you are aware Hurricane Maria has left Puerto Rico in dire straights since my visit. It has been painful to watch the United States’ response to the crisis and it has been even more painful keeping tabs on some of our students from the island. For example, Clifford M had to temporarily abandon his life in Puerto Rico for New York. The others which stayed in PR are getting by in testing conditions.

However, we have good news folks…(drum roll)… Collaborating with one of Tackle’s students, Antoine Izquierdo of Puerto Rico, we will be loading up on solar panels, batteries, converters, etc…to send down to PR and install on peoples’ homes, free of charge!

In the spirit of Environmental Hedging and Tackle Trading there really isn’t a better opportunity to put our money where our mouths are. Big thanks to the coaches @ Tackle Trading and Antoine for putting this together. I myself will be following the units down to P.R. and assisting with their installation. If any readers are interested in donating or volunteering their time and joining the actual service project you may feel free to shoot of an email to: [email protected] for further details.

Robin Hoods:

AMD—Advanced Micro Dynamics

Naked Puts: The earnings reaction gave investors and traders a bit of a scare a couple weeks ago, however, AMD and Intel joined forces and the stock bounced back, and then went back down and is now consolidating. There is some overhead resistance at 12.70 and if broken I plan on treating AMD as I did before earnings with a resistance zone of $14-14.50 per share. I am considering issuing naked puts some time this week.  Here is a video on Naked Puts

 FCX—Freeport McMorhan

Naked Puts: I love trades where there is nothing to report, good or bad. This is a “buffalo” trade at its finest, easy going neutrality, not a whole lot of volatility, simply grazing.

However leave it to Papuan Separatists to mess this one up and send the stock below $14. Since these separatists have hampered mining operations at one of Freeport’s mines in P.N.G. as of Tuesday, the stock is breaking down to, most likely, $13 per share. I have a strangled my trade and will be waiting for the riot to cease. When it does, I anticipate it going back up to $14 per share and potentially beyond.

For info on how to hedge a naked put, i.e. Strangle a naked put, check out Tyler’s synopsis: https://tackletrading.com/options-theory-hedge-naked-put/

X—United States Steel

Naked Puts: So X indeed sucked back after earnings and is nearing short term support @ $26 per share. If it breaks Ill be looking at $25 per share. The stock in a weekly chart is still bullish, so $25-$26 could be good prices to issue naked puts. A recent submission by analysts have it as market perform with a target of $28 per share.

/NG—Natural Gas Futures

Naked Puts: Natural Gas seems to be making a reversal and demand has been increasing due to seasonality. It is currently dancing around short-term resistance @ $3. 27 per share.

If it breaks above that it would be a good opportunity for naked puts. Delta Rule in the futures market is .10 and not .20 delta. Theta rule remains the same. (see the blog “Love Being Naked” for naked put rules and management). I anticipate issuing naked puts sometime this week, maybe next.

Targeted Stocks:

TSLA—Tesla Motors

Long Stock or Bull-Put: Per usual, TSLA bounced and is heading back north. I opened a trade on TSLA last week.

FSLR—First Solar

Covered Call: I went ahead and covered my position late last week and sold calls at 62.50. I anticipate a bullish retracement on the stock and would be fine with getting called out if that is not the case. My cost basis is low and premium on options are great right now, like $280 per contract. Let’s see what happens.

Here is a video on Trading Gaps

SPWR—Sun Power

 

Covered Call: SPWR has a bit of room to run northbound before resistance is tested. However, I am concerned about the hiccups in the overall market affecting this move. Although we have a Golden Cross forming, I am still cautious.

Environmental Hedging Week 19—Distribution of Wealth vs. the Concentration of Wealth

 Top-Down economics does not do a poor job of pumping up markets. As a matter of fact there is no other economic system in existence that does a better job of this.  As intended the system directs capital and capital efforts towards the top—i.e., big banks, corporations, institutions, and the like—in the form of deregulation, tax-breaks, and, in some instances, actual cash injections via subsidization or stimulus packages. From there capital will trickle-down down to the lower levels of the economy in the form of employment opportunity, aggregated-supply, and middle-outgrowth.

The logic is that if you do not the regulate or inhibit the larger contributors to the economy and allow their self-interest to proliferate, the resulting effect will be a stronger, more efficient, well-ran economic mechanism. In such an legislative and regulatory environment the economy will achieve its highest outputs, thus stimulating job growth, production and overall investment. Resulting from these efforts, there will be a trickle-down effect, further resulting in a higher standard of living as well as the enhanced potential for class-mobility by the individual.

In recent times, however, it has become apparent there is a problem with the “trickle-down” aspect of the system. Warren Buffet in 2017 wrote: “The real problem, in my view, is the prosperity has been unbelievable for the extremely rich people. If you go to 1982, when Forbes put on their first 400 list, those people had $93 billion. Now they have $2.4 trillion, [a multiple of] 25 for one. This has been a prosperity that’s been disproportionately rewarding to the people on top.”  Buffet was getting at two things in that article: for one, the quantifiable effects of Top-Down economic models and as a efficient means of capital concentration is apparent. However, on another level, he was being implicit of the notion that there is a problem with the concentration of wealth as “disproportional”. Which is in and of itself indicative of problems with the redistribution of that wealth. You know, that trickle-down effect that we hear of so often.

Now, when things are “disproportionately rewarding” for a small group of people it is typically the result of either: 1) Improper governmental regulation; 2) The human capacity for greed; or, 3) The efficiency of the system at hand.

  1. From a regulatory perspective—as pointed out in my prior blog—existing tax policy may be a contributing factor. For example, the off-shoring of labor and capital is commonly asserted that it is to expensive for corporations to do certain aspects of their businesses in the United States. Thus corporate tax reform could be beneficial to job creation in the United States as well as increased tax revenue for government. Consider companies like Apple, who offshore nearly 286 billion in taxable dollars, if they were incentivized house such capital in the U.S. system. If that were the case much of the social-welfare cuts being seen in the GOP budget proposal may not be necessary, nor a massive tax break for the top 1%. I mean, the lion’s share of multi-national corporations would love to set up shop in the U.S. if conditions were more favorable from a corporate tax perspective. Or, at least, in theory this is the case. It really comes down if the incentives will affect their bottom line in a positive way.
  2. Then there is the human-element… Human beings are often greedy and naturally resist taxation. Therefore, if there are disproportional advantages to be had in either taxation, banking, or economics, people will unitize the loopholes—its human nature. Consider the Paradise or the Panama paper(s) as paradigm examples. Thus it is in the interest of government as well as the people to legislatively regulate such routes of tax-avoidance. Sometimes it is best to anticipate the worst in the best of us. However, if such regulation is not conjured, expect the best of us having to play the same game as the worst of us.  Corporate lobbying can hedge these concerted efforts by lining pockets and rallying opposing legislation within government. They can either sway politics, or, better yet, they can regulate the regulators. So called regulatory capture—where the regulator acts in ways that benefit the entity it is regulating instead of the public—is a powerful force. The “simple answer is that it’s become standard practice for the Fed employees to go work for Wall Street firms” writer Michael Lewis once wrote. “Not to mention the problem of having an examiner making 150,000 a year standing up to a banker who makes ten times that salary” is futile.
  3. Then there is the systemic issue at hand. Top-Down economics is very good at creating large G.D.P. metrics as well as being very good at concentrating wealth. Those who are good practitioners of the system are allotted larger portions of the pie than, let’s say, someone whom participates at a lower level, like the teller of a gas station.

As the Conservative Progressive Walter Lipmann wrote in Society In Its Place: “The public must be put in it’s place, so that it may exercise its own powers, but no less and perhaps even more, so that each of us may live free of the trampling and roar of the bewildered herd.” The hallmark of this logic is rather basic and goes back to Ayn Rand: free the captains of industry, the innovators, and money makers from the bonds of regulation and let them do what they do best. In return they will create jobs, stimulate production and investment and as a result, everyone will have their own portion of the wealth that these “responsible men” create…even that gas-station teller.

The key factor, however, comes down to in what ways redistribution takes place. I would like to depart from common narratives and focus on redistribution by way of economics. In economics the redistribution of wealth is best punctuated by the market cycle itself—i.e. bull market vs bear market wherein both markets there are two critical points, the top and the bottom.

The top of the market traditionally meant the redistribution of wealth, that prescribed trickle-down effect, took place in the form of employment opportunity, aggregated-supply, and middle-outgrowth. My favorite analogy, made by Galbraith, defines Top-Down economics as “horse and sparrow economics”. The idea is if you ‘keep feeding the horse oats’ eventually enough ‘will pass through to the road for the sparrows’ to eat.  But in a globalized business world to much of this trickle down takes place outside of the United States, thus it’s domestic effects are limited beyond the service industry in America. In simpler terms, the horses left the stable and the sparrows have had their wings clipped. Which is helpful for factory workers in, let’s say Vietnam, but not so helpful for factory workers in, let’s say, Detroit.

At the bottom of a bear market, however, is the most essential aspect and negates what happens at the top of the market. This is where, primarily, the concentration of wealth takes place. When markets crash enormous amounts of capital are transferred, or, simply wiped out. One would assume, however, that the largest holders of capital would loose the most. In reality it’s the average person that takes the brunt of the blow.

You see at the bottom of markets there is the need for aggregated demand—which in simpler terms means there needs to be a buyer of goods and services. John Maynard Keyes, the father of Keynesian economics, theorized that in times of market crisis it is the job of government to step in and be the buyer. For Keyes, in times of aggregated supply, however, the market is, obviously, on the up and up. But at some point, usually 7-9yrs into it, the economy will have a change heart.

The core of this shift is rather innocent—basically, there is an overabundance of supply and debt and no buyers of supply and repayment on said debt, thus resulting in market corrections, crashes, or recessions. Since the early 1980s a combination of government and the privately owned Federal Reserve would confront market reversals. If and when a market reversal took place, the Federal Reserve lowers interest rates, and artificially pumps up the market per Keynesian application. Government then borrows from the Fed and packages capital in the form of bail-outs, bond-buying programs, and stimulus…and then directs that capital to where its needed. And what is borrowed is primarily funded by the general public via taxation at a later date, through inflation, or through the opportunity cost of stagnation.

In pure Keynesian thought, however, this capital is directed to the bottom of the market in the form of work force programs, subsidization, and corporate selection—much like F.D.R. did in the New Deal. In many ways it’s analogous of the public buying themselves jobs through taxes. Post Regan / Greenspan era, however, this capital is now directed to the top of the market, and more often than not, given directly to those who tanked it in the first place. In this case, the public is paying for the top of the market’s economic mistakes, hence the term “bail-out”. But either way, bottom or top, the intended result is the creation of a velocity of money to kick start the economy.

The key-term here is: velocity of money.  Therefore the question is which sector of the market—the bottom or the top—is going to create the largest velocity of money. Velocity of money is, basically, how many uses a dollar has. If it is given to the gas station teller, obviously, that money will be used as payment for the cost of doing business—like more gas and, let’s say, soft-drinks—much like it was used by the consumer who gave it to the teller in the first place. In that case there are 4 usages of that single dollar, i.e., first as payment for gas by the consumer; second as payment by the business for more gas to sell to consumers; third, as payment for the services of the teller; and, four, as capital which the teller and the owner of the station use to buy more goods and services within their personal lives…

If that money is given to big banks, however, it may just sit there in the bank for 7-9 yrs, creating little to no velocity whatsoever. In that case there is only one usage of that dollar. Milton Friedman, a Nobel economist from the Chicago School of economics argued that giving stimulus to the top of the market would only gentrify the issue at hand. And further argued that giving it to the bottom in the form of “helicopter checks” is the most effective means for a government / central bank to robustly intervene in a recession or a depression.

For one, imagine if the initial T.A.R.P. stimulus of 878 billion was divided up equally amongst 300 million citizens? Which would be several thousand dollars per person… But what if we incorporated the figures used in quantitative easing, something of 4.7 trillion dollars? Well that would be roughly 15,600 per citizen. Also consider if that combined amount was only issued to tax-paying citizens, non-felons, business owners and people directly affected by the recession. Well those figures could easily jump into the hundreds of thousands of dollars, and, in some filters, maybe even millions of dollars per allotted recipient. Also consider if the money was reserved for American products only…

Now, the question is: What would you have done with that money?… Maybe pay off some student loans, maybe your mortgage, maybe buy a new American made automobile? Maybe you would of blew it on new clothes and electronics, or maybe you would of made some investments? Who knows? Either way it is going back to the top—i.e., to the banks, auto industry and so on and so forth, right? But the way in which it goes back to the top is of interest. It would trickle-up in manner that would create an enormous velocity of money and would stimulate the domestic economy more than the top-down approach would. Think about that gas station teller…

The trickle-up effect ensures capital is first redistributed before it is later concentrated and this approach has worked in Chile, China, and Hungary in the past has been proven to as well be beneficial to big business. The primary reason for implementing such an angle is to jump-start stagnate economies which have been burdened by poor fiscal and monetary policy.

Japan in the 1990s would of benefited from this, but instead chose the Top-Down approach, thus insuring a decade of stagnation. The United States also would of benefited from helicopter checks in 2007 and as would of Italy and Spain. The idea behind Friedman’s theory is rather novel: give money to impoverished people…they need to survive. And as conspicuous consumers they will do what they do best: consume. This will stimulate production and, later, investment. The trick is merely one of ordering. Rather than concentrate wealth first in a recession and then distributing it later, distribute wealth first and then allow it to concentrate naturally, as was intended in American bottom-up economics. As Daniele Booth wrote: “the unintended consequences of unconventional monetary policy run amok {are}: pension systems at risk, unaffordable housing, malinvestment, rampant financial engineering by America’s top companies, stagnant wages, millions who have dropped out of the labor force, the stealth growth of the safety net financed by record low interest rates. And of course, more asset price bubbles than ever before.”

the benefits of helicopter checks in the next recession would be that the top 1% would not have as many opportunistic chances for greed since that money would not first go to them. No single corporation would be “to big to fail” but would be subject to the consumptive choices of the people—i.e., natural selection if you will. Since asset prices would again be cheap at the bottom of the recession, the average person would have a great opportunity to invest in their future, thus insuring class-mobility and middle-outgrowth throughout the next 7-9 yr bull-run. And as many environmental propitiates have expressed in the past, the best chance for a nation to invest in renewable infrastructure.

So, in the next recession, keep your ears close to the ground and any chance you have to fight or vote for the above mentioned it would be an A-political contribution paid back in full. In the meantime, however, seriously evaluate the current effort of wealth redistribution (or lack there of)… A corporate tax break combined with individual / estate tax breaks for the top 1% is the furthest from Trickle-Down Economics…In reality it is a capital land-grab. It ought to be one or the other, not both… Just look at how market likes the idea of corporate tax reform, as do I, but doesn’t seem to care for the individual / estate reform for the 1%…Mmm…

What we should be asking ourselves is: How responsible are these “responsible men”? And go ahead an take a serious look at the Paradise Papers… That tells us everything we need to know about the “disproportional  advantages” being had by the few. Until then, well…we will tarry on as a “bewildered herd”.

Cheers,

Bob Shannon

[1]http://www.newsweek.com/rich-people-america-buffett-629456

[2] Danielle Dimartino Booth, Fed-Up. Money Strong LLC: Portfolio Penguin, 2017; New York New York. Pg 251

[3] Danielle Dimartino Booth, Fed-Up. Money Strong LLC: Portfolio Penguin, 2017; New York New York. Pg 251

3 Replies to “Environmental Hedging: Distribution of Wealth”

  1. Avatar FRANCOCORIA says:

    Heck of a post, thanks. I was thinking on what happened in PR, and your mention to the natural human greed. Maybe you can touch on the Smith’s concept of “The Invisible Hand” in future posts…just an idea. Thanks again!

    1. Avatar Robert Shannon says:

      Well will have a “invisible hand” week then. Hope all is well Franco! Cheers!

  2. Avatar JINGLI says:

    Thank you for the post bobby

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