Saturday, January 30, 2010

Video Interview: Macro Economist Kenneth Rogoff Versus 'Enterpreneur' Tom Gloser On The Global Economy

This is an interesting video interview by CNBC of Harvard's Ken Rogoff and Tom Gloser of Thomson Reuters in Davos.

It is interesting because the message of both distinguished personalities evokes deeply contrasting views, even if they claim to represent different approaches (Mr. Rogoff-macro while Mr. Gloser-micro) in how they see the world.

Besides, CNBC's designated title "Economy to Crash if It Keeps Debt Appetite: Rogoff" seem to mislead, because Mr. Rogoff says it's gonna "get worse before it gets better" which hardly implies of a crash. Moreover, Mr. Rogoff consumed about only 5-10% of the total time interviewed, yet got the top billing for the video's title. If this is not a case of sensationalism, I don't know what is.

I say contrasting too, because while Mr. Rogoff spoke of difficult times ahead, Mr. Gloser sanguinely articulated on his ex-US "cautious" but manifold expansions, primarily on the "places that are growing", particularly the BRICs in order to "stay a step ahead".

For me, this exhibits the classic informational conflict between the interpretation of statistical aggregates against that of the information from what F. A. Hayek calls as the "man on the spot" or localized knowledge in ascertaining changes in the economy.

Another very important distinction is that while one operates in the realm of theories, the other votes with risk money. I wonder who among them would be right. Interesting indeed.

Friday, January 29, 2010

Federal Reserve Tightening: Exit Experiment or Bernanke's Confirmation Insurance?

Austrian economist Professor Gary North recently suggested that the Federal Reserve has been tacitly tightening.

He offers three charts as proof

The adjusted monetary base (which fell by November but has now recovered)

M1 Money Stock
M2 Money Multiplier

Here is Professor North,

``Why is the FED deflating? I offer these suggestions.

``It is testing the waters to see if unwinding will cause a crisis: a secondary recession.

``It is giving itself some wiggle room in case commercial banks begin to lend, which threatens to let M1's expansion force up consumer prices.

``It is providing visible confirmation for an announced policy that it cannot follow without creating a true depression.

``It has begun to unwind, as promised." (read the rest of Professor North's article here)


But I'd like to add more to his charts and his theory

As seen in the table of the Cleveland Fed, the Federal Reserve has been unloading some of the US treasuries it recently bought as part of its quantitative easing program, since December 9th.

And this appears to coincide with the firming of the US dollar from which markets instantaneously interprets as having the same dynamics as the 2008 episode. Hence all these signs may perhaps point to a tightening in spite of the Federal Reserve's continued QE.

While correlation may not be causality, I'd offer an added perspective in terms of why the Fed could have been experimenting- a possible conspiracy theory based on a political agenda.

The issue is connection with Ben Bernanke's confirmation.

As you can see from the Intrade prediction markets the Fed Chair Ben Bernanke's confirmation only surged by mid to late November.

Moreover, until mid January, there had been lingering doubts whether his tenure would be mandated since it appeared that opposition to his reappointment had been growing. It even took President Obama to personally endorse Mr. Bernanke, as per Businessweek ``Obama called some senators yesterday, including those in the leadership, to ensure Bernanke’s confirmation won’t be derailed."

In short, Bernanke's reappointment wasn't in the bag until the last minute.

Could it be then that the tightening shown by Professor North was actually an insurance policy taken by Mr. Bernanke?

By portraying that markets would be anxious over the uncertainty of his mandate, as enunciated by Connecticut Democrat Senator Christopher Dodd who said ``I think if you wanted to send the worst signal to the markets right now in the country and send us in a tailspin, it would be to reject this nomination" [as earlier discussed in US Trembler: Volcker Rule or Bernanke Confirmation?], his appointment would now be the "key" solution to the market's stabilization?

So like hitting two birds with one stone, the Federal Reserve could have been tightening to work for Bernanke's political interest BUT camouflaged by the experiment with 'exit' strategies.

Now that Bernanke has attained his goal, could we see the attendant easing to boost markets anew?

One must remember that market responds to policies with a lag, hence if this theory is correct, then markets should start to reflate over the next 2-3 months.

It's all about the boom bust cycle anyway.

Jeremy Grantham: Lessons Learned in the Decade

Here is a collection of insights by GMO's Jeremy Grantham from his latest outlook where he lists of the harsh lessons learned during the last decade.

Lessons Learned in the Decade: (Grantham in bold highlights) [comments mine]

-The Fed wields even more financial influence than we thought.

[This is nothing new. Mr. Grantham hasn't learned from 7th US President Andrew Jackson who caused the bankruptcy the Second National Bank of the United States. As per President Jackson, “Money is power, and in that government which pays all the public officers of the states will all political power be substantially concentrated.”]

-Low rates have a more powerful effect on driving financial assets than on driving the economy.

[The Austrians have been saying this long long long time ago.]

-The Fed is capable of being extremely out of touch with the real world – “what housing bubble?” – plus more doctrinaire – “no, the low rates had no effect on housing” – than anyone could have imagined.

[It's called delusions of grandeur, or as per Friedrich A. Hayek, 'Fatal Conceit']

-Congress is nearly dysfunctional, primarily controlled by large corporations, and hamstrung by the supermajority now routinely required in the Senate.

This is proof that this isn't about the failure of free markets but of corporatism, or crony capitalism. To quote Ron Paul, ``We don't have socialism here, but a mild form of fascism—corporatism--with corporations on the dole, making money off the military-industrial complex, while the banks and financial houses are making money off the monetary system." Again this is nothing new.]

-Government administrations can be incompetent for long periods.

[activist government administrations are almost always incompetent or affected by political goals (public choice economics) or a result of hubris, as Professor Arnold Kling recently wrote, "Libertarianism would indeed say that it takes a genius to do nothing"]

-Poor leadership can really damage a country’s hardwon reputation in a mere 10 years.

[see above]

-Obama is not a miracle worker!

[Again from F. A. Hayek, ``The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design." ]

-The leadership of major corporations can be very lacking in insight and competence on a fairly routine basis.

[When governments engage in inflationism, they distort and affect economic calculation of the entrepreneurs, hence the leadership resorts to "lobbying" for political privileges instead]

-The two time-tested investment tools, value (P/E ratios and P/B ratios) and price momentum, are now much more heavily used and not so reliable as they once were, say from 1977 to 1997.

[A validation of Fritz Machlup ``
A continual rise of stock prices cannot be explained by improved conditions of production or by increased voluntary savings, but only by an inflationary credit supply." see our Are Stock Market Prices Driven By Earnings or Inflation?]

-Asset classes really are more inefficiently priced than individual stocks on average, and therefore offer greater opportunities for adding value and reducing risk.

[inflationism distorts pricing, as noted above]

-Developed countries, including the U.S., are past their prime compared with developing countries: it is indeed a new world order.

[too much Keynesianism eventually strips economic advantage of developed countries by diluting wealth through boom bust cycles]

-Education and training are the keys to increasing wealth on a sustainable basis and the U.S. is in danger of losing its once large edge here.

-We all live on an island, which can be overexploited and turned into a barren Easter Island if we are not careful. Resources are finite and biodiversity is fragile, and both must be protected. Carbon emissions are the single greatest threat.

[False! Environmentalism has been a key channel for promoting socialism. The global warming bubble is presently imploding. Besides commodity prices have been on a downtrend for centuries even amidst growing population until today, where inflationism has caused serious dislocations such that these have become underinvested. Moroever, government regulations have caused price surges or overexploitation. Example, oil reserves are 90% owned by state or state owned companies this restricts supply. Further subsidized energy prices leads to greater demand.]

-Being a global policeman is expensive, and somewhere between difficult and impossible.

[Inflationism promotes imperialism that benefits the military-industrial complex.

Again from Ron Paul, ``The pressures exerted on our leadership from the military industrial complex and big business is not in favor of peace or freedom, or especially nonintervention. Intervention is big business. Defense contracts topped $300 billion last year, and total spending on war and our overseas empire is up to $1 trillion per year. That represents a lot of people earning a living off of war and conquest. But rather than adding to our economy, all of this money is taken from the economy in order to wage war and destruction. Imagine if those resources were put to creative, productive use here at home!

-The Fed learns no lessons!

[Then Abolish the Fed!]

Overall, it doesn't really take a decade to learn of such harsh lessons, since they have long been studied and transcribed by the Austrian School of Economics into various books or documents.

How Americans Voted With Their Feet From The Recent Recession

Here is an interesting graphic about the recent population mobility trends in the US, following the recent crisis or an illustration of how people reacted to the recession by voting with their feet.

personal finance – (for a crisper view click here to

From, ``In times of plenty, relocating for work usually means a better job or a higher standard of living. But in today’s tough economy, many are finding that they just can’t find work or maintain their standard of living where they currently live. It’s especially bad in New York and California, two places where the economy is suffering and the cost of living remains high. Many of these financial refugees are ending up in Texas, a place where the cost of living is low. And many of those that are relocating are in the very lowest income bracket, a further indication that money is their motivation for moving." [emphasis added]

The Wall Street Journal has a better perspective:

``But first the biggest loser, which was Michigan for the fourth year in a row. More than two families left the state for every family that moved in. The fall of GM and Chrysler has obviously hurt. But two-term Governor Jennifer Granholm has also made her state the test case for the policy mix of raising taxes on higher incomes, increasing regulation, and steering taxpayer money at favored programs like job retraining and renewable energy. It hasn't worked for Michigan, even with the auto bailouts.

``Ms. Granholm continues to be a regular economic policy adviser to the White House. Yikes.

``The next two biggest net losers were Illinois and New Jersey, while California and New York also continued to have far more departures than arrivals.

``Ten states gained net arrivals: Oregon, Arkansas, Nevada, Wyoming, Idaho, Colorado, Georgia, New Mexico, Texas and North Carolina. Of those,
only Oregon sways decidedly to the political left and it has benefited from the economic refugees fleeing California.

``Six of the eight states with no income tax were magnets for families
, while eight of the 10 highest income tax states had more people packing. Democrats in state capitals and Washington have convinced themselves that "soak the rich" tax policies can help balance budgets, but the main effect seems to be to stimulate bon voyage parties.[unintended consequences of taxation-Benson]

``As for the biggest winner, well, o
ur readers won't be surprised to learn that it was Washington, D.C. by a large margin. United Van Lines moved nearly seven families to the federal city last year for every three it moved out. As always when the feds gear up the income redistribution machine, the imperial city and its denizens get a big cut of the action.

``As in ancient Rome, the provinces are being required to send tribute to subsidize those living in the capital, which produces few services save transfer payments. No wonder the provincials are starting to rebel—even in Massachusetts."

My comment:

-Low taxes benefits from migration inflows

-High taxes suffers from population loss

-like maggots, political lobbyists, fast expanding government bureaucracy, and other political entities throng to the center where political favors are dispensed.

Politics: It’s Not About Jobs But About Income or Value Producing Opportunities

Speaking about the controversial political issue on employment or jobs, I’d like to share my experience.

Technically I am jobless; that’s because I don’t have an employer who pays me in salary. I also don’t run a formal business or enterprise, so I am not a business person.

Yet to survive, my livelihood depends on a mishmash of several accrued tasks; particularly free lance sales agent work for clients who trades the Philippine equity market, my own personal investments or trades, provides consultancy work for a broker firm via newsletters and doing this blog (where I earn a smidgen from sponsored ads).

In other words, while I am technically unemployed (if measured in wages), I have many jobs.

So the issue isn’t the lack of jobs- that’s because basically everyone can find something to do (like me)-but one of income or the willingness of someone to pay for service rendered and whose payment is acceptable to those providing the labor.

And here we find GMU's Professor Don Boudreaux arguments fundamentally valid and applicable, (bold highlights mine)

``The reason you refuse my offer of a (full-time!) job is because what you really want is not the opportunity to toil for someone else but, rather, the income that you can earn by toiling.

``No matter how prestigious the job, few of us are willing to toil unless we're paid to do so.

``The reverse, of course, isn't true. Nearly all of us are willing to be paid without having to toil for it.

``Only a moment of reflection is necessary to make clear that no society can survive if significant numbers of its denizens try living without working -- without producing. So the reverse course of action -- being paid without working -- is impossible to generalize. It's impossible to establish such a course of action as a general policy open to all.”

My comment:

Put differently, the politically colored issue of unemployment or the lack of jobs is essentially a diversion to promote entitlement "free lunch" privileges by means of interventionism.

Yet, interventionism precludes the elementary societal function that requires that we have to provide or produce what the markets needs or wants for us to be able to consume and survive.

Again Professor Boudreaux,(bold highlights mine)

``By speaking incessantly about "jobs" we lose sight of the above realities. What each person ultimately wants is not a job. What each person wants is income -- the ability to consume -- that enables ready access to a rich, and hopefully growing, array of goods and services.

``And in a society that affords widespread prosperity, income is attainable for each willing worker not by merely producing, but by producing goods and services that other people value.

``Rather than speak of "jobs," therefore, I wish that people who discuss economics would speak instead of "value-producing opportunities."

``Such a term is unquestionably awkward. But the clarity of thought that would be promoted by replacing "job" with "value-producing opportunity" would more than offset the cumbersome terminology.

``This change in word usage would make clearer that what people seek are not opportunities to toil. It would indicate more directly that what people want is maximum possible opportunities to produce value, for only by producing something that other people value will those other people pay a worker handsomely for his or her toiling.

``Substituting "value-producing opportunity" would also help expose the flaws in policies such as protectionism and government make-work programs. Such policies can indeed transfer wealth from society at large to people whose jobs exist only because government relieves them of the need to participate fairly in the market process. But such "jobs" clearly are not "value-producing opportunities" -- for the amount of value that such workers produce is less than they are paid.

``And no society can long survive by institutionalizing such unproductive policies on a widespread scale.”

My comment

As a final thought, interventionism via inflationism that essentially redirects resources from what is required by the market aimed at promoting the interest of a politically vested few leads NOT to more “value producing opportunity” or job based INCOME but LESS. That's because governments essentially don't create wealth, they can only tax and redistribute.

Yet we can’t expect an economy to become wealthy by simply having everyone to dig holes and fill them. Unfortunately, politicians, academic dogmatists and mainstream media tells us otherwise.

It's odd how deception can be construed and imbued as the truth.

Does President Obama Represent American Politics?

Does President Obama represent American politics?

From Gallup

And perhaps for those liberals who'd argue that this all about employment, here is a recent report from Pew Research,

``In fact, the relationship between unemployment and presidential approval varies from crystal clear to murky. Indeed since 1981 there have been a number of times when the ties between changes in joblessness rates and public judgments of the president have been weak or even indiscernible. But the link is strongest when unemployment rises precipitously. And it weakens, or even disappears entirely, when other concerns -- such as national security -- become dominant public issues." (bold highlights mine)

Aside, a stunning come from behind electoral victory in a liberal bailiwick of Massachusetts by Republican Scott Brown, seems to signify a massive symbolical setback to President Obama's programs...

So the answer to the question above appears to be NO!

Thursday, January 28, 2010

Asia Needs Investments More Than Consumption

The Economist NAILS IT this time (well conceptually speaking).

Asia needs more investments more than consumption.

According to The Economist, (bold highlights mine-and comments added)

``ASIA’S current-account surpluses have been widely (if unfairly) blamed for causing the global financial crisis. Large inflows of foreign money helped inflate America’s housing bubble, the argument runs. Many Western economists say that Asians should squirrel away less of their income and consume much more. But a more rigorous analysis suggests that in most Asian economies it is investment, not consumption, that is too low.

[I would add that experts proposing a currency elixir to resolve so-called global imbalances, are those living in NEVERLAND ignoring the fact that every economy operates on different structures, e.g. market, capital or production, regulatory and etc., would mean more than just a single dimensional approach. The implication, say for example, for China to expand domestic demand is to generate a credit bubble, similar to the Japan in the 80s]

``Even economists who believe that most of the blame for the crisis lies in Washington, DC, argue that Asian economies need to shift from exports and investment to consumption as their new engine of growth. In “The Next Asia”, a recently published book, Stephen Roach, chairman of Morgan Stanley in Asia, calculates that consumption in emerging Asian economies fell from 65% of GDP in 1980 to 47% in 2008. American consumer spending, by contrast, accounts for more than 70% of GDP. “Until export-led growth gives way to increased support from private consumption,” he argues, “the dream of an Asian century is likely to remain just that.” His prescription certainly applies to China, where private consumption fell to only 35% of GDP in 2008. But what about the rest of Asia?

``A country’s current-account surplus is, by definition, equal to its domestic saving minus its domestic investment. So Asian economies can reduce their surpluses by saving less (ie, consuming more) or by investing more. Which route is appropriate depends in part on why their current-account surpluses widened during the past decade. In China the blame lies entirely with saving, which rose faster than its investment rate. (India’s saving rate climbed just as steeply, but it was matched by an even bigger jump in investment, which kept its current account in deficit.)

As we tackled in Dueling Keynesians Translates To Protectionism? the principal goal is to produce so as to be able consume, as Adam Smith argued centuries ago, ``Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self-evident that it would be absurd to attempt to prove it. But in the mercantile system the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce."

Hence any arguments based on heuristics (mental shortcuts) and or oversimplification of facts and theories, particularly on the currency magic wand, would be fallacious.

Besides, for experts to argue for imposing on other countries is to engage in reckless overweening presumptions- this risks provoking antagonism that would undermine or worsen the present conditions that would likely result to the opposite goals.

Moreover, the liberals' proclivity to immerse in fingerpointing fundamentally shifts domestic policy failure accountability to other parties. As in the above, global investments has been MORE than savings which implies that the world, specifically the G-7 countries, has engaged in inflationism. Therefore, theories such as the "global savings glut" is nothing but an attempt to divert policy failures to others and at the same time justify inflationism.

Finally back to the Economist, ``A report by the Asian economics team at Barclays Capital concludes that to reduce their excess saving, most Asian economies need to invest more rather than consume more. Higher investment, especially in infrastructure, they argue, would not only reduce current-account surpluses but also boost growth and living standards. Better roads and railways would help farmers get their produce to cities and enable manufacturers to export their goods abroad. Clean water and sanitation could raise the quality of human capital, thereby lifting labour productivity."

Here we depart with the Economist or with Barclays Capital.

As seen in the earlier chart, Asia has engaged in massive spending during the early 90s but this didn't translate to the desired outcome. Yet the article didn't touch on why higher spending didn't engender domestic demand.

Well it's because investments then hasn't been directed at WHAT the market wants or needs, but instead had been fostered by bubble policies and profligate government spending which eventually led to the Asian Financial Crisis of 1997.

Moreover, as we previously argued, the protectionist-state capitalism model adapted by many Asian nations, e.g. ASEAN states, severely impeded market based investments.

Nevertheless, ASEAN and East Asia's thrust to integrate regionally and globally can be read as a major positive development going forward. [see Asia Goes For Free Trade]

Mark Mobius' Top 10 Emerging Markets

Here is Mark Mobius' roster of top 10 emerging market investment destinations.

From Timesonline,

1) Brazil

“It’s gone through an incredible transformation under President Lula. The resources sector is pretty important and there is also an active consumer sector. A number of banks also look interesting prospects right now.”

2) China

“This is the world’s fastest growing major economy and a big rise in per capita income is fuelling demand for consumer products such as cars.”

3) India

“This is the second fastest growing major economy. India is one of the most important commodity producers, especially of minerals such as iron ore. Its educated workforce is also a strong plus point and they have helped create many software consulting companies.”

4) Thailand

"The country has been handicapped by political concerns but a consumer revolution is now taking place. The banking system is ripe for growth and there are oil and gas deposits in the Gulf of Siam.”

5) Russia

“Russia has huge natural resources, including oil and gas but also nickel and palladium, which are much in demand. The Russians also possess considerable technological skills, thanks to their education system.”

6) Turkey

“This has been a favourite of mine for some time. I like the entrepreneurial spirit of the people and we have invested in banks and petroleum retailers.”

7) South Korea

“It has recently recovered from a dip and is beginning to come up again. We like the construction sector and the energy sector.”

8) Indonesia

“At 237 million Indonesia has a bigger population than eaither Russia or Brazil. It is a huge potential consumer market which we are keen to tap into.”

9) South Africa

“It has lots of problems but it also has some very attractive companies, such as Anglo American, the mining company. South Africa is a good way of obtaining exposure to the mining sector.”

10) Singapore

“This is an attractive place to do business and it has one company that we especially like: Dairy Farms South Asia, which has spread out from farming into retailing and food production across southern Asia.”

My comment:

If Templeton chief and market savant Mark Mobius lists the Philippine neighbors as major investment destinations, then this is likely to be a rising tide lift regional boats phenomenon. Oh yes I admit the guilt for using the fallacy of association (region) and cognitive bias called comfort of the crowds (neighbors)-although increasing regionalization should a key driving force for this.

Graphic: Anatomy Of US Financial Corporatism-The AIG Way

Here is an interesting graphic on AIG's bailout.

Joe Weisenthal and Kamelia Angelova from the Business Insider,

``Confused about the ongoing AIG controversy?

``Don't be any longer.

``Professor Linus Wilson has put together this helpful chart showing exactly how the bailout went down, complete with which banks got how much.

``Two things stand out: The Treasury's overpayment for preferred stock was a crucial part of the bailout, and though Goldman Sachs is usually held up as the bad guy here, SocGen received $2.5 billion more.

``Hope the Europeans appreciate your (the taxpayer) ponying up."

Here is John Stossel on what could be described as crony capitalism or corporatism

``What is crony capitalism? It's the economic system in which the marketplace is substantially shaped by a cozy relationship among government, big business, and big labor. Under crony capitalism, government bestows a variety of privileges that are simply unattainable in the free market, including import restrictions, bailouts, subsidies, and loan guarantees...

``If free-market capitalism is a private profit-and-loss system, crony capitalism is a private-profit and public-loss system. Companies keep their profits when they succeed but use government to stick the taxpayer with the losses when they fail. Nice work if you can get it.

Wednesday, January 27, 2010

Bill Gross: Beware The Ring Of (DEBT) Fire!

Here is PIMCO's Big Boss Mr. Bill Gross who makes the case of HIGH DEBT-LOW Growth and LOW DEBT-HIGH Growth investment theme...

They can be broken down into 2: For risk assets-select Asia and emerging markets and for less risky fixed income assets low debt developed nations.
Here is Mr. Gross: (bold emphasis his)

1. Risk/growth-oriented assets (as well as currencies) should be directed towards Asian/developing countries less levered and less easily prone to bubbling and therefore the negative deleveraging aspects of bubble popping. When the price is right, go where the growth is, where the consumer sector is still in its infancy, where national debt levels are low, where reserves are high, and where trade surpluses promise to generate additional reserves for years to come. Look, in other words, for a savings-oriented economy which should gradually evolve into a consumer-focused economy. China, India, Brazil and more miniature-sized examples of each would be excellent examples. The old established G-7 and their lookalikes as they delever have lost their position as drivers of the global economy.

2. Invest less risky, fixed income assets in many of these same countries if possible. Because of their reduced liquidity and less developed financial markets, however, most bond money must still look to the “old” as opposed to the new world for returns. It is true as well, that the “old” offer a more favorable environment from the standpoint of property rights and “willingness” to make interest payments under duress. Therefore, see #3 below.

3. Interest rate trends in developed markets may not follow the same historical conditions observed during the recent Great Moderation. The downward path of yields for many G-7 economies was remarkably similar over the past several decades with exception for the West German/East German amalgamation and the Japanese experience which still places their yields in relative isolation. Should an investor expect a similarly correlated upward wave in future years? Not as much. Not only have credit default expectations begun to widen sovereign spreads, but initial condition debt levels as mentioned in the McKinsey study will be important as they influence inflation and real interest rates in respective countries in future years. Each of several distinct developed economy bond markets presents interesting aspects that bear watching: 1) Japan with its aging demographics and need for external financing, 2) the U.S. with its large deficits and exploding entitlements, 3) Euroland with its disparate members – Germany the extreme saver and productive producer, Spain and Greece with their excessive reliance on debt and 4) the U.K., with the highest debt levels and a finance-oriented economy – exposed like London to the cold dark winter nights of deleveraging.

Of all of the developed countries, three broad fixed-income observations stand out: 1) given enough liquidity and current yields I would prefer to invest money in Canada. Its conservative banks never did participate in the housing crisis and it moved toward and stayed closer to fiscal balance than any other country, 2) Germany is the safest, most liquid sovereign alternative, although its leadership and the EU’s potential stance toward bailouts of Greece and Ireland must be watched. Think AIG and GMAC and you have a similar comparative predicament, and 3) the U.K. is a must to avoid. Its Gilts are resting on a bed of nitroglycerine. High debt with the potential to devalue its currency present high risks for bond investors. In addition, its interest rates are already artificially influenced by accounting standards that at one point last year produced long-term real interest rates of 1/2 % and lower.

End quote.

One last noteworthy quote...

"the use of historical models and econometric forecasting based on the experience of the past several decades may not only be useless, but counterproductive."

US Stock Market Turbulence Hardly About Fundamentals

In the US, it's been alleged that the recent market turbulence has exhibited on the fundamental state of her economy.

However, if we look at the recently concluded earnings performance of listed corporations...

they don't seem to paint the supposed picture.

According to Bespoke Invest, (bold emphasis mine)

``The earnings picture continues to look impressive. Heading into the close yesterday, the earnings beat rate (% of companies beating EPS estimates) stood at 71%, which is high in its own right. Last night and this morning, another 64 companies reported earnings, taking the total number of US companies that have reported since earnings season began up to 223. As shown below, the earnings beat rate now stands at 73.5%, which would mark the highest reading for any quarter since at least 1999 if the reporting period ended today. And even though the S&P 500 finished the day down, the companies that reported earnings last night and this morning collectively had a stellar day. The S&P 500 closed the day down 0.42%, but the stocks that reported earnings averaged a gain of 2.40%! The average 1-day % change for all companies reporting earnings this season stood at -0.24% coming into today, but the 64 additional companies added to the total today have bumped the overall number up to 0.52%."

Also if we look at the Index of Leading Economic Indicators, we see the same signs...
According to Northern Trust's Asha Bangalore, ``The Conference Board's Index of Leading Economic Indicators (LEI) rose 1.1% in December, marking the ninth consecutive monthly increase. The year-to-year change of the quarterly index advanced one quarter has a strong positive correlation with the year-to-year change of real GDP. The robust performance of the index points to continued economic growth." (emphasis added)

In short, actions in the markets again don't reflect on conventional fundamentalism.

While the (bull-bear) arguments may focus on ex-post events as against ex-ante scenarios, still there seems little clues that any of the recent activities could be attributable to "economic" metrics, unless one argues that a surprise or a sudden largely unseen "collapse" is in the offing.

That would be, of course, based on a preconceived bias and not based on current evidence.

Instead, this would seem to corroborate our thesis that politics have been the main force responsible for today's market jitters.

Tuesday, January 26, 2010

Fear The Boom And Bust- Keynes versus Hayek Rap Video

Hayek and Keynes debate the Boom Bust cycle on a rap video made by Professor Russ Robert of Cafe Hayek.

Update here's the lyrics:

We’ve been going back and forth for a century

[Keynes] I want to steer markets,

[Hayek] I want them set free

There’s a boom and bust cycle and good reason to fear it

[Hayek] Blame low interest rates.

[Keynes] No… it’s the animal spirits

[Keynes Sings:]

John Maynard Keynes, wrote the book on modern macro

The man you need when the economy’s off track, [whoa]

Depression, recession now your question’s in session

Have a seat and I’ll school you in one simple lesson

BOOM, 1929 the big crash

We didn’t bounce back—economy’s in the trash

Persistent unemployment, the result of sticky wages

Waiting for recovery? Seriously? That’s outrageous!

I had a real plan any fool can understand

The advice, real simple—boost aggregate demand!

C, I, G, all together gets to Y

Make sure the total’s growing, watch the economy fly

We’ve been going back and forth for a century

[Keynes] I want to steer markets,

[Hayek] I want them set free

There’s a boom and bust cycle and good reason to fear it

[Hayek] Blame low interest rates.

[Keynes] No… it’s the animal spirits

You see it’s all about spending, hear the register cha-ching

Circular flow, the dough is everything

So if that flow is getting low, doesn’t matter the reason

We need more government spending, now it’s stimulus season

So forget about saving, get it straight out of your head

Like I said, in the long run—we’re all dead

Savings is destruction, that’s the paradox of thrift

Don’t keep money in your pocket, or that growth will never lift…


Business is driven by the animal spirits

The bull and the bear, and there’s reason to fear its

Effects on capital investment, income and growth

That’s why the state should fill the gap with stimulus both…

The monetary and the fiscal, they’re equally correct

Public works, digging ditches, war has the same effect

Even a broken window helps the glass man have some wealth

The multiplier driving higher the economy’s health

And if the Central Bank’s interest rate policy tanks

A liquidity trap, that new money’s stuck in the banks!

Deficits could be the cure, you been looking for

Let the spending soar, now that you know the score

My General Theory’s made quite an impression

[a revolution] I transformed the econ profession

You know me, modesty, still I’m taking a bow

Say it loud, say it proud, we’re all Keynesians now

We’ve been goin’ back n forth for a century

[Keynes] I want to steer markets,

[Hayek] I want them set free

There’s a boom and bust cycle and good reason to fear it

[Keynes] I made my case, Freddie H

Listen up , Can you hear it?

Hayek sings:

I’ll begin in broad strokes, just like my friend Keynes

His theory conceals the mechanics of change,

That simple equation, too much aggregation

Ignores human action and motivation

And yet it continues as a justification

For bailouts and payoffs by pols with machinations

You provide them with cover to sell us a free lunch

Then all that we’re left with is debt, and a bunch

If you’re living high on that cheap credit hog

Don’t look for cure from the hair of the dog

Real savings come first if you want to invest

The market coordinates time with interest

Your focus on spending is pushing on thread

In the long run, my friend, it’s your theory that’s dead

So sorry there, buddy, if that sounds like invective

Prepared to get schooled in my Austrian perspective

We’ve been going back and forth for a century

[Keynes] I want to steer markets,

[Hayek] I want them set free

There’s a boom and bust cycle and good reason to fear it

[Hayek] Blame low interest rates.

[Keynes] No… it’s the animal spirits

The place you should study isn’t the bust

It’s the boom that should make you feel leery, that’s the thrust

Of my theory, the capital structure is key.

Malinvestments wreck the economy

The boom gets started with an expansion of credit

The Fed sets rates low, are you starting to get it?

That new money is confused for real loanable funds

But it’s just inflation that’s driving the ones

Who invest in new projects like housing construction

The boom plants the seeds for its future destruction

The savings aren’t real, consumption’s up too

And the grasping for resources reveals there’s too few

So the boom turns to bust as the interest rates rise

With the costs of production, price signals were lies

The boom was a binge that’s a matter of fact

Now its devalued capital that makes up the slack.

Whether it’s the late twenties or two thousand and five

Booming bad investments, seems like they’d thrive

You must save to invest, don’t use the printing press

Or a bust will surely follow, an economy depressed

Your so-called “stimulus” will make things even worse

It’s just more of the same, more incentives perversed

And that credit crunch ain’t a liquidity trap

Just a broke banking system, I’m done, that’s a wrap.

We’ve been goin’ back n forth for a century

[Keynes] I want to steer markets,

[Hayek] I want them set free

There’s a boom and bust cycle and good reason to fear it

[Hayek] Blame low interest rates.

[Keynes] No it’s the animal spirits

“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”

John Maynard Keynes

The General Theory of Employment, Interest and Money

“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

F A Hayek

The Fatal Conceit

More Evidence On The Deflating Man Made Climate Change Bubble

The anthropomorphic climate change hysteria is fast proving to be a deflating bubble [see earlier post here Exposing The Fraud Behind Man Made Global Warming? ]

According to (bold highlights mine)

``A London newspaper reports today that the unsubstantiated Himalayan-glacier melt figures contained in a supposedly authoritative 2007 report on climate warming
were used intentionally, despite the report’s lead author knowing there were no data to back them up.

``Until now, the organization that published the report – the Nobel Prize-winning Intergovernmental Panel on Climate Change –
had argued the exaggerated figures in that report were an accident: due to insufficient fact checking of the source material.

``Uh, no. It n
ow appears the incident wasn’t quite that innocent.

``The Sunday Mail’s David Rose reached Murari Lal, the coordinating lead author of the 2007 IPCC report’s chapter on Asia. Lal told Rose that he knew there were
no solid data to support the report’s claim that Himalayan glaciers – the source of drinking and irrigation water for downstream areas throughout Asia – could dry up by 2035. Said Lal: “We thought that if we can highlight it, it will impact policy makers and politicians and encourage them to take some concrete action.” In other words, Rose says, Lal “last night admitted [the scary figure] was included purely to put political pressure on world leaders.”

``A noble motive, perhaps, but totally inexcusable."

Uh.ummm. The Emperor [man made climate change religion] wears NO clothes!

Successful Bond Raising Dispels The Greek Debt Crisis Myth

Greece successfully raised funding on the debt markets on an oversubscribed basis.

This from the Timesonline,

``Concerns over a possible debt crisis in Greece eased yesterday after huge demand for the Greek Government’s first bond issue of this year.

``Greece had planned to sell €5 billion (£4.4 billion) of new five-year bonds to investors, but, after about €25 billion of demand emerged, it decided to issue €8 billion.

``The auction had been seen as a key test of investors’ appetite for Greek government debt and was heralded as a triumph by the authorities in Athens. “There was a lot of interest,” Spyros Papanikolaou, head of Greece’s public debt management agency, said. “This proves the trust [that] investors have in Greece’s economy. Greece [has] proved [that] it can raise the funds it needs for 2010 without a problem.”

The Greece Athex Composite rallied 2.8% as shown below from Bloomberg, in spite of the sustained pressures on the European and Asian markets.

While the uncertainty over Greece's debt problems haven't been entirely resolved, the successful bond issuance serves to validate our thesis that the PIIGS problem isn't the likely cause of the current stock market pressures, as discussed in When Politics Ruled The Market: A Week Of Market Jitters.

For the mainstream, it's more about the available bias or seeking of any available event that could be imputable to market action.

Monday, January 25, 2010

US Trembler: Volcker Rule or Bernanke Confirmation?

``What we do want, what we insist upon, is that no longer will decisions that carry so much economic weight be made in absolute secrecy. We want to know what arrangements the Fed makes with other governments and central banks. We want to know who is benefitting from the actions of the Fed and what deals are being made. The Fed is already reacting to pressure by scaling back its liquidity facilities and returning to more traditional monetary policy through direct asset purchases. With nearly $800 billion in mortgage-backed securities on its books already, $800 billion in Treasury securities, and no real limit to what the Fed can acquire, there is a tremendous opportunity for malfeasance. We need to know who the Fed deals with, what they buy, how much they spend, and who benefits. As good as any step towards Federal Reserve transparency is, anything less than full disclosure at this point is unacceptable.”-Congressman Ron Paul, Anything Less Than Full Disclosure is Unacceptable

The meltdown in the US market’s have largely been attributed to the proposed Volcker Rule, where US President Barack Obama endorsed Former Fed Chair Paul Volcker plan to overhaul the banking sector’s risk taking activities by restricting in house trading activities or proprietary trading and by preventing them from also investing in hedge funds or private equity operations.

While reducing the banking system to its original function of warehousing (deposit safekeeping) and loan services (acts as intermediary to finance business undertaking) would seem pretty ideal, the radical approach to “cleanse” the banking system of the so-called “greed” appears to be in reaction to the massive political capital loss suffered by President Obama at the hands of Republicans in the recent Massachusetts senatorial election, reportedly one of the main bailiwicks of liberal forces in the US.

The electoral loss signaled Obama’s health reform bill as losing popular support, which may likewise translate to a mighty comeback for the GOP (Grand Old Party) in the upcoming 2010 senatorial elections. The prospects of the Republicans back at the helm of the Senate risks enervating Pres. Obama’s programs, hence like all politics, desperate times calls for desperate measures.

The massive loss of political capital meant that President Obama had to piggyback on a popular issue, which at this point has been no less than to bash on the highly unpopular banking sector to regain some points.

Nonetheless while we mentioned that reducing the banking sector to its basic function should have been ideal, the Obama-Volcker tandem has merely been passing the buck.

They’ve fundamentally ignored the role of government failure that led to the recent two boom bust cycles, which essentially had been due to easy money policies, albeit for the recent housing bust these should have included the skewed capital regulations that encouraged excess leverage and regulatory arbitrage, housing policy that pushed home ownership by subsidizing mortgages and regulators sleeping at the wheel or in cahoots or captured by the industry, as well as, tax policies that encouraged debt take up.

Policymakers frequently deal with the superficial, it has never addressed the roots of “too big to fail” which is largely a product of crony capitalism emergent from bubble policies.

As per Constantino Bresciano-Turroni as quoted by Gerard Jackson ``The increase in banking business was not the consequence of a more intense economic activity. The work was increased because the banks were overloaded with orders for buying and selling shares and foreign exchange, proceeding from the public which, in increasing numbers, took part in speculations on the Bourse. The banks did not help in the production of new wealth; but the same claims to wealth continually passed from hand to hand.”

In other words, the so-called banker’s greed is a result of policy based support to the banking sector, and it’s kindda obvious where this leads to-another Potemkin village or poker bluff.

Unfortunately these desperate attempts by the US President risks unforeseen consequences, considering that major banks engage in these activities have been supported by the US government.

This translates to policy contradictions which increase the overall risk environment thereby heightening uncertainty, and thus, perhaps the market’s sharp reactions.

Figure 6: S&P ETFs By Sector

Well based on the sectoral performance by the S&P ETFs, the materials, financials and energy took the brunt of the recent selloffs, these implies that since China has emerged as a major force in the demand for commodities then the fall in materials and energy could have been construed as China related and the fall of the Financials as imputed on the Volcker Fund issue.

Figure 7: Danske: US treasuries

Moreover, this week’s meltdown didn’t come with higher interest rates. Therefore the issue wasn’t about funding, interest rate and or rollover risks. Instead the lower yields signaled a supposed flight to safety as Danske Team indicates above (right window) which has been corroborated by a rising US dollar.

Considering that the net supply of bonds have shriveled due to Fed QE purchases, the selloff wasn’t also indicative of concerns over exit plans.

One analyst offered a conspiracy theory and wrote that for the US to be able fund its intractable deficits she would need to engineer a stock market crash, as the frightened public (domestic and foreign) will likely buy into US treasuries. Although I would tend to dismiss this as normally outrageous, as any short term benefits will offset by medium to long term losses, desperate politicians may embrace almost anything silly for as long as it could preserve their privileges or power.

Lastly there is also the issue of the Ben Bernanke’s reconfirmation as the Federal Reserve chairman. Considering Mr. Bernanke needs 60 votes in the Senate to extend his term, the current anti-bank sentiment has prompted several Senators to cross partylines and move against extending Bernanke’s tenure which expires on January 31st.

``According to a Dow Jones Newswires tally, 26 senators have said they will back him; 15 have said they will oppose him. The remaining 59 haven't said what they will do. Under Senate rules, the earliest a vote could come is Wednesday,” notes the Wall Street Journal.

So why could the market crash with Bernanke’s confirmation in the line?

Perhaps Connecticut Democrat Senator Christopher Dodd, a Bernanke backer, gives us an inkling of what Ben Bernanke may or may not do, "I think if you wanted to send the worst signal to the markets right now in the country and send us in a tailspin, it would be to reject this nomination."

In other words, there seems no easy or better way to get reconfirmed than by holding the market hostage!

Yet all these political muddling makes us wonder, why would US debt get supported when regime uncertainty appears to be snowballing? Why should the US dollar become the safe haven when the pillars of central banking appear to be in jeopardy?

Other than all three variables-China’s efforts to quash a homegrown bubble, the US Volcker Fund brouhaha or the Bernanke confirmation controversy and fears of default Greece default-the markets could be looking for an excuse to correct.

So who says the markets are solely about the economy?

China’s Attempt To Quash Its Homegrown Bubble

``Indeed, there are two potential scenarios for EM stock prices: either a full-fledged mania will develop with multiples continuing to expand, or, a setback/period of indigestion will occur before a new upleg develops. Currently, the odds of a mania-type pattern developing in emerging markets are not significant. If a mania were to develop, Chinese stocks would be at the epicenter because China has the fastest growth rate”-BCA Research, Emerging Markets Appear To Be Fully Priced

China seems bowing to international pressure.

Since she has been accused of fostering or blowing bubbles, where even popular fund manager James Chanos has openly declared shorting China which became a recent controversy in his debate with Jim Rogers [see Jim Chanos Goes From Micro To Macro With Bet Against China], over the past 3 weeks, China has responded by engaging in a series of implied tightening measures, i.e. by allowing T-Bill rates to increase, by raising bank reserves, and last week by verbally arm twisting her banks to curtail credit expansion. It’s almost like one intervention per week.

And when government intervenes in the marketplace we expect the impact in the direction of the planned intervention to manifest itself over the short term. And that’s the reason why China’s markets have underperformed the G-7 and its emerging market peers.

However, in my view, the argument over bubbles seems grossly misunderstood. A Bubble is essentially a cyclical process, where government interventions in the economy, primarily via interest rate manipulations and compounded by other regulations, lead to massive distortions in the patterns of production and capital allocation, which eventually results to relative overinvestments [as discussed in What’s The Yield Curve Saying About Asia And The Bubble Cycle?].

In short, such process is exhibited through phases. And one of the symptoms is that suppressed interest rates with the accompanying credit expansion make long term investments appealing.

And we seem to be getting anecdotal evidences from these;

From Edmund Harriss of Guinness Atkinson, ``Economic growth of near 10% in the past year has been fuelled by domestic growth, almost all in­vestment, on the back of huge injections of liquidity and increased debt. Over $1 trillion of new credit has been extended and while we can see that the bulk is intended for medium- and long-term investment rather than short-term there is no doubt that money has found its way into the stock and real-estate markets. The appearance of state companies at land auctions (those who have had no prior interest in buying land) is significant. This has contributed to soaring land prices and helped a recent land sale in Guangzhou to achieve a record price of $852 per square meter ($78 per square foot), some 54% above the offer price.”

From Robert J. Horrocks, PhD and Andrew Foster of Matthews Asia, ``Nevertheless, it is prudent to be cautious about bank lending—not because we fear an unmanageable amount of nonperforming loans for the economy, but because Chinese banks generally made 3-year loans for projects with decade-long payoff periods (i.e., loans that were not appropriately matched to cash flows). Banks may have lent on the assumption of local government backing, which ultimately may not be provided.”

The other symptom is that increased money supply fosters rising prices in the economic system which leads to pressures to raise interest rates (see figure 4)

Figure 4: Danske Bank: China’s Rising Inflation

As you can see, while China has indeed been exhibiting symptoms of a formative bubble, as manifested above via investments in long term projects, aside from sporadic signs of frothy prices and emergent inflation, there seems to be less convincing evidences yet [see China And The Bubble Cycle In Pictures] that she has transitioned into the culmination stage or the manic phase -where bubbles have reached its maximum point of elasticity which is usually in response to the rollback of easy money policies by the government.

Besides, manic phases usually don’t draw in many and vocal skeptics. Instead the public will most likely be talking of a NEW PARADIGM. In other words, a manic phase would translate to a capitulation of pessimists, cynics and skeptics.

Hence, credit expansion is a necessary but not a sufficient condition for a bubble ripe for implosion. The other necessary ingredients to complete the recipe would be an asset price melt-up (intensive overvaluations) backed by euphoric public (hallucinatory bullish sentiment).

In addition, China seems reluctant to directly raise interest rates.

That’s because we think that policy arbitrage could work to induce the aggravation of China’s bubble cycle despite her rigid capital regulatory regime. And so far these have been manifested by the waves of capital flows into her system-indirectly or via unregulated channels. (see figure 5)

Figure 5: Danske Bank: China’s Staggering Hot Money Flows

China’s reserve accumulation has been a product of direct and indirect foreign money flows into the system (left window) which is likewise manifested through record accumulation of reserves (right window).

According to Danske’ Flemming J. Nielsen, ``We see no signs that China’s reserve accumulation is easing in today’s data and it appears that speculative hot money inflows has become a major policy challenge for China. Firstly, Peoples Bank of China (PBoC) will be struggling to neutralize the liquidity impact from its massive purchase of foreign exchange. This might be one reason for PBoC raising its reserve requirement for banks earlier in the week. Secondly it underlines that despite China’s capital controls, capital flows has become more important and it has become more difficult for China to maintain an independent monetary policy, while simultaneously maintaining a quasi peg to USD.” (all bold highlights mine)

And it is also one reason why the Chinese government has utilized unorthodox means of curbing the credit process through “verbal persuasion” over her banking sector.

So yes, over the interim perhaps we should expect the Chinese government to constantly apply further pressure on its system in an attempt to wring out hot money and reduce credit expansion to avert a full blown bubble from developing. And this could equally translate to possible weakness in China’s stock markets over the interim, as the market adjusts to the conditions of repeated interventions of the Chinese government.

But no, if her asset markets begin to recover even amidst these attempts or if markets start to disregard such policies then watch out, the asset melt up phase could commence.

And as we earlier described in Asia And Emerging Markets Should Benefit From The 2010 Poker Bluff, the more China tightens via the interest rate tool, the bigger the odds for a melt up as the spread of interest rates between China and G-7 economies widens. This would emanate from policy divergences- a tightening China, while the US, UK, Japan and EU remain loose-which becomes the fodder to the next bubble in motion.