Wednesday, March 31, 2010

Earth Hour: North Korean Version

Many of the locals have reportedly joined the celebration of Earth Hour.

Many have done so because like elections, they are there for "symbolism". It is more about social fad and peer pressure. Most of these participants hardly know of the economic and political implications and the attendant "costs" of what "earth hour" is about, and to whose benefit such policies would bring about.

Think of it, why does everyone seem to protest when prices of energy goes up, when high prices, in the real world, should spur "conservation" or a shift in consuming patterns?

So almost like everything else popular, seductive soundbites make it appear that the solution to environmental predicament is just a matter of allegorical representation or popular appeal, devoid of economic truths.

Nevertheless, we have a great example of earth hour as a permanent policy-North Korea!

According to a 2006 Daily Mail report, (picture above)

``The regime in the north is so short of electricity that the whole country is switched off at 9 p.m. - apart from the capital of Pyongyang where dictator Kim Jong-il and his cohorts live in relative luxury. But even there, lighting is drastically reduced.

``The result, as shown in this picture taken one night earlier this week, is a startling contrast between the blacked-out north and the south, which is ablaze with light, particularly around major cities and the capital, Seoul, in the north-west of the country." (bold highlights mine)

Professor Don Boudreaux makes this fitting comment ``the Dear Leader – like his father before him – works tirelessly to keep his nation’s carbon footprint to a bare minimum; in fact, if you look carefully you can see what is likely his, and only his, office light glimmering in Pyongyang.

``North Koreans show their reverence for mother nature not with a mere Earth Hour but, rather, with an entire “Earth Lifetime.”

Earth Hour, in the mainstream perspective, means bringing back societal order to the medieval eon. It means socialism. Just ask North Korea's Kim.

Tuesday, March 30, 2010

Why The Slack In Credit To Small Business In The US? Because Regulators Won't Allow Them

Politics can be characterized as a stratagem of saying one thing and doing another.

Here is a good example. US policymakers say that credit is vital to the economy and that all their efforts have been targeted at restoring the credit process.


But based on a report, what the left hand is doing seems being undone by the right hand.


From the
USA Today, [hat tip: Douglas French Mises Blog] (all bold emphasis mine)

``Across the USA, banks say there's a big reason they aren't lending more:
Regulators won't let them. Even as the White House exhorts banks to open the lending spigots, particularly for small-business borrowers who are key to job growth, banks say government field examiners are toughening their reviews in ways that discourage sound loans.

``Rep. Blaine Luetkemeyer, R-Mo., a former bank examiner, recently laced into top banking regulators. "We have this
huge disconnect between what's going on here in D.C. (and) what's actually been going on out in the field," he told them at a joint hearing of the House Financial Services and Small Business committees. "Quite frankly, you guys are part of the problem."

``Bank examiners — including those at the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency — don't approve or deny loans. However, bank executives say examiners are downgrading the ratings of performing loanssimply because the collateral — typically, commercial real estate — has fallen in value or the borrower is located in an economically distressed state. And
they're making banks exceed the minimum levels for capital and bad-loan reserves. Those practices, they say, fail to consider banks' familiarity with their communities and borrowers. And they constrict lending."

So much for lack of demand.


It makes me wonder, are these being done deliberately so as to justify more intervention and inflationism?

Popularity Ratings of World Leaders and the Pope

Here is a curious political indicator from the Economist-the Pope's popularity.
According to the Economist,

``THE pope addressed tens of thousands in St Peter’s Square on Palm Sunday (March 28th) at the start of Holy Week in the Catholic Church. Despite the crowds, Pope Benedict XVI’s popularity may be waning as a result of his handling of recent child-abuse scandals across Europe and America. Some even want him to resign for his part, before becoming pope in 2005, in a decision merely to send for therapy an alleged paedophile priest, who later returned to pastoral work. The church has said that Cardinal Ratzinger (as he then was) did not know that the priest returned to work. The pope is also accused of ignoring pleas for the removal of an American priest, who allegedly molested 200 deaf boys. Yet the pope's supporters point to his earlier efforts, reportedly ignored by his predecessor John Paul II, to launch a full inquiry into the behaviour of a cardinal in Vienna who was removed from office in 1995 after accusations of sex abuse."

While the Economist focuses on the Pope, it is noticeable that it isn't merely the Pope that has been stung by a bout of disapproval but most of the leaders of the world's major economies, particularly France's Sarkozy, (who is the most unpopular, followed by Obama, UK's Brown, EU commission's Barroso and Spain's Rodriguez Zapatero.

This is except for UN's Ki-Moon (largely neutral or marginally positive), and surprisingly Germany's Merkel which accounted for a big plus in ratings changes.


Angela Merkel is perceived to be the German version of "Maggie Thatcher".

Could it be that the world is becoming more attuned to a return of "Thatcherism" and "Reaganism" amidst today's onslaught of social democracy?


Monday, March 29, 2010

Example of Political Priorities: Politics First, You Later

This should be a good example of public choice, where officials decide on the basis of their self-interest than for the public good.

From Mary Anastasia O' Grady of the Wall Street Journal, (bold highlights mine) [hat tip: Cafe Hayek's Don Boudreaux]

``The image of House Speaker Nancy Pelosi wielding what resembled an oversized mallet while leading a mob of congressmen across Capitol Hill on the day of the health-care vote is the stuff of nightmares. It is also instructive. As a metaphor for how the Democrats view their power, the Pelosi hammer-pose could not be more perfect.

``Just ask Honduras.

``Last year, the U.S. tried to force the reinstatement of deposed president Manuel Zelaya. When that failed and Team Obama was looking like the Keystone Cops, it sent a delegation to Tegucigalpa to negotiate a compromise.

``Participants in those talks say Dan Restrepo, senior director for Western Hemisphere affairs at the National Security Council, let slip that the U.S. interest had to do with American politics. The Republicans, he said, were using the administration's support for Mr. Zelaya, an ally of Venezuelan Hugo Chávez, against the Democrats. It's not going to work, Mr. Restrepo is said to have informed the other negotiators, because "we have the power" and would be keeping it for a long time.

``It can't have been comforting for Hondurans to learn that while their country was living a monumental crisis, fueled by U.S. policy, Mr. Restrepo's concern was his party's power. For the record, an NSC spokesman says "Mr. Restrepo didn't say that." But my sources are more plausible considering what has transpired since."

Bottom line, according to Ms. O' Grady: ``It's hard to imagine what the U.S. thinks it achieves with a policy that divides Hondurans while strengthening the hand of a chavista. Revenge and power come to mind. Whatever it is, it can't be good for U.S. national security interests."

Ludwig von Mises on politics: "Political realism, that hodgepodge of cynicism, lack of conscience, and unvarnished selfishness."

Taylor Mali: "What Teachers Make"

Great poem by Taylor Mali about the role of a Teacher. (Hat tip: Seth Godin)

Is Honesty Enough For A Society To Succeed?

On my facebook, I frequently post a quote from a famous person or from an article I read or came across whose message, I THINK, is noteworthy to be remembered.

I posted this quote about 2 weeks ago from Alfred Whitney Griswold: "Certain things we cannot accomplish… by any process of government. We cannot legislate intelligence. We cannot legislate morality. No, and we cannot legislate loyalty, for loyalty is a kind of morality."

Probably in reaction to this, an indirect comment by a friend pointed out that relationships of people are best governed by honesty.

So to test the merits of the argument I responded with a question from a possible case-scenario.

“Suppose that I went to an ATM machine to do a transaction. I noticed that because it was late at night, there was nobody around the premises. So as I transacted with the machine, I noticed a 1,000 peso bill on the floor about a foot away from the ATM.

“Assuming that no one returned during the course of your transactions to claim the money, or after x minutes of wait.

“I have a set of options:

“1. ignore the money and leave the premises.

“2. pick up the money with the intent to give the money to the bank by daytime

“3. pick up the money and surrender it to the police station

“4. pick up the money and donate it to the church or to the mendicant at the next street corner

“5. pick up the money for myself

“Which of do you think among these options represent as honest which you recommend that I should take? And why?”

To my surprise two respondents made different choices on the above case. One chose 2 and the other chose 4.

This prompted me to make my reply and drive to the point.

“Going back to the issue, so what defines honesty? According to Dictionary.com, it is “truthfulness, sincerity, or frankness.” In my opinion, ‘truthfulness, sincerity, or frankness’ is rooted on upon the individual’s conscience or the moral or ethical values or principles. Simply said, the sense of right and wrong or the sense of justice that undergirds one’s thoughts and actions.

“So how do we arrive at our sense of right and wrong? We acquire these from an amalgam of factors: the teachings of our parents, the school, religion, culture, tradition, peers, what we read or watch, and the norms observed or practiced by the community.

“I would also presume that if this were to be an open survey, the answers by people will reflect on such diversity. In short, there will be NO universal single ‘honest’ answer.

“In addition, what some people will say and what they will do can differ in actual experience, as some people can be influenced by reputation, e.g. some don’t want to be seen “selfish”, or moods.

“This only illustrates that people can have different but honest opinions and intentions about how they interpret and judge specific events based on their sense of values at the time when such conditions emerge.

“Of course, lest be accused of framing, there are many alternative actions that can result from such a scenario (tearing up the money, burning the money etc.), but we will leave it to these selection to make it simple.

“The important question is, “can differences in “honesty” create conflict among people?” Unfortunately, the answer is yes.

“Here is an extension of my earlier example.

“Suppose that I have been undecided as to what to do with the money and thus brought it home, but shared this dilemma to my best friend Louie. Because of Louie’s excitement he went to tell the church, the police and the bank.

“The next day the lawyer of the bank emerges to claim the money, citing that their accountant reported that the ATM, where I transacted with, recorded a missing 1,000 pesos. The bank also cited that since the money I recovered was under their property premises, hence, it was rightfully theirs.

“[Of course, money lost by the ATM may not be the same money that I found; correlation does not imply causation.]

“A priest and the mendicant also appear on my front door to lay claim on the money. They priest cite “social justice”, which means redistribution of unowned property to the mendicant, as reasons why they deserved the money.

“A representative of the police and the central bank also surfaces. They argue that since money is a legal tender, therefore, having no claimant, the default ownership is with the government.

“On the other hand, I am thinking that since no one claimed the money, the “finders keepers” principle should apply, or the Lockean Proviso on claims to unowned resources. [‘enough as good’]

“As you can see four of us, could be honest and well-meaning, but have different opinions, divergent interpretations of truth, disparate justifications and antipodal interests. Does plain “honesty” then resolve our problem? Apparently not.

“With no fundamental parameters to rely on, our honest dispositions will only lead to an impasse.

“Why? Because the problem isn’t about honesty, but about ownership rights.

“In the above case, the worst part is for central bank through the police to arbitrarily confiscate the money I found under the threat of prosecution or under the barrel of the gun. This is called compassion (i.e. ‘honesty’) mixed with aggression, a violation of property rights.

“Bottom line: Honesty is an ideal but insufficient trait necessary for a well functioning society.

“Hence, honesty will benefit people but only under the strictures of the respect of ownership rights, the rule of law (and not the rule of men) and individual liberty from which the former two have been framed upon.

“We can all be honest under such existing conditions.

“Think of it, did honesty govern in communist Mao, or Soviet’s Stalin or North Korea’s Kim? Unfortunately, no; because people had NOT been permitted to be honest as they were treated as indentured servants deprived of ownership rights.

“[We must realize that voluntary exchange, e.g. what we buy and the services or products that we sell in exchange, are all based on property rights. Money, is essentially, about property rights, ergo medium of “exchange”-of properties.]

“In other words, “honesty” becomes an amorphous abstraction frequently used by politicians to bamboozle the public. Remember, the recent brouhaha over “I am not a thief?...sounds familiar?


The Lesson:

As Ludwig von Mises wrote, ``If history could prove and teach us anything, it would be that private ownership of the means of production is a necessary requisite of civilization and material well-being. . . . Only nations committed to the principle of private property have risen above penury and produced science, art and literature."

A Sweet Vindication And Validation As The Phisix Soar To A 25 Month High!

``Pharoah created jobs for us. Moses led us away from those jobs. Even though those jobs helped to complete public infrastructure. Even though they were green jobs, where we used our muscles and our backs instead of fossil fuels. Moses could have been part of the ruling class in Egypt. He chose freedom instead. Those of us who followed Moses also chose freedom. Freedom brings risks. But we preferred the risks of freedom to the security of bondage. Do not confuse government with G-d. Government cannot miraculously provide us with manna--or health care. When we look at government, we should not see G-d. We should see Pharoah. Government-worship is Pharoah-worship. Passover is known as the festival of freedom. To live in the Jerusalem of a free society, we have to leave the Egypt of the reach of government.”-Arnold Kling, If a Libertarian Gave a Sermon for Passover

We have pounded the table for reasons that the mainstream can’t or refuses to see.

For the local experts and media, Philippine equities simply cannot rise supposedly because of election risks[1].

Yet week after week, the momentum, market internals and the Peso has been suggesting an opposite perspective. Denial due to intense obsession over sensationalism and abstractionism seemed to have dislodged rationality from recognizing reality.

Six Impossible Things Before Breakfast

For the foreign mainstream pessimists, this simply can’t be happening.

Rising equities on low sponsorship (in the US), falling bank credit, balance sheet problems of the consumers and the banking system and high unemployment (of bubble afflicted economies), the fiscal woes of Dubai, Greece and the PIIGS, and extended valuations as seen from conventional metrics has been cited as principal reasons equivalent to Lewis Carroll’s “Six Impossible Things Before Breakfast” in Alice In Wonderland.

Yet, as Alice would say, “there is a place called wonderland”, thus, global financial markets continue with their upwards spiral. (see figure 1)


Figure 1: stockcharts.com: “Six Impossible Things Before Breakfast”

Of course, the reason for the apparent realization of such “impossibility” isn’t because wonderland exists, but because many have been fixated over a few variables which appear to be less influential in dictating the course of events.

In behavioural finance, this cognitive bias is called the “focusing effect” or when people place “too much importance on one aspect of an event; causes error in accurately predicting the utility of a future outcome”[2].

As you will note, for the Phisix (main window), the bulls ensured that the resistance at the 3,120-3,125, which has proven to be a significant obstacle, was transgressed with a mighty push, using the actions in the US as catalyst, which generated a noticeably wide gap.

Considering that the gap was backed by substantial volume (volume in pesos jumped 18% this week), one may construe this gap, in technical or chart analysis parlance as a “breakaway gap”.

A breakaway gap, in essence, is a breakout from a trading range or congestion[3].

A breakaway gap implies that the low of the breakout point should hold and serve as critical support. Likewise, this could imply of a beginning of a significant upside move.

Although we are not avid fans of charts, as they are not infallible and are subservient to patterns from past or historical performance, which may or may not unfold, [an example is the 3,120-3,125 level which formed 2 tops that would have indicated of a ‘double top’ bearish formation; however the pattern didn’t pan out]; our view today is that charts have now been in relative consonance with the underlying actions that appear to drive the market. In short, chart actions seem merely validating what we have been saying for sometime.

The Global Reflation Process

If we are correct, then global markets should extend gains over the medium term as the “animal spirits” respond to suppressed low interest rates and a still steep yield curve on a worldwide scale, including the Philippines (see Figure 2).
Figure 2: Asian Development Bank: Steep Yield Curves

The Philippines along with the US has one of the sharpest sloping curve through February 2010, as measured by the spread between the 2 year and the 10 year yields, along with the US, the European Union and Indonesia[4].

Considering the dearth of leverage in the domestic system (as that of Indonesia) compared to the West, the “borrow short invest/lend long” is likely to prompt for significantly more arbitrages and money flows into financial assets (local equities, real estate, bonds and the Peso). And perhaps it is why like Indonesia whose JKSE is up 10% year to date, the Phisix appears to be coming on strongly.

Although since the Phisix scored its eight consecutive week of advances and given the largely overbought conditions, as manifested by the local index’s sharp pullaway from the 50-day moving averages (blue line), a correction should be expected anytime.

Albeit any retracement isn’t likely to be deep and should see the support levels, from the current breakout, to hold. Nevertheless, in bullmarkets overextended upswings may continue.

Besides, given the ongoing “rotational” activities among listed issues, a correction does not likely imply that all issues will go down in synchronicity, but instead what is likely to happen would be a shift in the attention (or crowd favourites) to non-Phisix composite or third tier issues.

In addition, the Phisix, as likewise argued before, has been influenced by external forces, as exhibited by its close correlation with the performance of global equities, more than local issues. And this comes even as local participants dominate the overall market activities.

One would notice that Europe, plagued by the ongoing debt issues of Greece, Portugal and the rest of the PIIGS, appear to be, at first glance, outperforming Asia ($DJP1) and Emerging Markets (EEM) as seen by the performance of the Dow Jones Stoxx 50 ($stox50).

Of course the European Stoxx 50 is up by a measly 1.8% on a year to date basis and has been vastly outclassed by US markets (up over 4%). Incidentally, Asia (inclusive of Japan) is up 5% because it is started the year on a much lower point and has seen a more volatile ride, hence the appearance of lagging performance relative to the Stoxx 50.

In other words, what we are seeing is a global reflation process.

And this has been the core underlying dominant theme in the markets today, which has significantly been overlooked and underestimated by the mainstream pessimists.

Liquidity Seepage, Inflation Ahoy!

And where have most of the analytical loopholes by the pessimists can be found?

In the transmission effects of the collective zero bound interest rates, the lagged effects of yield curves, the idiosyncrasy of “habits” of every society[5], the impact from concerted fiscal policies or “automatic stabilizers” used [in the case of the US over $10 trillion in guarantees and spending on the banking system and other government spending on parts of the economy], the incentives from the potential impact from a stronger yuan, the varied effects of such policies to the distinct economic and capital structure of global economies, the Bernanke Put or the assurance to the financial markets of government’s continued inflationary support, which signifies as a ‘competitive advantage’ for the US in her nonpareil ability to underwrite reflationary policies through the issuance of liabilities with her own currency, and therefore provide a guarantee of liquidity to a highly complex global system vastly dependent on the US dollar.

As Doug Noland aptly observes,

``U.S. financial assets – hence the dollar – are perceived to benefit from a relative advantage versus other major currencies based upon, on the one hand, the virtual unlimited capacity for the Treasury to run massive deficits and, on the other, the Fed’s seemingly endless capacity to purchase (monetize) U.S. debt instruments and essentially peg interest-rates (short-term, and only to a lesser extent longer-term market yields). This extraordinary capacity and willingness by U.S. fiscal and monetary policymakers to inflate Credit and meddle (in the markets and economy) today bolsters marketplace confidence in the sustainability of economic recovery. As importantly, it cements the view that the soundness of Credit instruments throughout the entire system – Treasuries, mortgages, financial sector debt, corporates, munis, etc. – is underpinned by current and prospective reflationary policymaking.”[6] [bold emphasis mine]

And signs that credit takeup, even in balance sheet constrained economies as the US, seem to be gaining traction as this account from Bloomberg reveals[7],

``Investors are withdrawing from money-market funds at the fastest pace in at least two decades, reducing holdings that peaked at $3.9 trillion in January 2009… ‘The draining of cash from money-market funds shows people are becoming more comfortable taking risk, so equities are going up and bonds are also being well supported and the yield curve is flattening,’ said Christian Carrillo, a senior interest-rate strategist…at Societe Generale SA. ‘Such behavior can give some comfort to the Fed that it’s okay to reduce the size of its balance sheet, which is a pre-requisite for rate hikes.’” [emphasis added]

Rising markets are likely to spur a bandwagon effect, as these would exhibit on the reflexive nature of self-reinforcing mechanism between price signals and real events or the reflexivity theory. This means that bubbles are likely to continue to inflate and would only be compelled upon to reverse by the hands of nature. One sure sign of this would be the rising cost of inputs, higher consumer prices and increasing interest rates.

And as the report says, the hoarded liquidity in the US banking system is starting to find some leakage, as short term money market funds are regaining more confidence or “animal spirits” to redeploy cash into other asset markets in search of higher returns.

And once this seepage turns into a flood, that’s where we should start to worry. But this should take more time, and possibly, based on the cyclical effect of yield curves, inflationary pressures is likely to be more apparent by the last quarter of the year.

Hence, the idea that the current “bubble” will bust soon is likely to be inaccurate.



[1] See Why The Presidential Elections Will Have Little Impact On Philippine Markets and Philippine Markets And Elections: What People Do Against What People Say

[2] See Anchoring, Focusing Effect, Wikipedia.org

[3] Stockcharts.com Chart School, Gaps and Gap Analysis

[4] ADB, Asian Bond Monitor, March 2010

[5] See Influences Of The Yield Curve On The Equity And Commodity Markets

[6] Noland, Doug; The Restoration of King Dollar?

[7] Ibid



Does Rising US Treasury Yields Today Suggest Sovereign Debt Concerns Or Remergent Inflation?

``By 1991, China's economy was booming because of Deng's abandonment of Marxist economics in 1978. That left only Albania, Cuba, and North Korea. The Marxists had nowhere to turn to that offered evidence of economic success. Overnight, they became a laughing stock on campus. This will be the fate of Keynesians when the governments of the West finally go bust or else abandon the deficits and the fiat money.” Gary North, Invitation to an Anti-Keynes Project, Selling Keynes Short

Many have been puzzled by the broad based surge in the coupon yields of US treasuries.

Media tries to connect the dots to the developments of Greece and Portugal, where the latter has endured a debt downgrade by a credit rating agency last week.

An upsurge in yield, says perma bears, should hurt the markets. My quick retort is, not so fast, as this would largely depend on the degree of spike and the reasons behind it.


Figure 3: Stockcharts.com: Market Turmoil From Yield Spike?

Bernanke Put and The Public Choice

It is public knowledge that the Federal Reserve is slated to end its quantitative easing program or open market purchases of mortgage backed and agency securities.

Perhaps in this instance, the Fed could be testing the market. And should any turmoil emerge from this experiment, the Fed may immediately decide to reinstate its quantitative easing program or to increase purchases of US treasuries through off-balance sheet or indirect channels (indirect bidders) to covertly support the open ended buying by Fannie and Freddie of mortgage securities on the markets.

Given the Fed’s sensitivity to the price performance of assets, which effectively affects the valuations of the assets of the balance sheets of the banking system, as discussed above, the Fed via Bernanke has long been telegraphing that they would remain ultra supportive of the markets through policy accommodation[1].

Hence, the Bernanke Put has clearly been providing implied guarantee on the system against a repeat of 2008, and will continue to do so, until the forces of nature will upend them.

The underlying predicament of policymakers as Bernanke, is that of public choice economics; by taking on politically popular policies with short or immediate term impact that helps advance their careers instead of focusing on the long term upliftment through sound policies. And the economic doctrine espoused mostly by these technocrats appears fundamentally designed for such an outcome.

As William F. Shughart II writes, ``Public choice rejects the construction of organic decision-making units, such as “the people,” “the community,” or “society.” Groups do not make choices; only individuals do. The problem then becomes how to model the ways in which the diverse and often conflicting preferences of self-interested individuals get expressed and collated when decisions are made collectively.[2]” [bold emphasis added]

For some, this is has been hard to comprehend or digest.

Playing Into The Austrian Bubble Cycle

Nevertheless, we expect the next crisis to stem from two possible scenarios: one a bubble bust in Asia and or emerging markets, or two, a sovereign debt crisis in a developed economy. (I am not saying that this is happening soon).

Although one can lead to another; a popping bubble in Asia can lead to a sovereign crisis elsewhere as overstretched and overloaded levered balance sheets of developed economies may find it difficult to engage in another round of deficit spending for “automatic stabilizers”. And if officials frantically and instinctively resort to the same actions as today, then a sovereign debt crisis becomes a clear and present danger.

As Harvard’s Carmen Reinhart in an interview with the Wall Street Journal commented, ``historically, following a wave of financial crises especially in financial centers, you get a wave of defaults. You go from financial crises to sovereign debt crises. I think we’re in for a period where that kind of scenario is very likely. I don’t think a repeat of the fall of 2008 is at stake here, where it looks like the world is going to end.[3]” [underscore mine]

And it is here where the Mises Moment will likely be unleashed. A choice of default or hyperinflation.

Going back to the recent concerns of the soaring US treasuries (TNX), it is quite obvious that there has been little “mayhem” in the markets. US equities (SPX) firmed for the 4th straight week, the US dollar strengthened (USD) largely on a Euro weakness, and importantly Credit Default Swaps (CDS) the insurance premium for debt instruments has revealed little signs of distress.

BCA Research comments on the actions of the treasury market, ``Soaring Treasury supply also appears to have played a major role. Indeed, countries with higher budget deficits tend to have narrower (or negative) swap spreads. Does this mean that investors are finally demanding a higher premium to compensate for default risk in the U.S.? CDS spreads on Treasurys did not rise much and are still well below last year’s peak, suggesting that this week’s Treasury selloff was driven by technical factors rather than by a rising default risk premium.[4]

On the other hand, what we appears as an important development is the peaking of the yield curve (UST1Y:TNX), from which on our end, represents as a market based “backing up” or in mainstream jingoism the “normalization” of interest rates from today’s accommodative stance.

Since both the short and the long end of the yield curve has risen, but where short term end have risen faster, the market seems to be indicating signs of inflation gradually regaining foothold and diffusing in itself into the economy (a.k.a. economic growth-juiced up by liquidity), instead of a sovereign distress for now.

In short, in contrast to the outlook of deflation looking perma bears, pieces of the puzzle seems falling into place. Higher prices are beginning to manifest itself in the real economy as the reflexivity theory suggests. This is what we have labelled as inflation’s seductive ‘sweetspot’.[5]

So yes, the Austrian bubble cycle appears to be running in full steam.

And perhaps with an additional ingredient into the stew: Obamacare.



[1] Businessweek-Bloomberg, Bernanke Says Economy Needs ‘Accommodative’ Policies

[2] Shughart, William F. II Public Choice

[3] Reinhart, Carmen Q&A: Carmen Reinhart on Greece, U.S. Debt and Other ‘Scary Scenarios’

[4] BCA Research, U.S. Treasury Issuance: Reaching The Choke Point?

[5] See Inflation’s Sweet Spot Augur For A Gold Breakout And Global Equity Market Rally


What Obamacare and Rising Yields Mean

``The public will think the health-care system is what Democrats want it to be. Dissatisfaction with it will intensify because increasingly complex systems are increasingly annoying. And because Democrats promised the implausible -- prompt and noticeable improvements in the system. Forbidding insurance companies to deny coverage to persons because of preexisting conditions, thereby making the risk pool more risky, will increase the cost of premiums. Public complaints will be smothered by more subsidies. So dependency will grow.” George F. Will, A battle won, but a victory?

One of the seemingly uneventful but seismic political shifts just occurred in the US.

Last week, President Obama’s signature health reform program, the Obamacare, had finally been forced into a law through procedural manipulations, in both the House of Congress dominated by President’s Obama’s party.

With over a year in power, and with elections drawing nearer, the risks of a decline in the political power held by the Democratic Party eventually prompted a desperate power manuever. As an old saw goes, what are we in power for? Or to quote Emmanuel Rahm, White House’s Chief of Staff popular view on the last crisis, `` it's an opportunity to do things you think you could not do before.” That could have been the rallying cry of the progressives, in passing a highly unpopular law, regardless of the public’s opinion, as manifested in almost every polls.

So only after a year in office has President Obama successfully convinced several dissent partymates to shift sides, after several horse trading and compromises, from initially opposing his European style welfarism.

There could be several reasons why the market seemed to have discounted the enactment of Obamacare.

One, markets already expected the eventuality of this program considering the dominance in the political spectrum by President Obama’s Democratic Party.

Two, markets assumed that since many parts of the law will take place years from now, the adverse affects will unlikely have an impact soon. Besides, with Senate elections slated this year, there could be manifold amendments that result to a massive facelift.

Three, markets may not be the normal functioning markets as we know of. Like most US markets today, they could be under the influence of various agencies of government, just possibly in disguise.

Fourth, the initial impact of the Obamacare, ignored mostly by mass media and the experts, could possibly be the surge in yields of the US treasuries, which came a day late.

Obamacare Equals Greater Risks Of Fiscal Wreck

How can Obamacare be related to rising yields? In essence; increased government spending.

There is one thing we can be sure of; when government promises to curb deficits or produce savings with massive new redistribution program, it is likely to be unfulfilled.

In the case of the US Medicare, which was signed into a law in July 30, 1965[1], the initial estimates and actual expenditures turned out to be…you guessed it, was a mile apart. (see figure 4)


Figure 4: Cato.org: Huge Disparities in Projection and Actual Spending

Cato’s Daniel Mitchell refers to the testimony of Robert J Myers to the Joint Economic Committee as evidence, ``The federal government’s ability to predict healthcare spending leaves much to be desired. When Medicare was created in the 1960s, the long-range forecasts estimated that the program would cost about $12 billion by 1990. It ended up actually costing $110 billion that year, or nine times more than expected.[2]

Government estimates that Obamacare’s spending will be modest, ``The CBO estimates the bill would cost $940 billion over a decade and that it would cut the deficit by $130 billion in the first 10 years and some $1.2 trillion in the second 10 years” notes the MSNBC.

However, Alan Reynolds of Cato argues otherwise, saying that government spending will vastly accelerate after the next 4 years[3], [bold emphasis mine, italics his]

``In fact, new spending is negligible for four years. At that point the government would start luring sixteen million more people into Medicaid’s leaky gravy train, and start handing out subsidies to families earning up to $88,000. Spending then jumps from $54 billion in 2014 to $216 billion in 2019. That’s just the beginning.

``To be unduly optimistic (more so than the CBO), assume that the new entitlement schemes only increased by 7% a year. At that rate spending would double every ten years — to $432 billion a year in 2029, $864 billion a year in 2039, and more than $1.72 trillion by 2049. That $1.72 trillion is a conservative projection of extra spending in one year, not ten. How could that possibly not add to future deficits?

``Could anyone really imagine that the bill’s new taxes and fines could possibly grow by 7% a year? On the contrary, most of the claimed revenues are either a timing fraud (such as treating $70 billion for long-term care premiums as newly found treasure) or self-defeating. The hypothetical tax on Cadillac plans (suspiciously postponed until 2018), for example, is designed to discourage such plans from being offered by employers or wanted by employees — that is, it’s designed to yield less and less over time.”


Figure 5: US Treasury on Government Debt Estimates and Heritage.org on welfare programs

In the Secretary of the Treasury’s ‘2009 Financial Report of the United States Government’ report which does not include the Obamacare in its estimates, it recently warned (see figure 5 left window), ``But the Government must simultaneously address the medium- and long-term fiscal imbalance resulting from past budget deficits, the impact of the economic downturn, and demands on the nation’s social programs, notably Medicare, Medicaid, and Social Security. As currently structured, the Government's fiscal path cannot be sustained indefinitely and would, over time, dramatically increase the Government's budget deficit and debt.[4]” [emphasis added]

So Obamacare is likely to shorten the reckoning period for the current unsustainable path of growing fiscal risks from a vastly expanding welfare program.

Politicization of US Healthcare

Moreover, the 2,400 page law is a quagmire of bureaucracy[5]. This means much of the America’s healthcare will be politicized and effectively rationed by the unelected officials. And the traditional symptoms from increased bureaucracy will likely adversely impact health care distribution via more red tape, cost overruns, risks of fraud, risks of corruption, shortages, delays in payment, higher taxes on the wealthy, delayed or waiting list treatment, possibly reduced payments to hospitals and physicians, diminished competition and innovation and etc.

Hence, rising taxes, added regulatory compliance and more bureaucracy is likely to lead to lesser productivity, reduced incentives for entrepreneurship and competition or an increase in the cost of doing business or higher economic cost structures.

Protectionists are likely to blame other countries for job losses anew, when redistribution programs as massive as this would likely be a major factor in reducing investments.

This, is aside from, the prospects of heightened inflation and credit risks which may have seminally manifested itself on the treasury markets, last week. Of course as explained above, the sweetspot of inflation may blur such risks for now.

As Robert Higgs aptly explains[6], ``because health-care-related economic activity is such a huge part of the overall economy, what happens in this sector will have significant consequences for the operation of other sectors. For example, when Obamacare turns out to be much more costly than the government has claimed it will be, the government’s demand for loanable funds will be greatly increased, with far-reaching effects on interest rates, investment spending, economic growth, and even the U.S. Treasury’s creditworthiness. It is not inconceivable that the burden of supporting this health-care monstrosity will prove to be the (load of) straw that breaks the back of the government camel in the credit markets, where the U.S. Treasury has long been able to borrow the greatest amounts at the lowest rates of interest because its bonds were considered virtually riskless” [bold highlights mine]

Nevertheless one of the investment opportunities from the pollicisation of American health care, which concerns us non-Americans, should be off shore or medical tourism.

The rest will just be more like today, more offshoring and outsourcing and diversification in search for cost effective ways to maximize profits.



[1] Medicare, Wikepidia.org

[2] Mitchell, by Daniel J Will Federal Health Legislation Cause the Deficit to Soar? [Joint Economic Committee, “Are Health Care Reform Cost Estimates Reliable?” July 31, 2009. The JEC cites 1967 testimony by Robert J. Myers.]

[3] Alan Reynolds, Cato.org, It’s NOT a Health Bill, NOT a Medicare Tax and It Can’t Possibly Cost Only $940 Billion

[4] Secretary of the Treasury, Director of the Office of Management and Budget (OMB) and and Acting Comptroller General of the United States, 2009 Financial Report of the United States Government,”

[5] Businessweek, Obamacare's Cost Scalpel

[6] Higgs, Robert The Health-Care Reform Act: Que Paso?, Independent.org


Thursday, March 25, 2010

Are Inventory Buildups Meant For Government or For Consumers?

Quotes of the day are occasionally featured in this space, to put a spotlight on outstanding words of wisdom. However, today we will quote what may seem as an outlandish idea.

This from Finance Asia, ``Inventory is a crucial element to the global recovery because of the need for the corporate sector to spend in order to alleviate the government sector from the existing debt bubble."

Put yourself in the shoes of the producer-corporate president, entrepreneur, proprietor or etc... and reply to this question:

Do you spend on building up inventory to "alleviate the government sector" and thereby assure yourself of capital losses? Or do you spend on inventory in the expectations to profit from sales to customers?

It's a wonder, is such an observation reflective of the activities from another planet? Or is this a typo error?


Global Poverty Rates: Slumdog Declines On Deepening Globalization

The Economist gives us a good news: poverty rates (in %), as signified by slum dwelling, has been declining around the world, since 1990.


According to the Economist,

``THE proportion of the world’s urban population living in slums
has fallen from nearly 40% a decade ago to less than a third today. China and India have together lifted 125m people out of slum conditions in recent years. North Africa’s slum population has shrunk by a fifth. But the absolute number of slum dwellers around the world, estimated to be some 830m, is still rising. And in a few countries the share of the urban population in slums has also grown. In Zimbabwe, economic collapse and the forced relocation of urban dwellers have lifted the urban slum population. In Iraq, as a result of conflict, the number of people living in slums tripled in ten years." (emphasis added)

True, the absolute numbers have been rising but the % rates have materially declined.


However, since trade and the GDP has been highly correlated, the principal cause of such decline is most likely due to economic freedom or greater trade (globalization).

According to
the WTO, ``Data in real terms show that world gross domestic product (GDP) and world merchandise exports not only move in tandem, but that export growth exceeds GDP growth. Growth of world GDP is associated with an even higher growth in international trade."

Here are some WTO charts...


Merchandise exports and GDP in % annual change (line chart)


Merchandise Exports and GDP (same data but in bar charts)


The distribution or ratio of exports and goods and commercial services to GDP 2007 as seen in via map
Finally, from Heritage Foundation the relationship of economic freedom (freer trade) to GDP.

This is what the protectionists want to reverse, yet sanctimoniously claim the moral high grounds!

Lessons From China-Google Schism

The China Google rift has given us some interesting insights.


This from the New York Times, (all bold highlights)

``The story behind the success of these companies is a simple one, some analysts say. The young people who dominate Web use in China are not just searching for information; they’re searching for a lifestyle. They are passionate about downloading music, playing online games and engaging in social networking.

``“Sixty percent of the Internet users here are under the age of 30,” said Richard Ji, an Internet analyst at Morgan Stanley. “In the U.S., it’s the other way around. And in the U.S. it’s about information. But in China, the No. 1 priority is entertainment.”

``Experts say American companies have largely failed here because they don’t have local expertise, are too slow to adapt and don’t know how to deal with the Chinese government.

``“Internet companies in China have to work so closely with the government,” said Xiao Qiang, of the China Internet project at the University of California, Berkeley. “And that means the government’s political agenda can become the company’s business agenda.”

``The need to censor Web sites, for example, can overwhelm smaller companies, Mr. Xiao said. “This becomes a growing business cost. So often, small companies don’t develop.”

``At this stage, analysts say the Web in China is less about innovation than about quickly delivering on the latest online trend.

``“People here are quick to see trends, and to clone and innovate,” said William Bao Bean, a former Internet analyst who is now a partner at Softbank China & India Holdings. “If one company is doing well, other companies will quickly clone it and roll it out.”...

My observations:

1. cultural difference in the use of the web: "And in the U.S. it’s about information. But in China, the No. 1 priority is entertainment.”

2. American companies outside the China's intrusion has failed to grab a substantial share because of the lack of local knowledge or expertise.

This is very Hayekian. From the Use of Knowledge in Society, ``But a little reflection will show that there is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others because he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active cooperation."

How does this relate to macroeconomics-alot!

Google's failure involves one of risk money plus a real attempt to establish or gain a foothold in China's market. Whereas people or even officials condemning China, have not been there nor have they a real or working knowledge of how things operate in China. All they base their polemics is on aggregate assumptions. If Google can be wrong how much more with personalities suffering from "fatal conceit".

3. Government intervention have limited competition to the locals and may have even politicized the distribution.

More insights from the New York Times, (bold highlights mine)

``One advantage local companies have is government protectionism. Because the Communist Party wants to maintain tight control over communication and the media, foreign Internet companies come under suspicion.

``For instance, YouTube has been blocked inside the country for over a year, ever since a user uploaded a video that was said to show human rights violations in Tibet.

``YouTube, which is owned by Google, had a large following here. But now online video in China is being championed by companies like Youku.com and Tudou.com. They may have dominated anyway, analysts say, but it certainly helps to have few big competitors.

``And without competition here from Facebook, which has not yet tried to develop a site for the Chinese market, a social networking site called Kaixin001.com has managed to register over 70 million users.

``But some experts say Google’s departure will leave Internet users here with fewer options, making the country’s Internet market less competitive and less open.

“The biggest loser is Netizens,” says Fang Xingdong, chief executive of Chinalabs.com, a research firm. “Google is a multilinguistic search engine, but Baidu is a Chinese-language one. Chinese information only occupies a small fraction of the Internet.”

Additional observations:

4. It's odd that the New York Times can be promoting competition (selectively though), apparently this depends on which interest groups benefits.

5. As the article suggests, government protectionism is considerably hindering the development of social networking sites. This translates to endemic disadvantages or obstacles from developing the local market (even if the Yuan appreciates!) and from attaining productivity enhancing facilities that would enable them to even be more competitive in terms of value-added products.

Put differently, in a world being revolutionized by Web 2.0, China will unlikely match the level of capital structure of economies that fosters open competition in the cyberspace that would lead to more innovation.

So unless China opens up, the pace of growth will be constrained by the current industrial framework. But she will lag in the advances of technology, which I think will be a significant growth driver for the world over the coming years.