Tuesday, July 31, 2012

Massive Earth Hour (Blackouts) in India

Massive power outages in India has affected more than half of the population.

From the Bloomberg, (bold highlights mine)

India’s electricity grid collapsed for the second time in as many days, cutting off more than half the country’s 1.2 billion population in the nation’s worst power crisis on record.

Commuter trains in the capital stopped running, forcing the operator, Delhi Metro Rail Corp., to evacuate passengers, spokesman Anuj Dayal said. NTPC Ltd. (NTPC), the biggest generator, shut down 36 percent of its capacity as a precaution, Chairman Arup Roy Choudhury said by telephone. More than 100 inter-city trains were stranded, Northern Railway spokesman Neeraj Sharma said, as the blackout engulfed states in the north and east.

So what went wrong?

From the same article…

State-owned Power Grid Corp. of India Ltd., which operates the world’s largest transmission networks, manages power lines including in the northern and eastern regions. NTPC and billionaire Anil Ambani-controlled Reliance Power Ltd. (RPWR) operate power stations in north India that feed electricity into the national grid. The northern and eastern grids together account for about 40 percent of India’s total electricity generating capacity, according to the Central Electricity Authority.

The grids in the east, north, west and the northeast are interconnected, making them vulnerable, said Jayant Deo, managing director of the Indian Energy Exchange Ltd. The outage has also spread to seven additional states in the northeast, NDTV television channel reported.

“Without a definitive plan by the government to gradually bring the grids back online, this problem could absolutely get worse,” Deo said.

Singh is seeking to secure $400 billion of investment in the power industry in the next five years as he targets an additional 76,000 megawatts in generation by 2017. India has missed every annual target to add electricity production capacity since 1951.

Well in reality, the root of the problem hasn’t been about ‘definite plans’ by the Indian government, but rather largely due to India’s statist political economy.

Again from the same article…

Improving infrastructure, which the World Economic Forum says is a major obstacle to doing business in India, is among the toughest challenges facing Singh as he bids to revive expansion in Asia’s third-largest economy that slid to a nine- year low of 5.3 percent in the first quarter.

Tussles over policy making with allies in the ruling coalition, corruption allegations and defeats in regional elections have weakened Singh’s government since late 2010.

Must I forget, artificial electricity demand has partly been boosted by India’s central bank, the Reserve Bank of India (RBI), who passes the blame on others.

Again from the same article

The Reserve Bank of India, which has blamed infrastructure bottlenecks among others for contributing to the nation’s price pressures, today refrained from cutting interest rates even as growth in the $1.8 trillion economy cooled to a nine-year low in the first quarter.

Indian consumer-price inflation was 10.02 percent in June, the fastest among the Group of 20 major economies, while the benchmark wholesale-price measure is more than 7 percent.

The last time the northern grid collapsed was in 2001, leaving homes and businesses without electricity for 12 hours. The Confederation of Indian Industry, the country’s largest association of companies, estimated that blackout cost companies $107.5 million.



Chart above from global-rates.com and tradingeconomics.com

India’s bubble ‘easy money’ (upper window) policies in 2009-2010 fueled a stock market recovery (below window) in 2010.

On the other hand, the then negative interest rate regime also stoked local inflation (pane below policy interest rates).

This has prompted the Reserve Bank of India to repeatedly raise policy rates or tightened monetary policy. The result has been to put a brake on India’s economy and the stock market rebound.

Part of the Indian government’s attack on her twin deficits, which has been blamed for inflation through the decline of the currency, the rupee, has been to turn the heat on gold imports and bank gold sales.

Aside from demand from the monetary policies, electricity subsidies has also been a culprit. Farmers have been provided with subsidized electricity. Such subsidy has not only increased demand for power but also put pressure on water supplies.

Environmentalists would likely cheer this development as ‘Earth Hour’ environment conservation.

Yet India’s widespread blackouts are evidences and symptoms of government failure.

Rampant rolling blackouts extrapolate to severe economic dislocations which not only to means inconveniences but importantly prolonged economic hardship.

Bloomberg Censored in China

China’s authoritarian tendencies can still be seen from her continuing censorship of Bloomberg which seems in retaliation for the latter’s recent exposure of the China’s crony capitalist political economy.

Notes the CNN/Financial Times

Bloomberg's news website remains blocked by China's state censors a full month after it detailed the riches amassed by the family of Xi Jinping, the man who is expected to be the country's next president.

Although periodic outages of foreign media websites in China are common, the month-long total blackout of Bloomberg is an unusually harsh response, highlighting the extent to which its coverage angered the government.

Beijing has tried to apply pressure in other ways, too. In the weeks since the article was published, people believed to be state security agents have tailed some Bloomberg employees; Chinese bankers and financial regulators have cancelled previously arranged meetings with Matthew Winkler, Bloomberg's editor-in-chief; and Chinese investigators have visited local investment banks to see if they shared any information with Bloomberg, according to people with knowledge of these incidents…

In the report published on June 29, Bloomberg used publicly available records to show that Mr Xi's extended family had investments in companies with total assets of $376m; an 18 per cent indirect stake in a rare earths company with $1.73bn in assets; a $20.2m holding in a publicly traded technology company; a luxury villa in Hong Kong worth about $31.5m and at least six other Hong Kong properties worth a combined $24.1m.

Bloomberg was unable to trace any assets to Mr Xi himself, or to his wife or daughter. There was also no evidence of any wrongdoing by Mr Xi or his family.

Nevertheless, the report was seen as embarrassing for Mr Xi, threatening to undermine his image as a clean official in a country rife with corruption just months before he is set to succeed Hu Jintao as president in a once-in-a-decade leadership transition…

No other English-language mainstream media website has been blocked in China for longer than a few days since the 2008 Beijing Olympics. Censors now target specific articles or disrupt access to sites at politically sensitive times such as when dissident Liu Xiaobo was awarded the Nobel Peace Prize in 2010.

This just goes to show why the Panglossian view of China’s future seems unwarranted.

China’s fate will ultimately depend on how political trends evolve (Will China revert to socialism or statism or a closed economy? Or will China embrace deeper liberalization?).

This cannot be interpreted merely from past performance. The above may also be symptoms of the strains from ongoing political deadlock and from economic slowdown (or bubble bust?).

For now China’s bubbles from previous Keynesian quasi boom bust policies will have to be addressed.


So far, the Shanghai Composite index keeps plumbing to new depths.

Quote of the Day: The Glass Steagall Myth

From Washington Post’s Steve Pearlstein. (hat tip Bob Wenzel)

Repeal of Glass-Steagall has become for the Democratic left what Fannie Mae and Freddie Mac are for the Republican right — a simple and facially plausible conspiracy theory about the crisis that reinforces what they already believed about financial markets and economic policy.

But why let facts get in the way of a good screenplay?

Facts such as that Bear Stearns, Lehman Brothers and Merrill Lynch — three institutions at the heart of the crisis — were pure investment banks that had never crossed the old line into commercial banking. The same goes for Goldman Sachs, another favorite villain of the left.

The infamous AIG? An insurance firm. New Century Financial? A real estate investment trust. No Glass-Steagall there.

Two of the biggest banks that went under, Wachovia and Washington Mutual, got into trouble the old-fashioned way – largely by making risky loans to homeowners. Bank of America nearly met the same fate, not because it had bought an investment bank but because it had bought Countrywide Financial, a vanilla-variety mortgage lender.

Meanwhile, J.P. Morgan and Wells Fargo — two large banks with big investment banking arms — resisted taking government capital and arguably could have weathered the crisis without it.

Did U.S. investment banks create a shadow banking system and derivatives market outside the normal regulatory framework that encouraged sloppy lending and created what turned out to be toxic securities? You betcha.

And did regular banks make some of those bad loans and buy up some of those toxic securities? Yes, they did.

But that was as much a problem at the banks and investment banks that combined as those that remained independent. More significantly, the bulk of the money that flowed through the shadow banking system didn’t come from government-insured bank deposits. It came from money market funds, hedge funds, pension funds, insurance companies, foreign banks and foreign central banks.

Confronted with these inconvenient facts, the conspiracists like to double-down and argue that the real damage caused by repeal of Glass-Steagall is that it triggered a wave of bank consolidation — which has now left more than half of the country’s banking assets under the control of a handful of institutions that are so big that the government has no choice but to bail them out if they risk a meltdown of the financial system.

No doubt about it — too-big-to-fail is a problem. It turns out, however, that it was also a problem in 1984, when Continental Illinois, the seventh-largest U.S. bank with a whopping $40 billion in assets, had to be rescued. It was a problem a few years later when the Fed quietly rescued Citicorp because of mountains of loans to Latin American governments that turned sour. It was a problem in 1998 when the Fed had to orchestrate the rescue of Long-Term Capital Management, a hedge fund with less than $5 billion in capital. And it was the reason behind the Fed’s 2007 rescue of Bear Stearns, with less than a quarter the size of its biggest Wall Street rivals.

Read the rest here

For the left, evidences that goes against them have simply been ignored.

The creed of the infallible moral authority of governments implies that all so-called “market failures” intuitively stem from the lack of government controls or oversight, the repeal of the Glass-Steagall act, notwithstanding.

Canada didn’t have a Glass-Steagall yet avoided the crisis of 2008 (Tom Woods). This only goes to show that, not only from the evidence perspective, their logic has been inconsistent or does not add up.

Reducing government, for the neo-liberals, essentially takes away the path to political nirvana. It would be senseless to argue against faith based political zealotry.

Progressive Ideology: The 10 Paths to Nirvana

Progressives or the neo-liberalsm who account for populist politics in the US, unwaveringly embrace big government

Professor Robert Higgs enumerates the Progressives’ 10 paths to nirvana.

An economist notes in particular that progressive ideology now embraces the following default conclusions:

  1. If a social or economic problem seems to exist, the state should impose regulation to remedy it.
  2. If regulation has already been imposed, it should be made more expansive and severe.
  3. If an economic recession occurs, the state should adopt “stimulus” programs by actively employing the state’s fiscal and monetary powers.
  4. If the recession persists despite the state’s adoption of “stimulus” programs, the state should increase the size of these programs.
  5. If long-term economic growth seems to be too slow to satisfy powerful people’s standard of performance, the state should intervene to accelerate the rate of growth by making “investments” in infrastructure, health, education, and technological advance.
  6. If the state was already making such “investments,” it should make even more of them.
  7. Taxes on “the rich” should be increased during a recession, to reduce the government’s budget deficit.
  8. Taxes on “the rich” should also be increased during a business expansion, to ensure that they pay their “fair share” (that is, the great bulk) of total taxes and to reduce the government’s budget deficit.
  9. If progressives perceive a “market failure” of any kind, the state should intervene in whatever way promises to create Nirvana.
  10. If Nirvana has not resulted from past and current interventions, the state should increase its intervention until Nirvana is reached.

The foregoing progressive predispositions, and others too numerous to state here, provide the foundation on which the state justifies its current actions and its proposals for acting even more expansively. Progressives see no situation in which the best course of action requires that the government retrench or admit that it can do nothing constructive to help matters. They see the state as well-intentioned, sufficiently capable, and properly motivated to fix any social and economic problem whatsoever if only the public allows it to do so and bears the costs.

The Philippine social democracy version can be reduced into three: namely, change the leader, tax and regulate, and finally, throw money at the problem. Anything beyond these have been deemed as blasphemy.

I wrote about them here.

Understanding Political Terminologies 3: Frédéric Bastiat on Mercantilism

Why is it very easy to sell political crap? Because all one needs is to broach information that caters to heuristics and emotionalism.

In the case of mercantilism or protectionism, the great Frédéric Bastiat wrote of how the public can easily be swayed by falsehoods,

We must confess that our adversaries have a marked advantage over us in the discussion. In very few words they can announce a half-truth; and in order to demonstrate that it is incomplete, we are obliged to have recourse to long and dry dissertations.

This arises from the nature of things. Protection concentrates on one point the good which it produces, while the evils it inflicts are spread over the masses. The one is visible to the naked eye; the other only to the eye of the mind. In the case of liberty, it is just the reverse.

In the treatment of almost all economic questions we find it to be so.

You say: Here is a machine that has turned 30 workmen onto the street.

Or: Here is a spendthrift who encourages every branch of industry.

Or: The conquest of Algeria has doubled the trade of Marseilles.

Or: The budget secures subsistence for 100,000 families.

You are understood at once and by all. Your propositions are in themselves clear, simple, and true. What are your deductions from them?

Machinery is an evil.

Luxury, conquests, and heavy taxation are productive of good.

And your theory receives wide support in that you are in a situation to support it by reference to undoubted facts.

On our side, we must decline to confine our attention to the cause and its direct and immediate effect. We know that this very effect in its turn becomes a cause. To judge correctly of a measure, then, we must trace it through the whole chain of effects to its final result. In other words, we are forced to reason upon it.

To the unwitting public, if you tell lies that are big enough and keep repeating it, people will eventually come to believe it.

And that’s why even centuries after being debunked or being refuted by classical economics and by classical liberals, the spirit of mercantilism has remained politically popular.

This only exhibits that because many seem to have hardly been capable to think beyond their emotions, they become instruments for oppression, especially through the tyranny of mob-rule (democracy), by scheming politicians and their institutional followers.

Even in the Olympics, Central Planning Fails

Why do Olympic games suffer from financial losses? Because Olympic planners think that they have it all worked out.


From the Telegraph,

-Large areas of empty seats seen in stadia for the second day running

-London 2012 chairman Lord Coe reveals students and teachers are also being called in at the last minute

-Every tout arrested had tickets sent to foreign VIPS

-Organisers Locog have begun an investigation into the ticketing fiasco

To the chagrin of political authorities, to cover on the scores of empty seats, students and soldiers had to be bussed in.

This is a familiar scene in the Philippines which we call the “hakot crowd”

Again from the same Telegraph article,

Last night, Team GB cyclist Geraint Thomas said: ‘It’s quite sad, seeing all the empty seats.’

Lord Coe revealed yesterday how troops, students and teachers were being drafted in to help end the embarrassing spectacle of empty seats at Olympic venues.

By discriminating against the markets, authorities had these coming to them after all

Professor Christopher Westley at the Mises Blog rightly points out,

The Olympics are essentially mercantile events in which planning takes place outside of market forces so as to achieve outcomes preferred not by consumers but by states. (Peter Hitchens argues here that this trend started with the 1936 Olympics in Berlin when Hitler and Goebbels transformed them into “grandiose and torch-lit” spectacles.) Regardless, the events in London are demonstrating once again what an LSE economist in the 1930s said about economics–that its “curious task” was “to demonstrate to men how little they know about what they imagine they can design.” Why did Sebastian Coe and his team think they could effect a better outcome than what would result from the price system? These are practical men, but even Keynes might admit that they are probably slaves of some defunct and incorrect economist.

So at the end of the day, financial losses extrapolates to the debasement of medallions for winners or may even lead to higher taxes for the unfortunate London residents whom has hosted such grand boondoggle.

Monday, July 30, 2012

Quote of the Day: Shun the Non-Believers

When you do important work, work that changes things and work that matters, it's inconceivable that the change you're trying to make will be met with complete approval.

Trying to please everyone will water down your efforts, frustrate your forward motion and ultimately fail.

The balancing act is to work to please precisely the right people, and just enough of them, to get your best work out the door.

Shun the non-believers.

This is from my favorite marketing guru Seth Godin.

This powerful marketing message seems highly relevant to the struggle for liberty and to the advocacy of the unpopular economic truths.

Will this Week Highlight the Climax for the Euro Debt Crisis?

Will the Euro debt crisis see its climax this week? The head of the Eurogroup Jean Juncker thinks so…

From Marketwatch.com

The head of the Eurogroup, Jean-Claude Juncker, said the countries sharing the common currency, their rescue fund and the European Central Bank will soon act to save the euro, according to a pre-release of an interview to be published Monday by Sueddeutsche Zeitung.

"We will decide in the coming days which measures to take," Mr. Juncker is quoted as saying.

Mr. Juncker indicated the European Financial Stability Fund and the ECB will buy Spanish government debt to bring down yields after a summit of euro-zone leaders in late June had paved the way for sovereign-bond purchases by the bailout fund.

"I have no doubt that we will implement the decisions of the last summit," Mr. Juncker said, according to the newspaper.

His statements seem to be the first official confirmation of media reports that European leaders are drawing up a plan of purchases of Spanish and Italian government debt by the ECB and the rescue fund.

"The euro countries have reached a point at which we have to make clear with all available means that we are strongly determined to ensure the financial stability of the currency union," the German daily quotes him as saying.

"The world is talking about whether the euro zone will still exist in a few months," Mr. Juncker said, according to Sueddeutsche Zeitung.

Despite a gamut of bailouts, Euro’s debt crisis has lingered since 2008 and have been worsening,

The belief that a political solution will arrest the crisis, like in the recent past, will likely be just another delaying the day of reckoning, that would go against the central designs of the political masters—Messrs. Junker, Draghi, Hollande, Ms. Merkel and the rest, and this includes team Ben Bernanke of the US Federal Reserve, whom has been working closely with the ECB—to prop up the unsustainable political welfare-crony system.

But of course, real actions from central banks will have real effects in the marketplace and in the economy. And this is why the details of what they will do will greatly matter.

Global financial markets have priced in heavily the expectations of the coming massive bailout by the ECB.

So political actions will have to deal first with the market’s expectations. The failure of which may result to the magnified market tremors which could swiftly eviscerate gains we have seen in the recent days.

Next, financial markets have become extremely complacent and heavily dependent on steroids. Bad new has been interpreted as good news.

Growing signs of political desperation by Euro officials have only reinforced the market’s HOPE of a political fix from political narcotism (inflationism) even when unfolding events keeps us telling us the opposite.

Financial markets have been reduced to a branch of a grand casino according to ex-US President Reagan’s former budget director David Stockman

Not only will this mean sustained volatility of market pricing—out of the repeated price distortions from widespread interventions—such complacency amplifies the fat tail risks (or a market crash). Of course I hope that this won’t happen.But the risk environment or conditions says that this is a possibility.

But hope would not serve as a better guide for prudent investors, instead, we should prepare for the worst while hope for the best

Be very careful out there.

Video: I, Smartphone (Made Everywhere)

This is video is the modern day representation of Leonardo Read's must read classic I, Pencil.

Two points here:

One, nobody knows how to make a product on their own or the folly of self-reliance as peddled by politicians. This emphasizes the importance of the division of labor (or Prof. Kling's Patterns of sustainable trade and specialization).

Second, division of labor implies that products have been "made everywhere", which today, extrapolates to the global supply chain networks or "globalization"--which is why politically colored claims of "Made in China" have been utterly fallacious.

Sunday, July 29, 2012

What Draghi’s Statement “The ECB is Ready to do Whatever it Takes to Preserve the Euro” Means

I pointed out that ECB President Mario Draghi delivered a magical statement last week which sent markets soaring (I think much had to do with the covering of short sales).

For Professor Gary North such statement has the following implications

What he said was in fact a cry of desperation. He does not know what to do, other than to inflate. He knows he must break the Maastricht treaty that created the EU, but he does not have any choice. He has defined out of existence the treaty's limits on the ECB. He defines his mandate broadly. He knows that Spain is close to default. The ECB must buy Spain's bonds, or else provide funds for some other agencies to buy Spain's bonds. The weekend summit meeting less than a month ago has already broken down. Spain's ten-year bond rate went above the failsafe 7% figure.

The European banking system is being propped up by monetary inflation. There are signs that this cannot go on much longer, but the central bankers have enormous self-confidence. They believe that fiat money can delay any major crisis. They believe that fiat money is the ultimate ace in the hole. So do Keynesians. So do politicians. They really do believe that the exclusive government monopoly authority to supervise the creation of digits is the basis of prosperity.

Investors invest digits called money. They are convinced that the ability of central banks to create digits has created a failsafe for investors' digits. They believe that a prudent mixture of digit-generating investments will gain them a positive rate of return, as measured in digits, just so long as the total number of digits is always increasing. This is the key to every investment strategy that is tied to "digits invested now, more digits to invest later": an ever-increasing supply of digits.

You might think that investors would judge their success in investing by increased real income: stuff, not digits. But the vast majority of investors assume that stuff will inevitably take care of itself, if only the supply of digits is increasing. Here is the mantra of this generation: "The system of stuff production depends on a steady increase in the supply of digits."

This is why there is no resistance to central bank monetization. On the contrary, there is cheering. The journalists follow the economists. The economists have adopted the mantra of digits with the zealous commitment of any priesthood. Milton Friedman is their high priest.

Professor North sees depression or another crisis ahead, but this will either be through hyperinflation or through mass defaults. He thinks that defaults will be the most likely outcome because the incentives guiding the career of central bankers have been tied with large banks.

I think that the both scenario has a level 50-50 odds, as central bankers will most likely underestimate the impact of their actions.

Read the rest here

Fighting the Last War: Can the Philippines Beat China?

A video circulating in the cyberspace tries to whip up nationalist sentiment by using the Korean war experience to suggest that “the Philippines can beat China” should any military conflict arise from the recent territorial dispute.

Heard of the axiom “Generals are always prepared to fight the last war”?

Such expression applies to the video. The video has been framed in the assumption that future wars will be waged in the conventional sense and thus the vaunted Filipino mettle will matter.

Well this would not only be a big mistake but is patently myopic.

We are not only in the information age but in the age of weapons of mass destruction (WMD), not limited to nuclear warfare (but also to various types of chemical, biological and other evolving warfare such as computer, robotics and etc..).

[As a side note, I will not deal here with the moral issue of whether Filipino lives lost and taxpayer expenditures in the Korean war had been justified or not].

And China has been part of the states armed with substantial nuclear armaments (from Wikipedia.org)


China has also in possession of chemical and biological weapons. I will skip on the military tale of the tape, nevertheless I have shown them here earlier

This simply means that the risks of the employment of these dreadful killing machines or instruments increases once a shooting war have been initiated.

For many, getting social acceptance means to make a big issue out of things they hardly understand.

Political correctness also means stirring up nationalist fervor when they know that someone else will get to do the bloody part of the political violence, whose major beneficiaries will accrue to politicians at society’s expense. Of course this assumes a limited shooting war.

And in case of a full scale war, this will like result to mass destruction of the society (whose families and friends of these agitators will also suffer). Of course these people can’t think through their emotions enough to understand the consequences of their advocacies or are shills for the politicos.

I am reminded by distinguished historian Arnold Toynbee who claimed that people whom have not experienced the horrors of war have the tendency to become provocateurs (or the generational war cycle).

The survivors of a generation that has been of military age during a bout of war will be shy, for the rest of their lives, of bringing a repetition of this tragic experience either upon themselves or upon their children, and... therefore the psychological resistance of any move towards the breaking of a peace ....is likely to be prohibitively strong until a new generation.... has had the time to grow up and to come into power. On the same showing, a bout of war, once precipitated, is likely to persist until the peace-bred generation that has been lightheartedly run into war has been replaced, in its turn, by a war-worn generation.

And it is why agitators of war should get themselves enlisted in the military and request to get assigned in the frontlines so they can practice on what they preach.

[Updated to add: Here is a list of the death toll of 20th century wars, given the capacity of destruction of modern weaponry--assume the worst for the new age warfare]

Of course I am not convinced that the regional territorial controversy has solely been about superficial claims to property or about resources but more about the concealed political agenda such as the advancement of the military industrial complex, and or even perhaps a smoke and mirror encirclement strategy against Russia as China’s regional economic and military policies seem like Dr. Jekyll and Mr. Hyde.

The more important way to promote peace and social cooperation is none other than through expanded trade.

As the great Claude Frederic Bastiat once warned

if goods don’t cross borders, armies will

Even Olympic Medals have been “Debased”

While I am a fan of sports, I am not a fan of the Olympics.

Olympics, for me, represents the politicization of sports premised on feel good nationalism, which are largely financed by massive expenditures of taxpayer money.

The economics of Olympics suggests that the popular games, except for some instances (e.g. LA Olympics), have incurred losses for the hosts. At worst, financial losses extrapolated to higher taxes.

Professor David Henderson notes of the Canadian experience,

That view is understandable because losing money has been the norm. When the Olympics were held in Montreal in 1976, for example, the loss amounted to $2 billion, which was $700 per Montreal resident. And remember that that was in 1976 dollars. That loss resulted in a special tax on tobacco because, you know, smokers are such fans of the Olympics.

And proof of the politicization of sports via the Olympics can be further seen through the medallions for the winners—where the content of the London 2012 medals has been materially debased or devalued.


Image from BBC.

The Zero Hedge points out (bold original)

As every Olympic athlete knows, size matters. The London 2012 medals are the largest ever in terms of both weight and diameter - almost double the medals from Beijing. However, just as equally well-known is that quality beats quantity and that is where the current global austerity, coin-clipping, devaluation-fest begins. The 2012 gold is 92.5 percent silver, 6.16 copper and... 1.34 percent gold, with IOC rules specifying that it must contain 550 grams of high-quality silver and a whopping 6 grams of gold. The resulting medallion is worth about $500. For the silver medal, the gold is replaced with more copper, for a $260 bill of materials. The bronze medal is 97 percent copper, 2.5 percent zinc and 0.5 percent tin. Valued at about $3, you might be able to trade one for a bag of chips in Olympic park if you skip the fish.

The devaluation of the Olympic medals just exhibits the natural or deep-seated impulse of governments to inflate, as well as, to break their own established rules or standards—sports or no sports.

Saturday, July 28, 2012

China’s Sovereign Wealth Fund in the Red

Many think that government (central banking) surpluses should be ‘invested’ through loans or through financial markets as sovereign wealth funds. They solely look at the benefits of the supposed ‘investments’ while ignoring both the hidden and the visible costs.

The recent losses of China’s sovereign wealth fund should be an example.

From CNN,

China's sovereign wealth fund suffered its worst year ever in 2011, losing 4.3 per cent on its global investment portfolio.

In an annual report that has become the focal point of its efforts to portray itself as a transparent institution, China Investment Corp also confirmed that it had received a $30bn capital injection from the government at the end of last year, boosting its investment firepower.

CIC was established in 2007 with money carved out from China's foreign exchange reserves and given a mandate to make investments that would generate higher returns. However, it quickly ran into concerns about its government background and so has been at pains to demonstrate that it is a long-term investor focused on profits, not politics.

In its annual report CIC emphasised that point, noting that its board decided in 2011 to make rolling 10-year annualised returns a key measure of performance.

"As a long-term investor, we are well positioned to withstand short-term volatility in markets, to pursue contrarian investments and to build long-term positions that can capture the premium for less liquidity," it said.

There is no guarantee that government ‘investments’ will produce positive returns.

After all, government and central bank bureaucrats are human and suffer from the same knowledge problem, as well as, other human frailties (heuristics, biases, etc..) as with the rest.

The difference is that government actions has externality effects which unduly exposes taxpayers. Yes, central banks as government institutions are underwritten by taxpayers.

The other difference is that actions by government agents or bureaucrats are driven by legal technicalities and political priorities than from the profit and loss incentives.

Besides given the huge distortions of the marketplace financial assets are subject to immense volatility and boom bust cycles, which makes sovereign wealth funds highly susceptible to market risks.

The Magic of Central Banking Talk Therapy

The prospects of central banking inflation steroids bring hope to the forefront.


From Bloomberg,

The Dow Jones Industrial Average (INDU) climbed above 13,000, capping its longest weekly advance since January, amid speculation the European Central Bank will buy bonds to help lower borrowing costs and preserve the euro…

American stocks joined a global rally after two central bank officials said ECB President Mario Draghi will hold talks with Bundesbank President Jens Weidmann in an effort to overcome the biggest stumbling block to a new raft of measures including bond purchases. German Chancellor Angela Merkel and French President Francois Hollande echoed yesterday’s pledge by Draghi that they will do everything to protect the euro.

Bad news is good news: economic slowdown signifies as fodder for central bank support. More from the same article


Chart from tradingeconomics.com

In the U.S., data showed that the economy expanded at a slower pace in the second quarter as a softening job market prompted Americans to curb spending. Consumer confidence in July dropped to the lowest this year, according to a separate report. Cooling growth makes it harder to reduce unemployment, helping explain why Federal Reserve Chairman Ben S. Bernanke has said policy makers stand ready with more stimulus if needed.

“Growth has decelerated sharply,” said Philip Orlando, the New York-based chief equity strategist at Federated Investors Inc., which oversees $355.9 billion. He spoke in a telephone interview. “We need something to reverse that downtrend and that ‘something’ is policy.”

Consumers are cutting back just as Europe’s crisis and looming U.S. tax-policy changes dent confidence, hurting sales at companies from United Parcel Service Inc. to Procter & Gamble Co. Sales at almost 60 percent of S&P 500 (SPXL1) companies which reported second-quarter results missed estimates, data compiled by Bloomberg show. Still, 72 percent beat profit forecasts.

US equity markets have also been climbing amidst falling growth of money supply...


chart from St. Louis Fed

...also amidst declining forecasts or expectations for corporate earnings...


Dr. Ed Yardeni notes

As a result, the 2012 and 2013 estimates are at new lows of $104.11 and $116.41, respectively. These numbers imply earnings growth rates of 6% this year and 12% next year. They may still be too optimistic since revenue growth is likely to be closer to 5% during 2012 and 2013, while profit margins are likely to remain flat over this period.

Well, all these goes to show how financial markets, desperately seeking yields, have become ‘dopamine addicts’.

Douglas French at the Laissez Faire Books explains,

…cheap money combined with the herding animal spirits is a certain cocktail to engender bubbles. Tragically, these booms are followed by the inevitable busts, creating regret that is the difference in investors minds between the value of what is and the value of what could have been.

This is important because of dopamine, which is a chemical in the brain that helps humans decide how to take actions that will result in rewards at the right time.

People don’t get a dopamine kick when they get what they expect, only when they make an unexpected windfall. So, as Jason Zweig writes in Your Money and Your Brain, drug addicts crave ever-larger fixes to achieve the same satisfaction and “why investors have such a hankering for fast-rising stocks with ‘positive momentum’ or ‘accelerating earnings growth’.”

Also, dopamine dries up if the reward you expected fails to materialize.

The brain has 100 billion neurons and only one-thousandth of one percent produce dopamine, but “this minuscule neural minority wields enormous power over your investing decisions,” cautions Zweig.

Dopamine takes as little as a twentieth of second to reach your decision centers, estimating the value of an expected reward and more importantly propelling you to action to capture that reward. “We’ve evolved to be that way,” explains psychologist Kent Berridge, “because passively knowing about the future is not good enough.”

The effect of all this is what Zweig refers to as “the prediction addiction.” Humans hate randomness. We want to predict the unpredictable, which originates in the dopamine centers of the reflective brain, according to Zweig, leading humans to see patterns where none really exist…

The attempt to satisfy the dopamine which has been evoked by central bank policies, leads people to become increasingly more dependent on heuristics based thinking

More from Mr. French

We all tend to constantly feed our confirmation biases, seeking out experts that confirm our view of the world. We read writers that we agree with so that we can feel smarter, while ignoring or dismissing opinions different from our own.

Our brains are great for keeping us alive in the jungle. We look for patterns and motion. These instincts kept the cavemen alive, not to mention Wall Street’s technical analysts, but wreck the portfolios of investors.

Investors love a good story, but are vulnerable to anecdotes that mislead us, says Ritholtz.

No wonder markets are not sources of information, but instead sources of misinformation, according to resource investing guru Rick Rule…

“The information that people derive from markets is spectacularly wrong,” says Rule, a devotee of legendary investor Benjamin Graham. Like Graham, Rule looks for undervalued stocks and only wants to buy them when they are on sale. Quoting Graham, Rule says, “markets in the short term are voting machines, while in the long term they are weighing machines.”

Housewives are much more rational buying groceries than investors are in buying stocks. While a housewife will turn her nose up at expensive tuna fish, she will load up on it once it goes on sale. Conversely, her investor husband, in Rule’s story, is happy when the share price of his favorite stock goes up and he buys more. When the share price falls, he doesn’t buy more, as his wife does with tuna fish, but instead sells out in disgust.

In short, stock markets (and the financial markets) have been in disconnect with reality. Promises have been taken as facts.

Equity markets have mostly priced in prospective central banking support via QEs…


chart from Zero Hedge

The question now is how sustainable will this talk therapy rally be? Will talk therapy be enough to reinforce the current reanimated 'animal spirits' and filter into economic reality? What if central banks don't deliver as the markets expect?

P.S. I won’t be making my regular stock market commentary tomorrow.

Friday, July 27, 2012

3D Printer Milestone: World’s First 3D-Printed Gun

The 3-D printing technology has been advancing at an incredibly swift pace.

Now it seems that parts of the gun can be 3-D printed

The Nextweb.com writes

Gun enthusiast “HaveBlue” has documented in a blog post (via the AR15 forums) the process of what appears to be the first test firing of a firearm made with a 3D printer.


Credit: HaveBlue.org

Before you go about locking yourself in your closet, you should know that the only printed part of the gun was the lower receiver. But, according to the American Gun Control Act, the receiver is what counts as the firearm.

HaveBlue reportedly used a Stratasys 3D printer to craft the part, assembled it as a .22 pistol and fired more than 200 rounds with it.

The tester then attempted to assemble a rifle with the part and a .223 upper receiver but had “feed and extraction issues.” The problem may not in fact be with the 3D-printed part, though, as the issues remained when a standard aluminum lower was used.

3D printer gun designs have been floating around the Internet for some time now, but HaveBlue seems to be the first to take it to the next level.

Click here for a nice infographic of 3-D Printing also from Nextweb.com.

Graphic of the Day: Red Tape and Small Business

In the mainstream, hardly has there been any meaningful discussions about how red tape, costs of regulatory compliance and the costs of leviathan bureaucracy contributes to unemployment or how politicization of the economy via the bureaucracy and arbitrary rules (regime uncertainty) takes its toll on the economy, particularly on small business, which have been the major source of the employment in the US (and elsewhere).


The chart from the Joint Economic Committee Republicans exhibits the astounding maze of regulations.

So when the politicians deceivingly assert that the success of entrepreneurs has been due to the government, in truth this relationship has been in reverse: many business failures, stillborn and or unrealized businesses have been products of government interference in various forms.

Cato’s Dan Mitchell (where the chart above has been sourced) gives us some numbers on the onus of the bureaucracy to the US economy:

Americans spend 8.8 billion hours every year filling out government forms.

The economy-wide cost of regulation is now $1.75 trillion.

For every bureaucrat at a regulatory agency, one study estimated that100 jobs are destroyed in the economy’s productive sector.

As the great Ludwig von Mises pointed out,

The trend toward bureaucratic rigidity is not inherent in the evolution of business. It is an outcome of government meddling with business. It is a result of the policies designed to eliminate the profit motive from its role in the framework of society’s economic organization.

Elimination of the profit motive means a declining trend in a society’s standard of living.

The Economist has an article about “The parable of the four-engined planes” which nicely demonstrates of the failure of bureaucratic rigidity.

Updated to add:

Another worthwhile example is this article about a 13 year old aspiring entrepreneur whose business got shut down by local regulators. (pointer to Professor Gary North)

Has the US Government been Spying on All Americans?

The US government has reportedly been indiscriminately spying on their citizens according to whistleblowers

From the RT.com (hat tip Sovereign Man) [italics original]

In an interview broadcast on Current TV’s “Viewpoint” program on Monday, former NSA Technical Director William Binney commented on the government’s policy of blanket surveillance, alongside colleagues Thomas Drake and Kirk Wiebe, the agency's respective former Senior Official and Senior Analyst.

The interview comes on the heels of a series of speeches given by Binney, who has quickly become better known for his whistleblowing than his work with the NSA. In their latest appearance this week, though, the three former staffers suggested that America’s spy program is much more dangerous than it seems.

In an interview with “Viewpoint” host Eliot Spitzer, Drake said there was a “key decision made shortly after 9/11, which began to rapidly turn the United States of America into the equivalent of a foreign nation for dragnet blanket electronic surveillance.”

These powers have previously defended by claims of national security necessity, but Drake says that it doesn’t stop there. He warns that the government is giving itself the power to gather intel on every American that could be used in future prosecutions unrelated to terrorism.

“When you open up the Pandora’s Box of just getting access to incredible amounts of data, for people that have no reason to be put under suspicion, no reason to have done anything wrong, and just collect all that for potential future use or even current use, it opens up a real danger — and to what else what they could use that data for, particularly when it’s all being hidden behind the mantle of national security,” Drake said.

Although Drake’s accusations seem astounding, they corroborate allegations made by Binney only a week earlier. Speaking at the Hackers On Planet Earth conference in New York City earlier this month, Binney addressed a room of thousands about the NSA’s domestic spying efforts. But in a candid interview with journalist Geoff Shively during HOPE, the ex-NSA official candidly revealed the full extent of the surveillance program.

“Domestically, they're pulling together all the data about virtually every U.S. citizen in the country and assembling that information, building communities that you have relationships with, and knowledge about you; what your activities are; what you're doing. So the government is accumulating that kind of information about every individual person and it's a very dangerous process,” Binney said.

Drake and Binney’s statements follow the revelation that law enforcement officers collected cell phone records on 1.3 million Americans in 2011. More news articles are emerging every day suggesting that the surveillance of Americans — off-the-radar and under wraps — is growing at an exponential rate.

If true, then the US has progressively been marching into a police state.

China’s Hunan Province May Get Steroids, China’s Tax Revenues Drastically Fall

The intensifying urge for government’s opium has been palpable everywhere.

A slowing economy in China has prompted for more babbles of government spending stimulus.

Reports the Reuters

The government of Changsha, the capital of central China's Hunan province, has launched an 829 billion yuan ($130 billion) investment stimulus program to bolster the local economy, state media has reported.

The money would be spent on 195 projects, including airport, subway and urban infrastructure facilities, as well as developing energy efficient industries, said a report by the official China News Service on Wednesday.

The government of Changsha, a city known for its machine-making and non-ferrous metal industries, would also speed up financial reform and innovations, said the report, which provided no details about how the program would be financed.

The China News Service paraphrased Chen Runer, the Communist Party secretary of Changsha, saying that economic pressure on the city could not be ignored, despite relatively stable growth in the face of global headwinds, and it was time for initiative.

There was no reference to the program's existence on the government of Changsha's website on Thursday.

Zhang Zhiwei, chief China economist at Nomura in Hong Kong, calculates that the headline number on the stimulus plan is worth 147 percent of Changsha's nominal GDP in 2011, or 1.8 percent of China's national economic output.

Even if spread over five years, Zhang says the implied investment would be equivalent to 46 percent of total annual fixed asset investment in Changsha.


Skeptics say a program on that scale is implausible and could not be properly financed with China's banks still nursing bad loans worth an estimated 2-3 trillion yuan after local governments racked up debts of 10.7 trillion yuan in the wake of Beijing's nationwide stimulus program unveiled in 2008.

The mixed signals or tentativeness being shown by Chinese authorities reveal of the ongoing political discord.

Yet the Shanghai index continues with its slomo descent, which seems to have been discounting all the inveigles of inflationism


Also China’s tax revenues has been posting a marked decline


Writes Dr. Ed Yardeni (chart also from Dr. Yardeni)

The data confirm a significant slowdown in Chinese economic growth during the first half of this year:

(1) Tax revenues rose only 9.8% y/y during H1-2012, down from 29.6% over the same period a year ago. Growth rates were down across all 11 major revenue sources.

(2) Personal income taxes actually declined 8.0%. A year ago, they rose 35.4%. Corporate income taxes rose 17.3%, but that was down from 38.3% a year ago.

(3) Revenues from property transactions took a hit. The ones from “Land Value Increment” rose 14.7% vs. 91.1% a year ago. “Deed” revenues fell 9.9% after rising 27.5% a year ago.

Dr. Marc Faber lays out the contagion risks from China’s economic slowdown (start at 5:20)

Thursday, July 26, 2012

HOT: ECB’s Draghi: ECB Will Do What’s Needed To Preserve Euro

Steroid starved financial markets suddenly found life from promises of more inflationism.

From Bloomberg,

European Central Bank President Mario Draghi said policy makers will do whatever is needed to preserve the euro, suggesting they may intervene in bond markets as surging yields in Spain and Italy threaten the existence of the 17-nation currency bloc.

“To the extent that the size of these sovereign premia hamper the functioning of the monetary policy transmission channel, they come within our mandate,” Draghi said in a speech at the Global Investment Conference in London today. “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,” he said, adding: “believe me, it will be enough.”

Economists said the comments suggest the ECB may be preparing to unveil new measures to fight the crisis as potential bailouts for economies the size of Spain and Italy threaten to overwhelm Europe’s rescue funds. Spanish politicians have called on the ECB to do more after yields on the country’s bonds soared to euro-era records this week.

Spanish yields slumped after Draghi’s remarks, with the rate on the 10-year bond dropping 32 basis points to 6.98 percent at 1:26 p.m. in Madrid. It touched a record 7.69 percent on July 22. The euro jumped and stocks rose. The single currency climbed as high as $1.2285 after trading at $1.2118 before Draghi spoke. The Stoxx Europe 600 Index (SXXP) gained 1.6 percent.

Bad news once again is read as good news…that’s until markets wakes up to the reality of either empty promises or real action—meant to buy time before the day of reckoning arrives.