Saturday, December 20, 2008

Why Social Liberals Dominate The Academe?

In the ongoing debate about why the dominance of liberals in the academia, perhaps we find some answers from this Wall Street Journal article (bold highlight mine)….

``With the Big Three seeking a bailout from Washington, the Big Ten are following suit. Earlier this week the Carnegie Corporation of New York took out a two-page ad in the New York Times, signed by executives of 36 public universities, state university systems and higher-education associations, urging Congress and President-elect Obama to rescue them.

``Mr. Obama has already promised to expand federal subsidies to higher education by increasing Pell grants and making student-loan terms more permissive. The university chiefs seek an additional "federal infusion of capital" -- as much as $45 billion -- to build new facilities, especially "green" ones. "To ensure a rapid response, only projects that are shovel-ready or on which construction can begin within 120-180 days should be funded," says the ad.

``The Higher Education Investment Act, as the university chiefs call their proposed bailout, would allow them to make an end run around parsimonious state lawmakers: "The dollars should not be subject to appropriation by state legislatures. Federal funds should be conditional on states' agreement not to use these federal funds as an excuse to reduce budgetary commitments to state universities."

``Yet American higher education might benefit from more parsimony. Economist Richard Vedder has shown that large government subsidies already contribute to making universities "relatively inefficient institutions partly sheltered from the discipline of the market -- a discipline that provides incentives for cost reductions, product improvement, and innovation." The more subsidies rise, the higher tuitions seem to go. If taxpayers are going to shovel out more money to these schools, the academic executives should at least allow outsiders to perform a cost "restructuring."

Inefficient institutions that survive only from government largesse! Essentially you can’t bite the hand that feeds you.

Perhaps another clue can be found from this article… “With economy in shambles, Congress gets a raise” (thehill.com)

``A crumbling economy, more than 2 million constituents who have lost their jobs this year, and congressional demands of CEOs to work for free did not convince lawmakers to freeze their own pay.

``Instead, they will get a $4,700 pay increase, amounting to an additional $2.5 million that taxpayers will spend on congressional salaries, and watchdog groups are not happy about it.

“As lawmakers make a big show of forcing auto executives to accept just $1 a year in salary, they are quietly raiding the vault for their own personal gain,” said Daniel O’Connell, chairman of The Senior Citizens League (TSCL), a non-partisan group. “This money would be much better spent helping the millions of seniors who are living below the poverty line and struggling to keep their heat on this winter.”

``However, at 2.8 percent, the automatic raise that lawmakers receive is only half as large as the 2009 cost of living adjustment of Social Security recipients….

It’s especially nice to get enlisted as part of the government’s bureaucratic network especially when the economy-or the private sector- is in a recession.

Yet this isn't just a US affair as the dominance of liberals in the domestic arena is also apparent. They are frequently quoted by the press or write Op Ed columns for popular broadsheets. These days they write about the need for the so-called "equitable distribution" of land reform.

Thursday, December 18, 2008

Video: Inflation=Prosperity???

This video is an example of Keynesian Propaganda aimed at hoodwinking the public of the supposed magic of devaluing a currency (via the printing press) to create prosperity. (Hat Tip iTulip, Lew Rockwell).

Oh, this isn't just a US phenomenon, most politicians and academic experts here are likewise proponents of the devaluation of the Philippine Peso for the alleged benefit of the economy (a.k.a. exports or OFWs).

Meanwhile, the public is unaware that noble sounding projects/programs/policies only benefit the politically connected, government officials and the primary recipients of government inflation. The rest of the public suffers via higher prices.

Is US Dollar’s Price Action Reflecting The State Of Deleveraging?

According to Sir Isaac Newton, ``To every action there is an equal and opposite reaction”.

In terms of the US dollar index, Newton’s Third Law of Motion seems at work.

The US dollar index remarkably spiked just as after the Lehman Bros declared bankruptcy last September 15. But has surrendered more than three-fifths of its most of recent gains, with the gist of these losses surfacing during the past two weeks.


Courtesy of Bespoke Investment

Bespoke Invest notes that ``The US Dollar index fell another 2.2% today for its biggest 6-day decline ever…the current 6-day decline of 8.07% tops the prior record decline of -7.48% set back in September of 1985. If it's not one asset falling these days, there's sure to be another.”

So the amazing rise has now been equally met by an astounding fall. The question is if the recent decline will wipe out the entire gains accrued during the September-October rump.

Yet, some suggest that the US dollar is either in a long term bull market or will remain cyclically strong because of the present environment deleveraging, recession, risk aversion, narrowing growth differentials and the US dollar as reserve status.

While these factors may have, to varying degrees contributed, to the US dollar’s recent strength, we have long argued (see Demystifying the US Dollar’s Vitality) that deleveraging and the unwinding carry trade seem to be the critical binding force in pushing up the US dollar especially against Asian and other currencies, aside from the collapsing global financial markets and commodities.

Courtesy of Casey Research Charts

The post Lehman bankruptcy sent foreign buyers, mostly central banks, scrambling into US treasuries (US $147 billion-Casey Research) which drove yields to historical record levels and even to “negative yields” (see Living In Interesting Times).

The credit bust resulted to a dysfunctional banking system in the US, which caused global banks and Emerging Market economies to jostle for US dollars for mostly purposes of payment/settlement and or for capital building.

Thus, the fear factor or risk aversion and magnified status of the US dollar as the world’s currency reserve have basically been an offshoot to the massive debt deflation process. Debt deflation accounted for as the cause, all the rest were attendant actions or the effects.

And as the deleveraging eases, the US dollar should likewise reflect on its intrinsic economic weakness (yes, the US is the epicenter of today’s woes and unlikely representative of “safehaven” status) and the expansive inflationary actions undertaken by its policy makers (Dr. Jekyll and Mr. Hyde- Bernanke doing a Dr. Gideon Gono-see Zimbabwe’s Gono Lauds US and UK For "Seeing the Light" and "Making Positive Difference").

We don’t share the view that the US will recover first simply because it is experiencing enormous structural internal changes coming from an imploding bubble, which will fundamentally alter the country’s political economic landscape, aside from the reverberating weaknesses from its external linkages (exports or capital flows).

Even, Gao Xiqing president of the China Investment Corporation, which manages “only” about $200billion of the country’s foreign assets, recently observed of such fundamental shifts. In an interview with James Fallows at the Atlantic Magazine, Mr. Gao said,

``The overall financial situation in the U.S. is changing, and that’s what we don’t know about. It’s going to be changed fundamentally in many ways.

``Think about the way we’ve been living the past 30 years. Thirty years ago, the leverage of the investment banks was like 4-to-1, 5-to-1. Today, it’s 30-to-1. This is not just a change of numbers. This is a change of fundamental thinking.” (bold highlight mine)

Also, we do not share the view that plain recession or risk aversion will lead to a support in the US dollar. For instance, Pension funds, which for some should serve as pillars for the vitality of the US dollar, seem to have been impacted by forces that should help not weaken the US dollar, such as

1) the economic weakness that poked big holes in corporate pension funding...

This from Businessweek,

``In pooling together assets from many different corporations, a multi-employer plan should minimize the risk of any one company's not paying its pension tab, since it can tap other companies in the plan to make up for the shortfall. But something unexpected is happening now: As the recession grinds on, companies in a broad swath of industries, from transportation and manufacturing to food services and lodging, are going out of business and have stopped making their pension payments. That has left the remaining companies—healthy or not—with the burden of making up for the massive shortfalls. "The multi-employer plan is a great model as long as all of the companies stay alive and grow," says William D. Zollars, CEO of trucking giant YRC Worldwide, which participates in such plans. "But the way the current plans are structured, you not only pay for your employees but all the orphans whose employers have gone out of business."

``To prop up multi-employer plans, companies will have to dip into profits, which could force them to tamp down salaries and bonuses, cut jobs, and slash capital spending. It's a vicious circle: The bigger the shortfalls in coming months, the more they will weigh on the already slumping U.S. economy—which will only make the pension situation worse.


courtesy of Businessweek

2) severe mark down of asset values in the portfolios of Pension funds...

Again from Businessweek ``At least some of the blame for the nation's pension woes lies with Washington, which has unwittingly tied the hands of companies with single- or multi-employer plans. Under the 2006 Pension Protection Act that's just now taking effect, employers must ensure their pension plans have enough money on hand to cover current and future benefits. If a plan is significantly underfunded—meaning its obligations exceed its assets—the company or companies must make up the difference within a certain number of years.

``Talk about bad timing. The legislation was meant to force corporations to shore up their plans so that the government wouldn't have to bail them out. But no one foresaw the great bear market of 2008. Now, just as the new pension rules are kicking in, investment portfolios are plunging. The nation's largest pension plans in late October had just 85 cents of assets for every $1 of current and future obligations, according to Standard & Poor's and that gap, a record $204 billion, has likely increased with November's stock market swoon. Goldman Sachs estimates that companies will be forced to boost their pension contributions to $40 billion in 2009, from about $18 billion this year….

``Taxpayers could find themselves picking up the tab, precisely the scenario lawmakers tried to avoid. The Pension Benefit Guaranty Corp., a federal government agency, was created in the 1970s to manage the pension assets of bankrupt companies. In recent years the PBGC assumed the benefits of steel giants like Bethlehem Steel and airlines such as United Airlines and Delta. But the PBGC is also hurting, with just $69 billion on hand and $80 billion worth of obligations. Should another big pension provider go under, the PBGC might need more public funding. "We are always trying to be prepared for the future," says Charles Millard, the PBGC's director. "We regularly update our contingency plans and review the funded status of plans and industries that concern us."

None of these looks US dollar bullish, especially if the deleveraging dynamics should ebb.

Cartoon of the Day: Bernanke's Quantitative Easing

Nice cartoon from Prieur Du Plessis's Investment Postcards.com

Tuesday, December 16, 2008

Places Where to Find Or Avoid Promiscuous Sex

Sexual habits differ geographically.

That’s according to this Economist article,

``HOW much do sexual habits vary between countries? A great deal, according to a study of 14,000 people in 48 countries. The survey asked respondents to consider seven questions related to sex. Some questions were factual: how many sexual partners have you had in the past year and how many one-night stands have you had? Other questions were about attitudes to sex: is sex without love acceptable, or sex with casual partners? From the answers, the researchers compiled an index of promiscuity for respondents from each country. The result appears to show that Finns and other Europeans are the most promiscuous, whereas respondents from more conservative countries, such as Bangladesh and Zimbabwe, are less promiscuous. Around the world men and women vary in their attitudes to casual sex. Men are more likely to seek it out in their late twenties. Women wait until their thirties when the chances of a casual encounter resulting in pregnancy are less.”

courtesy of the Economist

Further observations or questions:

1. What drives the diverse habits of sexual activity among nations? Which among these variables could possibly weigh more?

-demographic trends,

-culture,

-wealth,

-religion,

-economic openness,

-regulation,

-race,

-others

2. Ah, Philippines ranks one of the most conservative! Is it because of…thank you Bishops? …or the dulling influence of soap operas or noontime vaudeville shows (sorry for the non-sequitors)?

It would be a wonder how population growth explosion would turnout if Filipinos ramp up sexual habits equal to those of the top 10.

3. For those eyeing to engage in casual sex the Economist gives some clues; Women at age 30s and men at the late 20s!


Sunday, December 14, 2008

Phisix: The Fantasy Of The 2008 "Window Dressing" Year End Rally

“If most of us remain ignorant of ourselves, it is because self-knowledge is painful and we prefer the pleasures of illusion.” Aldous Huxley (1894-1963), English Writer

We learned that some local experts recently opined that if a rally should occur in the Philippine equity markets this month, this would likely be driven by so called “Window Dressing”.

Window Dressing according to Investopedia.com is ``A strategy used by mutual fund and portfolio managers near the year or quarter end to improve the appearance of the portfolio/fund performance before presenting it to clients or shareholders”.

So after the recent rout, where the Phisix have chalked up 48% losses year to date and 51% since the credit bubble imploded last July, how should we expect “to improve the appearance” of portfolio funds to lift the market?

In our view, either such expert/s have been living on a different planet or have completely lost rationalizations to explain away market actions.

Why?

1. Lost in the understanding is the process called debt deflation or deleveraging.

During the previous boom, asset values in the global financial zoomed due to massive speculations underpinned by an easy money environment or the moneyness of credit. Remember, banks based their lending on the value of the collateral and the lending process enhances the value of such collateral. Hence the entire process of lending and collateral values becomes a self-reinforcing feedback loop.

So in boom periods, rising collateral values allow for more lending which again translates to even higher collateral values…until the whole becomes unsustainable and reverses.

Today, the process of lending and collateral values could be seen as similar to a “global margin call” where falling collateral values compels lenders to tighten either by asking for more collateral to secure outstanding loans or forcibly liquidate assets in order to pay for such loans. The whole feedback loop, thus, accentuate the downward spiral in asset values which all of us have been witnessing today.

2. Lost in the understanding is that the finance industry and fund managers are the main conduits of the deleveraging process.

The unraveling debt deflation phenomenon has basically been vented on the financial markets.

And this has visibly caused the market’s miseries today here or in Asia (see Figure 1) or elsewhere.

Figure 1: IMF: Fleeing Foreign Capital

According to IMF’s Kenneth Kang and Jacques Miniane (all italics mine),

``But given the region's large trade and financial integration with the rest of the world, investors' views of Asia soured as the global turmoil intensified and perceptions grew that the global economy was in for a major slowdown. Large net equity outflows have driven down stock prices sharply. Asia-focused hedge funds have been among the worst performers worldwide, with their returns consistently below those of other emerging market funds.

``Capital outflows have also significantly weakened currencies in some countries, notably India, Korea, New Zealand, and Vietnam. And several countries have responded by intervening to support their currencies, in stark contrast to the past several years, when most Asian countries were concerned about the rapid appreciation of their currencies.

``With the rise in global risk aversion, Asian governments, corporations, and financial institutions have found it more difficult to access the global financial markets. Countries with banking systems that rely more on wholesale financing and less on retail deposits (Australia, India, Korea, New Zealand) have experienced a higher rise in borrowing costs, partly because of concerns they will face difficulties rolling over their debts. As a result of these tightened conditions, the region's private external financing has fallen sharply.”

And because the process of deleveraging equates to forcible liquidations in order to reduce debt exposure, this means that global fund managers have likewise been retrenching to meet redemptions or to simply cut losses.

So we see this in hedge funds…

From Bloomberg, ``The global hedge-fund industry lost $64 billion of assets in November, with an index tracking its performance declining for a sixth month as economies in Asia and Europe joined the U.S. in recession, Eurekahedge Pte said…

``Hedge-fund industry assets peaked at $1.9 trillion in June, data compiled by Chicago-based Hedge Fund Research Inc. show. Investment losses and withdrawals may shrink that amount by 45 percent by the end of this month, according to estimates by analysts at Morgan Stanley.”

And in the mutual funds…

From ICI.org, ``The combined assets of the nation's mutual funds decreased by $1.087 trillion, or 10.2 percent, to $9.600 trillion in October, according to the Investment Company Institute's official survey of the mutual fund industry.”

And we can’t expect the local counterparts to immediately replace them considering that the industry has been quite underdeveloped, where according to Icap,com, ``total of 22 mutual funds in the country. Six (6) of these are bond funds, five (5) are equity funds, while the remaining ten (10) are balanced funds while one is a money market fund” and even if we add the domestic bank based UITF counterparts.

3. Finally, market inefficiencies brought about by the dynamics of the sheer scale of liquidations aside from tax angles could factor in negatively for the US markets which could spillover to other markets…

That’s if we heed former fund manager Andy Kessler who warns the public to ``stick wax in your ears and don't listen to the market until February.”

Quoting Andy Kessler (Wall Street Journal):

``-Tax-loss selling: Whenever you have a loss in a stock -- and who doesn't -- it's always tax smart to sell it, take a tax loss and either buy something similar or wait 30 days and buy the original one back. December can be an ugly month of indiscriminate selling. The December effect will be huge this year.

``- Mutual-fund redemptions: Mutual funds are also dumped for tax losses. When the stock market is down in the morning, it's usually because of mutual-fund redemptions…

``- Mutual fund cap-gain distributions: To make matters worse, in December mutual funds do capital-gains distributions. In a down year like 2008, you would think there are no taxes to pay. Think again. Legg Mason's Value Trust, run by Bill Miller, outperformed the market for 15 years by buying many "unvalue" names like Amazon. As investors redeem, he is forced to sell many of these stocks originally purchased at very low prices, triggering huge capital gains in a year his fund is down 62%. You can almost guarantee investors also will sell more of these funds to pay their unexpected tax bill.

``- Hedge-fund redemptions: Instead of overnight selling like mutual funds, hedge funds typically require 45 days' notice for investors to get out of a fund. They've been furiously selling since September to raise cash to pay investors. This usually shows up as a set of stocks that just go down and down and down with no obvious explanation.

``Rubbing salt in hedge-fund wounds is the fact that Lehman Brothers was a prime broker to many hedge funds, holding their shares. While Lehman's bankruptcy was not a problem in the U.S., in England the policy is to freeze accounts until the mess can be sorted out. There are billions in assets locked in this bankruptcy, and hedge funds are forced to sell positions in the U.S. and elsewhere to raise cash, exacerbating the downside here.

``By the way, when hedge funds are down for the year, they work practically for free until they make up the loss. We'll see hedge funds close and stocks liquidated as -- no surprise -- hedge-fund managers like to get paid.

``- Margin calls: Whenever stocks go down sharply, you quickly find who owns them with debt. We have seen spectacular margin calls, a requirement for more capital to cover share losses. Chesapeake Energy CEO Aubrey McClendon unloaded 33 million shares to cover losses. Viacom CEO Sumner Redstone had a forced sale of $400 million in Viacom and CBS shares because of a margin call on other stocks. You can bet many not-so-public margin calls are behind many huge price drops. These usually take place in the last 30 minutes of trading.”

Overall, the fundamental premise that global and local fund managers will provide for a temporary facelift for the Phisix doesn’t square with global trend of rising risk aversion, client and fund redemptions and or perhaps tax induced selling.

If the Phisix and global markets should rise, it is likely because long term investors will take over short term players or take advantage of the collateral crisis related losses or even perhaps take refuge in stocks as “store of value” in a world where global central banks have been racing to collectively devalue their currencies.

Window dressing could possibly be an issue after the deleveraging phenomenon or when markets stabilize.

To argue otherwise seems living off a fool’s paradise, or as
Sigmund Freud once wrote, ``Illusions commend themselves to us because they save us pain and allow us to enjoy pleasure instead. We must therefore accept it without complaint when they sometimes collide with a bit of reality against which they are dashed to pieces."

Is Ben Bernanke Turning The US Federal Reserve Into A Dictatorship?

``The deepest policy errors are lodged in the public’s expectation and belief that central banks and governments can alleviate recessions and in the public’s giving these organizations the legal power to do what they do (or tolerating their power grabs). Further errors lie in listening to mistaken experts who continue to justify these counterproductive methods and laws, and in failing to learn from experience that the policies that central banks and governments use to fight recessions make them worse and turn them into deeper recessions and depressions.”- Michael S. Rozeff, The Fed’s Exploding Balance Sheet: What It Means and Reviving the Revolution

Dictatorship means absolute rule.

Given the recent turn of events, it is noteworthy to point out that the recent actions undertaken by the US Federal Reserve appear to be evolving towards such an end.

While one may argue that given today’s emergency conditions, rapid responses from central authorities may be required to help ease the crisis, such assumption is fallaciously grounded on the infallibility of the central authority, where wrong decisions may present as systemic risk for our globalized society.

To quote Friedrich A. Hayek in Pretense of Knowledge, ``To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm. In the physical sciences there may be little objection to trying to do the impossible; one might even feel that one ought not to discourage the overconfident because their experiments may after all produce some new insights. But in the social field, the erroneous belief that the exercise of some power would have beneficial consequences is likely to lead to a new power to coerce other men being conferred on some authority. Even if such power is not in itself bad, its exercise is likely to impede the functioning of those spontaneous-ordering forces by which, without understanding them, man is in fact so largely assisted in the pursuit of his aims.” (italics mine)

Some of the recent events indicative of the dictatorial tendencies:

One, the Fed has activated the use of its emergency powers to bypass legal requirements or procedures,

This from Bloomberg, ``The Federal Reserve took advantage of emergency powers to authorize the auctions that officials felt were necessary to ease a credit squeeze, concluding it otherwise lacked legal permission to do so.

``The Fed bypassed requirements for prior notice and public comment when writing the regulations to implement today's agreement with the European Central Bank and three other central banks. The Fed's official notice today said any delay caused by following standard procedures would have been ``contrary to the public interest.''

``Such actions, while used ``sparingly'' over the years, were justified today because the new rules probably carry few costs, a former Fed attorney said. The action today was part of a coordinated effort with other central banks to alleviate a global growth slowdown, acting after interest-rate cuts failed to allay concerns that banks will reduce lending.

``It's something that they normally don't do,'' said Oliver Ireland, who worked as a Fed counsel for more than two decades and is now a partner at Morrison & Foerster in Washington. ``If you look at doing things to stabilize volatile markets, I don't think it's very hard to find good cause. There's no tangible harm to anybody.''

``The Fed uses the bypass powers regularly when changing the rate on direct loans to banks, though rarely when publishing broader rule changes. The Administrative Procedure Act requires federal agencies to give public notice and solicit comments on regulatory changes though with exceptions, Ireland said.

Two, the Federal Reserve has used its ‘war powers’ to also bypass its organization’s hierarchal decision making process.

Again from Bloomberg (italics mine), ``The district chiefs’ authority over borrowing costs has been marginalized in the past two months as Chairman Ben S. Bernanke and the Fed Board of Governors in Washington made their own decisions on emergency measures to flood the economy with cash.

“The Board has usurped authority,” said William Poole, former president of the St. Louis Fed and now a senior fellow at the Cato Institute in Washington. “This dramatic change in policy direction has not been announced or even acknowledged.”…

``A conference call last month showed how little say the central bank’s 12 regional presidents now have in some of the Fed’s biggest decisions…

``Regional bank presidents don’t have a vote when the Board uses emergency powers to lend to firms other than banks in “unusual and exigent circumstances,” as it’s done repeatedly this year.

``The district-bank chiefs by design are supposed to offer a counterbalance to the Board, and in the past haven’t been shy about challenging chairmen. In February 1994, former chairman Alan Greenspan had to argue against four presidents who wanted to raise rates at least a half percentage point, compared with his own preference for a quarter-point move.

Three, the Federal Reserve has remained intransigent to repeated requests for transparency or the disclosures on the recipients of the recently extended loans.

Again this from Bloomberg, ``The Federal Reserve refused a request by Bloomberg News to disclose the recipients of more than $2 trillion of emergency loans from U.S. taxpayers and the assets the central bank is accepting as collateral.

``Bloomberg filed suit Nov. 7 under the U.S. Freedom of Information Act requesting details about the terms of 11 Fed lending programs, most created during the deepest financial crisis since the Great Depression.

``The Fed responded Dec. 8, saying it’s allowed to withhold internal memos as well as information about trade secrets and commercial information. The institution confirmed that a records search found 231 pages of documents pertaining to some of the requests.

These acts of suppression of the access to information signify as common traits for dictatorships. To quote Ronald Wintrobe in “The Political Economy of Dictatorships”,

``Democratic institutions (such as freedom of speech, freedom of information, elections, a free press, organized opposition parties and an independent judiciary) all provide means whereby dissatisfaction with public policies may be communicated between citizens and their political leader. The dictator typically dispenses with these institutions and thus gains a freedom of action unknown in democracy.”

Lastly, the Federal Reserve is now mulling the path to issue its own debt instruments,

This from Wall Street Journal, ``The Federal Reserve is considering issuing its own debt for the first time, a move that would give the central bank additional flexibility as it tries to stabilize rocky financial markets.

``Government debt issuance is largely the province of the Treasury Department, and the Fed already can print as much money as it wants. But as the credit crisis drags on and the economy suffers from recession, Fed officials are looking broadly for new financial tools.

``Fed officials have approached Congress about the concept, which could include issuing bills or some other form of debt, according to people familiar with the matter.

``It isn't known whether these preliminary discussions will result in a formal proposal or Fed action. One hurdle: The Federal Reserve Act doesn't explicitly permit the Fed to issue notes beyond currency.

Figure 2: St. Louis Fed: Federal Reserve Bank Credit and Federal Reserve Holdings of US Treasuries

While others don’t see anything sinister to the possible intent of the Fed to issue debts in lieu of the rapidly depleting holdings of the US treasuries in its portfolio (see figure 2) or to “destroy” some of the paper it has recently been printing or as added arsenal for contingent use, the obvious consolidation of power seems to be giving rise to an all powerful “omnipotent” institution.

Why is this important to us even when are about 7-8,000 miles apart?

Because the world’s monetary system is anchored upon the de facto international currency standard in the US dollar. And anything that impacts the state of the US currency will likely send ripples across the world.

To quote Axel Merk of Merk Investments, ``The only leadership that seems to be emerging is from the Federal Reserve determined to print not just billions, but trillions of dollars to provide the backstop to all economic activity; at the same time the policies are an insult to any potential buyer of securities the Fed has targeted, as the intervention keeps yields artificially low. As China has been one of the premier buyers of these securities, namely Treasury bonds and agency securities, this is a clear message by the Fed that Chinese investments to finance U.S. deficits is no longer welcome; why else would the Fed depress the return for potential buyers during a time when unprecedented amounts of debt need to be raised? While we are provocative in our allegation, it is at best an unintended consequence, at worst highly deliberate. Intentional or not, it may coerce Asian buyers of U.S. debt to reduce their holdings to allow the U.S. dollar to weaken. The Fed may believe that it does not need the free market to set rates as it can use its own balance sheet to set economic policy; this ill-perceived view is also shared by economists that believe modern central banking is stronger than market forces.” (bold emphasis mine)

Figure 3: BIS: Central Bank Assets and Open Market Operations

And as we have long predicted, all these point towards more evidences of a seismic shift towards politically based actions than just targeted at economic concerns.

Central banks all over the world have been seemingly desperate enough to resort to “saving” the status quo, an attitude founded on the modern day central banking paradigm of economic growth brought about by credit or inflation and foisted to the public, by flooding the world with money (see figure 3), absorbing much these losses and adopting more innovative “socialistic” means to flex its recently acquired muscles in order to salvage a rapidly festering system.

As Jesús Huerta de Soto, professor of economics at the Complutense University of Madrid, wrote in Financial Crisis and Recession, “…nothing is more dangerous than to indulge in the "fatal conceit" — to use Hayek's useful expression — of believing oneself omniscient or at least wise and powerful enough to be able to keep the most suitable monetary policy fine-tuned at all times. Hence, rather than soften the most violent ups and downs of the economic cycle, the Federal Reserve and, to a lesser extent, the European Central Bank, have most likely been their main architects and the culprits in their worsening.”


Friday, December 12, 2008

7 Philippine Rural Banks Taken Over; Emerging Cracks In The System? (updated)

Suddenly some small local rural banks emerge to declare bank holidays or are being taken over by the Philippine Deposit Insurance Corp PDIC.

The Philippine Central Bank, the Bangko Sentral ng Pilipinas (BSP) provides a list:

-Rural Bank of Paranaque (Placed under PDIC receivership by the Monetary Board on 9 December 2008)

-Rural Bank of Bais based in Negros Oriental ( placed under PDIC receivership by the MB today, 11 December)

-Pilipino Rural Bank based in Cebu (placed under PDIC receivership by the MB today, 11 December)

-Rural Bank of San Jose based in San Jose, Batangas (placed under PDIC receivership by the MB today, 11 December)

-Philippine Countryside Bank based in Cebu

-Dynamic Bank (RB of Calatagan) based in Batangas

-San Pablo City Development Bank

-Nation Bank based in Bacolod City

While the BSP rightly asserts that the following banks “represent only a tiny fraction of the banking system and that this reaffirms the BSP’s assessment that the banking system remains stable, highly-capitalized, and highly liquid” and further downplayed these events as having systemic repercussions by advising “the public to avoid making sweeping judgment on the condition of individual banks based on pure speculation as these tend to be self-fulfilling”, they haven’t disclosed the reasons behind why these 7 banks suddenly folded up (as these institutions will yet be subjected to investigations).

It is our guess that given the interrelated nature of the global banking industry, these banks have been similarly impacted as with other small banks elsewhere, on exposures to toxic instruments or have seen their capital adequacy ratios shrink on the account of severe markdowns of its asset values.

If more of these “bank holidays” should occur then naturally there will be heightened concerns over the emergence of possible “cracks” in the system.

Only transparency and rapid response by the authorities can assuage the public from being overwhelmed by “self-fulfilling speculations”.

***

Latest Update:

We'd like to thank reader m2md for giving us more information about the said foreclosed banks. These banks reportedly fall under an umbrella organization that does selling pre-need plans called the "Legacy Group Banks" from which the Supreme court earlier issued a Temporary Restraining Order (TRO). In short, a domestic issue. See article here.

Earlier Update:

We received a comment suggesting that these bank holidays could have been due to the possible flawed business models adopted by the affected Rural Banks-attracting deposits with above market interest rates and similarly carrying above market interest loan portfolios.

Perhaps.

But this translates to the sensitivity of these rural banks’ portfolios to the country’s economic performance, which equally means that for these banks to fold suggests of a drastic slump in parts of the Philippine rural economy over the recent past quarters or so- or where these banks are located. But this doesn’t seem so.

Aside, our domestic version of “subprime lending” would also have surfaced gradually or could have popped up one at a time than altogether in just one month.

So for us, the issue boils down to a matter of timing.

If there has been anything that has dramatically changed for the worst over the same period, it is the global financial markets.

We are 2 months from the global meltdown and 3 months from the Lehman bankruptcy (September 15), which makes us suspect some causal association.

Besides, as we noted these may not be just about foreign toxic waste in the affected rural bank’s portfolios but also due to inadequate capital ratios brought about by losses in financial assets that have impacted the banks balance sheets.

But of course, correlation doesn’t imply causation, which is why BSP’s transparency matters.

So we’d have to wait for the official BSP pronouncements on these and keep vigil over the trend of bank holidays-if, at all, they might signify the proverbial “Canary In A Coal Mine”.


Wednesday, December 10, 2008

Influencing Gold and Silver Markets, Backwardations Imply Higher Gold and Silver Prices

In Stock Market Investing: Will Reading Political Tea Leaves Be A Better Gauge?, we argued that today’s financial market can’t be used as reliable signals for interpreting future trends simply because financial markets especially in the US seem to be operating under the profound “influence” by the government.

And it seems that such “influences” have likewise been extended to the precious metal markets. Some agents of the banking sector, which has been under the lifeline of the US Federal Reserve, seems to have built heavy short positions in both the silver and gold markets.

Here is the excerpt (which includes charts) from Resource Investor’s Gene Arensberg,

``As of December 2, as gold closed at $783.39, the CFTC reported that 3 U.S. banks had a net short positioning for gold on the COMEX, division of NYMEX, of 63,818 contracts. The CFTC also reported that as of the same date all traders classed by the CFTC as commercial held a collective net short positioning of 95,288 contracts.

``That means that just three U.S. banks accounted for 66.97% of all the commercial net short positioning on the COMEX for gold futures.


Courtesy of Resource Investor (Source CFTC for Bank Participation, Cash Market for gold)

``For silver, it’s even more startling. On December 2, as silver closed at $9.57, exactly 2 U.S. banks held a net short positioning of 24,555 contracts. The CFTC reports that as of the same date all traders classed as commercial held a net short positioning of 24,894 contracts. So, the 2 U.S. banks, with one particular Fed member bank probably holding almost all of it, held a sickening 98.64% of all the collective commercial net short positioning on the COMEX, division of NYMEX in New York.


Courtesy of Resource Investor’s Gene Arensberg

``Exactly two U.S. banks have practically all the COMEX commercial net short positioning on silver. For a little context, 24,555 net short contracts means that the two banks held net short positions on December 2 for 122,775,000 ounces of silver with silver at $9.57. The COMEX said on December 4, that there were 80,239,857 ounces total in the “Registered” category, so these 2 malefactor banks held net short positioning equal to about 153% of the amount of deliverable silver in ALL the COMEX members’ accounts.

``And people wonder why both silver and gold moved into backwardation over the past two or three weeks? People are apparently worried that they won’t be able to take delivery of gold or silver metal from the COMEX in the future. They'll pay a premium now to get it now.”

In other words, the historical backwardation seen in the gold-silver markets accounts for as the brewing disparities between the precious metals’ physical markets relative to the financial markets or prices in the financial markets don't seem to be in synch with what has been going on in the physical markets.

To quote Professor Antal E. Fekete, ``Gold going to permanent backwardation means that gold is no longer for sale at any price, whether it is quoted in dollars, yens, euros, or Swiss francs. The situation is exactly the same as it has been for years: gold is not for sale at any price quoted in Zimbabwe currency, however high the quote is. To put it differently, all offers to sell gold are being withdrawn, whether it concerns newly mined gold, scrap gold, bullion gold or coined gold…(emphasis mine)

For us, the most probable explanation for such attempts to influence the precious metal markets is to create the impression that “inflation” remains subdued or contained. The US government wants to stoke “inflation” in the asset markets (stocks and real estate), but not in the commodity markets.

To add, by keeping the impression of contained "inflation", this allows authorities to liberally expand its theater of operations as it continues to wage war against debt deflation.

Moreover, such backwardation can also be read as the unintended effects from the distortions brought about by the attempt to influence the gold and silver market prices and as growing indications of the weakening foundations of the US dollar.

Again quoting Professor Feteke, ``Backwardation will pull in stocks from the moon as it were, if need be. The cure for the backwardation of any commodity is more backwardation. For gold, there is no cure. Backwardation in gold is always and everywhere a monetary phenomenon: it is a reminder of the incurable pathology of paper money. It dramatizes the decay of the regime of irredeemable currency. It can only get worse. As confidence in the value of fiat money is a fragile thing, it will not get better. It depicts the paper dollar as Humpty Dumpty who sat on a wall and had a great fall and, now, “all the king’s horses and all the king’s men could not put Humpty Dumpty together again.” To paraphrase a proverb, give paper currency a bad name, you might as well scrap it.

``Once entrenched, backwardation in gold means that the cancer of the dollar has reached its terminal stages. The progressively evaporating trust in the value of the irredeemable dollar can no longer be stopped.” (emphasis mine)

A prolonged backwardation suggests that price suppression schemes will only build unsustainable pressures underneath which will eventually find a release valve and consequently be vented in prices. Thus, gold and silver prices are likely to zoom to the moon!


Weaning Away from a Bailout Culture? Crack Up Boom Next?

A sense of desperation led us to deduce that Americans have drastically turned towards the bailout syndrome to seek relief from their economic and financial travails.

And such sentiment has been powerful enough to have even driven the recent election outcome. And because of popular demand, the political landscape appears to have likewise accommodated such sentiment.

But times could be changing, as Americans appear to be waking up to the realization of the futility of embracing bailouts as elixirs.

That’s if we go by the polls.

Courtesy of Gallup

According to Gallup, ``With lawmakers weighing the prospect of a multi-billion dollar bailout for the U.S. auto industry, Gallup finds Americans falling out of favor with its $700 billion predecessor. Since October, Americans have flipped from being more positive than negative on the Wall Street bailout, 50% to 41%, to being slightly more negative than positive, 47% to 46%."

And the same dynamics seem to be surfacing even in the auto industry.


Courtesy of Gallup

According to Gallup, ``A slight majority of 51% of Americans say they oppose the federal government's giving major financial assistance to the Big Three U.S. automotive companies, while 43% favor it -- representing a slight decrease in support compared to three weeks ago. However, if it is stressed that one of the Big Three companies were certain to fail without government assistance, support rises to the majority level of 52% and opposition falls to 42%.

All these reminds us of the admonition of Ludwig von Mises, ``But then finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against "real" goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.”

Could these signal the emergence of a crack up boom?


Living In Interesting Times

Financial markets today have been experiencing bouts of irrationality if not plain insanity.

To consider, instead of getting compensated by loaning money to the US government via the purchase of US Treasuries, lenders LOSE money!

Three month T-Bill yields have turned Negative!

And investors have been piling on, this from Marketwatch.com ``The Treasury Department sold $32 billion in four-week bills Tuesday at a yield of zero, implying investors purely wanted the assurance that they would get their principal back. Investors bid $128 billion at the auction, more than four times the amount available. Yields on one-month debt have plunged from about 1.80% in June. "I have never seen this before," said Michael Franzese, head of government bond trading at Standard Chartered. "It's all about capital preservation for the turn of the year, not capital appreciation.”

From our end, this remarkable development implies of a bubble at work.

Next, stock market volatility in the US is at record levels if one measures volatility from the perspective of absolute daily changes!

Chart from Bespoke

This from Bespoke Invest
, ``Up until the start of 2008, a daily move of 4% in a 50-day period was noteworthy. From 1945 through 2007, the S&P 500 had 49 one-day moves of 4% or more, which is an average of less than one per year. This year we've had 28! For a market as big as the United States to average a 4.02% daily change over a 50-day period is truly astounding. This is the type of volatility that we see in frontier and emerging markets -- not the biggest, most developed market in the world. The volatility bubble won't last forever, and being long it at this stage of the game is a very risky bet.” (emphasis mine)

It’s been a wild rollercoaster ride out there.

Next, following the first official “rally” or “bounce” in US equities markets, Bespoke Invest says this had been the third worst bear market.


Chart from Bespoke

Again from Bespoke Invest
, ``As shown, the bear market that ran from 10/9/07 to 11/20/08 is the third worst ever with a decline of 51.93%. The bears that ended in June of 1932 (-61.81%) and March of 1938 (-54.47%) are the only two that had bigger declines without a rally of 20%.”

All these seem to indicate that we are in some sort of a crossroad.


Tuesday, December 09, 2008

China’s “Healing” Equity Markets: The New World Market Leader?

Despite the overload of streaming bad news and pessimism, few have noticed that prior to the “recovery” or “bounce” (depending on the bias of the observer) in the US markets, China’s market has been gradually stabilizing.

courtesy of stockcharts.com

The red arrow shows China’s Shanghai index in a seeming recovery mode (from late October) even as the US S&P have touched a milestone low (blue arrow) in mid November.


To consider, during the advent of today’s bear market, China’s Shanghai index have turned lower almost simultaneously with other Asian benchmarks despite the limited exposure to foreign investors.

And to further allude that China’s Shanghai has suffered the most pain compared to the neighbors after losses tallied to 70% at its nadir.

While it is arguable that today’s recovery may simply be representative of a mere bounce, technical picture appears to indicate otherwise.

The Shanghai composite has broken the bearish year-to-date trend line (pink) aside from the 50-day moving averages (blue) which may point to a segueing to the market cycle process known as a “bottom”.

Of course since today’s global trade structure has put a lot of weight into China…



Courtesy of nationmaster.com

China could signify as a huge driver in shaping the global economy and markets.

And as the region increasingly integrates, this probably would imply for a regional recovery.

So we should probably keep watch with some of the key Asian indices as Japan’s Nikkei. Japan's major benchmark appears to be on its way to test its resistance levels at 9,500 and the 50 day moving averages to corroborate China’s seeming transitioning phase.

And because China in the recent past had accounted for an important consumer for commodities, then we might also add that for China’s bottoming process to be further confirmed, we need to see an equivalent turn in commodity prices as in copper, oil and other base metals, something that has, as of the moment, been missing.

Will China lead the next phase of the market cycle?

Stay tuned.