Germany’s Negative Yielding Debt

In Europe, desperate times calls for desperate measures. Now the public pays the government to hold their money.

From the Wall Street Journal, (bold emphasis mine)

Investors agreed to pay the German government for the privilege of lending it money.

In an auction Monday, Germany sold €3.9 billion ($4.96 billion) of six-month bills that had an average yield of negative 0.0122%, the first time on record that yields at a German debt auction moved into negative territory.

This means that unlike most other short-term sovereign debt, in which investors expect to be repaid more than they lend, investors agreed to be paid slightly less. And they are willing to do that because they are so worried about the potential for big losses elsewhere.

That is particularly the case in Europe, where sovereign-bond markets have been rocked by a years-long crisis. Switzerland and the Netherlands, also seen as relatively safe countries in which to invest, are among the few that have sold debt with negative yields in recent months.

In other words, German, Swiss and Dutch debt holders are losing money in exchange for safety.

Negative yields are symptomatic of an aura of uncertainty, the intensifying state of distress, the insufficiency of an alternative and the urgency to seek safehaven.

Interesting times indeed.

State Propaganda, Post Hoc Fallacies and Critical Thinking

The North Korean government says that nature has been sympathizing with the recent loss of their leader.

The Reuters reports,

The passing of North Korean strongman Kim Jong-il has been marked by plunging temperatures, mourning bears and now, according to North Korean state media, by flocks of magpies.

Kim, who died in December aged 69 years after 17 years running the world's most reclusive state, was reputed to be able to control the weather, as well as to have scored a miraculous 38 under par round of golf.

"At around 17:30 on December 19, 2011, hundreds of magpies appeared from nowhere and hovered over a statue of President Kim Il Sung on Changdok School campus in Mangyongdae District, clattering as if they were telling him the sad news," state news agency KCNA reported on Monday.

To an outsider this would be read as absurd, because it is.

But unknown to most, such medium of political communication represents the dominant or mainstream way of how social issues are dealt or tackled with by the political order and by the political establishment influenced media—whether in the US, the Philippines or anywhere around the world.

Most of media’s treatment revolves around the same fallacy: Post hoc ergo propter hoc or “after this, therefore because of this"

Whether social issues as anthropomorphic global warming, trade imbalances, the ‘necessity’ of government spending, militant foreign policy, retributionist healthcare and education and others, hardly anyone seem to care about the research or analytical methodologies used for arriving at implied conclusions.

These social events are considered as given or as ‘facts’ which are mostly backed by references of politicians and or their academic and or institutional factotums (where the latter’s arguments have been premised on math ‘models’).

That’s the difference between the blatant propaganda by the North Korean media and the subtle propaganda masqueraded as well thought public issues in mainstream politics and media.

And the ensuing public debate would mostly center on these assumed ‘facts’ which only magnifies the influence of state propaganda to the public—mostly through the power of suggestion, which again are predicated on the veracity of these assumptions.

As Lenin once said,

A lie told often enough becomes the truth

In short, what the public sorely lacks is critical thinking. Yet the absence of critical thinking is what makes the public crucially vulnerable to political manipulation.

Quote of the Day: Limits of Knowledge

time is too short to worry about what’s merely possible. Nearly everything that is possible will never occur. The range of the possible is enormously larger than is the range of the plausible; the range of the plausible is larger than is the range of the probable; and the range of the probable is bigger than what (if we’re speaking of the past) has actually occurred or (if we’re speaking of the future) what will actually occur.

Part of what separates good thinkers (including those who are formal scholars) from poor thinkers is their wisdom in sensing what is relevant enough for analysis. Beyond an exposure to history and wide reading, I know of no recipe for instilling such wisdom. And I realize that if you lack such wisdom you necessarily lack the ability to understand that you lack such wisdom. We all think we have that wisdom; we all understand – correctly – that not everyone does have that wisdom.

From Professor Don Boudreaux.

The short version of this comes from Confucius

Real knowledge is to know the extent of one's ignorance.

How War Policies will Hurt the US

The economics of war will eventually weigh on the US.

The following is an excerpt from a must read article by investing guru Doug Casey (bold emphasis mine)

An AK-47 costs less than $500 most places in the world; the bullets cost about 20 cents apiece, and the teenager to employ them costs nothing at all. In fact, teenagers in the Muslim world are in such oversupply that they can be said to have a negative cost.

A US soldier, by contrast, is immensely expensive. Even though most of them come from lower socio-economic levels, a substantial investment has been made in taking them even through Grade 12. Then comes the cost of recruiting, training, equipping, paying, insuring, housing and transporting them in the military. I’m not sure the cost of a US soldier in the field has ever been accurately computed, but it has to be well over a million dollars for a simple grunt and much more for a specialist. That’s not counting the lifetime of pension benefits and medical care for the maimed. And with battlefield medical as good as it now is, the ratio of seriously wounded to dead is much higher than ever before. You may sympathize with the US soldier, but he’s definitely on the wrong side of the equation.

An M-1 tank costs about $5 million a copy. It, or any other vehicle, can be destroyed by an IED fabricated from fertilizer or unexploded ordnance. Even if it’s not destroyed, or not even severely damaged, the brains of its occupants are likely to be scrambled by the blast wave. This is, incidentally, something that is underappreciated. A blast wave bounces a brain around in a skull like an egg inside a tin can. Considering that IEDs are both devastating and extremely hard to detect, it’s no wonder they’re so popular.

Have you ever wondered why there’s no reporting on the numbers of tanks, APCs, Humvees, helicopters and other (immensely expensive) hardware being destroyed in the current US wars? It’s classified, because the numbers would be so embarrassing. Unlike in Vietnam, there’s no longer any body count of the enemy because that would be politically incorrect. But it doesn’t matter how large it is; every dead jihadi is a dragon’s tooth that will grow back as ten replacements. That’s why there’s really no way to win a guerrilla war before you go bankrupt – no way short of genocide or at least serious mass murder.

A $1,000 RPG will easily destroy a million-dollar armored personnel carrier and its occupants. A $10,000 shoulder-launched missile can take out a $10 million helicopter or a $40 million F-16. It may be practically impossible to shoot down a $1 billion B-2 bomber, but that’s academic; they were built to fight a nuclear war against the USSR. They’re useless except to deliver atomic weapons, but the new enemy lives in refugee camps and scattered within teeming cities. The B-2’s codename should be changed from Spirit to Albatross, because it’s not only totally uneconomic, it’s almost totally useless.

So the economics of guerrillas attacking an invading superpower are excellent. In response, the economics of a superpower attacking guerrillas or terrorists are disastrous. In its current wars, the US winds up using cruise missiles, at around $1.5 million each, to blow up wedding parties. The direct expense is bad enough; the vastly greater indirect expense is the creation of a clan of new enemies. The best result is for the missile to just pulverize some sand. Even if it hits a few mujahidin, that’s placing an implied value of several hundred thousand dollars apiece on their heads.

In other words, whether we’re looking at offense or defense, the economics of destruction are tilted not just 10 to1, not just 100 to 1, but probably closer to 1,000 to 1 in the favor of insurgents.

Perhaps you’re thinking further advances in technology will tilt the equation back toward the US. But as I explained above, the effect of each innovation will be just the opposite after only a short period of technological monopoly. People have a lot of misplaced confidence in the so-called "defense" establishment to come up with marvelous devices to confound groups designated as the enemy. Of course advances will be made, at least for as long as the US government has scores of billions to spend on R&D annually – which it soon may not, for financial reasons. But even if it diverts funds from its myriad other projects, the procurement process is stultifyingly bureaucratic, slow and costly. It’s not at all entrepreneurial, which it still was to a degree even during WWII, when the P-51, the best fighter of the war, was taken from concept to production in nine months and turned out for $50,000 a copy.

The US will even lose the war for new weapons as time goes on, simply because the Defense Department bureaucracy is so counterproductive. It’s like the company Dilbert works for in the cartoon pitted against millions of independent entrepreneurs in the Open Source world. Dilbert’s company moves like a dinosaur, while the Open Source world watches, imitates, innovates and improves at warp speed.

Today a ponderous state supposedly represents our side (I italicize that because, although I truly dislike many of the people it’s fighting against, I consider it to be an even greater danger). At best, it resembles a dim, tired old Tyrannosaurus up against hundreds of smart young Velociraptors intent on eating it. The outcome is obvious: a bunch of the attackers will get killed, but the T-Rex is dead meat.

Remember that there are more scientists and engineers alive today than in all of human history before them, the vast majority from non-OECD countries. The ones who are any good don’t want to work in a constrained, bureaucratic environment with no financial upside. Entirely apart from that, if the minions of the perversely named Defense Department come up with a real super-weapon, in today’s world it’s easy to replicate and improve on, and for a fraction of the original cost. That’s why there are scores of thousands of apps developed for most any electronic device that hits the market today – in addition to the device itself being "knocked off" illegally by small factories that could be anywhere.

Terrorism icon Osama bin Laden’s goal was reportedly to bankrupt the US. And the US has been fighting a 20th century modeled war, when times (or warfare’s evolving dynamics) has been dramatically changing.

In line with the way incumbent political institutions have been structured, the US political establishment has been failing to keep with the new realities (or with the emergent forces of decentralization). And at worst, they seem to be falling right into bin Laden’s ‘war of attrition’ trap.

Yet you can profit from terror (or political folly) as Doug Casey points out, read the rest here

What To Expect in 2012

Everything we know “based on evidence” is actually based on evidence together with appropriate theory. Steven Landsburg

Prediction 2011: Largely on the Spot But Too Much Optimism

First, a recap on the analysis and the predictions I made during the end of December of 2010 in an article “What to Expect in 2011”[1]

I identified four predominant conditions that would function as drivers of global financial markets (including the Philippine Phisix) as follows:

1. Monetary authorities of developed economies will fight to sustain low interest rates.

2. More Inflationism: Bailouts and QEs To Continue

3. Effects of Divergent Monetary Policies

4. The Globalization Factor

How they fared.

1. Low Interest Rates Regime

I noted that the US Federal Reserve has the “penchant to artificially keep down interest rates until forced by hand by the markets”; this has apparently been validated last year even as most of the market’s focus has shifted to the Eurozone.

In fact, suppressing interest rates has not just been undertaken by the US Federal Reserve, whom has promised that current zero bound rates (ZIRP) would be extended to 2013[2] aside from manipulating the yield curve via ‘Operation Twist’, but by major developed and emerging central banks as shown above[3].

Apparently, the worsening debt crisis in Eurozone compounded by Japan’s triple whammy natural disaster and China’s slowing economy (or popping bubble?) has intuitively or mechanically prompted policymakers to respond concertedly, nearly in the same fashion as 2008. This has resulted to a decline of global interest rates levels to that of 2009[4].

2. Bailouts and QEs Did Escalate

Except the US Federal Reserve, major global central banks have already been actively adapting credit easing or money printing policies.

The balance sheets of top 3 central banks has now accounted for almost 25% of world’s GDP[5]. Yet this doesn’t include the Swiss National Bank[6] (SNB) and the Bank of England[7] (BoE) whom has likewise scaled up on their respective asset purchasing programs.

The world is experiencing an unprecedented order of monetary inflation under today’s fiat standard based modern central banking.

3. Divergent Impacts of Monetary Policies on Financial Markets

I previously stated that

Divergent monetary policies will impact emerging markets and developed markets distinctly, with the former benefiting from the transmission effects from the latter’s policies.

While global equity markets have been down mostly on partial and sporadic signs of liquidity contraction arising from the unfolding Euro crisis and from indications of a global economic slowdown, monetary policy activism or strong responses by central banks did result to distinctive impacts on the marketplace.

Emerging markets with the least inflationary pressures exhibited resiliency. ASEAN 4 bourses, going into the close of the New Year, were among the ten world’s best performers[8] and served as noteworthy examples of the above.

The relative performances of global bourses have likewise been reflected on the commodity markets[9].

4. Globalization Remained Strong which Partly Offset Weak Spots

While there had been signs of partial stagnation of global trade in terms of volume during the last semester of the 2011, trade volumes remained at near record highs and have hardly reflected on signs of severe downturn or a recession[10] despite the Euro crisis.

Since deepening trends of globalization (in finance and trade) has also been expanding the correlations of the financial markets[11], which has been largely characterized as ‘Risk On’ and ‘Risk Off’ environments, the aggressive actions by central banks and the non-recessionary global environment in the face of the Euro crisis and patchy signs of economic slowdown has partly neutralized such tight relationship which allowed for selective variances in asset performances.

Overall, almost every condition that I defined in December of 2010 had been validated.

5. Mostly Right Yet Too Optimistic

On how I expected the markets to perform, I wrote,

Unless inflation explodes to the upside and becomes totally unwieldy, overall, for ASEAN and for the Philippine Phisix we should see significant positive gains anywhere around 20-40% at the yearend of 2011 based on the close of 2010. Needless to say, the 5,000 level would seem like a highly achievable target. What the mainstream sees as an economic boom will signify a blossoming bubble cycle.

Of course my foremost barometer for the state of the global equity markets would be the price direction of gold, which I expect to continue to generate sustained gains and possibly clear out in a cinch the Roubini hurdle of $1,500.

To repeat, Gold hasn’t proven to be a deflation hedge as shown by its performance during the 2008 Lehman collapse. The performance of Gold during the Great Depression and today is different because gold served as a monetary anchor then. Today, gold prices act as a temperature that measures the conditions of the faith based paper money system.

2011 saw the Philippine Phisix and ASEAN bourses marginally up, which means that I have been too optimistic to suggest of a minimum 20% return that was way off the mark.

Nevertheless, it hasn’t been that bad since the long-time darling of mine, the Philippine mining index, overshot on my expectations.

And given that the mining sector’s extraordinary returns has alternated every year[12], it is unclear if mining index will remain to be the horse to beat. Yet, current global monetary dynamics may change all that.

Aside, another observation of mine has been validated.

Gold, allegedly a deflation hedge/refuge, has not turned out as many have said.

Except for the July-September frame, gold prices have largely moved along with the price direction of the S&P 500 (blue circles).

The July-September frame which marked a short-term deviation from the previously tight correlations seems to coincide with the end of the QE 3.0. This along with the unfolding Euro crisis put pressure on US equity markets first, which eventually culminated with FED chair Ben Bernanke’s jilting of the market’s expectations of QE 3.0.

The belated collapse of gold prices (red circle), in response to Mr. Bernanke’s frustrating of the market expectations for more asset purchasing measures, had been aggravated by other events such as the forced liquidations by MF Global[13] to resolve its bankruptcy and several trade ownership issues aside from other trade restrictions or market interventions[14] that has stymied on gold’s rally.

Nevertheless, the gold-S&P 500 linkage appears to have been revived, where both gold and the S&P has taken on an interim upside trend (green line).

The S&P 500 closed the year with microscopic losses while gold registered its 11^th year of consecutive gains, up 10% in 2011.

Expect Volatile Markets in 2012

When asked to comment on the prospects of the stock market, JP Morgan’s once famous resounding reply was that “It [Markets] will fluctuate”.

1. Markets will Fluctuate—Wildly

2012 will essentially continue with whatever 2011 has left off.

Since 2011 has been dominated by the whack-a-mole policies on what has been an extension of the global crisis of 2008, which in reality represents the refusal of political authorities for markets to clear or to make the necessary adjustments on the accrued massive malinvestments or misdirection of resource allocation in order to protect the political welfare based system anchored on the triumvirate of the politically endowed banking sectors, the central banks and governments, then we should expect the same conditions in 2011 to apply particularly

1. Monetary authorities will continue to keep interest rates at record or near record low levels.

2. Money printing via QE and bailouts will continue and could accelerate.

3. There will be divergent impact from different monetary policies and

4. Globalization will remain a critical factor that could partly counterbalance the nasty effects of the collective inflationist policies (unless the ugly head of protectionism emerges).

I would add that since presidential election season in the US is fast approaching, most candidates or aspirants including the incumbent have been audibly beating the war drums on Iran[15], where an outbreak may exacerbate political interventions in the US and in the global economy and importantly justify more monetary inflationism.

One must realize that continued politicization of the marketplace via boom bust and bailout policies compounded by various market interventions and the risk of another war has immensely been distorting price signals which should lead markets to fluctuate wildly.

2. China and Japan’s Hedge—Steer Clear of the US Dollar

And where reports say that China and Japan have commenced on promoting direct transactions[16] by using their national currencies hardly represents acts to buttress the current system.

The Bank of Japan has also been underwriting their own Quantitative Easing (QE) which means the Japanese government are engaged in ‘competitive devaluation’ which is no more than a ‘beggar thy neighbour’ policy.

Instead, what this implies is that Japan and China, being the largest holders of US debt, seem to be veering away from their extensive dependence on the US economy as they reckon with, not only interest rate and credit risks, but also of currency, inflation, political and market risks. Even China and Japan appear to be taking measures to insure themselves from wild fluctuations.

On the other hand, China’s bilateral currency agreement with Japan plays into her strategy to use her currency as the region’s foreign exchange reserve[17].

3. Heightened Inflation Risks from Monetary Policies

QE 3.0 has not been an official policy yet by the US Federal Reserve but their balance sheet seem to be ballooning anew (chart from the Cleveland Federal Reserve[18]).

Yet this, along with surging money supply and recovering consumer and business credit growth, will have an impact on the US asset markets which should also be transmitted to global financial markets, as well as, to the commodity markets.

Yet given the large refinancing requirements for many governments (more than $7.6 trillion[19]) and for major financial institutions this year amidst the unresolved crisis, I expect major central banks to step up their role of lender of last resort.

Again the sustainability of the easy money environment from low interest rates and money printing by central banks will depend on the interest rates levels which will be influenced by any of the following factors: 1) inflation expectations 2) state of demand for credit relative to supply 3) perception of credit quality and or 4) of the scarcity/availability of capital.

Today’s bailout policies have been enabled and facilitated by an environment of suppressed consumer price inflation rates, partly because of globalization, partly because of the temporal effects from price manipulations or market interventions and partly because of the ongoing liquidations in some segments of the global marketplace such as from MF Global, the crisis affected banking and finance sectors of the Eurozone and also perhaps in sectors impacted by the economic slowdown or the real estate exposed industries in China, which may be suffering from a contraction.

However I don’t believe that the current low inflation landscape will be sustainable in the face of sustained credit easing operations by the central banks of major economies. Price inflation will eventually surface that could lead to restrictive policy actions (which subsequently could lead to a bust) or sustained inflationism (which risks hyperinflation). Signs from one of which may become evident probably by the second semester of this year.

Yet I think we could be seeing innate signs this: Given the current monetary stance and increasing geopolitical risks, oil (WTI) has the potential to spike above the 2011 high of $114 which may lead to a test of a 2008 high of $147.

4. Phisix: Interim Fulfilment of Expectations and Working Target

In the meantime, I expect the Philippine Phisix and ASEAN markets to continue to benefit from the current easy money landscape helped by seasonal strength, improvements in the market internals, and in the reversals of bearish chart patterns as forecasted last December[20]

The bearish indicators of head and shoulders (green curves) and the ‘death cross’ have now been replaced by bullish signals as anticipated[21]. The Phisix chart has now transitioned to the golden cross while ‘reverse head and shoulders’ (blue curves and trend line) has successfully broken out of the formation. It doesn’t require relying on charts to see this happen. Even the Dow Jones Industrials has affirmed on my prognosis[22].

The S&P 500, oil (WTI) and the Phisix seem to manifest a newfound correlation or has reflects on a synchronized move,whether this relationship will hold or not remains to be seen.

I believe that the Phisix at the 5,000 level should represent a practical working yearend target; where anything above should be a bonus.

Again all these are conditional to the very fluid external political-financial environment, which includes risks from not only from the Eurozone, but from China and the importantly US—whose debt level is just $25 million shy from the debt ceiling[23] (probably the debt ceiling political risk will become more evident during the last semester).

Moreover, I believe that gold prices will continue to recover from the recent low.

Gains will crescendo as global policymakers will most likely ramp up on the printing presses. Gold will likely reclaim the 1,900 level sometime this year and could even go higher and will end the year on a positive note.

But then again all these are extremely dependent or highly sensitive to the situational responses of global policymakers.

Predicting social events or the markets in the way of natural sciences is a mistake.

As the great Ludwig von Mises explained [24],

Nothing could be more mistaken than the now fashionable attempt to apply the methods and concepts of the natural sciences to the solution of social problems. In the realm of nature we cannot know anything about final causes, by reference to which events can be explained. But in the field of human actions there is the finality of acting men. Men make choices. They aim at certain ends and they apply means in order to attain the ends sought.

---

[1] See What To Expect In 2011, December 20, 2010

[2] See US Federal Reserve Goes For Subtle QE August 10, 2011

[3] Centralbanknews.info What Will 2012 Bring for Global Monetary Policy? December 27, 2011

[4] See Global Central Banks Ease the Most Since 2009, November 28, 2011

[5] Zero Hedge Top Three Central Banks Account For Up To 25% Of Developed World GDP, January 5, 2012

[6] See Hot: Swiss National Bank to Embrace Zimbabwe’s Gideon Gono model September 6, 2011

[7] See Bank of England Activates QE 2.0 October 6, 2011

[8] See Global Equity Market Performance Update: Philippine Phisix Ranks 6th among the Best, December 17, 2011

[9] See How Global Financial Markets Performed in 2011 December 31, 2011

[10] Key Trends in Globalization, New world trade data indicates slowdown but not recession in the global economy, November 25, 2011 ablog.typad.com

[11] Allstarcharts.com BCA Research: High Equity Correlations Are Here To Stay, January 4, 2011

[12] See Graphic of the PSE’s Sectoral Performance: Mining Sector and the Rotational Process, July 10, 2011

[13] See MF Global Fallout Haunts the Metal Markets, December 12, 2011

[14] See War On Gold: China Applies Selective Ban December 28, 2011

[15] See Could the US be using the Euro crisis to extract support for a possible war against Iran? January 8, 2012

[16] Bloomberg.com China, Japan to Back Direct Trade of Currencies, December 26, 2011

[17] See The Nonsense About Current Account Imbalances And Super-Sovereign Reserve Currency, April 20, 2011

[18] Cleveland Federal Reserve Credit Easing Policy Tools

[19] See World’s Biggest Economies Face $7.6 Trillion Bond Tab as Rally Seen Fading January 4, 2012

[20] See Phisix: Primed for an Upside Surprise December 11, 2011

[21] See How Reliable is the S&P’s ‘Death Cross’ Pattern?, August 14, 2011

[22] See US Equity Markets: From Death Cross to the Golden Cross, December 31, 2011

[23] Zerohedge.com Here We Go Again: US $25 Million Away From Debt Ceiling Breach, January 5, 2012

[24] von Mises Ludwig Misapprehended Darwinism, Refutation of Fallacies, Omnipotent Government p.120

Could the US be using the Euro crisis to extract support for a possible war against Iran?

The US appears to be dead set on bringing war to Iran.

Reports suggests that bailouts of the Eurozone via the IMF in exchange for embargoes against Iran could be part of the rescue package dangled or concessions arranged by US authorities.

Writes the Wall Street Journal Blog,

Europe may have just traded a U.S.-pushed Iranian oil embargo in exchange for Washington’s support of International Monetary Fund bailout loans to Italy and Spain, if one economist’s speculation is right.

Jacob Kirkegaard, a fellow at the Peterson Institute for International Economics, speculates the timing Europe’s newly-proposed ban on Iranian oil imports is too fortuitous to be purely coincidental.

Greece, Spain and Italy–in that order–heavily depend on Iranian crude and have been the most resistant to an embargo. They are now no longer fighting a ban–Italy has stated it would support it in principle while the others have signaled they wouldn’t stand in the way. [The agreement in principle is subject to substantial negotiations on timing or exemptions for long-term deals.]

Each of those countries are also the current epicenters of Europe’s sovereign debt crisis. Athens is in the middle of negotiating an agreement with bondholders on a debt deal that will pave the way for a near doubling of emergency loans, including from the IMF. Italy has to roll over nearly $340 billion in debt this year, but the cost of borrowing has soared beyond levels economists say is sustainable. Rome late last year turned down an offer for an IMF loan, but many economists say Italy will need IMF credit to pull itself out of its financial mire. And Spain’s banks are facing a housing bubble that could very well mean Madrid must soon ask for IMF assistance.

Earlier the US has already began to apply political pressure by imposing sanctions against Iran’s central bank.

From Yahoo,

Iran's currency hit a new record low to the U.S. dollar on Monday, two days after President Barack Obama signed into law a bill targeting Iran's central bank as part of the West's efforts to pressure Tehran over its nuclear program.

The semiofficial Mehr news agency said the Iranian currency's exchange rate hovered late Monday around 17,800 riyals to the dollar, marking a roughly 12 percent slide compared to Sunday's rate of 15,900 riyals to the dollar. The riyal was trading at around 10,500 riyals to the U.S. dollar in late December 2010.

The report said Iran's central bank called on Iranian experts to meet Wednesday to discuss the turbulence in the currency market.

The bill Obama signed on Saturday includes an amendment barring foreign financial institutions that do business with Iran's central bank from opening or maintaining correspondent operations in the United States. The Obama administration, however, is looking to soften the impact of the measure, fearing they could lead to a spike in global crude oil prices or pressure key allies that import Iranian oil.

Economic sanctions are meant to isolate nations which may invite or have been designed to provoke reprisals.

I am reminded by World War II, where economic sanctions has served as major compelling factor that has prompted Japan to strike at the US.

Writes historian Eric Margolis,

When in late 1941, US President Franklin Roosevelt sought (my view) to push Japan into the war by imposing an embargo of oil and scrap metal on Japan, Tokyo had a two-year stockpile of oil.

Tokyo’s military-dominated government faced a stark choice: go immediately to war in hopes of a quick victory while there was still oil, or watch its oil stores dwindle way and thus face military impotence. War was the choice.

Japan’s leading military officer, Admiral Isoroku Yamamoto, warned Japan was going to war for oil, and would be defeated because of lack of oil.

Stirring up patriotic passion through war has been a facile way to generate votes, especially with the US presidential elections fast approaching.

With President Obama’s improving but still near record low approval ratings, chances of re-election remains murky.

And it is of no wonder why most of the GOP Republican candidates, except for Ron Paul, have also adapted a war stance.

Presidential aspirants from both camps have palpably been appealing to the public's emotions or to patriotism to solicit votes, as well as, tacitly appease the military industrial and banking interests groups.

In the words of former United States Senator from Indiana Albert J. Beveridge (1862-1927) also an American historian

Beware the leader who bangs the drums of war in order to whip the citizenry into a patriotic fervor, for patriotism is indeed a double-edged sword. It both emboldens the blood, just as it narrows the mind. And when the drums of war have reached a fever pitch and the blood boils with hate and the mind has closed, the leader will have no need in seizing the rights of the citizenry. Rather, the citizenry, infused with fear and blinded by patriotism, will offer up all of their rights unto the leader and gladly so.

People get what they deserve.

Politicization of the Financial Markets

Below is an example of what I have been calling as the politicization dynamics of the financial markets.

Writes fund manager Axel Merk [who calls this celebrity central banking], (bold emphasis mine)

Swiss National Bank (SNB) President Philipp Hildebrand finds himself in the hot seat. SNB rules prohibit his family from trading based on non-public monetary and foreign exchange intentions of the SNB (c.f. §4). His wife netted a 60,000 Swiss franc profit buying, then selling U.S. dollars, all within a month; her husband’s intervention in the currency market was mostly responsible for the gain. Arguably, she traded to make a profit, publicly explaining, “what motivated me to buy dollars was the fact that it was at a record low and was almost ridiculously cheap”. In instructing her account manager, however, she emailed that her motivation was to manage the share of US dollars in their asset mix as part of a long-term investment allocation (c.f. Hildebrand statement).

The court of public opinion might be more damaging than the legal process in a country with a tightly knit elite that favors consensus over controversy. Relevant for policy makers and investors alike is that this episode highlights the vulnerability of what we call celebrity central banking. That is, central banking that heavily relies on the persona rather than underlying policy. In Switzerland, the 2009 attempt to peg the Swiss franc to the Euro was mostly driven by Hildebrand; similarly, last year’s introduction of a ceiling for the Swiss franc versus the euro is again mostly attributed to Hildebrand. The 2009 peg was given up after it proved too expensive. The 2010 intervention has, so far, held. But it is entirely dependent on the market believing that the SNB will do “whatever it takes” to keep the Swiss franc from rising….

What the Fed and the SNB have in common is that they are both run by celebrities. Bernanke has appeared on “60 Minutes”; Hildebrand is also learning what it means to be in the media limelight. Policy makers only have themselves to blame with the market’s obsession with their personas. If they pursued sound monetary policy rather than try to micro-manage their respective economies, market forces could play out. Instead, we may have capital chase the next perceived move of policy makers, leading to capital misallocation, greater volatility, and ultimately more intervention; a self-reinforcing cycle. The public has a high price to pay for modern celebrity central banking.

Conflict of interests (agency problems, regulatory capture and arbitrage), insider trading based on actions of politicians or bureaucrats, intensive lobbying and anticipating political actions by policymakers becomes the major thrust of market participants, instead of working to satisfy the consumers.

End result: vast distortions of the marketplace, malfeasant actions by political actors and their networks and boom bust cycles.

Video: Explaining Regulatory Capture

The following video from EconomicFreedom.org features the fundamental concept of Regulatory Capture as explained by George Washington University professor Susan Dudley.

(Hat tip Frank Stephenson Division of Labour)

Quote of the Day: Europe’s Sisyphean Task

Daily Reckoning’s Bill Bonner on Europe’s Sisyphean task or “endless and unavailing, as labor or a task” (Wikipedia.org)

European banks are stuffed with debt from insolvent governments. Governments are stuffed with debt from insolvent banks. Proposals on the table include plans to issue more debt by governments…or more debt by the banks. It’s fun to watch, but there’s no light at the end of the tunnel.

Two drunks propping up each other.

Ron Paul’s Outperforming Investment Portfolio

Presidential aspirant surely Ron Paul practices what he preaches…

From Jason Zweig at the Wall Street Journal,

Congressional financial-disclosure forms report holdings only in wide dollar ranges (for example, $15,001 to $50,000). If Rep. Paul owned gold bullion, estimating his investment performance would be fairly easy. But he doesn’t; he owns gold-mining stocks instead. And since the size of each stock holding is disclosed only within a broad band of valuation, there’s no way an outside observer can derive a long-term rate of return for Rep. Paul’s portfolio (or for any other member of Congress, for that matter). We did ask for comment, but his office didn’t respond.

And Mr. Paul’s portfolio generates investment returns almost parallel to Warren Buffett’s Berkshire Hathaway (20+% annual)…

There isn’t much doubt that Rep. Paul’s portfolio has outperformed the U.S. stock market as a whole. Ten years ago, the NYSE Arca Gold BUGS Index, a basket of stocks in mining companies, was at $65; this week, it’s at $522. That’s roughly a 23% average annual return; over the past decade, by contrast, the Standard & Poor’s 500-stock index, counting dividends, has returned some 2.9% annually.

Yet Mr. Zweig downplays Mr. Paul’s outperformance with the following self contradictory analysis…

In short, investing isn’t just about maximizing your upside if you turn out to be right. It’s also about minimizing your downside if you turn out to be wrong. Putting two-thirds of all your assets into one concentrated bet is a great idea if the future plays out just as you imagine it will – but a rotten idea if the future turns out to be full of surprises.

That’s why most investors diversify: to get cheap insurance against the two greatest risks we face.

One is the danger of other people’s ignorance and error: that governments will pursue reckless policies, that corporations will be run into the ground, that speculators will drive valuations of assets to euphoric highs and miserable lows. This is the kind of risk that Rep. Paul has insured against, so far very successfully.

The second risk is the danger of our own ignorance and error: that we will underestimate the resilience of people and markets, that we will mistake likelihoods for certainties, that we ourselves will be swept up in manias and dragged down into depression when markets go mad. Above all, it is the simple risk that we will end up so sure of our own view of the world that the future is certain to catch us by surprise. And this is the risk that Rep. Paul’s portfolio doesn’t appear to insure against at all.

Rep. Paul’s supporters admire him for the consistency of his political views. But if the future happens to unfold in ways he doesn’t expect, then his hot investment portfolio is likely to go cold in a hurry.

It would represent an oddity, if not impertinence, for Mr. Zweig to conclude that in any event that things don’t go as expected for Mr. Paul “his hot investment portfolio is likely to go cold in a hurry”. Such premises assume that Mr. Paul’s portfolio is in a permanent state, or that Mr. Zweig knows exactly what is in the mind of Mr. Paul and what Mr. Paul’s prospective actions are.

In addition, Mr. Zweig harangues Mr. Paul’s concentrated exposure on mining issues based on the vulnerabilities of ‘ignorance and error', yet ironically applies presumptive analysis and generalization of Mr. Paul’s portfolio which is also subject to Mr. Zweig's ‘ignorance and error’.

Ignorance and error would be especially magnified if we dismiss central banker’s actions as having lasting positive or “healing” effect on the markets and economy...

As for Mr. Zweig, he should heed Buddha’s advise:

Do not overrate what you have received, nor envy others. He who envies others does not obtain peace of mind.

What’s Common between Politicians and Psychopaths?

The similarities of politicians and psychopaths, writes Douglas French at the Mises Blog (bold emphasis mine)

According to law enforcement examiner Jim Kouri, politicians share a number of traits with serial killers. People with a talent for mixing charm, manipulation, intimidation, and occasionally violence to control others, to satisfy their own selfish needs are psychopathic.

Not all psychopaths are serial killers, but according to Kouri, serial killers display numerous psychopathic traits. Kouri writes,

“What doesn’t go unnoticed is the fact that some of the character traits exhibited by serial killers or criminals may be observed in many within the political arena. While not exhibiting physical violence, many political leaders display varying degrees of anger, feigned outrage and other behaviors. They also lack what most consider a “shame” mechanism. Quite simply, most serial killers and many professional politicians must mimic what they believe, are appropriate responses to situations they face such as sadness, empathy, sympathy, and other human responses to outside stimuli.”

Currency Controls: My Nightmare at the Airport

Not only has government paranoia almost cost me and my family a vacation, worst, I had to endure a traumatic episode from bureaucratic harassment from local officials.

My basic mistake was to leave my wallet and instead brought my peso cash allotted for our travel expenditures packed into a white business envelope.

At the immigration pat-down, I was asked what the lump in my left front pocket of my pants was which I promptly disclosed.

The inspector told me to step aside from the line and wait for the immigration official, stating that I had exceeded the maximum amount cash (P10,000) allowable for each local citizen to bring abroad, who would decide on my case.

The immigration official arrived and lectured me on my supposed offense. And the officer further said that in breach of the regulation, I was subject to penalty in accordance to the regulations of the Bureau of Customs.

I replied that I DID NOT know about any disclosure procedures, or of any currency exports regulations by individuals.

And prior to the pat-down all I did was to fill up a form where I affixed my signature which DID NOT contain any information about required disclosures.

The immigration departure document looked like this.

Looking back I found the said regulation from IATA’s website

Residents and Non-residents: local currency (Philippine Peso-PHP): up to PHP 10,000.-. Exceeding amounts require authorisation from the Central Bank of the Philippines. foreign currencies : up to USD 10,000.-, or its equivalent. Amounts exceeding USD 10,000.-, or its equivalent must be declared.

Information must be furnished on the source and purpose of the transport of such amount. Violation will be subject to sanctions under Philippine customs law and regulations.

This means I have to apply with the central bank for any amount exceeding 10k pesos to bring abroad! Gadzooks, what onerous red tape!

Back to the airport, the officer suggested that to circumvent the regulation, I could go out of the area and have my (slightly) excess pesos changed into US dollars or other foreign currencies.

However, because of time constraints, doing so risks that we could miss our flight, which would translate to financial losses on our flight tickets compounded by the psychic losses from our frustrated plans.

I pleaded to the officer that the marginally excess pesos (less than 5,000 per head) had been meant for my mom, who is an overseas resident, as a Christmas present. After a few minutes, the officer relented and allowed us through.

Of course, I am thankful to the officer for his ‘generous’ gesture in spite of the hassle.

But such event only reinforced my understanding of how unilateral or arbitrary laws corrupt a system.

-I became an alleged offender for bringing my personal property without knowledge of any breach of the law, and importantly without aggressing upon anybody else (except in the eyes of the enablers and implementers of the regulation, again whose regulations I didn’t know).

-For not enforcing the law, the officer can be construed as being remiss of his duties and equally culpable transgressor.

Yet he did so perhaps in the understanding of the law’s unreasonableness, in my opinion.

The officer knew such law has been repressive, selective in enforcement and would hurt citizens in good faith, thereby perhaps conscience dictated the tolerant decision.

Or it is possible too that the officer has seen enough of our mental and emotional anguish.

-The officer offered an alternative to go around the system (change excess pesos into US dollars), again for the same reasons.

-I was lucky to have that particular officer attend to me. For the outcome would have been different if someone else with malice adjudicated my case. Such regulations could have been used to mulct and extort on us.

And come to think of it, just how can one enjoy a vacation with only 10,000 pesos (USD 227 @44 pesos per USD) in the pocket, especially when visiting a country whose cost of living has vastly been higher than ours?

And considering the millions of local travellers abroad annually, I am quite certain that such regulation have hardly been implemented except for a few instances.

The implication is that such currency control regulation has not been only repressive, selective and arbitrary in implementation but also impractical.

Yet to whose benefit these regulations accrue?

One the political class.

By imposing capital controls, the political class does not want people to vote with their money, or for the markets to expose on their abuses to their constituencies.

The attempt to restrict money outflows, in the guise of preventing money laundering (applied mostly to political opponents rather than to the incumbents and their clients) and blame-the-speculators (not the policies of local politicians and bureaucrats) signify as symptoms of government repression, who coldheartedly would penalize the innocent for their upkeep.

Two, the banking class.

Obviously putting restrictions on cash movements has been designed to bring transactions to the politically privileged banking and finance industry, which have been under the ken or supervision of the political class.

Yet the unintended consequence has been to foster more underground activities, using loopholes (e.g. change to US dollars) or etc., while simultaneously breeding corruption of the bureaucracy.

Let me add that I brought spare cash as insurance from the untoward experience I had 5 years ago, where the failure to access my bank’s overseas ATM network almost left me helpless.

And I have to admit while I have some credit cards, I am an averse or an infrequent user where my credit cards have been meant for emergencies.

Yet another possible unintended consequence would be if there would be an emergency while in another country (say natural disaster), without enough CASH or access to credit cards or ATM, one will be left to suffer an undeserved fate because of such feckless regulations.

I have been reluctant to travel mostly because of my aerophobia, but now I have developed a new phobia: fear of bureaucracy-bureauphobia.

Quote of the Day: Consumption Equality

Just about every product or service that makes our lives better requires a mass market or it's not economic to bother offering. Those who invent and produce for the mass market get rich. And the more these innovators better the rest of our lives, the richer they get but the less they can differentiate themselves from the masses whose wants they serve. It's the Pages and Bransons and Zuckerbergs who have made the unequal equal: So, sure, income equality may widen, but consumption equality will become more the norm.

That’s from author and former hedge fund manager Andy Kessler in an op ed at the Wall Street Journal. Most people hardly realize that much of the improved standards of living have been a product of capitalism.

2011: The Time of My Life

Pardon me for this self-vanity post

Blogging has never been a tool which I initially expected to be.

In 2004, I acquired the idea to use the web from young people who used blogs as a journal or as channel for sundry expressions. My experiment with the blogosphere, then, was originally intended as a backup for the weekly newsletters I wrote as a sell side analyst, and additionally, as a search tool for my published archives.

However, I discovered that my blog had incrementally been generating readership from here and many parts of the world. This eventually made me change my priorities and prompted me to share more of what I have been learning, the application of my self-education through my work experiences, and importantly, the philosophical insights that I have been acquiring from my knowledge acquisition process.

Yet, important changes happen on the margins.

In 2011, I discovered that my blog had been used as reference by some international publications. I found my blog as part of the “blogroll” of a multilateral institution. I also got unsolicited endorsements from people I hardly know. And some of my articles became part of or have been cross posted in a local stock market forum. Also my blog’s readership base more than tripled.

On the investment side, the best reward came when my holdings of 8 years gave me “x baggers” in return. This not only proves or validates my long held and advocated view that the virtues of patience and prudence reap the best retuns, and that magnitude matters more than frequency. Oh, these allowed me to tide over the health challenges of my wife and have a great family vacation with mom and step dad.

My sincerest appreciation for your patronage and support for making 2011 “The Time of My life.”