Hot: Major Central Banks Coordinate Easing On Dollar Swaps

Wow. Now we are seeing some real heavy weightlifting! The world’s major central banks have embarked on a major coordinated credit easing operation.

This should be another "I told you so moment". As I earlier wrote

Global central banks and politicians have, in increasing signs of desperation, been intensifying the use of the nuclear option. Such concerted move is likely one of the many to come. Expect to see amplified market gyrations as consequence to the boom-bust policies of global central banks.

From Bloomberg, (bold emphasis mine)

The Federal Reserve cut the cost of emergency dollar funding for European banks as part of a globally coordinated central-bank response to the continent’s sovereign-debt crisis.

The interest rate has been reduced to the dollar overnight index swap rate plus 50 basis points, or half a percentage point, from 100 basis points, and the program was extended to Feb. 1, 2013, the Fed said in a statement in Washington. The Fed will coordinate with the European Central Bank in the program, which was also joined by the Bank of Canada, Bank of England, Bank of Japan (8301), and Swiss National Bank (SNBN) are involved in the coordinated action.

The move is aimed at easing strains in markets and boosting the central banks’ capacity to support the global financial system, the statement said. The cost for European banks to fund in dollars rose to the highest levels in three years today as concerns about a possible breakup of the euro area increased after leaders said they’d failed to boost the region’s bailout fund as much as planned….

The six central banks also agreed to create temporary bilateral swap programs so funding can be provided in any of the currencies “should market conditions so warrant.” Those swap lines were also authorized through Feb. 1, 2013.

The dollar swap lines were previously set to expire Aug. 1, 2012. The new pricing will be applied to operations starting on Dec. 5…

Separately, China two hours earlier cut the amount of cash that banks must set aside as reserves for the first time since 2008. The level for the biggest lenders falls to 21 percent from a record 21.5 percent, based on past statements.

The Frankfurt-based ECB, which says it is up to governments to stem the two-year-old debt crisis, unexpectedly cut its benchmark interest rate Nov. 3 as the turmoil threatens to drag the euro area into recession.

Refinancing Operation

Yesterday the ECB allotted the most to banks in its regular seven-day refinancing operation in more than two years, lending 265.5 billion euros. The ECB offers unlimited funding to euro- area banks against eligible collateral.

“The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity,” the statement said.

Under the dollar liquidity-swap program, the Fed lends dollars to the ECB and other central banks in exchange for currencies including euros. The central banks lend dollars to commercial banks in their jurisdictions through an auction process.

Well, central banks are defying Walter Bagehot’s rule of lending freely but at penalty rate. Major central banks have currently been lending freely and promoting moral hazard which eventually will backfire.

The Fed will essentially be printing money to support the Euro through the ECB, as well as other major central banks.

Again central bankers are dabbling with Pandora’s Box of inflationism

No wonder gold prices, European and US stocks have been surging as of this writing.

Again profit from folly.

How Money Dies: The Bulgarian and Romanian Experience

From the EU Observer, (bold emphasis mine)

Fifteen years ago, both Bulgaria and Romania went through rampant inflation linked to a financial crisis. Bucharest narrowly avoided the collapse, but Sofia was less fortunate and experienced a meltdown of the sort Greece is currently trying to prevent.

"Those were very bad times. Every day my salary was worth less and less, and there were fewer things I could buy with it," says Krassimira Komneva from the Sofia-based Most Foundation, an employment and education outfit.

Back in 1996, Komneva was doing office work in a construction company. She recalls how the salary was late when the currency collapsed. "When I received it one month later, it was worth much less than expected. We all hurried to buy food, bread, oil. The prices were just crazy," she recalls.

According to the International Institute of Finance, inflation in Bulgaria hit 174.4 percent in 1996 and a record of 1,077.5 percent the next year. Its curency, the lev, went from 500 per US dollar in late 1996 to 2,200 per US dollar in February 1997.

Food shortages and a harsh winter drove people to despair, with mass rallies ultimately forcing out the post-Communist government largely blamed for the disastrous policies that led to the currency collapse.

"For the average people, it was just terrible. Nobody really understood what happened, the only thing we could see was that it all ended in disaster," says Komneva.

The central bank was subsequently stripped of its powers as the country entered in a "currency board" agreement with the International Monetary Fund (IMF) and other international lenders in July 1997, with the lev being pegged to the German D-Mark. Aimed at lowering inflation, boosting national reserves and restoring market confidence in the country, the currency board nevertheless seriously dented Bulgaria's sovereignty.

Romania only narrowly avoided a similar fate in the same period.

According to former President Emil Constantinescu, elected to power in November 1996 as the first non-Communist leader of the country, the country's national reserves when he took over had just 600 million US dollars, compared to current levels of €20 billion. At the same time, Romania had taken up some 5 billion US dollars in loans, which had to be paid back during his mandate.

"All of this led the IMF to suggest Romania should declare default on its debt. The second day after Parliament had confirmed my mandate, I received international envoys who told me this and gave it to me in writing," Constantinescu said in a 2006 interview with Gardianul newspaper.

Like Bulgaria, Romania was struggling with failing banks - both state and private-owned. Taxpayers' money was poured into the ailing state giants to help save them after they had lent billions to former regime protegees and their respective companies.

Meanwhile, most so-called private banks were in fact pyramidal schemes "designed to steal the money from regular citizens, set up by the mafia of the former Securitate (Communist secret police)" Constantinescu recalled.

Inflation peaked at 150 percent in 1997 and Romania had to seek an IMF loan of 500 million US dollars. It also had to privatise and profoundly restructure its state enterprises. But it avoided the embarrassment of having its central bank replaced with a currency board.

Not everyone was miserable during those years in Romania. To 41-year old trader Paul Marian, those were lucrative times in Bucharest. He remembers people flocking to his exchange office to get rid of the quickly depreciating lei and turn them into more stable D-Marks, US dollars or Swiss francs.

Some observations;

The Bulgarian and Romanian experience exhibits similar dynamics which characterizes today’s crisis: Crony or State capitalism and the welfare state has allowed State Owned and politically privileged private banks to profit from and game the political order. The ensuing massive fiscal imbalances from rescuing these banks eventually got funded by respective central banks which stoked hyperinflation.

Hyperinflation ravages an economy (destroys the division of labor) and fuels political unrest or destabilization.

Fiscal and monetary discipline ended these hyperinflationary episodes.

Yet the mainstream cannot seem to read through or imbue on these lessons and mainly prescribes inflation to the current set of parallel political economic problems

As the great Professor Ludwig von Mises wrote,

But the administration does not want to stop inflation. It does not want to endanger its popularity with the voters by collecting, through taxation, all it wants to spend. It prefers to mislead the people by resorting to the seemingly non-onerous method of increasing the supply of money and credit. Yet, whatever system of financing may be adopted, whether taxation, borrowing, or inflation, the full incidence of the government's expenditures must fall upon the public.

With inflation as well as with taxation, it is the citizens who must foot the total bill. The distinguishing mark of inflation, when considered as a method of filling the vaults of the Treasury, is that it distributes the burden in a most unfair way, overcharging those who are least able to bear it.

Prescribing inflation is like playing with fire. Eventually most of us risks getting burned.

Video: The Rocketeer Goes Live

I recall a 1991 film the Rocketeer which, according to Wikipedia.org,

tells the story of stunt pilot Cliff Secord who discovers a jet pack that enables him to fly. His heroic deeds attract the attention of Howard Hughes and the FBI, as well as sadistic Nazi operatives.

Two decades later, a modern day ‘Rocketeer’, monikered the Jetman, is shown in the video below flying along with jet fighters…

The accelerating pace of technological innovation has simply been amazing.

Blaming Technology to Justify Tobin Tax

The Economist writes, (bold emphasis mine)

MOORE'S Law, an observation that the "number of transistors incorporated in a chip will approximately double every 24 months", has held broadly true since the creation of the first transistor in 1947. Computing power has increased some 600-fold over the past 15 years; 2.6 billion transistors can now be crammed onto a single computer chip. This advancement has facilitated the ability to trade ever-larger volumes of shares. During the 1960s, just under 17 billion shares were traded on the New York Stock Exchange. That amount was surpassed over just four average trading days in September 2011. And while the number of shares listed has increased by some 50-fold, annual share turnover has increased from an average of 17% in the 1960s to nearly 300% between 2008 and 2011. In theory all this activity ought to lead to more accurate pricing of stocks and more efficient allocation of capital. In practice there is a lot of tail-chasing going on. That has led to calls for a tax on financial transactions, the Tobin tax, which advocates argue would be a painless way of boosting government finances.

While it may be true that technological innovations may have boosted stock market trading volumes via widespread dispersion of information, deepening connectivity, algorithm based and real time trades, growing array of trading instruments and others, it doesn’t follow that “a lot of tail chasing” or market volatilities can be blamed on technology enhancements.

This seems to be a non-sequitur used to justify taxes on financial transaction which will only lead to more government spending based debt accumulation which ironically has been the root of today’s crisis and the consequent market volatilities.

The article also excludes the effects of the intensive politicization of the marketplace which leads to massive price distortions, malinvestments and business cycles.

Beware of politically biased commentaries veiled as expert opinions.

Canada Deepens Free Market Policies

It’s time to be bullish Canada. Here is why.

From Reuters (hat tip Mark Perry)

Canadian Finance Minister Jim Flaherty said on Sunday the government would eliminate tariffs on dozens more products used by Canadian manufacturers, aiming to lower their costs and encourage more hiring.

The initiative would scrap custom duties on 70 items used by businesses in sectors such as food processing, furniture and transportation equipment.

Flaherty, who estimated the tariff cuts would save Canadian businesses C$32 million ($30.5 million) a year, said the cuts were part of the Conservative government's overall free trade policy.

"We believe in free trade in Canada," Flaherty said on CTV's "Question Period" program. "Some of these old-fashioned tariffs get in the way. So we're getting rid of them."

As part of its Economic Action Plan to pull Canada through the global slowdown of 2008-09, the government has eliminated more than 1,800 tariff items, providing about C$435 million a year in tariff relief. Its stated goal is to make Canada a tariff-free zone for manufacturers by 2015.

The tariff move comes as Canada and the European Union negotiate a deal to knock down trade barriers on goods and services and boost two-way trade by 20 percent.

Cheers Mr. Flaherty!

Again, free markets seem to be gaining political headway at the margins.

Video: Ron Paul's Plan for Monetary Freedom

In the following interview with Judge Andrew Napolitano, Ron Paul discusses the possible transition process towards 'sound money' or monetary freedom from the current fiat standard.

Video: Milton Friedman: Abolish the Fed!

From Liberty Pen : Excerpts from an interview with Hillsdale College President Larry Arnn on May 22, 2006, in which Milton accurately forecasts the dangers of big government and advocates abolishing the FED (Hat tip Don Boudreaux)

The illustrious Mr. Friedman, who advocated activist monetary policy for most of his life, seemed to have a change of heart during the last moment.

President Obama Job Approval Ratings: Worst US President

From US News

President Obama's slow ride down Gallup's daily presidential job approval index has finally passed below Jimmy Carter, earning Obama the worst job approval rating of any president at this stage of his term in modern political history.

Since March, Obama's job approval rating has hovered above Carter's, considered among the 20th century's worst presidents, but today Obama's punctured Carter's dismal job approval line. On their comparison chart, Gallup put Obama's job approval rating at 43 percent compared to Carter's 51 percent.

Back in 1979, Carter was far below Obama until the Iran hostage crisis, eerily being duplicated in Tehran today with Iranian protesters storming the British embassy. The early days of the crisis helped Carter's ratings, though his failure to win the release of captured Americans, coupled with a bad economy, led to his defeat by Ronald Reagan in 1980.

According to Gallup, here are the job approval numbers for other presidents at this stage of their terms, a year before the re-election campaign:

-- Harry S. Truman: 54 percent.

-- Dwight Eisenhower: 78 percent.

-- Lyndon B. Johnson: 44 percent.

-- Richard M. Nixon: 50 percent.

-- Ronald Reagan: 54 percent.

-- George H.W. Bush: 52 percent.

-- Bill Clinton: 51 percent.

-- George W. Bush: 55 percent.

What's more, Gallup finds that Obama's overall job approval rating so far has averaged 49 percent. Only three former presidents have had a worse average rating at this stage: Carter, Ford, and Harry S. Truman. Only Truman won re-election in an anti-Congress campaign that Obama's team is using as a model.

Change we can believe in? I guess not.

The US Federal Reserve is Corrupt

Café Hayek’s Professor Robert Russell is right: The US Federal Reserve is Corrupt

From Bloomberg, (bold emphasis mine)

The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. Now, the rest of the world can see what it was missing.

The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue.

Saved by the bailout, bankers lobbied against government regulations, a job made easier by the Fed, which never disclosed the details of the rescue to lawmakers even as Congress doled out more money and debated new rules aimed at preventing the next collapse.

A fresh narrative of the financial crisis of 2007 to 2009 emerges from 29,000 pages of Fed documents obtained under the Freedom of Information Act and central bank records of more than 21,000 transactions. While Fed officials say that almost all of the loans were repaid and there have been no losses, details suggest taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger…

The amount of money the central bank parceled out was surprising even to Gary H. Stern, president of the Federal Reserve Bank of Minneapolis from 1985 to 2009, who says he “wasn’t aware of the magnitude.” It dwarfed the Treasury Department’s better-known $700 billion Troubled Asset Relief Program, or TARP. Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system, more than half the value of everything produced in the U.S. that year.

This serves as more proof of a political economic system gamed by special interests groups along with the political class. That's because vested interest groups represented by the banking class serves as the principal intermediaries for the welfare-warfare state and whom have been protected or bankrolled by the US Federal Reserve as shown above.

I might add that since the FED is an integral part of the complicit political arrangement then this implies that the incumbent political system is corrupt.

Ron Paul is right. End the FED. Abolish the welfare state. Reinstate sound money.

Philippines as Call Center Capital of the World Has Not Been about Wages

If markets are to function freely, we are likely to see division of labor and competition based competitive advantage as the main force driving economic growth.

One such remarkable evidence has been the booming call center industry of the Philippines which has recently been enthroned as “A New Capital of Call Centers” by the New York Times.

And contra Keynesians, who see economics as operating in a homogenous dynamic, the local boom HAS NOT BEEN about wage LEVELS.

From the New York Times (bold emphasis mine)

Over the last several years, a quiet revolution has been reshaping the call center business: the rise of the Philippines, a former United States colony that has a large population of young people who speak lightly accented English and, unlike many Indians, are steeped in American culture.

More Filipinos — about 400,000 — than Indians now spend their nights talking to mostly American consumers, industry officials said, as companies like AT&T, JPMorgan Chase and Expedia have hired call centers here, or built their own. The jobs have come from the United States, Europe and, to some extent, India as outsourcers followed their clients to the Philippines.

India, where offshore call centers first took off in a big way, fields as many as 350,000 call center agents, according to some industry estimates. The Philippines, which has a population one-tenth as big as India’s, overtook India this year, according to Jojo Uligan, executive director of the Contact Center Association of the Philippines.

The growing preference for the Philippines reflects in part the maturation of the outsourcing business and in part a preference for American English. In the early days, the industry focused simply on finding and setting up shop in countries with large English-speaking populations and low labor costs, which mostly led them to India. But executives say they are now increasingly identifying places best suited for specific tasks. India remains the biggest destination by far for software outsourcing, for instance.

Executives say the growth was not motivated by wage considerations. Filipino call center agents typically earn more than their Indian counterparts ($300 a month, rather than $250, at the entry level), but executives say they are worth the extra cost because American customers find them easier to understand than they do Indian agents, who speak British-style English and use unfamiliar idioms. Indians, for example, might say, “I will revert on the same,” rather than, “I will follow up on that.”…

In addition to language skills, the Philippines has better utility infrastructure than India — so companies spend little on generators and diesel fuel. Also, cities here are safer and have better public transportation, so employers do not have to bus employees to and from work as they do in India.

The Philippine call center boom has been about serving the needs of consumers, where consumers perceive that the Philippine preference for American English has been providing her the comparative edge, and of the more superior utility infrastructure investments made by local companies.

Quoting David Ricardo (Mises Wiki) [bold emphasis mine]

Under a system of perfectly free commerce, each country naturally devotes its capital and labor to such employments as are most beneficial to each. This pursuit of individual advantage is admirably connected with the universal good of the whole. By stimulating industry, by rewarding ingenuity, and by using most efficaciously the peculiar powers bestowed by nature, it distributes labor most effectively and most economically: while by increasing the general mass of productions, it diffuses general benefit, and binds together, by one common tie of interest and intercourse, the universal society of nations throughout the civilized world. It is this principle which determines that wine shall be made in France and Portugal, that corn shall be grown in America and Poland, and that hardware and other goods shall be manufactured in England.

ASEAN to Join Credit Easing Cycle Bandwagon, Philippines Launch Stimulus

As pointed out in my earlier blog, global central banks are on path to an interest rate easing cycle anew. Asian-ASEAN central bankers will also be joining the bandwagon.

From Bloomberg,

Asian central banks from Thailand to the Philippines may be preparing to cut interest rates in coming weeks as an escalating impact from Europe’s debt crisis prompts economists to scale back growth forecasts for the region.

Thailand will cut its benchmark one-day bond repurchase rate tomorrow, all 16 economists surveyed by Bloomberg News predict. Pakistan’s central bank may add to its previous rate cuts or refrain from raising borrowing costs, a separate survey showed. Two analysts expect the Philippines to cut its key rate on Dec. 1, the first predictions for an easing since August 2009 based on Bloomberg surveys.

Morgan Stanley lowered its Asian economic estimates this week as the region that led the rebound from the 2009 global recession sees export demand impaired by Europe’s sovereign-debt turmoil. Asia’s currencies and stocks have fallen in the past month as investors shun emerging-market assets and the faltering growth outlook prompts companies including Philippine Long Distance Telephone Co. to cut profit forecasts….

The last time Asia went into an interest rate easing spree was during the immediate post Lehman crisis in the last quarter of 2008 until 1^st quarter 2011

And to reminisce on what had happened to ASEAN equity markets…. (chart from the World Bank)

…that cycle stoked the seeds of the boom phase in ASEAN equity markets (chart from Bloomberg).

The Philippine Phisix (red), Malaysia’s KLSE (yellow), Indonesia’s JCI (green) and Thailand’s SET (orange) have all been substantially up (only Malaysia has been up by less than 100%, Indonesia has more than doubled)

While I think that this may spark a similar boom…

…one must be reminded that this cycle will be different. ASEAN’s inflation rate has been substantially elevated compared to 2008 (chart from World Bank). This means that the easing cycle via the interest rate channel will be limited. And that any further easing may fuel the risks of accelerated inflation.

And because of the constrained latitude of interest rate maneuvering, governments will be resorting to other forms of stimulus such as fiscal spending.

From the same Bloomberg article,

Bangko Sentral ng Pilipinas may consider easing its policy rate, Economic Planning Secretary Cayetano Paderanga said after the report. Twelve of the 14 economists surveyed expect the central bank to keep the benchmark at 4.5 percent, with two predicting a cut to 4.25 percent.

President Benigno Aquino unveiled a 72 billion-peso ($1.6 billion) fiscal stimulus package in October, joining neighbors including Malaysia and Indonesia in seeking to protect growth. Bank Indonesia unexpectedly cut rates by half a percentage point to a record low this month to 6 percent.

Fiscal stimulus essentially represents a tradeoff between future growth and current growth, as government spending borrows from future to finance the present.

The goal is to boost Keynesian constructed (spending based) statistics rather than to generate long term jobs as determined by the market.

Think of the irony, if economic growth is generated by government spending why not make spending infinite. Yet spending will have to be financed by taxes (also borrowing) or inflation which leads to either default or hyperinflation and political upheavals.

In reality, government spending will be directed to non-market or political (mostly vote generating, e.g. infrastructure) activities which will signify as 72 billion peso worth of wastage and a 72 billion peso window for corruption.

Thus, the "protection of growth" should be seen in the light of protecting the growth of politicians, allies and cronies rather than the public, as taxpayer money will be diverted into non productive engagements. Also this implies higher taxes ahead which again will increase the burden for investments and competitiveness and more unemployed workers.

So even as the current administration prosecutes the former administration for alleged misconduct, the fiscal spending program signifies a huge room for the same set of malfeasant actions.

Thus, politics is about grabbing credit (to get ratings approval or generate votes) by stepping on someone else’s toes, but at the same time providing opportunities for the same set of inappropriate actions.

And the best way to do this is to divert public’s attention so as to camouflage their actions in the name of "protecting economic growth" and of "anti corruption" measures through public arraignment or trial-by-publicity of political adversaries. In this context, personality based politics in the shadow of welfare-pork barrel politics as explained by Professor Robert Higgs seems fitting.

Nonetheless all those credit creation and spending will have to flow somewhere.

Once the interest rate reductions and the stimulus are activated, the fuse to the next leg of the bubble cycle would have been lit.

Profit from folly.

Global Central Banks Ease the Most Since 2009

Here is what I wrote last night

Yet what sets the today’s markets apart from the 2008, Japan’s stagnation and or the Great Depression has been the central bank activism which as I have been reiterating has been navigating on uncharted treacherous waters.

Artificially manipulated interest rate together with money printing results to relative pricing of assets, which all comprises the inflation cycle.

For a little validation of my observations, here’s the latest Bloomberg article with the particulars, (bold emphasis mine)

Central banks across five continents are undertaking the broadest reduction in borrowing costs since 2009 to avert a global economic slump stemming from Europe’s sovereign-debt turmoil.

The U.S., the U.K. and nine other nations, along with the European Central Bank, have bolstered monetary stimulus in the past three months. Six more countries, including Mexico and Sweden, probably will cut benchmark interest rates by the end of March, JPMorgan Chase & Co. forecasts.

With national leaders unable to increase spending or cut taxes, policy makers including Australia’s Glenn Stevens and Israel’s Stanley Fischer are seeking to cushion their economies from Europe’s crisis and U.S. unemployment stuck near 9 percent. Brazil and India are among countries where easing or forgoing higher interest rates runs the risk of exacerbating inflation already higher than desired levels.

“We’ve seen central banks that were hawkish begin to turn dovish” against a “backdrop of austerity” in fiscal policy, said Eric Stein, who co-manages the $6.6 billion Eaton Vance Global Macro Absolute Return Fund in Boston. “You could debate how bad it will be for growth, but it can’t be good,” he said of the challenges facing the world economy.

Global Rate

Monetary easing will push the average worldwide central bank interest rate, weighted for gross domestic product, to 1.79 percent by next June from 2.16 percent in September, the largest drop in two years, according to data and projections from JPMorgan, which tracks 31 central banks. The number of those banks loosening credit is the most since the third quarter of 2009, when 15 institutions cut rates, the data show…

While central banks in Australia and Indonesia have reduced borrowing costs and the Bank of Japan increased asset purchases in October, other countries in Asia may be slower to ease policy.

The People’s Bank of China has raised its main interest rate three times this year to fight inflation. India’s central bank lifted rates on Oct. 25 by a quarter of a percentage point, while signaling it was nearing the end of its record cycle of increases as the economy cooled.

“Most central banks will wait and see how the situation develops in Europe,” said Joseph Tan, Singapore-based chief economist for Asia at Credit Suisse Group AG’s private-banking division. “If we do have a continuation of the political impasse in Europe and that leads to a recession in Europe, and the U.S. economy starts to slow again, then Asian central banks will cut interest rates.”…

Europe’s turmoil has led Australia, Brazil, Denmark, Romania, Serbia, Israel, Indonesia, Georgia and Pakistan to reduce interest rates since late August. Chile, Mexico, Norway, Peru, Poland and Sweden are also forecast by JPMorgan Chase to lower borrowing costs by the end of the first quarter, while Australia, Brazil, Indonesia, Israel and Romania may cut rates further.

In the U.S., Federal Reserve Chairman Ben S. Bernanke is considering further actions to lower borrowing costs in the world’s biggest economy. He vowed in August to keep the benchmark interest rate close to zero through at least mid-2013. The central bank in September decided to replace $400 billion of short-term securities it holds with longer-term debt to reduce rates on extended-maturity debt.

The article doesn't say it but global central bank asset purchases have been unprecedented, although in terms of interest rate rates--yes, they are 2009 lows.

Yet given the above, there will be NO deflation coming as central banks continue to aggressively ease. I even expect more coming from the ECB

On the other hand, prepare for a boom bust cycle in parts of the global economy and nasty inflation ahead.

New Zealand’s John Key’s Victory, A Win for Free Markets

Despite all the troubles confronting the world today, forces of globalization and economic freedom appear to be getting some headway in the realm of politics.

From Bloomberg,

New Zealand Prime Minister John Key’s re-election with his party’s biggest mandate in 60 years will strengthen a government push for free-market policies as he pursues welfare cuts and asset sales to balance the budget.

Key’s National Party won 48 percent of the vote on Nov. 26, up from 45 percent three years ago, allowing him to form the next government with support from political allies in parliament. Electricity companies Mighty River Power Ltd. and Genesis Power Ltd. may be among the first considered for share sales, the prime minister signaled today, as his administration focuses on divesting some state assets.

A second term allows Key to expand policies aimed at reducing the economy’s reliance on government spending, an effort that was slowed in the past three years by the need to help the country recover from the global financial crisis and New Zealand’s deadliest earthquake in 80 years. The leader, whose popularity survived a credit-rating downgrade, has pledged to return the budget to surplus by 2014-15 or sooner as soaring borrowing costs imperil indebted European nations.

Information and education are the only means where free market/classical liberalism forces can generate political following. Nevertheless today’s technology enabled connectivity platforms (social media) should help facilitate the campaign for liberty.

John Key’s win plus the recent defeat of the Socialist government or a victory by Conservatives in Spain are refreshing examples of marginal changes in the political sphere that has been happening across the world.

Quote of the Day: Welfare State and Personality Based Politics

As the ranks of those dependent on the welfare state continue to grow, the need for the rulers to pay attention to the ruled population diminishes. The masters know full well that the sheep will not bolt the enclosure in which the shepherds are making it possible for them to survive. Every person who becomes dependent on the state simultaneously becomes one less person who might act in some way to oppose the existing regime. Thus have modern governments gone greatly beyond the bread and circuses with which the Roman Caesars purchased the common people’s allegiance. In these circumstances, it is hardly surprising that the only changes that occur in the makeup of the ruling elite resemble a shuffling of the occupants in the first-class cabins of a luxury liner. Never mind that this liner is the economic and moral equivalent of the Titanic and that its ultimate fate is no more propitious than was that of the “unsinkable” ship that went to the bottom a century ago.

From Professor Robert Higgs.

Oh, this very much applies to the Philippine political setting. Think Pork Barrel politics and the 250 political dynasties. And that's why the search for the elusive efficacious leader who is supposed to deliver us from hardship will always be just that: a constant source of frustration. People don't realize that the much sought after miracle of effectiveness and justice from the nanny patriarch state will always be a mirage.

More Signs of the Coming Inflation Tsunami from the ECB

Desperate times call for desperate measures.

In politics, supposed principled stance frequently gives way to convenience, as I have been predicting here and here.

From Reuters

France and Germany are planning a quick new pact on budget discipline that might persuade the European Central Bank to ramp up its government bond purchases, Welt am Sonntag reported on Sunday.

Echoing a Reuters report on Friday from Brussels, the Sunday newspaper said the French and German leaders were prepared to back a deal with other euro countries that might induce the ECB to intervene more forcefully to calm the euro debt crisis.

The newspaper report quoted German government sources as saying that the crisis fighting plan could possibly be announced by German Chancellor Angela Merkel and French President Nicolas Sarkozy in the coming week.

In an advance release before publication, Welt am Sonntag said that because it would take too long to change existing European Union treaties,euro zone countries should just agree among themselves on a new Stability Pact to enforce budget discipline - possibly implemented at the start of 2012.

At the end of the day, this will all be about defending the political syndicate of the welfare state-central bank-banking cartel.

Watch gold fly.

UK Prepares for Euro Collapse

From the Telegraph

As the Italian government struggled to borrow and Spain considered seeking an international bail-out, British ministers privately warned that the break-up of the euro, once almost unthinkable, is now increasingly plausible.

Diplomats are preparing to help Britons abroad through a banking collapse and even riots arising from the debt crisis.

The Treasury confirmed earlier this month that contingency planning for a collapse is now under way.

A senior minister has now revealed the extent of the Government’s concern, saying that Britain is now planning on the basis that a euro collapse is now just a matter of time.

“It’s in our interests that they keep playing for time because that gives us more time to prepare,” the minister told the Daily Telegraph.

Recent Foreign and Commonwealth Office instructions to embassies and consulates request contingency planning for extreme scenarios including rioting and social unrest.

Greece has seen several outbreaks of civil disorder as its government struggles with its huge debts. British officials think similar scenes cannot be ruled out in other nations if the euro collapses.

Diplomats have also been told to prepare to help tens of thousands of British citizens in eurozone countries with the consequences of a financial collapse that would leave them unable to access bank accounts or even withdraw cash.

I don’t trust how politicians and bureaucrats assess and analyze events. Usually more planning extrapolates to the extension of political control over the citizenry under the guise of sundry crises.

In the memorable words of the great Libertarian H.L. Mencken

Civilization, in fact, grows more and more maudlin and hysterical; especially under democracy it tends to degenerate into a mere combat of crazes; the whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by an endless series of hobgoblins, most of them imaginary.

On the other hand, could this signify as more signs of a crowded trade?

Video: Andrew Napolitano: What If Freedom's Greatest Hour of Danger Is Now?

A rousing message of Freedom from Judge Andrew Napolitano.


(hat tip Bob Wenzel)

Steve Leuthold: ‘I’m Scared to Death of the Markets’, but He’s Buying

This stuff caught my eye. Star Tribune’s Kara MCGuire quotes the veteran investor Steve Leuthold:

I'm scared to death of the market.

Here’s why Mr. Leuthold is scared.

"I've been scared to death of the market before and it's been the time to buy," he said, pointing out that the hundreds of data points the Leuthold investment team use to make buy-and-sell decisions have turned positive. Their core portfolio is now half invested in stocks -- up from 30 percent earlier this year.

"You do have pretty good valuations here, and we do think the economy is OK. We're not expecting a double dip -- we're probably going to see 2.5 to 3 percent GDP growth next year." He also expects a "Band-Aid" solution in Europe to address the uncertainty coming from Greece, Italy and Spain.

But several alarming issues loom: gridlock in Washington, the U.S. deficit and concerns about the long-term value of the U.S. dollar, to name three on the top of Leuthold's mind.

He said the last time individuals faced an economic crisis of this magnitude was in the 1970s. But investors who lost faith in the market back then could invest in Treasury bills and earn 15 percent in interest.

"Now there is nowhere to go with safety where you can get a decent return on your money," said Leuthold, who thinks the policy of keeping interest rates low is really hurting average investors, who are in over their heads to begin with.

Not far from how I see current developments.

Yet he shares some tips: (bold original)

"Opinions are for show; numbers are for dough." In other words, don't make investment decisions based on emotions, news reports or cocktail talk. Do your research. If you have a tendency to make emotional decisions, consider an asset allocation fund made up of a mix of stocks and bonds with a manager paid to worry for you.

Be conservative. Save more, spend less because the idea that the future will always be better, well, "That's not necessarily true."

Don't follow the herd. Although being in the middle of the herd is the most comfortable place to be, consider getting out of your comfort zone. "When you see everybody go one way, look at why they may be wrong."

Go global. Investors should work toward having 50 percent of their portfolio based outside the United States, particularly in Asia. "The U.S. was the economic king of the world after World War II," Leuthold explained. "We had this huge wave behind the U.S. that gave us superior growth for 30 years. Then all of a sudden [other countries] started catching up. ... We go along like we're still the kings and can afford deficits as far as the eye can see and something is going to happen magically to support all these retired people with Social Security and Medicare. And it's a pipe dream."

Remember that investing isn't about the warm fuzzies. It can be downright unnerving. One short-term, tactical play is to consider investing in European stocks with global earnings. He mentioned Nestlé, Siemens and Unilever.

In short, use your common sense and don’t follow your confidence fairy or ‘animal spirits’.

Phisix-ASEAN Bourses Diverge from Global Market Turmoil

Markets have been exposing the farcical nature of politics—the popular belief that the fundamental laws of economics can sustainably be controlled or manipulated by edicts or by fiats or by legal mandates. Thus, I don’t see any validity to the expression which says that “markets are being forced to come to grips with a distressing reality” in describing what’s been happening today. Europe’s debt crisis has been manifesting on the dynamics where markets have been compelling politicians to act. It isn’t the markets that have been detached from reality; instead it has been the vastly skewing influence of politics in the marketplace.

And it would be serious mistake to simply gloss over the motives of politicians and presume that, along with their allies, they would docilely submit to market forces. The political class along with their economic clients have benefited immensely from the incumbent political institutions, organized along the 20^th century vertical top-bottom framework, will likely continue to fight to maintain their entitlements through the preservation of the system.

And such transition would be surrounded by intense volatilities in the marketplace and in the political realm as evidenced today.

It’s not a question of simply reading past performance (current economic figures) and projecting them into the future as the mainstream does. Many who see the world as operating in a prism of the 2008 paradigm or the Japan stagnation or the Great Depression of the 1930s will most likely be mistaken, as consistently proven in the recent past.

Instead, it is the question of how politicians along with their respective bureaucratic leaders will react in the face of the continuing unfolding crisis and the possible ramifications thereof that would matter most in forecasting the path of price trends in financial markets.

Divergences as Emerging Theme

Divergence seems to be an emerging theme.

One would need just to see how equity markets have been reflecting on the emerging signs of divergences, instead of a contemporaneous convergence during periods of market stresses such as in the crisis of 2008.

Below is the weekly performance of the select major equity markets.

While reflecting signs of weakness, Asian equity markets have not been as buffeted in the scale of her Western counterparts.

To consider, globalization has been increasing the correlations of equity markets.

Asian equity markets (ex-Japan) since 1995 has been exhibiting growing interdependence with global markets[1].

Given today’s deepening of globalization trend, Asian equity markets have become more sensitive to developments of the world. And this is why the argument for a decoupling may not be persuasive.

However my thesis has been that—market divergences or relative asset pricing may likely persists for as long as the world doesn’t succumb to a vortex of liquidity contraction or from a global recession which may also manifest the same symptom.

Yet signs of seminal diversity in equity market performance seem even more apparent from a wider timeframe.

The year-to-date performance of select global benchmarks as seen below.

While the European debt crisis has substantially battered the region’s equity markets where the current bear markets—shown by Germany and France could exhibit signs of forthcoming recession, the expected ripple or ‘contagion’ effects from this crisis seems to have been limited, thus far.

Again the ASEAN-4 and the US S&P 500 appear to sizably deviate from the Eurozone. Japan’s gloomy performance may partly be attributed to dour global sentiment but mostly to the first quarter triple whammy natural disaster. Meanwhile, the weak state of China’s equity markets could be a manifestation of either a cyclical slowdown or a bubble bust, which so far has yet to be established.

It is important to note that we cannot discount a shock from happening given the current circumstances. However as I have repeatedly been pointing out, the fundamental difference of the market’s outcome (from that of 2008 or from Japan’s lost decade) will be determined by prospective policy actions.

Monetization and Debt Profiling

Part of the aberration in market pricing can be attributed to the market’s differentiation of credit risks by specific nations.

The fascinating table above from Bespoke Invest[2] signifies an updated tale of the tape of credit risks, where the cost to insure debt of 44 nations via credit default swaps (CDS) has materially surged in the Eurozone led by Greece and Portugal (see bottom portion of the table) whom has surpassed the former laggard socialist Venezuela.

The Eurozone’s crisis has even dragged AAA credit rating France whose costs of insurance have skyrocketed by 142% year-to-date and which has even topped the ASEAN-4. France has now been ‘riskier’ than the Philippines and the ASEAN.

Meanwhile the US continues to exhibit strength or outperformance amidst rising concerns over global credit risks, which has hardly dented on her CDS premiums. This comes in spite of the recent S&P downgrade.

But the above table doesn’t tell the entire story though.

The reason for the current Euro crisis and the relative ‘safe US credit standing’ has largely been due to the debt maturity profile.

Much of the refinancing needs of Italy and the rest of the crisis affected PIIGS have been current or due in near term (top chart[3]).

Meanwhile US debt maturity profile has been farther out of the curve[4].

Nevertheless, sovereign liabilities of the US continue to balloon.

This November, US debts have soared passed 100% of GDP[5] which adds the US in the company[6] of prospective deadbeats.

The major reason why US the hasn’t suffered the same fate as that of the European PIIGS is that the US Federal Reserve has been monetizing her US debts, something which the Keynesians and the Chartalists have been raving about. The implication is that the US, as the world’s premier foreign currency reserve, is virtually immune to laws of economics. For them, money printing allows the US government to spend at will, which hardly will stoke any risks of inflation. Thus, the aversion to discuss any hyperinflation parallels of Weimar Germany or of Zimbabwe.

Yet the seeds towards the destruction of the US dollar have already been sown, the US Federal Reserve has reportedly outpaced China as the largest owner of US debt[7]. This means that the US has principally been relying on money printing by the Fed to finance her present liabilities.

This also shows the absurdity of the idea that the US Federal Reserve won’t commit to additional quantitative easing (QE) measures, as argued by some.

The US is faced with extremely challenging circumstances of pronounced weakness in many parts of the global economy that could intensify the risks of another recession, in an environment where national (US) saving rates has on a deepening slump[8], the worsening insolvency crisis at the Eurozone area that will extrapolate to reduced access to private financing and a possible contagion from a distressed banking sector[9].

True, US bond yields have been drifting in near record lows. However this hasn’t been a sign of systemic deflation (yes oil prices is just under $100, gold at under $1,700), instead low yields have been representative of policies targeted at manipulating the yield curve and of the temporal haven currency reserve status of the US dollar[10].

To add US CPI inflation has been climbing which in October was at the 3.5% rate and has been above the 1914-2010 average at 3.38%[11]. To consider, US CPI construct has vastly been skewed towards housing[12] which doesn’t accurately signal the real rates.

Yet the shortfall of financing US debts will be reinforced by the ongoing ‘slowdown’ in China whom has been resorting to her own whack-a-mole or piecemeal approach in applying bailouts[13]. And this also should apply to other emerging markets as well.

So far, the appetite to finance US debts by foreign central banks has been drying up[14].

Also the current crisis in the Euro area will postulate an environment of an even tighter competition with the US, the EU and other governments, as well as, other private entities wanting to access to savings from private sector.

Of course a no QE scenario for the FED will only happen if Bernanke and the rest of the FOMC will experience the epiphany of letting the markets clear.

But I would say that the odds for such an event to happen will proximate ZERO.

Central Bank Activism

For as long as the rates of inflation remains suppressed, politicians and their bureaucrats will use the current opportunities to test the limits of controlling and manipulating of the markets.

Thus any proclamations to impose self-discipline should be seen with cynicism.

For instance, the once defiant Germans, who have strongly been opposing the European Central Bank’s (ECB) role as ‘lender of last resort’, appear to be gradually acceding to pressures[15] for the ECB to aggressively backstop the Euro in the name of fiscal integration or union.

In reality, today’s signs of divergences seem to be driven by idiosyncratic liquidity conditions of each nation—where asset prices appear to be priced depending on relative systemic exposure on debt combined with the prospective impact of loose monetary conditions to their respective markets and the economy. These, aside from the transmission effects from policies set by the US Federal Reserve.

Thus in considering the above, the low leverage of ASEAN 4 makes them more receptive to the present boom bust policies.

Yet what sets the today’s markets apart from the 2008, Japan’s stagnation and or the Great Depression has been the central bank activism which as I have been reiterating has been navigating on uncharted treacherous waters.

Artificially manipulated interest rate together with money printing results to relative pricing of assets, which all comprises the inflation cycle.

Bottom line: I think the boom phase for the Phisix ASEAN markets, despite the turbulence in the EU, remains intact, barring any unforeseen events.

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[1] Worldbank.org Navigating Turbulence, Sustaining Growth WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2011, VOLUME 2

[2] Bespokeinvest.com Global Sovereign Credit Default Swap Prices, November 25, 2011

[3] Macleod Alasdair Watch out for maturing debt, November 19, 2011

[4] Merk Axel, Operation Twist a Primer for QE3? , Merk Funds, October 4, 2011

[5] See US Debt Passes $15 Trillion or Over 100% of GDP, November 17, 2011

[6] Galland David Monetary Madness – Is the US Monetary System on the Verge of Collapse? , October 18, 2011, Daily Reckoning

[7] CNSNews.com Fed Now Largest Owner of U.S. Gov’t Debt—Surpassing China, November 16, 2011

[8] Bloomberg.com U.S. Economy Grew Less Than Forecast on Inventories, November 22, 2011 SFGate.com

[9] See The US Banking Sector’s Dependence on Bernanke’s QEs, October 5, 2011

[10] See Market Crash Confirms Some of My Thesis on Gold and Decoupling, October 2, 2011

[11] Tradingeconomics.com United States Inflation Rate

[12] See US CPI Inflation’s Smoke and Mirror Statistics May 18, 2011

[13] See China Expands Bailout Measures, Reduces Reserve Requirements for Select Financial Firms, November 24, 2011

[14] Vuk, Vedran Are Foreign Banks Losing Confidence in US Treasuries? October 17, 2011 Casey Research

[15] See Will the European Central Bank Relent to Political Pressures to Increase Debt Monetization? November 26, 2011