What to Expect from a Greece Moment

The economist must deal with doctrines, and not with men. It is for him to critique errant doctrine; it is not his charge to uncover the personal motives behind heterodoxy. The economist must face his opponents under the fictitious assumption that they are guided by objective considerations alone. It is irrelevant whether the advocate of a false notion acts in good or bad faith; what matters is if the stated notion is true or false. It is the charge of others to reveal corruption and enlighten the public concerning the same Ludwig von Mises, Memoirs p.40

For some, today’s Greece elections serve as the defining ‘Greece moment’ of the Euro crisis. This would seem like a paradise for the advocates of drachmaisation or the return to the local currency, drachma which enables domestic governments to inflate the system.

Yet whether Greece decides to stay within, or departs from the EU, there won’t likely be significant changes in the dominant policies espoused by policymakers in addressing this crisis.

Inflationistas have been drooling for the aggressive use of monetary inflation as the easy way out of the crisis.

The difference would be that of the policy responses by global authorities as consequence of the political choice made by Greeks.

Uncertainty from the resultant political actions will establish the feedback loop between policy responses to the market’s reaction and market’s reaction to policy responses. That’s why policymakers have incessantly talking about erecting firewalls. Spain’s recent bailout has reportedly been predicated against contagion risks[1] from today’s election.

Utopian False Choice

Inflationistas give us a proposition based on a false choice/ false dilemma[2], analyst John Mauldin[3], a populist, gives a good example

Europe is down to two choices. Either allow the eurozone to break up or go for a full fiscal union with central budget controls. The latter option ultimately means eurobonds and a central taxing authority.

If only the world have been that simple where people think alike, move and act alike and economies are mechanized that can be switched on and off or modulated like temperature gauge of an air conditioning unit. Or that people’s actions can be captured in aggregate numbers.

Yet if this is true, then we won’t be having today’s crisis at all.

As the great F.A. Hayek once warned against utopian thinking[4]

it is probably no exaggeration to say that economics developed mainly as the outcome of the investigation and refutation of successive Utopian proposals—if by ‘Utopian’ we mean proposals for the improvement of undesirable effects of the existing system, based upon a complete disregard of those forces which actually enabled it to work.

The false dilemma presented to us fails to take to account the micro conditions of what plagues the EU crisis affected nations.

This vignette of the Greece government, which has been drawn by a Greek public servant and labeled as macaroni, which I earlier posted on my blog[5], has illustrative been of the anatomy of the Europe’s crisis.

The public servant Mr. Panagiotis Karkatsoulis, who works in the Greek Ministry of Administrative Reform and e-Governance and teaches at the National School of Public Administration, has partly been accurate in the dissection of the origins of crisis, particularly, “More than 30 years of scant coordination has resulted in a morass of contradictory rules and a lack of legal clarity” and “the first government of George Papandreou in 2009 had 15 ministers, 9 vice-ministers and 21 adjunct ministers, along with 78 general or special secretaries, 1,200 counselors, 149 directorate generals and 886 directorates — this for a population of just over 11 million, or the same number of people as those living in Cuba. The resulting mesh of interdependencies for decision making has made governing Greece increasingly difficult”.

So Europe’s fundamental problems can be summarized into the following: mishmash of ambiguous, unenforceable and conflicting arbitrary rules and regulations, bloated bureaucracy, unsustainable welfare state, obscure property rights, politically restrained markets through various interventionist policies and high tax rates[6], and a public sector far larger than the private sector, which has been draining away resources from the private sector, as evidenced by Greece’s consumption economy despite relative lower nominal wages or earnings[7] compared to other developed EU nations. As a side note, the perceived or expected cost of labor has been higher in most crisis affected nations in Europe due to stringent labor regulations and bubble policies[8].

In short, Greece’s economy has survived on a parasitical relationship where unproductive sectors have essentially been draining out resources from the depleted hosts.

Devaluation, thus, will not solve the problem of SOLVENCY, PRODUCTIVITY and COMPETITIVENESS as inflation only destroys real savings and extinguishes purchasing power.

Greece’s problem has not been prompted for by rigidity in wages emanating from market forces, but from the rigidity of her incumbent POLITICAL system. Politics simply won’t allow markets to do what the market does best. And obsession to politics is the price paid through a crisis.

As previously discussed, accelerating capital flight has been spawned by the sustained barrage for the siren song of the devaluation elixir as advocated by the political order and their Keynesian protégés, most of whom ironically are residents outside these crisis affected nations.

It’s easy to make recommendations that don’t affect one’s interests or where errant endorsements don’t have a direct personal impact.

The capital flight in the crisis affected EU nations has accounted for as symptoms of savers and creditors who seek refuge out of their nations (again to preserve savings) as well as risks of a banking collapse, while debtors have practically deferred on making payments, possibly in anticipation that their debts would be best paid on a devalued currency.

Also capital controls[9] from the elevated risk of a potential exit has likely been seen as a consequential threat.

All these, including tax increases, negative interest rates, price controls, inflationism and various regulatory proscriptions, are financial repression measures undertaken by desperate governments and endorsed by their institutional apologists who seek to persecute and expropriate assets of their private sector constituents in order to sustain the privileges of the political elite.

Add to these the rising incidence of protectionism[10] which mostly emanated from developed nations, particularly the EU.

So Keynesian (and Fisherian) snake oil prescriptions has essentially backfired or produced a series of unintended consequences. Aside from capital flight, falling tax receipts (including Italy[11]) and a breakdown of trade has been intensifying the crisis[12].

Also fiscal and political union naively extends the problem of the tenuous parasitical relationship. Eventually new hosts or EU’s creditor nations as Germany, Finland, Netherland and the others will also get drained by such unproductive and unsustainable redistributive relationships.

Fund manager John Hussman makes a great analogy of mainstream’s foolish ideas which he analogizes as the “WarrenBonds”[13],

This is like 9 broke guys walking up to Warren Buffett and proposing that they all get together so each of them can issue "Warrenbonds." About 90% of the group would agree on the wisdom of that idea, and Warren would be criticized as a "holdout" to the success of the plan. You'd have 9 guys issuing press releases on their "general agreement" about the concept, and in his weaker moments, Buffett might even offer to "study" the proposal. But Buffett would never agree unless he could impose spending austerity and nearly complete authority over the budgets of those 9 guys. None of them would be willing to give up that much sovereignty, so the idea would never get off the ground. Without major steps toward fiscal union involving a substantial loss of national sovereignty, the same is true for Eurobonds.

Even if 9 broke guys accedes to give up on their sovereignty, for as long as the structural system of parasitical relationship remains, even Warren Buffett will see his resources dwindle and will go bankrupt.

In short, all sorts of proposed and implemented bailout mechanisms—banking union, Eurobonds, EU regional deposit guarantee schemes, European Stability Mechanism and or the European Financial Stability Fund (“EFSF”), Securities Markets Programme (SMP), Long Term Refinancing Operations (LTRO) and Target2—are essentially transfers of resources from productive to unproductive nations, which ensures capital consumption and the eventual demise of the Union.

Of course what exponents of inflationism via devaluation don’t see or refuses to see are that there are other practical market based options such as outright default or restructuring and ‘shock liberalization’[14] as coined by University of Chicago Professor John Cochrane, viz., liberalize economy, allow banks to fail, reduce government spending (by cutting down the bureaucracy and repealing unnecessary regulations), reduce tax rates and sell state assets or privatization.

Whatever the outcome of today’s election, the crisis will continue to linger and will most likely fester for as long as solvency, productivity and competitiveness issues will not addressed by giving the private sector a bigger hand.

Exploring the Greece Moment

A Greece vote to stay within the EU will likely have concerted efforts by the European Central Bank (ECB) to reflate the system backed by some superficial ‘austerity’ policies. This will be another attempt to delay the day of reckoning.

This will likely another incite short term upswing for the markets but eventually will wear off, as with all the rest.

In short, boom bust cycles until the grand finale: defaults either by massive inflation (which likely brings the end of the euro experiment) or by outright default (disunion may or may not happen).

A Greece vote out of the EU to may spell interim trouble for the global markets, but this would likely prompt central banks to collaborate by massively inflating the system. So volatility can swing fiercely from downside to upside and vice versa, depending on how large these actions will be.

I would make another guess. Under the conditions where global central banks steps on the proverbial pedal to the metal, the RISK ON RISK OFF environment will probably transition to a stagflationary environment[15] (slow economic growth, high unemployment but also high consumer price inflation).

Again this will be conditional or mainly dependent on the scale or degree of actions which is something cannot be foreseen. I have to admit I don’t have telephatic powers that would allow me to read the minds of central bankers.

Yet under a stagflationary setting, market’s attention may likely be focused on commodities as inflation hedges.

And that’s where I’d be.

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[1] Bloomberg.com Euro Bloc Faces Greek Vote Giving First Spanish Test, June 11, 2012

[2] Wikipedia.org False dilemma

[3] Mauldin John MAULDIN: The 'Bang!' Moment Is Here Businessinsider.com, June 16, 2012

[4] Hayek Friedrich von Four History And Politics The Trend Of Economic Thinking p.15 libertarianismo.org

[5] See Chart of the Day: Greece’s ‘Macaroni’ Bureaucracy, June 15, 2012

[6] Wikipedia.org Tax rates of Europe

[7] Eurostat Wages and labour costs European Commission

[8] See Germany’s Competitive Advantage over Spain: Freer Labor Markets May 25, 2012

[9] See The Coming Age of Capital Controls? June 13, 2012

[10] See More Wall of Worry: Rising Accounts of Protectionism June 15, 2012

[11] See Italy’s Pro-Growth Tax Increases Backfires, June 13, 2012

[12] See Is Greece Falling into a Failed State?, May 28, 2012

[13] Hussman John P. The Reality of the Situation, May 28, 2012 Hussmanfunds.com

[14] Cochrane John H. Euro explosion, June 15, 2012

[15] Investopedia.com Stagflation

Chart of the Day: Greece’s ‘Macaroni’ Bureaucracy

From Bloomberg, (bold emphasis mine) [hat tip P. Ella]

Panagiotis Karkatsoulis, who works in the Greek Ministry of Administrative Reform and e-Governance and teaches at the National School of Public Administration, has some well founded theories about where Greece went wrong. One long-standing habit of government that helped the country become almost unmanageable, according to Karkatsoulis, is its disdain for parliament: new rules and regulations in Greece have long been created by ministerial order and presidential decree rather than through parliamentary process.

About 70 percent of regulations were approved directly by ministers between 1975 and 2005, and just 2 percent were the result of parliamentary actions, Karkatsoulis says in this OECD presentation. Regions, prefectures and the president account for the remaining rule changes. More than 30 years of scant coordination has resulted in a morass of contradictory rules and a lack of legal clarity.

A profile of Karkatsoulis in Le Monde explains how the first government of George Papandreou in 2009 had 15 ministers, 9 vice-ministers and 21 adjunct ministers, along with 78 general or special secretaries, 1,200 counselors, 149 directorate generals and 886 directorates — this for a population of just over 11 million, or the same number of people as those living in Cuba. The resulting mesh of interdependencies for decision making has made governing Greece increasingly difficult.

The chart above from Mr. Karkatsoulis has been labeled as the ‘Macaroni’ chart.

This serves as a great example of how the Gordian Knot of arbitrary rules and regulations, which has been emblematic of a political economy built on an unsustainable parasitical relationship, ultimately ends up in a crisis.

Printing money via devaluation, as prescribed by the mainstream, will not solve the issue of excessive regulations, red tape and bureaucratic barnacles, as well as property rights, free markets and the rule of law.

Video: Greek Central Planner Goes Berserk!

Writes Bob Wenzel at the Economic Policy Journal,

Central planning in action.

Greek far-right Golden Dawn Mp slaps another member on LIVE Tv. Golden Dawn spokesman Ilias Kasidiaris was apparently provoked when his alleged involvement in an armed robbery was mentioned. The fun stuff comes in the last 12 seconds of the clip

Politics is religion to many.

For central planners and their followers, who assume that they have far superior knowledge than the rest, any opposition to their views may lead to violent responses as they are hardly tolerant of adverse opinion.

First they resort to fallacies, then ad hominem to score debating points, and eventually such personal attacks incites physical violence.

This essentially exhibits the innate ethical philosophy of statism: the use of force.

Some pseudo experts try to dominate discussions through supposedly a 'gentle' persuasion approach. But whose subtle but incessant (nonsensical) bombardments represent no more than attempts to brainwash, in the guise of 'investment insights' or 'social justice'. They think that discussions should strictly run along their lines (even if they are based on gaping fallacies). You may even consider their spiels, a spam. And if you resist, you are deemed an idiot. They simply cannot respect diversity. For them it is either black or white, with me or against me (false choice).

Nonetheless, fatal conceit in action.

Austerity in Spain?

Juan Carlos Hidalgo at the Cato Institute investigates claims that Spain has been suffering from “austerity”

Writes Mr. Hidalgo, (bold emphasis mine)

There is a wide consensus that Spain’s economic troubles are the result of an enormous housing bubble—even bigger than the one that hit the U.S.—that burst in 2008. Just the year before, Spain boasted healthy fiscal indicators: a general government budget surplus of 1.9% of GDP and a gross consolidated debt of just 36.2% of GDP. However, once the bubble burst, government revenues collapsed and stimulus spending was injected into the economy, resulting in a fiscal deficit of 11.2% in 2009 and a gross debt that has increased over 30 percentage points of GDP in just 4 years.

Paul Krugman and The Economist argue that this evidence shows that, unlike Greece, Spain wasn’t fiscally profligate. However, the devil is in the details. Spain did run budget surpluses prior to the crash, but those surpluses weren’t caused by restrained government spending, but by ballooning tax revenues (thanks to a growing housing bubble). If we look at total government spending in the last decade, we can see a steady and significant rise until 2009:

* Using GDP deflator.
Source: European Commission, Economic and Financial Affairs.

Government spending in nominal terms increased at an annual rate of 7.6% from 2000 to 2009. Ryan Avent at The Economist says that “the push for austerity began in 2010,” and thus we have to look at nominal spending after that year, when according to Avent, it fell “substantially” due to austerity measures. In reality, it went down by just 1% in 2010 and a further 3.6% in 2011. If these cuts seem “substantial” to Avent, then a yearly average increase of 7.6% for almost a decade must be staggering.

Moreover, if we look at spending in real terms, using constant euros from 2000, there hasn’t been any decrease in the level of government spending.

If we look at government spending as a share of the economy, Spain appears as fiscally prudent: Spending was 39.2% of GDP in 2000 and exactly the same figure in 2007. However, as has been noted by Juan Ramón Rallo, Ángel Martín Oro and Adrià Pérez Martí of the Juan de Mariana Institute in a recent Cato study, “the data should be interpreted with caution, given that the GDP was growing at an artificially high rate.” The point is proven by the fact that when the economy came to a halt in 2008 (it grew by just 0.9%), government spending as a share of GDP leapt 2.3 percentage points to 41.5% in just one year. Government spending as a share of the economy remained constant during much of the 2000’s not because the government was spending too little but because GDP was growing too fast.

Moreover, once the crisis kicked in, government spending as a share of GDP reached a peak at 46.3% in 2009 (due to a combination of still more stimulus spending and a contracting economy). It later fell to 43% in 2011, still a higher share than in 2008. Government spending in Spain has indeed come down in the last two years, but not in a dramatic fashion as some people would have us to believe.

What about taxes? As has been the case in Britain, France, Italy and Greece, in the last two years the Spanish government increased taxes to tackle the soaring deficit: personal income tax rates went up in 2010 and two new brackets of 44% and 45% were introduced for higher incomes. Tax credits to self-employed workers were revoked. The VAT rate went up from 16% to 18% and excise duties on tobacco and gasoline were also raised. All these tax increases took place before the large tax hike introduced this year by the conservative government of Mariano Rajoy, which turned Spain into one of the highest taxed countries in Europe (and explained at length in this Economic Development Bulletin).

In short, austerity in Spain, described by Paul Krugman as “insane,” consists mostly of significant tax increases and timid spending cuts.

So Spain’s economy has been enduring economic strains hardly from spending cuts but mainly from HEFTY TAX INCREASES, rigid labor regulations and the welfare state.

On asphyxiating labor environment the Economist noted last February,

Spain’s labour laws, which date back to the Franco era, have condemned half the workforce to unemployment or to temporary jobs while the rest enjoy ironclad contracts and huge redundancy pay-offs. The new law blurs this insider/outsider divide and may thus get more people into stable employment. The decree comes on top of a January agreement by unions and employers to limit pay rises over the next three years. Mr de Guindos thinks most Spaniards see the need for labour reform. But its success in terms of growth may depend on unions’ choice between protecting jobs and keeping up their members’ pay.

The same statist FALSEHOODs have been thrown to Greece, where supposed “devaluation” from an “EU exit” would have posed as “elixir” to Greek economic woes.

Yet the ramifications from such absurd mainstream propaganda has been to SPUR a stampede out of the Greek banking system or systemic “bank run” or “capital flight” into safe havens as Germany and the US, as Greeks feared the loss of savings from forcible conversion of their euros to “drachmas”.

And the same tax hike prescriptions from statists has led Greeks to drastically avoid paying taxes.

In short, statist medicines have been blowing up right smack on their faces.

Yes, polls have it that 80% of Greeks want to stay in the Euro!!!

Statist imbeciles engage in deceptive phraseology to promote their political religion. As George Orwell once wrote,

In our time, political speech and writing are largely the defence of the indefensible... Thus political language has to consist largely of euphemism, question-begging and sheer cloudy vagueness… Such phraseology is needed if one wants to name things without calling up mental pictures of them…The inflated style itself is a kind of euphemism.

The great enemy of clear language is insincerity. When there is a gap between one's real and one's declared aims, one turns as it were instinctively to long words and exhausted idioms, like a cuttlefish spurting out ink. In our age there is no such thing as ‘keeping out of politics’. All issues are political issues, and politics itself is a mass of lies, evasions, folly, hatred, and schizophrenia. When the general atmosphere is bad, language must suffer.

False prophets, these statists, are.

Is Greece Falling into a Failed State?

According to the mainstream media and establishment experts, Greeks supposedly loathed austerity. They wanted “growth”, which is a euphemism for continued unsustainable government spending. If true, then this means that Greeks wanted free lunch.

But many Greeks may have come to realize that there is NO such thing as a free lunch. They needed to pay taxes in return for political entitlements.

Yet Greeks have been balking at doing so.

From Reuters.com/GreeceReporter.com

With anxiety mounting that Greece might vote for anti-austerity parties in the June 17 elections and be forced to leave the Eurozone of 17 countries using the euro as a currency, more Greeks – already legendary tax evaders – have stopped paying taxes. A senior Finance Ministry official on May 23 said that tax revenues have fallen 10 percent while two tax officials who declined to be named told Reuters that May revenues fell by 15-30 percent in tax offices away from the major cities and relative wealth centers of Athens and Thessaloniki.

So Greeks have been refusing to pay taxes. The left hand does not know what the right hand is doing. That’s if the establishment’s assertion is true. Greeks cannot have it both ways.

Yet Greeks realize that if they cannot pay, then they would have to default on their debts.

But the establishment says that the only way to salvation is through devaluation that can only be actualized from an exit. So their prescription: Default by devaluation.

So this ‘exit’ prospect gives further jitters not just to the average Greeks, but to foreign businesses based on Greece, as well. Foreign businesses have been apprehensive about having inadequate laws to cover or protect them once Greece decides to exit.

From the New York Times,

What can companies do when the legally impossible becomes reasonably probable?

Under European Union law, Greece cannot leave the euro. That is the theory. But in practice, any protection the law offers investors could be difficult to enforce, according to lawyers trying to protect their corporate clients against the upheaval sure to follow if Greece were to default on its debts and adopt a new currency.

So their advice is blunt: Remove cash and other liquid assets from Greece and prepare to take a short-term hit on any other investments…

But, apart from trying to ensure that debts are paid promptly and therefore in euros, legal options for companies are limited. Contracts covered by Greek law, particularly for services delivered in Greece, provide little protection against the currency’s being redenominated and devalued — a development regarded as unlikely until recently.

“Greece would, through its laws, be able to amend contracts governed by Greek law or to be performed within the territory of Greece,” Mr. Clark said. “It is the governing law and the place of performance of the contract that is most important.”

International contracts, which might be covered by British, German or Swiss law, would be more likely to be honored in the designated currency, though in some cases the wording of the legal document may be vague.

And even if the law is on their side, companies would find that to extract payment from a Greek company, they would need a judge in Greece to enforce a ruling from a foreign court.

When the average Greeks doesn’t want to pay taxes, and when foreign businesses are either closing shop or transferring elsewhere, then this means that there will be insufficient tax revenues for the current government to finance her survival.

This also means that parasites have severely impaired the hosts, which may mean the prospective extinction of the parasitical relationship.

From FT/IBNLive.in

Greece's public finances could collapse as early as next month, leaving salaries and pensions unpaid unless a stable government emerges from the June 17 election, according to Lucas Papademos, the technocrat prime minister who left office after this month's inconclusive vote.

Mr Papademos warned that conditions were deteriorating faster than expected with cash flow likely to turn negative in early June amid a sharp fall in tax revenues and a loosening of spending controls during two back-to-back election campaigns.

Mounting anxiety that Greece is headed for further political instability and a possible exit from the euro has prompted many Greeks to postpone making tax payments, and has also accelerated outflows of deposits from local banks.

Athens bankers estimate that more than €3bn of cash withdrawn since the May 6 election has been stashed in safe-deposit boxes and under mattresses in case the country is forced to readopt the drachma.

Austerity becomes a NATURAL process as economic reality has been reasserting itself. This exposes the promises of a "state based elixir" as monumental delusion.

The prescription of devaluation has been provoking a bank runs and has been blowing up right ON the faces of establishment experts calling for devaluation.

This brings us to where the Greece might be headed for.

The new Deutsche bank boss calls Greece as a "failed state".

From Irish Times,

The incoming co-chief executive officer of Deutsche Bank today described Greece as a "corrupt" and "failed" state.

"Greece is the only country, I feel, where we can say 'it's a failed state,' it is a corrupt state, corrupt as far as its political leadership is concerned, and obviously other people had to be willing to support this," Juergen Fitschen, who takes up his post next week, said in a speech at a conference in Berlin.

Failed states, are characterized according to Wikipedia.org by

• loss of control of its territory, or of the monopoly on the legitimate use of physical force therein,
• erosion of legitimate authority to make collective decisions,
• an inability to provide public services, and
• an inability to interact with other states as a full member of the international community.

Often a failed state is characterized by social, political, and/or economic failure.

In reality “failed states” are mainly products of unsustainable parasitical relationships, whether in Somalia, Chad or Sudan as rated by US think tank Fund for Peace and Foreign Policy.

But this does not necessarily mean social, political and economic failure as commercial operations exists. Otherwise logic says that these nations will have been uninhabited or deserted either through diaspora or death. But this has clearly not been the case.

Ironically, the US Central Intelligence Agency even admits that the number one “failed state” Somalia as having a “healthy informal economy”.

Thus the “inability to provide public services” does not represent reality. The difference is that mainstream cannot swallow or fathom such ideas. And the global political establishment has been repeatedly attempting for “failed states” to go mainstream through foreign interventions.

Instead, what a “failed state” means is that there is no standing government or that imposed government will mostly likely be ignored by society or what could be called “stateless society”.

I am not sure if Greece will technically become a failed state.

What is certain is that we are witnessing the accelerating collapse of a parasitical relationship anchored upon the spendthrift welfare and bureaucratic state.

This validates anew the great Ludwig von Mises who presciently warned more than half a century ago that

An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. The whole system of interventionism collapses when this fountain is drained off: The Santa Claus principle liquidates itself.

And like Dr. Marc Faber, the collapse of the current Greece form of government should be bullish for Greeks over the long term (whether through exit or as part of the EU), as Greeks will be compelled to live within the laws of economics through greater economic freedom, and eschew feeding on political parasites.

Could Gold Prices be Signaling a Reprieve in Selloffs or a Bottom?

Over at the commodity markets, gold’s and silver’s recent bounce could yet signal a reprieve to the market’s selloff.

On the one hand, this bounce could signify a reaction to extremely oversold levels but may not be indicative of a bottom yet.

On the other hand, if gold and silver have found a bottom then they could likely be signaling the coming tsunami of inflationism, where the tendency is that gold leads other assets in a recovery, perhaps like 2008.

Also, the recent bounce came amidst Greek polls exhibiting improvements of the standings of pro-austerity camp, perhaps indicative of reduced odds of a Greece exit. A victory by pro-bailout camp government would allow the ECB to orchestrate the same operations that it has been conducting at the start of the year.

For most of the past 3 years prices of gold and the US S&P 500 have been correlated but with a time lag. Since March an anomalous divergence occurred, the S&P rose as the gold fell. For most of the past two weeks both gold and the S&P fumbled which seem to have closed the divergence gap.

But over the two days gold rose as stocks fell. Such anomaly will be resolved soon.

Again, gold cannot be seen as a standalone commodity and should be seen in the context of both the general commodity sphere and of other financial assets.

Focusing on gold alone misses the point that gold represents one of the contemporary assets that competes for an investor’s money. Such that changes in the gold prices would likewise affect prices of other relative assets.

Prices are all interconnected, the great Henry Hazlitt explained[1]

No single price, therefore, can be considered an isolated object in itself. It is interrelated with all other prices. It is precisely through these interrelationships that society is able to solve the immensely difficult and always changing problem of how to allocate production among thousands of different commodities and services so that each may be supplied as nearly as possible in relation to the comparative urgency of the need or desire for it.

To fixate only on gold without examining the actions of other assets would risk the misreading of the gold and other asset markets.

Let me further add that a Greece exit or a collapse of the Euro doesn’t automatically mean higher gold prices. This entirely depends on the actions of central banks.

Since gold is not yet money today, based on the incumbent legal tender laws, it would be totally absurd to argue that under today’s fiat money system—where financial contracts have been underwritten on paper currencies mostly denominated in US dollars or the foreign currency alternatives, European euro, British pound, Swiss franc, Japanese yen or even China’s renminbi—all debt liquidations, be it ‘calling in of loans’ or ‘margin calls’ will be consummated in paper money currency and not in gold.

This means that a genuine debt deflation would translate to greater demand for cash balance (based on Irving Fisher’s account of debt deflation[2]) which means more demand for the US dollar and other currencies of ex-euro trade counterparties.

And that’s what has been happening lately to the marketplace, the US dollar (USD) and US Treasuries 10 year prices (UST) has risen opposite to falling gold prices and other financial assets.

This means part of the global system has been enduring stresses from debt liquidations, which again bolsters the relative effects of money and boom bust cycles.

As pointed out before[3], it would be mistake to equate the 1930 eras (gold bullion standard) or the 1940 eras (Bretton Woods standard) with today’s digital and fiat money system. That would be reading trees for forest when gold was officially money then.

And given that gold has long been branded a “barbaric relic” and has practically been taken off the consciousness of the general public in Western nations, gold has hardly been appreciated as money, perhaps until a disaster happens.

It has only been recently and due to sustained gains of gold prices where gold’s importance has begun to percolate into the American public[4].

Yet the Americans see gold more of an investment than as money

But of course, this is different with many Asians who still values gold as money. For example, many Vietnam banks are even paying gold owners fee for storage[5] in defiance of government edict.

Gold’s rise would be premised from central banking inflationism designed to protect the certain political interests, which today have represented the banking institutions and the Federal and national governments.

As proof, the latest quasi bank run in Greece, which I pointed out above, has reportedly been due to concerns over devaluation of the drachma, should Greece exit from the EU and NOT from deflation.

While I remain long term bullish gold, short term I remain neutral and would like see further improvements in gold’s price trend and subsequently the relative trends of other “risk ON” assets.

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[1] Hazlitt Henry How Should Prices Be Determined? , May 18, 2012

[2] Wikipedia.org Fisher's formulation, Debt Deflation

[3] See Gold Unlikely A Deflation Hedge June 28, 2012

[4] Gallup.com Gold Still Americans' Top Pick Among Long-Term Investments, April 27, 2012

[5] See Vietnam Banks Pay Gold Owners for Storage, April 12, 2012

Are Greeks turning Pro-Austerity?

Recent polls seem to suggest that Greeks may after all, still want handouts from their Germans hosts, as pro-austerity votes seem to be gaining ground.

From the Independent

Less than a day after taking office, Greece's new caretaker government was faced with yet another credit downgrade as Fitch that warned Athens of a "probable" exit from the eurozone if pro-bailout parties failed to win new elections due on 17 June.

And it appears that Greeks might be taking this message on board. A new poll yesterday indicated that politicians backing austerity – a necessary condition of the rescue package – would secure up to a 167-seat majority in the new Parliament with the conservative New Democracy party maintaining its lead over Syriza, a left-wing party whose leader has vowed to stop the country's painful public sector cuts.

The poll, conducted for Alpha TV, predicts New Democracy would gain up 123 seats in the 300-member legislative assembly, leaving left-wing Syriza with 66 seats and Socialists Pasok 41. The findings will calm nervous European leaders and financial markets that panicked after an anti-austerity sentiment prevailed in the hung parliament after the 6 May election.

However, as the country embarks on the new campaign some newspapers were left doubtful over the accuracy of the poll. "Elevator polls" read the headline of centre-left daily Ethnos. Political leaders are only just starting to forge alliances with smaller parties in the hope of forming a coalition.

This is yet too early to say. Nevertheless caught between the choice of financial isolation on the one hand, and as beneficiary of conditional redistribution as member of the European Union, on the other hand, the shift in sentiment seems plausible. And it could be that the pro-austerity camp may yet prevail.

As caveat, “austerity” remains a vaguely defined concept today, as the term has been grotesquely mangled by neoliberals.

Greece Exit Estimated Price Tag: €155bn for Germany and France, Possible Trillions for Contagion

Estimates have been made as to the cost of a Greece exit

Writes Ambrose Pritchard at the Telegraph, (Hat tip Bob Wenzel)

Eric Dor's team at the IESEG School of Management in Lille has put together a table on the direct costs to Germany and France if Greece is pushed out of the euro.

These assume that relations between Europe and Greece break down in acrimony, with a full-fledged "stuff-you" default on euro liabilities. It assumes a drachma devaluation of 50pc.

Potential losses for the states, including central banks

They conclude:

The total losses could reach €66.4bn for France and €89.8bn for Germany. These are upper bounds, but even in the case of a partial default, the losses would be huge.

Assuming that the new national currency would depreciate by 50 per cent against the euro, which is realistic, the losses for French banks would reach €19.8bn. They would reach €4.5bn for German banks.

Sounds about right.

I doubt that the US, China, and the world powers would sit back if the EU tried to "teach Greeks a lesson" by making life Hell for them.

There would be massive global pressure on Europe to handle the exit in a grown-up fashion, with backstops in place to stabilize Greece. The IMF would step in.

And here is the part to worry about.

More from Mr. Pritchard,

Needless to say, the real danger is contagion to Portugal, Ireland, Spain, Italy, Belgium, France, and the deadly linkages between €15 trillion in public and private debt in these countries and the €27 trillion European banking nexus.

The ECB will likely resort to printing of money in the scale like never before and will likely be backed by the US Federal Reserve.

If hell breaks lose and the Euro comes undone the more money printing will be unleashed by independent central banks to protect their banking system.

As a side note, this is about the preservation politically protected banking system which has functioned as an integral part of the current structure of political institutions—the welfare-warfare governments and central banks.

So we should expect markets to be highly volatile in either directions as events unfold.

Just a reminder, I bring this up NOT to scare the wits out of market participants (funny how from being a perceived Panglossian analyst, I am precipitately seen as the present day Jeremiah). Some people reduce stock market logic into a groupthink fallacy ("either you are with us or against us").

Paradoxically, the article I quoted above comes from the mainstream.

I am simply presenting the risks that faces the marketplace given the current conditions.

As an old saw goes, pray for the best, prepare for the worst.

As to whether Greece will exit the Eurozone or is beyond my knowledge. The Greek government emerging from the June elections will decide on that. I can only guess or toss a coin. But I can either act to ignore this or include this in my calculation for my positioning.

The fact is that in case the new Greek government decides to opt out of the EU, this would have a material impact on the marketplace—all over the world, the Phisix not withstanding.

Since the overall impact to the markets will likely be unknown, except for some numerical estimates to rely on (which may or may not be reliable) and where the psychological impact cannot be quantified or even qualified, such environment is called as uncertainty.

The current conditions suggests of greater than usual uncertainty. Add to that the China factor and the Fed’s monetary policies.

So, for me, it pays to keep a balanced understanding of how the local markets may become vulnerable to a contagion transmission from external events, than from blindly embracing or getting married to a single position.

I always try to keep in mind the legendary trader Jessie Livermore’s precious advice: There is only one side of the market and it is not the bull side or the bear side, but the right side

Since the markets are about managing opportunities, then opportunities will arise for profits, and opportunities will also arise for wealth preservation.

For now I see the right side of the trade as balancing my portfolio tilted towards the preservation of resources.

On the other hand, I must add that bloated egos will eventually be humbled by the marketplace.

Chart of the Day: Greece Austerity?

chart from tradingeconomics.com

Some experts question the “benefits of austerity” on the Greece economy.

The graph above prompts for the question, where the heck is “austerity”?

Should a one year slump in Greece’s government budget (referenced only to 2010) be discerned as austerity? But how about comparing the Greece’s budget since 1995…does this look anywhere like austerity?

Reference points can be manipulated or framed to fit biases. But that would translate to intellectual dishonesty.

Former Central Banker Papademos Is Greece New Prime Minister

Over at Europe, Central Bank—Wall Street—Welfare state interests are becoming entrenched politically.

First we have Mario Draghi, an alumnus of Goldman Sachs as the president of the European Central Bank (ECB).

Now we have an ex-ECB vice president as Greece’s PM.

From the Bloomberg

Lucas Papademos, named today to be interim prime minister of Greece, steered the country into the euro region as central bank governor more than a decade ago. Now the former European Central Bank vice president will have to secure the country’s euro membership for a second time.

Papademos, who has never held elected office, helped foster economic growth rates that surpassed Germany’s and France’s in his eight years at Greece’s central bank before moving to the ECB in 2002. Most recently a visiting professor at Harvard University in Cambridge, Massachusetts, and an adviser to departing Prime Minister George Papandreou, Papademos takes over a country weeks from being unable to meet its debt obligations…

Appointed Greek central bank chief in 1994, Papademos presided over an economy lagging behind its European counterparts. Growth had averaged 1.3 percent in the previous decade, almost half the average of the other 11 countries preparing to join the euro.

Papademos, who described his monetary strategy as “eclectic” in a 2001 interview with Institutional Investor magazine, stabilized the drachma and inflation in his early years at the Greek central bank.

In March 1998, Greece devalued the drachma by 14 percent against a basket of European currencies to join the EU’s exchange-rate mechanism. Papademos then kept the bank’s main rate above 10 percent for the next two years to curb consumer prices following the devaluation. By 2000, inflation, which had been 14.2 percent in 1993, slowed to 3.2 percent.

Papademos’s legacy as central bank governor was blown apart by the debt crisis that’s ricocheting through world markets. As Papandreou’s government, elected two years ago, revealed that the country’s budget deficit was more than double the previous administration’s effort, investors dumped the country’s bonds, forcing the country to seek a European Union-led bailout.

The interests of politically endowed banking cartel are evidently being protected through revolving door politics.

Obviously the same story, but only different personalities involved.

Gold Prices Climbs the Wall of Worry, Portends Higher Stock Markets

The Occupy Wall Street crowd sees this as a problem with capitalism. I believe that they are correct in their target, but wrong in their diagnosis. This is not a problem of capitalism since Wall Street is a practitioner of monetarism. A real capitalist system works through real intermediation creating positive opportunities for productive enterprises (scarce money is actually vital here). Our current system of repo-to-maturity and gold leasing is nothing but empty monetarism’s habit of regularly forcing the circulation of empty paper. And when the system begins to doubt itself, as it did in 2008, the answer is always about finding a way to restart the fractional maximization process yet again, which means disguising the real risks inherent to that process. There is no real mystery as to why prices and values have seen such a divergence, and why that is a big problem to a system that depends on appearances. Jeff Snider

Dramatic fluctuations out of the interminable nerve racking geopolitical developments continue to plague global financial markets.

Yet despite the seemingly dire outlook, major equity market bellwethers seem to be climbing the proverbial wall of worry.

The price trend of gold, for me, serves as a major barometer for the prospective direction of stock markets, aside from, as measure to the current state of monetary disorder.

Gold’s significant breakout beyond the 50-day moving averages implies that gold’s bull run have been intact and could reaccelerate going to the yearend.

Thus, rising gold prices should likely bode well for global stock markets.

Seasonal Bias Favors Gold, Gold Mining Issues and Stock Markets

It is important to point out that gold’s statistical correlation with global stock markets may not be foolproof and or consistently reliable as they oscillate overtime. In addition, gold has no direct causal relationship with stock markets.

From a causal realist standpoint, the actions of gold prices shares the same etiological symptoms with stock markets—they function as lighting rod to excessive liquidity unleashed by central banks looking to ease financial conditions for political goals.

As shown above, all three major bellwethers of the US S&P 500 (SPX), China’s Shanghai index (SSEC) and the Euro Stox 50 (STOX50) seem to be in a recovery mode. This in spite of last week’s still lingering crisis at the Eurozone.

While I may not be a votary of statistically based metrics, seasonal patterns, mostly influenced by demand changes based on cultural factors, could have significant effects when other variables become passive.

In terms of gold prices, higher demand for jewelries from annual holiday religious celebrations, e.g. India’s Diwali and the wedding season, Christmas Holidays and preparations for China’s 2012 New Year of the Dragon[1], has statistically produced positive and the best returns of the year.

‘Statistical’ bias for a yearend rally in gold mining stocks (see lower right window) reveals that monthly returns for November has the largest gain of the year, with a potential follow through to December.

In addition, the stock market also has a seasonal ‘statistical’ flavoring with a potential yearend rally supported by additional gains from the first quarter as shown in the above chart by Bespoke Invest using the Dow Jones Industrials computed over 100 years in 2010[2]

Distinctions in the monthly returns involves many factors such as the tax milestones, quarterly "earnings season", "window-dressing" on the part of fund managers, index-rebalancing periods or many more[3] but these should never be seen as fixed variables as conditions ceaselessly changes.

Again statistics only measures and interprets history, but most importantly statistics does not take in consideration the actual operations of prospective human actions[4]. For instance, statistics can’t tell if policymakers will raise interest rates or hike taxes or print money and their potential effect on the markets.

Deeply Entrenched Bailout Policies—Globally

Nevertheless, given the current political climate, gold prices will mainly be driven by changes in the political environment. Seasonal effects will most likely be enhanced by political factors than the other way around.

In China, policymakers have reportedly been shifting towards an easing stance meant to address the current funding squeeze being encountered by small businesses.

Lending quotas of some China’s banks have reportedly been increased, where new lending may exceed 600 billion yuan ($94 billion) this month from 470 billion in September reports the Bloomberg[5].

These actions could have been driving the current recovery of the China’s Shanghai Index.

In Greece, political impasse has reportedly forced Greece Prime Minister George Papandreou to call for a referendum which initially rattled global financial markets[6].

In reality, Mr. Papandreou’s ploy looks like a brilliantly calculated move resonant of Pontius Pilate’s washing of his hand on the execution of Jesus Christ[7].

Given the recent poll results[8] which shows that the Greeks have not been favorable to government’s austerity reforms or bailouts but have also exhibited fervid reluctance to exit from the Eurozone (since Greeks has been benefiting from Germans), PM Papandreou saw the opportunity to absolve himself by tossing the self-contradictory predicament for the public to decide on.

In addition, realizing the potential risks, Germany’s Angela Merkel and France’s Nicolas Sarkozy interceded to prevent a referendum from happening, which I suppose could also be part of PM Papandreou’s tactical maneuver.

From these accounts, a vote of confidence over PM Papandreou’s government was held instead, where by a slim margin, PM Papandreou prevailed. The parliamentary victory thus empowers him to reorganize and consolidate power through a supposed Unity government[9].

In Italy, popular protests have been mounting against Prime Minister Silvio Berlusconi supposedly for his failure to convince investors and European allies that Italy can trim the Euro-region’s second biggest debt, which saw the Italy’s 10 year bond spiked to record high 6.4% on Friday[10].

PM Berlusconi recently rejected an offer of aid from the IMF, but instead, requested the multilateral institution to monitor her debt cutting efforts.

Yet given the current political maelstrom, European Central Bank (ECB) president Mario Draghi, who is also an alumnus of Goldman Sachs and who has just recently assumed office from Jean Claude Trichet surprised the financial markets with an interest rate cut citing risks of a Greece exit from the EU and from an economic slowdown brought about by the current financial turmoil[11].

Mr. Draghi’s actions seems like a compromise to the Global Banking cartel[12] where the latter has clamored for the ECB to backstop the bond markets by active interventions through quantitative easing (QE).

Obnoxious partisan politics seem to have provided a veil or an excuse for the ECB’s widening use of her printing press.

Yet ironically, attempts to portray the ECB as imposing disciplinary measures[13] on profligate crisis affected governments seem like a comic skit in the Eurozone’s absurd political theatre. The public is being made to believe that one branch of government intends to provide check and balance against the other.

In truth, the Euro-bank bailouts reallocates the distribution or transfers resources from the welfare government to the ECB and the Banking cartel in the hope that by rescuing banks, who functions as the major conduit in providing access to funds for governments, the welfare state will eventually be saved.

Yet instead of a check and balance, both the ECB and EU governments have been in collusion against EU taxpayers and EU consumers, to preserve a fragile an archaic government system that seems in a trajectory headed for a collapse.

The ECB’s asset purchases (upper right window) have been driving up money supply (upper left window) even as the EU’s economy seems faced with growing risks of recession—as evidenced by floundering credit growth in the EU zone. Yet contrary to Keynesians obsessed with the fallacious liquidity trap theory, inflation rate has remained obstinately above government’s targets which allude to the increasing risks of stagflation for the EU.

And further increases in inflation rates will ultimately be reflected and vented on the bond or the interest rate markets. These should put to risk both the complicit governments and their beleaguered financiers—the politically privileged banking system backed by the central banks—whom are all hocked to the eyeballs. Rising interest rates likewise means two aspects, dearth of supply of savings and diminishing the potency of the printing press. Yet to insist in using the latter option means playing with fires of hyperinflation.

And like in the US, the welfare warfare states have continuously been engaging in policies that would signify as digging themselves deeper into a hole.

Proof?

Inflationism as Cover to the Derivatives Trigger

It’s also very important to point out anew[14] that the US banking and financial system are vastly susceptible to the developments in the Eurozone. In short, US financial system has been profoundly interconnected or interrelated with the Euro’s financial system

Exposure of US banks to holders of Greek, Portuguese, Irish, Spanish and Italian debt in the first semester of 2011 has jumped by $80.7 billion to $518 billion mostly through credit default swaps where counterparty risks from a default could ripple through the US banking sector.

Yet about 97% of the US derivative exposure has been underwritten by JPMorgan, Morgan Stanley, Goldman Sachs, Bank of America Corp. and Citigroup Inc. The estimated total net exposure by the five government protected “too big too fail” banks to the crisis affected PIIGS are at measly $45 billion.

However, part of the hedging strategy by these banks and other financial institutions have been to buy credit insurance or Credit Default Swaps (CDS) of their counterparties which have not been included as part of these estimates. In addition, counterparties have not been clearly identified.

Because of this, European leaders have reportedly been extremely sensitive as not to trigger default clauses in CDS contracts that may put banks across two continents at risk.

Ironically, the institution that decides on whether debt restructuring triggers CDS payments, the International Swaps & Derivatives Association, or the ISDA, has these biggest government’s cartelized private banks sitting on the company’s boards.

So the big 5 essentially calls the shots in the derivatives markets or on when default clauses are triggered and when it is not.

At the end of the day, this eye-catching quote from the Bloomberg article[15] from which most of the discussion have been based on, seems to capture the essence of the policy direction today’s political system

U.S. banks are probably betting that the European Union will also rescue its lenders, said Daniel Alpert, managing partner at Westwood Capital LLC, a New York investment bank.

“There’s a firewall for the U.S. banks when it comes to this CDS risk,” Alpert said. “That’s the EU banks being bailed out by their governments.”

The point to drive at is that both governments, most likely through their respective central banks, will continue to engage in serial massive bailout policies to avert a possible banking sector meltdown from an implosion in derivatives.

Such dynamics lights up the fuse that should propel gold prices to head skyward. And the consequent massive infusion of monetary liquidity will only buoy global stock markets higher, for as long as inflation rates remain constrained for the time being.

Remember, central banks have used stock markets as part of their tool kit to manipulate the “animal spirits”[16] from which they see as a key source of economic multiplier from the misleading spending based theory known as the “wealth effect”, a theory that justifies crony capitalist policies.

Policies that have partly been targeted at the stock market and mostly at the preservation of the current unsustainable political system are being funneled into gold and reflected on its prices, which has stood as an unintended main beneficiary from such collective political madness.

Yet rising gold prices shows the way for the stock markets until the inflation rates hurt the latter. But again, not all equity securities are the equal.

I would take the current windows of opportunities to accumulate.

---

[1] Holmes Frank Investor Alert - 3 Drivers, 2 Months, 1 Gold Rally?, November 4, 2011, US Global Investors

[2] Bespoke Invest Seasonality Does Not Favor Stock Investments In February, February 1, 2011 Decodingwallstreet.blogspot.com

[3] Stockwarrants.com Seasonality

[4] See Flaws of Economic Models: Differentiating Social Sciences from Natural Sciences, November 3, 2011

[5] Bloomberg.com China Easing Loan Quotas May Cut Economic Risks, Daiwa Says, November 4, 2011

[6] See The Swiftly Unfolding Political Drama in Greece, November 2, 2011

[7] Wiipedia.org Pontius Pilate

[8] Craig Roberts, Paul Western Democracy: A Farce and a Sham, November 4, 2011, Lew Rockwell.com “A poll for a Greek newspaper indicates that whereas 46% oppose the bailout, 70% favor staying in the EU, which the Greeks see as a life or death issue.”

[9] See Greece PM Papandreou Wins Vote of Confidence, November 5, 2011

[10] Bloomberg.com Thousands Rally in Rome, Pressing Italy’s Berlusconi to Resign Amid Crisis, November 6, 2011

[11] See ECB’s Mario Draghi’s Baptism of Fire: Surprise Interest Rate Cut, November 4, 2011

[12] See Banking Cartel Pressures ECB to Expand QE, November 3, 2011

[13] Reuters Canada ECB debates ending Italy bond buys if reforms don't come, November 5, 2011

[14] See US Banks are Exposed to the Euro Debt Crisis, October 8, 2011

[15] Bloomberg.com Selling More CDS on Europe Debt Raises Risk for U.S. Banks, November 1, 2011

[16] See US Stock Markets and Animal Spirits Targeted Policies, July 21, 2010