The Toxicity of Mainstream News

Chris Mayer at the Daily Reckoning explains why we should not rely on mainstream news as source for decision making (bold emphasis mine)

Dobelli’s analogy with food is a good one. We know if you eat too much junk food, it makes us fat and can cause us all kinds of health problems. Dobelli makes a good case that the mind works the same way. News is brightly colored candy for the mind.

News is systematically misleading, reporting on the highly visible and ignoring the subtle and deeper stories. It is made to grab our attention, not report on the world. And thus, it gives us a false sense of how the world works, masking the truer probabilities of events.

News is mostly irrelevant. Dobelli says to think about the roughly 10,000 news stories you’ve read or heard over the past year. How many helped you make a better decision about something affecting your life? This one hit home…

We get swamped with news, but it is harder to filter out what is relevant — which gets me to another point that hit home. Dobelli talks about the feeling of “missing something.” When traveling, I sometimes have this feeling. But as he says, if something really important happened, you’d hear about it from your friends, family, neighbors and/or co-workers. They also serve as your filter. They won’t tell you about the latest antics of Charlie Sheen because they know you won’t care.

Further, news is not important, but the threads that link stories and give understanding are. Dobelli makes the case that “reading news to understand the world is worse than not reading anything.” In markets, I find this is true. The mainstream press has little understanding of how markets work. They constantly report on trivia and make links where none exist for the sake of a story, or just for the sake of having something that “makes sense.”

In markets, reporters try to explain the market every day. “The market falls on Greek news” is an example. Better to not read anything if you’re going to take this kind of play-by-play seriously at all.

The fact is we don’t know why lots of things happen. We can’t know for sure why, exactly, things unfolded just as they did when they did. As Dobelli writes, “We don’t know why the stock market moves as it moves. Too many factors go into such shifts. Any journalist who writes, ‘The market moved because of X’... is an idiot.”

You contaminate your thinking if you accept the neat packages news provides for why things happen. And Dobelli has all kinds of good stuff about how consuming news makes you a shallow thinker and actually alters the structure of your brain — for the worse.

News is also costly. As Dobelli points out, even checking the news for 15 minutes three times a day adds up to more than five hours a week. For what? He uses the example of the Mumbai terror attacks in 2008. If a billion people spent one hour of their attention on the tragedy by either reading about it in the news or watching it, you’re talking about 1 billion hours. That’s more than 100,000 years. Using the global life expectancy of 66 years means the news consumed nearly 2,000 lives!

Pretty wild, right?

So what to do? Dobelli recommends swearing off newspapers, TV news and websites that provide news. Delete the news apps from your iPhone. No news feeds to your inbox. Instead, read long-form journalism and books. Dobelli likes magazines like Science and The New Yorker, for instance.

News and analysis from the mainstream usually represents oversimplified narration of facts that has been typically grounded from cognitive biases (heuristics) and logical fallacies.

Also because news outfits are profit based businesses, their presentations are often designed to generate or to solicit public’s attention through sensationalist reporting or through supposed “analytical” discussions mostly predicated on the emotive dimensions.

Moreover because news outfits have enormous influence on voters, they have embedded ties with the establishment as they reciprocate each other in projecting "noble"political goals. Thus media's bias has been to promote the establishment's interests and frequently serve as discreet channels for political propaganda.

Noticeably most of their arguments have been focused on personality issues rather than the objective evaluation of the system.

Yet their basic recourse to any social problem would be to: 1) change the leader, 2) throw money at the problem, 3) prohibit or intervene on any supposed social ills or 4) tax particular groups. No one ever sees how their proposed interventionism creates more problems which they intend to resolve.

Except for the facts I usually refrain from reading or listening to any of their stupefying analysis.

And I firmly agree with Mr. Dobelli who is quoted above saying “reading news to understand the world is worse than not reading anything”. I’d rather be dumb than be indoctrinated with a quack view of the world.

Video: Statistical Trickery on US Wage Stagnation

Professor Don Boudreaux exposes on how statistics can be subject to analytical prestidigitation. Statistical legerdemain has frequently been used to mislead the public in order to justify certain policy preferences. In the following video, Professor Boudreaux rebuts the twisted use of statistics to argue the case of US wage stagnation. (hat tip: Dan Mitchell)

Statistics are frequently used as an intellectual cover to what are truly (political or economic) biases founded on heuristics.

Selection Bias in Reporting Inflation

From Bloomberg’s Caroline Baum,

When statisticians use the term "sample selection bias," they are referring to a flaw in the selection process that influences the outcome of a study and produces distorted results…

When energy prices boost headline inflation in any given month, the commentary focuses on the usually tame core to support the conclusion that there is no inflation. When energy prices depress the CPI, somehow the focus shifts to the headline CPI -- once again to show there is no inflation. That's what made me think of selection bias, at least in terms of what we choose to see.

The Federal Reserve has an implicit inflation target of 1.5 percent to 2 percent. With the CPI up 3.4 percent in the past year and the core up 2.2 percent and climbing, policymakers better hope those inflation expectations are well anchored.

In my earlier post, I wrote

Statistics can be manipulated to suit one’s dogmatic perspective.

I might add, statistics can be manipulated or interpreted to tailor fit the interests of political authorities.

US CPI Inflation’s Smoke and Mirror Statistics, Part 2

In defense of their interventionist bias, the conventional question framed by mainstream statists goes around this context, “given the FED’s printing of money, where is inflation?”

So I will be updating my earlier post questioning the reliability of US CPI Inflation as an accurate or dependable measure of inflation.

The magnificent charts below are from dshort.com, here, here and here

First, the breakdown of the CPI basket…

Next, the changes of inflation rate for each of the components from 2000 as shown by the line chart below…

The histogram perspective of the same rate of change over the same period….

What has weighed on the CPI inflation index has been the housing component which represents 42% of the basket. Apparel, recreation and communication which constitutes a 16.5% share has also had a downside influence on both indices (CPI and CORE CPI). Meanwhile inflation rates of energy, tuition fee and medical care have skyrocketed.

Yet energy’s impact on the basket appears to have been suppressed or muted.

Writes Doug Short

The BLS does not lump energy costs into an expenditure category, but it does include energy subcategories in Housing in addition to the fuel subcategory in Transportation. Also, energy costs are indirectly reflected in expenditure changes for goods and services across the CPI.

The BLS does track Energy as a separate aggregate index, which in recent years has been assigned a relative importance of 8.553 out of 100. In other words, Uncle Sam calculates inflation on the assumption that energy in one form or another constitutes about 8.55% of total expenditures, about half of which (4.53%) goes to transportation fuels — mostly gasoline.

Finally, below is the long term inflation chart which includes

“the alternative look at inflation *without* the calculation modifications the 1980s and 1990s”

In short, the current methodological construct of the US CPI inflation vastly understates the genuine rate of inflation, which appears to be accelerating (green arrow)—even when measured without current CPI modifications.

And contrary to the mainstream arguments, deflation seems nowhere in sight. This only implies that those dismissing the presence of inflation seem to be engaged in sophism anchored on political bias rather from reality.

Statistics can be manipulated to suit one’s dogmatic perspective.

While much of the money created and parked at the FED will pose as an inflationary problem ahead, the dilemma would be in the timing or that when these will enter the market.

Besides the US Federal Reserve appears to be in an undeclared QE 3.0 mode, as the Fed’s balance sheet has began to swell anew, with notable increases in lending to financial institutions, growth in liquidity to key credit markets and purchases of the Fed agency debt mortgage-backed securities (chart from the Cleveland Federal Reserve).

Applying Austrian economics means to explain how future events will transpire rather than to make exact predictions.

In other words, we don’t know when the tipping point would occur, which would result to rapid escalation of inflation rates that will be increasingly visible to the public. Instead we do know that if the present trend of policymaking continues, the subsequent outcome would be a ramped up rate of inflation.

As the great Ludwig von Mises wrote,

Economics can only tell us that a boom engendered by credit expansion will not last. It cannot tell us after what amount of credit expansion the slump will start or when this event will occur. All that economists and other people say about these quantitative and calendar problems partakes of neither economics nor any other science. What they say in the attempt to anticipate future events makes use of specific "understanding," the same method which is practiced by everybody in all dealings with his fellow man.

In the fullness of time, surging inflation will explode on the nonsensical or absurd arguments peddled by statist-inflationists.

Falling Markets, QE 3.0 and Propaganda

The essence of the interventionist policy is to take from one group to give to another. It is confiscation and distribution.-Ludwig von Mises

Some say that falling markets won’t account for the imminence of QE 3.0.

That would signify a blatant misread.

For me, falling markets account as one of the two possible conditions for the re-institution of QE

As I previously wrote[1],

Although I expect that this extension won’t come automatically which I see as either tied to the US Congressional vote to raise debt limits or in reaction to growing pessimism in the some of the world’s economic environment due to a cyclical slowdown or to the accrued effects of signaling channels applied by governments or from mainstream’s addiction to inflationism. Besides if the debt ceiling will be raised this gives further excuse for the FED to activate QE 3.0.

Today’s financial markets have essentially been influenced by political forces more than economic developments. All the accounts of bailouts, rescues and assorted market interventions (quantitative easing, currency interventions, credit margin hikes on commodity markets) are part of the many examples. All these have effects on the marketplace[2].

Thereby, the state of the current sluggishness in the Philippine and global markets could likely be symptomatic of more of political design than merely reactions from economic forces.

Markets as Hostage to Politics

This week, we saw a political representative of China and one of the Fed officials jawbone on the possible adverse repercussions[3] from the palpable dabbling of a brief debt default by several Republican lawmakers as the debt ceiling is being deliberated.

This week, reports also say US President Obama pondered on using tax cuts as possible concession to the Republicans to reach a compromise[4].

Earlier both President Obama[5] and Treasury Secretary Tim Geithner[6] warned of a global recession if a settlement on raising the debt limits won’t be reached.

About a month ago a series of studies from the US Federal Reserve came out to state that commodity prices have not been tied with Quantitative Easing. Also during the same period commodity markets were slammed by the repeated increases of credit margins[7] of several commodities.

The point is the markets are seemingly being held hostage by politics. The idea is that markets can indeed go down, for the plain reason that the market is being used as leverage to secure political concessions.

Intervening and manipulating, directly or indirectly in the marketplace has been the du jour trend of today.

And what appears to be the imperative political tenet resonates in the famous statements of President Obama’s former Chief of Staff Rahm Emanuel[8]...

Never let a serious crisis go to waste. What I mean by that is it's an opportunity to do things you couldn't do before.

Don’t you see, the vehement aversion to crises has been the hallmark of today’s politicking?

This runs along with the prevailing economic ideology which guides on the directives of the political orthodoxy, where the prescription to supposed “market failures” would be through interventions channeled mainly through Keynesian concepts of ‘parting with liquidity’ (giving up liquid assets in exchange for employment-creating illiquid assets) ‘euthanizing the rentiers’ (low interest rates), and ‘socializing investment’ (public private partnership)[9].

Even Harvard Professor Carmen Reinhart along with her colleagues observes of the ongoing non-market features of today’s marketplace[10] characterizing an environment which they call as financial repression, (bold emphasis mine)

Undoubtedly, a critical factor explaining the high incidence of negative real interest rates was the aggressively expansive monetary policy (and, more broadly, official central bank intervention) in many advanced and emerging economies during the crisis. This raises the broad question of the extent to which current interest rates reflect the stance of official large players in financial markets rather than market conditions. A large role for nonmarket forces in interest rate determination is a key feature of financial repression.

In short, official players will likely manipulate markets to meet their ends.

Stoking Fear

And part of such tactical operations would probably mean instilling fear to paint an ambiance of urgency.

And speaking of fear, the current stock market declines seem to have twitched Wall Street’s fear measures higher.

Whether seen from original computation of volatility ($VXO), the current VIX ($VIX) and volatility applied to the CBOE S&P 500 3-Month ($VXV) signs of fear have emerged. The rallying US dollar appears to chime with such an environment.

This fear has been evident even seen Google Search trends (chart below).

Lately Google has shown increasing searches by the public for ‘double dip’. Meanwhile news and articles featuring double dip have also grown.

Given that Wall Street has been a politically privileged sector, with more fear comes the greater clamor for interventions.

Wall Street operates in an environment fostered by the moral hazard, which reveals on their sense of entitlement.

Rescues signify political events. Only in the pretext of growing risks of a crisis that would incur pernicious broad market and economy welfare implications will bailout measures be deemed as justifiable by politicians and the bureaucracy.

And along this line, it wouldn’t be farfetched to say today’s actions in the marketplace could be part of the effects of the conventional signaling channel tool used by central banks in preparation for the next set of rescue measures.

That’s why mainstream media seems to have misinterpreted Bernanke’s last comments as having ‘no QE 3.0’ when the fact is Bernanke’s statements prior to November 2010’s QE 2.0 resembled his latest comments[11].

In short, if there is no emergency, then there will be no rescue. Falling markets sow the seeds of alarmism, and thereby, setting in motion the conditions required for prospective rescues.

As previously noted, this has been the routine recourse by political leaders almost everywhere.

A Possible Growth Scare and Not a Crisis

Despite the recent signs of fear, credit markets in the US and in Euro seem to remain calm.

The above chart from Danske Bank[12] shows marginal signs of impact from the current equity-commodity downdraft on US bond markets and on interbank loans as represented by the LIBOR OIS spread.

But this has not been powerful enough to stir the proverbial hornet’s nest.

And the cyclical downturn of major economies following a vigorous upside could also be part of the story.

As the Danske Research writes[13],

Global leading indicators have suffered a setback recently, pointing to slower growth. The US ISM dropped considerably in May and European PMIs also fell faster than expected. China, on the other hand, seems to have stabilised, as the PMI dropped slightly in May and order-inventory bottomed.

The current declines could represent more of a growth scare instead of imminent risks of crisis or recession as presented by politicians.

Also, Danske Research[14] thinks that the dislocation from Japan’s recent disaster has partly been the culprit of the downturn of economies. But signs according to them are that Japan has been recovering fast.

The above evidences seem to show that the essence of fear being manifested by reports which highlights ‘double dip’ concerns may seem unwarranted.

A growth scare and not a crisis could be taking place.

Yet it is quite obvious that politics have been dominating feature of the marketplace.

---

[1] See ASEAN’s Equity Divergence, Foreign Fund Flows and Politically Driven Markets, June 5, 2011

[2] See Poker Bluff: No Quantitative Easing 3.0?, June 5, 2011

[3] See China Warns US on Debt Default as ‘Playing with Fire’, June 9, 2011

[4] See US President Obama Mulls Tax Cuts as Compromise for Raising Debt Limits June 9, 2011

[5] Huffington Post, Obama Debt Ceiling Warning: Raise Limit Or Risk Global Recession, April 15, 2011

[6] Wall Street Journal Geithner Issues Warning on Debt Ceiling, May 15, 2011

[7] See War on Commodities: Intervention Phase Worsens and Spreads With More Credit Margin Hikes! , May 14, 2011

[8] Wall Street Journal A 40-Year Wish List, January 28, 2009

[9] what-when-how.com SOCIALIZATION OF INVESTMENT

[10] Reinhart Carmen M., Kirkegaard Jacob F., Sbrancia M. Belen Financial Repression Redux, June 2011, IMF FINANCE & DEVELOPMENT

[11] See Bernanke’s Comments Mirror Those of Pre-QE 2.0 in 2010, June 8, 2011

[12] Danske Bank, Bad macro indicators and Greece weigh on market sentiment, Weekly Credit Market, June 10, 2011

[13] Danske Bank, Global: Business Cycle Monitor, June 6, 2011

[14] Danske Bank, ECB confirms July rate hike, Weekly Focus June 10, 2012

End The IMF

The sexual molestation scandal has compelled the resignation of IMF’s Dominique Strauss Khan.

Now there are have been speculations on his replacement.

As of yesterday bookmakers have placed the odds on some possible replacement candidates.

This from the Economist

Here are some of the people viewed to be plausible contenders to replace Mr Strauss-Kahn, and the odds on their getting the top job according to William Hill, a British bookmaker. A win for a non-European would be a first for the IMF, as would the appointment of Christine Lagarde, who would be the first woman to head the organisation.

Meanwhile, the Wall Street Journal describes part of how IMF politics works.

From the WSJ

Because the U.S. and European nations together have always held a majority voting stake in the IMF, that unwritten convention has guided the leadership process for the past six decades. Any executive directors on the 24-member board — representing the IMF’s 187 governments — can propose candidates for consideration, generally based on guidance from their home countries. In turn, the board has used informal straw polls — rather than formal recorded votes — to gauge support for the candidates. (Though formal voting isn’t used, the distribution of voting shares helps determine who can garner enough support as a candidate.)

At times, though, the U.S. and Europe have been divided on their options. In 2000, for instance, the European Union formally backed German deputy finance minister Caio Koch-Weser to take the top post at the fund, replacing longtime IMF Managing Director Michel Camdessus of France. But the U.S. balked, leading the White House press secretary at the time to publicly oppose the choice. Many developing nations wanted then-Acting Managing Director Stanley Fischer, an American born in Zambia, to fill the job.

After a month of heated public debate, the IMF eventually settled on German national Horst Kohler, who was president of the European Bank for Reconstruction and Development.

The U.S. has been expected to take a back-seat role in choosing the next managing director, focusing instead on its traditional role of picking the IMF’s No. 2 official. The current No. 2, John Lipsky, is slated to leave his post in August. For now, though, U.S. officials have put that process on hold considering the rush to fill the top post.

Since the IMF’s founding, all 10 IMF managing directors have come from Europe. The managing director is typically a former finance minister or central bank governor from a Western European country.

So the IMF has been mostly been a US-Europe turf, where the US has allowed Europeans to take the helm since.

Yet some have floated that the Kahn episode could even be a frame up.

Writes Bob Wenzel,

I continue to believe that the most likely explanation for him coming out of the bathroom naked is that he was expecting someone.

If he did make a call to an escort service than I fully believe a government agency could have set DSK up. What's more, this is a major French hotel, which means it his highly likely that French government agents are floating around the hotel as guests and employees.

The reasons: perhaps because he “broke free from the party line” (may have offended some vested interest groups) with his current policies or perhaps it was about the upcoming national elections in France or a combination of both.

A French poll reveals that about 57% believes that Kahn had been a ‘victim of a plot’

This only shows how politicking could have played a nasty part in the sordid Kahn affair which also reveals on the operational procedures of the IMF—which seems indistinguishable from any national agencies which redistributes resources politically.

Also the US-European political hegemony of the multilateral institution translates to the channeling resources to uphold their political interest. And this is why Emerging Markets are unlikely to gain a leadership foothold in the near future. The division of spoils belong to the winners.

Besides, the fundamental role for IMF’s existence have been exhausted, where the agency’s operations has shifted from ‘monetary’ to ‘developmental’.

As Cato’s Doug Bandow writes, [hat tip Dan Mitchell] (bold highlights mine)

The IMF's founding purpose vanished when the system of fixed exchange rates collapsed in the early 1970s. But instead of closing up shop (no jobs for international bureaucrats in that!), the IMF switched to promoting development. That is, it became a welfare program for Third World governments (and, more recently, for Eastern Europe and even Greece).

So maybe it’s not time to seek a replacement. Maybe it’s time for the IMF to stop meddling in the affairs of nations.

Maybe it’s time for the IMF to stop propping up collectivist regimes, bailing out unsustainable systems and promoting interests of political operatives behind the scenes.

As Leland B. Yeager writes in Cato (Hat tip Don Boudreaux) [bold emphasis mine]

I am inclined to concur in points made by Ian V squez (1997) and Allan Meltzer (1995) about activities of the IMF (and similarly of the World Bank). These tend to support government domination of economies, despite ``conditionality'' purporting to do otherwise; and politicization of economies increases the scope for rent-seeking. Thrusting debt onto poor countries, putting them onto a debt treadmill, ill serves economic development. Funds for bailouts create moral hazard, tending to delay reforming crisis-prone policies (see The Economist 1997b). New issues of SDRs, which the IMF staff likes to propose, accomplish international transfers of wealth in a way that most legislators do not even understand. Self-important international bureaucracies have institutional incentives to invent new functions for themselves, to expand, and to keep client countries dependent on their aid.

Maybe it’s time to abolish the IMF.

US CPI Inflation’s Smoke and Mirror Statistics

Cato’s Mark Calabria asks Is Housing Holding Back Inflation?

He writes,

Also of interest in the April numbers is that if you subtract housing, which makes up over 40% of the weight of the CPI, then prices increased 4.2 percent — twice Bernanke’s measure of stability. What has always been problematic of the housing component is that its largest piece is an estimate of what owners would pay themselves if they rented their own residence. This estimate makes up about a fourth of the CPI. As the chart below demonstrates, for much of 2010, the direction in this number was actually negative, which held down CPI over the last year. The current annualized figure for owner’s rent is 0.9 from April 2010 to April 2011. Oddly enough, this is below the actual increase in rents, which was 1.3. For most homeowners, the real cost of housing — their mortgage payment — has likely been flat, not decreasing. So whatever benefit there has been to declining housing costs, most consumers are unlikely to feel any benefit from those declines, if they are actually real.

Mr. Calabria is right. Housing data has been foundering. US housing starts dropped 10.6% in April says the Financial Times.

US Federal Reserve researchers and their apologists (academic and institutional representatives) have staunchly been defending (denying) Fed policies, by dissociating rising commodity prices with CPI inflation.

Yet, ironically, the US government has waged war on inflation by trying to influence the prices of commodities.

Importantly, putting into context Mr. Calabria’s concern, the construct of the US CPI seems mostly a statistical smoke and mirror.

Some great charts from Dshort.com can elaborate on this.

The above is the CPI breakdown

The above is the % change of each component of the CPI.

Except for housing, apparel and recreation all other categories have been moving sharply higher!

Dshort has more charts of CPI relative to Energy, Tuition and CPI versus core CPI here-where you can see the difference.

So unless you don’t eat or travel or have children in school, inflation seems nonexistent only for ivory tower based experts.

Also, it would be a wonder why Chairman Bernanke has refrained from mentioning ‘core inflation’, as Forbes Brian Domitrovic observes,

Heard a lot about “core inflation” from Federal Reserve chairman Ben Bernanke lately? You haven’t, because two months ago his handlers had him stop using the term. Now he uses substitutes, such as “headline” versus “underlying” inflation

What’s with the jargon? Everyone knows that prices are going up. Corn on the cob that used to sell a dollar a bushel is now a dollar each. Talk about core inflation: These days even cobs (which feed pigs, after all) at the center of the fruit of the stalk are worth a pretty penny.

Suppressed CPI gives the Fed the leeway to inflate more.

I am reminded of Mark Twain who once said, lies, damned lies and statistics.

Global Equity Markets: Sell in May and Go Away?

Some experts have been talking about selling in May and going away.

The premise of this precept is fundamentally seasonal.

Chart from Equityclock.com

One expert even cited the Tobin Q which implied for high valuations, as one of the 'fundamental' reasons to do so.

Chart from Greg Mankiw

As I have been saying since 2008, it has been politics that has essentially driven financial markets more than corporate valuations or economics. And that’s why many experts, relying on the former metrics as guidance, have got it all so wrong.

Anything can happen in the markets. Most especially that today’s financial markets have been heavily distorted by various government interventions.

And as I have repeatedly been pointing out, the stock market have been a target for government policies where the US government has even less been coy about this, which they claim represents “success” in policymaking.

This means politics will continue to determine market outcomes or its directions (via the boom bust cycle).

Say for instance, if the US Federal Reserve decides to “covertly” bolster the US Democratic Party to negotiate for the vote on the debt ceiling, all the Fed has to do is to allow 'some' market volatility to pervade by withholding QE or by selling some market securities held by the Fed.

And the ensuing market volatility, as the politicians will point out, will be imputed to the uncertainty from the unwillingness to increase the debt ceiling by the opposing Republican Party.

But the truth is the US Fed has been instrumental in shaping the conditions of the equity markets. It’s been part of Ben Bernanke’s ‘crash course to central bankers’ dogma.

Market volatility, thus, adds to the leverage of politicians in negotiating vital policies.

Also the war on commodities may have ripple effects on global financial markets not limited to equities, as I pointed out in my latest observation on the possible ramifications of global price manipulations on the commodity markets to the Philippine Mining index.

So there are many complex interrelated and intertwined factors that may influence global stock markets more than seasonal factors.

I’d rather use the actions taking shape in major commodity markets, global equity markets, yield curves of major economies and of Asia, and the unfolding geopolitical events as guidance.

$1.1 Trillion Spent On Arms Is $1.1 Trillion of Wasted Resources

$1.1 trillion was spent by nations for defense.

According to the Economist, (bold highlights mine)

THE ten biggest defence budgets for 2010 add up to a total of more than $1.1 trillion, according to the latest Military Balance report from the International Institute for Strategic Studies (IISS), a think-tank. The defence budget of America alone, at $693 billion, accounts for more than 60% of the total. But when defence spending is compared to the overall size of each country's economy, Saudi Arabia tops the list. It spends over 10% of GDP on defence, more than double the proportion spent by America. China ranks second in the world's biggest defence budgets (spending some $76 billion) and also boasts the largest armed forces. Only America, India, Russia and North Korea (not shown) have more than 1m military personnel. Defence budgets have grown since 2005, but the balance of military power may be shifting. Western countries, many of which are engaged in Afghanistan, now face budget constrains and cuts, whilst emerging economies, such as Brazil and China, have increased military spending in line with economic growth.

That’s $1.1 trillion of resources wasted on whimsical government actions designed to promote self interests of the politicians.

Then US President Dwight Eisenhower’s “Chance for Peace” Speech poignantly reverberates on this dilemma. (pointer Robert Higgs) [all bold highlights mine]

The worst to be feared and the best to be expected can be simply stated.

The worst is atomic war.

The best would be this: a life of perpetual fear and tension; a burden of arms draining the wealth and the labor of all peoples; a wasting of strength that defies the American system or the Soviet system or any system to achieve true abundance and happiness for the peoples of this earth.

Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed.

This world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children. The cost of one modern heavy bomber is this: a modern brick school in more than 30 cities. It is two electric power plants, each serving a town of 60,000 population. It is two fine, fully equipped hospitals.

It is some 50 miles of concrete highway. We pay for a single fighter with a half million bushels of wheat. We pay for a single destroyer with new homes that could have housed more than 8,000 people.

This, I repeat, is the best way of life to be found on the road the world has been taking.

This is not a way of life at all, in any true sense. Under the cloud of threatening war, it is humanity hanging from a cross of iron.

Bottom line: Politicians use the threat of war to expand control over us. Yet unknown to many, most of these military expenditures represents nothing more than a waste of valuable resources.

Inflation Expectations: The Widening Chasm Between Households And Experts

Despite mainstream experts blabbering about deflation, we’ve been defiantly predicting for a long long long long time that inflation would be coming and would pose as the next real risk (everywhere).

That’s because it has been the instinctive/intuitive approach by central bankers to use their printing presses as antidote to perceived economic predicaments. (Despite years of experience people never learn and always find ways to perpetuate policies anchored upon acquiring “something from nothing”-which I would call “political greed”)

And reemergent “consumer price” inflation represents as the “unintended consequence” and “symptoms” from such persistent policies.

This report from the Wall Street Journal’s Blog, (bold emphasis original)

Consumers see more inflation ahead. That views puts them at odds with Federal Reserve officials and private sector economists.

According to Friday’s consumer sentiment survey released by Reuters/University of Michigan, inflation expectations have been rising since late summer. Back in September, U.S. consumers expected the inflation rate one year out to hit 2.2%. In early-February, the one-year expected inflation rate is up to 3.4%.

Contrast that rate with the tamer forecasts at the Fed and among private economists.

On Wednesday, Fed chairman Ben Bernanke told the House Budget Committee that “inflation is expected to persist below the levels that Federal Reserve policymakers have judged to be consistent over the longer term with our statutory mandate to foster maximum employment and price stability.”

In the US, it’s hardly true that mainstream private sector experts have been on the “inflation risk” camp, many, if not most, have sided with officials to claim inflation hasn’t been a threat mostly because of “output gap", “capacity utilization”, “unemployment” conditions and etc...an example of this outlook can be read here

Yet the “man on the street” sees things differently.

More from the same article, (bold highlights mine)

How can households be more hawkish about inflation than the Fed?

Much of the dichotomy reflects which prices are in focus. The Fed and economists tend to pay attention to core inflation, which ignores food and energy and which better reflects underlying economic conditions. Households pay more attention to the items most frequently bought, in particular gasoline and groceries.

See the difference?

The expert-official camp fundamentally relies on statistical data which isolates real world variables.

Meanwhile, households feel the pressure from relative price changes that affects their overall purchasing power based budgets.

The end result: A massive detachment between expert-official opinions and real events which shapes household’s expectation.

The use of statistical data can be manipulated to the extent that it will be (has been repeatedly) used to justify the imposition of ideologically based policies (mostly predicated on mathematical models).

Again to quote Mark Twain,

There are three kinds of lies: lies, damned lies and statistics

Eventually statistical chicanery backfires, as the above developments shows.

Validated On The Goldman Sachs-SEC Episode

I had repeatedly argued here that the Goldman-SEC row had been nothing but a slick political publicity stunt, some excerpts:

“Moreover, it also seems ridiculous to perceive of a sustained path of attack, considering that Goldman Sachs has been more than a political ally to the Democratic Party. In fact the company has constantly played the role of key financier of the Democratic Party”

See Why The US SEC-Goldman Sachs Hoopla Is Likely A Charade

“We have long known that the global financial system have been "gamed" by the elite in cahoots with politicians. And part of the game is the borrow and spend policies, that actually benefits the banking cartel.

“As we earlier said, it won't take long for this political masquerade to be unraveled...

“What I have been saying is that this has been a political ruse meant to either shore up somebody's electoral image or an attempt to control the gold markets.”

See SEC-Goldman Sachs: Hindsight Bias, Staged For Political Advantage

“And this gives even more motivation for the ruling political class to use the Goldman caper as a likely prop as the "fall guy" role for political ends.

“We just don't oversimplistically regulate cartels out of existence, not when the cartel itself is lead by the government via the Federal Reserve.”

See: SEC-Goldman Sachs Row: The Rising Populist Tide Against Big Governments

“Moreover, there have been pressures for Goldman to amicably settle with the SEC even if “they’re right on the merits of the case”.

“And surprisingly, President Obama despite earlier reports to verbally assail Wall Street turned up with a conciliatory voice at a recent speech ``Ultimately, there is no dividing line between Main Street and Wall Street,” Obama said in his speech at Cooper Union, about two miles from the financial district. “We will rise or we will fall together as one nation.”

See: Markets Ignore US SEC-Goldman Sachs Tiff, More Political Dirty Dancing

It appears that this has been the case, as the Goldman-SEC row has officially been settled.

This from Bloomberg/Businessweek,

``Goldman Sachs Group Inc.’s $550 million settlement with U.S. regulators yesterday will benefit the firm by ending three months of uncertainty at an affordable price. Now the rest of Wall Street begins calculating the cost.

``Investors welcomed the deal with the Securities and Exchange Commission, saying the company won key points: The cost was below some analysts’ estimates of at least $1 billion; no management changes were required; and Goldman Sachs said the SEC indicated it doesn’t plan claims related to other mortgage- linked securities it examined. The stock’s late surge on anticipation of a settlement yesterday added more than $3 billion to the company’s market value, and it climbed further after New York trading closed.

“You’d have to look at it as a victory for Goldman,” said Peter Sorrentino, senior portfolio manager at Huntington Asset Advisors in Cincinnati, which manages $13.3 billion including Goldman Sachs shares. “This takes a cloud off the stock.”

``In the settlement, unveiled less than two hours after the Senate passed legislation to reform the financial system and avert future crises, Goldman Sachs acknowledged that marketing materials for the 2007 deal at the center of the case contained “incomplete information.” In its April 16 suit, the SEC accused the firm of defrauding investors in a mortgage-backed collateralized debt obligation by failing to tell them that hedge fund Paulson & Co., which was planning to bet against the deal, had helped to design it.” (bold emphasis added)

Quid pro quo?

Earth Hour In The Philippines: Rotational Brownouts! The Revenge Of Economics

For domestic Earth Hour fans, your dreams just came true: Earth hour is for now a reality -via rotational brownouts in Metro Manila!

2-3 hour brownouts plagued the Philippine metropolis over the week.

Of course the news has cited many "seen" factors, such as high energy costs, "extremely high prices at the wholesale electricity spot market", the weather "With El Niño still around, hydropower facilities in Luzon were likewise not performing to capacity", and the dearth of operating capacity, "Data from NGCP, the agency tasked with transporting power from generation plants to power distributors, showed that several generation facilities were either still out of commission or producing way below capacity."

Others blame it on monopoly distributor Meralco, one analyst argues that powers generators should be held responsible.

Anything else but the government.

Earlier, some conspiracy theorists associated brownouts with surreptitious plans to "sabotage" the elections in order to declare a 'failure', thereby extend the rule of the incumbent.

YET what is not reported or the "unseen" is that the Philippine energy sector is one of the tightest regulated (and most politicized) industry, which means hardly any activities are outside the ambit of regulatory scrutiny or "oversight".

Can Meralco raise rates without the approval of ERC (Energy Regulatory Commission)? Can power plants be constructed liberally without the Department of Energy's approval? The obvious answers to these questions: No.

Yet for all the power and authority vested in the presumed "expertise" of regulators, this has to happen.

What I am saying is that in contrast to all other factors cited by talking heads and the media, brownouts are simply representative of regulatory or government failure.

Proof?

Take subsidies.

The Philippine energy sector has operated on various subsidies from which the ERC has reportedly recently waived except for lifeline subsidies for the "poor".

Yet politics is always seen as operating outside the realm of economics.

Economic 101 tells us that low prices will spur greater demand. And rising demand will create pressures on supply. In free markets, these imbalances will be vented through market price signals, from where adjustments in supply will be made in order to meet demand.

But energy prices here are not determined by market prices but by prices set by the government, particularly by the ERB (via PBR for Meralco) [see earlier discussion Bubble Thoughts Over Meralco’s Bubble].

This indicates that energy prices reflects on the bureaucratic assessments, which not only deals with the market (we don't know how they define the market), its compromises with energy producers, but for its political needs too.

Moreover, subsidies made to the "poor" or the unproductive sectors create additional demand (due to subsidized prices) which are paid for by the productive sectors.

Hence, the productive sectors are paying for higher cost of energy, from which adds to the cost of doing business, which thereby reduces the rates of domestic investment.

Here is Meralco's 3rd quarter financial statement.

The table simply shows that the income from lifeline subsidies jumped by a hefty 60% through September 2009 relative to the same period in 2008.

This is simply the laws of economics at work.

This also implies that the productive sector (investors, entrepreneurs and working class) along with the rest of society is suffering from the brownouts based on the policy to subsidize energy rates on the poor.

It's essentially a manifold blackeye for the productive sectors:
-paying for a higher cost to subsidize the poor (where the latter takes advantage of) or deadweight loss,
-production and work disruption from energy outages,
-lesser income from diminished output
-reduced economic growth from high cost of doing business and work disruptions and
-personal inconvenience!

And there's the rub. Good intentions are blighted by economic reality.

And guess what? We seem to be seeing more of a rerun of 1994. The next President is likely to preside or oversee a deluge of investments that would cater to present shortages.

And these would seem as the ripe opportunities for the Return of Investments (ROI) for the political class that rightly invested on this elections.

And this is why we have predicted there will be little material change with a new government.

It's all about human nature, in terms public choice theory.

Finally there are other factors to deal with, local regulation, environment and most importantly taxes (VAT and royalty). But we will deal with these later.

Federal Reserve Tightening: Exit Experiment or Bernanke's Confirmation Insurance?

Austrian economist Professor Gary North recently suggested that the Federal Reserve has been tacitly tightening.

He offers three charts as proof

The adjusted monetary base (which fell by November but has now recovered)

M1 Money Stock

M2 Money Multiplier

Here is Professor North,

``Why is the FED deflating? I offer these suggestions.

``It is testing the waters to see if unwinding will cause a crisis: a secondary recession.

``It is giving itself some wiggle room in case commercial banks begin to lend, which threatens to let M1's expansion force up consumer prices.

``It is providing visible confirmation for an announced policy that it cannot follow without creating a true depression.

``It has begun to unwind, as promised." (read the rest of Professor North's article here)

Perhaps.

But I'd like to add more to his charts and his theory

As seen in the table of the Cleveland Fed, the Federal Reserve has been unloading some of the US treasuries it recently bought as part of its quantitative easing program, since December 9th.

And this appears to coincide with the firming of the US dollar from which markets instantaneously interprets as having the same dynamics as the 2008 episode. Hence all these signs may perhaps point to a tightening in spite of the Federal Reserve's continued QE.

While correlation may not be causality, I'd offer an added perspective in terms of why the Fed could have been experimenting- a possible conspiracy theory based on a political agenda.

The issue is connection with Ben Bernanke's confirmation.


As you can see from the Intrade prediction markets the Fed Chair Ben Bernanke's confirmation only surged by mid to late November.

Moreover, until mid January, there had been lingering doubts whether his tenure would be mandated since it appeared that opposition to his reappointment had been growing. It even took President Obama to personally endorse Mr. Bernanke, as per Businessweek ``Obama called some senators yesterday, including those in the leadership, to ensure Bernanke’s confirmation won’t be derailed."

In short, Bernanke's reappointment wasn't in the bag until the last minute.

Could it be then that the tightening shown by Professor North was actually an insurance policy taken by Mr. Bernanke?

By portraying that markets would be anxious over the uncertainty of his mandate, as enunciated by Connecticut Democrat Senator Christopher Dodd who said ``I think if you wanted to send the worst signal to the markets right now in the country and send us in a tailspin, it would be to reject this nomination" [as earlier discussed in US Trembler: Volcker Rule or Bernanke Confirmation?], his appointment would now be the "key" solution to the market's stabilization?

So like hitting two birds with one stone, the Federal Reserve could have been tightening to work for Bernanke's political interest BUT camouflaged by the experiment with 'exit' strategies.

Now that Bernanke has attained his goal, could we see the attendant easing to boost markets anew?

One must remember that market responds to policies with a lag, hence if this theory is correct, then markets should start to reflate over the next 2-3 months.

It's all about the boom bust cycle anyway.