Is the S&P trying to influence the EU Summit by Warning of Downgrades?

Is the S&P trying to influence the outcome of the EU Summit by warning of Downgrades?

From the Bloomberg,

Standard & Poor’s said Germany and France may be stripped of their AAA credit ratings as the debt crisis prompts 15 euro nations to be put on review for possible downgrade.

The euro area’s six AAA rated countries are among the nations to be placed on a negative outlook, and their credit ratings may be cut depending on the result of a summit of European Union leaders on Dec. 9, S&P said today in a statement. The euro reversed its gains and U.S. Treasuries rose earlier today after the Financial Times reported that the credit-ranking firm planned to reduce six AAA outlooks.

“Systemic stress in the eurozone has risen in recent weeks and reached such a level that a review of all eurozone sovereign ratings is warranted,” S&P said in a statement.

The downgrade warnings come as German Chancellor Angela Merkeland French President Nicolas Sarkozy push for a rewrite of the EU’s governing rules to tighten economic cooperation in a demonstration of unity on ending the debt crisis. With the fate of the currency shared by the 17 euro countries at risk, Merkel and Sarkozy presented a common platform for a Dec. 8-9 summit of EU leaders in Brussels that aims to halt the crisis now in its third year.

In my view, the answer could be yes, S&P may be using to credit rating standings as leverage. The timing of credit rating downgrade puts the S&P’s action in question. Although it seems unclear which agenda the S&P has been pushing.

Nonetheless, S&P’s warnings has lagged what’s been happening in the markets.

Chart from Danske Bank

In other words, the markets has already been downgrading the core Euro bonds, with current relief coming from the ECB’s bond purchases and the facilitation of swap lines from the US Federal Reserve.

How Capital Regulations Contributed to the Current Crisis

At the Wall Street Journal, American Enterprise Institute’s Peter J. Wallison explains how capital regulations are partly responsible for the current mess (bold emphasis mine)

Basel is the Swiss city where the world's bank supervisors regularly meet to consider and establish these rules. Among other things, the rules define how capital should be calculated and how much capital internationally active banks are required to hold.

First decreed in 1988 and refined several times since then, the Basel rules require commercial banks to hold a specified amount of capital against certain kinds of assets. Under a voluntary agreement with the Securities and Exchange Commission, the largest U.S investment banks were also subject to the form of Basel capital rules that existed in 2008. Under these rules, banks and investment banks were required to hold 8% capital against corporate loans, 4% against mortgages and 1.6% against mortgage-backed securities. Capital is primarily equity, like common shares.

Although these rules are intended to match capital requirements with the risk associated with each of these asset types, the match is very rough. Thus, financial institutions subject to the rules had substantially lower capital requirements for holding mortgage-backed securities than for holding corporate debt, even though we now know that the risks of MBS were greater, in some cases, than loans to companies. In other words, the U.S. financial crisis was made substantially worse because banks and other financial institutions were encouraged by the Basel rules to hold the very assets—mortgage-backed securities—that collapsed in value when the U.S. housing bubble deflated in 2007.

Today's European crisis illustrates the problem even more dramatically. Under the Basel rules, sovereign debt—even the debt of countries with weak economies such as Greece and Italy—is accorded a zero risk-weight. Holding sovereign debt provides banks with interest-earning investments that do not require them to raise any additional capital.

Accordingly, when banks in Europe and elsewhere were pressured by supervisors to raise their capital positions, many chose to sell other assets and increase their commitments to sovereign debt, especially the debt of weak governments offering high yields. If one of those countries should now default, a common shock like what happened in the U.S. in 2008 could well follow. But this time the European banks will be the ones most affected.

In the U.S. and Europe, governments and bank supervisors are reluctant to acknowledge that their political decisions—such as mandating a zero risk-weight for all sovereign debt, or favoring mortgages and mortgage-backed securities over corporate debt—have created the conditions for common shocks.

I have explained here and here how Basel capital standard regulations does not address the root of the crisis—fiat money and central banking—and will continue to churn out rules premised on political goals, knee jerk responses to current predicaments (time inconsistent rules) and incomplete knowledge.

A manifestation of the institutional distortions as consequence to regulations which advances political goals can be noted at the last paragraph where US and European governments and bank supervisors are “reluctant to acknowledge that their political decisions”, which have not only “created conditions for common shocks”, but has existed to fund the welfare state and the priorities of political leaders in boosting homeownership ownership which benefited or rewarded the politically privileged banks immensely.

Capital regulation rules will continue to deal with the superficial problems of the banking system which implies that banking crises will continue to haunt us or won’t be going away anytime soon despite all model based capital ratio adjustments. It's been this way since the closing of the gold window or the Nixon shock (see above chart from the World Bank)

Video: Study Praxeology

Learn the fundamentals of Austrian Economics. Start with the science of human action, see video below: (hat tip: lewrockwell.com)

Quote of the Day: How Interventions Destabilizes

The critical issue in both cases is the artificial suppression of volatility -- the ups and downs of life -- in the name of stability. It is both misguided and dangerous to push unobserved risks further into the statistical tails of the probability distribution of outcomes and allow these high-impact, low-probability "tail risks" to disappear from policymakers' fields of observation. What the world is witnessing in Tunisia, Egypt, and Libya is simply what happens when highly constrained systems explode.

Complex systems that have artificially suppressed volatility tend to become extremely fragile, while at the same time exhibiting no visible risks. In fact, they tend to be too calm and exhibit minimal variability as silent risks accumulate beneath the surface. Although the stated intention of political leaders and economic policymakers is to stabilize the system by inhibiting fluctuations, the result tends to be the opposite. These artificially constrained systems become prone to "Black Swans" -- that is, they become extremely vulnerable to large-scale events that lie far from the statistical norm and were largely unpredictable to a given set of observers.

Such environments eventually experience massive blowups, catching everyone off-guard and undoing years of stability or, in some cases, ending up far worse than they were in their initial volatile state. Indeed, the longer it takes for the blowup to occur, the worse the resulting harm in both economic and political systems.

[bold emphasis added]

This one comes from my favorite iconoclast Nassim Taleb (hat tip Zero Hedge).

In short, interventions tends to disturb the natural flow of socio-economic-market systems, which results to unintended build up of destabilizing or unnatural or artificially imposed forces (e.g. economic malinvestments, imbalances in political representation) that eventually gets vented via “Black Swan” events.

This applies whether to financial markets or the political economy.

Russia’s Putin Loses Majority, Resurgence of Communists

Russia’s Vladmir Putin’s leadership appears on the edges.

From Reuters,

Russian voters have dealt Vladimir Putin's ruling party a heavy blow by cutting its parliamentary majority in an election that showed growing unease with his domination of the country as he prepares to reclaim the presidency.

Incomplete results showed Putin's United Russia was struggling even to win 50 percent of the votes in Sunday's election, compared with more than 64 percent four years ago. Opposition parties said even that outcome was inflated by fraud.

Although Putin is still likely to win a presidential election in March, Sunday's result could dent the authority of the man who has ruled for almost 12 years with a mixture of hardline security policies, political acumen and showmanship but was booed and jeered after a martial arts bout last month.

United Russia had 49.94 percent of the votes after results were counted in 70 percent of voting districts for the election to the State Duma, the lower house of parliament. Exit polls had also put United Russia below 50 percent.

And desperation against Putin’s autocratic crony capitalism has fueled the resurgence of communists.

From another Reuters article,

The Communist Party (CPRF) for most Russians evokes images of bemedaled war veterans and the elderly poor deprived of pensions and left behind in a "New Russia" of glitzy indulgence. Large swathes of society have appeared beyond the reach of the red flag and hammer and sickle.

Not that the Communist Party's doubling of its vote to about 20 percent presages any imminent assault on power. The memories of repression in the old communist Soviet Union, the labor camps and the "Red Terror" are still too fresh for many. But vote they did, if perhaps with gritted teeth.

"With sadness I remember how I passionately vowed to my grandfather I would never vote for the Communists," Yulia Serpikova, 27, a freelance location manager in the film industry, told Reuters. "It's sad that with the ballot in hand I had to tick the box for them to vote against it all."

For many Russians disillusioned by rampant corruption and a widening gap between rich and poor, the communists represented the only credible opposition to Putin's United Russia.

For some, desperation means jumping from the frying pan to the fire. The communist resurgence, who seem to base their preference by nostalgia, never seem to realize that Putin has been a product communism who used his position to snare power and to shape the current system.

They should rather realize that economic freedom and free trade will give them more chances of attaining prosperity than to depend on politicians, who will use all sorts of power grabs to enhance their status and privileges at the people’s expense.

Tradeoffs are a fact of life. The choice of politics over markets means greater risks of gaming of the system, corruption, wealth and power inequality, cronyism and poverty. It's a lesson that most people have yet to learn and digest.

Wall Street Journal Cites Austrian Economics in Dealing with China’s Bubble

Austrian economics has slowly but surely been spreading into the mainstream.

From the Wall Street Journal (hat tip Bob Wenzel)

China is a poster child for the Austrian school of economics' theory of the business cycle. After undertaking the biggest stimulus program the world has ever seen in response to the global financial crisis, the country is drowning in unproductive investments financed with credit.

The government spent 15% of GDP largely on public works projects in inland regions, financed with loans from the state-owned banks. Investment as a share of GDP soared to 48.5% in 2010, and the M2 measure of money supply ballooned to 140% that of the U.S.

Now comes the hangover. The public works projects are winding down, unleashing a wave of unemployment and an uptick in social unrest. The banks' nonperforming loans are rising, and local governments are insolvent. The country is littered with luxurious county government offices, ghost cities of empty apartment blocks, unsafe high-speed rail lines and crumbling highways to nowhere.

One effect of negative real interest rates was a nationwide bubble in private housing, with the average price of an urban apartment reaching eight times the average annual income. Real estate is the most popular investment for the wealthy, according to a central bank survey in September. Millions of luxury apartments are vacant, even as there is a shortage of affordable housing for the poor.

Property construction became "the most important sector in the universe," in the words of UBS economist Jonathan Anderson. It directly accounts for about 13% of the economy, 20% if one includes related industries like concrete and steel. It also provided 40% of local government revenues through land sales.

Worsening inflation forced the government to put on the brakes this year. As with most property busts, transactions dried up, followed by a free fall in prices. Land prices were down 60% year on year in September. Property developers are slashing prices of new homes to stave off bankruptcy.

Beijing recognizes the dangers of a property bubble and deliberately popped this one by telling banks to cut back loans to developers. The government seems to be determined to force some of the smaller developers to the wall, both to force consolidation in the industry and convince the remaining developers to get on board with the state-run program of building low-income housing.

Earlier this year banking regulators conducted stress tests that supposedly showed the financial system can withstand a 40% fall in property prices. Loans to developers and mortgages account for about 20% of the banks' loan books. But since the health of the wider economy is tied to property, China could face a scenario close to that of the U.S. in recent years. Because the private market for housing was tiny 10 years ago when the current boom began, the country has never experienced a broad-based decline in property prices.

The government and the more sanguine analysts say low-income housing construction will pick up the economic slack, as activity at the top end of the market contracts. The problem is that even if the government meets its goals, the program is still too small to save the economy. Barclays estimates that it will contribute one percentage point to growth in 2011, and 0.5 percentage points in 2012.

There is no easy way to avoid the bust that is coming. The silver lining is that China's increasingly state-led growth model will be discredited, and a debate will begin on restarting the reforms that stalled in the mid-2000s. A financial sector that allocates credit based on politics rather than price signals led China into this mess. Popular pressure to dismantle crony capitalism is building, and the Communist Party would be wise to get in front of it while it can.

Anyway I have dealt with how China's bubble seems playing right into the Austrian Business Cycle here

Yet Austrian economics gaining mainstream's attention seems another case of Gandhi’s rule:

First they ignore you, then they laugh at you, then they fight you, then you win

Commonsense economics finally gaining ground.

Can the Phisix rise Amidst the Euro Crisis?

During the downturning segment of the cycle, the situation is such that credit for investment will be refused. With its supply of credit, the central bank will encounter a rejection of credit-taking by the economy. We have already given two reasons for this. On the one hand, the psychological conditions necessary for the investment of money into durable investments will not be present. There will be general unrest in the economy. On the other hand, the relationship of prices and the general tendency of price development will stand in the way of investment activity. The repudiation of credit will, however, not be general. Even in this stage of the cycle there is a very significant demand for credit, namely the demand by those who are forced to liquidate, to make emergency sales or to cease production due to a lack of capital—a demand for which any credit means at least the momentary avoidance of losses and perhaps even the potential for later improvements. However, satisfying this demand implies delaying the liquidation of the crisis, lengthening and strengthening it. For it is essential to this situation that a significant demand for credit by those who would like to work towards continuing the boom, that is, an “unhealthy” demand for credit, exists along with a significantly reduced demand for new sound investments- Richard Strigl, From Capital and Production (1934)

A local mainstream expert recently argued that for as long as the Euro crisis prevails, the Philippine Phisix won’t likely be able to carve out new highs. His argument has been mostly predicated on the deleveraging process being experienced by major developed economies, momentarily led by the Eurozone.

And given that the correlations of global markets has been intensifying as shown by the chart above[1], which means diversification among global markets have become a less appealing option to scrape for ‘Alpha’ returns, the Phisix will succumb to the same pressures being encountered by her contemporaries, and so it is held.

While part of such observation is true, as I have persistently maintained that an outright decoupling under financial globalization would be highly improbable, divergent outcomes would only become apparent under conditions where the risk of a global recession is low.

And most importantly, aggressive and sustained cumulative policies by global central banks to ease credit through zero bound rates and rampant injections of liquidity via asset purchases could defer the crisis from fully unwinding.

What You See Depends On Where You Stand: Charts

Many local mechanical chartists will see a foreboding road ahead with the bearish head and shoulder pattern looming over the Phisix (blue curves), aside from the extant death cross pattern[2]. Given this pattern searching impulse, these chartists would likely use the bleak events in the Eurozone as confirmation of their personal bias to argue for a pessimistic case.

US markets, as represented by the S&P 500, still trades significantly above the 2010 lows and whose present momentum could lead to an upside breakout above the 1,285 levels which would confirm her interim uptrend.

Moreover, both bellwethers of Europe (E1DOW) and Asia (P1DOW) seem to have bounced off the 2010 critical support levels. This could similarly be construed as either double or triple bottoms—a bullish pattern.

So even from the technical viewpoint, should the US, Europe and Asian equities continue to rebound from current levels then external pressures will imply for a rebound in local stocks more than what the Phisix chart patterns have been signaling.

In short, if global equity markets will retain the trend of high correlations, then external forces will likely influence activities in the local market. This will hold true unless there will be some dominant quirks in the local political economy that could influence the activities in the Philippine Stock Exchange, which thus far seems remote.

What You See Depends On Where You Stand: Liquidity Trap

On the other hand, mainstream economists, who premise their analysis on alleged ‘liquidity trap’, would say that ‘deleveraging’ would translate to a decline in ‘spending’, mainly seen through the credit channel and through consumers, which should translate to lower economic growth and subsequently lower asset prices.

Never mind if little of such assumptions have been proven to be accurately reflected by empirical data.

While US real personal consumption (lower window, red arrows) did fall along with credit conditions in 2008-2009 (upper window), consumer spending has recovered earlier and faster than the credit environment which presently treads at an all-time high.

Furthermore, US equity markets have been mixed year-to-date in spite of the European crisis.

As of Friday’s close, the Dow Industrial was up by 3.8%, the S&P 500 marginally down by 1.06% and the Nasdaq slightly down by .97%. These are hardly signs of deflation.

Moreover, deflationist arguments such as “Given the deflationary pressures that are the natural result of a recession and deleveraging/default, they can print a lot of money without igniting too much inflation[3]” is simply contorted and incorrect.

The excessive focus on the nominal yields of US government’s Treasuries, unemployment data and the CPI index used as basis to declare a supposedly deflationary environment blatantly ignores the composition of the CPI index[4] (which has been heavily weighted to housing), the manipulation of the yield curve via monetary policies and bank regulation, as well as the role of US dollar as the world’s premier reserve currency.

Of course “too much inflation” is a matter of semantics.

Nevertheless, even if US CPI index does not reflect on the actual state, US CPI inflation for October 3.5% has been higher than the 96 year average[5]. This applies to the Eurozone as well, where November’s inflation has been at 3%[6] vastly higher than the 19 year average at 2.24%[7]

Most importantly NONE of the crisis affected Eurozone crisis nations have shown disinflation. Only Greece’s inflation rate has shown some signs of decline, although the rate of growth has remained positive. Meanwhile Portugal, Spain and Italy’s inflation rate appear to be in an upswing in spite of the current crisis.

While it may be true that money supply has reportedly been contracting in Italy, the recent round of stepped up purchases by the ECB of Italian bonds are likely to offset this.

And given that inflation rates of the Eurozone and the US are above the average, this could be read as “too much inflation” in a relative sense.

No deflation here, move along.

And with gold prices drifting significantly above the $1,700 level and with oil prices at the $ 100 level, further inflationary actions by global central banks will imply for higher inflation figures ahead or that inflation rates will remain sturdily above their averages much to the contrary of the expectations of deflation proponents.

Lastly, the deflation perspective forgets that the deleveraging by the private sector are being substituted or offset by enormous increases in leveraging of major governments via their central banks. Yet all such actions will have consequences which most of them have been ignoring.

Misunderstanding Hyperinflation

Also those in the view that the “US is far from Zimbabwe” again represents deep denial based on the delusion the US can freely operate above or will be immune to the natural forces economics.

And importantly, these denials manifests blatant misunderstanding of the dynamics of inflation or the feedback loop mechanism between government controlled quantity of money and the public’s demand of money, as shaped by price influenced expectations, in the face of policies that leads to hyperinflation.

As a refresher let me quote the great Murray Rothbard[8] on how hyperinflation becomes a reality, (bold emphasis mine, italics original)

When expectations tip decisively over from deflationary, or steady, to inflationary, the economy enters a danger zone. The crucial question is how the government and its monetary authorities are going to react to the new situation. When prices are going up faster than the money supply, the people begin to experience a severe shortage of money, for they now face a shortage of cash balances relative to the much higher price levels. Total cash balances are no longer sufficient to carry transactions at the higher price. The people will then clamor for the government to issue more money to catch up to the higher price. If the government tightens its own belt and stops printing (or otherwise creating) new money, then inflationary expectations will eventually be reversed, and prices will fall once more—thus relieving the money shortage by lowering prices. But if government follows its own inherent inclination to counterfeit and appeases the clamor by printing more money so as to allow the public’s cash balances to “catch up” to prices, then the country is off to the races.

Money and prices will follow each other upward in an ever-accelerating spiral, until finally prices “run away,” doing something like tripling every hour. Chaos ensues, for now the psychology of the public is not merely inflationary, but hyperinflationary, and Phase III’s runaway psychology is as follows: “The value of money is disappearing even as I sit here and contemplate it. I must get rid of money right away, and buy anything, it matters not what, so long as it isn’t money.” A frantic rush ensues to get rid of money at all costs and to buy anything else. In Germany, this was called a “flight into real values.” The demand for money falls precipitously almost to zero, and prices skyrocket upward virtually to infinity. The money collapses in a wild “crack-up boom.”

Episodes of hyperinflation can be seen similar to a hockey stick—serial, gradual and incremental increases of inflation rates for long periods that eventually transitions into a sudden explosion or exponential rates of increases.

The Germany’s Weimar experience[9] exhibits this hockey stick-like transition process from muted inflation towards hyperinflation.

It would further be foolish to assume that hyperinflation signifies as a desired policy outcome. Hyperinflation mostly represents an unintended consequence from repeated and intensifying doses of inflationism. This process eventually results to a critical mass or a tipping point where inflation morphs into hyperinflation. Yet again this will be decided by policymakers who control the money supply.

And stopping hyperinflation, says author of When Money Dies and witness to Weimar Germany’s hyperinflation, Adam Fergusson[10], would require

“the kind of courage that politicians cannot have”

As a caveat, I am not saying that a global hyperinflation is imminent, but hyperinflation could be one of the two possible major extreme outcomes that should NOT be written off.

Again all this would greatly depend on the underlying actions by the global political stewards.

Dollar Swaps, Lehman Comparison and Central Bank Activism

Overtime, a binge of debt defaults should be expected[11], although the political path or approach to such crisis has yet to be determined. And such defaults may be channeled anew through inflation (which risks hyperinflation) or restructuring (repudiation, e.g. Greece 50% haircut[12]) or a mixture of both. All of these aforementioned scenarios would bring about different sets of market outcomes, but assured volatility.

And given the way politicians have been loading up on taxpayer liabilities for the benefit of the bondholders and the banking class, aside from the massive interventions in the economy, growing out of the debt mess economically will be next to impossible.

Yet inflationism seems to be the de facto or preferred path as exhibited by the exhaustive policy efforts to prop up the asset markets.

This week’s joint or coordinated action by 5 major central banks have been targeted to ease credit conditions by lowering of interest rates on dollar swaps and by the creation of bilateral swaps[13]. Such actions has been complimented by China’s lowering of reserve requirements[14]—the first time in 3 years—appears to be symptomatic of major economy’s central banks in a panic mode.

But instead of a panicky market, global equity markets zoomed.

The essence of these swaps would be to facilitate funding flows, in case of a cataclysmic banking run or an abrupt capital flight from the Eurozone.

This week’s EU summit will be critical as they will be dealing with the prospects of treaty changes (that may possibly allow ECB), the proposed fiscal union and the committee’s proposal for Eurobonds[15].

As Professor Gary North incisively writes about the purpose of the swaps[16],

…this was an action preliminary to (1) Angela Merkel's December 2 speech to the German parliament, which is preliminary to (2) the next Eurozone summit, scheduled for the weekend of December 9, which is preliminary to (3) a coordinated violation of the two treaties that created the European Union, which is hoped will (4) pressure the European Central Bank to buy newly created Eurobonds issued illegally by the EU, in order to (5) raise enough euros fast enough to buy Italian government bonds before (6) the Italian government misses interest payments, which may (7) bankrupt the largest French banks, which could (8) trigger a worldwide financial panic.

In short, Bernanke and his peers are in a pre-panic panic.

And failure to reach an agreement may trigger such panic, which is probably why these major central banks led by the US Federal Reserve may have coordinated their actions to institute preventive measures against possible funding stops or a gridlock that may lead to sharp market fluctuations and to ensure accessibility of funds.

And given the state of interdependence of the global banking system, the worsening troubles for the Eurozone would severely hurt US the banking system, an event which the US Federal Reserve may see as urgent which requires their participations.

Writes the Economist[17],

According to data from the Bank for International Settlements, American banks had just $47 billion in exposure to Italian institutions (including the sovereign) as of June. That's a digestable amount. France, on the other hand, has $416 billion in exposure to Italy. That's very bad news for France, but it's also very bad news for America; American banks have a total exposure to France of some $271 billion. Trouble in Italy is manageable, from an American perspective. Trouble in France makes Americans nervous. But that's not where it ends. British banks have a total of $305 billion in total exposure to France. And American exposure to Britain is close to $800 billion.

There are more ties to worry about, of course. If France and Italy get into serious trouble, then German, Swiss, and Dutch banks will also be in very serious trouble, and British and American exposure to those countries is also enormous. And so the full scope of the danger begins to become clear. It was very important for the euro zone to limit trouble to Greece, Ireland, and Portugal. Europe could handle big losses on Greek, Irish, and Portuguese investments, but Italy is too-big-to-fail and, for everyone but the ECB, too-big-to-save. As far as Britain is concerned, trouble in Spain and Italy is worrisome, but problems in France are devastating. And in America, a sinking France is a big headache, but a crash in Germany and Britain is simply gutting.

And by backstopping the Eurozone, the US Federal Reserve will be conducting a global bailout through swaps as another form of quantitative easing most likely on a scale far larger than in 2008.

This chain of prospective bailout, like the footsteps of Germany and France, will likely drag the US deeper into the crisis which would further diminish her status as foreign reserve currency.

The likely difference will be a more liberal US Federal Reserve in terms of lending that could buy the affected parties some time, but would risk heightened inflation.

Nonetheless dealing with the unfolding Euro debt crisis has increasingly become dependent on central banks.

I would further add that comparing today’s dollar swap facility with that of 2008 would seem misleading.

The accounts where the foreign central bank dollar swaps with the US Federal Reserve did not prevent the US equity market from further deterioration in 2008 were true. But one must be reminded that conditions of 2008 has far been different than today.

Today has seen an unparalleled scale of the ramping up of major central banks’ balance sheets even prior to the dollar swap interest rate cuts.

The US Federal Reserve opened dollar swap access to specific central banks, namely the ECB and the SNB in March of 2008. The FED gradually expanded the amount involved as the US recession deepened.

However immediately after the Lehman bankruptcy, the US dollar swap facility was expanded to cover more central banks, which came along with increased amout of lending (see chart above from the New York Federal Reserve[18]).

As one would note, the first signs of the current EU crisis has already been manifested in 2008 where the ECB was the largest borrower. As I have been saying, today’s crisis has been a continuation of the 2007-2008 bust phase. This means most of what we see as “recovery” represents artificial boosters from the extensive use of the central bank’s balance sheets to shore up the financial system first and the economy second.

And seen from the actions of the US equity markets, the S&P 500’s trough in February 2009 coincided with the culmination of US dollar swap facility borrowings.

To reiterate, the difference then from today has been global central banks actively revving up on their asset purchases.

In fact, not only seen from asset purchasing perspective, today’s global interest rate environment has been the lowest since 2009[19]. In short, even emerging markets have joined the bandwagon of reflating the system through open market operations[20] which also employs asset purchasing.

At the end of the day, the understanding that the policy of inflationism via activist central banking remains as the dominant path in managing of the unfolding debt crisis is what sets our view apart from the mainstream.

Conclusion: Can the Phisix rise amidst the Euro crisis?

So going back to the original premise, can the Phisix rise amidst the Euro crisis?

Again this will critically depend on the feedback loop mechanism from the prospective political actions of global authorities in response to the unfolding conditions.

If global central bankers will inflate massively, far more than the market’s expectations from the adverse effects of the crisis then the answer should be a conditional “yes”. This week’s EU summit could serve as an implicit license for more asset purchases by the ECB.

And there can be no stronger evidence of the abovestated dynamic than the recent showing of ASEAN bourses.

DESPITE the crisis, the Phisix has been down by only about 5.75% from its August peak.

Yet on a year-to-date basis, the Phisix and the Indonesia’s JCI has been UP by about 2%, while Thailand’s SET and Malaysia’s KLSE has been marginally lower. ASEAN’s performance goes in contrast to the returns of major equity markets, whom are down or negative in the range of 10-25%, except for the United States.

True, past performance may not guarantee future outcome. However, for as long as global central banks remains on an inflationary path in support of the asset markets, then we should see divergent or relative price actions which are likely to benefit the Phisix and ASEAN bourses.

And even more, any hiatus from the perceived worsening of the EU crisis, which will likely be treated with the band-aid approach most likely emanating from massive ECB purchases and possibly from the US Federal Reserve, will likely lead to ASEAN bourses outperforming the region or the world.

This means that contra mechanical chartists and consistently wrong mainstream deflationists, my bet is for the Phisix to breach the August highs perhaps sometime within the first quarter of 2012. Again, all these are conditional or subject to the premise where global central banks will continue to unleash waves and waves of inflationism. Otherwise all bets are off.

---

[1] US Global Investors Investor Alert - Are Stars Aligned for a Year-End Rally?, December 2, 2011

[2] See Phisix Should Outperform as Global Markets Improve, November 6, 2011

[3] Mauldin John Time to Bring Out the Howitzers December 3, 2011, HoweStreet.com

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

[5] Tradingeconomics.com United States Inflation Rate

[6] Reuters.com UPDATE 1-Euro zone inflation holds at 3 pct for third month, November 30, 2011

[7] Tradingeconomics.com Euro Area Inflation Rate

[8] Rothbard, Murray N. The Mystery of Banking, 2^nd Edition, p.71-72 Mises.org

[9] Nowandfutures.com Germany, during the Weimar Republic & the hyperinflation

[10] See Video: Adam Fergusson: Inflationism is Playing with Fire November 15, 2011

[11] See The Coming Global Government Debt Default Binge, June 20, 2011

[12] See Global Risk Environment: The Transition from Red Light to Yellow Light, October 30, 2011

[13] See Hot: Major Central Banks Coordinate Easing On Dollar Swaps, November 30, 2011

[14] Bloomberg.com China Reserve-Ratio Cut May Signal Slowdown December 1, 2011

[15] Guardian.co.uk Angela Merkel vows to create 'fiscal union' across Eurozone, December 2, 2011

[16] North Gary French Fried Banks, December 2, 2011 Lewrockwell.com

[17] R.A Run, run, run, The Economist, Free Exchange, December 1, 2011

[18] Goldberg Linda S., Kennedy Craig, Miu Jason Central Bank Dollar Swap Lines and Overseas Dollar Funding Costs FRBNY Economic Policy Review / May 2011

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

[20] Wikipedia.org Open market operations

Video: Jon Stewart on the Bailout Ripoff

World Corruption Perception Index Charts

The following charts from Transparency International

Of the 183 countries surveyed, two thirds have been seen as “corrupt”.

Meanwhile the Philippines has been ranked 129^th with a score of 2.6, an ‘improvement’ from last year’s score of 2.4 and from the 134^th spot. Although I have yet to ascertain on the aspects where the Philippines have made ‘improvements’ on.

One more observation: Given that Somalia’s transitional government has just been a little over 1 year old, it would signify an oddity to include her in the index.

At the end of the day, Transparency International corruption perception index represents merely ‘perception’ or estimates from surveys, which could likely be off from the reality.

Forbes America’s Most Promising Companies: Technology Firms Leads

From Forbes.com

The companies on our AMPC list hail from 22 industries, with software-and-services taking the biggest slice (35%). Some fast facts: 90 have raised outside capital; 70 have a CEO who is also one of the founders; 12 have one younger than 35 years old; 7 have yet to generate revenue; and one sells a burger topped with pastrami. None of these outfits may blossom into the next Google or Apple, but all, it appears, have bright futures.

Read the rest and see the list here

Technology companies taking the lead represents as more signs of the evolving transition to the information age.

Video: JP Auclair Street Skiing Segment

Amazing music video

JP Auclair Street Segment (from All.I.Can.) from Sherpas Cinema on Vimeo.

Audio: Property Rights, Land Titling in the India

From NPR (hat tip divisionoflabour.com)



Notable quote from Corey Flintoff:

The plot of land is tiny, barely large enough for a small house and a backyard garden for fruits and vegetables. But it's an address, and if you have an address that belongs to you, you can get political identity papers, access to credit, and eligibility for government help programs. Without an address, you literally don't count.

Quote of the Day: Trade Spreads Culture

Every increase in trade facilities aids in the spreading of cultural values; and, contrariwise, every interference with trade results in a corresponding retardation of cultural progress. In other words, the freer the trade, the greater the advance in civilization, and the more restrictions there are on trade, the surer will be the retrogression of civilization.

That’s from the great Frank Chodorov in the 1940 essay “Civilization or Caveman Economy?” (source Café Hayek’s Don Boudreaux)

Zimbabwe’s Gideon Gono Hearts the Chinese Yuan

Below is an interesting article about the eccentric Gideon Gono of Zimbabwe.

From New Zimbabwe (bold emphasis mine)

RESERVE Bank governor Gideon Gono has warned that Zimbabwe’s nascent economic recovery is at the mercy of the United States dollar, which is facing new pressures from the Euro-zone debt crisis.

Gono says Zimbabwe should in fact be looking to the Chinese yuan as its main currency, while urgently seeking to restore its own currency which was abandoned in 2009 after a dramatic loss of its value.

Speaking in Gweru last Saturday, Gono said: “The extraordinary happenings in Europe where economic power houses in the Euro-zone have been hit by a debt crisis deserves extraordinary measures, especially here in Zimbabwe where we have adopted the U dollar as the major currency in our multi-currency regime.

"With the continuous firming of the Chinese yuan, the US dollar is fast ceasing to be the world's reserve currency and the Euro-Zone debt crisis has made things even worse.

“As a country, we still have the opportunity to avoid being caught napping by adopting the Chinese yuan as part of consolidating the country's look East policy.”

China is now Zimbabwe’s biggest trading partner, with the Asian giant absorbing most of the country’s mineral and agricultural produce.

Vice President Joice Mujuru first raised the possibility of adopting the yuan in September last year, saying it would be a “logical step” and could help solve some of the country’s liquidity constraints.

The multiple currency regime announced in January 2009 has been fraught with difficulties. Retailers are supposed to accept the Euro and the British pound but those two currencies have never caught on, with most transactions being conducted in United States dollars, the South African rand and the Botswana pula.

This serves as a noteworthy example of the pot calling the kettle black.

Mr. Gono, who ironically engineered the death of Zimbabwe’s currency, the Zimbabwe dollar, has not given up on his conceit of supposedly knowing what is best for their country, yet has the chutzpah to bash the US dollar when Ben Bernanke has simply been mimicking Mr. Gono's policies.

Zimbabweans rejected Mr. Gono’s hyperflated dollar following years of hyperinflationary depression which eventually led to its ‘abandonment’.

Yet Zimbabwe’s post hyperinflation transition exhibits a socio-economic phenomenon of spontaneous order from politically induced chaos.

One would note that following the demise of the Zimbabwe dollar, the market CHOSE or expressed preference for the US dollar, the South African rand and the Bostwana pula over the Euro and the British pound as alternative replacements for medium of exchange.

And another interesting facet is that this serves as evidence that markets are dominant over politics or that people will adjust to the conditions even outside of government’s influence.

China’s increasing trade with Zimbabwe may possibly lead to more use of the yuan, but this would depend on Zimbabweans than from Mr. Gono. The hyperinflationary episode has eroded much of the political capital of Zimbabwean government which will need to rebuilt before the marketplace will regain their trust on them.

For now, spontaneous order governs the Zimbabwean marketplace, which has impelled for a "nascent recovery" of the ravaged economy of Zimbabwe.

Mr. Gono can keep talking, but little of what he says will be taken seriously.

Stanford University Expands Free Online Courses

I’ve been pointing out how the information age will reconfigure and transform almost every aspect of our lives including education. (see here here and here).

Education’s evolving online platform will put a lot of pressure to the incumbent school models designed out of the industrial age. And today’s high cost of tuition will eventually crumble, not only from online competition but also from globalization--where education will become less dependent on local or territorial access, and instead, will increasingly be facilitated by distance learning.

From ZDNET

A couple of months back, we reported on how some IT professors at Stanford University were opening up their courses for the world to participate, with no tuition cost. This fall, courses onIntroduction to Artificial Intelligence, Introduction to Databases and Introduction to Machine Learning were launched, all delivered between October and December. (I have been participating in the AI course, it’s really extremely well presented and informative.)

Three million people have checked out the AI course page since it was announced (now doubt driven by my blog post here), and course co-professor Peter Norvig reports that 35,000 students have stuck with the course and exams. There are also 135 students taking the course onsite, Norvig is quoted as saying in the Good News site,

Now it is being reported that due to the great success of the program, Stanford plans to offer eight more computer science classes beginning in January, including Software as a Service,Computer Science 101, Machine Learning, Cryptography, Natural Language Processing, Human Computer Interaction, Design and Analysis of Algorithms I, and Probabilistic Graphic Models.

Here is the write-up on the SaaS course:

“This course teaches the engineering fundamentals for long-lived software using the highly-productive Agile development method for Software as a Service (SaaS) using Ruby on Rails. Agile developers continuously refine and refactor a working but incomplete prototype until the customer is happy with result, with the customer offering continuous feedback. Agile emphasizes user stories to validate customer requirements; test-driven development to reduce mistakes; biweekly iterations of new software releases; and velocity to measure progress. We will introduce all these elements of the Agile development cycle, and go through one iteration by adding features to a simple app and deploying it on the cloud using tools like Github, Cucumber, RSpec, RCov, Pivotal Tracker, and Heroku.”

Being in the heart and brains of Silicon Valley, Stanford professors will also be offering two online courses on entrepreneurship. The entrepreneurship courses include Technology Entrepreneurship—a class on how to launch a successful startup, and The Lean Launchpad, which will teach how to turn “a great idea into a great company.”

At zero bound tuition costs, education will eventually become democratized worldwide, will not require or justify taxpayer funding and will become increasingly specialized.

The Orwellian Approach of Mainstream Media

From Lew Rockwell.com

Today, mainstream media coverage uses programmed distortion, confusion, even outright lying when its Money Power masters order it to support the “official story” on any major political, economic or financial process. When looked at closely, however, the “official story” of things can be seen to be inaccurate, misleading, often hardly believable if not downright stupid.

Examples of this: Iraq’s inexistent WMD’s leading to the invasion and destruction of that country; global mega-banker bail-outs with taxpayer money; irrational US diplomatic, military, financial and ideological alignment to Israeli objectives; “we-killed-Osama-Bin-Laden-and-dumped-his-body-into-the-sea”; and the wide array of “whodunits” surrounding 9/11 in New York and Washington, 7/7 in London, the AMIA/Israeli Embassy attacks in Buenos Aires in 1992/1994, and – of course – that all time favorite: who shot JFK…?…

How they do it…

The Seven Step Mainstream Media Country Destruction Guide

1. First, they start by targeting a country ripe for “Regime Change”, and brand it a “rogue state”; then…

2. They arm, train, finance local terrorist groups through CIA, MI6, Mossad, Al-Qaeda (a CIA operation), drug cartels (often CIA operations) and call them “freedom fighters”; then…

3. As mock UN Security Council Resolutions are staged that rain death and destruction upon millions of civilians, they call it “UN sanctions to protect civilians”; then…

4. They spread flagrant lies through their “newsrooms” and paid journalists, and call it "the international community’s concerns expressed by prestigious spokespeople and analysts…” then…

5. They bomb, invade and begin to control the target country and call it “liberation”; then…

6 As the target country falls fully under their control, they impose “the kind of democracy that we want to see” (as Hillary Clinton before visiting Egypt and Tunisia on March 10, 2011), until finally…

7. They steal appetizing oil, mineral and agricultural reserves handing them over to Global Power Elite corporations, and impose unnecessary private banking debt and call it “foreign investment and reconstruction.”

Their keynotes are: Force and Hypocrisy, which they have used time and again to destroy entire countries, always in the name of “freedom”, “democracy”, “peace” and “human rights”. Utmost force and violence is used to achieve their ends and goals.

Read the rest here

Mainstream media has served as traditional and conventional channels for political interests to broadcast propaganda, even in the Philippines.

Here, the local theme may be different from the above, but the objective has been the same: to justify the use or expansion of political control over the populace--mostly done through abstractions.

As George Orwell wrote,

The inflated style is itself an kind of euphemism. A mass of Latin words falls upon the facts like soft snow, blurring the outlines and covering up all the details. 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 squirting 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.

Seth Godin Explains On the Margin

Products and services succeed one person at a time, as the word slowly spreads. Customers defect one person at a time, as hearts are broken and people are disappointed. Doors open, sure, but not all at once. One at a time.

One at a time is a little anticlimactic and difficult to get in a froth over, but one at a time is how we win and how we lose.

Another effusive quote from my favorite marketing guru Seth Godin.

I may add that the the ideological war for liberty will be won or lost one at a time.

Swap Facility Backdoor for Quantitative Easing

Writes PIMCO’s Tony Crescenzi at the CNBC… (bold emphasis original) [hat tip Bob Wenzel]

Keep in mind that any use of the Fed’s swap facility expands the Fed’s monetary base: all dollars, no matter where they are deposited, whether it be Kazakhstan, Japan, or Mexico, wind up back in an American bank. This means that any time a foreign central bank engages in a swap with the Federal Reserve, the Fed will create new money in order to make the swap. Use of the Fed’s liquidity swap line in late 2008 was the main cause of a surge in the Fed’s monetary base at that time. The peak for the swap line was about $600 billion in December 2008. Some observers will therefore say that the swap line is a backdoor way to engage in more quantitative easing .

So there you have it, the foundations of QE 3.0 has been put in place. QE 3.0 seems now a matter of formality.