Effects Of Inflationary Policies Surface In Currency Markets

``America’s policy is pushing China towards developing an alternative financial system. For the past two decades China’s entry into the global economy rested on making cheap labour available to multi-nationals and pegging the renminbi to the dollar. The dollar peg allowed China to leverage the US financial system for its international needs, while domestic finance remained state-controlled to redistribute prosperity from the coast to interior provinces. This dual approach has worked remarkably well. China could have its cake and eat it too. Of course, the global credit bubble was what allowed China’s dual approach to be effective; its inefficiency was masked by bubble-generated global demand. China is aware that it must become independent from the dollar at some point. Its recent decision to turn Shanghai into a financial centre by 2020 reflects China’s anxiety over relying on the dollar system. The year 2020 seems remote, and the US will not pay attention to something so distant. However, if global stagflation takes hold, as I expect it to, it will force China to accelerate its reforms to float its currency and create a single, independent and market-based financial system. When that happens, the dollar will collapse.”- Andy Xie If China loses faith the dollar will collapse

This episode of the stock markets in a fierce rebound has brought about exhortations of “greenshoots” and “prospective” economic recovery, which we have described as the reflexivity theory at work.

And as we have repeatedly been saying, the unparalleled scale of concerted and collaborative global central bank actions will ultimately be transmitted to the currency markets which subsequently will pose as the underlying current to financial market actions.

Figure 3: stockcharts.com: Falling US Dollar And Rising Stocks, Commodities and Treasury Yields

As governments continue to distort the market pricing process by providing subsidies, guarantees, fiscal spending and other interventionist measures, the pressures accrued from the imbalances will ultimately be vented on the world’s currency market which risks a cataclysmic collapse in the present monetary system.

Let me reiterate, this grandest experiment of the unbacked paper-digital money system has been 38 years old. If one would treasure the lessons of history, ALL paper money had been extinguished out of the propensity of the rulers to inflate or destroy the currency-mostly for political survival or wars, see our previous discussion Government Guarantees And the US Dollar Standard.

So those fervently praying for governments to “print money” as a way out of the present predicament or to “avoid a Japan” have been putting undue faith on a system which had temporarily weaved “short term” magic before, but at the cost of building a riskier economic and financial structure based on the exponential growth in systemic leverage and moral hazard, which only leads to worsening cyclical bubbles or worst a collapse in the world’s monetary architecture.

Yet policies that serve to uphold the economically unsustainable borrow, speculate and spend policies will ultimately meet its comeuppance. You can dream of printing away the economic crisis similar to Zimbabwe. But that dream we know only turned into a real life nightmare.

Yet, today’s global policy directions reflect on the very essence of why paper money has failed.

The present “boom” appears to be manifesting inflation as getting some “traction”.

As figure 3 shows, the Euro-weighted US dollar index (USD) has broken below its 200-day moving averages, which signals a regression to its long term bear market.

Some will interpret today’s phenomenon as the revival of risk appetite or the reawakening of the “animal spirits” especially when seen with rising yields of the long term US treasuries (TNX).

Some others will adduce market activities especially by the performances of the global stock markets (DJW) alongside rising commodity prices (oil broke above $55 and is now $58!) to prospective global economic recovery.

We hope both of these arguments are right because this will be the ideal “goldilocks” scenario.

From our end, we understand this “goldilocks” scenario as toothfairy economics simply because of the “the marginal utility of real goods and services divided by the marginal utility (mostly for portfolio and transactions purposes) of government liabilities” or inflation as defined by Professor John Hussman in our previous discussion Expect A Different Inflationary Environment.

In short, when more paper money is produced than real goods we essentially get inflation.

But think of it, if present trends will persist and inflation is indeed gaining traction, then rising commodities will essentially squeeze purchasing power of consumers and raise the cost of production for producers.

Meanwhile, rising interest rates will jeopardize or even defeat programs instituted by governments to ease debtor angst, especially in the crisis affected nations.

Aside, rising interest will translate to higher cost of maintaining or servicing debt for the government and the private sector.

So governments seem trapped in a fix; on one hand by allowing markets to function this will translate to the much dreaded (but needed) deflation, which policymakers won’t accept.

On the other hand, policies to pump money in the system will mean more inflation which essentially will undermine most of the programs that have been put in place to mend the dislocations brought upon by the present crisis.

More proof of inflation driving the currency markets in Asia which seems being transmitted to the stock markets? See figure 4.

Figure 4: Bloomberg: Bloomberg-JP Morgan Asia Dollar Index (yellow), MSCI AC ASIA PACIFIC (green)

When Asian Markets are on a rebound as shown by the Bloomberg’s MSCI ASIA PACIFIC [MXAP:IND-green], the Asian currency benchmark Bloomberg-JP Morgan Asia Dollar Index [ADXY:IND-yellow] goes positive-meaning regional currencies appreciate against the US dollar.

There appears to be a strong correlation between the activities in the stock markets and the region’s currency values possibly influenced by portfolio flows, relative economic growth, relative inflation and or yield differential expectations.

But I would like to remind you that currency markets aren’t free markets (no markets are actually free) and are subjected to repeated government manipulations directly (direct market operations) or indirectly (domestic inflationary policies).

Yes, today’s fiat paper money currency standard is a monopoly supplied by governments.

This makes currencies values vulnerable to political interferences which may induce short term aberrations where arguably market prices do not manifest efficiency.

Nevertheless, while imbalances can be deferred for sometime, in due course they get to be exposed by the natural forces of the market.

And applied to the Philippine Peso, in contrast to mainstream and popular predictions, we argued in 2009: Phisix and Peso Will Advance!, that the Peso like the Phisix will defy bearish projections, which had mostly been anchored on remittances and exports, made by mainstream experts who remain afflicted with rear view looking, ivory tower ensconced-laboratory based economic theories and an obsession with self-importance.

The Philippine Peso has been marginally up on a year to date basis with Friday’s close at Php 47.25 and quite distant yet to the Php 50-52 level predicted by the consensus of “experts”.

And based on the above premises, we expect the Peso to similarly reflect gains in the Phisix. In my view, the Peso will possibly appreciate towards the Php 45-46 level or better by the yearend.

And as a final word today’s boom in contrast to the 2003-2007 cycle which basically lasted more than 4 years maybe swifter, steeper and shorter.

Seeds of Hyperinflation Have Been Sown

``Many false arguments are used to defend inflationism. Least harmful is the claim that a moderate inflation does not do much harm. This has to be admitted. A small dose of poison is less pernicious than a large one. But this is no justification for administering the poison in the first place. It is claimed that in times of a grave emergency the use of means may be justified which in normal times would not be considered. But who is to decide whether the emergency is grave enough to warrant the application of dangerous measures? Every government and every political party in power is inclined to regard the difficulties it has to cope with as quite extraordinary and to conclude that any means for combatting them is justified. The drug addict, who says he will abstain from tomorrow on, will never conquer the drug habit. We have to adopt a sound policy today, not tomorrow.”-Ludwig von Mises, Interventionism: An Economic Analysis, Inflation and Credit Expansion

While “greenshoots” have been more evident in Asia and emerging markets than their OECD counterparts, as evidenced by rising reports of indices based on Purchasing Managers Index and bank lending, some have questioned the sustainability of these improvements.

For instance, acquisitions of oil and petroleum products allegedly haven’t been reflective of the economy’s demand and supply, here we quote CBI China (FT Alphaville)

``Most players expected bearish gasoil market in may amid weaker speculative demand and increased supplies. Speculative demand will probably plunge if the market gains no more support in may, but end-user demand is not likely to grow much amid gloomy economy. Meanwhile, oversupply will probably remain as supplies grow. When supplies from PetroChina and Sinopec are not seen to change, CNOOC Huizhou refinery is estimated to supply 200,000-300,000mt of gasoil to East and South China per month. Without much support from international crude, PetroChina and Sinopec may cut prices to promote sales in some regions, where they failed to fulfill their sales targets in April.

``There is little possibility for China to import any gasoil in May in view of negative import margin and weak demand from the domestic market. Meanwhile, Sinopec’s and PetroChina’s gasoil exports may be little changed from the previous three months, about 200,000-300,000mt altogether.” (emphasis added)

Moreover, China’s electricity consumption which serves as a key barometer of economic activities has equally registered a decline on a year to year basis in April (Xinhua).

Furthermore, energy bears point to the growing disconnect between rising oil prices and high inventory, see figure 5.

Figure 5: FT Alphavile: US Oil Inventories Nearly At The Brim

The Financial Times Alphaville quotes Goldman Sachs; ``Commodity prices cannot diverge for long from physical fundamentals as they are largely “spot” assets….As storage bridges the gap between today and the future, commodities that are easier to store, such as metals and agriculture, are more anticipatory.

``Thus, electricity followed by natural gas are the most spot or least anticipatory commodities given the difficulties in storing these commodities while base metals are generally the least spot or most anticipatory given their ease of storage, followed by agriculture and then oil.”

In other words, given the storage issues energy prices are supposed to reflect actual demand and supply.

But as we have earlier asserted experts tend to look at ONLY demand and supply of real goods frequently disregarding the demand and supply of money relative to real goods.

Left to markets, storage issues will find a remedy. And most likely rising oil prices could a manifestation of the diffusing liquidity in the system.

Proof?

In China, the surge in bank lending has mainly been about government induced lending rather than growth in the private sector activity, according to the Wall Street Journal (bold highlight mine),

``China’s state-controlled banks are clearly leading the lending charge, accounting for 50.5% of the new credit extended during the quarter. Foreign banks are, however, behaving more like they are elsewhere, and are not following their Chinese colleagues into the lending surge. Loans by foreign financial institutions declined by 26.4 billion yuan in the first quarter.

``The central bank’s breakdown of new medium- and long-term borrowing, the kind most likely to be used to pay for investment, shows that 50.1% went to infrastructure in the first quarter. That clearly reflects how banks are being pressed to give priority to government stimulus projects. But such lending has its own risks. “Recent bank lending has been concentrated in government projects which, while helping drive rapid investment, also requires evaluation of local governments’ ability to repay the debts,” the central bank said.

``Outside of stimulus projects, demand for credit is not as strong. Only 7.9% of new medium- and long-term lending went to manufacturing, and 11.2% to real estate development.”

Moreover, China continues to massively import iron ore which jumped 24% in April.

As we discussed in The Nonsense About Current Account Imbalances And Super-Sovereign Reserve Currency and Has China Begun Preparing For The Crack-Up Boom? China appears to be heavily acquiring commodities mostly likely designed to diversify from its US dollar reserves holdings which could function as insurance against the risks of hyperinflation or have been consolidating its potential role as primary contender to the currency reserve hegemony, presently held by the US dollar or both.

But as far as the loose connections leaving experts in the quandary, for us they all seem like puzzles falling into place.

As Ludwig von Mises wrote in Interventionism: An Economic Analysis, Inflation and Credit Expansion, ``But on the other hand inflation cannot continue indefinitely. As soon as the public realizes that the government does not intend to stop inflation, that the quantity of money will continue to increase with no end in sight, and that consequently the money prices of all goods and services will continue to soar with no possibility of stopping them, everybody will tend to buy as much as possible and to keep his ready cash at a minimum. The keeping of cash under such conditions involves not only the costs usually called interest, but also considerable losses due to the decrease in the money’s purchasing power. The advantages of holding cash must be bought at sacrifices which appear so high that everybody restricts more and more his ready cash. During the great inflations of World War I, this development was termed “a flight to commodities” and the “crack-up boom.” The monetary system is then bound to collapse; a panic ensues; it ends in a complete devaluation of money Barter is substituted or a new kind of money is resorted to. Examples are the Continental Currency in 1781, the French Assignats in 1796, and the German Mark in 1923.”

For us, this means that the seeds for hyperinflation have been sown, and that those arguing for “timing” and the “inevitability” have been tunneling their market outlook based on Holy Grail economics as guide to investing.

Mr. Russell Napier, author of the Anatomy of the Bear Market seems to share our outlook, in an interview at the Financial Times quoted by FT Alphaville, we quote Mr. Napier (bold emphasis mine),

``The key three indicators that we’ve passed the risk of deflation are rising price of Treasury inflation protected securities, the rising price of commodities and the rising price of corporate bonds. This is not to say that this bounce is the end of the bear market…

And a decoupling with China?

Adds Mr. Napier, ``So I see inflation problems in a couple of years and I see problems with the Chinese not being as big a buyer of US treasuries simply because they will be having a great domestic consumption boom which means they’ll not run surpluses and buy these surpluses. And the crucial one people sometimes forget is the retirement of the babyboomers, the medicare costs in particular and the social security costs of this is going to be issuing a lot of treasuries into the future…

And the US will probably experience a fierce bear market in US treasuries aside from the excruciating effects to its economy due to rising interest rates…see figure 6.

Figure 6: Economagic: The End of the US Treasury Bull Market?

Again Mr. Napier, ``For the next couple of years people will see it as normalisation, if yields on Treasuries go to 4 or 4.5 per cent. People will say this is a normalisation of the treasury yield as we pass the deflation risk . There’ll be a great breath and sigh of relief that we’re going back into another business cycle, and when it looks like we may never get there equity prices will go up. But the final sting I believe is in the tail. The last treasury bear market lasted from 1946 -1981 and there’s no reason to suggest that this one will be any shorter.”

US Treasuries have been in a bullmarket since 1980s, the long cycle does indicate that an inflection point is imminent.

The last word from Mr. Warren Buffett during his latest Berkshire Hathaway’s Woodstock for Capitalists, ``Anybody who holds (US) dollar obligations from outside this country is going to get back less in purchasing power in the future”.

World's Most Reputable Companies

Earlier we featured the world's largest companies (25 Largest Companies of the World), now the Economist brings us the world's most reputable companies.

From the Economist, ``FERRERO, an Italian chocolate-maker, has come out top in an annual survey of the world's most reputable companies. Based on perceptions of the companies in their home markets, the Reputation Institute, a research firm, has asked the public to rate the world's 600 largest firms according to trust, admiration and respect, good feeling and overall esteem. Despite the economic turmoil, respect for business is still generally quite high. But some sectors have suffered. Banks and other financial institutions, which commanded reasonable repect in years gone by, have slipped alarmingly, though they still do better than tobacco companies"

Of the 15, the US holds 4, Asia has 4 (Japan-2, Singapore-1, India-1), Europe has 5 (Spain-2, Italy-1, Sweden-1, France-1) and Latin America has 2 (both from Brazil).

Dictatorship 101

Here is a fabulous amusing article by Paul Collier published at the foreignpolicy.com detailing on the advantages and disadvantages of policies frequently used by dictators (or even conventional politicians in "democracies").

Prologue:

``The old rulers of the Soviet Union were terrified of facing contested elections. Those of us who studied political systems presumed they must be right: Elections would empower citizens against the arrogance of government. And with the fall of the Iron Curtain, elections indeed swept the world. Yet democracy doesn’t seem to have delivered on its promise. Surprisingly often, the same old rulers are still there, ruling in much the same old way. Something has gone wrong, but what?

``To answer this question, I put myself in the shoes of an old autocrat—say, Egypt’s Hosni Mubarak—now having to retain power in a “democracy.” What options do I face? Hard as it is to bear, I have to be honest with myself: My people do not love me. Far from being grateful for the wonders that I have achieved, they may increasingly be aware that under my long rule our country has stagnated while similar countries have transformed themselves. There are even a few cogent voices out there explaining why this situation is my fault. I shake my head in disbelief that it has come to this, seize my gold pen, and start listing my options. I decide to be systematic, in each case evaluating the pros and cons. --Paul Collier

Some interesting strategies utilized by politicians/dictators from the must read article:

``Option 3: Scapegoat a minority

``Pros: This one works! I can blame either unpopular minorities within my country or foreign governments for all my problems. The politics of hatred has a long and, electorally speaking, pretty successful pedigree. In the Ivory Coast it was the Burkinabe immigrants; in Zimbabwe, the whites; in the Democratic Republic of the Congo, the Tutsi. Failing all else, I can always blame Israel America. I can also promise favoritism for my own group.

``Cons: Some of my best friends are ethnic minorities. In fact, they have been funding me for years in return for favors. I prefer doing business with ethnic minorities because, however rich they become, they cannot challenge me politically. It is the core ethnic groups I need to keep out of business. Scare the minorities too badly, and they will move their money out. So, though scapegoating works, beyond a certain point it gets rather costly....

Another common example is "Tax the Rich"!

The next two options have been commonly used in the Philippines...

``Option 4: Buy the votes to win

``Pros: Bribing voters plays to one of my key advantages over the opposition—I have more money.

``Cons: Can I trust people to honor the deal? If I pay them, will they actually vote for me? After all, there are some pretty unscrupulous people out there.

``On balance, I am not sure. I search the Web and stumble on a study by someone named Pedro Vicente at Oxford University. Vicente conducted a randomized, controlled experiment on electoral bribery in São Tomé and Príncipe. In some districts, bribery was restrained by external scrutiny, whereas in others it was not. Systematically, where bribery was unrestrained, the candidate offering bribes got more votes. Bribery works!

``In fact, bribery comes in two modes: retail and wholesale. Retail bribery is expensive and difficult but might still be worthwhile. Its advantage is that I can target pockets of voters critical for success...

``Why is this not a very effective counter? I have two points of discipline. One, paradoxically, is morality: Often, ordinary decent people feel bad if they take someone’s money but then renege. The other is fear of detection: How secret is the ballot? In Zimbabwe, President Robert Mugabe’s street boys spread the word that the government would know how votes were cast, and in the prevailing conditions of misgovernance, this warning could not be treated as an idle threat.

``But how much does it cost to bribe the typical voter? How many votes do I need to buy, and how much can I afford? Is there a cheaper way of buying votes?

``Indeed there is: wholesale bribery. Wholesale bribery works by paying for votes delivered in blocs rather than individually. Bloc voting is very common in impoverished, traditional, rural societies, where the local big shot’s advice is not seriously questioned. When votes are counted, it is common for many villages to have voted 100 percent for one candidate. If the big shot determines how individuals vote, it is obviously cheaper to buy his support directly.

``Overall, bribery is my kind of strategy. The only problem is whether I have enough money to win with it.

``Option 7: Last but not least, miscount the votes

``Pros: Finally, I have found a strategy that sounds reliable. With this one, I literally cannot lose. The tally might be: incumbent, 1; opponent, 10,000,000. But the headline will read: “Incumbent Wins Narrowly.” It also has advantages in reinforcing some of the other strategies. Once people get the sense that I am going to win anyway and that their true votes will not be counted, they have even less incentive to forgo bribes and take the risk of joining the opposition. Better still, I can also keep this strategy in reserve until I see that I am losing.

``Cons: The international community won’t like it. I’ll just have to remember not to go overboard: not 99 percent. It should not look like a Soviet election.

This reminds me of "Hello Garci"!

Hedge Fund Manager Refutes President Obama

After the hedge fund industry got slammed by US President Obama, Hedge Fund manager Clifford S. Asness makes a stirring rebuttal...

From New York Times Deal Book (all bold highlight mine)

Unafraid In Greenwich Connecticut
Clifford S. Asness
Managing and Founding Principal
AQR Capital Management, LLC

The President has just harshly castigated hedge fund managers for being unwilling to take his administration’s bid for their Chrysler bonds. He called them “speculators” who were “refusing to sacrifice like everyone else” and who wanted “to hold out for the prospect of an unjustified taxpayer-funded bailout.”

The responses of hedge fund managers have been, appropriately, outrage, but generally have been anonymous for fear of going on the record against a powerful President (an exception, though still in the form of a “group letter,” was the superb note from “The Committee of Chrysler Non-TARP Lenders,” some of the points of which I echo here, and a relatively few firms, like Oppenheimer, that have publicly defended themselves). Furthermore, one by one the managers and banks are said to be caving to the President’s wishes out of justifiable fear.

I run an approximately twenty billion dollar money management firm that offers hedge funds as well as public mutual funds and unhedged traditional investments. My company is not involved in the Chrysler situation, but I am still aghast at the President’s comments (of course, these are my own views, not those of my company). Furthermore, for some reason I was not born with the common sense to keep it to myself, though my title should more accurately be called “Not Afraid Enough” as I am indeed fearful writing this… It’s really a bad idea to speak out.

Angering the President is a mistake, and my views will annoy half my clients. I hope my clients will understand that I’m entitled to my voice and to speak it loudly, just as they are in this great country. I hope they will also like that I do not think I have the right to intentionally “sacrifice” their money without their permission.

Here’s a shock. When hedge funds, pension funds, mutual funds, and individuals, including very sweet grandmothers, lend their money they expect to get it back. However, they know, or should know, they take the risk of not being paid back. But if such a bad event happens, it usually does not result in a complete loss. A firm in bankruptcy still has assets. It’s not always a pretty process. Bankruptcy court is about figuring out how to most fairly divvy up the remaining assets based on who is owed what and whose contracts come first.

The process already has built-in partial protections for employees and pensions, and can set lenders’ contracts aside in order to help the company survive, all of which are the rules of the game lenders know before they lend. But, without this recovery process nobody would lend to risky borrowers. Essentially, lenders accept less than shareholders (means bonds return less than stocks) in good times only because they get more than shareholders in bad times.

The above is how it works in America, or how it’s supposed to work. The President and his team sought to avoid having Chrysler go through this process, proposing their own plan for reorganizing the company and partially paying off Chrysler’s creditors. Some bondholders thought this plan unfair. Specifically, they thought it unfairly favored the United Auto Workers, and unfairly paid bondholders less than they would get in bankruptcy court. So, they said no to the plan and decided, as is their right, to take their chances in the bankruptcy process. But, as his quotes above show, the President thought they were being unpatriotic or worse.

Let’s be clear, it is the job and obligation of all investment managers, including hedge fund managers, to get their clients the most return they can. They are allowed to be charitable with their own money, and many are spectacularly so, but if they give away their clients’ money to share in the “sacrifice,” they are stealing. Clients of hedge funds include, among others, pension funds of all kinds of workers, unionized and not.

The managers have a fiduciary obligation to look after their clients’ money as best they can, not to support the President, nor to oppose him, nor otherwise advance their personal political views. That’s how the system works. If you hired an investment professional and he could preserve more of your money in a financial disaster, but instead he decided to spend it on the UAW so you could “share in the sacrifice,” you would not be happy.

Let’s quickly review a few side issues.

The President’s attempted diktat takes money from bondholders and gives it to a labor union that delivers money and votes for him. Why is he not calling on his party to “sacrifice” some campaign contributions, and votes, for the greater good? Shaking down lenders for the benefit of political donors is recycled corruption and abuse of power.

Let’s also mention only in passing the irony of this same President begging hedge funds to borrow more to purchase other troubled securities. That he expects them to do so when he has already shown what happens if they ask for their money to be repaid fairly would be amusing if not so dangerous. That hedge funds might not participate in these programs because of fear of getting sucked into some toxic demagoguery that ends in arbitrary punishment for trying to work with the Treasury is distressing. Some useful programs, like those designed to help finance consumer loans, won’t work because of this irresponsible hectoring.

Last but not least, the President screaming that the hedge funds are looking for an unjustified taxpayer-funded bailout is the big lie writ large. Find me a hedge fund that has been bailed out. Find me a hedge fund, even a failed one, that has asked for one. In fact, it was only because hedge funds have not taken government funds that they could stand up to this bullying.

The TARP recipients had no choice but to go along. The hedge funds were singled out only because they are unpopular, not because they behaved any differently from any other ethical manager of other people’s money. The President’s comments here are backwards and libelous. Yet, somehow I don’t think the hedge funds will be following ACORN’s lead and trucking in a bunch of paid professional protesters soon. Hedge funds really need a community organizer.

This is America. We have a free enterprise system that has worked spectacularly for us for two hundred-plus years. When it fails it fixes itself. Most importantly, it is not an owned lackey of the Oval Office to be scolded for disobedience by the President.

I am ready for my “personalized” tax rate now.

Swine Flu: Mostly A Media Fuss

I was supposed to write something about the seeming fear mongering by media on the swine flu, but the Associated Press beat me to the punch.

Here is an excerpt (all emphasis mine)...

``The so-far mild swine flu outbreak has many people saying all the talk about a devastating global epidemic was just fear-mongering hype. But that's not how public health officials see it, calling complacency the thing that keeps them up at night.

``The World Health Organization added a scary-sounding warning Thursday, predicting up to 2 billion people could catch the new flu if the outbreak turns into a global epidemic.

``Many blame such alarms and the breathless media coverage for creating an overreaction that disrupted many people's lives.

``Schools shut down, idling even healthy kids and forcing parents to stay home from work; colleges scaled back or even canceled graduation ceremonies; a big Cinco de Mayo celebration in Chicago was canned; face masks and hand sanitizers sold out — all because of an outbreak that seems no worse than a mild flu season.

``"I don't know anyone who has it. I haven't met anyone who knows anyone who contracted it," said Carl Shepherd, a suburban Chicago video producer and father of two. "It's really frightening more people than it should have. It's like crying wolf."

``Two weeks after news broke about the new flu strain, there have been 46 deaths — 44 in Mexico and two in the United States. More than 2,300 are sick in 26 countries, including about 900 U.S. cases. Those are much lower numbers than were feared at the start based on early reports of an aggressive and deadly flu in Mexico.

``Miranda Smith, whose graduation ceremony at Cisco Junior College in central Texas was canceled to avoid spreading the flu, blames the media.

``"It's been totally overblown," she said Thursday.

Well speaking of "overblown" and "breathless media coverage" Pew Research shows of how the epidemic scare has eclipsed all other topics.
According to Pew Research, ``Yet all those stories were overwhelmed by the frantic coverage of a new flu virus that in a matter of days had made its way around the globe and was threatening to become the first influenza pandemic in four decades. From April 27-May 3, the swine flu, or H1N1 as it officially became known, accounted for nearly one-third of the newshole (31%) studied, according to the Pew Research Center's Project for Excellence in Journalism."

It is understandable for media to revolve around sensationalist news simply because its fundamental incentive is to generate more audiences. And when fear or panic is in the air, the public gropes for information to which media obliges.

But for governments, aside from the "social service" function, the unstated incentives may vary from expanding government control, desire to increased access to funding, or cronyism as discussed in Swine Flu: The Black Swan That Wasn’t and Swine Flu: The Politics of Fear and Control.


Yet according to Gallup, Americans appear nearly evenly split between those who say that media coverage of the swine flu had been exaggerated and those who say media coverage was just right.

But I don't think this will last.

The subdued impact from the swine flu infestation has reduced fear as shown by the Gallup survey above. Note that at the peak only 25% of those surveyed said they were personally worried by the Flu which means 75% were not. Now only 17% are concerned, which implies 83% aren't.

This suggests that, despite the intensive media coverage, the American public hasn't been cowed into panic. This further implies that media has indeed overhyped its coverage of the swine flu.

This declining trend of swine flu scare has likewise been apparent in Google's search trends. Thus eventually I expect more converts to the exaggerated camp for as long as the spread of the disease do not worsen.

Lastly, congratulations to world boxing legend Manny Pacquiao not only for a stunning triumph in his latest quest for glory but also for defying authorities who had been trying to curtail his civil liberty from a vastly inflated health scare.

4-Block World: Who Says Green Jobs Don't Pay Well

Great illustration of Al Gore's Green Jobs From Tom McMahon's 4-Block World

Swine Flu: The Politics of Fear and Control

The swine flu "hysteria" continues to hug the headlines where the latest Bloomberg report says,

``Swine flu, also known as H1N1, has been confirmed by laboratory tests in 1,516 patients in 22 countries, according to the WHO. Mexico has reported 942 cases, including 29 deaths, while the U.S. has 403 cases and two deaths, officials in those countries said. Canada has 165 cases."

Hysteria because fear foisted upon by media, politicians and experts has spurred irrational reactions. For instance, we read with incredulity that some of Tokyo's hospitals have reportedly refused or turned away patients exhibiting flu-like symptoms.

According to the Japan Times, ``An increasing number of patients running a fever have been rejected by Tokyo hospitals that fear they may have swine flu even though the risk of their being infected is minimal, the metropolitan government said Tuesday.

``The number of cases in which hospitals refused medical examinations for such patients totaled 92 from Saturday morning to Tuesday noon, a survey by the metropolitan government found.

``"We want hospitals to respond calmly even if they fear that patients infected with the new flu may appear or that other patients will get infected," a Tokyo official said." Those inflicted by Flu have effectively become castes.

And yet we have experts compounding these sentiments by associating flu epidemics to economic depression.

Take for instance this op-ed from Wall Street Journal by Robert Barro and Jose Ursua (emphasis added),

``Our ongoing study of economic disasters for 36 countries since 1870 suggests that this concern is well founded. In this sample, we have isolated 158 depressions -- defined as declines in a country's real per capita gross domestic product (GDP) by at least 10%. The most prominent features of these depressions are wars and financial crises. But the fourth-worst global macroeconomic event since 1870 seems to be the Great Influenza Epidemic of 1918-20. This "health shock" accounts for 13 of the depression events. In contrast, World War II is associated with 25, World War I with 23, and the Great Depression of the early 1930s with 21.

``The Great Influenza Epidemic (aka the Spanish Flu) began in spring 1918, went through three or four waves, and lasted into 1920. The spread of the disease was propelled by international travel, much of which involved troop movements in 1918 because of World War I. Estimates of world-wide flu deaths cover a wide range but are typically around 50 million.

``We have, thus far, compiled estimates of excess deaths from the flu in 1918-20 for 32 of our 36 countries. The median excess mortality rate was 0.7 per 1,000 people, with a range from 0.1 for Argentina to 4.4 for India and South Africa. (The mean rate was 1.1 per 1,000.) Spain, forever associated with the flu, had a mortality rate of 1.2 per thousand, well above the median. The United States, at 0.65, was close to the median (there were 675,000 American deaths). When applied to today's U.S. population, this rate would translate into two million fatalities....

``The troughs in macroeconomic activity that we associate with the Great Influenza Epidemic were typically in 1920 or 1921. Not all of our 36 countries showed economic declines in this period. But on average the fall in real per capita GDP from the previous peak in 1918 (or sometimes 1919 or 1920) was 6.6%. (For the 24 countries with data, the average decrease in real consumer spending per person was similar to that for real per capita GDP.) Notable declines in GDP among the 13 depression cases were Canada and South Africa at 24% and Italy at 22%. For the U.S. from 1918 to 1921, the falls in per capita GDP and consumer spending by 12% and 14%, respectively, meant that this contraction was second in size since 1870 only to the Great Depression."

The problem with looking at history is that it may be seen from a one dimensional lens.

This isn't 1918. Today's economic climate is far different from the Great Depression.

While travel and troop movements may have been accounted for as the aggravating circumstances for the spread of the disease, this hasn't been sufficient.

On the other hand, Prof. William Anderson asserts that government policies then exacerbated the pandemic. He writes (all bold highlights mine),

``Most people don’t remember 1918 as the year the flu pandemic began; they remember it as the year that World War I ended. This was the "War to End All Wars," or so it was called, when a more appropriate title might have been the "War to Permanently Expand the State." More than 10 million soldiers died on the battlefields of Europe and millions of civilians died deaths of starvation or were killed in the crossfire.

``Since war is a tool of the state, we safely and honestly can say that the calamities of World War I were state-created. Unfortunately, people did not just die from bullets, artillery shells, bombs, and even starvation. Across the globe, the war resulted in vast swaths of malnourishment as crops were diverted from civilian populations to the huge armies strung across Europe. At the same time, once-productive croplands in Europe were reduced to moonscapes as the armies obliterated the land.

``But governments were not satisfied with the sheer amount of physical and human destruction. Indeed, the government made things worse through lies, and nowhere was that more apparent that the lies told by state agents in order to "prevent panic" from the onrushing flu epidemic. As Wikipedia points out:

"The Great Influenza was the source of much fear in citizens around the world. Further inflaming that fear was the fact that governments and health officials were downplaying the influenza. While the panic from World War I was dwindling, governments attempted to keep morale up by spreading lies and dismissing the influenza. On September 11, 1918, Washington officials reported that the Spanish Influenza had arrived in the city. The following day, roughly thirteen million men across the country lined up to register for the war draft, providing the influenza with an efficient way to spread. However, the influenza had little impact upon institutions and organizations. While medical scientists did rapidly attempt to discover a cure or vaccine, there were virtually no changes in the government or corporations. Additionally, the political and military events were fairly unaffected due to the impartiality of the disease, which affected both sides alike".

``Exacerbating the crisis in this country was the crowding of American troops onto ships following the war’s end, which was guaranteed to spread the sickness and help it spread when the soldiers reached the USA. On the home front, huge war bond rallies in large cities brought people into very close proximity with each other, allowing the flu to spread rapidly. On one end, the government helped to create the conditions that spread the flu; on the other hand, agents representing the state lied about those conditions.

``By the war’s end, Germany was near starvation (and many people did starve to death during the British blockade that lasted well into 1919), and about a half-million civilians succumbed to the sickness in that country. It is estimated that 16 million people in India died of the pandemic.

``Yet, when it raises the prospect of a repeat of this very horror, governments engage in more lies. We forget that life expectancy in the United States was in the mid-50s for white males and less than 50 for black men. In countries elsewhere, and especially in Asia and Africa, life expectancy was much shorter. Medical care at that time was primitive compared to what we have today, even in poor countries, and it was not uncommon in that era for people to be exposed to epidemics that pretty much have disappeared today.

``Even with those odds, the mortality rate during the 1918–1920 pandemic was estimated at between 2.5 and 5 percent. We can be assured today that not only would fewer people become sick, but even fewer people would die. In other words, even at its worst, the current outbreak of Swine Flu, while bad, is not going to turn into a pandemic no matter what CNN and the CDC try to tell us."

In short, the swine flu seems to be more about the politics of government control than of the health hazard itself.

Professor Anderson concludes, ``I doubt seriously that any plan by government can or will lessen the impact of this current "epidemic," if we can call it that. However, I also have no doubt that if emergency plans are kicked into place, it will be much easier for the government to call for further states of emergency, with the threshold becoming lower and lower. That we should fear much more than the Swine Flu."

Global Warming: Politics versus Science

What has been advocated by politicians...

According to Seattlepi.com, ``Al Gore said Tuesday the world must act quickly to slow the melting of the world's polar ice packs and glaciers before it reaches a critical rate for global warming."

``"We have to act and we have to act quickly because we don't want to cross this tipping point," the Nobel peace laureate and former U.S. vice president told a meeting of foreign ministers, experts and scientists from the most affected countries.

``The meeting, called "Melting Ice Regional Dramas, Global Wake-Up Call" was held the day before a meeting of the Arctic Council of foreign ministers. The council members are the United States, Russia, Canada, Sweden, Denmark, Finland, Iceland and Norway.

Hasn't been validated by evidence...

From Canada Free Press: North Pole Sea Ice twice as thick as expected

``The research aircraft “Polar 5” today concluded its Arctic expedition in Canada. During the flight, researchers measured the current ice thickness at the North Pole and in areas that have never before been surveyed. The result: The sea-ice in the surveyed areas is apparently thicker than scientists had suspected.

``Normally, newly formed ice measures some two meters in thickness after two years. “Here, we measured ice thickness up to four meters,” said a spokesperson for Bremerhaven’s Alfred Wegener Institute for Polar and Marine Research. At present, this result contradicts the warming of the sea water, according to the scientists.

Apart from measuring ice thickness, the composition of arctic air was also investigated. With the help of a laser, the researchers studied the level of pollution of the atmosphere by emissions from industrialized countries. In the next few weeks the results will be evaluated. Some 20 scientists from the U.S., Canada, Italy and Germany took part in the expedition.

From National Post: Lawrence Solomon: Thick Arctic ice surprises scientific expedition

``Ice in the Arctic is often twice as thick as expected, report surprised scientists who returned last week from a major scientific expedition. The scientists - a 20-member contingent from Canada, the U.S., Germany, and Italy - spent one month exploring the North Pole as well as never-before measured regions of the Arctic. Among their findings: Rather than finding newly formed ice to be two metres thick, "we measured ice thickness up to four metres," stated a spokesperson for the Alfred Wegener Institute for Polar and Marine Research of the Helmholtz Association, Germany's largest scientific organization.

``The Alfred Wegener Institute is one of the six research organizations involved in the month-long expedition, called Pan-Arctic Measurements and Arctic Climate Model Inter Comparison Project. The other five include three from Canada (Environment Canada, University of Alberta, York University) one from the U.S. (National Oceanic and Atmospheric Administration) and one from Italy (Institute of Atmospheric Sciences and Climate.

``The path-breaking project broke new ground by employing the Polar 5, a fixed-wing aircraft, rather than a helicopter with its more limited range. The Polar 5 not only landed in the Arctic ice, it towed a device called EM-Bird on an 80 metre-long rope 20 metres above the ice surface. The EM-Bird conducts electromagnetic (EM) induction sounding for ice thickness measurements.

The thickest ice that the expedition found was at Ellesmere Iceland, where thicknesses often exceeded 15 metres.

Nonetheless green house effect global warming dissenters seem to be getting mainstream coverage, which implies of a growing crowd of supporters.

From the New York Times, ``Marc Morano does not think global warming is anything to worry about, and he brags about his confrontations with those who do...

``As a spokesman for Senator James M. Inhofe of Oklahoma, the ranking Republican on the Environment and Public Works Committee, Mr. Morano was for years a ceaseless purveyor of the dissenting view on climate change, sending out a blizzard of e-mail to journalists covering the issue. Now, with Congress debating legislation to curb carbon dioxide emissions, Mr. Morano is hoping to have an even greater impact. He has left his job with Mr. Inhofe to start his own Web site, ClimateDepot.com.

``The site, scheduled to debut this week, will be a “one-stop shop” for anyone following climate change, Mr. Morano says. He will post research he thinks the public should see, as well as reported video segments and ratings of environmental journalists.

``Supporters see Mr. Morano as a crucial organizing force who has taken diffuse pieces of scientific research and fused them into a political battering ram.

“Before Marc, efforts to debunk global warming were scattered and disorganized,” said John Coleman, a weather broadcaster who helped found the Weather Channel and who has called global warming “a scam.”

``And environmentalists and mainstream climate scientists, however much they disagree with Mr. Morano’s views, still pay attention to what he does.

And why AL Gore's persistence to promote the global warming theory?

From Investor's Business Daily's editorial, ``When Gore left office in January 2001, he was said to have a net worth in the neighborhood of $2 million. A mere eight years later, estimates are that he is now worth about $100 million. It seems it's easy being green, at least for some.

``Gore has his lectures and speeches, his books, a hit movie and Oscar, and a Nobel Prize. But Rep. Marsha Blackburn, R-Tenn., was curious about how a man dedicated to saving the planet could get so wealthy so quickly. She sought out investment advice we all could use in a shaky economy.

``Last May, we noted that Big Al had joined the venture capital group Kleiner Perkins Caufield & Byers the previous September. On May 1, 2008, the firm announced a $500 million investment in maturing green technology firms called the Green Growth Fund.

``Last Friday, Gore was the star witness at the hearings on cap-and- trade legislation before the House Energy and Commerce Committee. Blackburn asked Gore about Kleiner-Perkins, noting that at last count they "have invested about a billion dollars invested in 40 companies that are going to benefit from cap-and-trade legislation that we are discussing here today."

``Blackburn then asked the $100 million question: "Is that something that you are going to personally benefit from?" Gore gave the stock answer that "the transition to a green economy is good for our economy and good for all of us, and I have invested in it but every penny that I have made I have put right into a nonprofit, the Alliance for Climate Protection, to spread awareness of why we have to take on this challenge."

``Last May, we also noted that on March 1, Gore, while speaking at a conference in Monterey, Calif., admitted to having "a stake" in a number of green investments that he recommended attendees put money in rather than "subprime carbon assets" such as tar sands and shale oil.

``He also is co-founder of Generation Investment Management, which sells carbon offsets that allow rich polluters to continue with a clear conscience. It's a scheme that will make traders of this new commodity rich and Bernie Madoff look like a pickpocket. The other founder is former Goldman Sachs partner David Blood."

Hmmmm...

Hat Tip Mark Perry

Asian Markets: Crossing the Bull Market Rubicon?

For many fundamental reasons discussed in our previous articles (such as in 2009: Asian Markets Could OUTPERFORM, or in Will “Divergences” Be A Theme for 2009?, or in What Posttraumatic Stress Disorder (PTSD) Have To Do With Today’s Financial Crisis,) it has been our longstanding belief that Asian markets will likely 'decouple' or diverge and or outperform the rest of the world.

In addition, we further advanced the case that general technical indicators, market sentiment and market internals have been substantially improving in our domestic market as it had likewise been reflecting on the state of the regional performance (see Phisix: The Case For A Bull Run,) where the final obstacle to the full transition of the market cycle from a bottom to the advance phase requires the breach of the 200-day moving averages.

This week, the Philippine Phisix has been buoyed by the same regional tide and appears to have successfully hurdled the remaining last barrier.

So have Asian markets finally crossed the rubicon?

The Philippine Phisix has now popped above the milestone 200 day moving averages (red line).

Some have argued that excess capacity have plagued nations, whose primary economic activities cater to US consumers, will suffer more than the US due to "lack of domestic demand".

Well East Asian bourses, in contrast to such expectations have surged earlier than the rest.

Like Taiwan's Taiex

Singapore's STI

Hong Kong's Hang Seng

Even India's BSE index has leapt above the threshold mark.

We see the same actions in some of our closest neighbors.

Indonesia has also broken through

As well as Malaysia.
Albeit, Thailand has yet to achieve the same goal but is now at the testing zone. Although as of this writing Thailand appears to have joined the bandwagon.

Nonetheless, there are still some laggards...

As New Zealand's NZ50
The Australian All Ordinaries

And Japan's Nikkei 225.

But we shouldn't forget the leader of the pack: China's Shanghai index that has braved the negative tide and continues to post higher highs.

Yet the recent run has prompted many regional bellwethers to reach nearly oversold levels. Combined with seasonal factors perhaps there may be some weakness that may lie ahead.

Nonetheless they would seem like buying opportunities ahead of the immense liquidity driven market environment.