Asia Leads Rebound In Global Housing Markets

The tidal wave of money from collective reflationary policies appears to be lifting global property prices. Although the impact has so far been variable.

This from Global Property Guide,

``Housing markets in the world’s leading economies continue to recover, says the Global Property Guide's summary of housing statistics for the year to end-Q3, 2009.


``Many housing markets in leading economies remain distressed. Of the 27 countries which have already published their Q3 data, more countries have experienced house price falls (17 countries) during the year to date, than have enjoyed price rises (10). In addition, the house price falls in several countries have been much larger than house price rises anywhere, and include unprecedentedly severe falls in Latvia (-59.7% year to date), the UAE (-48.1%), Bulgaria (-28.7%), Iceland (-21.2%), Russia (-19.5%) and Slovakia (-15.3%) (all figures inflation-adjusted).

``However the annual data is somewhat like a car’s rearview mirror. During the latest quarter, price rises have occurred in 16 countries, and falls in only 11, of the 27 countries (both major US indices were nominally positive, but adjusting for inflation puts the FHFA index still in negative territory). Quarter-on-quarter house price changes in the UK, Canada, Germany, Singapore, and South Africa are back in positive territory, after these countries suffered during the global financial crisis.

``So the trend is toward recovery. More broadly, the world seems polarized between the Asian economies, which are enjoying strong economic growth and high residential property price rises (Thailand excepted), and Eastern Europe and the UAE, where growth has stalled and property markets have crashed. Even there, figures for the latest quarter offer hope." (bold emphasis mine)

Read the rest of the article here

So again we can observe that Asia has been outperforming developing economies in terms of housing prices (which is another sign of decoupling) and possibly could be indications of a property bubble in motion.

Maguindanao Election Massacre: A Quarrel Over Economic Bones

It's sad and sickening to learn how political violence has resurfaced, where 52 people have been reportedly massacred in Southern Philippines.

This from the New York Times,

``The death toll in Monday’s election violence rose to 52 on Wednesday, the Philippine authorities said, as six more bodies were recovered.

``The regional police commander in Maguindanao Province, Josefino Cataluna, said the bodies were dug out from a shallow pit near a grassy hilltop where police and troops earlier found 46 other corpses after Monday’s attack, The Associated Press reported. He said the 52 victims included the family of a gubernatorial candidate and 18 Filipino journalists who accompanied his relatives in filing his election papers.

So what provoked the aggression?

Again from NYT's Carlos Conde (bold highlights mine), ``it was rooted in rivalries among local clans that the government had empowered as a way of combating the insurgents. One clan, the Ampatuans, is considered the closest political ally of Mrs. Arroyo in that part of the southern Philippines."

``There are at least 250 political dynasties scattered throughout the Philippines, according to the Center for People Empowerment in Governance, a nonprofit group. For many of them and particularly those in the south, politics is literally a blood sport, with the clans’ power and income riding on the outcome of elections. As a consequence, violence has become a fixture of elections here; at least 126 died in the 2007 elections and 189 in 2004."

In other words, Philippine politics is, in essence, a contest to secure economic rent from the state.

And the 250 political dynasties, which has thrived all these years, is manifestation or a symptom of such political blight brought about by statism or the welfare state.

This is also basically a form of protectionism which fuels political competition or feuds that results to dastardly violent acts as the above. And it's a classic case where politics have substituted for trade.

Professor Murray Rothbard in Man, Economy and State accurately explains the phenomenon, (bold highlights mine)

``Individuals recognize, through the use of rea­son, the advantages of exchange resulting from the higher pro­ductivity of the division of labor, and they proceed to follow this advantageous course. In fact, it is far more likely that feelings of friendship and communion are the effects of a regime of (con­tractual) social co-operation rather than the cause. Suppose, for example, that the division of labor were not productive, or that men had failed to recognize its productivity. In that case, there would be little or no opportunity for exchange, and each man would try to obtain his goods in autistic independence. The re­sult would undoubtedly be a fierce struggle to gain possession of the scarce goods, since, in such a world, each man's gain of useful goods would be some other man's loss. It would be almost inevi­table for such an autistic world to be strongly marked by violence and perpetual war. Since each man could gain from his fellows only at their expense, violence would be prevalent, and it seems highly likely that feelings of mutual hostility would be dominant. As in the case of animals quarreling over bones, such a warring world could cause only hatred and hostility between man and man. Life would be a bitter "struggle for survival."

In short, in the absence of free trade, some politicians resort to a fatalistic quarrel over economic bones.

Will Vertical Farming Prevent A Food Crisis?

I chanced upon an article about growing food in buildings which piqued my interest. It's called vertical farming.

The following are the illustrated conceptual framework of vertical farming....

Now this article from CBC Canada,

``Is it an elegant solution to pressing problems related to the food supply, or another example of putting too much faith in technology?

``That's a tough question to answer. But what is clear right now is that vertical farming is in its infancy.

``The idea is to grow food inside buildings — not conventional greenhouses, but multi-storey buildings, quite likely in cities — in closed ecosystems using hydroponics rather than soil, and without the use of pesticides.

``So far it has only been tried on a very small scale. Paignton Zoo in South Devon, U.K., for example, is growing produce to feed some of its animals.

``But advocates of vertical farming — notably Dickson Despommier, a Columbia University professor of public health — envision towering gardens in the heart of a city. Despommier, who is working on a book on the idea, sees vertical farming as part of the answer to global warming, water shortages and inner-city health problems.

The key arguments for vertical farming are these:

• Conventional farms waste water. Despommier says irrigation accounts for 70 per cent of worldwide water use, and much of that is wasted as runoff, but because it's contaminated with silt, pesticides and fertilizers, it can't be captured and reused. Vertical farms would grow crops hydroponically, in a water-and-nutrient solution, or perhaps aeroponically, using a mist of nutrient-laden water. The approach could grow the same crops with as little as 10 per cent of the water used in traditional agriculture, Despommier argues.
• Vertical farms would make it easy to grow food without chemicals. There is growing concern about the environmental effects of pesticides and fertilizers used in traditional agriculture. Some see organic farming as the answer, others argue organic farming can't deliver the yields necessary to feed the world. But vertical farming would virtually eliminate the need for pesticides because air coming in could be filtered to keep pests out, and whatever fertilizers were used could be kept within the system and out of lakes and rivers.
• Growing fresh produce in cities would make it more accessible to poor city-dwellers. As a public-health professor, this one particularly interests Despommier. "It's very difficult to find fresh produce in inner cities," he said, so people who live there tend to eat less nutritious foods. "The data is overwhelming," he added: If healthier food is available, people will eat it.
• Growing food close to where it's eaten would reduce transportation needs, which would cut greenhouse-gas emissions. Reduced use of fossil-fuelled farm machinery would also help cut emissions.
• Vertical farms would improve air quality in cities by consuming carbon dioxide and releasing oxygen.

``All this sounds too good to be true — and some people argue that it is.

``The arguments against vertical farming aren't as numerous as those for it, but one of them in particular stands out: Urban land is just too expensive for vertical farming to be commercially viable in cities."

This last statement appears to be reading present conditions into the future. Should a food crisis erupt, this equation will be radically altered-farm lands will likely be more expensive than urban lands.

Vertical farming seems designed for nations that lack agricultural lands than addressing a food crisis. That's why it is technology dependent.

As how will vertical farming impact the world today, Grant Buckler of CBC writes, ``We have never suggested that it will replace conventional agricultural systems," Bradford says.

``And whatever potential vertical farming has, it won't be realized overnight. Even Despommier, probably its most enthusiastic proponent, says the idea could take 50 years to take hold — but he does expect some significant experiments in the next couple of years."

Bottom line, we can't seek salvation from vertical farming should a food crisis emerge.

Exposing The Fraud Behind Man Made Global Warming?

Computer hackers confer some benefit to the society after all.

Some recently hacked into the computers of climate research scientists and surreptitiously obtained a wealth of information: scientific evidences in support of anthropogenic (man caused) global warming were allegedly manufactured, if not tweaked to produce man made global warming!

This from the New York Times, ``Hundreds of private e-mail messages and documents hacked from a computer server at a British university are causing a stir among global warming skeptics, who say they show that climate scientists conspired to overstate the case for a human influence on climate change.[bold emphasis added]

``The e-mail messages, attributed to prominent American and British climate researchers, include discussions of scientific data and whether it should be released, exchanges about how best to combat the arguments of skeptics, and casual comments — in some cases derisive — about specific people known for their skeptical views. Drafts of scientific papers and a photo collage that portrays climate skeptics on an ice floe were also among the hacked data, some of which dates back 13 years."

According to Telegraph's James Delingpole, (blue bold highlights mine, black bold original)

``When you read some of those files – including 1079 emails and 72 documents – you realise just why the boffins at Hadley CRU might have preferred to keep them confidential. As Andrew Bolt puts it, this scandal could well be “the greatest in modern science”. These alleged emails – supposedly exchanged by some of the most prominent scientists pushing AGW theory – suggest:

Conspiracy, collusion in exaggerating warming data, possibly illegal destruction of embarrassing information, organised resistance to disclosure, manipulation of data, private admissions of flaws in their public claims and much more.

Mr. Delingpole's points to several issues...[bold highlights original]

``But if genuine, they suggest dubious practices such as:

Manipulation of evidence:

I’ve just completed Mike’s Nature trick of adding in the real temps to each series for the last 20 years (ie from 1981 onwards) amd from 1961 for Keith’s to hide the decline.

Private doubts about whether the world really is heating up:

The fact is that we can’t account for the lack of warming at the moment and it is a travesty that we can’t. The CERES data published in the August BAMS 09 supplement on 2008 shows there should be even more warming: but the data are surely wrong. Our observing system is inadequate.

Suppression of evidence:

Can you delete any emails you may have had with Keith re AR4?

Keith will do likewise. He’s not in at the moment – minor family crisis.

Can you also email Gene and get him to do the same? I don’t have his new email address.

We will be getting Caspar to do likewise.

Fantasies of violence against prominent Climate Sceptic scientists:

Next time I see Pat Michaels at a scientific meeting, I’ll be tempted to beat the crap out of him. Very tempted.

Attempts to disguise the inconvenient truth of the Medieval Warm Period (MWP):

……Phil and I have recently submitted a paper using about a dozen NH records that fit this category, and many of which are available nearly 2K back–I think that trying to adopt a timeframe of 2K, rather than the usual 1K, addresses a good earlier point that Peck made w/ regard to the memo, that it would be nice to try to “contain” the putative “MWP”, even if we don’t yet have a hemispheric mean reconstruction available that far back….

You can read the rest of the article here.

Bishop Hill has a collection of sensitive communications here.

This just goes to show how closet communists or socialists have been using the environment as cover or as camouflaged platform to advance their political agenda. It isn't the environment that truly matters but absolute societal (the political economy) control by would be dictators or tyrants. They'd like to bring us back to the hunter gatherer age!

To quote Professor George Reisman, ``the intellectuals have chosen to foist the doctrine of environmentalism on the world, as a last-ditch effort to destroy capitalism and save socialism."

It's a conspiracy, if not a bubble, that appears to be falling apart.

Global Medical Tourism As Health Care Reform

While Americans quibble about healthcare reform, little is known that there has been an ongoing evolution in health industry outside the ambit of government [so far].

It's fundamentally a free market transformation: The globalization of the healthcare services or popularly known as Medical Tourism.

This article from Wall Street Journal highlights on such transition, (all bold highlights mine)

``Hair tucked into a surgical cap, eyes hidden behind thick-framed magnifying glasses, Devi Shetty leans over the sawed open chest of an 11-year-old boy, using bright blue thread to sew an artificial aorta onto his stopped heart.

``As Dr. Shetty pulls the thread tight with scissors, an assistant reads aloud a proposed agreement for him to build a new hospital in the Cayman Islands that would primarily serve Americans in search of lower-cost medical care. The agreement is inked a few days later, pending approval of the Cayman parliament.



``Dr. Shetty, who entered the limelight in the early 1990s as Mother Teresa's cardiac surgeon, offers cutting-edge medical care in India at a fraction of what it costs elsewhere in the world. His flagship heart hospital charges $2,000, on average, for open-heart surgery, compared with hospitals in the U.S. that are paid between $20,000 and $100,000, depending on the complexity of the surgery.

``The approach has transformed health care in India through a simple premise that works in other industries: economies of scale. By driving huge volumes, even of procedures as sophisticated, delicate and dangerous as heart surgery, Dr. Shetty has managed to drive down the cost of health care in his nation of one billion.

``His model offers insights for countries worldwide that are struggling with soaring medical costs, including the U.S. as it debates major health-care overhaul.

"Japanese companies reinvented the process of making cars. That's what we're doing in health care," Dr. Shetty says. "What health care needs is process innovation, not product innovation."

``At his flagship, 1,000-bed Narayana Hrudayalaya Hospital, surgeons operate at a capacity virtually unheard of in the U.S., where the average hospital has 160 beds, according to the American Hospital Association.

``Narayana's 42 cardiac surgeons performed 3,174 cardiac bypass surgeries in 2008, more than double the 1,367 the Cleveland Clinic, a U.S. leader, did in the same year. His surgeons operated on 2,777 pediatric patients, more than double the 1,026 surgeries performed at Children's Hospital Boston.

``Next door to Narayana, Dr. Shetty built a 1,400-bed cancer hospital and a 300-bed eye hospital, which share the same laboratories and blood bank as the heart institute. His family-owned business group, Narayana Hrudayalaya Private Ltd., reports a 7.7% profit after taxes, or slightly above the 6.9% average for a U.S. hospital, according to American Hospital Association data."

Pls read the rest of the article here.

As you would note, outside government intervention, it is the basic laws of economics at work here [free markets]; to the benefit of the consumers (patients), the providers (Doctors, hospitals, medical suppliers and ancillary services) and the society in general (in terms of greater spending power and increased revenues).

The Web 2.0 Evolution: McKinsey Quarterly Interviews MIT’s Andrew McAfee

It's been a frequent theme on this blog space that conventionalism doesn't take into account how the world has been transitioning from the post-industrial age to the information age.

This video interview of MIT's Andrew McAfee by McKinsey Quarterly "How Web 2.0 is changing the way we work"deals with such transformation.

According to McKinsey Quarterly,

``In recent years, using technology to change the way people work has often meant painful disruption, as CIOs rolled enterprise software programs through the ranks of reluctant staffers. Today, employees are more likely to bring in new technologies on their own—and to do so enthusiastically—through their Web browser, whether it’s starting a blog, setting up a wiki to share knowledge, or collaborating on documents hosted online. Andrew McAfee, principal research scientist at the Center for Digital Business at the MIT Sloan School of Management, has been watching this shift closely. His new book, Enterprise 2.0: New Collaborative Tools for your Organization’s Toughest Challenges, explores the ways that leading organizations are bringing Web 2.0 tools inside. McAfee calls these tools “emergent social software platforms”—highly visible environments with tools that evolve as people use them—and he is optimistic about their potential to improve the way we work.

``McAfee spoke with McKinsey’s Roger Roberts, a principal in the Silicon Valley office, in Palo Alto, California, in October 2009.

Andrew McAfee: ``One of my initial assumptions was after looking at the Web, you see the phenomenal growth of things like Facebook and Wikipedia and Flickr and YouTube and all that. I thought these technologies were essentially so cool that when you dropped them in an organization, people flocked to them. That was the assumption I carried around in my research.

``I very quickly had that overturned. And in fact what you see is—particularly for longer tenured workers, particularly for older workers—this is a big shift for them, changing their current work practices and moving over to Enterprise 2.0. This is not an overnight phenomenon at all. And while there are pockets of energy, getting mass adoption remains a pretty serious challenge for a lot of organizations." (Things do change at the margins-Benson)

If video doesn't appear pls proceed to McKinsey's website here.

The Transcript of the interview here

Ron Paul: Gold Is Telling Us That The US dollar Is In Danger

Congressman Ron Paul rebuts on some objections of his Audit The Fed bill at a CNBC interview

Some notes:

Audit The Fed bill
-is not about running monetary policy
-is against secrecy...Fed Independence is secrecy. Paul wants transparency
-Gold is telling us that the US dollar is in danger
-Audit of the fed won’t save us from super regulation
-Fed will self destruct because they’re [the FED's] gonna destroy the dollar
-Fed is politicized…who appoints the chairman?
-it's the deficits that puts the pressure on the dollar

China's Ghost Cities

There is a saying that goes "build and they will come"-perhaps rooted from "Supply creates its own demand" which is a (Keynesian) misinterpretation of Say's Law.

And perhaps too that's the core China's economic model, judging from this news account, courtesy of Al Jazeera (Hat Tip: Robert Blumen/Mises Blog)

Unfortunately in as much as there had been a theoretical misinterpretation and the subsequent failed "theory", China's uninhabited 'ghost' cities seem like a symptom of misdirected capital.

To quote Robert Blumen, ``A lot of the so-called GDP growth is spending by central planners that has no real economic value. The reporter says that "a country can raise its GDP by spending more", which is almost a tautology, since GDP counts spending. But GDP growth does not necessarily mean real economic growth. Real growth can only be accomplished by expanding the capital base, and that requires economic calculation by entrepreneurs who are risking loss of their own capital. Just building a lot of physical stuff and counting the amount you spent is not the same thing."

Indeed "no economic value"- that's because capital is locked up or sunk into unproductive assets and activities. Frontloading expenditures to prop statistical Keynesian constructed "GDP" will come at the cost of future capital losses.

This makes China's economic model as seemingly unfeasible and unsustainable. Anyway, let the good times roll, since imbalances take time to accrue before unraveling.

Well, that's the nature of bubble cycles.

Is Gold In A Bubble?

``Gold was not selected arbitrarily by governments to be the monetary standard. Gold had developed for many centuries on the free market as the best money; as the commodity providing the most stable and desirable monetary medium." - Murray N. Rothbard, What Has Government Done to Our Money?

In this issue:

Is Gold In A Bubble?

-Fed’s Quantitative Easing Update

-Misrepresenting Gold’s History

-The Misunderstood Role Of Central Bankers

-Appraising Gold And The Origin of Money

-Crack Up Boom Versus Bubble Psychology

Fed’s Quantitative Easing Update

The US Federal Reserve has vastly accelerated its purchases of US treasuries to the tune of about $7 billion, based on the data from the Federal Bank of Cleveland. This has been in breach of its self-imposed limits.

Likewise, the increased treasury purchases appears to be in line with the commencement of the next wave of mortgage resets that seems likely to signify as the next round of strains to the US banking system. As previously noted, ``With the risks of the next wave of resets from the Alt-A, Prime Mortgages, Commercial Real Estate Mortgages, aside from the Jumbo and HELOC looming larger, they are likely to exert more pressure on the banking system” [see past discussion in 5 Reasons Why The Recent Market Slump Is Not What Mainstream Expects].

Figure 1: Sifma, Zero Hedge: US Mortgage and US Treasury Market

Since the crisis erupted, the US government, through its GSE agencies, has virtually been THE mortgage market (see left window: blue bars FED agency mortgages, gray bars private labels).

We see the same trend for US treasuries, the US government via the Federal Reserve is on its way to become the buyer of last resort- since the activation of the QE program last March, Fed purchases (black line, right window) of US treasuries accounts for almost half of the market (Zero Hedge) displacing foreign official holdings (blue line).

The above developments dispel on the flawed notions that the US government will refuse to assume the literal role as the buyer of the last resort, especially under extreme circumstances. As a political institution, once a political expediency arises-such as a renewed threat to the survivability of its banking system that could risk undermining the US dollar standard system-the US Federal Reserve will act according to its perceived priorities. And the actions in the above markets have been telling.

Misrepresenting Gold’s History

The recent spike in gold prices has evoked shrill cries of a “bubble”.

Does rising prices automatically constitute as a mania? What distinguishes a mania from structural changes?

For us, the fundamental issue is to understand the role of gold in the marketplace or in the economy than simply presuppose or generalize a bubble.

Basically, the gold debate can be delineated into two extreme camps: the gold bugs (ideological believers that money should be comprise or be backed by gold or commodity) and its antipode (ideological believers influenced by JMKeynes where gold or commodity as money is deemed as relic or a “barbaric metal”).

Of course the issue can’t be seen as simply black or white because the mainstream fundamentally operates on gray areas, out of the lack of understanding. But have mostly been tilted towards the “Barbaric” metal persuasion.

Here are some examples, (bold emphasis mine)

The Bloomberg quotes the highly distinguished trader Dennis Gartman, ``The gold bull run is not predicated upon inflation but is instead predicated upon the notion that gold is becoming a reservable asset.”

Or from Socgen’s Dylan Grice, ``How can something with no cashflow or earnings power be valued? The simple answer is that it can't be. Intrinsically it is pretty much worthless.”

Ironically Mr. Grice predicts that the price of gold to reach $6,300 primarily because of bubble psychology, the discount value of Gold relative to US dollars issued and “insolvent governments”.

On the other hand, Mr. Gartman does not qualify on the definition of, as well as, elaborate on WHY and HOW gold is “becoming a reservable asset”.

For the Barbaric metal camp, Gold is presented mostly as an unworthy investment (see figure 2)

Figure 2: Socgen: Real Prices of Gold

According to Mr. Grice, ``But the same chart also shows how unreliable gold has been as a store of wealth. A 15th century gold bug who'd stored all of his wealth in bullion, bequeathed it to his children and required them to do the same would be more than a little miffed when gazing down from his celestial place of rest to see the real wealth of his lineage decline by nearly 90% over the next 500 years (though he might take comfort from the knowledge that his financial advisor would be burning in hell). More recently, had you bought at the peak of the last bull market in January 1980 for $850, you'd have suffered a nominal decline of 70% by the time it bottomed in 1999. On an annualised basis you'd have lost 6% pa nominal and 9% real.” (bold highlight mine)

Mr. Grice’s premise seems plausible but blatantly misleads. Why?

Simply because Mr. Grice forgets to remind us that gold (including silver) was NOT held for investment, but was instead USED as money during the aforementioned eras.

And as money, gold and or silver was subjected to liquidity flows depending on the society’s perception of uncertainty, which ultimately determines the level of demand for money relative to the available supply of money. To quote Austrian economist Hans-Hermann Hoppe, ``The holding of money is a result of the systemic uncertainty of human action.”

For instance, in the mid 16^th century the fall of the real price of gold (exchange value relative to other commodities) was mainly due war “conquest” financing.

According to Professor Niall Ferguson in his latest book The Ascent Of Money, ``during the so-called “price revolution”, which affected all of Europe from the 1540s until the 1640s, the cost of food-which had shown no sustained upward trend for three hundred years-rose markedly.” [italics mine]

Professor Ferguson’s account appears very consistent with the real price trend of gold on the chart, especially on the 300 years prior to the eon of war financing.

Moreover, following the Spanish conquest of the Inca Empire by a Spanish colonel Francisco Pizzaro, huge precious metals (money) streamed into Spain, many of which came from the Potosi (otherwise known as Domingo de Santo Tomas-mouth of hell) mines in Bolivia.

Again from Niall Ferguson’s Ascent of Money, ``between 1556 and 1783, the rich hill yielded 45,000 tons of pure silver to be transformed into bars and coins in the Casa de Moneda, and shipped to Seville…Pizarro’s conquest, it seemed, had made the Spanish crown rich beyond the dreams of avarice.” Thus, the relative surplus of gold and silver against other commodities explains anew the depressed real prices of gold and is consistent with the price action of gold chart above.

Yet going into the industrial revolution in 1800s-1913, one would observe that the real price of gold has mostly stabilized.

Notes Professor Michael Rozeff, ``Before there is a central bank and when metals are being used in the money and banking system, there is greater price stability. There is no contest. Pre-1913, the price level falls gently each year on the average by less than ½ of one percent. After 1913, the price level rises each year by 6.8 times as much as it used to decline before 1913 (in absolute value.)” [italics his]

Following the introduction of the US Federal Reserve in 1913, real prices of gold have gyrated mostly higher over time. And the upside volatility has been accentuated after the Nixon Shock or when former President Nixon closed the gold window or ended the Bretton Woods system on the 15^th of August 1971.

In other words, the chart above from 1265-1971 or in 7 centuries gold chiefly performed the role of money. Today, this hasn’t been the case...yet.

To conclude, to use gold real prices as a metric to justify on gold’s poor investment returns is highly inconsistent, flawed and a misrepresentation. Gold’s role today isn’t like in the past where gold functioned as a medium of exchange, which should be nuanced from the current role as non-money commodity.

To add, since gold isn’t used in transactions by the general public today, then fundamentally gold isn’t money. Only to the eyes of central bankers could gold be deemed as a form of money. Thereby comparing gold as money and gold as non-money is like comparing apples to oranges.

The Misunderstood Role Of Central Bankers

Some have cited the activities of central banks as possible indication for inflection points on gold prices. For instance, the sale of UK Chancellor Gordon Brown of 400 tonnes of gold reserves in 1999 coincided with the end of the bear market. In other words, central bankers are thought to resemble retail investors, whom traditionally play the role of the greater fool during market extremes.

Yet like all human beings, while central bankers are subject to the corporeal frailties and could be influenced somewhat by the developments of the marketplace, what seem glaringly overlooked by mainstream’s oversimplification are the governing incentives from which the political bureaucracy operates on.

As Professor Ludwig von Mises rightly notes of the crux of the distinction, ``For it is a fact that as a rule the authorities are inclined to deviate from the profit system. They do not want to operate their enterprises from the viewpoint of the attainment of the greatest possible profit. They consider the accomplishment of other tasks more important. They are ready to renounce profit or at least a part of profit or even to take a loss for the achievement of other ends.” (bold emphasis mine)

So unlike typical investors driven by profits, political leaders and the bureaucracy, being political actors, fundamentally operates on political goals. In short, central banks transactions in the marketplace may represent price insensitivity, and importantly, are most likely subject to political ends that may be extraneous to market forces.

Manias are essentially founded by a massive credit boom and underpinned by government policies to create boom conditions, from which induces investor irrationality responses based on expectations of perpetually easy profits. Therefore, a gold mania cannot mechanically be attributed to central bank activities because this would highly depend on the underlying political goals in support of their activities.

Furthermore, a mania depends on pyramiding leverage or accelerating credit boom. At the present moment, central bank buying of gold has been funded from their stash of US foreign exchange surpluses.

The tiny resort island of Mauritius recently followed India to acquire 2 metric tons from the IMF (Bloomberg).

Figure 3: Virtual Metals: Gold Demand Trends, Central Banks As Net Buyers

In addition, central banks accounted for as net buyers for the second successive quarter this year, where according to mineweb.com, ``the official sector was a net purchaser of gold in the third quarter, although the figures are low, at five tonnes in Q2 and 15 tonnes in Q3. The underlying trend is "expected to remain intact" as central banks, like private investors, continue to look for diversifiers, especially with respect to the dollar. Central banks outside the CBGA agreement that the WGC identified as gold purchasers included Mexico and the Philippines.” (see Figure 3-right window)

It is noteworthy that gold prices continue to rise, in spite of the massive net gold sales by the official sector even when gold’s bullmarket has been on the fringe.

Again from mineweb.com, ``at the end of 1998, world central bank holdings of gold amounted to 33,500 tonnes and that by the end of 2008 this was down to 29,700 tonnes so that the rate of disposal over the decade was the fastest in history - and still the price doubled.”

The important point is that the complexion of gold’s pricing dynamics has been significantly transforming from traditional “jewelry” based to “investment” based (left window). And this has been responsible for today’s buoyant gold prices, even in the face of central bank selling.

There is no better way to parse on central banking mindset than from their statements or “rationalization”. Mineweb’s Rhona O’Connell covers M. Paul Mercier, the European Central Bank's Principal Advisor in Market Operations, who in a recent speech gave four reasons why central bankers value gold.

From Ms. O’Connell (all bold and italics emphasis mine), ``The four primary reasons for a central bank to hold gold were listed as follows:

-Economic security. The physical and chemical characteristics of gold with its high density and resistance to oxidation, for example (unlike silver, the oxidation of which is the cause of tarnishing) combine with the fact that it is the only asset that is no-one else's liability to make it a vital element of foreign exchange reserves. Holding another party's securities always carries the possibility that the behaviour of the counter-party can affect the value of those securities.

-Unexpected needs. There is always a possibility, albeit very low, of highly damaging developments such as war or high inflation that can have a severe impact on sovereign debt, or result in a country's isolation. As the ultimate global means of payment gold is an important insurance policy. It can also be used as international collateral (for example the loan to the Banca d'Italia from the Bundesbank in the early 1970s).

-Confidence. Although gold no longer backs currencies in circulation, M. Mercier argued that it helps to underpin international confidence in any one currency, especially since, without gold's formal backing, currency values are based on faith in one another. He reminded us of the IMF's recent reiteration of the IMF's statement about hoe gold gives a "fundamental strength" to its balance sheet.

-Risk diversification. This, he asserts, is probably even more highly valued by central banks than it is by other investors. There is a considerable body of study that quantifies the ways in which gold brings robustness to a portfolio, most notably, for a central banker, the reduction in volatility.”

Ironically after selling 3,800 tonnes over the period where central banking dogma thought that they have successfully lorded over inflation [see Rediscovering Gold’s Monetary Appeal], counterparty risks, insurance, confidence and risk diversification suddenly becomes an issue for central bankers in reconsidering gold sales.

What has impelled them to raise such concerns?

Obviously signs like this… (all bold emphasis mine)

The Financial Times on India’s IMF’s gold’s purchase, ``Pranab Mukherjee, India’s finance minister, said the acquisition reflected the power of an economy that laid claim to the fifth-largest global foreign reserves: “We have money to buy gold. We have enough foreign exchange reserves.” He contrasted India’s strength with weakness elsewhere: “Europe collapsed and North America collapsed.”

Unsettling concerns over new bubble cycles emanating from the low interest rates regime implemented by the US Federal Reserve as articulated by the Chinese and Japanese leadership, from Bloomberg, ``“The continuous depreciation in the dollar, and the U.S. government’s indication that, in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation,” Liu, chairman of the China Banking Regulatory Commission, said in Beijing yesterday.

``While lower interest rates will help Americans pare debt, “there are also risks involved in continued low rates,” Shirakawa said today at a Paris Europlace Financial Forum in Tokyo. Having borrowing costs near zero may strain government finances if it spurs speculation that the dollar will continue to slide, he said, while warning that easy policy by officials globally may have repercussions in the long term.

``“Monetary easing in advanced economies has stimulated capital inflows to emerging economies,” Shirakawa said. If emerging nations continue to recover at a faster pace than advanced ones, they “might overheat and experience financial turmoil, triggering a recession,” he said.

Hong Kong’s monetary authority likewise includes the FED’s Quantitative Easing program aside from the prevailing low interest regime over concerns on formative bubbles, this from the Wall Street Journal, ``“The question one really has to ask is to what extent quantitative easing is necessary. Is the dosage right, because $2 trillion is a lot of money in the banking system, it’s high power money,” said Norman Chan, monetary authority chief executive. He and Ms. Yellen were at a forum sponsored by the Institute of Regulation & Risk. Ms. Yellen gave a speech that touched on how policymakers should address future asset bubbles.

“In Asian economies, Hong Kong included, we have seen a very massive inflow of funds that is explainable by the very low global interest rates and coupled with this huge amount of quantitative easing,” Mr. Chan said. “This question of potential risk of asset bubbles forming if this is to continue for a long period of time is a big challenge for us,” he said to Ms. Yellen.”

Basically, it’s been a predicament for Asian central banks to raise interest rates because higher rates will widen the currency yield spreads in their favor and exacerbate inward money flows. This, in essence, will blow the region’s asset bubbles faster. Yet by suppressing interest rate asset bubbles could be internally generated.

To quote CLSA’s high profile strategists Christopher Woods (highlight mine), ``The irony is that the more anaemic the Western recovery proves to be, the longer it will take for Western interest rates to normalize and the bigger the resulting asset bubble in Asia. Emerging Asia, not the U.S. consumer, will be the prime beneficiary of the Fed's easy money policy.

And the prospect of fostering asset bubbles has prompted for Asian central banks to consider imposing capital controls.

So Gartman’s argument where “gold is becoming a reservable asset” increasingly seems as a protective or insurance cover against the possible impacts from globalized systematic inflation (instead of no inflation), such as blossoming asset bubbles, emerging malinvestments, rampant speculation, financial and economic imbalances, arbitrages and carry trades, ballooning systemic leverage and surging inflation, which could all end up in tears. All these signify as inexorable monetary disorder.

In other words, many central banks have been insuring themselves, from inflation and counterparty risks by taking on gold as reservable asset. In short, gold’s appears to be gradually regaining its role as money.

Yet it would also be a grievous mistake to read bubbles as routinely blowing and popping without taking into account the magnitude where bubble cycles are becoming larger in scope and more damaging in scale upon impact when the mean reversion occurs.

Figure 4: Socgen, wikipedia: Central Bank Gold Shocks, Zimbabwe Dollar

A more fatal mistake would be to misjudge the impact from a lethal policy mix of flagrant money printing programs and low interest rate regime that could transmogrify a bubble cycle into hyperinflation.

So while global central banks could be buying gold today as shield against bubble cycles, they and everyone else would be stampeding into gold if and when the risks of a currency crisis becomes imminent.

Hence basing a projection on past performance (left window figure 4), where central banks bought during the 70s, which eventually turned into 2 gold shocks of sharply higher gold prices, assumes that present monetary disorder would be resolved in the traditional sense. We aren’t that confident. And Zimbabwe’s real life hyperinflation (right window) which ended last year should serve as reminder.

Appraising Gold And The Origin of Money

Many have made the case of valuing gold by discounting currency in circulation with that of available gold reserves.

As in the case of Socgen Dylan Grice, “So one way to value gold, therefore, is to ask at what gold price the value of outstanding central bank paper would be completely backed by gold. The US owns nearly 263m troy ounces of gold (the world's biggest holder) while the Fed's monetary base is $1.7 trillion. So the price of gold at which the US dollars would be fully gold-backed is currently around $6,300.”

Or based on Professor Michael Rozeff’s Zero Discount Value where ``value for gold such that every outstanding dollar liability in the central bank’s monetary base (currency plus bank reserves) is backed by an equivalent dollar’s worth of gold. It is what the dollar price of gold would be if the central bank’s liabilities were 100 percent backed or covered by gold.”

From our point of view, while these hypotheses could serve as meaningful concepts to measure gold, they are predicated on the assumption where variables (as monetary base) remains stable, secondly the world currency system persists on operating under the present US dollar standard, and lastly assumes that gold’s valuation in the light of current and constant conditions, hence won’t likely serve as accurate barometers, in my view.

Since we believe the world operates in a highly action-reaction dynamic, the complexity of the distribution isn’t likely to lead into a modeled outcome that can be easily captured by math estimates.

Instead we believe that policy actions are likely to be more of an accurate gauge to implied directions of the marketplace.

And it would also be true, to affirm with the behavioral camp, that human emotions will be an elaborate part of the price setting of gold, and thus is likely to cause price exaggerations beyond any models especially in bubble cycles.

In addition, while it seems conceivable to argue that gold’s rise could be a function of a bubble psychology, as per Socgen Dylan Grice, ``If my "valuation" of gold strikes you as a desperate attempt to value something which can't be valued, it's no different from metrics such as the "market cap to clicks" or "ARPU" ratios which were used in the late 1990s during the technology bubble when demand for bullish "valuation analysis" mushroomed”, this observation is far from accurate.

Yet Mr. Grice borrows some monetary aspects to rationalize an argument for a bubble cycle, ``Like today, central banks weren't buying gold in the late 1960s to prop it up, they were abandoning attempts to prop up the dollar.”

Using behavioral aspects he adds, ``Today, central banks are monetising government deficits to accommodate the recessionary effect of the credit crisis. Then the convincing narrative was that with the Middle East controlling our energy from abroad and aggressive trade unions rampant at home, policymakers were no longer in control. Today, the perception of central bank infallibility has been permanently ruptured by their collective failure to see the 2008 crash coming. Nagging concern at their over-willingness to inflate, at the blurring of monetary and fiscal policy and over long-term government solvency gives traction to a similar narrative today.”

In short, Mr. Grice utilizes the behavioral finance perspective to argue for a gold bubble and simultaneously disparage gold’s role in society.

The idea that gold is intrinsically worthless is to argue against 4,000 years of history whereby gold or silver has accounted for as money. To quote Murray Rothbard in What Has Government Done to Our Money?, ``Money is not an abstract unit of account, divorceable from a concrete good; it is not a useless token only good for exchanging; it is not a claim on society; it is not a guarantee of a fixed price level. It is simply a commodity.”

Yet gold, as commodity money, didn’t just pop out of nowhere, nor had they been they imposed by Kings or political leaders to be accepted by their constituents as money. On the contrary, historical evidences reveal that money evolved from the market’s selection process.

Some earlier forms of money that were used in select societies, such as cowrie shells in Maldives, peppers and squirrels skins in parts of Europe (The Ascent of Money), fish on the Atlantic sea coast of colonial America, beaver in the old Northwest, and tobacco, in Southern colonies (Rothbard-Mystery of Banking) salt, sugar, iron hoes, feathers, leaves and seeds, land to even huge stones weighing up to 500 lbs in the Pacific Islands of the Yap, failed to generate wider acceptance.

Instead, commodity metals, particularly of the precious metals family –gold, silver and copper- had been largely adopted due to its marketability.

According to Professor Ludwig von Mises in The Theory of Money and Credit, ``There would be an inevitable tendency for the less marketable of the series of goods used as media of exchange to be one by one rejected until at last only a single commodity remained. Which was universally employed as a medium of exchange; in a word money.”

Aside from marketability, commodity money has acquired its role due to added special traits as being highly divisible, portable, high value per unit weight and highly durable (Rothbard-Mystery of Banking).

Yet money in a conventional sense, to quote Professor Niall Ferguson in The Ascent Of Money, is a medium of exchange, which has the advantage of eliminating inefficiencies of barter; a unit of account which facilitates valuation and calculation and a store of value, which allows economic transactions to be conducted over long periods as well as geographical distances.

In other words, it would seem incoherent, if not self contradictory or plain arrogance, for anyone to claim that an object is intrinsically useless yet is considered as the most marketable combined with special traits for it to assume the role of money for thousands of years. It’s like arguing that Manny Pacquiao is a loser in spite of snaring a world record breaking title win!

Crack Up Boom Versus Bubble Psychology

Yet forecasting gold prices at $6,300 driven by plain narrative based bubble psychology is like proposing to buy or exchange something you own for something that is essentially a chimera. Or simply, would you buy rubbish simply because everybody else is doing so? How logically consistent can this be? To recall Warren Buffett’s priceless words of wisdom, ``the dumbest reason in the world to buy a stock [or any investment –mine] is because it's going up.”

Furthermore, the argument for a ‘displacement’ that would trigger a bubble cycle predicated on the rationale of “insolvent governments” ignores the psychology that drives money-FAITH.

In essence, bubble psychology deals with investor irrationality, cognitive biases and the animal spirits, which eventually revert to the mean. It underestimates and overlooks on the impact of the bubble cycles on monetary health conditions and sees a limited effect only to investment assets.

On the other hand, the truism is that money is driven by trust or faith accrued over the long years of established virtues or properties acquired which allowed money to assume its role. Confusing one for the other would be misleading.

Figure 5: Casey Research: Weimar Hyperinflation: How Faith Evaporates

As to how faith in money can vanish (see figure 5-the Weimar Germany experience) beyond the realm of behavioral finance, again this quote from Prof. von Mises, ``But then finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against "real" goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.”

In finale, my view of rising gold prices is that it reflects on a burgeoning global monetary disorder based on the incumbent operating currency platform (US dollar standard) more than simply bubble symptoms. It’s more than a narrative; it is an underlying degenerating malaise that places at risks faith in our money.

Although a gold bubble cycle CANNOT be discounted, we’d like to see evidences of a credit driven euphoria underpinning private or public sector acquisition. Absent credit expansion, which is the sine qua non fuel for any bubble, rising gold prices signify as a symptom.

Globalization Trends: No Crisis In Research And Development Spending

The recent crisis negatively affected nearly anything BUT research and development spending.

According to the Economist, ``BIG carmakers and drug and technology firms devote the most cash to research and development, according to the European Commission’s latest tally. These types of business rely on developing new products or constantly updating old ones to compete for customers. Toyota was the world's leading R&D spender in 2008. The Japanese carmaker increased its annual R&D budget by 7.6% to €7.6 billion ($10.6 billion), knocking Microsoft off the top spot. Worldwide R&D spending increased by 6.9% in 2008, having also grown by 9% in 2007."

This only serves as proof of the well entrenched globalization trend in spite of the crisis.

To quote Dan McLaughlin, `` Modern society is highly dependent on the division of labor, on vast networks of traders, on information and communications. The goal of modern society is not full employment, but rather the increasing prosperity that comes from continuing innovation and increasing specialization, trade and capital accumulation, where even the poor are better off than most people in the world. Economic freedom in fact reduces unemployment to levels significantly below those in less free countries." (emphasis added)

Or from Peter F. Drucker, ``Innovation is the specific instrument of entrepreneurship. The act that endows resources with a new capacity to create wealth."

Power Of Social Networking: President Obama Responds To A Freedom Advocate Blogger

We have written alot about how web based technology have been democratizing information. Its apparent impact appears to be vastly broadening and filtering into the political space.

Recently, Cuba's controversial freedom advocate blogger Yoani Sánchez received a surprise reply from US President Obama. From Committee to Protect Journalist, (bold highlights mine) [pointer from Professor Mark Perry]

``Cuban blogger Yoani Sánchez was astounded this week by President Barack Obama’s decision to respond a written questionnaire Sánchez submitted to the White House. Still recovering from bruises left by a recent vicious attack by state security agents, she told CPJ from her home in Havana: “This is the best way to get better.”

``The blogger said that she had tried for months to reach the U.S. president through different channels. Sánchez said she had sent written questions to Obama through a wide range of different people before the White House responded. On her blog Generación Y, where she has posted Obama’s answers to her seven questions, Sánchez explained that the questions were based on issues “that keep me from sleeping,” and were born from her personal experience.

``“It was a very pleasant surprise,” Sánchez said, acknowledging that the chances that Obama would reply were minimal. Before responding to the questions, Obama thanked Sánchez for the opportunity to exchange views with her and her readers in Cuba, and congratulated her for receiving Columbia’s University Maria Moors Cabot Award for excellence in Latin American reporting.

“Your blog provides the world a unique window into the realities of daily life in Cuba,” Obama wrote. “It is telling that the Internet has provided you and other courageous Cuban bloggers with an outlet to express yourself so freely, and I applaud your collective efforts to empower fellow Cubans to express themselves through the use of technology. The government and people of the United States join all of you in looking forward to the day all Cubans can freely express themselves in public without fear and without reprisals.”

``Sánchez asked Obama questions that ranged from U.S. foreign policy toward Cuba, to the legitimacy of President Raúl Castro and the potential involvement of the Cuban exile community, the political opposition, and nascent civil society groups.

``Sánchez also raised the issue of limited Internet access in Cuba, asking whether the U.S. embargo has anything to do with it. Obama responded by saying that his administration has taken steps “to promote the free flow of information to and from the Cuban people particularly through new technologies.” But Obama warned that this will not have its full effect without action from Cuba. “I understand the Cuban government has announced a plan to provide Cubans greater access to the Internet at post offices,” said Obama. The president urged the Cuban government “to allow its people to enjoy unrestricted access to the Internet and to information.”

Additional comments..

It is precisely such freedom of expression that serves as important barriers against socialism. Yet governments worldwide, despite the pronouncements of President Obama, has taken aim to control or regulate the cyberspace.

The Lost Decade: US Edition

Mr. Floyd Norris of the New York Times gives us a good account of how US stocks have fared in a relative sense compared to emerging markets and commodities over the past decade or so...


According to Mr. Norris, (all bold highlight mine) ``THE American stock market has soared 64 percent since it hit bottom eight months ago.

``And that leaves it just where it was more than 11 years ago.

``The United States stock market was the world leader in the great bull market of the late 1990s, but more recently it has been a laggard, in large part because of the weakness of the dollar. As the accompanying charts show, a stock investor looking for a part of the world to invest in back in 1998 — and to hold onto until now — could not have done worse than to choose the United States.

``The charts show the movement of the Standard &Poor’s 500 and the S.& P. International 700 in the period since the American index first reached 1,100 on March 24, 1998. The International 700, which encompasses the non-American stocks in the S.& P. Global 1,200, rose much faster in the middle of this decade, then fell faster in the global recession. But since prices bottomed, it has leaped more than 80 percent.

``For the entire period, an investor was better off in emerging markets than in the developed world. The segments of the global index representing Latin America, Australia and emerging Asian countries have soared. The Canadian index also more than doubled, thanks largely to natural resources stocks.

``But prices, as measured in local currencies, are lower now than in 1998 for both the S.& P. Europe 350 and the S.& P./Topix 150, covering Japan. Measured in American dollars, as shown in the charts, those markets posted gains of 20 percent and 7 percent, respectively, because of currency movements.

``On a sector basis, the best place to be over that period, both in the United States and globally, was in energy stocks. Oil prices fell to just above $10 a barrel in late 1998, and few investors saw value in the area. More recently, oil company profits set records as crude soared well above $100 a barrel, and even after the global downturn the price is more than $70.

``Financial stocks have suffered more in the United States than in the rest of the world, but the credit crisis brought down many banks in other regions as well.

``The charts also show 15 well-known companies from around the globe whose share prices are at least 300 percent higher than they were in 1998, and 15 such companies whose prices are less than half what they were then."

Additional comments:

-the return of the S & P 500 to the 1,100 level established 11 years ago implies that the US stocks have been in a bear market. It resembles Japan's lost decade-the American Edition.

This means that investors have largely lost than profited from stock investment.

-losses in the US markets do not account for real or inflation adjusted returns. According to the inflation calculator of the Bls.gov the US dollar has lost 25% of its purchasing power since 1998.This implies that US stocks have yet to recoup the real inflation adjusted levels in spite of the S&P reclaiming the 1,100.

-commodities and emerging markets have been clear outstanding winners.


-the Dow Jones have essentially reflected on the inflation of the US dollar, which have lost 75% in relative terms against gold.

This essentially debunks objections that gold is a lousy investment because it has no income. Chart courtesy of Reuters

-the US dollar isn't the primary source of the 'stagnation' of US stocks but instead reflects on bubble policies imposed by the US government. The US dollar serves only as a market outlet or a manifestation of such imprudent policies.

-This also shows that bubble policies have temporary benefits and don't work or prolongs investor agony over the long run, yet government officials are addicted to them.

-In addition, this also implies that the current policy directives to devalue the US dollar aimed at propping up the banking system and to reduce real liabilities means a wealth transfer and further outperformance of commodities and emerging markets relative to the US.