Global Central Banking Bureaucracy And Performance

The Economist chart below shows of the bureaucracy or the ratio of number of people employed by the world's major central banks relative to the population.

According to the Economist,

``AMERICA'S Federal Reserve may be the most important central bank in the world, but it has a smaller staff than the Reserve Bank of India and employs less than half as many people as the European Central Bank. The euro area has so many central bankers per head because many euro-zone countries have not shrunk their national central banks, even though they no longer have an independent monetary policy. With 71,200 employees, the Bank of Russia has the most employees of any central bank in the world, and the number of central bankers per head in Russia is the largest of any big economy. China has only 0.19 central bankers per 100,000 people. Even Somalia (not shown) has more central bankers per head than China does." (bold emphasis mine)

Does more central bankers translate to more effective monetary policies or more balance in the economic and financial system or price stability?

Well judging from the recent boom bust cycle, the answer is clearly a NO.

Apparently based on the above table, some of the economies that had been least affected by the crisis had been those with leaner bureaucracies.

Besides it doesn't take too much of central banking 'expertise' for a nation to accumulate heaps of debt in order to juice up economic 'growth'.


According to another article from the Economist, ``The sheer scale of their fiscal burdens may tempt governments to lighten their loads by inflation or even outright default. Inflation seems increasingly plausible because many central banks are already printing money to buy government bonds. To fiscal pessimists this is but a small step from printing money simply to pay the government’s bills. Adding to their worries, many economists argue that a bout of modest inflation would be the least painful way to ease the financial hangover.

``The rich world’s build-up of debt may also cause changes in countries’ relative creditworthiness. Investors have long viewed emerging economies as riskier sovereign borrowers than rich ones, because of their history of macroeconomic instability and more frequent defaults. But the biggest emerging economies are now by and large in better fiscal shape than their richer fellows, and that discrepancy is set to widen. The emerging members of the G20 had a ratio of public debt to GDP of 38% in 2007. By 2014, says the IMF study, this is likely to fall to 35%, less than a third of the rich world’s average. As a result the gap between the yields investors demand from rich and emerging economies’ bonds is likely to narrow." (all bold highlights mine)

Moreover, as adduced in the article, the current policies by central bankers is in the direction of the money printing nostrum.

This does not require a lot of personnel, except to churn out "studies" or "reports" that have been used to justify them. Just ask Zimbabwe's Dr. Gideon Gono.

This also implies that it doesn't also take too much of bureaucratic proficiency over the marketplace to debase a currency.

On the other hand, it could be construed that central banking have been proficient in resorting to policies that have made currencies lost its purchasing power.

From AIER

The purchasing power of the currencies of major economies have been declining since 1910 as shown in the chart above. The chart ends in 2005, the declining trend should be more accentuated today.

Bottom line: based on the above evidences, the correlation between ballooning central banking bureaucracy and economic, fiscal and monetary performance appears as inverse. This implies that a bigger bureaucracy doesn't mean more policy effectiveness, instead a bigger bureaucracy could translate to more economic fiscal or monetary underperformance.

This also extrapolates that central banking have been a monstrous boondoggle at the expense of society.

A reminder from Ludwig von Mises, ``Bureaucratic management is management of affairs which cannot be checked by economic calculation."

Dubai's Bubble Cycle 2: The Real Estate Crash

Here's a chart from Business Insider's Clusterstock illustrating the recent real estate crash of Dubai.

From Business Insider: ``Far too much easy money flowed into Dubai during previous years, fueling a massive construction boom financed with debt. For awhile this debt looked sustainable to those involved because it was ostensibly backed by valuable property.

``Yet when the global financial crisis hit, property prices fell in many parts of the world. Dubai property prices were hit especially hard.

``Dubai property rates per square foot fell 45% from Q3 2008 to Q3 2009 according to Colliers International.

``Thus just as many American's went underwater on their mortgages due to the American property crisis, owing more to the bank than their house was worth, the same thing basically happened to the Nakheel property business of the Dubai state-owned conglomerate Dubai World.

``Combined with near-term cash flow constraints, this finally forced Dubai World to admit to its creditors that it would not be able to meet all of its debt obligations.

Dubai's Bubble Cycle

Dubai's imploding bubble is another lesson that needs to be taken heed.

Inflationism can be initially seductive and temporarily gratifying, but comes at an excruciating price as a result of non-economically feasible projects or misallocation of resources.

The chart from Bespoke Invest is a harrowing depiction of the unraveling Dubai Bubble cycle as reflected on its stock market benchmark.


Bespoke explains, ``Since 2004, Dubai's stock market has taken investors on a wild roller-coaster ride. Unfortunately, investors are at the bottom of the ride and not the top at the moment. From the start of 2004 to November 9th, 2005, the DFM General rose a whopping 748% as oil prices shot up along with the global economy. After the DFM General peaked on 11/9/05, however, it declined 57% over the next year and a half. The index staged a 72% snap-back rally from 4/3/07 to 1/15/08, but then it jumped on the global meltdown bandwagon and has declined 71% since then. Currently, the DFM General is down 78% from its peak on November 9th, 2005, but it is still up 83% since the start of 2004."

To quote Professor Ludwig von Mises, ``Continued inflation inevitably leads to catastrophe."

Pew Research: How The World Sees Free Trade

Post 2008 financial crisis, a chart below from Pew Research exhibits how the world perceives of free trade in 2009.


Free trade is seen as favorable by a majority of subjects surveyed for most countries except for Argentina, Japan and Indonesia. Nonetheless, this remains a big plus factor...yet.

How Long Does Gold Prices Take To Hurdle Every $100 mark?

With gold above $1,200, how long does gold prices take to hurdle every $100 mark?

That's the interesting perspective proffered by Bespoke Invest as shown in the chart below.

According to Bespoke, (bold emphasis mine) ``the amount of calendar days that transpired between century marks for the price of gold. For example, after closing above 200 for the first time on 3/6/78, gold didn't close above the $300 mark for another 459 days (6/8/79). However, after closing above $300 for the first time, gold breezed through five different century marks over a span of only 223 days. In January 1980, the price of gold closed above $700 on January 15th, and then closed above $800 two days later! [that's because this marked the euphoric stage or the end of the bubble-Benson]

``And keep in mind that with each successive century mark, the percentage rally required to get to the next hurdle declines ($300 to $400 equals a 33% gain, while a rally of only 9% is needed to get from $1,100 to $1,200). If the price of gold were to stage a rally similar to the one in 1979, $1,200 gold would seem like small peanuts."[present market action reflects a cocktail of momentum, seasonal strength and importantly, driven by the concept of gold as insurance-Benson]

Asia Leads In Web Connectivity

Asia is the largest and the fastest growing region in terms of web connectivity.

That's according to the stats from comScore as shown below

(all bold highlights mine)

``In September 2009, the Internet population in the Asia-Pacific region reached 484 million visitors age 15+ that accessed the Internet from a home or work location, an increase of 22 percent from the previous year. With nearly half a billion people online, the region now accounts for 41 percent of the total 1.2 billion person global Internet audience. China, home to the largest Internet population in the world, experienced a 31-percent increase to 220.8 million, making it the fastest-growing Internet country in the region. Japan saw its online population surge 18 percent to 68.3 million, while India climbed 17 percent to 35.8 million users. "

Here is the breakdown of the growth stats of each country...

Again from comScore,

“Asia is not only home to the largest Internet population in the world, but it is also one of the fast-growing,” said Will Hodgman, comScore executive vice president for the Asia-Pacific region. “With most markets in the region experiencing double-digit growth, marketers and advertisers have the opportunity to capitalize on the potential of the online channel to reach and engage a surging number of people engaging in a variety of consumer activities online, including reading content, watching video, playing online games, engaging with brands, conducting financial transactions and making online purchases.”

To access the comScore presentation here

Let me add that web connectivity will likely enhance productivity growth and market pricing efficiency via ease of access to information thereby reducing communication, research and transaction costs.

In addition, web connectivity is likely a source of friction or can serve as deterrent against pervasive government intervention by virtue of free or liberal access to information.

With reduced government intervention web connectivity is likely to power more trade among nations.

Moral Hazard: Citibank's Dubai Loan Portfolio

Marginal Revolution's Alex Tabarrok rightly points out on how the recent bailout of the US financial system has translated to a moral hazard dilemma, as in the recent case of a government protected institution in Citibank "lending" to Dubai.

Mr. Tabarrok writes, ``The problem of moral hazard is often written off as a problem for "the future," less important than dealing with a present crisis. Not so. The bailouts may have encouraged more lending to other places that were perceived as good bailout prospects."

From New York Times' Andrew Ross Sorkin (bold underscore mine): That fact was overlooked by many investors who didn’t want to miss out on a quick buck. What about the risk? The view was, and apparently still is, that if Dubai gets in trouble, its oil-rich neighbors in Abu Dhabi will bail everyone out to avoid damage to their collective reputation and, by extension, the region’s economy. Just as the United States stood behind its banks, in part, to avoid losing the confidence of foreign investors, Abu Dhabi might have to do the same.

``That had to be what Citigroup, with its firsthand expertise with bailouts, must have been thinking when it lent $8 billion to Dubai last year. Oh, and here’s an interesting fact: Citigroup made the loan to Dubai on Dec. 14, 2008. Take a look at the calendar — that’s after it received tens of billions in TARP funds. Citigroup’s chairman, Win Bischoff, said at the time, “This is in line with our commitment to the U.A.E. market in general, and reflects our positive outlook on Dubai in particular.” Good call."

Chart from Wall Street Journal.

Should Dubai default on the $8 billion of debts to Citi, guess who's gonna pay for the losses?

Climate Change: The Greatest Scientific Scandal of Our Generation

Sir Ernest John Pickstone Benn once said, ``Politics is the art of looking for trouble, finding it whether it exists or not, diagnosing it incorrectly, and applying the wrong remedy."

Since the environmental science issue of climate change or man made "anthropogenic" global warming has been transposed into political policies, like any politicized issues-deception and skulduggery have been used to promote vested interests.

Christopher Booker at the Telegraph presents a neat summary of how politics has transformed the global warming episode as the "greatest scientific scandal of our generation" to quote Professor Mark Perry.

(bold highlight mine, sub titles in blue font mine)

``There are three threads in particular in the leaked documents which have sent a shock wave through informed observers across the world. Perhaps the most obvious, as lucidly put together by Willis Eschenbach (see McIntyre's blog Climate Audit and Anthony Watt's blog Watts Up With That ), is the highly disturbing series of emails which show how Dr Jones and his colleagues have for years been discussing the devious tactics whereby they could avoid releasing their data to outsiders under freedom of information laws."

1. Data Suppression

``They have come up with every possible excuse for concealing the background data on which their findings and temperature records were based.

``This in itself has become a major scandal, not least Dr Jones's refusal to release the basic data from which the CRU derives its hugely influential temperature record, which culminated last summer in his startling claim that much of the data from all over the world had simply got "lost". Most incriminating of all are the emails in which scientists are advised to delete large chunks of data, which, when this is done after receipt of a freedom of information request, is a criminal offence.

``But the question which inevitably arises from this systematic refusal to release their data is – what is it that these scientists seem so anxious to hide?"

2. Data Manipulation

``The second and most shocking revelation of the leaked documents is how they show the scientists trying to manipulate data through their tortuous computer programmes, always to point in only the one desired direction – to lower past temperatures and to "adjust" recent temperatures upwards, in order to convey the impression of an accelerated warming. This comes up so often (not least in the documents relating to computer data in the Harry Read Me file) that it becomes the most disturbing single element of the entire story. This is what Mr McIntyre caught Dr Hansen doing with his GISS temperature record last year (after which Hansen was forced to revise his record), and two further shocking examples have now come to light from Australia and New Zealand.

``In each of these countries it has been possible for local scientists to compare the official temperature record with the original data on which it was supposedly based. In each case it is clear that the same trick has been played – to turn an essentially flat temperature chart into a graph which shows temperatures steadily rising. And in each case this manipulation was carried out under the influence of the CRU.

``What is tragically evident from the Harry Read Me file is the picture it gives of the CRU scientists hopelessly at sea with the complex computer programmes they had devised to contort their data in the approved direction, more than once expressing their own desperation at how difficult it was to get the desired results."

3. Censorship

``The third shocking revelation of these documents is the ruthless way in which these academics have been determined to silence any expert questioning of the findings they have arrived at by such dubious methods – not just by refusing to disclose their basic data but by discrediting and freezing out any scientific journal which dares to publish their critics' work. It seems they are prepared to stop at nothing to stifle scientific debate in this way, not least by ensuring that no dissenting research should find its way into the pages of IPCC reports."

Read the rest of the article here.

The diagram below, from Professor Richard Lindzen shows how science have been parlayed into politics...

Read the Professor Lindzen's Global Warming power point presentation here (Hat Tip Stephan Kinsella/Mises Blog)

Market Myths and Fallacies On The Dubai Debt Crisis

``Economic history is a never-ending series of episodes based on falsehood and lies, not truths. It represents the path to big money. The object is to recognize the trend whose premise is false, ride that trend, and step off before it is discredited" -George Soros

For an abbreviated trading week, the US Federal Reserve bought $11 billion worth agency debt, mortgage backed debt securities and US treasury. Tyler Durden of Zero Hedge notes that the balance sheet of the Federal Reserve has “hit a new all time record of $2.2 Trillion in assets”.

Following their failed prediction for a market collapse late October, the “desperately seeking normal camp” are back with their old antics of forecasting a deflationary doomsday or the “end of the bear market rally”, following the latest market volatility prompted for by the events at Dubai.

Dubai through its state owned Dubai World asked “creditors for a “standstill” agreement as it negotiates to extend debt maturities” (Bloomberg) last November 25^th, which apparently rattled Europe first, whose shockwaves reached Asia, and belatedly to the US-since the latter was on a Thanksgiving holiday when the Dubai debt crisis surfaced.

We then read headlines of “Era Of Green Shoots Over” or “Hyperinflation in Reverse” or “Mark End of Risk Trade” or emotive comments like ``The stock markets and the bond markets are in violent disagreement, and at some point, it is going to be resolved by a sell-off in the equity markets” (New York Times) to even a simpleton “expert” swagger at a Bloomberg interview claiming that “when a crisis emerges everyone runs to the US dollar”.

Figure 1: stockcharts.com: Dubai Temblor

As one would observe in Figure 1, upon the revelation of the Dubai debt crisis on the 25^th, the US dollar fell steeply to a 17 month low rather than functioned as safehaven, as fictitiously alleged by the expert.

It was the next day, Friday, when the violent US Dollar rally occurred, which inversely took down commodities as gold. Babbling from the perspective of Friday’s action as a generalized trend is blatantly misleading.

However, the rally appeared like a knee jerk response. The USD gave back most of its gains but still ended the session 1% higher. This huge reversal was equally reflected on the commodity markets.

Yet despite the sharp intraday fall of gold, the former commodity money bounced mightily until the end of the session. Over the week gold registered a 2.3% gain, just a few percentage points (about 1.5%) off its fresh record high $1195, established Thursday, incidentally when the lid of the Dubai crisis was uncovered.

It takes a lot of chutzpah to make logically false claims on air.

I would like to further point out that the rally in bond markets have been an ongoing event since late October as shown by the record move of the 2 year Treasury bill (see window $USTU). This means the rally has fundamentally little to do with the Dubai crisis, and could likely reflect on position squaring for sprucing up year end balance sheet goals of financial institutions and or importantly, a manifestation of the distortions from government interventions.

To interpret for a “violent disagreement” that would be resolved by a selloff in the stock markets accounts for as nothing more than a preconceived bias which fallaciously underestimates the political imperatives by the US government (or even global governments) to support asset markets with the ultimate aim to uphold the survivability of the US banking and financial sector.

Proof? A Bloomberg report as quoted by the Credit Bubble Bulletin: ``French Prime Minister Francois Fillon said Dubai’s request to reschedule debt repayments shows the global financial crisis “is not over” and that stimulus efforts must be maintained to avoid “breaking the weak recovery.’” (emphasis mine)

Figure 2: New York Times: Tsunami Of Debt

If there is any asset market that would likely experience a bust as a result of the reversal of bubble conditions, it would primarily be the US treasury market.

According to the New York Times, ``With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher.”

$1.9 trillion of debt required for refinancing + $1.5 trillion in additional deficits + $ .2 trillion in interest payments=$3.6 trillion of financing required for 2010! Since US and global savers (particularly Asia) are unlikely to finance this humungous amount, [other parts of the world will require debt financing too (!!)], the available alternative options appear to be narrowing-the Federal Reserve would have to act as the financer of last resort through the Bernanke’s printing press or declare a default. Of course, Bernanke could always pray for a “Dues ex machina” miracle.

So embracing a bond bubble “out of deflationary fears” would be like a Turkey accustomed to a plethora of feeds but is unknowingly headed for the Thanksgivng day kitchen.

We might like to add that Europe’s stocks as represented by $STOX 50 appears to have been diverging with US stocks, even prior to the Dubai episode. While US stocks are off the new highs, European stocks have been flaccid since mid November. The Dubai debt crisis has only exacerbated the sentiment rather than ‘caused’ it.

And another important perspective missed by the mainstream is that China’s Shanghai bellwether, which lost 6.4% this week (as seen in the $SSEC window), has likewise been languishing even prior to the Dubai episode.

Bottom line: Volatile market action during the week has been aggravated by the Dubai debt crisis instead of a Dubai prompted meltdown. Hence, to interpret this week’s volatility as a start of cross cascading market selloffs would likely account for as another gaffe in a disgraceful menagerie of errors.

Eventually since markets operate on cycles driven by government policies, there will be another crash due to mounting unsustainable imbalances. But as a cliché goes, even a broken clock is right twice a day, which means wrong conclusions from false premises will be peddled until markets will confirm their outlook for “timing” reasons.

Why Dubai’s Debt Crisis Isn’t Likely THE Next Lehman

``In the first place, government must cease inflating as soon as possible. It is true that this will, inevitably, bring the inflationary boom abruptly to an end, and commence the inevitable recession or depression. But the longer the government waits for this, the worse the necessary readjustments will have to be. The sooner the depression-readjustment is gotten over with, the better.” Murray N. Rothbard Economic Depressions: Their Cause and Cure

The unraveling of the Dubai debt crisis during the US Thanksgivng holiday may have contributed to the sharp gyrations in the marketplace. The dearth of information speedily led to emotions based speculations. Since there was a paucity of information from the details surrounding the Dubai Debt Crisis, perhaps some investors made decisions or projections anchored on a leash or a chain effect where countries sensitive to leveraged balance sheets will likewise suffer from debt woes.

And perhaps that’s the reason why some selloffs had been broad based (except in parts of Latin America) and not limited to the banking system or to some crisis affected countries.

We even read some even citing the Dubai Crisis as evolving to “Icelandic proportions”.

Figure 3: Bespoke Invest/Bloomberg: Dubai CDS

It’s a folly to trade based on emotions but as we wrote in Dubai Blues As Seen In CDS, It's All About Perception!, we have to look at the bigger picture than react intuitively like our ancestors during the hunter gatherer era in the face of wild predators. Technology has given us the privilege of accessing global information at the touch of our fingertips.

So we basically agree with Bespoke Invest that the recent market carnage seems as a vastly exaggerated reaction, as per Bespoke, ``As shown in the Bloomberg snapshot of Dubai's historical sovereign debt credit default swap price, the recent spike up to 600 bps or so isn't even near the level of 1,000 bps seen earlier this year. Had Dubai's default risk spike earlier this year been an isolated event like it is this time around, it would have made news back then. At the time, however, default risk was spiking for the majority of developed nations as well, so Dubai was the least of our problems. Now that global markets have stabilized and exited crisis mode, an isolated event in Dubai where default risk doesn't even spike to its 2009 highs has caused a global market selloff." (bold highlights mine)

In a rush to drum up a contagion effect, some have even mistakenly, in my view, placed the entire United Arab Emirates at risk!

The United Arab Emirates is a federation of seven emirates, particularly Abu Dhabi, Dubai, Sharjah, Ajman, Umm al-Quwain, Ras al-Khaimah and Fujairah.

Dubai is only the second largest emirate, while the Abu Dhabi serves as the seat of the national government. Abu Dhabi according to Wikipedia.org, ``is also the country's center of political, industrial, and cultural activities.”

Dubai’s meteoric rise via profligate projects produced many of the world’s landmark projects (boondoggles), such as the only seven star hotel, the Burj Al Arab, the world’s tallest skyscraper, Burj Dubai (uncompleted), biggest indoor ski slope, Ski Dubai, largest shopping mall (in terms of total area and not gross leasable space), the Dubai Mall, the world’s biggest theme park, the Dubailand and the Palm Islands, the Palm Jumeirah, has virtually challenged Abu Dhabi’s role.

Figure 4: McKinsey Quarterly: The New Power Brokers

To consider that Abu Dhabi has still the world’s largest sovereign wealth fund estimated at $470-740 billion as shown in Figure 4, despite suffering an estimated $125 billion of losses last year due to the contagion effect from the US mortgage crisis (Bloomberg).

Meanwhile the debt burden accrued by Dubai World, Dubai’s investment arm, is estimated by UBS AG to be in the range of $80-90 billion, which includes its property arm unit, the Nakheel PJSC, which has some $3.52 billion of Islamic bonds due Dec. 14. (Bloomberg)

This means that Abu Dhabi could easily extend a bailout if it so desires, without necessarily roiling the markets. But it didn’t. Although we understand that some Abu Dhabi banks already have loan exposures estimated at $5 billion to Dubai prior to the Dubai Crisis (Reuters).

The point is, this may not necessarily be confined to an economic “debt problem” spectrum but to one with a political face. Perhaps Abu Dhabi desires to impose some sort of discipline or temper Dubai’s spendthrift ways or politically revert Dubai to her role as supporting cast.

So a contagion risk is not necessarily in place.

Second, it would be another mistake to argue that the Dubai Debt Crisis is outside the jurisdiction of the major central banks.

The fact that the biggest underwriter of loans to Dubai World is the Royal Bank of Scotland Group, which according to Bloomberg, ``RBS, the largest U.K. government-controlled bank, arranged $2.3 billion, or 17 percent, of Dubai World loans since January 2007, JPMorgan said in a report today, citing Dealogic data. HSBC, Europe’s biggest bank, has the “largest absolute exposure” in the U.A.E. with $17 billion of loans in 2008, JPMorgan said, citing the Emirates Banks Association”, means that major central banks have direct and indirect influence on Dubai’s credit predicament.

As Bob Eisenbeis of Cumberland Advisors rightly explains, ``US financial institutions are not exposed to Dubai to the significant extent that European institutions are. Furthermore, discount-window and other borrowing facilities are already in place, should liquidity be needed.” (bold emphasis mine)

This means that existing currency swap arrangements can also be used, aside from extending the Quantitative Easing programs to cover problematic assets or loans held by HSBC or RBS or other banks exposed to Dubai.

Moreover, even if we incorporate all estimated Western banking system’s loan books of UAE they appear to be manageable.

Figure 5: Danske Bank: Western Banks Exposure to UAE as of 2008

To quote Danske Bank, ``Although some UK banks have exposure to UAE (Dubai is only one of seven emirates) it is not material in our view…As can be seen the exposure to the region is fairly limited. Furthermore, it should be stressed that so far we are only talking about one (big) company. Still, it is a factor to watch out for in case the problems are more widespread than they appear. Remember, back in 2007 virtually everybody agreed that subprime mortgage loans were a manageable and limited problem. So some caution is warranted.”

Indeed.

Bottom line: The Dubai Debt Crisis doesn’t necessarily imply a contagion risk. That’s because the crisis appears to have a national political twist, since Abu Dhabi alone could have reticently mounted a rescue considering its immense forex holdings in its SWF-the largest in the world.

Besides, global central banks have the means to deploy their “inflationary” tools to “rescue” anew national banks exposed to potential bad loans in Dubai. European and Abu Dhabi banks have the most risk exposure to Dubai.

And this is exactly why inflation is a future risk because of mainstream central banker’s fundamental fear of a deflation triggered global banking meltdown. Hence, we should expect some Dubai related globally coordinated policy actions in the coming days or weeks.

Furthermore, the western banking system has relatively minute exposure to the UAE which isn’t likely to further dent on their beleaguered balance sheets.

What needs to be seen is if other nations suffering from similar debt pressures may surface and do a Dubai.

Otherwise, the Dubai tempest will likely signify as a short term bump or a bear raid amidst an inflationary recess.

Vietnam’s Inflation Control Measures And The Japanese Yen’s Record High

``If most of us remain ignorant of ourselves, it is because self-knowledge is painful and we prefer the pleasures of illusion.” Aldous Huxley

There are other issues that appear to have been eclipsed by the Dubai Debt Crisis.

Vietnam’s Inflation Control Measures

First, Vietnam announced a sharp hike in its interest rate to allegedly combat inflation. According to Finance Asia, ``The State Bank of Vietnam will increase its benchmark interest rate to 8% from 7% as of December 1”

In addition, Vietnam likewise devalued its currency the Dong by 5.2%. According anew to Finance Asia, [bold emphasis mine] ``The State Bank of Vietnam also reset the US dollar reference rate to 17,961 dong from its current level of 17,034 dong, in its third devaluation of the currency in two years. The central bank will also narrow the trading band of the dollar against the dong to 3% from 5%.

``This is an effort not only to bring confidence to the currency, but also to correct the difference versus where the dong is trading on the black market, which has been at about 19,700 per US dollar in recent weeks.”

Figure 6: Wall Street Journal: Vietnam’s Devaluation

In other words, currency controls have widened the spread between the black market rate of the Vietnam Dong relative to the US dollar and the official devaluation merely is an attempt to close the chasm. The Vietnamese economy has been suffering from a huge current account deficit to the tune of almost 8% of its GDP.

However, in spite of the fresh monetary actions (see figure 6) the black market rate for the Dong and the official rate remain far apart.

And because of the spike in interest rates, the Vietnam equity benchmark fell by 11.73% over the week.

However, a curious and notable observation is that Vietnam’s present policies seems like responding to a market symptom which can be characterized as our Mises Moment,

This from Thanhnien.com, ``Vietnamese lenders are facing a shortage of funds to meet rising demand for loans because gains in gold and the dollar are deterring people from putting money in the bank, according to a government statement. Commercial banks have had to raise deposit interest rates to as high as 9.99 percent over the past week and offered gifts and bonuses to depositors to lure them back, the statement on the government’s website said.” [bold emphasis original]

In other words, the Vietnamese people have been hoarding gold and foreign currency (US Dollar) and have shunned the banking system in response to Vietnam’s government repeated debasement of its currency. It’s seems like an early symptom of demonetization.

As we have previously quoted Professor Ludwig von Mises from his Stabilization of the Monetary Unit? From the Viewpoint of Theory,

``If people are buying unnecessary commodities, or at least commodities not needed at the moment, because they do not want to hold on to their paper notes, then the process which forces the notes out of use as a generally acceptable medium of exchange has already begun. This is the beginning of the “demonetization” of the notes. The panicky quality inherent in the operation must speed up the process. It may be possible to calm the excited masses once, twice, perhaps even three or four times. However, matters must finally come to an end. Then there is no going back. Once the depreciation makes such rapid strides that sellers are fearful of suffering heavy losses, even if they buy again with the greatest possible speed, there is no longer any chance of rescuing the currency. In every country in which inflation has proceeded at a rapid pace, it has been discovered that the depreciation of the money has eventually proceeded faster than the increase in its quantity.” [bold emphasis mine]

Will Vietnam follow the path of the most recently concluded Zimbabwean monetary disease?

I was thinking of Venezuela as next likely candidate but here we have a next door neighbor exhibiting the same symptoms that ails every government that attempts to control or manipulate the marketplace.

The Japanese Yen On A 14 Year High

The second issue overshadowed by the Dubai Debt Crisis is that the Japanese Yen soared to its highest level against the US dollar in 14 years.

According to a Bloomberg report, ``The dollar dropped to the lowest level versus the yen since July 1995 and fell against the euro as the Federal Reserve’s signal it will tolerate a weaker greenback encouraged investors to buy higher-yielding assets outside the U.S.”

The strength of the Japanese yen had been broad based against other major currencies but gains were marginal.

The news blamed the Yen’s rise on the carry trade ``delay debt repayments spurred investors to sell higher-yielding assets funded with the currencies.”

Such oversimplification is not convincing or backed by evidence.

As noted earlier, the US dollar fell to new lows on the Dubai incident before rallying back Friday but eventually giving back most of its gains.

Besides, not all markets had been severely hit. In Latin America, Brazil, Columbia, Chile, Mexico and Venezuela all registered weekly gains. Emerging markets are expected to take it to the chin when carry trades unravel. This hasn’t been the general case.

In Europe, Germany, Italy, Norway, Sweden, Switzerland and Italy survived the week on positive grounds. So even if the Dubai debt crisis exposed Europe more than the others, the selling pressure wasn’t the same. UK home to RBS suffered marginal losses (.11%).

Again none of these accounts for as any solid or concrete signs of an unwinding of carry trade.

Figure 7: stockcharts/google: Nikkei-Yen and Japan exports

While the rising Japanese Yen has so far coincided with a lethargic Nikkei since August (see figure 7 left window), it’s not clear that such correlation has causation linkages.

Although the Japanese government thinks it has.

Again from the same Bloomberg article, ``Finance Minister Hirohisa Fujii said he will contact U.S. and European officials about exchange rates if needed, signaling his growing concern that the yen’s ascent will hurt the economy. The Bank of Japan checked rates at commercial banks in Tokyo, seen as a type of verbal intervention, Kyodo News Service reported.

``Japan hasn’t sold its currency since March 16, 2004, when it traded around 109 per dollar. The Bank of Japan sold 14.8 trillion yen ($172 billion) in the first three months of 2004, after record sales of 20.4 trillion yen in 2003. Japan last bought the currency in 1998, purchasing 3.05 trillion yen as the rate fell as low as 147.66.”

Well it came to my surprise that after all the political gibberish about Japan’s so-called export economy or export dependency, we realized that Japan’s economy is hardly about global trade.

According to ADB data, Japan’s trade in 2006 only accounted for 28.2% of the nation’s GDP, where export (right window) is only 16% of the GDP pie (yes this stunned me as I had the impression all along that Japan’s trade was at the levels of Hong Kong and Singapore and I had to check on official or government data).

The Philippines has even a higher share of trade (84.7%) and exports (36.9%)!

In addition, Japan’s industry, as a share of GDP pie registered for only 26.3%, according to the CIA factbook in 2008.

So a policy for a weaker yen is likely to benefit a small but strong lobbying segment of the society at the expense of the consumers (via cheaper products) or the society.

All these are strong evidences on why the world is facing a greater degree of risks from a hyperinflation episode.

The fallacious Mercantilist-Keynesian paradigm wants a race to devalue currency values, based on a simplistic one product, single price sensitivity, one labor, homogenous capital model which presumes global trade is a zero sum game. They hardly think of money in terms of purchasing power but from political interests based on “aggregate demand”.

Finally, Finance Minister Hirohisa Fujii isn’t likely to succeed in convincing his peers to collaborate to prevent the yen from strengthening. That’s because all of them share the same line of thinking or ideology. And Fed Chairman Bernanke has been on a helicopter mission that will likely to persist until imbalances unravel to haunt the global markets anew.

This Time Is NOT Different

``Let it be your constant method to look into the design of people's actions, and see what they would be at, as often as it is practicable; and to make this custom the more significant, practice it first upon yourself.” Marcus Aurelius

“This time it’s different” is a popular but fallacious investing catchphrase that mostly reflects on sentimental excesses.

It exhibits mostly overconfidence on a perception of knowledge or embody a generation of new faith adherents that justifies the course of particular set of actions. For instance, distinguished economist Irving Fisher, who developed and popularized the debt deflation theory, in the boom days prior to the Great Depression uttered, ``Stocks have reached what looks like a permanently high plateau”. Mr. Irving was in a delusion that the price values in the stock market would perpetually rise.

“This time it’s different” in today’s context can be observed from commentators who appear to be perplexed by the evolving unorthodoxy in the marketplace. They appear to be befuddled by the impact from the massive concerted government interventions in the marketplace worldwide, which has resulted to these large deviances relative to conventional standards.

So while there is a grain of truth whereby global government “relief” operations have obscured developments in the marketplace, especially in terms of scale, scope and or magnitude involved, arguing that “This time it’s different” is generally superficial and incomprehensive of the gist of what makes this episode NOT different from the past-INFLATIONISM.

As Mark Twain once remarked, ``History doesn't repeat itself - at best it sometimes rhymes”. In short, specific policy actions and their degree may vary (tactical operations), but the ultimate purpose or design driving the underlying actions (strategical process) has been the same with the past. And history has been littered with demonetized or “dead” currencies as a result mostly from the same teleological (study of the evidences of design or purpose in nature) impetus.

Therefore, this time is NOT different.

Dubai Blues As Seen In CDS, It's All About Perception!

A cliche goes, 'what you see depends on where you stand'.

For many, this could be rephrased as 'what you see depends on what you are looking for'. In the behavioral aspects, this means looking to confirm a bias or selective perception. For the bears, the Dubai incident has served as a rallying cry for their much awaited deflation blow-up scenario.

The chart from Bespoke exhibits on the default risk as measured through the Credit Default Swaps (CDS) on a year to date basis for 39 nations.
For a clearer image press on the link.

According to Bespoke, "we highlight current credit default swap prices and the year-to-date change for the sovereign debt of 39 countries. As shown, default risk has declined for every country except Japan in 2009, including Dubai."[underscore mine]

What this means is that despite the present turmoil, default risk measures haven't reached or is quite distant [yet] from the magnitude as it had been at the start of the year.

So unless the succeeding events deteriorate more, this volatility may be a head fake signal more than a genuine inflection point.

Global Art Market As Bubble Meter, China's Fast Expanding Role

Even in the global art markets, the Chinese growth juggernaut appears to be shifting the playing field in her favor.

This from the Economist (bold highlight mine),

"LAST year China overtook France as the world’s third-biggest art market after America and Britain. Thanks to shifts in policy, which once banned owning, inheriting or exchanging pre-communist works, Chinese buyers are now catching up in a big way. More Chinese treasures are now sold at auction in Hong Kong than in New York, London and Paris. At Sotheby's in Hong Kong last month a world record for a piece of Chinese furniture was set when a Qianlong-period throne made of precious zitan wood and carved with dragons fetched just under HK$86m ($11.1m)."

In short, the liberalization of the marketplace and global wealth transfer dynamics have been key forces driving China's race to the top. That's the good news.

But here's the bad news.

This growth market may also reflect on bubble policies.

Since art is a luxury item, a booming art market could be indicative of inflation fueled consumption excesses.

As with Japan's experience in the late 80s, whose buyers "swept the Western art markets", according to wikipedia.org, China's prospective assumption of the dominant role could likewise be ominous of a bubble top.

This hasn't been limited to Japan, in the list of the most expensive paintings ever sold (artwolf.com), here are the top 5:

1. JACKSON POLLOCK: "Number 5, 1948", 1948

$140 million

Private sale, 2006. Seller: David Geffen. Buyer: David Martínez (claimed)

2. WILLEM DE KOONING: "Woman III", 1952-53

$137.5 million

Private sale, 2006. Seller: David Geffen. Buyer: Steven Cohen

3. GUSTAV KLIMT: "Adele Bloch-bauer I", 1907

$135 million

Private sale, 2006. Buyer: Ronald Lauder.

4. PABLO PICASSO: "Garçon a la pipe", 1904

$104.1 million

Sotheby's New York , May 2004. Buyer: anonymous

5. PABLO PICASSO: "Dora Maar au chat", 1941

$95.2 million

Sotheby's New York , May 2006. Buyer: anonymous

It could be observed that four out of the five most expensive paintings were transacted in 2006.

These had incidentally been at the pinnacle of the US housing bubble as shown in the Case Shiller chart above!

Bottom line: The art markets could, most likely, serve as one important bellwether to estimate on the whereabouts of a bubble cycle.

Turkey Talk And The Message Of US Thanksgiving

Mintlife's interesting trivia on the US Thanksgiving celebration.

For a crispier view, please click on the image.

Personal Finance – Mint.com

Some noteworthy Thanksgiving messages from:

(Pls. click on link to read the articles...)

-Dr. Richard Ebeling: The Real Meaning of Thanksgiving: The Triumph of Capitalism over Collectivism

-Wall Street Journal's Editorial: And the Fair Land

``But we can all remind ourselves that the richness of this country was not born in the resources of the earth, though they be plentiful, but in the men that took its measure. For that reminder is everywhere--in the cities, towns, farms, roads, factories, homes, hospitals, schools that spread everywhere over that wilderness.

``We can remind ourselves that for all our social discord we yet remain the longest enduring society of free men governing themselves without benefit of kings or dictators. Being so, we are the marvel and the mystery of the world, for that enduring liberty is no less a blessing than the abundance of the earth.

-Steven Landsburg: Giving Thanks

``We can be thankful too for the system that channels all that potentially destructive greed into life-sustaining brilliance."

Graphic: Booming Bond Market In Europe

This is a magnificent illustration of what we discussed in Record Corporate Bond Issuance: Where Did All The Money Go? last October.

From Bloomberg Chart of the Day,

``European companies are turning to credit markets after losses stemming from the financial crisis left banks reluctant to lend, cutting off corporations from their primary source of financing, according to UBS AG.


``The CHART OF THE DAY shows the level of corporate bonds in the credit market, in blue, has risen 12 percent over the past year, and bank loans, in yellow, have fallen to the lowest in 13 months. While the euro-region economy returned to growth in the third quarter, banks may remain reluctant to lend for some time, boosting bond issuance further, said Stephane Deo, UBS chief European economist in London.

“One of the key reasons why banks remain cautious about lending are future economic prospects,” Deo said. “New debt now comes disproportionately from markets. This is a very unusual pattern.”

``In the euro area, bank lending accounts for about 70 percent of corporate financing compared with 20 percent in the U.S., according to the European Central Bank. Banks started tightening credit standards in the third quarter of 2007 as a result of the financial crisis, according to ECB statistics.

“Companies that have access to the credit market are better off compared to those that have no access,” Deo said."

Let me add- perhaps the proceeds from global QE programs have been helping boost the liquidity in the system in support of these record bond issuance.

This also implies that a cut in QE would probably negatively impact on the bond markets unless lending from the banking system recovers.

Dr. Tim Ball On Climategate

In Exposing The Fraud Behind Man Made Global Warming? [Climategate], we showed how hackers managed to infiltrate into the computers files of climatologist researchers and expose the alleged manipulation of data to present proof of that global warming is man made.

The corberttreports interviews retired climatologist Dr. Tim Ball on this expose. According to Dr. Ball "the manipulation of records on this level... you have to think it has to be criminal somewhere."



University of Michigan's Professor Mark Perry (source of video) offers additional links on this

CLIMATE BOMBSHELL: Hacker leaks thousands of emails showing conspiracy to "hide" the real data on manmade climate change

The Death Blow to Climate Science

And of course, Wikipedia already has a webpage: Climatic Research Unit e-mail Hacking Incident

Chart of the Day: John Paulson's Gold Holdings Bigger Than Reserves Held By Many Central Banks

The interesting chart below from The Reformed Broker is an estimate of Hedge Fund manager John Paulson's gold holdings which could be larger than gold reserves held by many central banks.

Read the rest here