More Evidence On The Deflating Man Made Climate Change Bubble

The anthropomorphic climate change hysteria is fast proving to be a deflating bubble [see earlier post here Exposing The Fraud Behind Man Made Global Warming? ]

According to Sciencenews.org (bold highlights mine)

``A London newspaper reports today that the unsubstantiated Himalayan-glacier melt figures contained in a supposedly authoritative 2007 report on climate warming were used intentionally, despite the report’s lead author knowing there were no data to back them up.

``Until now, the organization that published the report – the Nobel Prize-winning Intergovernmental Panel on Climate Change – had argued the exaggerated figures in that report were an accident: due to insufficient fact checking of the source material.

``Uh, no. It now appears the incident wasn’t quite that innocent.

``The Sunday Mail’s David Rose reached Murari Lal, the coordinating lead author of the 2007 IPCC report’s chapter on Asia. Lal told Rose that he knew there were no solid data to support the report’s claim that Himalayan glaciers – the source of drinking and irrigation water for downstream areas throughout Asia – could dry up by 2035. Said Lal: “We thought that if we can highlight it, it will impact policy makers and politicians and encourage them to take some concrete action.” In other words, Rose says, Lal “last night admitted [the scary figure] was included purely to put political pressure on world leaders.”

``A noble motive, perhaps, but totally inexcusable."

Uh.ummm. The Emperor [man made climate change religion] wears NO clothes!

Successful Bond Raising Dispels The Greek Debt Crisis Myth

Greece successfully raised funding on the debt markets on an oversubscribed basis.

This from the Timesonline,

``Concerns over a possible debt crisis in Greece eased yesterday after huge demand for the Greek Government’s first bond issue of this year.

``Greece had planned to sell €5 billion (£4.4 billion) of new five-year bonds to investors, but, after about €25 billion of demand emerged, it decided to issue €8 billion.

``The auction had been seen as a key test of investors’ appetite for Greek government debt and was heralded as a triumph by the authorities in Athens. “There was a lot of interest,” Spyros Papanikolaou, head of Greece’s public debt management agency, said. “This proves the trust [that] investors have in Greece’s economy. Greece [has] proved [that] it can raise the funds it needs for 2010 without a problem.”

The Greece Athex Composite rallied 2.8% as shown below from Bloomberg, in spite of the sustained pressures on the European and Asian markets.

While the uncertainty over Greece's debt problems haven't been entirely resolved, the successful bond issuance serves to validate our thesis that the PIIGS problem isn't the likely cause of the current stock market pressures, as discussed in When Politics Ruled The Market: A Week Of Market Jitters.

For the mainstream, it's more about the available bias or seeking of any available event that could be imputable to market action.

US Trembler: Volcker Rule or Bernanke Confirmation?

``What we do want, what we insist upon, is that no longer will decisions that carry so much economic weight be made in absolute secrecy. We want to know what arrangements the Fed makes with other governments and central banks. We want to know who is benefitting from the actions of the Fed and what deals are being made. The Fed is already reacting to pressure by scaling back its liquidity facilities and returning to more traditional monetary policy through direct asset purchases. With nearly $800 billion in mortgage-backed securities on its books already, $800 billion in Treasury securities, and no real limit to what the Fed can acquire, there is a tremendous opportunity for malfeasance. We need to know who the Fed deals with, what they buy, how much they spend, and who benefits. As good as any step towards Federal Reserve transparency is, anything less than full disclosure at this point is unacceptable.”-Congressman Ron Paul, Anything Less Than Full Disclosure is Unacceptable

The meltdown in the US market’s have largely been attributed to the proposed Volcker Rule, where US President Barack Obama endorsed Former Fed Chair Paul Volcker plan to overhaul the banking sector’s risk taking activities by restricting in house trading activities or proprietary trading and by preventing them from also investing in hedge funds or private equity operations.

While reducing the banking system to its original function of warehousing (deposit safekeeping) and loan services (acts as intermediary to finance business undertaking) would seem pretty ideal, the radical approach to “cleanse” the banking system of the so-called “greed” appears to be in reaction to the massive political capital loss suffered by President Obama at the hands of Republicans in the recent Massachusetts senatorial election, reportedly one of the main bailiwicks of liberal forces in the US.

The electoral loss signaled Obama’s health reform bill as losing popular support, which may likewise translate to a mighty comeback for the GOP (Grand Old Party) in the upcoming 2010 senatorial elections. The prospects of the Republicans back at the helm of the Senate risks enervating Pres. Obama’s programs, hence like all politics, desperate times calls for desperate measures.

The massive loss of political capital meant that President Obama had to piggyback on a popular issue, which at this point has been no less than to bash on the highly unpopular banking sector to regain some points.

Nonetheless while we mentioned that reducing the banking sector to its basic function should have been ideal, the Obama-Volcker tandem has merely been passing the buck.

They’ve fundamentally ignored the role of government failure that led to the recent two boom bust cycles, which essentially had been due to easy money policies, albeit for the recent housing bust these should have included the skewed capital regulations that encouraged excess leverage and regulatory arbitrage, housing policy that pushed home ownership by subsidizing mortgages and regulators sleeping at the wheel or in cahoots or captured by the industry, as well as, tax policies that encouraged debt take up.

Policymakers frequently deal with the superficial, it has never addressed the roots of “too big to fail” which is largely a product of crony capitalism emergent from bubble policies.

As per Constantino Bresciano-Turroni as quoted by Gerard Jackson ``The increase in banking business was not the consequence of a more intense economic activity. The work was increased because the banks were overloaded with orders for buying and selling shares and foreign exchange, proceeding from the public which, in increasing numbers, took part in speculations on the Bourse. The banks did not help in the production of new wealth; but the same claims to wealth continually passed from hand to hand.”

In other words, the so-called banker’s greed is a result of policy based support to the banking sector, and it’s kindda obvious where this leads to-another Potemkin village or poker bluff.

Unfortunately these desperate attempts by the US President risks unforeseen consequences, considering that major banks engage in these activities have been supported by the US government.

This translates to policy contradictions which increase the overall risk environment thereby heightening uncertainty, and thus, perhaps the market’s sharp reactions.

Figure 6: stockcharts.com: S&P ETFs By Sector

Well based on the sectoral performance by the S&P ETFs, the materials, financials and energy took the brunt of the recent selloffs, these implies that since China has emerged as a major force in the demand for commodities then the fall in materials and energy could have been construed as China related and the fall of the Financials as imputed on the Volcker Fund issue.

Figure 7: Danske: US treasuries

Moreover, this week’s meltdown didn’t come with higher interest rates. Therefore the issue wasn’t about funding, interest rate and or rollover risks. Instead the lower yields signaled a supposed flight to safety as Danske Team indicates above (right window) which has been corroborated by a rising US dollar.

Considering that the net supply of bonds have shriveled due to Fed QE purchases, the selloff wasn’t also indicative of concerns over exit plans.

One analyst offered a conspiracy theory and wrote that for the US to be able fund its intractable deficits she would need to engineer a stock market crash, as the frightened public (domestic and foreign) will likely buy into US treasuries. Although I would tend to dismiss this as normally outrageous, as any short term benefits will offset by medium to long term losses, desperate politicians may embrace almost anything silly for as long as it could preserve their privileges or power.

Lastly there is also the issue of the Ben Bernanke’s reconfirmation as the Federal Reserve chairman. Considering Mr. Bernanke needs 60 votes in the Senate to extend his term, the current anti-bank sentiment has prompted several Senators to cross partylines and move against extending Bernanke’s tenure which expires on January 31^st.

``According to a Dow Jones Newswires tally, 26 senators have said they will back him; 15 have said they will oppose him. The remaining 59 haven't said what they will do. Under Senate rules, the earliest a vote could come is Wednesday,” notes the Wall Street Journal.

So why could the market crash with Bernanke’s confirmation in the line?

Perhaps Connecticut Democrat Senator Christopher Dodd, a Bernanke backer, gives us an inkling of what Ben Bernanke may or may not do, "I think if you wanted to send the worst signal to the markets right now in the country and send us in a tailspin, it would be to reject this nomination."

In other words, there seems no easy or better way to get reconfirmed than by holding the market hostage!

Yet all these political muddling makes us wonder, why would US debt get supported when regime uncertainty appears to be snowballing? Why should the US dollar become the safe haven when the pillars of central banking appear to be in jeopardy?

Other than all three variables-China’s efforts to quash a homegrown bubble, the US Volcker Fund brouhaha or the Bernanke confirmation controversy and fears of default Greece default-the markets could be looking for an excuse to correct.

So who says the markets are solely about the economy?

China’s Attempt To Quash Its Homegrown Bubble

``Indeed, there are two potential scenarios for EM stock prices: either a full-fledged mania will develop with multiples continuing to expand, or, a setback/period of indigestion will occur before a new upleg develops. Currently, the odds of a mania-type pattern developing in emerging markets are not significant. If a mania were to develop, Chinese stocks would be at the epicenter because China has the fastest growth rate”-BCA Research, Emerging Markets Appear To Be Fully Priced

China seems bowing to international pressure.

Since she has been accused of fostering or blowing bubbles, where even popular fund manager James Chanos has openly declared shorting China which became a recent controversy in his debate with Jim Rogers [see Jim Chanos Goes From Micro To Macro With Bet Against China], over the past 3 weeks, China has responded by engaging in a series of implied tightening measures, i.e. by allowing T-Bill rates to increase, by raising bank reserves, and last week by verbally arm twisting her banks to curtail credit expansion. It’s almost like one intervention per week.

And when government intervenes in the marketplace we expect the impact in the direction of the planned intervention to manifest itself over the short term. And that’s the reason why China’s markets have underperformed the G-7 and its emerging market peers.

However, in my view, the argument over bubbles seems grossly misunderstood. A Bubble is essentially a cyclical process, where government interventions in the economy, primarily via interest rate manipulations and compounded by other regulations, lead to massive distortions in the patterns of production and capital allocation, which eventually results to relative overinvestments [as discussed in What’s The Yield Curve Saying About Asia And The Bubble Cycle?].

In short, such process is exhibited through phases. And one of the symptoms is that suppressed interest rates with the accompanying credit expansion make long term investments appealing.

And we seem to be getting anecdotal evidences from these;

From Edmund Harriss of Guinness Atkinson, ``Economic growth of near 10% in the past year has been fuelled by domestic growth, almost all in­vestment, on the back of huge injections of liquidity and increased debt. Over $1 trillion of new credit has been extended and while we can see that the bulk is intended for medium- and long-term investment rather than short-term there is no doubt that money has found its way into the stock and real-estate markets. The appearance of state companies at land auctions (those who have had no prior interest in buying land) is significant. This has contributed to soaring land prices and helped a recent land sale in Guangzhou to achieve a record price of $852 per square meter ($78 per square foot), some 54% above the offer price.”

From Robert J. Horrocks, PhD and Andrew Foster of Matthews Asia, ``Nevertheless, it is prudent to be cautious about bank lending—not because we fear an unmanageable amount of nonperforming loans for the economy, but because Chinese banks generally made 3-year loans for projects with decade-long payoff periods (i.e., loans that were not appropriately matched to cash flows). Banks may have lent on the assumption of local government backing, which ultimately may not be provided.”

The other symptom is that increased money supply fosters rising prices in the economic system which leads to pressures to raise interest rates (see figure 4)

Figure 4: Danske Bank: China’s Rising Inflation

As you can see, while China has indeed been exhibiting symptoms of a formative bubble, as manifested above via investments in long term projects, aside from sporadic signs of frothy prices and emergent inflation, there seems to be less convincing evidences yet [see China And The Bubble Cycle In Pictures] that she has transitioned into the culmination stage or the manic phase -where bubbles have reached its maximum point of elasticity which is usually in response to the rollback of easy money policies by the government.

Besides, manic phases usually don’t draw in many and vocal skeptics. Instead the public will most likely be talking of a NEW PARADIGM. In other words, a manic phase would translate to a capitulation of pessimists, cynics and skeptics.

Hence, credit expansion is a necessary but not a sufficient condition for a bubble ripe for implosion. The other necessary ingredients to complete the recipe would be an asset price melt-up (intensive overvaluations) backed by euphoric public (hallucinatory bullish sentiment).

In addition, China seems reluctant to directly raise interest rates.

That’s because we think that policy arbitrage could work to induce the aggravation of China’s bubble cycle despite her rigid capital regulatory regime. And so far these have been manifested by the waves of capital flows into her system-indirectly or via unregulated channels. (see figure 5)

Figure 5: Danske Bank: China’s Staggering Hot Money Flows

China’s reserve accumulation has been a product of direct and indirect foreign money flows into the system (left window) which is likewise manifested through record accumulation of reserves (right window).

According to Danske’ Flemming J. Nielsen, ``We see no signs that China’s reserve accumulation is easing in today’s data and it appears that speculative hot money inflows has become a major policy challenge for China. Firstly, Peoples Bank of China (PBoC) will be struggling to neutralize the liquidity impact from its massive purchase of foreign exchange. This might be one reason for PBoC raising its reserve requirement for banks earlier in the week. Secondly it underlines that despite China’s capital controls, capital flows has become more important and it has become more difficult for China to maintain an independent monetary policy, while simultaneously maintaining a quasi peg to USD.” (all bold highlights mine)

And it is also one reason why the Chinese government has utilized unorthodox means of curbing the credit process through “verbal persuasion” over her banking sector.

So yes, over the interim perhaps we should expect the Chinese government to constantly apply further pressure on its system in an attempt to wring out hot money and reduce credit expansion to avert a full blown bubble from developing. And this could equally translate to possible weakness in China’s stock markets over the interim, as the market adjusts to the conditions of repeated interventions of the Chinese government.

But no, if her asset markets begin to recover even amidst these attempts or if markets start to disregard such policies then watch out, the asset melt up phase could commence.

And as we earlier described in Asia And Emerging Markets Should Benefit From The 2010 Poker Bluff, the more China tightens via the interest rate tool, the bigger the odds for a melt up as the spread of interest rates between China and G-7 economies widens. This would emanate from policy divergences- a tightening China, while the US, UK, Japan and EU remain loose-which becomes the fodder to the next bubble in motion.

When Politics Ruled The Market: A Week Of Market Jitters

``The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.” Thomas Sowell

As we have repeatedly argued, politics today more than the economy shapes market activities. That’s because boom-bust cycles are essentially politically oriented where inflationism is about the politics of redistribution.

Whether the source of this week’s troubles has been from China, Greece or the US, they have a common denominator, politics rule the day.

Bizarrely, there has been an apparent disorientation from media on who to blame or which among these nations have spawned major global markets to swoon!

Perhaps we can get some clues from the recent activities depicted in the charts (see figure 1)

Figure 1: stockcharts.com: What Caused The Meltdown?

The Dow Jones Stoxx 50 (main window-STOX50) or a benchmark of major European heavyweights collapsed only during the last three successive sessions of the week which also had been reflected on the US S & P 500 ($SPX).

Whereas China’s Shanghai Index ($SSEC), has peaked last August of 2009 and has repeatedly been underpressure since the start of the year.

Meanwhile the US dollar index bottomed during the start of December, and has, from then substantially ascended.

So gleaned from the first mover advantage perhaps it could have been China. But correlations appear rather unconvincing. Possibly a time lag effect? Maybe.

Greek Mythology And Market Divergences

This brings us first to the Greece.

The Greek episode as we earlier discussed in Poker Bluffing Booby Traps: PIMCO And The PIIGS seems more like a political poker bluff. That’s because European authorities won’t likely afford to put at risk the Union’s credibility that could easily escalate and eventually result to its disintegration.

Moreover, it wouldn’t also seem in the interest of Greece to take radical actions that would result to its leaving the Union. Since most of her debts have been denominated in the Euro, any devaluation would only expand her outstanding liabilities and result to more painstaking adjustments.

The team from the Danske Bank, Frank Øland Hansen and Gustav Smidth, puts it nicely, ``Greece could also choose to leave the euro and devalue. This is seen as a 'quick-fix' by some market participants. The Greek Central Bank Governor, George Provopoulus, has however emphasised today in the Financial Times, that this is not an option. Referring to Greek mythology, he said that "The future of its economy is unwaveringly tied to the mast provided by the euro". If Greece were to leave the euro and devalue, the new currency would lack credibility and there would be expectations of further devaluations. The outcome would be higher inflation and higher rates. In addition, existing eurodenominated debt would become foreign-currency debt. Any devaluation of the new domestic currency against the euro would thus increase the debt burden. We think that this 'quick-fix' is a highly unlikely scenario too.”

In other words, Greece will have to embrace austerity with or without the Union. But to disengage with the Union will likely result to greater hardship (larger debt, lesser access to financing, lose the privilege of integrated markets) and could present as “lose-lose” scenario for both parties. Hence assuming reform under the EU’s auspices would likely result to enhanced collaborative efforts to resolve her problems.

So unless there would be other unidentified incentives that implicitly serve the political parties involved, the most likely option would possibly be either for a broad European based rescue or with an IMF assisted bailout for Greece.

Figure 2: Danske Bank: Credit Markets Amidst The Market Turmoil

True, while the recent market volatility has triggered considerable anxieties in the credit sphere, as premiums on Credit Default Swaps-or cost to insure bonds- have spiked, it’s been largely a Greek problem (see figure 2 left window-lime green trend line).

Although Italy (gray) and Spain (blue) have likewise accounted for substantial upside movements, it hasn’t been as steep as Greece.

On the other hand, Ireland’s CDS (red) has improved in spite of the recent trembler.

In addition, the index of high yield spreads of the European (right window-blue trend) and US corporations (red trend) appears somewhat little shaken by the turmoil.

Let me add that Greece’s equity bellwether, the Greece [Athens] General Share index, has fallen by 31% since mid October. This brings her back her down 61% off its 2007 highs which has been reflective of the market’s apprehensions over her default risks. The Greece index lost over 70% during the market meltdown of 2007-2008 on a peak-to-trough basis.

Now if the ECB’s forthcoming actions will, as we expect, likely focus on market calming measures then we should see some semblance of rebound for Europe’s market.

To give us a clue, former crisis affected economies of emerging Eastern Europe such as Estonia, Latvia, Lithuania, Ukraine appears to have even shrugged off the recent antsy to stage massive rallies. Estonia is up 30% (!!!) on a year to date or 3 weeks basis after falling by about 75% from the 2007 peak. The current rally has only recovered 50% of the losses [see Scorecard From This Week's Global Equity Bloodbath].

So unlike in the 2008 episode where there had been a generalized fear, which resulted to a flight to safety, the apparent market based dissonance gives some credence to the decoupling theory.

And this has two important implications:

One. If markets deteriorate further, then the current inter-market divergences (Euro credit spreads, emerging markets versus G-7 equities and bond performances) would appear as belated responses to the lead actions of the core group, particularly the G-7 and BRICs which recently suffered from heavy losses.

In short, the losses will spread and close any gap that would lead to a convergence-partially resembling the 2007-2008 episode. I say partially because policymakers given will likely react in the same magnitude and swiftness to arrest any signs of a repeat of a 2008-esque meltdown.

Two. If major markets do find some stabilization or a base in the coming sessions from the recent mayhem, then we should expect inter-market divergences to materially widen. This implies that major emerging markets will likely recover earlier or ahead of its developed country peers and that those that has recently outperformed as emerging Eastern Europe could increase its outperformances. Emerging Eastern Europe looks likely on a catch up mode.

So the perma bears, whom have mostly anchored on a 2008 meltdown or a Japan crash scenario, will possibly be met anew by another setback-failed predictions.

I think this is the most likely outcome given the significant evidences of market divergences (credit, equity and bond markets) in the face of this week’s intense selling pressure.

Gold Tracing Euro’s Path

Another aspect that I’d like to dispel is the nonsensical view that gold is behaving like a bursting bubble or reflecting on deflationary forces.

Figure 3: stockcharts.com: Nonsensical Views About Gold

One should realize that gold’s action has NOT been exhibiting deflation or inflation but instead has moved mainly in consonance with the Euro, or inversely, but to a lesser degree, against the US dollar index where the Euro constitutes a hefty 57.6% of the index (see figure 3).

Notice that the contours of both gold (candlestick) and the Euro ($xeu-black line behind gold) have been nearly the same for the past 6 months. Thereby any variances lie within the degree of the changes.

A rising Euro does NOT translate to “inflation” nor does a falling Euro imply “deflation”. That would be another sign of clustering illusions.

As the earlier divergences discussed, this seems UNLIKE the AFTER LEHMAN Syndrome of October 2008. It hasn’t been the case where liquidity is being sucked out of the system that has resulted to a banking gridlock. The problems such as Greece, China or the US Volker fund appear to be more political than economic.

In short, the Euro and gold has had a strong correlation of late. But as caveat, the high correlation doesn’t imply any semblance of causation, that’s because gold’s relevance is as nemesis of any paper based currency and that’s why even central bankers tacitly revere it as “insurance” [see Is Gold In A Bubble?].

More signs of divergences? Just look at copper ($copper). Even as gold and oil has flailed along with major equity benchmarks over the last few sessions, copper prices remains vibrant and even rose.

In addition, if one should argue about prices being representative of less speculation and more real demand for commodities, then the Baltic Dry Index seems to be another sign of deviation. It has been in consolidation.

In short, unless markets will prove us wrong, signs have been saying that the recent meltdown is likely a bear trap.

Analyzing Predictions

“I’ve been dealing with these big mathematical models of forecasting the economy…I’ve been in the forecasting business for 50 years…I’m no better than I ever was, and nobody else is. Forecasting 50 years ago was as good or as bad as it is today. And the reason is that human nature hasn’t changed. We can’t improve ourselves.” Alan Greenspan

Baseball legend Yogi Berra once quipped on a sarcastic irony on prediction, ``Prediction is very difficult, especially if it's about the future."

Nevertheless prediction has been hardwired into the mankind’s genes with the implicit goal to overcome risks in order to ensure existential continuity of the specie. As Peter Bernstein aptly wrote in Against The Gods, ``The revolutionary idea that defines the boundary between modern times and the past is the mastery of risk…”

Predictions From A Historian’s Perspective

Well, prediction is a tricky business. Since the advancement of science, the scientific model (quantitative) approach has been frequently utilized to determine probabilistic outcomes given defined set of variables.

However, social science appear to be more complex than anticipated, given that people have different scale of values, which are likewise meaningfully influenced by the divergences in time preferences, and also influenced by sundry cognitive biases, which subsequently makes us respond differently even to the same set of conditions.

As mathematician and scientist Professor Benoit Mandelbrot of the Fractal Geometry fame said in a PBS News Hour Interview, ``The basis of weather forecasting is looking from the satellite and seeing the storm coming but not predicting that the storm will form, the behavior of economic phenomenon is far more complicated than the behavior of liquid and gasses” (underscore mine)

Since markets are essentially economic events, the complications is that they represent endemically a menagerie of action-reaction and stimulus-response feedback loop dynamics to which Professor Mandelbroit elucidated in The (Mis)Behaviour Of Markets as, ``prices are determined by endogenous effects peculiar to the inner workings of the markets themselves, rather than solely by the exogenous actions of outside events.”

So given that markets signify more of human action dynamics than the functional state of natural science then our choice in making predictions will be one similar to the work of historians. Murray N. Rothbard makes the appropriate analogy, ``The latter attempts to "predict" the events of the past by explaining their antecedent causes; similarly, the forecaster attempts to predict the events of the future on the basis of present and past events already known. He uses all his nomothetic knowledge, economic, political, military, psychological, and technological; but at best his work is an art rather than an exact science. Thus, some forecasters will inevitably be better than others, and the superior forecasters will make the more successful entrepreneurs, speculators, generals, and bettors on elections or football games.” (all bold underscore mine)

The point is: Markets are likely to exhibit the causal effects from precursory human actions than from math designed economic models that ignore the aspects of human decision making.

Unfortunately the mainstream appears addicted to apply models even if they’ve been proven to be repeatedly unrealistic, either for reputational (need to be seen as pedagogic) or for social affiliations (need to be seen talking the same language) motivations or due to ideological blindspots (dogmatic treatment of economic theories).

Predictions Based On Dumb Luck

Besides, predictions should be weighed from the angles of opportunity costs and the incentives of the forecaster’s standpoint.

When a forecast for a certain direction of the market is unfulfilled, but at worst, goes into substantially to the opposite direction, losses will be real for those who adhered to them.

For instance, many ‘experts’ who predicted the “crash of the stock market” in 2009, when the market soared anywhere from 20-50% based on G-7 and BRIC and key emerging markets, could have bled their customers dry or would have lost 20-50% in profit opportunities from such erroneous predictions.

Yet for them to bluster “I told you so!” because the markets sizably fell this week would signify as “even a broken clock is right twice a day”! This implies that they’ve been right for the wrong reasons or as indicated by Urban Dictionary “success obtained through dumb luck”.

Market predictions shouldn’t translate to an immediate or outright fulfillment but instead focus on mitigating risks and optimizing profits. When markets move violently against a touted position and the forecaster refuses to badge, then it isn’t about “mitigating risks and optimizing profits” nor is it about accuracy, but about being foolishly arrogant or about obstinately adhering to wrong analytical models.

Remember since markets move in only two directions (up or down)… they are going to be right somehow.

Nevertheless successful investing isn’t myopically about being theoretically right or wrong but about generating maximum profits from the right moves and reducing losses on the wrong moves.

Since as human beings we are susceptible to mundane lapses, then investing is about dealing with the magnitude or the scalability of the portfolio and not of the frequency of transactions. In addition, it is also about the allocative distribution of a portfolio pertinent to perceived risks conditions.

Furthermore, as we said in Reasons To Distrust Mainstream Economists, some forecasters have different incentives for making publicly based predictions.

Some are there for mere publicity purposes (celebrity guru such as Nouriel Roubini makes the spotlight anew with another wondrous shift by predicting a market meltdown in the 2^nd half! It’s amazing how media glorifies an expert whose calls have been repeatedly off tangent) or to promote certain agenda- e.g. promote political interventions-example Bill Gross [see Poker Bluffing Booby Traps: PIMCO And The PIIGS], sell newsletters, sell funds, etc...

For instance, some experts recently argued that the recent wobbles in Wall Street validates the state of the economy. Does this translate that markets only reflect on reality on when they conform to the directions advocated by these so-called “seers”? That would be utter crock.

The truth is that the current state of the global economy operates under a fiat money regime which perpetuate on the boom bust cycles, irrespective of the actions by regulators to curtail private greed but not on their actions-which have been the underlying cause of it.

Put bluntly, politically oriented boom bust cycles are the dominant and governing themes for both the global markets and the world economy. Therefore, market actions on both directions have been revealing these dynamics.

They don’t essentially validate or invalidate the workings of the economy, because they are `` endogenous effects peculiar to the inner workings of the markets themselves, rather than solely by the exogenous actions of outside events” as Professor Mandelbroit would argue.

Hence, the “desperately seeking normal” school of thought represents as a daft pursuit to resurrect old paradigms under UNSUPPORTIVE conditions- we don’t use radar to locate for submarines or any underwater objects!

Similarly ludicrous is to show comparative charts of the crash of 1929 as a seeming parallel for today’s prospective outcome. This is a brazen example of the cognitive bias known as the “clustering illusions” or seeking patterns where there is none.

Unfortunately, even professionals fall for such lunacy, which is emblematic of why mainstream analysis should be distrusted [see earlier discussion in Why Investor Irrationality Does Not Solely Account For Bubble Cycles].

These people fundamentally forget that 1920s operated on a GOLD STANDARD while today’s world has been on a de facto US dollar standard. Today we have deposit insurance when in 1929 crash we didn’t.

Today is the age of the internet or Web 2.0, where communications have advanced such that they are done by email, or conducted real time as voice mail, web based conferencing, digital cameras, iPods and etc., and where the cost to do business has substantially fallen to near zero and which has, consequently, attracted the scalability of globalization.

In the 1920s, communications were in a primal mode: stamped postal mails, the electrical telegraphs, manual based switchboard rotary telephones, and photography were based on celluloid film 35mm Leitz cameras. All these were emblematic that the 1920s had operated on an agro-industrial age.

Today we have niche or specialized markets when in the 1900s it was all about mass marketing. These are just a few of the major outstanding differences.

In short, the fact that the basic operating framework of the political economy has been disparate implies that the effects to the markets would be equally distinct. Think of it, fundamentally speaking, monetary policies in the pre Bretton Woods 1900s were restricted to the amount of gold held in a country’s reserves while today central banks have unrestrained capacity for currency issuance.

Columbia Business School’s Charles Calomiris makes this very important policy-market response feedback loop differentiation in an interview,

``From 1874 to 1913, there was a lot of globalization. But worldwide there were only 4 big banking crises…From 1978 to now, there have been 140 big banking crises, defined the same way as the earlier ones: total losses of banks in a country equalling or greater than 10% of GDP.” (bold highlights mine)

As you would notice, the emergence and proliferation of central banking coincided with the repeated and stressful occurrences of big banking crisis. Put differently, where central banking fiat currency replaced the gold the standard, banking crisis became a common feature. So to argue that market actions don’t reflect reality translates to a monumental incomprehension or misinterpretation of facts and theory.

Yet if markets should reflect on the same 1929 dynamics, this would be more the mechanics of dumb luck than representative of economic reality. Besides, to presuppose as engaging in “economic” analysis to support such outlandish theories, but without taking to account on these dissimilarities, would also signify as chimerical gibberish or pretentious knowledge.

Bottom line: I’d be careful about heeding on the predictions of the so-called experts, where I would read between the lines of interests of these forecasters, their way of interpreting facts and the theory used, aside from opportunity costs from lapses, and their forthrightness.

Yet, I’d pay heed to Benjamin Graham, the father of value investing when he admonished, ``If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what’s going to happen to the stock market."

Scorecard From This Week's Global Equity Bloodbath

This chart from Bespoke presents a good coverage of this week's resurgent volatility. According to Bespoke,

``As shown, both the G-7 and BRIC countries sit at the top of the list of worst performers. The countries that have held up better are located mainly in the Middle East, Africa, and Eastern Europe.

``Combining the BRICs and the G-7, Russia has done the worst since Tuesday with a decline of 6.33%. But Brazil and the US are not far behind with declines of more than 5%. Italy, France, and Germany are all down around 4.75%, followed by Britain at -3.81%. There has been lots of talk about China partly at fault for the global sell-off, but the country itself is down just 3.64% since 1/19. Japan has by far done the best of the G-7 and BRIC countries over the last three days with a decline of just 1.62%."

While it is true that BRICs got equally hit as hard as the G-7, the picture isn't complete. In any comparison, points of references are important because they can tilt balance of presentation.

Remember, in 2009 the BRICs outperformed the G-7 by a wide wide wide margin hence it should be natural for them to bear the brunt of the recent carnage.

However, last week's selloff reveals that the damage hasn't been significantly different. And if the current correlation continue, one can expect the BRICs to materially outperform its G-7 counterparts anew.

Although as seen from a year to date (or on a 3-week) basis on the left column, the BRICs have marginally underperformed the G-7, however 3 weeks is too early to call.

Nevertheless the overall market conditions should give us some clues.

As mentioned by Bespoke some markets in former crisis plagued Eastern Europe and the Middle East have outperformed.

For instance, Estonia was up 7% on a week on week basis but is up 30% (!!!) on a year to date basis and so with her peers (also based on year to date) Latvia 15.04%, Lithuania 11.29%, Romania 7.2% and Ukraine 7.08 as well as Malta 13.27, Kenya 11.73%, Egypt 9.76% and so forth...

While everyone's focus (as indicated by Bespoke's article) has been on how the key markets got hammered (BRICs and G-7), what may have been ignored by the rest is how the broad periphery (emerging markets) had been vastly unfazed by the ruckus.

This for us, implies two significant messages:

First, that the periphery signifies delayed or belated reaction from the still to be felt ripples or

Second, that many emerging markets will likely show signs of meaningful divergences (decoupling), which could mark the theme for 2010.

And if it is the latter scenario, then this week's meltdown could be suggestive of a bear market trap.

Hazards Of Corporatism: The Bankruptcy of Japan Airlines

The unfortunate fate of Japan Airlines (JAL) should be a vivid demonstration of how companies that have been politically privileged, kept afloat and protected (zombie companies) despite continued financial losses, end up being malignantly mismanaged and eventually ran aground on a surfeit debt ($25 bilion).

This from the Wall Street Journal, (bold emphasis mine)

``Marking a fundamental shift to this nation's corporate culture, Japan AirlinesCorp. filed the country's largest-ever bankruptcy petition by a nonfinancial company, kicking off a painful, three-year restructuring that will have lasting effects on hundreds of thousands of people.

``Undone by government ties that propped up excessive spending, the former flag carrier now will significantly shrink its operations. A third of JAL's work force, 15,700 employees, will be axed. Thousands of retail shareholders will be wiped out. And bondholders will likely take a fat reduction to their holdings. Employees at JAL's sprawling group subsidiaries in Japan and abroad also will be affected...

``A pillar of Japan Inc. founded in 1951 to help the country rise from the ashes of World War II, Asia's largest airline by revenue sought court protection from creditors on Tuesday to grapple with a debt load of $25 billion, a level well above its cash flow.

``Much like Washington's takeover of General Motors Co., JAL will be aided by a $10 billion lifeline from its government through capital injections and credit and will spread billions of dollars in losses across an already weak Japanese economy. Bureaucrats strong-armed Japan's banks, the airline's biggest creditors, into forgiving more than $8 billion of JAL's debt. Retirees and employees accepted more than $11 billion in pension cuts, representing a 30% reduction for retirees and a 50% cut for current employees...

Kevin Duffy of Mises Blog aptly enumerates on the decade long sins of JAL which led to this...

From Mr. Duffy (all bold highlights mine),

``For the record, JAL offers a quick primer on how government intervention destroys an economy:

1. State ownership and control. "Though financial profligacy was one cause of JAL's demise, its close ties with the government -- even after it was privatized in 1987 -- effectively crippled the carrier. Pork-barrel aviation policies drawn up by transport bureaucrats caused JAL to fly unprofitable routes for decades."

2. Moral hazard of implicit government backing. The 1987 IPO (and others like it, such as Nippon Telephone & Telegraph) were wildly successful in part because investors felt the government wouldn't allow them to lose money.

3. Bubble behavior. "When Japan Inc. rose to glory in the late 1980s, gobbling up trophy icons such as New York's Rockefeller Center, JAL also spread its tentacles around the world by buying the Essex House in New York and setting up resorts in Hawaii."

4. Endless government lifelines. According to CNBC, JAL was bailed out four times by the Japanese government over the past decade".

For companies that had undergone the same 'bailout' process during this crisis, the JAL experience would seem as the most likely outcome, in the fullness of time.

Graphic: BRIC Versus G7

This is graphic is a comparative from the Financial Times between major emerging economies coined as the BRIC (Brazil, Russia, India and China) relative to G7 economies.

The chart highlights both the positive and the negative aspects of the BRICs.

Nonetheless I find this an apples and oranges comparison, therefore impertinent (which is why one should be cautious with the mainstream).

The advantage of the BRICs on the left corner is predicated on the projections of future performances: growth contributions, share of the economy and growth rate.

Whereas the right corner accounts for as the disadvantages of the BRICs which reflects on the present conditions (lower per capita GDP and weak private consumption).

The comparative graphic should have shown projections on similar time dimensions, unless the FT assumes that while BRIC outperforms in growth, per capita and private consumption remains static?!