People Adapt To Climates, Intervention Not Required

That’s the message of Matt Ridley and Indur Goklany, as they write against relying on climate models to argue for political interventionism. (bold emphasis mine)

Was this because we controlled the weather? No. It was because we adapted to it. So even if extreme downpours do increase, death rates as a result of them will continue to decline so long as we continue to get more people access to roads, telephones, houses and information. It’s like malaria: it retreated rapidly in the twentieth century despite rising temperatures, and it will retreat rapidly in the twenty-first century despite rising temperatures.

As the above figure shows, globally the average annual death toll from all extreme weather events is about 35,000. Compare this to the hundreds of thousands of excess winter deaths that occur annually. Perhaps we should try to control winter before we tackle climate change! Oddly enough, while we may not be able to control the weather, in the U.S., millions have done the next best thing—they have migrated from colder northeastern climes to the warmer southwestern states. This, according to a paper in MIT Press’s Review of Economics and Statistics by econometricians Deschênes and Moretti, is responsible for 8%–15% of the total gains in life expectancy in the U.S. population from 1970 to 2000.

Read more of their splendid article here

Emergent Signs Of People Power In China

The Web based People Power revolution appears to have diffused into China.

From AP/Yahoo,

Jittery Chinese authorities wary of any domestic dissent staged a show of force Sunday to squelch a mysterious online call for a "Jasmine Revolution," with only a handful of people joining protests apparently modeled on the pro-democracy demonstrations sweeping the Middle East.

Read the rest here

I’m not sure if any People Power movement would sell to the average Chinese today, if China is indeed experiencing an inflation based economic boom. The next crisis (bust) would look fertile for this.

However, Austrian economist Dr. Antony Mueller is right,

You can't stop a revolution once it's time has come. Repression does not work in China just as it did not work in the Middle East.

China’s top-down political system and her attempt to bottom-up the economic system looks rife for a head-on collision course.

And it’s just a matter of time.

Capitulating Deflationists: It’s John Mauldin’s Turn

Like Nouriel Roubini whom I pointed out earlier, we see another deflationist throwing in the proverbial ‘towel’.

From ‘Fisherian’ John Mauldin,

It takes at least 12 months (or longer) for monetary policy to work its way into the economy. The current small rise in inflation is not due to QE2. That will show up later. It appears to me the deflation war, at least for the time being, is won (the next recession will bring that worry back). But now, it is time for the adults at the FOMC to stand up and say stop the printing presses.

More and more celebrity gurus appear to be capitulating.

Usury Prohibition: Medieval Crony Capitalism

During medieval Europe, the Roman Catholic Church via Pope Benedict XIV promulgated usury prohibition or Vix Pervenit: On Usury and Other Dishonest Profit—where charging interest rates on loans were condemned as a sin.

Guess who profited from the prohibition throughout those years?

From Mark Koyama* (hat tip: Café Hayek) [bold emphasis mine]

The usury prohibition created monopoly rents which made it possible for the Church, the state and international merchant–bankers to benefit from the suppression of usury. It was this shared interest that made the usury prohibition a self enforcing institution. It cemented a partnership between the leading merchant–bankers, secular rulers, and the Church, and because it shaped the beliefs and expectations of medieval society as a whole, it generated behavior that reinforced and perpetuated its own existence.

So the church integrated the role of the ‘baptist and the bootlegger’ which essentially converted her moral positions into laws that generated economic windfall for them. Of course, this was not restricted to the church , who acted as a political patron, but had to be backed by a vested economic client seen in “international merchant bankers”-manifestations of patron client relations.

In short, the usury prohibition laws engendered crony capitalism-the medieval ‘church’ edition.

Then and today, the nature of economic rent hardly makes any difference. Only the participants has changed.

*Evading the ‘Taint of Usury’: The usury prohibition as a barrier to entry

MENA Revolutions Are Not People Power!

That’s according to some pundits who claim that unfolding events in the Middle East and Africa have not accounted for as People’s Power.

They allege that these upheavals are politically organized aimed at destabilizing the existing regime for the benefit of some scheming insiders.

How valid are their assertions?

From today’s New York Times, [bold highlights mine]

In Bahrain, the day started out with a lull, as both sides appeared to have been rattled by the violence of the past week, in which at least seven people were killed. The leaders of the major opposition parties called off the protests for Saturday, telling the public to stay home in an effort to lower the temperature.

But in what appeared to be a measure of who controls the movement now, the people ignored their ostensible leaders. Marchers set out from villages and the city center and by midday converged on Pearl Square.

The police met them with tear gas and rubber bullets. Young men collapsed in the road and others ran for cover, but people kept coming.

The police fired again.

Then the government blinked, perhaps sensing that the only way to calm a spiral of violence that claimed more lives with each passing day was to cede the square to the protesters.

I guess the main concept of people power revolution to these pundits is one of outright bloodshed modeled after the early 20th century (highlighted by centralized political philosophies).

From the above account, nevertheless, they seem totally out of touch with present reality.

So much for top-down thinking.

Resurgent Gold Equals Resurgent Emerging Market Bourses?

By the way, full employment was one of the main justifications for the Reichsbank's inflationist monetary policies. So nothing has changed. Central bankers still believe that monetary policy can lower the unemployment rate. Patrick Barron The Nightmare of 1923 and Its Cause

Don’t look now, but gold is surging right back! (I have to wait for a successful test of 1,430 before I could blurt out ‘I told you so’[1])

If gold is surging right back, then it is likely that global equity markets will follow gold’s path. And this includes the Philippine Phisix.

Figure 1: Stockcharts.com: Phisix-Gold

We’ve been saying that gold has been a reliable barometer of the equity markets.

As you can see in figure 1, gold (black line main window) seems highly correlated with the actions of the Phisix (candle chart main window), as well as with the movements of key emerging markets as the BRIC (Brazil, Russia, India and China via BKF) as well as ASEAN equities (via FSEAX).

However such correlation doesn’t imply causation. The link between gold and emerging markets can be traced to concerted monetary inflationism by global central banks most especially by the Fed’s QE programs.

And places which were said to suffer from the risks of deflation, as the US[2], UK[3] or Euro[4], have actually been experiencing the opposite—inflation has begun to seep in and has even been accelerating.

Earlier, mainstream had been telling us that inflation wouldn’t be a factor. How consistently ‘spectacularly’ wrong they have been[5].

Inflation hasn’t just been manifested in the asset markets but has also been spreading throughout the commodity space (see figure 2).

Figure 2: Price Shocks in Food and $100 Brent Crude (sources: Danske Bank[6] and tradingeconomics[7])

Some in mainstream media has pointed to the soaring food and energy prices[8] as representing effects of the unfolding political events in the Middle East and Africa.

However the causation has, in fact, been the opposite—the unintended effects of the cocktail mix of monetary, fiscal and administrative policies of global governments has caused a widespread boom (signs of crack up boom) in commodity prices that has partly added to the public’s political discontent which have led to the spate of unrest in many countries. While rising food and energy prices has functioned as trigger, there are deeper underlying problems from which has caused the public to vent their dissatisfaction.

Concerns of the risks of supply shocks represent as only ‘secondary’ effects or as a feedback mechanism from the main cause—government inflationist policies.

The False Allure Of Negative Knowledge

This reminds me of Nassim Nicolas Taleb’s “Subtractive Prophecy” knowledge theory where the knowledge of the consensus can be characterized as generally “negative”.

Mr. Taleb’s proposition holds that (from his forthcoming “must buy” book-AntiFragility[9]): [bold emphasis mine]

we know a lot more what is wrong than what is right, or, phrased according to the fragile/robust classification, negative knowledge (what is wrong, what does not work) is more robust to error than positive knowledge (what is right, what works). So knowledge grows by subtraction, a lot more than addition —given that what we know today might turn out to be wrong but what we know to be wrong cannot turn out to be right, at least not easily.

Mr. Taleb’s negative knowledge theory melds with my own when I alluded to why many celebrity gurus remain highly popular[10] despite being constantly ‘spectacularly’ wrong on their predictions—the public may not all be concerned with what really works but espouses on what may seem as the traditionally or conventionally accepted wisdom. Peer pressure, or the informational bandwagon, seems to be the single most influential factor in disseminating ‘negative knowledge’.

In addition, a secondary factor could one of projecting the acquisition of ‘positive knowledge’ built around empiricism modelled through scientism or as Professor Russ Roberts writes[11], “the use of the language and tools of science to reach a conclusion that is not merited”.

In short, scientism could signify a form of social signalling aimed at exhibiting one’s intellectual prowess through math based models.

Or simply said, the desire to build self esteem or social capital by projecting themselves as intellectuals. Thus, much of mainstream’s actions have hardly been about the quest to achieve positive knowledge, instead they are focused on sprucing up image or reputation for the intent of social interactions.

As prudent investors our main concern should not be about what is conventionally accepted, but about being right, and importantly, what works. That’s because return of investments depend on ‘positive knowledge’ rather than the false allure or the wishful thinking from a top-down engineered social utopianism.

Soaring Gold Investment ‘Reservation’ Demand

It is important to also point out that as we have been predicting[12], the demand composition for gold has been shifting from a typical commodity to one of money, and this has been represented by the substantial expansion of ‘investment’ demand (figure 3).

Figure 3: US Global Investors[13]: Changing Composition of Gold’s Demand

Investment demand for gold leapt 70% in 2011 with China as a big factor in the demand growth.

According to this Bloomberg report[14],

Investment demand in 2010 jumped 70 percent and consumption by the jewelery sector gained to a record, it said. Investment was 179.9 metric tons, surpassing Germany and the U.S., as buyers sought out gold bars and coins, according the London- based industry group. Demand from the jewelry sector was 400 tons, it said....

Chinese investors have shown great enthusiasm amid lack of other alternative investments,” Wang Lixin, China representative for the council, said today in Beijing. Wang said the forecast was a “conservative estimate.”

As for the supposed reasons for such growth in demand, the same Bloomberg article quotes a report from the World Gold Council...

“The main motivation behind this demand has been concern over domestic inflation pressure and poor performance of alternative investments, combined with expectations of further gold price gains,” the council said in a report released today.

Again the report only further confirms what we have repeatedly been talking about—a shift of gold’s demand dynamics to one of ‘reservation demand’. As I previously wrote[15],

“money’s “store of value” is increasingly being factored into gold prices (unit of account). Hence, relative to gold pricing, this implies that reservation dynamics or the reservation model (and not consumption model) determines gold valuations or that the exchange ratio or monetary valuations relative to fiat currency applies-- where valuations are determined by the expected changes in relationship between the relative quantity of, and the demand for, gold as money vis-a-vis paper currencies.”

So while jewellery still accounts for as the largest demand for gold, the gist would likely shift towards investments. Nevertheless, statistics can’t assimilate on what people actions represent.

Applied to gold, people can buy jewellery not only for aesthetics or for ornamental purposes, but also as investments.

Official Buying And Monetary Stablization

Figure 4: WGC: Official Purchases First Time in 21 Years

It hasn’t been only the man on streets and the financial markets whom has contributed to a surge in the demand for gold. Governments, perhaps, may have equally been afraid of their own shadows and have begun to stockpile.

In 2010, the official sector, writes the World Gold Council[16], became a net buyer of gold for the first time in 21 years. (see figure 4)

Two factors seem to bear this out, one emerging markets became significant net buyers and secondly, Europe, with significant gold holdings, has greatly reduced their traditional sales activities.

The end in the streak of official selling, should serve as a pellucid and practical example of the error prone predictive value of rigidly relying on statistics and or on the anchoring effect (linear expectations) of past performances. Numbers cannot and will not substitute for people’s actions (this includes the government, who are also comprised of individuals).

As to whether the shift in the attitudes of some governments as reflected by their gold buying patterns would parlay into prospective policies would be another matter.

Yet unless governments act in the way a gold standard is in place (which is to severely downsize on the welfare state and various forms of political economic interventionism), or that government democratizes the banking system to allow for mass competition (by dismantling the banking cartel structure), we are not likely to see governments stabilize the monetary system soon. Adjustments will likely happen at the brink of or during a crisis or what I would call the Mises Moment.

That’s because central banks can always surreptitiously work for the state’s political agenda camouflaged by the esoteric nature of the operations of central banking.

In the fitting and resonant words of Henry Ford,

It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.

So while the fiscal side of governments may be scrutinized by a vigilant public over the perceived profligacy of a government, central banks actions can and will likely substitute for such a loss.

In the US the Federal Reserve’s recent actions appear to reflect on this.

Fund manager Axel Merk glibly explains[17],

Many of the Fed’s policies since the onset of the financial crisis have not been traditional monetary policies: a central bank usually applies a very broad brush in managing economic growth by controlling levers such as interest rates or money supply. However, when the Fed, for example, bought mortgage-backed securities (MBS), it steered money to a specific sector of the economy. That’s fiscal, not monetary policy, traditionally reserved for elected policy makers in Congress. Just like the MBS program, many of the Fed’s policies continue to appear to be attempts at addressing the “shortcomings” of Congress.

In short, what the Congress cannot do, the central bank can.

So any talk of monetary stability should translate to the reining of the actions of central banks or to a more radical extent—abolishing the central banking platform.

Alternatively this also means that given the absence of popular discontent with central banking, the monetary skulduggery can and will likely go on, in spite of globalization or the internet.

Thus, like all price trends, gold will not go up on a straight line but will sporadically encounter severe headwinds, as seen in the previous months.

Nevertheless, the general trend for gold is that it will continually move higher, and most importantly, increasingly assimilate more of money’s characteristics in the face of the persistent central bank manipulation of the monetary system coupled with competitive debasement for political goals.

Even in the political front we seem to be seeing the evolution of gold as money gain significant ground.

I mentioned earlier the World Bank Chief Robert Zoellig[18] has called for the inclusion of gold in monetary reforms. This seems to be shared too by Kansas Federal Reserve President Thomas Hoenig[19] whereby Mr. Hoenig says gold standard is "legitimate”. And so with 10 US states which had “introduced bills in the past few years to allow state commerce to be conducted with gold and silver.[20]”

Moreover, there has been NO fear factor or fear premium in gold[21] as the vicissitudes (rise and fall) of gold prices has been along with risk assets.

To stubbornly insist on this is to put misplaced belief rather than acting on the basis of evidence required for any serious examination.

Having said so, with the momentum of gold seemingly regaining the upside path, we are likely to see a similar price inflation on equity assets as gold and equity prices have shown strong correlations.

This is most likely to be seen on many emerging market bourses that has started the year on the wrong side of the fence.

The Philippine Phisix included.

---

[1] See Gold Fundamentals Remain Positive, January 31, 2011

[2] Wall Street Journal, Deja Deflation Fear, February 18, 2011

[3] bbc.co.uk UK inflation rate rises ‘hitting savers’, February 15, 2011

[4] Bloomberg.com Trichet Says ECB Doesn’t Exclude Possibility of Inflation Risks, February 19, 2011

[5] See Inflation Expectations: The Widening Chasm Between Households And Experts, February 12, 2011

[6] Danske Bank, Inflation so far not a risk to growth February 17, 2011

[7] Tradingeconomics.com, Brent Crude

[8] Bloomberg.com Brent Crude Trades Near Two-Year High on Mideast Supply Concern, February 17, 2010

[9] Taleb Nassim Nicolas Anti Fragility, How To Live In A World We Don’t Understand, Chapter 5, How (NOT) To Be A Prophet fooledbyrandomenss.com

[10] See Explaining Popularity In Terms of Predictions: Dr. Nouriel Roubini’s Case, February 17, 2011

[11] Roberts Russ Scientism, Cafe Hayek, January 10, 2011

[12] See Is Gold In A Bubble?, November 22, 2009

[13] US Global Investors, Investor Alert - February 18, 2011

[14] Bloomberg.com China 2011 Gold Investment May Jump 50%, Council Says, February 17, 2010

[15] See What Gold’s Latest Record Prices Mean, June 21, 2011

[16] World Gold Council, Gold Demand Trends Full year 2010

[17] Merk Axel, Politics of Inflation, safehaven.com February 16, 2011

[18] See World Bank Chief Robert Zoellig: Bring Gold Back As Part Of The New Monetary Order, November 9, 2010

[19] Reuters.com Fed's Hoenig says gold standard "legitimate", January 5, 2011

[20] TPMDC, At Least 10 States Have Introduced Gold Coins-As-Currency Bills, January 5, 2011

[21] See Four Reasons Why ‘Fear’ In Gold Prices Is A Fallacy, April 26, 2009

Phisix: What Market Internals Are Saying

A short comment on the market breadth of the Phisix.

The Phisix registered its first official weekly gain for 2011.

In 6 weeks through this year, the Phisix suffered 4 successive weekly losses and a nearly neutral week during the first trading week of the year.

So the bears have dominated.

I think that this will change quite soon.

Even if we set aside the argument of gold’s correlation and dissect on the market internals there are signs to suggest that the Phisix may have hit the bottom.

True, the rally last week had slim volume which usually demarcates a dead cat’s bounce.

However in furtherance of our earlier argument[1] where the extreme actions of retail participants represent as an opportunity to profit by doing the opposite, such signs seem to be reverberating.

One must realize that retail participants act mostly on the orientation of a very narrow timeframe, assess markets based on ticker based movements (linear thinking), and most importantly, are driven by emotions that are enveloped by mental biases and logical fallicies as rationalization.

That’s the reason why they are frequently referred to in Wall Street as the proverbial Pigs, who always get slaughtered by either the bulls or bears.

Figure 5 PSE: More Signs of Retail Selling

I have been saying that there have been signs of emergent market dissonance[2] which only proves that today’s falling Phisix signifies just a hiatus.

This includes the rising trend of local and regional currencies, divergences between developed economy and EM bourses, steepening of the yield curve, economic growth disparities, aside from net foreign trade.

As for the last aspect we can see some signs of diminished degree of selling (right window figure 5).

While it is true that advance decline spread has been deteriorating (left window), I think we have reached a point of climax where panicking retail participants appear to have capitulated during the previous week (not last week).

And with a significant number of Phisix composite issues now showing signs of stabilization, in terms of price action through the charts, my hunch is that today’s hiatus is bound for closure.

Go take advantage of this. Thank me later.

---

[1] See Phisix: Panicking Retail Investors Equals Buying Opportunity, January 31, 2011

[2] See ASEAN Bourses Undergoing Interim Correction, February 14, 2011

Knowledge Revolution: Creators and Servers

The transition towards Toffler’s Third Wave or the Hayekian knowledge revolution isn’t just my outlook. It is likewise shared by some, who like me, sees things evolving from the fringes.

Author Andy Kessler predicts that people will play starkly different roles from that of the past, and where technology (and not the Yuan) will eat alot of jobs.

In promoting his latest book Eat People, Andy Kessler writes at the Wall Street Journal, (bold highlights mine, italics his) [my comments]

There are two types of workers in our economy: creators and servers.

Creators are the ones driving productivity—writing code, designing chips, creating drugs, running search engines. Servers, on the other hand, service these creators (and other servers) by building homes, providing food, offering legal advice, and working at the Department of Motor Vehicles. Many servers will be replaced by machines, by computers and by changes in how business operates. It's no coincidence that Google announced it plans to hire 6,000 workers in 2011.

But even the label "servers" is too vague. So I've broken down the service economy further, as a guide to figure out the next set of unproductive jobs that will disappear. (Don't blame me if your job is listed here; technology spares no one, not even writers.)

• Sloppers are those that move things—from one side of a store or factory to another. Amazon is displacing thousands of retail workers. DMV employees and so many other government workers move information from one side of a counter to another without adding any value. Such sloppers are easy to purge with clever code.

• Sponges are those who earned their jobs by passing a test meant to limit supply. According to this newspaper, 23% of U.S. workers now need a state license. The Series 7 exam is required for stock brokers. Cosmetologists, real estate brokers, doctors and lawyers all need government certification. All this does is legally bar others from doing the same job, so existing workers can charge more and sponge off the rest of us.

But eDiscovery is the hottest thing right now in corporate legal departments. The software scans documents and looks for important keywords and phrases, displacing lawyers and paralegals who charge hundreds of dollars per hour to read the often millions of litigation documents. Lawyers, understandably, hate eDiscovery. [Yes, this should diminish the brains for interventionists-Prudentinvestor]

Doctors are under fire as well, from computer imaging that looks inside of us and from Computer Aided Diagnosis, which looks for patterns in X-rays to identify breast cancer and other diseases more cheaply and effectively than radiologists do. Other than barbers, no sponges are safe. [According to Marketingcharts.com ‘8 in 10 Web Users Look for Online Health Data’-Prudentinvestor]

• Supersloppers mark up prices based on some marketing or branding gimmick, not true economic value. That Rolex Oyster Perpetual Submariner Two-Tone Date for $9,200 doesn't tell time as well as the free clock on my iPhone, but supersloppers will convince you to buy it. Markups don't generate wealth, except for those marking up. These products and services provide a huge price umbrella for something better to sell under.

• Slimers are those that work in finance and on Wall Street. They provide the grease that lubricates the gears of the economy. Financial firms provide access to capital, shielding companies from the volatility of the stock and bond and derivative markets. For that, they charge hefty fees. But electronic trading has cut into their profits, and corporations are negotiating lower fees for mergers and financings. Wall Street will always exist, but with many fewer workers.

• Thieves have a government mandate to make good money and a franchise that could disappear with the stroke of a pen. You know many of them: phone companies, cable operators and cellular companies are the obvious ones. But there are more annoying ones—asbestos testing and removal, plus all the regulatory inspectors who don't add value beyond making sure everyone pays them. Technologies like Skype have picked off phone companies by lowering international rates. And consumers are cutting expensive cable TV services in favor of Web-streamed video. [crony capitalism under pressure-prudentinvestor]

Like it or not, we are at the beginning of a decades-long trend. Beyond the demise of toll takers and stock traders, watch enrollment dwindle in law schools and medical schools. Watch the divergence in stock performance between companies that actually create and those that are in transition—just look at Apple, Netflix and Google over the last five years as compared to retailers and media.

Two things:

One, this makes investments in the technology sector very compelling, despite the applied inflationism by global central banks.

Proof of this has been the steady ‘top’ ranking of the technology sector in the distribution of the sectoral weightings in the US S&P 500 over the years. And the technology sector remains a solid outperformer today.

Two, political opposition would likely emanate not only from anti trade/mercantilists but likewise from neo-Luddites.

Frederic Bastiat in his magnificent classic That Which is Seen, and That Which is Not Seen rebutted a similar objection as seen through this: "A curse on machines! Every year, their increasing power devotes millions of workmen to pauperism, by depriving them of work, and therefore of wages and bread. A curse on machines!"

Libertarianism And The Internet

The ever brilliant GMU Professor Bryan Caplan notes that the social skills of libertarian students have materially increased over the past few years due to the internet.

Professor Caplan writes,

The best explanation I've got so far: the Internet. Back in the old days, libertarian students spent a lot of time alone with their books. It was awfully hard to meet others with a shared interest in liberty. This social isolation had two effects. The first was a treatment effect: Libertarians got a lot less practice sharing their ideas in a civilized and constructive way. The second was a selection effect: Few "people people" became libertarians because it was too depressing. As the Internet - and social networking, its favorite child - blossomed over the last two decades, these effects of libertarian isolation largely faded away. Nowadays, almost no libertarian is isolated unless he wants to be. As it turns out, few do.

Aside from linking or connecting shared interests in real time and across diverse geography, the internet offers a wealth of informational exchange, at diminishing costs, from which libertarians use to solidify their convictions, grounded mostly on philosophical, political and or economic reasons.

So convictions are not only backed by what marketing guru Seth Godin would call as ‘tribes’, but also by increased knowledge that provides confidence to libertarian adherents. And this helps increase social skills and the number of enthusiasts which likewise help reduce libertarians from isolation.

Besides, in what I would call the unfolding Hayekian knowledge revolution brought about by democratization of knowledge through the internet, libertarian philosophy blends smoothly with horizontal flow of informational exchange as previously discussed here.

In other words, my bold forecast is that the philosophy of libertarianism and classical liberalism is bound to go mainstream.

China’s Real Estate Bubble: Using Divorce As Regulatory Arbitrage

The cat and mouse game between the regulators and the markets or regulatory arbitrages have not been limited to institutions.

Even individuals practice them for profit reasons.

In China, one way to elude government administrative controls on the ballooning property bubble has been for families to apply for divorce.

Writes Teresa Kong of Matthews Asia, (bold emphasis mine)

Real estate risks are still big concerns for investors in China. The central authorities have been trying to dampen property speculation, but as the saying goes in China: “for every government policy, the people have a counterpolicy.” Trying to control demand through administrative means leads people to devise some novel ways around the rules. This begs the question of just how effective China’s new regulations may be in moderating property prices. In September last year, the Chinese government announced that all mortgages on second homes would require at least a 50% down payment, and mortgages on third homes were banned. While on tour at one of the developments, I heard one property manager say that he and his wife got a divorce to get around this rule. It was simple, he explained, a divorce certificate required 10 yuan (US$1.50), and a visit to city hall. That way they would be considered two households and his wife would be able to finance her “first” home with a traditional first-home mortgage—practical, though not exactly romantic.

And it is no wonder why China’s divorce rate has recently skyrocketed.

Yet China’s government controlled media has blamed the accelerating divorce rates on “rising wealth and independence” according to the China Post.

As earlier mentioned, governments and their apologists, as well as the media, employs such deep-seated bad habits of mistakenly treating symptoms as the underlying cause of the unfolding events.

That’s why governments end up not only having regulations that prompts for an economic backfire, but importantly, become direct promoters of the decline of a nation’s moral fibre.

Regulatory Arbitrage: Some Banks In The US Circumvent The New Capital Rule

The major flaws of the interventionist ideology are that they seem to always figuratively “fight the last war”, treat symptoms rather than the source of the disease and starkly misjudge market dynamics in adapting to a new regulatory environment.

A good example of the last condition, largely known as regulatory arbitrage, can be defined as, according to moneyterms.co.uk, “financial engineering that uses differences between economic substance and regulatory position to evade unwelcome regulation. The term is also sometimes used to describe firms structuring or relocating transactions to choose the least burdensome regulator, but this is better described as regulator shopping.”

The essence is that in search of profits, private enterprises tend to look for loopholes which circumvent unfavourable regulations from where they can operate.

It’s fundamentally a cat-mouse game between authorities and the markets.

Below is a good example.

From the Wall Street Journal, (bold highlights mine)

Some foreign banks are moving to restructure their U.S. operations to avoid one of the most-burdensome requirements of the new Dodd-Frank law.

In November, Barclays PLC quietly changed the legal classification of the U.K. bank's main subsidiary in the U.S. so that the unit would no longer be subject to federal bank-capital requirements. Several other banks based outside the U.S. are considering similar moves, according to people familiar with the matter.

The maneuver allows them to escape a provision of the financial-overhaul law that forces the pumping of billions of dollars of new capital into the U.S. entities, known as bank-holding companies.

"It's just not worth it to have all that capital trapped" in the holding company, said a New York lawyer who is advising banks on how to restructure.

The moves are the latest example of how banks are scrambling to cushion the impact of new laws and rules around the world.

Policy makers are demanding banks hold more capital and cash to help prevent a repeat of the financial crisis. But bank executives are worried that all the changes will crimp profits without making the financial system safer.

Last summer's Dodd-Frank law beefed up rules governing the quantity and types of capital banks must keep to protect themselves from potential losses. The provision also closed a loophole that allowed foreign banks to run their U.S. subsidiaries with thinner capital buffers than those of their local rivals.

All these simply show how markets are much superior to governments and how government regulations may lead to unintended consequences.

Filibustering Via Voting Boycott

In politics you can expect the unexpected.

In the state of Wisconsin in the US, minority lawmakers reportedly resorted to a bizarre form of filibustering which looks deserving of the hall of shame...

Take it away Tyler Durden (of Zerohedge)...

The farce over the Wisconsin anti-union vote has just passed into the surreal. According to the AP, democrat lawmakers, who are firmly opposed to voting on the bill which is said to already have majority support, and who have been boycotting the vote by being absent from the state capitol, have now escalated and patriotically left the state. The reason is that while the vote can not take place without at least one Democrat being present, the police had been sent out earlier, with orders to sequester the democrats. The democrat response: run away. As the AP reports: "Senate Republicans can't vote on the bill unless at least one Democrat is present. Police could be dispatched to retrieve them, but it was unclear if they would have the authority to cross state lines." So to all who were expecting the latest iteration of members of the executive class to run away (with or without gold) to come from Africa or the Middle East, will be disappointed: it was in America's very own back yard. (emphasis mine)

They certainly can run but they can’t hide as the laws of economics have been bearing down on them hard.

Ludwig von Mises has been once again validated when presciently wrote,

An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. The whole system of interventionism collapses when this fountain is drained off: The Santa Claus principle liquidates itself.

The People Power Handbook By Gene Sharp

This from the New York Times,

Halfway around the world from Tahrir Square in Cairo, an aging American intellectual shuffles about his cluttered brick row house in a working-class neighborhood here. His name is Gene Sharp. Stoop-shouldered and white-haired at 83, he grows orchids, has yet to master the Internet and hardly seems like a dangerous man.

But for the world’s despots, his ideas can be fatal.

Few Americans have heard of Mr. Sharp. But for decades, his practical writings on nonviolent revolution — most notably “From Dictatorship to Democracy,” a 93-page guide to toppling autocrats, available for download in 24 languages — have inspired dissidents around the world, including in Burma, Bosnia, Estonia and Zimbabwe, and now Tunisia and Egypt.

Get hold of the People power handbook “From Dictatorship to Democracy” from Gene Sharp. Just press on the New York Times link above.

An enlightened constituency will be least prone to political machinations and manipulation. Intelligence/Knowledge is our only way to defend and attain genuine freedom or liberty.

How Philippine Renewable Energy Policies Sow The Seeds To The Next People Power Revolt

Friend and libertarian colleague Nonoy Oplas has a wonderful article on renewable energy cronyism, as a result of climate change hysteria, here in the Philippines.

Politicos along with the media have successfully drummed up fear based frenzy on the public that has led to the justification of political interventionism in the local energy sector.

And like parasites, vested interest groups (associated with the political class) jump in to profit from such politically mandated economic concessions-all manifesting symptoms of crony capitalism.

Mr. Oplas’ article can be summarized into the imposition of the arbitrary law, the Renewable Energy Act or RA 9513 that has the following features:

-punishes non renewable energy with taxation and regulation while exempting clean and renewable energy

-guarantees profits (despite the inefficiency) of the politically privileged industry

-a deluge of other unilateral incentives:

a) Income Tax Holiday for 7 years, (b) Duty-free importation of RE machinery, equipment and materials within the first 10 years, (c) Special realty tax rates, (d) Net Operating Loss Carry-over (to be carried for the next 7 consecutive years), (e) 10% Corporate tax rate, (f) Tax Exemption of Carbon Credits, and (g) Tax Credit

-and an expansion of the bureaucracy:

the National RE Board (NREB) to be composed of different government agencies to some private sector players. The other is a technical secretariat, the RE Management Bureau (REMB)

You can read the rest of Mr. Oplas article here

However, the unintended consequences of Renewable Energy Act or RA 9513:

-the redistribution from traditional energy suppliers to politically endowed renewable energy suppliers is a form of political economic discrimination which means forthcoming shortages in conventional “cheaper” energy supplies.

-political economic discrimination spawns more illegitimate activities such as envy based violence and corruption

Why? Because, as the great libertarian Frank Chodorov explained,

State does not grant privileges without a quid pro quo. Every privilege involves the getting of something for nothing; it is never an honorable exchange, and therefore has to be enforced. The coercive power of the political establishment is involved. The State, far from being an impersonal fiction, consists of men who are called politicians but whose inclinations are not unlike those of other men. The only difference between the politician and the rest of mankind is that he is invested with the power to compel other men to do what they do not want to do, or to refrain from doing what they want to do. (bold highlights mine)

-Mr. Oplas further notes that renewable energy are pricier where the “current RE costs per kwh are high, between 2x to 5x the prevailing rates, and even if RE supply is unstable and unreliable. Us energy consumers will be forced to pay for their more expensive energy output”

So essentially the public will be faced with a perfect storm: rampant energy and eventually food price inflation!

Shortages in conventional energy equates to higher prices, while high costs of renewable energy means higher prices to the consumers too!

So along with the transmission channels from energy prices to food production and distribution, such policies we are likely to sow the seeds of the next “People Power” revolution here.

The Philippines is the most prone or vulnerable to food-energy inflation in Asia, as shown by the chart above by Soc-Gen and Businessinsider.

So even if prices from renewable energy are to be subsidized to the public, since there is no such thing as a “free lunch”, then the nation’s fiscal conditions will eventually bear the brunt in the substance of ballooning fiscal deficits.

Remember, the government has been tinkering here with the most politically sensitive commodities.

-in providing state guarantees where profits are privatized and losses are socialized this also means redistribution from the consumers to the cronies (robbing the poor to give to the rich).

As people pay for higher energy prices, the cronies of the ruling class will get wealthier.

And people, likely to be led astray by media, will blame 'greed' on free markets or laissez faire capitalism for what essentially is a state capitalism based on social democracy or political greed.

And when public uproar translates to the end of the system, cronies remain insured (flee the country) while fiscal situation as above worsens--public pays for the sins of the political class.

In other words, we should expect higher taxes, lower economic growth and more unemployment, if these laws remain enforced.

-the usual cycle: every new law means more bureaucracy and government spending.

All these along with the above only entails the ruling class, government employees and the cronies benefit while the society suffers.

The problem is that people or the public have been allured to the pessimism bias, which makes them all too vulnerable to the manipulation or propaganda of political-economic (ruling) elite classes.

Alternative Investments

In an inflationary boom, the tendency is for asset inflation to become broadbased and not limited to the traditional classes such as equities and commodities, but to a wider range of non conventional assets or otherwise known as “alternative investments”.

Minyaville presents 10 possible alternative investments:

1. Vintage Apple Computers and Other PCs

2. Fine Art

3. Gemstones

4. Litigation Funding

5. Rare Stamps

6. Fine Wine

7. Luxury Food and Tea

8. Baseball Cards

9. Celebrity Autographs

10. Vintage Toys

They write, (bold emphasis mine)

If you're looking to protect at least a portion of your money, one option is to move into uncorrelated investments -- buy some stamps, gemstones, wine or fine art. Risky and not always easy to exit, these markets are tempting to many because they're typically unaffected by the highs and lows of the general economy. They are said to be recession-proof, able to hold their own during downturns, or even grow at astounding rates of 10 to 20%.

If you choose to go this route, however, it's imperative to know your risks. Some experts complain that the hype about market-beating returns is based only on the success stories, not the average transaction. Critics also claim that some seemingly uncorrelated markets have become correlated -- they're now attached to traditional assets -- meaning they're just as vulnerable to larger market crashes as any other investment.

You may read on from this link or go above to the specific alternative asset markets and press on the link accordingly.

I’d like to say that I belong to the latter- the skeptics, whom are not convinced that these are ‘recession proof’ nor are they assets that signify uncorrelated nature useful for portfolio ‘diversification’.

The art markets as previously argued is one the many metrics I use in trying to gauge on the state of the bubble.

I’d also say that liquidity of such markets could also pose as a problem.

Thus returns may be greater but so are the risks.

Bottom line: There are many ways to exploit asset investments in today’s environment, but we should be circumspect or know about the risk profile of the particular asset market we intend to deal with before plunging in. Risk comes from not knowing what we are doing as value investor turned political entrepreneur Warren Buffett used to say.

Explaining Popularity In Terms of Predictions: Dr. Nouriel Roubini’s Case

This seems like good news to me. My favourite mainstream Keynesian bear, Nouriel Roubini, appears to have ‘capitulated’. Mr. Roubini, a popular and very well connected economist, has almost always been on the wrong side of the prediction fence, and this seems to be just another of chapter of his string of failed forecasts and eventual turnaround.

Mr. Roubini has turned bullish on the US markets, reports the Bloomberg,

Nouriel Roubini, the economist who predicted the financial crisis, said U.S. stocks may gain in the next few months as company earnings remain resilient.

Adds Thomas Brown of bankstocks.com

What the heck happened to the L-shaped recovery? Roubini’s view is now squarely within the mainstream expectation. Good for him. The facts changed, and so he changed his opinion. Keynes would be pleased.

For me, Mr Roubini exemplifies as one of the bizarre ironies of the marketplace where despite his persistent wrong predictions, Mr. Roubini has remained quite popular with media.

If his strategy has been patterned to a tournament bridge game called “playing for a swing” as Professor Arnold Kling suggests, where “It would appear that Roubini's strategy is to make forecasts that differentiate himself from the consensus forecast. This allows him to be spectacularly right sometimes and spectacularly wrong sometimes. As long as he succeeds in getting everyone to remember the right forecasts more clearly than the wrong ones, he becomes a prophet”, then his success reflects on the public’s poor memory (or survivorship bias).

Google search trends for Mr. Roubini vis-a-vis Dr. Marc Faber

While there may be some truth to this, I am not convinced.

The public seems jaded to the forecasting accuracy by experts.

In relative performance, another (less) popular grizzly bear (but Austrian school leaning bear), Dr Marc Faber, who appears to have consistently been accurate even in predicting short to medium term trends—even the latest divergence between EM and developed economies stocks—has almost trailed Dr. Roubini’s in terms of popularity. (note the difference in search volume index—X axis).

So the explanation of “spectacularly” right or wrong doesn’t seem to suffice.

Instead, I think, Mr. Roubini signifies what the public wants to hear more than the validity of his theories. He personifies the confirmation of many entrenched but flawed beliefs.

Search volume for Austrian versus Keynesian Economics

One would note of an almost similar performance between Dr. Faber and Dr. Roubini’s popularity variance levels—Austrian economics has largely been subordinate in popularity to Keynesian economics during the past years (although this could be changing).

Finally there could be another factor: pessimism bias sells.

In the question and answer portion of this splendid talk on innovation, economist Deirdre McCloskey points out that Paul Ralph Elrich remains quite popular in spite of his ‘spectacularly’ wrong prediction.

Mr. Elrich is known for having lost the famous Simon-Elrich wager- wager that based on the price of 5 metals anchored upon the overblown risks of overpopulation.

Perhaps many are simply more attracted to a pessimistic outlook, whether valid or not, out of the penchant to see or resist a change in the status quo, or based on social signalling (to conform with the consensus outlook or to show intellectual prowess or promote an ideology, e.g. using fear to expand government control)

As Professor Bryan Caplan writes,

David Hume—economist, philosopher, and Adam Smith’s best friend—blamed popular pessimism on our psychology. “The humour of blaming the present, and admiring the past, is strongly rooted in human nature,” he wrote, “and has an influence even on persons endued with the profoundest judgment and most extensive learning.”

Bottom line: The popularity of economic or market forecasters appear grounded mostly on the confirmation bias or giving the public what they want or desire to hear more than the validity of theories or the batting average or the accuracy of predictions.