Occupy Washington, the US Federal Reserve and the Princeton University

Investing savant Dr. Marc Faber says that demonstrators against Wall Street should instead occupy Washington and the US Federal Reserve.

The Business Intelligence Middle East quotes Dr. Faber (bold emphasis mine)

On the US Federal Reserve’s preference to support the banking and financial class through bubble policies:

We cannot blame Wall Street and well-to-do people for the mishap, for this ratio to have exploded on the upside. We have to blame essentially expansionary monetary policies that favor assets. So you have low consumer price inflation, you have no wage inflation."

In fact, the problem in America is that real wages, real compensation has been down since the 1970s. But at the same time, asset prices, equities, real estate and so forth have gone up dramatically, and that favors people who have these assets. And so the ratio expanded and you have now a record wealth inequality, and income inequality…

On Washington’s bribery of Americans in order to expand welfare state for the benefit of the political class and their cronies.

The problem with government is that the original intention of, especially a democracy, is very good.

Everybody has a say in how societies should be structured, but over time, it becomes very polarized and it moves into the hands of powerful business interests, and also interest groups like the military complex, or say the welfare recipients and so forth…

So you end up with kind of on the one hand a tyranny of the masses where you distribute all kinds of goodies to people. Like in America roughly 50% of the population gets a handout one way or the other from the government. So by continuing to support these people, you get their votes.

The protestors should focus on the root of the problem

Wall Street is a minority, anyone else would have done the same, they use the system but they didn't create the system. The system was created by the lobbyists and by Washington. So they [the protesters] should actually go to Washington and also occupy the Federal Reserve on the way

Professor William L. Anderson further suggests for an Occupy Princeton University movement (highlights mine)

That's right, I am calling for an immediate occupation of...Princeton University, and specifically, its economics department. There is no other place on earth that has given us more players and more enablers of the financial madness that has gripped this economy for many years.

Reason: Because of the notoriety of some of the academic alumnus towards interventionist and inflationist policies: Ben Bernanke, Alan Blinder, Alan Krueger and Paul Krugman

Continue reading Professor Anderson’s explanations here

Quote of the Day: Cycles of Political Institutions

From Bill Bonner

As an institution matures, little by little it shifts from serving its original purpose to serving the ends of those who control it. It becomes rigid — digging in its heels and resisting any change that would diminish the power and wealth of the controlling groups. The longer the institution remains unchanged, the more parasitic and arthritic it becomes. It drains resources away from honest production and redirects them towards favored groups of leeches.

Then…history returns. Then cometh the revolution.

Global Equity Markets Update: Deepening Losses

Global equity markets appear to be in a deepening funk.

Of last month's 10, now only four of the 78 global equity market indices monitored by Bespoke Invest posted gains, the Bespoke writes,

Just four countries are currently in the black this year -- Venezuela, Botswana, Jamaica and Ecuador. Greece and the Ukraine are the worst performers year-to-date with respective declines of -45.15% and -46.93%. The UK ranks second out of the G7 countries with a decline of 7.35%, followed by Canada (-10.13%) and Germany (-13.70%). Italy is the worst performing G7 country so far in 2011 with a decline of 19.25%. All of the BRICs are down more than 10% year to date.

And nearly a third of global benchmarks may be tipping into the bear market territory. Currently 8 or 14% of the total have losses of more than 20%

So far ASEAN markets continue to outperform the world but they have also been in the red.

The broadening of stock market declines reveal how interrelated today’s financial markets are and how global markets react in tidal flows as consequence to central banking boom bust policies.

The Next Phase of Euro Bailout: Market Volatility from Broken Promises

I have been saying that financial markets have been riding partly based on the promises of European political leaders that have been meant to be broken. Now the breaking down of such pledges begins

From Bloomberg (bold emphasis mine)

Europe’s options for overcoming the debt crisis narrowed as Germany doused expectations of a breakthrough at this weekend’s summit and central bankers balked at extended bond purchases.

European stocks and the euro reversed initial gains yesterday, slumping after German Chancellor Angela Merkel’s office knocked down what it called “dreams” that the Oct. 23 summit will be the last word in taming the crisis. Christian Noyer, head of France’s central bank, ruled out a ramping up of the European Central Bank’s bond-buying program as part of a multi-pronged strategy to shield countries like Italy.

While Group of 20 finance ministers and central bankers pressed European Union leaders to set out a strategy by the end of the week, divisions flared over an emerging plan to avoid a Greek default, bolster banks and curb contagion.

“We’re really in a bind here,” Carl Weinberg, founder and chief economist at High Frequency Economics, said in an interview with Betty Liu on Bloomberg Television’s “In the Loop.” “We have a lot of egos, a lot of national interests, a lot of political considerations, and that’s just hampering us from getting to a solution.”

The ECB said yesterday it bought 2.2 billion euros ($3 billion) of bonds last week, the least since it restarted the market support program in August over the objections of Germans on its council. While looking to exit the bond-buying business, the ECB also opposes the use of its balance sheet to boost the government-financed 440 billion-euro rescue fund with enough firepower to do that job…

Merkel has made it clear that “dreams that are taking hold again now that with this package everything will be solved and everything will be over on Monday won’t be able to be fulfilled,” Seibert told reporters in Berlin. The search for an end to the crisis “surely extends well into next year.”

Group of 20 finance ministers and central bankers concluded weekend talks in Paris endorsing parts of Europe’s emerging crisis plan. Providing a week to act, they set the Oct. 23 meeting of European leaders as the deadline.

My guess is that the recent market rebound may have given Euro’s political leaders some confidence to back off from their earlier assurances, AND OR that the reality of the heterogeneity and complexity of the underlying problems has been rendering their ‘grandiose’ centralized plans for a ‘comprehensive’ rescue as untenable.

Importantly the October 23 deadline by the G-20 on Euro policy makers will likely amplify current volatility.

Telegraphing reluctance to inject more ‘money from thin air’ means that turbulent times are not over.

Video: How to silence a Nobel Prize winning economist: Ask him about the economy.

This video from Peter Schiff is a must watch. (hat tip Justin Ptak Mises Blog)

The current Nobel Prize winners, whom are economic modelers or supposed technical experts on the economy, can't seem to defend their work, or much less explain their perspective of the US or European economy, in public.

Incredibly or even embarrassingly, both opted to take a silent stance in a news conference.

Watch the Princeton news conference video through this link

Another vindication of the great Ludwig von Mises who once wrote,

There is no such thing as quantitative economics. All economic quantities we know about are data of economic history. No reasonable man can contend that the relations between price and supply is, in general or in respect of certain commodities, constant. We know, on the contrary, that external phenomena affect different people in different ways, that the reactions of the same people to the same external events vary, and that it is not possible to assign individuals to classes of men reacting in the same way. This insight is a product of our aprioristic theory.

The European Central Bank as Symbol of Capitalism?

Today’s headlines reads “Rallies vs. Corporate Greed Sweep World” (Inquirer, Agence France-Presse, Associated Press) [emphasis added]

Other than Rome’s, the demonstrations across Europe were largely peaceful, with thousands of people marching past ancient monuments and gathering in front of capitalist symbols like the European Central Bank in Frankfurt.

My auto impulse response: WTFAYTA??!!

To save you precious seconds from searching, the acronym is the internet slang of "What The F*** Are You Talking About?"

Don’t these media guys know that…

Centralization of credit in the banks of the state, by means of a national bank with state capital and an exclusive monopoly.

…is the 5^th of the 10 measures of Marx-Engels Communist manifesto????

So how the heck does a ‘communist’ institution metamorphose into a symbol of capitalism???

Mises Institute’s Jonathan M.F. Catalán has a nice apropos cartoon depicting a past protest against the Aldrich Plan in 1912 or the proposed formation of the US central bank

The parody presciently portrays what has been happening today: a political economy based on Too big to Fail Banks-central banking-welfare/warfare state or a central bank-led cartel.

The ECB as a symbol of capitalism serves as telling evidence of how media has either been totally ignorant or complicit to the political propaganda aimed at shifting the culpability away from the government to everyone else.

The snowballing populist protest has rightly been directed at central banks, but media and many people and even some protestors don't get it: Corporate greed exists because of the symbiotic political relations with Political greed.

The lyrics below from Depeche Mode’s 1983 song ‘Everything Counts in Large Amounts’ seems event relevant

The graph on the wall
Tells the story of it all
Picture it now see just how
The lies and deceit gained a little more power
Confidence - taken in
By a suntan and a grin

The grabbing hands grab all they can
All for themselves - after all
The grabbing hands grab all they can
All for themselves - after all
It's a competitive world

More Inflation Myths: Velocity of Money

John Mauldin defines inflation as

a combination of the money supply AND the velocity of money. In short, if the velocity of money is falling, the Fed can print a great deal of money (expanding its balance sheet) without bringing about inflation.

So how valid or real is his definition?

The Velocity of M2 has been in a decline since 2006. This decline culminated in 2008 with the Lehman bankruptcy. Since bottoming out in early 2009, the velocity of M2 has been rangebound

In contrast, % change of M2 has been ascendant from 2007 and peaked during the first quarter of 2009. From 2009-2010, M2 has been in a steady decline. Following a bottom in early 2010, the % change of the M2 has been roaring upwards.

By the conditional definition that inflation is a function of Money Supply AND velocity, the US should be witnessing disinflation from 2009-2010, since it was only then where both money stock AND velocity had a synchronized decline. And from 2010 to date, a stagnant or rangebound inflation rate.

Unfortunately, only part of the story seems correct. US inflation rate fell from July 2008 and bottomed in July 2009. Since, US CPI rate continues to climb upwards in defiance of Mr. Mauldin’s definition of inflation (chart from trading economics)

The same story applies when seen with the US Producer’s Price Index

Mr. Mauldin was actually discussing the chances of hyperinflation in the US using the Weimar Germany as example

The Weimar hyperinflation according to Wikipedia.org is the

period of hyperinflation in Germany (the Weimar Republic) between 1921 and 1923. (I am emphasizing the period)

Chart from Now and Futures

During the Weimar episode, the velocity of money AND money supply only spiked together during the grand finale, which means that by clinging on to the velocity of money to define inflation, the value of your cash would have been a toilet paper. Similar to the Zimbabwe dollar.

In short, in the Weimar experience velocity of money lagged money supply growth.

Professor Hans Sennholz described how hyperinflation occurred in Weimar Germany (bold emphasis mine)

The German inflation of 1914–1923 had an inconspicuous beginning, a creeping rate of one to two percent. On the first day of the war, the German Reichsbank, like the other central banks of the belligerent powers, suspended redeemability of its notes in order to prevent a run on its gold reserves.

Like all the other banks, it offered assistance to the central government in financing the war effort. Since taxes are always unpopular, the German government preferred to borrow the needed amounts of money rather than raise its taxes substantially. To this end it was readily assisted by the Reichsbank, which discounted most treasury obligations.

A growing percentage of government debt thus found its way into the vaults of the central bank and an equivalent amount of printing press money into people's cash holdings. In short, the central bank was monetizing the growing government debt.

By the end of the war the amount of money in circulation had risen fourfold and prices some 140 percent. Yet the German mark had suffered no more than the British pound, was somewhat weaker than the American dollar but stronger than the French franc. Five years later, in December 1923, the Reichsbank had issued 496.5 quintillion marks, each of which had fallen to one-trillionth of its 1914 gold value

I am delighted that the recent political schisms (Volker et. al.) and the division among US Federal Reserve officials seems to have prompted team Bernanke’s reluctance to deploy QE 3.0.

This is a manifestation of institutional ‘check and balance’ that indeed lessens the odds of a US based hyperinflation

However, using velocity of money as an excuse to justify the actions of the US Federal Reserve resonates exactly why hyperinflation transpired in Weimar

Again Hans Sennholz (bold emphasis added)

The most amazing economic sophism that was advanced by eminent financiers, politicians, and economists endeavored to show that there was neither monetary nor credit inflation in Germany. These experts readily admitted that the nominal amount of paper money issued was indeed enormous. But the real value of all currency in circulation, that is, the gold value in terms of gold or goods prices, they argued, was much lower than before the war or than that of other industrial countries….

Of course, this fantastic conclusion drawn by monetary authorities and experts bore ominous consequences for millions of people. Through devious sophisms it simply removed the cause of disaster from individual responsibility and thus also all limits to the issuance of more paper money.

The source of this momentous error probably lies in the ignorance of one of the most important determinants of money value, which is the very attitude of people toward money. For one reason or another people may vary their cash holdings. An increase in cash holdings by many people tends to raise the exchange value of money; reduction in cash holdings tends to lower it. Now in order to change radically their cash holdings, individuals must have cogent reasons. They naturally enlarge their holdings whenever they anticipate rising money value as, for instance, in a depression. And they reduce their holdings whenever they expect declining money value. In the German hyperinflation they reduced their holdings to an absolute minimum and finally avoided any possession at all. It is obvious that goods prices must then rise faster and the value of money depreciate faster than the rate of money creation. If the value of individual cash holdings declines faster than the rate of money printing, the value of the total stock of money must also depreciate faster than this rate. This is so well understood that even the mathematical economists emphasize the money "velocity" in their equations and calculations of money value. But the German monetary authorities were unaware of such basic principles of human action.

To give an aura of credibility, many adhere to statistical aggregates for economic definitions and explanations. They forget that economics and money is about people and their actions.

Sharp Market Gyrations Could Imply an Inflection Point

The path to a robust political economy must begin with treating political decision making (and the incentives and information embedded in that process) in the realm of policy making not as a footnote caution, but at the very beginning of the analysis.-Professor Peter Boettke

Violent gyrations in the equity markets usually occur during inflection or reversal periods of major trends.

While the current upside swing could reflect a bottoming phase, on the other hand, it could also reflect a transition towards a downside bias—a bear market.

For example, in 2007, after the first jolt from the market peak in July, both the major bellwethers of the US and the Philippines, the S&P 500 (blue-bar) and the Phisix (black candle), dramatically recoiled to the upside (red rectangles).

The initial rally saw both indices BROKE out of the resistance levels (green vertical lines) but eventually faltered. The second downswing had almost been a miniature replica of the first violent reversal.

Seen in the lens of a chart technician or chartist, such dynamic represents a chart pattern failure, where whipsaw motions can be identified as ‘bull traps’—or as investopedia defines[1],

A false signal indicating that a declining trend in a stock or index has reversed and is heading upwards when, in fact, the security will continue to decline

Consequently, following the two failed patterns which diminished the vim of the bulls, the bears assumed dominance.

Don’t Get Married to an Investing theme

I am NOT suggesting that today would be a repeat of 2007-2008.

I keep pounding on the fact that patterns only capture parts of the reality, where the motion of time will always be distinctive with reference to the changes brought about by people’s actions, as well as, the changes in the environment.

It would signify a monumental folly to bet the farm based on the expectation of pattern repetition alone.

And one of the major difference between today and 2007-2008 as I wrote last September[2]

Central bank activism essentially differentiates today’s environment from that of 2008.

As I explained before[3], my bias outcome is for a non-recession bear market.

I think current US markets will likely exhibit symptoms of the non recession bear markets of the 1962 (Kennedy Slide) and 1987 (Black Monday).

Charts from Economagic

And this should be reflected on global markets too

But exposing risk money based on personal biases can be very costly.

Individual expectation of the marketplace and reality usually depart. We DO NOT and CANNOT know everything, and should humbly accept such truism. The desire to see certain outcomes, when facts present themselves to the contrary, will inflict not only monetary losses, but most importantly, mental or psychic anguish from stubborn DENIAL.

This explains the popular trading maxim “Don’t get married to a stock.” Rephrasing this, we should NOT get married to an investment theme.

Prudent investing suggest that we should be taking action based on theory and backed by evidences which either confirms or falsifies it. Confirmation means that we can position to gain profits while a non-confirmation should impel us to consider exiting positions regardless of the profit or loss standings. Learning to manage the state of our emotions reflects on our degree of self-discipline.

And since our understanding of the marketplace shapes our expectations and our attendant actions, we need to seek constant improvement. Expanding our horizons should improve the batting average of our profitability or returns.

Going back to the financial markets, it has been my understanding that the principal drivers of the global financial markets has been the actions of political authorities. Their actions do NOT merely influence the markets, current policymaking via accelerating dosages of inflationism, myriad forms of trading controls and the imposition of byzantine financial and bank regulations represent as direct acts of market manipulation.

Political insider trading not only distorts price signals but importantly politicizes the distribution of gains towards the political class and their benefactors.

In short, in the understanding of the above we just should follow the money.

---

[1] Investopedia.com Bull Market Trap

[2] See Definitely Not a Reprise of 2008, Phisix-ASEAN Equities Still in Consolidation, September 18, 2011

[3] See Phisix-ASEAN Market Volatility: Politically Induced Boom Bust Cycles October 2, 2011

More Evidence of China’s Unraveling Bubble?

A day after I pointed out my suspicions of a possible implosion of China’s bubble economy, China’s government announced that she will be intervening to support their banking and financial system by acquiring shares of major banks through her sovereign wealth fund, Central Huijin[1].

China’s reported interventions sent the Shanghai index up 3% over the week.

Financial bailouts has not been confined to China’s stock markets, but to the real economy too, China declared another bailout package for small companies[2]. The measure includes tax breaks, easier access to loans and leniency on appraising bad loans following the reported collapse of some manufacturers in Wenzhou which has been indicative of the growing risks to China’s economy.

Resorting to emergency stabilization policies basically confirms my suspicions, China is presently suffering from either a sharp economic slowdown or in the process of a bubble implosion. The latter is where I am leaning on, but this requires more evidence.

As earlier mentioned, China’s recent strains have been representative of the unintended consequences of China’s boom bust or inflationist policies. Part of which constitutes the aftereffects of the 2008 stimulus, combined with the impact from China’s struggle to contain her inner demons—elevated consumer price inflation (CPI).

And also as previously noted, the bear market of the Shanghai index since 2007 represents a continuing dynamic of China’s massive boom bust cycle that only has shifted from the stock market to the property sector.

Slowing money supply growth from the series of interest rates increases, the hiking of bank reserves requirements and the appreciation of her currency, the yuan, has been putting financial strains on the massive misallocation of capital due to the previous policies directed at preventing a bust and the political imperatives to maintain a permanent state of quasi booms[3].

And to further give weight to my suspicions, we seem to be seeing substantial outflows of hot money which has materially reduced China’s foreign reserve accumulation. Part of this has also been been attributed to China’s declining current account surpluses[4].

For now, the continuity of the outflows is not clear and will likely depend on the scale of economic and financial deterioration.

Seen from the perspective of China’s currency, we are unlikely to see the yuan appreciate further. And contrary to public expectations, the unwinding of China’s bubble economy would lead to a depreciating yuan.

While many see the current downturn to meaningfully reduce China’s lofty Consumer Price Inflation (CPI), which gives China’s government more latitude to ‘ease’ credit or provide additional bailout measures, economic downturns do not mechanically imply a disinflation of consumer prices. This will greatly depend on the actions of the Chinese government

But more bailouts should be expected as the political objectives for the China’s ruling class ensures such course of action. China’s political stewards will work to postpone an inevitable bubble meltdown. That’s because a sharp economic downturn will likely trigger China’s version of the Arab Spring uprising or a populist upheaval that magnifies the risk of toppling the incumbent regime. There have already been snowballing accounts of protest movements[5] over the country.

Put differently, signs of accelerating stress levels in the financial sector, where loan losses from bad debts could spike to 60% of equity capital according to the estimates the Credit Suisse[6], and a slowdown in parts of the China’s economy suggests that the campaign to contain inflation will shift towards promoting inflation as evidenced by the two bailout measures unveiled last week. There will be more coming.

And like the current policymaking dilemma in the Eurozone, where Euro officials have been struggling to thresh out a “comprehensive strategy” which would ring fence the Euro’s fragile banking sector[7], and similar to the sequential actions of US authorities leading towards the Lehman bankruptcy in 2008, Chinese officials are likely to apply a whack-a-mole approach in dealing with the emergent economic strains.

Unlike in 2008, last week’s twin bailout packages have been inexplicit or indeterminate as there has been no amount specified.

In short, expect Chinese policies to be reactive until such problems will become significant enough for the government to announce a massive specific systemwide bailout program.

Dissonant Market Signals

For the meantime, the current financial and economic environment remains fundamentally a guesswork.

China and the Eurozone’s bailout has hardly boosted copper prices.

Dr. Copper, whose price action have conventionally been interpreted as exhibiting the health conditions of the global economy seems unconvinced, as the recent price performance has evidently lagged the recovery seen in global equity markets.

For chartists, the current rally appear to have forged a bearish rising wedge pattern which seem ominous for another bout of selling episode.

And considering the newly announced expansions of QE measures by the European Central Bank (ECB)[8] and the Bank of England (BoE)[9] as well as the soaring money supply aggregates in the US (which is a fundamental reason why the US is unlikely to fall into a recession unless an external shock occurs like that of China), the same essence of skepticism can be construed to the underperformance of gold prices.

While threats to[10] and actual imposition of various trading curbs on the commodity markets are currently being waged by global authorities, the effects of these are likely to be short term. The greater and more lasting impact would emanate from the large scale redistribution schemes of bailouts, taxations and inflationism.

Nonetheless, the unfolding events in China poses as a black swan event that could undermine the current rally.

Thus, we should closely observe the developments in China and how Chinese and global authorities will react to the unfolding developments.

Grandiose Plans and Promises Meant To Be Broken

To repeat, the current state of the markets appear to be driven by the spate of newly implemented political programs such as QEs, bailouts (Drexia[11]) etc..., as well as, promises for a political resolution on what has mainly been a politically induced problem for the China, the Eurozone and the US.

The current European based QEs may not seem as large as the previous which, in my view, could be a source of liquidity strains on the financial markets starving for sustained massive injections of money or inflationism.

It would be interesting to see if the flurry of news of actual and proposed bailouts will succeed in the restoration of confidence (which means reduced market volatilities highlighted by a fortified upside trend) or if such narratives will be reinforced by concrete actions such as the recent ratification[12] of the European Financial Stability Fund (EFSF) or recently announced QEs by the ECB and the BoE. Again, size matters.

So far some stories or plans may just end up in the shelf or in the trash bins signifying another failed attempt at propping up a highly fragile and tenuous system.

In the Eurozone, a proposal being floated to ring fence the region’s banking system will be through the conversion of the EFSF into an insurance like credit mechanism, where the EFSF will bear the first 20% of losses on sovereign debts, but allows the banks to lever up its firepower fivefold to € 2 trillion[13]

Yet the lack of real resources, insufficient capital by the ECB, highly concentrated and the high default correlation of underlying investments could be possible factors that could undermine such grandiose plans. Besides, such plans appear to have been tailor fitted to reduce credit rating risks of France and Germany aside from allowing the ECB to monetize on these debts[14].

Again given the complexities of the system, it would be difficult to conceive how these centralized plans would ever succeed.

At the end of the day, the final intuitive recourse, like in most of our history, would be for political authorities to engage in inflationism.

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[1] See Black Swan Event: Has China’s Bubble Been Pricked?, October 9, 2011

[2] Bloomberg.com China Offers Help to Small Companies Amid Wenzhou Risks, October 14, 2011 SFGATE.com

[3] See China’s Bubble Cycle Deepens with More Grand Inflation Based Projects, June 2, 2011

[4] Danske Bank China: FX intervention eased substantially in Q3, October 14, 2011

[5] See Does Growing Signs of People Power Upheavals in China Presage a ‘China Spring’? September 26, 2011

[6] Bloomberg.com Chinese Banks’ Bad Debt May Hit 60% of Equity Capital, Credit Suisse Says October 12, 2011

[7] Bloomberg.com Europe Crisis Plan Wins Global Backing as G-20 Urges Action, October 15, 2011 Businessweek.com

[8] See European Central Bank expands QE to include Covered Bonds, October 6, 2011

[9] See Bank of England Activates QE 2.0 October 6, 2011

[10] See War on Commodities: Eurozone Threatens to Impose Derivative Trading Curbs, October 15, 2011

[11] See Reported Bailout of Belgium’s Dexia Spurs a fantastic US Equity Market Comeback October 5, 2011

[12] See Slovakia ratifies Euro Bailout Fund (EFSF), October 14, 2011

[13] Reuters.com G20 tells euro zone to fix debt crisis within weeks October 15, 2011 Hindustantimes.com

[14] Das Satjayit A Psychiatric Assessment of the Eurozone's Leveraged Bailout Fund, October 5, Minyanville.com

Iranian Terror Plot: US Government’s Imaginary Hobgoblins

From Judge Andrew P. Napolitano (bold emphasis mine)

Since the tragedy of 9/11, numerous crazies and low-level copy-cats have engaged in criminal behavior which they hoped would result in the deaths of innocent Americans and somehow advance the cause of jihad. If you ask the leadership of the FBI, most of whose field agents are tireless, dedicated, Constitution-supporting professionals, it will tell you that it has foiled about seventeen plots to kill Americans during the past ten years. What it will not tell you is that there have been twenty foiled plots; and of them, three were interrupted by members of the public. The seventeen that were interrupted by the feds were created by them.

We all remember the three that were foiled by diligent Americans: The shoe bomber, the underwear bomber, and the Times Square bomber. In all of these cases, the crimes charged were those of attempting to kill and conspiring with others to do so. In all three of those cases, alert Americans on transcontinental flights on or the streets of New York told authorities of bizarre behavior, or actually subdued the threats themselves. There was no foiling by the FBI. The plotters were – thankfully – bumbling fools who had poorly planned their criminal behavior, and who ended up harming no one. All three are serving life terms.

But the more curious cases are the remaining seventeen for which the federal government has taken credit. They all have a common and reprehensible thread. They were planned, plotted, controlled, and carried out by the federal government itself. In all of these seventeen cases – from the Ft. Dix Six to the Lackawanna Seven to the Portland Parade Bomber – the feds found young men of Muslim backgrounds; loners who were bitter at America. They befriended them, cajoled them, and persuaded them that they could change the world by killing Americans. In all these cases, agents worked undercover and portrayed themselves to the targets as Arabs of like un-American mind. In some cases, the federal agents used third parties to act as middlemen. The third parties are typically persons who have been convicted of crimes and who, in return for leniency at their sentencings, were willing to work with the same feds who prosecuted them in order to help entrap whomever else those feds are pursuing.

Thus, in all seventeen of these cases, because of the command and control of federal agents, no one was ever in danger, no one was harmed, no bomb went off, and no property was damaged. But in all those cases, the losers whom the feds targeted each believed that they were interacting with real plotters who would really bring them cash and bombs. As we know, sometimes the cash arrived, but the bombs never did. The defendants were essentially charged and convicted for playing a game with federal agents.

The most recent of those government-generated plots was revealed yesterday. It has a new twist as it allegedly involves agents of the intelligence apparatus of the government of Iran. It, too, was destined to go nowhere, as the feds monitored and taped every move made by the target as he interacted with federal agents whom he stupidly believed to be drug dealers and co-conspirators. Today, the feds themselves revealed that high officials of Iran's government knew nothing of this. Of course, the neocons have demanded bombs on Tehran, no matter what the government there knew. And this plot came to light the day before the Attorney General himself was subpoenaed by Congress in the Fast and Furious case.

Read the rest here

Creating something from nothing isn’t just about the money printing; essentially this represents the fundamental precept guiding today’s modern political institutions. It’s the politics of free lunch.

So in order to justify the existence, the continued funding and the expansion of the warfare-anti terror state, credits on political ‘achievement’ targets has to be demonstrated. Hence if there have been no actual terror threats, then, as shown above, just engineer one.

With the help of mainstream media and the sundry apologists for the establishment, our civil liberties would then be diminished in the name of the security.

The great libertarian H. L. Mencken was darned right,

The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary.

Why Shale Gas is the Future of Energy

So argues the ever stimulating author Matt Ridley

A chap called George Mitchell turned the gas industry on its head. Using just the right combination of horizontal drilling and hydraulic fracturing (fracking) – both well established technologies -- he worked out how to get gas out of shale where most of it is, rather than just out of (conventional) porous rocks, where it sometimes pools. The Barnett shale in Texas, where Mitchell worked, turned into one of the biggest gas reserves in America. Then the Haynesville shale in Louisiana dwarfed it. The Marcellus shale mainly in Pennsylvania then trumped that with a barely believable 500 trillion cubic feet of gas, as big as any oil field ever found, on the doorstep of the biggest market in the world.

The impact of shale gas in America is already huge. Gas prices have decoupled from oil prices and are half what they are in Europe. Chemical companies, which use gas as a feedstock, are rushing back from the Persian Gulf to the Gulf of Mexico. Cities are converting their bus fleets to gas. Coal projects are being shelved; nuclear ones abandoned.

Rural Pennsylvania is being transformed by the royalties that shale gas pays (Lancashire take note). Drive around the hills near Pittsburgh and you see new fences, repainted barns and – in the local towns – thriving car dealerships and upmarket shops. The one thing you barely see is gas rigs. The one I visited was hidden in a hollow in the woods, invisible till I came round the last corner where a flock of wild turkeys was crossing the road. Drilling rigs are on site for about five weeks, fracking trucks a few weeks after that, and when they are gone all that is left is a “Christmas tree” wellhead and a few small storage tanks.

The International Energy Agency reckons there is quarter of a millennium’s worth of cheap shale gas in the world. A company called Cuadrilla drilled a hole in Blackpool, hoping to find a few trillion cubic feet of gas. Last month it announced 200 trillion cubic feet, nearly half the size of the giant Marcellus field. That’s enough to keep the entire British economy going for many decades. And it’s just the first field to have been drilled.

Read the rest here

Natural Gas prics shown in the 3 year chart above from stockcharts.com appears to have indeed decoupled from Oil (WTIC)

I would even suppose that the current prices of oil have also been affected by conversions or the expanded use of natural gas.

Shale gas is not only abundant and economically feasible but also environmental friendly and importantly representative of market’s preference as energy alternative over the favorites of politicians: renewables

Professor Mark Perry adds,

The chart above is from the Energy Information Administration and illustrates graphically the significant increases in natural gas production in recent years from increased drilling activity in the Marcellus Shale region of Pennsylvania. In only about a three-year period, natural gas production in the northeast United States has tripled from 1.5 billion cubic feet per day in July 2008 to more than 4.5 billion cubic feet per day by July 2011, with almost all of the increase coming from new drilling in Pennsylvania. The shale gas revolution in Pennsylvania has been responsible for America going from the ninth largest producer in the world ten year ago to the No. 1 producer in the world starting last year.

I would guess that the shale gas revolution will be a worldwide phenomenon which should wean away our dependence on oil. The net effect outside manipulation of money by governments should be to materially bring down or lower prices of energy.

On an investment perspective, prices of listed shale gas companies may reflect on such sanguine dynamic overtime.

War on Commodities: Eurozone Threatens to Impose Derivative Trading Curbs

Once again politicians in the Eurozone are pinning the blame on the financial markets for the current crisis, which consequently, they threaten to apply price controls through trading curbs.

From Bloomberg

The European Union may impose position limits for commodities derivatives and curbs on high- frequency trading as part of plans to overhaul the region’s financial-market rules.

The European Commission, the 27-nation EU’s executive arm, is seeking limits on the number of commodity derivative contracts “any given market members or participants can enter into over a specified period of time, or alternative arrangements” with the same impact, according to copies of proposals set for release on Oct. 20 that were obtained by Bloomberg News.

French President Nicolas Sarkozy has demanded steps to curb commodity derivatives speculation, which he blames for driving up world food prices. He has made the issue a priority of France’s presidency this year of the Group of 20 nations.

Earlier, one even ridiculously accused traders for being influenced by cocaine, which for him, caused the recent excess market volatility.

Yet such represents a reckless assumption that money printing has no effects on the goods and services and that trading curbs will successfully suppress prices of commodities.

What politicians decry of, instead, reflects on their unstated intentions—to continue the looting of the taxpayers and to keep printing money to sustain and expand on their privileges.

In the world of politics, distortion of the truth is a not only the norm, but regarded by the public as moral.

As Professor Butler Shaffer rightly argues

Because the state is grounded in such a network of lies, contradictions, deceptions, and conflicts, it is safe to say that political systems are inherently in conflict with reality and must resort to intentional distortions of truth as a way of trying to appear coherent to a gullible public.

Politics contributes significantly to the dumbing down of the way people think.

Obama’s Presidential Re-Election Campaign: Has the Strategy of the Politics of Divide been working?

I recently observed that Occupy Wall Street seem to be a part of President Obama’s re-election campaign strategy which fundamentally revolves around the groupthink “us against them” gimmickry.

Has this been working?

Current evidence indicates that there has been little impact in swaying the tide to favor President Obama.

Professor Brad Smith at the Division of Labor writes

In a column today in the Washington Post, Charles Krauthammer excoriates President Obama's new style of more aggressively "scapegoating" Republicans and "the rich," and giving succor to the OWS crowd. But while Krauthammer calls it "dangerous," he concludes, "it's working."

Is it? In it's August monthly poll, Gallup showed the President leading a generic Republican by 45-39%. On September 8, the President kicked off his re-election campaign with his call for the "American Jobs Act," (the AJA) and spent the next several days pushing for it. Gallup conducted its September monthly from September 8 through the 11th. The result: Generic Republican led the President by 46% to 38%. In late September, Occupy Wall Street began to garner attention - it crowded the Brooklyn Bridge on the last weekend of the month and has been almost non-stop in the news since. But Gallup's October poll, released today, shows a generic Republican leading the President by 46-38% - exactly the same as a month before.

Amongst Independent voters, the generic Republican edge has grown from 40-35% in August to 43-30% in October (though down slightly from September).

When he gave his AJA speech in September, Obama's average approval was 43.8, per Real Clear Politics. Today it stands at 43.6, though with a slight uptick in the last week - almost entirely the result of a surprisingly strong (for the President) poll from Rasmussen, the pollster liberals love to hate. The most recent polls from other pollsters in the field since OWS briefly seized the Brooklyn Bridge, compared to their prior poll, show him down in Gallup, flat in Ipsos/Reuters, down in ABC/Washington Post, and down in Fox New.

The politics of promoting guilt, envy, hate, blame and anger will unlikely help advance Mr. Obama’s re-election chances, unless this has been more than just a re-election agenda.

Maybe sowing social divisiveness has been meant to promote a popular revolution that would justify the imposition of socialism, if not despotism.

As Ludwig von Mises wrote,

The worst consequence of the antidemocratic spirit is that it divides the nation into hostile camps. The citizenry lose confidence in the working of democratic government. They fear that some day one of the antidemocratic minority groups may actually succeed in seizing power. Thus they think it necessary to arm and defend their rights against the menace of an armed minority.

Chart of the Day: Stock Market Returns from 20th Century Boom Bust Cycles

From the Economist

For the world, the best returns can be seen during the era of post war II recovery and the expansionary decade of the 80s and 90s which had been fueled by the deepening trend of globalization.

The worst returns had been during the Great Depression of the 30s and the stagflation decade of the 70s.

Video: America's Declining Economic Freedom

A revealing video of how declining economic freedom the US has been affecting the performance of the US economy (hat tip Dan Mitchell)

Chart of the Day: Bernanke’s Ineffective policies

Chart above and the following quote from Bespoke Invest

following each of the prior two announcements, the yield on the 10-year rose by more than 100 basis points (bps) in just a matter of months. Following its most recent announcement in September, the yield on the 10-year is already up 36 bps.

While one could argue that yield declined ahead of each of the prior announcements due to the fact that each move was widely telegraphed, at face value it appears that the Fed's attempts to lower long-term interest rates have been futile.

Economic Policy Journal’s Bob Wenzel seems validated, Bernanke looks like a mad scientist who keeps failing with his faulty ‘econometric’ models, nevertheless the relentless attitude to keep trying—at everyone’s expense, of course.

The great F. A Hayek called this Fatal conceit.

Quote of the Day: Sargent-Sims knees the groin of Hayek

From Professor Arnold Kling on the 2011 Nobel Prize winners Thomas J. Sargent and Christopher A. Sims, (bold emphasis mine)

Rational expectations in the Sargent-Sims tradition treats everyone as having the same model with which to form expectations. As Frydman and Goldberg point out in Imperfect Knowledge Economics, this assumes away the local knowledge and tacit knowledge that Hayek correctly identified as being very important in the economy.

Indeed, if Sargent and Sims represent a slap in the face to Keynes, they must be regarded as a knee to the groin of Hayek. Hayek coined the term "scientism" to describe the pretentious pose that economists strike when they equate mathematics with rigor. If scientism is a germ that infects economics, then Sargent and Sims were responsible for unleashing some of the most virulent strains.

Slovakia ratifies Euro Bailout Fund (EFSF)

As expected, Slovakian politicians have closed ranks to save global elite bankers meant to preserve the current political welfare based institutions, despite the valiant last stand to oppose the EFSF by the Slovakia’s classical liberal party, the Freedom and Solidarity (SaS) led by Richard Sulik

From Bloomberg,

Slovakia approved Europe’s enhanced bailout fund, completing ratification across the 17 euro countries as the region’s leaders prepare for a summit.

Lawmakers voted 114 to 30 with three abstentions to support the European Financial Stability Facility in the second attempt this week after parliament failed to approve the measures on Oct. 11.

Enhancing the powers of the EFSF, the temporary bailout fund, is crucial for adopting the key element in the strategy to prevent contagion from the debt crisis that has spread from Greece to other countries. European Commission President Jose Barroso yesterday called for a reinforcement of crisis-hit banks, the payout of a sixth loan to Greece and a faster start for a permanent rescue fund to ease debt woes.

So the EFSF appears to defer the day of reckoning. Nonetheless like the Greek mythical beast the Hydra, for each head decapitated, grew two more, today the credit rating S&P downgraded Spain. Governments are likely to clamp down or apply censorship on these politically privileged entities too.

Markets have been gyrating based on a whack-a-mole patchwork approach applied by global governments.