Can China’s Slowdown Trigger a 1987 moment?

A very important feature that distinguishes the epic 1987 crash from modern equity market meltdowns has been that the cataclysmic ‘1987 moment’ originated overseas than from the US, as the Wikipedia.org describes[1],

The crash began in Hong Kong and spread west to Europe, hitting the United States after other markets had already declined by a significant margin. The Dow Jones Industrial Average (DJIA) dropped by 508 points to 1738.74 (22.61%).

Ignoring China’s Woes

Much of the concentration of the public’s attention has been in the developments of Europe or the US functioning as the major drivers of the price actions of global equity markets.

Again, most have been ignoring the developments in China.

This week, China’s Shanghai index expunged all gains previously acquired from the declared rescue efforts by the Chinese government’s sovereign wealth fund, Central Huijin to buy shares of major Chinese banks to demonstrate support for her banking and financial sector as well as the stock market, aside from the recently announced bailout measures which extended liberal financing to small scale enterprises following deepening signs of economic weakness[2]

The Shanghai index broke down from her immediate support. Importantly, momentum suggests that a meaningful test or even a possible encroachment of the 15-month critical support levels could happen anytime soon.

Again whether the current conditions signify as plain vanilla economic slowdown or have been symptomatic of a bubble bursting phase of China’s puffed up real estate sector, current events ostensibly exhibits a liquidity contraction process at work as consequences to earlier policies to contain inflation via increases in interest rate and reserve requirement channels and through the appreciation of her currency, the yuan.

China’s policies have shown little difference from the policies of the West, Keynesian attempts to perpetuate quasi-booms that are eventually met with busts.

And as previously mentioned, since China has been a major consumer of commodities, a liquidity contraction will likely extrapolate to price declines over a broad spectrum of commodities. At worst, a bursting bubble could mean a price collapse.

Thus far, the commodity sphere appears to be confirming the China liquidity contraction theme as commodities have shown sharp declines almost in conjunction with recent selloffs in the Shanghai Index.

Industrial metals (GYX), Precious Metals (GPX), Energy (DJAEN) and Agriculture (GKX) have all stumbled markedly and have mostly been drifting in bear market territories except for the Precious metals.

Can China Withstand the Financial Storm Unfazed?

For many there has been much optimism over China’s ability to conduct a successful bailout of the affected segments of her economy. Some say that China has been equipped with ‘financial tools’ and or the wherewithal to arrest the current decline.

While it may be true that China’s government has a lot of savings, estimated at 8% of the GDP, and similarly holds sizeable deposits, where government savings has been estimated at 8% of the GDP[3], it is not clear if these deposits have remained in the banking system or had been lent out as various forms of loans that could have been exposed as off-balance sheet liabilities that has propped up the property bubble.

Also, my skepticism applies to the alleged large pool of state owned assets estimated at 15 times GDP that could serve as cushion to any ‘systemic meltdown’[4].

In short, I am doubtful of these statistical premised presumptions. Further, I am a cynic to the credibility and reliability of the actual metrics used to calculate accurately the existence of these assets.

And speaking of credibility, China’s accounting system has remained partly abstruse, whose transparency should be reckoned as questionable. China has yet to fully adapt and integrate to the world’s standard of generally accepted accounting principles or International Accounting Standards[5]. Up to February of 2010 China’s accounting standards has still been under Chinese standards.

Moreover, much of China’s foreign exchange surpluses have been representative of monetary or credit expansion and thus vulnerable to any credit contraction-hot money outflows from a bursting of her property bubble.

Foreign reserve surpluses are equally vulnerable as Austrian economist Dr. Anthony P. Mueller explains[6],

The expansion of debt by the issuer of the international reserve medium augments the stock of international reserves and the increase of the reserves works like a growth of the global money supply. Central bank balance sheets show that the circulating domestic money forms a debit item, while foreign reserves are part of the credit side. All other things being equal, an increase in foreign reserves implies money creation. This way, foreign debt accumulation by the issuer of a global reserve currency impacts monetary demand through two channels: in the debtor country by the domestic spending of foreign savings, and in the creditor country by the accumulation of foreign exchange reserves which augment the money supply….

And the engagement of further bailouts would only shift the burden to government which would accumulate more debts that ultimately becomes unsustainable

Again Dr. Mueller,

Governmental debt accumulation and monetary expansions tend to go the extremes until they will collapse. While it has taken many years for the capital structures of the economies involved to adapt to these conditions, the catastrophic event of the debt collapse will abruptly confront the capital structure with a new and very different setting. International capital flows driven by government possess the same general features like a debt cycle caused by monetary expansion that is not funded by savings.

For as long as China’s government will persists on with various interventionist policies, bailouts, bubbles, and an expansion of the welfare system, this should lead to capital consumption activities which would undermine whatever supposed advantages accrued from the foreign reserves.

The lingering debt crisis in the Eurozone has only increased the indebtedness of the region, which according to reports has boosted the region’s debt average to 85.4 percent of gross domestic product from 79.8 percent in 2009[7]. The continuing growth of debt has been corollary to the increase of ‘budget deficits’ and of ‘bank-recapitalization costs’.

The attendant strains from the transference of scarce resources from productive sectors to unproductive or politically privileged sectors as banks eventually weighs on the creditworthiness standings of foreign reserve surplus nations such as Germany and France as shown in the above chart by Danske Bank[8].

In addition, I am dubious of any implied sophistication of China’s central banking, whose supposed financial tools like any conventional modern central banks have been merely about printing of money. Transferring liabilities from one pocket and to another only to be camouflaged by fiat money from the PBOC will eventually will get exposed when the proverbial tide subsides.

Inflation is a policy that will not last.

Questioning China’s Crisis Management Experience

Furthermore, China’s experience with handling a major banking crisis should be viewed with skepticism. The last time China had a major banking crisis was in the late 90s where China rescued her major state owned banks that had been complimented by recapitalizations through the Hong Kong Stock Exchange[9].

Also China has only had a major recession over the past two decade. The last recession seem to have coincided with the banking crisis in 1998-99, where real growth fell to 5% while reported growth dipped only slightly below 8% according to the Economist[10].

The point that needs to be stressed here is that given the dramatic changes in the scale, the scope and the complexity of the global economy which includes China’s economy which has in the recent years catapulted to the 2^nd largest in the world[11], I would have sincere doubts about her ability to conduct an orderly rescue outside the scope of massive reflating the system.

By the same token, it would signify as reckless assumptions to believe that the developed world will be insulated from the risks of a further deterioration of China’s economy.

If the world has supposedly been lifted out of the recession in 2009, led mainly by China and India with the help of the rest of Asia[12], where the region’s share of the economic pie has been rapidly expanding, then we would likely have a reverse contagion effect where a slowdown in China and Asia will exacerbate on the protracted economic pressures being endured by the fragile economies of the crisis affected Western nations.

The degree of contamination will most likely depend on the strength of the internal dynamics of the respective local economies. Thus, it remains to be seen if the massive growth in money supply in the US can offset the liquidity contraction being experienced by China.

China’s Crisis will likely Impact ASEAN Bourses

It would equally be foolish to presume that the ASEAN 4, whom has been outperforming the world in terms of equity markets, would remain unsullied by a China liquidity contraction.

The transmission mechanism from a China crisis postulates that the rapid growth of ASEAN exports to China which has been driven mainly by commodities, information technology and regional supply chain integration[13] would be confronted with tremendous pressures that would have real untoward economic effects.

And despite my bullish bias it would be hard to argue against empirical evidence.

Although the ASEAN majors have not yet violated the 20% threshold level or the technical demarcation for a bear market, chart patterns appear to corroborate such anxious global market sentiments where Indonesia (IDDOW), Malaysia (MYDOW) and Thailand (SETI) bellwethers have transitioned into a bearish ‘death cross’.

People’s actions shape chart trends, this only implies that current market climate has been imbued with too much uncertainty whose present state seems opaquely identifiable. In other words, I am uncertain if we are in a consolidation phase or in a transition to bear market or a pause from a bull market.

Thus, the global equity markets, inclusive of the ASEAN bourses, appear to be much in limbo.

Conclusion

Market signals today appear to be reflective of the rampant uncertainties brought about by the amorphous political environment which has held global financial markets hostage.

Again, the state of extreme fluidity of the events implies that anything may happen in the transition. Equity markets will likely remain sharply volatile in both directions.

And this will remain so until we see major ‘concrete’ actions from global policymakers, including the political stewards of China, the Eurozone, and importantly, from the US Federal Reserve Chief Ben Bernanke, who bizarrely keeps incessantly dangling on variations of his preferred policy action—quantitative easing[14].

The October 1987 crash signified a low probability high impact event or a Black Swan where such event transpired unanticipated by the mainstream.

Such an event risk may seem partly applicable today and could be magnified if the current impasse in policymaking or the stalemate in the political domain remains in place.

On the other hand, for the global financial market greatly dependent on government steroids, concrete or specific actions by policymakers will likely turn the tide that would recalibrate the bubble cycle.

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[1] Wikipedia.org Black Monday (1987)

[2] See More Evidence of China’s Unraveling Bubble?, October 16, 2011

[3] US Global Investors Investor Alert - Do Bullish Investors Have an Ace in the Hole?, October 21, 2011

[4] Huang YiPing, Is China's Economy Headed for Trouble? October 12, 2011, Wall Street Journal

[5] Wikipedia.org Chinese accounting standards

[6] Mueller Antony P. Do Current Account Deficits Matter? Mises.org Journals

[7] Bloomberg.com Euro-Area Debt Reaches Record 85.4% of GDP as Turmoil Deepens, October 21, 2011

[8] Danske Bank Preview EU summit: The moment of truth, Strategy October 20, 2011

[9] Xie Andy Here We Go Again, September 10, 2009 China International Business

[10] The Economist, Reflating the dragon, November 13, 2008

[11] The Telegraph China is the world's second largest economy, February 14, 2011

[12] Singh Anoop, Asia Leading the Way IMF Finance and Development June 2010

[13] IMF.org Navigating an Uncertain Global Environment While Building Inclusive Growth, Regional Economic Outlook, October 2011

[14] See Bernanke’s Doctrine: Fed Mulls Purchases of Mortgage Backed Securities, October 22, 2011

The Philippine Phisix at Crossroads

From a technical perspective, the Phisix shown above seems to be drifting towards a crucial point, whose destiny will be shaped either by a major reversal or will constitute as a continuation of the current bullmarket.

That’s because the Phisix seems to be moving towards a transition into what has been popularly known as a ‘death cross’ pattern[1] where the long term moving averages could move to break above the short term averages that would imply of a major trend reversal whose trend bias will favor the bears.

But since charts represent as only a guidepost for me, which means that such instruments are not only infallible, but in fact are susceptible to statistical inconsistencies, it is important to emphasize that trends are not propelled mechanically by the patterns itself, but by people’s action.

From here we can say that the current trends demonstrated by the Phisix are manifestations of externally influenced price dynamics that likewise are reflective of the ongoing apprehensions from global political vacillations.

The actions of the Phisix seem congruent with the actions of her neighbors as shown earlier.

To repeat, even if there should be any downside thrust that could be manifested in the chart of the Phisix over the coming sessions, which may suggest of a bear market in motion, any major moves undertaken by global policymakers can or may undo such chart formations.

This would be similar to the much bruited ‘death cross’ formation of the US equity markets highlighted by the S&P 500 in 2010, which had been vanquished by Ben Bernanke’s announcement of QE 2.0[2].

Nonetheless the current oversold rebound by the Phsix signifies much of indecisiveness.

As the Phisix has bounced off its latest lows, the recent rebound has been accompanied by diminishing volume (as shown by the Peso volume averaged on a weekly basis)

The advance decline-spread computed on a weekly basis seem to have equally been damaged by the recent sell-offs.

Both variables above reveal a lot of tentativeness among market bulls.

The good news, so far, is that the current market carnage has mostly been a locally driven phenomenon as net foreign outflow has remained minimal.

The paucity of foreign outflow has kept the Peso from a substantial drop and has likewise buoyed current sentiments.

Bottom line: The current sentiment exhibits that there has been continued signs of uneasiness from both local and foreign participants who appear to have been revealingly traumatized by the recent bloodbath.

To see signs of improvement, we need a significant expansion of Peso volume trades, a broad based bullish or optimistic market breadth which should be supported by an improvement in chart price actions.

But most importantly, outside the local context, we need to see strong evidences of recoveries from our neighbors’ bourses, and similarly from the commodity markets.

Such recovery should likely be accompanied by signs of consolidation or parallel enhancements of the price actions in developed economy contemporaries.

Only from the above developments can we say that we have successfully sailed through the Greek mythological treacherous waters of Scylla and Charybdis[3].

---

[1] Investopedia.com, Death Cross

[2] See How Reliable is the S&P’s ‘Death Cross’ Pattern?, August 14, 2011

[3] Mythagora.com Kirke

Applying Methodological Individualism to the Financial Markets

I recently received a suggestion for me ‘quantify’ the probabilities of my risk scenarios.

While this may represent the conventional practise by the mainstream, I see this as a foolish undertaking.

Putting numbers assumes that I KNOW the nitty gritty or the minutest details of the risk events that I have been investigating. It also means that I KNOW how people think and their corresponding responses to the changes in the economy, the environment or the financial marketplace. Otherwise, I would be making irresponsible assumptions that may be out of touch with reality.

Besides, I don’t see the need to ‘signal’ or project my expertise just to get plaudits from any institutions. All I aim to do is to excel at my current undertakings in order to survive.

Anyway the prediction markets such as Intrade.com exhibits the probabilities of specific events based on actual risk money or bets and not merely from mathematical models.

For instance, the odds of a US recession in 2012[1] has been quite volatile.

The odds of a recession began to recede since the last quarter of 2010 and began to bottom out in the first quarter of 2011. But this trend reversed to the upside and currently stands at the highest level since the last quarter of 2009.

As of this writing, the odds of a recession by the betting public is at 43.6% and constantly changes depending on the risk perception of the betting public.

The above simply shows that there is NO constancy in people’s actions or that the only thing constant in the real world is change.

Therefore to apply probabilities based on math or econometric constructed ‘models’ from faulty and flawed assumptions would not be only ridiculous but dangerous, especially to our management of portfolio.

Class and Case Probabilities

A better option would be to apply what the Austrian School of economics calls as Class and Case Probabilities.

Class probability, as the great professor Ludwig von Mises defined is[2]

We know or assume to know, with regard to the problem concerned, everything about the behavior of a whole class of events or phenomena; but about the actual singular events or phenomena we know nothing but that they are elements of this class.

We know, for instance, that there are ninety tickets in a lottery and that five of them will be drawn. Thus we know all about the behavior of the whole class of tickets. But with regard to the singular tickets we do not know anything but that they are elements of this class of tickets.

On the other hand, Case probability according again to Professor Mises means:

We know, with regard to a particular event, some of the factors which determine its outcome; but there are other determining factors about which we know nothing.

Case probability has nothing in common with class probability but the incompleteness of our knowledge. In every other regard the two are entirely different.

Let me apply these probabilities to the recent typhoon that hit Metro Manila. [As a caveat I don’t know exactly the details of the typhoon but am comparing the major hits from a typhoon in the metropolis.]

Class probability means that we know some generalized information of the risk event.

-Typhoons can result to loss of lives, injuries or damage to properties as a result of flooding, strong winds and other related or ancilliary consequences (landslide, health hazards as leptospirosis, snake bites, E. coli and etc..).

-We can predict the path of typhoons using satellites.

-We know for instance that around 19 cyclones or tropical storms enter the Philippine area of responsibility every year[3].

From the above, we can even parallel class probabilities or “the behavior of a whole class of events or phenomena” to former US secretary of defense Donald Rumsfeld theory of uncertainty called ‘known knowns’[4]

Yet if there are ‘known knowns’ then the antipode would be the ‘unknown unknowns’.

This would represent as the Case probabilities or fragmented, dispersed and localized information on specific risk events.

Back to typhoons, we don’t know the exactitude and the variability of the typhoon’s strength (only estimates) and or its impact to particular affected localities.

While the Typhoon Nesat[5] [code name: Pedring] recently hit Northern Luzon’s Aurora and Isabela provinces the hardest, in Metro Manila, the famous Manila district of Roxas Boulevard got slammed by a barrage of extremely high storm surges that caused flooding at a public hospital, a five-star hotel and the US embassy.

This is in contrast to Typhoon Ketsana[6] [code name: Ondoy] in 2009 where strong continuous rains basically submerged Metro Manila’s Marikina City that led to many fatalities.

Think of it, about 19 typhoons hit the Philippines every year, yet we hardly know much about the prospective destruction or the scale of calamity these typhoons would bring about and where they will hit for us to apply precautionary measures.

But if you listen to the self-righteous blarneys of prominent media broadcasters, who base their comments on ex post analysis of ‘case’ events, you’d bear the impression that if the government only does as they propose the next typhoon won’t have an impact to the nation at all. Duh!

Yet fallacies from such presumptive omniscient gibberish can be applied to the most recent triple whammy calamity of Japan: the 2011 Tohoku earthquake, tsunami and the nuclear reactor meltdown[7].

Japan’s geographical location[8] makes her exceedingly vulnerable or prone to earthquakes. Thus Japan has lavished in putting up scientific prediction models, which only has proven to be a massive failure in predicting the latest catastrophe[9].

The moral: While it would seem as intellectually comforting to be guided by math based models in predicting the probabilities of the markets or the economy or of any people based risk events, unfortunately, they almost always fail to achieve their goals. The problem is that the social science isn’t physics or natural sciences that are quantifiable and work on some constants.

As Professor Mises wrote[10],

People would like to find in an economics book knowledge that perfectly fits into their preconceived image of what economics ought to be, viz., a discipline shaped according to the logical structure of physics or of biology. They are bewildered and desist from seriously grappling with problems the analysis of which requires an unwonted mental exertion.

Another notable example would be how the 2008 crisis exposed the travesty of quant[11] models[12]. UK’s Queen Elizabeth even questioned the economic profession[13] on why they haven’t seen the crisis coming.

To insist on applying something that doesn’t work is an exercise of self-deception or delusion.

Using Methodological Individualism on Uncertainty

The best methodology will always be to apply the understanding of human action or methodological individualism on social problems

Again from Professor Ludwig von Mises, (bold highlights mine)

Praxeological knowledge makes it possible to predict with apodictic certainty the outcome of various modes of action. But, of course, such prediction can never imply anything regarding quantitative matters. Quantitative problems are in the field of human action open to no other elucidation than that by understanding.

We can predict, as will be shown later, that — other things being equal — a fall in the demand for a will result in a drop in the price of a. But we cannot predict the extent of this drop. This question can be answered only by understanding.

The fundamental deficiency implied in every quantitative approach to economic problems consists in the neglect of the fact that there are no constant relations between what are called economic dimensions. There is neither constancy nor continuity in the valuations and in the formation of exchange ratios between various commodities. Every new datum brings about a reshuffling of the whole price structure. Understanding, by trying to grasp what is going on in the minds of the men concerned, can approach the problem of forecasting future conditions. We may call its methods unsatisfactory and the positivists may arrogantly scorn it. But such arbitrary judgments must not and cannot obscure the fact that understanding is the only appropriate method of dealing with the uncertainty of future conditions.

Understanding of how individuals interact with one another and with the environment should give us a better insight than sloppy thinking based on hypothetical numerical aggregates which attempts to substitute for people’s choices.

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[1] Intrade.com The US Economy will go into Recession during 2012

[2] Mises Ludwig von Uncertainty Mises.org

[3] Wikipedia.org Typhoons in the Philippines

[4] Wikipedia.org There are known knowns

[5] Wikipedia.org Typhoon Nesat (2011), Philippines

[6] Wikipedia.org Typhoon Ketsana

[7] Wikipedia.org 2011 Tōhoku earthquake and tsunami

[8] Wikipedia.org Seismicity in Japan

[9] See Science Models Fail To Predict Japan’s Earthquake, March 12, 2011

[10] Mises Ludwig von Blue-Collar Anticapitalism, Mises.org

[11] See How Math Models Can Lead To Disaster, February 25, 2009

[12] See Beware Of Economists Bearing Predictions From Models, May 27 2009

[13] The Telegraph The Queen asks why no one saw the credit crunch coming, November 5, 2008

Euro Debt Crisis hastens development of Bond Capital Markets

Opportunities emerge in every crisis. Though I am not referring to political opportunities (ala Emmanuel Rahm)

The Euro debt crisis has been shifting funding dynamics of the Eurozone's corporate world from the banking sector to the corporate bond markets.

From the Henrik Art of Danske Research

A recent report by Fitch confirms that European companies are increasingly relying on bond markets for their financing as bank lending becomes less attractive. By the end of 2010, corporate bonds represented 73% of the EUR1.3trn in debt used by 161 large European companies examined by Fitch.

Going forward, the trend towards US-style funding, where debt capital markets are a more important source of corporate funding than traditional bank loans, is likely to continue. The ongoing fundamental and regulatory challenges for the European banks that translate into persistent higher funding and capital costs are the key reasons for this development. In this respect, investment grade blue-chip corporates have access to cheaper funding in the bond market than their peers in the financial sector. As such, the critical mass required for a company to go to the capital market is getting lower.

According to Fitch, the European bond market continues to broaden and deepen and thus the trend towards increased funding disintermediation is occurring across virtually all industries and rating categories. To illustrate this point, for the first time, the high yield companies in Fitch’s sample group ended a year (2010) with more bonds than bank loans.

Economically unsustainable institutional political platforms are being forcibly reconfigured by the markets.

The stranglehold of the central banking cartel financed and facilitated welfare state is in a process of erosion.

Quote of the Day: Stupidity Not an Excuse for Laziness

Stupidity is not an excuse for laziness, so argues my favorite marketing guru Seth Godin (bold emphasis mine)

(Is it that you can't do it or perhaps you don't want to do the work?)

When I was in college, I took a ton of advanced math courses, three or four of them, until one day I hit the wall. Too many dimensions, transformations and toroids for me to keep in my head. I was too stupid to do really hard math so I stopped.

Was it that I was too stupid, or did I merely decide that with my priorities, it wasn't worth the work?

Isn't it amazing that we'd rather call ourselves stupid than lazy? At least laziness is easy to fix.

People say that they are not gifted/talented/smart enough to play the trumpet/learn to code/write a book. That's crazy. Sure, it may be that they don't possess world-class talent, the sort of stuff that is one in a million. But too stupid to do something that millions and millions of people can do?

I'm not buying it. Call it as it is and live with it (or not). I'm just not willing to believe we're as stupid as we pretend to be.

Instead of stupidity, my encounters with such genre of an excuse often times are packaged as self-imposed handicaps or even as fear of failures, e.g. I am not a college graduate, I am not an economics graduate, I am just a small investor, I am not good looking, work is too overwhelming and etc.

But as Mr. Godin rightly points out most of these are in essence as signs of laziness or sloth which can be rectified.

After all, mental attitude is about our desire and our corresponding actions which can be directed either to strive for success or to condescend to failure.

The sad part is that for many, failure is seen as endemic trait even without lifting a single effort to go for success.

Video: Political Economy Basics "My Friend Sarah"

From the winner of the 2009 Fraser Institute Video Contest (hat tip David Henderson)

Bernanke’s Doctrine: Fed Mulls Purchases of Mortgage Backed Securities

From the Wall Street Journal. (bold emphasis mine)

Federal Reserve officials are starting to build a case for a new program of buying mortgage-backed securities to boost the ailing economy, though they appear unlikely to move swiftly.

The idea would be to target any new efforts by the central bank at the parts of the economy that are most severely impeding a recovery—the housing and mortgage markets—by working to push down mortgage rates.

Lower mortgage rates, in turn, could encourage more home buying and mortgage-refinancing, and help the economy by freeing up cash for consumers to spend on other goods and services. Mortgage rates are already very low, but some Fed officials believe they might be pushed lower. Moreover, Fed officials believe their past purchase programs helped to lift stock markets, by driving investors from low-risk investments toward riskier investments.

The Fed discussions occur amid broader efforts in the government to find ways to revive housing markets and stir refinancing.

"I believe we should move back up toward the top of the list of options the large-scale purchase of additional mortgage-backed securities," Federal Reserve governor Dan Tarullo said in a speech Thursday at Columbia University.

A new Fed mortgage-bond-buying program isn't a certainty. If inflation doesn't recede as many officials expect, or if the economy picks up with surprising vigor on its own, such a program might not win broad support inside the Fed.

I’ve been repeatedly saying that team Bernanke’s ‘ant-deflation’ policies have been meant to fire up the ‘animal spirits’ of the economy via the stock markets as the primary target.

It’s still been the same same same guiding path of policymaking for Bernanke et.al.

However so far, all these so-called variations of the next Quantitative Easing has remained as virtual reality...promises. Yet, even without QE, US money supply keeps growing robustly.

More Signs of China’s Bubble: Unused State of the Art Sports Stadiums

China’s manifold grand real estate projects like ghost cities and empty malls are manifestations of her “spend you way to prosperity” bubble economy. And there is more, China has been erecting ostentatious sports stadiums that has hardly been used.

The Business Insider writes

The stadium-building frenzy that took over China in the lead up to the 2008 Olympics hasn't stopped.

The glitzy new Shanghai Oriental Sports Center opened earlier this summer, and more venues are currently under construction in cities and towns across the country.

But these stadiums have one little problem: no one uses them.

China's domestic sports scene is still in its infancy — with basketball and a corruption-hit soccer league the only viable organizations.

Here are two samples of these grand edifices.

Click here to see more pictures of the hardly used stadiums from the Business Insider

Steve Jobs to President Obama: Only a One Term Presidency

Steve Jobs reportedly told President Obama that the latter would only hold on the US presidency for only one term

The Huffington Post writes,

In one of the most hotly-anticipated biographies of the year, "Steve Jobs," author Walter Isaacson reveals that the Apple CEO offered to design political ads for President Obama's 2012 campaign despite being highly critical of the administration's policies and that Jobs refused potentially life-saving surgery on his pancreatic cancer because he felt it was too invasive. Nine months later, he got the operation but it was too late.

Those are just some of the tidbits about Jobs' life revealed in the upcoming biography, a copy of which was obtained by The Huffington Post…

Jobs, who was known for his prickly, stubborn personality, almost missed meeting President Obama in the fall of 2010 because he insisted that the president personally ask him for a meeting. Though his wife told him that Obama "was really psyched to meet with you," Jobs insisted on the personal invitation, and the standoff lasted for five days. When he finally relented and they met at the Westin San Francisco Airport, Jobs was characteristically blunt. He seemed to have transformed from a liberal into a conservative.

"You're headed for a one-term presidency," he told Obama at the start of their meeting, insisting that the administration needed to be more business-friendly. As an example, Jobs described the ease with which companies can build factories in China compared to the United States, where "regulations and unnecessary costs" make it difficult for them.

Gallup: Occupy Wall Street Not Supported by Most Americans

From Gallup,

Americans are more than twice as likely to blame the federal government in Washington (64%) for the economic problems facing the United States as they are the financial institutions on Wall Street (30%).

Both of these large entities have been the target of protest groups this year. The Occupy Wall Street movement has focused on large financial institutions on Wall Street, while the Tea Party movement continues to focus mainly on the federal government.

Class warfare has been typically used as an election stratagem. And most likely this movement may have also been a maneuver used by the beleaguered and seemingly desperate incumbents to preserve their fragile hold on power which will be contested during the coming elections.

Graphic: Home Bias

Another nice graphic depiction of the home from the ever imaginative Jessica Hagy

Lew Rockwell on the REAL Evil 1%

Mises Institute Founder and Chairman Llewellyn H. Rockwell, Jr. eloquently writes,

In the end, we end up with about 3 million people who constitute what is commonly called the State. For short, we can just call these people the 1%.

The 1% do not generate any wealth of their own. Everything they have they get by taking from others under the cover of law. They live at our expense. Without us, the State as an institution would die….

The State is the institution that essentially redefines criminal wrongdoing to make itself exempt from the law that governs everyone else.

It is the same with every tax, every regulation, every mandate, and every single word of the federal code. It all represents coercion. Even in the area of money and banking, it is the State that created and sustains the Fed and the dollar because it forcibly limits competition in money and banking, preventing people from making gold or silver money, or innovating in other ways. And in some ways, this is the most dreadful intervention of all, because it allows the State to destroy our money on a whim.

The State is everybody’s enemy. Why don’t the protesters get this? Because they are victims of propaganda by the State, doled out in public school, that attempts to blame all human suffering on private parties and free enterprise. They do not comprehend that the real enemy is the institution that brainwashes them to think they way they do.

They are right that society is rife with conflicts, and that the contest is wildly lopsided. It is indeed the 99% vs. the 1%. They’re just wrong about the identity of the enemy.

Parasites thrive on hosts and at the latter's expense. That’s how the causal relationship works (even in biology).

Mary Meeker on Global Internet Trends: Prepare for a Lift off!

Former Morgan Stanley's now KPCB's technology analyst Mary Meeker with her fabulous presentation of the current and prospective internet trends.

Notice how the deepening of penetration levels and the widening of connectivity has been changing people's lifestyles globally. Importantly trade and commerce is part of that trend (p.50).

Many analysts tend to underrate this ongoing seismic shift, we shouldn't.
KPCB Internet Trends (2011)

Greed and the ONE Percent

Greed.

One way to win voters during an election period is to bash a minority group and appeal to the majority for the use of institutional or organized political force to achieve social goals as ‘equality’.

This Wall Street Journal article spares me precious time to parse on the newly released 2011 Wealth report from Credit Suisse, but nevertheless reflects on the du jour political theme: Greed is evil.

Wall Street the Wealth Report Blog’s Robert Frank writes,

Here’s another stat that the Occupy Wall Streeters can hoist on their placards: The world’s millionaires and billionaires now control 38.5% of the world’s wealth

According to the latest Global Wealth Report from Credit Suisse, the 29.7 million people in the world with household net worths of $1 million (representing less than 1% of the world’s population) control about $89 trillion of the world’s wealth. That’s up from a share of 35.6% in 2010, and their wealth increased by about $20 trillion, according Credit Suisse.

The wealth of the millionaires grew 29% — about twice as fast as the wealth in the world as a whole, which now has $231 trillion in wealth.

The U.S. has been the largest wealth generator over the past 18 months, according to the report, adding $4.6 trillion to global wealth. China ranked second with $4 trillion, followed by Japan ($3.8 trillion), Brazil ($1.87 trillion) and Australia ($1.85 trillion).

There are now 84,700 people in the world worth $50 million or more — with 35,400 of them living in the U.S.. There are 29,000 people world-wide worth $100 million or more and 2,700 worth $500 million or more.

The fastest growth in the coming years will be in China, India and Brazil. China now has a million millionaires. Wealth in China and Africa is expected to grow 90%, to $39 trillion and $5.8 trillion respectively, by 2016. Wealth in India and Brazil is expected to more than double to $8.9 trillion and $9.2 trillion respectively.

The article does not specify ‘greed’ or what form of greed constitutes evil. Nevertheless, the article already suggests that the statistics presented by the study could serve as an emotional fodder for the current movement of global protests.

Yet to broaden the perspective let me add more charts from the same study

Worldwide wealth in dollar terms has been expanding

The degree of growth varies from nation to nation

Or even seen from the perspective of region to region. The point is that wealth is relative.

Alternatively, this also means that wealth creation basically reflects on the idiosyncratic structure of a nation’s political economy.

Bottom line: Wealth is NOT created equally and will never be equal.

This runs contrary to socialist utopian abstractions which tries to project ‘equality’ where everyone should not only have same degree of income and wealth or access to public goods, but also perhaps the impossibility of us having to look alike, think alike, share the same value, share similar space for our presence and spouse, etc...

A Wall Street Journal editorial expounds on Asia’s newfound wealth (bold emphasis mine),

Rising net worth ought to be a sign that a growing number of individuals are spotting productive economic opportunities and profiting handsomely in return for the big entrepreneurial risks they've taken. That's certainly how the likes of Steve Jobs or Richard Branson made their billions in the West. There's also a fair share of that in Asia.

But it's also true—and troubling—that so much wealth-creation in the region is related to various forms of government patronage. There are the Hong Kong tycoons who benefit from favorable government land-sale rules, or the Korean chaebol executives who gain from lenient treatment "for the national economic interest" when corporate fraud allegations pop up. China is especially notable for being an environment where friendly connections with government officials can pave the way through a bureaucratic labyrinth, even easing access to capital that's scarce for purely private-sector enterprises.

In a modern free economy it's false to suggest that the wealth of one entrepreneur impoverishes others—the pie can grow for everyone even if it grows faster for some. But wealth amassed through collecting government favors often does impoverish others: those who don't enjoy similar benefits. This fact, and the cynicism it breeds, is a greater threat to social stability than unequal wealth distribution.

In short, wealth is achieved either by political means or by market (economic) means.

The other way to say this is that ‘greed’ as a human trait influences BOTH the market and politics. And the process undertaken to achieve an end (‘equality’) extrapolates to a TRADEOFF between these two means.

For example if society aims to attain ‘equality’ through the markets then the tradeoff equates to lesser political interventions. Yet if society opts to distribute resources ‘equally’ via the political means then market influences will diminish.

The $231 trillion question is which of these two means will function as the more efficient way to arrive at social prosperity.

Thus such tradeoffs suggests that there will either be market inequality or political inequality. The reality is that there will be no equality in whatever sense.

In the real world operating on scarce resources, then equality is no more than a utopian fantasy or mental self-abuse.

To give you an idea how some of the world’s wealth have been politically derived, the following excerpt is from the New Scientist (bold emphasis mine)

The Zurich team can. From Orbis 2007, a database listing 37 million companies and investors worldwide, they pulled out all 43,060 TNCs and the share ownerships linking them. Then they constructed a model of which companies controlled others through shareholding networks, coupled with each company's operating revenues, to map the structure of economic power.

The work, to be published in PloS One, revealed a core of 1318 companies with interlocking ownerships. Each of the 1318 had ties to two or more other companies, and on average they were connected to 20. What's more, although they represented 20 per cent of global operating revenues, the 1318 appeared to collectively own through their shares the majority of the world's large blue chip and manufacturing firms - the "real" economy - representing a further 60 per cent of global revenues.

When the team further untangled the web of ownership, it found much of it tracked back to a "super-entity" of 147 even more tightly knit companies - all of their ownership was held by other members of the super-entity - that controlled 40 per cent of the total wealth in the network. "In effect, less than 1 per cent of the companies were able to control 40 per cent of the entire network," says Glattfelder. Most were financial institutions. The top 20 included Barclays Bank, JPMorgan Chase & Co, and The Goldman Sachs Group.

The list of the biggest interlocking companies

Focusing on the financial behemoths, the above serves as example of crony capitalism or corporatism, where politically privileged private companies benefit from political concessions, regulations, monopolies, subsidies, private-public partnerships or other anti-market policies premised on “privatizing profits and socializing losses” that SHOULD BE differentiated from wealth derived from entrepreneurial or capitalist functions, whose gains are derived from pleasing consumers.

Political wealth (pelf) is mainly extracted from the looting of the taxpayer.

In fact the above only underscores the Austrian economic school’s thesis of a central-bank-cartel based [banking-and-financial sector cronyism] whom has lately been living off tremendous amounts of government subsides, bailouts, central bank QEs and massive interventions in the marketplace all of which has been designed to preserve the current cartel based welfare-warfare state.

Of course not all of the abovestated interlocking companies represent cronyism or politically generated wealth.

Cato’s Dr. Tom Palmer explains the differences of wealth in the video below

Cato’s Dan Mitchell also expounds on differences of entrepreneurship from political privileges in this Fox interview

Finally a good reminder comes from this classic video interview of the illustrious Milton Friedman on Greed, as I earlier posted

The magnificent Milton Friedman quote:

Well, first of all, tell me is there some society you know that doesn’t run on greed? You think Russia doesn’t run on greed? You think China doesn’t run on greed? What is greed? Of course none of us are greedy; its only the other fellow who’s greedy.

The world runs on individuals pursuing their separate interests. The great achievements of civilization have not come from government bureaus. Einstein didn’t construct his theory under order from a bureaucrat. Henry Ford didn’t revolutionize the automobile industry that way. In the only cases in which the masses have escaped from the kind of grinding poverty you’re talking about, the only cases in recorded history are where they have had capitalism and largely free trade. If you want to know where the masses are worst off, it’s exactly in the kinds of societies that depart from that. So that the record of history is absolutely crystal clear: that there is no alternative way so far discovered of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system.

As said above, greed is a human trait that plagues politicians too.

Here is the list of the richest politicians of the world

Again to re-quote Milton Friedman above

none of us are greedy; its only the other fellow who’s greedy

GOP CNN Nevada Debate: The Unflinching and Remarkable Ron Paul

Watch Ron Paul's remarkable consistency, detailed and candid responses in the GOP CNN Nevada Debate (hat tip Lew Rockwell Political Theater)

The Catastrophe Portfolio

Many of the world’s wealthiest families have reportedly been hedging their portfolios from the risks of financial meltdown via a ‘catastrophe portfolio’.

From the Reuters

The world's wealthiest families have embarked on damage limitation rather than seeking to boost their fortunes as financial turmoil erodes their riches, with some so worried they are putting their money in 'catastrophe' portfolios.

"We have to explain to our clients, it's not about making money these days, it's about keeping wealth," said Ivan Adamovich, head of the Geneva operations of Swiss bank Wegelin.

With inflation eating away at people's nest eggs and rock-bottom interest rates making living off capital increasingly difficult, many rich people are taking new risks just to stand still, private bankers said.

"We have already inflation higher than interest rates in many markets ... Unless you take some risk you will not achieve a level of return just maintaining (wealth)," Pierre de Weck, head of Deutsche Bank's private wealth management business, said at the Reuters Wealth Management Summit in Geneva.

Adamovich said a model portfolio designed to protect people's wealth in the face of global catastrophe has attracted more interest as financial turmoil spread in recent months.

The "catastrophe portfolio" allocates one third of money to gold, one third to defensive and internationally diversified blue chip company shares and a third to the debt of ultra safe developed countries.

In my view, there is NO such thing as a catastrophe portfolio or a portfolio designed to weather the proverbial storm. That’s because whether it be cash, bonds, gold or blue chips, all are subject to market or systematic risks which entirely depends on the character of the coming crisis.

Hyperinflation would be good for gold and bad for cash, but a systemic deflation from a major banking system collapse contagion would likely do the opposite. On the other hand, wars may adversely impact blue chips or transnational companies, while ‘ultra safe government debt’ could be a delusion if their welfare system has soaked up on too much debt from having an economy that consumes more than she produces or earns. Of course there are possible gray areas, such as debt defaults.

Also, since the conventional markets have been greatly influenced by pervasive bubble policies and political interferences, then my conjecture is that the ramifications from the actions of political authorities will remain as major factors in determining the risk environment.

This makes taking action from reading and analyzing the political tea leaves a better and a more flexible approach than a one-size-fit-all portfolio.

Quote of the Day: Class Warfare

From Walter E Williams

For politicians, it's another story: Demonize people whose power you want to usurp. That's the typical way totalitarians gain power. They give the masses someone to hate. In 18th-century France, it was Maximilien Robespierre's promoting hatred of the aristocracy that was the key to his acquiring more dictatorial power than the aristocracy had ever had. In the 20th century, the communists gained power by promoting public hatred of the czars and capitalists. In Germany, Adolf Hitler gained power by promoting hatred of Jews and Bolsheviks. In each case, the power gained led to greater misery and bloodshed than anything the old regime could have done.

That’s why politics is a zero sum game.

Paul Krugman’s Positive Take on the Blogsphere

I have been saying that the information or digital age has been changing the way information flows or has been democratizing knowledge.

Writes Paul Krugman (Hat tip Bob Wenzel) [bold emphasis mine]

What the blogs have done, in a way, is open up that process. Twenty years ago it was possible and even normal to get research into circulation and have everyone talking about it without having gone through the refereeing process – but you had to be part of a certain circle, and basically had to have graduated from a prestigious department, to be part of that game. Now you can break in from anywhere; although there’s still at any given time a sort of magic circle that’s hard to get into, it’s less formal and less defined by where you sit or where you went to school.

Since there’s some kind of conservation principle here, the fact that it’s easier for people with less formal credentials to get heard means that people who have those credentials are less guaranteed of respectful treatment. So yes, we’ve seen some famous names run into firestorms of criticism — *justified* criticism – even as some “nobodies” become players. That’s a good thing! Famous economists have been saying foolish things forever; now they get called on it.

And this process has showed what things are really like. If some famous economists seem to be showing themselves intellectually naked, it’s not really a change in their wardrobe, it’s the fact that it’s easier than it used to be for little boys to get a word in.

As you can see, I think this is all positive. The econoblogosphere makes it a lot harder for economists to shout down other people by pulling rank — although some of them still try — but that’s a good thing.

Mr. Krugman doesn’t say it directly, but the econoblogsphere has been functioning as self-regulating free market of economic opinions or ideas and this is a development to cheer about.

War on Naked Shorts: EU Bans Short Selling

Politicization of the marketplace has been broadening. Trading curbs are not only applied to commodities but to short-selling as well.

From Bloomberg,

The European Union reached a deal as part of a short-selling law that will pave the way for an optional ban on naked credit-default swaps on sovereign debt.

Poland, which holds the rotating presidency of the EU, and lawmakers from the European Parliament reached the accord at a meeting in Brussels yesterday.

Under the deal, traders may be prevented from buying CDS on government bonds unless they either own the sovereign debt or other assets whose price moves in tandem with it. Nations will have the right to opt out of the measure if they detect signs that it may affect their borrowing costs.

“These balanced measures will ensure that sovereign CDS are used for the purpose for which they were designed, hedging against the risk of sovereign default, without putting at risk the proper functioning of sovereign-debt markets,” EU Financial Services Commissioner Michel Barnier said in a statement.

German Finance Minister Wolfgang Schaeuble and lawmakers in the European Parliament have called for a ban on naked CDS trades on government debt over concerns the practice fueled the euro zone’s debt crisis. Germany already has restrictions on using swaps to bet on sovereign defaults.

Some European governments have also criticized the use of short selling to bet against bank stocks, arguing that the practice has roiled markets. Volatility that sent European bank stocks to two-year lows led France, Spain, Belgium and Italy in August to impose temporary bans on short selling that remain in force.

Opt-Out Clause

Under yesterday’s deal, national regulators will be able to suspend the CDS ban in their territory at the first signs that it may harm their sovereign debt market.

The opt out-clause won over some critics of possible bans.

“I never signed up to the belief that a ban on uncovered sovereign CDS would have any positive impact,” Syed Kamall, who represents London in the EU Parliament, said in an e-mailed statement. “However, I’m reassured that member states will have the ability to opt out of the ban, if they see signals that sovereign debt markets are distressed.”

The European Securities and Markets Authority will give a non-binding opinion on whether a national regulators’ decision to drop the ban makes sense. ESMA coordinates the work of national markets regulators in the 27-nation EU.

Renew Indefinitely

While the suspensions will in theory be temporary, regulators will be able to renew them indefinitely. Under the terms of the agreement, existing CDS positions will be grandfathered until they expire.

CDS are instruments that act as insurance for the buyer against losses on bonds. The practice becomes naked when someone buys swaps on debt that they do not actually own.

The measure forms part of a broader agreement on an EU law that will also curb naked short selling of stocks and government bonds.

All these curbs seem like a 'comprehensive strategy' to preserve the status quo

Global governments want to see LOWER commodity prices because this allows them some space to apply more inflationism to uphold political goals when deemed as expedient by the incumbent authorities. Also this allows them to declare victory against ‘inflation’ or to swagger about the success of their policies.

Governments do not want see the public go SHORT on sovereign debt because the welfare state based governments badly desire to maintain their spendthrift -borrow and spend-ways, whose benefits accrue to the political class, their voting constituent groups and their cronies.

Instead governments want HIGHER stock markets, particularly the banking and financial sectors as these institutions hold much of sovereign debt in their balance sheets as Basel mandated ‘risk free’ assets. Remember, banks serve as the PRINCIPAL conduits in the financing of the welfare state.

That’s why a ban on naked shorts, a form of price control, has been designed NOT only to preserve the access to funding by the welfare state, they are meant to keep banking and financial stocks AFLOAT.

Besides for central bankers higher stock markets PROMOTE aggregate demand via more spending (regardless of what kind of spending).

Yet these policies are directed to benefit holders financial assets at the expense of the productive sectors of the economy. Wealth/Income inequality and political inequality anyone?

To add it up: The overall direction of global market interventions has been to promote Bernanke’s doctrine of the wealth effect worldwide and to preserve the welfare state.

The caveat is that all these cumulative actions presumes that market interventions will effectively skew the law of demand supply in their favor—a utopian scenario.

Occupy Wall Street guys, have you been listening?

War on Commodities: US Regulators Approve Derivative Trading Curbs

The relentless politicization of the marketplace continues, with intensifying fixation on commodity trading curbs

From Bloomberg,

The top U.S. derivatives regulators voted 3 to 2 today to curb trading in oil, wheat, gold and other commodities after a boom in raw-materials speculation, record- high prices and years of debate and delay.

The rule has been among the most controversial provisions of the Dodd-Frank financial overhaul, enacted last year, which gave the Commodity Futures Trading Commission the authority to limit trading in over-the-counter commodity swaps as well as exchange-traded futures. The rule will limit the number of contracts a single firm can hold.

“Our duty is to protect both market participants and the American public from fraud, manipulation and other abuses,” Chairman Gary Gensler said at the commission’s meeting in Washington in support of the rule. “Position limits have served since the Commodity Exchange Act passed in 1936 as a tool to curb or prevent excessive speculation that may burden interstate commerce.”

The rule limits traders to 25 percent of deliverable supply in the month nearest to delivery. The spot-month limits apply separately to physically settled and cash-settled contracts. Deliverable supply will be determined by the CFTC in conjunction with the exchanges.

Gas Contracts

Cash-settled natural gas contracts will be subject to a different regime. Traders will be permitted to hold contracts equal to five times deliverable supply in Henry Hub swaps, derivatives that settle in cash instead of the delivery of the underlying commodity. Henry Hub is a natural gas delivery point in Erath, Louisiana, and the benchmark for U.S. futures.

Outside the spot month, the caps limit traders to 10 percent of the first 25,000 contracts of open interest and 2.5 percent thereafter.

“You want speculation or you don’t have any markets,” said Commissioner Bart Chilton in an interview today on Bloomberg TV. “There’s nothing wrong with speculators. It’s when it begins to get excessive. We’ve seen where you can have 30, 35, 40 percent plus in some markets with just one trader holding onto that concentration. That can impact markets.”

The commission estimates that the limits will affect 85 energy traders, 12 metals traders and 84 traders of certain agricultural contracts. The caps will go into effect 60 days after the agency defines the term “swap.” The agency declined to estimate when that will be. Limits outside the spot month are likely to go into effect in late 2012.

Affected Contracts

The limits will apply to 28 physical commodity futures and their financially equivalent swaps including contracts for corn, wheat, soybeans, oats, cotton, oil, heating oil, gasoline, cocoa, milk, sugar, silver, palladium and platinum.

The rule calls for traders to aggregate their positions, a change that may affect large firms with multiple strategies. It also would tighten an exemption allowing so-called bona fide hedgers to exceed the caps.

The new ruling is certainly not about protecting the public from fraud, which has always been used as excuse for interference.

The flurry of various interventions in the commodity spectrum has been directed at controlling prices with the ultimate goal of containing consumer price inflation. This opens the doors to further interventions in the marketplace and the economy which most likely will be channeled through monetary policies.

This has been part of the signaling channel policies designed to manage inflation expectations or to camouflage the untoward effects of current policies.

Again this will likely impact the commodity markets on the short term.

The markets will always find a way to go around or skirt regulations. Price controls or edicts won’t stop the laws of economics, especially from venting on the negative consequences from arbitrary regulations. Price controls only skew the economic balance of these commodities which leads to even more volatility.

The sad thing is that it has been the nature of politics not to penalize authorities or hold them accountable for any failure of their actions. On the other hand, policy failures translates to even more interventions.