Should Markets Count on the ECB to Ride to the Rescue?

A Wall Street Journal blog says that markets should NOT “count on ECB riding to rescue”.

The article attempts to highlight on the differences in the expectations of institutional economists and what some of the European Central Bank officials have recently been saying.

“Clearly, it is not the task of the central bank to intervene… when there are fundamental doubts about the sustainability of some countries,” fellow board member Peter Praet said Thursday in comments posted on the blog Debating Europe.

Bank of Portugal head Carlos Costa, echoed that sentiment late Wednesday, saying the ECB “took its capacity to intervene to the limit.” Dutch Central Bank president Klaas Knot also said the ECB has about reached its limit.

But politicians usually say something but do another.

The BCA Research writes, (bold emphasis mine)

Political events in Italy are not progressing as fast as markets would like. The announcement that Prime Minister Silvio Berlusconi would resign provided only short-lived relief. It is unclear, however, whether any political evolution will be sufficient to satisfy the markets at this point. Thus, the ECB is once again being forced to intervene and is reportedly buying Italian bonds in the secondary market. Unfortunately, the impact on yields is muted since there are now few other buyers for the debt. Two major clearinghouses have announced increased margin requirements for Italian debt as the spread over bunds crossed the 450 basis point “line in the sand” that previously had prompted similar moves on Irish and Portuguese debt. This is important since the decision to raise margin requirements decreases the bonds’ liquidity, leading to a further spike in yields. The further danger is that Italian banks begin to come under pressure as markets discount the effect of sovereign debt markdowns on their balance sheets. Given that there is not enough firepower in the EFSF to support Italian banks, the ECB may soon find itself dealing with a bigger and bigger problem. A further deterioration in Italian sovereign debt prices might prompt the ECB to follow the Federal Reserve and Bank of England and expand its balance sheet through more aggressive purchases, possibly unsterilized, of government debt.

In short, continued political wrangling will likely force the hand of the ECB to resort to the printing press.

And in contrast to what the political bureaucrats cited above recently said, the ECB reportedly did intervene in the bond markets yesterday.

Of course political bickering has not been exclusive to political entities, such as in Italy and in Greece, but likewise apparent in the ECB—as evidenced by the infighting over policies, as well as, political appointments to its organizational hierarchy.

Earlier two ECB officials, Jürgen Stark and Axel Weber resigned over policy differences—in protest of ECB’s bond purchases.

Yesterday another ECB official, Bini Smaghi, resigned

The Bloomberg reports

Lorenzo Bini Smaghi resigned from the European Central Bank’s Executive Board, clearing the way for France to regain a seat after the retirement last month of President Jean-Claude Trichet.

Bini Smaghi, whose term officially ends in May 2013, will join Harvard University’s Center for International Affairs on Jan. 1, 2012, the Frankfurt-based ECB said in an e-mailed statement yesterday. ECB President Mario Draghi thanked Bini Smaghi for his “contributions in the field of European and international monetary and economic affairs over many years.”

Italy’s Prime Minister Silvio Berlusconi had stepped up pressure on Bini Smaghi to quit in recent weeks in a bid to defuse a row with French President Nicolas Sarkozy over the Italian’s seat on the central bank’s six-member Executive Board. Sarkozy had backed Mario Draghi’s candidacy to head the central bank on the condition that Berlusconi get Bini Smaghi to step aside to make way for a French candidate and avoid leaving the board with two Italians when Trichet, a Frenchman, finished his term at the end of October.

Berlusconi angered France last month when he failed to name Bini Smaghi to replace Draghi as head of the Bank of Italy, which would have resolved the impasse over the ECB board. After saying that Bini Smaghi was a candidate on Oct. 18, Berlusconi appointed Ignazio Visco, the bank’s deputy director general, to run the Italian central bank. Bini Smaghi had initially refused to resign before his term ended in 2013.

And that based on demonstrated preference, which as defined by Murray N. Rothbard signifies as the

actual choice reveals, or demonstrates, a man's preferences; that is, that his preferences are deducible from what he has chosen in action

…the cumulative actions by policymakers suggest that the interests of political authorities remain supreme.

This means that the ECB will continue to do what central banks have originally been designed to do—finance deficits and conduct bailouts of the banking cartel (with or without political tussles—as everything else will be used as an excuse)

And importantly, the popular notion that central bank acts independently from political influence has been exposed as a mirage.

Former Central Banker Papademos Is Greece New Prime Minister

Over at Europe, Central Bank—Wall Street—Welfare state interests are becoming entrenched politically.

First we have Mario Draghi, an alumnus of Goldman Sachs as the president of the European Central Bank (ECB).

Now we have an ex-ECB vice president as Greece’s PM.

From the Bloomberg

Lucas Papademos, named today to be interim prime minister of Greece, steered the country into the euro region as central bank governor more than a decade ago. Now the former European Central Bank vice president will have to secure the country’s euro membership for a second time.

Papademos, who has never held elected office, helped foster economic growth rates that surpassed Germany’s and France’s in his eight years at Greece’s central bank before moving to the ECB in 2002. Most recently a visiting professor at Harvard University in Cambridge, Massachusetts, and an adviser to departing Prime Minister George Papandreou, Papademos takes over a country weeks from being unable to meet its debt obligations…

Appointed Greek central bank chief in 1994, Papademos presided over an economy lagging behind its European counterparts. Growth had averaged 1.3 percent in the previous decade, almost half the average of the other 11 countries preparing to join the euro.

Papademos, who described his monetary strategy as “eclectic” in a 2001 interview with Institutional Investor magazine, stabilized the drachma and inflation in his early years at the Greek central bank.

In March 1998, Greece devalued the drachma by 14 percent against a basket of European currencies to join the EU’s exchange-rate mechanism. Papademos then kept the bank’s main rate above 10 percent for the next two years to curb consumer prices following the devaluation. By 2000, inflation, which had been 14.2 percent in 1993, slowed to 3.2 percent.

Papademos’s legacy as central bank governor was blown apart by the debt crisis that’s ricocheting through world markets. As Papandreou’s government, elected two years ago, revealed that the country’s budget deficit was more than double the previous administration’s effort, investors dumped the country’s bonds, forcing the country to seek a European Union-led bailout.

The interests of politically endowed banking cartel are evidently being protected through revolving door politics.

Obviously the same story, but only different personalities involved.

Are Emigrating Wealthy Chinese Afraid of a Coming Political Tempest?

Recently I blogged about an increasing number of Chinese elites who are emigrating or considering to emigrate, which contrary to conventional thinking, does not augur well or reflect sanguine signs of a “China Century”

I even alluded to snowballing risks of a political crisis

Perhaps many of these Chinese millionaires may be sensing trouble ahead (see bold highlights above), not only from a bubble bust, but also from the growing fragile state of China’s unsustainable capitalist-communist political economy.

Well, I guess my hunches seem to be getting some confirmation.

This from Financial Times/CNBC

In private conversations, many of the people who supposedly make up the ruling elite of China express serious misgivings about the direction and future stability of the country, while admitting that they feel largely powerless to affect meaningful change.

“There is a sense that we are approaching an inevitable breaking point, when the pressures in society will boil over and consume the rulers,” says one Chinese banker with close ties to a number of powerful political families.

“Almost all of the elements are in place for an uprising like we saw in 1989 – corruption is worse today than it was then, people feel they can’t get ahead without political connections, the wealth gap is much bigger and growing and there has been virtually no political reform at all. The only missing ingredient now is a domestic economic crisis.”

And many wealthy Chinese seem to be flocking to the US, by investing in “US citizenship”

From the Wall Street Journal Blog

In 2011, 2,969 Chinese citizens applied for the program and 934 were approved, according to the Immigration Service. (Approval doesn’t mean they get citizenship, it just means they can start the program). Their numbers represented more than three quarters of the total number of applicants and approvals.

It’s also a huge increase from previous years. In 2007, only 270 Chinese citizens applied and only 161 were approved, accounting for only about a third of the totals.

Why the huge increase?

The obvious reason is that China has a lot more millionaires and billionaires.

But the other reason is that these newly rich want out – or at least an escape hatch and presence in another country in case they have to flee.

So speaking of voting with their feet, many wealthy Chinese seem to view the US as having a relatively better potential compared to their homeland. They could be right.

But they could also be wrong. Maybe these Chinese elites don’t realize that they risk jumping from the proverbial frying pan to the fire.

Quote of the Day: A Very Expensive Education in Basic Economics

From First Trust’s Brian Wesbury (italics original)

There is a simple rule in monetary economics, which many seem to have forgotten. A weak currency cannot replace a strong currency. In other words, the existence of the euro will force the countries of Europe to confront budgetary problems fiscally, not monetarily. No wonder governments are collapsing across the continent.

The Greek government, and some misguided economists, think the failure of the welfare state could be averted if Greece would only devalue its currency. This is a sad statement. A de-valuation is just a default by another name. It puts most of the burden on creditors, savers, and income earners, who face the pain and loss of reduced purchasing power.

Without the ability to devalue, the pain of restructuring falls on those who benefit from the largesse of government spending. Government jobs, pension payments, subsidies, and services will all need to be cut. The pain will fall inordinately on those who count on government for some form of support.

No wonder governments often choose devaluation instead of austerity. Devaluations can be blamed on the markets and Wall Street. But spending cuts hit constituents – those who voted for politicians who promised that government would never run out of money. This is why governments are collapsing, and will continue to collapse. Voters are completely disillusioned and they are facing a great deal of pain as they get a very expensive education in basic economics.

Read the rest here

Unsustainable political economic systems, particularly the Welfare state, will eventually get undone by the laws of scarcity.

Politically Driven Global Stock Markets Slammed Anew

Global stock markets got clobbered anew as Italian bonds breached the 7% threshold level in the face of Italy’s lingering political crisis in trying to resolve the debt issue. This also demonstrates signs of the diffusion of debt crisis in the Eurozone

From the Bloomberg report, (bold highlights added)

Europe’s biggest clearinghouse said that customers must put down bigger deposits to trade Italian bonds as concern rises that the government will struggle to reduce the world’s third- largest debt burden. Italian yields surged as Prime Minister Silvio Berlusconi said he won’t resign until austerity measures are passed, even after he failed to muster an absolute majority on a routine ballot in parliament yesterday.

A senior lawmaker said German Chancellor Angela Merkel’s Christian Democratic Union may adopt a motion at an annual party congress next week to allow euro members to exit the currency area. In Greece, Prime Minister George Papandreou’s drive to put together a unity government fell into disarray as rival parties squabbled over the next premier.

The important twist here is that the formerly rigid stance of the Eurozone on their membership standings seem to have shifted, EU bureaucrats appear to be exploring the option for member exit.

None the less, if the market’s downside volatility has been due to the Eurozone, then it is a curiosity to see US equities falling more than the Euro stocks

(from Bloomberg)

Are the markets suggesting that US stocks, which has outperformed the Euro contemporaries, will be doing a catching up?

Well gold prices despite yesterdays’ steep losses remain on bullish trend which may indicate that the current volatility may be an interim development

As I have been saying expect sharp market volatilities based on the effects of the politicization of the financial markets and from boom bust policies.

The market climate remains very fragile and highly sensitive to the fluid developments in the realm of global politics.

Was Steve Jobs a “Tweaker”?

The real genius of Steve Jobs was about his tweaking, that’s according to the perceptive author Malcolm Gladwell in his latest article at the New Yorker,

The visionary starts with a clean sheet of paper, and re-imagines the world. The tweaker inherits things as they are, and has to push and pull them toward some more nearly perfect solution. That is not a lesser task.

Read the rest here

Has the Growing Use of Violence by the Occupy Wall Street Movement Been Exposing their True Agenda?

Has the Occupy Wall Street (OWS) movement been gradually revealing their true nature (or purpose) by turning violent?

This from The Foundry of the conservative Heritage Foundation Network (bold emphasis mine)

On Friday night in Washington, D.C., the Occupy protests turned violent when activists marched on the city’s convention center in opposition to an annual summit held by the conservative Americans for Prosperity Foundation. Forbes reports on the conflict:

“Occupiers, many of whom had their faces obscured by masks or bandanas, began banging on the transparent glass walls and doors of the building, demanding entrance, then attempting to gain access by pushing their way in when guests came or went. Eventually all doors bar one at L Street were locked, with AFP guests and accredited press able to do nothing but stand inside and watch the clash intensify, with a line of police and security guards manning the locked doors at the Mt Vernon St entrance.”

At one point, a 78-year-old woman who was attending the event was knocked down some stairs while attempting to get around the protesters, as this video shows. She reportedly wound up with a bump on her head and a bloody nose. One occupier forced her children into the center of the protest, and four protesters were injured by a car when they were intentionally obstructing traffic. D.C. Police Chief Cathy Lanier said of the violence, “That is no longer a peaceful protest” and that the protesters have become “increasingly confrontational and violent toward uninvolved bystanders and motorists.”

In New York, women were recently forced to set up a “safety tent” after a rash of sexual assaults and fear of more sexual predators joining the protests. In October, Baltimore occupiers discouraged women from reporting sexual assaults and rapes to the police. Also in New York, an occupier turned violent this week in a McDonald’s often used for bathrooms when the restaurant refused to give him free food.

These incidents follow violence last month in Oakland, California, in which protesters shut down a busy port, took over abandoned buildings, set fires, burned American flags, defaced private property and destroyed ATMs. And as the movement turns violent, news is emerging regarding the Occupy movement’s radical, left-wing affiliations.

Heritage’s Lachlan Markay reports that as the Occupy Wall Street begins taking in hundreds of thousands of dollars in donations, an organization known as the Alliance for Global Justice (AFGJ) has been retained to process the transactions. That group’s other activities and associations are cause for alarm:

“The AFGJ provides ‘grassroots’ support for organizations that pursue ‘a socially, ecologically and economically just world,’ according to its website. Among its initiatives are efforts to encourage American soldiers to desert and an anti-George Bush organization founded by members of the Revolutionary Communist Party.

The organization’s president, Katherine Hoyt, leads the Alliance’s Nicaragua Network program, which supports the country’s Marxist Sandinista political party — and was founded for the explicit purpose of overthrowing the country’s government. Hoyt previously worked for the Sandinista government, and has written numerous scholarly works lauding the group. The Sandinistas ruled from 1979 to 1990. Their leader, Daniel Ortega, was elected again in 2006.”

Another of AFGJ’s affiliates: George Soros. His Open Society Institute has given the group $100,000. The Occupy Wall Street movement has other supporters, too, including Big Labor. The AFL-CIO took out advertisements supporting the protests and, according to The Washington Post, “Labor groups are mobilizing to provide office space, meeting rooms, photocopying services, legal help, food and other necessities to the protesters.” And despite the violence and radicalism, it’s a movement that President Barack Obama and others on the left have been quick to support, too.

More OWS videos from Charleston Voice here

It seems that these protesters have began to implement what their leaders may have programmed them to do.

In the words of Karl Marx and Friedrich Engels (bold emphasis mine)

The Communists disdain to conceal their views and aims. They openly declare that their ends can be attained only by the forcible overthrow of all existing social conditions. Let the ruling classes tremble at a Communistic revolution. The proletarians have nothing to lose but their chains. They have a world to win.

And in rebuking the Vatican support for Occupy Wall Street, I previously wrote

Just how can love or ‘ethic of solidarity’ be attained through the enforcement of redistributionist policies that have been anchored on violence?

Heaven on Earth.

I guess, if the above indications should hold true then I stand corrected.

In the 20th century communism has killed an estimated 94 million people more than Nazi Germany’s 25 million.

In short, communist revolutions and the many attempts to impose communist systems around the world has proven to be “Hell on earth”.

OCW’s turn to violence may not just be a presidential re-election strategy but a holistic campaign to resurrect a failed colossal political experiment that simply won’t go away.

US Stock Markets and the Austrian Business Cycle

Following the bullish outlook from Warren Buffett’s aggressive actions on the US stock markets, I came across Bloomberg’s chart of the day which suggests that S&P 500 earnings have lagged price actions of stocks, which implies of the potential for more upside movements.

From the Bloomberg,

The Standard & Poor’s 500 Index’s failure to keep pace with record corporate earnings may signal the benchmark equity gauge will surge if it returns to its historical relationship with profits.

The CHART OF THE DAY shows that four years ago, when the S&P 500 lagged behind trailing 12-month corporate profits, the measure went on to reach an all-time high of 1,565.15. The chart also shows that while combined earnings by companies in the index have exceeded the previous peak reached in 2007, the measure itself is 19 percent below that October 2007 record.

Companies have “increased efficiency, productivity and profit margins,” said David Goerz, the chief investment officer at Highmark Capital Management Inc., in a telephone interview yesterday. “That’s resulted in strong performances at a time when investors are very skeptical about the future. It’s not surprising that the market would be trading at a significant discount.” He said, “There’s a lot of upside for the U.S. equity market.”

In the meantime analyst Ed Yardeni says that while the third quarter has been a good earnings season, many analysts seem to be cutting earnings forecasts.

The reason says Mr. Yardeni,

They must be getting downward guidance from company managements. Yesterday’s FOMC statement notes that “there are significant downside risks to the economic outlook, including strains in global financial markets.” The Fed isn’t alone in lowering expectations for economic growth next year. October’s surveys of purchasing managers showed recessionary readings for the major economies of Europe. Company managements must be seeing a worrisome deterioration in the prospects for European economies and telling analysts to curb their enthusiasm about Q4 and 2012.

In my view, capital spending, credit growth and private domestic investments have been all pointing to a recovery…

And I think the above dynamics seem to be reflecting on the anticipated consequences of the boom bust policies or a partial confirmation of the Austrian business cycle theory (ABCT).

Friedrich von Hayek wrote of the influence of monetary inflation to business profits (and to stocks). (bold emphasis mine)

Now the chief effect of inflation which makes it at first generally welcome to business is precisely that prices of products turn out to be higher in general than foreseen. It is this which produces the general state of euphoria, a false sense of wellbeing, in which everybody seems to prosper. Those who without inflation would have made high profits make still higher ones. Those who would have made normal profits make unusually high ones. And not only businesses which were near failure but even some which ought to fail are kept above water by the unexpected boom. There is a general excess of demand over supply--all is saleable and everybody can continue what he had been doing…

But, and this brings me to my next point, "full employment" in his sense requires not only continued inflation but inflation at a growing rate. Because, as we have seen, it will have its immediate beneficial effect only so long as it, or at least its magnitude, is not foreseen. But once it has continued for some time, its further continuance comes to be expected. If prices have for some time been rising at five percent per annum, it comes to be expected that they will do the same in the future. Present prices of factors are driven up by the expectation of the higher prices for the product--sometimes, where some of the cost elements are fixed, the flexible costs may be driven up even more than the expected rise of the price of the product--up to the point where there will be only a normal profit.

But if prices then do not rise more than expected, no extra profits will be made. Although prices continue to rise at the former rate, this will no longer have the miraculous effect on sales and employment it had before. The artificial gains will disappear, there will again be losses, and some firms will find that prices will not even cover costs. To maintain the effect inflation had earlier when its full extent was not anticipated, it will have to be stronger than before.

So like users of illegal substance, more and more inflationism will be needed to sustain the current sanguine conditions of profits.

Nevertheless with almost every major central banks in a renewed easing mode (QEs and lowering of interest rates), my guess is that we could be at the next phase of the business cycle. And importantly, consumer price inflation will pose more of a risk than of an economic slowdown as projected by the mainstream. Again the boom bust process at work.

ECB’s Jens Weidmann warns Printing Money for Bailouts may lead to Hyperinflation

ECB’s council member and chief of Germany’s Bundesbank Jens Weidmann says that printing money to bailout institutions may lead to hyperinflation.

From the Bloomberg, (bold emphasis mine)

“One of the severest forms of monetary policy being roped in for fiscal purposes is monetary financing, in colloquial terms also known as the financing of public debt via the money printing press,” Weidmann, who heads Germany’s Bundesbank, said in a speech in Berlin today. The prohibition of monetary financing in the euro area “is one of the most important achievements in central banking” and “specifically for Germany, it is also a key lesson from the experience of hyperinflation after World War I,” he said.

The ECB is under pressure to ramp up its bond purchases to cap soaring yields in Italy as governments fail to contain the two-year-old sovereign debt crisis. Weidmann also rejected proposals to use Bundesbank currency and gold reserves to help finance purchases by a special fund, saying this is another form of monetary financing.

Such a course “undermines the incentives for sound public finances, creates appetite for ever more of that sweet poison and harms the credibility of the central bank in its quest for price stability,” Weidmann said…

And in rejecting the expanded leveraged for the EFSF…

“I am glad that also the German government echoed our resistance to the use of German currency or gold reserves in funding financial assistance to other” euro-area members, he said. “Proposals to involve the Eurosystem in leveraging the EFSF -- be it through a refinancing of the EFSF by the central bank or most recently via the use of currency reserves as collateral for a special purpose vehicle buying government bonds -- would be a clear violation of this prohibition” on monetary financing.

Mr. Weidmann practically exposes the proposed leveraged scheme of the EFSF as concealed money printing operations as I have previously pointed out here and here

However my general impression behind all the ‘smoke and mirrors’ promoted as a comprehensive rescue strategy is that these measures fundamentally stands on the ECB’s monetization of government debt.

In short, the EU’s Bazooka bailout deal represents as an implicit license for or as façade to the ECB’s massive money printing program.

One would note that path dependency continues to influence the mindset of policymakers—Germany’s traumatic experience with the gruesome Weimar episode of hyperinflation has made German policymakers outspokenly resistant to money printing policies, whereas America’s harrowing experience with a decade long of economic depression has made US policymakers more accommodative to inflationist policies.

Nevertheless, the tallied ECB’s 183 billion euros ($253 billion) purchases of distressed nations’ assets has been said to be sterilized, albeit I’m not sure to what extent these has been (as EU’s money supply growth has been ramping up) and what will occur once these neutralization measures reaches its statutory limits.

Quote of the Day: Worn-out Welfare State

If you look at the troubles which happened in European countries, this is purely because of the accumulated troubles of the worn-out welfare society. I think the labor laws are outdated. The labor laws induce sloth, indolence, rather than hard [work]. The incentive system is totally out of whack.

Why should, for instance, within [the] euro zone some members' people have to work to 65, even longer, whereas in some other countries they are happily retiring at 55, languishing on the beach? This is unfair. The welfare system is good for any society to reduce the gap, to help those who happen to have disadvantages, to enjoy a good life, but a welfare society should not induce people not to work hard.

That’s from Jin Liqun, the supervising chairman of China's sovereign wealth fund, speaking to al Jazeera television, who surprising bashes Europe's welfare state (WSJ).

I would totally agree with the first paragraph.

However, contra Mr. Liqun, ANY welfare society REDUCES people's incentives to work hard. Forcibly picking on the pocket of Mr. Yu for the benefit of Mr. Lee always spawns friction, breeds dependency and the consequent loss of personal dignity. Welfarism is a zero sum activity.

Besides how does one qualify “reducing the gap"? The Chinese way? Chinese Keynesian leaning bubble policies today are hardly a paradigm to emulate and whose path eventually leads to that of Europe.

In politics, the best way to seize credit is to step on someone’s shoe.

Booming Asia’s Office Rental Properties

Globalization combined with the transmission mechanism of the US Federal Reserve’s policies compounded by domestic ‘low interest rates’ monetary policies has been fuelling a boom in Asia’s office rents—which should also reflect on an ongoing boom in the property (sale) sector.

From Bloomberg,

Office rents in the Asia-Pacific region increased at about double the global pace in the third quarter as China’s economic expansion fueled demand for commercial real estate, Jones Lang LaSalle Inc. (JLL)said.

Rents for the highest-quality office space in the region increased 10.5 percent from a year earlier, the Chicago-based broker said yesterday in a report. That compared with a global growth rate of 5.5 percent.

Cities in Asia, including China’s financial hub Shanghai, Perth in Australia’s mining heartland and the technology center of Bangalore in India, had some of the highest levels of annual rental growth, Jones Lang said, as economic expansion in the region outpaces the U.S. and Europe. The Americas had a 2.6 percent advance, while rents in Europe rose 4.4 percent.

“Most major markets are in better shape than they have been since 2008, but investors and corporations are unsettled by current economic uncertainties,” Arthur de Haast, head of Jones Lang’s international capital group, said in the report. “Appetite for risk has diminished,” he said, prompting investors to focus on buildings that already have tenants.

Beijing rents soared 50.6 percent year on year, the most in the Asia-Pacific region, followed by Jakarta with 48 percent and Perth with 26.9 percent because of demand from China for Australia’s commodities. Beijing, Jakarta and Perth also had the largest quarter-on-quarter increases, according to the report.

Prime office rents in the 81 markets researched by Jones Lang rose by 1.1 percent during the quarter from the previous three months. Overall rents increased for the seventh consecutive quarter and they are up 8.2 percent since the bottom of the market in the fourth quarter of 2009, Jones Lang said.

The average global office vacancy rate is 13.8 percent, the lowest in two years, according to the broker.

As the great Murray N. Rothbard wrote of the causes of economic depression (Austrian Business Cycle)

Businesses, in short, happily borrow the newly expanded bank money that is coming to them at cheaper rates; they use the money to invest in capital goods, and eventually this money gets paid out in higher rents to land, and higher wages to workers in the capital goods industries. The increased business demand bids up labor costs, but businesses think they can pay these higher costs because they have been fooled by the government-and-bank intervention in the loan market and its decisively important tampering with the interest-rate signal of the marketplace.

Warren Buffett Sees a US Stock Market Boom

Value investor turned political entrepreneur or crony capitalist Warren Buffett appears to be intensely bullish with the US stock markets as he has aggressively deployed much of the spare cash of his flagship company, Berkshire Hathaway.

Here is Bloomberg,

Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) invested $23.9 billion in the third-quarter, the most in at least 15 years, as he accelerated stock purchases and broadened the portfolio beyond consumer and financial-company holdings.

Berkshire bought almost $7 billion of equity securities in the three months ended Sept. 30, compared with $3.62 billion in the second quarter and $834 million in the first, the Omaha, Nebraska-based company said Nov. 4 in a filing. Stockholdings labeled “commercial, industrial and other” soared 62 percent in the three months to $17.4 billion on a cost basis, surpassing equity investments in financial and consumer-product firms.

“He sees something, and it’s big,” said Thomas Russo, a partner at Berkshire investor Gardner Russo & Gardner.

Buffett, 81, drew down Berkshire’s cash as Europe’s debt crisis and Standard & Poor’s downgrade of the U.S. pushed stocks to their worst quarterly performance since 2008. The investments disclosed Nov. 4 include $6.9 billion of equities, $5 billion for preferred shares and warrants in Bank of America Corp. and the acquisition of Lubrizol Corp. for about $9 billion.

Buffett is expanding a portfolio that for more than 20 years has included equity stakes in Coca-Cola Co. (KO), the world’s largest soft-drink maker, and Wells Fargo & Co. (WFC), now the No. 1 U.S. home lender. The chairman and chief executive officer acquired a power company in 2000 and railroad Burlington Northern Santa Fe last year.

I have still have great respect for Mr. Buffett’s stock picking abilities but am outraged at his political leanings. Anyway, Mr. Buffett’s action only reveals that he foresees a boom in US stock market.

I am bullish too, but perhaps not as aggressive as Mr. Buffett

Nevertheless record growth in US money supply plus all the combined QEs by developed world central banks, compounded by easing of interest rates everywhere is likely to support the new leg of the inflation driven boom phase of this bubble cycle.

Quote of the Day: The Myth of the Beneficial Bureaucracy

From Professor Michael Rozeff (bold emphasis mine)

As a rule, the regulatory agencies all produce abominable regulations, and it doesn't matter who is heading them. They are all bureaucratic. They all create an impossible administrative law apparatus that lacks justice. They all are out of control of their creators, the Congress. There is no such thing as a beneficial regulatory agency. They are a fourth branch of government that combines legislative, executive, and judicial functions, and that's worse than even the ordinary government, if such a thing is possible.

There is no one to "take a good look" at regulators and their regulations on an ongoing basis. Congressmen certainly can't do it and don't do it unless there is such a big squawk that they have to.

It's a near certainty that a close look at any agency will uncover all sorts of cozy and corrupt relations with those whom they regulate. It will uncover cushy and protected jobs. There is probably a library of books written by ex-bureaucrats that provide gory details of the agency blunders and poor organizations.

It is pointless to "look into" these bureaucracies. They need to be completely eliminated but if that is too radical, then I always have the other radical suggestion, which is that all those Americans who want to be regulated by these agencies volunteer to be so controlled; and those of us who do not want to be run by these agencies gain our freedom to live our lives free from their regulations.

To add to this stirring quote, the above reminds me of the frequent investigations conducted by the local congress/senate mostly on corruption charges or on controversial issues that draws much of the public’s attention.

Yet these public sessions are held hardly because of the pronounced intent of “in aid of legislation" to cleanse or reform an innately and incorrigibly corrupt system but for the opportunity to grandstand to the public, generate votes to prolong their tenures and their hold on political privileges, and most importantly, to expand their stranglehold over society with even more arbitrary rules which comes with more diversion of resources from the economy to fund the relentless expansions of regulatory agencies or the bureaucracy to enforce these feckless and corruption enhancing laws. This is another example of political insanity—doing the same thing over and over and expecting different results—except that these web of controls expand to cover different facets of our social life.

The public’s attention are always being diverted or framed to where the political establishment wants them to look at. To analogize, in a sports game, we cheer at the game itself but hardly examine the process from which the game came about.

It’s a wonder how these supposed investigators with all their unchecked hold over humongous amounts of pork barrels will be able to exorcise corruption. This would seem like the proverbial pot calling the kettle black.

The unfortunate nature of politics is that credit is usually gained from the degree of sensationalism extracted from the blaming of personalities than from the system.

And it is why the framework of the incumbent political institutions represents “an impossible administrative law apparatus that lacks justice” as Professor Rozeff writes. Corrupt laws which empowers corrupt political enforcement agencies will never deliver justice.

All the rest is public relations travesty.

Lew Rockwell on Video: Abolish the Euro and the EU

Ludwig von Mises Institute Chairman Llewellyn Rockwell Jr. says that the Euro and EU (and the US) operates to survive politically privileged banks

we live in some sort of bank-ocracy (2:17)

Wikileaks Exposé: Eurozone Needs a Bankruptcy Option

Wikileaks intercepted and posted on the web a cable sent by the Berlin by the US ambassador to Germany, Philip Murphy, to the Treasury Department and the State Department, on February 12, 2010 citing a Chapter 11 for Eurozone countries

From Bob Wenzel, (bold emphasis mine)

In part the cable reads:

“A EUROZONE CHAPTER 11: DB [Deustche Bank] Chief Economist Thomas Mayer told Ambassador Murphy he was pessimistic Greece would take the difficult steps needed to put its house in order. A worst case scenario, says Mayer, could be that Germany pulls out of the Eurozone altogether in 20 years time. In 1990, Germany's Constitutional Court ruled that the country could withdraw from the Euro if: 1) the currency union became an "inflationary zone," or 2) the German taxpayer became the Eurozone's "de facto bailout provider." Mayer proposes a "Chapter 11 for Eurozone countries," which would place troubled members under economic supervision until they put their house in order. Unfortunately, there is no serious discussion of this underway, he lamented.”

The cable outlines the concern German officials have with using German taxpayer money to bailout Greece and other financially weak Eurozone members. The cable in many ways explains Germany's recent foot dragging on getting a bailout deal done, since a completed deal will mean either funding by German taxpayers or European Central Bank money printing. Here's more from the cable:

“Chancellor Angela Merkel's government welcomed the decision taken at the EU's February 11 [2010] informal summit in Brussels not to provide financial assistance, for the moment, to cash-strapped Greece. German officials believe a bailout is not needed at this time, and that extending a lifeline to Greece would have carried too many risks. One major fear in Germany is that "saving" Greece would lead to other needy Eurozone members expecting the same treatment...Prior to the February 11 EU Summit in Brussels, there was much hair pulling in Berlin over the wisdom of participating in some sort of Greek rescue. No one savored the idea of explaining to German taxpayers, already concerned about Germany's record deficit, that they would be footing the bill for the irresponsible behavior of another country. A Finance Ministry official explained to us that many Germans felt disgusted by the situation in Greece: "While Germans have spent the past decade tightening their belts and improving their competitiveness, Greek civil servants still earn 14 months' salary per year." A recent editorial in the German daily Frankfurter Allgemeine Zeitung (FAZ) asked rhetorically whether Germans would need to work until age 69 just to finance early retirement for Greek workers. With important upcoming elections in the state of North Rhine-Westphalia, bailing out Greece would not be a vote winner...The German government was, in fact, "relieved" that the European Council meeting on February 11 decided not to put concrete assistance on the table at this time...”

But here's more from the cable, which explains why Germany even cares what happens to Greece

“Chancellor Merkel is clearly relieved she does not, for now, have to explain to the public why the German government is running up its own deficit to bail out debt-laden Greece. Still, the German government appears prepared to step in as a last resort if needed and is cognizant that German banks (such as Hypo Real Estate and Deutsche Bank) and insurance companies (Allianz) have significant exposure to Greek sovereign debt.”

In other words, it's all about the damn banksters.

Read the rest here

Incidentally, Deutsche Bank Chief Economist Thomas Mayer who proposed “Chapter 11 for Eurozone countries” or the Eurozone’s bankruptcy option recently wrote about the revival of Austrian economics (bold original from my earlier post)

Therefore we need to dump the flat-earth theories promising that economic and financial outcomes can be planned with a high degree of certainty and need to look at other theories that accept the limits of our knowledge about the future. A revival of Austrian economics could be a good start for such a research programme.

Could it be that the influence of Austrian economics has begun to permeate into policymaking?

Gold Prices Climbs the Wall of Worry, Portends Higher Stock Markets

The Occupy Wall Street crowd sees this as a problem with capitalism. I believe that they are correct in their target, but wrong in their diagnosis. This is not a problem of capitalism since Wall Street is a practitioner of monetarism. A real capitalist system works through real intermediation creating positive opportunities for productive enterprises (scarce money is actually vital here). Our current system of repo-to-maturity and gold leasing is nothing but empty monetarism’s habit of regularly forcing the circulation of empty paper. And when the system begins to doubt itself, as it did in 2008, the answer is always about finding a way to restart the fractional maximization process yet again, which means disguising the real risks inherent to that process. There is no real mystery as to why prices and values have seen such a divergence, and why that is a big problem to a system that depends on appearances. Jeff Snider

Dramatic fluctuations out of the interminable nerve racking geopolitical developments continue to plague global financial markets.

Yet despite the seemingly dire outlook, major equity market bellwethers seem to be climbing the proverbial wall of worry.

The price trend of gold, for me, serves as a major barometer for the prospective direction of stock markets, aside from, as measure to the current state of monetary disorder.

Gold’s significant breakout beyond the 50-day moving averages implies that gold’s bull run have been intact and could reaccelerate going to the yearend.

Thus, rising gold prices should likely bode well for global stock markets.

Seasonal Bias Favors Gold, Gold Mining Issues and Stock Markets

It is important to point out that gold’s statistical correlation with global stock markets may not be foolproof and or consistently reliable as they oscillate overtime. In addition, gold has no direct causal relationship with stock markets.

From a causal realist standpoint, the actions of gold prices shares the same etiological symptoms with stock markets—they function as lighting rod to excessive liquidity unleashed by central banks looking to ease financial conditions for political goals.

As shown above, all three major bellwethers of the US S&P 500 (SPX), China’s Shanghai index (SSEC) and the Euro Stox 50 (STOX50) seem to be in a recovery mode. This in spite of last week’s still lingering crisis at the Eurozone.

While I may not be a votary of statistically based metrics, seasonal patterns, mostly influenced by demand changes based on cultural factors, could have significant effects when other variables become passive.

In terms of gold prices, higher demand for jewelries from annual holiday religious celebrations, e.g. India’s Diwali and the wedding season, Christmas Holidays and preparations for China’s 2012 New Year of the Dragon[1], has statistically produced positive and the best returns of the year.

‘Statistical’ bias for a yearend rally in gold mining stocks (see lower right window) reveals that monthly returns for November has the largest gain of the year, with a potential follow through to December.

In addition, the stock market also has a seasonal ‘statistical’ flavoring with a potential yearend rally supported by additional gains from the first quarter as shown in the above chart by Bespoke Invest using the Dow Jones Industrials computed over 100 years in 2010[2]

Distinctions in the monthly returns involves many factors such as the tax milestones, quarterly "earnings season", "window-dressing" on the part of fund managers, index-rebalancing periods or many more[3] but these should never be seen as fixed variables as conditions ceaselessly changes.

Again statistics only measures and interprets history, but most importantly statistics does not take in consideration the actual operations of prospective human actions[4]. For instance, statistics can’t tell if policymakers will raise interest rates or hike taxes or print money and their potential effect on the markets.

Deeply Entrenched Bailout Policies—Globally

Nevertheless, given the current political climate, gold prices will mainly be driven by changes in the political environment. Seasonal effects will most likely be enhanced by political factors than the other way around.

In China, policymakers have reportedly been shifting towards an easing stance meant to address the current funding squeeze being encountered by small businesses.

Lending quotas of some China’s banks have reportedly been increased, where new lending may exceed 600 billion yuan ($94 billion) this month from 470 billion in September reports the Bloomberg[5].

These actions could have been driving the current recovery of the China’s Shanghai Index.

In Greece, political impasse has reportedly forced Greece Prime Minister George Papandreou to call for a referendum which initially rattled global financial markets[6].

In reality, Mr. Papandreou’s ploy looks like a brilliantly calculated move resonant of Pontius Pilate’s washing of his hand on the execution of Jesus Christ[7].

Given the recent poll results[8] which shows that the Greeks have not been favorable to government’s austerity reforms or bailouts but have also exhibited fervid reluctance to exit from the Eurozone (since Greeks has been benefiting from Germans), PM Papandreou saw the opportunity to absolve himself by tossing the self-contradictory predicament for the public to decide on.

In addition, realizing the potential risks, Germany’s Angela Merkel and France’s Nicolas Sarkozy interceded to prevent a referendum from happening, which I suppose could also be part of PM Papandreou’s tactical maneuver.

From these accounts, a vote of confidence over PM Papandreou’s government was held instead, where by a slim margin, PM Papandreou prevailed. The parliamentary victory thus empowers him to reorganize and consolidate power through a supposed Unity government[9].

In Italy, popular protests have been mounting against Prime Minister Silvio Berlusconi supposedly for his failure to convince investors and European allies that Italy can trim the Euro-region’s second biggest debt, which saw the Italy’s 10 year bond spiked to record high 6.4% on Friday[10].

PM Berlusconi recently rejected an offer of aid from the IMF, but instead, requested the multilateral institution to monitor her debt cutting efforts.

Yet given the current political maelstrom, European Central Bank (ECB) president Mario Draghi, who is also an alumnus of Goldman Sachs and who has just recently assumed office from Jean Claude Trichet surprised the financial markets with an interest rate cut citing risks of a Greece exit from the EU and from an economic slowdown brought about by the current financial turmoil[11].

Mr. Draghi’s actions seems like a compromise to the Global Banking cartel[12] where the latter has clamored for the ECB to backstop the bond markets by active interventions through quantitative easing (QE).

Obnoxious partisan politics seem to have provided a veil or an excuse for the ECB’s widening use of her printing press.

Yet ironically, attempts to portray the ECB as imposing disciplinary measures[13] on profligate crisis affected governments seem like a comic skit in the Eurozone’s absurd political theatre. The public is being made to believe that one branch of government intends to provide check and balance against the other.

In truth, the Euro-bank bailouts reallocates the distribution or transfers resources from the welfare government to the ECB and the Banking cartel in the hope that by rescuing banks, who functions as the major conduit in providing access to funds for governments, the welfare state will eventually be saved.

Yet instead of a check and balance, both the ECB and EU governments have been in collusion against EU taxpayers and EU consumers, to preserve a fragile an archaic government system that seems in a trajectory headed for a collapse.

The ECB’s asset purchases (upper right window) have been driving up money supply (upper left window) even as the EU’s economy seems faced with growing risks of recession—as evidenced by floundering credit growth in the EU zone. Yet contrary to Keynesians obsessed with the fallacious liquidity trap theory, inflation rate has remained obstinately above government’s targets which allude to the increasing risks of stagflation for the EU.

And further increases in inflation rates will ultimately be reflected and vented on the bond or the interest rate markets. These should put to risk both the complicit governments and their beleaguered financiers—the politically privileged banking system backed by the central banks—whom are all hocked to the eyeballs. Rising interest rates likewise means two aspects, dearth of supply of savings and diminishing the potency of the printing press. Yet to insist in using the latter option means playing with fires of hyperinflation.

And like in the US, the welfare warfare states have continuously been engaging in policies that would signify as digging themselves deeper into a hole.

Proof?

Inflationism as Cover to the Derivatives Trigger

It’s also very important to point out anew[14] that the US banking and financial system are vastly susceptible to the developments in the Eurozone. In short, US financial system has been profoundly interconnected or interrelated with the Euro’s financial system

Exposure of US banks to holders of Greek, Portuguese, Irish, Spanish and Italian debt in the first semester of 2011 has jumped by $80.7 billion to $518 billion mostly through credit default swaps where counterparty risks from a default could ripple through the US banking sector.

Yet about 97% of the US derivative exposure has been underwritten by JPMorgan, Morgan Stanley, Goldman Sachs, Bank of America Corp. and Citigroup Inc. The estimated total net exposure by the five government protected “too big too fail” banks to the crisis affected PIIGS are at measly $45 billion.

However, part of the hedging strategy by these banks and other financial institutions have been to buy credit insurance or Credit Default Swaps (CDS) of their counterparties which have not been included as part of these estimates. In addition, counterparties have not been clearly identified.

Because of this, European leaders have reportedly been extremely sensitive as not to trigger default clauses in CDS contracts that may put banks across two continents at risk.

Ironically, the institution that decides on whether debt restructuring triggers CDS payments, the International Swaps & Derivatives Association, or the ISDA, has these biggest government’s cartelized private banks sitting on the company’s boards.

So the big 5 essentially calls the shots in the derivatives markets or on when default clauses are triggered and when it is not.

At the end of the day, this eye-catching quote from the Bloomberg article[15] from which most of the discussion have been based on, seems to capture the essence of the policy direction today’s political system

U.S. banks are probably betting that the European Union will also rescue its lenders, said Daniel Alpert, managing partner at Westwood Capital LLC, a New York investment bank.

“There’s a firewall for the U.S. banks when it comes to this CDS risk,” Alpert said. “That’s the EU banks being bailed out by their governments.”

The point to drive at is that both governments, most likely through their respective central banks, will continue to engage in serial massive bailout policies to avert a possible banking sector meltdown from an implosion in derivatives.

Such dynamics lights up the fuse that should propel gold prices to head skyward. And the consequent massive infusion of monetary liquidity will only buoy global stock markets higher, for as long as inflation rates remain constrained for the time being.

Remember, central banks have used stock markets as part of their tool kit to manipulate the “animal spirits”[16] from which they see as a key source of economic multiplier from the misleading spending based theory known as the “wealth effect”, a theory that justifies crony capitalist policies.

Policies that have partly been targeted at the stock market and mostly at the preservation of the current unsustainable political system are being funneled into gold and reflected on its prices, which has stood as an unintended main beneficiary from such collective political madness.

Yet rising gold prices shows the way for the stock markets until the inflation rates hurt the latter. But again, not all equity securities are the equal.

I would take the current windows of opportunities to accumulate.

---

[1] Holmes Frank Investor Alert - 3 Drivers, 2 Months, 1 Gold Rally?, November 4, 2011, US Global Investors

[2] Bespoke Invest Seasonality Does Not Favor Stock Investments In February, February 1, 2011 Decodingwallstreet.blogspot.com

[3] Stockwarrants.com Seasonality

[4] See Flaws of Economic Models: Differentiating Social Sciences from Natural Sciences, November 3, 2011

[5] Bloomberg.com China Easing Loan Quotas May Cut Economic Risks, Daiwa Says, November 4, 2011

[6] See The Swiftly Unfolding Political Drama in Greece, November 2, 2011

[7] Wiipedia.org Pontius Pilate

[8] Craig Roberts, Paul Western Democracy: A Farce and a Sham, November 4, 2011, Lew Rockwell.com “A poll for a Greek newspaper indicates that whereas 46% oppose the bailout, 70% favor staying in the EU, which the Greeks see as a life or death issue.”

[9] See Greece PM Papandreou Wins Vote of Confidence, November 5, 2011

[10] Bloomberg.com Thousands Rally in Rome, Pressing Italy’s Berlusconi to Resign Amid Crisis, November 6, 2011

[11] See ECB’s Mario Draghi’s Baptism of Fire: Surprise Interest Rate Cut, November 4, 2011

[12] See Banking Cartel Pressures ECB to Expand QE, November 3, 2011

[13] Reuters Canada ECB debates ending Italy bond buys if reforms don't come, November 5, 2011

[14] See US Banks are Exposed to the Euro Debt Crisis, October 8, 2011

[15] Bloomberg.com Selling More CDS on Europe Debt Raises Risk for U.S. Banks, November 1, 2011

[16] See US Stock Markets and Animal Spirits Targeted Policies, July 21, 2010