New Record Highs for the Philippine Phisix; How to Deal with Tips

I worry less about small failures, more about large, potentially terminal ones. I worry far more about the "promising" stock market, particularly the "safe" blue chip stocks, than I do about speculative ventures-the former present invisible risks, the latter offer no surprises since you know how volatile they are and can limit your downside by investing smaller amount. I worry less about advertised and sensational risks, more about the more vicious hidden ones I worry less about terrorism than about diabetes, less about matters people usually worry about because they are obvious worries, and more about matters that lie outside our consciousness and common discourse (I also have to confess that I do not worry a lot - I try to worry about matters I can do something about) I worry less about embarrassment than about missing an opportunity. Nassim Nicholas Taleb The Black Swan The Impact of the Highly Improbable

Rampaging stock market bulls has propelled the local benchmark, the Phisix to another milestone record high!

Friday’s electrifying breakout anchored by a 2.4% advance, largely influenced by developments overseas, essentially pushed the Phsix farther away from the 13 month consolidation level (green channel). This seems to reinforce the new support level, which formerly was represented by the resistance level (upper green horizontal line).

Of course, price charts merely function as guides, as they are ultimately driven, not by patterns, but by the value-scale time preference exhibited by the marketplace or by market participants acting through the price mechanism.

The Global Boom Phase

It is important to keep in perspective what has been driving actions in the stock markets.

Where the mainstream associates today’s milestone feat to ‘economic growth’, ‘earnings growth’, ‘confidence’ to the political affairs or to some other bunk, it is worth accentuating that what has been happening in the Philippines has not been an insulated event but a global phenomenon.

The exemplary performance by the local bellwether has not even kept pace with the remarkable advances by many of the world’s bourses.

While the Phisix has assumed on the leader’s role relative to the performance of our nieghbors or the ASEAN-4, we even trail the returns of another ASEAN member particularly Vietnam’s 14.72% on a year-to-date basis.

The exceptional gains by Hong Kong and India as indicated in the above table as one of the top performers in the world, has also outclassed the Phisix.

Yet most of Asia has been up by over 10%, except for China, Indonesia, Malaysia, Australia and New Zealand. Only Sri Lanka, Bangladesh and Mongolia registered losses over the same period.

And of the 71 international bourses on my radar screen, 42% have posted gains of over 10%. Such broad based bullishness has simply been astounding.

Intensifying Local Boom

In the local markets, again, the bullmarket sentiment has not been limited to select issues, particularly to heavyweight components of the Phisix, but to the broader market.

While we should be expecting a natural profit taking process or a countertrend to occur anytime, overbought conditions in a bullmarket may remain extended.

Such dynamics may be taking place.

The recent decline in the advance-decline differentials (averaged weekly) seems to have augured for a retracement. However, Friday’s intense rally may have deferred anew what should have been a normal profit taking sequence.

The market’s sentiment can be measured by the trading activities or internal market actions.

The average daily traded issues, which has been ascendant since November of 2011, has also been exhibiting signs of exhaustion. Friday’s rally has not alleviated the weekly decline.

So far market breadth seems indicative of a coming salutary profit taking cycle.

This week’s rally has evidently been led by the service sector via gains of the major telecom issues. The property and the financial indices, took second and third spot, have similarly bolstered the gains of the Phisix.

On a year-to-date basis the property and the financial sector continues to widen their lead relative to their contemporaries, whose gains have mostly been responsible for the outstanding returns of the Phisix.

And if we are to look at the biggest companies within the Phisix basket, whose ranking are based on free float market cap, the actions of the heavyweight basically confirms the standings of the sectoral performances.

Property issues led by Ayala Land [ALI] have taken the commanding lead, along with SM Primeholdings [SMPH] at fourth spot.

Meanwhile, the financial sector has been powered by BPI and MBT at third and fifth spot respectively. Ayala Corp, the mother unit to ALI and BPI, at second place has also been buoyed by the gains of the sizzling hot subsidiaries.

And in evaluation of the above dynamics there are several things to keep in mind:

One, the gains of the Phisix hasn’t been limited to Phisix based heavyweight components but manifested on the overall markets. This means that market’s attention has been percolating into second or third tier issues.

Two, the rotational process has been in progress, where past laggards are today’s darling and yesterday’s favorites have become the du jour laggards. Such dynamics are being exhibited in the actions of the Phisix heavyweights, which have been confirming the sectoral rankings. The interchanging gains with the Mining industry[1] relative to the other capital intensive sectors of the property and telecoms, along with financial sector, which functions as the financial intermediaries of these industries, signify as symptoms of a mounting inflationary boom. In short, the real relative effects of monetary inflation[2] are being likewise being demonstrated in the actions in the stock markets, here and around the world.

Also the rotational process extrapolates to the shifting market’s attention from heavyweights to second or third tier issues and vice versa which can also be a dynamic found within specific sectors.

The bottom line is that for as long as the monetary inflationary push persists, the Phisix will continue to ascend, but the distribution of gains will vary in terms of degree and of timing seen from sector to sector and from heavyweights to tiered issues.

Inflationary Credit Fueling the Boom Phase

There is another very important aspect to remember in the environment where everybody is a genius.

To quote the legendary trader Jesse Livermore via Edwin Lefèvre in the must read classic Reminiscences of a Stock Operator[3], (emphasis added)

The public ought always to keep in mind the elementals of stock trading. When a stock is going up no elaborate explanation is needed as to why it is going up. It takes continuous buying to make a stock keep on going up. As long as it does so, with only small and natural reactions from time to time, it is a pretty safe proposition to trail along with it.

Sustained broad stock market gains will not occur if funded by savings alone. Since savings are limited or are scarce, market will then reflect on offsetting actions—i.e. gainers would be counterbalanced by losers, where net gains will only emerge from dividends. It is under such environment where earnings would truly matter.

Austrian economist Fritz Machlup provides the economic underpinnings to Mr. Livermore’s empirical observation[4] (emphasis added)

A factor which is capable of evoking expectations of a rise in security prices is a reduction of the interest rate. In so far as this reduction occurs merely as the result of an increased supply of intended new savings, the likelihood of a long-lasting upward movement of the market is rather meagre.

In addition, since stock markets operate on the principle of pricing, then any increase in the demand for stocks through higher prices would likewise entice more supply (more listings). This would again entail offsetting actions under a savings only financed milieu

Again from Mr. Machlup continuing from the same paragraph,

It is easy to see that if dividend prospects are unchanged increased and the rate of interest is reduced, security prices will rise, and it is more than probable that a sufficient amount of security sales from "final sellers' (unloading by temporary holders and new issues) will be quickly forthcoming: comparatively small offerings of securities will suffice to absorb the increased supply of new savings and to drain them off to other markets. For no matter how the supply of money capital derived from current new savings may fluctuate, it is scarcely conceivable that the total supply of money capital can ever rise to unexpected dimensions as the result of an increased flow from this source. If the public devotes only its new savings to the securities market, and the new demand at once causes some groups of securities to become "firmer," it will not be necessary for the purchasing power of the public to be withdrawn from the commodity market until it has "run through'* all the securities quoted on the exchange and has adjusted the prices of securities, one after the other, to the new market conditions.

In the present world, boom conditions spread from the markets to the real economy.

Yet the boom phase of the business cycle, as reflected in the actions of the stock markets requires continuous infusion of credit to facilitate an increase in demand for stocks.

Mr. Machlup further explained[5],

If it were not for the elasticity of bank credit, which has often been regarded as such a good thing, a boom in security values could not last for any length of time. In the absence of inflationary credit the funds available for lending to the public for security purchases would soon be exhausted, since even a large supply is ultimately limited. The supply of funds derived solely from current new savings and amortization current amortization allowances is fairly inelastic, and optimism about the development of security prices, would promptly lead to a "tightening" on the credit market, and the cessation of speculation "for the rise." There would thus be no chains of speculative transactions and the limited amount of credit available would pass into production without delay.

And such a boom can only happen when interest rates have been tampered with to produce a negative real rate environment.

Today’s boom can easily be traced to seemingly coordinated policies by global central banks to allegedly fight economic downturn with an environment of negative real rates.

Zero interest rate policies (ZIRP) have become the conventional creed utilized by central bankers as shield against the publicized menace of recessions. In reality, these measures have been designed to buttress and preserve the beleaguered banking system from a collapse.

Interest rates today on a global scale have been approaching the 2009 levels[6], although policy rates directives of emerging markets have been less aggressive compared to crisis afflicted developed economies[7].

This week, we see the same patterns of credit easing policies in some of the major economies. Sweden cut interest rates[8], China pared down the banking sector’s reserve requirements for the second time in 3 months[9] and importantly, the Bank of Japan (BoJ) surprised the markets by aggressively expanding quantitative easing (QE) which according to them is slated to be completed by the end of 2012[10].

While the markets were palpably surprised by BoJ’s announcement, to the contrary we had expected this, as I wrote last week[11]

…politicians have been pressuring the Bank of Japan (BoJ) to ease further or face a revision of the BoJ law in order to “give the government more room to intervene in monetary policy”. This is an example of the sham in the so-called central banking independence.

Central banks are politically influenced directly or indirectly. The BoJ will be stepping on the QE gas pedal. Yet, if Japan’s government manages to remold on the BoJ law which gives Japanese politicians the space to intervene directly, then the yen will be faced with greater risk of hyperinflation.

This serves a reminder that central banks are politically influenced and that any talks of the completion of QE should be taken with a grain of salt. Political agents change their statements almost as fast as they change their underwear.

So credit easing measures will continue, with pretext of economic doom as cover for their actions.

And yet the actions of central bankers have been percolating into to the real economy, through the commodity sphere. Oil has broken out of the consolidation- quasi cup and handle formation while Natural gas which has been on a decline, largely influenced by the Shale gas revolution has suddenly surged. If the uptick in natural gas prices continues in spite of the expansion of the Shale gas output, then we could be seeing seminal signs of what Ludwig von Mises calls as the “crack up” boom or the intensifying symptoms of monetary disorder.

Jesse Livermore’s Investing Tip: Don’t Listen to Tips!

In a bullmarket, everyone’s a genius. That’s because ascendant prices will varnish many mistakes used in the evaluation stock price trends. Tersely put, many will be right for the wrong reasons. And the natural ramifications from easy money made from a bull run will be overconfidence, embedding of wrong analytical methodology (where many analyses are really just heuristics) and greater risk appetite.

Since broad market gains are the character of the typical bullmarkets, issues which are commonly deemed as ‘speculative’ or ‘third’ tier or in local colloquial terminology known as ‘basura’ issues will be imbued with magnificent gains symptoms of which we are seeing today.

The common conventional attribution for spectacularly performing speculative issues are that they are being spurred by undisclosed or yet to be disclosed insider activities which have been channeled as rumors, gossips or insider tips.

In reality while there may be some truth to such insider based plans and developments, the causal linkage between price actions and insider activities have not been straight forward. Such rumor based price action relationship hardly exists during bear markets.

Insider tips usually signify as available bias or looking at current events or scouring for any “available” seemingly plausible information to explain the market’s actions or the post hoc fallacy.

And insider tips are ultimately dependent on general market sentiment.

In short, negative real rates or the increase in people’s time preference have impelled market participants to look for all sorts of justifications to buy into the markets.

Another important factor is that insider tips can be subject to the machinations of stock market operators.

Again from the profound wisdom of the celebrated trader Mr. Jesse Livermore via Mr. Lefèvre[12] (bold emphasis added)

Tips! How people want tips! They crave not only to get them but to give them. There is greed involved, and vanity. It is very amusing, at times, to watch really intelligent people fish for them. And the tip-giver need not hesitate about the quality, for the tipseeker is not really after good tips, but after any tip. If it makes good, fine! If it doesn't, better luck with the next. I am thinking of the average customer of the average commission house. There is a type of promoter or manipulator that believes in tips first, last and all the time. A good flow of tips is considered by him as a sort of sublimated publicity work, the best merchandising dope in the world, for, since tip-seekers and tiptakers are invariably tip-passers, tip-broadcasting becomes a sort of endless-chain advertising. The tipster-promoter labours under the delusion that no human being breathes who can resist a tip if properly delivered. He studies the art of handing them out artistically

And relying on tips to goad for a buying action equally requires dependence on tips on how to close the transaction. More from Mr. Livermore[13].

A man must believe in himself and his judgment if he expects to make a living at this game. That is why I don't believe in tips. If I buy stocks on Smith's tip I must sell those same stocks on Smith's tip. I am depending on him.

Also relying on tips would seem like depending on the advice of quack doctors on your health. Yet again Mr. Livermore[14],

I have said many times and cannot say it too often that the experience of years as a stock operator has convinced me that no man can consistently and continuously beat the stock market though he may make money in individual stocks on certain occasions. No matter how experienced a trader is the possibility of his making losing plays is always present because speculation cannot be made 100 per cent safe. Wall Street professionals know that acting on "inside" tips will break a man more quickly than famine, pestilence, crop failures, political readjustments or what might be called normal accidents.

These seem like common sense and easy to observe advise that has been hardly practised by most participants. And the reason for this is due to our intuitive attachment to emotions which embodies our human frailty[15].

There are many thousands of people who buy and sell stocks speculatively but the number of those who speculate profitably is small. As the public always is "in" the market to some extent, it follows that there are losses by the public all the time. The speculator's deadly enemies are: Ignorance, greed, fear and hope. All the statute books in the world and all the rules of all the Exchanges on earth cannot eliminate these from the human animal. Accidents which knock carefully conceived plans skyhigh also are beyond regulation by bodies of coldblooded economists or warm-hearted philanthropists. There remains another source of loss and that is, deliberate misinformation as distinguished from straight tips. And because it is apt to come to a stock trader variously disguised and camouflaged, it is the more insidious and dangerous

Despite enrolling in the school of hard knocks, many fail to heed on such fundamental lessons.

Finally, for investment success, the proof of the proverbial pudding is in the eating. Mr. Livermore’s priceless counsel[16],

Nobody can catch all the fluctuations. In a bull market your game is to buy and hold until you believe that the bull market is near its end. To do this you must study general conditions and not tips or special factors affecting individual stocks. Then get out of all your stocks; get out for keeps! Wait until you see or if you prefer, until you think you see the turn of the market; the beginning of a reversal of general conditions. You have to use your brains and your vision to do this; otherwise my advice would be as idiotic as to tell you to buy cheap and sell dear. One of the most helpful things that anybody can learn is to give up trying to catch the last eighth or the first. These two are the most expensive eighths in the world. They have cost stock traders, in the aggregate, enough millions of dollars to build a concrete highway across the continent.

Mr. Livermore’s line of thinking emanates from an empirical or pragmatic point of view which unknowingly to him, his ideas have been backed by sound economic theory.

Mr. Livermore’s emphasis on gains comes in form of capturing magnitude and not on the frequency. And this is the opportunity that buy-and-hold in a conditional bull market or the boom phase of the bubble cycle offers.

Prudent investing means to manage one’s portfolio under such direction.

---

[1] See Graphic of the PSE’s Sectoral Performance: Mining Sector and the Rotational Process, July 10, 2011

[2] See Phisix and the Rotational Dynamics, January 30, 2012

[3] Lefèvre, Edwin Reminiscences of a Stock Operator p.255 os24.org

[4] Machlup Fritz The Stock Market, Credit And Capital Formation, p.90 Mises.org

[5] Machlup, op. cit. p.92

[6] See Global Central Banks Ease the Most Since 2009, November 28, 2011

[7] Centralbanknews.info Emerging Markets Monetary Policy Rate Indicator, February 18, 2012

[8] Bloomberg.com, Sweden Abandons Rate Rises as Euro Crisis Hits Nordics: Economy February 16, 2012

[9] Bloomberg.com China Cuts Bank Reserve Reqs; Exports ’Grim’, February 19,2012

[10] Danske Research Nerves on edge, but brighter outlook Weekly Focus, February 17, 2012

[11] See Global Equity Market’s Inflationary Boom: Divergent Returns On Convergent Actions, February 13, 2012

[12] Lefèvre op.cit. p.166

[13] Lefèvre op.cit. p.27

[14] Lefèvre op.cit. p.256

[15] Lefèvre op.cit p.245

[16] Lefèvre op.cit p.55

$6 Trillion worth of Fake US bonds Seized by Italian Police

From Reuters

Italian police said on Friday they had seized about $6 trillion worth of fake U.S. Treasury bonds and other securities in Switzerland, and arrested eight Italians accused of international fraud and other financial crimes.

The operation, co-ordinated by prosecutors from the southern Italian city of Potenza, was carried out by Italian, Swiss and U.S. authorities after a year-long investigation, an Italian police source said.

It began as a investigation into mafia loan-sharking, but gradually expanded as prosecutors used telephone and computer intercepts to unearth evidence of illegal activity surrounding Treasury bonds.

The fake securities, worth more than a third of U.S. national debt, were seized in January from a Swiss trust company where they were held in three large trunks.

The U.S. Embassy in Rome thanked the Italian authorities and said the forgeries were "an attempt to defraud several Swiss banks". It said U.S. experts had helped to identify the bonds as fakes.

Eventually these alleged 'genuine' government or treasury bonds will be exposed for what they are. They will be defaulted upon either directly or indirectly through massive inflation. In addition, “risk free” by edict (Basel Accord) is a myth.

Canada’s Housing Bubble

Central bank policies have been serially blowing bubbles everywhere.

From the Bloomberg’s chart of the day,

Canada may be on the cusp of a “severe” housing correction as real estate investment surges above a tipping point relative to economic output, according to George Athanassakos, professor of finance at the Richard Ivey School of Business.

The CHART OF THE DAY shows Canada’s housing investment as a percentage of gross domestic product, and the declines in inflation-adjusted house prices that follow when this ratio tops 7 percent.

“Eventually, everything boils down to demand and supply,” Athanassakos said in a telephone interview from Western University in London, Ontario. “Whenever this ratio goes over 7 percent, it signifies overinvestment in housing and two or three years later, we have a severe correction.”

Canada’s housing market is booming as historically-low interest rates fuel purchases, driving uphome prices and adding to record household debt. Canada’s ratio of housing investment to GDP has averaged 5.8 percent over the last 50 years and is currently at about 7 percent, based on Statistics Canada figures as of the third quarter of 2011, Athanassakos said. Housing investment includes spending on new homes, renovations and real estate transaction fees.

More from the Economist,

Speculators are pouring into the property markets in Toronto and Vancouver. “We have foreign investors who are purchasing two, three, four, five properties,” says Michael Thompson, who heads Toronto’s economic-development committee. Last month a modest Toronto home put on the market for C$380,000 ($381,500) sold for C$570,000, following a bidding war among 31 prospective buyers. According to Demographia, a consultancy, Vancouver’s ratio of home prices to incomes is the highest in the English-speaking world.

Bankers are becoming alarmed. Mark Carney, the governor of the central bank, has been warning for years that Canadians are consuming beyond their means. The bosses of banks with big mortgage businesses, including CIBC, Royal Bank of Canada and the Bank of Montreal, have all said the housing market is at or near its peak. Canada’s ratio of household debt to disposable income has risen by 40% in the past decade, recently surpassing America’s (see chart). And its ratio of house prices to income is now 30% above its historical average—less than, say, Ireland’s excesses (which reached 70%), but high enough to expect a drop. A recent report from Bank of America said Canada was “showing many of the signs of a classic bubble”.

Like China, Canada’s central bank is in a crossroad; tighten monetary environment which translates to a bust (recession/crisis), or attempt to fine tune the boom bust cycle which only delays the day of reckoning but aggravates the situation.

I am reminded by the admonitions of the preeminent Professor Murray N. Rothbard,

Like the repeated doping of a horse, the boom is kept on its way and ahead of its inevitable comeuppance, by repeated doses of the stimulant of bank credit. It is only when bank credit expansion must finally stop, either because the banks are getting into a shaky condition or because the public begins to balk at the continuing inflation, that retribution finally catches up with the boom. As soon as credit expansion stops, then the piper must be paid, and the inevitable readjustments liquidate the unsound over-investments of the boom, with the reassertion of a greater proportionate emphasis on consumers' goods production.

Central banks are caught in a bind, regulations have been failing to stop boom bust cycles, which they deny have been a product of their constant manipulation of interest rates.

Oops, Ron Paul Supporter Meets Michelle Obama at the White House

Strange fate.

From DailyMail.co.uk, (hat tip: Bob Wenzel)

Most people who go on a White House tour expect to see some famous portraits of presidents and first ladies past, and perhaps a busy politico or two.

But today, that all changed as one lucky group of visitors were surprised by a meet-and-greet with Michelle Obama and the family dog Bo.

All of the visitors seemed happy about the addition to their tour, even one teenage boy wearing a Ron Paul t-shirt.

Quote of the Day: Albert Einstein on Prohibition Laws

The prestige of government has undoubtedly been lowered considerably by the prohibition law. For nothing is more destructive of respect for the government and the law of the land than passing laws which cannot be enforced. It is an open secret that the dangerous increase of crime in this country is closely connected with this.

Albert Einstein, "My First Impression of the U.S.A.", 1921 (deoxy.org).

Updated to add:

Albert Einstein was a professed socialist. But the comment above was made during his first trip to the US where he received the Nobel Prize in Physics, perhaps when politics was of least interest to him. However as Mr. Einstein's popularity grew, so with his political views, which became elaborate in the middle of the 20th century and which was highlighted by his article "Why Socialism?"

Cartoon of the Day: The Johari window of Ben Bernanke

Hat tip Professor Antony Mueller

EUROASIAN Union: Regionalizing Cronyism or Despotism?

Russia’s Vladimir Putin has a grand design, he intends to integrate ex-Soviet Union states.

From the Businessinsider.com,

It's likely you've never heard of half of the prospective members of Vladimir Putin's plans for a "Eurasian Union".

However, if the plan goes ahead, you'll need to get familiar with them quick.

A Eurasian Union (EuU) including most of the former U.S.S.R. would become a major counterweight to the EU (a Eurasian Union could control up to 33 percent of the world’s proven natural gas reserves, according to Forbes).

Putin, who floated the idea in October of last year, at the time went to lengths to deny that the bloc would recreate the Soviet Union. However, Russia has already gotten many other former Soviet Union states to sign up for a free trade agreement, including Armenia, Moldova, Ukraine (which was initially set on joining the EU), Kyrgyzstan, and Tajikistan. Uzbekistan, Azerbaijan, and Turkmenistan could follow suit.

Purportedly the union is about a establishing a free trade bloc.

More from Reuters,

Putin said the new union would build on an existing Customs Union with Belarus and Kazakhstan which from next year will remove all barriers to trade, capital and labor movement between the three countries.

"We are not going to stop there and are setting an ambitious goal -- to achieve an even higher integration level in the Eurasian Union," Putin wrote in an article which will be published in Izvestia newspaper on October 4…

Putin wrote that he saw the way out of the global crisis through a regional integration, mentioning the European Union, Asia-Pacific Economic Cooperation, the North American Free Trade Agreement and the Association of Southeast Asian Nations as examples.

"These 'bricks' can assemble into a more stable global economy," Putin wrote.

Politicians espousing free trade or liberalization of the markets have always been welcome news. However one should be leery of any noble sounding intentions, because what politicians say almost always works to the contrary from what they do.

The great Professor Ludwig von Mises says that free trade is about practicing what has been preached

Everybody was in favor of free trade for all other nations and of hyper‑protectionism for his own. It did not seem to occur to anyone that free trade begins at home. For nearly everyone favored government control of busi­ness within his own country.

True to the word of Professor von Mises, we find that the supposed ex-Soviet free trade bloc are composed of mostly economically UNFREE nations.

According to the Heritage economic freedom index, Russia ranks 144^th, Ukraine 163^rd, Moldova 124^th, Armenia 39^th, Kyrgyz Republic 88^th, Tajikistan 129^th and potential participants Uzbekistan 164^th Azerbaijan 91^st and Turkmenistan 168^th.

Except for Armenia and the Kyrgyz Republic whom are classified as moderately free, all the rest led by Putin’s Russia has been mostly unfree.

And the deficiency in freedom has not been limited to economic sphere but has likewise been reflected in their respective political institutions. The following categorization according to Freedomhouse.org

Partly Free: Ukraine, Moldova Kyrgyz Republic

Not free: Russia, Tajikistan. Uzbekistan, Azerbaijan, Turkmenistan

So free trade looks likely a façade to what seems as covert design to control energy reserves which will likely be corralled by the political class and their regional private sector allies.

And like the EU, whom has gone in the direction of a political union, Putin’s union seems like a step towards centralization of the region’s political framework.

Genuine free trade doesn’t need trading blocs or treaties. All that is required of a nation need is to voluntarily open the doors for trade, regardless of the what neighbors or others do.

Again this golden nugget from Professor Ludwig von Mises.

It is hopeless to expect a change by an international agreement. If a country thinks that more free trade is to its own advantage, then it may always open its frontiers. But if it views free trade as a disadvantage to its own interests it will not be more willing to grant it in an international treaty.

Well I hope I am wrong on this, and that such trading bloc will pry open these mostly unfree economies and spur not only regional trade openness but a global one too.

Shale Gas Won’t Boost the US Dollar

At the Financial Times, managing director of foreign exchange strategy at UBS Mansoor Mohi-uddin says that Shale Gas will be instrumental in shifting the trade balance of the US that should translate to a stronger US dollar.

Writes Mr. Mohi-uddin

The future of the dollar is more likely to be determined in the shale gas and oilfields of Dakota and Texas than in the sovereign wealth funds of Asia and the Middle East. This is because striking new technological developments are set to transform America’s energy supplies, significantly improving the US balance of payments and the long-term outlook for the greenback.

The US’s current account deficit has been a longstanding drag on the dollar. At the height of the credit boom in 2006, it reached $800bn or 6 per cent of gross domestic product. Though the deficit has halved as the credit crunch has lowered imports, it still stands at 3 per cent of GDP, largely because the US, like the eurozone, Japan, China and India, remains a major energy importer, with annual net foreign oil purchases of $300bn a year. As the US economy slowly recovers, the International Monetary Fund expects the US current account deficit to start rising again. That would lead to foreign central banks accumulating greater reserves of dollars.

But such straight-line forecasts are likely to be challenged as the US’s shale gas and “tight oil” reserves are commercially exploited over the next few years. The US has vast reserves of shale gas but, until recently, energy companies were unable to tap the gas trapped in shale rock. Now, through hydraulic fracturing or ‘fracking’, US reserves of economically available gas supplies have started to rise sharply.

While I am in accord that shale gas is the future of energy, a lopsided focus on energy as driving the US dollar risks a substantial diagnostic error.

Trade balances are largely influenced by policies, directly or indirectly. Policies which promotes boom bust cycles and increased government spending (or the debt culture) stimulates consumption activities at the expense of production, thus boost trade deficits. So even if shale gas may reduce US dependence on foreign energy, growth of consumption activities will expand to other sectors.

Today, the declining share of oil imports (above chart courtesy of Mark Perry) relative to consumption has hardly been a factor affecting the US trade balance—the latter which suffered a major bump from the 2008 recession or crisis (chart below tradingeconomics.com).

In short, the above only exhibits that there has been a shift taking place in import activities from oil to the other sectors.

The US dollar has hardly strengthened because of the improving oil trade balance but instead has functioned as a du jour shock absorber from the unresolved crisis from 2008 which lingers on today through the Eurozone.

And another thing, the Fed’s money printing activities relative to other central banks will drive the destiny of the US dollar more than just shale gas output. Money is never neutral.

Cartoon(s) of the Day: The Johari Window of Libertarians

From Cato’s Dan Mitchell

From Bastiat Institute (facebook)

The US as Human Rights Violator

US President Obama recently dissed on China’s human rights record.

However, former Assistant Secretary of the US Treasury and former associate editor of the Wall Street Journal, Paul Craig Roberts exposes on this charade,

Washington is now in the second decade of murdering Muslim men, women, and children in six countries. Washington is so concerned with human rights that it drops bombs on schools, hospitals, weddings and funerals, all in order to uphold the human rights of Muslim people. You see, bombing liberates Muslim women from having to wear the burka and from male domination.

One hundred thousand, or one million, dead Iraqis, four million displaced Iraqis, a country with destroyed infrastructure, and entire cities, such as Fallujah, bombed and burnt with white phosphorus into cinders is the proper way to show concern for human rights.

Ditto for Afghanistan. And Libya.

In Pakistan, Yemen, and Somalia Washington’s drones bring human rights to the people.

Abu Ghraib, Guantanamo, and secret CIA prison sites are other places to which Washington brings human rights. Obama, who has the power to murder American citizens without due process of law, is too powerless to close Guantanamo Prison.

He is powerless to prevent himself from supplying Israel with weapons with which to murder Palestinians and Lebanese citizens to whom Obama brings human rights by vetoing every UN resolution passed against Israel for its crimes against humanity.

Instead of following Washington’s human rights lead, the evil Chinese invest in other countries, buy things from them, and sell them goods.

For US politicians, moral standards seem to fall into “might makes right”—where there is one set of morality for political opponents and another set for the self-instituted policeman of the world.

The numerous atrocities committed by the US, as part of their imperial foreign policy, serves as further evidence that in Asia (particularly on the US military's proposed expansion due to the Spratly’s issue) the China threat has mostly been a contrived issue which exemplifies H.L. Mencken’s series of hobgoblins, most of them imaginary. Such is borne out of the continuing promotion of war policies meant to uphold the interests of the political class and their welfare-warfare clients/cronies.

Of course, infractions on human rights issues does not extend only to foreigners but to the Americans themselves, in their homeland.

Again Mr. Roberts,

Washington’s concern with human rights does not extend as far as airport security where little girls and grandmothers are sexually groped. Antiwar activists have their homes invaded, their personal possessions carried off, and a grand jury is summoned to frame them up on some terrorist charge. US soldier Bradley Manning is held for two years in violation of the US Constitution while the human rights government concocts fabricated charges to punish him for revealing a US war crime. WikiLeaks’ Julian Assange is harassed endlessly with the goal of bringing him into the human rights clutches of Washington. Critics of Washington’s inhumane policies are monitored and spied upon.

More signs that the US appears to be moving away from the embodiment of the “Land of the Free”.

Is Ron Paul Being Cheated out of the GOP Caucuses?

Electoral vote shaving isn’t just a common phenomenon in Philippine elections, indications are that such fraud may be happening in the US despite only the GOP caucuses (not general elections yet).

From the Business Insider,

By now, it is clear that the Maine caucuses were a complete mess.

Evidence is mounting that Mitt Romney's 194-vote victory over Ron Paul was prematurely announced, if not totally wrong. Washington County canceled their caucus on Saturday on account of three inches of snow (hardly a blizzard by Maine standards), and other towns that scheduled their caucuses for this week have been left out of the vote count. Now, it looks like caucuses that did take place before Feb. 11 have also been left out of final tally.

As the full extent of the chaos unfolds, sources close to the Paul campaign tell Business Insider that it is looking increasingly like Romney's team might have a hand in denying Paul votes, noting that Romney has some admirably ruthless operatives on his side and a powerful incentive to avoid a fifth caucus loss this month.

According to the Paul campaign, the Maine Republican Party is severely under-reporting Paul's results — and Romney isn't getting the same treatment. For example, nearly all the towns in Waldo County — a Ron Paul stronghold – held their caucuses on Feb. 4, but the state GOP reported no results for those towns. In Waterville, a college town in Central Maine, results were reported but not included in the party vote count. Paul beat Romney 21-5 there, according to the Kennebec County GOP.

Here is a video of the alleged fraud, (hat tip Professor Robert Murphy)

The Ron Paul revolution seems emblematic of the zeitgeist signifying the structural challenge posed by the forces of decentralization against the established forces of the industrial age top-down welfare-warfare based political institutions.

As one would observe, the substantial growth in Ron Paul’s following has been defying the establishment’s implicit campaign to repress his presence (such as media blackout), the exclusion from Jewish forum debate and etc...

I would even posit that some of the GOP candidates have been fielded (by vested interest groups) to erode on Ron Paul’s growing influence over the voting population.

The Ron Paul phenomenon has clearly been bolstered by the internet where the latter as a medium of communication and connectivity has apparently been taking over the lead from mainstream media.

The US may not be the world’s biggest user but has been the largest in terms of penetration level (chart from internetworldstats.com)

And the supposed fraud seems likely as more evidence of fear by the entrenched establishment of an anti-establishment candidate commanding clout from the voters. So the continued task to suppress candidate Paul’s rise.

Ron Paul may not win (which the insiders will make sure of) but his ascendance clearly marks the sign of the times.

Quote of the Day: True Patriotism

Mr. Jacob Hornberger, founder and president of The Future of Freedom Foundation, on true patriotism

The true patriot scrutinizes the actions of his own government with unceasing vigilance. And when his government violates the morality and rightness associated with principles of individual freedom and private property, he immediately rises in opposition to his government.

Graphic: A Valentine Day’s Card for the Economist

If you have an economist as a S.O. (significant other), don’t be surprised if he/she sends you a valentine's day greeting card with the following graphics…or you can send one.

There are 14 ways in graphs, how the economist express their love, check out the rest here (hat tip the Economist blog). [warning: the layman may find this boring!]

War on Drugs: Guatemala President Proposes Legalization

Prohibition laws, though popular, has not worked before and won’t work today, whether applied to alcohol, prostitution, drugs and etc, for the simple reason that demand and supply can’t be wished away by fiat.

Worst, applying prohibition signifies as the proverbial cure that is worst than the disease.

Apparently Guatemala’s President, Otto Pérez Molina, seems to see the light.

From Cato’s Juan Carlos Hidalgo, (bold emphasis mine)

It was going to happen sooner rather than later. Three years ago, a trio of former Latin American presidents denounced drug prohibition and called to “break the taboo” of discussing policy alternatives such as drug decriminalization. Then, a few months later, we had a former Mexican president calling for outright legalization. Late last year, a sitting Colombian president said that he would favor drug legalization “if the rest of the world does it too.” This weekend,a sitting Guatemalan president said he will propose drug legalization for Central America in an upcoming regional summit.

Otto Pérez Molina thus becomes the first sitting head of state to propose ending the war on drugs. Being a conservative former general who ran on a platform of fighting crime with “an iron fist,” Pérez Molina is an unlikely champion of sensible drug policy reform. As he described it, under his proposal “It wouldn’t be a crime to transport, to move drugs. It would all have to be regulated.” Pérez Molina says that with legalization, “you would get rid of money-laundering, smuggling, arms trafficking and the corruption that has crippled judges, police forces and entire government institutions, not only in our country but in the region.”

Central America is one of the hottest battlegrounds in Washington’s hemispheric war on drugs. Guatemala, along with neighboring Honduras, El Salvador and Belize, are among the most violent countries in the world. Most of the violence stems from turf wars between juvenile gangs, but Mexican drug cartels are increasingly escalating it as they extend their influence and operations in the region.

As Pérez Molina said, Central America’s biggest liability in its fight against organized crime is its institutional weakness. Judges, policemen, politicians, and soldiers are easily corrupted by cartels. Despite increasing their security budgets by 60% in the last five years, Central American countries spent approximately $4 billion in 2010 on security and justice. This amount dwarfs with the estimated $25-35 billion that Mexican cartels—who run the drug business in Central America—pocket every year.

Institutional corruption has been a major unintended effect from the war on drugs.

As economist Mark Thornton explains,

In general, however, prohibition results in more, not less, crime and corruption. The black markets that result from prohibitions represent institutionalized criminal exchanges. These criminal exchanges, or victimless crimes, often involve violent criminal acts. Prohibitions have also been associated with organized crime and gangs. Violence is used in black markets and criminal organizations to enforce contracts, maintain market share, and defend sales territory.

The crime and violence that occurred during the late 1920s and early 1930s was a major reason for the repeal of Prohibition (Kyvig 1979, 123, 167). The nondrug criminal activity of heroin addicts has been associated with the economic effects of prohibition laws and is viewed by Erickson (1969) and others as a major cost of heroin prohibition.

Corruption of law-enforcement officers and other public officials is also a familiar manifestation of prohibited markets. Experience with prohibition has shown it to be a major corrupting influence. The corruption of the Prohibition Bureau proved to be a major stumbling block to the effective enforcement of Prohibition and was also cited as a reason for repeal. Most important, this corruption penetrates beyond the enforcement bureaucracy to government in general.

Recent experience has shown that worldwide multidrug prohibition is a major corrupting force in several national governments, such as Colombia and Mexico.

Corruption is a natural side-effect from interventionism.

Yet there are three ways to deal with the drug menace: prohibition, education and rehabilitation-therapy.

Since prohibition predominantly fails, then the next two options would provide for better alternatives: focus on education and rehabilitation.

Mega-Success, Downfall and Sentimentalism

Libertarian columnist Robert Ringer writes,

Seems like we’ve been here before … many, many times. Whitney Houston’s tragic death is the latest in a long string of drug- and alcohol-related celebrity deaths, going back to Jimi Hendrix and Janis Joplin in 1970, Jim Morrison in 1971, Elvis in 1977, Andy Gibb and John Belushi in the eighties, and, of course, Michael Jackson in 2009. And these are just a few of the names that come quickly to mind.

When a show-business icon dies prematurely, we tend to focus on his/her death rather than the life that led to that death. In the case of Whitney Houston, her travails were in the news so much over the years that even I — not a frequent showbiz reader — was aware of them. Anyone who watched the evening news couldn’t help but know about her bouts with drugs and alcohol, and, perhaps even worse, her fifteen-year marriage to a man who physically abused her.

Mr. Ringer says that immaturity (from youth) compounded by loneliness, rather than mega-success brings about the typical downfall of many celebrities.

In my view, mega-success and too much expectations of one’s value to the world can exacerbate ‘immaturity’, aside from inability to adjust to realities. In the average person, wisdom usually supersedes immaturity as people age. So if age doesn’t usher in maturity, then there must be something else wrong.

And possibly intractable egotism bloated by mega-success can be a factor in one’s downfall (not necessarily limited to celebrities). Again the inability to adjust with changing times could bring about loneliness and frustrations.

Of course, all the above depends on the individual’s value scales. This means that while some celebrities fall for the above traps, many others don’t.

But there is another factor I would like to point out. While I lament the loss of many artists of my generation, I usually get miffed at the excessive sentimentality expressed by many to recently deceased celebrities.

For me, this represents an action inconsistent compared to when the celebrity lived. Then, nobody seems to given a whit to what the celebrity did (most especially when they were down). Somewhat like schadenfraude, death becomes an opportunity for credit grabbing, promotion of shows and for social signaling.

Yet this seems part of how public opinion gets molded.

Bank of Japan Yields to Political Pressure, Adds $128 billion to QE

From the Bloomberg,

Japan’s central bank unexpectedly added 10 trillion yen ($128 billion) to an asset-purchase program and set an inflation target after an economic slide fuelled criticism it has been slower to act than counterparts.

An asset fund rose to 30 trillion yen, with a credit lending program at 35 trillion yen, the central bank said in Tokyo today. The BOJ said today that it will target 1 percent inflation for now. The overnight lending rate stayed between zero and 0.1 percent.

Stocks rose and the yen weakened against the dollar as the central bank expanded stimulus for the first time since October to revive an economy that shrank 2.3 percent in the fourth quarter. Lawmakers had urged extra efforts to counter deflation after the Federal Reserve adopted a 2 percent inflation target and the European Central Bank expanded its balance sheet.

Today’s decision “shows the BOJ bowed to political pressure,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “There will probably be limited impact on the yen’s gains.”

Twelve of 13 economists surveyed by Bloomberg News had anticipated no change in stimulus or rates.

Obviously the BoJ succumbed or ‘bowed’ to the blackmail or pressures applied by the politicos. This announcement basically fulfills my contrarian expectations (the mainstream didn't see this coming).

Here is what I wrote last Sunday,

…politicians have been pressuring the Bank of Japan (BoJ) to ease further or face a revision of the BoJ law in order to “give the government more room to intervene in monetary policy”. This is an example of the sham in the so-called central banking independence.

Central banks are politically influenced directly or indirectly. The BoJ will be stepping on the QE gas pedal. Yet, if Japan’s government manages to remold on the BoJ law which gives Japanese politicians the space to intervene directly, then the yen will be faced with greater risk of hyperinflation.

There will be more to come. Central banking independence? Duh!

Paper Money’s Usefulness

In Zimbabwe, the former Zimbabwe dollar was used as toilet paper or for mural décor.

Hungary’s Central Bank discovers a new use.

From the Telegraph (hat tip Professor Robert Murphy)

Hungary's central bank is burning old monetary notes to help the needy in Europe's deadly cold snap.

The bank is pulping wads of old notes into briquettes to help heat humanitarian organisations.

"It's a very useful charitable act, a vital aid for our foundation because we can save part of our heating costs," said Krisztina Haraszti, the head of a centre for autistic children in the impoverished northeastern town of Miskolc.

It helped the centre, which also provides aid to autistic adults, save between 50,000 and 60,000 forints (£200) a month, which is a "considerable sum in this time of crisis," she told AFP.

Since the briquettes have a high calorific value, "one only needs to add a few bits of wood and the rooms are really warm," said Haraszti.

As Voltaire once said "Paper money returns to its intrinsic value—zero."

Video: The Economics of Valentine's Day

In the following video, Professor Chris Coyne explains (via Learnliberty.org) the importance of Valentine's Day as a product of free markets, as well as, highlights on the essence of Valentine's Day celebration--mostly as social signaling or the expression of emotions. (hat tip Mark Perry)

Happy Valentines Day!

Quotation of the Day: Fickle Public Opinion

In a sense, public opinion is like one of those mountain snow accumulations…. As snow builds up, the likelihood that the whole drift will come crashing down the mountain steadily increases. Finally, as the ultimate snowflake falls on top of the drift, the weight is now too much too be borne, and the whole drift comes down. Major changes in public opinion tend to take the same form. A very large number of books, articles, and lectures which appear to have no great effect nevertheless prepare the way. Eventually a critical mass is reached and what appears to be an overnight change of opinion occurs.

That’s from Gordon Tullock’s “Foreword” to J. Ronnie Davis’s 1971 book The New Economics and the Old Economists (source: Don Boudreaux at Café Hayek)

Public opinion is fundamentally driven by mawkishness and unctuousness.

Public opinion, today, can be characterized by several dominant cognitive biases; particularly, the comfort of the crowd, appeal to tradition, appeal to majority, appeal to experts and appeal to the emotion.

There hardly have been any critical thinking involved in what have been deemed as ‘cerebral’ discussions among conventional experts. Debates mostly revolve around the acceptance of current circumstances, conditions and methodology, where variances of ideas mostly deal with interpretation of events and or on personality issues and or semantical dimensions (mostly bordering on the abstract).

This means that public opinion has been largely influenced by the way elites or how the intellectual class think and project on the issues.

Yet questioning on the validity and the biases of the sources of information, the socio-economic political theories and or the philosophical underpinnings of the current institutional framework would be considered as heresy that risks ostracism for the expositor. Thus, conformity and social acceptance are prioritized at the expense of reality which drives the popular mindset.

And that’s why politics has mainly been centered on the manipulation of public opinion.

Nevertheless, times have been changing.

Real time connectivity has been encouraging on more critical thinking. A diffusion of critical thinking could influence a shift in public opinion through a change in the direction of the way the intellectual group thinks.

Structural changes are happening at the margins. So will public opinion.

Quote of the Day: How Media Obfuscates Reality

Another fantastic Facebook quote from my favorite iconoclast author Nassim Nicolas Taleb.

Why the Austrian Business Cycle is Not a Tarot Card

Many, if not most people, tend to look for a one-size-fits-all solution or supposed elixirs to the world’s problem. That’s one of the key reason why many are seduced by analysis or reasoning premised on mathematical or statistical models or on pattern seeking formulas.

Readers of this blog recognize that I use much of the Austrian Business Cycle Theory (ABCT), but not as a standalone way to evaluate markets and events. It is important to know of the limitations of every theory, and this applies to the ABCT as well.

Professor Steve Horwitz explains, (italics original, bold emphasis mine)

Both critics and adherents of the ABCT misunderstand it if they think it is some sort of comprehensive theory of the boom, breaking point, and length/depth of the bust. It isn't. As Roger Garrison has long insisted, the theory by itself is a theory of the unsustainable boom. It is a theory that explains why driving the market rate of interest below the natural rate through expansionary monetary policy produces a boom that contains endogenous processes that will cause that boom to turn to a bust. Again, it's a theory of the unsustainable boom.

ABCT tells us nothing about exactly when the boom will break and the precise factors that will cause it. The theory claims that eventually costs will rise in such a way that make it clear that the longer-term production processes falsely induced by the boom will not be profitable, leading to their abandonment. But it says nothing about which projects will be undertaken in which markets and which costs (other than perhaps the loan rate) will rise, and it tells us nothing about the timing of those events. We know it has to happen, but the where and when are unique, not typical, features of business cycles.

Once the turning point is reached, ABCT tells us little to nothing about how the bust will play out. Yes, we know that further inflation and interventionist attempts to prevent the necessary reallocation of resources will make matters worse, but the theory by itself doesn't tell us a priori how this will play out in any given historical circumstance. The ABCT is not a theory of the causes of the length and depth of recessions/depressions, but a theory of the unsustainable boom.

In short, the ABCT explains the cause and effects of tampering with interest rates. Yet there are many other influences to people's incentives to act, which is not limited to interest rate signals.

And in looking for specifics or exactitudes, like ‘timing’ and which ‘particular projects or costs’ will be affected, would be similar to looking for answers from the tarot card. Obviously ABCT does not work that way.