How Environmental Politics Pollutes

Professor Donald Boudreaux writes,

I speak of polluted perceptions of reality.

Wildlife made ugly and ill by spilled oil make for vivid images. And photos of such misfortunes do indeed reveal a risk of oil drilling -- namely, temporary spoliation of some parts of the natural environment.

But precisely because such spills are relatively rare (and getting rarer), we don't see such images routinely. So when these images are presented to us, they stir our emotions.

Trouble is, by focusing on such photos we get a distorted view of the bigger picture, one that includes oil's manifest benefits.

How many of us reflect on the benefits that we enjoy from asphalt? Asphalt makes road construction and repair less costly. So we in the industrialized world daily drive to school, work and play on clean, smooth roads that would not exist, or that would be less smooth and wide, were it not for this unassuming product made from petroleum.

Asphalt is so common that we take no notice of it. Yet if it disappeared tomorrow, we'd all suffer noticeably.

The same is true for, say, plastic wrap. We give this stuff nary a thought. Yet because bacteria cannot pass through it, those thin sheets of plastic keep meats, vegetables, dairy products and breads fresher -- and protect us against food poisoning.

Fact is, gasoline and aviation fuel aren't the only products produced with petroleum. Our modern lives are full of too many such products to count.

And not only are petroleum-based products all around us and practically indispensable -- they're also inexpensive. Yet we pay no attention to these everyday wonders.

This fact is why photos of oil-covered wildlife are dangerous: They make us aware of petroleum's risks while we remain oblivious to petroleum's benefits.

In the real world petroleum is an astonishingly beneficial, versatile and inexpensive resource. In the fantasy world of too many people, however, petroleum is a vile substance that does little beyond enriching a few sheiks and billionaires while it kills both the planet and humanity.

But in fact our world is incalculably better and even cleaner because of petroleum -- which is why it is especially regrettable that newspaper pictures of the likes of plastic wrap and asphalt would not grab readers' attention with anywhere near the impact of pictures of oil-covered animals.

Sounds familiar?

It’s been a common practice by sensationalist media to tunnel on accidents or disasters and blame them on people's actions to justify all sorts of political interventionism (to the delight of or in the interests of political authorities).

First, is to deal with the public’s emotions by manipulating images to project a political message.

Then with an audience carried away by the desire to assist, the next step would be to strongly advocate for interventions. This will likely be augmented by ‘scientific papers’ backed by institutions with political biases.

Never mind if such interventions would mean siphoning of valuable resources away from productive activities (that leads to nastier effects on future accidents or disasters). Never mind the unappreciated benefits to consumers as discussed above. And importantly, never mind the consequences of the alternative.

Short term becomes the imperative. Control becomes the primary tool to achieve a questionable end. Freedom of choice is sacrificed for political expediency and presumptiveness.

Think bans on Plastic bags. Philippines have been moving into this direction. They all emerged from the same focusing effect allegedly meant to save the environment.

Yet unknown to most, these are the types of environmental policies that advocates societal atavism (regression).

They go against the desire of the consuming public. That’s why bans are mandated proscriptions. Otherwise the public would vote with their money and plastic bags would disappear with no political coercion required.

Interventionist environmental politics assumes that we don’t know what’s good for ourselves.

Yet studies suggest that bans on plastic bags have been exaggerated.

Moreover, what are the alternatives? Paper bags? Are paper bags more environmental friendly?

No, according to biodeg.org

The process of making paper bags causes 70% more atmospheric pollution than plastic bags. Paper bags use 300% more energy to produce, and the process uses huge amounts of water and creates very unpleasant organic waste. When they degrade paper bags emit carbon dioxide, and will emit methane in anaerobic conditions.

A stack of 1,000 new plastic carrier bags would be around 2 inches high, but a stack of 1,000 new paper grocery bags could be around 2 feet high. It would take at least seven times the number of trucks to deliver the same number of bags, creating seven times more transport pollution and road congestion.Also, because paper bags are not as strong as plastic, people may use two or three bags inside each other. Paper bags cannot normally be re-used, and will disintegrate if wet.

Notwithstanding, politicians don’t see where papers originate from: the forests.

In short, bans on plastic bags protects, promotes or subsidizes logging. So consumers are not only being punished through inconvenience, they are needlessly faced with a political devil and the deep blue sea, through higher costs--all in the name of saving the environment. Yet this is another example where the cure is worse than the disease.

Like earth hour (which impliedly condemns modern electricity and promotes candles), these feel good policies will have a serious blowback. Unfortunately, since politicians are unaccountable for their actions, they will keep implementing noble sounding (vote generating) but unrealistic and uneconomical regulations with nasty unforeseen consequences.

Interventionist environmental politics not only pollutes the environment, at worst it pollutes people’s mind.

Agency Problem: Goldman Sachs Edition

Asymmetric incentives usually leads to conflicts of interests in relationships (seen in both the private and the public sectors), which typically is known as the principal-agent or the agency problem

On how this applies in the evaluation of sources of information I recently wrote,

This brings us to the most sensitive part of information sourcing: the principal-agent or the agency problem

Economic agents or market participants have divergent incentives, and these different incentives may result to conflicting interests.

To show you a good example, let us examine the business relationship between the broker and the client-investor.

The broker derives their income from commissions while the investor’s earning depends on capital appreciation or from trading profits or from dividends. The economic interests of these two agents are distinct.

How do they conflict?

The broker who generates their income from commissions will likely publish literatures that would encourage the investor to churn their accounts or to trade frequently. In short, the literature will be designed to shorten the investor’s time orientation.

Yet unknown to the investor, the shortening of one’s time orientation translates to higher transaction costs (by churning or frequent trading). This essentially reduces the investor’s return prospects and on the other hand increases his risk premium.

How? By diverting the investor’s focus towards frequency (of small gains) rather than the magnitude. Thus, a short term horizon tilts the risk-reward scale towards greater risk.

Writing at the New York Times, a recently resigned Goldman Sachs employee scathingly accuses his former employer of the said infraction.

Writes Greg Smith,

TODAY is my last day at Goldman Sachs. After almost 12 years at the firm — first as a summer intern while at Stanford, then in New York for 10 years, and now in London — I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.

To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money. Goldman Sachs is one of the world’s largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for…

Goldman Sach’s agency problem, from Mr. Smith’s account (bold emphasis mine)

How did we get here? The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.

What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.

Today, many of these leaders display a Goldman Sachs culture quotient of exactly zero percent. I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all.

It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail…

It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are.

I would add that the cultural transformation of the company may have largely been brought about by the amplification in the political role played by Goldman Sachs in shaping US politics.

A company that earns through political rent seeking or has been protected by regulators will largely become indifferent to its consumers. Since they have become substantially less subjected to market discipline, their priorities will run in the direction of influencing policymaking in line with their interests or gaming the system.

Bottom line: interventionism magnifies the agency problems.

Quote of the Day: Property Rights ARE Human Rights

One of the left's most effective canards has been its alleged distinction between property rights and human rights. The fact is that property rights are human rights. My right to my computer--my property--is not my computer's right to itself. It's my right, and I'm human.

A fantastic quote from Professor David Henderson. This is commonsensical. Unfortunately for the left, commonsense isn't common.

How Foreign Trade Restrictions Obstructs Economic Growth

In discussing the official complaint filed by the US at the World Trade Organization (WTO) against China’s rare earth export restrictions, Cato’s Dan Ikenson explains the adverse implications of trade restrictions. Mr. Ikenson writes, (bold emphasis mine)

USTR’s argument against Chinese export restrictions in the raw materials and Rare Earths cases are just as applicable to U.S. import restrictions. Removing restrictions—whether the export variety imposed by foreign governments or the import variety imposed by our own—reduces input prices, lowers domestic production costs, enables more competitive final-goods pricing and, thus, greater profits for U.S.-based producers.

Yet the U.S. government imposes its own restrictions on imports of some of the very same raw materials. It maintains antidumping duties on magnesium, silicon metal, and coke (all raw materials subject to Chinese export restrictions). In fact, over 80 percent of the nearly 350 U.S. antidumping and countervailing duty measures in place restrict imports of raw materials and industrial inputs—ingredients required by U.S. producers in their own production processes. But those companies—those producers and workers for whom Ambassador Kirk professes to be going to bat in the WTO case on rare earths (and the previous raw materials case)—don’t have a seat at the table when it comes to deciding whether to impose AD or CVD duties. (Full story here.)

Ambassador Kirk’s logic and the facts about who exactly is victimized by U.S. trade policies provide a compelling case for trade law reform, such as requiring the administering authorities to consider the economic impact of AD/CVD measures on producers in downstream industries—companies like magnesium-cast automobile parts producers, manufacturers of silicones used in solar panels, and even steel producers, who require coke for their blast furnaces.

Feel good protectionist policies does the opposite of what they intend to accomplish

Yet such policies have been imposed by vested interest groups, who uses the law (in cahoots with vote seeking politicians) to protect their economic standings at the expense of consumers and of the society. This is known as Rent Seeking.

Trade restrictions has significant direct and indirect (unseen spillover) impact to the economy.

Bank of Japan Ups Stimulus to 2 Trillion Yen!

Once tried, it's never enough...

From the Wall Street Journal,

The Bank of Japan said Tuesday that it would stoke the economy with an additional ¥2 trillion ($24.32 billion) in lending, following a surprise monetary easing at its previous meeting, as it heightens its drive to rid the economy of deflation.

"We came up with the measure as part of a package" to deal with deflation along with the credit-easing move last month, BOJ Gov. Masaaki Shirakawa said at a news conference following a two-day meeting of the bank's policy board.

"Persistent efforts are needed to create growth potential and thereby defeat deflation," he said, adding the BOJ "will continue to do what it can," but that government, the financial sector and corporations must play a part.

Analysts said the remarks helped to reassure markets, showing that the BOJ appears resolved to help Japan recover from its long slump, and leaving the door open to further measures in the months ahead.

In Tuesday's actions, the BOJ will boost its high-growth-sector loan program by ¥2 trillion, to ¥5.5 trillion, and will make the money available for two additional years, to March 2014. The program, introduced in June 2010, provides loans to private banks for one year at a 0.1% interest rate to provide lending to 18 high-growth sectors, including renewable energy, medical treatment and nursing care.

As part of the total, the BOJ also will offer loans denominated in U.S. dollars worth ¥1 trillion, using existing foreign-currency assets held by the central bank. The BOJ holds an estimated ¥4 trillion in foreign currencies, separate from the government's foreign reserves.

Economists said the absence of further monetary easing was expected. At the February meeting, the bank surprised markets by expanding its asset-purchase program by ¥10 trillion, to ¥65 trillion, and moved closer to setting a clear inflation target of 1%.

This is another validation of my prediction that the Bank of Japan (BoJ) will increase stimulus from last month. This also exhibits that so called central bank independence is a myth.

Nevertheless, the Japan’s Equity Benchmark the Nikkei seems to “like” the policy. It is more that the banking and financial system, the recipients of BoJ’s new money, has channeled them into the equity markets.

As Murray N. Rothbard wrote of the policy induced Business cycle,

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.

California’s Welfare Crisis

The Greek tragedy is being played out in the US through California

Writes Professor Michael Boskin and Professor John Cogan at the Wall Street Journal, (hat tip Professor Antony Mueller) [bold emphasis mine]

No one should write off the Golden State. But it will take massive reforms to reverse its economic decline…

California's rising standards of living and outstanding public schools and universities once attracted millions seeking upward economic mobility. But then something went radically wrong as California legislatures and governors built a welfare state on high tax rates, liberal entitlement benefits, and excessive regulation. The results, though predictable, are nonetheless striking. From the mid-1980s to 2005, California's population grew by 10 million, while Medicaid recipients soared by seven million; tax filers paying income taxes rose by just 150,000; and the prison population swelled by 115,000.

California's economy, which used to outperform the rest of the country, now substantially underperforms. The unemployment rate, at 10.9%, is higher than every other state except Nevada and Rhode Island. With 12% of America's population, California has one third of the nation's welfare recipients.

Partly due to generous union wages and benefits, inflexible work rules and lobbying for more spending, many state programs and institutions spend too much and achieve too little. For example, annual spending on each California prison inmate is equal to an entire middle-income family's after-tax income. Many of California's K-12 public schools rank poorly on standardized tests. The unfunded pension and retiree health-care liabilities of workers in the state-run Calpers system, which includes teachers and university personnel, totals around $250 billion.

Meanwhile, the state lurches from fiscal tragedy to fiscal farce, running deficits in good times as well as bad. The general fund's spending exceeded its tax revenues in nine of the last 10 years (the only exceptions being 2005 at the height of the housing bubble), abetted by creative accounting and temporary IOUs.

There is no currency union to put the blame on this time.

Yet the above exposes much of the fraud in analyzing the Greek crisis. Both Greece and California have been plagued by the unsustainable welfare state system.

And like Greece, the repercussion has been a stream of ongoing business exodus

From Fox Business

Creative Destruction: The Demise of Encyclopedia Britannica Print Edition

From the Washington Post (hat tip Professor Mark Perry)

Encyclopaedia Britannica Inc. said Tuesday that it will stop publishing print editions of its flagship encyclopedia for the first time since the sets were originally published more than 200 years ago.

The book-form of Encyclopaedia Britannica has been in print since it was first published in Edinburgh, Scotland, in 1768. It will stop being available when the current stock runs out, the company said. The Chicago-based company will continue to offer digital versions of the encyclopedia.

More signs of how the information age has been reconfiguring commercial activities.

Graphics: The Risk On Environment

Rampaging bulls set some milestones last night…

The US S&P 500 hits the highest level since 2007

Nasdaq at an 11 year

Volatility Index at 5-year lows

Cost to insure debts has fallen on a global scale

Bespoke Invest writes, (chart theirs too)

The average country on the list has seen default risk drop by 16% this year. As shown, Norway currently has the lowest default risk at 27.74 bps, followed by the US at 33.18 bps. Switzerland, Sweden and the UK round out the top five in terms of the lowest CDS prices. All five of these countries have seen default risk drop by more than 30% so far in 2012.

This is certainly not about a Goldilocks economy (not to hot, not too cold, but moderating growth)…

Chart from Zero Hedge

…but of markets being manipulated by central banks.

This represents the salient opiating impact from the initial round of money printing by global central banks. Put differently, this is the boom phase of a boom bust cycle. These has also been the partial fulfillment of my expectations

Quote of the Day: Economic Freedom Fosters Innovation

Places that are open and possess low entry barriers for people gain creativity advantage from their ability to attract people from a wide range of backgrounds. All else equal, more open and diverse places are likely to attract greater numbers of talented and creative people – the sort of people who power innovation and growth.

That’s from Richard Florida, quoted in a paper by Niclas Berggren and Therese Nilsson (hat tip Cato’s Mark Calabria)

Nassim Taleb Endorses Ron Paul

My favorite iconoclast Nassim Taleb goes for Ron Paul.

From Benzinga.com (hat tip Bob Wenzel)

Nassim Taleb, the best-selling author of The Black Swan, endorsed the presidential aspirations of Ron Paul. "From the risk vantage point, Paul is the only candidate that represents my values," he told CNBC earlier today.

"There are four key issues that no one else is addressing," said NYU Politechnic Institute and Oxford University professor, the first three of which he identified as the deficit, the Fed, and US militarism. "Then there is the notion that America is about resilience. You do not achieve that through bailouts," he told CNBC.

"I want a system that gets better after every shock. A system that relies on bailouts is not such a system," he said, noting that Ron Paul is the only candidate willing to take the risk to talk about the hot button issues.

"He is doing the equivalent of chemotherapy on the fundamental issues," said Taleb. "It may hurt, but that is the only choice you have. You cannot advocate for novocaine when in fact you need a root canal."

It is interesting to see an intersection of views with people of different backgrounds.

Here is Nassim Taleb in Davos 2009,

It was effortless to talk about complexity and its effect on risk: how redundancy, diversity, and such properties were central in avoiding collapse.

In short both believe in forces of decentralization in dealing with a complex world. That’s fundamentally the opposite of all standing US presidential candidates out there.

My preference for Ron Paul is not only because he represents the Classical Liberal-Austrian School of Economics and libertarian perspective, but he is for me, the ideal freedom fighter.

A Ron Paul victory will resonate for the cause of (individual) freedom around the world. But even if he loses, the Ron Paul revolution has been emblematic of the political trends of the information age era.

I may be wrong, but I think the establishment will do everything it can to block a Ron Paul presidency. And even if Ron Paul does win the presidency, I fear that he may target for assassination as a Ron Paul regime (that’s if he keeps up with his ideals and promises) will be devastating to entrenched vested interest groups (both from the interests of the left-the welfare class, and the right-the warfare class).

Laissez Faire Capitalism and City Competitiveness

The Economist devised a new measure of competitiveness applied to cities.

They write

The 120 cities in the index are home to some 750m people and $20.2 trillion worth of GDP, 29% of the world's total. High concentrations of skilled residents, infrastructure and institutions mean that the top of the index is dominated by America and western Europe, with 24 cities in the top 30. Comparing the index to the EIU's cost of living data (a measure of western-style living expenses), identifies those cities which also represent good value for money for the ambitious expatriate.

Explaining their findings, they add

Well over half of the world’s population now lives in cities, generating more than 80% of global GDP. Already, global business is beginning to plan strategy from a city, rather than a country, perspective.

Given the rapid growth and development of many cities, particularly in emerging markets such as China and India, competition between them for business, investment and talent will only get fiercer.

Size alone does not determine a city’s growth potential. While some megacities, such as New York and Tokyo, are immensely influential, there are smaller ones, such as Hong Kong and Singapore, which have established themselves as globally competitive centres in recent years. Meanwhile, emerging market cities such as Ahmedabad and Tianjin are witnessing double-digit economic growth and have the potential to grow even faster.

Competitiveness, however, is a holistic concept. While economic size and growth are important and necessary, several other factors determine a city’s overall competitiveness, including its business and regulatory environment, the quality of human capital and indeed the quality of life. These factors not only help a city sustain a high economic growth rate, but also create a stable and harmonious business and social environment.

The scatter plot diagram has a substantially significant message: the state of competitiveness is highly correlated with the standards of living. The more competitive a city is, the higher standards of living and vice versa. Given the above, the US and the west has, at present, the highest level of competitiveness, which similarly extrapolates to the highest ranking of standard of living. Meanwhile, Africa and Latin America has lagged.

And what has been the causal link which drives the correlation between competitiveness and quality of living?

The answer is capital accumulation via laissez faire capitalism

The great Professor Ludwig von Mises already explained this more than half a century ago or that the city competitiveness index merely validates Professor von Mises. (bold emphasis mine)

The truth is that the accumulation of capital and its in­vest­ment in machines, the source of the comparatively greater wealth of the Western peoples, are due exclusively to laissez-faire capi­talism which the same document of the churches passionately misrepresents and rejects on moral grounds. It is not the fault of the capitalists that the Asiatics and Afri­cans did not adopt those ideologies and policies which would have made the evolution of autochthonous capitalism possi­ble. Neither is it the fault of the capitalists that the policies of these nations thwarted the attempts of foreign investors to give them “the benefits of more machine production.” No one contests that what makes hundreds of mil­lions in Asia and Africa destitute is that they cling to primitive methods of production and miss the benefits which the employ­ment of better tools and up-to-date technological designs could be­stow upon them. But there is only one means to relieve their distress—namely, the full adoption of laissez-faire capitalism. What they need is private enterprise and the accumulation of new capital, capitalists and entrepreneurs. It is nonsensical to blame capitalism and the capitalistic nations of the West for the plight the backward peoples have brought upon themselves. The remedy indicated is not “justice” but the substitution of sound, i.e., laissez-faire, policies for unsound policies.

Of course times have been changing. Globalization has been prompting for the laggards (like Africa) to embrace more capitalism therefore becoming more competitive. Whereas debt plagued welfare states of West has led to a diminishing competitiveness. This should lead to a wealth convergence.

The Toxicity of Mainstream News

Chris Mayer at the Daily Reckoning explains why we should not rely on mainstream news as source for decision making (bold emphasis mine)

Dobelli’s analogy with food is a good one. We know if you eat too much junk food, it makes us fat and can cause us all kinds of health problems. Dobelli makes a good case that the mind works the same way. News is brightly colored candy for the mind.

News is systematically misleading, reporting on the highly visible and ignoring the subtle and deeper stories. It is made to grab our attention, not report on the world. And thus, it gives us a false sense of how the world works, masking the truer probabilities of events.

News is mostly irrelevant. Dobelli says to think about the roughly 10,000 news stories you’ve read or heard over the past year. How many helped you make a better decision about something affecting your life? This one hit home…

We get swamped with news, but it is harder to filter out what is relevant — which gets me to another point that hit home. Dobelli talks about the feeling of “missing something.” When traveling, I sometimes have this feeling. But as he says, if something really important happened, you’d hear about it from your friends, family, neighbors and/or co-workers. They also serve as your filter. They won’t tell you about the latest antics of Charlie Sheen because they know you won’t care.

Further, news is not important, but the threads that link stories and give understanding are. Dobelli makes the case that “reading news to understand the world is worse than not reading anything.” In markets, I find this is true. The mainstream press has little understanding of how markets work. They constantly report on trivia and make links where none exist for the sake of a story, or just for the sake of having something that “makes sense.”

In markets, reporters try to explain the market every day. “The market falls on Greek news” is an example. Better to not read anything if you’re going to take this kind of play-by-play seriously at all.

The fact is we don’t know why lots of things happen. We can’t know for sure why, exactly, things unfolded just as they did when they did. As Dobelli writes, “We don’t know why the stock market moves as it moves. Too many factors go into such shifts. Any journalist who writes, ‘The market moved because of X’... is an idiot.”

You contaminate your thinking if you accept the neat packages news provides for why things happen. And Dobelli has all kinds of good stuff about how consuming news makes you a shallow thinker and actually alters the structure of your brain — for the worse.

News is also costly. As Dobelli points out, even checking the news for 15 minutes three times a day adds up to more than five hours a week. For what? He uses the example of the Mumbai terror attacks in 2008. If a billion people spent one hour of their attention on the tragedy by either reading about it in the news or watching it, you’re talking about 1 billion hours. That’s more than 100,000 years. Using the global life expectancy of 66 years means the news consumed nearly 2,000 lives!

Pretty wild, right?

So what to do? Dobelli recommends swearing off newspapers, TV news and websites that provide news. Delete the news apps from your iPhone. No news feeds to your inbox. Instead, read long-form journalism and books. Dobelli likes magazines like Science and The New Yorker, for instance.

News and analysis from the mainstream usually represents oversimplified narration of facts that has been typically grounded from cognitive biases (heuristics) and logical fallacies.

Also because news outfits are profit based businesses, their presentations are often designed to generate or to solicit public’s attention through sensationalist reporting or through supposed “analytical” discussions mostly predicated on the emotive dimensions.

Moreover because news outfits have enormous influence on voters, they have embedded ties with the establishment as they reciprocate each other in projecting "noble"political goals. Thus media's bias has been to promote the establishment's interests and frequently serve as discreet channels for political propaganda.

Noticeably most of their arguments have been focused on personality issues rather than the objective evaluation of the system.

Yet their basic recourse to any social problem would be to: 1) change the leader, 2) throw money at the problem, 3) prohibit or intervene on any supposed social ills or 4) tax particular groups. No one ever sees how their proposed interventionism creates more problems which they intend to resolve.

Except for the facts I usually refrain from reading or listening to any of their stupefying analysis.

And I firmly agree with Mr. Dobelli who is quoted above saying “reading news to understand the world is worse than not reading anything”. I’d rather be dumb than be indoctrinated with a quack view of the world.

The Geopolitics of Oil and Russia’s Knowledge Economy

Writes the Institutional Investor at the Minyanville

All it would take for Russian President Vladimir Putin’s regime to begin to crumble would be for the price of oil to slump to the $70-a-barrel range, former Secretary of State Condoleezza Rice told an audience last week.

Speaking at Everest Capital’s Emerging Markets Forum in Miami, Rice said that if the price of oil remains above the $100-a-barrel mark during the next few years, Putin’s Kremlin would have the means to continue paying off cronies and keeping the current regime — which she described as an “oil syndicate” — intact. With crude currently hovering around $110 a barrel, she said, there is no incentive for Russians to change the nature of their economy.

But the days of a Russia fueled exclusively by petrodollars is waning, especially if the price of crude begins to fall, she said. Ready to replace Putin’s petrostate is a knowledge-based economy crying to break free, said Rice, also a former national security adviser to President George W. Bush and an expert on the Russian political economy. “Wouldn’t it be refreshing to see that the basis of Russian power is the knowledge and creativity of its people? They could be a very big part of the 21st century,” she said.

Rice told the audience at the emerging markets summit a story about how the former president, Dimitri Medvedev, once boasted to her that Russia produced the world’s finest mathematicians. Her response: What if they were actually working in Moscow instead of in Palo Alto and Tel Aviv? She said that Medvedev acknowledged that Russia needed to provide an ecosystem in which its homegrown talent would remain at home and help the country flourish. “The arts and sciences in Russia have been legendary even in the worst of times. Can you imagine how remarkable their economy could be if their leading scientists weren’t leaving for Silicon Valley?” she said.

Besides being extraordinarily dependent on oil, Putin’s regime has done little to censor or monitor the Internet compared to, say, China, according to Rice. The former KGB agent focuses his attention on producing state television broadcasts reminiscent of the Cold War Era — an old-line communist activity that matters little to a younger generation of Russians who receive their news over the Internet, she said.

There are two things of note here:

1. The geopolitics of oil simply posits that the survival of many of the resource dependent welfare states have been moored to high oil prices. That’s because the political leadership uses revenues from resources to buy off the public’s support to maintain their privileges (usually known as the resource curse).

The same desire to use revenues to finance pet projects of politicians also serves at the main incentive for the political leadership around the world, including the Philippines, to engage in resource nationalism during commodity booms

Yet take away the lofty price oil, say by allowing free markets to work and all these autocratic regimes, such as Iran, Venezuela and etc…, collapses. So war will never be necessary for any regime changes. Just allow free markets to clear and despots and tyrants will subsequently vanish.

But the problem is that many western friendly autocratic welfare states are also dependent on elevated oil prices like the GULF states.

Also Obama’s green energy/jobs policies depends on high oil prices too.

The Investor’s Business Daily recently noted that

Energy Secretary Steven Chu admits the administration has no interest in bringing them down…At a hearing this week, Rep. Alan Nunnelee, R-Miss., specifically asked Chu if "the overall goal" of the administration is to "get our price down." Chu's answer was no.

Since this implies that deeply entrenched vested interest groups are in command of the political environment—whose survival again greatly depends on lofty oil prices—the geopolitical imperatives will focus on the manipulation of oil supply and demand, war mongering and importantly inflationist policies. In short, oil politics greatly influence, not only national welfare politics, but also foreign policies.

So while governments may pretend to express care about consumers affected by high oil prices (say by imposing subsidies, cash giving out cash transfers and etc.) and subsequently pin the blame on private companies for greed, in reality, the geopolitics of oil is about the preservation of political entitlements through redistribution of resources from consumers to the political clients (mostly oil producers and allied industries) and their political leadership patrons.

Only free markets will undo such political economic inequality.

2. Russia’s growing knowledge economy is a demonstration of how the internet has been functioning as a pivotal force in reshaping the world’s political economy.

The internet helps spur the development of commercial activities that operates in circumvention of stifling regulations that fosters more underground economy.

Chart from pyramid research

Underground or informal or shadow economies are symptoms of arbitrary and unenforceable laws, lack of property rights, byzantine red tape, high tax regimes, choking bureaucratic regulations, corruption, weak institutions and other political impediments to commerce.

The share of informal economy to Russia’s economy is one of the highest in the world. So as with the Philippines.

I recently quoted the investment guru Doug Casey which I find relevant in the discussion of informal economies,

If you're going to have a ridiculous number of impossible laws, corruption is a good thing. Increasingly, what matters is not the number or even nature of laws on the books in the place you live, but the amount of actual control the state has over private individuals. Corruption subverts idiotic laws; it's the next best thing to abolishing them.

Aside from corruption, big informal economies are to paraphrase Mr. Casey, symptomatic of the subversion of “idiotic” laws. The other way to say this is that anarchy emerges, as expressed by the existence of informal economies, out of the abject failure of the incumbent political order for these political economies.

Bank Regulations as Instruments of Repression

From IFC Review, (hat tip Dan Mitchell)

Banks and other financial services firms had to deal with 60 regulatory changes each working day during 2011, according to a report from Thomson Reuters Governance, Risk & Compliance, reports City AM.

Regulators around the world announced 14,215 changes in 2011, a 16 per cent increase from the 12,179 announcements in 2010.

The report shows that the majority of regulatory activity, 57 per cent, came from the US, while the UK and rest of Europe made up 22 per cent and Asia accounted for 15 per cent.

The volume of announcements, which can include anything from a speech which may signal the direction of a new regulation to a final binding rule, has grown continuously since 2008 when regulators issued 8,704 changes.

The firm warn that the level of announcements will increase even more during 2012 as governments tighten regulation and new directives, including those related to the US Dodd-Frank act, are implemented.’

The incredible pace of regulatory changes (60 regulatory changes a day!!!) will prompt for many innocent people to be charged as criminals as in my experience.

The deluge of banking regulations represents the repressive nature of arbitrary regulations which will and has been used to subjugate the citizenry or the public largely unaware of the existence of these regulations.

Yet these are intensifying signs of desperation by the politicians whom has conscripted, and or colluded, with the banking system to extort resources from the public to sustain their privileges.

In reality, the torrent of new regulations also account for as disguised capital controls or a form of financial repression. Harvard’s Carmen Reinhart in today’s Bloomberg OpEd writes,

some of these requirements may be motivated by a government’s desire to curb money laundering and tax evasion, the measures also amount, in some cases, to administrative capital controls.

So the public is being wangled financially and oppressed politically through a variety of new arbitrary regulations under the cover of money laundering and or tax evasion. Laws are being used to violate and restrain our freedom in the name of political expediency.

Anti Money Laundering Laws (AMLA) is an example of the numerous bank regulations that has been covered by the alterations in the banking regulatory regime. Cato’s Dan Mitchell discusses the law’s ineffectiveness.

Afghan War: US Soldier Kills 16 Civilians

Ghastly outcome from US imperial policies.

From the Bloomberg,

A U.S. soldier shot to death 16 Afghan civilians in their homes before returning to his base and being taken into custody, Afghan and NATO officials said.

The shooting spree yesterday threatens to reignite anti- American protests weeks after a Koran-burning incident triggered violence. Women and children were among those killed in the attacks in the southern province of Kandahar, which has been a stronghold for the Taliban.

Ever wonder why the proliferation of anti-American sentiment especially in places where the US intervenes? And why there will always acts of reprisal via terrorism? Interventionism breeds terrorism.

Phisix: The Journey Of A Thousand Miles Begins With A Single Step

The much awaited breathing space for the Phisix has finally arrived, but the crucial question is how long and how deep will this last?

This week’s marginal .71% decline has been only the second weekly decline for the year, or 2 out of the 10 weeks into the 1^st quarter of 2012.

Market Internals Exhibits Healthy Rotational Process

But the actions of the local benchmark have not been representative of the overall dynamics.

Despite this week’s profit taking, market internals continue to exhibit positive developments. The weekly advance-decline spread seems to be improving, highlighted by a positive market breadth where there had been marginally more advancing issues than declining issues.

This implies that the current retrenchment has been more about the big market caps.

Of the 10 largest free floated market cap components of the Phisix, only Bank of the Philippine Island [PSE:BPI] and San Miguel Corporation [PSE:SMC] posted gains thereby partly offsetting the losses seen in the major benchmark, while the rest were in the red, led by SM Prime Holdings [PSE:BPI] and Philippine Long Distance Company [PSE:TEL]. Combined these issues account for 62.2% of the Phisix market capitalization as of Friday’s close.

So market internals have only been affirming our rotational process at work.

As I previously wrote[1],

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.

And amidst the Phisix correction, sectoral performance had also been mixed. The industrials and the mining sector, whom have been this year’s laggards has apparently outperformed their peers.

Meanwhile the gains in the industrial sector has been led by water utility Manila Water Corporation [PSE:MWC] the laggard independent power producer Energy Development Corporation [PSE:EDC] and electricity distribution monopoly Meralco [PSE: MER]

Year-to-date EDC and SMC has deviated from the bullish path of their contemporaries. My hunch is that the anomalies in the correlations should end soon.

Average Daily peso volume (weekly basis) remains robust despite the profit taking sessions.

Peso Firming Against Inflating Currencies

Yet despite sporadic selling pressures in some of the big cap issues, net foreign trade exhibited sustained inflows. In short, locals took profits while foreign funds have been net buyers of local equities.

And on the account of a policy induced “search-for-yield” dynamics here and abroad which will likely be stimulated even more by cumulative efforts to keep interest rates at zero bound in major economies, I expect an acceleration of foreign fund flows into local assets (stocks, bonds and properties) to be priced into the local currency, the Philippine Peso.

Foreign portfolio flows in 2011 moderated[2], partly manifesting on global apprehensions on the Euro crisis. Yet if the currently instituted liquidity based rescue programs temporarily does alleviates the crisis in the Eurozone, the risk ON environment will whet the appetite of foreign arbitrageurs.

Again as I recently wrote[3],

should portfolio flows into the Philippines intensify, through the PSE and local bond markets, then the lagging Philippine Peso will likely see more room for appreciation.

And the local currency will not only appreciate against the US dollar but likewise against all countries undertaking massive credit easing measures.

We are already seeing this in the context of the Peso vis-à-vis the Euro (upper) and the Japanese Yen (lower), where we seem to be witnessing major trend reversals.

The Peso has also been appreciating against the Swiss Franc (upper) and the British Pound (lower)

The currency markets have only been validating what the great Ludwig von Mises taught us about valuing currencies[4].

These observers do not understand that the valuation of a monetary unit depends not on the wealth of a country, but rather on the relationship between the quantity of, and demand for, money. Thus, even the richest country can have a bad currency and the poorest country a good one.

What this means is that the Philippines (and our ASEAN contemporaries) is likely to lure spread arbitrages or carry trades from US, Japanese, Swiss and European investors or punters that is likely to kick start a foreign stimulated boom in the local assets including those listed on the Philippine Stock Exchange.

The Journey Of A Thousand Miles Begins With A Single Step

The bottom line is that given the current conditions where major economies have just initiated on recalibrating their policies to ease credit further, then it is unlikely to expect a material profit-taking mode. Since the effects of these policies usually come with a time lag, we can expect a strong momentum perhaps until the 2^nd quarter of the year where some of the credit easing programs are due to end.

In addition, aside from a positive market breadth, the markets hardly showed of any signs of distribution. Last week only reinforced my long held view of a broad based rotational process where there had been a rotation away from big caps to the broader market (second and third tier issues), rotation among sectors (from leaders to laggards) and rotation of issues within specific sectors.

All of which have been manifestations of an inflationary boom.

Moreover, if a correction does occur, any profit taking of around 5-10% should be reckoned as healthy and a buying window. Remember, predicting the market over the short term can be very tricky.

Nonetheless it is important to realize that the long term is an accretion of short term actions. To analogize, I would not see tomorrow if I die today, thus tomorrow is a function of my living of every moment until tomorrow, or as represented in a popular axiom, the journey of a thousand miles begins with a single step.

This extrapolates that for any long term projections to be fulfilled, the accumulated dominant direction of short term actions, in spite of sharp fluctuations, has to be in the path of the long term.

For instance, I’ve long asserted my audacious prediction that the Phisix is bound for and will breach the 10,000 levels.

This I believe my target isn’t an issue of an IF but a WHEN. This will possibly be fuelled by an amalgam of factors such as a domestic boom bust cycle[5], global wealth convergence trends and or globalization.

While there may be medium term obstacles such as the recent contagion from an external bubble bust 2007-2008, the general trend of the Phisix has been one of the upside and has been confirming the secular bull market trend.

This seems reminiscent of the past 17-year cycle where the previous bullmarket had two interregnums (green ellipses) prior to the Phisix climax in 1994-1997.

I am not certain whether we will see a repeat of the discontinuities similar to the 1986-1997 bull market cycle or will suffer more than the past cycle before reaching my goal or if the Phisix will proceed to double. What needs to be monitored are drivers of the current trends and the whereabouts[6] of the present boom cycle based on internal and external dynamics.

So far even as the Phisix has reached half of my target, domestic systemic leverage has yet to reach bubble proportions. Thus while another external contagion bust may hamper the current phase anew, for as long as any intermissions have NOT originated from domestic imbalances, the secular bullish trend of the Phisix should be expected to continue.

In finale, anyone who argues about the long term without the series of short term actions confirming their views is engaged in a practise of wishful thinking.

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[1] See New Record Highs for the Philippine Phisix; How to Deal with Tips February 20,2012

[2] IMF.org THE PHILIPPINES 2011 ARTICLE IV CONSULTATION, IMF Country Report March 2012

[3] See Phisix: Expect A Breakout from the 5,000 level Soon, February 26, 2012

[4] Mises, Ludwig von 3. Trend Of Depreciation II. THE EMANCIPATION OF MONETARY VALUE FROM THE INFLUENCE OF GOVERNMENT On The Manipulation Of Money And Credit p.25 Mises.org

[5] See The Phisix And The Boom Bust Cycle, January 10, 2011

[6] See After 5,000: What’s Next for the Phisix? March 5, 2012