The Unraveling Global ‘Earth Hour’ Energy Industry Bubble

Like the welfare state, the supposedly politically correct environmental position represented by green energy projects are being exposed for what they truly are—delusions of grandeur.

Political support for green ‘renewable’ energy has been diminishing in Western nations.

From the Wall Street Journal, (bold emphasis mine)

The green economy strikes again, or shall we say strikes out. Oakland-based Solar Trust of America filed for bankruptcy this week, leaving its planned multibillion-dollar plant in California on ice. The company declared itself insolvent after its parent—Germany's Solar Millennium—filed for bankruptcy in December, and Solar Trust realized it wouldn't be able to pay a $1 million rent check due April 1.

Solar Millennium, in turn, had been hoping to sell a controlling stake in Solar Trust to the German company, solarhybrid, until solarhybrid also filed for bankruptcy in March. Then there's Q-Cells, another German solar company, which also filed for bankruptcy this week, sharing that fate with Solon, the Berlin-headquartered photovoltaic firm that went bust in December.

This cascade of insolvencies comes after Germany decided last year to slash the above-market prices it forces utilities to pay for renewable energy sources and to cut the subsidies that have locked German taxpayers into €100 billion in handouts to the solar industry. Even before the subsidy cut, German solar manufacturers were struggling under price pressure from China, which has responded to Western subsidies by ramping up its own production, undercutting higher-cost European and American producers in the process.

Greens in Germany and beyond are protesting that if only governments would continue soaking taxpayers to prop up solar, wind and other low-carbon favorites, these technologies would be viable. But even that is far from clear. Q-Cells and others had responded to Chinese competition by outsourcing some of their own production to Asia to cut costs. That wasn't enough to save them.

The real story is that green manufacturing, which was supposed to be the planet's salvation and Europe's new industrial base, proved to be as vulnerable to low-cost competition as many other industries. Far from creating a sustainable comparative advantage, German subsidies sparked the very rivalry now putting its home-grown industry out of business.

The Italian government appears to have taken note of these economic realities and last weekend said it would slash "excessive" subsidies for solar and wind power. Industry Minister Corrado Passera uttered the obligatory promise that Rome remains committed to generating a carbon-free, wind- and sun-powered economy, but that "we need to do so without overreliance on taxpayer resources."

So economic reality has been prevailing over mass hysteria.

Aside from gross mismanagement, mainly due to the moral hazard of political support which has been wasting taxpayers money, competition from Asia has added to the industry’s woes.

Of course, the most important factor is that there is no such thing as a free lunch, or the Santa Claus Principle, as most political zealots believe.

And considering the tremendous financial pressures to survive the welfare state, politicians see the latter as more of a priority than sustaining the economically unviable green industry, which ironically, has been contributing to the welfare state’s financial burden.

Under fiscal pressure from the ongoing debt crisis ordeal, Spain has also cut subsidies to unfeasible political pet projects.

From Bloomberg, (bold emphasis mine)

Spain halted subsidies for renewable energy projects to help curb its budget deficit and rein in power-system borrowings backed by the state that reached 24 billion euros ($31 billion) at the end of 2011.

“What is today an energy problem could become a financial problem,” Industry Minister Jose Manuel Soria said in Madrid. The government passed a decree today stopping subsidies for new wind, solar, co-generation or waste incineration plants.

The system’s debts were racked up as revenue from state- controlled prices failed to cover the cost of delivering power. Costs have swollen in the past five years because of an increase in regulated payments for the power grid, support for Spanish coal mines and subsidies for renewable energy plants…

Spain’s decision is a “first step” to rein in debts, and officials are working on a broader package of measures, Soria said. The nation isn’t planning a levy on hydropower or nuclear plants, nor will it take on power-system liabilities, he said.

The Spanish action follows Germany’s announcement last week that it would phase out support for solar panels by 2017 and the U.K.’s legal battle to reduce its subsidies for the industry.

Spain was an early mover in developing renewables plants, and support for wind energy helped Iberdrola become the world’s biggest producer of clean power, with plants in the U.S. and Brazil. The industry sustains about 110,000 Spanish jobs, according to the Renewable Energy Producers Association.

The government is wrestling with competing priorities as it struggles to convince investors it can meet a target to cut the budget deficit to 4.4 percent of gross domestic product this year, from 8 percent last year, while trying to create jobs in a country where 23 percent of workers are unemployed.

Oooooh that ought to hurt.

A relevant quote from Warren Buffett on bubbles,

Only when the tide goes out do you discover who's been swimming naked.

Apparently green energy has been caught swimming naked and whose bubble seems to have been pricked.

Yet those proposing to promote green energy in the Philippines through the same political route of subsidies (whether consumer or supplier based) ought to open their eyes and see what has been happening abroad.

Any industry that cannot survive on its own [because the consumers don’t want them] and which requires political fiat to thrive extrapolates to a redistribution of resources from the economy to the political privileged groups. This is rank crony capitalism.

And crony capitalism results to huge wastages, economic inefficiency, discoordination of the economy and corruption among the many other nasty side effects. And this accounts for as the reverse Robin Hood where the poor and the middle class subsidizes the rich cronies (through taxes and inflation).

Worst is that the underlying (feel good) dogma of such environmental political religion has been founded on supposed infallibility and omniscience of computer based models.

As the great H.L. Mencken wrote,

Civilization, in fact, grows more and more maudlin and hysterical; especially under democracy it tends to degenerate into a mere combat of crazes; the whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by an endless series of hobgoblins, most of them imaginary.

Unintended Consequences from the Libyan Intervention

Benjamin Friedman of the Cato Institute enumerates the unintended consequences of the foreign policy of military interventions in Libya in 2011

Writes Mr. Friedman (bold emphasis added)

Advocates of both interventions underestimate coercion’s contribution to political order. Autocratic rule in these countries is partially a consequence of state weakness—the absence of strong liberal norms, government institutions, and nationalism. By helping to remove the levers of coercion in places like Libya and Syria, we risk producing anarchy—continual civil war or long-lived violent disorder. Either outcome would likely worsen suffering through widespread murder, a collapse of sanitation and health services, and stunted economic growth conducive to well-being. And the most promising paths to new of forms of unity and order in these states are illiberal: religious rule, war, or new autocrats. The humanitarian and liberal cases for these interventions are unconvincing.

Aside from Qaddafi’s fall, U.S. leaders gave three primary rationales for military intervention Libya (I repeatedly criticized them last spring). One was to show other dictators that the international community would not tolerate the violent suppression of dissenters. That reverse domino theory has obviously failed. If Qaddafi’s fate taught neighboring leaders like Bashar al-Assad anything, it is to brutally nip opposition movements in the bud before they coalesce, attract foreign arms and air support, and kill you, or, if you’re lucky, ship you off to the Hague.

The second rationale was the establishment of liberal democracy. But Libya, like Syria, lacks the traditional building blocks of liberal democracy. And history suggests that foreign military intervention impedes democratization. Whether or not it manages to hold elections, Libya seems unlikely to become a truly liberal state any time soon. As with Syria, any path to that outcome is likely to be long and bloody.

Meanwhile, Libya’s revolution has destabilized Mali. Qaddafi’s fall pushed hundreds of Tuareg tribesmen that fought on his side back to their native Mali, where they promptly reignited an old insurgency. Malian military officers, citing their government’s insufficient vigor against the rebels, mounted a coup, overthrowing democracy that had lasted over twenty years. Thus far, the military intervention in Libya has reduced the number of democracies by one.

The most widely cited rationale for helping Libya’s rebels was to save civilians from the regime. Along with many commentators, President Obama and his aides insisted that Qaddafi promised to slaughter civilians in towns that his forces were poised to retake last March. Thus, intervention saved hundreds of thousands of lives. A minor problem with this claim is that Qaddafi’s speeches actually threatened rebel fighters, not civilians, and he explicitly exempted those rebels that put down arms. More importantly, if Qaddafi intended to massacre civilians, his forces had ample opportunity to do it. They did commit war crimes, using force indiscriminately and executing and torturing prisoners. But the sort of wholesale slaughter that the Obama administration warned of did not occur—maybe because the regime’s forces lacked the organization needed for systematic slaughter.

The limited nature of the regime’s brutality does not itself invalidate humanitarian concerns. It might be worthwhile to stop even a historically mild suppression of rebellion if the cost of doing so is low enough. The trouble with the humanitarian argument for intervention in Libya is instead that the intervention and the chaos it produced may ultimately cause more suffering than the atrocities it prevented. Libya’s rebel leaders have thus far failed to resurrect central authority. Hundreds of militias police cities and occasionally battle. There are many credible reports that militias have unlawfully detained thousands of regime supporters, executed others, driven mistrusted communities from their homes, and engaged in widespread torture.

The looting of Libya’s weapons stockpiles is also likely to contribute to Libya’s misery, in part by arming the militias that obstruct central authority. The weapons depots reportedly included thousands of man-portable air-defense systems (MANPADS), some of which may still work. It is worth noting that the widely-reported claim that Libya lost 20,000 MANPADS appears exaggerated. That figure comes from Senate testimony last spring by the head of Africa Command, who did not substantiate it (my two requests to Africa’s Command PR people for information on this claim were ignored). A State Department official recently gave the same figure before essentially admitting that we have no idea what the right figure is.

As always, the politics of interventionism has been veneered with noble “humanitarian” intentions which not only fails to meet their goals but eventually backfires.

In reality, "noble intentions" has always been used as cover to promote the interests of parties who operate 'behind the curtains' through the state.

Incredible Futuristic Eyeglasses from Google

From KurzweilAI,

In a post on Google Plus, Google X employees unveilved a prototype of the company’s “Project Glass” wrap-around augmented-reality glasses.

The glasses can superimpose information on the lenses and allow the wearer to send and receive messages via voice commands, similar to Siri.

A built-in camera can record video and take pictures.

“We’re sharing this information now because we want to start a conversation and learn from your valuable input,” the Google employees wrote. “Please follow along as we share some of our ideas and stories. We’d love to hear yours, too. What would you like to see from Project Glass?”

See video below

So eyeglasses with many digital based functionalities that can be found in today's Smartphones or the tablet. (X-Ray vision next? Lol!)

The pace of technological advancement has taken on a fantastic leap. And these have been enabled and facilitated by market forces in spite of the current spate of governments interventions.

And this is why I remain cautiously or guardedly optimistic about the future as forces of decentralization gnaws away at the foundations of 20th century centralized welfare-warfare states.

Quote of the Day: Government Driven Inequality

The regulatory and tax states have made the lower classes into pariahs from the point of view of the commercial world. They are expensive to hire and hard to fire, which makes them even more expensive to hire. The minimum wage is bad enough, but that is only the beginning. A giant machinery governs how, where, when, and under what terms they can work and enjoy fulfilling lives. Business creation is harder than ever for anyone but the highly educated elite.

When they do get jobs, the whole system is allied against their social advancement. Cash business is criminalized. Everything requires a permit. The bureaucracy rules, instead of the entrepreneur. The laws, taxes, mandates, programs — and everything else the state has done — work like a giant bed of sharp rocks in the middle of a river that punishes those who tried to get to the other side.

Inflation and the Fed’s interest-rate policy have punished the accumulation of wealth and shortened the time horizon of the lower third of the population classes. The rise of the police state and the criminalization of their lifestyle have driven them into a culturally, socially, and legally marginal existence, so that they are always one step away from entanglement with police, courts, and jail.

As government grows — and the regulatory and tax states expand — and as the prohibitions on behaviors, services, and goods grow and grow, society becomes ever less economically mobile and dynamic. The class system that is part of every society becomes a caste system of entrenched position. It becomes a society of the put-upons versus the privileged.

That’s an excellent excerpt from a book review by Jeffrey Tucker at the Laissez Faire Books.

Every choice represents a tradeoff. Growth of government equates to reduced growth for the private sector. And where choices are politicized, the end result is wealth inequality prompted for by asymmetric political exposures—political inequality. So wealth becomes concentrated to the political class and their cronies at the expense of everyone else. Yet media and the academe have been blind to these developments.

Easter’s Message: There is Hope for Freedom

There is hope for Freedom. And that’s Easter’s message according to this splendid article from Judge Andrew Napolitano…

Today it seems the power of the government continues to expand and the freedom of the individual continues to shrink. The loss of freedom comes in many forms. Sometimes it is direct and profound, as when the government stops you from doing what you formerly had the freedom to do – like choose your own doctor and your own health care insurance or choose not to have health care insurance. Sometimes it is more subtle – like when the government prints money to pay its bills and, as a result, all the money you already have loses much of its value. And sometimes the government steals freedom without you knowing it – like when federal agents write their own search warrants, authorizing themselves to learn of your computer use or medical or banking records; and they never tell you what they've done.

Freedom is the ability of every person to exercise his own free will, rather than be subject to the will of someone else. Free will is the essence of humanity, and humanity is God's greatest gift. When the government affirmatively takes away freedom, the government violates the natural law; it prevents us from having and utilizing the means to the truth. Your moral ability to exercise your free will to seek the truth is your natural right, and the government may only morally interfere with the exercise of that right when you have used fraud or force to interfere with the exercise of someone else's natural rights….

Easter is the linchpin of human existence: With it, life is worth living, no matter its cost or pain. Without it, life is meaningless, no matter its fleeting joys or triumphs. Easter has a meaning that is both incomprehensible and simple. It is incomprehensible that a human being had the freedom to rise from the dead. It is simple because that human being was and is God. Easter means that there is hope for the dead. And if there's hope for the dead, there's hope for the living.

Read the rest here

Lenten Thoughts for the Day: My Salute to Holy Week Entrepreneurs

Celebrating the Lenten tradition does not eliminate human needs and wants.

So while some entrepreneurs take these as opportunities to benefit financially, in reality, the main beneficiaries are the consuming public especially when many, if not most, people elect to spend time away from work. Life becomes a lot more convenient for the most of us.

Thus I salute entrepreneurs who elect to tradeoff leisure time to open shop when most businesses are closed. This is an example of ethical self-interest which extrapolates into public good.

In the words of investing guru Doug Casey

It's in your selfish best interest to provide the maximum amount of value to the maximum number of people

And the provision of public service through trade is, in effect, loving and servicing one's neighbors, clues of which can be found in the Bible.

From Galatians 5:13-14

For you were called to freedom, brothers. Only do not use your freedom as an opportunity for the flesh, but through love serve one another. For the whole law is fulfilled in one word: “You shall love your neighbor as yourself.”

Chart of the Day: The Inflation Cycle

Today’s crisis-political response feedback loop mechanism incisively captured by this diagram from Zero Hedge.

The reason for this as resoundingly pointed out by Professor Ludwig von Mises in his magnum opus the Human Action, more than half a century ago,

The hindrance that the monetary or circulation credit theory had to overcome was not merely theoretical error but also political bias. Public opinion is prone to see in interest nothing but a merely institutional obstacle to the expansion of production. It does not realize that the discount of future goods as against present goods is a necessary and eternal category of human action and cannot be abolished by bank manipulation. In the eyes of cranks and demagogues, interest is a product of the sinister machinations of rugged exploiters. The age-old disapprobation of interest has been fully revived by modern interventionism. It clings to the dogma that it is one of the foremost duties of good government to lower the rate of interest as far as possible or to abolish it altogether. All present-day governments are fanatically committed to an easy money policy.

The more things change, the more they stay the same.

Why Property Rights is NOT a Public Policy Problem

I know most people are on a vacation this Passover week or the culmination of the Lenten Season. But for as long as the computer is within my handle, I’d continue to keep sharing ideas of liberty.

Happy Easter in advance.

Below is a superb essay by Professor David Henderson on how private property resolves our societal problems.

Should restaurants allow smoking or not? Should schools teach evolution or intelligent design or both? Should insurance companies cover contraception? Should I be able to take off my shoes in your living room?

You might think that that last question doesn't belong with the first three. After all, the first three questions are momentous ones about "public policy." The last one is only about the rules you have for my behavior in your living room—a "private-policy" question. And your answer to that question will depend on how you want to use your property.

But think about what you just read: Your answer to whether I should be able to remove my shoes in your living room depends on how youwant to use your property. What is implicit here, but obvious to all, is that the choice is yours. I have no say in the matter. That doesn't mean you won't take account of my thoughts and feelings. You will. Let's assume that you find it distasteful for me to take off my shoes, but that you like my company. Let's further assume that telling me that I can't get comfortable by taking off my shoes will mean that I won't want to visit you. Then you will trade off your distaste at having me shoeless with the pleasure you take from my company. If one outweighs the other, in your subjective estimation, then you'll choose accordingly.

Notice how property rights solve the problem. It's your living room and so you get to choose. How your living room gets used is not a public-policy problem.

Read the rest here

As a final point, the capital markets, which includes stock markets, are rooted on property rights. Take away property rights, capital and stock markets ceases to exist.

Quote of the Day: Blaming Capitalism, Redux

But blaming capitalism for the world’s economic ills is like blaming the guy who invented gunpowder for nuclear holocaust. Sure, you could make an argument that the two are loosely related, but the real blame lies with the system itself– a system which awards perverse power and control to an elite few.

As I’ve often written, future historians will look back on our time with utter incredulity and wonder how we could allow such a system to take over… to allow a tiny handful of men to control the lives and livelihoods of billions of people.

Certainly, injustice in the world is great. There are a lot of people who are suffering, people who have had their lives turned upside down from state-sponsored corporate welfare.

Holding out for the government to fix it, though, is like waiting for a thief to give your stuff back. It’s not going to happen. They’re instrumental in perpetuating the problem.

That’s from the Mr. Simon Black of the sovereignman.com commenting on the fallacies of the Occupy Movement.

My earlier quote of the day on blaming capitalism here.

Let me add that not only governments “perpetuate” the problem, they are THE problem. If “a tiny handful of men to control the lives and livelihoods of billions of people”, then governments represent as instruments of control by the political class in complicity with vested interest groups who profit from political rents or popularly known as “state-sponsored corporate welfare”.

These are the people who disdain the free market, capitalism or economic freedom for the simple reason of aversion to competition, which stems from valid and real concerns of the erosion of their current usufruct privileges, which they enjoy out of government protection and redistribution. Take away government’s aegis, then these parasites will be vanquished.

And their tentacles of venal influence for the public to continue with their servitude extends vastly through the incumbent establishment institutions—media, academia, Wall Street and many others, covering all the aspects of our lives.

So the analogy of “waiting for a thief to give your stuff back” is correct. These politically entrenched groups will fight to preserve their unsustainable privileges until the point of self-destruction. The chickens will come home to roost.

Occupational Licensing: Tokyo Eases Restrictions on Blowfish Culinary Licenses

Japan’s exotic delicacy, the Porcupine fish or commonly known as the blowfish can be fatal to people. The preparation of which requires skilled expertise.

Yet Tokyo’s city government seeks to promote competition by reducing regulations that once protected experts.

From the Reuters,

With a scoop of a net Tokyo chef Naohito Hashimoto selects a poisonous blowfish, considered a delicacy in Japan, and with a few deft strokes of his gleaming knife starts the delicate process of preparing it for a customer.

In moments, Hashimoto has separated the edible parts of the fish from organs filled with a poison more deadly than cyanide.

For more than six decades, dicing blowfish in Tokyo has been the preserve of a small band of strictly regulated and licensed chefs, usually in exclusive restaurants.

But new laws coming into effect from October are opening the lucrative trade to restaurants without a license, making chefs like Hashimoto see red.

"We have spent time and money in order to obtain and use the blowfish license, but with these new rules anybody can handle blowfish even without a license," said Hashimoto, a blowfish chef for some 30 years.

Occupational licensing is a form of protectionism which politicizes the supply of labor through permissions, licenses, restrictions, and cartelization of jobs that has been meant to raise incomes for the people in these fields.

Yet the effects of occupational licensing has done little to benefit the consumers.

In a 2008 interview, Professor Morris Kleiner, labor economics and public policy professor at the University of Minnesota’s Humphrey Institute and Carlson School of Management, said,

Occupational licensing has either no impact or even a negative impact on the quality of services provided to customers by members of the regulated occupation. Additionally, as occupations become licensed, members of regulated occupations see their earnings go up.

Well I guess Mr. Kleiner’s observation has been validated from Japan’s blowfish culinary experience.

Again from the same Reuters article,

The Tokyo Metropolitan Government says city laws covering the serving of blowfish should be changed to reflect changing times and hope that relaxing the rules will cut prices and bring Tokyo in line with the rest of the nation.

"Outside of Tokyo, the regulations for blowfish are even more relaxed and yet there are hardly any poison-related accidents," said Hironobu Kondo, an official at the city's Food Control Department.

"There is the hope that the number of restaurants with unlicensed chefs serving blowfish will rise, and that blowfish as an ingredient will be used not only for traditional Japanese foods but also others such as Chinese and Western foods."

My guess is that many of the today's social problems may partly involve job protectionism, but has been overlooked by contemporaneous analysis. [I will deal with this in the future]

Yet I hope that more of such marginal acts to liberalize the economy and induce competition will become a common practice in Japan and elsewhere around the globe.

China Deepens Liberalization of Capital Markets

I have pointed out that the ongoing tensions in the political spectrum in China may have been ideologically based.

Entrepreneurs in China may have grown enough political clout enough to challenge to the degenerative command and control political structure of the old China order.

And it seems as if the forces of decentralization seem to be getting the upper hand, as China undertakes further liberalization of their capital markets.

From the Bloomberg,

China accelerated the opening of its capital markets by more than doubling the amount foreigners can invest in stocks, bonds and bank deposits as the government shifts its growth model to domestic consumption from exports.

The China Securities Regulatory Commission increased the quotas for qualified foreign institutional investors to $80 billion from $30 billion, according to a statement on its website yesterday. Offshore investors will also be allowed to pump an extra 50 billion yuan ($7.95 billion) of local currency into the country, up from 20 billion yuan

China, the world’s second-biggest economy, has pledged this year to free up control of the yuan and liberalize interest rates as the government deepens reforms to revive growth and offset slowing exports and a cooling housing market. China needs to rely more on markets and the private sector as its export- oriented model isn’t sustainable, World Bank President Robert Zoellick said in February.

Here’s more

The regulator had granted a total of $24.6 billion in quotas to 129 overseas companies since the program first started in 2003 through the end of March. About 75 percent of assets were invested in Chinese stocks, with the rest in bonds and deposits, according to the statement.

The CSRC accelerated the program last month, granting a record $2.1 billion of quotas to 15 companies. It was more than the $1.9 billion in 2011 as a whole.

“The QFII program enhances our experience of monitoring and regulating cross-board investment and capital flows,” the CSRC said in the statement. “It is a positive experiment to further open up the market and achieve the yuan convertibility under the capital account.”

Premier Wen Jiabao is seeking to attract international investment as economic growth cools, prompting the benchmark Shanghai Composite Index to slump 24 percent in the past year. The country posted its largest trade deficit since at least 1989 in February as Europe’s sovereign-debt turmoil damped exports.

China needs to break a banking “monopoly” of a few big lenders that makes easy profits, Wen told private company executives in Fujian province yesterday, as cited by China National Radio.

Breaking up a privileged banking monopoly essentially transfers resources to the productive sector which should serve China well, as well as, serves as welcome and enriching news for Asia and the rest of the world.

And by liberalization of their capital markets, China will become more integrated with the world, and thus diffusing risks of brinkmanship geopolitics, or the risks of military confrontations.

Again such development adds evidence to my theory that the Spratlys tensions may have just been about political leverage or about helping promote indirectly the US arms sales.

Nevertheless, China has yet to face the harmful unintended consequences of her past and present Keynesian bubble policies.

However the long term is key, or far more important. The kind of reforms matters most.

And reforms that deepen economic freedom or laissez faire capitalism (away from state capitalism) in China and the attendant development of capital markets could likely mean that the rest of Asia may follow suit. The implication is that regional and domestic capital will less likely be recycled to the West, and instead would find more productive use at home or a ‘home bias’ for Asian investors.

Moreover, the crumbling welfare states of the west would mean more capital flows into the Asia as savings seek refuge from sustained policies of inflationism.

All these should accentuate my wealth convergence theory.

Of course, China’s strategy to liberalize her capital markets may also represent a move to challenge the US dollar standard.

Recently BRICs officials slammed US and Euro’s monetary “tsunami” policies and in the process has been contemplating to put up their version of a World Bank—joint development bank.

While these gripes have been valid, the latter’s action has little substance. What the other ex-China BRICs should to do is to mimic China’s path to rapidly liberalize their economy and their capital markets.

That’s because societal integration functions as a natural force when commercial activities or economic freedom intensifies.

As the great Ludwig von Mises wrote about the social effects of the division of labor,

Social cooperation means the division of labor.

The various members, the various individuals, in a society do not live their own lives without any reference or connection with other individuals. Thanks to the division of labor, we are connected with others by working for them and by receiving and consuming what others have produced for us. As a result, we have an exchange economy which consists in the cooperation of many individuals. Everybody produces, not only for himself alone, but for other people in the expectation that these other people will produce for him. This system requires acts of exchange.

The peaceful cooperation, the peaceful achievements of men, are effected on the market. Cooperation necessarily means that people are exchanging services and goods, the products of services. These exchanges bring about the market. The market is precisely the freedom of people to produce, to consume, to determine what has to be produced, in whatever quantity, in whatever quality, and to whomever these products are to go. Such a free system without a market is impossible; such a free system is the market.

Picture of the Day: Capitalism

This picture practically captures the tangible benefits of capitalism to mankind…

…technology convergence, innovation, productivity impelled deflation et.al. Many gadgets of the past have now been bundled into one that serves to the convenience of the consumers.

Simply incredible.

Of course, the picture does not include the intangible benefits—the better quality of life from the services these gizmos have been providing us.

Professor Russ Roberts rightly calls this picture “worth a thousand words”. Indeed

Yet I am fortunate to have witnessed such progression in my lifetime.

And I further believe that the coming generations will see even more of this, in spite of the intense challenges posed by the archaic welfare based industrial age political system.

Video: Economics is Fun: Why Economics Isn't (Natural) Science

Dr Madsen Pirie of Adam Smith Institute does a great job in explaining vivaciously why economics isn't (natural) science, which conventional practitioners try to mold them into--through statistical or econometric models.

Here's a good quote [1:07]

When an economist tries to simplify it by leaving out stuff by, so that a small model can be created you have assumed away the real world.

(hat tip Greg Ransom)



Economics is the youngest of all sciences to quote the great Ludwig von Mises.

And it is important to note that the science of economics represents a subdiscipline to the science of human action. Again Professor Mises in his magnum opus Human Action,

The scope of praxeology is the explication of the category of human action. All that is needed for the deduction of all praxeological theorems is knowledge of the essence of human action. It is a knowledge that is our own because we are men; no being of human descent that pathological conditions have not reduced to a merely vegetative existence lacks it. No special experience is needed in order to comprehend these theorems, and no experience, however rich, could disclose them to a being who did not know a priori what human action is. The only way to a cognition of these theorems is logical analysis of our inherent knowledge of the category of action. We must bethink ourselves and reflect upon the structure of human action. Like logic and mathematics, praxeological knowledge is in us; it does not come from without.

All the concepts and theorems of praxeology are implied in the category of human action. The first task is to extract and to deduce them, to expound their implications and to define the universal conditions of acting as such.

And the difference between the science of human action from natural science in the words of Mises (emphasis added)

WHAT differentiates the realm of the natural sciences from that of the sciences of human action is the categorical system resorted to in each in interpreting phenomena and constructing theories. The natural sciences do not know anything about final causes; inquiry and theorizing are entirely guided by the category of causality. The field of the sciences of human action is the orbit of purpose and of conscious aiming at ends; it is teleological.

Both categories were resorted to by primitive man and are resorted to today by everybody in daily thinking and acting. The most simple skills and techniques imply knowledge gathered by rudimentary research into causality. Where people did not know how to seek the relation of cause and effect, they looked for a teleological interpretation.

Another US Government Sponsored ‘Earth Hour’ Company Goes Bust

First, mainstream environmental politics tell us of the need to become energy independent

Next, mainstream environmental politics tell us that people have been mainly responsible for the deterioration of the environment [based on computer models].

Third environmental politics tell us of the need to shift to green energy, by suggesting that prices of oil should rise to facilitate such a shift.

I may add this really serves as cover to promote the interest as well as to ensure the survival of welfare state nations, whom has depended on the sustainment of lofty oil prices to bribe their citizenry for them to stay in power.

Overall, mainstream environmental politics has been about promoting the privileges of a few entrenched vested interest groups through political privileges of social control by immersing the public with indoctrination based on tomfoolery and propaganda.

So how has the business of green energy fared?

Here is Zero Hedge, (bold emphasis mine)

Solyndra was just the appetizer. Earlier today, in what will come as a surprise only to members of the administration, the company which proudly held the rights to the world's largest solar power project, the hilariously named Solar Trust of America ("STA"), filed for bankruptcy. And while one could say that the company's epic collapse is more a function of alternative energy politics in Germany, where its 70% parent Solar Millennium AG filed for bankruptcy last December, what is relevant is that last April STA was the proud recipient of a $2.1 billion conditional loan from the Department of Energy, incidentally the second largest loan ever handed out by the DOE's Stephen Chu. That amount was supposed to fund the expansion of the company's 1000 MW Blythe Solar Power Project in Riverside, California. From the funding press release, "This project construction is expected to create over 1,000 direct jobs in Southern California, 7,500 indirect jobs in related industries throughout the United States, and more than 200 long-term operational jobs at the facility itself. It will play a key role in stimulating the American economy,”said Uwe T. Schmidt, Chairman and CEO of Solar Trust of America and Executive Chairman of project development subsidiary Solar Millennium, LLC." Instead, what Solar Trust will do is create lots of billable hours for bankruptcy attorneys (at $1,000/hour), and a good old equity extraction for the $22 million DIP lender, which just happens to be NextEra Energy Resources, LLC, another "alternative energy" company which last yearreceived a $935 million loan courtesy of the very same (and now $2.1 billion poorer) Department of Energy, which is also a subsidiary of public NextEra Energy (NEE), in the process ultimately resulting in yet another transfer of taxpayer cash to NEE's private shareholders.

As Bloomberg notes: "The company joins Energy Conversion Devices Inc., a U.S. solar manufacturer that suspended production last year; LSP Energy LP, the owner of a natural-gas-fired power plant in Mississippi; Ener1 Inc., maker of lithium-ion batteries for plug-in electric cars; solar-panel maker Solyndra LLC; and energy storage company Beacon Power Corp. (BCONQ) in bankruptcy."

And so central planning fails again, and again, and again, and again. But it sure will be better with the centrally planned monetary (and in the absence of a working Congress - also fiscal) policy. Because this time it really will be different.

US taxpayer's money down the drain again.

Politics based on social control, this time applied to environmentalism, fits very much into Ben Franklin/Albert Einstein’s description of insanity —doing the same thing over and over and expecting it to come out different. [The insanity quote may have been misattributed to Mr. Franklin and to Mr. Einstein but the essence of the message holds. ]

The unsustainable political picking of winners and losers will work only for as long as the public remains dense to reality, and for as long there remains real savings from the private sector from which would be forcibly diverted into such wasteful political enterprises.

As the great Professor Ludwig von Mises warned,

An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. The whole system of interventionism collapses when this fountain is drained off: The Santa Claus principle liquidates itself.

Quote of the Day: Anatomy of a Power Grab

The pathology of a government power grab is not hard to discern. The state creates the conditions for crisis. Crisis strikes. Politicians seize extraordinary powers. Crisis passes. Left behind is a popular perception that complete annihilation was averted due to government genius. Politicians are permitted to expand their power.

That’s an excellent excerpt from columnist Mary Anastasia O’Grady at the Wall Street Journal who tersely narrates of the anatomy of political power grab by governments.

In using Argentina as example, Ms. O’Grady exposes the Kirchner administration use of the above stratagem to extend political control of their monetary policies through the central bank.

Yet this is not limited to Argentina but applies to the politics of interventionism everywhere.

Chart of the Day: Terrorist Identification Chart

Looks like everyone can be branded a terrorist (hat tip Karen De Coster at the Lew Rockwell Blog)

Self-Discipline and Understanding Market Drivers as Key to Risk Management

Here is an investment tip for those who wish to protect themselves from market volatilities [dedicated to my friends at Stock Market Pilipinas]

As I have been writing, inflationary bullmarkets tend to inflate almost every issue on the stock exchange (rotational process).

This does not apply only to stocks but also to other assets.

In the US, small caps have been beating large caps… (US Global Investors)

…while junk bonds have been thrashing investment grade bonds as US companies with junk ratings pile into the bond markets at record pace to take advantage of ultra low interest rates (Wall Street Journal)

These are evidences of yield chasing phenomenon as an offshoot to central bank policies.

Because the world has been flushed with money, this only implies of highly volatile markets which are characterized by huge swings or strong surges and equally sharp retracements.

Again inflationary markets will tend to push up almost every issue but in different degrees and at different times. This impacts the stock markets in a similar manner. Eventually we will see this happen in consumer prices.

The same phenomenon impacts the second or third tier issues in the local markets, as money spillovers into the broader market.

Second while there will always be unscrupulous people (or stock market manipulators or operators), pump and dump and short and distort are activities that are difficult to establish.

Take for example of the 6 major holding issues constituting the Holding firm index of the Philippine Stock Exchange, 4 have been drifting in near or at record levels.

DM Consunji [PSE: DMC, RED], JG Summit [PSE: JGS, black], and Aboitiz Equity Ventures [PSE: AEV, black] (I did not include Ayala Corp [PSE: AC] because AC has yet to beat, but is about to, the 2007 high)

Are the record levels of stock prices of heavy caps JGS, AEV and DMC (and partly AC) justifying their valuations? So does this make JGS, AEV and DMC a pump and dump?

Some would say no because they are heavyweights (highly liquid issues with real cash flows). But this is would be a non-sequitor or irrelevant to the issue.

The following are the income statement statistics and estimates from 4-traders.com

JGS Summit

Aboitiz Equity Ventures

DMCI

The crux of the matter is: does the earnings trend justify the current price volatility?

In my view no, earnings in the contemporary sense DO NOT justify such volatility as shown above. There seems hardly any correlation between corporate performance and stock prices

And again this brings to fore the largely mistaken orthodox belief about earnings.

Today it has hardly earnings that drive prices but high powered money from central banks. By such thesis, one would understand the nature of inflationary booms and deflationary busts (Was there any pump and dump during the bear market in 2007-2008?)

Nevertheless here are very important tips for stock market participants to keep in mind which I will convey through the wisdom of my favorite stock market savants

Warren Buffett: Risk comes from not knowing what you are doing.

Warren Buffett: The dumbest reason in the world to buy a stock is because it's going up

My comment: Both of the above quotes from Mr. Buffett are intertwined.

Apparently many participants, both neophytes and veterans, are drawn to the fervent desire to earn fast buck while at the same time disregarding the risks involved that makes them easily fall prey to market volatilities and to manipulators.

Jesse Livermore (my all time favorite): “the average man doesn't wish to be told that it is a bull or bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing. He does not wish to work. He doesn't even wish to have to think. It is too much bother to have to count the money that he picks up from the ground.”

My comment:

Many people don't really want to think.

Example: getting information from newspapers and extrapolating them into investment isn't thinking at all. 50k-100k people read business section of the newspapers everyday. This means by the time one reads the newspaper, others may have already read them and may have already acted on the new information provided.

Yet in reality, these newspaper based information are likely to affect markets over the short run and are splashed with logical errors and fallacies.

That’s why I call the allure of mainstream media’s information as largely toxic.

So instead of working to get ahead of the curve, one acts at the tailend. As a famous Wall Street axiom goes,

Bulls make money, bear make money but pigs get slaughtered.

The desire to improve one’s grasp of the markets requires further scrutiny and goes beyond the conventional analytical methodology.

Moreover, many want to use the stock market to talk themselves or bloat their egos.

Aside from the economic role, stock markets or financial markets have social aspects, which is evident by the bandwagon effects.

More quotes of wisdom

Jesse Livermore: I began to realize that the big money must necessarily be in the big swing. Whatever might seem to give a big swing its initial impulse, the fact is that its continuance is not the result of manipulation by pools or artifice by financiers, but depends on underlying conditions. And no matter who opposes it, the swing must inevitably run as far and as fast and as long as the impelling forces determine.”

Jesse Livermore: In actual practice a man has to guard against many things, and most of all against himself—that is, against human nature.

The basic lesson from the above is that in order to protect one self, one needs to practice self-discipline which means controlling emotions or egos (Emotional Intelligence), as well as, to understand the underlying conditions of the marketplace.

As I previously noted, relying on tips and rumors can be a disastrous proposition.

Manipulators are hardly responsible for losses incurred by market participants. In reality, it is the self who is mostly culpable. Worst, it is policies of political authorities that influences people’s incentives to become short term oriented and to undertake reckless activities and makes them vulnerable to bubbles and to manipulation.

Placebo Effects of Earnings Drives Stock Prices

Here is an excerpt to my note to a special client

Corporate "Fundamentals" serve as placebo to most of the momentum chasers. People look for psychological refuge mostly on what is popular rather than what really works.

A sample of my previous argument in this link.

It is very important to understand that since half of every transactions made by everyone in the marketplace have been based on money or credit—money financed by a financial intermediary that will be paid for with future money or income of the debtor—then policies that tampers with money and interest rates (price of time) affects practically ALL economic and financial activities.

But the impact will not be the same for everyone. Inflationist policies eventually work through a spillover or a trickle down effect.

The first beneficiaries are the wards of the state, the state itself, and the industries or sectors connected to or targeted by the state.

Those affiliated to the first beneficiaries represents as the secondary layer of the inflation multiplier and so on. This is the Cantillon Effect on Money as earlier discussed here

This also extrapolates that people’s incentives, through value scales and time preferences channels, will change in response to these policies. Again the changes will differ from individual to individual.

For instance, today’s negative real rates regime have been prompting many banks to call on me (weekly) to offer credit, which is evidently an offshoot to the current policies which encourages banks to profit from the yield curve through maturity transformation (loans or spread arbitrages) activities.

Those who don’t understand the nature of business cycles may be tempted to add leverage which may induce them to engage in extravagant spending.

If many respond to such policies by taking up loads of debt, then the growth in credit may become systemic in that it reaches levels that may not be adequately financed by aggregate debtor’s income, (perhaps to be pricked by higher interest rates) then the balance sheets of creditor institutions have reached bubble conditions that is bound to burst.

Yet in order to delay the day of reckoning requires sustained credit growth which will likely be facilitated through central banking policies. And this is why central banks exists--to provide backstop to the banking system and to provide finance to the state.

In effect, a financial system that thrives on bubble policies will require sustained credit injections. So many of the company’s business models may transition towards a Hyman Minsky’s Ponzi finance paradigm that only worsens or exacerbate the unsustainable bubble conditions. Remember major US investment banks vanished in 2008.

And there is the social signaling effect. Policies that promote consumption fosters the Keeping up with the Jones’ mentality that tries to lift one’s relative social standings through accumulation of positional material goods. These behavioral changes are partly conditioned, but mainly fueled by monetary policies, promotes what is known as 'consumerism'.

Thus, the subsequent effect of inflationist policies has been to reconfigure social and economic activities through people's incentives.

Consumption, savings and investment patterns, or the effective allocations of resources, has substantially been altered as compared to the non-existence of such policies. The policy induced distortion of the economic coordination process eventually leads to malinvestments and to an eventual discoordination.

Therefore sales, earnings, operating costs, investments, or leverage (gearing) or what in finance nomenclature known as ‘corporate fundamentals’ will be substantially affected, but again on varying degrees.

Of course every markets have individual characteristics too. They are shaped by idiosyncratic culture, unique legal framework, distinct political institutions, individual tax and regulatory regimes, varying depth of the market economy and many many many other variables.

This also means that the earnings principle is NOT a one-size-fits all dynamic. The earnings of the corporations in the US can’t be seen in the same lens as the from earnings of the companies listed on the Philippine Stock Exchange, where many of the latter’s companies have been shielded from competitions or are de facto political concessions. It is important to note that the business environment in the Philippines has been vastly more unfriendly and significantly less competitive than the US, principally due to politically related factors.

The bottom line is that the mainstream’s mathematical or financial construct of earnings DOES NOT accurately describe how policies shape or affect them. That said, earnings hardly will function as a reliable metric for the ascertainment of stock values.

So like the Heisenberg uncertainty principle, the entrenched orthodox belief in earnings is like trying to pin down an elusive target that never really is, or signifies as vain attempts to get hold of the Holy Grail--especially when markets have been vastly distorted or artificially boosted by rampant interventionism and inflationism. This is based more on faith or groupthink than of functionality.

Effects must not be read as the cause.

Signs of China’s Snowballing Political Crisis: Six Arrested over Coup Rumors

China’s political sphere seems to be feeling the heat from the unraveling of the Keynesian policies

From the Telegraph, (hat tip Bob Wenzel)

The arrests are a sign of the ruling communist party's (CCP) extreme nervousness in the wake of an extraordinary few weeks in which an unusually public power struggle amongst the party elite has seen the one-time politburo contender Bo Xilai deposed.

Rumours that a coup was imminent began spreading after Mr Bo was removed from his position as CCP chief of the southwestern city of Chongqing two weeks ago. Posts on microblogs claimed that armoured personnel carriers and tanks had been seen on the streets of Beijing.

China's state news agency Xinhua reported late on Friday that six people are under arrest for "fabricating or disseminating online rumours".

Sixteen websites have been closed for posting reports of "military vehicles entering Beijing and something wrong going on in Beijing". An unknown number of people were "admonished and educated" for their part in spreading the rumours, according to police in Beijing.

"The rumours have "caused a very bad effect on the public," said a spokesman for the State internet Information Office, while the websites were shut down for not acting to stop their spread. Two of China's most popular microblogging sites, weibo.com and qq.com, were also "criticised and punished accordingly" for their failure to prevent the rumours circulating said the spokesman.

As I previously wrote,

China’s copycat of western Keynesian policies have led to massive internal bubbles, blatant misreporting of issued loans and financial innovative arbitrages by the political class, particularly the local governments, whom has circumvented party regulations by setting up 6,000 finance companies to raise funds for public works.

The negative effects of such top down policies have not only bred corruption, it has sown political conflicts which run the risks of escalation and transition to violent political uprisings.

The bottom line is that China’s behind the scene political struggles have been seeping out into the public and will be manifested through price signals in the marketplace, despite repeated attempts by political authorities to expurgate such developments.

China’s Credit Default Swap reportedly rose to new four month highs.

China’s Shanghai index fell 3.69% over the week and seems on path to neutralize this year's gains. Year-to-date, and based on Friday's close, China's gains have been reduced to 2.88%.

Longer term, the Shanghai index seem as approaching a critical threshold.

The almost 5 year symmetrical triangle formation seems on path towards a culmination.

Of course, the SSEC can breakdown or have an upside breakout or extended consolidation. Interpreting the charts mainly depends on the bias of the observer.

However, given the current conditions, the balance of risks seems tilted towards the downside. And this may likely be driven by the economic developments filtering into the political sphere.

It is unclear whether China’s authorities will be able to put a rein on this, and kick the proverbial can down the road, or if political tensions will deteriorate further.

Yet despite attempts to apply strong arm tactics through censorship, price signals will be the most dependable source of information. And any attempts to manipulate the markets may have short term effects.

While the Chinese yuan remains strong, any further deterioration in the political spectrum is likely to reverse the gains and may trigger hot money stampede out of China. And this may ripple through the commodity sphere and to global stock markets.

Again, China could just be the blackswan that could upend today’s central bank powered rallies.

China’s increasing censorship of social media or an attack on free speech also represents an assault to the forces of decentralization which has been operating on the internet platform. The jury is still out as to which of the two forces will eventually prevail. Over the interim expect heightened volatility on the marketplace.

Stay tuned.

Quote of the Day: Keynes the Crony

Writes Bob Wenzel,

He was 83% long going into the downturn that resulted in the 1929 crash. So how could Keynes be a great investor with such a bad performance? Because Keynes, the evil bastard, along with Bernard Baruch, talked FDR into confiscating the gold owned by all Americans. He then loaded up his portfolio with gold mining stocks and then urged FDR to prop up the price of gold.

So John Maynard Keynes practiced the interventionist theories he preached because he personally profited from them—he was a rent seeking crony after all!