Quote of the Day: The Volcker Rule is a Bad Idea

what the Volcker Rule does is drive banking from the private sector and toward the government sector. Thus, this rule, rather than limiting credit, simply pushes banks to use funds to invest in and provide more liquidity for the government sector.

If credit is to be created by the Fed, I would rather have those funds directed to the private sector, or see banks blow themselves up with synthetic instruments, than have the funds directed toward more investments in the government sector, which will do nothing but allow the state to grow. Thus, the Volcker Rule is a bad idea.

That’s from Austrian economist Bob Wenzel.

Like the Basel regulations, banks are being directed by statute to channel private sector savings to finance the government than to the private sector.

This legislation seems to be a component of the unholy grand scheme of financial repression—the plunder of private sector’s resources for the use of politicians through the banking system. [yeah and politicians and their sycophants have the effrontery to call out on “inequality” when much of the private sector resources have already been absorbed by them.]

And this is why banks end up in cohabitation with governments, as well as, why central banks have been there to provide a backstop on them when private sector resources have been squeezed dry.

Corruption is indeed rooted on arbitrary and repressive laws.

Navigating Today’s Market Volatility: A Bird at Hand is Worth Two in the Bush

Current developments appear to have validated my projections. While I really don’t do short term predictions, I must admit to be lucky on this call.

I will be working from my outlook and recommendations of last week

Here is what I wrote[1],

And any further weakness in commodity prices will likely filter into the asset markets…

For the Phisix, the current resiliency by the heavy caps has been a noteworthy auspicious development. Yet we should not discount the likelihood of a contagion from any adverse exogenous events.

My inclination is that based on the above evidences and in the understanding that NO TREND GOES IN A STRAIGHT LINE, the Phisix will likely undergo a correction or profit taking phase.

This retrenchment, perhaps 5-10% from the peak or a low of 4,800, should be seen as healthy and normal. Should this be realized then the local benchmark will likely drift rangebound.

Of course external developments will play a big role in either confirming or falsifying this.

The retrenchment turned out exactly as described last week, albeit too fast and too soon.

The accelerating decline of the broad based commodity market, as measured by the CRB (behind), apparently dragged the Phisix substantially lower (candle).

The local benchmark slumped by a ghastly 5.4% in just one week! And the Phisix has lost about 8% from the peak and is just over 1.6% away from the 4,800 level. Year to date the Phisix is still up 11.61% as of Friday’s close.

It must be noted that the CRB has been on a downtrend since May of 2010. But following the temporary rebound which peaked this March, the rate of the recent decline has somewhat paralleled the intensity of the selloff in September-October 2011, in scale but not in timeframe.

The commodity rout then coincided with the short term massacre of global equities.

The seeming effect of today’s commodity slump appears to resonate with that of 2011, global stock markets have been clobbered.

It should be noted that factors driving the volatility of 2011 and today’s market stress has been different. And a further question is how long would this thrashing last?

In perspective, the decline of the Phisix signifies a worldwide dynamic that covers developed markets, the BRIC and the emerging markets.

Last week’s carnage has been no different with our ASEAN contemporaries.

Aside from the Phisix which posted the largest loss for the week, Indonesia’s JCI (green), Thailand’s SET (yellow) and Malaysia’s FBMKLSI (red) likewise hemorrhaged down by over 3% this week.

More from last week’s letter

Yet I am LESS inclined to believe that a new high for the Phisix will be reached soon. Such should be until major central bankers will have announced their renewed support for the markets or if there have been conspicuous signs that they have been operating behind the curtains…

So far, the fact is, that the damage seen in the market internals will have to be remedied first…

The good part is that the much of the selloff has been locally driven which unfortunately has affected many momentum participants. Yet foreign buying remains net positive in spite of the carnage and may have provided cushion to the heavyweights…

Finally in the expectation of the possibility of the non-participation of central banks until June or after, this means greater volatility ahead in both directions.

In fact, the damage to the general market seems to have intensified.

Previously, the concentration of the losses had mainly been in mid-tier and peripheral issues. Last week, seller’s wrath encompassed the Phisix major heavyweights.

Volatility has indeed been seen in both directions.

Except for Thursday bounce which reduced the overall impairment of this week’s market breadth as shown above, the broad corrosion of internal market activities over the past 2 weeks has practically chimed with the ferocity of losses endured by the major benchmark the Phisix.

Despite the drubbing, sectoral rotation seems to have been evident last week as the distribution of losses rotated.

The major loser from last week’s funk, the Mining index was this week’s least injured.

On the other hand, last week’s second outperformer the Holding index, suffered most.

Foreign sentiment seemed to have also soured.

This week, foreign activities showed modest NET selling, which may have likewise been reflected on the local currency the peso, which lost 1.6% this week.

For almost every instance where the Phisix (red) encounters major downturn, the Peso fumbles along with it (green oval).

Yet this should not been as isolated to the local currency, but seen as a REGIONAL dynamic.

The year to date chart of the Bloomberg JP Morgan Asian dollar index[2] has exhibited the same degree of pressure as the peso

On the other hand, the US dollar has once again served as the lightning rod during market shocks.

My concluding statement of last week…

Investors may raise their cash balance during rallies and buy on every episodes of panic. And in the event that any one of the major central banks declares the next steroid (the size should matter), then our strategy shifts to buy high, sell higher.

All the evidences provided above suggest that for any material recovery to occur, market internals would have to settle or immensely improve from the current conditions.

Also while there will surely be intermittent rallies emanating from vastly oversold conditions, the path of least resistance for local equities, for the moment, seems tilted to the downside until proven otherwise. I am not sure if the 4,800 level will hold.

From this point of view, to improve on what I earlier wrote, while investors may raise cash balance during rallies, buying should be done lightly on select episodes of panic.

Again such position should be maintained until we see stability in the actions of the Phisix, which must be accompanied by an improvement of market internals.

Of course, since the Phisix has been externally influenced, any improvements must be compatible with developments abroad.

And since investments are about managing economic opportunities, then there would be time for profit, and there would also be time for wealth preservation.

Until we see marked progress in price trends, market internals and actions in overseas markets, for now, a bird at hand seems better than two in the bush.

Said differently, an overweight on cash position seems to be the most prudent option in negotiating with today’s tumultuous road.

---

[1] See Phisix: The Correction Phase Cometh, May 14, 2012

[2] Bloomberg.com Bloomberg JP Morgan Asia Dollar Index Chart

Risk ON Risk OFF is Synonym of The Boom Bust Cycle

Prices are relative: high prices may go higher, while low prices may go lower.

The accretion of price actions is what constitutes a trend. Trends can be seen in a time variant lens: intraday, day, weekly, monthly, yearly or decades.

A bullmarket is when the dominant or major trend is up, while the opposite, a bearmarket is when the major trend is down. A market in consolidation means neither the bulls nor the bears get the dominance.

Yet price trends can be seen in many ways depending on reference points. Having said so, people can make biased and deceptive claims by the manipulating the frame of the trend’s reference points to uphold their perspective.

Meanwhile inflection points extrapolate to a reversal of trends which may allude to major or minor trends.

The actions over the past two weeks may yet be seen as normal correction. That is what I hope it is. But I can’t vouch for this.

We Have Met The Enemy And He Is Us

Yet relying on hope can be a very dangerous proposition. As a popular Wall Street maxim goes, bear markets descends on a ladder of hope. While I am not saying we are in a bear market, it pays to understand that quintessentially “hope” represents the basic shortcoming of vulnerable market participants.

Managing emotional intelligence or having a street smart-commonsensical approach, or prudence is a better a part of valor is my preferred option in dealing with today’s torturous bubble plagued markets[1]. There are times that require valiance, however, I don’t see this as applicable today yet.

As an aside, in testy times as these, market participants should learn how to control their emotions or temperaments so as to prevent blaming somebody else for one’s mistakes, and learn how to take responsibility for their own actions. Self-discipline should be the elementary trait for any investors[2].

Regrets should be set aside for real actions. This means that we can opt to buy, sell or hold, depending on our risk tolerance, time orientation and perception of the conditions of the markets. People forget that holding is in itself an action, because this represents a choice—a means to an end.

And because the average person are mostly afflicted by the heuristic of loss aversion[3] or the tendency to strongly prefer avoiding losses to acquiring gain, in reality since a loss taken signifies an acknowledgement of mistakes, the pain from such admission leads to one to take on more risks that leads to more losses, than to avoiding losses.

As American financial historian, economist, author and educator Peter Bernstein wrote[4],

When the choice involves losses, we are risk-seekers, not risk averse.

Egos, hence, play a big role in shaping our trading, investing or speculative positions.

To borrow comic strip cartoon character Pogo most famous line[5]

We have met the enemy and he is us

The Essence of Risk ON Risk OFF Moments

Nevertheless current developments continue to reinforce my perspective of the markets.

1. Despite all the recent hype about local developments driving the local market, external factors has remained as the prime mover or influence in establishing Phisix price trend. This has been true since 2003. Remember, the Philippine President even piggybacked on this[6]

The good thing about market selloffs is that this has been unmasking of the delusions of greatness and its corollary, the deflation of many puffed up egos.

This also shows that there has been no decoupling

2. Global financial markets have moved in on a Risk On or Risk Off fashion.

While the degree of performances may differ, actions in the global financial markets today have shown increasingly tight correlations. The general trend direction and even the undulations of the Phisix, the US S&P 500, the European Stox 50 and the Dow Jones Asia Pacific index over past 3 years have shown increased degree of conformity.

Risk ON moments are mostly characterized by greater appetite for speculative actions as seen in the correlated upside movements of prices of corporate bonds, equities, commodities, and ex-US dollar currencies.

On the other hand, Risk OFF episodes or risk-averse moments like today, have accounted for “across the board selloffs” a flight to safety shift to the US dollar and US treasuries.

There has been little variance in price trends that merits so-called portfolio diversification. As pointed out before these have been signs of “broken”[7] or highly distorted financial markets.

Observe that whether the actions WITHIN the Philippine Stock Exchange, or among major developed and emerging market bellwethers or the other asset markets, current market trends produces the same Risk ON-Risk OFF patterns.

A dramatic upside move during the first four months only to be substantially reduced this month exhibits little evidence of conventional wisdom at work. Neither earnings can adequately explain the excessive gyrations in market fluctuations nor has contemporary economics.

Risk ON and Risk OFF, are in reality mainstream’s euphemism for boom bust cycles, which have been caused by inflationism and various forms of interventions—that has engendered outsized volatility in price actions.

Knightean Uncertainty: Greece Exit, China Slowdown and Fed’s End Program Volatility

As pointed out last week, there have been three major forces that have been instrumental in contributing to the recent distress being endured by global financial markets, particularly, the SEEN factor: Greece and the Euro crisis, the UNSEEN factors—China’s slowdown (or an ongoing bust???) and anxieties over US monetary policies.

Since risks implies of measured probability of future events while uncertainty refers to the incalculable probability of future events[8], current events suggests of GREATER uncertainty than of the average risk environment.

For the third time in 6 months, the People’s Bank of China (PBoC) last week cut reserve requirements[9], yet the Shanghai index ignored the credit easing measures and posted a significant weekly loss.

Moreover, the economic slowdown in China has hardly abated.

China’s four biggest banks reported almost zero growth of net lending over the past two weeks[10].

In addition, according to a study by made by a think tank affiliated with PRC’s state council, the estimated the debt-to-asset ratio[11] of Chinese state and private companies, as well as individuals, has reached about 105.4 percent, the highest among 20 countries.

These represent the increasing likelihood of the unwinding of China’s unsustainable bubble. For the moment China’s authorities seems to be in a quandary as they have implemented half-hearted measures which her domestic markets appear to have taken in blase.

Yet if the economy does sharply deteriorate, I would expect more forceful policies to be put in place. So far this has not been the case.

It has been no different in the Euroland where politics have posed as an obstacle to further interventions from the European Central Bank (ECB)

The risks of a Greece exit from the Eurozone seem to have been intensifying. This has been evidenced by the open acknowledgement by Mario Draghi, European Central Bank president, that Greece could leave the Euro. The ECB has even halted to provide loans to four Greek banks[12].

Lending to banks in Greece, which has been experiencing slow-mo bank runs but seem to be escalating over the last week on fears of massive devaluation from the return to the drachma[13], are presently being funded by the national central bank of Greece[14] via the Emergency Lending Assistance.

While there have been estimates as to the degree of exposures by major banks of several nations on Greece, particularly €155 billion for Germany and France[15], no one can really assess on the psychological impact that would translate to financial losses that may occur once official ties have been disconnected. Even Singapore has reportedly been exposed with “a stunning 60%-plus of GDP tied up in European bank claims” according to Zero Hedge[16].

Add to this undeclared the derivatives exposure on Greek securities at an estimated $90 billion[17], the losses from a full blown contagion can reach trillions to the global banking system.

Thus, the probability looms large that that major central banks would use this as an excuse to justify massive inflationism to protect their respective banking systems.

Again the problem that prevents the ECB from further inflating today has been the uncertain status from the politics of Greece. Since nobody in Greece seems to be in charge, the ECB doesn’t know whom to strike a deal with yet. And perhaps in an attempt to influence Greek politics, as stated above, the ECB has partially cut off funding to some Greece banks.

So this should be another evidence of the interruptions of the money spigots.

But the issue here will be the scale of interventions once the process of the Greece exit is set on motion. This will practically be a race between the market and central bank interventions.

And this is why I believe the markets could be exposed to excessively huge volatility during this May to June window, mostly likely with volatility going in both directions, but having more of a downside bias, until the forcefulness of interventions would be enough to temporarily provide patches to malinvestments from becoming evident.

And perhaps in the realization of the risks from financial isolation and the benefits of conditional redistribution from their German hosts, the good news is that the pro-austerity or the pro-bailout camp appears to be gaining ground.

Recent polls seem to suggest that pro-bailouts as having a slight edge[18] or are in dead heat[19] with former favorites, the anti-austerity camp.

The term austerity has been deliberately contorted by the neoliberals. In reality there has been NO real[20] austerity[21] in the Eurozone as government spending (whether nominal, real or debt to gdp) has hardly been reduced. What has been happening has been more of tax increases with little reforms on the labor market or on the regulatory front to make these economies competitive[22][23].

Finally, compounded by external developments, US markets are likewise being buffeted by the uncertainty towards the Fed’s monetary policies where each time the FED ended their easing measures, downside volatility follows.

This was the case for QE 1 and QE 2, and apparently with the closing of OPERATION TWIST this June, US markets have become volatile again.

And as the US markets has recently sagged, the Federal Market Open Committee (FOMC) once again has signaled that they are open to more credit easing measures using the Euro crisis and the US government budget and or debt-ceiling issues[24] as pretext.

The so-called Bush Tax cuts which is set to expire at the end of the year, will translate to a broad increase in tax rates for all[25], will also be a part of the economic issue. Tax increases in a fragile economy heightens a risk of a downturn, and this will likely be met with more easing policies.

Bottomline: The major issues driving the markets has been about the feedback loop between the markets and inflationism (bubble cycles).

Lethargic prices of financial assets have accounted for as symptoms of the artificiality of price levels set by the governments and major central banks through credit easing programs and zero bound interest rates meant to protect the banking system that has been integral to the current political structures which includes the welfare-warfare state and central banking.

In short, falling markets are simply signs of pricked bubbles.

Outside additional support from central banks, asset prices have been weakening, supported by some episodes of debt liquidations, particularly in the Eurozone and in China.

Currently the PBoC, ECB or the FED appear to be constrained or reluctant to pursue with further aggressive interventions for one reason or another. As previously noted, the BoE has officially put to a halt their QE[26].

It could be that they may be waiting for more downside volatility, which should provide them political cover for such action. Also the unresolved political problems of Greece have been an impediment.

So yes, today’s markets have still principally been driven by the ON and OFF steroids or inflationism from central bankers and will continue to do so until markets or politics forces them to cease.

---

[1] See Applying Emotional Intelligence to the Boom Bust Cycle, August 21, 2011

[2] See Self-Discipline and Understanding Market Drivers as Key to Risk Management, April 2, 2012

[3] Wikipedia.org Loss aversion

[4] Bernstein Peter Against The Gods, The Remarkable Story of Risks, p. 273 John Wiley & Sons

[5] Wikipedia.org "We have met the enemy and he is us." Pogo (comic strip)

[6] See The Message Behind the Phisix Record High May 7, 2012

[7] See “Pump and Dump” Policies Pumps Up Miniature and Grand Bubbles April 30, 2012

[8] See The Fallacies of Inflating Away Debt August 9, 2009

[9] See China Cuts Reserve Requirement May 14, 2012

[10] Businessweek.com/Bloomberg.com Loan Growth Stalled at China’s Biggest Banks, News Says May 15, 2012

[11] Bloomberg.com Chinese Company Debt Is At ‘Alarming Levels,’ Xinhua Says May 17, 2012

[12] See Hot: ECB Holds Loans to Select Greek Banks, ECB’s Draghi Talks Greece Exit May 17, 2012

[13] MSNBC.com Greeks withdraw $894 million in a day: Is this beginning of a run on banks?, May 16, 2012

[14] Brussel’s Blog The slow-motion run on Greece’s banks Financial Times, May 17, 2012

[15] See Greece Exit Estimated Price Tag: €155bn for Germany and France, Possible Trillions for Contagion May 17, 2012

[16] Zero Hedge Why Stability Stalwart Singapore Should Be Seriously Scared If The Feta Is Truly Accompli, May 18, 2012

[17] Zero Hedge, Alasdair Macleod: All Roads In Europe Lead To Gold, May 19, 2012

[18] See Are Greeks turning Pro-Austerity? May 19, 2012

[19] Reuters India Greek election race tightens into dead heat May 20, 2012

[20] See More on the Phony Fiscal Austerity, May 16, 2012

[21] See In Pictures: The Eurozone’s “Austerity” Programs, May 8, 2012

[22] See Choking Labor Regulations: French Edition, May 14, 2012

[23] See Greeks Mount Civil Disobedience, Scorn Taxes, May 16, 2012

[24] Bloomberg.com Several on FOMC Said Easing May Be Needed on Faltering, May 17, 2012

[25] See What to Expect when the Bush Tax Cuts Expire May 19, 2012

[26] See Bank of England Halts QE for Now, May 10, 2012

Could Gold Prices be Signaling a Reprieve in Selloffs or a Bottom?

Over at the commodity markets, gold’s and silver’s recent bounce could yet signal a reprieve to the market’s selloff.

On the one hand, this bounce could signify a reaction to extremely oversold levels but may not be indicative of a bottom yet.

On the other hand, if gold and silver have found a bottom then they could likely be signaling the coming tsunami of inflationism, where the tendency is that gold leads other assets in a recovery, perhaps like 2008.

Also, the recent bounce came amidst Greek polls exhibiting improvements of the standings of pro-austerity camp, perhaps indicative of reduced odds of a Greece exit. A victory by pro-bailout camp government would allow the ECB to orchestrate the same operations that it has been conducting at the start of the year.

For most of the past 3 years prices of gold and the US S&P 500 have been correlated but with a time lag. Since March an anomalous divergence occurred, the S&P rose as the gold fell. For most of the past two weeks both gold and the S&P fumbled which seem to have closed the divergence gap.

But over the two days gold rose as stocks fell. Such anomaly will be resolved soon.

Again, gold cannot be seen as a standalone commodity and should be seen in the context of both the general commodity sphere and of other financial assets.

Focusing on gold alone misses the point that gold represents one of the contemporary assets that competes for an investor’s money. Such that changes in the gold prices would likewise affect prices of other relative assets.

Prices are all interconnected, the great Henry Hazlitt explained[1]

No single price, therefore, can be considered an isolated object in itself. It is interrelated with all other prices. It is precisely through these interrelationships that society is able to solve the immensely difficult and always changing problem of how to allocate production among thousands of different commodities and services so that each may be supplied as nearly as possible in relation to the comparative urgency of the need or desire for it.

To fixate only on gold without examining the actions of other assets would risk the misreading of the gold and other asset markets.

Let me further add that a Greece exit or a collapse of the Euro doesn’t automatically mean higher gold prices. This entirely depends on the actions of central banks.

Since gold is not yet money today, based on the incumbent legal tender laws, it would be totally absurd to argue that under today’s fiat money system—where financial contracts have been underwritten on paper currencies mostly denominated in US dollars or the foreign currency alternatives, European euro, British pound, Swiss franc, Japanese yen or even China’s renminbi—all debt liquidations, be it ‘calling in of loans’ or ‘margin calls’ will be consummated in paper money currency and not in gold.

This means that a genuine debt deflation would translate to greater demand for cash balance (based on Irving Fisher’s account of debt deflation[2]) which means more demand for the US dollar and other currencies of ex-euro trade counterparties.

And that’s what has been happening lately to the marketplace, the US dollar (USD) and US Treasuries 10 year prices (UST) has risen opposite to falling gold prices and other financial assets.

This means part of the global system has been enduring stresses from debt liquidations, which again bolsters the relative effects of money and boom bust cycles.

As pointed out before[3], it would be mistake to equate the 1930 eras (gold bullion standard) or the 1940 eras (Bretton Woods standard) with today’s digital and fiat money system. That would be reading trees for forest when gold was officially money then.

And given that gold has long been branded a “barbaric relic” and has practically been taken off the consciousness of the general public in Western nations, gold has hardly been appreciated as money, perhaps until a disaster happens.

It has only been recently and due to sustained gains of gold prices where gold’s importance has begun to percolate into the American public[4].

Yet the Americans see gold more of an investment than as money

But of course, this is different with many Asians who still values gold as money. For example, many Vietnam banks are even paying gold owners fee for storage[5] in defiance of government edict.

Gold’s rise would be premised from central banking inflationism designed to protect the certain political interests, which today have represented the banking institutions and the Federal and national governments.

As proof, the latest quasi bank run in Greece, which I pointed out above, has reportedly been due to concerns over devaluation of the drachma, should Greece exit from the EU and NOT from deflation.

While I remain long term bullish gold, short term I remain neutral and would like see further improvements in gold’s price trend and subsequently the relative trends of other “risk ON” assets.

---

[1] Hazlitt Henry How Should Prices Be Determined? , May 18, 2012

[2] Wikipedia.org Fisher's formulation, Debt Deflation

[3] See Gold Unlikely A Deflation Hedge June 28, 2012

[4] Gallup.com Gold Still Americans' Top Pick Among Long-Term Investments, April 27, 2012

[5] See Vietnam Banks Pay Gold Owners for Storage, April 12, 2012

Are Greeks turning Pro-Austerity?

Recent polls seem to suggest that Greeks may after all, still want handouts from their Germans hosts, as pro-austerity votes seem to be gaining ground.

From the Independent

Less than a day after taking office, Greece's new caretaker government was faced with yet another credit downgrade as Fitch that warned Athens of a "probable" exit from the eurozone if pro-bailout parties failed to win new elections due on 17 June.

And it appears that Greeks might be taking this message on board. A new poll yesterday indicated that politicians backing austerity – a necessary condition of the rescue package – would secure up to a 167-seat majority in the new Parliament with the conservative New Democracy party maintaining its lead over Syriza, a left-wing party whose leader has vowed to stop the country's painful public sector cuts.

The poll, conducted for Alpha TV, predicts New Democracy would gain up 123 seats in the 300-member legislative assembly, leaving left-wing Syriza with 66 seats and Socialists Pasok 41. The findings will calm nervous European leaders and financial markets that panicked after an anti-austerity sentiment prevailed in the hung parliament after the 6 May election.

However, as the country embarks on the new campaign some newspapers were left doubtful over the accuracy of the poll. "Elevator polls" read the headline of centre-left daily Ethnos. Political leaders are only just starting to forge alliances with smaller parties in the hope of forming a coalition.

This is yet too early to say. Nevertheless caught between the choice of financial isolation on the one hand, and as beneficiary of conditional redistribution as member of the European Union, on the other hand, the shift in sentiment seems plausible. And it could be that the pro-austerity camp may yet prevail.

As caveat, “austerity” remains a vaguely defined concept today, as the term has been grotesquely mangled by neoliberals.

What to Expect when the Bush Tax Cuts Expire

Well it is not just the Euro or China that faces headwinds from political uncertainty but also the US.

Should the “Bush Tax cuts” be allowed to expire, then this means generally higher taxes for Americans.

From Yahoo, (bold and italics original)

The so-called Bush tax cuts are scheduled to expire at the end of this year. While you may already know that, you may not fully understand what's in store for you and your family. Here's what to expect.

Higher Tax Rates for All

You may think only individuals in the top two brackets will face higher federal income taxes if the Bush cuts go bye-bye as scheduled on Jan. 1, 2013. Not true. Unless Congress takes action and the president goes along (whoever that is), rates will go up for everyone -- not just "the rich." Specifically, the existing 10% bracket will go away, and the lowest "new" bracket will be 15%. The existing 25% bracket will be replaced by the "new" 28% bracket; the existing 28% bracket will be replaced by the new 31% bracket; the existing 33% bracket will be replaced by the 36% bracket; and the existing 35% bracket will be replaced by the 39.6% bracket.

Bottom line: We'll all see higher taxes.

In addition to the above, there would be broader implications.

As the same yahoo article explains, we should expect higher capital gains and dividends taxes for everyone, harsher marriage penalty, return of the phase-out rule for itemized deductions, return of phase-out rule for personal exemptions and with only some of the “Bush Tax Cuts” that may likely be retained

Higher taxes means private sector funds will be shifted from productive to consumption use. This means slower real economic growth amidst a fragile economic environment.

And this also means taxpayers will be laboring on to pay for all the wasteful projects and activities of politicians and their cronies (Wall Street, green energy, labor unions etc..)

Greece Exit: Fall Back to Better Leap Forward

Historian Eric Margolis argues that Greece must exit the EU to save the euro

At the LewRockwell.com, Mr. Margolis writes,

What would happen to Greece if it quit the euro? Financial chaos, capital flight, riots, and bank failures. But after the apocalypse, Greece would eventually revert to its 1960’s status: a poor but proud nation living off tourism, shipping, agriculture and fishing.

Devaluing a new drachma won’t do much for a nation whose main export is olives and feta cheese. Besides, the Greeks have severely damaged their tourist industry by endless strikes and surly service.

Angela Merkel is rightly concerned that Greece’s exit from the euro would be a blow to Europe’s political unity. This aspect of the crisis is as important as the economic/financial dimension.

But Merkel should also recall the timeless dictum of Prussia’s king and renowned general, Frederick the Great: "he who defends everything, defends nothing."

Greece should never have been admitted to the euro. It snuck into the currency union by hiring those miscreants at Goldman Sachs to falsify its financial books.

Admitting Greece to the euro zone was a bridge too far. Euro membership should be limited to those nations that have solid finances and honest reporting. In short, a club of northern European nations that follow Germanic good government. Unprepared nations, like Greece, Romania, Bulgaria, Serbia, Moldova or Ukraine do not belong in the euro zone. Most have no business in the EU either.

The European Union and euro zone expanded too far, too fast. Retrenchment is now in order. As the French say, "fall back to better leap forward."

Amidst this crisis, what many forget is that it was caused by politicians borrowing too much to buy votes and shady bankers lending recklessly to boost their own bonuses.

If there is one thing we learn from the Euromess it is the Golden Rule: governments must raise any and all funds they spend.

Borrowing from the money lenders is poison. More empires and nations have been ruined by unsustainable borrowing than by wars. Politicians should not be allowed to borrow except for well-defined, long-term projects, likes roads or bridges, in which revenue streams and repayment schedules are clearly defined.

Well, government spending which has led to massive borrowing has been the main culprit that has brought upon this crisis. And to reduce government spending means to allow forces of productivity to flourish. And productivity comes from the free markets. It’s the only way.

Warren Buffett and the Austrian Business Cycle Theory

Warren Buffett’s dad the prominent libertarian Howard Buffett in a letter to Murray Rothbard wanted to share the latter’s book, “The Panic of 1819”, to his son, perhaps to introduce the Austrian Business Cycle Theory (ABCT).

from the Lew Rockwell Blog

Excerpted from the second to the last paragraph… (hat tip Bob Wenzel)

Somewhere I had read that you wrote a book on the "Panic of 1819". If this is correct, I would like to know where I can buy a copy of it. I have a son who is a particularly avid reader of books about panics and similar phenomenon. I would like to present him with the book referred to.

It’s interesting to know that Warren Buffett’s adapted philosophy has been in the opposite dimension relative to his Dad, especially amplified today...Warren’s twilight years.

Ironically, son Warren has even furiously assailed on the essence of what his Dad believed in.

The sad part is that Warren Buffett evolved from being a model value investor and deigned himself into a major crony for the Obama administration, where the son Warren may have sold out Dad’s principles for convenience, status and wealth.

This reminds me of Jedi master Yoda who warned apprentice Jedi Anakin Skywalker in the final episode of the prequel Star Wars Episode III: Revenge of the Sith

The fear of loss is a path to the dark side.

I am inclined to think that the prospect of the loss of the above privileges could have been a key influence behind the son’s embrace of the state…and the dark side.

Quote of the Day: The Ethics of the War Economy

War - to people like Obama, Romney and the people they serve - doesn't mean death or misery or lost limbs and minds.

It doesn't mean a soldier's life, a mother or a father's life, or a child's life blasted to liquid or left wasting away toward death.

It means something altogether different. It means the creation of artificial demand for certain favored sectors and a jump-start to a languishing economy.

It means teaching the world that it will continue to pay for oil in US dollars or else.

It means distracting a restless populace from the meaninglessness of their decaying lives into a rally around a flag and the cause of patriotism to justify even more sacrifice.

It means a rising stock market and arms company stock price windfalls - like the millions of taxpayer funded war largesse the Bush family clan reaped out of their Carlyle Group holdings along with their Saudi counterparts the bin Ladens.

And with concentrated effort and a bit of luck, war means the wholesale capture of human and mineral resources at a non-negotiated, discounted price - arguably its ultimate aim.

Alternatively, it can even mean demand destruction - providing the means to regroup and reallocate resources according to the dictates of the executive in a planned economy or a command economy.

For many in the privileged class, war presents a cornucopia of enticements that woo and intoxicate them into a delirium of self-righteous rigidity, of arrogance and exceptionalism, of paranoid rationalization, of lust for power and control, of hunger for violence and, ultimately, into a delirium of insanity.

(Italics original)

That’s from Dale Gordon Sinner of the International Man.

First Shale Gas Output from China, India to Follow

I previously pointed out that, the Southeast Asian territorial dispute has NOT been about oil as popularly thought.

And since China has the largest reserves of Shale energy in the world, like the US, dependence on external sourcing of oil WILL diminish. So there hardly is any need or incentive for gunboat diplomacy (except to use this as diversion for other unstated reasons).

Also I pointed out that Shale gas revolution is the future of energy which should translate to a worldwide phenomenon.

I would guess that the shale gas revolution will be a worldwide phenomenon which should wean away our dependence on oil. The net effect outside manipulation of money by governments should be to materially bring down or lower prices of energy.

Now some confirmations to this prediction: China will be having its first shale gas output while India is slated to access local Shale energy too.

The roll out of Asia’s shale gas boom has began!

From Bloomberg (bold emphasis mine)

ONGC, India’s biggest explorer, is studying data for shale- gas deposits and awaiting a government policy on commercial drilling for gas trapped in shale rock, Sudhir Vasudeva, chairman of the state-run company, said in a telephone interview yesterday. China Petrochemical Corp. will start pumping the nation’s first shale gas from a project in Sichuan province next month, according to a report on Caixin’s website on May 15, citing the company…

India holds 6.1 trillion cubic feet of technically recoverable shale gas reserves in three basins, the U.S. Geological Survey estimated in a report in January. That was less than 10 percent of the 63 trillion cubic feet estimate made the previous year, in April, by the U.S. Energy Information Administration in a report.

“The U.S. estimates are just estimates, and we’ll have to survey the geology and deposits and drill wells before we know how much shale gas we have,” Vasudeva said. “What we do know is that India does have shale-gas reserves.”

ONGC found shale gas at a well in India’s West Bengal state, according to a Jan. 27, 2011, statement. The company signed an agreement with ConocoPhillips (COP) on March 30 for developing shale resources in India and North America.

India Auction

India has started mapping its shale resources and will have exploration rules in place by 2013, Prime Minister Manmohan Singh said March 23. Blocks will be auctioned next year after the policy is published, G.C. Chaturvedi, the top bureaucrat in the oil ministry, said Dec. 21…

China has 25.08 trillion cubic meters (886 trillion cubic feet) of exploitable onshore shale-gas reserves, the country’s land ministry said March 1. The world’s biggest energy consumer aims to produce 6.5 billion cubic meters of shale gas by 2015 and set a target of 60 billion to 100 billion cubic meters by 2020, the National Development and Reform Commission said.

China Shale

China drilled 50 shale-gas wells in the past year, compared with 1,300 a month in the U.S., Chris Faulkner, chief executive officer of Breitling Oil and Gas Corp., said April 23. It takes “three to five years” for a shale-gas discovery to start commercial production and an extensive pipeline network is needed to transport the fuel to consumers.

My comments

This should serve as more proof that shale gas is the future of energy.

This also means that the emphasis for acquiring energy reserves will largely be directed to Shale at the expense of alternatives (conventional oil, coal, nuclear, solar, wind)

And this is why energy geopolitics will shift to Shale.

My favorite environmental science and economics author Matt Ridley writes

The campaign to stop shale gas proving its case in the market is political, not scientific. Behind it lies vested interests. The Russian gas industry, which is alarmed at losing its impending near-monopoly on European gas supplies, has been vocal in its criticism of shale gas. The coal and nuclear industries too would like to see this baby strangled at birth, but have been less high-profile.

Most of the opposition, though, has come from those with a vested interest in renewable energy, including the big environmental pressure groups, which are alarmed that the rich subsidies paid to wind, biomass and solar may be under threat if gas gets too cheap and cuts carbon emissions too effectively. Their entire rationale for subsidy, parroted by their dutiful poodle Chris Huhne, when Energy Secretary, is that gas would get more expensive until even wind and solar looked cheap. That was wishful thinking.

Even if you do not think carbon emissions are the highest environmental priority, there is a more fundamental reason why using gas is good for the planet. No other species needs or uses it. Every time you grow a biofuel crop, harvest timber for a biomass power station, pave a desert with solar panels or dam a river for a hydro plant, you are stealing energy from the natural world. Even the wind is needed - by eagles for soaring, by bats for feeding (both are regularly killed by wind turbines). As the only species that uses gas, the more we use it the more we can leave other sources of energy for nature.

And lastly, given all of the above, this is further evidence that many have seduced to the quackery, peddled by politicians and mainstream media, that the Southeast Asian territorial disputes of Scarborough or Spratlys has been about oil.

As a side note, Japan and China has their version of territorial dispute through Senkaku Islands which I earlier pointed out. Yet, in spite of the supposed bickering, Japan-China-South Korea concluded last week what has been labeled as the "Trilateral Summit" covering vast economic and political issues

Part of the rapprochement reached from the conference as noted by Xinhua, ironically China’s official press agency:

On strengthening communication and coordination in regional and international affairs, they stressed the mutually reinforcing and complementary roles of the trilateral cooperation and such regional fora as ASEAN Plus One, ASEAN Plus Three, East Asia Summit, ASEAN Regional Forum and Asia-Pacific Economic Cooperation, said the declaration.

They reaffirmed that the ASEAN Plus Working Groups need to be established without delay to accelerate the discussion on a regional comprehensive economic partnership towards the commencement of negotiations, taking into account the initiatives of East Asia Free Trade Area (EAFTA) and Comprehensive Economic Partnership for East Asia (CEPEA).

So again, the Philippines either has a Dr. Jekyl and Mr. Hyde relationship with China or that all the ruckus about the gunboat diplomacy has been geopolitical vaudeville.

Quote of the Day: The Moral Case of Free Markets: Achievement

The lesson is that defenders of free enterprise have to put less weight on happiness. Sure, happiness is one good thing. But so is achievement - doing something productive with your life. And on this score, free enterprise looks a lot better than welfare states that subsidize people who skate through life without even trying to make something of themselves.

Once you take achievement seriously, moreover, you start to see that redistribution is immoral in and of itself. When someone achieves something - whether writing an article or building a business - they deserve to keep the product. It matters little whether keeping the product makes the achiever happy. The point is that achiever earned what he has, and other people - including government - ought to respect his rights. From here, you're close to the truism that taxation is theft - and the moral case for free enterprise looks solid indeed.

That’s from Professor Bryan Caplan at the Econolog.