Dealing with Today’s Uncertainty: Patience is the Better Part of Valor

Highly volatile markets will be the outcome of today’s treacherous geopolitical conditions. That’s what I have been saying all along.

Volatility in Both Directions but with a Downside Bias

So far my perspective has been continually confirmed: volatility on both directions with a downside bias, especially for the Phisix.

A week ago, the Phisix got slammed early but the bulls worked their way to cover on the lost ground, and by the end of the week, losses had been trimmed to less than half[1].

The opposite scenario occurred this week: the Phisix had a strong opening carried mostly by the initial torrent from Spain’s bailout, but bulls eventually succumbed to the bears by the week’s close.

Technically speaking, in spite of all the volatility, the Phisix has been rangebound.

Volatility has been global.

In seeming defiance of gravity where bad news conventionally extrapolates to lower markets, today, bad news IS good news.

It is ironic to see central bankers scream for blood[2], yet global equity markets trekked higher. That’s because market participants have been conditioned to the Bernanke Put or expectations that central bankers, led by the US Federal Reserve, will like a knight in shining armor, ride to the rescue.

News of the $125 billion Spanish bailout prompted for a one day euphoria which quickly faded. It was evident that markets saw through the flaws of the proposed bailout[3]. However as the week progressed, the spate of bad news gave way to intensifying speculations, which has been further fuelled by promises[4] of renewed interventions by central bankers.

Except for ASEAN bourses which posted mixed showing, major global indices registered modest to significant gains over the week.

China’s Loan Growth and Chart Patterns

China’s loans unexpectedly jumped in May, according to news reports[5]. This has prompted the Shanghai index to post a modest advance of 1.13% over the week.

Most of the growth in China’s credit markets seems to have been driven by State Owned Enterprises (SOE). This means that China may have embarked on a furtive state based stimulus rather than a nationwide program.

Unfortunately SOE’s which have played a prominent role in the expansion of China’s highly fragile shadow banking system and which has already been encumbered by questionable loans, may have limited actions for further expansion. But of course, given that SOEs are government owned firms, restrictions may be circumvented to advance political goals.

Yet given the moderate gains exhibited by China’s equity markets on such development, investors must have remained cynical to the sustainability of China’s bailout policies.

Nevertheless surging bond yields have not posed as a burden to global stock markets in heavy anticipation of central bank steroids. In spite of Spain’s bailout, Spain and Italy’s bond yields soared[6].

A week’s action cannot be read as a sustainable trend, thus we must continue to observe how prices in various markets will react to China, as well as to the developments in Europe, particularly the Greece moment and in the US.

Many have crowed about the bullish potentials of the US stock market through the reverse head and shoulder pattern, which they think may have a spillover on the Philippines.

As I pointed out in the past, patterns don’t make prices, people’s actions do.

It will be actions of central bankers that will determine the directions of the marketplace rather than chart patterns. I pointed out last year that the death cross in the US S&P 500 in August of 2011 signified a false alarm[7] (false positive error) and was eventually validated four months after[8].

So far, US money supply M2 seem not supportive of a sustained rise by the S&P 500 owing possibly to the US Federal Reserve’s offsetting of the “flight to safety” inflows coming from the EU and from the closure or winding up operations of Operation Twist as discussed last week[9].

It would likely take the FED another ramping up of their balance sheet expansion to rekindle the monetary accommodation.

So the bullish chart pattern may play out its trend if the Fed will ease further, otherwise, the chart pattern will likely fail.

Buy the Rumor, Sell the News

Global financial markets have relied heavily on the “buy the rumor” from central banking rescues.

These are likely to have two short to medium term outcomes.

One, if central bankers FAIL to deliver in accordance to market’s expectations, then we will likely see another huge bout of downside volatility in global equity markets.

The Phisix, whom has not been immune to contagion, may breakdown its recent support level at 4,863, a level which represents nearly 10% from the peak. But a breakdown may not necessary lead to a bear market.

Yet such market turmoil may likely serve as fulcrum for the next batch of intensive interventions. Nevertheless, under such conditions, it would be best to wait and see until volatilities in the financial markets (stocks, commodities, bonds) subside, before considering to reposition.

On the other hand, if markets may be temporarily satisfied with REAL actions of central banks (e.g. $1 trillion bailout) then we should see a minor or a slight “sell on news”. But this should be seen as opportunities to RE-ENTER the markets incrementally.

Of course, the direction of gold prices, as well as, prices of general commodities, will serve as crucial indicators in determining the strength of the trend.

While gold’s price trend has significantly improved, there have been little signs of progress in the oil market (WTIC) and the general commodities (CRB).

Finally as caveat, I would like to reiterate that should markets continue to rise in ABSENCE of REAL actions from central bankers, we cannot rule out that the markets could fall like a house of cards (fat tail risks) or what I would call a Dr. Marc Faber event[10].

The market’s deep addiction to stimulus will eventually seek REAL stimulus more than just promises or in central bank lingo, signalling channel. Reversal of expectations can become violent.

As a side note, I find it ridiculous for people especially so-called experts to assert that today’s problems have been caused by lack of confidence, as if confidence has been randomly determined, and not in reaction to changes in the environment or in response to interactions with people. People have been not confident with the markets because of the persistent problem of insolvency and price artificiality and price distortions from political meddling. It’s a severe mistake to interpret effects as THE cause.

Bottom line: Global financial markets, including the Phisix, remains in a state of limbo. Uncertainty still governs. Under current conditions, the best guiding principle would be; patience is the better part of valor.

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[1] See Expect a Continuation of the Risk ON-Risk OFF Environment, June 11, 2012

[2] See Central Bankers Talk Doom, Markets Surge, June 16, 2012

[3] See Why Spain’s Bailout may NOT Work June 12, 2012

[4] See Talk Therapy boost US Markets, June 15, 2012

[5] See China’s New Loans Unexpectedly Surged in May, June 12, 2012

[6] Danske Bank, All eyes on Greek election June 15, 2012 Weekly Focus

[7] See How Reliable is the S&P’s ‘Death Cross’ Pattern?, August 14, 2011

[8] See US Equity Markets: From Death Cross to the Golden Cross, December 31, 2011

[9] See Expect a Continuation of the Risk ON-Risk OFF Environment, June 11, 2012

[10] See Dr. Marc Faber Warns of 1987 Crash if No QE 3.0, May 11, 2012

Quote of the Day: Failed and Failing States

Professor Michael S. Rozeff at the lewrockwell.com writes,

I like to use the ammunition provided by the statists themselves (or those who take states for granted) that discredits their own statism. For example, there is the "Failed States Index".

How many states are there in the world, and how many are failures or leaning toward failure, according to the people who devised this index? They assess 177 states. Of these, 124 are in the troubled categories (ALERT and WARNING). That's 70 percent! Here we have a great experiment at one point in time. We have 177 trials of the state as a way to organize, and we have 124 failed or failing or approaching failure. Among the Moderate and Sustainable categories (non-failed states) we have such wonderful states as Greece and Spain.

If instead we look at the performance of states across time, a century or two, we find huge and endemic failures almost everywhere we look in major countries: Russia, Japan, Germany, Italy, France, China, many eastern European countries, and even the United States (if we count, for example, the civil war as evidence of a gigantic failure). The U.S. has held together by force, not law. Is that what a non-failed state is supposed to mean? Many European states have failed time and again, as several world wars and hyperinflations demonstrate. Their current financial manipulations are new evidence of their failure, as are their high rates of unemployment.

70% of the world nations are considered as at the risk of becoming a ‘failed state’. That’s a great measure of political success.

Prof. Rozeff rightly points out that the today’s crisis affected EU nations have been categorized as moderate (non-failed states) which has not accurately reflect been on the failed state index (as this was based on 2011)

Yet, the increasingly dysfunctional political institutions of Greece would almost qualify her as a ‘failed state’.

As I recently wrote,

Instead, what a “failed state” means is that there is no standing government or that imposed government will mostly likely be ignored by society or what could be called “stateless society”.

I am not sure if Greece will technically become a failed state.

What is certain is that we are witnessing the accelerating collapse of a parasitical relationship anchored upon the spendthrift welfare and bureaucratic state.

Nonetheless this should be good news as Greece’s political economy would be compelled by nature to face economic realities; regardless of the outcome of today’s elections.

Oh by the way, despite all the cheering, drum beating and exaltation by media over the supposed political progress in the Philippines, the nation remains a candidate of becoming a failed state.

The Philippines has been ranked 51^st and classified as in “warning” conditions.

I’d say that the Philippines has more characteristics of a failed state: 40+% of the domestic economy are considered as informal. OFWs, whom has been labeled as heroes, are in reality symptoms government failure due to the lack of economic opportunities and depressed standards of living. Yet these combined forces which operates outside of government spectrum, has been delivering the real progress, but whose credit has been usurped by politicians and by mainstream media and institutions.

Yes, there have marginal improvements from 2010, but this could be seen on a relative perspective—perhaps more states have been performing far worst than the Philippines than the Philippines doing better.

Information Age Education: Student Focused Online Platforms

The information age will massively disrupt (20th century classroom mass based) education as we know of it today.

Hedge fund manager Andy Kessler in his interview with Artificial Intelligence expert Sebastian Thrun, published at the Wall Street Journal, gives us some clues. (bold highlight mine)

Yet there is one project he's happy to talk about. Frustrated that his (and fellow Googler Peter Norvig's) Stanford artificial intelligence class only reached 200 students, they put up a website offering an online version. They got few takers. Then he mentioned the online course at a conference with 80 attendees and 80 people signed up. On a Friday, he sent an offer to the mailing list of a top AI association. On Saturday morning he had 3,000 sign-ups—by Monday morning, 14,000.

In the midst of this, there was a slight hitch, Mr. Thrun says. "I had forgotten to tell Stanford about it. There was my authority problem. Stanford said 'If you give the same exams and the same certificate of completion [as Stanford does], then you are really messing with what certificates really are. People are going to go out with the certificates and ask for admission [at the university] and how do we even know who they really are?' And I said: I. Don't. Care."

In the end, there were 160,000 people signed up, from every country in the world, he says, except North Korea. Rather than tape boring lectures, the professors asked students to solve problems and then the next course video would discuss solutions. Mr. Thrun broke the rules again. Twenty-three thousand people finished the course. Of his 200 Stanford students, 30 attended lectures and the other 170 took it online. The top 410 performers on exams were online students. The first Stanford student was No. 411.

Mr. Thrun's cost was basically $1 per student per class. That's on the order of 1,000 times less per pupil than for a K-12 or a college education—way more than the rule of thumb in Silicon Valley that you need a 10 times cost advantage to drive change.

So Mr. Thrun set up a company, Udacity, that joins many other companies attacking the problem of how to deliver the optimal online education. "What I see is democratizing education will change everything," he says. "I have an unbelievable passion about this. We will reach students that have never been reached. I can give my love of learning to other people. I've stumbled into the most amazing Wonderland. I've taken the red pill and seen how deep Wonderland is."

"But Wonderland is also crazy!" I interrupt.

"So?"

Ah, another Thrun project that can radically disrupt the old way of doing things. "But isn't that exactly what we should be doing? I'm going part-time at Google to pursue this. I really care. Isn't this the American history? Can't you pinpoint almost everything that happened back to some technological breakthrough?" Indeed, this is going to disrupt public schools and teachers unions and universities and tenured professors and so on, Mr. Thrun effectively interjects: "The dialogue always focuses on what's going to happen to the institutions. I'm totally siding with the students."

I ask why he always takes on these quantum changes instead of trying something incremental. "That's what Google taught me. Aim higher. Udacity is my playground—to radically experiment and find out. I've seen the light."

Education in the information age will see a deepening trend towards personalized (demassified) learning, will focus on job related skill building (which does away with useless subjects aimed at indoctrination) and on increasing specialization.

Continues innovation, competition and noncontiguous platform which should cover the entire world (in terms of providers, educators and students), will become important forces in driving down the cost, or the “democratization” of education.

Finally, job hiring based on the education credential system model will be challenged, if not transformed to meet the new digital realities.

Explore Sebastian Thrun's Meet Udacity website here.

China’s Middle Class Support Demand for Gold

From Mineweb.com

The rise of China's middle-class is helping support demand for gold in the country. China, the largest producer of gold, is set to become the biggest consumer of the metal in 2012, with a significant proportion of luxury purchases in China veering towards gold accessories, bought by middle-class aspirational consumers.

By 2020, 25% of China's population is expected to be middle-class, creating great consumption demand. Diamond studded luxury items and gold watches are seeing `blow-out like demand' from wealthy shoppers in China, who are snapping up these expensive accessories to make a fashion statement, give as business gifts or just collect.

What also augurs well this year is that middle-class wealth is expected to spread to 600 million people in third-tier Chinese cities, with a sizeable percentage investing in gold or buying gold jewellery.

For a country whose gold production in the first four months of 2012 reached 109.6 tonnes, up 6.13% from the same period last year, passion for the yellow metal has scaled new heights.

Total retail sales of gold, silver and jewellery in China amounted to $2.82 billion in May, up 18.2% compared to the same period last year, according to the National Bureau of Statistics of China. Accumulative retail sales of the segment in the first five months of 2012 reached $14.6 billion, up 16.1% compared to the same period last year.

In May, the country's overall retail sales of consumer goods including gold, silver and jewellery totalled $262 billion, up 13.8% year-on-year at nominal growth rates. The real growth rate was 11%, data showed.

The jewellery sector in China has become a hot spot fuelled by surging investment demand for gold and precious stones. Jewellery retailers registered a 42% increase in sales last year, driven by consumers' taste for gold and gemstone-encrusted jewellery. Reports indicate that these jewellers are looking beyond traditional markets, eager to dig into the pockets of the newly rich middle-class in smaller cities.

For some time now, the country's growing middle-class has been pursuing a quality of lifestyle that includes appreciation for exquisite fine jewellery. And, retail jewellery chains are expanding to smaller cities and districts to keep up with demand.

Statists have always made the point that paper money has been the popular choice. But appeal to popularity premised on free lunch or Santa Claus politics cannot and will not supplant economic reality.

Today’s crisis have been manifestations of the unraveling of such unsustainable institutional arrangements.

Statists also say that people will have difficulty over adjusting or accepting to the return of gold as money. Maybe for the people of the West this may hold some substance. The intellectual elite may have successfully indoctrinated upon the public to accept the ideology that gold is a “barbaric metal” and where free lunch politics have promoted and embedded to their lifestyles the creed that “debt based spending is the path to prosperity” through government’s cartelized banking system.

But this certainly is far from reality for most of Asia such as China, India, Malaysia or Vietnam. The rate of growth of gold’s demand by China’s middle class looks like a testament to these.

In other words, should a global currency crisis emerge, then Asians are likely to reform their respective monetary system faster than that of the West. But that would be just a guess.

Yet it is unclear if prospective monetary reforms will include gold. But chances are increasing that gold may be part of it.

Global central banks have been accumulating gold at a faster rate led by Asia.

From Reuters.com

The Bank for International Settlements (BIS) noted in its June 2012 Quarterly Review that "central bank balance sheets in emerging Asia expanded rapidly over the past decade because of the unprecedented rise in foreign reserve assets" Reserves rose from $1.1 trillion to $6.4 trillion in 2011.

This quote, which I earlier posted, attributed to Janos Feteke (who I think was the deputy governor of the National Bank of Hungary) looks apropos to the surging demand of gold from China’s middle class and to the micro versus macro debate on the return of the gold standard,

There are about three hundred economists in the world who are against gold, and they think that gold is a barbarous relic - and they might be right. Unfortunately, there are three billion inhabitants of the world who believe in gold.

What truly matters is to get monetary system out of government's hands or to depoliticize or denationalize (Hayek) money and allow for competition in banking (free banking), where gold standard may or may not be the accepted standard. Nevertheless sound money based on free markets.

Quote of the Day: Good Conduct is a Consequence of Freedom

Great part of that order which reigns among mankind is not the effect of government. It has its origin in the principles of society and the natural constitution of man. It existed prior to government, and would exist if the formality of government was abolished. The mutual dependence and reciprocal interest which man has upon man, and all the parts of civilised community upon each other, create that great chain of connection which holds it together. The landholder, the farmer, the manufacturer, the merchant, the tradesman, and every occupation, prospers by the aid which each receives from the other, and from the whole. Common interest regulates their concerns, and forms their law; and the laws which common usage ordains, have a greater influence than the laws of government. In fine, society performs for itself almost everything which is ascribed to government.

That’s from Thomas Paine, English-American author, pamphleteer, radical, inventor, intellectual, revolutionary, and one of the Founding Fathers of the United States quoted from the Rights of Man Part 2, by libertarian author Sheldon Richman who aptly sums it up…

good conduct isn’t a precondition of freedom; it is a consequence of freedom

Central Bankers Talk Doom, Markets Surge

You’ve got to hand it central bankers for deftly using scare tactics to drive up the markets

This from a Bloomberg article entitled Central Banks Warn Greek-Led Euro Stress Threatens World

Central banks intensified warnings that Europe’s failure to tame its debt crisis threatens to roil the world’s financial markets and economy as Greece’s election in two days looms as the next flashpoint for investors.

Monetary policy makers from the U.K. to Japan and Canada sounded the alert about potential fallout from the single currency bloc’s troubles. They spoke as Group of 20 leaders prepare to meet in Mexico next week amid the weakest international economy since the 2009 recession.

A victory by Syriza, the party that promises to renege on Greece’s end of the bailout deal, could speed the nation’s exit from the euro. Absent a quick fix from divided European governments, central bankers may have to engage in fresh crisis- fighting of their own to ensure markets operate and their economies grow if the election jolts investors. Spain’s 10-year bond yield vaulted to 7 percent yesterday in a fresh sign of the stress that has plagued the region for two years.

The crisis has created a “large black cloud of uncertainty hanging over not only the euro area, but our economy too, and indeed the world economy,” Bank of England Governor Mervyn King said in London late yesterday.

‘Major Shock’

Canada faces a “major shock,” and global financial conditions could deteriorate significantly if Europe’s crisis worsens, the country’s central bank said yesterday. Bank of Japan (8301)Governor Masaaki Shirakawa said June 13 that the euro area poses the biggest challenge to the world’s No. 3 economy. The BOJ today kept monetary policy unchanged, while saying it will be giving “particular” attention to global market developments.

So when has DOOM become POSITIVE for markets? Well that’s when markets have been PROMISED to be defended with a tsunami of STEROIDS

Here are some examples:

Bank of England proposes £140 billion rescue plan

From the Telegraph

George Osborne unveiled a £140 billion emergency scheme to try to avoid a second credit crunch caused by the ongoing chaos in the eurozone.

The Bank of England is to offer money to high-street banks to kick-start mortgage and small business lending to prevent loans being rationed for many families and entrepreneurs, the Chancellor announced.

It comes after sharp rises in the costs of mortgages and other loans in recent months as banks struggle to raise money in the midst of the single currency crisis.

Bloomberg on last night’s positive reception of US markets on the alleged doomsday

Expectations for global policy action grew as central banks intensified warnings that Europe’s failure to tame its crisis threatens the economy. European Central Bank policy makers have overcome a key concern about taking the benchmark rate below 1 percent, two euro-area central bank officials said. The June 17 vote will turn on whether Greeks accept open-ended austerity to stay in the euro or reject the conditions of a bailout and risk becoming the first to exit the 17-member currency.

Fed Action

Stocks also rose on speculation the Federal Reserve may join central banks in taking steps to boost growth. Data today showed that industrial production unexpectedly fell and consumer confidence slid, adding to evidence of U.S. economic weakness. U.S. policy makers meet June 19-20.

Of course, flooding the world with money would not be sufficient, central bankers would need to ensure an easing of regulatory conditions to make the credit environment conducive, e.g. lighten up on collateral requirements

From Marketwatch.com

International regulators are on the verge of easing new banking rules that are meant to help the safety of the financial system, the Wall Street Journal reports, citing unnamed sources. Some of the regulators apparently worry that forging ahead with the new requirements could actually make the European financial meltdown worse, the newspaper noted. So, the new plan is to make it easier for the industry to comply with requirement that lenders keep on hand enough liquid assets to weather market plunges or other disasters.

To preserve the current system, central bankers should be expected to INTENSIFY the use of steroids—which do not really help anyway and actually worsen it—in order to postpone what is truly inevitable.

Today’s markets have increasingly been anchored or hostaged on expectations of huge infusions of steroids. This implies that FAILURE to please or satisfy such expectations would lead to tremendous or outsized volatilities.

Nonetheless central bankers have, in reality, been using the crisis to expand political control over their constituents

As the great libertarian H.L. Mencken once said,

The urge to save humanity is almost always a false-face for the urge to rule it.

Be very careful out there.

Chart of the Day: Greece’s ‘Macaroni’ Bureaucracy

From Bloomberg, (bold emphasis mine) [hat tip P. Ella]

Panagiotis Karkatsoulis, who works in the Greek Ministry of Administrative Reform and e-Governance and teaches at the National School of Public Administration, has some well founded theories about where Greece went wrong. One long-standing habit of government that helped the country become almost unmanageable, according to Karkatsoulis, is its disdain for parliament: new rules and regulations in Greece have long been created by ministerial order and presidential decree rather than through parliamentary process.

About 70 percent of regulations were approved directly by ministers between 1975 and 2005, and just 2 percent were the result of parliamentary actions, Karkatsoulis says in this OECD presentation. Regions, prefectures and the president account for the remaining rule changes. More than 30 years of scant coordination has resulted in a morass of contradictory rules and a lack of legal clarity.

A profile of Karkatsoulis in Le Monde explains how the first government of George Papandreou in 2009 had 15 ministers, 9 vice-ministers and 21 adjunct ministers, along with 78 general or special secretaries, 1,200 counselors, 149 directorate generals and 886 directorates — this for a population of just over 11 million, or the same number of people as those living in Cuba. The resulting mesh of interdependencies for decision making has made governing Greece increasingly difficult.

The chart above from Mr. Karkatsoulis has been labeled as the ‘Macaroni’ chart.

This serves as a great example of how the Gordian Knot of arbitrary rules and regulations, which has been emblematic of a political economy built on an unsustainable parasitical relationship, ultimately ends up in a crisis.

Printing money via devaluation, as prescribed by the mainstream, will not solve the issue of excessive regulations, red tape and bureaucratic barnacles, as well as property rights, free markets and the rule of law.

More Wall of Worry: Rising Accounts of Protectionism

Another area to be concerned with is the reemergence of protectionism.

Writes the Wall Street Journal Blog,

As worries rise about an economic slowdown, major nations around the world are ramping up measures to protect their economies from trade threats.

Global Trade Alert, an independent monitoring group, says in a new report today that at least 110 new protectionist measures were implemented around the world since the Group of 20 advanced and developing economies met in France last November. Of those 110, 89 were by G-20 members, who meet again next week in Mexico.

Protectionist measures such as export restrictions and higher tariffs spiked after the 2008 financial crisis but didn’t subside afterward. Since then, nations have been pursuing stealthier measures — “murky protectionism” — to circumvent international trade rules, the group says.

The latest updated tally names the 27-member European Union as the leading culprit since November 2008, with 302 discriminatory measures, followed by Russia and Argentina with about half that number each. China ranked at the top of a list of “number of trading partners affected” — with 193, or nearly all of them, followed by the European Union at 187.

Bailout policies are a form of protectionism. And they protect certain domestic politically privileged interest groups at the expense of the consumer.

It has been the G-20 or developed nations (mostly the EU) that has initiated most or about 80% of protectionist measures.

This reveals of the state of their government’s growing desperation which aside from protectionism has resorted to various financial repression measures such as raising taxes, imposing capital controls, inflationism, negative interest rates, price controls and various regulatory proscriptions.

In addition, Russia and Argentina’s deepening slide to statism has also contributed to rising incidences protectionism.

China, as the report said, is likely to suffer most from the reversal of globalization or deglobalization. In reality, the whole world will suffer as economic doors close.

Unknown to many, the resurgence of protectionism is likely to provoke retaliatory responses which should lead to a deterioration in geopolitical relationships that increases the risks of military conflagration. The great depression of the 1930s paved way for World War II.

As the great Ludwig von Mises warned,

What is needed to make peace durable is a change in ideologies. What generates war is the economic philosophy almost universally espoused today by governments and political parties. As this philosophy sees it, there prevail within the unhampered market economy irreconcilable conflicts between the interests of various nations. Free trade harms a nation; it brings about impoverishment. It is the duty of government to prevent the evils of free trade by trade barriers. We may, for the sake of argument, disregard the fact that protectionism also hurts the interests of the nations which resort to it. But there can be no doubt that protectionism aims at damaging the interests of foreign peoples and really does damage them. It is an illusion to assume that those injured will tolerate other nations' protectionism if they believe that they are strong enough to brush it away by the use of arms. The philosophy of protectionism is a philosophy of war. The wars of our age are not at variance with popular economic doctrines; they are, on the contrary, the inescapable result of a consistent application of these doctrines.

Desperate politicians and their cronies would use every trick on their books to preserve their privileges, mostly in the cover of nationalism, that comes at the expense of long term interest of their constituents.

Nationalism serves no more than a ruse conjured by politicians and those of the political order to justify social controls.

I hope and pray that the growing trend of protectionism will be curbed and that wars will be avoided.

Quote of the Day: Global Competition is the 21st Century Reality

instead of pursuing a 20th century trade policy model that seeks to secure market-access advantages for certain producers, policy should be recalibrated to reflect the 21st century reality that governments around the world are competing for business investment and talent, which both tend to flow to jurisdictions where the rule of law is clear and abided; where there is greater certainty to the business and political climate; where the specter of asset expropriation is negligible; where physical and administrative infrastructure is in good shape; where the local work force is productive; where there are limited physical, political, and regulatory barriers, etc. This global competition in policy is a positive development because — among other reasons — its serves to discipline bad government policy.

That’s from Daniel Ikenson at the Cato Institute.

We Owe it to Ourselves: US Federal Reserve buys as US Treasury Sells Debt

Well, the US government continues to indulge in self-financing her ballooning debts.

The Zero Hedge notes,

Same time, same place, One day later. After yesterday the Treasury engaged in nearly contemporaneous monetization in the 10 Year bond courtesy of the Fed, first buying then selling the paper, at a record low yield of course, so minutes ago the Treasury just sold $13 billion in 30 year paper at another fresh record low yield of 2.72%, down from 3.06% in April. Ignore that the Bid To Cover plunged from 2.73 to 2.40, the lowest since November 2011, and that Indirects were barely interested, taking down just 32.5%, it was all about the Directs, whose 24% take down soared, and as in yesterday's case, was one of the Top 5 highest ever. China? or Pimco? We will find out soon. Dealers were left with the balance, or 43.5% the lowest since October 2011. Something tells us that once the Fed extends Twist, or engages in more outright LSAPs, we will be seeing much more of this same day turnaround service as little by little all interest-rate sensitive instruments slowly grind down to zero.

As the great Ludwig von Mises wrote,

The most popular of these doctrines is crystallized in the phrase: A public debt is no burden because we owe it to ourselves. If this were true, then the wholesale obliteration of the public debt would be an innocuous operation, a mere act of bookkeeping and accountancy. The fact is that the public debt embodies claims of people who have in the past entrusted funds to the government against all those who are daily producing new wealth. It burdens the producing strata for the benefit of another part of the people.

Every action has consequences. These will be revealed in due time.

Talk Therapy boost US Markets

Again US stocks reportedly rose on chatters of the US Federal Reserve rescue.

From Bloomberg,

U.S. stocks advanced, erasing a weekly loss for the Standard & Poor’s 500 Index, amid reports policy makers may take steps to assist economies battered by Europe’s sovereign debt crisis…

Stocks extended gains today amid reports of plans by central banks. Bloomberg News reported that U.K. Chancellor of the Exchequer George Osborne and Bank of England Governor Mervyn King are preparing two programs to increase the flow of credit. Reuters said that central banks are prepared to take action if needed to boost liquidity in financial markets if the Greek elections cause tumultuous trading, citing officials linked to the Group of 20 nations.

Speculation grew that the Federal Reserve will discuss stimulus efforts at its meeting next week after reports showed jobless claims unexpectedly climbed by 6,000 to 386,000 last week and the cost of living fell by the most in more than three years.

‘Good Stage’

“Good inflation data and weak employment is a good stage for a Fed policy response,” Kevin Shacknofsky, who helps manage about $5 billion for Alpine Mutual Funds in Purchase, New York, said in an e-mail. “We are at the stage where bad news is good news in terms of a policy response. Jobs will be the critical factor that influences the Fed.”

Imagine “bad news-is-good news” because of the prospects of rescues? That’s how distorted markets are today. Yet until what point will the market simply imbue all talks, with no actions? This is simply addiction.

And because the Fed’s talk therapy (signaling channel) seems have accomplished more than the implemented policies of QEs or Operation Twist, indecision or policy procrastination maybe a (deliberate) decision.

Bloomberg columnist Caroline Baum explains, (bold emphasis mine)

All it took was a lousy employment report and news that Spain’s banks were in the ICU to slice the yield on the 10-year Treasury note to a record low of 1.43 percent on June 1, a 30-basis-point decline for the week. The market accomplished in a matter of days what the Fed couldn’t in nine months and $400 billion of curve-twisting operations.

I suspect we are two events away from a 1 percent yield on the 10-year note and a flatter curve. All it would take is another weak employment report and a Greek exit from the euro zone to send investors rushing for the safety and security of U.S. Treasuries. And no, those buyers aren’t expecting to earn a positive return during the next 10 years.

Compromised Compass

In the old days, the spread provided a timely reading on the economy’s health by juxtaposing a Fed-pegged short-term rate with a market-determined long-term rate. The market rate served as a kind of check on Fed policy.. Why would the Fed want to compromise a good compass and reduce the incentive for banks to lend?

The argument for additional curve-twisting rests on the idea that lowering long-term Treasury yields brings down mortgage rates and helps the ailing housing sector. Freddie Mac’s 30-year commitment rate fell to a record low of 3.67 percent last week. It’s not the rate that’s deterring home purchases; it’s the lenders, having wisely determined that a good credit score and a 20 percent down payment are important after all. Not to mention potential buyers’ fears that home prices may fall further.

If Bernanke isn’t convinced of the need for more QE just yet and twisting the yield curve is cosmetic, what else could the Fed do at the conclusion of the June 19-20 meeting? More talk therapy.

"Bad news-is-good news" because the FED believes or thinks that they can continually talk up the markets.

Yet promises alone cannot satisfy the cravings of addicts (of anything).

And rising markets based on talk therapy looks likely indeed a candidate for “two events away from a 1 percent yield on the 10-year note”, that’s euphemism for a crash.

The more the market rises on the FED’s talk therapy, the greater the risks of a Dr. Marc Faber event.

Be very careful out there.

Quote of the Day: Welfare Crisis Aggravated by Demographics

Demography is destiny. If so, then the future will be challenging in many countries around the world where fertility rates have dropped below the replacement rate. At the same time, people are living longer. So dependency ratios--the number of retirees divided by the number of earners--are destined to soar.

Why have fertility rates fallen around the world? There are a few plausible explanations. One of them stands out, in my opinion: Socialism may breed infertility! In the past, people relied on their children to support them in their old age. Your children were your old-age insurance policy. Over the past few decades, people have come to depend increasingly on social security provided by their governments. So they are having fewer kids.

That’s fine as long as the ratio of retirees to workers isn't so high that the burden of supporting our senior citizens crushes any incentive to work resulting from excessively high tax rates. The cost of increasingly generous and excessive entitlements has been soaring relative to taxable earned incomes even before dependency ratios are set to rise in many countries. Governments have chosen to borrow to finance social security and other entitlements, to avoid burdening workers with the extremely high tax rates that are necessary to balance entitlement-bloated budgets.

Median ages are highest in advanced economies with large social welfare states. Among the 45 major countries, Japan has the highest median age (44.7), while the Philippines has the lowest (22.2). Advanced economies tend to have higher median ages than emerging ones because they provide more social welfare, which boosts longevity and depresses fertility.

Bond markets may be starting to shut down for countries that have accumulated too much debt. That’s creating a Debt Trap for debt-challenged governments. If they slash their spending and raise their tax rates, economic growth will tend to slow. If tax revenues fall faster than spending, their budget deficits will widen. There has recently been an outcry about the hopelessness of such “austerian” policies that perversely lead to higher, rather than lower, debt-to-GDP ratios.

The demographic reality is that people around the world are living into their 80s and 90s. Some of them believe that they are entitled to retire in their late 50s and early 60s even though they are living longer. Yet, they didn’t have enough children to support them either directly (out-of-pocket) or indirectly (through taxation). Instead, they expect that their governments will support them. So governments have had to borrow more to fund retirement benefits. That debt is mounting fast and will be a great burden for our children. The result can only be described as the Theft of Generations.

That’s from Dr Ed Yardeni at his blog. To “depend increasingly on social security” has not really been about socialism (government ownership of production) but about the welfare state that has played a significant role in driving today’s debt crisis. The Santa Claus principle is being unraveled.

How Tax Rates Affect Manufacturing

From the Business Insider (bold highlights original)

The theme of this year’s Technology Day at MIT was advanced manufacturing in the U.S. Kresge Auditorium was close to capacity with alumni from all reunion years.

Learned MIT faculty weighed in on the importance of proximity between engineers and factories. The Atlas Device story was initially an inspiring tale of can-do New England spirit, with engineers in Somerville and a machine shop in Woburn working together to make improvements on a weekly basis.

But then we found out that the main customer was the U.S. military and they really didn’t care how much it cost or how efficiently it was produced. Similarly, the solar cell talk was great until we learned that there are about 12 good reasons why solar cells must be manufactured in Asia.

In a panel discussion afterwards, the speakers were asked what it would take to make the U.S. more competitive for manufacturing.

The answer was that it was pretty much hopeless at current tax rates.

Big companies make a lot of money in foreign countries, but if they bring the profits back home they get hit with the world’s highest corporate tax rate. So they leave the money in China, for example, and then invest it there in research and development or a new factory. I.e., our own multinational companies are financing the new facilities around the world that are rendering the U.S. uncompetitive.

Globalization is not to be blamed for investors who straddle to take advantage of the variances of tax rates. Instead, tax competition should help keep a check on insatiable or greedy governments. And importantly, tax competition provides a channel for the old saw—”money flows where it is treated best”.

The lesson is that tax rates should be competitive as they signify as one of the key variable in determining resource allocations. Although I would prefer to abolish them all.

Philippine Overseas Workers Help Fuel Philippine Property Bubble

Again reports glorify political superficialities as supposedly fueling economic progress.

From Bloomberg,

Filipinos investing in the local property market with money earned overseas helped make the peso Asia’s best-performing currency of 2012, even as a global economic slump sapped demand for riskier assets.

Euliver Dizon, a web designer in the U.S., is scouting for a home in Manila, praising President Benigno Aquino for improving the economy. Rommel Adre, a software developer who worked abroad from 2000 to 2011, bought a home in the capital and some properties to rent. Aileen Respicio, a former domestic helper, opened a beach resort with her Scottish husband six years ago and is now buying more land.

The peso has gained 3.7 percent this year versus the dollar including interest. Capital inflows aid Aquino’s drive to win an investment-grade rating, which would allow the Philippines to attract pension money needed to build roads, bridges and airports. Central bank data shows remittances from overseas workers rose 5.4 percent in the first quarter from a year earlier to $4.8 billion, accounting for 10 percent of the economy. They don’t detail use of funds.

There seems hardly a meaningful correlation between the year on year changes of remittances AND the Philippine Peso. In other words, it would be misguided to allude a causal relationship between the Peso and Remittances. This would be a post hoc fallacy.

Moreover, in reality, the Peso has been appreciating prior to the current administration. So domestic politics has hardly been a big factor in the Peso’s advances.

Also, the Peso’s rise has not been in isolation, the Peso has risen ALONG with major ASEAN contemporaries. This means that the Peso’s rise, as well as the Phisix has been a regional if not global phenomenon as I previously discussed.

This is another validation of George Soro’s reflexivity theory which describes the feedback loop mechanism between the influences of price actions in the financial markets and perceptions affecting real actions.

This also shows how policies can be manipulated to promote political agenda: What is misread as progress has in reality, been an offshoot of negative real interest rate policies. This ongoing property boom has long been in my tarot cards.

Yet local officials can’t see bubbles.

More from the same article…

The peso rose 0.7 percent to a one-month high of 42.635 per dollar yesterday. The central bank, due to report April data tomorrow, predicts remittances will reach a record $21 billion this year. They are growing faster than the 5 percent target, helping to support the peso, Finance Secretary Cesar Purisima said. He said there is no evidence of hot money driving property prices higher.

“We are monitoring carefully the situation to make sure we don’t create problems down the road for us in terms of asset bubbles,” Purisima said in an interview at Bloomberg’s headquarters in New York on June 12. “We are very far from the situation.”

Overseas Filipinos account for about 30 percent of residential sales, as many workers have already satisfied the food and clothing needs of their families, said Alex Pomento, head of research at Macquarie Group’s Manila unit. About 100,000 housing units have been added per year since Aquino took office in 2010, up from about 60,000 in 2007, he said.

Of course, it would be self defeating for politicians to curb the bubble which has been part of their image building or in projecting of their “success”. Public opinion is easily swayed by actions with short term impact.

Let me add that such news tend to overrate the 30%, which account for the residential sales by Filipino overseas buyers, but has been silent on the 70%--the local buyers. Media, mainstream experts and politicians panders to OFWs because the latter has gained political clout.

With the rate of real estate projects mushrooming over the metropolis, one would wonder where all the buyers and tenants would come from to fill up coming supplies.

Metro Manila has nearly 12 million population with a annual growth rate of around 2%. I don’t have data on the per capita growth of the metropolis, but construction activities suggest of expectations of immense (unrealistic) growth or an unsustainable boom.

Besides unlike Hong Kong and Singapore which has lack of land space to build on, the Philippines has vastly wide areas for residents especially if one considers the adjacent outskirts.

A little observation will help. Go out at night and observe the existing condos. I estimate that occupancy level, based on lights, has been less than 50% for most condo buildings especially on business districts. So more supplies will improve occupancy?

Overseas hot money may not (at the moment) be the drivers of the current property bubble but local money from easy money policies will. This will be compounded by money from Filipino Overseas Workers whom will be impelled by monetary policies abroad and seduced by political fiction.

I’d rather be picking on the wreckage of a bubble bust, than be a victim of political hysteria.

Italy’s Pro-Growth Tax Increases Backfires

Economic reality flies in the face of the “pro-growth” policies prescribed by politicians and which has been endorsed by mainstream experts.

Italians join Greeks in dodging tax increases, which demonstrates their refusal to feed big government through the strangulation of the private sector.

From Bloomberg,

Italian Prime Minister Mario Monti is facing signs that tax increases are beginning to backfire as his new levy on real estate goes into effect.

Value-added tax receipts have declined since Monti’s predecessor, Silvio Berlusconi, raised the rate by 1 percentage point in September as the economy was slipping into recession,government data released June 5 showed. The amount collected fell in the 12 months ended April 30 to the lowest since 2006.

Finding the right deficit-reduction mix as Monti fights to meet budget targets is critical for Italy to avoid becoming the biggest victim yet of Europe’s financial crisis. A slump that is driving up welfare spending is adding urgency to Monti’s effort to make the economy more competitive amid a growing backlash across Europe against austerity.

“This government has raised taxes too much,” said Alberto Alesina, a professor of political economy at Harvard University. “It would be much, much better to lower spending.”…

The decline in VAT revenue figures may bolster the government’s efforts to postpone a further increase in the rate after October by 2 percentage points to 23 percent. That would put Italy on par with Greece.

The emperor has no clothes. Pretentious knowledge has been exposed via the law of unintended consequences

Again from the same Bloomberg article, (bold emphasis added)

Monti planned to tap more than 4 billion euros of projected savings from a government spending review to put off the VAT increase, which his deputies acknowledge may deepen the recession.

“The economy shows signs of strong deterioration,” Finance Undersecretary Gianfranco Polillo told the Senate in Rome on June 6. “In light of the fall in domestic demand, betting on a further VAT increase would be incomprehensible and even wrong.”…

Under Monti, Italy’s tax burden, the ratio of tax revenue to economic output, will rise to 45.1 percent this year from 42.5 percent in 2011, and won’t start falling until 2015.

Monti, a former university president and Goldman Sachs Group Inc. (GS) adviser, was brought to power in November to rein in bond yields and bring down debt. His 20 billion-euro austerity package raised retirement ages and was followed by measures to ease firing rules and promote competition. Increased rates on gasoline were enacted in December and on luxury goods earlier this year, while the first property tax payments are due next week.

“I don’t want to deny that we could have done more and better,” Monti said in a June 7 speech. Still, his reforms have produced results, he said.

Dodging Tax

The government had 99.8 billion euros in VAT receipts in the 12 months ended April 30 tied to internal trade, or transactions among domestic counterparties. That compares with 100 billion euro in the 12 months ended March 31 and 101.3 billion euros in the period ended April 30, 2011.

“VAT revenue does depend on growth in domestic consumption,” said Ian Roxan, director of the Tax Programme at London School of Economics and Political Science. “It is also not immune to evasion. It is certainly possible that in a time of austerity people become less willing to pay VAT.”

Italy loses more than 120 billion euros in unpaid taxes every year, according to the Equitalia tax-collection agency. The country retrieved 12.7 billion euros from the fight against evasion in 2011, up 15.5 percent from 2010.

This also exposes the propaganda that the public has been “anti-austerity” which is nothing more than media's manipulation of people’s minds. Because if Italians have indeed been anti-austerity, they would have rushed to the tax collection agencies to pay their share. Duh. Or maybe Italians came to realize they are NO free lunches.

The harsh lesson from reality is “If you tax something, you get less of it.”

Millionaire’s Portfolio: Collectibles are the Rage

From the CNBC

Collectibles are all the rage. From the $120 million hammer price for the pastel of Edvard Munch's "The Scream" to the run-up in prices for diamonds, wine and antique cars, the collectibles market (or “passion investments” or “treasure assets”) is booming on the back of demand from wealthy investors.

For the rich, Burgundy and sapphire are the new black.

But financial expectations for collectibles may be surpassing reality.

A new report from Barclays Wealth shows that among global investors with more than $1.5 million in investible assets, collectibles and precious metals now account for 9.6 percent of their total wealth. The numbers are even higher in the United Arab Emirates (18 percent) and China (17 percent).

As Barclays points out, wealthy investors like collectibles because they want “tangible, scarce and non-fungible investments" that “could provide a stable store of value in uncertain times.”

Yet Barclays says that “the world of collectibles thrives on fairy tales” like "The Scream" sale, calling collectibles markets “riddled with inefficiencies, "frequently opaque and illiquid," and "extremely volatile and risky.”

Reasons for the growth of collectibles as a share of the portfolio of the millionaires, according to Barclay: Emotions, Hidden Cost, Opaque Markets, Correlation and illiquid.

Yet it would seem misguided to lump arts, wines, precious metals and jewelries as a single asset ‘collectible’ class, as the utility and reservation demand functions of these items are different.

Some of the wealthy people will buy because of aesthetics, enjoyment and or for social status.

But it isn’t a ‘fairy tale’ when wealthy investors say that they had opted for ‘collectibles’ out of “tangible, scarce and non-fungible investments" that “could provide a stable store of value in uncertain times.”

Bluntly put, 'collectibles' represents as insurance against counterparty risks and are ‘real’ assets for the millionaires.

What truly will be exposed as fairy tale are the colossal financial claims at the fractional reserve banking system. The euro debt crisis signifies an ongoing manifestation of such a process.

Thus, the increased exposures by millionaires on 'collectibles' reflect on the present economic and financial realities.

Quote of the Day: The First Nation to use Cyberwar weapons

As for the malware, or Stuxnet virus, introduced into Natanz, was it wise to use this powerful and secret weapon against a plant that is under international inspection and enriches uranium only to 5 percent?

We may have disrupted Natanz for months, but we also revealed to Iran and the world our cyberwar capabilities. And we became the first nation to use cyberwar weapons on a country with which we are not at war.

If we have a right to attack Iran's nuclear facilities like Natanz and Bushehr that are under U.N. supervision, does Iran have a right to attack our nuclear plants, like Three Mile Island, with cyberwar viruses they create?

We have now alerted technologically advanced nations like Russia and China to our capabilities and impelled them to get cracking on their own cyberwar weapons, both offensive and defensive.

That’s from Patrick J. Buchanan author and co-founder and editor of The American Conservative at the lewrockwell.com on the moral, strategic and legal issue of the recent secret U.S-Israeli cyberwar strike on Iran's uranium enrichment plant at Natanz.

Welcome to the information age.