Why Current Market Conditions Warrants a Defensive Stance

Here is what I wrote last week[1],

Also the Phisix is likely to surf on the global ‘EU Summit honeymoon’ sentiment, as well as on the momentum from an imminent RECORD breakout.

Whether this breakaway run will be sustainable remains unclear as global markets will remain volatile on both directions.

Indeed the jubilation from the EU Summit combined with momentum powered the major local equity benchmark, the Phisix, to a fresh record high.

Of course this breakaway run will be subject to the question of sustainability given the recent developments abroad.

Nevertheless after 3 successive weeks of advances which racked up 8.53% in returns, it would be normal to see some profit taking.

Nonetheless today’s exemplary standings have more stories to tell.

The ASEAN Standout

From my radar screen of 70+ international equity benchmarks, the Phisix only ranks fourth among the best performers based on a year-to-date returns.

But the Phisix is the ONLY bellwether among the elite contenders that has been trading at record highs.

Except for Venezuela which has been drifting close to the recently etched milestone highs established last May, it is only Thailand that comes close to having a superb feat.

All the rest are still way off from their apogees set during the last 3-5 years

I do not count Venezuela’s stock market as a real contender for the simple reason that the outperformance of the Venezuelan stock market could be a reaction to the amplified risks of hyperinflation.

Due to a combination of price controls and massive imports by the government, Venezuela’s inflation rate has been down reportedly to 21.3% last June[2]. But this is likely to be temporary and designed for the reelection of President Chavez this October

Combined with falling oil prices and massively expanding government expenditures, the Venezuelan government will likely run out of hard currency or of foreign exchange which may force them to ramp up on the printing presses for financing.

Stock markets have been functioned as safehaven during episodes of hyperinflation as people jettison currency for real assets. A good example is the recent bout of horrific hyperinflation[3] endured by Zimbabwe which culminated in 2008[4].

Surging stocks amidst hyperinflation has barely been about real (investment) returns but about people trying to preserve savings through acquisition of claims on real assets (insurance against monetary disorder).

And going back to the top 11, Thailand’s stock market as measured by the major bellwether the Stock Exchange of Thailand (SET) is second only to the Phisix to demonstrate remarkable gains.

While the SET is at a milestone multi-year high, the Thai bellwether is still about 30% off from the 1994 pre-Asian crisis record.

Yet the best annual performers masks or are framed to exclude the position of the others. This shows why the use of statistics can tricky and can be tailored to fit a predetermined conclusion.

Indonesia and Malaysia may have posted moderate year-to-date returns relative to the Phisix, up only 6.1% and 5.87% respectively, but Malaysia, like Philippines, trades at record HIGHs.

Meanwhile Indonesia trades a few percentages or (3.5%) off the recent record.

So ALL four major ASEAN bourses are AT or NEAR landmark highs but so far the Phisix leads the pack.

Outside the region, I have not encountered any national stock markets that have come close to beating their 3-5 year highs.

Growing Detachment between Stock Markets and Real Events

It is obvious that any economic or financial gains would be used as political advertisement.

For instance the recent S&P upgrade of the Philippine credit rating have been painted as a puffery of good governance. The fact is that whatever gains seen in the Philippines has been a regional dynamic. They are in reality symptoms of the boom phase of the business cycle that has mainly been driven by the domestic monetary policies through the negative real rate regime and supplemented by external monetary policies which has induced a search for yield dynamic from foreign investors in response to international easing policies. This ‘search-for-yield’ can also be interpreted as capital flight.

The current market conditions of the Phisix fit the inflationary boom scenario described by the late Austrian economist Fritz Machlup[5]

If, however, we inquire into the causes of the inflow of speculative capital from abroad which is so much objected to, we shall often find that it was the boom tendencies that were already present on the stock exchange which attracted the foreign funds. La hausse amene la hausse. The beginnings of the speculative boom originated in a flow of money from domestic sources. And as it is extremely difficult domestic to conceive of a sudden epidemic of saving, we are once again driven back to credit expansion by the banks. It is the "domestic" creation of credit which usually produces that sentiment on the stock exchange and that movement of stock prices, which act as an by foreign invitation to foreign funds.

The occasions when the short-term foreign funds flowing onto the stock exchange are to be regarded with real mistrust are when these funds owe their boom is existence to a credit inflation abroad. In this case foreign they bring the foreign “business cycle germ” into the home country

Yet the much ballyhooed upgrade has been based on superficial measures. They have most likely been influenced by surging prices in the asset markets (reflexivity theory), by political Public Relations campaign, particularly the phony war against corruption (where corruption is misleadingly portrayed as a function of ethical virtuosity rather than from real cause: arbitrary statutes and regulations[6]) and could even possibly be related to dwindling stock of “safe assets” for the global banking system than from real changes or market based economic reforms as I explained earlier[7]

What the credit upgrade does is to give license to the Philippine government to lavish on public expenditures. This would only promote crony capitalism, (yes guess which parties will be awarded with the proposed $16 billion of public work spending?) and that rewarding debt would work to the detriment of the economy over the long run through the adverse effects of the crowding out phenomenon[8], higher taxes and the serial blowing of the bubble cycles.

Grandiose skyscrapers (or the Skyscraper Index) have exhibited uncanny accuracy as harbingers of the bust phase of financial bubbles.

And believe it or not, 9 of the 10 of the world’s tallest building will rise in Asia and have been slated for completion from 2015 onwards—with China having four, South Korea three and one apiece for Indonesia (3^rd largest) and Malaysia[9].

So if the skyscraper index remains a functional indicator of financial excesses then we could or we may see a regional financial crisis anytime during the time window of 2015-2017.

Yet given the extreme fluidity of current conditions, such bubble conditions may be delayed or hastened depending on the direction of external and domestic social policies mostly channeled through monetary policies, particularly the complicit war by central bankers against interest rates (or the euthanasia of the rentier).

From the prescient admonitions of the great Ludwig von Mises[10]

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

Of course, I see the soaring Phisix as effects of the bubbles parlayed as symptoms of Panglossian complacency (based on the belief that the Phisix or the region will decouple) or if not Pavlov’s classic mental conditioning (of the strongly held belief that central bankers will successfully bailout financial markets) or as effects of “jockeyed” markets.

As for the latter, aggressive buying in a landscape where global political authorities have been exhibiting anxieties over global economic conditions simply does not match with the current state of exuberance.

To give some examples.

The Bloomberg quotes IMF’s Christine Lagarde’s diagnosis of the world economy[11]

“Over the past few months, the outlook has regrettably become more worrisome,” Lagarde said. “Many indicators of economic activity -- investment, employment, manufacturing -- have deteriorated. And not just in Europe or the United States.”

Or how about the “45-minute salvo” fired by 3 central banks last Thursday as acts of desperation?

From another Bloomberg article[12]

Global central banks went on the offensive against the faltering world economy, cutting interest rates and increasing bond buying as a round of international stimulus gathers pace.

In a 45-minute span, the European Central Bank and People’s Bank of China cut their benchmark borrowing costs, while the Bank of England raised the size of its asset-purchase program. Two weeks ago, the Federal Reserve expanded a program lengthening the maturity of bonds it holds and Chairman Ben S. Bernanke indicated more measures will be taken if needed.

Many major global equity markets sagged following the news of the 45 minute interval coordinated easing from 3 major central banks.

The most curious response I saw came from China.

The Shanghai index remained wobbly and even traded on the negative for almost two thirds of Friday’s session which appeared to have discounted the interest rate cuts. The above chart from Bloomberg shows of the intraday actions. It took the last minute for the Shanghai index to surge, which according to news reports had been led by the property sector[13].

That last minute adrenalin shot may not persist as China’s Premier Wen Jiabao immediately shot down the notion of the lifting property controls in a comment today[14].

This is yet another example of the confounding stance by China’s political authorities.

The weaknesses in global markets following the reported near simultaneous interventions in the bourses of major economies could be deemed as “buy the rumor, sell on news” or of reality check relative to hope based expectations.

As I wrote a few weeks back[15],

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….

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.

Considering that the Phisix has soared since, I don’t see today as a providing a buying window, unless global central bankers would bring on their vaunted bazookas or until there will be meaningful improvements in the global economic arena

When financial markets flows into the opposite direction from the economy sans support from central bankers then the risks of a crash becomes a factor to reckon with.

One thing that could be justify divergences or decoupling is the possibility of intensified capital flight. While there are little signs of these affecting ASEAN markets yet, as explained last week, Denmark’s case seems like a relevant model.

Denmark’s bond markets which earlier have exhibited negative yields have now been reinforced by Denmark’s central bank policy of negative interest rates. Capital flight from the Eurozone to Denmark has prompted for an outperformance of Denmark’s equity markets[16] and has been on my top 11 list.

However the same capital flight phenomenon has not boosted the Switzerland’s Swiss Market’s Index in the same degree as Denmark. So we need to observe this further.

Outside More Central Bank Intervention, Expect Downside Pressures

Current conditions could be ripe for a significant retrenchment for global equity markets based on ‘fundamentals’.

Nearly 80% of the world’s industrial activities have been contracting[17].

Compared to 2007-2008 which had the US property bust as the epicenter, today’s slowdown has been coming from different directions, particularly, the Euro area and the BRICs.

Even in the US, both the industrial activities[18] and non-industrial activities[19] have been exhibiting considerable signs of weakening.

These may not signal yet the imminence of recession, but the risk of recession grows if both domestic and international conditions deteriorate further.

And the global economic slowdown has shown incipient signs of filtering into US corporate profits[20].

While the distribution of revenues from S&P 500 member companies has marginally been tilted towards US, nonetheless revenues from abroad still accounts for a substantial 45% share[21].

This means that slowing global economic growth will pose as material drag to current “fundamentals”.

So in the absence of further interventions by central banks or when steroid dependent markets have been left to their own devices, broad based downturns on the world economy would hurt profits and will get reflected on the stock prices.

The alternative view is that since global weakness has been coming from different directions interventions will require global coordination similar to the 45 minutes salvo.

In addition, “liquidity” conditions in emerging markets have reportedly been faltering.

This essentially reflects on the ongoing monetary tightening or increasing manifestations of bubble bust conditions in major economies as the Eurozone and the BRICs to Emerging Markets.

The transmission mechanism of which can be seen through the deterioration in trade balances which has been exacerbated by falling commodity prices, declining foreign reserve accumulation as some EM authorities have used excess reserves to support their domestic currency and a slowdown in capital inflows (which even may risk a reversal, if current conditions worsen)[22].

I would further point out that easing through interest rate policies will have miniscule effects to economies laden with debt.

Demand for credit will be limited as hock to the eyeball indebted individuals, households or corporations will be working to pay off existing liabilities. Further, impaired credit ratings diminish access to debt. Also supply of credit will be limited as institutions whose balance sheets have been compromised by problematic assets will work on building up capital reserves. Also, slowing of economic conditions will also hamper debt activities.

This means that unless global central banks pull out another rabbit out of a hat trick of aggressive ‘delaying the day of reckoning’ interventions through money printing, money conditions will tighten, as the malinvestments from previously inflated activities will have to undergo price adjustments that would need re-coordination in the transfer of resources from non-productive to productive activities.

So debt acquired during the bubble heydays will have to be dealt with eventually through the laws of economics.

Aside from the ECB, all eyes will be on the US Federal Reserve FOMC’s meeting on July 31 to August 1, 2012[23]

It would be interesting to see how the Phisix and ASEAN bourses will react in the face of a more pronounced slowdown in the US

Stay Defensive

The principal reason why the Philippines and her ASEAN neighbors have been more receptive towards negative real rates policies is that these economies has been excised of leverage as a result of the Asian crisis as shown in the above chart[24].

But this does not mean that the Philippine and ASEAN economies will be immune from a global economic slowdown. Again the exceptionalism and resiliency of ASEAN markets will be tested with a US economic slowdown.

Again since negative real rates rewards debt and speculation, today’s low debt era may easily transform low debt ASEAN economies into speculative and consumption activities based on debt similar to conditions which plagues developed economies today.

That’s the nature of bubble cycles.

For now, unless the US Federal Reserve (and or the European Central Bank) brings out the BAZOOKA soon, expect the Phisix, ASEAN and global markets to retrench.

At record and near record highs for the Phisix and ASEAN markets, retracements should be seen as normal countercyclical process.

But since events have been so fluid, we cannot discount the risks of a global recession emanating from continuing political stalemate, dithering over monetary policies and from policy errors. Recessions can turn bullmarkets into bear markets.

Oppositely, powerful responses from central bankers may alter the risk scenario for the benefit of the bulls for another short period.

And this is why excessive volatility in both directions will continue to characterize the financial marketplace.

Yet if the Phisix continues to soar, alone or along with ASEAN, despite all the mounting risks, and without support by the FED and or by the ECB, and if they are not driven by capital flight, the tail risks of downside volatility may become magnified.

The current conditions of financial markets can be analogized to navigating in treacherous waters where one’s survival depends on skillful handling of the steep ebbs and flows of the tides, and of course guided too by lady luck. Yet chance according to Louis Pasteur favors the prepared mind.

So still, I would advise that prudence will remain a better part of valor in terms of portfolio management

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[1] See Why has the Phisix Shined? July 2, 2012

[2] Businessweek/Bloomberg Venezuela Inflation Slows for Seventh Month on Import Surge, July 3, 2012

[3] See Zimbabwe's Hyperinflation February 25, 2009

[4] See Zimbabwe In The Aftermath Of Hyperinflation: Free Markets November 16, 2009

[5] Machlup Fritz A Digression On International Speculation Chapter 10, The Stock Market, Credit And Capital Formation William Hodge And Company, Limited p.163 Mises.org

[6] See Doug Casey On Corruption: Laws Create Corruption And Corruption Engenders Laws February 10, 2011

[7] See S&P’s Philippine Upgrade: There's More than Meets the Eye July 5, 2012

[8] Wikipedia.org Crowding out (economics)

[9] See Does the Skyscrapers Curse Signal a coming Asian Crisis?, July 6, 2012

[10] Mises Ludwig von 8. The Monetary or Circulation Credit Theory of the Trade Cycle XX. INTEREST, CREDIT EXPANSION, AND THE TRADE CYCLE Human Action Mises.org

[11] Bloomberg.com Lagarde Says IMF To Cut Growth Outlook As Global Economy Weakens, July 5, 2011

[12] Bloomberg.com, Central Banks Deliver 45-Minute Salvo As Growth Weakens, July 5, 2012

[13] Reuters.com China bank shares pull down Hong Kong HSI, property lifts Shanghai, July 6, 2012

[14] See China’s Property Controls: Mistaking Forest for Trees July 8, 2012

[15] See Dealing with Today’s Uncertainty: Patience is the Better Part of Valor June 17, 2012

[16] See Denmark Cuts Interest Rates to Negative, July 4, 2012

[17] Zero Hedge 80% Of The World's Industrial Activity Is Now Contracting July 5, 2012

[18] Yardeni.com US Manufacturing Purchasing Managers Index July 3, 2012

[19] Wall Street Journal Blog Vital Signs: Slowing in Nonmanufacturing, July 6, 2012

[20] Wall Street Journal Blog, Number of the Week: Rest of World Pulls Down U.S. Profits June30, 2012

[21] Businessinsider.com CHART: A Breakdown Of Where S&P 500 Companies Get Overseas Business, June 27, 2012

[22] See Emerging Market “Liquidity” Conditions Deteriorate July 5, 2012

[23] US Federal Reserve Meeting calendars, statements, and minutes (2007-2013)

[24] Zero Hedge, Asia's Downside Risk And The Three Big Hopes June 21, 2012

Barclay’s Libor Scandal: The US Federal Reserve as the Biggest Manipulator

Since 2008 it has been obvious that the US Federal Reserve through its manifold tools has been engaged in the manipulation of interest rates. Here is the alphabet soup of the Fed’s tools

I pointed this out earlier here

Nevertheless the Zero Hedge shows partly how the manipulation process has been done (hat tip Bob Wenzel) [bold original]

Via Peter Tchir of TF Market Advisors,

The Fed does everything it can to keep LIBOR low.

This chart says it all.

The Fed cannot affect LIBOR directly, but in general LIBOR trades in line with Fed Funds. You can see that historically as Fed Funds was changed, LIBOR responded appropriately. There was typically some small premium to reflect the "credit risk" of banks versus the Fed, but it was relatively small, and fairly stable. 3 Month LIBOR would deviate a bit as rate cuts and hikes were anticipated in the market, but in general, it was a fairly stable game.

That all started to break down in 2007. We saw the first real signs of LIBOR deviating from its normal spread to Fed Funds in the summer of 2007. The Fed responded by cutting the "penalty" rate for using the discount window, and in fact encouraged banks to use the discount window (I still can't shake the mental image of someone sitting in a dark basement with a green eye-shade doling out money to banks that request it). Then the crisis got worse. Bear needed to be rescued. Facilities such as the Term Auction Facility that had been put in earlier were increased in size. The Fed backstopped some portfolios that JPM acquired as part of the Bear Stearns deal.

As the crisis re-ignited in the late summer of 2008 and peaked after Lehman and AIG, the Fed took step after step to reduce borrowing costs. The Fed was blatantly clear that it wanted borrowing costs to go down. They had the obvious tool of reducing Fed Funds to virtually zero, but when LIBOR didn't follow, the Fed took further action. The Fed did not want bank borrowing costs to be high.

They increased dollar swap lines so foreign banks could borrow. The Fed stepped into the commercial paper market so banks wouldn't have to use money to meet drawdowns on revolvers. TALF was another creation to take pressure of bank lending.

The FDIC allowed banks to issue bonds with FDIC backing (so not quite Fed program, but who is going to quibble).

Fears that MS and GS and GE would topple the banks were alleviated by making them banks.

The list goes on. The Fed has done a lot and trying to control LIBOR as a key borrowing rate is one of the things they have worked on, both directly and indirectly.

In reality, central banks worldwide have been working round the clock to rein interest rates almost at every channel.

Bailouts are part of the umbrella mechanism of interest rate controls, as they prevent markets from revealing the real conditions of people’s time preferences over money and from the clearing of the loan markets—suppliers and demanders of loan.

And the biggest evidence is the scale of balance sheet expansions of the G-4 central banks since 2008 with the US Federal Reserve as the leader. (cumber.com)

China’s Property Controls: Mistaking Forest for Trees

Once again China’s confused policies

From Bloomberg,

China must “unswervingly” continue its property controls and prevent prices from rebounding, Premier Wen Jiabao said yesterday, after the central bank cut interest rates and triggered a surge in property stocks.

Local governments that introduced or covered up a loosening of curbs on residential real-estate must be stopped, Wen said during a visit to Changzhou city in eastern Jiangsu province, according to the official Xinhua News Agency. Restricting speculative demand and investment in property must be made a long-term policy, he said.

Wen’s comments underscore the government’s determination to maintain restrictions on housing purchases even as it cuts interest rates and boosts infrastructure spending to reverse a slowdown in the world’s second-biggest economy. China’s new-home prices rose for the first time in 10 months in June, according to SouFun Holdings Ltd. (SFUN), owner of the nation’s biggest real- estate website.

“We must unswervingly continue to implement all manner of controls in the property market to allow prices to return to reasonable levels,” Wen was quoted as saying when he met residents and local government officials in charge of affordable housing. “We cannot allow prices to rebound, or all our efforts will come to naught,” he said…

All financial institutions must continue to strictly implement a differentiated housing credit policy to continue curbing property-buying for speculation and investment purposes,” it said in its statement announcing the interest- rate cut.

China started imposing restrictions on home purchases two years ago as prices surged after the government started a stimulus package to shield the economy from the impact of the global financial crisis. Measures included raising down-payments and mortgage-rate requirements, limiting purchases in some cities and trialing a tax on homes in Shanghai and Chongqing.

Property controls are still in a “critical period” and the task remains “arduous,” Wen said yesterday. Cases of illegal acquisition of property-rights must be investigated, he said.

Property Tax

The government must “promote the study and implementation of changes to the property-tax mechanism, and to speed up the establishment of a comprehensive long-term mechanism and policy framework for controlling the property market,” Xinhua cited Wen as saying.

This is an example of the left hand doesn't know what the right hand is doing.

Premier Wen also mistakes forest for trees. Property prices are symptoms and not the source of the bubble. In reality the repeated campaign of monetary policy accommodations compounded by ‘investment spending’ fiscal policies or the Keynesian policies of perpetuating unsustainable quasi-booms has been the culprit

Another manifestation of such bubble conditions has been through China’s version of Shadow banking system which has ballooned to 1.7 trillion which has financed the property bubble.

Yet depending on the debt level conditions, recent rate cuts could reinvigorate speculations in the property sector, if not spillover or get diverted to other sectors of the economy, perhaps in the stock market, commodities or industries that may benefit from “inland development strategy” or euphemism for new pet projects of China’s political authorities.

The inconsistencies of China’s policies will only deepen the uncertainty and of the growing risks of the implosion of China’s bubble economy.

More Brain Drain Canard: When All You Have is a Hammer, Everything is a Nail

The politically colored term “Brain drain” can be seen as an example of what George Orwell labeled as “doublespeak” or language that deliberately disguises, distorts, or reverses the meaning of words.

Here is the Inquirer,

The brain drain has become a bigger problem in the last 12 years, as the yearly exodus of people trained in science and technology (S&T) grew by about two and a half times from 1998 to 2009.

According to a Bureau of Labor and Employment Statistics (BLES) report, the number of S&T workers who opted for overseas jobs rose from 9,877 in 1998 to 24,502 in 2009.

The numbers refer only to new hires or those leaving the country for jobs for the first time.

The BLES cited data from a study titled “International Migration of Science and Technology Manpower-OFWs,” which the Department of Science and Technology’s Science Education Institute (SEI-DOST) published in 2011.

S&T deployment

Results showed that during the 12-year period, S&T deployment grew by an average of 11 percent yearly, peaking at a 59-percent increase in 2001 when 17,756 professionals left, compared with 11,186 the previous year.

Based on the SEI-DOST study, S&T manpower includes physicists, chemists, mathematicians, statisticians, computing professionals, engineers, life science professionals, health professionals (except nurses), and nurses and midwives.

The study found that nurses and midwives represented the biggest group with an average of 9,348 deployed yearly, or 60 percent of the total S&T average of 15,555.

Brain drain is essentially OFWs in different attires.

How can migration be a “problem” when they are representative of individual choices and responses to the current political economic environment?

Have OFWs not been acclaimed as modern day heroes based on mainstream politics?

Whether it is about greener pastures or about career advancement or many other reasons, the point is that OFWs VOTED with their feet. Thus, the actions of science, math and technology graduates, simply reveals of the lack of income, if not career opportunities in the Philippines. These people are simply looking out for their welfare.

Are they not in a better state than becoming unemployed tertiary or college graduates which not only adds to political dependency and the government's fiscal problems but also dehumanizes or demoralizes the individual and their families?

So it is ok to send graduates of different courses or undergraduates, but it isn’t ok to send (S&T) graduates? So the government discriminates or plays favorite with different segments of OFWs? How moral is this?

I have dealt with this bromide lengthily here

Ah but of course, it said that when all you have is a hammer, everything else is a nail. When the government sees a problem they have the typical solution: spend, spend, spend and spend more of other people’s money

From the same article,

When the national budget for 2012 was pending in Congress last year and Malacañang was pushing for a 10-percent increase in allocations for state universities and colleges (SUCS), Budget Secretary Florencio B. Abad said the Executive supports the development of SUCs toward five priority areas that are expected to drive economic growth and employment.

So there you have it.

“Brain drain” has not been a problem when it gives the political authorities free advertisement, as “modern day heroes”, to advance on their political goals.

But “Brain drain” becomes a problem when the government has been itching to spend money other people’s money.

Doublespeak it is.

EU’s Growing Border Controls Undermines the Principle of Freedom of Movement

While European politicians desperately try to keep the European Union from falling apart, through frantic rescues of insolvent sovereigns and banks, the reality is that their actions have already been gnawing at the foundations of the union: freedom of movement.

Sovereign Man’s Simon Black observes of EU’s growing border patrols:

Speaking of travel restrictions and border controls, though, European authorities seem to have no qualms about implementing them.

For the last several days, I’ve been weaving between northern Italy and Switzerland checking out great places to bank, new places to store gold, and taking in these gorgeous lake views.

Every single time I’ve crossed the border, I’ve been met by rather snarly police on both sides; they’re stopping cars, turning people’s trunks inside out, and causing major traffic problems.

A friend of mine who came up on the train from Florence to meet me for lunch in Lugano said he was stopped at the border for nearly an hour as thuggish customs agents randomly questioned train passengers and demanded to see their IDs.

So much for Europe’s 26-country ‘borderless area.’

Based on Europe’s 1985 Schengen Treaty and 1997 Amsterdam Treaty, you’re supposed to be able to drive from Tallinn, Estonia to Lisbon, Portgual without so much as slowing down at the border.

This is not dissimilar from driving between states in the US or provinces in Canada.

Yet as Europe descends into greater financial and social chaos, leaders are starting to ignore these agreements which guarantee freedom of movement across the continent.

No big surprise, electing Marxists and Neo-Nazis tends to bring that sort of change. Border controls, currency controls, wage and price controls– these are the usual tactics of desperate, insolvent governments.

As times get tougher, they tighten their grip, foolishly believing that they can decree and legislate their country back to health.

In the early 4th century AD after decades of economic turmoil and social strife within the Roman Empire, Diocletian issued his infamous Edictum De Pretiis Rerum Venalium, or Edict on Prices.

In addition to setting a fixed ceiling on over 1,000 products, services, and wages, Diocletian also commanded the death penalty for currency and commodity speculators who he blamed for inflation (as opposed to the steady debasement of the currency).

Obviously very little has changed.

Capital controls usually follow; these amount to the direct confiscation of wealth by a government from its citizens.

Often capital controls take the form of legal requirements which prevent people from moving money abroad, holding foreign currencies, or buying precious metals.

Just yesterday, in fact, Argentina’s central bank formally banned people from buying US dollars– forcing them to hold rapidly depreciating pesos and watch their savings inflate away.

At some point, people finally reach their breaking points and spill out into the streets to be beaten by the police. This is when we see social controls implemented– turning off mobile and Internet infrastructure, curfews, etc.

These tactics have been all too common over the last 18-months.

And finally, if things get really bad, border controls are implemented as a way to prevent a flood of people from leaving. After all, the government needs as many milk cows as it can get.

Here is an example of principles sacrificed at the altar for politics

Yet such self contradictory policies are signs of the growing desperation by the political elites and can be seen as the proverbial writing on the wall for the EU: the ballooning social controls via various despotic measures are likely inflame regional animosity (nationalism) that leads to the breakdown of division of labor and rouse civil strife that amplifies the risks of war.

Through politics, noble intentions backfire.

Has the Higgs Boson been Discovered?

This information age will usher in more science and technological breakthroughs.

Lately media scooped at the supposed “discovery” of the Higgs Boson or the ‘God Particle’.

I believe that such breakthroughs may just be a teaser.

From Bloomberg,

Scientists seeking to explain the origins of matter discovered a particle that may support a decades-old theory of physics, bringing people closer to understanding unseen parts of the universe.

The observed particle is the heaviest boson ever found, said Joe Incandela, spokesman for one of the experiments at CERN, the European Organization for Nuclear Research, at a seminar yesterday at its Geneva headquarters. Scientists stopped short of claiming they have found the elusive Higgs boson, a theoretical particle that could explain where mass comes from.

“As a layman, I think I would say ‘we have it,’” said Rolf-Dieter Heuer, director of CERN, at a press conference in Geneva. It will take at least three to four years of research to fully understand the properties of the observed particle, Heuer said.

The announcement brings humankind closer to answering a millennia-old question that the ancient Greeks wrestled with: what is matter made of? The particle is a key to the Standard Model, a theory explaining how the universe is built, and its existence would help scientists gain a better understanding of how galaxies hold together. It also could open a door to exploring other parts of physics such as superparticles or dark matter that telescopes can’t detect.

‘Sings and Dances’

The new boson “sings and dances like” the theoretical particle, said Pauline Gagnon, a researcher on the Atlas set of experiments in Geneva, in an interview in Melbourne, where she was attending the bi-annual International Conference on High Energy Physics. “There is no doubt it comes from a different signal, different channels, with different experiments. We just need in the next few months with more data to ascertain exactly what are the properties of this particle to see if it is exactly the Standard Model Higgs boson or some variation of it."”

Particle physics is the study of the elemental building blocks that make up matter. These particles, with names such as quark, fermion, lepton and boson, can’t be subdivided. They exist and interact within several unseen ‘‘fields’’ that permeate the universe.

The field that generates mass for objects is named for U.K. physicist Peter Higgs, who in the 1960s was one of the first scientists to outline a working theory on how elemental particles achieve mass. Higgs was one of four of the theorists attending yesterday’s meeting in Geneva. He wiped a tear from his eye as the findings were presented.

Champagne for Higgs

‘‘For me, it’s really an incredible thing that it’s happened in my lifetime,” Higgs said in Geneva. In a statement, he said he would be “asking my family to put some champagne in the fridge.”

Higgs wrote that some particles -- such as photons, the basic unit of light -- don’t interact with the Higgs field, and thus don’t achieve mass. Most others do.

To put it another way, if the Higgs field were a Hollywood party, a photon would be the unknown actor who hurries through without gaining a bit of interest from others in the room. Other particles would be more like Angelina Jolie, drawing crowds of hangers-on as they move through the party.

It gets increasingly harder to stop such a cluster from moving forward and more difficult to get it moving again once it’s stopped, meeting one definition of mass.

Scientists are trying to prove the existence of the Higgs field by displaying a physical effect for the Higgs boson, a particle that lives for less than a trillionth of a second and is an excitation, or force, within the Higgs field.

Digging Deeper

Providing indirect evidence that the Higgs field exists will allow scientists to dig even deeper into the secrets of our existence, said Mark Wise, a professor of physics at California Institute of Technology.

“In some sense, this is the beginning,” Wise said of finding the boson. “Because we want to know all its properties.”

The data presented yesterday are the latest from the $10.5 billion Large Hadron Collider, a 27-kilometer (17-mile) circumference particle accelerator buried on the border of France andSwitzerland. CERN has 10,000 scientists working on the project, in which billions of subatomic particles are hurled at each other at velocities approaching the speed of light.

The collider will provide more data later this year, giving scientists a more complete picture of the observed new particle. Researchers will try to determine whether it is a Higgs boson, the particle predicted by the Standard Model.

A few years back alarmists warned us that the Large Hadron Collider (LHC) would bring about Armageddon. Yet like most of social alarmist (Malthusians, environmentalists and etc..) they have proven to be wrong.

Instead, the LHC brought us a step closer towards understanding more of nature.

While I have infinitesimal idea about particle physics, I am astounded by the accelerating rate of developments the field of sciences.

Below is a nice video explaining the Higgs Boson

Turkish Banks offer Gold Deposit Accounts

Speaking of a reset in the global order monetary, one possible step towards the reintroduction of gold as money is for the banking system not only to accept gold as loan collateral but for people to be able to have gold deposit accounts which could pave way for payments and settlements services in gold.

Banks in Turkey seems to have lunged into this path.

From Mineweb.com

For centuries, Turks have flocked to the jewellery shops of Istanbul's labyrinthine Grand Bazaar to trade their gold - ornaments handed down through their families over generations, or bars stashed under mattresses as savings. But in recent months the shops have a new and unexpected competitor: banks.

The country's commercial banks are pouring their technical expertise and marketing resources into offering their customers gold deposit accounts. Customers hand their gold to a bank and can make withdrawals from their accounts in gold bars or the lira currency; the accounts offer interest rates that are substantially lower than those on normal time deposits.

Gold deposit accounts have been growing around the world, but Turkey's boom has made it a leader in the trend. This appears to have cut the amount of gold flowing to jewellers in the Grand Bazaar and elsewhere in the country, a trend which dismays the shop owners. In the long run, it could threaten their business model, which relies partly on turning scrap gold they buy into jewellery and selling it back to retail customers…

Gold is big business in Turkey, for cultural reasons and also because of the country's experience with bouts of high inflation over the past century. The metal is traditionally given as a gift at weddings and circumcision ceremonies, and demand for imports tends to surge during the summer months.

Turks are believed to have accumulated about 5,000 tonnes of gold in their homes, worth around $250 billion at current international prices, according to the World Gold Council, an industry lobby. It ranks Turkey's gold demand as fifth in the world for jewellery and eighth for retail investment, mostly behind countries with much bigger populations such as India, China and the United States.

I hope that Philippine banking system does the same.

Quote of the Day: Global Monetary Order is on the Verge of a Reset

The return to gold is unmistakably the product of a strategic, not merely a tactical, shift in global central banking policy. Central banks in the developed world have now altogether stopped selling bullion. This was foreshadowed by their behavior over the past decade, when they sold even less gold than they were permitted to under the anti-dumping Central Bank Gold Agreements. Clearly the concern about dumping gold was out of step with the trend. But more importantly, central banks in the emerging markets have been buying gold by the truckload.

Since the financial crisis of '08, nations as diverse as Mexico, the Philippines, Thailand, Kazakhstan, Turkey, Ukraine, Russia, Saudi Arabia, and India have led the way back to gold as a primary reserve asset. Russia alone has added an impressive 400 tonnes of bullion to its reserves, most of it coming from domestic purchases. Mexico has added over 120 tonnes, including 78 tonnes from one mega-purchase in March 2011. The Philippines have bought over 60 tonnes, with 32 tonnes coming in as recently as March 2012. Thailand has added approximately 60 tonnes, and Kazakhstan just shy of 30 tonnes. Turkey amended its regulatory policy late last year to allow commercial banks to count gold towards their reserve requirements, adding over 120 tonnes to its official reserves. And bullion imports into mainland China through Hong Kong have been reaching all-time highs.

Finally, loyal US allies Saudi Arabia and India, in what is sure to leave particularly bitter taste in Washington's mouth, have been adding gold to their reserves by the hundreds of tonnes.

In short, the governments of emerging markets recognize that the global monetary order is on the verge of a reset. These emerging markets are the economic engines of the 21st century, and they're determined not to be undermined by Western fiat paper.

This is from Peter Schiff at the lewrockwell.com talking about the return to the gold standard

Does the Skyscrapers Curse Signal a coming Asian Crisis?

Austrian economist and professor Mark Thornton principal exponent of Skyscraper Index Model notes that skyscrapers has had a record of uncanny accuracy in the prediction of many crises which includes today’s Euro crisis.

At the Mises Blog, Professor Thornton writes,

The ECB has once again come to the rescue by cutting interest rates in order to forestall a collapse of the European economy. Also, in a “surprise” move, the Chinese central bank cut interest rates in response to a continuing slow down in economic activity.

When the Skyscraper Index issued a European crisis signal last summer the European stocks markets were riding a wave of optimism and the Euro was worth about a $1.50. Most European stock markets have lost considerable ground along with the value of the Euro. However, we can best visualize the economic trouble from where the skyscraper crisis signal was issued: in the London real estate market. The Shard Skyscraper (which issued the crisis signal by becoming the tallest skyscraper in Western Europe) opened its doors to a badly slumping real estate market. Its owners made the bad mistake of buying out one of its primary lessee at 70 pounds per square foot. Leases are now going for 55 pounds per foot and probably heading lower.

In addition to Europe, there has been a regional crisis signal in China and possible world crisis signals coming from both China and the Middle East.

As for the Middle East, the Burj Khalifa, the world tallest building at 2,717 feet (at the moment), which opened two years ago has now been considered a “distressed property”.

The crash of Dubai’s stock market serves as a harrowing reminder of the bubble bust.

Many of the other grand projects in the Middle East, after having been stricken by the crisis, had also been shelved.

Well, I have been repeatedly saying that the Philippines and ASEAN economies have been undergoing a business or bubble cycle.

And since skyscrapers and business cycles are almost joined to the hip, with skyscrapers as pathological manifestations of financial excesses, then current prestige based property trends could be ominous of a coming crisis with its epicenter in Asia, or even in Southeast Asia.

That’s because Asia has been the focal point of where most of the next generation of the world’s tallest buildings will rise.

China and South Korea tops the list, along with Indonesia and Malaysia who will be having their own signature towers.

However, the Middle East will still lay claim to the tiara of having the tallest, with Saudi Arabia’s proposed Kingdom Tower which which will be due for completion this 2018. Eerily, Saudi’s grandiose project seem to coincide with mounting financial pressures on Saudi’s welfare economy.

Some of the proposed tallest buildings in Southeast Asia and Korea (from Business Insider)

Menara Warisan Merdeka

Skyscraper City

Location: Kuala Lumpur, Malaysia

Height: 1,722 feet

The Menara Warisan Merdeka will serve as a residential, office, and hotel building.

The Menera is scheduled to be completed by 2015. When completed, it would be the tallest building in Malaysia, according to The Star.

Signature Tower Jakarta

Skyscraper Center

Location: Jakarta, Indonesia

Height: 2,093 feet

The Signature Tower Jakarta is a 119-floor building (with six floors below ground) that is scheduled to be completed in 2017.

The building will serve as a hotel and an office. If completed, it will be the world's fifth-largest building, according to The Jakarta Post.

Seoul Light DMC Tower

Skyscraper Center

Location: Seoul, South Korea

Height: 2,101 feet

The Seoul Light DMC Tower will be a hotel, residential, and office building.

It's scheduled to be completed in 2017. The building will use wind to power itself, and have interior gardens that act as "lungs" for the building, according to the tower's website.

For the rest of the list, you can see them here

The point is if the Skyscraper Index model’s accurate predictive capabilities should continue, then that time window of 2015-2017 could portend to an Asian Crisis 2.0

The relationship between the Skyscraper and the Austrian Business Cycle as explained by Professor Thornton [bold emphasis mine]

The common pattern in these four historical episodes contains the following features. First, a period of “easy money” leads to a rapid expansion of the economy and a boom in the stock market. In particular, the relatively easy availability of credit fuels a substantial increase in capital expenditures. Capital expenditures flow in the direction of new technologies which in turn creates new industries and transforms some existing industries in terms of their structure and technology. This is when the world’s tallest buildings are begun. At some point thereafter negative information ignites panicky behavior in financial markets and there is a decline in the relative price of fixed capital goods. Finally, unemployment increases, particularly in capital and technology-intensive industries. While this analysis concentrates on the U.S. economy, the impact of these crises was often felt outside the domestic economy.

It would be very easy to dismiss the skyscraper index as a predictor of the business cycle, just as other indicators and indexes have been rightly rejected. However, the skyscraper has many of the characteristic features that play critical roles in various business cycle theories. It is these features that make skyscrapers, especially the construction of the world’s tallest buildings, a salient marker of the twentieth-century’s business cycle; the reoccurring pattern of entrepreneurial error that takes place in the boom phase that is later revealed during the bust phase. In the twentieth century the skyscraper has replaced the factory and railroad, just as the information and service sectors have replaced heavy industry and manufacturing as the dominant sectors of the economy. The skyscraper is the critical nexus of the administration of modern global capitalism and commerce where decisions are made and transmitted throughout the capitalist system and where traders communicate and exchange information and goods, interconnecting with the telecommunications network. Therefore it should not be surprising that the skyscraper is an important manifestation of the twentieth-century business cycle, just as the canals, railroads, and factories were in previous times.

Denmark Cuts Interest Rates to Negative

Capital flight from the Eurozone has been giving Denmark’s central bank a headache.

So they experiment with negative rates—instead of the central bank (borrower) paying money to depositors (lenders), it’s now depositors (lenders) who pay the central bank (borrower) for safekeeping.

From Bloomberg, (bold emphasis mine)

Denmark’s central bank cut its main borrowing costs to record lows and brought the rate it offers on certificates of deposit below zero, as policy makers test uncharted territory to fight a capital influx.

The benchmark lending rate was cut to 0.2 percent from 0.45 percent, while the deposit rate was reduced to minus 0.2 percent from 0.05 percent, Copenhagen-based Nationalbanken said in a statement today. The move followed a quarter of a percentage point cut in the European Central Bank’s main rate to 0.75 percent. Nationalbanken doesn’t hold scheduled meetings and only adjusts rates to defend the krone’s peg to the euro.

“There’s no experience of how negative deposit rates will affect the financial markets and the krone,” Jacob Graven, chief economist at Sydbank A/S, said in a phone interview today before the decision was announced. “It’s a sign of the strong Danish economy. This is good. The opposite situation would be far worse, if the central bank would have to hike rates to defend the krone. We have a luxury problem.”

Denmark has stepped up its battle to prevent the krone from strengthening beyond its currency band as the nation’s haven status attracts investors. Danske Bank A/S (DANSKE), the country’s biggest lender, said last week it now has a risk scenario that envisages Denmark abandoning the peg should the cost of fighting currency appreciation grow too high. The bank doesn’t view this as a likely outcome, it said.

‘Absurd Scenario’

Negative rates were “until recently an absurd scenario,” said Christian H. Heinig, an economist at Realkredit Danmark A/S, the mortgage unit of Danske Bank. “Mortgage loan rates are already at record lows, and today’s rate announcement won’t have more than a limited effect here.”

The rate cut sent the krone to its weakest level since April 16 at 7.4427 against the euro. The currency was trading at 7.4396 as of 4:26 p.m. local time, compared with 7.4367 yesterday, according to prices available on Bloomberg.

Denmark has an agreement with the ECB to let the krone swing no more than 2.25 percent from central rate of 7.46038, though it maintains a tighter band in practice. Denmark’s foreign reserves climbed to a record high in June after the central bank tapped the currency market to weaken the krone. Reserves rose by 9.2 billion kroner last month to 511.6 billion kroner ($85 billion), the central bank said on July 3.

Of course there will an impact, even if they haven’t been visible to the economy now.

I’ve noted how Denmark’s 2 year bonds turned negative earlier here.

Such destabilizing capital flows are likely to spawn boom bust cycles.

And perhaps this may have began to manifest through Denmark’s equity markets.

Denmark’s major equity benchmark the Copenhagen 20 has been one of top world performers (18% year to date) and trails the Philippine Phisix by only a few percentage points.

No, this isn't about liquidity traps.

But this is the loony kindda o’ stuff you see only with the paper money system.

HOT: ECB Cuts Rate to Record Low, Deposit Rates at Zero

The European Central Bank, joins China and the Bank of England in moves to ease credit.

From Bloomberg,

The European Central Bank cut interest rates to a record low and said it won’t pay anything on overnight deposits as the sovereign debt crisis threatens to drive the euro region into recession.

Policy makers meeting in Frankfurt today lowered the ECB’s main refinancing rate to 0.75 percent from 1 percent, as predicted by 49 of 64 economists in a Bloomberg News survey. The ECB also cut its deposit rate to zero from 0.25 percent and its marginal lending rate to 1.5 percent from 1.75 percent. President Mario Draghi holds a press conference at 2:30 p.m. in Frankfurt to explain the decision.

With Europe’s debt crisis curbing growth across the continent and damping the global outlook, the ECB was under pressure to ease monetary conditions, even though Draghi last month voiced misgivings about the effectiveness of a rate reduction. While today’s moves may not stimulate demand, they will lower borrowing costs for struggling banks and could build on the confidence boost euro-area governments delivered last week when they took steps toward a deeper economic union.

Looks very much like a synchronized move.

Still, the doctrine of the euthanasia of the rentier that wages war against interest rates have become so incredibly prominent

Here is the premise for such action, from the same article…

A deposit rate of zero may encourage banks to lend to other institutions, companies or households instead of parking excess cash in the ECB’s overnight deposit facility. About 800 billion euros ($1 trillion) is currently being deposited with the ECB each day.

The deposit rate has steered market borrowing costs since the ECB started to provide banks with unlimited liquidity after the collapse of Lehman Brothers Holdings Inc. in 2008. That policy removed the need for banks to lend to each other to meet their reserve requirements, pushing down interest rates. Today’s move may therefore lower the euro overnight index average, or Eonia, which stood at 0.33 percent yesterday.

This is really crazy stuff.

Debt has been the core symptom of the current crisis yet debt is still seen as the solution.

So there is hardly any meaningful reforms in the direction to allow markets to clear by transferring resources held by unproductive entities to the productive sectors at large price markdowns. Of course this means bankruptcy for both insolvent governments and banks, which is why political authorities have been doing the same things over and over again and expecting different, hopefully positive (wishful thinking) results.

Again as the great Professor Ludwig von MIses warned,

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

The reality is that all these have been meant to shore up the cartelized debt based political system that has operated around the triumvirate: privileged bankers, the central bank and the welfare governments.

For these political and quasi political agents losing entitlements is non-negotiable…until forced upon by economic reality.

Kick the can policies has only been worsening the problem.

HOT: China Cuts Lending and Deposit Rates for the Second Time in 2012

Coordinated moves this seem to have been!

Just a few minutes back the Bank of England initiated the next wave of credit 'quantitative' easing policies, now comes China.

From the Marketwatch.com,

The People's Bank of China cut its benchmark lending and deposit rates late Thursday, its second rate cut since early June, according to reports. The Chinese central bank lowered its one-year yuan deposit rate 25 basis points and its one-year lending rate by 31 basis points, according to Dow Jones Newswires. The central bank also announced more relaxed rules on lending, allowing bank lending rates to fall to 70% of the benchmark rate, down from 80% currently.

So China’s political authorities have remained interventionists after all.

I believe that the People’s Bank of China’s (PBoC) response may have been triggered by today’s clobbering of her already beaten down equity markets. The Shanghai index fell by more than 1%.

It is also possible that global central bankers may have decided to coordinate or synchronize their “kick-the-can-down-the-road” responses.

If China’s banks and businesses have been stuffed with bad loans, then interest rates cuts may not be effective. So the next measures will either be asset purchases (ala developed economies) or fiscal stimulus.

BUT we will observe the reaction of China’s financial markets and the commodity markets to these measures.

HOT: Bank of England Reactivates QE

The Bank of England fired the first salvo to the much expected (or may I say much awaited) series of credit easing policies by global central banks

From the Bloomberg,

The Bank of England restared bond purchases two months after halting its expansion of stimulus as the deteriorating outlook spurred policy makers to ramp up efforts to kick start a recovery.

The Monetary Policy Committee led by Governor Mervyn King raised its asset-purchase target by 50 billion pounds ($78 billion) to 375 billion pounds…

The resumption of quantitative easing is a part of a twin- pronged effort by the central bank to pull Britain out of a recession that includes a new credit-boosting program. With inflation easing and reports this week showing that factory,services and construction activity weakened in June, policy makers were spurred to act…

Policy makers also left their benchmark rate at a record low of 0.5 percent today, a move forecast by all but one of 50 economists in a Bloomberg survey. Within the QE survey, two forecast no change, one forecast a 25 billion-pound increase and eight predicted an addition of 75 billion pounds.

The ECB has likewise been widely expected to cut interest rates today.

The last time the BoE delivered the QE (BoE's balance sheet from the Bank of England), this boosted UK’s major equity benchmark, the FTSE, for about one quarter or for about the same time until the program expired.

The Bank of England’s action has not been about the economy but of the saving of the skins of bankers and stock market investors. This is the Bernanke Put in motion.