Prediction Record of the US Federal Reserve: The Sun Will Come Out Tomorrow

The US Federal Reserve’s supposed transparency has only been exposing their string of serial forecasting blemishes.

Evan Solitas has been tracking the Fed’s performance and observed, (bold emphasis mine)

The Bernanke Fed has made a significant effort since June 2009, when the NBER judges the recession to have ended, to increase transparency by providing guidance about future policy and macroeconomic forecasts. What is striking, however, is how this transparency has not prevented in the slightest the intellectual dishonesty in ignoring its failure to meet its own goals.

A disparaging but not unfair comparison would be to little orphan Annie. "The sun'll come out tomorrow," Annie sang. "Bet your bottom dollar that tomorrow there'll be sun." The 3-to-4 percent recovery growth we've been long promising will come out tomorrow, the FOMC basically says every quarterly meeting. Bet your bottom dollar that tomorrow there'll be lower unemployment.

The Fed must love tomorrow. Because, as they say, it's always a day away.

What I mean by this is the Fed makes projections, misses them by miles and consistently in the wrong direction, and then doesn't own up to it. They just push back their forecast. The forecasts are not inappropriately optimistic, either -- it's just that the Fed's actions have fallen short, and that there is zero accountability to target the forecast.

Their transparency, however, allows us to demonstrate thoroughly the extent of this failure.

Their fundamental error: the haughty assumptions that human action can be aggregated into mathematical expressions similar to natural sciences or positivism.

The late economist Percy Greaves lucidly explained of the mainstream’s basic shortcomings (bold emphasis mine)

Reason and experience show us that there are two separate realms: the external world of physical, chemical, and physiological phenomena, and the internal world, in our minds, of our thoughts, feelings, valuations, and purposes in life. There is no bridge connecting these two spheres. They are not connected automatically. We always have the right to choose our actions. Identical external events often produce different human reactions, and different external events sometimes produce identical human actions. We do not know why.

So, the science of human action is different from the physical sciences. We cannot experiment with human beings except in a physiological, medical, or biological sense. In the realm of ideas, we cannot experiment as we can in the physical sciences. We cannot duplicate situations in which all things are maintained the same as before. We cannot change one condition and always get the same consequences. We cannot experiment with human actions, because the world, its population, its knowledge, its resources are all constantly changing and cannot be held still.

In economics we must use our minds to deduce our conclusions. We have to say, Other things being equal, other things being the same, this change will produce such and such an effect. We have to trace in our minds the inevitable results of contemplated changes. We are dealing with changeable human beings. We cannot perform actual experiments, because the human conditions cannot be duplicated, controlled, or completely manipulated in real life like chemical experiments in a laboratory. Therefore, there are great differences between economics and the physical sciences. We cannot experiment and we cannot measure. There are no constants with which to measure the actions and the forces which determine the actions and the choices of men. In order to measure you must have a constant standard, and there is no constant standard for measuring the minds, the values, or the ideas of men.

More, Federal Reserve (central bank) 'experts' are unlikely to produce unorthodox or radical or ‘out of the box’ thinking as they are supposed to uphold the institutions that employ them, thus the “zero accountability”. It's not about being right or wrong but what needs to broached by such institutions.

Bluntly put, their studies are basically designed to rationalize or justify the existence of their institutions. You may call this biased analysis. Also the conflict of interests between politicized money and the citizenry highlights the agency problem or the principal agent dilemma.

And such outlook applies to almost all political and politically affiliated institutions.

Why is this important? Because the Fed or central bank policies or centrally planned monetary actions have essentially been derived from their analysis or outlook.

And analysis with consistently large deviance from economic reality would only translate to high probability that their accompanying actions would have negative implications or consequences than the intended or expected goals or objectives.

Policy errors, thus, are likely to be the rule than the exception.

In short, we shouldn’t trust central bankers. We don’t even need them.

Thus, prudent investors need to anticipate of such centrally planned monetary misdiagnosis-malpractice, and take appropriate action to protect or insure themselves from their adverse effects.

Don’t forget half of every transactions we make has been coursed through political (fiat legal tender based) money. And distortions of the economics of money through interventions only extrapolates to parallel disruptions in the production or economic structure. This is why boom bust cycles and hyperinflation exists.

Explaining Super Mario’s Trifecta

The Buttonwood’s Notebook columnist (Philip Coggan) of the Economist provides a presumable explanation of last week’s rally following ECB Prez Mario Draghi’s pledge to do “Whatever it Takes to Save the Euro”

AN interesting note from the always-perceptive Dhaval Joshi at BCA Research shows that July was a remarkable month. It was the only month in the last 400 in which European stocks, the German 10-year bund and gold rallied by more than 2.5%. Even when Mr Joshi uses a lower 2% hurdle, the last simultaneous rally on this scale was February 1987, and there have been only seven such months in the last 30 years.

Normally, you would expect the conditions for a simultaneous rally to be rare. Inflation would be good for gold and bad for bonds; a recession would be good for bonds and bad for equities and so on.

Super Mario was partly responsible for July's trifecta with his promise to do whatever it takes to save the euro. Equities rallied on the hope that Europe's economy would avoid a catastrophe; gold rallied because the ECB would likely create money; and bunds rallied because the ECB would save all the costs of Spanish rescue from falling on the German taxpayer. or at least that is a plausible explanation, based on the fundamentals. An alternative is that this was a risk-on rally in which investors moved money out of cash and into any likely asset class.

I may add a more important dimension to the above explanation: shorts had been deliberately set up for the ambush

One example: Euro shorts collapsed by 10% in one week and 35% in one month.

Notes the Zero hedge,

And where two months ago, the net short position in the EUR hit an all time record, north of -200K contracts, in the interim this number has contracted by over a third, and as of minutes ago was revealed to be "just" 139K in the week ending July 31, a 10% drop in shorts in one week. Why is this important? Because while short covering rallies have long been yet another narrative to keep shorts on the sidelines, the probability of such an event has declined dramatically now that the bulk of the weak hands have been kicked out, and the net exposure is back to January 2012 levels.

Underneath all the supposed noble sounding rhetoric to save the Euro, interventionism has mostly been about price controls or the manipulation of markets.

Is Hong Kong’s Free Economy a Myth?

Hong Kong has been known as the freest economy in the world.

But skeptics argue that such claims may not be accurate as Hong Kong’s capitalist political economy may have been shadowed by cronyism.

Writes Eddie Leung and Pepe Escobar at the Asia Times,

For the Heritage Foundation is a matter of routine to rank Hong Kong as the freest economy in the world - with a whopping overall score of 89.9 compared with a world average of 59.5. This Milton-Friedmanesque paradise is extolled for "small government, low taxes and light regulation".

Much is made of "business freedom" and "labor freedom". True - you can open a business in three days; you just need a Hong Kong ID, a form and US$350. But depending on the business, you will be squeezed by monopolies and oligopolies in no time. And if you are "labor", chances are in most cases you can only aspire to some sort of glorified slavery.

Heritage researchers may be excused for losing the plot between dinners at the Mandarin Oriental and partying in Lan Kwai Fong, both favored drinking and dining spots near the central business district. Behind all those luxury malls and the best bottles of Margaux, real life Hong Kong has absolutely nothing to do with a free economy encouraging competition on a level playing field. It's more like a rigged game.

The dark secret at the heart of Hong Kong is the unmitigated collusion between the government and a property cartel - controlled by just a few tycoons; the Lis, the Kwoks, the Lees, the Chengs, the Pao and Woo duo, and the Kadoories (more about them on part 2 of this report). These tycoons and their close business associates also happen to dominate seats on the 1,200-member Election Committee that chooses Hong Kong's chief executive…

We should be back again to a Chinese maxim: land is power. All the conglomerates controlled by Hong Kong tycoons are fattened on owning land. The local government is the sole supplier of land. So no wonder it keeps a vested interest in the property market - and that's a huge understatement - as it pockets fortunes from land sales and premiums on so-called "lease modifications".

As for the maxim that prevails across the city's property market cycles, it's always been the same: "Buy low and sell high".

Read the rest here.

Hong Kong has certainly not been an ideal laissez faire economy as no country in this world has been.

But rankings of economic freedom, whether by Heritage Foundation or by the Fraser Institute, has been relatively established and have not been measured on absolute terms.

It is also important to note that for as long as the distribution of any resources are politically determined, the natural outcome will be one of collusion, horse trading, favoritism and corruption.

Virtuous or moral government is an illusion more than Hong Kong’s free economy is a myth.

Government officials are human beings too limited by knowledge problem, cognitive biases, value preferences (determined by education, religion, culture, ideologies, family values and etc…), peer pressure, social standings, career ambitions and etc...

While some of Hong Kong’s wealthiest may have made their fortunes from cronyism (or politicized real estate policies), the above critics who resort to claims of “oligopolies and monopolies” that leads to “high prices land policy” and “glorified slavery” fails to recognize that Hong Kong’s property boom has also been influenced by the US Federal Reserve policies via the US dollar peg.

Also Asia’s increasing social mobility has been an influence to Hong Kong’s property market.

Hong Kong has been the second hottest property market in the world according to MSNBC.com

The growing wealth of mainland Chinese, coupled with China’s property restrictions, has led to an influx of mainland buyers into Hong Kong’s residential market in recent years. According to industry estimates, three in 10 deals in Hong Kong’s luxury property markets are done by mainland Chinese buyers.

Property restrictions too add to the politicization of Hong Kong’s real estate market.

Finally the above authors seem to have misunderstood the meaning of competition by which they ascribe to flawed neo-classical concepts of oligopolies and monopolies through “captive markets” or “limited competition”.

Let me quote the explanation of Austrian economist Dr. George Reisman (bold emphasis mine)

Actual price competition is an omnipresent phenomenon in a capitalist economy. But it is completely unlike the kind of pricing envisioned by the doctrine of "pure and perfect competition." It is not the product of a mass of short-sighted, individually insignificant little chiselers, each of whom acts to cut his price in the hope that his action won't be noticed by any of the others. The real-life competitor who cuts his price does not live in a rat's world, hoping to scurry away undetected with a morsel of the cheese of thousands of other rats, only to find that they too have been guided by the same stupidity, with the result that all have less cheese.

The competitor who cuts his price is fully aware of the impact on other competitors and that they will try to match his price. He acts in the knowledge that some of them will not be able to afford the cut, while he is, and that he will eventually pick up their business, as well as a major portion of any additional business that may come to the industry as a whole as the result of charging a lower price. He is able to afford the cut when and if his productive efficiency is greater than theirs, which lowers his costs to a level they cannot match.

The ability to lower the costs of production is the base of price competition. It enables an efficient producer who lowers his prices, to gain most of the new customers in his field; his lower costs become the source of additional profits, the reinvestment of which enables him to expand his capacity. Furthermore, his cost-cutting ability permits him to forestall the potential competition of outsiders who might be tempted to enter his field, drawn by the hope of making profits at high prices, but who cannot match his cost efficiency and, consequently, his lower prices. Thus price competition, under capitalism, is the result of a contest of efficiency, competence, ability.

Price competition is not the self-sacrificial chiseling of prices to "marginal cost" or their day by day, minute by minute adjustment to the requirements of "rationing scarce capacity." It is the setting of prices perhaps only once a year — by the most efficient, lowest-cost producers, motivated by their own self-interest. The extent of the price competition varies in direct proportion to the size and the economic potency of these producers. It is firms like Ford, General Motors and A & P — not a microscopic-sized wheat farmer or sharecropper — that are responsible for price competition. The price competition of the giant Ford Motor Company reduced the price of automobiles from a level at which they could be only rich men's toys to a level at which a low-paid laborer could afford to own a car. The price competition of General Motors was so intense that firms like Kaiser and Studebaker could not meet it. The price competition of A & P was so successful that the supporters of "pure and perfect competition" have never stopped complaining about all the two-by-four grocery stores that had to go out of business.

I agree that there have been accounts of cronyism in Hong Kong. But Hong Kong’s largely open economy has also been materially influenced by external forces (monetary transmission and mainland immigration and or speculation), focusing on one at the expense of the other only exposes of analytical bias and would signify a big mistake.

Thus to conclude that Hong Kong’s political economy has veered towards an oligarchic-monopolistic environment would “currently” seem exaggerated as there has been little evidence of the deficiency of price competition in the context of the promotion of efficiency, competence and ability.

I say “current” because Hong Kong seems to have taken the slippery slope towards China’s mixed economy (by the introduction of minimum wages) which may change the incumbent political economic setting.

Hong Kong may not be a laissez faire or classical liberal paradise, but relatively speaking, I don’t think that Hong Kong’s free market has been a myth, especially not when compared to the Philippines.

Has Friday’s Surge by the US Stock Markets Been about the ‘Positive’ Jobs Report?

That’s how media paints it.

This Bloomberg headline serves as an example “Dow Posts Longest Weekly Rally Since October After Jobs Report”

Here is an excerpt: (bold emphasis mine)

U.S. stocks rose for a fourth week, giving the Dow Jones Industrial Average the longest rally since October, as better-than-forecast jobs data erased a four-day drop amid investor disappointment with global stimulus efforts.

Technology companies climbed the most among the 10 industry groups in the Standard & Poor’s 500 Index. Apple Inc. (AAPL) jumped 5.2 percent amid speculation the company may join the Dow, while First Solar Inc. (FSLR) soared 18 percent on surging profit. Better- than-expected earnings at MetLife Inc. (MET) and Frontier Communications Corp. (FTR) sent their stocks up at least 9 percent. Knight (KCG) Capital Group Inc. plunged 61 percent after a trading error spurred a $440 million loss.

The S&P 500 added 0.4 percent for the week to 1,390.99. The benchmark index for American equities extended its 2012 gain to 11 percent. The Dow climbed 20.51 points, or 0.2 percent, to 13,096.17, the highest level since May 3.

“We’ve come to fall into this trap if you will, when it comes to central banks, we want something from them immediately and if we don’t get it, the market gets disappointed,” Mark Freeman, who oversees about $13 billion as chief investment officer at Westwood Holdings Group Inc. in Dallas, said in a phone interview. “At the end of the day, the fundamentals matter, and the fundamentals are doing OK.”

Equities reversed weekly losses on the final day, with the S&P 500 jumping 1.9 percent, after a Labor Department report showed American payrolls climbed more than forecast even as the jobless rate unexpectedly rose. The benchmark index slumped 1.5 percent in the previous four days as European Central Bank President Mario Draghi and Federal Reserve Chairman Ben S. Bernanke failed to reassure investors on immediate efforts to bolster the economy.

The unemployment data ROSE despite the better than expected payroll figures? How’s that?

That’s because many people dropped out of the labor force.

From CNN Money: (bold emphasis mine)

Employers said they added 163,000 jobs in the month, according to a Labor Department report released Friday, much better than the 95,000 jobs economists had forecast.

But at the same time, the unemployment rate unexpectedly rose to 8.3% as households claimed they lost 195,000 jobs.

The government's monthly jobs report comes from two separate surveys: one that looks at employer payrolls, and the other which questions households. Those two reports went in opposite directions in July, confusing the overall reading on the job market.

"There are two sides of this report, and unfortunately both sides are not telling us the same thing," said Ellen Zentner, senior U.S. economist for Nomura. "This is a report showing the economy expanded at a greater pace in July than in June, but households are still telling us they're in pain.

How will “fundamentals matter” if the US economy and the financial markets have been heavily dependent on the Fed's steroids, as if to imply that monetary policies have neutral or only positive effects on the economy and the markets? Such observation is unfounded: the US Fed's balance sheets have ballooned but unemployment and economic growth remains sluggish.

Yes the CNN interprets the report as “confusing” even as the markets allegedly saw them as substantially positive.

Some positive developments eh?

Yet the breakout by the US stock markets seem to lack support as seen from internal market dynamics.

Bespoke Invest has a nice insight: (chart theirs too) [bold mine]

While the S&P 500's price has been in a steady uptrend, cumulative breadth for the index has actually been pretty weak. As shown in the lower chart, with each successive higher high in the index, breadth has actually been making a lower high.

Typically, it is optimal to see breadth trends confirming the moves in price, but the recent narrowing of breadth is indicative of fewer stocks participating in the rally, and likely a sign that more managers are underperforming.

“Fewer stocks participating in the rally” means two things for me, one the insufficiently supported rally could signs of developing weakness rather than strength; although most of the buying seems to have been directed at index heavyweights—Could the Fed or proxies of the Fed be behind this (too big to fail banks or the Plunge Protection team), ala the Bank of Japan via ETFs?

And second such could also be indications of distribution days.

Table from Bloomberg.com

Bottom line: I would put more weight in the interpretation of Friday’s hefty index-based US stock market rally as a “sympathy move” to the monster rebound (see the above table) by the Europe’s equity markets based on the mounting expectations of the imminent unveilment or announcement of the ECB-EU’s big bazooka.

Quote of the Day: Freedom is Indivisible

First, let me say that freedom is indivisible. You cannot lose a part of your freedom, the freedom of speech, the freedom to buy, the freedom to print, without eventually losing all of your freedom. Of course, all freedom is based on economic freedom. Freedom is indivisible. No one man invented the airplane. It took many, many men to invent today's jet. It took a lot of history, a lot of just minor improvements.

My great teacher, Mises, asks, "What is the automobile of 1969?" He answers his own question: "It is just the automobile of 1909 with thousands upon thousands of minor improvements." Everyone who suggested an improvement did it with the hope that he would make a profit. Many made suggestions that fell by the wayside. But it was the freedom of those men to work on improving the automobile that has given us the automobile that we have today. No one man invented it, neither did one man produce it.

This is from the late economist Percy L. Greaves, Jr’s must read article (it's really a transcript from a talk) about the essence of Economics.

Will the Accord by the ECB-EU Politicians Pave Way for the Big Bazooka?

Amazing volatility.

Graphics from Bloomberg

European markets appear to skyrocketing (after yesterday’s deep slump) on the proposed accord by the ECB and EU politicians.

From Bloomberg, (bold emphasis added)

After 2 1/2 years of incremental crisis management and false starts, a bargain is beginning to emerge between Europe’s politicians and central bankers over how to calm bond markets and end the debt tumult that threatens the euro’s survival.

The European Central Bank sketched out its side of the deal yesterday, offering to buy Italy’s and Spain’s bonds on the market as long as the euro governments’ bailout fund makes purchases directly from the two countries’ treasuries and ties them to tough conditions.

ECB President Mario Draghi offered only a glimpse of the new strategy, with the actual interventions weeks or months away and a host of obstacles standing in the way before Europe can claim to be on a path out of the crisis that emerged in Greece in late 2009. Investors looking for a quicker fix pushed down the euro, European stocks and bonds of at-risk countries.

“All of the announcements, if transferred into actual activity, would be close to the big bazooka approach that the markets are looking for,” said Charles Diebel, head of market strategy at Lloyds Banking Group Plc in London. “Market disappointment is hardly surprising in this context but we may well find this lays the groundwork for the grand plan in coming weeks.”

The conditions set by the ECB on EU governments, again from the same article…

A bond-buying program would require Italy and Spain to make austerity and economic-reform commitments -- or potentially only restate the ones they’ve already made -- and submit to international monitoring. Spain has already gotten over the stigma of relying on outside help by tapping a 100 billion-euro program to shore up its banks.

Draghi’s pledge took the ECB further away from its roots as a politically autonomous central bank, modelled on Germany’s Bundesbank, with prime responsibility for containing inflation and only a lesser focus on the broader economy and the stability of the banking system.

The Bundesbank’s leader, Jens Weidmann, was alone on the ECB’s 23-member policy council in expressing “reservations,” Draghi told the press. For now, Weidmann stayed silent, contrasting with the objections to the ECB’s original bond- purchasing program that were immediately voiced by his predecessor, Axel Weber, in May 2010.

I really doubt if the prospective deal will be complied with.

The political institutions of the EU have broken much of the self-made/imposed regulations (e.g. Maastricht criteria, changes in collateral eligibility rules and etc...) to accommodate the interests of the political authorities and the banking cartel.

Yet such agreement seems as justification for the deployment of ‘big bazooka’ inflationism, perhaps through the reactivation of the Securities Markets Programme (SMP) that would only defer on the day of reckoning or to buy time for whatever political reasons.

And I also think that the team Ben Bernanke and the US Federal Reserve may not be pulling the trigger for QE 3.0 perhaps until after the ECB-EU’s joint actions.

More from the same article,

One reason Draghi had to buy time is that European governments won’t be able to act until at least mid-September, the earliest possible startup date for the planned 500 billion- euro permanent rescue fund, the European Stability Mechanism. It faces a German supreme court ruling on Sept. 12.

Until then, Europe’s only rescue vehicle is the European Financial Stability Facility, with as little as 148 billion euros left over after last month’s approval of Spanish bank aid.

So the likelihood is that the deal will likely prompt Spain and or Italy to access the EFSF (temporary fund) first, from which the ECB may provide bridge financing until the ESM (permanent fund) is ready. Yet political authorities seem to optimistically think that these would be enough to deal with the crisis. They are most likely to be mistaken.

It’s just incredible to see how financial markets respond like a pendulum—swinging from one extreme end to another—in the collision of expectations from promises to inflate as against the reality of unsustainable arrangements and of the ongoing economic recession in the EU.

One might just easily generalize that financial markets have almost been rigged by the central banks.

Nonetheless, all talk about the prospective actions by the ECB-EU seems to have scarcely influenced on the price actions of gold and oil. While both are up signifying a return to the risk ON mode, the degree of gains have not been the same as the equities. Could gold be sensing something else?

Be careful out there.

Video: Legal Gun Ban in Australia Backfires

In 1996 and in 2003 the Australian government decreed a compulsory gun buy back program.

Yet like almost all prohibition regulations, the cure have been worse than the disease. [hat tip Charleston Voice]



Wikipedia has an account of the effects of the gun ban. More statistics on Australia's gun ban here.

Laws that forbid the carrying of arms... disarm only those who are neither inclined nor determined to commit crimes... Such laws make things worse for the assaulted and better for the assailants; they serve rather to encourage than to prevent homicides, for an unarmed man may be attacked with greater confidence than an armed man. ~Thomas Jefferson

PIMCO’s Mohamed El-Erian: “Frightening” Global Synchronized Slowdown

Mohamed El-Erian of PIMCO, one of the top investment firms with more than $1.7 trillion of managed funds, has been apprehensive with current global economic conditions.

From Bloomberg,

Pacific Investment Management Co.’s Mohamed El-Erian called recent declines in purchasing manager indexes in Europe and Asia “frightening” and said the world economy is suffering its severest slowdown since the global recession ended in 2009.

El-Erian, who is chief executive officer of the Newport Beach, California-based Pimco, predicted global growth of 2.25 percent over the next 12 months. That’s down from the 3.9 percent in 2011 and 5.3 percent in 2010 recorded by the International Monetary Fund. The world economy contracted 0.6 percent in 2009.

“This is a serious, synchronized slowdown,” El-Erian said in an interview today.

His forecast highlights the troubles the global economy is facing as the euro area struggles to contain its debt crisis and growth in the U.S. and China slows. Separate surveys of purchasing managers released yesterday showed manufacturing in the 17-nation euro area shrinking by the most in 37 months while Chinese factories teetered on the edge of contraction.

Mr. El-Erian shares my concern about the huge uncertainty which beclouds the global economy.

The growing risks of global recession, in my view, has been brought about by political gridlocks in major economies, aside from tentative central bankers who seem to have shifted to Public Relations work to manage the public’s expectations than from taking real actions.

Considering that global financial markets and economies have become heavily dependent on central banking steroids, the dearth of these only brings to the surface all the misdirected investments which only magnifies the bubble busting conditions.

Below is a list of the factory activities of some of the major economies of the world. Table from the Wall Street Journal Blog

About 70% of the global factory activity index has been in contraction, this includes all G-7 economies.

To add, over the past three days, news seems to be getting a lot bleaker.

Taiwan’s economy contracted in the three months which ended in June (BBC).

Japan’s industrial output fell for the third straight month. (BBC)

South Korea’s factory index sank the most in seven months in July (CNBC)

US consumer spending slips in June (Northern Trust)

US Manufacturing contracts for the second month in a row (Zero Hedge)

This morning, China’s non-manufacturing industries expanded at a slower pace in July as new orders and outlooks for future business slipped, an official survey indicated (Bloomberg)

This seems congruent to the recent decline of China’s Manufacturing Index which seems at the brink of contraction (Bloomberg)

Be careful out there.

More Promises from ECB’s Mario Draghi and the US Federal Reserve

Central bankers continue to engage in talk therapy or jawboning the markets or manipulating the public's expectations in the hope that promises to inflate may be enough to rejuvenate the “animal spirits”.

From Bloomberg,

European Central Bank President Mario Draghi signaled the ECB intends to join forces with governments to buy bonds in sufficient quantities to ease the region’s debt crisis, while conceding that Germany’s Bundesbank has reservations about the plan.

ECB bond purchases would likely focus on shorter-term maturities, would be conducted in a way to soothe investors’ concerns about seniority, and wouldn’t breach European Union rules prohibiting the financing of government deficits, Draghi told reporters in Frankfurt today. ECB officials are working on the plan and details will be fleshed out in coming weeks, he said.

“Risk premia that are related to fears of the reversibility of the euro are unacceptable, and they need to be addressed in a fundamental manner,” Draghi said at a press conference after keeping the benchmark interest rate on hold at 0.75 percent. “The euro is irreversible.” There is a “severe malfunctioning” in bond markets, he said.

This seems little different from the US Federal Reserve which has deferred from taking on more stimulus but gave a strong signal that such contingency would be used in case the economy deteriorates further.

From an earlier Bloomberg article,

The Federal Reserve said it will pump fresh stimulus if necessary into the weakening economic expansion to boost growth and reduce an unemployment rate that’s been stuck at 8 percent or higher for more than three years.

The Federal Open Market Committee “will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability,” it said today in a statement at the end of a two-day meeting in Washington. “Economic activity decelerated somewhat over the first half of this year.”

So far markets have held on well to such promises, although as I previously admonished, eventually markets will seek the real thing.

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.

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.

Such opaqueness in policy directions only underscores the uncertainty of the financial marketplace which only amplifies the risks of sharp volatilities.

Be very careful out there.

Will Soaring Agricultural Commodity Prices Bring about Stagflation to Asia?

Over the past few weeks, US dollar prices of key agricultural commodities have soared.

Prices of corn, wheat and grains have reached their highest levels in 3 years.

And this has alarmed economic experts from Africa.

From Reuters, (bold emphasis mine)

Rising food prices could hit commodity producers in Africa with a dangerous "double whammy" when combined with an economic slowdown in Europe and China reducing African exports of oil and raw materials, a leading African economist said on Tuesday.

Mthuli Ncube, Chief Economist and Vice President of the African Development Bank (AfDB), saw the threat of a food price spike casting a shadow over an otherwise positive growth outlook for Africa that will outpace much of the rest of the world.

"Certainly, there is a lot of reason to worry," Ncube told Reuters, recalling a food and fuel prices squeeze in 2008 that touched off social unrest and food riots in several African nations and also directly affected the continent's growth.

Global economic slowdown compounded by surging food prices would mean stagflation.

From the same Reuters article,

Despite Africa's comparatively strong economic expansion rates, the continent was experiencing "jobless growth", particularly in relation to its huge reservoir of unemployed youth, Ncube said.

Youth represented 60 percent of Africa's unemployed, and despite recording world-topping growth rates between 2000 and 2008, the continent was failing to create the number of jobs necessary to absorb the 10-12 million young and increasingly educated people entering the labor market each year.

Ncube said a major obstacle to more job creation was the persistence of what he called "one-sided economies" in Africa that exported oil and raw materials instead of moving decisively to diversify into job-multiplying manufacturing, commercial agriculture or agro-processing.

"It's a painful slog to diversify," he said.

"We need entrepreneurs to do it. We need to spend the time to build that business culture, the entrepreneurs," he added.

While Africa has taken important steps towards embracing liberalization, their hefty dependence on commodity exports remains an impediment to economic freedom which is the reason for the dearth of entrepreneurs.

This serves as more evidence where the supposed blessing from abundant resources can in fact translate to disadvantage—resource curse. Politicians and their cronies who benefit from commodities have little incentive to open their respective economies until forced by economic reality.

Although the bright side is that multilateral experts from Africa, who provide policy recommendations to political leaders, have exhibited increased recognition of the importance of entrepreneurship and of a political friendly business environment to economic development.

Yet while news tell us that drought in the US has mainly been the catalyst for the spike in prices of agri commodities, others share my insight that an integral element of these price surges has been because of central bank actions.

From yesterday’s Bloomberg article, (bold emphasis mine)

For the first time in more than two years, commodities, equities, bonds and the dollar posted gains, as the U.S. drought sent corn prices to a record and European Central Bank President Mario Draghi’s pledge to protect the euro buoyed stocks.

Raw materials led the increase as the Standard & Poor’s GSCI Total Return Index of 24 raw materials rose 6.4 percent in July, the most since October. The MSCI All-Country World Index of equities rallied at the end of the month for a 1.4 percent gain. The Dollar Index, a measure against six currencies, added 1.3 percent. Bonds of all types returned 1.4 percent on average, the most since December, Bank of America Merrill Lynch’s Global Broad Market Index shows.

The last time all four measures rose for a month was in April 2010, when concerns about Greece were heating up and U.S. economic reports were improving. While corn rose the most last month in almost a quarter century and wheat reached a four-year high, financial assets gained as policy makers worked to boost global growth. Federal Reserve Chairman Ben S. Bernanke said he’s prepared to take more steps, and Draghi pledged to do “whatever it takes” to preserve the euro.

“A lot of the rally in everything is central-bank led,” said Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, New Mexico, which oversees $80 billion. “So now we have a world where central-bank actions are really what people are looking at, and those actions are really positive for all asset prices and negative for savers and folks who are looking to put money in at reasonable levels over a longer period of time.”

And Africa’s stagflation concerns should also haunt Asia, and the Philippines, whom have been major agricultural commodity importers

As Zero Hedge points out, (bold original)

The level of inventories were already low going in and as Bloomberg notes, consumers around the world will feel the effect of higher food prices as the worst drought in 50 years impact the world's largest exporter of corn and wheat (and 3rd largest of soymeal). Within Asia, Korea and Malaysia will be most adversely affected, considering direct effects referenced in per capita and GDP terms. Indonesia and Japan are Asia’s largest importers of wheat, both importing roughly 5.7 million metric tons on average. China is by a wide margin the region’s largest importer of soy, with average imports of 49.9 million in the last five years. The impact on headline inflation in Asia will be stronger for the economies with lower per capita incomes — Vietnam, India, the Philippines and Indonesia — where food and food products account for a larger share of the typical consumption basket. Even in places where incomes are high, such as Singapore, food accounts for 22 percent of the consumer price index.

This only means that high commodity prices will be transmitted to Asia, whom has been inflating too (mostly through negative real interest rates).

And that a prolonged environment of elevated prices in agricultural commodities will likely induce an adverse impact to the region’s domestic economies too. (chart from Financial Times)

Stagflation risks therefore represents as another potential source of contagion.

Yet the most likely political response from the risks of a food crisis will be protectionist in nature (couched through cries of “self sufficiency”) that will only exacerbate such conditions.

In the Philippines, the risks of global and local food crisis may have been amplified by the desire by the Philippine central bank, Bangko Sentral ng Pilipinas’ (BSP) to stoke inflation through the recent cut of policy interest rates to new lows.

As the Inquirer reported last week,

Lower interest rates are expected to spur demand for loans which, in turn, could help boost purchases of goods and services. Higher demand, if supply remains constant, will help accelerate inflation.

The BSP said preventing the consumer price index from falling below target was as important for the economy as avoiding a higher-than-target inflation. Depending on variables, a very low inflation rate can be just as bad for business as high inflation, according to economists.

The BSP shares the same demand side interventionist creed as her international contemporaries.

They believe that the stealth redistribution of resources from the society (which includes the poor) to the cronies and to the political class will ‘help the economy’. In reality, this functions no more than a political setup, where markets will eventually get the blame, and thus lays the groundwork for more interventionism.

The great Ludwig von Mises presciently warned of this in his Theory of Money and Credit (bold highlights mine)

The undesirable but inevitable consequence of inflation, the rise in prices, provides them with a welcome pretext to establish price control and thus step by step to realize their scheme of all-round planning. The illusory profits which the inflationary falsification of economic calculation makes appear are dealt with as if they were real profits; in taxing them away under the misleading label of excess profits, parts of the capital invested are confiscated. In spreading discontent and social unrest, inflation generates favourable conditions for the subversive propaganda of the self-styled champions of welfare and progress. The spectacle that the political scene of the last two decades has offered has been really amazing. Governments without any hesitation have embarked upon vast inflation and government economists have proclaimed deficit spending and 'expansionist' monetary and credit management as the surest way towards prosperity, steady progress, and economic improvement. But the same governments and their henchmen have indicted business for the inevitable consequences of inflation. While advocating high prices and wage rates as a panacea and praising the Administration for having raised the 'national income' (of course, expressed in terms of a depreciating currency) to an unprecedented height, they blamed private enterprise for charging outrageous prices and profiteering. While deliberately restricting the output of agricultural products in order to raise prices, statesmen have had the audacity to contend that capitalism creates scarcity and that but for the sinister machinations of big business there would be plenty of everything. And millions of voters have swallowed all this.

So the next time a food crisis erupts, you should know the real culprit.

False Flag Operations by Governments

Here is a list of False Flag operations conducted by governments.

False Flag, according to Wikipedia.org, are covert operations designed to deceive in such a way that the operations appear as though they are being carried out by other entities. The name is derived from the military concept of flying false colors; that is: flying the flag of a country other than one’s own.

From Washington’s Blog (hat tip Lew Rockwell.com)

• A major with the Nazi SS admitted at the Nuremberg trials that - under orders from the chief of the Gestapo - he and some other Nazi operatives faked attacks on their own people and resources which they blamed on the Poles, to justify the invasion of Poland. Nazi general Franz Halder also testified at the Nuremberg trials that Nazi leader Hermann Goering admitted to setting fire to the German parliament building, and then falsely blaming the communists for the arson

• The CIA admits that it hired Iranians in the 1950's to pose as Communists and stage bombings in Iran in order to turn the country against its democratically-elected prime minister

• Israel admits that an Israeli terrorist cell operating in Egypt planted bombs in several buildings, including U.S. diplomatic facilities, then left behind "evidence" implicating the Arabs as the culprits (one of the bombs detonated prematurely, allowing the Egyptians to identify the bombers, and several of the Israelis later confessed) (and see this and this)

• The former Italian Prime Minister, an Italian judge, and the former head of Italian counterintelligence admit that NATO, with the help of the Pentagon and CIA, carried out terror bombings in Italy and other European countries in the 1950s and blamed the communists, in order to rally people’s support for their governments in Europe in their fight against communism. As one participant in this formerly-secret program stated: "You had to attack civilians, people, women, children, innocent people, unknown people far removed from any political game. The reason was quite simple. They were supposed to force these people, the Italian public, to turn to the state to ask for greater security" (and see this)(Italy and other European countries subject to the terror campaign had joined NATO before the bombings occurred)

• As admitted by the U.S. government, recently declassified documents show that in the 1960's, the American Joint Chiefs of Staff signed off on a plan to blow up AMERICAN airplanes (using an elaborate plan involving the switching of airplanes), and also to commit terrorist acts on American soil, and then to blame it on the Cubans in order to justify an invasion of Cuba. See the following ABC news report; the official documents; and watch this interview with the former Washington Investigative Producer for ABC's World News Tonight with Peter Jennings. Official State Department documents show that - only nine months before - the head of the Joint Chiefs of Staff and other high-level officials discussed blowing up a consulate in the Dominican Republic in order to justify an invasion of that country. (While the Joint Chiefs of Staff pushed as a serious proposal for Operation Northwoods to be carried out, cooler heads fortunately prevailed; President Kennedy or his Secretary of Defense Robert McNamara apparently vetoed the plan)

• The South African Truth and Reconciliation Council found that, in 1989, the Civil Cooperation Bureau (a covert branch of the South African Defense Force) approached an explosives expert and asked him "to participate in an operation aimed at discrediting the ANC [the African National Congress] by bombing the police vehicle of the investigating officer into the murder incident", thus framing the ANC for the bombing

• An Algerian diplomat and several officers in the Algerian army admit that, in the 1990s, the Algerian army frequently massacred Algerian civilians and then blamed Islamic militants for the killings (and see this video; and Agence France-Presse, 9/27/2002, French Court Dismisses Algerian Defamation Suit Against Author)

• Former chairman of the Joint Chiefs of Staff General Hugh Shelton says that a Clinton cabinet member proposed letting Saddam kill an American pilot as a pretext for war in Iraq (and see this)
• According to the Washington Post, Indonesian police admit that the Indonesian military killed American teachers in Papua in 2002 and blamed the murders on a Papuan separatist group in order to get that group listed as a terrorist organization.

• The well-respected former Indonesian president also admits that the government probably had a role in the Bali bombings

• As reported by BBC, the New York Times, and Associated Press, Macedonian officials admit that the government murdered 7 innocent immigrants in cold blood and pretended that they were Al Qaeda soldiers attempting to assassinate Macedonian police, in order to join the "war on terror".

Read the rest here

Recently the supposed underwear bomber suicide bomber turned out to be a CIA double agent

In the Philippines, the Marcos regime staged the ambush of then Secretary of National Defense Juan Ponce Enrile as pretext to impose Martial Law.

Bottom line: Political events can be manipulated by governments to achieve stealth goal/s.

I believe this may apply to the controversial territorial disputes

We can’t simply trust politically influenced media or the mainstream to tell us the truth.

The IRS Awaits US Olympic Winners

Poor US Olympic athletes.

Triumph from years of hard work will only mean that much of their earnings (seized) taxed away by the IRS.

From America’s Tax Reform, (bold original)

While 529 hardworking athletes proudly represent the United States in the 2012 Olympics, any medals and money they earn wearing red, white and blue will be taxed by the IRS. According to research done by the Americans for Tax Reform Foundation, U.S. Olympic athletes are liable to pay income tax on medals earned and prizes received at the London games.

American medalists face a top income tax rate of 35 percent. Under U.S. tax law, they must add the value of their Olympic medals and prizes to their taxable income. It is therefore easy to calculate the tax bite on Olympic glory.

At today’s commodity prices, the value of a gold medal is about $675. A silver medal is worth about $385 while a bronze medal is worth under $5.

There are also prizes that accompany each medal: $25,000 for gold, $15,000 for silver, and $10,000 for bronze.

So how much will U.S. Olympic medal winners have to pay in taxes to the IRS?

	Medal Tax	Prize Tax	Total Tax Burden
Gold	$236	$8,750	$8,986
Silver	$135	$5,250	$5,385
Bronze	$2	$3,500	$3,502

American gold medal winners will pay the IRS up to $8,986. Silver medal winners will pay up to $5,385. Bronze medal winners will pay up to $3,502.

Of course add to the miseries of the world Olympians are the vastly reduced value of their medallions which I showed earlier.

Below is from the Economist,

Calculations by The Economist find that this is much more than the "podium value" of any previous gold medal (based on estimates of the composition of medals and bullion prices at the time, adjusted for inflation). This is partly because gold and silver prices are now historically high and partly because this year's medal is so much heavier, even though the extra weight is silver rather than gold. For the first time, the silver in this year's "gold" medal is actually worth more than its gold content. Moreover, if the metal content of earlier medals is valued at today's bullion prices, the London gold is worth only just over half of those handed out in 1912.

Yet the above signifies as evidences that governments barely reward the efforts and merits by their citizenry.

Quote of the Day: Olympics: A Giant Exercise in Sports Socialism

The Olympics are a giant exercise in sports socialism—or crony capitalism, if you prefer—where the profits are privatized and the costs socialized. The games never pay for themselves because they are designed not to. That’s because the International Olympic Committee (an opaque “nongovernmental” bureaucracy made up of fat cats from various countries) pockets most of the revenue from sponsorships and media rights (allegedly to promote global sports), requiring the host country to pay the bulk of the costs. Among the very few times the games haven’t left a city swimming in red ink was after the 1984 Los Angeles Olympics, when voters, having learned from Montreal’s experience, barred the use of public funds, forcing the IOC to use existing facilities and pick up most of the tab for new ones.

This is from Shikha Dalmia at Reason. (Hat tip Professor Mark Perry)

Politicized activities are frequently characterized by guilt, envy, anger, finger pointing, victimization, divisiveness and covetism.

The astonishing record breaking feat by China’s 16 year old lady swimmer, Ye Shiwen, who even bested the 50 meter free style record of male American swimmer Ryan Lochte in the men’s race triggered swirl of rumors about “doping” which she vehemently denies.

Even without proof, such controversies reveal of the intolerance of the establishment of the unorthodox, where they would instead resort to mudslinging or rumor mongering.

As Professor Kling recently wrote

Politics channels the base emotion of hatred. A lot of political actions derive from hatred of the other.

Such antagonistic controversies only highlights the socialism of sports via the Olympics.

P.S. I was bogged down by the day long power outage (localized earth hour) yesterday so I wasn’t able to do much posting.

Quote of the Day: Preservation of Political Freedom through the Free Markets

What the market does is to reduce greatly the range of issues that must be decided through political means, and thereby to minimize the extent to which government need participate directly in the game. The characteristic feature of action through political channels is that it tends to require or enforce substantial conformity. The great advantage of the market, on the other hand, is that it permits wide diversity. It is, in political terms, a system of proportional representation. Each man can vote, as it were, for the color of tie he wants and get it; he does not have to see what color-the majority wants and then, if he is in the minority, submit.

It is this feature of the market that we refer to when we say that the market provides economic freedom. But this characteristic also has implications that go far beyond the narrowly economic. Political freedom means the absence of coercion of a man by his fellow men. The fundamental threat to freedom is power to coerce, be it in the hands of a monarch, a dictator, an oligarchy, or a momentary majority. The preservation of freedom requires the elimination of such concentration of power to the fullest possible extent and the dispersal and distribution of whatever power cannot be eliminated – a system of checks and balances. By removing the organization of economic activity from the control of political authority, the market eliminates this source of coercive power. It enables economic strength to be a check to political power rather than a reinforcement.

(bold emphasis added)

This from Milton and Rose Friedman’s 1962 book (p.15), Capitalism and Freedom (as quoted by Professor Don Boudreaux at Café Hayek).

The illustrious economist and freedom fighter Milton Friedman celebrated his centennial birthday yesterday. And this stirred up the hornet’s nest about Dr. Friedman’s “love fest” with Keynes.

I’d say that this controversy just shows how people’s views evolve and this applies to Dr. Friedman. For instance, despite promoting activist monetarism, Dr. Friedman eventually declared that he favored the abolishment of the US Federal Reserve see here and here

Nevertheless, while I may not be agreeable to some of his earlier “statist comprises”, he surely has been one of the most eloquent and charismatic promoter and advocate of free markets, in general. That's why many of his videos have been posted here.

Belated Happy Birthday Dr. Friedman