Has US Federal Reserve Policies Been Engineered for President Obama’s Re-election?

I have been arguing that Fed policies have been designed for the re-election of Barack Obama.

More clues from LVMI President Douglas French at the Laissez Faire Books,

In their paper “Social Mood, Stock Market Performance and U.S. Presidential Elections: A Socionomic Perspective on Voting Results,” researchers at the Socionomic Institute studied the results of every presidential election, since 1792. According to the paper, stock market performance is the best predictor of election results: better than unemployment, GDP or inflation.

It turns out, the higher the DJIA, the better the chance of re-election. Voters give incumbents a pass for their first year in office, figuring it was, in this case, George W. Bush’s fault. So the Dow 30 stood at 9,712.73 on Oct. 30, 2009, when Obama started his second year. That’s the point of no return. It will take a 25% market meltdown, from over 13,000 on the Dow to below 9,712, for Ann Romney to start thinking about rearranging the furniture at 1600 Pennsylvania Ave.: That is if the social mood folks have it right.

So while the Fed’s money policy hasn’t produced more jobs (and won’t), the ground-hugging interest rates have levitated the securities markets and may just get Obama elected to four more years.

Job One in Washington is to be re-elected. How Lord Keynes’ methods get it done doesn’t matter.

This only goes to show how inflationary policies benefits the political class and their allies.

The Enemy from Within: Afghan Forces Turning Against Their U.S. Trainers

Wars spawn their own monsters.

Aside from growing numbers of suicides within the US Army, in the Afghan war, Afghan forces have reportedly been turning against their US benefactors.

Writes the pro-war conservative Heritage Foundation,

American troops in Afghanistan face an increased threat from “insider” attacks in which the Afghan forces they are there to help and train are turning their guns on their American partners, raising serious questions about the viability of the U.S. mission in Afghanistan.

The attacks, which have killed 40 U.S. and NATO troops so far this year, are also referred to as “green-on-blue attacks,” because the military refers to local forces as “green” and allied forces as “blue.”*

Who are the Afghan security forces? While the Afghan Army leaders are professional and committed to working with their American counterparts, the recruits are mostly rural, illiterate men who can become disgruntled by cultural differences with their American trainers or susceptible to insurgent bribes or intimidation. U.S. military officials attribute only about 10 percent of the insider attacks to Taliban infiltration, despite Taliban claims of responsibility for most of the attacks.

There are about 350,000 Afghan security forces, including the police and army. As of October 1, there will be 68,000 U.S. troops in Afghanistan. The U.S. strategy in Afghanistan is centered on being able to train the Afghan forces so they can eventually face down the insurgent threat on their own. If the number of insider attacks does not abate, it will be increasingly difficult to justify a large-scale U.S. troop presence in the nation.

The backlash from US Imperial policies has been intensifying.

As a side note, here is an interesting social media video of US troops in Afghanistan doing a “call me maybe”. (hat tip from cbsnews.com)

Well this is just one of the explosive “call me maybe” videos, you can see more here.

Ironically, the New York Times decries such viral effects of social media as “the music industry itself, has been upended by social media”. This logic has it backwards, the Carly Rae Jepsen “call me maybe” phenomenon became a "viral" hit because of social media. I wouldn’t be listening to her music if not for these amazing videos. [My daughter and her classmates even made one]

Infographic: Scientific Evidence for Popular Health Supplements

Visual.ly has an interesting infographic on the supposed variable tangible benefits of popular health supplements.

[Note I am posting this to share the interesting perspective and should not be reckoned or interpreted as an endorsement].

Learn about infographic design.

Dr Jekyll and Mr Hyde: China and Vietnam to Expand Trade Via Road Network

More signs of China’s love-hate relationship with ASEAN.

Vietnam one of the claimants in the territorial dispute in the South China Sea has forged a “historic” agreement with China to expand trade through a major road network

From ADB, (bold added)

For the first time, buses and trucks will be able to cross overland between the rugged southern regions of the People’s Republic of China (PRC) and the remote northern regions of Viet Nam using a 1,300 kilometer route spanning from Ha Noi to Shenzhen made possible through a road transport agreement between the two countries.

“The new transport agreement will have a profound impact not only on bilateral trade and tourism, but also on Greater Mekong Subregion (GMS) transport facilitation," said Yushu Feng, Principal Economist, Regional Cooperation, at the Asian Development Bank (ADB), which facilitated the bilateral road transport agreement in line with GMS transport facilitation initiatives. “This is a key milestone for regional cooperation.”

The new agreement will ease restrictions on trucks and buses travelling between major economic zones in PRC’s Yunnan province, Guangxi Zhuang autonomous region, Guangdong province and six provinces in Viet Nam, including Lang Son and Quang Ninh provinces, and the cities of Ha Noi and Hai Phong.

Previously, transport operators were only allowed to travel up to 20 kilometers into each other’s territories. Starting August 2012, each country will be able to issue up to 15,100 permits for trucks and buses that travel within the border province area, and each will be able to issue up to 500 permits for trucks and buses than can go to inland provincial areas.

Another significant route, connecting Kunming to Ha Noi and Hai Phong and governed by the same agreement, was inaugurated in Kunming on 16 August 2012.

In 2011, road transport volume between PRC and Viet Nam through the Yuyi-Friendship border gate was as much as 1 million tons for goods and around 726,000 passengers traveled overland between both countries. Transport volume is expected to increase with the newly-implemented road transport agreement. To accommodate market demand, the permit quota for 2013 will be increased, accordingly.

The controversial disputes make it to the headlines and thus fire up emotions that arouse aggression via obtuse (feel good) nationalism.

But these trade agreements which signifies “key milestone for regional cooperation” will be relegated to the business or back pages.Yes the growing trade volume between ASEAN-China are for real.

Overall, China’s seeming antagonistic foreign policies or the gunboat diplomacy has hardly been consistent with her economic policies.

This makes me suspect that one of the two contradicting policies signify as no more than false signals (if not a false flag) aimed at the promotion of concealed political goals.

Global Warming in the Perspective of Social Science

Politics has mainly been about arousing emotions. In the debate over global warming, arguments have essentially been reduced to either black and white, or either “you are for are against us” (False choice).

Never mind if previous predictions has always failed due to misdiagnosis arising from blind spot-illusory superiority cognitive biases or the overestimation of one's assumptions (knowledge problem).

Professor Steve Horwitz puts the global warming-climate change issue into perspective with 8 highly relevant questions (from thefreemanonline.org) [Italics bold original]

1. Is the planet getting warmer?

2. If it’s getting warmer, is that warming caused by humans? Obviously this is a big question because if warming is not human-caused, then it’s not clear how much we can do to reduce it. What we might do about the consequences, however, remains an open question.

3. If it’s getting warmer, by what magnitude? If the magnitude is large, then there’s one set of implications. But if it’s small, then, as we’ll see, it might not be worth responding to. This is a good example of a scientific question with large implications for policy.

Matters of Science

All these questions are presumably matters of science. In principle we ought to be able to answer them using the tools of science, even if they are complex issues that involve competing interpretations and methods. Let’s assume the planet is in fact warming and that humans are the reason.

4. What are the costs of global warming? This question is frequently asked and answered.

5. What are the benefits of global warming? This question needs to be asked as well, as global warming might bring currently arctic areas into a more temperate climate that would enable them to become sources of food. Plus, a warmer planet might decrease the demand for fossil fuels for heating homes and businesses in those formerly colder places.

6. Do the benefits outweigh the costs or do the costs outweigh the benefits? This is also not frequently asked. Obviously, if the benefits outweigh the costs, then we shouldn’t be worrying about global warming. Two other points are worth considering. First, the benefits and costs are not questions of scientific fact because how we do the accounting depends on all kinds of value-laden questions. But that doesn’t mean the cost-benefit comparison isn’t important. Second, this question might depend greatly on the answers to the scientific questions above. In other words: All questions of public policy are ones that require both facts and values to answer. One cannot go directly from science to policy without asking the kinds of questions I’ve raised here.

7. If the costs outweigh the benefits, what sorts of policies are appropriate? There are many too many questions here to deal with in detail, but it should be noted that disagreements over what sorts of policies would best deal with the net costs of global warming are, again, matters of both fact and value, or science and social science.

8. What are the costs of the policies designed to reduce the costs of global warming? This question is not asked nearly enough. Even if we design policies on the blackboard that seem to mitigate the effects of global warming, we have to consider, first, whether those policies are even likely to be passed by politicians as we know them, and second, whether the policies might have associated costs that outweigh their benefits with respect to global warming. So if in our attempt to reduce the effects of global warming we slow economic growth so far as to impoverish more people, or we give powers to governments that are likely to be used in ways having little to do with global warming, we have to consider those results in the total costs and benefits of using policy to combat global warming. This is a question of social science that is no less important than the scientific questions I began with.

I could add more, but this is sufficient to make my key points.

Professor Horwitz’s striking conclusions:

First, it is perfectly possible to accept the science of global warming but reject the policies most often put forward to combat it. One can think humans are causing the planet to warm but logically and humanely conclude that we should do nothing about it.

Second, people who take that position and back it up with good arguments should not be called “deniers.” They are not denying the science; they are questioning its implications. In fact, those who think they can go directly from science to policy are, as it turns out, engaged in denial – denial of the relevance of social science.

Global warming-climate change is as much about economics or social sciences than just an issue of environmental science. Don’t be misled.

Why Not to Pay Heed to the Prophets of Ecological Apocalypse

Emotions based issues sell because people are emotional animals. Yet among all the emotions it is fear which is most powerful. That’s why horror movies sell, stock market crashes occur [where fear is a symptom and an accelerator of the market process], and that’s why many fall prey easily to "fear" based politics (e.g. climate change, peak resources and etc…).

Doomsayers sell or are popular also because of many people’s attachment to the Pessimism bias or the bias which exaggerates the likelihood of a negative outcome.

The profound Matthew Ridley writing at the Wired.com chronicles a list of prediction failures made by prophets of the apocalypse or Armageddon.

Ironically, despite the string of utter prediction failures; fear based issues remain in high demand. These have been evident in four fronts of social affairs, particularly in chemicals, diseases, people and resources. Mr. Ridley calls them the four horsemen of the apocalyptic promises

Here is an excerpt from the article.

Religious zealots hardly have a monopoly on apocalyptic thinking. Consider some of the environmental cataclysms that so many experts promised were inevitable. Best-selling economist Robert Heilbroner in 1974: “The outlook for man, I believe, is painful, difficult, perhaps desperate, and the hope that can be held out for his future prospects seem to be very slim indeed.” Or best-selling ecologist Paul Ehrlich in 1968: “The battle to feed all of humanity is over. In the 1970s ["and 1980s" was added in a later edition] the world will undergo famines—hundreds of millions of people are going to starve to death in spite of any crash programs embarked on now … nothing can prevent a substantial increase in the world death rate.” Or Jimmy Carter in a televised speech in 1977: “We could use up all of the proven reserves of oil in the entire world by the end of the next decade.”

Predictions of global famine and the end of oil in the 1970s proved just as wrong as end-of-the-world forecasts from millennialist priests. Yet there is no sign that experts are becoming more cautious about apocalyptic promises. If anything, the rhetoric has ramped up in recent years. Echoing the Mayan calendar folk, the Bulletin of the Atomic Scientists moved its Doomsday Clock one minute closer to midnight at the start of 2012, commenting: “The global community may be near a point of no return in efforts to prevent catastrophe from changes in Earth’s atmosphere.”

Over the five decades since the success of Rachel Carson’s Silent Spring in 1962 and the four decades since the success of the Club of Rome’s The Limits to Growth in 1972, prophecies of doom on a colossal scale have become routine. Indeed, we seem to crave ever-more-frightening predictions—we are now, in writer Gary Alexander’s word, apocaholic. The past half century has brought us warnings of population explosions, global famines, plagues, water wars, oil exhaustion, mineral shortages, falling sperm counts, thinning ozone, acidifying rain, nuclear winters, Y2K bugs, mad cow epidemics, killer bees, sex-change fish, cell-phone-induced brain-cancer epidemics, and climate catastrophes.

So far all of these specters have turned out to be exaggerated. True, we have encountered obstacles, public-health emergencies, and even mass tragedies. But the promised Armageddons—the thresholds that cannot be uncrossed, the tipping points that cannot be untipped, the existential threats to Life as We Know It—have consistently failed to materialize. To see the full depth of our apocaholism, and to understand why we keep getting it so wrong, we need to consult the past 50 years of history.

The classic apocalypse has four horsemen, and our modern version follows that pattern, with the four riders being chemicals (DDT, CFCs, acid rain), diseases (bird flu, swine flu, SARS, AIDS, Ebola, mad cow disease), people (population, famine), and resources (oil, metals). Let’s visit them each in turn.

Read the rest here

China’s Central Bank Floods System with Record Cash

China’s central bank flushes her financial system with record cash

From Businessweek/Bloomberg,

China’s interest-rate swaps fell from a three-month high as the central bank injected record funds into the financial system to ease a cash crunch.

The six-month contract, the fixed cost to receive the seven-day repurchase rate, fell five basis points, or 0.05 percentage point, to 3.25 percent as of 10:27 a.m. in Shanghai, according to data compiled by Bloomberg. It reached 3.31 percent yesterday, the highest since May 11. The seven-day repo rate, a gauge of interbank funding availability, increased 10 basis points to 3.72 percent, a weighted average shows.

The People’s Bank of China conducted 220 billion yuan ($34.6 billion) of reverse-repurchase operations, the most in a single day, according to a trader at a primary dealer required to bid at the auctions. The government may introduce new policies to boost consumers’ borrowing and spending this year, the Economic Information Daily reported today, citing an unidentified person.

“This unusually large volume points to the central bank’s concern about the elevated level of money-market rates,” Dariusz Kowalczyk, a strategist at Credit Agricole CIB in Hong Kong, wrote in a note to clients today. “We still expect a reserve-requirement cut, but the impact of this large open- market operation should be lower interest-rate swaps at the short end.”

The central bank last lowered banks’ reserve requirements in May and cut benchmark interest rates in June and July to support the economy. Gross domestic product increased 7.6 percent from a year earlier in the second quarter, the least since the first quarter of 2009, official figures show. Economic growth will slow to a 13-year low of 8.2 percent in 2012, based on the median estimate in a Bloomberg survey.

By the way the PBOC acted, China’s economy has been suffering more than just a slowdown. Yet this, perhaps, may be a precursor to bigger interventions.

The Shanghai index closed modestly higher today. Gold prices has so far responded positively.

Quote of the Day: Neoconservatism Represents Big Government

Neoconservatism is not the philosophy of free markets and a wise foreign policy. Instead, it represents big-government welfare at home and a program of using our military might to spread their version of American values throughout the world. Since neoconservatives dominate the way the U.S. government now operates, it behooves us all to understand their beliefs and goals.

This is from congressman Ron Paul on Neo-conservatism

Phisix: Choosing The Ideology behind Profitable Actions

We have been trained to look for godliness, virtue, direction, and truth outside ourselves, in some agency external to ourselves. Such beliefs have been generated largely by those who have either a religion or a political system to fasten upon the necks of their fellow beings. It is through such thinking that some have been able to control the thoughts and actions of others by attacking their victims' sense of self-capacity and worthiness to function in the world.-Butler Shaffer

There will be only 3 trading sessions in the coming week because of the extended holidays (on Monday Eidul Fitar and Tuesday Ninoy Aquino Day).

This means that the public will likely be in a vacation mode. So unless some externally driven event will incite unusual volatility that may trigger a local response, I expect the market’s mood to be largely lackadaisical. So whatever direction the Phisix closes the week, the average trading volume will likely be weaker.

Since momentum in the global markets appear sprightly; the odds for a shock seem unlikely.

But given the fragility of current conditions, no one can really tell.

Update on Holiday Economics

As a side note, the string of political holidays only depletes productivity from the economy. The mainstream will argue that “holiday economics” promotes tourism and tourism related industries from which should support the economy. But again, costs are not benefits.

While holidays indeed promote tourism and allied industries, such thinking ignores the unseen costs borne by such political holiday statutes.

As I previously wrote[1],

local policies are counterproductive, privileges one sector (4% direct 10% indirect) over the entire economy, raises cost of doing business, reduces output, promotes idleness, hedonism and wrong virtues (spending instead of saving) and importantly the "elitist" tendencies of the powers that be.

For an update, according to World Travel & Tourism Council[2], the direct contribution of Travel & Tourism to GDP was PHP194.7bn (2.0% of total GDP) in 2011, the total contribution of Travel & Tourism (meaning tourism related industries) to GDP was PHP830.8bn (8.5% of GDP) in 2011. In terms of employment, direct employment from the industry accounted for 778,000 jobs or 2.1% of total employment and the total contribution of the industry to employment, including jobs indirectly was 9.6% of total employment (3,547,500 jobs).

Back of the napkin calculation tells us that ‘Holiday economics’ means supporting 8.5% (of GDP) against the 91.5% of the economy, and in terms of employment, 9.6% as against 90.4% of the labor force.

Holiday economics has been premised on promoting the interests of the elite at the expense of the underprivileged or the ‘poor’.

Market Internals Suggests of Healthy Correction Phase

In the Philippine equity markets, part of what I expected occurred last week.

The recent selloff in the mining sector seems to have percolated into the broader markets.

The Phisix languished, down 1.07% this week, weighed by all major sectoral indices except for the mining and oil which defied the broad market correction

As I wrote last week[3],

I lean on condition (B) or where the bear market of the mining sector will likely percolate into the general market, due to growing risks of contagion.

However everything really depends on how and what future policies will be conducted, especially in the US, as previously discussed.

So the correction phase appears to be another rotational process which essentially shifts the flow of sentiment from the mining sector to the general market and vice versa.

I seriously doubt that the domestic mining sector as having reached an inflection point or has “bottomed” out. I would like to be convinced based on evidences from internal and external forces. Instead I suspect that this week’s rally has been more of a dead cat’s bounce, from a vastly oversold position, than from a recovery.

The correction phase can be seen in the modest deterioration of the market breadth. The rotational process, as well as, the modest decline of the general market should be seen as a healthy profit taking process.

The continuity of the benign conditions, as I have repeatedly been pointing out, will depend on external developments.

Superstitious Beliefs versus Rigorous Analysis

Many have assigned the current weakness in the local equity market as having been influenced by the Chinese tradition of the “Ghost Month” (August 17 to September 15, 2012)[4]

The tradition suggests that many activities such as evening strolls, traveling, moving house, or starting a new business or even swimming can bring about bad luck, thus believers refrain from doing them.

People’s beliefs are acquired mostly through three ways[5], through tradition (handed down through generations), through persons of authority (whose opinions people take as truth and accept or assimilate them, e.g. parents, teachers, religious leaders, politicos, experts and etc…) and or from reason and evidence.

Based on reason, there has been little empirical evidence to support such claims.

While I don’t have the exact figures for the said periods, I used the annual % monthly returns of August (left window) and September (right window) of the Phisix since 1985 to see its validity.

As one would note that in the above chart, from both August and September windows, negative returns have not been a predominant feature. Instead we see sporadic fluctuations between positive and negative zones.

Examining further, one would note that the direction of returns have largely been driven by the dominant trend of the marketplace: Returns have either been negative or marginally positive during cyclical bear market periods, while in bull markets, returns have mostly been positive.

One interesting aspect is that sharp market volatilities has characterized September returns, where gains and losses have been magnified.

I think this seem to square with the seasonal activities in the US where September tends to be the worst month for stocks as exhibited by the Average Monthly gain by the Dow Jones Industrials since 1950[6].

And the sharp volatility compounded by negative returns could have been due to the simultaneous large liquidations of savings, which includes sales of stocks, to fund major consumption expenses by US households, particularly spending for new school clothes for children, winter clothes and other weather related consumption activities. Fueled by tight monetary conditions, the massive outlays for consumption may have served as catalyst for the notorious September-October window which has been seasonally prone to market crashes[7]

The lesson that can be gleaned from the above is that beliefs based on superstitions and or the tendency of many to employ the availability heuristics—mental shortcuts based on what we can remember rather than from complete data[8]—are hardly useful substitutes for thorough investigation and rigorous analysis of the marketplace from which to project the future or even explain markets on an ex-post basis.

On the contrary, I would say that the recent weakness of the Phisix can be traced to a single axiom: NO Trend Moves in a Straight Line.

Given that the Philippine Phisix, which has outperformed most of the world’s equity benchmarks on a year to date basis, has shown signs of being overbought and overextended, then a salutary reprieve should be a natural state.

In short, profit taking is an inherent process of the financial markets.

Year-to-date, Thailand seems to have successfully passed the Philippines (19.37 versus 19.1% respectively) to take the region’s leadership. Yet both managed to keep some distance from last year’s leader Indonesia, as well as, Malaysia who remains the laggard among the ASEAN majors.

Meanwhile Malaysia’s year-to-date returns largely understates the real action—Malaysia has been the only bourse in the region (if not the world) trading at record highs.

I think that in as much as rotations occur within the domestic market, the same dynamic will likely influence activities of the region’s equity bourses.

As I previously noted[9],

given the rotational dynamics, we might see some “catch up” play or the narrowing of the recent wide variance between the laggards and leaders overtime. But this doesn’t intuitively mean that such gaps will close.

So far, only the Phisix has backtracked while Thailand’s SET has still been in high Octane. On the other hand, Indonesia has slightly narrowed the gap with the Phisix.

Risk ON Stands on Perpetual Promises of Rescues

The reason why the world’s bourses have turned conspicuously positive has been due to the recent return of the RISK ON environment.

The following represents mainstream media’s attribution of the strong performance of global equity markets for the week.

European stocks, from Businessweek/Bloomberg[10]

European stocks rose to the highest level since July 2011, extending gains for an 11th week, as investors anticipated policy makers will stimulate the euro-area economy and German growth retreated less than forecast.

Asian stocks, from another Businessweek/Bloomberg[11]

Asian stocks rose this week, with the benchmark index posting its longest weekly winning streak since March, after China’s Premier Wen Jiabao said there’s more room to adjust monetary policy and U.S. economic reports signaled strength in the world’s largest economy.

In spite of indefatigable pledges by Chinese authorities, China’s bellwether, the Shanghai index remains in doldrums seemingly unaffected by the global RISK ON landscape.

In fact, China’s authorities have admitted to recent signs of outflows of hot money[12] as domestic banks became net sellers of foreign exchange or 3.8 billion yuan ($597 million), which for me could be worrying signs of a popping bubble.

Meanwhile US stock markets according to the Reuters[13]

The S&P 500 held near a four-year high on Friday, and the market's key gauge of anxiety sank to its lowest since 2007, suggesting a belief that the problems stressing investors might be closer to a resolution…

The S&P 500 made a solid move above the closely watched 1,400 level in the last session, posting its biggest gain in two weeks. But trading volume remained low…

The S&P 500 has risen 2.8 percent in August and about 11 percent since a year low in June as traders eye some encouraging U.S. jobs data and highly anticipated policy meetings at the European Central Bank and the Federal Reserve in September.

In essence, the gist of today’s rally in the global stock markets has been galvanized around intensifying expectations that global central banks and governments will effectively rescue the markets.

And tidbits of good news are seen as signs of selective confirmation of a recovery. On the other hand, bad news have been interpreted as having to add pressure on governments to intervene, the result of which is to supposedly deliver good news—a recovery.

In other words, today’s global equity markets investors seem to have been strongly conditioned to carry expectations that markets can only move in one direction: UP. It can be said that the circularity of this logic entails a “heads I win, tails you lose” market environment from political guarantees. Such is the confirmation bias which intensely embodies the mainstream view.

Such has also been the reason why markets everywhere have increasingly been politicized as participants have been oriented to see rising markets as a form of political entitlement.

Divergences Aplenty

It has been interesting to note that, yes corporate fundamentals may have posted some positive signs but again everything depends on the reference points.

From the big picture, the positive signs emitted by the S&P 500 have not been convincing.

Aside from low volume, the divergences I previously mentioned, such as earnings, global economy, industrial and non-industrial activities[14], market internals, divergent signs on sub-sectors such as Transportation (Dow Theory)[15] or even the Russell 2000, have shown marginal and not substantial improvements, in spite of the near four year highs by the S&P 500.

A good example is the current divergence in the % of companies beating earnings and revenue estimates. While the above has shown positive results, it seems that US markets have been cheering what seems like diminishing returns or a decline in positive developments. (chart above from Bespoke Invest[16])

chart from Bespoke Invest

Again recent highs of the US markets have been accompanied by narrowing market breadth.

This means the drivers responsible for lifting the equity benchmarks have mainly been big cap issues. Yet the accounts of publicly listed companies at 52-week highs have also been diminishing. If such trend should continue then this entails limited upside for the S&P[17].

Finally the current rally in the US markets seems to have departed from the previous trend relative to gold.

In the past, rallying US markets (represented by the S&P 500) came at the heels of a more powerful run in gold (see lower window) and in other major commodities. So even as the S&P rose, gold climbed faster, thus the declining ratio between the S&P and gold.

The implication is that the RISK ON environment then had been broader which also meant that the rally had a firmer footing.

Today’s RISK ON environment seems to be concentrated on the equity markets and the junk bond markets where Gold and commodities has vastly underperformed, thus, the rising ratio between S&P and gold.

Junk bonds have been posting record issuance. Companies have been taking advantage of zero bound rates and strong demand which has brought down yields of speculative bonds to a few points away from the record lows reached during May of 2011[18]. Such yield chasing phenomenon exhibits the nature of today’s yield chasing rampant punting and speculations.

This means that gold’s modest rise has not been consistent with a strong RISK ON landscape.

The selective risk appetite and the apparent narrowing of asset selections mean that the markets could be highly susceptible to sudden changes of expectations or to mood swings: thus elevating the current risk profile of would be buyers.

Current Conditions Remain Highly Fragile

I have long been making this point: For as long as the US won’t fall into a recession or won’t suffer from a financial shock that could lead to a global recession, the recent decline in the Phisix extrapolates to a healthy profit taking process.

That said, a five to ten percent decline from the peak or the range at 4,825-5,080 could prove to be a spring board for the next record high. This is all conditional on the unfolding events abroad, and should not be read as one-size-fits all analysis.

Given the nature from which the recent global rally has been anchored, i.e. expectations from promises of rescues, I still remain highly apprehensive, or I will not write off the risks of possible sharp changes in expectations that may precipitate the current moderate RISK ON conditions to a swift and dramatic RISK OFF environment.

The contagion risks are real, which means current conditions remain highly fragile. Rising markets have not smoothened out all the underlying stresses.

Given the enormous distortions of the markets from repeated interventions, the best is to watch the interplay of stimulus-response between markets and policymakers.

To close, let us not forget our beliefs essentially drive our actions, rightly or wrongly. As the great Ludwig von Mises wrote[19],

In acting man is directed by ideologies. He chooses ends and means under the influence of ideologies. The might of an ideology is either direct or indirect. It is direct when the actor is convinced that the content of the ideology is correct and that he serves his own interests directly in complying with it. It is indirect when the actor rejects the content of the ideology as false, but is under the necessity of adjusting his actions to the fact that this ideology is endorsed by other people. The mores of their social environment are a power which people are forced to consider. Those recognizing the spuriousness of the generally accepted opinions and habits must in each instance choose between the advantages to be derived from resorting to a more efficient mode of acting and the disadvantages resulting from the contempt of popular prejudices, superstitions, and folkways.

---

[1] See The Economics of Holidays, October 22, 2009

[2] World Travel & Tourism Council Travel & Tourism Economic Impact 2012 Philippines

[3] See Philippine Mining Index: Will The Divergences Last?, August 13, 2012

[4] Mandarin Language Ghost Month and Ghost Festival About.com

[5] Green Alexander, The Noblest Expression of the Human Spirit, Early To Rise, October 6, 2010

[6] Chart of the Day Dow-Average Monthly Gains

[7] See Austrian Business Cycle and September Market Crashes, June 27, 2012

[8] Changingofminds.org Availability Heuristic

[9] See Phisix and ASEAN Equities in the Shadow of Contagion Risks July 22, 2012

[10] Businessweek/Bloomberg, European Stocks Rise for 11th Week on Stimulus Bets, GDP August 17, 2012

[11] Businessweek/Bloomberg, Asia Stocks Rise for a Third Week on Wen Comments, U.S. Economy August 17, 2012

[12] Wall Street Journal Investors Shift Money Out of China August 14, 2012

[13] Reuters.com US STOCKS-S&P 500 up for 6th week; fear index hits 5 yr low, August 18, 2012

[14] See Why Current Market Conditions Warrants a Defensive Stance, July 9, 2012

[15] See Phisix: Managing Through Volatile Times, August 6, 2012

[16] Bespoke Invest Final Earnings and Revenue Beat Rates August 17, 2012

[17] Bespoke Invest Wanted: More New Highs August 17, 2012

[18] Bloomberg.com Junk-Bond Sales Soar To Record In August: Credit Markets, August 17, 2012

[19] Mises, Ludwig von 2. The Role of Power XXIII. THE DATA OF THE MARKET Human Action, Mises.org

US Military Suicides: The Enemy from Within

Fighting needless wars and playing the role of the global policeman to fulfill the political and financial goals of neocon politics and the military industrial complex has apparently been taking a heavy mental toll on US military personnel

From Yahoo/Reuters

Twenty-six active-duty soldiers are believed to have committed suicide in July, more than double the number reported for June and the most suicides ever recorded in a month since the U.S. Army began tracking detailed statistics on such deaths.

During the first seven months of this year, there were 116 suspected suicides among active-duty soldiers, compared to 165 suicides for all of last year, the Army said. The military branch reported 12 likely suicides during June.

The monthly totals for 2012 include confirmed suicides and cases still under investigation, the Army said.

Twelve reserve soldiers who were not on active duty also appear to have killed themselves in July, bringing the yearly total for that group to 71 suicides.

The Army, which has collected in-depth monthly suicide data since January 2009, confirmed 118 suicides among members of the branch's National Guard and Reserve components in 2011.

"Suicide is the toughest enemy I have faced in my 37 years in the Army," General Lloyd J. Austin III, vice chief of staff of the Army, said in the report released on Thursday.

The above data affirms what seems to be an escalating trend.

As Congressman Ron Paul wrote last May,

Unfortunately, when presidents misuse our military on an unprecedented scale – and Congress lets them get away with it – the resulting stress causes military suicides to increase dramatically, both among active duty and retired service members. In fact, military deaths from suicide far outnumber combat deaths. According to an article in the Air Force Times this month, suicides among airmen are up 40 percent over last year.

This seems even a greater threat than the external enemies the US government has spawned or has been waging war against as the enemy has emerged from within: the loss of moral fiber (strength of character or firmness of purpose-dictionary.com)

This backlash from imperialist US foreign policies has not just been impairing the mental health of the US military but can likewise be observed in the developing “road to serfdom” political economic trends of the US (see links here, here and here).

All these seems ominous to a quote widely attributed to Soviet Union Premier Joseph Stalin but has been disputed by snopes.com

America is like a healthy body and its resistance is threefold: its patriotism, its morality and its spiritual life. If we can undermine these three areas, America will collapse from within.

Quote of the Day: End the Empire

The empire has put in place the pseudo-legal "laws" that it needs to repress dissidents within America. It will use these "laws" and executive orders in order to quell restiveness and resistance among Americans. The reason for the domestic suppression is because the empire cannot expand overseas if its domestic population is not under firm control. The driving force in domestic suppression is the goal of world empire. This is why lovers and supporters of liberty should strongly condemn all of the many U.S. actions to expand empire.

The idea that I've just expressed is not widely known, much less accepted. So I'll repeat it again. The U.S. wants a world empire and is actively trying to achieve that aim. That's its number one priority. In order to achieve that, it needs a cooperative, compliant, and productive population and one that does not resist that aim. That is why the government has been putting measures in place that are repressive and destroy judicial rights.

According to an Iranian analyst who specializes in Russia, the Russians now understand what the U.S. is after. It has taken them a while for this to penetrate. He writes of the Russians

"Russian analysts maintain that the current foreign policy of the United States is based on two theories: 'ultimate realism,' and 'new liberalism.' As a result, the Americans actually believe that world countries are simply divided into the United States’ friends and enemies. Hostile countries, therefore, should be weakened and their presence in global and regional strategic arenas should be limited and even suppressed in political, economic and cultural terms.

"The new liberalism also claims that all wars break out between non-democratic states. Therefore, all countries should go through an American style democratization process and if needed, military means such as preventive war, can be used to achieve that purpose.

"As a result of the above arguments, Russia believes that the current political developments in the Middle East and North Africa are steered by the United States. Moscow firmly believes that a new wave of the world order has been initiated by the United States in order to create a new version of the past unipolar world system. The main targets of this wave, Moscow maintains, include North Africa, the Middle East, Iran, Eurasia, and finally China and Russia."

This is from Michael S. Rozeff at the Lew Rockwell Blog

Corporations Are People

Emotions can make even the best lose their sense of reasoning

My favorite marketing guru, Seth Godin, writing in disgust from an unfortunate experience by a customer with an insurance company, rants,

if someone in your neighborhood used this approach, treating others this way, if a human with a face and a house and a reputation did it, they'd have to move away in shame. If a local businessperson did this, no one in town would ever do business there again.

Corporations (even though it's possible that individuals working there might mean well) play a different game all too often. They bet on short memories and the healing power of marketing dollars, commercials and discounts. Employees are pushed to focus on bureaucratic policies and quarterly numbers, not a realization that individuals, not corporations, are responsible for what they do…

Corporations don't have to act like this. It's people who can make them stop. Corporations aren't people, people are people.

I sympathize with the tragic case presented by Mr. Godin. But personal tragedies should not be mixed up with ethical principles.

It’s is true that there will always be unscrupulous corporations. But CROOKED or IMMORAL behaviors or actions are NOT exclusive to corporations, they apply to PEOPLE—individuals or even communities (e.g. hate groups)—and most especially this applies to GOVERMENTs who wields coercive power over the community.

Corporations are no other than juridical or legal entity comprising sets of individuals.

Yet one unfortunate experience does not justify a sweeping condemnation of the rest. This represents a fallacy of composition.

Otherwise markets become zero-sum games which tilts the balance according to Mr. Godin’s accusations to producers or service providers at the expense of consumers. This is patently false.

In a market economy, corporations essentially do NOT force ‘people’ to buy their products or services. Mr. Godin admits to this, “If a local businessperson did this, no one in town would ever do business there again.”

But why should this be different elsewhere?

Only governments forces people to avail of their services. On many occasions these may come along with political arrangements with privileged private or semi-private owned corporations (e.g. public private partnerships, monopolies, subsidies and etc).

Corporations under such politically directed setting then would focus “on bureaucratic policies” or meeting political goals rather than servicing the consumers. The incentives guiding profit based private enterprises and public institutions are different.

In a market environment if corporations do not fulfill on their promises, then consumers can vote with their wallets and or file legal suits or countersuits against them.

Markets basically do not reward greed or “the power of marketing dollars” as the consumers are kings—unless inhibited by politics

Apparently, social media pressure (yes the free markets) seems to have forced the alleged corporate non-people antagonist to a settlement with the aggrieved. So the supposed villain has some people aspects too.

The idea of corporations as not representing the individual or the people looks like a Janus faced populist self-contradicting argument riding on people’s emotions in order to get “likes”.

Yet assuming Mr. Godin’s censure is true, this implies that since he possibly owns corporations (e.g. Seth Godin Productions Inc and Squidoo) then his denouncement could also mean that he must be similarly liable for “Corporations aren't people, people are people”

Ever heard of the proverbial pot calling the kettle black?

Failure of Alcohol Bans in the Muslim World

I have been saying here that prohibition statutes are noble sounding “feel good” political actions that fails to accomplish their goals (in fact they make them worst). Said differently, politics will never eviscerate the natural laws of economics.

The Economist has a terse commentary on the status of alcohol ban on Muslim countries which seem to validate such premises (bold added)

NOBODY knows exactly when Islamic scholars decided that booze was sinful. In the 1970s political Islam led some countries such as Iran and Pakistan to ban alcohol, although many do not and exceptions are made for non-Muslims. In some countries the punishment for Muslims caught quaffing are severe: 80 lashes in the case of Iran. Things may get more arid yet as Islamist parties from Indonesia to Tunisia moot restrictions on alcohol. The number of drinkers varies by country, but some put the total at 5% of those identifying themselves as Muslim. Drinking may even be on the rise. Between 2001 and 2011 sales of alcohol in the Middle East, where Muslims dominate, grew by 72%, against a global average of 30%. That rise is unlikely to be accounted for by non-Muslims and foreigners alone. The black market for spirits flourishes in Libya, while Iranians are adept at producing home brew. Could Islam become more tolerant of drinking? A handful of scholars permit alcohol as long as it is not made from grapes and dates, because these are specifically mentioned in the Koran.

Black markets (and bootleggers) naturally emerge where prohibition laws occur. Yet the article has been reticent about the criminality and corruption related aspects which usually account for as the other forms of unintended consequences inherent to such bans.

I may add that the above data may have severely underestimated the state of alcohol production and usage given that these “illegal” acts are done underground or in the shadow economy.

The more interesting part is that given the apparent failure of the alcohol ban, political authorities appear to be rationalizing (e.g. not made from grapes and dates) the prospective easing of such bans as expressed through opinion of experts.

Prohibition laws fail because, as Professor Mark Thornton argues, (bold mine)

History also supports the finding that prohibition is impossible to achieve in the economic sense. Legislatures do enact prohibitions and establish penalties and enforcement bureaus. The actions of these bureaus to enforce prohibition decrees have an effect, and when a prohibition survives long enough to be enforced it is successful in a political sense. I argue, however, that prohibitions have no socially desirable effect.

Of course prohibition should not be evaluated against a higher standard than other laws. Murder is against the law, but not all murderers are apprehended, convicted, and punished. Likewise, to expect complete or perfect prohibition is unrealistic. Rather, prohibition will be measured against its public-spirited intentions, that is, to reduce consumption of a good in order indirectly to reduce social ills (such as crime, destruction of free will, drug-related deaths) and to promote social goals (family life, democracy, health, and economic development).

To the extent that prohibitions result in increased prices, they produce increased crime and political corruption. Higher prices for a prohibited product also result in the substitution of related products and the innovation of more dangerous substitutes. Prohibited products tend to be more dangerous than legal substitutes in many respects, the result of prohibition, not the product itself.

Therefore, to assume that more severe penalties or increased enforcement will result in the substitution of legal for prohibited products is to make an invalid conclusion.

People dream about a moral society, yet the best way to do this is through free markets.

Quote of the Day: The Free Market is in Full Harmony with the Principles of Christianity

I am a very staunch believer that free-market principles are in full harmony with Christian principles and that the free market is the only economic system that is consistent with Christian or Judeo-Christian principles. I must say that in recent years the organized churches, both the Protestant and the Roman Catholic, have not been in harmony with free-market teachings, nor have they been in harmony with what I must hold are the principles taught in the Bible. The organized churches have largely accepted the welfare state ideology so popular today. This ideology has changed the original meaning of the Ten Commandments. I could give you quite a speech on that. However, I want to make just this one point. There is the Commandment which in English is only four words: "Thou shalt not steal." Today, most of our people think that it has been expanded to eight words. They think it is: "Thou shalt not steal except by majority vote." They seem to think that any stealing done by majority vote is all right.

Except when necessary for defense, neither capitalism nor Christianity approves of the use of force or coercion. The fundamental principle of the free market, voluntary social cooperation for mutual advantage, is in full conformity with Judeo-Christian teachings.

This is from an article or transcript from a talk given by the late free-market economist Percy L. Greaves, Jr. (1906–1984).