Phisix: Bullmarket Reprieve Represents Profit Opportunities

Life in general has never been even close to fair, so the pretense that the government can make it fair is a valuable and inexhaustible asset to politicians who want to expand government.-Thomas Sowell

Since I look at the world events from the big picture perspective, I hardly change on my views unless some random events (for me) should radically alter the embedded trends.

Following the FED-ECB announcements to support asset prices, I hold on to the premise that these actions combined with domestic interest rates are likely to feed through asset prices especially for ASEAN-Phisix markets

As I wrote last week[1],

artificially suppressed interest rates that have brought about a domestic negative real rates regime, as well as, foreign capital flow movements influenced by external credit easing policies (negative real rates and Quantitative Easing), are likely to further inflate bubble dynamics in the country and in the region, far more than their developed economy and BRIC counterparts.

Yet such credit driven boom will be interpreted by the mainstream as “economic growth” when in reality they represent a bubble cycle or systemic misallocation of capital in progression.

One must be reminded that bubbles come in stages. So far the Philippines seem to be at a benign phase of the bubble cycle.

Again bubbles will principally be manifested on capital intensive sectors (like real estate, mining, manufacturing) and possibly, but not necessarily, through the stock markets.

This means that for as long as the US does not fall into a recession or a crisis, ASEAN outperformance, fueled by a banking credit boom and foreign fund flows operating on a carry trade dynamic or interest rate and currency arbitrages (capital flight I might add), should be expected to continue.

And again I will maintain that ASEAN’s record breaking streak may be sustained at least until the end of the year 2012.

Yet such streak will strictly be conditional to the political-economic developments abroad, as well as, on the monetary engagements by major central banks.

It is important to point out that given the fragility of the current external environments shocks, which may be viewed as a random or “black swan” event, should not be discounted.

Nevertheless global markets as indicated by major benchmarks mostly retrenched this week.

The current pullback (dark maroon bars) essentially represents reversals from last week’s material gains (light maroon bars). This is particularly true for ASEAN markets, India, Russia, France and the US.

So far, this suggests of an environment marked by trading range or a consolidation period.

For the Phisix, the current retreat off the recent record highs should be seen as countercyclical correction phase which normally follows a landmark upside breakout. This should be used as an opportunity to position or accumulate depending on the industry.

From a technical support-resistance perspective, the correction phase brings back the Phisix to the former resistance level (about 5,365), currently the minor support level.

Should the profit taking stage continue, then the 5,175-level can be seen as the next stop or the next support level.

Although my guess is that this bullmarket reprieve is likely to be short and narrow

Rotational and Seasonal Forces at Work

I may further that a rotation process typifies this week’s sectoral performance.

The mining index, which has lagged the broader market last week (light violent) and for the rest of the year, has considerably outperformed this week (dark violent).

Rotating leadership has been the crux of the inflationary boom in the Phisix.

As I pointed out last week, I expect 2013 to be the year where the mining index would regain their leadership. The alternating annual leadership since 2007, not only accounts for the normative rotational process, but also of the truism of “no trend moves in a straight line”, and or, the reversion to the mean.

I would add that seasonal factors could also be a factor in play.

The September-October window has been notorious for major stock market crashes[2].

But given that the US Federal Reserve and the European Central Bank’s recent announcement of “unlimited” buying of bonds (estimated at $2 trillion or more), particularly aimed at providing support to financial assets, the likelihood of a nearby crash seems vastly reduced.

Again as pointed out last week, instead what we may be seeing could be the “buy the rumor, sell on news” dynamic. The massive build up of expectations from central bank steroids priced in a boom. The realization brought about by these central banker’s moves to reflate the system may have triggered some profit taking activities.

So “sell on news” could have been compounded by seasonal weakness[3]. This perhaps could be due to back to school expenditures in the US, and for the Philippines, second semester[4].

Yet as October culminates, we should expect an acceleration of the price recovery of the Phisix and ASEAN bellwethers which will likely come in the backdrop of the ECB’s active engagement of asset purchases. This should emanate from the activation or institution of the permanent bailout fund, the European Stability Mechanism[5].

Parallel Universe: Markets and Economic Reality Diverge

Lingering global economic weakness could be a factor too.

However, this seems likely a subordinate force. That’s because massive interventions in the marketplace have spawned a parallel universe—where prices of financial assets have departed from economic reality.

Proof?

The Phisix continues to break into new highs even as a sharp fall in Philippine exports last August will likely to weigh down on statistical economic growth and on earnings of export based publicly listed companies.

Contra mainstream expectations, whom have mostly been entranced by political illusions, the decline in exports validates my prognosis last July[6]. 

Yet no amount of downward revisions of company earnings[7] has put to halt to the year-to-date advances of US equity benchmarks specifically, the Dow Industrials 9.1%, the S&P 500 13.6% and the Nasdaq 16.85% in spite of this week’s substantial 2%+ of losses for each of them.

Similarly no amount of downward revisions[8] has been an obstacle to substantial year-to-date gains of over 10% for industrialized economies of ex-Japan Asia; Singapore, Hong Kong, Australia and New Zealand, except for Taiwan and Korea whom are up by 5%+. For emerging Asia the story has been the same, Thailand, Philippines, India, Vietnam and Indonesia has been on fire with 10-20% gains except for Malaysia (8%+).

This serve as more proof that in a world of fiat money, corporate earnings have hardly been a major factor in determining the price direction of equity markets.

Now that the FED-ECB has thrown the gauntlet for significantly more interventions, mainstream analysts have begun to bloviate about a “recovery” in earnings, i.e. to justify even higher prices.

If downside revisions hardly influenced stock prices to reflect on its “actual” state, the same analysts have now suggesting that “improvements” in earnings will extrapolate to higher stocks. It’s a bizarre twist of logic.

The Asian outperformance has been bruited as sporting a low beta relative to the US S&P and Euro Stoxx[9] which seem to imply of “decoupling”.

This placid state of relative low beta has accounted for the non-recessionary environment for the US. The notion of decoupling in a deeply interconnected world and financial markets resonates Sir John Templeton’s four most dangerous words in investing, “This time is different”[10]

As the Asian Development Bank warns[11],

Yet, the Lehman shock in 2008 and the ongoing eurozone debt crisis have tested the resilience of these markets, and the threat of financial contagion is real. A closer analysis shows that shock and volatility spillovers from both crises to Asian markets are quite significant.

Finally the main empirical evidence on why ASEAN has been relatively outperforming the rest of Asia…

…can be seen from ASEAN’s credit growth[12], where ASEAN has surpassed the region’s industrialized and major emerging market counterparts.

As I have repeatedly been pointing out, these have been the outcome of lesser fiscal baggage, which brings about more traction on the negative real rates imposed by their respective central banks, and from the steep yield curve, which induces the banking system to issue more credit to take advantage of the spread.

All these constitutes as main ingredients to a credit bubble.

The Progressing Inflationary Boom, Political Feel Good But Cruel Intentions

Internal market indicators remain buoyant

Despite this week’s retrenchment in major Phisix weighted issues, broadbased sentiment have been perking up behind the scenes.

The weekly averaged daily trades have been rebounding. This means either that there have been more market participants or that current participants have been trading or churning their accounts more frequently. To do so suggests of confidence in the marketplace.

The rebound in daily trades has equally been confirmed by a bounce in the average number of issues traded daily.

Confidence has also been diffusing to the extent where market participants have been dabbling with third tier issues.

And considering the lack of liquidity, third tier issues tend to generate outsized returns that often magnetize people afflicted with the gambler’s tick.

The supercilious idea by certain bureaucrats that some speculators have formed into syndicates of “trading gangs”[13] to take advantage of others through manipulation of the markets via social media misses the point entirely: Inflationary booms electrify the gambler’s adrenalin or the speculator’s dopamine[14].

Both charts above reveals of the broad based yield chasing phenomenon brought about by negative real rates regime.

Since incentives drives people’s actions, the incentive to punt or to wager has been prompted for by the desire to eke out returns on an environment imposed upon the unwitting public of policies that penalizes savings and rewards irresponsibility and fecklessness.

The narrowing people’s time preferences only encourage wanton wagering.

In reality people’s response to incentives from government’s  manipulation of the marketplace signify as symptoms of the bubble or business cycle in motion.

Read my lips: Don’t mistake effects as the cause; it is government policies that incentivize on most of such malfeasance.

Yet people don’t realize that at the peak of a mania, imprudence becomes the norm. (see above diagrams)

As late economist Lionel Robbins wrote[15],

And if they do not last — and you can see that once people have been seized with the speculative mania it would take a continuously increasing inflation to keep them going — if these conditions do not last, then these mistakes are revealed.

The fact that authorities cannot see these manifests of their cluelessness or of their dishonesty by attempting to pass the blame onto the marketplace what truly has been a policy design, i.e. To promote aggregate demand through consumption and speculation via inflationary “euthanasia of the rentier” policies.

Let me add that if local authorities can’t seem to see this, ironically the IMF has[16]

“It is a concern,” said Laura Kodres, an assistant director in the IMF’s monetary and capital markets department, told reporters in Washington today. “The low interest rates environment has a lot of other effects besides lowering interest rates to consumers.”

“Widespread evidence suggests that a prolonged period of low short-term interest rates encourages excessive risk taking” by financial institutions, the IMF wrote in a chapter of its Global Financial Stability report released today.

If financial professionals are gullible enough to fall into the low interest rate trap, then how much more the retail investors?

Yet pretentious attempts to control prices from supposed unwieldy behavior by the markets through feel good sounding regulations represents as the alter ego of inflation.

As the great Ludwig von Mises warned[17],

The second mischief is that those engaged in futile and hopeless attempts to fight the inevitable consequences of inflation — the rise in prices — are masquerading their endeavors as a fight against inflation. While fighting the symptoms, they pretend to fight the root causes of the evil. And because they do not comprehend the causal relation between the increase in money in circulation and credit expansion on the one hand and the rise in prices on the other, they practically make things worse.

This week’s substantial retreat by the Phisix has hardly accounted for as a broad market decline. This only solidifies the theory of rotation or relative pricing from an inflationary boom as evident in the stock market.

Many took profits from outperforming Phisix issues and shifted to the mining industry and to other third tier issues.

Nevertheless these signify as signs that market participants still desire to remain engaged with the stock market.

Amidst QE: The Mighty Peso and Prospective Foreign Fund Flows 

Finally it has been clear that local investors have been instrumental in providing most of the support on the domestic market so far.

Typically, foreign funds accounts for about 40-45%

This matches the fund flows monitored by the IMF where foreign fund flows to emerging market bonds and to equities have remained modest through most of 2012.

This dynamic I expect to change soon.

A simple clue can be seen below

I have argued that domestic financial repression policies by developed economies will eventually prompt for more dramatic yield chasing dynamic or euphemism for capital flight on a global scale.

While all central banks have been engaged in either printing money or adding digital entries to their balance sheets, the difference is on the degree.

The highly impressive strength by the Philippine Peso exhibits this seminal phenomenon.

The Peso has been rising against the European euro, the Japanese yen, the British pound and even the Chinese Yuan. I purposely excluded the US dollar since everyone has been fixated on this, as well as, the Swiss franc which has been anchored to the euro. Nevertheless, the mainstream will be surprised to realize that the Peso has been outperforming currencies of major economies; no not because of grandeur accomplishments by political leaders but as consequence mostly from the war on interest rates from monetary actions

I believe that the Japan may spearhead that capital flight to ASEAN[18] 

Considering that the valuations of currencies have to take into account principally the demand and supply as per the great Professor von Mises’ advise [19],

The valuation of a monetary unit depends not on the wealth of a country, but rather on the relationship between the quantity of, and demand for, money. Thus, even the richest country can have a bad currency and the poorest country a good one.

The supply of money remains relatively in favor of the Peso. That’s because the Bangko Sentral ng Piliipinas, or the BSP, does much less in balance sheet expansion than her peers. Oh yes you can ignore or take the verbal waffling or twaddle about the BSP refusing to print money with a grain of salt, unless they obscure or change the definition of money creation. In reality they have been doing as their peers[20].

On the demand side, the underlying and largely ignored credit boom has been painting the Philippines and the ASEAN peers as providing the economic “growth” premium.

Bottom line: Despite the current fragility from global economic anxieties, I expect financial repression in developed economies to funnel significant amount of money into ASEAN region and into the Philippines.

For now, unless stagflation becomes a clear and present danger, expect the Phisix and ASEAN markets to reach new highs until at least the year end, provided no external shocks emerge.

---

[1] see Phisix-ASEAN Bellwethers at Fresh Record Highs October 8, 2012

[2] Wikipedia.org List of stock market crashes and bear markets

[3] Business Insider September Is The Worst Month For Stocks — But Do You Realize HOW Bad It Really Is? September 3, 2012

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

[5] See Europe’s ESM Activated, Expect ECB to Rev Up on the Printing Press October 9, 2012

[6] See I Told You So Moment: Philippine Exports Hit in August, October 12, 2012

[7] Ed Yardeni S&P 500 Revenues & Earnings October 9, 2012

[8] DBS Group Research Economics Markets Strategy 4^th Quarter September 13, 2012

[9] DBS Research ibid

[10] Parkman Bob Consider these 'words of wisdom' about investing SirJohnTempleton.org September 20, 2006

[11] Asian Development Bank ASIA BOND MONITOR SEPTEMBER 2012 ADBOnline.adb.org

[12] IMF Regional Economic Outlook Asia and Pacific Regional Economic Outlook––October 2012 Update, October 11, 2012

[13] See The Philippine SEC’s Phantasm of “Trading Gangs” October 14, 2012

[14] See The Magic of Central Banking Talk Therapy July 28, 2012

[15] Lionel Robbins The Twofold Roots of the Great Depression: Inflationism and Intervention, October 1, 2010, Mises.org

[16] Bloomberg.com Low Interest Rates May Lead to Risky Behavior, IMF Says September 28, 2012

[17] Ludwig von Mises Inflation and Price Control May 27, 2005

[18] See Will Japan’s Investments Drive the Phisix to the 10,000 levels?, March 19, 2012

[19] Ludwig von Mises STABILIZATION OF THE MONETARY UNIT—FROM THE VIEWPOINT OF THEORY (1923) THE CAUSES OF THE ECONOMIC CRISIS p.18 Mises.org

[20] See How True is it that the BSP Refuses to Print Money? October 9, 2012

The Philippine SEC’s Phantasm of “Trading Gangs”

Below is an example of Hayek's Fatal Conceit applied to the Philippines

From the Business Mirror,

The Securities and Exchange Commission (SEC) is studying new surveillance initiatives that may see the establishment of a special division to monitor online chatter targeting so-called trading gangs, SEC Commissioner Juanita Cueto said on Thursday.

Trading gangs, according to Cueto are loosely defined as short-term trader syndicates who have both the resources and numbers to drive market prices and volumes.

She added that the trading rings that “play” the market are nothing new in the country or even abroad, but she noted that their influence had been growing in recent years, aided by the anonymity offered by the Internet and the influx of new and relatively inexperienced investors who may fall prey to these groups.

“They have pseudo names on the Internet. The scary part is they buy and sell in unison. Some of their analyses are inaccurate and can hurt issuers,” Cueto told the BusinessMirror. “It is a concern of legitimate brokers and issuers.”

She said the surveillance measures could involve closer scrutiny of Internet-based stock-market forums.

Some people cheer at this development WITHOUT an inkling of understanding HOW the SEC will be able to define and enforce surveillance of the so called "short term trader syndicates" that “have both the resources and numbers to drive market prices and volumes” from so-called trading gangs.

At what criterion will groups of people (syndicates) who shares “beliefs” in certain stocks, even in the short term, whom they are or could be exposed to, culpable of “driving” market prices and volumes? What if the stocks they promote indeed goes up? 

If a prediction fails, does this mechanically imply fraud?

In bear markets, does allegations of “pump and dump” proliferate or even exist at all?

Importantly what delineates “belief” and “analysis” from the intent to “defraud” through manipulation?

So the implication is that such regulations will be arbitrarily defined or established according to the whims of the political masters.

People who espouse political intrusions have a strange mystic adulation for the supposed omniscience of authorities and of the platonic ethics of regulators.

Yet if this logic holds true, then markets DO NOT need to exist at all.

Áll such ruckus essentially boils down to the definition of prices and values.

Who determines what appropriate prices and values are? The SEC? From what basis?

For starters, market prices are ALWAYS subjectively determined

To quote the great Ludwig von Mises,

It is ultimately always the subjective value judgments of individuals that determine the formation of prices. Catallactics in conceiving the pricing process necessarily reverts to the fundamental category of action, the preference given to a over b. In view of popular errors it is expedient to emphasize that catallactics deals with the real prices as they are paid in definite transactions and not with imaginary prices. The concept of final prices is merely a mental tool for the grasp of a particular problem, the emergence of entrepreneurial profit and loss.

Prices, which are subjective expressions of people’s value scales and time preferences, are principally used for economic calculations from where trades (of all kinds including stock markets) emerge, again Professor Mises

In the market society there are money prices. Economic calculation is calculation in terms of money prices. The various quantities of goods and services enter into this calculation with the amount of money for which they are bought and sold on the market or for which they could prospectively be bought and sold. It is a fictitious assumption that an isolated self-sufficient individual or the general manager of a socialist system, i.e., a system in which there is no market for means of production, could calculate. There is no way which could lead one from the money computation of a market economy to any kind of computation in a nonmarket system.

So if prices are subjectively determined, how then does the "gods" of the SEC know each and every individuals order of priorities?

And at what levels are prices to be considered “fair”?

Again Professor Mises,

The concept of a "just" or "fair" price is devoid of any scientific meaning; it is a disguise for wishes, a striving for a state of affairs different from reality. Market prices are entirely determined by the value judgments of men as they really act.

So supposed fraud will be substituted for propaganda and the curtailment of civil liberties.

This comment by a market practitioner from the same article “It could be really hard to prove wrongdoing this way,” is half correct, but has been obscured by the misleading reference of “noting how identities can be masked online”.

“Anonymity” does not automatically make stock promotions unethical. What makes unethical is the deliberate act to defraud or bamboozle people, e.g. a breach of contract or deprivation of property rights, which based on the above seems very difficult to prove.

This would be analogical to say that advertising is a fraud.

To which government providing “truth” in advertising is likewise delusional, Professor Ludwig von Mises writes,

But whoever is ready to grant to the government this power would be inconsistent if he objected to the demand to submit the statements of churches and sects to the same examination. Freedom is indivisible. As soon as one starts to restrict it, one enters upon a decline on which it is difficult to stop. If one assigns to the government the task of making truth prevail in the advertising of perfumes and toothpaste, one cannot contest it the right to look after truth in the more important matters of religion, philosophy, and social ideology.

And government interventions DO NOT make transactions ethical too, on the contrary, they make them worst.

Bruce L Benson in “The Enterprise of Law: Justice Without the State” writes, (bold emphasis mine) 

When government becomes involved in the enterprise of law, both the rules of conduct and the institutions for enforcement are likely to change. The primary functions of governments are to act as a mechanism to take wealth from some and transfer it to others, and to discriminate among groups on the basis of their relative power in order to determine who gains and who loses.

Yes most people don’t seem to realize that in an inflationary boom, the guiding incentives provided by manipulation of interest rates promote rampant gambling and irresponsible actions which are always blamed on market actors.

From the great Henry Hazlitt

Inflation, to sum up, is the increase in the volume of money and bank credit in relation to the volume of goods. It is harmful because it depreciates the value of the monetary unit, raises everybody's cost of living, imposes what is in effect a tax on the poorest (without exemptions) at as high a rate as the tax on the richest, wipes out the value of past savings, discourages future savings, redistributes wealth and income wantonly, encourages and rewards speculation and gambling at the expense of thrift and work, undermines confidence in the justice of a free enterprise system, and corrupts public and private morals.

Non-Austrian Charles Kindleberger author of Mania’s Panics and Crashes also notes how swindles emerge during bubble cycles. (Previously I quoted him here)

Commercial and financial crisis are intimately bound up with transactions that overstep the confines of law and morality shadowy though these confines be. The propensities to swindle and be swindled run parallel to the propensity to speculate during a boom. Crash and panic, with their motto of sauve qui peut induce still more to cheat in order to save themselves. And the signal for panic is often the revelation of some swindle, theft embezzlement or fraud

And as proof, I cited instances of Ponzi schemes in the US has had meaningful correlations with the FED’s credit easing policies.

When political gods determine winners and losers, contrary to popular brainwashed expectations, the outcome is not one of optimism. According to author, philosopher and individualist Ayn Rand on her classic novel Atlas Shrugged,

Money is the barometer of a society's virtue. When you see that trading is done, not by consent, but by compulsion--when you see that in order to produce, you need to obtain permission from men who produce nothing--when you see that money is flowing to those who deal, not in goods, but in favors--when you see that men get richer by graft and by pull than by work, and your laws don't protect you against them, but protect them against you--when you see corruption being rewarded and honesty becoming a self-sacrifice--you may know that your society is doomed. Money is so noble a medium that is does not compete with guns and it does not make terms with brutality. It will not permit a country to survive as half-property, half-loot.

Such interventionism also leads to a suppression of freedom of expression.

Nonetheless, sorry to say but regulations will not solve or protect people form their silliness or foolishness, their reckless behavior and the entitlement mentality which most likely has been a result of existing policies…instead these would only do worse.

And in contrast, as I previously noted, successful investing requires Self discipline.

Thieves have Preempted Bernanke’s (QE 4.0) Helicopter Drop?

Thieves may just have arrogated team Bernanke on QE 4.0.

According to the NBC New York (hat tip Zero Hedge) 

Federal authorities are warning merchants to be on the lookout for stolen $100 bills that aren't supposed to go into circulation until next year.

The bills were stolen from an airplane that landed in Philadelphia from Dallas Thursday morning. The plane had been transporting money from the Federal Reserve facility in Dallas.

Bills meant for circulation next year will add to the already exploding currency in circulation. 

nominal currency in circulation (chart from St. Louis Fed)

annual % growth

Signs of the Accession of Austrian Economics in China

In China, anti-Keynesianism via Austrian economics seems to be gaining foothold even in the academic world. (hat tip Prof. John Cochran at the Mises Blog) 

First the recognition of the Keynesian flopperoo.

From the Wall Street Journal 

Three years ago, Keynesianism was official policy. The 2008 financial crisis had Beijing gloating over the failure of the free-market "Washington Consensus" and touting the "China Model" of government intervention. Keynesianism fit the statist zeitgeist and Beijing then suffered an export slump, so the government allocated $3.5 trillion—or about 50% of gross domestic product—in bank loans and direct spending.

Mr. Zhang's academic colleagues were all praise for the "China Model," but in 2009 he was giving speeches entitled "Bury Keynesianism." Then a top administrator at Peking University, where he now teaches economics, he argued that since the financial crisis was caused by easy money, it couldn't be solved by the same. "The current economy is like a drug addict, and the prescription from the doctor is morphine, so the final result will be much worse," he said.

Next, recognition of the bubble (business cycle) phenomenon from the growing embrace of Austrian economics

He invoked the ideas of the late Nobel laureate Friedrich Hayek and the Austrian School of Economics to argue that if the economy weren't allowed to adjust on its own, China's minor bust would be followed by a bigger one. He also advocated doing away with existing distortions such as the monopolies enjoyed in many industries by state-owned enterprises.

Those were the days when China was fast becoming the world's second-largest economy (growth in one 2010 quarter crossed 11% on an annual basis), so the establishment was in no mood to listen. "When I criticized the central government's stimulus policy, many senior officials were not happy," Mr. Zhang says. It might not have helped that at last year's World Economic Forum in China he called the government's powerful National Development and Reform Commission "a bunch of smart people doing something really stupid."

Ultimately, Beijing's stimulus fed a false investment boom that stoked asset bubbles—then the morphine wore off while the government tightened. Officials claim the economy grew at 7.6% year-on-year between April and June this year. Skeptics think the real number is closer to 4%. (One London research house says 1%.) Meanwhile, industries dominated or favored by the state, such as steel or solar power, are idling from overcapacity. Countless sheets of copper are reportedly stacked in warehouses, blocking doorways and exemplifying Hayek's notion of "malinvestment."

In other words, the stimulus was a poster child for Mr. Zhang's Austrian theories. And the sheer size of the failure suddenly has people paying attention. "The Keynesian policy didn't deliver what it promised," he says, so "more and more people realize that . . . when the government makes investment [in] something that's useless, recession will come."

Mr. Zhang’s punchline deserving of the quote of the day:

"We human beings always seek happiness," says Mr. Zhang. "Now there are two ways. You make yourself happy by making other people unhappy—I call that the logic of robbery. The other way, you make yourself happy by making other people happy—that's the logic of the market. Which way do you prefer?"

Given the snowballing forces decentralization prompted for by globalization compounded by massive technological innovation that has deepened connectivity and diffusion of the knowledge revolution, these could yet be signs of the twilight of, or as Professor Gary North predicts, "dancing on the grave of" Keynesianism.

Asia as the World’s Precious Metal Hub: Singapore Cuts Taxes on Gold as Hong Kong Adds Storage Facilities

Asia will likely become the world’s gold hub soon. That’s because key Asian countries as Hong Kong and Singapore (as well China) have been taking substantial steps to attract gold and other precious metals trades.

First, Singapore recently cut taxes on precious metals

From Mineweb.com

Singapore has repealed a 7% tax on investment-grade gold and other precious metals to spur the development of gold trading in the country. It is hoped the move will lift demand for gold bars and coins in the fourth quarter and applies to gold of 99.5% purity, silver of 99.9% purity and platinum of 99% purity.

While in the works for several months, the repeal came into effect on October 1.

Singapore is hoping the scrapping of the tax will lure bullion refiners to the country and convince trading houses to open storage facilities, transforming it into a key Asian pricing hub. along the lines of London and Zurich. Currently holding 2% of global gold demand, the Southeast Asian city-state aims to hike that to 10% to 15% over the next five to 10 years.

Currently, Singapore imports gold bars from Australia, Switzerland, Hong Kong and Japan, which are then sold to buyers in Southeast Asia and neighbouring India.

Singapore's investment gold demand nearly tripled to 3.5 tonnes in 2011, according to consultancy firm GFMS. Singapore has already tripled gold imports year over year, ending December.

At least one major refiner has already shown interest in opening a factory in Singapore. More gold traders are expected to set up offices and store more bullion, post the move.

Gold scraps from the across the region are also traded in Singapore, which helps determine the premiums for gold bars against prices in London.  Earlier, refiners were put off by Singapore's taxes, opting instead to mould and sell gold bars in Hong Kong, which does not impose duties on bullion, and Japan, where the consumption tax on gold was very low.

Also, Hong Kong has been adding to gold and precious metal storage facilities. 

From Sovereign Man’s Tim Staermose,

While the current world hubs for gold trading and storage are London, Zurich, and New York, stores of physical metal are also beginning to migrate east. Gold storage facilities are springing up all over Asia like mushrooms after a summer rain.

Back in 2009, the Hong Kong Airport Authority set up the first secure gold storage facility inside the confines of the Hong Kong Airport.

This September, Malca-Amit, the Tel Aviv-based diamonds and precious metals company is opening a second state of the art facility at the airport, which will have capacity for 1,000 metric tons of gold.

That compares to the 4,582 tons that the US government claims is in Fort Knox, and the record 2,414 million tons that the world’s exchange traded gold funds collectively held – mostly in London– as of July 5th.

Malca-Amit also has a facility in Singapore’s Freeport complex, and the company is planning a third Asian precious metals storage facility in Shanghai in the near future.

As the world’s precious metal hub, this means wealth is likely to flow or move from the West to the East.

I believe that these steps could be seen as insurance against the reckless fiscal and monetary policies of mostly developed Western governments. Add Japan to them.

Quote of the Day: The Myth of Deleveraging

Doug Noland of the Credit Bubble Bulletin at the Prudentbear.com spectacularly demolishes the popular notion that the US has been deleveraging by delving into the nitty gritty of US systemic financing [bold mine]

The three Trillion-plus contraction in FSCMD did reduce Total System Market Debt – in the process seemingly improving debt-to-GDP ratios.  It is not, however, indicative of true system deleveraging and surely doesn’t reflect an improvement in our nation’s overall Credit standing.  Far from it.  From a Macro Credit Analysis perspective, the decline in FSCMD is instead reflective of fundamental changes in both the type of debt now fueling the boom and the corresponding nature of system risk intermediation.

First of all, mortgage debt is about to wrap up its fourth straight year of post-Bubble contraction.  Problem loan charge-offs have played a significant role, as have individuals using lower debt service costs (and near-zero returns on savings!) to speed the repayment of outstanding mortgages.  And, importantly, the decline in home values and the steep drop in transaction volumes have reduced demand for new mortgage debt – hence the need to intermediate mortgage Credit.  That said, the biggest factor behind the drop in FSCMD has been the activist Federal Reserve.

The Fed’s balance sheet is separate from the Financial Sector.  Federal Reserve Assets ended 2007 at $951bn.  Fed holdings ended Q2 2012 at $2.882 TN, up $1.931 TN, or 203%, in 18 quarters.  The Fed essentially transferred $2 TN of Financial Sector liabilities to a secure new home on its balance sheet.  Some may refer to this as “deleveraging,” but I won’t.

Importantly, the Fed’s moves to collapse interest rates and monetize debt (in conjunction with mortgage assistance programs) incited a major wave of mortgage refinancing.  And through the refi process, large quantities of private-label mortgages (previously included in FSCMD as ABS) were essentially transformed into sparkling new GSE-backed mortgage securities – and many then conveniently found their way onto the Federal Reserve’s rapidly inflating balance sheet.  This provided critical liquidity that allowed highly-leveraged Wall Street proprietary trading desks, hedge funds and banks to de-risk/de-leverage.  This bailout accommodated deleveraging for the financial speculators, yet for the real economy the boom in Non-Financial debt ran unabated. 

As noted above, Total Non-Financial Market debt ended this year’s second quarter at $38.924 TN and 249% of GDP – both all-time records.  Garnering all the focus from the deleveraging crowd, Total Household Debt has indeed declined since 2008 – having dropped $787bn, or 5.8%, to $12.896 TN.  At the same time, Federal debt has increased $4.689 TN to $11.050 TN. Non-Financial Corporate debt increased $434bn since ’08 to end Q2 2012 at a record $11.990 TN.  State & Local debt has expanded $101bn since ’08, ending Q2 at about $3.0 TN.   The data is the data - and Deleveraging is a Myth.

A 100% increase in Federal debt and 200% growth in the Federal Reserve’s balance sheet are surely not indicative of system de-leveraging.  Such extraordinary Credit developments do, however, have profound effects throughout the markets and real economy. The ongoing Credit expansion has inflated incomes, spending, corporate earnings and securities prices, in the process sustaining for now the U.S. economy’s Bubble structure.  And I would argue strongly that the data support the thesis that our system remains dominated by Bubble Dynamics. 

Also keep in mind that, in contrast to risky mortgage debt, federal debt requires little intermediation.  The marketplace absolutely loves it just the way it is, conspicuous warts and all.  For now, at least, it is “money” and shares money’s dangerous attribute of enjoying virtually insatiable demand.  The only alchemy necessary is to keep those electronic “printing presses” running 24/7.  It is, after all, the massive inflation of federal debt that is inflating incomes, cash-flows and profits, equities and fixed-income securities prices, and government tax receipts and expenditures – in the process validating the “moneyness” of the ever-expanding level of system debt (Ponzi Finance).

To validate Mr. Noland’s point, here are some charts from the US Flow of Funds for the period ended September 28, 2012 (courtesy of Dr. Ed Yardeni’s Blog)

Total US Debt as % of GDP

Non financial debt broken down into domestic sectors as % of GDP

Transformation of US debts from the household to Federal Debt and…

…and the US Federal Reserve’s balance sheet. (also from Dr. Ed Yardeni’s Blog on Central Banks and QE)

And the Fed balance sheet assets has increasingly been concentrated on US Treasuries.

Systemic deleveraging has indeed been nonexistent.

Make Way for 3D Printed Guitars

3D Printing has indeed been revolutionary. Many products today are being 3D "printed" such as guns and jaw replacements

Add to that list acoustic and electric guitars

Image from Businessweek/Bloomberg

From Businessweek/Bloomberg,

Scott Summit does unusual things on his vacations. For instance, he just spent a week up in the mountains, taking in the majestic scenery and all that, but also sitting at his laptop creating a 3D model of his ideal guitar. Then he sent the computer design to 3D Systems (DDD), which used its massive 3D printers to transform the graphic model into an actual acoustic instrument that Summit can play.

As far as anyone seems to know, this is the first 3D-printed acoustic guitar on the planet, and it raises all kinds musical possibilities. (As several readers noted, people have already made 3D printed electric guitars.)

As a kid, Summit pined after fancy guitars. “I wanted a $3,000 one like Jerry Garcia would play,” he says. At the time, Summit didn’t have the money, so he spent around $100 on wood and other parts and fashioned his own guitar. “It sounded like crap,” he says.

These days, Summit spends most of his time designing custom body parts and stylish prosthetics that get built from 3D printers. He is, in fact, one of the world’s leading 3D printing and design experts, and he decided to put those skills to use over a holiday, refining his childhood vision.

Yet the difference in quality seems to be negligible…

Since the acoustic guitar would be made from fused plastic, Summit figured it would have some serious shortcomings. If it actually worked, it would probably sound worse than his old $100 model. But chances were the guitar would break under the 200 pounds of string pressure that comes with tightening the strings via a tuning machine. Summit set up a video camera to record what would happen when the stringing process started. “I thought it would at least be cool if the guitar exploded,” he says.

But, no. It worked, and it sounds pretty good. “It’s rich and full and has a great tonal range,” says Summit, who’s been known to play at friends’ weddings and at dive bars.

3D made guitars signifies as a breakthrough with more innovations and product transformations ahead

Summit describes this version as a rough draft. He wants to start experimenting with more radical designs to see how they change the sound. Somewhere down the road he figures people will be able to use software to pick out what sort of treble, bass, or sustain they desire and then print a guitar to match those qualities. “It will arrive in the mail and sound just the way you wanted,” he says.

3D printing will alter the division of labor, production process, investment flows, increase specialization and will likely become a household necessity. Eventually too, 3D printing will become object of politicization from mostly the neo-luddites or even from socialists clothed with environmentalist rhetoric.

Video: Ron Paul on the US Presidential Elections: It's a One Party System

In the following telephone interview by CNBC, Congressman Ron Paul says that he won't be endorsing Republican presidential challenger Mitt Romney. 

Mr. Paul's caustic remarks on both candidates:

Neither one of them has the vaguest idea what Austrian free-market hard-money economics is all about. But at the same time they know how to play the game and they represent a one party system… 

There is essentially no difference between one administration and another, no matter what the platform.

Infographic: World Economic Freedom, US Ranks 18th; The Lowest Ever

Here is a neat infographic on the world's economic freedom as published by onlinebusinessdegree.org  (hat tip Zero Hedge)

Note of the substantial deterioration of the US at the near lowest portion of the graph as a result of war on drugs and terrorism, bailouts and other government interventions. 

This only means that economic growth trends for the US is likely to decline unless reforms to reverse current dynamics will be made.

For a crispier illustration proceed here

European Union wins Nobel Prize for Peace

Surprise.  The Nobel Prize for peace has been awarded to the crisis stricken European Union.

Ironically, the award of prestige has been focused on the long historical role even when the panel of judges appear to be substantially concerned with present political conditions

Reports the New York Times 

Thorbjorn Jagland, the former Norwegian prime minister who is chairman of the panel awarding the prize, said there had been deep concern about Europe’s destiny as it faces the debt-driven woes that have placed the future of the single currency in jeopardy.

“There is a great danger,” he said in an interview in Oslo. “We see already now an increase of extremism and nationalistic attitudes. There is a real danger that Europe will start disintegrating. Therefore, we should focus again on the fundamental aims of the organization.”

Asked if the euro currency would survive, he replied: “That I don’t know. What I know is that if the euro fails, then the danger is that many other things will disintegrate as well, like the internal market and free borders. Then you will get nationalistic policies again. So it may set in motion a process which most Europeans would dislike.”

In announcing the award, Mr. Jagland described it as a signal focusing on the union’s historical role binding France and Germany together after World War II and its perceived impact in spreading reconciliation and democracy beyond the Iron Curtain that once divided Europe and on to the Balkans. “The stabilizing part played by the E.U. has helped to transform most of Europe from a continent of war to a continent of peace,” he said.

I have pointed out that increasing capital controls and rising political tensions from bailouts have led to increasing border controls. 

Nevertheless UK Independent Party’s Nigel Farage has a stirring rebuke on this. 

"You only have to open your eyes to see the increasing violence and division within the EU which is caused by the Euro project" he said.

"Spain is on the verge of a bail-out, with senior military figures warning that the Army may have to intervene in Catalonia. In Greece people are starving and abandoning their children through desperate poverty and never a week goes by that we don't see riots and protests in capital cities against the troika and the economic prison they have imposed.

"The next stage is to abandon the Nation state: the awarding of this prize to the EU brings it into disrepute."

Mr Farage added, " The last attempt in Europe to impose a new flag, currency and nationality on separate states was called Yugoslavia. The EU is repeating the same tragic mistake.

"Rather than bring peace and harmony, the EU will cause insurgency and violence."

Let me add that interventionism, inflationism, protectionism, and all other coming government or political –isms from EU politicians and the bureaucracy will signify as seeds to political and social conflicts. 

If social conflict should arise, the Nobel Prize would further erode its credibility.

Quote of the Day: Economics is a Policy Science

Nevertheless, from the standpoint of influencing future policy, the elementary teacher is more important than I. I hope that my work will trickle down to the elementary teacher and through him to the large number of potential voters, potential Congressman, and potential newspapermen in his class. This is however merely hope. I don't actually do anything to make that more probable. It is true that my writings are, generally speaking, much more accessible to the ordinary person than most economic writings. This may help somewhat.

Nevertheless, the present situation is in my opinion very undesirable. Economics is a policy science and we should be trying to influence policy.

This is from law and economics Professor Gordon Tullock known for his work with Professor James Buchanan on the Public Choice Theory, as quoted by Professor Peter Boettke at the Coordination Problem Blog.

For the Austrian school, economics is basically value free (Wertfreiheit) or neutral with regards to all value judgments.

However this does not take away analysis through the provision of “praxeological critique of inconsistent and meaningless ethical programs” and the analytical exposition of “all the myriad consequences of different political systems and different methods of government intervention” (Rothbard). This implies that economic education is the principal way to influence public opinion on politics, as well as, on social policies.