Will Frothy Bond Markets Drive the Phisix Higher?

The Philippine equity benchmark, the Phisix seems to be knocking on the gateway of another milestone high, as I noted two weeks back[1],

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.

Friday’s substantial decline in the US stock markets may put a start-of-the-week dampener on the current momentum. However this seems unlikely a hurdle to the Bernanke-Draghi inspired Christmas or year-end rally particularly for the record setting ASEAN bourses as shown above [Philippine Phisix PCOMP orange, Indonesia JCI green, Thailand SET yellow, Malaysia FMKLCI red].

Emerging Market Bonds Outperform Equities

The price actions of the bonds of emerging market should give us a clue.

The zooming pace of the JP Morgan USD Emerging Market Bond Fund (EMB) appears to be accelerating.

In the bond fund, the Philippines and Indonesia have been among the major components of with 6.81% and 6.56% share of the pie in the total portfolio[2]. This implies that the ASEAN bond markets have been outperforming their respective equity peers.

A further clue can be seen in what appears as emerging bond markets (EMB) eclipsing the gains of emerging equity (EEM)[3] counterparts.

As caveat, the country based distribution of weightings of the bond and equity indices have been different. This means that we can’t entirely depend on its accuracy when making a comparison.

Nevertheless, for local bond currency market, the huge jump in the share distribution of the real estate (18% in June vis-à-vis 13% December 2011) and infrastructure-based industries (from insignificant to 6%) gives further evidence of the business cycle in progress.

As per the largest issuers by sector, banks and financials remain the largest but have lost 3% of the share of the pie. This is followed by the rapidly growing real estate sector and holding companies.

And for the share of the ownership of investors by type, based on % of local currency denominated government bonds issued, banks and financial institutions have been the largest, albeit on a steady marginal decline in terms of trend over the past 7 years.

Other major investors, according to the Asian Development Bond includes[4]

1) BTr-managed funds which account for Bond Sinking Fund (BSF) Securities Stabilization Fund (SSF), and the Special Guaranty Fund (SGF),

2) contractual savings and tax-exempt institutions (TEIs) which represent government pension and insurance funds (e.g., Government Service Insurance System [GSIS], Social Security System [SSS], and Philippine Health Insurance Corp. [PHIC]), private insurance companies, and tax exempt funds and corporations

3) custodians which are BSP-accredited securities custodians for investor-clients and lastly

4) other government entities such as government-owned and -controlled corporations (GOCCs), and various corporate and individual investors.

The apparent boom in emerging market bond markets may have been partly reflected on the sectoral returns in the equity markets.

The financial sector, property and holding companies—which have been heavy on both—have returned a whopping 42.54%, 40.95% and 33.32% respectively; on a year-to-date basis (see light maroon bars).

Except for the service sector, the nearly broad based weekly gains (dark maroon bars) for the rest of industry compounded on the outsized year-to-date returns (see light maroon bars).

Bonds are Less Risky or a Bubble?

The positive flows into the bond markets have not been limited to Asia, this has apparently been true even in the US, where fund flows have mostly been concentrated on fixed income related investments such as ETFs and “hybrid” balance funds with income orientation as retail investor flee equity markets[5].

Yet the idea that bonds are relatively “less risky” represents charade bestowed upon by global central bank’s tsunami of monetary inflation and financial and banking regulations that have biased towards incentivizing financial and bank institutions to hold bonds[6].

For instance, Japan’s central bank, the Bank of Japan (BoJ) recently warned the banking and financial industry of their high sensitivity to interest rate risks; where for every 1% increase of interest rates, large banks and regional banks could suffer losses of ¥ 3.7 trillion and ¥3.0 trillion respectively[7]

But the supreme irony has been that the BoJ themselves have been responsible for putting at risks the domestic banking system through their pronounced policy of supposedly fighting deflation through inflationism via asset purchases. The BoJ’s balance sheet[8] now accounts for about 30% of the IMF’s estimated economic growth rate.

Reports also suggest that the BoJ may even add to their monetary easing efforts[9] on October 30^th

Noticeably Japan’s outward investment flows, which are at near record levels[10], have supplanted China, despite the streak of failures where the batting average of outward FDIs have been unfavorable and the losses have been substantial.

About 26 trillion yen ($330 billion) have accounted for the lost market value from the 10 biggest overseas purchases by Japanese companies from 2000 to a year ago. Apparently the batting success average of Japan’s outward Foreign Direct Investments has been 1: 5 or 20%, where two posted gains while eight companies suffered losses during the said period.

And of the two winners, one is from Kirin Holdings whose acquisition of 48% of San Miguel Brewery [PSE:SMB] in 2009 has tripled in value[11].

I have been pointing out here that beyond the mainstream’s false notion of Japan’s deflation bogeyman, monetary policies, policy or regulatory (regime) uncertainties, interest rate risks and credit risks have all compounded to haunt Japan’s increasingly crony based political economy, prompting resident investors to take larger and unnecessary risks abroad for either survival or to seek out higher returns[12].

Going back to the fund flows in the US, ironically, despite the sustained outflows in the equity markets and last Friday’s slump, the US major bellwether the S&P 500 ended the week marginally on the positive note (dark violet bars).

Yet major global equity markets, led by the S&P 500, have mostly been significantly up on a year-to-date basis (light violet bars).

This fantastic but unsustainable run in the bond markets, which has exhibited symptoms of bubble dynamics, will unlikely persist.

We can either expect a shift out of bonds and into the stock markets or that the bond markets could be the trigger to the coming crisis.

In my view, the former is likely to happen first perhaps before the latter. To also add that triggers to crisis could come from exogenous forces.

Central Bank Actions Rule the Day

So far, steroids from central banks aimed at supporting the asset markets will continue to distort market price signals. And this time I am not alone saying this.

This recent commentary from Financial Times[13] seems highly relevant to the current state of affairs (bold emphasis mine)

Much of the blame for this tends to be attributed to the fact that markets now move to a drumbeat of statements from politicians and central bankers, such as the head of the US Federal Reserve. “All 500 S&P companies have the same chairman and his name is Ben Bernanke,” says Jurrien Timmer of the Fidelity Global Strategies Fund.

It is also true that securities within markets, as well as far-flung debt and equity markets have been trading more “in sync” with each other: the willingness of investors to take on risk being a common factor behind price moves.

The conditions of a parallel universe—where markets have become seemingly detached to economic reality—which I have been pounding on the table since, has even been recognized by the chief executive Mohamed El-Erian of PIMCO one of the largest fixed income firms.

At the Financial Times Mr. El-Erian writes[14] (bold mine)

Essentially, the Fed is inserting a sizeable policy wedge between market values and underlying fundamentals. And investors in virtually every market segment – including bonds, commodities, equities, foreign exchange and volatility – have benefited handsomely. In the process, many asset prices have been taken close to what would normally be regarded as bubble territory, with some already there. 

Central bank action, both real and perceived, rules the investment day, and will continue to do so for now. This is also the case in Europe.

And if central bank actions have truly become the rule for the investment world, then to what degree of relevance does traditional or conventional knowledge apply on pricing and valuing stock markets in the current setting?

Another commentary from the Lex Column of the Financial Times nails it[15],

Perhaps the most horrifying thing about the current combination of sales deceleration, margin contraction and high valuations is that it might not even be a sell signal.  The central banks of the US and Europe may well keep investors trapped in risky assets indefinitely. Those who look at the fundamentals and flee to cash had better be patient.

In reality market participants are being sucked into the vortex of speculative mania, which means another round of intensive build-up of misallocated resources or malinvestments and a future bust. We are in a boom phase of a bubble cycle.

FED policies have begun to diffuse into the US property markets which have shown significant broad based recovery[16]: particularly in existing home sales, housing starts, new home sales, building permits, builder confidence, to even a decline in shadow inventories, and signs of the inflection point of real estate loans at ALL commercial banks.

The assumption that FED policies have been successful would signify as presumptive or short sightedness or even blind belief of the capabilities of bureaucrats.

People forget that costs are not benefits. What seems as a boom today will ultimately end in tears. And bubbles, which have been growing in scale and frequency, once pricked will lead to massive capital destruction that would take years to recover especially when interventions delay them and or even make them worse.

General destruction of wealth and wealth generating activities can never be a benefit even from the Pareto optimal perspective. 

The recovering US real estate industry is being buttressed by the improving state of credit as seen by the annual % change in consumer loans and commercial industrial loans at ALL commercial banks. (Source St. Louis Fed)

Yet once the colossal excess reserves by depositary institutions held at the US Federal Reserve flows into the system, the US and the rest of the world will be faced with the risks of price inflation.

And price inflation or the market’s recognition of the unsustainability of the fiscal positions of US will likely serve as the proverbial the pin that would perforate and end the inflating bubble.

For now, the US asset bubble will likely be sustained.

Miniature Stock Bubble: Alcorn Petroleum

At the local markets, as pointed out last week, inflationary booms titillates the gambling ticks and speculative adrenalin of many participants. Punters and tyros will be seduced to the allure of easy money based on dramatic price surges, and eventually, fall prey to gruesome price collapses.

And the imprudent and those bearing the entitlement mentality will pass the blame on ‘manipulation’ or ‘fraud’ to the markets and call for regulations without accounting for the incentives brought about by bubble policies on people’s behavior.

Let me quote anew the great libertarian economist, journalist Henry Hazlitt[17]

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.

More regulations will not solve the behavioral imbalances caused and rewarded by antecedent immoral policies.

Over the past two weeks Alcorn Petroleum [PSE: APM] has skyrocketed to close on Friday by an eye-popping 600+%!

The company officially disclosed that they “cannot confirm” the rumored backdoor listing by allegedly the other “retailing” businesses owned by the same of owners, although the firm “appointed a financial adviser” to submit recommendations[18]. If the rumor involved different parties then such denial would seem sensible as negotiations involve the risks of transaction failure. But in this case, the parties supposedly are the same owners.

The company also referred the excessive price fluctuations or movements to a possible “oil exploration play”. Alcorn Petroleum has a 9.32% participating interests at the Service Contract 51- covering the East Visayas Basin.

Yet since the other partners in the same service contract[19] have had mixed performance this week, particularly, Trans Asia (+5.79%) [PSE: TA] and PetroEnergy [PSE: PERC] (-.84%) one can hardly impute an oil exploration play to the astronomical price surge of APM.

Whatever the reasons behind the price spike, prudence dictates that such huge series of price surges characterizes bubble dynamics which overtime typically ends up with huge frustrations for those left holding the proverbial bag.

Property giant Century Property Group [PSE: CPG], which got listed through the backdoor from the buyout of East Asia Power Resources in August[20] of last year, had seen a similar stratospheric surge as many jumped in on the rumored backdoor play.

However when the rumor became fact, CPG retrenched most of its accrued bottom-to-peak gains. As of Friday, CPG’s prices have been down about 62% from its zenith closing price.

Today’s bullmarket, and partly CPG’s financial heft, have essentially provided support to her current price levels. 

CPG’s tale is unlike the sordid experience of another stock bubble in 2000, which again involved another backdoor listing play, particularly Philweb [PSE: WEB] through formerly listed South Seas Oil[21]. Not to mention the BW Resources scandal in 1999.

In the backdrop of a bear market and upon the realization of the deal, WEB virtually gave back all its 1,000++% gains or returned whence it came from. And many punters who took part in the play had about a decade or more to recoup part of their losses (that’s for those who can’t accept their mistakes).

WEB’s experience seems to parallel the Thailand episode during the Asian Crisis as previously discussed[22]. Bubbles take time to heal whether seen from a macro or micro level.

The bottom line is to apply the Duck Test[23] for suspected stock bubbles: if it walks like duck, swims like a duck and quacks like a duck, it must be a duck.

These are the issues to avoid and to ignore.

This wisdom quote from author C Joybell C should apply to stock picking as well

Choose your battles wisely. After all, life isn't measured by how many times you stood up to fight. It's not winning battles that makes you happy, but it's how many times you turned away and chose to look into a better direction. Life is too short to spend it on warring. Fight only the most, most, most important ones, let the rest go.

Today’s bullmarket should come with a lot of opportunities without having to expose oneself to enormous risk. And all it takes is emotional intelligence[24] and self-discipline[25]

---

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

[2] iShares.com J.P. Morgan USD Emerging Markets Bond Fund us.iShares.com

[3] iShares.com MSCI Emerging Markets Index Fund us.iShares.com

[4] ADB, Asia Bond Monitor, Asianbondsonline.org September 2012

[5] Zero Hedge R(osenberg) & B(ernstein): Two Ex-Merrill Colleagues, Two Opposing Outlooks, One Permabull Rebuttal, October 19, 2012

[6] See How Capital Regulations Contributed to the Current Crisis December 5, 2011

[7] Wall Street Journal Japanese Banks Face Huge Rate Rise Risk, Warns BOJ, October 19, 2012

[8] Pedro Da Costa Central bank balance sheets: Battle of the bulge Reuters Blog April 12, 2012

[9] Asahi Shimbun BOJ mulls further monetary easing, October 18, 2012

[10] Zero Hedge Forget China; Japan Is 'Taking Over' The World Again October 15, 2012

[11] Bloomberg.com Softbank’s Son Seeks to Skirt Cross-Border Failure History, October 17, 2012

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

[13] Dan McCrum End to ‘alpha’ spells trouble for fund managers Financial Times September 10, 2012

[14] Mohamed El Erian Beware the ‘central bank put’ bubble Financial Times, October 10, 2012

[15] Dave Glen Markets Remain Bid Despite Weakish Fundamentals September 18, 2012

[16] See US Federal Reserve Policies Re-Inflate US Property Bubble October 20, 2012

[17] Henry Hazlitt What You Should Know About Inflation p.18 Mises.org

[18] Alcorn Petroleum Re: Comment on Inquirer.net News Article PSE.com.ph October 16, 2012

[19] Business Inquirer.net Drillers settle dispute on farm-in deal August 10, 2012

[20]Business Inquirer.net Century Properties sets backdoor listing on Philippine Stock Exchange, August 18, 2012

[21] Newsflash.org BOI OKAYS REGISTRATION OF PHILWEB AS NEW I.T. FIRM January 29, 2001

[22] See FED-ECB’s Nuclear Policies: Risk ON is Back! September 17, 2012

[23] Wikipedia.org Duck test

[24] See Applying Emotional Intelligence to the Boom Bust Cycle August 21, 2011

[25] See Self-Discipline and Understanding Market Drivers as Key to Risk Management April 2, 2012

Quote of the Day: Private Sector Infrastructure Investment and the Industrial Age

Any growth theory where government investment plays a crucial role in stimulating growth immediately runs afoul of the historical record, however.  The first countries to industrialize did not require extensive government involvement to make these investments.  In England, it was apparent that neither early capital accumulation nor social overhead investment depended heavily on the public sector, as Phyllis Deane (1979) notes when commenting on traditional explanations of growth that rely on government involvement to overcome lumpiness and externalities:

“The consequence is that social overhead capital generally has to be provided collectively, by governments or international financial institutions rather than individuals, and the mobilization of the large chunks of capital required is most easily achieved through taxation or borrowing.  The interesting thing about the British experience, however, is that it was almost entirely native private enterprise that found both the initiative and the capital to lay down the system of communications which was essential to the British industrial revolution.” [p. 73]

Private returns were, apparently, sufficiently high in the late eighteenth and early nineteenth century to induce the private sector to make the necessary infrastructure investment required by the Industrial Revolution.

(bold mine)

This excerpt is from John Wallis’s Chapter 13 of the 1994 essay “Government Growth, Income Growth, and Economic Growth,” of Capitalism in Context: Essays on Economic Development and Cultural Change in Honor of R. M. Hartwell (John A. James & Mark Thomas, eds., 1994) (link added) as quoted by Professor Don Boudreaux at the Café Hayek.

The above dispels the popular myth that only governments can provide the required infrastructure investment (e.g. roads, bridges, and etc…) for a society.

And an even more important point is that such initiative from the private sector came about when the world had been less economically prosperous.

In other words, the miraculous economic development, or the rags to riches story, or the magnificent transformation of human society from the medieval age--through the industrial age--to today’s information age, during the last 200 years as depicted by Hans Rosling in this video has been rooted from private sector’s infrastructure investments.

Costs are not benefits. Contrary to another popular misperception, capital does NOT just emerge out of nowhere. They are accumulated by the private sector through savings and investments. And that the resources that government has always accrue from, or have been coercively taken from, the private sector.

This means that outside the ambit of regulatory and political obstacles or interference, the private sector could have used these resources to finance and build the required infrastructure ala the industrial age.

The problem is that politicization of infrastructure investments emerges from its capacity to deliver votes.

It’s also a mistake to see the world as operating in a vacuum, such that only governments can make the “right” decision based on presumed "superiority" of knowledge, for infrastructure spending.

After all, the government is comprised of people too.

This means that politicians and bureaucrats have similar limitations like anyone else except that they have the privilege of using guns and badges against their constituents to meet their goal.

Yet any erroneous actions from centralized institutions will have far greater “externalities” or impact to the society than from the decentralized private sectors.

The entrenched belief that governments “know better” accounts for as one of the greatest myths of our time.

The Untold Story of the Cuban Missile Crisis

Popular accounts of major historical events have mostly been inaccurate as they have either been incomplete or have been twisted to suit the biases of the author (for whatever purposes).

Historian Eric Margolis narrates of untold story of the Cuban Missile Crisis where covert horse trading between the governments of the US and the USSR led to its resolution thereby averting a nuclear holocaust.

Writes Mr. Margolis at the LewRockwell.com 

HAVANA – The black, sinister-looking Soviet SS-4 intermediate-ranged missile on display at Havana’s La Cabana fortress looks old, roughly finished, and rather primitive.

But this missile, and 41 others (including some longer-ranged SS-5’s) terrified the United States during the October 1962 missile crisis – 13 days that shook the world. Each of them could have delivered a one megaton warhead onto America’s East Coast cities, starting with Washington DC. One megaton is a city-buster.

When the Cuban missile crisis erupted 50 years ago this month, I was a student at Washington’s Georgetown University Foreign Service School. Cuba was headline news. The Cold War was at its peak.

A CIA-operation to invade Cuba and overthrow Fidel Castro’s Marxist government had spectacularly failed at the Bay of Pigs. The new, inexperienced US president, John Kennedy, got cold feet on the last minute and called off vital air cover for an invasion by Cuban exiles. Deprived of air cover, most were killed or captured. Kennedy should have either call off the amphibious operation or provided it air cover.

The Pentagon then urged a full-scale US invasion of Cuba, backed by massive naval and air power. The Kennedy administration wavered.

Soviet Chairman Nikita Khrushchev seized the moment by sneaking 42 medium-ranged missiles and smaller tactical nukes into Cuba, right under the nose of the Americans. He gambled the Soviet nuclear-armed missiles would forestall a US invasion of Cuba, which Moscow intended to use as a base to expand its influence in Latin America.

When US U-2 spy planes finally spotted the Soviet missile bases all hell broke loose.

US forces went to DEFCON 3, then DEFCON 2 – the highest readiness stage before all-out war. Six US army and Marine divisions moved to South Florida and Georgia. Nearly 600 US warplanes were poised to attack.

On 25 Oct. nuclear weapons were loaded onto US B-47 and B-52 bombers. Seventy five percent of the Strategic Air Command’s bombers were airborne or poised to attack the USSR. Curiously, the Soviets did not go to maximum readiness.

In an act of madness, Fidel Castro furiously demanded Khrushchev launch a pre-emptive nuclear strike on the US. Decades later, Castro admitted this was a terrible mistake. Fortunately, the Soviet leadership said "nyet!" A nuclear exchange in 1962 between the US and USSR would have killed an estimated 100 million people on each side.

As Soviet freighters steamed towards Cuba, the Kennedy White House imposed a naval and air blockade on Cuba. But it was called a "quarantine" since under international law, a blockade is an act of war. Today, in Washington’s undeclared war against Iran, the favored term is "sanctions."

Read the rest here

US Federal Reserve Policies Re-Inflate US Property Bubble

Team Ben Bernanke’s policies designed to provide support on asset prices, via money printing or digital inputs and through negative real rates, appears to have re-inflated the US property bubble.

Video from Bloomberg (hat tip Zero Hedge)

The property sector has been exhibiting a broad based recovery

Housing starts, building permits, existing home sales and new home sales have all been rising significantly (From Northern Trust)

Builder confidence has also been sharply recovering 

This goes hand in hand with the dramatic recovery in the annual % change in median sales (both charts from AEI’s Carpe Diem by Professor Mark Perry).

The supply side of “Shadow inventory” has been declining. Notes the Daily Beast (hat tip Bob Wenzel) 

The chart shows that the number of delinquent mortgages is finally down to pre-2008 levels. The number of foreclosed real-estate units has also shrunk dramatically in the last couple of quarters. And the number of foreclosed homes repossessed by lenders (REO) is also down. As that colorful mountain of housing pain levels off, housing faces far fewer headwinds.

Finally loans to the real estate sector appears to have reached an inflection point. This could further provide a significant push on the above dynamics.

Annual % change of real estate loans from all commercial banks

Same data but based on nominal value or billions of dollars. Both charts from the US Federal Reserve Bank of St. Louis.

Bubbles account for as artificial recoveries. Eventually all these steroid based booms end up in a bust

Quote of the Day: The Real Forgotten Man

The existence of government power sets man against man. It sets those who would achieve and create against those who would steal through elections and laws and taxes. In the end, the burden of government falls on that Forgotten Man, that real Forgotten Man. It is he who has worked and saved and done the right things to take care of himself and his family. Yet now he is told he must pay again for others who have not worked and saved as he.

This incisive excerpt is from investment analyst Chris Mayer in a book review of American educator and proto-libertarian William Graham Sumner’s It Is Not Wicked to Be Rich at the Laissez Faire Books

Mexico’s Government Declares War on Cash

The war on cash transactions has been gaining traction among governments. Crisis stricken European countries as Italy, Spain and Greece have earlier initiated the curtailment in the use of cash. 

The Mexican government has joined this bandwagon by announcing a ban on “large” cash transactions supposedly to stem money laundering, most likely emanating from the drug war.

From the Washington Post 

Mexican President Felipe Calderon has signed into law a ban on large cash transactions as part of an effort to fight money laundering that experts estimate may amount to around $10 billion per year in Mexico.

The bill forbids buyers and sellers from giving or accepting cash payments of more than a half million pesos ($38,750) for real-estate purchases. It also forbids cash purchases of more than 200,000 pesos ($15,500) for automobiles or items like jewelry and lottery tickets.

It is kindda odd for governments to pin the blame on the public in the knowledge that for the top 10 lists of most corrupt government officials, many of them have been known to launder pelf acquired during their morally tainted regimes. 

In the financial world they are known as Politically Exposed Person (PEP), which according to Wikipedia.org, “describes a person who has been entrusted with a prominent public function, or an individual who is closely related to such a person” 

The Wikipedia.org also notes of the relationship between corruption and money laundering… (bold mine)

By virtue of their position and the influence that they may hold, a PEP generally presents a higher risk for potential involvement in bribery and corruption. Most financial institutions view such clients as potential compliance risks and perform enhanced monitoring of accounts that fall within this category….

PEP-specific compliance legislation underlines the link between corrupt politicians, money laundering and the financing of terrorism. Since September 11, 2001, more than 100 countries have changed their laws related to financial services regulation, with the fight against political corruption playing a fundamental role. Despite attempts at regulation, certain political leaders like Muammar Gaddafi and Hosni Mubarak have made news for having frozen assets located in US banks that did not follow these processes for these individuals.

So by virtue of the connection of corruption and laundering then Mexico cash ban should also implicate politicians. But this isn’t likely the real score.

In the understanding the politicians typically use noble sounding justifications to camouflage the genuine design to impose social controls, cash bans have mostly been about governments wanting to take control of the public’s savings in order to finance their profligacy.

Except for the quirk this 2012 in terms of government budget as % of GDP—perhaps due to initial reporting, but as of September Mexico’s debt will equal to 42.9% of GDP—generally speaking, Mexico’s fiscal position (mostly supported by oil revenues) has been in marked deterioration. (chart from tradingeconomics.com) 

With oil production falling from declining reserves, and where oil revenues account for 40% of Mexico's national budget…

…we now get a better picture or understanding of the seeming desperation exhibited by the Mexican government which impels them to corral public’s savings through currency restrictions.

Of course ban on cash would do little to control supposed “money laundering” which in reality represents an offshoot to corrupt arbitrary laws.

In the US, the war on drugs, for instance, has prompted drug trades to migrate to other marketable commodities as the Tide liquid detergents as means of payment. Instead of dealing with failure of the war on drugs, governments typically resort to attacking symptoms. This has been no less than political showmanship or the pretense of doing something. 

Economic and financial restrictions or blockade against Iran by the US has prompted Iran to use gold as money. So essentially, the US government has taken steps to underwrite the decline of the US dollar standard by incentivizing emerging markets to trade using other mediums as gold. 

As I previously wrote, 

As governments stifle people’s social and commercial activities through tyrannical laws, expect the use of more cash, local currencies or commodities (such as Tide) as alternative medium of exchanges, as the informal or shadow economies grow. 

Most importantly, real assets will become more valuable and may become an integral part of money, as sustained policies of inflationism, as Voltaire once said, will bring fiat money back to its intrinsic value—zero. 

The Mexican government’s war on cash will do little to help what truly has been the problem of political greed.

Chart of the Day: Education and Medical Care Inflation in the US

Speaking of the US education bubble, the chart below demonstrates of the runaway inflation in tuition and education related fees.

Another area where price inflation has been surging is in Medical care

Explains Dr. Ed Yardeni at his blog

If you are looking for out-of-control inflation in the US, look no further than the college and hospital next door.The CPI data show that college tuition and fees have increased 1,036% since January 1979 vs. 546% for Medical Care Goods & Services vs. 238% for the overall CPI. In other words, college costs have more than quadrupled relative to the CPI over this period, while Medical Care has more than doubled relative to the CPI.

Quote of the Day: Wealth Drives Evertything

Wealth drives everything. Military might, scientific achievement, medical breakthroughs, and technological advancement are all possible in wealthy societies. 

Of course, nations don’t just become wealthy by accident. National prosperity is built on a foundation of savings, economic freedom, ingenuity, and hard work… all factors that are in terminal decline in the west today.

(bold original) 

This quote is from Sovereign Man's Simon Black discussing the economic power renascence of Asia. 

Infographic: Tale of Tape United States vs. China

I posted this due to the dainty looking infographic. (hat tip Zero Hedge). 

The main objective of this has been to emphasize on the educational difference (see lowest portion), where the US is seen as losing the edge. No comment on that, except that the education in US seems like an inflating bubble.

Just avoid the impression that this is about populist politics of "us against them", as both countries are joined to hip in many ways.

 

Source: Master of Finance Degrees