E-Vat 15%: Possible Consequence from Current Quasi Boom Policies

Thus the remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the so-called boom to last. The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom. John Maynard Keynes, The General Theory of Employment, Interest and Money[1]

Quasi Boom Policies Drives Risk ON Today

Today’s bubble dynamics has essentially been drawn from Keynesian policy paradigm of establishing permanently quasi booms.

This has become the global central banker’s creed in managing the monetary state of affairs of their respective economies channeled through zero bound interest rates (ZIRP) and quantitative easing (balance sheet expansions)

The Philippine counterpart, particularly the Bangko Sentral ng Pilipinas (BSP), particularly has acted along in conformity with the de facto global central banking standard.

Debt financed consumption activities have been anchored on permanent quasi boom policies.

Policies promoting quasi booms effectively prioritizes the short term.

Whether through democratic politics, economics or in the markets, narrowing people’s time orientation and value scales has adverse impact on the society, as Austrian economist Hans Hermann Hoppe writes[2],

Democracy has achieved what Keynes only dreamt of: the "euthanasia of the rentier class." Keynes's statement that "in the long run we are all dead" accurately expresses the democratic spirit of our times: present-oriented hedonism. Although it is perverse not to think beyond one's own life, such thinking has become typical. Instead of ennobling the proletarians, democracy has proletarianized the elites and has systematically perverted the thinking and judgment of the masses.

And booming stock market and property sectors have likewise been expressions of policy induced changes that gives a premium to the short term.

The consumption/investment ratio or consumer/savings preferences by the marketplace have been altered to reflect on the preference for price titles of capital goods caused by expansion of bank credit. In other words, investments have focused on capital and producer’s goods at the expense of the consumer industry. People have been made to believe that rising prices extrapolates to real growth, when this has been a mirage prompted for by Potemkin effect from credit expansion.

These rush to capital intensive sectors mostly via the property boom has become evident worldwide and especially pronounced in countries least affected by the previous crisis.

For instance, Canada[3] and Australia[4], now reckoned as alternative foreign reserve currencies[5] even prior to the anointment of the IMF, has been nurturing their own domestic bubbles.

Asia has likewise been manifesting symptoms of bubbles. Hong Kong even has a bizarre parking lot bubble[6]. Add to this the mushrooming of grandiose signature buildings in China and major ASEAN nations which have usually highlighted the Skyscraper curse[7].

Even the US has been currently experiencing a seeming renascence or reflation of the property sector[8]

Going to the stock markets, among the ASEAN majors, the Philippine benchmark the Phisix has essentially surpassed Thailand’s SET with three consecutive weekly gains totaling 6.39% since November 16^th.

Such succession of weekly gains means that the Phisix has carved out back-to-back record highs. Year-to-date returns on the Phisix commanded a lofty 32.53% as of Friday’s close.

Despite the huge gains, in Asia, the Phisix trails Pakistan’s Karachi 100 which has skyrocketed to an incredible return of 48.12% and Laos (Laos Securities) with an impressive 33.24% advance.

One would also note that global equity markets have generally been surfing on a bullish wave over the same period.

And among the majors, only the China’s Shanghai index has remained as the odd man out. Nevertheless, this week’s spectacular 4.12% gains have pruned down a big segment of this year’s losses. 

Given the recent record liquidity injections by the People’s Bank of China (PBoC) which coincided with the latest leadership changes[9], and improving signs of credit growth, perhaps from stealth stimulus[10] coursed through State Owned Enterprises (SoE), accelerating signs of improvements on infrastructure investments[11] (see above), and with retail investors almost abandoning the stock market[12] out of depression, China’s reflationary policies may yet spark new bubbles in both the stock market and the property sectors.

The “success” of Chinese government thrust to reflate its bubble will depend on the availability of real savings derived from the productive agents or the wealth generators (business and commercial enterprises). For as long as productive activities thrives in spite of the redistributive and wealth consuming activities by her government, or for as long as there will be resources that can be reallocated, such bubbles may last.

Recovering prices of industrial metals also seem to underpin and or portend for China’s stock market recovery.

A reflation of China’s asset bubbles will likely be supportive of the recent gains attained by ASEAN bourses.

Moreover for the moment, the inflationary boom, as revealed by the rising tide phenomenon, which has become the dominant force, with China likely being part of the cast simply reinforces the RISK ON environment.

As I have repeatedly been pounding on the table, the direction of global asset prices, including the Philippines are in the palm of the hands of central bankers.

The same dynamic be seen within the Philippine market. The rising tide seems to be lifting all boats. Even the politically persecuted sectors[13], whom have been this year’s laggards, specifically the mining-oil and the service industries, have likewise posted (less than impressive) advances this week.

The fresh milestone highs of the Phisix have emerged in the backdrop of immensely improving confidence levels.

Of the 287 issues listed[14] on the Philippine Stock Exchange, about 71% are now being traded. Average number of issues traded daily (left) have been nearing the highest level since the 1^st quarter of 2012.

The same applies to the average daily trades (right) which could signal new participants and or more churning of trades by existing ones.

Increasing peso volume backed by the average number of daily trades and the average number of issues traded daily have been suggestive growing and broadening of risk appetite.

Yield chasing dynamic continues to fuel today’s advances.

I believe that should an interim correction emerge from an overheated Phisix occur, then rotation dynamic will reinforce the current inflationary boom.

The Transmission Mechanism of Quasi Booms; the Bangladesh Episode

I have been pointing out[15] that the reason for the outperformance of the Phisix has been due to the easing policies embraced by the BSP, which has been the most aggressive in Asia. 

This aggressive policy easing comes in the face of the steep Philippine yield curve, which still has been the steepest in Asia (chart from ADB[16]).

And with the BSP manipulating the short end of the curve, banks have been motivated to profit from the curve through fractional reserve banking based maturity mismatches or the maturity transformation[17] or simply “borrow short term, lend long term”

Manipulation of the yield curve represents an effective subsidy to highly protected banking industry. Banks have been the main financiers of the ongoing boom in the property sector. This effectively chimes with the Austrian business cycle. Investors mistakenly sees the abundance of savings in driving down interest rates which allows them to undertake formerly unfeasible projects. Hardly do they realize that there has not been sufficient savings and resources to back this up. And artificially suppressed interest rates, which have been products of central banking manipulations, are unsustainable.

Think of it. If a local currency domestic time deposit today yields about 2% or less depending on the size of the deposits per year, and if loan rates are about 15% per annum where the stock market returns 30% over the same period today, would the public not be tempted to plough into stock market by shifting their time deposits, and or if not, even borrow from the banks to reach for yields?

That’s exactly the temptation brought about by quasi boom-negative real rates policies. People will be seduced to the yield aspects, while ignoring the risk accompanying participation in the stock market (basically the same mechanics for those who fall for Ponzi schemes[18]).

And most likely as the yield curve flattens, banks will compete feverishly to serve consumer financing demand by lowering the quality of lending standards and or by issuing new products that arbitrages on existing regulation (I am thinking the shadow banking system). That’s how current monetary policies subliminally influence people’s incentives and economic calculation

The country’s banking industry recently reported a double digit rise in income growth rate during the first three quarters of the year[19]. While much of this has been attributed to increased demand for financial non-interest services, such could be seen as testament to the blossoming credit bubble.

The outperformance of the banking and property sector has been reflected on the year to date gains in the domestic stock market.

As I predicted 2 years back[20]

Thus the environment of low leverage and prolonged stagnation in property values is likely to get a structural facelift from policy inducements, such as suppressed interest rates which are likely to trigger an inflation fuelled boom by generating massive misdirection of resources-or malinvestments.

Of course many would argue on a myriad of tangential or superficial reasons: economic growth, rising middle class, urbanization and etc... But these would mainly signify as mainstream drivels, as media and the experts will seek to rationalize market action on anything that would seem fashionable.

And the business cycle will be left unheard of until perhaps the realization of a bust.

Remember just recently the incumbent administration bragged about the huge jump in construction industry as the “best property boom in two decades”[21] which incidentally cushioned the decline of the export sector to deliver a surprise third quarter 7.1% economic growth.

The administration even had the audacity to label such statistical outperformance as “Aquinomics”, when all these have accounted no more than the frontloading of consumption via the Keynesian permanent quasi boom formula of debt based spending.

But media has kept reticent in saying that the surge in construction activities has been financed by a credit boom or “lending to the real estate sector hit an all-time high” last June[22].

Domestic credit provided by the banking sector as of 2011 according to the World Bank via tradingeconomics.com[23] has steadily been rising since 2003. In 2011, bank credit as a share of GDP has accounted for 51.84% of the GDP. This must be a lot higher today.

Current growth trends have popped above the long term average. The implication is that growth credit has begun to surpass the growth in the real GDP. Credit expansion now drives the statistical economy.

One would notice that growth in bank credit can leapfrog, similar to the 1992-1998 window which culminated with the Asian crisis[24]. In 1997 or at the precipice of the boom, bank credit accounted for 84.47% of the GDP.

The economic crisis during the terminal phase of the Marcos regime[25] led to a contraction of bank credit which had been reversed during pre-Asian crisis Japanese money driven boom.

By the way, a déjà vu of a Japan driven Phisix-ASEAN bubble in response to the Japan’s government’s policies must not be discounted[26]

Unfortunately, despite announcements of domestic regulators of the supposed potency of their ability to control credit flow, unless they possess the supernatural privilege of omniscience, such money flows emanating from credit expansion can hardly be determined with technocratic precision.

The great Austrian professor Ludwig von Mises admonished[27],

Discrimination in lending is no substitute for checks placed on credit expansion, the only means that could really prevent a rise in stock exchange quotations and an expansion of investment in fixed capital. The mode in which the additional amount of credit finds its way into the loan market is only of secondary importance. What matters is that there is an inflow of newly created credit. If the banks grand more credits to the farmers, the farmers are in a position to repay loans received from other sources and to pay cash for their purchases. If they grant more credits to business as circulating capital, they free funds which were previously tied up for this use. In any case they create an abundance of disposable money for which its owners try to find the most profitable investment. Very promptly these funds find outlets in the stock exchange or in fixed investment. The notion that it is possible to pursue a credit expansion without making stock prices rise and fixed investment expand is absurd.

This means quasi boom policies may incite money flows into the stock market and or to the property sector and or both and or other capital intensive industries. 

No one knows exactly where these monies will flow into.

This has been the case of Bangladesh in 2011.

Prior to the politically tumultuous stock market crash[28], the stock market absorbed much of the credit expansion from the banking system. Loans had been diverted away from intended uses, which fueled to the antecedent stock market boom. Bangladesh’s Dhaka became one of the best performing bourses in the world in 2010[29].

However, Bangladesh officials apparently realized of the danger from pursuing easy money policies and decided to sacrifice the boom by tightening credit. This impelled for the crash.

Since the peak in November 2010, Bangladesh’s Dhaka 100 has been about 50% lower. (see above chart from Bloomberg)

Fortunately, the underdeveloped Bangladesh’s stock market’s capitalization represents only 21.6% of the GDP as of 2011 (this should be lower today) as the crash hardly made a dent to her economy.

It’s a different story for the ASEAN majors whose market capitalization plays a big role in the economy: as of 2011 Indonesia accounted for 46.11% of GDP, Malaysia 141.8%, the Philippines 73.6% and Thailand 77.7% according to World Bank[30]. And the aforementioned ratios should be much larger today, given the huge gains

The point is once consumption-savings preferences will revert to their former proportions, and where the shortages of savings and real resources would have been revealed and that prices of goods and labor would have been bided up too high, all of these will be ventilated through higher interest rates, where the ensuing bust will account for the necessary adjustments for the massive build-up of malinvestments during the preceding boom.

A bursting credit bubble for ASEAN, whom has begun to interlock equity markets via cross listings, will have far more catastrophic effect than one experienced by Bangladesh. Moreover, Asia’s intra-region trade links has been growing overtime now accounting for more than 50%[31]. This amplifies the contagion risks.

Real Bubble Bust: The Path to E-VAT 15%

In the Philippines, today’s quasi boom policies which are being manifested through the property and the stock market boom and which has been spurred by credit expansion will likely be compounded by consumer debt and aggressive government spending programs.

Consumers will be tempted to live beyond their means. They are likely to expand consumption activities through consumer credit facilities through credit cards, housing loans, car loans and etc…

All these imply that debt based activities from the private sector—via speculation on capital intensive misdirected investment projects and via consumer credit—along with government spending will translate to stiff competition for resources which will put pressure on interest rates.

The likelihood is that given the low savings rate about 19-23% of GDP, where the Philippines has the lowest savings in the region[32] (partly due to limited access to the formal banking system), trade balance could turn into deficit as OFW remittances and export receipts would fail to cover for the debt based consumption activities.

It would seem as déjà vu of the Asian crisis as trade deficits continue to widen but so far thanks to record remittances[33] and globalization such deficits has been amply covered.

Record forex currency reserves would begin to deplete as these would likely be used to bridge finance on such gaps.

And if the BSP makes good of the threat to impose more reverse capital controls[34], to control influx of foreign money, interest rates will zoom higher to reflect on the scarcity of savings and of real resources. This would prick the credit bubble and send the Phisix and the Peso on a tailspin.

Let me add that the IMF’s recent endorsement of reverse capital controls[35] could be seen as partly advocating selective protectionism, and partly could be part of the central bank cabal to place an international dragnet to keep capital flows from nations imposing intense financial repression from fleeing.

The New York Times[36] recently gave a clue noting that “the Internal Revenue Service is asking foreign financial institutions and tax agencies to join the cause”. I just cannot help but think that this has been part of the encirclement strategy or pincer movement[37] employed by increasingly desperate politicians to thwart capital mobility with the help and collaboration of other central banks in order to seize private sector resources to finance the unsustainable profligacy of politicians and bureaucrats.

And since the prolonging of the domestic boom requires foreign capital or that trade deficits would need to be offset by capital accounts[38] or increasing foreign claims on local assets, either the BSP loosens up or keeps an eye closed on foreign money flows. Most of which will likely come from hot money inflows seeking refuge from inflationism and financial repression.

Nonetheless if political conditions overseas become intolerable, where international savings will seek shelter from overseas, no amount of capital controls can really stop this.

In the case of China, which has stringent capital controls, hot money continues to play a significant role in driving up the boom-bust cycles.

All these suggest once the domestic and regional bubble has been popped, governments will do the same things as they are doing today in crisis afflicted developed nations. They are likely to engage in bailouts of the banking and finance sectors.

And of course, financial repression via forcible transfer of resources which are meant to safeguard the politically privileged enterprises would mean higher taxes for everyone. Haven’t you noticed? We always pay for the mistakes of the political leaders.

That’s why I believe that the consequence from today’s boom will be a 15% E-VAT in the fullness of time.

Currently E-VAT is at 12% which was implemented on September 1, 2005[39]. The Value added Tax was introduced in the Philippines by President Cory Aquino’s Executive Order 273 in July 25, 1987[40]

My impression is that domestic politicians would see the Value Added Taxes as the easiest way to capture taxes on a broader scale. Yet perhaps it may be more than just about collections

As the great libertarian Frank Chodorov pointed out (quoted by Murray Rothbard[41])

It is not the size of the yield, nor the certainty of collection, which gives indirect taxation [read: VAT] preeminence in the state's scheme of appropriation. Its most commendable quality is that of being surreptitious. It is taking, so to speak, while the victim is not looking.

Those who strain themselves to give taxation a moral character are under obligation to explain the state's preoccupation with hiding taxes in the price of goods. (Frank Chodorov, Out of Step, Devin-Adair, 1962, p. 220)

Bottom line: Policies which promotes permanent Quasi booms have real effects of damaging and consuming wealth through perpetual bubble cycles

---

[1] John Maynard Keynes Book VI Short Notes Suggested by the General Theory Chapter 22. Notes on the Trade Cycle John Maynard Keynes The General Theory of Employment, Interest and Money Marxist.org

[2] Hans Hermann Hoppe, Natural Elites, Intellectuals, and the State Mises.org

[3] The Globe and Mail, Canada’s credit bubble a central banker’s dilemma October 21, 2012

[4] The Sydney Herald Is the RBA trying to re-inflate the housing bubble? October 3, 2012

[5] See New Currency Reserves: Australian Dollar, Canadian Dollar and Gold, November 28, 2012

[6] See Hong Kong’s Parking Lot Bubble November 28, 2012

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

[8] see US Federal Reserve Policies Re-Inflate US Property Bubble October 20, 2012

[9] see On China’s New Leaders November 19, 2012

[10] See Possible Reasons Behind the 2.9% Surge by China’s Shanghai Index December 5, 2012

[11] Danske Bank The Tide is Turning Global Scenarios December 2012

[12] see Lessons from the Sad Experience of China’s Retail Stock Market Investors December 6, 2012

[13] See Inflationary Boom Powers Phisix to Milestone Highs November 26, 2012

[14] Credit Risk Monitor Directory of Public Companies in Philippines crmz.com

[15] See Phisix at 5,600: Emergent Signs of Euphoria? December 3, 2012

[16] Asianbondsonline.org ASIA BOND MONITOR NOVEMBER 2012

[17] Wikipedia.org Maturity transformation, Wikipedia.org Banks Economic Function

[18] See The Symmetry Between Ponzi Scams and Ponzi Financed Global Financial Markets November 19, 2012

[19] Inquirer.net PH banks post double-digit income rise as of Q3 December 7, 2012

[20] see The Upcoming Boom In The Philippine Property Sector September 12, 2010

[21] See The Secret of Aquinomics: Bubble Economic Policies November 29,2012

[22] Oxford Business Group Philippines: Real estate loans rising November 2, 2012

[23] Tradingeconomics.com DOMESTIC CREDIT PROVIDED BY BANKING SECTOR (% OF GDP) IN PHILIPPINES The Domestic credit provided by banking sector (% of GDP) in Philippines was last reported at 51.84 in 2011, according to a World Bank report published in 2012. Domestic credit provided by the banking sector includes all credit to various sectors on a gross basis, with the exception of credit to the central government, which is net. The banking sector includes monetary authorities and deposit money banks, as well as other banking institutions where data are available (including institutions that do not accept transferable deposits but do incur such liabilities as time and savings deposits). Examples of other banking institutions are savings and mortgage loan institutions and building and loan associations.

[24] Wikipedia.org 1997 Asian financial crisis

[25] Country-data.com Philippines External Debt

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

[27] Ludwig von Mises, 5. Credit Expansion XXXI. CURRENCY AND CREDIT MANIPULATION Human Action Mises.org

[28] See Bangladesh Stock Market Crash: Evidence of Inflation Driven Markets January 11, 2011

[29] Wikipedia.org Investment 2010-11 market crash Economy of Bangladesh

[30] World Bank Data Market capitalization of listed companies (% of GDP)

[31] Asianbondsonline.org Asian Economic Integration Monitor JULY 2012

[32] Asian Investment Managers Guide Philippines Market Profile

[33] Inquirer.net BSP expects forex reserves to hit new highs December 4, 2012

[34] Philstar.com Capital controls should serve only as measure of last resort – BSP December 5, 2012

[35] See IMF Supports Capital Controls December 5, 2012

[36] New York Times Few Places to Hide as Taxes Trend Higher Worldwide, December 2, 2012

[37] Wikipedia.org Pincer movement

[38] Wikipedia.org Capital account

[39] Wikipedia.org Republic Act 9337

[40] Lawphil.net EXECUTIVE ORDER NO. 273 July 25, 1987 ADOPTING A VALUE-ADDED TAX, AMENDING FOR THIS PURPOSE CERTAIN PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AND FOR OTHER PURPOSES

[41] Murray Rothbard The Value-Added Tax Is Not the Answer Mises.org April 23, 2010

Video: Reuters Pictures of the Year 2012

Pictures of the year 2012 from Reuters

Robert Higgs: How Economic Warfare Provoked Japan’s Attack on Pearl Harbor

71 years ago December 7, the Japanese government bombed Pearl Harbor. This “day of infamy” has been portrayed by the mainstream as having been a “good war”. 

In truth, there is more than meets the eye. America’s entry to World War II had been a contrivance.

Austrian economist Professor Robert Higgs in a recent talk narrates of how US president Franklin D. Roosevelt baited the Japanese into attacking the US, that paved way for America’s participation in World War II.

The gist from Mises Institute (bold mine)

When Franklin D. Roosevelt became president in 1933, the U.S. government fell under the control of a man who disliked the Japanese and harbored a romantic affection for the Chinese because, some writers have speculated, Roosevelt's ancestors had made money in the China trade. Roosevelt also disliked the Germans in general and Adolf Hitler in particular, and he tended to favor the British in his personal relations and in world affairs. He did not pay much attention to foreign policy, however, until his New Deal began to peter out in 1937. Thereafter he relied heavily on foreign policy to fulfill his political ambitions, including his desire for reelection to an unprecedented third term.

When Germany began to rearm and to seek Lebensraum aggressively in the late 1930s, the Roosevelt administration cooperated closely with the British and the French in measures to oppose German expansion. After World War II commenced in 1939, this U.S. assistance grew ever greater and included such measures as the so-called destroyer deal and the deceptively named Lend-Lease program. In anticipation of U.S. entry into the war, British and U.S. military staffs secretly formulated plans for joint operations. U.S. forces sought to create a war-justifying incident by cooperating with the British navy in attacks on German U-boats in the northern Atlantic, but Hitler refused to take the bait, thus denying Roosevelt the pretext he craved for making the United States a full-fledged, declared belligerent—a belligerence that the great majority of Americans opposed.

In June 1940, Henry L. Stimson, who had been secretary of war under William Howard Taft and secretary of state under Herbert Hoover, became secretary of war again. Stimson was a lion of the Anglophile, northeastern upper crust and no friend of the Japanese. In support of the so-called Open Door Policy for China, Stimson favored the use of economic sanctions to obstruct Japan's advance in Asia. Treasury Secretary Henry Morgenthau and Interior Secretary Harold Ickes vigorously endorsed this policy. Roosevelt hoped that such sanctions would goad the Japanese into making a rash mistake by launching a war against the United States, which would bring in Germany because Japan and Germany were allied.

The Roosevelt administration, while curtly dismissing Japanese diplomatic overtures to harmonize relations, accordingly imposed a series of increasingly stringent economic sanctions on Japan. In 1939, the United States terminated the 1911 commercial treaty with Japan. "On July 2, 1940, Roosevelt signed the Export Control Act, authorizing the President to license or prohibit the export of essential defense materials." Under this authority, "[o]n July 31, exports of aviation motor fuels and lubricants and No. 1 heavy melting iron and steel scrap were restricted." Next, in a move aimed at Japan, Roosevelt slapped an embargo, effective October 16, "on all exports of scrap iron and steel to destinations other than Britain and the nations of the Western Hemisphere." Finally, on July 26, 1941, Roosevelt "froze Japanese assets in the United States, thus bringing commercial relations between the nations to an effective end. One week later Roosevelt embargoed the export of such grades of oil as still were in commercial flow to Japan."  The British and the Dutch followed suit, embargoing exports to Japan from their colonies in Southeast Asia.

Roosevelt and his subordinates knew they were putting Japan in an untenable position and that the Japanese government might well try to escape the stranglehold by going to war. Having broken the Japanese diplomatic code, the American leaders knew, among many other things, what Foreign Minister Teijiro Toyoda had communicated to Ambassador Kichisaburo Nomura on July 31: "Commercial and economic relations between Japan and third countries, led by England and the United States, are gradually becoming so horribly strained that we cannot endure it much longer. Consequently, our Empire, to save its very life, must take measures to secure the raw materials of the South Seas."

Because American cryptographers had also broken the Japanese naval code, the leaders in Washington also knew that Japan's "measures" would include an attack on Pearl Harbor. Yet they withheld this critical information from the commanders in Hawaii, who might have headed off the attack or prepared themselves to defend against it. That Roosevelt and his chieftains did not ring the tocsin makes perfect sense: after all, the impending attack constituted precisely what they had been seeking for a long time. As Stimson confided to his diary after a meeting of the War Cabinet on November 25, "The question was how we should maneuver them [the Japanese] into firing the first shot without allowing too much danger to ourselves." After the attack, Stimson confessed that "my first feeling was of relief . . . that a crisis had come in a way which would unite all our people."

Read the rest or the start of his talk here

This explains the "coincidence" or “the stroke of luck” on why none of the three US aircraft carriers stationed at Pearl Harbor where present during the time of strike.

[Updated to add: Also think about how political leaders lack the compunction to even offer their citizens as sacrificial lambs (Pearl Harbor casualties 2,402 deaths 1,282 injured) in order to pursue personal political agenda.]

Today, the same strategy of economic and financial sanctions has been slapped on Iran.

The great French proto-Austrolibertarian Frédéric Bastiat was right, if goods don’t cross borders, armies will.  Protectionism is an act of war.

Study: Beer has Anti Virus Powers

It’s yuletide season, which means lots of parties and for some, beer guzzling sessions

Nonetheless a study shows that beer swilling has good health effects.

This, for me, is really a confirmation bias (justification to drink more beer).

From Yahoo/AFP 

Consuming large quantities of a key ingredient in beer can protect against winter sniffles and even some serious illnesses in small children, a Japanese brewery said citing a scientific study.

A chemical compound in hops, the plant brewers use to give beer its bitter taste, provides an effective guard against a virus that can cause severe forms of pneumonia and bronchitis in youngsters, Sapporo Breweries said Wednesday.

In research with scientists at Sapporo Medical University, the compound -- humulone -- was found to be effective in curbing the respiratory syncytial (RS) virus, said the company, which funded the study.

"The RS virus can cause serious pneumonia and breathing difficulties for infants and toddlers, but no vaccination is available at the moment to contain it," said Jun Fuchimoto, a researcher from the company.

The virus tends to spread in winter and can also cause cold-like symptoms in adults.

Fuchimoto said such small quantities of humulone were present in beer that someone would have to drink around 30 cans, each of 350 millilitres (12 oz), for it to have any virus-fighting effect.

Cheers!

Why the Shale Gas Revolution will go on…

...because the benefits enormously outweigh the costs.

Prolific author Matt Ridley writing at the UK Telegraph enumerates them

1. Cheap and abundant energy should help spur economic growth

Cheap energy is the surest way to encourage economic growth. It was cheap coal that fuelled the Industrial Revolution, enabling British workers with steam-driven machinery to be far more productive than their competitors in Asia and Europe in the 19th century. The discovery, 12 years ago, of how to use pressurised water (with less than 1 per cent kitchen-sink chemicals added), instead of exotic guar gel made from Indian beans, to crack shale and release gas has now unleashed an energy revolution almost as far-reaching as the harnessing of Newcastle’s coal.

2. Environmental Friendly

And if cutting carbon emissions is what floats your boat, you will like shale gas even more. The advent of cheap gas, by displacing coal from electricity generation, has drastically cut America’s carbon dioxide emissions back to levels last seen in the early 1990s; per capita emissions are now lower than in the 1960s. 

3. Market driven energy and less baggage on taxpayers compared to political driven alternatives

Britain’s subsidised dash for renewable energy has had no such result: wind power is still making a trivial contribution to total energy use (0.4 per cent) while most renewable energy comes from wood, the highest-carbon fuel of all.

4. Alter geopolitical environment

Best of all, the shale revolution is causing consternation in Moscow and Tehran, which had expected to corner the natural gas market in decades to come. As a sign of the panic it is inducing, a forthcoming Matt Damon anti-fracking film was financed partly by a company owned by the United Arab Emirates government. (The film’s plot had to be rewritten after the authorities absolved a gas company of causing pollution in a well-publicised case in Dimock, Pennsylvania.)

I might add that the Shale gas revolution will likely compel authoritarian resource rich, or might I rather say resource curse, economies to liberalize, knowing that their stranglehold on energy supplies faces stiff competition.

(chart from Danske Bank)

The Shale boom will also put tremendous pressure on the authoritarian regimes' energy based welfare states, which has been the main source of the political existence.

So the shale gas revolution will likely bring on more trade, more reforms and lesser welfare states

5. Safe technology

Exploiting shale gas is safe, according to the Royal Society and the Royal Academy of Engineering. Fracking of one kind or another has been used here for decades; the earthquakes it causes are no worse than a bus going past; it does not use much water compared with other industries; it’s not responsible for flammable tap water; and methane leakage is not as bad as has been claimed. Nor, with a mile of rock between the fractures and the aquifers, does it cause groundwater contamination. Last year there were 125,000 fracs in the United States. According to the Environmental Protection Agency, no frac has ever contaminated groundwater.

The Shale gas boom will initially benefit the US and Canada, but will most likely spillover to the rest of the world.

Shale gas reserves can be found in many countries. The Wall Street Journal notes that

U.S.-government contracted study of 32 countries estimated they held 6.6 quadrillion cubic feet of shale gas, more than 50 years worth of current global consumption. The U.S. held 862 trillion cubic feet, or just 13% of the estimated resource

The study didn't offer an estimate of either the volume of oil in global shales or the size of massive shale deposits in Russia and the Middle East. Other estimators have suggested this figure could be high, but nonetheless expect there is vast untapped energy in shales world-wide.

Although the boom has several obstacles to overcome mostly in terms of politics: government ownership of mineral rights, environmental concerns and the lack of infrastructure.

For instance, countries like France and Bulgaria has banned hydraulic fracking. China huge shale reserves are situated in arid or heavily populated areas where accessibility to water poses as constraints.

There are also technology constraints or access to technology which so far has limited market participants.

Nevertheless, the shale revolution has been estimated to shift energy consumption and trade patterns globally.

The US may reach self-sufficiency and become an exporter by 2035

Notes the Economist,

the same technology is unlocking shale oil, which along with fuel efficiency measures, could slash America's dependence on oil imports. With all sources of energy taken together (including nuclear, renewables, etc) the country could hit net self-sufficiency by 2035. The rest of the world is set to rely even more heavily on imports, with the exception of Japan and South Korea, which already import all their oil and gas, and the ASEAN region, which will have less of a surplus to export

Recently I pointed out that Asians have began piling on on Shale gas boom through record corporate takeovers of Shale companies

Mr. Ridley is right, countries that turn their backs on cheap energy will lose out

Video: Christmas Carol: Deck the Halls with Macro Follies

Econostories.tv has an amusing video debunking macroeconomic fallacies. (thanks to Coordination Problem Blog)

Lessons from the Sad Experience of China’s Retail Stock Market Investors

Sovereign Man’s Tim Staermose thinks that China’s glum retail sentiment on the stock market appears as a bullish contrarian signal, [bold mine]

Since 2009, the benchmarkShanghai Stock Exchange index has been in a deep funk.  Last week, in fact, the index hit 4-year lows and dipped below the psychological 2,000 level.

Further, a recent survey of 8,438 Chinese households published by China’s Southwestern University of Finance and Economics found that 77% of those who had invested in Chinese stocks lost money.

This is huge. Chinese retail investors account for around 80% of the transactions on domestic exchanges. Famous for being active traders with investment behavior bordering on gambling, Chinese retail investors are now completely disillusioned with the market.

According to JP Morgan, as of the end of October 2012, 44% of all Chinese stock trading accounts had been dormant (i.e. without activity) for at least a year.  At the end of 2007, the comparable number was just 2%… an enormous difference.

These are the sorts of data points that contrarians love. Whenever the retail crowd runs loses interest in investing, it generally suggests that the bottom is in. Today, China fits that bill.

There are two aspects to draw from the above account

One: sentiment of retail investors as market indicator

Chart from chartrus.com

China’s case looks like the classic depiction of the popular Wall Street axiom, “Bears make money, bulls make money but pigs get slaughtered”

It’s a showcase of how artificial booms seduces the gullible and vulnerable.

It essentially starts with the adage “In a bullmarket, everyone’s a genius.”

Hardly anyone realizes that in an inflationary boom, whatever analytical method one adapts gets to be validated via ascending prices, usually manifested through the rising tide lifts all boat effect.

Easy money lures the public to engage in reckless behavior. The string of initial successes would embolden neophytes to take on more aggressive risk taking. The public will even expand or increase their speculative exposures by engaging in margin trades with the hope of snaring greater profits. Emotions will dominate trading activities.

Mainstream narratives will rationalize the public’s intensifying derring do actions, even if they have little to do with reality

As I previously wrote, (bold original)

And the rising tide compels people to make various attributions to market actions, such as economic growth or earnings or mergers and acquisitions, no matter how loosely correlated they are or how little relevance they are with the genuine market drivers. Most of this account for as popular dogmatic fables or widely held superstitions as evidences does not support the causality nexus from such premises.

And most people will fall for the self-serving (attribution) bias believing that they have attained success through personal skills and that failures are brought about by misfortune or external forces.

All this leads to the fatalistic “overconfidence”.

Worst, little is understood of the real factors driving boom-bust episodes. 

During the boom phase, rising prices will be seen as perpetual dynamic or even an entitlement. And any fall in prices will be tainted with political color “insider trading, price manipulation and etc…”

And when the stage has been reached where you have unintelligent money via housemaids, gardeners, farmers pouring into stocks, such should be seen as warning signs

Again in my article cautioning the idea that household helpers should be enticed to speculate in the stock market, I wrote,

During the acme of the bubble cycle in China in 2008, the onrush of retail punters into stocks, which included housemaids, signified the peak of frenzied activities.

As Shujie Yao Dan Luo of The University of Nottingham wrote in their recent study, (emphasis added)

``Most of these investors, which included farmers, cleaners, taxi drivers and house maids, knew little about stock markets and how share prices were determined. Many of these people started investing in the stock markets when prices had already risen rapidly to peak levels, just before the market bubble burst. The participation of these ‘envious’ investors artificially prolonged the bullish market and created a much larger market bubble than would have occurred had they not become involved.”

In short, retail investors GOT SINGED and were left HOLDING THE EMPTY BAG. They accounted for as the FOOL in the Greater Fool Theory.

I have seen this personally before.

In the Philippine Phisix bear market trough of 2002, I spoke with several retail accounts assigned to me by my principal, to persuade them to take advantage of what I believed as the market’s major inflection point. 

Then the typical response to my suggestion has been one of embitterment. Yet I wasn’t speaking to lowly accounts but to the upper middle and to the wealthy accounts.

I even recalled being cussed at by a disenchanted retail account. The person said that the stock market was a fraud and had been manipulated and that my being part of it means I am part of the cabal.

Well, the market began to recover in March 2003 or about less than a year after I made my pitch. The rest is history

Thus, I am in sympathy with contrarian view that extremely negative sentiment or depression by retail investors can be construed as signs of the market’s bottom.

Next, has China’s Shanghai index bottomed?

This really depends if there are still significant degree of real savings from domestic wealth generators from which the Chinese government's reflationary policies will draw from.

As Austrian economist Dr. Frank Shostak explains,

The only way fiscal and monetary stimulus could "work" is if the flow of real savings (i.e., real funding) is large enough to support (i.e., fund) government activities and activities that sprang up on the back of loose-monetary policy while still permitting a positive rate of growth in the activities of real-wealth generators. (Note that the overall increase in real economic activity is in this case erroneously attributed to the loose fiscal and monetary policies.)

If however the flow of real savings is falling, then, regardless of any increase in government outlays and monetary pumping overall, real economic activity cannot be revived. In this case, the more the government spends and the more the central bank pumps, the more will be taken from wealth generators — thereby weakening any prospects for a recovery.

As explained last night, China’s Shanghai Index posted the biggest gains in 3 months of 2.9% yesterday. This could highlight a dead cat’s bounce (from oversold conditions), or might be suggestive of an inflection on the back of recent easing policies. I would add to this the depressed retail sentiment.

Today, the Shanghai index has been little change.

Dividend Cliff: Dividend Payments by US Companies Triple

People respond to incentives. Social policies influence people incentives to act.

Prospects of higher taxes on dividends has prompted many companies in the US to issue dividends three times last year’s amount.

From CNBC.com

More than 110 companies have announced special dividends totaling more than $22 billion this quarter – more than three times last year's fourth-quarter total,according to Markit Equities Research. The payouts are aimed at beating a potential increase in tax rates for dividends.

Dividend payments are currently taxed at 15 percent, but the rate could go to 43.4 percent for some top earners if the Bush-era tax cuts expire.

The total taxes paid on that $22 billion of dividends will be around $3.3 billion – $9.5 billion less than next year's potential taxes.

All shareholders benefit from the dividends, of course. But some of the biggest beneficiaries are corporate insiders and large shareholders. The companies paying accelerated dividends have an average insider ownership of 27 percent — higher than the broadermarket, according to Markit.

The question is if these dividends have been frontloaded? If yes, then dividends payments will fall and the tax revenues from tax increases on dividends will also decline which extrapolates to the Laffer curve in motion.

And if many public listed companies opts to withhold or reduce dividend payments in the coming year/s, then theoretically, this won’t bode well for the stock market

 

That’s because since 1930 dividends have accounted for 40% of total returns (chart from Absolute Return Letter)

This just goes to show how insidious "class warfare" business hostile policies can lead to unforeseen adverse outcomes.

Possible Reasons Behind the 2.9% Surge by China’s Shanghai Index

China’s flagging stock market, which has also been the world’s laggard, surged today by a remarkable 2.9%

The reasons, according to Bloomberg,  “the government allowed insurers to invest more in banks and investors speculated profits at construction and cement companies will increase.”

Perhaps.

But I think today’s bounce could have been more about the belated effects of China’s credit easing policies chart from (Danske Research). It’s just that investors have used today’s deregulation as an impetus to drive markets higher.

It could also be about severely oversold conditions and or a combination of all of the above.

The Shanghai index has been on a downdraft along with copper prices for about a year.

The recent spike in copper prices seems to have also presaged today’s outcome.

We will see soon if today’s biggest advance in 3 months will mark the inflection point of the China’s major bellwether, or if current easing policies has found enough "traction" to reverse the current downtrend and reflate China's asset bubbles.

IMF Supports Capital Controls

The IMF reveals their true color.

From Bloomberg, 

The International Monetary Fund endorsed nations’ use of capital controls in certain circumstances, making official a shift, which has been in the works for three years, that will guide the fund’s advice.

In a reversal of its historic support for unrestricted flows of money across borders, the Washington-based IMF said controls can be useful when countries have little room for economic policies such as lowering interest rates or when surging capital inflows threaten financial stability. Still, it said the measures should be targeted, temporary and not discriminate between residents and non-residents.

“Capital flows can have important benefits for individual countries across the fund membership and the global economy,” IMF staff wrote in a report discussed by the board on Nov. 16 and published today. They “also carry risks, however, as they can be volatile and large relative to the size of domestic markets.”

Countries from Brazil to the Philippines have sought in recent years to manage inflows of capital that put upward pressure on their currencies and threatened to create asset bubbles. The new guidelines will enable the fund to provide consistent advice, though rules prevent it from imposing views about managing capital flows on its 188 member nations.

Capital (currency) controls treat the symptoms and not the disease.

The real disease has been the unhinged central banking-paper money system that perpetuates the worldwide bubble cycles. Such unstable system distorts the pricing structure that destabilizes economic balance, promotes high risk taking and encourages reckless yield chasing dynamics, and worst, redistributes wealth to the political elites and their cronies, whom are the first recipients of easy money bubble policies (the latter incidentally operates with an implied guarantee or moral hazard, they are usually beneficiaries of bailouts)

Eventually they all end up in a bubble bust.

Countries with banking crisis exploded coincidentally after the Nixon Shock or the closing of the Bretton Woods gold exchange standard

Previously I warned that the penchant for greater interventionism in response to the recent crisis has sown the seeds of capital controls which risk the headway towards protectionism. 

Capital controls are part of the grand scheme of financial repression policies designed by bankrupt governments to expropriate private sector resources.

Aside from capital controls, other measures include, raising taxes, inflationism, negative interest rates, price controls and various regulatory proscriptions

Capital controls has short term impact and spawns black markets as the price spread between official and unofficial rates widens.

Yet capital controls or exchange rate controls will hardly prevent the inflation of bubbles borne out of internal or domestic policies. The Philippines, which has been cited by the article, should be a good example. Loose monetary policies have been in the process of puffing a property and stock market bubble which has been misconstrued by the mainstream as economic “growth” story.

As Austrian economist Dr. Frank Shostak warned

The idea that capital controls and fixing the external value of a currency can strengthen economic fundamentals is flawed. While capital controls may help boost economic activity in terms of GDP, they cannot lift the real net worth of the economy. On the contrary, capital controls will only add to distortions caused by the monetary pumping and the artificial lowering of interest rates, thereby making the inevitable economic bust much more severe.

Quote of the Day: When We Reify the Model, We Misunderstand the World

We reify the model, and misunderstand the world.

People need to understand that this is exactly the *same* insight that dawned upon Ludwig Wittgenstein — mental constructs made of “given givens” which are given to one mind fail to capture the imperfect networks of imperfectly coordinated common patterns of orienting our self in the world via language — and these ‘given given’ entities mislead us about the source of significance or meaning — we go looking for significance in ‘given given’ entities, eg Plato’s essences, Russell’s logical atoms, Frege’s senses, Kripke’s direct references, Lewis’s possible world entities.

When we reify the mental construct we’ve built of ‘language’ using logic and meaning entities, we misunderstand the real world of the social phenomena of language.

In the economic case, we lose sight of networks of price relations in the world as found social tools already existing in the world for orienting our doings in coordination with other people. Social tools which aren’t always perfect and don’t always guarantee perfect coordination.

In the language case, we lose sight of networks of shared practices of going on in the world involving speech and written words as found social tools already existing in the world for orienting our doings in coordination with other people. Social tools with aren’t always perfect and don’t always guarantee perfect coordination.

Prices and language are external social network realities with an existence and reality far beyond the closed system of any single individual’s formal mental model of the price system or the language system made of of ‘given givens’ or stipulated ‘meanings’ and their formal relations.

The lesson of Mises’ socialist calculation argument and Wittgenstein’s private language argument is that we can’t recreate this social thing that lies outside us in a fully surveyed formal system of “givens”, we can’t recreate it and we can’t replace it, what we do is make use of it coordination our social doings within this larger *socially* given network of relations, which we don’t receive as ‘given given’ entities like a hat in a box, but as networks of significance we are constantly orienting ourselves within and internalizing, in the first instance without any real explicit articulated fixed rules of going on together in a coordinated way. We acquire usefully and commonly coordinated practices via imitation, trial and error, training, absorbing the culture, practice, getting advice from others, etc.

This is from Greg Ransom of the Hayek Center 

SMS Messaging Turns 20 Years old: Happy bday txt msg! :D

Text Messaging turned 20 years old yesterday.

From the Economist

ON DECEMBER 3rd 1992 a young Vodafone engineer wished his boss "Merry Christmas" by SMS (short message service). This is widely regarded as the first ever text. (Tapping out 07734 on a calculator, turning it upside down and handing it to someone does not count.) Since then, texting has become a global phenomenon, growing particularly rapidly in the early-noughties when America finally embraced the medium and Chinese mobile subscriptions took off. According to Portio Research, a market-research firm, 7.8 trillion text messages were sent in 2011 and the number is expected to increase. The growth of social networks in recent years such as Facebook and Twitter (based on the SMS format) and services such as BlackBerry Messenger and WhatsApp (which offer free or cheap texts) are seen to herald the death of SMS. Portio predicts a decline in texting around 2016 as the mobile market reaches saturation and rival systems become more popular. Yet for the moment, people's thumbs continue to peck at the fingerpad to send texts, as the number of mobile subscribers worldwide continues to grow.

The Philippines still holds the tiara as the “text capital of the world” in 2012. In 2009, 1.39 billion SMS messages were sent daily. This must be alot more today.

Never mind, if text messaging can make people stupid. The point is that SMS provides the public a cheap and convenient way to connect socially and that the growth rate, prompted for by the free markets, has been stupendous.

As for the reigning world champions, the Filipino texters, unfortunately, the government who pretends to care about the public, wishes to increase the cost of texting through higher taxes and by charging needless penalties by arbitrarily discrediting the industry. This would mean lesser connectivity, especially for the underprivileged. On the other hand, this means the Philippines will likely lose its title of being the world's text capital.

The proposed SMS taxes and penalties to be slapped on the industry has been designed to forcibly redistribute funds to the incumbent populist political class who promotes spending by them as the magical path to prosperity. In reality, it is only the political class, their allies and cronies, who will be the major beneficiaries from such political programs.

Shale Gas Boom Attracts Record Asian Takeovers

The booming shale natural gas industry has lured Asian companies to make record takeovers, now at par with the US.

 

From Bloomberg

Woodside Petroleum Ltd. (WPL)’s purchase of a stake in Israel’s largest natural gas deposit takes Asia- Pacific oil and gas acquisitions to a record $99 billion this year, tying the U.S. for the first time.

Australia’s second-largest petroleum producer yesterday said it will pay partners including Noble Energy Inc. (NBL) an initial $696 million and as much as $2.3 billion for part of the Leviathan field. Deals by U.S. energy companies have fallen 35 percent to $98.7 billion in 2012, while Asia-Pacific purchases increased 3.8 percent, according to data compiled by Bloomberg.

The Leviathan deal underlines the growing appetite for oil and gas assets among Asia-Pacific companies after energy demand in the region grew at more than double the world average of 2.5 percent in 2011. China Petroleum & Chemical Corp. (600028), Cnooc Ltd. (883) and India’s Oil & Natural Gas Corp. (ONGC) have secured supplies abroad as new fields are found from North America to Africa.

“There are so many more options for Asian companies now with new discoveries around the world,” said Laban Yu, head of Asian oil and gas equity research at Jefferies Hong Kong Ltd. “The trend will be led by China, which has a large foreign- exchange reserve and is seeking hard assets.”…

A surge in oil and gas production from shale rocks in the U.S. and Canada is prompting operators to rope in partners to meet capital expenditure. Canada, home to the world’s third- biggest oil reserves, will require almost C$650 billion ($655 billion) of investments to develop the nation’s biggest resource projects over the next decade, according to Natural Resources Minister Joe Oliver.

“Higher production in North America means large amounts of capital and operators have no option but to sell some of their assets,” said Sonia Song, a Hong Kong-based analyst at Nomura Holdings Inc. “Buyers from Asia are stepping in.”

Some insights from the above.

The Shale gas boom has been attracting global capital and investments. The Shale boom is not only going global, it has been a deepening trend.

This will likely spillover to the reconfiguration of energy usage. For instance, parts of the transportation industry will likely shift to natural gas fuel.

In the Philippines, about 15,000 taxicabs have been running on LPG fuel converted engines.

Eventually major car companies will likely mass produce OEM (Original Equipment Manufactured) LPG fueled engines or Autogas units. So far, 16 million out of the 600 million passenger cars world wide are fueled by autogas, which has been popular Turkey South Korea, Poland, Italy and Australia.

Asian capital has been taking advantage of such opportunities by filling in the capital-investment gap where the boom has been initially taking place: US and Canada.

Asia’s record takeover could be seen as more signs of wealth convergence.

Also, Asian investments can be construed as opportunities to acquire and assimilate the new technologies underpinning the Shale gas boom which could be applied domestically.

As for the diversification of foreign exchange reserves into hard assets, technically speaking these Shale-natural gas investments have not been made by the People’s Bank of China. So it is unlikely that diversification of foreign exchange has been the priority.

Chinese state owned firm’s investments in the booming energy sector are mostly done out of political and economic interests—meant to expand energy reserves in order to meet increasing demand and or to secure energy supplies to maintain politically stability.