Phisix and the BSP: This Time is Different?

All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.- Arthur Schopenhauer, German philosopher

So the much needed breather has finally arrived.

The Phisix fell by a hefty 2.62% this week accounting for the second weekly loss for the year and a year to date return of 14.48%.

This week’s pause means Phisix 10,000 on August 2013 will be postponed but nevertheless remains a target for this year or 2014.

Again Phisix 10,000 will depend on the rate of progress of the manic phase, which I earlier described as

characterized by the acceleration of the yield chasing phenomenon, which have been rationalized by vogue themes or by popular but flawed perception of reality, enabled and facilitated by credit expansion.

Also the weekly loss has allowed Thailand’s SET (14.81% y-t-d, nominal currency returns) to overtake on the Phisix.

Nonetheless, equities of developed economies continue to sizzle. The Dow Jones Industrials are at fresh record highs (12.18% y-t-d), the US S&P 500 (11.29% y-t-d) also at the level of the previously established record highs in 2007 with the imminence of a breakout, while the Japan’s Nikkei continues to skyrocket from promises of more “liquor” from the Bank of Japan. Major European bellwethers have also been marginally up this week, UK’s FTSE 100 (9.52%), the German DAX (5.65%) and the French CAC (5.57%).

Yet signs are that the Phisix correction will likely be short-lived.

The media narrative of this week’s correction has been one of “valuations”.

A foreign analyst rationalizes this by saying[1] “While the story is a good one, there’s a limit to how much you can pay. It’s about the most expensive in the world.”

Mainstream media and the experts they cite, hardly reckon or explain on how and why valuations became the “most expensive in the world”. Most just seems satisfied with oversimplified interpretation that links “effects” as “causes”.

Philippine equities have reportedly been valued at 19.7 times projected 12 month earnings compared to her emerging market peers, where the MSCI Emerging market index supposedly trades at 10.9 times.

Yet a local buy side analyst from the same article claims that such profit taking phase represents an opportunity “to re-enter the market” supposedly because of “bullish” outlook of fundamentals.

So if 18-19 times earnings have been considered as a “buy”, then what indeed is “the limit to how much one can pay” for local stocks?

Bubble Mentality: This Time is Different

Such mentality reflects on the refusal for the market to retrench, a conviction that we have attained a “brave new world” or of the “denigration of history”—where people have come to believe that bad things will never happen to them

As I wrote last week[2],

And as perilous as it is, as the mania develops, the sweeping rationalizations and justifications from mainstream experts, such as “the Philippines is resilient to external forces”, “is not crisis prone”, “has low debt levels”, among the many others, has reinforced the view that the boom is a one way street.

Such an outlook is shared not by mainstream “experts” but has been the evangelistic message preached by political authorities.

In a March 12th speech at the Euromoney Philippine Investment Forum, Philippine central bank Bangko Sentral ng Pilipinas (BSP) governor Amando M Tetangco, Jr admits that[3] “Domestic credit to-GDP ratio at 50.4 percent (Q4 2012) still ranks one of the lowest in the region”.

The red line from the chart above indicates of this adjusted official position[4].

Mr. Tetangco downplays the growing credit menace by using logical substitution, particularly comparing apples-to-oranges or by referencing credit conditions of other nations with that of the country.

I have previously pointed out of the irrelevance of such premise stating that “each nation have their own unique characteristics or idiosyncrasies”, such that “it is not helpful to make comparisons with other nations or region. Moreover, while many crises may seem similar, each has their individual distinctions” Importantly, “there has been no definitive line in the sand for credit events”[5]

Current domestic credit to-GDP conditions (50.4%) have almost reached the 1982 peak levels of 51.59%, when the Philippine economy then succumbed to a recession.

Since 2011, the ratio has grown at an average of 9.31% a year. At this rate, we will surpass the 1995 levels of 54.85% in 2013, and will almost reach the 1997 high of 62.2% in 2014 and far exceed the 1997 levels thereafter.

Yet there is nothing constant in social events for us to rely on numerical averages.

There are two ways were the ratio could explode higher that risks amplifying systemic fragility:

One, even if domestic credit growth remains static, the denominator [GDP] slows meaningfully, and

Second, domestic credit growth accelerates far more rapidly than the rate of GDP growth. The latter is the more likely the scenario, given today’s progressing manic phase.

In other words, given the current rate of debt buildup, we will reach or even surpass the pre-Asian Crisis high anytime soon, regardless of the assurances of the BSP.

Harvard’s professors Carmen Reinhart and Kenneth Rogoff, whose book “This Time is Different: Eight Centuries of Financial Folly” covers the historical account of various financial crisis over eight centuries throughout the world, aptly notes of people’s tendency to ignore the lessons of history.

In their preface they write[6], (bold mine)

If there is one common theme to the vast range of crises…it is that excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom. Infusions of cash can make a government look like it is providing greater growth to its economy than it really is. Private sector borrowing binges can inflate housing and stock prices far beyond their long-run sustainable levels, and make banks seem more stable and profitable than they really are. Such large scale debt buildups pose risks because they make an economy vulnerable to crises of confidence, particularly when debt is short term and needs to be constantly refinanced. Debt fuelled booms all too often provide false affirmation of a government’s policies, a financial institution’s ability to make outsized profits, or a country’s standard of living. Most of these booms end badly.

I would say that all credit bubbles end badly.

In short, debt fuelled booms camouflages on the financial and economic imbalances that progresses unnoticed by the public. This eventually leads to a bust.

And “false affirmation” of current events reveals of how the public have been deluded or misled by false perceptions of reality only to be exposed as being left holding the proverbial empty bag.

“This Time is Different” as admonished[7] by Professor’s Reinhart and Rogoff

Throughout history, rich and poor countries alike have been lending, borrowing, crashing -- and recovering -- their way through an extraordinary range of financial crises. Each time, the experts have chimed, 'this time is different', claiming that the old rules of valuation no longer apply and that the new situation bears little similarity to past disasters."

Well “this time is different” or “old rules no longer apply” can be seen even in policymaking.

In recognition of the risks of “bubbly behavior” of “interest-rate sensitive” equity and property markets, the good governor Tetangco in the same speech remarked, (bold emphasis mine)

The recent global financial crisis showed that sole focus on price stability is not sufficient to attain macroeconomic stability. Policymakers need to deliver more than stable prices if they are to achieve sustained and stable growth. Price stability does not guarantee financial stability. The BSP, therefore, is attentive to pressure points that could impact on both price stability and financial stability.

To ensure financial stability we have utilized prudential measures to manage capital inflows and moderate, if not prevent, the build-up of excesses in specific sectors and in the banking system. Prudential policies are the instrument of choice and employed as the first line of defense against financial stability risks.

Wow. Not content with targeting “price stability”, the BSP governor deems that expansionary powers is necessary to deal with “surges” in foreign capital whom they associate as the primary cause of imbalances.

Every problem appears as a problem of exogenous origin with hardly any of their policies having to contribute to them.

The BSP also believes that they have the right mix of policy tools to attain their vision of “financial stability” utopia.

SDA Rate Cuts will Fuel Asset Bubbles and Price Inflation

However, in disparity with the confidence exuded by the BSP governor, the BSP seems to be in a big quandary.

Last week, they lowered interest on Special Deposit Accounts (SDA)[8]. SDAs are fixed-term deposits by banks and trust entities of BSP-supervised financial institutions with the BSP[9]. The BSP have used SDAs as a policy tool to “mop up” or sterilize liquidity in the system.

The lowering of SDA rates has been implemented allegedly to discourage the inflow of foreign portfolio investments that will likewise “temper” the appreciation of the local currency the peso. Moreover, lowering SDA rates has been supposedly meant to encourage “banks to withdraw some of their funds parked in the BSP, thereby increasing money circulating in the economy”. BSP’s Tetangco further dismissed the threat of inflation risks from such actions[10].

So by redefining inflation as hardly a consequence from additional supply of money, the BSP thinks that they can wish away inflation through mere edict. 

Yet if “inflation is always and everywhere”, according to the illustrious Nobel laureate Milton Friedman[11], “a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output”, then the BSP’s policies will backfire pretty much soon.

Unleashing or emancipating part of the record holdings of 1.86 trillion pesos (as of mid February) of SDAs will intensify the inflation of the domestic credit bubble, fuel and exacerbate the manic phase of “bubbly behavior” of property and equity markets and subsequently prompt for a possible spillover to price inflation.

Thus political efforts to attain “financial stability” will lead to the opposite outcome: price instability and the risks of greater financial volatility. Such policies, in essence, underwrite bubble cycles and stagflation.

And because inflation has relative effects on society the likely ramification is that of social upheaval.

As the great Austrian economist Ludwig von Mises wrote[12] (bold mine)

Inflation does not affect the prices of the various commodities and services at the same time and to the same extent. Some prices rise sooner, some lag behind. While inflation takes its course and has not yet exhausted all its price-affecting potentialities, there are in the nation winners and losers. Winners—popularly called profiteers if they are entrepreneurs—are people who are in the fortunate position of selling commodities and services the prices of which are already adjusted to the changed relation of the supply of and the demand for money while the prices of commodities and services they are buying still correspond to a previous state of this relation. Losers are those who are forced to pay the new higher prices for the things they buy while the things they are selling have not yet risen at all or not sufficiently. The serious social conflicts which inflation kindles, all the grievances of consumers, wage earners, and salaried people it originates, are caused by the fact that its effects appear neither synchronously nor to the same extent. If an increase in the quantity of money in circulation were to produce at one blow proportionally the same rise in the prices of every kind of commodities and services, changes in the monetary unit's purchasing power would, apart from affecting deferred payments, be of no social consequence; they would neither benefit nor hurt anybody and would not arouse political unrest. But such an evenness in the effects of inflation—or, for that matter, of deflation—can never happen.

In short, BSP actions on SDAs can be analogized as playing with fire, and those who get burned will be the public.

And today’s correction phase in the PSE will likely be ephemeral.

And the potential shift from SDAs to the market will serve as another enormous force that will underpin the coming rally in the Phisix that would lead to the 10,000 levels.

But there seems to be another story behind the lowering of SDA rates.

Reports say that the BSP has nearly exhausted on the available stock of government bonds on their balance sheet to sell to the public[13]. Domestic sovereign bonds have been used as instrument to intervene in the currency markets by the BSP.

Unlike central bank of other countries as South Korea and India, the BSP is said to be legally constrained to issue their own bonds. The BSP is only allowed to issue “certificates of indebtedness” only “in cases of extraordinary movement in price levels” according to Section 92 Article 5 of the New Central Bank Act (Republic Act 7653).[14] So the BSP has been negotiating with the national government to authorise issuance of BSP bonds.

SDAs have been reported to be the “biggest drain on the BSP finances” resulting to the reduction of the BSP’s “net worth” from a surplus of 115 billion pesos in January 2012 to only 37.9 billion pesos in November of the same year. Earnings from US dollar and euro assets have failed to compensate for SDA operations.

In short, sterilization via the SDAs may have been an obstacle to the BSP’s operations and financial conditions. And this has prompted the BSP to relax on SDAs from where all sorts of rationalizations have been used to justify on such actions. Such may also represent politicking between political agencies.

Yet the financial world speculates that the prospects of reduced interventions from the BSP via limited access to national sovereign bonds may lead to a stronger peso. This could be a possibility, but I doubt that this would be the dominant factor.

Instead I am inclined to think that given the politics of the peso (appeal to the voters of OFW families and exporters) and of the dominant politics of social democracy, this provides the opportunity and justification for the national government to go on a spending splurge, through the issuance of more debt instruments that will be intermediated through the domestic banking system with the BSP. They will be labeled as spending meant for infrastructure and other social services, when such will be used mainly to “manage the peso”. 

Yet increases in government debt will compound on the accelerating systemic debt levels.

The other option is for the national government, via the congress, is to allow the BSP to issue their own bonds which empowers the BSP to parlay on the politics of the peso.

Having both options may not be far-fetched scenario.

Capital Flows: Myth and Reality

I would further add that international capital flows, the du jour bogeyman of central banks, are really not the culprit of financial instability or price inflation as these latter two variables belongs to the realm of domestic monetary policies. 

As Wall Street financial analyst Kel Kelly explains[15], (bold mine)

The notion of capital flows and money crossing borders is misunderstood by most people. Except for physical paper bills belonging to tourists, to drug dealers, or to foreign workers sending cash earnings home to relatives, money does not cross borders. Money generally remains in the country to which it belongs — and merely changes ownership. As this section will show, "speculative" money "flowing across borders" really consists only of the domestic central bank trying to keep its currency artificially priced.

So called "capital" or "hot money" does not "flow" from one country of origin into another country. However, money created in one country can be — and is, to a limited degree — used to buy the currency of another country and direct it into the purchase of asset prices in that country (bidding asset prices higher in the process). If a disproportionate amount of local currency is channeled into asset prices in a country, less currency is being spent on goods and services in the economy, causing consumer prices to fall.

But in reality, consumer prices in countries with booming asset markets do not usually fall while asset prices rise; both usually rise in tandem. This is because the local money supply is increasing, and pushing up both classes of prices (i.e., financial assets and consumer prices), even though one is rising faster than the other. It is therefore local money, not foreign money, inflating assets.

In short, spiralling prices is a function of yield chasing mentality powered by domestic credit and money expansion. Entry of foreign funds only changes the composition of the ownership of asset prices and does not necessarily constitute or equate to rising of asset prices. 

And there is no money flows in the asset markets.

As I previously wrote[16],

Simply said, the presence foreign buyers don’t necessarily extrapolate to higher prices. This would depend on the valuation of every participant, whether the foreigner acts for himself or in behalf of a fiduciary fund from which his/her valuations and preferences would translate into action.

If the foreigner is aggressive then he/she may bid up prices. But again since people’s valuations differ, the scale of establishing parameters for each action varies individually.

A foreign participant can also be conservative, who may rather patiently accumulate, than bid up prices.

And speaking of foreign portfolio investments, the BSP reported that for February, registered foreign investments totalled $2.1 billion[17]. This has been 24.6% lower than from $2.8 billion last January. Most of these or 76.4% were directed at the PSE listed companies, particularly holding firms (US$474 million), banks (US$332 million), property companies (US$211 million), telecommunication firms (US$151 million), and utility companies (US$123 million).

One would note that the ranking of foreign buying essentially reflects on the returns of the PSE sectors which has been led by Property-holding-financial industries of which have been the primary objects of today’s credit bubble

Paul Volcker: Central banking “Hubris”

And going back to central bank policies, like Bank of Thailand’s deputy governor Mr Pongpen Ruengvirayudh, the BSP honcho Mr. Tetangco acknowledges of the dynamics of a bubble, and of the growing rate of domestic credit. But both categorically denies of the risks of respective domestic bubbles. That’s because they believe that “old rules of valuation no longer apply” and that they think that they possess divine omniscience or a magic wand that will successfully control or manage markets and the laws of economics in line with their visions.

In stark contrast to such chimerical outlook, in a March 13 2013 speech, former US Federal Reserve chairman Paul Volcker, a retired colleague of theirs, takes to task conventional central bankers at an economic conference sponsored by the Atlantic magazine.

Mr. Volcker holds them as unaccountable and as inept for the heavy cost paid from the “failure to recognize the implications of behavior patterns and speculative excesses in the financial markets that culminated in the crisis”[18]

Mr. Volcker has even more strident words on what he sees as “hubris” from contemporary central banking peers: (bold mine)

I do see a risk of what I consider a strange theory that these all-powerful central banks can play a little game.  And when you want to expand – let’s have a little inflation that peps it up.  But, of course, as soon as it gets a little big we’ll shut it off and then we’ll bring it down again.  There is no central bank that I know of that has ever exhibited the capacity for that kind of fine-tuning.  And if they lose sight of the basic role of a central bank is to maintain price stability, stability generally – the game will sooner or later be lost.  That doesn’t mean you’re going to off in the next few years on some great inflationary boom – an inflationary process.  But this hubris that somehow we have the tools that can manage in a very defined way little increases or decreases in the inflation rate to manage the real economy is nonsense.  Did I say that strongly enough?

Add to this, even more bizarre has been the concept where increases in asset prices have been seen or read by policymakers as signs of ‘stability’, whereas, decreasing asset prices have been viewed or interpreted as ‘instability’ which for them requires interventionist actions.

The fact of the matter is that these are symptoms of artificially inflated unsustainable booms that results to its natural corollary—asset deflation.

So when authorities talk about focusing on ‘financial stability’, this should serve as warning signals over the risks of a blossoming manic phase of a maturing bubble process in motion.

Bottom line: This week’s correction mode in the Phisix may possibly continue, perhaps headed towards a 5-10% level from the recent peak. However, such retrenchment phase is likely to be one of a short duration.

The sustained manic “This time is different” mentality both reflected on market participants as well as in political authorities expressed through policymaking as signified by this week’s cut in SDA rates by the BSP, will likely rekindle another bout of buying binge soon, unless external events may cause some disruption. The effects of taxing depositors to bailout Cyprus could signify as “one thing leads to another” via the growing risks of bank runs in the Eurozone[19].

And given the intense politicization of the marketplace, expect financial markets to remain highly volatile, as this will be marked by sharp advances and declines. 

---

[1] Bloomberg.com Philippine Stocks Drop Most in Asia on Valuations: Manila Mover March 14, 2014

[2] See Phisix’s Mania: We’re Still Dancing, March 11, 2013

[3] Amando M Tetangco, Jr: The Philippine economy – primes for a sustainable and solid growth, Bank of International Settlements March 12, 2013

[4] Tradingeconomics.com DOMESTIC CREDIT TO PRIVATE SECTOR (% OF GDP) IN PHILIPPINES

[5] See Has the Phisix has Gone Ballistic?! February 25,2013

[6] Carmen Reinhart and Kenneth Rogoff This Time is Different: Eight Centuries of Financial Folly Princeton University 2009

[7] Carmen Reinhart and Kenneth Rogoff This Time is Different: Eight Centuries of Financial Folly ReinhartandRogoff.com

[8] Bangko Sentral ng Pilipinas Monetary Board Keeps Policy Rates Unchanged, Reduces SDA Rates Anew March 14, 2013

[9] Bangko Sentral ng Pilipinas: Monetary Policy - Glossary and Abbreviations Special Deposit Accounts – Fixed-term deposits by banks and trust entities of BSP-supervised financial institutions with the BSP. These deposits were introduced in November 1998 to expand the BSP's toolkit for liquidity management. In April 2007, the BSP expanded the access to the SDA facility to allow trust entities of financial institutions under BSP supervision to deposit in the facility.

[10] Inquirer.net BSP cuts SDA yield, retains key policy rates, March 15, 2013

[11] Milton Friedman The Counter-Revolution in Monetary Theory (1970) Wikiquote

[12] Ludwig von Mises, Section 5 The Controversy Concerning the Choice of the New Gold Parity CHAPTER III THE RETURN TO SOUND MONEY Theory of Money and Credit p 454 Mises.org

[13] Reuters Analysis: Philippine central bank runs low on intervention funds March 13, 2013

[14] REPUBLIC ACT No. 7653 THE NEW CENTRAL BANK ACT lawphil.net

[15] Kel Kelly The China Bust: Tic Toc October 10, 2011 Mises.org

[16] See Phisix Amidst the Global Pandemic of Bubbles February 18, 2013

[17] Bangko Sentral ng Pilipinas Foreign Portfolio Investments Yield Net Inflows in February March 15, 2013

[18] Paul Volker Quoted by Doug Noland, Insights From Former Fed Chairmen, March 15, 2013 Credit Bubble Bulletin Prudentbear.com

[19] See War on Savers: Cyprus’ $13 Billion Bailout to be Funded by Taxing Depositors, March 17, 2013

War on Savers: Cyprus’ $13 Billion Bailout to be Funded by Taxing Depositors

In Cyprus, abetted by the IMF, increasingly desperate politicians will now tax depositors in order to bailout banksters.  This is financial repression at its finest.

From Bloomberg,

Euro-area finance ministers agreed to an unprecedented tax on Cypriot bank deposits as officials unveiled a 10 billion-euro ($13 billion) rescue plan for the country, the fifth since Europe’s debt crisis broke out in 2009.

Cyprus will impose a levy of 6.75 percent on deposits of less than 100,000 euros -- the ceiling for European Union account insurance -- and 9.9 percent above that. The measures will raise 5.8 billion euros, in addition to the emergency loans, Dutch Finance Minister Jeroen Dijsselbloem, who leads the group of euro-area ministers, told reporters early today after 10 hours of talks in Brussels. The International Monetary Fund may contribute to the package and junior bondholders may also be tapped in a so-called bail-in, the ministers' statement said.

Officials have struggled to find an agreement that would rescue Cyprus, which accounts for just half of a percent of the euro region’s economy, without unsettling investors in larger countries and sparking a new round of market contagion. Finance Minister Michael Sarris said the plan was the “least onerous” of the options Cyprus faced to stay afloat.

The Cyprus government is supposed to vote on this today. However, such plan has already incited incidences of panic.

From Reuters,

The decision prompted a run on cashpoints, most of which were depleted by mid afternoon, and co-operative credit societies closed to prevent angry savers withdrawing deposits.

Almost half Cyprus's bank depositors are believed to be non-resident Russians, but most queuing on Saturday at automatic teller machines appeared to be Cypriots.

This is monumental. Governments today have become more brazen. They are not content with imposing implicit taxation channeled through inflation, but now take on the recourse of outright confiscation of private property. With inflation, lost purchasing power means lesser quantity of goods or services to acquire. With taxation, people simply lose money and the attendant services derived from it.

True, Cyprus maybe small, but this serves a trial balloon on what governments will resort to, as today’s crisis deepens or remains unresolved.

Yet politicians forget that when you tax something you get less of it. Incipient signs of consternation may translate to potential bank runs, not limited to Cyprus but to crisis stricken Euro nations. Depositors from the PIIGs could express fear of the same policies that could be implemented on them.

And since the deal was forged while the financial markets has been closed for the weekend, I expect some volatility in the marketplace at the week's opening.

Moreover, ravaging depositors will increase political risks that may escalate into social unrest. This also amplifies the sundering or progression the demise of the EU project.

Of course when people become distrustful of the institutions that are supposed to underwrite the safety of their savings, gold and precious metals will function as the main beneficiaries. 

Welcoming the Gas Age

The future of the world’s energy will likely be dominated by natural gas, as Methane hydrate joins shale gas and deep sea gas.

Writes Matthew Ridley at the Rational Optimist Blog

Move over shale gas, here comes methane hydrate. (Perhaps.) On Tuesday the Japanese government’s drilling ship Chikyu started flaring off gas from a hole drilled into a solid deposit of methane and ice, 300 metres beneath the seabed under 1000 metres of water, 30 miles off the Japanese coast.

The real significance of this gas flare probably lies decades in the future, though the Japanese are talking about commercial production by 2018. The technology for getting fuel out of hydrated methane, also known as clathrate, is in its infancy. After many attempts to turn this “fire ice” into gas by heating it proved uneconomic, the technology used this week – depressurizing the stuff – was first tested five years ago in Northern Canada. It looks much more promising.

Methane hydrate is found all around the world beneath the seabed near continental margins as well as in the Arctic under land. Any combination of low temperature and high pressure causes methane and water to crystallise together in a sort of molecular lattice. Nobody knows exactly how much there is, but probably more than all the coal and oil put together, let alone other gas.

The proof that hydrate can be extracted should finally bury the stubborn myth that the world will run out of fossil fuels in any meaningful sense in the next few centuries, let alone decades. In 1866, William Stanley Jevons persuaded Gladstone that coal would soon run out. In 1922 a United States Presidential Commission said “Already the output of gas has begun to wane. Production of oil cannot long maintain its present rate.” In 1956, M. King Hubbert of Shell forecast that American gas production would peak in 1970. In 1977 Jimmy Carter said oil production would start to decline in “six or eight years”. Woops.

The key will be cost. However, Japan currently pays more than five times as much for natural gas as America so even high-cost gas will be welcome there. The American economy, drunk on cheap shale gas, will not rush to develop hydrate. (Unlike oil, there is no world price of gas because of the expense of liquefying it for transport by ship.)

Read the rest here.

Chart of the Day: First Non European Pope in Nearly 1,300 Years

Chart from Reuters

Short non-related personal opinions

From the way headlines on the domestic mainstream media looked, it would seem that the Philippine candidate, Cardinal Luis Tagle, was shoo-in for the Papacy. [Sorry I didn't dwell on the articles] But this has hardly been the case from the perspective of international media.

Domestic media’s elaborate drumming up of the local cardinal represents no more than the sustained indoctrination of “nationalism”, which comes at the exclusion of the minority religions practiced locally.

Nevertheless, like his predecessor, the new Pope, Argentine Cardinal Jorge Mario Bergoglio, now Pope Francis I, has been said to be another anti-free market or pro-big government activist. [The Pope should see what big government has been doing to his homeland.]

We shall soon see.

Quote of the Day: The Religion of Democracy

Modern social theory clings to two ultimate presuppositions. First, men are motivated by economic self-interest. Second, democratic institutions can be used to limit the success of such special-interest groups. The ultimate special-interest group, which is not a special-interest group at all, but the general interest, namely, the democratic masses, will be victorious in history. This is the god of the modern world, and this god is defended by a priesthood. The priesthood is mostly academic, and what is not academic is embedded in the media. The professor and the anchorman are the high priests of this well-organized religion.

The professors and the anchorman resent any suggestion that there is a hidden group behind them that shapes their thinking. They resent the fact that some people say that they have been bought off. I think it is a mistake to imagine that buying off someone with money constitutes the whole story. They have not merely been bought off. They have bought in. They have bought into the outlook that democracy will triumph over the economic interests of special-interest capitalism.

The people who say that the priests of academia and the media have been bought off have not followed the money far enough. These priests have indeed been bought off, but they have been bought off in a very special way. They have been screened in terms of their confession of faith. Their confession of faith must be in favor of the religion of democracy. Anyone who deviates from this faith has not yet been promoted into the highest visible seats of priestly service.

These carefully screened spokesmen for the Establishment deeply resent any suggestion that behind the religion of democracy has always been a calculating group whose senior members believe that you can fool all of the people most of the time, and that you can fool most of the professors all of the time. They resent the fact that anybody would suggest that the way they attained their positions is based on crass payoffs. I agree. The payoffs are not at all crass. They are subtle. One of C.S. Lewis's greatest essays is "The Inner Ring." It describes the nature of the payoffs.

This is Austrian economist Gary North discussing conspiracy theories vs. the religion of democracy.

Applied to the Philippines, this reminds me of mainstream media networks whose slogan consists of claims of “walang pinapanigan” or “walang kinakampihan”—no biases.

Regret Theory: Japanese Consumers on Electric Cars

Regret theory is the difference between the actual payoff and the payoff that would have been obtained if a different course of action had been chosen (Wikipedia.org) 

In short, regret over a decision made (opportunity loss)

A McKinsey Quarterly research reveals that many electric car buyers in Japan feel remorse or were disappointed over their decision to acquire electric cars:

If electric vehicles (EVs) are to develop from a niche into a mass market, carmakers should learn from early adopters who say they may not buy one again. Our recent research on such consumers in Japan finds that about one-third of them fall into this category. These buyers said they were “seduced” by low energy costs, attractive subsidies, and a good test drive. But they were less well informed about EVs than were environmentally conscious “green enthusiasts” (who love EV technology for its low energy costs and comfortable driving experience) and became less enthusiastic about their purchase when they faced issues such as higher electric bills and locating places to charge their cars.

Japan’s government heavily promotes electric cars through subsidizes and or through tax discounts.

Yet the study exhibits how the stereotyped politically induced projects hardly meets the taste of the consumers, which is the critical reason for their failures.

As the great Austrian economist Ludwig von Mises explained 

The real bosses, in the capitalist system of market economy, are the consumers. They, by their buying and by their abstention from buying, decide who should own the capital and run the plants. They determine what should be produced and in what quantity and quality. Their attitudes result either in profit or in loss for the enterpriser. They make poor men rich and rich men poor. They are no easy bosses. They are full of whims and fancies, changeable and unpredictable. They do not care a whit for past merit. As soon as something is offered to them that they like better or that is cheaper, they desert their old  purveyors. With them nothing counts more than their own satisfaction. They bother neither about the vested interests of capitalists nor about the fate of the workers who lose their jobs if as consumers they no longer buy what they used to buy.

Of course as I earlier posted, electric cars aren’t exactly "green" or environmental friendly as environmental zealots allege or want the public to believe.

Quote of the Day: The Taint Inherent in Absolute Power is Anti-Humanity

The corruption inherent in absolute power derives from the fact that such power is never free from the tendency to turn man into a thing, and press him back into the matrix of nature from which he has risen. For the impulse of power is to turn every variable into a constant, and give to commands the inexorableness and relentlessness of laws of nature. Hence absolute power corrupts even when exercised for humane purposes. The benevolent despot who sees himself as a shepherd of the people still demands from others the submissiveness of sheep. The taint inherent in absolute power is not its inhumanity but its anti-humanity.

This is from American Moral and social philosopher Eric Hoffer from Ch. 15: "The Unnaturalness Of Human Nature" of his book The Ordeal of Change (1963)

Video: Matt Ridley: Fossil Fuels are Greening the Planet

In a talk hosted by reasonTV.com, prolific author Matt Ridley talks about how fossil fuels, contra popular wisdom, have been contributing to the greening of the planet.

Dad Howard Buffet’s Wish for Son Warren Buffett Delivered

I earlier posted that the prominent libertarian Howard Buffett, father of one of the world’s richest man, Warren Buffett, wrote the great dean of Austrian economics Murray Rothbard to ask where he could buy the latter's book "The Panic of 1819".  That book was intended for his son, Warren.

 

Unfortunately for dad Howard, son Warren not only turned from a value investor into a political entrepreneur (crony) but embraced a political  philosophy that justified his actions, which runs diametrically in contrast with his dad.

Nonetheless, Austrian school professor and economist Mark Thornton fulfills dad Howard’s wish, 51 year after. 

Writes Daniel Sanchez at the Mises Blog 

Warren Buffett’s father Howard (an anti-New Deal and anti-interventionist Congressman) wrote to Murray Rothbard in 1962 about sending some of Murray’s books to his son. Judging from Warren’s recent comments, it seems the books were lost in the mail. So Mark Thornton has sent this care package to the billionaire investor.

  

Social Media in the Shadow of the War on Drugs

In the light of Mexico’s war on drugs, social media has reportedly replaced traditional media as the main source of information

From Juan Carlos Hidalgo of the Cato Institute,

Unfortunately, one of the biggest casualties from the bloodshed that besets Mexico is freedom of the press. Drug cartels have targeted traditional media outlets such as TV stations and newspapers for their coverage of the violence. Mexico is now the most dangerous country to be a journalist. However, a blackout of information about the extent of violence has been avoided because of activity on Facebook pages, blogs, Twitter accounts, and YouTube channels…

Andrés Monroy-Hernández from Microsoft Research presented the findings of his paper “The New War Correspondents: The Rise of Civic Media Curation in Urban Warfare” which shows how Twitter has replaced traditional media in several Mexican cities as the primary source of information about drug violence.

Hmmm. Things have been changing at the margins.

Fighting Bubbles: Hong Kong Banks Raises Interest Rates

This should be interesting and may serve as precursor to what will happen worldwide.

From Bloomberg, (bold mine)

HSBC Holdings Plc (HSBA) and Standard Chartered Plc (2888) raised Hong Kong mortgage rates for the first time since 2011, after the banking regulator tightened risk rules on concern a property bubble may undermine financial stability.

The lenders will raise home loan charges priced at the best lending rate by 25 basis points, starting today, they said in separate e-mailed statements yesterday. HSBC mortgages linked to the best rate will climb to a range of 2.85 percent to 3.15 percent, from 2.6 percent to 2.9 percent.

The Hong Kong Monetary Authority last month told banks to set the risk weighting for new residential loans at 15 percent or more, seeking to strengthen buffers after prices doubled to a record in the past four years. Prices may fall by as much as 20 percent over 24 months as mortgage rates increase and the government seeks to cool demand, Deutsche Bank said yesterday.

“Hong Kong banks won’t increase mortgage rates too much, as this would cause home prices to fall, which isn’t good for them,” Dominic Chan, an analyst at BNP Paribas SA in the city, said by telephone today. “With the larger banks increasing rates, the smaller ones will follow suit.”

If a mania has been in place, marginal interest rate increases will hardly prevent people from continuing the leveraged-based yield-chasing process. I have used the recent US housing bubble, as well as Thailand’s pre-Asian crisis as examples.

What happens instead is that as interest rate increases, projects erected behind low interest rates will begin to suffer losses. Bankruptcies then spreads from the periphery to the core or until it reaches a tipping point whereby accrued financial losses morphs into a crisis.

The idea of “modulating” interest rates to “manage” home prices ignores or overlooks the significance of  the market’s psychology, the essence of bubble activities and the basic laws of economics.

Bubbles represent misallocation of resources, which means they are unsustainable and eventually lead to capital losses which will be reflected on the economy.

And monetary tightening essentially exposes on the illusion of policy-induced booms.

As Dr. Frank Shostak writes,

Needless to say, bubble activities are not going to like this since the diversion of real wealth to them from wealth generators will slow down or cease all together.

A fall in economic activity in this case is in fact the demise of various bubble activities.

The demise of various bubble activities usually translates to a domestic crisis.

Electric Cars Aren’t Really Green

Contra popular wisdom, and opposite to the thrust by governments, e.g. US and Indonesia, to promote green energy via electric cars; electric cars aren’t really green. 

AEI’s Mark Perry summarizes the Bjorn Lomborg’s explanation published at the Wall Street Journal, (bold original)

1. A 2012 comprehensive life-cycle analysis in the Journal of Industrial Ecology shows that almost half the lifetime carbon-dioxide emissions from an electric car come from the energy used to produce the car, especially the battery. The mining of lithium, for instance, is a less than green activity. When an electric car rolls off the production line, it has already been responsible for 30,000 pounds of carbon-dioxide emission.

2. By contrast, the manufacture of a gas-powered car accounts for 17% of its lifetime carbon-dioxide emissions. The amount for making a conventional car:14,000 pounds.

3. The life-cycle analysis shows that for every mile driven, the average electric car indirectly emits about six ounces of carbon-dioxide. This is still a lot better than a similar-size conventional car, which emits about 12 ounces per mile. But remember, the production of the electric car has already resulted in sizeable emissions—the equivalent of 80,000 miles of travel in the vehicle.

4. If a typical electric car is driven 50,000 miles over its lifetime, the huge initial emissions from its manufacture means the car will actually have put more carbon-dioxide in the atmosphere than a similar-size gasoline-powered car driven the same number of miles. Similarly, if the energy used to recharge the electric car comes mostly from coal-fired power plants, it will be responsible for the emission of almost 15 ounces of carbon-dioxide for every one of the 50,000 miles it is driven—three ounces more than a similar gas-powered car.

5. Even if the electric car is driven for 90,000 miles and the owner stays away from coal-powered electricity, the car will cause just 24% less carbon-dioxide emission than its gas-powered cousin. This is a far cry from “zero emissions.” Over its entire lifetime, the electric car will be responsible for 8.7 tons of carbon dioxide less than the average conventional car.

6. Those 8.7 tons may sound like a considerable amount, but it’s not. The current best estimate of the global warming damage of an extra ton of carbon-dioxide is about $5. This means an optimistic assessment of the avoided carbon-dioxide associated with an electric car will allow the owner to spare the world about $44 in climate damage. On the European emissions market, credit for 8.7 tons of carbon-dioxide costs $48.

7. Yet the U.S. federal government essentially subsidizes electric-car buyers with up to $7,500. In addition, more than $5.5 billion in federal grants and loans go directly to battery and electric-car manufacturers. This is a very poor deal for taxpayers.

The world of politics is about smoke and mirrors.

Quote of the Day: The State is a Soulless Machine

It is my firm conviction that if the State suppressed capitalism by violence, it will be caught in the coils of violence itself, and fail to develop nonviolence at any time. The State represents violence in a concentrated and organized form. The individual has a soul, but as the State is a soulless machine, it can never be weaned from violence to which it owes its very existence

This quote is from Mahatma Gandhi, a political leader and inspiration to India’s independence via non-violent resistance movement, from his The Non Violent State Essay

South Korea: Mini Skirt Regulation Provokes Outrage

All sorts of civil restrictions seem to be cropping up from governments worldwide.

In South Korea, new regulations on mini skirt, which domestic officials label as “excessive” public exposure, have prompted for public outrage.

From Korea Times

A decree to fine those who engage in “excessive” public exposure passed at a Cabinet meeting presided over by President Park Geun-hye ignited controversy Monday.

The decree is expected to go into effect starting March 22.

People were outraged by the 50,000 won fine, as it brought back memories of similar restrictions on skirt lengths in the 1970s under the rule of the late President Park Chung-hee.

Many netizens criticized the decree as a signal of a return to the authoritarian era.

Social networks services, such as Twitter and Facebook, were buzzing with critical comments ― ranging from who decides the standards of decency to whether the decree will apply to swimming pools and gymnasiums.

Considering that South Korea ranks as one of the most wired or web connected nation in the world, it would be interesting to watch the forces of decentralization “netcitizens” square off with her centralized government.

The trend to regulate everything seem also an offshoot to bubble cycles, where the expanding sphere of political control represent growing signs of desperation by political forces over failed policies. Such also signifies the attempt to divert the public's attention from real problems.

Video: Real Estate "Frenzy" in California

Central bank policies have been fueling a mania on a vast category of asset prices worldwide.

The following video reveals signs of a growing real estate frenzy in California (source: Calculated Risk). 

Note of the term used by the video anchor "bidding war", "it's a frenzy, "psychedelic" and "people want to know how hot it is".

Abenomics Hurting Japanese Consumers

Japan’s PM Shinzo Abe’s aggressive interventionist economic policies, popularly known “Abenomics”, or in reality “riches to rags” policies appear to be hurting domestic household consumers far more than the much touted "competitiveness" benefits it has been meant to provide.

From Nikkei.com 

Households are beginning to feel pinched by the weaker Japanese currency, which has resulted in higher costs for gasoline and some consumer goods.

The average price of regular gasoline rose to an eight-month high of 150 yen per liter on Tuesday, up 1.2 yen from a week earlier, according to data released on Thursday by the Agency for Natural Resources and Energy. The price has climbed 4.5 yen, or 3%, since late November, when the yen's downswing started. The dollar-based price of crude oil has remained steady since November, but the yen's slide by about 10 yen to the dollar has resulted in higher import prices.

The price of kerosene rose to a nine-month peak. Growing demand due to a cold spell have pushed the price of the fuel up more sharply than other petroleum products.

Japanese have been traveling less too...

From Bloomberg,

Japanese visits to Korea have fallen five straight months to the lowest in two years in January, according to the Korea Tourism Organization. Korean Air Lines Co. passenger traffic between the two countries fell 9 percent last quarter from a year earlier, the biggest drop since the second quarter 2011, after Japan was struck by its most powerful recorded earthquake.

The 13 percent decline in the yen against the won since the start of December prompted Japanese tourists, who account for the biggest portion of foreigners traveling to Korea, to cut spending. To weather the downturn, Korean companies that relied on Japanese visitors are offering charter flights and prizes to lure Chinese who more than doubled their spending in January and February from a year earlier at Lotte Duty Free…

The number of Japanese tourists in Korea dropped 22 percent to 683,182 between November and January from the same period a year earlier, according to the Korea Tourism Organization. About 3.52 million Japanese visited Korea last year where the average visitor spent $1,273, generating approximately $4.5 billion in revenue, based on information from the Korea Tourism Organization and Korea Culture and Tourism Institute.

It won’t be long when Abenomics will be exposed for its quackery, and blow up into smithereens, perhaps via popular unrest and or a debt crisis.

How Collectible Markets Performed

Since the US Federal Reserve went into an expansionary mode in order to supposedly "reflate" the US economy following the dot.com bust, the collectible markets seems to have been one of the major beneficiaries of such policies
 

According to CNBC’s Robert Frank

According Knight Frank's Wealth Report, an index of the nine main collectibles markets grew by 175 percent over the past 10 years – a far better record than U.S. stocks. All nine categories tracked by Knight Frank increased in value except collectible furniture.

Over a ten year period, classic cars, coins, stamps and fine arts returned about 200% and above.

However, popular themes lagged. Again from the CNBC,

As Knight Frank says, however, "performance doesn't go hand in hand with popularity." Sometimes the most beloved collectibles are dogs as investments.

Art remains far and away the most widely collected collectible among the world's wealthy and affluent. The world's millionaires plan to increase their spending by 13 percent on art this year. 

The second most popular collectible is watches – led by Asian collectors. That was followed by fine wine, jewelry and then cars.

Bottom line: The impact of central bank policies on asset prices are different. Also, popular themes may not be the best choice.

Quote of the Day: To Forestall Armageddon, Central Banks cap the Price of Gold

It is important to the Federal Reserve’s low interest rate policy to suppress the bullion price. If the prices of gold and silver continue to rise relative to the US dollar, the Fed cannot keep the prices of bonds high and interest rates low. If the dollar is widely perceived to be declining in value in relation to gold, the price of dollar-denominated assets will also decline, including bonds. If the dollar loses value, the Fed loses control over interest rates, and the US financial bubble pops, with hell to pay.

To forestall armageddon, the Fed and its dependent banks cap the price of gold.

This is from Paul Craig Roberts, former Assistant Secretary of the US Treasury and former associate editor of the Wall Street Journal at the lewrockwell.com

Laffer Curve Russian Edition: 300K Entrepreneurs Quit over Taxes

Politicians hardly ever consider the economic effects of their actions. They almost see things as operating in a stasis.

Well here is another instance of the Laffer curve (elasticity of taxable income) in action, this time in Russia

From Rianovesti or en.ria.ru

Almost 300,000 self-employed Russians have quit business in Russia in the past three months due to social tax hikes, an Economics Ministry official said on Monday.

From January 1, 2013, the Russian government doubled the annual fixed-sum social security tax for individual entrepreneurs to 36,000 rubles ($1,200), in a move that directly affected babysitters, housemaids, tutors, handymen and other self-employed Russian workers earning 50,000-100,000 rubles a year.

“The new tariffs that came into force from January 1, 2013 and doubled the taxation base for fixed-rate payments reduced the number of individual entrepreneurs by 293,421 people between December 2012 and February 2013,” said Natalia Larionova, director of the ministry’s department for small-medium enterprise business and competition.

That represents 7 percent of the total number of individual entrepreneurs registered in Russia, she said.

Bottom line: When you tax something you get less of it. On the other hand when you subsidize something, you get more of it.

Indian Government Agencies Squabble over Inflation

I have been saying here that QE has not been a practice limited to developed economies, but has become a global central bank operating standard.

In India, in what seems as pot calling the kettle black, two government agencies wrangle over who is responsible for causing of “inflation”.

From Bloomberg, (bold mine)

The biggest critic of India’s $100 billion budget deficit is also one of the largest purchasers of the debt that finances it: the central bank.

The Reserve Bank of India faults government expenditure for stoking inflation even as its sovereign-bond holdings have risen to $91 billion from negligible amounts in 2008. While it has a mandate for price stability -- like counterparts in the U.S., Europe and Japan -- the RBI has another charge its peers lack: ensuring the government achieves its borrowing program.

The RBI’s ability to damp the cost of living may be further curtailed by record government borrowing and spending next fiscal year, stoking demand and prices in an economy facing supply constraints. The inflation threat adds pressure on India to join nations from the U.S. to Brazil in separating debt management from inflation control. A bill to do so has been sent for cabinet approval, two Finance Ministry officials said…

The bank holds about 27 percent of the sovereign bonds issued since 2008, when its holdings stood at $2.5 billion, according to calculations by Bloomberg News based on RBI data.

The late great dean of the Austrian school Murray Rothbard lucidly explains the disparity between budget deficits/deficit spending and inflation: (bold mine)

Deficits mean that the federal government is spending more than it is taking in in taxes. Those deficits can be financed in two ways. If they are financed by selling Treasury bonds to the public, then the deficits are not inflationary. No new money is created; people and institutions simply draw down their bank deposits to pay for the bonds, and the Treasury spends that money. Money has simply been transferred from the public to the Treasury, and then the money is spent on other members of the public.

On the other hand, the deficit may be financed by selling bonds to the banking system. If that occurs, the banks create new money by creating new bank deposits and using them to buy the bonds. The new money, in the form of bank deposits, is then spent by the Treasury, and thereby enters permanently into the spending stream of the economy, raising prices and causing inflation. By a complex process, the Federal Reserve enables the banks to create the new money by generating bank reserves of one-tenth that amount. Thus, if banks are to buy $100 billion of new bonds to finance the deficit, the Fed buys approximately $10 billion of old Treasury bonds. This purchase increases bank reserves by $10 billion, allowing the banks to pyramid the creation of new bank deposits or money by ten times that amount. In short, the government and the banking system it controls in effect "print" new money to pay for the federal deficit.

Thus, deficits are inflationary to the extent that they are financed by the banking system; they are not inflationary to the extent they are underwritten by the public.

The RBI can always opt NOT to finance the government deficits via QE or debt monetization. But such would undermine the reason for their existence.

At the end of the day, all such manipulations and political accommodations through central banking inflationism will have nasty consequences.

Quote of the Day: Real Austerity is Economic Freedom

But what is austerity? Real austerity means that the government and its employees have less money at their disposal. For the economists at the International Monetary Fund, “austerity” may mean spending cuts, but it also means increasing taxes on the beleaguered public in order to, at all costs, repay the government’s corrupt creditors. Keynesian economists reject all forms of austerity. They promote the “borrow and spend” approach that is supposedly scientific and is gentle on the people: paycheck insurance for the unemployed, bailouts for failing businesses, and stimulus packages for everyone else.

Austrian School economists reject both the Keynesian stimulus approach and the IMF-style high-tax, pro-bankster “Austerian” approach. Although “Austrians” are often lumped in with “Austerians,” Austrian School economists support real austerity. This involves cutting government budgets, salaries, employee benefits, retirement benefits, and taxes. It also involves selling government assets and even repudiating government debt

(bold mine)

This is from Professor Mark Thornton at the Mises.org.

The mainstream has been resorting to the strawman argument by distorting the definition of “austerity” and by repeatedly trying to link bankster “Austerian” approach, which has been a failure with, the Austrian school’s real austerity.  

Real austerity is about economic freedom

Video: Peter Schiff Versus John Mauldin on US Dollar and Deficits

The following video exhibits the extemporaneous debate between Peter Schiff and the populist analyst John Mauldin on the US dollar and deficits. 

The Zero Hedge make this observation, (bold original)

Based on the coming 'oil revolution', John Mauldin makes the point that the US can run $300-400 billion deficits and the Fed "can print trillions" and the dollar will surge (since the rest of the world demands it). Peter Schiff begins quietly adding that "we don't have that much oil" then goes on to discuss the 'ifs' in Mauldin's thesis, beginning the wildcard that "we can't suppress interest rates indefinitely" as we await this supposed oil export boom to begin - and that somehow the US is expected to generate a budget surplus when even the perpetually optimistic CBO in its most recent forecast gave up on expecting a surplus in the future of America. Ever. The ensuing 3 minutes or so is worth the price of admission as Dollar bull meets Dollar bear in a nose-dripping, face-ripping trip into the future.

Note that Mr. Mauldin sees the world in the light of statistics or mathematical equations or "macro", while Mr. Schiff shreds on the contradictory logic behind them

Start at 5:25