Parallel Universe: Record US Stock Markets and Falling Estimates of Corporate Earnings

With many benchmarks of US stock markets at record highs, conventional wisdom tells us that this must have been about beating earnings, perhaps also at record levels.

The Dow Jones Industrials (top pane) has clearly passed the 2007 threshold, while the S&P 500 (lower pane) has marginally breached through same levels. (chart from Bigcharts.com)

But conventional wisdom seems out-of-place or has been rendered irrelevant in today’s era of central banking wizardry.

The percentage of companies beating earnings (top pane) and revenues (bottom pane) expectations continues to be in a downtrend (chart from Bespoke Invest).

And such dynamics hasn’t been a short term anomaly, rather these has been THE trend since 2006 (green lines). The decline in the % of companies beating earnings and revenue estimates has been worsening since 2010 (red lines).

This deterioration in earnings and revenues can even be seen from a different perspective, or relative to the historical averages.

They show the same results.

The % of companies that missed estimates have jumped (left window top). Average earnings surprises has materially declined (top right window) as average revenue surprises turned negative (bottom window). All charts above from Zero Hedge

So it seems that a speculative frenzy has been in motion in US equity markets. The above also reveals of the parallel universe or of the flagrant disconnect between fundamentals and market prices.

This suggests that the orthodox wisdom where “corporate fundamentals” drive market prices seems to have been falsified by the actions of central bankers.

I mentioned above that the % of companies beating earnings and revenue estimates has been worsening since 2010, this seems to coincide with the re-acceleration of the Fed’s QE program from QE 2.0 in 2010 (chart from the Cleveland Federal Reserve).

And again this exhibits the substantial influence of central bankers or the US Federal Reserve in determining the direction of stock markets.

This also reminds me of the stock markets of two Latin American nations, Argentina (Merval-left) and Venezuela (IBVC-right), where both economies have been experiencing hyperinflation but in different degrees.

Skyrocketing stock markets for these countries are signs of monetary disorder or a blossoming of a currency crises rather than an economic boom or a credit bubble. (charts from Bloomberg). 

I am not suggesting that US markets have been suffering from the same bout of hyperinflation, rather I am saying that the record rise in US stock markets are most likely symptoms of monetary distress.

It pays to recognize the difference.

This Time is Different: Central Bankers as Superheroes

Gee. We really have reached the manic phase with more signs of fatal conceit from monetary authorities.

The mania in psychological context. This time is different. New Paradigm. New order. Boom emanates from my good policies. I am smart, infallible, and invincible. The salvation of social order is on my palms.

From Reuters

In other ages, we have called on shamans or saints in times of crisis when the usual remedies have not worked.

In the stagnant world economy today, we have designated central bankers as our superheroes, and we are relying on their magical monetary powers to restart global growth.

As the European Central Bank president, Mario Draghi, whom some have nicknamed Super Mario, said this month: "There was a time, not too long ago, when central banking was considered to be a rather boring and unexciting occupation."

Not anymore. No one embodies this new glamour more than Mark Carney, the 48-year-old governor of the Bank of Canada, who has been tapped to lead the Bank of England, making him the first foreign governor in the institution's 319-year history.

The bar for Carney could not be higher. A cartoon in the British papers made the point. It showed a Bethlehem inn with Joseph leading Mary on a donkey. The caption above the innkeeper's head declares: "Unless you're Mark Carney, you'll have to make do with the stable."

Wow. What deification for central bankers!

This is why we should expect central bankers to indulge in more inflationism or that for central bankers to push inflationism to the limits.

And media’s worship of central bankers means that the weight of policy making has shifted from the elected executive branch of government to the unelected monetary bureaucrats. In short, politicians have implicitly become subordinate to monetary authorities.

This also shows that central bankers are indirectly being pressured by well financed and political influential interest groups via such embellished reports.

Veneration of central bankers, the Bangko Sentral ng Pilipinas edition. From the BSP

The Bangko Sentral ng Pilipinas has been chosen as the 2013 Best Macroeconomic Regulator in the Asia Pacific Region by The Asian Banker, one of Asia’s leading financial services consultancies. The award was given during The Asian Banker Leadership Achievement Awards in Jakarta, Indonesia on 23 April 2013.

Ooh my. This resonates with the pre-crisis 9 awards the Bank of Cyprus received in 2011-2012. One of Cyprus major banks, the Bank of Cyprus then thought that they had reached some state of policy making nirvana, when they first eluded the Euro crisis, which was exposed in March 2013 as the emperor with no clothes,  as discussed last Sunday.

Adam Smith warns of the consequences from the conceit by “the man of the system” in his classic Theory of Moral Sentiments (bold mine)

The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder.

All these are really signs to worry about.

 

Central banking hubris will inevitably lead to the "highest degree of disorder". Yet this is not a question of “if”, but a when.  

And I would say pretty much soon.

Why Bank of England’s Small Business Loans Program May Fail

Talk about central banking wizardry. 

The Bank of England (BoE) will extend lending programs to small and business enterprises for another year even if such measure has initially failed.

From Bloomberg:

The Bank of England will extend by one year its plan to provide cheap loans to companies and consumers and make credit available for small companies, enhancing a nine-month-old program to aid the economy.

The Funding for Lending Scheme will now last until January 2015, and will make lending to small companies more attractive and open to non-bank lenders, the BOE and the Treasury said in London today. The government says its program has lowered borrowing costs by about 100 basis points and provided 13.8 billion pounds ($21 billion) between its creation and December

“This is a big boost for the small and medium sized businesses that are at the heart of the British economy,” Chancellor of the Exchequer George Osborne said in an e-mailed statement. “This innovative extension will now do even more for small and medium sized businesses so that they can play their full part in creating new jobs.”

Osborne is expanding the program on the eve of economic statistics that may show Britain’s economy was close to an unprecedented triple dip in the first quarter. The announcement also precedes an audit of the U.K. by the International Monetary Fund, whose delegation visits London next month after the fund said Osborne should ease his austerity plan to aid growth.

Today’s extension to the FLS will allow banks to borrow 10 pounds next year for every 1 pound they lend to small companies in 2013, the Treasury said. If they wait to extend the loan until next year, the amount they can borrow under the plan is halved to 5 pounds for every pound loaned. Banks can borrow 1 pound for every pound loaned with the rest of the program.

The premise here is that access to finance has been the key barrier besetting the Small and Medium scale businesses.

While it has been true that UK’s overleveraged economy has forced households and firms to pay down debts, that’s only part of the story.

The main obstacle to small and medium scale businesses has been the domestic economy and domestic demand, this is according to the latest survey by the Federation of Small Businesses (FSB).

John Walker, National Chairman of FSB says another factor influencing the weak economy and demand has been inflation

Though our members are feeling more optimistic, the outlook remains challenging with domestic demand weak. Consumer spending has been subdued by inflation, eroding disposable incomes, with inflation expected to remain above the target level in 2013. In this quarter, members report that three cost elements – fuel costs, input prices and utility bills – are increasing their overheads and while down from 12 months ago, the last three quarters of 2012 showed these cost pressures persisting.

So this should be a great example of how inflationism distorts the economic calculation that leads to a stagnating economy amidst elevated inflation or stagflation

The Bank of England has basically increased their balance sheet by almost three times since 2008. 

Over the same period, UK’s statistical consumer price inflation rate remains lofty despite the deleveraging by households and firms. 

Yet as pointed out by the article, UK’s economy is facing the risks of a triple dip recession. (charts from tradingeconomics.com)

In short, all money printing by the BoE has failed to deliver what has been promised—a recovery.

Instead what all the money printing has done has been to keep the bubble in the property sector afloat. 

While UK’s average housing prices have been down from 2007, they remain above the pre-bubble bust levels. This goes the same with housing pe ratios (chart from Nationwide.co.uk)

Another area which BoE’s QE has positively influenced has been the stock market.

UK’s FTSE 100 has been on the rise since 2011 (blue trend line), even as the economy fumbled from one recession to another. Another wonderful example of a parallel universe. The FTSE has been up 8.6% year to date as of yesterday’s close. (chart from Bloomberg)

In other words, all cheap credit and money has done has been to incentivize speculation (asset bubbles) at the expense of the productive sector of the economy. 

Why invest in businesses when the costs of operating one have been unpredictable and when financial markets, especially backed by an implicit Bank of England Put, would give a better yield?

Since the inception of the FLS, the BoE’s recourse to cheap credit has also failed to boost lending to the SMEs.

What this means is that the BoE’s FLS credit program hardly addresses the roots of the problems, which hasn’t been about credit. The BoE fails to see that her inflationist policies has functioned as one of the principal obstacles to economic recovery.

Yet like typical political authorities, who wants to be seen as “doing something”, the expedient action has been to do the same thing over and over again and expecting different results. Unfortunately, the outcome will likely go against their wishful expectations. 

Tourism Unlikely to Save Abenomics

This article attempts to cheerlead on the supposed benefits of the weak Japanese currency the yen.

From Bloomberg:

The Thai baht’s biggest quarterly gain against the yen since 1998 was enough reason for Kornkarun Cheewatrakoolpong, a 32-year-old economics lecturer in Bangkok, to change her honeymoon destination to Japan from Italy.

“It’s more affordable,” Kornkarun said in an interview from her home in the capital on April 17, after returning from a business trip to Japan. “I don’t feel it’s that expensive like in the past. I still expect that when I go for my honeymoon in November, the yen will remain weak.”

Kornkarun followed 36,000 Thai tourists who headed to Japan in the first two months of the year, 31 percent more than the same period of 2012 and the largest increase among five major Southeast Asian countries, according to data from the Japan National Tourist Organization. The baht, Asia’s best-performing currency in 2013, strengthened 14 percent versus the yen in the three months through March before rising a further 7.1 percent in April, making costs for accommodation, shopping and food cheaper for visitors from Thailand.

The rise in tourists caused a shortage of yen banknotes in Thailand, central bank Governor Prasarn Trairatvorakul told reporters in Bangkok on April 9, before the nation’s markets closed for the four-day New Year holiday, known as Songkran. The Bank of Japan’s monetary easing, coupled with increasing investment, helped drive the baht to its strongest against the yen in five years on April 22. Japan’s currency may weaken to 100 per dollar for the first time since 2009 by year-end, according to 54 analysts surveyed by Bloomberg.

For now the weak yen may boost tourism. This represents one of the short term effects of inflationist policies. Yet such a boom will be temporary.  When the inflation genie pops out of the proverbial lamp, which has been the expressed goal of 'Abenomics', and runs berserk, the risks of a crisis and social unrest will be magnified. 

Political and economic instability reduces the incentives of foreigners to travel. Thus, if price inflation turns for the worst or if a crisis emerges, tourism will take a hit.

Japan’s tourism (direct and indirect) constitutes only 6.7% of the GDP, according to World Travel and Tourism Council. 

This means that whatever benefits the tourism sector will reap are relatively puny, and will be more than offset or neutralized by economic losses in the broader economy due to the distortions of economic calculation, which reduces incentives for people to invest but nonetheless encourages speculation and capital flight. Also inflationism will constrict on the purchasing power of the consumers.

As the Austrian economist great Ludwig von Mises wrote,

The much-talked-about advantages which devaluation secures in foreign trade and tourism are entirely due to the fact that the adjustment of domestic prices and wage rates to the state of affairs created by devaluation requires some time. As long as this adjustment process is not yet completed, exporting is encouraged and importing is discouraged. However, this merely means that in this interval the citizens of the devaluating country are getting less for what they are selling abroad and paying more for what they are buying abroad; concomitantly they must restrict their consumption.

So enjoy the boom while it last.

As for the strong baht, that’s the result of Thailand’s credit bubble.

Video: Ron Paul on the Gold Crash and Bitcoins

Former US Congressman and presidential aspirant Ron Paul eloquently handles objections on gold posed by Bloomberg newscasters.

Some excerpt of the interview, courtesy of Zero Hedge (bold original)

Paul on whether he's concerned about the drop in gold:

"I am concerned about the erraticness of the dollar. The dollar is up, the dollar is down. We print a lot of dollars. The dollar gets devalued. That is really the concern. If people think the gold price up and down is a reflection of something wrong with gold, no, I say it is something wrong with the dollar. People have been expressing concerns over the past couple of months about gold, but compared to what?

Compared to where gold went from when the Fed took over where it was $20 per ounce compared to what has happened in the past?...

I remember in the 1970's when they finally allow people to own gold and it went from $35 to $200 rather rapidly, and then it lost 50%. Then it went up to $800.

To compare a couple of months or a couple of weeks and forget about a bull market in gold price in relationship to the dollar for 12 years. I would say the comparison is not an authentic comparison. What you have to look at is the inflation. Inflation is an increased supply of money.

Since 2008 they have quadrupled the supply of Federal Reserve credit and are buying $85 billion per month of treasury bills. At the same time last week they bought $60 billion. That is the inflation. That is the distortion of the market and that's why we're not getting economic growth."

On whether we're seeing the opposite of inflation right now:

"It depends on how you define it. Inflation is when you increase the supply of money. Bond prices go up. Stocks are going up. Housing prices are starting to go back up again. Education costs are going up, but the gross distortion is the effect that the inflation of the money does on the price of money and interest rates and how it causes economic problems and why you don't get economic growth.

You have to look at the malinvestment and destruction that occurs when you mess around with the price of money. It's not just the CPI because the CPI is not reliable. The government fudges that as well. They change the way they measure it. Free-market economists say it is going up about 8%. A lot of deception going on out there. I was just talking to someone on getting social security, they're not happy with the purchasing power of the dollar and you can't tell me there is no inflation."

On what the real value of gold is:

"No one knows it other than what is happening at that moment. The Supply and demand of gold is very important. That is why it is money, because gold is used elsewhere and it is commodity. The supply and money of paper is the culprit. That is the one that is causing all the trouble. People ignore the supply and demand of paper. Yes, paper goes up and goes down, but look at the long term purchasing power of the dollar. It has been devastating. At the rate they are printing the money, you will see a continual devastation of the value of the dollar.

You will not see economic growth until you liquidate the debt and liquidate the malinvestment out there. Sure, you will see housing go up again, but you will see more bubble formation because prices go up does not mean there is economic growth. We are a long way from the correction, mainly because they ignore the definition of inflation and ignore the need to liquidate debt and the need to liquidate and get rid of all the malinvestment.

One good comparison is look at the price of stocks and gold. Although in the past couple of weeks it has changed a bit. The price of the stock market has crashed, because you used to be able to buy the Dow with 44 ounces of gold. Now it is under 10 ounces of gold. It will probably go a lot lower."

"I think the way gold is acting it acts like a market does. You get ahead of itself, there has to be a correction. The amazing thing is not the correction, the amazing thing is the biggest bull market of the century when one commodity went up for 12 years straight. You cannot ignore that. To say, well there has to be an adjustment because prices are subjectively decided by many factors so you cannot predict exactly where the money will go. Unfortunately right now the money that the Fed creates goes into reserves, further distorting the markets and pumping up prices of bonds, further building a bubble that will burst because our economic growth is not there and we are in every bit as much trouble of Europe and Greece.

Someday there will be a lack of confidence in our dollar and you will see the correction in the paper a lot more severe than you see the correction in the dollar-gold ratio."

On Bitcoin:

"To tell you the truth, it's little bit too complicated. If I can't put it in my pocket, I have some reservations about that. But it has been designed in the free market. If it is a means of exchange, it would not ever be illegal. You shouldn't regulate it in the free market, but I do not think it fits the definition of money, which has been around for 6000 years.

People want to see something they can know what it is, they can define it, touch it and put in their pocket. If you do not have a computer and someone running the computer and calculations, you don't have it. I am not a big supporter of that, but I am not opposed to it. I admit, I do not fully understand what is going on with it."

On whether the Boston marathon tragedy is an opportunity to fix immigration:

"There is always an opportunity because there is a need for it, but I do not think they will solve any problems at all because they are too big and complicated and very much involved with economics. I don't think you can deal with immigration unless you deal with the welfare state. It is an incentive for people not to work. It is an incentive for others to come and get free services. Also, I think it is more important that we look at our work permit, letting people come in and work, and put aside the idea of how we will give automatic citizenship.

That becomes a political football because everyone is lining up. Who is going to get the vote? One side says that we are going to get all the votes -- we want them all to be legalized. I think you have to deal with the economic policy and really open up the opportunities for people to come back and forth and to work, but not to insist everyone will become a citizen because I do not think that will work under these circumstances."

On how Republicans will win the next election if there is no solidarity:

"I think the solidarity is the same problem in Republican and Democratic parties. It's ongoing. There's always factions. Of course, I want to unify everyone in the belief and the cause of liberty. Sound money, balanced budget, the constitution. So yes, there's a good way to unify them, but unity for the sake of unity makes no sense whatever. The old guard are losing their way. The party is getting smaller. It is splintered. They will have to face up to the fact that if they talk about limited government and personal liberties, they have to believe in it and do something about it because the young people will not be fooled. If this continues, the party will become smaller."

On whether Rand Paul will run for president in 2016:

"You'll have to ask him. I have no idea what he wants to do."

S&P on Abenomics: More than one third chance of downgrade

Here’s an example why one shouldn’t trust the judgement of credit ratings agencies.

From Reuters:

Rating agency Standard & Poor's said on Tuesday it saw more than a one-third chance that it would downgrade Japan's sovereign ratings because of uncertainty about whether the government's push to revive growth and end deflation will succeed.

Only more than a third chance of a downgrade???

Given Kuroda’s reckless grand experiment with inflationism, Japan’s debts should have already been downgraded. Yet the S&P can’t seem to go beyond figuring out on the magnified risks from the incorrigible economic logic contradictions from such policies; particularly the goal to ignite price inflation while hoping that the bond markets remain perpetually tranquil at zero bound rates.

Japan’s "Abenomics" epitomizes the proverbial “castles in the air”

The S&P seems to be tentatively alarmed (hence the more than 33% chance), but still maintains the wishful thinking that “Abenomics” may strike gold.

Or possibly, there might have been implied political pressure on the credit rating agency from the Japanese government, in the same way the US government has. The US government recently sued the S&P which many suspects as retaliatory move following the latter’s downgrade of the former’s debt.

Of course, the big three US credit rating agencies had not only missed predicting the occurrence of the US mortgage crisis of 2007-2008, they had been party to crisis; they were part of the blowing of the real estate bubble by giving mortgage securities blessings which many turned out to be junk. 

Ironically, the US government lawsuit against the S&P has been based on this. 

More Signs of Parallel Universe in Gold: American Eagle Coins Sold Out

More signs of the widening disconnect between bankers-government paper gold versus physical individual real gold. 

From Bloomberg: (bold mine)

The U.S. Mint ran out of its smallest American Eagle gold coin after demand surged following the biggest drop in futures in three decades.

Sales of the coins weighing a 10th of an ounce were suspended after demand more than doubled in 2013 from a year earlier, the Mint said yesterday in a statement. Total sales of American Eagles in April have almost tripled from a month earlier, according to its website.

Shoppers from India to China and Japan joined consumers in the U.S. and Australia in the rush to buy jewelry and coins after futures slumped 13 percent in two days through April 15. Indian buyers flocked to stores and banks for ornaments, coins and bars as purchases from the Perth Mint in Australia doubled and retail sales across China tripled.

Pressure on inventory means higher premium

A rush by Indian consumers for bracelets and coins is prompting jewelers to offer premiums on imports as traders and banks run out of stockpiles, a trade group said yesterday. Jewelers in big cities are paying as much as 800 rupees ($14.73) per 10 grams (0.02 pounds) while retailers in some remote areas are paying about 1,200 rupees per 10 grams as a premium, according to Haresh Soni, chairman of the All India Gems & Jewellery Trade Federation...

Volumes of gold products sold jumped 150 percent in Hong Kong and Macau during the April 13 weekend compared with the weekend before, according to Dennis Lau, director of sales operations at Chow Sang Sang Holdings International Ltd. (116), last week. Retail sales tripled across China on April 15-16, the China Gold Association reported.

And the Japanese capital flight to gold may have began as anticipated.

Japanese consumers are poised to become net buyers of gold for the first time in eight years as the yen’s decline and looming inflation drive them to seek refuge in bullion, according to Standard Bank Plc.

Funny how the depletion of inventories and higher premiums doesn’t seem to be reflected on paper gold.

Such chasm between physical and paper gold means one thing, gold prices have likely been manipulated.

French Property Sector Takes a Hit from Hollande’s Taxes

Talk about unintended consequences. The highly repressive tax regime of French President Francois Hollande has not only spurred wealthy residents to flee or scamper out of the country (e.g. actor Gerard Depardieu, and also former President Nicolas Sarkozy was recently exposed as planning to move to UK) which even prompted for the downfall of the ousted Budget Minister for avoiding taxes by moving personal money abroad, but such policies has also prompted for stagnation in the property sector

 

From Bloomberg

At least one in four Paris apartments listed by realtor Agence Etoile can’t be sold, even with mortgage rates at record lows, as buyers and sellers fail to agree on price, the company’s director said.

“I have some inventory that’s too expensive and sellers don’t want to lower prices,” Christine Perrissel said in an interview. “Buyers are just much more selective.”

Across France, an economy that’s stalled for two years, joblessness at a 15-year high, property prices near record highs and new taxes have made households reluctant to borrow to buy homes. While Europe’s debt crisis prompted banks to tighten credit, since the start of this year they’ve offered more attractive terms to lure customers and meet lending targets, after borrowing plunged in 2012.

The average home-loan rate fell 0.8 percentage point from a year ago to a record low 3.34 percent in the first two months of the year. Still, new mortgages granted in the 12 months through February slid 27 percent from a year earlier to 98.4 billion euros ($129 billion), according to the Bank of France.

New home sales plunged 18 percent in 2012 to 77,900. Existing home sales declined 12 percent to 709,000, with the drop worsening to 22 percent in the year to February. The average housing investment funded with loans represented 3.73 years of the buyer’s income in March, the lowest since January 2010, a study by lender Credit Logement SA and polling firm CSA shows

The data reveal that as rates fall, the market still hasn’t fully shaken off the gloom of 2012 when real estate purchases plunged as banks tightened mortgage lending and after former President Nicolas Sarkozy and his successor Francois Hollande, elected in May, added property taxes to trim the country’s deficit.

Hollande, the first Socialist president in France since 1995, has called on those “with the most to show patriotism” in tough times. He’s raised income taxes, those on capital gains from property, as well as wealth and inheritance levies. That prompted Gerard Depardieu, who played Obelix in films about one of France’s most beloved fictional characters, to move to Belgium.

“We’ve had a catastrophic start of the year in January and February with the tax squeeze,” said Marc Julien, founder and chief executive officer of Pierre Invest, a broker specializing in new properties for the Paris region, referring to the property taxes.

French tax policies signifies as another ticking time bomb to a full blown debt crisis brought about by the nation's unsustainable welfare state.

Quote of the Day: Capitalism Day (instead of Earth Day)

Of the estimated 1 billion people who will observe Earth Day worldwide this year, few will know about the progress that has been made. Fewer still will know how it was made. The media, uninterested in looking at the real story, will simply credit the environmental movement for the improvements.

We won't discount the movement's contribution. Four decades ago, it helped show the world the value of global stewardship. But that movement is no longer interested in a cleaner world.

Filled with extremists and anti-capitalist crusaders, its primary goals have changed. Topping the agenda of today's environmentalist groups is the pulling down of market economies, the raising up of central planning for egalitarian goals, forced lifestyle changes and the vilification — in hopes of the elimination — of signs of wealth.

None of these advance the planet's environmental health. But capitalism has. Through wealth generated by the free market, we have enough resources to move beyond the subsistence economies that damage the environment, enough disposable income to fund clean-up programs, enough wealth to scrub and polish industry.

Only in advanced economies can the technology needed to recycle hazardous waste or to replace dirty coal-fired power plants with cleaner gas or nuclear plants be developed. That technology cannot be produced in centrally planned economies where the profit motive is squelched and lives are marshalled by the state.

There's nothing wrong with setting aside a day to honor the Earth. In fairness, though, it should be complemented by Capitalism Day. It's important that the world be reminded of what has driven the environmental improvements since Earth Day began in 1970.

This is from 2009 Editorial of the Investor’s Business Daily (hat tip Professor Mark Perry)

War on Terror: The Imperialist Roots of the Russia-Chechen Conflict

Media likes to portray the “war on terror” such as the Boston bombing incident as either individual (psychological) aberrations or sectarian (religious) problems. They hardly consider the geopolitical or even internal political angles from which may have inspired on such heinous actions. 

Suspects of the unfortunate Boston incident have reportedly been of Chechen descent or from Chechnya

Understanding the Russia-Chechen conflict may give us a clue to the recent events.

From historian Eric Margolis at the lewrockwell.com in 2010

There is an old saying about the fierce Chechen tribes who inhabit southern Russia's Caucasus mountains: "Chechen cannot ever be defeated. They can only be killed."

Chechen are Russia's nemesis. Even the notoriously brutal Russian mafia fears the ferocious Chechen, and for good reason.

Last year, Prime Minister Vladimir Putin proudly proclaimed that resistance to Russian rule in the North Caucasus had been eliminated. The region was pacified.

Confounding Putin's claim, Chechen suicide bombers hit Moscow's subway last week, killing 39 and injuring over 70. Chechen suicide bombers in Dagestan killed twelve, mostly policemen. There were further attacks in neighboring Dagestan. The North Caucasus was again at a boil.

The attacks seriously rattled Russians and left the Kremlin deeply embarrassed and enraged.

Two "black widows" – wives or daughters of Chechen independence fighters killed or raped by the Russians (Russians call them "Islamic terrorists" and "bandits") – took their revenge last week, as so often in recent years.

The latest Chechen leader, Doku Umarov – all his predecessors were liquidated by Russia – claimed from his hideout in the Caucasus mountains that the subway attacks were reprisal for the recent killing of Chechen civilians by Russian security forces.

He warned Moscow, "we will make you feel what we feel."

In recent years, Chechen "black widows" have brought down two civilian airliners. Other Chechen hijacked an entire Moscow theater, and derailed the "Alexander Nevsky" Express that runs from Moscow to St. Petersburg.

Chechen are a tiny but fierce North Caucasian mountain people of Indo-European origin. They, and other Muslim Caucasian tribes, such as Dagestanis and Cherkass (Circasians), have battled Russian imperial rule for the past 300 years.

In 1877, Imperial Russia killed 40% of the Chechen population of about 220,000. Four hundred thousand Cherkass were expelled.

Stalin, from neighboring Georgia, hated Chechen. He divided Chechnya, creating the republic of Ingushetia. Then, in July 1937, his secret police, NKVD, shot 14,000 Chechen.

In 1944, Stalin ordered the entire Chechen people rounded up and shipped in cattle cars to his Siberian concentration camps or dumped to perish into icy fields. Other Muslims followed: Ingush, Tatars, Karachai, Balkars.

Neither bullets nor gas chambers were needed in Stalin's death camps. A third of the prisoners died each year from cold, starvation or disease in the concentration camps. In all, some 2.5 million Soviet Muslims were murdered by Stalin, "the Breaker of Nations," among them half of the Chechen people.

In my new book, American Raj, I entitle the section on the Chechen, "Genocide in the Caucasus."

Gulag survivors filtered back to Chechnya. When the Soviet Union collapsed in 1991, Chechen demanded independence like the Soviet republics.

Instead, Boris Yeltsin's government invaded Chechnya, killing some 100,000 Chechen civilians through massive carpet bombing and shelling. Chechen leader Dzhokar Dudayev was assassinated, reportedly thanks to telephone homing equipment supplied to Moscow by the US National Security Agency. President Bill Clinton actually lauded Boris Yeltsin as "Russia's Abraham Lincoln."

Incredibly, Chechen fighters managed to defeat Russia's army and won de facto independence.

Read the rest here

As one would note, imperialism typically engenders retributions via acts of “terror” or terrorism.

Paper ‘Wall Street’ Gold versus Physical ‘Real’ Gold

Casey Research economist Bud Conrad suggests that the recent flash crash in gold may have been engineered.

Can markets really be influenced by big players? Well, was the LIBOR rate accurately reported by huge banks? Have players ever tried to corner markets? The answer to all the above, unfortunately, is yes.

There's an even bigger problem with the legal structure of the futures market: even the segregated funds on deposit can be pilfered by the broker for the brokerage's other obligations. That is what happened to MF Global customers under Mr. Corzine. (I had an account with a predecessor company called Man Financial – the "MF" in the name. I also had an account with Refco, which is now defunct. Fortunately, the daggers did not hit my account, since I was not a holder when the catastrophes occurred.) My take: the futures market is dangerous, and not a place for beginners.

One last note: after the Bankruptcy Act of 2005, the regulations support the brokers, not the investors, when there are questions of legality about losses in individual investment accounts.

The recent actions in the gold markets reveals of the stark difference between paper gold and physical gold markets.

Paper gold markets have essentially been influenced by Wall Street, who in turn are influenced by policymakers such as the FED and central bank cartel, as well as, the governments via regulations and mandates.

In contrast, the physical gold represents real demand and supply which involves the consuming and investing public and real inventories around the world.

So when gold prices suffered a quasi price crash, instead of triggering a wave of selling spree, retail participants rose to the occasion and used such opportunity to accumulate with such ferocity. 

Of course it would be a mistake to view retail buying as non-investments or as non-investors as media commonly portrays. 

Said differently panic selling in Wall Street extrapolated to the inverse scenario—panic buying in the global physical market as shown by the chart from US Global Investors.

In short, the gold flash crash demonstrated the contrasting actions between politically backed financial institutions and of non political influenced individuals.

There has been more accounts of rapid depletion of gold inventories as a result of the flash crash. Premium on physical gold continues to rise, particularly in Asia as of this writing, as a result to supply constraints

Even prior to the flash crash, physical markets kept showing signs of vigorous demand, so the crash shouldn’t have happened, but it did.

This tell us that the parallel universe or patent disparity between gold’s paper markets and the physical markets implies of the anomalous nature with the current pricing dynamics of gold. 

Thus logic supports the idea that there has been an ongoing suppression-manipulation scheme against gold prices or an undeclared war on gold.

And it would also signify a mistake to assert otherwise.  

We don’t really need conspiracy theories, for the simple reason that manipulation of the marketplace has been legitimated and a principal tool used for implementing social policies.

Proof? From Ben Bernanke’s 2010 speech: (bold mine)

Notably, since December 2008, the FOMC has held its target for the federal funds rate in a range of 0 to 25 basis points. Moreover, since March 2009, the Committee has consistently stated its expectation that economic conditions are likely to warrant exceptionally low policy rates for an extended period. Partially in response to FOMC communications, futures markets quotes suggest that investors are not anticipating significant policy tightening by the Federal Reserve for quite some time. Market expectations for continued accommodative policy have in turn helped reduce interest rates on a range of short- and medium-term financial instruments to quite low levels, indeed not far above the zero lower bound on nominal interest rates in many cases.

The FOMC has also acted to improve market functioning and to push longer-term interest rates lower through its large-scale purchases of agency debt, agency mortgage-backed securities (MBS), and longer-term Treasury securities, of which the Federal Reserve currently holds more than $2 trillion.

Or from a recent speech

The expected path of short-term real interest rates is, of course, influenced by monetary policy, both the current stance of policy and market participants' expectations of how policy will evolve. The stance of monetary policy at any given time, in turn, is driven largely by the economic outlook, the risks surrounding that outlook, and at times other factors, such as whether the zero lower bound on nominal interest rates is binding

The above speeches showcases how the FED works to influence the interest rate markets and thereby financial and economic forces. They are direct manipulations on the bond markets and indirect manipulations on other financial instruments.

 

Market manipulation has also been acknowledged by authorities. The New York Fed bragged about how FED policies has boosted US stock markets.  Japan’s finance minister recently said that they have a target for their stock markets.

Governments have also been engaged in banning short sales in both the stock markets and the bond markets to influence prices. Have this not been manipulation?

Here is a recent one.

From the Financial Times

It’s called the law of unintended consequences. Last November, European regulators were fed up with hedge funds using the derivatives market to bet against sovereigns so they imposed a ban on outright speculation.

But fund managers, not being ones to roll over and play nice for regulators, have found other ways to express the same view – this time in a way that analysts warn could increase borrowing costs for the banking sector.

Six months on from the ban on buying naked sovereign CDS protection – where the investor does not own the underlying government bond – it is clear that negative bets against large financials have emerged as a partial replacement.

A CDS, or credit default swap, protects the buyer against the risk of a company or government going into default. The instrument is worth more if the risks of default is perceived to be higher.

Investors are buying protection on European banks on the basis that banks and sovereigns are so intimately linked that any increased risk of a sovereign default will increase the value of a bank CDS in a similar way to a sovereign CDS.

Using organized force or governments to prevent markets from clearing or from revealing their real conditions are manipulations. Government's actions,  thereby, signify as the ultimate perpetrators of insider trading and of picking winners and losers.

So if the stocks and bond markets have been subjected to interventions, or may I say manipulations, directly or indirectly, then why should the gold-commodity markets be any different?

As I recently wrote,

A famous politician once said, You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time.

The pushback from the gold bear raid as seen in the physical gold market implies that the governments and their apologists cannot fool all the people all the time.