A Coming Change in North Korea’s Politics?

Starving North Koreans appear to be forcing changes in the political sphere.

From Austrian economist Gary North at the Tea Party Economist:

The last bastion has fallen. The last hold-out is no longer holding out.  North Korea now allows collective farms to lease land to peasants. The peasants pay 30% of the crop to the collective.

This is sharecropping.  This is what the USA had in the South after 1865. This is a move to capitalism.

We can be sure of this: output will rise. This is what Deng did in 1978. He freed up agriculture. The boom began within a year.

Starvation is the mother of political invention.

The peasants will buy into this if they believe they will really get to keep 70%. It may take a couple of years to persuade them. They have reasons to be skeptical. They are suspicious. But if the collectives abide by the rules, Communism is finished.

The experiment has failed.

From Smartphones to the Internet of Things

The team at Lux Research foresees a transition from Smartphones to the Internet of things: (hat tip Lux’s founder/Forbes contributor Josh Wolfe) [bold original]

“Smartphones plateau and decline.” It could be the title of a scary summer shark flick for the electronics industry, but it’s a reality that a mounting body of evidence supports: handset sales, profits, app downloads, and even innovation itself are flatlining, hitting financials at Samsung and Apple (which both now spend more on patent litigation than R&D) while RIM, HTC, and Nokia struggle to survive at all. In the same process that desktops, notebooks, feature phones, PDAs, and every other information appliance in history has passed through, smartphones are poised to peak and then plummet between now and 2016, leaving electronics industry execs scrambling for the safety – the next big thing

So what are the next big things?

-Wearables includes Smart watches and glasses

-The Internet of Things (IOT) which comprises Low-cost computing, communications, and sensors

-Industrial IOT such as Smart buildings, water management and more

-The Lux team calls the “blue ocean strategy” the biggest promise of all. This is the networking things in motion. The things that move – from smart-textile garments and self-driving cars to robots and satellites

Read the rest here

The information age will continue to pave way for radical advances in creative destruction, disruptive- innovation technologies that will reconfigure people’s lifestyles, and thus the economic environment. For investors, these represent as profit opportunities to ponder at.

Humor: A Modest Bury-Dig Keynesian Employment Proposal

From Simon Black of the Sovereign Man:

Decades ago, John Maynard Keynes famously wrote in his book The General Theory:

“If the Treasury were to fill old bottles with bank-notes, bury them at suitable depths in disused coal-mines. . . and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again. . . there need be no more unemployment.”

To Keynes, all that mattered was that people were employed doing something, anything. The quality of employment didn’t matter.

Clearly this line of reasoning worked out well for the Soviets; as was said of their economic system producing mounds of left boots with no right boots, “We pretended to work, and they pretended to pay us.”

Today, famous Nobel Prize-winning economists like Paul Krugman echo Keynes’ sentiment.

Krugman has even suggested that spending trillions of dollars to defend against a phony alien invasion would save the economy.

This, coming from a man who has won society’s most ‘esteemed’ prize for intellectual achievement.

Given several years of a ‘print money with wanton abandon’ monetary policy, it seems like Ben Bernanke goes to bed at night with Keynes’ General Theory on his bedside table.

But following these principles, Mr. Bernanke has backed himself into a corner. He has printed so much money that the mere suggestion of scaling back his bond-buying program sends financial markets roiling.

He’s now forced to speak from both sides of his mouth– on one hand suggesting that he will “taper”, and on the other hand that the Fed is “by no means on a preset course.”

In other words, they have no plan or exit strategy. They’re just making it up as they go along.

Bernanke further claims that his money printing and bond buying will remain in effect until the unemployment rate falls dramatically.

This is a perplexing qualifier since unemployment remains quite high despite trillions of dollars created over the last few years.

Considering that the ‘quality’ of jobs doesn’t matter in this Keynesian worldview, though, I’ve come up with a simple idea.

The Fed is now printing $85 billion / month… roughly $1 trillion annually. So if they really want to move the needle, I propose that Mr. Bernanke cuts out the middleman (i.e. the ‘economy’) and hires workers himself.

To do what, you might ask?

Count. Specifically, count the amount of money he’s creating.

It’s simple. You assign everyone a range of numbers and have them count as he prints.

On average (I’ve tested this), it takes about 5-6 seconds per number.

Sure, one two three four is quick. But how long does it take to say 16,847,512,971…? (You’re saying it right now, aren’t you?)

I’ve calculated that it would take a special workforce of roughly 1 million people, including supervisors and support staff, in order to count the amount of money that Mr. Bernanke is creating.

This assumes that these folks count eight hours per day, with two weeks of paid vacation and ten federal holidays. This is, after all, a cushy financial sector job.

At $50,000 per worker, Bernanke would be adding substantially to the economy… not to mention really moving the needle on the unemployment rate.

“Oh but this is ludicrous…” Of course it is. And so is conjuring trillions of dollars out of thin air to monetize the debt.

And it’s a hell of a lot easier than putting together an alien invasion hoax. Besides, I’m sure the government could never bring itself to stage a false flag operation. Not in the Land of the Free… right?

US Part Time Jobs: Obamacare and Regime Uncertainty

Dr. Ben Bernanke and his team at the US Federal Reserve appears to be in a quandary over the surge of part time jobs.

From the Bloomberg:

The number of workers holding full-time positions fell in the U.S. in June as part-timers hit a record after rising for three straight months, according to the Bureau of Labor Statistics household data. Part-time employment has been outpacing full-time job growth since 2008. Economists cite still-tough economic conditions as the root cause, with some saying President Barack Obama’s 2010 health-care law exacerbates the trend.

U.S. Federal Reserve Chairman Ben Bernanke told a House committee July 17 that policy makers consider underemployment, which includes part-time workers who want full-time jobs, one of the gauges of labor-market strength…

The number of part-time employees in June rose by 360,000, the Bureau of Labor Statistics reported, based on its survey of households. Full-time workers fell by 240,000, erasing much of the gains from April and May. The share of Americans who work part-time for economic reasons, meaning they can’t find full-time jobs or because their hours have been cut, is 78 percent higher than in December 2007, when the 18-month recession began.

So what the mainstream sees as “strong” economic growth has been founded by part time jobs.

The charts above from Zero Hedge shows of how part time jobs came at the expense of full time jobs last June.

Importantly, much of the new jobs comes from the low wage segments of the service industry, particularly leisure and hospitality, retail trade and education,  health and other temp jobs, as observed by  the Zero Hedge.

Talk about economic "vigor".

Asked whether Obamacare has contributed to the part time jobs, from the same Bloomberg article (bold mine)

“It’s hard to make any judgment,” Bernanke said when Stutzman asked if the Patient Protection and Affordable Care Act’s mandates are slowing the economy. Bernanke said that it has been cited in the economic outlook survey known as the Beige Book, which the Federal Open Market Committee considers in assessing the economy.

“One thing that we hear in the commentary that we get at the FOMC is that some employers are hiring part-time in order to avoid the mandate,” Bernanke said. He added that “the very high level of part-time employment has been around since the beginning of the recovery, and we don’t fully understand it.”

For the official whose opinions and decisions moves the global financial markets and likewise plays a significant role in influencing activities on the main street and on the global economy, “we don’t fully understand it” looks really very reassuring. This means that “we don’t fully understand it” has been the basis of all grand experimental policies being conducted by the FED.

[As a side note: Dr. Bernanke applies the same concept on gold prices, stating that “Nobody really understands gold prices and I don’t pretend to understand them either” but curiously has the audacity to make conclusions on gold prices based on his “non-understanding”]

I believe that the crucial changes in the character of US employment has been related to the record cash pileup by US non-financial corporations

As the Wall Street Journal noted in June, (chart from creditwritedowns.com)

The Federal Reserve reported Thursday that nonfinancial companies had socked away $1.84 trillion in cash and other liquid assets as of the end of March, up 26% from a year earlier and the largest-ever increase in records going back to 1952. Cash made up about 7% of all company assets, including factories and financial investments, the highest level since 1963.

Both variables, the reluctance to invest (as expressed by huge cash holdings) and the change in the character of the US labor force, have been products of regime uncertainty. 

Regime uncertainty as defined by Austrian economics professor Robert Higgs represents the “pervasive lack of confidence among investors in their ability to foresee the extent to which future government actions will alter their private-property rights”

On whether Obamacare has been responsible for such trend changes, Dr. Bernanke’s adroitly fudges the issue by referring to “the beginning of the recovery”.

The reality is that the Patient Protection and Affordable Care Act (PPACA) or the Affordable Care Act(ACA), popularly known as Obamacare was signed into law in March of 2010, basically “the beginning of the recovery”. 

Some provisions of the said law has been slated for January 2014 and the rest in 2020 according to Wikipedia.org  [Update: The US house of representatives has just voted to delay the implementation of the Individual mandate]

As I pointed out in the past, Obamacare comes with 21 new or higher taxes.

And small businesses are the main sector that appear to be hardly affected.

Small businesses have been the heart of the US economy. According to the National Small Business Association, 

-Small business represents 99.7 percent of all employer firms.

-In 2010, there were an estimated 27.9 million small businesses in the U.S.—5.9 million with employees and 21.4 million without employees.

-Small businesses employ about half of the country’s private sector workforce.

- Small firms accounted for 64 percent or 9.8 million of the 15 million net new jobs created between 1993 and 2011.

Yet from a recent survey conducted by the US Chamber of Commerce, “unease around Obamacare appears to be increasing among small businesses” according to the Huffington Post.

In a survey conducted by National Federation of Independent Business (NFIB) last June, small business optimism continues to be plagued by taxes and government regulations and red tape

As the NFIB chief economist William Dunkelburg wrote (bold highlights mine)

The economy remains “bifurcated”, with the big firms producing most of the GDP growth with little help from small business. That balance is shifting, but unfortunately because larger firms are losing ground, not because small business is growing faster. Housing and energy are helping, and that does involve a lot of small businesses but the rout in housing was so severe that there are now supply constraints developing in new home construction due to lost capacity that cannot be easily reconstituted. Home prices are now increasing at double digit rates. Consumer net worth is allegedly doing well due to stock prices and house prices rising. But the quantity of items held, real wealth (houses, cars, fractions of a company owned), is not increasing that fast, just the prices. Been there, done that.

While US government sponsored surveys or the US Federal Reserve of Philadelphia and Minneapolis says that only a small portion has been affected by Obamacare, circumstantial developments (part time jobs and high cash by non-financial corporations due to reluctance to invest) says otherwise.

Nonetheless, “Big firms producing most of the GDP growth with little help from small business” has been a common feature in today’s QE-ZIRP based global financial economy where monetary policies have been engineered to buoy asset markets (stocks, real estate) via credit fueled destabilizing speculations (bubbles).

The reality is that the Dr. Bernanke's policies has substantially been responsible for these. FED easing policies combined with Obamacare and the increased regulatory mandates (the Federal Register is now over 81,000 pages long. Obamacare has 906 pages, Dodd Frank has 849 pages) and aside from a surge in taxes (US tax code now 72,000 pages) all contributes to the uncertainty over the investor’s property rights, hence the lack of commitment to invest and the corresponding changes in the hiring and employment dynamic.

Detroit: US Largest City to File for Bankruptcy

As US stock markets soar to record highs, Michigan’s most populous city of Detroit once the cradle of the US automobile industry files for bankruptcy

From the BBC:

The US city of Detroit in Michigan has become the largest American city ever to file for bankruptcy, with debts of at least $15bn (£10bn).

State-appointed emergency manager Kevyn Orr asked a federal judge to place the city into bankruptcy protection.

If it is approved, he would be allowed to liquidate city assets to satisfy creditors and pensions.

Detroit stopped unsecured-debt payments last month to keep the city running as Mr Orr negotiated with creditors.

He proposed a deal last month in which creditors would accept 10 cents for every dollar they were owed.

But two pension funds representing retired city workers resisted the plan. Thursday's bankruptcy filing comes days ahead of a hearing that would have tried to stop the city from making such a move.

A Wall Street Journal report estimates “Municipal-worker retirees are set to get less than 10% of what they are owed under the plan.” Ouch.

Detroit's riches to rags synopsis from the same BBC article:

The city, once renowned as a manufacturing powerhouse, has struggled with its finances for some time, driven by a number of factors, including a steep population loss.

The murder rate is at a 40-year high and only one third of the its ambulances were in service in early 2013.

Declining investment in street lights and emergency services have made it difficult to police the city.

And Detroit's government has been hit by a string of corruption scandals over the years.

Between 2000-10, the number of residents declined by 250,000 as residents moved away.

Detroit is only the latest US city to file for bankruptcy in recent years.

In 2012, three California cities - Stockton, Mammoth Lakes and San Bernardino - took the step.

In 2011, Harrisburg, Pennsylvania tried to file for bankruptcy but the move was ruled illegal.

But Thursday's move in Detroit is significantly larger than any of the earlier filings.

Detroit ranks 9th in terms of highest taxes based on US cities according to the Marketwatch.com. On the obverse side of high taxes has been unsustainable government spending from bureaucracy to welfare.

From Reuters:

Detroit's state and local tax burden as a percentage of annual family income surpassed the average for other large U.S. cities. For example, the tax burden at the $25,000 income level was 13.1 percent in Detroit versus an average of 12.3 percent.

Buss said that Detroit has seen a significant expansion in deficit spending over the last two years, reaching an accumulated $326.6 million at the end of fiscal 2012 from an accumulated deficit of $196.6 million in fiscal 2011. The city has had a budget deficit every year since 2003…

Total revenue in Detroit has fallen sharply over the last 10 years by over $400 million or 22 percent, according to the analysis. State revenue sharing has also been cut, although the city, which accounts for 7 percent of the state's residents, gets by far the biggest amount on a per capita basis -- $335 per resident -- far more than other Michigan cities with populations over 50,000.

Half of Detroit's top 10 employers are governmental entities, led by the city itself with nearly 11,400 workers, down from 20,800 in 2003, followed by the Detroit Public Schools at 10,951, the report said. Two health care systems and the federal government round out the top five. Chrysler, the only automaker in the group, ranks eighth, employing 4,150 workers, a drop of more than a half from 2003.

Also part of the decline of Detroit has attributed to “raced based” policies which sparked a “White Flight” according to economist Walter Williams.

Local politics shaped by labor activism or labor unions likewise compounded on the loss of competitiveness.

So Detroit seems as the US version of Greece: declining economy predicated on the lack of competitiveness shaped by repressive social policies and by excess political baggage via the welfare and bureaucratic state.

Detroit signifies a harbinger for a world addicted to debt based 'political' consumption spending.

Nonetheless The USA Today lays out “What happens next” or the possible legal steps on the Detroit Bankruptcy 

And furthermore, while Detroit represents the largest city or the largest municipal bankruptcy in history, there are yet other local troubled spots (graphic from New York Times).

Yet if the current inflationary boom in the US morphs into a bust, then we will see even more candidates similar to Detroit. 

Worse, even the US government is at the risk of becoming a Detroit, especially if interest rates (as expressed by the bond markets or of the return of the bond vigilantes) continue with its upside trek.

Mayhem in the US Treasury Markets, No Problem, China to the Rescue!

When you're down and troubled and you need a helping hand and nothing, whoa, nothing is going right.

Close your eyes and think of me and soon I will be there to brighten up even your darkest nights. —James Taylor, You’ve got a friend

China’s government has played the role of “savior” to what could have been a US treasury market crash last May. 

As the US Treasury markets seized up, the Chinese government added $25.2 billion to its US treasury holdings which represents the highest hoard ever.

From China Daily USA:

China, the biggest creditor to the United States, increased its holdings of US Treasury bonds by 2 percent in May to $1.32 trillion, even as foreign demand for the bonds fell for a second consecutive month, according to the US Treasury.

China had increased its holdings of US bonds by 1.6 percent in April, which was revised higher after an initially 0.4 percent drop. Japan, the second-largest buyer, trimmed its holdings 0.2 percent to $1.11 trillion in May…

US residents increased their holdings of long-term foreign securities, with net purchases of $27.2 billion, while foreign investors decreased their holdings by $39.2 billion, said the Treasury report.

The sum total in May of all net foreign acquisitions of long-term securities, short-term US securities, and banking flows was a monthly net of $56.4 billion, said the Treasury Department. Net foreign private inflows were $46.6 billion, and net foreign official inflows were $10 billion.

TIC data shows that total foreign ownership of USTs reached a fresh record of $4097.9 billion in May, surpassing the February highs of $4097.4. 

China’s additional acquisition of $25.2 billion of USTs has been the swing factor. This implies that China’s actions played a crucial role in providing counterbalance to the resurfacing of the bond vigilantes. [The Philippines joined the "you've got a friend" movement adding $.2 billion last May]

This also demonstrates of the deepening dependency by the US government on her Chinese counterpart.

Austrian economist Gary North explains;

The U.S. government is running about a $650 billion deficit this fiscal year. The People’s Bank of China is doing its part to help out. It just bought another $25 billion of this deficit last month.

Why is it doing this? To hold up the value of the dollar.

Why is it holding up the value of the dollar? To make it less expensive for Americans to buy goods made in China.

But then protectionists in Congress scream bloody murder, because China is subsidizing exports to Americans. Then they vote for federal spending that runs a huge deficit. So, in order to hold down government interest rates, the Treasury Department must find buyers of this debt, other than the Federal Reserve System. The Chinese central bank is a large buyer.

So, every time Senator Chuck Schumer of New York insists that China must be stopped from rigging its currency, he is really saying that the Chinese central bank should stop buying IOUs issued by Congress. Then he votes for another spending program.

The Chinese central bank creates money out of nothing, just as the Federal Reserve does. Then it takes this newly counterfeited money and buys U.S. government debt, just as the Federal Reserve does. It bought $25 billion of this debt last month. The Federal Reserve bought $45 billion. So, when it comes to currency-rigging, which central bank is the greater culprit?

This is the race to the bottom. Which central bank will destroy its currency first? Or, if the central banks decide not to inflate any more, which central bank will cease counterfeiting money, thereby causing an economic depression?

The two economies, China’s and America’s, are addicted to the drug of fiat money. The first central bank to quit counterfeiting — the first one to “taper” — starts the international recession. Which will it be?  The first one to stop inflating permanently will turn the recession into a depression. Which will it be?

In May of 2012, the Chinese government has been given direct access to the US Treasury which basically bypasses the crony Wall Street. That reveals of the significance of the US-China relationship.

Such dependancy extrapolates to a Dr. Jekyll and Mr. Hyde relationship where on the financial front, the US and the Chinese government have been operating stealthily as staunchest allies, as against the geopolitical front, which media paints both parties as nemesis or adversaries.

The implication as I wrote a year ago:

Of course the inference from the above statement is that the Scarborough Shoal controversy has been mostly a false flag. What you see isn't really what has been. Politicians and media has taken the public for a ride at the circus.

I would add that not only has the media portrayed conflict between US-China been to promote the military industrial industrial complex, it serves as convenient pretext for the political class of these respective nations involved in territorial disputes, to expand control on their constituents via more financial repression, more taxes, more regulations and other forms of political control...all in the name of nationalism. 

At the end of the day, the world operates in a gamed system.

Behavioral Bubbles and the Business Cycle

Writing at the Project Syndicate, Yale professor of economics and author of Irrational Exuberance Robert Shiller sees bubbles in Columbia and many parts of the world.  (hat tip Zero Hedge) [all bold mine]

From the world of rational expectations and efficient market hypothesis, Mr. Shiller points out that bubbles do not exist

This raises the question: just what is a speculative bubble? The Oxford English Dictionary defines a bubble as “anything fragile, unsubstantial, empty, or worthless; a deceptive show. From 17th c. onwards often applied to delusive commercial or financial schemes.” The problem is that words like “show” and “scheme” suggest a deliberate creation, rather than a widespread social phenomenon that is not directed by any impresario.

Maybe the word bubble is used too carelessly.

Eugene Fama certainly thinks so. Fama, the most important proponent of the “efficient markets hypothesis,” denies that bubbles exist. As he put it in a 2010 interview with John Cassidy for The New Yorker, “I don’t even know what a bubble means. These words have become popular. I don’t think they have any meaning.”

Contra EMH, Mr. Shiller says that bubbles are not rational

In the second edition of my book Irrational Exuberance, I tried to give a better definition of a bubble. A “speculative bubble,” I wrote then, is “a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increase.” This attracts “a larger and larger class of investors, who, despite doubts about the real value of the investment, are drawn to it partly through envy of others’ successes and partly through a gambler’s excitement.”

That seems to be the core of the meaning of the word as it is most consistently used. Implicit in this definition is a suggestion about why it is so difficult for “smart money” to profit by betting against bubbles: the psychological contagion promotes a mindset that justifies the price increases, so that participation in the bubble might be called almost rational. But it is not rational.

The story in every country is different, reflecting its own news, which does not always jibe with news in other countries. For example, the current story in Colombia appears to be that the country’s government, now under the well-regarded management of President Juan Manuel Santos, has brought down inflation and interest rates to developed-country levels, while all but eliminating the threat posed by the FARC rebels, thereby injecting new vitality into the Colombian economy. That is a good enough story to drive a housing bubble.

Because bubbles are essentially social-psychological phenomena, they are, by their very nature, difficult to control. Regulatory action since the financial crisis might diminish bubbles in the future. But public fear of bubbles may also enhance psychological contagion, fueling even more self-fulfilling prophecies.

And bubbles eventually pop…

One problem with the word bubble is that it creates a mental picture of an expanding soap bubble, which is destined to pop suddenly and irrevocably. But speculative bubbles are not so easily ended; indeed, they may deflate somewhat, as the story changes, and then reflate.

It would seem more accurate to refer to these episodes as speculative epidemics. We know from influenza that a new epidemic can suddenly appear just as an older one is fading, if a new form of the virus appears, or if some environmental factor increases the contagion rate. Similarly, a new speculative bubble can appear anywhere if a new story about the economy appears, and if it has enough narrative strength to spark a new contagion of investor thinking.

This is what happened in the bull market of the 1920’s in the US, with the peak in 1929. We have distorted that history by thinking of bubbles as a period of dramatic price growth, followed by a sudden turning point and a major and definitive crash. In fact, a major boom in real stock prices in the US after “Black Tuesday” brought them halfway back to 1929 levels by 1930. This was followed by a second crash, another boom from 1932 to 1937, and a third crash.

Speculative bubbles do not end like a short story, novel, or play. There is no final denouement that brings all the strands of a narrative into an impressive final conclusion. In the real world, we never know when the story is over.

In the real world, speculative bubbles operate on cycles. A boom is followed by a crash. Why there seems to be “no final denouement” on these episodes has been that policy responses to bubble crashes has been to “reflate” unsustainable bubbles, ergo the repetition, the cycles. Social policies have essentially been designed to prevent the market clearing process.

The other reality is that the “social-psychological” phenomenon of every bubble is a symptom rather than a cause, since peoples actions does not emerge from a vacuum. The behavioral aspect represents a narrative of people’s reactions to a largely “unseen” stimulus which prompts the “herding or lemming effect” and thus resulting to “irrational exuberance” or speculative bubbles.  

Yield chasing actions, thus are “rational” from an individual’s ex-ante point of view and “irrational” from an “ex-post” (hindsight is 20/20) perspective or from a third party interpretation of an evolving bubble, similar to me or to Professor Shiller.

In other words, "rationality" represents the time inconsistent dilemma on the individuals and on the markets. And that the yield chasing dynamic attendant to these events signify as the immediacy effect or temporary discounting.  

Another reality is that grand bubbles will hardly exist WITHOUT resources fueling them.

Thus the limitations of people’s highly exuberant behavior and actions or “speculative bubbles” will ultimately depend on the limits of resources that enables and facilitates such activiites. 

As Austrian economist Roger W. Garrison explained, first "you can’t just spend expectations" and importantly, (bold mine)

individuals who are in possession of increased money balances and who have correct, or rational, expectations still may not spend in a pattern consistent with the New Classicist view. A spending pattern that is internally inconsistent on an economywide basis does not necessarily imply inconsistency for the individual. That is, macroeconomic irrationality does not imply individual irrationality. An individual can rationally choose to initiate or perpetuate a chain letter—sending one dollar to the person on the top of the list, adding his name to the bottom, and mailing the letter to a dozen other individuals—even though he knows that the pyramiding is ultimately unsustainable. Similarly, it is possible for the individual to profit by his participation in a market process that is—and is known by that individual to be—an ill-fated process. So long as it is possible to buy in and sell out before the process reverses itself, rational expectations may exacerbate rather than ameliorate the misallocation of resources induced by monetary expansion.

To repeat, people’s actions doesn’t operate on a vacuum. 

Social policies are hardly neutral, they shape people's incentives and action. Monetary policies via credit expansion serve as the fuel for every bubble.

Video: How Government Regulations Affect the Transportation (Bus) Services

The following video from ReasonTV.com demonstrates of the adverse impact of government regulations on the commuting public and the transport industry (hat tip Cafe Hayek)

This should not be seen as isolated to the US as regulatory interventions apply everywhere and to any industries.

Quote of the Day: Human freedom means freedom for everyone

When freedom is subjectively defined by each individual, it is reduced to a meaningless abstract.  The only way freedom can be rationally viewed is in its pure, no‑compromise form:  human freedom — the freedom of each individual to do as he pleases, so long as he does not commit aggression against others.

Politicians love to talk about freedom, even while telling us how they intend to further enslave us.  They do this by manufacturing “rights” out of thin air.  The problem is that all artificially created rights are anti-freedom, because in order to fulfill one person’s rights (read, desires), another person’s rights must be violated.  That is precisely what is meant by the infamous statement, “Someone is going to have to give up a piece of their pie so someone else can have more.”

The reality is that those who harbor such twisted thinking are actually opposed to freedom.  Often, they are individuals who are unable to achieve success in a free society, thus they yearn for an external force (government) to “level the playing field” and equalize results.  These are the people whose votes the liberal fascists in Washington have cleverly locked up.

True freedom means freedom for the “poor,” freedom for the “rich,” freedom for the “weak,” and freedom for the “strong.”  Human freedom means freedom for everyone.

This is from entrepreneur, motivational speaker and self help author Robert Ringer at his Voice of Sanity website

More Signs of the End of Easy Money: Following Brazil, the Indian Government Raises Interest Rates

The return of the bond vigilantes has prompted the Brazilian government to  set the trend of hiking interest rates, now it seems as India’s turn.

From Businessweek-Bloomberg:

India stepped up efforts to help the rupee after its plunge to a record low, raising two interest rates in a move that escalates a tightening in liquidity across most of the biggest emerging markets.

The central bank announced the decision late yesterday after Governor Duvvuri Subbarao earlier in the day canceled a speech to meet the finance minister. The RBI raised two money-market rates by 2 percentage points and plans to drain 120 billion rupees ($2 billion) through bond purchases.

Indian rupee forwards jumped the most in 10 months, and the RBI’s move yesterday left Russia as the only BRIC economy to not have reined in funds in its financial system. Brazil has raised its benchmark rates three times this year and a cash squeeze in China sent interbank borrowing costs soaring to records last month.

Media recently cheered on the one month contraction from record trade deficits largely due to gold import and trade curbs.

Yet if the rupee-US dollar exchange ratio continues to decline or if the USD-rupee persist to ascend as shown above, then statistical data may not reflect on the real state of affairs.

Gold restriction mandates have only been diverting India’s gold trade underground. Gold smuggling has massively risen, partly channeled through Nepal. 

Decline in India’s rupee has equally been reflected on consumer price inflation which increased to a three month high.

A curious mind would ask why, given India’s relatively low inflation and interest rate levels, has these been prompting alarm on Indian authorities for them to act to tighten?

Well, the obvious answer is that today’s systemic debt have reached epic proportions as shown by domestic credit % to the economy.

It’s not just domestic debt but also India's external debt has sharply risen to record highs.

All these has made India’s economy and financial system highly vulnerable to interest rate increases. (above charts from tradingeconomics.com)

But these governments sees the risks in the currency spectrum as potential tinderboxes for a crisis, and thus opt for the interest rate medium to effect policy changes.

As I have been pointing out, one cannot just compare with past data in analyzing economic events, that’s because, there are multitude of changes happening real time. 

So what may seem as relatively “low” interest rates and “low” consumer price inflation today, may be “high” relative to the changes in the debt position.

Nonetheless, theoretically the bigger the debt, the more sensitive debt conditions are to interest rate increases, which likewise implies of the amplification of credit risks.

So far India’s stock market, represented by the BSE 30, after falling 9% in reaction to “tapering” fears, from the May’s peak, appears to be challenging the record highs. Dr. Bernanke’s "put" has put an oomph to the latest rally. 

In contrast, stock markets of Brazil, China and Russia continues to flounder.

Also I pointed out that Turkey's officials previously announced measures to use record foreign currency reserves to combat the bond vigilantes, they seem to have a change of heart, after the initial forex measures, as predicted, have apparently failed to stanch the decline of the lira. 

Now, Turkish monetary officials are contemplating to likewise tighten via the interest rate channel.

Brazil and India’s tightening, brought about by the return of the bond vigilantes, which will likely to be a trend for many more emerging markets as Turkey and Indonesia and possibly too on developed economies, are deepening signs of the transition from easy money to the tight money. 

It would be reckless to ignore the risks of disorderly market adjustments should bond vigilantes continue to run berserk.

Stock Markets and the Economic Disconnect: China Edition

Stock markets according to popular wisdom serves as an indicator of economic growth conditions.

This Bloomberg article shows why popular wisdom has been wrong when applied to China: (bold mine)

China’s 20-year economic boom has boosted the wealth of its 1.3 billion citizens at the fastest pace worldwide and spawned some of the biggest companies in history. Foreigners earned less than 1 percent a year investing in Chinese stocks, a sixth of what they would have made owning U.S. Treasury bills.

The MSCI China Index (M8CN) has gained about 14 percent, including dividends, since Tsingtao Brewery Co. (168) became the first mainland company to sell H shares to international investors in Hong Kong in July 1993. That compares with a 452 percent return in the Standard & Poor’s 500 Index (SPXT), 322 percent in the MSCI Emerging Markets Index and 86 percent from Treasuries. Only the MSCI Japan Index had a weaker performance among the 10 largest markets, losing about 1 percent.

While China’s shift toward a market economy has lifted per-capita incomes by 1,074 percent and helped its companies raise at least $195 billion through stock sales in Hong Kong, investors with $695 billion say that corporate governance concerns, competition and state intervention have eroded returns for minority shareholders. Now, as China allows unprecedented access to its local capital markets amid the weakest projected gross domestic product growth since 1990, Aberdeen Asset Management Plc says valuations must fall further before it buys.

China’s bear market means cheap valuation getting cheaper…

The gauge of companies from Industrial & Commercial Bank of China Ltd., the world’s second-largest lender by market value, to PetroChina Co. (857), the third-biggest energy producer, entered a bear market last month after falling as much as 22 percent from this year’s high in January.

The Hang Seng China Enterprises Index (HSCEI), a gauge of 40 H shares, has declined 18 percent this year. It’s up 138 percent, excluding dividends, since Tsingtao Brewery began trading on July 15, 1993. The Shanghai Composite Index (SHCOMP) of mainland-listed companies has dropped 10 percent this year and is up 143 percent during the past two decades…

China will increase a program for foreign funds to invest in its local financial markets to $150 billion from a previous limit of $80 billion, according to a statement posted on the China Securities Regulatory Commission’s website on July 12. The government restricts access to mainland markets through its Qualified Foreign Institutional Investor program, which has granted firms a combined quota of $43.5 billion as of June 26. That compares with the $3 trillion market value of locally-listed companies.

MSCI’s China measure trades for 9.3 times reported earnings, versus 16 times for the S&P 500index, the biggest discount since September 2003, weekly data compiled by Bloomberg show. The MSCI Emerging Markets index has a multiple of 11.

How state directed credit hurt the stock markets…

Under former President Hu Jintao, banks were directed to lend to local governments during the global financial crisis to boost growth, while artificially low fuel prices have hurt refiners such as PetroChina. ICBC, the Beijing-based lender, traded at a record low 4.9 times earnings last month, while PetroChina (857) fell on June 25 to its lowest valuation since 2011.

More than 25 percent of China’s state-owned enterprises are unprofitable and their productivity growth has trailed that of private firms the past three decades, the World Bank said in February 2012.

And how state interventions affects corporate governance…

China was ranked ninth out of 11 Asian countries for corporate governance as of September 2012 and had the biggest deterioration in the region since 2010, according to a survey by CLSA Asia Pacific Markets and the Asian Corporate Governance Association…

SOEs “primarily serve the interests of the government, frequently making decisions with little regard for return on investment,” Hsu said in an e-mailed interview on July 11. Hsu said he invests in Chinese companies run by entrepreneurs with large ownership stakes, while he’s selling short shares of state-owned companies.

The following charts from tradingeconomics.com demonstrates the relationship between China’s stock market and economic growth.

One of the major reason why China’s stock market has languished has been due to the boom-bust cycle.

Stock investors participants not only made miniscule returns over 2 decades, but lost money in terms of real or inflation adjusted returns.

China’s previous stock market boom has coincided with a surge in both domestic credit as % to the economy (middle) and the domestic credit provided by the banking sector as % to the economy (bottom). 

The implication is that a credit boom functioned as the backbone for the stock market boom. Unfortunately the unsustainable boom was not to last.

However, when China’s stock market bubble imploded along with 2008 global crisis, what spared the Chinese economy from going into a recession had been the huge RMB¥ 4 trillion (US$ 586 billion) stimulus whose unintended effects are presently being felt.

Thus the side effects of 2008 stimulus are being revealed in “cheap” valuations which seem as getting even much more “cheaper”.

A potential financial crisis as indicated by the recent cash squeeze, purportedly to weed out shadow banks will only aggravate such dynamics.

You see the problem with relying on financial metrics? They are based on historical ex post events. 

If China’s economy has been materially slowing despite the recently announced marginally changed statistical growth data of 7.5% in the 2nd quarter from a government who hides, deletes and censors economic data, then an environment where a pullback of economic growth will also extrapolate to the slackening of sales, which should be reflected on cash flows, curtailment of investment expansions and eventually reflect on earnings. A crisis, which will be marked by massive liquidations, will exacerbate such conditions.

This means that today’s "cheap" valuations may become "pricey".

And another thing, given the non-resolution of the imbalances in China’s economy, the recent spike of credit or loans growth has only been redirected or rechanneled, instead of the stock markets, to the monumental and destabilizing debt fueled rampant speculations in the property sector, partly financed by shadow banking system, which China’s government has been attempting to regulate.

The disconnect or the apparent "parallel universe" between China’s stock market and the economy reveals of the huge effects of inflationism and interventionism in the economy.

As the Austrian economist Fritz Machlup wrote

A continual rise of stock prices cannot be explained by improved conditions of production or by increased voluntary savings, but only by an inflationary credit supply

China’s boom bust cycle should be a noteworthy example.