Phisix: Don’t Ignore the Bond Vigilantes

A human group transforms itself into a crowd when it suddenly responds to a suggestion rather than to reasoning, to an image rather than an idea, to an affirmation rather than to proof, to the repetition of a phrase rather than to arguments, to prestige rather than to competence.” Jean-François Revel French Journalist and Philosopher

This is one chart which every stock market bulls have either ignored or dismissed as irrelevant.

Yields of 10-year US Treasury Notes skyrocketed by 249 basis points or 9.7% this week to reach a TWO year high of 2.829% as of Friday’s close. This represents 803 basis points above the May 22^nd levels at 2.026%, when the perceived “taper” talk by US Federal Reserve chief Ben Bernanke jolted and brought many of global stock markets down on their knees.

While US markets, as embodied by the S&P 500 (SPX), recovered from the early losses to even carve milestone record highs, ASEAN markets (ASEA-FTSE ASEAN 40 ETF) and ASIAN markets ($P1DOW-Dow Jones Asia Pacific) posted unimpressive gains. Such failure to rise along with US stocks has revealed her vulnerability to such transitional phase, see red vertical line. 

Considering what I have been calling as the Wile E. Coyete moment or the incompatibility or the unsustainable relationship between rising stock markets and ascendant bond yields (including $100 oil), it seems that signs of such strains has become evident in US stocks.

As I previously wrote[1],

The stock markets operates on a Wile E. Coyote moment. These forces are incompatible and serves as major headwinds to the stock markets. Such relationship eventually will become unglued. Either bond yields and oil prices will have to fall to sustain rising stocks, or stock markets will have to reflect on the new reality brought about by higher interest rates (and oil prices), or that all three will have to adjust accordingly...hopefully in an 'orderly' fashion. Well, the other possibility from 'orderly' is disorderly or instability.

The S&P fell 2.1% this week adding to last week’s loss as yields of 10 year USTs soared (see green circle).

Rising yields affect credit markets anchored on them. This means higher interest rates for many bond or fixed income markets and fixed mortgages[2]. 

And given a system built on huge debt, viz, $55.3 trillion in total outstanding debt and $179 trillion in credit derivatives, rising interest rates will mean higher cost of debt servicing on $243 trillion of debt related securities[3], thereby putting pressure on profit margins and increasing cost of capital which magnifies credit and counterparty risks. Higher rates also discourage credit based consumption, thereby reducing demand. 

In essence, ascendant yields or higher interest rates will expose on the many misallocated capital brought about by the previous easy money policies.

One example is margin debt on stock markets.

The recent record highs reached by the US stock markets have been bolstered by inflationary credit via record levels of net margin debt (New York Stock Exchange).

Should rising yields translate to higher interest rates and where market returns will be insufficient to finance the rising costs of margin credit, then this will lead to calls by brokerage firms on leveraged clients to raise capital or collateral (margin calls[4]) or be faced with forced liquidations.

And intensification of the offloading of securities due to margin calls may become a horrendous reflexive debt liquidation-falling prices feedback loop.

Since 1950s, record margin debt levels tend to peak ahead of the US stock market according to a study by Deutsche Bank as presented by the Zero Hedge[5]. 

In 2000 and in 2007, the aftermath of record debt levels along with landmark stock market prices has been the dreaded debt-stock market deflation spiral or the stock market bubble bust.

Net margin debt appears to have peaked in April according to the data from New York Stock Exchange[6]. This is about 3 months ahead of the late July highs reached by the S&P 500 echoing the 2007 cycle.

But will this time be different?

Rising Yields Equals Mounting Losses on Global Financial Markets

Rising yields extrapolates to mounting losses on myriad fixed income instruments held by banks, by financial institutions and by governments. 

For instance, bond market losses exhibited by rising yields on various US Treasury instruments has led to record outflows in June, which according to Reuters represents the largest since August 2007[7].

The largest UST holder, the Chinese government and her private financial institutions, who supported the UST last May[8], apparently changed their minds. They sold $21.5 billion in June. 

Meanwhile the second largest UST holder, the Japanese government and her financial institutions unloaded $20.3 billion signifying a third consecutive month of decline.

Combined selling by China and Japan accounted for 74% of overall net foreign selling.

Total foreign holdings of UST fell by $56.5 billion or by 1% to $5.6 trillion in June where about 71% of the total UST foreign holdings represent official creditors[9]

The Philippines joined the bond market exodus by lowering her UST holding by $1.9 billion to $37.1 billion in July.

However, Japanese investors, mostly from the banking sector, reportedly reversed course and bought $16 billion of US treasuries during the first week of August[10].

Instead of investing locally, as expected from the audacious policy program set by PM Shinzo Abe called Abenomics, the result, so far and as predicted[11], has been the opposite: capital flight. The lower than expected GDP in June also exposes on the continuing reluctance by Japanese investors to invest locally (-.1%)[12].

Politicians and their apologists hardly understand that policy or regime uncertainty and price instability obscures the entrepreneurs’ and of business peoples’ economic calculation process thereby deterring incentives to invest. When uncertainty reigns, especially from increased interventions, people opt to hold cash. And when government debases the currency, people will look to preserve their savings via alternative currencies or assets.

This only shows how the average Japanese investors have been caught between the proverbial devil and the deep blue sea.

It’s not just in UST markets. Losses have spread to cover many bond markets

In the US, bond market losses led to redemptions on bond funds as investors yanked $68 billion in June and $8 billion in July. The Wall Street Journal[13] reports that the June outflow signifies as the first monthly net outflow in two years, according to the Morningstar

Again the actions of the bond vigilantes are being reflected by the reflexive feedback loop between falling prices (higher yields) prompting for liquidations and vice versa.

Rising yields will not only translate to higher cost of capital, which reduces investments, and diminished appetite for speculation, the sustained rate of sharp increases in bond yields accentuate the “the uncertainty factor” in the financial and economic environment. Outsized volatility from today’s mercurial bond markets compounds on the uncertainty factor by spurring a bandwagon effect from the reflexive selling action and in the reluctance by investors to increase exposure on risk assets.

As bond yields continue to rise the losses will spread.

The Impact of Rising UST Yields on Asia

US Treasuries have been also used as key benchmark by many foreign markets. Hence, rapid changes in US bond prices or yields will likewise impact foreign markets.

And as explained last week, substantial improvements in the US twin (fiscal and trade) deficits postulates to the Triffin Paradox. This reserve currency dilemma implies that improved trade and fiscal balance means that there will be lesser US dollars available to the global financial system which has been heavily dependent on the US dollar as bank reserve currency and as medium for trading and settlement. 

Such scarcity of the US dollar may undermine trade and the the reserve currency recycling process between the US and her trading partners.

Higher yields and a rise in the US dollar relative to her non-reserve currency major trading partners are likely symptoms from a less liquid or a dollar scarce system

And if rising UST yields have indeed been reflecting on growing scarcity of the quantity of US dollar relative to her non-reserve currency trading partners such as ASEAN, then higher yields would likewise imply pressure on the currencies, and similarly but not contemporaneous, on prices of financial assets.

All four currencies of ASEAN majors are under duress from the bond vigilantes.

The pressure on prices of other financial assets will be a function of accrued internal imbalances that will be amplified by external concerns.

One exception is the Chinese yuan whose currency has yet to be adapted as international currency reserve. The yuan trades at record highs vis-à-vis the US dollar, even as her 10 year yields have been on the rise[14].

In the meantime, fresh reports indicate that despite all the previous regulatory clamps applied by the Chinese government, China’s bubble has been intensifying with new home sales rising in 69 out of 70 cities in July, and with record gains posted by the biggest metropolitan cities[15].

Curiously the report also says that the China’s property markets expect minimal intervention from the Chinese government.

If true then this means that in order for the Chinese economy to register statistical growth, the seemingly desperate Chinese government will further tolerate the inflation of bubbles which has brought public and private debts to already precarious levels. 

Rising yields of Chinese 10 year bonds will serve as a natural barrier to the bubble blowing policies by the Chinese government. The sustained rise of interest rates in China may prick China’s simmering property bubble that would lead to a disorderly unwinding that risks a contagion effect on Asia and the world.

Europe’s Bizarre Divergences 

Yet, rising UST yields has thus far affected Europe and Asia distinctly.

Bond yields of major European nations[16] as Germany, United Kingdom and France have been on the rise, the former two have resonated with the US counterpart. Yields of German and UK bonds have climbed to a two year high as shown in the upper window [GDBR10:IND Germany red, GUKG10:IND United Kingdom yellow and GFRN10:IND France green].

Paradoxically bonds of the crisis stricken PIGS have shown a stark contrast: declining yields [GGGB10YR:IND Greece green, GBTPGR10:IND Italy red-orange, GSPT10YR:IND Portugal red and GSPG10YR:IND Spain orange.]

I do not subscribe to the idea that such divergence has been a function of the German and French economy having pushed the EU out of a statistical recession last quarter[17]. Instead I think that such deviation has partly been due to the yield chasing by German, UK and French investors on debt of PIGS. But this would seem as a temporary episode.

Such divergences may also be due to furtive manipulation by several European governments given the election season. As this Bloomberg article insinuates[18]:

The bond-market calm that has descended on the euro area in the run-up to next month’s German election masks unresolved conflicts that have frustrated the region’s leaders for more than three years.

Greece needs more debt relief, the International Monetary Fund says; Portugal is struggling to exit its support program; Spanish Prime Minister Mariano Rajoy is battling corruption allegations and calls to resign; France faces unrest as Socialist President Francois Hollande follows through on his promise to cut pension-system losses.

But if the bond vigilantes will continue to trample on the bond markets then eventually such whitewashing will be exposed.

The Fed’s Portfolio Balancing Channel via USTs

In my opening statement I said that every stock market bulls have either ignored or dismissed the activities of the bond vigilantes as irrelevant to stock markets pricing.

It seems that the mainstream hardly realize that USTs have been the object of the Fed’s QE policies. In other words, what the mainstream ignores is actually what monetary officials value.

The FED now owns a total of 31.47% of the total outstanding ten year equivalents according to the Zero Hedge[19]. And with the current rate UST accumulation by the FED, or even with a “taper” (marginal reduction in UST buying), eventually what used to be a very liquid asset will become illiquid. This would even heighten the volatility risks of the UST markets.

The FED uses USTs as part of the policy transmission from its “Portfolio Balance Channel” theory which intends to “affect financial conditions by changing the quantity and mix of financial assets held by the public” according to Fed Chairman Bernanke[20]. This will be conducted “so that changes in the net supply of an asset available to investors affect its yield and those of broadly similar asset”

In other words, by influencing yield and duration through the manipulation of the supply side of several asset markets, such policies have been designed to alter or sway the public’s perception of risk and portfolio holdings in accordance to the FED’s views.

Unfortunately the above only shows that markets run in different direction than what has been centrally planned by ivory tower based bureaucrats.

Whether in the US, Europe or Asia, where policymakers have been touting of the perpetuity of accommodative or easy money conditions, markets, as the revealed by bond vigilantes, has been disproving them. Soaring bond yields flies in the face of “do whatever it takes” promises.

Bottom line: Rising UST yields have been affecting global asset markets at a distinct or relative scale. 

Rising yields has been a function of a combination of factors such as the growing scarcity of capital or the shrinking pool of real savings at an international level, the unsustainability of inflationary boom, the Triffin Paradox, growing scepticism over central bank and government policies and of the unsustainability of the current growth rate of debt and of the present debt levels (see chart above[21]).

While so far, Asia and other Emerging Markets appear to be the most vulnerable, should bond yields continue to soar, which implies of amplified volatility on the bond markets and eventually interest rate markets, the impact from such lethal one-two punch will spread and intensify.

This makes global risks assets increasingly vulnerable to black swans (low probability-high impact events) accidents.

Caveat emptor.

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[1] See Don’t Worry Be Happy Stock Markets Ignores the Bond Vigilantes August 14, 2013

[2] See Emerging Market Rout: Prelude to a Global Crisis? June 27, 2013

[3] See The Wile E. Coyote Moment: US Treasury Yields Spikes! June 11, 2013

[4] Investopedia.com Margin Debt

[5] Zero Hedge Deutsche Bank Hopes "Not All Margin Calls Come At Once In Case Of A Sell-Off" August 13, 2013

[6] New York Stock Exchange Securities market credit ($ in mils.), 2013 www.nyxdata.com

[7] Reuters.com China, Japan lead record outflow from Treasuries in June August 16, 2013

[8] See Mayhem in the US Treasury Markets, No Problem, China to the Rescue! July 18, 2013

[9] US Treasury MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES

[10] Wall Street Journal Japanese Investors Buy Foreign Debt As Domestic Rates Fall August 14, 2013

[11] See Global Equity Markets: Signs of Distribution and Japan’s Capital Flight April 8, 2013

[12] Real Time Economics Blog Japan GDP Clouds Tax Debate Wall Street Journal August 12, 2013

[13] Wall Street Journal Bond Funds Outflows Shouldn't Panic Investors August 16, 2013

[14] Tradingeconomics.com CHINA GOVERNMENT BOND 10Y

[15] Bloomberg.com China July Home Prices Rise as Big Cities Post Record Gains August 18, 2013

[16] Bloomberg.com Rates & Bonds

[17] BBC.co.uk Eurozone edges out of recession

[18] Bloomberg.com Europe Muddles to German Vote as To-Do List Grows August 15, 2013

[19] Zero Hedge Good Luck Unwinding That August 15, 2013

[20] Chairman Ben S. Bernanke The Economic Outlook and Monetary Policy At the Federal Reserve Bank of Kansas City Economic Symposium, Jackson Hole, Wyoming August 27, 2010

[21] Zero Hedge Dylan Grice On The Intrinsic Value Of Gold, And How Not To Be A Turkey July 31, 2013

More Troubling Signs in the Charts of ASEAN Stock Markets; The Peso Carry Trade?

Two weeks back I showed of the troubling signs in the chart patterns of 3 of the 4 ASEAN equity markets[1].

This week the Thailand’s SET and the Phisix posted significant gains as well as a (somewhat) muted decline by the Indonesia’s benchmark.

But the weekly scores don’t tell of the real story. Extreme volatility has swamped ASEAN equity markets. The three ASEAN markets opened strong, only to see much of their gains or losses reduced by the end of the week.

Importantly the amplified volatility in the three ASEAN stocks led to a substantial deterioration in the chart patterns.

The Phisix has been bedecked by 3 “head and shoulder” patterns.

Stock market ‘bulls’ have mainly moored their sanguine readings by emphasizing on the bullish reverse head and shoulder pattern (green lines) formed during the last bear market strike in June.

But they have mostly been ignoring the older and larger 6 month toppish head and shoulder pattern (blue lines), which supposedly, as I previously pointed out, has a bigger chance of playing out.

This only shows that charts serve to fulfill the role of confirmation bias and as social talking points rather than objective assessment in the tradeoff of risks and rewards.

At the start of the week, some bulls prayed for the 200 day moving average (red trend line) to hold. And sure enough their supplications were answered. The Phisix stormed to a three day 3.8% advance. However the euphoria has abruptly been squelched by a huge drop in US stocks. The US influenced accrued Thursday and Friday losses in the Phisix chipped away half of the 3 day advances.

But this week’s botched advance has carved out another head and extended right shoulder (red lines). So does the new short term pattern offset or neutralize the earlier short term pattern? Does the new pattern reinforce the older and longer pattern?

One thing is sure, the motley of contradictory signals will reveal of the biases of analysts who, I expect, will continue to ignore signals that goes against their preferences.

Thailand’s SET seems to peculiarly share the same chart formation and even patterns with the Phsix, except that the toppish formation has been MORE pronounced.

Aside from the short (red) and mid-term (green) head and shoulder reversal pattern, the SET has now transcended into a supposedly bearish death cross where the 200 dma is above the 50 day dma (see blue oval).

Yet the death cross has likewise afflicted the Dow Jones Indonesia Stock Index (IDDOW).

Friday’s 3% decline has breached the short term support, which supposedly means that the momentum now runs in favor of the bears.

Yet I am not banking on charts.

As I previously said, the much advertised ‘strong’ fundamentals peddled by politicians and their lackeys will eventually be unmasked and reflected on charts. So far charts of these 3 major ASEAN benchmarks appear to already disagree with mainstream or consensus prognosis and expectations.

Yet if the market’s downshift deepens, then expect ‘fundamentals’ or future news to reflect on such downgrade.

As I previously wrote[2]

“Fundamentals” tend to flow along with the market, which is evidence of the reflexive actions of price signals and people’s actions. Boom today can easily be a recession tomorrow.

For me, for as long as the juggernaut of the bond vigilante prevails, it would be natural for these markets to respond to the fundamental changes being signaled by the markets.

And it would seem naïve to believe that history will mechanically repeat in the face of substantially changing conditions.

The Peso Carry Trade?

And one more thing, given the two year highs by yields of 10 year USTs, the spread between the Philippine and US counterparts have shrank to only 74.5 basis points or the smallest ever in history.

 

The Philippines has already bested not only ASEAN neighbors but even China and Australia in terms of treasury bond yields. 

While I previously discussed that such mispricing have been signs of a Philippine bond bubble[3], the incredibly low yield will not only reduce the incentives by foreigners to buy local assets or invest in the Philippines, such low yields may even induce foreigners, or even locals, to use the Philippine currency as funding currency for uncovered interest rate or currency carry trades[4].

Foreigners or even locals may borrow the Peso using such proceeds to buy into higher yielding ex-Peso assets. The internet now enables locals to access foreign markets. Borrowing Peso to fund a currency trade will only bloat on the swiftly growing loans in the banking system increasing credit risks as well as currency and interest rate risks. And by borrowing the Peso and converting them to foreign currency, the Peso carry will tend to temporarily weaken the local currency.

And given the prospects of reduced foreign buying from excessively low yields, this leaves locals representing a miniscule segment of the population as support for the domestic stock markets.

However the growth of local population participation on the domestic stock markets will hardly be significant in the same way how the domestic banking system has been unable to increase household participation due to excessive regulations.

Little of the above dynamics supports a return to a low interest rate dependent bullish backdrop. 

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[1] See Charts of ASEAN Stock Markets: Troubling Signs August 13, 2013

[2] See Phisix: Don’t Ignore the Bear Market Warnings June 30, 2013

[3] See Phisix: The Impact of Slowing Banking Loans August 5, 2013

[4] Wikipedia.org Currency Carry (investment)

Matthew Ridley on the Myths of Fracking and Wind Power’s Environmental Harm

Prolific author Matthew Ridley rebuts the 5 myths (lies) of fracking.

Here is a snippet:

Here are five things that they keep saying which are just not true. First, that shale gas production has polluted aquifers in the United States. Second, that it releases more methane than other forms of gas production. Third, that it uses a worryingly large amount of water. Fourth, that it uses hundreds of toxic chemicals. Fifth, that it causes damaging earthquakes.

Mr. Ridley also says that Wind Power contributes to more environmental damage than fracking:

Spoiling God’s glorious creation: as Clive Hambler of Oxford University has documented, each year between 6m and 18m birds and bats are killed in Spain alone by wind turbines, including rare griffon vultures, 400 of which were killed in one year, and even rarer Egyptian vultures. In Tasmania wedge-tailed eagles are in danger of extinction because of wind turbines. Norwegian wind farms kill ten white-tailed eagles each year. German wind turbines kill 200,000 bats a year, many of which have migrated hundreds of miles.

The wind industry, which is immune from prosecution for wildlife crime, counters that far more birds are killed by cars and cats and likes to point to a spurious calculation that if the climate gets very warm and habitats change then the oil industry could one day be said to have killed off many birds. But when was the last time your cat brought home an Imperial Eagle or a needle-tailed swift? Says Dr Hambler: “Climate change won’t drive those species to extinction; well-meaning environmentalists might.”

[Here's a video of a vulture hitting a turbine blade in Crete.]

Wind turbines are not only far more conspicuous than gas drilling rigs, but cover vastly more area. Just ten hectares (25 acres) of oil or gas drilling pads can produce more energy that the entire British wind industry. Which does the greatest harm to God’s glorious creation, rev?

Read the rest of the explanation here.

Shanghai Composite's Flash Spike: Fat Finger or Botched Manipulation?

Instead of a flash crash, like in the US where the Dow Industrial Averages suddenly dropped by 1,000 points intraday in May 6th of 2010 that had been blamed on a combination of factors—technical glitch, high frequency traders and large one sided directional bets—yesterday the Chinese bourse experienced the opposite: a flash spike!

From Bloomberg:

The biggest swing in China’s benchmark equity index since 2009 threatens to further erode confidence in the nation’s stock market after it lost more money for investors than any in the world during the past four years.

China’s shares were roiled yesterday by a trading error at Everbright Securities Co. (601788)that spurred a 53 percent surge in volumes and a swing of more than 6 percent in the Shanghai Composite Index. The gauge jumped from a loss of as much as 1 percent to a gain of 5.6 percent in two minutes during the morning session, then ended the day with a 0.6 percent drop. Erroneous buy orders from Everbright’s proprietary trading group sparked the early rally, the securities regulator said.

The Chinese stock index has tumbled 40 percent from its August 2009 high, erasing about $644 billion in market value, as the world’s second-largest economy slowed and local investors emptied more than 2 million equity trading accounts. Only Greece’s ASE Index has fallen more in percentage terms.

Yesterday's intraday action of the Shanghai Composite (SSEC)

Despite the initial 6%+ surge, the Shanghai index closed down by .64% (data and chart from Bloomberg)

The flash spike from a 6 months perspective (from stockcharts.com).

Again the supposed culprit from the same article

Everbright Securities, the nation’s ninth-largest brokerage by assets, disclosed its trading error in a statement filed to the Shanghai exchange. Board Secretary Mei Jian didn’t return a call and text message seeking comment.

Everbright Securities is a state owned enterprise controlled by state owned conglomerate the China Everbright Group.

So instead of the fat finger error theory, my suspicion and conjecture is that this could have been a botched attempt to push the stock market higher. Perhaps this may have been part of a PR campaign to paint a picture of stability and of a ‘revitalized’ economy, where, in reality, the latter has been tainted by unsustainable bubbles fostered by frenzied debt expansion. 

Unfortunately, such actions failed to trigger the desired bandwagon effect, so the involved company was forced to make a disclosure predicated on the fat finger error.

Nonetheless whether fat finger error or not, such faux pas will “cost Everbright an extra 3 billion yuan” (or US $490.1 million) according to the South China Morning Post. 

Pity the Chinese taxpayer.

Video: Ashton Kutcher Gives Good Advice

It's rare to see celebrities offer profound insights. But American actor Ashton Kutcher seems an exception, as shown by his talk at the the Teen Choice Awards.

The background from screaming groupies, who seem hardly listening, have partly muted Mr. Kutcher's talk (hat tip Professor David Henderson), so you have to turn on the volume

Frédéric Bastiat on the 10 Billion Pesos Philippine Pork Barrel Scandal

The unraveling Pork Barrel Scandal in the Philippine political system resonates on the admonitions of legal plunder by the great French classical liberal economist Claude Frédéric Bastiat in “The Law”

From the Philippine Daily Inquirer: (bold mine)

It’s not only Janet Lim-Napoles and her associates who will be on trial if the pork barrel funds scam reaches the courts—she’ll be dragging along with her the Philippines’ political and justice systems, Sen. Miriam Defensor-Santiago said on Friday.

Santiago made the remark as authorities entered the second day of a manhunt for the alleged mastermind of the P10-billion racket amid doubts that the lawmakers supposedly involved could be brought to justice

Bastiat: (bold mine)

When a portion of wealth is transferred from the person who owns it — without his consent and without compensation, and whether by force or by fraud — to anyone who does not own it, then I say that property is violated; that an act of plunder is committed.

I say that this act is exactly what the law is supposed to suppress, always and everywhere. When the law itself commits this act that it is supposed to suppress, I say that plunder is still committed, and I add that from the point of view of society and welfare, this aggression against rights is even worse…The responsibility for this legal plunder rests with the law, the legislator, and society itself.

From Today’s Inquirer headlines:

The COA report said that between 2007 and 2009, the Department of Budget and Management (DBM) released the following amounts: about P101.6 billion for various infrastructures including local projects (VILP); P12 billion for Priority Development Assistance Fund (PDAF) projects; and P2.36 billion for financial assistance to local government units (LGUs); and budgetary support for government-owned and controlled corporations (GOCCs).

Bastiat:

Legal plunder has two roots: One of them, as I have said before, is in human greed; the other is in false philanthropy…

Now, legal plunder can be committed in an infinite number of ways. Thus we have an infinite number of plans for organizing it: tariffs, protection, benefits, subsidies, encouragements, progressive taxation, public schools, guaranteed jobs, guaranteed profits, minimum wages, a right to relief, a right to the tools of labor, free credit, and so on, and so on. All these plans as a whole — with their common aim of legal plunder — constitute socialism.

From the first Inquirer article:

Santiago also took issue with President Aquino’s decision to continue to provide for billions of pesos in the Priority Development Assistance Fund (PDAF)—more derisively known as the pork barrel—in the proposed national budget for 2014.

“This entire scandal is the offshoot of kickbacks in pork barrel so, of course, the public began crying for the abolition of pork barrel,” Santiago said. “Yet the President refused to abolish it.  It’s the Office of the President that prepares the budget and it’s still there and he even defended it.”

Bastiat

Sometimes the law defends plunder and participates in it. Thus the beneficiaries are spared the shame, danger, and scruple which their acts would otherwise involve. Sometimes the law places the whole apparatus of judges, police, prisons, and gendarmes at the service of the plunderers, and treats the victim — when he defends himself — as a criminal. In short, there is a legal plunder…

This legal plunder may be only an isolated stain among the legislative measures of the people. If so, it is best to wipe it out with a minimum of speeches and denunciations — and in spite of the uproar of the vested interests.

Not to forget that the Philippine president has a pork barrel ‘earmark’ to the tune of at least Php 2.5 billion for 2014 and used Php 2.028 billion last year (Inquirer.net). DBM 2013 Philippine budget here, President's Pork barrel in 2012 here. We will hardly know if these declarations are accurate.

And as I wrote in 2008

So essentially, the Pork Barrel culture reinforces the patron-client relations from which the Patron (politicos) delivers doleouts and subsidies, which is squeezed from the Pork Barrel projects, to the clients who deliver the votes and keeps the former in power. Hence, the Pork Barrel system is essentially a legitimized source of corruption and abuse of power seen from almost every level of the nation’s political structure, an oxymoron from its original “moralistic” intent (unintended consequences). As the saying goes “the road to hell is paved with good intentions”.

Contra mainstream media and pundits who portrays today’s scandal in the framework of personality based politics, in the context of the great French classical liberal Frédéric Bastiat, it is the perversions of the law/s that has been rooted on legalized plunder that spawns all such malfeasances. 

There can hardly ever be ‘Good governance’ or corruption free government when “the law/s” in and on itself represents the principal source of corruption. 

Quote of the Day: True Heroes

Cowards play to the roaring crowd, and give the crowd what the crowd demands.  Cowards buy their cheap glory and security by coddling what is seen and loved, and by attacking what is seen and despised, without regard to the consequences that such coddling and attacking will have in the future.  In contrast, a true economic hero is someone who, even at great personal cost, appropriately deals with the unseen future – with the unnoticed and unappreciated potentials – no less than with the noticed and looming here and now.

This is from Professor and Café Hayek Blogger Donald J. Boudreaux

Misleading Housing Statistics on US Household Budget

Government  statistics should never be trusted as shown by the example below.

In questioning the U.S. Department of Agriculture’s (USDA) statistical treatment of the housing expenditure share of the household budget, Austrian economist Gary North writes:

What’s wrong with this? First, attributing 30% to the cost of housing. If a family puts three boys on one bedroom, and three girls in a second bedroom, the cost per child will plummet.

In fact, the housing expense for children is close to zero. Here’s why. All costs are marginal, economic theory teaches. What is the cost of those extra rooms? Almost zero.

When childless couples buy a home, do they buy a one-bedroom home? No. They buy at least a two-bedroom home. Most of them buy a three-bedroom home. But if the average American family buys extra bedrooms for show, the marginal cost of having a child live in that bedroom is zero. This is basic economics.

Do they immediately move out when the children depart? No. So, the marginal cost of the children’s occupancy was zero. Americans pay for bedrooms they don’t need. It’s aesthetic. It’s cultural. It’s the American dream.

I live in a three-bedroom home. Two of them are empty. I could easily convert two more rooms into bedrooms. I could adopt 10 children, and the housing costs would not rise much: the loss of one office, which could be moved into the basement, where there is another empty room. What did I pay for the house, plus the basement? About $225,000. I bought it in 2009. So, spare us the cries of high housing costs for children. These costs are marginal. The more kids you stick into a bedroom, the more marginal the costs are.

Read more here

Statistics have been designed to see society as one-size-fits-all phenomenon. Why? Because they are used as basis to justify interventionism. 

As the great dean of the Austrian school of economics, Murray N. Rothbard warned

Certainly, only by statistics, can the federal government make even a fitful attempt to plan, regulate, control, or reform various industries — or impose central planning and socialization on the entire economic system

India Bans Gold Coin Imports, Imposes Capital Controls

I may be right, newly appointed free market central banker Raghu Rajan either has failed to oppose his colleagues from expanding interventionist policies or has succumbed to powers of the dark side as the Indian government moved not only to ban all gold coin imports but impose rigid capital controls as well.

First capital controls, from the Times of India:

Amid continuing pressure on the rupee, the RBI on Wednesday announced stern measures, including curbs on Indian firms investing abroad and a reduction of outward remittances, to restrict the outflow of foreign currency.

The central bank reduced the limit for overseas direct investment (ODI) by domestic companies, other than oil PSUs, under the automatic route from 400 per cent of net worth to 100 per cent. Oil India and ONGC Videsh are exempt from this limitation…

The RBI reduced the limit for remittances made by resident individuals under the liberalized remittances scheme (LRS) from $2 lakh to USD 75,000 a year. Resident individuals are, however, allowed to set up joint ventures or wholly owned subsidiaries outside under the ODI route within the revised LRS limit.

Next, expanding gold curbs via total import ban…

Seeking to reduce the import of gold, the Reserve Bank Wednesday prohibited inward shipment of gold coins, medallions and dores without license. "From now onwards, import of gold in the form of coins and medallions is prohibited and henceforth all import of gold in any form or purity shall be subject to a licence issued by DGFT prescribing 20-80 scheme," economic affairs secretary Arvind Mayaram told reporters here.

The latest measures are part of the series of steps taken to curb gold import, the single biggest contributor to the widening current account deficit (CAD). After a dip in June, gold imports again surged in July with 47 tonnes of inward shipments compared to 31 tonnes in the previous month. Import of gold in April-July rose 87 per cent to 383 tonnes.

Not satisfied with scapegoating gold, the Indian government has vastly expanded political controls over the financial system. Such actions will not only hit India’s economy hard as economic activities will be suppressed, but likewise  will sink the financial markets and worsen India’s financial conditions. 

As the great Austrian economist Ludwig von Mises warned;

State interference in economic life, which calls itself "economic policy," has done nothing but destroy economic life. Prohibitions and regulations have by their general obstructive tendency fostered the growth of the spirit of wastefulness. Already during the war period this policy had gained so much ground that practically all economic action of the entrepreneur was branded as violation of the law. That production is still being carried on, even semi-rationally, is to be ascribed only to the fact that destructionist laws and measures have not yet been able to operate completely and effectively. Were they more effective, hunger and mass extinction would be the lot of all civilized nations today.

Ironically despite the earlier gold curbs, India’s gold imports soared in July with smuggling as one major route. But these has forced India’s neighbors to impose their own controls 

These absurd actions by the Indian government validates Jim Rogers’ short position on India. Expect more weakness in India’s rupee (chart from XE.com)

The Indian government’s dilemma has truly been due to their insatiable profligacy. Yet, this is another example of the ratchet effect, or the mission creep of interventionism.

Also since the Indian government has been fighting the Indian tradition, it is not far fetched to expect social upheaval as repercussion from such gold sale prohibition. 

Also I expect emergent fissures in the relationship with her foreign trade partners and neighbors as the interventionism by the Indian government spreads.

Stock Market Strains from Raging Bond Vigilantes

I have been pounding on the table saying that the rampaging bond vigilantes and $100+ oil prices are incompatible with rising credit fueled stock markets. 

Last Wednesday I wrote:

The stock markets operates on a Wile E. Coyote moment.These forces are incompatible and serves as major headwinds to the stock markets. Such relationship eventually will become unglued. Either bond yields and oil prices will have to fall to sustain rising stocks, or stock markets will have to reflect on the new reality brought about by higher interest rates (and oil prices), or that all three will have to adjust accordingly...hopefully in an 'orderly' fashion. Well, the other possibility from 'orderly' is disorderly or instability.

Last night, yields of 10 year US Treasury Notes spiked by 43 basis points! (all stock market charts from stockcharts.com)

The US S&P fell by 1.43%, but still remains above the 50-day moving average

Meanwhile the Dow Industrials Averages broke the 50 day moving averages down by 1.47%.

Yields of UK 10 year Treasuries likewise soared. The chart from Bloomberg has not been updated to include last night’s close

UK’s FTSE 100 dropped 1.58% and appears to have formed a mini-head and shoulders.

Nonetheless the FTSE also still is above the 50 day mas

Yields of 10 year German bonds also surged. 

The German Dax fell by only .73%.

Yields of 10 year French bonds also spiked, but ironically the CAC dropped by only .51%.

For technicians, the CAC earlier falsified what seemed as a head and shoulder formation but now appears to be in a steep rising wedge.

It may be true that two days of a downshift in stock market prices does not a trend make, but for me these represent as incipient transitional strains from the clashing forces operating behind the stock markets. 

Yet if the bond vigilantes continue to precipitately reinforce their presence, then expect the turmoil in global financial market to intensify. And the 'don’t-worry-be-happy-crowd' will be faced with their respective ‘black swans’.

Caveat emptor

Quote of the Day: The goal of Nixon Shock is to get foreign governments to hold US debts

Nixon unilaterally abolished the monetary agreement established in 1944 at Bretton Woods, New Hampshire. At that meeting, the United States, Great Britain, and other Western nations established a new monetary order. It would be supported by the United States Treasury. The United States Treasury would guarantee that any central bank or foreign government could buy gold from the Treasury at a price of $35 per ounce.

The goal of the Treasury was simple: to get foreign governments to hold Treasury debt instead of gold. Because Treasury debt was supposedly as good as gold, foreign governments and central banks could hold Treasury debt instead of holding gold. This enabled the United States government to run fiscal deficits, and foreign governments and central banks financed a portion of this debt. They did so by creating their own domestic currencies out of nothing, and then using these currencies to buy U.S. dollar-denominated debt, meaning U.S. Treasury debt. It was a nice arrangement. Foreign governments and foreign central banks gained an interest rate return on holding treasury debt, which they could not get by holding gold. Yet the dollars that they were being promised by the Treasury were supposedly as good as gold.

This is an extract from Austrian economist Gary North’s article in remembrance of the Nixon Shock or the closing of the Bretton Woods Gold Exchange Standard 42 years ago today.  

This shift towards the fiat money US dollar standard regime magnifies the Triffin Dilemma, where recent improvements in US trade and budget deficits could mean trouble ahead for global markets and economies.

Why Jim Rogers is Shorting India

In an interview at Wall Street Journal’s Livemint, the legendary investor Jim Rogers says that he is shorting India…

I used to own tourist companies in India at a time. India should have had the greatest tourist companies in the world. If you can only visit one country in your life, my goodness, it should be India—it is an astonishingly spectacular place to visit. There is no place that has the depth of culture that India has. Yes, I have new reasons to short India—just read its newspapers everyday and you will see why.

The government goes from one mistake to another—no matter what the controls are, no matter how much the debt keeps rising, Indian politicians are only looking for scapegoats. Look at the latest thing with gold—Indian politicians want to blame the problems of their economy on someone else, and now it is gold. Gold is not causing India problems, but it is quite the contrary. Exchange controls in India are absurd, the regulations that India puts in place result in foreigners going through 70 loops before they can invest in India. Foreigners cannot invest in commodities in India.

India should have been among the world’s greatest agriculture nations—you have the soil, the people, the weather, but it is astonishing that you have not become one—it is because Indian politicians, in their wisdom, have made it illegal for farmers to own more than five hectares of land. What the hell—can a farmer with just five hectares compete with someone in Australia or Canada? Even if you put together the land in all your family, it is still not possible to compete. Much as I love India, I am not a fan of its government. Every one year, they (Indian government) come up with more reasons for me to be less optimistic about that country.

India’s major equity benchmark the BSE 30

The more a country’s economy becomes politicized and the more their government engages in bubble blowing activities resulting to inflated asset prices, this usually makes for an attractive ‘short’ opportunity.

Rock Star Bono Embraces Capitalism

Rock star and U2’s lead singer, Paul David Hewson popularly known as Bono, who formerly advocated alleviating poverty through government foreign aid. appears to have tergiversated to capitalism.

Mr. Hewson or Bono is more than a celebrity fighting for a social cause, he is both an entrepreneur and a devout Christian.

Watch Bono preach capitalism in a speech at Georgetown University

“Commerce is real. Foreign aid is just a stopgap. Commerce and entrepreneurial capitalism take more people out of poverty than foreign aid, of course we know that. We need Africa to become an economic powerhouse.” (hat tip Mark Perry)

Nice to see celebrities recognize reality. 

Don’t Worry Be Happy Stock Markets Ignores the Bond Vigilantes

The “don’t worry, be happy” crowd is back. 

Rising stock markets are being driven anew by the yield chasing bandwagon mentality where punters have been stampeding back into the stock markets, rationalizing their actions with “fundamentals” (e.g. recovering global economy)

Yet rising stock markets has obviously has been ignoring important risks factors, particularly, what has been happening at the global bond markets. 

Well last night, the bond vigilantes has driven yields of 10 year bonds of some major economies to fresh highs.

US 10 year spiked to 2.715%! 

The last time bond yields hit this level global stock markets had a huge shakeout. Remember the Bernanke taper? 

I guess markets today have become desensitized or jaded to rising yields.

And this has not been just a US event.

Yields of UK 10 year gilts have closed also at June highs (will this be a double top or rounded bottom?)

Yields of Germany’s 10 year bonds also near or at June high levels, echoing UK bonds.

Yields of French 10 year bonds also ascendant but ironically is still distant from June highs.

I say ‘ironically’ because France seem as the weakest link among the above, both in terms of economic performance and sensitivity to credit risks, yet bond yields have been more relatively subdued.

I almost forgot, yields of China's 10 year bonds has also resonated with the above. (pls press on the link to see the chart)

Higher yields means higher cost of refinancing and increased costs of acquiring debt on a system that has been intensely leveraged or exposed to debt.  

Higher yields also extrapolate to higher costs of capital and increased credit risks. 

Well, for the don’t worry be happy crowd, none of this applies.

And one more thing, oil remains at above $105 levels.

The stock markets operates on a Wile E. Coyote moment. These forces are incompatible and serves as major headwinds to the stock markets. Such relationship eventually will become unglued. Either bond yields and oil prices will have to fall to sustain rising stocks, or stock markets will have to reflect on the new reality brought about by higher interest rates (and oil prices), or that all three will have to adjust accordingly...hopefully in an 'orderly' fashion. Well, the other possibility from 'orderly' is disorderly or instability.

Caveat emptor

War on the Internet: Meshnet activists Rebuilds the Net from Scratch

In anticipation that the US government will require the surrendering of customer’s data, two small email providers including Lavabit, a Texas-based service that was reportedly used by whistleblower Edward J. Snowden, decided to preempt them by shutting down and destroying their servers.

Such are examples of how government has used the web not only to expand their power but to mount repressive policies on their constituents. 

At the same time these are examples how government policies rob economic opportunities of small businesses (favoring the big ones).

However markets aren’t taking this slippery slope of privacy invasion sitting down. Some entities has taken into their own hands the rebuilding of the internet from scratch.

From the New Scientist 

Across the US, from Maryland to Seattle, work is underway to construct user-owned wireless networks that will permit secure communication without surveillance or any centralised organisation. They are known as meshnets and ultimately, if their designers get their way, they will span the country.

Dan Ryan is one of the leaders of the Seattle Meshnet project, where sparse coverage already exists thanks to radio links set up by fellow hackers. Those links mean that instead of communicating through commercial internet connections, meshnetters can talk to each other through a channel that they themselves control.

Each node in the mesh, consisting of a radio transceiver and a computer, relays messages from other parts of the network. If the data can't be passed by one route, the meshnet finds an alternative way through to its destination. Ryan says the plan is for the Seattle meshnet to extend its coverage by linking up two wireless nodes across Lake Union in downtown Seattle. And over the country at the University of Maryland, Baltimore County, student Alexander Bauer is hoping to build a campus meshnet later this year. That will give his fellow students an alternative communications infrastructure to the internet.

While these projects are just getting off the ground, a mesh network in Catalonia, Spain, is going from strength to strength. Guifi was started in the early 2000s by Ramon Roca, an Oracle employee who wanted broadband at his rural home. The local network now has more than 21,000 wireless nodes, spanning much of Catalonia. As well as allowing users to communicate with each other, Guifi also hosts web servers, videoconferencing services and internet radio broadcasts, all of which would work if the internet went down for the rest of the country.

So successful is the community model that Guifi is now building physical fibre-optic links to places like hospitals and town halls where it can help carry the heaviest traffic.

The development of the “new” guerilla internet doesn’t totally bypass the current system.

Again from the same article:

Hyperboria, the virtual layer that underpins meshnet efforts in the US. Hyperboria is a virtual meshnet because it runs through the existing internet, but is purely peer-to-peer. This means people who use it exchange information with others directly over a completely encrypted connection, with nothing readable by any centralised servers.

When physical meshnet nodes like those in Maryland and Seattle are set up, existing Hyperboria connections can simply be routed through them. At the moment, Hyperboria offers a blogging platform, email services, and even forums similar to reddit.

Unlike sheep or automatons, the above shows how people respond to incentives. The war on the internet will signify a cat and mouse relationship in the deepening age of decentralization.

Quote of the Day: Climate Change Without Humans and CO2

The volcanic ash emitted into the Earth’s atmosphere in just four days – yes, FOUR DAYS – by that volcano in Iceland has totally erased every single effort you have made to reduce the evil beast, carbon.   And there are around 200 active volcanoes on the planet spewing out this crud at any one time – EVERY DAY.

I don’t really want to rain on your parade too much, but I should mention that when the volcano Mt. Pinatubo erupted in the Philippines in 1991, it spewed out more greenhouse gases into the atmosphere than the entire human race had emitted in all its years on earth.

Yes, folks, Mt Pinatubo was active for over one year – think about it.

Of course, I shouldn’t spoil this ‘touchy-feely tree-hugging’ moment and mention the effect of solar and cosmic activity and the well-recognized 800-year global heating and cooling cycle, which keeps happening despite our completely insignificant efforts to affect climate change.

And I do wish I had a silver lining to this volcanic ash cloud, but the fact of the matter is that the bush fire season across the western USA and Australia this year alone will negate your efforts to reduce carbon in our world for the next two to three years.   And it happens every year.

Just remember that your government just tried to impose a whopping carbon tax on you, on the basis of the bogus ‘human-caused’ climate-change scenario.

(UPPERCASE-original)

This is from Ian Rutherford Plimer, Australian geologist, professor emeritus of earth sciences at the University of Melbourne, professor of mining geology at the University of Adelaide, and the director of multiple mineral exploration and mining companies at Ruthfullyyours.com (hat tip Lance Vance Lew Rockwell Blog)