Kenneth Rogoff’s War on Cash

Sovereign Man’s Simon Black warns of the suggestions for a cashless Society: (bold mine)

Rogoff begins asking the question: “Has the time come to consider phasing out anonymous paper currency, starting with large-denomination notes?”

He goes on to explain that getting rid of paper currency would provide two critical benefits:

1) It would reduce crime and tax evasion;

2) It would allow central banks to drop interest rates BELOW ZERO.

I was stunned. Though given the status quo thinking we have to put up with today, I really shouldn’t have been.

In fairness, Mr. Rogoff is an academic. It’s his job to dispassionately analyze data and render conclusions, whatever they may be. What’s scary is that some dim-witted politician will likely jump all over this.

People have been deluded into believing that only criminals and tax cheats hold cash in large denominations. And the conclusion is that if we ban cash, criminals will simply quit their craft because they’ll no longer have an officially-sanctioned medium of exchange.

This is total baloney, obviously. Banning cash doesn’t eliminate crime. It just creates a new cottage industry for cash alternatives.

Drug deals can just as easily go down swapping share certificate of Apple. Or title to a new car. Any number of things.

Perhaps the more important point, however, is the notion that eliminating cash frees up central bankers to force interest rates into negative territory.

The contention is that the official data tells us that inflation is tame. Consequently, central banks should be free to expand the money supply and ratchet down interest rates even more. 

There’s just one problem: interest rates are basically at zero already.

Technically a central banker could drop interest rates to below zero.

But if they did that, who in his/her right mind would hold their savings at a bank where they would have to PAY THE BANK to make wild bets with their money? 

People would just go to physical cash instead.

Solution? Eliminate cash! Then people would be forced to suffer NEGATIVE interest rates… and thus have a HUGE INCENTIVE to spend as much as they can as quickly as they can. Forget about putting something aside for a rainy day.

But hey, at least the stock market would probably rise.

Now, I highly doubt that physical cash is going to be sucked out of the system… tomorrow. But the War on Cash is very real indeed.

As I travel around the world, I’ve seen with my own eyes– CASH has become the #1 hot button item for customs agents everywhere. They even have highly trained cash sniffing dogs now.

It’s becoming more and more obvious that people should divorce themselves from this system and consider holding at least a portion of their savings in something other than fiat currency.

And of all the options out there, it’s hard to beat the convenience and tradition of precious metals.

Indeed governments have increasingly been waging war on cash. 

The latest: Israel’s government has recently declared limits on cash transactions.

From Reuters: Cash transactions between businesses will be limited to 5,000 shekels ($1,400) under an Israeli government plan to fight money laundering and tax evasion.

I have previously shown that various governments have waged war on cash like Mexico, Italy, Russia, Nigeria and Ghana or even in the US.

In the Philippines I had my share of nightmare with the domestic authorities at the domestic airport whom harassed me for bringing slightly excess cash (based on the mandated limits) for an outbound trip predicated on a regulation that I wasn’t even aware of then. As a side note, the slightly excess cash was meant as gift for my Mom who resides overseas!!

Money laundering or tax evasion has served as the stereotyped alibi or scapegoat for the war on cash. But such is a sign of desperation. Remember cash as currency or medium of exchange, are issued to the citizenry by the respective governments who wield the monopoly seignorage. So by waging war on cash, governments have not only assailed on their basic function, they reveal signs of dissatisfaction with current revenues from such seignorage privilege.

War on cash serves as an extension of financial repression policies. 

The fundamental reason is that governments intend to capture even more of the public’s resources (directly and indirectly) to fund the interest of political agents and their private sector allies. It's is a sign of unmitigated greed imposed on society by force.

The real targets are really not money laundering or tax evasion but the cash holding society, particularly the informal economy. Again this is a sign of desperation.

Statist always conjure up reasons for state control over everything.They always point to so-called benefits without looking at the costs. But costs are not benefits. 

For instance, the importance of cash came into the limelight when the western banking system nearly collapsed in 2008. In Europe, many took shelter by hoarding € 500 cash. So the assumption to migrate to a cashless society extrapolates that the banking sector and the governments are risk free.

But this is something untrue. In fact both the government and banks are the major sources of risks. Just look at the massive build up of debt levels of major economies. What happens when all these unravels? 

Yet the war on cash is also based on the mirage that growth in debt and transfer of resources will have little or even NO limits or repercussions. This is utterly wrong. The war on cash only allows the establishment to buy time before their unsustainable system implodes.

US Economy Contracts in the 1st Quarter 2014, But Stocks are at Record Highs!

Has any expert anticipated this?

Chart from Tradingeconomics.com

From Bloomberg:

The economy in the U.S. contracted for the first time in three years from January through March as companies added to inventories at a slower pace and curtailed investment.

Gross domestic product fell at a 1 percent annualized rate in the first quarter, a bigger decline than projected, after a previously reported 0.1 percent gain, the Commerce Department said today in Washington. The last time the economy shrank was in the same three months of 2011. The median forecast of economists surveyed by Bloomberg called for a 0.5 percent drop.

This m-o-m data has originally shown a scanty .1% growth in 1Q14 which I said has been the significants effects of the Emerging Market contagion but had been revised lower. The y-o-y data still shows a positive but unimpressive 2% growth.

Has the stock market factored this in? Apparently not. And perhaps they never will. That’s because some major indices like the Dow Industrials and the S&P 500 are at record highs.

But again like all rationalization, this slowdown has been justified as an anomaly brought about by weather.

From the same article:

A pickup in receipts at retailers, stronger manufacturing and faster job growth indicate the first-quarter setback will prove temporary as pent-up demand is unleashed. Federal Reserve policy makers said at their April meeting that the economy has strengthened after adverse weather took its toll.

“Will prove temporary’'” exudes  the confidence to justify stock market actions. So the “growth” story, whether real or not, has metastasized into a fairy (DEBT) godmother meant to justify stocks market prices bound for the never-never land.

Also the above divergences serves as more evidence that the stock market hasn’t about the economy. Today's world has been warped into parallel universes.

China Politics: The Price of Security or Safety: More Repression

In the name of public security and safety, the Chinese government has waged an implicit war against her constituency.

Photos from Wall Street Journal

From the Wall Street Journal

Already difficult commutes in China’s capital became even more punishing this week, as Beijing beefed up subway security checks in the wake of deadly attacks targeting civilians.

Hundreds of unhappy commuters stood in long lines across the city Wednesday morning to undergo enhanced security screenings, which now include body checks as well as bag screenings in several stations. At stations in the city’s north, subway staff said passengers had to wait between 20-30 minutes to get through the security line, up from about 10-15 minutes prior to the new screening requirements.

Why is this? (bold mine)

Security measures have stiffened across China in recent weeks, following a series of violent attacks since the start of the year. In the most recent incident, 31 people were killed last week in an attack at a market in northwest Urumqi. In March, dozens were killed in an assault by knife-wielding assailants at a train station in southwest Kunming. Authorities have labeled such episodes terrorist attacks and attributed them to separatists in northwestern Xinjiang.

Additional security measures in Beijing now include helicopter patrols, while cities across the country have been further arming their police forces, as well.

So treating the average citizenry as suspects have been responses to the growing internal political troubles plaguing the alarmed Chinese government.

Yet if the Chinese government can’t respect her own people what more the neighbors? 

And as her asset bubbles deflate which should mean an acceleration in economic downturn, more incidences of social upheavals is to be expected which will be met by even more political 'tyrannical' repression.

The above seem as more signs that the Chinese government has been preparing for the worst.

So the next thing that Chinese government will be exporting will hardly be goods and services but social turmoil.

All these reminds me of Benjamin Franklin who once said,

They who would give up essential Liberty, to purchase a little temporary Safety, deserve neither Liberty nor Safety.

But don't worry be happy. Stocks will always go up.

Capital Flight in Japan Dressed Up as Foreign Direct Investments

Last year I wrote: (I removed the footnote and replaced it with a link)

ASEAN and the Philippines will likely become beneficiaries of BoJ’s inflationism

The foremost reason why many Japanese may invest in the Philippines under the cover of “the least problematic” technically represents euphemism for capital fleeing Japan because of devaluation policies—capital flight!

Capital flight will be masqueraded with technical terminologies of portfolio flows and Foreign Direct Investments (FDIs)

Bingo! 

The latest external investments data from Japan, from the Wall Street Journal: (bold mine)

The total value of foreign direct investment by Japanese companies rose 35% from a year earlier to a record ¥13.248 trillion ($130 billion) during 2013, according to data released by the Ministry of Finance Tuesday.

Unfazed by a sharp decline in the yen’s value that makes foreign ventures more expensive, Japanese companies sharply expanded their investments in the world’s major markets, including Southeast Asia, the U.S. and the European Union.

One notable exception was China, where the amount of Japanese FDI shrank by 18% to ¥887 billion, the first decline in three years. The drop signals that as bilateral tensions continue to soar over a territorial dispute, Japanese companies are growing more cautious about business prospects in China after pouring money into its fast-growing economy for years. Corporate executives have said rising production costs and a slowdown in domestic demand in China are also worrisome.

In contrast, companies showed strong appetite for expanding operations in other Asian markets, such as Thailand and the Philippines. The amount of new FDI in the member countries of the Association of Southeast Asian Nations rose to ¥2.33 trillion, nearly triple the previous year’s level and sharply higher than the previous record of ¥1.55 trillion reported in 2011.

The above further confirms my predictions in 2012

The bottom line is that YES we should expect Japanese FDI and portfolio investments into the Philippines and the region to swell.

But since (inward) capital flows into ASEAN will reflect on global central bank activities, this dynamic would not be limited to Japan but would likely include western economies as well.

(bold added) 

Oh while this looks positive on the surface, the question is in what areas have the Japanese been investing at? Have these monies been channeled into the bubble sectors?  

For the Philippines as I explained here, restrictions on FDI’s  have increased since October 2012.  Liberalization has been limited to bubble areas such as large retailers and casinos. And as I also pointed out the January 2014 data confirms that FDIs have flowed into these sectors.

The recent BoJ impelled FDI’s flows have an uncanny resemblance to pre-Asian crisis conditions

Again as I also noted in 2012

Today’s FDI flows eerily resonates or resembles on the time window of the 1985 Plaza Accord to the post Japan bubble in 1990s until the climax, the 1997 Asian Crisis.

The Business Insider quotes author and former Deputy Chief of the Hong Kong Monetary Authority Andrew Sheng in the latter’s book From Asian to Global Financial Crisis

… shift production to countries that not only welcomes Japanese FDI but also had cheap land and labour… By the late 1980s, Japan had become the single largest source of FDI for the fast-growing emerging Asian economies. This trend was particularly clear when another surge of Japanese FDI into Asia took place between 1993 and 1997, with Japanese FDI rising nearly twofold from US$6.5 billion to US$ 11.1 billion during this period…

… banks followed their manufacturing customers into non-Japan Asia in earnest… From 1985 to 1997 Japanese banks supplied over 40 percent of the total outstanding international bank lending to Asia in general… The massive expansion in Japanese bank lending, in both yen and foreign currency, created huge capital flows globally.”

So could we be experiencing a déjà vu, Asian Crisis 2.0?

To repeat déjà vu, Asian Crisis 2.0 courtesy of Abenomics? [updated to add Again the main culprit here are the national central banks, Abenomics serves as an aggravating factor]

China Bubble: Chinese tycoon jumps ship, another declares the “end of the Golden Era” for China’s property Industry

More Chinese tycoons appear to be jumping ship or has been expressing reservations on the Chinese economy. 

Earlier I pointed to  Li Ka Shing, who sold his entire holdings in China, and to Soho China Ltd. Pan Shiyi who equated the current economic slowdown in the face of mounting debt as the “Titanic moment”.

Another tycoon, Song Weiping has been reported to be in the process of selling his holdings while blaming the government for his troubles

From Marketwatch.com  (bold mine) [hat tip Zero Hedge]

A prominent property tycoon in China on Friday lashed out at government real estate policies, took a verbal swipe at a former premier and said authorities shouldn't be squeezing small- and medium-size developers out of business.

Song Weiping, who is selling most of his stake in luxury-property developer Greentown China Holdings and is stepping down as chairman amid a worsening market downturn, told a news briefing that local and central governments were to blame for the industry's problems, having interfered too much in the market.

China's property developers face increasing pressure from falling sales and stringent government limits on home purchases. Since 2010, Beijing has rolled out tight measures such as curbs on second or subsequent homes and price ceilings to rein in market speculation and high housing prices.

Property developers have complained that such measures distort the market, and the recent downturn in the country's housing market has brought more of such comments to surface. Mr. Song said he is tired of operating in an environment in which the market isn't free.

So far this year, housing sales have been hit by excessive supply and bouts of price slashing, with expectations of more discounting to come.

Every credit inspired boom is a distortion. The attendant bust has been the  market’s response to the uncovering of the imbalances brought about by the phony boom. Government regulations certainly add more to the such distortions. But the point is that during the bust cycle, there will be lots of finger pointing. It’s part of the denial stage.

Yet this serves as more evidence of resident elites or "smart money" anticipating a black swan in China. 

And if these monies move out of China, they will continue to pressure on the currency the renminbi

While not as dreary another bigwig from the industry has called for the end of China’s golden era for the property market

From Bloomberg: (bold mine)

China Vanke Co. (3333), the nation’s biggest developer, is focused on developing homes for owner occupiers rather than investors because the country’s property industry has passed its “golden era,” President Yu Liang said.

“The period in which everybody makes money out of property is gone,” Yu told reporters May 26 in Dongguan, a southern city in Guangdong province. “Vanke will take a cautiously optimistic approach to face the slowdown and target those buyers who need homes for self-use.”

Yu joins Vanke Chairman Wang Shi in flagging a slowdown in China’s property market and follows Moody’s Investors Service’s revision of its credit outlook for Chinese developers to negative from stable last week. Home sales slumped 10 percent in the first four months of this year amid tight credit and slower economic growth, reversing last year’s 27 percent jump and prompting developers including Vanke to cut prices.

It’s quite odd to declare the passing of the golden era while taking on a cautiously “optimistic” approach. The implication is that not all of China’s property sector have been fated for a bust. But doesn't look like the case.

The most probable reason why the Vanke hasn’t been as bearish is because they are looking into investing in the Chinese government's privatization of state owned firmed that had been hit from the recent slowdown. According to a Reuters report “As part of the government's reform plans, Beijing has promised to allow more private participation in state-owned enterprises. Many of those state-owned enterprises have expanded into property development in recent years, drawn by big profits.”

So perhaps the Vanke group will be doing some special crony deals with the government in the so-called reforms. Most likely, political deals redounds to cautiously "optimistic" approach.

In the meantime Chinese government reported a surge in Non Performing loans. From Bloomberg:

China’s biggest banks are poised to report the highest proportion of bad debts since 2009 after late payments on loans surged to a five-year high, indicating borrowers are struggling amid an economic slowdown.

The nation’s 10 largest lenders reported overdue loans reached 588 billion yuan ($94 billion) at the end of 2013, a 21 percent increase from a year earlier to the highest level since at least 2009. The rise in late payments portends more losses on soured loans for banks in coming months as China’s slowing economy crimps companies’ earnings, while a government crackdown on nonbank funding makes it tougher for borrowers to get new credit or finance older debt.

“Overdue loans are a leading indicator of asset-quality deterioration and show the rising liquidity constraints among borrowers,” said Liao Qiang, a Beijing-based director at Standard & Poor’s. “While we believe Chinese banks’ credit woes will unfold gradually, the disturbing thing is that the end is nowhere in sight.”

Overdue loans, those late by at least a day, were 31 percent greater for the banks as of Dec. 31 than nonperforming ones, which are debts they don’t expect to recoup in full. That’s the biggest gap in at least five years, signaling lenders may be resisting acknowledging the deterioration to avoid setting aside funds to cover potential losses.

More signs of big trouble in big China. But for the "be happy" crowd, stocks has been destined to always go up.

Thailand’s Junta Government Clamps down on Facebook and Media

Thailand’s coup regime has just censored Facebook. 

From Reuters:

Thailand's information technology ministry blocked Facebook on Wednesday and planned to hold talks with other social networking sites to stem protests against the military government, a senior official said.

"We have blocked Facebook temporarily and tomorrow we will call a meeting with other social media, like Twitter and Instagram, to ask for cooperation from them," Surachai Srisaracam, permanent secretary of the Information and Communications Technology Ministry, told Reuters.

So the new military government will open only media sites for as long as they sing hallelujahs on them

This applies to Mainstream Media too…

Print and broadcast media have already been instructed to refrain from critical reporting of the military's May 22 takeover.

As I noted last weekend, Thailand has a gigantic bubble that appears to be in the process of unraveling. And Thai junta government’s increasing recourse to repression may just aggravate the current deteriorating conditions.

So what’s next? Will the new Thai government impose capital controls?

Nonetheless even in the face of Thailand’s contracting economy and the recent putsch, such factors hasn’t been a barrier for the stock market bulls. 

Notice the contradictory forces at work: contracting economy and rising stocks. So who says stock markets are about the economy?

And if there is any sign of financial market pressure it has been in Thai’s currency, the USD-baht…

…which seems poised for a breakout.

Again these are evidences of massive disregard for risks or "peak complacency".

Tim Price: I’ve been investing since January and I’ve never seen anything like it.

At the Sovereign Man website, Tim Price Director of Investment at PFP Wealth Management in the UK shares some important tips on investing in an environment resembling the pre-Asian crisis 

[Bold fonts mine. My comment are in unquoted sections and will deal with Philippines conditions unless stated otherwise ]

“I don’t know what to say. I’ve been investing since January and I’ve never seen anything like it.” – Unnamed Hong Kong housewife during the Asian financial crisis of 1997/8.

What follows is a continued personal perspective on some of the challenges facing today’s investor:

1. For many investors, capital preservation in real terms should be more important than capital growth in notional ones.

Note capital PRESERVATION should be the priority

2. Investors – as humans – are typically loss-averse. We feel the emotional impact of equivalent gains and losses disproportionately. This does not mean we should avoid considered risks, but to invest dispassionately.

In the Philippines, I have never seen so much or intense “passion” in the belief of a supposed "riskless" one way trade, based on a new “growth” paradigm. Even dissenting opinions are now considered a taboo!

3. Investing dispassionately is difficult when most of the investment media comprise the participants in a 24/7 circus. If the business of investing is either entertaining or exciting, you’re doing it wrong.

When people argue that one’s position should echo with the crowd’s opinion, then this is about entertainment and or having a dopamine “trip”. One may add "ego trip" to that. In a bullmarket everyone is a genius. 

This certainly is not about investing but about social desirability bias.

4. The answer is obvious: turn off CNBC. (Judging by their viewing figures, plenty of investors already have.)

Turn off mainstream media: newspaper, tv, radio, or even populist internet circles.

5. True diversification remains the last free lunch in finance.

When the rising tide lifts almost all boats there are very small windows for diversification

6. Having fatally tainted monetary policy, the dismal science of economics has wrought damage across investment theory as well: ‘homo economicus’ does not actually exist, and markets will never be wholly efficient until all people are, too. 

7. “The investor’s chief problem – and even his worst enemy – is likely to be himself.” (Benjamin Graham)

The seventh rule will be discovered by crowd soon.

8. The general principles of investing are not arcane. They should begin with the avoidance of loss.

Again avoidance of loss is capital preservation

9. Starting valuation is the most important characteristic of any investment.

When a stock tout tells you that PERs of 30,40,50,60s+ and PBV 4,5,,6,7,8+ of mature companies represent a "buy", then this hasn’t been about investing. Rather this is about the delusional belief of a one way trade where “Growth” serves as a fictitious slogan for stock market prices rising to eternity. 

10. Risk is poorly defined as volatility. It is better defined as the possibility of a permanent loss of capital.

In the Philippines, the public sees little or no risks even even when money supply growth rate has soared to 30++% for nine straight months.

11. “Operations for profit should be based not on optimism but on arithmetic.” (Also Benjamin Graham)

The inflationary boom has lobotomized arithmetic, or most importantly, common sense.

12. Don’t buy poor quality investments pushed by sell-side interests; don’t overpay for quality investments.

Beneficiaries of  the inflationary boom naturally want the public to overpay for pseudo investments which they say is about "quality". But the real reason behind the spin is this that due to financial repression, negative real rates enables and facilitates the redistribution of risks and resources from the unsuspecting public to politically connected vested interest groups.

13. The ‘equity / bond / property / cash’ paradigm struggles fundamentally in an environment where all of these asset classes appear overvalued.

Again little window for diversification

14. Friends are unlikely to share their worst investment outcomes at the golf club.

The stock market is a social phenomenon. During booms, stock market becomes THE talking point in social gatherings. During depressionary busts, the stock market is seen as operating in oblivion.

15. Liquidity is overrated. For capital that can be safely committed to the longer term, it is irrelevant.

Central bank injected liquidity is the ultimate source of the boom-bust cycle.

16. Private investors are often poorly served by the asset management industry.

17. The medical profession has the Hippocratic Oath: first, do no harm. The asset management profession lacks such an explicit expression of fiduciary commitment to its clients.

For both 16 and 17 when asset managers commit resources of depositors to overvalued assets, this would account for as the Wolf of Wall street model. It’s a combination of principal agent problem (asset managers benefiting at the expense of depositors) and Keynes’ sound banker (lead the crowd during booms and hide under the skirt of the crowd during busts).

18. Private investors may, all things being equal, be better served by small, unlisted, private partnerships than by global, publicly listed, full service investment brands.

19. Rising compliance and regulatory pressure reduce variety in the asset management business. This is unlikely to be in the best interests of private investors.

Increase in regulations mostly skew the benefits to the interests of entrenched groups.

20. When interest rates are close to all-time lows and the printing presses are running, the merits of ‘deep value,’ profitable, well-managed businesses are more than usually compelling – compared to just about any other asset or asset class.

Value is a rarity in today’s central bank driven deeply overvalued global markets. As Warren Buffett aptly noted, it's only when the tide goes out do you discover who has been swimming naked. That's when value will surface.

21. Distrust anybody who claims to have all the answers. Especially today.

Oh yes, this is very important. Please do your own research based on objectivity, independence, “arithmetic” and common sense. And avoid the mainstream.

Do it in the way of value investor and mentor of Warren Buffett Ben Graham

You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.

Graphic of the Day: The Religion Of Consumerism

Source (Zero Hedge)

Video: Mark Thornton on How Silver Money Kept Inflation in Check

From the Mises Blog

Much of the history of Philippine money has been in commodity: gold/silver. This is until the US Congress enacted the Philippine Coinage Act.

The Untold Story of Fidel Castro’s Lavish Lifestyle

A former bodyguard spills the beans on Cuban dictator Fidel Castro’s luxurious way of living.

From Miami Herald (hat Tip EPJ)

With luxury homes, diamonds, women and more, Fidel Castro ‘lives in a luxury that most Cubans can’t even imagine,’ says a former bodyguard who wrote a book of memoirs on the dictator.

Fidel Castro once claimed that he lived a life of exemplary revolutionary frugality on a salary of merely $36 per month.

“Lies,” said Juan Reinaldo Sanchez, 65, who served as a bodyguard for the former Cuban leader for 17 years and has published a book of memoirs portraying Castro as a sort of feudal lord who ran the island like it was a personal fiefdom.

Castro controlled about 20 luxury homes, a Caribbean island getaway with a pool and dolphins, the 88-foot yacht Aquarama II, and several fishing vessels whose catch was sold for dollars deposited in his accounts, according to Sanchez.

“He always claims he lives frugally. Lies. He lives in a luxury that most Cubans can’t even imagine,” Sanchez told el Nuevo Herald in his first interview after writing his book, The Secret Life of Fidel Castro, published Wednesday in France.

More…

His 325-page book says Castro, now 87, controlled several numbered bank accounts abroad as well as the finances of several state enterprises — including a small gold mine in the Isle of Youth — that reported to him as president of the ruling Council of State. When Castro received a Cohiba cigar box full of Angolan diamonds, he told an aide to sell the gems on the international market “and you know what to do,” Sanchez said.

Two large elephant tusks that once stood in his home also came from Angola. None of the bank accounts or enterprises were in Castro’s name, but they didn’t have to be, the bodyguard said. “He didn’t have to report to anyone. He had sole control” over economic activity he estimated at “hundreds of millions of dollars” over 10 years. 

But after Forbes magazine included the Cuban ruler in its 2006 list of 10 richest “Kings, Queens and Dictators,” he declared that his salary was about 900 pesos per month, or $36. The former bodyguard said part of the book focuses on Castro’s luxurious life because so little is known about it even within the communist-ruled nation. The leader has said his personal life is a “state secret” because of the multiple attempts to assassinate him.

If true, then the communist purist used the state’s coercive machinery to siphon the nation’s resources to his account for him to indulge in a stealth hedonist lifestyle. Poor Cubans.

But this is how the world of politics has mostly worked; smoke and mirrors.

Hot: Fishing boat warfare: Chinese vessel sink Vietnamese boat

The geopolitical tension between the Chinese and the Vietnamese government seems to be intensifying. Both countries have engaged in a proxy military warfare but channeled through, for now, fishing boats ramming the foe and the firing of water cannons.

The latest casualty: one Vietnamese boat

The Bloomberg reports

Vietnam said a Chinese vessel sank one of its fishing boats, the most serious bilateral standoff since 2007 and a move that underscores China’s assertiveness in pushing its claims in the disputed South China Sea.

“It was rammed by a Chinese boat,” Foreign Ministry spokesman Le Hai Binh said by phone. The 10 fishermen on board DNa 90152 were rescued by other Vietnamese ships after yesterday’s scrap, according to a government statement posted on its website. The incident occurred after some 40 Chinese fishing vessels encircled a group of Vietnamese boats in Vietnam’s exclusive economic zone, the government said.

The Vietnamese craft overturned as it harassed a Chinese fishing boat in the area, China’s official Xinhua News Agency reported.

One thing can lead to another.

Earlier Chinese troops had reportedly been amassing at the Vietnam border.

Reports the China Daily Mail:

A large number of People’s Liberation Army troops have reportedly been spotted heading towards the China-Vietnam border as tensions between the two countries continue to escalate, reports Hong Kong's Sing Tao Daily. Sing Tao Daily is generally considered to be aligned to Chinese state media.

Thousands of Chinese nationals living or on business in Vietnam have already fled the country amid anti-China riots, which were sparked by a tense standoff between Chinese and Vietnamese naval ships near a Chinese oil rig in disputed waters off the Paracel Islands in the South China Sea on May 4.

The Chinese and Vietnamese government has squared off in a number of times. 

In 1974, there was the Battle of Paracel islands, exactly the same area where the current flare ups have been. Then it was the South Vietnamese government that engaged the Chinese government.

Following the loss of American government in the Vietnam war, the Vietnamese government aligned with the Soviet Union, attacked and invaded the Khmer Rouge of Cambodia—an ally of the Chinese government. Due to the Sino-Soviet split, the Chinese government deemed the Cambodian invasion as Soviet expansionism. So the Chinese retaliated and fought at their borders, which was known as the Third Indochina. This ended up in a stalemate with both sides claiming victory. But Vietnam remained in Cambodia.

So grudges from previous rivalries could resurface once again with the growing risks of real engagement.

As I have been saying, while rancorous actions of the Chinese government may partly be in response to US foreign policy of encirclement, a much bigger factor could be the financial and economic pressures from the hissing bubble which has been aggravating the spreading of local unrest.

In short, the Chinese government have most likely been diverting the national attention from the economy and use nationalism to rally people around them. If the Chinese economy does meltdown, chances of political instability will surge. This may lead to revolts which may unseat current leaders. So the Chinese government may be spreading the troubles in the region again to distract home audience. It’s all about maintaining power by the political elites.

But for the don’t worry be happy crowd, such deterioration in regional relations will be discounted. For them, there has been little or no risks from protectionism and real military engagements even if these may lead to capital flight. Again for the same crowd, stocks have only one direction: up, up and away!

Natural Disasters: Loss of life means reduced economic growth

At the Mises Institute, Professor Frank Hollenbeck makes a splendid case against the "broken window fallacy" or why “Natural Disasters Don’t Increase Economic Growth”

I’d like to add my humble two cents. 

Disasters usually costs human lives and or injuries. This means dislocation in the economic sphere. Yet each human life lost entails loss of economic activity. Therefore, the loss of human capital simply means reduced economic growth. And no government action will replace lives that had been lost.

Euro and European Periphery Bonds strength hooked on BoJ’s Abenomics, Reversal Time Coming?

Speaking of carry trades, do you know that BoJ’s ‘Abenomics’ stimulus has fostered the the recent strength of the euro and the latest comeback or reprise of the European peripheral bond’s convergence trade? Part of today's risk ON landscape has been due to this too.

From Bloomberg’s chart of the day: (bold mine)

Euro-area peripheral bonds are hooked on Japan’s monetary stimulus.

The CHART OF THE DAY shows Europe’s peripheral bond rally stalled this month as the yen strengthened versus the euro. Last week the Bank of Japan refrained from adding to the 60 trillion yen ($589 billion) to 70 trillion yen poured into the monetary base each year that has encouraged Japanese investors to put money into higher-yielding European assets.

“Peripheral yield spreads appear vulnerable to a correction following the strong rally and the yen tends to often strengthen on credit risk,” said Anezka Christovova, a foreign-exchange strategist at Credit Suisse Group AG in London. “Japanese portfolio flows usually have an impact. Those flows could now divert elsewhere. We don’t expect any substantial action from the Bank of Japan in coming months and that could also lead the yen to strengthen.”

Japanese investors bought a net 1.41 trillion yen of long-term foreign debt in the week ended May 16, the most since Aug. 9, data from the finance ministry in Tokyo showed on May 22. Flows into Europe may be tempered as yields in Europe’s periphery climb. The average yield spread of 10-year Portuguese, Greek, Spanish and Italian bonds over German bunds has risen 20 basis points this month to 270 basis points, after touching 239 basis points on May 8, the lowest since May 2010, based on closing prices.

New York-based BlackRock Inc., the world’s biggest money manager, said on May 8 it had cut its holdings of Portuguese debt, while Bluebay Asset Management said on May 9 it had seen the majority of spread tightening it was looking for.

This yen euro carry perspective has been shared by my favorite laser focused bubble watcher Credit Bubble Bulletin’s Doug Noland: (bold mine)

Importantly, Draghi’s “ready to do whatever it takes… And believe me, it will be enough” was a direct threat aimed at speculators that had accumulated large bets against European debt and the euro. It’s my view that the Fed and BOJ’s extraordinary measures to devalue the dollar and yen – as the ECB refrained from QE - were instrumental in bolstering the vulnerable euro. And with global central banks supporting the euro coupled with Draghi promising a bond backstop, suddenly European periphery bonds were transformed into an incredible opportunity for speculation - in a world awash in free-flowing speculative finance. Stated differently, the major central banks dictated that the hedge funds and speculators reverse their bearish euro-related bets and instead go leveraged long. This powerful Bubble flourishes to this day.

Aside from ensuring financing flows of government, QEs and ZIRPs have implicitly been meant to suppress “shorts” or bearish bets on the asset markets. In other words, monetary policies have directed to massage market prices by fueling a an asset boom. This is the Bernanke/Yellen-Kuroda-Draghi put in action.

Yet if the BoJ will remain resolute in abstaining from providing further stimulus, then the Yen-Euro carry will reverse and most likely bring back Risk OFF environment. But will the BoJ just take the heat from the Wall Streets of the world?

Also, has the Philippine central bank chief's repeated mentioning of the concerns over foreign "hot money" flows been tacitly referring to this yen-euro carry?

Very interesting times indeed.

Quote of the Day: China’s Titanic Moment

I think China’s property market is like the Titanic and it will soon hit an iceberg in front of it…

After hitting the iceberg, the risks will not only be in the real estate sector. The bigger risk will be in the financial sector…

When housing prices fall 20% to 30%, these problems will be all exposed (referring to wealth and trust products.)

This is from tycoon co-founder and chairman of Soho China Ltd. Pan Shiyi as quoted by the Wall Street Journal.

Mr. Pan is not alone. Asia’s richest man Li Ka Shing has reportedly sold all his assets in China early this year, which is demonstrative of Mr. Li’s dire outlook on the economy. This shows where the sentiment of smart money has been.

Deglobalization: Chinese State owned firms to sever ties with US consulting firms

Geopolitical strains have begun to spillover into the economic realm.

The Chinese government orders her state owned companies to cut ties with US consulting firms

From Reuters:

China has told its state-owned enterprises to sever links with American consulting firms just days after the United States charged five Chinese military officers with hacking U.S. companies, the Financial Times reported on Sunday.

China's action, which targets companies like McKinsey & Company and The Boston Consulting Group (BCG), stems from fears the firms are providing trade secrets to the U.S. government, the FT reported, citing unnamed sources close to senior Chinese leaders.

These are seeds of protectionism. If there will be more tit-for-tat responses, protectionist policies will spread and swell to cover many economic areas. This implies deglobalization or a potential significant slowdown of global trade and finance or capital flows. Importantly, protectionism increases the risk of a military showdown. 

Very bullish no?

US Retail-Shopping Mall Bust Deepens

Two weeks back I noted that the US shopping mall of the continuing bubble bust: “just look at how US shopping malls are being demolished. Here is a list of demolished malls and this list will expand”

More signs of financial pressure on US retailers-shopping malls, from Jim Quinn of the Burning platform (bold original) [ht zero hedge]

Retail store results for the 1st quarter of 2014 have been rolling in over the last week. It seems the hideous government reported retail sales results over the last six months are being confirmed by the dying bricks and mortar mega-chains. In case you missed the corporate mainstream media not reporting the facts and doing their usual positive spin, here are the absolutely dreadful headlines:

Wal-Mart Profit Plunges By $220 Million as US Store Traffic Declines by 1.4%

Target Profit Plunges by $80 Million, 16% Lower Than 2013, as Store Traffic Declines by 2.3%

Sears Loses $358 Million in First Quarter as Comparable Store Sales at Sears Plunge by 7.8% and Sales at Kmart Plunge by 5.1%

JC Penney Thrilled With Loss of Only $358 Million For the Quarter

Kohl’s Operating Income Plunges by 17% as Comparable Sales Decline by 3.4%

Costco Profit Declines by $84 Million as Comp Store Sales Only Increase by 2%

Staples Profit Plunges by 44% as Sales Collapse and Closing Hundreds of Stores

Gap Income Drops 22% as Same Store Sales Fall

American Eagle Profits Tumble 86%, Will Close 150 Stores

Aeropostale Losses $77 Million as Sales Collapse by 12%

Best Buy Sales Decline by $300 Million as Margins Decline and Comparable Store Sales Decline by 1.3%

Macy’s Profit Flat as Comparable Store Sales decline by 1.4%

Dollar General Profit Plummets by 40% as Comp Store Sales Decline by 3.8%

Urban Outfitters Earnings Collapse by 20% as Sales Stagnate

McDonalds Earnings Fall by $66 Million as US Comp Sales Fall by 1.7%

Darden Profit Collapses by 30% as Same Restaurant Sales Plunge by 5.6% and Company Selling Red Lobster

TJX Misses Earnings Expectations as Sales & Earnings Flat

Dick’s Misses Earnings Expectations as Golf Store Sales Plummet

Home Depot Misses Earnings Expectations as Customer Traffic Only Rises by 2.2%

Lowes Misses Earnings Expectations as Customer Traffic was Flat

More… (bold original, italics mine)

The pundits, politicians and delusional retail CEOs continue to await the revival of retail sales as if reality doesn’t exist. The 1 million retail stores, 109,000 shopping centers, and nearly 15 billion square feet of retail space for an aging, increasingly impoverished, and savings poor populace might be a tad too much and will require a slight downsizing – say 3 or 4 billion square feet. Considering the debt fueled frenzy from 2000 through 2008 added 2.7 billion square feet to our suburban sprawl concrete landscape, a divestiture of that foolish investment will be the floor. If you think there are a lot of SPACE AVAILABLE signs dotting the countryside, you ain’t seen nothing yet. The mega-chains have already halted all expansion. That was the first step. The weaker players like Radio Shack, Sears, Family Dollar, Coldwater Creek, Staples, Barnes & Noble, Blockbuster and dozens of others are already closing stores by the hundreds. Thousands more will follow.

This isn’t some doom and gloom prediction based on nothing but my opinion. This is the inevitable result of demographic certainties, unequivocal data, and the consequences of a retailer herd mentality and lemming like behavior of consumers. The open and shut case for further shuttering of 3 to 4 billion square feet of retail is as follows:

• There is 47 square feet of retail space per person in America. This is 8 times as much as any other country on earth. This is up from 38 square feet in 2005; 30 square feet in 2000; 19 square feet in 1990; and 4 square feet in 1960. If we just revert to 2005 levels, 3 billion square feet would need to go dark. Does that sound outrageous?

Read the rest here

If this can happen in the US, why does the shopping mall bulls in the Philippines think that they are exempt from the basic law of economics? Because "this time is different"?

Mises Institute’s Jeff Deist: Memorial Day and the Meaning of Freedom

I’ve noticed that almost everyone believes in freedom, except that  their understanding of freedom has been arbitrary: they believe freedom for themselves but not freedom for the others. And so the foundation for the intense competition for the use of social policies to achieve unilateral freedom--via coercion.

In celebration of Memorial Day in the US, Mises Institute’s Jeff Deist explains in brevity the real meaning of Freedom. From Mises Blog (italics original, bold mine)

Memorial Day provides the political class countless opportunities to ruin an otherwise thoroughly enjoyable holiday weekend.  Like clockwork, local congressmen, mayors, city council members, et al. materialize at parades, picnics, and churches to give speeches about “freedom.”

But what does freedom really mean?

Just as we should repudiate Junk English in economics, we should demand precision when it comes to the language of political posturing! In other words, we should insist that politicians use defined terms (I’m not holding my breath).

In essence, freedom is the absence of state coercion. Nothing more, but certainly nothing less.

Dr. Ron Paul explains this coercive reality behind those invoking freedom while advocating state action:

Few Americans understand that all government action is inherently coercive. If nothing else, government action requires taxes. If taxes were freely paid, they wouldn’t be called taxes, they’d be called donations. If we intend to use the word freedom in an honest way, we should have the simple integrity to give it real meaning: Freedom is living without government coercion. So when a politician talks about freedom for this group or that, ask yourself whether he is advocating more government action or less.

Taking this definition a step further, Hans-Hermann Hoppe describes a free society as the absence of aggression against one’s body and property:

A society is free, if every person is recognized as the exclusive owner of his own (scarce) physical body, if everyone is free to appropriate or “homestead” previously un-owned things as private property, if everyone is free to use his body and his homesteaded goods to produce whatever he wants to produce (without thereby damaging the physical integrity of other peoples’ property), and if everyone is free to contract with others regarding their respective properties in any way deemed mutually beneficial. Any interference with this constitutes an act of aggression, and a society is un-free to the extent of such aggressions.

In The Ethics of Liberty, Murray Rothbard similarly defined freedom as the “absence of invasion by another man of any man’s person or property” (italics in original).

This encapsulates the critical libertarian concept of negative liberty, as opposed to the view of positive liberty in the form of mastery over one’s person and surroundings generally favored by “progressives.”

This definition of freedom is fundamental.  It means free people should be able to use their minds, bodies, and talents to advance their well-being (whether material, intellectual, or spiritual) as they see fit.  It does not mean they can demand freedom from material want, or scarcity, or illness, or unhappiness, or unpleasantness generally.  It does not mean anyone owes them housing, medical care, food, or a “living wage.” It means, in sum, the freedom to be left alone.  And this is precisely what the political class of all stripes cannot abide.

Real freedom applies to everyone.