Professions of Politicians

The Economist came up with an unusual observation about the stereotyped professions of politicians in different countries.

From the Economist, ``WHEN Barack Obama met Hu Jintao, his Chinese counterpart, it was an encounter not just between two presidents, but also between two professions. A lawyer, trained to argue from first principles and haggle over words, was speaking to an engineer, who knew how to build physical structures and keep them intact. To find out why some professions are prevalent among politicians The Economist trawled through a sample of almost 5,000 politicians in “International Who’s Who”, a reference book, to examine their backgrounds. Some findings are predictable. Africa is full of military men, while lawyers dominate in democracies such as Germany, France and, of course, America. China has a fondness for engineers. But other countries have their own peculiarities. Egypt likes academics; South Korea, civil servants; Brazil, doctors."

Military leaders in Africa reflects on the despotic state of national governance, while "law" in democracies are representative of the prominence of argumentation and debate characteristics which are almost always designed to win the appeal of voters.

Here in the Philippines, many past and present politicos have "law" as background. 8 of the 14 Philippine Presidents were law graduates, namely Ferdinand Marcos, Diosdado Macapagal, Carlos Garcia, Elpidio Quirino, Manuel Roxas, Sergio Osmenia, Jose Laurel, Manuel Quezon. Even Corazon Aquino had an unfinished post graduate studies in law.

Interestingly, since President Marcos, the succeeding presidents have had diverse credentials: Asia's first female President Corazon Aquino had been known as "plain housewife", President Fidel V. Ramos had been a top ranking military officer, President Joseph Estrada a prestigous film actor and the incumbent President Gloria Macapagal Arroyo had been an academic economist and a civil servant.

Nonetheless going back to the commentary by the Economist, we can't explain the quirks of China (fondness for engineers), South Korea (civil servants), Egypt (academics) or Brazil (doctors).

But all these reminds me of two signficant commentaries from Frank Chodorov (1887–1966) in Economics versus Politics, The Rise and Fall of the Society where he says (bold highlight mine)...

``The intrusion of politics into the field of economics is simply an evidence of human ignorance or arrogance, and is as fatuous as an attempt to control the rise and fall of tides. Since the beginning of political institutions, there have been attempts to fix wages, control prices, and create capital, all resulting in failure. Such undertakings must fail because the only competence of politics is in compelling men to do what they do not want to do or to refrain from doing what they are inclined to do, and the laws of economics do not come within that scope. They are impervious to coercion. Wages and prices and capital accumulations have laws of their own, laws which are beyond the purview of the policeman."

and secondly...

``The assumption that economics is subservient to politics stems from a logical fallacy. Since the state (the machinery of politics) can and does control human behavior, and since men are always engaged in the making of a living, in which the laws of economics operate, it seems to follow that in controlling men the state can also bend these laws to its will. The reasoning is erroneous because it overlooks consequences. It is an invariable principle that men labor in order to satisfy their desires, or that the motive power of production is the prospect of consumption; in fact, a thing is not produced until it reaches the consumer."

The underlying moral: regardless of the politician's experience or background, the law of economics must dominate society's needs.

Fed's "Short Circuiting of Inflationary Consequences" Equals Greater Risks of Hyperinflation

Wall Street Journal's economic blog yesterday noted of the surge in the US Federal Bank's balance sheet.

WSJ's Tim Hanrahan reported, ``The U.S. Federal Reserve’s balance sheet expanded again in the latest week with asset holdings growing to $2.19 trillion Wednesday from $2.09 trillion a week earlier as reduced use of traditional lending facilities was again offset by a rise in the central bank’s holdings of mortgage-backed securities."

But according to Dallas Fed President Richard Fisher inflation isn't a threat or even a concern since the Fed would be able to engineer a reversal of these policies once economic growth kicks in.

``It is clear that we will grow our balance sheet even more as we complete our programs," Fisher said. "We are acutely aware ... that this may give rise to some apprehension among large holders of Treasuries and agency paper such as your (the Chinese) government," he said. But Fisher said the Fed is committed to short-circuiting "any inflationary consequences of its balance sheet growth."(Reuters)

This is highly presumptive for an institution that failed to foresee or even control this crisis from happening. Yet an exit strategy hasn't been publicly defined by the Fed or the US government, except for opaque general statements as the above.

On the other hand, the case against the Fed's ability to reverse the inflationary policies which risks the path towards hyperinflation has been strongly spelled out by Delta Global Advisors as quoted by Chris Whalen of Institutional Risk Analytics...

From Delta Global Advisors (all bold highlights mine)

``Historically speaking, the composition of the Fed's balance sheet has been mostly Treasuries. And the Federal Open Market Committee would typically raise rates by selling Treasuries from its balance sheet into the market to soak up excess liquidity. However, because of the Fed's decision to purchase up to $1 trillion in Mortgage Backed Securities (and other unorthodox holdings), it will not be selling highly-liquid US debt to drain reserves from banks. Rather, it will be unwinding highly distressed MBS and packaged loans to AIG. Not to mention the fact the Fed would have to break its promise of being a "hold-to-maturity investor" of such assets.

``Moreover, not only are the new assets on the Fed's balance sheet less liquid but the durations of the loans are being extended. According to Bloomberg, the Fed is contemplating extending TALF loans to buy mortgaged backed securities to five years from three after pressure it received from lobbyists and a failed second monthly round of auctions. That means when it finally decides it's time to fight inflation, the Fed will find it much more difficult to reverse course.

``But because of the extraordinary and unprecedented (some would say illegal) measures Mr. Bernanke has implemented, only $505 billion of the $2 trillion balance sheet is composed of U.S. Treasury debt. Today, most Fed assets are derived from the alphabet soup of lending programs including $250 billion in commercial paper, $312 billion of Central Bank liquidity swaps and $236 billion in mortgage-backed securities.

``Thus, our economy has become more addicted than ever to low interest rates. But because bank assets will now be collecting income at record low rates, when and if the Fed tries to raise rates it will only be able to do so on the margin. If Bernanke raises rates substantially to fight inflation, banks will be paying out more on deposits than they collect on their income streams. Couple that with their already distressed balances sheets and look out!

``Additionally, not only do the consumers need low rates to keep their Financial Obligation Ratio low, but the Federal government also needs low rates to ensure interest rates on the skyrocketing national debt can be serviced. Our projected $1.8 trillion annual deficit stems from the belief that the government must expand its balance sheet as the consumer begins to deleverage. In fact, both the consumer and government need to deleverage for total debt relief to occur, else we're just shuffling debts around and avoiding a healthy deleveraging entirely.

``In order to have viable and sustainable growth total debt levels must decrease, savings must increase and interest rates must rise. But that would require an extended period of negative GDP growth-a completely untenable position for politicians of all stripes. Ben Bernanke would like you to believe inflation will be quiescent and he can vanquish it if it ever becomes a problem. Just make sure you don't invest as though you believe him."

If the US government hasn't been able to resolve the issue of how to go about liquidating the banking system's toxic assets, it is equally absurd to believe that they can easily liquidate some of these into the market which are accounted for in the assets of the Fed's balance sheets.

As Professor Art Carden noted in the Mises Blog, ``Any social policy must be economically possible before it can be considered morally desirable".

The Fed's social policy doesn't seem economically possible, hence risks an undesirable moral outcome.

Global Stock Market Performance Update: The BRICs and Emerging Markets Dominate Gains

Bespoke Invest gives us a good rundown on the performances of global stockmarkets as of Apr 16th.

According to Bespoke, ``The MSCI World index bottomed on March 9th just as the S&P 500 did. Below is a table highlighting stock market performance for 83 countries around the world since March 9th and year to date. As shown, Ukraine is up the most since March 9th with a gain of 67%. Ukraine is followed by Puerto Rico, Romania, Peru, and Russia. Even after rallying 52.7% since March 9th, Puerto Rico is still down 34% year to date. Ten countries are actually down since March 9th, with Bermuda falling the most at 22%.

``Of the BRIC countries, Russia has done the best since March 9th, followed by India (34%), Brazil (24%), and then China (19.6%). Italy has been the best performing G-7 country with a gain of 37.7%. The US ranks second in the G-7, followed by Germany, Japan, and Canada. The UK has been the worst performing G-7 country since March 9th with a gain of 14%.

Bespoke uses the March 9th low as reference point from which has been premised from the US bottom.

We don't like to get caught in a selective perception since as the stockcharts.com above shows that China and Emerging Markets have begun to recover even prior to the US bounce.

We also don't buy the argument that the reason for outperformance of EM economies has been due to the degree of losses suffered. This "rear view mirror" perspective glosses over the overall boom bust performances of EM versus G7 from 2003-todate. It's no use to nitpick over "technicalities" though, since the playing field is always about tomorrow.

And our thought is that EM markets are likely to continue to outperform the structurally credit bubble-bust impaired G7 economies.

On a year to date basis, Bespoke adds, ``Year to date, Peru ranks first with a gain of 45.47%, followed by China, Pakistan, and Taiwan. Bermuda, Costa Rica, and Nigeria are down the most year to date."

We'd like to alter how the above quote has been framed.

On a year to date basis:

Except for Canada whose gains registered 2.58%, the rest of the G7 markets are all negative: Italy 6.45%, US 5.47%, Germany 4.17%, Japan 1.18%, France 5.59% and Britain 8.6%.

In contrast the BRIC's scorecard are all markedly positive: Brazil 21.2%, Russia 29.7%, India 13.48% and China 39.18%. Moreover, most EM markets are likewise up.

Our point: Global financial markets presently debunk the claims that "decoupling is a myth".

Cartoon of the Day: Occupational Hazard

From Dilbert (Hat tip Greg Mankiw)

Has China Begun Preparing For The Crack-Up Boom?

We came across a thought provoking article by Telegraph’s Ambrose Evans-Pritchard where he suggests that perhaps China’s diversification from US assets might already be happening.

But instead of accumulating gold, which most observers have been expecting her to do, the diversification process could have been channeled through unexpected assets….copper and other base metals.

We quote Mr. Pritchard in “A Copper Standard' for the world's currency system?” (bold highlight mine)

``China's State Reserves Bureau (SRB) has instead been buying copper and other industrial metals over recent months on a scale that appears to go beyond the usual rebuilding of stocks for commercial reasons.

``Nobu Su, head of Taiwan's TMT group, which ships commodities to China, said Beijing is trying to extricate itself from dollar dependency as fast as it can.

``"China has woken up. The West is a black hole with all this money being printed. The Chinese are buying raw materials because it is a much better way to use their $1.9 trillion of reserves. They get ten times the impact, and can cover their infrastructure for 50 years."

``"The next industrial revolution is going to be led by hybrid cars, and that needs copper. You can see the subtle way that China is moving into 30 or 40 countries with resources," he said.

``The SRB has also been accumulating aluminium, zinc, nickel, and rarer metals such as titanium, indium (thin-film technology), rhodium (catalytic converters) and praseodymium (glass).

Circumstantial evidence seem to corroborate such hypothesis.

One, China’s purchases of US treasuries appears to have slowed.

According to the New York Times, ``China’s foreign reserves grew in the first quarter of this year at the slowest pace in nearly eight years, edging up $7.7 billion, compared with a record increase of $153.9 billion in the same quarter last year.

While others suggests that China’s apparent moderation in acquiring of US assets could be a function of diminishing forex reserve accumulation, the alternative is that China could indeed be massively accumulating base metals including copper.

Next, copper prices have been on a rampage since hitting a low last December.

And if Mr. Pritchard’s account of China’s accumulation is accurate then the rise in base metal prices could also be reflective of the Middle Kingdom’s tacit diversification…

Moreover, Mr. Pritchard seems to connect these activities to China’s recent call for a global currency system.

From Mr. Pritchard, ``Zhou Xiaochuan, the central bank governor, piqued the interest of metal buffs last month by calling for a world currency modelled on the "Bancor", floated by John Maynard Keynes at Bretton Woods in 1944.

``The Bancor was to be anchored on 30 commodities - a broader base than the Gold Standard, which had caused so much grief in the 1930s. Mr Zhou said such a currency would prevent the sort of "credit-based" excess that has brought the global finance to its knees.

``If his thoughts reflect Communist Party thinking, it would explain the bizarre moves in commodity markets over recent weeks. Copper prices have surged 49pc this year to $4,925 a tonne despite estimates by the CRU copper group that world demand will fall 15pc to 20pc this year as construction wilts…

``The beauty of recycling China's surplus into metals instead of US bonds is that it kills so many birds with one stone: it stops the yuan rising, without provoking complaints of currency manipulation by Washington; metals are easily stored in warehouses, unlike oil; the holdings are likely to rise in value over time since the earth's crust is gradually depleting its accessible ores. Above all, such a policy safeguards China's industrial revolution, while the West may one day face a supply crisis.”

Mr. Pritchard’s essay reminds us of Ludwig von Mises' admonition in Interventionism: An Economic Analysis, Inflation and Credit Expansion of the harmful effects of persistent inflationary policies…

``But on the other hand inflation cannot continue indefinitely. As soon as the public realizes that the government does not intend to stop inflation, that the quantity of money will continue to increase with no end in sight, and that consequently the money prices of all goods and services will continue to soar with no possibility of stopping them, everybody will tend to buy as much as possible and to keep his ready cash at a minimum. The keeping of cash under such conditions involves not only the costs usually called interest, but also considerable losses due to the decrease in the money’s purchasing power. The advantages of holding cash must be bought at sacrifices which appear so high that everybody restricts more and more his ready cash. During the great inflations of World War I, this development was termed “a flight to commodities” and the “crack-up boom.” The monetary system is then bound to collapse; a panic ensues; it ends in a complete devaluation of money Barter is substituted or a new kind of money is resorted to. Examples are the Continental Currency in 1781, the French Assignats in 1796, and the German Mark in 1923.”

While China has spoken of the need for a global currency, our thought is in acquiescence to Mr. Pritchard's supposition that China could indeed be seeking insurance with massive purchases of metals which could eventually back their currency.

Maybe China's is doing a flanking approach with accumulation centered mostly in base metal and copper first, agriculture and energy next and lastly gold.

The Prospective Farming Boom: The Japan Experience

Legendary investor Jim Rogers has repeatedly predicted that participants of the next global sunshine industry would be driving Lamborghinis and Maseratis will be mostly farmers.

In Japan, farming appears to be on a verge to a boom but NOT because of demand-supply disparities as seen through rising commodity prices YET. But because farming seems to be a dying industry (again validating the view that the age long neglect of the industry has been contributing to global supply pressures) and presently benefiting from the recessionary pressures in their economy- farming is one of the industries that has the capability to absorb displaced and idled workers from the recent crisis.

All pictures from Wall Street Journal, slide show here

This from the Wall Street Journal, (all bold highlights mine)…

``As the global financial crisis sinks Japan into its worst recession since World War II and hundreds of thousands of jobs are slashed in factories and offices, farming has emerged as a promising new career track. "Agriculture Will Save Japan," blared a headline for a business weekly magazine. Farmer's Kitchen, a popular new Tokyo restaurant, plasters its walls with posters of hunky farmers who supply the eatery with organic vegetables.

``Seeing agriculture as one of the few industries that could generate jobs right now, the government has earmarked $10 million to send 900 people to job-training programs in farming, forestry and fishing. Japan's unemployment rate was 4.4% in February, up from 3.9% a year earlier, but still lower than the U.S. or Europe. Some economists expect the figure to rise to a record 8% or so within the next couple of years.

``Policy makers are hoping newly unemployed young people will help revive Japan's dwindling farming population, where two in three full-time farmers are 65 or older. Of Japan's total population, 6% work in agriculture, most doing so only part time, down from about 20% three decades ago.

``"If they can't find young workers over the next several years, Japan's agriculture will disappear," said Kazumasa Iwata, a government economist and former deputy governor of the Bank of Japan.

Of course a radical shift in the economy export driven environment has brought about a resistance to change in terms of work attitude.

Again from the same WSJ article,

``Despite the popularity of the training programs and of the government's longer, one-year farm internships, many young people end up returning to cities, unable to adjust to life in the countryside. Last year, Fukiko Oshiro, a farmer in western Okayama prefecture, hired five workers from cities like Osaka, including a couple of former salesmen, to work at her nursery and fruit farm. She said she has already lost three of them.

``"These young people think it's their right to come and impose on us," said Ms. Oshiro as she surveyed her busy farm stand recently. "They have no idea how much work we put in to teach them."

``Since the beginning of the year, said Ms. Oshiro, her farm has received a flood of résumés from people affected by the recession, including some let go from a nearby assembly plant of Mitsubishi Motors Corp. While Ms. Oshiro needs more workers for her expanding farm, she doesn't have high expectations for these applicants.

``"At least people who came before were interested in agriculture," the 49-year-old said. "These new applicants are coming because they have no other choice."

All these simply show how resources misused in the previous unsustainable policy induced booms which are released from the present contracting activities and are being transferred into previously underinvested but are today's expanding industries.

Finally as to bust turning into a boom relative to labor, here is a description from John Cochran and Noah Yetter in Capital in Disequilibrium: An Austrian Approach to Recession and Recovery (bold emphasis mine)

``The reallocation of labor develops in much the same fashion as the reallocation of capital. Firms realize they have employed labor in a pattern inconsistent with consumer preferences, and this labor is then liquidated (i.e.: workers are laid off). It must be remembered that labor has specificity just like capital does, and it likely will not do to offer workers pay cuts when the type of labor services those workers provide is realized to be wholly inappropriate (viz. consumer preferences)….Unfortunately for workers, it is difficult for the economy to reallocate labor until it has already reallocated capital. That is, though firms are realizing their errors and adjusting production plans to once again coincide with consumer preferences, labor employment in sectors towards which activity is being directed is not likely to be strong until the necessary capital is in place to complement it.”

Until more capital is promptly reallocated towards farming where the benefits will be strongly felt, the present recovery will likely be muted.

Nonetheless, the torrent of global government spending ensures that this phenomenon will likely accelerate.

F.A. Hayek Interviewed By John O'Sullivan

F.A. Hayek Interviewed By John O'Sullivan from FEE on Vimeo.

George Carlin on Saving The Planet

Some trenchant excerpts from comedian George Carlin [Hat tip Mark Perry]...

``Saving endangered species is just one more arrogant attempt by humans to control nature. It’s arrogant meddling. It’s what got us here in the first place. Doesn’t everybody understand? Interfering with Nature”

``We’re so self-important. Everybody’s gotta save something else…and the greatest arrogance of all is save the planet. What? What is this @#$%^ people kidding me? Save the planet when we don’t even know how to take care of ourselves yet! We haven’t learned to care for one another, we’re gonna save the@#$%^ planet? I am getting tired of that %^&#!

``I am tired of the @#$%^ earth day, I am tired of this self-righteous environmentalists, this white bourgeois liberals who think that the only thing wrong with this planet is that there isn’t enough bicycle paths. People trying to make the world safe for their Volvos.

``Besides, environmentalists don’t give a $%^& about the planet, they don’t care about the planet. Not in the abstract they don’t. You know what they are interest in? A clean place to live. Their own Habitat. They’re worried that someday that they’d be personally inconvenienced. Narrow unenlightened self-interest doesn’t impress me. Besides, there is nothing wrong with the planet.

``...there is nothing wrong with the planet, the planet is fine, the people are @#$%^&! Difference…compared to the people the planet is doing great. It has been here for 4 ½ billion years…

``We’ve been only engaged in heavy industry for a little over 200 years…200 year versus 4 ½ billion, and we have the conceit to think that somehow we are a threat, that somehow we’ll put in jeopardy….

``The planet has been through a lot worst than us…earthquakes, volcanoes, quake tectonics, continental drift, solar flares, sun spots, magnetic storms, the magnetic reversal of the poles, hundreds of thousands of years of bombardment by comets and asteroids and meteors, worldwide floods, tidal wave, worldwide fires, erosion, cosmic rays, recurring high stages….and we think some plastic bags and some aluminum cans are going to make a difference???!!!

``The planet will be here for a long long looonngg time after we’re gone, and will heal itself, it will cleanse itself, because that is what it does, it is a self correcting system…

Wikinomics: The Exploding Growth In Social Networking Media

We are witnessing a growth juggernaut in social networking.

In the US social networking among broadband users have soared by 93% according to a new report from Netpop Research, LLC that delves into social networking trends and habits (Marketing Charts).

And talking, sharing, and providing opinions and perspectives have been taking up the "new" form of entertainment displacing the traditional forms as shown below. (All charts from Marketingcharts.com)

Of the 105 million US users, a big majority or 76% are counted as active participants to social media.

This implies of the sundry roles of contribution: upload audio/video, post to wiki, publish a blog, upload photos or podcasts, publish websites, tag articles or vidoes, post to microblog, send/forward email, live in a virtual world, post to blog or forum, rate or review products, P2P file sharing, publish personal pages...see below

Meanwhile, WEB 2.0 is being shaped at the margins.

Web 2.0 is defined by wikipedia.org as the ``perceived second generation of web development and design, that facilitates communication, secure information sharing, interoperability, and collaboration on the World Wide Web. Web 2.0 concepts have led to the development and evolution of web-based communities, hosted services, and applications; such as social-networking sites, video-sharing sites, wikis, blogs, and folksonomies.”

This means less than 10% of US broadband users are “heavy” social media contributors, concentrating their activities to at least 6 applications- such as blogging, microblogging, social networking and photo/video sharing - and connect with 248 people on a one-to-many basis in a typical week (marketing charts.com).

And which is the most used social networking media?

According to Marketingcharts.com which quotes Hitwise it is still MySpace, ``MySpace accounted for 52.21% of those visits, the highest in the category, despite a decrease in visits of 28% compared with February 2008.” Albeit MySpace appears to be losing out to competitors.

Nonetheless, while MySpace is where Americans spent more time among the most visited media: “with 29 minutes and 38 seconds - though this represents a decrease of 2% compared with February 2008”, the fastest growth was seen in Facebook and Tagged.

Again from Marketing Charts, `` In contrast to MySpace’s negative growth, US visits to Facebook increased 149% in February 2009 compared with February 2008. The site received the second-highest market share of US. visits for the month, with 36.03%. Tagged received 2.47% of visits in February 2009, the third-largest number, and had the largest percentage gain in market share of visits among the top five visited websites increasing 280% compared with February 2008.”

Yet based on demographics, Facebook appeals more to older users…

``Looking at the demographic breakdown of visitors to MySpace and Facebook, users between the ages 18-34 still dominate, as 58.81% and 53.91% of US visits, respectively, came from those combined age groups in February 2009. This represents a 2% growth for MySpace and a 14% decline for Facebook in terms of year-over-year percentages. Visitors to the sites who are age 35+ have increased 23% to Facebook in February 2009 compared with February 2008, while visitors from that age group to MySpace have declined 2%.” reports the Marketingcharts.com

All of these underscores of the exploding social networking business model of Wikinomics (openness, peering, sharing and acting globally). This means that from an investment point of view companies actively exploiting these opportunities could be tomorrow’s bonanza.

Importantly we can take note of additional social networking data from Marketingcharts.com:

Additional findings about Chinese users:

-China has a sizable proportion of social media contributors who participate in many Web 2.0 activities, including blogs, micro-blogs, social media, video and photo sharing

-43% of Chinese broadband users (105 million) contribute to forums and discussion boards.

-Young professionals ages 25-29 are the most active users of social media in China. They use more online modes of communication more often than any other age group.

-37 percent of bloggers, or 29 million bloggers, post to blogs on a daily basis.

-41 million Chinese are heavy social media contributors (6+ activities) who connect with 84 people on a ‘one-to-many’ basis in a typical week.

For Chinese Netizens, Netpop said, social media add exponentially to the sources and perspectives available online and represent a new experience for a country accustomed to a single source for media and information.

A global growth juggernaut indeed.

Somalia’s Growing Pirate Industry, Understanding Pirates’ Historical Role

Happy Easter!

Pirates are in the news again.

No, this isn’t about Johnny Depp as Jack Sparrow and the Pirates of the Caribbean in search of mythical treasures but about Somalia’s burgeoning Pirate industry.

The recent abduction of Maersk Alabama Captain Richard Philips puts into spotlight how Somali’s buccaneering industry has grown audacious enough to challenge world’s superpower.

According to the Associated Press, ``Capt. Richard Phillips, of Underhill, Vt., is believed to have been the first U.S. citizen taken by pirates since 1804, when U.S. Navy Commodore Stephen Decatur battled the infamous Barbary pirates off the northern coast of what is now Libya, dispatching U.S. Marines to the shores of Tripoli.”

``Last year, more than 40 ships were captured, and with ransoms ranging from $500,000 (£341,120) to $2m, they have made a fortune. One pirate, Yassin Dheere, recently said he had made $250,000 from a single incident” reports the BBC.

In a memo prepared last month by the staff of the U.S. House Armed Services the estimated cumulative ransoms ranged from around $30-80 million in a $5.524 billion economy- based on purchasing power (CIA).

The distribution of the Pirates revenues are based on an organizational hierarchy as described by the Associated Press,

``The memo cited one captured pirate as saying pirates only take 30 percent of ransoms — on average $1 million to $2 million per boat.

``Twenty percent goes to group bosses, 30 percent is spent on bribing local officials, and 20 percent goes for capital investment like guns, ammunition, fuel, food, cigarettes. (Cuss said pirates were becoming more sophisticated and in the last two months have, for the first time, begun launching nighttime attacks, possibly indicating pirates have obtained night-vision goggles).

``U.S. officials have found no direct ties between East African pirates and terror groups, but the illegal trade is believed backed by an international network of Somali expatriates who offer funds, equipment and information in exchange for a cut of ransoms.

``The House memo said Somali buccaneers operate in five well-organized groups, drawing members from large clans, which are extended family networks. Cuss said the industry is controlled by "warlords and criminal gangs who recruit local fishermen and take a lion's share of the profits."…

``Today, they number around 1,500, up from around 100 five to seven years ago, Mwangura said.”

What’s interesting to know is that following years of Somali’s statelessness, piracy evolved not out of the intent to practice banditry but from a vigilante movement aimed at fighting off unlicensed foreign trawlers (estimated at 700 foreign fishing vessels by a UN group) which has illegally been fishing and against foreign vessels which has been dumping toxic and hazardous waste at Somalia's fish rich waters. In addition, trespassing foreign boats had allegedly used intimidation tactics and hired militants to harass natives.

With threatened livelihoods, a communal thrust to combat these external threats emerged. Hence, Somalia’s pirate industry was born.

``What began as a defensive movement by local fishermen has evolved into a complex amalgamation of banditry, organized crime, freebooting, and insurgency targeting all types of vessels from fishing trawlers to oil tankers. Somali waters emerged as the hotbed of piracy, accounting for close to 32% of attacks reported globally between January and September 2008. Some fishermen independently attack foreign vessels, others join well-organized pirate groups consisting of criminal gangs, warlords, and clan militias who in turn attack foreign vessels, local fishermen, and each other. Organized groups commit most attacks and are well armed, equipped with fast-boats, satellite navigation, radios, and employ large “mother-ships” to launch long-distance operations.” wrote Christopher Jasparro National Security Affairs at the U.S. Naval War College at Yale Center for Globalization (Yale global)

Pirates have also functioned as private security for some private companies which has likewise parlayed into a booming coastal cities.

Adds Mr. Jasparro, ``The failed governance of the country also comes into play. Officials from Somalia’s semi-autonomous region of Puntland issue “licenses” to foreign vessels that then employ pirates as security. With local and diaspora businessmen and clan leaders providing logistics and capital to pirates Puntland’s coastal cities are experiencing a piracy fueled economic boom. Pirates masquerade as Robin Hood-like defenders of Somalia, supposedly protecting the country from exploitation.”

Remember, there are always 2 sides to a coin.

And yes, they’ve been described “noble heroes” by native Somalis according to the Associated Press.

Another angle to look at this is--since Somalia has no functional government, pirates operate similar to an ad hoc naval force which taxes (by kidnap for ransom or by robbery) on vessels plying their waters.

The fact that Somalia’s Pirate industry stemmed from what Mr. Jasparro aptly calls as ``Weakly governed and failed states are often themselves victimized by foreigners” suggests that the solution required to deal with this highly complex predicament is not merely a military approach but principally a geopolitical one.

For as long the interests of the Somalis appear to be threatened by so-called “abusive” foreigners, under the conditions where the country can’t fend for itself, Somalis will likely justify the existence of the industry.

Finally, Peter Leeson an economics professor at George Mason University and author of The Invisible Hook: The Hidden Economics of Pirates recently has an interesting take on the contribution of historical Pirates to the quest for liberty…

Mr. Lesson wrote at the NPR.org (all bold highlights mine),

``Pirates are getting a bad rep. Every month we hear more news of the Somali pirates' depredations, most recently involving an attack on an American crew. To be sure, these pirates deserve our condemnation. They're thugs and the world would be better without them.

``But we shouldn't let our condemnation of modern pirates spill over, unchecked, onto their more colorful, and socially contributory, early 18th-century forefathers. These Caribbean pirates, men like Blackbeard, "Black Bart" Roberts, and "Calico" Jack Rackam, were also watery thieves. But unlike their Somali successors, they didn't only take something out of the world. They gave the world something of value, too.

``Historical pirates were harbingers of some of contemporary civilization's most cherished values, such as liberty, democracy and social safety. At a time when the legitimate world's favored system of government was unconstrained monarchy, Caribbean pirates were practicing constitutional democracy. Before setting sail each would-be pirate crew drew up and agreed to a set of written rules that governed them. These rules regulated gambling, smoking, drinking, the adjudication of conflicts and, in some cases, even prohibited harassing members of the fairer sex.

Read the rest here.

Ahead of the Curve: Web Search Trends

Looking for ways to get ahead of the curve?

Google offers an innovative method to predict market or economic trends: by search “query data”.

From Google

The above shows of a tight correlation between sales of Ford vehicles and the google search trends for Ford.

This from Hal Varian, Chief Economist and Hyunyoung Choi, Decision Support Engineering Analyst of Google (bold highlight mine),

``The answer depends on what you mean by "predict." Google Trends and Google Insights for Search provide a real time report on query volume, while economic data is typically released several days after the close of the month. Given this time lag, it is not implausible that Google queries in a category like "Automotive/Vehicle Shopping" during the first few weeks of March may help predict what actual March automotive sales will be like when the official data is released halfway through April.

``That famous economist Yogi Berra once said "It's tough to make predictions, especially about the future." This inspired our approach: let us lower the bar and just try to predict the present.

``Our work to date is summarized in a paper called Predicting the Present with Google Trends. We find that Google Trends data can help improve forecasts of the current level of activity for a number of different economic time series, including automobile sales, home sales, retail sales, and travel behavior.

``Even predicting the present is useful, since it may help identify "turning points" in economic time series. If people start doing significantly more searches for "Real Estate Agents" in a certain location, it is tempting to think that house sales might increase in that area in the near future.”

In other words, trends from web search data could function as "lead" indicator for possible “turning points” of economic or market activities.

I tried to confirm this theory by comparing the trend of stock market searches with the performance of global stock markets.

And got a pleasant surprise…

Of the last 6 spikes in Google trend’s search for stock market…

largely coincided with stock market bottoms or “inflection points” with stunning near precision (except during the meltdown in October).

Arrows from stockcharts.com reflected on the spikes seen in the Google search trend chart above.

Google trend’s activities somehow appear to mirror the VIX or Fear Index, where such correlation (a peak in searches and a stock market bottom) could have been due to people’s greater appetite for more information possibly out of fear or angst (especially during the latest panic).

Yet I think it won’t be long where markets could spawn out of Google’s trends something in the line of prediction markets or in derivatives.

Finally this reminds us of Jean Baptiste Say’s quote in A Treatise on Political Economy.

``the advantage enjoyed by everyone who, from distinct and accurate observation, can establish the existence of these general facts, demonstrate their connection and deduce their consequences. They as certainly proceed from the nature of things as the laws of the material world. We do not imagine them; they are results disclosed to us by judicious observation and analysis.....

Looks like a handy tool. Thanks for the tip Google.