Market Myths and Fallacies On The Dubai Debt Crisis

``Economic history is a never-ending series of episodes based on falsehood and lies, not truths. It represents the path to big money. The object is to recognize the trend whose premise is false, ride that trend, and step off before it is discredited" -George Soros

For an abbreviated trading week, the US Federal Reserve bought $11 billion worth agency debt, mortgage backed debt securities and US treasury. Tyler Durden of Zero Hedge notes that the balance sheet of the Federal Reserve has “hit a new all time record of $2.2 Trillion in assets”.

Following their failed prediction for a market collapse late October, the “desperately seeking normal camp” are back with their old antics of forecasting a deflationary doomsday or the “end of the bear market rally”, following the latest market volatility prompted for by the events at Dubai.

Dubai through its state owned Dubai World asked “creditors for a “standstill” agreement as it negotiates to extend debt maturities” (Bloomberg) last November 25^th, which apparently rattled Europe first, whose shockwaves reached Asia, and belatedly to the US-since the latter was on a Thanksgiving holiday when the Dubai debt crisis surfaced.

We then read headlines of “Era Of Green Shoots Over” or “Hyperinflation in Reverse” or “Mark End of Risk Trade” or emotive comments like ``The stock markets and the bond markets are in violent disagreement, and at some point, it is going to be resolved by a sell-off in the equity markets” (New York Times) to even a simpleton “expert” swagger at a Bloomberg interview claiming that “when a crisis emerges everyone runs to the US dollar”.

Figure 1: stockcharts.com: Dubai Temblor

As one would observe in Figure 1, upon the revelation of the Dubai debt crisis on the 25^th, the US dollar fell steeply to a 17 month low rather than functioned as safehaven, as fictitiously alleged by the expert.

It was the next day, Friday, when the violent US Dollar rally occurred, which inversely took down commodities as gold. Babbling from the perspective of Friday’s action as a generalized trend is blatantly misleading.

However, the rally appeared like a knee jerk response. The USD gave back most of its gains but still ended the session 1% higher. This huge reversal was equally reflected on the commodity markets.

Yet despite the sharp intraday fall of gold, the former commodity money bounced mightily until the end of the session. Over the week gold registered a 2.3% gain, just a few percentage points (about 1.5%) off its fresh record high $1195, established Thursday, incidentally when the lid of the Dubai crisis was uncovered.

It takes a lot of chutzpah to make logically false claims on air.

I would like to further point out that the rally in bond markets have been an ongoing event since late October as shown by the record move of the 2 year Treasury bill (see window $USTU). This means the rally has fundamentally little to do with the Dubai crisis, and could likely reflect on position squaring for sprucing up year end balance sheet goals of financial institutions and or importantly, a manifestation of the distortions from government interventions.

To interpret for a “violent disagreement” that would be resolved by a selloff in the stock markets accounts for as nothing more than a preconceived bias which fallaciously underestimates the political imperatives by the US government (or even global governments) to support asset markets with the ultimate aim to uphold the survivability of the US banking and financial sector.

Proof? A Bloomberg report as quoted by the Credit Bubble Bulletin: ``French Prime Minister Francois Fillon said Dubai’s request to reschedule debt repayments shows the global financial crisis “is not over” and that stimulus efforts must be maintained to avoid “breaking the weak recovery.’” (emphasis mine)

Figure 2: New York Times: Tsunami Of Debt

If there is any asset market that would likely experience a bust as a result of the reversal of bubble conditions, it would primarily be the US treasury market.

According to the New York Times, ``With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher.”

$1.9 trillion of debt required for refinancing + $1.5 trillion in additional deficits + $ .2 trillion in interest payments=$3.6 trillion of financing required for 2010! Since US and global savers (particularly Asia) are unlikely to finance this humungous amount, [other parts of the world will require debt financing too (!!)], the available alternative options appear to be narrowing-the Federal Reserve would have to act as the financer of last resort through the Bernanke’s printing press or declare a default. Of course, Bernanke could always pray for a “Dues ex machina” miracle.

So embracing a bond bubble “out of deflationary fears” would be like a Turkey accustomed to a plethora of feeds but is unknowingly headed for the Thanksgivng day kitchen.

We might like to add that Europe’s stocks as represented by $STOX 50 appears to have been diverging with US stocks, even prior to the Dubai episode. While US stocks are off the new highs, European stocks have been flaccid since mid November. The Dubai debt crisis has only exacerbated the sentiment rather than ‘caused’ it.

And another important perspective missed by the mainstream is that China’s Shanghai bellwether, which lost 6.4% this week (as seen in the $SSEC window), has likewise been languishing even prior to the Dubai episode.

Bottom line: Volatile market action during the week has been aggravated by the Dubai debt crisis instead of a Dubai prompted meltdown. Hence, to interpret this week’s volatility as a start of cross cascading market selloffs would likely account for as another gaffe in a disgraceful menagerie of errors.

Eventually since markets operate on cycles driven by government policies, there will be another crash due to mounting unsustainable imbalances. But as a cliché goes, even a broken clock is right twice a day, which means wrong conclusions from false premises will be peddled until markets will confirm their outlook for “timing” reasons.

Why Dubai’s Debt Crisis Isn’t Likely THE Next Lehman

``In the first place, government must cease inflating as soon as possible. It is true that this will, inevitably, bring the inflationary boom abruptly to an end, and commence the inevitable recession or depression. But the longer the government waits for this, the worse the necessary readjustments will have to be. The sooner the depression-readjustment is gotten over with, the better.” Murray N. Rothbard Economic Depressions: Their Cause and Cure

The unraveling of the Dubai debt crisis during the US Thanksgivng holiday may have contributed to the sharp gyrations in the marketplace. The dearth of information speedily led to emotions based speculations. Since there was a paucity of information from the details surrounding the Dubai Debt Crisis, perhaps some investors made decisions or projections anchored on a leash or a chain effect where countries sensitive to leveraged balance sheets will likewise suffer from debt woes.

And perhaps that’s the reason why some selloffs had been broad based (except in parts of Latin America) and not limited to the banking system or to some crisis affected countries.

We even read some even citing the Dubai Crisis as evolving to “Icelandic proportions”.

Figure 3: Bespoke Invest/Bloomberg: Dubai CDS

It’s a folly to trade based on emotions but as we wrote in Dubai Blues As Seen In CDS, It's All About Perception!, we have to look at the bigger picture than react intuitively like our ancestors during the hunter gatherer era in the face of wild predators. Technology has given us the privilege of accessing global information at the touch of our fingertips.

So we basically agree with Bespoke Invest that the recent market carnage seems as a vastly exaggerated reaction, as per Bespoke, ``As shown in the Bloomberg snapshot of Dubai's historical sovereign debt credit default swap price, the recent spike up to 600 bps or so isn't even near the level of 1,000 bps seen earlier this year. Had Dubai's default risk spike earlier this year been an isolated event like it is this time around, it would have made news back then. At the time, however, default risk was spiking for the majority of developed nations as well, so Dubai was the least of our problems. Now that global markets have stabilized and exited crisis mode, an isolated event in Dubai where default risk doesn't even spike to its 2009 highs has caused a global market selloff." (bold highlights mine)

In a rush to drum up a contagion effect, some have even mistakenly, in my view, placed the entire United Arab Emirates at risk!

The United Arab Emirates is a federation of seven emirates, particularly Abu Dhabi, Dubai, Sharjah, Ajman, Umm al-Quwain, Ras al-Khaimah and Fujairah.

Dubai is only the second largest emirate, while the Abu Dhabi serves as the seat of the national government. Abu Dhabi according to Wikipedia.org, ``is also the country's center of political, industrial, and cultural activities.”

Dubai’s meteoric rise via profligate projects produced many of the world’s landmark projects (boondoggles), such as the only seven star hotel, the Burj Al Arab, the world’s tallest skyscraper, Burj Dubai (uncompleted), biggest indoor ski slope, Ski Dubai, largest shopping mall (in terms of total area and not gross leasable space), the Dubai Mall, the world’s biggest theme park, the Dubailand and the Palm Islands, the Palm Jumeirah, has virtually challenged Abu Dhabi’s role.

Figure 4: McKinsey Quarterly: The New Power Brokers

To consider that Abu Dhabi has still the world’s largest sovereign wealth fund estimated at $470-740 billion as shown in Figure 4, despite suffering an estimated $125 billion of losses last year due to the contagion effect from the US mortgage crisis (Bloomberg).

Meanwhile the debt burden accrued by Dubai World, Dubai’s investment arm, is estimated by UBS AG to be in the range of $80-90 billion, which includes its property arm unit, the Nakheel PJSC, which has some $3.52 billion of Islamic bonds due Dec. 14. (Bloomberg)

This means that Abu Dhabi could easily extend a bailout if it so desires, without necessarily roiling the markets. But it didn’t. Although we understand that some Abu Dhabi banks already have loan exposures estimated at $5 billion to Dubai prior to the Dubai Crisis (Reuters).

The point is, this may not necessarily be confined to an economic “debt problem” spectrum but to one with a political face. Perhaps Abu Dhabi desires to impose some sort of discipline or temper Dubai’s spendthrift ways or politically revert Dubai to her role as supporting cast.

So a contagion risk is not necessarily in place.

Second, it would be another mistake to argue that the Dubai Debt Crisis is outside the jurisdiction of the major central banks.

The fact that the biggest underwriter of loans to Dubai World is the Royal Bank of Scotland Group, which according to Bloomberg, ``RBS, the largest U.K. government-controlled bank, arranged $2.3 billion, or 17 percent, of Dubai World loans since January 2007, JPMorgan said in a report today, citing Dealogic data. HSBC, Europe’s biggest bank, has the “largest absolute exposure” in the U.A.E. with $17 billion of loans in 2008, JPMorgan said, citing the Emirates Banks Association”, means that major central banks have direct and indirect influence on Dubai’s credit predicament.

As Bob Eisenbeis of Cumberland Advisors rightly explains, ``US financial institutions are not exposed to Dubai to the significant extent that European institutions are. Furthermore, discount-window and other borrowing facilities are already in place, should liquidity be needed.” (bold emphasis mine)

This means that existing currency swap arrangements can also be used, aside from extending the Quantitative Easing programs to cover problematic assets or loans held by HSBC or RBS or other banks exposed to Dubai.

Moreover, even if we incorporate all estimated Western banking system’s loan books of UAE they appear to be manageable.

Figure 5: Danske Bank: Western Banks Exposure to UAE as of 2008

To quote Danske Bank, ``Although some UK banks have exposure to UAE (Dubai is only one of seven emirates) it is not material in our view…As can be seen the exposure to the region is fairly limited. Furthermore, it should be stressed that so far we are only talking about one (big) company. Still, it is a factor to watch out for in case the problems are more widespread than they appear. Remember, back in 2007 virtually everybody agreed that subprime mortgage loans were a manageable and limited problem. So some caution is warranted.”

Indeed.

Bottom line: The Dubai Debt Crisis doesn’t necessarily imply a contagion risk. That’s because the crisis appears to have a national political twist, since Abu Dhabi alone could have reticently mounted a rescue considering its immense forex holdings in its SWF-the largest in the world.

Besides, global central banks have the means to deploy their “inflationary” tools to “rescue” anew national banks exposed to potential bad loans in Dubai. European and Abu Dhabi banks have the most risk exposure to Dubai.

And this is exactly why inflation is a future risk because of mainstream central banker’s fundamental fear of a deflation triggered global banking meltdown. Hence, we should expect some Dubai related globally coordinated policy actions in the coming days or weeks.

Furthermore, the western banking system has relatively minute exposure to the UAE which isn’t likely to further dent on their beleaguered balance sheets.

What needs to be seen is if other nations suffering from similar debt pressures may surface and do a Dubai.

Otherwise, the Dubai tempest will likely signify as a short term bump or a bear raid amidst an inflationary recess.

Vietnam’s Inflation Control Measures And The Japanese Yen’s Record High

``If most of us remain ignorant of ourselves, it is because self-knowledge is painful and we prefer the pleasures of illusion.” Aldous Huxley

There are other issues that appear to have been eclipsed by the Dubai Debt Crisis.

Vietnam’s Inflation Control Measures

First, Vietnam announced a sharp hike in its interest rate to allegedly combat inflation. According to Finance Asia, ``The State Bank of Vietnam will increase its benchmark interest rate to 8% from 7% as of December 1”

In addition, Vietnam likewise devalued its currency the Dong by 5.2%. According anew to Finance Asia, [bold emphasis mine] ``The State Bank of Vietnam also reset the US dollar reference rate to 17,961 dong from its current level of 17,034 dong, in its third devaluation of the currency in two years. The central bank will also narrow the trading band of the dollar against the dong to 3% from 5%.

``This is an effort not only to bring confidence to the currency, but also to correct the difference versus where the dong is trading on the black market, which has been at about 19,700 per US dollar in recent weeks.”

Figure 6: Wall Street Journal: Vietnam’s Devaluation

In other words, currency controls have widened the spread between the black market rate of the Vietnam Dong relative to the US dollar and the official devaluation merely is an attempt to close the chasm. The Vietnamese economy has been suffering from a huge current account deficit to the tune of almost 8% of its GDP.

However, in spite of the fresh monetary actions (see figure 6) the black market rate for the Dong and the official rate remain far apart.

And because of the spike in interest rates, the Vietnam equity benchmark fell by 11.73% over the week.

However, a curious and notable observation is that Vietnam’s present policies seems like responding to a market symptom which can be characterized as our Mises Moment,

This from Thanhnien.com, ``Vietnamese lenders are facing a shortage of funds to meet rising demand for loans because gains in gold and the dollar are deterring people from putting money in the bank, according to a government statement. Commercial banks have had to raise deposit interest rates to as high as 9.99 percent over the past week and offered gifts and bonuses to depositors to lure them back, the statement on the government’s website said.” [bold emphasis original]

In other words, the Vietnamese people have been hoarding gold and foreign currency (US Dollar) and have shunned the banking system in response to Vietnam’s government repeated debasement of its currency. It’s seems like an early symptom of demonetization.

As we have previously quoted Professor Ludwig von Mises from his Stabilization of the Monetary Unit? From the Viewpoint of Theory,

``If people are buying unnecessary commodities, or at least commodities not needed at the moment, because they do not want to hold on to their paper notes, then the process which forces the notes out of use as a generally acceptable medium of exchange has already begun. This is the beginning of the “demonetization” of the notes. The panicky quality inherent in the operation must speed up the process. It may be possible to calm the excited masses once, twice, perhaps even three or four times. However, matters must finally come to an end. Then there is no going back. Once the depreciation makes such rapid strides that sellers are fearful of suffering heavy losses, even if they buy again with the greatest possible speed, there is no longer any chance of rescuing the currency. In every country in which inflation has proceeded at a rapid pace, it has been discovered that the depreciation of the money has eventually proceeded faster than the increase in its quantity.” [bold emphasis mine]

Will Vietnam follow the path of the most recently concluded Zimbabwean monetary disease?

I was thinking of Venezuela as next likely candidate but here we have a next door neighbor exhibiting the same symptoms that ails every government that attempts to control or manipulate the marketplace.

The Japanese Yen On A 14 Year High

The second issue overshadowed by the Dubai Debt Crisis is that the Japanese Yen soared to its highest level against the US dollar in 14 years.

According to a Bloomberg report, ``The dollar dropped to the lowest level versus the yen since July 1995 and fell against the euro as the Federal Reserve’s signal it will tolerate a weaker greenback encouraged investors to buy higher-yielding assets outside the U.S.”

The strength of the Japanese yen had been broad based against other major currencies but gains were marginal.

The news blamed the Yen’s rise on the carry trade ``delay debt repayments spurred investors to sell higher-yielding assets funded with the currencies.”

Such oversimplification is not convincing or backed by evidence.

As noted earlier, the US dollar fell to new lows on the Dubai incident before rallying back Friday but eventually giving back most of its gains.

Besides, not all markets had been severely hit. In Latin America, Brazil, Columbia, Chile, Mexico and Venezuela all registered weekly gains. Emerging markets are expected to take it to the chin when carry trades unravel. This hasn’t been the general case.

In Europe, Germany, Italy, Norway, Sweden, Switzerland and Italy survived the week on positive grounds. So even if the Dubai debt crisis exposed Europe more than the others, the selling pressure wasn’t the same. UK home to RBS suffered marginal losses (.11%).

Again none of these accounts for as any solid or concrete signs of an unwinding of carry trade.

Figure 7: stockcharts/google: Nikkei-Yen and Japan exports

While the rising Japanese Yen has so far coincided with a lethargic Nikkei since August (see figure 7 left window), it’s not clear that such correlation has causation linkages.

Although the Japanese government thinks it has.

Again from the same Bloomberg article, ``Finance Minister Hirohisa Fujii said he will contact U.S. and European officials about exchange rates if needed, signaling his growing concern that the yen’s ascent will hurt the economy. The Bank of Japan checked rates at commercial banks in Tokyo, seen as a type of verbal intervention, Kyodo News Service reported.

``Japan hasn’t sold its currency since March 16, 2004, when it traded around 109 per dollar. The Bank of Japan sold 14.8 trillion yen ($172 billion) in the first three months of 2004, after record sales of 20.4 trillion yen in 2003. Japan last bought the currency in 1998, purchasing 3.05 trillion yen as the rate fell as low as 147.66.”

Well it came to my surprise that after all the political gibberish about Japan’s so-called export economy or export dependency, we realized that Japan’s economy is hardly about global trade.

According to ADB data, Japan’s trade in 2006 only accounted for 28.2% of the nation’s GDP, where export (right window) is only 16% of the GDP pie (yes this stunned me as I had the impression all along that Japan’s trade was at the levels of Hong Kong and Singapore and I had to check on official or government data).

The Philippines has even a higher share of trade (84.7%) and exports (36.9%)!

In addition, Japan’s industry, as a share of GDP pie registered for only 26.3%, according to the CIA factbook in 2008.

So a policy for a weaker yen is likely to benefit a small but strong lobbying segment of the society at the expense of the consumers (via cheaper products) or the society.

All these are strong evidences on why the world is facing a greater degree of risks from a hyperinflation episode.

The fallacious Mercantilist-Keynesian paradigm wants a race to devalue currency values, based on a simplistic one product, single price sensitivity, one labor, homogenous capital model which presumes global trade is a zero sum game. They hardly think of money in terms of purchasing power but from political interests based on “aggregate demand”.

Finally, Finance Minister Hirohisa Fujii isn’t likely to succeed in convincing his peers to collaborate to prevent the yen from strengthening. That’s because all of them share the same line of thinking or ideology. And Fed Chairman Bernanke has been on a helicopter mission that will likely to persist until imbalances unravel to haunt the global markets anew.

This Time Is NOT Different

``Let it be your constant method to look into the design of people's actions, and see what they would be at, as often as it is practicable; and to make this custom the more significant, practice it first upon yourself.” Marcus Aurelius

“This time it’s different” is a popular but fallacious investing catchphrase that mostly reflects on sentimental excesses.

It exhibits mostly overconfidence on a perception of knowledge or embody a generation of new faith adherents that justifies the course of particular set of actions. For instance, distinguished economist Irving Fisher, who developed and popularized the debt deflation theory, in the boom days prior to the Great Depression uttered, ``Stocks have reached what looks like a permanently high plateau”. Mr. Irving was in a delusion that the price values in the stock market would perpetually rise.

“This time it’s different” in today’s context can be observed from commentators who appear to be perplexed by the evolving unorthodoxy in the marketplace. They appear to be befuddled by the impact from the massive concerted government interventions in the marketplace worldwide, which has resulted to these large deviances relative to conventional standards.

So while there is a grain of truth whereby global government “relief” operations have obscured developments in the marketplace, especially in terms of scale, scope and or magnitude involved, arguing that “This time it’s different” is generally superficial and incomprehensive of the gist of what makes this episode NOT different from the past-INFLATIONISM.

As Mark Twain once remarked, ``History doesn't repeat itself - at best it sometimes rhymes”. In short, specific policy actions and their degree may vary (tactical operations), but the ultimate purpose or design driving the underlying actions (strategical process) has been the same with the past. And history has been littered with demonetized or “dead” currencies as a result mostly from the same teleological (study of the evidences of design or purpose in nature) impetus.

Therefore, this time is NOT different.

Dubai Blues As Seen In CDS, It's All About Perception!

A cliche goes, 'what you see depends on where you stand'.

For many, this could be rephrased as 'what you see depends on what you are looking for'. In the behavioral aspects, this means looking to confirm a bias or selective perception. For the bears, the Dubai incident has served as a rallying cry for their much awaited deflation blow-up scenario.

The chart from Bespoke exhibits on the default risk as measured through the Credit Default Swaps (CDS) on a year to date basis for 39 nations.
For a clearer image press on the link.

According to Bespoke, "we highlight current credit default swap prices and the year-to-date change for the sovereign debt of 39 countries. As shown, default risk has declined for every country except Japan in 2009, including Dubai."[underscore mine]

What this means is that despite the present turmoil, default risk measures haven't reached or is quite distant [yet] from the magnitude as it had been at the start of the year.

So unless the succeeding events deteriorate more, this volatility may be a head fake signal more than a genuine inflection point.

Global Art Market As Bubble Meter, China's Fast Expanding Role

Even in the global art markets, the Chinese growth juggernaut appears to be shifting the playing field in her favor.

This from the Economist (bold highlight mine),

"LAST year China overtook France as the world’s third-biggest art market after America and Britain. Thanks to shifts in policy, which once banned owning, inheriting or exchanging pre-communist works, Chinese buyers are now catching up in a big way. More Chinese treasures are now sold at auction in Hong Kong than in New York, London and Paris. At Sotheby's in Hong Kong last month a world record for a piece of Chinese furniture was set when a Qianlong-period throne made of precious zitan wood and carved with dragons fetched just under HK$86m ($11.1m)."

In short, the liberalization of the marketplace and global wealth transfer dynamics have been key forces driving China's race to the top. That's the good news.

But here's the bad news.

This growth market may also reflect on bubble policies.

Since art is a luxury item, a booming art market could be indicative of inflation fueled consumption excesses.

As with Japan's experience in the late 80s, whose buyers "swept the Western art markets", according to wikipedia.org, China's prospective assumption of the dominant role could likewise be ominous of a bubble top.

This hasn't been limited to Japan, in the list of the most expensive paintings ever sold (artwolf.com), here are the top 5:

1. JACKSON POLLOCK: "Number 5, 1948", 1948

$140 million

Private sale, 2006. Seller: David Geffen. Buyer: David Martínez (claimed)

2. WILLEM DE KOONING: "Woman III", 1952-53

$137.5 million

Private sale, 2006. Seller: David Geffen. Buyer: Steven Cohen

3. GUSTAV KLIMT: "Adele Bloch-bauer I", 1907

$135 million

Private sale, 2006. Buyer: Ronald Lauder.

4. PABLO PICASSO: "Garçon a la pipe", 1904

$104.1 million

Sotheby's New York , May 2004. Buyer: anonymous

5. PABLO PICASSO: "Dora Maar au chat", 1941

$95.2 million

Sotheby's New York , May 2006. Buyer: anonymous

It could be observed that four out of the five most expensive paintings were transacted in 2006.

These had incidentally been at the pinnacle of the US housing bubble as shown in the Case Shiller chart above!

Bottom line: The art markets could, most likely, serve as one important bellwether to estimate on the whereabouts of a bubble cycle.

Turkey Talk And The Message Of US Thanksgiving

Mintlife's interesting trivia on the US Thanksgiving celebration.

For a crispier view, please click on the image.

Personal Finance – Mint.com

Some noteworthy Thanksgiving messages from:

(Pls. click on link to read the articles...)

-Dr. Richard Ebeling: The Real Meaning of Thanksgiving: The Triumph of Capitalism over Collectivism

-Wall Street Journal's Editorial: And the Fair Land

``But we can all remind ourselves that the richness of this country was not born in the resources of the earth, though they be plentiful, but in the men that took its measure. For that reminder is everywhere--in the cities, towns, farms, roads, factories, homes, hospitals, schools that spread everywhere over that wilderness.

``We can remind ourselves that for all our social discord we yet remain the longest enduring society of free men governing themselves without benefit of kings or dictators. Being so, we are the marvel and the mystery of the world, for that enduring liberty is no less a blessing than the abundance of the earth.

-Steven Landsburg: Giving Thanks

``We can be thankful too for the system that channels all that potentially destructive greed into life-sustaining brilliance."

Graphic: Booming Bond Market In Europe

This is a magnificent illustration of what we discussed in Record Corporate Bond Issuance: Where Did All The Money Go? last October.

From Bloomberg Chart of the Day,

``European companies are turning to credit markets after losses stemming from the financial crisis left banks reluctant to lend, cutting off corporations from their primary source of financing, according to UBS AG.


``The CHART OF THE DAY shows the level of corporate bonds in the credit market, in blue, has risen 12 percent over the past year, and bank loans, in yellow, have fallen to the lowest in 13 months. While the euro-region economy returned to growth in the third quarter, banks may remain reluctant to lend for some time, boosting bond issuance further, said Stephane Deo, UBS chief European economist in London.

“One of the key reasons why banks remain cautious about lending are future economic prospects,” Deo said. “New debt now comes disproportionately from markets. This is a very unusual pattern.”

``In the euro area, bank lending accounts for about 70 percent of corporate financing compared with 20 percent in the U.S., according to the European Central Bank. Banks started tightening credit standards in the third quarter of 2007 as a result of the financial crisis, according to ECB statistics.

“Companies that have access to the credit market are better off compared to those that have no access,” Deo said."

Let me add- perhaps the proceeds from global QE programs have been helping boost the liquidity in the system in support of these record bond issuance.

This also implies that a cut in QE would probably negatively impact on the bond markets unless lending from the banking system recovers.

Dr. Tim Ball On Climategate

In Exposing The Fraud Behind Man Made Global Warming? [Climategate], we showed how hackers managed to infiltrate into the computers files of climatologist researchers and expose the alleged manipulation of data to present proof of that global warming is man made.

The corberttreports interviews retired climatologist Dr. Tim Ball on this expose. According to Dr. Ball "the manipulation of records on this level... you have to think it has to be criminal somewhere."



University of Michigan's Professor Mark Perry (source of video) offers additional links on this

CLIMATE BOMBSHELL: Hacker leaks thousands of emails showing conspiracy to "hide" the real data on manmade climate change

The Death Blow to Climate Science

And of course, Wikipedia already has a webpage: Climatic Research Unit e-mail Hacking Incident

Chart of the Day: John Paulson's Gold Holdings Bigger Than Reserves Held By Many Central Banks

The interesting chart below from The Reformed Broker is an estimate of Hedge Fund manager John Paulson's gold holdings which could be larger than gold reserves held by many central banks.

Read the rest here

Asia Leads Rebound In Global Housing Markets

The tidal wave of money from collective reflationary policies appears to be lifting global property prices. Although the impact has so far been variable.

This from Global Property Guide,

``Housing markets in the world’s leading economies continue to recover, says the Global Property Guide's summary of housing statistics for the year to end-Q3, 2009.


``Many housing markets in leading economies remain distressed. Of the 27 countries which have already published their Q3 data, more countries have experienced house price falls (17 countries) during the year to date, than have enjoyed price rises (10). In addition, the house price falls in several countries have been much larger than house price rises anywhere, and include unprecedentedly severe falls in Latvia (-59.7% year to date), the UAE (-48.1%), Bulgaria (-28.7%), Iceland (-21.2%), Russia (-19.5%) and Slovakia (-15.3%) (all figures inflation-adjusted).

``However the annual data is somewhat like a car’s rearview mirror. During the latest quarter, price rises have occurred in 16 countries, and falls in only 11, of the 27 countries (both major US indices were nominally positive, but adjusting for inflation puts the FHFA index still in negative territory). Quarter-on-quarter house price changes in the UK, Canada, Germany, Singapore, and South Africa are back in positive territory, after these countries suffered during the global financial crisis.

``So the trend is toward recovery. More broadly, the world seems polarized between the Asian economies, which are enjoying strong economic growth and high residential property price rises (Thailand excepted), and Eastern Europe and the UAE, where growth has stalled and property markets have crashed. Even there, figures for the latest quarter offer hope." (bold emphasis mine)

Read the rest of the article here

So again we can observe that Asia has been outperforming developing economies in terms of housing prices (which is another sign of decoupling) and possibly could be indications of a property bubble in motion.

Maguindanao Election Massacre: A Quarrel Over Economic Bones

It's sad and sickening to learn how political violence has resurfaced, where 52 people have been reportedly massacred in Southern Philippines.

This from the New York Times,

``The death toll in Monday’s election violence rose to 52 on Wednesday, the Philippine authorities said, as six more bodies were recovered.

``The regional police commander in Maguindanao Province, Josefino Cataluna, said the bodies were dug out from a shallow pit near a grassy hilltop where police and troops earlier found 46 other corpses after Monday’s attack, The Associated Press reported. He said the 52 victims included the family of a gubernatorial candidate and 18 Filipino journalists who accompanied his relatives in filing his election papers.

So what provoked the aggression?

Again from NYT's Carlos Conde (bold highlights mine), ``it was rooted in rivalries among local clans that the government had empowered as a way of combating the insurgents. One clan, the Ampatuans, is considered the closest political ally of Mrs. Arroyo in that part of the southern Philippines."

``There are at least 250 political dynasties scattered throughout the Philippines, according to the Center for People Empowerment in Governance, a nonprofit group. For many of them and particularly those in the south, politics is literally a blood sport, with the clans’ power and income riding on the outcome of elections. As a consequence, violence has become a fixture of elections here; at least 126 died in the 2007 elections and 189 in 2004."

In other words, Philippine politics is, in essence, a contest to secure economic rent from the state.

And the 250 political dynasties, which has thrived all these years, is manifestation or a symptom of such political blight brought about by statism or the welfare state.

This is also basically a form of protectionism which fuels political competition or feuds that results to dastardly violent acts as the above. And it's a classic case where politics have substituted for trade.

Professor Murray Rothbard in Man, Economy and State accurately explains the phenomenon, (bold highlights mine)

``Individuals recognize, through the use of rea­son, the advantages of exchange resulting from the higher pro­ductivity of the division of labor, and they proceed to follow this advantageous course. In fact, it is far more likely that feelings of friendship and communion are the effects of a regime of (con­tractual) social co-operation rather than the cause. Suppose, for example, that the division of labor were not productive, or that men had failed to recognize its productivity. In that case, there would be little or no opportunity for exchange, and each man would try to obtain his goods in autistic independence. The re­sult would undoubtedly be a fierce struggle to gain possession of the scarce goods, since, in such a world, each man's gain of useful goods would be some other man's loss. It would be almost inevi­table for such an autistic world to be strongly marked by violence and perpetual war. Since each man could gain from his fellows only at their expense, violence would be prevalent, and it seems highly likely that feelings of mutual hostility would be dominant. As in the case of animals quarreling over bones, such a warring world could cause only hatred and hostility between man and man. Life would be a bitter "struggle for survival."

In short, in the absence of free trade, some politicians resort to a fatalistic quarrel over economic bones.

Will Vertical Farming Prevent A Food Crisis?

I chanced upon an article about growing food in buildings which piqued my interest. It's called vertical farming.

The following are the illustrated conceptual framework of vertical farming....

Now this article from CBC Canada,

``Is it an elegant solution to pressing problems related to the food supply, or another example of putting too much faith in technology?

``That's a tough question to answer. But what is clear right now is that vertical farming is in its infancy.

``The idea is to grow food inside buildings — not conventional greenhouses, but multi-storey buildings, quite likely in cities — in closed ecosystems using hydroponics rather than soil, and without the use of pesticides.

``So far it has only been tried on a very small scale. Paignton Zoo in South Devon, U.K., for example, is growing produce to feed some of its animals.

``But advocates of vertical farming — notably Dickson Despommier, a Columbia University professor of public health — envision towering gardens in the heart of a city. Despommier, who is working on a book on the idea, sees vertical farming as part of the answer to global warming, water shortages and inner-city health problems.

The key arguments for vertical farming are these:

• Conventional farms waste water. Despommier says irrigation accounts for 70 per cent of worldwide water use, and much of that is wasted as runoff, but because it's contaminated with silt, pesticides and fertilizers, it can't be captured and reused. Vertical farms would grow crops hydroponically, in a water-and-nutrient solution, or perhaps aeroponically, using a mist of nutrient-laden water. The approach could grow the same crops with as little as 10 per cent of the water used in traditional agriculture, Despommier argues.
• Vertical farms would make it easy to grow food without chemicals. There is growing concern about the environmental effects of pesticides and fertilizers used in traditional agriculture. Some see organic farming as the answer, others argue organic farming can't deliver the yields necessary to feed the world. But vertical farming would virtually eliminate the need for pesticides because air coming in could be filtered to keep pests out, and whatever fertilizers were used could be kept within the system and out of lakes and rivers.
• Growing fresh produce in cities would make it more accessible to poor city-dwellers. As a public-health professor, this one particularly interests Despommier. "It's very difficult to find fresh produce in inner cities," he said, so people who live there tend to eat less nutritious foods. "The data is overwhelming," he added: If healthier food is available, people will eat it.
• Growing food close to where it's eaten would reduce transportation needs, which would cut greenhouse-gas emissions. Reduced use of fossil-fuelled farm machinery would also help cut emissions.
• Vertical farms would improve air quality in cities by consuming carbon dioxide and releasing oxygen.

``All this sounds too good to be true — and some people argue that it is.

``The arguments against vertical farming aren't as numerous as those for it, but one of them in particular stands out: Urban land is just too expensive for vertical farming to be commercially viable in cities."

This last statement appears to be reading present conditions into the future. Should a food crisis erupt, this equation will be radically altered-farm lands will likely be more expensive than urban lands.

Vertical farming seems designed for nations that lack agricultural lands than addressing a food crisis. That's why it is technology dependent.

As how will vertical farming impact the world today, Grant Buckler of CBC writes, ``We have never suggested that it will replace conventional agricultural systems," Bradford says.

``And whatever potential vertical farming has, it won't be realized overnight. Even Despommier, probably its most enthusiastic proponent, says the idea could take 50 years to take hold — but he does expect some significant experiments in the next couple of years."

Bottom line, we can't seek salvation from vertical farming should a food crisis emerge.

Exposing The Fraud Behind Man Made Global Warming?

Computer hackers confer some benefit to the society after all.

Some recently hacked into the computers of climate research scientists and surreptitiously obtained a wealth of information: scientific evidences in support of anthropogenic (man caused) global warming were allegedly manufactured, if not tweaked to produce man made global warming!

This from the New York Times, ``Hundreds of private e-mail messages and documents hacked from a computer server at a British university are causing a stir among global warming skeptics, who say they show that climate scientists conspired to overstate the case for a human influence on climate change.[bold emphasis added]

``The e-mail messages, attributed to prominent American and British climate researchers, include discussions of scientific data and whether it should be released, exchanges about how best to combat the arguments of skeptics, and casual comments — in some cases derisive — about specific people known for their skeptical views. Drafts of scientific papers and a photo collage that portrays climate skeptics on an ice floe were also among the hacked data, some of which dates back 13 years."

According to Telegraph's James Delingpole, (blue bold highlights mine, black bold original)

``When you read some of those files – including 1079 emails and 72 documents – you realise just why the boffins at Hadley CRU might have preferred to keep them confidential. As Andrew Bolt puts it, this scandal could well be “the greatest in modern science”. These alleged emails – supposedly exchanged by some of the most prominent scientists pushing AGW theory – suggest:

Conspiracy, collusion in exaggerating warming data, possibly illegal destruction of embarrassing information, organised resistance to disclosure, manipulation of data, private admissions of flaws in their public claims and much more.

Mr. Delingpole's points to several issues...[bold highlights original]

``But if genuine, they suggest dubious practices such as:

Manipulation of evidence:

I’ve just completed Mike’s Nature trick of adding in the real temps to each series for the last 20 years (ie from 1981 onwards) amd from 1961 for Keith’s to hide the decline.

Private doubts about whether the world really is heating up:

The fact is that we can’t account for the lack of warming at the moment and it is a travesty that we can’t. The CERES data published in the August BAMS 09 supplement on 2008 shows there should be even more warming: but the data are surely wrong. Our observing system is inadequate.

Suppression of evidence:

Can you delete any emails you may have had with Keith re AR4?

Keith will do likewise. He’s not in at the moment – minor family crisis.

Can you also email Gene and get him to do the same? I don’t have his new email address.

We will be getting Caspar to do likewise.

Fantasies of violence against prominent Climate Sceptic scientists:

Next time I see Pat Michaels at a scientific meeting, I’ll be tempted to beat the crap out of him. Very tempted.

Attempts to disguise the inconvenient truth of the Medieval Warm Period (MWP):

……Phil and I have recently submitted a paper using about a dozen NH records that fit this category, and many of which are available nearly 2K back–I think that trying to adopt a timeframe of 2K, rather than the usual 1K, addresses a good earlier point that Peck made w/ regard to the memo, that it would be nice to try to “contain” the putative “MWP”, even if we don’t yet have a hemispheric mean reconstruction available that far back….

You can read the rest of the article here.

Bishop Hill has a collection of sensitive communications here.

This just goes to show how closet communists or socialists have been using the environment as cover or as camouflaged platform to advance their political agenda. It isn't the environment that truly matters but absolute societal (the political economy) control by would be dictators or tyrants. They'd like to bring us back to the hunter gatherer age!

To quote Professor George Reisman, ``the intellectuals have chosen to foist the doctrine of environmentalism on the world, as a last-ditch effort to destroy capitalism and save socialism."

It's a conspiracy, if not a bubble, that appears to be falling apart.

Global Medical Tourism As Health Care Reform

While Americans quibble about healthcare reform, little is known that there has been an ongoing evolution in health industry outside the ambit of government [so far].

It's fundamentally a free market transformation: The globalization of the healthcare services or popularly known as Medical Tourism.

This article from Wall Street Journal highlights on such transition, (all bold highlights mine)

``Hair tucked into a surgical cap, eyes hidden behind thick-framed magnifying glasses, Devi Shetty leans over the sawed open chest of an 11-year-old boy, using bright blue thread to sew an artificial aorta onto his stopped heart.

``As Dr. Shetty pulls the thread tight with scissors, an assistant reads aloud a proposed agreement for him to build a new hospital in the Cayman Islands that would primarily serve Americans in search of lower-cost medical care. The agreement is inked a few days later, pending approval of the Cayman parliament.



``Dr. Shetty, who entered the limelight in the early 1990s as Mother Teresa's cardiac surgeon, offers cutting-edge medical care in India at a fraction of what it costs elsewhere in the world. His flagship heart hospital charges $2,000, on average, for open-heart surgery, compared with hospitals in the U.S. that are paid between $20,000 and $100,000, depending on the complexity of the surgery.

``The approach has transformed health care in India through a simple premise that works in other industries: economies of scale. By driving huge volumes, even of procedures as sophisticated, delicate and dangerous as heart surgery, Dr. Shetty has managed to drive down the cost of health care in his nation of one billion.

``His model offers insights for countries worldwide that are struggling with soaring medical costs, including the U.S. as it debates major health-care overhaul.

"Japanese companies reinvented the process of making cars. That's what we're doing in health care," Dr. Shetty says. "What health care needs is process innovation, not product innovation."

``At his flagship, 1,000-bed Narayana Hrudayalaya Hospital, surgeons operate at a capacity virtually unheard of in the U.S., where the average hospital has 160 beds, according to the American Hospital Association.

``Narayana's 42 cardiac surgeons performed 3,174 cardiac bypass surgeries in 2008, more than double the 1,367 the Cleveland Clinic, a U.S. leader, did in the same year. His surgeons operated on 2,777 pediatric patients, more than double the 1,026 surgeries performed at Children's Hospital Boston.

``Next door to Narayana, Dr. Shetty built a 1,400-bed cancer hospital and a 300-bed eye hospital, which share the same laboratories and blood bank as the heart institute. His family-owned business group, Narayana Hrudayalaya Private Ltd., reports a 7.7% profit after taxes, or slightly above the 6.9% average for a U.S. hospital, according to American Hospital Association data."

Pls read the rest of the article here.

As you would note, outside government intervention, it is the basic laws of economics at work here [free markets]; to the benefit of the consumers (patients), the providers (Doctors, hospitals, medical suppliers and ancillary services) and the society in general (in terms of greater spending power and increased revenues).

The Web 2.0 Evolution: McKinsey Quarterly Interviews MIT’s Andrew McAfee

It's been a frequent theme on this blog space that conventionalism doesn't take into account how the world has been transitioning from the post-industrial age to the information age.

This video interview of MIT's Andrew McAfee by McKinsey Quarterly "How Web 2.0 is changing the way we work"deals with such transformation.

According to McKinsey Quarterly,

``In recent years, using technology to change the way people work has often meant painful disruption, as CIOs rolled enterprise software programs through the ranks of reluctant staffers. Today, employees are more likely to bring in new technologies on their own—and to do so enthusiastically—through their Web browser, whether it’s starting a blog, setting up a wiki to share knowledge, or collaborating on documents hosted online. Andrew McAfee, principal research scientist at the Center for Digital Business at the MIT Sloan School of Management, has been watching this shift closely. His new book, Enterprise 2.0: New Collaborative Tools for your Organization’s Toughest Challenges, explores the ways that leading organizations are bringing Web 2.0 tools inside. McAfee calls these tools “emergent social software platforms”—highly visible environments with tools that evolve as people use them—and he is optimistic about their potential to improve the way we work.

``McAfee spoke with McKinsey’s Roger Roberts, a principal in the Silicon Valley office, in Palo Alto, California, in October 2009.

Andrew McAfee: ``One of my initial assumptions was after looking at the Web, you see the phenomenal growth of things like Facebook and Wikipedia and Flickr and YouTube and all that. I thought these technologies were essentially so cool that when you dropped them in an organization, people flocked to them. That was the assumption I carried around in my research.

``I very quickly had that overturned. And in fact what you see is—particularly for longer tenured workers, particularly for older workers—this is a big shift for them, changing their current work practices and moving over to Enterprise 2.0. This is not an overnight phenomenon at all. And while there are pockets of energy, getting mass adoption remains a pretty serious challenge for a lot of organizations." (Things do change at the margins-Benson)

If video doesn't appear pls proceed to McKinsey's website here.

The Transcript of the interview here

Ron Paul: Gold Is Telling Us That The US dollar Is In Danger

Congressman Ron Paul rebuts on some objections of his Audit The Fed bill at a CNBC interview

Some notes:

Audit The Fed bill
-is not about running monetary policy
-is against secrecy...Fed Independence is secrecy. Paul wants transparency
-Gold is telling us that the US dollar is in danger
-Audit of the fed won’t save us from super regulation
-Fed will self destruct because they’re [the FED's] gonna destroy the dollar
-Fed is politicized…who appoints the chairman?
-it's the deficits that puts the pressure on the dollar

China's Ghost Cities

There is a saying that goes "build and they will come"-perhaps rooted from "Supply creates its own demand" which is a (Keynesian) misinterpretation of Say's Law.

And perhaps too that's the core China's economic model, judging from this news account, courtesy of Al Jazeera (Hat Tip: Robert Blumen/Mises Blog)

Unfortunately in as much as there had been a theoretical misinterpretation and the subsequent failed "theory", China's uninhabited 'ghost' cities seem like a symptom of misdirected capital.

To quote Robert Blumen, ``A lot of the so-called GDP growth is spending by central planners that has no real economic value. The reporter says that "a country can raise its GDP by spending more", which is almost a tautology, since GDP counts spending. But GDP growth does not necessarily mean real economic growth. Real growth can only be accomplished by expanding the capital base, and that requires economic calculation by entrepreneurs who are risking loss of their own capital. Just building a lot of physical stuff and counting the amount you spent is not the same thing."

Indeed "no economic value"- that's because capital is locked up or sunk into unproductive assets and activities. Frontloading expenditures to prop statistical Keynesian constructed "GDP" will come at the cost of future capital losses.

This makes China's economic model as seemingly unfeasible and unsustainable. Anyway, let the good times roll, since imbalances take time to accrue before unraveling.

Well, that's the nature of bubble cycles.