How Myths As Market Guide Can Lead To Catastrophe

``This is how humans are: we question all our beliefs, except for the ones we really believe, and those we never think to question.” -Orson Scott Card

If I told you that the global financial markets have been simply looking for reasons to correct from its overbought position, would you buy this argument?

For many the answer is no. People look for news to fill this vacuum or what is known as a “last illusion bias” or “the belief that someone must know what is going on[1]”.

Because it is the proclivity of man to seek more complicated explanations, the Occam Razor’s rule[2]-the simplest solution is usually the correct one- is usually perceived as inadequate. Yet even if profit taking is a real phenomenon on the individual level, outside of the realm of statistics or news linkages, this is usually deemed as inconceivable by an information starved mind.

I would surmise that such a human dynamic could be a function of esteem based reputational incentives, or the need to seek self-comfort in being seen as “sophisticated”.

And stumbling from one cognitive bias to another, this camp usually associates cause and effects to “availability heuristic” or what we simplistically call “available bias” or the practice of “estimating the frequency of an event according to the ease with which the instances of the event can be recalled”[3]. And this is so prevalent in newspaper based accounts of how the markets performed over a given period.

Though we can’t discount some influences from news on a day-to-day basis, they may contribute to what we call as “noise”, since they represent tangential forces that are distant to the genuine “signals” that truly undergirds market actions.

In other words, people frequently mistake noise for signals.

And worst, for financial market practitioners scourged by an innate “dogma” bias, a characteristic seen among the extremes, particularly in the Pollyanna and Perma Bear camps, the attempt to connect the cause and effects of market actions and the political economy is largely predicated on spotty reasoning; specifically what I call as “Cart Before the Horse” reasoning - where X is the desired conclusion, therefore event A results to X.

This can actually be read as combining both logical fallacies (Begging the Question and Post Hoc Ergo Propter Hoc) and cognitive biases, particularly Belief bias or the “evaluation of the logical strength of an argument is biased by their belief in the truth or falsity of the conclusion[4]”, from which they apply behavioral decision making errors by selective perception or choosing data that fits into their desired conclusion (while omitting the rest), by the focusing effect or placing too much emphasis on one or two aspects of an event (at the expense of the aspects) and by the Blind Spot bias or reasoning that fails to account of their personal prejudices.

In short, the deliberate misperception of reality is a representation of distorted beliefs on how the world ought to be.

Clearing Cobwebs Of Cognitive Biases and Logical Fallacies

Let apply this into today’s market actions.

In the US equity markets, the bulls have fallen short of SEVEN CONSECUTIVE[5] weeks of broad market gains following Friday’s SEC-Goldman Sachs related sell-off as the week closed mixed for key US bellwethers.

The S&P 500 was the sole spoiler among the big three benchmark, where the Dow Jones Industrials and the technology rich Nasdaq still managed to tally seven straight weeks of advances (despite Google’s 7.59% loss prior to the Goldman Sach’s news).

Yet in spite of Friday’s selloffs, the week-on-week performance by the different sectors constituting the S&P had been also been mixed (see figure 1).

Figure 1 US Global Investor: Weekly Sectoral Performance and stockcharts.com: S&P 500 Financial Sector

This means that while Friday’s market selloff had been broad based, it wasn’t enough to reverse the general trend over the broader market, even considering the largely overheated pace of the ascent for the overall markets. Yes, we have been expecting a correction[6] and perhaps this could be the start of the natural phase of any market cycle.

Moreover, while the SEC-Goldman Sachs (explanation in the below article) news may have triggered the selloff on Friday, the largest loss over the week had been in the materials and telecom sectors with the Financial, where Goldman Sachs belongs, took up the fourth position.

Considering that the S&P Financial Index took a severe drubbing on Friday (down 3.81%-see left window), this only exhibits that the sector’s muted loss on a weekly basis had been an outcome of an earlier steep climb or an upside spike!

In short, in whatever technical indicator (MACD, moving averages, or Relative Strength Index) one would look at, the US financial sector has been severely in overstretched and overbought conditions which have been looking for the right opportunity for a snapback. Apparently, the SEC-Goldman event merely provided the window for this to happen.

Perma Bears: Broken Clock Is Right Twice A Day

Now for the Perma bear camp, whom have been nearly entirely wrong since the crash of 2008, seems to have nestled on the current hoopla over the SEC-Goldman Sachs as the next issue to bring the house down.

And like a broken clock that is right only twice a day, never has it occurred to them that since markets don’t move in a straight line, they can be coincidentally ‘right’ for misplaced causal reasons.

Their horrible track record in projecting a market crash early this year predicated on the US dollar carry trade bubble and the Greek Debt Crisis has only manifested events to the contrary of their expectation in terms of both the markets and the political economy. Instead, what seem to be happening are the scenarios which we have had pointed out[7].

Here is Oxford Analytica on the US dollar carry trade[8], ``As financial markets possess a demonstrable tendency to overshoot expectations, the carry trade probably is stoking market euphoria in certain places. However, this may only be partially significant, as underlying fundamentals still inform a large cross-section of investment activities.” (bold emphasis mine).

As you can see the deepening lack of correlation, which highlights on the glaring lapses in causality linkages, from which the 2008 crash became a paradigm for the mainstream, is now being accepted as “reality”. The rear-view mirror syndrome or the anchoring bias is becoming exposed as what it is: A fundamental heuristical flaw, which cosmetically had been supported by misleading reasoning.

And as for the Greek Tragedy, the resolution is increasingly becoming a bailout option. Writes the Businessweek-Bloomberg, ``The euro may receive a temporary boost to $1.38 when Greece accesses a 45 billion euro ($61 billion) bailout plan before traders reestablish bets that the shared currency will decline, according to UBS AG.[9]”

And Morgan Stanley’s Joachim Fels, who among the mainstream analysts we respect, decries the prospective action, ``The bail-out and the ECB's softer collateral stance set a bad precedent for other euro area member states and make it more likely that the euro area degenerates into a zone of fiscal profligacy, currency weakness and higher inflationary pressures over time.[10]” (bold highlights mine)

The difference between us and Mr. Fels is that we look at the political incentives that impels the decision making process of policymakers-where the default option or the path dependency by any government, in a world of central banking, has been towards inflationism as recourse to any critical economic problem.

And Mr. Fels appears to be reading the market along our lines.

Price inflation, which Mr. Fels warns of, is starting to creep higher and becoming more manifest even in economies that have been expected to have lesser impact from inflation due to more monetary constraints, such as the Eurozone (see figure 2).

Figure 2: Danske Bank: Will Nasty Inflation Challenge the ECB?

The Danske team, led by Allan von Mehren, expects an inflation surprise[11] to challenge the European Central Bank (ECB) based on 3 factors, rising oil prices, rising food prices and depreciating Euro.

For us, these factors are merely symptoms of the political actions and not the source of inflation.

And for those plagued by the said dogmatic biases, they keep repeatedly asking the wrong question-“where is inflation?”-even when (corporate and sovereign) bonds, commodities, stocks, derivatives and most market signals have been pointing to inflation, across the world.

The fact that inflation is in positive territory for most economies, already dismisses such a highly flawed argument.

Yet, the narrowed focus or the ‘focusing effect’ or excessive tunneling on business or industrial credit take-up or unemployment rates or on rangebound sovereign yields (particularly in the US) purposely disregards the fact that inflation is a political process.

Government which resorts to the printing press as the ultimate means to resolve economic predicaments can only reduce the purchasing value of every existing currency from the introduction of new ones.

Tea Parties As Signs Of The Reemergence Of The Bond Vigilantes

In addition, such outlook neglects the fact that

-inflation has existed even during high period of unemployment rates as in the 70s,

-consumer credit isn’t the principal cause of inflation but intractable government spending and

-as argued last week, governments will opt to sustain low interest rates (even if it means manipulating them-e.g. quantitative easing) as a policy because ``governments through central banks always find low interest rates as an attractive way to finance their spending through borrowing instead of taxation, thereby favor (or would be biased for) extended period of low interest rates.[12]”

Moreover, for a population with a deepening culture of dependency on government welfare programs, the inclination is to accelerate government spending[13] in order to keep up with public demands for more welfarism. And this can only be funded by borrowing, inflation, and taxes in that pecking order.

Why taxes as the lowest priority? Because to quote Professor Gary North[14], ``Politicians fear a taxpayer revolt. Such a revolt is unlikely until investors cease buying Treasury debt. For as long as the government can run deficits at low interest rates, that is how long they will continue.”

The ballooning Tea Party in the US, for instance, which reportedly accounts for 15-25% of the population is relatively a new spontaneously organized political movement that has apparently emerged in response to the prospects of significantly higher taxes.

For the politically and economically blinded progressives to demean this as “superficial” accounts for as utter myopia. How superficial is it to resist a runaway government spending spree, which should translate to prospective higher taxes and or lower standards of living via inflation?

As author and Professor Steven Landsburg rightly argues[15], ``Once the money is spent, the bill must eventually come due—and there’s nobody around to foot that bill except the taxpayers. We are locked into higher current spending and therefore locked into higher future taxes. The president hasn’t lowered taxes; he’s raised and then deferred them. To say otherwise is—let’s be blunt—a flat-out lie.” (bold highlights mine)

Instead, the superficiality should be applied to the fabled belief that government spending and inflationism will account for society’s prosperity. Name a country over human history that has prospered from the printing press or inflationism?!

Hence, the emergence of the Tea party movement appears to sow the seeds of a taxpayer revolt, or as seen in the market, the soft resurfacing of the long absence in the bond vigilantes, who could be simply waiting at the corner to pounce on the policy mistakes based on the delusions of grandeur by charlatan governing socialists and their followers, at the opportune moment.

Until the tea partiers gain a political upperhand, the deflation story is nothing but a justification to undertake more inflationism.

The Siren Song Of Inflation

Going back to the naïve outlook for deflation, the lack of borrowing from both domestic and overseas savings doesn’t close the inflation window, in fact it enhances it. This will entirely depend on manifold forces as culture, habit (or addiction)[16], time constancy of political sentiment and political tolerance and etc...and importantly, the attendant policies in response to the political demands.

Nevertheless, Morgan Stanley’s Spyros Andreopoulos enumerates why inflation is seemingly a siren song[17] for policymakers in dealing with a gargantuan and burgeoning debt problem.

From Mr. Andreopoulos (bold emphasis his, italics mine):

``Public debt overhang: The higher the outstanding amount of government debt, the greater the burden of servicing it. Hence, the temptation to inflate increases with the debt.

``Maturity of the debt: The longer the maturity of the debt, the easier it is for a government to reduce the real costs of debt service. To take an extreme example, if the maturity of the debt is zero - i.e., the entire stock of debt rolls every period - then it would be impossible to reduce the debt burden if yields respond immediately and fully to higher inflation. Hence, the longer the maturity of the debt, the greater the temptation to inflate.

``Currency denomination of the debt: Own currency debt can be inflated away easily. Foreign currency-denominated debt on the other hand cannot be inflated away. Worse, the currency depreciation that will be the likely consequence of higher inflation would make it more difficult to repay foreign currency debt: government tax revenues are in domestic currency, and the domestic currency would be worth less in foreign currency. So, the temptation to inflate increases with the share of debt denominated in domestic currency.

``Foreign versus domestic ownership of debt: The ownership of debt determines who will be affected by higher inflation. The higher the foreign ownership, the less will the fall in the real value of government debt affect domestic residents. This matters not least because only domestic residents vote in elections. Note that unlike domestic owners, foreign owners may not necessarily be interested in the real value of government debt since they consume goods in their own country. But they will nonetheless be affected by the inflation-induced depreciation. So, the temptation to inflate increases with the share of foreign ownership of the debt.

``Proportion of debt indexed to inflation: By construction, indexed debt cannot be inflated away. Hence, the higher the proportion of debt that is indexed to inflation, the lower the temptation to inflate.

``To these purely fiscal arguments we add another dimension, private sector indebtedness:

``Private sector debt overhang: An overlevered private sector may generate macroeconomic fragility and pose a threat to public balance sheets. Hence, high private debt also increases the incentive to inflate.

As per Mr. Andreopoulos perspective, there are many alluring technical reasons on why the political option is to inflate rather than adapt market based austerity or to allow market forces to clear up previous imbalances so as to move to the direction of equilibrium.

And combined with today’s prevailing economic dogma and direction of political leadership, the path dependency will most likely be in this direction.

Real Economic Progress And Deflation

None the less, real progress is characterized by increasing efficiency and technological advances that decreases costs of production and increases in output.

The result of which is a rising value of purchasing power of money or “deflation” (see figure 3) and not higher inflation which is the result of excessive government intervention.

Figure 3: AIER: Purchasing Power of the US dollar

This was mostly the case in the United States until the introduction of the US Federal Reserve in 1913, from which the US dollar has been on a steady decline or where the only thing constant today is to see the US dollar collapse in terms of purchasing power.

Going to the US government’s Bureau of Labor Statistics’ inflation calculator, $100 US dollars in 1913 is now only worth $4.55. That’s a loss of over 95%!

So aside from death and taxes, another thing certain in this world is that the value of paper money is headed to its intrinsic value-Zero[18]!

Yet it is funny how protectionists, who stubbornly argue about the “overvalued” currency of the US as the main source of her problem, have been only been asking for more of the same nostrums, instead of looking at WHY these has emerged on the first place.

Like in reading markets, belief in myths can be the greatest error that could lead to tremendous losses that investors can get entangled with.

As former US President John F. Kennedy once said, ``The great enemy of the truth is very often not the lie -- deliberate, contrived and dishonest, but the myth, persistent, persuasive, and unrealistic. Belief in myths allows the comfort of opinion without the discomfort of thought.”

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[1] Wikipedia.org, List of cognitive biases

[2] Wikipedia.org, Occam Razor

[3] Taleb, Nassim Nicolas; Fooled By Randomness, p. 195, Random House

[4] Wikipedia.org, Belief Bias

[5] The emphasis on seven is meant to highlight the degree of overextension or overheating

[6] See US Stock Markets: Rising Tide Lifts Most Boats And Is Overbought

[7] For my earlier treatise on the US dollar carry bubble see What Has Pavlov’s Dogs And Posttraumatic Stress Got To Do With The Current Market Weakness?, and Why The Greece Episode Means More Inflationism for my discourse on the Greece crisis.

[8] Oxford Analytica; Dollar Carry Trade No Longer a Sure Bet, Researchrecap.com

[9] Businessweek, Greek Bailout in ‘Matter of Days” to Boost Euro, UBS Says, Bloomberg

[10] Fels, Joachim, Euro Wreckage Reloaded April 16, 2010, Morgan Stanley Global Economic Forum

[11] Mehren, Allan von; Euroland: Nasty inflation surprise will challenge ECB, Danske Bank

[12] See How Moralism Impacts The Markets

[13] See Where Is Deflation?

[14] North, Gary The Economics Of The Free Ride

[15] Landsburg, Steven; Tax Relief, Obama Style, thebigquestions.com

[16] See Influences Of The Yield Curve On The Equity And Commodity Markets

[17] Andreopoulos, Spyros; Debtflation Temptation

[18] See Paper Money On Path To Return To Intrinsic Value - ZERO

Why The US SEC-Goldman Sachs Hoopla Is Likely A Charade

``In discussing the situation as it developed under the expansionist pressure on trade created by years of cheap interest rates policy, one must be fully aware of the fact that the termination of this policy will make visible the havoc it has spread. The incorrigible inflationists will cry out against alleged deflation and will advertise again their patent medicine, inflation, rebaptising it re-deflation. What generates the evils is the expansionist policy. Its termination only makes the evils visible. This termination must at any rate come sooner or later, and the later it comes, the more severe are the damages which the artificial boom has caused. As things are now, after a long period of artificially low interest rates, the question is not how to avoid the hardships of the process of recovery altogether, but how to reduce them to a minimum. If one does not terminate the expansionist policy in time by a return to balanced budgets, by abstaining from government borrowing from the commercial banks and by letting the market determine the height of interest rates, one chooses the German way of 1923.-Ludwig von Mises, The Trade Cycle and Credit Expansion: The Economic Consequences of Cheap Money

Goldman Sachs, one of the top ‘too big to fail’ pillars of Wall Street have recently been sued by the US Security and Exchange Commission for allegedly intermediating mortgage securities that allowed several investors to ‘short-sale’ the housing market and for the buyers of the said securities a market that supposedly ``was secretly intended to fail”[1].

In my view, this is a bizarre case from a fait accompli standpoint.

From the news reports, unless there are signs of blatant manipulation or misrepresentations or procedural deviations or deliberate indiscretions, Goldman Sachs only acted as “market maker” or a bridge for parties that intended to bet on the opposite fence of the housing industry. This means that if there was a willing buyer and a willing seller, then obviously one of the two parties was bound to be wrong. Ergo, if the property boom had continued until the present and where the buyers benefited, would the SEC have sued the Goldman Sachs for the same reasons with respect to the losses incurred by the seller, particularly led by the popular hedge fund manager John Paulson, who allegedly orchestrated the creation of the controversial instruments?

Outside the technicalities of the suit, we can only sense political maneuvering out of the SEC-Goldman Sachs row.

Unless one thinks that regulators are divine interpreters and hallowed dispensers of the law, laws can be (or are many times) used as instruments to extract political goals, for the benefit of the regulator/s and or the political leadership and or some vested interests group in cahoots with the regulator/s.

Or unless President Obama is recast into a Thomas Jefferson, which means the next strike will be against the US Federal Reserve, only then, upon this new setting should we rethink of a vital shakeup in how things will be done. But this would seem hardly the case.

This brings us to the possible reasons why the Obama administration has resorted to such actions and if the attack on Wall Street will take the sails away from today’s inflation based markets.

It’s All About Politics

It’s public knowledge that following the forced passage of the highly unpopular Obamacare or President Obama’s signature health reform program, Obama’s job approval popularity rating has plunged to its lowest level[2], where the odds for his reelection is now in jeopardy[3], and worst, in a hypothetical match-up between libertarian champion Texas Congressman Ron Paul and President Obama, the odds appear to be dead-even[4]!

And if we are to interpret actions of politicians as a transfer of the “rational actor model of economic theory to the realm of politics”[5], then this only implies that as human being with a career to contemplate on, President Obama’s actions as seen through the SEC are merely designed as means to extend his tenure as well as expand the scope of his power.

As this LA Times article rightly argues, ``White House officials can't bank on a sudden surge in the economy coming to their rescue for the midterm elections. So they are hoping they can redirect voter anger by accusing the GOP of coddling large banks.[6]”

In short, it’s all about politics.

Moreover, it also seems ridiculous to perceive of a sustained path of attack, considering that Goldman Sachs has been more than a political ally to the Democratic Party. In fact the company has constantly played the role of key financier of the Democratic Party (Figure 4)

Figure 4: Opensecrets.org: Goldman Sach’s As Key Political Financier Of America’s Ruling Class

Goldman Sachs had even been the second largest contributor to Obama’s 2008 Presidential campaign[7]!

In addition, where action speaks louder than words, Goldman Sachs has been a key beneficiary from the US government’s bailout to the tune of $10 billion from the US Treasury’s Troubled Asset Relief Program (TARP)[8] which the company had fully redeemed in mid 2009[9].

More to this is that Goldman Sachs had also been a key beneficiary of the AIG bailout from which the company also recovered $12.9 billion out of the $90 billion of taxpayer funds earmarked for payment to AIG counterparties[10].

And these rescues merely demonstrate that as part of the “Too Big Too Fail” cabal, Goldman Sachs evidently has been operating under the protective umbrella of the US Federal Reserve.

As Murray N. Rothbard defines the principal roles of the Central Bank[11],

``The Central Bank has always had two major roles: (1) to help finance the government's deficit; and (2) to cartelize the private commercial banks in the country, so as to help remove the two great market limits on their expansion of credit, on their propensity to counterfeit: a possible loss of confidence leading to bank runs; and the loss of reserves should any one bank expand its own credit. For cartels on the market, even if they are to each firm's advantage, are very difficult to sustain unless government enforces the cartel. In the area of fractional-reserve banking, the Central Bank can assist cartelization by removing or alleviating these two basic free-market limits on banks' inflationary expansion credit.

So would President Obama afford a “possible loss of confidence leading to bank runs; and the loss of reserves should any one bank expand its own credit” from one of its major cartel member banks? The most likely answer is a BIG NO!

My guess is that the assault on Goldman Sachs seems likely a sign or an act of desperation, hence possibly miscalculated on the unintended impact on the markets via Friday’s selloff. Nevertheless, as noted above the markets appear to be extremely overbought and had been readily looking for an excuse or a trigger to retrench.

Yet even if under the scenario where President Obama may be politically desperate to shore up his image, a continued legal barrage on Wall Street that would send markets cascading lower betrays the populist ideals of a rising markets=rising confidence=economic growth, which is unlikely to achieve the intended goals.

It’s a silly thing for the perma bears to naively believe and argue that President Obama is on a warpath against the forces which brought him to power and against the oligarchy that has a strategic stranglehold on key US institutions and the US political economy.

Fighting Wall Street is essentially waging a proxy battle against the US Federal Reserve! And fighting the Fed is a proxy battle for Congressman Ron Paul, who not only wants an audit[12] of the Federal Reserve but also has been asking for its abolishment[13] (Yes, I am in Ron Paul’s camp!).

And this is why President Obama is shown to be quite in a tight fix where his actions could be read as publicity stunt or political vaudeville or an outright charade that is meant to be eventually unmasked.

The worst part is for the dispute to set a precedent and generate incentives from the losers of 2008 to lodge similar legal claims not only against Goldman Sachs but on different institutions. This will be tort on a massive scale, the unintended consequence.

Legal Actions As Counterbalance To Commodity Market Whistleblowers?

Yet there might be another angle to consider. It’s a conspiracy theory though.

Over the past weeks, there had been two accounts of whisteblowing[14] on the silver markets, where the precious metals have allegedly been under a price suppression scheme or have long been manipulated so as not to reflect on its market value, by a cabal of major institutions such as JP Morgan.

Since the exposé at the end of March, gold and silver has been on the upside (see figure 5)

Figure 5: Stockcharts.com/reformedbroker.com[15]: Counterattack on Whistle Blowers?

Could it be that the surge in gold and silver prices has put tremendous pressure on the precious metal naked shorts of major financial institutions that they have asked the US government to intervene by declaring an indirect war against the whistle blowers via the SEC-Goldman Sachs tiff as a subterfuge?

Remember the key personality involved in the political squabble is John Paulson, who currently owns more gold in tonnes compared to Romania, Poland, Thailand, Australia and other nations (based on Oct 2009).

Although Mr. Paulson isn’t part of the lawsuit, his involvement could be designed to put pressure on his investors so as to force him to liquidate on his gold holdings, and thereby ease the pressure on the colossal exposure of the clique of financial institutions on their “short” positions.

Unless the government can pin Mr. Paulson down to be part of the wrongdoers in the proceedings, this precious market “Pearl Harbor” isn’t likely to be sustained.

At the end of the day, whether it is an attempt to spruce up Mr. Obama’s image or an attempt to contain the sharp upside movements of the precious metal market, all these, nevertheless, reeks of dastardly politics in play.

The worst part would be to see the unintended consequences from such political nonsense morph into full scale disaster.

Revaluation of Asian Currencies and Market Outlook

So while we see financial markets, perhaps, may be looking for an excuse for a recess (anywhere 5-20% on the downside or a consolidation instead of a decline), it is not likely a crash in the making.

Politicians and bureaucrats, who watch after their career and status, more than we acknowledge, aren’t likely to roil the markets that would only defeat their goals.

Figure 6: IMF Global Financial Stability Report: Global Liquidity and Interest Rates

Under such conditions, we see global markets as likely to continually respond to the massive inflationism deployed by global authorities. And there could be rotational activities in the global asset markets instead of a general market decline.

With the recent revaluation of Singapore currency[16], we see this as a further positive force and a cushion on the markets as other Asian currencies will be under pressure to revalue and this applies to China too. Along with the Singapore Dollar, Philippine Peso surged 1.2% this week to 44.385 against the US dollar.

Though a global financial market may stem this dynamic out of the corrective pressures, any reversal would prove to be temporary.

So yes, we expect the markets to possibly look for opportunities to rest. But no, we don’t expect market to crash, not at this stage of the bubble cycle yet.

Finally, the Philippine Phisix nearly shares the same record with the US markets, of having gains in 6 out of 7 weeks, which only proves that the Philippines has not moved in an isolated manner, but rather in sync with region's markets, if not the worlds' markets. This also goes to show that Philippine elections have been eclipsed by global forces.

So like the rest of the markets, until we can establish self determinism, we see global dynamics to prevail due to the linkages of inflationism.

In my view any correction should pose as a buying opportunity as we are still in the sweetspot of inflationism.

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[1] New York Times, S.E.C. Accuses Goldman of Fraud in Housing Deal

[2] Gallup.com; April 12,2010 Obama Weekly Approval at 47%, Lowest Yet by One Point

[3] Gallup.com April 16 Voters Currently Divided on Second Obama Term

[4] Rasmussen Reports: April 14, 2010; Election 2012: Barack Obama 42%, Ron Paul 41%

[5] Shughart, William F. II, Public Choice

[6] Nicolas, Peter; Goldman Sachs case could help Obama shift voter anger, Los Angeles Times

[7] Opensecrets.org; Top Contributors, Barack Obama

[8] Wikipedia.org, Goldman Sachs

[9] Reuters.com, Goldman Sachs redeems TARP warrants for $1.1 billion

[10] Reuters.com, Goldman's share of AIG bailout money draws fire

[11] Rothbard, Murray N. The Case Against The Fed p. 58

[12] RonPaul.com Audit the Federal Reserve: HR 1207 and S 604

[13] Paul, Ron; End The Fed

[14] Durden, Tyler; Exclusive: Second Whistleblower Emerges - A Deep Insider's Walkthru To Silver Market Manipulation, Zerohedge.com and

Durden, Tyler; Whistleblower Exposes JP Morgan's Silver Manipulation Scheme, Zerohedge.com

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

[16] Businessweek, Singapore’s Revaluation May Spur China, South Korea, Bloomberg

What Are The Odds On The Next Big Volcanic Eruption?

Here is the Economist on the odds of volcanic eruption.


According to the Economist,

``ASH propelled into the atmosphere by the eruption of a volcano in Iceland led to cancelled flights and closed airspace in Britain, Ireland, Holland, Sweden, Norway, Denmark and Finland on Thursday April 15th. Eyjafjallajokull blasted clouds of ash several miles into the atmosphere on Wednesday night, which drifted south-east on the wind. Volcanic ash does not mix well with jet engines, hence the disruption. In addition to surprising airlines, Eyjafjallajokull caught bookmakers unawares. Paddy Power, an Irish bookie, had the odds on it erupting at 28-1. The odds are much shorter on other volcanoes around the world losing their lids."

Some thoughts to ponder on:

-Philippine Mayon volcano is out of the list, does this mean the eruption risks have diminished, even when it accounted for a minor eruption in 2009?

-has the recent spate of earthquakes from Haiti, to Chile, to Indonesia and China been related to volcanic activities?

-so what is the relevance of climate change to the gamut of earthquakes and volcanic activities?

Time Magazine and Philippine Elections

For the politicized public, when a politician gets featured in Time magazine, this is something worth babbling about.

But like all magazine indicators such publicity tend to focus on populist sentiment and the biases held by the editors.

But the fact is, the prominence offered by gracing the cover of Time Magazine doesn't imply impeccability.

Proof?

Just take a look at some of the record of Time's Person of the Year.

Adolf Hitler Time's Person of the Year 1939

Joseph Stalin, Time's Person of the Year twice in 1939 and 1940

Iran's Ayatollah Khomeini Time Person of the Year 1980

You can read the complete list here

One more thing, if magazine cover occasionally work for markets as contrarian indicators, applied to the local elections, could this imply a popularity peak (or possible loss from the "magazine curse") for the top running local candidate?

[See earlier post: Media Indicators And Market Reversals]

This should be a good running test on the supposed predictive prowess of magazine cover indicators.

Mary Meeker on Web 2.0: Bet On Mobile And Social Networking Trends

GIGAOM.com showcases the projections of “Queen of the Net” or Morgan Stanley's Internet guru Mary Meeker.

All the following quotes from GIGAOM.com

Ms. Meeker first predicts the major dynamic:

"Two overwhelming trends that will affect consumers, the hardware/infrastructure industry and the commercial potential of the web: mobile and social networking."

Next is the evolution of the technology cycle from the Desktop to Mobile.


"The Morgan Stanley analyst says that the world is currently in the midst of the fifth major technology cycle of the past half a century. The previous four were the mainframe era of the 1950s and 60s, the mini-computer era of the 1970s and the desktop Internet era of the 80s. The current cycle is the era of the mobile Internet, she says — predicting that within the next five years “more users will connect to the Internet over mobile devices than desktop PCs.”

In addition, internet take up will increasingly migrate to the mobile spectrum.

"Meeker says that mobile Internet usage is ramping up substantially faster than desktop Internet usage did, a view she and her team arrived at by comparing the adoption rates of iPhone/iPod touch to that of AOL and Netscape in the early 1990s"

And in terms of application, connectivity is now largely driven real time via social networking platforms as email is gradually being dislodged as the main instrument of communication.

"On the social networking side, Meeker’s report notes that social network use is bigger than email in terms of both aggregate numbers of users and time spent, and is still growing rapidly. Social networking passed email in terms of time spent in 2007, hitting about 100 billion"

Another feature of the rapid adaption of technology would be the "creative destruction" as toll carriers lose ground on the increasing use of data.

"But that mobile boom will take its toll on carriers, Meeker says, because mobile Internet use is all about data."

As you can see the next set of "industrial" wreckage (and job losses) is already becoming palpable, as people (consumers) speedily migrate to new technologies to 'enhance' their web 2.0 based lifestyles.

This also means business models will likewise be changing, where those attuned to these changes are likely to benefit, while those who can't cope up with the swiftly altering consumer demand are likely to perish.

This only implies a deepening transition to web based businesses as new industries are likely to be created.

"One of the implications of mobile access is a growth in ecommerce, says Meeker, featuring things such as location-based services, time-based offers, mobile coupons, push notifications, etc. In China, the success of social network Tencent proves that virtual goods can be a big business, she says — virtual goods sales accounted for $2.2 billion worth of the company’s revenue in 2009 and $24 in annual revenue per user. Online commerce and paid services made up 32 percent of mobile revenue in Japan in 2008, up from just 14 percent in 2000. Meeker’s report suggests that the rest of the world — which is still below the 14 percent-mark — could see much the same trajectory over the next 10 years.

Finally Ms. Meeker gives us where the revenue side is likely to emanate;

"Meeker says that users are more willing to pay for content on mobile devices than they are on desktops for a number of reasons, including:

* Easy-to-Use/Secure Payment Systems — embedded systems like carrier billing and iTunes allow real-time payment

* Small Price Tags -– most content and subscriptions carry sub-$5 price tags

* Walled Gardens Reduce Piracy -– content exists in proprietary environments, difficult to get pirated content onto mobile devices

* Established Store Fronts -– carrier decks and iTunes store allow easy discovery and purchase

* Personalization -– more important on mobiles than desktops

Read Ms. Meeker's presentation via GIGAOM.com

Ms. Meeker appears to be validating what we think as a massive shift in the wealth creating process, which had been predicted by Alvin and Heidi Toffler in Revolutionary Wealth,

The Tofflers: "Several forces have been converging to drive the acceleration needle of the gauge. The 1980s and '90s saw a global shift towards liberal economies and hypercompetition. Combine that with the eighteen-month doubling rate of semi-conductor chip power and you get near-instantaneous financial transactions. (Currency traders can find out about a trade within two hundred milliseconds of its completion.) Put differently, behind all these pressures is the historic move to a wealth system whose chief raw material-knowledge-can now move at nearly real-time speed. We live at a pace so hyper that the old law that "time is money" needs revision. Every interval of time is now worth more money than the last one because in principle if not practice, more wealth can be created during it."

George Soros: Beware The Borrowing-Spending Bubble

Billionaire Philanthropist George Soros, like us, sees today's developments as emblematic of a ballooning bubble.

This from Reuters, (all bold highlights mine)

``The man who ‘broke’ the Bank of England (and who is still able to earn a cool $3.3 bln in a year) said the same strategy of borrowing and spending that had got us out of the Asian crisis could shunt us towards another crisis unless tough lessons are learned.

``Soros, who worked as a porter to pay for his studies at the London School of Economics after emigrating from Hungary, warned us to heed the lesson that modern economics had got it wrong and that markets are not inherently stable.

“The success in bailing out the system on the previous occasion led to a superbubble, except that in 2008 we used the same methods,” he told a meeting hosted by The Economist at the City of London’s modern and impressive Haberdashers’ Hall.

``“Unless we learn the lessons, that markets are inherently unstable and that stability needs to the objective of public policy, we are facing a yet larger bubble.

“We have added to the leverage by replacing private credit with sovereign credit and increasing national debt by a significant amount.”

``One crumb of comfort could be the 10-year period between the 1998 Asian crisis and the 2008 credit crisis. If the pattern is repeated, it should at least mean we have another 8 years to go before the next crash…"

My comment:

Mr. Soros appears betwixt in suggesting that markets are inherently unstable and that stability "needs to the objective of public policy" and of "added to the leverage by replacing private credit with sovereign credit and increasing national debt by a significant amount.”

To rephrase Mr. Soros' comment:

"The objective of public policy" has been to add "leverage by replacing private credit with sovereign credit and increasing national debt by a significant amount" and this has resulted to "inherent market instability".

After all, "sovereign credit" and "national debt" have NOT been incurred by the private sector, i.e. the markets, but by governments as contingent policies.

So this essentially should straighten up the apparent confused definition by Mr. Soros on the causality of the boom-bust cycle.

Besides, one more point of Mr. Soros' disorientation of bubbles is that the "borrowing and spending" which he warns of, is essentially mainstream ideology shaped by government policies.

Point is: whether it is Austrian Business cycle, Hyman Minsky or Charles Kindleberger's model, every apparent actions seems to allude the next boom bust cycle.

Moreover, I doubt if the issue at hand will take 8 years to unravel.

This would greatly depend on the acceleration phase of this bubble phenomenon considering today's rescue has been unprecedented in scale.

Put differently past patterns may rhyme but on a much shorter phase.

Moral of the story: there is no philosophers' stone, we cannot spend our way to prosperity.

US Financial Profits Explode: More Evidence of the Bubble Cycle

More proof why today's "recovery" is no more than serial bubble blowing by people who believe they know more of what's good for us.

This from the Bloomberg's chart of the day:

"Record low U.S. interest rates are boosting the profitability of financial companies, creating the same kind of imbalances that fueled the credit crisis, according to Jim Reid, a Deutsche Bank AG strategist in London.

More from Bloomberg,

``The CHART OF THE DAY tracks finance industry profit in billions of dollars, measured by the yellow line, against earnings for non-finance companies in green and nominal U.S. gross domestic product, shown by the red dotted line.

``“It seems incredible that financials are now scaling their 2006/2007 heights again,” Reid wrote in a research note published yesterday. “The dramatic imbalances are re- occurring.”

Here is Murray Rothbard on the Austrian Business cycle,

``The answer is that booms would be very short lived if the bank credit expansion and subsequent pushing of the rate of interest below the free market level were a one-shot affair. But the point is that the credit expansion is not one-shot; it proceeds on and on, never giving consumers the chance to reestablish their preferred proportions of consumption and saving, never allowing the rise in costs in the capital goods industries to catch up to the inflationary rise in prices. Like the repeated doping of a horse, the boom is kept on its way and ahead of its inevitable comeuppance, by repeated doses of the stimulant of bank credit. It is only when bank credit expansion must finally stop, either because the banks are getting into a shaky condition or because the public begins to balk at the continuing inflation, that retribution finally catches up with the boom. As soon as credit expansion stops, then the piper must be paid, and the inevitable readjustments liquidate the unsound over-investments of the boom, with the reassertion of a greater proportionate emphasis on consumers' goods production."

We never seem to learn.

The Importance of Choice

This is great stuff from marketing guru Seth Godin,

With so many options in media, interaction and venues, you now get to choose what you expose yourself to.

Expose yourself to art, and you'll come to appreciate it and aspire to make it.

Expose yourself to anonymous scathing critics and you will begin to believe them (or flinch in anticipation of their next appearance.)

Expose yourself to get-rich-quick stories and you'll want to become one.

Expose yourself to fast food ads and you'll crave french fries.

Expose yourself to angry mobs of uninformed, easily manipulated protesters and you'll want to join a mob.

Expose yourself to metrics about your brand or business or performance and you'll work to improve them.

Expose yourself to anger and you might get angry too.

Expose yourself to people making smart decisions and you'll probably learn how to do it as well.

Expose yourself to eager long-term investors (of every kind) and you'll likely to start making what they want to support.

It's a choice if you want it to be.

There is a political aspect to this message; that's if we are made free to make that choice.

Unfortunately, many people would like to have such privilege taken away from us.

They prefer individual choice to be substituted by choice made by some elite group, particularly, technocrats, officials, bureaucrats or politicians, expecting that you and I are not qualified to make the right decisions on ourselves. And worst, they force their choices on us!

The moral as I see it from Seth's message, is best said by Archibald MacLeish [(1892-1982) Poet, playwright, Librarian of Congress, & Assistant Secretary of State under Franklin Roosevelt],

"Freedom is the right to choose: the right to create for oneself the alternatives of choice. Without the possibility of choice and the exercise of choice, a man is not a man but a member, an instrument, a thing."

US Equities: Growing Evidence of Rising Tide From Inflationism

Interesting observation from Bespoke; the rally in the US appears to be broadening.
Here is Bespoke,

``Today's rally certainly isn't narrow in terms of its scope. With another two hours left in the trading day, 132 stocks (26.4%) in the S&P 500 have already hit a new 52-week high, which is the best level of the current bull market."

All signs of sweetspot of the inflationism.

It's simply a rising tide lifting most boats phenomenon.

Should You Listen To Equity Analysts?

Should you heed the advise of equity analysts (this includes me)?

If you ask the McKinsey team the answer is a NO!

Why?

Because we are too optimistic, which means "we" (the industry) have usually been off the mark.




The McKinsey Quarterly team explains,

``This pattern confirms our earlier findings that analysts typically lag behind events in revising their forecasts to reflect new economic conditions.

``When economic growth accelerates, the size of the forecast error declines; when economic growth slows, it increases. So as economic growth cycles up and down, the actual earnings S&P 500 companies report occasionally coincide with the analysts’ forecasts, as they did, for example, in 1988, from 1994 to 1997, and from 2003 to 2006.

``Moreover, analysts have been persistently overoptimistic for the past 25 years, with estimates ranging from 10 to 12 percent a year, compared with actual earnings growth of 6 percent."

My comment:

First of all, optimism is basically a "neural network" related trait not only for analysts, but for most people.

Second, it's all about incentives. In the Philippine setting, one reason for the "optimism" bias is that the underdeveloped financial market industry earns only from one direction-the upside!

Lastly, not all analysts share the same methodology of research. Here, most of the mainstream framework is confined to the micro sphere or analysis based on corporate or micro economic fundamentals, while yours truly is concentrated on "inflation" cycle based political-economic analysis.

Moreover, we don't subscribe to the "animal spirits" and "spending the way out to prosperity analytic" in contrast to macro mainstream practitioners.

This means that speaking of track records, this blog should serve as evidence.

My recommendation for everyone is to heed investing guru Peter Lynch's advise, ``The list of qualities [an investor should have] includes patience, self-reliance, common sense, a tolerance for pain, open-mindedness, detachment, persistence, humility, flexibility, a willingness to do independent research, an equal willingness to admit mistakes, and the ability to ignore general panic."

Forbes.com: 30 Jobs In Asia

Here is an interesting slide show from Forbes. It suggests that there is a plethora of jobs in Asia from which foreigners can take advantage of.

Forbes.com makes a pithy explanation...

``The rationale? Asia is where wealth is growing the fastest. As a result, banks need to take on more money managers to look after all that newly invested cash, as well as more equity derivatives traders, commodities buyers and math-whiz portfolio managers.

``It's not just financial jobs that are in demand. As banks expand, there is a trickle-down effect on hiring practices. That's good news for all job-seekers in the region. Positions up for grabs include traditional ones, like those for lawyers, accountants and information-technology mavens.

``But places like the Philippines are also adding posts for mortgage processors and insurance underwriters, as those services are beginning to be outsourced to emerging markets. And competent HR heads will be needed to oversee all the new employees."

More...

``Call centers in India and the Philippines employ thousands of people who answer the phones and provide customer service or back-office support for major multinational companies. Such a big group requires a talented executive to guide them. "For every one expat manager, he's going to on average manage a group size of between 200 people for an IT operation and 600 for a call center operation," says Richard Mills, chairman of Manila-based Chalre Associates.

``For top-tier positions, experts say many companies are looking either for Asian-born workers who may been educated abroad or have risen through the ranks of a major multinational company. However, expatriates who have spent much of their career in Asia are equally sought-after, and there's even a need for recent graduates with specialized skills.

``But back in the world of finance, certain traders are particularly coveted, according to Doron Vermaat, managing consultant at English-language job Web site New China Careers. Algorithm/quant traders juggle high-frequency trades and must have facility in math, computer science or engineering. For these posts, language skills and nationality are secondary to technical expertise, Vermaat says.

``Burgeoning fields, like that of corporate social responsibility, are also boosting employment opportunities. Advisors ensure a company is seen as having a social mission, to better the community and the world, in addition to its stated business goals. From reducing carbon emissions to sponsoring charity events to promoting transparency and diversity, CSR is now a mainstay in most Western companies. "It's just Asia catching up with the Western world when it comes to implementing this into their businesses," Vermaat says. "It was always a relatively new concept in many Asian countries."

click on the image below to redirect link to the slideshow
If this serves as an opportunity for foreigners, this should be similarly an opportunity for the locals (me too?).

How Minsky's Ponzi Dynamics Applies To Asia's Guarantees On Local Bonds

It's great news to hear Asia's efforts to boost her financial markets as these would enhance her ability to intermediate savings into investments, which should improve on her capital accumulation process or prosperity.

This from the ADB, (bold highlights mine)

``The Asian Development Bank (ADB) and ASEAN nations, along with People’s Republic of China, Japan, and the Republic of Korea, are moving to establish a jointly owned credit guarantee facility, which is aimed at promoting financial stability and boosting long-term investment in the region.

``ADB's Board of Directors approved the establishment of the Credit Guarantee and Investment Facility (CGIF) as a trust fund with a capital contribution of $130 million. The ASEAN+3 governments will provide a combined $570 million to create the $700 million facility.

``The pilot CGIF, due to start operations in 2011, will provide guarantees on local currency denominated bonds issued by companies in the region. Such guarantees will make it easier for firms to issue local bonds with longer maturities. This will help reduce the currency and maturity mismatches which caused the 1997-1998 Asian financial crisis and make the regional financial system more resilient to volatile global capital flows and external shocks.

``Providing credit protection to investors should also help unlock the region’s vast savings for badly needed investment in infrastructure and other key areas.

"The Credit Guarantee and Investment Facility will make it possible for corporations to issue bonds in their domestic markets and in neighboring markets and across ASEAN+3," said Noy Siackhachanh, advisor with ADB's Office of Regional Economic Integration. "Channeling regional savings into regional investments will support economic growth, creating jobs and alleviating poverty."

However, the overeagerness of the region's policymakers to provide "guarantees" on issuing companies risks exacerbating the seeds of the next bubble.

How? Via the Moral Hazard.

A refresher quote from Hyman Minksy [see How Moralism Impacts The Markets]

``It should be noted that this stabilizing effect of big government has destabilizing implications in that once borrowers and lenders recognize that the downside instability of profits has decreased there will be an increase in the willingness and ability of business and bankers to debt-finance. If the cash flows to validate debt are virtually guaranteed by the profit implications of big government then debt-financing of positions in capital assets is encouraged. An inflationary consequence follows from the way the downside variability of aggregate profits is constrained by deficits.”

So yes, markets will likely respond positively to such policy efforts but this will likely skew the market's incentives for risk taking.

In short, moral hazard leads to Ponzi dynamics.

Signs of Cuba's Transition Towards Capitalism?

From the New York Times,

``Cuba is turning over hundreds of state-run barber shops and beauty salons to employees in what appears to be the start of a long-expected revamping of state retail services by President Raúl Castro. The measure marks the first time state-run retail establishments have been handed over to employees since they were nationalized in 1968. Barbers and hairdressers said they would now rent the space where they worked instead of receiving a monthly wage.

[hat tip: Mark Perry]