Does Falling Oil Prices Suggest A Drop In Real Economic Growth?

This chart says yes!

For biased opinion writers, data mining facts to support their point of view is a common folly.

The chart above from the Casey Research, who I usually agree with except for this, reveals on such vulnerability.

Unfortunately, while correlation isn't necessarily causation, the correlation shown above isn't even persuasive enough to suggest of a meaningful causal effect.

There are four periods (in blue numbers) indicated to exhibit the so-called 'strong' correlation between falling oil prices which allegedly leads to falling GDP.

Unfortunately the first two (early and late 70s) shows falling real GDP ahead of falling oil prices. It's only in 2001 and 2008 where falling prices seemingly coincided with falling GDP.

Moreover, in nearly two decades, i.e. 1981-1998 (that's one heck of a long period!), the oil-real GDP correlation was entirely absent!

I am not saying that their implications won't happen.

If it does, it 's more because of many other factors, which makes the oil-GDP correlations more serendipitous than from actual cause and effect relations.

What I am saying is that the suggested correlation isn't only infallible, it is rather inconsistent to be relied on.

But this certainly makes for a good presentation.

Is Greece Suffering From Deflation?

New York Times' Floyd Norris writes,

``Making Greece’s exporters competitive will be a very difficult task while the country remains in the euro zone. If it does, the likelihood is that there will be a prolonged period of deflation, with wages being reduced in an effort to cut costs." (bold highlights mine)

The mainstream impression is that because Greece is stuck with the rigidities of having a monetary system anchored on the Euro, where devaluation isn't an option, the attendant adjustments to the current debt problems intuitively leads to deflation.

But how true is this perception?

Greece has indeed been suffering from recession throughout most of 2009 until the present as shown in the above annual and quarterly charts from tradingeconomics.com.

Yet the inflation index registers a hefty jump (annual basis)!

In addition, during the depth of the global crisis, Greece's inflation index shows that consumer prices had NOT fallen below zero or to the negative levels! So even if we stick by the mainstream's definition of deflation- of falling consumer prices and not shrinking money supply- deflation has been non-existent in Greece!

And the index has even yet to account for the recent massive bailout.

Bottom line: the mainstream perception, premised on the dominant economic ideology, of how the world operates seems far far far away from reality.

Before I forget, let me add that Greece seems to be suffering from 'stagflation' or a period of slow economic growth, high unemployment and rising prices, a scenario which mainstream has blatantly overlooked in the past (1970s) and seemingly appears to be the same source of vulnerability today.

Nassim Taleb: Waking Up One Day To Perceptional Hyperinflation

Here is Bloomberg's recent interview of Black Swan author Nassim Taleb.

Great stuff from Mr. Taleb...




Some notes:

-If you look at governments they typically underestimate deficits
-No government wants solution to apply on themselves
-I think we are going to have, at some point, a failed auction that’s gonna cause severe worries...here in Greece in US, something that’s gonna contage...
-We don’t have enough buyers for treasury bonds so the government may have to print them, and you know can what can happen when you start printing money
-Nothing happens early on and then suddenly you wake up one day and you have something called hyperinflation without having inflation-perceptional hyperinflation.
-Worried about government debt and rising interest rates
-Perceptional hyperinflation is going to penalize real estate in real terms, stock market and companies
-The problem was debt, you don’t cure debt with debt.
-I am going to give what I call as negative advise-what investors should not be doing
-I don’t recommend...treasury bonds as a repository of value...go very short term
-Euro and the US dollar will have the same ills
-If you have perceptional hyperinflation you should have hard assets...a good collection of metals would work or agricultural land
-I’d recommend not thinking about the stock market...
-If you go to business school today they teach you the wrong stuff, so I suggest not to go to business schools
-Don’t take any class that has equations in it. Learn accounting, computer science but not what they teach you...it’s all bogus

Emerging Asia Surpasses EU As Top US Export Destination

This should be a very interesting and promising development-Asia has surpassed the EU as the biggest US export market!

As reported by the Wall Street Journal Blog, (all bold highlights mine)

``Yet John Lonski, chief economist at Moody’s Investor Service, points out an interesting nugget within the March trade figures, released on Wednesday by the Commerce Department, in a note to clients today. March was “a watershed month,” he says, as “For the first time in recorded history, the moving 12-month sum of $227.6 billion of U.S. merchandise exports to Asia’s emerging market countries surpassed the… $223.7 billion of such exports to the European Union.”

``In the year through March, he notes, U.S. merchandise exports to emerging Asia — which includes China, India, Hong Kong, Taiwan, Korea plus a handful of smaller nations — rose by 3.7% while shipments to the EU dropped by 13.9%. In other words, U.S. exports to Europe have already been dwindling while Asia has become an increasingly important destination for U.S. goods. That should help U.S. companies avoid too much of a hit from euro zone woes.

``But the development carries risks of its own: Asian economies are growing so strongly at the moment that China in particular is scaling up efforts to damp inflation through tighter monetary policy. While a “soft landing” outcome in which the Chinese economy slows to say at 8% annualized growth rate would be ideal, a harder landing whereby higher interest rates slow demand precipitously can’t be ruled out. Indeed, it’s one of the top risks to the global growth outlook. Though much attention has been focused across the Atlantic lately, it’s actually the Pacific Rim which perhaps should merit closer scrutiny."

As we'd habitually point out, social actions are always dynamic, where people respond to ecological changes rather than being static-except in the eyes of retrogressive anti-development protectionists.

Moreover, the trade and competitive issues are not predicated solely on currency values (or the pixie dust economics for mercantilists), but on many many many factors such as the willingness or openness to trade, economic freedom, hurdle rate, market size and composition and relative costs in terms of tax and regulatory compliance costs, transaction costs, accessibility to finance, raw materials, technology, communication, labor and infrastructure, quality of communication and infrastructure platforms, accessibility to labor, relative labor costs, labor regulations, labor productivity and etc...

Otherwise this shifting trade development wouldn't be happening.

Moreover, this also goes to show of the broadening importance of Emerging Asia's role in global trade.

So yes the composition of world trade is changing, so will geopolitics.

Are Record Gold Prices Signalling A Crack-Up Boom?

Gold prices zoomed to nominal record highs based on the US dollar during the past two days. See chart below


While much of the recent actions have been imputed to the events in the Eurozone, e.g. 'currency fears', gold's rise hasn't been a one-off affair, but a long term trend.

Likewise rising gold prices hasn't been limited to the US dollar but against global currencies.

Put differently, this means gold prices has risen across paper money over the long term and where the current pace of increases seem to be accelerating.

Below are charts of gold prices relative to different currencies, courtesy of gold.org.

As reminder, these charts were updated last May 10th and doesn't include the spike of the previous two days.

Gold Prices in US dollar since 2000

Gold Prices in Japanese Yen

Gold Prices in British Pound

Gold Prices in South African Rand

Gold prices in Australian Dollar

Gold prices in Canadian Dollar

Gold Prices in India Rupee

Gold prices in G5 currency basket

There are two possible themes which record gold prices appear to be telling us:

One, since the symptoms of the monetary disorder (or inflationism) has been intensive and applied on a global scale, gold prices are seemingly being incorporated gradually as part of the global currency system.

And as Ludwig von Mises reminds us,

``The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market. But it could not last forever even if inflation and credit expansion were to go on endlessly. It would then encounter the barriers which prevent the boundless expansion of circulation credit. It would lead to the crack-up boom and the breakdown of the whole monetary system."

This leads us to the second theme, the growing risks of global hyperinflation.

As global governments continue to inflate the system to delay the day of reckoning, the rate of financing bailouts through money printing and through suppressed interest rates appear to be swelling. And all these appear to be enhancing the case of a crack-up boom or our Mises moment.

The original bailout for Greece at $146 billion (110 billion euros) didn't calm the markets. And it took a "shock and awe" or a Hank Paulson's bazooka approach of nearly $1 trillion (750 billion euro) to achieve some semblance of stabilization.

To paraphrase Senator Everett Dirksen ``A trillion here and a trillion there, and pretty soon you're talking real money; (gold as money)"

For now, every leakage that could bring about a global bust, would be fiercely met by the policies revolving around the printing press as solution, until the critical point where policymakers would have to decide whether to embrace market reality (declare a default or restructure) or let the printing presses rip. The latter would put an end to the current paper money system.

And we hope the world will come to their senses enough to realize the lunacy of inflationism, before it is too late.

Has Quitting Facebook Been Gaining Steam?

There are some permabears who believe that moods drive people's action. According to this school, negative mood prompts people to cloister or become less open.

And in spotting few instances of people deactivating their Facebook accounts, such permabears declare a generalized trend towards social insulation.


Unfortunately this is simply not true or could be discerned as a fallacy of composition (making mountain of an anthill).

The chart from Nielsen/Marketingcharts.com shows that Facebook has been generating most of the recent gains among social media outfit in the US last March. In addition, the gains of Facebook has surged (and not collapsed) in spite of the 2008 crisis.

Where Facebook has reached more than 400 million members worldwide, see Facebook's statistics here, it would be natural for some among the huge number of people to become discontented enough to prompt them to quit for one reason or another.

But the point is to see whether trends in membership are NET positive or negative. The generalized net positive gains, so far, debunks the negative social mood outlook.

Anyway ABC News has an interesting article about Quitting Facebook.

Italy's Government Owned Cars And The Debt Crisis

This is one manifestation or symptom of why the PIIGS (Portugal, Italy, Ireland, and Greece) are in a crisis.

From the Economist, (bold highlights mine)

``RECKLESS, flashy and chaotic sums up the general view of Italian governments as well as the popular image of the country's drivers. It is hardly surprising that the two are so similar according to Renato Brunetta, Italy's minister for public administration. He reckons that the country runs a fleet of 629,000 official cars, ten times the number in similar European countries and 50,000 more than just a couple of years ago. The official fleet includes top-of-the-range Maseratis to ferry senior officials around Rome. Italy's domestic carmakers, which are starting to recover after a tough time, will be hoping that this particular government-efficiency drive goes no further."



Markets have been revealing the cracks from the unsustainable lavish spending by governments of mostly developed nations. Yet, as shown by the recent spate of bailouts, governments will fight to retain these privileges.

As an old saw goes, What are we in power for?

Philippine Elections: So Where Is The Election Failure?

Since the start of the year, we’ve been repeatedly told by mainstream media that that domestic markets had been affected by jitters arising out of a 'general election failure'.

Yet, over the months, the markets steadily climbed and signalled the opposite to what was being reported.

And we argued in Why The Presidential Elections Will Have Little Impact On Philippine Markets and Philippine Markets And Elections: What People Do Against What People Say, there is simply little incentives for the outgoing administration to destablize elections given the balance of risk-reward tradeoffs.

And any aspiring political groups are also unlikely to desire a tumultuous outcome, except probably for those who are on the extreme ends and are not in active in the present political process. But the latter would have a different version of troublemaking than the peddled automation based failure.

In short, media and the politically obsessed crowd had been forcing a causal relationship even when there was little evidence for it, a behavioural fallacy known as the available bias.

Last week, this so called election jitters had even been more pronounced [see Has Election Jitters "Caused" Falling Philippine Peso and Stocks?]. Yet media and 'experts' ignored or downplayed the role of external evidences, even if domestic markets were indeed tracking external developments more than domestic politics.

With over 50% of votes tallied, it safe to ask, where is all the brouhaha over election jitters? Apparently only in the imaginative minds of the politically frenzied crowd.

Today, we will see the same biased reporting.

Following a massive rally in the Phisix 3.85% which likely reflects on the rally in Wall Street (3%+) and in Europe (+5%) last night, aside from a rebounding Peso, in response to the monster bailout of the Euro currency, news reports will focus on associating the current gains with domestic politics-a vote for the new administration!

Of course local markets will likely have a "presidential honeymoon cycle" as with the previous, but this will be more of a rationalization fueled by a global zero bound interest rate regime and worldwide inflationism.

Bottom line: a culture obsessed with politics is likely to misread and gloss over the genuine factors driving the markets or the economy.

Mark Mobius On The Chinese Yuan (Renmimbi)

Here is Templeton's Mark Mobius view on the Yuan, (bold highlights mine)

``We look at all currencies on the basis of purchasing power parity (i.e. comparisons of different inflation rates) and, of course, any controls and influences imposed by the central bank of each country. We then try to asses whether a currency is over or undervalued, how devaluation or revaluation may impact a specific currency, and then gauge the potential impact of such currency characteristics on the business of each company. For example, for an export-oriented company, a devaluation of its operating currency could be positive because it may be able to export more aggressively and more profitably, while the opposite could be true for an import-oriented company.

``Our purchasing power parity studies indicate that China’s currency, the renminbi, is actually close to fair value against the U.S. dollar at this stage. Judging from past experience, we believe that China is unlikely to act quickly on currency adjustments because they are afraid of the consequences of such volatility.

``The Chinese Central Bank Governor, Zhou Xiaochuan, hinted in March that the renminbi might be allowed to rise once the global economy recovered. However, the Commerce Ministry and others protective of Chinese exporters expressed opposition to a rise in the renminbi, as exporters saw shipments fall early in 2009 for the first time since China began opening trade in the late 1970s.

``As we see it, Chinese exporters have plenty of orders and Chinese companies are even stockpiling commodities such as crude oil, various metals, and grains, as a hedge against what appears to be rising inflation. Wages are moving up – in the export provinces of coastal China, for example, wages were raised by about 20% recently in an attempt to attract more workers from the interior.

``If the renminbi appreciates, that could mean losses in China’s vast foreign reserves, which would fall in renminbi terms. Meanwhile, the Chinese are addressing the depreciation of the U.S. dollar with a diversification of their foreign reserves into other currencies and a move to higher interest rate securities compared to low-interest U.S. Treasuries.

``The purchasing and storing of commodities is another way for China to conserve its value of foreign exchange reserves in an environment of a depreciating U.S. dollar. While statistics on commodity inventory levels in China may not be reliable or fully disclosed, our current information indicates that China’s commodity inventory levels are high. The Chinese favor commodities knowing that they will eventually be used, and also because they are concerned, given high and increasing demand, that commodity prices could rise further. A possible course of action could be to revalue the renminbi upwards so commodities would be cheaper in renminbi terms and wage demands could more easily be met. But with nationalist emotions rising, that course is probably closed."

Based on Mr. Mobius' account of China's forex management, China seems to be acting on her perceived changes in the exchange value of money of her currency relative to other currencies by diversification through higher yields of ex-US dollar instruments and importantly through massive stockpiling of commodities.

In the words of Ludwig von Mises,

``He who believes that the prices of the goods in which he takes an interest will rise, buys more of them than he would have bought in the absence of this belief: accordingly he restricts his cash holding. He who believes that prices will drop, restricts his purchases and thus enlarges his cash holding. As long as such speculative anticipations are limited to some commodities, they do not bring about a general tendency toward changes in cash holding. But it is different if people believe that they are on the eve of big cash-induced changes in purchasing power. When they expect that the money prices of all goods will rise or fall, they expand or restrict their purchases. These attitudes strengthen and accelerate the expected tendencies considerably. This goes on until the point is reached beyond which no further changes in the purchasing power of money are expected. Only then does this inclination to buy or to sell stop and do people begin again to increase or to decrease their cash holdings."

So it's not just the public acting to safeguard money as a store of value, even China seems aware of the endemic propensity by her trading partners to engage in inflationism thereby seek alternative havens.

In short, these are simply manifestations of the ongoing global monetary disorders, which I expect to worsen overtime.

Political Talk (Demagoguery) And Their Meanings

Economist Bob Higgs translates conventional politico-speak into their intended messages, in an article which he calls "When a Congressman Says X, He Is Thinking Y"

Some samples (includes my comments)

X : I will serve the people of this district to the best of my ability.

Y: I intend to look out for my own interest every step of the way, so unless you’re the highest bidder for my services, you’d better start saying your prayers now.

(my comment: corruption free government? That's utter nonsense. The more dependent people are on governments the greater the risks of corruption)

***

X: The people have spoken, and they have chosen me.

Y: The rich guys and well-heeled organizations that backed my candidacy picked me to run, and they coughed up enough dough to buy or steal this election for me. I’d be a damned fool to forget who put me in office.

(my comment: it's a political quid pro quo. That's if you grasp the reality that politics is an affair of people and not some delusional divine rights of political "masters")

***

X: America [or country X-additional remarks mine] needs A, B, and C.

Y: My critical electoral coalition stands to make a shipload of money off of A, B, and C. If I want to keep my sorry ass in office, I’d better do everything in my power to see that the government carries out A, B, and C.

(my comment: simply throw money at social problems to make politicians look good to win elections)

***

X: Thank you very much, ladies and gentlemen. Just let me assure you that I will continue to do my very best to prove that I deserve your continued trust and support.

Y: Money talks, bullshit walks.

(my comment: this is self explanatory)

Read more here

$1 Trillion Monster Bailout For The Euro!

I'm back!

And am vindicated anew!

Coming back from my self imposed exile away from the miasma of domestic politics, I picked this up from media on my way home; this from the Associated Press,

"We shall defend the euro whatever it takes," EU Commissioner Olli Rehn said after an 11 hour-meeting of EU finance ministers that capped a hectic week of chaotic sparring between panicked governments and aggressive markets." (bold emphasis mine)

It's been long argued on this space that policymakers have the innate proclivity to act towards inflationism. That's because of the following factors: inherent addiction to the printing press (or government spending), policy "triumphalism" (recent gains from interim policies), prevailing economic ideology and short term or "career" oriented policy based decisions.

And the political reaction to last week's meltdown was as clinically precise as we had anticipated.

Whether it is the US, China or the EU, the policy approach have all been similar-throw money at the problem- regardless of the long term consequences of their actions.

And it will be no different even for the newly elected authorities in the Philippines.

More from the AP,

(bold emphasis mine)

"The European Union spearheaded a $1 trillion plan Monday to contain Europe's spreading debt crisis and keep it from tearing the euro currency apart and derailing the global economic recovery.

"Central banks around the world joined the coordinated effort to prop up the euro and repel speculative attacks against Europe's weakest countries. The European Central Bank used what analysts called its "nuclear option" — buying public and private debt to shore up liquidity in "dysfunctional" markets and lower borrowing costs.The U.S. Federal Reserve separately reopened a currency "swap" program to ship billions of dollars overseas, pumping more short-term cash into the financial system...

"Under the three-year plan, the European Commission — the EU's governing body — will make euro60 billion ($75 billion) available while countries from the 16-nation eurozone would promise backing for euro440 billion ($570 billion). The IMF would contribute an additional sum of at least half of the EU's total contribution, or euro250 billion."

So the massive bailout is essentially another redistribution from the real economy to the banking system, and to bank related creditors, as well as governments -the Euro version!

But this time with much of the world participating in the monster bailout via the IMF.

Rest assured that inflationary pressures are not limited to one country or region, but a concerted global action. So while the Fed inflates to protect her domestic banking system, the ECB, EU and the IMF along with everyone else are doing the same. We expect any further problems, say in China, to be met by the same response.

It's good to be back and proven right!

Blogging Hiatus On The Election Weekend

This weekend will culminate with the national elections in the Philippines, where Filipinos will go to the polling booth on Monday. The holiday on Monday means an extended weekend.

While most of the people here will be devoting their precious time to elect a set of new leaders under the perpetual promise of elusive 'change', I will be doing what most won't be doing- I'll take this opportunity to spend my time with my growing children, hopefully away from what I consider as an exercise of illusion.

This also means that I will be totally away from access to the computer until the post elections, which is on Tuesday.

So enjoy your weekend.

Central and Eastern Europe's Minsky Based Economic Recovery ?

Professor Arnold Kling writes,

``In a Garett Jones economy, hiring is discretionary. It is not tied automatically to output. Instead, it is a form of investment. In a Minsky economy, when the economy is in a "hedge finance" stage, businesses are reluctant to borrow and instead finance investment out of profits."

In Deutsche Bank's study on Central and Eastern Europe (CEE), they note that Eastern Europe's economic recovery has been credit less.

"Although Eastern Europe is lagging other EM regions in terms of recovery, most countries have left recession and and will record modestly positive growth rates this year. Only the worst or latest hit countries (Latvia, Lithuania, Hungary, Romania and Bulgaria) were still in recession in Q4 2009 or Q1 2010. But the recovery has been credit-less so far. Credit is still declining in most countries (see charts) and will only pick up slowly."


This means that for the CEE region, savings has served as the template of the recovery, not credit. In the Minksy model, savings leads to profit.

Hence, perhaps we are seeing a seeming Minsky model of profit -based economic recovery in the CEE region.

Nevertheless, some signs of renewed appetite for credit lending has emerged. Here is the New York Times, (bold highlights mine)

``No other region of the world suffered more grievous economic damage from the financial crisis last year than Eastern Europe, and a main cause was extensive borrowing in euros and other foreign currencies.

``When the currencies of countries like Hungary and Romania plunged last year, thousands of businesses and homeowners there found themselves stuck with some of the most extreme variable-interest-rate loans on the planet. Monthly payments soared, raising the threat of defaults and bank failures that was averted only with a joint rescue last year by the European Union and the International Monetary Fund — at a cost of €52 billion, or about $66 billion.

``So it may come as a surprise that Austrian, Italian and other West European institutions that dominate the regional banking market are once again offering Eastern Europeans the same kind of credit that nearly derailed their economies only a few months ago."

Of course, going forward, its going to be a question of how the fallout from the Greece crisis will impact this ongoing transition towards more accommodation to the credit process.

My point is, the mainstream idea that credit serves as the backbone for any recovery is just false.

A Black Monday 1987 Redux?

Was the plunge in the US markets, which allegedly had been due to "unusual trading activity" or from a rumored Citigroup Trader instigated 'quant' program selling, reminiscent of Black Monday October 19th 1987?
Intraday, the US markets fell by about 9% before recovering much of the losses but still suffered from a huge decline, a 3.2% for both the Dow Jones Industrials and the S&P 500. (chart from Bloomberg)

Well opposite to the rising tide, we have most issues suffering, with only 28% of S&P 500 companies trading above their 50-day moving averages (courtesy of Bespoke)

Of course, perhaps one major difference is that as the market fell out of "fear" (VIX index spiked beyond the February high) along with a crumbling Euro (XEU), gold surged! And its also hardly about a sovereign contagion when US treasuries (TNX) were among the biggest gainers, via falling yields!

Anyway this was how October 19, 1987 played out. Could we see a rhyme or could this be a start of the the perma-bear scenarios?

Has Election Jitters "Caused" Falling Philippine Peso and Stocks?

Media says yes!

It's funny but elections have long been a known issue and that markets has continually trekked higher in spite of the so-called jitters.

Yet media ought to explain this....

As you can see, the Philippine Phisix, the S&P 500, (SPX) Asia's Dow Jones ex-Japan (DJP2), and the European index (Stox5E) have near simultaneously fallen.

And this has been equally reflected on Asian Currencies as shown by Bloomberg-JP Morgan Asian Currency Index

Perhaps a more fitting rephrase of media's reasoning should have been:

"Global markets, ex-US dollar currencies fall on Philippine election jitters!!"

@#$%!!!

Was The Greece Bailout, A Bailout of The Euro System?

Here are two great charts depicting why European policymakers opted for bailout route for Greece.

Albeit the perspective from these charts strictly focuses on the financial system and not the political facets.

To aptly quote the analyst interviewed by the New York Times, "This is not a bailout of Greece...This is a bailout of the euro system.”
Europe's banking system has been deeply interconnected....

Again the New York Times, ``For all the handwringing, the reality is that the Germans, the French and the rest of Europe have little choice. In the decade since the introduction of the euro, the economies on the continent have become increasingly interwoven. With cross-border banking and borrowing, many countries on the periphery of Europe owe vast sums to one another, as well as to richer neighbors like Germany and France." (bold emphasis added)

where the amount of exposure has been substantial.

To quote the Economist, ``Estimates by The Economist put the total euro-area exposure of foreign banks to Greek sovereign debt at €76 billion, with over 71% held by France and Germany. Estimates for Portugal, which may also be vulnerable to a default, are €32 billion. Little wonder that investors are taking flight."

The argument that Europe have little choice rests on the fundamental premise of the operating platform of the Euro system.

As Gavekal's Charles Gave argues, ``Indeed, the balance sheets of European banks and insurance companies are heavily distorted by past investments made in the debt of technically bankrupt governments. For the past 15 years, banks and insurance companies all over Europe have been lured into believing that the Greek risk was equivalent to the German risk, or the Spanish risk similar to that of the Dutch, etc. As a result, the capital of too many financial institutions was invested in very dubious paper.

``Moreover, in the countries which have "enjoyed" a massive real estate bubble (Spain, Ireland...) because of the distortions in the cost of money introduced by the Euro, the banks are now loaded with real estate loans of very questionable value. To add insult to injury, regulatory powers all over Europe have literally forced banks and insurance companies into buying the bonds issued by European governments ("risk free" they were told, and zero reserve requirements!) while forcing them to sell good quality equity positions established over decades. So whether one looks at balance sheets, reserves, loan books or future sources of income, it is hard to avoid the conclusion that European financials are in a pickle. This is a true and very unfortunate consequence of the Euro." (all bold highlights mine)

In gist, the problem is with de facto monetary system, which I don't think is limited to the Euro but to the concurrent paper money standard.

When regulators compel or require the financial system to buy government debts as part of the 'risk free' reserves, this essentially signifies as subsidies to government expenditures which consequently induces more spending, regardless of the necessity.

Said differently, government debt is considered "risk free", because it is backed the barrel of the gun via taxation. However, taxation can only finance part of these expenditures because they depend on the performance of the entities that operate on the real economy.

So in order to continually fund burgeoning government expenditures, central banks encourage deficit financing by inflating the system. And inflating the system engenders a feedback mechanism that leads to an unsustainable Ponzi financing system combined with intractable government spending. The charts above simply illustrates this dynamic.

And as the Greek crisis has shown, reality eventually dawns on the fictitious world where spending equals prosperity and where 'risk free' isn't what it had seemed.

And this is further proof that the cartelized system from which the central banking operates on exist to serve political goals. Fiat paper money system is highly political.

Mr. Gave, a prominent Euro bear, argues here that the disintegration of the Euro will be bullish for markets and the global economy as the political "Roman Empire" wisdom from which lays as the foundation to the EU's concept of "centralized super-government" will pave way for freer markets.

But I don't believe that the political elite in the Eurozone will easily succumb to free market forces knowing that free markets would emasculate their privileges. Perhaps, not until economic reality totally overwhelms the fantasyworld.

I see this as happening farther down the road.

So yes, the bailout translates to a rescue of the Euro system.

Update: Addendum: Greece's bailout will need to have the commitments of the financiers ratified by their respective governments (parliaments).

Philippine Elections: Why I Will Vote For President "None Of The Above"

On Monday May 10th, we will be holding our national elections. And I cast my vote in favour of "None Of The Above" as President. 

Here is why: My vote will not affect the outcome of the election, not even if I am able to convince my family or as a metaphor the barangay where I reside. (about 1% of voting population equals 500,000 votes). 

 Besides, the personal cost of going to vote (transportation, filling up forms, effort, time, risks to security etc.) seems greater than the impact of my vote. My vote will not affect the prospective policies of the future leaders.

For example, US President Obama was popularly elected but enacted a very unpopular law-the Obamacare. President Obama’s approval ratings now are at the lowest level since he assumed the post, not only because of Obamacare but on the issues prior to this. 

 Also what is popular is mostly wrong, whether it is Philippine elections 1998 which led to People Power 2, Juan Peron, Adolf Hitler, or etc..., what you vote for, most of the time, may not be what you expect to get. My vote won’t be reflective of symbolism or popular expectations of peoples' interpretation of their morality vicariously reflected on their desired candidates. 

Instead, my vote will anchor on political-economic reality. The way I see in today’s political theatre, the current crop of contestants for the highest field in the land can be classified into two categories-the status quo-cians and socialist dreamers. The status quo-cians are the leading candidates whose political successes have emanated from the current political conditions. They are what Professor Arnold Kling calls as the "Insiders" in the Philippine context. Hence they are unlikely to roil the present conditions in spite of the rhetorical demagoguery about “changes”. 

Have you heard any politician who doesn’t utter the spiel about "changes"? 

Commons sense tells me that immense elections expenses will need to be recovered and that the political baggage from assorted horse trading and backroom dealing with different and ideologically opposed political groups will suggest more of the same policies, but with a subtle difference-the distribution of power will be based according to the degree of political debts as perceived by the new leaders. 

In other words, the only “changes” I expect to see post elections are personalities involved in dispensing public funds and controlling power (and not in the system dominated by cronyism and client-patron relations). The rule of the entrenched political class means 'the more things change the more they remain the same'. 

On the other hand, the socialist dreamers are those in the tailgroups of the survey and are unlikely to win, but whose idea of change appear mostly predicated on their socialist messianic visions. While they come with less political albatross, the lack of machinery, popularity and finance poses as big handicaps to their ambitions. 

In realization of these therefore my vote will not be an imaginary display of democratic virtue. 

Finally, my vote will reflect on my understanding that governance is a very complex issue and not some grand simplistic mythology about leadership virtuosity and omniscience. There are many factors involved such as behavioral, stimulus-response or feedback mechanisms from existing laws and welfare system, the effectiveness of social institutions, diversity of public's demand for social services, bureaucratic hurdles, opportunity costs and etc... 

 In addition, governance is even more than just an issue of knowledge problem. It is more about the issue of the stakeholders problem-where the incentives to secure knowledge are driven by the degree of stakeholdings. For example a businessman would try to secure all required knowledge in his field to assure the survivalship of his enterprise. That’s because if one fails, the cost of failure will be significant, i.e. loss of capital aside from the attendant psychological effects. 

Meanwhile for voters, since the costs of voting for a losing candidate are personally inconsequential and because of the lack of stakeholdings, people tend to vote based on prejudices, popularity, and potential connections (or even from bribery). 

 That’s why people see election like sports game, to fittingly quote the Economist, ``POLITICS, our Bagehot columnist reckons, is like sport: the way people see incidents is determined by which team or party they want to win, even if they do not realise this is the case.” 

 While some people try to portray elections as a battle between “good” over “evil”, the fact is that all candidates are human beings and are subject to human frailties [as noted above subject to political debts, subjective interpretation of events, limited knowledge, influenced by networks, etc...]. 

Hence good over evil, or black propaganda seems equivalent to the proverbial "pot calling the kettle black" and reveals only of the irrationality of voters. Little has been said about the candidates’ biases on the economic impacts from a bloated bureaucracy, complexity and enforceability of laws, costs of redistribution, costs of compliance, politicization of social institutions, taxation and etc... things that truly matters most. Well even if they did, they were buried in media, since they haven’t been in the fancy of the public, since these issues are complex or hardly understood (or maybe even plain refusal to be understood). 

As for leaders, the issue of stakeholdings depends largely on their career interests. That’s why politicians and bureaucrats are typically “reactive” agents-their policy responses are predominantly reactions to the events that capture the attention of the populace for the moment (example, whatever happened to the proposed law surrounding the Halili-Ong sex video scandal?) 

Thereby, considering the vast coverage of the interconnectedness and complexity of any society, securing knowledge are merely delegated to the bureaucracy and attended to only at the “need” of the moment. 

In short, the knowledge problem exists not only due to human frailty but likewise due to the low incentives or stakeholdings by the leadership to attain them (yes to repeat, because society is too broad to be comprehended by any single person or by the state). 

 What does the stakeholding problem suggest of the prospective candidates? Well as said above very little, except to get elected. To close, I think domestic political trends will increasingly be shaped by external factors as argued here and that's why some political aspirants have been directing their platitudinous political themes to OFWs. 

And perhaps like many followers of President Obama, a year after next week's elections, many voters would turn out frustrated enough to regret their choice this coming Monday.

Selling In May, The Greek "Contagion" Panic In Perspective

We will try to put into perspective last night's panic which was supposedly triggered by concerns over a Greek contagion.

The chart below from Bespoke shows of the Credit Default Swap (CDS) prices or the cost of insuring debt, as of last night.

Bespoke decries the exaggeration in the news, "While CDS prices are higher today for countries like Greece, Portugal, Spain, and Italy, they were just as high late last week prior to declining quite a bit yesterday on news of the Greek bailout. Basically default risk today is right back where it was late last week and not "blowing out" to higher levels."


It's true that the PIIGS led by Greece has seen a rebound in CDS prices to indicate renewed concerns over sovereign issues in spite of the bailout, but they remain below their previous highs and have NOT reached the level of Argentina and Venezuela levels for now.

Again from Bespoke, ``Greece 5-year CDS is at 737 basis points today. Prior to the bailout it was above 800 bps. Venezuela and Argentina still have higher default risk than Greece. Portugal CDS is at 355.4 bps today, up from 275 bps yesterday, but still below the 380 bps it was at last week. Spain is probably the most worrisome country on the list at 208 bps, since it has a much bigger economy than any of the other countries at similar default risk levels. And Italy has jumped up to 164 bps today, which is more than double the next closest G-7 country."

The interesting part is, despite the so-called contagion spurred selloffs, CDS prices in the US and the UK have barely budged! In short, the selling frenzy could be media "exaggerations" and market sentiment feeding into each other more than a real "contagion" related dynamic.


We see parallel developments in the US treasury market. US 10 year yields have fallen (alternatively bond prices rallied) as stock markets retrenched. This implies more of "fear" than sovereign related concerns as both the CDS and treasury markets suggests.

Yet despite the spike in the VIX "fear" index, the US S&P seems more resilient relative to the similar episode last February-meaning that while the VIX have climbed about three quarters of the VIX high in Feb, the decline in the S&P have been relatively less.

Importantly while both the Euro benchmark (STOX50E) and the S&P fell nearly by the same degree last February, today, the S&P appears to outperform the Eurozone by falling less.

So even if the month of May could be partially validating the maxim, sell in May and go away, it isn't clear that this is the start of THE major inflection point. It looks more like a reprieve following the string of gains with Greece as serving as a rallying point for the current market action- of course, until proven otherwise.

Who Pays For Greece's Bailout?

Great chart from the Wall Street Journal...
One, Europe including crisis affected Spain (!).

Next, the world through the IMF (186 members) via the respective quota system "Most resources for IMF loans are provided by member countries, primarily through their payment of quotas".


Importantly, the US- since she constitutes the largest share in the IMF's membership quota system [chart courtesy of Stratfor].

After all, since the US functions as the operator of the de facto monetary standard, this only implies that she can simply inflate even under her current "tight" fiscal conditions [yeah-what are we in power for?]

In addition, this also goes to show that the US has indirect means to conduct foreign policy. And that the current bailout only implies that the US has also vital political interests to protect in the Eurozone. And this became evident when President Obama called on German Chancellor Angela Merkel during the peak of the crisis.

As we've been saying all along inflationism is the standard policy approach of global policymakers or authorities to concurrent political-economic problems.

Warren Buffett On The US SEC-Goldman Sachs Controversy

Here is Warren Buffett's remarks on the US SEC-Goldman Sachs row at the "woodstock for capitalist" at the Berkshire Hathaway annual meeting...

From the New York Times Deal Book,

``According to DealBook’s Andrew Ross Sorkin, who’s one of three panelists asking questions at the meeting, Mr. Buffett essentially took Goldman’s defense that everyone involved in the deal under scrutiny, Abacus, was a sophisticated investor fully capable of evaluating the risks in the subprime mortgage investment. Instead of needing to be told that a hedge fund manager who suggested which bonds should form the underpinnings of the Abacus collateralized debt obligation was also short the bonds, the investors should have relied on their own due diligence, Mr. Buffett said.

“If I have to care who is on the other side of the trade, I shouldn’t be insuring bonds,” he said.

``Mr. Buffett added an implicit rebuke of a line of questioning raised by several senators during this week’s Goldman hearings. An investment bank could very well be short the securities Berkshire is buying, and a buyer like Berkshire should be perfectly aware of that in any case."

One may argue that Mr. Buffett's defense of Goldman arises from his company's stake in the company.

But as we long said, the counterparties involved were not individual patsies but institutions ran by an army of supposed experts, who likewise engaged in similar activities as Goldman.

In short, the counterparties knew of the risks that they took but that were entranced by the siren song of a perpetual boom as well as having to over-confidently outsource risk appraisal to the rating agencies. Mr. Buffett, thus, shares our view.

The fundamental problem with politics is the inherent scapegoating of market forces for political goals. And the intuitive reaction- institute "controls" by penalizing "profiteers".

What the mainstream left don't realize or keeps as secret is that the intent to impose more regulations signify as stealth efforts to maintain a stranglehold of the banking cartel on the political-economic ecology.