Cartoon of the Day: Prices are Evil

From Karen De Coster:

Raising prices is “gouging.”

Lowering prices is “predation.”

Keeping them the same is “collusion.”

Cutting costs is “scheming.”

So for governments, market prices signify a ‘damned-if-you and damned-if-you-don’t’ thing.

Yet without the pricing system there won’t be economic calculation which functions to coordinate or discoordinate the distribution of resources.

As Ludwig von Mises aptly pointed out.

A government that sets out to abolish market prices is inevitably driven toward the abolition of private property; it has to recognize that there is no middle way between the system of private property in the means of production combined with free contract, and the system of common ownership of the means of production, or socialism. It is gradually forced toward compulsory production, universal obligation to labor, rationing of consumption, and, finally, official regulation of the whole of production and consumption.

The Bolsheviks have tried this and failed, from the PBS.org (bold emphasis added)

1917-1920: With the October 1917 revolution, the Marxist concept of the moneyless economy becomes a desired goal, but not yet a practical one. The Bolsheviks nationalize the banks, but make no attempt to restrict inflation. With the destruction of the market economy, inflation soars, and money becomes virtually valueless. A black market based on barter develops to fill the vacuum.

Fox's Juan Williams: Ron Paul is Changing the Republican Party

Fox political analyst Juan Williams says Ron Paul has been changing the Republican Party. (hat tip: lewrockwell.com)



Whether 2012 will reckon as the 'Ron Paul moment' or not, 'changing the Republican Party' implies that libertarianism has been gaining constituents. This should be something to cheer for.

Can We Survive a World with 9 billion people?

Prolific author Matt Ridley says yes (bold emphasis mine)...

We trebled yields in the last 60 years without taking extra land under the plough. If we did that again – by getting fertilizer to farmers in Africa and central Asia, by cutting losses to pests and droughts through ever more subtle genetic manipulation, by improving roads and encouraging trade – then we could feed nine billion better than we feed seven billion today. And still retire huge swathes of land from farming to rainforest and other forms of wilderness.

The two most effective policies for frustrating this uplifting ambition are: organic agriculture and renewable bio-energy. Organic farming means growing your nitrogen fertilizer rather than fixing it from the air. That requires more land, either grazed by cattle or planted with legumes. The quickest way to destroy what wilderness we have left is to go organic. Bio-energy (growing crops to make fuel or electricity) takes food out of the mouths of the poor. In 2010, the world diverted 5% of its grain crops into making fuel, displacing just 0.6% of oil use yet killing an estimated 192,000 people by tipping them into malnutrition through higher food prices. We should stop such madness now.

...provided environmental politics would not lead to vicious government meddling which would subvert earlier victories with deleterious policies that would function as the proverbial cure which is worse than the disease.

He writes about how Malthusians like Paul Ehrlich, who wrongly forecasted for a worldwide cataclysmic famine, had mainly been foiled by creative persistency of the father of Green Revolution Nobel Laureate Norman Borlaug, one of the genuine unsung heroes of the world (my earlier post here).

He also writes about how technology has substantially increased farming efficiency which has led to a massive reduction in land usage for agriculture. (bold emphasis mine)...

We currently feed nearly seven billion people by farming about 38% of the land surface of the planet. If we wanted to feed that many people by using the techniques, varieties and – mostly organic – fertilizers of the 1950s, we would need to cultivate roughly 84% of the land surface. There goes the rain forest, the national parks, the wetlands. The intensification of agriculture has saved wilderness.

...and also how famine prevention defused the population time bomb.

Read Mr. Ridley’s fantastic article here

Bottomline: Mr. Ridley bets on human ingenuity (and not on econometric models) brought upon mostly by free trade. And so do I.

Deepening of Information Age: More Proof of Structural Changes in Job Markets

With the deepening of the information age, jobs will be characterized by increasing specialization, as said in many occasions in this post, such as here here and here

Here is an anecdotal proof provided by a large US manpower agency.

From the Wall Street Journal Blog (bold highlights mine)

Joerres said the global skills shortage applied particularly to technical areas, like specialized trades, but also sales staff. “There is still unemployment, but companies are having a difficult time finding the people they need to fill their positions. As the world is becoming more technical, the sales staff are having to become more technical, too,” Joerres said.

The shortage also applied to laborers, especially in developing markets. “You cannot just throw people at production to get more output,” Joerres said. “With the use of (computer numerical control, or CNC) machines, for example, it is more difficult to find the right people.”

ManpowerGroup’s sixth annual talent shortage survey, to be published Thursday, will show that persistent talent shortages across many geographies and industry sectors are frustrating employers who struggle to find qualified talent amid an oversupply of available workers.

And this has been a worldwide phenomenon. From the same article (bold highlights mine)

Although European countries aren’t yet feeling such an acute impact of talent shortages, the U.S. has seen a considerable uptick in the number of employers who can’t find the talent they need, Joerres said.

India now has the second-highest problem with skilled labor shortages. “The number of companies in India reporting difficulty filling vacancies is second only to Japan,” Joerres said.

“India is a big place with lots of people but there’s a shortage of assurance engineers, people who can read blueprints, designers and (computer-aided design, or CAD) designers.”

Manpower, based in Milwaukee, is looking to expand its operations in emerging markets that make up around 15% of its sales, which reached $5.07 billion in the first quarter of 2011.

The more the specialization, the more aggregate based statistics will become flawed and unreliable.

So when politicians and their ‘expert’ apologists speak about solving unemployment with use of aggregates, expect that these approaches to fall short because they are mostly likely addressing the wrong (industrial age based) issues.

Are US Farmlands the Next Bubble?

From Bloomberg’s Chart of the Day

U.S. farmland may turn into “the next big speculative bubble” as prices climb, according to Robert J. Shiller, a Yale University economics professor.

The CHART OF THE DAY shows that the value of agricultural land in the upper Midwest has doubled since 2002, according to data compiled by the Federal Reserve Bank of Chicago. The chart also depicts farm values in inflation-adjusted terms, which are approaching their highs from the 1970s. The region encompasses Illinois, Indiana, Iowa, Michigan and Wisconsin.

Shiller, whose book “Irrational Exuberance” foreshadowed the end of the 1990s surge in stocks, wrote yesterday that farms are “my favorite dark-horse bubble candidate for the next decade or so.”…

“Farmland, as least in certain places, seems to have the most contagious ‘new era’ story right now,” Shiller wrote. He cited the risk of food shortages related to global warming as contributing to a boom in the U.K., along with the U.S.

The price trends of farmlands (not only in the US) will almost entirely depend on the actions of the commodity spectrum. If the US and other governments continue to massively inflate, then commodities will respond accordingly. Farmlands will subsequently respond too.

It would signify as utter nonsense to say that everything that goes up represents a ‘speculative bubble’. This assumes that current conditions are hunky dory except for the ‘irrational exuberance’ by the marketplace.

Yet one would realize that it isn’t just farmlands but also the technology sector showing semblance of ‘bubble’ actions. The point being—you won’t have symptoms of bubbles (in the US and elsewhere) without fuel to inflate them.

And $6.4 trillion question is who’s been providing that?

Besides, hasn’t it been the morbid fear of falling prices that has led to the corresponding policies designed to boost prices higher?

Essentially surging farmlands (and commodities) represents the proverbial “be careful of what you wish for” pathology.

Irrational exuberance represents the secondary cause and not the main mover.

US CPI Inflation’s Smoke and Mirror Statistics

Cato’s Mark Calabria asks Is Housing Holding Back Inflation?

He writes,

Also of interest in the April numbers is that if you subtract housing, which makes up over 40% of the weight of the CPI, then prices increased 4.2 percent — twice Bernanke’s measure of stability. What has always been problematic of the housing component is that its largest piece is an estimate of what owners would pay themselves if they rented their own residence. This estimate makes up about a fourth of the CPI. As the chart below demonstrates, for much of 2010, the direction in this number was actually negative, which held down CPI over the last year. The current annualized figure for owner’s rent is 0.9 from April 2010 to April 2011. Oddly enough, this is below the actual increase in rents, which was 1.3. For most homeowners, the real cost of housing — their mortgage payment — has likely been flat, not decreasing. So whatever benefit there has been to declining housing costs, most consumers are unlikely to feel any benefit from those declines, if they are actually real.

Mr. Calabria is right. Housing data has been foundering. US housing starts dropped 10.6% in April says the Financial Times.

US Federal Reserve researchers and their apologists (academic and institutional representatives) have staunchly been defending (denying) Fed policies, by dissociating rising commodity prices with CPI inflation.

Yet, ironically, the US government has waged war on inflation by trying to influence the prices of commodities.

Importantly, putting into context Mr. Calabria’s concern, the construct of the US CPI seems mostly a statistical smoke and mirror.

Some great charts from Dshort.com can elaborate on this.

The above is the CPI breakdown

The above is the % change of each component of the CPI.

Except for housing, apparel and recreation all other categories have been moving sharply higher!

Dshort has more charts of CPI relative to Energy, Tuition and CPI versus core CPI here-where you can see the difference.

So unless you don’t eat or travel or have children in school, inflation seems nonexistent only for ivory tower based experts.

Also, it would be a wonder why Chairman Bernanke has refrained from mentioning ‘core inflation’, as Forbes Brian Domitrovic observes,

Heard a lot about “core inflation” from Federal Reserve chairman Ben Bernanke lately? You haven’t, because two months ago his handlers had him stop using the term. Now he uses substitutes, such as “headline” versus “underlying” inflation

What’s with the jargon? Everyone knows that prices are going up. Corn on the cob that used to sell a dollar a bushel is now a dollar each. Talk about core inflation: These days even cobs (which feed pigs, after all) at the center of the fruit of the stalk are worth a pretty penny.

Suppressed CPI gives the Fed the leeway to inflate more.

I am reminded of Mark Twain who once said, lies, damned lies and statistics.

War on Speculators: Restricting Short Sales on Sovereign Debt and Equities

How does government resolve the problem of their profligacy? Well, blame the speculators (a.k.a. markets)!

From the Wall Street Journal

European Union finance ministers Tuesday reached an agreement on rules limiting short-selling of shares and sovereign debt, overcoming concern from the U.K. that the legislation will give the EU's new securities regulator too much power.

The ministers must now negotiate a final version of the legislation with lawmakers at the European Parliament, which favors broader rules that would also cover short sales of credit default swaps linked to sovereign debt.

France and Germany in particular have blamed short-selling of sovereign debt for having exacerbated the euro-zone debt crisis, though regulators say there is little evidence that trading activity has caused the yields of Greek, Irish and Portuguese bonds to soar in the past year.

These has been a continuing motion to pass the blame on everyone else in what truly represents as the unintended adverse consequences of past policies.

Proximity Based Manufacturing Supply Chains as Trend of the Future?

The Economist proposes that the current trend in global manufacturing could shift based on the following priorities, other than labor arbitrages.

-Proximity to customers

Many multinationals will continue to build most of their new factories in emerging markets, not to export stuff back home but because that is where demand is growing fastest.

-Inventory Management

Firms are also trying to reduce their inventory costs. Importing from China to the United States may require a company to hold 100 days of inventory. That burden can be handily reduced if the goods are made nearer home (though that could be in Mexico rather than in America).

Read the rest here

Ballooning inflation means not only rising wages in Emerging markets which erodes the opportunities for labor arbitrage, but may also extrapolate to substantial increases in transportation costs which could alter the cost benefits of outsourcing.

So perhaps proximity based supply chains could be a dynamic that could gain a larger role in the future.

The Wonderful Effects of Deflation in the Telecommunication Sector

Telecom fees continue to fall almost everywhere.

Notably, the largest decline can be seen in developing economies. Yet in spite of this, developed economies still maintain the lowest rates.

From the Economist,

DEVELOPING countries still pay far more for communications than developed countries as a proportion of overall income. But over the past two years these services have become more affordable worldwide, according to the ITU (International Telecommunication Union). The ITU’s ICT price basket combines the average cost of fixed-line telephones, mobile phones and fixed-line broadband internet services, calculated as a proportion of gross national income per person. (Broadband is not shown on the chart because in countries where it is still rare, its high cost swamps the chart and makes it difficult to read.) Africa made the biggest gains. Of the countries covered, seven countries had overall price-basket declines greater than 50%, mainly because of declines in fixed broadband. Mobile-phone charges are higher in developing countries in part because many customers pay for calls using pre-paid scratch cards rather than via monthly contracts which include large "buckets" of calling time for which the effective cost per minute is much lower.

Developed economies have the natural advantage of having lower rates primarily because of accumulated wealth (capital stock) and high productivity.

This also shows that an industry once thought as “natural monopoly” has proven to be a myth.

As Professor Thomas DiLorenzo writes,

The biggest myth of all in this regard is the notion that telephone service is a natural monopoly. Economists have taught generations of students that telephone service is a "classic" example of market failure and that government regulation in the "public interest" was necessary.

The ITU seems reticent on why costs have been falling. Their narratives have mainly focused on the developments of falling prices rather than the essence of what makes cost of telecom services decline.

Nevertheless I’ll quote the ITU in 2008,

Market liberalisation has played a key role in spreading mobile telephony by driving competition and bringing down prices.

Lastly, telecom fees signify as great examples of what we shouldn’t be afraid of—deflation.

On the contrary, basic economics in the telecom sector has worked magnificently...

...where falling prices (arising from market based competition) equates to greater volume. This has translated to mass adaption by the public. Worldwide, there are 69 mobile subscribers per 100 people and growing. Chart from Google Public Data

To quote ITU’s Secretary-General Dr Hamadoun Touré

With ICTs now a primary driver of social and economic development, these results are highly encouraging...Our next challenge is to find strategies to replicate the ‘mobile miracle’ for broadband, which is fast becoming basic infrastructure. Countries without affordable broadband access risk falling quickly behind.

Well, the answer to the desire for "mobile miracle" in broadband should be the same dynamics that has made the above circumstances possible—market liberalisation!

Video: Morality of Profits; Should We Give Back Wealth to the Society?

Billionaire-philanthropist Bill Gates says that the we should pursue the idea of giving back wealth to the society.

In this video the illustrious Tom Palmer explains the morality of profits by distinguishing between wealth obtained from voluntary and involuntary (pelf) exchanges.

As Ludwig von Mises once wrote,

Profit is the reward for the best fulfillment of some voluntarily assumed duties. It is the instrument that makes the masses supreme.

Are Internet Stocks A Bubble?

That’s an interesting question posed by the Economist in a recent article.

They note of three powerful forces among many influencing the evolution of the internet world particularly, rapid advance in technology, wider range of willing investors and globalization

Read their explanation here.

Nevertheless they also point to the following as beacon...

Lofty prices in the secondary markets.

The Economist writes,

Their task has been made easier by the advent of secondary markets in America, such as SharesPost and SecondMarket, that allow professional investors to trade the equity of private companies more efficiently. They have also made it simpler for employees and angel investors to offload some shares—and have enabled the world at large to observe a remarkable rise in valuations

And the winning streak of technology stocks.

I talked about the potentials of the technology sector as a source of bubble where I used the Charles Kindleberger model of dislocations.

Here is what I wrote in July 2010

Some factors that may prompt for a technology based dislocation (Kindleberger model) bubble are the following:

-less government intrusion in the market clearing process of the previous dot.com bust,

-swift obsolescence rate of the technology cycle and or rapid rate of innovation could mean new applications

-globalization means more consumers of technology products and services, thus a wider reach and bigger markets, albeit a more niche oriented one (another potential source of dislocation)

-importantly, freer markets which allows for more intensive competition could spawn heightened innovation from which new products with widespread application could emerge.

Yet there are many factors from which technology should play a role in shaping markets and the economy. Fundamentally this involves greater dispersion of knowledge and the deeper role of specialization, which some have labeled as the Hayekian Moment.

The impact of which should include vastly improved business processes via the development of organizational capital, provide for more real time activities which immensely reduces transaction costs thereby generate an explosion of commercial or commercial related activities, and significantly flatten organizational hierarchy which becomes attuned to the dynamics of a more competitive environment.

Economic development trends appear to be tilted towards having a greater share of technology based service sector. The more competitive an economy is, the greater the share of the technology based service economy.

This, essentially, is the running transition away from the industrial age towards the information age.

Thus, free market based competition has been directing economic development towards more specialization, or in Austrian economics terms-the lengthening of the production structure.

So a Kindleberger bubble should be on our watch list.

Given the above plus the artificially suppressed interest rates and credit easing policies (a.k.a. quantitative easing), this essentially combines segments of the Austrian Business Cycle with the Kindleberger’s model, which means the answer is a likely yes; the internet sector would seem like candidate of an inflating bubble.

But remember bubble cycles signify a process. This means that internet/technology stocks can stretch higher until it reaches its maximum point of elasticity where eventually it snaps.

Besides that’s what US authorities have been looking for, a replacement bubble.

The Ten Growing and Dying Industries in the US

The Wall Street Journal compiles a list, from a study of IBIS World, of the rapidly growing industries, as well as, dying industries in the US.

First the sad news.

The Dying Industries

According to the WSJ Blog,

The dominance of the Web and digital media also puts Newspaper publishers, record stores and video-rental companies on the list. Meanwhile, photofinishing also takes its place among the top 10 dying industries thanks to the growing influence of digital photography.

Cheap imports are blamed for a decline in mills and apparel manufacturers. Companies that rent formal wear are also counted among dying industries amid both competition from abroad and lower prices making owning your own formal wear a more attractive option than renting.

The only clear recession casualty that makes the list is manufactured home dealers. The housing boom led to a surge in the industry, but now years after the bubble burst the sector has continued to struggle.

I have a different view from the political correct undertones of the above narrative.

The dying industries illustrates how the US economy has been evolving from commoditized (highly price sensitive) low value industries to high value technology based industries.

Now for the good news.

The Sunshine ‘Thriving’ Industries

Again the WSJ Blog

Unsurprisingly, the list is led by the tech and environmental sectors, which take up eight of the ten spots. There’s some good news for some of those in the top 10 dying industries. While wired telecom carriers dominated the dying list, voice over Internet protocol leads the list of thriving industries, illustrating the shift from one technology to another. Similarly, while newspaper publishers are among the dying industries, Internet publishers are counted with the thrivers.

Meanwhile, demographic shifts are also adding to the list of fastest-growing industries. Insurance-claims adjusters are in a growing sector as the Baby Boom generation ages. Unfortunately, a growing population also increases the need for prison guards, as correctional facilities make the list of thriving industries.

I observe two major factors from the fast expanding sectors:

One: creative destruction has been working her wonders.

Second: favored government sectors has been benefiting from political largesse.

As for creative destruction, let me quote Joseph Schumpeter Capitalism, Socialism, and Democracy (1942) (p. 83)

The opening up of new markets, foreign or domestic, and the organizational development from the craft shop to such concerns as U.S. Steel illustrate the same process of industrial mutation—if I may use that biological term—that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. [emphasis added]

Bottom line: Despite segments of cronyism, the dynamic process of ‘Creative Destruction’ plays a very substantial role in providing benefits to consumers.

In short, capitalism still weaves her magic despite the US government’s very visible hands.

Global Equity Markets: Signs of Exhaustion; What US Outperformance Means

Bespoke Invest has an updated table of the year-to-date and the month-to-date performances of global equity markets.

I will only show the year-to-date chart.

The month to date chart you can go directly to Bespoke here

Only 18 out of the 78 countries or 23% of the countries in Bespoke’s tally posted positive returns from April 15 to May 15 2011.

Major economies and the BRIC bourses have all been in the red. But the BRIC has underperformed the G-7.

ASEAN bourses largely outperformed most of the world.

On a year to date basis the picture changes; about half of the global equity markets are still in the black or registered positive gains.

Nevertheless the continuing weakness in the markets as a result of many political events is likely to weigh on the above standings.

Again, y-t-d the G-7 economies have outclassed the BRICs, while ASEAN bourses remain slightly above the mean.

Venezuela's Stagflation

An irony is that Venezuela whom just popped out of the recession leaped 10% in May to grab the 2^nd spot.

Venezuela’s recovery could merely be statistical considering that the country, despite being an oil exporter, has now been rationing electricity in the face of rolling brownouts.

Nationalization policies have led to a material drop in foreign investments that has contributed to such social blight.

Venezuela’s inflation at 22.9% has hardly been affecting stock price levels.

I’d say the so-called Venezuelan outperformance is a result of government’s money printing in preparation for 2012 Presidential elections.

Venezuela looks more like the movie The Curious Case of Benjamin Button. Venezuela stagflationary environment has exhibited an interesting phenomenon of a rising stock market amidst a recessionary environment and high unemployment.

As stated before, for me, the Venezuela's Chavez regime seems like a prime candidate for Zimbabwe 2.0.

Implication of the Changes in the Ratio of Emerging Market-US Equity

Yet the outperformance of the US relative to Emerging Markets should be seen from the bigger picture.

Again chart above courtesy of Bespoke.

EM bourses have largely bested US markets at the start of the recovery or since November 2008 until its peak on November 2010 (see red trend line).

Presently such trend seems to have reversed. (see blue line which forms a wedge)

I am not sure if this means that EM would start underperforming over the coming months or if this represents plain consolidation or a pause prior to the next up leg. Although I am inclined to think the latter.

Besides it’s no good news to suggest that the US outperforms the world considering that globalization has been reducing the US share contribution to the global economy. (in 1960 US share is 39%, in 2009 it was 24.23%)

This only implies that perhaps tightening of money conditions could have been taking hold outside the US, and may affect the global economy, which appears to be exhibited by current stock market performances. And this may eventually will get transmitted to the US.

One would further note that the previous market top in 2007-2008 was defined by a consolidation phase between the EM economies and US markets before the Lehman crash in October 2008 (see green oval).

So while home biased US managers see this as good news, this ain’t one for me.

Let me be clear: This isn’t a case to be strongly bearish yet. Although this should serve a yellow flag, which requires more confirmation or falsification.

MENA Uprisings: Iran Sends Flotilla To Bahrain

If there is one risk that seems to have been overlooked by the marketplace is this: a potential escalation of Middle East tensions.

The Reuters reports,

Shi'ite-ruled Iran sent a flotilla to Bahrain on Monday to show solidarity with mainly Shi'ite Muslim protesters, escalating tensions with the island kingdom that is home to the U.S. Navy's Fifth Fleet.

It was not clear when the convoy might reach Bahrain, which has a majority Shi'ite population but is ruled by a Sunni king.

Bahrain, which has cracked down on pro-democracy protesters in recent weeks, has criticised the decision to send the flotilla and accused non-Arab Iran of interfering its affairs.

Iran's English-language Press TV said 120 activists, including professors, students and clerics, were aboard the convoy, sent to condemn the killing of Bahraini protesters.

The MENA unrest has earlier spread to Bahrain from which Saudi Arabia earlier sent troops to help quash the mounting opposition.

Kuwait has likewise declared in the same article that

“Kuwait will not hesitate to defend the Kingdom of Bahrain against any danger that may threaten its security," the al-Watan daily quoted an unnamed senior Kuwaiti source as saying.”

Ruling autocracies has been linking arms in the face of growing dissent from her constituencies.

Moreover this isn’t about Christian-Muslim conflict but about Muslim inter-religious or sectarian schism. The point I would to make is for those who tunnel on the view that the world operates as religious black and white conflict, obviously this isn’t one of them.

In addition, the Bahrain episode is more of a consequence of foreign meddling on what is a local political disorder. And the meddling of Saudi Arabia has similarly triggered a counter response: Iran implicitly applies symbolical intervention by sending a flotilla.

What used to be a local problem has now gravitated to a regional predicament a risk I earlier pointed out.

We hope that this won’t turn into a full scale conflagration, because if it does, there will be much turmoil especially in the energy markets.

This is one development that requires vigil.

Ron Paul Slams IMF on Strauss Kahn

From the Right Perspective, (bold highlights mine)

US Presidential candidate Ron Paul says the arrest of IMF boss Dominique Strauss-Kahn shows why economic sovereignty and control of the money supply should not be handed over to an international body.

“These are the kind of people that are running the IMF and we want to turn the world finances and the control of the money supply to them?,” Paul rhetorically asked on FOX News Sunday. “That should awaken everybody to the fact that they ought to look into the IMF and find out why we shouldn’t be sacrificing more sovereignty to an organization like that and an individual like he was.”

US Rep. Ron Paul has referred to proposals for a global currency that would serve as substitute to the US dollar which according to the proponents would be represented by the IMF’s SDR (special drawing rights).

The fact is that the IMF’s SDR, as a global currency, has long been a fantasy for Keynesians.

As Murray Rothbard pointed out,

At best, the Keynesian Dream is a long shot. It is always possible that, not only British opposition, but also the ordinary and numerous frictions between sovereign nations will insure that the Dream will never be achieved. It would be heartening, however, if principled opposition to the Dream could also be mounted. For what the Keynesians want is no less than an internationally coordinated and controlled world-wide, paper-money inflation, a fine-tuned inflation that would proceed unchecked upon its merry way until, whoops!, it landed the entire world smack into the middle of the untold horrors of global runaway hyperinflation

Perish the thought of an IMF SDR as global currency!

Twilight Zone: Zimbabwe Considers A Gold Backed Dollar!

It’s always a reasonable advice to expect the unexpected.

Zimbabwe, whom has been the latest country to endure a stunning gut-wrenching episode of hyperinflation as shown below (previously posted here)....

….has reportedly been considering…hold your breath…a Dollar backed by GOLD!

Reports the New Zimbabwe (hat tip Bob Wenzel)

THE central bank says the country must consider adopting a gold-backed Zimbabwean dollar warning that the US greenback’s days as the world’s reserve currency are numbered.

Government ditched the Zimbabwe dollar in 2009 after it had been rendered worthless by record inflation levels and adopted multiple foreign currencies with the US dollar, the South African Rand and the Botswana being the most widely used.

Finance minister Tendai Biti says the country needs at least six months import cover and a sustainable track-record of economic growth, inflation stability and above 60 percent capacity utilisation in industry before the Zim dollar can be brought back into circulation.

However central bank chief, Dr Gideon Gono said the country should consider adopting a gold-backed currency.

“There is a need for us to begin thinking seriously and urgently about introducing a Gold-backed Zimbabwe currency which will not only stable but internationally acceptable,” he said in an interview with state media.

“We need to re-think our gold-mining strategy, our gold-liberalisation and marketing strategies as a country. The world needs to and will most certainly move to a gold standard and Zimbabwe must lead the way.”

Gono said the inflationary effects of United States’ deficit financing of its budget was likely to impact other countries to leading to a resistance of the green back as a base currency.

Has this tergiversation talk of Dr. Gono, the man responsible for Zimbabwe’s hyperinflation, imply of a genuine conversion? I doubt so.

Yet, as earlier pointed out in my previous post where Steve Forbes has predicted the return of the Gold Standard in 5 years, it usually takes a calamitous event for politicians to embrace what is seen as politically repulsive.

Could Dr. Gono be the trendsetter?

Global Equity Markets: Sell in May and Go Away?

Some experts have been talking about selling in May and going away.

The premise of this precept is fundamentally seasonal.

Chart from Equityclock.com

One expert even cited the Tobin Q which implied for high valuations, as one of the 'fundamental' reasons to do so.

Chart from Greg Mankiw

As I have been saying since 2008, it has been politics that has essentially driven financial markets more than corporate valuations or economics. And that’s why many experts, relying on the former metrics as guidance, have got it all so wrong.

Anything can happen in the markets. Most especially that today’s financial markets have been heavily distorted by various government interventions.

And as I have repeatedly been pointing out, the stock market have been a target for government policies where the US government has even less been coy about this, which they claim represents “success” in policymaking.

This means politics will continue to determine market outcomes or its directions (via the boom bust cycle).

Say for instance, if the US Federal Reserve decides to “covertly” bolster the US Democratic Party to negotiate for the vote on the debt ceiling, all the Fed has to do is to allow 'some' market volatility to pervade by withholding QE or by selling some market securities held by the Fed.

And the ensuing market volatility, as the politicians will point out, will be imputed to the uncertainty from the unwillingness to increase the debt ceiling by the opposing Republican Party.

But the truth is the US Fed has been instrumental in shaping the conditions of the equity markets. It’s been part of Ben Bernanke’s ‘crash course to central bankers’ dogma.

Market volatility, thus, adds to the leverage of politicians in negotiating vital policies.

Also the war on commodities may have ripple effects on global financial markets not limited to equities, as I pointed out in my latest observation on the possible ramifications of global price manipulations on the commodity markets to the Philippine Mining index.

So there are many complex interrelated and intertwined factors that may influence global stock markets more than seasonal factors.

I’d rather use the actions taking shape in major commodity markets, global equity markets, yield curves of major economies and of Asia, and the unfolding geopolitical events as guidance.

War on Commodities: Falling Prices Equals Ballooning Demand For Gold Coins

The implied price controls conducted by some the major governments have apparently been meant to forestall the rise of statistical inflation via the commodity transmission.

Yet instead of the markets freaking out of commodities, physical demand instead has reportedly been swelling.

From Bloomberg, (bold highlights mine)

Sales of gold coins are on track for the best month in a year amid the worst commodities rout since 2008, a sign that bullion’s longest bull market in nine decades has further to run, if history is a guide.

The U.S. Mint sold 85,000 ounces of American Eagle coins since May 1 as the Standard & Poor’s GSCI Index of 24 raw materials fell 9.9 percent. The last time sales reached that level, bullion rose 21 percent in the next year...

It’s not just the U.S. Mint that saw accelerating sales. Rand Refinery Ltd., which makes the Krugerrand, said May 13 that sales are heading for their best month since August. Demand for physical gold on May 6 was the strongest since early February, Standard Bank said in a report May 11. The U.S. Mint sold 62,000 ounces of American Eagles in the first week of May, as the S&P GSCI slumped 11 percent, the most since December 2008.

UBS AG, Switzerland’s biggest bank, had its second-best day this year for physical sales on May 9, according to a report the following day. The bank’s sales to India, the world’s top bullion consumer, are more than 10 percent higher than in 2010.

So like my earlier post on declining silver inventories, we seem to be witnessing markets taking advantage of the government orchestrated turmoil.

And this has not been an all the private sector affair; Emerging market governments have reportedly joined the frenzy to accumulate.

From the same Bloomberg article, (bold highlights mine)

Another warning sign for the rally may be central banks adding to their reserves for the first time in a generation. Mexico, Russia and Thailand bought about a combined $6 billion in February and March, International Monetary Fund data show. Central banks hold 30,575 tons, equal to about 18 percent of all the metal ever mined, the data show.

The banks were also boosting holdings in 1980 when gold rose to a then-record $850, only to fall for most of the next 20 years. That high is equal to $2,299 in inflation-adjusted terms, according to a calculator on the website of the Federal Reserve Bank of Minneapolis. Prices tripled from 1999 through the beginning of 2008 as the banks sold more than 4,000 tons.

It would seem that the current ploy implemented by the US could be benefiting emerging market economies. Has the rigging of the marketplace also been meant to give EM economies ‘friends’ a discount?

Needless to say, the effect of the price manipulation seems becoming more evident—a policy failure.

Has the Magic of Technology Ebbed?

Marketing guru Seth Godin thinks so. He writes, (bold emphasis mine)

Arthur C. Clarke told us, “Any sufficiently advanced technology is indistinguishable from magic.”

Head back to the 1800s with a Taser or a Prius or an iPad and the townsfolk will no doubt either burn you at the stake or worship you.

So many doors have been opened by technology in the last twenty years that the word “sufficiently” is being stretched. If it happens on a screen (Google automatically guessing what I want next, a social network knowing who my friends are before I tell them) we just assume it’s technology at work. Hard to even imagine magic here.

I remember eagerly opening my copy of Wired every month (fifteen years ago). On every page there was something new and sparkly and yes, magical.

No doubt that there will be magic again one day... magic of biotech, say, or quantum string theory, whatever that is. But one reason for our ennui as technology hounds is that we’re missing the feeling that was delivered to us daily for a decade or more. It’s not that there’s no new technology to come (there is, certainly). It’s that many of us can already imagine it.

The current generation, whom have been key beneficiaries of the transformative technological innovations, may seem to be less appreciative of the contributions of technology to our current welfare. That’s because technology has been giving us constantly more for less.

Thus, the diminishing returns on expectations from the impact of technological progress: the perceived loss of magical touch.

But I think it goes more than that.

Perhaps most people may be a lot less familiar with the antecedent of today’s state of technology. Or, people may have forgotten the roots of today’s progress: our ancestors compounded efforts or actions.

As the great Ludwig von Mises once wrote, (bold highlights mine)

Nobody denies that technological progress is a gradual process, a chain of successive steps performed by long lines of men each of whom adds something to the accomplishments of his predecessors. The history of every technological contrivance, when completely told, leads back to the most primitive inventions made by cave dwellers in the earliest ages of mankind. To choose any later starting point is an arbitrary restriction of the whole tale. One may begin a history of wireless telegraphy with Maxwell and Hertz, but one may as well go back to the first experiments with electricity or to any previous technological feats that had necessarily to precede the construction of a radio network. All this does not in the least affect the truth that each step forward was made by an individual and not by some mythical impersonal agency.

When people forget about history; the contribution of a multitude of individuals in today’s progress through the years, then they became less appreciative of the blessings that has been happening.

Many people today seem to think that the progress from technology is just a given. It is not.

For as long as people are allowed to trade, trade will then function as the main driver of technological progress.

Writers like me will try to keep that magic alive.

IMF Head Arrested For Sexual Molestation

From New York Daily News

A top French politician nicknamed "the great seducer" was dragged off a flight at Kennedy Airport Saturday after he was accused of sexually assaulting a Manhattan hotel maid.

Port Authority cops grabbed Dominique Strauss-Kahn, the head of the International Monetary Fund and a presidential hopeful in France, moments before his Air France plane took off about 4:45 p.m.

Strauss-Kahn, 62, allegedly crept up behind a maid after she entered his room and forced her to perform oral sex on him, sources said.

The woman broke free and ran out of the room. Strauss-Kahn quickly headed for the airport, sources said.

Charges against Strauss-Kahn, who is married to well-known French TV journalist Anne Sinclair, were pending Saturday night, sources said.

Hours before Strauss-Kahn was pulled from the flight, a close Socialist Party ally claimed he was the target of a smear campaign by French President Nicolas Sarkozy.

My two cents.

Politics is a dirty game.

While this sorry event shows how officials are subject to the same frailties as anyone else, the difference is that the political class have the tendency to abuse their powers just to meet their personal desires.

Besides, the law applies differently to everyone. Remember this? (hat tip Charleston Voice)

Or that maybe too much of economics can increase one's libido too?