Political Interventions has Led to the Widening of Divergences in Global Asset Markets

By creating illusory profits and distorting economic calculation, inflation will suspend the free market's penalizing of inefficient, and rewarding of efficient, firms. Almost all firms will seemingly prosper. The general atmosphere of a "sellers' market" will lead to a decline in the quality of goods and of service to consumers, since consumers often resist price increases less when they occur in the form of downgrading of quality. The quality of work will decline in an inflation for a more subtle reason: people become enamored of "get-rich-quick" schemes, seemingly within their grasp in an era of ever-rising prices, and often scorn sober effort. Inflation also penalizes thrift and encourages debt, for any sum of money loaned will be repaid in dollars of lower purchasing power than when originally received. The incentive, then, is to borrow and repay later rather than save and lend. Inflation, therefore, lowers the general standard of living in the very course of creating a tinsel atmosphere of "prosperity.- Murray N. Rothbard

The fascinating thing about markets is that we can always expect the unexpected.

When events don’t play out according to expected patterns, this only shows how people respond differently to even similar conditions. That’s because many variables affect or influence people’s response to evolving conditions.

As the great Ludwig von Mises wrote, (bold emphasis mine)[1]

Epistemologically the distinctive mark of what we call nature is to be seen in the ascertainable and inevitable regularity in the concatenation and sequence of phenomena. On the other hand the distinctive mark of what we call the human sphere or history or, better, the realm of human action is the absence of such a universally prevailing regularity. Under identical conditions stones always react to the same stimuli in the same way; we can learn something about these regular patterns of reacting, and we can make use of this knowledge in directing our actions toward definite goals. Our classification of natural objects and our assigning names to these classes is an outcome of this cognition. A stone is a thing that reacts in a definite way. Men react to the same stimuli in different ways, and the same man at different instants of time may react in ways different from his previous or later conduct. It is impossible to group men into classes whose members always react in the same way.

This is not to say that future human actions are totally unpredictable. They can, in a certain way, be anticipated to some extent. But the methods applied in such anticipations, and their scope, are logically and epistemologically entirely different from those applied in anticipating natural events, and from their scope.

And based on logical and epistemological observations one can observe that the current market conditions are being defined by the deepening signs of divergences.

Divergences in Global Equity Markets

As global markets continue to wobble, most of Asian markets caught fire this week.

Despite Asia’s seeming reanimated equities, individual performances based on recent price actions have been idiosyncratic. In other words, some bourses have recoiled strongly from sharply oversold conditions while the other outperforming bourses have merely shed some the recent languor and could be poised for another upside run.

I would think the Philippine Phisix as representing the second category.

Most of the major bourses, the US S&P 500 [SPX], iShares MSCI All Country Asia ex Japan Index Fund [AAXJ] and the MSCI World (ex USA) Index (EOD) [MSWORLD] have all been on a downdraft almost synchronically since May.

In the past, all markets would have chimed as one.

In contrast the Phisix has swung like a pendulum to erase last week’s losses and post a positive (+2.15%) year to date gains.

Yet based on chart formations, the Phisix appears to be emitting significantly bullish signals. A reverse head and shoulder pattern, which once transgressed or encroached, could possibly send the local benchmark to the 4,900-5,000 level by the year end.

On the other hand, the actions of the BRICs represent the first category where some of the recent gains of Asian bourses signify more of oversold bounces.

China’s (SSEC) and India’s (BSE) spectacular rallies this week, appears to have broken the intermediate downtrend. As to whether the upside breakaway from the current downturns signify as key inflection points remains to be seen.

This will likely be reflected on the commodity markets too.

Divergence in Commodity Markets

Again divergences have likewise been apparent over at the commodity markets.

The recent rally in gold seems to have been thwarted and this has been coincidental to the forcible or manipulated tanking of oil prices which have been due to the International Energy Agency’s [IEA] declaration to release oil reserves in the markets over the coming month[2].

This has been part of the concerted efforts to depress commodity prices since May.

So far the gold and silver remains on the uptrend while oil and the CRB Reuters [CCI] index appears to have broken down.

With the Belgian central bank reportedly having to lease out 41% of their gold reserves, which effectively represents as shorting of gold[3], another political angle with which to manipulate the commodity markets, aside from the setting up for the conditions required for the next wave of asset purchasing program[4], would be to limit the losses being suffered by central banks that have been ‘short’ gold.

But this, in my view, signifies as the secondary order.

On the other hand, the current distortions in the commodity markets brought about by these variable interventions will likely only worsen the commodity economic imbalances and would likely signify a fleeting impact.

To the contrary, this could even setup the gold market for a possible trailblazing run!

Signs of such dynamic can be seen in the unfolding Greece debt crisis where ordinary Greeks have reportedly been stampeding into gold (to even eschew gains from interest rates) just to safeguard their savings from the fear of a collapse of their banking system[5].

QE 2.0 as Bailout of Foreign Banks?

And speaking of the European debt and entitlement crisis, US Federal Reserve Chairman Ben Bernanke recently downplayed the contagion risks of US banks because US banks haven’t been “significantly exposed”. Although Mr. Bernanke admits that US banks have “very substantial exposure to European banks in the so-called core countries, Germany, France”[6].

Given Mr. Bernanke’s very dismal track record and his admission that they “don’t have a precise read” of the performance of the US economy[7], I am pretty confident that his public statements conceals the true nature of intended political actions.

Tyler Durden of Zerohedge.com exposes evidences where money from QE 2.0 have been redirected or diverted to foreign or mostly European banks operating in the US.

Cash holdings of foreign banks based on the US have risen almost in proportion with the US Federal Reserve’s $600 billion QE 2.0.

These intricate diversions have been coursed indirectly through the Eurodollar market via US primarily dealers, US and foreign banks. The US Federal Reserve do not buy assets directly, they are done through agents.

The beneficiary international banks had supposedly been in trouble and require these excess reserves to neutralize the growing risks from the ongoing crisis at the Eurozone.

To quote Mr. Durden[8] (bold emphasis mine, above chart from Zerohedge)

In other words, foreign banks operating in the US have an artificially pumped up cash balance creating a false sense of security, with the fungible cash having been borrowed from abroad. This also means, that when and if European banks realize they need the cash "lent out" to US-based subsidiaries, and demand the $600 billion+ in dollars, all they will see is a white flag of surrender, as the US-operating banks disclose they have pledged the cash for one thousands and one uses, and its sudden withdrawal would end up crashing the capital markets. It also means that explanations that this cash was used by European banks to satisfy regulatory capitalization shortfalls are absolute gibberish. And yes, if and when there is a surge in dollar needs out of Europe, the Fed will have two choices: QE(x) and FX liquidity swaps.

If such claim is true, then we should even expect more QEs to come...and quite soon, given the current tumultuous conditions of the Eurozone.

Also, such actions imply that the US has been very concerned with the developments in Europe enough to engage in QE 2.0 for this reason.

Also, this only goes to show that the US has surreptitiously been in rescuing or bailing out banks across the globe.

Fitting pieces of the puzzle together, we can easily see why a Goldman Sachs alumni has been appointed as the European Central Bank president[9] and why Bank of Japan (BoJ) has imported Ben Bernanke’s dogma of propping up her domestic stock markets by asset purchases as policy[10]—all of which has been meant to rescue the teetering banking system of the world.

If the overall undeclared aim is to survive the current central bank-banking cartel, then there will be NO alternative but for central banks to maintain the asset purchasing programs.

Apparently, the myriad political interventions in the marketplace have led to different effects or the widening of divergent price actions across the global asset markets.

---

[1] Mises, Ludwig von Regularity and Prediction, Theory and History; Introduction

[2] See War on Commodities: IEA Intervenes by Releasing Oil Reserves, June 24, 2011

[3] See Belgian Central Bank ‘Lends’ 41% of Gold Reserves, Growing Role of Gold as Money, June 21, 2011

[4] See Poker Bluff: No Quantitative Easing 3.0?, June 5, 2011

[5] See Greeks Go For Gold, June 22,2011

[6] Bloomberg.com Bernanke Sees Small Impact on U.S. Banks of a Greek Default (1), June 22, 2011

[7] See Ben Bernanke Admits to the Knowledge Problem, June 23, 2011

[8] Durden, Tyler The Eurodollar Missing Link: Explaining The QE2-Related Cash Surge In US-Based Foreign Banks, Zerohedge.com June 22, 2011

[9] See Revolving Door Syndrome: European Central Bank’s New Head was Goldman Sach’s Honcho, June 25, 2011

[10] See Bank of Japan’s Interventions in Japan’s Stock Markets, June 23, 2011

Phisix: Divergences Point to a Bullish Momentum

Chance is always powerful. Let your hook always be cast; in the pool where you least expect it, there will be fish.-Ovid

As pointed out above, the Philippine Phisix along with her ASEAN peers, has, so far, been major beneficiaries of the deepening accounts of global market divergences.

I would like to reiterate, we should NOT misconstrue divergences with DECOUPLING.

As I previously wrote[1],

Signs of decoupling will be manifested once the next crisis emerges. Yet given the depth or scale of today’s globalization or social interconnectedness which has not been limited to trade, labor, capital flows or to even monetary policies, I strongly doubt that this should transpire.

And since there have been little signs yet of intensified deterioration in the global economic and financial sphere, except for cyclical slowdown, part of which seems orchestrated[2], there hardly has been substantial evidence to read current events as prelude to the next recession or crisis. [Yes there will be a coming crisis, which will be far worse than 2008, yet I don’t think we have approached this eventuality yet. Not unless a black swan/fat tail occurs]

This gives me the confidence to say that divergences can or may be sustained for the time being.

And along with a significantly bullish reverse head and shoulders as shown earlier, this week’s rally has largely been broadmarket based.

As gains had been manifested on every sector, market breadth ostensibly recovered. The advance-decline spread turned positive, the number of trades improved and foreign trade remained nearly neutral (slight outflows-as shown below chart).

This implies that the recent rally has been fueled by local participants.

Again the mining index, after a two week reprieve, has regained market leadership.

The service and financial sector which registered gains above the Phisix also buoyed or contributed to the overall advances of the major local equity benchmark.

The service sector was led by PLDT which gained 8.63% for the week, while the financial sector was led by last week’s big losers BPI (+6.21%) and BDO (+5.98%).

Interestingly, BPI and BDO erased the losses from the anomalous last minute selling during Friday of the other week, June 17^th.

Add to this bullish backdrop was the rally in the Peso.

The correlationship between the Peso (blue line chart) and the Phisix (black candle) appears to be tight (red direction lines).

The underlying causal link of this relationship has been demand for the Peso assets which has partly been evidenced by foreign fund flows and monetary policy divergences and artificially low rates.

All these factors, particularly chart formation, rallying peso, improving market breadth, bullish local investors, appears to have converged to signify possibly as a significant tailwind in favor of the bulls.

Should the Phisix successfully encroach on the reverse head and shoulders resistance level at 4,318, then we could be looking at 4,900-5,000 by the yearend.

As caveat, this prognosis has been based on exegesis of current market conditions and on assumptions of future actions of the drivers of the marketplace—specifically politicians and central bankers. If my assumptions or an exogenous shock occurs, then my scenario could get upended.

---

[1] See ASEAN’s Equity Divergence, Foreign Fund Flows and Politically Driven Markets June 5, 2011

[2] See Falling Markets, QE 3.0 and Propaganda, June 12, 2011

Philippine Mining Index Nearly at 20,000, Fulfilling My Predictions

Bear and endure: This sorrow will one day prove to be for your good. -Ovid

The Philippine Mining index soared to a fresh record high as major mining issues have been on a rampage.

Over the past years, many have questioned my premises and have impatiently chastised me for the underperformance of my pet sector. For me, these people wanted excitement and satisfaction of the ego, more than they desired profits.

And I have always used Ovid’s quote to justify my calls:

Everything comes gradually and at its appointed hour.

Here is what I wrote in November 2009[1],

From this juncture, we believe that the mining index next goal would conservatively be at least 20,000.

With the Philippine mining index at 19,975 or 25 points away, it would appear that NOW is the appointed hour!

It’s not only that the 20,000 level that is in near fulfilment, but most importantly would be how these series of events are being realized.

Again me in 2009, (bold highlights original)

Actions among the mining components appear to be rotational- a classic symptom of bullmarket driven by inflation. This implies that the next major moves could likely come from those that have been in a reprieve.

Market trends are social trends. As mentioned above, the speculative label on the mining industry is a symptom of the lack of social acceptance or persistent aversion emanating from over two decades of depression. Essentially such resistance is psychologically bullish. That’s because despite present levels, only a handful have been invested. In social terms, bandwagon effect occurs when trends are reinforced by confirmation of expectations. In other words, long term trends draws in more converts.

First, today’s fiercely rallying mining issues have been broadening.

The first time the local mining index surpassed the previous record high was due to the blitzkrieg of Philex Mining. Today’s juggernaut has included many other issues as Lepanto [PSE:LC], Semirara [PSE:SCC], Atlas Consolidated [PSE:AT], PetroEnergy [PSE: PERC] and Manila Mining [PSE: MA].

Second, the broad based rally has been winning many converts. Even my mentor who has been a staunch mining critic now trades the sector.

In terms of Peso value traded, the mining sector accounts for 18% of this week’s trade which would have been larger (about 20%) if special block sales is excluded. To consider, the Philippine Stock Exchange has 6 sectors which means the share of the others have been captured by the mining sector.

In addition, the mining sector grabbed the top spot in terms of peso value, in two of the four trading days this week.

These are evidences which continues to manifest how investing in mines and resource sectors have transitioned from the fringes and into the mainstream.

The Rotation to Atlas-APO

The recent actions of the mining sector has shifted to Atlas Consolidated [PSE: AT] and the Forbes 28^th richest[2] Philippine tycoon Alfredo Ramos’ investment vehicle, Anglo-Phil Holdings [PSE: APO]

Many have attributed APO’s eye-popping 66% surge this week to the developments of the Atlas Consolidated, from which APO has an 11.67% stake in[3].

Atlas Consolidated, which gained 19% over the week, has reportedly offered to buy her Singaporean partners in a $368 million deal[4], which will be funded by debt and equity.

Some have speculated that part of this equity side of the deal has been designed to include Manny Pangilinan’s entry into Atlas via Philex Mining[5].

That would be fait accompli.

I would have a different story.

The actions of Atlas [green] and Philodrill [blue; PSE: OV], which APO has a .28% stake in, have been tightly correlated with the actions of APO. Such close correlations can be traced way back to 1998. Though the correlation has not been 100%; seen from major trend movements, the APO and AT-OV correlation seem to be in the bag.

Recently, Atlas has been moving higher along with other mining issues. I was partly concerned that the overbought conditions in major issues as Lepanto, Philex and Manila Mining could affect Atlas[6]. Apparently it didn’t.

Also, I spoke about the resurgence in the oil sector[7] which was led by Philodrill. Yet APO lagged as both Atlas and OV ascended. Such deviation presented a buying opportunity for me. [disclosure: I bought APO shares during this window and perhaps got lucky; I have long been a shareholder of LC, PERC, AT]

Then, I can’t say about the specifics of these deals which I would not ever be privy to until after the fact.

Yet since 2003 (see my initial prediction at safehaven.com[8]), I have long been saying that investments trends will favor the local mining and resource based industries considering that the Philippines is a resource rich nation which has mainly been untapped.

Yet I don’t need to know the specifics. I only need to know about the general trend.

And all these forces have been validating my long held premises.

In the 1970s, Atlas Consolidated was considered a blue chip and was traded at php 400s levels.

For me this means that most, if not all mining and resource based issues, will rise far beyond current price levels over the coming years, but will be subject to the flows and ebbs of the global boom bust cycles.

Not only because these sectors represent as investments, but importantly, because resource based securities will account for as hedges against central bank inflationism.

Once the risk of an inflationary panic becomes a reality, where physical metal will get drained from the spot markets, mining issues will likely serve as the next object of the ‘flight to value’.

For now, APO and AT could be short term sells considering the massive moves that has brought them to overbought levels. Yet momentum and bullmarket sentiment can lead them to vastly extended zones similar to what has been happening to Lepanto.

For most occasions market timing for me is about luck, unless one can spot rare arbitrage opportunities as the above.

Yet I always recommend investments in the prism of medium to longer term basis and hardly about market timing or short term scalps.

Importantly, these themes have to be backed by theories that work with evolving general conditions and not just to feed the intellectual ego.

Yet it does surely feel good to get validated anew. I thank my dear Lord for this special insight.

To close, again I quote Ovid,

Time is generally the best doctor.

Indeed.

---

[1] See Prediction Fulfilled: Philippine Mining Index Tops 9,000 (Now 11,300!), November 15, 2009

[2] Forbes.com #28 Alfredo Ramos, Philippines 40 richest

[3] Anglo Philipines Holdings Corporation Business Interest

[4] Reuters.com Manila's Atlas to fully own Carmen Copper in $368 mln deal, June 24, 2011

[5] Abs-cbnnews.com Philex climbs most in 6 months on Atlas speculation, June 25, 2011

[6] See Phisix: Why I Expect A Rotation Out of The Mining Sector, May 15, 2011

[7] See The Awakening of the Philippine Oil Exploration Sector?, May 22, 2011

[8] Safehaven.com The Philippine Mining Index Lags the World, September 26, 2003

Mark Twain and China’s Yuan

The brilliant nanotech investor and analyst Josh Wolfe of Forbes offers three invaluable investment insights premised on the maxims of literary and philosophy luminaries: F. Scott Fitzgerald, Mark Twain and Arthur Schopenhauer

The wisdom from the select quotes of the three wise men seem representative of openmindedness (Fitzgerald), the risks of overconfidence and comfort of crowds or the contrarian stance (Twain) and innovation (Schopenhauer).

Read them here

I’d like to make a brief comment on the Mark Twain situation applied to the Yuan

Mr. Wolfe writes, (bold emphasis mine)

Mark Twain said that: “it ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just aint’ so.”

Twain Situations are those where the consensus is near certain about something. But as Buffett has noted, you pay a high price for a cheery consensus. These are situations with payoff structures that Nassim Taleb would call Black Swans. The opposite of the consensus is often entirely unrecognized, unappreciated and massively underpriced. If they are wrong, it’s a massive blow-up. Buying puts and expressing a contrarian view, with cheap insurance may be ways to express this “Twain” view. And this is precisely where the prescient Cullen Thompson and Bienville Capital Management LLC has done along with Mark Hart of Corriente Advisors LLC (who correctly nailed the huge asymmetric payoff with a contrary to consensus view on subprime housing, when all others believed housing prices could only rise). Here is Thompson quoted in today’s WSJ:

“Given the magnitude of China’s credit problems, it’s at least a possibility the yuan drops sharply. The potential of the trade is so great, and when there’s cheap insurance in today’s environment it’s silly not to buy it”

Everybody I speak: politicians, pundits and principal investors all believe, nay they “know” that the Yuan is undervalued and must rise. It just must! And therein lies the opportunity.

Like Mr. Wolfe, I have been saying that the consensus expectations of an overvalued yuan have been misplaced.

That’s because the mainstream’s macro analysis and prescription over ‘global imbalances’ has been premised on flimsy and tenuous grounds.

First, global imbalances have been a diversion (if not a patent misdiagnose) from the true problem: the US dollar paper money system that abets inflationism and interventionism.

Second, the currency valve policy resolution is too oversimplistic and naive, which essentially views the global economy as homogenous.

Lastly, the excessive fixation over these two supposed cause and effect dynamic overlooks the bubble nature of China’s economy.

This reminds me of the Asian crisis where the Thai baht largely operating on a fixed or pegged exchange rate blew up as the Asian crisis emerged (above window).

China’s quasi pegged currency trend looks alot like the Thai baht prior to the Asian crisis (below window). [Charts courtesy of Thai Baht Tradingeconomics.com and Yuan forecastchart.com]

Inflationism only obscures the way the public reads or analyze markets.

As Murray N. Rothbard wrote,

Inflation has other disastrous effects. It distorts that keystone of our economy: business calculation.

Revolving Door Syndrome: European Central Bank’s New Head was Goldman Sach’s Honcho

It has been a revolving door affair between the banking industry, particularly the ‘Too Big to Fail’ cabal, and the government/central bankers.

This goes for the recent appointment of the new president of the European Central Bank

From BBC.co.uk

Mario Draghi takes the helm of the European Central Bank (ECB) at the most difficult period in its 13-year history.

With a number of eurozone economies straining under the weight of massive government debt levels, some observers have even suggested the very future of the euro is at stake.

Much will depend on the 63-year old Italian central banker.

"Super Mario", as he is known, is well respected and widely recognised as the best person to head the ECB.

He certainly has impeccable credentials. A graduate of the University of Rome, he holds a PhD in economics from the Massachusetts Institute of Technology and served as professor of economics at the University of Florence between 1981 to 1991.

But Mr Draghi is no dry academic. He went on to become managing director and vice-chairman of Goldman Sachs International, giving him a vital insight into how financial markets work in practice.

He has also worked as an executive director of the World Bank, director general of the Italian Treasury and, perhaps most importantly in the eyes of investors, head of the Financial Stability Board.

Ever noticed why the interests of privileged bankers and governments/central banks have been intertwined?

Europe’s Financial Repression: How Solvency II may affect Portfolio Allocations of Insurance Firms

Governments around the world have been applying financial repression—part of which is to use new regulations to force financial institutions to funnel private savings into government debt.

We see this also happening in Europe where insurance firms are being ‘incentivized’ by new rules to invest in government debt than in equities.

From Researchrecap.com (bold highlights mine)

Fitch Ratings believes that Solvency II, the new regulatory regime for European insurers from 1 January 2013, is set to transform how insurers allocate their investments.

European insurers are the largest investors in Europe’s financial markets, holding EUR6.7trn of assets, including more than EUR3trn of government and corporate debt. Any reallocation of insurers’ asset portfolios could therefore lead to fundamental shifts in demand and pricing for several asset classes. The new rules will force insurers to value assets and liabilities at market value when determining their solvency position, and to hold explicit capital to reflect shortterm volatility in the market value of assets.

Fitch expects a shift from long-term to shorter-term debt; an increase in the attractiveness of higher-rated corporate debt and government bonds, and shift away from equity; and a preference for assets based on the long-term swap rate.

People hardly see it, but rules are being utilized to skew resource allocation for the benefit of political forces.

Video: Christien Meindertsma on the Economic Value of Pigs

Here is a fascinating talk by Ms. Christien Meindertsma on TED, about the economic value of Pigs. I mean the animal (oink oink) variety and not the debt plagued acronym of peripheral European countries.

Ms.Meindertsma's talk somewhat resembles Leonard Read's I, Pencil except that she focuses on the pig as a product than as part of the market process [pointer to Mike Du]



Some passages:

The market process of pigs (bold emphasis mine-from TED)

And what I was curious about -- because historically, the whole pig would be used up until the last bit so nothing would be wasted ... and I was curious to find out if this was actually still the case. And I spent about three years researching. And I followed this one pig with number "05049" all the way up until the end and to what products it's made of. And in these years, I met all kinds people, like, for instance, farmers and butchers, which seems logical. But I also met aluminum mold makers, ammunition producers and all kinds of people. And what was striking to me is that the farmers actually had no clue what was made of their pigs, but the consumers -- as in us -- had also no idea of the pigs being in all these products.

The pig's economic value: (bold emphasis mine)

In total, I found 185 products. And what they showed me is that, well, firstly, it's at least to say odd that we don't treat these pigs as absolute kings and queens. And the second, is that we actually don't have a clue of what all these products that surround us are made of.

And you might think I'm very fond of pigs, but actually -- well, I am a little bit -- but I'm more fond of raw materials in general. And I think that, in order to take better care of what's behind our products -- so, the livestock, the crops, the plants, the non-renewable materials, but also the people that produce these products -- the first step would actually be to know that they are there.

We can't surely know everything. But we can understand the market process. And that's why markets are indispensable.

As Leonard Read writes,(emphasis added)

There is a fact still more astounding: The absence of a master mind, of anyone dictating or forcibly directing these countless actions which bring me into being. No trace of such a person can be found. Instead, we find the Invisible Hand at work. This is the mystery to which I earlier referred.

Central Planning in Education Fails

Central planning even in education doesn’t work. Take a look at Japan’s PhD’s experience

From Nature.com (hat tip: Prof Arnold Kling) [bold emphasis mine]

Of all the countries in which to graduate with a science PhD, Japan is arguably one of the worst. In the 1990s, the government set a policy to triple the number of postdocs to 10,000, and stepped up PhD recruitment to meet that goal. The policy was meant to bring Japan’s science capacity up to match that of the West — but is now much criticized because, although it quickly succeeded, it gave little thought to where all those postdocs were going to end up.

Academia doesn’t want them: the number of 18-year-olds entering higher education has been dropping, so universities don’t need the staff. Neither does Japanese industry, which has traditionally preferred young, fresh bachelor’s graduates who can be trained on the job. The science and education ministry couldn’t even sell them off when, in 2009, it started offering companies around ¥4 million (US$47,000) each to take on some of the country’s 18,000 unemployed postdoctoral students (one of several initiatives that have been introduced to improve the situation). “It’s just hard to find a match” between postdoc and company, says Koichi Kitazawa, the head of the Japan Science and Technology Agency.

This means there are few jobs for the current
crop of PhDs. Of the 1,350 people awarded doctorates in natural sciences in 2010, just over half (746) had full-time posts lined up by the time they graduated. But only 162 were in the academic sciences or technological services,; of the rest, 250 took industry positions, 256 went into education and 38 got government jobs.

In short, even PhD graduates end up jobless.

The basic problem is that educational output does not conform with the desires or requirements of the marketplace.

Instead government policies, out of political goals “to match the capacity of the West”, produced surpluses, which has led to these unemployed “experts”. In other words, these unemployed PhDs had been products of misdirected political imperatives. This also applies to capital too.

It’s the same with public education. Four out of TEN college graduates in the Philippines have been unemployed. That’s because the problem hasn’t been about the lack of education, but rather, the lack of economic opportunities and the misguidance brought about by too much government interventionism.

Graduates can only work when there are available jobs. And economically productive jobs emanate from the private sector. Even government jobs are financed by taxes from the private sector. When the private sector are burdened by too much regulations, political mandates, taxes and compliance costs, investment opportunities dwindles. Thus, the surge in unemployment.

Bottom line: Education does not guarantee jobs. Economic freedom does.

War on Commodities: IEA Intervenes by Releasing Oil Reserves

Ever since May 2011, a tactical multi-pronged assault on the commodity markets has been in operation.

From drastically raising of credit margins which started with silver then spread to other commodities, then European regulators have impliedly taken vigil over profits from commodity trade by the banking sector, China has joined the commodity price control fad, UN’s endorsement of price controls (which represents public mind conditioning to justify the cumulative price control actions worldwide), the ban on US OTC trades on precious metals, and the labeling of ‘Conflict Gold’ aimed to control gold flows.

All these appears to be timed with the termination of Quantitative Easing 2.0 this month.

Now comes another direct intervention; the IEA has announced that it will be releasing 2 million barrels a day for the next 30 days

Reports the Marketwatch.com,

The International Energy Agency said Thursday that its 28 member countries have agreed to release 60 million barrels of oil in the coming month because of the ongoing disruption of oil supplies from Libya. The Libyan unrest removed 132 million barrels of light, sweet crude oil from the market by the end of May, according to IEA estimates. As part of the IEA move, the U.S. will release 30 million barrels of oil from the Strategic Petroleum Reserve, which stands at 727 million barrels. This is the third time in the history of the IEA that its members have decided to release stocks. "I expect this action will contribute to well-supplied markets and to ensuring a soft landing for the world economy," said IEA Executive Director Nobuo Tanaka in a statement

I have been saying that this has been part of the implicit communications policy tool called as signaling channel, which is being employed by central banks aimed at managing ‘inflation expectations’.

The goal is to create conditions where statistical inflation has been suppressed (or termed as ‘transitory’).

These actions are currently being backed by claims or studies from the US Federal Reserve and allied institutions that shows that central bank actions have not been related to commodity price increases.

These centrally planned coordinated actions seem designed to rationalize for the next major overt interventions, which will come in the form of asset purchases (currently designated as Quantitative Easing or Credit Easing policies).

Of course, the above pays little heed to the longer term consequence of these series of actions.

Political actions mainly focus on the short term benefits—which are aimed at generating votes and high approval rating for tenure or election reasons. The public hardly sees that these actions concealedly reward or goes in the interests of powerful vested interest groups.

Bank of Japan’s Interventions in Japan’s Stock Markets

Japan’s central bank, the Bank of Japan (BoJ), through her version of quantitative easing program, has been bidding up her local local stock market

From Reuters, (bold emphasis mine)

Many market players also said expectations that the Bank of Japan would buy stock exchange-traded funds (ETFs) should there be sharp falls in share prices were limiting any incentive to sell aggressively.

The central bank has made about 300 billion yen's worth of such purchases since December, and has stepped up buying since the earthquake in March, as part of its asset purchase programme that includes buying of up to 900 billion yen of ETFs.

This serves as another proof that the US Federal Reserve and Ben Bernanke’s creed of supporting stock markets has been exported to Japan and is likewise further proof of the coordinated actions by central bankers globally.

Also, such actions works in the favor of the Japan’s mega banks whom holds substantial exposure to equity assets.

Almost everywhere, central bankers have prioritized the interests of the banking system

Nonetheless the Nikkei continues to wobble in the red on a year to date basis (chart from Bloomberg) despite the BoJ interventions.

Yet money spent to boost the Nikkei is money lost for productive uses.

Financial Success is a Function of Common Sense and Self Discipline

Some have this misbegotten notion/belief that attaining wealth and fame translates to a state of permanence.

Well it’s not.

This should be a noteworthy example, from yahoo.com (bold emphasis mine)

Patricia Kluge was once known as "the wealthiest divorcee in history." Those days are over. Kluge, who had formerly been married to the late billionaire Paul Kluge, recently filed for bankruptcy protection, citing debts somewhere between $10 million and $50 million and assets between $1 million and $10 million….

We doubt the couple will be out on the street selling pencils anytime soon. Still, Patricia Kluge's present straits represent a remarkable reversal for a woman who, at one time, was one of America's richest and most extravagant socialites. A buzzy article from the AP explains that the Kluges once hosted parties for "royalty, corporate chieftains, celebrities, and literary figures." She lived in a 23,500-square-foot mansion, owned a winery and, by all accounts, lived the good life.

A little too good, as it turned out. Her financial troubles began to pile up during the economic downturn and creditors started seizing her assets in earnest earlier this year. Kluge and her husband had attempted to renegotiate their loans with various banks, but failed. In April, Donald Trump bought most of Kluge's winery and vineyard from Farm Credit Bank for $6.21 million.

As I always tell my wonderful kids, financial success depends on a simple equation:

Income – Expense = deficit or surplus

If spending is greater than income where constant excess spending is financed by drawing from future income (debt), one ends up consuming wealth.

So has been the case of Patricia Kluge. And so will be the case for all the rest who fail to heed or realize on this simple lesson.

[Yes, local boxing legend Manny Pacquiao, despite his newfound riches, won’t be spared from this basic rule]

And so has this predicament befallen on governments, whom mistakenly believe that they can spend their way to prosperity.

Bottom line: It would need or take only common sense and self-discipline to observe this rule, which unfortunately many people especially those in the governments and their apologists don’t have (many live under the delusion that they are beyond or immune to the laws of economics. Also the idea that they are equipped with or backed by the printing presses can do them magical stuffs).

Ben Bernanke Admits to the Knowledge Problem

“We don’t have a precise read on why this slower pace of growth is persisting,” the Fed chairman, Ben S. Bernanke, said Wednesday at a news conference. “Some of the headwinds that have been concerning us, like the weakness in the financial sector, problems in the housing sector, balance sheet and deleveraging issues, may be stronger and more persistent than we thought.”

That’s from the New York Times.

US Federal Reserve Ben Bernanke finally acknowledges to the “knowledge problem”, which again validates the knowledge theory of the great F.A. Hayek.

Of course, we’ve been saying that Ben Bernanke has had a string of inaccurate predictions.

Remember, Mr. Bernanke is backed by about 450 Federal Reserve economists, half of which are PhDs.

In essence, this is an admission of the grand failure of macroeconomics founded on econometrics.

Now for QE 3.0

Back to the same article, (bold highlights added)

Mr. Bernanke dismissed for now any possibility that the Fed would extend its efforts to stimulate growth, saying that the economy was moving in the right direction. The slow pace of the recovery justified the Fed in continuing its existing efforts, he said, but not more.

The Fed’s policy board, the Federal Open Market Committee, voted unanimously to maintain its two-year-old commitment to hold a benchmark interest rate near zero “for an extended period.” Mr. Bernanke said the language meant it would not raise interest rates for “at least two or three meetings,” pushing back to November the earliest moment rates could rise. Economists consider it likely that the central bank will hold interest rates near zero well into next year.

The board also voted to maintain the Fed’s portfolio of more than $2 trillion in Treasuries and mortgage-backed securities by reinvesting principal payments. The board did not indicate how long this policy would continue, a decision that Mr. Bernanke described as intentional. Fed officials have said that allowing the portfolio to dwindle is likely to be the first step when the central bank decides to begin the withdrawal of its aid programs.

Action speaks louder than words.

True, QE may not be immediate, as QE 2.0 has been activated five months after the completion of QE 1.0, but to maintain the $2 trillion balance sheet by ‘reinvesting’ principal payment for an indefinite period signifies transitional QE.

Given the current political institutional framework, QEs signifies a strong force in keeping this arrangement intact.

Besides for an economy that has been artificially propped up by a tsunami of liquidity, obviously a withdrawal or non addition would trigger a meaningful regression—the risk prospect of which, based on their guiding ideology, should be sternly avoided.

This means that the door for QE is wide open, (which I think is part of the mind ‘conditioning’ communication tools applied by the FED)...

Now the Fed is standing back again to see if the economy can grow without constant prodding. “A little bit of time to see what’s going to happen is useful in making policy decisions,” Mr. Bernanke said. He allowed, however, that the Fed could take additional steps, from declaring a longer period of near-zero interest rates to buying even more assets.

Ben Bernanke admits that the he and the rest of US Federal Reserve can’t read the economy, but then he believes that his set of tools works.

What a contradiction.

Finally because of some political backlash on the Fed’s polices, the asset purchasing (money printing) program may come in a different form and or under a name.

Paradigm Shift: Brazil, Indians and Chinese Invest in Overseas Properties

Past performance do not guarantee future results.

Many of today’s international property investors have not hailed from the West, but rather from the Nouveau riche of the BRICs (excluding Russia), whom have reportedly been on a buying spree.

First, the Brazilians.

From the Bloomberg, (bold highlights mine)

Surging real estate prices in Brazil and the currency’s 45 percent gain against the U.S. dollar since 2008 are sending Brazilians to South Florida in search of bargain vacation homes and property investments. That’s helping bolster Miami’s condo market, with total sales increasing 79 percent in the first five months of 2011 from a year earlier, according to data from the Florida Association of Realtors released today.

In the Miami area, Brazilians bought 9 percent of homes and apartments sold to international buyers in the 12 months through March 2010, behind only Canadians and Venezuelans, according to the Miami Association of Realtors. Since then, “anecdotal evidence certainly points to a significant increase,” said Lynda Fernandez, a spokeswoman for the group. In May, international clients bought about 60 percent of existing houses and condos and 90 percent of newly built homes, the association reported today.

Next, the Indians

From loansafe.org

Wealthy Indians are keeping the family bonhomie alive in the heart of London, buying not one but a cluster of houses or apartments for themselves, their children and small teams of personal staff. Tony areas like Kensington, Mayfair, Knightsbridge and Belgravia are some of the popular destinations for such clusters.The homes typically are a network of residential properties on a street or an apartment block. The central idea behind such purchases is that it will give the children a sense of independence, staying just a few houses away from their parents, with support staff being just a buzz away.

High networth individuals from India and the Middle East are the main cluster buyers in London. In fact, there has been a marked increase in the number of Asian buyers. “Asians are our biggest single group of purchasers now, accounting for 44 percent of sales in 2010. Of this, 17 percent were Indians. In 2008, only 7 percent of the purchases were made by Asians,” Shirley Humphrey, sales and marketing director of Harrods Estates, a property broking firm, said. According to her, a weak British pound and low interest rates have contributed to the appeal of cluster buying in prime residential areas. (bold emphasis mine)

Finally the Chinese

From China Daily (bold emphasis added)

An increasing number of China's rich are snapping up properties overseas in the expectation that domestic inflation will continue to rise after the consumer price index reached a 34-month high in May.

According to Colliers International, a real estate service provider, the proportion of Chinese buyers in Vancouver's property market is on the rise. At the end of the first quarter this year, it increased to 29 percent of all homebuyers.

In the past six months, Chinese spent 1.3 billion yuan ($200 million) through Colliers' international property department, with Canada, the UK and Australia topping the buying list.

"We are expecting a clear increase in the extent of mainland buyers' purchases of overseas properties this year because of the government's rigorous restraint on the number of homes a family can buy in key cities," said Alan Liu, managing director of Colliers International (North Asia).

Due to the latest financial push from China, the average price of a home in Greater Vancouver rose 12 percent in 2010 and is expected to rise another 3 percent this year, according to the Canada Mortgage and Housing Corporation.

Demand from mainland immigrants now accounts for 29 percent of all new homes in Vancouver.

The situation in London is similar. Last year, overseas nationals purchased 28 percent of all resale properties across all prime London sites and 54 percent by value in the prime central London area in the more than 5 million pound ($8 million) price bracket, according to a recent report by Savillsresearch.

"If the money from China were to start flowing into London at the same rate it does from billionaires in other countries, we would expect the value of ultra-prime London properties to grow by as much as 15 per cent," said Yolande Barnes, head of Savills residential research.

"The issue at present is that Chinese buyers aren't taking, or can't take, their money out of China."

The biggest increase in global billionaires since 2007 has occurred in China and the Commonwealth of Independent States (CIS). While CIS buying activity has been strong, accounting for 15 percent of prime central London purchases by value, Chinese billionaires have yet to have a real impact, accounting for just 3 percent of prime central London resale purchases by value.

More thoughts.

International and domestic monetary policies have been a significant factor in driving property investments overseas.

There is also globalization.

Finally, the irony is that the erstwhile ‘poor’ appears to be saving the traditional ‘rich’ as in the case of London and South Florida.

How times have been changing.