How Global Stock Markets Reacted to the Greece Crisis Resolution

One of my favorite website, Bespoke Invest, has a nice rundown on the performances of 78 world equity benchmarks this week highlighted by the Greece vote on crisis resolution measures.

As expected, most of the benefits accrued to markets that had been most sensitive to the risks of a Euro crisis contagion.

The Philippines have seemingly been indifferent (but not today where the Phisix rose 1.4% to breakout from the massive reverse and shoulder pattern)

But what I find interesting is this comment.

From Bespoke (including chart) [bold emphasis mine]

Looking at year-to-date performance, Bangladesh is down the most with a decline of 26.21%, followed by Peru at -19.20%. Other countries that have really struggled so far in 2011 include Finland, Oman, Malta, Kuwait, Kenya, Vietnam and Brazil. With so much attention being paid to the problems in Greece, you would think that its stock market would be getting absolutely crushed this year, but it's currently down just 9.54%. This obviously isn't a positive number, but it's at least better than ten other countries on the list.

This is true.

I’ve seen many people soooo fixated by the Greece crisis such that they almost see the end of the world take place. This I argued successfully against.

In behavioral science this known as the focusing effect, where people transfix their attention to one event at the expense of the rest.

Black Swan author Nassim Taleb calls this tunneling or “uncertainty of the deluded”

People who tunnel on sources of uncertainty by producing precise sources like the great uncertainty principle or similar, less consequential, matters to real life, worrying about subatomic particles while forgetting that we can’t predict tomorrow’s crises.

Such focusing effect/tunneling vision seems so elaborate on people whom are plagued by political and or economic creeds or those who see the world rigidly in the prism of their (self-righteous) designs and who interprets evolving events that gives much weight on the short term or present oriented actions.

And this is why obsession or getting married to a view/theme can lead to blindspots that can be very fatal.

Aside from the global rally in equities, the Euro-Gold correlations, both have substantially been rallying, have once reaffirmed its relational harmony in defiance of the world according to these ideologues.

President Aquino’s First Term Speech: Everything to get Applause

President Aquino's speech on his first year in office, as excerpted by the Inquirer,

“Before, there was resignation, dejection and apathy,” the President told reporters.

“If you remember at the time, you were writing about the people’s apathy and numbness, as if they did not expect anything from their government. They were blasé to scandals that were being unearthed,” he said.

“Now, more people are expectant that their lives are changing for the better,” Mr. Aquino said.

He said growing demands for change from the people were a good thing.

And these are the cited accomplishments of the administration

Again from the same article,

These include the 21,800 families of policemen and soldiers who will have decent homes before the year ends, the 2 million poor families set to benefit from the conditional cash transfer program and the 240,000 farmers who will benefit from 2,000-kilometer farm-to-market roads finished in just one year, Mr. Aquino said.

“Isn’t it clear that there is change?” he said.

He said that because of reforms in the government financial system, the government was able to save funds more than the amounts allocated by the General Appropriations Act to implement programs, the President said.

These include providing P12 billion for the “Pantawid Pasada” for transport workers affected by high oil prices, he said.

“Housing, rice, security, salaries, roads, Pantawid Pasada and other lifeguards for the people drowning from poverty. These are the changes that we are reaping now,” he said.

It’s another vindication for me as economic reality has been unmasking all the illusions of deliverance from our over dependency on political distribution as a way to success.

Also, this justifies why I have not and will not exercise the so-called the rights to suffrage which only buttresses this perpetual charade.

People hardly realize that there are only TWO ways to attain people’s needs: this is by production (economic means) or by plunder (political means--forcibly taking other’s resources through political mandates) [Franz Oppenheimer].

The political route is a non-market process of distributing resources ‘legally’ expropriated from society. The choices made by political leaders are premised according to their biases, ambitions, interests, value preferences, ideology, networks, comfort zones, cultural, educational or religious orientation and other personal attributes.

Remember, political leaders are not gods but humans. So they suffer from the same frailties as anyone else. Most importantly they suffer from the knowledge problem.

The only difference is that they are backed by the power of organized violence through the state.

And since all economies are highly complex and dynamic, political distributions means taking or assuming choices for the benefit of a few groups from among the widely diversified and competing sectors.

Because various interests groups will jockey for such privilege, the societal interactions by these competing groups would translate to the employment of patronage, horse trading, shady deals, bribery and many other morally unscrupulous actions.

Politics is a zero sum game. Thus, the actions of these competing groups along with the respective political entities involved will be predicated on or revolve around attaining political goals by guiltism, covetism, envyism angerism and villainism (to borrow from libertarian Robert Ringer) which always leads to “resignation, dejection and apathy” and most importantly to perennial conflict.

So it never changes.

Yet it is naive, seemingly insensitive and supercilious to suggest that there has been "growing demands for change", as if Filipinos have been chronic dolts and have been blindly satisfied with the status quo despite their dire condtions.

The reason people act is to fulfill their uneasiness, thus, always strive for change.

The apparent passivity of the Philippine populace to political misconducts is NOT because of the lack of desire for change, but because most appear to have succumbed to the frustrations of the failed glamorized heroism of the state. Repeated government failures have jaded the Filipino’s vim.

And it is because of too much expectations founded from the grave misunderstanding on the role and limits of the state that has signified as the country’s main blight or the nation's Achilles Heels'.

Importantly, such delusions extends to the elitist academia (which serves as the recruitment pool for bureaucrats and private sector patrons of political actions) and well into the business sector, whom all look for patronage, anti-competition, and doleout as virtuous and a necessary condition for economic development.

If there have been any changes during the first year of President Aquino’s term these accounts for changes on the beneficiaries of redistribution.

Essentially, President Aquino has been no different from the actions of the predecessors, which is what I have been saying even prior to the last elections.

Yet most of the incumbent’s reported accomplishments have been designed as “feel good” noble intended redistribution programs (“Pantawid Pasada” or cash transfers to farmers) and to cosset groups that assures their hold on to power (policemen and soldiers).

This reminds me of the great H.L. Mencken’s description of former US President T.R. Roosevelt, whom Professor Don Boudreaux quotes from A Mencken Chrestomathy

What ailed him was the fact that his lust for glory, when it came to a struggle, was always vastly more powerful than his lust for the eternal verities. Tempted sufficiently, he would sacrifice anything and everything to get applause.

As a general rule, political self-interests signify as the most important priority for political actors. Apparently, President Aquino has not been an exception.

North Korea: Education for All Except under the Threat of Revolt

In North Korea, threats of a "Jasmine revolution" or "Arab Spring" may have prompted the government to suspend classes for 10 months.

From Telegraph,

Reports in South Korea indicated that the government in Pyongyang on Monday ordered all universities to cancel classes until April of next year. The only exemptions are for students who will be graduating in the next few months and foreign students.

The reports suggested that the students will be put to work on construction projects in major cities while there are also indications that repair work may be needed in agricultural regions that were affected by a major typhoon recently.

Analysts in Japan claim there may be other reasons behind the decision to disperse the students across the country.

"One reason is that there is a possibility of demonstrations at university campuses," said Toshimitsu Shigemura, a professor at Tokyo's Waseda University and author of a number of books on the North Korean leadership.

"The leadership has seen the 'Jasmine Revolution' in Africa and it is very frightened that the same thing could happen in North Korea," he said. "They fear it could start in the universities."

Education for all? Only if it serves the interests of the powers that be.

Greece Passes Austerity Measures Paving Way for Bailout

Pardon me, but this seems as another “I told you so” moment in terms of the Greece crisis.

Many have stridently been calling for a Euro collapse on this Greece vote.

I argued otherwise,

But most importantly this signifies as the implicit desire to keep the current unholy central bank-government-banking system cartel or patronage system intact.

Proof of this is that the exigency to conduct bailouts has almost been representative of the creditor nation’s banking system exposure to crisis affected economies

Any signs that would risk the survival of this tripartite global political arrangement would translate to urgent or contingent collaborative actions, despite political differences.

Faced with the risks of a Greek default, the ECB and Germany have been working on a compromise. China’s recent declaration to help shore up Eurozone bonds or the bailout of Greece has also demonstrated such tight kinship on a global scale.

The current framework of socio-political institutions has been built around such symbiosis. It’s a relationship based on financial repression.

And unknown to most, the political elites will fight to maintain this status quo despite the unpopularity on the constituency.

And apparently events has been turning out the way I saw it.

From Bloomberg,

Greek Prime Minister George Papandreou won approval for his 78 billion euro ($113 billion) package of budget cuts and asset sales aimed at meeting European aid requirements and will face a second vote on the implementation of the plan today. Data today may show European consumer prices climbed in June, fueling the prospects of an interest-rate increase next week,

This comes even as the Greek populace, accustomed to welfare entitlements, seems to be vehemently against it.

From the Financial Times,

Violent protests escalated after the governing Panhellenic Socialist Movement (Pasok) had won the vote by a clear majority. Clashes between stone-throwing protesters and riot police firing teargas spread beyond Syntagma into the city’s main shopping streets. Angry demonstrators tore bollards from the ground and used them to smash paving stones and marble facades for ammunition. Rubbish bins were upturned, their contents spewed across roads and were set on fire...

Pasok won approval for the new four-year package of tax increases and spending cuts by 155 votes to 138 with five abstentions – all by members of the Democratic Alliance, a conservative splinter group. Two deputies were absent.

Fears that as many as five deputies would defect proved unfounded as only one, Panayiotis Kouroumblis, shouted “No” when it came to the vote. He was then expelled from Pasok.

With one exception, the conservative opposition New Democracy party voted against the package after Antonis Samaras, their leader, had once again rejected appeals for consensus by Olli Rehn, the European commissioner handling the crisis, and Angela Merkel, German chancellor.

As you can see politicians will lord it over their constituency by force. It’s repression, whether applied to politics (political repression) or economics (financial repression).

This is NOT to say that the Euro crisis is over. It’s been another dilatory ‘kick the can down the road’ tactic with repercussions down the road.

I DO NOT imply that Euro can’t collapse too. All conventional currencies based on central banking fiat money system, will remain under pressure, if the bailout policies persists and becomes entrenched.

For the Euro, it’s obviously not their appointed hour yet.

The point is:

This has been how the political institutions have been established, and this will likely be the general direction of policies...until the system reaches a 'tipping point' such that economic reality will work to undermine the existence of these institutions or when common sense and self discipline prevails.

Video: The Morality of Economic Freedom

The difference is striking. Economic freedom leads to prosperity.

As the following video says

If you care about improving people's lives then you care about then you really care about economic freedom

Do Filipinos Need a New Attitude on Entrepreneurship?

I received a promotional email for an entrepreneurship seminar which comes with a column from Brian Quebengco entitled “Championing Philippine Ideas: The Rise of Silicon Valley in the Philippines”

Mr. Quebengco writes, (no link included in the email),

It is not an evolution that we need, nor is it a revolution. Rather, what we need is a transformation. Since the glory days of Semi Conductors and the Filipino entrepreneurs that championed them, we have evolved a great deal up to our present state. And as we are witnessing right now, a revolution in technology and communication has made the world flat. But what is lacking, and I feel the most important, is for us, the individual Filipino, to transform our attitude and ways to give rise to the Filipino Entrepreneur. We don't need mechanisms, infrastructures, or even the presence of a strong venture capital community to do this. In my own view, business is about people first, and everything else second. That transformation must and can only start with the individual Filipino.

He further says entrepreneurs should be individually motivated which should permeate to culture and subsequently to infrastructure. And from this he advocates the promotion of “a new kind of Enterpreneur”, one who will “challenge the global arena”.

I am delighted that there are local experts advocating entrepreneurship which functions as the cornerstone for any market economy.

However, I would suggest that any “new kind of entrepreneur” hardly matches the operational concept of entrepreneurship.

Entrepreneurs are those who allocate factors of production (labor, capital goods and natural resources) in the service of consumers. (Mises wiki)

Further, entrepreneurs employ “discovery” or “alertness” to profit opportunities in scanning the market horizon which can bring about innovation, better quality of goods or services or cheaper prices. (Israel M. Kirzner)

So aside from Silicon Valley which he seems to see as a paradigm to emulate, homegrown entrepreneurs are the balut vendors, carinderia operators, laundry services and etc… to the bigwig who compete internationally like Jollibee, San Miguel Brewery and others.

Each of them offers specific goods or services to serve their consumers in return for profit opportunities. These voluntary exchanges constitute the free markets.

What I am trying to say is that the marketplace hardly operates on “new” entrepreneurs founded on “new attitudes” but rather on individual specialization.

As the great Austrian economist Ludwig von Mises wrote, (bold emphasis mine)

The selection of the market does not establish social orders, castes, or classes in the Marxian sense. Nor do the entrepreneurs and promoters form an integrated social class. Each individual is free to become a promoter if he relies upon his own ability to anticipate future market conditions better than his fellow citizens and if his attempts to act at his own peril and on his own responsibility are approved by the consumers. One enters the ranks of the promoters by spontaneously pushing forward and thus submitting to the trial to which the market subjects, without respect for persons, everybody who wants to become a promoter or to remain in this eminent position. Everybody has the opportunity to take his chance. A newcomer does not need to wait for an invitation or encouragement from anyone. He must leap forward on his own account and must himself know how to provide the means needed.

It must be understood too that the entrepreneurship ethos is also hardly acquired from formal educational training.

Again from von Mises, (highlights added)

In order to succeed in business a man does not need a degree from a school of business administration. These schools train the subalterns for routine jobs. They certainly do not train entrepreneurs. An entrepreneur cannot be trained. A man becomes an entrepreneur in seizing an opportunity and filling the gap. No special education is required for such a display of keen judgment, foresight, and energy. The most successful businessmen were often uneducated when measured by the scholastic standards of the teaching profession. But they were equal to their social function of adjusting production to the most urgent demand. Because of these merits the consumers chose them for business leadership.

There is NO holy grail to successful entrepreneurship, as it takes sustained “keen judgment, foresight, and energy” to compete in the marketplace, even in the global arena.

What needs to be transformed is NOT the individual attitude towards entrepreneurship but rather the Filipinos’ seeming dependence on political means of dispensing economic opportunities.

In the environment where...

-taxes are high,

-red tapes are byzantine,

-bureaucracy is bloated

-regulatory compliance costs are numerous, time consuming and burdensome,

-corruption is rampant,

-competition is restricted,

-economic opportunities are distributed as political concessions (subsidies, monopolies, private-public partnership, cartel, and etc.)

-redistribution programs are plentiful (which essentially transfers productive resources to non-productive activities and at worst, induces people toward entitlements and subsequently takes away the drive for entrepreneurship)

-and many more,

...so even if most Filipinos would want to become entrepreneurs they can’t. That’ because the Philippine government (regardless of who is in power) prevents them from doing so. The cost of doing business or the risk premium is prohibitive enough to require high hurdle rates for entrepreneurs to generate decent returns.

All these signify as the Filipinos’ aversion to free markets which is what genuinely inhibits the Filipino entrepreneurial discovery process from taking hold.

We are Living in the Best Years in over Two Thousand Years

The Economist has this interesting population weighted chart which shows that much of human history and progress has been happening during the 20^th century up to the present.

The Economist writes, (bold emphasis mine)

Since there are almost 7 billion people alive today, it follows that they are making seven times as much history as the 1 billion alive in 1811. The chart below shows a population-weighted history of the past two millennia. By this reckoning, over 28% of all the history made since the birth of Christ was made in the 20th century. Measured in years lived, the present century, which is only ten years old, is already "longer" than the whole of the 17th century. This century has made an even bigger contribution to economic history. Over 23% of all the goods and services made since 1AD were produced from 2001 to 2010, according to an updated version of Angus Maddison's figures.

The chart reveals how growth in population has coincided with economic output expansion.

And second and most importantly, that human progress from the last century through the current millennium has been exponential.

Perhaps Professor Deirdre McCloskey’s “Bourgeois Revaluation” accounts for as the pivotal factor for such astounding acceleration in the rate of progress.

As Professor Don Boudreaux writes of Professor McCloskey’s thesis, (bold emphasis mine)

Only when merchants, tinkerers and practical seekers of profit in markets came to be respected -- and to be widely spoken of with respect, even with admiration -- did the social status of the bourgeoisie increase enough to make membership in that group desirable to large numbers of people. And when this Bourgeois Revaluation happened, innovation skyrocketed.

It's this innovation -- mad, fevered, historically off-the-charts amounts of innovation -- that really is what we today call "capitalism."

I am glad to have lived in this generation and to be a part of and witness such magnificent phenomenon unfold before our eyes.

And I guess that despite all the risks and the prospective afflictions which could interrupt or disrupt on such trends, the best is yet to come. I think that we are transitioning towards the information age that should characterize even faster rate of innovations under more decentralized settings (governance included).

Remember, such feat came in spite of the 2 World Wars and the gruesome tragedies of the failed experiment of communism in the 20^th century.

The above should serve as good tidings for our progenies.

China’s Bubble Cycle: Shadow Financing at $1.7 Trillion

The US mortgage bubble had substantially been financed by Shadow Banking system, where major private financial firms arbitraged around existing regulations in complicity with regulators.

China’s bubble has been progressing with the same symptoms but with different players.

This time local government agencies have relied on unofficial sectors to fund the blossoming property mania.

From the Bloomberg

China’s first audit of local government debt found liabilities of 10.7 trillion yuan ($1.7 trillion) at the end of last year and warned of repayment risks, including a reliance on land sales.

Financing vehicles set up by regional authorities already had more than 8 billion yuan in overdue debt, while more than 5 percent of such companies used new bank borrowing to repay loans, according to the audit, posted on the National Audit Office’s website and submitted to China’s cabinet.

“Some local government financing platforms’ management is irregular, and their profitability and ability to pay their debt is quite weak,” Liu Jiayi, the country’s auditor-general said in speech published today.

Premier Wen Jiabao ordered the first audit of local- government borrowing in March, amid concern spending designed to support the economy following the 2008 global financial crisis would leave a legacy of bad debt. As much as 30 percent of bank loans are expected to turn sour and they are likely to be the biggest source of non-performing assets for the industry, Standard & Poor’s said in April.

Local governments, barred from selling bonds or borrowing directly from banks, had set up 6,576 financing vehicles by the end of 2010 to raise money, the audit showed, accounting for 4.97 trillion yuan, 60 percent of which governments have responsibility to repay. Some governments have offered illicit guarantees to such companies, while others rely on land sales to help them repay, Liu said.

UBS AG estimated in a June 7 report that local government debt could be 30 percent of gross domestic product and may generate around 2 to 3 trillion yuan of non-performing loans. Credit Suisse AG economist Tao Dong said it was the biggest “time bomb” for China’s economy.

The Austrian business (bubble) cycle seems to be buttressed by the Hyman Minsky Ponzi financing dynamics or financial instability hypothesis.

A refresher quote from Professor Minsky, (bold emphasis mine)

“Three financial postures for firms, households, and government units can be differentiated by the relation between the contractual payment commitments due to their liabilities and their primary cash flows. These financial postures are hedge, speculative, and ‘Ponzi.’ The stability of an economy’s financial structure depends upon the mix of financial postures. For any given regime of financial institutions and government interventions the greater the weight of hedge financing in the economy the greater the stability of the economy whereas an increasing weight of speculative and Ponzi financing indicates an increasing susceptibility of the economy to financial instability.”

Many who see the fallacious “global imbalances” symptom will be proven wrong once China’s bubble bursts. We will see China's currency the yuan collapse the way the Thai baht did in 1997

Has the Tensions over Spratly’s Islands been about US Weapons Exports?

At the Lew Rockwell Blog, Butler Shaffer writes,

As the Philippines and China continue their conflict over sovereignty in the South China seas, the United States announced that it will provide the Philippines with additional military weaponry. Wars — and the sale of tools of death and destruction with which to conduct them — remain America’s principal exports to the rest of the world!

The big boys club continues to show how they pledge cooperation with one another. China, yesterday, has once again reaffirmed her commitment to help save Europe by offering to buy bonds of crisis affected European countries, as I recently posted.

If big boys seem to be in cahoots over highly sensitive geopolitical affairs, then it would be an oddity to see continuing antagonism on the Spratly’s issue when the same big boys are directly (China) or indirectly (US) involved.

Perhaps, it could be read that China has been bullying the Philippines. Yet perhaps not.

Or that China could be using Spratly’s as diversion to domestic political problems as evidenced by sporadic riots.

But, Professor Butler’s comment provoked a ‘naughty’ idea on my part represented by this question:

Has China been acting as a shill for the US military-industrial complex?

Or stated differently, has the tensions over the Spratly’s Island been all about boosting US weapons exports?

My earlier thoughts on the Spratly’s dispute here and here. Yet, this seems like a new angle to explore.

Japan Mulls More Bailouts for the Nuclear Industry (and Mega Banks)

As I have been saying, governments around the world would look for any excuses to print money and or extend bailouts or other political-financial privileges to pet sectors at the expense of the economy.

Japan mulls on extending new loans purportedly aimed at supporting her nuclear industry and to other sectors tied to the recent disaster.

Reports the Bloomberg, (bold emphasis mine)

Japan’s government is considering about 230 billion yen ($2.8 billion) in outlays for aid to Tokyo Electric Power Co. and radiation monitoring in its planned extra budget, according to a draft outline prepared by the Finance Ministry.

Prime Minister Naoto Kan’s government has yet to release details of the 2 trillion yen supplementary budget, which will need parliamentary approval. Officials will apply 1.8 trillion yen in tax revenue left over from the last fiscal year to help fund the package, according to the document, a copy of which was obtained by Bloomberg News.

The spending would be aimed at a nuclear crisis that remains unresolved more than three months after Japan’s record earthquake and ensuing tsunami crippled Tokyo Electric’s Fukushima Dai-Ichi reactor north of Tokyo. The utility, which has seen almost $37 billion of its market value erased, will hold its annual general meeting today...

Another 78 billion yen will be used to set up a fund for health care costs of people that were affected by radiation or live near the damaged reactor, the document said.

The cost of dismantling the Fukushima plant may reach 20 trillion yen, and compensation for households in a 20-kilometer evacuation zone may total 630 billion yen over 10 years, according to the Japan Center for Economic Research.

The draft budget also earmarked about 80 billion yen to help households that were indebted before the quake and now need to borrow more for repairs. Additional funds will be devoted to small companies affected by the natural disaster that left more than 23,000 dead or missing, according to the proposal.

Damage to buildings, roads and infrastructure will be around 16.9 trillion yen, the lower end of the government’s initial 16 trillion to 25 trillion yen forecast, the Cabinet Office said last week.

The government pledged 4 trillion yen in spending it its first extra budget, which was used to build temporary homes and clean up debris from the earthquake and tsunami.

As I earlier posted, Japan’s maintains a patronage crony relationship with the nuclear industry, and thus the proposed actions.

Second, I smell another indirect bailout of the domestic banking system. Japan’s mega banks have huge loan exposures on TEPCO which credit rating agency Moody’s recently threatened to downgrade.

From Businessweek.com

“About 2 trillion yen of loans to Tepco from megabanks and life insurance companies offered before the March quake would virtually fall to a default status if the financial institutions were to write them off,” Moody's analysts led by Tetsuya Yamamoto, Tokyo-based vice president of the financial institutions group, said in a report today.

Like any governments, politicians have no qualms on spending of other people’s money, especially for the benefit of their related or politically affiliated interests.

The Anatomy of False Economics as Revealed by the Greece Crisis

We have been told by economic ideologues that spending translates to prosperity especially if this is done by government via ‘free lunch’ socio-welfare programs.

The Greece debt and entitlement crisis should be one good example of how quant economics gets it so badly.

From the Daily Mail, (all bold highlights mine) [ht: Prof William Anderson]

There is another bonus for users of this state-of-the-art rapid transport system: it is, in effect, free for the five million people of the Greek capital.

With no barriers to prevent free entry or exit to this impressive tube network, the good citizens of Athens are instead asked to 'validate' their tickets at honesty machines before boarding. Few bother.

This is not surprising: fiddling on a Herculean scale — from the owner of the smallest shop to the most powerful figures in business and politics — has become as much a part of Greek life as ouzo and olives.

Indeed, as well as not paying for their metro tickets, the people of Greece barely paid a penny of the underground’s £1.5 billion cost — a ‘sweetener’ from Brussels (and, therefore, the UK taxpayer) to help the country put on an impressive 2004 Olympics free of the city’s notorious traffic jams.

The transport perks are not confined to the customers. Incredibly, the average salary on Greece’s railways is £60,000, which includes cleaners and track workers - treble the earnings of the average private sector employee here.

The overground rail network is as big a racket as the EU-funded underground. While its annual income is only £80 million from ticket sales, the wage bill is more than £500m a year — prompting one Greek politician to famously remark that it would be cheaper to put all the commuters into private taxis.

‘We have a railroad company which is bankrupt beyond comprehension,’ says Stefans Manos, a former Greek finance minister. ‘And yet, there isn’t a single private company in Greece with that kind of average pay.’

Significantly, since entering Europe as part of an ill-fated dream by politicians of creating a European super-state, the wage bill of the Greek public sector has doubled in a decade. At the same time, perks and fiddles reminiscent of Britain in the union-controlled 1970s have flourished.

Ridiculously, Greek pastry chefs, radio announcers, hairdressers and masseurs in steam baths are among more than 600 professions allowed to retire at 50 (with a state pension of 95 per cent of their last working year’s earnings) — on account of the ‘arduous and perilous’ nature of their work.

We are further told that by devaluation Greece would solve its problems.

From Wall Street Journal’s Holman Jenkins Jr., (bold highlights mine) [ht: Dan Mitchell]

Whether Greece gets debt relief now or later, the Greeks will not escape sweeping structural reform of their economy—one of the most corrupt, crony-ridden, patronage-ridden, inefficient, silly economies in Christendom. Its tax system operates on voluntarism and fine judgments about whether the bribe or the tax would be more burdensome to pay. The state railroad maintains a payroll four times larger than its ticket sales. When a military officer dies, his pension continues for his unwed daughter as long as she remains unwed. Various workers are allowed to retire with a full state pension at age 45.

Those who say if only Greece still had its own currency, so much pain would have been avoidable, exaggerate. Under no possible currency regime would Greece have been able to go on forever borrowing money from foreigners to live beyond its means or its willingness to work. The same is true to lesser degree of other troubled European economies, including Portugal and Spain.

All along, the challenge of the euro was the challenge that undid the gold standard—to make "the law of one price" prevail across multiple countries in the age of interest group democracy. "One price" in one country works—Americans will pick up and move 3,000 miles for a job, but even in America, not without pain.

Yet the nostalgia for a Europe of independent currencies is mostly nostalgia for an illusory shortcut—even more so as services, rather than tradable goods, become the overwhelming source of employment in modern economies. Greece, with its sun and history, has every potential to make a happy, privileged existence inside the euro zone. Today's growth gap between Europe's north and south, which some say proves the unwisdom of a common monetary policy, is hardly organic—it's the product of their common mistake in loading too much debt on unreformed southern economies in giddy expectation of euro-based prosperity.

Putting into perspective the scale of Greece’s predicament from the accrued free lunch policies, from the Foxnews.com (bold emphasis mine)

Greece's Finance Ministry estimates that, on its current track, government debt will reach €501 billion by 2015. That comes to a debt of over $66,000 per person, and Greece’s personal income is only about two-thirds our own. Greater deficits and 17 percent interest rates can cause difficult problems to grow into impossible ones very quickly.

Greece can and should do much more. Both the European Central Bank and the IMF estimate that Greece can pay off €300 of the €347 billion debt by selling off shares the government owns in publicly traded companies and much of its real estate holdings. The government owns stock in casinos, hotels, resorts, railways, docks, as well as utilities providing electricity and water. But Greek unions fiercely oppose even partial privatizations. Rolling blackouts are promised this week to dissuade the government from selling of even 17 percent of its stake in the Public Power Corporation.

It takes common sense and self-discipline to realize that:

-Spending more than what one earns cannot happen indefinitely

-Redistribution has its limits. Picking on someone’s pocket is a zero sum game.

-Welfare programs engender a culture of entitlement and dependency.

-Printing money won’t solve the problems of insufficient production. Greece’s problem has been about the chronic or deep-seated culture of over-dependency from political-welfare programs than from the lack of ‘aggregate demand’.

-Where politics determines economics, or where zero sum (free lunch) political economics is applied, poverty is the outcome.

Economic reality eventually exposes false economics.

US Money Market Funds likely the Contagion Link to the PIIGS crisis

How vulnerable is the US to the PIIGS debt and entitlement crisis?

From Bloomberg, (bold emphasis mine)

U.S. money funds eligible to buy corporate debt had about $800 billion, or half their assets as of May 31, in securities issued by European banks, Fitch Ratings estimated. European lenders held more than $2 trillion at year-end in loans to Greece, Portugal, Ireland, Spain and Italy, the most indebted European countries, the Bank of International Settlements estimated...

European Union leaders vowed June 24 to prevent a Greek default as long as Prime Minister George Papandreou pushes a $78 billion euro ($111 billion) package of budget cuts and asset sales through Parliament this week. Greece needs to cover 6.6 billion euros ($9.4 billion) of maturing bonds in August.

“Money-market mutual funds still remain vulnerable to an unexpected credit shock that could cause investors to doubt the ability to redeem at a stable net asset value,” Eric Rosengren, president of the Federal Reserve Bank of Boston, said in a June 3 speech. Some funds have “sizable exposures” to European banks through short-term debt, he said.

The $2.68 trillion money-fund industry is the biggest collective buyer in the commercial paper market.

The bankruptcy of Lehman Brothers Holdings Inc. led to the Sept. 16, 2008, closure of the $62.5 billion Reserve Primary Fund when it suffered a loss on debt issued by the bank. Reserve Primary triggered a wave of redemption requests when it became the first money-market fund in 14 years to expose investors to losses.

Customers were denied access to most of their cash for months as the fund liquidated. Investors, fearing that other funds might fail, withdrew $230 billion from the industry by Sept. 19 in a run that threatened to cripple issuers of short- term debt.

Money market funds are limited to securities that can be converted into cash within 13 months.

JPMorgan’s Roever and Peter Rizzo, senior director of fund services at credit rater Standard & Poor’s in New York, said U.S. managers have been reducing their European bank holdings and shortening the average maturities of those remaining. That would allow them to withdraw more quickly without having to sell securities into a potentially illiquid market.

S&P estimated that 80 percent of European bank holdings is limited to three months or less, and 95 percent to six months or less among the 500 U.S. and European money funds it rates.

And this is partly why news feeds of proposed continued buying by the US Federal Reserve of US treasuries continue to stream

From another Bloomberg article,

The Federal Reserve will remain the biggest buyer of Treasuries, even after the second round of quantitative easing ends this week, as the central bank uses its $2.86 trillion balance sheet to keep interest rate slow.

While the $600 billion purchase program, known as QE2, winds down, the Fed said June 22 that it will continue to buy Treasuries with proceeds from the maturing debt it currently owns. That could mean purchases of as much as $300 billion of government debt over the next 12 months without adding money to the financial system.

As I earlier noted, even if QE 2.0 does officially end this month, this proposed reinvestment program serves as transitional QE. Eventually whether it is QE or another name, asset purchasing programs by the US Federal will continue.

This also lends credence to the view that QE 2.0 may have been put in place to save foreign (European) banks in order to diminish contagion risks.

At the end of the day, it’s been all about saving the international banking cartel under the guise of saving the economy.

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.

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[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.

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[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