Graphic: Dead Currencies

Below is a deck of pictures, courtesy of Casey Research, showing various currencies from different parts of the world that have expired or have been abandoned.

It is foolish or naïve, for some, to believe that political actors willed or deliberately engineered the demise of these currencies, or that these have been the responsibility of the private sector.

Instead, the spate of currency extinction overtime signifies as the outcome of a series of actions undertaken by political leaders which essentially collided with economic reality and failed.

In other words, hyperinflation or war, which had been mainly responsible for the demise of most of these currencies, represents as the unintended effects from the desire to preserve or expand of political power by incumbent political leaders during their era.

As the great Ludwig von Mises reminds us, (bold emphasis mine)

But then, finally, the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against "real" goods, no matter whether he needs them or not, no matter how much money he has to pay for them.

Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.

It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German Mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last forever.

I Told You So Moment: The Phisix At Milestone Highs

First they ignore you, then they laugh at you, then they fight you, then you win- Mahatma Gandhi

It’s not that we didn’t see this coming, the Philippine Phisix closed this week at a milestone record nominal HIGH at 4,458.

For me, this signifies another “I told you so” moment, as cynics both from the mainstream economics and the mechanical charting camp have mistakenly stated that this won’t be happening soon.

Epic Breakout on a Divergent Marketplace

Yet such monumental breakout came amidst a wobbly and seemingly discordant global equity market.

It’s not that this epic moment has been isolated or represents a unique trait seen exclusively to the Phisix only, but rather, the ASEAN majors have been one of the best performing equity markets of late. In short, as I have repeatedly been pointing out, this has been a regional dynamic.

By our latest reckoning, the Philippines along with Indonesia, Malaysia and Thailand have been in the top 20[1] among the 78 bourses worldwide.

The abbreviated price actions of the FTSE ASEAN 40 (ASEA) Exchange Traded Fund [ETF], which is a newly constructed bellwether, exhibit this new height.

This has happened as most of Asia seems on the upside, as represented by the Dow Jones Asia Pacific index (P1DOW). Meanwhile, the US S&P 500 (SPX) seems edgy, but still has been manifesting upward inclinations.

Only the European benchmark (stoxx 50) appears to be the odd man out, considering the festering debt crisis which seems to be spreading to the PIIGS.

And nowhere has this seeming exceptional deviation by the ASEAN majors imply of “decoupling”.

As the charts above from CLSA/Businessinsider indicate[2], over the past two decades returns of Asian bourses have been converging.

This gives credence to my repeated assertions[3] that in the world of globalization, the correlation of global equity markets have been tightening.

Yet to view performance digressions as “decoupling” risks false and misleading interpretations of events that may result to wrong prognosis, overconfidence and consequent errant actions that could lead to monetary and psychic losses.

One would further note that divergent actions occur mostly during crisis or recessions, as in the Asian crisis of 1997, the dot.com bust in 2000 and the US mortgage bubble crash of 2008. However, the boom phase of a bubble cycle tends to show signs of re-convergence.

Not every of the market signals I earlier alluded to[4] participated in the confirmation of the local boom. Europe’s ongoing crisis has partly taken some steam off from the global equity market re-convergence.

If there is any lesson from the above, it is that the local and ASEAN boom would likely become stronger if global equity markets would act in consonance. Oppositely, a further widening of divergences would put to doubt the string of current advances.

Gold-Phisix Correlation Redux

There is another noteworthy development that needs to be emphasized, as the Phisix and ASEAN bourses have reached record territories, so has gold prices.

As I previously wrote about how gold’s price actions seem to lead the Phisix[5],

The implication is: for as long as the trend of gold prices remains to the upside, the Phisix will likely follow unless domestic factors become powerful enough to impel a disconnect.

Prices of gold have served as reliable barometer so far.

Alternatively, this also means that accrued corporate earnings or micro economics or mainstream’s macro views can hardly explain this phenomenon.

Consumption demand, which has been the popular perspective, can hardly explain the broad based increases in commodity prices along with equity prices.

Of course correlation does not imply causation or that there presents no causal relationship between gold and the Phisix.

The point is: both gold and the Phisix account for as symptoms of an underlying pathology, which has largely been an unseen factor.

Again correlation does not represent causation. Yet the degree of correlation may vary according the causal relationship dynamics that underpins these markets.

In my view, I see this relationship anchored on the unfolding (Austrian) business cycle or bubble cycle fueled by monetary policies.

And the political process in fostering such boom phase of this bubble cycle has clearly been at work.

In the US, Federal Reserve chairman Ben Bernanke recently placed the QE 3.0 option on the table[6] partially confirming my forecasts[7].

Although Mr. Bernanke partly backtracked[8] from his earlier stance by stating that while QE 3.0 is in the cards it will not be used soon.

I see this as part of the mind conditioning-communication tactical tools used by the central bankers (or the signaling channel) to influence market expectations (aside from indirect market interventions).

The important point is that the Fed seems to be projecting the idea of renewed access to QE which is a sign of imminence. The question isn’t about an IF, but rather a WHEN.

And the commodity markets seem to have been affirming such expectations. Even the perennial laggard Natural Gas (NATGAS) appear to be on the rise. Silver, oil (WTIC) and the CRB Reuters (CCI) have been on climbing higher, despite the string of recent interventions.

Of course I don’t think Mr. Ben Bernanke would automatically employ QE or its variant, that’s because QE is a political tool designed at attaining political ends.

QE 3.0 will likely be tied to the congressional vote on the US debt ceiling, the deadline[9] of which is on August 2^nd is fast approaching.

The political pressure to raise the debt ceiling continues to intensify as major credit rating agencies as the S&P and Moody’s has warned of a possible downgrade[10] if a deal won’t be reached.

Higher prices of Credit Default Swaps (CDS)—an insurance against default risks—on US sovereign debt (see left window below[11]) has been attributed to the recent political impasse.

Although in perspective, the rising prices of US CDS can be seen amidst a backdrop of general concerns over credit risks for most of the world[12] (including the Philippines which is two notches below the US), but especially for many European countries over a one month frame. In short, politicking may have led to the misplaced focusing effect for many politically blinded observers.

The above reveals that the causation link of higher US CDS prices and political stalemate over the debt ceiling seems unclear.

The other major factor that could prompt Ben Bernanke to reactivate QE 3.0 soon is if the debt crisis in the Eurozone escalates to the point of putting US banks at risk. As pointed out in the past[13], QE 2.0 has reportedly benefited foreign banks or had been used as an indirect channel to conduct bailouts of Eurozone banks through the Eurodollar market.

I wouldn’t know which of these events would prompt Mr. Bernanke to trigger the next version of QE, but one thing is certain, given the trillions of bailouts thrown to US banks (demonstrated preference or actions as proof of the order of priorities), combined with ideological or doctrinal leanings and path dependency, plus reluctance to adapt fiscal discipline as the necessary path for reform, all these point towards the QE option to secure or safeguard the tripartite government-banking system-central bank political structure.

All these imply that monetary accommodation will prevail over marketplace for a longer period of time which should support the current risk environment.

And given that the global transmission of credit easing (QE) policies and artificially suppressed interest rates everywhere would have different impacts on different asset classes, the gold-phisix correlations, unless the latter would be influenced more by domestic factors, will likely be sustained.

Market Breadth and Internals Point to Further Strength

Since financial markets are driven by psychology, underpinned by the above forces, people’s outlook can be measured from actions being undertaken from different financial market indicators.

The milestone breakout by the Phisix has been bolstered by the broader market.

Market breadth has been broadly positive as all sectors posted gains (left window).

Again the Philippine composite has been elevated by mostly the mining sector followed by the financial sector, particularly led by Metrobank [PSE: MBT].

Advance decline spread (weekly basis) has likewise turned significantly positive (right window).

Market internals have also demonstrated broad bullishness.

Average daily trades (weekly basis) and daily number of issues traded (weekly basis) has dramatically improved.

While no trend goes in a straight line, such congruent positive actions are likely signs of continuity. Importantly, such trends could reaccelerate.

Philippine Peso Driven by Portfolio Investments

This week the Philippine Peso has partially departed from its tight correlation with the Phisix.

The monumental advance of the Phisix saw the Peso soften instead. The Peso seems to reflect more on the region’s actions than to confirm the Phisix’s vigorous advances. Or maybe currency intervention by the local central bank could also be a factor.

Although one week does not a trend make, I think that the Peso should eventually make more confirmations of the actions of the Phisix and vice versa.

As I keep saying[14],

this has been premised mostly on the favorable relative demand for Peso assets, aside from the lesser inflationary path by the Peso based on the supply side.

There is no proof stronger than this.

The chart above from the World Bank[15] and yahoo finance shows that Philippine Peso has hardly been driven by remittances, which has been peddled by the mainstream, but by virtue of correlations based causal logic the net capital flows (manifested mostly by portfolio investments).

For as long as the net capital flows (again mostly by portfolio investments) continue to expand, some of which will be evidenced in the actions of the Philippine Stock Exchange, we should then expect that this would be reflected on a rising Peso.

Bottom line: Again momentum, via various market signals, favors the confirmation of this week’s epic breakout.

We should see the Phisix at 4,900-5,000 by the yearend barring any exogenous shocks.

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[1] See How Global Equity Markets have Measured Up to the PIIGS Crisis, July 13, 2011

[2] Weisenthal, Joe This Is What Global Market Correlation Looks Like, Businessinsider.com, July 11, 2011

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

[4] See I Just Can’t Get Enough: Philippine Phisix Emits Intensely Bullish Signals, July 3, 2011

[5] See How External Forces Influence Activities of the Phisix, May 29, 2011

[6] See Ben Bernanke Hints at QE 3.0 June 13, 2011

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

[8] See Ben Bernanke on QE 3.0: Not Now, But An Open Option, July 15, 2011

[9] Reuters.com Obama, lawmakers press ahead for elusive debt deal, July 16, 2011

[10] Bloomberg.com Moody’s Downgrade Warning Adds Pressure on U.S. Debt Deal, July 14, 2011

[11] Zero Hedge, US Default Risk Jumps To Highest Since February 2010 On Debt Ceiling Worries, July 14, 2011

[12] Bespoke Invest, Changes in Sovereign Debt Default Risk Over the Last Month, July 16, 2011

[13] See Political Interventions has Led to the Widening of Divergences in Global Asset Markets, June 26, 2011

[14] See I Just Can’t Get Enough: Philippine Phisix Emits Intensely Bullish Signals, July 3, 2011

[15] Worldbank.org, Generating More Inclusive Growth, Philippine Quarterly Update June 2011

Expect a Rebound from the Lagging Philippine Property Sector

Like the repeated doping of a horse, the boom is kept on its way and ahead of its inevitable comeuppance, by repeated doses of the stimulant of bank credit. It is only when bank credit expansion must finally stop, either because the banks are getting into a shaky condition or because the public begins to balk at the continuing inflation, that retribution finally catches up with the boom. As soon as credit expansion stops, then the piper must be paid, and the inevitable readjustments liquidate the unsound over-investments of the boom, with the reassertion of a greater proportionate emphasis on consumers' goods production. Thus, the Misesian theory of the business cycle accounts for all of our puzzles: The repeated and recurrent nature of the cycle, the massive cluster of entrepreneurial error, the far greater intensity of the boom and bust in the producers' goods industries. Murray N. Rothbard

Two of last week’s cynosure or market darlings had been East Asia Power [PSE: PWR] on a mind boggling gain of 232%, and Boulevard Holdings [PSE: BHI] 31.4%.

PWR can now be considered as a property issue considering the takeover by Century Properties has been formalized[1]. Meanwhile, BHI’s rumored acquisition by another real estate giant has yet to be confirmed.

To me, these developments signify as writing on the wall.

Where the huge breakout by the Phisix has been validated by broad market based bullishness or a “rising tide phenomenon”, a confirmation or continuation of these upside biased actions on the Phisix would also mean rising prices of property issues.

During the recent phase of the bubble cycle, which began in early 2009, the property sector (top window, blue line) has mostly led or outclassed the Phisix. This seems in stark contrast to the financial sector (lower window, red line) which has mostly lagged the local benchmark.

The two large red circles I drew demonstrate the occasions where the Property sector has vastly outperformed the Phisix and the green circle which reveals that the roles have reversed.

This implies two possible scenarios:

-one, the lagging property sector could be an anomaly that would eventually revert to the mean, or

-two, the seeming laggard effect could be representative of a new trend.

The 6 biggest property sector according to their free float market cap weighting in the PSE Property basket are (in pecking order[2]): Ayala Land 35.96% [PSE: ALI], SM Prime Holdings 17.92% [PSE: SMPH], Belle Corporation 10.97% [PSE: BEL], Megaworld Corporation 7.91% [PSE: MEG], Robinson’s Land 7.66% [PSE: RLC] and Filinvest Land 5.01% [PSE: FLI].

The performances of the big six on a year to date basis in %:

Only BEL and SMPH posted gains so far, while the others remain in the red, with Megaworld suffering the most.

The massive divergence between the price actions of most of these property heavyweights and the Phisix is the reason why the property sector has conspicuously trailed.

Yet parsing on the recent price trends….

…I find that the returns on the table above haven’t been revealing exactly what has been happening.

Individual trends suggest that there has been an ongoing rotation; leaders BEL (blue) and SMPH (black candle) appears to be in consolidation whereas the laggards have all been ascendant, namely RLC (violet), ALI (red), FLI (orange) and Megaworld (green).

So the rising tide has already begun to filter into the worst performers and we would likely see more of the same actions going forward.

With the steep local yield curve (left window) along with the domestic monetary environment operating on negative real interest rates (right window), which the World Bank chart confirms my earlier observations[3], foreign portfolio inflows should include not only investments in equities but also on real estate which should likewise get reflected on the Phisix Property index.

And the same forces are likely to also impel locals to get into a property acquisition binge.

A construction boom can be ubiquitously seen in the Metropolis as new buildings grow like mushrooms. Such anecdotal evidence appears to be confirmed by the reported $ 1.19 billion worth of real estate investments for the first 5 months in 2011[4].

And the property sector signifies as a capital intensive sector most receptive to the monetary policy induced Austrian Business Cycle.

To quote the great Murray N. Rothbard[5], (bold emphasis mine, italics original)

For businessmen, seeing the rate of interest fall, react as they always would and must to such a change of market signals: They invest more in capital and producers' goods. Investments, particularly in lengthy and time-consuming projects, which previously looked unprofitable now seem profitable, because of the fall of the interest charge. In short, businessmen react as they would react if savings had genuinely increased: They expand their investment in durable equipment, in capital goods, in industrial raw material, in construction as compared to their direct production of consumer goods.

Like the capital intensive mining sector, the domestic property sector will undergo a boom bust cycle phase.

Bottom line:

The lagging effect of the Property sector seems more of an anomaly than an evolving trend.

The breakout of the Phisix should be seen as a catalyst that could launch the next leg up for the property sector.

The upcoming rebound would not only close the underperformance gap but would also power this sector as one of the best performers.

The Philippine property sector as I earlier predicted will see a boom phase[6] (again barring any exogenous shocks). Real estate or property booms have traditionally functioned as the centrifugal force from a monetary induced bubble cycle. This has been very evident in China[7]. And likewise became the ground zero for the US mortgage-banking crisis[8].

Well it’s time to profit from the political folly.

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[1] Philstar.com Century Properties seals deal to take over East Asia Power, July 12, 2011

[2] based on Friday’s close and only considered weights of 5% up

[3] See Phisix: Negative Real Interest Rate and Stagflation Risks, June 12, 2011

[4] Philstar.com Surge in investment shows return of investor's confidence, July 2, 2011

[5] Rothbard, Murray N. The Austrian Theory of the Trade Cycle, Economic Depressions: Their Cause and Cure, Mises.org

[6] See The Upcoming Boom In The Philippine Property Sector, September 12, 2010

[7] See China’s Bubble Cycle: Shadow Financing at $1.7 Trillion, June 28, 2011

[8] See 2008 US Mortgage Crisis: The US Federal Reserve and Crony Capitalism as Principal Causes, May 31, 2011

Nassim Taleb on Dodd Frank’s OFR: Soviet Style Management

While rapid advancement of technology has been decentralizing or democratizing data and information flows, central planners dream of the opposite: centralizing these in an attempt to control the markets.

A recently enacted financial overhaul law, Dodd Frank has an offspring called the Office of Financial Research.

According to the Wall Street Journal Blog, (bold emphasis mine)

Dodd-Frank created the new semi-autonomous office to support a new council of regulators – the Financial Stability Oversight Council, or FSOC – that is charged with spotting and tamping down emerging risks to financial stability. The OFR has two key components – a data-collection arm that has broad power to request any kind of information from financial firms it deems necessary, and a research and analysis arm that to be focused on monitoring the financial system for risk and producing research to improve regulation.

Celebrity author and Black Swan expositor Nassim Taleb critiqued the framework of this new office. In a prepared testimony Mr. Taleb says that this represents

an attempt to create “an omniscient Soviet-style central risk manager.”

That’s because Mr. Taleb points out that quant models can’t capture real events

According to the same article, (bold emphasis mine)

In his testimony, Mr. Taleb said that “[f]inancial risks, particularly those known as Black Swan events cannot be measured in any possible quantitative and predictive manner; they can only be dealt with [in] nonpredictive ways.” He argued that trying to do what the OFR is designed to do could actually increase risks, in part by increasing “overconfidence” in the information’s ability to predict the next crisis.

Like all quant-econometric based models, they suffer from what the great F. A. Hayek calls as the knowledge problem as embodied by the quote below:

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.

Most people hardly ever learn

Telemedicine: Health Care of Tomorrow

From Teladoc.com (hat tip Prof Mark Perry)

1. You wake up one morning with sudden cold-like symptoms: stuffy nose, cough, congestion. You don’t want to miss time at work by sitting in an urgent care or ER waiting room. What to do?

2. Simply log in to your account or call 1-800-Teladoc to request a phone or online video consultation with a Teladoc doctor. You can use Teladoc from home, work, on vacation, or while traveling internationally. The average doctor call back time is 22 minutes.

3. A U.S. board-certified doctor or pediatrician licensed in your state reviews your Electronic Health Record (EHR), then contacts you, listens to your concerns and asks questions. It's just like an in-person consultation. There is no time limit to the consult.

4. The doctor recommends the right treatment for your medical issue. If a prescription is necessary, it's sent to the pharmacy of your choice.

5. Teladoc costs far less than in-person visits: $38 or lower, depending on your plan design. Teladoc charges the credit card you provided when requesting your consultation or your billing information on file. You can request a receipt for deductibles or reimbursement, if needed. The doctor updates your HIPAA-compliant EHR based upon the consultation. Teladoc is a qualified expense for HSA, FSA and HRA accounts.

6. At the end of every call, the doctor will ask if he's answered all of your questions, and we'll follow up to make sure you're delighted with the service.

I am hoping to see telemedicine flourish not only abroad but also in the Philippines soon.

I understand that the Philippine government has initiated telemedicine aimed at the remote areas. But I don’t think the government is the answer.

And yes this could be seen as a sunshine investment opportunity.

Nonetheless, considering the exponential growth of the internet in the Philippines, where usage now is about 6.3% of the population and growing...

Chart from Google Public Data

...digital healthcare trends will surely be headed in this direction.

Cartoon of the Day: Evolution of the Welfare State

The caricature above shows how communal unity, what in the Philippines has been known as the Bayanihan Spirit, transforms into a culture of entitlement.

I’d like to add an important missing element in the sketch: the use of the threat of violence (the gun via taxation) in forcing people to pull the cart.

Thanks to Cato’s Dan Mitchell

Loss of Economic Freedom means Business Exodus: The California Experience

This is what happens when Economic Freedom gets curtailed: economic opportunities shrivels as investors leave for better alternatives. In short, money goes where it is treated best.

The California experience from CNN:

Buffeted by high taxes, strict regulations and uncertain state budgets, a growing number of California companies are seeking friendlier business environments outside of the Golden State.

And governors around the country, smelling blood in the water, have stepped up their courtship of California companies. Officials in states like Florida, Texas, Arizona and Utah are telling California firms how business-friendly they are in comparison.

Companies are "disinvesting" in California at a rate five times greater than just two years ago, said Joseph Vranich, a business relocation expert based in Irvine. This includes leaving altogether, establishing divisions elsewhere or opting not to set up shop in California.

People respond to incentives. This is what regulators and policymakers everywhere, including the Philippines, don’t seem to understand.

Ben Bernanke on QE 3.0: Not Now, But An Open Option

Signaling channel is an esoteric tool used by central bankers to project future stance of monetary policy. The objective is to influence market expectations by transmitting the possible courses of actions that the central banks may undertake.

This exactly defines the current actions of US Federal Reserve chairman Ben Bernanke on the contingent option to exercise QE 3.0.

The other day Mr. Bernanke floated a trial balloon, today he demurs.

From Bloomberg, (bold emphasis mine)

Federal Reserve Chairman Ben S. Bernanke told Congress that the central bank isn’t currently ready to embark on a third round of government bond-buying to stimulate the economy.

“We’re not prepared at this point to take further action,” Bernanke said today, in response to a question from Senate Banking Committee Chairman Tim Johnson, a Democrat from South Dakota. Johnson asked Bernanke why the Fed wasn’t immediately starting a new stimulus program given the weak economic recovery and rising unemployment...

In House testimony yesterday, Bernanke said the Fed still has tools to spur growth, and that “we have to keep all the options on the table,” driving share prices higher. Bernanke told Senators today that policy makers want to see if the economy rebounds as anticipated in the coming months, and that they are keeping a close eye on inflation.

Should the economy turn out to be weaker than expected, the central bank may provide more monetary stimulus, Bernanke said. A third round of quantitative easing, or QE3, is an option if a recent economic slowdown persists and deflationary forces re- emerge, he said.

As part of policy communications, I don’t think that this had been meant to only test the market. I think this serves part of the mind conditioning where QE 3.0 will be used eventually. By laying down the QE option, the unstated purpose is to imprint the notion of access.

Yet it’s not a question of IF but a WHEN.

Economic slowdown or deflation has merely been used as justification. I see this ‘slowdown-deflation’ pretext as tied either to the US congressional vote on the debt ceiling (see earlier explanation here) or to the evolving political and market conditions in the Eurozone (see here).

Anytime a perceived risk to the banking system surfaces, whether in Europe or the US or in Asia, the QE option for central banks, has been the recently adapted standard.

Understand this.

Will We be part of the 100 years old Club?

Will we live to be 100 years old?

Me, no. Maybe for you and the younger generation the chances are likely a yes.

The rapid advances in technology will likely enhance this process. Futurist Ray Kurzweil predicts that man may reach immortality by 2045. It’s an incredible, fascinating and optimistic thought.

Nevertheless, the Economist projects there will be more than 1 million centenarians by 2100, they write

MOST countries celebrate the survival of a citizen for a century with a letter from a president or monarch, or even some cash. This is just about feasible at the moment, when centenarians are still comparatively rare, but it will not be the case for much longer. The chart below, drawn from UN data, shows projections for the five countries that will have more than a million centenarians by the end of the century. China will get there first in 2069, 90 years after its one-child policy was implemented.

I don’t know how the UN came up with these projections.

What I know is that:

The US has the most centenarians 70,490 as of September 2010. Japan has 44,449. (Wikipedia.org) Following charts from Google's Public Data

Life expectancy has been expanding as more people have been enabled to trade freely.

Trade brings about the innovation in technology which has vastly contributed to this extended lifespan. Of course increasing wealth from trade has also been a factor.

Yet if people will indeed grow older as the UN or Kurzweil predicts, then there will be further strains on current Bismarckian government welfare system. This means radical changes will confront the current governments founded on the industrial age society.

Also despite longer lifespans which should add to the global population, I don’t believe in the Malthusian crap about “peak” resources. Under free markets, people’s ingenuity will prevail.

At the end of the day, the sustainability of longer lifespans will ultimately depend on the state of free markets and economic freedom.

Video: Ron Paul versus Ben Bernanke: Is Gold Money?

Ron Paul slugs it out with Ben Bernanke (hat tip: Bob Wenzel)

The best part of the exchange:

Ron Paul: Do you believe that gold is money?

Bernanke: No.

Ron Paul: Why do central banks hold gold?

Bernanke: It is an asset, like Treasuries. They're not money.

Ron Paul: Why hold gold, and not diamonds?

Bernanke: Oh, tradition, I suppose.

Photo of Pacquiao-Cotto fight from Regiekun Blog

Ben Bernanke Hints at QE 3.0

I told you NOT to call on the poker bluff being peddled by some analysts and officials who claim that there will be no extension of Quantitative Easing 2.0.

Chairman Ben Bernanke floats the trial balloon for QE 3.0.

From Marketwatch.com (bold emphasis mine)

While the Federal Reserve believes that the temporary shocks holding down economic activity will pass, the central bank is examining several untested means to stimulate growth if conditions deteriorate, including another round of asset purchases, dubbed QE3, Fed chairman Ben Bernanke said Wednesday in remarks prepared for the House Financial Services Committee. Bernanke discussed three approaches to further easing in his prepared remarks. One option, Bernanke said, would be for the Fed to provide more "explicit guidance" to the pledge that rates will stay low for "an extended period." Another approach would be another round of asset purchases, or quantitative easing, or for the Fed to "increase the average maturity of our holdings." Finally, the Fed could also reduce the quarter percentage point rate of interest that it pays to banks on their reserves, "thereby putting downward pressure on short-term rates more generally." Bernanke was clear to stress that easing was not the only option under consideration and that the next Fed move could well be to tighten. At the moment, Fed officials see a recovery that "will likely remain moderate," Bernanke said, with the unemployment rate falling "only gradually." Inflation is expected to subside in coming months, he said

There you have it. QE 3.0 is on the pipeline.

Italian Crisis: Banking Cartel Addicted to Bailouts

The Economist proposes that Italy is in a better place than Greece in terms of debt.

According to the Economist

FEARS over the safety of Italy's government debt would take the euro-zone crisis to a new phase: for its members a choice between breaking up the project and sanctioning big transfers from healthy economies to struggling ones; for banks a question of how to manage exposure to the world's third-largest bond market. When Italian spreads over German bunds ballooned at the end of last week and kept moving in the same direction on July 11th and the morning of July 12th, it looked like that moment of panic had arrived. Markets have since calmed down a little and rightly so, according to this chart, which ranks countries by their debt burdens. But until markets get a clear signal from European governments that they are willing to do whatever it takes to stand behind the euro, the gyrations will continue.

I think the issue of the debt crisis represents a camouflage to what is truly at work here.

To me, the Italian (or the Greek) crisis is no more than an extension of saving the scalp of the badly pummeled European Central Bank sponsored banking (cartel) system.

From Bloomberg,

French banks, including BNP Paribas SA and Credit Agricole SA (ACA), have the most at risk from the euro- region’s debt crisis infecting Europe’s largest borrower: Italy.

At the end of 2010, French banks carried $392.6 billion in Italian government and private debt, according to data from Basel, Switzerland-based Bank for International Settlements. That’s the most for financial institutions from any foreign country and more than double held by German lenders.

At the end of the day, the ECB will ride to rescue the cartel, despite the current rhetorical differences, which has reportedly been the kernel of the current financial turmoil at the Eurozone.

That’s what central banks had been established for. And that’s what they’ll do as they have previously done in the US or in Greece.

And the US will likewise participate indirectly via the IMF and or through foreign currency swaps and or via another asset purchasing program (Quantitative Easing) that would possibly channel money through the Eurodollar market to the stricken banking system as with QE 2.0.

And this is why gold has now been trading at $1572+ as of this writing (kitco.com). And this is likely why gold prices seems likely to make another milestone breakout to set a fresh nominal record highs pretty soon.

The Increasing Role of Commodity Currencies as Forex Reserves

Here is more proof of the declining role of the US dollar as the de facto international currency reserve.

From BCA Research (bold emphasis mine)

In addition to the dollar, four currencies – the euro, British pound, Japanese yen and Swiss franc – have accounted for the vast majority of FX reserves. For most of the last decade, it was these currencies (especially the euro) that benefited from the dollar’s relative decline in global reserves. But there has been a new development to central banks’ diversification strategy; since early 2009, central banks have been looking to what the IMF simply classifies as “other currencies”. From 2% in early 2009, “other currencies” now account for almost 5% of total reserves; the holdings of these alternative currencies increased by $300 billion over a two year period. While the IMF does not provide any further information, we speculate that it largely consists of the commodity currencies: the CAD, AUD, NZD and perhaps the SEK and NOK. For these relatively small economies, $150 billion of annual capital inflows is an enormous amount to absorb. Bottom line: Central banks in emerging economies will continue to shift a portion of their new reserves into non-dollar currencies.

So diversification away from the US dollar continues to deepen.

But this time this has not been limited to currencies of other major economies, but more evidently to currencies which are backed by commodity production-exports.

With gold knocking at the recent highs and copper also within striking range to the recent highs (oil has been creeping higher while silver still consolidating after an explosive run), the likelihood is that given the persistent crisis in major economies, which are constantly being resolved by the printing press, we should see a more expansive role for commodity currencies as international foreign reserves.

The other way to view this is that the growing role of commodity currencies signifies a symptom known as “flight to real value” to a disease known as “inflationism”.

How Global Equity Markets have Measured Up to the PIIGS Crisis

My favorite equity monitor site, Bespoke Invest has a nice updated graph on the performances of global equities as of yesterday.

Here are my observations:

Of the 78 global benchmarks shown, only 24 or 30% of the countries have registered gains.

Although most have been in the red, the degree of losses have not been on a bear market scale.

The current top performer has been Venezuela, who along with Greece shares, represents one of the highest default risks.

8 of the 24 top gainers hail from Asia.

As I keep pointing out, ASEAN mainstays have been among the biggest gainers: Indonesia (7^th), Malaysia (14^th) Philippines (18^th) and Thailand (19^th) which has been moving in near synchronicity.

Among the BRICs, only Russia is in the winning column. India and Brazil have suffered hefty losses.

Brazil may endure a recession next year, following an inversion of its yield curve—oops! chart below from Bloomberg

Vietnam's equity bellwether, which has been among the worst losers, has a yield curve that has likewise been leaning towards inversion ala Brazil.

chart from ADB’s Asian Bonds Online

Vietnam’s equity has been fumbling from her government’s attempt to contain inflation by tightening the monetary environment. So the yield curve has reflected on this concern.

Among the G-7, the US and Germany are the only gainers ranked 12^th and 16^th.