Global Equity Market Performance Update: ASEAN Equity Markets as co-Leaders

ASEAN equity markets are among the world’s best performers.

Below is an updated year to date chart from Bespoke Invest

Indonesia, the Philippines and Thailand has thus far ranked 5th, 7th and 10th respectively, while Malaysia ranked 18th has been down by 4.78%, a notch below another ASEAN member Vietnam (down –4.48%).

Of the 78 nations on the roster, there are only 11 gainers, whereas 22 nations, mostly from the Eurozone, are in a bear market.

Clearly global markets have now been biased to the downside…

…where 6 of the top 20 largest world equity markets have also been treading on bear territory.

The distribution of losses are almost similar to the broader picture, but the gains have not been represented since the latter are from emerging and frontier markets.

To add, the US and Canada appears to outperform the average, even if they are likewise enduring losses.

In my view, outside a real recession, and with major central banks pumping money furiously, the current complexion, characterized by the dreary outlook, will likely improve going to year end.

Learning from the Financial Mistakes of Sports Celebrities

Ron Lieber of the New York Times offers 3 lessons to the financial blunders of sports celebrities (bold highlights mine)

Michael Vick will take the field on Sunday wearing the uniform of the Philadelphia Eagles, who took him in after his imprisonment for helping to run a dogfighting ring.

But thanks to his personal bankruptcy filing after he went to jail, he will also be playing for BMW Financial Services, Dodson Pest Control, Summertime Pool and the Monticello Woods Homeowners Association. They are not sponsors. Instead, they and many others have a claim on his future earnings.

Bankrupt professional athletes are a sad fixture on the sports scene, and Mr. Vick isn’t even alone among quarterbacks who have hit the financially injured reserve list. The former Cleveland Browns star Bernie Kosar and the current New York Jets backup, Mark Brunell, have had their brushes with bankruptcy, too.

Sports stars may or may not mess up more often than the average person who earns a lot of money really fast, but their troubles seem outsize because of their fame and the pathetic schemes they fall for. The stakes are high for football players in particular, since their average professional career lasts just four seasons or so and may leave lingering injuries and the health costs or physical limitations that come with them.

Mr. Vick is the rare athlete who is getting a second chance. His lucrative new contract with the Eagles should allow him to pay all of his creditors in full.

Read the rest here

Mr. Lieber’s lessons can be summed up as: avoiding “questionable schemes” of investments, limiting “outsize financial gestures” or largesse and seeking “professional financial help”

It is true that throwing money to businesses or to financial assets, where insufficiency of knowledge or comprehension to the undertaking dominates, does not represent investments, but gambling.

Also, it takes a lot of introspection to manage the ego. This would be the most difficult part, self-control. As Confucius once said, he who conquers himself is the mightiest warrior.

And lastly, professional help represents an option but not a prerequisite.

That’s because as I have previously stated

financial success depends on a simple equation:

Income – Expense = deficit or surplus

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

It would need or take only common sense and self-discipline to observe this rule.

And common sense says that self-education should account for a vital part of the action to achieve self-discipline or emotional intelligence.

Only after financial goals and limitations have been established, is when the need for professional help arises. That’s because carte blanche delegation of personal finances would signify as high risk proposition, for the simple reason that a fund manager’s incentives may not align with those of the client.

George Carlin on Airport Secuirty : One More Way of Reducing Your Liberty

(hat tip: Lew Rockwell Blog)

Information Age: How Blogs Transforms Attitudes

From a paper written by David McKenzie and Berk Özler of the World Bank

There is a proliferation of economics blogs, with increasing numbers of economists attracting large numbers of readers, yet little is known about the impact of this new medium. Using a variety of experimental and non-experimental techniques, this study quantifies some of their effects.

First, links from blogs cause a striking increase in the number of abstract views and downloads of economics papers.

Second, blogging raises the profile of the blogger (and his or her institution) and boosts their reputation above economists with similar publication records.

Finally, a blog can transform attitudes about some of the topics it covers

(hat tip Mark Perry)

My take:

Blogs offer alternative channels to access to information and knowledge.

Blogs provide unofficial channels of education.

Blogs challenges the vertical flow of information which mainstream institutions have been based upon.

Blogs democratizes self-expression and the conveyance of information and knowledge.

Blogs are where ideas mate and procreate.

Blogs have signified as instruments of free markets in the realm of idea markets.

Phisix-ASEAN Equities: Staying Afloat Amidst Global Financial Market Hurricane

The chart below is an update of the current outperformance of the Philippine Phisix (and of ASEAN bourses) relative to global bourses.

Over the past two years, the Phisix (PSEC) remains on an uptrend while equity indices of developed economy bourses as represented by the US S&P 500 (SPX), the European Stoxx 50 (stox50) and the iShares MSCI All Country Asia ex Japan Index Fund (AAXJ) seems to have broken down.

The European Stoxx50 technically has segued into a bearmarket, down by 24% from the February 2011 peak, while the US S&P (-15%) and the MSCI Asia (-16%) seems at the verge of gradating into one. A bearmarket is defined as a downturn of 20% or more in multiple broad market indexes, according to investopedia.com[1]

Global equity markets have essentially been severely dampened by the reemergent and intensifying debt crisis in the Eurozone as contagion risks escalates.

Chart from Danske Bank

The bond spreads of Greece relative to Germany has widened extensively (left window). Credit Default Swaps have now priced Greece bonds with a 92% probability of a default[2]. CDS prices of European financials have eclipsed the 2008 highs[3] (right window). This means that the financial market stress levels at the Eurozone has been far worse than the Lehman episode in 2008.

Adding to the current woes has been the conventional wisdom that sees heightened recession risks for the US.

So far, the market turbulence overseas has had modest impact on the ASEAN equity markets.

Over the short term or during past two months, the correlation of Phisix and ASEAN indices with that of distressed global equity markets have evinced formative signs of tightening or reconvergence.

As I have been saying, divergences in market performance may persist for as long as a global recession is not in the horizon.

One must remember that decoupling signifies as an unproven thesis that can only be validated during a full-blown crisis. It’s a theory that I have been sceptical of, considering the concurrent interconnectedness and interdependence of global economies.

To prove this point, the degree of globalization or interconnectedness with the world, as measured by the merchandise trade as % to GDP[4], Malaysia and Thailand seems far more exposed to a global recession and or contagion risk compared to the Philippines and Indonesia.

One would note that the ordinal rankings of the year-to-date performances of ASEAN equity markets (as of Friday’s close) have partially reflected on such dynamic, where less globally exposed Indonesia and the Philippines has outclassed Thailand and Malaysia

But this variable alone does not convincingly or entirely explain the conspicuous aberration of the ASEAN’s performance relative to global equities or even among her Asian peers. For instance, India has the lowest merchandise trade compared to the ASEAN majors but her equity market is down 17.7% year-to-date.

Chart from US Global Investors/BCA Research

Of course there are other external links such as remittances and investment (capital account) flows to consider. These, as well as, many domestic variables as savings and investment responses to current fiscal and monetary policies, degree of economic freedom and etc… For instance, government expenditures as a ratio of GDP[5] remain low for the Philippines relative to her developed economy contemporaries and major Emerging Market peers. And where the financial markets have been attuned or fixated to debt levels and government spending, such relatively ‘better’ standings may have also been one of the many factors that has contributed to the asymmetric outcomes in global equity markets.

Although we have yet to see how the Phisix and ASEAN markets will respond to another major bout of developed market equity selloffs—the US Dow Jones Industrials -2.69%, S&P 500 -2.67% and European equity markets Stoxx 50 -4.15%, UK’s FTSE -2.35%—as seen last Friday.

The point is that there will be pockets of divergent market actions considering the nuances in the political responses by global authorities to the present chain of financial market imbroglios. This accentuates the point that today’s market conditions are manifestly dissimilar to that of 2008.

For instance, money supply growth in the US is at double digit rates or 15.6% annualized (three months through July) while the Eurozone is printing money at a significantly much slower pace at 2.1% annualized M2 over the same period[6].

So the present convulsions the Eurozone has been enduring can be traced to the ‘less’ aggressive ‘sheepish’ approach applied by the European Central Bank (ECB), the political divisions over monetary policies (as manifested by the resignation of ‘inflation hawk’ ECB Executive Board Member Juergen Stark[7] which might pave way for the ECB’s more aggressive stance towards inflationism) and capital adequacy regulations[8]

Nonetheless, given today’s vastly distorted marketplace, in times of heightened volatility, market correlations have the tendency to tighten or converge as the US equity markets[9] have been showing[10]. But again I wouldn’t bet on a 2008 scenario.

Resilient Phisix Equals a Sturdy Philippine Peso

One good way to assess general sentiment is to look at how market internals and the Philippine Peso have been playing out in the face of the current mercurial climate.

The resilience in the domestic equities has palpably been reflected on the Philippine Peso (left window) and Asian currencies as represented by the ADXY or the Bloomberg JP Morgan Asian Dollar Index (right window).

Even as there have been signs of mass liquidations abroad, so far, foreign investors have not been in a stampede mode out of Philippine assets.

The weekly ‘averaged’ net foreign trade hardly reveals of signs of heightened distress. This has, so far, worked in favour of the Philippine Stock Exchange. Foreign trades have accounted for a little over 1/3 of the current traded peso based volume.

True, Friday saw big declines in Asian currencies as the US dollar fiercely rebounded over a broad number of major currencies. This US dollar rally may see an extension this Monday (unless there will be declarations for major actions by US and European policymakers over the weekend).

However, the Peso closed relatively little changed on Friday at 42.49 (against the US dollar) compared to Thursday’s close at 42.47. The Peso was only been slightly lower (.8%) from last week at 42.14.

So far, the Peso and the Phisix has managed to brush off major shocks from developed world economies.

Rotational Process Means Market Consolidation

Market sentiment has also been manifesting signs of consolidation, through a rotational process instead of deteriorating market breadth.

Weekly ‘averaged’ Advance-Decline spread has been rangebound since the start of 2011. In seeming defiance of the Phisix which registered a 1.07% loss this week, market breadth appears to be improving from the troughs of the week of August 7^th.

So far, the worst conditions of August had even been far better than the conditions during the Arab Spring-Japan Calamity last February until March.

Also last week’s market consolidation phase seems to bring about my long held prediction that there would be a rotation out of the severely overbought mining sector.

The property and industrial sectors posted slight gains over the week as the financials, mining and services weighed on the Phisix composite.

The variances in sectoral performances corroborate the signals emitted by the market internals as explained above. In short, the decline of the Phisix does not imply for broad market corrosion.

On a year to date basis, while the mining sector remains the dominant leader, the gains of the Phisix has been partly shaped by miniscule gains of the financials and the holdings sectors, whereas the industrials, property and the service sectors have been laggards.

Consolidation and rotation has been principal theme of the current market actions.

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[1] Investopedia.com Bear Market

[2] See Greece’s Welfare State at Death Throes, Germany Prepares to Rescue Banks,

[3] Danske Bank Another week with the focus on Greece Weekly Focus, September 9, 2011

[4] World Bank World Development Indicators Merchandise Trade, Google Public Data Explorer

[5] Holmes, Frank Investor Alert - China Fears Much Ado About Nothing US Global Investors, September 9, 2011

[6] Wenzel Robert, The Just Released G7 Communique versus Reality Economic Policy Journal, September 9, 2011

[7] Reuters.com Top German quits ECB over bond-buying row, September 9, 2011

[8] See Why Capital Standard Regulations Will Fail, August 22, 2011

[9] See Applying Emotional Intelligence to the Boom Bust Cycle, August 21, 2011

[10] See More Evidence of Boom Bust Cycles Driving Equity Market Prices, September 10, 2011

Philippine Mining Sector’s Pause Signifies Buying Opportunity

Even if the mining sector could be in a consolidation phase over the coming week/s, this would likely be temporary event.

A Resurgent Boom in Global Gold Mining Stocks?

With gold prices drifting just a few percentages below the newly established record levels at over $1,900, gold mining stocks in the US, Canada and South Africa seem headed for a breakaway run following what seems like a serial or concerted breakout attempts from about one year period of consolidation.

This can be seen in the charts of US major mining indices, such as the CBOE Gold Index (GOX), the Gold Bugs Index – AMEX (HUI), the Gold & Silver Index - Philadelphia (XAU) and the DJUSPM Dow Jones Gold Mining Index, where except for the XAU which is at the resistance levels, the rest are in a resistance breakout mode.

While price actions of the local mining index has had little correlations with international mining indices, one cannot discount the possibility that a continuity of the recent price advances or of the breakaway run of global mining issues may also filter into local issues.

And considering that local participants have increasingly been more receptive to the mining industry, then share prices of the composite members may just get a second wind going into the yearend.

And part of the mainstream story has been the recent $14 billion political economic concessions[1] “investments” ‘within the next 5 years’[2] signed in China by President Aquino during his latest State visit.

The local mining industry has easily become a political tool for gaining approval ratings.

Mounting Inflationism is a Plus For Gold

The unravelling European debt crisis and the conventional wisdom of heightened recession risks appear to be provoking more aggressive policy responses from a previously ‘dithering’ officialdom.

Central banks as the Swiss National Bank have aggressively been inflating the system[3] allegedly to curb the rise of the franc (which in reality has been part of the scheme to save European banks). South Korea has also reportedly been into the game too[4] but at a modest scale.

Yet as the crisis deepens, political pressure will bear down on political authorities who have represented the inflation hawks camp or dissidents of QEs or asset purchases by central banks such as ECB’s Juergen Stark who recently resigned out of policy schism.

US Federal Reserve chair Ben Bernanke has once again signalled that further ‘credit easing’ (a.k.a. inflationism) is on the table, aside from proposing to modify the mix of the Fed’s existing balance sheet via the ‘Operation Twist’ or the lowering of long term interest rates in order to induce the public to take upon more risk[5]. The Fed’s trial balloon or public communications management or conditioning tool comes in conjunction with President Obama’s $447 jobs program, apparently meant to shore up the latter’s sagging chances for re-election.

In other words, political “do something” about the current economic problems is being impressed upon to the public for their acceptance or for justifications for more political interventions from both the fiscal and monetary dimensions.

And it wouldn’t signify a farfetched idea that a grand coordinated QE project or credit easing measures by major central banks something similar to the Plaza Accord as predicted by Morgan Stanley’s analysts could be in the works too[6]. The Plaza Accord was a joint intervention in the currency markets by major economies to depreciate the US dollar in 1985[7]. This time, perhaps, the biggest economies will all act in concert to devalue their currencies impliedly against commodities.

Thus, any of the realization of these ‘arranged or independent’ acts to reflate the system to stem the current wave of liquidations of malinvestments meant to preserve the troika political system of the welfare-warfare state, the central banking and banking cartel and to further attain a permanent state of quasi-booms would be exceedingly bullish for gold.

The current stream of inflationism would be added on top of the existing ones which only would expand the fragility of the incumbent but rapidly degenerate monetary system.

Finally I would like to add that while many see mines as ‘investment’, my long held view is that in absence of a local spot and futures market for commodities, local mining issues would represent as proxy to direct gold ownership or as insurance against mounting policies aimed at destroying the purchasing power of the legal tender based paper money system for Philippine residents.

As gold has been shaping up to be the main safe haven or as store of value, so will gold’s function be represented here. This is where the divergences will likely hold—the gold mining sector.

At this very crucial time, I would seek haven in gold and precious metals.

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[1] See P-Noy’s Entourage is a Showcase of the Philippine Political Economy August 31, 2011

[2] Inquirer.net $14-B investments in mining eyed from China within the next 5 years, September 7, 2011

[3] See Hot: Swiss National Bank to Embrace Zimbabwe’s Gideon Gono model September 6, 2011

[4] See South Korea Joins the Currency Devaluation Derby, September 8, 2011

[5] See US Mulls ‘official’ QE 3.0, Operation Twist AND Fiscal Stimulus, September 9, 2011

[6] See Will the Global Central Banks Coordinate a Global Devaluation or Plaza Accord 2.0? September 9, 2011

[7] Wikipedia.org Plaza Accord

Landslide Win by Ron Paul on the GOP NBC Debate Poll

From prolific libertarian author Robert Ringer

According to a poll conducted by NBC News Political Unit Poll, the guy whom Bill O’Reilly referred to prior to Wednesday’s Republican debate as “a loon” and Dick Morris dismissed as the only candidate who had no chance of winning, 174,354 Americans not only believed Ron Paul won the debate at the Reagan Library, but did so in a landslide.

As of 4:00 pm Thursday, 54 percent (94,096 votes) voted for Ron Paul, with Mitt Romney a distant second at 15.8 percent (27,523 votes). Rick Perry, the supposed front runner, was at 13.2 percent (23,065 votes), Jon Huntsman at 6.5 percent (11,411 votes), and the rest of the field below 5 percent.

This is downright embarrassing to the Republican Party, whose establishment wishes Paul would just go away and rejoin the Libertarian Party. Left-wing moderators Brian Williams (NBC) and John Harris (Politico) did their best to diminish Paul in two ways. First, they asked him very few questions, and, second, the questions they did ask him were aimed at painting him as an extremist.

If the media cover-up regarding Paul’s popularity continues, establishment Republicans may just get their wish — at least partially. I don’t think Paul would run on the Libertarian Party ticket, but he might just form a third-party, which would probably end any hopes the Republicans have for taking back the White House.

Despite media bias against Presidential aspirant Ron Paul, the poll reveals that the trend following on classical liberalism, which Mr. Paul champions, seems to be snowballing.

Here is The Daily Show host Jon Stewart's hilarious take on the latest GOP debate

The Daily Show
Get More: Daily Show Full Episodes,Political Humor & Satire Blog,The Daily Show on Facebook

More Evidence of Boom Bust Cycles Driving Equity Market Prices

I have repeatedly been saying that inflationism or the boom bust cycle or my Machlup-Livermore paradigm, have signified as the key force in determining equity prices around the world (Philippines included).

The Financial Times observes of the same pattern taking hold in the US stock markets, (bold highlights mine)

The correlation between the movement of big US stocks is at the highest level since Black Monday in 1987, with price moves increasingly driven by the ebb and flow of investors’ fears over the economic environment.

Stocks, in theory, should move in individual directions based on company fundamentals. But markets of late have been characterised by mass selling alternating with waves of buying, as investors upgrade or downgrade the risk of the US slipping into recession, or a financial crisis sparked by a European sovereign default.

The correlation between the biggest 250 stocks in the S&P 500 over the past month has reached its highest since 1987 this week, at 81 per cent, according to JPMorgan figures.

This means those stocks move in the same direction 81 per cent of the time. The historical average is 30 per cent. The measure peaked at 88 per cent during the October 1987 US crash, when the Dow Jones Industrial Average fell 22 per cent in one session.

Other spikes in correlation, including the collapse of Lehman and the Japanese earthquake, peaked at about 70 per cent but quickly fell away.

The unusually high level of correlation this month has raised speculation that markets could repeat the aftermath in 1987, when relationships between stocks did not return to their historical norm until several months later, in March 1988.

With intensifying government intrusions in the marketplace everywhere, one should expect the financial markets to behave in tidal flows or in undulating motions with high or tight correlations, especially during steeply volatile days.

Yet such insights have not been covered within the ambit of conventional analysis, which is why most will find today’s environment bewildering.

Thinking out of the box is required to navigate today’s increasingly distorted marketplace.

Greece’s Welfare State at Death Throes, Germany Prepares to Rescue Banks

The global financial markets have been pricing the imminence of a Greece default as the Eurozone appears lost over trying to contain the contagion.

The Greece government is having a difficult time selling to her populace the EU imposed ‘austerity’ package required for continued bailouts.

From Bloomberg, (bold emphasis mine)

Prime Minister George Papandreou will seek today to counter mounting domestic opposition to budget cuts and growing doubts that Greece can avoid default as a three-year recession worsens.

With the country’s bond yields at records and European officials increasing pressure on the premier for more cuts before they dole out a sixth tranche of bailout loans, Papandreou will deliver a nationally televised address on the economy from the northern city of Thessaloniki at 8 p.m.

A total of 4,500 police officers are being deployed in the city to keep order as unions rally, students march against education reforms, and taxi drivers across Greece strike to oppose new licensing rules. Finance Minister Evangelos Venizelos said on Sept. 6 the government will accelerate austerity measures pledged in return for emergency loans…

Fears have deepened since a scheduled quarterly review of Greece’s progress by the European Union and the International Monetary Fund was unexpectedly suspended for 10 days last week. Greek sovereign debt jumped 212 basis points yesterday to a record 3,238, according to CMA. The five-year contracts signal there’s a 92 percent probability the country won’t meet its debt commitments.

Venizelos expects the economy to shrink by about 5 percent this year, worse than the June estimate of 3.8 percent from the EU and IMF, and a deeper contraction than in the past two years. The forecast damps hopes that Greece will lower its deficit to 7.5 percent of gross domestic product in 2011, with the government blaming the slump for a budget deficit that widened 25 percent in the first seven months of the year.

Greece is aiming at an additional 6.4 billion euros ($9 billion) in savings through the end of the year to meet the 2011 deficit target, part of a 78 billion-euro package of state-asset sales and budget measures that threatened to topple Papandreou in June.

Venizelos this week pledged to immediately transfer state assets to a fund for sale and place civil servants in a “reserve” system to retrain them and cut expenses, as well as merge and shut down dozens of agencies.

As I have been saying, the concurrent bailout packages have been a sham. This has not been about restraining the welfare state but about rescuing the banking system.

What has been happening instead is the political process where massive amount of resources are being transferred from the welfare state to the banking sector.

Global political leaders are hopeful that by rescuing the politically privileged interconnected banks, they can bring 'normalcy' back to the 20th century designed politically entwined institutions of the welfare state-banking system-central banking system.

And since the makeshift measures applied by the EU have been less aggressive than that of the US, which have been exacerbated by fierce regional and local political impediments, as the above, economic reality has been swiftly catching up with politics. The latter has made many to mistakenly generalize that a political or fiscal union is the solution,it is not.

And in realization of the looming default, Germany prepares to support her national banks.

Again from another Bloomberg article,

Chancellor Angela Merkel’s government is preparing plans to shore up German banks in the event that Greece fails to meet the terms of its aid package and defaults, three coalition officials said.

The emergency plan involves measures to help banks and insurers that face a possible 50 percent loss on their Greek bonds if the next tranche of Greece’s bailout is withheld, said the people, who spoke on condition of anonymity because the deliberations are being held in private. The successor to the German government’s bank-rescue fund introduced in 2008 might be enrolled to help recapitalize the banks, one of the people said.

The existence of a “Plan B” underscores German concerns that Greece’s failure to stick to budget-cutting targets threatens European efforts to tame the debt crisis rattling the euro. German lawmakers stepped up their criticism of Greece this week, threatening to withhold aid unless it meets the terms of its austerity package, after an international mission to Athens suspended its report on the country’s progress.

Greece is “on a knife’s edge,” German Finance Minister Wolfgang Schaeuble told lawmakers at a closed-door meeting in Berlin on Sept. 7, a report in parliament’s bulletin showed yesterday. If the government can’t meet the aid terms, “it’s up to Greece to figure out how to get financing without the euro zone’s help,” he later said in a speech to parliament.

A Greece default would likely lead the ECB and the US Federal Reserve to make massive transfusions of digital ‘bailout’ money to ECB and US banks.

Also Greece could be ‘convinced’ to leave the Euro.

This should be very bullish for gold.

Yet, realize that the temporary ‘Band aid’ patches being applied by political authorities won’t survive an unsustainable system based on a political economy of zero sum redistributions.

The welfare state-banking sector-central banking architecture operating on a fiat money platform is bound for collapse.

Greece seems as paving the way.

War on Terror: More Terrorism Deaths Since 9-11

Since 9/11, the US government led war on terror has brought upon more fatalities and not less. This in spite of all the legal and bureaucratic inconveniences imposed on travel, finance and etc.

From the Economist, (bold emphasis mine)

THE attacks of September 11th 2001 killed 2,996 people. Despite the subsequent declaration of a war on terror, over the past ten years thousands more have been killed by terrorists of all hues. The chart below tracks the number of terrorist-related fatalities worldwide. The data is from the National Consortium for the Study of Terrorism and Responses to Terrorism, which defines terrorism as “the use of illegal force and violence by a non-state actor to attain a political, economic, religious, or social goal”.

This is just another brazen example of government failure

Congressman and US Presidential aspirant Ron Paul is right, we should stop terrorism through empathy and free trade. (bold highlights mine)

Sadly, one thing that has entirely escaped modern American foreign policy is empathy. Without much humility or regard for human life, our foreign policy has been reduced to alternately bribing and bombing other nations, all with the stated goal of "promoting democracy." But if a country democratically elects a leader who is not sufficiently pro-American, our government will refuse to recognize them, will impose sanctions on them, and will possibly even support covert efforts to remove them. Democracy is obviously not what we are interested in. It is more likely that our government is interested in imposing its will on other governments. This policy of endless intervention in the affairs of others is very damaging to American liberty and security.

If we were really interested in democracy, peace, prosperity, and safety, we would pursue more free trade with other countries. Free and abundant trade is much more conducive to peace because it is generally bad business to kill your customers. When one’s livelihood is on the line, and the business agreements are mutually beneficial, it is in everyone’s best interests to maintain cooperative and friendly relations and not kill each other. But instead, to force other countries to bend to our will, we impose trade barriers and sanctions. If our government really wanted to promote freedom, Americans would be free to travel and trade with whoever they wished. And if we would simply look at our own policies around the world through the eyes of others, we would understand how these actions make us more targeted and therefore less safe from terrorism. The only answer is get back to free trade with all and entangling alliances with none. It is our bombs and sanctions and condescending aid packages that isolate us.

US Mulls ‘official’ QE 3.0, Operation Twist AND Fiscal Stimulus

Again, it’s almost too predictable that the path dependency of political authorities have been to resort to more central bank activism and to apply additional government spending on emergent signs of economic weakness.

In the US, the QE 2.0 has still been in motion despite the official program for its closure last June.

Yet, over the interim there have been modified actions which can be extrapolated to stealth QE 3.0: such as extended zero bound rates until 2013 and the reinvesting of principal payments (whose mix of asset purchases would be altered partly to induce mortgage refinancing).

This news account gives light to the potential course of action by Team Ben Bernanke after his speech last night, from Bloomberg, (bold highlights mine)

Federal Reserve Chairman Ben S. Bernanke said policy makers will discuss the tools they could use to boost the recovery at their next meeting this month and stand ready to use them if necessary.

Policy makers “are prepared to employ these tools as appropriate to promote a stronger economic recovery in the context of price stability,” Bernanke said today in Minneapolis, echoing points from his Aug. 26 remarks in Jackson Hole, Wyoming.

The Fed chief, in a speech to economists, stopped short of signaling what he believes is the central bank’s best option to aid the economy. He said in previous remarks that the Fed’s measures to bolster growth include lengthening the duration of securities in its $1.65 trillion Treasury portfolio and buying more government bonds.

Media calls this portfolio rebalancing towards the lengthening of the duration of securities held as ‘Operation Twist’ which apparently aims to lower long term interest rates in order to induce the marketplace to get exposed into more risk assets. This has been part of Bernanke’s dogma of the wonkish Financial Accelerator where

changes in interest rates engineered by the central bank affect the values of the assets and the cash flows of potential borrowers and thus their creditworthiness, which in turn affects the external finance premium that borrowers face

The constant alterations of monetary policy reveal of how the previous QEs has failed. And such experiment/s will likely be put in place ahead of another official QE. The next FOMC meeting will be on the third week of September.

Of course, Ben Bernanke sees inflation as having little risk for him to have the mettle to toy around with such experimental measures.

From Marketwatch.com

see little indication that the higher rate of inflation experienced so far this year has become ingrained in the economy

The perceived low risk inflation regime has partly been because of the way the bond markets have been structured which many ideologically biased experts use as measure for inflation, and also of the constant manipulations of the commodity markets as part of their signaling channel to manage ‘inflation expectations’. Even gold markets have been subjected to price suppression scheme according to the Wikileaks

And the barrage of QE in the headlines of late, which I read has been part of this communications management tool being employed to condition the public for the next official QE.

Of course, the last act won’t come from the Bernanke’s Federal Reserve, as President Obama has offered to join in by introducing more government spending coupled with temporary tax cuts to please the opposition (Republicans).

This from the Bloomberg,

President Barack Obama called on Congress to pass a jobs plan that would inject $447 billion into the economy through infrastructure spending, subsidies to local governments to stem teacher layoffs, and cutting in half the payroll taxes paid by workers and small-business owners.

The package is heavily geared toward tax cuts, which account for more than half the dollar value of the stimulus, and administration officials said they believe that will have the greatest appeal to Republican members of Congress.

“The question is whether, in the face of an ongoing national crisis, we can stop the political circus and actually do something to help the economy,” Obama told a joint session of Congress tonight, according to a text of the address released by the White House.

A $105 billion infrastructure proposal includes money for school modernization, transportation projects and rehabilitation of vacant properties. Most of the economic impact from the infrastructure spending would be next year though some of it would come in 2013, an administration official said.

“Ultimately, our recovery will be driven not by Washington, but by our businesses and workers,” the president said. “But we can help. We can make a difference.”

The administration estimated that $35 billion it’s seeking in direct aid to state and local governments to stem layoffs of educators and emergency personnel would save the jobs of 280,000 teachers, according to a White House fact sheet.

It has never been the question whether past policies worked. It’s just doing the same thing over and over with practically the same results which represents as plain insanity and the misplaced belief on miracles from centrally planned actions.

Economic reality will eventually unmask the charade of shifting resources from productive activities to non-productive activities that will not only lead to capital consumption but also lead to cronyism, corruption, regime uncertainty, economic and financial fragility and political instability. Obviously Obama's is desperately trying to shore up his re-election odds, whose popularity rating has fallen to new lows.

Nonetheless we will be seeing expanded stimulus from all fronts in the US and the world which means a vastly distorted financial markets. More stimulus on top of the existing ones which means increasing systemic risks from artificial boosters or substance dependency.

This also means traditional metrics in the assessment of the financial marketplace will hardly be effective.

Will the Global Central Banks Coordinate a Global Devaluation or Plaza Accord 2.0?

Policymakers easily change tunes especially when faced with fickle political exigencies

ECB’s President Jean-Claude Trichet, once a reluctant inflationist, will join the US in resorting to ‘open arms’ inflationism.

From the Bloomberg, (bold emphasis mine)

European Central Bank President Jean-Claude Trichet said threats to the euro region have worsened and inflation risks have eased, giving officials the option to take further action should the debt crisis worsen.

The economy faces “particularly high uncertainty and intensified downside risks,” Trichet said at a press conference in Frankfurt today after the ECB left its benchmark rate at 1.5 percent. While monetary policy is still “accommodative,” financing conditions have worsened in parts of the 17-member euro region and the ECB stands ready to pump more cash into markets if needed, he said.

The Bank of England recently refrained from extending credit easing (QE) programs, this could be temporary.

From another article from Bloomberg, (bold emphasis mine)

Bank of England officials resisted calls to extend economic stimulus as they attempt to navigate a path between accelerating inflation and a faltering recovery.

The nine-member Monetary Policy Committee, led by Mervyn King, maintained the target of its bond program at 200 billion pounds ($320 billion), as forecast by all but one of 41 economists in a Bloomberg News survey. It also held the benchmark interest rate at a record-low 0.5 percent today, as predicted by all 57 economists in a separate poll. The pound rose against the dollar after the announcement.

Central banks are refocusing on bolstering growth, with the Bank of Canada saying yesterday there is a “diminished” need for it to raise rates and Sweden’s Riksbank abandoning a planned tightening. While two U.K. policy makers who were calling for rate increases dropped that position last month, the Bank of England may be reluctant to do more so-called quantitative easing with inflation more than double its target.

Again my view is that central bankers appear to be looking for justifications to employ the increasingly unpopular QE programs.

However as shown above, some of the hardliner’s stance can easily give way when confronted by the prospects of a reemergent crisis.

For political authorities, an adapted political stance have mostly been symbolical. For the public hardwired to expect actions from these authorities, it would be politically difficult or unpopular not give in, as crisis can instantaneously change popular perception. Put differently, an aura of desperation can shift what seems unpopular today to become popular tomorrow, and thus political actions can be as capricious as political sentiment.

Yet given the predilection towards QE policies, analysts at Morgan Stanley speculate that a Plaza Accord 2.0 will likely be the course of action for global central bankers.

From Barrons, (bold emphasis mine)

Is a Plaza Accord 2.0 ahead? Some 26 years ago this month, the major industrialized nations hatched a plan to lower the dollar and unleash a wave of liquidity that raised global equity markets in the mid-1980s. Could it happen again?

Yes, say Joachim Fels, Manor Pradhan and Spyros Andreopolous, who head Morgan Stanley's global economics. In a report released Wednesday, they write that monetary authorities of the developed economies -- the Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England -- could react to "weak growth and soggy asset markets" with coordinated easing.

In addition, they note that surprise easing moves by leading emerging-market economies, Brazil and Turkey, would complement the process. And while the Morgan Stanley team doesn't mention it explicitly, the Swiss National Bank's decision to peg the Swiss franc to the euro also would be consistent with an internationally coordinated easing move.

In my view, competitive devaluation has not only been happening, but has been intensifying. Although coordination may only be part of the story, perhaps applied to Western and developed economy central banks. Nevertheless the path towards policy harmonization could be in the works as proposed.

Yet I’m not sure about the effects of a global concerted and coordinated devaluation.

Although one thing seems certain: This policy addiction or obsession to debauch or destroy the currency serves as THE reason to own gold.

South Korea Joins the Currency Devaluation Derby

Competitive devaluation has been the central bankers’ conventional response to emergent financial and economic problems. It seems part of their operating manual. And Asian central bankers have been engaging in the same inflationism as with their crisis affected Western counterparts.

From the Wall Street Journal, (bold emphasis mine)

Is anyone really surprised inflation in South Korea has hit a three-year high? They shouldn't be. Seoul is, like so many other East Asian governments, in large part a victim of economic policies hatched in Washington. Yet Korean policy makers seem to be doing everything they can to make their monetary problems worse.

The government was quick to blame last week's price-rise data—up 5.3% for August compared to the same month last year—on that old inflationary whipping boy, the weather. Summer flooding supposedly depressed agriculture supplies and pushed food prices higher. Perhaps that even explains part of it.

But alarm bells also should be ringing over energy prices. The consumer inflation data included increases of between 2% and 10% on various oil and gas products as the government scales back increasingly unaffordable subsidies. No Korean oil fields were flooded since there aren't any Korean oil fields to flood. Clearly something bigger than Mother Nature is afoot.

Such as monetary policy, both in the U.S. and in Korea. Korea has been hit by the same dollar tidal wave the Federal Reserve has unleashed on the rest of the world. These inflows have caused inflation spikes all over, with consumer price rises of nearly 4.5% in Thailand, more than 3% in Malaysia, above 5% in Singapore and so forth in recent months. A weak-dollar policy out of Washington inevitably strains everyone else in what still is the Asian dollar bloc.

Korea, however, has managed to make matters worse by attempting a form of competitive devaluation of the won on the sly. Dollar inflows have also sparked currency appreciations in most corners of Asia, with the yen (up 17.5% vis-à-vis the dollar since January 2010), Singapore dollar (14%) and Thai baht (10%) leading the pack.

But in Seoul, the central bank has refrained from raising interest rates that are still negative after accounting for inflation, despite unsustainably robust growth and mounting evidence of rising prices. Data on foreign-exchange reserve accumulation over the past two years also suggest the government may be quietly buying dollars and selling won, although the government denies this.

Political authorities, adapting the mercantilist view, have been averse to see their currencies appreciate, so their common response has been to resort to the beggar thy neighbor approach of inflating the system.

The five year chart of the South Korean won (from yahoo). The won has not recovered from the 2008 collapse relative to the US dollar.

The race to destroy currencies has been the principal reason why gold prices will continue to blossom.

The Negative Impact of the New Chinese Property Law

Here is an example of how discriminatory laws can adversely affect people’s relationship.

This from the New York Times, (bold emphasis mine)

Millions of Chinese women, and some men, woke on Aug. 13 to discover their spouse had, in effect, become their landlord.

On that day, the Supreme Court’s new interpretation of the 1980 Marriage Law came into force, stipulating that property bought before marriage, either outright or on mortgage, reverted to the buyer on divorce. Previously, the family home had been considered joint property. Experts agree the change would mostly affect women, since men traditionally provide the family home.

The result has been uproar — and, in the cities, a rush to add the wife’s name to title deeds.

Some husbands have agreed to this, but others have balked, and Chinese news outlets have already reported on marriage breakdowns caused by a husband’s refusal to add his wife’s name.

How this law came about?

The government says that in an era of soaring property prices — up about 500 percent since 2000, according to the National Bureau of Statistics — the law must protect a family’s investment. Parents and other relatives often contribute money to buy an apartment for their son, in order to help him attract a wife.

The law does not specify gender, so a woman who bought an apartment would also get it back at divorce. Yet social scientists say far fewer women buy family homes.

The interpretation is intended to address an immediate problem, and not build a perfect, logical system, a senior Supreme Court official, Du Wanhua, told legal experts last year, Southern Weekend reported in a recent article, “The Behind-the-Scenes Struggle of the New Marriage Law.”

But marriage law specialists said court officials ignored their opinions, listening instead to property law specialists.

The above is a lucid example of the untoward unintended consequences of the political actions by an elite group of people who believed that they knew what was best for their constituents. This represents what the great F. A. Hayek calls as the ‘pretence of knowledge’ or ‘fatal conceit’.

Yet the government will not be held accountable for the negative externality or the costs of such laws.

In addition, as admitted by the officials the new law has been meant to “address an immediate problem” which is what politics has mostly been about—short term at the expense of the long term.