Definitely Not a Reprise of 2008, Phisix-ASEAN Equities Still in Consolidation

Note: I am in a hurry so this week's outlook will be abbreviated.

This year’s top-notch performers among global stock markets[1] (based on year-to-date) accounted for biggest losers in the region this week: I am referring to ASEAN equities.

Correction and NOT a Reversal

ASEAN markets had recently been defying ‘gravity’ but as I noted last week[2] there seems to be signs of tightening correlations.

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.

So the previous downside volatility of the global financial markets appears to have been carried over during this week, which had adversely affected ASEAN markets.

Yet reports of China-led BRIC (Brazil, Russia and India) proposed rescue[3] of the Eurozone by buying of Euro bonds, and most importantly, the joint or coordinated liquidity infusions by major central banks[4] as the U.S. Federal Reserve, the Bank of England, Bank of Japan, and the Swiss National Bank through foreign currency swap lines or exchanging of an agreed amount of currencies (see the basics here[5]), underpinned a fierce rally in major global equity markets.

We seem to be witnessing another variety of quantitative easing (QE) or money printing measures at work.

Perhaps one unstated objective for the synchronized liquidity injections has been to finance $800 billion derivatives[6], where 40% of which has been accounted for by “equity” options, whose expiration on during last week would have reportedly triggered tremendous pressure on the marketplace. Also such interventions could have been meant to forcibly cover equity ‘shorts’ via the derivatives market which signifies another war against the markets and alternatively represents as policies aimed to bolster equity markets.

As I have repeatedly been pointing out, what I call as the Bernanke’s doctrine[7] has been about inducing a stock market boom that would serve as a wealth effect transmission to the economy.

Furthermore, the violent pendulum gyrations seen in the market breadth[8] of US markets resonates how today’s financial markets have behaving—boom bust cycles.

Essentially, emanating from the embers of the 2008 meltdown, global equity markets have increasingly been steroid dependent which means MORE boom bust cycles ahead.

Again as I projected last week

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).

The unfolding crisis in the Eurozone has been prompting for short term funding predicaments that has led to liquidations across financial markets worldwide, including Asia.

This has been reflected on Asian currencies as well as the Peso.

This terse quote from a Bloomberg article summarizes the week’s action in Asia’s currency markets[9]

Losses for the won, rupee, ringgit and Taiwan dollar were the worst since mid-2010.

As with most of Asia, the Philippine Peso lost a hefty 1.91% over the week.

This Is NOT 2008, Redux

I would disagree to imputations that current environment is about rising risk aversion. Such description would likely apply to financial markets of crisis afflicted economies but not to Asia markets.

Proof?

The Euro debt crisis and fears of another recession has indeed been increasing overall market anxieties around, but for Asia such concern has been muted, relative to 2008.

The above graph of Credit Default Swap prices representing debt default risks of Asian sovereigns from ADB[10] shows that credit concerns in the region subdued.

In addition, net foreign trade in the Philippine Stock Exchange has been inconsequential despite emergent signs of selling pressures so far.

It could be that local investors may seem to have been more ‘traumatized’ (Post Stress Traumatic Disorder) by the last crisis to stampede into US dollars, relative to foreigners.

Moreover, while emerging markets in general have endured equity outflows from the recent volatility, this has partly been offset by inflows to the bond markets[11].

And there is even more evidence that risk environment has been conspicuously nuanced compared to 2008—the continuing lofty levels of prices of gold and other precious metals and even of oil.

Notice that the recent downside actions of the S&P 500 (SPX) has been accompanied by downswings of gold, precious metals (DJGSP) and oil (WTIC), yet the former two has basically risen above the levels from where the declines were triggered.

Furthermore, oil at $87 hardly accounts for a ‘recessionary’ environment.

And there have been some insinuations that bullion banks have been significantly hurt by the recent upsurge in gold prices, such that manipulation of the gold-precious metal markets downwards has been undertaken to ease on the losses of these banks under the camouflage of central bank actions.

As Goldmoney.com Alasdair Macleod writes[12],

In common with dealers and market makers in all markets, bullion traders run short positions in bull markets. The turnover on the bullion markets is massive, and a dealer active on behalf of its customers and its own trading book can make substantial dealing profits. So long as those profits exceed the losses on their short positions, all is well. This is why the greatest threat to the bullion market is not the bull market itself, but prices rising too rapidly.

In the last two months, the market for gold has been particularly strong, erasing trading profits for many bullion dealers. Central bankers see this as the result of financial flows building due to the difficulties in the euro area. The targets for these flows out of the euro are the Swiss franc and gold, so the SNB’s move is designed to take the heat out of both of them.

The whopping $2 billion trading losses racked up by Swiss bank UBS[13] from supposedly unauthorized trade by a ‘rogue’ trader, Kweku Adoboli, has allegedly been due to voluminous exposure in “shorting” silver[14].

All machinations to manipulate the metals market will prove to be a temporary event. We should see metals rally significantly in the light of intensifying interventions (via assorted money printing measures) in the marketplace.

With the team Ben Bernanke meeting this week (September 21^st) for an extended 2 days[15], we should expect Operation Twist, a pioneering measure telegraphed by Mr. Bernanke in his last speech[16], which aims to lower interest rates on the longer duration securities, to be formally in operation.

This could be backed by another formal QE 3.0 or by a significant interest rate cut on excess reserves (IOER) meant to disincentivize banks from parking their excess reserves at the Fed.

And considering that much of the developed world has been already been immersed into various forms of QE, we should expect improvements in global equity markets that should filter over to ASEAN markets.

Again, to repeat, this has NOT been 2008. There are hardly signs of deflationary risks that warrant an increase of cash holdings. In the US, money supply has been rampaging along with improving signs of credit conditions[17]. Elsewhere, we should expect policy directions towards an accommodative stance by keeping current levels of interest rates or perhaps even by lowering policy rates.

Central bank activism essentially differentiates today’s environment from that of 2008.

PSE Still in Consolidation Mode

The local market has indeed been under pressure, but again there have hardly been signs of major deterioration.

True, every sector has been marked by declines this week with the ALL sector suffering the largest loss due to Manulife (-6.02%).

Mining, being overextended, suffered most from last week’s profit taking. Again I view this as a fleeting event.

The Phisix has been rangebound. However, trading indicators seem to suggest of partially oversold conditions (MACD). This implies that a rebound could be in the offing.

And peso volume has been dropping as the Phsix consolidates. This serves as indication of the diminishing strength of sellers.

Market internals, despite last week’s significant profit taking, has not materially deteriorated.

If US markets will continue to rebound, then we should see the current consolidation trend in the Phisix to segue into an ascending trend.

I would certainly watch the US Federal Reserve’s announcement and the ensuing market response.

If team Bernake will commence on a third series of QE (dependent on the size) or a cut in the interest rate on excess reserves (IOER), I would be aggressively bullish with the equity markets, not because of conventional fundamentals, but because massive doses of money injections will have to flow somewhere. Equity markets—particulary in Asia and the commodity markets will likely be major beneficiaries.

As a caveat, with markets being sustained by policy steroids, expect sharp volatilities in both directions.

---

[1] See Global Equity Market Performance Update: ASEAN Equity Markets as co-Leaders, September 13, 2011

[2] See Phisix-ASEAN Equities: Staying Afloat Amidst Global Financial Market Hurricane, September 11, 2011

[3] See BRICs Mulls Bailout of the Eurozone September 14, 2011

[4] See Hot: Major Central Banks to Jointly Offer US Dollar Liquidity, September 15, 2011

[5] See How Does Swap Lines Work? Possible Implications to Asia and Emerging Markets, October 30, 2008

[6] Naked trader.com Almost 40% of S&P 500 Options Expire Sept. 16, JPMorgan Says

[7] See US Stock Markets and Animal Spirits Targeted Policies, July 21 2010

[8] See US Equity Markets: Signs of Intensifying Boom Bust Cycles, September 17, 2011

[9] Bloomberg.com Asian Currencies Fell in Week on Concern Europe’s Debt Crisis Will Worsen, September 17, 2011

[10] Asianbondsonline.org Emerging East Asia CDS - Senior 5-year

[11] Wall Street Journal Emerging Market Local Currency Bonds Funds Continue To Draw Money, September 16, 2011

[12] Macleod Alasdair Central banks and the gold price goldmoney.com September 11, 2011

[13] Washington Post, UBS says rogue trader caused $2 billion loss, September 15, 2011

[14] Keiser Max BREAKING: UBS rogue trader was trying to exit a naked silver short…. [UPDATED], maxkeiser.com September 15, 2011

[15] IBTimesFX The Week Ahead September 16, 2011

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

[17] See US in a Deflationary Environment, NOT! (In Charts) September 16, 2011

Quote of the Day: Law Differs from Legislation

Today’s quote of the day comes from Professor Don Boudreaux

law is not at all the same thing as legislation. Law deserves far more respect (although, still, not respect given mindlessly) than does legislation; indeed, legislation, by its very nature, is frequently used to break the law. For example, Jim Crow legislation in the late 19th-century American south broke the law that effectively enforced racial desegregation on streetcars.

One of the greatest dangers unleashed by modern language is the treatment of “legislation” and “law” as synonyms for each other – and, hence, the bestowal on legislation of the genuine respect that is due to law.

Gold as Money: China’s Gold ATMs and Donald Trump’s Gold Security Deposit

We are witnessing more signs of gold’s reassuming its place as money.

From Forbes, (bold emphasis mine)

China’s got the gold bug. Recently, the government allowed citizens to actually own gold bullion. And now, starting on Sept 23, Chinese people can buy gold bars directly from vending machines.

Gold has caught on like a wrong and oversold political narrative. Is this WMD, or is gold for real?

The China machines, made by German firm TG Gold Super Market, is the first of its kind there, but are already up and running in Las Vegas and Boca Rotan in the U.S., as well as Abu Dhabi, Germany, Spain and Italy. The ATMs dispense gold bars weighing up to 2.5 kilograms and work just like the normal ATMs. The machines can accept both cash and credit cards.

The cash-for-gold machines will be on trial at Beijing’s upscale night clubs and private banks during the initial period for security reasons.

I posted Germany’s first gold vending machine or ATMs in 2009 here.

With gold more accessible to the public, it won’t be long when the function of payment and settlement in the marketplace will include gold bars or coins. (That’s if governments won’t engage in gold confiscation)

In fact, Donald Trump may be setting a precedent on this.

Mr Trump recently accepted gold bars as payment for Security Deposit for property rentals.

From the Wall Street Journal,

On Thursday, the newest tenant in Donald Trump's 40 Wall Street, a 70-story skyscraper in Manhattan's Financial District, will hand Mr. Trump a security deposit worth about $176,000. No money will change hands—just three 32-ounce bars of gold, each about the size of a television remote control.

The occasion will mark the first time the Trump Organization has accepted 99.9% pure gold bullion, rather than cash, as a deposit on a commercial lease. The tenant, precious-metals dealer Apmex, will sign a 10-year lease for 40 Wall's 50th floor at a leasing rate of about $50 a square foot, according to Apmex Chief Executive Michael R. Haynes. The company is promoting the use of gold as a replacement for cash in some situations.

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

Under the gold standard gold is money and money is gold. It is immaterial whether or not the laws assign legal tender quality only to gold coins minted by the government. What counts is that these coins really contain a fixed weight of gold and that every quantity of bullion can be transformed into coins. Under the gold standard the dollar and the pound sterling were merely names for a definite weight of gold, within very narrow margins precisely determined by the laws. We may call such a sort of money commodity money.

Sound money could be in the future as the current paper money based system self-destructs.

Video: Jon Stewart on President Obama’s Solyndra Green Jobs Scandal

President Obama’s green jobs showcase… (hat tip: Lew Rockwell blog)

The true engines of economic growth will always be companies like Solyndra...

It's here that companies like Solyndra are leading the way towards a brighter and most prosperous future

…appears to collapsing into a scandal.

Here is the Daily Show Jon Stewart’s comical take…

US Equity Markets: Signs of Intensifying Boom Bust Cycles

More evidence where US equity markets seem as increasingly being influenced by monetary policy propelled tidal flows.

Again another marvelous observation as exhibited by the chart above and the comment below by Bespoke Invest

we have made numerous references to how the increased volatility this Summer has caused a big uptick in the number of 'all or nothing' days for the equity market. We consider 'all or nothing' days in the market to be days where the net daily A/D reading in the S&P 500 exceeds plus or minus 400.

So far this year there have been 38 days where the net A/D reading for the S&P 500 was above +400 or below -400. On an annualized basis, this now puts 2011 on pace to see 54 'all or nothing' days, which would make it the most volatile year since at least 1990.

The amplifying accounts of market breadth volatility signifies as intensifying price distortions which have been symptomatic of the escalating government interventions in the US financial and monetary system, which I would add as being transmitted or diffused worldwide.

Deutsche Bank: We’re Austrians Now

From Thomas Mayer of Deutsche Bank: (bold emphasis mine)

Modern macro- and financial economics are based on the belief that economic agents always hold rational expectations and that markets are always efficient, in other words, that the earth is flat. We now find out that this is not true. There are elements of irrationality and inefficiencies in the behavior of people and markets. Therefore we need to dump the flat-earth theories promising that economic and financial outcomes can be planned with a high degree of certainty and need to look at other theories that accept the limits of our knowledge about the future. A revival of Austrian economics could be a good start for such a research programme.

Unfortunately, however, the battle cry of the public and politicians is for more regulation: regulate banks, regulate markets, regulate financial products! But those who push for blanket regulation suffer from the same control-illusion that got us into this crisis. In our view, instead of more regulation we need more intelligent regulation. At the heart of such regulation must stand the simple recognition that we can at best tentatively plan for the future and must feel our way forward in a process of trial and error.

In a world where we need to reckon with ―unknown unknowns‖ – in a world where Knightian uncertainty reigns – financial firms and investors need larger buffers to cope with the unforeseen, i.e. more equity and less leverage. In a world, where markets are not always liquid but can seize up in a collective fit of panic, financial firms and investors also need a greater reserve of liquidity.

Mr. Mayer can always visit the Ludwig von Mises Institute, so he can get ahead of the snowballing revival.

Nonetheless this is revolutionary, from the above, Austrian Economics appears headed mainstream.

Bloomberg Chart: Gold Prices Headed for $10,000 an ounce?

The Bloomberg chart of the day features Societe Generale’s Dylan Grice assessment that Gold prices could reach $10k.

From Bloomberg, (hat tip Lew Rockwell blog)

Gold has the potential to jump more than fivefold as the precious metal’s price catches up with the surging amount of money in the U.S. economy, according to Dylan Grice, a global strategist at Societe Generale SA.

The CHART OF THE DAY shows the price at which each U.S. dollar in the monetary base, compiled by the Federal Reserve, would have been backed by an ounce of gold for the past half century. International Monetary Fund data on the country’s gold reserves were used in the calculation.

Grice, based in London, identified this price as the metal’s “fair value” yesterday in a report. Since June, it has exceeded $10,000 an ounce, as depicted in the chart’s top panel. Gold for immediate delivery closed at $1,819.63 an ounce on the spot market yesterday.

The bottom panel tracks the value of U.S. gold holdings, based on the spot price, as a percentage of the monetary base for the 50-year period. August’s proportion was 18 percent of the $2.66 trillion in the economy. The latter figure was more than triple the amount three years earlier, reflecting efforts by the Fed to spur economic growth.

I agree that $10k could indeed be a target or even possibly more. Austrian economist Bob Wenzel says $25k could be a possibility.

These, of course, will ultimately depend on the actions or reactions of global political authorities towards the imploding political institutions based on the troika of welfare-warfare state, central bank and the banking cartel system.

The $64 trillion question is “To what degree are they willing to debauch today’s paper money system?” The answer to this is likely the scale of where the level of gold prices will be + potential excesses from market irrationality (bandwagon effect).

For the meantime, low interest rates and modest inflation numbers (both markets which authorities have materially intervened) have been giving officials the leeway to pump up on inflationism.

So in my view, I’ll take it one step at a time, $2k first, then every additional $500 thereafter, where I would assess the reactions of the political leaders on the unfolding state of affairs.

Will Burma Embrace a Market Economy?

Forbes Magazine’ Simon Montlake thinks so (bold highlights mine)

It usually pays to be bearish on Burma. But a flurry of initiatives by a new, semi-elected government has raised hopes of a fresh start. Since taking power in March, it has begun tackling barriers to economic growth, such as commodity import cartels and restrictive investment and labor laws. President Thein Sein, a retired general, has pledged to support local entrepreneurship and to attract foreign investors to special economic zones. He's also tapped independent thinkers as economic advisors and appointed businessmen as ministers. In much of Asia this would be mainstream politics. In Burma it's almost a Tea Party movement. Even the political standoff that has defined Burma on the world stage--the Lady versus the Generals--appears to have eased with a warm presidential reception on Aug. 19 for Aung San Suu Kyi, the opposition leader. "Things have moved surprisingly quickly," says a European diplomat. A veteran foreign aid worker concurs: "The political conversation has changed."

Burma's political history is strewn with false starts and reversals. The question on everyone's lips is whether this time is different. Skeptics say Thein Sein has yet to deliver on his reformist rhetoric and faces resistance from political hardliners and conservative bureaucrats, as well as rent-seeking tycoons who thrived under the dictatorship.

This uncertainty, as much as sanctions and boycotts, prevents many Western firms from taking the plunge, says Luc de Waegh, founder of West Indochina, a consultancy in Singapore. "The business environment isn't friendly to foreign investors yet. It's challenging to do business there," he says. Asian manufacturers have also been deterred by high costs for inputs and dilapidated infrastructure, despite a cheap labor pool. Only Burma's natural resources have attracted significant investment, led by China, though this has proven controversial.

Still, some Western executives are keen to size up a potential market of 54 million people with an estimated GDP of $43 billion. Tourist arrivals rose 23% in the first half of 2011, and not all were vacationers. "The big guys from the big companies are going there for tourism and business curiosity. It's like the last frontier," says De Waegh, who used to run British American Tobacco's Burma operations. Under political pressure at home, BAT exited in 2003.

While some will think that a seminal market economy for Burma will pose as threats to them, I think Burma’s possible conversion should be very positive, not only for Burma, but for ASEAN and for the world.

This means more business opportunities and access to a previously closed market that is not only resource rich but likewise has significant human capital and also fabulous recreational sites or vacation spots for potential tourists (like me).

A universal axiom is that de-politicization of any economy extrapolates to the empowerment of the masses through the markets, where the interests of the consumers should reign supreme than the interests of the political overlords.

As the great Ludwig von Mises once wrote,

The fundamental principle of capitalism is mass production to supply the masses. It is the patronage of the masses that makes enterprises grow into bigness. The common man is supreme in the market economy. He is the customer "who is always right

I hope Burma will indeed commence on the path of embracing a market economy.

Green Jobs: The Anatomy of Government Failure

From the Washington Post, (bold emphasis mine)

A $38.6 billion loan guarantee program that the Obama administration promised would create or save 65,000 jobs has created just a few thousand jobs two years after it began, government records show.

The program — designed to jump-start the nation’s clean technology industry by giving energy companies access to low-cost, government-backed loans — has directly created 3,545 new, permanent jobs after giving out almost half the allocated amount, according to Energy Department tallies.

President Obama has made “green jobs” a showcase of his recovery plan, vowing to foster new jobs, new technologies and more competitive American industries. But the loan guarantee program came under scrutiny Wednesday from Republicans and Democrats at a House oversight committee hearing about the collapse of Solyndra, a solar-panel maker whose closure could leave taxpayers on the hook for as much as $527 million.

The GOP lawmakers accused the administration of rushing approval of a guarantee of the firm’s project and failing to adequately vet it. “My goodness. We should be reviewing every one of these loan guarantee” projects, said Rep. Marsha Blackburn (R-Tenn.).

Obama’s efforts to create green jobs are lagging behind expectations at a time of persistently high unemployment. Many economists say that because alternative-­energy projects are so expensive and slow to ramp up, they are not the most efficient way to stimulate the economy.

“There are good reasons to create green jobs, but they have more to do with green than with jobs,” Princeton University economics professor and former Federal Reserve vice chairman Alan Blinder has said.

The loan guarantee program can also be unwieldy. It works like this: Companies negotiate with the Energy Department for a government loan guarantee, which means taxpayers will pay off bank loans if the project fails. Then the Office of Management and Budget must sign off on the guarantees, often changing terms…

Solyndra’s closure prompted concerns about whether the administration made good bets in the rest of its portfolio of clean-tech projects it had helped subsidize with taxpayer-guaranteed loans. The primary investors in Solyndra were funds tied to a major Obama fundraising bundler, Tulsa oilman George Kaiser.

My take:

Again the article proves that there hardly has been any qualm for political authorities to spend on other people’s money because they won’t be held accountable for decision failures.

The political process of picking winners does not guarantee success.

Wrong decisions by political stewards ultimately mean higher taxes which decreases the competitiveness of the economy. Oh don’t blame globalization for the effects of stupid domestic policies.

Importantly, this has been lucid evidence of how central planning fails and how politics can’t subvert the will of the markets.

With taxpayer guarantees, the political beneficiaries of loans (stimulus) from the government are not only protégés of the administration (crony capitalism) but notably have not been subject to the discipline of market forces, and thus, can or will recklessly handle finances even to the risk of finagling them. Call it corruption and moral hazard.

US in a Deflationary Environment, NOT! (In Charts)

The mainstream meme has been about the US economy being embroiled in a ‘liquidity trap’, therefore enduring a deflationary environment.

There have been many signs that the US economy seems flagging of late. (The following 2 wonderful charts from Bespoke Invest)

But there hardly seem signs of deflation with money aggregates skyrocketing (charts from St. Louis Fed)

M2…

MZM…

And credit environment has been conspicuously improving too.

For businesses…

And so with consumer loans…

Importantly, the current economic landscape has certainly NOT BEEN A PROBLEM OF CONSUMER SPENDING, which have much been bruited about by deflationists.

(chart below from Professor Mark Perry)

…but from the lack of investments. (See Robert Higgs magnificent explanation here)

Lastly, US CPI inflation keeps ascending (again from Bespoke)

…yet one would note that the calculation for the CPI index may not be accurate or has vastly understated the above inflation rates, perhaps for political reasons (Wikipedia.org).

The composition of CPI index has been disproportionately weighed towards housing.

Great chart above and below from DSHORT.com

And in looking at the performance of each of the components…

…we find that except for the apparel, the entire spectrum of goods and services in the CPI basket has been ascendant! With the only difference seen at the relative performance of prices.

Bottom line:

What Deflation, where?

NOT until central banks will cease and desist from inflating either forced by markets or by politics, and NOT until central banks will sacrifice to the alter of economics and the markets, the high privileged but beleaguered banking cartel.

Bonds markets have NOT been an accurate indicator, for the simple reasons of government designed financial repression and or government manipulation (QEs).

In planet earth, we see inflation as THE predominant theme or the prospects of a stagflation (which could transit into hyperinflation) risk.

And with global political authorities coordinating efforts to intensify inflationism in the hope that the liquidity therapy will solve the malady of insolvency, then expect MORE INFLATION ahead.

Deflation, which has signified as a bogeyman, will be further used to justify expanded inflationism which in reality has been designed to preserve the existing political order.

As the great Ludwig von Mises wrote

It is no answer to this to object that public opinion in the capitalist countries favors the policy of cheap money. The masses are misled by the assertions of the pseudo experts that cheap money can make them prosperous at no expense whatever. They do not realize that investment can be expanded only to the extent that more capital is accumulated by saving. They are deceived by the fairy tales of monetary cranks. Yet what counts in reality is not fairy tales, but people's conduct. If men are not prepared to save more by cutting down their current consumption, the means for a substantial expansion of investment are lacking. These means cannot be provided by printing banknotes and by credit on the bank books.

Unfortunately for us, political authorities and their zealots, fables are seen and adapted as reality, where we have to bear the consequences of their actions.

Hot: Major Central Banks to Jointly Offer US Dollar Liquidity

From Marketwatch.com,

Along with other central banks, the European Central Bank will undertake new operations to provide U.S. dollar liquidity. The operations will be conducted in coordination with the U.S. Federal Reserve, the Bank of England, Bank of Japan, and the Swiss National Bank. The operations will be conducted in addition to the ECB's ongoing weekly seven-day dollar operations announced in May 2010. The move comes amid worries about dollar-funding tensions in market amid the turmoil related to the euro zone's sovereign debt crisis

Here is what I wrote a few days back

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. The Plaza Accord was a joint intervention in the currency markets by major economies to depreciate the US dollar in 1985. This time, perhaps, the biggest economies will all act in concert to devalue their currencies impliedly against commodities.

Global central banks and politicians have, in increasing signs of desperation, been intensifying the use of the nuclear option. Such concerted move is likely one of the many to come. Expect to see amplified market gyrations as consequence to the boom-bust policies of global central banks.

I told you so.

Video: Economic and Political Roles of Chain Stores

LearnLiberty.org presents another great educational video. Professor Art Carden explains the economic and political roles of chain stores to our society.

From Learn Liberty,

Are chain stores good or bad? According to prof. Art Carden, there are reasons to both like and dislike chain stores. The reasons to like chain stores include their ability to lower prices, increase variety, and reduce uncertainty. However, chain stores also do things to dislike such as pursuing special government privileges like subsidies and eminent domain.

Essentially, when chain stores respond to the incentives of the market, they create wealth for society. On the other hand, when chains stores respond to the incentives of the political process, they often produce detrimental effects for society.

With the Philippines hosting 3 of the top 10 largest malls in the world (2009), the above discussion seem quite apropos

Video: Differentiating Natural Rights from Legal and Constitutional Rights

The educational video below from LearnLiberty.org, explains the differences of rights.

From Learn Liberty,

Individuals have rights. But are they natural? And how do they compare and contrast with legal or constitutional rights? Are legal or constitutional rights similar to those inalienable rights mentioned in the Declaration of Independence? Professor Aeon Skoble distinguishes such constitutional rights, such as the right to vote, from the rights protected by governments and constitutions—natural rights not actually granted by governments themselves. He concludes that legal systems should create rights that are combatable with natural rights.

Media Bias and the REAL US Small Business Sentiment Survey

The reason I do NOT trust mainstream media has been due to their innate tendencies to manipulate information to dovetail to their political biases.

The recent survey of US small businesses which exhibited signs of declining optimism is just one good example.

Writes the Wall Street Journal Blog, (bold emphasis added)

“Nobody knows the trouble I’ve seen.” That’s the song small-business owners around the U.S. are singing. But it isn’t regulation, tax policy or credit constraints causing the woes. It’s the lack of customers.

The widely watched survey of small businesses done by the National Federation of Independent Business shows optimism in August was the lowest since July 2010 when the recovery last hit a soft patch. The drop to 88.1 was the sixth consecutive decline — a record string of declines in the index.

What the author would like to present is that the woes of small businesses has been due to the lack of aggregate demand (lack of customers). Because from the Keynesian perspective this means that government intervention should take the place of the private sector, thus justifying more stimulus.

But it’s a totally different story when seen from the actual National Federation of Independent Business report.

Here is the NFIB Economic Trend Report for September 2011 with commentary from William C. Dunkelberg and Holly Wade (bold emphasis mine)

The August survey was mailed out as Congress and the Administration reached their “deal” to curb spending and reduce the debt/deficit problems. Had this been a convincing one to “Main Street,” confidence would have improved and, likely, also spending and hiring. But, NFIB’s confidence measure took a dive as did the University of Michigan’s consumer confidence Index which produced its lowest reading since 1980. In particular, it was expected real sales gains and expected business conditions in 6 months that plummeted in the NFIB report. These two components by themselves lowered the Index 2.1 points versus the total loss from all 10 components of 1.8 points. With such a dim outlook, owners are not going to do a lot of hiring or expanding.

Business expansion, the purchase of new equipment and vehicles and even hiring are “long term” investments. Most important to the decision process is the sales forecast, but against expected sales over the life of an asset, the owner must figure in labor costs, taxes, the cost of new regulations, financing costs and the like to decide whether or not an “investment” will pay off. This is one reason why “short term” stimuli don’t work. The planning horizon for the private sector is longer than the time to the next election!!! At this point, no one knows what their tax rate will be 6 months from now; no one knows what the health care will do to labor costs. Higher for sure, but by how much? Yes, the President suspended costly EPA rules that were going into effect, but you know that they will be back after the election if he wins

The NLRB is pushing the union agenda, card check, mandating owners to post notices of the right to unionize, interfering with Boeing’s business decision making (and the President’s Chief of Staff was on Boeing’s board when the South Carolina project was approved). Supporters of the Administration are pushing for another hike in the minimum wage and the new CEA chairman favors and wants a national sales tax to be imposed. It would take a book to itemize it all. Short-term fixes will not help, private sector decision makers think longer term – they do and they don’t like what they see, there is little clarity or certainty. Consumer spending is still a key factor and 9 of 10 people who want a job still have a job and would spend more if they were more confident about the future

And here is the NFIB’s press release calling for President Obama to repeal employer mandates (bold emphasis mine)

The National Federation of Independent Business is again pushing to repeal the employer mandate in the Patient Protection and Affordable Care Act (PPACA) on the heels of President Obama’s ask for bipartisan job creation. There is currently legislation in Congress to repeal the employer mandate, and the NFIB has long-supported and championed this important initiative.

“At the same time that President Obama is asking small-business owners to create jobs, his very health care law is preventing them from doing so,” said Susan Eckerly, Senior Vice President of Federal Public Policy at NFIB. “In fact, small-business owners will tell you that they are suffering a crisis of confidence right now that prevents them from expanding and hiring; how do they move forward with job creation when the unknown costs stemming from the policies of the past few years continue to stand in their way?

“Instead of advocating for more Washington spending bills that do little to help the situation that small-business owners are currently drowning under, Congress should immediately review and repeal some of the policies of the past few years that stand between an employer and an employee. Simply put, the repeal of the employer mandate is an important step toward sound, long-term job creation.”

Provisions of the health care law, such as the employer mandate, have left many small-business owners unable to expand operations as they brace for new costs and taxes coming out of Washington. The health care law requires that employers with 50 or more full-time equivalent employees offer “affordable, minimum essential [healthcare] coverage” beginning in 2014.

Lastly NFIB economist William Dunkelberg says in this video that in order to raise capital we need savings and not stimulus.

This has NOT been an issue of tax policy or government regulation? Duh!

So the Wall Street article either did not the read the report and instead arbitrarily replaced their conclusions over the NFIB's context, or has equivocated on the survey result of NFIB.

Nonetheless the biggest problem weighing on US small businesses, whom signifies as the largest employers of the US economy, generally can be described as “regime uncertainty” or the assault to private property rights through the legal and regulatory channels which heightens the economy’s risk climate and which subsequently reduces the incentive by entrepreneurs and business people to spend on investments required for job growth.

Regime uncertainty, best defined and enunciated by economist Robert Higgs, (as previously posted) as having to do (bold emphasis mine)

with widespread inability to form confident expectations about future private property rights in all of their dimensions. Private property rights specify the property owner’s rights to decide how property will be used, to accrue income from its uses, and to transfer these rights to others in various voluntary arrangements. Because the content of private property rights is complex, threats to such rights can arise from many different sources, including actions by legislators, administrators, prosecutors, judges, juries, and others (e.g., sit-down strikers, mobs).

Because of the great variety of ways in which government officials can threaten private property rights, the security of such rights turns not only on law “on the books,” but also to an important degree on the character of the government officials who administer and enforce the law.

Thanks to the internet we can weed out prevarications and or political propaganda.

Peter Schiff Schools US Congress: Government Spending Represents Shot of Monetary and Fiscal Heroin

Peter Schiff does a magnificent job lecturing Congress and their private sector ally in this testimony...

Part 1 On burdensome regulations

Part 2 On baneful impacts of government spending

Philippine Competitiveness: Marginal Improvements, More Required

From World Economic Forum (bold emphasis mine)

Up 10 places to 75th, the Philippines posts one of the largest improvements in this year’s rankings. The vast majority of individual indicators composing the GCI improve, sometimes markedly. Yet the challenges are many, especially in the areas at the foundation of any competitive economy, even at an early stage of development.

The quality of the country’s public institutions continues to be assessed as poor: the Philippines ranks beyond the 100 mark on each of the 16 related indicators. Issues of corruption and physical security appear particularly acute (127th and 117th, respectively). The state of its infrastructure is improving marginally, but not nearly fast enough to meet the needs of the business sector. The country ranks a mediocre 113th for the overall state of its infrastructure, with particularly low marks for the quality of its seaport (123rd) and airport infrastructure (115th). Finally, despite an enrolment rate of around 90 percent, primary education is characterized by low-quality standards (110th). Against such weaknesses, the macroeconomic situation of the Philippines is more positive: the country is up 14 places to 54th in the macroeconomic environment pillar, thanks to slightly lower public deficit and debt, an improved country credit rating, and inflation that remains under control.

In the other, more complex pillars of the Index, the Philippines continues to have a vast opportunity for improvement. In particular, the largely inflexible and inefficient labor market (113th) has shown very little progress over the past four years. On a more positive note, the country ranks a good 57th in the business sophistication category, thanks to a large quantity of local suppliers, the existence of numerous and well developed clusters, and an increased presence of Filipino businesses in the higher segments of the value chain. Finally, the sheer size of the domestic market (36th) confers a notable competitive advantage.

I would suggest that much of the aforementioned improvements may have been due to macro economic trends more than having been policy induced.

That said, the Philippines needs more economic freedom and less reliance on politics to improve trade competitiveness

Has Globalization been Responsible for US Economic Woes?

That’s the popular accusation thrown by progressives.

One example is from Jeffrey Sachs (Financial Times),

Globalisation has raised very serious adjustment challenges for the high-income world, and most high-income countries, notably the US, have failed to meet those challenges. The challenges include the loss of jobs and incomes of lower-skilled workers, a shift of manufacturing sector investments away from the transatlantic towards the emerging economies, a rise in energy costs occasioned by rapidly growing energy use in Asia, and an explosion of income and political power at the top of the income distribution, stoked by international tax havens and tax competition between jurisdictions.

Mr. Sachs essentially believes that political control must prevail over voluntary exchanges.

Here is the World Economic Forum’s (WEF) take on US competitiveness. (bold emphasis mine)

The United States continues the decline that began three years ago, falling one more position to 5th place. While many structural features continue to make its economy extremely productive, a number of escalating weaknesses have lowered the US ranking in recent years. US companies are highly sophisticated and innovative, supported by an excellent university system that collaborates admirably with the business sector in R&D. Combined with flexible labor markets and the scale opportunities afforded by the sheer size of its domestic economy—the largest in the world by far—these qualities continue to make the United States very competitive. On the other hand, there are some weaknesses in particular areas that have deepened since past assessments. The business community continues to be critical toward public and private institutions (39th).

In particular, its trust in politicians is not strong (50th), it remains concerned about the government’s ability to maintain arms-length relationships with the private sector (50th), and it considers that the government spends its resources relatively wastefully (66th). In comparison with last year, policymaking is assessed as less transparent (50th) and regulation as more burdensome (58th).

A lack of macroeconomic stability continues to be the United States’ greatest area of weakness (90th). Over the past decade, the country has been running repeated fiscal deficits, leading to burgeoning levels of public indebtedness that are likely to weigh heavily on the country’s future growth. On a more positive note, after having declined for two years in a row, measures of financial market development are showing a hesitant recovery, improving from 31st last year to 22nd overall this year in that pillar.

In sharp contrast to Mr. Sachs, the WEF sees that expanding government interventions (arms length relationships, transparency issues, burdensome regulations, fiscal deficits...I would add to that list minimum wage, Obamacare, taxes, various job mandates, unemployment benefits and regime uncertainty) as major factors responsible for the declining competitiveness of the US economy.

I would also place policies that trigger boom bust cycles and the growing welfare state (example record food stamps) and warfare state as major contributors too.

In short, by ignoring the ramifications of domestic policies and political developments, Mr. Sachs seems as confusing effects as the cause.

BRICs Mulls Bailout of the Eurozone

From the Reuters,

BRIC major emerging markets are considering ramping up holdings of euro-denominated bonds in a bid to help European countries mired in a sovereign debt crisis, newspaper Valor Economico reported on Tuesday, citing a monetary official.

Valor reported a decision could be made at a Sept. 22 meeting of finance ministers and central bank presidents from Brazil, Russia, India, China and South Africa in Washington.

Brazil's central bank declined to comment on the story.

This comes on the heels of China’s proposed investment on Italy, yesterday.

From Bloomberg/Businessweek, (bold emphasis mine)

China’s status as the fastest- growing major economy and holder of the largest foreign-exchange reserves lured another bailout candidate as Italy struggles to avoid a collapse in investor confidence.

Italian officials held talks in the past few weeks with Chinese counterparts about potential investments in the country, an Italian government official said yesterday, adding that bonds weren’t the focus. Finance Minister Giulio Tremonti met with Chinese officials in Rome earlier this month, his spokesman Filippo Pepe said by phone today, declining to say exactly when the talks took place or what was discussed.

Foreign Ministry spokeswoman Jiang Yu, asked about buying Italian assets, said Europe is one of China’s main investment destinations, without specifically mentioning Italy.

Italy joins Spain, Greece, Portugal and investment bank Morgan Stanley among distressed borrowers that turned to China since the 2007 collapse in U.S. mortgage securities set off a crisis that widened to engulf euro-region sovereign debtors. Stocks rose on the potential Chinese investment in Italy even as previous commitments failed to have a lasting impact…

Any Chinese purchases of euro-region debt to date haven’t produced a lasting cut in yield premiums for Greece, Portugal or Spain…

Any Chinese purchases of euro-denominated debt may help it diversify its reserves away from dollars. The biggest foreign owner of U.S. government debt has doubled its holdings of Treasuries in the three years through June to about $1.17 trillion.

China is playing a “white knight” role in assisting Europe and buying itself goodwill that will enable it to purchase more sensitive European assets such as technology companies, according to Stamford, Connecticut-based Faros Trading in a June report. The European Union still has an arms embargo on China, imposed after the Tiananmen Square massacre in 1989.

My comments:

1. The above exhibits the bailout mentality prevalent among policymakers. It’s easy to spend money or resources that aren’t theirs, since the costs of the ensuing political actions are distributed or externalized or borne by taxpayers. Policymakers are essentially unaccountable for their actions.

2. This also demonstrates the implicit desire of global governments to preserve the status quo, again at the expense of local taxpayers.

3. The transfer of resources from productive to non productive entities will have temporary palliative effects. Over the long term, this weakens the productive capability of productive enterprises, as well as, heightens the risk environment of the global economic and financial system. Besides, such transfers distort price signals and resource distribution in the marketplace which only increases systemic fragility.

And since we are dealing with non-productive entities, i.e. governments, for BRIC political leaders, the above represents a choice between domestic or international ‘political’ expenditures.

Again go back to #1.

4. BRIC governments will be a part of the consortium that will rescue elite bankers of the Eurozone and the US. This only reveals how widespread the welfare government-banking-central banking cartel is.

5. For China, part of the incentive to conduct a bail out is to project her growing geopolitical influence; yet a very expensive way to signal success.

China will also use this opportunity to squeeze political deals with economic repercussions. Like any political concession, these would likely benefit the client cronies and the political patrons of the incumbent Chinese government.

6. Diversification of currency reserves out of the US dollars has been attributed as one of the motives for the rescue. But why the Euro, whom like the US suffers from the almost the same disease?

Notice that the current developments signifies as a continuing crisis since 2008. Despite repeated trillions of US dollars or Euro spent on a seemingly expanding breadth of bailouts, there are hardly any convincing signs that this crisis will be over anytime soon. Much of the present political actions have been meant to 'kick the can down the road', which means the likelihood of even larger crisis ahead.

None of the above shows that the BRIC's rescue will matter. Again the thumbprints gleaned from the above would likely be more inflationism.

Bloomberg Editorial: European Central Bank needs to Inflate Aggressively

The Editors of the Bloomberg write, (bold emphasis mine)

In the short term, then, somebody other than German Chancellor Angela Merkel and French President Nicolas Sarkozy will have to take on the task of avoiding disaster. The only candidate is ECB President Jean-Claude Trichet. Unlike Merkel and Sarkozy, Trichet is not constrained by short-term political concerns, and the ECB has access to an almost unlimited resource: the power to print euros. It has already demonstrated a willingness to use that power by purchasing tens of billions of euros in Spanish and Italian bonds to keep those governments’ borrowing costs from skyrocketing.

In its simplest form, ECB intervention would entail the central bank buying Greek and other euro-area government bonds. To keep countries’ borrowing costs in check until European leaders come up with a more comprehensive solution, such purchases would go far beyond the 440 billion euros available to the European Financial Stability Facility (the euro area’s bailout vehicle). The ECB would be buying bonds from banks at an artificially high price, leaving the central bank to suffer losses if and when some of the debts are written off.

The ECB could also be more activist, spurring governments to restructure their debts and get their fiscal affairs in order. The central bank, for example, could pledge to buy newly issued bonds at full face value only if governments adopt credible rules to balance their budgets over the economic cycle; the bank would guarantee existing euro-area debt at only half its face value. Market prices for existing debt would quickly fall to what investors believed governments could actually afford to pay, putting them in a position to negotiate debt- relief deals with creditors. As with the issuance of euro bonds, this approach would require governments to recapitalize banks that take heavy losses as a result of debt restructurings.

To be sure, ECB intervention would come at great cost, including threatening to undermine the central bank’s inflation- fighting mandate. It would not substitute for a real fix to the euro area’s flaws. Europe is reaching a point, though, where aggressive ECB action could be the lesser of all possible evils.

Well, the above sentiment are emblematic of what I had earlier written about,

That’s because central banks can always surreptitiously work for the state’s political agenda camouflaged by the esoteric nature of the operations of central banking.

In the fitting and resonant words of Henry Ford,

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”

So while the fiscal side of governments may be scrutinized by a vigilant public over the perceived profligacy of a government, central banks actions can and will likely substitute for such a loss.

The call to action for more intensive short term fixes had been predicted by the great Ludwig von Mises (Theory of Money and Credit), [bold emphasis mine]

A government always finds itself obliged to resort to inflationary measures when it cannot negotiate loans and dare not levy taxes, because it has reason to fear that it will forfeit approval of the policy it is following if it reveals too soon the financial and general economic consequences of that policy. Thus inflation becomes the most important psychological resource of any economic policy whose consequences have to be concealed; and so in this sense it can be called an instrument of unpopular, i.e., of antidemocratic, policy, since by misleading public opinion it makes possible the continued existence of a system of government that would have no hope of the consent of the people if the circumstances were clearly laid before them. That is the political function of inflation. It explains why inflation has always been an important resource of policies of war and revolution and why we also find it in the service of socialism. When governments do not think it necessary to accommodate their expenditure to their revenue and arrogate to themselves the right of making up the deficit by issuing notes, their ideology is merely a disguised absolutism.

So goes part of the political process aimed at conditioning the public for the acceptance of the ideology of ‘disguised absolutism’

Cartoon of the Day: Social Security and the Ponzi Scheme

Cartoon by Mike Lester

An apropos quote, which explains the cartoon above comes from Econolog’s Professor David Henderson

There are two main differences between Ponzi's original scam and the Social Security system. The first difference is that Social Security is run by government and, whatever its constitutionality and its questionable ethics, is legal. The second difference follows from the first: Whereas Ponzi had to rely on suckers, the government can and does use force.