Losses from Japan’s Currency Market Intervention Mounts: Estimated at $512 billion

I earlier posted that Bank of Japan’s losses have accrued to $281 billion, it seems that the losses have been accruing pretty fast.

From the Bloomberg,

Japan’s government faces almost 40 trillion yen ($512 billion) in losses from intervening in the foreign-exchange markets to stem the yen’s advance, according to estimates by JPMorgan Chase & Co.

Valuation losses on Japan’s foreign-exchange reserves minus yen liabilities totaled 35.3 trillion yen at the end of 2010, according to Finance Ministry data. The losses may swell further as the yen is projected to climb to 72 versus the dollar by September 2012, said Tohru Sasaki, head of Japan rates and foreign-exchange research at JPMorgan Chase in Tokyo.

“It’s difficult to change the trend of the currency market” with intervention, said Sasaki, who used to work in the foreign-exchange division of the Bank of Japan, at a forum in Tokyo yesterday. “Even if the action can stem the currency’s gains temporarily, the yen will eventually appreciate.”

Japan on Oct. 31 intervened in foreign-exchange markets to weaken the yen for the third time this year after the currency gained to a postwar record. Finance Minister Jun Azumi said he will continue to intervene until he’s “satisfied.”

Japan may have spent a record amount to stem the yen’s gains, according to the BOJ’s projection of deposits held by financial institutions at the central bank. It estimated that deposits climbed 7.7 trillion yen to a total 37.2 trillion yen, according to a statement released yesterday. The figure suggests that the government sold approximately 8 trillion yen, said Yuichi Takahashi, a market economist at Totan Research Co. in Tokyo.

Perhaps for Japan’s political authorities, central banks losses can merely be covered or financed by more money printing. Yet unknown to most, such actions only intensifies the transferring of scarce sources from the public to the political institutions and to their stewards, as I pointed out here.

Maybe Japan could just be too wealthy for political authorities to desire a larger piece of the pie or that maybe the average Japanese has been more condescending and tolerable to the actions of their political leaders. Or maybe the average Japanese are not aware of this.

May be too global political and monetary authorities, including those of Japan, have venerated and are tacit disciples of Gideon Gono and his doctrine.

Mr. Gono is the incumbent governor of the Reserve bank of Zimbabwe, who successfully steered the nation’s currency, the Zimbabwe dollar, to its sensational hyperinflationary demise.

Or that there could be many more maybes left unsaid.

Ben Bernanke Dangles QE, Redux

Is the public being hypnotized by US Federal Reserve Chairman Ben Bernanke?

I will give you stimulus, I will give you stimulus, I will give you stimulus, I will give you stimulus…

For the umpteenth time, from the Bloomberg, (emphasis added)

Federal Reserve Chairman Ben S. Bernanke said unemployment is still “far too high” and the Fed may take further steps to boost growth, such as buying mortgage bonds or changing the way it communicates its policy goals to the public.

Additional stimulus “remains on the table,” Bernanke said today at a press conference in Washington, declining to specify conditions that would prompt a move. “While we still expect that economic activity and labor market conditions will improve gradually over time, the pace of progress is likely to be frustratingly slow.”

Bernanke spoke after the policy-setting Federal Open Market Committee said the economy picked up in third quarter and repeated its statement from September that there are “significant downside risks” to the outlook. Officials kept policy unchanged, saying they would lengthen the maturity of the Fed’s bond portfolio and hold the benchmark interest rate near zero through at least mid-2013 if unemployment remains high and the inflation outlook is “subdued.”

Bernanke and his colleagues on the panel cut their growth forecasts for 2012 and said unemployment will average 8.5 percent to 8.7 percent in the final three months of next year, up from a prior range of 7.8 percent to 8.2 percent.

“The medium-term outlook relative to our June projections has been downgraded” and “remains unsatisfactory,” Bernanke said. “Unemployment is far too high,” and “I fully sympathize with the notion that the economy is not performing the way we would like.”

Again the repeated dangling of QE 3.0 or additional stimulus, which represent a monetary policy tool used by Central Banks called as 'signaling channel' or as the article implicitly puts it—“changing the way it communicates its policy goals”—have been directed at conditioning or manipulating the public’s expectations.

We are being treated like Pavlov’s dogs. According to Wikipedia on Classical conditioning, Pavlov used a bell to call the dogs to their food and, after a few repetitions, the dogs started to salivate in response to the bell. The dogs are the financial markets, and the ringing bell is the signaling policy used, and the food is the QE 3.0. In essence, the financial markets are being conditioned to be dependent on US Federal Reserve or central bank policies.

Bernanke must be pleased with how equity markets has responded to his communication tool (see above table from Bloomberg), which seem to have neutralized the surprise developments in Greece.

Yet, the constant conditioning being applied to the market is most likely meant not only to project policy “transparency” but also to reduce political opposition to Bernanke’s favorite tool.

With US money supply growth exploding, which may perhaps be indicative of indirect tools being utilized by team Bernanke, QE 3.0 seems no more than a formality.

On the count of three, you will awaken…

The Economist’s Marxist Fallacies on Corporations and Profits

The Economist eulogizes Karl Marx (bold emphasis mine)

WRITING in "Das Kapital" in 1867, Karl Marx observed that in the capitalist system competition "ends in the ruin of many small capitalists, whose capitals partly pass into the hands of their conquerors". This way, he posited, capital would become increasingly concentrated in the hands of a few. Out of the 6,000 or so companies whose primary listing is on an American stock exchange, the top 5% accounted for 70% ($10.6 trillion) of the market value and 90% ($765 billion) of the total profit in 2010. In 2000, the profit from the top 5% of companies was greater than 100%, offsetting the huge losses by the bottom 50%. The figures are remarkably similar for listed companies in Western Europe. Confounding the view of the "Occupy" protests taking place across the globe that the world is run by increasingly rapacious corporations, those proportions have declined since 2000 (the earliest year for which robust data are available). At the very top, the largest 1% of listed companies in America and Western Europe accounted for 53% and 48% of market value in 2000. In 2010, those proportions had declined to 40% and 28% respectively.

The Economist, if they are not engaged in a pun, has been guilty of logical sophism.

“Capital would become increasingly concentrated in the hands of a few” represents a post hoc fallacy; capital does not mechanically or automatically gravitate into the hands of a few. The Economist does not elaborate on the process except to irresponsibly and uncritically adhere to the Marxian creed.

Next, it would be a monumental folly to imagine that the world today as operating on a laissez faire ‘capitalist system’ considering the countless regulations, legal proscriptions, market manipulations and other forms of interventionisms in almost every social activity that one is engaged in, everywhere around the world.

Also by also engaging in reductio ad absurdum the article attempts to oversimplify correlations and the causation nexus between corporations and profit concentrations.

Such preposterous assertions assume away the influences, contributions and the effects of specific political policies on affected groups, the periphery and the rest of society, as well as, the impact of the incumbent legal environment and political institutions to the marketplace...which ultimately shapes the variable scale of interrelationships and degree of complicity between corporations and their respective governments (where they operate on).

As earlier pointed out, many of these huge companies has been beneficiaries of government concessions or political privileges as subsidies, cartels, monopolies, licensing, behest loans, tariffs, bailouts, private-public partnerships, tax credits, and sundry regulations that are essentially anti-competition based that has led to their current heft and widespread global reach.

In short, 'rapacious corporations' are the outcome of policies from political leaderships aimed at sustaining welfare-warfare based crony capitalist governance and not of the deceptive and logically bereft Marxist premises.

As Ludwig von Mises wrote of Marxism,

The incomparable success of Marxism is due to the prospect it offers of fulfilling those dream-aspirations and dreams of vengeance which have been so deeply imbedded in the human soul from time immemorial. It promises a Paradise on earth, a Land of Hearts Desire full of happiness and enjoyment, and — sweeter still to the losers in life's game — humiliation of all who are stronger and better than the multitude. Logic and reasoning, which might show the absurdity of such dreams of bliss and revenge, are to be thrust aside

Quote of the Day: Political Zombiesm

From Daily Reckoning’s Bill Bonner

Here is the foundation of our General Theory of Zombieism:

1. All (or almost all) people want wealth, power and status.
2. They want to get it in the easiest way possible.
3. The easiest way to get wealth is to steal it, which is why all groups turn to the government, the only institution which gets to steal lawfully.
4. Over time, more and more groups are able to use the system for their own ends.

If they are poor, they implore the government to ‘tax the rich’ and give the money to the poor. If they are rich, they want the government to protect their wealth and status — with every means available to them. Democratic governments generally do both. They support the poor with loud attacks on the rich combined with whimpers of money (for the poor can generally be bought — vote for vote — much cheaper than the rich). As for the rich, their support is more subtle and underhanded. There are tax credits and loopholes for anyone who can afford them; sugar-laden contracts for the insiders and plenty of jobs for well-credentialized blowhards.

The rich complain about the poor. The poor complain about the rich. Both complain about the government. And everybody hates capitalism.

But over time, the giveaways, bribes, regulations, intercessions and meddling on the part of the government have a big effect on the economy. The more the government interferes with market signals and market-based capital allocation, the less able the economy is to produce real wealth. More and more resources are purloined by the insiders before the truck reaches its destination. Paperwork, lawyers, administration, regulation, taxes take a toll. So does misallocation of capital investment to huge, unproductive industries such as education, health, and defense. There is also a shift of wealth generally from those who earn it to those to whom it is redistributed…and from capital formation to consumption. And gradually the economy becomes paralyzed and parasitic…and nearly everyone gets poorer. And often, the state…and the mobs that support it…become desperate for more money. Then…the rich had better watch out!

The Swiftly Unfolding Political Drama in Greece

Last week the ECB’s Bazooka deal seems to gotten the financial market upbeat.

Yesterday, positive sentiments suddenly evaporated on the bizarre twist of events unraveling in Greece.

Greek Prime Minister George Papandreou unexpectedly called for a referendum on the Euro bailout measures that heightened the risks of a default. A default could trigger a derivatives meltdown, as well as, jeopardize the recent agreement.

This from Bloomberg,

Greek Prime Minister George Papandreou called a referendum and a parliamentary confidence vote, raising the prospect of derailing the European bailout effort and pushing Greece into default. Stocks and the euro tumbled.

Papandreou’s gambit risks pushing the country into default if rejected by voters, and raises the ante with dissidents in his own party. Papandreou’s popularity has plunged after a raft of austerity measures cut pensions and wages, increased taxes and sparked a wave of social unrest. An opinion poll published Oct. 29 showed most Greeks believe the accord on a new bailout package and a debt writedown is negative.

“Papandreou could lose the referendum, which means that new elections would have to be called,” Thomas Costerg, European economist at Standard Chartered Bank in London, said in an e-mail. “Heightened Greek uncertainty could propagate to other fragile euro-area countries, in particular Italy.”…

Separately, the International Swaps and Derivatives Association said that the euro-area proposals for Greek bonds appear to involve “a voluntary exchange that would not be binding on all holders,” according to an e-mailed statement.

“As such, it does not appear to be likely that the euro zone proposal will trigger payments under existing CDS contracts,” the statement said. “However, whether or not it does so will be decided by the Determinations Committee on the basis of specific facts, if a request is made to them.”

The ISDA statement late yesterday follows a review of whether the proposal would constitute a “credit event” for holders of credit-default swaps linked to the securities.

The deteriorating political events has even led to an abrupt reshuffling of their key military officers.

From the Telegraph,

In a surprise development, Panos Beglitis, Defence Minister, a close confidante of Mr Papandreou, summoned the chiefs of the army, navy and air-force and announced that they were being replaced by other senior officers.

Neither the minister nor any government spokesman offered an explanation for the sudden, sweeping changes, which were scheduled to be considered on November 7 as part of a regular annual review of military leadership retirements and promotions. Usually the annual changes do not affect the entire leadership.

To my perspective, the Greek political drama (or tragedy) has now diffused to the military hierarchy which implies of increased risks of a mutiny or a coup d'état.

Additionally, Papandreou’s grip over the Greek government appears to be crumbling

According to the Business Insider,

Meanwhile, turmoil seethes within Papandreou's ruling PASOK party. One PASOK MP has already resigned over the referendum decision and six more have called for Papandreou's resignation, according to eKathermirini.

The opposition has even stepped up calls for a snap election instead of a referendum where the referendum “was putting Greece's EU membership at risk”.

Again, political events in the Eurozone has been unfolding real fast. Uncertainty clouds the marketplace.

More Evidence of Tidal Flows in the US Stock Markets

Boom. Bust. Financial markets are being held hostage by politics and subjected to monetary tidal flows which can be seen in increasing correlations of price actions of US stocks.

Evidence from Bespoke,

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. With today's current net A/D reading of -460, there have now been 55 all or nothing days for the S&P 500 in 2011. At this rate, 2011 is now on pace to see 66 all or nothing days, which is well above the prior high of 52 back in 2008.

In the 66 trading days since the start of August, more than half (35) have now been all or nothing days. As we noted last week, the number of occurrences that we have seen in the last three months eclipses the total number of all or nothing days that we saw from 1990 through 2001 (34).

Again because of the politicized nature of the financial markets, price actions can go extremely volatile either way.

It would signify a reckless assumption that the prevailing risk environment can be traded short term.

The highly fluid turn of events that brings about an aura of heightened uncertainty appears to enhance the risks of rapid deterioration of events which could be vented on the marketplace beyond anyone’s expectations.

This should apply to the Philippine markets as well.

Where the extreme gyrations of the financial markets reflect on casino like odds, I’d rather play cards.

Video: Halloween Day Tax Lesson

Comedian Tim Slagle shows how to teach taxes to kids using the Halloween Day celebrations (hat tip Professor David Henderson)

7 Billion People: Boon or Bane?

The United Nations says that world population have reached 7 billion.

In attempting to visualize the impact of 7 billion people The Economist writes,

THE UN's doughty demographers have declared that October 31st is the day on which the world's population reached 7 billion. They may be wrong (the UN got the timing of the 6 billionth birth out by a couple of years) but no matter: the announcement has triggered celebrations in maternity wards around the globe and a hunt for the 7 billionth child. Yet the growth in the world’s population is actually slowing. The peak was in the late 1960s, when it was rising by almost 2% a year. Now the rate is half that. The last time it was so low was in 1950, when the death rate was much higher. The result is that the next billion people will take 14 years to arrive, the first time that a billion milestone has taken longer to reach than the one before. The billion after that will take 18 years. Where will all these people fit? The chart below, worked out on a maximum population density of six Economist staffers per square metre, gives the space needed to accommodate the world's population at various points in history, expressed in multiples of the borough of Manhattan. Looked at another way, each of us now has the equivalent of Red Square to ourselves.

7 billion represents merely a statistical estimate which most likely is an inaccurate measure of the real number of the world’s population.

Yet, the UN’s declaration seems loaded with political inferences.

For instance, the Economist article above tries to project maximum land allocated per individual or a population density. But this would be a chimera for the simple reason that all land area are not the same (e.g. mountains are different from coastline or from hills or from plateau; there are private owned and public owned) and that each individual does not use up or require as much space as what the Economist implies.

So the framing from the 7 billion figure could essentially foster political alarmism over a potential conflict from growing population relative to the scarcity of land which is fundamentally not only false but unrealistic.

The other implication of the UN’s hype is to give neo-Malthusians (who falsely believed that overpopulation would translate to a catastrophe for mankind or the Malthusian Catastrophe) room to advocate for more political controls on everyone. Their focal point has been centered on the strains to access scarce resources and to the environmental impact from a growing population.

Following charts from World Bank-Google Public Data

Yet even if there is some semblance of truth to the claim that we are now 7 billion people, the $7 billion question is that how have we been able to successfully reach this state in defiance of the doom mongers’ expectations of a ‘catastrophe’? And importantly if such factors will continue to support even a larger population?

The Economist rightly points out that world fertility rate have been going down.

If this slowing fertility trend should continue, then population growth trends would imply for a slowdown or even a potential peaking.

Nevertheless, another very important aspect that has supported today’s 7 billion people has been a huge jump in GDP per capita that coincides with the slowing fertility growth

The substantial improvement in per capita GDP has mostly been because of globalization and a more pervasive adaption of economic freedom.

Competition in free markets has been cultivating and accelerating the rate of technological innovations that has helped in resolving the scarcity problem in many aspects such as in the science and medicine, information and communications, business process and etc..

Largely uncelebrated hero Norman Borlaug discovered high yielding wheat varieties which he combined with modern agricultural techniques which paved way for the green revolution. Mr. Borlaug was eventually awarded the Nobel Peace Prize and was known as the ‘father of green revolution’ who has been credited with saving over a billion people from starvation

And further advancements in technology whose costs have materially decreased have became available to a wider range of people which has increased people's lifespans

The very impressive author Matthew Ridley wearing his Julian Simon hat (the famous free market economist who made a controversial bet against Malthusian Paul Elrich and won) sums up at the Wall Street Journal on why population growth trends will slow

(bold emphasis mine)

Birth rates have gone down because of prosperity, not poverty. Everywhere it has occurred, it has followed a fall in child mortality and famine and an increase in income and education. The wider availability of contraception has been necessary, even vital, for this shift, but it has not been sufficient.

To a biologist, the demographic transition is both surprising and intriguing. No other species drops its birth rate when its food supply increases. Frankly, no expert has yet fully explained the phenomenon. It remains something of a demographic enigma.

The best guess is that modern society causes human beings to switch their reproductive strategy from quantity to quality. Thus, once child mortality drops and paid work becomes available to the children of subsistence farmers, parents become more interested in getting one or two children into education or jobs than in begetting lots of heirs and spares for the farm.

Whatever the explanation, history shows that top-down policies aimed directly at population control have generally proved less successful than bottom-up ones aimed at human welfare, which get population control as a bonus. The faster poor countries can grow their economies, the slower they will grow their populations.

While present developments has generated much progress, there are still many afflicted by poverty. That’s because there continues to be meaningful resistance in embracing a bottom up approach in dealing with socio-economic development.

It's really not about the number of people but the process or the means by which people use to sustain their living. This means, in general, the world is much better off with MORE PRODUCTIVE people.

Bank of Japan posts $281m losses from QEs

This seems as poetic justice at work.

From Bloomberg,

The Bank of Japan has lost more than 22.4 billion yen ($281.7 million) purchasing exchange-traded funds as the Topix Index approaches a 27-year low.

The central bank’s stock holdings have fallen about 4 percent since buying began on Dec. 15, 2010, according to estimates calculated by Bloomberg using government filings. Losses climbed above 67.6 billion yen in September as equities plunged amid concern Europe’s debt crisis would trigger a global recession, the data show.

The purchases are part of a 20 trillion yen BOJ plan to stimulate economic growth and boost investor confidence by buying securities, such as government debt, commercial paper and real estate investment trusts. The central bank expanded the program last week by 5 trillion yen after the country’s currency reached a postwar record against the dollar, threatening the export-led economy.

“This is not what a central bank should be doing,” said Masaaki Kanno, the Bank of Japan’s former chief foreign-exchange dealer and now chief Japan economist at JPMorgan Chase & Co. Parliament needs “to debate if the program can get backing from the public after running a loss like this," he said…

This isn’t the first time the central bank has bought stocks. The BOJ in October 2002 purchased shares that financial firms owned in other companies to stem losses at banks after the Topix plunged 52 percent from a peak in February 2000. The BOJ’s investment foreshadowed a rally in the Topix, which bottomed in March 2003 and more than doubled over the next four years.

The BOJ’S ETF purchases accelerated this year after concern over Europe’s sovereign-debt crisis triggered a global equity rout and sent the Nikkei Stock Average Volatility Index on Aug. 9 to the highest level since the aftermath of Japan’s March 11 earthquake and tsunami. The central bank spent 403.5 billion yen on ETF shares tracking the Nikkei 225 or Topix since August, compared with 340.4 billion yen in the previous eight months, filings show.

The purchases, which are listed on the BOJ’s website, have taken place when Japanese stocks declined and have signaled better performance the next day. The Nikkei 225 fell an average of 1.9 percent on days when the BOJ bought, slipping 0.1 percent the following day, data compiled by Bloomberg show.

The investments represent a small part of Japan’s ETF market. The central bank spent 17.3 billion yen buying shares on Oct. 18, less than 1.5 percent of the total value traded in either Nomura’s Nikkei 225 or Topix ETFs, according to data compiled by Bloomberg.

The red arrow shows when the asset purchases began, which again seem to have worked over the short term, and how the Topix has been discounting Japan’s QEs over the longer term or during the one year period.

The $281 million loss may seem negligible to the above report, but it is important to point out that those who made these decisions that led to these ‘hefty’ losses which will eventually be distributed to the average Japanese via taxes, have not been held accountable.

That’s the way politics works; squandering people’s money has always been assumed away, and thus, the propensity to keep making the same mistakes over and over again. Ultimately taxpayers picks up the tab for the mess created by a few. Yes, political insanity.

Of course as earlier pointed out, the public (including the world) is being hoodwinked to believe that these mercantilist measures has been about supporting the “export-led” economy, which in reality isn’t. Exports account for only less than 15% of the GDP, so how can exports lead Japan's economy?

Instead, the whole saga of interventionism and applied inflationism (via QEs) has been meant to shore up Japan’s debilitating political institutions.

Eventually all these anticapitalistic actions will meet its destiny.

Poetic justice.

Competitive Devaluations: Japan Intervenes to Curb Yen gains for the Third Time this year

Japan intervened in the currency market today, to allegedly halt a rising yen. Today’s action is the third intervention this year.

From Bloomberg

The yen dropped by the most in three years against the dollar as Japan stepped into foreign-exchange markets to weaken the currency for the third time this year after its gains to a postwar record threatened exporters.

“I’ve repeatedly said that we’ll take bold action against speculative moves in the market,” Japanese Finance Minister Jun Azumi told reporters today in Tokyo after the government acted unilaterally. “I’ll continue to intervene until I am satisfied.”

The yen weakened against the more than 150 currencies that Bloomberg tracks as Azumi said that he ordered the intervention at 10:25 a.m. local time because “speculative moves” in the currency failed to reflect Japan’s economic fundamentals. Today’s drop reversed this month’s previous gain by the yen against the greenback, which came amid speculation the Federal Reserve may add to stimulus measures as the U.S. economic recovery stagnates.

Statements like this “I’ll continue to intervene until I am satisfied’” might mislead people to think that political authorities really have the power to control the markets.

It is true enough that their actions may have a momentary or short term impact.

That’s the yen headed lower following today’s intervention.

But from a one year perspective, the first two interventions eventually resulted to a HIGHER and NOT a lower yen (blue uptrend)! The initial intervention was in March 18 where the BoJ bought $1 billion and the second was in August 4, both interventions are marked by green ellipse.

Talk about hubris.

Nevertheless, the inflationism or competitive devaluations being undertaken by Japan has hardly been about exports—why prop up exporters when this sector account for only less than 15% of Japan’s GDP?

Instead, like her contemporaries, the devaluation has been meant to prop up Japan’s rapidly decaying debt laden political institutions of the welfare state-banking system-central banking.

Japan’s government has the largest share and has the biggest growth of Japan’s overall debt (McKinsey Quarterly)

And as the great Ludwig von Mises wrote

The devaluation, say its champions, reduces the burden of debts. This is certainly true. It favors debtors at the expense of creditors. In the eyes of those who still have not learned that under modern conditions the creditors must not be identified with the rich not the debtors with the poor, this is beneficial. The actual effect is that the indebted owners of real estate and farm land and the shareholders of indebted corporations reap gains at the expense of the majority of people whose savings are invested in bonds, debentures, savings-bank deposits, and insurance policies.

It is sad know how politicians misrepresent what they stand for and use class warfare or supposed underprivileged sectors to rationalize the imposition of what are truly designed as self preservation measures.

Put another way, the BoJ’s serial devaluations has actually been meant to illicitly transfer the resources of the average Japanese citizens to the political class and her banking system. Incidentally, the latter, like the Euro counterparts, has been under strain.

From Bloomberg (Topix Banks index)

Share prices of Japan's banks have slumped since 2007.

So much for blabbering about public interest. Devaluations are all about political greed.

Philippine 100 Peso Commemorative Bills and the Philippine Political Economy

Yesterday I was surprised to see the freshly printed moneys I received as change from a popular fast chain came with an embossed stamp from an elite law school.

I looked up the web and discovered that such stamp had supposedly been meant as commemorative to the 75^th Diamond Jubilee anniversary as shown below.

Ateneo alumni President Aquino was a guest speaker and received the plaque of special issue from the Philippine central bank, Bangko Sentral ng Pilipinas (BSP) honcho Mr. Amando Tetangco at a recent ceremony

And this has not just been for Ateneo but also for state school University of the Philippines (100 peso bill pictures of Ateneo and UP from rightonthemark)

People don’t seem to see anything wrong with this but I do. I see these actions as symptoms of a deeply seated social disorder which continues to plague the Philippine society.

My point of inquiries:

1. Why Ateneo and University of the Philippines (UP) and NOT other competing law schools such as San Beda, UST, FEU, UE, Pamantasan ng Lungsod ng Manila, University of San Carlos, Arellano, Lyceum or St. Louis University? What's so special with UP and Ateneo?

2. Why law schools instead of engineering, computer science, sciences, liberal arts, culinary or other schools with different specialization? What's so special with law schools?

3. Why schools and not some other private sector interests (charity, socio-civic groups etc)? Why the predilection for schools?

4. Yet are these commemoratives signs of independence from political and private sector influences?

The privilege of central bank’s monopoly in the issuance of money clearly reveals of its political bias in favor of the political and economic elite and their interests.

Commemoratives are thus emblematic of the incumbent policy structure and the prospective direction of political policies.

Moreover, the impression that central banks are independent of political influences is entirely a myth.

Even more, the preference for ‘elitist’ law schools signify as symptoms of the crony capitalist framework of the Philippine political economy. As pointed out before, elite schools (including my alma mater—saying this cost me many facebook ‘school’ friends) serve as breeding, training and recruitment grounds for the political class and their politically privileged economic clients.

A subordinate polemic is that the Peso bills are used as implicit advertisement space which again depends on political connections and the attendant political interests of the political stewards.

Finally, the pathetic commemoratives on the 100 Peso bill only exposes the true essence of legal tender based paper funny money—the existence of which (New Central Bank Act) ironically have been based on unilateral regulations drafted by lawyers and legitimated by legislators.

Global Risk Environment: The Transition from Red Light to Yellow Light

One of the foremost concerns of all parties hostile to economic freedom is to withhold this knowledge from the voters. The various brands of socialism and interventionism could not retain their popularity if people were to discover that the measures whose adoption is hailed as social progress curtail production and tend to bring about capital decumulation. To conceal these facts from the public is one of the services inflation renders to the so-called progressive policies. Inflation is the true opium of the people and it is administered to them by anticapitalist governments and parties. Ludwig von Mises

Remember what I have been saying about financial markets being dependent on policy steroids?

Here’s what I wrote during mid-September[1]

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.

Global financial markets, from equities, commodities and currencies have been playing out almost exactly as I have described.

The difference is that instead of being driven by the US Federal Reserve’s credit easing policies, last week’s ferocious global stock market rally appears to have been impelled by the Eurozone’s bailout which came with both a 50% ‘voluntary’ haircut on Greek bondholders and the $1.4 trillion expansion of the European Financial Stability Fund (EFSF).

Insanity: Doing The Same Thing Over And Over Again

Some experts have even been so perplexed by the heft, scale and breadth of the market’s rally to even label this ‘crazy’[2]. However what is seen as ferly to others has long been understood by us as transitional episodes of boom bust cycles. And flouncing markets could even serve as an indicator of major trend reversals[3].

My problem then was that without concrete actions and commitments from policymakers, markets were functionally fragile or vulnerable to a crash.

The Eurozone’s bailout deal fundamentally confirms my earlier exposition on the mechanics of the proposed bailout[4]. But the deal covered more conditions, aside from the conversion of the bailout fund into an insurance-derivative mechanism, this included the ‘voluntary’ 50% haircut of Greece bondholders, the creation of a Special Purpose Vehicle (SPV) which allows private and other non-EU investors (such as the IMF or possibly China and other emerging markets) to participate in the financing of the bailout, bank recapitalization—where banks capital ratio would be increased to 9% by June of 2012, and importantly the continuation of the European Central Bank’s asset purchasing program.

The unfurled package has ostensibly been way beyond the markets expectations and had been warmly received. This exhibits the state of the current markets—deep addiction to policy steroids.

The deal’s insurance-derivative model provides guarantees to investors on the initial (20%?) tranche of debts issued by select EU governments that would allow four to fivefold increase of the debt issuance through leverage; where the details of which has yet to be threshed out[5].

There are valid reasons to be skeptical on the final mechanics of the supposed bailout scheme.

One, questions as to the actual available resources to implement these programs. For instance, the EFSF supposedly will be used as insurance to guarantee debt issuance AND also as last resort financing access to bank recapitalization, so how will the fund be apportioned? Are EU leaders assuming that these resources will only function as contingent resources? Wouldn’t this be too optimistic?

Next the supposed leveraging of debt issuance will likely come from already debt distressed nations.

As the Bloomberg chart of the day rightly points out[6]

the average rating for the bloc, calculated by Bloomberg from the assessments of the three main evaluators, has worsened to 3.14, representing the third-best grade, from 2.12 in May 2010 when the European Financial Stability Facility was designed. The measure fell 0.23 point in the previous 15 months. The average is calculated by giving a numerical grade for each grading, where 1 is the highest, and adjusting it for each country’s share of the EFSF guarantee.

Seven of the 17 euro-sharing nations have had their ratings downgraded since the announcement of the facility, which maintains a top grade from Standard & Poor’s, Moody’s Investors Service and Fitch Ratings. As the contagion has spread to banks, prompting governments to work out recapitalization plans, further cuts, mainly for the top-rated countries, may reduce the strength of the fund.

So the EU bailout is essentially applying what Albert Einstein defines as Insanity: doing the same thing over and over again while expecting different results. More debt will be compounded on existing debt.

A major credit rating agency Fitch Ratings sees the proposed deal on Greece bondholders as a default that would not remove the risk of further downgrades for other sovereigns[7].

However my general impression behind all the ‘smoke and mirrors’ promoted as a comprehensive rescue strategy is that these measures fundamentally stands on the ECB’s monetization of government debt.

In short, the EU’s Bazooka bailout deal represents as an implicit license for or as façade to the ECB’s massive money printing program.

Global Market Responses

And the commodity markets appear to have responded to the grandiose measures in terms of increasing expectations of the inflationary implications

Gold has regained its bullish momentum (top most chart), while oil (WTIC) appears to be testing the 200-day moving averages where a breach would mean a reversal of the ‘death cross’. On the other hand, copper has reclaimed the 50-day moving averages.

The coming sessions will be very crucial as they will either reinforce the formative uptrend or falsify the recent recovery.

Importantly, as I have been repeatedly saying, I don’t see the imminence of a recession risk for the US economy for the simple reason that money supply growth has been exploding.

And a possible evidence of the diffusion of money supply growth has been the very impressive record breaking growth of US capital spending[8]. Capital spending growth should be seen as a leading indicator which should mean more improvement in the employment data ahead. Besides, record capital spending growth demolishes the popular mythical idea of a liquidity trap[9].

China remains as my focal point in my assessment of risk.

Again it is unclear whether China has merely been experiencing a cyclical slowdown or a bubble bust. Signs of piecemeal bailouts including the latest rescue of Ministry of Railways[10] could be signs of a popping bubble.

However signals generated from global equity markets seem to indicate that developments in both the Eurozone and the US could likely influence China, than the other way around.

Major global equity markets appear to have reaccelerated to the upside.

The US S&P 500 has broken above the 200-day moving averages, where a continuation of this upside momentum would extrapolate to the inflection of the ‘death cross’ into a bullish ‘golden cross’.

And it would seem that my hunch of a non-recession short-lived US bear market ala the Kennedy Slide of 1962 and 1987 Black Monday crash may come to fruition[11].

Meanwhile Europe’s Stoxx 50 appears to also trail the price actions of the US S&P 500 along with China’s Shanghai index whose recent bounce off the new lows has brought the index to test the 50-day moving averages.

Of the three major equity market bellwethers, the US seems to provide the market’s leadership, although it has yet to be determined if the momentum of China’s market can be sustained.

Overall, the impact of the collective inflationary policies being undertaken by the developed nations seems to permeate on both global equity markets and the commodity markets.

And in downplaying the predictive value of mechanical chart reading I recently wrote[12], (bold emphasis original)

The prospective actions of US Federal Reserve’s Ben Bernanke and European Central Bank’s Jean-Claude Trichet represents as the major forces that determines the success or failure of the death cross (and not statistics nor the pattern in itself). If they force enough inflation, then markets will reverse regardless of what today’s chart patterns indicate. Otherwise, the death cross could confirm the pattern. Yet given the ideological leanings and path dependency of regulators or policymakers, the desire to seek the preservation of the status quo and the protection of the banking class, I think the former is likely the outcome than the latter.

Events appear to be turning out in near precision as predicted

In addition, while the markets may have been discounting a QE 3.0 from the coming Federal Open Market Committee (FOMC) meeting this November 2^nd, any surprise from team Bernanke could even escalate the current surge in the inflationary boom momentum.

Remember, US Federal Reserve Chair Ben Bernanke has repeatedly been dangling QE 3.0 or has been emphasizing that QE 3.0 remains an option[13], which could readily be redeployed as conditions warrant.

To add, except the US almost every major economy central banks have recently undertaken to expand on their respective versions of QE (chart from Danske Bank[14]). Aside from Bank of England[15] (BoE) whom earlier this month has announced the expansion of their QE policies, last week the Bank of Japan (BoJ) also increased their asset purchasing program[16].

Thus, the dramatic shift in sentiment to my interpretation epitomizes a transitional phase that can be analogized to the shifting in traffic light signal from red to yellow.

I would reckon the current climate as a gradual phasing-in or a cautious buy for risk assets.

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[1] See Definitely Not a Reprise of 2008, Phisix-ASEAN Equities Still in Consolidation, September 18, 2011

[2] See Global Stock Markets: The Euro Bazooka Deal and the Boom Bust Cycle, October 28, 2011

[3] See Sharp Market Gyrations Could Imply an Inflection Point, October 16, 2011

[4] See More Evidence of China’s Unraveling Bubble? October 16, 2011

[5] See Euro’s Bailout Deal: Rescue Fund Jumps to $1.4 Trillion and a 50% haircut on Greece bondholders, October 27, 2011

[6] Bloomberg.com Euro Region’s Debt Quality Is Worsening at Record Pace: Chart of the Day, October 25, 2011

[7] Wall Street Journal Fitch: Greek Debt Deal a Default, October 28, 2011

[8] Wall Street Journal Blog Vital Signs: Capital Spending Hits Record, October 27, 2011

[9] See No Liquidity Trap, US Economy Picks Up Steam, October 27, 2011

[10] See China Bails Out the Ministry of Railways, October 25, 2011

[11] See Phisix-ASEAN Market Volatility: Politically Induced Boom Bust Cycles, October 2, 2011

[12] See How Reliable is the S&P’s ‘Death Cross’ Pattern?, August 14, 2011

[13] International Business Times, Market, FOMC Officials Suggest ‘Increasing Likelihood’ QE3 is Coming, October 26 2011

[14] Danske Research Preview: Bank of Japan Further easing likely, renewed intervention close, October 26, 2011

[15] See Bank of England Activates QE 2.0, October 6, 2011

[16] See Bank of Japan Expands QE, October 27, 2011