Key Man Risk: With Steve Jobs Gone, Apple In A Funk

From Bloomberg,

Anyone who expects Apple Inc.’s growth to rebound after sales and earnings shortfalls last quarter is “living in denial,” according to David Nelson, chief strategist at Belpointe Asset Management LLC.

As the CHART OF THE DAY shows, shares of the maker of iPhones and iPad tablet computers have trailed the Standard & Poor’s 500 Index and a gauge of S&P 500 technology companies since the company reported fourth-quarter results a month ago.

“This is no longer a hyper-growth company,” Nelson said yesterday in a telephone interview. Apple’s products are now reaching customers who are less likely to upgrade as newer models are released, he added…

Let me first disclose that I have no interest in Apple [AAPL] since I don’t use Apple’s products nor am I a stockholder.

The reason I posted this is to show what in insurance is known as Key Man Risk—the effect of losing one important member of the team.

I have no judgment of Apple except to say that the market currently prices the company as undergoing an uncertain transition process without the presence of the Key Man—Steve Jobs. In short, Apple appears to be suffering from a Key Man Risk.

I think the same Key Man dynamics will apply to Warren Buffett’s Berkshire Hathaway [BRK/A and BRK/B] or to Bill Gates’ Microsoft [MSFT] or to any successful company whose image has been built as an alter ego of the owner-manager.

Nonetheless, I don’t think that the markets has entirely written off Apple, as all will depend on the performance of the current team (owners and managers) in serving the consumers, which should theoretically reflect on the company’s stock prices.

MF Global Holding’s Liquidations and the November 17th Commodity Prices Rout

Aside from China’s proposed increase on credit margins for Silver, I think that the unwinding of mostly commodity assets of bankrupt MF Global Holdings has had much to do with the rout in the commodity markets last Thursday (November 17).

The above chart from stockcharts.com, is the weekly charts for gold, silver and CRB indices which exhibits the steep decline last Thursday.

From Businessweek-Bloomberg dated November 16th, (bold emphasis mine)

The trustee liquidating commodities broker MF Global Inc. filed papers yesterday setting up an emergency hearing tomorrow for approval to require the accelerated filing of claims.

Six customers filed a motion asking the bankruptcy judge to overrule the trustee and allow customers to take out 90 percent or more of their collateral.

In papers filed yesterday referring to his “vigorous efforts,” the trustee said the “precise size of and the reasons for the shortfall in segregated accounts are not yet known by the trustee, law enforcement, and other officials and regulators conducting investigations.”

If the trustee has his way, there will be a two-track process where commodities and securities customers must file claims by Jan. 27 to receive the maximum distribution of so- called customer property. General creditors must submit claims by May 28.

James W. Giddens, the trustee for the MF Global broker, said he has already distributed about 3 million commodities contracts in 17,000 customer accounts, together with $1.55 billion in collateral, to 12 or more other brokers. Accounts that weren't transferred by Nov. 11 are undergoing an “orderly liquidation,” Giddens said.

Giddens also said he's looking for other brokers to accept bulk transfers of 450 customer accounts for securities. He also asked a judge to let him transfer about $520 million in collateral to commodity customers whose accounts consisted solely of cash on Oct. 31.

The trustee said he will review customer claims on a “rolling basis” as they are filed. Given what he called the “relatively poor state” of the books, the trustee said he hopes to make additional requests to the court for further distributions of so-called customer property.

Giddens was unable to transfer accounts immediately because about $600 million of customers' collateral is missing. Consequently, open contracts transferred to other brokers weren't accompanied by all the collateral customers had on account with MF Global.

Six customers in their motion filed yesterday contend the trustee should be giving them at least 90 percent of the collateral. They arrive at the figure saying that the $600 million in missing cash is about 10 percent of the $5.5 billion supposedly held for customers.

Missing cash, accelerated filing (November 15th) of claims and orderly liquidations for accounts that have not been transferred seem to coincide with November 17’s rout in commodity prices.

I expected this liquidation induced volatility from MF Global Holdings to happen a week ago. Apparently legal obstacles may have delayed the process from taking place until late this week.

While it is unclear if the procedural liquidations has culminated, the likely effect from this should be temporary which means current weakness in commodity prices may prove to be a great buying opportunity.

War on Commodities: China will Raise Credit Margins on Silver

From Reuters

The Shanghai Gold Exchange said it will raise margins on silver forwards to 18 percent from 15 percent from Monday if the silver contract hits its daily trade limit on settlement on Friday.

The exchange said it would lift daily trade limits on silver forward contracts to 15 percent from 12 percent if the contract hits limit up or down on settlement on Friday.

Last week’s steep drop in commodity prices may have been influenced by the above. As I have been tirelessly pointing out, global governments has repeatedly been attempting to rein and control prices for political motivations (e.g. manage inflation expectations).

Strong Performance of the US Economy Surprises the Mainstream

Yet another confirmation of my hunches.

From Reuters, (bold highlights mine)

The U.S. economy is gaining steam as factories churn out more cars and slowing inflation boosts spending power, putting the country on stronger footing to resist an economic storm gathering over Europe.

Recent readings of the U.S. economic pulse have steadily topped analysts' expectations. Many now think the fourth quarter will prove stronger than the third, when the economy expanded at a 2.5 percent annual rate. Forecasting firm Macroeconomic Advisers, for example, sees a growth rate of 3.2 percent over the final three months of the year.

While a widely expected European recession will likely drag on the U.S. economy next year, the United States will be able to lean into that headwind more than was possible just a few months ago.

"There is enough momentum in the near term to withstand some pain from overseas," said Michelle Meyer, an economist with Bank of America Merrill Lynch in New York.

U.S. industrial output rose last month by the most since July, helped by higher production of motor vehicles and parts.

The current upswing points to a continuation as evidenced by leading economic indicators (LOI)

From Bloomberg, (bold highlights mine)

The index of U.S. leading indicators climbed more than forecast in October, signaling the world’s largest economy will keep growing in early 2012.

The Conference Board’s gauge of the outlook for the next three to six months rose 0.9 percent, the biggest jump since February, after a 0.1 percent September increase, the New York- based research group said today. The median forecast of 56 economists surveyed by Bloomberg News projected the gauge would advance 0.6 percent.

Gains in consumer spending, manufacturing and homebuilding, combined with fewer job losses, point to an economy that is weathering the turbulence in financial markets caused by the debt crisis in Europe. Nonetheless, a 9 percent jobless rate and political gridlock over deficit-cutting have hurt confidence, which may be a hurdle to a further pickup in the pace of growth.

Many popular mainstream analysts mainly of the Keynesian persuasion have been predicting an economic downswing that would lead to a recession. The news above only contravenes their forecasts.

And like momentum traders, many of the mainstream analysts (experts), given their wrong assessment and forecasts, appear to be chasing the upside momentum by adjusting their forecasts. One doesn’t need to be an expert to seek “comfort of the crowds”.

Here is what I wrote at the end of October,

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. 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.

Widening Political Cracks in China’s Political Economy

More signs of the simmering tension between China’s political top-bottom leadership and bottom up forces (average Chinese)

In what appears to signal China’s prospective political actions, China has recently awarded the new Confucius Peace Prize to Russia’s autocratic leader Vladmir Putin.

Why Putin? The Wall Street Journal Editorial explains

A 16-member committee of Chinese scholars announced on Sunday that this year's winner is Vladimir Putin. To most of the world, the Russian prime minister may inspire many adjectives, but man of peace isn't one of them. The image he likes to project is that of the tough-guy Russian nationalist.

Which is precisely why the Chinese say they chose him. The Confucius committee cited in particular "his iron hand and toughness" and "large-scale military action" during the 1999 war in Chechnya. The committee cited as well "his teenage dream," subsequently realized, to join the Soviet secret police and his opposition this year to NATO's bombing campaign in Libya. Apparently Moammar Gadhafi, since deposed and now dead, wasn't eligible.

China created the Confucius Prize last year, in its fury that the Nobel Peace Prize was awarded to dissident Liu Xiaobo. It's a kind of anti-Nobel, and in that sense it is meant to flatter both Mr. Putin and China's government. China's Communist Party sees a kindred soul in a man who has stayed in power in Moscow for 12 years and has designs on at least 12 more.

China's other great fear is that ethnic nationalists in Tibet or Xinjiang, like democrats in Taiwan, might succeed in governing themselves. Thus does Mr. Putin, who razed the small province of Chechnya and who invaded Georgia in 2008 to teach an imperial lesson, became a hero to Chinese rulers.

To revere “iron hand and toughness” in a time where many Chinese reportedly have been deeply dissatisfied with their government seems to serve as admonition to political malcontents.

On the other hand, symbolisms like the above may also signify symptoms of veiled apprehensions by China’s political leaders.

Here’s why. From another Wall Street Journal Editorial,

Chinese lost faith in local-level officials a long time ago, but until recently they continued to believe in their national leaders. They also largely accepted the post-1989 social contract in which the Party provided rising living standards in return for not questioning its monopoly on power.

This is changing as a result of two trends. The first is a growing awareness among the bottom strata of society that it is policy made at higher levels, not merely the incompetence or corruption of local officials, that is responsible for their woes. The second is the interest of the wealthy and the intellectuals in reform after two decades of being bought off by the Communist Party.

The first trend is typified by the willingness of about 100 people across the country to risk their freedom and put themselves forward as independent candidates in elections for local People's Congresses. Some are professionals, but most seem to be ordinary workers. These government bodies have traditionally rubber-stamped Party decisions, but their members theoretically have the power to supervise officials.

Most Chinese won't to be so bold unless they are mobilized from above, which is why new activism among the educated minority is so significant. Beijing intellectuals are making pilgrimages to the remote Shandong town of Linyi where blind legal activist Chen Guangcheng is under house arrest. Since the tax authorities last week presented the dissident artist Ai Weiwei with a $2.4 million bill for fines and back taxes, a movement has sprung up to donate money, both electronically and in paper airplanes delivered to his house, to keep him out of prison. Anger over the government's concealment of air pollution levels, even as the leaders in Beijing install air purifiers to protect their own health, has spawned another ad hoc campaign.

What seems to be turning the tide toward political activism is a realization that unless one is a member of the Party elite, upward mobility is limited and hard-won advancement can be taken away without due process. Since universities expanded enrollments in the early 2000s, many families have borrowed heavily to pay tuition for their children. But graduates without political connections have trouble getting on the career ladder, ending up joining the "ant tribe," slang for educated young people living in slums. Meanwhile, the children of elites can street-race their Ferraris without fear of arrest.

Faith in the competence of the central government is also declining because of a lack of accountability. After the July crash of two trains in Wenzhou, the media exposed problems in the trophy high-speed rail program. Yet the Railways Ministry continues to receive massive amounts of new capital to finance rail lines that probably can't recoup the investment. New parents are obsessed with obtaining imported baby formula because they don't trust domestic brands.

State-owned industries increasingly prosper at the expense of private companies and households. In order to tackle high inflation the central bank tightened credit, but state companies continue to get bank loans while entrepreneurs are going bankrupt. Property developers are forced to sell inventory to stay afloat, so the price of real estate, one of the main stores of savings for the rich, is falling nationally, destroying wealth.

As I recently wrote,

China’s top-down political system and her attempt to bottom-up the economic system looks rife for a head-on collision course.

And it’s just a matter of time.

And that’s why the Chinese government will keep on inflating their economy to delay an inevitable economic bust that could spark a widespread revolt that risks toppling her government, which Chinese authorities seem to fear.

Nonetheless China’s political system would either have to reform to dovetail with the current economic conditions or revert back to an “iron-fisted” led closed economy which implies economic atavism.

No wonder many wealthy Chinese seem to be emigrating.

Sunshine Industry: Telemedicine or Digital Healthcare

The emergent digital healthcare or telemedicine industry will likely be a sunshine industry.

The Reuters reports,

Mobile technologies will be increasingly deployed to enable people in Asia to monitor and manage their health, with the market expected to hit $7 billion by 2017, an industry official said.

In parts of Europe and the United States, diabetics can now have doctors monitor their blood sugar levels by punching daily readings into their mobile phones and doctors can provide answers to expectant mothers via short message services (SMS).

Jeanine Vos, who heads the mobile health unit at Global System for Mobile Communications Association (GSMA), said such technologies are finding their way into Asia.

GSMA represents nearly 800 mobile operators around the world and 200 other mobile-related companies such as handset makers, software, media and Internet companies.

"We foresee that market opportunities can reach $7 billion by 2017 (from under $500 million now)...We are really at the start of a take-off," Vos told Reuters in an interview.

The figures were derived from a study conducted by GSMA and PricewaterhouseCoopers and will be released in full in December. Fifty-five percent of that amount would involve health monitoring services and 24 percent, diagnostic services.

Companies that stand to gain from the expansion of mobile technologies for healthcare purposes include mobile operators, device manufacturers, software developers and healthcare providers, Vos said.

Digital healthcare are evidences of how rapidly evolving technological progress has been permeating into vast areas of industries.

Although Asia has the demographic scale that should work to her advantage, telemedicine will be a global phenomenon. And I do hope that competition will lead to lower healthcare costs.

Besides telemedicine should substantially help improve the world’s life expectancy given that access to health information will become widespread. And as previously pointed out, telemedicine may reshape the global health industry.

And investors may handsomely profit from this promising field if they meticulously do their homework.

A Classroom Experiment on Socialism

Below is a great anecdote of the efficacy of socialism applied to a classroom (Thanks to Cato’s prolific Dan Mitchell) [Bold highlights mine]

An economics professor at a local college made a statement that he had never failed a single student before, but had recently failed an entire class. That class had insisted that Obama’s socialism worked and that no one would be poor and no one would be rich, a great equalizer.

The professor then said, “OK, we will have an experiment in this class on Obama’s plan”. All grades will be averaged and everyone will receive the same grade so no one will fail and no one will receive an A…. (substituting grades for dollars – something closer to home and more readily understood by all).

After the first test, the grades were averaged and everyone got a B. The students who studied hard were upset and the students who studied little were happy. As the second test rolled around, the students who studied little had studied even less and the ones who studied hard decided they wanted a free ride too so they studied little.

The second test average was a D! No one was happy.

When the 3rd test rolled around, the average was an F.

As the tests proceeded, the scores never increased as bickering, blame and name-calling all resulted in hard feelings and no one would study for the benefit of anyone else.

To their great surprise, ALL FAILED and the professor told them that socialism would also ultimately fail because when the reward is great, the effort to succeed is great, but when government takes all the reward away, no one will try or want to succeed.
It could not be any simpler than that.

There are five morals to this story:

1. You cannot legislate the poor into prosperity by legislating the wealthy out of prosperity.

2. What one person receives without working for, another person must work for without receiving.

3. The government cannot give to anybody anything that the government does not first take from somebody else.

4. You cannot multiply wealth by dividing it!

5. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that is the beginning of the end of any nation.

Chart of the Day: France ‘Riskier’ than the Philippines, ASEAN

Insuring 5-year debt against default or credit risk as measured by CDS prices has been more expensive for France than ASEAN countries such as Indonesia, the Philippines and Thailand, according to the Daily Reckoning

Insider Trading: What is Legal isn’t Necessarily Moral

Cato’s Walter Olson has a splendid article on the recent controversy over alleged insider trading by some politicians

Mr. Olson writes, (italics original)

Washington has been buzzing for the past 48 hours over revelations that some of Capitol Hill’s best-known lawmakers have been making fortunes speculating in the stocks of companies affected by official actions, typically while in possession of market-moving inside information. Rep. John Boehner (R-OH), Senatorial wife Teresa Kerry and others made bundles trading in health companies’ stocks shortly before Congressional or executive-branch action affecting the companies’ fortunes. After closed-door 2008 meetings in which Fed chairman Ben Bernanke briefed Congress on the gravity of the financial collapse, some lawmakers dumped their own stockholdings or even placed bets that the market would fall. Rep. Nancy Pelosi (D-CA) got access to highly desirable IPO (initial public offering) stock placements, some in companies with business before Congress. And so on. Studies have found that lawmakers as a group reap far above-average returns on their investments—suggesting either that these politicians are among the world’s cleverest investors, or else that they are profiting from inside information. All this has been turned into a front-page issue thanks to Throw Them All Out, a book by Hoover fellow Peter Schweizer, whose findings were showcased the other night on 60 Minutes.

So the question is: is all this legal? While there’s some difference of opinion on the issue among law professors, the proper answer to that question is most likely going to be, “Yes, it’s legal.” As UCLA’s Stephen Bainbridge points out, existing insider trading law, developed by way of a long series of contested cases under the Securities and Exchange Commission’s Rule 10b-5, assigns liability to persons who are not corporate insiders if they are violating a recognized duty of loyalty to those for whom they work. As applied to the investment whizzes of the Hill, this implies that trading on inside information might be a violation if done by Congressional staffers (since they owe a duty of loyalty to higher-ups) but not when done by members of Congress themselves.

First of all, I am not certain about the validity of the alleged statistics. Unless the analysts, who uncovered the controversial wealth derived from supposed insider trading, have been privy to the personal accounts of the aforementioned politicians or entirely trust disclosures as being forthright, these figures should be seen with cynicism.

How do we ascertain if under the table deals (concessions, bribery and etc.) are being passed off or camouflaged as investment gains? In short, what distinguishes money laundering from insider trading?

Second, what is legal isn’t necessarily moral.

Are insider trading laws moral?

As Professor Philosopher Tibor Machan writes, (bold emphasis mine, italics original)

It is conventional wisdom to treat this version of insider trading as morally wrong because it supposed to adversely affect others by being unfair. As one critic has put it, “What causes injury or loss to outsiders is not what the insider knew or did, rather it is what they themselves [the outsiders] did not know. It is their own lack of knowledge which exposes them to risk of loss or denies them an opportunity to make a profit.” By the fact that these others do not know what the insider does know, they are harmed since they are not able to make use of opportunities that are in fact available, knowable to us.

But what kind of causation is it that fails to make a difference when it does not exist? If someone’s knowing a good deal has no impact on what another does, it cannot be said that any harm upon another had been caused by that someone. Certainly, had the other known what the insider knew, he or she could have acted differently. By not acting differently, he or she could easily have failed to reap advantages the insider did reap. But nothing here shows that the insider caused any harm, only that he or she had a better set of opportunities. Unless we assume that valuable information known by one person ought, morally—and perhaps legally—be distributed to all interested parties—something that would beg the most important question—there is no moral fault involved in insider trading nor any causation of harm.

In short, insider trading is fundamentally about asymmetric information or "a situation in which one party in a transaction has more or superior information compared to another" (investopedia.com) and its effect on the marketplace.

I might add that even if there have been symmetry of information, people’s interpretation of information have factually been nuanced or different such that diversity of thoughts leads to variable actions, and thus voluntary exchange. In reality, there will never be symmetry of information because of the variable factors people read or construe information.

So how does one establish “fairness” in information?

Again, Professor Machan, (bold added, italics original)

As this applies to insider trading, if I have a prior obligation to share my information with others, that is, a fiduciary duty to clients or associates, then it is not that the information is “from the inside” but that it is owed to others that makes my dealings morally and possibly legally objectionable. It is only in such cases that fairness is obligatory, as a matter of one’s professional relationship to others, one established by the promise made or contract one has entered into prior to the ensuing duty to be fair. It is only then that one cause injury by refusing to do what one has agreed to do, namely, divulge information prior to using it for oneself. Accordingly, Hetherington’s objection to insider trading is without moral force. What he should have objected to is the breaching of fiduciary duty, which may occur on occasion by means of failing to divulge information (possibly gained “from the inside”) that has been—perhaps even contractually— promised to a client.

Furthermore, if I have stolen the information—spied or bribed for or extorted it—again the moral deficiency comes not from its being inside information but from its having been ill gotten.

If there has been no established fiduciary duty then fairness or unfairness becomes another abstraction used by politicians as pretext to enforce control over the marketplace. Insider trading, thus, becomes subjective and arbitrarily determined by politicians and regulators

This leads us back to Mr. Olson’s conclusion (bold emphasis mine)

It is tempting to approach the new revelations the way an ambitious prosecutor might, trying to stitch together a test-case indictment from, say, the penumbra of the mail and wire fraud statutes bulked up with a bit of newly hypothesized fiduciary duty here and a little “honest services” there. But that’s not how criminal law is supposed to work: for the sake of all of our liberties, prohibited behavior needs to be clearly marked out as prohibited in advance, not afterward once we realize it doesn’t pass a smell test. But we are still free to deplore the hypocrisy of a Congress that has long been content to criminalize for the private sector—often with stiff jail sentences—behavior not much different from what lawmakers are happy to engage in themselves.

My conclusions

It is unclear whether politicians benefited from insider trading or from other shady deals which has been passed off as stock market investments, thus the alleged outpeformance.

Insider trading, as argued from a moral standpoint, without clear parameters of the how the inequitable distribution or the lack of knowledge affects other parties accounts for as an arbitrary law. Hence these can be used by politicians to harass some participants in the marketplace for political or personal goals, and thus can be construed as an immoral law.

Given that politicians have become above the law, this accentuates the unfairness or the unilateral nature of the ethically flawed insider trading law or regulations

Finally, politicization of the marketplace, bailouts, inflationism, green energy and other market manipulation which predominate today’s have been skewing gains in favor of political clients at the expense of society, so where has the prosecution on insider trading been?

Clearly, what is legal may not be moral as the insider trading law reveals.

P.S. The Philippines has seen its popular Insider trading Scandal via the BW Resources.

Don’t blame this on free markets but one of state corporatism or crony capitalism

As the PCIJ writes, (bold emphasis mine)

The machinations surrounding the operation of the BW Resources Corp. and its affiliated BW Gaming and Entertainment Co. were probably the height of presidential recklessness. To begin with, Estrada was Dante Tan's secret partner in BW, confirms Espiritu. That was why BW became the recipient of so many government favors: an online bingo license given in record time by the Philippine Amusement and Gaming Corporation (Pagcor), the state-owned gaming company; a P600-million loan from the Philippine National Bank that was approved even if the collateral was worthless land; and a contract from Pagcor that ensured the transfer of Pagcor operations to a building that BW was constructing in downtown Manila.

Moreover, as various officials attested during the impeachment hearing, Estrada intervened on behalf of Tan when he was being investigated by the Securities and Exchange Commission (SEC) for insider trading and stock price manipulation. The President also ordered Jimenez and ethnic Chinese businessmen Wilson Sy and Willy Ocier, whose speculative play in the market was believed to have caused BW prices to fall precipitously in late 1999, to return the money Tan had lost to shore up BW prices.

"That was the version of Dante Tan when I confronted him about it," says Espiritu. "That version was also confirmed by the brokers at the Philippine Stock Exchange." Face to face with an angry president, Sy and Ocier agreed to reimburse Tan's losses, according to prosecution lawyers in the Estrada impeachment trial. The payoff was supposedly made not in cash but in 650 million shares of Belle Corp. worth P1.5 billion. The shares were turned over not to Tan but to Estrada, who then supposedly sold them to SSS and GSIS at a profit of P800 million.

Such politically driven stock market manipulation has been fated to meet with divine justice.

President Estrada has been impeached (yes I know Mr. Estrada ran and placed second in the 2010 presidential elections), where the scandal had been part of the impeachment proceedings, and BW Resources crashed back to earth, where crony Dante Tan, reportedly lost lots of money and has fled country and reportedly is in Canada even if the courts eventually absolved him--which again reveals of the nebulousness of the law.

BW Resources (blue chart) [from my previous post]

Huge Military Industrial Complex Equals Big Government

The US have been pampering her military institutions...

From Bloomberg,

The two-star general’s new home came with granite countertops, hardwood floors, stainless appliances and high expectations. It was a gift to the U.S. Army from the taxpayers of Huntsville, Alabama.

Major General James Pillsbury and wife Becky moved into the house during November 2003. The 4,200-square-foot (390-square- meter) brick villa was built using city paving funds. It was the first of 10 costing a total of $3.8 million that the city donated to the Army to enhance nearby Redstone Arsenal as the Pentagon prepared to close bases around the country.

“It’s what we affectionately call ‘pass-through pork,’” says James Link, a retired Army three-star general who was commander of the arsenal in the 1990s.

Luxury quarters for generals were just part of a leave- nothing-to-chance strategy led by Joe Ritch, a 61-year-old lawyer. Armed with campaign contributions and lobbying funds, his network of politicians, boosters and defense executives helped Huntsville expand its military presence, win billions of dollars in Pentagon contracts and add thousands of jobs. Per capita defense spending climbed to 13 times the national rate, creating an oasis of prosperity in a lackluster U.S. economy.

Huntsville helps show why it’s difficult to slash defense spending. Congress and the president have told the Pentagon to find $450 billion in cuts over the next 10 years. The Defense Department’s past efforts have fallen short. In 2005, the military promised to save $36 billion by consolidating bases and missed its goal by almost two-thirds, according to a January 2009 Government Accountability Office report….

Fifty years ago, President Dwight D. Eisenhower warned against “the acquisition of unwarranted influence” by “the military-industrial complex” of defense contractors, lawmakers and Pentagon officials. The local advocacy groups represent a new spoke on the wheel that keeps military spending rolling.

US military spending have been the largest in the world and is even larger than the combined spending of rest of the world. (chart from the Economist)

True, there are some areas or sectors that have benefit from such activities. But it is important to note that military spending has not only been non-productive but crowds out resources meant for consumers.

As Professor Thomas Woods aptly writes,

Measurements of “economic growth” can be misleading if they do not differentiate between productive growth and parasitic growth. Productive growth improves people’s standard of living and/or contributes to future production. Parasitic growth merely depletes manpower and existing stocks of goods without accomplishing either of these ends. Military spending constitutes the classic example of parasitic growth.

In other words, politically privileged sectors (or cronies) are again beneficiaries of politically allocated expenditures—all for the sake of the preservation and expansion of power over society—which incidentally resonates with the title of the Bloomberg article quoted above “Big Gov’t Embraced to Keep U.S. Generals Happy”

As the great Murray Rothbard wrote, (bold emphasis mine)

What the State fears above all, of course, is any fundamental threat to its own power and its own existence. The death of a State can come about in two major ways: (a) through conquest by another State, or (b) through revolutionary overthrow by its own subjects, in short, by war or revolution. War and revolution, as the two basic threats, invariably arouse in the State rulers their maximum efforts and maximum propaganda among the people. As stated above, any way must always be used to mobilize the people to come to the State's defense in the belief that they are defending themselves. The fallacy of the idea becomes evident when conscription is wielded against those who refuse to "defend" themselves and are, therefore, forced into joining the State's military band: needless to add, no "defense" is permitted them against this act of "their own" State.

In war, State power is pushed to its ultimate, and, under the slogans of "defense" and "emergency," it can impose a tyranny upon the public such as might be openly resisted in time of peace. War thus provides many benefits to a State, and indeed every modern war has brought to the warring peoples a permanent legacy of increased State burdens upon society.

So some pointers from the above…

Wars have been provoked or incited (directly or discreetly) by politicians to expand political control over society and or to gratify the whims or ideologies of politicians and or to protect the interest of certain powerful groups (Read Anthony Gregory’s excellent review of historian Ralph Raico’s book here)

Wars do not benefit society, but politicians and their private sector allies.

The threat of wars signifies as propaganda bogeymen meant to justify the existence and the expenditures of the military industrial complex.

Military expenditures have been a drain to the economy as resources are diverted to non-productive or non-market (consumer) uses.

Military expenditures partly account for as implicit buying of the military’s support to sustain politicians’ control over society and to eliminate the risk of a military orchestrated upheaval.

And like the welfare state the warfare state essentially represents crony capitalism or State Corporatism.

Bottom line: The warfare state is largely incompatible with economic, political and civil freedom.

US Debt Passes $15 Trillion or Over 100% of GDP

From Zero Hedge,

Too sad for commentary, but here is some math: total US debt has increased by 41.5%, or $4.4 trillion, from $10,626,877,048,913 on January 20, to $15,033,607,255,920, under Obama as president.

(as a reminder the most recently updated debt ceiling is $15.194 trillion)

Some sectors think that the growing US debt dynamic, which has now gone past 100% of the GDP ($14.582 trillion in 2010), won’t pose as a major concern since US debt has been underwritten on their own currency, the US dollar, which means the US can simply monetize her own debts.

Yet as author Adam Fergusson recently said, in citing his experience with the Weimar Germany, this would tantamount to playing with fire.

The unwieldy US debt dynamic is like a ticking time bomb.

Quote of the Day: Hayek on Equality

There is all the difference in the world between treating people equally and attempting to make them equal. While the first is the condition of a free society, the second means, as De Tocqueville described it, “a new form of servitude.

That’s from Friedrich August von Hayek in Individualism and economic order (hat tip Professor Don Boudreaux)

The Explosive Growth of Shale Gas

The growth momentum of the ‘sunshine’ Shale gas industry has been revving up.

From Bloomberg

Surging crude output in the Bakken shale formation is set to make North Dakota a bigger oil producer than OPEC member Ecuador.

The CHART OF THE DAY tracks North Dakota’s production, which has almost doubled in the past two years, as Ecuadorean output has stagnated.

North Dakota and neighboring Montana are home to the Bakken Formation, identified by the U.S. Geological Survey in 2008 as having as much as 4.3 billion barrels of recoverable oil. Companies extract the oil with hydraulic fracturing, a technique that shoots water, sand and chemicals into shale.

“There’s been an amazing jump in North Dakota output,” said Rick Mueller, a principal with ESAI Energy LLC in Wakefield, Massachusetts. “We are looking for output to be anywhere from 700,000 barrels to 1 million barrels a day within five years.”

North Dakota pumped a record 464,129 barrels a day in September, the most recent month with available data, according to the state government, up from 86,072 barrels 10 years earlier. The state is now the fourth-biggest producer in the U.S. after Texas, Alaska and California, according to the Energy Department.

Ecuador produced 485,000 barrels a day in September, according to a monthly Bloomberg News survey of oil companies, producers and analysts, near the top of its range for the past four years. It was OPEC’s smallest producer until Libya’s production was disrupted this year by the insurrection that toppled Muammar Qaddafi.

The momentous growth by Shale gas industry has largely been ignored by the mainstream obsessed by politically ordained ‘renewable energy’ or by peak oil theorists fixated with Malthusian dynamics

A good example can be seen from the Economist

EFFORTS to tackle climate change include heavy investment in renewable sources of electricity around the world. Solar power saw the biggest leap in 2010, with the installed base jumping 70% compared with 2009 to 40 gigawatts. Wind power also grew strongly, adding 24% of generating capacity. Yet the biggest source of renewable electricity, hydropower, and the smallest, geothermal, both only added 3% to capacity. Finding usable sources of either is becoming increasingly hard or costly. The region that saw the biggest growth in renewable energy projects was power-hungry Asia. Investment in renewables also saw the biggest leap since 2007, with $243 billion spent, a 30% increase over 2009.

Eventually the growth of the industry will likely reach a scale enough to incentivize a structural change or reconfiguration in the distribution of demand.

Anatomy of Political Distribution: Solyndra Scandal

Below is an example of the anatomy of political distribution

From the Washington Post (hat tip Professor William Anderson)

The Obama administration urged officers of the struggling solar company Solyndra to postpone announcing planned layoffs until after the November 2010 midterm elections, newly released e-mails show.

Solyndra, the now-shuttered California company, had been a poster child of President Obama’s initiative to invest in clean energies and received the administration’s first energy loan of $535 million. But a year ago, in October 2010, the solar panel manufacturer was quickly running out of money and had warned the Energy Department it would need emergency cash to avoid having to shut down.

The natural drive in politics has been to either generate votes or to expand/maintain political control over a particular turf. And political mandates of picking winners and losers results to conflict of interests.

The above article shows all these at work: conflict of interest, policy failure and the desire to win votes by shielding the negative effects of applied policies

Yet in politics, since there is no economic calculation involved or no discipline from profit or losses, government failures hardly gets the retribution or reckoning required which largely makes policymakers unaccountable for their actions and incentivizes them to keep repeating similar mistakes.

The net effect is negative externality or that society suffers from these.

Video: Adam Fergusson: Inflationism is Playing with Fire

GoldMoney.com's Director James Turk, interviews Adam Fergusson, author of the bestselling book When Money Dies at the recent Casey Research/Sprott Summit.




Gold Money summarizes the interview...

Fergusson discusses how the hyperinflation affected different groups in German society in different ways – with debtors benefitting and huge numbers of middle-class savers wiped out. Riots, corruption and political extremism were just some of the malignancies encouraged by the hyperinflation. He points out that those who held hard currencies as well as people who held tangible assets like gold and silver were in-large part protected from the worst economic consequences of the hyperinflation. In his words: “gold remained at all times in Germany the measure of what was important to them.”

James and Adam discuss whether or not today there is any way for governments in the developed world to repay their huge debts. Both men conclude that inflation is the only politically viable method of repudiating these unmanageable obligations. Fergusson highlights the importance of velocity and the demand for money in determining whether or not inflation turns into hyperinflation – though points out that this tipping point can take a surprisingly long-time to arrive; in Germany, people kept confidence with the rapidly devaluing mark throughout the First World War, despite clear signs that the country was heading for a currency crisis.

Fergusson thinks that we are heading for high inflation in many countries, but is doubtful that Weimar Germany’s nightmare currency collapse can be replicated in a sophisticated modern economy. He concludes with a quote from Jean-Claude Juncker, prime minister of Luxembourg, who recently commented with respect of the sovereign debt crisis: “we all know what has to be done; what we don’t know is how to get re-elected once we done it.”

While Mr. Ferguson doesn't want to predict the imminence of hyperinflation in the West, he questions if policymakers would have "the kind of courage that politicians cannot have" in preventing a full blown hyperinflation from happening (34:20) once the tipping point arrives. He further sneered at economists for repeatedly predicting the wrong things (33:12).

You can read When Money Dies: The Nightmare of the Weimar Collapse in pdf form by pressing this link

Risks of Too Much Wealth: Family Feuds

One of the major risks from having too much wealth: Family Feuds

Wall Street Journal’s Robert Frank writes,

One reason more wealth doesn’t always bring more happiness is family conflict.

According to the study, conflicts are more likely with higher wealth levels. When asked whether wealth creates family conflict, 40% of those with net worths of $1.5 million to $3 million agreed. Yet among those with $15 million or more in wealth, 46% agreed.

The Philippines has not been a stranger to this. Some of the famous family squabbles has been covered or reported by media.

For instance this from the Philstar.com (2002)

In the Philippines, among the famous family feuds include that of the Cojuangco clan, with the Cory Cojuangco-Aquino side versus the branch of first cousin Danding Cojuangco (a feud which crossed over to the level of national politics); the Zobel-Ayala split between first cousins Jaime Zobel de Ayala and Enrique Zobel; the disagreements among the third-generation Soriano siblings of Anscor; the recent and much-publicized Ilusorio family feud involving warring spouses with three children on each side; the Uytengsu-Young conflict between brothers-in-law in General Milling and Alaska Milk; and the feud between the late Senate President Gil Puyat Sr. and his sister, which caused a split in the Puyat business empire, among many others.

The article cites more cases and attributes the unfortunate familial disputes to the failure to “institutionalize an orderly and clearly-defined succession” or from not having a succession planning-management.

While the lack of succession planning management could signify as a substantial variable in the partitioning of the inherited property rights, I would add that, to my opinion, divergent value scale of members of the family and the base impulse to appropriate than to generate wealth as the other contributing factors.

Ron Paul: Europe’s Bailout Threatens the US Dollar

Congressman Ron Paul shows us why paper money is about to meet its cataclysmic destiny: Voltaire’s curse. (bold highlights mine)

The global economic situation is becoming more dire every day. Approximately half of all US banks have significant exposure to the debt crisis in Europe. Much more dangerous for the US taxpayer is the dollar's status as reserve currency for the world, and the US Federal Reserve's status as the lender of last resort. As we've learned in recent disclosures, this has not only benefitted companies like AIG, the auto industry and various US banks, but multiple foreign central banks as they have run into trouble. Nothing has been solved, however, by offering up the productivity of Americans as a sacrificial lamb. Greece is set to be the first domino to fall in the string of European economies at risk. Rather than learning from Greece's terrible example of an over-consuming public sector and drowning private sector, what is more likely from our politicians is an eventual bailout of European investors.

The US has a relatively small exposure to overwhelmed Greek banks, but much larger economies in Europe are set to follow and that will have serious implications for US banks. Greece is technically small enough to bail out. Italy is not. Germany is not. France is not. It is estimated that US banks have over a trillion dollars tied up in at-risk German and French banks. Because the urge to paper over the debt with more credit is so strong, the collapse of the Euro is imminent. Will the Fed be held responsible if the Euro brings the US dollar down with it?

The most disingenuous aspect of the narrative about the European sovereign debt crisis is that entire economies will collapse if more resources are not bilked from productive people around the world. This is untrue. Tough times are coming for the banks, to be sure, but free people always find a way back to prosperity if the politicians leave them alone. Communities within Greece are coming together and forming barter systems because they know the Euro is becoming unstable. Greeks are learning how to engage in commerce with each other, without the use of fiat currency controlled by central banks. In other words, they are rediscovering what money really is, and they are trading with each other in ways that cannot be controlled, manipulated, squandered, inflated away and generally ruined by corrupt bankers and the politicians that enable them. Farmers will still grow food, mechanics will still fix cars, people will still make things and exchange them with each other. No banker, no politician can stop that by destroying one medium of exchange. People will find or create another medium of exchange.

Unfortunately when politicians try to monopolize currency with legal tender laws, the people find it harder and harder to survive the inflation and taxation to which they are subjected. Bankers should take their dreaded haircut rather than making innocent people pay for their mistakes. The losses should be limited and liquidated, rather than perpetuated and rewarded. This is the only way we can recover.

Government debt is often considered rock solid because it is backed by a government's ability to forcibly extract interest payments out of the public. The public is increasingly unwilling to be bilked to make bankers whole. The riots and the violence in Greece should tell us something about the sustainability of this system.

If we continue to bail out banks and bankers so they can continue to lose money, if we cavalierly put this burden on the taxpayer, it is all too predictable what will happen here.

Evidence where Greece has been seguing into a barter society (real news reporter)

As the Greek economy succumbs to the debt crisis and individual Greeks are made poorer each day through austerity measures and job cuts, many have begun resorting to traditional bartering as a way to make ends meet and at the same time increase their involvement with neighbors and their general community…

As we’ve suggested on previous occasions, when a country goes through a monetary crisis, depression or recession, traditional methods of income disappear, sometimes overnight. As a result, those who are aware that the paradigm has or is shifting and are willing to accept their new reality will prosper.

Greece, referred to by many as the canary in the coal mine of the ever-worsening global economic crisis, is a perfect example of how communities will respond during monetary, fiscal and political chaos. Use their example to your benefit, because similar circumstances will take place in the U.S. and other industrialized Western nations in due time.

Read New York Times’ coverage of the emerging Greek barter economy here

As one would note in the above table from Danske Bank, Greece’s welfare state and heavy regulatory regime has resulted to the stifling of entrepreneurship and the overdependence of bank-financed government which has resulted to this crisis. Greece ranks at the bottom of ease of doing business list.

The new reality of Greece's collapsing welfare state has been changing this dynamic, as people shift activities towards trade in the informal or underground economy.

Yet this serves as proof that inflationism (to save the bankers and the political class) isn’t the solution. Neither is mainstream's favorite proposed panacea: political or fiscal union. The answer lies in unleashing economic freedom.

Argentina’s Currency Controls Spurs Capital Flight

Each time government attempts to control the markets they usually end up having the opposite effect from what has been intended.

In Argentina capital controls have been implemented to stem capital flight.

From the Washington Post, (bold emphasis mine)

Argentine President Cristina Fernandez has placed strict controls on the foreign-exchange market and forced oil, gas and mining companies to keep their export earnings in the country.

The moves are designed to shore up foreign-currency reserves and discourage citizens from sending their assets abroad. But they have set off alarm bells among her critics, prompting comparisons to the heavy-handed economic tactics of Venezuelan President Hugo Chavez.

The result of which has been to accelerate capital flight. From the same article (bold highlights mine)

Until last week, the peso was depreciating at a 7 percent yearly pace, according to Boris Segura, a Latin American analyst for Nomura Securities. The peso today trades at 4.26 to the dollar; a year ago, it traded at 3.9 to the dollar.

The decline has prompted an uptick in the number of Argentines seeking to exchange pesos for dollars.

To discourage such demand, the Fernandez government on Oct. 30 began requiring people seeking to exchange pesos for any foreign currency to enter their national identification numbers into a database to show they aren’t tax scofflaws.

The government also sent 4,400 tax agents to exchange houses across the country to implement the verification system.

Meanwhile, Mrs. Fernandez is trying to keep foreign currencies in the local exchange market by requiring oil, gas and mining companies to cash in their export sales at home. The country’s central bank estimates this will keep some $3 billion in U.S. dollars in the exchange market.

Bloomberg News reported Wednesday that, as Argentina has put limits on foreign exchange purchases, nervous investors are withdrawing their money in anticipation of further controls, and Argentine dollar deposits are heading toward their first annual decline in a decade. Dollar deposits have fallen by about $300 million since the Oct. 31 decree.

“In the past, these sorts of moves have been preludes to quite severe changes to the rules of the game, such as freezes and devaluations,” said Joseph S. Tulchin of Harvard University’s Center for Latin American Studies during a phone call from Cordoba, Argentina. “That’s why this has been setting off alarm bells.”

Argentina’s statist government has been feeling the impact of their profligacy (e.g. 4,400 tax agents), local investors are finding safe haven or diverting capital elsewhere.

Basically, capital controls applied by the Argentine government is sister (corollary) to inflationist policies. This goes hand in hand with the censorship on reporting real inflation rates.

From another Washington Post article

Facing government sanctions, most continue to calculate their own inflation figures. But they do it quietly, their findings used mainly in private reports issued to clients, economists sanctioned by the government said in interviews.

“I feel that I am carrying out serious research and providing an alternative to the government pricing index, which is not credible,” said Bevacqua, a mathematician whose group, GB Consumer Price Index, is nonprofit.

For the first time since 2007 — when statisticians and field workers at the National Institute of Statistics and Censuses were replaced with political appointees and the official inflation rate started to fall — the once-hot-button issue of inflation in Argentina is fading from the front pages, said Victor Beker, director of the Center for Research on the New Economy at the University of Belgrano.

“What the government set out to do was to suppress alternative statistics,” Beker said. “The objective is to ensure that the consultancies stop publishing and that the official numbers become the only statistics.”

Bottom line, if the current political trends persist, Argentina, like their model Venezuela, will be hot candidates for another episode of hyperinflation, in the fullness of time.

China Manipulates Yield Curve to Engineer a Boom

Learning from the West, China’s political authorities has clearly been assimilating Keynesian policies of promoting permanent quasi booms, but this time through the manipulation of interest rates…

From Bloomberg,

China’s long-term bonds are offering investors the biggest yield advantage over shorter-maturity notes in six months as Premier Wen Jiabao relaxes lending curbs to combat a slowdown in Asia’s biggest economy.

The gap between the government’s one-year note yields and 10-year securities widened to 102 basis points on Nov. 11 from 62 at the start of the month, Chinabond data show. That’s the most since May 4. The difference in U.S. Treasuries with similar maturities rose four basis points since October to 204, while the so-called yield curve for Indian bonds shrank two to 19, according to data compiled by Bloomberg.

“The curve will continue to steepen because long-term yields priced in too much concern of a slump,” said Wang Mingfeng, a Beijing-based bond analyst at Citic Securities Co., the nation’s third-biggest brokerage by assets. “There won’t be a hard landing, and the loosening measures may lead to a rebound in growth in the second quarter.”

Wen said Oct. 25 that policies will be “fine tuned,” a turnaround after interest rates were increased five times and lenders’ reserve-requirement ratios raised on nine occasions since September 2010 to tame inflation. The central bank has since lowered the yield on one-year bills for the first time since 2008 and injected 163 billion yuan ($25.7 billion) into the financial system…

Here is how China’s yield curve looks like (as of November 11, from Asian Bonds Online)

A steep yield curve induces borrow short-lend long dynamic or maturity transformation which carries the risk of maturity mismatching that could lead to a systemic bust or insolvency.

Yet, to stave off a hard landing, China has recently been expanding loans to reflate the economy (from the same Bloomberg article)

Some 587 billion yuan of loans were granted in October, the most in four months, the People’s Bank of China reported Nov. 11. That exceeded all 18 economist estimates in a Bloomberg News survey.

“This is a meaningful pickup in new loans which suggests selective easing has already started,”Qu Hongbin, a Hong Kong- based economist with HSBC Holdings Plc (HSBA), wrote in a research note. “China has no risk of a hard landing.”…

Add to expansion of loans, China may also be hiking government expenditures… (from the same Bloomberg article)

As much as 1 trillion yuan of public funds will be injected into the economy in December, ensuring abundant liquidity for lenders and making a cut in reserve-ratio requirements unlikely this year, according to Chen Jianheng, a bond analyst at China International Capital Corp. The finance ministry typically does most of its spending at the end of the year, he said

At the end of the day, the same noxious practices of Western contemporaries haunt China’s political stewards. The implication of which would likely be the same consequence—boom bust cycles.

Over the years, politicians have been doing the same thing and expecting different results.

Politics indeed signifies insanity.