Phisix-ASEAN Bourses Diverge from Global Market Turmoil

Markets have been exposing the farcical nature of politics—the popular belief that the fundamental laws of economics can sustainably be controlled or manipulated by edicts or by fiats or by legal mandates. Thus, I don’t see any validity to the expression which says that “markets are being forced to come to grips with a distressing reality” in describing what’s been happening today. Europe’s debt crisis has been manifesting on the dynamics where markets have been compelling politicians to act. It isn’t the markets that have been detached from reality; instead it has been the vastly skewing influence of politics in the marketplace.

And it would be serious mistake to simply gloss over the motives of politicians and presume that, along with their allies, they would docilely submit to market forces. The political class along with their economic clients have benefited immensely from the incumbent political institutions, organized along the 20^th century vertical top-bottom framework, will likely continue to fight to maintain their entitlements through the preservation of the system.

And such transition would be surrounded by intense volatilities in the marketplace and in the political realm as evidenced today.

It’s not a question of simply reading past performance (current economic figures) and projecting them into the future as the mainstream does. Many who see the world as operating in a prism of the 2008 paradigm or the Japan stagnation or the Great Depression of the 1930s will most likely be mistaken, as consistently proven in the recent past.

Instead, it is the question of how politicians along with their respective bureaucratic leaders will react in the face of the continuing unfolding crisis and the possible ramifications thereof that would matter most in forecasting the path of price trends in financial markets.

Divergences as Emerging Theme

Divergence seems to be an emerging theme.

One would need just to see how equity markets have been reflecting on the emerging signs of divergences, instead of a contemporaneous convergence during periods of market stresses such as in the crisis of 2008.

Below is the weekly performance of the select major equity markets.

While reflecting signs of weakness, Asian equity markets have not been as buffeted in the scale of her Western counterparts.

To consider, globalization has been increasing the correlations of equity markets.

Asian equity markets (ex-Japan) since 1995 has been exhibiting growing interdependence with global markets[1].

Given today’s deepening of globalization trend, Asian equity markets have become more sensitive to developments of the world. And this is why the argument for a decoupling may not be persuasive.

However my thesis has been that—market divergences or relative asset pricing may likely persists for as long as the world doesn’t succumb to a vortex of liquidity contraction or from a global recession which may also manifest the same symptom.

Yet signs of seminal diversity in equity market performance seem even more apparent from a wider timeframe.

The year-to-date performance of select global benchmarks as seen below.

While the European debt crisis has substantially battered the region’s equity markets where the current bear markets—shown by Germany and France could exhibit signs of forthcoming recession, the expected ripple or ‘contagion’ effects from this crisis seems to have been limited, thus far.

Again the ASEAN-4 and the US S&P 500 appear to sizably deviate from the Eurozone. Japan’s gloomy performance may partly be attributed to dour global sentiment but mostly to the first quarter triple whammy natural disaster. Meanwhile, the weak state of China’s equity markets could be a manifestation of either a cyclical slowdown or a bubble bust, which so far has yet to be established.

It is important to note that we cannot discount a shock from happening given the current circumstances. However as I have repeatedly been pointing out, the fundamental difference of the market’s outcome (from that of 2008 or from Japan’s lost decade) will be determined by prospective policy actions.

Monetization and Debt Profiling

Part of the aberration in market pricing can be attributed to the market’s differentiation of credit risks by specific nations.

The fascinating table above from Bespoke Invest[2] signifies an updated tale of the tape of credit risks, where the cost to insure debt of 44 nations via credit default swaps (CDS) has materially surged in the Eurozone led by Greece and Portugal (see bottom portion of the table) whom has surpassed the former laggard socialist Venezuela.

The Eurozone’s crisis has even dragged AAA credit rating France whose costs of insurance have skyrocketed by 142% year-to-date and which has even topped the ASEAN-4. France has now been ‘riskier’ than the Philippines and the ASEAN.

Meanwhile the US continues to exhibit strength or outperformance amidst rising concerns over global credit risks, which has hardly dented on her CDS premiums. This comes in spite of the recent S&P downgrade.

But the above table doesn’t tell the entire story though.

The reason for the current Euro crisis and the relative ‘safe US credit standing’ has largely been due to the debt maturity profile.

Much of the refinancing needs of Italy and the rest of the crisis affected PIIGS have been current or due in near term (top chart[3]).

Meanwhile US debt maturity profile has been farther out of the curve[4].

Nevertheless, sovereign liabilities of the US continue to balloon.

This November, US debts have soared passed 100% of GDP[5] which adds the US in the company[6] of prospective deadbeats.

The major reason why US the hasn’t suffered the same fate as that of the European PIIGS is that the US Federal Reserve has been monetizing her US debts, something which the Keynesians and the Chartalists have been raving about. The implication is that the US, as the world’s premier foreign currency reserve, is virtually immune to laws of economics. For them, money printing allows the US government to spend at will, which hardly will stoke any risks of inflation. Thus, the aversion to discuss any hyperinflation parallels of Weimar Germany or of Zimbabwe.

Yet the seeds towards the destruction of the US dollar have already been sown, the US Federal Reserve has reportedly outpaced China as the largest owner of US debt[7]. This means that the US has principally been relying on money printing by the Fed to finance her present liabilities.

This also shows the absurdity of the idea that the US Federal Reserve won’t commit to additional quantitative easing (QE) measures, as argued by some.

The US is faced with extremely challenging circumstances of pronounced weakness in many parts of the global economy that could intensify the risks of another recession, in an environment where national (US) saving rates has on a deepening slump[8], the worsening insolvency crisis at the Eurozone area that will extrapolate to reduced access to private financing and a possible contagion from a distressed banking sector[9].

True, US bond yields have been drifting in near record lows. However this hasn’t been a sign of systemic deflation (yes oil prices is just under $100, gold at under $1,700), instead low yields have been representative of policies targeted at manipulating the yield curve and of the temporal haven currency reserve status of the US dollar[10].

To add US CPI inflation has been climbing which in October was at the 3.5% rate and has been above the 1914-2010 average at 3.38%[11]. To consider, US CPI construct has vastly been skewed towards housing[12] which doesn’t accurately signal the real rates.

Yet the shortfall of financing US debts will be reinforced by the ongoing ‘slowdown’ in China whom has been resorting to her own whack-a-mole or piecemeal approach in applying bailouts[13]. And this also should apply to other emerging markets as well.

So far, the appetite to finance US debts by foreign central banks has been drying up[14].

Also the current crisis in the Euro area will postulate an environment of an even tighter competition with the US, the EU and other governments, as well as, other private entities wanting to access to savings from private sector.

Of course a no QE scenario for the FED will only happen if Bernanke and the rest of the FOMC will experience the epiphany of letting the markets clear.

But I would say that the odds for such an event to happen will proximate ZERO.

Central Bank Activism

For as long as the rates of inflation remains suppressed, politicians and their bureaucrats will use the current opportunities to test the limits of controlling and manipulating of the markets.

Thus any proclamations to impose self-discipline should be seen with cynicism.

For instance, the once defiant Germans, who have strongly been opposing the European Central Bank’s (ECB) role as ‘lender of last resort’, appear to be gradually acceding to pressures[15] for the ECB to aggressively backstop the Euro in the name of fiscal integration or union.

In reality, today’s signs of divergences seem to be driven by idiosyncratic liquidity conditions of each nation—where asset prices appear to be priced depending on relative systemic exposure on debt combined with the prospective impact of loose monetary conditions to their respective markets and the economy. These, aside from the transmission effects from policies set by the US Federal Reserve.

Thus in considering the above, the low leverage of ASEAN 4 makes them more receptive to the present boom bust policies.

Yet what sets the today’s markets apart from the 2008, Japan’s stagnation and or the Great Depression has been the central bank activism which as I have been reiterating has been navigating on uncharted treacherous waters.

Artificially manipulated interest rate together with money printing results to relative pricing of assets, which all comprises the inflation cycle.

Bottom line: I think the boom phase for the Phisix ASEAN markets, despite the turbulence in the EU, remains intact, barring any unforeseen events.

---

[1] Worldbank.org Navigating Turbulence, Sustaining Growth WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2011, VOLUME 2

[2] Bespokeinvest.com Global Sovereign Credit Default Swap Prices, November 25, 2011

[3] Macleod Alasdair Watch out for maturing debt, November 19, 2011

[4] Merk Axel, Operation Twist a Primer for QE3? , Merk Funds, October 4, 2011

[5] See US Debt Passes $15 Trillion or Over 100% of GDP, November 17, 2011

[6] Galland David Monetary Madness – Is the US Monetary System on the Verge of Collapse? , October 18, 2011, Daily Reckoning

[7] CNSNews.com Fed Now Largest Owner of U.S. Gov’t Debt—Surpassing China, November 16, 2011

[8] Bloomberg.com U.S. Economy Grew Less Than Forecast on Inventories, November 22, 2011 SFGate.com

[9] See The US Banking Sector’s Dependence on Bernanke’s QEs, October 5, 2011

[10] See Market Crash Confirms Some of My Thesis on Gold and Decoupling, October 2, 2011

[11] Tradingeconomics.com United States Inflation Rate

[12] See US CPI Inflation’s Smoke and Mirror Statistics May 18, 2011

[13] See China Expands Bailout Measures, Reduces Reserve Requirements for Select Financial Firms, November 24, 2011

[14] Vuk, Vedran Are Foreign Banks Losing Confidence in US Treasuries? October 17, 2011 Casey Research

[15] See Will the European Central Bank Relent to Political Pressures to Increase Debt Monetization? November 26, 2011

Euro Debt Crisis: The Confidence Fairy Tale and Devaluation Delusion

The Confidence Fairy (Fear and Greed) Fable

Suggestions have been made that Euro crisis has been an issue of confidence or “animal spirits” as alleged by the mainstream analysts.

This represents half-truth.

The idea that people are driven by sheer optimism or pessimism dumbs down the people’s ability to look after their self-interest. Of course those peddling such rubbish assume that they are above the rest of mankind.

Yet in a bizarre way of thinking, they use assorted and complex economic analysis when at the end of the day, everything for them, essentially boils down to random optimism or pessimism.

The assumption that psychological factors as purely driving the marketplace ignores the truism of the collective individual’s ability to calculate on the elemental tradeoffs of cost relative to benefits or of risk relative to rewards.

People don’t buy financial securities because they wake up in the morning feeling ‘optimistic’ or sell when they feel ‘pessimistic’. People buy or sell because they see, rightly or wrongly, beneficial aspects from the execution of such actions. Whether psychic or monetary, the assumed rewards are subjectively determined by the person taking action.

The supposed confidence fairy of fear and greed are essentially driven by an underlying event stimulus or incentive and not by mere impulse.

For instance, a market crash doesn’t happen because of fear itself. Instead a crash happens when people discover that the issues they own have not been priced accordingly or has substantially been worth below the most recent value as a result of some chain of causes.

Like those stampeding out of a theater (effect) because of a sudden discovery of fire (cause), the simultaneous act by many to exit ownership of financial securities fuels impulses or emotions to go along with the crowd (bandwagon effect). Thus fear signifies a symptom of an underlying cause rather than a cause in itself.

Yet fear and greed are prominent symptoms of bubble cycles.

During market euphoria usually at the acme of a bubble cycle, people pile up on ascendant prices because of the thought of the perpetuity of such price trends.

Of course, this can be only made possible by the loosening of extensions of credit (circulation credit) where the credit-collateral feedback loop mechanism gets rolling—where rising collateral values prompts for more lending, and more lending increases collateral values.

Thus, circulation credit (which are consequences of artificially suppressed interest rates and from policy directives, e.g. credit subsidies, bailouts) fuels bubble cycles which impels contortions in people’s economic calculations and subsequently results to the emotive price chasing phenomenon—Greed.

The opposite phenomenon holds true during bubble busts. The credit-collateral feedback loop mechanism goes into a reverse operation—falling collateral values prompts for margin calls and the calling in of bank loans both of which decreases collateral values. The simultaneous acts of exodus essentially signify—Fear.

In truth the confidence fairy has nothing been more than a pretext for more government intervention.

As the great Murray Rothbard once wrote[1]

Keynesian doctrine is, despite its algebraic and geometric jargon, breathtakingly simple at its core: recessions are caused by underspending in the economy, inflation is caused by overspending. Of the two major categories of spending, consumption is passive and determined, almost robotically, by income; hopes for the proper amount of spending, therefore, rest on investment, but private investors, while active and decidedly non-robotic, are erratic and volatile, unreliably dependent on fluctuations in what Keynes called their "animal spirits."

Fortunately for all of us, there is another group in the economy that is just as active and decisive as investors, but who are also--if guided by Keynesian economists--scientific and rational, able to act in the interests of all: Big Daddy government. When investors and consumers underspend, government can and should step in and increase social spending via deficits, thereby lifting the economy out of recession. When private animal spirits get too wild, government is supposed to step in and reduce private spending by what the Keynesians revealingly call "sopping up excess purchasing power" (that's ours).

The Euro crisis has hardly been founded from the issue of greed and fear, but of boom bust cycles.

Following massive imbalances acquired from the antecedent boom, market prices have been prevented from clearing or from seeking to adjust to the required levels that would allow resources to be transferred from unproductive to productive use. The discoordination and coordination mechanism of the marketplace have been impeded.

Yet the constant interventions that has sustained the current artificial price levels have led to mass distortions and market participants astray. So once the effect of interventions subsides or once markets discover the artificiality of such price levels, volatility ensues. Emotional transactions follow.

Hence, the distributive outcomes from a significantly politicized marketplace suggest of massive price distortions from repeated government interventions. This has been mistakenly construed or touted as fear. Those saying so have been misreading effects as the cause.

Political Insanity and the Devaluation Elixir

The mainstream has also been suggesting that the gold standard effect from the Eurozone Union, which prohibits internal devaluation of member states, has been a cause to this crisis. For me this represents as unalloyed hogwash[2].

While I agree that the EU needs to be dissolved because of the latent intention to politically centralize Euro economies such as the supposed need to fiscally integrate the EU, I oppose the idea of nationalizing currency for the sole purpose of inflationism via devaluation.

I will not elaborate on the evils of inflationism[3], but rather point out how ridiculous the assertion of supposedly allowing Greece, for instance, to devalue to become ‘competitive’.

Based on the average hourly labour costs in the business economy in 2009[4], Greece has been one of the cheapest among the peripheral EU states. Italy, Spain and Portugal are just within the range of Greece.

The cheaper labor costs (on the right) belong to those of emerging Europe.

And labor costs signify as part of labor market efficiency[5]

The crisis affected PIIGS also belong to the least competitive rankings[6] in terms of labor efficiency.

In other words, cheap labor did not translate to export greatness.

Thus, devaluation will hardly impact the competitiveness of the labor market because this does not treat the disease.

The disease which plagues the PIIGS are highlighted by the unfriendly business enviroment[7] caused by too much regulations and bureaucratic hurdles.

And importantly, by the intractable government expenditures[8] mostly from the welfare state as measured by the Fiscal Imbalances (FI)[9].

At the end of the day, those who yearn for a Zimbabwe solution to the Euro don’t have the intention of resolving the crisis but to promote the same ills that has blighted them.

No wonder Albert Einstein called—doing the same thing and expecting different results—insanity.

---

[1] Rothbard Murray N. Keynesianism Redux, Chapter 12, Making Economic Sense

[2] See Quote of the Day: A Very Expensive Education in Basic Economics, November 10, 2011

[3] See Vatican Banker Endorses ECB’s Inflationism November 24, 2011

[4] Euro Commission Wages and labour costs, Eurostat

[5] Financial-lib.com Labor efficiency variance: the number of hours actually worked minus the standard hours allowed for the production achieved multiplied by the standard rate to establish a value for efficiency (favorable) or inefficiency(unfavorable) of the work force

[6] Infectiousgreed.com Reforming Labor Markets, November 14, 2011

[7] Danske Research Euro Area Macro Handbook, November 2011

[8] Gokhale Jagadeesh Measuring the Unfunded Obligations of European Countries January 2009

[9] The fiscal imbalance (FI) measures the size of the total imbalance built into current fiscal policies, including future changes already scheduled by law. It is a country’s unfounded liability, looking indefinitely into the future. It is the difference between the present cost of continuing current government spending programs, including entitlement promises, present public debt, net of expected tax revenues. It is the amount of additional resources the government must have on hand today, invested and earning interest, in order to continue policies forever. Alternatively, it equals the additional net revenue or cost savings required from future policy adjustments to close the budeget gap embedded in current fiscal policies.

The FI is similar to outstanding public debt in one important way: It grows larger over time because of accruing interest costs. In addition fiscal policies that imply a positive FI are unsustainable: Because the ratio of FI to the present value of future GDP also grows larger over time, the implied annual service payments would eventually become larger than annual GDP

Will the European Central Bank Relent to Political Pressures to Increase Debt Monetization?

Here is what I said last week

I would conjecture that rules, laws, regulations, policies or self-imposed limits change according to the convenience and the interests of politicians.

This seems to be happening. A dithering European Central Bank (ECB) may be “softening” their stance as pressures for her to backstop the Eurozone mounts.

The Euro crisis has been rapidly spreading like a wildfire.

Even Germany’s bonds are being dragged by the crisis. (chart from Bespoke Invest).

Last night, Belgium’s credit rating had been lowered by the S&P. Belgium follows Slovenia, Spain, Italy, Ireland, Portugal, Cyprus and Greece as euro-area countries having their credit rating cut this year. The country of 10.8 million people, whose capital, Brussels, is home to the European Commission and the North Atlantic Treaty Organization, last had its credit standing lowered in December 1998 by Fitch Ratings. (Bloomberg)

The following report from Bloomberg shows us how political interests will likely lead to a change in the rules of the game in dealing with the Euro Crisis, (bold emphasis mine)

European governments may ease provisions in a planned permanent rescue fund requiring bondholders to share losses in sovereign bailouts, German Finance Minister Wolfgang Schaeuble suggested.

Schaeuble signaled that Germany may retreat from demands that private creditors contribute to rescues in exchange for European treaty amendments toughening rules on budget oversight.

European efforts to speed the setup of the 500 billion-euro ($662 billion) European Stability Mechanism from its planned mid-2013 debut have lost momentum as Germany and the Netherlands resisted pleas by France, Spain, Portugal and Ireland to drop its bondholder-loss provisions.

“Basically, we agreed on the principle for the ESM already in July,” Schaeuble told reporters in Berlin after talks with his Dutch and Finnish counterparts today. “If we now manage to move toward a stability union, we’ll see how one might possibly adjust the treaty.”

The debt crisis rattled Germany, Europe’s biggest economy, with the failure of a bund auction two days ago. Bond yields in Spain and Italy surged today, with Spain dropping a plan to auction a three-year benchmark next week and Italy being forced to pay more to borrow for two years than for 10. Belgium's credit rating was cut today to AA from AA+ by Standard and Poor's.

While there “may be discussions in Brussels” next week on sector involvement under the ESM, the aim of a finance ministers’ meeting will be to flesh out details of the agreement by EU leaders last month to write down Greek debt, recapitalize banks and strengthen the existing rescue fund, the European Financial Stability Facility, Schaeuble said.

ECB Pressure

As the crisis worsens, the European Central Bank is coming under pressure to step up its response. While France yesterday agreed to stop pressuring the ECB to print money, policy makers today signaled they are willing to offer cash-strapped banks more liquidity if needed.

Pieces of the jigsaw puzzle seems falling into place.

The probable reason why France has “agreed to stop pressuring the ECB” is because Benoit Coeure, chief economist at the country’s finance ministry has reportedly been nominated to the ECB to replace Lorenzo Bini Smagh, which appears to be part of the horse trading on the political appointments happening at the European Central Bank.

The growing clamor for the EU to have a "fiscal union" has served as veneer for the ECB to go on the path similar to the US Federal Reserve in pursuing an aggressive monetary policy stance.

Looks like we may be headed there pretty soon.

Quote of the Day: Perversion of the Law

The law perverted! And the police powers of the state perverted along with it! The law, I say, not only turned from its proper purpose but made to follow an entirely contrary purpose! The law become the weapon of every kind of greed! Instead of checking crime, the law itself guilty of the evils it is supposed to punish! If this is true, it is a serious fact, and moral duty requires me to call the attention of my fellow-citizens to it.

A very time relevant quote from the great Frédéric Bastiat, The Law (hat tip Professor Art Carden)

War on Drugs: Misplaced ‘Follow the Money’ Priorities by Cops Results to More Crimes

You think the war on drugs make society peaceful? Think again.

Police officers, like any human being, also follow the money. But unlike us, since they are armed by mandate, they may use the law for their self-interest or benefit at our expense.

From Radley Balko of the Huffington Post (bold emphasis added) [hat tip Don Boudreaux]

As Jessica Shaver and I chat at a coffee shop in Chicago's north-side Andersonville neighborhood, a police car pulls into the parking lot across the street. Then another. Two cops get out, lean up against their cars, and appear to gaze across traffic into the store. At times, they seem to be looking directly at us. Shaver, who works as an eyebrow waxer at a nearby spa, appears nervous.

"See what I mean? They follow me," says Shaver, 30. During several phone conversations Shaver told me that she thinks a small group of Chicago police officers are trying to intimidate her. These particular cops likely aren't following her; the barista tells me Chicago cops regularly stop in that particular parking lot to chat. But if Shaver is a bit paranoid, it's hard to blame her.

A year and a half ago she was beaten by a neighborhood thug outside of a city bar. It took months of do-it-yourself sleuthing, a meeting with a city alderman and a public shaming in a community newspaper before the Chicago Police Department would pay any attention to her. About a year later, Shaver got more attention from cops than she ever could have wanted: A team of Chicago cops took down her door with a battering ram and raided her apartment, searching for drugs.

Shaver has no evidence that the two incidents are related, and they likely aren't in any direct way. But they provide a striking example of how the drug war perverts the priorities of America's police departments. Federal anti-drug grants, asset forfeiture policies and a generation of battlefield rhetoric from politicians have made pursuing low-level drug dealers and drug users a top priority for police departments across the country. There's only so much time in the day, and the focus on drugs often comes at the expense of investigating violent crimes with victims like Jessica Shaver. In the span of about a year, she experienced both problems firsthand….

In other words priority has been skewed towards milking out drug felons at the expense of other peacekeeping tasks. All because of following the money

Again from Huffington Post…

Arresting people for assaults, beatings and robberies doesn't bring money back to police departments, but drug cases do in a couple of ways. First, police departments across the country compete for a pool of federal anti-drug grants. The more arrests and drug seizures a department can claim, the stronger its application for those grants.

"The availability of huge federal anti-drug grants incentivizes departments to pay for SWAT team armor and weapons, and leads our police officers to abandon real crime victims in our communities in favor of ratcheting up their drug arrest stats," said former Los Angeles Deputy Chief of Police Stephen Downing. Downing is now a member of Law Enforcement Against Prohibition, an advocacy group of cops and prosecutors who are calling for an end to the drug war…

At the same time, there's increasing evidence that the NYPD is paying less attention to violent crime. In an explosive Village Voice series last year, current and former NYPD officers told the publication that supervising officers encouraged them to either downgrade or not even bother to file reports for assault, robbery and even sexual assault. The theory is that the department faces political pressure to produce statistics showing that violent crime continues to drop. Since then, other New Yorkers have told the Voice that they have been rebuffed by NYPD when trying to report a crime.

The most perverse policy may be asset forfeiture. Under civil asset forfeiture, police can seize property from people merely suspected of drug crimes. So long as police can show even the slightest link of drug activity to a car, some cash, or even a home, they can seize it. In the majority of cases, most or all of the seized cash goes back to the police department. In some cases, the department has taken possession of cars as well, but generally non-cash property is auctioned off, with the proceeds then going back to the department. An innocent person who has property seized must go to court and prove his property was earned legitimately, even if he was never charged with a crime. The process of going to court can often be more expensive than the value of the property itself.

Asset forfeiture not only encourages police agencies to use resources and manpower on drug crimes at the expense of violent crimes, it also provides an incentive for police agencies to actually wait until drugs are on the streets before making a bust. In a 1994 study reported in Justice Quarterly, criminologists J. Mitchell Miller and Lance H. Selva watched several police agencies delay busts of suspected drug dealers in order to maximize the cash the department could seize. A stash of illegal drugs isn't of much value to a police department. Letting the dealers sell the drugs first is more lucrative.

Read the rest here

Again like all human beings, the police resorts to actions based on priorities or on personal value scales. And arbitrary laws affect their underlying incentives to act as public officials. Apparently the war on drugs tend to misplace their priorities, all at the expense of society.

China Aims To Centralize Underground Stock Exchanges

Informal economies are symptomatic of the state of affairs for economies struggling with byzantine legal and bureaucratic entanglements.

But in today’s modern finance based economy, it’s my first time to hear of the proliferation of informal stock exchanges.

From Bloomberg,

China will ban trading of securities and futures on unauthorized exchanges to regulate the market and prevent financial risks, the State Council said.

Some of the trading activities have led to price manipulation and fund embezzlement by the exchange managers, China’s cabinet said in a statement dated yesterday. Such problems may cause regional financial risks and endanger social stability, the statement said.

There are over 300 unregulated bourses across the country, the Financial Times reported today, citing analysts. Turnover on the three authorized commodity futures and a financial futures exchanges in China fell 4 percent to 113.4 trillion yuan ($18 trillion) in the first ten months from a year ago, according to the China Futures Association.

“Regulators are concerned because these exchanges do not pay much attention to risk control, and volatile trading could hurt the participants and have a spillover effect on other companies and related industries,” said Shen Zhaoming, a Shanghai-based analyst at brokerage Changjiang Futures Co. “Local governments all hope for bigger economic influence, and they think establishing such exchange platforms is an efficient way to achieve the goal.”

Apart from the stock and futures exchanges approved by the State Council, no other bourses are allowed to list new shares, offer centralized pricing or make markets, the statement said. Exchanges that trade gold, insurance or credit products must receive approvals from financial authorities under the State Council, it said.

Price manipulation and fund embezzlement (e.g. MF Global Holdings) have also been present in ‘regulated’ exchanges.

Centralization does not sanitize or prevent markets from having miscreants. To the contrary, politicized regulated markets may even spawn them e.g. Philippines’ BW Resources Scandal and the US shadow banking system, where the former is the result of cronyism and the latter has mostly been product of regulatory capture and regulatory arbitrage.

So price manipulation and fund embezzlement would be a flimsy pretext by the Chinese government to exercise control over informal exchanges.

Besides, bailouts, unilateral credit margin maneuvering, quantitative easing, artificially low interest rates, Operation Twist (manipulation of the yield curve), Basel Accord (Financial Repression), ban on shorts and other forms of politicization of the marketplace represent price manipulations which has been the du jour policies being undertaken by global governments at the expense of the average market participants and the taxpayers.

So it is ‘legal’ for governments and their cronies to finagle or to manipulate or to exercise insider trading of the markets. To add, governments are beyond or are exempt from the laws which they implement. Again this implies that 'what may be legal is not moral'. One would call this political inequality.

Finally it is simply amazing how “300 unregulated bourses” exists in China.

Again some possible drivers here,

-regulated exchanges have been too much bureaucratic or extensively politically controlled to force many financial market investors to go underground,

-the major bourses of mainland China Shanghai and Shenzhen have not expanded enough to cover the entire country. However, the current state of technology seem to reduce the odds of such dynamic unless restrained by politics.

-China’s capital markets have been so limited or constrained such that boom bust policies have been compelling many investors to seek ways to stretch on yields by participating in the informal stock exchanges. And a possible symptom of this would be the China’s version of the shadow banking or financing system that has funded the recent property boom (and possibly informal stock exchanges too?).

This should be a great example of how the markets are always way ahead of and manage to circumvent regulators—a perpetual cat and mouse game.

Magazine Cover Indicator: Signs of a Euro Bottom?

The business of any magazine publisher is to sell. That’s why magazines usually dwell on the popular, sensational and or the controversial—they are easy to sell.

And because the dominant public sentiment has usually been reflected on magazine covers, popular themes occasionally serve as useful indicators of pivotal market inflection points.

The recent cover of The Economist magazine deals with prospective end of the Euro.

See Economist article here

I am not to argue here about the prospects of the dissolution of the Euro, as I think all paper currencies will eventually meet their fate in the fullness of time. However, to repeat, magazine covers may imply an important inflection point which essentially could manifest on what is known as the crowded trade phenomenon.

And the magazine cover indicator seems to have a noteworthy track record as shown below.

January 1983. Time Magazine worries about the debt bomb which didn’t happen. This looks more appropriate today.

September 1977. Time magazine exhibited concerns of real estate bubble. A bubble that happened nearly 2 decades later.

August 1997. This has been one of the most popularly featured contrarian magazine indicator. 1979 was followed by the greatest boom in the US stock market history.

July 2002. Businessweek’s Angry Bear cover signaled the US stock market bottom and the next phase of the bubble cycle.

2006. Time Magazine swings to the beat of the US real estate bubble as the the bubble peaked.

Oct 2003 The Economist accentuates the End of Oil Age as oil prices bottomed, article here

December 2004. The Economist underscores popular sentiment of the crashing US dollar. A furious rally in the US dollar occurred the following year or in 2005.

See more magazine cover indicators from Minyanville here

As caveat, I don’t know what were the other magazine covers during the abovestated periods, and that there has been no tabulation of the batting averages of such indicators of specific magazines. I am disclosing this to avoid on “framing” the issue.

Yet even if the Euro were to bottom, I’d buy gold instead.

China Expands Bailout Measures, Reduces Reserve Requirements for Select Financial Firms

China’s government selectively lowered reserve requirements as part of credit boosting measures (euphemism for bailouts)

From Bloomberg, (bold emphasis mine)

China widened efforts to support cash-strapped companies in Zhejiang and rural areas hit by a credit squeeze that’s slowing the second-largest economy just as Europe’s debt crisis saps export demand.

The People’s Bank of China cut the reserve ratio for more than 20 rural credit cooperatives nationwide by half a percentage point, according to an announcement from its Hangzhou branch in Zhejiang, where small businesses have complained about lack of access to credit. Bank of America Merrill Lynch predicts officials will lower the ratio for large commercial banks early in 2012.

Evidence is mounting that growth has moderated in the economy that’s led the global expansion, with home sales falling 25 percent last month and a report yesterday signaling manufacturing may shrink the most in almost three years. Premier Wen Jiabao has pledged to “fine tune” policy as needed.

“The unexpectedly sharp drop in China’s flash PMI for November, if corroborated by other indicators, is likely to push policy makers to go beyond policy ‘fine-tuning’ to outright easing,” said Mark Williams, a London-based Asia economist at Capital Economics Ltd. “Confirmation that the People’s Bank has lowered reserve requirements for some banks is likely to be only the start.”…

The Chinese central bank’s move yesterday reduces the percentage of deposits the cooperatives are required to park with the central bank to 16 percent, a “normalization” after an increase a year ago, the Hangzhou branch said in its statement yesterday. The extra 0.5 percentage point requirement had penalized lenders that failed to meet lending targets in rural areas, and was imposed after a check carried out each November, it said.

In another sign of China’s shift, the central bank on Nov. 11 said local-currency lending was 586.8 billion yuan ($92 billion) in October, exceeding September’s 470 billion yuan and higher than the 500 billion yuan median estimate in a Bloomberg News survey.

Injecting Liquidity

The PBOC has also injected greater liquidity into the market for loans between banks, through open market operations that have depressed interbank rates, Goldman Sachs Group Inc. economists wrote in a note to clients last week. Further tools will include a slower pace of currency appreciation and looser fiscal policy, Goldman analysts said.

Under the incumbent fiat currency regime, the policy of bailouts has become a widespread practice, which China has not been exempt. Nonetheless, these political actions will intensify China’s domestic boom bust cycle dynamics.

Vatican Banker Endorses ECB’s Inflationism

Not even the pious seem to be exempt from the temptations of inflationism

From Wall Street Journal,

The European Central Bank should act as the euro zone’s lender of last resort and the implementation of the euro-zone bonds proposal are both necessary in the bloc’s efforts to rein in the debt crisis, the head of the Vatican’s bank said Wednesday.

The signal that these measures would send to investors would be so strong as to abate speculative attacks on some euro-zone countries, Ettore Gotti Tedeschi, chairman of the Vatican bank, known as the Institute of Religious Works, said at a conference in Rome on the debt crisis.

The aforementioned Vatican banker advocates on the GREED which the Vatican recently vehemently censured. This also implies that he endorses the rescue of the politically privileged banking class and the political class at the expense of the average citizens.

The left hand does not know what the right hand is doing.

Inflationism is evil, Henry Hazlitt explained why…

The real evil of inflation is that it redistributes wealth and income in a wanton fashion often unrelated to the contribution of different groups and individuals to production. All those who gain through inflation on net balance necessarily do so at the expense of others who lose through it on net balance. And it is often the biggest gainers by inflation who cry the loudest that they are its chief victims. Inflation is a twisted magnifying lens through which everything is confused, distorted, and out of focus, so that few men are any longer able to see realities in their true proportions.

More…

An inflation tends to demoralize those who gain by it even more than those who lose by it. The gainers become used to an "unearned increment." They want to keep their relative gains. Those who have made money from speculation prefer to continue this way of making money instead of working for it. I remember once, early in 1929, a conversation between two friends, both of whom held prominent posts as book reviewers but both of whom were heavily in the stock market. They were exchanging stories about their profits. "Today your salary," they agreed, "is just a tip." People do not like to work full time just for a tip.

The long-term trend in an inflation is toward less work and production, and more speculation and gambling. The profiteers from inflation tend to spend freely, frivolously, and ostentatiously. This increases the resentment of those who have been less favored. The incentive to ordinary saving, in the form of savings accounts, insurance, bonds, or other fixed-income obligations, tends to disappear. The spectacle of quick and easy returns increases the temptations to corruption and crime.

It is not merely that inflation breeds the gambling spirit and corruption and dishonesty in a nation. Inflation is itself an immoral act on the part of government. When modern governments inflate by increasing the paper-money supply, directly or indirectly, they do in principle what kings once did when they clipped the coins. Diluting the money supply with paper is the moral equivalent of diluting the milk supply with water. Notwithstanding all the pious pretenses of governments that inflation is some evil visitation from without, inflation is practically always the result of deliberate governmental policy.

‘Heavenly’ noble sounding policies applied to reality ‘earth’ doesn’t work. Inflationism is the work of the devil in disguise.

Quote of the Day: Charitable Markets

But the truth is, Wal-Mart and its counterparts spread far more holiday-food cheer than do churches and public-service groups.

Scholars estimate that the presence of Wal-Mart in a community reduces food prices somewhere between 10% and 15%. That's equivalent to shoppers receiving an additional 5.2 to 7.8 weeks of "free" food shopping. That Wal-Mart's customer base is skewed toward lower-income shoppers reinforces the beneficent consequences of its price effect.

That’s from T. Norman Van Cott of Ball State University in a letter to the Editor at the Wall Street Journal (hat tip: Don Boudreaux)

Global Capital Markets: Debt over Equity

The Economist writes,

Many observers are worried about the rapid growth of bank lending in the Middle Kingdom. Indeed, China's private-sector credit grew to 131% of GDP by the end of 2010, according to a recent financial-stability report by the IMF. However, this partly reflects the unusual dominance of banks in China’s financial system. If other forms of finance are included, such as bonds and equities, China ceases to stand out so much when compared with other countries. Total financial credit is only 2.5 times GDP, not much higher than in Brazil or India, and far less than some of the developed countries now facing more worrying economic difficulties, such as low-growth America, Britain and Japan.

I’d see the chart from a different angle.

The chart reveals of the bias of debt over equity financing where a broad part of today’s distribution of “credit intermediation” has been forged by myriad regulations and mandates. Much of these has been made to promote the interests of the welfare-warfare state via the politically endowed banking sector which has been backstopped by the central banks.