How Reliable is CNBC’s Rankings of the Best Countries with Long Term Growth?

CNBC recently came out with a slide show depicting that troubles in the Eurozone and in the US has been prompting investors to search for new or alternative markets to invest in. And based on their selections mainly derived from demographics, natural resources or geography they came up with the following list:

10 Algeria

9. China

8. Egypt

7. Vietnam

6. Malaysia

5. Bangladesh

4 India

3 Peru

2 Ukraine

And the winner of CNBC’s best countries for long term growth…

…is the Philippines.

Given the endowment effect or home bias I should be screaming “yehey, buy buy buy the Philippines!”

Here is what CNBC has to say on the Philippines

1. Philippines

Projected annual growth: 7%

2010: $112 billion*

2050 projected GDP: $1.688 trillion

The Philippines has one of the fastest-growing populations in Asia. The population is set to jump by almost 70 percent over the next 40 years, and HSBC believes the combination of its powerful demographics and strong fundamentals will drive the economy to become the world’s 16th largest by 2050. That would mark a jump of 27 places from its current ranking of 43.

The country is one of the world’s largest exporters of labor, with over 9 million Filipinos working abroad, according to the latest data from the Commission of Filipinos Overseas. In 2010, almost $19 billion was sent back to the Philippines as remittances from Filipinos working abroad.

More recently, the country’s fast-developing business process outsourcing (BPO) industry has helped keep some of the workforce from leaving the country. Already 350,000 Filipinos are estimated to work in call centers, compared with 330,000 Indians, according to the Contact Center Association of the Philippines. The industry is projected to provide more than 1 million jobs within two years.

The economy’s focus on the services sector and domestic consumption, as well as a lower exposure to global financial markets, helped it to escape a recession following the 2008 global financial crisis.

It would seem as reductio ad absurdum to predict on long term growth based simply on variables of natural resources, demographics and or geography.

If these variables have been instrumental in generating prosperity, then the linkages should have been evident today.

Yet in looking at the world’s top 20 wealthiest nations based on per capita income from Wikipedia.org we see limited influences of abundant natural resources, young populations (demographics) or geography.

Why?

Countries with natural resources are usually afflicted by what is known as resource curse, which according to Wikipedia.org

refers to the paradox that countries and regions with an abundance of natural resources, specifically point-source non-renewable resources like minerals and fuels, tend to have less economic growth and worse development outcomes than countries with fewer natural resources. This is hypothesized to happen for many different reasons, including a decline in the competitiveness of other economic sectors (caused by appreciation of the real exchange rate as resource revenues enter an economy), volatility of revenues from the natural resource sector due to exposure to global commodity market swings, government mismanagement of resources, or weak, ineffectual, unstable or corrupt institutions (possibly due to the easily diverted actual or anticipated revenue stream from extractive activities).

In reality, the biggest reason why the resource curse occurs has been due to the cartelization of resource based industries by politicians and their oligarchic cronies. These have mostly led to a political economic regime that have been anchored on anti-competition regulations which inhibits external and domestic trade.

Also it would be pretty naïve to focus on geography when vastly improving modes of transportation have been reducing the attendant costs.

Transport, Insurance and freight costs as share of import cost have been on a secular decline

Mark Dean of the Bank’s International Economic Analysis Division and Maria Sebastia-Barriel of the Bank’s Structural Economic Analysis Division notes in the following study,

One of the most obvious costs to international trade is the cost of transporting goods from one country to another. Transport technologies are continually improving and transport services are also becoming cheaper through increased competition. The goods transported are also changing; some goods are now transported electronically, such as newspapers and magazines, due to improvements in communication technology and others are becoming lighter, for example mobile phones. All this should be reflected in lower transport costs.

In short, falling transaction costs diminishes the impact of geographic vantages.

Finally while I agree that “go forth and multiply” should generally be positive for the global economy; that link may not be obvious.

Most of the nations with the fastest population growth (table from Wikipedia) have hardly been the best economic growth performers. To the contrary most have been economic bottom dwellers.

The fundamental reason is that commercial activities have been severely restrained due to lack of property rights, deficiency in the rule of law, failure to protect contractual rights and limitations to voluntary productive exchanges. Also the political economic environment by many of these economies can be characterized as having been plagued by despotism and socialism. So the positive effects of population growth have been stunted, instead large populations morphs into a social burden.

Next, based on population growth, Indonesia has far outsprinted CNBC’s top 10 (chart from Google Public Data).

Indonesia has likewise been a resource rich country, and as our neighbor has been endowed with geographic advantages. So it would be a curiosity for me that Indonesia has been glossed over by CNBC.

And in terms of debt management, (chart from tradingeconomics.com) Indonesia has thus far bested the Philippines.

While this is both good news for the Philippines and Indonesia, the bottom line is that CNBC’s coverage hardly seems objective. There must be some undeclared biases in their methodology, such that even considering the few specious variables they can be amiss of other major potential contenders for investors, as Indonesia or Thailand.

And finally too much reliance on domestic consumption is unsustainable. This has been the Keynesian mantra embraced by mainstream media.

When excess consumption (government and private) in the Philippines will get manifested in the current account balance, which has still been positive today due to remittance and portfolio flows, the country’s declining debt to gdp trend will reverse and deteriorate.

Current negative real rates policies have already been adding to consumption activities via an artificially stimulated boom from domestic monetary policies by the BSP.

Yet the obverse side of a boom is a bust. And that’s hardly a long term positive growth proposition.

[As a caveat I don’t trust government statistics considering that almost two fifth of the Philippine economy is considered informal or underground or shadow. There are yet many factors not captured by statistical aggregates.]

Finally it should be a reminder that the key to prosperity is through attaining trade competitiveness (chart from the WEForum) via economic freedom or a deepening of the market economy or capitalism. The most competitive nations have almost reflected on the same standings as with the most prosperous nations.

To quote the great Ludwig von Mises

Capitalism is essentially a system of mass production for the satisfaction of the needs of the masses. It pours a horn of plenty upon the common man. It has raised the average standard of living to a height never dreamed of in earlier ages. It has made accessible to millions of people enjoyments which a few generations ago were only within the reach of a small elite.

Apparently, that’s not in the equation of CNBC. When reality is dealt with a blackout occurs.

Online Honesty

It is interesting to know that people seem to be more honest in an impersonal setting like the online environment

Explains another favorite author of mine, Matt Ridley at the Wall Street Journal (bold emphasis mine)

It is now well known that people are generally accurate and (sometimes embarrassingly) honest about their personalities when profiling themselves on social-networking sites. Patients are willing to be more open about psychiatric symptoms to an automated online doctor than a real one. Pollsters find that people give more honest answers to an online survey than to one conducted by phone.

But online honesty cuts both ways. Bloggers find that readers who comment on their posts are often harshly frank but that these same rude critics become polite if contacted directly. There's a curious pattern here that goes against old concerns over the threat of online dissembling. In fact, the mechanized medium of the Internet causes not concealment but disinhibition, giving us both confessional behavior and ugly brusqueness. When the medium is impersonal, people are prepared to be personal…

Deep in our psyches, the act of writing a furious online critique of someone's views does not feel like a confrontation, whereas telling them the same thing over the phone or face to face does. All the cues are missing that would warn us not to risk a revenge attack by being too frank.

The phenomenon has a name: the online disinhibition effect. John Suler of Rider University, who coined the phrase, points out that, online, the cues to status and hierarchy are also missing. Just like junior apes, junior people are reluctant to say what they really think to somebody with authority for fear of disapproval and punishment. "But online, in what feels like a peer relationship—with the appearances of 'authority' minimized—people are much more willing to speak out or misbehave."

Internet flaming and its benign equivalent, online honesty, are a surprise. Two decades ago, most people thought the anonymity of the online world would cause an epidemic of dishonesty, just as they thought it would lead to geeky social isolation. Then along came social networking, and the Internet not only turned social but became embarrassingly honest. The greatest perils most people perceive in their children's social networking are that they spend too much time being social and that they admit to things that will come back to haunt them when they apply for work

My comments:

Much of our actions seem to be guided by social signaling.

Popular impression about the effects of social networking have hardly been accurate.

I find this article very relevant. I find it easier to discuss or debate online, perhaps for the same reasons cited: cues to status and hierarchy become less of an influence.

But online honesty does have harmful effects too, deficiency in diplomatic expression especially against the powers that may lead to undesirable or even adverse personal consequence such as the arrests or incarceration of bloggers in South Korea or Cuba.

Imprudent social networking remarks (in Facebook or in Twitter) have also costs people jobs and personal relationships.

New Record Highs for the Philippine Phisix; How to Deal with Tips

I worry less about small failures, more about large, potentially terminal ones. I worry far more about the "promising" stock market, particularly the "safe" blue chip stocks, than I do about speculative ventures-the former present invisible risks, the latter offer no surprises since you know how volatile they are and can limit your downside by investing smaller amount. I worry less about advertised and sensational risks, more about the more vicious hidden ones I worry less about terrorism than about diabetes, less about matters people usually worry about because they are obvious worries, and more about matters that lie outside our consciousness and common discourse (I also have to confess that I do not worry a lot - I try to worry about matters I can do something about) I worry less about embarrassment than about missing an opportunity. Nassim Nicholas Taleb The Black Swan The Impact of the Highly Improbable

Rampaging stock market bulls has propelled the local benchmark, the Phisix to another milestone record high!

Friday’s electrifying breakout anchored by a 2.4% advance, largely influenced by developments overseas, essentially pushed the Phsix farther away from the 13 month consolidation level (green channel). This seems to reinforce the new support level, which formerly was represented by the resistance level (upper green horizontal line).

Of course, price charts merely function as guides, as they are ultimately driven, not by patterns, but by the value-scale time preference exhibited by the marketplace or by market participants acting through the price mechanism.

The Global Boom Phase

It is important to keep in perspective what has been driving actions in the stock markets.

Where the mainstream associates today’s milestone feat to ‘economic growth’, ‘earnings growth’, ‘confidence’ to the political affairs or to some other bunk, it is worth accentuating that what has been happening in the Philippines has not been an insulated event but a global phenomenon.

The exemplary performance by the local bellwether has not even kept pace with the remarkable advances by many of the world’s bourses.

While the Phisix has assumed on the leader’s role relative to the performance of our nieghbors or the ASEAN-4, we even trail the returns of another ASEAN member particularly Vietnam’s 14.72% on a year-to-date basis.

The exceptional gains by Hong Kong and India as indicated in the above table as one of the top performers in the world, has also outclassed the Phisix.

Yet most of Asia has been up by over 10%, except for China, Indonesia, Malaysia, Australia and New Zealand. Only Sri Lanka, Bangladesh and Mongolia registered losses over the same period.

And of the 71 international bourses on my radar screen, 42% have posted gains of over 10%. Such broad based bullishness has simply been astounding.

Intensifying Local Boom

In the local markets, again, the bullmarket sentiment has not been limited to select issues, particularly to heavyweight components of the Phisix, but to the broader market.

While we should be expecting a natural profit taking process or a countertrend to occur anytime, overbought conditions in a bullmarket may remain extended.

Such dynamics may be taking place.

The recent decline in the advance-decline differentials (averaged weekly) seems to have augured for a retracement. However, Friday’s intense rally may have deferred anew what should have been a normal profit taking sequence.

The market’s sentiment can be measured by the trading activities or internal market actions.

The average daily traded issues, which has been ascendant since November of 2011, has also been exhibiting signs of exhaustion. Friday’s rally has not alleviated the weekly decline.

So far market breadth seems indicative of a coming salutary profit taking cycle.

This week’s rally has evidently been led by the service sector via gains of the major telecom issues. The property and the financial indices, took second and third spot, have similarly bolstered the gains of the Phisix.

On a year-to-date basis the property and the financial sector continues to widen their lead relative to their contemporaries, whose gains have mostly been responsible for the outstanding returns of the Phisix.

And if we are to look at the biggest companies within the Phisix basket, whose ranking are based on free float market cap, the actions of the heavyweight basically confirms the standings of the sectoral performances.

Property issues led by Ayala Land [ALI] have taken the commanding lead, along with SM Primeholdings [SMPH] at fourth spot.

Meanwhile, the financial sector has been powered by BPI and MBT at third and fifth spot respectively. Ayala Corp, the mother unit to ALI and BPI, at second place has also been buoyed by the gains of the sizzling hot subsidiaries.

And in evaluation of the above dynamics there are several things to keep in mind:

One, the gains of the Phisix hasn’t been limited to Phisix based heavyweight components but manifested on the overall markets. This means that market’s attention has been percolating into second or third tier issues.

Two, the rotational process has been in progress, where past laggards are today’s darling and yesterday’s favorites have become the du jour laggards. Such dynamics are being exhibited in the actions of the Phisix heavyweights, which have been confirming the sectoral rankings. The interchanging gains with the Mining industry[1] relative to the other capital intensive sectors of the property and telecoms, along with financial sector, which functions as the financial intermediaries of these industries, signify as symptoms of a mounting inflationary boom. In short, the real relative effects of monetary inflation[2] are being likewise being demonstrated in the actions in the stock markets, here and around the world.

Also the rotational process extrapolates to the shifting market’s attention from heavyweights to second or third tier issues and vice versa which can also be a dynamic found within specific sectors.

The bottom line is that for as long as the monetary inflationary push persists, the Phisix will continue to ascend, but the distribution of gains will vary in terms of degree and of timing seen from sector to sector and from heavyweights to tiered issues.

Inflationary Credit Fueling the Boom Phase

There is another very important aspect to remember in the environment where everybody is a genius.

To quote the legendary trader Jesse Livermore via Edwin Lefèvre in the must read classic Reminiscences of a Stock Operator[3], (emphasis added)

The public ought always to keep in mind the elementals of stock trading. When a stock is going up no elaborate explanation is needed as to why it is going up. It takes continuous buying to make a stock keep on going up. As long as it does so, with only small and natural reactions from time to time, it is a pretty safe proposition to trail along with it.

Sustained broad stock market gains will not occur if funded by savings alone. Since savings are limited or are scarce, market will then reflect on offsetting actions—i.e. gainers would be counterbalanced by losers, where net gains will only emerge from dividends. It is under such environment where earnings would truly matter.

Austrian economist Fritz Machlup provides the economic underpinnings to Mr. Livermore’s empirical observation[4] (emphasis added)

A factor which is capable of evoking expectations of a rise in security prices is a reduction of the interest rate. In so far as this reduction occurs merely as the result of an increased supply of intended new savings, the likelihood of a long-lasting upward movement of the market is rather meagre.

In addition, since stock markets operate on the principle of pricing, then any increase in the demand for stocks through higher prices would likewise entice more supply (more listings). This would again entail offsetting actions under a savings only financed milieu

Again from Mr. Machlup continuing from the same paragraph,

It is easy to see that if dividend prospects are unchanged increased and the rate of interest is reduced, security prices will rise, and it is more than probable that a sufficient amount of security sales from "final sellers' (unloading by temporary holders and new issues) will be quickly forthcoming: comparatively small offerings of securities will suffice to absorb the increased supply of new savings and to drain them off to other markets. For no matter how the supply of money capital derived from current new savings may fluctuate, it is scarcely conceivable that the total supply of money capital can ever rise to unexpected dimensions as the result of an increased flow from this source. If the public devotes only its new savings to the securities market, and the new demand at once causes some groups of securities to become "firmer," it will not be necessary for the purchasing power of the public to be withdrawn from the commodity market until it has "run through'* all the securities quoted on the exchange and has adjusted the prices of securities, one after the other, to the new market conditions.

In the present world, boom conditions spread from the markets to the real economy.

Yet the boom phase of the business cycle, as reflected in the actions of the stock markets requires continuous infusion of credit to facilitate an increase in demand for stocks.

Mr. Machlup further explained[5],

If it were not for the elasticity of bank credit, which has often been regarded as such a good thing, a boom in security values could not last for any length of time. In the absence of inflationary credit the funds available for lending to the public for security purchases would soon be exhausted, since even a large supply is ultimately limited. The supply of funds derived solely from current new savings and amortization current amortization allowances is fairly inelastic, and optimism about the development of security prices, would promptly lead to a "tightening" on the credit market, and the cessation of speculation "for the rise." There would thus be no chains of speculative transactions and the limited amount of credit available would pass into production without delay.

And such a boom can only happen when interest rates have been tampered with to produce a negative real rate environment.

Today’s boom can easily be traced to seemingly coordinated policies by global central banks to allegedly fight economic downturn with an environment of negative real rates.

Zero interest rate policies (ZIRP) have become the conventional creed utilized by central bankers as shield against the publicized menace of recessions. In reality, these measures have been designed to buttress and preserve the beleaguered banking system from a collapse.

Interest rates today on a global scale have been approaching the 2009 levels[6], although policy rates directives of emerging markets have been less aggressive compared to crisis afflicted developed economies[7].

This week, we see the same patterns of credit easing policies in some of the major economies. Sweden cut interest rates[8], China pared down the banking sector’s reserve requirements for the second time in 3 months[9] and importantly, the Bank of Japan (BoJ) surprised the markets by aggressively expanding quantitative easing (QE) which according to them is slated to be completed by the end of 2012[10].

While the markets were palpably surprised by BoJ’s announcement, to the contrary we had expected this, as I wrote last week[11]

…politicians have been pressuring the Bank of Japan (BoJ) to ease further or face a revision of the BoJ law in order to “give the government more room to intervene in monetary policy”. This is an example of the sham in the so-called central banking independence.

Central banks are politically influenced directly or indirectly. The BoJ will be stepping on the QE gas pedal. Yet, if Japan’s government manages to remold on the BoJ law which gives Japanese politicians the space to intervene directly, then the yen will be faced with greater risk of hyperinflation.

This serves a reminder that central banks are politically influenced and that any talks of the completion of QE should be taken with a grain of salt. Political agents change their statements almost as fast as they change their underwear.

So credit easing measures will continue, with pretext of economic doom as cover for their actions.

And yet the actions of central bankers have been percolating into to the real economy, through the commodity sphere. Oil has broken out of the consolidation- quasi cup and handle formation while Natural gas which has been on a decline, largely influenced by the Shale gas revolution has suddenly surged. If the uptick in natural gas prices continues in spite of the expansion of the Shale gas output, then we could be seeing seminal signs of what Ludwig von Mises calls as the “crack up” boom or the intensifying symptoms of monetary disorder.

Jesse Livermore’s Investing Tip: Don’t Listen to Tips!

In a bullmarket, everyone’s a genius. That’s because ascendant prices will varnish many mistakes used in the evaluation stock price trends. Tersely put, many will be right for the wrong reasons. And the natural ramifications from easy money made from a bull run will be overconfidence, embedding of wrong analytical methodology (where many analyses are really just heuristics) and greater risk appetite.

Since broad market gains are the character of the typical bullmarkets, issues which are commonly deemed as ‘speculative’ or ‘third’ tier or in local colloquial terminology known as ‘basura’ issues will be imbued with magnificent gains symptoms of which we are seeing today.

The common conventional attribution for spectacularly performing speculative issues are that they are being spurred by undisclosed or yet to be disclosed insider activities which have been channeled as rumors, gossips or insider tips.

In reality while there may be some truth to such insider based plans and developments, the causal linkage between price actions and insider activities have not been straight forward. Such rumor based price action relationship hardly exists during bear markets.

Insider tips usually signify as available bias or looking at current events or scouring for any “available” seemingly plausible information to explain the market’s actions or the post hoc fallacy.

And insider tips are ultimately dependent on general market sentiment.

In short, negative real rates or the increase in people’s time preference have impelled market participants to look for all sorts of justifications to buy into the markets.

Another important factor is that insider tips can be subject to the machinations of stock market operators.

Again from the profound wisdom of the celebrated trader Mr. Jesse Livermore via Mr. Lefèvre[12] (bold emphasis added)

Tips! How people want tips! They crave not only to get them but to give them. There is greed involved, and vanity. It is very amusing, at times, to watch really intelligent people fish for them. And the tip-giver need not hesitate about the quality, for the tipseeker is not really after good tips, but after any tip. If it makes good, fine! If it doesn't, better luck with the next. I am thinking of the average customer of the average commission house. There is a type of promoter or manipulator that believes in tips first, last and all the time. A good flow of tips is considered by him as a sort of sublimated publicity work, the best merchandising dope in the world, for, since tip-seekers and tiptakers are invariably tip-passers, tip-broadcasting becomes a sort of endless-chain advertising. The tipster-promoter labours under the delusion that no human being breathes who can resist a tip if properly delivered. He studies the art of handing them out artistically

And relying on tips to goad for a buying action equally requires dependence on tips on how to close the transaction. More from Mr. Livermore[13].

A man must believe in himself and his judgment if he expects to make a living at this game. That is why I don't believe in tips. If I buy stocks on Smith's tip I must sell those same stocks on Smith's tip. I am depending on him.

Also relying on tips would seem like depending on the advice of quack doctors on your health. Yet again Mr. Livermore[14],

I have said many times and cannot say it too often that the experience of years as a stock operator has convinced me that no man can consistently and continuously beat the stock market though he may make money in individual stocks on certain occasions. No matter how experienced a trader is the possibility of his making losing plays is always present because speculation cannot be made 100 per cent safe. Wall Street professionals know that acting on "inside" tips will break a man more quickly than famine, pestilence, crop failures, political readjustments or what might be called normal accidents.

These seem like common sense and easy to observe advise that has been hardly practised by most participants. And the reason for this is due to our intuitive attachment to emotions which embodies our human frailty[15].

There are many thousands of people who buy and sell stocks speculatively but the number of those who speculate profitably is small. As the public always is "in" the market to some extent, it follows that there are losses by the public all the time. The speculator's deadly enemies are: Ignorance, greed, fear and hope. All the statute books in the world and all the rules of all the Exchanges on earth cannot eliminate these from the human animal. Accidents which knock carefully conceived plans skyhigh also are beyond regulation by bodies of coldblooded economists or warm-hearted philanthropists. There remains another source of loss and that is, deliberate misinformation as distinguished from straight tips. And because it is apt to come to a stock trader variously disguised and camouflaged, it is the more insidious and dangerous

Despite enrolling in the school of hard knocks, many fail to heed on such fundamental lessons.

Finally, for investment success, the proof of the proverbial pudding is in the eating. Mr. Livermore’s priceless counsel[16],

Nobody can catch all the fluctuations. In a bull market your game is to buy and hold until you believe that the bull market is near its end. To do this you must study general conditions and not tips or special factors affecting individual stocks. Then get out of all your stocks; get out for keeps! Wait until you see or if you prefer, until you think you see the turn of the market; the beginning of a reversal of general conditions. You have to use your brains and your vision to do this; otherwise my advice would be as idiotic as to tell you to buy cheap and sell dear. One of the most helpful things that anybody can learn is to give up trying to catch the last eighth or the first. These two are the most expensive eighths in the world. They have cost stock traders, in the aggregate, enough millions of dollars to build a concrete highway across the continent.

Mr. Livermore’s line of thinking emanates from an empirical or pragmatic point of view which unknowingly to him, his ideas have been backed by sound economic theory.

Mr. Livermore’s emphasis on gains comes in form of capturing magnitude and not on the frequency. And this is the opportunity that buy-and-hold in a conditional bull market or the boom phase of the bubble cycle offers.

Prudent investing means to manage one’s portfolio under such direction.

---

[1] See Graphic of the PSE’s Sectoral Performance: Mining Sector and the Rotational Process, July 10, 2011

[2] See Phisix and the Rotational Dynamics, January 30, 2012

[3] Lefèvre, Edwin Reminiscences of a Stock Operator p.255 os24.org

[4] Machlup Fritz The Stock Market, Credit And Capital Formation, p.90 Mises.org

[5] Machlup, op. cit. p.92

[6] See Global Central Banks Ease the Most Since 2009, November 28, 2011

[7] Centralbanknews.info Emerging Markets Monetary Policy Rate Indicator, February 18, 2012

[8] Bloomberg.com, Sweden Abandons Rate Rises as Euro Crisis Hits Nordics: Economy February 16, 2012

[9] Bloomberg.com China Cuts Bank Reserve Reqs; Exports ’Grim’, February 19,2012

[10] Danske Research Nerves on edge, but brighter outlook Weekly Focus, February 17, 2012

[11] See Global Equity Market’s Inflationary Boom: Divergent Returns On Convergent Actions, February 13, 2012

[12] Lefèvre op.cit. p.166

[13] Lefèvre op.cit. p.27

[14] Lefèvre op.cit. p.256

[15] Lefèvre op.cit p.245

[16] Lefèvre op.cit p.55

$6 Trillion worth of Fake US bonds Seized by Italian Police

From Reuters

Italian police said on Friday they had seized about $6 trillion worth of fake U.S. Treasury bonds and other securities in Switzerland, and arrested eight Italians accused of international fraud and other financial crimes.

The operation, co-ordinated by prosecutors from the southern Italian city of Potenza, was carried out by Italian, Swiss and U.S. authorities after a year-long investigation, an Italian police source said.

It began as a investigation into mafia loan-sharking, but gradually expanded as prosecutors used telephone and computer intercepts to unearth evidence of illegal activity surrounding Treasury bonds.

The fake securities, worth more than a third of U.S. national debt, were seized in January from a Swiss trust company where they were held in three large trunks.

The U.S. Embassy in Rome thanked the Italian authorities and said the forgeries were "an attempt to defraud several Swiss banks". It said U.S. experts had helped to identify the bonds as fakes.

Eventually these alleged 'genuine' government or treasury bonds will be exposed for what they are. They will be defaulted upon either directly or indirectly through massive inflation. In addition, “risk free” by edict (Basel Accord) is a myth.

Canada’s Housing Bubble

Central bank policies have been serially blowing bubbles everywhere.

From the Bloomberg’s chart of the day,

Canada may be on the cusp of a “severe” housing correction as real estate investment surges above a tipping point relative to economic output, according to George Athanassakos, professor of finance at the Richard Ivey School of Business.

The CHART OF THE DAY shows Canada’s housing investment as a percentage of gross domestic product, and the declines in inflation-adjusted house prices that follow when this ratio tops 7 percent.

“Eventually, everything boils down to demand and supply,” Athanassakos said in a telephone interview from Western University in London, Ontario. “Whenever this ratio goes over 7 percent, it signifies overinvestment in housing and two or three years later, we have a severe correction.”

Canada’s housing market is booming as historically-low interest rates fuel purchases, driving uphome prices and adding to record household debt. Canada’s ratio of housing investment to GDP has averaged 5.8 percent over the last 50 years and is currently at about 7 percent, based on Statistics Canada figures as of the third quarter of 2011, Athanassakos said. Housing investment includes spending on new homes, renovations and real estate transaction fees.

More from the Economist,

Speculators are pouring into the property markets in Toronto and Vancouver. “We have foreign investors who are purchasing two, three, four, five properties,” says Michael Thompson, who heads Toronto’s economic-development committee. Last month a modest Toronto home put on the market for C$380,000 ($381,500) sold for C$570,000, following a bidding war among 31 prospective buyers. According to Demographia, a consultancy, Vancouver’s ratio of home prices to incomes is the highest in the English-speaking world.

Bankers are becoming alarmed. Mark Carney, the governor of the central bank, has been warning for years that Canadians are consuming beyond their means. The bosses of banks with big mortgage businesses, including CIBC, Royal Bank of Canada and the Bank of Montreal, have all said the housing market is at or near its peak. Canada’s ratio of household debt to disposable income has risen by 40% in the past decade, recently surpassing America’s (see chart). And its ratio of house prices to income is now 30% above its historical average—less than, say, Ireland’s excesses (which reached 70%), but high enough to expect a drop. A recent report from Bank of America said Canada was “showing many of the signs of a classic bubble”.

Like China, Canada’s central bank is in a crossroad; tighten monetary environment which translates to a bust (recession/crisis), or attempt to fine tune the boom bust cycle which only delays the day of reckoning but aggravates the situation.

I am reminded by the admonitions of the preeminent Professor Murray N. Rothbard,

Like the repeated doping of a horse, the boom is kept on its way and ahead of its inevitable comeuppance, by repeated doses of the stimulant of bank credit. It is only when bank credit expansion must finally stop, either because the banks are getting into a shaky condition or because the public begins to balk at the continuing inflation, that retribution finally catches up with the boom. As soon as credit expansion stops, then the piper must be paid, and the inevitable readjustments liquidate the unsound over-investments of the boom, with the reassertion of a greater proportionate emphasis on consumers' goods production.

Central banks are caught in a bind, regulations have been failing to stop boom bust cycles, which they deny have been a product of their constant manipulation of interest rates.

Oops, Ron Paul Supporter Meets Michelle Obama at the White House

Strange fate.

From DailyMail.co.uk, (hat tip: Bob Wenzel)

Most people who go on a White House tour expect to see some famous portraits of presidents and first ladies past, and perhaps a busy politico or two.

But today, that all changed as one lucky group of visitors were surprised by a meet-and-greet with Michelle Obama and the family dog Bo.

All of the visitors seemed happy about the addition to their tour, even one teenage boy wearing a Ron Paul t-shirt.

Quote of the Day: Albert Einstein on Prohibition Laws

The prestige of government has undoubtedly been lowered considerably by the prohibition law. For nothing is more destructive of respect for the government and the law of the land than passing laws which cannot be enforced. It is an open secret that the dangerous increase of crime in this country is closely connected with this.

Albert Einstein, "My First Impression of the U.S.A.", 1921 (deoxy.org).

Updated to add:

Albert Einstein was a professed socialist. But the comment above was made during his first trip to the US where he received the Nobel Prize in Physics, perhaps when politics was of least interest to him. However as Mr. Einstein's popularity grew, so with his political views, which became elaborate in the middle of the 20th century and which was highlighted by his article "Why Socialism?"

Cartoon of the Day: The Johari window of Ben Bernanke

Hat tip Professor Antony Mueller

EUROASIAN Union: Regionalizing Cronyism or Despotism?

Russia’s Vladimir Putin has a grand design, he intends to integrate ex-Soviet Union states.

From the Businessinsider.com,

It's likely you've never heard of half of the prospective members of Vladimir Putin's plans for a "Eurasian Union".

However, if the plan goes ahead, you'll need to get familiar with them quick.

A Eurasian Union (EuU) including most of the former U.S.S.R. would become a major counterweight to the EU (a Eurasian Union could control up to 33 percent of the world’s proven natural gas reserves, according to Forbes).

Putin, who floated the idea in October of last year, at the time went to lengths to deny that the bloc would recreate the Soviet Union. However, Russia has already gotten many other former Soviet Union states to sign up for a free trade agreement, including Armenia, Moldova, Ukraine (which was initially set on joining the EU), Kyrgyzstan, and Tajikistan. Uzbekistan, Azerbaijan, and Turkmenistan could follow suit.

Purportedly the union is about a establishing a free trade bloc.

More from Reuters,

Putin said the new union would build on an existing Customs Union with Belarus and Kazakhstan which from next year will remove all barriers to trade, capital and labor movement between the three countries.

"We are not going to stop there and are setting an ambitious goal -- to achieve an even higher integration level in the Eurasian Union," Putin wrote in an article which will be published in Izvestia newspaper on October 4…

Putin wrote that he saw the way out of the global crisis through a regional integration, mentioning the European Union, Asia-Pacific Economic Cooperation, the North American Free Trade Agreement and the Association of Southeast Asian Nations as examples.

"These 'bricks' can assemble into a more stable global economy," Putin wrote.

Politicians espousing free trade or liberalization of the markets have always been welcome news. However one should be leery of any noble sounding intentions, because what politicians say almost always works to the contrary from what they do.

The great Professor Ludwig von Mises says that free trade is about practicing what has been preached

Everybody was in favor of free trade for all other nations and of hyper‑protectionism for his own. It did not seem to occur to anyone that free trade begins at home. For nearly everyone favored government control of busi­ness within his own country.

True to the word of Professor von Mises, we find that the supposed ex-Soviet free trade bloc are composed of mostly economically UNFREE nations.

According to the Heritage economic freedom index, Russia ranks 144^th, Ukraine 163^rd, Moldova 124^th, Armenia 39^th, Kyrgyz Republic 88^th, Tajikistan 129^th and potential participants Uzbekistan 164^th Azerbaijan 91^st and Turkmenistan 168^th.

Except for Armenia and the Kyrgyz Republic whom are classified as moderately free, all the rest led by Putin’s Russia has been mostly unfree.

And the deficiency in freedom has not been limited to economic sphere but has likewise been reflected in their respective political institutions. The following categorization according to Freedomhouse.org

Partly Free: Ukraine, Moldova Kyrgyz Republic

Not free: Russia, Tajikistan. Uzbekistan, Azerbaijan, Turkmenistan

So free trade looks likely a façade to what seems as covert design to control energy reserves which will likely be corralled by the political class and their regional private sector allies.

And like the EU, whom has gone in the direction of a political union, Putin’s union seems like a step towards centralization of the region’s political framework.

Genuine free trade doesn’t need trading blocs or treaties. All that is required of a nation need is to voluntarily open the doors for trade, regardless of the what neighbors or others do.

Again this golden nugget from Professor Ludwig von Mises.

It is hopeless to expect a change by an international agreement. If a country thinks that more free trade is to its own advantage, then it may always open its frontiers. But if it views free trade as a disadvantage to its own interests it will not be more willing to grant it in an international treaty.

Well I hope I am wrong on this, and that such trading bloc will pry open these mostly unfree economies and spur not only regional trade openness but a global one too.

Shale Gas Won’t Boost the US Dollar

At the Financial Times, managing director of foreign exchange strategy at UBS Mansoor Mohi-uddin says that Shale Gas will be instrumental in shifting the trade balance of the US that should translate to a stronger US dollar.

Writes Mr. Mohi-uddin

The future of the dollar is more likely to be determined in the shale gas and oilfields of Dakota and Texas than in the sovereign wealth funds of Asia and the Middle East. This is because striking new technological developments are set to transform America’s energy supplies, significantly improving the US balance of payments and the long-term outlook for the greenback.

The US’s current account deficit has been a longstanding drag on the dollar. At the height of the credit boom in 2006, it reached $800bn or 6 per cent of gross domestic product. Though the deficit has halved as the credit crunch has lowered imports, it still stands at 3 per cent of GDP, largely because the US, like the eurozone, Japan, China and India, remains a major energy importer, with annual net foreign oil purchases of $300bn a year. As the US economy slowly recovers, the International Monetary Fund expects the US current account deficit to start rising again. That would lead to foreign central banks accumulating greater reserves of dollars.

But such straight-line forecasts are likely to be challenged as the US’s shale gas and “tight oil” reserves are commercially exploited over the next few years. The US has vast reserves of shale gas but, until recently, energy companies were unable to tap the gas trapped in shale rock. Now, through hydraulic fracturing or ‘fracking’, US reserves of economically available gas supplies have started to rise sharply.

While I am in accord that shale gas is the future of energy, a lopsided focus on energy as driving the US dollar risks a substantial diagnostic error.

Trade balances are largely influenced by policies, directly or indirectly. Policies which promotes boom bust cycles and increased government spending (or the debt culture) stimulates consumption activities at the expense of production, thus boost trade deficits. So even if shale gas may reduce US dependence on foreign energy, growth of consumption activities will expand to other sectors.

Today, the declining share of oil imports (above chart courtesy of Mark Perry) relative to consumption has hardly been a factor affecting the US trade balance—the latter which suffered a major bump from the 2008 recession or crisis (chart below tradingeconomics.com).

In short, the above only exhibits that there has been a shift taking place in import activities from oil to the other sectors.

The US dollar has hardly strengthened because of the improving oil trade balance but instead has functioned as a du jour shock absorber from the unresolved crisis from 2008 which lingers on today through the Eurozone.

And another thing, the Fed’s money printing activities relative to other central banks will drive the destiny of the US dollar more than just shale gas output. Money is never neutral.

Cartoon(s) of the Day: The Johari Window of Libertarians

From Cato’s Dan Mitchell

From Bastiat Institute (facebook)

The US as Human Rights Violator

US President Obama recently dissed on China’s human rights record.

However, former Assistant Secretary of the US Treasury and former associate editor of the Wall Street Journal, Paul Craig Roberts exposes on this charade,

Washington is now in the second decade of murdering Muslim men, women, and children in six countries. Washington is so concerned with human rights that it drops bombs on schools, hospitals, weddings and funerals, all in order to uphold the human rights of Muslim people. You see, bombing liberates Muslim women from having to wear the burka and from male domination.

One hundred thousand, or one million, dead Iraqis, four million displaced Iraqis, a country with destroyed infrastructure, and entire cities, such as Fallujah, bombed and burnt with white phosphorus into cinders is the proper way to show concern for human rights.

Ditto for Afghanistan. And Libya.

In Pakistan, Yemen, and Somalia Washington’s drones bring human rights to the people.

Abu Ghraib, Guantanamo, and secret CIA prison sites are other places to which Washington brings human rights. Obama, who has the power to murder American citizens without due process of law, is too powerless to close Guantanamo Prison.

He is powerless to prevent himself from supplying Israel with weapons with which to murder Palestinians and Lebanese citizens to whom Obama brings human rights by vetoing every UN resolution passed against Israel for its crimes against humanity.

Instead of following Washington’s human rights lead, the evil Chinese invest in other countries, buy things from them, and sell them goods.

For US politicians, moral standards seem to fall into “might makes right”—where there is one set of morality for political opponents and another set for the self-instituted policeman of the world.

The numerous atrocities committed by the US, as part of their imperial foreign policy, serves as further evidence that in Asia (particularly on the US military's proposed expansion due to the Spratly’s issue) the China threat has mostly been a contrived issue which exemplifies H.L. Mencken’s series of hobgoblins, most of them imaginary. Such is borne out of the continuing promotion of war policies meant to uphold the interests of the political class and their welfare-warfare clients/cronies.

Of course, infractions on human rights issues does not extend only to foreigners but to the Americans themselves, in their homeland.

Again Mr. Roberts,

Washington’s concern with human rights does not extend as far as airport security where little girls and grandmothers are sexually groped. Antiwar activists have their homes invaded, their personal possessions carried off, and a grand jury is summoned to frame them up on some terrorist charge. US soldier Bradley Manning is held for two years in violation of the US Constitution while the human rights government concocts fabricated charges to punish him for revealing a US war crime. WikiLeaks’ Julian Assange is harassed endlessly with the goal of bringing him into the human rights clutches of Washington. Critics of Washington’s inhumane policies are monitored and spied upon.

More signs that the US appears to be moving away from the embodiment of the “Land of the Free”.