Monday, April 30, 2012

“Pump and Dump” Policies Pumps Up Miniature and Grand Bubbles

A friend recently called to say that there have been numerous accounts of “miniature bubbles” in the local markets. Others claim that these have been brought about by unscrupulous people engaged in “pump and dump”.

In reality as I have been pointing out, miniature bubbles are symptoms of the ultimate bubble blower—central bank policies. Central bank policies distort people’s incentives towards money. Savings, investment and consumption patterns will have all been skewered. Where negative real rates punish savers, naturally people whose savings are being diminished through the erosion of purchasing power will seek higher yield, and thus, redeploy their savings into other activities which may include more consumption activities, speculation or high risk investments and or take up more debt to fund these activities. Even private sector Ponzi schemes has been flourishing under today’s environment[1]

In essence policies that tamper with money motivates the public to value short term over the long term.

Thus heightened price volatilities which are deemed as “pump and dump” or as “miniature bubbles” represent as symptoms rather than the cause. People will look for excuses to push up prices or speculate for the simple reason that policies have egged them to do so.

The easy money climate lures the vulnerable public to go for momentum and chase prices using any available tools (charts, corporate fundamentals or even tips[2] and rumors) to do so. And this is why pump and dumps happen.

Large price swings make some people think that stock market operators are culpable for such swing. But this would be mistaking trees for the forests. Absent easy money policies, bubbles and pump and dumps hardly has been a feature. Had there been mini bubbles or pump and dumps during the bear market of 2007-2008? No, because inflated assets were all deflating in response or as contagion to the real estate-banking crisis abroad.

Broken Markets

And as earlier pointed out[3], the US today has not been different, junk bonds or high yielding debt has been booming.

Writes the Buttonwood (Philipp Coggan) of the Economist[4]

Of course, the broader point is that investors are being pushed into these high-yielding assets because of the policy of the Fed (and most developed world central banks) of keeping interest rates close to zero. Similar reasoning drove the enthusiasm for structured products that financed the subprime boom.

Zero bound rates have prompted for yield chasing actions, here or in the US.

The mainstream finally comes to admit what I have been saying all along—that markets have been vastly distorted where one cannot use “fundamentals” in the traditional and conventional sense to evaluate investments.

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The excessive price volatility in today’s markets does not match with the fluctuations of conventional metrics of financial ratios. Today’s price volatility has been incongruent with trends of corporate fundamentals. And thus as I earlier pointed out[5], anyone who believed in “fundamentals” would have sold as early as March.

Considering the huge jump in prices from the start of the year, we should be around at near the peak of 2007. So anyone who believes in this stuff ought to be shorting or selling the market. I won’t.

The left window from the chart above as I earlier posted last March has a time series that ended November of 2011. The right chart from DBS represents a more updated one albeit was updated until last March. Considering that the Phisix has now been drifting at over 5,150 which means valuations continues to climb higher away from these charts, the Phisix has become “priciest” stock market in Asia.

Yet leaning on earnings or conventional fundamental metrics, like the Heisenberg uncertainty principle, becomes a permanently moving target which is impossible to pin down, especially punctuated under today’s easy market climate.

Will I sell on the account of earnings/fundamentals? My answer is still no. Not until interest rates climb in response to consumer price inflation, or through heightened demand for credit, or questions over credit quality of government papers or the scarcity of capital becomes apparent[6]. Nominal interest rates are not a one-size-fits-all thing, and there are many measures (like real interest rates, CDS, yield curve et.al.) to gauge if the monetary environment has begun to tighten for one reason or another. This also should come in the condition that the hands of central bankers have also been shackled and would be unable to respond forcefully as they have been doing today.

For now central banks around will continue to find ways and means to push more easing measures in support of the asset markets which was highlighted by last week’s additional stimulus by the Bank of Japan (BoJ)[7]

The following excerpt from the mainstream loudly resonates on what I have been saying.

From the Financial Times[8],

Markets are broken. Accepted investment wisdom has been overturned and the basic tenets of value and diversification no longer work. The financial crisis put the market into a volatile “risk on, risk off” – or Roro – mode for which there is no cure.

For many investors, this has made stockpicking seemingly an impossible task. Markets once responded to their fundamentals. Now, disparate assets have a much greater tendency to move together, individual characteristics lost. Trusted strategies such as relative value and currency carry trades are nearly useless, overwhelmed by daily market-wide volatility.

“Assets now behave as either risky assets or safe havens, and their own fundamentals are secondary,” writes HSBC strategist Stacy Williams in a recent note. “In a world where most asset classes are synchronised, it becomes very difficult to achieve diversification. It also means that since most individual assets are dominated by a common price component, it becomes increasingly futile to invest in them based on their usual fundamentals.”

Though asset classes had been moving in closer correlation since the start of the financial crisis in 2007, the Roro trend became most apparent after the collapse of Lehman Brothers a year later. The uncertainty helped turn investing bimodal, where every price has been contaminated by systemic risk. Everything became a bet on whether we were closer to a global recovery or to deeper crisis.

So what recommendations do they offer for the public to deal with the state of “broken markets? They have three. One is to pick a position from the boom or the bust scenario, second is to chase momentum and third is to hedge positions through index futures.

I would like to emphasize on the second option, not because this is my preferred approach but because of its relevance to the conditions of the local markets, from the same article,

Another option is to seek out an investment strategy that still works. Momentum investing – in effect, buying the winners and selling the losers – is a method that HSBC analysts highlight as having been largely impervious to the risk trade. To chase a trend aims to harvest small but systematic mispricing of assets, and there is no reason to suppose these anomalies would disappear in bimodal markets, the broker argues. (In this context, the growth of high-frequency trading since the start of the crisis is unlikely to be coincidental.)

This simply means that the mainstream will largely be chasing momentum, by targeting frequency over magnitude through “harvest small but systematic mispricing of assets”. So in essence, high risk speculative activities or gambling (a.k.a “miniature bubbles” and “pump and dump”) has been recognized as the common or standardized feature of the current market place. So history will rhyme and a bust will be around the corner.

I would rather “time” the bubble cycle rather than go chasing prices. And this is why it is imperative for any serious investors to understand the bubble process or the boom bust cycle.

Stock Market is about Human Action

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Finally financial markets signify a social phenomenon. There is a popular aphorism from former President John F. Kennedy, who said in the aftermath of the failed Bay of Pigs Invasion[9], which seems relevant to the financial markets,

Victory has a thousand fathers; defeat is an orphan.

Winning issues and or market tops tend to attract substantial participants as a function of easy money (get rich quick mentality), keeping up with the Joneses (bandwagon effect) or survivorship bias (focus on survivors or winners at the expense of the others) or social signaling (desire for greater social acceptance, elevated social status and or ego trips).

On the other hand market bottoms results to the opposite: depression, avoidance, isolation and animus behaviour for those caught by the crash.

Most people don’t realize that emotional intelligence or self discipline is key to surviving the market’s volatility, not math models or charts or any Holy Grail or Greek formulas. And this comes from the desire to attain self discipline than from advices of other people.

Yet self discipline is earned and acquired through knowledge and through the whetting of one’s skills based on these accrued knowledge. Alternatively, self discipline cannot be not given or inherited. And that’s why I vehemently opposed the suggestion by a popular religious personality, who had investments on a mutual fund, to get housemaids to invest in the stock market[10].

The incentive to acquire the desired knowledge and skills varies from individual to individual because they are largely driven by the degree of stakeholdings or the stakeholder’s dilemma or stakeholder’s problem[11].

Today’s information age has democratized access to information. What can be given are information relevant to attaining knowledge and skills. What can NOT be given is the knowledge that dovetails to one’s personality for the prudent management of one’s portfolio. Like entrepreneurship this involves a self-discovery process.

And most importantly, what can NOT be given are the attendant actions to fulfill the individual’s objectives.

Stock market investing is about people and their actions. That’s why this is a social phenomenon. No more, no less.


[1] See After 5,000: What’s Next for the Phisix?, March 5, 2012

[2] See New Record Highs for the Philippine Phisix; How to Deal with Tips February 20, 2012

[3] See Self-Discipline and Understanding Market Drivers as Key to Risk Management, April 12, 2012

[4] Buttonwood Hooked on junk, April 27, 2012, The Economist

[5] See Earnings Drive Stock Prices? International Container Terminal and Ayala Land, March 6, 2012

[6] See Global Equity Market’s Inflationary Boom: Divergent Returns On Convergent Actions, February 13, 2002

[7] See Bank of Japan Adds More Stimulus, April 17, 2012

[8] Financial Times ‘Roro’ reduces trading to bets on black or red April 20, 2012

[9] Quotationspage.com Quotation Details John F. Kennedy, "A Thousand Days," by Arthur M. Schlesinger Jr [1965]., p289. Comment made by JFK in the aftermath of the failed Bay of Pigs invasion, 1961.

[10] See Should Your Housemaid Invest In The Stock Market? September 5, 2010

[11] See Knowledge Acquisition: The Importance of Information Sourcing and Quality, March 6, 2011

Sunday, April 29, 2012

Quote of the Day: Bourgeois Virtues

Give a woman some rice, and you save her for a day. That’s the simplest form of what Christians flatter themselves by calling “Christian charity.” Give a man some seed and you save him for a year. That’s the plan of investment in capital, tried for decades in foreign aid, without much success. But give a man and a woman the liberty to innovate, and persuade them to admire enterprise and to cultivate the bourgeois virtues, and you save them both for a long life of wide scope, and for successively wider lives for their children and their grandchildren, too. That’s the Bourgeois Deal, which paid off in the Age of Innovation.

This brilliant passage is from Deirdre McCloskey’s 2010 landmark volume, Bourgeois Dignity page 449 as excerpted by Professor Don Boudreaux at Café Hayek.

Saturday, April 28, 2012

Scarborough Shoal Dispute: The Politics of Nationalism

The Inquirer.net reports

As the dispute between China and the Philippines over Scarborough Shoal entered its 18th day Friday, Senate President Juan Ponce Enrile called on the nation to rally behind President Aquino in asserting the country’s sovereignty in the West Philippine Sea (South China Sea)…

At the hearing, Enrile explained that the dispute over territorial waters in the West Philippine Sea was not political.

“This is a national issue that requires the support of the entire nation, and we support the President on this,” Enrile said. There should be no deviation. “There should be unanimity of all Filipinos in supporting Malacañang regardless of political persuasion and affiliation on this particular issue,” he said.

“We must show the People’s Republic of China that in this particular issue, the Filipino nation is one in supporting the leadership of the Republic of the Philippines in asserting the sovereign rights of this republic and the Filipino people over the Scarborough Shoal and the Reed Bank, and all the areas the Republic of the Philippines occupy in the South China Sea,” said Enrile.

Say what? Asking for popular approval is NOT about politics?

The definition of politics according to dictionary.com

exercising or seeking power in the governmental or public affairs of a state, municipality, etc.: a political machine; apolitical boss.

of, pertaining to, or involving the state or its government: apolitical offense.

So seeking power in public affairs and or the involvement of the state IS political. And we have a national politician stirring up dangerous nationalist fervor with sloganeering based on untruths.

As George Orwell once wrote,

Political language…is designed to make lies sound truthful and murder respectable, and to give an appearance of solidity to pure wind.

As I earlier pointed out, the Scarborough Shoal territorial dispute has NOT been about oil or resources and which has mostly likely been about political DIVERSION amidst internal political divisions in China and or the PROMOTION of arms sales for the military industrial complex. Further it is not in the interest of China to provoke military conflagrations when she has been promoting her currency as the region's foreign currency reserve.

And the seeming insouciance of financial markets over the brinkmanship politics, expressed through the price mechanism, has limned on the perceived risk environment where political sensationalism has departed from people voting with their money. The Phisix closed the week at record highs while the local currency the Philippine Peso closed the week up at 42.37 and seems to be approaching the February highs.

In other words, what politicians sees as urgency that requires “unanimity of all Filipinos” which is being touted by mainstream media, seems to depart from the actions of the marketplace, where the latter sees the risks of a shooting war to be negligible.

Of course, politicians know that in case of a real military skirmish, they or their families will not be at the battlefront (they will most likely be ensconced abroad), thus their audacity to call for implied aggressive populist nationalism that might justify an armed confrontation.

Furthermore, considering that both Spratlys and Scarborough Shoals have largely been uninhabited or has no population, the main benefits over the disputed “resource rich” islands will likely accrue to the cronies and the interests of political authorities than that of the nation. Yet the masses are being conjured to fight for their interests via calls for pretentious nationalism.

The history of war, said Michael Rivero, is the history of powerful individuals willing to sacrifice thousands upon thousands of other people’s lives for personal gains.

Finally, the real target of these war mongers are our civil liberties and economic freedom.

As French historian Alexis de Tocqueville wrote,

All those who seek to destroy the liberties of a democratic nation ought to know that war is the surest and shortest means to accomplish it.

Thus, the call for nationalism over territorial disputes is like putting the proverbial lipstick on the political pig.

Friday, April 27, 2012

Quote of the Day: The True Job Creators

Citing the success of Apple, libertarian author Robert Ringer points out that the genuine source of productive job creation, that leads to economic prosperity, comes from entrepreneurs.

Mr. Ringer writes,

Apple’s ingenuity and marketing skills are so good that its sales in China not only are skyrocketing, but playing a major role in its meteoric growth. Imagine — a U.S. company so good at what it does that even the Chinese are rushing to buy its products.

How could Apple accomplish such amazing feats without a government bailout or government “investment” in its technology? Because it had an entrepreneur at the helm who had the creativity, marketing savvy, personal ambition, and drive to bring the company back from the dead. No other help needed, thank you.

It is more than just a bit ironic that Steve Jobs’ last name is a testament to how entrepreneurs, when left to their own devices, are the true job creators. It also highlights the arrogance of politicians, particularly those who have never created or marketed anything, who believe they somehow have the ability — let alone the right — to take money from private citizens and “invest” it in technologies of their choosing.

Unfortunately the public does not recognize the true heroes, and at worst, have been bedazzled by the voodoo of politics.

Bank of Japan Adds More Stimulus

The Bank of Japan (BoJ) added to their stimulus measures for the third time this year. Central bankers have standardized Quantitative Easing (QE) operations [euphemism for money printing] as their principal tool for crisis management.

And this serves as another “I told you so moment”.

From the Marketwatch.com

The Bank of Japan on Friday said it will increase the size of its asset purchase program by 5 trillion yen ($61.88 billion) to a total of ¥70 trillion, while leaving its policy interest rate in the current target range of 0% to 0.1%. The increase in the size of the asset purchases, a quantitative easing measure aimed at improving demand, compared with the ¥5 trillion to ¥10 trillion addition that was already priced in by markets, according to a Reuters report. The BOJ said it would increase purchases of Japanese government bonds by about ¥10 trillion, while adjusting lower its purchases of another type of asset by ¥5 trillion.

This really has not been about “demand” which functions no less than a masquerade or an excuse to justify such repressive redistributive political action.

But all these has been about the stealth grand collaborative scheme to sustain and preserve the 20th century political institutions built around the cartel of the politically privileged banking system, the welfare (and warfare) state and central banks, through bailouts in the form of financial repression and inflationism.

To reiterate, as a universal rule, inflation is a policy that will not last.

Thursday, April 26, 2012

Google Launches the Google Drive

The information age will bring about a deluge of innovative consumer friendly applications in the thrust to competitively serve the consumers.

Yesterday, technology giant Google launched the Google Drive which aims to integrate much of Google’s applications and MORE.

From the Google Official Blog, (hat tip Kurzweilai.net)

Today, we’re introducing Google Drive—a place where you can create, share, collaborate, and keep all of your stuff. Whether you’re working with a friend on a joint research project, planning a wedding with your fiancé or tracking a budget with roommates, you can do it in Drive. You can upload and access all of your files, including videos, photos, Google Docs, PDFs and beyond.

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With Google Drive, you can:

  • Create and collaborate. Google Docs is built right into Google Drive, so you can work with others in real time on documents, spreadsheets and presentations. Once you choose to share content with others, you can add and reply to comments on anything (PDF, image, video file, etc.) and receive notifications when other people comment on shared items.
  • Store everything safely and access it anywhere (especially while on the go). All your stuff is just... there. You can access your stuff from anywhere—on the web, in your home, at the office, while running errands and from all of your devices. You can install Drive on your Mac or PC and can download the Drive app to your Android phone or tablet. We’re also working hard on a Drive app for your iOS devices. And regardless of platform, blind users can access Drive with a screen reader.
  • Search everything. Search by keyword and filter by file type, owner and more. Drive can even recognize text in scanned documents using Optical Character Recognition (OCR) technology. Let’s say you upload a scanned image of an old newspaper clipping. You can search for a word from the text of the actual article. We also use image recognition so that if you drag and drop photos from your Grand Canyon trip into Drive, you can later search for [grand canyon] and photos of its gorges should pop up. This technology is still in its early stages, and we expect it to get better over time.

You can get started with 5GB of storage for free—that’s enough to store the high-res photos of your trip to the Mt. Everest, scanned copies of your grandparents’ love letters or a career’s worth of business proposals, and still have space for the novel you’re working on. You can choose to upgrade to 25GB for $2.49/month, 100GB for $4.99/month or even 1TB for $49.99/month. When you upgrade to a paid account, your Gmail account storage will also expand to 25GB.

Drive is built to work seamlessly with your overall Google experience. You can attach photos from Drive to posts in Google+, and soon you’ll be able to attach stuff from Drive directly to emails in Gmail. Drive is also an open platform, so we’re working with many third-party developers so you can do things like send faxes, edit videos and create website mockups directly from Drive. To install these apps, visit the Chrome Web Store—and look out for even more useful apps in the future.

This is just the beginning for Google Drive; there’s a lot more to come.

Since alot of my work has been based on the Google platform, I applied for the free option and await for their notice of access.

And yes, as a fan of technology, although I hardly know how to use the many conventional sophisticated gadgets, I expect much more consumer friendly services to come not only from Google from the rest of the industry.

An Austrian Economist’s Message to the US Federal Reserve: Lock the Doors and Leave the Building

Austrian economist Robert Wenzel in a stirring speech in front of central bankers at the New York Federal Reserve has a poignant message for them: Abandon Ship.

Mr. Wenzel's closing statement:

Let’s have one good meal here. Let’s make it a feast. Then I ask you, I plead with you, I beg you all, walk out of here with me, never to come back. It’s the moral and ethical thing to do. Nothing good goes on in this place. Let’s lock the doors and leave the building to the spiders, moths and four-legged rats.

Read Mr. Wenzel’s provocative speech here.

Quote of the Day: Omniscient Social Justice

The question is not what anybody deserves. The question is who is to take on the God-like role of deciding what anyone else deserves. You can talk about 'social justice' all you want. But what death taxes boil down to is letting politicians take money from widows and orphans to pay for goodies that they will hand out to others, in order to buy votes to get reelected. That is not social justice or any other kind of justice

That’s from the brilliant Professor Thomas Sowell who defends inherited wealth from charges of inequality in his book the Controversial Essays. The equally profound David Gordon of the Mises Institute has a review of the book from which the above quote has been sourced.

Video: Milton Friedman: Abolish the Fed! (2)

In the following 1994 interview (17:17), the preeminent free market Nobel laureate economist Milton Friedman said that he favored the abolishment of the US Federal Reserve primarily due to its blatant string of policy failures. His position then seems consistent even with his 2006 interview which I earlier posted.

Unfortunately, as David Kramer points out at the Lew Rockwell Blog, while Mr. Friedman desired the elimination of the FED, he maintained a pro-central banking stance, which seemed a bizarre paradox.

Video: Government Debt Problems are Spending Problems

Michael Moroney of LearnLiberty sends me this instructive video where Professor Antony Davies explains why the problem of government debt represents a spending problem. Thanks Mike.
A policy of deficit spending saps the very foundation of all interpersonal relations and contracts. It frustrates all kinds of savings, social security benefits and pensions.
Ludwig von Mises

Wednesday, April 25, 2012

Quote of the Day: The Politics of Taxation

The fact that the income tax burden is distributed so unevenly produces great politically borne fiscal problems. People who pay little or no income taxes become natural constituents for big-spending politicians. After all, if you pay no income taxes, what do you care if income taxes are raised? Also, you won't be enthusiastic about tax cuts; you'll see them as a threat to your handouts.

That’s from Professor Walter E. Williams

Are Falling Gold Mining Stocks Signaling Deflation?

Gold mining stocks in the US seems to have diverged from prices of gold.

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There have been suggestions that such divergence could be indicative of “deflation”. For some of the hardcore devotees of the Keynesian religion, any price declines (be it consumer, equities, commodities) represents “deflation”. The definitional context of the term has been lost out of the desperation to prove the merits of their case.

However it’s really not just gold, but the same underperformance can be seen in prices of oil stocks.

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Charts above from US Global Funds

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Commodities, in general seem to have foundered since March whether in Agriculture (GKX), Energy (DJAEN) or Industrial metals (DJAIN) [chart from stockcharts.com]

And feebleness in commodity prices may get reflected on consumer prices.

Yet the current price weakness in commodities seems coincidental with the price declines of the Spain’s equity market via the Madrid General Index…

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…along with China’s Shanghai index, both of which saw significant slumps in March.

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Nevertheless global equity markets, overall, remains buoyant in spite of the reemergence of the euro debt crisis and of concerns over China’s economic slowdown.

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Yet current conditions suggest that following the strong surge from the start of the year, global equity markets may be in a natural consolidation phase, perhaps awaiting for the next round of central bank actions. You see, no trend goes in a straight line.

And lower CPI prices will likely motivate central bankers to go for more credit easing measures.

So the above exhibits the divergences playing out between stocks and commodities.

Does this signal "deflation" in the monetary sense? Obviously not.

What we are seeing instead has been the relative effects of money on asset prices. While commodity and commodity related stocks have generally underperformed (perhaps partly due to China or the Euro crisis) much of the money from easing policies of major central banks have been flowing into equity and other financial “credit” assets. In short, central bank policies have produced more asset (price) inflation than commodity (price) inflation

Proof of this is of the record flows of investor money into hedge funds.

From Reuters,

Investors poured billions of dollars into hedge funds in the first quarter, helping to send total industry assets into record territory, data released Thursday shows.

Investors allocated a net $16 billion to hedge funds in the first three months of the year, according to Hedge Fund Research, which tracks industry flows and performance.

With the new capital, as well as average gains of about 5 percent for hedge funds in the first quarter, total industry assets reached $2.13 trillion, HFR found. An earlier record was set halfway through 2011, when total capital invested with hedge fund managers hit $2.04 trillion.

In one of its worst annual performances in history, hedge funds lost about 5 percent in 2011. However, the industry seemed to get its groove back in the beginning of 2012 as global equity and credit markets rallied, and managers recorded the best first quarter of performance in five years.

Thus the weakness in the commodity sector may have filtered into oil and gold stocks which have caused their divergences with the prices of gold and oil. Such anomaly will likely be resolved soon as gold and oil prices should move higher.

Outside the policymaking actions, seasonal factors could also be a factor

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Chart from US Global Investors

But I won’t give so much weight on this

And finally falling commodities, which may translate to lower consumer price inflation, does not translate to the absence of a brewing boom-bust cycle.

The great Murray Rothbard explained that consumer prices had not been a factor in 1920 recession or boom bust cycle (America’s Great Depression p.169-170) [bold emphasis mine]

Actually, bank credit expansion creates its mischievous effects by distorting price relations and by raising and altering prices compared to what they would have been without the expansion. Statistically, therefore, we can only identify the increase in money supply, a simple fact. We cannot prove inflation by pointing to price increases. We can only approximate explanations of complex price movements by engaging in a comprehensive economic history of an era—a task which is beyond the scope of this study. Suffice it to say here that the stability of wholesale prices in the 1920s was the result of monetary inflation offset by increased productivity, which lowered costs of production and increased the supply of goods. But this “offset” was only statistical; it did not eliminate the boom–bust cycle, it only obscured it. The economists who emphasized the importance of a stable price level were thus especially deceived, for they should have concentrated on what was happening to the supply of money. Consequently, the economists who raised an alarm over inflation in the 1920s were largely the qualitativists. They were written off as hopelessly old-fashioned by the “newer” economists who realized the overriding importance of the quantitative in monetary affairs. The trouble did not lie with particular credit on particular markets (such as stock or real estate); the boom in the stock and real estate markets reflected Mises’s trade cycle: a disproportionate boom in the prices of titles to capital goods, caused by the increase in money supply attendant upon bank credit expansion.

For as long as central bankers remain on a monetary expansionary mode or continues to adapt rampant inflationism, my expectations is that current weakness represents a temporary and natural outcome of the relative effects of money.

Keynesian Policy Failure: Portugal Edition

For the mainstream, “austerity” has been a harmful, immoral or inhuman policy. And the popular prescription has been for "virtuous" government to keep spending money to pump up the “aggregate demand”.

However for the incumbent government of Portugal, tried Keynesian interventionist policies has signified an utter failure.

From the New York Times,

Defending austerity is not getting any easier for Europe’s politicians. And Vitor Gaspar, Portugal’s finance minister, has it harder than others. The country’s unemployment rate is 14 percent, and its economy, which has been stagnant for years, is expected to shrink another 3.3 percent in 2012.

Opponents of austerity may cite Portugal as a country that could benefit from economic stimulus and kinder budget cuts. But Mr. Gaspar, speaking to The New York Times last week, has a message for observers who say Europe needs to substantially relax its austerity approach: We tried stimulus and it backfired.

Like some other European countries, Portugal tried what Mr. Gaspar called “a Keynesian style expansion” in 2008, referring to a theory by economist John Maynard Keynes . But it didn’t turn things around, and may have made things worse.

“My country definitely provides a cautionary tale that shows that, in some instances, short-run expansionary policies can be counterproductive,” Mr. Gaspar said. “There are some limitations to the intuitions from Keynes,” arguing that the economist himself saw instances when demand-stoking policies might not lead to growth.

The tough line has yet to win markets over. The yield on Portuguese government bonds – more than 11 percent on longer-term bonds — is substantially higher than the yields on debt issued by Ireland, Spain or Italy. Mr. Gaspar says the yields are “not a reflection of the fundamentals.”

If interventionism caused the crisis, then it should be expected that further interventionism will worsen the crisis. So Portugal’s botched Keynesian experiment which “may have made things worse”, did what simple logic dictated.

However in the world of politics, the stereotyped approach for crisis management can be characterized as “doing the same thing over and over again and expecting different results”. In the world of politics, insanity has been the conventional policy.

It’s refreshing to know that Portugal’s government seem to have been awakened from a mental stupor.

Tuesday, April 24, 2012

Climate Change Alarmist James Lovelock Admits Mistake

One of the intellectual pillars of climate change alarmism admits that his predictions have failed.

The MSNBC.com reports (my tip of the hat to libertarian colleague Patrick Ella)

James Lovelock, the maverick scientist who became a guru to the environmental movement with his “Gaia” theory of the Earth as a single organism, has admitted to being “alarmist” about climate change and says other environmental commentators, such as Al Gore, were too.

Lovelock, 92, is writing a new book in which he will say climate change is still happening, but not as quickly as he once feared.

He previously painted some of the direst visions of the effects of climate change. In 2006, in an article in the U.K.’s Independent newspaper, he wrote that “before this century is over billions of us will die and the few breeding pairs of people that survive will be in the Arctic where the climate remains tolerable.”…

Mr. Lovelock acknowledges that his models didn’t work and that environmentalists have been overestimating on their understanding of nature.

More from the same article…

“The problem is we don’t know what the climate is doing. We thought we knew 20 years ago. That led to some alarmist books – mine included – because it looked clear-cut, but it hasn’t happened,” Lovelock said.

“The climate is doing its usual tricks. There’s nothing much really happening yet. We were supposed to be halfway toward a frying world now,” he said.

“The world has not warmed up very much since the millennium. Twelve years is a reasonable time… it (the temperature) has stayed almost constant, whereas it should have been rising -- carbon dioxide is rising, no question about that,” he added.

He pointed to Gore’s “An Inconvenient Truth” and Tim Flannery’s “The Weather Makers” as other examples of “alarmist” forecasts of the future…

His admission…

“We will have global warming, but it’s been deferred a bit,” Lovelock said.

'I made a mistake'

As “an independent and a loner,” he said he did not mind saying “All right, I made a mistake.” He claimed a university or government scientist might fear an admission of a mistake would lead to the loss of funding.

Just say what government wants and funding will follow. This epitomizes the politics of climate change.

At least Mr. Lovelock has been forthright enough to face up with reality. Although like doomsday diviner Harold Camping whose controversial forecasts in 2011 failed to materialize, Mr. Lovelock seems locked into a defensive posture to protect his work by pushing his forecasts to the indeterminate future.

Only when the tide goes out, said Warren Buffett, do you discover who’s been swimming naked.

Apparently the anthropomorphic climate change dogma has been swimming naked.

The Anatomy of Economic Fascism: Argentina Edition

Following the Repsol’s discovery of huge Shale oil and gas deposits under the "Vaca Muerta" ("Dead Cow") basin of Neuquen province, the cash strapped Kirchner regime decides to nationalize the embattled Spanish energy company.

Here is a graphic narrative of Argentina’s economic fascism from the ever eloquent Wall Street Journal columnist Mary O’Grady

Nationalizations, particularly in the energy sector in Latin America, are nothing new. But the circumstances surrounding the Argentine grab of YPF may be. They demonstrate the special nature of kirchnerismo, an economic model that enriches friends of the government while driving the nation toward poverty.

Repsol won ownership of YPF in a 1999 privatization. It seemed like a good idea at the time. But then the 2001-2002 peso collapse hit. The economy contracted sharply and a political crisis followed. In 2003, Néstor Kirchner, husband of Cristina and a former governor of the province of Santa Cruz, was elected president—with a mere 22% plurality.

Kirchner needed to shore up support. He did so by demonizing business and promising to redistribute wealth to the have-nots, whose numbers had swelled due to the crisis. He denounced entrepreneurs, condemned profits and stirred up class warfare. To hold back inflation after the peso devaluation, he imposed price controls on food and fuel. Utilities got hit with rate freezes. But wages and taxes kept going up. Companies referred to the slow strangulation by government diktat as "asphyxia."

Repsol was trapped. The government set the price of a barrel of oil at $42 and mandated that YPF oil output could not be exported until Argentine demand was satisfied. The natural gas business was even more difficult. Repsol says that the price controls combined with subsidies drove demand through the roof, taxing the company's resources.

The relationship between the government and the Spanish company became strained. But having made a sizeable investment, Repsol did not want to exit. According to press reports supported by my own sources, the company agreed to allow Nestor Kirchner to broker a deal in 2008 to bring in an Argentine partner that he chose. That partner, the Petersen Group, was headed by banker and construction magnate Enrique Eskenazi, a long-time Kirchner ally.

According to published accounts in the Argentine press and in The Wall Street Journal, the Petersen acquisition of almost 25.5% of YPF was completed with almost no money down. Repsol agreed to finance the majority of the shares and loans from banks financed the balance. Repsol says that the Petersen Group still owes it $1.9 billion.

Repsol also agreed to increase YPF's dividend payout to 90% of earnings. Using those dividends Petersen was to pay back its loan to Repsol over time along with some $680 million in bank loans, according to Bloomberg. The company also paid one extraordinary dividend from retained earnings to help in paying down the loan.

Was this an attempt to avoid "asphyxia"? I asked Repsol why it agreed to such a deal and if it went along with the arrangement because Kirchner, who died in 2010, had been strong-arming the company. Repsol declined to comment.

Petersen's no-money-down acquisition was a sweet deal and some Argentines wonder if Kirchner set it up out of the goodness of his heart. This is a pertinent question since both Kirchner administrations have been notorious for a lack of transparency and have been plagued by corruption scandals. It is hard to answer because it is not clear who are the owners of the shares of Australian-based Petersen Energy. One Argentine source told me those shares are in bearer form, which would mean that there is no record of ownership. But when I asked Petersen if that is true and also how it financed the purchase of the YPF shares, it declined to comment. The Argentine government did not respond to requests for comment.

Read the rest here

At the end of the day, economic fascism is about cronyism and corruption through repressive laws.

Has the European Crisis been about the Welfare State?

Yes, according Fredrik Erixon, director of an independent think tank in Brussels, the European Centre for International Political Economy.

At the Bloomberg Mr. Erixon writes (hat tip Dan Mitchell)

When it comes to overspending on social welfare, though, Europe has no angels.

Even the “good” Scandinavians, and governments that appeared to be in sound fiscal shape in 2008, but were then undone by unsustainable private-sector debts, were spending too much and will have to restructure. The only question is whether this will be done gradually, or via shock therapy.

Take the four countries at the epicenter of the euro-area crisis: Greece, Ireland, Portugal and Spain. They are in many ways different, but they have three important characteristics in common.

First, total debt in these countries expanded rapidly throughout the past decade -- either because of increased government borrowing (Greece and Portugal) or through a rapid buildup of private debt (Ireland and Spain). Second, they all ran substantial current-account deficits in the years before the crisis. Third, government spending in those nations grew at remarkably high rates. In Greece and Spain, nominal spending by the state increased 50 percent to 55 percent in the five years before the crisis started, according to my calculations based on government data. In Portugal, public expenditure rose 35 percent; in Ireland, almost 75 percent. No other country in Western Europe came close to these rates.

Clearly, the welfare-state expansion in Greece and Portugal was part of the reason these two countries ended up as clients of Europe’s bailout mechanisms. But Ireland and Spain had problems with the rapid expansion of the state, too. A big part of rising affluence during the boom years was generated by escalating real-estate bubbles, which caused private debt to soar. They boosted the construction sectors and, more generally, pushed domestic consumption to the point where Spain had to borrow as much as 8 percent of gross domestic product every year to finance its current account deficit. Like other bubbles, they spearheaded economic growth, which allowed governments to expand the state rapidly.

Read the rest here.

Bottom line is that today’s euro crisis represents the cumulative impact of intertwined government policy failures.

This includes monetary ‘bubble’ policies, which pumped up malinvestments and incentivized state profligacy, as well as, increased political centralization through webs of regulations which resulted to the lack of competitiveness (most pronounced in the labor markets), and the unsustainable social welfare systems (which also had been boosted by the bubble).

Quote of the Day: Corruption is a Regular Effect of Interventionism

You can read thousands of academic papers on the problem of “corruption” in countries around the world and completely miss the central point. The way to eliminate the corruption is to eliminate the barriers to enterprise. Why is this not obvious? Because many people imagine a utopian ideal that does not now and never has existed: good government. They imagine that government rules can be enforced impartially based on science or the public good.

It’s sheer nonsense. As Ludwig von Mises wrote in Human Action in 1966:

“Unfortunately, the office-holders and their staffs are not angelic. They learn very soon that their decisions mean for the businessmen either considerable losses or — sometimes — considerable gains. Certainly, there are also bureaucrats who do not take bribes, but there are others who are anxious to take advantage of any ‘safe’ opportunity of ‘sharing’ with those whom their decisions favor… Corruption is a regular effect of interventionism.”

(bold emphasis added)

That’s from Jeffrey A. Tucker at the Laissez Faire Books.

Monday, April 23, 2012

Quote of the Day: Ideas as Cultural Currency

The monopoly currency of cultural evolution is ideas. Ideas can only be generated when an alert mind senses a further or more powerful meaning implicit in an already established idea or body of ideas. Once such an infant idea is broadcast out into the public square of reflection and debate it must be attacked, recast, or whatever to find acceptance or be overwhelmed. Only along this tortuous path may a new idea be widely accepted into the prevailing body of knowledge.

That’s from Richard Abel, author of The Gutenberg Revolution, as interviewed by Anthony Wile at the Daily Bell

Sunday, April 22, 2012

Bullish Signal Confirmed as Phisix Sets New Record High

As I said last week, rising stock prices on a slew of internal and external bad news usually signifies as bullish indicators.

Here is what I wrote,

Foreign trades have also been sluggish with paltry changes over the last two weeks. Yet, despite the marginal actions by foreign investors, the Philippine Peso posted modest advances.

So essentially, last week’s action suggest of a rotation away from second and third tier issues back into the blue chips.

Yet I expect to see normalization of trading activities in terms of Peso volume which should undergird either the current consolidation phase or a fresh attempt to break away into new highs.

When the markets to defy the spate of bad news that signifies as a bullish signal.

Speaking of luck that’s exactly how it turned out the week!

First of all, the Phisix broke into fresh nominal record high even as the Scarborough issue has not been resolved.

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As an aside, I would reiterate that for whatever innuendos about resources alluded by media, the Spratlys-Scarborough issue has not been about oil or commodities but more about unspecified political agenda which could be related to promoting arm exports or ploys to divert the public from festering real political issues or as justifications for inflationism.

I might add that the heated kerfuffle over territorial claims has expanded to cover the disputed Senkaku Islands, where Japanese authorities has jumped into the fray to announce of their acquisition of the island from the “owners”. This has resulted to a political backlash from Chinese authorities.

Given that politics in Japan seems to have been entangled with monetary policies, Japan’s recent provocative foreign policy posture could be portentous of Bank of Japan’s (BoJ) moves to expand its stimulus (via asset purchases), perhaps under the pretext of increasing military spending.

Going back to the Philippine stock market, given the record performance, we can’t discount the prospects of interim ‘profit taking’. But again I think momentum still favors the bulls.

Second, net foreign trade has turned significantly positive mostly bolstered by the GT Capital’s listing last Friday

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Third market breadth also turned positive…

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…as advancing issues took the driver’s seat anew.

If the positive momentum, which is likely to be reflected on the actions of the benchmark Phisix should persist, then we would see a broadening of gains over the broader market.

Most of the gains had been concentrated on the sectoral leaders since the start of the year, particularly, property, finance and holding companies or mother units of the former two.

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I think that rotation will occur among the heavyweights as the current leaders may take a short reprieve.

Importantly the Peso volume DID normalize…

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Daily traded Peso volume (averaged weekly) surged amidst as last week’s record breakout.

I see a continuity of the bullish or upside momentum of the financial markets which may last until the first semester of the year, where central bank steroids are due for expiration. While this may lead to an interim volatile phase perhaps backed by deteriorating economic or financial conditions in Europe or in China, we should expect downside volatility to be met by aggressive responses from central bankers. This feedback mechanism between markets and central bank interventions has not only been made to condition the markets, but has become the central bankers’ guiding policy of crisis management.

BSP’s Euthanasia of the Rentier

This dogmatic approach has been assimilated even by the local central bank, the Bangko Sentral ng Pilipinas (BSP).

Just last week, domestic interest rate policies have been kept at “historics” lows whose levels were justified as “sufficient to help boost economic activity and avoid potential spike in inflation amid volatile global oil prices”.

The BSP blames external factors as secondary variables of domestic inflation through a “likely rise in foreign portfolio investments and higher prices of electricity amid petitions for further power-rate increases.”

In reality, interest rates policies that has driven been to superficially “historic” lows that are financed by “money from thin” are the real cause of inflation

Austrian economist Dr. Frank Shostak explains,

The exchange of nothing for something that the expansion of money out of "thin air" sets in motion cannot be undone by an increase in the production of goods. The increase in money supply — i.e., the increase in inflation — is going to set in motion all the negative side effects that money printing does, including the menace of the boom-bust cycle, regardless of the increase in the production of goods.

And symptoms from BSP’s actions have been manifesting on the domestic credit markets. Notes the Inquirer.net

True enough, credit growth so far this year has been robust. As of February, data from the central bank showed that outstanding loans by universal and commercial banks grew by 18 percent year on year to P2.74 trillion. The BSP said the increase in bank lending benefited both individual and corporate borrowers.

A boost in bank lending is not “a one-size-fits-all” thing.

A boost in bank lending that has NOT been prompted by consumer preferences but from the skewing price signals due to political “money printing” policies designed to achieve quasi permanent booms leads to bubble cycles.

And what is deemed as “robust growth” by media are, in reality, signs of malinvestments and speculative diversion of productive capital. Some of these borrowed money will find their way to the local stock exchange, real estate properties, bond markets and much of which will be diverted into consumption spending or misallocated capital that leads to capital consumption.

And adding to the policies of the promotion of “aggregate demand” or “the euthanasia of the rentier” through “historic” low interest rates has been the announcement by the local version of the welfare state, the Social Security System (SSS), to lower interest rates and to increase loanable amount to members for housing loans.

Apparently, little has been learned by local political authorities of the lessons from the latest US centric political homeownership crisis that has diffused across the world and whose phantom continues to haunt the political economies of the developed world.

Noble intentions eventually get burned by politically instituted economically unfeasible projects.

Sell In May?

Fund manager David Kotok of Cumberland Advisors rightly points out the differences in the current environment from yesteryears, such that seasonal statistical patterns like Sell in May and Go Away may not be relevant to current conditions.

History shows that ‘Sell in May and go away’ has applied when the Federal Reserve was in a tightening mode during the six-month span from May to November. If the Fed was actively raising interest rates, withdrawing or constricting credit, imposing additional reserve requirements, or taking an action that was of a tightening mode, stock markets were usually punished in that six-month period.

When we did the study we examined what the Fed did, not what it said. We used actual changes in the Federal Funds rate to determine whether the Fed was tightening, easing, or neutral. Once the Fed took the interest rate to zero at the end of 2008, the historical data series lost its power for forecast purposes, since the Fed cannot take the rate below zero. However, we believe the concept is valid even if the present measurement problem exists.

It is human action and NOT charts (for example the failed death cross pattern of the S&P 500 of 2011) or seasonal patterns, based on either statistics or historical outcomes, that determines future outcomes.

The substantial impact of central bank policies on the markets has been through the manipulation of money. Since money is a medium of exchange which represents half of every transactions people make, tinkering with money has greater tendency to alter or reshape the incentives of people.

Manipulation of money through inflationism tend to narrow people’s time orientation or increases time preferences which has been and will be ventilated through several attendant actions, as higher inclination to take debt, misdirection of investments via distorted price signals, consumption based lifestyles or pejoratively known as “consumerism”, greater risk appetite or higher inclinations towards speculation.

So when major central banks combine to tamper with money, which among themselves account for about 85% of the capital markets of the world, we can expect participants of the marketplace to adjust accordingly to these newly implemented policies. Current policies have been engendering asset inflation, which in reality has been designed to keep the flagging banking system and the unsustainable welfare states afloat.

Even emerging market central banks, as the Philippines have employed the same policies which are often justified from “growth risk”. Yet despite the standardization of monetary policies, the differences in market outcomes have been resultant to variances of people’s actions relative to the idiosyncratic structural compositions of each political economy.

In addition, while monetary policies have significant effects on people’s incentives other policies also matters such as fiscal policies and tax regimes, rule of law and protection of property rights, trade and economic freedom, and regulatory policies.

The bottom line is all these policies would have a greater impact to people’s action than simply reading numbers and history as basis for predictions.

As the great Ludwig von Mises wrote in Theory and History

Historicism was right in stressing the fact that in order to know something in the field of human affairs one has to familiarize oneself with the way in which it developed. The historicists' fateful error consisted in the belief that this analysis of the past in itself conveys information about the course future action has to take. What the historical account provides is the description of the situation; the reaction depends on the meaning the actor gives it, on the ends he wants to attain, and on the means he chooses for their attainment...

The historical analysis gives a diagnosis. The reaction is determined, so far as the choice of ends is concerned, by judgments of value and, so far as the choice of means is concerned, by the whole body of teachings placed at man's disposal by praxeology and technology.

Along the lines of the Professor von Mises, my former idol the exemplary stock market guru but who now has been converted to a crony, Warren Buffett, once lashed out at the tendency of people to anchor or rely heavily on past performance. The ailing 81 year old billionaire Mr. Buffett said

If past history was all there was to the game, the richest people would be librarians.