The Message Behind the Phisix Record High

The theory of reflexivity developed by billionaire (and crony) George Soros underscores the dynamics of bubble psychology, as expressed through a feedback loop mechanism between people’s expectations and their attendant actions in response to the changes in the prices.

Mr. Soros wrote[1]

The underlying trend influences the participants' perceptions through the cognitive function; the resulting change in perceptions affects the situation through the participating function. In the case of the stock market, the primary impact is on stock prices. The change in stock prices may, in turn, affect both the participants' bias and the underlying trend.

Reflexive Theory Applied to the Phisix

The foundation of this theory seems to be anchored on the confirmation bias, where changes in prices that reinforces the underlying trend, gives confidence or strengthens the convictions of people to undertake action in the direction of the same trend. Such action feeds into the price mechanism and thus the feedback loop.

Applied to the Philippine equity market, many people will interpret the current state of the Phisix, which is at fresh record levels, as positive changes in the real economy. Believers would see this as having raised confidence levels, which that merits further actions through additional investments. Again this eventually feeds into higher prices.

An article at the Financial Times sings hallelujah to the Philippines[2],

Whisper it if you will, but the Philippines may at last be getting its act together. These are early days. But there are definite signs that the country – with its young population of nearly 100m people, the world’s 12th largest – has turned a corner…

The Philippines may still be the llama of south-east Asia. But, for the moment at least, the llama has broken into a trot.

President Noynoy Aquino has also used this opportunity to grab credit

From the Inquirer.net[3]

“Investors and Filipinos alike see what is happening: Here is a country determined to turn the corner by instituting genuine, wide-ranging, meaningful reform, and acting on its belief that good governance is the bedrock of equitable progress,” the President said.

We have had six positive ratings actions since we took over government a little less than two years ago—a stark contrast to the single upgrade and six downgrades in the nine years of the previous administration,” he added.

He said the country’s stock market also experienced 27 all-time highs in his 22 months in office.

Let’s put this into perspective.

While the Philippine equity bellwether has indeed been at record levels, such gains have not been unique or limited to the Philippines. In reality, major ASEAN bellwethers have ALL been on a bullish rampage. In other words, what has been portrayed as a special case is, in fact, a regional phenomenon.

Three of the ASEAN-4 majors are in ALL time record highs, particularly Indonesia [JCI:IND, dark orange], the Philippines [PCOMP:IND, green] and the seemingly underperforming Malaysia [FBMKLCI:IND, light orange] whom has marginally encroached the 2007 highs.

Meanwhile, Thailand [SET:IND, yellow] treads at a milestone 14-year high, but has yet to breach the 1993 record.

Yet these can hardly be construed as coincidental, as the undulations of the ASEAN-4 stock markets have eerily been similar for the last 5 years.

The other way to say this is that there has been a seemingly tight correlation between the Phisix and ASEAN markets. While correlation is not causation, there has been linking factor to their parallel performances.

So if there should be any special developments this must be attributable to the region and not to specific nations.

On a year-to-date basis, the Philippine Phisix, posted a 21.17% gain as of Friday’s close, ranked third only in the Asian region.

The top spot has been Vietnam with 35% returns, while Pakistan has is in second with 28.77% gains.

Notice that except for India, equity benchmarks of Asian majors Japan, Singapore and Hong Kong have yielded over 10%.

In short, Asia in general has posted substantial gains, but emerging Asia has outperformed.

Nonetheless while it may be true that the Philippines has exhibited material improvements on the dimensions of fiscal balances and debt[4], the bulk of the improvements came prior to the incumbent Aquino administration.

In relative dimensions, the degree of progress of the Philippines has been subordinate to the ASEAN peers.

Importantly, ASEAN in general has shown similar path of improvements in both aspects.

Real Reforms? Informal Economy Says No

So admittedly while there have been noteworthy advances in the management of government finances, the question is, has the Philippines been adapting reforms to encourage investments through a business friendly environment?

Well, the World Bank figures suggest otherwise.

Out of 183 countries, the Philippine scorecard[5] for Ease of Doing Business for 2012 has seen marginal improvements in 3 aspects (getting electricity, trading across borders, and enforcing contracts) while 7 areas posted declines in 2012.

Overall, the Philippines fell from 134^th ranking in 2011 to 136^th in 2012, where 1 accounts for the easiest place to do business while the last rank represents the most difficult place for business.

The above diagram from Doing Business report on the Philippines for 2012[6] gives as a better view of the domestic business climate.

Fundamentally, the Philippines have long lagged the region and the world because of the manifold political hurdles that has undermined relative competitiveness and has raised the bars (or hurdle rate) for attracting investments.

More, while the mainstream meme has touted remittances, which signifies about 8.9% of the economy (Wikipedia.org[7]), as powering the Philippine economy, what they don’t tell you is that there has been a far far far larger of the share of the domestic economy that has a more significant influence: the informal or shadow economy.

The Philippines has one of the largest informal sectors in the world[8], which accounts for nearly half of the economy. They are the balut (fertilized duck egg), peanut and cigarette vendors, carinderias, family drivers, household helps, and etc…

People tend to ignore the obvious.

As Black Swan author Nassim Taleb posted on his facebook account[9]

We are all, in a way, handicapped in a similar way, unable to recognize ideas when presented in a different contexts. It is as if we were doomed to be fooled by the most possibly superficial part of things, the packaging, the gift-wrapping paper around the object. This is why we don’t see antifragility in places that are obvious, too obvious.

For instance, the mainstream overemphasizes on the much heralded 10% (remittances) while ignoring the 45% (informal economy). In behavioral finance, the fixation on the visible while overlooking the others is a logical error that is called the survivorship bias[10]

About a year ago, I interviewed a balut and a peanut vendor from our neighborhood. The peanut vendor told me that he earns about 400-500 pesos a day. But because he can’t read and write, he has been reluctant to open a bank account and instead keeps his money in some physical storage (I think in a can). Yet over the years, his savings has enabled him to buy 2 tricycles which he lent out to 2 relatives for business.

The balut vendor on the other hand told me that his eldest son has been self financing his college engineering education. The son rides the bike which he uses to sell balut at night, and goes to school in the late mornings until the afternoon. The balut vendor father is even in a better position than I am. He owns his house.

Even if people from the informal sectors have been beyond the radar screens of the government and of the institutions of the establishment, the money they save (capital accumulation) helps increase the standard of living of Filipinos. And amazingly these are stuffs which statistics has not been able capture and has left mainstream experts lost at explaining the consumption economy which they mistakenly attribute to “multiplier” from remittances.

And this is why I have long believed that the statistics has understated the real savings rate of Philippines. And it is from such unseen sources of savings that has enabled the Philippines to have 3 out of the 10 largest shopping malls in the world (as of 2008)[11].

Yet the informal sector is an offshoot to economies that has been unduly burdened by a labyrinth of regulations, stifling taxes, onerous social security payments, restrictions in the official labor market, mandated wage rates and other labor restrictions, maze of bureaucratic red tape, politicization of economic opportunities and the many other various forms of interventions[12].

The peanut vendor told me that because he has been a mainstay in the area where he operates, local officials have not been a menace to him, because he got acquainted with them. But other vendors have not been as fortunate, many has to shell out “under-the-table” money for them to operate even during night time, while the others operate on a dictum of “when the cat’s away the mouse will play”.

That’s precisely why informal economies have been associated with greater incidence of corruption.

A weak rule of law, which emanates from unilateral, arbitrary, partisan, repressive and selectively enforceable laws, edicts, regulations, ordinances, impels people to circumvent them, much of it through bribery. And this has been further exacerbated by weak institutions.

As Ms. Ana Eiras at the Heritage Foundation writes[13],

Informality is a response to economic repression, not to something inherently unethical in those who circumvent legislation. What is most unethical about informality is the condition in which the government forces the poor to live. Informally employed people are condemned to a standard of living that is significantly lower than that of formally employed people, who have credit access. Also, informality creates a culture of contempt for the law and fosters corruption and bribery in the public sector as a necessary means to navigate the bureaucracy.

And as the great Austrian economist Professor Ludwig von Mises reminds us[14],

Corruption is a regular effect of interventionism.

So talks about abolishing corruption have simply been misleading. That’s because informal economies, again, exist as consequences of repressive and abusive laws which fosters corruption and are symptoms of economically unfree nations.

Yet if we should give credit where credit is due, then it is the informal economy through the various domestic entrepreneurs and the silent labor force, whom has been defying all these regulatory and political obstacles, that has mostly breathed life to the Philippine economy. Otherwise, chaos would rule.

Until the government meaningfully dismantles the obstacles that inhibit commercial activities, then the “good governance is the bedrock of equitable progress” represents nothing more than a flimflam.

Remittances are Partly Symptoms of Unfree Economies

Politics has always been about distortion of the truth.

The mainstream savors the romanticized notion that OFWs are the “modern day heroes”. In a way they are. Yet hardly any of these experts deal with why OFWs thrives and why they are heroes, outside of the context of $ remittances.

People seem to have mental blackout if we point out that today’s modern day heroes, the OFWs, like their shadow economy counterparts, have been products of unfree economies.

The inadequacy or insufficiency of economic opportunities (particularly for investments which has been diffused into jobs, yes about 4 out of 10 college graduates have been unemployed), have been prompting Filipinos to seek livelihood or greener pastures abroad (13% of graduates go abroad[15]).

Emerging economies whom have been highly dependent on remittance contributions have mostly been unfree economies.

Of the 30 countries on the table, 20 are mostly unfree if not repressed economies. While others like Lebanon, Samoa, El Salvador, Kyrgyz Republic, Jamaica, Albania, Guatemala, Cape Verde, Armenia and the Domincan Republic are moderately free according to the rankings based from Heritage Foundation[16]. Yet many of these “moderately free” nations are on the “borderline”.

The remittance phenomenon serves as an incredible paradox: The lack of economic opportunities as manifested by high unemployment which has been the outcome of the towering walls of arbitrary regulations and the politicization of markets, has been offset through migration and overseas employment. Yet politicians and media glorify what in reality has been exposing on their flagrant mistakes of collectivization.

Yet the heroic part of the OFW is this; oppressive laws have not prevented them from finding ways and means to survive. So they go abroad and elude domestic government. This has been the part not seen by the mainstream. What has been mostly seen has been the dollars sent and social costs of parting ways with the family, a theme that has been assimilated in media (tv series or movies).

To wit, individuals work to find ways to survive and thrive through circumventing laws by either going to the informal sectors, by corruption (bribery) or by voting with their feet through working abroad as OFW or emigration.

This is the real world and not a figment of someone’s political alter ego (in psychology these are dissociative identity disorders[17] where people live in their dreams and to have a life of what they had always wanted.[18]). Yet it has been inherent for politicians to engage in semantical abstractions to hoodwink the gullible public.

Bottom line: For Filipino politicians to deservingly claim credit for their deeds, we need to see three outcomes from the thrust to promote a business friendly environment or economic freedom: an explosion of legitimate small medium scale businesses, a natural decline in the informal economy out of the reduction of politicization of commerce and a voluntary repatriation of OFWs as a result of the increased economic opportunities at home.

The Disconnect: Stock Market and the Economy

This brings us back to the reflexivity theory.

Whatever “progress” that is largely being interpreted from buoyant financial markets has not yet been representative of the actual performance of the real economy.

If we go by the simple theory where corporate earnings growth has been a part of GDP[19] the implication is that stock prices should be somehow reflect on the expected GDP growth trend.

But the volatility of prices of the Phisix simply does not match with such measures. [As a side note, aside from earnings, a portion of GDP growth[20] also comes from capital increases such as new share issuances, rights issues, or IPOs].

Take note that the Phisix fell by over 50% in 2007-2008 yet the GDP growth hardly turned negative.

Also, note that in the same context GDP growth fell from 8% in 2010 to a little less than 4% yet in late 2011 yet the Phisix continued to set record after record.

In other words, such disconnect simply means either one of the two measures (the Phisix or the GDP) has been emitting false signals or that reality simply defies conventional wisdom.

And where “a flaw in the participants’ perception of the fundamentals” becomes recognized and escalates, this “sets the stage for a reversal of the prevailing bias”[21].

In short, the artificially embellished boom transforms into an ugly bust.

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[1] Soros George The Alchemy of Finance p.53 John Wiley & Sons

[2] Pilling David South-east Asia’s llama breaks into a trot, April 25, 2012 Financial Times

[3] Inquirer.net Aquino tells ADB: Corruption over, May 5, 2012

[4] HSBC Global Research Step by step October 11, 2011

[5] Doingbusiness.org Ease of Doing Business in Philippines

[6] Doingbusiness.org Economy Profile: Philippines 2010

[7] Wikipedia.org Philippines Remittance

[8] Pyramid Research Emerging Market Operators Go Underground, January 29, 201

[9] Taleb Nassim Nicholas Facebook

[10] Wikipedia.org Survivorship bias

[11] See A Nation Of Shoppers??!!, April 9, 2008

[12] See Does The Government Deserve Credit Over Philippine Economic Growth? May 31, 2010

[13] Eiras Ana, Ethics, Corruption, and Economic Freedom December 9, 2003 Heritage Foundation

[14] Mises, Ludwig von 6. Direct Government Interference with Consumption XXVII. THE GOVERNMENT AND THE MARKET

[15] See College Isn’t For Everybody, February 3, 2011

[16] World Bank Migration and Remittances: Top Countries Migration and Remittances Factbook

[17] Wikipedia.org Alter ego

[18] Healthguidance.org Alter Ego Definition

[19] Wikipedia.org Relationship with GDP growth Earnings growth

[20] MSCI Barra Is There a Link Between GDP Growth and Equity Returns?, May 2010

[21] Soros, op. cit. p.57

Bubble Signs at the PSE: Raising Capital Through Pre-selling Model

Current developments in the marketplace also suggest of the high tolerance of speculative activities or of greater risk appetite or where markets simply don’t buy earnings in the traditional sense.

Bloombery as Trendsetter

From Finance Asia[1],

Bloomberry Resorts has raised Ps8.84 billion ($209 million) from its first follow-on share issue since it listed through a reverse takeover late last year, after fixing the price just above the mid-point of the range.

The Philippine company, which is set to become the first licence holder to open an integrated casino resort in Manila’s new Entertainment City gaming hub early next year, attracted strong demand from international investors in particular and sources said the deal was multiple times covered throughout the price range. In fact, the subscription level and the quality of the book were deemed strong enough for the bookrunners to close the fully marketed deal two days early…

Bloomberry holds one of the four licences to build integrated tourism resorts in Entertainment City that were awarded in 2009, and started construction on its Solaire Manila project in July last year. Phase one, which will include 300 gaming tables, 1,200 slot machines, one 500-room hotel, seven specialty restaurants and a number of other food and beverage outlets, is scheduled to open in the first quarter of 2013.

In short, Bloombery [PSE: BLOOM] which has YET to generate cash flows has successfully raised Ps8.84 billion from local and global investors.

As of Friday’s close, BLOOM’s market capitalization surged to a surreal 87,343,301,226 which beat property giants Robinsons Land [PSE:RLC] 72,215,173,283 or SM Development Corp [PSE:SMDC] 59,757,133,523

So how was the company valued?

Again from Finance Asia,

At the final price, Bloomberry is valued at an enterprise value-to-Ebitda multiple of about 7 to 7.1 times, which puts it at a sizeable discount to all the Macau casino operators. However, even at the top of the range, the Philippine company was pitched only at an EV/Ebitda multiple of 7.8 times, which compares with a valuation range of 7.5 times to 10.4 times for the Macau players and explains why some investors were comfortable to pay the maximum price.

Ebitda or earnings before interest, tax, depreciation, and amortization[2]???

Ebitda has been the prominent financial metric used to value technology[3] companies during the height of the dot.com bubble.

This simply shows that many people hide behind numbers. Financial metrics, valid or not, have been used either as marketing instruments or as justification for buying actions.

In reality, the BLOOM case represents nothing more than a promise to build. The difference is that this promise has been backed by a prominent name, tycoon Enrique Razon.

Mr. Razon deftly capitalized on the bullish market sentiment through a “fast break play”: he bought Active Alliance at 3.3 per share[4] last February, backdoor listed BLOOM and sold part of the portion of his shares to the public at 7.5 per share for a whopping 127% gain in just THREE months!

Yet like the dot.com boom, I believe that BLOOM’s highly successful “pre-sellling” strategy (similar to pre-selling condo units) would set a trend for succeeding IPOs or secondary listings or follow on offerings.

We should not forget that the dot.com bubble was highlighted by an IPO boom[5]

Volume, Money Flows and Profit Taking

And of course, a continuing boom will likely to attract volume. The US Global Investor suggests that the recent improvements in trading volumes may attract foreigners.

The US Global Investor writes[6],

increasing trading volume in the Philippine stock exchange, explaining why the Philippine market has outperformed Asian peer’s year-to date and the last year. Morgan Stanley research shows $829 million new money has flowed into the Philippine stock market so far this year, encouraged by better macro economic indicators and strong corporate growth prospects.

Rising volumes signify effects rather than causes. The yield chasing phenomenon as consequence of easy money policies here and abroad has been driving the domestic markets and will continue to spur interest from foreigners.

As governments of developed economies continue to debase their currencies, discreet capital flight into asset markets and currencies of ASEAN economies and other emerging markets, may become an entrenched trend.

Second, what they refer to as new money could probably mean money from “new” investors. That’s because the popular concept of money “flows” in stock markets are fallacious[7].

For every peso of traded, this means that the peso exchanged from the buyer of a specific security goes to the seller of that security. So there are no money flows. Perhaps there are more “new” retail investors today as “old” investors take profits or go cash.

All that has been discussed above demonstrates growing symptoms of market’s response to bubble policies. Today’s record or near record lows in nominal interest rates[8] are policies designed to promote consumption (and speculation) via a negative real interest rate regime.

In a bubble cycle, systemic distortion of prices means that markets neither manifest earnings nor the real economic performance, but one of malinvestments and rampant speculations.

In predicting the continued rise of the Phisix in 2010 I wrote[9]

The point is inflationism creates an illusion of prosperity by inflating asset bubbles in domestic market such as in the Philippines or in the Asian region, which eventually would exact toll on the society. The normative outcome of any bubble bust would be high rate of unemployment, output and capital losses, political turmoil, aside from a lowered standard of living via more incidences of poverty.

That illusion is now being interpreted as real progress.

And as a final note, given the recent dramatic record run up, we should expect natural profit taking process to follow. And perhaps such profit taking will take cue from weakening commodity prices (CRB) and stock markets abroad led by the S&P 500 (SPX). This is likely to be a temporary event, or another episode where steroid propped financial market clamors to be fed with more steroids of inflationism.

Perhaps the weekend elections in the Eurozone could also spice things up.

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[1] FinanceAsia.com Bloomberry re-IPO raises $209 million May 3, 2012

[2] Thismatter.com Enterprise Value

[3] Brennan Linda L. Social, Ethical and Policy Implications of Information Technology p.161 Google Books

[4] Philstar.com Razon-led Active Alliance hikes capital February 7, 2012

[5] Wiki Mises.org IPO Boom Dot-com bubble

[6] US Global Investors Do Emerging Markets Win, Place or Show in Your Portfolio? Investor Alert May 04, 2012

[7] See The Myth Of Money Flows Into The Stock Markets, April 5, 2009

[8] Asian Development Bank ASIA BOND MONITOR APRIL 2012 p.29

[9] See Why The Philippine Phisix Will Climb The Global Wall Of Worries June 7, 2010

Are Booming Sales of Home Safes signs of the Next Crisis?

In the US, home safes or vaults seem to be in fashion

From Smart Money

In an era marked by financial turbulence, it's probably not surprising that safes have become a popular commodity, with some manufacturers, retailers and installers reporting sales increases of as much as 40 percent from a few years ago. But the bigger eyebrow-raiser is what has happened to those iconic gray-steel boxes of yore: They've undergone an extreme makeover -- or several of them. Taking the place of those old square combination jobs are a range of custom safes, from boutique showpieces to decoy models for the family den -- not to mention the truly offbeat (a hideaway lockbox resembling, ahem, a pair of men's underwear) and the seriously safe (an in-home vault with a price tag of more than $100,000). And that's not even getting into the ever-broadening array of color choices (champagne marble, anyone?) "None of our safes should be hidden in a closet," says Markus Dottling, principal at Dottling, a German specialty-safe manufacturer whose museum-worthy designs can cost more than the average American house.

One thing that isn't driving the safe boom, apparently, is crime. Indeed, U.S. burglary rates have been plunging for years. Still, experts say that many savers and investors feel a lingering sense of insecurity in their finances -- a hard-to-shake fear borne out of the jolting recession and, at times, wobbly recovery -- which is helping to spur the new safeguarding mentality. Tyler D. Nunnally, founder and CEO of Upside Risk, an Atlanta firm that researches investor psychology, says sticking tangible assets in a safe can be a natural reaction to volatility in the markets. "People dislike loss twice as much as they like gains," he says. "They want to protect what they have." Growing numbers of these fearful types simply don't trust their banks to protect them: In a Gallup poll last year, a record-high 36 percent of Americans said they had "very little" or "no" confidence in U.S. banks. (In 2008 and 2009, when the financial crisis was peaking, that figure stood at 22 and 29 percent, respectively.) And growing concern about identity theft has made some people more eager to keep their assets in a form they can see and count, says R. Brent Lang, an investment manager in Surrey, British Columbia: "By acquiring one password, someone can wipe out all your digital wealth," he says.

That’s because many people seem to be taking measures to protect their wealth. “Don’t trust their banks”, “insecurity in their finances” “identity theft” and “crime” has been cited as reasons for the dramatic shift in the perception of risks.

Yet mainstream experts will see “stashing or hoarding cash” as “negative” for the economy which is hardly accurate. As the great Professor Murray N. Rothbard explained in What has Government Done to Our Money? (bold emphasis mine, italics original)

Why do people keep any cash balances at all? Suppose that all of us were able to foretell the future with absolute certainty. In that case, no one would have to keep cash balances on hand. Everyone would know exactly how much he will spend, and how much income he will receive, at all future dates. He need not keep any money at hand, but will lend out his gold so as to receive his payments in the needed amounts on the very days he makes his expenditures. But, of course, we necessarily live in a world of uncertainty. People do not precisely know what will happen to them, or what their future incomes or costs will be. The more uncertain and fearful they are, the more cash balances they will want to hold; the more secure, the less cash they will wish to keep on hand. Another reason for keeping cash is also a function of the real world of uncertainty. If people expect the price of money to fall in the near future, they will spend their money now while money is more valuable, thus "dishoarding" and reducing their demand for money. Conversely, if they expect the price of money to rise, they will wait to spend money later when it is more valuable, and their demand for cash will increase. People's demands for cash balances, then, rise and fall for good and sound reasons.

Economists err if they believe something is wrong when money is not in constant, active "circulation." Money is only useful for exchange value, true, but it is not only useful at the actual moment of exchange. This truth has been often overlooked. Money is just as useful when lying "idle" in somebody's cash balance, even in a miser's "hoard." For that money is being held now in wait for possible future exchange--it supplies to its owner, right now, the usefulness of permitting exchanges at any time--present or future--the owner might desire.

In short, since people don’t know the future and where the perception of the risk of uncertainty are being amplified, the increased demand for money represents people’s satisfaction.

However the mainstream would then use “lack of aggregate demand” or insufficient consumption as further justification for government intrusion. In reality, today’s uncertain environments have been caused by excessive and obstructive role of governments.

Record gun sales (Telegraph) and gold seen as the "best investment option" (Gallup) seem to correspond with the growing demand for home safes or vaults. All these add up to highlight heightened uncertainty.

Add to this a bleak report which noted that the US government may be preparing for a “civil war”.

From Beacon Equity Research,

In a riveting interview on TruNews Radio, Wednesday, private investigator Doug Hagmann said high-level, reliable sources told him the U.S. Department of Homeland Security (DHS) is preparing for “massive civil war” in America.

“Folks, we’re getting ready for one massive economic collapse,” Hagmann told TruNews host Rick Wiles.

“We have problems . . . The federal government is preparing for civil uprising,” he added, “so every time you hear about troop movements, every time you hear about movements of military equipment, the militarization of the police, the buying of the ammunition, all of this is . . . they (DHS) are preparing for a massive uprising.”

Hagmann goes on to say that his sources tell him the concerns of the DHS stem from a collapse of the U.S. dollar and the hyperinflation a collapse in the value of the world’s primary reserve currency implies to a nation of 311 million Americans, who, for the significant portion of the population, is armed.

Uprisings in Greece is, indeed, a problem, but an uprising of armed Americans becomes a matter of serious national security, a point addressed in a recent report by the Pentagon and highlighted as a vulnerability and threat to the U.S. during war-game exercises at the Department of Defense last year, according to one of the DoD’s war-game participants, Jim Rickards, author of Currency Wars: The Making of the Next Global Crisis.

Where government interventionism and inflationism has been intensifying, all designed to protect the interests of vested interest groups (unions), cronies (such as green energy, banking system, and others) and the welfare and warfare state, then the risks of a political economic meltdown grows.

I hope that Americans will come to the realization that interventionism and inflationism are economically unsustainable policies and promptly act to reform the system before disaster strikes. Remember, what happens to the US will most likely ripple across the globe.

Nevertheless, as for everyone else, while we should hope for the best, we should prepare for the worst.

Al-Qaida as Bogeyman

Writes journalist Eric Margolis

Al-Qaida was never the vast, worldwide terror organization that President George W. Bush claimed. As I witnessed, it was always tiny, no more than 200 men. Al-Qaida’s original goal was to fight the mostly Tajik and Uzbek Afghan Communists and their Soviet masters.

Al-Qaida became an ally of Taliban in this anti-Communist struggle. But Taliban had nothing to do with the 9/11 attacks. As the renowned journalist Arnaud de Borchgrave reported from Afghanistan, Taliban’s tribal chiefs tried to oust firebrand Bin Laden from their nation.

Today, what’s left of al-Qaida numbers no more than 25 men in Afghanistan, according to US Defense Secretary Leon Panetta. Yet President Barack Obama cites the alleged al-Qaida "threat" as the reason for keeping US forces in Afghanistan and keeping Pakistan under semi-occupation. That was the real purpose for releasing these letters. Al-Qaida has become an integral part of US politics.

Al-Qaida is being used as a bogeyman by America’s Republicans to defend bloated US military spending and defend torture as having led to finding bin Laden. My sources tell me a huge bribe led the US to bin Laden, not torture.

Wars or the threat of wars would have to be contrived in order to justify military spending (and inflationism) that benefits the very influential and powerful military industrial complex.

Today's "imperial" wars has basically been in realization of former President Dwight Eisenhower's admonitions in 1960. In a speech Mr. Eisenhower forewarned

[bold emphasis mine]

A vital element in keeping the peace is our military establishment. Our arms must be mighty, ready for instant action, so that no potential aggressor may be tempted to risk his own destruction.

Our military organization today bears little relation to that known by any of my predecessors in peacetime, or indeed by the fighting men of World War II or Korea.

Until the latest of our world conflicts, the United States had no armaments industry. American makers of plowshares could, with time and as required, make swords as well. But now we can no longer risk emergency improvisation of national defense; we have been compelled to create a permanent armaments industry of vast proportions. Added to this, three and a half million men and women are directly engaged in the defense establishment. We annually spend on military security more than the net income of all United States corporations.

This conjunction of an immense military establishment and a large arms industry is new in the American experience. The total influence -- economic, political, even spiritual -- is felt in every city, every State house, every office of the Federal government. We recognize the imperative need for this development. Yet we must not fail to comprehend its grave implications. Our toil, resources and livelihood are all involved; so is the very structure of our society.

In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.

We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted. Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals, so that security and liberty may prosper together.

This could likely be one of the “unseen” factors, if not the main factor, behind the recent territorial claims dispute in Southeast Asia.

Achieving Financial Independence

Self development guru and author Michael Masterson lists Eight Rules for Financial Independence

Mr. Masterson at the Early to Rise writes, (italics mine, bold original)

When I decided to become rich, I began to keep a journal of thoughts I had about making money, losing money, and building wealth.

One chapter of that journal had to do with financial independence. And the eight rules I came up with then are the same rules I follow today:

1. You can't truly trust anybody but yourself with your money.

2. The harder someone tries to convince you to trust him, the less you should.

3. However good a track record someone has, never believe that he/she can't suddenly start your losing money. In fact, if you are like me, the moment you invest will be the moment his/her track record starts falling apart.

4. All markets rise and fall. Don't ever believe anyone who assures you that they can predict the future.

5. If you don't learn to spend less than you make, you will never have peace of mind.

6. Most of what you buy when your income is above $100,000 is discretionary. Don't fool yourself into thinking you need a big house or a fancy car.

7. In making financial projections for yourself or a business, always create three scenarios: one that shows what things will look like if everything goes as hoped; one that shows what will happen if things are mediocre; and one that shows what will happen if things fall apart.

8. Know that the third scenario is optimistic.

Add these up, and you will come to one inevitable conclusion:

The only way to be truly financially independent is to have multiple streams of income, each one of them sufficient to pay for the lifestyle you want to live.

The above mostly signifies common sense, contingency planning. determination and persistence all of which constitutes self-discipline.

Yet the most important point by Mr. Masterson is that “you cannot anybody but yourself.” This resonates with my latest advice:

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.

Bottom line: Attaining financial independence starts with the self (Latin “Ï”), or the ability to think independently.

Quote of the Day: Unintended Consequences of Regulations

Unregulated, a business’s reputation is its most valuable asset. A regulated business does not have the same problem, so long as it obeys the regulations. Regulations replace the overriding need for a business to protect its reputation, and it is no longer solely concerned for its customers: the rule book has precedence. And the more regulation replaces reputation, the less important customers become. Nowhere is this more obvious than in financial services…

The regulators assume the public are innocents in need of protection. They have set themselves up to be gamed by all manner of businesses intent on using and adapting the rules for their own benefits at the expense of their customers. These businesses lobby to change the rules over time to their own advantage and hide behind regulatory respectability, as clients of both MF Global and Bernie Madoff have found to their cost.

That’s from Alasdair Macleod at the GoldMoney.com

Actually this has represented more of the anatomy of crony capitalism and too big too fail corporations. Interventions upon interventions, through regulations, ultimately leads to politically captured industries.

Gold Standard Years: Era of Relative Stability

Author and Bloomberg columnist Amity Shlaes defends the performance of the gold standard from mainstream critics.

The record of gold’s performance in all economies over the past century is not all “terrible.” Especially not in relation to areas that concern us today: growth, inflation or the frequency of bank crises. The problem here may lie not with the gold bugs but with those who work so hard to isolate them.

Gold’s Real Record

Conveniently enough, the gold record happens to have been assembled recently by a highly credentialed team at the Bank of England. In a December 2011 bank report, the authors Oliver Bush, Katie Farrant and Michelle Wright review three eras: the period of a traditional gold standard (1870-1913); the period of a gold-standard variant, the Bretton Woods gold-exchange standard (1948 to 1972); and a period of flexible exchange rates (1972-2008).

The report then looks at annual real growth per capita worldwide, over many nations. Such growth, they find, was stronger in the recent non-gold-standard modern period, averaging an annual increase of 1.8 percent per capita, than in the classical gold-standard period before 1913, when real per- capita gross domestic product increased 1.3 percent annually. Give a point to the gold disdainers.

But the authors also find that in the gold exchange standard years of 1948 to 1972 the world averaged annual per- capita growth of 2.8 percent, higher than the recent gold-free era. The gold exchange standard is a variant of the gold standard. That outcome doesn’t tell you we must go back to the gold exchange standard yesterday. But it does suggest that figuring out how the standard worked might prove a worthy, or at least not a ridiculous, endeavor.

Gold shone in other ways. In a gold-standard regime, money is backed by gold, so it’s impossible, or at least more difficult, for governments to inflate. Naturally the gold standard and Bretton Woods years therefore enjoyed lower rates of inflation compared with the most recent era. The gold standard endures a reputation for causing more banking crises than other monetary regimes. The Bank of England paper suggests gold stabilizes banks: The incidence of banking crises in the non-gold-standard period is higher than the incidence in the two gold periods.

“Overall the gold standard appeared to perform reasonably well against its financial stability and allocative efficiency objectives,” wrote Bush, Farrant and Wright.

Stable Markets

Markets and countries enjoyed relative stability in gold- standard years, and capital in those years flowed to worthy growth-generating projects. The main sacrifice in gold regimes that the authors identify is that governments lose authority to micromanage domestic economies. But given governments’ records, that may not be such a bad thing, either.

The gold standard essentially distilled or detached money from politics, by placing tethers on the spending abilities of politicians.

And this has been the key reason why politicians, their allies and captured institutions everywhere have worked fervently and in complicity to mangle or contort gold’s relatively better track record and or even discreetly attempted to expunge gold’s role from the pages of history books.

As the champion of sound money Professor Ludwig von Mises once wrote,

The excellence of the gold standard is to be seen in the fact that it renders the determination of the monetary unit's purchasing power independent of the policies of governments and political parties. Furthermore, it prevents rulers from eluding the financial and budgetary prerogatives of the representative assemblies. Parliamentary control of finances works only if the government is not in a position to provide for unauthorized expenditures by increasing the circulating amount of fiat money. Viewed in this light, the gold standard appears as an indispensable implement of the body of constitutional guarantees that make the system of representative government function.

The mainstream may deny it, but the way governments, through central banks, have been rapidly and intensely emaciating (or put bluntly destroying) their currencies, we shouldn’t discount that prospective reforms to the current US dollar standard system could partly include the return of gold, or that gold may play a bigger role in the monetary system.

Former World Bank President Robert Zoellick suggested this in 2010, but he may have been pressured by some quarters that prompted for a swift abdication of his earlier position.

Nevertheless the only way to bring back stability is to depoliticize money. This could be attained by first removing the monopoly privileges of government over money and by allowing for currency competition. So markets will determine whether gold will reassume its role or whether other forms of currency systems will emerge.

In Defense of Speculation

Riding to the defense of speculators, Terry Duffy, the executive chairman of exchange operator CME Group Inc. recently said, (hat tip Professor Mark Perry)

When the Dow goes above 13000, Google goes above $600 per share and everybody celebrates, who do you think did that? The U.S. equity market is 100% speculators

Rightly so.

Speculation happens not only when prices go up, but speculation also occurs when prices go down or stay stagnant.

As I previously wrote, Because we are uncertain of the future, all of us speculate.

Let me further quote the great Ludwig von Mises, (The Ultimate Foundation of Economic Science, p.50-51) [bold emphasis mine]

The term "speculate" was originally employed to signify any kind of meditation and forming of an opinion. Today it is employed with an opprobrious connotation to disparage those men who, in the capitalistic market economy, excel in better anticipating the future reactions of their fellow men than the average man does. The rationale of this semantic usage is to be seen in the inability of shortsighted people to notice the uncertainty of the future. These people fail to realize that all production activities aim at satisfying the most urgent future wants and that today no certainty about future conditions is available. They are not aware of the fact that there is a qualitative problem in providing for the future. In all the writings of the socialist authors there is not the slightest allusion to be found to the fact that one of the main problems of the conduct of production activities is to anticipate the future demands of the consumers.

Every action is a speculation, i.e., guided by a definite opinion concerning the uncertain conditions of the future. Even in short run activities this uncertainty prevails. Nobody can know whether some unexpected fact will not render vain all that he has provided for the next day or the next hour.

Politically controlling markets doesn’t solve the knowledge problem based on the issue of scarcity and human action or the “anticipation of the demands of the consumers”. Instead, interventions worsen them.

Proof?

Venezuela should be a vivid example the abject failure of price controls

From the New York Times

Venezuela is one of the world’s top oil producers at a time of soaring energy prices, yet shortages of staples like milk, meat and toilet paper are a chronic part of life here, often turning grocery shopping into a hit or miss proposition.

Some residents arrange their calendars around the once-a-week deliveries made to government-subsidized stores like this one, lining up before dawn to buy a single frozen chicken before the stock runs out. Or a couple of bags of flour. Or a bottle of cooking oil.

The shortages affect both the poor and the well-off, in surprising ways. A supermarket in the upscale La Castellana neighborhood recently had plenty of chicken and cheese — even quail eggs — but not a single roll of toilet paper. Only a few bags of coffee remained on a bottom shelf.

Asked where a shopper could get milk on a day when that, too, was out of stock, a manager said with sarcasm, “At Chávez’s house.”

At the heart of the debate is President Hugo Chávez’s socialist-inspired government, which imposes strict price controls that are intended to make a range of foods and other goods more affordable for the poor. They are often the very products that are the hardest to find.

“Venezuela is too rich a country to have this,” Nery Reyes, 55, a restaurant worker, said outside a government-subsidized store in the working-class Santa Rosalía neighborhood. “I’m wasting my day here standing in line to buy one chicken and some rice.”

Venezuela was long one of the most prosperous countries in the region, with sophisticated manufacturing, vibrant agriculture and strong businesses, making it hard for many residents to accept such widespread scarcities. But amid the prosperity, the gap between rich and poor was extreme, a problem that Mr. Chávez and his ministers say they are trying to eliminate.

They blame unfettered capitalism for the country’s economic ills and argue that controls are needed to keep prices in check in a country where inflation rose to 27.6 percent last year, one of the highest rates in the world. They say companies cause shortages on purpose, holding products off the market to push up prices. This month, the government required price cuts on fruit juice, toothpaste, disposable diapers and more than a dozen other products.

“We are not asking them to lose money, just that they make money in a rational way, that they don’t rob the people,” Mr. Chávez said recently.

But many economists call it a classic case of a government causing a problem rather than solving it. Prices are set so low, they say, that companies and producers cannot make a profit. So farmers grow less food, manufacturers cut back production and retailers stock less inventory. Moreover, some of the shortages are in industries, like dairy and coffee, where the government has seized private companies and is now running them, saying it is in the national interest.

Again, the knowledge problem or the failure to anticipate consumer demands in the absence of market based prices, due to suppression of capitalist speculations through political edicts, has led to shortages, black markets and worsened standard of living.

This is another classic example of how noble intentions (or feel good political biases) clashes with economic realities.

Or as an old saw goes, the path to hell is paved with good intentions.

Quote of the Day: Mathematics Diminishes Economics

Mathematics, seemingly so precise, inevitably ends in reducing economics from the complete knowledge of general principles to arbitrary formulas which alter and distort the principles and hence corrupt the conclusions.

That’s from the great Murray N. Rothbard, who discussed the origins of the methodology of praxeology or human action from J.B. Say.

Outside the promotion of self-esteem, mathematics via econometrics and or statistics serves as intellectual cover to what is truly heuristics based biases.

Ron Paul: Central Bankers are Intellectually Bankrupt

Zero bound rates, QEs, currency swaps and other forms of monetary interventionism, which are all bailout mechanisms, function as political redistribution of resources that benefits a few, particularly, the politically privileged class, at the expense of society.

This has served as the operating manual or the standard operating tool for crisis management applied by central bankers around the world, which has not been limited to the US, Europe and Japan.

And Ron Paul rightly denounces such policies as guided by “intellectually bankruptcy”.

Writes Ron Paul at the Financial Times

The financial crisis has fully exposed the intellectual bankruptcy of the world’s central bankers.

Why? Central bankers neglect the fact that interest rates are prices. Manipulating those prices through credit expansion or contraction has real and deleterious effects on the economy. Yet while socialism and centralised economic planning have largely been rejected by free-market economists, the myth persists that central banks are a necessary component of market economies.

These economists understand that having wages or commodity prices established by government fiat would cause shortages, misallocations of capital and hardship. Yet they accept at face value the notion that central banks must determine not only the supply of one particular commodity – money – but also the cost of that commodity via the setting of interest rates.

Printing unlimited amounts of money does not lead to unlimited prosperity. This is readily apparent from observing the Fed’s monetary policy over the past two decades. It has pumped trillions of dollars into the economy, providing money to banks with the hope that this new money will spur lending and, in turn, consumption. These interventions are intended to raise stock prices, lower borrowing costs for companies and individuals, and maintain high housing prices.

But like their predecessors in the 1930s, today’s Fed governors behave as if the height of the credit bubble is the status quo to which we need to return. This confuses money with wealth, and reflects the idea that prosperity stems from high asset prices and large amounts of money and credit.

The push for easy money is not new. Central banking was supposed to have ended the types of periodic financial crises the US experienced throughout the 19th century. Yet US financial panics have only got worse since the centralisation of monetary policy via the creation of the Fed in 1913. The Depression in the 1930s; the haemorrhaging of gold reserves during the 1960s; the stagflation of the 1970s; the dotcom bubble of the early 2000s; and the current recession all have their root in the Fed’s loose monetary policy.

Each of these crises began with an inflationary monetary policy that led to bubbles, and the solution to the busts that inevitably followed has always been to reflate the bubble.

This only sows the seeds for the next crisis.

Read the rest here

I would add that this dogmatic approach to central banking seems almost a religion, where any opposition to them is seen as blasphemy.

Nevertheless, inflation is a policy that cannot not last.