Monday, May 14, 2012

Choking Labor Regulations: French Edition

Below has been a lucid example of what plagues Europe

From Businessweek/Bloomberg, [bold emphasis added] (hat tip Dan Mitchell)

Here’s a curious fact about the French economy: The country has 2.4 times as many companies with 49 employees as with 50. What difference does one employee make? Plenty, according to the French labor code. Once a company has at least 50 employees inside France, management must create three worker councils, introduce profit sharing, and submit restructuring plans to the councils if the company decides to fire workers for economic reasons.

French businesspeople often skirt these restraints by creating new companies rather than expanding existing ones. “I can’t tell you how many times when I was Minister I’d meet an entrepreneur who would tell me about his companies,” Thierry Breton, chief executive officer of consulting firm Atos and Minister of Finance from 2005 to 2007, said at a Paris conference on April 4. “I’d ask, ‘Why companies?’ He’d say, ‘Oh, I have several so that I can keep [the workforce] under 50.’ We have to review our labor code.”

While polls show job creation and the economic crisis are the top issues for voters in the May 5 second-round vote for president, neither President Nicolas Sarkozy nor Socialist challenger François Hollande are focusing on Breton’s concern. Companies say the biggest obstacle to hiring is the 102-year-old Code du Travail, a 3,200-page rule book that dictates everything from job classifications to the ability to fire workers. Many of these rules kick in after a company’s French payroll creeps beyond 49.

Tired of delays in getting orders filled, Pierrick Haan, CEO of Dupont Medical (not to be confused with chemical company DuPont (DD)), decided last year to return production of some wheelchairs and medical equipment to France. The 150-year-old company, based in Frouard in eastern France, created 20 jobs making custom devices at a French plant—and will stop there. Faced with France’s stifling labor code, Haan probably will send any additional production of standard equipment to what he calls “Near France”—Tunisia, Bulgaria, or Romania. “The cost of labor isn’t the main problem, it’s the rigidities,” Haan says. “If you make a mistake in your hiring plans, you can’t correct it.”

There are now 2.9 million people out of work in France, almost 10 percent of the workforce and the most in 12 years. “For the 100 employees we have in France, we have 10 employee representatives, for whom we have to organize weekly meetings even when there is nothing to discuss,” Haan says. “Every time a social security contribution changes, which is frequently, we have to update software and send our HR people for training. We can’t fire anyone without exorbitant costs.

As one would note, the French dilemma has NOT been about expensive labor, but rather severely restrictive labor regulations. The byzantine regulations impedes the entrepreneurs capacity to expand, as well as, to attract additional investments. That’s aside from dealing with compliance costs, taxes and other regulations.

To argue that inflationism (through devaluation) would represent as the required solution, thus, is outrageously daffy.

This for the simple reason inflation does not deal with the disease: suffocating labor regulations. The solution here is labor reforms through liberalization or as aptly pointed out by the article “to overhaul its rigid labor laws”

Quote of the Day: Hatred is the Essence of Politics

In politics and government, however, the institutional makeup fosters hatred at every turn. Parties recruit followers by exploiting hatreds. Bureaucracies bulk up their power and budgets by artfully weaving hatreds into their mission statements and day-to-day procedures. Regulators take advantage of artificially heightened hatreds. Group identity is emphasized at every turn, and such tribal distinctions are tailor-made for the maintenance and increase of hatred among individual persons who might otherwise disregard the kinds of groupings that the politicians and their supporters emphasize ceaselessly.

That’s from economist Robert Higgs.

Political hatred, which stems from group identity (us against them), is actually groupthink fallacy. People become easily manipulated when they surrender individual thinking to the collective.

I previously quoted a study at my earlier post, Groupthink fallacy has the following traits

1. Illusion of invulnerability –Creates excessive optimism that encourages taking extreme risks.

2. Collective rationalization – Members discount warnings and do not reconsider their assumptions.

3. Belief in inherent morality – Members believe in the rightness of their cause and therefore ignore the ethical or moral consequences of their decisions.

4. Stereotyped views of out-groups – Negative views of “enemy” make effective responses to conflict seem unnecessary.

5. Direct pressure on dissenters – Members are under pressure not to express arguments against any of the group’s views.

6. Self-censorship – Doubts and deviations from the perceived group consensus are not expressed.

7. Illusion of unanimity – The majority view and judgments are assumed to be unanimous.

8. Self-appointed ‘mindguards’ – Members protect the group and the leader from information that is problematic or contradictory to the group’s cohesiveness, view, and/or decisions.

These can be summed up to "seeking comfort of the crowds".

And politicians, mainstream institutions and media pander to the gullible public through groupthink fallacy (e.g. nationalism) by sowing hatred (us against them mindset) to advance their interests.

Phisix: The Correction Phase Cometh

I believe that the Phisix has entered a temporary corrective phase, or a pause from the bullmarket.

I wrote last week[1]

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.

I have been pointing out from the start of the year that the bullrun of the local stock market may last until the first semester of this year[2] from which we may encounter renewed volatility.

In March I said[3]

the raft of credit easing measures announced last month will likely push equity market higher perhaps until the first semester or somewhere at near the end of these programs. Of course there will be sporadic shallow short term corrections amidst the current surge.

However, the next downside volatility will only serve as pretext for more injections until the market will upend such policies most likely through intensified price inflation.

The reason for pointing this out is to dispel the misimpression that I only see the market as moving in one direction—UP.

It just so happened that last week’s correction came sooner and deeper than expected.

For Every (Mini) Boom, a (Mini) Bust

And the recent re-emergence of the downside volatilities which again has likely been prompted by overbought conditions seems to have taken cue from the external environment.

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Emerging markets around the world or not limited to Asia have mostly been slammed. Major Asian bourses have been battered as well.

In a relative sense, in general, Asia has endured substantially more losses than the US or Europe.

And it is ironic that crisis afflicted Portugal, Italy and Spain posted marginal gains this week. Meanwhile Greece equities collapsed, the ASE general crumbled by 11.3% this week and down 10% for the year.

Meanwhile the losses of the Phisix seem understated.

Instead of the usual rotation, or the process of alternating winners and losers, this week, the broader market breadth sharply deteriorated.

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In just one week, overall positive market sentiment seemed to have been reversed. Declining issues reasserted dominance with manifest forcefulness.

The scale of last week’s dramatic recoil has almost mirrored the fierce downside move of September-October of 2011, where the Phisix lost 18% from the August peak.

Of course current conditions are different from the 2011. But the point of the above is to show the perspective from the big picture and not just to absorb the frames presented.

Technically speaking the Phisix has yet to breach the 50-day moving averages. This could be seen yet as a positive sign.

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In addition, the seeming resiliency of the Phisix means that while most of the broad market losses have been concentrated on the implosion of many “miniature” bubbles seen in second and third tier issues, the heavyweights has been less affected.

Of the 13 issues with 3% and above free market capitalization float that constitutes 70.38% of the Phisix basket as of Friday’s close, 3 defied the last week’s carnage, while 5 issues fell more than the decline of the Phisix. The Phisix dropped 2.63% which reduced year to date gains to 17.93%

It is just apt to remind everyone that Newton's third law of motion[4] “To every action there is always an equal and opposite reaction" has some validity in the stock markets.

The lesson being that during occurrences of market euphoria, where powerful speculative activities or price chasing dynamics results to many high flying issues, a reversal of which would result to prices falling more swiftly and more intensely almost as they have ascended.

Prices fall faster than they rise because of the behavioral principle of loss aversion[5], where fear is a stronger motivator than the pleasure of gain.

That’s why I don’t recommend chasing prices.

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Asset price inflation is followed by asset price deflation: minor boom bust cycles within major boom bust cycles.

Except for the mining issues, the previously biggest winners (Property and finance) have basically been last week’s largest losers. Because the losses of the holder sector have been limited the mother units of top performers have taken the top spot in terms of returns on a year to date basis.

The swift and dramatic reversal of the market’s sentiment haunted the high flying mining peripheries first, which then rippled across to the heavyweights, the contagion effect has visibly been seen in the breakdown of the mining index.

Commodity Prices as Stethoscope

Importantly, adverse developments at the world commodity markets may have influenced the recent crash of the local mining sector.

Yet such decline have not been limited to gold or oil but dispersed throughout the entire commodity spectrum.

And instead of earlier divergences[6] where global financial assets has seen price inflation amidst a backdrop of declining commodity prices, recently, divergences seem to have transformed into a convergence—where both commodity prices and financial securities have been evincing signs of lethargy.

This serves as further proof that assets have been highly correlated and that markets have been severely distorted or “broken”[7] where the pricing mechanism have been manipulated to reflect on the preferred pricing levels by politicians.

Thus today’s investing environment has been transformed into a grand casino operating on the principle of a “Risk On or Risk Off” environment.

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From the technical viewpoint, commodity markets seem to highlight the ongoing corrosion of price trends. Both the broad commodity index the Reuters/Jefferies (CRB) and the main US oil benchmark the West Texas Intermediate Crude (WTIC) seem to be signaling a bearish head and shoulder pattern. The WTIC has already broken down while the CRB has yet to breakdown.

Though I am not a believer in patterns, the numerous momentum players can make such patterns as self-fulfilling over the short term.

That’s why this week will be crucial for the CRB, where a successful breakdown of which may be portentous to global stock markets, the Phisix as well.

We should remember that oil markets hardly exhibits “real economics” or free market based demand and supply. Oil markets, as I have repeatedly pointing out, have been highly politicized[8].

The welfare states of many of the major producers, particularly OPEC economies or even non-OPEC such as Russia[9] greatly depends lofty oil prices, perhaps about $85 and above. Even President Obama’s green energy projects have been anchored on high oil prices.

This means that if oil prices breaks below their welfare threshold for a prolonged period, then this would incite popular uprising and the eventual collapse of the current political order.

And this is why oil producing governments have been limiting private sector’s access to oil reserves[10]. Yet the capacity by these governments to bring oil to the surface has been constrained by government budget, which has been mostly spent on welfare (yes to buy off their political privileges from their constituents), and the lack of technology.

The implication of the above is that these governments will probably try to restrict production, seek the war option[11] (e.g. urge the US to militarily take on Iran), inflate their economies to pay for their welfare system or influence major central banks and politicians of major economies to resort to more inflationism.

I might add that given the current political arrangement, it may not be farfetched to deduce that many, if not most US politicians from both parties, have been bankrolled by these oil producing client states.

Add to these, falling oil prices jeopardizes President’s Obama’s green projects.

Thus contemporary political institutions significantly dependent on revenues from resources (resource curse) rather than from trade would represent a vested interest group that would lobby to seek for bailouts in the form of inflation or through bank rescues.

Don’t forget one of the beneficiaries of US Federal Reserve bailout in 2009, was ironically, the Libyan government headed by then ally turned enemy Muamar Gaddafi[12]

So from this supply side perspective we understand that the policy direction of current governments will be through more inflationism. [On the demand side, money printing has enabled the welfare state to grow]

China’s Weakening Consumption Demand?

The listless state of commodity prices may be driven by two important forces;

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One is consumption demand.

If the sluggishness in commodity prices has been representative of consumption demand, then the likely source for such weakness could emanate from China.

Soft economic data on export and import data for April (right window[13]) and a seeming rolling over of China’s equity markets (left window) seem to support this angle.

While many analysts read this to be an anomaly, such as ‘calendar effect’, I don’t. I would prefer to wait and watch.

I have been saying that China could be the global markets next black swan[14] whose economic slowdown has been highlighted by growing signs of the political fissures.

And that’s why I believe that the Scarborough Shoal territorial claim dispute has either been a squid tactic meant to divert the public’s attention from real economic conditions or a yeoman’s undercover sales job for the US and China’s military industrial complex[15] or both.

And given China’s Keynesian policies of permanent quasi booms, then it should be expected that a commensurably huge bust will be in the offing. Evidences of malinvestments have already been present; 64 million empty apartments, ghost cities and vacant shopping malls[16] which have been considerably financed by China’s version of the $1.7 trillion shadow financing system[17].

The question for the coming bust is a WHEN rather than an IF. And this depends on the China’s state of real savings

At present, the $64 trillion question is to what degree will China’s government’s conduct the bailout? If China still has substantial real savings then her government may be able to kick the proverbial can down the road.

As Austrian economist Dr. Frank Shostak explains[18],

For a while, the government's package can appear to be working; this is because there is still enough real savings to support both profitable and unprofitable activities. If, however, savings and capital are shrinking, nothing is going to help, and the real economy will follow up with further declines.

That’s why I am largely neutral on China’s financial markets.

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In the commodity sphere, China has become the proverbial gorilla in the room as the largest, if not a significant, consumer of many commodities (see upper window)

As IMF’s Shaun K. Roache writes[19],

China is a large consumer of a broad range of primary commodities. As a percent of global production, China’s consumption during 2010 accounted for about 20 percent of nonrenewable energy resources, 23 percent of major agricultural crops, and 40 percent of base metals. These market shares have increased sharply since 2000, mainly reflecting China’s rapid economic growth. History has shown that as countries become richer, their commodity consumption rises at an increasing rate before eventually stabilizing at much higher levels.

Further, commodity prices seem to be correlated with the actions of China’s equity bellwether the Shanghai index (lower window[20]).

Yet the correlation can go both ways, either China’s or the commodity markets could lead. The Shanghai index [SSEC] may recover (perhaps boosted by a major move from Chinese authorities) and this may provide a lift to commodity prices, otherwise a continuing and deepening slowdown of China’s economy could pose as a drag to the commodity markets which will diffuse into the SSEC.

On the other hand, a major boost from a major central bank could power commodities higher, and this may help buoy China’s markets higher.

Or Indecisive Central Bankers?

Weak commodity prices may have also been symptomatic of asset liquidations, perhaps evidenced by JP Morgan’s $2 billion trading losses in credit derivatives[21].

This may be indicative that commodity prices along with financial asset prices could be factoring in less than aggressive interventions from major central banks.

And this may have been underscored by the ECB’s reluctance to intervene[22], perhaps until political impasse at several EU nations will have been resolved.

Sunday’s elections in Greece has failed to “put together a government[23]” from which contending parties, divided between pro- or anti- bailout camps, have reportedly been haggling to form a coalition to avert national elections. Such national elections have been seen as increasing the risks of a Greece exit from the EU.

Ironically, the EU officials appear to be openly talking about a Greek exit[24], perhaps to condition the public of its eventuality.

The same is true for France where the parliamentary elections in June will either solidify the dominance of the socialists[25] or may open the nexus for the extreme (fascist) right to acquire and expand power[26].

Thus until the political leadership of these nations have been established, the ECB will likely to adapt a wait and see stance.

And except for the Bank of Japan (BoJ) whom has continued to expand her balance sheet[27], the Bank of England (BoE) as well, has officially declared a halt[28] on their asset purchasing program, which I say is temporary.

Meanwhile, US Federal Reserve through their chairman Mr. Ben Bernanke continues to dither or give mixed signals on the prospects of more quantitative easing measures[29]. True monetary conditions in the US remains easy, as seen by the renewed pickup of growth in M2, but this could be offset by perceptions about inadequate support.

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The current Operation Twist has also been slated to expire next month or on June[30].

And if history will rhyme, then the past two incidences where the Fed technically concluded market intervention programs led to sharp downside volatilities, as shown in the republished chart[31].

My hunch is that the current market pressures could most likely be exhibiting parallel symptoms of market’s apprehension over the lack of further steroids.

[As a reminder, I am vehemently against inflationism, but as an investor, we have to be realists and play by the cards we are dealt with]

Conclusion and Recommendations

The current weakness in commodity prices, which has partly been transmitted to the global stock markets, could represent a deepening China’s economic slowdown (bust has not yet been established) or the factoring in by financial markets of the withholding of the provision of more support to the financial markets, by central bankers, via direct interventions of asset purchases or even both.

And any further weakness in commodity prices will likely filter into the asset markets.

As an aside, I know much of the mainstream will say that weak commodity markets should be a positive aspect because these lowers input costs and improves profits. In reality, what they mean is that “low consumer price inflation” will justify more interventions from major central bankers.

And this has been exactly the message I have been saying, see my March note

“the next downside volatility will only serve as pretext for more injections”

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The general idea is that markets have been prone to boom bust cycles or the inflation cycle[32] or volatility as a result of government and central bank policies that keeps markets dependent on “on and off” steroid boosters.

My guess is that China’s markets will be addressed politically in the same way too.

And it would seem that periods of greater market volatility and the ensuing fear will leave market participants begging for more interventions and inflationism.

For the Phisix, the current resiliency by the heavy caps has been a noteworthy auspicious development. Yet we should not discount the likelihood of a contagion from any adverse exogenous events.

My inclination is that based on the above evidences and in the understanding that NO TREND GOES IN A STRAIGHT LINE, the Phisix will likely undergo a correction or profit taking phase.

This retrenchment, perhaps 5-10% from the peak or a low of 4,800, should be seen as healthy and normal. Should this be realized then the local benchmark will likely drift rangebound.

Of course external developments will play a big role in either confirming or falsifying this.

Yet I am LESS inclined to believe that a new high for the Phisix will be reached soon. Such should be until major central bankers will have announced their renewed support for the markets or if there have been conspicuous signs that they have been operating behind the curtains.

Should I be wrong and the local (and global) markets continue to tread higher without support from major central bankers, unless this would be backed by a strong surge of lending from the banking system particularly in the US, Europe or China, then we should even be more cautious, as any rally would likely lose steam from the current environment, again, without steroids.

The outlier risk from this would even be a crash, as Dr. Marc Faber suggests[33] during the second half of the year.

So far, the fact is, that the damage seen in the market internals will have to be remedied first.

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The good part is that the much of the selloff has been locally driven which unfortunately has affected many momentum participants. Yet foreign buying remains net positive in spite of the carnage and may have provided cushion to the heavyweights.

Well this chapter should serve as part of our continued learning process.

Finally in the expectation of the possibility of the non-participation of central banks until June or after, this means greater volatility ahead in both directions.

Investors may raise their cash balance during rallies and buy on every episodes of panic. And in the event that any one of the major central banks declares the next steroid (the size should matter), then our strategy shifts to buy high, sell higher.


[1] See Bubble Signs at the PSE: Raising Capital Through Pre-selling Model, May 7, 2012

[2] See An Inflationary Boom Powered Phisix Bullmarket January 22, 2012

[3] See Global Stock Markets: Will the Recent Rise in Interest Rates Pop the Bubble? March 18, 2012

[4] Wikipedia.org Newton's third law

[5] Wikipedia.org Loss aversion

[6] See Are Falling Gold Mining Stocks Signaling Deflation? April 25, 2012

[7] See “Pump and Dump” Policies Pumps Up Miniature and Grand Bubbles Aprl 30,

[8] See Are Surging Oil Prices Symptoms of a Crack-up Boom?, February 24, 2012

[9] See The Geopolitics of Oil and Russia’s Knowledge Economy March 13, 2012

[10] See Peak Oil Represents Government Failure, February 10, 2011

[11] See Saber Rattling over Iran is only Part of the Big Oil Price Story January 25, 2012

[12] See US Federal Reserve Lent To (or Bailed Out?) Libya’s Qaddafi in 2009, April 5, 2011

[13] Danske Research China: Slowing imports & exports due to calendar effects? , May 10, 2012

[14] See Signs of China’s Snowballing Political Crisis: Six Arrested over Coup Rumors, April 1, 2011

[15] See The Scarborough Shoal Standoff Has Not Been About Oil, April 16, 2012

[16] See China’s Tiger by the Tail, April 13, 2012

[17] See China’s Bubble Cycle: Shadow Financing at $1.7 Trillion, June 28, 2011

[18] Shostak, Frank The Rescue Package Will Delay Recovery, September 29, 2008 Mises.org

[19] Roache Shaun K. China's Impact on World Commodity Markets, IMF Working Paper, May 2012

[20] Holmes Frank Looking to China to Fire Up its Economy, May 11, 2011

[21] Tavakoli Janet Jamie Dimon's SNAFU: JPMorgan's Other Derivatives' Losses Huffington Post, May 12, 2012

[22] Reuters India, ECB fends off pressure to take crisis action May 8, 2012

[23] Reuters.com Greek president makes last push to avert elections, May 12, 2012

[24] Thestar.com Greek euro-exit talk seeps into public as officials air doubts, May 9, 2012

[25] Bloomberg.com French Favor Socialists, Allies in June Parliamentary Elections, May 11, 2012

[26] See Will French Politics Swing from Socialism to Fascism? May 12, 2012

[27] See Bank of Japan Adds More Stimulus, April 27, 2012

[28] See Bank of England Halts QE for Now, May 10, 2012

[29] Wall Street Journal Bernanke Expresses Fiscal Concerns To Senate Democrats, May 10, 2012

[30] Federal Open Market Committee Federal Reserve issues FOMC statement, US Federal Reserve September 21, 2011

[31] See Central Bankers Whets Wall Street’s Fetish For Inflationism, March 12, 2012

[32] See Chart of the Day: The Inflation Cycle, April 5, 2012

[33] See Dr. Marc Faber Warns of 1987 Crash if No QE 3.0 May 11, 2011

Sunday, May 13, 2012

Quote of the Day: The Value of Superfluous Fluff

Some economists like to believe (although this belief has blessedly faded in the recent decades) that economics is an edifice built on the rocks of mathematical theory and statistical empiricism, and everything else is superfluous fluff. McCloskey (1983) thoroughly strafed that conceit, pointing out in “The Rhetoric of Economics” that the research and analysis of economists is built on uncertain and subjective judgments, and often uses, among its rhetorical tools, analogy and metaphor, appeals to authority and to commonsense intuition, and the use of “toy models” counterbalanced with the choice of supposedly illustrative real-world episodes.

Economic arguments rooted purely in mathematical formalism or statistical analyses are superb at specifying the steps leading to the particular conclusion. However, cynical economists (but I repeat myself) know that a model can be built to illustrate any desired conclusion, and that if the data are tortured for long enough, they will confess to anything. Persuasiveness requires a multidimensional argument that reaches beyond formalism. As McCloskey (1983) wrote: “There is no good reason to to make ‘scientific’ as opposed to plausible statements.”

That’s from economist Timothy Taylor on the issue of editing economists (hat tip Professor David Henderson).

Phony and manipulated “tortured” models function as standard instruments used to justify social controls through public policies. Think anthropomorphic global warming, Keynesian stimulus, mercantilism and etc…

Saturday, May 12, 2012

Will French Politics Swing from Socialism to Fascism?

Far right Marine Le Pen’s strong showing at the recent Presidential runoff in France may have opened the door for politics of the extreme right.

Writes historian Eric Margolis at the Lewrockwell.com

Talk about déjà vu. Such a sweeping change would return France to its pre-war political landscape, when hard Left and hard Right were locked in bitter confrontation. Marine Le Pen could well emerge as the angry voice of many Europeans – a prospect that causes shudders across conservative-ruled Europe.

She could also prove the nemesis of the European Union. Le Pen has vowed to oppose austerity pacts, quit the Euro, restore the franc, and follow economic mercantilism. Her anti-EU, anti-free trade policies are attracting many people across Europe and even in Russia.

Fortunately, Francois Holland could prove a counter-balance to the ascendant Right. He is a moderate, cautious centrist politician given to pragmatism rather than ideology. His popularity and image of geniality and caring about people will help him withstand the forces of both Left and Right trying to pull him in different directions.

Even so, Marine Le Pen and her aggressive rightists are likely to become an ever-increasing threat to the French Republic as economic conditions worsen. It seems only a matter of time before fascism rears its head again in Spain, Italy, and Portugal. Greece is already on the way. Failure to implement austerity plans will bring economic convulsions and with them the bully boys in black

Mr. Francois Holland's victory has been negative enough for domestic entrepreneurs. Many of whom have reportedly been looking for refuge overseas from the prospects of punitive tax increases, if not from asset forfeitures, by the incoming socialist government, whom has openly declared war against the wealthy.

Yet if the prognosis of Mr. Margolis becomes a reality, then the rise of fascism (based on economic nationalism or mercantilism) elevates the risk of regional war.

As the great Ludwig von Mises once admonished,

What generates war is the economic philosophy almost universally espoused today by governments and political parties. As this philosophy sees it, there prevail within the unhampered market economy irreconcilable conflicts between the interests of various nations. Free trade harms a nation; it brings about impoverishment. It is the duty of government to prevent the evils of free trade by trade barriers. We may, for the sake of argument, disregard the fact that protectionism also hurts the interests of the nations which resort to it. But there can be no doubt that protectionism aims at damaging the interests of foreign peoples and really does damage them. It is an illusion to assume that those injured will tolerate other nations' protectionism if they believe that they are strong enough to brush it away by the use of arms. The philosophy of protectionism is a philosophy of war. The wars of our age are not at variance with popular economic doctrines; they are, on the contrary, the inescapable result of a consistent application of these doctrines.

The current trend of French politics seems locked into a wretched choice between the proverbial devil and the deep blue sea. Beautiful France may not be as beautiful as she is today in the future.

Democracy, as the great libertarian H.L. Mencken said, is the theory that the common people know what they want, and deserve to get it good and hard.

Quote of the Day: Under ZIRP, Corporate Balance Sheets DO NOT Matter

What, however, people do not know is that under ZIRP, when every basis point of debt return over 0% is praised, and an epic scramble ensues among hedge for any yielding paper no matter how worthless, the balance sheets of companies just do not matter. In other words, for companies that have massive leverage, high interest rates, negative cash flow, which all were corporate death knells as recently as 2008, the capitalization structure is completely irrelevant.

(bold highlights original)

That’s from the anonymous Tyler Durden at the Zero Hedge, discussing the boom in high yield debt. The unprecedented or uncharted scale of interventionism and inflationism has been massively distorting the way asset markets are being valued. The result has been magnified volatility and boom bust episodes.

More on US Exodus: Facebook co-founder Gives up US citizenship

Wow. Wealthy Americans giving up on their citizenship seems to be snowballing.

Now we’ve got a high profile case; one of Facebook’s founders has reportedly renounced his citizenship before the company’s IPO.

From Bloomberg,

Eduardo Saverin, the billionaire co- founder of Facebook Inc. (FB), renounced his U.S. citizenship before an initial public offering that values the social network at as much as $96 billion, a move that may reduce his tax bill.

Facebook plans to raise as much as $11.8 billion through the IPO, the biggest in history for an Internet company. Saverin’s stake is about 4 percent, according to the website Who Owns Facebook. At the high end of the IPO valuation, that would be worth about $3.84 billion. His holdings aren’t listed in Facebook’s regulatory filings.

Saverin, 30, joins a growing number of people giving up U.S. citizenship, a move that can trim their tax liabilities in that country. The Brazilian-born resident of Singapore is one of several people who helped Mark Zuckerberg start Facebook in a Harvard University dorm and stand to reap billions of dollars after the world’s largest social network holds its IPO.

“Eduardo recently found it more practical to become a resident of Singapore since he plans to live there for an indefinite period of time,” said Tom Goodman, a spokesman for Saverin, in an e-mailed statement.

Saverin’s name is on a list of people who chose to renounce citizenship as of April 30, published by the Internal Revenue Service. Saverin renounced his U.S. citizenship “around September” of last year, according to his spokesman.

Singapore doesn’t have a capital gains tax. It does tax income earned in that nation, as well as “certain foreign- sourced income,” according to a government website on tax policies there.

Exit Tax

Saverin won’t escape all U.S. taxes. Americans who give up their citizenship owe what is effectively an exit tax on the capital gains from their stock holdings, even if they don’t sell the shares, said Reuven S. Avi-Yonah, director of the international tax program at the University of Michigan’s law school. For tax purposes, the IRS treats the stock as if it has been sold.

Renouncing your citizenship well in advance of an IPO is “a very smart idea,” from a tax standpoint, said Avi-Yonah. “Once it’s public you can’t fool around with the value.”

The tax bill from Facebook’s IPO, I believe, could be just one issue seen by the media.

Future taxes and civil liberties, I think, could be of the more important unnoticed concern.

Of course, America’s loss, in the case of Mr Saverin, should likely benefit Singapore, which is another sign of wealth convergence or productive capital moving to Asia and emerging markets. Another wow, the billionaire is only 30 years old (signs of how technology has been reshaping industries).

Unless the political trend towards repressiveness in the US reverses, there will be more cases of exiting wealthy Americans.

And speaking of taxes, globalization and the information age seems to have conspired to create opportunities for technology companies to use legal loopholes to arbitrage away taxes through overseas corporate vehicles.

From the New York Times

The growing digital economy presents a conundrum for lawmakers overseeing corporate taxation: although technology is now one of the nation’s largest and most valued industries, many tech companies are among the least taxed, according to government and corporate data. Over the last two years, the 71 technology companies in the Standard & Poor’s 500-stock index — including Apple, Google, Yahoo and Dell — reported paying worldwide cash taxes at a rate that, on average, was a third less than other S.& P. companies’. (Cash taxes may include payments for multiple years.)

Even among tech companies, Apple’s rates are low. And while the company has remade industries, ignited economic growth and delighted customers, it has also devised corporate strategies that take advantage of gaps in the tax code, according to former executives who helped create those strategies.

Apple, for instance, was among the first tech companies to designate overseas salespeople in high-tax countries in a manner that allowed them to sell on behalf of low-tax subsidiaries on other continents, sidestepping income taxes, according to former executives. Apple was a pioneer of an accounting technique known as the “Double Irish With a Dutch Sandwich,” which reduces taxes by routing profits through Irish subsidiaries and the Netherlands and then to the Caribbean. Today, that tactic is used by hundreds of other corporations — some of which directly imitated Apple’s methods, say accountants at those companies.

So class warfare politicians appear to be increasingly caught in the bind of economic reality. Raise taxes, capital flees.

Friday, May 11, 2012

Graphic: Endowment Effect

Another gem from my favorite cartoonist Ms. Jessica Hagy of Indexed, who creatively turns complex ideas into simple graphics.

Ms Hagy calls the chart below as “What would you grab if the house was on fire?”Link

image

I would say that this is a precise depiction or representation of the endowment effect bias (from changingminds.org)

When I own something, I will tend to value it more highly. If I have to sell it, I will probably want to ask more than it is really worth.

Dr. Marc Faber Warns of 1987 Crash if No QE 3.0

From Bloomberg,

U.S. stocks may plunge in the second half of the year “like in 1987” if the Standard & Poor’s 500 Index (SPX) climbs without further stimulus from the Federal Reserve, said Marc Faber, whose prediction of a February selloff in global equities never materialized.

“I think the market will have difficulties to move up strongly unless we have a massive QE3,” Faber, who manages $300 million at Marc Faber Ltd., told Betty Liu on Bloomberg Television’s “In the Loop” from Zurich today, referring to a third round of large-scale asset purchases by the Fed. “If it moves and makes a high above 1,422, the second half of the year could witness a crash, like in 1987.”

The Dow Jones Industrial Average plunged 23 percent on Oct. 19, 1987 in the biggest crash since 1914, triggering losses in stock-market values around the world. The Standard & Poor’s 500 Index plummeted 20 percent. The Dow still closed 2.3 percent higher in 1987, and the S&P 500 advanced 2 percent.
“If the market makes a new high, it will be a new high with very few stocks pushing up and the majority of stocks having already rolled over,” Faber said. “The earnings outlook is not particularly good because most economies in the world are slowing down.”

Profit Growth

More than 69 percent of companies the S&P 500 that reported results since April 10 have exceeded analysts’ forecasts for per-share earnings, according to data compiled by Bloomberg. Profits are due to increase 3.9 percent in the second quarter and 6 percent the following period, estimates compiled by Bloomberg show.

Faber said a third round of quantitative easing would “definitely occur” if the S&P 500 dropped another 100 to 150 points. If it bounces back to 1,400, he said, the Fed will probably wait to see how the economy develops.

see Bloomberg's interview of Dr. Marc Faber below

Media has the innate tendency of reducing investment gurus into astrologers or soothsayers by soliciting predictions over the short term. And investing gurus eager to gain media limelight fall into their trap. And this is why Dr. Faber’s warnings comes with a Bloomberg notice about his latest failed predictions, which has been punctuated by "whose prediction of a February selloff in global equities never materialized."

Dr. Faber, who introduced me to the Austrian school of economics through his writings, is simply stating that if a tsunami of central banking money has been responsible for the buoyant state of markets, then a withdrawal of which should mean lower asset prices. In short, the state of the financial markets heavily, if not almost totally, relies on the actions of central bankers.

Yet since we can’t entirely predict the timing and the degree of central bank interventions, or if they intervene at all, we should expect markets to be highly sensitive to excessive volatility.

And aside from money printing, the risk of high volatility has been amplified by many other interventions on the marketplace (via various bank and financial market regulations). And heightened volatility could translate to a crash. And don’t forget a crash could be used to justify QE 3.0.

As to whether the Fed’s QE 3.0 will come before or after a substantial market move is also beyond our knowledge, since this will depend on the actions of political authorities. I have to admit I can’t read the minds of central bankers.

Yet QE 3.0 may come yet in the form of actions of other central bankers, e.g. ECB’s LTRO and or SMP.

What I know is that inflationism has been seen by the mainstream and by the incumbent political authorities as very crucial for the survival of the current forms of political institutions. This is why I, or perhaps Dr. Faber, sees the probability for more central bank interventions over the marketplace. This is because the cost of non-intervention would be a substantial reduction of the political control over society from vastly impaired political institutions.

It must be noted that Austrian economics is basically an explanatory science, where given a set of actions we see the consequence being such or such. The idea of reducing logical deduction into some form of predictive science is wizardry.

In short, while I don't predict a crash I would not rule out this option. Especially not in a highly distorted and politicized markets

Video: How Occupational Licensing Hurts the Economy

This video from the Institute for Justice shows how occupational licensing, or restrictive employment regulations, represents a form of labor protectionism that hurts the consumers, investors and job seekers, or as a whole, the economy. Yet the beneficiaries are the small number of privileged license holders and the government of course.

While the video has been focused on occupational licensing in the US, labor market interventions has universal relevance. In short, this applies to the Philippines too.

David Stockman: The US Federal Reserve is Destroying the Capital Markets

David Stockman, former Republican U.S. Congressman and director of the Office of Management and Budget, founding partner of Heartland Industrial Partners and the author of The Triumph of Politics: Why Reagan's Revolution Failed and the soon-to-be released The Great Deformation: How Crony Capitalism Corrupts Free Markets and Democracy in an interview at the Gold Report has this biting message. [bold emphasis mine]

The Fed is destroying the capital market by pegging and manipulating the price of money and debt capital. Interest rates signal nothing anymore because they are zero. The yield curve signals nothing anymore because it is totally manipulated by the Fed. The very idea of "Operation Twist" is an abomination.

Capital markets are at the heart of capitalism and they are not working. Savers are being crushed when we desperately need savings. The federal government is borrowing when it is broke. Wall Street is arbitraging the Fed's monetary policy by borrowing overnight money at 10 basis points and investing it in 10-year treasuries at a yield of 200 basis points, capturing the profit and laughing all the way to the bank. The Fed has become a captive of the traders and robots on Wall Street…

I think the likely catalyst is a breakdown of the U.S. government bond market. It is the heart of the fixed income market and, therefore, the world's financial market.

Because of Fed management and interest-rate pegging, the market is artificially medicated. All of the rates and spreads are unreal. The yield curve is not market driven. Supply and demand for savings and investment, future inflation risk discounts by investors – none of these free market forces matter. The price of money is dictated by the Fed, and Wall Street merely attempts to front-run its next move.

As long as the hedge fund traders and fast-money boys believe the Fed can keep everything pegged, we may limp along. The minute they lose confidence, they will unwind their trades.

On the margin, nobody owns the Treasury bond; you rent it. Trillions of treasury paper is funded on repo: You buy $100 million (M) in Treasuries and immediately put them up as collateral for overnight borrowings of $98M. Traders can capture the spread as long as the price of the bond is stable or rising, as it has been for the last year or two. If the bond drops 2%, the spread has been wiped out.

If that happens, the massive repo structures – that is, debt owned by still more debt – will start to unwind and create a panic in the Treasury market. People will realize the emperor is naked.

Read the rest here.

Many people believe that the numerous incidences of irregularities seen in financial markets emanate from unscrupulous behavior by some market agents, little has been understood that central bank policies, together policies that cater to crony capitalism, have been incentivizing or fostering such behavioral anomalies.

And importantly, the nature of capital markets have been intensely distorted to the point where conventional wisdom of its mechanics has nearly been rendered obsolete.

Either we face up to such evolving realities or suffer from our recalcitrance to adjust when the day of reckoning arrives.

Has the Underwear Bomber Hoax been Designed to Justify Naked Airport Security Checks?

I recently pointed out that the expose on the underwear bomber terrorist hoax has likely been driven by an undeclared political incentive,

Visible ‘terrorism’ effects, as illustrated above, can be manufactured for political reasons—example to justify the existence and or the expansion of government bureaucracies (such as US Homeland Security) or to promote interests of the military industrial complex or both.

Paul Craig Roberts, former Assistant Secretary of the US Treasury and former associate editor of the Wall Street Journal, writing at the lewrockwell.com proposes this source of motivation,

But the real significance of this latest hoax is to introduce into the fearful American public the idea of an undetectable underwear bomb.

What does this bring to mind? Anyone of my generation or any science fiction aficionado immediately thinks of Robert Heinlein’s The Puppet Masters.

Written in 1951 but set in our time, Earth is invaded by small creatures that attach to the human body and take over the person. The humans become the puppets of their masters. Large areas of America succumb to the invaders before the morons in Washington understand that the invasion is real and not a conspiracy theory.

On clothed humans, the creatures cannot be detected, and the edict goes out that anyone clothed is a suspect. Everyone must go about naked. Women are not even allowed to carry purses in their hand, because the creature can be in the purse attached to the woman’s hand.

Obviously, if the CIA, the news sources, and Dianne Feinstein’s briefers are correct that defeated al-Qaeda has come up with an “undetectable” bomb, we will have to pass through airport security naked.

In short, create a scenario to justify the TSA’s lust for naked security checks (perhaps this porno entertainment for them).

Could be.

Nonetheless the current trend of airport security checks has been dehumanizing and symptomatic of the expanding rule of tyranny.

Video: 10 years after, Ron Paul was Right

In a 5 minute 2002 speech at the US Congress, congressman Ron Paul made a challenge for the public to track the accuracy of his litany of predictions. (hat tip Bob Wenzel)

At the close of this speech Mr. Paul said,
"I have no timetable for these predictions, but just in case, keep them around and look at them in 5-10 years. Let's hope and pray that I'm wrong on all accounts. If so, I will be very pleased."
Unfortunately, after 10 years, most of the events which he had hoped that would NOT happen became stunningly true.