First Shale Gas Output from China, India to Follow

I previously pointed out that, the Southeast Asian territorial dispute has NOT been about oil as popularly thought.

And since China has the largest reserves of Shale energy in the world, like the US, dependence on external sourcing of oil WILL diminish. So there hardly is any need or incentive for gunboat diplomacy (except to use this as diversion for other unstated reasons).

Also I pointed out that Shale gas revolution is the future of energy which should translate to a worldwide phenomenon.

I would guess that the shale gas revolution will be a worldwide phenomenon which should wean away our dependence on oil. The net effect outside manipulation of money by governments should be to materially bring down or lower prices of energy.

Now some confirmations to this prediction: China will be having its first shale gas output while India is slated to access local Shale energy too.

The roll out of Asia’s shale gas boom has began!

From Bloomberg (bold emphasis mine)

ONGC, India’s biggest explorer, is studying data for shale- gas deposits and awaiting a government policy on commercial drilling for gas trapped in shale rock, Sudhir Vasudeva, chairman of the state-run company, said in a telephone interview yesterday. China Petrochemical Corp. will start pumping the nation’s first shale gas from a project in Sichuan province next month, according to a report on Caixin’s website on May 15, citing the company…

India holds 6.1 trillion cubic feet of technically recoverable shale gas reserves in three basins, the U.S. Geological Survey estimated in a report in January. That was less than 10 percent of the 63 trillion cubic feet estimate made the previous year, in April, by the U.S. Energy Information Administration in a report.

“The U.S. estimates are just estimates, and we’ll have to survey the geology and deposits and drill wells before we know how much shale gas we have,” Vasudeva said. “What we do know is that India does have shale-gas reserves.”

ONGC found shale gas at a well in India’s West Bengal state, according to a Jan. 27, 2011, statement. The company signed an agreement with ConocoPhillips (COP) on March 30 for developing shale resources in India and North America.

India Auction

India has started mapping its shale resources and will have exploration rules in place by 2013, Prime Minister Manmohan Singh said March 23. Blocks will be auctioned next year after the policy is published, G.C. Chaturvedi, the top bureaucrat in the oil ministry, said Dec. 21…

China has 25.08 trillion cubic meters (886 trillion cubic feet) of exploitable onshore shale-gas reserves, the country’s land ministry said March 1. The world’s biggest energy consumer aims to produce 6.5 billion cubic meters of shale gas by 2015 and set a target of 60 billion to 100 billion cubic meters by 2020, the National Development and Reform Commission said.

China Shale

China drilled 50 shale-gas wells in the past year, compared with 1,300 a month in the U.S., Chris Faulkner, chief executive officer of Breitling Oil and Gas Corp., said April 23. It takes “three to five years” for a shale-gas discovery to start commercial production and an extensive pipeline network is needed to transport the fuel to consumers.

My comments

This should serve as more proof that shale gas is the future of energy.

This also means that the emphasis for acquiring energy reserves will largely be directed to Shale at the expense of alternatives (conventional oil, coal, nuclear, solar, wind)

And this is why energy geopolitics will shift to Shale.

My favorite environmental science and economics author Matt Ridley writes

The campaign to stop shale gas proving its case in the market is political, not scientific. Behind it lies vested interests. The Russian gas industry, which is alarmed at losing its impending near-monopoly on European gas supplies, has been vocal in its criticism of shale gas. The coal and nuclear industries too would like to see this baby strangled at birth, but have been less high-profile.

Most of the opposition, though, has come from those with a vested interest in renewable energy, including the big environmental pressure groups, which are alarmed that the rich subsidies paid to wind, biomass and solar may be under threat if gas gets too cheap and cuts carbon emissions too effectively. Their entire rationale for subsidy, parroted by their dutiful poodle Chris Huhne, when Energy Secretary, is that gas would get more expensive until even wind and solar looked cheap. That was wishful thinking.

Even if you do not think carbon emissions are the highest environmental priority, there is a more fundamental reason why using gas is good for the planet. No other species needs or uses it. Every time you grow a biofuel crop, harvest timber for a biomass power station, pave a desert with solar panels or dam a river for a hydro plant, you are stealing energy from the natural world. Even the wind is needed - by eagles for soaring, by bats for feeding (both are regularly killed by wind turbines). As the only species that uses gas, the more we use it the more we can leave other sources of energy for nature.

And lastly, given all of the above, this is further evidence that many have seduced to the quackery, peddled by politicians and mainstream media, that the Southeast Asian territorial disputes of Scarborough or Spratlys has been about oil.

As a side note, Japan and China has their version of territorial dispute through Senkaku Islands which I earlier pointed out. Yet, in spite of the supposed bickering, Japan-China-South Korea concluded last week what has been labeled as the "Trilateral Summit" covering vast economic and political issues

Part of the rapprochement reached from the conference as noted by Xinhua, ironically China’s official press agency:

On strengthening communication and coordination in regional and international affairs, they stressed the mutually reinforcing and complementary roles of the trilateral cooperation and such regional fora as ASEAN Plus One, ASEAN Plus Three, East Asia Summit, ASEAN Regional Forum and Asia-Pacific Economic Cooperation, said the declaration.

They reaffirmed that the ASEAN Plus Working Groups need to be established without delay to accelerate the discussion on a regional comprehensive economic partnership towards the commencement of negotiations, taking into account the initiatives of East Asia Free Trade Area (EAFTA) and Comprehensive Economic Partnership for East Asia (CEPEA).

So again, the Philippines either has a Dr. Jekyl and Mr. Hyde relationship with China or that all the ruckus about the gunboat diplomacy has been geopolitical vaudeville.

Quote of the Day: The Moral Case of Free Markets: Achievement

The lesson is that defenders of free enterprise have to put less weight on happiness. Sure, happiness is one good thing. But so is achievement - doing something productive with your life. And on this score, free enterprise looks a lot better than welfare states that subsidize people who skate through life without even trying to make something of themselves.

Once you take achievement seriously, moreover, you start to see that redistribution is immoral in and of itself. When someone achieves something - whether writing an article or building a business - they deserve to keep the product. It matters little whether keeping the product makes the achiever happy. The point is that achiever earned what he has, and other people - including government - ought to respect his rights. From here, you're close to the truism that taxation is theft - and the moral case for free enterprise looks solid indeed.

That’s from Professor Bryan Caplan at the Econolog.

Economics in a War Prison Camp

It is said that nature abhors a vacuum. And since people are part of nature then obviously the human community also abhors a state of vacuum.

Even in prison camps the law of economics work. I earlier pointed out how recently Mackerel has emerged as money for prisoners of California’s prison camp.

Economist and author Tim Harford citing the work of Robert A. Radford on the “Economic Organisation of a P.O.W. Camp” has an amazing account of the workings of economics under a German war prison camp (hat tip Bob Wenzel). Writes Mr. Harford

First, a word about the basic economic building blocks. Prisoners received some rations from the Germans, but were mostly sustained by parcels of food and cigarettes from the Red Cross. The parcels were standardised – everyone got the same. Occasionally the Red Cross received bumper supplies, or ran short; in those instances everybody enjoyed a surplus or a shortage.

Radford’s first sociological observation was that there was no gift economy in the camp. Everybody started with the same, so what was the point? But trading quickly developed, because while prisoners had equal means they did not have identical preferences – the Sikhs sold their beef rations, the French were desperate for coffee. So middlemen who could speak Urdu or bribe a guard to let them visit the French quarters had the chance to make “small fortunes” in biscuits or cigarettes. In rare circumstances, the camp’s economy interacted with the outside world: coffee rations apparently went “over the wire” and traded at high prices in black market cafés in Munich.

Market institutions, Radford concluded, were universal and spontaneous, “a response to immediate needs” rather than an attempt to imitate civilian life. One of the spontaneous developments was the emergence of a currency: the cigarette, which was portable and reasonably homogenous. Not entirely so, though: cigarettes could be “sweated” by rolling them back and forth between the fingers to shake a little tobacco out. Gresham’s Law – “bad money drives out good” – asserted itself, as the plumper cigarettes were reserved for smoking, while those that circulated as money grew thinner. When Red Cross supplies were interrupted, deflation set in, as a cigarette bought ever more goods.

The law of one price also tended to hold: arbitrage meant prices rarely varied much within a permanent camp. The chaos of transit camps, however, created profit opportunities. “Stories circulated of a padre who started off round the camp with a tin of cheese and five cigarettes and returned to his bed with a complete parcel in addition to his original cheese and cigarettes; the market was not yet perfect.”

Relative prices moved in response to broader developments – such as an influx of new, hungry POWs – and from day to day. With bread rations handed out on Monday, on Sunday evening “bread now” traded at a premium to “bread Monday”. And yes, there was a futures market.

As the above experience shows, the natural tendency for people is to conduct trade or voluntary exchanges in whatsoever political conditions.That's why socialism fails.

Jeffrey Tucker on the 5 Pillars of Economic Freedom

I previously posted the 10 principles of classical liberalism.

The outspoken Jeffrey Tucker of the Laissez Faire Books reduces them into 5 (emphasis original)

Here are five core elements to this idea of market freedom, or whatever you want to call it. It is my short summary of the classical liberal vision of the free society and its functioning, which isn’t just about economics but the whole of life itself.

Volition. Markets are about human choice at every level of society. These choices extend to every sector and every individual. You can choose your work. No one can force you. At the same time, you can’t force yourself on any employer. No one can force you to buy anything, either, but neither can you force someone to sell to you.

This right of choice recognizes the infinite diversity within the human family (whereas state policy has to assume people are interchangeable units). Some people feel a calling to live lives of prayer and contemplation in a community of religious believers. Others have a talent for managing high-risk hedge funds. Others favor the arts or accounting, or any profession or calling that you can imagine. Whatever it is, you can do it, provided it is pursued peacefully.

You are the chooser, but in your relations with others, “agreement” is the watchword. This implies maximum freedom for everyone in society. It also implies a maximum role for what are called “civil liberties.” It means freedom of speech, freedom to consume, freedom to buy and sell, freedom to advertise and so on. No one set of choices is legally privileged over others.

Ownership. In a world of infinite abundance, there would be no need for ownership. But so long as we live in the material world, there will be potential conflicts over scarce resources. These conflicts can be resolved through fighting over things or through the recognition of property rights. If we prefer peace over war, volition over violence, productivity over poverty, all scarce resources — without exception — need private owners.

Everyone can use his or her property in any way that is peaceful. There are no accumulation mandates or limits on accumulation. Society cannot declare anyone too rich, nor prohibit voluntary aestheticism by declaring anyone too poor. At no point can anyone take what is yours without your permission. You can reassign ownership rights to heirs after you die.

Socialism is not really an option in the material world. There can be no collective ownership of anything materially scarce. One or another faction will assert control in the name of society. Inevitably, the faction will be the most-powerful society — that is, the state. This is why all attempts to create socialism in scarce goods or services devolve into totalitarian systems.

Cooperation. Volition and ownership grant the right to anyone to live in a state of pure autarky. On the other hand, that won’t get you very far. You will be poor, and your life will be short. People need people to obtain a better life. We trade to our mutual betterment. We cooperate in work. We develop every form of association with each other: commercial, familial and religious. The lives of each of us are improved by our capacity to cooperate in some form with other people.

In a society based on volition, ownership and cooperation, networks of human association develop across time and space to create the complexities of the social and economic order. No one is the master of anyone else. If we want to succeed in life, we come to value serving each other in the best way we can. Businesses serve consumers. Managers serve employees just as employees serve businesses.

A free society is a society of extended friendship. It is a society of service and benevolence.

Learning. No one is born into this world knowing much of anything. We learn from our parents and teachers, but more importantly, we learn from the infinite bits of information that come to us every instant of the day all throughout our lives. We observe success and failure in others, and we are free to accept or reject these lessons as we see fit. In a free society, we are free to emulate others, accumulate and apply wisdom, read and absorb ideas and extract information from any source and adapt it to our own uses.

All of the information we come across in our lives, provided it is obtained noncoercively, is a free good, not subject to the limits of scarcity because it is infinitely copyable. You can own it and I can own it and everyone can own it without limit.

Here we find the “socialist” side of the capitalist system. The recipes for success and failure are everywhere and available to use for the taking. This is why the very notion of “intellectual property” is inimical to freedom: It always implies coercing people and thereby violating the principles of volition, authentic ownership and cooperation.

Competition. When people think of capitalism, competition is perhaps that first idea that comes to mind. But the idea is widely misunderstood. It doesn’t mean that there must be several suppliers of every good or service, or that there must be a set number of producers of anything. It means only that there should be no legal (coercive) limits on the ways in which we are permitted to serve each other. And there really are infinite numbers of ways in which this can take place.

In sports, competition has a goal: to win. Competition has a goal in the market economy, too: service to the consumer through ever increasing degrees of excellence. This excellence can come from providing better and cheaper products or services or providing new innovations that meet people’s needs better than existing products or services. It doesn’t mean “killing” the competition; it means striving to do a better job than anyone else.

Every competitive act is a risk, a leap into an unknown future. Whether the judgment was right or wrong is ratified by the system of profit and loss, signals that serve as objective measures of whether resources are being used wisely or not. These signals are derived from prices that are established freely on the market — which is to say that they reflect prior agreements among choosing individuals.

Unlike sports, there is no end point to the competition. It is a process that never ends. There is no final winner; there is an ongoing rotation of excellence among the players. And anyone can join the game, provided they go about it peacefully.

Summary. There we have it: volition, ownership, cooperation, learning and competition. That’s capitalism as I understand it, as described in the classical liberal tradition improved by the Austrian social theorists of the 20th century. It is not a system so much as a social setting for all times and places that favor human flourishing.

The way to peace and prosperity is only through economic freedom.

Hot: ECB Holds Loans to Select Greek Banks, ECB’s Draghi Talks Greece Exit

Events have been moving very swiftly.

From the Bloomberg,

The European Central Bank said it will temporarily stop lending to some Greek banks to limit its risk as President Mario Draghi signaled the ECB won’t compromise on key principles to keep Greece in the euro area.

The Frankfurt-based ECB said yesterday it will push the responsibility for lending to some Greek financial institutions onto the Greek central bank until they have sufficiently boosted their capital. “Once the recapitalization process is finalized, and we expect this to be finalized soon, the banks will regain access to standard Eurosystem refinancing operations,” the ECB said in an emailed statement.

The move comes after Draghi acknowledged for the first time that Greece could leave the monetary union. While the bank’s “strong preference” is that Greece stays in the 17-nation euro area, the ECB will continue to preserve “the integrity of our balance sheet,” he said in a speech in Frankfurt yesterday.

“A Greek exit was seen as an absurdity up to now,” said Thomas Costerg, an economist at Standard Chartered Bank in London. “It is gradually becoming the main scenario. The ECB is prioritizing its balance sheet over monetary-union geography.”

Greece faces a fresh election on June 17 that may boost parties opposed to the conditions of its international bailouts, raising the specter of its exit.

This is pretty serious stuff.

[Updated to add: This seems to reinforce what I earlier said as the ECB having been reluctant to intervene. Yet the difference now is that the ECB appears to be signaling the end of support for Greece.]

Fools rush in where angels fear to tread.

Greece Exit Estimated Price Tag: €155bn for Germany and France, Possible Trillions for Contagion

Estimates have been made as to the cost of a Greece exit

Writes Ambrose Pritchard at the Telegraph, (Hat tip Bob Wenzel)

Eric Dor's team at the IESEG School of Management in Lille has put together a table on the direct costs to Germany and France if Greece is pushed out of the euro.

These assume that relations between Europe and Greece break down in acrimony, with a full-fledged "stuff-you" default on euro liabilities. It assumes a drachma devaluation of 50pc.

Potential losses for the states, including central banks

They conclude:

The total losses could reach €66.4bn for France and €89.8bn for Germany. These are upper bounds, but even in the case of a partial default, the losses would be huge.

Assuming that the new national currency would depreciate by 50 per cent against the euro, which is realistic, the losses for French banks would reach €19.8bn. They would reach €4.5bn for German banks.

Sounds about right.

I doubt that the US, China, and the world powers would sit back if the EU tried to "teach Greeks a lesson" by making life Hell for them.

There would be massive global pressure on Europe to handle the exit in a grown-up fashion, with backstops in place to stabilize Greece. The IMF would step in.

And here is the part to worry about.

More from Mr. Pritchard,

Needless to say, the real danger is contagion to Portugal, Ireland, Spain, Italy, Belgium, France, and the deadly linkages between €15 trillion in public and private debt in these countries and the €27 trillion European banking nexus.

The ECB will likely resort to printing of money in the scale like never before and will likely be backed by the US Federal Reserve.

If hell breaks lose and the Euro comes undone the more money printing will be unleashed by independent central banks to protect their banking system.

As a side note, this is about the preservation politically protected banking system which has functioned as an integral part of the current structure of political institutions—the welfare-warfare governments and central banks.

So we should expect markets to be highly volatile in either directions as events unfold.

Just a reminder, I bring this up NOT to scare the wits out of market participants (funny how from being a perceived Panglossian analyst, I am precipitately seen as the present day Jeremiah). Some people reduce stock market logic into a groupthink fallacy ("either you are with us or against us").

Paradoxically, the article I quoted above comes from the mainstream.

I am simply presenting the risks that faces the marketplace given the current conditions.

As an old saw goes, pray for the best, prepare for the worst.

As to whether Greece will exit the Eurozone or is beyond my knowledge. The Greek government emerging from the June elections will decide on that. I can only guess or toss a coin. But I can either act to ignore this or include this in my calculation for my positioning.

The fact is that in case the new Greek government decides to opt out of the EU, this would have a material impact on the marketplace—all over the world, the Phisix not withstanding.

Since the overall impact to the markets will likely be unknown, except for some numerical estimates to rely on (which may or may not be reliable) and where the psychological impact cannot be quantified or even qualified, such environment is called as uncertainty.

The current conditions suggests of greater than usual uncertainty. Add to that the China factor and the Fed’s monetary policies.

So, for me, it pays to keep a balanced understanding of how the local markets may become vulnerable to a contagion transmission from external events, than from blindly embracing or getting married to a single position.

I always try to keep in mind the legendary trader Jessie Livermore’s precious advice: There is only one side of the market and it is not the bull side or the bear side, but the right side

Since the markets are about managing opportunities, then opportunities will arise for profits, and opportunities will also arise for wealth preservation.

For now I see the right side of the trade as balancing my portfolio tilted towards the preservation of resources.

On the other hand, I must add that bloated egos will eventually be humbled by the marketplace.

Quote of the Day: The Information Age will Revolutionize Higher Education

Mainline universities loudly proclaim their love of online learning — and pedagogical innovation more generally — while doing everything possible to retard it. The strategy has been to make a few easy, low-cost, conservative moves that preserve the status quo, such as putting some existing courses online, while trying to suppress the innovative outsiders like Phoenix, DeVry, TED, Kahn Academy, etc. It’s a classic example of what Clayton Christensen calls sustaining innovation — incremental changes that keep the existing market structure intact. The last thing the higher-ed establishment wants is disruptive innovation that challenges its dominant incumbent position.

This is from Austrian economist Peter G. Klein at the Mises Blog.

Accelerating instances of "disruptive innovation" from the information age will help collapse the current education bubble.

How Government Policies Contributed to JP Morgan’s Blunder

Author and derivatives manager Satyajit Das, ironically a neoliberal, has a superb article at the Minyanville, which elaborates on how regulations and government policies, which I earlier posted, has shaped the incentives of Too Big to Fail institutions to take excessive risks and the failure of regulators to prevent them (all bold emphasis mine)

The large investment portfolio is the result of banks needing to maintain high levels of liquidity, dictated by both volatile market conditions and also regulatory pressures to maintain larger cash buffers against contingencies. Broader monetary policies, such as quantitative easing, have also increased cash held by banks, which must be deployed profitably. Regulatory moves to prevent banks from trading on their own account -- the Volcker Rule -- have encouraged the migration of trading to other areas of the bank, such as liquidity management and portfolio risk management hedging.

Faced with weak revenues in its core operations and low interest rates on cash or secure short term investment, JPMorgan may have been under pressure to increase returns on this portfolio. The bank appears to have invested in a variety of securities, including mortgage backed securities and corporate debt, to generate returns above the firm’s cost of capital.

Again, the failure of models…

Given JPMorgan vaunted risk management credentials and boasts of a “fortress like” balance sheet, it is surprising that the problems of the hedge were not identified earlier. In general, most banks stress test hedges to ensure their efficacy prior to implementation and monitor them closely.

While the $2 billion loss is grievous, the bank’s restatement of its VaR risk from $67 million to $129 million (an increase of 93%) and reinstatement of an older risk model is also significant, suggesting a failure of risk modeling.

The knowledge problem…

Banks are now obliged to report positions and trades, especially certain credit derivatives. This information is available to regulators in considerable detail. Given that the hedge appears to have been large in size (estimates range from ten to hundreds of billions), regulators should have been aware of the positions. It is not clear whether they knew and what discussions if any ensued with the bank.

External auditors and equity analysts who cover the bank also did not pick up the potential problems. Like regulators, they perhaps relied on assurances from the bank’s management, without performing the required independent analysis.

Hayek’s “Fatal Conceit” or the pretentions of knowledge by regulators to apply controls over society or the marketplace…

Legislators and regulators now argue that the rules for portfolio hedging are too wide and impossible to police effectively. In addition, the statutory basis may not support the rule. The legislative intent was intended only to exempt risk-mitigating hedging activity, specifically hedging positions that reduce a bank’s risk. Interestingly, drafters of the portfolio hedging exemption recognized the potential problems, seeking comment on whether portfolio hedging created “the potential for abuse of the hedging exemption” or made it difficult to distinguish between hedging or prohibited trading.

In a recent Congressional hearing, Former Fed Chairman Paul Volcker, who helped shape the eponymous provision, questioned whether the volume of derivatives traded was “all directed toward some explicit protection against some explicit risk.”

The pundits have been quick to suggest that the losses point to the need for more stringent regulations. But it is not clear that a prohibition on proprietary trading would have prevented the losses.

In practice, without deep and intimate knowledge of the institution and its activities, it is difficult to differentiate between legitimate investment and trading of a firm’s surplus cash resources or investment capital.

It is also difficult sometimes to distinguish between hedging and speculation. The JPMorgan positions that caused the problems were predicated on certain market movements -- a flattening of the credit margin term structure -- which did not occur.

Hedging individual positions is impractical and would be expensive. It would push up the cost of credit to borrowers significantly. All hedging also entails risk. At a minimum, it assumes that the counterparty performs on its hedge. But inability to legitimately hedge also escalates risk of financial institutions. Ultimately no hedging is perfect. or as author Frank Partnoy told Bloomberg: “The only perfect hedge is in a Japanese garden.”

Additional regulation assumes that the appropriate rules can be drafted and policed. Experience suggests that it will not prevent future problems.

Bankers and regulators have always been seduced by an elegant vision of a scientific and mathematically precise vision of risk. As the English author G.K. Chesterton wrote: “The real trouble with this world [is that]…. It looks just a little more mathematical and regular than it is; its exactitude is obvious but its inexactitude is hidden; its wildness lies in wait.”

In reality it is not just “without deep and intimate knowledge of the institution and its activities” but about having the prior knowledge of the choices of the individuals behind these institutions. This is virtually unknowable.

Finally, the monumental government failure…

How do regulatory initiatives and monetary policy action affect bank risk taking? Central bank policies are adding to the problem of banks in terms of large cash balances which must be then invested at a profit. The implementation of the Volcker Rule may have had unintended consequences. It encouraged moving risk-taking activities from trading desks where the apparatus of risk management may be marginally better established to other parts of banks where there is less scrutiny.

The most important question remains whether any specific action short of banning specific instruments and activities can prevent such episodes in the future. It seems as Lord Voldemort observed in Harry Potter and the Deathly Hallows Part 2: “They never learn. Such a pity.”

People who are blinded by power and or the thought of power never really learn.

Flight to Gold: Japanese Pension Shifts into Gold

The flight to safety into gold by the average Japanese seem to be escalating.

From the Financial Times,

Okayama Metal & Machinery has become the first Japanese pension fund to make public purchases of gold, in a sign of dwindling faith in paper currencies.

Initially, the fund aims to keep about 1.5 per cent of its total assets of Y40bn ($500m) in bullion-backed exchange traded funds, according to chief investment officer Yoshisuke Kiguchi, who said he was diversifying into gold to “escape sovereign risk”.

The move into a non-yielding asset comes as funds in the world’s second-biggest pension market are under increasing pressure to meet promised payments, as domestic interest rates remain rooted near zero. This year, the first of Japan’s baby boomers turn 65, becoming eligible for payouts.

Mr Kiguchi said the lack of yield was a concern for the fund’s investment committee, but he persuaded them that “from a very long-term point of view, gold may be one of the safe currencies”. He added that he had sold Australian dollars this month to meet his initial target allocation for gold for the fund, which has 20,000 members.

Mizuho Trust & Banking, a unit of Mizuho Financial Group, has begun to offer investment schemes allowing smaller pension funds to invest in gold.

While few fund managers are counting on a crash in core assets such as Japanese government bonds, said Takahiro Morita, head of the Tokyo arm of the World Gold Council, a producers’ association, they were increasingly receptive to the idea that gold could act as a buffer against shocks. “Last year’s tsunami and the eurozone debt crisis shows that it was wise to expect the unexpected,” he said.

Historically, institutions in the $3.4tn Japanese pension market have clung to traditional assets. Bonds accounted for 59 per cent of industry assets in 2011, the highest share in the world, according to Towers Watson, a consultant. Just 6 per cent – the lowest share – was invested in alternatives such as property, private equity and hedge funds.

Here is what I wrote earlier

As the BoJ works to undermine her currency, the yen, the Japanese citizenry will continue to flock into gold and or may find refuge in ASEAN assets and currencies, whom has been inflating less.

So not only events are clearly moving on my expected path, but the mainstream now acknowledges the driving force “dwindling faith in paper currencies” behind it.

The current doldrums in gold prices is likely a temporary event that has been intertwined with actions of the general commodity markets and symptomatic of the ongoing concerns of China and the Eurozone.

Philippines Moves to Ban Coin Collection

The Philippine government has expanded her version of financial repression

Using flimsy scapegoats, a bill has been filed to criminalize coin hoarding.

From Yahoo.com

Coin collectors beware.

Senator Manuel Lapid has filed a bill to penalize the hoarding of coins to avoid coin shortage.

Citing figures from the Bangko Sentral ng Pilipinas (BSP), Lapid said there should be around 17.34 billion coins--worth around P18.94 billion--in circulation. He said that would mean around 184 coins per Filipino.

"To enterprising crooks, this volume of coins in circulation is a goldmine. Recent valuation of the worth of the country's coinage suggests four of the coins are worth more than their face value if melted," he said in his explanatory note.

Lapid warned that melting down coins "along with the common practice of keeping coins in piggy banks, commercial undertakings such as the Automatic Tubig Machines which use coins for operation, video games machines and illegal numbers games, may threaten the sound circulation of coins in the country."

His bill defines coin hoarding as possessing coins of legal tender "beyond the requirements of his regular business as may be determined by the BSP."…

More from the same article,

Although coin collecting is allowed, the BSP can demand that people turn in all their coins within a month of declaring a coin shortage. Under the Lapid bill, "failure to make the surrender within the required period shall constitute coin hoarding."

The bill proposes a penalty of one year in prison and a fine of P100,000 "for every one thousand pieces of coins hoarded or a fraction thereof."

If passed into law, the bill allows the government to confiscate the coins for its own use.

Finally the admission…

The bill also proposes to allow BSP, in case of a coin shortage, to require all business transactions to be done in coins. "Any transaction to the contrary shall be considered coin hoarding," his bill reads.

"Though the day may be far when we may legally accept being given candies for change instead of coins, such a problem may not be remote as indicated by reports in other jurisdictions. It is thus imperative that preventive measures be put in place," Lapid said.

BSP has had a coin recirculation program since 2005 to address perceived coin shortages in some areas in the Philippines and to save money because the “intrinsic value of the coin is greater than its nominal value especially for the lower-denominated coins.”

First, government issues you the money to use, and then wants to dictate to you how much, and what medium, you should keep and use. If this isn’t an example of despotism, then I don’t know what else is.

Next, the Philippine government finally admits that “intrinsic value of the coin is greater than its nominal value especially for the lower-denominated coins” which means the government has been inflating the purchasing power of the local currency, the paper Peso, away.

Yet instead of maintaining monetary discipline, they chose to pin the blame, threaten to criminalize and perhaps actualize confiscation of the savings owned by the innocent citizenry. This should be a noteworthy example of arbitrary immoral laws.

Also, as predicted, inflationism’s alter ego has always been price control. The proposed banning of the hoarding of coins extrapolates to forcing people to keep coins in circulation, for imagined hobgoblins.

This also means forcing people to accept the coins at face value, which ironically they admit, has been worth more. So in essence, the Philippine government wants you and me to forget about prices and values or economics.

[Updated to add: I forgot to mention that what the government fears is that when the value of coins immensely widens from its face value, out of the effects of inflation, the tendency is for the public to hoard them. This is Gresham's Law at work which I mentioned earlier when Ron Paul talked about modern day coin debasement]

Yet setting up a strawman to justify the attack on the citizenry, through price controls, has long been a pattern of desperate politicians, as the great Ludwig von Mises explained,

in futile and hopeless attempts to fight the inevitable consequences of inflation — the rise in prices — are masquerading their endeavors as a fight against inflation. While fighting the symptoms, they pretend to fight the root causes of the evil. And because they do not comprehend the causal relation between the increase in money in circulation and credit expansion on the one hand and the rise in prices on the other, they practically make things worse.

Moreover, this represents an assault to the informal economy which operates mostly on cash (paper money and coins). This means that such law will become an instrument of subjugation and repression of mostly the poor (who don’t have bank accounts and who are most likely the major users of coins), the middle class, and importantly the political opposition.

Lastly, I am inclined to think that some vested interest groups have been pushing to keep these coins for themselves, of course, by forcing the public cough up on these coins through legislation.

The great Frédéric Bastiat in “The Law” warned

It is impossible to introduce into society a greater change and a greater evil than this: the conversion of the law into an instrument of plunder.

Confiscation of coins will not remove the effects of monetary inflation.

Yet by disallowing people to save through their preferred means and by confiscation of their savings means that such policy have the latent intent to destroy people's wealth.

Quote of the Day: Should We Obey Immoral Laws?

Moral people can't rely solely on the courts to establish what's right or wrong. Slavery is immoral; therefore, any laws that support slavery are also immoral. In the words of Thomas Jefferson, "to consider the judges as the ultimate arbiters of all constitutional questions (is) a very dangerous doctrine indeed, and one which would place us under the despotism of an oligarchy."

That’s from Professor Walter E. Williams at the lewrockwell.com

More on the Phony Fiscal Austerity

I have been repeatedly pointing out that what statists call as “austerity” has actually been a canard or terminological or semantical sleight of hand.

Many have been saying the same thing too…

The austerity spin in Britain from the Telegraph

Tullett Prebon, a bond trader, said that “public expenditures have hardly been reduced at all” and that claims of a “big cut in public spending is bare-faced deception”.

Figures highlighted by the firm show that public spending actually rose during 2010-11 and fell by just 1.5 percent last year.

Government spending is more than £22 billion higher than it was in 2008 when the financial crisis erupted.

The majority of extra money required by ministers to fill the black hole in the finances caused by the recession is being raised from extra taxes rather than cuts in Government spending.

Dr Tim Morgan, the global head of research at Tullett Prebon, said: “It’s high time that this mendacity was exposed for what it is. Government has done very little about its spending, has appropriated three-quarters of all gains in economic output for its own use, has carried on piling up debt – and has tried to pass all this off as 'responsible austerity’.

“The motivation for government spin is obvious enough. On the one hand, rises in market interest rates could be a disaster, given the extent to which British households are leveraged. On the other, implementing the real cuts required to back up a genuine austerity package have proved politically unpalatable.”

Dr Morgan warned that it seemed “improbable” that the bond markets would “continue to fall for this spin-job” and would “sooner rather than later” call the Government to account.

The austerity blarney in Europe as exposed by Cato’s Juan Carlos Hidalgo (emphasis added)

Source: Source: European Commission, Economic and Financial Affairs.

Spending has declined to approximately its 2007 level in nominal terms, while in real terms it actually continues to go up. (I look at spending in real terms because that’s what Ryan Avent at The Economist said we should look at in a reply to Veronique de Rugy’s initial graph on austerity in Europe. Note that, as in my previous posts on Britain and France, I’m using the GDP deflator to calculate spending in real terms). If we look at spending in real terms, there haven’t been any spending cuts in Greece. On the other hand, Tyler Cowen observes that “in the short run it is supposedly nominal which matters (that said, gdp and population [and inflation] are not skyrocketing in these countries for the most part).” Let’s look at nominal then. Since 2000, public spending rose in Greece at an annual rate of 7.8% until 2009. Then it declined by 8.3% in 2010 and a further 4.1% in 2011. This is certainly a cut in spending, but far from brutal.

Some argue that we shouldn’t look at spending levels when talking about austerity, but rather at spending as a share of the economy. In that sense, government spending in Greece went up from 47.1% of GDP in 2000 to 53.8% in 2009 and it has come down to 50.3% in 2011—approximately its 2008 level. However, I don’t buy the argument. Does it mean that the government has to spend an ever increasing share of the GDP in order to keep the economy afloat? Is half of the economy not enough when it comes to government spending?

What about Zakaria’s argument of the crippling effect of firing government workers on growth? Last January, The Economist looked at the situation in Greece and noted that “Of the 470,000 who have lost their jobs since 2008, not one came from the public sector. The civil service has had a 13.5% pay cut and some reductions in benefits, but no net job losses.” As for what “austerity” means for most Greeks, the magazine added, “Since Greece’s first bail-out in May 2010, the government has imposed austerity, increasing taxes so much that people can barely manage.”

The Economist is not alone in pointing out the extent to which taxes have gone up. Even the IMF has done so. Back in November, Poul Thomsen, the IMF mission chief in Greece, said that the country “has relied too much on taxes and I think one of the things we have seen in 2011 is that we have reached the limit of what can be achieved through increasing taxes.” Since then Greece agreed to eliminate 15,000 government jobs (2% of its public sector workforce) in exchange for a second bailout. Once again, that figure pales when compared to the number of people who have lost their jobs in the private sector.

The evidence shows that in Greece austerity has meant significant tax increases and timid spending cuts.

The real, but discreetly conveyed message, or the intended prescription of so-called pro-growth camp is for these economies to embrace even more socialism. They just can't be forthright about it.

Greeks Mount Civil Disobedience, Scorn Taxes

Raising taxes has been one of the major proposed elixir of “growth” by mainstream analysts for resolving the crisis in the Eurozone. More inflationism and more deficit spending as the other nostrums.

Unfortunately, economic reality and intentions by politicians and their institutional backers don’t seem to square. Greeks have mounted a civil disobedience campaign against paying taxes.

Here is the Financial Times (Alphaville) Blog,

The desperate cunning scheme to get Greeks to pay property taxes by bundling them with electricity bills didn’t last long. You guessed it, people stopped paying their electricity bills and now it looks like the power company – which had to be bailed out last month – has stopped even trying to collect the levy.

From Ekathimerini, the Greek daily (emphasis ours):

“Public Power Corporation (PPC) has already disengaged itself from involvement in the payment of the special property tax that had been incorporated into electricity bills.

“Well-informed sources suggest that the new bills the company is issuing do not include the property levy despite the law providing for the first installment concerning 2012.

The decision, the same sources say, appears to have the acquiescence of the Finance Ministry.

“Judging by the fact that unpaid bills in the first quarter of the year totaled some 1 billion euros, PPC believes it has become clear that households cannot afford to pay electricity bills that are burdened further by the extraordinary property tax in the current recession conditions.

The government had hoped to raise €1.7bn-€2bn from the levy in the fourth quarter of last year. But a massive unions-led civil disobedience movement against this “injustice” scuppered that and a ruling that it was illegal to disconnect people’s electricity supply for non-payment sent the collection rate even lower.

However, the memorandum of understanding with the IMF-EU signed in March demands that Athens collects a range of back taxes, such as the property tax from 2009 which was essentially never collected. So it will be interesting to see how the Troika reacts to these most recent developments.

Again, more signs of the ongoing self-liquidation process of Europe’s embrace of the Santa Claus principle.

Updated to add:

Greece banks reported a surge in deposit withdrawals last Monday, and capital flight or "buy orders received by Greek banks for German bunds" to the tune of € EUR800 million.

Also, tax revolts have also become apparent in Italy.

A recent report from the Telegraph.co.uk (hat tip: Cato's Dan Mitchell)

In the last six months there has been a wave of countrywide attacks on offices of Equitalia, the agency which handles tax collection, with the most recent on

Saturday night when a branch was hit with two petrol bombs.

Staff have also expressed fears over their personal safety with increasing numbers calling in sick and with one unidentified employee telling Italian TV: “I have told my son not to say where I work or tell anyone what I do for a living.”

In another incident last week Roberto Adinolfi a director with arms firm Finmeccanica was wounded by anarchists in Genoa. The group later said in a letter claiming responsibility that they would carry out further attacks.

Annamaria Cancellieri, the interior minister, said she was considering calling in the army in a bid to quell the rising social tensions.

“There have been several attacks on the offices of Equitalia in recent weeks. I want to remind people that attacking Equitalia is the equivalent of attacking the State,” she said in an interview with La Repubblica newspaper.

Who is to blame for JP Morgan’s $2 billion loss?

It’s all about bad decisions, argues Mike Brownfield of the conservative Heritage Foundation

Heritage’s David C. John explains that while JP Morgan’s loss represents a clear failure of management, it’s not a systemic problem that requires or would be fixed by additional regulation. For starters, JP Morgan is a $2.3 trillion bank with a net worth of $189 billion, meaning that this loss reduced the bank’s capital ratio from 8.4 percent to 8.2 percent. In other words, the bank can absorb the loss, and it’s nowhere close to needing any form of federal intervention.

Some more perspective could be gleaned by examining the $3.2 billion loss the U.S. Post Office experienced in the most recent quarter, or the billions lost on risky green energy bets made by President Obama and Energy Secretary Steven Chu. Only those losses weren’t incurred by private investors, but by you the taxpayer.

What’s more, John explains, the regulations that are now being called for — particularly the so-called Volcker Rule — would not have prevented the losses since it would not have affected this transaction. Finally, John writes, the system worked as is. “JPMorgan Chase losses were not discovered by regulators; they were discovered by the bank itself conducting its own management reviews.”

What America is witnessing is the left using the news of JP Morgan’s bad judgment as an excuse for more government regulation. But as even Carney acknowledged, regulations “can’t prevent bad decisions from being made on Wall Street.”

It’s true that regulations “can’t prevent bad decisions”. But I’d go deeper. Regulations, on the other hand, can induce bad decisions.

Moral Hazard is when undue risks are taken because the costs are not borne by the party taking the risk. So when regulations and political actions (such as bailouts) rewards excessive risk taking, by having taxpayers shoulder the burden of the mistakes of the privileged parties like JP Morgan and other Too Big To Fail banks, then we should expect more of these.

At the Think Market Blog, Cato’s Jerry O’ Driscoll expounds further,

Reports indicate that senior management and the board of directors were aware of the trades and exercising oversight. The fact the losses were incurred anyway confirms what many of us have been arguing. Major financial institutions are at once very large and very complex. They are too large and too complex to manage. That is in part what beset Citigroup in the 2000s and now Morgan, which has been recognized as a well-managed institution.

If ordinary market forces were at work, these institutions would shrink to a size and level of complexity that is manageable. Ordinary market forces are not at work, however. As discussed on this site before, public policy rewards size (and the complexity that accompanies it). Major financial institutions know from experience they will be bailed out when they incur losses that threaten their surivival. Morgan’s losses do not appear to fall into that category, but they illustrate how bad incentives lead to bad outcomes.

Large financial institutions will continue taking on excessive risks so long as they know they can off-load the losses on taxpayers if needed. That is the policy summarized as “too big to fail.” Banks may be too big and complex to close immediately, but no institution is too big to fail. Failure means the stockholders and possibly the bondholders are wiped out. Until that discipline is reintroduced (having once existed), there will be more big financial bets going bad at these banks.

Deepening of Information Age: Record Pace of Smart Phone Adaption

Technology adaption has been speeding up, with smart phones saturating the US markets in record time

From Technologyreview.com (hat tip Professor Mark Perry)

Today's technology scene seems overheated to some. Apple is the most valuable company on earth. Software apps are reaching tens of millions of users within weeks. Major technology names like Research in Motion and Nokia are being undone by rapid changes to their markets. Underlying these developments: the unprecedented speed at which mobile computers are spreading.

Presented below is the U.S. market penetration achieved by nine technologies since 1876, the year Alexander Graham Bell patented the telephone. Penetration rates have been organized to show three phases of a technology's spread: traction, maturity, and saturation.

Those technologies with "last mile" problems—bringing electricity cables or telephone wire to individual homes—appear to spread more slowly. It took almost a century for landline phones to reach saturation, or the point at which new demand falls off. Mobile phones, by contrast, achieved saturation in just 20 years. Smart phones are on track to halve that rate yet again, and tablets could move still faster, setting consecutive records for speed to market saturation in the United States.

It is difficult to conclude categorically from the available data that smart phones are spreading faster than any previous technology. Statistics are not always available globally, and not every technology is easily tracked. Also, because smart phones have not yet reached market saturation, as electricity and television have, the results are still coming in.

This for me represents additional manifestations of the deepening of the information age.

This also means that the diffusion of technology usage will increasingly change the way live or do things or how we conduct commerce.

The influence of technology will not be limited to economy, but will also affect politics and political institutions.

The intensifying friction between on the one side, globalization and technology innovation, and on the other, centralized political institutions should be a noteworthy example.

Nonetheless the transition will not be smooth as entrenched parties, who benefited from the industrial political economy, will resist and fight change.

Quote of the Day: Blinded by Science

Even some from the mainstream gets it.

Finance is often said to suffer from Physics Envy. This is generally held to mean that we in finance would love to write out complex equations and models as do those working in the field of Physics. There are certainly a large number of market participants who would love this outcome.

I believe, though, that there is much we could learn from Physics. For instance, you don’t find physicists betting that a feather and a brick will hit the ground at the same time in the real world. In other words, they are acutely aware of the limitations imposed by their assumptions. In contrast, all too often people seem ready to bet the ranch on the flimsiest of financial models.

Someone intelligent (if only I could remember who!) once opined that rather than breaking the sciences into the usual categories of “Hard” and “Soft,” they should be split into “Easy” and “Difficult.” The “Hard” sciences are generally “Easy” thanks to the ability to perform repeated controlled experiments. In contrast, the “Soft” sciences are “Difficult” because they involve trying to understand human behaviour.

Put another way, the atoms of the feather and brick don’t try to outsmart and exploit the laws of physics. Yet financial models often fail for exactly this reason. All financial model underpinnings and assumptions should be rigorously reviewed to find their weakest links or the elements they deliberately ignore, as these are the most likely source of a model’s failure.

That’s from GMO’s James Montier (source Zero Hedge).

Mr. Montier also discusses the psychological aspects of people’s predisposition for mathematical or science based models: particularly “complexity to impress” (The penchant to signal “intelligence” to acquire social acceptance—my opinion) and “defer to authority”.

And here is the warning against being blinded by science from the dean of the Austrian school of economics the great Professor Murray N. Rothbard,

Not only measurement but the use of mathematics in general in the social sciences and philosophy today, is an illegitimate transfer from physics. In the first place, a mathematical equation implies the existence of quantities that can be equated, which in turn implies a unit of measurement for these quantities. Second, mathematical relations are functional; that is, variables are interdependent, and identifying the causal variable depends on which is held as given and which is changed. This methodology is appropriate in physics, where entities do not themselves provide the causes for their actions, but instead are determined by discoverable quantitative laws of their nature and the nature of the interacting entities. But in human action, the free-will choice of the human consciousness is the cause, and this cause generates certain effects. The mathematical concept of an interdetermining "function" is therefore inappropriate.

The Liquidation of Europe’s Santa Claus Principle

Dr. Ed Yardeni has a nice follow up on Europe’s imploding wonderland which poignantly captures the unfolding developments at Eurozone.

Dr. Yardeni at his blog writes,

Welcome to Neverland! Last Wednesday, I wrote that Europe is a socialist’s wonderland. Actually, it’s more like where Peter Pan resides. Peter, as we all know, never ages and has no interest in ever growing up. He prefers the company of a tiny fairy named Tinker Bell and hangs out with the Lost Boys. There’s no adult supervision in Neverland. It’s all about eternal childhood and escapism. That sure sounds like the Europe that socialists have created and are trying to preserve. Let's join the fun:

(1) A good article on this subject, titled “What the Greek Left Wants,” appeared in last Wednesday’s WSJ. The author is a columnist for protagon.gr. His main conclusion about the Greek elections held a week ago is that “[w]hile austerity measures did play a part in voter discontent, the most important factor in the outcome of the elections was opposition to any talk of structural reform of the Greek economy.”

He observes that Syriza, the radical left party, ended up in second place largely because it promised to maintain the status quo: “The Greek left today does not represent an industrial proletariat that wants a bigger share of the economic pie. Syriza represents all the groups that have been able to grow and flourish under Greece's political system and who now feel threatened by reforms. It derives its support from various professional interest groups--lawyers, teachers, journalists and civil servants--who feel that their jobs and special privileges are at risk if Greece is forced to open up its economy to competition.”

(2) The only adult supervision in Europe’s Neverland seems to be coming out of Germany, particularly Chancellor Angela Merkel. Last Thursday, she rejected calls from her center-left opponents in Germany and Europe for economic stimulus policies that rely on new debt. In a speech before the Bundestag, she admonished, “Growth through structural reforms is sensible, important and necessary. Growth on credit would just push us right back to the beginning of the crisis, and that is why we should not and will not do it.” Yesterday, Merkel suffered a major blow after voters in Germany's biggest region, North Rhine-Westphalia, rejected her austerity policies, raising doubts that her government can stay in power after next year's general election.

(3) In her speech, the German Chancellor seemed to be responding to Italian Prime Minister Mario Monti’s call on Wednesday for a “new compromise.” In other words, he wants to add more deficit-financed spending to the fiscal austerity pact that 25 of the 27 leaders of the EU had agreed to at the end of last year. He wants to see more public spending on large infrastructure projects. He added that his proposal was aimed at "winning over German minds and, what's more difficult, German hearts."

Monti’s comments might also have been aimed at winning over Italian hearts and minds. In local elections in Italy on Sunday and Monday of last week, the vote saw heavy losses for the center-right PDL, a key party in his majority, and big gains for opposition parties, including The 5 Star Movement, which campaigns for Italy to leave the euro and default on its debt.

(4) Last Tuesday, Monti called for changes in EU budget rules to allow governments to pay outstanding bills to the private sector without pushing up their budget deficits and for greater distinction between public investments and other types of spending. Reuters reported: “The issue of late payments by the public sector is under the spotlight in Italy, where firms are being squeezed by a lack of liquidity and the state is notoriously slow in settling bills with the private sector, estimated at least 60 billion euros. Monti said budget deficit calculations should distinguish between ‘virtuous’ public investments and less productive state spending, something so far resisted by Germany and some other northern European countries.”

(5) This morning’s Washington Post reports: “Greece appears headed to new parliamentary elections next month, further delaying its efforts to meet international demands to overhaul its economy, after leaders of the country’s major political parties declared little hope Sunday for a last-ditch effort to form a coalition government. The failure of the leaders to pull together a coalition brings Greece one step closer to leaving the 17-country bloc that uses the euro currency, although much will depend on the new elections.”

Dr. Yardeni’s zinger…

(6) In other words, the Europeans want to grow, but they don’t want to grow up. They want to play accounting and other games. The unruly crowd is ignoring the sensible, but stern admonishments of Frau Merkel. She might have to cut off their allowance. As the WSJ notes today: “By next month, Athens must identify €11.5 billion, or $15 billion, in fresh spending cuts or face suspension of the international loans it needs to pay pensions and run schools. If it doesn't get the money, it would eventually have to print its own.”

Europe’s wonderland is really a psychological alter ego problem.

Such delusions of grandeur have been premised on what the great Ludwig von Mises called as the Santa Claus principle—the misconception of the existence of the inexhaustible fund which political authorities can draw upon.

Unfortunately economic reality will prove to be a bitter medicine to swallow and would pose as rude awakening for the incorrigible utopians for three reasons.

As Professor Mises explained (bold highlights mine)

First: Restrictive measures always restrict output and the amount of goods available for consumption. Whatever arguments may be advanced in favor of definite restrictions and prohibitions, such measures in themselves can never constitute a system of social production.

Second: All varieties of interference with the market phenomena not only fail to achieve the ends aimed at by their authors and supporters but bring about a state of affairs which — from the point of view of their authors' and advocates' valuations — is less desirable than the previous state of affairs which they were designed to alter. If one wants to correct their manifest unsuitableness and preposterousness by supplementing the first acts of intervention with more and more of such acts, one must go further and further until the market economy has been entirely destroyed and socialism has been substituted for it.

Third: Interventionism aims at confiscating the "surplus" of one part of the population and at giving it to the other part. Once this surplus is exhausted by total confiscation, a further continuation of this policy is impossible.

The pressures seen in the financial markets have mainly been symptomatic of the ventilation of economic reality against utopian fantasies. And fighting against reality will mean more sufferings.

Europe’s Santa Claus fund is in the process of self-liquidation.

China Cuts Reserve Requirement

From Finance Asia,

China’s central bank said it would cut banks’ reserve requirements on Friday, after a set of disappointing trade data. Effective May 18, it will cut the reserve requirement ratio for banks by 50bp to 20%, which it hopes will free up lending and stimulate a recovery — or at least avert a hard landing.

It will likely need to do much more, and soon, given the terrible data. Analysts surveyed by Bloomberg were expecting year-on-year import growth of 10.9% and export growth of 8.5% — far higher than the actual print of 0.3% and 4.9%, respectively.

The slow growth in imports helped China’s trade surplus to beat expectations, but that is hardly a positive sign. With a return to recession in the eurozone, China is more reliant on domestic demand than ever.

There was plenty of other bad news. Industrial production also missed estimates, with year-on-year growth during April of 9.3%, compared to expectations of 12.2%. Power output grew just 0.7%, down from 7.7% during March, while fixed asset investment and retail sales also missed.

Sell-side analysts have largely welcomed the move to cut reserve requirements, but it is a fairly weak response in the face of such bleak numbers. It will mean banks have more money to lend, of course, but it will do little to make their customers more keen to borrow it.

As I said, China’s monetary policies resemble that of the West, yet China’s equity markets, as of this writing, has seen little improvement since the announcement.

Further one would note how the financial sector have been yearning for more through comments like “fairly weak responses”.

From Bloomberg

Moreover, gold and oil has seen modest declines as of this writing, which also seemed to have ignored this additional stimulus.

But perhaps gold and oil’s response could be more about fresh reports of political stalemate in Greece which the markets see as increasing the odds for a Greece exit from the EU.