China’s Middle Class Support Demand for Gold

From Mineweb.com

The rise of China's middle-class is helping support demand for gold in the country. China, the largest producer of gold, is set to become the biggest consumer of the metal in 2012, with a significant proportion of luxury purchases in China veering towards gold accessories, bought by middle-class aspirational consumers.

By 2020, 25% of China's population is expected to be middle-class, creating great consumption demand. Diamond studded luxury items and gold watches are seeing `blow-out like demand' from wealthy shoppers in China, who are snapping up these expensive accessories to make a fashion statement, give as business gifts or just collect.

What also augurs well this year is that middle-class wealth is expected to spread to 600 million people in third-tier Chinese cities, with a sizeable percentage investing in gold or buying gold jewellery.

For a country whose gold production in the first four months of 2012 reached 109.6 tonnes, up 6.13% from the same period last year, passion for the yellow metal has scaled new heights.

Total retail sales of gold, silver and jewellery in China amounted to $2.82 billion in May, up 18.2% compared to the same period last year, according to the National Bureau of Statistics of China. Accumulative retail sales of the segment in the first five months of 2012 reached $14.6 billion, up 16.1% compared to the same period last year.

In May, the country's overall retail sales of consumer goods including gold, silver and jewellery totalled $262 billion, up 13.8% year-on-year at nominal growth rates. The real growth rate was 11%, data showed.

The jewellery sector in China has become a hot spot fuelled by surging investment demand for gold and precious stones. Jewellery retailers registered a 42% increase in sales last year, driven by consumers' taste for gold and gemstone-encrusted jewellery. Reports indicate that these jewellers are looking beyond traditional markets, eager to dig into the pockets of the newly rich middle-class in smaller cities.

For some time now, the country's growing middle-class has been pursuing a quality of lifestyle that includes appreciation for exquisite fine jewellery. And, retail jewellery chains are expanding to smaller cities and districts to keep up with demand.

Statists have always made the point that paper money has been the popular choice. But appeal to popularity premised on free lunch or Santa Claus politics cannot and will not supplant economic reality.

Today’s crisis have been manifestations of the unraveling of such unsustainable institutional arrangements.

Statists also say that people will have difficulty over adjusting or accepting to the return of gold as money. Maybe for the people of the West this may hold some substance. The intellectual elite may have successfully indoctrinated upon the public to accept the ideology that gold is a “barbaric metal” and where free lunch politics have promoted and embedded to their lifestyles the creed that “debt based spending is the path to prosperity” through government’s cartelized banking system.

But this certainly is far from reality for most of Asia such as China, India, Malaysia or Vietnam. The rate of growth of gold’s demand by China’s middle class looks like a testament to these.

In other words, should a global currency crisis emerge, then Asians are likely to reform their respective monetary system faster than that of the West. But that would be just a guess.

Yet it is unclear if prospective monetary reforms will include gold. But chances are increasing that gold may be part of it.

Global central banks have been accumulating gold at a faster rate led by Asia.

From Reuters.com

The Bank for International Settlements (BIS) noted in its June 2012 Quarterly Review that "central bank balance sheets in emerging Asia expanded rapidly over the past decade because of the unprecedented rise in foreign reserve assets" Reserves rose from $1.1 trillion to $6.4 trillion in 2011.

This quote, which I earlier posted, attributed to Janos Feteke (who I think was the deputy governor of the National Bank of Hungary) looks apropos to the surging demand of gold from China’s middle class and to the micro versus macro debate on the return of the gold standard,

There are about three hundred economists in the world who are against gold, and they think that gold is a barbarous relic - and they might be right. Unfortunately, there are three billion inhabitants of the world who believe in gold.

What truly matters is to get monetary system out of government's hands or to depoliticize or denationalize (Hayek) money and allow for competition in banking (free banking), where gold standard may or may not be the accepted standard. Nevertheless sound money based on free markets.

Quote of the Day: Good Conduct is a Consequence of Freedom

Great part of that order which reigns among mankind is not the effect of government. It has its origin in the principles of society and the natural constitution of man. It existed prior to government, and would exist if the formality of government was abolished. The mutual dependence and reciprocal interest which man has upon man, and all the parts of civilised community upon each other, create that great chain of connection which holds it together. The landholder, the farmer, the manufacturer, the merchant, the tradesman, and every occupation, prospers by the aid which each receives from the other, and from the whole. Common interest regulates their concerns, and forms their law; and the laws which common usage ordains, have a greater influence than the laws of government. In fine, society performs for itself almost everything which is ascribed to government.

That’s from Thomas Paine, English-American author, pamphleteer, radical, inventor, intellectual, revolutionary, and one of the Founding Fathers of the United States quoted from the Rights of Man Part 2, by libertarian author Sheldon Richman who aptly sums it up…

good conduct isn’t a precondition of freedom; it is a consequence of freedom

Central Bankers Talk Doom, Markets Surge

You’ve got to hand it central bankers for deftly using scare tactics to drive up the markets

This from a Bloomberg article entitled Central Banks Warn Greek-Led Euro Stress Threatens World

Central banks intensified warnings that Europe’s failure to tame its debt crisis threatens to roil the world’s financial markets and economy as Greece’s election in two days looms as the next flashpoint for investors.

Monetary policy makers from the U.K. to Japan and Canada sounded the alert about potential fallout from the single currency bloc’s troubles. They spoke as Group of 20 leaders prepare to meet in Mexico next week amid the weakest international economy since the 2009 recession.

A victory by Syriza, the party that promises to renege on Greece’s end of the bailout deal, could speed the nation’s exit from the euro. Absent a quick fix from divided European governments, central bankers may have to engage in fresh crisis- fighting of their own to ensure markets operate and their economies grow if the election jolts investors. Spain’s 10-year bond yield vaulted to 7 percent yesterday in a fresh sign of the stress that has plagued the region for two years.

The crisis has created a “large black cloud of uncertainty hanging over not only the euro area, but our economy too, and indeed the world economy,” Bank of England Governor Mervyn King said in London late yesterday.

‘Major Shock’

Canada faces a “major shock,” and global financial conditions could deteriorate significantly if Europe’s crisis worsens, the country’s central bank said yesterday. Bank of Japan (8301)Governor Masaaki Shirakawa said June 13 that the euro area poses the biggest challenge to the world’s No. 3 economy. The BOJ today kept monetary policy unchanged, while saying it will be giving “particular” attention to global market developments.

So when has DOOM become POSITIVE for markets? Well that’s when markets have been PROMISED to be defended with a tsunami of STEROIDS

Here are some examples:

Bank of England proposes £140 billion rescue plan

From the Telegraph

George Osborne unveiled a £140 billion emergency scheme to try to avoid a second credit crunch caused by the ongoing chaos in the eurozone.

The Bank of England is to offer money to high-street banks to kick-start mortgage and small business lending to prevent loans being rationed for many families and entrepreneurs, the Chancellor announced.

It comes after sharp rises in the costs of mortgages and other loans in recent months as banks struggle to raise money in the midst of the single currency crisis.

Bloomberg on last night’s positive reception of US markets on the alleged doomsday

Expectations for global policy action grew as central banks intensified warnings that Europe’s failure to tame its crisis threatens the economy. European Central Bank policy makers have overcome a key concern about taking the benchmark rate below 1 percent, two euro-area central bank officials said. The June 17 vote will turn on whether Greeks accept open-ended austerity to stay in the euro or reject the conditions of a bailout and risk becoming the first to exit the 17-member currency.

Fed Action

Stocks also rose on speculation the Federal Reserve may join central banks in taking steps to boost growth. Data today showed that industrial production unexpectedly fell and consumer confidence slid, adding to evidence of U.S. economic weakness. U.S. policy makers meet June 19-20.

Of course, flooding the world with money would not be sufficient, central bankers would need to ensure an easing of regulatory conditions to make the credit environment conducive, e.g. lighten up on collateral requirements

From Marketwatch.com

International regulators are on the verge of easing new banking rules that are meant to help the safety of the financial system, the Wall Street Journal reports, citing unnamed sources. Some of the regulators apparently worry that forging ahead with the new requirements could actually make the European financial meltdown worse, the newspaper noted. So, the new plan is to make it easier for the industry to comply with requirement that lenders keep on hand enough liquid assets to weather market plunges or other disasters.

To preserve the current system, central bankers should be expected to INTENSIFY the use of steroids—which do not really help anyway and actually worsen it—in order to postpone what is truly inevitable.

Today’s markets have increasingly been anchored or hostaged on expectations of huge infusions of steroids. This implies that FAILURE to please or satisfy such expectations would lead to tremendous or outsized volatilities.

Nonetheless central bankers have, in reality, been using the crisis to expand political control over their constituents

As the great libertarian H.L. Mencken once said,

The urge to save humanity is almost always a false-face for the urge to rule it.

Be very careful out there.

Chart of the Day: Greece’s ‘Macaroni’ Bureaucracy

From Bloomberg, (bold emphasis mine) [hat tip P. Ella]

Panagiotis Karkatsoulis, who works in the Greek Ministry of Administrative Reform and e-Governance and teaches at the National School of Public Administration, has some well founded theories about where Greece went wrong. One long-standing habit of government that helped the country become almost unmanageable, according to Karkatsoulis, is its disdain for parliament: new rules and regulations in Greece have long been created by ministerial order and presidential decree rather than through parliamentary process.

About 70 percent of regulations were approved directly by ministers between 1975 and 2005, and just 2 percent were the result of parliamentary actions, Karkatsoulis says in this OECD presentation. Regions, prefectures and the president account for the remaining rule changes. More than 30 years of scant coordination has resulted in a morass of contradictory rules and a lack of legal clarity.

A profile of Karkatsoulis in Le Monde explains how the first government of George Papandreou in 2009 had 15 ministers, 9 vice-ministers and 21 adjunct ministers, along with 78 general or special secretaries, 1,200 counselors, 149 directorate generals and 886 directorates — this for a population of just over 11 million, or the same number of people as those living in Cuba. The resulting mesh of interdependencies for decision making has made governing Greece increasingly difficult.

The chart above from Mr. Karkatsoulis has been labeled as the ‘Macaroni’ chart.

This serves as a great example of how the Gordian Knot of arbitrary rules and regulations, which has been emblematic of a political economy built on an unsustainable parasitical relationship, ultimately ends up in a crisis.

Printing money via devaluation, as prescribed by the mainstream, will not solve the issue of excessive regulations, red tape and bureaucratic barnacles, as well as property rights, free markets and the rule of law.

More Wall of Worry: Rising Accounts of Protectionism

Another area to be concerned with is the reemergence of protectionism.

Writes the Wall Street Journal Blog,

As worries rise about an economic slowdown, major nations around the world are ramping up measures to protect their economies from trade threats.

Global Trade Alert, an independent monitoring group, says in a new report today that at least 110 new protectionist measures were implemented around the world since the Group of 20 advanced and developing economies met in France last November. Of those 110, 89 were by G-20 members, who meet again next week in Mexico.

Protectionist measures such as export restrictions and higher tariffs spiked after the 2008 financial crisis but didn’t subside afterward. Since then, nations have been pursuing stealthier measures — “murky protectionism” — to circumvent international trade rules, the group says.

The latest updated tally names the 27-member European Union as the leading culprit since November 2008, with 302 discriminatory measures, followed by Russia and Argentina with about half that number each. China ranked at the top of a list of “number of trading partners affected” — with 193, or nearly all of them, followed by the European Union at 187.

Bailout policies are a form of protectionism. And they protect certain domestic politically privileged interest groups at the expense of the consumer.

It has been the G-20 or developed nations (mostly the EU) that has initiated most or about 80% of protectionist measures.

This reveals of the state of their government’s growing desperation which aside from protectionism has resorted to various financial repression measures such as raising taxes, imposing capital controls, inflationism, negative interest rates, price controls and various regulatory proscriptions.

In addition, Russia and Argentina’s deepening slide to statism has also contributed to rising incidences protectionism.

China, as the report said, is likely to suffer most from the reversal of globalization or deglobalization. In reality, the whole world will suffer as economic doors close.

Unknown to many, the resurgence of protectionism is likely to provoke retaliatory responses which should lead to a deterioration in geopolitical relationships that increases the risks of military conflagration. The great depression of the 1930s paved way for World War II.

As the great Ludwig von Mises warned,

What is needed to make peace durable is a change in ideologies. 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.

Desperate politicians and their cronies would use every trick on their books to preserve their privileges, mostly in the cover of nationalism, that comes at the expense of long term interest of their constituents.

Nationalism serves no more than a ruse conjured by politicians and those of the political order to justify social controls.

I hope and pray that the growing trend of protectionism will be curbed and that wars will be avoided.

Quote of the Day: Global Competition is the 21st Century Reality

instead of pursuing a 20th century trade policy model that seeks to secure market-access advantages for certain producers, policy should be recalibrated to reflect the 21st century reality that governments around the world are competing for business investment and talent, which both tend to flow to jurisdictions where the rule of law is clear and abided; where there is greater certainty to the business and political climate; where the specter of asset expropriation is negligible; where physical and administrative infrastructure is in good shape; where the local work force is productive; where there are limited physical, political, and regulatory barriers, etc. This global competition in policy is a positive development because — among other reasons — its serves to discipline bad government policy.

That’s from Daniel Ikenson at the Cato Institute.

We Owe it to Ourselves: US Federal Reserve buys as US Treasury Sells Debt

Well, the US government continues to indulge in self-financing her ballooning debts.

The Zero Hedge notes,

Same time, same place, One day later. After yesterday the Treasury engaged in nearly contemporaneous monetization in the 10 Year bond courtesy of the Fed, first buying then selling the paper, at a record low yield of course, so minutes ago the Treasury just sold $13 billion in 30 year paper at another fresh record low yield of 2.72%, down from 3.06% in April. Ignore that the Bid To Cover plunged from 2.73 to 2.40, the lowest since November 2011, and that Indirects were barely interested, taking down just 32.5%, it was all about the Directs, whose 24% take down soared, and as in yesterday's case, was one of the Top 5 highest ever. China? or Pimco? We will find out soon. Dealers were left with the balance, or 43.5% the lowest since October 2011. Something tells us that once the Fed extends Twist, or engages in more outright LSAPs, we will be seeing much more of this same day turnaround service as little by little all interest-rate sensitive instruments slowly grind down to zero.

As the great Ludwig von Mises wrote,

The most popular of these doctrines is crystallized in the phrase: A public debt is no burden because we owe it to ourselves. If this were true, then the wholesale obliteration of the public debt would be an innocuous operation, a mere act of bookkeeping and accountancy. The fact is that the public debt embodies claims of people who have in the past entrusted funds to the government against all those who are daily producing new wealth. It burdens the producing strata for the benefit of another part of the people.

Every action has consequences. These will be revealed in due time.

Talk Therapy boost US Markets

Again US stocks reportedly rose on chatters of the US Federal Reserve rescue.

From Bloomberg,

U.S. stocks advanced, erasing a weekly loss for the Standard & Poor’s 500 Index, amid reports policy makers may take steps to assist economies battered by Europe’s sovereign debt crisis…

Stocks extended gains today amid reports of plans by central banks. Bloomberg News reported that U.K. Chancellor of the Exchequer George Osborne and Bank of England Governor Mervyn King are preparing two programs to increase the flow of credit. Reuters said that central banks are prepared to take action if needed to boost liquidity in financial markets if the Greek elections cause tumultuous trading, citing officials linked to the Group of 20 nations.

Speculation grew that the Federal Reserve will discuss stimulus efforts at its meeting next week after reports showed jobless claims unexpectedly climbed by 6,000 to 386,000 last week and the cost of living fell by the most in more than three years.

‘Good Stage’

“Good inflation data and weak employment is a good stage for a Fed policy response,” Kevin Shacknofsky, who helps manage about $5 billion for Alpine Mutual Funds in Purchase, New York, said in an e-mail. “We are at the stage where bad news is good news in terms of a policy response. Jobs will be the critical factor that influences the Fed.”

Imagine “bad news-is-good news” because of the prospects of rescues? That’s how distorted markets are today. Yet until what point will the market simply imbue all talks, with no actions? This is simply addiction.

And because the Fed’s talk therapy (signaling channel) seems have accomplished more than the implemented policies of QEs or Operation Twist, indecision or policy procrastination maybe a (deliberate) decision.

Bloomberg columnist Caroline Baum explains, (bold emphasis mine)

All it took was a lousy employment report and news that Spain’s banks were in the ICU to slice the yield on the 10-year Treasury note to a record low of 1.43 percent on June 1, a 30-basis-point decline for the week. The market accomplished in a matter of days what the Fed couldn’t in nine months and $400 billion of curve-twisting operations.

I suspect we are two events away from a 1 percent yield on the 10-year note and a flatter curve. All it would take is another weak employment report and a Greek exit from the euro zone to send investors rushing for the safety and security of U.S. Treasuries. And no, those buyers aren’t expecting to earn a positive return during the next 10 years.

Compromised Compass

In the old days, the spread provided a timely reading on the economy’s health by juxtaposing a Fed-pegged short-term rate with a market-determined long-term rate. The market rate served as a kind of check on Fed policy.. Why would the Fed want to compromise a good compass and reduce the incentive for banks to lend?

The argument for additional curve-twisting rests on the idea that lowering long-term Treasury yields brings down mortgage rates and helps the ailing housing sector. Freddie Mac’s 30-year commitment rate fell to a record low of 3.67 percent last week. It’s not the rate that’s deterring home purchases; it’s the lenders, having wisely determined that a good credit score and a 20 percent down payment are important after all. Not to mention potential buyers’ fears that home prices may fall further.

If Bernanke isn’t convinced of the need for more QE just yet and twisting the yield curve is cosmetic, what else could the Fed do at the conclusion of the June 19-20 meeting? More talk therapy.

"Bad news-is-good news" because the FED believes or thinks that they can continually talk up the markets.

Yet promises alone cannot satisfy the cravings of addicts (of anything).

And rising markets based on talk therapy looks likely indeed a candidate for “two events away from a 1 percent yield on the 10-year note”, that’s euphemism for a crash.

The more the market rises on the FED’s talk therapy, the greater the risks of a Dr. Marc Faber event.

Be very careful out there.

Quote of the Day: Welfare Crisis Aggravated by Demographics

Demography is destiny. If so, then the future will be challenging in many countries around the world where fertility rates have dropped below the replacement rate. At the same time, people are living longer. So dependency ratios--the number of retirees divided by the number of earners--are destined to soar.

Why have fertility rates fallen around the world? There are a few plausible explanations. One of them stands out, in my opinion: Socialism may breed infertility! In the past, people relied on their children to support them in their old age. Your children were your old-age insurance policy. Over the past few decades, people have come to depend increasingly on social security provided by their governments. So they are having fewer kids.

That’s fine as long as the ratio of retirees to workers isn't so high that the burden of supporting our senior citizens crushes any incentive to work resulting from excessively high tax rates. The cost of increasingly generous and excessive entitlements has been soaring relative to taxable earned incomes even before dependency ratios are set to rise in many countries. Governments have chosen to borrow to finance social security and other entitlements, to avoid burdening workers with the extremely high tax rates that are necessary to balance entitlement-bloated budgets.

Median ages are highest in advanced economies with large social welfare states. Among the 45 major countries, Japan has the highest median age (44.7), while the Philippines has the lowest (22.2). Advanced economies tend to have higher median ages than emerging ones because they provide more social welfare, which boosts longevity and depresses fertility.

Bond markets may be starting to shut down for countries that have accumulated too much debt. That’s creating a Debt Trap for debt-challenged governments. If they slash their spending and raise their tax rates, economic growth will tend to slow. If tax revenues fall faster than spending, their budget deficits will widen. There has recently been an outcry about the hopelessness of such “austerian” policies that perversely lead to higher, rather than lower, debt-to-GDP ratios.

The demographic reality is that people around the world are living into their 80s and 90s. Some of them believe that they are entitled to retire in their late 50s and early 60s even though they are living longer. Yet, they didn’t have enough children to support them either directly (out-of-pocket) or indirectly (through taxation). Instead, they expect that their governments will support them. So governments have had to borrow more to fund retirement benefits. That debt is mounting fast and will be a great burden for our children. The result can only be described as the Theft of Generations.

That’s from Dr Ed Yardeni at his blog. To “depend increasingly on social security” has not really been about socialism (government ownership of production) but about the welfare state that has played a significant role in driving today’s debt crisis. The Santa Claus principle is being unraveled.

How Tax Rates Affect Manufacturing

From the Business Insider (bold highlights original)

The theme of this year’s Technology Day at MIT was advanced manufacturing in the U.S. Kresge Auditorium was close to capacity with alumni from all reunion years.

Learned MIT faculty weighed in on the importance of proximity between engineers and factories. The Atlas Device story was initially an inspiring tale of can-do New England spirit, with engineers in Somerville and a machine shop in Woburn working together to make improvements on a weekly basis.

But then we found out that the main customer was the U.S. military and they really didn’t care how much it cost or how efficiently it was produced. Similarly, the solar cell talk was great until we learned that there are about 12 good reasons why solar cells must be manufactured in Asia.

In a panel discussion afterwards, the speakers were asked what it would take to make the U.S. more competitive for manufacturing.

The answer was that it was pretty much hopeless at current tax rates.

Big companies make a lot of money in foreign countries, but if they bring the profits back home they get hit with the world’s highest corporate tax rate. So they leave the money in China, for example, and then invest it there in research and development or a new factory. I.e., our own multinational companies are financing the new facilities around the world that are rendering the U.S. uncompetitive.

Globalization is not to be blamed for investors who straddle to take advantage of the variances of tax rates. Instead, tax competition should help keep a check on insatiable or greedy governments. And importantly, tax competition provides a channel for the old saw—”money flows where it is treated best”.

The lesson is that tax rates should be competitive as they signify as one of the key variable in determining resource allocations. Although I would prefer to abolish them all.

Philippine Overseas Workers Help Fuel Philippine Property Bubble

Again reports glorify political superficialities as supposedly fueling economic progress.

From Bloomberg,

Filipinos investing in the local property market with money earned overseas helped make the peso Asia’s best-performing currency of 2012, even as a global economic slump sapped demand for riskier assets.

Euliver Dizon, a web designer in the U.S., is scouting for a home in Manila, praising President Benigno Aquino for improving the economy. Rommel Adre, a software developer who worked abroad from 2000 to 2011, bought a home in the capital and some properties to rent. Aileen Respicio, a former domestic helper, opened a beach resort with her Scottish husband six years ago and is now buying more land.

The peso has gained 3.7 percent this year versus the dollar including interest. Capital inflows aid Aquino’s drive to win an investment-grade rating, which would allow the Philippines to attract pension money needed to build roads, bridges and airports. Central bank data shows remittances from overseas workers rose 5.4 percent in the first quarter from a year earlier to $4.8 billion, accounting for 10 percent of the economy. They don’t detail use of funds.

There seems hardly a meaningful correlation between the year on year changes of remittances AND the Philippine Peso. In other words, it would be misguided to allude a causal relationship between the Peso and Remittances. This would be a post hoc fallacy.

Moreover, in reality, the Peso has been appreciating prior to the current administration. So domestic politics has hardly been a big factor in the Peso’s advances.

Also, the Peso’s rise has not been in isolation, the Peso has risen ALONG with major ASEAN contemporaries. This means that the Peso’s rise, as well as the Phisix has been a regional if not global phenomenon as I previously discussed.

This is another validation of George Soro’s reflexivity theory which describes the feedback loop mechanism between the influences of price actions in the financial markets and perceptions affecting real actions.

This also shows how policies can be manipulated to promote political agenda: What is misread as progress has in reality, been an offshoot of negative real interest rate policies. This ongoing property boom has long been in my tarot cards.

Yet local officials can’t see bubbles.

More from the same article…

The peso rose 0.7 percent to a one-month high of 42.635 per dollar yesterday. The central bank, due to report April data tomorrow, predicts remittances will reach a record $21 billion this year. They are growing faster than the 5 percent target, helping to support the peso, Finance Secretary Cesar Purisima said. He said there is no evidence of hot money driving property prices higher.

“We are monitoring carefully the situation to make sure we don’t create problems down the road for us in terms of asset bubbles,” Purisima said in an interview at Bloomberg’s headquarters in New York on June 12. “We are very far from the situation.”

Overseas Filipinos account for about 30 percent of residential sales, as many workers have already satisfied the food and clothing needs of their families, said Alex Pomento, head of research at Macquarie Group’s Manila unit. About 100,000 housing units have been added per year since Aquino took office in 2010, up from about 60,000 in 2007, he said.

Of course, it would be self defeating for politicians to curb the bubble which has been part of their image building or in projecting of their “success”. Public opinion is easily swayed by actions with short term impact.

Let me add that such news tend to overrate the 30%, which account for the residential sales by Filipino overseas buyers, but has been silent on the 70%--the local buyers. Media, mainstream experts and politicians panders to OFWs because the latter has gained political clout.

With the rate of real estate projects mushrooming over the metropolis, one would wonder where all the buyers and tenants would come from to fill up coming supplies.

Metro Manila has nearly 12 million population with a annual growth rate of around 2%. I don’t have data on the per capita growth of the metropolis, but construction activities suggest of expectations of immense (unrealistic) growth or an unsustainable boom.

Besides unlike Hong Kong and Singapore which has lack of land space to build on, the Philippines has vastly wide areas for residents especially if one considers the adjacent outskirts.

A little observation will help. Go out at night and observe the existing condos. I estimate that occupancy level, based on lights, has been less than 50% for most condo buildings especially on business districts. So more supplies will improve occupancy?

Overseas hot money may not (at the moment) be the drivers of the current property bubble but local money from easy money policies will. This will be compounded by money from Filipino Overseas Workers whom will be impelled by monetary policies abroad and seduced by political fiction.

I’d rather be picking on the wreckage of a bubble bust, than be a victim of political hysteria.

Italy’s Pro-Growth Tax Increases Backfires

Economic reality flies in the face of the “pro-growth” policies prescribed by politicians and which has been endorsed by mainstream experts.

Italians join Greeks in dodging tax increases, which demonstrates their refusal to feed big government through the strangulation of the private sector.

From Bloomberg,

Italian Prime Minister Mario Monti is facing signs that tax increases are beginning to backfire as his new levy on real estate goes into effect.

Value-added tax receipts have declined since Monti’s predecessor, Silvio Berlusconi, raised the rate by 1 percentage point in September as the economy was slipping into recession,government data released June 5 showed. The amount collected fell in the 12 months ended April 30 to the lowest since 2006.

Finding the right deficit-reduction mix as Monti fights to meet budget targets is critical for Italy to avoid becoming the biggest victim yet of Europe’s financial crisis. A slump that is driving up welfare spending is adding urgency to Monti’s effort to make the economy more competitive amid a growing backlash across Europe against austerity.

“This government has raised taxes too much,” said Alberto Alesina, a professor of political economy at Harvard University. “It would be much, much better to lower spending.”…

The decline in VAT revenue figures may bolster the government’s efforts to postpone a further increase in the rate after October by 2 percentage points to 23 percent. That would put Italy on par with Greece.

The emperor has no clothes. Pretentious knowledge has been exposed via the law of unintended consequences

Again from the same Bloomberg article, (bold emphasis added)

Monti planned to tap more than 4 billion euros of projected savings from a government spending review to put off the VAT increase, which his deputies acknowledge may deepen the recession.

“The economy shows signs of strong deterioration,” Finance Undersecretary Gianfranco Polillo told the Senate in Rome on June 6. “In light of the fall in domestic demand, betting on a further VAT increase would be incomprehensible and even wrong.”…

Under Monti, Italy’s tax burden, the ratio of tax revenue to economic output, will rise to 45.1 percent this year from 42.5 percent in 2011, and won’t start falling until 2015.

Monti, a former university president and Goldman Sachs Group Inc. (GS) adviser, was brought to power in November to rein in bond yields and bring down debt. His 20 billion-euro austerity package raised retirement ages and was followed by measures to ease firing rules and promote competition. Increased rates on gasoline were enacted in December and on luxury goods earlier this year, while the first property tax payments are due next week.

“I don’t want to deny that we could have done more and better,” Monti said in a June 7 speech. Still, his reforms have produced results, he said.

Dodging Tax

The government had 99.8 billion euros in VAT receipts in the 12 months ended April 30 tied to internal trade, or transactions among domestic counterparties. That compares with 100 billion euro in the 12 months ended March 31 and 101.3 billion euros in the period ended April 30, 2011.

“VAT revenue does depend on growth in domestic consumption,” said Ian Roxan, director of the Tax Programme at London School of Economics and Political Science. “It is also not immune to evasion. It is certainly possible that in a time of austerity people become less willing to pay VAT.”

Italy loses more than 120 billion euros in unpaid taxes every year, according to the Equitalia tax-collection agency. The country retrieved 12.7 billion euros from the fight against evasion in 2011, up 15.5 percent from 2010.

This also exposes the propaganda that the public has been “anti-austerity” which is nothing more than media's manipulation of people’s minds. Because if Italians have indeed been anti-austerity, they would have rushed to the tax collection agencies to pay their share. Duh. Or maybe Italians came to realize they are NO free lunches.

The harsh lesson from reality is “If you tax something, you get less of it.”

Millionaire’s Portfolio: Collectibles are the Rage

From the CNBC

Collectibles are all the rage. From the $120 million hammer price for the pastel of Edvard Munch's "The Scream" to the run-up in prices for diamonds, wine and antique cars, the collectibles market (or “passion investments” or “treasure assets”) is booming on the back of demand from wealthy investors.

For the rich, Burgundy and sapphire are the new black.

But financial expectations for collectibles may be surpassing reality.

A new report from Barclays Wealth shows that among global investors with more than $1.5 million in investible assets, collectibles and precious metals now account for 9.6 percent of their total wealth. The numbers are even higher in the United Arab Emirates (18 percent) and China (17 percent).

As Barclays points out, wealthy investors like collectibles because they want “tangible, scarce and non-fungible investments" that “could provide a stable store of value in uncertain times.”

Yet Barclays says that “the world of collectibles thrives on fairy tales” like "The Scream" sale, calling collectibles markets “riddled with inefficiencies, "frequently opaque and illiquid," and "extremely volatile and risky.”

Reasons for the growth of collectibles as a share of the portfolio of the millionaires, according to Barclay: Emotions, Hidden Cost, Opaque Markets, Correlation and illiquid.

Yet it would seem misguided to lump arts, wines, precious metals and jewelries as a single asset ‘collectible’ class, as the utility and reservation demand functions of these items are different.

Some of the wealthy people will buy because of aesthetics, enjoyment and or for social status.

But it isn’t a ‘fairy tale’ when wealthy investors say that they had opted for ‘collectibles’ out of “tangible, scarce and non-fungible investments" that “could provide a stable store of value in uncertain times.”

Bluntly put, 'collectibles' represents as insurance against counterparty risks and are ‘real’ assets for the millionaires.

What truly will be exposed as fairy tale are the colossal financial claims at the fractional reserve banking system. The euro debt crisis signifies an ongoing manifestation of such a process.

Thus, the increased exposures by millionaires on 'collectibles' reflect on the present economic and financial realities.

Quote of the Day: The First Nation to use Cyberwar weapons

As for the malware, or Stuxnet virus, introduced into Natanz, was it wise to use this powerful and secret weapon against a plant that is under international inspection and enriches uranium only to 5 percent?

We may have disrupted Natanz for months, but we also revealed to Iran and the world our cyberwar capabilities. And we became the first nation to use cyberwar weapons on a country with which we are not at war.

If we have a right to attack Iran's nuclear facilities like Natanz and Bushehr that are under U.N. supervision, does Iran have a right to attack our nuclear plants, like Three Mile Island, with cyberwar viruses they create?

We have now alerted technologically advanced nations like Russia and China to our capabilities and impelled them to get cracking on their own cyberwar weapons, both offensive and defensive.

That’s from Patrick J. Buchanan author and co-founder and editor of The American Conservative at the lewrockwell.com on the moral, strategic and legal issue of the recent secret U.S-Israeli cyberwar strike on Iran's uranium enrichment plant at Natanz.

Welcome to the information age.

The Coming Age of Capital Controls?

Bureaucrats in Brussels have been floating trial balloons on capital controls

The Daily Mail reports

EU finance chiefs today admitted holding contingency ‘discussions’ about possibly putting limits on Greek cash machines to stop mass withdrawals if Greece quits the euro.

European Commission officials also discussed imposing border checks and capital controls in a bid to stop a possible flight of funds.

‘There are indeed discussions, and we are asked to clarify what is foreseen in EU treaties,’ said Commission spokesman Olivier Bailly following a raft of press reports claiming this had happened.

He refused to reveal the precise details of the talks but admitted some of these ideas had been discussed under ‘disaster scenarios’.

He said the commission is ‘providing information about EU laws regarding treaties,’ that mean capital ‘restrictions are possible’ on the grounds of ‘public order and public security.’

However, he stressed that the commission was not planing on the basis that Greece would leave the euro depending on the outcome of elections on Sunday.

More from Simon Black at the Sovereign Man

Some of these measures have already been implemented sporadically; customers of Italian bank BNI, for example, were all frozen out of their accounts starting May 31st upon the recommendation and approval of Italy’s bank regulator. No ATM withdrawls, no bill payments, nothing. Just locked out overnight.

In Greece, the government has taken to simply pulling funds directly out of its citizens’ bank accounts; anyone suspected of being a tax cheat (with a very loose interpretation in the sole discretion of the government) is being releived of their funds without so much as administrative notification.

It’s no wonder why, according to the Greek daily paper Kathimerini, over $125 million per day is fleeing the Greek banking system.

Capital controls are part of the grand scheme of financial repression policies designed by bankrupt governments to expropriate private sector resources.

Aside from capital controls, other measures include, raising taxes, inflationism, negative interest rates, price controls and various regulatory proscriptions.

Simon Black lucidly explains the nitty gritty and the moral issue of capital controls,

capital controls are policies which restrict the free flow of capital into, out of, through, and within a nation’s borders. They can take a variety of forms, including:

- Setting a fixed amount for bank withdrawals, or suspending them altogether

- Forcing citizens or banks to hold government debt

- Curtailing or suspending international bank transfers

- Curtailing or suspending foreign exchange transactions

- Criminalizing the purchase and ownership of precious metals

- Fixing an official exchange rate and criminalizing market-based transactions

Establishing capital controls is one of the worst forms of theft that a government can impose. It traps people’s hard earned savings and their future income within a nation’s borders.

This trapped pool of capital allows the government to transfer wealth from the people to their own coffers through excessive taxation or rampant inflation… both of which soon follow.

The thing about capital controls is that they’re like airine baggage fees; ultimately, all governments want to do it, they’re just waiting on the first guy to impose them so that they can shrug their shoulders, stick it to the people, and blame ‘industry standards’.

Moreover, capital controls were a normal part of the global economic landscape for most of the 20th century, right up to the 1970s. It’s been a long time coming for governments to return to that model.

A return to capital controls would extrapolate to deglobalization and protectionism whose likely outcome would be the Great Depression of the 21st century. I hope and pray that these parasites will not succeed.

Pavlovian Markets Rise on ECB’s Proposed Deposit Guarantees

US and European stocks went back into a Risk ON mode last night while Asian stocks climb again today on another report of a planned stimulus: Deposit Guarantees.

From Reuters

European Central Bank Vice-President Vitor Constancio made a fresh push for the bank to become the supervisor of the euro zone's biggest banks on Tuesday, saying the wording of Europe's founding treaty meant it would be an easy change to make.

The ECB is the driving force behind a three-pillar plan for a euro zone banking union, consisting of central monitoring of banks, a fund to wind down big lenders and a pan-European deposit guarantee.

As previously pointed out, ‘guarantees’ signify as the politician’s and mainstream’s travesty where the public has been made to believe that government’s stamp or edicts can simply do away with the laws of economics. Everyone is made to look at the intended goal, while ignoring the reality of who pays for such guarantees and how to get there. Yet the crisis, since 2008, continues to worsen. These guarantees are really meant to pave way for massive inflationism

Nevertheless the past few days has seen an incredible surge in volatility

Monday, the US S&P had a fantastic rollercoaster 2% ride. The major US benchmark was initially up on the news of Spain’s bailout, but the day’s gains had been reversed where the S&P closed sharply down 1.14%. Last night was another huge 1.13% upside close which offset Monday’s decline.

The Risk ON-Risk OFF landscape has obviously been intensifying, all premised on government’s Pavlovian classic conditioning. I worry that these huge swings could become a dangerous precedent that could ominous of, or increase the risk of a ‘crash’, which I hope it won’t.

Financial markets has been transformed into a grand casino.

Caveat emptor

Chart of the Day: US Money Supply Hits Wall, Points to Trouble Ahead

I pointed out last Sunday that in response to the ongoing capital flight from crisis affected European nations, the US Federal Reserve have resorted to the contraction of its balance sheet which may further prompt for a decline in money supply. This may have been compounded by the culmination of Operation Twist.

Chart and the following quote from goldmoney.com

Simply put: the more sluggish money supply growth is, the more likely it is that we see a stock market and broader economic crash that would make 2008 look like child’s play.

Since US Federal Reserve is likely to respond forcefully to any material convulsions in the financial markets, a “crash” does not seem inevitable (yet). But this should NOT be discounted.

Like it or not, expect further turbulence and volatility ahead.

Be careful out there.

Aftermath of Boom Bust Policies: US Family Net Worth Fell Nearly 40% Between 2007-2010

From the Wall Street Journal Blog (bold emphasis mine)

Families’ median net worth fell almost 40% between 2007 and 2010, down to levels last seen in 1992, the Federal Reserve said in a report Monday.

As the U.S. economy roiled for three tumultuous years, families saw corresponding drops in their income and net wealth, according to the Fed’s Survey of Consumer Finances, a detailed snapshot of household finances conducted every three years.

Median net worth of families fell to $77,300 in 2010 from $126,400 in 2007, a drop of 38.8%–the largest drop since the current survey began in 1989, Fed economists said Monday. Net worth represents the difference between a family’s gross assets and its liabilities. Average net worth fell 14.7% during the same three-year period.

Much of that drop was driven by the housing market’s collapse. Families whose assets were tied up more in housing saw their net worth decline by more. Among families that owned homes, their median home equity declined to $75,000 in 2010, down from $110,000 three years earlier.

Between 2007 and 2010, incomes also dropped sharply. In 2010, median family income fell to $45,800 from $49,600 in 2007, a drop of 7.7%. Average income fell 11.1% to $78,500, down from $88,300. That was a departure from earlier in the decade. During the preceding three years, median income had been constant, while the mean had climbed 8.5%.

Family incomes also dropped the most in regions of the country hardest hit by the housing market tumble. Median family income in the West and South decreased substantially, while those in the Northeast and Midwest saw little change.

This serves as evidence of how interest rate policies (zero bound rates) which attempts to induce a “permanent quasi boom” essentially impoverishes a society.

The market’s fierce backlash from Keynesian snake oil policies, serves as another validation or the realization of admonitions from the great Ludwig von Mises.

He who wants to "abolish" interest will have to induce people to value an apple available in a hundred years no less than a present apple. What can be abolished by laws and decrees is merely the right of the capitalists to receive interest. But such decrees would bring about capital consumption and would very soon throw mankind back into the original state of natural poverty.

Capital consumption indeed.

Postscript:

Policymakers instead has been shifting the blame on China than accepting their mistakes and has further pursued similar set of policies. This means we should expect the same results overtime. Yet part of the imbalances caused by the boom phase of bubble cycles has been to overvalue a currency.

As a side note, politicians and mercantilists have long blamed China for alleged currency manipulation. The US Treasury recently avoided a direct confrontation by refusing to label China as one. That's because the US Treasury has become beholden to China, as evidenced by the privilege of direct access. This represents the another case where the mythical pot calls the kettle black.

Why Spain’s Bailout may NOT Work

Author and derivatives analyst Satyajit Das at the Minyanville.com has an insightful dissection of why Spain’s bailout will not likely succeed (all bold emphasis mine)

1. Spain’s bailout package overlooks the requirements of larger banks

The amount -- 100 billion euros or more depending on the independent assessment of the needs of Spanish banks -- may not be enough. On the surface, the amount appears around three times the 37 billion euros the International Monetary Fund says is needed. The capital requirements of Spanish banks may turn out to much higher -- as much as 200 billion to 300 billion euros.

The IMF assumes only the smaller Spanish savings banks (the Cajas) will need help. In reality, the larger Spanish banks may also require capital.

Spain’s banks have over 300 billion euros in exposure to the real estate sector, mostly through loans to developers. Around 180 billion euros of this exposure is considered “problematic” by Spain’s central bank.

Estimates suggest that there are about 700,000 vacant newly built homes, but including repossessed properties the total could be as high as 1 million or even higher. At current sales levels, it will take many years to clear the backlog, which will be compounded by more properties being completed and coming onto the market. Housing prices have fallen by 15% to 20% but are forecast to fall eventually by as much as 50% to 60%. A severe recession and unemployment of 25% means that losses on Spain’s over 600 billion euros of home mortgages loans are likely to also rise.

2. The bailout excludes sovereign debts

The proposed amount also does not include any provision for write-downs on holding of sovereign debt. Local banks are estimated to hold over 60% of outstanding Spanish government bonds.

3. The conditions of Spain’s bailout may prompt for a domino effect or demand for changes in the conditions or covenants of existing bailouts by other crisis affected EU nations.

The bailout will be provided with no conditions, which creates its own problems. The lack of conditions may lead to Greece, Ireland, and Portugal seeking relaxation of the terms of their assistance packages. The lack of conditions also prevented the IMF from contributing.

4. The bailout lacks the discipline of keeping the house in order, unlike crisis affected Asian economies during the 1997 Asian Crisis.

In an opinion piece in the Financial Times, Jin Liqun, chairman of the supervisory board at the China Investment Corporation, pointedly noted the contrast between the treatment of European and Asian countries.

Viewed from China, the management of the eurozone debt crisis offers a stark contrast to the handling of the 1997-98 east Asian crisis. In that episode, Thailand, South Korea and Indonesia were all forced to implement tough austerity programmes imposed by the International Monetary Fund.... Unlike many of today’s Europeans, the people of east Asia did not have the luxury of large relief funds from outside their countries. The people had to tolerate hardship...In a poignant case, the Korean people contributed gold and household foreign exchanges to the government to help ease fiscal pressure.

Amen to that.

Western politicians think that they can elude the laws of nature. Markets will eventually prevail.

5. The bailout overestimates on the sources for funding.

Future international support, either bilateral or through the IMF, may be difficult.

The funds will come from either the European Financial Stability Fund or the still to be approved European Stability Mechanism. Since 2010, the eurozone has committed 386 billion euros to the bailout packages for Greece, Ireland, and Portugal. In theory, the EFSF and ESM can raise a further 500 billion euros, beyond the commitment to Greece, Ireland, and Portugal, allowing them to contribute the 100 billion euros for the recapitalisation of the Spanish banking system. The EFSF/ESM also assumes that it “can leverage resources." The reality may be different.

For a start, Finland has indicated that it may seek collateral for its commitment, an extension of its position on Greece which the European Union ill-advisedly agreed to.

As Spain could not presumably act as a guarantor of the EFSF once it asks for financing, Germany’s liability will increase further from 29% to 33%. France’s share also increases from 22% to 25%. The liability of Italy, which is in poor shape to assume any additional external financial burden, rises from 19% to 22%.

The EFSF’s AA+ credit rating may now be reduced. Irrespective of the rating, the EFSF and ESM will have to issue debt to finance the bailout. Support for any fund raising by these instrumentalities is uncertain.

Commercial lenders have been reducing European exposure. Emerging market members with investible funds lack enthusiasm for further European involvement. Lou Jiwei, the chairman of China Investment Corporation, the country’s sovereign wealth fund, has ruled out further purchases of European debt: “The risk is too big, and the return too low."

6. Spain’s bailout will worsen Spain’s financial ratios which could likely dissuade participation from the private sector.

The bailout also does not address fundamental issues.

The funds will be lent to the Spanish government, probably its bank recapitalisation agency Fondo de Reestructuracion Ordenada Bancaria (FROB), rather than supplied directly to the banks because of legal constraints. This will add 11% of GDP to Spain’s debt level. The transaction will do nothing to reduce the country’s overall debt level -- over 360% of GDP before this transaction.

Spain’s access to capital markets or its cost of debt is not addressed. The last auction of Spanish government bonds saw yield around 6.50% per annum with the bulk of bonds being purchased by local banks. Spain and its banks also face pressure on their own ratings, which are now perilously close to becoming non-investment grade.

The bailout may actually adversely affect the ability of Spain and its banks to funds. Commercial lenders are now subordinated to official lenders. Based on the precedent of Greece, this increases the risk significantly, discouraging investment.

The European Union has stated that it believes that these measures will help the supply of credit to the real economy and assist a return to growth. This optimism is unlikely to be realised.

Restoring the bank’s solvency will not result in an increase in credit. The capital will allow existing bank debts to be written off. Spanish banks have limited access to funding. They are heavily reliant on the European Central Bank for money, a position which the assistance does not address.

Interventionism begets more interventionism which substantially deepens the distortions of the markets, through more misallocations or malinvestments and which consequently aggravates the problems.

Policymakers do NOT have the KNOWLEDGE and the RESOURCES to deal with the worsening crisis.

The basic 'commonsense' solutions are to keep the proverbial house in order through fiscal discipline “austerity”, allow unsustainable institutions to fail or for the markets to clear and to induce competitiveness by removing structural political and regulatory obstacles (e.g. labor market reforms).

Yet commonsense has been disregarded for wishful thinking.

The current path of policies of sustained bailouts only increases the risk of MORE inflationism which serves as the fundamental reasons to be bullish on gold and commodities.

Quote of the Day: Economics is a Display of Abstract Reasoning

Economics, like logic and mathematics, is a display of abstract reasoning. Economics can never be experimental and empirical. The economist does not need an expensive apparatus for the conduct of his studies. What he needs is the power to think clearly and to discern in the wilderness of events what is essential from what is merely accidental.

That’s from the great Ludwig von Mises from his magnum opus Human Action. (hat tip Mises Blog).