Shortage of the US Dollar as Pretext for More Inflationism

Newswires say there has been a shortage of US dollars in the global financial system.

Bloomberg reports,

Central banks rebuilding foreign- exchange reserves at the fastest pace since 2004 are crowding out private investors seeking U.S. dollars, boosting demand even as the Federal Reserve considers printing more currency.

After falling to an all-time low of 60.5 percent in the second quarter of last year, the dollar’s share of global reserves rose 1.6 percentage points to 62.1 percent in December, the latest International Monetary Fund figures show. The buying has left the private sector with $2 trillion less than it needs, according to investment-flow data by Morgan Stanley, which sees the dollar gaining 8.2 percent in 2012, the most in seven years.

While the Fed has created more than $2 trillion under its stimulus programs since 2008, the flows signal that there may actually be a shortage of dollars to meet demand as Europe’s debt crisis deepens and the global economy slows. The dollar has risen 3.5 percent since the end of April against a basket of the most-widely traded currencies even amid speculation that the Fed, which meets this week, may undertake the type of stimulus measures that weakened it in the past.

“The market often assumes that people are long dollars, but many of those dollars are held by central banks, which are unlikely to move out,” Ian Stannard, head of European currency strategy at Morgan Stanley in London, said in a June 13 interview. “That leaves us with the private sector, which is short,” meaning they don’t have enough of them, he said. “In an environment where we see a global slowdown, the dollar will be well supported.”

Dollar Scarcity

Morgan Stanley says the potential scarcity of dollars among foreign private borrowers represents the U.S.’s net position with lenders abroad of minus $2.4 trillion, adding $4.8 trillion of U.S. financial assets held by central banks, and subtracting $500 billion of foreign official assets held by the U.S.

That equals about $2 trillion of demand from foreign private banks and companies. The gap has expanded from $400 billion in 2008, according to the New York-based firm. In 2002, there was a dollar surplus of $900 billion, the data show.

The shift in the share of global forex reserves weighted towards the US dollar hardly translates to a US dollar ‘shortage’. But it can be made to look that way.

Instead, these accounts for symptoms of capital flight (see chart below of deposits of foreign lenders at the US Federal Reserve), ongoing liquidations (loan repayments margin calls etc..) and growing concern over a dysfunctional banking system, which has been magnified in Europe.

Chart from Bloomberg

The statement “many of those dollars are held by central bank” are manifestations of such concerns or of distorted price signals where politicians arduously struggle to protect privileged institutions from market forces through massive interventions. The ensuing uncertainty from regulations and political directions prompts the private sector to seek refuge in central banks than to operate normally.

The innuendo behind the dollar shortage analysis nonetheless represents the clamor for the FED to inject more money into the system.

As the great Ludwig von Mises once wrote,

In the opinion of the public, more inflation and more credit expansion are the only remedy against the evils which inflation and credit expansion have brought about.

Solve the problem of inflation with even more inflation. Yet people forget inflation is a policy that will not and cannot last.

A Global Migration U-Turn?

In the past, people from developing countries flocked to developed nations mostly to find greener pastures. Such flow of migration caused controversial social issues as the mythical “brain drain”, “immigration restrictions” and etc..

As pointed out before, this trend seems to be in reversal.

From Gillian Tett of the Financial Times, (bold highlights added) [hat tip Sovereign Man]

It is a telling little indication of how the world is being subtly turned on its head, amid the rolling crises. During the past five decades, if anybody has been packing their bags to travel overseas to send remittances home, it has typically been the Brazilians, or other “emerging markets” peoples, not the developed Europeans. In recent years, Spain and Portugal have been pulling in vast quantities of migrant workers, both skilled and unskilled, as Poles and other eastern European workers have flooded to places such as the UK and Ireland. America has sucked even larger numbers of migrants, not just from Brazil but from other parts of South America. A couple of months ago, for example, the Pew Hispanic Center (PHC) in America released a fascinating report which calculated that 12 million immigrants have moved from Mexico to the US in the past four decades alone, to seek jobs and cash. “The US today has more immigrants from Mexico alone – 12.0 million – than any other country in the world has from all countries of the world,” the PHC report observed, noting that in absolute terms “no country has ever seen as many of its people immigrate to this country as Mexico has in the past four decades.”

Yet these days the most fascinating detail of the PHC report, which echoes that Boston lunch, is that a change is afoot. Last year “the net migration flow from Mexico to the United States has stopped and may have reversed,” it says, for the first time since records began.

Part of the explanation is “the weakened US job and housing construction markets, heightened border enforcement, a rise in deportations,” along with “the growing dangers associated with illegal border crossings and the long-term decline in Mexico’s birth rates”. But another issue is the improved “broader economic conditions in Mexico”. Life south of the border, in other words, is no longer quite as grim as it was before, or not relative to the risks of moving to the US.

Sadly, there is surprisingly little comparable data for other immigration flows. As Ian Goldin, an Oxford academic, has long lamented, the world lacks any centralised system to track migration flows in a timely way, let alone devise policies. Thus we do not really know how many young Portuguese or Spanish are seeking jobs in Latin America now (although Reuters reports that around 328,000 Portuguese hold work permits for Brazil, 50,000 more than last year, it is unclear whether these have been exercised). Nor is it clear how many Poles are returning to their homeland from the UK or Ireland, as austerity bites there; or how many young Irish may now be seeking their fortunes overseas (yet again). While I have recently heard plenty of anecdotes at American dinner parties and conferences about how young American graduates are becoming so disillusioned with their jobs markets that they are moving “temporarily” to Brazil or India, tracking data on that American flux – if it exists – is hard.

The other unmentioned factors are the repressive measures undertaken by governments of developed economies to forcibly wring out resources from the private sector, only to transfer them to crony or pet industries of the political class, that has led to sharp deterioration in investments and thus reduced employment opportunities.

Such is aside from the explicit policies of currency devaluation (or inflationism) by developed nations, that has caused boom bust cycles and thus reduced their respective standards of living. Example, the net worth of US families fell by almost 40% between 2007-2010

A reversal of the poor to rich global migration trend are manifestations of the wealth convergence dynamic.

War on Internet: Google Reports Increasing Government Requests for Censorship

Governments of western economies has been breathing down the neck of Google to censor ‘political’ content on Google’s cyberspace.

From TGDaily.com

Google's released data on the governments aiming to censor internet content, and says it's seen a worrying rise in the number of such requests from Western democracies.

In the second half of last year, for example, Spanish regulators asked for the removal of 270 search results that linked to blogs and newspaper articles referencing individuals and public figures, including mayors and public prosecutors.

One example that's more entertaining than chilling came from the Canadian authorities. They called for the removal of a YouTube video showing a man urinating on his passport and flushing it down the toilet. Google let the video stand.

"When we started releasing this data in 2010, we also added annotations with some of the more interesting stories behind the numbers. We noticed that government agencies from different countries would sometimes ask us to remove political content that our users had posted on our services. We hoped this was an aberration. But now we know it’s not," says senior policy analyst Dorothy Chou…

Google also received a number of requests from US law enforcement agencies. One concerned a blog post alleged to defame a law enforcement official in a personal capacity; another a series of 1,400 YouTube videos that were claimed to constitute harassment.

Google has so far ‘refused to comply’ with these requests and thus deserves a pat on the back.

Google earlier announced that they will warn users of state sponsored privacy intrusions.

My guess is that governments will continue to pressure Google, but perhaps more through indirect channels (taxes, licenses, anti-trust etc..) to get their wishes done.

Will Google eventually cave in?

Henry Hazlitt on the Task of Libertarians

The great late Henry Hazlitt, in an article at the Mises Institute today, tells Libertarians to work on TWO fundamental aspects in preaching liberty. (dedicated to my Filipino libertarians and Casey Phyle friends, as well as, passive libertarian audiences or visitors)

One is to specialize or apply liberty in our respective field of expertise… (bold emphasis mine)

We libertarians have our work cut out for us.

In order to indicate further the dimensions of this work, it is not merely the organized bureaucracy that the libertarian has to answer; it is the individual private zealots. A day never passes without some ardent reformer or group of reformers suggesting some new government intervention, some new statist scheme to fill some alleged "need" or relieve some alleged distress. They accompany their scheme by elaborate statistics that supposedly prove the need or the distress that they want the taxpayers to relieve. So it comes about that the reputed "experts" on relief, unemployment insurance, Social Security, Medicare, subsidized housing, foreign aid, and the like are precisely the people who are advocating more relief, unemployment insurance, Social Security, Medicare, subsidized housing, foreign aid, and all the rest…

We libertarians cannot content ourselves merely with repeating pious generalities about liberty, free enterprise, and limited government. To assert and repeat these general principles is absolutely necessary, of course, either as prologue or conclusion. But if we hope to be individually or collectively effective, we must individually master a great deal of detailed knowledge, and make ourselves specialists in one or two lines, so that we can show how our libertarian principles apply in special fields, and so that we can convincingly dispute the proponents of statist schemes for public housing, farm subsidies, increased relief, bigger Social Security benefits, bigger Medicare, guaranteed incomes, bigger government spending, bigger taxation, especially more progressive income taxation, higher tariffs or import quotas, restrictions or penalties on foreign investment and foreign travel, price controls, wage controls, rent controls, interest rate controls, more laws for so-called consumer protection, and still tighter regulations and restrictions on business everywhere.

This means, among other things, that libertarians must form and maintain organizations not only to promote their broad principles — as do, for example, the Foundation for Economic Education at Irvington-on-Hudson, New York, the American Institute for Economic Research at Great Barrington, Massachusetts, and the American Economic Foundation in New York City — but to promote these principles in special fields. I am thinking, for example, of such excellent existing specialized organizations as the Citizens Foreign Aid Committee, the Economists' National Committee on Monetary Policy, the Tax Foundation, and so on.

…which should include or cover law and politics.

But, of course, liberty cannot be enlarged or preserved unless its necessity is understood in many other fields — and most notably in law and in politics.

We have to ask, for example, whether liberty, economic progress, and political stability can be preserved if we continue to allow the people on relief — the people who are mainly or solely supported by the government and who live at the expense of the taxpayers — to exercise the franchise. The great liberals of the 19th and early 20th centuries, including John Stuart Mill and A.V. Dicey, expressed the most serious misgivings on this point.

Second is to focus on inflation, as all interventionism starts and ends with inflationism… (italics original, bold mine)

This issue has the inherent advantage that it can be made clear and simple because fundamentally it is clear and simple. All inflation is government made. All inflation is the result of increasing the quantity of money and credit; and the cure is simply to halt the increase.

If libertarians lose on the inflation issue, they are threatened with the loss of every other issue. If libertarians could win the inflation issue, they could come close to winning everything else. If they could succeed in halting the increase in the quantity of money, it would be because they could halt the chronic deficits that force this increase. If they could halt these chronic deficits, it would be because they had halted the rapid increase in welfare spending and all the socialistic schemes that are dependent on welfare spending. If they could halt the constant increase in spending, they could halt the constant increase in government power.

Well this blog is has both contents. The truth will set us free.

Quote of the Day: A Greek Reprieve

The tragedy of Greece, and much of the rest of Europe, is that it overborrowed during the euro's first decade to finance a higher standard of living than it could afford. Now the debtors have to adjust.

The best way to do so is with supply-side reforms in taxes, pensions and labor markets that will lure investment and make Europe's economies more competitive. They need austerity for government but growth for the private economy. Without that, the Greek reprieve will be merely another opportunity lost.

That’s from the Editorial of the Wall Street Journal

China’s Property Prices Fall, Mixed Signals on Stimulus from Chinese Authorities

Markets are in a state of bacchanalia in celebration of the pro-austerity pro-bailout parties in Greece.

Bad news is good news even in China.

China property markets remains stuck in a muck.

A fresh report from Bloomberg,

China’s home values fell in a record 54 of 70 cities tracked by the government in May as developers cut prices to boost sales amid housing curbs.

The eastern city of Wenzhou led declines with a 14 percent slump in values from a year earlier, while Beijing and Shanghai recorded losses of as much as 1.6 percent, according to data released by the statistics bureau today.

China has pledged to maintain its curbs on the housing market even as economic growth is slowing, prompting the central bank to cut borrowing costs for the first time since 2008 on June 7. The Housing Ministry said this month that China will steadfastly continue with its property curbs that have so far included higher down payments and restrictions on the number of homes being bought.

Another report from Bloomberg said that China won’t engage in the same degree of stimulus as she had in 2009.

Premier Wen Jiabao has an unspoken message to his Group of 20 counterparts in Mexico today: This time, don’t count on a growth bailout from China.

In the depths of the 2008 credit crunch, Wen’s 4 trillion yuan ($586 billion) fiscal injection over two years and 17.6 trillion yuan credit surge helped prop up the global economy. In China, it fueled a property bubble, stoked inflation and amassed bad debts that Fitch Ratings says weakened the banking system…

China has accelerated approvals for wind farms, hydropower plants, airports and steel mills endorsed in its five-year plan through 2015. The government released 66 billion yuan in funding for 2.3 million low-cost houses, and will allocate a 26.5 billion yuan subsidy for eco-friendly household appliances and 6 billion yuan to stimulate sales of energy-efficient vehicles.

Policy makers have relaxed lending rules for banks and expanded loans for first-home buyers to try to support the property market without fueling the speculation that drove up house prices in 2009.

While China’s equity benchmark seems to have partaken in today’s revelry, mixed signals from China’s political authorities don’t seem encouraging.

I guess the actions in the financial markets over the next few weeks should give us a better picture.

Top 10 Alcoholic US Presidents: President Obama Tops the List

From the Top Ten List (hat tip LewRockwell.com)

Many US Presidents have a colourful past. Many of the Presidents on the list are/were alcoholics and took pride in their drinking habits. This article identifies them and who they are/were.

1. Barack Obama:

A 2010 news report surfaced surrounding Barack Obama’s drinking problem. The Daily Mail reported that the doctor recommended the President stop drinking excessively and stop smoking. This recommendation came after Obama’s cholesterol levels were up to borderline high.

2. George W. Bush:

Bush was no saint in the 1960s and 70s. Bush even admitted to substance abuse under the age of 40. He described this period as nomadic and irresponsible youth. This all occurred before he made a religious conversion and was enlightened by Billy Graham.

The rest in the top 10 alcoholic list:

3. Richard Nixon

4. Martin van Buren

5. Ulysses Grant

6. Franklin Pierce

7. James Buchanan

8. Franklin D. Roosevelt

9. William Taft

10. John Adams

Read them here.

That’s the top 10, which could mean that many others were likely drinkers too.

Ex- President Warren Harding during the Prohibition era drank bootleg whiskey which he also gave out to his guests. Talk about the highest executive of the land defying stupid arbitrary regulations.

Better drink than intervene. To President Obama, Bush and the rest of the political alcoholics, Cheers!

Video: Murray Rothbard on Understanding Libertarianism

(hat tip Bob Wenzel)

Surprise, Manny Pacquiao is Human

Veteran sport analyst and commentator Ronnie Nathanielsz finally awakens to reality and asked the right question “Is Pacquiao Slowing Down”

Mr. Nathanielsz at yahoo.com

As we cautioned some years ago, the late nights, the drinking and gambling would eventually take its toll on Pacquiao's physical condition and when the effects of abuse of a person's body and the effects of dissipation set in, it often happens abruptly.

A careful review of the fight tape shows Pacquiao has lost a split second in terms of speed, which both Arum and trainer Freddie Roach long pointed to as a key factor in Pacquiao's arsenal which effectively accentuated his power.

"Speed kills" was what Arum pointed to before Pacquiao pulverized De La Hoya that saw him quit on his stool at the end of the seventh round.

That speed has diminished as Pacquiao nears his 34^th birthday on December 17, and as we assess his diminishing assets of speed and devastating power we need to accept the reality that the passing of the summers inevitably takes its toll on even the finest, relentlessly hardworking athlete who walked through the doors of Roach's Wild Card Gym in Los Angeles in the first week of June 2001, eleven long years ago. The innumerable fights, the punches he has taken, the burdens of training and the demands on his time as a congressman, a crossover superstar, a TV personality and a caring human being not to mention his former wild and wooly ways have surely taken their toll and its time we admit it, although such an admission doesn't mitigate the high crime committed in Las Vegas last June 9.

Let us put in a simple way: Contrary to popular expectations, Manny Pacquiao is just human. Yes read my lips, human. Mortal. Not superman. Yes, he susceptible to physiological ageing as anyone else.

Even if Mr. Pacquiao did away with gambling, drinking or late night escapades during his early years, unless technology will save the day, age will function as Manny’s neutralizing factor. This exempts no one, not even priests, monks or other vice free celibates.

You can go to the Boxing Hall of Fame and examine one by one and determine the median, if not the average age, when these former boxing legends had their career inflection point or when they retired.

That’s where the legendary Manny Pacquiao is today.

In the past, most of Pacquiao’s scintillating or brilliant victories came at the expense of OLDER boxers as noted I here. That cycle has turned.

Mr. Pacquiao will now wear the shoes of his former older opponents as most of his contemporaries have hanged up their gloves. So he will be faced with YOUNGER boxers even if he wins against Tim Bradley in a return bout.

The point is the more Pacquiao fights, the lesser the chances of his victory. Of course, this comes in the condition that he duels with younger foes with world class caliber.

And if he insist on staying on the ring, we should expect that after 3-4 more bouts (assuming 2 fights a year), the chances of losing badly (by KO or TKO) will become very significant. And that's when reality will sink in to him (that's if he remains stubborn to pursue more ring engagements)

So while relative age matter, a boxer’s career cycle has even more impact.

In economics, this is merely called the law of diminishing returns.

The law of diminishing returns based on the physiological ageing process has brought upon the twilight of Mr. Pacquiao’s boxing career.

Truth hurts. But that’s how nature works.

Deal with it.

Shelve the Greece Moment; Greeks are Pro-Austerity After All

We had been repeatedly told (if not lied to) by media and neoliberals that Greeks has been anti-bailout.

The election nears conclusion and the results run opposite to what has been bruited.

From Bloomberg,

New Democracy won 130 seats in the 300-seat parliament, according to Interior Ministry projections with almost 90 percent of the vote counted. Pasok, which has alternated in power with New Democracy over the past four decades, won 33 seats, enough to forge a coalition that backs the creditors’ austerity demands.

Syriza Demands

Syriza matched its second-place ranking of last month by stepping up demands to abandon the fiscal-tightening program.

Alexis Tsipras, the head of eight-year-old Syriza, had vowed to keep Greece in the euro while winning concessions on the rescue terms from European leaders including German Chancellor Angela Merkel. He said New Democracy and Pasok, which united last year to back further fiscal tightening by a caretaker government, had “lowered the Greek flag and surrendered it to Angela Merkel.”

Tsipras signaled yesterday that Syriza won’t join a government with New Democracy and Pasok, saying his faction “will be present in all developments as the main voice of the anti-bailout vote in Greece.”

With 166 out of 300 or a 55% vote (New Democracy and Pasok) for the pro-austerity camp, reality finally trumped fiction. The victory cannot be considered as marginal in race among about 8 political parties, namely, New Democracy, Syriza, Pasok Party, Independent Greeks, Golden Dawn, Democratic Left, Communist Party and Ecologist Greens

This squares with accounts of capital flight and resistance to pay taxes (mostly in reaction fears over a Greece exit) which implied that Greeks did not want to exit the EU. This has also been consistent with earlier polls which indicated that a vast majority of Greeks wanted to remain part of the EU.

Demonstrated preference prevails over statist canard.

Only in the eyes of neoliberals and rabid inflationistas, who salivate for massive devaluation as panacea to social ills, has reality been skewed. So there is no Greece moment for now.

The Greece pro-austerity victory does not diminish the crisis. As earlier explained, Greece in or out of the EU will mean inflationism. The difference lies on who will do the inflating. What the pro-austerity victory does is to simply buy off time with the ECB functioning as the main bridge financier, but whose costs will be borne mostly by the Germans overtime. For as long as strong parasitical relationships remain in place, and without real reforms, this crisis will continue.

Greece will now form a government. The ECB should be expected to unveil another region-wide monetary rescue program and perhaps cut interest rates. One thorn has been temporarily taken out. The next is to wait for the announcement of concrete measures from major central banks not limited to the ECB.

With fears of an exit diminished, capital flight in the crisis affected EU nations will likely ease. This would have an impact on the monetary systems of many economies who functioned as shock absorbers. Volatility remains.

Greece’s real reform must be made through economic freedom, not from the illusion of having to turn economic knobs and shower money to the public from helicopters as elixir to economic woes as recommended by experts trying to get social plaudits.

What to Expect from a Greece Moment

The economist must deal with doctrines, and not with men. It is for him to critique errant doctrine; it is not his charge to uncover the personal motives behind heterodoxy. The economist must face his opponents under the fictitious assumption that they are guided by objective considerations alone. It is irrelevant whether the advocate of a false notion acts in good or bad faith; what matters is if the stated notion is true or false. It is the charge of others to reveal corruption and enlighten the public concerning the same Ludwig von Mises, Memoirs p.40

For some, today’s Greece elections serve as the defining ‘Greece moment’ of the Euro crisis. This would seem like a paradise for the advocates of drachmaisation or the return to the local currency, drachma which enables domestic governments to inflate the system.

Yet whether Greece decides to stay within, or departs from the EU, there won’t likely be significant changes in the dominant policies espoused by policymakers in addressing this crisis.

Inflationistas have been drooling for the aggressive use of monetary inflation as the easy way out of the crisis.

The difference would be that of the policy responses by global authorities as consequence of the political choice made by Greeks.

Uncertainty from the resultant political actions will establish the feedback loop between policy responses to the market’s reaction and market’s reaction to policy responses. That’s why policymakers have incessantly talking about erecting firewalls. Spain’s recent bailout has reportedly been predicated against contagion risks[1] from today’s election.

Utopian False Choice

Inflationistas give us a proposition based on a false choice/ false dilemma[2], analyst John Mauldin[3], a populist, gives a good example

Europe is down to two choices. Either allow the eurozone to break up or go for a full fiscal union with central budget controls. The latter option ultimately means eurobonds and a central taxing authority.

If only the world have been that simple where people think alike, move and act alike and economies are mechanized that can be switched on and off or modulated like temperature gauge of an air conditioning unit. Or that people’s actions can be captured in aggregate numbers.

Yet if this is true, then we won’t be having today’s crisis at all.

As the great F.A. Hayek once warned against utopian thinking[4]

it is probably no exaggeration to say that economics developed mainly as the outcome of the investigation and refutation of successive Utopian proposals—if by ‘Utopian’ we mean proposals for the improvement of undesirable effects of the existing system, based upon a complete disregard of those forces which actually enabled it to work.

The false dilemma presented to us fails to take to account the micro conditions of what plagues the EU crisis affected nations.

This vignette of the Greece government, which has been drawn by a Greek public servant and labeled as macaroni, which I earlier posted on my blog[5], has illustrative been of the anatomy of the Europe’s crisis.

The public servant Mr. Panagiotis Karkatsoulis, who works in the Greek Ministry of Administrative Reform and e-Governance and teaches at the National School of Public Administration, has partly been accurate in the dissection of the origins of crisis, particularly, “More than 30 years of scant coordination has resulted in a morass of contradictory rules and a lack of legal clarity” and “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”.

So Europe’s fundamental problems can be summarized into the following: mishmash of ambiguous, unenforceable and conflicting arbitrary rules and regulations, bloated bureaucracy, unsustainable welfare state, obscure property rights, politically restrained markets through various interventionist policies and high tax rates[6], and a public sector far larger than the private sector, which has been draining away resources from the private sector, as evidenced by Greece’s consumption economy despite relative lower nominal wages or earnings[7] compared to other developed EU nations. As a side note, the perceived or expected cost of labor has been higher in most crisis affected nations in Europe due to stringent labor regulations and bubble policies[8].

In short, Greece’s economy has survived on a parasitical relationship where unproductive sectors have essentially been draining out resources from the depleted hosts.

Devaluation, thus, will not solve the problem of SOLVENCY, PRODUCTIVITY and COMPETITIVENESS as inflation only destroys real savings and extinguishes purchasing power.

Greece’s problem has not been prompted for by rigidity in wages emanating from market forces, but from the rigidity of her incumbent POLITICAL system. Politics simply won’t allow markets to do what the market does best. And obsession to politics is the price paid through a crisis.

As previously discussed, accelerating capital flight has been spawned by the sustained barrage for the siren song of the devaluation elixir as advocated by the political order and their Keynesian protégés, most of whom ironically are residents outside these crisis affected nations.

It’s easy to make recommendations that don’t affect one’s interests or where errant endorsements don’t have a direct personal impact.

The capital flight in the crisis affected EU nations has accounted for as symptoms of savers and creditors who seek refuge out of their nations (again to preserve savings) as well as risks of a banking collapse, while debtors have practically deferred on making payments, possibly in anticipation that their debts would be best paid on a devalued currency.

Also capital controls[9] from the elevated risk of a potential exit has likely been seen as a consequential threat.

All these, including tax increases, negative interest rates, price controls, inflationism and various regulatory proscriptions, are financial repression measures undertaken by desperate governments and endorsed by their institutional apologists who seek to persecute and expropriate assets of their private sector constituents in order to sustain the privileges of the political elite.

Add to these the rising incidence of protectionism[10] which mostly emanated from developed nations, particularly the EU.

So Keynesian (and Fisherian) snake oil prescriptions has essentially backfired or produced a series of unintended consequences. Aside from capital flight, falling tax receipts (including Italy[11]) and a breakdown of trade has been intensifying the crisis[12].

Also fiscal and political union naively extends the problem of the tenuous parasitical relationship. Eventually new hosts or EU’s creditor nations as Germany, Finland, Netherland and the others will also get drained by such unproductive and unsustainable redistributive relationships.

Fund manager John Hussman makes a great analogy of mainstream’s foolish ideas which he analogizes as the “WarrenBonds”[13],

This is like 9 broke guys walking up to Warren Buffett and proposing that they all get together so each of them can issue "Warrenbonds." About 90% of the group would agree on the wisdom of that idea, and Warren would be criticized as a "holdout" to the success of the plan. You'd have 9 guys issuing press releases on their "general agreement" about the concept, and in his weaker moments, Buffett might even offer to "study" the proposal. But Buffett would never agree unless he could impose spending austerity and nearly complete authority over the budgets of those 9 guys. None of them would be willing to give up that much sovereignty, so the idea would never get off the ground. Without major steps toward fiscal union involving a substantial loss of national sovereignty, the same is true for Eurobonds.

Even if 9 broke guys accedes to give up on their sovereignty, for as long as the structural system of parasitical relationship remains, even Warren Buffett will see his resources dwindle and will go bankrupt.

In short, all sorts of proposed and implemented bailout mechanisms—banking union, Eurobonds, EU regional deposit guarantee schemes, European Stability Mechanism and or the European Financial Stability Fund (“EFSF”), Securities Markets Programme (SMP), Long Term Refinancing Operations (LTRO) and Target2—are essentially transfers of resources from productive to unproductive nations, which ensures capital consumption and the eventual demise of the Union.

Of course what exponents of inflationism via devaluation don’t see or refuses to see are that there are other practical market based options such as outright default or restructuring and ‘shock liberalization’[14] as coined by University of Chicago Professor John Cochrane, viz., liberalize economy, allow banks to fail, reduce government spending (by cutting down the bureaucracy and repealing unnecessary regulations), reduce tax rates and sell state assets or privatization.

Whatever the outcome of today’s election, the crisis will continue to linger and will most likely fester for as long as solvency, productivity and competitiveness issues will not addressed by giving the private sector a bigger hand.

Exploring the Greece Moment

A Greece vote to stay within the EU will likely have concerted efforts by the European Central Bank (ECB) to reflate the system backed by some superficial ‘austerity’ policies. This will be another attempt to delay the day of reckoning.

This will likely another incite short term upswing for the markets but eventually will wear off, as with all the rest.

In short, boom bust cycles until the grand finale: defaults either by massive inflation (which likely brings the end of the euro experiment) or by outright default (disunion may or may not happen).

A Greece vote out of the EU to may spell interim trouble for the global markets, but this would likely prompt central banks to collaborate by massively inflating the system. So volatility can swing fiercely from downside to upside and vice versa, depending on how large these actions will be.

I would make another guess. Under the conditions where global central banks steps on the proverbial pedal to the metal, the RISK ON RISK OFF environment will probably transition to a stagflationary environment[15] (slow economic growth, high unemployment but also high consumer price inflation).

Again this will be conditional or mainly dependent on the scale or degree of actions which is something cannot be foreseen. I have to admit I don’t have telephatic powers that would allow me to read the minds of central bankers.

Yet under a stagflationary setting, market’s attention may likely be focused on commodities as inflation hedges.

And that’s where I’d be.

---

[1] Bloomberg.com Euro Bloc Faces Greek Vote Giving First Spanish Test, June 11, 2012

[2] Wikipedia.org False dilemma

[3] Mauldin John MAULDIN: The 'Bang!' Moment Is Here Businessinsider.com, June 16, 2012

[4] Hayek Friedrich von Four History And Politics The Trend Of Economic Thinking p.15 libertarianismo.org

[5] See Chart of the Day: Greece’s ‘Macaroni’ Bureaucracy, June 15, 2012

[6] Wikipedia.org Tax rates of Europe

[7] Eurostat Wages and labour costs European Commission

[8] See Germany’s Competitive Advantage over Spain: Freer Labor Markets May 25, 2012

[9] See The Coming Age of Capital Controls? June 13, 2012

[10] See More Wall of Worry: Rising Accounts of Protectionism June 15, 2012

[11] See Italy’s Pro-Growth Tax Increases Backfires, June 13, 2012

[12] See Is Greece Falling into a Failed State?, May 28, 2012

[13] Hussman John P. The Reality of the Situation, May 28, 2012 Hussmanfunds.com

[14] Cochrane John H. Euro explosion, June 15, 2012

[15] Investopedia.com Stagflation

Dealing with Today’s Uncertainty: Patience is the Better Part of Valor

Highly volatile markets will be the outcome of today’s treacherous geopolitical conditions. That’s what I have been saying all along.

Volatility in Both Directions but with a Downside Bias

So far my perspective has been continually confirmed: volatility on both directions with a downside bias, especially for the Phisix.

A week ago, the Phisix got slammed early but the bulls worked their way to cover on the lost ground, and by the end of the week, losses had been trimmed to less than half[1].

The opposite scenario occurred this week: the Phisix had a strong opening carried mostly by the initial torrent from Spain’s bailout, but bulls eventually succumbed to the bears by the week’s close.

Technically speaking, in spite of all the volatility, the Phisix has been rangebound.

Volatility has been global.

In seeming defiance of gravity where bad news conventionally extrapolates to lower markets, today, bad news IS good news.

It is ironic to see central bankers scream for blood[2], yet global equity markets trekked higher. That’s because market participants have been conditioned to the Bernanke Put or expectations that central bankers, led by the US Federal Reserve, will like a knight in shining armor, ride to the rescue.

News of the $125 billion Spanish bailout prompted for a one day euphoria which quickly faded. It was evident that markets saw through the flaws of the proposed bailout[3]. However as the week progressed, the spate of bad news gave way to intensifying speculations, which has been further fuelled by promises[4] of renewed interventions by central bankers.

Except for ASEAN bourses which posted mixed showing, major global indices registered modest to significant gains over the week.

China’s Loan Growth and Chart Patterns

China’s loans unexpectedly jumped in May, according to news reports[5]. This has prompted the Shanghai index to post a modest advance of 1.13% over the week.

Most of the growth in China’s credit markets seems to have been driven by State Owned Enterprises (SOE). This means that China may have embarked on a furtive state based stimulus rather than a nationwide program.

Unfortunately SOE’s which have played a prominent role in the expansion of China’s highly fragile shadow banking system and which has already been encumbered by questionable loans, may have limited actions for further expansion. But of course, given that SOEs are government owned firms, restrictions may be circumvented to advance political goals.

Yet given the moderate gains exhibited by China’s equity markets on such development, investors must have remained cynical to the sustainability of China’s bailout policies.

Nevertheless surging bond yields have not posed as a burden to global stock markets in heavy anticipation of central bank steroids. In spite of Spain’s bailout, Spain and Italy’s bond yields soared[6].

A week’s action cannot be read as a sustainable trend, thus we must continue to observe how prices in various markets will react to China, as well as to the developments in Europe, particularly the Greece moment and in the US.

Many have crowed about the bullish potentials of the US stock market through the reverse head and shoulder pattern, which they think may have a spillover on the Philippines.

As I pointed out in the past, patterns don’t make prices, people’s actions do.

It will be actions of central bankers that will determine the directions of the marketplace rather than chart patterns. I pointed out last year that the death cross in the US S&P 500 in August of 2011 signified a false alarm[7] (false positive error) and was eventually validated four months after[8].

So far, US money supply M2 seem not supportive of a sustained rise by the S&P 500 owing possibly to the US Federal Reserve’s offsetting of the “flight to safety” inflows coming from the EU and from the closure or winding up operations of Operation Twist as discussed last week[9].

It would likely take the FED another ramping up of their balance sheet expansion to rekindle the monetary accommodation.

So the bullish chart pattern may play out its trend if the Fed will ease further, otherwise, the chart pattern will likely fail.

Buy the Rumor, Sell the News

Global financial markets have relied heavily on the “buy the rumor” from central banking rescues.

These are likely to have two short to medium term outcomes.

One, if central bankers FAIL to deliver in accordance to market’s expectations, then we will likely see another huge bout of downside volatility in global equity markets.

The Phisix, whom has not been immune to contagion, may breakdown its recent support level at 4,863, a level which represents nearly 10% from the peak. But a breakdown may not necessary lead to a bear market.

Yet such market turmoil may likely serve as fulcrum for the next batch of intensive interventions. Nevertheless, under such conditions, it would be best to wait and see until volatilities in the financial markets (stocks, commodities, bonds) subside, before considering to reposition.

On the other hand, if markets may be temporarily satisfied with REAL actions of central banks (e.g. $1 trillion bailout) then we should see a minor or a slight “sell on news”. But this should be seen as opportunities to RE-ENTER the markets incrementally.

Of course, the direction of gold prices, as well as, prices of general commodities, will serve as crucial indicators in determining the strength of the trend.

While gold’s price trend has significantly improved, there have been little signs of progress in the oil market (WTIC) and the general commodities (CRB).

Finally as caveat, I would like to reiterate that should markets continue to rise in ABSENCE of REAL actions from central bankers, we cannot rule out that the markets could fall like a house of cards (fat tail risks) or what I would call a Dr. Marc Faber event[10].

The market’s deep addiction to stimulus will eventually seek REAL stimulus more than just promises or in central bank lingo, signalling channel. Reversal of expectations can become violent.

As a side note, I find it ridiculous for people especially so-called experts to assert that today’s problems have been caused by lack of confidence, as if confidence has been randomly determined, and not in reaction to changes in the environment or in response to interactions with people. People have been not confident with the markets because of the persistent problem of insolvency and price artificiality and price distortions from political meddling. It’s a severe mistake to interpret effects as THE cause.

Bottom line: Global financial markets, including the Phisix, remains in a state of limbo. Uncertainty still governs. Under current conditions, the best guiding principle would be; patience is the better part of valor.

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[1] See Expect a Continuation of the Risk ON-Risk OFF Environment, June 11, 2012

[2] See Central Bankers Talk Doom, Markets Surge, June 16, 2012

[3] See Why Spain’s Bailout may NOT Work June 12, 2012

[4] See Talk Therapy boost US Markets, June 15, 2012

[5] See China’s New Loans Unexpectedly Surged in May, June 12, 2012

[6] Danske Bank, All eyes on Greek election June 15, 2012 Weekly Focus

[7] See How Reliable is the S&P’s ‘Death Cross’ Pattern?, August 14, 2011

[8] See US Equity Markets: From Death Cross to the Golden Cross, December 31, 2011

[9] See Expect a Continuation of the Risk ON-Risk OFF Environment, June 11, 2012

[10] See Dr. Marc Faber Warns of 1987 Crash if No QE 3.0, May 11, 2012

Quote of the Day: Failed and Failing States

Professor Michael S. Rozeff at the lewrockwell.com writes,

I like to use the ammunition provided by the statists themselves (or those who take states for granted) that discredits their own statism. For example, there is the "Failed States Index".

How many states are there in the world, and how many are failures or leaning toward failure, according to the people who devised this index? They assess 177 states. Of these, 124 are in the troubled categories (ALERT and WARNING). That's 70 percent! Here we have a great experiment at one point in time. We have 177 trials of the state as a way to organize, and we have 124 failed or failing or approaching failure. Among the Moderate and Sustainable categories (non-failed states) we have such wonderful states as Greece and Spain.

If instead we look at the performance of states across time, a century or two, we find huge and endemic failures almost everywhere we look in major countries: Russia, Japan, Germany, Italy, France, China, many eastern European countries, and even the United States (if we count, for example, the civil war as evidence of a gigantic failure). The U.S. has held together by force, not law. Is that what a non-failed state is supposed to mean? Many European states have failed time and again, as several world wars and hyperinflations demonstrate. Their current financial manipulations are new evidence of their failure, as are their high rates of unemployment.

70% of the world nations are considered as at the risk of becoming a ‘failed state’. That’s a great measure of political success.

Prof. Rozeff rightly points out that the today’s crisis affected EU nations have been categorized as moderate (non-failed states) which has not accurately reflect been on the failed state index (as this was based on 2011)

Yet, the increasingly dysfunctional political institutions of Greece would almost qualify her as a ‘failed state’.

As I recently wrote,

Instead, what a “failed state” means is that there is no standing government or that imposed government will mostly likely be ignored by society or what could be called “stateless society”.

I am not sure if Greece will technically become a failed state.

What is certain is that we are witnessing the accelerating collapse of a parasitical relationship anchored upon the spendthrift welfare and bureaucratic state.

Nonetheless this should be good news as Greece’s political economy would be compelled by nature to face economic realities; regardless of the outcome of today’s elections.

Oh by the way, despite all the cheering, drum beating and exaltation by media over the supposed political progress in the Philippines, the nation remains a candidate of becoming a failed state.

The Philippines has been ranked 51^st and classified as in “warning” conditions.

I’d say that the Philippines has more characteristics of a failed state: 40+% of the domestic economy are considered as informal. OFWs, whom has been labeled as heroes, are in reality symptoms government failure due to the lack of economic opportunities and depressed standards of living. Yet these combined forces which operates outside of government spectrum, has been delivering the real progress, but whose credit has been usurped by politicians and by mainstream media and institutions.

Yes, there have marginal improvements from 2010, but this could be seen on a relative perspective—perhaps more states have been performing far worst than the Philippines than the Philippines doing better.

Information Age Education: Student Focused Online Platforms

The information age will massively disrupt (20th century classroom mass based) education as we know of it today.

Hedge fund manager Andy Kessler in his interview with Artificial Intelligence expert Sebastian Thrun, published at the Wall Street Journal, gives us some clues. (bold highlight mine)

Yet there is one project he's happy to talk about. Frustrated that his (and fellow Googler Peter Norvig's) Stanford artificial intelligence class only reached 200 students, they put up a website offering an online version. They got few takers. Then he mentioned the online course at a conference with 80 attendees and 80 people signed up. On a Friday, he sent an offer to the mailing list of a top AI association. On Saturday morning he had 3,000 sign-ups—by Monday morning, 14,000.

In the midst of this, there was a slight hitch, Mr. Thrun says. "I had forgotten to tell Stanford about it. There was my authority problem. Stanford said 'If you give the same exams and the same certificate of completion [as Stanford does], then you are really messing with what certificates really are. People are going to go out with the certificates and ask for admission [at the university] and how do we even know who they really are?' And I said: I. Don't. Care."

In the end, there were 160,000 people signed up, from every country in the world, he says, except North Korea. Rather than tape boring lectures, the professors asked students to solve problems and then the next course video would discuss solutions. Mr. Thrun broke the rules again. Twenty-three thousand people finished the course. Of his 200 Stanford students, 30 attended lectures and the other 170 took it online. The top 410 performers on exams were online students. The first Stanford student was No. 411.

Mr. Thrun's cost was basically $1 per student per class. That's on the order of 1,000 times less per pupil than for a K-12 or a college education—way more than the rule of thumb in Silicon Valley that you need a 10 times cost advantage to drive change.

So Mr. Thrun set up a company, Udacity, that joins many other companies attacking the problem of how to deliver the optimal online education. "What I see is democratizing education will change everything," he says. "I have an unbelievable passion about this. We will reach students that have never been reached. I can give my love of learning to other people. I've stumbled into the most amazing Wonderland. I've taken the red pill and seen how deep Wonderland is."

"But Wonderland is also crazy!" I interrupt.

"So?"

Ah, another Thrun project that can radically disrupt the old way of doing things. "But isn't that exactly what we should be doing? I'm going part-time at Google to pursue this. I really care. Isn't this the American history? Can't you pinpoint almost everything that happened back to some technological breakthrough?" Indeed, this is going to disrupt public schools and teachers unions and universities and tenured professors and so on, Mr. Thrun effectively interjects: "The dialogue always focuses on what's going to happen to the institutions. I'm totally siding with the students."

I ask why he always takes on these quantum changes instead of trying something incremental. "That's what Google taught me. Aim higher. Udacity is my playground—to radically experiment and find out. I've seen the light."

Education in the information age will see a deepening trend towards personalized (demassified) learning, will focus on job related skill building (which does away with useless subjects aimed at indoctrination) and on increasing specialization.

Continues innovation, competition and noncontiguous platform which should cover the entire world (in terms of providers, educators and students), will become important forces in driving down the cost, or the “democratization” of education.

Finally, job hiring based on the education credential system model will be challenged, if not transformed to meet the new digital realities.

Explore Sebastian Thrun's Meet Udacity website here.