Why has the Phisix Shined?

Negative Real Rates and the Business Cycle

Negative real interest (91 day T-Bill rate 2.174%, May 2012 Inflation rate 2.9% from the latest BSP data) may continue to whet the appetite of local investors to speculate or gamble** on the stock markets even when confronted by the increasing risks of economic and earnings based downswing.

By punishing savers and rewarding borrowers and speculators, excessive risk taking or what people call as “greed” are also symptoms of the distortions of people’s incentives, behavior and ethical values through the politicization of interest rate markets.

A brewing property bubble[1] prompted for by the negative real rates appear to be confirming my prognosis of the business cycle in motion, as bank loans to the industry has been ballooning.

From the Bangko Sentral ng Pilipinas[2],

As of end-March 2012, the combined exposure to the real estate sector of universal and commercial banks (U/KBs) and thrift banks (TBs) reached its highest level yet at P538.1 billion. This was up by 3.8 percent from previous quarter’s P518.6 billion and by 21.0 percent from last year’s P444.9 billion. Additional exposure during the quarter came from real estate loans (RELs), which grew by 3.6 percent (P18.3 billion) to P524.1 billion, and investments in securities issued by real estate companies which grew by 9.9 percent (P1.3 billion) to P14.0 billion.

Yet rose-colored glass punters think that the Philippines have become immune to external influences or that they have been ingrained with the notion that interventions would always save the day for the markets.

Such sloppy thinking needlessly exposes oneself to outsized risks.

While it may true that the Philippines may be less affected by an exogenous downturn relative to the others, this does not mean that the domestic stock markets won’t factor them.

Major economic downturns or recessions are manifestations of violent market based adjustments of malinvestments borne out of earlier monetary and fiscal policies and from other forms of government interventions on the marketplace. They represent policy-induced boom bust cycles.

As the great dean of Austrian economics Professor Murray N. Rothbard explained[3],

The inflationary boom thus leads to distortions of the pricing and production system. Prices of labor and raw materials in the capital goods industries had been bid up during the boom too high to be profitable once the consumers reassert their old consumption/investment preferences. The "depression" is then seen as the necessary and healthy phase by which the market economy sloughs off and liquidates the unsound, uneconomic investments of the boom, and reestablishes those proportions between consumption and investment that are truly desired by the consumers. The depression is the painful but necessary process by which the free market sloughs off the excesses and errors of the boom and reestablishes the market economy in its function of efficient service to the mass of consumers. Since prices of factors of production have been bid too high in the boom, this means that prices of labor and goods in these capital goods industries must be allowed to fall until proper market relations are resumed.

The 2007-2008 bear market should be a reminder. The Philippines escaped recession, earnings were hardly scathed, but prices of local stocks more than halved. That’s mainly because of contagion. Yet conventional analysis cannot explain this.

True, today is not 2008. Then, foreign money dominated trading activities. For this cycle, local participants have taken over the leadership role. Nonetheless the share of foreign money remains substantial in terms of trading activities and equity ownership.

So writing off the contagion risk could be hazardous to one’s portfolio.

Foreign Money: Neither Yield Chasing nor Capital Flight

I have also said in the past that capital flight[4] from economies enduring monetary inflation may likely bolster equities of local and of the ASEAN region.

Yield chasing may be a euphemism for capital flight when applied to foreign money.

The Phisix posted a huge jump in net foreign inflows last Friday.

But this had been due to the special block sales of San Miguel Corporation shares which news report attribute to the sale by Eduardo “Danding” Cojuangco Jr. to his trusted allies led by Ramon S. Ang for P37 billion[5].

With a 28 billion pesos NET foreign buying on Friday, this either means that part of Ramon Ang’s allies have been foreign entities or that these ‘allies’ are locally owned corporations with foreign addresses. The human factor behind numbers cannot be explained by statistics alone.

Besides should a capital flight dynamic take hold I believe that this will be a regional phenomenon for the simple reason that no single ASEAN markets can absorb the potentially huge inflows from developed economies.

The Philippines lags the region in terms of traded value and market capitalization. So we are likely to be the least preferred by huge foreign funds in search of safe haven or of greater yields based on their volume.

When viewed from the Asian perspective[6], the Philippine Stock Exchange ranked SECOND to the SMALLEST in terms of traded value (left window). Relative to our ASEAN peers, the PSE is the least liquid.

And similarly the Philippines have been the SECOND to the SMALLEST in terms of market cap in Asia (right window). The relative lack of market depth implies of quantity (lesser number of publicly listed companies) or quality issues (smaller market cap companies listed) or both.

The shortcomings from the lack of market depth and of the dearth of liquidity[7] (the degree of tradability) subjects foreign investors to greater volatility risks[8].

To analogize, the Philippines is like a third tier issue on a stock market exchange.

True, there will always be a distinct story to tell for every political economy, but market exposures by foreign funds are driven by manifold market parameters as liquidity, market depth, transaction costs, hurdle rates, regulations on capital movements and many other factors.

Considering the major constraints on liquidity and market depth issues, fund managers are likely to go for the more liquid and for markets with greater depth as the priority. However they could also possibly deploy a smaller degree of risk exposures on high beta[9] or more volatile issues.

Bring Home the Bacon

I still harbor the suspicion that the local markets have recently been propped up for some unstated (perhaps political) reasons.

The recent strength of the domestic market could be interpreted as having been based on politically colored rationalization[10]: Near record highs shows that the administration successfully delivered the international investment ‘bacon’! (yeah, bring home the bacon are done deals cooked earlier and formalized through Photo Ops)

Perhaps these may have been meant to justify the recent overseas junkets or to generate more approval ratings in preparation for the coming national elections.

So far, the strength of the Phisix seems less about yield chasing from foreign money but more of yield chasing and speculation from domestic investors seduced by the allure of quick buck from a negative interest rate regime. Also I think that current markets have partly been propped up perhaps for political reasons.

Anyway, market sentiment has shown belated signs of improvements along with the rise of the Phisix. The spread of the weekly advance-decline ratio has been widening in favor of the bulls. This extrapolates to a favourable short term momentum.

Also the Phisix is likely to surf on the global ‘EU Summit honeymoon’ sentiment, as well as on the momentum from an imminent RECORD breakout.

Whether this breakaway run will be sustainable remains unclear as global markets will remain volatile on both directions.

The Phisix may continue to outperform but will be subject to the ebbs and flows of political and economic developments abroad.

Avoid from the belief that the Phisix can decouple. We need to operate on proof and theory rather than from faith. Deductive logic says that in today’s globalization, the odds for sustainable divergence seem remote.

Also we need further evidence that in absence of central bank interventions, global economies are on a path to recovery.

Evidence has not been reinforcing this yet.

In fact we have the reverse, that markets are being bolstered by bailouts and pledges even as global economic momentum grinds nearly to a halt.

So do take a cautious or defensive stance.

**In essence stock markets are not about gambling. However the stock market may be transformed into gambling when government interventions distort the pricing efficiency and tilts the benefits to patrons and friends. As I previously wrote[11],

government interventions can tilt or distort any markets away far from its price signaling efficiency. This is where the level of the playing field or the distribution share of the odds are skewed to favor one party over the others, mostly the recipients or beneficiaries from these interventions. Where the governments assume the role as the HOUSE and the beneficiaries as the DEALERS, then all other participants operate as PLAYERS, hence your basic description of a gambling casino.

---

[1] See The Upcoming Boom In The Philippine Property Sector, September 12, 2010

[2] BSP.gov.ph Exposure to Real Estate of U/KBs & TBs Continues to Rise, June 29, 2012

[3] Rothbard Murray N Economic Depressions: Their Cause and Cure June 25, 2012 Mises.org

[4] See Will Japan’s Investments Drive the Phisix to the 10,000 levels? March 19, 2012

[5] Inquirer.net Cojuangco sells 15% SMC stake to allies June 29, 2012

[6] Asianetrading.com 2010 Exchange Statistics For Asia February 11, 2011

[7] Wikipedia.org Liquidity risks

[8] Wikipedia.org Volatility Risks

[9] Investopedia.com Beta: Know The Risk

[10] Manila Bulletin PNoy’s $2-Billion ‘Bacon’, June 8, 2012

[11] See A Primer On Stock Markets-Why It Isn’t Generally A Gambling Casino, June 18, 2009

Deeper Slump in China’s Manufacturing, Will Bad News Become Good News?

Fresh from Bloomberg,

China’s manufacturing expanded at the weakest pace this year as new orders and export demand dropped, adding to evidence the nation’s economic slowdown is deepening, a government report showed today.

The Purchasing Managers’ Index fell to 50.2 in June from 50.4 in May, the Beijing-based National Bureau of Statistics and China Federation of Logistics and Purchasing said. That compares with the 49.9 median estimate in a Bloomberg News survey of 24 economists. A reading above 50 indicates expansion.

Today’s data increase the odds Premier Wen Jiabao will introduce more stimulus to stem a deceleration in the world’s second-biggest economy that may have extended into a sixth quarter. The central bank will fine-tune economic policies in a “timely and appropriate” manner, central bank Governor Zhou Xiaochuan said on June 29.

“The weaker reading should trigger more-aggressive policy easing,” Sun Junwei, a Beijing-based economist with HSBC Holdings Plc, said before the release. “Economic growth will rebound to over 8.5 percent in the second half once these additional easing measures filter through,” she said.

Steps may include a reduction in interest rates, four cuts in banks’ reserve requirements, more fiscal spending on public works and tax cuts, according to Sun, who forecasts second- quarter economic growth may have slid to 7.8 percent from a year earlier, after slowing to 8.1 percent in the first three months of the year.

When I say bad news is good news, I am talking about the mind conditioning of the financial marketplace. Basically market participants have been programmed to expect of a Bernanke Put or automatic backstops from governments, particularly from central banks, as reflected by this statement “increase the odds Premier Wen Jiabao will introduce more stimulus”.

The problem is that China’s political authorities remains tentative towards aggressive interventions so far.

The compromise at the EU summit seems to have temporarily put a floor on the Shanghai index, last Friday. But this comes after a technical break down in spite of the repeated assurances by politicians and the media.

And one important thing that many people don’t seem to realize: rescues and bailouts policies are unsustainable, they cannot and will not be self-perpetuating.

Obamacare’s 21 New or Higher Taxes for the US economy

The Supreme Court’s upholding of Obamacare will translate to 21 new or higher taxes for the US economy.

Ryan Ellis enumerates them (hat tip Bob Wenzel)

1. Individual Mandate Excise Tax(Jan 2014)

2. Employer Mandate Tax(Jan 2014)

3. Surtax on Investment Income ($123 billion/Jan. 2013)

4. Excise Tax on Comprehensive Health Insurance Plans($32 bil/Jan 2018)

5. Hike in Medicare Payroll Tax($86.8 bil/Jan 2013)

6. Medicine Cabinet Tax($5 bil/Jan 2011)

7. HSA Withdrawal Tax Hike($1.4 bil/Jan 2011)

8. Flexible Spending Account Cap – aka“Special Needs Kids Tax”($13 bil/Jan 2013)

9. Tax on Medical Device Manufacturers($20 bil/Jan 2013)

10. Raise "Haircut" for Medical Itemized Deduction from 7.5% to 10% of AGI($15.2 bil/Jan 2013)

11. Tax on Indoor Tanning Services($2.7 billion/July 1, 2010)

12. Elimination of tax deduction for employer-provided retirement Rx drug coverage in coordination with Medicare Part D($4.5 bil/Jan 2013)

13. Blue Cross/Blue Shield Tax Hike($0.4 bil/Jan 2010)

14. Excise Tax on Charitable Hospitals(Min$/immediate)

15. Tax on Innovator Drug Companies($22.2 bil/Jan 2010)

16. Tax on Health Insurers($60.1 bil/Jan 2014)

17. $500,000 Annual Executive Compensation Limit for Health Insurance Executives($0.6 bil/Jan 2013)

18. Employer Reporting of Insurance on W-2(Min$/Jan 2011)

19. Corporate 1099-MISC Information Reporting($17.1 bil/Jan 2012)

20. “Black liquor” tax hike(Tax hike of $23.6 billion)

21. Codification of the “economic substance doctrine”(Tax hike of $4.5 billion).

Read the explanation or details here

All these will negatively impact corporate profits, business investments, employment and productivity.

Yet all these means more bureaucracy, greater government spending, MORE Fiscal DEFICITS and SURGING DEBTS.

Add Obamacare to the existing welfare, warfare and other growing spending programs, a Greece crisis seems like a destiny.

This means that the US Federal Reserve will only continue to pump massive amounts of money to system into prevent interest rate from rising. An upward trend of interest rates will jeopardize funding for all these social spending programs.

This possibly extrapolates to continuation of the US Federal Reserve as the buyer of last resort.

Put differently, inflationism will function as the lipstick on the pig for these economically unsustainable programs. One would already note that interest on debt already exceeds many spending programs. (charts from Heritage Foundation)

Sometimes you’ve got to wonder: Are these purposely designed to destroy society?

Updated to add: Since the Heritage chart embed didn't work out as I expected, I had to redo the entire post.

Video: Robert Reich on the Shocking Truth about Obamacare

An audio recording of Former Labor Secretary Robert Reich, in a talk at the University of California, Berkley on September 26th, 2007, explains of the "shocking" impact of Obamacare to the US. (hat tip Bob Wenzel).

Graphic of the Day: The Wonders of Capitalism: Dematerialization

From Marian Tupy of the Cato Institute

Dematerialization, in other words, should be welcome news for those who worry about the ostensible conflict between the growing world population on the one hand and availability of natural resources on the other hand. While opinions regarding scarcity of resources in the future differ, dematerialization will better enable our species to go on enjoying material comforts and be good stewards of our planet at the same time. That is particularly important with regard to the people in developing countries, who ought to have a chance to experience material plenty in an age of rising environmental concerns.

Maybe I am too much of an optimist, but dematerialization could also lead to a greater appreciation of capitalism. Namely, the “profit motive” can be good for the environment. No, I am not talking about dumping toxic chemicals into our rivers, which is illegal and should be prosecuted. Rather, I am talking about the natural propensity of firms to minimize inputs and maximize outputs. Take the humble soda can. According to the Aluminum Association, “In 1972… a pound of aluminum yielded 21.75 cans. Today, as a result of can-makers’ use of less metal per unit, one pound of aluminum can produce 33 cans.”

Aside from the benefits of dematerialization, consumer surpluses from the added convenience, connectivity and productivity or a better standard of living are consequences of one of capitalism’s key driving force: innovation.

The information age is bound to accelerate on the monumental transformations of innovation.

Remembering Frédéric Bastiat on his 211th Birthday

My path to libertarianism began with the great Claude Frédéric Bastiat’s masterpiece: That Which Is Seen, and That Which Is Not Seen

Thank you Mr. Bastiat. Happy Birthday! (thanks to econolog for the reminder)

Quoting Mr. Bastiat from his classic The State (1848)

The state is the great fiction through which everybody endeavors to live at the expense of everybody else.

Does China’s Special Currency Test Zone Signal the End of the Hong Kong- US Dollar Peg?

China’s government plans to open direct lending access between Hong Kong banks and China based companies through a special currency “test” zone

Reports the CNN/Financial Times

China plans to create a special zone to experiment with currency convertibility in Shenzhen, the city where it introduced key economic reforms three decades ago.

The measure will enable Hong Kong banks to lend renminbi directly to companies in Qianhai Bay -- a new economic zone on a peninsula across the water from Hong Kong -- according to Chinese state media.

Bejing will unveil the details on Friday as Hu Jintao, Chinese president, visits Hong Kong for the 15th anniversary of the handover of the city from Britain.

Analysts say the experiment could prove as critical to eventually dismantling capital controls as Deng Xiaoping's reforms were to opening China to the world.

The Qianhai experiment follows a series of steps taken by the Chinese government to move towards making the renminbi a convertible currency that analysts believe could one day vie with the US dollar for pre-eminence in global markets.

Over the past two years, Chinese companies have been allowed to settle most of their international trade in renminbi. This has provided a conduit for the currency to flow abroad for the first time in large volumes.

Foreign institutions have also been given a limited but growing array of investment options for their renminbi holdings, such as Hong Kong's dim sum bond market and a programme for buying Chinese equities.

In addition, the proposed measures includes cross listings of their respective stock exchanges.

Again from the same article,

Separately on Friday, the stock exchanges of Hong Kong, Shanghai and Shenzhen said they would create a joint venture index company to give investors access to companies listed in all three cities for the first time and boost their capital markets.

Charles Li, chief executive of the Hong Kong Exchange, said it would create its first cross-border indices by the end of the year and launch derivative products and exchange traded funds based on the indices and stocks next year.

The thrust to make the yuan convertible has widely been painted as a challenge to the US dollar standard as evidenced by this assertion “could one day vie with the US dollar for pre-eminence in global markets”.

While this is true, I would say that a more important issue could be about the insurance role played by the yuan against the growing risks of a currency crisis.

My suspicions seems to be highlighted by the latest proposal by Prof Joseph Yam, the former head of the Hong Kong Monetary Authority (HKMA) and who is one of the architects of Hong Kong-US dollar peg through a monetary board, to alter Hong Kong’s monetary system by shifting from US dollar peg towards China’s yuan or through a basket of other currencies.

Notes the BBC

When asked why he was making such a dramatic public reversal of opinion, Prof Yam told Hong Kong media it was because times had changed.

The US dollar peg had contributed to inflation and asset bubbles in Hong Kong because of the policy of quantitative easing the US Federal Reserve adopted following the global financial crisis, he said.

This direct Hong Kong-China currency “test” zone seems like an icebreaker to the inevitable end the Hong Kong dollar-US dollar peg.

As I observed in August of 2009

In my view, the Hong Kong dollar's pegged days seems numbered. And so as its existence, as the Yuan could displace it sometime in the near future.

Quote of the Day: Connecting the Dots: The System is Crumbling

Simon Black of the Sovereign Man eloquently nails it:

This week may very well go down as ‘connect the dots’ week. Things have been moving so quickly, so let’s step back briefly and review the big picture from the week’s events:

1) After weeks… months… even years of posturing and denial, Spain and Cyprus became the fourth and fifth countries to formally request aid from Europe’s bailout funds on Monday.

In doing so, these governments have officially confessed to their own insolvency and the insolvency of their respective banking systems.

Meanwhile, Slovenia’s prime minister said that his country may soon ask for a bailout. (Humorously, Slovenia’s Finance Minister denied any such plans.)

Spain’s 10-year bond yield jumped to over 7% again in response, and many Spanish banks were downgraded to junk status by Moodys.

2) Over in the US, the city of Stockton, California filed for bankruptcy this week… the largest so far, but certainly a mere drop in the proverbial bucket.

3) JP Morgan, considered to be among the few ‘good’ banks remaining in the US, conceded that the $2 billion loss they announced several weeks ago might actually be more like $9 billion.

4) The Federal Reserve reported yesterday that foreigners are reducing their holdings of US Treasuries.

5) Countries from Ukraine to Kazakstan to Turkey announced that they have purchased gold in recent months to bolster their growing reserves.

6) Chile has joined a growing list of countries that has agreed to bypass the US dollar and settle all of its trade with China in renminbi.

7) China has further announced plans to create a special zone in Shenzhen, one of its wealthiest cities, to allow full exchange and convertibility of the renminbi.

8) World banking regulators from the Bank of International Settlements to the FDIC are proposing that gold bullion be treated as a risk-free cash equivalent by commercial banks.

So… what we can see from this week’s events is:

- European governments are insolvent
- European banks are insolvent
- US governments are heading in that direction
- Even the best US banks are not as strong as believed
- Foreigners are abandoning the US dollar and seeking alternatives
- Gold is money

These events are all connected, and the trend is becoming so clear that even the most casual observers are starting to wake up.

When you connect the dots, the next steps lead to what may soon be regarded as an obvious conclusion: the system, as it exists right now, is crumbling.

No amount of self-delusion can make this go away.

Global financial markets have been ignoring these developments and seems to be desperately interpreting any political actions as having potential long term positive effects. To paraphrase novelist Anatole France if millions of people say and do a foolish thing, it is still a foolish thing.

So far it’s been about hope over reality.

The Anatomy of Rent Seeking: China Edition

Rent seeking is simply the manipulation of the social or political environment in order to obtain wealth through monopoly privileges (Wikipedia.org). Such actions usually comes in the form of subsidies, various political concessions and or regulations which works to prevent free market competition.

The following controversial article from Bloomberg (which reportedly has been censored in China, according to Zero Hedge) gives an example.

Bloomberg: (bold emphasis mine)

Xi Jinping, the man in line to be China’s next president, warned officials on a 2004 anti-graft conference call: “Rein in your spouses, children, relatives, friends and staff, and vow not to use power for personal gain.”

As Xi climbed the Communist Party ranks, his extended family expanded their business interests to include minerals, real estate and mobile-phone equipment, according to public documents compiled by Bloomberg.

Those interests include investments in companies with total assets of $376 million; an 18 percent indirect stake in a rare- earths company with $1.73 billion in assets; and a $20.2 million holding in a publicly traded technology company. The figures don’t account for liabilities and thus don’t reflect the family’s net worth.

No assets were traced to Xi, who turns 59 this month; his wife Peng Liyuan, 49, a famous People’s Liberation Army singer; or their daughter, the documents show. There is no indication Xi intervened to advance his relatives’ business transactions, or of any wrongdoing by Xi or his extended family.

While the investments are obscured from public view by multiple holding companies, government restrictions on access to company documents and in some cases online censorship, they are identified in thousands of pages of regulatory filings.

The trail also leads to a hillside villa overlooking the South China Sea in Hong Kong, with an estimated value of $31.5 million. The doorbell ringer dangles from its wires, and neighbors say the house has been empty for years. The family owns at least six other Hong Kong properties with a combined estimated value of $24.1 million.

Standing Committee

Xi has risen through the party over the past three decades, holding leadership positions in several provinces and joining the ruling Politburo Standing Committee in 2007. Along the way, he built a reputation for clean government.

He led an anti-graft campaign in the rich coastal province of Zhejiang, where he issued the “rein in” warning to officials in 2004, according to a People’s Daily publication. In Shanghai, he was brought in as party chief after a 3.7 billion- yuan ($582 million) scandal.

A 2009 cable from the U.S. Embassy in Beijing cited an acquaintance of Xi’s saying he wasn’t corrupt or driven by money. Xi was “repulsed by the all-encompassing commercialization of Chinese society, with its attendant nouveau riche, official corruption, loss of values, dignity, and self- respect,” the cable disclosed by Wikileaks said, citing the friend. Wikileaks publishes secret government documents online.

A U.S. government spokesman declined to comment on the document.

While inequality is an innate feature of the marketplace, it is even worse when political access and privilege drives these.

Again from the same Bloomberg article:

Increasing resentment over China’s most powerful families carving up the spoils of economic growth poses a challenge for the Communist Party. The income gap in urban China has widened more than in any other country in Asia over the past 20 years, according to the International Monetary Fund.

“The average Chinese person gets angry when he hears about deals where people make hundreds of millions, or even billions of dollars, by trading on political influence,” said Barry Naughton, professor of Chinese economy at the University of California, San Diego, who wasn’t referring to the Xi family specifically.

Read the rest here

Realize that when politicians and their followers peddle arguments based on “noble sounding” or “feel good policies” such as self sufficiency, nationalism, anti-foreign, currency manipulations-trade deficits, the need for political spending to generate employment (make work bias) and etc.., they are preaching of mercantilism and protectionism which tacitly promotes their interests and NOT of the consumers or of the “people”.

The ultimate beneficiaries of interventionists policies, like the above, are the powers that be.

Interventionism is the essence of rent-seeking politics or crony capitalism.

The rent seeking political economy is a universal phenomenon. The greater share of the political influences on the economy, the more economic opportunities are driven by rent seeking. This includes the Philippines. All you’ve got to do is to OPEN your eyes, use common sense and stop listening to sycophants and the institutional propaganda machines.

Politicians hardly practices on what they preach, as they are focused mainly on generating votes or approval ratings to preserve or expand their entitlements.

In the rent seeking political economy, there are many ways to skin a cat, something which the public can hardly see.

When media and politicians talk about “inequality”, like magicians, they simply are engaged in verbal manipulative framing of the public’s mindset. They deliberately shift the blame on market forces, what in essence are mainly caused by political inequality.

Wealthy Swiss Hold Cash and Gold on Fears of the Euro’s Doom

From CNBC,

If you want proof that the world’s wealthy are worried, consider this: Swiss banking clients have nearly a third of their portfolio in cash. And one in five believe the Euro will collapse.

The findings are included in a new report from LGT Group, the Austrian banking company, conducted with Austria’s Johannes Kepler University. The study found that wealthy Swiss and Austrian private-banking clients remain highly risk-averse and fearful of inflation, sovereign debt defaults and the unstable financial system.

In Switzerland, 58 percent of private banking clients have lost confidence in the financial system. Forty-four percent worry about inflation.

Fully 22 percent expect the euro zone to collapse. The number was the same for Austrian clients. Only 15 percent of Swiss and 16 percent of Austrians say the lessons have been learned from the euro crisis.

The study also said clients are reducing their diversification strategies and retreating to gold, cash and their home markets. Only a small fraction of clients are out to get better returns than the broader market.

I sympathize with the position of these affluent Swiss banking clients. The financial system has indeed been unstable and has become too dependent on political steroids

And I think that the present concerns goes beyond the Euro crisis as current woes seem multipronged: the BRICs (especially China) and the US too.

Yet geopolitical events, which has been holding the global financial markets hostage, has been very fluid and can move very swiftly and dramatically which would likely incite even more volatility in the financial markets from what we are seeing today.

Uncertainty prevails.

Markets in Risk ON mode on Easing of EU’s Debt Crisis Rules

It seems that global financial markets are in a RISK ON mode anew as EU officials come into an accord to ease debt rules.

From Bloomberg,

Euro-area leaders agreed to ease repayment rules for emergency loans to Spanish banks and relax conditions on possible help for Italy as an outflanked German Chancellor Angela Merkel gave in on expanded steps to stem the debt crisis.

After 13 1/2 hours of talks ending at 4:30 a.m. in Brussels today, leaders of the 17 euro countries dropped the requirement that governments get preferred creditor status on crisis loans to Spain’s blighted banks and opened the door to recapitalizing banks directly with bailout funds once Europe sets up a single banking supervisor.

The leaders struggled for consensus on reducing market pressure on Italy and Spain, where surging borrowing costs stoked concern among investors and global policy makers that the currency union threatened to splinter and risk damaging the global economy. They would be allowed access to rescue loans without relinquishing control of their economies.

“We agreed on short-term measures that should apply to Spain and Italy,” said Luxembourg Prime Minister Jean-Claude Juncker, who heads the group of euro finance ministers. “We will keep all options open to do the interventions that need to be done to calm the situation. There is a whole array of possible interventions and measures.”

Make-or-Break

The gathering marked at least the fourth time in the past year that the guardians of the euro faced a make-or-break summit to restore confidence in their 17-nation bloc. They have struggled so far in vain to contain the financial crisis that began in Greece in 2009. The turmoil claimed its fifth victim this week when Cyprus sought a bailout.

Rules are made to be broken in order to accommodate the interests of the political elites, so what else is new?

We have seen this story play out again and again.

1. Realization that the crisis hasn’t been resolved sends the market into a RISK OFF mode.

2. EU officials meet and make announcements (pledges to inflate, new accord, new rules, new lending and etc…) and the markets switches to a RISK ON mode.

3. Go back to stage 1.

The problem is that the positive impact from such political actions seems to be diminishing.

The article says that EU “have struggled so far in vain to contain the financial crisis that began in Greece in 2009”.

Well that’s because EU officials have been using politics (such as the above) as the main tool to solve economic problems in order to preserve the status quo, mostly through financial repression measures.

Instead, EU officials should adjust politics to conform with economic realities through economic liberalization reforms.

Denials and measures that bank on hope or short term patches won’t have any lasting impact. This only worsens the uncertainty and sets the conditions for magnified volatility.

Understanding Political Terminologies 2: Social Justice, Greece, Austerity and Insurance

Political language have been deliberately mangled to suit and promote the interests of political agents and their followers. I have given a few examples earlier.

More examples:

1. SOCIAL JUSTICE

Once again here is the brilliant Thomas Sowell on “Social Justice”

If there were a Hall of Fame for political rhetoric, the phrase "social justice" would deserve a prominent place there. It has the prime virtue of political catchwords: It means many different things to many different people.

In other words, if you are a politician, you can get lots of people, with different concrete ideas, to agree with you when you come out boldly for the vague generality of "social justice."

Justice Oliver Wendell Holmes said that a good catchword can stop thought for 50 years. The phrase "social justice" has stopped many people from thinking, for at least a century -- and counting.

If someone told you that Country A had more "social justice" than Country B, and you had all the statistics in the world available to you, how would you go about determining whether Country A or Country B had more "social justice"? In short, what does the phrase mean in practice -- if it has any concrete meaning?

In political and ideological discussions, the issue is usually whether there is some social injustice. Even if we can agree that there is some injustice, what makes it social?

Surely most of us are repelled by the thought that some people are born into dire poverty, while others are born into extravagant luxury -- each through no fault of their own and no virtue of their own. If this is an injustice, does that make it social?

The baby born into dire poverty might belong to a family in Bangladesh, and the one born to extravagant luxury might belong to a family in America. Whose fault is this disparity or injustice? Is there some specific society that caused this? Or is it just one of those things in the world that we wish was very different?

If it is an injustice, it is unjust from some cosmic perspective, an unjust fate, rather than necessarily an unjust policy, institution or society.

Investing guru Doug Casey also shares more verbal twisting (Greece and Austerity)…

2. GREECE

it's not "Greece" we're talking about, but the Greek government. It's the Greek government that's made the laws that got people used to pensions for retirement at age 55. It's the Greek government that's built up a giant and highly paid bureaucracy that just sits around when it's not actively gumming up the economy. It's the Greek government that's saddled the country with onerous taxes and regulations that make most business more trouble than it's worth. It's the Greek government that borrowed billions that the citizens are arguably responsible for. It's the Greek government that's set the legal and moral tone for the pickle the place is in.

3. AUSTERITY

the term "austerity" is used very loosely by the talking heads on TV. It sounds bad, even though it just means living within one's means… or, for Europeans, not too insanely above them. But who knows what's actually included or excluded from what the EU leaders think of as austerity? Take the Greek pension funds, for example: exactly how are they funded? I'd expect that private companies make payments to a state fund, as Americans do via the Social Security program. I suspect there's no money in the coffers; it's all been frittered on high living and socialist boondoggles. Tough luck for pensioners. Maybe they can convince the Chinese to give them money to keep living high off the hog…

4. I would add INSURANCE as camouflage for the Welfare State

From Murray N. Rothbard,

The answer is the very existence of health-care insurance, which was established or subsidized or promoted by the government to help ease the previous burden of medical care. Medicare, Blue Cross, etc., are also very peculiar forms of "insurance."

If your house burns down and you have fire insurance, you receive (if you can pry the money loose from your friendly insurance company) a compensating fixed money benefit. For this privilege, you pay in advance a fixed annual premium. Only in our system of medical insurance, does the government or Blue Cross pay, not a fixed sum, but whatever the doctor or hospital chooses to charge.

In economic terms, this means that the demand curve for physicians and hospitals can rise without limit. In short, in a form grotesquely different from Say's Law, the suppliers can literally create their own demand through unlimited third-party payments to pick up the tab. If demand curves rise virtually without limit, so too do the prices of the service.

In order to stanch the flow of taxes or subsidies, in recent years the government and other third party insurers have felt obliged to restrict somewhat the flow of goodies: by increasing deductibles, or by putting caps on Medicare payments. All this has been met by howls of anguish from medical customers who have come to think of unlimited third-party payments as some sort of divine right, and from physicians and hospitals who charge the government with "socialistic price controls" — for trying to stem its own largesse to the health-care industry!

In addition to artificial raising of the demand curve, there is another deep flaw in the medical insurance concept. Theft is theft, and fire is fire, so that fire or theft insurance is fairly clear-cut the only problem being the "moral hazard" of insurees succumbing to the temptation of burning down their own unprofitable store or apartment house, or staging a fake theft, in order to collect the insurance.

In the world of politics,lies, distortions and equivocations are the norm.

Don't fall for them

Video: The Difference between Obamacare and Medicare; What to Expect Next

Law professor Elizabeth Price Foley explains the difference...

(thanks to Learn Liberty's Tim Hedberg for the video)


Meanwhile Cato's Chris Edwards has an amusing satire of what to expect next after the Supreme court's decision on Obamacare

Federal Broccoli Act of 2013: Eat your broccoli, else pay the IRS $1,000.

Federal Recycling Act of 2014: Fill your blue box and put on the curb, else pay the IRS $2,000.

Federal Green Car Act of 2015: Make your next car battery powered, else pay the IRS $3,000.

Federal Domestic Jobs Act of 2016: Don’t exceed 25 percent foreign content on family consumer purchases, else pay the IRS $4,000.

Federal Obesity Act of 2017: Achieve listed BMI on your mandated annual physical, else pay the IRS $5,000.

Federal National Service Act of 2018: Serve two years in the military or the local soup kitchen, else pay the IRS $6,000.

Federal Housing Efficiency Act of 2019: Don’t exceed 1,000 square feet of living space per person in your household, else pay the IRS $7,000.

Federal Population Growth Act of 2020: Don’t exceed two children per couple, else pay the IRS $8,000.

Quote of the Day: Obamacare is Against a Free Society

Today we should remember that virtually everything government does is a 'mandate.' The issue is not whether Congress can compel commerce by forcing you to buy insurance, or simply compel you to pay a tax if you don’t. The issue is that this compulsion implies the use of government force against those who refuse. The fundamental hallmark of a free society should be the rejection of force. In a free society, therefore, individuals could opt out of “Obamacare” without paying a government tribute.

Those of us in Congress who believe in individual liberty must work tirelessly to repeal this national health care law and reduce federal involvement in healthcare generally. Obamacare can only increase third party interference in the doctor-patient relationship, increase costs, and reduce the quality of care. Only free market medicine can restore the critical independence of doctors, reduce costs through real competition and price sensitivity, and eliminate enormous paperwork burdens. Americans will opt out of Obamacare with or without Congress, but we can seize the opportunity today by crafting the legal framework to allow them to do so.

That’s from Ron Paul commenting on today’s Supreme Court ruling

US Federal Home Loan Banks Exposed to Europe’s Debt Crisis

From the Bloomberg/Businessweek

The U.S. Federal Home Loan Banks’ unsecured lending to foreign institutions skyrocketed last year as the European sovereign debt crisis intensified, raising concerns about their risk management, an auditor’s report said today.

The Federal Housing Finance Agency, which oversees the 12 regional Home Loan Banks, should tighten limits on such lending and improve monitoring of whether that lending exceeds the limits, the FHFA Office of Inspector General said in the report.

“FHFA’s current regulation continues to permit FHLBanks to build large unsecured credit portfolios that may produce unreasonable risk,” wrote Richard Parker, director of the auditor’s Office of Policy, Oversight and Review. “FHFA should, therefore, reassess the counterparty risk limits associated with its existing regulation.”

Several Home Loan Banks last year made short-term loans totaling about $3 billion to two European banks that had received government bailouts and were on a credit watch, according to the report.

Federal Home Loan Banks’ unsecured lending to foreign banks peaked in April of 2011 at $101 billion before falling to $41 billion at the end of the year, the audit found.

The US banking system has likely more exposure to the Eurozone than disclosed. This could be just one example.

BSP's loan to the IMF: Costs are Not Benefits

The simmering debate over the proposed loan to the IMF by the Bangko Sentral ng Pilipinas (BSP) can be summarized as:

For the anti-camp, the issue is largely one of purse control or where to spend the government (or in particular the BSP’s money) seen from the moral dimensions.

For the pro-camp or the apologists for the BSP and the government, the argument has been made mostly over the opportunity cost of capital or (Wikipedia.org) or the expected rate of return forgone by bypassing of other potential investment activities, e.g. best “riskless” way to earn money, appeal to tradition, e.g. Philippines has been lending money to the IMF for decades, and with some quirk “foreign exchange assets …are not like money held by the treasury” which is meant to dissociate the argument of purse control with central bank policies.

I will be dealing with latter

This assertion “foreign exchange assets …are not like money held by the treasury” is technically true or valid in terms of FORM, but false in terms of SUBSTANCE.

Foreign exchange assets are in reality products of Central Banking monetary or foreign exchange policies of buying and selling of official international reserves (Wikipedia.org)

This means that foreign exchange assets and reserves are acquired and sold by the BSP with local currency units, or the Philippine Peso, prices of which are set by the marketplace

It is important to address the fact that the local currency the Peso has been mandated as legal tender by The New Central Bank Act or REPUBLIC ACT No. 7653 which says

Section 52. Legal Tender Power. -

All notes and coins issued by the Bangko Sentral shall be fully guaranteed by the Government of the Republic of the Philippines and shall be legal tender in the Philippines for all debts, both public and private

This means that ALL transactions made by the BSP based on the Peso are guaranteed by the Philippine government. This also further implies that foreign exchange assets held by the BSP, which were bought with the Peso, are underwritten by the local taxpayers. Therefore claims that taxpayer money as not being exposed to the proposed BSP $1 billion loan to the IMF are unfounded, if not downright silly. We don’t need to drill down on the content of the balance sheet and the definition of International Reserves for the BSP to further prove this point.

The more important point here: whether foreign exchange or treasury or private sector assets, we are dealing with money.

And money, as the great Austrian professor Ludwig von Mises pointed out, must necessarily be an economic good, the notion of a money that would not be scarce is absurd.

As a scarce good, money held by the National government or by the BSP is NOT money held by the private sector.

Therefore the government or the BSP’s “earnings” translates to lost “earnings” for the private sector.

Costs are not benefits. To paraphrase Professor Don Boudreaux, that the benefit the BSP gets from investing in the asset markets might make sacrificing some unseen private sector industries worthwhile does not mean such sacrifices are a benefit in and of itself.

The public sees what has only been made to be seen by politics. Yet the public does not see the opportunities lost from such actions. Therefore, the cost-benefit tradeoff cannot be fully established.

Besides, any idea that loans to the IMF is risk free is a myth. There is no such thing as risk free. The laws of economics cannot be made to disappear, or cannot become subservient, to mere government edicts as today’s crisis has shown. Remember the IMF depends on contributions from taxpayers of member nations. And for many reasons where taxpayers of these nations might resist to contribute further, and or where the loan exposures by the IMF does not get paid, then the IMF will be in a deep hole.

As I pointed previous out the risk to IMF’s loan to crisis nation are real. There hardly has been anything to enforce loan covenants or deals made with EU's crisis restricted nations.

Also, it is naïve to believe that just because the Philippines has had a track record of lending to the IMF, that such actions makes it automatically financially viable or moral. This heuristics (mental short cut) wishes away the nitty gritty realities of the distinctive risks-return tradeoffs, as well as the moral issues, attendant to every transaction. Here the Wall Street saw applies: Past performance does not guarantee future outcomes.

It is further misguided to believe that the government (in particular the BSP) behaves like any other private enterprises.

As a side note, I find it funny how apologists use logical verbal sleight of hand in attempting to distinguish central bank operations from treasury operations but ironically and spuriously attempts to synthesize the functionality of government and private enterprises.

Two reasons:

1. Central banks are political institutions with political goals.

As the great dean of Austrian School of economics, Murray N. Rothbard pointed out,

The Central Bank has always had two major roles: (1) to help finance the government's deficit; and (2) to cartelize the private commercial banks in the country, so as to help remove the two great market limits on their expansion of credit, on their propensity to counterfeit: a possible loss of confidence leading to bank runs; and the loss of reserves should any one bank expand its own credit. For cartels on the market, even if they are to each firm's advantage, are very difficult to sustain unless government enforces the cartel. In the area of fractional-reserve banking, the Central Bank can assist cartelization by removing or alleviating these two basic free-market limits on banks' inflationary expansion credit.

2. The guiding incentives and structure of operations for government agencies (not limited to the BSP) is totally different from profit-loss driven private enterprises.

Again Professor Rothbard,

Proponents of government enterprise may retort that the government could simply tell its bureau to act as if it were a profit-making enterprise and to establish itself in the same way as a private business. There are two flaws in this theory. First, it is impossible to play enterprise. Enterprise means risking one's own money in investment. Bureaucratic managers and politicians have no real incentive to develop entrepreneurial skill, to really adjust to consumer demands. They do not risk loss of their money in the enterprise. Secondly, aside from the question of incentives, even the most eager managers could not function as a business. Regardless of the treatment accorded the operation after it is established, the initial launching of the firm is made with government money, and therefore by coercive levy. An arbitrary element has been "built into" the very vitals of the enterprise. Further, any future expenditures may be made out of tax funds, and therefore the decisions of the managers will be subject to the same flaw. The ease of obtaining money will inherently distort the operations of the government enterprise. Moreover, suppose the government "invests" in an enterprise, E. Either the free market, left alone, would also have invested the same amount in the selfsame enterprise, or it would not. If it would have, then the economy suffers at least from the "take" going to the intermediary bureaucracy. If not, and this is almost certain, then it follows immediately that the expenditure on E is a distortion of private utility on the market — that some other expenditure would have greater monetary returns. It follows once again that a government enterprise cannot duplicate the conditions of private business.

In addition, the establishment of government enterprise creates an inherent competitive advantage over private firms, for at least part of its capital was gained by coercion rather than service. It is clear that government, with its subsidization, if it wishes can drive private business out of the field. Private investment in the same industry will be greatly restricted, since future investors will anticipate losses at the hands of the privileged governmental competitors. Moreover, since all services compete for the consumer's dollar, all private firms and all private investment will to some degree be affected and hampered. And when a government enterprise opens, it generates fears in other industries that they will be next, and that they will be either confiscated or forced to compete with government-subsidized enterprises. This fear tends to repress productive investment further and thus lower the general standard of living still more.

From here we derive the third view that distinguishes from the two mainstream camps:

Government is NOT supposed to “earn” money. Government should leave the private sector to earn from productive undertakings. Whatever “surpluses” or “earnings” should be given back to the taxpayers. How? By reducing taxes, by cutting down government spending and or by paying down public debt.

The “returns” from these actions will surely outweigh gains made from political speculations. Unfortunately this has been unseen.

As the great Frederic Bastiat once remarked

Between a good and a bad economist this constitutes the whole difference - the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favourable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, - at the risk of a small present evil.

Quote of the Day: Euro Crisis is the Tip of the Iceberg

Those governments are all bankrupt. But much more serious than financial bankruptcy is their total moral and intellectual bankruptcy. At this point the Europeans are so craven and degraded they deserve to be indentured servants of the Chinese, which they will be. The debt they are using to finance their bulging bureaucracies, bloated welfare rolls, giant pensions, and so forth is largely coming from the banks. But the banks are all bankrupt too, partly because they've lent so much capital to bankrupt governments. So you've got two sets of bankrupt institutions trading debt back and forth between themselves. It doesn't help to say that it's the PIIGS that are in the worst shape, because it's the banks in the supposedly wealthier countries that own the PIIGS's debt. They are all tied together.

It's much worse, on a global scale, because Europe is China's largest trading partner. When the EU really goes into reverse and suffers a major economic collapse, the Chinese are going to lose their main customers – and end up owning a lot of chateaux. That also means the Chinese will stop buying the raw materials – commodities – they use to make what they sell to the Europeans. That will hammer the Australian, Brazilian, Canadian, and other resource-driven economies.

And the problems with Japan are even worse, though somewhat different, than the ones in Europe. Chronically corrupt and now depopulating Russia is headed for a fall; its economy produces nothing but raw materials and weapons. The problem is truly global. The headlines keep pointing at Europe right now, but the EU is just the tip of the iceberg the global economy is aimed at.

This is from investing guru and philosopher Doug Casey on the coming Eurocrash.

Graphic of the Day: Knowledge Problem

From my favorite graphic artist, the highly creative Jessica Hagy

War on Gold: Indian Government Mulls Ban on Bank Gold Sales

From Mineweb.com,

The sale of gold coins in India by banks could be curbed with the Reserve Bank of India considering banning such sales. Partly, an attempt by the Reserve Bank to help curb rising gold imports, the Bank says it also believes such sales are not relevant to core banking operations.

The move, if implemented, could deal a major blow to banks that are estimated to make a clear profit of $26 million (Rs 1.5 billion) given the 3% margin from the sales of gold coins. Some 36 banks have been nominated by the apex bank to import gold into the country.

Gold is a regulated sector in India and the government allows state-run and private banks to trade in bullion at the wholesale and retail level. To profit from Indians love of gold, banks in India started vending gold coins four years ago, earning a small commission with each sale.

Though the practise did not catch the fancy of Indian customers in its early days, major discounts and monthly instalment programmes offered by banks during festivals and other auspicious days, including gold-buying days, have resulted in huge sales.

For Indian investors, gold coins in smaller denominations are considered apt for corporate gifting and rewards for contests or for commemorative giveaways. Banks have also been incentivising their staff to sell gold coins as they earn a margin of $2.62 (Rs 150) per gram of gold. Special edition gold coins with images of deities or monuments have also helped to drive the overall coin sales in the country.

The Indian government has been desperately looking for a scapegoat. This attempt to ban bank sales of gold coin is a follow-up to the earlier tariffs imposed on gold imports

Unfortunately the problem isn’t gold (or the Indian people), the problem is the government as I pointed out before.