The US Housing Bubbles Deepens

Bubbles are being blown everywhere. The bubble in the US housing markets, which I have been pointing out, seems to be spreading and or intensifying.

The Bloomberg reports: (bold mine)

Just a year since the U.S. housing market hit bottom after the biggest plunge in eight decades, signs of excess are re-emerging.

An open house for a five-bedroom brownstone in Brooklyn, New York, priced at $949,000 drew 300 visitors and brought in 50 offers. Three thousand miles away in Menlo Park, California, a one-story home listed for $2 million got six offers last month, including four from builders planning to tear it down to construct a bigger house. In south Florida, ground zero for the last building boom and bust, 3,300 new condominium units are under way, the most since 2007.

The U.S. spring homebuying season has been marked by a frenzy of demand fueled by the Federal Reserve’s drive to push down borrowing costs, a scarcity of listings and Wall Street’s new appetite for foreclosed homes. While values remain well below their peak, economists including Stan Humphries of Zillow Inc. (Z) and Mark Vitner of Wells Fargo & Co. assert prices in some areas are rising at an unsustainable pace -- a dramatic shift from early 2012, when billionaire Warren Buffetts aid housing “remains in a depression.”

Why signs of bubbles? (bold mine)

U.S. home prices jumped almost 11 percent in March from a year earlier, the biggest gain since the height of the real estate boom in 2006, CoreLogic Inc. reported last week. Values are rising faster than incomes, an indication that prices may fall in some cities once higher mortgage rates erode affordability, Humphries said. Investor purchases will inevitably cool, adding another potential hit to the market, according to Vitner.

The gains in some U.S. areas aren’t sustainable for a healthy market, said Dean Baker, co-director of the Center for Economic and Policy Research in Washington.

“If prices keep going up at this rate for another six months, we will have a bubble, and people will get hurt,” he said in a telephone interview.

U.S. buyers spent three times their annual incomes on homes at the end of last year, and those properties were 15 percent pricier relative to incomes than before the housing bubble of the mid-2000s, according to data from Seattle-based Zillow (Z). Markets such as Silicon Valley, Southern California, Boston and New York will look expensive relative to incomes when mortgage rates rise, Humphries said.

People buying more than their income means acquisition through debt financing or increasing exposure on leveraging.

This shows that extended price gains of any assets can only be fueled by credit expansion.

Euphoric or manic (frenzy) actions signify a reflexive feedback loop between expectations shaped from (rising) prices and outcome as a consequence of (buying) action. Such is the yield chasing phenomenon financed by debt. 

As one would note, US stocks and real estate, which are titles to capital goods, have been booming even when statistical economic growth continues to wobble. The annual growth rate of the US economy has hardly topped the 2000 and 2004 highs.

So like elsewhere we are seeing “parallel universes” or price-reality distortions which are symptoms of bubbles.

Pimco’s chief Bill Gross mostly shares my view of a global pandemic of bubbles—as quoted by Zero Hedge (bold original)

We see bubbles everywhere, and that is not to be dramatic and not to suggest they will pop immediately. I just suggested in the bond market with a bubble in treasuries and bubble in narrow credit spreads and high-yield prices, that perhaps there is a significant distortion there. Having said that, it suggests that as long as the FED and Bank of Japan and other Central Banks keep writing checks and do not withdraw, then the bubble can be supported as in blowing bubbles. They are blowing bubbles. When that stops there will be repercussions. It doesn't mean something like 2008 but the potential end of the bull markets everywhere. Not just in the bond market but in the stock market as well and a developing one in the house market as well.

The only difference is that Mr. Gross seems to downplay or soften on the repercussions, perhaps out of political correctness.

Yet if every action has an equal and opposite reaction then for every boom is a corresponding bust. Ramifications will certainly not be pleasant.

If central banks continue to inflate amidst a bursting the bubble, then the bust morphs into an inflation/currency crisis.

Quote of the Day: Hyperinflation Starts with a Rise in Asset Prices

It’s important to point out amid all this euphoria, though, that nearly every known instance of hyperinflation started with a rise in asset prices. And in this case, frighteningly enough, we’re seeing a rise in almost ALL asset prices.

This was famously the case in post-Revolutionary France in the1790s. People actually cheered the idea of creating more fiat money because the values of their properties and assets kept rising.

Eventually, so did everything else. Between 1790 and 1795, the price of flour increased more than 100-fold, from 2 francs to 225 francs. Or a pair of shoes from 5 francs to 200.

And all the while, politicians pushed to print even more, threatening that if they didn’t, the country would plunge into deflation! Sounds familiar?

Bankrupt governments almost invariably resort to the same desperate tactics– like polluting the currency into hyperinflation, selling it to the people as ‘for their own good’, and criminalizing any alternative (like we just saw today with Bitcoin).

Some of the most dangerous words on earth are “this time is different.” It’s not. This time is never different.

This is from the eloquent Simon Black at the Sovereign Man.

Be reminded that inflationism is a political process whose effects on the marketplace undergoes different stages over different time periods.

Gold as a foreign policy tool: US Government Bans Gold Sales to Iran

The US government overtly intervenes in the gold markets when it uses gold as a foreign policy tool.

From the Economic Times:

WASHINGTON: The United States is working to block sales of gold to Iranians in order to undermine their currency the rial and to step up pressure on Tehran over its nuclear program, officials said on Wednesday.

From July 1, the US will ban sales of gold by anyone to either the Iranian government or to Iranian citizens, a senior US Treasury official said. Washington has warned Iran's neighbors Turkey and the United Arab Emirates, key regional centers of the gold trade, to stop gold sales to Iran, said David Cohen, treasury under-secretary for terrorism and financial intelligence.

Embargoes and trade sanctions are acts of war. The US has been provoking Iran into a war ever since.

Yet the US government’s arbitrary ban gold sales are really an attack on the average Iranians whom has gravitated to gold and to bitcoins due to Iran’s simmering hyperinflation. 

This shows how ruthless governments are, in wanting to starve or sacrifice innocent civilians in order to serve the political (neocons) and economic (military industrial complex) interests of the powerful elites. 

And I don’t think gold has just been a foreign policy tool but a monetary signaling channel or central bank communications tool as well.

“Wall Street versus the world” attempts to impress upon the main street and the real economy that gold has lost its luster as inflation hedge. The Iranian ban seem to also suggest of the same. The same article quotes the above US official: (bold mine)

The move to block gold sales is part of the effort to further weaken the rial, he explained. "There's a tremendous demand for gold among private Iranian citizens, which in some respects is an indication of the success of our sanctions."

"They are dumping their rials to buy gold as a way to try to preserve their wealth. That is I think an indication that they recognize that the value of their currency is declining."

So from the political authority’s perspective, the ban on gold means that Iranians would have to revert to the rapidly diminishing value of the rial and die alongside with the decaying currency.

Nonetheless the average Iranians know better thus the “dumping their rials to buy gold as a way to try to preserve their wealth”. 

Gold, not an inflation hedge? Only in Wall Street.

 

Like all forms of prohibitions they are most likely to fail.

Venezuela’s Hyperinflation: Toilet Paper Shortages

Inflationism destroys economic calculation and the division of labor. Such has been most evident in nations experiencing extreme form of inflation, particularly hyperinflation such as Venezuela

From the US Today:(hat tip EPJ)

CARACAS, Venezuela (AP) — First milk, butter, coffee and cornmeal ran short. Now Venezuela is running out of the most basic of necessities — toilet paper.

Blaming political opponents for the shortfall, as it does for other shortages, the embattled socialist government says it will import 50 million rolls to boost supplies.

That was little comfort to consumers struggling to find toilet paper on Wednesday.

"This is the last straw," said Manuel Fagundes, a shopper hunting for tissue in downtown Caracas. "I'm 71 years old and this is the first time I've seen this."

Yet inflationism has never been an isolated policy. Inflationism has always been part of a general policy of social repression. Thus, price controls have signfied as inflationism’s alter ego.

More from the same article;

Economists say Venezuela's shortages stem from price controls meant to make basic goods available to the poorest parts of society and the government's controls on foreign currency.

"State-controlled prices — prices that are set below market-clearing price — always result in shortages. The shortage problem will only get worse, as it did over the years in the Soviet Union," said Steve Hanke, professor of economics at Johns Hopkins University.

Politicians have and will always pass the blame on everyone else but themselves. Such would lay the excuse for doing more of the same.

Interventionism begets interventionism until the society collapses.

How Paper Wall Street Gold Dominates the Gold Markets

Now we have a better picture of the ongoing selloffs in gold.

We have been told that overall demand of gold slumped during the first quarter to a nine year low, primarily due to Paper Exchange Traded Products (ETP) gold.

From Bloomberg: (all bold mine)

Gold demand dropped 13 percent to the lowest in nine years in the first quarter as record exchange-traded product sales by investors outweighed a surge in buying from China and India, the World Gold Council said.

Yet most of the selling in Paper gold has been US based. Same article...

Prices that rallied as much as sevenfold in the past 12 years entered a bear market last month as inflation failed to accelerate and as equities climbed on mounting optimism that the U.S. will lead a global economic recovery. Some investors’ loss of faith in gold as a protection of wealth is being reflected in ETP holdings that have declined every month this year. About 75 percent of the ETP sales were from U.S. products, the council estimates. The price slump boosted demand for coins and jewelry….

Investors sold a record 182.1 tons of gold through ETPs in the three months through March, data compiled by Bloomberg show. Assets have since dropped another 230.1 tons, falling to 2,219.7 tons by May 14, the lowest since July 2011. Holdings are down 16 percent this year after increasing every year since the first product was listed in 2003.

The impression painted by the media is that buyers of jewelry and coins have not been due to monetary "purchasing power preservation" reasons. Only Wall Street people are qualified to be labeled as "investors".

On the other hand, falling prices have boosted demand for physical gold around the world

Global jewelry demand rose 12 percent to 551 tons in the latest quarter, as purchases jumped 19 percent to 184.8 tons in China and climbed 15 percent to 159.5 tons in India, the report showed. U.S. jewelry consumption was up 6.2 percent, the first quarterly increase since 2005, Grubb said…

Total consumer demand in China jumped 20 percent to 294.3 tons, beating Indian consumption that climbed 27 percent to 256.5 tons, the council said. Bar and coin investment advanced 22 percent to 109.5 tons in China and rose 52 percent to 97 tons in India. While the council previously said China will probably overtake India as the biggest buyer on an annual basis, it expects Indian demand may reach about 965 tons this year, remaining above Chinese consumption of about 880 tons.

“You may see a situation in the future where these two markets change places with each other on quite a regular basis,” said Grubb. “Before, it did look as if China was going to accelerate through India quite quickly and become the larger market for a sustainable period. I think that’s now much less clear. The good thing is you’ve got two big markets now.”

Global coin sales were up 19 percent from a year earlier and bar demand rose 8.1 percent. Over-the-counter and stock flow demand, partly a statistical residual, was at 119.6 tons, compared with sales of 75 tons a year earlier, the council said. That left total investment little changed at 320.4 tons.

So essentially this reveals of the escalating conflict between Paper Wall Street gold versus Physical real gold: Wall Street versus the world.

Current activities validates my perception where paper gold sales in the US are being transferred to the physical market across the globe. More from the same article:

There’s a dichotomy here between what’s happened in the ETFs, which is mainly U.S. based, and what’s happened in OTC investment, which is more outside the U.S.,” said Grubb. The OTC estimate “suggests that some investors in other geographies were buying gold and they were doing it through allocated and unallocated bullion accounts. My hunch is that a lot of that increase in demand will have been outside North America.”

It’s not just physical markets though, emerging market central banks have remained as vigorous net buyers too

Central banks added 109.2 tons to reserves in the three months through March, a ninth successive quarter of net buying, the council said. Nations from Brazil to Russia added 534.6 tons to reserves last year, 17 percent more than in 2011 and the most since 1964, it estimates. Buying may be between 450 and 550 tons this year, Grubb said.

The chart, courtesy of the World Gold Council shows of the distribution of gold demand. It also has been a revelation of the current activities in the gold markets: Wall Street versus the world

Let us summarize: the major categories of gold demand specifically jewelry, bars and coins and central banks remain net buyers, whose rate of purchasing activities have been robustly growing even as prices fall.

Net sellers have mostly been ETFs which are 75% based on the US. Technology demand which is a fraction of the overall also posted a slight decline.

Bottom line: the current selling pressures in gold has MOSTLY been a Wall Street dictated affair.

So how large are the ETFs?

According to the World Gold Council’s latest report

As of end-March, total ETF gold holdings accounted for just 1% of the entire 175,000t above-ground stock of gold. The outflow of from ETFs in the first quarter, while sizeable and significant in its impact on the overall demand figures represents an equally small proportion of the overall stock gold held by private investors.

In the latest press release, the WGC confirmed the substance of the real markets over ETFs:

Marcus Grubb, Managing Director, Investment at the World Gold Council commented: 

“The price drop in April, fuelled by non-physical moves in the market, proved to be the catalyst for a surge of buying that has left many retailers short of stock and refineries introducing waiting lists for deliveries. Putting this into context, sales of bars and coins, jewellery and consumption in the technology sector still make up 81% of the market

And who are these ETP/ETF holders? 

Wall Street people like George Soros, Blackrock Inc. and etc.…

If ETF products are just a smidgen of the overall markets how can they negate the influence of the much larger physical real markets?

The answer: through leveraged derivatives gold markets

Former Assistant Secretary of the US Treasury Paul Craig Roberts at the lewrockwell.com explains:

The price of bullion is not set in the physical market where individuals take delivery of bullion purchases. It is set in the paper futures market where short selling can drive down the price even if the demand for physical possession is rising. The paper gold market is also the market in which people speculate and leverage their positions, place stop-loss orders, and are subject to margin calls.

When the enormous naked shorts hit the COMEX, stop-loss orders were triggered adding to the sales, and margin calls forced more sales. Investors who were not in on the manipulation lost a lot of money.

The sales of GLD shares are accumulated by the banksters in 100,000 lots and presented to GLD for redemption in gold acquired at the driven down price.

The short sale is leveraged by the stop-loss triggers and margin calls, and results in a profit for the banksters who placed the short sell order. The banksters then profit again as they sell the released gold into the physical market, especially in Asia, where demand has been stimulated by the sharp drop in bullion price and by the loss of confidence in fiat currency. Asian prices are usually at a higher premium above the spot prices in New York-London.

Some readers have said “don’t bet against the Federal Reserve; the manipulation can go on forever.” But can it? As the ETFs such as GLD are drained of gold, their ability to cover any of their obligations to investors diminishes. In my opinion, these ETFs are like a fractional reserve banking system. The claims on gold exceed the amount of gold in the trusts. When the ETFs are looted of their gold by the banksters, the gold price will explode, as the claims on gold will greatly exceed the supply.

Kranzler reports that the current June futures contracts are 12.5 times the amount of deliverable gold. If more than 8 percent of these trades were to demand delivery, COMEX would default. That such a situation is possible indicates the total failure of federal financial regulation.

12.5 times leveraged!! No wonder Wall Street can dictate on such terms.

Unfortunately, Wall Street cannot print gold. Physical gold buyers will demand possession.

 

Thus the ongoing fire sale in gold which also means shifting ownership from Wall Street to the world, would eventually translate to less leverage for the former to manipulate on the gold markets

For now, Wall Street hope and prays that given their huge leverage, claims on Paper gold will not be transformed into demand deliveries.

The Real Story behind Japan’s 3.5% Statistical Growth

Reading media can be toxic to one’s intelligence.

Mainstream media applauds Japan’s statistical growth from “Abenomics”.

First, the statistics from he Bloomberg:

Japan’s economy expanded more than analysts estimated in the first quarter on gains in consumer spending and exports, building momentum for Prime Minister Shinzo Abe’s campaign for a sustained growth revival.

Gross domestic product rose an annualized 3.5 percent, the most in a year, a Cabinet Office report showed in today in Tokyo. The median estimate of 36 economists in a Bloomberg News survey was for a 2.7 percent gain. In the fourth quarter, growth was a revised 1 percent. GDP rose 0.9 percent on quarter.

Then the flawed interpretation:

Japan’s surging stock market is making consumers feel wealthier, helping to fuel spending and growth in the world’s third-biggest economy. Now, Abe needs to convince businesses to invest and boost wages to pull the nation out of a decade-long deflationary funk, a challenge highlighted by a decline in company spending in the first quarter.

Surging stock markets in Japan can HARDLY make the consumers feel wealthier because only 6.8% of Japanese households own stocks according to the Bank of Japan as of December 2012.

Granted let us say that these may have grown, perhaps even doubled today. But how will the 15% of households logically be sufficient to make the entire economy grow? What about the 85%? Multiplier, where?

Now the self contradiction:

Consumers are spending while businesses have been reluctant to invest, “Abe needs to convince businesses to invest and boost wages”.

Great. Spending grows the economy. But businesses are not investing. Where are people getting the goods to spend on? 

Obviously from imports. Japan’s trade balance has been in a deficit. (tradingeconomics.com)

What the Japanese has been doing is simply running down on their savings or drawing from their external assets and or accumulating debt to finance such spending.

How does spending without producing extrapolate to growth? If there are no businesses where will income be generated from? Who provides the money to spend?

Another article reinforces the supply side problem where today’s falling stocks signifies a shortfall in earnings expectations. 

From the Bloomberg:

Most Asian stocks fell as Japanese banks declined after forecasting lower earnings, offsetting a report that Japan’s economy expanded faster than analysts estimated in the first quarter.

Media doesn’t tell us that devaluing money would prompt for lesser demand to hold cash by spending, by buying hard assets or by sending them abroad. Just ask the citizens of Argentina. 

Media also doesn’t say that price distortions reduces the incentives for investors to invest because price instability impedes on economic calculation. If Abenomics intends to produce 2% inflation, what happens if inflation goes beyond it? McDonald's increased prices by about 25%, demand slumped. Rising petrol prices reduced fisherman's cost-benefit incentives to catch squid, thus a big shortage on squid. So how will uncertainties from unstable prices driven by policies motivate investments?

I earlier pointed to the financial losses incurred by Japan's McDonald’s even with the recent hefty hikes in prices of their products. Japan’s major multinational  company Sharp Corporation similarly posted the biggest losses over the past 100 years!

Japan’s 3.5% statistical growth is a function of higher prices and not because more output. Printing money increases prices but not necessarily quantitative output. Real growth comes with output not from prices.

Besides as also previously pointed out living tax increases will frontload spending and thereby boosts spending over the interim.

What would really matter is the interest rate trends, particularly the 2-5 year JGBs. That’s because a continuous surge in yields would increase rollover and credit or default risks where 2-5 year maturing JGBs account for 76% and 60% in 2013 and 2014 respectively.

There has been a material increase in such yields over the month according to the table from Bloomberg

As said before, Abenomics operates in an incorrigible self-contradiction: Abenomics has been designed to produce substantial price inflation but expects interest rates at permanently zero bound. Such two variables are like polar opposites. Thus expectations for their harmonious combination are founded on whims rather from economic reality.

And this why whatever stock market boom we are seeing will eventually metastasize into a crisis that will shake the world, if these policies will be sustained.

As for media’s misrepresentation, Nassim Nicolas Taleb recently posted at Facebook this apt description:

Journalists cannot grasp that what is interesting is not necessarily important; most cannot even grasp that what is sensational is not necessarily interesting.

War on Bitcoin: US Government Seizes Assets of Mt Gox

The US government has officially launched a campaign against bitcoin by seizing accounts tied to one of the largest bitcoin exchange.

From the Wall Street Journal:

WASHINGTON—U.S. officials dealt a blow to the fledgling digital currency called bitcoin, freezing an account that is tied to the largest bitcoin exchange just months after regulators warned that such entities should follow traditional rules on money laundering.

The authorities obtained a warrant Tuesday to seize an account of a subsidiary of Mt. Gox held at the online payments firm Dwolla, according to a copy of the warrant provided by the Department of Homeland Security on Wednesday. The department declined to comment further on the matter.

The scrutiny from law enforcement comes after the Treasury Department ruled in March that the same money-laundering rules that apply to traditional money-order providers, such as Western Union Co., WU +0.98% would also be applied to firms that issue or exchange online cash, including currencies not backed by a central bank.

Bitcoins are supposedly decentralized. So technically speaking the US government cannot directly strike at bitcoin without taking on the internet itself. Thus the US government’s campaign against bitcoin has been channeled through the financing facilities of the trading platforms and not bitcoin itself. 

But so far, other exchanges as US-based competitors Seattle-based CoinLab and San Francisco-based Coinbase or bitcoin exchanges registered with the Treasury Department has not been subjected to the same harassment. On the other hand, the Mt. Gox case should benefit them.

The US government wants bitcoin dealers to operate under their umbrella and has assailed or harassed those operating outside their ambit.

In short, the governments will work on controlling cryptocurrencies covering all variants; aside from Bitcoin: Litecoin, PPcoin, Freicoin, Solidcoin, BBQcoin, Fairbrix, Geistgeld among the many more.

Besides, it may come as a coincidence but the Mt. Gox crackdown comes in the light of the second wave of selling pressure on gold prices. Gold fell 2.34% last night to close below the psychological $1,400 threshold level.

Remember that the Wall Street initiated flash crash in gold came alongside the crash in bitcoin prices during mid April. (chart from stockcharts.com and bitcoincharts.com)

The current actions against Mt.Gox’s bitcoin platform has so far unaffected prices of bitcoins.

The crux is--bitcoins and gold appear to be simultaneously under political pressure as expressed through prices or through direct government intervention

Yet look at the irony with the following headline: US Stocks Rise on Stimulus bets as Manufacturing Falls.

This means more bad news is good news; which also implies that stocks have been totally dependent on steroids, thus the parallel universe: stagnant economies yet surging stocks on steroids.

This also impresses on the public that the connection between gold and government steroids have become detached. People are being made to believe that gold have lost its “inflation hedge” function. (Although in the real world this hasn’t been true: Just take a look at the seminal hyperinflation phase in Argentina where the average citizens flee to gold and bitcoins as refuge)

What else am I saying? Well, governments simply hates competition. So currency alternatives as gold and bitcoins are not just being manipulated, they are being attacked.

All financial markets are being manipulated, but at different degrees. Assets that benefits the political objectives of governments such as stocks, bonds and the property sector are being subsidized (directly and indirectly) whereas those opposed such as short sellers, commodities and bitcoins are being marginalized. 

But the real economy, which allegedly has been the target of all these assistance, has been ignoring them.  

And yet the real objective behind all these has been to save or preserve the cartel of the political institutions of the banking system-central bank-welfare/warfare state. Remember rising asset prices buoy the balance sheets of insolvent banks and governments, thereby the cumulative inflationist policies.

Thus the parallel universe or the huge detachment between the real economy and prices of financial assets.

All these are really signs of bubble blowing activities everywhere and of how terribly desperate governments have become. 

Yet all failed government actions would translate to deeper confiscations of people's savings by governments. Hence, governments are working around the clock to close all possible loopholes as seen by the attack on Mt. Gox or from the Indian government's ban on gold imports.

Video: Bill Fleckenstein on How Abenomics Could Blow Up the US and the World

The legendary investor and contrarian writer for MSN Money, Bill Fleckenstein interviewed by Yahoo.

A snippet of the interview transcript:

On Japan:

What is going on in Japan is potentially very, very dangerous not just for Japan but for world markets. And, I’m not speaking about the Nikkei. What has taken place in the Japanese JGB [Japanese government bond] is extraordinary. In the last three days, the yield has gone from 60 basis points to 86. Can you imagine what would happen in America if yields on 10-year Treasuries went from 6% to 8.6%?

There are huge derivative books in Japan where there’s been tremendous amount of derivatives written assuming that rates would stay low forever. I think this could be on the verge of blowing up. This may be the start of it, this may get quiet, or it may get ugly right now. That will impact the American bond market and it will affect equities everywhere. So, it’s potentially dangerous.

Read the rest at Yahoo.com

Parallel Universe: Booming German and French Stocks as Economies Stagnate

In a the world where central bankers have become demigods, the disconnection between the financial markets and the real economy have increasingly become evident.

From the Bloomberg:

The German economy expanded less than forecast in the first quarter and France’s slipped into recession, increasing pressure on the European Central Bank to do more to stimulate growth.

German gross domestic product rose 0.1 percent from the fourth quarter, when it fell a downwardly revised 0.7 percent, the Federal Statistics Office in Wiesbaden said today. Economists forecast a 0.3 percent gain, according to the median of 41 estimates in a Bloomberg News survey. The French economy contracted 0.2 percent in the three months through March after shrinking the same amount in the final quarter of last year.

The above data revealed in the charts below. [Charts courtesy of tradingeconomics.com and stockcharts.com]

 

The German equity market bellwether, the DAX, has been on an uptrend (upper pane) since October 2011 even when statistical economic growth peaked during the first semester of 2010 and continues to worsen (lower pane). Thus, the two year divergence can hardly be interpreted as anomaly.

Year to date, the DAX, as of yesterday’s close, has been up 9.55% even as statistical economic growth is at the borderline with the negative.

The French phenomenon seems even more elaborate.

The French equity market as measured by its bellwether, the CAC, has been on an uptrend along with the German DAX where both began to reverse near simultaneously higher during the last quarter of 2011.

Ironically, the French economy has been zigzagging mostly in the recessionary territory (lower window) even as the stock market continues to boom through 2012 (upper window).

Once again, the French economy has been reported above as enduring a statistical recession, but the CAC has been up 10.38% year to date as of yesterday's close.

The above has been exhibiting the unintended consequences of central bank policies.

The micro or the real economy continues to suffer from real economic obstacles (high taxes, more mandates, relative price distortions, regulations and etc….) which deters investments, but adds to the incentives generated by easy money policies in diverting capital towards yield chasing activities in the financial markets, where the latter have also been buttressed by central bank guarantees.

Such parallel universe is a sign of an unsustainable bubble in progress. 

For now we see a boom. Eventually we would either see a grand bursting of these bubbles that would likely lead to cascading wave of debt defaults or a currency crisis.

Argentineans Find BMWs, Bitcoin and Gold as Inflation Hedges

The Argentine Peso continues to massively devalue to the point that they have become symptoms of hyperinflation. 

In barely a few days the peso has sunk to its weakest level ever at 10.45 pesos vis-à-vis the US dollar. As of last week, the implied annual rate of inflation, based on 9.87 pesos/USD, is at 98.7% as estimated by Cato’s Steve Hanke. In short, the peso fell by whopping 5.9% in less than a week. 

Yet Argentines don’t just hold cash and see their savings erode, they have sought refuge partly through purchases of luxury cars.

From the Bloomberg:

Argentines are buying more BMWs, Jaguars and other luxury cars as a store of value as inflation decimates their deposits and pummels the nation’s bonds.

Purchases of cars from Germany’s Bayerische Motoren Werke AG (BMW) and Jaguar Land Rover Automotive Plc, owned by India’s Tata Motors Ltd. (TTMT), jumped the most in April among brands sold in Argentina. The sales were part of a 30 percent surge in car sales from a year earlier that was the biggest increase in 20 months, according to the Argentine Car Producers Association. While used-car prices rose in line with inflation last year, or about 25 percent, peso bonds tied to consumer prices fell 13 percent. The drop was the biggest in emerging markets.

Car sales in Argentina increased by the most in almost two years last month as a ban on buying dollars made Argentines turn to vehicles to protect savings against the fastest inflation in the Western Hemisphere after Venezuela. Luxury models are becoming more attractive because they are imported at the official dollar rate, said Gonzalo Dalmasso, vehicle industry analyst at Buenos Aires research company Abeceb.com. Argentines with savings in dollars are able to purchase cars at half the cost by trading in the unofficial currency market.

It is not clear how the operations of these high end car merchants remain viable considering the wide disparity between currency rates from which such trade has been conducted. The blackmarket rate is nearly about 50% below the official rate, this should translate to significant economic losses for these firms.

On the other hand, used car sellers appear to be losing money as selling prices has only been expanding at the statistical inflation rate of 25% when real inflation rate has been above 90%. 

The unevenness of returns suggests of something fishy behind the surge in luxury car sales.

Though barter has reportedly been one of the options taken by these firms. From the same article:

The decree prompted BMW to export rice and Porsche Automobil Holding SE to begin exporting olives and Malbec red wine. Shizuoka Subaru Motor Co. agreed to export chicken feed, Hyundai Motor Co. began sending soy flour to Vietnam and Mitsubishi Motors Corp. (7211) started shipping peanuts.

These reports are really questionable.

Rather I suspect that these luxury car dealers are cronies or political allies, who are subsidized by Argentina’s politicians through the government. In turn, Argentina’s political elites and their allies could have been the major buyers of these high end cars.

In short, subsidies to exotic car traders are really transfers or subsidies to the political class and their cronies in disguise.

Yet the average Argentinean seeks gold and bitcoins as refuge.

More from the same article:

Argentines are buying cars, gold and even virtual currency such as bitcoin as they look for ways to preserve their savings as the peso is forecast to fall 17 percent this year.

It's pretty obvious that Argentina has gone into a debt default route via inflation. Again from the same article:

Argentina’s dollar-denominated bonds aren’t a better alternative as a U.S. legal dispute on repayment of the nation’s defaulted debt caused average yields to soar to 13.92 percent, almost three times the average in emerging markets, according to JPMorgan Chase & Co.

The notes have plunged 10 percent his year.

The rate banks pay for 30-day deposits of more than 1 million pesos was 15.38 percent on May 10….

The cost to insure Argentine debt against default within the next five years through credit default swaps rose 107 basis points to 2,770 basis points, according to data compiled by CMA Ltd.

While inflation and a gap in the exchange rates is fueling sales, the same reasons are also deterring investment in the car industry, said Cristiano Rattazzi, President of Fiat Auto Argentina SA.

See what I mean? The gap in inflation and exchange rate has simply not been consistent with soaring sales for the toys for wealthy class unless they have been subsidized. 

Unfortunately for the political elites, when hyperinflation will hit critical levels enough to spur social violent unrest, these luxury cars will easily become objects of agitation and consequently will be transformed into junk.

Philippine Elections: The Politics of Symbolism

From the Inquirer:

A day after unofficial election results showed her ahead in the Senate race, Grace Poe evaded a television reporter who wanted to shadow her, received business cards handed to her staff by strangers and had Pad Thai noodles for lunch…

Nalokah (crazed),” was how Poe described herself in a solicited text message upon learning that she was No. 1 in the partial and unofficial tallies aired on television hours after voting precincts closed on Monday.

“I was very surprised, I was blown away,” she said…

Poe realized during the campaign that people wanted a closure to her father’s death. She said these people saw her “as the image of FPJ in defense of the oppressed, the champion of the poor” in his movies.

The result of the Philippine national elections demonstrates and validates theories and academic studies showing why elections are nothing but about feel good politics and of the myth of the rational voter.

The lists of winners consist of families from the political elites, celebrities or people with popular symbolical representations or a combination of.

As I wrote back then on the US elections

It would be conceivably naïve to rely on political rhetoric of competing candidates as basis for examining and projecting prospective policies.

Politicians usually appeal to the views the median voter to ensnare votes. In other words, politicians, who are running for office, are predisposed to say what the public wants or expects to hear.

On the obverse end, people hardly vote for policies but for symbolisms which these candidates represent. Thus aspiring politicians work hard to project themselves as symbols to reinforce people’s biases.

And this is why politicians usually end up with unfulfilled promises or have usually gone against their rhetorical assurances made during the campaign sorties.

Voters become useful only to politicians when election season arrives.

Yet the oppressor-oppressed political axis (Arnold Kling: Three Languages of Politics) which has been embedded deeply in human nature represents how domestic politics works, or how local politicians have exploited the Progressive perspective of justifying ‘social justice’ through coercive redistribution.

This serves as another reason why the Philippine boom will soon be revealed as a paper tiger. Social policies will be directed mostly towards redistribution than to real economic reforms. This means more government spending that will be financed by higher taxes, debt and inflation.

All these validates my view of the quasi-mob rule way of the selection process, which lays foundation to the local version of social democracy that has been skewed to, or even tacitly designed for the benefit of the political class and their allies.

As an old saw goes "the more things change the more they stay the same"

War on Gold: India bans Import Consignments

Well we don’t need a conspiracy plot to know that India’s gold trade has repeatedly been under assault from her government.

From the Reuters:

Gold buying in India, the world's biggest buyer of the metal, came to a halt on Tuesday, a day after the central bank restricted gold imports on consignment basis and jewellery sellers saw a sharp rise in festival sales.

On May 13, the Reserve Bank of India (RBI) banned gold imports through consignment, and traders awaited for more clarity from the central bank. Gold and silver imports rose 138 percent in value terms to $7.5 billion, data from the trade ministry showed, increasing pressure on the current account balance.

This has likely been in reaction to the fantastic 138% jump in gold imports last month, which has been spurred by a demand spike following gold price's flash crash fomented by Wall Street.

From the Hindu Times:

Terming the 138 per cent surge in gold imports last month as an ‘aberration’, the government on Tuesday expressed the hope that the appetite for foreign gold would subside by next month due to the high inventory costs.

Overall, the recent surge in imports has attributed to the drop in global commodity prices, including gold.

Talking to reporters, Economic Affairs Secretary Arvind Mayaram said it appears that to hedge against future rise the traders in India have imported large quantity of gold.

If it is true that 138% surge in gold imports has been an ‘aberration’, then why the need for the import ban? Obviously the Indian government wants to make sure that the proclaimed ‘aberration’ becomes a reality through social controls.

What such controls will do instead is to drive gold trades underground and push up premiums as supply shrinks.

Media appears to have already been in cahoots with the government in the implicit campaign to downplay or shoot down India’s feverish gold trade. 

Taking a look at last Friday’s headlines from Reuters, it says "Gold Stuck in a Trading Range, physical demand down"

Has physical demand really been down?

More from the report: “Gold futures edged lower on Friday, but still stuck in familiar trading range, though demand from physical buyers was down compared with last week amid limited supplies ahead of a major gold buying festival.” (bold added)

Physical demand has been down because lack of supply? Gee. Lack of trade due to limited supply doesn’t necessarily mean physical demand is down. This may be so because limited supply means extremely high premiums. 

While this may be a journalistic gaffe, on the other hand, it could well be a misrepresentation.

All these reveals how financially desperate governments have been tightening the noose on the public’s savings by attempting to wring out currency alternatives such as gold and bitcoin.

Desperate times calls for desperate measures. 

Here’s a guess, India’s government will fail in her quest to quash the gold trade, which has not been only a cultural affinity but also a monetary-purchasing power issue.

Quote of the Day: Anger is a Convex Heuristic

Anger is a convex heuristic; it is not a reaction to be judged by its small mistakes, but by the total payoff, assuming you direct it at things that offend your sense of ethics. Forget the dictum that anger is madness, to be controlled, etc. If you systematically vent your anger at things that offend you deeply, you may have small regrets, but the upshot is that you will never feel corrupt, hypocritical, or unprincipled. This is the only life worth living. (ANTIFRAGILE HEURISTICS)

This is from Black Swan theorist and inconoclast Nassim Nicolas Taleb at the Facebook