Monday, October 14, 2013

Phisix: Rising Systemic Debt Erodes the Margin of Safety

Read Ben Graham and Phil Fisher, read annual reports, but don't do equations with Greek letters in them. - Warren Buffett

During casual conversations, and for those who are aware of my line of work, I am always asked whether the domestic stock market is headed up or down.

These lay persons can’t be blamed. They have been hardwired to resort to the law of least efforts or the “most convenient search method[1]” or the act to attain similar goals with the “least demanding course of action”. And as Nobel Prize psychologist Daniel Kahneman expounds “In the economy of action, effort is a cost, and the acquisition of skill is driven by the balance of benefits and costs. Laziness is built deep into our nature”[2].

The principle of least effort applies not only to physical activities but also on the mental sphere. That’s why people resort to mental short cuts or heuristics in almost everything including investments[3]. And that’s why mainstream media sells oversimplified narratives of events that cater to such popular demand for “lazy” information. And this is why politicians sell “lazy” but noble sounding programs to the gullible voters.

And when people ask for a definitive outcome, not only are they mistaking market analysis for soothsaying, usually these are signs of the layperson’s search for the confirmation of their ingrained beliefs.

And because I see markets as a function of risk and reward, a tradeoff of cost and benefits, my standard response has been to refer to the current risk environment in relation to its potential gains. 

US Stocks and the Deepening Scarcity of Margin of Safety

Prudent investors look for a margin of safety on their investments rather than undertake activities that risks compromising the preservation of capital.

As the father of value investing and inspirational mentors of Warren Buffett, Benjamin Graham wrote[4]
Investment requires and presupposes a margin of safety to protect against adverse developments. In market trading, as in most other forms of speculation, there is no real margin for error; you are either right or wrong, and if wrong lose money. Consequently, even if we believed that the ordinary intelligent reader could learn to make money by trading in the market, we should send him elsewhere for instruction. But everybody knows that most people who trade in the market lose money at in the end. The people who persist in trying it are either (a) unintelligent, or (b) willing to lose money for the fun of the game, or (c) gifted with some uncommon and incommunicable talent. In any case they are not investors.
The current risk reward environment hardly seems conducive to providing a margin of safety for investors.

When markets appear to be entirely dependent or hostaged by political actions, and when market participants become confidentially resolute over their perceived outcomes of the markets without addressing the underlying risks factors then the markets are transformed from investment to gambling.

The late financial historian, economist and author Peter L. Bernstein reminds us that[5]
In their calmer moments, investors recognize their inability to know what the future holds. In moments of extreme panic or enthusiasm, however, they become remarkably bold in their predictions; they act as though uncertainty has vanished and the outcome is beyond doubt. Reality is abruptly transformed into that hypothetical future where the outcome is known. These are rare occasions, but they are also unforgettable: major tops and bottoms in markets are defined by this switch from doubt to certainty
So when the consensus has arrived with the conclusion with unwavering conviction that interventionist politics drives economic performance, the newfound established permanence of high flying statistical growth and when credit rating upgrades have been discerned as signs of international acceptance of such magical transformation of the economy, then this looks very much like a resonating switch from ‘doubt to certainty’ that compromises the margin of safety for stock market investing.

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The recent wild pendulum swings in the US equity markets seems like a testament to such politically induced volatility. As measured by the Dow Jones Industrial Averages (DJIA), miniature boom bust inflection points have all been politically driven.

Note: The blue arrows above have not been meant to reveal precise dates of indicated events but rather to show of the reversal points of the violent fluctuations in reaction to political events.

As one would infer, each time the prospects of the curtailment of has been envisaged, e.g. the Fed’s Taper, Debt Ceiling over even a Larry Summers appointment for Fed chairmanship, the DJIA convulses.

On the other hand, every time the mainstream accepts political assurance that the easy money environment will be retained, the DJIA flies.

The addiction to debt hasn’t been merely a government spending affair. Market participants have deepened the used of debt as tools to chase yields and to squeeze earnings thus higher stock market prices

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Behind the scenes, or what the mainstream overlooks or deliberately ignores has been that near record US stocks have been accompanied by the swelling of net margin trades to likewise near record levels as shown by the chart from Bank of America Merrill Lynch via the Zero Hedge[6].

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And corporations have been increasingly been resorting to debt to undertake equity buybacks[7] which also helps boost stock prices.

In other words, debt or inflationary credit has become the principal force in driving stock market pricing and valuations.

And this seems why US equity markets have become highly sensitive to developments in the political sphere as market participants have largely anchored their perceptions and positioning on the influence of the fluid political dynamics on the credit environment.

Can US stocks continue to head higher? Sure. But this now represents a confidence game that stands on the delicate tolerance level of companies and of the system to absorb more debt intertwined with the actions of the bond vigilantes.

Will returns from speculation be higher than climbing cost of servicing such debts? If so, then the game can play on. If not, more firms will likely resort to Ponzi financing, in the hope that debt IN-debt OUT and further increases in security prices would camouflage the structural impairments of a company’s operations.

This may continue for as long as the confidence levels on such tenuous dynamics hold or will be maintained and for as long as the bond vigilantes will be kept restrained.

This also means that to push stocks higher there needs to be even greater absorption of debt. So debt begets more debt, thereby intensifying systemic vulnerability.
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So it has not been a surprise to see signs of reluctance to invest or of the verbalizing of concerns over market conditions from celebrity gurus and billionaires such as George Soros, Warren Buffett, John Paulson[8], Stanley Druckenmiller, Paul Singer, Seth Klarman[9], Howard Marks, Julian Robertson and Jim Chanos, whom has reportedly reduced exposure on US equities[10].

The character of equity ownership has also been changing. During the second quarter, US Federal Reserve’s Equity “Flow of funds”[11] indicates a marginal reversal or net selling for the households. Net purchases by Equity ETFs also materially slowed. On the other hand, Equity mutual funds more than doubled from the 1st quarter.

Since Equity ETFs and mutual funds are largely household financial assets, this may be indicative of a shifting by household accounts from direct to indirect ownership. Americans may be relying more on “experts” than from directly dabbling with the stock markets.

Meanwhile institutional investors which include property-casualty insurance, life insurance, private pension funds, state and local retirement funds and Federal government retirement funds posted marginal gains whereas foreign investors have posted sizable outflows, the second largest since 1990s.

In the other words, record US stocks has mainly been driven by demand from funds servicing the household or retail sector.

Rising stocks based on debt erodes one’s margin of safety.

Value investor Benjamin Graham warned on this too[12]…(bold mine)
The first and most obvious of these principles is, “Know what ou doing—know your business.” For the investor this means: Do not try to make “business profits” out of securities—that is, returns in excess of normal and dividend income—unless you know as much about security values as would need to know about the value of merchandise that you proposed to deal or manufacture
Higher Philippine Stocks Doesn’t Exorcise Risks

Can Philippine stocks move higher?

Why not? As I reported last week[13], BSP loans seem to have emitted signs of reversal from a marginal declining trend which commenced in the 1st quarter in August. Some of those loans may have been re-channelled to the stock market. If the August reversal on what the BSP calls as “loans for production” or general loans by the banking system (and particularly the financial intermediary sector) will be sustained or re-accelerates, then the Phisix may edge higher. The Philippine credit market participants appear to have shrugged off the August stock market convulsion. This serves as more signs of a shift from doubt to certainty.

Heightened volatility is hardly a sign of a salutary bull market. On the contrary it is a sign of toppish market.

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We have seen a parallel of this story during the pre-Asian crisis era.

Following the 1993 juggernaut (blow off top) by the bulls where the Phisix racked up a stunning or fantastic 154% nominal currency return, the Phisix encountered two years of extreme volatility. Two years seem as maximum pain for either the bull or bears.

Since the peak in January 1994, the Phisix endured three bear markets assaults through the last quarter of 1995.

Over two years the Phisix fell into a quasi bear market and lost 33.3% from the January 1994 peak to the November 1995 trough.

I call this three bear market strikes in 1994-1995 “the boy who cried wolf”. This is because the financial markets seem to have wanted to substantially correct on the excesses of the 1993 gains, but this “this time is different” outlook powered by a swift spike in credit growth in the real economy prevented this from happening. 

Domestic credit as a % of the economy skyrocketed or more than doubled from 25.18% of the GDP in 1992 to 62.2% in 1997[14]. That’s how rapidly things evolve when doubt is substituted with certainty.

The bears appear to have relented to the bulls a temporary upper hand, where in one year the bulls recovered all the losses from the peak of January 1994 to score 56.9% return in 1 year and three months.

By February 1997, or when the bulls pushed the Phisix a little above the 1994 highs, the bears reasserted their dominance by drubbing the bulls with the final massive bear market strike in just three months that finalized the contest.

Two months later, the Asian crisis was formally unveiled.

In 19 months the entire gains of 1993 had been wiped out, and the Phisix lost a ghastly 68.6%. The bear market from the Asian crisis would lead to culmination of the bear market 7 years after or in 2003.

In late 2002 I was shouting at the top of my lungs for “a buy”. But the consensus would have none of it. [As a side note: You can see my bullish call on the mining sector in 2003 as published by safehaven.com[15]]

I even remembered being cussed at during my first call to a dormant client assigned to me by my principals which was a shock to me. The client accused me of partaking in the syndicate (the Philippine Stock Exchange) that has short-changed stock market investors. This encounter reinforced my belief that the PSE hit a nadir. The PSE was an orphan then. Doubt prevailed.

How things have changed. Today 10 years after, where the Phisix peaked at nearly 7,400 in May 2013 or or nearly 7.4x the nadir, PSE has a thousand fathers, particularly most of the industry participants, the political class and the toady media.

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Following two attempted thrusts to the bear market levels in June and August, the Phisix has been inching higher. This resonates on the actions of her neighboring bellwethers. The Phisix is still about 900 points away from the recent highs

Based on the 1997 and 2008 experience, previous highs had never been successfully encroached and in fact, became critical turning points for a full blown bear market. 

Will this time be different?

Ultimately the continuity of the bullmarket will depend on the actions of the bond vigilantes.

On Domestic Credit-to-GDP ratio: Money doesn’t grow on trees

Today the mainstream backed by declaration from the official pooh-poohs the risks from over leveraging.

This is a re-quote from a speech by BSP governor Amando M Tetangco Jr in the Euromoney Philippine Investment Forum in Manila last March 12, 2013[16] (bold mine)
It is also important to note that indebtedness in the Philippines is still quite low. Domestic credit-to-GDP ratio at 50.4% (Q4 2012) still ranks one of the lowest in the region, This would suggest that the risk of excessive leverage is less and the threat to financial stability is likewise lower, should asset prices correct.
I had to quote Mr. Tetangco because there has been some figures going around stating that as of the end 2012, Domestic credit-to-GDP is at the 31+% levels. With Mr. Tetangco repeating the same figure over a news article interview 2 days after, my guess is that this serves as official figure[17].

Mr. Tetangco also referenced his claim that Philippine debt levels “ranks one of the lowest in the region” in a footnote, “Latest available Indonesia 40.2%, Malaysia 133.3% Singapore 151.8%, Thailand 129.4% Japan 221.2% China 153.1% and Korea 104.1%.” 

Implying that Philippine credit can grow as much as the other nations signifies a fallacy of division or “what is true of a whole must also be true of its constituents and justification for that inference is not provided”[18]. Such is mistaking forest for the trees.

One reason why other nations have greater tolerance level for credit is that except for Indonesia, on a per capita GDP level, other nations have been way way way higher than the Philippines. 

Theoretically, credit should be more accessible to those with higher income.

As per World Bank 2012 figures per capita GDP[19]: the Philippines $4,410, Indonesia $4,956 Malaysia $17,143 Singapore $61,803 Thailand $9,820 Japan $35,178 China $9,233 and South Korea $30,801.

The other reasons are in the context of the state of the financial system.

With a very low participation rate by the population, credit growth has been concentrated to those with access to the formal banking system. Only an estimated 21% of Philippine households have the privilege to benefit from the Php 8.117 trillion banking system (as of March 2013[20]).

This includes elected officials, bureaucrats, and employees whose stipend and perquisites (or even Pork) have been channelled through government owned banks or to their private sector affiliates.

Therefore domestic to credit ratio will remain disproportionately reliant on the conditions of the current bank account holders which will be limited to their capacity to access credit, via income conditions, perceived credit quality, reputation, willingness of the bank to lend and available collateral.

Yet most of the credit growth has been taking place in the supply side. This means big companies who increasingly use leverage for expansion or operations. And this why risks of bubbles have become ‘systemic’; where the concentration of credit to a few theoretically should mean ‘greater’ threat to financial stability.

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But if the banking system has a low penetration level, this even applies more to the non-banking channels, particularly to the capital markets. The PSE has only 525,000 accounts even when these participants now control resources at over 100% of GDP.

The same applies to the Philippine bond market which has been dominated by government debt. Government debt as of the 2nd quarter constitutes 86% of both US$ denominated and LCY bonds[21]. Meanwhile, private corporate bonds are largely from publicly listed companies. So the same set of people who are principal beneficiaries of the stock market are likewise the beneficiaries of the bond markets.

This means that the idea that the “threat to financial stability is likewise lower” is correct seen from a different sense; should a credit bubble pop, the threat to financial stability will fall upon the lap of mostly the political economic elites than to the general unbanked public. Like in 1997 the politically tormented informal economy will save the day.

Yet the elites desire more credit to fuel a larger bubble which the BSP has been happy to oblige.

Additionally, the domestic to credit ratio will improve only when the informal economy migrates to the formal banking industry.

But the informal economy is a product of government failure, particularly of the policies of financial repression, overregulation and weak property rights as imposed on the public by the government.

By keeping markets underdeveloped the government can capture resources owned by the private sector through the captive banking system and through the reduction of purchasing power of the domestic currency, the peso. This is the financial repression aspect.

So the transfer of resources from the general economy to the political class means that resources for entrepreneurship have been constrained.

Add to this the over-politicization of the marketplace via overregulation. Overregulation has its attendant costs, particularly high costs of compliance, high taxes and non-pecuniary burdens to comply with the bureaucratic regulations or red tape. This means that time, effort and money spent on regulatory compliance equally reduces resources for commerce or entrepreneurship which further implies a reduction of productive activities and the incentive to undertake survivalship through the informal sector.

It is true that the informal sector holds a lot of potential capital that could spur a real economic boom. However most of these are what Peruvian economist Hernando de Soto[22] calls as “dead capital” or as per Wikipedia[23], “property which is informally held that it is not legally recognized. The uncertainty of ownership decreases the value of the asset and/or the ability to lend or borrow against it. These lost forms of value are dead capital.”

Institutional deficiencies that facilitate weak protection of property rights and the lack of the rule of law have been responsible for this lack of conversion of dead capital to productive capital.

In short, the structural inability to intermediate savings from the private sector to productive activities functions as the major constraint to expansion of domestic credit to gdp ratio.

Money, as the above shows, doesn’t grow on trees.

Philippine Economy: Inflationary Debt Boom is a Bad Policy

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Yet the Philippines hasn’t been taint free from debt, au contraire

The Philippine debt stock has ballooned to nearly 150% of GDP (left window) growing along with the rest of the neighbors.

The World Bank in a recent report seems concerned on the potential impact of the FED’s tapering and of rising rates on an increasingly levered Emerging Asia[24] (bold mine)
Economies may be especially vulnerable to the extent that they have significant external financing requirements, saw rapid credit growth when interest rates were low, or have experienced large increases in debt. Indeed, markets appear to be discriminating on the basis of country fundamentals. Indonesia’s high bond yields partly reflect its current-account deficit. Again, in Indonesia, and in Malaysia, the Philippines, and Thailand, there are concerns about rapid credit growth leading to financial-sector overextension. Gross national debt now exceeds 150 percent of GDP in Malaysia, China, and Thailand, and 100 percent of GDP in the Philippines (Figure 29; see also note on “China’s Credit Binge May Have Run Its Course,” in this Economic Update). Specific concerns include a sharp increase over the last few years in household debt in Malaysia and Thailand, and high leverage in state-owned enterprises in Vietnam.
While the World Bank sees that Emerging Asia should be “in a relatively strong position to face this shock”, given the “significantly lower vulnerabilities than in the run-up to the 1997–98 Asian crises” they are concerned of the unclear potentially large impact on capital flows from the actions of the US Federal Reserve

Notice that the nations of ASEAN have a distinct distribution of debt stock. This implies of the difference in the degree of credit risk exposure.

While Malaysia’s risks, for instance, have been one of the overexposed credit by the household, credit risk on the Philippines has been from the financial sector.

And notice too that today’s potential flashpoint for a regional crisis has been Indonesia which ironically has the smallest debt exposure.

Notice too that given the variance between per capita levels between the Philippines and her neighbors as noted above, the Philippine debt levels have now been in proximity to her counterparts. So domestic credit seem to have been growing relatively faster than her neighbors

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This reminds me that in the 1997 Asian crisis, the Philippine banking system had relatively less exposure to leverage[25] compared to the regional peers but nonetheless suffered from the contagion effects from the ASEAN meltdown.

This shows that there simply is NO one-size fits all formula for debt composition, degree of debt levels, or debt tolerance. A sudden reversal of confidence by creditors will only expose on the degree of debt tolerance and malinvestments a nation has. And worst, the ramification is likely a contagion.

Additionally, the Philippines have the smallest household exposure to debt.

Moreover, Philippine debt stock has been concentrated on the financial sector, and secondarily, the government. Based on my interpretation of the World Bank chart, the financial sector has been lending to the government (as major buyers of bonds), secondarily to the non-financial resources. Lending to the household signifies a morsel of total banking activities.

This validates all my previous writings including the above about the myth of the consumer economy[26], vital role played by the highly underappreciated large informal economy and of the concentrated or biased nature of economic growth favouring those with access to the banking system, capital markets, the politically connected and the political class.

And this shows how the current supply side growth dynamic, which the credit rating agencies and the consensus worship as the growth ‘elixir’ has really been cosmetic and will eventually prove to be unsustainable.

And while today’s high growth rates could mean, as the great Austrian economist Friedrich von Hayek pointed as “the more the available opportunities of a country remain unexploited, the greater its opportunities for growth; this often means that a high growth rate is more a sign of bad policies in the past than of good policies in the present”[27], high growth rates via inflationary boom which really means redistribution of resources to a select privileged few, that temporarily generates high statistical growth rates, but leaves a large segment of the available opportunities of a country unexploited is also a bad policy.




[2] Daniel Kahneman, Thinking Fast and Slow Macmillan p.35


[4] Benjamin Graham The Intelligent Investor Harper Business p.12

[5] Bernstein Peter, quoted from A Study Of Market History And Valuation Through Graham And Buffett And Others By John Chew, istockanalyst.com






[11] Yardeni Research US Flow of Funds Equities September 27, 2013

[12] Benjamin Graham op.cit. 249



[15] Benson Te The Philippine Mining Index Lags the World September 26, 2003 Safehaven.com

[16] Amando M Tetangco Jr: The Philippine economy—primes for a sustainable and solid growth March 12, 2013 Bank of the International Settlements.


[18] The Nizkor Project Fallacy: Division


[20] Bangko Sentral ng Pilipinas BALANCE SHEET AND KEY RATIOS as of March 13, 2013

[21] Asian Development Bank ASIA BOND MONITOR September 2013


[23] Wikipedia.org Dead capital

[24] World Bank Rebuilding Policy Buffers, Reinvigorating Growth EAST ASIA AND PACIFIC ECONOMIC UPDATE OCTOBER 2013 p.45-46

[25] Marcus Noland The Philippines in the Asian Financial Crisis: How the Sick Man Avoided Pneumonia University of California Press June 2000


[27] Friedrich von Hayek Competition as a Discovery Procedure, Mises Institute Journals p.20

Sunday, October 13, 2013

Shutdown-Debt Ceiling Politics: The Charles Schumer Put

Step aside Alan Greenspan and Ben Bernanke. New York Senator Charles Ellis ‘Chuck’ Schumer has declared that the preservation of stock market has to be prioritized from the shutdown-debt deal stalemate.

From the Zero Hedge: (bold-italics original)
We commend Senator Schumer for being the first Senator to openly step up and admit that the worst case scenario in the whole Congressional 3D IMAX farce is not about keeping the economy afloat, is not about preserving jobs, but merely keeping the stock market at or near its all time highs:
  • Schumer Says He Worries About Monday Stock Drop on Default Risk. "This is playing with fire," Sen. Charles Schumer, D-N.Y., tells reporters. Says he worried whether “the stock market will go down
For those confused, Schumer has merely admitted what the vast majority of the Senate, where two thirds are millionaires, and nearly half the House, think: don't you dare let the manipulated precious, which at last check was just 1% below its all time Fed-balance sheet derived highs, drop.

And speaking of Chuck Schumer's "bottom line", here it is.
Bluntly stated; protect my investments and the interests of my campaign contributors

Saturday, October 12, 2013

Shutdown Politics: Defying Yorktown’s National Park Service

Bureaucrats use the recent government shutdown to send a message to Washington, particularly the Republicans, instead, they got a pushback from the public.

From Austrian economist Gary North at the LewRockwell.com
A restaurant owner in the Colonial National Historical Park in Yorktown was told by the National Park Service to close his restaurant. The Park Service does not own it. It leased the building to the owner. It unilaterally broke its lease.

He closed it for a few days. Then he re-opened it.

The Park Service now has a huge public relations problem. It can choose to enforce its order. It can send in armed men to force the closing. Or it can just ignore this act of defiance.

The media have picked up the story as a human interest story. In this story, the Park Service is the villain — a bureaucratic agency trying to force the Republicans in the House to raise the debt ceiling. “Shut it down!” This mentality led to the closing of various Washington monuments. It has backfired on the senior-level bureaucrats who came up with this policy. First, a bunch of World War II vets removed the barriers, and walked into the monument area. Now a restaurant owner is doing the same thing.

What’s a bureaucrat to do?

It is significant that the restaurant owner is taking his stand in Yorktown. This makes the Park Service’s PR problem even worse. Yorktown is where George Washington, with help from the French fleet, defeated General Cornwallis in October 1781. That defeat ended Great Britain’s resistance to the American Revolution. The Park Service wants to be seen as George Washington. Instead, it is being seen as Cornwallis. It is going to lose this PR battle. It’s the bureaucratic world turned upside down.

This confirms North’s law of bureaucracy: “Some bureaucrat will eventually enforce a regulation to the point of utter imbecility.”

Quote of the Day: True socialism is synonymous with public slavery

More practical socialism a country, the more living conditions deteriorate and abuses of human rights are observed. One has only to see Cuba and North Korea that have degenerated into bloody socialist monarchies because leaders can not trust anyone outside their families. For cons, the introduction of the market economy elsewhere, notably in China, has led to a reduction in the level of poverty and a better quality of life for the population. Some people tend to cite Sweden and Finland as the country where socialism works. This is not true. None of these countries can not be considered as having practiced socialist or socialist policies. Socialism is government ownership and it is pretty small in Scandinavia. In the Soviet Union and Mao's China, and while everyone were considered the property of the state. True socialism is synonymous with public slavery.
The above is a French to English Google translated quote from Yuri Maltsev, Professor of Economics and former adviser to Soviet President Mikael Gorbachev as interviewed by Lemauricien.com (hat tip Circle Bastiat)

Why a US debt default extrapolates to the END of the US dollar hegemony

I previously pointed out from the public choice perspective why a debt default today by the US government is unlikely and has mostly likely been part of the political theatrics in the contest of power.

Politicians will hardly fight for an unpopular cause or principle, particularly against a system deeply hooked on entitlement or dependency programs, which will only cost them their careers and their privileges as political leaders.

The two-day bacchanalia by US equity markets where the Dow Jones Industrial skyrocketed by 434 points or 2.9% is a testament to this chronic addiction to the entrenched debt based entitlement culture. 

There is another major reason why the US the default card serves as another political poker bluff: A debt default extrapolates to the END of the US dollar hegemony.

Writing at the Project Syndicate, economist and political science professor Barry Eichengreen spells out the likely consequences of a US debt default. (hat tip Zero Hedge) [bold mine, italics original]

But a default on US government debt precipitated by failure to raise the debt ceiling would be a very different kind of shock, with very different effects. In response to the subprime disruption and Lehman’s collapse, investors piled into US government bonds, because they offered safety and liquidity – prized attributes in a crisis. These are precisely the attributes that would be jeopardized by a default.

The presumption that US Treasury bonds are a safe source of income would be the first casualty of default. Even if the Treasury paid bondholders first – choosing to stiff, say, contractors or Social Security recipients – the idea that the US government always pays its bills would no longer be taken for granted. Holders of US Treasury bonds would begin to think twice.

The impact on market liquidity would also be severe. Fedwire, the electronic network operated by the US Federal Reserve to transfer funds between financial institutions, is not set up to settle transactions in defaulted securities. So Fedwire would immediately freeze. The repo market, in which loans are provided against Treasury bonds, would also seize up.

For their part, mutual funds that are prohibited by covenant from holding defaulted securities would have to dump their Treasuries in a self-destructive fire sale. Money-market mutual funds, virtually without exception, would “break the buck,” allowing their shares to go to a discount. The impact would be many times more severe than when one money-market player, the Reserve Primary Fund, broke the buck in 2008.

Indeed, the entire commercial banking sector, which owns nearly $2 trillion in government-backed securities – would be threatened.Confidence in the banks rests on confidence in the Federal Deposit Insurance Corporation, which insures deposits. But it is not inconceivable that the FDIC would go bust if the value of the banks’ Treasury bonds cratered.

The result would be a sharp drop in the dollar and catastrophic losses for US financial institutions. Beyond the immediate financial costs, the dollar’s global safe-haven status would be lost.

It is difficult to estimate the cost to the US of losing the dollar’s position as the leading international currency. But 2% of GDP, or one year’s worth of economic growth, is not an unreasonable guess. With foreign central banks and international investors shunning dollars, the US Treasury would have to pay more to borrow, even if the debt ceiling was eventually raised. The US would also lose the insurance value of a currency that automatically strengthens when something goes wrong (whether at home or abroad).

The impact on the rest of the world would be even more calamitous. Foreign investors, too, would suffer severe losses on their holdings of US treasuries. In addition, disaffected holders of dollars would rush into other currencies, like the euro, which would appreciate sharply as a result. A significantly stronger euro is, of course, the last thing a moribund Europe needs. Consider the adverse impact on Spain, an ailing economy that is struggling to increase its exports.

Likewise, small economies’ currencies – for example, the Canadian dollar and the Norwegian krone – would shoot through the roof. Even emerging-market countries like South Korea and Mexico would experience similar effects, jeopardizing their export sectors. They would have no choice but to apply strict capital controls to limit foreign purchases of their securities. It is not inconceivable that advanced countries would do the same, which would mean the end of financial globalization. Indeed, it could spell the end of all economic globalization.
Once the confidence on the US dollar as a global reserve currency collapses, the outcome will be massive protectionism,  a horrific devastation of the global economy, widespread social unrest and worst, this will likely trigger a world war.

But the above doesn’t go far enough. Aside from global central banks taking a hit from their US dollar reserve holdings, the banking system outside the US will also come under duress or face the risks of collapse as the value of US dollar portfolios (reserves, assets and loan exposure) plunge. 

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The highly leveraged currency markets itself will likely fail or seize up. The US dollar constitutes 87% of the $5.3 trillion currency market trades a day under today’s circumstances or conditions.

Domestic defaults, considering the  vastly expanded debt levels are likely to explode as financial flows freeze.

This will be compounded by a standstill of trade and economic activities, which should severely affect the the banking system’s loan portfolios.

And the icing in the cake will likely be a crash of financial markets, where financial assets makes up a key part of the banking sector’s balance sheet.

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And given the systemic defaults ex-US government bonds are unlikely to function as safehaven too.

As of the 2nd quarter of 2011, US bonds account for 32% of the $99 trillion global bond markets which about half are government bonds.

And there surely will be huge impact on the global derivative market at $633 trillion as of December 2012

In short ramifications from a contagion of a US dollar collapse seems incomprehensibly catastrophic.

Given this scenario, I am not persuaded that ex-US dollar currencies will rise in the face of a US dollar meltdown.

This assumption will hold true only if ex-US banks have been prepared for such a dire scenario which is a remote possibility. 

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But the fact that the US dollar remains a major part of the global foreign currency reserve system demonstrates the continued dependency by the world on the US dollar.

The global banking system whose architectural foundations has been built on the US dollar system are likely to disintegrate too along with the US financial system.

In my view, a collapse of the US dollar standard will extrapolate to the destruction of the incumbent paper money standard. The world will be forced to adapt a new currency standard, whether gold will play or role or not is beside the point. 

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Yet I would like to add that the US Federal Reserve holds $2.87 trillion of US treasuries according to the weekly updates on the Factors Affecting the Reserve Balances as of October 9th. The accounting entry by the USTs held by the FED are at “face value” which according to them is  “not necessarily at market value

This also means that the Fed is susceptible huge losses even if the Fed can resort to changes in accounting treatment to evade insolvency.

The bottom line is that if all the FED’s credit easing programs has been meant to shore up the unsustainable debt financed political system anchored on privileges for vested interest groups operating under troika of the welfare-warfare state, crony banking system and the US Federal Reserve, a debt default would essentially negate the FED’s actions, annihilate such political economic arrangements and importantly leads to the loss of the US dollar standard hegemony.

These are factors which the political “power that be” will unlikely gamble with, lest lose their privileges.

Yet given the persistence of the current debt financed deficit spending and other political spending trends, a debt default and a market driven government shutdown signifies as an inevitable destiny.

Friday, October 11, 2013

Quote of the Day: Ludwig von Mises: The most important economist of the 20th century

Ludwig von Mises died 40 years ago today at the age of 92 in a hospital in New York.  To me, he was the most important economist of the 20th century because he addressed the most important economic issue of the century: capitalism versus socialism. His essay "Economic Calculation in the Socialist Commonwealth" (1920) and his book Socialism (1922) staked out a controversial position on the feasibility of complete central planning. Mises claimed that it was impossible for any society that wanted more than a primitive standard of living. The centrally planned economies that have existed have proved him right: they have had extensive but not complete central planning.  Complete central planning involves the abolition of money. The two countries that have tried it, the Soviet Union from 1920-1921 and Cambodia under the Khmer Rouge, found that the result was a rapid descent towards economic backwardness. Centrally planned economies therefore have grudgingly had to allow a sphere for individual initiative in exchange to correct in part the mistakes of the planners, and so they have had money, though it has been bad money. As the late Don Lavoie stressed in Rivalry and Central Planning (1984), a book that builds on Mises's ideas, "actually existing socialism" after the Soviet Union's attempted abolition of money marked a retreat from complete central planning. (Sorry, no link to Lavoie's book because it's out of print. You can find expensive used copies online, or go to the library.)

At the time of Mises's death, the reputation of capitalism was near its lowest ebb since the Great Depression. Inflation was starting to become a problem in the advanced capitalist countries. In the remainder of the 1970s, central planning  spread to South Vietnam, Cambodia, Laos, Ethiopia, Angola, Mozambique, Nicaragua, and Afghanistan. It looked as though the Third World countries were moving closer to the Second World than to the First World.

And yet, cracks were appearing in the socialist façade. The first volume of Aleksandr Solzhenitsyn's The Gulag Archipelago was published in 1973. In 1978, local government officials and 18 Chinese farmers made a secret agreement to spur individual initiative in production through a partial de faco privatization of communal farmland. The success of this and other such arrangements elsewhere became the foundation of China's momentous official turn toward (though not all the way to) capitalism under Deng Xiaoping. Poland's Solidarity movement formed in 1980. By 20 years after Mises's death, socialism had collapsed, retreating to small redoubts in in Cuba and North Korea.

The underlying lesson of Mises's thought on socialism has nonetheless failed to penetrate deeply into economic policy making. Few people regard the collapse of extensive central planning as an argument against piecemeal central planning in monetary policy, transportation, education, health care, and other areas (including toilet paper in one country).
This is from non-Austrian economist Kurt Schuler writing at the FreeBanking.org

Graphic: The Globalization of Boeing’s Dreamliner

Assembled in the US, much of what makes up the Boeing’s Dreamliner has been sourced overseas

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Source Reuters; hat tip Businessinsider

Note: Since the following graphic has been dated in January 2011. There may be changes on them

Chinese Government to Crack Down on Fake Statistical Data?

More reasons to distrust statistical economic and financial figures from the Chinese government.

From Bloomberg:
China’s statistics-bureau chief said the agency has “zero tolerance” for falsified data after it publicized cases of manipulated local numbers and the customs bureau cracked down on fraudulent export invoices.

Incidents exposed by the agency are isolated and won’t affect the broader quality of data, Ma Jiantang, head of the National Bureau of Statistics, said today in Beijing at an “open day” attended by officials, journalists and school students.

China’s government has struggled to win the trust of investors and economists for data ranging from gross domestic product to trade. Li Keqiang, who became premier this year, said in 2007 that GDP figures were “man-made” and “for reference only,” according to a WikiLeaks cable.

Ma said that his agency has gained better control over the numbers through a direct reporting system that limits local officials’ ability to manipulate the numbers.
When political careers of the local authorities depends on the boosting of growth statistics then the natural consequence—or reaction by local leaders to the incentives provided by the political system—would be to fuel localized bubbles or to manipulate statistics or a combination of both as previously discussed

This serves as the difference between China's top-down politics relative to the Philippine Pork Barrel based system--where the latter's political power are attained by buying votes directly or indirectly from the electorate and from other political constituencies using earmarks (Pork), while the former gets appointed to local posts by meeting national targets.

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And political leaders resort to, as well as, contribute and participate in the China’s shadow banking system via the local government financing vehicles (LGFV) to finance local projects. Off balance sheets now play a big role in China’s credit system (Business Insider)

Stephen Green of Standard Charter estimates at least 10,800 operational LGFVs from which only 800-900 LGFVs have financial statements on publicly issued debt.

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Nomura economics estimate total LGFV debt at the end of 2012 at RMB19.0trn (37% of GDP), which included RMB14.3trn of interest-bearing debt. From 2010-12, LGFV debt rose by 39%, which implies total government debt of RMB31.7trn accounts for  61% of GDP at end-2012. (FT Alphaville)

Yet if many local governments have been notorious in the manipulation of statistics in response to the political system’s incentives, then why should we trust the central-national government when the same incentives influence the national leaders? 

For instance, Chinese Premier Li Keqiang has a self-imposed quota for economic growth which is at 7.5 percent. Today Premier Li says this quota has been surpassed 

From another Bloomberg report: (bold mine)
Chinese Premier Li Keqiang said the nation’s economic growth exceeded 7.5 percent in the first nine months of the year, a sign the government will next week report success in arresting a two-quarter slowdown.

Gross domestic product “maintained a fairly high growth rate of over 7.5 percent” in the first three quarters, Li said today in a speech at the East Asia Summit in Brunei. He said earlier today at an Association of Southeast Asian Nations summit that the economy has “shown stronger momentum of steady growth” in recent months, with indicators that reflect market expectations, such as the Purchasing Managers’ Index (SHCOMP), improving.

China previously reported expansion of 7.6 percent in the first half and Li’s government introduced measures including faster railway spending and tax cuts to defend a 7.5 percent goal for the full year. The National Bureau of Statistics reports third-quarter growth on Oct. 18, with the median estimate of 33 analysts surveyed by Bloomberg News for a 7.8 percent pace, up from the second quarter’s 7.5 percent.
At the end of the day, China’s economic growth has been all about meeting political objectives as measured by statistics whether from the national or the local level. 

Thus government activities will focus on attaining statistical growth at the expense of real economic growth. 

And these will likely be achieved by serially blowing bubbles and or by statistical manipulation via hiding, censoring and deleting of data which doesn't conform with the administration's goals.

Marc Faber: A Corrupt System that Rewards Stupidity

Today’s political economic system has increasingly evolved to what Nassim Taleb calls as the lack of the "skin in the game" (or a syndrome combining principal agent problem and the moral hazard) or the stakeholders dilemma where political agents and their apologists hardly feel the consequences of their proposals or edicts.

These agents promote policies that pushes people to take reckless risk taking activities at the cost of the economy and freedom.

Dr. Marc Faber at the Daily Reckoning explains. (bold original)
For the greater part of human history, leaders who were in a position to exercise power were accountable for their actions. If they waged wars or had to defend their territories from invading hostile forces, they frequently lost their lives, territories, armies, power and crowns. I don’t deny that some leaders were irresponsible, but in general, they were fully aware that they were responsible for their acts and, therefore, they acted responsibly.

The problem we are faced with today is that our political and (frequently) business leaders are not being held responsible for their actions. Thomas Sowell sums it up well:

…we have today a system where leaders are not only not punished for their failures, but are actually rewarded…

“It is hard to imagine a more stupid or more dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong.”

When political leaders or economic policymakers are seen to fail, the worst that will happen to them is that they won’t be re-elected or reappointed. They then become a lobbyist or an adviser or consultant, and give speeches, earning in the process a high income on top of their pension.

Similarly, many corporate executives and fund managers who have no personal stake in the business that employs them will receive generous pensions even if they fail to do their job properly and are dismissed. (This doesn’t apply to hedge fund managers, most of whose wealth is invested in their funds.) In other words, probably for the first time in history, we have today a system where leaders are not only not punished for their failures, but are actually rewarded…

Recently, Warren Buffett said that the Fed was the world’s largest hedge fund. He is wrong. The world’s largest hedge funds are owned by people who are risk takers with their own money, since they are usually the largest investors in their funds. The academics at the Fed are playing with other people’s money.
Read the rest here

Histrionics of US Politics: Markets in Buying Orgy on Hopes of Debt Ceiling Deal

US stocks went into a frenzied jubilation today on hopes of a deal by the US congress and President Obama on the debt ceiling-shutdown-Obamacare impasse.

From Bloomberg:
U.S. stocks jumped, with benchmark indexes rallying the most since January, as lawmakers moved toward an agreement to increase the debt ceiling and avoid a default….

Investors reacted to a House Republican proposal for a short-term increase in the debt ceiling that would reduce the prospects for a U.S. default. The plan would push the lapse of U.S. borrowing authority to Nov. 22 from Oct. 17. It wouldn’t end the 10-day-old partial shutdown of the federal government.

President Barack Obama would support a short increase in the U.S. debt limit with no “partisan strings attached,” though he prefers a longer extension, Jay Carney, the White House press secretary, said today. The proposal could come up for a vote on the House floor as soon as tomorrow.

U.S. Treasury Secretary Jacob J. Lew warned Congress today that “uncertainty” over the debt limit is starting to stress financial markets and trying to time an increase to the last minute “could be very dangerous.”
Yet rising CDS (default risks) will be used as political leverage to justify the call for raising the debt ceiling. (Have the CDS markets been stage managed?)

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Americans have been deeply hooked on entitlements. More than 70% of Federal Spending has been due to dependency programs and growing.

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This means that despite the hullabaloo in the US Congress, which really is just a vaudeville, as congress people will fear the wrath of losing political power and privileges from entitlement dependent-parasitical voters, eventually the debt ceiling will be raised. (charts from the Heritage Foundation).

Like actions of central banks led by the US Federal Reserve, America’s welfare state will be pushed to the brink of a crisis or will fall into a crisis first, before real reforms will be made.

In the world of politics, cost-benefit tradeoffs has been reduced to short term expediencies.
And the fear of the wrath of the public which means losing political power have become a potent force in the shaping of the supposed deal…the American public has been putting the blame on the GOP (Republicans).

From Gallup:
With the Republican-controlled House of Representatives engaged in a tense, government-shuttering budgetary standoff against a Democratic president and Senate, the Republican Party is now viewed favorably by 28% of Americans, down from 38% in September. This is the lowest favorable rating measured for either party since Gallup began asking this question in 1992.
Republican and Democratic Party Favorables, 1992-2013
The Democratic Party also has a public image problem -- although not on the same elephantine scale as that of the Republican Party -- with 43% viewing the Democratic Party favorably, down four percentage points from last month.
Pieces of the jigsaw puzzle falling into its rightful places.

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Most of the so-called fear over a UST default  has been felt in the short end of the curve as shown by the 1 month, 6 month and 1 year USTs. Today’s gigantic stock market seem to have only put a dent on the recent spike.

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However, the fear has not been evident in the longer end of the curve or when US stocks went up, bonds fell (yields surged) and when US stocks fell, bonds rallied (yields declined) as shown by the 10 year and 30 year USTs

Today’s rally seem to have only rekindled the bond vigilantes.

Notice too that US stocks have become hostaged to politics as measured by the Dow Industrial's recent performance.

The fears from the FED's “Taper” supposedly prompted for a selloff in May-June. This was reversed when Fed officials went into media blitz to cushion on Taper fears. 

The Syrian crisis, speculation over Bernanke's replacement and bond vigilantes remerged to haunt the Dow which plummeted to September lows.

The discounting of the taper, Larry Summer's withdrawal and the surprise FED’s "untaper" sends the Dow to new highs. 

Then the lows from the shutdown-debt ceiling-Obamacare stalemate.

Funny, how stockmarkets have seemingly been transformed into puppets or instruments of governments.

Thursday, October 10, 2013

Mark Thornton on How to Read Mises

Interested to learn more about the contributions of the leader of the Austrian school of economics, the late great Ludwig von Mises? 

Austrian economist Mark Thornton at the Mises Blog recommends a step by step 'building process' approach—from easy to technical—to go about the works of von Mises 
October 10th is the 40th anniversary of the death of Ludwig von Mises. He was one of the most notable economists and social philosophers of the twentieth century who created an integrated, deductive science of economics. He based system on the fundamental axiom that human beings act purposely to achieve their desired goals. Mises left a legacy of books and articles that continue to teach and inspire people in a method and science that makes an undeniable case for a society based on freedom and peace.

Many have tried and failed to grasp the enormity of Mises’s contributions. I have been asked many times about “how to read Mises.” For a long time my only answer was “don’t start with Human Action, Mises’s magnum opus. Then, a few years ago, I set out to produce The Quotable Mises where I collected quotes from all his books. This book gives readers quick access to Mises’s contributions and viewpoints. It also serves as a handy tool for researchers and journalists.

It also gave me some insight into the question of how to read Mises. My suggestion now is to begin reading his shorter, popular articles, as well as audio and video lectures on Mises.org. Then proceed to his shorter books like Bureaucracy and Planned Chaos before moving to longer treatments such as Liberalism, A Critique of Interventionism, Omnipotent Government, and Nation, State, and Economy. Next take on the big four Theory of Money and Credit, Socialism, Epistemological Problems, and Theory and History. Finally, you are ready for the centerpiece of Mises’s system of economics, Human Action.

I believe that this approach to reading Mises works because Mises system was comprehensive and cohesive, but his writings represent a building process in which economics is constructed and where concepts are repeated in finer and more elaborate detail. What you might not understand at one level becomes increasingly clear, coherent, and relevant for understanding his overall system.
Here is the list of von Mises' short articles (Some of them are excerpts from his books)



Quote of the Day: The Fed’s enormous power is concentrated

Today, enormous power is concentrated in the hands of the 12-member Federal Open Market Committee, which sets interest rates and regulates the money supply behind closed doors – decisions that are not subject to review or challenge. Retirees can sue if their homes are seized for urban renewal, but not if the Fed’s financial suppression deprives them of a return on their savings
This is from Tufts University legal professor and author Amar Bhidé arguing for a decentralized FED at the Project Syndicate. (hat tip Café Hayek’s Russ Roberts)

Since money is half of almost every transaction, a centrally planned 'politicized' monetary system will have significant influences on the configuration of the political economic system.

Iceland Recovery? Capital Controls and Devaluation Backfires…

Well Iceland’s supposed recovery seems to have been truncated as policies of capital controls and devaluation appears to have backfired.

From the Bloomberg:
Iceland’s private sector is running out of cash to repay its foreign currency debt, according to the nation’s central bank.

Non-krona debt owed by entities besides the Treasury and the central bank due through 2018 totals about 700 billion kronur ($5.8 billion), the bank said yesterday. The projected current account surpluses over the next five years aren’t estimated to reach even half of that and will equal a shortfall of about 20 percent of gross domestic product.

Kaupthing Bank hf, Glitnir Bank hf and Landsbanki Islands hf defaulted on a combined $85 billion in October 2008 after running out of cash to sustain their debt-funded expansions. The collapse plunged the economy into its worst recession in six decades, forcing the government to seek an International Monetary Fund bailout to stay afloat.

For now, the controls are still helping Iceland manage its debts by rationing payments. That means the largest foreign refinancing risk, which stems from repayments on two Landsbankinn hf bonds totaling 296 billion kronur, won’t destabilize the economy.

“Repayment of this debt is currently under capital controls,” said Benediktsdottir. “So we can use the capital controls to actually manage the outflow of those repayments. By doing so, we can keep both financial and currency stability.”
If Iceland capital controls have been "helping" manage debts then the private sector won't be running the risks of non-payment of foreign currency debt.
 
Iceland reportedly allowed her insolvent banks to go bankrupt, the Iceland’s President even bragged about this as I earlier showed

But the reality is that Iceland’s government bailed out the central bank by raising the amount of debt 5 fold where the latter has been heavily exposed to foreign creditors


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The central bank bailout has been implemented with rigorous capital controls and devaluation, which mainstream mercantilists cheered as the magic wand for Iceland’s recovery.

Unfortunately for devaluation proponents, inflationism’s magic works only over the interim or the short term, where long term costs have now become apparent.

At the Geo-Graphics Blog of the Coucil of Foreign Relation (CFR). Benn Steil and Dinah Walker shows of the boom-bust cycle and the economic backlash (via relative underperformance with her peers) from a supposed devaluation based miracle…
Here it is, folks: Iceland, whose currency lost half its value against the euro in 2008, vs. Estonia, Latvia, and Ireland, all of which were euroized or pegged to the euro over the entire period . . .
 
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In the updated figure, Estonia comes out on top, by a lot – well above Iceland, which performed no better than Latvia or Ireland, even using a starting date chosen by Krugman to make Iceland look as good as possible.
Yet Iceland “success story” now comes with a likely imitation of the Cyprus bailin model as the Iceland government mulls to remove its blanket authority for large depositors as well as depositor haircuts.

Notes the Zero Hedge, (bold original)
Following the crisis in October 2008, Iceland's government declared all deposits in domestic financial institutions were 'blanket' guaranteed - an Emergency Act that was reafrmed twice since. However, according to RUV, the finance minister is proposing to restrict this guarantee to only deposits less-than-EUR100,000. While some might see the removal of an 'emergency' measure as a positive, it is of course sadly reminiscent of the European Union "template" to haircut large depositors. This is coincidental (threatening) timing given the current stagnation of talks between Iceland bank creditors and the government over haircuts and lifting capital controls - which have restricted the outflows of around $8 billion.
Interventionism and inflationism only works to the benefit of the political class and their favored constituencies, while the rest of the society suffers…

Yet this has been to be the global trend

Wednesday, October 09, 2013

Bernanke Replacement Janet Yellen to be Nominated, First Female Fed Chair

Outgoing Fed chair Ben Bernanke will be officially replaced by Ms. Janet Yellen.

From Bloomberg:
President Barack Obama will nominate Janet Yellen as chairman of the Federal Reserve, which would put the world’s most powerful central bank in the hands of a key architect of its unprecedented stimulus program and the first female leader in its 100-year history.

Obama will announce the nomination at 3 p.m. today in Washington, a White House official said in an e-mailed statement. Yellen, 67, would succeed Ben S. Bernanke, whose term expires on Jan. 31.

Obama turned to Yellen, vice chairman of the Fed since 2010, after the other leading candidate, former Treasury secretary and White House economic adviser Lawrence Summers, withdrew from consideration amid mounting opposition from Democrats on the Senate Banking Committee
Here is a timeline of Ms. Yellen’s career

Here is Dr. Marc Faber’s comment on Ms. Yellen as previously posted here
She will make Mr. Bernanke look like a hawk. She, in 2010, said if could vote for negative interest rates, in other words, you would have a deposit with the bank of $100,000 at the beginning of the year and at the end, you would only get $95,000 back, that she would be voting for that. And that basically her view will be to keep interest rates in real terms, in other words, inflation-adjusted.And don't believe a minute the inflation figures published by the bureau of labor statistics. You live in New York. You should know very well how much costs of living are increasing every day. Now, the consequences of these monetary policies and artificially low interest rates is of course that the government becomes bigger and bigger and you have less and less freedom and you have people like Mr. De Blasio, who comes in and says let's tax people who have high incomes more. And, of course, immediately, because in a democracy, there are more poor people than rich people, they all applaud and vote for him. That is the consequence.
Rising financial markets as of this writing appear to reflect on the cheering her nomination as she will likely reward Wall Street and governments around the world with more gifts from money printing.

Asian policymakers also warmly welcomes Ms. Yellen. The Wall Street Journal Real Times Economic Blog quotes Philippines Finance Secretary Cesar Purisima 
More importantly, Ms. Yellen’s nomination signals a commitment to stability, continuity, and a smooth transition at the Fed. Ms. Yellen was one of Chairman Bernanke’s co-pilots as they navigated the turbulence of the global financial crisis, as well as the uncertainty of its aftermath. On their watch, the United States was saved many times from economic disaster, and I am confident that her leadership will continue to ably guide the Fed,” he said.
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"Saved" many times from disaster of their own creation? Yet will Ms. Yellen’s regime really be about stability and continuity or about shifting resources from mainstreet to the government and their cronies? 

Or has Dr. Bernanke been smart enough to bail out of the FED while setting up Ms. Yellen for a trap? 

The chart from Austrian economist Bob Murphy shows of the baptism of fire (S&P crash) for the newly appointed Alan Greenspan and Ben Bernanke. 

Will Ms. Yellen suffer the same fate too?


European Economic Recovery? UK Industrial Production Unexpectedly Drops

Again we see another example of the difference between what people say and what people actually do. 

Earlier, UK’s economy has been touted as emerging “strongly from the deep recession of recent years” , due to a big jump on the purchasing managers index (PMI) which rose from 54.8 in July to 57.2 August – “its highest level in two and a half years” (the Guardian).

The reality turns out different, contra consensus expectations UK’s industrial production fell "most in almost a year"

From Bloomberg:
U.K. industrial production unexpectedly fell in August by the most in almost a year, casting doubt on the strength of the third-quarter recovery.

Industrial output dropped 1.1 percent from July, when it gained 0.1 percent, the Office for National Statistics said today in London. The median forecast of 30 economists in a Bloomberg News survey was for an increase of 0.4 percent. Factories cut output by 1.2 percent, with pharmaceuticals contributing most to the decline.
Whether in the Eurozone or Japan, the establishment’s spin machine eventually faces wrenching reality

Was America Discovered by the Chinese 70 years Before Columbus?

A  British historian says the Chinese came ahead of Columbus.

From the DailyMail.co.uk (hat tip Lew Rockwell)
-Gavin Menzies, a British historian, claims Chiense Admiral Zheng He set up colonies and sailed round South America before Columbus

-Menzies' new book, 'Who Discovered America?' also claims the Chinese have been sailing to the New World since 40,000 BC across the Pacific Ocean

-His theories are not widely accepted by academia and he has been labeled a 'pseudo-historian'

A copy of a 600-year-old map found in a second-hand book shop is the key to proving that the Chinese, not Christopher Columbus, were the first to discover the New World, a controversial British historian claims.

The document is purportedly an 18th century copy of a 1418 map charted by Chinese Admiral Zheng He, which appears to show the New World in some detail.

This purported evidence that a Chinese sailor mapped the Western Hemisphere more than seven decades before Columbus is just one of Earth-shattering claims that author Gavin Menzies makes in his new book ‘Who Discovered America?’ - out today, just in time for the Columbus Day holiday.

‘The traditional story of Columbus discovering the New World is absolute fantasy, it’s fairy tales,’ Mr Menzies told MailOnline.

Among Menzies other claims are that the first inhabitants of the Western hemisphere didn’t come over land from the Bering Strait, but instead were Chinese sailors who first crossed the Pacific Ocean 40,000 years ago.

He also writes that DNA markers prove American Indians and other natives are the descendants of several waves of Asian settlers.
Read the rest here

Given the recent string of controversial territorial dispute events such as Senkaku, Kashmir, Scarborough Shoals, Spratly’s Islands (Wikipedia has a list here), will this prompt the Chinese government to make a claim on the US?

Tuesday, October 08, 2013

The Impact of the declining international reputation of the US government

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Writes Simon Black of the Sovereign Man (bold mine)
It’s amazing when you step back and look at the big picture.

The Russians are preventing a US military invasion. The Chinese actually have to step in and say something publicly to ensure that the US government pays its bills. The Brazilians are too disgusted to even visit Washington DC.

What a completely different world we live in, even compared to just 10 or 15 years ago.

Think back to the late 90s. The US really was the pinnacle of civilization. The government was beginning to pay down its debt. America’s reputation was unblemished. And to most foreigners, the US economy was the envy of the world.

What’s happening today would have been unthinkable back then. But it just goes to show how quickly things can unravel.

It’s tremendously important that the reputation of the US government is sinking to an all-time low internationally.

Remember, the reason that the US Federal Reserve can print trillions of dollars is because the rest of the world has for decades been willing to accept dollars for international transactions and sovereign reserves.

Nearly every government and central bank on the planet has a big pile of dollars stashed away.

The US government seems to think that this arrangement will last forever, and that their actions are without consequence. Nothing is further from the truth.

As the US government’s international reputation craters after one embarrassing episode after another, other nations are beginning to no longer trust the US, whether it comes to spying or managing a sound currency.

This puts the US dollar at even greater risk of quickly losing global reserve domination, and along with it, the ability to print money without damning ramifications.

As history has shown so many times before, this is exactly how the end begins.

Graphic: I therefore Intend to oppose the effort to increase America’s debt burden

How things change when one is on the top... 

(hat tip Zero Hedge)

Monday, October 07, 2013

Quote of the Day: Almost all social order emerges undesigned and unplanned

Sadly, most people are apparently just incapable of understanding that almost all social order emerges undesigned and unplanned.  Most people are and seemingly will remain naive secular creationists, ignorant that the forces of natural selection and evolution are constantly at play in society, and that these force are usually only thwarted or distorted by attempts to engineer society from on high.  And (here’s an irony) this sad ignorance of the nature of society afflicts even – perhaps especially – those people who have no difficulty understanding that very complex, beautiful, and highly functional non-social orders (such as biological order and the order of the cosmos) emerge unplanned and undesigned.
This is from Professor Donald J. Boudreaux at the Café Hayek.

Unplanned and undesigned social order can be seen as spontaneous order or you even as anarchism