Monday, October 28, 2013

Phisix: The Implication of the US Boom Bust Cycle

We are big fans of fear, and in investing, it is clearly better to be scared than sorry. -Seth Klarman
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Stock markets of the US and select developed countries continue with its melt-UP record smashing breakout streak.

This week, the Dow Industrials (not in chart) climbed 1.1% approaching a record while her peers at historic highs also posted gains, particularly, S&P 500 +.88% and the Nasdaq +.74%. The Russell 2000 small cap closed nearly unchanged +.003%.
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Outperforming US stocks, this week, relative to emerging markets and against many other developed peers imply that the share of US stocks in terms of market capitalization to the world should be expanding.

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However, the flagging US dollar has essentially offset nominal currency gains made by US equities.

Net foreign selling in US equities during the 2nd quarter, which I cited two weeks back[1], represents the second largest in record since the 1990s.

Political bickering theatrics over government shutdown, debit ceiling and Obamacare reportedly prompted for net foreign selling of US assets in August. Net sales of U.S. equities by official holders abroad were a record $3.1 billion, according to a report from Bloomberg[2].

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Rising stock markets amidst severe currency strains hardly represents signs of economic strength. Instead such dynamics are manifestations of an escalation of monetary ailment.

A good example of such extremes can be seen in the unfolding real time currency crisis in Venezuela. The Caracas Index or Venezuela’s stock market benchmark has been in a phenomenal vertiginous parabolic climb—up 347.5% (!!!) year-to-date, this adds to the 2012 gains at 302.81% for a total of 650.31% in one year and ten months (!!!)—as the collapse of the Venezuelan Bolivar[3] as shown via its black market rates steepen.

Ironically, in the face of massive goods shortages or an economic standstill, the increasingly desperate Venezuelan government decrees a Vice Ministry of Supreme Social Happiness[4]. Individual “happiness” will now be substituted for collective “happiness” as perceived and implemented by the political leaders[5].

I know the US is not Venezuela. Japan is not Venezuela too. But all three has exercised the same currency debasement programs, resulting to the same outcomes at varying degrees.

Venezuela which is at the advance stage of a currency crisis, serves as example of what may happen to the US or Japan if political leaders insist proceeding towards such trajectory.

And since the world still depends on the US dollar as main currency for foreign currency bank reserves and as the principal medium for payment and settlements for international financial transactions, despite actions by some nations to wean themselves from the US dollar via currency swaps, bilateral currency trade deals and barter[6], the fate of the US dollar will have significant influence on the direction of the global financial markets.

I would also add that aside from the US dollar, developments in the US financial markets—the largest in the world, for instance, the US stock markets, despite the fall of US market cap relative to the world, remains at 34.6% (as of October 13, 2013) according to Bespoke Invest[7]—will also have big sway on global markets. The meltdown from the perceived tapering by the Fed last May which intensified the actions of the bond vigilantes should be a noteworthy example.

In today’s globalization expect connectivity not just in the web, or telecoms but also in financial markets and economies.

Manipulating Earnings Guidance to Boost Share Prices

When market participants frenziedly bid up stock prices to astronomical levels, the unsustainability of such actions can be established by simple observations.

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Again as I pointed out last week, zooming stocks has led to astonishing valuations. The small cap Russell[8] 2000’s PE ratio[9] has been valued at a fantastic 84.51 as of Friday’s close.

Given that the Forward PE has been estimated at 22.5, this means that earnings for the coming year have been expected to explode by a stunning 276%!

However if one were to weigh on the sentiment of small businesses to assess such potentials, a recent survey by small business (conservative lobbying[10]) organization the National Federation of Independent Business (NFIB)[11] seems barely sanguine to justify such valuations (bold mine)
Small-business owner optimism did not “crash “ in September, but it did fall, dropping 0.20 from August’s (corrected) reading of 94.1 and landing at 93.9. The largest contributing factor to the dip was the significant increase in pessimism about future business conditions, although this was somewhat offset by a notable increase in number of small-business owners expecting higher sales
So we have basically a neutral condition unsupportive of wild earnings growth expectations. 

The same hold true with Dow Utility. With a trailing PE at 30.89 and forward PE at 16.15 this means that priced at Friday’s close, the drop in forward PE will mean that earnings must jump by 92%!

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Aside from bond based share buybacks discussed last week, publicly listed companies “beat earnings estimates” by resorting to lowering guidance[12] has been a major pillar in driving up US stocks.

As one would note, 62.6% of corporations recently beat earnings estimates. Although the positive surprise trend has been on a decline since 2006.

On the other hand, the spread or the variance between positive and negative guidance by companies has been in a deficit since the 3rd quarter of 2011.

In other words, listed firms set easier profit goals which they eventually outperform via “beat estimates”. The positive surprise then spurs higher prices.

In my view this looks like accounting prestidigitation.

Yet negative guidance according to the Factset has been at record levels[13]

For Q3 2013, 89 companies have issued negative EPS guidance while 19 companies have issued positive EPS guidance. If 89 is the final number of companies issuing negative EPS guidance for the quarter, it will mark the highest number of companies issuing negative EPS guidance since FactSet began tracking guidance data in 2006.

Managing earnings expectations in order to “beat the estimates” has usually been a bear market technique used by the management.

According to Investopedia.com[14] “It is one of the analyst's jobs to evaluate management expectations and determine if these expectations are too optimistic or too low, which may be an attempt at setting an easier target. Unfortunately, this is something that many analysts forgot to do during the dotcom bubble.”

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The Factset graph also shows that Utilities and Telecoms have had 100% negative guidance changes. In short, these two industries expect materially LOWER profits thus the widespread downscaling of their estimates.

So how on earth will Utility earnings jump by 92%?!

Except for the energy sector, positive guidance has been a scarcity.

Since corporate profits represent a component of the income side of the National Income and Product Account (NIPA) [15], the lowering of profit guidance hardly reflects on a robust economy. This hardly justifies a sustainable upside run of stock market prices.

But again over the interim, rational irrationality may rule.

The other way to look at these: Management of many publicly listed corporations may have purposely been guiding “earnings” expectations down in order to generate “surprises”. Such positive surprise should extrapolate to an increase in (earnings performance based) compensation.

Rewarding executives based on earnings performance has been loaded with agency (conflict of interest) problems

According to an academic paper written by Lan Sun of UNE Business School, Faculty of the Professions[16] (bold mine)
In theory, a link between a CEO's compensation and a firm performance will promote better incentive alignment and higher firm values (Jensen & Meckling, 1976). However, executive compensation contract is an incentive where opportunistic earnings management behaviour is likely to be detected since CEOs are expected to have incentives to manipulate earnings if executive compensation is strongly linked to performance. A substantial literature has emerged to test the relationship between executive compensation and earnings management and has documented that compensation contracts create strong incentives for earnings management…When earnings management is driven by opportunistic management incentives, firms will ultimately pay a price and its negative impact on shareholders is economically significant.
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So far, total corporate profits based on y-o-y changes inclusive of Inventory Valuations Adjustments (IVA) and Capital Consumption Adjustment (CCAdj)[17] have chimed with the trend of lowering of profit expectations.

Yet curiously bad news (negative trends), which represents the underlying largely overlooked or ignored real factor of declining trend of profitability or eps growth rate and net income as shown last week, has been seen as good news (by mainly focusing on beat estimates or nominal growth figures or Fed easing)

It’s all about selective perception or picking of information to fit one’s biases or beliefs.

Let’s Keep Dancing: The Intensifying Credit Orgy

In a manic phase of the boom-bust cycle, zooming stocks equals ballooning credit.

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Back to the future with exploding leveraged loans and covenant lite bonds, from the Financial Times[18] (bold mine)
Neiman Marcus, the upscale US department store chain, is no stranger to fashion trends. But in the autumn of 2005 the luxury retailer started a very different kind of fad – this time for an unusual new bond structure known as a “payment-in-kind toggle”.

Pik-toggle notes, as they became known, gave Neiman Marcus the option to pay its lenders with more bonds instead of cash if the retailer ever ran into financial difficulty. For a company that was at the time being bought by private equity giants TPG and Warburg Pincus, in a leveraged buyout involving about $4.3bn worth of debt, that additional financial flexibility was considered a savvy move….

The average amount of debt used to finance LBOs has jumped from a low of 3.69 times earnings in 2009 to an average 5.37 so far this year, according to data from S&P Capital IQ. At the height of the LBO boom, average leverage was 6.05.

The $6bn sale of Neiman Marcus to Ares and a Canadian pension fund is expected to leave the retailer with a debt of about seven times earnings.

At the same time, more than $200bn of “cov-lite” loans have been sold so far this year, eclipsing the $100bn issued in 2007. That means 56 per cent of new leveraged loans now come with fewer protections for lenders than normal loans.
Regulators have sounded the alarm bells on covenant light loans but the industry group has pushed back saying that loan warnings will hurt the “neediest borrowers”[19]. Such characterizes the rationalization of the mania phase. Echoing the infamous words of ex-Citibank chair Charles Prince during the height of the US housing boom, “For as long as the music is playing, you’ve got to get up and dance. We’re still dancing[20].” 

Let’s keep dancing

And when it comes to yield chasing via increased leveraging, the absence of a stamp of approval by credit rating agencies has hardly become a factor to Wall Street’s peddling of Commercial Mortgage Bonds (CMBS). [note credit rating enthusiasts, credit rating warnings ignored by markets]

From the Bloomberg[21]: (bold mine)
Wall Street banks that package commercial mortgages into bonds are forgoing a ranking from Moody’s Investors Service on the riskier portions of the deals, a sign the credit grader isn’t willing to stamp the debt investment-grade amid deteriorating underwriting standards.

Moody’s didn’t grade the lower-ranking debt in 9 of the 14 commercial-mortgage bond transactions it’s rated since mid-July, according to Jefferies Group LLC. Deutsche Bank AG (DBK), Cantor Fitzgerald LP and UBS AG (UBSN) are selling a $1 billion transaction this week that doesn’t carry a Moody’s designation for a $64.3 million portion that Fitch Ratings and Kroll Bond Rating Agency ranked the lowest level of investment grade, said two people with knowledge of the deal.

Moody’s absence from the riskier securities in commercial-mortgage deals suggests the New York-based firm is taking a harsher view of the quality of some new loans as issuance surges in the $550 billion market, Jefferies analysts led by Lisa Pendergast said in a report last week. Credit Suisse Group AG’s forecast for $70 billion of offerings this year would be the most since issuance peaked at $232 billion in 2007.

Credit bacchanalia has gone global. Booming issuance of high yield (junk) bonds linked to M&A has reached 2007 highs. 

From the Financial Times[22]:
A burst of investor “animal spirits” has boosted the value of mergers and acquisitions-related bonds to the highest raised since the financial crisis.

Global acquisition-related bond issuance from non-investment grade, or high yield, companies has risen by 15 per cent to $62.9bn for the year to date compared with the same period in 2012.

This is the highest amount since 2007, according to Dealogic, the data provider.

The surge has been driven by purchases outside the US as non-US acquisition bond issuance nearly tripled to $14.1bn compared with last year, including deals such as Liberty Global ’s $2.7bn issue
High grade corporates likewise reveals of a debt issuance bonanza.

From the Wall Street Journal[23], (bold mine)
According to data provider Dealogic, the $884.3 billion of highly rated corporate bonds sold in the U.S. this year through Wednesday has been the most of any year at that point since 1995, when it began keeping records.

October’s rush of supply has helped put 2013 back on track to exceed the record $1.01 trillion issuance seen in 2012.
The accounts above validate my view on the transition process of companies from hedge financing to Ponzi financing.

As I wrote last week[24], (bold original)
So while most publicly listed US companies have yet to immerse themselves into Ponzi financing, sustained easy money policies have been motivating them towards such direction.

The greater the dependence on debt, the more Ponzi like dynamics will take shape.

The Fallacy of Little Screwy People

Record or near record issuance of high yield bonds, commercial-mortgage bonds, covenant lite bonds leverage buyout loans and investment grade bonds constitute signs of liquidity trap? To the contrary it would seem like a tidal wave of money.

Yet most central bankers and the consensus see the former (as if the world exists in some vacuum) to justify direct intervention via QE.

And thus far all these credit easing has failed to accomplish its end.

And we don’t need to heed on the former Fed chief Alan Greenspan’s view[25] about forecasting.
We really can't forecast all that well. We pretend that we can but we can't. And markets do really weird things sometimes because they react to the way people behave, and sometimes people are a little screwy.
And if officials can’t forecast on the consequences of their policies using their econometric models, then why experiment?

Yet it is hardly about people being a “little screwy” but more about people responding to daft experiments imposed on societies as economic policies (US and their multiplier effects worldwide) by ivory tower bureaucrats who hardly knows about real economic relationships except to see them as mechanistic mathematical models, and at the same time, have the impudence to undertake grand trials because they barely have skin on the game. 

Moreover policies which punish savings and simultaneously “nudge” the public to wantonly indulge in reckless risk activities leads people to become “screwy”. Bad ideas have bad consequences.

So the cost of their policies will be borne by the average citizenry via restrictions of economic opportunities, financial losses, assuming a bigger burden of financing pet projects of politicians and their bureaucracy, diminished purchasing power and many other non-pecuniary social costs (e.g. erosion of moral fiber, curtailment of civil liberties, social upheaval and etc...)

And these booming credit markets have largely undergirded the financing of the housing or the stock markets bubbles rather than channelled to the real economy for productive activities. The opportunity cost for monetary policy-induced speculation has been the productive sectors, thus the real economy’s growth remains muted or sluggish relative to asset markets.

Monetary inflation has essentially been absorbed by the asset markets. Monetary inflation has spurred massive risk taking, speculative splurge, blatant momentum yield chasing, having been financed by exponential credit growth that has resulted to severe misallocation of resources, blatant mispricing of assets and maladjusted economies.

And such asset bubbles have become international. Thus risks from any unhinging of the bubbles from the US or from any developed economies or even from big emerging markets may likely have a domino effect.

We don’t really need to forecast. All we need is to understand the real economic relationships applied to instituted policies to appreciate the risks.

As the great dean of Austrian economics Murray Rothbard explained[26]: (bold mine)
Economics provides us with true laws, of the type if A, then B, then C, etc. Some of these laws are true all the time, i.e., A always holds (the law of diminishing marginal utility, time preference, etc.). Others require A to be established as true before the consequents can be affirmed in practice. The person who identifies economic laws in practice and uses them to explain complex economic fact is, then, acting as an economic historian rather than as an economic theorist. He is an historian when he seeks the casual explanation of past facts; he is a forecaster when he attempts to predict future facts. In either case, he uses absolutely true laws, but must determine when any particular law applies to a given situation. Furthermore, the laws are necessarily qualitative rather than quantitative, and hence, when the forecaster attempts to make quantitative predictions, he is going beyond the knowledge provided by economic science









[7] Bespoke Invest US Loses Share to Rest of World October 14, 2013

[8] Russell Investments Russell 2000® Index The Russell 2000 is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.

[9] Wall Street Journal P/Es & Yields on Major Indexes Market Data Center


[11] National Federation of Independent Business October Report Small Business Economic Trends

[12] Bespoke Invest Guidance Remains Weak October 24, 2013

[13] Factset Guidance S&P 500 September 30,2013



[16] Lan Sun EXECUTIVE COMPENSATION AND CONTRACT-DRIVEN EARNINGS MANAGEMENT ASIAN ACADEMY of MANAGEMENT JOURNAL of ACCOUNTING and FINANCE 2012


[18] Tracy Alloway and Vivianne Rodrigues Boom-era credit deals raise fears of overheating Financial Times October 22, 2013




[22] Financial Times M&A bonds surge to highest in six years October 21, 2013

[23] Wall Street Journal Latest Headlines Low Rates Bring Bond Bonanza October 25, 2012



[26] Murray N. Rothbard, 1. Economics: Its Nature and Its Uses CONCLUSION: ECONOMICS AND PUBLIC POLICY Man, Economy & State

Phisix: ASEAN Equity Markets Continue to Lag

It has been a curiosity for me to see ASEAN equity markets, with the exception of Malaysia, fail to rev up along with high octane US and some European markets as the German Dax, considering an environment of falling US dollar and a reprieve from the bond vigilantes.

Global Trade Woes?

Could it be because of growing concerns on global trade particularly from export dependent Asia?

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According to a Bloomberg report[1],
The Hague-based CPB Netherlands Bureau for Economic Policy Analysis estimated global trade volume fell 0.8 percent in August, eroding a 1.8 percent jump of the previous month. It was the weakest performance since a 1.1 percent decline in February and left the three-month average lagging its historical pace.
While global merchandise trade remains slightly off record highs, the rate of gains has been on a decline (quarter on quarter—left) and (quarter from a year ago—right)[2],

Much of the failing trade has been attributed to the ‘lack of demand’ from emerging markets. But the article did not bother to explain further.

Unlike mainstream view, the slowing growth in emerging markets has mainly been a product of internal bubbles, many of whom have been approaching their inflection points. The threat by the US Fed to “taper” last May only exposed on these vulnerabilities. 

In addition, the adverse consequences from the largely unseen redistribution of resources from US Federal Reserve policies which has been embraced as the de facto operating standard by global central banks seem as becoming more evident.

Credit easing policies such as zero bound rates has gradually been eroding on the real savings of many Asian nations who adapted such schemes. Borrowing demand from the future financed by debt has come home to roost.

And since inflationism has been designed to transfer resources to privileged constituents or to protect certain interest groups at the expense of the rest, the corollary inequalities have led to politically charged atmosphere.

And in the realm of politics, the intuitive and the best way to divert the public’s attention from the real issue have been to blame the foreigners. 

In doing so, inflationism which usually is followed by price controls eventually spawns trade, finance and labor protectionism.

So the next political actions we should expect would be travel or social mobility restrictions, higher tariffs or more non-tariff trade barriers and capital controls.

The same article suggests that we are headed in such direction.
Protectionism is also on the rise despite pledges to avoid it by the Group of 20 leading industrial and developing economies, according to Evenett. He estimates 337 measures have been imposed worldwide so far this year after 503 in 2012.
However, near record high New Zealand stocks and record high Malaysian and Australian stocks can hardly explain the global trade factor.

Credit Concerns?

The other factor causing such divergence could be slowing credit growth.
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As pointed out above, internal bubbles have served as an internal hindrance to expanding credit growth.

A survey from the Institute of International Finance[3] (IIF) on Emerging Markets suggests that “bank lending conditions continued to tighten in emerging economies for the second quarter in a row.”

And while demand for loans in Asia seem to have improved, credit standards, funding conditions and trade finance have all meaningfully slowed.

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The IIF data actually mostly reflects on the credit conditions of the Philippine banking system, based on the BSP data from the start of the year until August. Except that credit growth in August appear to have rebounded, despite the “Ghost Month” which curiously the BSP incorporates as “economic” analysis.

[As a side note, the BSP’s stubborn insistence to use “Ghost Month”[4] assumes that whether Filipino or Chinese or foreign non-Chinese, all subscribe to such superstition. Based on such logic, perhaps ‘paranormal’ forces had been responsible for the credit growth last August]

I have no data yet for September to see whether the August loan rebound has been sustained or had been a blip.

I have yet to access credit data conditions for Malaysia, Australia and New Zealand, but have been limited by time constraints

Capricious Credit Rating Agencies

Credit rating agency Fitch has revised their outlook on Malaysia to Negative from Stable in July, they further warned about the growing pressure on credit profiles of Asia-Pacific Sovereigns[5]

The Standard & Poors seem to have seconded such concerns where “positive trend of Asia-Pacific sovereign ratings”, said KimEng Tan, senior director for Standard & Poor’s Ratings Services in an interview[6], “over much of the past decade looks likely to break in the next one or two years. We do not see a high likelihood of a sovereign rating upgrade during that period. Instead, three sovereign ratings in the region currently carry negative outlooks – India, Japan and Mongolia. We do not have any Asia-Pacific sovereign on a positive outlook.” (bold mine)

It is ironic how Malaysia’s July downside revision has led to new record high stocks while the trifecta of credit rating upgrades have still left the Phisix midway from the distance of the recent historic highs and the meltdown lows.

Importantly both credit rating agencies appear to be “playing safe”, such that in the event that another market meltdown episode, they would have the leeway to immediately initiate downgrades.

As pointed out before[7], credit rating agencies have essentially been reactionary. They respond to market events rather than take action in antecedence. They hardly see risks coming. Two market meltdowns appear to have altered their sanguine viewpoints on the region. Yet as a sign of dithering, they refrain from actual downgrades but instead float trial balloons by verbalizing their concerns.

In the case of the S&P, they have placed on negative outlook, for instance the S&P on India, Japan and Mongolia. Paradoxically, like Fitch on Malaysia, India’s stocks are also a breath away off from the recent landmark highs.

This also reveals of the narrowness of the span of vision of credit rating agencies has for their subjects, or in this case the sovereigns, such that they easily change sentiments.

The above also suggests of the extreme volatility of the markets as they become detached with fundamentals.

The China Wild Card: Has Inflation Reached a Critical State?

It is hard to see the Chinese card on ASEAN when Australian stocks are at record territories and when the Australian dollar have strengthened (except for the past three days)

But again, it’s hard to see a straight connection based on economic fundamentals when financial markets have been heavily distorted by excessive politicization.

My goal here will not be explain past stock market actions, but rather to anticipate the potential actions given the recent events.

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The Chinese government has reportedly suspended three consecutive sessions of reverse repurchase operations.

This has supposedly impelled a spike in the Chinese interest rate markets. Shibor rates (Shanghai Interbank Offered Rates[8]) interest rates representing unsecured short term interbank money markets have soared across the maturity spectrum. The overnight (left most), the 6 months (middle) and 1 year (right most)[9] have all surged.

Friday, yields of China’s 10 year bonds hit 4.23% but closed back at 4.16% the highest since November 2007 when it peaked at 4.6%[10]

Part of the cause has been attributed to “financial and tax paid in October” which contributed to tightening conditions.

While the Chinese government has taken new steps to liberalize interest rates last week where banks rather than the PBOC would set benchmark[11], I don’t think the new interest rate regime has anything to do with the turmoil.

One domestic google translated English article[12] noted that the market is said to be worried about "money shortage", since “excessive tightening of liquidity could lead to systemic risk”. The article mentioned money shortage thrice.

Another google translated English article[13] noted of the same “market money shortage recurrence concerns”, but this time, the quoted expert raised inflation rate and housing prices as contributing to the tightening.

When people complain about “shortages of money”, they could be expressing signs of acceleration of inflation, where changes in the supply of money have been deemed as insufficient to meet changes in money prices. Put differently such represents an advance phase of inflationism.

As the dean of the Austrian school of economics, Murray Rothbard explained[14] (bold mine)
At first, when prices rise, people say: "Well, this is abnormal, the product of some emergency. I will postpone my purchases and wait until prices go back down." This is the common attitude during the first phase of an inflation. This notion moderates the price rise itself, and conceals the inflation further, since the demand for money is thereby increased. But, as inflation proceeds, people begin to realize that prices are going up perpetually as a result of perpetual inflation. Now people will say: "I will buy now, though prices are `high,' because if I wait, prices will go up still further." As a result, the demand for money now falls and prices go up more, proportionately, than the increase in the money supply. At this point, the government is often called upon to "relieve the money shortage" caused by the accelerated price rise, and it inflates even faster. Soon, the country reaches the stage of the "crack-up boom," when people say: "I must buy anything now--anything to get rid of money which depreciates on my hands." The supply of money skyrockets, the demand plummets, and prices rise astronomically. Production falls sharply, as people spend more and more of their time finding ways to get rid of their money. The monetary system has, in effect, broken down completely, and the economy reverts to other moneys, if they are attainable--other metal, foreign currencies if this is a one-country inflation, or even a return to barter conditions. The monetary system has broken down under the impact of inflation.
If the Chinese government really thinks that inflation has gotten out of control then the thrust to tighten may continue. However such tightening could mean bursting of many highly leveraged businesses. This also means that credit woes will spread via the periphery to the core dynamic, given China’s highly leveraged the formal and informal banking system. In short boom could turn into a massive bust.

It is unclear how determined and how much pain and pressures the Chinese political leadership can withstand.

But if it is true that China’s system has reached an advanced phase in terms of inflation and if the Chinese government accommodates the demand for money to ease the shortages then China may experience a Venezuela.

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This has been the second time the Chinese government has attempted to curb liquidity.

The first time was in June where China’s credit turmoil caused a stir in Asian markets (blue lines).

While global markets as Australia appears to have discounted the Chinese turbulence as perhaps just another typical quirk, we will have to see or ascertain if the economic conditions has really deteriorated. Japan’s Nikkei appears to be weakening again coincidental with the Chinese benchmark.

The following days will be critical.

If the problems in China have turned unwieldy then another round of a market meltdown can’t be discounted.

As I have been lately saying, there are many flashpoints or minefields around the world that could spell the difference between one’s return ON investments as against return OF investments.





[3] Institute of International Finance Emerging Markets Bank Lending Conditions Survey - 2013Q3 October 24, 2013











[14] Murray N. Rothbard, 2. The Economic Effects of Inflation Government Meddling With Money What Has Government Done to Our Money?

Sunday, October 27, 2013

Amidst Hyperinflation, Venezuelan Government Decrees a ‘Happiness’ Ministry

In Venezuela, “happiness” will now be imposed by fiat.

The Venezuelan government has announced a new bureaucracy called the Vice Ministry of Supreme Social Happiness

A new Vice Ministry of Supreme Social Happiness has been created by Nicolas Maduro, the Venezuelan president, in an attempt to coordinate all the "mission" programmes created by Hugo Chavez to alleviate poverty.

"I have decided to create this Vice ministry and I have given it this name to honour Chávez and Bolívar," Mr Maduro announced on Thursday in a televised speech made from the presidential palace. He said that the Vice ministry aimed to take care of the most "sublime, vulnerable and delicate, to those who are most loved by anyone who calls themselves a revolutionary, a Christian and Chavista."

Oil-rich Venezuela is chronically short of basic goods and medical supplies. Annual inflation is running officially at near 50 per cent and the US dollar now fetches more than seven times the official rate on the black market.

The creation of the ministry sparked widespread mirth and mocking in the streets and on social media.

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In a state of hunger, shortages and hyperinflation, the Venezuelan government will force their citizenry to be “happy”. Maybe frowning, sulking or crying in public or in households will be prohibited.

In reality, the only entities who will be "happy" are the political leadership and the bureaucracy who will be spending more of other people money, and who will virtually dictate on lives of their constituencies to conform with the conceit of their leaders. “Be happy! Or else….”

Well in my view this fits Australia's Walk Free Foundation definition of “modern day slavery” which according to the Los Angeles Times, takes many forms, and is known by many names. Whether it is called human trafficking, forced labor, slavery or slavery-like practices … victims of modern slavery have their freedom denied, and are used and controlled and exploited by another person for profit, sex or the thrill of domination." (bold mine)

Happiness can never be imposed. Happiness is subjective and comes from the individual's inner self. 

As the great Austrian economist Ludwig von Mises explained, (Liberalism p.46)  [bold mine]
Whoever wants to see the world governed according to his own ideas must strive for dominion over men's minds. It is impossible, in the long run, to subject men against their will to a regime that they reject. Whoever tries to do so by force will ultimately come to grief, and the struggles provoked by his attempt will do more harm than the worst government based on the consent of the governed could ever do. Men cannot be made happy against their will
Happiness as a social policy is an example of the height of statist lunacy.

But as Mises warned Venezuela’s Happiness Ministry will eventually "grieve" or have its pretentiousness exposed.

Saturday, October 26, 2013

More Statistical Hocus Focus in EU, Emerging Asia and Japan?

Have governments been desperate enough to resort to statistical trickery to boost up economic growth or downplay risks? 

Europe’s data management from Wall Street Real Times Economic Blog: (bold mine)
Sometimes, the absence of data is a data point itself.

Take, for example, a paper published Friday on transparency trends in the International Monetary Fund’s surveillance.

The paper — see Table 4 — reveals that the European Union and its member countries deleted sensitive information about their financial sector in more than a quarter of the IMF’s reports on their economies last year.
Emerging Asia also previously engaged in the same data mining activities…
It also shows that emerging Asian countries are more confident about public scrutiny of their exchange-rate policies than they were in 2010, when they deleted sensitive references to their exchange rates in nearly one-fifth of the IMF’s country reports on the region’s emerging market economies.

The fund’s annual reports on member countries’ economic policies—called Article IVs in a reference to the specific IMF bylaw that created them–are a hallmark of the global lending institution’s analysis. The reports are designed to ensure both domestic and international economic stability.
IMF’s justification of statistical data "management"….
Member countries have the right, however, to delete material in the reports they deem too sensitive, delay publishing of reports, and even prevent the IMF from publishing reports altogether. The deletions are to help rid surveillance reports of market-sensitive and potentially market-damaging data and preserve the IMF’s role as a trusted adviser. (See Table 8 for publication lags.)
See, when statistical data doesn’t fit with the political agenda, then data management have been rationalized or justified as “market-sensitive and potentially market-damaging data”. This means hiding, censoring or editing or data mining by governments, similar to the Chinese government experience, so as to purportedly “ensure both domestic and international economic stability”

We achieve “stability” by misrepresenting data? 

The logical relations flows the other way around. Phony or inaccurate data, which most likely underpins politically induced imbalances, motivates more mismanagement by politicians. And despite censorship, a continued buildup of such misallocation of resources will eventually reach a tipping point or a critical mass that will then be vented on the marketplace. Economic reality will expose on such whitewashed data.

And it may not just be about EU, emerging Asia and China.

Has Japan been managing statistical data too?

In recent months, the government has been proudly trumpeting rises in consumer prices, including energy, as proof of its success in ending deflation. Yet non-believers have said that’s cheating, as the yen’s 11% fall against the dollar this year has naturally pushed up prices of imported energy.
The following quote on statistics attributed to Prussian born Austrian surgeon and amateur musician Theodore Billroth says it best…
Statistics are like women; mirrors of purest virtue and truth, or like whores to use as one pleases.

Friday, October 25, 2013

Quote of the Day: Law is the unconscious creation of society

Law is not a body of commands imposed upon society from without, either by an individual sovereign or superior, or by a sovereign body constituted by representatives of society itself.  It exists at all times as one of the elements of society springing directly from habit and custom.  It is therefore the unconscious creation of society, or in other words, a growth.
This is from page 21 of the American Bar Association’s publication of James C. Carter’s 1890 essay “The Ideal and the Actual in the Law“. The source of the above quote Café Hayek’s prolific blogger and economic professor Don Boudreaux expounds on the James Carter quote
Legislators are legislation-makers; they are not lawmakers.

True law can no more be consciously designed and created outside of the myriad social interactions that give rise to true law than can a true price be consciously chosen outside of the myriad economic interactions that give rise to true prices.  Commands that look to some people like law can be, and are, consciously designed and created.  But these are not law.  And because commands typically run against the spontaneous forces that give rise to law, such commands are typically against the law – just as a government-imposed price (or price control) results in something that looks like a price but is, in fact, not a true price at all.