Celebrating Earth Day With Free Markets

There are two ways to celebrate Earth Day.

The first path, if we opt to follow the environmentalists solution; the most efficient way to reduce Carbon Footprint would be through atavism (bring life back to the medieval ages) or simply commit suicide.

As Michael S. Berliner, Ph.D. writes,

``Such is the naked essence of environmentalism: it mourns the death of one whale or tree but actually welcomes the death of billions of people. A more malevolent, man-hating philosophy is unimaginable."

But hostility to human affairs on the environment has long been here.

Professor Pierre Desrochers in the Financial Post writes, ``The idea that Nature is in fragile balance and under constant threat from human greed goes back much further than is generally believed.

``In his treatise On the Testimony of the Soul published more than 1,800 years ago, at a time when the world’s population was about 30 times lower than it is today, the theologian Tertullian noted with horror that humans have “become a burden to the Earth; the fruits of nature hardly suffice to sustain us; there is a general pressure of scarcity giving rise to complaints, since the Earth can no longer support us.” Fortunately, he added, “plague and famine, warfare and earthquake, come to be regarded as remedies.”

``Human existence was also long blamed for changes in the weather, as researchers Hans von Storch and Nico Stehr explained in a recent scientific article. Well before a supposed “consensus” blamed our use of coal, oil and natural gas for climate change, periods of cooling or heating over the last few centuries were attributed to various manmade causes such as witchcraft, deforestation, the invention of the lightning rod and then wireless telegraphy, cannon shots in the First World War and nuclear testing."

But since, people have outlasted such pessimism and will continue to do so.

And apparently beyond all the environmental ruckus, life has been improving.

Writes Bjorn Lomborg, ``But consider this: In virtually every developed country, the air is more breathable and the water is more drinkable than it was in 1970. In most of the First World, deforestation has turned to reforestation. Moreover, the percentage of malnutrition has been reduced, and ever-more people have access to clean water and sanitation."

So George Carlin's "Saving The Planet" video which we blogged last year George Carlin on Saving The Planet, should be a comic refresher anent the fallacy from the demagoguery engaged by extremist environmentalists.



The second way to celebrate Earth Day is to recognize that we are in a much better position to acknowledge the importance of our planet.

Again Bjorn Lomborg, ``But in a world in which most developing countries depend almost exclusively on fossil fuels to power their economies, it's both impractical and immoral to insist that the only solution is for everyone to drastically cut carbon emissions. This approach might make sense if we were able to offer developing countries practical, affordable alternatives to coal and oil. But we cannot— and as long as we can't, all we're really doing when we call for massive carbon cuts is asking the world's poor people to continue living lives of misery and deprivation...

"...we might consider one of the fundamental lessons of the past 40 years of environmental concern. You cannot expect people to care about what the environment may be like 100 years from now if they are worrying about whether their children have enough to eat. With this in mind, we should focus on the many more immediate problems faced by the developing world today — problems such as malnutrition, education, disease and clean drinking water."

In other words, the path to a better environment is to for economies to prosper first.

How? Through free markets.

Professor Pierre Desrochers anew, ``It was not regulation or green activism that provided for improvements in the quality of our environment over the last few decades but rather a process inherent to the market economy, leading to ever more efficient innovations and an ever more economical use of resources." (underscore mine)

The World Bank agrees, (bold highlights mine)

``A new report from the World Bank, International Trade and Climate Change: Economic, Legal, and Institutional Perspectives, says liberalization of the global trading system will be a key factor in helping developing countries reduce their greenhouse gas emissions and adapt to climate change.

“Climate change is a global challenge requiring international collaboration,” said Warren Evans, Director of Environment, World Bank. “One area where countries have successfully committed to a long-term multilateral resolution is the liberalization of international trade. Integration into the world economy has proven a powerful means for countries to promote economic growth, development, and poverty reduction.”

Said Evans, “Improving future human welfare is a goal shared by both global trade and climate regimes. Yet both climate and trade agendas have evolved largely independently through the years, despite their mutually supporting objectives. Since global emission goals and global trade objectives are shared policy objectives of most countries, and nearly all of the World Bank’s clients, it makes sense to consider the two sets of objectives together.”

Amen

US-China Pork 'Imbalance'

Here is another interesting development in the international "Pork" market.

There seems to be an ongoing divergence in China and the US.

In China, pork prices seem to be collapsing.

This from the Wall Street Journal, (bold highlights mine)

``Pork prices have fallen 14 weeks in a row according to China’s Ministry of Agriculture, their lowest level in four years, and cheaper even than some vegetables. In the first week of April, the average hog price was 9.43 yuan ($1.38) a kilogram.

``The porcine price plummet has forced the government to add to its much vaunted frozen pork reserve, a series of icy warehouses around the country it set up a few years ago to stabilize pork prices.

``One Chinese press report, citing government statistics, says live pig prices have dropped 21% this year. Another report says pork prices have fallen below the lowly lentil.

``The hope is that by adding to the frozen pork hoard, the government demand will take enough meat off the market to drive prices back up.

``Why does the government want higher prices? Farmers are complaining. According to several stories in the Chinese press too many slaughtered pigs are coming to market, driving farmers to despair.

``Pork plays a vital role in China’s commerce. There are almost half a billion pigs in China, one for every three people. In gross terms, like in humans, China dwarfs other countries in pigs. And there’s no India of pigs to rival China. The next biggest producer is the U.S., which has 65 million pigs, according to the United Nation’s Food and Agriculture Organization. In fact China produces more pigs than the next 43 pork producing countries combined."


And here is why Pork supplies ballooned in China, back to the WSJ,

``The cause of the recent glut of pigs was a reaction to a shortage just a few years ago. An epidemic of blue pig ear disease wiped out pigs across the country and sent pork prices skyrocketing, leading inflation to dangerous levels. The virus attacks pigs’ reproductive systems.

``After the 2007 and 2008 price spike, the government set up the frozen pork reserve and offered subsidies to pig farmers to get the pig population back up. It seems to have worked too well.

``A Ministry of Agriculture report also says changes in the economy have also curbed the growth in the nation’s pork appetite. Demand for pork from migrant workers in big cities has ebbed as more country folk stayed home after the economic slowdown."

In short, markets reacted to the surge in prices by dramatically adding to supply, which had been exacerbated by government "subsidies".

So a pork "bubble" may have developed, which apparently could have just imploded.

At the other side of the continent, in the US, pork prices are going into the opposite direction.
Pork futures (lean hogs) seem to be skyrocketing! (chart courtesy of ino.com)

I have little clue on the status of the global pork trade, except for the following

-the global agriculture market remains one of the "closed" areas.
-the US became a net pork exporter since the mid 1990s.
-Chinese reportedly will reopen to US exports following a ban due to concerns over H1N1 virus.
-current rise in US futures is due to 'tight supplies'

I would suspect that such imbalances could have been mostly due to the distortions brought about by trade restrictions.

This means that the global pork market could be alot inefficient hence the immense disparity in the prices. Otherwise, in a free market, allocative adjustments through price signals would have approached the law of one price.

To add, there seems hardly a cross currency factor here influencing trade ("no 'low' yuan makes us poorer" meme here; move along nothing to see here).

Worst, closed markets, plus government interventions seem to give rise to miniature boom-bust patterns.

Graphic: Origin of The Rule of Law

This seems like an introspective portrayal by Ms. Jessica Hagy apropos "rules" which she calls Don't you know better by now?

From my point of view, this seems like a good depiction of the "origin of the rule of law".

Here is David Hume's the History of England, (bold highlights mine)

``No government, at that time, appeared in the world, nor is perhaps found in the records of any history, which subsisted without a mixture of some arbitrary authority, committed to some magistrate; and it might reasonably, beforehand, appear doubtful whether human society could ever arrive at that state of perfection, as to support itself with no other control, than the general and rigid maxims of law and equity. But the Parliament justly thought that the King was too eminent a magistrate to be trusted with discretionary power, which he might so easily turn to the destruction of liberty. And in the event it has been found that, though some inconveniencies arise from the maxim of adhering strictly to law, yet, the advantages so much overbalance them, as should render the English forever grateful to the memory of their ancestors who, after repeated contests, at last established that noble principle."

SEC-Goldman Sachs Row: The Rising Populist Tide Against Big Government

Professor Arnold Kling writes,

``perhaps it is not so crucial to bolster a financial sector that was misallocating capital or to bolster a state and local government sector that has been captured by unions. Perhaps these heroic efforts undertaken in the name of saving the economy only served to reward the looting classes. Perhaps we have arrived at a point in this country where looting is the most rewarding economic activity. In that case, it will not take many years before the wealth available to loot starts to shrink." (emphasis added)

He scorns the transformation to cronyism, which we totally agree. And that's why I see the latest Goldman controversy as part of the ploy to camouflage the "looting classes".

I guess some charts of Pew Research captures prevailing public sentiment.

From Pew Research, (bold highlights mine)

``By almost every conceivable measure Americans are less positive and more critical of government these days. A new Pew Research Center survey finds a perfect storm of conditions associated with distrust of government -- a dismal economy, an unhappy public, bitter partisan-based backlash, and epic discontent with Congress and elected officials.

``Rather than an activist government to deal with the nation's top problems, the public now wants government reformed and growing numbers want its power curtailed. With the exception of greater regulation of major financial institutions, there is less of an appetite for government solutions to the nation's problems -- including more government control over the economy -- than there was when Barack Obama first took office.

``The public's hostility toward government seems likely to be an important election issue favoring the Republicans this fall. However, the Democrats can take some solace in the fact that neither party can be confident that they have the advantage among such a disillusioned electorate. Favorable ratings for both major parties, as well as for Congress, have reached record lows while opposition to congressional incumbents, already approaching an all-time high, continues to climb.

``The Tea Party movement, which has a small but fervent anti-government constituency, could be a wild card in this election. On one hand, its sympathizers are highly energized and inclined to vote Republican this fall. On the other, many Republicans and Republican-leaning independents say the Tea Party represents their point of view better than does the GOP."

In contrast to those who see and think in terms of their political party lines, the polls suggest that there is ballooning discontent about bi-partisan polity.

And it's why perhaps both the Democratic Party and the Republican Party have felt the backlash from the public and thereby has seen their approval ratings plummet, which has mostly been a reflection of the performance of the US congress.

And it is also why the Tea Party has spontaneously emerged.

Yet some would stubbornly argue that more government activism is likely the answer. For instance more regulation in the financial sphere. This camp never seem to realize that in politics, what you see isn't what you get.

As Heritage's Conn Carroll comments on the proposed financial reform bill, ``So whenever Sen. Chris Dodd (D-CT) says his Wall Street Bailout Bill "would have prevented that kind of events from happening" he needs to explain how. If anything, the Dodd plan will only make future Wall Street bailouts more likely and more costly while also stifling consumer choice." (emphasis added)

This only goes to show that the proposed "new" regulatory reforms are being shaped to even benefit MORE (and not less) the looting class!

Not to mention that the controversial John Paulson who helped inspired the Goldman brouhaha, has been a generous political contributor.

According to Ben Smith of the Politico, ``Though many hedge fund managers lean Democratic, Paulson has split his giving, offering maximum six-figure contributions both the the Democratic Senatorial Campaign Committee and to the Republican National Committee. Paulson, ranked 45 on Forbes' list of America's richest individuals, made maximum contributions to the presidential campaigns of Mitt Romney, John McCain, and Rudy Giuliani in 2008, but has also given to key Democratic senators for the finance industry, including Chris Dodd and Max Baucus.

``Paulson hasn't given directly to Schumer, though he maxed out to Schumer's committee. But he did host a fundraiser for the senior New York senator earlier this month, describing him in the invitation as "one of the few members of Congress that has consistently supported the hedge fund industry." (bold emphasis mine)

And all these (lobby groups, contributions, biased laws, regulatory capture etc...) seemingly add to the reasons on why the public's attitude on politicians seems to have tipped over. Instead of big government, which they had earlier hoped to work, they now seem prefer "smaller" government.

Again from Pew, ``Despite the public's negative attitudes toward large corporations, most Americans (58%) say that "the government has gone too far in regulating business and interfering with the free enterprise system." This is about the same percentage that agreed with this statement in October 1997 (56%)."

The point is that the polls suggest that there seems to be a growing public recognition that the previous "big government" or "activist government" experiment has noticeably been a failure, from which is being manifested in politics, as shown in the intratrade.com prediction markets chart courtesy of Bespoke Invest.

And this gives even more motivation for the ruling political class to use the Goldman caper as a likely prop as the "fall guy" role for political ends.

We just don't oversimplistically regulate cartels out of existence, not when the cartel itself is lead by the government via the Federal Reserve.

To quote Dr. Antony Mueller, "There can be no honesty in a dishonest monetary system".

Quote of the Day on Wall Street: After Nearly A Century, Hardly Any Change

Here is Murray Rothbard on the predicament of the Fed's origin

``The bankers, however, faced a big public relations problem. What they wanted was the federal government creating and enforcing a banking cartel by means of a Central Bank. Yet they faced a political climate that was hostile to monopoly and centralization, and favored free competition. They also faced a public opinion hostile to Wall Street and to what they perceptively but inchoately saw as the "money power."" (bold highlights mine)

So the problem of nearly 100 years ago is basically the same as today! The difference is that the Federal Reserve- banking cartel has been realized, but is still under fire.

SEC-Goldman Sachs: Hindsight Bias, Staged For Political Advantage

This looks like a nice flowchart illustration from Wall Street Journal of the controversial Goldman Sachs-John Paulson deal.

We find new information from the dispute from the Wall Street Journal Editorial: (bold highlights mine)

``More fundamentally, the investment at issue did not hold mortgages, or even mortgage-backed securities. This is why it is called a "synthetic" CDO, which means it is a financial instrument that lets investors bet on the future value of certain mortgage-backed securities without actually owning them.

``Yet much of the SEC complaint is written as if the offering included actual pools of mortgages, rather than a collection of bets against them. Why would the SEC not offer a clearer description? Perhaps the SEC's enforcement division doesn't understand the difference between a cash CDO—which contains slices of mortgage-backed securities—and a synthetic CDO containing bets against these securities.

``More likely, the SEC knows the distinction but muddied up the complaint language to confuse journalists and the public about what investors clearly would have known: That by definition such a CDO transaction is a bet for and against securities backed by subprime mortgages. The existence of a short bet wasn't Goldman's dark secret. It was the very premise of the transaction."

Like us, the Wall Street Journal finds this as reeking with sensationalism.

``Did Goldman have an obligation to tell everyone that Mr. Paulson was the one shorting subprime? Goldman insists it is "normal business practice" for a market maker like itself not to disclose the parties to a transaction, and one question is why it would have made any difference. Mr. Paulson has since become famous for this mortgage gamble, from which he made $1 billion. But at the time of the trade he was just another hedge-fund trader, and no long-side investor would have felt this was like betting against Warren Buffett."...

[my comment:

People become attracted or conscious about full disclosure ex-post.

When the bubble blossomed no one essentially cared. This is an example of time constancy-interpretation of information depending on the conditions of that period, ergo full disclosure may not have been significant at all.

Heck, lots of institutions fell for pyramiding and Ponzi schemes like Bernard Madoff!

If the public have been circumspect fraudulent get rich schemes as PONZI and PYRAMIDING won't have existed at all. The fact is that there are just too many intellectual patsies out there.

And just piggybacking on the skyrocketing prices mattered then. Would there have been a crash if there had been no antecedent boom?

Besides, I have hardly seen any argument which stated that the counterparties which had been big financial institutions have a battery of lawyers, economists, accountants, statisticians, quants, security analysts, financial analysts and other experts who would have had the power from preventing this to happen. The so called losers (no they are not victims) were not gullible individuals.

So what stopped them? A stasis in thinking?! A mental blackout?

The fact is that these institutions fell for the seduction of the inflation boom, which after all was generated by the government. Expert or no expert they paid the price for falling into the trap set up by their own cognitive biases ]

``By the way, Goldman was also one of the losers here. Although the firm received a $15 million fee for putting the deal together, Goldman says it ended up losing $90 million on the transaction itself, because it ultimately decided to bet alongside ACA and IKB. In other words, the SEC is suing Goldman for deceiving long-side investors in a transaction in which Goldman also took the long side. So Goldman conspired to defraud . . . itself?...

[my comment: see Hyman Minsky quote in prior post]

``Perhaps the SEC has more evidence than it presented in its complaint, but on the record so far the government and media seem to be engaged in an exercise in hindsight bias. Three years later, after the mortgage market has blown up and after the panic and recession, the political class is looking for legal cases to prove its preferred explanation that the entire mess was Wall Street's fault. Goldman makes a convenient villain. But judging by this complaint, the real story is how little villainy the feds have found."

[my comment: Oops, " an exercise in hindsight bias" seems representative of our "fait accompli argument".]

Bill Sardi in Lewrockwell.com argues that additional regulatory lapses had been part of the story,

``the Commodities Futures Modernization Act which Congress passed a decade ago, opened the door for trades like John Paulson’s. This legislation eliminated the long-standing rule that derivatives bets made outside regulated exchanges are legally enforceable only if one the parties involved in the bet were hedging against a pre-existing risk. Prior regulations said the only people who can bet against an investment actually have to own shares in it. Here is Paulson betting against an investment he had no ownership in."

Like us, Mr. Sardi believes that this is being "staged for political advantage" of the administration in preparation for the Mid term elections.

``For sure, the Administration in Washington DC will be portrayed in coming months as the hero, rescuing the public from the blood-suckers on Wall Street. Be it government to save us all from problems it created and then pin a badge of honor on itself. The current and former administrations in Washington DC are, and have been, so tightly controlled and managed by Wall Street, even with its ex-CEOs strategically implanted within the Executive Branch, as to call all alleged reforms and sanctions into question. These are just for show...

``Goldman Sachs knows it has to make the President look good or there will be unending SEC prosecution. The public wants to know whose side is the President is on, the financial titans on Wall Street or the unemployed on Main Street? It will be scripted from the beginning.

``And now a final question – will Goldman Sachs be the fall guy in exchange for future favors from the government? If fines are handed out and nobody goes to jail, you will know this was likely preplanned."

We have long known that the global financial system have been "gamed" by the elite in cahoots with politicians. And part of the game is the borrow and spend policies, that actually benefits the banking cartel.

As we earlier said, it won't take long for this political masquerade to be unraveled.

Perhaps if the markets continue to stumble more and deeper, then there will "compromises" (via fines), which ends the US government part of the story.

But the unintended consequence could be the potential follow on class suits by other private parties. It's like opening the Pandora's box. The ultimate risk here is that the incentives to remove the profit and loss mechanism in the markets will lead to a total market malfunction.

Update:

Just to be clear, nowhere in this blog space (as well as in my earlier post) did I say that the political implication here is for the US Government to take over Wall Street. Nationalization betrays the essence of the banking cartel.

What I have been saying is that this has been a political ruse meant to either shore up somebody's electoral image or an attempt to control the gold markets.

More On Goldman Sachs: Moral Hazard And Regulatory Capture

More on the Goldman Sachs debate.

Simon Johnson writes,

``When you deliberately withhold adverse material information from customers, that is fraud. When you do this on a grand scale, the full weight of the law will come down on you and the people who supposedly supervised you. And if the weight of that law is no longer sufficient to deal with – and to prevent going forward – the latest forms of very old and reprehensible crimes, then it is again time to change the law."

While this is ideal in theory, in the real world, it won't work.

Why?

Because it does not deal with the source of the problem: incentives.

Once again Hyman Minsky ``It should be noted that this stabilizing effect of big government has destabilizing implications in that once borrowers and lenders recognize that the downside instability of profits has decreased there will be an increase in the willingness and ability of business and bankers to debt-finance. If the cash flows to validate debt are virtually guaranteed by the profit implications of big government then debt-financing of positions in capital assets is encouraged. An inflationary consequence follows from the way the downside variability of aggregate profits is constrained by deficits.”

In short, there are two factors involved which fundamentally erodes idealist solutions as proposed by Mr. Johnson, one as shown by Mr. Minsky is the moral hazard problem provided for by government.

This means that aside from bailouts, government implicit and explicit backing has provided the Wall Street with the incentive to commit "fraud". When you know the law is behind ya, the motivations shifts from risk averse to aggressive "ponzi dynamics" which may involve indiscretions.

Yet fundamentally what Goldman Sachs had done is a product of the bubble cycle (ponzi dynamics)...

Again Mr. Minsky, “Ponzi financing units cannot carry on too long. Feedbacks from revealed financial weakness of some units affect the willingness of bankers and businessmen to debt finance a wide variety of organizations.” "Inflation, Recession and Economic Policy", 1982 (page 67)

Another factor, the Government is doing it themselves. It's basically MBO-Management By Example, or follow the leader.

Proof?

Here is Bloomberg,

``Bloomberg News asked a U.S. court today to force the Federal Reserve to disclose securities the central bank is accepting on behalf of American taxpayers as collateral for $1.5 trillion of loans to banks.

``The lawsuit is based on the U.S. Freedom of Information Act, which requires federal agencies to make government documents available to the press and the public, according to the complaint. The suit, filed in New York, doesn't seek money damages.

``The American taxpayer is entitled to know the risks, costs and methodology associated with the unprecedented government bailout of the U.S. financial industry,'' said Matthew Winkler, the editor-in-chief of Bloomberg News, a unit of New York-based Bloomberg LP, in an e-mail.

The next important reason why grand idealist one size fits all solutions aren't likely to work is due to the incentives provided for by the cartelization of the banking industry by the Federal Reserve.

Again Murray N. Rothbard, ``the real reason for the adoption of the Federal Reserve, and its promotion by the large banks, was the exact opposite of their loudly trumpeted motivations.

``Rather than create an institution to curb their own profits on behalf of the public interest, the banks sought a Central Bank to enhance their profits by permitting them to inflate far beyond the bounds set by free-market competition."

It's called regulatory capture- collusion between the regulator and the regulated.

How this came about?

Again Mr. Rothbard, "The answer was the same in both cases: the big businessmen and financiers had to form an alliance with the opinionmolding classes in society, in order to engineer the consent of the public by means of crafty and persuasive propaganda."

So yes, in the aftermath of the bubble there will always be finger pointing.

But no, taking out Goldman Sachs is insufficient, it'll just be a merry go around.

We need to take away the source of the problem, the provider of the misdirected incentives-the US Federal Reserve.

Here is Ron Paul, ``A point we learn from this event and every other banking panic in U.S. history is that a crisis has always led to greater centralization. A system that is mixed between freedom and the state is a shaky system, and its internal contradictions have been resolved not by tending toward a free market but rather through a trend toward statism. It is not surprising, then, that academic opinion swung in favor of central banking too, with most important economists — having long forgotten their classical roots — seeing new magic powers associated with elastic money."

How Myths As Market Guide Can Lead To Catastrophe

``This is how humans are: we question all our beliefs, except for the ones we really believe, and those we never think to question.” -Orson Scott Card

If I told you that the global financial markets have been simply looking for reasons to correct from its overbought position, would you buy this argument?

For many the answer is no. People look for news to fill this vacuum or what is known as a “last illusion bias” or “the belief that someone must know what is going on[1]”.

Because it is the proclivity of man to seek more complicated explanations, the Occam Razor’s rule[2]-the simplest solution is usually the correct one- is usually perceived as inadequate. Yet even if profit taking is a real phenomenon on the individual level, outside of the realm of statistics or news linkages, this is usually deemed as inconceivable by an information starved mind.

I would surmise that such a human dynamic could be a function of esteem based reputational incentives, or the need to seek self-comfort in being seen as “sophisticated”.

And stumbling from one cognitive bias to another, this camp usually associates cause and effects to “availability heuristic” or what we simplistically call “available bias” or the practice of “estimating the frequency of an event according to the ease with which the instances of the event can be recalled”[3]. And this is so prevalent in newspaper based accounts of how the markets performed over a given period.

Though we can’t discount some influences from news on a day-to-day basis, they may contribute to what we call as “noise”, since they represent tangential forces that are distant to the genuine “signals” that truly undergirds market actions.

In other words, people frequently mistake noise for signals.

And worst, for financial market practitioners scourged by an innate “dogma” bias, a characteristic seen among the extremes, particularly in the Pollyanna and Perma Bear camps, the attempt to connect the cause and effects of market actions and the political economy is largely predicated on spotty reasoning; specifically what I call as “Cart Before the Horse” reasoning - where X is the desired conclusion, therefore event A results to X.

This can actually be read as combining both logical fallacies (Begging the Question and Post Hoc Ergo Propter Hoc) and cognitive biases, particularly Belief bias or the “evaluation of the logical strength of an argument is biased by their belief in the truth or falsity of the conclusion[4]”, from which they apply behavioral decision making errors by selective perception or choosing data that fits into their desired conclusion (while omitting the rest), by the focusing effect or placing too much emphasis on one or two aspects of an event (at the expense of the aspects) and by the Blind Spot bias or reasoning that fails to account of their personal prejudices.

In short, the deliberate misperception of reality is a representation of distorted beliefs on how the world ought to be.

Clearing Cobwebs Of Cognitive Biases and Logical Fallacies

Let apply this into today’s market actions.

In the US equity markets, the bulls have fallen short of SEVEN CONSECUTIVE[5] weeks of broad market gains following Friday’s SEC-Goldman Sachs related sell-off as the week closed mixed for key US bellwethers.

The S&P 500 was the sole spoiler among the big three benchmark, where the Dow Jones Industrials and the technology rich Nasdaq still managed to tally seven straight weeks of advances (despite Google’s 7.59% loss prior to the Goldman Sach’s news).

Yet in spite of Friday’s selloffs, the week-on-week performance by the different sectors constituting the S&P had been also been mixed (see figure 1).

Figure 1 US Global Investor: Weekly Sectoral Performance and stockcharts.com: S&P 500 Financial Sector

This means that while Friday’s market selloff had been broad based, it wasn’t enough to reverse the general trend over the broader market, even considering the largely overheated pace of the ascent for the overall markets. Yes, we have been expecting a correction[6] and perhaps this could be the start of the natural phase of any market cycle.

Moreover, while the SEC-Goldman Sachs (explanation in the below article) news may have triggered the selloff on Friday, the largest loss over the week had been in the materials and telecom sectors with the Financial, where Goldman Sachs belongs, took up the fourth position.

Considering that the S&P Financial Index took a severe drubbing on Friday (down 3.81%-see left window), this only exhibits that the sector’s muted loss on a weekly basis had been an outcome of an earlier steep climb or an upside spike!

In short, in whatever technical indicator (MACD, moving averages, or Relative Strength Index) one would look at, the US financial sector has been severely in overstretched and overbought conditions which have been looking for the right opportunity for a snapback. Apparently, the SEC-Goldman event merely provided the window for this to happen.

Perma Bears: Broken Clock Is Right Twice A Day

Now for the Perma bear camp, whom have been nearly entirely wrong since the crash of 2008, seems to have nestled on the current hoopla over the SEC-Goldman Sachs as the next issue to bring the house down.

And like a broken clock that is right only twice a day, never has it occurred to them that since markets don’t move in a straight line, they can be coincidentally ‘right’ for misplaced causal reasons.

Their horrible track record in projecting a market crash early this year predicated on the US dollar carry trade bubble and the Greek Debt Crisis has only manifested events to the contrary of their expectation in terms of both the markets and the political economy. Instead, what seem to be happening are the scenarios which we have had pointed out[7].

Here is Oxford Analytica on the US dollar carry trade[8], ``As financial markets possess a demonstrable tendency to overshoot expectations, the carry trade probably is stoking market euphoria in certain places. However, this may only be partially significant, as underlying fundamentals still inform a large cross-section of investment activities.” (bold emphasis mine).

As you can see the deepening lack of correlation, which highlights on the glaring lapses in causality linkages, from which the 2008 crash became a paradigm for the mainstream, is now being accepted as “reality”. The rear-view mirror syndrome or the anchoring bias is becoming exposed as what it is: A fundamental heuristical flaw, which cosmetically had been supported by misleading reasoning.

And as for the Greek Tragedy, the resolution is increasingly becoming a bailout option. Writes the Businessweek-Bloomberg, ``The euro may receive a temporary boost to $1.38 when Greece accesses a 45 billion euro ($61 billion) bailout plan before traders reestablish bets that the shared currency will decline, according to UBS AG.[9]”

And Morgan Stanley’s Joachim Fels, who among the mainstream analysts we respect, decries the prospective action, ``The bail-out and the ECB's softer collateral stance set a bad precedent for other euro area member states and make it more likely that the euro area degenerates into a zone of fiscal profligacy, currency weakness and higher inflationary pressures over time.[10]” (bold highlights mine)

The difference between us and Mr. Fels is that we look at the political incentives that impels the decision making process of policymakers-where the default option or the path dependency by any government, in a world of central banking, has been towards inflationism as recourse to any critical economic problem.

And Mr. Fels appears to be reading the market along our lines.

Price inflation, which Mr. Fels warns of, is starting to creep higher and becoming more manifest even in economies that have been expected to have lesser impact from inflation due to more monetary constraints, such as the Eurozone (see figure 2).

Figure 2: Danske Bank: Will Nasty Inflation Challenge the ECB?

The Danske team, led by Allan von Mehren, expects an inflation surprise[11] to challenge the European Central Bank (ECB) based on 3 factors, rising oil prices, rising food prices and depreciating Euro.

For us, these factors are merely symptoms of the political actions and not the source of inflation.

And for those plagued by the said dogmatic biases, they keep repeatedly asking the wrong question-“where is inflation?”-even when (corporate and sovereign) bonds, commodities, stocks, derivatives and most market signals have been pointing to inflation, across the world.

The fact that inflation is in positive territory for most economies, already dismisses such a highly flawed argument.

Yet, the narrowed focus or the ‘focusing effect’ or excessive tunneling on business or industrial credit take-up or unemployment rates or on rangebound sovereign yields (particularly in the US) purposely disregards the fact that inflation is a political process.

Government which resorts to the printing press as the ultimate means to resolve economic predicaments can only reduce the purchasing value of every existing currency from the introduction of new ones.

Tea Parties As Signs Of The Reemergence Of The Bond Vigilantes

In addition, such outlook neglects the fact that

-inflation has existed even during high period of unemployment rates as in the 70s,

-consumer credit isn’t the principal cause of inflation but intractable government spending and

-as argued last week, governments will opt to sustain low interest rates (even if it means manipulating them-e.g. quantitative easing) as a policy because ``governments through central banks always find low interest rates as an attractive way to finance their spending through borrowing instead of taxation, thereby favor (or would be biased for) extended period of low interest rates.[12]”

Moreover, for a population with a deepening culture of dependency on government welfare programs, the inclination is to accelerate government spending[13] in order to keep up with public demands for more welfarism. And this can only be funded by borrowing, inflation, and taxes in that pecking order.

Why taxes as the lowest priority? Because to quote Professor Gary North[14], ``Politicians fear a taxpayer revolt. Such a revolt is unlikely until investors cease buying Treasury debt. For as long as the government can run deficits at low interest rates, that is how long they will continue.”

The ballooning Tea Party in the US, for instance, which reportedly accounts for 15-25% of the population is relatively a new spontaneously organized political movement that has apparently emerged in response to the prospects of significantly higher taxes.

For the politically and economically blinded progressives to demean this as “superficial” accounts for as utter myopia. How superficial is it to resist a runaway government spending spree, which should translate to prospective higher taxes and or lower standards of living via inflation?

As author and Professor Steven Landsburg rightly argues[15], ``Once the money is spent, the bill must eventually come due—and there’s nobody around to foot that bill except the taxpayers. We are locked into higher current spending and therefore locked into higher future taxes. The president hasn’t lowered taxes; he’s raised and then deferred them. To say otherwise is—let’s be blunt—a flat-out lie.” (bold highlights mine)

Instead, the superficiality should be applied to the fabled belief that government spending and inflationism will account for society’s prosperity. Name a country over human history that has prospered from the printing press or inflationism?!

Hence, the emergence of the Tea party movement appears to sow the seeds of a taxpayer revolt, or as seen in the market, the soft resurfacing of the long absence in the bond vigilantes, who could be simply waiting at the corner to pounce on the policy mistakes based on the delusions of grandeur by charlatan governing socialists and their followers, at the opportune moment.

Until the tea partiers gain a political upperhand, the deflation story is nothing but a justification to undertake more inflationism.

The Siren Song Of Inflation

Going back to the naïve outlook for deflation, the lack of borrowing from both domestic and overseas savings doesn’t close the inflation window, in fact it enhances it. This will entirely depend on manifold forces as culture, habit (or addiction)[16], time constancy of political sentiment and political tolerance and etc...and importantly, the attendant policies in response to the political demands.

Nevertheless, Morgan Stanley’s Spyros Andreopoulos enumerates why inflation is seemingly a siren song[17] for policymakers in dealing with a gargantuan and burgeoning debt problem.

From Mr. Andreopoulos (bold emphasis his, italics mine):

``Public debt overhang: The higher the outstanding amount of government debt, the greater the burden of servicing it. Hence, the temptation to inflate increases with the debt.

``Maturity of the debt: The longer the maturity of the debt, the easier it is for a government to reduce the real costs of debt service. To take an extreme example, if the maturity of the debt is zero - i.e., the entire stock of debt rolls every period - then it would be impossible to reduce the debt burden if yields respond immediately and fully to higher inflation. Hence, the longer the maturity of the debt, the greater the temptation to inflate.

``Currency denomination of the debt: Own currency debt can be inflated away easily. Foreign currency-denominated debt on the other hand cannot be inflated away. Worse, the currency depreciation that will be the likely consequence of higher inflation would make it more difficult to repay foreign currency debt: government tax revenues are in domestic currency, and the domestic currency would be worth less in foreign currency. So, the temptation to inflate increases with the share of debt denominated in domestic currency.

``Foreign versus domestic ownership of debt: The ownership of debt determines who will be affected by higher inflation. The higher the foreign ownership, the less will the fall in the real value of government debt affect domestic residents. This matters not least because only domestic residents vote in elections. Note that unlike domestic owners, foreign owners may not necessarily be interested in the real value of government debt since they consume goods in their own country. But they will nonetheless be affected by the inflation-induced depreciation. So, the temptation to inflate increases with the share of foreign ownership of the debt.

``Proportion of debt indexed to inflation: By construction, indexed debt cannot be inflated away. Hence, the higher the proportion of debt that is indexed to inflation, the lower the temptation to inflate.

``To these purely fiscal arguments we add another dimension, private sector indebtedness:

``Private sector debt overhang: An overlevered private sector may generate macroeconomic fragility and pose a threat to public balance sheets. Hence, high private debt also increases the incentive to inflate.

As per Mr. Andreopoulos perspective, there are many alluring technical reasons on why the political option is to inflate rather than adapt market based austerity or to allow market forces to clear up previous imbalances so as to move to the direction of equilibrium.

And combined with today’s prevailing economic dogma and direction of political leadership, the path dependency will most likely be in this direction.

Real Economic Progress And Deflation

None the less, real progress is characterized by increasing efficiency and technological advances that decreases costs of production and increases in output.

The result of which is a rising value of purchasing power of money or “deflation” (see figure 3) and not higher inflation which is the result of excessive government intervention.

Figure 3: AIER: Purchasing Power of the US dollar

This was mostly the case in the United States until the introduction of the US Federal Reserve in 1913, from which the US dollar has been on a steady decline or where the only thing constant today is to see the US dollar collapse in terms of purchasing power.

Going to the US government’s Bureau of Labor Statistics’ inflation calculator, $100 US dollars in 1913 is now only worth $4.55. That’s a loss of over 95%!

So aside from death and taxes, another thing certain in this world is that the value of paper money is headed to its intrinsic value-Zero[18]!

Yet it is funny how protectionists, who stubbornly argue about the “overvalued” currency of the US as the main source of her problem, have been only been asking for more of the same nostrums, instead of looking at WHY these has emerged on the first place.

Like in reading markets, belief in myths can be the greatest error that could lead to tremendous losses that investors can get entangled with.

As former US President John F. Kennedy once said, ``The great enemy of the truth is very often not the lie -- deliberate, contrived and dishonest, but the myth, persistent, persuasive, and unrealistic. Belief in myths allows the comfort of opinion without the discomfort of thought.”

---

[1] Wikipedia.org, List of cognitive biases

[2] Wikipedia.org, Occam Razor

[3] Taleb, Nassim Nicolas; Fooled By Randomness, p. 195, Random House

[4] Wikipedia.org, Belief Bias

[5] The emphasis on seven is meant to highlight the degree of overextension or overheating

[6] See US Stock Markets: Rising Tide Lifts Most Boats And Is Overbought

[7] For my earlier treatise on the US dollar carry bubble see What Has Pavlov’s Dogs And Posttraumatic Stress Got To Do With The Current Market Weakness?, and Why The Greece Episode Means More Inflationism for my discourse on the Greece crisis.

[8] Oxford Analytica; Dollar Carry Trade No Longer a Sure Bet, Researchrecap.com

[9] Businessweek, Greek Bailout in ‘Matter of Days” to Boost Euro, UBS Says, Bloomberg

[10] Fels, Joachim, Euro Wreckage Reloaded April 16, 2010, Morgan Stanley Global Economic Forum

[11] Mehren, Allan von; Euroland: Nasty inflation surprise will challenge ECB, Danske Bank

[12] See How Moralism Impacts The Markets

[13] See Where Is Deflation?

[14] North, Gary The Economics Of The Free Ride

[15] Landsburg, Steven; Tax Relief, Obama Style, thebigquestions.com

[16] See Influences Of The Yield Curve On The Equity And Commodity Markets

[17] Andreopoulos, Spyros; Debtflation Temptation

[18] See Paper Money On Path To Return To Intrinsic Value - ZERO

Why The US SEC-Goldman Sachs Hoopla Is Likely A Charade

``In discussing the situation as it developed under the expansionist pressure on trade created by years of cheap interest rates policy, one must be fully aware of the fact that the termination of this policy will make visible the havoc it has spread. The incorrigible inflationists will cry out against alleged deflation and will advertise again their patent medicine, inflation, rebaptising it re-deflation. What generates the evils is the expansionist policy. Its termination only makes the evils visible. This termination must at any rate come sooner or later, and the later it comes, the more severe are the damages which the artificial boom has caused. As things are now, after a long period of artificially low interest rates, the question is not how to avoid the hardships of the process of recovery altogether, but how to reduce them to a minimum. If one does not terminate the expansionist policy in time by a return to balanced budgets, by abstaining from government borrowing from the commercial banks and by letting the market determine the height of interest rates, one chooses the German way of 1923.-Ludwig von Mises, The Trade Cycle and Credit Expansion: The Economic Consequences of Cheap Money

Goldman Sachs, one of the top ‘too big to fail’ pillars of Wall Street have recently been sued by the US Security and Exchange Commission for allegedly intermediating mortgage securities that allowed several investors to ‘short-sale’ the housing market and for the buyers of the said securities a market that supposedly ``was secretly intended to fail”[1].

In my view, this is a bizarre case from a fait accompli standpoint.

From the news reports, unless there are signs of blatant manipulation or misrepresentations or procedural deviations or deliberate indiscretions, Goldman Sachs only acted as “market maker” or a bridge for parties that intended to bet on the opposite fence of the housing industry. This means that if there was a willing buyer and a willing seller, then obviously one of the two parties was bound to be wrong. Ergo, if the property boom had continued until the present and where the buyers benefited, would the SEC have sued the Goldman Sachs for the same reasons with respect to the losses incurred by the seller, particularly led by the popular hedge fund manager John Paulson, who allegedly orchestrated the creation of the controversial instruments?

Outside the technicalities of the suit, we can only sense political maneuvering out of the SEC-Goldman Sachs row.

Unless one thinks that regulators are divine interpreters and hallowed dispensers of the law, laws can be (or are many times) used as instruments to extract political goals, for the benefit of the regulator/s and or the political leadership and or some vested interests group in cahoots with the regulator/s.

Or unless President Obama is recast into a Thomas Jefferson, which means the next strike will be against the US Federal Reserve, only then, upon this new setting should we rethink of a vital shakeup in how things will be done. But this would seem hardly the case.

This brings us to the possible reasons why the Obama administration has resorted to such actions and if the attack on Wall Street will take the sails away from today’s inflation based markets.

It’s All About Politics

It’s public knowledge that following the forced passage of the highly unpopular Obamacare or President Obama’s signature health reform program, Obama’s job approval popularity rating has plunged to its lowest level[2], where the odds for his reelection is now in jeopardy[3], and worst, in a hypothetical match-up between libertarian champion Texas Congressman Ron Paul and President Obama, the odds appear to be dead-even[4]!

And if we are to interpret actions of politicians as a transfer of the “rational actor model of economic theory to the realm of politics”[5], then this only implies that as human being with a career to contemplate on, President Obama’s actions as seen through the SEC are merely designed as means to extend his tenure as well as expand the scope of his power.

As this LA Times article rightly argues, ``White House officials can't bank on a sudden surge in the economy coming to their rescue for the midterm elections. So they are hoping they can redirect voter anger by accusing the GOP of coddling large banks.[6]”

In short, it’s all about politics.

Moreover, it also seems ridiculous to perceive of a sustained path of attack, considering that Goldman Sachs has been more than a political ally to the Democratic Party. In fact the company has constantly played the role of key financier of the Democratic Party (Figure 4)

Figure 4: Opensecrets.org: Goldman Sach’s As Key Political Financier Of America’s Ruling Class

Goldman Sachs had even been the second largest contributor to Obama’s 2008 Presidential campaign[7]!

In addition, where action speaks louder than words, Goldman Sachs has been a key beneficiary from the US government’s bailout to the tune of $10 billion from the US Treasury’s Troubled Asset Relief Program (TARP)[8] which the company had fully redeemed in mid 2009[9].

More to this is that Goldman Sachs had also been a key beneficiary of the AIG bailout from which the company also recovered $12.9 billion out of the $90 billion of taxpayer funds earmarked for payment to AIG counterparties[10].

And these rescues merely demonstrate that as part of the “Too Big Too Fail” cabal, Goldman Sachs evidently has been operating under the protective umbrella of the US Federal Reserve.

As Murray N. Rothbard defines the principal roles of the Central Bank[11],

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

So would President Obama afford a “possible loss of confidence leading to bank runs; and the loss of reserves should any one bank expand its own credit” from one of its major cartel member banks? The most likely answer is a BIG NO!

My guess is that the assault on Goldman Sachs seems likely a sign or an act of desperation, hence possibly miscalculated on the unintended impact on the markets via Friday’s selloff. Nevertheless, as noted above the markets appear to be extremely overbought and had been readily looking for an excuse or a trigger to retrench.

Yet even if under the scenario where President Obama may be politically desperate to shore up his image, a continued legal barrage on Wall Street that would send markets cascading lower betrays the populist ideals of a rising markets=rising confidence=economic growth, which is unlikely to achieve the intended goals.

It’s a silly thing for the perma bears to naively believe and argue that President Obama is on a warpath against the forces which brought him to power and against the oligarchy that has a strategic stranglehold on key US institutions and the US political economy.

Fighting Wall Street is essentially waging a proxy battle against the US Federal Reserve! And fighting the Fed is a proxy battle for Congressman Ron Paul, who not only wants an audit[12] of the Federal Reserve but also has been asking for its abolishment[13] (Yes, I am in Ron Paul’s camp!).

And this is why President Obama is shown to be quite in a tight fix where his actions could be read as publicity stunt or political vaudeville or an outright charade that is meant to be eventually unmasked.

The worst part is for the dispute to set a precedent and generate incentives from the losers of 2008 to lodge similar legal claims not only against Goldman Sachs but on different institutions. This will be tort on a massive scale, the unintended consequence.

Legal Actions As Counterbalance To Commodity Market Whistleblowers?

Yet there might be another angle to consider. It’s a conspiracy theory though.

Over the past weeks, there had been two accounts of whisteblowing[14] on the silver markets, where the precious metals have allegedly been under a price suppression scheme or have long been manipulated so as not to reflect on its market value, by a cabal of major institutions such as JP Morgan.

Since the exposé at the end of March, gold and silver has been on the upside (see figure 5)

Figure 5: Stockcharts.com/reformedbroker.com[15]: Counterattack on Whistle Blowers?

Could it be that the surge in gold and silver prices has put tremendous pressure on the precious metal naked shorts of major financial institutions that they have asked the US government to intervene by declaring an indirect war against the whistle blowers via the SEC-Goldman Sachs tiff as a subterfuge?

Remember the key personality involved in the political squabble is John Paulson, who currently owns more gold in tonnes compared to Romania, Poland, Thailand, Australia and other nations (based on Oct 2009).

Although Mr. Paulson isn’t part of the lawsuit, his involvement could be designed to put pressure on his investors so as to force him to liquidate on his gold holdings, and thereby ease the pressure on the colossal exposure of the clique of financial institutions on their “short” positions.

Unless the government can pin Mr. Paulson down to be part of the wrongdoers in the proceedings, this precious market “Pearl Harbor” isn’t likely to be sustained.

At the end of the day, whether it is an attempt to spruce up Mr. Obama’s image or an attempt to contain the sharp upside movements of the precious metal market, all these, nevertheless, reeks of dastardly politics in play.

The worst part would be to see the unintended consequences from such political nonsense morph into full scale disaster.

Revaluation of Asian Currencies and Market Outlook

So while we see financial markets, perhaps, may be looking for an excuse for a recess (anywhere 5-20% on the downside or a consolidation instead of a decline), it is not likely a crash in the making.

Politicians and bureaucrats, who watch after their career and status, more than we acknowledge, aren’t likely to roil the markets that would only defeat their goals.

Figure 6: IMF Global Financial Stability Report: Global Liquidity and Interest Rates

Under such conditions, we see global markets as likely to continually respond to the massive inflationism deployed by global authorities. And there could be rotational activities in the global asset markets instead of a general market decline.

With the recent revaluation of Singapore currency[16], we see this as a further positive force and a cushion on the markets as other Asian currencies will be under pressure to revalue and this applies to China too. Along with the Singapore Dollar, Philippine Peso surged 1.2% this week to 44.385 against the US dollar.

Though a global financial market may stem this dynamic out of the corrective pressures, any reversal would prove to be temporary.

So yes, we expect the markets to possibly look for opportunities to rest. But no, we don’t expect market to crash, not at this stage of the bubble cycle yet.

Finally, the Philippine Phisix nearly shares the same record with the US markets, of having gains in 6 out of 7 weeks, which only proves that the Philippines has not moved in an isolated manner, but rather in sync with region's markets, if not the worlds' markets. This also goes to show that Philippine elections have been eclipsed by global forces.

So like the rest of the markets, until we can establish self determinism, we see global dynamics to prevail due to the linkages of inflationism.

In my view any correction should pose as a buying opportunity as we are still in the sweetspot of inflationism.

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[1] New York Times, S.E.C. Accuses Goldman of Fraud in Housing Deal

[2] Gallup.com; April 12,2010 Obama Weekly Approval at 47%, Lowest Yet by One Point

[3] Gallup.com April 16 Voters Currently Divided on Second Obama Term

[4] Rasmussen Reports: April 14, 2010; Election 2012: Barack Obama 42%, Ron Paul 41%

[5] Shughart, William F. II, Public Choice

[6] Nicolas, Peter; Goldman Sachs case could help Obama shift voter anger, Los Angeles Times

[7] Opensecrets.org; Top Contributors, Barack Obama

[8] Wikipedia.org, Goldman Sachs

[9] Reuters.com, Goldman Sachs redeems TARP warrants for $1.1 billion

[10] Reuters.com, Goldman's share of AIG bailout money draws fire

[11] Rothbard, Murray N. The Case Against The Fed p. 58

[12] RonPaul.com Audit the Federal Reserve: HR 1207 and S 604

[13] Paul, Ron; End The Fed

[14] Durden, Tyler; Exclusive: Second Whistleblower Emerges - A Deep Insider's Walkthru To Silver Market Manipulation, Zerohedge.com and

Durden, Tyler; Whistleblower Exposes JP Morgan's Silver Manipulation Scheme, Zerohedge.com

[15] See Chart of the Day: John Paulson's Gold Holdings Bigger Than Reserves Held By Many Central Banks

[16] Businessweek, Singapore’s Revaluation May Spur China, South Korea, Bloomberg