Osama Bin Laden’s Death and the US Presidential Elections

I just can’t trust governments.

Especially not the news of the alleged death of the most wanted fugitive Osama Bin Laden.

Succeeding reports seem to show some inconsistencies.

While I read that DNA tests confirmed that they belonged to Mr. Bin Laden, the photos circulating the cyberspace was reportedly faked according to the Washington Post.

I’m no forensic expert but DNAs can be stored for a number of years according to easy-DNA.com. The possible implication is that the death of Bin Laden may or may not have happened exactly as claimed by the US government.

Moreover, Bin Laden’s cadaver, was reportedly buried at sea, which according to IOL news, would have prevented his followers from making it into a shrine.

Perhaps. But some say the reason is to get rid of evidence.

But what if there had been no Bin Laden? Some quarters allege that Bin Laden has long been dead.

All the above seem to be anchored on the credibility of the US government and nothing more.

Yet the US Presidential election is around the corner.

Considering that President Obama’s approval rating hit an all time low in March of 2011, there’s got to be a ‘miracle’ for him to boost his chances for re-election.

And true enough, reports of the slaying of Bin Laden did give him a boost.

From Mark Perry (Enterprise Blog)

Prediction markets (intrade.com) reveal a spike in the election odds in favor of President Obama.

Yet a day after the Bin Laden was slain, reports say that the controversial birth certificate, which President Obama recently produced in reaction to the challenge of presidential aspirant Donald Trump, could be a fake.

According to the Daily Mail

Leaders of the so-called 'birther' movement have claimed that the birth certificate produced by Barack Obama is a fake.

Despite the president providing the the full long-form document last week, the 'birthers' - fronted by Donald Trump - have taken their case to a federal appeals court in Southern California.

They claim the birth certificate had been doctored; that the document's serial number was out of sequence, the typing wasn't aligned, and it was printed on green paper instead of white paper like other Hawaiian birth records of that era.

The timing or coincidence of Bin Laden’s death raises the level of my scepticism. Has President Obama been trying to preempt or divert the public’s attention on this?

I am not in the camp of the 'birthers' as mudslinging seems to be a normal tactic employed during elections. But of course what if claim of the 'birthers' are true?

I may also sound like a conspiracy theorist but that’s because of the confusing signals I get.

Even more puzzle is that reports say that the fugitive Bin Laden could have used the compound where he was allegedly slain as a safe house for 5-6 years!

The Reuters quotes White House counterterrorism chief John Brennan, (bold emphasis mine)

"Well I think the latest information is that he was in this compound for the past five or six years and he had virtually no interaction with others outside that compound. But yet he seemed to be very active inside the compound," Brennan said on the CBS Early Show program.

Of course someone has to take the blame. That’s the nature of politics. So the scapegoat, according to US officials, should be Pakistan. According to The Hill,

Washington placed Pakistani officials in the rhetorical crosshairs Monday, questioning how they could be ignorant of Osama bin Laden’s hiding place just miles from Islamabad.

Now if the reports are valid that Bin Laden stayed in that compound for 5-6 years then this represents a troubling intelligence failure for the US government more than Pakistan. It’s the US who has been obsessed with Bin Laden.

On the other hand, we could also deduce that there had been no intelligence failure. Instead, the US government could have tolerated (or even harbored) Bin Laden’s presence until the political exigency for his elimination.

The US has placed the responsibility of the infamous 9-11 to Bin Laden, who initially denied involvement.

But 9-11 also was used by the US government to extend her coercive powers (Patriot Act, Homeland Defense) domestically and to engage in war against the Taliban in Afghanistan.

Chart from Wikipedia Federal Budget and Defense Spending Trend

Thus, Bin Laden served as one of the principal reasons for the massive expansion in US government spending on home defence and overseas wars.

In other words, the hunt for Bin Laden represented one big business for the military industrial complex. So I can’t help but piece together what may seem like a staged operation.

But one may argue that the death of Bin Laden should mean reduced expenditures for the military; not if this were part of the concessions made with President Obama. Besides, they have got Libya's Muammar Gaddafi to replace Bin Laden.

Bottom line:

Bin Laden’s death seems to produce more questions than answers.

I could be wrong, but for me, this looks a lot related to the upcoming US Presidential elections.

For President Obama, desperate times call for desperate measures.

Video: Prince Charles on Helping The Environment: Do As I Say Not As I Do

I am no fan of Royal Weddings. Not only because this is an example of how government lavishly spend other people's money to promote pompousness, but also because romantic hypes could end up in a failure.

Well speaking of hypes, here is Prince Charles talking about helping the environment by promoting less consumption. That is we should consume less. Of course, this does not apply to him. (hat tip Bob Wenzel)

Resource Nationalism Equals Government Greed

I keep pointing out how high energy (and commodity) prices have been partly due to the geographical access restrictions imposed by governments on investors.

This is aside from the tsunami of money being printed around the world by central banks led by the US Federal Reserve.

Likewise, the artificially low interest rates being used to promote spending that has been stoking new bubble cycles.

Yet the allure of high commodity prices has now been changing some government’s receptiveness to investors by virtue of resource nationalism

From the Wall Street Journal, (bold highlights mine)

The government-led ouster of the CEO of Brazilian mining giant Vale SA follows a string of moves by national governments to intervene in their countries' highly profitable and highly coveted natural-resources concerns.

Some of those moves have included rejections of efforts by foreign companies to gain big stakes in local mining and resource companies. Big miners who have sought global acquisitions, including BHP Billiton, Rio Tinto PLC and Xstrata PLC, had no new comment on the trend following the change at Vale, where Brazilian President Dilma Rousseff forced out CEO Roger Agnelli. The big miners said they didn't expect the Vale move to alter their investment or expansion plans, which have already factored in the rising tide of nationalism and efforts by governments to extract higher taxes.

Indeed, many miners are pulling back or reducing the target size of foreign acquisitions to avoid defensive moves by governments. In some cases, they are abandoning huge exploration projects, which are costly and may end up benefiting the local governments rather than shareholders or customers...

Commodity-rich Latin America has been a leader in extending government control over natural resources, such as oil and other raw materials, in recent years. Venezuela and Bolivia nationalized oil and gas assets, while Ecuador started taxing what it considered windfall oil profits at a 70% rate. After Brazil discovered enormous deep-water oil fields off Rio de Janeiro, the South American country rewrote the rules for rights auctions to give its state oil company, Petroleo Brasileiro SA, the lion's share of the business. In many cases the moves were a turnaround from the 1990s, when the mostly cash-strapped nations opened up their industries to foreign investment, prompting a boom in exploration.

But the protectionism extends to other countries. BHP Billiton, the world's largest miner, has already seen several of its mining projects thwarted by foreign government. Last year, Canada nixed BHP's planned $38 billion acquisition of Potash Corp., and Australia put up so many blocks between a planned joint iron-ore venture with Rio Tinto months earlier, the two miners quit that project.

Resource nationalism only adds to the supply imbalances which should mean lesser supplies and subsequently further upward price pressures.

Such actions are being prompted by expectations of governments to generate more revenues with the ultimate end of having more money to spend on political projects. They are doing this in the name of nationalism.

Yet because of the higher costs of doing business or a higher hurdle rate, aside from questions of security of ownership (property rights), investors naturally would back out or become reluctant to invest. This essentially defeats government’s agenda.

In addition, the lack of investments extrapolates to the promotion of unemployment and lost opportunity to grow.

Any local investments will not be sufficient. That’s why they have not been accessed.

Besides, local investments are likely to be “politicized” which means that only the political class and their economic patrons would become the beneficiaries.

And because the resources are there, illegal extraction would occur and proliferate. Subsequently, black markets will blossom.

And illegal activities will lead to more violence, more corruption and more environmental degradation.

All these because government wants more revenues for increased spending.

They blame capitalist for greed, what ya call this?

Canada’s Politics: It’s Hayek Over Keynes As Harper Conservatives Win Majority

As I earlier noted, Keynesians have been on a losing streak.

Now we seem to be seeing this phenomenon percolate even in the realm of politics, a traditional Keynesian bastion.

This from Bloomberg, (bold highlights mine)

Canadian Prime Minister Stephen Harper won a majority of seats in Parliament for the first time, giving him a mandate to fund corporate and personal income tax cuts with curbs on spending.

Harper’s Conservatives were ahead or leading in 166 districts, according to preliminary results from Elections Canada. Jack Layton’s New Democratic Party was leading in 103 seats and will form the official opposition for the first time, followed by 34 for the Liberal Party led by Michael Ignatieff. The separatist Bloc Quebecois led in four seats with the Green Party ahead in one. The Conservatives held 143 seats in the 308- seat legislature before the vote was called in March.

The victory in the national election yesterday ends seven years of minority governments that have fueled government spending, and may make it easier for Harper to open up industries to foreign investment. Throughout the campaign, Harper said he needed a majority to secure the country’s economic recovery.

Stephan Harper grew up on Hayekian ideals, as this report from Canadianbusiness.com shows...

The government’s sudden embrace of Keynesian economics — the theory that you can spend your way out of a recession — is pretty much the mirror image of everything Harper has fought for over the past two decades. He complained bitterly about big government, high taxes and profligate spending during his time at the Reform Party (1987–1997), NCC (1997–2001), as leader of the Opposition (2002–2006), and even as prime minister, since he was first elected on Feb. 6, 2006. During the latest election campaign, Harper routinely criticized the tax-and-spend policies of his opponents, and as recently as October, he declared matter-of-factly: “I know economists will say we could run a small deficit, but the problem is that once you cross that line, as we see in the United States, nothing stops deficits from getting larger and larger and spiralling out of control.”

Few of Harper’s friends or supporters believe he honestly thinks the massive stimulus spending outlined in his latest budget will rescue Canada’s slowing economy. The measures, they say, are merely an attempt to stave off a non-confidence vote, like the one that loomed after Finance Minister Jim Flaherty threatened to remove the multimillion-dollar subsidy opposition parties have come to depend on in his economic statement in November. “Stephen Harper didn’t suddenly wake up and become a Keynesian,” says Frank Atkins, an economics professor at the University of Calgary who once taught the prime minister. “This is nothing more than a political budget.”...

Returning to the University of Calgary to work on his master’s degree, Harper began reading the works of Austria’s Friedrich Hayek, the influential conservative economist. Hayek vehemently disagreed with the Keynesian notion that government spending could limit economic downturns, and instead warned that intervention in the marketplace would merely prolong suffering and create unintended, and harmful, consequences.

(hat tip Greg Ransom)

Political History: Democracy Shaped By Trade

Economics drive politics.

Author Matt Ridley points to the accounts in history where democracy had been shaped by trade (in agriculture).

From the Wall Street Journal, (bold highlights mine)

Trade is much older than farming: Australian aborigines used to trade stone axes for sting-ray barbs over long distances, showing that hunter-gatherers can benefit from exchange. The advent of agriculture accelerated the trend toward specialization—but not everywhere. In temperate zones, farming encouraged trade, but in the tropics subsistence farmers often ate and wore their own produce.

I have been pondering why this difference emerged since reading a fine new paper by Stephen Haber of Stanford and Victor Menaldo of the University of Washington. They argue that, historically, stable democracy has depended on the growing of grain, because it is a tradeable commodity and is best grown on a small scale. Therefore, they say, the parts of the world suited to grain-growing have developed the institutions that build equitably distributed human capital, and hence democracy. This explains why democracy flourishes where rainfall is modest.

Their idea has just as much to say about economic development as about politics. The key is perishability. Where farmers produced food that could be stored, especially cereal grain and pulses (peas and beans), trade flourished, specialization increased and cities emerged, filled with manufacturers, soldiers and priests who swapped their outputs for the grain supplied by the farmers.

Tropical fruit, however, was harder to store and therefore harder to trade, as were other tropical crops like cassava root, which rots after a week or so. This goes some way to explaining the lack of cities in the tropics before the industrial era: You simply cannot ship bananas to an urban elite in the way you can ship grain. Hence the invention of olive oil and wine as tradeable versions of olives and grapes. The ancient civilizations around the Mediterranean depended heavily on trading networks that brought grain, oil and wine to cities.

Read the rest here

War on Precious Metals: Silver Prices Plunge On Higher Credit Margins

As silver prices have been on a juggernaut, the CME group tightens credit margins to exert control. The result: silver prices take a plunge.

From the Bloomberg,

Silver futures plunged as much as 13 percent, the biggest intraday drop since October 2008, as CME Group Inc. raised the amount of cash that traders must deposit for speculative positions.

The metal for July delivery dropped to $42.2 an ounce before trading at $43.875 an ounce at 11:46 a.m. in Singapore. The CME increased margins by 13 percent with effect from the close on Friday, according to a statement...

Silver is the best performer this year on the Standard & Poor’s GSCI Index of 24 commodities. The metal led the way in April as commodities beat stocks, bonds and the dollar for a fifth straight month, the longest stretch in at least 14 years.

Gold increased 9.2 percent this year and is set for its 11th annual gain, while silver jumped 43 percent as investors increased their holdings in exchange-traded products to a record 15,518 metric tons on April 26.

Hedge-fund managers and other large speculators cut their net-long positions in New York silver futures by 26 percent in the week ended April 26, according to U.S. Commodity Futures Trading Commission data. Speculative long positions, or bets prices will gain, outnumbered short positions by 24,995 contracts on the Comex division of the New York Mercantile Exchange, according to the CFTC.

Initial margins increased to $14,513 per contract from $12,825 and maintenance deposits rose to $10,750 from $9,500, said CME, parent of Comex where the futures are traded.

I am reminded of the climax of the last bubble in silver during 1980, where the Hunt Brothers unsuccessfully attempted to corner the silver market but was foiled through the same measures.

Notes the Wikipedia,

But on January 7, 1980, in response to the Hunt's accumulation, the exchange rules regarding leverage were changed, when COMEX adopted "Silver Rule 7" placing heavy restrictions on the purchase of commodities on margin. The Hunt brothers had borrowed heavily to finance their purchases, and as the price began to fall again, dropping over 50% in just four days, they were unable to meet their obligations, causing panic in the markets.

Yet the conditions of the silver market in 1980 is different than today.

Silver, then, had been rising along with interest rates, where many credit former US Federal Reserve chairman Paul Volcker for ending stagflation by tightening the money supply which prompted interest rates to rise.

However, globalization and commodity supply glut could have been a factor too.

As Dr. Marc Faber wrote,

I would therefore argue that even if Paul Volcker hadn't pursued an active monetary policy that was designed to curb inflation by pushing up interest rates dramatically in 1980/81, the rate of inflation around the world would have slowed down very considerably in the course of the 1980s, as commodity markets became glutted and highly competitive imports from Asia and Mexico began to put pressure on consumer product prices in the USA.

Today, global governments have still been flooding the world with money. In addition, global interest rates remain artificially depressed.

This suggests that downside pressures on silver prices from tighter credit margins would likely to be temporary. As I have repeatedly been saying no trend moves in a straight line.

Though CME Group is a publicly listed company (Nasdaq: CME), it’s a wonder if the US government has a hand in this.

Superman Renounces US Citizenship, Goes Global

This from the LA Times Blog (bold emphasis mine)

Superman renouncing his U.S. citizenship is the newest wrinkle of the fascinating life of the man of steel.

In the latest issue of Action Comics, Superman becomes overly concerned that his heroism is being viewed as a tool for the United States exclusively.

"I intend to speak before the United Nations tomorrow and inform them that I am renouncing my U.S. citizenship. I'm tired of having my actions construed as instruments of U.S. policy," the superhero says in issue No. 900.

" 'Truth, justice and the American way' -- it's not enough anymore," the man from Krypton says, refocusing on a more global approach to crime-fighting.

"Superman is a visitor from a distant planet who has long embraced American values. As a character and an icon, he embodies the best of the American way," DC's co-publishers, Jim Lee and Dan DiDio, said in a statement to the N.Y. Post.

"In a short story in ACTION COMICS 900, Superman announces his intention to put a global focus on his never-ending battle, but he remains, as always, committed to his adopted home and his roots as a Kansas farm boy from Smallville," they said.

My two cents.

The “American way” hasn’t been the way it used to be.

Globalization and the eroding role of the US dollar standard, as a consequence of internal US policies, has markedly been affecting people’s psychology, such that even comic strips have now been exhibiting such symptoms.

Signs of times indeed.

The Tangoing Phisix and the Philippine Peso

I think it was a long step forward in my trading education when I realised at last that when old Mr Partridge kept on telling other customers, “Well, you know this is a bull market!” he really meant to tell them that the big money was not in the individual fluctuations but in the main movements-that is, not in reading the tape but in sizing up the entire market and its trend.-Jesse Livermore

The Phisix has been on a winning streak for 6 consecutive weeks.

Year-to-date, this week’s gains accrues to a year to date performance of a positive 2.82%.

In dollar terms, this should translate to returns of over 5%, as the Philippine Peso has risen by about 2.3% over the same period.

Net foreign trade (left window) in the Philippine Stock Exchange has steadily been advancing along with the ascendant Peso (right window; chart from yahoo[1]). Note: I am framing this presentation on a year-to-date basis, hence the blue vertical line on the Philippine Peso-US dollar chart.

As I have been pointing out[2], in today’s epoch of financial globalization, the Phisix and the Peso have strong correlations where the action of the local currency should be expected to harmonize with that of the Phisix.

And any interim divergences should be seen as a short term anomaly that would eventually be resolved—either the Phisix and the Peso conjointly rises or both will fall.

Again from this perspective we have been validated anew.

It’s not a dynamic limited to the Philippines.

ASEAN equity bourses and Asian currencies have shown similar patterns and near synchronous motions.

Chart from Bloomberg

The undulations of ASEAN equity benchmarks (lower window) and Asian currencies represented by the Bloomberg-JP Morgan Asian Dollar (upper window) appear to be contemporaneous. Despite some sporadic weaknesses, the general trend has been up!

With Thailand’s SET (SET-red line) successfully clearing of the hurdle or breaking above the November resistance level highs, and where the Phisix (PCOMP-yellow line) and Jakarta Composite (JCI-orange line) appears poised for their respective breakout points, I would suggest that momentum should favor a successful breach in the near future. I can’t say exactly when, perhaps anytime within 1 week to 1 months, but tailwinds seem to be headed in that direction.

The sharp rise of the Chinese yuan, which reached fresh milestone highs last Friday, signifies one of such forces[3].

Another is the fast foundering US dollar and surging prices of precious metals as gold and silver.

Chart from stockcharts.com

The growing sentiment against the US dollar appears to have prompted Emerging Market central bankers to seek safehaven in commodities[4].

The broad weighted Reuters CRB index (CCI) also reveals that surging prices have not been confined to a few commodities, but instead price surges have been broad based or signifying a ‘rising tide lifting all boats’ phenomenon.

As one would note, the US dollar index (USD) has broken down from its 2009 low.

Also Hong Kong’s currency board, the Hong Kong Monetary Authority [HKMA] has reportedly[5] shifted $300 billion of its US dollar holdings to “alternative investments, including real estate, private equity and emerging-market equity and fixed income.”

So there seems to be an implicit revolt against the US dollar standard which could be taking shape.

In addition, I earlier said[6] that the buoyancy of the Peso, despite the retrenchment or corrective phase in the Phisix, represented a rotational process instead of an exit.

I can see a paradox—a strong Peso and equity outflows—or a meaningful divergence...

These variables appear to imply that the negative foreign trade in the PSE had NOT been repatriated abroad, but possibly rotated into other local assets.

And this perhaps explains the continued strenght of the Peso despite a weak equity market environment. Again, a divergence that is likely to be resolved soon.

I guess I have been further validated.

Throughout the equity hiatus phase, foreign money which went out of equities only shifted to domestics bonds. That period, where the consensus mistakenly used the MENA Revolts-Japan triple whammy-high oil prices as pretext to call for further downturn of the equity markets, showed how bonds outperformed equities.

Incidentally, Philippine bonds in terms of returns snared the top spot in Asia (left window-Charts from IMF[7]) with Indonesia and Thailand, taking second and third place. Only India endured from NET outflows.

Also, the Weekly Net Flows to Asian equity and bonds (right window) during the first quarter of 2011 looks almost similar to the trend dynamics of the Net Foreign Trade chart in the PSE (see first chart left window).

I guess it is Asian equity’s turn to do a catch up with its bond counterpart.

Again, the rotational process among asset classes in Asia seems to resonate with actions within the Philippine Stock Exchange.

Sectoral rotation continues to take hold: over the past weeks we saw the focus shift from service to property to mining and holding, and now back to service.

Gains of major telecom issues such as PLDT (+4.02%) and Globe (+4.11%) has contributed substantially to the advances of the service sector index, as well as, in the Phisix.

This only goes to show that even if the Phisix may endure interim corrections, these are likely to be short term as the general uptrend appears to be reinforced by the abovestated dynamics.

To quote[8] the legendary trader Jesse Livermore through Edwin Lefevre in the classic book[9], Reminiscences of a Stock Operator (bold emphasis mine)

The public ought always to keep in mind the elementals of stock trading. When a stock is going up no elaborate explanation is needed as to why it is going up. It takes continuous buying to make a stock keep going up. As long as it does so, with only small and natural reactions from time to time, it is a pretty safe proposition to trail with it.

Bottom line:

Stock prices are relative. High prices can go higher. Inflationism is making sure that this bubble cycle is happening.

---

[1] Yahoo Finance, Philippine Peso

[2] See Phisix-Philippine Peso Back In Rhythm April 10, 2011

[3] See China’s Yuan Rises To Milestone High, April 30, 2011

[4] See The Implication of Emerging Market Central Banks’ Buying of Gold, April 30, 2011

[5] Asianinvestor.net HKMA enters alternative investments, April 28, 2011

[6] See Are The Current External Event Risks Signals or Noise? March 13, 2011

[7] IMF.org Managing the Next Phase of Growth, Regional Economic Outlook, April 2011

[8] The 3500, Quotes from Reminiscences of a Stock Operator (Jesse Livermore), February 1, 2007

[9] Wikipedia.org Reminiscences of a Stock Operator

China’s Yuan Rises To Milestone High

In a seemingly desperate attempt to contain her homegrown bubble, China now resorts to the currency valve.

Reports the Bloomberg,

China’s yuan strengthened beyond 6.5 per dollar for the first time since 1993, supported by speculation the central bank will allow appreciation to help tame the fastest inflation in more than two years.

The currency’s seventh weekly gain, its longest winning streak since July 2008, may damp U.S. criticism of China’s exchange-rate policy before Vice Premier Wang Qishan heads to Washington next month for talks with Treasury Secretary Tim Geithner. Consumer prices in Asia’s biggest economy rose 5.4 percent from a year earlier in March, exceeding the government’s 4 percent goal for this year.

“Inflation is still higher than what the government would like to see,” said David Cohen, a Singapore-based economist at Action Economics, who previously worked for the Federal Reserve. “The central bank is tolerating faster currency appreciation to contain import costs.”...

The People’s Bank of China set the yuan’s reference rate at 6.4990 per dollar, the strongest level since July 2005. The currency is allowed to trade up to 0.5 percent on either side of the official rate.

Chart from Yahoo

If China continues to appreciate her currency then this means less recycling of her US dollar reserves into US treasuries.

But hot money flows, despite China’s capital controls, will still be a factor to China’s predicament.

The US Global Investor writes,

An influx of global funds seeking short-term returns, or hot money, into China moderates the impact of monetary tightening and increases inflationary pressure. The CEBM Group estimated the total amount of hot money influx was Rmb 930 billion in the first quarter, marginally above the historical high of Rmb 921.9 billion reached in the first quarter of 2008. This quarter’s hot money could offset the impact of 150 basis points of the required reserve ratio hike.

China’s rising interest rates and expectations of further appreciation could likely fuel more hot money flows.

All these attempts to macro manage China’s economy will eventually lead to adverse unintended consequences.

And in contrast to the consensus, once a bust or a bubble burst should occur, then I expect the yuan to suffer from a decline as consequence to the exodus of hot money.

That’s the scourge of the paper money system.

Cartoon of the Day: Diminishing Marginal Utility

From Graph Jam (hat tip Casey Research)

Keynesians On A Losing Streak

Keynesians have been on a losing streak. They have got it so wrong in predicting the direction of markets and inflation. And importantly, their policy prescriptions have likewise failed to achieve the purported economic recovery.

In a comparison between Reagan and Obama policies, the Wall Street Journal concludes, (bold emphasis mine)

The contrast in results between the current recovery and the Reagan years is instructive because the policy mix was so different. In the 1980s, the policy goals were to cut tax rates, reduce regulatory costs and uncertainty, let the private economy allocate capital free of political direction, and focus monetary policy on price stability rather than on reducing unemployment. This is the policy mix we need to rediscover if we are going to escape our current malaise and stop suffering from the Keynesian discount.

In reaction to this article, economist Tim Kane of the Kauffman Foundation writes, (bold emphasis original)

The great advantage of Keynesianism is also its great weakness. It is exceedingly simple. It's fair to think of monetary policy in simple terms: tighten money supply or loosen it? While there are surely nuances of financial oversight and regulation, the point is that fiscal policy is simply never going to be so simple. It wasn't simple in 1500, and it sure isn't simple now. Fiscal policy under modern Keynesianism is, in public policy discussion, reduced to precisely that crude metric: more deficit-based government expenditures/taxes or less. To say it misses the forest for the trees is also too simple. What it misses is the genotype for the phenotype. Or how about: it misses the recipe for the ingredients?...

The one dilemma I have is not whether modern Keynesianism is bankrupt (it is), but what that implies about the growth rate. When I heard Scott Sumner speak in January, I really had to wonder if I, let alone he, believed there was a bubble in 2008 or not. If it was a bubble, then we shouldn't expect GDP to "recover," nor can anyone blame politicians for the relatively weak recovery. Right? No, wrong, dead wrong. If it was a real recession and not a bubble, then clearly the policy response has failed. If instead it was a bubble, then the policy response has been an obscene waste of money. There is no way out for Keynesians now.

It’s no use to for liberals to make the excuse that “crisis has setback the pace of economic activity by a greater degree compared with other post-war recessions” for the failure of their policies to generate traction. That would signify as red herring.

That’s because the financial crisis had been the outcome of the same set of Keynesian policies employed to inflate the last bubble.

As Paul Krugman wrote in 2002 (New York Times) (bold emphasis mine)

The basic point is that the recession of 2001 wasn't a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

Apparently Mr. Greenspan complied.

And the great Ludwig von Mises had been validated anew when he presciently wrote, (bold highlights mine)

There are still teachers who tell their students that “an economy can lift itself by its own bootstraps” and that “we can spend our way into prosperity.” But the Keynesian miracle fails to materialize; the stones do not turn into bread. The panegyrics of the learned authors who cooperated in the production of the present volume merely confirm the editor’s introductory statement that “Keynes could awaken in his disciples an almost religious fervor for his economics, which could be affectively harnessed for the dissemination of the new economics.”…

There is no use in arguing with people who are driven by “an almost religious fervor” and believe that their master “had the Revelation.” It is one of the tasks of economics to analyze carefully each of the inflationist plans, those of Keynes and Gesell no less than those of their innumerable predecessors from John Law down to Major Douglas. Yet, no one should expect that any logical argument or any experience could ever shake the almost religious fervor of those who believe in salvation through spending and credit expansion.

The false religion has been exposed anew.

The Implication of Emerging Market Central Banks’ Buying of Gold

The revolt against the US dollar regime seems underway.

The Bloomberg reports, (bold highlights mine)

Central banks that were net sellers of gold a decade ago are buying the precious metal to reduce their reliance on the dollar as a reserve currency, signaling demand that may extend a record rally in prices....

In 2010, central banks became net buyers for the first time in two decades, adding 87 metric tons in official-sector purchases by countries including Bolivia, Sri Lanka and Mauritius, according to World Gold Council data. China, with more than $3 trillion in foreign-currency reserves, plans to set up new funds to invest in precious metals, Century Weekly reported this week. Russia purchased 8 tons of gold in the first quarter...

China, which has just 1.6 percent of its reserves in gold, may invest more than $1 trillion in bullion, Pento said. “China wants to be an international player, and they need to own more gold than they currently have.”...

As of April, China was the sixth-largest official holder of gold, with 1,054.1 tons, according to World Gold Council estimates. The U.S. has the most, with 8,133.5 tons, or 74.8 percent of the nation’s currency reserves, council data show.

Central-bank buying may have the same impact on gold as the introduction of exchange-traded funds, Cuggino said. Prices have more than tripled since the SPDR Gold Trust, the biggest ETF backed by bullion, was introduced in November 2004.

Central banks in emerging markets may aim to hold 2 percent to 8 percent of their foreign-currency reserves in gold, Francisco Blanch, the head of commodities research at Bank of America Merrill Lynch in New York, said in an interview.

If emerging market central banks sustain the shift of their dollar reserve stash for gold or other metals, then this means that US government will have to increasingly rely on their resident savings or on the US Federal Reserve to finance their fiscal deficits.

Otherwise, the US economy faces the risk of higher interest rates.

So far, while the nominal amount of US treasuries debt held by foreign central banks continue to climb; the annual rate of change has been falling since 2009. (chart courtesy of yardeni.com)

BRICs and East Asia are major holders ‘financiers’ of long term US debts. (charts above and below from Wikipedia)

Yet about 28% of US debts has been owned by foreigners. The gist of these debts has been held by the Federal Reserve and intragovernmental Holdings whose trend has risen steadily since 1997.

Higher interest rates go against the implied guiding dogma of the incumbent authorities of the US Federal Reserve which has been anchored on low interest rates (ZIRP) to perpetuate permanently ‘quasi booms’.

Also higher interest rates can severely affect the balance sheets of the overleveraged banking system which may again result to another turmoil.

According to Wikipedia,

The U.S. banking sector's short-term liabilities as of October 11, 2008 are 15% of the GDP of the United States or 43% of its national debt, and the average bank leverage ratio (assets divided by net worth) is 12 to 1.

And given that the US government has spent and exposed her taxpayers to trillions of dollars worth to protect the banking industry, I expect the Federal Reserve to see the interests of the banking sector as a continuing political priority.

So going by the elimination process, I see the conditionality as:

-if emerging market central banks continue to reduce their US dollar exposure

-if savings of US residents would turn out to be inadequate to finance government deficits

-given the path dependency and political interests (priorities) of US government and

-the US government’s refusal to pare down spending

then the US Fed seems backed into a corner with further QEs (this may not happen immediately right after QE 2.0 in June, but any signs of weakness or volatility will likely prompt the FED for the next set of QE)

And more QEs extrapolate to higher gold prices, lower dollar, possibly higher equity prices (depending on the degree of the impact of CPI inflation) and more CPI inflation...all these signifying a feedback mechanism of the inflation cycle until CPI inflation turns into a nightmare.

Alternatively, the US can cut government spending and reduce debt, but that would be an anathema or a seeming taboo for politicians.

Graphic: Logic Is No Use Against Faith

Here is another gem from Jessica Hagy. She calls it “You can’t use logic against belief.”

She amazingly turns messages into revealing graphics which takes so many words for me to express.

Well, I call this blind faith analysis.

As I earlier wrote,

“applied to economic and political analysis, blind faith analysis is simply cart before the horse logic; of which the common characteristics are: they are full of factual errors, the frequent use of logical fallacies, deliberately misinterpretation of theories, ambiguous definitions and data mining or selective application of evidence.”

Capitulating Deflationists: David Rosenberg and Rick Ackerman

One by one members of the deflationist camp have been capitulating.

I earlier pointed to populist analyst John Mauldin and celebrity guru Nouriel Roubini.

Now, Pragmatic Capitalism’s Cullen Roche says this time it’s David Rosenberg’s turn.

From Mr. Roche

After trying to call the top in equities every other week for the last two years, David Rosenberg has finally thrown in the towel on the bearish calls. In his Wednesday research report he detailed why he believes equities have achieved a “holy grail” and should continue to move higher:

“On a very near-term basis, and despite my long-standing macro concern list, which has not gone away, it does look like the market is set to rise further. The technicals are suggesting as much, though I do await what Walter Murphy may have to say on the matter. I had said before that a breakout to new highs led by higher volume would be an important technical signpost. Well, we achieved that Holy Grail yesterday – both in level terms and with respect to the change. This is not throwing in the towel, it is an acknowledgment of what the market internals are flashing at the current time from a purely tactical and technical standpoint….

“…All that said, we had a breakout to new highs yesterday and this time, the volume rose on the major exchanges, not to mention rising above the 50 DMA on the Nasdaq, which is a clear sign that the big boys are putting money to work. This market continues to impressively climb a wall of worry. Market internals are too strong to ignore right now – the NYSE advancers beat decliners by a 3 to 1 ratio yesterday; the Dow transports soared 1.9%; and the small caps beat their major benchmarks. My overall macro concerns have not gone away, but these market facts on the ground are tough to ignore.”

Austrian economics Professor Gary North also points to the defection of Rick Ackerman after 30 years of adhering to the deflationist outlook. He follows Martin Weiss in 2009

Writes Professor North,

What I have always said is this: there is no deflationary factor in the structure of the capital markets to keep a central bank from destroying the currency unit. There are no deflationary forces that central banking cannot overcome if it chooses to destroy the currency unit.

Well, this represents the fundamental flaw of deflationists, which they have stubbornly refused to pay heed to... of course, until the markets have proven them constantly and profoundly wrong which eventually led to their apostasy.

Nevertheless as a saying goes it's better late than never.

George Soros Misrepresents F.A. Hayek

Billionaire and philanthropist George Soros attempts to pander to followers of the great F. A. Hayek, he writes,

Human beings act on the basis of their imperfect understanding — and their decisions have unintended consequences. That makes human affairs less predictable than natural phenomenon. So Hayek was right in originally opposing scientism.

At the time of the Economica articles, Popper was between Hayek and the socialist planners. He was just as opposed as Hayek to communism’s threat to individual liberty, but he advocated what he called piecemeal social engineering rather than laissez-faire.

Here I sided with Popper. But Popper and Hayek were not that far apart. I was influenced by both — and I also found fault with both.

By identifying Hayek’s inconsistency and political bias, I do not mean to demean him — but to improve our understanding of financial markets and other social phenomena.

When F. A. Hayek posited of a society that emerges from spontaneous order, what he meant was that there is no specific social or economic outcome set by anyone most especially by central planners, but of a system that emerges from interactions done by individuals.

To quote Hayek, (bold emphasis mine)

A spontaneous order is a system which has developed not through the central direction or patronage of one or a few individuals but through the unintended consequences of the decisions of myriad individuals each pursuing their own interests through voluntary exchange, cooperation, and trial and error.

Thus, it is plain nuts to say that Hayek has been plagued by political bias.

Political bias represents ideology which sees political and economic order as having specific socio-economic outcomes designed by various schools of thought on central planning, which is the opposite of what Hayek or his followers stand for.

Moreover, Soros says he is influenced by Hayek. But as Greg Ransom aptly points out,

Soros calls for a middle ground between Popper and Hayek, between the far left and Hayek. What Soros doesn’t explain is why there is no middle ground in his political activities — or why he funds so many fundamentally dishonest and hard left “Think Tanks”, people who have no problem mischaracterizing or even smearing the ideas of Hayek — and those who teach them — at the drop of a hat.

In short, what Soros says and what he does conflicts. It is Mr. Soros who seems to be plagued by inconsistencies and not Hayek.

Moreover, like typical believers in central planning, the common argument begins with a cart before the horse “strawman” argument; Soros favorite is to use “market fundamentalism” to typify Hayek’s supposed ideology.

Bob Wenzel exposes this fallacy,

The fact of the matter is that free market advocates understand that the free market system is about profits and losses, and that losses are just as important in directing an economy in a better direction as are profits. There is no belief that there are no errors in a market system.

In addition, to pin the blame on “inherent market instability” as the work of “market fundamentalism” or free market forces is totally misguided.

For instance, bubble cycles won’t occur without interventionism (inflationism), most especially from Central Banks. Since policies and regulations affect people's behavior and actions, the stimulus response mechanism constituting Soros' reflexivity theory comes to play.

In short, people respond to incentives which policies or regulations shape.

I would partly agree with Soros for his view on human action via the reflexivity theory (which I also use in analyzing the markets), but I think he has either misunderstood or misrepresented Hayek.

Quote of the Day: Spending People’s Money To Lobby For More of People’s Money

Prolific author Matt Ridley on government’s funding/financing of lobby groups to argue for more taxpayer funded political projects.

You don't take money off people to spend it on getting people to argue for more money to be taken off them.

Read more here.

It’s one way to buy the mainstream. And it’s another way for politicos to have one’s cake and eat it too while taxpayers get fried on their own lard.

Earnings Drive Stock Prices? Not From Thailand’s Experience

I have continually argued against the supposed causal relationship of “earnings drive stock prices”, which for me signifies as a popular myth with little relevance to market realties. [Read my Machlup-Livermore paradigm here here and here]

Thailand’s experience should be a noteworthy example.

This from World Bank data on Thailand’s Stock Exchange. (World Bank Thailand Economic Monitor)

The left window represents nominal profits of listed companies. The right window exhibits the % change of financial indicators in terms of Gross Profit, Return on Assets and Return on Equity.

The above is the 5- year chart of Thailand’s SET (courtesy of Bloomberg).

My observations:

Profits of SET listed companies suffered a decline for only ONE QUARTER, particularly, the fourth quarter of 2008. Yet the SET fell 55% for 16 months (green circle)!

The one quarter of decline in profits looks more like an anomaly (from an external shock) than from a structural perspective (see right window showing financial indicators where % change were all positive despite the profit drop).

If stock market prices function as a discounting mechanism predicated on earnings, then what justifies a 55% slump for an extended duration of 16 months (about 6 quarters) when profits declined for only 1 quarter?

Conversely, profits immediately recovered during the 1^st quarter of 2009, yet it took the SET about 5 months into 2009 to consolidate and ascend (green arrow on SET chart), so what happened to the discounting mechanism role played by prices, if stock price are driven by earnings?

Said differently, if it took 16 months to factor in one month decline in profits, then why has not the same discounting factor apply during the recovery or that profits have been recovering yet stock prices remained depressed, so what gives?

By the earnings drive stock prices logic, any decline should have been muted and short. Apparently, there hardly has been any solid evidence to prove that such correlation exists or that the causation of earnings drive stock prices is valid.

In addition, one might point to the rate of change of Gross profits, ROA and ROE as a reason (red arrow on % change of financial indicators).

If this is true, then the SET should be on a decline since 2005, because financial indicators have been on a decline over the same period. But the opposite happened, the SET boomed from 2004 (2006 in chart) until May 2007 (red arrow on SET chart)!

As Canadian born American writer Saul Bellow said

A great deal of intelligence can be invested in ignorance when the need for illusion is deep.

It’s one thing to believe, it’s another to get real.

Volatility of China’s Food Prices Largely Due to Policies

In China, rising food prices have been blamed on speculators. Now that select food prices have slumped, particularly vegetables, the culpability has been assigned to speculators anew.

From Business China,

Farmers across China are suffering from unmarketable vegetables since the arrival of spring, hurt by an increase in output following speculation last year’s surge in demand would continue in 2011.

Last week, the average price of 19 kinds of vegetables in 286 wholesale markets nationwide was RMB 2.66 per kilogram, down 11.4% from the previous week, according to data from the Ministry of Agriculture.

Many farmers blamed oversupply as the main reason for the poor market. Due to climate factors, leaf vegetables from northern and southern China came onto the market almost at the same time, making the supply much higher than last year.

Speculators also played a major role in the price collapse, as they dumped vegetables that they had been hoarding onto the market.

Since the markets have always been the villains then obviously the government, as hero, would come to the rescue.

From the same article,

Chinese government authorities have stepped in to help the farmers and deal with the vegetable oversupply.

Some supermarkets, schools and company canteens are on a buying spree in east China's Shandong province as the government urged them to help relieve farmers from a glut of vegetables.

Municipal authorities should take immediate action to "help farmers tackle difficulties in selling their produce and maintain a stable market," said a notice from Shandong's commerce department released on April 22.

The Ministry of Commerce (MOFCOM) and the Ministry of Agriculture have also issued a notice to ask local authorities to take immediate action to "help farmers tackle difficulties in selling their produce and maintain a stable market".

Of course, the article has not been that candid.

A better explanation from the World Bank’s quarterly report on China comes with the supply side perspective, (bold emphasis mine)

In addition to normalizing the overall macro policy stance it took some measures to boost food supply and reduce the cost of production and logistics, including releasing grain from China’s large reserves, increasing subsidies to farmers, exempting transport of vegetables from road toll, and boosting food imports. More recently, this was followed by limiting the increase in domestic fuel prices arising from higher oil prices and applying moral suasion on manufacturers of food and consumer products.

So a combination of price controls, import liberalization, targeted subsidies and tax reliefs has been applied.

In essence, massive interventions has been employed to control inflation, from which the effects could likely be temporary, and could further add to the imbalances from the previous actions of China’s government to blow bubbles.

Importantly, if inflation is a monetary phenomenon as Milton Friedman would have it, then the bust in the vegetable market in China could be a symptom of the prevailing monetary policies...

Again from the World Bank, (bold emphasis mine)

Since October 2010 the government has raised benchmark interest rates 4 times and RRRs 7 times. Most importantly, quantitative guidance on bank credit, traditionally the backbone of monetary policy tightening, began to be reinforced, especially in early 2011. As a result, M2 growth came down from 19.5% in the fourth quarter to 16.6% on average in the first quarter, close to the target for the end of 2011, with a similar slowdown in bank lending. In recent years, total bank credit extention has been significantly larger than headline data suggests as banks expanded the use of credit instruments such as designated loans, trust loans and corporate paper, financed in part by trust and wealth management products that are not counted as deposits and are not part of M2, in order to evade lending quotas, capital requirements and RRRs.

China’s equity markets, specifically the Shanghai index appears to have recoiled after hitting the resistance levels as earlier discussed.

This is the interim price action of the Shanghai Composite bellwether. (chart from Bloomberg)

In my view, the current retracement of the Shanghai index could also be reflecting on the current monetary tightening environment.

If there should be a broader weakening of consumer and financial market prices then this would possibly prompt Chinese authorities to unleash their main Keynesian weapon--inflation.

I’d posit that since the stage of China’s inflation cycle looks more advanced than the rest of the world, then the ongoing developments in China’s financial markets needs to be closely monitored.