Phisix: Why I Expect A Rotation Out of The Mining Sector

Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.-Charles Mackay

Let me open by saying that I remain a long term bull on the mining sector.

However given the current ‘blitzkrieg’ seen in most of the major mining issues, which has substantially bolstered the Philippine mining index, I am inclined to believe that bigger profits premised on lesser risk can be made on other sectors, over the interim.

Mining Index’s Remarkable Outperformance Needs A Reprieve

Even as most of the world’s major equity markets appear to stagger, ASEAN equity markets have remained buoyant. The biggest gains over the week had been posted by Thailand (+3.25%), Singapore (+2.07%), Philippines (+1.73%), Malaysia (+1.67%), Vietnam (+1.47%) and Indonesia (+.88%). Asia was largely but tentatively positive with decliners seen only in Bangladesh, Australia and Japan’s benchmarks.

Such buoyancy had likewise been reflected over the broad markets of the Philippine Stock Exchange.

Advancers modestly eclipsed decliners (376-309), while most of the sectoral averages registered positive except for the financial industry.

The Mining and oil sector remained the leader, whose gains were matched by the Holding sector (powered by the peripheral issues—JGS Summit +7.42% and DMC Holdings +6.84%) followed by the service sector (led by the heavyweights PLDT +2.98% and ICT +3.13%).

The turbocharged mining sector has unwaveringly advanced for 7 consecutive weeks!

In addition, the mining sector has assumed the market’s leadership (also co-leadership as the above) in the last 4 out 5 of the weeks.

Year to date, the mining sector, has exhibited such domineering trait: While the Phisix has been up by a meager 2.17%, the mining sector has skyrocketed by an astounding 27.98%! The rest of the other sectors have only to watch helplessly as they get left behind.

Yet such grand performance is likely to draw in much of the crowd. It is when the impulsive and emotionally driven crowd steps in is when we should exercise cautiousness. The greater fool theory works in a crowd driven trade.

In observing the crowd phenomenon, a popular quote attributed to author Gustave Le Bon[1],

When popular opinion is nearly unanimous, contrary thinking tends to be most profitable. The reason is that once the crowd takes a position, it creates a short-term, self-fulfilling prophecy. But when a change occurs, everyone seems to change his mind at once.

Given the above, there are two investing axioms to keep in mind:

One—no trend goes in a straight line

Second—never get married to an investing theme

Given such axioms, there are four factors which I think should make the mining sector vulnerable to a correction:

1. Buy the rumor sell the news,

2. seasonality,

3. war against commodities and

4. rotation

Buy the Rumor, Sell the News

‘Buy the Rumor, Sell the News’ is a popular trading strategy built around the premise where stock prices in reaction to rumors (based on myriad issues such as new products, new markets, mergers and acquisition, joint ventures, new investors and etc...) substantially rises. And once the rumors gets either confirmed or denied, the stock prices falls.

‘Buy the rumor sell the news’ functions like a miniature boom bust cycle applied to specific issues. Only that this phenomenon occurs mostly during bull market cycles which accentuates sharp gyrations of the marketplace given the underdeveloped state of the local equity markets underscored by the lack of depth, sophistication and alternatives.

The ranking of the Philippine mining index based on weightings as of Friday’s close are as follows, [this includes the year-to-date performances]

Philex Mining 26.6% [22.73%]

Lepanto Consolidated 26.06% combined [A-76.08%, B-80.22%]

Semirara Mining Corp 18.72% [15.03%]

Atlas Consolidated 10.62% [23.19%]

Manila Mining Corp 6.64% [A & B-108.7%]

One would easily note that the gist of the fantastic gains of the Philippine Mining Index revolves around two issues: Manila Mining [MA, MAB] and Lepanto Mining [LC, LCB].

In addition, the one year chart shows that three issues have relatively strong correlations—particularly Philex (blue line), Lepanto (red line) and Manila Mining (black candle) where the undulations appear to be synchronized. The difference is in the magnitude of price actions.

On the other hand, Atlas Consolidated (green line) has only partly shadowed the actions of her peers. While coal mining energy based Semirara has fundamentally distanced its price actions with activities of the precious metals group.

Last week, following a voluntary trading halt, the three companies with strongly linked movements disclosed that they have closed a deal[2].

Philex Mining [PX] will reportedly get a 5% interest of the Kalayaan Copper Gold Resources which is 100% owned by Manila Mining [MA], in exchange for $25 million. Philex has the option to expand its stakes to 60% in Kalayaan in the condition that the feasibility and other pre-development expenditures will be shouldered by the company.

Incidentally, Lepanto [LC] owns a 20% share of Manila Mining.

We see overbought technical conditions for mainly Manila Mining and Lepanto and partly with Philex. Such signs of euphoria combined with the confirmation of the rumor—which is now a news could be negative for their share prices. Without further developments to speculate on, profit taking will likely take hold.

Should my prediction hold true where a corrective phase on these 3 issues would occur, it is unclear if Atlas [AT] or Semirara [SCC] will follow their footsteps, as they have not been part of the event based actions.

As said above, “buy the rumor sell the news” are issue specific activities that may not necessarily influence the price actions of the contemporaries.

Considering that the weightings of participants of that deal constitutes about 59.3% of the Mining index, then any significant correction will likewise be reflected on the bellwether.

To add, given the variances in the degree of gains, the correction phase will also respond accordingly.

Seasonality

Based on seasonal performances, the precious metal groups appear to be most senstive to price corretions during May to September.

This is not limited to the metals as exhibited by the gold future[3] seasonals see top window in the above chart, but also to the Material sector[4] (S&P 500) (also see window below).

And since the metals function as the main drivers of the stock prices of mining securities then perhaps such seasonal forces may add to the profit taking mode.

Over the past 8 years the Philippine mining index has shown some semblance of seasonally influenced performance.

The Mines strengthened mostly during the last quarter then peaked during the first or second quarter then downshifted or consolidated. The timing may not be perfect or that there may be variances but the cyclical essence holds.

This applied in 5 out of 6 years, except in 2008, where the mining index responded to exogenous forces more than the seasonality flows.

One would also note that price declines (based on peak-trough) from anywhere 25-40% (ex-2008) delineates the downcycle phases of the mining index.

War Against Commodities

US, Europe and China has openly engaged in a supposed campaign[5] against so-called “speculators”.

These governments have actively or indirectly intervened in the marketplace by changing the rules of the game, particularly for the US and China, in abruptly raising of the credit margins of commodity trades.

This hasn’t been a one-time affair, but appears to have been deployed successively to almost the entire commodity sphere.

Such ‘Pearl Harbor strategy’ has been meant to “shock and awe” speculators to forcibly bring down prices.

Similar to the failed coordinated interventions by central banks against speculators to stem the rise of the yen last March[6], I expect these intrusions to have short term effects.

To add because such interventions does not address the fundmanental reasons why commodities have been rising, government actions will only exacerbate imbalances already put in place by earlier polcies. So this seems like another case where the cure is worse than the disease.

Since we should expect global governments to persist on such actions for unstated political goals, commodities will, thereby, be subjected to sharp gyrations.

So far the war on commodities has diffused to global mining indices such as the S&P/TSX Global Mining Index (SPTGM) and the Dow Jones US Mining Index (DJUSMG). This should serve as a temporary headwind against local mining industry.

Nevertheless such intrusions may also engender “regime uncertainty’, or an aura of regulatory risks which may also affect the general marketplace.

By June, the US Federal Reserve is scheduled to end QE 2.0 (Quantitative Easing or a.k.a. ‘Credit Easing’ policies).

I am not sure that the US Federal Reserve will automatically reengage in QE 3.0, since this seems largely a political issue. Although, I suspect that QE 3.0 will be implemented sometime within the year. Of course the other issue will be the controversial vote on debt limit which will likely be associated with QE 3.0. A vote to raise the US debt ceiling implies of more pressure for the US Federal Reserve to put QE 3.0 on the pipeline.

Besides, part of the ‘signaling channel’ or one of the tools used by central bankers to control or manage inflation expectations could be to project some market “volatility”. This may be used to justify the next round of money printing measures. Thus, for the interim, the marketplace could be subject to more of politics than of market based action.

Promoting fear seems as the best way to advance policies of social control.

Market volatility may be an outcome of deliberate tactical operations, or as unintended consequences in the battle being waged against the “inflation”.

Rotational Process

A prominent symptom of inflation is that prices are affected unevenly or relatively.

Eventually prices in general moves higher, but the degree and timing of price actions are not the same.

It’s the same in stock markets, which represents as one of the major absorbers of policy induced inflation.

Prices of some issues tend go up more and earlier than the others. At certain levels, the public’s attention tend to shift to the other issues which has lagged. This brings about a general rise in prices.

These are the spillover effects which I call the rotational process.

I have been predicting that the mines will outperform the rest of the equity markets[7] since 2003. Yet while this has been fulfiled, in retrospection, the path towards attaining today’s conditions hasn’t been straightforward.

The early periods had been marked by refusals and denials which gradually segued towards slow acceptance and finally transiting into today’s mid-cognizant phase. Yes even today’s boom has not fully convinced many disbelievers.

The path to glory isn’t without pain.

One would note that mines gyrated steeply from 2007-2010. And this period hallmarks the gradual acceptance stage.

Yet while the mines had racked up the biggest gains as exhibited by the index overtime, it suffered periods of the deepest losses (2008) and periods of ennui or underperformance (2010).

People tend to see what is recent (anchoring bias), and project the present into the future. That’s how I think many see them today.

Yet given the above outlook: war against commodities, overheating on several mining issues, buy the rumor and sell the news, the seasonality phases, and signs of euphoria—all these seem to point to a possible correction.

Importantly even if the Philippine central bank, the Bangko Sentral ng Pilipinas recently raised interest[8] for the second time this year, local policies still seem very accommodative as policy rates are considerably below previous[9] and projected (from 5[10]-7%[11]) economic growth rates.

Also I also believe that inflation rates have been meaningfully underestimated.

If the promulgated reason for raising interest is to “to control inflation expectations amid rising oil and food prices”, then the rates of increases of food and gas here and abroad would seem far been greater than current levels of interest rates.

This, essentially, points to a ‘negative real interest’ environment[12], the implication of which is throw more fuel to the boom phase of domestic financial asset markets.

This means that if the mining index declines, then some sectors would have to pick up the slack.

Trade The Opportunity

Bottom line: No trend moves linearly.

I predict that the local Mining index will undergo a corrective phase over the next quarter or so. But eventually should pick up steam anytime during the late 3^rd quarter or during the last quarter of the year.

One could take some profits off the table while leaving most of one’s mining holding positioned for the long term or in the event of my miscalculation.

Proceeds from the profit taking could be used for repositioning to other sectors in anticipation of a rotational process or to relish the fruits of one’s triumph.

---

[1] Nowandfutures.com Some favorite quotes, A world of Possible Futures. I say attributed because I can’t find it in Gustave Le Bon’s The Crowd

[2] PSE.com Lepanto Consolidated Mining Company Agreement between MA and PX for exploration and development of Kalayaan Project; Lifting of trading suspension, May 12, 2011

[3] Equityclock.com, Gold Futures Seasonal Chart

[4] Ibid., Material Sector Seasonality

[5] See War On Commodities: China Joins Fray, Global Commodity Politics Intensifies, May 14, 2011

[6] See Did the Joint Currency Intervention for a Weaker Yen Succeed? May 14, 2011

[7] See Philippine Mining Index Surfs The Commodity Tide, April 24, 2011

[8] Philstar.com BSP hikes interest rates by 25 basis points, May 6, 2011

[9] Abs-cbnnews.com Philippines posts record 7.3% economic growth in 2010, January 31,

[10] Mb.com.ph Latest WB forecast puts Philippine GDP growth at 5% to 5.4% for 2011 and 2012, January 14, 2011

[11] Breakingnews.ph NEDA chief confident of 7-8% GDP growth, February 10, 2011

[12] Wikipedia.org Negative real interest rates

Did the Joint Currency Intervention for a Weaker Yen Succeed?

Japan’s triple whammy calamity, last March, pushed the yen to the stratosphere. This prompted global finance ministers to jointly intervene in the currency markets to stem its rise.

This from UK’s Guardian.co.uk last March, (highlights mine)

Finance ministers and central bankers from the world's developed nations decided late on Thursday night to send a firm message to financial markets that they would not stand by and watch the yen continue to strengthen

The Bank of Japan began selling yen overnight to depress its value. Other central banks are expected to follow suit as their markets open through today, in a rare concerted move.

The intervention signified as war against speculators: central banks versus speculators.

Over a month since the intervention, the New York Federal disclosed yesterday its participation in the joint action:

The U.S. monetary authorities intervened in the foreign exchange markets on one occasion during the first quarter, on March 18, buying $1 billion against Japanese yen, the Federal Reserve Bank of New York said today in its quarterly report to the U.S. Congress.

During the three months that ended March 31, the dollar depreciated 5.5 percent against the euro but appreciated 2.5 percent against the Japanese yen. In this period, the dollar’s trade-weighted exchange value depreciated 3.7 percent as measured by the Federal Reserve Board’s major currencies index.

The coordinated G-7 intervention was carried out by the foreign exchange trading desk at the New York Fed, operating in conjunction with Japanese monetary authorities, the European Central Bank (ECB) and the monetary authorities of, Canada and the United Kingdom. The intervention amount was split evenly between the Federal Reserve System Open Market Account and the U.S. Treasury’s Exchange Stabilization Fund (ESF).

The blue arrow marks the date when the US government (US Federal Reserve and the Treasury) intervened along with central banks of other nations in a grand scale of collaboration against speculators.

Over the short term, the intervention proved to be a success; the yen weakened.

Today, the yen is seen back at the level where the global governments intervened. In short, billions of dollars of taxpayers money went down the drain.

Bottom line:

Interventions did have immediate effects (which resonates with today’s war against commodities). However, eventually the effects wear out.

Yet who bears the losses from such interventions? Obviously taxpayers!

The battle was won by the central banks in March, but they appear to be losing the war.

Humor: How to Make a Pass at an Economist

From Modified Rapture

The Top Ten Lines for Hitting on an Economist

1. You’ve got the curves to supply my demand!

2. Let’s go to bed and try to disprove the law of diminishing marginal utility.

3. You’re my very favorite kind of moral hazard.

4. I have a feeling you really understand the “nature of the firm.”

5. Baby, I love you so much I’m willing to forgo my exit option.

6. Wanna talk about our private goods?

7. You’re an economist. I’m an economist. How about a little horizontal integration?

8. Now those are some tangible assets!

9. I’ll reveal my preferences if you will.

War On Commodities: China Joins Fray, Global Commodity Politics Intensifies

The Europeans have reportedly been breathing down on profits by the banking sector from commodity trades.

The US has been rigging the rules of the game by apply a Pearl Harbor strategy via a spate of margin hikes in the commodity markets over a short period of time.

Now, China joins the bandwagon on the assault on commodity prices.

Reports the Marketwatch,

The Shanghai Gold Exchange said Thursday it will raise margin requirements for silver futures as part of risk-control measures, its third round of increases in less than a month, according to a statement posted on the exchange's web site. Margin requirements will rise to 19% of a contract's value from 18%, while the daily price limit for the one kilogram silver forward contract will rise to 13% from 10% above or below the previous session's close. The new trading requirements will be effective from May 13.

China has been combating her inner demons during the past 2 years and seems as the most problematic nation among major economies in dealing with inflation (aside from India).

Since China has been a key player in the commodity markets then it’s apparent that coordinating policies with her major trading partners might mean more success in attaining price control goals.

From Hostra University

The above chart reveals of the China commodity consumption story as of 2009, relative to the world. And it’s the reason why China’s growth story has partly been tied with commodity price trends.

There is also the supply side story which we won’t be dealing here.

Relative to China’s silver’s price margin hikes:

China’s industrial demand for silver comprises nearly half of the world’s silver consumption.

According to Goldcore,

Today industrial uses account for 44% of worldwide silver consumption and in conjunction with investment and store of value demand, industrial demand continues to grow.

And China’s silver imports have exploded over the years which turned her from an exporter to a major importer.

According to the Wall Street Journal, (bold emphasis mine)

China's net imports of silver hit a record high of 400% in 2010 to 3,500 tonnes .

China used to be a silver exporter now China has become the importer of silver

About 70% of China's silver demand comes from the industrial sectors. Silver is widely used in the China is the third largest producer of mined silver in the world.

China also is a major consumer of silver, absorbing large and rapidly growing volumes of silver in its manufacturing sector.

Chinese silver mining witnesses significant growth and development in recent years, fueled by technological strides in exploration and an increase in production in response to steady growth in domestic and international demand China is a major global producer and consumer of silver-based brazing alloys.

China has some of the world's largest manufacturing facilities for home electronics and electrical appliances, which utilize various type of silver-based solder.

China is the world's largest producer of solar power and electronics.

Silver price increased more than 80% in 2010.

Silver demand in China is soaring thanks to increasing use for industrial and jewelery purposes.

About 70% of China's silver demand comes from the industrial sectors. Silver is widely used in the China is the third largest producer of mined silver in the world.

So controlling silver prices from spiking could mean ‘less statistical inflation’. This should also represent subsidies to her industrial users. Hence the incentive to join the price control bandwagon.

According to the Financial Times,

Chinese speculators have emerged as a big driver of silver’s spectacular rally and subsequent crash with trading in the metal in Shanghai soaring nearly 30-fold since the start of the year.

The commodity, nicknamed “the devil’s metal” for its wild price swings, surged 175 per cent from August to a peak of almost $50 a troy ounce two weeks ago. Since then, it has plummeted 35 per cent, hitting a low of $32.33 on Thursday.

At the same time, silver turnover on the Shanghai Gold Exchange, China’s main precious metals trading hub spiked, rising 2,837 per cent from the start of this year to a peak of 70m ounces on April 26, according to exchange data.

The number of contracts outstanding, an indicator of investor exposure, doubled over the same period.

Manipulating silver’s prices also means punishing savers who buy silver in the form of hedging against currency debasement. As the article above implies, about 30% of silver’s demand in China have been due to “jewelry”. Given the underdeveloped conditions of China’s capital markets, hedging may come in the form of jewelry.

The global war on commodities is becoming more evident by the day...

Reports the Reuters (highlights mine)

There's no question pressure from Washington is growing.

A group of 17 U.S. senators on Wednesday called on the Commodity Futures Trading Commission to crack down immediately on excessive speculation in crude oil markets, demanding the agency's plan to impose position limits within weeks.

...as we see more and more calls for interventions from politicians around the world.

And the assaults on the commodity markets have also been expected to cover agricultural futures soon.

So we should expect continued volatility until governments would run out of ammunition or once commodity demand and supply backfire on their policies.

Yet for as long the US Federal Reserve pursues the policy of inflationism (this includes other major central banks or even China)…

Chart from Minyanville

…the outcome will be higher commodity prices!

Scapegoating speculators and intervening in the markets may temporarily achieve political goals. However, such actions would only worsen the economic balance and lead to even higher prices—the law of unintended consequences.

It is just a matter of time.

In my view, this telling chart forebodes on why the concerted intervention in commodity markets.

Printing money does not equal higher inflation, that’s what’s being portrayed. Why? Because the Fed and their acolytes think that they need more of these, since government spending, for them, is holy grail to resolving socio-economic problems.

Money printing is the way to prosperity, so it is held.

I see higher inflation.

War on Commodities: Intervention Phase Worsens and Spreads With More Credit Margin Hikes!

[This post, which I published last May 10, seems to have vanished from my inventory of articles. Perhaps this could be an unintentional omission as part of the patching of the technical glitch, or the alternative, I don’t like to think about it. Nevertheless I am reposting it, but with slight revisions. Anyone who has a copy of the old post pls resend to me benson.te@gmail.com. Thanks]

So the mainstream picks up on the war being waged on commodities.

For politicians it’s all been about political correctness, thus any deviances or incorrectness must be faced with 'discipline'.

Bloomberg’s Matthew Lynn writes, (bold highlights mine)

The battleground that matters most for the banking and finance industry right now is the profits it is making from commodities trading.

Over the last few days, prices have been bouncing all over the place, a reminder for everyone of just how unstable the market in food and raw materials has become.

Now there is a backlash building. The banks should take note of that. If they don’t, they could easily be driven out of this business -- and they will only have themselves to blame.

Investors held a record $412 billion of raw-material assets at the end of March, almost 50 percent more than a year earlier, according to estimates by Barclays Capital. Trading in futures and options contracts is rising rapidly. For banks and fund managers, it is a lucrative business. And the more volatile it is, the more profitable it gets.

Not everyone is happy about that. Last month, Barclays Plc was targeted at its annual general meeting for its trading profits in food commodities. The World Development Movement, a London-based group, claims that Barclays may be making as much as 340 million pounds ($554 million) a year from “food speculative activities.”

That may be exaggerated, but there will be plenty of sympathy for that view. French President Nicolas Sarkozy has blamed speculators for pushing up food prices. The European Union’s financial services commissioner, Michel Barnier, is even calling for limits on trading in commodities...

It would be easy to dismiss those protests as nothing more than the complaints of a few anti-business fringe groups and grandstanding politicians. Easy, but wrong. In reality, there is a serious issue here. Speculation in commodities isn’t like trading in financial instruments. People don’t eat Nestle SA shares. They don’t need Treasury bills to keep their factories running. The prices of those instruments can jump around like crazy without it affecting people’s lives.

But when the price of wheat or copper soars, it makes a big difference. Some people can’t afford to eat anymore because food is too expensive. Companies that used to be profitable start losing money and firing workers because the cost of their raw materials has risen so much. If they think the banks are to blame for that, they will be angry.

As I have been saying governments have been so predictable;

First governments inflates, then blames everybody else.

Then they apply propaganda to justify their actions.

Next they’ll impose price controls in the hope that edicts will be able repeal economics.

Eventually reality catches up and the facade collapses.

And as we have been pointing out inflation and price controls are like (fraternal) twins. Fraternal because both emanate from government policies, however one aspect is monetary while the other is administrative or fiscal.

Now the propaganda-price control stage is getting clearer

And this has been part of the slew of propaganda being tossed out by the Fed which for me constitutes part of the ‘signaling channel’ conditioning for the next QE.

Here is a Fed study which attempts to show that the link between US dollar and inflation has been fading.

From the Wall Street Journal Blog,

Currency weakness leading to higher import prices is a hallowed cause-effect connection for economists. But it’s a link that may be eroding...

Certainly, import prices have increased as the dollar has weakened. Over the year ended April, the trade-weighted value of the dollar fell about 6%, while the prices of non-oil imports increased 4.3%.

Much of the price gain, however, reflects higher costs for imported commodities and supplies. The prices of imported capital and consumer goods — items that feed more directly into broader U.S. inflation measures — are up only about 1% over the past year.

Economists at the Fed have looked into the link between exchange rate and import prices. What they found is the pass-through effect from a weaker currency eroded from the 1980s into the early 2000s.

What’s behind the looser link?

One reason, the economists theorize, is that a greater share of imports are goods with prices less sensitive to currency movements. For instance, Apple — not the forex market — sets the price of iPads.

Also, companies are more able to hedge against currency moves or shift production and supply sources around the globe.

Another reason for the erosion is China dominance of the U.S. import market.

With all the gobbledygook, we should start believing them. Unfortunately technical gibberish won’t supplant the law of economics. Printing more money relative to actual output of goods and services will lead to HIGHER prices.

And that’s what’s been happening.

Yet if you look at their chart which tries to identify the so-called decoupling, it simply is not there, see the trend lines I drew—red nominal imports; blue trade weighted US dollar.

The immediate effects may not be as strong as the previous, but it doesn’t mean the current divergences should translate to a deepening trend.

One development which may induce this temporal decoupling would be by intervention via the financial markets, which is what the governments been doing now.

The charts above reveal that prices of non-commodity imports have been rising.

Then Northern Trust notes,

Prices of consumer goods excluding autos increased 0.4% in April and are up 0.6% from a year ago. Prices of autos have risen 1.8%, while that of capital goods have increased 1.0%. The import price index of manufactured goods posted a 5.5% increase in April.

At the present time, the upward trend of non-oil import prices reflects the impact of a weak dollar. It is conceivable that these prices will be more threatening as demand gathers steam.

So politicians in realizing these, appears to be in an intense denial, thus the transition towards the psy-war and intervention phase.

It should be a reminder that denial and anger is part of the human psychology when undergoing substantial stress.

This can be seen in the Kubler-Ross Grief cycle.

Of course the intervention phase, so far, has not been directed at the consumer level, but as pointed out by Mr. Lynn, rather through the financial markets.

The desperate attempts to control commodity prices have been worsening.

Notes Tyler Durden of Zerohedge.com, (bold emphasis mine)

CME goes full retard, and is now seriously threatening to destabilize the clearing structure of the market with what appears a panicked margin hike every single day in one or more commodities. Among today's products impacted RBOB and RBOB crack spreads, up by 21% and 50%, respectively, as the CME makes it all too clear which products the Obama memo said need to be killed post haste.

Changing rules of the game won’t change the outcome.

As the great Professor Ludwig von Mises presciently wrote, (highlights mine)

The public discussion of economic problems ignores almost entirely all that has been said by economists in the last two hundred years. Prices, wage rates, interest rates, and profits are dealt with as if their determination were not subject to any law. Governments try to decree and to enforce maximum commodity prices and minimum wage rates. Statesmen exhort businessmen to cut down profits, to lower prices, and to raise wage rates as if these matters were dependent on the laudable intentions of individuals. In the treatment of international economic relations people blithely resort to the most naive fallacies of Mercantilism. Few are aware of the shortcomings of all these popular doctrines, or realize why the policies based upon them invariably spread disaster.

These are sad facts. However, there is only one way in which a man can respond to them: by never relaxing in the search for truth.

Blogger’s Friday the 13th Snafu

Blogger’s been down for more than a day. But it’s obviously back.

Unless one is stricken by Friday the 13^th phobia or friggatriskaidekaphobia, then blogger.com’s foul up has most likely been a coincidence.

Hopefully it’s been a technical glitch….

Notes the CNET,

"We're nearly back to normal -- you can publish again, and in the coming hours posts and comments that were temporarily removed should be restored," Eddie Kessler, tech lead/manager at Blogger, wrote in a post on the Blogger Buzz site around 10:30 a.m. PT.

The post continues:

Here's what happened: during scheduled maintenance work Wednesday night, we experienced some data corruption that impacted Blogger's behavior. Since then, bloggers and readers may have experienced a variety of anomalies including intermittent outages, disappearing posts, and arriving at unintended blogs or error pages. A small subset of Blogger users (we estimate 0.16%) may have encountered additional problems specific to their accounts. Yesterday we returned Blogger to a pre-maintenance state and placed the service in read-only mode while we worked on restoring all content: that's why you haven't been able to publish. We rolled back to a version of Blogger as of Wednesday May 11th, so your posts since then were temporarily removed. Those are the posts that we're in the progress of restoring.

The publishing site has millions of active blogs, he said.

…and not seeds towards online censorship.

Graphic: Devil Finds Work For Idle Hands

Here is another wonderful illustration from Jessica Hagy’s Indexed which she calls as ‘Often A wonderful thing’.

For me, this looks more like the idiom the ‘devil finds work for idle hands’

Steve Forbes: The US Will Revert to the Gold Standard in 5 years

The US will embrace the gold standard in 5 years, predicts publisher Steve Forbes of the Forbes magazine.

According to Humanevents.com (hat tip Bob Wenzel) [bold emphasis mine]

A return to the gold standard by the United States within the next five years now seems likely, because that move would help the nation solve a variety of economic, fiscal, and monetary ills, Steve Forbes predicted during an exclusive interview this week with HUMAN EVENTS.

“What seems astonishing today could become conventional wisdom in a short period of time,” Forbes said.

Such a move would help to stabilize the value of the dollar, restore confidence among foreign investors in U.S. government bonds, and discourage reckless federal spending, the media mogul and former presidential candidate said. The United States used gold as the basis for valuing the U.S. dollar successfully for roughly 180 years before President Richard Nixon embarked upon an experiment to end the practice in the 1970s that has contributed to a number of woes that the country is suffering from now, Forbes added.

If the gold standard had been in place in recent years, the value of the U.S. dollar would not have weakened as it has and excessive federal spending would have been curbed, Forbes told HUMAN EVENTS. The constantly changing value of the U.S. dollar leads to marketplace uncertainty and consequently spurs speculation in commodity investing as a hedge against inflation.

The only probable 2012 U.S. presidential candidate who has championed a return to the gold standard so far is Rep. Ron Paul (R.-Tex.).

The gold standard has been gaining much of public’s attention as I have pointed out earlier.

And the gold standard has been associated with Congressman and presidential aspirant Ron Paul, which implies that Dr. Paul’s advocacy throughout the years has been successfully gaining followers.

I don’t think going back to the gold standard would come orderly or casually.

Considering that most politicians are intuitively averse to cut even the slightest of their expenditures, a gold standard would translate not only to less spending, but a substantial reduction of political power for power hungry politicians. And this seems to be a universal phenomenon, which means this applies to most politicians of every government.

I don’t think that this would happen even if Mr. Ron Paul successfully wins the US Presidency in 2012. (Although Dr. Paul could aid or facilitate the process, but an orderly transition is something else. Dr. Paul will be fighting entrenched and powerful vested interest groups who will vigorously oppose him by hook or by crook)

In other words, a gold standard will only happen once a severe financial storm slams the US and the world economy and markets sooooo strong or powerful enough for people to compel politicians to renege on the current system.

That’s unless politicians wake up one day and find themselves assimilating angelic virtues, all willing to abandon their functional entitlements. But this would be a black swan for me.

In effect, my interpretation of Mr. Forbes prediction is that over the next 5 years a big crisis will buffet the US for her to reluctantly adapt to a gold standard (of course this means the world too).

Have a nice day.

The US Stock Markets As Target of US Federal Reserve Policies

The US stock markets have been target of US Federal Reserve policies!

This is what I’ve repeatedly been saying all along since 2008! And have been validated anew.

First, Fed officials deny it.

Reports the Wall Street Journal Blog (bold highlights mine)

For many years, central bankers have declined to comment on the performance of stock markets, and have instead justified their actions in purely economic terms. To the extent financial markets entered into it, central bankers were most mindful of bond markets as the mechanism that translated changes in monetary policy into credit availability for businesses and households.

The stock market only entered into the picture in times of deep market disruptions, or as part of broader discussions about the “wealth effect,” wherein rising stock prices are thought to make households feel richer, and spend accordingly. Of course, stock market operators have always spoken of the a Fed “put,” in which the central bank will ease policy to arrest sustained stock market declines.

All of that has changed since the Fed restarted late last year a program to buy $600 billion in longer-dated government bonds, in a bid to spur higher levels of growth and get the unemployment rate down faster than would otherwise be the case.

Then they confirm it.

Again from the same WSJ Blog (bold highlights mine)

It isn’t clear whether Bernanke’s shift in focus represents a change in how the Fed does business, or whether his comments represent an effort to justify a policy that hasn’t worked as planned, leaving the chairman to support it in whatever way he can. It’s a potentially dangerous policy stance, because if stocks were to undergo an extended period of losses, it could argue for the Fed to keep policy easier than it may want to.

For Federal Reserve Bank of Minneapolis President Narayana Kocherlakota, the increased prominence of asset prices as a focus of monetary policy is not so much an enduring shift in how policy is made, as it is a recognition of what caused the huge economic and financial problems of recent years.

“This recession and the relatively slow recovery we’ve gone through, a lot of it can be traced back to net worth,” Kocherlakota told reporters after a speech in New York Wednesday. “The fall in net worth is what drove us into recession” and “in those circumstances you can see why asset values, both for land and for stocks, are really going to be a central ingredient in the recovery process,” he said.

To ensure the recovery will take hold, it’s important for the Fed to help re-flate asset prices and given households and businesses a chance to rebuild and rebalance their respective financial positions, the official explained.

“In this kind of post financial crisis, post net worth driven recession, it makes sense to be thinking about asset value as a way to try to generate more stimulus than you do in a typical recession,” Kocherlakota said.

I earlier quoted Ben Bernanke in November 2010 who already validated my views... (bold highlights mine)

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

This has long been Chairman Ben Bernanke’s guiding principle since he was a professor at the Princeton University (unfortunately the link to foreignpolicy.com has been removed, nevertheless can be found in Wikipedia) [emphasis added]

There’s no denying that a collapse in stock prices today would pose serious macroeconomic challenges for the United States. Consumer spending would slow, and the U.S. economy would become less of a magnet for foreign investors. Economic growth, which in any case has recently been at unsustainable levels, would decline somewhat. History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse.

If the imperatives of the “wealth effect” or that the Fed sees the importance “to help re-flate asset prices and given households and businesses a chance to rebuild and rebalance their respective financial positions” then ending QE, given current fragile "asset price" conditions, would mean that the FED will overturn her priorities. This would signify as a bizarre logic.

This only gives further clues that the Fed will continue to inflate the system, in spite of the current rhetoric about exits and the culmination of the QE which for me signifies as another episode of poker bluffs.

Incidentally, US household ownership of stocks has been on a big decline since 2007.

According to Gallup,

Even as stocks have returned to lofty heights from their March 2009 lows, the percentage of Americans saying they hold individual stocks, stock mutual funds, or stocks in their 401(k) or IRA fell to 54% in April -- the lowest level since Gallup began monitoring stock ownership annually in 1999. Self-reported stock ownership has trended downward since 2007 -- before the recession and financial crisis began -- when 65% of Americans owned stocks...

Americans still have still been enamored to properties.

Again the Gallup, (emphasis added)

The financial crisis and the losses it produced for many investors have combined with government bailouts and Wall Street scandals to turn many Americans away from investing in stocks. Even as stocks have surged over the past couple of years, it has been hard for most Americans to understand what is happening on Wall Street and why, leaving them hesitant to invest in the stock market.

On the other hand, housing and real estate have also experienced sharp losses in recent years and show no signs of significant recovery; still, many Americans see real estate as the best investment for the long term. In part, this may be because depressed prices in the real estate sector make it a relatively attractive investment when investors hold it for the long term. It could also be that Americans feel more comfortable with and better understand real estate as an investment compared with stocks and Wall Street.

My final two cents.

Rising equity prices seen in the backdrop of falling US household ownership means that the equity gains have primarily been benefiting financials companies, since nonfinancial corporations have also been sated with cash.

Chart from Wall Street Journal Blog

This is the obvious effects of the redistribution of wealth from the households to Wall Street and other Washington cronies.

Two, I doubt Americans see real estate as “best investment”. I’d rather surmise that falling real estate represents cognitive biases of “loss aversion” and the “endowment effect” where homeowners have been reluctant to realize or accept losses and instead hold out on their properties based on hope.

Maybe they are hoping that the crash would just go away soon. Or maybe that Fed policies could relieve them.

Either way, if asset prices has been the essential determinant of spending, as proposed by Fed officials led by Ben Bernanke, then obviously inflationism will be expected to continue.

And this seems one good reason why the campaign or war against commodities has intensified.

Video: Paul Romer on how 'Charter Cities' can change the world

Stanford and New York University's Paul Romer gives a fascinating talk at the TED on how rule based Charter Cities which empowers choices for people and leaders, can significantly improve the world. (hat tip: Tom Palmer)

Mr. Romer concludes with a noteworthy quote,

The reason we can be so well off even though there are so many people on earth is because of the power of ideas. We can share ideas with other people when they discover them they share with us. It’s not like scarce objects where sharing means we each gets less, when we share ideas we get more. When we think about ideas in that way we usually think about technologies, but there is another class of ideas, the rules that govern how we interact with each other...

If we can keep innovating in our space of rules, and particularly innovate in the sense for coming up with rules for changing rules so we don’t get stuck with bad rules then we can keep moving progress forward and truly make a better place...

Self Development: Success= Compound Efforts + Fire In the Belly

Earlier I posted here a great article by Agora Publishing’s Bill Bonner on how to use ‘efforts’ similar to interest rates: by compounding—the length and quality of exposure determines expertise or specialization or productivity.

Austrian Economist Professor Gary North expands the discussion, see link here.

But this time Professor North’s article comes with an additional tip: Fire in the Belly or PASSION (calling).

The reason I am posting topics related to self-development is to help newbies readers like my children. [I noticed that many readers of this blog are from schools, which I presume could mostly be students]

The lessons here applies to almost anything most especially to investment.

The following are excerpts from Prof. North’s wonderful article supplemented by my headings (blue bold emphasis mine)

1. Compound efforts needs FUTURE orientation

It is not a matter of brains. It is a matter of character. From time to time, we do hear of young men who seem to understand as teenagers how little time men have, and how large the payoff is for hard work, high thrift, and dedication to the mastery of some field. These are the super-performers discussed in books like Malcolm Gladwell's Outliers. They invest their crucial 10,000 hours before they reach age 21.

But it is not just character. It is something else. It is their understanding of time. They recognize that effort and assets invested early in life have a compounding effect. This makes an enormous difference at age 40 or 50, if a person finds the right niche in which to invest his time.

To do this, a young person needs future-orientation. This is exceedingly rare among the young. As Ben Franklin put it in 1750, "A child thinks that twenty pounds and twenty years can never be spent." A few musical artists figure it out early, or at least consent to their parents' demands while they are still forming their habits in life. But few understand it with respect to money.

2 Capital accumulation or wealth is a PROCESS

In Chapter XVIII of his magnum opus, Human Action (1949), Ludwig von Mises presented the case for the importance of time perspective as a source of thrift, capital formation, and wealth. He called this outlook "time-preference." Some people are present-oriented. They want satisfaction now. They will not lend money at low rates of interest. They borrow at high rates. Others are future-oriented. They save at low rates of interest. They refuse to pay high rates of interest when borrowing.

He made a profound observation on why we are rich compared to earlier generations.

Our activities are designed for a longer period of provision because we are the lucky heirs of a past which has lengthened, step by step, the period of provision and has bequeathed to us the means to expand the waiting period.

Mises recognized that modern man is the heir of generations of capital formation and thrift.

3. Future Orientation MUST come with PASSION

FIRE IN THE BELLY

There are good employees who meet the criteria of predictable performance. But they will remain employees if they do not have fire in the belly.

Some people call this character trait an obsession. It probably is. Others call it ambition. It often is. Still others call it visionary. It always is…

The person with no fire in his belly is unlikely to take the risks that mastery require. Mastery is a high-risk endeavor. It is more than routine maintenance. It is a matter of putting your reputation on the line in something like full public view.

Rockefeller and Carnegie had fire in the belly. They helped to create a new, far richer world. Both of them switched to charitable giving when they got old. Their money bankrolled some of the most insidious projects of the so-called New World Order. They were better at piling up wealth than giving it away. They had no skills at giving it away. They would have done more good for mankind in their lifetimes if they had stuck to their knitting. But super-rich men cannot escape their responsibility for managing great wealth in this way. Their piled-up capital will be inherited....

I think a person must have this fire in the belly: his calling. I define calling as the most important thing you can do in which you would be most difficult to replace. This may be a person's occupation, but only rarely. It was an aspect of John Wooden's job, but it reached far deeper than his job. After he retired, his calling remained. His influence grew greater over the years as a result of the foundation of his life, which was also the foundation of his occupational success...

Fire in the belly keeps a person from getting sidetracked. He may go over a cliff.

That’s why applied to the stock markets, I vehemently oppose simulation games (because this lacks the element of the stakeholder’s problem) or short term trades (yes even taught by schools!!!).

This is because any person who is dominated by present orientation extrapolates to a lack of depth in analysis or thinking, in trading—limits to gains while enlarging risks (with emphasis on the frequency more than the magnitude), amplifies emotional approach to the markets, and renders one vulnerable to social conformity rather than rigorous independent thinking which is a prerequisite to getting ahead of the curve.

I hope this helps.