Phisix: Divergences Point to a Bullish Momentum

Chance is always powerful. Let your hook always be cast; in the pool where you least expect it, there will be fish.-Ovid

As pointed out above, the Philippine Phisix along with her ASEAN peers, has, so far, been major beneficiaries of the deepening accounts of global market divergences.

I would like to reiterate, we should NOT misconstrue divergences with DECOUPLING.

As I previously wrote[1],

Signs of decoupling will be manifested once the next crisis emerges. Yet given the depth or scale of today’s globalization or social interconnectedness which has not been limited to trade, labor, capital flows or to even monetary policies, I strongly doubt that this should transpire.

And since there have been little signs yet of intensified deterioration in the global economic and financial sphere, except for cyclical slowdown, part of which seems orchestrated[2], there hardly has been substantial evidence to read current events as prelude to the next recession or crisis. [Yes there will be a coming crisis, which will be far worse than 2008, yet I don’t think we have approached this eventuality yet. Not unless a black swan/fat tail occurs]

This gives me the confidence to say that divergences can or may be sustained for the time being.

And along with a significantly bullish reverse head and shoulders as shown earlier, this week’s rally has largely been broadmarket based.

As gains had been manifested on every sector, market breadth ostensibly recovered. The advance-decline spread turned positive, the number of trades improved and foreign trade remained nearly neutral (slight outflows-as shown below chart).

This implies that the recent rally has been fueled by local participants.

Again the mining index, after a two week reprieve, has regained market leadership.

The service and financial sector which registered gains above the Phisix also buoyed or contributed to the overall advances of the major local equity benchmark.

The service sector was led by PLDT which gained 8.63% for the week, while the financial sector was led by last week’s big losers BPI (+6.21%) and BDO (+5.98%).

Interestingly, BPI and BDO erased the losses from the anomalous last minute selling during Friday of the other week, June 17^th.

Add to this bullish backdrop was the rally in the Peso.

The correlationship between the Peso (blue line chart) and the Phisix (black candle) appears to be tight (red direction lines).

The underlying causal link of this relationship has been demand for the Peso assets which has partly been evidenced by foreign fund flows and monetary policy divergences and artificially low rates.

All these factors, particularly chart formation, rallying peso, improving market breadth, bullish local investors, appears to have converged to signify possibly as a significant tailwind in favor of the bulls.

Should the Phisix successfully encroach on the reverse head and shoulders resistance level at 4,318, then we could be looking at 4,900-5,000 by the yearend.

As caveat, this prognosis has been based on exegesis of current market conditions and on assumptions of future actions of the drivers of the marketplace—specifically politicians and central bankers. If my assumptions or an exogenous shock occurs, then my scenario could get upended.

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[1] See ASEAN’s Equity Divergence, Foreign Fund Flows and Politically Driven Markets June 5, 2011

[2] See Falling Markets, QE 3.0 and Propaganda, June 12, 2011

Philippine Mining Index Nearly at 20,000, Fulfilling My Predictions

Bear and endure: This sorrow will one day prove to be for your good. -Ovid

The Philippine Mining index soared to a fresh record high as major mining issues have been on a rampage.

Over the past years, many have questioned my premises and have impatiently chastised me for the underperformance of my pet sector. For me, these people wanted excitement and satisfaction of the ego, more than they desired profits.

And I have always used Ovid’s quote to justify my calls:

Everything comes gradually and at its appointed hour.

Here is what I wrote in November 2009[1],

From this juncture, we believe that the mining index next goal would conservatively be at least 20,000.

With the Philippine mining index at 19,975 or 25 points away, it would appear that NOW is the appointed hour!

It’s not only that the 20,000 level that is in near fulfilment, but most importantly would be how these series of events are being realized.

Again me in 2009, (bold highlights original)

Actions among the mining components appear to be rotational- a classic symptom of bullmarket driven by inflation. This implies that the next major moves could likely come from those that have been in a reprieve.

Market trends are social trends. As mentioned above, the speculative label on the mining industry is a symptom of the lack of social acceptance or persistent aversion emanating from over two decades of depression. Essentially such resistance is psychologically bullish. That’s because despite present levels, only a handful have been invested. In social terms, bandwagon effect occurs when trends are reinforced by confirmation of expectations. In other words, long term trends draws in more converts.

First, today’s fiercely rallying mining issues have been broadening.

The first time the local mining index surpassed the previous record high was due to the blitzkrieg of Philex Mining. Today’s juggernaut has included many other issues as Lepanto [PSE:LC], Semirara [PSE:SCC], Atlas Consolidated [PSE:AT], PetroEnergy [PSE: PERC] and Manila Mining [PSE: MA].

Second, the broad based rally has been winning many converts. Even my mentor who has been a staunch mining critic now trades the sector.

In terms of Peso value traded, the mining sector accounts for 18% of this week’s trade which would have been larger (about 20%) if special block sales is excluded. To consider, the Philippine Stock Exchange has 6 sectors which means the share of the others have been captured by the mining sector.

In addition, the mining sector grabbed the top spot in terms of peso value, in two of the four trading days this week.

These are evidences which continues to manifest how investing in mines and resource sectors have transitioned from the fringes and into the mainstream.

The Rotation to Atlas-APO

The recent actions of the mining sector has shifted to Atlas Consolidated [PSE: AT] and the Forbes 28^th richest[2] Philippine tycoon Alfredo Ramos’ investment vehicle, Anglo-Phil Holdings [PSE: APO]

Many have attributed APO’s eye-popping 66% surge this week to the developments of the Atlas Consolidated, from which APO has an 11.67% stake in[3].

Atlas Consolidated, which gained 19% over the week, has reportedly offered to buy her Singaporean partners in a $368 million deal[4], which will be funded by debt and equity.

Some have speculated that part of this equity side of the deal has been designed to include Manny Pangilinan’s entry into Atlas via Philex Mining[5].

That would be fait accompli.

I would have a different story.

The actions of Atlas [green] and Philodrill [blue; PSE: OV], which APO has a .28% stake in, have been tightly correlated with the actions of APO. Such close correlations can be traced way back to 1998. Though the correlation has not been 100%; seen from major trend movements, the APO and AT-OV correlation seem to be in the bag.

Recently, Atlas has been moving higher along with other mining issues. I was partly concerned that the overbought conditions in major issues as Lepanto, Philex and Manila Mining could affect Atlas[6]. Apparently it didn’t.

Also, I spoke about the resurgence in the oil sector[7] which was led by Philodrill. Yet APO lagged as both Atlas and OV ascended. Such deviation presented a buying opportunity for me. [disclosure: I bought APO shares during this window and perhaps got lucky; I have long been a shareholder of LC, PERC, AT]

Then, I can’t say about the specifics of these deals which I would not ever be privy to until after the fact.

Yet since 2003 (see my initial prediction at safehaven.com[8]), I have long been saying that investments trends will favor the local mining and resource based industries considering that the Philippines is a resource rich nation which has mainly been untapped.

Yet I don’t need to know the specifics. I only need to know about the general trend.

And all these forces have been validating my long held premises.

In the 1970s, Atlas Consolidated was considered a blue chip and was traded at php 400s levels.

For me this means that most, if not all mining and resource based issues, will rise far beyond current price levels over the coming years, but will be subject to the flows and ebbs of the global boom bust cycles.

Not only because these sectors represent as investments, but importantly, because resource based securities will account for as hedges against central bank inflationism.

Once the risk of an inflationary panic becomes a reality, where physical metal will get drained from the spot markets, mining issues will likely serve as the next object of the ‘flight to value’.

For now, APO and AT could be short term sells considering the massive moves that has brought them to overbought levels. Yet momentum and bullmarket sentiment can lead them to vastly extended zones similar to what has been happening to Lepanto.

For most occasions market timing for me is about luck, unless one can spot rare arbitrage opportunities as the above.

Yet I always recommend investments in the prism of medium to longer term basis and hardly about market timing or short term scalps.

Importantly, these themes have to be backed by theories that work with evolving general conditions and not just to feed the intellectual ego.

Yet it does surely feel good to get validated anew. I thank my dear Lord for this special insight.

To close, again I quote Ovid,

Time is generally the best doctor.

Indeed.

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[1] See Prediction Fulfilled: Philippine Mining Index Tops 9,000 (Now 11,300!), November 15, 2009

[2] Forbes.com #28 Alfredo Ramos, Philippines 40 richest

[3] Anglo Philipines Holdings Corporation Business Interest

[4] Reuters.com Manila's Atlas to fully own Carmen Copper in $368 mln deal, June 24, 2011

[5] Abs-cbnnews.com Philex climbs most in 6 months on Atlas speculation, June 25, 2011

[6] See Phisix: Why I Expect A Rotation Out of The Mining Sector, May 15, 2011

[7] See The Awakening of the Philippine Oil Exploration Sector?, May 22, 2011

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

Mark Twain and China’s Yuan

The brilliant nanotech investor and analyst Josh Wolfe of Forbes offers three invaluable investment insights premised on the maxims of literary and philosophy luminaries: F. Scott Fitzgerald, Mark Twain and Arthur Schopenhauer

The wisdom from the select quotes of the three wise men seem representative of openmindedness (Fitzgerald), the risks of overconfidence and comfort of crowds or the contrarian stance (Twain) and innovation (Schopenhauer).

Read them here

I’d like to make a brief comment on the Mark Twain situation applied to the Yuan

Mr. Wolfe writes, (bold emphasis mine)

Mark Twain said that: “it ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just aint’ so.”

Twain Situations are those where the consensus is near certain about something. But as Buffett has noted, you pay a high price for a cheery consensus. These are situations with payoff structures that Nassim Taleb would call Black Swans. The opposite of the consensus is often entirely unrecognized, unappreciated and massively underpriced. If they are wrong, it’s a massive blow-up. Buying puts and expressing a contrarian view, with cheap insurance may be ways to express this “Twain” view. And this is precisely where the prescient Cullen Thompson and Bienville Capital Management LLC has done along with Mark Hart of Corriente Advisors LLC (who correctly nailed the huge asymmetric payoff with a contrary to consensus view on subprime housing, when all others believed housing prices could only rise). Here is Thompson quoted in today’s WSJ:

“Given the magnitude of China’s credit problems, it’s at least a possibility the yuan drops sharply. The potential of the trade is so great, and when there’s cheap insurance in today’s environment it’s silly not to buy it”

Everybody I speak: politicians, pundits and principal investors all believe, nay they “know” that the Yuan is undervalued and must rise. It just must! And therein lies the opportunity.

Like Mr. Wolfe, I have been saying that the consensus expectations of an overvalued yuan have been misplaced.

That’s because the mainstream’s macro analysis and prescription over ‘global imbalances’ has been premised on flimsy and tenuous grounds.

First, global imbalances have been a diversion (if not a patent misdiagnose) from the true problem: the US dollar paper money system that abets inflationism and interventionism.

Second, the currency valve policy resolution is too oversimplistic and naive, which essentially views the global economy as homogenous.

Lastly, the excessive fixation over these two supposed cause and effect dynamic overlooks the bubble nature of China’s economy.

This reminds me of the Asian crisis where the Thai baht largely operating on a fixed or pegged exchange rate blew up as the Asian crisis emerged (above window).

China’s quasi pegged currency trend looks alot like the Thai baht prior to the Asian crisis (below window). [Charts courtesy of Thai Baht Tradingeconomics.com and Yuan forecastchart.com]

Inflationism only obscures the way the public reads or analyze markets.

As Murray N. Rothbard wrote,

Inflation has other disastrous effects. It distorts that keystone of our economy: business calculation.

Revolving Door Syndrome: European Central Bank’s New Head was Goldman Sach’s Honcho

It has been a revolving door affair between the banking industry, particularly the ‘Too Big to Fail’ cabal, and the government/central bankers.

This goes for the recent appointment of the new president of the European Central Bank

From BBC.co.uk

Mario Draghi takes the helm of the European Central Bank (ECB) at the most difficult period in its 13-year history.

With a number of eurozone economies straining under the weight of massive government debt levels, some observers have even suggested the very future of the euro is at stake.

Much will depend on the 63-year old Italian central banker.

"Super Mario", as he is known, is well respected and widely recognised as the best person to head the ECB.

He certainly has impeccable credentials. A graduate of the University of Rome, he holds a PhD in economics from the Massachusetts Institute of Technology and served as professor of economics at the University of Florence between 1981 to 1991.

But Mr Draghi is no dry academic. He went on to become managing director and vice-chairman of Goldman Sachs International, giving him a vital insight into how financial markets work in practice.

He has also worked as an executive director of the World Bank, director general of the Italian Treasury and, perhaps most importantly in the eyes of investors, head of the Financial Stability Board.

Ever noticed why the interests of privileged bankers and governments/central banks have been intertwined?

Europe’s Financial Repression: How Solvency II may affect Portfolio Allocations of Insurance Firms

Governments around the world have been applying financial repression—part of which is to use new regulations to force financial institutions to funnel private savings into government debt.

We see this also happening in Europe where insurance firms are being ‘incentivized’ by new rules to invest in government debt than in equities.

From Researchrecap.com (bold highlights mine)

Fitch Ratings believes that Solvency II, the new regulatory regime for European insurers from 1 January 2013, is set to transform how insurers allocate their investments.

European insurers are the largest investors in Europe’s financial markets, holding EUR6.7trn of assets, including more than EUR3trn of government and corporate debt. Any reallocation of insurers’ asset portfolios could therefore lead to fundamental shifts in demand and pricing for several asset classes. The new rules will force insurers to value assets and liabilities at market value when determining their solvency position, and to hold explicit capital to reflect shortterm volatility in the market value of assets.

Fitch expects a shift from long-term to shorter-term debt; an increase in the attractiveness of higher-rated corporate debt and government bonds, and shift away from equity; and a preference for assets based on the long-term swap rate.

People hardly see it, but rules are being utilized to skew resource allocation for the benefit of political forces.

Video: Christien Meindertsma on the Economic Value of Pigs

Here is a fascinating talk by Ms. Christien Meindertsma on TED, about the economic value of Pigs. I mean the animal (oink oink) variety and not the debt plagued acronym of peripheral European countries.

Ms.Meindertsma's talk somewhat resembles Leonard Read's I, Pencil except that she focuses on the pig as a product than as part of the market process [pointer to Mike Du]



Some passages:

The market process of pigs (bold emphasis mine-from TED)

And what I was curious about -- because historically, the whole pig would be used up until the last bit so nothing would be wasted ... and I was curious to find out if this was actually still the case. And I spent about three years researching. And I followed this one pig with number "05049" all the way up until the end and to what products it's made of. And in these years, I met all kinds people, like, for instance, farmers and butchers, which seems logical. But I also met aluminum mold makers, ammunition producers and all kinds of people. And what was striking to me is that the farmers actually had no clue what was made of their pigs, but the consumers -- as in us -- had also no idea of the pigs being in all these products.

The pig's economic value: (bold emphasis mine)

In total, I found 185 products. And what they showed me is that, well, firstly, it's at least to say odd that we don't treat these pigs as absolute kings and queens. And the second, is that we actually don't have a clue of what all these products that surround us are made of.

And you might think I'm very fond of pigs, but actually -- well, I am a little bit -- but I'm more fond of raw materials in general. And I think that, in order to take better care of what's behind our products -- so, the livestock, the crops, the plants, the non-renewable materials, but also the people that produce these products -- the first step would actually be to know that they are there.

We can't surely know everything. But we can understand the market process. And that's why markets are indispensable.

As Leonard Read writes,(emphasis added)

There is a fact still more astounding: The absence of a master mind, of anyone dictating or forcibly directing these countless actions which bring me into being. No trace of such a person can be found. Instead, we find the Invisible Hand at work. This is the mystery to which I earlier referred.

Central Planning in Education Fails

Central planning even in education doesn’t work. Take a look at Japan’s PhD’s experience

From Nature.com (hat tip: Prof Arnold Kling) [bold emphasis mine]

Of all the countries in which to graduate with a science PhD, Japan is arguably one of the worst. In the 1990s, the government set a policy to triple the number of postdocs to 10,000, and stepped up PhD recruitment to meet that goal. The policy was meant to bring Japan’s science capacity up to match that of the West — but is now much criticized because, although it quickly succeeded, it gave little thought to where all those postdocs were going to end up.

Academia doesn’t want them: the number of 18-year-olds entering higher education has been dropping, so universities don’t need the staff. Neither does Japanese industry, which has traditionally preferred young, fresh bachelor’s graduates who can be trained on the job. The science and education ministry couldn’t even sell them off when, in 2009, it started offering companies around ¥4 million (US$47,000) each to take on some of the country’s 18,000 unemployed postdoctoral students (one of several initiatives that have been introduced to improve the situation). “It’s just hard to find a match” between postdoc and company, says Koichi Kitazawa, the head of the Japan Science and Technology Agency.

This means there are few jobs for the current
crop of PhDs. Of the 1,350 people awarded doctorates in natural sciences in 2010, just over half (746) had full-time posts lined up by the time they graduated. But only 162 were in the academic sciences or technological services,; of the rest, 250 took industry positions, 256 went into education and 38 got government jobs.

In short, even PhD graduates end up jobless.

The basic problem is that educational output does not conform with the desires or requirements of the marketplace.

Instead government policies, out of political goals “to match the capacity of the West”, produced surpluses, which has led to these unemployed “experts”. In other words, these unemployed PhDs had been products of misdirected political imperatives. This also applies to capital too.

It’s the same with public education. Four out of TEN college graduates in the Philippines have been unemployed. That’s because the problem hasn’t been about the lack of education, but rather, the lack of economic opportunities and the misguidance brought about by too much government interventionism.

Graduates can only work when there are available jobs. And economically productive jobs emanate from the private sector. Even government jobs are financed by taxes from the private sector. When the private sector are burdened by too much regulations, political mandates, taxes and compliance costs, investment opportunities dwindles. Thus, the surge in unemployment.

Bottom line: Education does not guarantee jobs. Economic freedom does.

War on Commodities: IEA Intervenes by Releasing Oil Reserves

Ever since May 2011, a tactical multi-pronged assault on the commodity markets has been in operation.

From drastically raising of credit margins which started with silver then spread to other commodities, then European regulators have impliedly taken vigil over profits from commodity trade by the banking sector, China has joined the commodity price control fad, UN’s endorsement of price controls (which represents public mind conditioning to justify the cumulative price control actions worldwide), the ban on US OTC trades on precious metals, and the labeling of ‘Conflict Gold’ aimed to control gold flows.

All these appears to be timed with the termination of Quantitative Easing 2.0 this month.

Now comes another direct intervention; the IEA has announced that it will be releasing 2 million barrels a day for the next 30 days

Reports the Marketwatch.com,

The International Energy Agency said Thursday that its 28 member countries have agreed to release 60 million barrels of oil in the coming month because of the ongoing disruption of oil supplies from Libya. The Libyan unrest removed 132 million barrels of light, sweet crude oil from the market by the end of May, according to IEA estimates. As part of the IEA move, the U.S. will release 30 million barrels of oil from the Strategic Petroleum Reserve, which stands at 727 million barrels. This is the third time in the history of the IEA that its members have decided to release stocks. "I expect this action will contribute to well-supplied markets and to ensuring a soft landing for the world economy," said IEA Executive Director Nobuo Tanaka in a statement

I have been saying that this has been part of the implicit communications policy tool called as signaling channel, which is being employed by central banks aimed at managing ‘inflation expectations’.

The goal is to create conditions where statistical inflation has been suppressed (or termed as ‘transitory’).

These actions are currently being backed by claims or studies from the US Federal Reserve and allied institutions that shows that central bank actions have not been related to commodity price increases.

These centrally planned coordinated actions seem designed to rationalize for the next major overt interventions, which will come in the form of asset purchases (currently designated as Quantitative Easing or Credit Easing policies).

Of course, the above pays little heed to the longer term consequence of these series of actions.

Political actions mainly focus on the short term benefits—which are aimed at generating votes and high approval rating for tenure or election reasons. The public hardly sees that these actions concealedly reward or goes in the interests of powerful vested interest groups.

Bank of Japan’s Interventions in Japan’s Stock Markets

Japan’s central bank, the Bank of Japan (BoJ), through her version of quantitative easing program, has been bidding up her local local stock market

From Reuters, (bold emphasis mine)

Many market players also said expectations that the Bank of Japan would buy stock exchange-traded funds (ETFs) should there be sharp falls in share prices were limiting any incentive to sell aggressively.

The central bank has made about 300 billion yen's worth of such purchases since December, and has stepped up buying since the earthquake in March, as part of its asset purchase programme that includes buying of up to 900 billion yen of ETFs.

This serves as another proof that the US Federal Reserve and Ben Bernanke’s creed of supporting stock markets has been exported to Japan and is likewise further proof of the coordinated actions by central bankers globally.

Also, such actions works in the favor of the Japan’s mega banks whom holds substantial exposure to equity assets.

Almost everywhere, central bankers have prioritized the interests of the banking system

Nonetheless the Nikkei continues to wobble in the red on a year to date basis (chart from Bloomberg) despite the BoJ interventions.

Yet money spent to boost the Nikkei is money lost for productive uses.

Financial Success is a Function of Common Sense and Self Discipline

Some have this misbegotten notion/belief that attaining wealth and fame translates to a state of permanence.

Well it’s not.

This should be a noteworthy example, from yahoo.com (bold emphasis mine)

Patricia Kluge was once known as "the wealthiest divorcee in history." Those days are over. Kluge, who had formerly been married to the late billionaire Paul Kluge, recently filed for bankruptcy protection, citing debts somewhere between $10 million and $50 million and assets between $1 million and $10 million….

We doubt the couple will be out on the street selling pencils anytime soon. Still, Patricia Kluge's present straits represent a remarkable reversal for a woman who, at one time, was one of America's richest and most extravagant socialites. A buzzy article from the AP explains that the Kluges once hosted parties for "royalty, corporate chieftains, celebrities, and literary figures." She lived in a 23,500-square-foot mansion, owned a winery and, by all accounts, lived the good life.

A little too good, as it turned out. Her financial troubles began to pile up during the economic downturn and creditors started seizing her assets in earnest earlier this year. Kluge and her husband had attempted to renegotiate their loans with various banks, but failed. In April, Donald Trump bought most of Kluge's winery and vineyard from Farm Credit Bank for $6.21 million.

As I always tell my wonderful kids, financial success depends on a simple equation:

Income – Expense = deficit or surplus

If spending is greater than income where constant excess spending is financed by drawing from future income (debt), one ends up consuming wealth.

So has been the case of Patricia Kluge. And so will be the case for all the rest who fail to heed or realize on this simple lesson.

[Yes, local boxing legend Manny Pacquiao, despite his newfound riches, won’t be spared from this basic rule]

And so has this predicament befallen on governments, whom mistakenly believe that they can spend their way to prosperity.

Bottom line: It would need or take only common sense and self-discipline to observe this rule, which unfortunately many people especially those in the governments and their apologists don’t have (many live under the delusion that they are beyond or immune to the laws of economics. Also the idea that they are equipped with or backed by the printing presses can do them magical stuffs).

Ben Bernanke Admits to the Knowledge Problem

“We don’t have a precise read on why this slower pace of growth is persisting,” the Fed chairman, Ben S. Bernanke, said Wednesday at a news conference. “Some of the headwinds that have been concerning us, like the weakness in the financial sector, problems in the housing sector, balance sheet and deleveraging issues, may be stronger and more persistent than we thought.”

That’s from the New York Times.

US Federal Reserve Ben Bernanke finally acknowledges to the “knowledge problem”, which again validates the knowledge theory of the great F.A. Hayek.

Of course, we’ve been saying that Ben Bernanke has had a string of inaccurate predictions.

Remember, Mr. Bernanke is backed by about 450 Federal Reserve economists, half of which are PhDs.

In essence, this is an admission of the grand failure of macroeconomics founded on econometrics.

Now for QE 3.0

Back to the same article, (bold highlights added)

Mr. Bernanke dismissed for now any possibility that the Fed would extend its efforts to stimulate growth, saying that the economy was moving in the right direction. The slow pace of the recovery justified the Fed in continuing its existing efforts, he said, but not more.

The Fed’s policy board, the Federal Open Market Committee, voted unanimously to maintain its two-year-old commitment to hold a benchmark interest rate near zero “for an extended period.” Mr. Bernanke said the language meant it would not raise interest rates for “at least two or three meetings,” pushing back to November the earliest moment rates could rise. Economists consider it likely that the central bank will hold interest rates near zero well into next year.

The board also voted to maintain the Fed’s portfolio of more than $2 trillion in Treasuries and mortgage-backed securities by reinvesting principal payments. The board did not indicate how long this policy would continue, a decision that Mr. Bernanke described as intentional. Fed officials have said that allowing the portfolio to dwindle is likely to be the first step when the central bank decides to begin the withdrawal of its aid programs.

Action speaks louder than words.

True, QE may not be immediate, as QE 2.0 has been activated five months after the completion of QE 1.0, but to maintain the $2 trillion balance sheet by ‘reinvesting’ principal payment for an indefinite period signifies transitional QE.

Given the current political institutional framework, QEs signifies a strong force in keeping this arrangement intact.

Besides for an economy that has been artificially propped up by a tsunami of liquidity, obviously a withdrawal or non addition would trigger a meaningful regression—the risk prospect of which, based on their guiding ideology, should be sternly avoided.

This means that the door for QE is wide open, (which I think is part of the mind ‘conditioning’ communication tools applied by the FED)...

Now the Fed is standing back again to see if the economy can grow without constant prodding. “A little bit of time to see what’s going to happen is useful in making policy decisions,” Mr. Bernanke said. He allowed, however, that the Fed could take additional steps, from declaring a longer period of near-zero interest rates to buying even more assets.

Ben Bernanke admits that the he and the rest of US Federal Reserve can’t read the economy, but then he believes that his set of tools works.

What a contradiction.

Finally because of some political backlash on the Fed’s polices, the asset purchasing (money printing) program may come in a different form and or under a name.

Paradigm Shift: Brazil, Indians and Chinese Invest in Overseas Properties

Past performance do not guarantee future results.

Many of today’s international property investors have not hailed from the West, but rather from the Nouveau riche of the BRICs (excluding Russia), whom have reportedly been on a buying spree.

First, the Brazilians.

From the Bloomberg, (bold highlights mine)

Surging real estate prices in Brazil and the currency’s 45 percent gain against the U.S. dollar since 2008 are sending Brazilians to South Florida in search of bargain vacation homes and property investments. That’s helping bolster Miami’s condo market, with total sales increasing 79 percent in the first five months of 2011 from a year earlier, according to data from the Florida Association of Realtors released today.

In the Miami area, Brazilians bought 9 percent of homes and apartments sold to international buyers in the 12 months through March 2010, behind only Canadians and Venezuelans, according to the Miami Association of Realtors. Since then, “anecdotal evidence certainly points to a significant increase,” said Lynda Fernandez, a spokeswoman for the group. In May, international clients bought about 60 percent of existing houses and condos and 90 percent of newly built homes, the association reported today.

Next, the Indians

From loansafe.org

Wealthy Indians are keeping the family bonhomie alive in the heart of London, buying not one but a cluster of houses or apartments for themselves, their children and small teams of personal staff. Tony areas like Kensington, Mayfair, Knightsbridge and Belgravia are some of the popular destinations for such clusters.The homes typically are a network of residential properties on a street or an apartment block. The central idea behind such purchases is that it will give the children a sense of independence, staying just a few houses away from their parents, with support staff being just a buzz away.

High networth individuals from India and the Middle East are the main cluster buyers in London. In fact, there has been a marked increase in the number of Asian buyers. “Asians are our biggest single group of purchasers now, accounting for 44 percent of sales in 2010. Of this, 17 percent were Indians. In 2008, only 7 percent of the purchases were made by Asians,” Shirley Humphrey, sales and marketing director of Harrods Estates, a property broking firm, said. According to her, a weak British pound and low interest rates have contributed to the appeal of cluster buying in prime residential areas. (bold emphasis mine)

Finally the Chinese

From China Daily (bold emphasis added)

An increasing number of China's rich are snapping up properties overseas in the expectation that domestic inflation will continue to rise after the consumer price index reached a 34-month high in May.

According to Colliers International, a real estate service provider, the proportion of Chinese buyers in Vancouver's property market is on the rise. At the end of the first quarter this year, it increased to 29 percent of all homebuyers.

In the past six months, Chinese spent 1.3 billion yuan ($200 million) through Colliers' international property department, with Canada, the UK and Australia topping the buying list.

"We are expecting a clear increase in the extent of mainland buyers' purchases of overseas properties this year because of the government's rigorous restraint on the number of homes a family can buy in key cities," said Alan Liu, managing director of Colliers International (North Asia).

Due to the latest financial push from China, the average price of a home in Greater Vancouver rose 12 percent in 2010 and is expected to rise another 3 percent this year, according to the Canada Mortgage and Housing Corporation.

Demand from mainland immigrants now accounts for 29 percent of all new homes in Vancouver.

The situation in London is similar. Last year, overseas nationals purchased 28 percent of all resale properties across all prime London sites and 54 percent by value in the prime central London area in the more than 5 million pound ($8 million) price bracket, according to a recent report by Savillsresearch.

"If the money from China were to start flowing into London at the same rate it does from billionaires in other countries, we would expect the value of ultra-prime London properties to grow by as much as 15 per cent," said Yolande Barnes, head of Savills residential research.

"The issue at present is that Chinese buyers aren't taking, or can't take, their money out of China."

The biggest increase in global billionaires since 2007 has occurred in China and the Commonwealth of Independent States (CIS). While CIS buying activity has been strong, accounting for 15 percent of prime central London purchases by value, Chinese billionaires have yet to have a real impact, accounting for just 3 percent of prime central London resale purchases by value.

More thoughts.

International and domestic monetary policies have been a significant factor in driving property investments overseas.

There is also globalization.

Finally, the irony is that the erstwhile ‘poor’ appears to be saving the traditional ‘rich’ as in the case of London and South Florida.

How times have been changing.

Greeks Go For Gold

Ah, paper money versus gold.

When the public lose trust on the highly flawed system that had been imposed on them, they revert back to the old tried and tested ways.

That applies to the Greeks who are reportedly rushing to acquire Gold to secure their savings.

From the Financial Times [bold highlights mine]

Greek citizens are emptying savings accounts and buying gold as they brace themselves for the possibility of a sovereign default and a run on the banks.

Pledges by socialist prime minister George Papandreou that his government would “save the country” have been widely discounted by the public. However, parliament gave him a vote of confidence late on Tuesday night. The socialists have a six-seat majority in the 300-member house.

Sales of gold coins have soared as savers seek a safer and fungible source of value...

Monthly bank withdrawals were running at €1.5bn-€2bn (£1.3bn-£1.8bn) in the first quarter. Last year, depositors withdrew €30bn, equivalent to 12.3 per cent of total savings, according to the central bank. Greek deposits worth an estimated €8bn were transferred to banks in Cyprus in 2010. But the flow has dried up this year amid fears that Cypriot banks could suffer contagion.

Andreas, a supermarket manager, transferred the family savings to Munich earlier this year: “The Swiss banks aren’t interested unless you’ve got several hundred thousand euros.”

“We can’t trust the politicians to get us out of this mess [and] have to protect our families,” Sakis, a garage owner, said at an anti-austerity protest in Athens’ Syntagma square. “A bank collapse has got to be on the cards.” He added he had withdrawn his savings and placed them in a bank safe deposit box “for security. Who cares about interest right now?”

Politicians can fool us most of the time, but not all of the time. Eventually economic reality prevails and fraudulent promises are exposed. It's been this way for ages.

US Government’s War on US Expats and American Investments Overseas

I have been saying that the US government has increasingly been intruding in the marketplace or applying financial repression for implicit political reasons.

This time the object of their engagement appears to be American expats and possibly overseas investment by American residents! In other words, the US has declared war with her own citizens.

From Financial Times’ Gillian Tett [bold emphasis mine]

This summer, the senior management of one of Asia’s largest financial groups is quietly mulling a potentially explosive question: could it organise some of its subsidiaries so that they could stop handling all US Treasury bonds?

Their motive has nothing to do with the outlook for the dollar. Nor does it reflect fears about the US debt ceiling (or the risk that the US will soon default if it fails to raise the legal limit on bond issuance).

Instead, what is worrying this particular Asian financial group is tax. In January 2013, the US will implement a new law called the Foreign Account Tax Compliance Act (Fatca), that forces all global financial companies to report details to the IRS, the US tax authority, of any clients linked to the US with more than $50,000 in an account. These rules, quietly passed by Congress last year, would partly put the responsibility on the bank or asset manager – not just the individual – to make this filing.

The IRS insists that these measures are simple for banks and asset managers to implement; they just need to perform an electronic “sweep” of their clients to track those with more than $50,000 in an account and obvious connections with the US, such as an address, Treasury officials argue.

“The US interest is to have reporting on accounts to stem the tide of offshore tax evasion,” says Manal Corwin, a senior official at the US Treasury, which hopes the measures could net billions of dollars of badly needed new revenues.

While this logic might sound sensible, the new rules leave some financial officials fuming in places such as Australia, Canada, Germany, Hong Kong and Singapore. Little wonder. Never mind the fact that implementing these measures is likely to be costly; in jurisdictions such as Singapore or Hong Kong, the IRS rules appear to contravene local privacy laws. After all, as Terry Campbell, head of Canada’s banking association, points out, the rules are essentially akin to “conscripting financial institutions around the world to be arms of US tax authorities”.

What has left some financiers doubly angry is that Congress introduced the law with little overseas consultation – but the IRS is now threatening heavy penalties for non-compliance.

More specifically, the IRS is threatening to impose a withholding tax of up to 30 per cent on sales of US assets by groups that it deems to be “non-compliant” – and the assets could include US shares or US Treasury bonds.

Hence the fact that some non-US asset managers and banking groups are debating whether they could simply ignore Fatca by creating subsidiaries that never touch US assets at all.

“This is complete madness for the US – America needs global investors to buy its bonds,” fumes one bank manager. “But not holding US assets might turn out to be the easiest thing for us to do.”

Whether anybody follows through on this threat remains doubtful. In practice, banks in places such as Canada, Australia and Germany say that it would probably be impossible for them to not handle US Treasuries or stocks. Some are consequently considering whether they should shun US citizens as clients instead.

In the name of tax evasion, this time taxes are being deployed as instruments for repression and implied interventions on the actions of market participants—“threatening to impose a withholding tax of up to 30 per cent on sales of US assets by groups”.

Also regulations imposed on foreign institutions will likely to create geopolitical frictions and other untoward effects, some of which have been explained above.

Maybe legendary investor Jim Rogers got them all so roiled up.

Again we are seeing increasing signs of desperation.

Could capital controls be next?

Markets in Everything: China’s Village Specializes in Breeding Snakes

Markets emerge when people discover economic value in specific goods or services.

In China, cuisine and medicinal demand for snakes has led to a village specializing in snake breeding.

From Reuters,

This sleepy village nestled in the heart of vast farmland in China's eastern Zhejiang province hides a deadly secret.

A step into the homes of any of the farming families here brings visitors eye-to-eye with thousands of some of the world's most feared creatures -- snakes, many of them poisonous.

Cobras, vipers and pythons are everywhere in Zisiqiao, aptly known as the snake village, where the reptiles are deliberately raised for use as food and in traditional medicine, bringing in millions of dollars to a village that otherwise would rely solely on farming.

"As the number one snake village in China, it's impossible for us to raise only one kind of snake," said Yang Hongchang, the 60-year-old farmer who introduced snake breeding to the village decades ago.

"We are researching many kinds of snakes and the methods of breeding them."...

Today, more than three million snakes are bred in the village every year by the 160 farming families.

Snakes are renowned for their medicinal properties in traditional Chinese medicine and are commonly drunk as soup or wine to boost the person's immunity.

Belgian Central Bank ‘Lends’ 41% of Gold Reserves, Growing Role of Gold as Money

Tyler Durden of Zero Hedge points to CLSA’s Chris Wood’s report noting that the Belgian Central Bank has lent out 41% of its gold reserves and that gold and silver coins as money have been making strides in the US.

From CLSA (via Zero Hedge) [bold emphasis mine]

Belgian central bank Vice Governor Francoise Masai reportedly told shareholders that about 41% of the central bank’s 216 metric tons of gold was on loan at the end of last year, and that the central bank earned a 0.3% return on its loans of physical gold to commercial banks last year. There are two points to note about this. The first is the puny annualised return earned on the gold leasing market. The second is the significant percentage of the central bank’s gold lent out. This is a reminder that the paper gold market is significantly larger than the physical market. Just like a run on a bank in a fractional banking system, GREED & fear suspects it will be very hard to settle all the paper claims to gold physically in a real scramble for the metal. This is why in a parabolic spike physical gold is likely to trade at a significant premium to paper claims. On this point GREED & fear should make it clear that the 25% of the global portfolio for a US dollar-denominated pension fund allocated to gold bullion is in physical gold.

Meanwhile, it is an interesting note that more than a dozen state legislators in America have now seen bills introduced that would make gold and silver coins legal tender in the respective states. Thus, gold and silver coins minted by the US government are now considered legal tender in Utah. Much of this activism is coming from Tea Party supporters. Financial sophisticates will scoff. But to GREED & fear it is a healthy sign that some people in America are thinking. For more on this popular movement to return to the monetary role of gold read an article published last week by the Los Angeles Times (“Pushing for a return to the gold standard”, 3 June 2011 by Nathaniel Popper).

Gold leasing is almost equivalent to short sales.

As John Hathaway of Tocqueville Asset Management L.P explains,

The gold that is being borrowed from central banks [and private sources] is being sold into the physical market where it is being consumed as jewelry. It is no longer in liquid, deliverable form. Gold loans will not be as easy to repay as the borrowed yen. The shorts are facing an epic squeeze.

Aside from Belgium, I would suspect that many of central banks of major economies could have also lent out (shorted) part of their gold reserves.

Aside from the lease-short sale dynamics, the emerging fissures in the paper money system will likely drive many EM economies as major buyers of gold. Chart above from IBTimes

And that’s what we seem to be seeing today.

From gold.org May report,

As of the IMF’s May release of its International Financial Statistics, several countries have reported additional purchases of gold. Notably, Mexico reported to the IMF that it acquired 14.8 and 78.5 tonnes of gold in February and March, respectively. This was a significant increase in its gold holdings, raising Mexico’s position in the table to the 34th largest holder of gold with 100.2 tonnes. In its press release, the Banco de Mexico indicated that its acquisition of gold was in line with prudent diversification principles of reserves management. Indeed, Banco de Mexico’s acquisition of gold was likely motivated by a need to diversify its rapidly expanding foreign reserves, which increased from approximately $75 billion to $120 billion between Q1 2007 and Q1 2011.

Additionally, Thailand also reported an increase in its gold reserves of 9.3 tonnes in March, raising its total gold holdings to 108.9 tonnes. This follows an acquisition of 15 tonnes in July of last year. Finally, Russia continues to regularly add gold to its reserves, adding 22.5 tonnes between January and March. Russia is the 8th largest holder of gold.

The latest statistics show no significant selling by the signatory central banks in Year 2 of the third Central Bank Gold Agreement (CBGA3).

So these incentives should continue to drive the actions of the central banks, which should account for a significant force for higher gold prices.

Also as previously explained, rising gold prices has gradually been changing the outlook of the public; once an outcast which economic ideologues disparaged as the ‘Barbaric relic’, now momentum favors more acceptance of gold and silver as money—as it had been for most of human history.

This time won’t be different.

Philippine Banking System: “Most Heavily Fortified Bastion of Privilege and Profit”

The unholy trinity of banking-central banking and government patronage system operates even in the Philippines as well.

From Joe Studwell Asian Godfathers, Money and Power in Hong Kong and Southeast Asia [p.105], (bold emphasis mine)

Such antics caught up with the Philippines in the early 1980s, when the debt-laden regime defaulted on its foreign on its foreign borrowings and several banks failed. After the departure of Marcos in 1986, however, the government of Cory Aquino bailed out the banking system by issuing high-yielding government bonds and providing additional, cheap government deposits. The cost of this action became apparent in 1993 when the old central bank was closed down with a US$12-billion write-off to be born by the treasury, and hence taxpayers. The annual cost of servicing this debt in the mid 1990s was more than the Philippines’ health budget. Those tycoons who did not, like Benedicto and Disini, flee with Marcos, and survived the Philippine Commission on Good Government, found their banks revived with public money and able to enforce cartel pricing that in the late 1990s gave them the best banking margins in Asia. Despite all the trading and production cartels and monopolies sanctioned by Marcos and others in the Philippines, Paul Hutchcroft concludes that the banking sector has always been the ‘the country’s most heavily fortified bastion of privilege and profits’.

That’s the Philippine version of ‘Financial Repression’.

Also, here lies the political "dirty laundry" which have largely been unseen by the public. Good government? Bah!

The Coming Global Government Debt Default Binge

From the Wall Street Journal blog:

The biggest risk, however, isn’t Greece per se. It is the prospect of other peripheral euro members — Ireland, Spain, and Portugal — following Greece down the default path. That cascade effect has to be avoided….

The global credit authorities and financial markets have been digesting this problem for more than a year. Some participants think a default is inevitable; Greece should just do it.

Then the world can move on to an even bigger worry: whether the U.S. government will soon default on its debt.

Yes, ballooning debt as a consequence of incessant government spending on the welfare state isn’t just an issue of Greece. It’s everywhere.

From the Bank of International Settlements

Sooner or later, something will occur to prevent debt from exploding: governments will adopt corrective measures on their own, or they will be forced to act as sovereign risk premia reach unbearable levels.

And this is only from the facet of government liabilities, which does not include the banking system

This bring us to the admonitions of the great Ludwig von Mises

The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market. But it could not last forever even if inflation and credit expansion were to go on endlessly. It would then encounter the barriers which prevent the boundless expansion of circulation credit. It would lead to the crack-up boom and the breakdown of the whole monetary system.

Governments will default, either by massive inflation or by the far better option-deflation.

And that’s why the events in Greece is a prelude to the next monumental chain of government-and-banking debt crisis.

We are approaching the Mises moment.