Philippine Mining Sector’s Pause Signifies Buying Opportunity

Even if the mining sector could be in a consolidation phase over the coming week/s, this would likely be temporary event.

A Resurgent Boom in Global Gold Mining Stocks?

With gold prices drifting just a few percentages below the newly established record levels at over $1,900, gold mining stocks in the US, Canada and South Africa seem headed for a breakaway run following what seems like a serial or concerted breakout attempts from about one year period of consolidation.

This can be seen in the charts of US major mining indices, such as the CBOE Gold Index (GOX), the Gold Bugs Index – AMEX (HUI), the Gold & Silver Index - Philadelphia (XAU) and the DJUSPM Dow Jones Gold Mining Index, where except for the XAU which is at the resistance levels, the rest are in a resistance breakout mode.

While price actions of the local mining index has had little correlations with international mining indices, one cannot discount the possibility that a continuity of the recent price advances or of the breakaway run of global mining issues may also filter into local issues.

And considering that local participants have increasingly been more receptive to the mining industry, then share prices of the composite members may just get a second wind going into the yearend.

And part of the mainstream story has been the recent $14 billion political economic concessions[1] “investments” ‘within the next 5 years’[2] signed in China by President Aquino during his latest State visit.

The local mining industry has easily become a political tool for gaining approval ratings.

Mounting Inflationism is a Plus For Gold

The unravelling European debt crisis and the conventional wisdom of heightened recession risks appear to be provoking more aggressive policy responses from a previously ‘dithering’ officialdom.

Central banks as the Swiss National Bank have aggressively been inflating the system[3] allegedly to curb the rise of the franc (which in reality has been part of the scheme to save European banks). South Korea has also reportedly been into the game too[4] but at a modest scale.

Yet as the crisis deepens, political pressure will bear down on political authorities who have represented the inflation hawks camp or dissidents of QEs or asset purchases by central banks such as ECB’s Juergen Stark who recently resigned out of policy schism.

US Federal Reserve chair Ben Bernanke has once again signalled that further ‘credit easing’ (a.k.a. inflationism) is on the table, aside from proposing to modify the mix of the Fed’s existing balance sheet via the ‘Operation Twist’ or the lowering of long term interest rates in order to induce the public to take upon more risk[5]. The Fed’s trial balloon or public communications management or conditioning tool comes in conjunction with President Obama’s $447 jobs program, apparently meant to shore up the latter’s sagging chances for re-election.

In other words, political “do something” about the current economic problems is being impressed upon to the public for their acceptance or for justifications for more political interventions from both the fiscal and monetary dimensions.

And it wouldn’t signify a farfetched idea that a grand coordinated QE project or credit easing measures by major central banks something similar to the Plaza Accord as predicted by Morgan Stanley’s analysts could be in the works too[6]. The Plaza Accord was a joint intervention in the currency markets by major economies to depreciate the US dollar in 1985[7]. This time, perhaps, the biggest economies will all act in concert to devalue their currencies impliedly against commodities.

Thus, any of the realization of these ‘arranged or independent’ acts to reflate the system to stem the current wave of liquidations of malinvestments meant to preserve the troika political system of the welfare-warfare state, the central banking and banking cartel and to further attain a permanent state of quasi-booms would be exceedingly bullish for gold.

The current stream of inflationism would be added on top of the existing ones which only would expand the fragility of the incumbent but rapidly degenerate monetary system.

Finally I would like to add that while many see mines as ‘investment’, my long held view is that in absence of a local spot and futures market for commodities, local mining issues would represent as proxy to direct gold ownership or as insurance against mounting policies aimed at destroying the purchasing power of the legal tender based paper money system for Philippine residents.

As gold has been shaping up to be the main safe haven or as store of value, so will gold’s function be represented here. This is where the divergences will likely hold—the gold mining sector.

At this very crucial time, I would seek haven in gold and precious metals.

---

[1] See P-Noy’s Entourage is a Showcase of the Philippine Political Economy August 31, 2011

[2] Inquirer.net $14-B investments in mining eyed from China within the next 5 years, September 7, 2011

[3] See Hot: Swiss National Bank to Embrace Zimbabwe’s Gideon Gono model September 6, 2011

[4] See South Korea Joins the Currency Devaluation Derby, September 8, 2011

[5] See US Mulls ‘official’ QE 3.0, Operation Twist AND Fiscal Stimulus, September 9, 2011

[6] See Will the Global Central Banks Coordinate a Global Devaluation or Plaza Accord 2.0? September 9, 2011

[7] Wikipedia.org Plaza Accord

Landslide Win by Ron Paul on the GOP NBC Debate Poll

From prolific libertarian author Robert Ringer

According to a poll conducted by NBC News Political Unit Poll, the guy whom Bill O’Reilly referred to prior to Wednesday’s Republican debate as “a loon” and Dick Morris dismissed as the only candidate who had no chance of winning, 174,354 Americans not only believed Ron Paul won the debate at the Reagan Library, but did so in a landslide.

As of 4:00 pm Thursday, 54 percent (94,096 votes) voted for Ron Paul, with Mitt Romney a distant second at 15.8 percent (27,523 votes). Rick Perry, the supposed front runner, was at 13.2 percent (23,065 votes), Jon Huntsman at 6.5 percent (11,411 votes), and the rest of the field below 5 percent.

This is downright embarrassing to the Republican Party, whose establishment wishes Paul would just go away and rejoin the Libertarian Party. Left-wing moderators Brian Williams (NBC) and John Harris (Politico) did their best to diminish Paul in two ways. First, they asked him very few questions, and, second, the questions they did ask him were aimed at painting him as an extremist.

If the media cover-up regarding Paul’s popularity continues, establishment Republicans may just get their wish — at least partially. I don’t think Paul would run on the Libertarian Party ticket, but he might just form a third-party, which would probably end any hopes the Republicans have for taking back the White House.

Despite media bias against Presidential aspirant Ron Paul, the poll reveals that the trend following on classical liberalism, which Mr. Paul champions, seems to be snowballing.

Here is The Daily Show host Jon Stewart's hilarious take on the latest GOP debate

The Daily Show
Get More: Daily Show Full Episodes,Political Humor & Satire Blog,The Daily Show on Facebook

More Evidence of Boom Bust Cycles Driving Equity Market Prices

I have repeatedly been saying that inflationism or the boom bust cycle or my Machlup-Livermore paradigm, have signified as the key force in determining equity prices around the world (Philippines included).

The Financial Times observes of the same pattern taking hold in the US stock markets, (bold highlights mine)

The correlation between the movement of big US stocks is at the highest level since Black Monday in 1987, with price moves increasingly driven by the ebb and flow of investors’ fears over the economic environment.

Stocks, in theory, should move in individual directions based on company fundamentals. But markets of late have been characterised by mass selling alternating with waves of buying, as investors upgrade or downgrade the risk of the US slipping into recession, or a financial crisis sparked by a European sovereign default.

The correlation between the biggest 250 stocks in the S&P 500 over the past month has reached its highest since 1987 this week, at 81 per cent, according to JPMorgan figures.

This means those stocks move in the same direction 81 per cent of the time. The historical average is 30 per cent. The measure peaked at 88 per cent during the October 1987 US crash, when the Dow Jones Industrial Average fell 22 per cent in one session.

Other spikes in correlation, including the collapse of Lehman and the Japanese earthquake, peaked at about 70 per cent but quickly fell away.

The unusually high level of correlation this month has raised speculation that markets could repeat the aftermath in 1987, when relationships between stocks did not return to their historical norm until several months later, in March 1988.

With intensifying government intrusions in the marketplace everywhere, one should expect the financial markets to behave in tidal flows or in undulating motions with high or tight correlations, especially during steeply volatile days.

Yet such insights have not been covered within the ambit of conventional analysis, which is why most will find today’s environment bewildering.

Thinking out of the box is required to navigate today’s increasingly distorted marketplace.

Greece’s Welfare State at Death Throes, Germany Prepares to Rescue Banks

The global financial markets have been pricing the imminence of a Greece default as the Eurozone appears lost over trying to contain the contagion.

The Greece government is having a difficult time selling to her populace the EU imposed ‘austerity’ package required for continued bailouts.

From Bloomberg, (bold emphasis mine)

Prime Minister George Papandreou will seek today to counter mounting domestic opposition to budget cuts and growing doubts that Greece can avoid default as a three-year recession worsens.

With the country’s bond yields at records and European officials increasing pressure on the premier for more cuts before they dole out a sixth tranche of bailout loans, Papandreou will deliver a nationally televised address on the economy from the northern city of Thessaloniki at 8 p.m.

A total of 4,500 police officers are being deployed in the city to keep order as unions rally, students march against education reforms, and taxi drivers across Greece strike to oppose new licensing rules. Finance Minister Evangelos Venizelos said on Sept. 6 the government will accelerate austerity measures pledged in return for emergency loans…

Fears have deepened since a scheduled quarterly review of Greece’s progress by the European Union and the International Monetary Fund was unexpectedly suspended for 10 days last week. Greek sovereign debt jumped 212 basis points yesterday to a record 3,238, according to CMA. The five-year contracts signal there’s a 92 percent probability the country won’t meet its debt commitments.

Venizelos expects the economy to shrink by about 5 percent this year, worse than the June estimate of 3.8 percent from the EU and IMF, and a deeper contraction than in the past two years. The forecast damps hopes that Greece will lower its deficit to 7.5 percent of gross domestic product in 2011, with the government blaming the slump for a budget deficit that widened 25 percent in the first seven months of the year.

Greece is aiming at an additional 6.4 billion euros ($9 billion) in savings through the end of the year to meet the 2011 deficit target, part of a 78 billion-euro package of state-asset sales and budget measures that threatened to topple Papandreou in June.

Venizelos this week pledged to immediately transfer state assets to a fund for sale and place civil servants in a “reserve” system to retrain them and cut expenses, as well as merge and shut down dozens of agencies.

As I have been saying, the concurrent bailout packages have been a sham. This has not been about restraining the welfare state but about rescuing the banking system.

What has been happening instead is the political process where massive amount of resources are being transferred from the welfare state to the banking sector.

Global political leaders are hopeful that by rescuing the politically privileged interconnected banks, they can bring 'normalcy' back to the 20th century designed politically entwined institutions of the welfare state-banking system-central banking system.

And since the makeshift measures applied by the EU have been less aggressive than that of the US, which have been exacerbated by fierce regional and local political impediments, as the above, economic reality has been swiftly catching up with politics. The latter has made many to mistakenly generalize that a political or fiscal union is the solution,it is not.

And in realization of the looming default, Germany prepares to support her national banks.

Again from another Bloomberg article,

Chancellor Angela Merkel’s government is preparing plans to shore up German banks in the event that Greece fails to meet the terms of its aid package and defaults, three coalition officials said.

The emergency plan involves measures to help banks and insurers that face a possible 50 percent loss on their Greek bonds if the next tranche of Greece’s bailout is withheld, said the people, who spoke on condition of anonymity because the deliberations are being held in private. The successor to the German government’s bank-rescue fund introduced in 2008 might be enrolled to help recapitalize the banks, one of the people said.

The existence of a “Plan B” underscores German concerns that Greece’s failure to stick to budget-cutting targets threatens European efforts to tame the debt crisis rattling the euro. German lawmakers stepped up their criticism of Greece this week, threatening to withhold aid unless it meets the terms of its austerity package, after an international mission to Athens suspended its report on the country’s progress.

Greece is “on a knife’s edge,” German Finance Minister Wolfgang Schaeuble told lawmakers at a closed-door meeting in Berlin on Sept. 7, a report in parliament’s bulletin showed yesterday. If the government can’t meet the aid terms, “it’s up to Greece to figure out how to get financing without the euro zone’s help,” he later said in a speech to parliament.

A Greece default would likely lead the ECB and the US Federal Reserve to make massive transfusions of digital ‘bailout’ money to ECB and US banks.

Also Greece could be ‘convinced’ to leave the Euro.

This should be very bullish for gold.

Yet, realize that the temporary ‘Band aid’ patches being applied by political authorities won’t survive an unsustainable system based on a political economy of zero sum redistributions.

The welfare state-banking sector-central banking architecture operating on a fiat money platform is bound for collapse.

Greece seems as paving the way.

War on Terror: More Terrorism Deaths Since 9-11

Since 9/11, the US government led war on terror has brought upon more fatalities and not less. This in spite of all the legal and bureaucratic inconveniences imposed on travel, finance and etc.

From the Economist, (bold emphasis mine)

THE attacks of September 11th 2001 killed 2,996 people. Despite the subsequent declaration of a war on terror, over the past ten years thousands more have been killed by terrorists of all hues. The chart below tracks the number of terrorist-related fatalities worldwide. The data is from the National Consortium for the Study of Terrorism and Responses to Terrorism, which defines terrorism as “the use of illegal force and violence by a non-state actor to attain a political, economic, religious, or social goal”.

This is just another brazen example of government failure

Congressman and US Presidential aspirant Ron Paul is right, we should stop terrorism through empathy and free trade. (bold highlights mine)

Sadly, one thing that has entirely escaped modern American foreign policy is empathy. Without much humility or regard for human life, our foreign policy has been reduced to alternately bribing and bombing other nations, all with the stated goal of "promoting democracy." But if a country democratically elects a leader who is not sufficiently pro-American, our government will refuse to recognize them, will impose sanctions on them, and will possibly even support covert efforts to remove them. Democracy is obviously not what we are interested in. It is more likely that our government is interested in imposing its will on other governments. This policy of endless intervention in the affairs of others is very damaging to American liberty and security.

If we were really interested in democracy, peace, prosperity, and safety, we would pursue more free trade with other countries. Free and abundant trade is much more conducive to peace because it is generally bad business to kill your customers. When one’s livelihood is on the line, and the business agreements are mutually beneficial, it is in everyone’s best interests to maintain cooperative and friendly relations and not kill each other. But instead, to force other countries to bend to our will, we impose trade barriers and sanctions. If our government really wanted to promote freedom, Americans would be free to travel and trade with whoever they wished. And if we would simply look at our own policies around the world through the eyes of others, we would understand how these actions make us more targeted and therefore less safe from terrorism. The only answer is get back to free trade with all and entangling alliances with none. It is our bombs and sanctions and condescending aid packages that isolate us.

US Mulls ‘official’ QE 3.0, Operation Twist AND Fiscal Stimulus

Again, it’s almost too predictable that the path dependency of political authorities have been to resort to more central bank activism and to apply additional government spending on emergent signs of economic weakness.

In the US, the QE 2.0 has still been in motion despite the official program for its closure last June.

Yet, over the interim there have been modified actions which can be extrapolated to stealth QE 3.0: such as extended zero bound rates until 2013 and the reinvesting of principal payments (whose mix of asset purchases would be altered partly to induce mortgage refinancing).

This news account gives light to the potential course of action by Team Ben Bernanke after his speech last night, from Bloomberg, (bold highlights mine)

Federal Reserve Chairman Ben S. Bernanke said policy makers will discuss the tools they could use to boost the recovery at their next meeting this month and stand ready to use them if necessary.

Policy makers “are prepared to employ these tools as appropriate to promote a stronger economic recovery in the context of price stability,” Bernanke said today in Minneapolis, echoing points from his Aug. 26 remarks in Jackson Hole, Wyoming.

The Fed chief, in a speech to economists, stopped short of signaling what he believes is the central bank’s best option to aid the economy. He said in previous remarks that the Fed’s measures to bolster growth include lengthening the duration of securities in its $1.65 trillion Treasury portfolio and buying more government bonds.

Media calls this portfolio rebalancing towards the lengthening of the duration of securities held as ‘Operation Twist’ which apparently aims to lower long term interest rates in order to induce the marketplace to get exposed into more risk assets. This has been part of Bernanke’s dogma of the wonkish Financial Accelerator where

changes in interest rates engineered by the central bank affect the values of the assets and the cash flows of potential borrowers and thus their creditworthiness, which in turn affects the external finance premium that borrowers face

The constant alterations of monetary policy reveal of how the previous QEs has failed. And such experiment/s will likely be put in place ahead of another official QE. The next FOMC meeting will be on the third week of September.

Of course, Ben Bernanke sees inflation as having little risk for him to have the mettle to toy around with such experimental measures.

From Marketwatch.com

see little indication that the higher rate of inflation experienced so far this year has become ingrained in the economy

The perceived low risk inflation regime has partly been because of the way the bond markets have been structured which many ideologically biased experts use as measure for inflation, and also of the constant manipulations of the commodity markets as part of their signaling channel to manage ‘inflation expectations’. Even gold markets have been subjected to price suppression scheme according to the Wikileaks

And the barrage of QE in the headlines of late, which I read has been part of this communications management tool being employed to condition the public for the next official QE.

Of course, the last act won’t come from the Bernanke’s Federal Reserve, as President Obama has offered to join in by introducing more government spending coupled with temporary tax cuts to please the opposition (Republicans).

This from the Bloomberg,

President Barack Obama called on Congress to pass a jobs plan that would inject $447 billion into the economy through infrastructure spending, subsidies to local governments to stem teacher layoffs, and cutting in half the payroll taxes paid by workers and small-business owners.

The package is heavily geared toward tax cuts, which account for more than half the dollar value of the stimulus, and administration officials said they believe that will have the greatest appeal to Republican members of Congress.

“The question is whether, in the face of an ongoing national crisis, we can stop the political circus and actually do something to help the economy,” Obama told a joint session of Congress tonight, according to a text of the address released by the White House.

A $105 billion infrastructure proposal includes money for school modernization, transportation projects and rehabilitation of vacant properties. Most of the economic impact from the infrastructure spending would be next year though some of it would come in 2013, an administration official said.

“Ultimately, our recovery will be driven not by Washington, but by our businesses and workers,” the president said. “But we can help. We can make a difference.”

The administration estimated that $35 billion it’s seeking in direct aid to state and local governments to stem layoffs of educators and emergency personnel would save the jobs of 280,000 teachers, according to a White House fact sheet.

It has never been the question whether past policies worked. It’s just doing the same thing over and over with practically the same results which represents as plain insanity and the misplaced belief on miracles from centrally planned actions.

Economic reality will eventually unmask the charade of shifting resources from productive activities to non-productive activities that will not only lead to capital consumption but also lead to cronyism, corruption, regime uncertainty, economic and financial fragility and political instability. Obviously Obama's is desperately trying to shore up his re-election odds, whose popularity rating has fallen to new lows.

Nonetheless we will be seeing expanded stimulus from all fronts in the US and the world which means a vastly distorted financial markets. More stimulus on top of the existing ones which means increasing systemic risks from artificial boosters or substance dependency.

This also means traditional metrics in the assessment of the financial marketplace will hardly be effective.

Will the Global Central Banks Coordinate a Global Devaluation or Plaza Accord 2.0?

Policymakers easily change tunes especially when faced with fickle political exigencies

ECB’s President Jean-Claude Trichet, once a reluctant inflationist, will join the US in resorting to ‘open arms’ inflationism.

From the Bloomberg, (bold emphasis mine)

European Central Bank President Jean-Claude Trichet said threats to the euro region have worsened and inflation risks have eased, giving officials the option to take further action should the debt crisis worsen.

The economy faces “particularly high uncertainty and intensified downside risks,” Trichet said at a press conference in Frankfurt today after the ECB left its benchmark rate at 1.5 percent. While monetary policy is still “accommodative,” financing conditions have worsened in parts of the 17-member euro region and the ECB stands ready to pump more cash into markets if needed, he said.

The Bank of England recently refrained from extending credit easing (QE) programs, this could be temporary.

From another article from Bloomberg, (bold emphasis mine)

Bank of England officials resisted calls to extend economic stimulus as they attempt to navigate a path between accelerating inflation and a faltering recovery.

The nine-member Monetary Policy Committee, led by Mervyn King, maintained the target of its bond program at 200 billion pounds ($320 billion), as forecast by all but one of 41 economists in a Bloomberg News survey. It also held the benchmark interest rate at a record-low 0.5 percent today, as predicted by all 57 economists in a separate poll. The pound rose against the dollar after the announcement.

Central banks are refocusing on bolstering growth, with the Bank of Canada saying yesterday there is a “diminished” need for it to raise rates and Sweden’s Riksbank abandoning a planned tightening. While two U.K. policy makers who were calling for rate increases dropped that position last month, the Bank of England may be reluctant to do more so-called quantitative easing with inflation more than double its target.

Again my view is that central bankers appear to be looking for justifications to employ the increasingly unpopular QE programs.

However as shown above, some of the hardliner’s stance can easily give way when confronted by the prospects of a reemergent crisis.

For political authorities, an adapted political stance have mostly been symbolical. For the public hardwired to expect actions from these authorities, it would be politically difficult or unpopular not give in, as crisis can instantaneously change popular perception. Put differently, an aura of desperation can shift what seems unpopular today to become popular tomorrow, and thus political actions can be as capricious as political sentiment.

Yet given the predilection towards QE policies, analysts at Morgan Stanley speculate that a Plaza Accord 2.0 will likely be the course of action for global central bankers.

From Barrons, (bold emphasis mine)

Is a Plaza Accord 2.0 ahead? Some 26 years ago this month, the major industrialized nations hatched a plan to lower the dollar and unleash a wave of liquidity that raised global equity markets in the mid-1980s. Could it happen again?

Yes, say Joachim Fels, Manor Pradhan and Spyros Andreopolous, who head Morgan Stanley's global economics. In a report released Wednesday, they write that monetary authorities of the developed economies -- the Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England -- could react to "weak growth and soggy asset markets" with coordinated easing.

In addition, they note that surprise easing moves by leading emerging-market economies, Brazil and Turkey, would complement the process. And while the Morgan Stanley team doesn't mention it explicitly, the Swiss National Bank's decision to peg the Swiss franc to the euro also would be consistent with an internationally coordinated easing move.

In my view, competitive devaluation has not only been happening, but has been intensifying. Although coordination may only be part of the story, perhaps applied to Western and developed economy central banks. Nevertheless the path towards policy harmonization could be in the works as proposed.

Yet I’m not sure about the effects of a global concerted and coordinated devaluation.

Although one thing seems certain: This policy addiction or obsession to debauch or destroy the currency serves as THE reason to own gold.

South Korea Joins the Currency Devaluation Derby

Competitive devaluation has been the central bankers’ conventional response to emergent financial and economic problems. It seems part of their operating manual. And Asian central bankers have been engaging in the same inflationism as with their crisis affected Western counterparts.

From the Wall Street Journal, (bold emphasis mine)

Is anyone really surprised inflation in South Korea has hit a three-year high? They shouldn't be. Seoul is, like so many other East Asian governments, in large part a victim of economic policies hatched in Washington. Yet Korean policy makers seem to be doing everything they can to make their monetary problems worse.

The government was quick to blame last week's price-rise data—up 5.3% for August compared to the same month last year—on that old inflationary whipping boy, the weather. Summer flooding supposedly depressed agriculture supplies and pushed food prices higher. Perhaps that even explains part of it.

But alarm bells also should be ringing over energy prices. The consumer inflation data included increases of between 2% and 10% on various oil and gas products as the government scales back increasingly unaffordable subsidies. No Korean oil fields were flooded since there aren't any Korean oil fields to flood. Clearly something bigger than Mother Nature is afoot.

Such as monetary policy, both in the U.S. and in Korea. Korea has been hit by the same dollar tidal wave the Federal Reserve has unleashed on the rest of the world. These inflows have caused inflation spikes all over, with consumer price rises of nearly 4.5% in Thailand, more than 3% in Malaysia, above 5% in Singapore and so forth in recent months. A weak-dollar policy out of Washington inevitably strains everyone else in what still is the Asian dollar bloc.

Korea, however, has managed to make matters worse by attempting a form of competitive devaluation of the won on the sly. Dollar inflows have also sparked currency appreciations in most corners of Asia, with the yen (up 17.5% vis-à-vis the dollar since January 2010), Singapore dollar (14%) and Thai baht (10%) leading the pack.

But in Seoul, the central bank has refrained from raising interest rates that are still negative after accounting for inflation, despite unsustainably robust growth and mounting evidence of rising prices. Data on foreign-exchange reserve accumulation over the past two years also suggest the government may be quietly buying dollars and selling won, although the government denies this.

Political authorities, adapting the mercantilist view, have been averse to see their currencies appreciate, so their common response has been to resort to the beggar thy neighbor approach of inflating the system.

The five year chart of the South Korean won (from yahoo). The won has not recovered from the 2008 collapse relative to the US dollar.

The race to destroy currencies has been the principal reason why gold prices will continue to blossom.

The Negative Impact of the New Chinese Property Law

Here is an example of how discriminatory laws can adversely affect people’s relationship.

This from the New York Times, (bold emphasis mine)

Millions of Chinese women, and some men, woke on Aug. 13 to discover their spouse had, in effect, become their landlord.

On that day, the Supreme Court’s new interpretation of the 1980 Marriage Law came into force, stipulating that property bought before marriage, either outright or on mortgage, reverted to the buyer on divorce. Previously, the family home had been considered joint property. Experts agree the change would mostly affect women, since men traditionally provide the family home.

The result has been uproar — and, in the cities, a rush to add the wife’s name to title deeds.

Some husbands have agreed to this, but others have balked, and Chinese news outlets have already reported on marriage breakdowns caused by a husband’s refusal to add his wife’s name.

How this law came about?

The government says that in an era of soaring property prices — up about 500 percent since 2000, according to the National Bureau of Statistics — the law must protect a family’s investment. Parents and other relatives often contribute money to buy an apartment for their son, in order to help him attract a wife.

The law does not specify gender, so a woman who bought an apartment would also get it back at divorce. Yet social scientists say far fewer women buy family homes.

The interpretation is intended to address an immediate problem, and not build a perfect, logical system, a senior Supreme Court official, Du Wanhua, told legal experts last year, Southern Weekend reported in a recent article, “The Behind-the-Scenes Struggle of the New Marriage Law.”

But marriage law specialists said court officials ignored their opinions, listening instead to property law specialists.

The above is a lucid example of the untoward unintended consequences of the political actions by an elite group of people who believed that they knew what was best for their constituents. This represents what the great F. A. Hayek calls as the ‘pretence of knowledge’ or ‘fatal conceit’.

Yet the government will not be held accountable for the negative externality or the costs of such laws.

In addition, as admitted by the officials the new law has been meant to “address an immediate problem” which is what politics has mostly been about—short term at the expense of the long term.

Paul Krugman’s Rationalization of Record Gold Prices

Here is Paul Krugman's take on today's record gold prices (quote from the Business Insider) [bold emphasis mine]

The logic, if you think about it, is pretty intuitive: with lower interest rates, it makes more sense to hoard gold now and push its actual use further into the future, which means higher prices in the short run and the near future.

But suppose this is the right story, or at least a good part of the story, of gold prices. If so, just about everything you read about what gold prices mean is wrong.

For this is essentially a “real” story about gold, in which the price has risen because expected returns on other investments have fallen; it is not, repeat not, a story about inflation expectations. Not only are surging gold prices not a sign of severe inflation just around the corner, they’re actually the result of a persistently depressed economy stuck in a liquidity trap — an economy that basically faces the threat of Japanese-style deflation, not Weimar-style inflation. So people who bought gold because they believed that inflation was around the corner were right for the wrong reasons.

My comments

This is an example of a biased ex-post analysis wherein facts are fitted into a theory or model.

First of all, Mr. Krugman assumes a causal linkage between gold prices and interest rates without telling us why gold became the preferred choice of investors among the many possible ‘other investment’ alternatives.

Gold’s prices has just simply been assumed as fait accompli.

Second, it isn’t just gold that’s been rising but the precious metals group and most of the commodity sphere. His model has been silent on this.

The S&P GSCI Energy Index (GSCI), Dow Jones-UBS Agriculture sub index (DJAAG) and Dow Jones-UBS Industrial Metals (DJAIN) are all in an uptrend (yeah blame emerging markets!)

Third, Mr. Krugman does not explain why this relationship did not hold true in the 90s where interest rates had been in a secular decline along with the bear market of gold prices.

Neither does he explain how this model worked when gold prices soared along with ascendant interest rates during the stagflation decade of 1970-1980s

Lastly if Mr. Krugman’s analysis is right, then why hasn’t he predicted today’s record gold prices?

Celebrating Unsung Heroes of Capitalism: Keith W. Tantlinger

From the New York Times (bold emphasis mine)

Nearly six decades ago, Keith W. Tantlinger built a box — or, more accurately, the corners of a box. It was a seemingly small invention, but a vital one: it set in motion a chain of events that changed the way people buy and sell things, transformed the means by which nations do business and ultimately gave rise to the present-day global economy.

Mr. Tantlinger’s box, large, heavy and metal, is known as the shipping container. Though he did not invent it (such containers had been in use at least since the 19th century to haul heavy cargo like coal), he is widely credited with having created, in the 1950s, the first commercially viable modern one.

The crucial refinements he made — including a corner mechanism that locks containers together — allowed them to be hefted by crane, stacked high in ships and transferred from shipboard to trucks and trains far more easily, and cheaply, than ever before.

Thus, without ever intending to, Mr. Tantlinger, an engineer who died at 92 on Aug. 27 and who had long worked out of the limelight, helped bring about the vast web of international trade that is a fact of 21st-century life. More than any other innovation, the modern shipping container — by turns venerated and castigated — is now acknowledged to have been the spark that touched off globalization.

In short, Mr. Tantlinger's propagation and commercialization of the shipping container, which he did not invent but refined on, signifies as one of the main instruments used in international trade. Or our access to a wider variety of products has partly been facilitated by his efforts.

Thanks Mr. Tanlinger.

Heyday for Asian Bankers as the Region’s Millionaires Swell

Asian bankers are having a field day as the number of millionaires in the region swell

From Bloomberg (bold emphasis mine)

Asia-Pacific millionaires outnumbered those in Europe for the first time in 2010, according to a survey by Capgemini SA and Bank of America Corp. More millionaires means more spending and more demand for private wealth managers from banks such as BSI SA, JPMorgan Chase & Co. (JPM), UBS AG (UBSN) and HSBC Holdings Plc. (HSBA)Recruiters say too many banks are hunting too few experienced staff in the region, pushing up salaries and crimping profits.

“Good bankers have at least one offer on the table, if not two,” said Collardi, 37. “Today, if you want to be successful in hiring, you need to be forceful.”

Global demand for client relationship managers is expected to rise 13 percent over 2011 and 2012, while growth in the Asia- Pacific region will be double that, PricewaterhouseCoopers LLP said in an e-mail. That’s pushed top salaries in Singapore to almost twice the level in Switzerland, the world’s biggest offshore wealth manager, according to London-based recruitment firm EMA Partners International.

Senior private bankers in Singapore earn between $160,000 and $410,000 a year, while the comparative range in Switzerland is $152,000 to $210,000, EMA estimates.

“People are simply paying too much and that cannot be justified from an economic point of view,” said Thomas R. Meier, Zurich-based Julius Baer’s CEO in Asia. If a bank pays 30 percent more than a person’s salary at his previous employer, and the new recruit ends up adding just 5 percent more to revenue, the bank will feel the pinch, the 48-year-old said.

The premium to attract somebody new in Asia is 20 percent to 30 percent of their base compensation, said Matthew Streeton, partner at The Consulting Partnership, a Singapore-based recruitment firm. Usually, private bankers get a guaranteed bonus in their first year on top of the base salary and thereafter earn an annual bonus based on performance, he said…

Asia’s 3.3 million high-net-worth individuals had $10.8 trillion in assets, compared with the $10.2 trillion accumulated by their 3.1 million counterparts in Europe, according to the report published in June by Capgemini and Bank of America’s Merrill Lynch Global Wealth Management.

Recruiters say private bankers need an apprenticeship because wealthy clients expect to be advised by someone with experience who can understand their goals.

Remarkably Asian bankers are even paid more than their bosses or multinational employers.

Yet all these signify as mounting evidence of an ongoing paradigm shift from a myriad of agglomerated forces, such as globalization, wealth convergence, the internet, technology driven innovation and differences in the degree of the welfare state, economic freedom and applied administrative, fiscal and monetary policies.

Peter Buffett: Freedom over Money

Not everything is about money. Peter Buffett, son of one of the world's richest and investing savant Warren Buffett, gave up his inheritance of Berkshire Hathaway shares (worth about $72 million in 2010) for the freedom to live a life as musician.

Peter Buffett writes, (hat tip Professor Russ Roberts) [bold emphasis mine]

My inheritance was relatively modest, but it was more than most young people receive to get a start in life. Having that money was a privilege, a gift I had not earned. If I'd faced the necessity of making a living from day one, I would not have been able to follow the path I chose.

Would my father have helped me get started if I'd chosen a career on Wall Street? I'm sure he would have. Would he have given me a job at Berkshire Hathaway if I'd asked for one? I suppose so. But in either of those cases, the onus would have been on me to demonstrate that I felt a true vocation for those fields, rather than simply taking the course of least resistance. My father would not have served as an enabler of my taking the easy way out. That would not have been an exercise of privilege, but of diminishment.

This demonstrates the differences of value preferences. Peter's priorities are different from his father's. One cannot measure individual choices from aggregates or statistics.

Yet like Professor Roberts, who counselled his students “not to take the job that pays the most money” but instead go for trade which delivers “satisfaction, meaning, leisure, beauty, pride, and honor,” I recently advised my newly graduate eldest son not to seek the pursuit of money as the primary objective for career development, but to go for specialization in the field which he feels comfortable with.

After all, achieving career excellence is about the ability to serve consumers; where consumers ultimately determine one’s market value or career success (outside the political spectrum).

Euro Crisis: Path towards United States of Europe?

Is the Emmanuel Rahm creed of using crisis as an opportunity to expand political power being tacitly enforced in the Eurozone?

This from the New York Times, (bold emphasis mine)

As leaders in Europe try to contain a deepening financial crisis, they are also increasingly talking about making fundamental changes to the way their 17-nation economic union works.

The idea is to create a central financial authority — with powers in areas like taxation, bond issuance and budget approval — that could eventually turn the euro zone into something resembling a United States of Europe.

Officials have been hesitant to publicly endorse such a drastic change. But privately they say the issue has gained urgency in recent months, as it has become clear that Europe’s current approach, which requires unanimity on any significant moves, is unwieldy and inefficient. The idea is being promoted by some global financial officials, who worry about the risks that continued uncertainty in Europe poses to the global economy.

Recently, for instance, when an official from a European central bank met with a financial official in Washington, his host brandished the Articles of Confederation, the 1781 precursor to the United States Constitution, to use as an example of why stronger unions become necessary…

And that is why, despite all the political obstacles, Europe appears to be inching closer to a more centralized approach, and some officials are going public on the issue…

The idea of a European Treasury that would enforce fiscal discipline on wayward countries, while also having the power to spread European Union wealth from healthier countries to ones struggling to pay their debts, is fiercely unpopular among voters in many countries. Those in prosperous nations like Germany do not want to see their taxes used to bail out countries that borrowed their way into trouble. And those in weaker nations are reluctant to allow outsiders to dictate how their governments spend their money and tax their citizens.

I have dealt with this earlier.

Those who believe that the success of the Euro will depend on ‘fiscal and political union’ will acclaim this move as a necessity. They would see this as an elixir. Again, they would be wrong.

As I pointed out earlier, the Soviet Union (or Yugoslavia) had them both, but this didn’t stop these unions from dissolution. Proponents of the political-fiscal union nostrum, only look at the US as THE model, without looking at others. This is called the focusing effect.

Yet everything boils down to fundamental economics, where spending more than one can finance would extrapolate to insolvency, bankruptcy and or eventual political dismemberment. No amount of fiscal or political union will stop this. Politics will never supersede economics.

The obsession to centralize and its fulfillment would account for the death knell for the Euro.

Apparently the current political winds hasn’t been to wean away from the welfare state, instead, such gradualist actions toward a ‘United States of Europe’ implies of the opposite—the preservation and expansion of the tripartite political architecture of the welfare state-central bank-banking system. In other words, use the political union to save the banking system and expand control over the marketplace.

This reveals that the politicians of the Eurozone seek models that only suit their self-interests.

As earlier noted, the political climate of the Eurozone could be symptomatic of the state of the mental health of many Europeans.

Many Europeans Suffer from Mental Illness

That’s from Reuters,

Europeans are plagued by mental and neurological illnesses, with almost 165 million people or 38 percent of the population suffering each year from a brain disorder such as depression, anxiety, insomnia or dementia, according to a large new study.

With only about a third of cases receiving the therapy or medication needed, mental illnesses cause a huge economic and social burden -- measured in the hundreds of billions of euros -- as sufferers become too unwell to work and personal relationships break down.

"Mental disorders have become Europe's largest health challenge of the 21st century," the study's authors said…

Mental illnesses are a major cause of death, disability, and economic burden worldwide and the World Health Organization predicts that by 2020, depression will be the second leading contributor to the global burden of disease across all ages.

Wittchen said that in Europe, that grim future had arrived early, with diseases of the brain already the single largest contributor to the EU's burden of ill health.

The four most disabling conditions -- measured in terms of disability-adjusted life years or DALYs, a standard measure used to compare the impact of various diseases -- are depression, dementias such as Alzheimer's disease and vascular dementia, alcohol dependence and stroke.

The last major European study of brain disorders, which was published in 2005 and covered a smaller population of about 301 million people, found 27 percent of the EU adult population was suffering from mental illnesses.

Although the 2005 study cannot be compared directly with the latest finding -- the scope and population was different -- it found the cost burden of these and neurological disorders amounted to about 386 billion euros ($555 billion) a year at that time. Wittchen's team has yet to finalize the economic impact data from this latest work, but he said the costs would be "considerably more" than estimated in 2005.

Let me guess, the above signify as indirect consequences of the welfare state.

Also, with 4 out of 10 people suffering from mental disorders, many of them are likely politicians and from the bureaucracy, so it would not be farfetch to deduce that the political and regulatory environment could also be symptomatic of the above diseases.

Regime Uncertainty: Assault on Private Property Rights

Professor Robert Higgs explains, (bold emphasis mine)

it has to do with widespread inability to form confident expectations about future private property rights in all of their dimensions. Private property rights specify the property owner’s rights to decide how property will be used, to accrue income from its uses, and to transfer these rights to others in various voluntary arrangements. Because the content of private property rights is complex, threats to such rights can arise from many different sources, including actions by legislators, administrators, prosecutors, judges, juries, and others (e.g., sit-down strikers, mobs).

Because of the great variety of ways in which government officials can threaten private property rights, the security of such rights turns not only on law “on the books,” but also to an important degree on the character of the government officials who administer and enforce the law. An important reason why regime uncertainty arose in the latter half of the 1930s, for example, had to do with the character of the advisers who had the greatest access to President Franklin Roosevelt at that time—people such as Tom Corcoran, Ben Cohen, William O. Douglas, Felix Frankfurter, and others of their ilk. These people were known to hate businessmen and the private enterprise system; they believed in strict, pervasive regulation of the market system by—who would have guessed?—people such as themselves. So, as bad as the National Labor Relations Board was on paper, it was immensely worse (for employers) in practice. And so forth, across the full range of new regulatory powers created by New Deal legislation. In a similar way, the apparatchiki who run the federal regulatory leviathan today can only inspire apprehension on the part of investors and business executives. President Obama’s cadre of crony capitalists, which he drags out to show that “business is being fully considered,” in no way diminishes these worries.

Thus, regime uncertainty is a multifaceted and somewhat nuanced concept. Many economists don’t like it because it cannot be measured and compiled along with other standard macro variables in a convenient data base.

Read the rest here

Every time governments intervene in the marketplace someone’s property rights gets affected. The unintended consequence is risk aversion from heightened atmosphere of uncertainty.

Hot: Swiss National Bank to Embrace Zimbabwe’s Gideon Gono model

The Swiss National Bank has impliedly adapted Zimbabwe’s Central Bank Governor Gideon Gono’s hyperinflationary model.

From Reuters, (bold emphasis mine)

The Swiss National Bank said on Tuesday it would set a minimum exchange rate target of 1.20 francs to the euro and would enforce it by buying foreign currency in unlimited quantities.

The Fiat money standard’s race to perdition via competitive devaluation seems to be accelerating.

All these for saving the banking system. As I recently wrote,

Late last week, the US Federal Reserve has extended a $200 million loan facility via currency swap lines to the Swiss National Bank (SNB), as an unidentified European bank reportedly secured a $500 million emergency loan. This essentially validates my suspicion that the so-called currency intervention by the SNB camouflaged its true purpose, i.e. the extension of liquidity to distressed banks, whose woes have been ventilated on the equity markets.

Creative Destruction: The Growing Obsolescence of Postal Service

The US Postal Service is a great example of how vertical hierarchical organizations or political institutions are headed the way of the dinosaurs.

From the New York Times, (bold emphasis mine)

The United States Postal Service has long lived on the financial edge, but it has never been as close to the precipice as it is today: the agency is so low on cash that it will not be able to make a $5.5 billion payment due this month and may have to shut down entirely this winter unless Congress takes emergency action to stabilize its finances.

“Our situation is extremely serious,” the postmaster general, Patrick R. Donahoe, said in an interview. “If Congress doesn’t act, we will default.”

In recent weeks, Mr. Donahoe has been pushing a series of painful cost-cutting measures to erase the agency’s deficit, which will reach $9.2 billion this fiscal year. They include eliminating Saturday mail delivery, closing up to 3,700 postal locations and laying off 120,000 workers — nearly one-fifth of the agency’s work force — despite a no-layoffs clause in the unions’ contracts.

The post office’s problems stem from one hard reality: it is being squeezed on both revenue and costs.

As any computer user knows, the Internet revolution has led to people and businesses sending far less conventional mail.

At the same time, decades of contractual promises made to unionized workers, including no-layoff clauses, are increasing the post office’s costs. Labor represents 80 percent of the agency’s expenses, compared with 53 percent at United Parcel Service and 32 percent at FedEx, its two biggest private competitors. Postal workers also receive more generous health benefits than most other federal employees.

The postal office model represents an artifact of the industrial age. The deepening of the information age or the internet revolution has been rendering such model obsolete. This is creative destruction at work.

This is also a magnificent example of how the internet has been reconfiguring social activities.

Because the postal office is a political institution, organizational inefficiencies have exacerbated its financial woes. This can be seen by the labor heavy share of the agency’s expenses relative to the private sector counterparts. Its existence has palpably been designed to generate votes than to serve the public.

Under current conditions, the agency’s survival entirely depends on taxpayer funding. With the welfare state apparently crumbling from the self-inflicted borrow-tax-spend ways, any imperative to balance the fiscal budget extrapolates to the agency’s prospective extinction or privatization.

The fate of the US postal service and its growing obsolescence will apply around the world.

Joseph Stiglitz: The US Federal Reserve is ‘Corrupt’

From the Huffington Post,

One of the world's leading economists said Wednesday that the very structure of the Federal Reserve system is so fraught with conflicts that it's "corrupt."

Nobel laureate Joseph Stiglitz, a former chief economist at the World Bank, said that if a country had applied for World Bank aid during his tenure, with a financial regulatory system similar to the Federal Reserve's -- in which regional Feds are partly governed by the very banks they're supposed to police -- it would have raised alarms.

"If we had seen a governance structure that corresponds to our Federal Reserve system, we would have been yelling and screaming and saying that country does not deserve any assistance, this is a corrupt governing structure," Stiglitz said during a conference on financial reform in New York. "It's time for us to reflect on our own structure today, and to say there are parts that can be improved."

Stiglitz made the remarks at a conference held by the Roosevelt Institute. He and other speakers, including Harvard Law Professor and federal bailout watchdog Elizabeth Warren and legendary investor George Soros, had bold ideas about reforming the nation's financial system.

After the conference, Stiglitz said that his remarks on the Fed were "maybe a little hyperbole," but then again made the case that if another country had presented a plan to reform its financial system, and included a regulatory regime that copied the makeup of the Federal Reserve system, "it would have been a big signal that something is wrong."

To Stiglitz, the core issue is that regional Fed banks, such as the New York Fed, have clear conflicts of interest -- a result of the banks being partly governed by a board of directors that includes officers of the very banks they're supposed to be overseeing.

Corruption is a product of arbitrary edicts, fiats or laws which benefits vested interest groups.

Central banking has been institutionalized to safeguard the interests of the welfare-warfare state through the funding mechanism of the banking system. So obviously ‘conflicts of interests’ that leads to corruption has been the institution's conventional trait.

Gold Reclaims $1,900 level

As Europe equities endures another bout of paroxysm today, gold prices race back to reclaim the $ 1,900 level.