Information Age Investing: Entrenching Technology Sector Leadership

Bespoke Invest shows us some very important developments in the US stock markets during the recent sharp volatility: Technology Sector’s market leadership has been intensifying

Bespoke Invest writes

As shown, the Technology sector, which was already the largest sector in the index, has seen the biggest gain in weighting since the bull market peaked. On April 29th, Tech had a weighting of 18.07%. As of now, its weighting is 19.06%. The gain in Tech is even more impressive because the only other sectors that have seen increases in their weightings since the bull market peaked are non-cyclical in nature (Cons. Staples, Utilities, Health Care, Telecom).

Additionally, the technology sector has been outpacing the industrials.

Again from Bespoke Invest

While Industrials have been slumping, the Technology sector has been ramping. Although there have been numerous calls to avoid the sector during this downturn, Tech stocks have been handily outperforming the market. In fact, heading into today, Technology was the least oversold of the ten sectors.

My thoughts

Recent volatility has been proving to be more of a shakeout than a genuine inflection point.

The underlying change of market leadership or divergent actions in the sectoral performances, which reveals of an ongoing rotation towards the technology sector, shows that this has not been a debt deflation driven financial market sell down, as global central bankers have been applying aggressive activists measures.

The gap in the market cap weighting of the technology and other sector has been widening. In the Philippines, the Mining sector has been assuming this role.

As I have been saying, as the information age deepens, the pie of the technology sector relative to the economy will continue to expand.

Global production process will continue to lengthen or experience enhanced specialization as more technology products and services will be offered and provided to the marketplace. Competition led innovation will be the major driving force for this dynamic.

People hardly notice that the internet search industry is one big example of this ongoing dynamic.

The technology market leadership dynamic will continue to be reflected on prices of technology equities, which should be expected to have a greater share in the US equity market’s sectoral weightings as time goes by.

Essentially, a bet on the information age should translate to a bet on the technology sector.

But as caveat, since policies of central bankers have led to periodic bubble cycles, the capital intensive technology sector could be in a formative bubble cycle process. Although I guess this has yet to reach a maturity phase.

Of course, US treasuries are the ultimate bubble in the US, which I think is in a near maturity or blowoff phase. The global bond bubble applies to many developed economies based on the 20th century designed welfare system.

And so goes the US treasury securities and other bond bubbles (EU, Japan), so with the US dollar and the US dollar system.

I’d stick to precious metals and the technology sector.

More Endorsement for the Prudent Investor Newsletters

Businessmirror’s prolific financial columnist John Mangun tweets last August 10^th,

I hardly open my twitter, but had to discover this from another reader. Thus my late reaction.

Anyway, my profuse thanks, John.

Follow John Mangun's twitter address here

Information Age: The Blooming Internet Search Industry

In today’s rapidly evolving society, many people tend to overlook the contributions of the web in the economy.

McKinsey Quarterly in a new report outlines the fast expanding internet search industry. (bold emphasis mine)

A new McKinsey study, The impact of Internet technologies: Search, takes a more comprehensive view of this phenomenon and its rising value. We looked at five key developed and developing economies—Brazil, France, Germany, India, and the United States—indentifying nine activities that are primary sources of search value, as well as 11 private, public, and individual constituencies that reap the benefits.Among the key findings:

• Using country-level analysis as a base, we estimated that the total gross value of Internet search across the global economy was $780 billion in 2009, equivalent to the GDP of the Netherlands or Turkey. By this estimate, each search is worth about $0.50.
• Of that value, $540 billion—69 percent of the total and 25 times the annual value added (profits) of search companies—flowed directly to global GDP, chiefly in the form of e-commerce, advertising revenues, and higher corporate productivity. Search accounted for 1.2 percent of US and for 0.5 percent of India’s GDP.
• The remaining $240 billion (31 percent) does not show up in GDP statistics. It is captured by individuals rather than companies, in the form of consumer surplus, and arises from unmeasured benefits, such as lower prices, convenience, and the time saved by swift access to information. We estimate those benefits at $20 a month for consumers in France, Germany, and the United States and at $2 to $5 a month for their counterparts in Brazil and India.
• Among retailers, the value of search in 2009 equaled 2 percent of total annual revenues in developed nations and 1 percent in developing ones. That value stemmed directly from online shopping, as well as from online research that led to an in-store sale. US retailers saw as much as $67 billion in search-related revenues, Brazil’s retailers as much as $2.4 billion.
• In the five countries we studied, knowledge workers experienced search-related productivity gains of up to $117 billion, flowing from faster and more accurate access to information.
• Our research also identified emerging sources of search-related value. One is the rise of new niche (or “long tail”) retailing, as search techniques help consumers access ever-narrower product segments. Another is new business models, such as those keyed to the needs of consumers who search via mobile devices.

Read the rest here

As pointed out in the above, many of the web’s consumer surpluses are not being reflected on the GDP statistics, computations of which are based on the industrial age era.

In addition, as more and more people get wired, the complexion of our social activities will dramatically change. And this will be manifested on commerce and the economy. The above is just the start.

War against Short Selling: France, Spain, Italy, Belgium Ban Short Sales

Regulators/Policymakers maintain a delusion of control.

From Bloomberg, (bold highlights mine)

France, Spain, Italy and Belgium will impose bans on short-selling from today to stabilize markets after European banks including Societe Generale SA hit their lowest level since the credit crisis.

“While short-selling can be a valid trading strategy, when used in combination with spreading false market rumors this is clearly abusive,” the European Securities and Markets Authority, which coordinates the work of national regulators in the 27- nation European Union, said in a statement after talks ended late yesterday. National regulators will impose the bans “to restrict the benefits that can be achieved from spreading false rumors or to achieve a regulatory level playing field.”

The watchdogs are trying to stem a rout that sent European bank stocks to their lowest in almost 2 1/2 years and quell concern that European lenders may be struggling to fund themselves. Banks’ overnight borrowings from the European Central Bank jumped to the highest in three months yesterday, a sign some lenders may have need for emergency cash. Regulators imposed similar limits on short sales in September 2008 following the collapse of Lehman Brothers Holdings Inc.

Politicians and regulators want you believe that prices can be fixed by edict or fiat.

They make you believe that a worthless or junk piece of security should have value because they say so.

The countries planning to impose the ban on short sales have all seen their stock prices crashing.

Essentially France (CAC; orange), Spain (MADX; green), Italy (FTSEMB; light orange) and Belguim (BEL20; red) have been in bear market territories. The performance or % yield from the above chart is seen from the year-to-date perspective. This means that the above does not reflect on the peak-trough returns, which should amplify the degree of losses.

As I pointed out in the same recent case as Korea:

1. Bans hardly have been effective. Instead they are mostly symbolical as the “need to be seen as doing something”

2. Regulators react almost always too late in the game (which means that their markets may be at the process of nearly bottoming out.)

3. I would further add current policies have clearly or overtly been in support of the banking system and the stock market.

4. This only validates the theory that the policy direction of governments and global central bankers has primarily been anchored upon the Bernanke ‘crash course for central bankers’ doctrine of saving the stock market.

5. Importantly, applied policies have been meant to preserve the tripartite cartelized system of the welfare state, central banks and the crony banking system.

Despite Globalization, US Still a ‘Closed’ Economy

Some important figures from Cato’s Dan Ikenson

-Despite globalization, the U.S. economy “actually remains relatively closed.” (By “relatively closed,” the authors mean that imports are puny compared to the size of the economy—not that U.S. policies are relatively restrictive of imports.)

-The vast majority of goods and services purchased by U.S. consumers (88.5%) is produced in the United States

-When accounting for the value of foreign content in final U.S. production of goods and services, 86.1% of U.S. consumer purchases of goods and services is produced in the United States.

-Of the 11.5% of total U.S. consumer spending on imports, 64% accounts for the goods and services produced abroad and 36% accounts for transportation, wholesaling, retailing and other activities performed in the United States.

-Only 2.7% of U.S. consumer spending is devoted to goods labeled “Made in China.”

-Of the 2.7% of U.S. consumer spending on imports from China, only 45% is for the foreign-produced good and 55% goes to transportation, wholesaling, retailing, and other activities performed in the United States. In other words, $.55 of every dollar spent on imports from China directly supports economic activity in the United States.

This Cato paper gives broader perspective to the findings of the aforementioned studies.

Added thoughts:

US trade with the world has been less than 20% of the world’s GDP. Given the heft of the US economy, this low % has brought down the average % of world trade. In other words, many nations have merchandise exports at vastly over 50% of their respective GDPs.

Chart from Google Public Data

The popular anti-trade mercantilist rhetoric about China’s significance (or usurping jobs and trade) has been vastly exaggerated. This only exposes politicians, who advocate protectionism, are engaged in the power of suggestion to dupe gullible masses.

Another way to look at this is that for the US economy to have a stronger recovery, she has to open her trading doors wider to the world, instead of using the printing press which only diverts resources to politicians and their allies and cronies.

In short, there is immensely more room for genuine and sound economic growth via free trade.

Global Equity Markets Meltdown: Global Central Banks Gropes For A Fix

Central bankers are racing to shield their economies from fiscal tightening and lopsided currency swings that threaten a new global recession.

In the 72 hours after a Group of Seven conference call on Aug. 7, the Federal Reserve pledged to keep interest rates near zero through at least mid-2013, the European Central Bank intervened in bond markets and the Bank of England indicated it’s ready to add more stimulus if needed. Japan signaled renewed concern about the yen and Switzerland yesterday stepped up its fight to curb an “overvalued” franc…

Today, the Bank of Korea kept interest rates unchanged for a second month and government officials planned a 2 p.m. local time media briefing in Seoul on the stock market rout. The MSCI Asia Pacific Index sank 1.1 percent as of 9:42 a.m. in Tokyo.

Finance ministers and central bankers from the G-7 nations, which include the U.S., U.K. and Germany, said in a statement Aug. 7 that they will “take all necessary measures to support financial stability and growth in a spirit of close cooperation and confidence.”

That’s from Bloomberg.

The insufficiency of current measures applied by central banks is likely to be the main source of the market’s recent violent reaction, as I recently said.

Remember, the global financial markets has been propped up and has been habituated to inflationism. Today they crave for more.

A comment from Wall Street celebrity echoes this sentiment. From the same Bloomberg article

“Central banks are trying to get their act together,” said Mohamed El-Erian, chief executive officer at Pacific Investment Management Co., the world’s largest manager of bond funds.

“But we have to recognize that what they do is necessary but not sufficient,” El-Erian said yesterday on Bloomberg Television’s “In the Loop” with Betty Liu. “We need other agencies, whether in the U.S. or in Europe, to get their act together.”

The same set of remedy has been applied to the same set of problems, which appear to be worsening.

Problems of which essentially signifies as unintended consequences to prior central bank actions.

From the same article,

In the U.S., Fed Chairman Ben S. Bernanke signaled that the central bank may consider a third round of large-scale asset purchases, even after the first two rounds totaling $2.3 trillion failed to secure sufficient job growth and sustain the two-year-old recovery. This week’s decision to leave its benchmark interest rate near zero through at least mid-2013 provoked three dissents from policy makers, the most opposition since Bernanke took office in 2006.

At the end of the day, central banks don’t know how and what to do to solve these problem, except to apply age old solution of inflationism.

From the same article,

Even as they take action, central bankers “don’t know the panacea” and have disagreement within their ranks, Deutsche Bank’s Schneider said. “It’s increasingly unclear who can stop this spiral.”

Well if the ECB and the FED’s latest move hasn’t been enough, then we should expect more of the same therapy to be applied, but at a vastly larger scale. The result will be the same--speculative excess, moral hazard, malinvestments, crony capitalism, corruption, capital consumption and boom bust cycles.

War on Gold: CME Raises Credit Margins on Gold Futures

This time the interventionist war is being directed on the gold futures markets

From Bloomberg,

Gold declined from its record above $1,800 an ounce after CME Group Inc. (CME) boosted margins on futures contracts, prompting some investors to sell the metal after a four-day rally.

Bullion for immediate delivery dropped as much as 0.8 percent to $1,779.20 and traded at $1,788.25 at 12:58 p.m. in Singapore. Earlier, the metal rallied as much as 1.2 percent to $1,814.95 on concern that global economic growth is stalling as governments in the U.S. and Europe remain constrained by debt.

CME, the world’s largest futures market, raised margins on gold contracts by 22 percent with effect from the close of business today, according to a statement on its website. The initial-margin requirement, or the minimum amount of cash that speculators must keep on deposit, will rise to $7,425 per contract from $6,075, CME said. The margin for hedging will also increase 22 percent, rising to $5,500 from $4,500, it said.

For governments and their allies, desperate times calls for desperate measures.

Philippine Phisix: What An Incredible Turnaround! (Global Equity Markets Update)

Amazing, the Philippine Phisix simply shrugged off the US-European market rout yesterday.

Chart from technistock.net

The actions of the market can’t be argued as having been boosted from US Federal Reserve assurances as alleged by some, for the following reasons:

One, the Phisix opened down only less than 2% (81.47 points). This represents evidence that even with heightened uncertainty overseas, investors put an immediate floor on the Phisix from the opening bell.

Two, Japan’s Nikkei is still down more than 1% as of this writing. This hardly means Fed assurance factor.

Three, except for Indonesia which is down about 1%, Malaysia and Thailand are slightly lower. In other words, today's action is another validation of the ASEAN divergence process at work.

Fourth, the mining issues spearheaded this magnificent intraday recovery.

The mining index surged by 4.2% and carried the weight of the Phisix rebound!

Nevertheless, the big picture tells us that the Fed’s (stealth QE) and the ECB’s QE may have been interpreted by the world markets as an antidote with insufficient potency to overwhelm the prevailing negative factors

Second, the Eurozone’s crisis continues to affect global markets

And that’s why Ben Bernanke came out last night swinging at the notion that dissensions from within the ranks of the US Federal Reserve board of governors would stop him from declaring another round of overt Quantitative Easing.

We will see.

In my view, I believe that despite today's superb performance by the Phisix, caution is highly warranted until we see:

-concrete or definitive actions by the US Federal Reserve. Again, stealth QE by the Fed and the ECB’s overt QE has been essentially eclipsed or overpowered by the banking-PIIGS meltdown in Eurozone.

-signs of stability in global equity markets (where large swings or gyration dissipates), even if most of the world markets continue to decline.

Though yes, $1,800 gold appears to be lending support to the Phisix as I have been arguing here.

Just to show how the Phisix-ASEAN seems to metaphorically defy gravity, this great year to date chart is from the Bespoke Invest is telling.

As of yesterday, of 78 nations monitored by Bespoke Invest, there are only 10 gainers so far.

Two of them hails from ASEAN, particularly Thailand and Indonesia. The Philippines (12^th) and Malaysia (14^th) are still ranked in the top 20 of the world's best performers despite marginal losses.

The US is ranked 19^th in spite of the series of recent blood bath.

If you look at the overall performance, one would note that global equities have mostly been in the sea of red, with more countries joining the ranks of bear market losses (20% or more) rather than of the gainers’ column.

Such broadening losses should be seen as a source of caution, nevertheless, cautious optimism.

Britain’s Riots: Symptoms of the Disease called Welfare State

The psychology of entitlement or dependency derived from the welfare state brings with it the propensity for violence once this privilege is seen as being taken away. The political beneficiaries think that there is an inexhaustible Santa Claus fund always there to serve them.

Add to the baneful effect of this dependency psychology is the lack of respect for the sanctity of private property rights.

And Britain’s riots appear to have been manifesting these symptoms.

Writes Allister Heath cityam.com (hat tip Dan Mitchell)

The cause of the riots is the looters; opportunistic, greedy, arrogant and amoral young criminals who believe that they have the right to steal, burn and destroy other people’s property. There were no extenuating circumstances, no excuses. The context was two-fold: first, decades of failed social, educational, family and microeconomic policies, which means that a large chunk of the UK has become alienated from mainstream society, culturally impoverished, bereft of role models, permanently workless and trapped and dependent on welfare or the shadow economy. For this the establishment and the dominant politically correct ideology are to blame: they deemed it acceptable to permanently chuck welfare money at sink estates, claiming victory over material poverty, regardless of the wider consequences, in return for acquiring a clean conscience. The second was a failure of policing and criminal justice, exacerbated by an ultra-soft reaction to riots over the past year involving attacks on banks, shops, the Tory party HQ and so on, as well as an official policy to shut prisons and reduce sentences. Criminals need to fear the possibility and consequence of arrest; if they do not, they suddenly realise that the emperor has no clothes. At some point, something was bound to happen to trigger both these forces and for consumerist thugs to let themselves loose on innocent bystanders.

But while all three main parties are responsible for flawed policies that have fuelled this growing underclass at a time of national prosperity – 5.5m-6m adults now on out of work benefits, a number that has been roughly constant for over two decades – the argument made by some that the riots were “caused” or “provoked” by cuts, university fees or unemployment is wrong-headed. Just because someone is in personal trouble doesn’t give them the right to rob, attacks or riot.

In any case, the state will spend 50.1 per cent of GDP this year; state spending has still been rising by 2 per cent year on year in cash terms. It has never been as high as it is today – in fact, it is squeezing out private sector growth and hence reducing opportunities and jobs. Many of the vandals were school children not yet in the labour market; unemployment is a tragedy that must be fought but 9, 10 or 14 year olds can’t be pillaging because of it. Equally tragically, most of the older rioters would never have any hope of going to university, regardless of cost, such is their educational poverty.

What they wanted is free money and free goods and so they helped themselves. They were driven by greed, a culture of entitlement, of rights without responsibility, combined with a complete detachment from traditional morality, generalised teenage anger and a sense that anything goes in the current climate. This wasn’t a political protest, it was thievery.

read the rest here

War Against Market Prices: South Korea Imposes Ban on Short Sales

Regulators generally have deep aversion for falling prices (deflation), or applied to financial markets, they fear bear markets.

So they apply all sorts of price control measures to prevent the required adjustment in prices that essentially reflects on the underlying fundamentals of the securities or markets.

Today, South Korea copycats Greece.

Here is Bloomberg, (emphasis mine)

South Korea banned equity short sales for three months while the two biggest state-run funds said they may boost investments as the government seeks to shore up a market that’s had its biggest six-day drop in three years.

The Financial Services Commission said it will ban short selling on all shares until Nov. 9 from today. The National Pension Service, the country’s biggest investor, said yesterday it plans to buy more stocks this month than it originally targeted. Korea Teachers Pension said it purchased about 70 billion won of stocks amid the sell-off and may buy more.

South Korea joins Greece this week in banning short selling after the Kospi Index (KOSPI) slumped 17 percent in six days. The gauge reached an intraday level yesterday that was 24 percent below its May 2 record close. Domestic institutions should play a bigger role to contain volatility that is often caused by sell- offs by overseas investors, the FSC’s Chairman Kim Seok Dong told lawmakers in parliament yesterday.

The current ban exhibits the same attempt made in September 2008.

From the same article,

South Korea imposed a ban in 2008 on short sales following similar actions taken by U.S. and U.K. regulators in the aftermath of Lehman Brothers Holdings Inc.’s collapse. Korea lifted the rule from June 2009, while keeping the ban for financial stocks. The nation already bans so-called naked short sales, where investors don’t need to borrow the shares.

How effective has the been the ban which South Korean authorities imposed in September 30^th of 2008?

Apparently a big failure as the Kospi index’s crash even accelerated when the ban was imposed (blue arrow).

Korea wasn’t alone, she was accompanied by Taiwan and Indonesia who also imposed short trading prohibitions.

And the results were identical.

Like South Korea, both Taiwan (TSEC black candle) and Indonesia (JKSE-blue candle) fell sharply during the final phase of the bear market of 2008, in spite of the short selling ban. In short, regulators failed to control their respective equity markets.

The good news is that actions of regulators are almost always mechanically reactive to unfolding events (present and past events). Usually the failed policies they implement occur during the culmination of major inflection points.

Another good example of this was UK’s Gordon Brown infamous “bottom” selling of the Bank of England’s gold reserves in 1999. BoE’s loss has been the market gains.

An important lesson is that actions of politicians may function as good or reliable contrarian indicator.

Applied to the short selling ban by South Korean authorities, if the past will rhyme, short-term market pressures may still proceed, but this may also signal the near conclusion of the current selling pressure (mid term) cycle.

US Federal Reserve Goes For Subtle QE

Excerpt from the FOMC Statement (bold emphasis mine)

To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings.

The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate. The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.

Read the entire statement here

So the Fed’s support comes in a cryptic template:

QE 2.5 (maintain reinvesting of principal payments) + ensured a prolonged low interest rate regime by identifying a specified period (at least through mid-2013) instead of “extended period” + proposed an open ended action on the Fed’s balance sheet.

All these translates to, as Bob Wenzel of Economic Policy Journal writes,

The Fed will print whatever quantity of money is necessary to prop up the Treasury market and stock market. The Fed is in full inflation mode.

With growing dissent from FOMC members, the Fed’s intervention appears to have transitioned to communication or language management but still headed for the same direction--monetary easing (inflationism).

D-Day for the US Federal Reserve’s QE 3.0

This is the day where the Fed will likely be announcing QE 3.0 or another asset purchasing program under a new format, template or name.

Wall Street has been bleeding profusely and the sentiment can be captured by this comment by Harvard’s Kenneth Rogoff

From Bloomberg,

Federal Reserve policy makers are likely to embark on a third round of large-scale asset purchases, moving “more decisively” to secure the U.S. recovery, said Harvard University economist Kenneth Rogoff.

“They certainly should do something right away,” said Rogoff, a former International Monetary Fund chief economist who attended graduate school with Fed Chairman Ben S. Bernanke. It’s “hard to know” if Bernanke would immediately be able to gain the support of Federal Open Market Committee members, Rogoff said in an interview today on Bloomberg Television.”

This validates what I earlier wrote

Besides, who would like to see a market crash with them on the helm, and not be seen as “doing something”? Today’s politics, embodied by the Emmanuel Rahm doctrine has mostly been about the need to be seen “doing something” even if such actions entail having adverse long term consequences. Actions by the ECB, SNB and BoJ have all revealed and exemplified such tendencies. Even the debt ceiling bill was forged from the need to do something to avert an Armageddon charade.

Danske Bank’s Research team also sees a FED QE today: (bold emphasis original)

Developments have moved significantly in the wrong direction for the US economy over the past months. We believe this will be enough for Fed to launch new stimulus measures at its meeting today. The main arguments are the following:

1. Growth will be significantly lower than Fed forecast in June.

2. Unemployment is very far from target and not coming down.

3. Fiscal tightening in coming years leaves Fed as the only entity to support growth

further and counter the significant drags on the US economy.

4. Action is needed to fight the current confidence crisis in the markets.

Of course, I see this as a setup meant to save the tripartite cartel of welfare state-central bank and banking system.

Now here is how I think the market’s possible reaction to a QE 3.0 (or its variety)

For the market to respond positively to the Fed’s QE 3.0, this will likely be another huge “shock and awe” delivery type. Otherwise, they may end up like the ECB’s sputtering Bazooka (perhaps they used the 2^nd world war type-L.O.L!) where the stock market fell hard despite actual bond purchases.

Today gold will most likely fall from its lofty record perch. Gold may fall because of profit taking from the "buy the rumor sell the news" dynamic, a smaller than expected QE delivery package or NO QE.

But the difference will be in the degree of decline. Profit taking off a significantly packaged QE will still be substantial perhaps back to the 1700 level, but this would come amidst a backdrop of sharply rebounding global equity markets. Some will misread this as eroding "fear premium". It isn't.

However a market perceived insufficient QE, or a “NO” QE would translate to bigger fall for gold prices along with another round of crashing equity markets.

As of this writing US futures are modestly up while Europe’s 3.5% decline has been reduced to less than 1%.

This is the day.

Here is a 1980s MTV 'This is the Day' from a band called The The.

The lyrics appear suited for the Wall Street cartel and the Bernanke Team,

THIS IS THE DAY -- Your life will surely change.
THIS IS THE DAY -- Your life will surely change.
You could've done anything -- if you'd wanted
And all your friends and family think that you're lucky.
But the side of you they'll never see
Is when you're left alone with the memories
That hold your life together like
Glue...

Again, it's time to profit from political folly.

Quote of the Day: Spending Utopia

From Thomas Sowell

Amid all the concerns about the skyrocketing government debt, a front-page headline in the Wall Street Journal said: "Families Slice Debt to Lowest In 6 Years." It is remarkable how differently people behave when they are spending their own money compared to the way politicians behave when spending the government's money.

I would add that it’s also remarkable how the consensus expect people who work for governments as morphing into supernatural entities by operating above and beyond economic laws.

When we apply utopianism to reality we either get lost, confused and frustrated or become mental slaves (zombies) to the fantasies of a transcendental state.

Global Debt Crisis: Rotation from Global Equities ($7.8 trillion losses) to Bonds ($132 billion gains)

The global debt crisis experienced another rotation: Global equity markets posted whopping losses estimated at $7.8 trillion as bonds gained $132 billion.

From Bloomberg, (bold emphasis mine)

The worldwide retreat from stocks and commodities following Standard & Poor’s unprecedented cut of the U.S. AAA credit rating has driven the value of the global bond market to a record high.

The market value of Bank of America Merrill Lynch’s Global Broad Market Index has increased $132.4 billion since the end of July to $42.1 trillion, the most in data going back to 1996. The index, containing more than 19,000 bonds sold by governments, banks and the world’s biggest companies, returned 1.09 percent this month as yesterday’s stock rout wiped out about $2.5 trillion in global equity values, extending total losses since July 26 to $7.8 trillion.

While S&P said the credit worthiness of the U.S. was diminished when it cut the rating to AA+ on Aug. 5, Treasuries have surged. The yield on the benchmark 10-year note dropped today to as low as 2.27 percent, the least since January 2009. Investors are seeking the safest assets amid growing concern that debt crises in the U.S. and Europe and a manufacturing growth slowdown in the world’s two biggest economies may cause the global recovery to falter.

Point is: there always will be a bullmarket somewhere. This functional rotation should also take into the context the actions of gold, the Japanese Yen and the Swiss franc whom have, like bonds, has served as ‘flight to safety’ assets.

Nevertheless, this puts into perspective the negative correlation of bonds and stocks.

Minyanville’s Howard Simons observed of this widening bond-equity correlation in June and wrote,

Interestingly enough a rolling three-month correlation of returns between the two indices shows we are at a level normally visited only during a bear market. As the bonds’ returns are rising and stocks’ have been falling, we must conclude the debt claim on corporate cash has become quite expensive while the equity claim has become cheaper. Who is the starry-eyed cheerleader now?

The present state of affairs can be restated as bond investors over-paying for the perception of safety and stock investors underpaying for a dollar of dividend income. Viewed on this basis, stock investors remain chastened while bond investors are eager participants in a bubble driven by excess financial liquidity.

I add my two cents

Asset correlations changes over time. Negative correlations between bond and equities become pronounced during sharply volatile markets (today-the equity markets).

I guess this correlation should apply with other assets such as gold too. This should give us windows to trade developing correlations or correlation trade.

Next, Mr. Simons’ observations resonates more today than in June where stocks have been heavily oversold while bonds have been sharply overbought.

Finally, if this has truly been about a debt crisis, then both bonds and equities should have been equally in a downturn. Bond vigilantes would have haunted debts of nations whose paying capability has been put to question.

Such dissonant actions tell me that financial markets are either confused (distorted by heavy interventions) or has not been telling us the entire story.

Cartoon of the Day: The Krugman Elixir

Hat tip: Mises Blog and sourced from mugnaini.tumblr.com

Has the S&P’s Downgrade been the cause of the US Stock Market’s Crash?

Hardly so, it would seem.

Since the announced downgrade last Friday, coupon yields of US sovereign issues have been collapsing across the yield curve.

This has HARDLY been signs of an intuitive market response to a credit rating downgrade, where interest rates should be surging higher!

Instead, this looks likely a typical market reaction when the confronted with the prospects of recession.

What has been happening has been a rotation away from equities to bonds, since the debt downgrade crisis episode surfaced.

The currency market hardly exhibits the same downgrade reaction too. Instead of a selloff, we see the US dollar consolidating for the past two sessions. Over the span of two weeks, the US dollar has been inching higher.

Overall, the US dollar has not outperformed (as the previous bear market) or functioned as safehaven currency but has not collapsed either.

Yet gold prices continues to spike to record levels, which is now at 1,740s! (goldprice.org)

Of course gold prices has been suggestive of aggressive activism by central bankers to counteract this ongoing meltdown.

And with the appearance that ECB’s Bazooka (QE), estimated at $1.2 trillion, has fizzled out or has sputtered, more QEs could be in the pipeline.

Such market dissonance is telling.

Misleading Discussion on US Debt Downgrade Crisis

Here is my open letter to broadcasters Paolo Bediones and Cherry Mercado

Dear Paolo Bediones and Cherry Mercado,

Last night, I overheard your supposed cerebral discussion about the US debt downgrade crisis on your radio program while on the way home, on a cab with my family.

I would like to make significant corrections on the litany of false information that had been disseminated on air.

First you claim that after with America’s downgrade, only New Zealand is left with AAA ratings.

This in patently incorrect as shown by the chart from the New York Times

There are 13 countries still with AAA ratings.

Next, you alleged that the Philippine economy mostly depends on the remittances. This is again far from truth. (The downgrade of which you deduce would hurt the OFWs.)

While the Philippines ranks 4^th among the largest remittance recipients in the world (US $21 billion in 2010)…

…the share of remittances to our economy is only 12% (see below). This means there are 88% more of non-OFW sectors to consider. Mathematically speaking, 88 should be greater than 12, or am I missing something?

Charts from World Bank’s Migration and Remittance Factbook 2011

True, the multiplier for remittance contribution could mean a lot more share of the economic pie, but this is certainly far from the exaggerated claim that the Philippines entirely or mostly depend on remittances.

The above chart from ADB shows that while the growth of net factor income from abroad (NFIA) has indeed been substantial, remittances has only been part of this. NFIA also includes contributions from exports and investment inflows. Importantly, gross domestic savings still accounts for the largest share.

So you seem to be pandering to the OFW voting class/audience by overestimating their contributions and underestimating the role of the local economy.

You further moralize on the problem of the 'debt crisis' to Americans as one of having spent too much on things which they didn’t “need”, in as much as they ate in “excess”.

Again both of you seem to be missing out the root of the problem.

Today’s US debt crisis has been mostly about skyrocketing US government spending emanating from promises to her citizenry from which the US government won't be able to finance (chart from Wall Street Journal)

(chart from Heritage Foundation)

If you think that McMansions and SUV’s are “not” needed by Americans, then that would represent fait accompli thinking.

And yet how do you determine what is needed and what is not? And similarly by what measure would you know what or which levels signify as “enough” for each person? If I value beer most and you value coffee most, should my preferences be forced to conform to you or should I sacrifice my beer for your coffee? On what grounds-because most of the people will agree with you?

You see, the fundamental problem has mainly been about the addiction to acquire debt (not only by the American public but MOSTLY by the government).

Moreover while I applaud you for saying that Filipinos should stay clear from incurring debt, I reject your prescription that 'safety nets' should be provided for by the Philippine government to the OFWs in the face of this crisis.

Such safety nets has exactly been the (borrow and spend) formula which has caused the downgrade of the US

Proof?

This is the press release from the Credit rating agency S & P, whom downgraded the US, (bold highlights mine)

The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.

More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.

Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics any time soon.

None in the above says that this has about excess consumption of food and the needless expenditures on material personal needs. Instead, the above shows that this crisis has been representative of the overdependence on government.

Finally, both of you only see the negative side of the downgrade. The bright side is that these events could mean more investment funds for countries willing to embrace investors.

As a saying goes, money flows to where it is treated best. If the US government can’t treat their resident investors adequately, then the Philippines can offer them an alternative venue.

This will happen only if we make the right policy reforms of embracing greater economic freedom.

Ideas have consequences, especially the bad ones. Spreading half-truths could mislead people into doing something that they shouldn’t have politically.

I hope to see public personalities engage in responsible expositions of our society’s problems than just utter rubbish and unfounded statements, especially directed to gullible audiences who mostly don’t understand the situation and who would easily fall prey to demagoguery which they may assimilate as “truth”.

In short, I hope that that both of you practice responsible journalism.

Hope this helps,

Benson

Commodity Currencies as Refuge from Crisis?

“This time is different is a phrase” which I usually loathe. But applied to safehaven or refuge assets during a crisis, “this time has indeed been different” as Gold, the Swiss Franc and the Japanese Yen has replaced the US dollar, as discussed here.

Now a report from Bloomberg says that today’s market rout has seen gains in commodity currencies which may become alternative havens.

The currency havens are disappearing as Switzerland and Japan intervene in foreign-exchange markets, while U.S. and European debt loads undermine credit ratings.

The biggest beneficiaries in the $4 trillion-a-day currency market may be Norway’s krone and the Australia and New Zealand dollars, according to Frankfurt Trust, which oversees about $23 billion. All have debt that is less than 48 percent of gross domestic product, compared with about 60 percent in the U.S., 77 percent in the U.K. and 79 percent in Germany, according to data compiled by Bloomberg.

The Swiss franc and Japanese yen, which had become favorites of traders skittish about holding dollars and euros, became perilous after the Swiss National Bank unexpectedly cut interest rates and Japan sold its currency. The yen weakened as much as 3.2 percent on Aug. 4, according to Bloomberg Correlation-Weighted Indexes. The U.S. came within days of defaulting and Italian and Spanish bond yields approached levels that spurred bailouts of Greece and Ireland.

“You want to stay away from the euro and dollar because this is really an ugly pair and there are alternatives,” Christoph Kind, the head of asset allocation in Frankfurt at Frankfurt Trust, said in a telephone interview last week. “I like currencies like the Australian and New Zealand dollars, the Swedish krona and the Norwegian krone. They are AAA-rated countries with a currency they can manage and handle, and they have pretty liquid markets.”

Charts below from Yahoo Finance

One day does not a trend make.

While Norway krone (NOKUSD) and Sweden’s krona (SEKUSD) are headed up and above yesterday’s close (red horizontal line), this isn’t true with Australia (AUDUSD) and New Zealand’s (NZDUSD) dollar both of whom appear to be rebounding but are significantly below their respective previous closes. Before I forget, the charts above represent a one day window.

Imploding Welfare States: France Faces Downgrade After U.S. Cut

One by one the Bismarckian welfare states appear to be collapsing from their own weight.

From Bloomberg,

The decision by Standard & Poor’s to downgrade the U.S. credit rating leaves France as the AAA country most likely to lose its top grade, some investors and economists say.

France is more expensive to insure against default than lower-rated governments including Malaysia, Thailand, Japan, Mexico, Czech Republic, the state of Texas and the U.S.

“France is not, in my view, a AAA country,” said Paul Donovan, London-based deputy head of global economics at UBS AG. “France can’t print its own money, a critical distinction from the U.S. It is not treated as AAA by the markets.”

While all three major credit-rating companies have confirmed France’s top level in recent months, market measures indicate increasing investor skittishness over the country’s vulnerability to the European debt crisis. Euro-region central bank governors signalled after emergency talks yesterday that they would buy bonds from Spain and Italy to counter investor concerns and limit fallout from the U.S. cut…

While France’s debt of 84.7 percent of gross domestic product is less than Italy’s 120.3 percent, as a percentage of economic output it has risen twice as fast as Italy’s since 2007. French government debt totaled 1.59 trillion euros ($2.3 trillion) at the end of 2010, according to the European Union; Italy’s was about 1.8 trillion euros. France has had a larger budget deficit than Italy every year since 2006. S&P rates Italy A+, four levels below France.

Chart from the Economist

It has been turning out to be a great vindication and equally a monumental triumph for the Classical Liberals whom have warned all these years about the artificiality of this system.

As the great Ludwig von Mises once wrote,

An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. The whole system of interventionism collapses when this fountain is drained off: The Santa Claus principle liquidates itself.

This process of liquidating the Santa Claus principle has been happening as Risk Free are being exposed as Risk Loaded.

Although governments should be expected to keep up the struggle and resort to even more desperate measures in order to preserve this unsustainable system (via inflationism).

At the end of the day, economic reality will overwhelm them.

Quote of the Day: Dogmatism

Great stuff from Professor Steve Horwitz,

If dogmatism is the continued arrogant adherence to a set of ideas regardless of the evidence to support them or arguments against them, the real dogmatists right now are those who continue to cling stubbornly to the belief, against the piled up evidence to the contrary, that more government is the way out of this mess. Liberals and progressives (as well as a good number of conservatives) who claim to believe in reason and evidence and to oppose dogma need to take a good long look in the mirror and decide whether they want to take the advice of Einstein who defined insanity as "doing the same thing over and over again and expecting different results.

Side note: quoted definition of insanity has been frequently misattributed to Benjamin Franklin, Mark Twain or Albert Einstein (according to Wikipedia.org). Most likely origin Rita Mae Brown

Hot: Gold now $1,700!

From Bloomberg,

G-7: More QEs Coming

From Bloomberg, (bold highlights mine)

Group of Seven nations sought to head off a collapse in global investor confidence after the U.S. sovereign-rating downgrade and a sell-off in Italian and Spanish debt intensified threats to the world economic recovery.

The G-7 will take “all necessary measures to support financial stability and growth,” the nations’ finance ministers and central bankers said in a statement today. Members will inject liquidity and act against disorderly currency moves as needed, they said.

QE 3.0 looks like a dead giveaway.