Media Bias and the REAL US Small Business Sentiment Survey

The reason I do NOT trust mainstream media has been due to their innate tendencies to manipulate information to dovetail to their political biases.

The recent survey of US small businesses which exhibited signs of declining optimism is just one good example.

Writes the Wall Street Journal Blog, (bold emphasis added)

“Nobody knows the trouble I’ve seen.” That’s the song small-business owners around the U.S. are singing. But it isn’t regulation, tax policy or credit constraints causing the woes. It’s the lack of customers.

The widely watched survey of small businesses done by the National Federation of Independent Business shows optimism in August was the lowest since July 2010 when the recovery last hit a soft patch. The drop to 88.1 was the sixth consecutive decline — a record string of declines in the index.

What the author would like to present is that the woes of small businesses has been due to the lack of aggregate demand (lack of customers). Because from the Keynesian perspective this means that government intervention should take the place of the private sector, thus justifying more stimulus.

But it’s a totally different story when seen from the actual National Federation of Independent Business report.

Here is the NFIB Economic Trend Report for September 2011 with commentary from William C. Dunkelberg and Holly Wade (bold emphasis mine)

The August survey was mailed out as Congress and the Administration reached their “deal” to curb spending and reduce the debt/deficit problems. Had this been a convincing one to “Main Street,” confidence would have improved and, likely, also spending and hiring. But, NFIB’s confidence measure took a dive as did the University of Michigan’s consumer confidence Index which produced its lowest reading since 1980. In particular, it was expected real sales gains and expected business conditions in 6 months that plummeted in the NFIB report. These two components by themselves lowered the Index 2.1 points versus the total loss from all 10 components of 1.8 points. With such a dim outlook, owners are not going to do a lot of hiring or expanding.

Business expansion, the purchase of new equipment and vehicles and even hiring are “long term” investments. Most important to the decision process is the sales forecast, but against expected sales over the life of an asset, the owner must figure in labor costs, taxes, the cost of new regulations, financing costs and the like to decide whether or not an “investment” will pay off. This is one reason why “short term” stimuli don’t work. The planning horizon for the private sector is longer than the time to the next election!!! At this point, no one knows what their tax rate will be 6 months from now; no one knows what the health care will do to labor costs. Higher for sure, but by how much? Yes, the President suspended costly EPA rules that were going into effect, but you know that they will be back after the election if he wins

The NLRB is pushing the union agenda, card check, mandating owners to post notices of the right to unionize, interfering with Boeing’s business decision making (and the President’s Chief of Staff was on Boeing’s board when the South Carolina project was approved). Supporters of the Administration are pushing for another hike in the minimum wage and the new CEA chairman favors and wants a national sales tax to be imposed. It would take a book to itemize it all. Short-term fixes will not help, private sector decision makers think longer term – they do and they don’t like what they see, there is little clarity or certainty. Consumer spending is still a key factor and 9 of 10 people who want a job still have a job and would spend more if they were more confident about the future

And here is the NFIB’s press release calling for President Obama to repeal employer mandates (bold emphasis mine)

The National Federation of Independent Business is again pushing to repeal the employer mandate in the Patient Protection and Affordable Care Act (PPACA) on the heels of President Obama’s ask for bipartisan job creation. There is currently legislation in Congress to repeal the employer mandate, and the NFIB has long-supported and championed this important initiative.

“At the same time that President Obama is asking small-business owners to create jobs, his very health care law is preventing them from doing so,” said Susan Eckerly, Senior Vice President of Federal Public Policy at NFIB. “In fact, small-business owners will tell you that they are suffering a crisis of confidence right now that prevents them from expanding and hiring; how do they move forward with job creation when the unknown costs stemming from the policies of the past few years continue to stand in their way?

“Instead of advocating for more Washington spending bills that do little to help the situation that small-business owners are currently drowning under, Congress should immediately review and repeal some of the policies of the past few years that stand between an employer and an employee. Simply put, the repeal of the employer mandate is an important step toward sound, long-term job creation.”

Provisions of the health care law, such as the employer mandate, have left many small-business owners unable to expand operations as they brace for new costs and taxes coming out of Washington. The health care law requires that employers with 50 or more full-time equivalent employees offer “affordable, minimum essential [healthcare] coverage” beginning in 2014.

Lastly NFIB economist William Dunkelberg says in this video that in order to raise capital we need savings and not stimulus.

This has NOT been an issue of tax policy or government regulation? Duh!

So the Wall Street article either did not the read the report and instead arbitrarily replaced their conclusions over the NFIB's context, or has equivocated on the survey result of NFIB.

Nonetheless the biggest problem weighing on US small businesses, whom signifies as the largest employers of the US economy, generally can be described as “regime uncertainty” or the assault to private property rights through the legal and regulatory channels which heightens the economy’s risk climate and which subsequently reduces the incentive by entrepreneurs and business people to spend on investments required for job growth.

Regime uncertainty, best defined and enunciated by economist Robert Higgs, (as previously posted) as having to do (bold emphasis mine)

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.

Thanks to the internet we can weed out prevarications and or political propaganda.

Peter Schiff Schools US Congress: Government Spending Represents Shot of Monetary and Fiscal Heroin

Peter Schiff does a magnificent job lecturing Congress and their private sector ally in this testimony...

Part 1 On burdensome regulations

Part 2 On baneful impacts of government spending

Philippine Competitiveness: Marginal Improvements, More Required

From World Economic Forum (bold emphasis mine)

Up 10 places to 75th, the Philippines posts one of the largest improvements in this year’s rankings. The vast majority of individual indicators composing the GCI improve, sometimes markedly. Yet the challenges are many, especially in the areas at the foundation of any competitive economy, even at an early stage of development.

The quality of the country’s public institutions continues to be assessed as poor: the Philippines ranks beyond the 100 mark on each of the 16 related indicators. Issues of corruption and physical security appear particularly acute (127th and 117th, respectively). The state of its infrastructure is improving marginally, but not nearly fast enough to meet the needs of the business sector. The country ranks a mediocre 113th for the overall state of its infrastructure, with particularly low marks for the quality of its seaport (123rd) and airport infrastructure (115th). Finally, despite an enrolment rate of around 90 percent, primary education is characterized by low-quality standards (110th). Against such weaknesses, the macroeconomic situation of the Philippines is more positive: the country is up 14 places to 54th in the macroeconomic environment pillar, thanks to slightly lower public deficit and debt, an improved country credit rating, and inflation that remains under control.

In the other, more complex pillars of the Index, the Philippines continues to have a vast opportunity for improvement. In particular, the largely inflexible and inefficient labor market (113th) has shown very little progress over the past four years. On a more positive note, the country ranks a good 57th in the business sophistication category, thanks to a large quantity of local suppliers, the existence of numerous and well developed clusters, and an increased presence of Filipino businesses in the higher segments of the value chain. Finally, the sheer size of the domestic market (36th) confers a notable competitive advantage.

I would suggest that much of the aforementioned improvements may have been due to macro economic trends more than having been policy induced.

That said, the Philippines needs more economic freedom and less reliance on politics to improve trade competitiveness

Has Globalization been Responsible for US Economic Woes?

That’s the popular accusation thrown by progressives.

One example is from Jeffrey Sachs (Financial Times),

Globalisation has raised very serious adjustment challenges for the high-income world, and most high-income countries, notably the US, have failed to meet those challenges. The challenges include the loss of jobs and incomes of lower-skilled workers, a shift of manufacturing sector investments away from the transatlantic towards the emerging economies, a rise in energy costs occasioned by rapidly growing energy use in Asia, and an explosion of income and political power at the top of the income distribution, stoked by international tax havens and tax competition between jurisdictions.

Mr. Sachs essentially believes that political control must prevail over voluntary exchanges.

Here is the World Economic Forum’s (WEF) take on US competitiveness. (bold emphasis mine)

The United States continues the decline that began three years ago, falling one more position to 5th place. While many structural features continue to make its economy extremely productive, a number of escalating weaknesses have lowered the US ranking in recent years. US companies are highly sophisticated and innovative, supported by an excellent university system that collaborates admirably with the business sector in R&D. Combined with flexible labor markets and the scale opportunities afforded by the sheer size of its domestic economy—the largest in the world by far—these qualities continue to make the United States very competitive. On the other hand, there are some weaknesses in particular areas that have deepened since past assessments. The business community continues to be critical toward public and private institutions (39th).

In particular, its trust in politicians is not strong (50th), it remains concerned about the government’s ability to maintain arms-length relationships with the private sector (50th), and it considers that the government spends its resources relatively wastefully (66th). In comparison with last year, policymaking is assessed as less transparent (50th) and regulation as more burdensome (58th).

A lack of macroeconomic stability continues to be the United States’ greatest area of weakness (90th). Over the past decade, the country has been running repeated fiscal deficits, leading to burgeoning levels of public indebtedness that are likely to weigh heavily on the country’s future growth. On a more positive note, after having declined for two years in a row, measures of financial market development are showing a hesitant recovery, improving from 31st last year to 22nd overall this year in that pillar.

In sharp contrast to Mr. Sachs, the WEF sees that expanding government interventions (arms length relationships, transparency issues, burdensome regulations, fiscal deficits...I would add to that list minimum wage, Obamacare, taxes, various job mandates, unemployment benefits and regime uncertainty) as major factors responsible for the declining competitiveness of the US economy.

I would also place policies that trigger boom bust cycles and the growing welfare state (example record food stamps) and warfare state as major contributors too.

In short, by ignoring the ramifications of domestic policies and political developments, Mr. Sachs seems as confusing effects as the cause.

BRICs Mulls Bailout of the Eurozone

From the Reuters,

BRIC major emerging markets are considering ramping up holdings of euro-denominated bonds in a bid to help European countries mired in a sovereign debt crisis, newspaper Valor Economico reported on Tuesday, citing a monetary official.

Valor reported a decision could be made at a Sept. 22 meeting of finance ministers and central bank presidents from Brazil, Russia, India, China and South Africa in Washington.

Brazil's central bank declined to comment on the story.

This comes on the heels of China’s proposed investment on Italy, yesterday.

From Bloomberg/Businessweek, (bold emphasis mine)

China’s status as the fastest- growing major economy and holder of the largest foreign-exchange reserves lured another bailout candidate as Italy struggles to avoid a collapse in investor confidence.

Italian officials held talks in the past few weeks with Chinese counterparts about potential investments in the country, an Italian government official said yesterday, adding that bonds weren’t the focus. Finance Minister Giulio Tremonti met with Chinese officials in Rome earlier this month, his spokesman Filippo Pepe said by phone today, declining to say exactly when the talks took place or what was discussed.

Foreign Ministry spokeswoman Jiang Yu, asked about buying Italian assets, said Europe is one of China’s main investment destinations, without specifically mentioning Italy.

Italy joins Spain, Greece, Portugal and investment bank Morgan Stanley among distressed borrowers that turned to China since the 2007 collapse in U.S. mortgage securities set off a crisis that widened to engulf euro-region sovereign debtors. Stocks rose on the potential Chinese investment in Italy even as previous commitments failed to have a lasting impact…

Any Chinese purchases of euro-region debt to date haven’t produced a lasting cut in yield premiums for Greece, Portugal or Spain…

Any Chinese purchases of euro-denominated debt may help it diversify its reserves away from dollars. The biggest foreign owner of U.S. government debt has doubled its holdings of Treasuries in the three years through June to about $1.17 trillion.

China is playing a “white knight” role in assisting Europe and buying itself goodwill that will enable it to purchase more sensitive European assets such as technology companies, according to Stamford, Connecticut-based Faros Trading in a June report. The European Union still has an arms embargo on China, imposed after the Tiananmen Square massacre in 1989.

My comments:

1. The above exhibits the bailout mentality prevalent among policymakers. It’s easy to spend money or resources that aren’t theirs, since the costs of the ensuing political actions are distributed or externalized or borne by taxpayers. Policymakers are essentially unaccountable for their actions.

2. This also demonstrates the implicit desire of global governments to preserve the status quo, again at the expense of local taxpayers.

3. The transfer of resources from productive to non productive entities will have temporary palliative effects. Over the long term, this weakens the productive capability of productive enterprises, as well as, heightens the risk environment of the global economic and financial system. Besides, such transfers distort price signals and resource distribution in the marketplace which only increases systemic fragility.

And since we are dealing with non-productive entities, i.e. governments, for BRIC political leaders, the above represents a choice between domestic or international ‘political’ expenditures.

Again go back to #1.

4. BRIC governments will be a part of the consortium that will rescue elite bankers of the Eurozone and the US. This only reveals how widespread the welfare government-banking-central banking cartel is.

5. For China, part of the incentive to conduct a bail out is to project her growing geopolitical influence; yet a very expensive way to signal success.

China will also use this opportunity to squeeze political deals with economic repercussions. Like any political concession, these would likely benefit the client cronies and the political patrons of the incumbent Chinese government.

6. Diversification of currency reserves out of the US dollars has been attributed as one of the motives for the rescue. But why the Euro, whom like the US suffers from the almost the same disease?

Notice that the current developments signifies as a continuing crisis since 2008. Despite repeated trillions of US dollars or Euro spent on a seemingly expanding breadth of bailouts, there are hardly any convincing signs that this crisis will be over anytime soon. Much of the present political actions have been meant to 'kick the can down the road', which means the likelihood of even larger crisis ahead.

None of the above shows that the BRIC's rescue will matter. Again the thumbprints gleaned from the above would likely be more inflationism.

Bloomberg Editorial: European Central Bank needs to Inflate Aggressively

The Editors of the Bloomberg write, (bold emphasis mine)

In the short term, then, somebody other than German Chancellor Angela Merkel and French President Nicolas Sarkozy will have to take on the task of avoiding disaster. The only candidate is ECB President Jean-Claude Trichet. Unlike Merkel and Sarkozy, Trichet is not constrained by short-term political concerns, and the ECB has access to an almost unlimited resource: the power to print euros. It has already demonstrated a willingness to use that power by purchasing tens of billions of euros in Spanish and Italian bonds to keep those governments’ borrowing costs from skyrocketing.

In its simplest form, ECB intervention would entail the central bank buying Greek and other euro-area government bonds. To keep countries’ borrowing costs in check until European leaders come up with a more comprehensive solution, such purchases would go far beyond the 440 billion euros available to the European Financial Stability Facility (the euro area’s bailout vehicle). The ECB would be buying bonds from banks at an artificially high price, leaving the central bank to suffer losses if and when some of the debts are written off.

The ECB could also be more activist, spurring governments to restructure their debts and get their fiscal affairs in order. The central bank, for example, could pledge to buy newly issued bonds at full face value only if governments adopt credible rules to balance their budgets over the economic cycle; the bank would guarantee existing euro-area debt at only half its face value. Market prices for existing debt would quickly fall to what investors believed governments could actually afford to pay, putting them in a position to negotiate debt- relief deals with creditors. As with the issuance of euro bonds, this approach would require governments to recapitalize banks that take heavy losses as a result of debt restructurings.

To be sure, ECB intervention would come at great cost, including threatening to undermine the central bank’s inflation- fighting mandate. It would not substitute for a real fix to the euro area’s flaws. Europe is reaching a point, though, where aggressive ECB action could be the lesser of all possible evils.

Well, the above sentiment are emblematic of what I had earlier written about,

That’s because central banks can always surreptitiously work for the state’s political agenda camouflaged by the esoteric nature of the operations of central banking.

In the fitting and resonant words of Henry Ford,

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”

So while the fiscal side of governments may be scrutinized by a vigilant public over the perceived profligacy of a government, central banks actions can and will likely substitute for such a loss.

The call to action for more intensive short term fixes had been predicted by the great Ludwig von Mises (Theory of Money and Credit), [bold emphasis mine]

A government always finds itself obliged to resort to inflationary measures when it cannot negotiate loans and dare not levy taxes, because it has reason to fear that it will forfeit approval of the policy it is following if it reveals too soon the financial and general economic consequences of that policy. Thus inflation becomes the most important psychological resource of any economic policy whose consequences have to be concealed; and so in this sense it can be called an instrument of unpopular, i.e., of antidemocratic, policy, since by misleading public opinion it makes possible the continued existence of a system of government that would have no hope of the consent of the people if the circumstances were clearly laid before them. That is the political function of inflation. It explains why inflation has always been an important resource of policies of war and revolution and why we also find it in the service of socialism. When governments do not think it necessary to accommodate their expenditure to their revenue and arrogate to themselves the right of making up the deficit by issuing notes, their ideology is merely a disguised absolutism.

So goes part of the political process aimed at conditioning the public for the acceptance of the ideology of ‘disguised absolutism’

Cartoon of the Day: Social Security and the Ponzi Scheme

Cartoon by Mike Lester

An apropos quote, which explains the cartoon above comes from Econolog’s Professor David Henderson

There are two main differences between Ponzi's original scam and the Social Security system. The first difference is that Social Security is run by government and, whatever its constitutionality and its questionable ethics, is legal. The second difference follows from the first: Whereas Ponzi had to rely on suckers, the government can and does use force.

Global Equity Market Performance Update: ASEAN Equity Markets as co-Leaders

ASEAN equity markets are among the world’s best performers.

Below is an updated year to date chart from Bespoke Invest

Indonesia, the Philippines and Thailand has thus far ranked 5th, 7th and 10th respectively, while Malaysia ranked 18th has been down by 4.78%, a notch below another ASEAN member Vietnam (down –4.48%).

Of the 78 nations on the roster, there are only 11 gainers, whereas 22 nations, mostly from the Eurozone, are in a bear market.

Clearly global markets have now been biased to the downside…

…where 6 of the top 20 largest world equity markets have also been treading on bear territory.

The distribution of losses are almost similar to the broader picture, but the gains have not been represented since the latter are from emerging and frontier markets.

To add, the US and Canada appears to outperform the average, even if they are likewise enduring losses.

In my view, outside a real recession, and with major central banks pumping money furiously, the current complexion, characterized by the dreary outlook, will likely improve going to year end.

Learning from the Financial Mistakes of Sports Celebrities

Ron Lieber of the New York Times offers 3 lessons to the financial blunders of sports celebrities (bold highlights mine)

Michael Vick will take the field on Sunday wearing the uniform of the Philadelphia Eagles, who took him in after his imprisonment for helping to run a dogfighting ring.

But thanks to his personal bankruptcy filing after he went to jail, he will also be playing for BMW Financial Services, Dodson Pest Control, Summertime Pool and the Monticello Woods Homeowners Association. They are not sponsors. Instead, they and many others have a claim on his future earnings.

Bankrupt professional athletes are a sad fixture on the sports scene, and Mr. Vick isn’t even alone among quarterbacks who have hit the financially injured reserve list. The former Cleveland Browns star Bernie Kosar and the current New York Jets backup, Mark Brunell, have had their brushes with bankruptcy, too.

Sports stars may or may not mess up more often than the average person who earns a lot of money really fast, but their troubles seem outsize because of their fame and the pathetic schemes they fall for. The stakes are high for football players in particular, since their average professional career lasts just four seasons or so and may leave lingering injuries and the health costs or physical limitations that come with them.

Mr. Vick is the rare athlete who is getting a second chance. His lucrative new contract with the Eagles should allow him to pay all of his creditors in full.

Read the rest here

Mr. Lieber’s lessons can be summed up as: avoiding “questionable schemes” of investments, limiting “outsize financial gestures” or largesse and seeking “professional financial help”

It is true that throwing money to businesses or to financial assets, where insufficiency of knowledge or comprehension to the undertaking dominates, does not represent investments, but gambling.

Also, it takes a lot of introspection to manage the ego. This would be the most difficult part, self-control. As Confucius once said, he who conquers himself is the mightiest warrior.

And lastly, professional help represents an option but not a prerequisite.

That’s because as I have previously stated

financial success depends on a simple equation:

Income – Expense = deficit or surplus

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

It would need or take only common sense and self-discipline to observe this rule.

And common sense says that self-education should account for a vital part of the action to achieve self-discipline or emotional intelligence.

Only after financial goals and limitations have been established, is when the need for professional help arises. That’s because carte blanche delegation of personal finances would signify as high risk proposition, for the simple reason that a fund manager’s incentives may not align with those of the client.

George Carlin on Airport Secuirty : One More Way of Reducing Your Liberty

(hat tip: Lew Rockwell Blog)

Information Age: How Blogs Transforms Attitudes

From a paper written by David McKenzie and Berk Özler of the World Bank

There is a proliferation of economics blogs, with increasing numbers of economists attracting large numbers of readers, yet little is known about the impact of this new medium. Using a variety of experimental and non-experimental techniques, this study quantifies some of their effects.

First, links from blogs cause a striking increase in the number of abstract views and downloads of economics papers.

Second, blogging raises the profile of the blogger (and his or her institution) and boosts their reputation above economists with similar publication records.

Finally, a blog can transform attitudes about some of the topics it covers

(hat tip Mark Perry)

My take:

Blogs offer alternative channels to access to information and knowledge.

Blogs provide unofficial channels of education.

Blogs challenges the vertical flow of information which mainstream institutions have been based upon.

Blogs democratizes self-expression and the conveyance of information and knowledge.

Blogs are where ideas mate and procreate.

Blogs have signified as instruments of free markets in the realm of idea markets.

Phisix-ASEAN Equities: Staying Afloat Amidst Global Financial Market Hurricane

The chart below is an update of the current outperformance of the Philippine Phisix (and of ASEAN bourses) relative to global bourses.

Over the past two years, the Phisix (PSEC) remains on an uptrend while equity indices of developed economy bourses as represented by the US S&P 500 (SPX), the European Stoxx 50 (stox50) and the iShares MSCI All Country Asia ex Japan Index Fund (AAXJ) seems to have broken down.

The European Stoxx50 technically has segued into a bearmarket, down by 24% from the February 2011 peak, while the US S&P (-15%) and the MSCI Asia (-16%) seems at the verge of gradating into one. A bearmarket is defined as a downturn of 20% or more in multiple broad market indexes, according to investopedia.com[1]

Global equity markets have essentially been severely dampened by the reemergent and intensifying debt crisis in the Eurozone as contagion risks escalates.

Chart from Danske Bank

The bond spreads of Greece relative to Germany has widened extensively (left window). Credit Default Swaps have now priced Greece bonds with a 92% probability of a default[2]. CDS prices of European financials have eclipsed the 2008 highs[3] (right window). This means that the financial market stress levels at the Eurozone has been far worse than the Lehman episode in 2008.

Adding to the current woes has been the conventional wisdom that sees heightened recession risks for the US.

So far, the market turbulence overseas has had modest impact on the ASEAN equity markets.

Over the short term or during past two months, the correlation of Phisix and ASEAN indices with that of distressed global equity markets have evinced formative signs of tightening or reconvergence.

As I have been saying, divergences in market performance may persist for as long as a global recession is not in the horizon.

One must remember that decoupling signifies as an unproven thesis that can only be validated during a full-blown crisis. It’s a theory that I have been sceptical of, considering the concurrent interconnectedness and interdependence of global economies.

To prove this point, the degree of globalization or interconnectedness with the world, as measured by the merchandise trade as % to GDP[4], Malaysia and Thailand seems far more exposed to a global recession and or contagion risk compared to the Philippines and Indonesia.

One would note that the ordinal rankings of the year-to-date performances of ASEAN equity markets (as of Friday’s close) have partially reflected on such dynamic, where less globally exposed Indonesia and the Philippines has outclassed Thailand and Malaysia

But this variable alone does not convincingly or entirely explain the conspicuous aberration of the ASEAN’s performance relative to global equities or even among her Asian peers. For instance, India has the lowest merchandise trade compared to the ASEAN majors but her equity market is down 17.7% year-to-date.

Chart from US Global Investors/BCA Research

Of course there are other external links such as remittances and investment (capital account) flows to consider. These, as well as, many domestic variables as savings and investment responses to current fiscal and monetary policies, degree of economic freedom and etc… For instance, government expenditures as a ratio of GDP[5] remain low for the Philippines relative to her developed economy contemporaries and major Emerging Market peers. And where the financial markets have been attuned or fixated to debt levels and government spending, such relatively ‘better’ standings may have also been one of the many factors that has contributed to the asymmetric outcomes in global equity markets.

Although we have yet to see how the Phisix and ASEAN markets will respond to another major bout of developed market equity selloffs—the US Dow Jones Industrials -2.69%, S&P 500 -2.67% and European equity markets Stoxx 50 -4.15%, UK’s FTSE -2.35%—as seen last Friday.

The point is that there will be pockets of divergent market actions considering the nuances in the political responses by global authorities to the present chain of financial market imbroglios. This accentuates the point that today’s market conditions are manifestly dissimilar to that of 2008.

For instance, money supply growth in the US is at double digit rates or 15.6% annualized (three months through July) while the Eurozone is printing money at a significantly much slower pace at 2.1% annualized M2 over the same period[6].

So the present convulsions the Eurozone has been enduring can be traced to the ‘less’ aggressive ‘sheepish’ approach applied by the European Central Bank (ECB), the political divisions over monetary policies (as manifested by the resignation of ‘inflation hawk’ ECB Executive Board Member Juergen Stark[7] which might pave way for the ECB’s more aggressive stance towards inflationism) and capital adequacy regulations[8]

Nonetheless, given today’s vastly distorted marketplace, in times of heightened volatility, market correlations have the tendency to tighten or converge as the US equity markets[9] have been showing[10]. But again I wouldn’t bet on a 2008 scenario.

Resilient Phisix Equals a Sturdy Philippine Peso

One good way to assess general sentiment is to look at how market internals and the Philippine Peso have been playing out in the face of the current mercurial climate.

The resilience in the domestic equities has palpably been reflected on the Philippine Peso (left window) and Asian currencies as represented by the ADXY or the Bloomberg JP Morgan Asian Dollar Index (right window).

Even as there have been signs of mass liquidations abroad, so far, foreign investors have not been in a stampede mode out of Philippine assets.

The weekly ‘averaged’ net foreign trade hardly reveals of signs of heightened distress. This has, so far, worked in favour of the Philippine Stock Exchange. Foreign trades have accounted for a little over 1/3 of the current traded peso based volume.

True, Friday saw big declines in Asian currencies as the US dollar fiercely rebounded over a broad number of major currencies. This US dollar rally may see an extension this Monday (unless there will be declarations for major actions by US and European policymakers over the weekend).

However, the Peso closed relatively little changed on Friday at 42.49 (against the US dollar) compared to Thursday’s close at 42.47. The Peso was only been slightly lower (.8%) from last week at 42.14.

So far, the Peso and the Phisix has managed to brush off major shocks from developed world economies.

Rotational Process Means Market Consolidation

Market sentiment has also been manifesting signs of consolidation, through a rotational process instead of deteriorating market breadth.

Weekly ‘averaged’ Advance-Decline spread has been rangebound since the start of 2011. In seeming defiance of the Phisix which registered a 1.07% loss this week, market breadth appears to be improving from the troughs of the week of August 7^th.

So far, the worst conditions of August had even been far better than the conditions during the Arab Spring-Japan Calamity last February until March.

Also last week’s market consolidation phase seems to bring about my long held prediction that there would be a rotation out of the severely overbought mining sector.

The property and industrial sectors posted slight gains over the week as the financials, mining and services weighed on the Phisix composite.

The variances in sectoral performances corroborate the signals emitted by the market internals as explained above. In short, the decline of the Phisix does not imply for broad market corrosion.

On a year to date basis, while the mining sector remains the dominant leader, the gains of the Phisix has been partly shaped by miniscule gains of the financials and the holdings sectors, whereas the industrials, property and the service sectors have been laggards.

Consolidation and rotation has been principal theme of the current market actions.

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[1] Investopedia.com Bear Market

[2] See Greece’s Welfare State at Death Throes, Germany Prepares to Rescue Banks,

[3] Danske Bank Another week with the focus on Greece Weekly Focus, September 9, 2011

[4] World Bank World Development Indicators Merchandise Trade, Google Public Data Explorer

[5] Holmes, Frank Investor Alert - China Fears Much Ado About Nothing US Global Investors, September 9, 2011

[6] Wenzel Robert, The Just Released G7 Communique versus Reality Economic Policy Journal, September 9, 2011

[7] Reuters.com Top German quits ECB over bond-buying row, September 9, 2011

[8] See Why Capital Standard Regulations Will Fail, August 22, 2011

[9] See Applying Emotional Intelligence to the Boom Bust Cycle, August 21, 2011

[10] See More Evidence of Boom Bust Cycles Driving Equity Market Prices, September 10, 2011

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.

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[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

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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.