Gold Prices Climbs the Wall of Worry, Portends Higher Stock Markets

The Occupy Wall Street crowd sees this as a problem with capitalism. I believe that they are correct in their target, but wrong in their diagnosis. This is not a problem of capitalism since Wall Street is a practitioner of monetarism. A real capitalist system works through real intermediation creating positive opportunities for productive enterprises (scarce money is actually vital here). Our current system of repo-to-maturity and gold leasing is nothing but empty monetarism’s habit of regularly forcing the circulation of empty paper. And when the system begins to doubt itself, as it did in 2008, the answer is always about finding a way to restart the fractional maximization process yet again, which means disguising the real risks inherent to that process. There is no real mystery as to why prices and values have seen such a divergence, and why that is a big problem to a system that depends on appearances. Jeff Snider

Dramatic fluctuations out of the interminable nerve racking geopolitical developments continue to plague global financial markets.

Yet despite the seemingly dire outlook, major equity market bellwethers seem to be climbing the proverbial wall of worry.

The price trend of gold, for me, serves as a major barometer for the prospective direction of stock markets, aside from, as measure to the current state of monetary disorder.

Gold’s significant breakout beyond the 50-day moving averages implies that gold’s bull run have been intact and could reaccelerate going to the yearend.

Thus, rising gold prices should likely bode well for global stock markets.

Seasonal Bias Favors Gold, Gold Mining Issues and Stock Markets

It is important to point out that gold’s statistical correlation with global stock markets may not be foolproof and or consistently reliable as they oscillate overtime. In addition, gold has no direct causal relationship with stock markets.

From a causal realist standpoint, the actions of gold prices shares the same etiological symptoms with stock markets—they function as lighting rod to excessive liquidity unleashed by central banks looking to ease financial conditions for political goals.

As shown above, all three major bellwethers of the US S&P 500 (SPX), China’s Shanghai index (SSEC) and the Euro Stox 50 (STOX50) seem to be in a recovery mode. This in spite of last week’s still lingering crisis at the Eurozone.

While I may not be a votary of statistically based metrics, seasonal patterns, mostly influenced by demand changes based on cultural factors, could have significant effects when other variables become passive.

In terms of gold prices, higher demand for jewelries from annual holiday religious celebrations, e.g. India’s Diwali and the wedding season, Christmas Holidays and preparations for China’s 2012 New Year of the Dragon[1], has statistically produced positive and the best returns of the year.

‘Statistical’ bias for a yearend rally in gold mining stocks (see lower right window) reveals that monthly returns for November has the largest gain of the year, with a potential follow through to December.

In addition, the stock market also has a seasonal ‘statistical’ flavoring with a potential yearend rally supported by additional gains from the first quarter as shown in the above chart by Bespoke Invest using the Dow Jones Industrials computed over 100 years in 2010[2]

Distinctions in the monthly returns involves many factors such as the tax milestones, quarterly "earnings season", "window-dressing" on the part of fund managers, index-rebalancing periods or many more[3] but these should never be seen as fixed variables as conditions ceaselessly changes.

Again statistics only measures and interprets history, but most importantly statistics does not take in consideration the actual operations of prospective human actions[4]. For instance, statistics can’t tell if policymakers will raise interest rates or hike taxes or print money and their potential effect on the markets.

Deeply Entrenched Bailout Policies—Globally

Nevertheless, given the current political climate, gold prices will mainly be driven by changes in the political environment. Seasonal effects will most likely be enhanced by political factors than the other way around.

In China, policymakers have reportedly been shifting towards an easing stance meant to address the current funding squeeze being encountered by small businesses.

Lending quotas of some China’s banks have reportedly been increased, where new lending may exceed 600 billion yuan ($94 billion) this month from 470 billion in September reports the Bloomberg[5].

These actions could have been driving the current recovery of the China’s Shanghai Index.

In Greece, political impasse has reportedly forced Greece Prime Minister George Papandreou to call for a referendum which initially rattled global financial markets[6].

In reality, Mr. Papandreou’s ploy looks like a brilliantly calculated move resonant of Pontius Pilate’s washing of his hand on the execution of Jesus Christ[7].

Given the recent poll results[8] which shows that the Greeks have not been favorable to government’s austerity reforms or bailouts but have also exhibited fervid reluctance to exit from the Eurozone (since Greeks has been benefiting from Germans), PM Papandreou saw the opportunity to absolve himself by tossing the self-contradictory predicament for the public to decide on.

In addition, realizing the potential risks, Germany’s Angela Merkel and France’s Nicolas Sarkozy interceded to prevent a referendum from happening, which I suppose could also be part of PM Papandreou’s tactical maneuver.

From these accounts, a vote of confidence over PM Papandreou’s government was held instead, where by a slim margin, PM Papandreou prevailed. The parliamentary victory thus empowers him to reorganize and consolidate power through a supposed Unity government[9].

In Italy, popular protests have been mounting against Prime Minister Silvio Berlusconi supposedly for his failure to convince investors and European allies that Italy can trim the Euro-region’s second biggest debt, which saw the Italy’s 10 year bond spiked to record high 6.4% on Friday[10].

PM Berlusconi recently rejected an offer of aid from the IMF, but instead, requested the multilateral institution to monitor her debt cutting efforts.

Yet given the current political maelstrom, European Central Bank (ECB) president Mario Draghi, who is also an alumnus of Goldman Sachs and who has just recently assumed office from Jean Claude Trichet surprised the financial markets with an interest rate cut citing risks of a Greece exit from the EU and from an economic slowdown brought about by the current financial turmoil[11].

Mr. Draghi’s actions seems like a compromise to the Global Banking cartel[12] where the latter has clamored for the ECB to backstop the bond markets by active interventions through quantitative easing (QE).

Obnoxious partisan politics seem to have provided a veil or an excuse for the ECB’s widening use of her printing press.

Yet ironically, attempts to portray the ECB as imposing disciplinary measures[13] on profligate crisis affected governments seem like a comic skit in the Eurozone’s absurd political theatre. The public is being made to believe that one branch of government intends to provide check and balance against the other.

In truth, the Euro-bank bailouts reallocates the distribution or transfers resources from the welfare government to the ECB and the Banking cartel in the hope that by rescuing banks, who functions as the major conduit in providing access to funds for governments, the welfare state will eventually be saved.

Yet instead of a check and balance, both the ECB and EU governments have been in collusion against EU taxpayers and EU consumers, to preserve a fragile an archaic government system that seems in a trajectory headed for a collapse.

The ECB’s asset purchases (upper right window) have been driving up money supply (upper left window) even as the EU’s economy seems faced with growing risks of recession—as evidenced by floundering credit growth in the EU zone. Yet contrary to Keynesians obsessed with the fallacious liquidity trap theory, inflation rate has remained obstinately above government’s targets which allude to the increasing risks of stagflation for the EU.

And further increases in inflation rates will ultimately be reflected and vented on the bond or the interest rate markets. These should put to risk both the complicit governments and their beleaguered financiers—the politically privileged banking system backed by the central banks—whom are all hocked to the eyeballs. Rising interest rates likewise means two aspects, dearth of supply of savings and diminishing the potency of the printing press. Yet to insist in using the latter option means playing with fires of hyperinflation.

And like in the US, the welfare warfare states have continuously been engaging in policies that would signify as digging themselves deeper into a hole.

Proof?

Inflationism as Cover to the Derivatives Trigger

It’s also very important to point out anew[14] that the US banking and financial system are vastly susceptible to the developments in the Eurozone. In short, US financial system has been profoundly interconnected or interrelated with the Euro’s financial system

Exposure of US banks to holders of Greek, Portuguese, Irish, Spanish and Italian debt in the first semester of 2011 has jumped by $80.7 billion to $518 billion mostly through credit default swaps where counterparty risks from a default could ripple through the US banking sector.

Yet about 97% of the US derivative exposure has been underwritten by JPMorgan, Morgan Stanley, Goldman Sachs, Bank of America Corp. and Citigroup Inc. The estimated total net exposure by the five government protected “too big too fail” banks to the crisis affected PIIGS are at measly $45 billion.

However, part of the hedging strategy by these banks and other financial institutions have been to buy credit insurance or Credit Default Swaps (CDS) of their counterparties which have not been included as part of these estimates. In addition, counterparties have not been clearly identified.

Because of this, European leaders have reportedly been extremely sensitive as not to trigger default clauses in CDS contracts that may put banks across two continents at risk.

Ironically, the institution that decides on whether debt restructuring triggers CDS payments, the International Swaps & Derivatives Association, or the ISDA, has these biggest government’s cartelized private banks sitting on the company’s boards.

So the big 5 essentially calls the shots in the derivatives markets or on when default clauses are triggered and when it is not.

At the end of the day, this eye-catching quote from the Bloomberg article[15] from which most of the discussion have been based on, seems to capture the essence of the policy direction today’s political system

U.S. banks are probably betting that the European Union will also rescue its lenders, said Daniel Alpert, managing partner at Westwood Capital LLC, a New York investment bank.

“There’s a firewall for the U.S. banks when it comes to this CDS risk,” Alpert said. “That’s the EU banks being bailed out by their governments.”

The point to drive at is that both governments, most likely through their respective central banks, will continue to engage in serial massive bailout policies to avert a possible banking sector meltdown from an implosion in derivatives.

Such dynamics lights up the fuse that should propel gold prices to head skyward. And the consequent massive infusion of monetary liquidity will only buoy global stock markets higher, for as long as inflation rates remain constrained for the time being.

Remember, central banks have used stock markets as part of their tool kit to manipulate the “animal spirits”[16] from which they see as a key source of economic multiplier from the misleading spending based theory known as the “wealth effect”, a theory that justifies crony capitalist policies.

Policies that have partly been targeted at the stock market and mostly at the preservation of the current unsustainable political system are being funneled into gold and reflected on its prices, which has stood as an unintended main beneficiary from such collective political madness.

Yet rising gold prices shows the way for the stock markets until the inflation rates hurt the latter. But again, not all equity securities are the equal.

I would take the current windows of opportunities to accumulate.

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[1] Holmes Frank Investor Alert - 3 Drivers, 2 Months, 1 Gold Rally?, November 4, 2011, US Global Investors

[2] Bespoke Invest Seasonality Does Not Favor Stock Investments In February, February 1, 2011 Decodingwallstreet.blogspot.com

[3] Stockwarrants.com Seasonality

[4] See Flaws of Economic Models: Differentiating Social Sciences from Natural Sciences, November 3, 2011

[5] Bloomberg.com China Easing Loan Quotas May Cut Economic Risks, Daiwa Says, November 4, 2011

[6] See The Swiftly Unfolding Political Drama in Greece, November 2, 2011

[7] Wiipedia.org Pontius Pilate

[8] Craig Roberts, Paul Western Democracy: A Farce and a Sham, November 4, 2011, Lew Rockwell.com “A poll for a Greek newspaper indicates that whereas 46% oppose the bailout, 70% favor staying in the EU, which the Greeks see as a life or death issue.”

[9] See Greece PM Papandreou Wins Vote of Confidence, November 5, 2011

[10] Bloomberg.com Thousands Rally in Rome, Pressing Italy’s Berlusconi to Resign Amid Crisis, November 6, 2011

[11] See ECB’s Mario Draghi’s Baptism of Fire: Surprise Interest Rate Cut, November 4, 2011

[12] See Banking Cartel Pressures ECB to Expand QE, November 3, 2011

[13] Reuters Canada ECB debates ending Italy bond buys if reforms don't come, November 5, 2011

[14] See US Banks are Exposed to the Euro Debt Crisis, October 8, 2011

[15] Bloomberg.com Selling More CDS on Europe Debt Raises Risk for U.S. Banks, November 1, 2011

[16] See US Stock Markets and Animal Spirits Targeted Policies, July 21, 2010

Phisix Should Outperform as Global Markets Improve

And right here let me say one thing: After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I've known many men who were right at exactly the right time, and began buying and selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine - that is, they made no real money out of it. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money. It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance. Jesse Livermore

Mechanical chartists will consider the present environment a sell.

That’s because the Phisix has joined her ASEAN neighbors (MYDOW- Malaysia, IDDOW- Indonesia and Thailand-SETI) into a transition towards the bearish “death cross”—where long term moving averages have gone above the short term moving averages.

As an aside, it’s a heresy for fanatic chart practitioners to know the fact that trading based on mechanical charting usually leads to needless churning, which benefits brokers, commissioners (like me) and governments (taxes) more than investors, due to the accumulated transaction costs that only hampers or diminishes on investor’s returns. Who cares about truth, anyway? For most people, belief is about social acceptance than of reality.

Never mind if trying to catch tops and bottoms of highly dynamic price actions of each securities driven by variable human choices under unique circumstances would seem like fictional heroine Alice—of the famed Charles Lutwidge Dodgson known under the pseudonym Lewis Carroll’s fable—who tries to ascertain if Wonderland was a reality.

To quote the legendary Jesse Livermore via Edwin Lefevre through the classic Reminiscences of a Stock Operator[1]

The reason is that a man may see straight and clearly and yet become impatient or doubtful when the market takes its time about doing as he figured it must do. That is why so many men in Wall Street, who are not at all in the sucker class, not even in the third grade, nevertheless lose money. The market does not beat them. They beat themselves, because though they have brains they cannot sit tight.

Feeding on emotional impulses and cognitive biases only deprives market participants of the needed regimen of self-discipline and importantly narrows a participant’s time preference in conducting risk reward analysis in the silly pursuit of short term “frequent” gains but at the risks of the magnitude of greater risk.

Again the legendary Jesse Livermore

Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can catch all the fluctuations. In a bull market your game is to buy and hold until you believe that the bull market is near its end. To do this you must study general conditions and not tips or special factors affecting individual stocks.

It is important for market practitioners to realize that what counts is the magnitude of the effects of one’s action than of its frequency[2].

Frequency will mostly be about luck while magnitude will account for the impact of patience, discipline and mental rigor.

Going back to the big picture, given that the developed economies has once again embarked on undertaking policies to substantially ease financial conditions, which this time includes developed markets periphery and some emerging markets, e.g. Australia recently joined Turkey, Brazil and Indonesia to cut policy rates[3], we may be looking at the next leg of the boom phase of the present bubble cycle.

Outside another round of exogenous based political spooks, market internals in the Phisix appear to be showing meaningful signs of improvements.

While volume still lacks the vigor of a strong recovery, possibly due to the sluggishness brought about by the extended holiday from an abbreviated trading week, signs like average number of trades (computed on a weekly basis) seem to be holding ground and showing incremental improvements.

To consider this week’s losses in the Phisix seem to reflect on the weakness of the global markets.

My interpretation of last week’s action was one of natural profit taking following a strong push from the previous weeks. The correction of which only used the Greece political circus as an excuse to take profits.

For instance, the US Dow Jones Industrials saw a winning streak of 5 consecutive weeks which accrued gains of 12.92%, but gave back 2.03% this week for a retracement of 15% from the previous gains.

The Phisix seem to reflect on the same motions, the local benchmark racked up 11% over the same 5 week period where US markets went up, but lost 1.43% this week equivalent to a 13% retracement.

Yet over the broad market, except for the financial sector which was largely unchanged, the mining sector led the losses which weighed mostly on the local composite bellwether.

And this week’s losses have hardly dinted on foreign sentiments, which as stated last week, the present recovery appears to be accelerating.

Again one of the major surprises has been that foreign investors has hardly been affected even by the September shakeout.

Finally, the Peso’s performance again appear to reflect on the actions of the Phisix.

The gap generated the other week seeems as being filled, using the current profit taking mode as pretext.

Nevertheless, since the outperformance and the momentum by ASEAN bourses seem to have been spoiled by the recent exogenous contagion, an easing financial environment will likely spur the next leg up, barring unforeseen circumstances.

My bet is that the Phisix’s ‘death cross’ along with the ASEAN counterparts are likely false signals that will become whipsaws soon, another failed chart pattern.

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[1] Gold-eagle.com Wisdom of Jesse Livermore 6

[2] See Dealing With Financial Market Information, February 27, 2011

[3] FT.com Growth fears prompt Australian rate cut, November 1, 2011

Client Accounts Transfer from MF Global Holdings may trigger Market Volatility Next Week

Transfers of client accounts from bankrupt futures brokerage MF Global Holdings to new brokers may cause some market volatility next week due to possible liquidations on margin calls.

From FoxBusiness.com (bold emphasis mine)

--Ex-customers of MF Global are gaining access to frozen accounts moved to new clearing house

--Some traders fear new margin calls after the move

--Not all money backing current market positions moved with accounts

Some former customers of MF Global Inc. (MFGLQ) rushed Friday to sort through newly unfrozen funds--and awaited word on whether they will have to put up additional capital to back their market bets.

Friday, CME Group Inc. (CME) transferred about $1.45 billion in 15,000 customer accounts from MF Global's U.S. brokerage--roughly 30% of the 50,000 accounts to be moved--to new clearing firms. A group of 10 clearing firms received the bulk transfers throughout the day Friday and began contacting clients about the accounts.

For many of those new clients, the process was a nerve-wracking experience. Some said they were still unsure of when they would gain access to an active account, which is required to resume trading. Others who gained access rushed to sell some positions in order to meet what they expect will be margin calls due to bets that have turned against them over the past week.

For all open bets in the commodities markets, traders need to put up cash to back the position, known as posting margin. In order to keep holding those bets if the contract falls in value, traders are required to post additional cash with their clearing firm.

But confusion still reigns over much of the market and traders are unsure whether their new clearing firms will require them to post additional margins on their trades.

Reuters estimates that some $1 billion will need to be raised next week (bold emphasis added)

There was little sign yet of mass liquidations analysts feared may ensue as traders rush to raise up to $1 billion in additional margin with new brokers.

But with margins due Friday evening or later, forcible liquidation looming on Monday morning, and thousands of accounts still unsettled, dealers were jittery.

"It seems that without MF (Global) in there...no one wants to be held with big positions, if and when these accounts are allowed to trade. It's better to have a lighter position on, in the event that you get a move in the markets," Bill Raffety, senior analyst for futures brokerage Penson Futures in New York, said of the day's light trade in soft commodity markets.

MF Global holdings chief Jon Corzine, a former chief of Goldman Sachs and former governor of New Jersey, who resigned yesterday without his $12.1 million severance pay, made bet a huge bet in Euro debts in the belief that “Europe wouldn’t let these countries go down”, which obviously boomeranged.

Mr Corzine was apparently undone by his extreme faith in governments to deliver miracles and possibly on expectations of a MF Global bailout—both of which did not occur.The Bank of England (BoE) says that MF Global "posed too small a risk to financial stability to merit a bailout" (Bloomberg)

To add, many of major market participants, like Mr. Corzine, have been positioning based on expectations of the directions of political actions from policymakers and their possible ramifications. This validates my view of how politicized financial markets have been.

Yet our fundamental difference; Mr Corzine trusted governments too much (and was betrayed) while I am too deeply skeptical of each and every actions made by politicians and their wards.

Cuba Opens Door to Capitalism

In a world of bizarre contradictions, while Wall Street Occupy protestors hanker for socialism—perhaps Cuban style—Cuba appears to be inching her way towards Capitalism by laying the seeds of private property.

From the New York Times,

Cuba announced a new property law Thursday that promises to allow citizens and permanent residents to buy and sell real estate — the most significant market-oriented change yet approved by the government of Raúl Castro, and one that will probably reshape Cuba’s cities and conceptions of class.

The new rules go into effect on Nov. 10, according to Cuba’s state-run newspaper, and while some of the fine print is still being written, the law published on Thursday amounts to a major break from decades of socialist housing. For the first time since the early days of the revolution, buyers and sellers will be allowed to set home prices and move when they want. Transactions of various kinds, including sales, trades and gifts to relatives by Cubans who are emigrating, will no longer be subject to government approval, the new law says.

“To say that it’s huge is an understatement,” said Pedro Freyre, an expert in Cuban-American legal relations who teaches at Columbia Law School. “This is the foundation, this is how you build capitalism, by allowing the free trade of property.”

Cuban officials would disagree; they argue that they are carefully protecting socialism as they move toward economic reform, and the new law includes some provisions that seem aimed at controlling both speculation and the concentration of wealth. Owners will be limited to two homes (a residence and a vacation property) and financing must go through Cuba’s Central Bank, which will charge fees, which have not been determined. And a tax of 8 percent will be split by the buyer and seller.

Nonetheless, experts and Cuban residents — who have been expecting the law for months — say the law’s implications are likely to be far-reaching. In a country defined by limited change and pent-up demand for freedom of all kinds, they argue, the law will probably open a Pandora’s box of benefits and risks.

Of course politicians will hardly admit to their policy failures. Nonetheless, Cuba’s latest market based reforms will likely be modeled after China’s communism draped with capitalism.

To quote the great Ludwig von Mises in Liberalism (p.87),

The continued existence of society depends upon private property, and since men have need of society, they must hold fast to the institution of private property to avoid injuring their own interests as well as the interests of everyone else. For society can continue to exist only on the foundation of private property. Whoever champions the latter champions by the same token the preservation of the social bond that unites mankind, the preservation of culture and civilization. He is an apologist and defender of society, culture, and civilization, and because he desires them as ends, he must also desire and defend the one means that leads to them, namely, private property.

(hat tip Justin Ptak Mises Blog)

Greece PM Papandreou Wins Vote of Confidence

From the Bloomberg,

Prime Minister George Papandreou won a confidence vote after offering to form a government of national unity that may lead to him stepping down as he sought to reach an accord on European aid needed to avert default.

The premier said he’ll meet with President Karolos Papoulias to discuss his proposal to create a unity government. Main opposition leader Antonis Samaras rejected the offer and called for elections.

“I ask for a vote of confidence tonight so that we can secure the course of this country,” Papandreou said. “I have already communicated with the president of the republic to inform him that I intend to proceed with consultations for a government of cooperation.”

Papandreou’s offer caps a tumultuous week that started with him securing a second bailout from the European Union then roiling markets by unilaterally deciding to put the terms of that rescue to the Greek people in a vote. The premier must heal political divisions to secure agreement on the aid package before Greece runs out of funds next month.

PM Papandreou’s win on a slim margin (153 to 145) only shows how divisive Greek politics has been. The offer by the PM for a conciliatory gesture to ‘step down’ could have been a mawkish bait to garner votes.

And the formation of a ‘Unity government’ whatever that means will likely remain elusive, as the Greece political class seem to have different interests. Nevertheless their common interest is to maintain their privilege of free lunches, the only problem is who and how will these be financed.

The political maneuverings and the bizarre twists manifests of the ongoing political circus in Greece.

I doubt if this political smoke and mirror act will prevent Greece from a default. Yet like almost every political act, this has been meant to buy time.

Wealthy Chinese Consider Emigration

Many say that the 21^st Century belongs to China.

While I certainly hope that China will, I am not entirely convinced, especially not if the Chinese themselves seem distrustful of their nation’s future.

This bleak news from the Wall Street Journal, (bold highlights mine)

More than half of China's millionaires are either considering emigrating or have already taken steps to do so, according to a survey that builds on similar findings earlier this year, highlighting worries among the business elite about their quality of life and financial prospects, despite the country's fast-paced growth.

The U.S. is the most popular emigration destination, according to the survey of 980 Chinese people with assets of more than 10 million yuan ($1.6 million) published on Saturday by Bank of China and wealth researcher Hurun Report.

While growth has slowed, China's economic performance is still the envy of the Western world: It registered annual gross domestic product growth of 9.1% in the third quarter, and the International Monetary Fund has forecast growth of 9.5% for all of 2011.

Concerns are mounting, however, that China's growth could be derailed by a raft of problems, including high inflation, a bubbly real-estate sector and a sharp slowdown in external demand.

Many Chinese who have profited most from the country's growth also express increasing concerns in private about social issues such as China's one-child policy, food safety, pollution, corruption, poor schooling, and a weak legal system.

Rupert Hoogewerf, the founder and publisher of Hurun Report, said the most common reason cited by respondents who were emigrating was their children's education, followed by a desire for better medical treatment, and the fear of pollution in China.

"There's also an element of insurance being taken out here," he said, citing concerns about the economic and political environment.

He cautioned, though, that it was unclear if the survey results signaled capital flight as many high-net-worth individuals who were emigrating also said they were keeping much of their money invested in China.

China maintains capital controls that make it hard for rich Chinese to move their money out of the country, but there are substantial loopholes in the system.

Some economists say they have detected signs of large capital outflows in recent months, likely driven by a decline in global risk appetite and expectations of slower yuan appreciation.

A research report from Bank of America Merrill Lynch's strategy team in Hong Kong last month cited "hot-money outflows" as one of four systemic risks that could lead to a hard landing for China's economy. It said that a sign of such outflows were record gambling revenue in the gambling enclave of Macau, a former Portuguese colony near Hong Kong, where many mainland Chinese go to gamble.

In another indication of the jittery mood among China's rich, several Western embassies have also noted a marked increase this year in the number of applications for investment visas, a category that allows people to immigrate if they invest a certain amount of money, according to diplomats.

There is evidence, too, of an uptick in the number of Chinese people buying high-end properties in major Western cities, especially London, Sydney and New York, according to property analysts.

The recent economic success experienced by China has mainly been due to her embrace of globalization.

However, deepening tensions brought upon by rapidly expanding bottom-up economic forces has apparently come into conflict with the rigid political priorities of the China’s government aimed at the preservation of the incumbent structure.

And because of the attendant fear of social disorder arising from an economic bust, which may upset the current political balance, China’s political authorities have careened towards adapting short sighted Keynesian policies that has resulted to an inflating bubble economy that risks a massive bust, possibly in the near future.

Perhaps many of these Chinese millionaires may be sensing trouble ahead (see bold highlights above), not only from a bubble bust, but also from the growing fragile state of China’s unsustainable capitalist-communist political economy.

Yet, a substantial exodus from many of China’s productive sectors will likely put further strain on such tenuous relationship.

This is not to say that a China Century may not be ahead, instead this is to say that China must ultimately depend on market forces to determine the economic direction than rely on temporary nostrums from political diktat that only hastens erosion of the current political economic framework.

Eventually China’s political leadership will have to decide either to cope up with the swift and material changes in her economy or to revert to the old China model of a closed society. The success or failure of the goal of a China Century, thus, depends on the political choices taken.

Laugh of the day: The Godfather and his Lawyer

A Mafia Godfather finds out that his bookkeeper, Guido, has cheated him out of $10,000,000.00.

His bookkeeper is deaf. That was the reason he got the job in the first place.

It was assumed that Guido would hear nothing and would therefore never have to testify in court.

When the Godfather goes to confront Guido about the missing $10 million, he takes along his lawyer, who knows sign language.

The Godfather tells the lawyer, “Ask him where the money is.”

The lawyer, using sign language, asks Guido, Where’s the money?

Guido signs back, “I don’t know what you are talking about.”

The lawyer tells the Godfather, “He says he doesn’t know what you are talking about.”

The Godfather pulls out a pistol, puts it to Guido’s head and says, “Ask him again or I’ll kill him!”

The lawyer signs to Guido, “He’ll kill you if you don’t tell him.”

Guido trembles and signs back, “OK! You win! The money is in a brown briefcase, buried behind the shed at my cousin Bruno’s house.”

The Godfather asks the lawyer, “What did he say?”

The lawyer replies, “He says you don’t have the balls to pull the trigger.”

Don’t you just love lawyers?

(source The Grandich letter)

ECB’s Mario Draghi’s Baptism of Fire: Surprise Interest Rate Cut

You’ve just got to love how predictable welfare state politics operate.

Yesterday I pointed out that the global Banking cartel has intensified lobbying for the European Central Bank (ECB) to conduct more asset purchases or Quantitative Easing (QE)

Goldman Sachs alumni now ECB President Mario Draghi in his first meeting gave them an indirect platter—interest rate cuts using the Greece political drama as well as a potential Greece exit as an excuse!

From Bloomberg, (bold emphasis added)

The European Central Bank unexpectedly cut interest rates at President Mario Draghi’s first meeting in charge after the prospect of a Greek exit from the euro region sent bond yields soaring in Italy and Spain.

ECB officials lowered the benchmark interest rate by 25 basis points to 1.25 percent, confounding 51 of 55 economists in a Bloomberg News survey. Four predicted a quarter-point move and two expected a half-point reduction. The euro fell almost a cent to $1.3729 and the yield on Italian 10-year bonds retreated to 6.14 percent after surging to a euro-era high this week.

“The ongoing tensions in financial markets are likely to dampen the pace of economic growth in the euro area in the second half of the year and beyond,” Draghi said at a press conference in Frankfurt today.

European leaders last night raised the prospect of the 17- member area splintering, with France and Germany saying they would treat Greece’s surprise referendum on a second bailout as a vote on its euro membership. With the region’s economic slowdown deepening and investors growing increasingly concerned, the ECB was under pressure to reverse this year’s two rate increases.

Global financial markets just love it when they are being pampered…

Artificially manipulated low interest rates (premised on the “euthanasia of the rentier”) and quantitative easing (premised on “parting with liquidity”) translates to inflationism as opium to the political and banking-financial elites. Of course there is a third one: socialization of investment (bailouts).

How these elites love Keynesian policies of redistributing or diverting resources from the poor to the rich. (Wall Street Occupy people, where are you?)

US and European equity markets immensely applaud on ECB Draghi’s surprise cut.

Well I may be getting quite ahead of myself, ECB’s Draghi’s baptism of fire looks like a precursor to what the global banking elite has been asking for. Take it one step at a time.

The Greek Political Circus

Prime Minister George Papandreou surprised everyone with a call for a referendum then suddenly backs out, reportedly out of pressures from the Euro political elites…

From the Daily Mail, (bold emphasis mine)

EU leaders have forced the Greek leader George Papandreou to back down on his promise of a popular vote on the European debt treaty.

So what is it about the EU and referendums?

The Brussels elite positively loathes them - or indeed democracy in general.

But those pesky nation states keep insisting on them. And every now and again they get the wrong answer - voting No to a proposal blessed by the high priests of the EU (Denmark 1992 over Maastricht, Ireland 2001 over the Treaty of Nice, France and the Dutch over the proposed European Constitution, Ireland again over the Treaty of Lisbon).

The standard Brussels response is to demand a second vote, usually after offering a few debatable concessions. That got the Danes off the hook and the Irish twice. More cynically, plans for a European Constitution were dropped after the French and Dutch votes, only to be reincarnated as the Lisbon Treaty (much the same package but a different wrapper).

But this time the European high command has gone a stage further. No sooner had Greek prime minister George Papandreou announced a referendum on the Greek bailout plan - to the shock and fury of the Eurocrats and their allies in the chancelleries of the big European states - France, Germany and Italy all denounced the Greek leader's move as bordering on betrayal

Papandreou had his own internal reasons for proposing a referendum. His main opponents back home in Athens are the New Democrats, who are against the bailout plan because of the tough conditions attached but at the same time want Greece to stay in the euro. Papandreou wanted to force them to face the contradictions of their stance - either to back savage spending cuts bringing rioters onto the streets or to recognise that Greece could not survive in the euro.

He was also looking for a popular mandate - the kind of thing you are meant to do in a democracy - for cuts that slash public sector wages and pensions and to apply pressure to the big powers to offer more favourable terms to Greece.

But New Democracy is that in name only. It was against a referendum, presumably because it saw advantage in perpetual political grandstanding.

With his MPs and Cabinet ministers defecting and Papandreou facing a no-confidence vote, we may well see a new short-term National Unity Coalition government, made up of technocrats not politicians, formed in Athens to do the bidding of Brussels.

Well up to this writing, there has been no coalition government yet.

From the Bloomberg,

Prime Minister George Papandreou struggled to hold on to power after Greece’s largest opposition party rebuffed his overtures to form a national government, raising the prospect of elections that could delay aid needed to prevent default.

Opposition leader Antonis Samaras rejected sharing power with Papandreou and called on the premier to quit. Papandreou, 59, scrapped a referendum on an accord with the European Union to avert a split in his party before a confidence vote scheduled for midnight tonight.

“I never excluded any topic from the discussion, not even my own position,” Papandreou told lawmakers in Parliament. “I am not tied to a particular post. I repeat I am not interested in being re-elected but just in saving the country.”

While the highly fluid developments in Greece remain a potential tinderbox, as shown above, the direction of political actions still seem to emanate from Brussels than from the 'people of Greece'. Plutarchy-Oligarchy over Democracy.

Quote of the Day: Discontinuity

Financial prices certainly jump, skip, and leap—up and down. In fact, I contend the capacity for jumps, or discontinuity, is the principal conceptual difference between economics and classical physics. In a perfect gas, as molecules collide and exchange heat, their billions of individually infinitesimal transactions collectively produce a genuine “average” temperature, around which smooth gradients lead up or down the scale. But in a financial market, the news that impels an investor can be minor or major. His buying power can be insignificant or market-moving. His decision can be based on an instantaneous change of heart, from bull to bear and back again. The result is a far wilder distribution of price changes: not just price movements, but price dislocations.

That’s from the illustrious French American mathematician and author Benoit Mandelbrot (November 20, 1924—October 14, 2010) in his bestseller, The (Mis)Behavior of Markets: a fractal view of risk, ruin and reward (p.237).

It is important to note that a distinguished mathematician can spot the indispensable difference between ‘discontinuity’ as consequence of human action with that of the ‘averages’ as an output of natural ‘physics’ sciences.

US Healthcare: Price Controls Results to Shortages in Cancer Drugs

Bush-Obama price controls have led to a shortage in cancer drugs.

That’s according to the Wall Street Journal editorial

Shortages have more than tripled since 2005, according to the University of Utah's Drug Information Service, and by the end of the year more than 300 products are likely to be back-ordered, in short supply or totally unavailable. Some are anesthetics and pain therapies, others emergency room "crash cart" drugs. But most—about 70% in 2010—belong to the class of drugs known as "sterile injectables" that are mainstays of the chemotherapy arsenal, such as paclitaxel or cytarabine.

The result is that more and more patients are receiving substandard care—relying on less effective or more expensive substitutes or else forced to postpone treatment. In oncology, delays of weeks or even days can be fatal.

Most sterile injectables have been off-patent for decades, but unlike other cheap generic drugs with low profit margins, production is complex and requires special facilities. Nonetheless, George W. Bush and the Republican majority decided that Medicare was "overpaying" for these cancer drugs and included a 6% cap on price increases every six months in the 2003 prescription drug bill. These new price controls (which apply to the providers that purchase the drugs) took effect in 2005, when the shortages began.

In a rational market, sterile injectable prices would now be rising to encourage more supply, since the demand for cancer drugs is inelastic. The old reimbursement system, called "buy and bill," was imperfect, but at least it allowed prices to float and wasn't producing the scarcity that central planning always does. The sterile injectables that are in short supply currently sell for $37.88 a dose on average, and modest price increases could make the market economic.

The problem is compounded because Food and Drug Administration rules cause pointless delays. It takes as long as two and a half years to receive FDA manufacturing approval for a generic, so other drug makers can't ramp up production if a company cancels a product line due to these disincentives or even if the fragile supply chain for sterile injectables is contaminated and manufacture is delayed.

This should serve as another evidence of the economic infeasibility of political policies cloaked with noble intentions that eventually succumbs to the laws of unintended consequences.

And another important lesson exhibited from the above is that the whims of politicians via edicts or by fiat cannot and will not ever subvert the laws of economics.

In short, the political therapy is worse than the misdiagnosed disease.

Failed repeated attempts to politicize economics has posed as a vicious cycle that had been experimented for the last 40,000 years (Professor Thomas DiLorenzo has a synopsis here).

This means that people have never learned from history. And that people simply get mesmerized and tolerate political insanity or doing the same things over and over again yet expecting different results.

I’d say that political insanity seems far worst in many aspects in the Philippines but maybe not as much as in the healthcare sector yet.

Flaws of Economic Models: Differentiating Social Sciences from Natural Sciences

David Freedman of the Scientific American asks “Why Economic Models Are Always Wrong?”

He gives the answer,

The problem, of course, is that while these different versions of the model might all match the historical data, they would in general generate different predictions going forward--and sure enough, his calibrated model produced terrible predictions compared to the "reality" originally generated by the perfect model. Calibration--a standard procedure used by all modelers in all fields, including finance--had rendered a perfect model seriously flawed. Though taken aback, he continued his study, and found that having even tiny flaws in the model or the historical data made the situation far worse. "As far as I can tell, you'd have exactly the same situation with any model that has to be calibrated," says Carter.

That financial models are plagued by calibration problems is no surprise to Wilmott--he notes that it has become routine for modelers in finance to simply keep recalibrating their models over and over again as the models continue to turn out bad predictions. "When you have to keep recalibrating a model, something is wrong with it," he says. "If you had to readjust the constant in Newton's law of gravity every time you got out of bed in the morning in order for it to agree with your scale, it wouldn't be much of a law But in finance they just keep on recalibrating and pretending that the models work."

We can’t simplify, through mathematical models, what truly is a highly complex environment. Repeated “recalibrating their models” or “calibration problems” only exposes on these structural analytical errors.

The ultimate reason why economic models are always wrong is that investigations have been patterned after natural sciences. Yet analyzing natural sciences isn’t the same as social sciences. That’s what modelers and their disciples cannot seem to grasp.

The great Ludwig von Mises draws a clear distinction between the two sciences, (bold emphasis mine, italics original)

Since the elements of social cognition are abstract and not reducible to concrete images one would like to have metaphors. First there were biological metaphors, now mostly mechanistic ones. These are based in positivist view of social science that holds that social science should be built up by experimental method as ideally applied in Newtonian physics. Economics becomes experimental, mathematical and about measurement. This is all wrong:

1. Social sciences cannot be based on experience like the natural sciences. Social experience is of a complexity and cannot be experimented with

2. Therefore the social sciences can never use experience to verify their statements. Every fact and experience is open to multiple interpretations (but see Kuhn. KS)

3. The impossibility of experimenting implies the impossibility of measurement. In human behavior there are no invariable relations like there are between physical properties, which means that it is pointless to mathematize them in order to make predictions. Statistics merely studies history.

4. Mathematics does not deal with actual operations of human actions but with a fictitious concept, static equilibrium (tomorrow is like today, no uncertainty), that economists build up for instrumental purposes. But not only is this unrealistic, it is also inconsistent for lack of uncertainty and change implies lack of actions. The only purpose mathematics can have in economics is the study of the nature of relations between costs and prices and thereby of profits.

5. Mathematics cannot tell us how the market arrives at a static equilibrium.

6. Mathematicians are prone to consider the price either as measurement of value or as equivalent to the commodity. But prices are neither; they are simply the amount of money exchanged for a commodity and there is reversed valuation.

Economics deals with human action, not with objects (as physics does) such as commodities, economic quantities or prices. Therefore economists do not consider their subject matter from without, but from within, through our own understanding of what it is to be human and to act. What makes natural science possible is the power to experiment, what makes social science possible is the power to grasp the meaning of human action….

Social sciences have a distinct method, praxeology and verstehen, due to the special character of their objects, and owe their progress through it and do not have to and cannot use the method of the natural sciences.

Praxeological concepts refer exactly and with certainty to the reality of human action because both the science of human action and human action itself have their toot in human reason. The quantitative approach would not render them more exact.

Nobody denies that economics is not perfect yet, but:

1. the present unsatisfactory state of social and political affairs is not due to deficiencies in economic theory, but in policy. People just don’t use economic theory enough.

2. even if economics needs to be drastically reformed someday it cannot take the direction proposed by those who use the model of the natural sciences. This idea has been thoroughly refuted forever.

Again many people seem to find comfort in models, for many possible reasons such as social signaling, conversation, career, politics and others.

But in terms of the predictive value, as the Scientific American article’s inquiry as indicated by the title, economic models have always been wrong.

Banking Cartel Pressures ECB to Expand QE

The banking cartel lobbies the European Central Bank [ECB] to engage in more Quantitative Easing [QE] or asset purchases by central banks funded by “money from thin air”

Here is the Wall Street Journal Blog,

The banking sector’s international lobbying group on Wednesday joined the campaign to boost the European Central Bank‘s role in the euro-zone rescue, calling for the ECB to backstop struggling bond markets while the currency bloc implements its latest debt deal.

The comments by the Washington-based Institute of International Finance, which represents more than 450 financial institutions in 70 countries, add another major voice for a heightened ECB role despite concerns from some European officials — particularly in Germany — about the central bank’s bond purchases.

As Europe develops details around its new debt deal, “it is essential that all parties come together behind the continued active role of the ECB in the secondary government bond market,” IIF Managing Director Charles Dallara wrote in a letter to officials from the Group of 20 industrial and developing economies meeting in Cannes, France, this week. “This will allow time for national authorities’ adjustment efforts to take hold, and help stabilize markets at this crucial juncture.”

The ECB’s new president, Mario Draghi, who took his post Tuesday, faces the question of whether to continue or increase ECB purchases of Italian government debt to push yields lower. The ECB has bought an estimated 70 billion euros in Italian debt since August, but that hasn’t been enough to keep the 10-year yield on Italian debt below 6%.

Direct lobbying might not be enough though. A wider range of publicity tools would be required to justify these actions to the public, especially given the du jour populist demonstrations

So the politically embattled banking and finance sector would have to employ the same set of tools used by central banks to manipulate the public’s expectations—signaling channel (a.k.a propaganda).

And a lot of these will come from the academe or from the mainstream media.

An example of which is an excerpt from a recent article of Telegraph’s Ambrose Pritchard Evans, who uses the stereotyped deflation bogeyman to argue for more of ECB’s QE.

The two halves are locked together in a broken marriage. To pretend otherwise is no longer responsible. The structural gap cannot be closed by debt-deflation in the South – the current default setting of EU policy. It could arguably be closed if Germany were to let the European Central Bank reflate the whole eurozone system.

Instead, the ECB has done the opposite, opting to blight the chances that Spain might just be able to claw its way back to viability within the constraints of EMU.

Paradoxically, Mr. Evans is a popular columnist whose opinions easily flip-flops, i.e. from mainstream views towards espousing the contrarian [end the Fed] and backsliding again to the mainstream.

Nevertheless I am reminded by the great Murray N. Rothbard who presciently wrote [modifications mine]

An "impartial" Central Bank, on the other hand, driven as it is by the public interest, could and would restrain the banks from their natural narrow and selfish tendency to make profits at the expense of the public weal. The stark fact that it was bankers themselves who were making this argument was supposed to attest to their nobility and altruism.

In fact, as we have seen, the banks desperately desired a Central Bank, not to place fetters on their own natural tendency to inflate, but, on the contrary, to enable them to inflate and expand together without incurring the penalties of market competition. As a lender of last resort, the Central Bank could permit and encourage them to inflate when they would ordinarily have to contract their loans in order to save themselves. In short, the real reason for the adoption of the Federal Reserve European Central Bank [strike through and italic insertion mine], and its promotion by the large banks, was the exact opposite of their loudly trumpeted motivations. Rather than create an institution to curb their own profits on behalf of the public interest, the banks sought a Central Bank to enhance their profits by permitting them to inflate far beyond the bounds set by free-market competition. [bold mine]

Seems like a case of sleeping with the enemy

Losses from Japan’s Currency Market Intervention Mounts: Estimated at $512 billion

I earlier posted that Bank of Japan’s losses have accrued to $281 billion, it seems that the losses have been accruing pretty fast.

From the Bloomberg,

Japan’s government faces almost 40 trillion yen ($512 billion) in losses from intervening in the foreign-exchange markets to stem the yen’s advance, according to estimates by JPMorgan Chase & Co.

Valuation losses on Japan’s foreign-exchange reserves minus yen liabilities totaled 35.3 trillion yen at the end of 2010, according to Finance Ministry data. The losses may swell further as the yen is projected to climb to 72 versus the dollar by September 2012, said Tohru Sasaki, head of Japan rates and foreign-exchange research at JPMorgan Chase in Tokyo.

“It’s difficult to change the trend of the currency market” with intervention, said Sasaki, who used to work in the foreign-exchange division of the Bank of Japan, at a forum in Tokyo yesterday. “Even if the action can stem the currency’s gains temporarily, the yen will eventually appreciate.”

Japan on Oct. 31 intervened in foreign-exchange markets to weaken the yen for the third time this year after the currency gained to a postwar record. Finance Minister Jun Azumi said he will continue to intervene until he’s “satisfied.”

Japan may have spent a record amount to stem the yen’s gains, according to the BOJ’s projection of deposits held by financial institutions at the central bank. It estimated that deposits climbed 7.7 trillion yen to a total 37.2 trillion yen, according to a statement released yesterday. The figure suggests that the government sold approximately 8 trillion yen, said Yuichi Takahashi, a market economist at Totan Research Co. in Tokyo.

Perhaps for Japan’s political authorities, central banks losses can merely be covered or financed by more money printing. Yet unknown to most, such actions only intensifies the transferring of scarce sources from the public to the political institutions and to their stewards, as I pointed out here.

Maybe Japan could just be too wealthy for political authorities to desire a larger piece of the pie or that maybe the average Japanese has been more condescending and tolerable to the actions of their political leaders. Or maybe the average Japanese are not aware of this.

May be too global political and monetary authorities, including those of Japan, have venerated and are tacit disciples of Gideon Gono and his doctrine.

Mr. Gono is the incumbent governor of the Reserve bank of Zimbabwe, who successfully steered the nation’s currency, the Zimbabwe dollar, to its sensational hyperinflationary demise.

Or that there could be many more maybes left unsaid.

Ben Bernanke Dangles QE, Redux

Is the public being hypnotized by US Federal Reserve Chairman Ben Bernanke?

I will give you stimulus, I will give you stimulus, I will give you stimulus, I will give you stimulus…

For the umpteenth time, from the Bloomberg, (emphasis added)

Federal Reserve Chairman Ben S. Bernanke said unemployment is still “far too high” and the Fed may take further steps to boost growth, such as buying mortgage bonds or changing the way it communicates its policy goals to the public.

Additional stimulus “remains on the table,” Bernanke said today at a press conference in Washington, declining to specify conditions that would prompt a move. “While we still expect that economic activity and labor market conditions will improve gradually over time, the pace of progress is likely to be frustratingly slow.”

Bernanke spoke after the policy-setting Federal Open Market Committee said the economy picked up in third quarter and repeated its statement from September that there are “significant downside risks” to the outlook. Officials kept policy unchanged, saying they would lengthen the maturity of the Fed’s bond portfolio and hold the benchmark interest rate near zero through at least mid-2013 if unemployment remains high and the inflation outlook is “subdued.”

Bernanke and his colleagues on the panel cut their growth forecasts for 2012 and said unemployment will average 8.5 percent to 8.7 percent in the final three months of next year, up from a prior range of 7.8 percent to 8.2 percent.

“The medium-term outlook relative to our June projections has been downgraded” and “remains unsatisfactory,” Bernanke said. “Unemployment is far too high,” and “I fully sympathize with the notion that the economy is not performing the way we would like.”

Again the repeated dangling of QE 3.0 or additional stimulus, which represent a monetary policy tool used by Central Banks called as 'signaling channel' or as the article implicitly puts it—“changing the way it communicates its policy goals”—have been directed at conditioning or manipulating the public’s expectations.

We are being treated like Pavlov’s dogs. According to Wikipedia on Classical conditioning, Pavlov used a bell to call the dogs to their food and, after a few repetitions, the dogs started to salivate in response to the bell. The dogs are the financial markets, and the ringing bell is the signaling policy used, and the food is the QE 3.0. In essence, the financial markets are being conditioned to be dependent on US Federal Reserve or central bank policies.

Bernanke must be pleased with how equity markets has responded to his communication tool (see above table from Bloomberg), which seem to have neutralized the surprise developments in Greece.

Yet, the constant conditioning being applied to the market is most likely meant not only to project policy “transparency” but also to reduce political opposition to Bernanke’s favorite tool.

With US money supply growth exploding, which may perhaps be indicative of indirect tools being utilized by team Bernanke, QE 3.0 seems no more than a formality.

On the count of three, you will awaken…

The Economist’s Marxist Fallacies on Corporations and Profits

The Economist eulogizes Karl Marx (bold emphasis mine)

WRITING in "Das Kapital" in 1867, Karl Marx observed that in the capitalist system competition "ends in the ruin of many small capitalists, whose capitals partly pass into the hands of their conquerors". This way, he posited, capital would become increasingly concentrated in the hands of a few. Out of the 6,000 or so companies whose primary listing is on an American stock exchange, the top 5% accounted for 70% ($10.6 trillion) of the market value and 90% ($765 billion) of the total profit in 2010. In 2000, the profit from the top 5% of companies was greater than 100%, offsetting the huge losses by the bottom 50%. The figures are remarkably similar for listed companies in Western Europe. Confounding the view of the "Occupy" protests taking place across the globe that the world is run by increasingly rapacious corporations, those proportions have declined since 2000 (the earliest year for which robust data are available). At the very top, the largest 1% of listed companies in America and Western Europe accounted for 53% and 48% of market value in 2000. In 2010, those proportions had declined to 40% and 28% respectively.

The Economist, if they are not engaged in a pun, has been guilty of logical sophism.

“Capital would become increasingly concentrated in the hands of a few” represents a post hoc fallacy; capital does not mechanically or automatically gravitate into the hands of a few. The Economist does not elaborate on the process except to irresponsibly and uncritically adhere to the Marxian creed.

Next, it would be a monumental folly to imagine that the world today as operating on a laissez faire ‘capitalist system’ considering the countless regulations, legal proscriptions, market manipulations and other forms of interventionisms in almost every social activity that one is engaged in, everywhere around the world.

Also by also engaging in reductio ad absurdum the article attempts to oversimplify correlations and the causation nexus between corporations and profit concentrations.

Such preposterous assertions assume away the influences, contributions and the effects of specific political policies on affected groups, the periphery and the rest of society, as well as, the impact of the incumbent legal environment and political institutions to the marketplace...which ultimately shapes the variable scale of interrelationships and degree of complicity between corporations and their respective governments (where they operate on).

As earlier pointed out, many of these huge companies has been beneficiaries of government concessions or political privileges as subsidies, cartels, monopolies, licensing, behest loans, tariffs, bailouts, private-public partnerships, tax credits, and sundry regulations that are essentially anti-competition based that has led to their current heft and widespread global reach.

In short, 'rapacious corporations' are the outcome of policies from political leaderships aimed at sustaining welfare-warfare based crony capitalist governance and not of the deceptive and logically bereft Marxist premises.

As Ludwig von Mises wrote of Marxism,

The incomparable success of Marxism is due to the prospect it offers of fulfilling those dream-aspirations and dreams of vengeance which have been so deeply imbedded in the human soul from time immemorial. It promises a Paradise on earth, a Land of Hearts Desire full of happiness and enjoyment, and — sweeter still to the losers in life's game — humiliation of all who are stronger and better than the multitude. Logic and reasoning, which might show the absurdity of such dreams of bliss and revenge, are to be thrust aside

Quote of the Day: Political Zombiesm

From Daily Reckoning’s Bill Bonner

Here is the foundation of our General Theory of Zombieism:

1. All (or almost all) people want wealth, power and status.
2. They want to get it in the easiest way possible.
3. The easiest way to get wealth is to steal it, which is why all groups turn to the government, the only institution which gets to steal lawfully.
4. Over time, more and more groups are able to use the system for their own ends.

If they are poor, they implore the government to ‘tax the rich’ and give the money to the poor. If they are rich, they want the government to protect their wealth and status — with every means available to them. Democratic governments generally do both. They support the poor with loud attacks on the rich combined with whimpers of money (for the poor can generally be bought — vote for vote — much cheaper than the rich). As for the rich, their support is more subtle and underhanded. There are tax credits and loopholes for anyone who can afford them; sugar-laden contracts for the insiders and plenty of jobs for well-credentialized blowhards.

The rich complain about the poor. The poor complain about the rich. Both complain about the government. And everybody hates capitalism.

But over time, the giveaways, bribes, regulations, intercessions and meddling on the part of the government have a big effect on the economy. The more the government interferes with market signals and market-based capital allocation, the less able the economy is to produce real wealth. More and more resources are purloined by the insiders before the truck reaches its destination. Paperwork, lawyers, administration, regulation, taxes take a toll. So does misallocation of capital investment to huge, unproductive industries such as education, health, and defense. There is also a shift of wealth generally from those who earn it to those to whom it is redistributed…and from capital formation to consumption. And gradually the economy becomes paralyzed and parasitic…and nearly everyone gets poorer. And often, the state…and the mobs that support it…become desperate for more money. Then…the rich had better watch out!