Phisix: Primed for an Upside Surprise

In our age there is no such thing as 'keeping out of politics.' All issues are political issues, and politics itself is a mass of lies, evasions, folly, hatred and schizophrenia. -George Orwell

It’s the advent of the holiday season. Since the public’s attention will likely be diverted towards the coming festivities, the common intuition is to expect less of an active market which usually has been marked by lean trading volumes.

Central Bank Actions Should Amplify Seasonal Factors

Yet still, the seasonality factor favors December.

While seasonal forces may yield some influence on the marketplace (such as triple witching hour[1] and window dressing[2]), one cannot depend on its statistical accuracy, given the manifold factors involved, particularly the politicization of the marketplace.

However, the current financial and economic environment, which has been distinguished by near record low interest rates and global central banks heavy on the pump[3], are most likely to provide continued support to, and bolster the seasonal effects, on financial assets.

Most of the world’s major economies have been operating on negative interest rates as shown by the chart above[4].

Except for Brazil, even nations with positive real rates have not significantly been above zero. And that is if the statistics used to measure inflation has been accurate. Usually measurements of inflation have been understated.

And considering the politicized nature of the present state of the global financial markets, persistent volatilities should not be discounted.

And accentuated volatility has the tendency to attract short term traders despite the holiday season.

The EU Fiscal Union Masquerade

The EU crisis will continue to partly hold sway on the developments in the global markets.

Over the week, global equity markets gyrated on vacillating expectations brought about by conflicting statements by politicians and bureaucrats.

Growing expectations for more aggressive participation by the European Central Bank (ECB) in acquiring bonds through Quantitative Easing (QE) has helped buoyed global markets. However ECB’s chief Mario Draghi dispelled the popular clamor for a carte blanche approach which doused cold water on the markets that sent commodities and equity markets tumbling[5]. This resonates with US Fed chair Ben Bernanke’s recent jilting of market’s expectations over the telegraphed QE 3.0 at the end of September which incited a mini-crash[6].

Political factors have restrained the actions of both central banks. Prior to the FOMC meeting last September, Fed chair Ben Bernanke came under fire from various political fronts, which most likely prompted for him to backtrack on his pet QE 3.0 program.

Meanwhile Mr. Draghi’s ambivalence could be seen as extracting political leverage at this week’s EU summit for EU member states to accede to a “fiscal compact”.

Despite the recent volatility, the scale of the losses has not been similar to that of the Bernanke episode last September.

Perhaps markets may have digested on the other credit easing measures adapted by the ECB, particularly, a cut in interest rate, unlimited access to two long-term refinancing operations (LTRO), a reduction in reserve requirements and the lowering of credit rating threshold which expands the eligible collateral base.

This weekend hallmarks a “fiscal compact” that would most likely reconfigure the European Union. The main points of summit agreement can be found here[7].

However, contrary to popular wisdom, the ‘fiscal union’ elixir will likely prove to be an illusion to the current EU Debt crisis.

Any political system that becomes highly dependent on the redistributive process that overwhelms on society’s productive sectors will fail.

To analogize the current developments, in the words of the illustrious Ayn Rand,

When you see that trading is done, not by consent, but by compulsion - when you see that in order to produce, you need to obtain permission from men who produce nothing - when you see that money is flowing to those who deal, not in goods, but in favors - when you see that men get richer by graft and by pull than by work, and your laws don't protect you against them, but protect them against you - when you see corruption being rewarded and honesty becoming a self-sacrifice - you may know that your society is doomed.

Great examples of failed union states would be the Soviet Union or Yugoslavia or the Roman Empire.

And considering that the major directives undertaken towards resolving the debt crisis has been to mostly raise taxes[8] and to engage in more monetary inflation, we can expect that these policies would translate to growth retardant economies that would be marked by lesser investments and sustained high unemployment rates.

Using Italy as an example, author Joe Studwell writes[9],

Meanwhile Frau Merkel and Sarko are coming up with a scheme to sanction countries like Italy that don’t stick to budget targets. This plays to German political opinion, but completely misses the point.

It treats Italy as a debt problem. But it isn’t. Italy is a growth problem that can only be resolved with legal system, bureaucratic and labour market reforms that make growth possible. Italy needs to be made to work institutionally.

Aside from misdiagnosis by EU’s politicos, the one-size-fits-all therapy would signify the proverbial cure that could be worse than the disease.

And perhaps in acknowledging these flaws, the United Kingdom has vetoed plans for her inclusion in the treaty because of the EU-wide tax on financial transactions[10] which essentially would mean a loss of control over financial regulation.

Moreover, the fiscal union shaped by current political crisis exigencies postulates that the disciplinary mechanism to uphold on the treaty will likewise be insufficient and subject to various legal loopholes.

Similar to the current failings of the EU, errant member states of the EU such as Greece, who fudged her statistics to gain entry to the EU via complex currency and credit derivatives, and of other reports of creative accounting and manipulated statistics[11] by other EU nations, will possibly continue to plague an even more centralized European Union. We don’t expect Germany to send her army to delinquent members to enforce such penalties.

And any sign of temporary stabilization will result to political leaders of the EU states to relax on attaining fiscal balance which represents the moral hazard of the bailouts.

Further, treaty provisions and regulations will likely be arbitrary and predisposed towards the interests of politicians and bureaucrats.

And instead of dealing with the lack of competitiveness and impediments to economic growth as a result of bureaucratic red tape, welfare state, high tax regime and obstructive regulations, the political direction has essentially been to apply the same set of policies that has brought them to the current state of the crisis.

At the end of the day, the proposed remedies for a fiscal union, along with the additional money loaned by the EU to the IMF[12] to be lent to EU’s crisis affected nations (sort of an escrow arrangement), will only represent cosmetic changes that serves as veneer for the ECB to engage in more monetary inflation, and to transfer and expand the political power to EU technocrats at Brussels at the expense of the freedom and civil liberties of citizens of the EU member states.

The ECB’s balance sheets has rapidly been ballooning as shown by the chart from Danske Bank[13]. A new EU will likely prod the ECB to increase purchases.

This band aid approach may provide an ephemeral calm to the financial markets from which the effects of inflatonism will likely become more visible.

Bearish Chart Patterns Nearing Reversal

The Philippine benchmark, the Phisix has been in a consolidation phase and seems on the path to reverse the bearish technical indicator known as the ‘death cross’.

Following the September-Bernanke shakeout, the Phisix has been rangebound since the rally which climaxed last November.

The 50 day moving average (blue) has worked to narrow on the 200 day moving averages (red). Once the 50 day regains the upperhand or successfully crossover the 200 day moving averages then the bearish death cross transitions into a bullish golden cross.

Many use technicals, as the above, to analyse and predict the phases of markets. Yet it seems likely that “death cross” may not be living up to its putative billing. The current death cross has not led to a bear market.

And a reversal would mean a whipsaw or a chart pattern failure. This only would prove my point that sole reliance on chart patterns would translate to inaccurate reading of the markets.

Mechanical chart reading fundamentally ignores the vast differentials between past conditions with the present and future conditions. Also, mechanical charting has dubious statistical accuracies in terms of prediction success rates, as well as, feeding upon our mental impulse to seek patterns, or cognitive bias known as clustering illusion—seeing a pattern in what is actually a random sequence of numbers or events[14]

Most importantly, mechanical charting fails to account for the indispensable role of people’s action which ultimately determines price trends.

In the current case, negative interest rates and intensive money pumping by global central banks and the politicization of markets aimed at propping up asset prices, to keep banks and governments afloat, will continue to influence people’s reading, evaluation, interpretation and analysis of prices and their attendant actions to allocate scarce resources via the money medium.

As I previously wrote[15], (emphasis original)

The prospective actions of US Federal Reserve’s Ben Bernanke and European Central Bank’s Jean-Claude Trichet represents as the major forces that determines the success or failure of the death cross (and not statistics nor the pattern in itself). If they force enough inflation, then markets will reverse regardless of what today’s chart patterns indicate. Otherwise, the death cross could confirm the pattern. Yet given the ideological leanings and path dependency of regulators or policymakers, the desire to seek the preservation of the status quo and the protection of the banking class, I think the former is likely the outcome than the latter.

And any further material uptick by the Phisix will likely accelerate such reversal process.

To add, people who say that the Phisix will remain rangebound could be taken in for a big surprise.

If I am not mistaken, even the US markets could be on a path similar to the Phisix. The US version of the ‘death cross’ could be reversed once the S&P slams past the resistance portal of 1,262-1,285 and beyond.

And given the continuing growth in monetary aggregates and material signs of improvement in the US credit markets, we should expect these conditions to be reflected on equity prices.

Bank Loans and Credit as measured by activities in all US commercial banks[16] as well as commercial and industrial loans have been ramping up.

Outside any shocks from the EU or China, US equities seem poised to move higher.

Charts are useful when used as guide rather than as principal determinant in the evaluation of the risk-reward tradeoff and the accompanying actions to attain portfolio management goals.

And the further point is that a chart pattern reversal should add to the bullish sentiment as many technically based traders or investors will most likely reenter the markets. At least you have been ahead.

Regional Activities and Market Internals Exhibit Upside Potentials

Since every financial asset competes to attract one’s money, then a functional correlationship exists with all other asset markets around the world.

Then observing price actions of other asset markets especially those which are closely related should be a worthy exercise.

Given the price action of our neighbors, I think it would be a folly to write off a potential yearend run.

The chances for an emergent upside seem to increases once we examine the developments in the region’s markets and of the market internals in the Philippine Stock Exchange.

Only Malaysia (FBMKLCI; light orange) has been (3.9%) down on a year-to-date basis, while Indonesia (JCI; green), Phisix (PCOMP; red) and Thailand (SET; dark orange) have been marginally higher 1.52%, 2.17% and .12% respectively as of Friday’s close.

So far Thailand’s SET, among the three, has been the most aggressive having risen by nearly 7% over the past 2 weeks.

Given the seemingly tight correlations (based on trend undulations rather than numerical coefficients), one can’t discount the same belated actions on the Phisix, on Indonesia’s JCI and Malaysia’s KLSE. On the other hand one may argue that Thailand may fall along the line with rest.

However given that Southeast Asia’s relatively lesser debt exposed or leveraged economies, the region’s financial markets are likely to be more receptive towards negative real rates policies which should induces speculative activities.

So far, Indonesia and the Philippine banking sector has the least exposure to real estate loans in the region[17]. This implies that the region’s bubble cycle could be in the formative stages, and may have more room to climb.

Yet the price actions of the region’s bourses seem to be replicated or mirrored in the sectoral performance of the Phisix or the Philippine Stock Exchange.

All sectors appear to be in a consolidation phase. However there seems to be emergent signs of restiveness. The banking sector (black candle) has been the best performer over the past two weeks as revealed by the recent attempt to gain higher grounds.

This has been followed by mining (light orange) and the property sector (violet) while services (red), holding (teal) and the Commercial Industrial (blue) have moved almost in tandem with the Phisix.

Additionally, market internals appear to be also manifesting some signs of notable improvements which may compliment the sectoral activities.

Net foreign buying averaged on a weekly basis seems to be on a sustained upswing since June of this year.

If net foreign buying will accelerate or improve further, then much of these fund flows will likely be directed to elite Phisix member components.

A boost on the Phisix is likely to buttress general sentiment.

Average daily trade on a weekly basis also has been incrementally improving. This sentiment indicator seems to be exhibiting signs of confidence gaining momentum.

Any sustained rally in the Phisix which may come during the yearend or during the first quarter of 2012 will likely translate to a broad market rally.

Bottom line:

While the holiday season may lead to less active markets which could be manifested by leaner volume of trades, they could also serve as windows to accumulate or position. But this is no certainty as current market volatility may induce more trading activities.

Nonetheless given the concerted global credit easing efforts and the predominantly negative real rates worldwide, I think current conditions may suggest of a potential sizeable upside swing in the equity markets of the region and in the Phisix.

My guess is that such moves may also be reflected on commodity markets.

Again global market activities will hold sway or materially affect activities in the regional and local financial markets. And the conventional “kick the can down the road” policies by major developed economies and by China may generate heightened demand for risk assets over the interim.

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[1] Investopedia.com Triple Witching

An event that occurs when the contracts for stock index futures, stock index options and stock options all expire on the same day. Triple witching days happen four times a year on the third Friday of March, June, September and December.

[2] Investopedia.com, Window Dressing

A strategy used by mutual fund and portfolio managers near the year or quarter end to improve the appearance of the portfolio/fund performance before presenting it to clients or shareholders. To window dress, the fund manager will sell stocks with large losses and purchase high flying stocks near the end of the quarter. These securities are then reported as part of the fund's holdings.

[3] See Global Central Banks Ease the Most Since 2009, November 28, 2011

[4] US Global Investors Investor Alert - You Can’t Print More Gold, usfunds.com December 9, 2011

[5] See ECB’s Draghi Balks at More QE, Global Equity Markets Tumble, December 9, 2011

[6] See Bernanke Jilts Markets on Steroids, Suffers Violent Withdrawal Symptoms, September 22, 2011

[7] Guardian.co.uk European Union summit agreement: the main points, December 9 2011

[8] See European Debt Crisis: Taxing the Economy to Prosperity December 10, 2011

[9] Studwell Joe Wrong Menu, Joestudwell.com, December 5, 2011

[10] DailyMail.com A day for Britain to salute Mr Cameron, December 9, 2011

[11] Wikipedia.org National statistics, European Sovereign Debt Crisis

[12] Bloomberg.com IMF Seeks Funds for European Debt Crisis, December 11, 2011

[13] Danske Bank Euro tensions to continue, Weekly Focus, December 9, 2011

[14] Rationalwiki.org Clustering illusion

[15] See How Reliable is the S&P’s ‘Death Cross’ Pattern?, August 14, 2011

[16] Federal Reserve Bank of St. Louis, US Financial Data Economic Research Bank Loans and Credit and Commercial and Industrial Loans

[17] Worldbank.org Navigating Turbulence, Sustaining Growth WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2011, VOLUME 2

European Debt Crisis: Taxing the Economy to Prosperity

The Wall Street Journal editorial has a nice and trenchant discourse on Europe’s chosen course of action in working to resolve on their debt and financial crisis. (bold emphasis mine)

European leaders are meeting in Brussels today to craft their third attempt—or is it the sixth?—to end the Continent's debt crisis and avert a deep recession. So it seems an apt moment to review the economic policy record of the leaders seeking to set Europe back on course. It isn't pretty.

A large part of the problem is the state of Europe's intellectual debate, which pits government spending against "austerity" as the only two economic policy choices. The Keynesians are blaming Europe's looming slowdown on belt-tightening governments, as if public spending is the only way to spur economic growth. But the problem across most of Europe isn't a lack of government spending that typically represents about half of GDP. It's the failure to create the conditions for private investment and growth.

When the financial panic hit in 2008, the EU and International Monetary Fund urged governments across the Continent to spend like crazy to avoid recession. So they spent, only to discover that such spending is unsustainable. Now the same wise men are urging governments to raise taxes to offset all that spending and even to spend more "in the short term." The one policy none of these leaders has tried is the Reagan-Thatcher model of cutting taxes to spur growth.

Read the list of tax measures being imposed and or the rest of the article here (subscription required)

The mainstream, as rightly pointed out by the WSJ, offers a false choice where government spending has been portrayed as the elixir or magic wand that would bring about prosperity. So aside from the additional burden of taxation, the alternative option to finance government spending or private sector rescues has been the shrill clamor for the ECB to inflate the system or for peripheral states to leave the core to be able to inflate (allegedly to regain competitiveness, which has hardly been the reality).

There has been little regards towards incentivizing those who generate wealth—the entrepreneurs and the capitalists—or as per the WSJ “conditions for private investment and growth”.

Yet to the contrary, taxation and inflation demotivates or discourages investments.

So far, the direction of policies has been geared towards the preservation of the status quo or the political architecture of the welfare state—central banking—banking cartel at the expense of the wealth creators.

This political preference to redistribute rather than create wealth means that any ‘fiscal union’ risks not only the failure to attain the objective of saving ‘peripheral states’ so as to preserve the EU, but also risks undermining the credit standings of stronger or creditor nations. In other words, every nation that joins in the bailout bandwagon will likely get dragged into economic morass, where eventually there won't be enough resources from which to redistribute and the whole structure falls apart.

Politicians and the bureaucrats, desperately looking for short term nostrums, looks like they are digging themselves deeper into the hole.

And given such conditions, the crisis should be expected to linger on and that sharp volatilities will continue to be the common feature of the marketplace.

Sunshine Industry: Video Games Media

One of the likely fastest growing applications of the information age would probably the video game industry.

From the Economist, (emphasis added)

OVER the past two decades the video-games business has gone from a cottage industry selling to a few niche customers to a fully grown branch of the entertainment industry. According to PricewaterhouseCoopers (PwC), a consulting firm, the global video-game market was worth around $56 billion last year, and has grown by over 60% since 2006, when the Nintendo Wii console was launched. The gaming industry is more than twice the size of the recorded-music industry, nearly a quarter more than the magazine business and about three-fifths the size of the film industry. PwC predicts that video games will be the fastest-growing form of media over the next few years, with sales rising to $82 billion by 2015. The biggest market is America, whose consumers this year are expected to spend $14.1 billion on games, mostly on the console variety. Consoles also dominate in Britain, the fifth-largest gaming market. In other parts of Europe, and particularly Germany, PC games are more popular. China has overtaken Japan to become the second-biggest market, and is one of the fastest-growing, with sales rising by 20% last year.

How will the growth of video games be facilitated?

Again from the same article, (bold emphasis mine)

Now the ever-increasing computing power of mobile phones has put the means of playing games into the pockets of people who would never think of spending hundreds of dollars on a dedicated console or a PC. The simple games that came pre-loaded onto the mobile handsets of a decade ago have evolved into a subset of the industry in its own right, appealing to a more casual crowd who play them on trains, in airport departure lounges or while waiting for the washing to finish. Today’s smartphones pack far more computing power than the original PlayStation, and games are a big part of their appeal: the two most popular kinds of software on Apple’s App Store are games and entertainment.

The internet has played a crucial part in the rise of video games, enabling developers to get their products into their customers’ hands without the need for traditional shops or publishers. That has allowed small, independent developers to compete with the big firms who might spend tens of millions of dollars on developing a single title and as much again on marketing it. As a result the industry is becoming increasingly fragmented as its markets become more differentiated.

The internet has also become a games platform in its own right, making the hobby truly sociable by electronically linking gamers the world over. Millions of people spend many hours each week playing and working (sometimes the distinction is not clear) in virtual places such as “World of Warcraft” and “EVE Online”. Hundreds of millions more play free, simple, sociable games on Facebook, such as “Lexulous”, which is a bit like Scrabble, and “FarmVille”, a game with an agricultural setting. Increasingly the games themselves are free, but the virtual goods available in these online worlds—a stable for one’s electronic horses, say, or a particularly pretty shirt for one’s digital alter ego to wear—cost real money.

The internet will likely remain a hub for the introduction of many innovative applications due to its largely free market setting.

And video games, mobile commerce, mobile banking and digital healthcare or telemedicine are likely major growth application areas for consumers that will be powered by the rapidly exploding mobile internet platform as manifested by tablet sales.

Quote of the Day: Business Value of Austrian Economics

I came to Austrian economics because that is how business in the real world felt to me.

Bingo!

Professor Arnold Kling captures the essence of what has attracted me to Austrian economics…real world values applied to business and the finance.

Considering that my career has revolved around dealing with markets, I have long been immersed or indoctrinated with conventional methodologies based on formulaic sciences, pattern seeking models and of heuristics veneered as traditionalism that has only led to many frustrations and manifold errors.

Austrian economics has not only signified out of the box thinking, but most importantly has helped me survived the recent storms from its common sense approach to economic analysis, i.e. human action, law of scarcity, knowledge problem, and opportunity costs.

Cracks in South Korea’s Mercantilists Policymaking Mindset?

Mercantilist policymaking in South Korea may be exhibiting some signs of fissures.

Michael Han at Matthews Asia writes,

South Korea has long been an export-oriented economy; more than half its economy is still dependent on export-heavy industries such as shipbuilding, automotives and information technology. The government’s supportive political sentiment toward exports is understandable since these industries have been South Korea’s “bread and butter” ever since it began its transformation in the 1960s from one of Asia’s poorest countries. But Korea now needs to take a deeper look domestically, particularly in terms of its social welfare system.

Recently, the government’s ruling party members, including its president, have lost major elections and seen their approval ratings plummet to all-time lows as issues surrounding currency movements, inflation and overall monetary policy have plagued the country. Many domestic consumer companies and consumers feel policies primarily benefit exporters at their expense. And while the general sentiment, “What is good for Korea’s major global corporations is also good for the country,” was once widely held, that mentality is shifting.

If true, then reality must be sinking into the public’s outlook.

Over the years, Korea’s exports have reached 50% of the GDP, but at what price? (chart from Google Public Data explorer)

Foreign currency reserve of South Korea has been exploding.(chart from Bloomberg)

The acquisition of US dollars by the Bank of Korea, by printing and issuing won, have been reflected on inflation rates (chart from tradingeconomics.com).

Each policy that politically promotes certain industries always comes at the expense of another. The imbalances of which, especially in manipulating or suppressing currencies for export promotion, will eventually get ventilated on the economy via inflation.

And such imbalances has supposedly begun to permeate into the political realm.

The won has been higher since 2009, but would be a lot higher if not for repeated interventions.

The other proposed solution of welfare spending will simply add to the predicament as resources will be transferred from productive to non-productive uses (politicos and welfare parasites).

Nevertheless, the Korea’s Kospi has been showing similar trend manifestations or seeming tight correlations as with all of the above (won, inflation rate, foreign currency reserves and even mortgage growth-as shown below).

While there maybe some signs of a seminal property bubble brewing, the Korean cycle has yet to culminate. So far annual change has not risen to alarming levels (charts from global property guide)

Bottom line: Interventionists policies end up spawning bubble or boom bust cycles which eventually percolates into the political sphere. And South Korea has not been exempted from such process.

ECB’s Draghi Balks at More QE, Global Equity Markets Tumble

Need more proof that financial markets have been held hostage by politics?

This from Bloomberg, (bold emphasis mine)

European Central Bank President Mario Draghi cut interest rates and offered banks unlimited cash for three years while damping speculation the ECB will buy more government bonds to stem the region’s debt crisis.

Policy makers meeting in Frankfurt today reduced the benchmark rate by a quarter percentage point to 1 percent, matching a record low. They also loosened collateral rules so that banks can borrow more from the ECB and announced two unlimited three-year loans. The measures “should ensure enhanced access of the banking sector to liquidity,” Draghi said at a press conference.

Hours before European leaders meet in Brussels, Draghi kept the onus on them to solve the two-year debt crisis by repeating his call for a “fiscal compact” and denying he had hinted the ECB would automatically support such an initiative with more bond purchases.

Draghi’s comments roiled markets, with stocks and the euro rising on the bank-lending measures before falling after he damped expectations of more ECB bond buying. The euro sank more than 1 percent and traded at $1.3310 at 6:30 p.m. in Frankfurt.

This despite… (from the same article)

With the ECB’s focus on jolting banks into lending, Draghi made it easier for them to borrow cash from the central bank.

Credit claims such as bank loans will become eligible as collateral and the central bank reduced the rating threshold on asset-backed securities.

The ECB also cut in half banks’ reserve ratio, which determines the amount of money they have to deposit with their national central banks every month, to 1 percent of total assets.

Reserve requirements currently amount to around 206 billion euros ($275 billion), so the reduction means “a significant increase in available collateral to banks,” said Laurent Fransolet, head of European fixed income strategy at Barclay’s Capital in London.

Draghi said the new measures should encourage banks to lend to companies and households.

Easing bank lending conditions have not been perceived as sufficient. Apparently market’s addiction to inflationism has made them crave for more of ECB’s quantitative easing.

Yet the ECB seems to be using QE as leverage for the EU to attain a “fiscal compact” during today’s summit, a seemingly perennial event since the crisis emerged that hasn’t made any significant progress.

And like the September shakeout where Ben Bernanke jilted the markets over expectations of QE 3.0, yesterday’s selloff had been broadbased which included important commodity benchmarks as oil and gold.

Nevertheless today’s selloff hasn’t been in the same scale as the September episode.

So financial markets will continue to be heavily influenced by expectations of political actions which only means sustained significant volatility in both directions.

Yet considering how the ECB has been trying to ease the credit environment with assorted measures (e.g. reserve ratio, collateral eligibility), more QE from the ECB can’t be discounted.

ECB’s Draghi’s declarations looks more like posturing.

Global Warming Debate: Sea levels aren't rising dangerously

Popular ‘media’ hysteria on climate change have principally been based from math derived models.

Yet in contravention of the establishment consensus, an expert based on extensive field observation claims that ‘sea levels are not rising dangerously’.

From the Spectator.co.uk,

This week's Spectator cover star Nils-Axel Mörner brings some good news to a world otherwise mired in misery: sea levels are not rising dangerously – and haven't been for at least 300 years. To many readers this may come as a surprise. After all, are not rising sea levels – caused, we are given to understand, by melting glaciers and shrinking polar ice – one of the main planks of the IPCC's argument that we need to act now to 'combat climate change'?

But where the IPCC's sea level figures are based on computer 'projections', questionable measurements and arbitrary adjustments, Mörner's are based on extensive field observations. His most recent trip to Goa in India last month – just like his previous expeditions to Bangladesh and the Maldives – has only served to confirm his long-held view that reports of the world's imminent inundation have been greatly exaggerated for ends that have more to do with political activism than science.

Mörner's views have not endeared him to environmental campaigners or the IPCC establishment. A few years ago, when I mentioned his name in a public debate with George Monbiot, I vividly remember an audible hissing from sections of the audience as if I'd invoked the equivalent of Lord Voldemort.

The problem for Mörner's detractors is that, eccentric and outspoken Swedish count though he no doubt is, he also happens to be the world's pre-eminent expert on sea levels. Besides being responsible for dozens of peer-reviewed papers on the subject, he was also chairman of INQUA Commission on Sea Level Changes and Coastal Evolution. This means that his findings can not easily be dismissed as those of a raving 'climate change denier'.’

I’d be very cautious about heeding populist or the mainstream’s claims when much of them seem to be communism/socialism garbed in environmental mores.

Burton Malkiel: Why Developed Economy Government Bondholders will Lose Money

At the Wall Street Journal, Professor Burton Malkiel, author of the classic finance book "A Random Walk Down Wall Street", argues that government bonds will generate negative for investors. He writes, (bold emphasis mine)

For years, investors have been urged to diversify their investments by including asset classes in their portfolios that may be relatively uncorrelated with the stock market. Over the 2000s, bonds have been an excellent diversifier by performing particularly well when the stock market declined and providing stability to an investor's overall returns. But bond yields today are unusually low.

Are we in an era now when many bondholders are likely to experience very unsatisfactory investment results? I think the answer is "yes" for many types of bonds—and that this will remain true for some time to come.

Many of the developed economies of the world are burdened with excessive debt. Governments around the world are having great difficulty reining in spending. The seemingly less painful policy response to these problems is very likely to keep interest rates on government debt artificially low as the real burdens of government debt are reduced—meaning the debt is inflated away.

Artificially low interest rates are a subtle form of debt restructuring and represent a kind of invisible taxation. Today, the 10-year U.S. Treasury bond yields 2%, which is below the current 3.5% headline (Consumer Price Index) rate of inflation. Even if inflation over the next decade averages 2%, which is the Federal Reserve's informal target, investors will find that they will have earned a zero real rate of return. If inflation accelerates, the rate of return will be negative.

We have seen this movie before. After World War II, the debt-to-GDP ratio in the United States peaked at 122% in 1946, even higher than today's ratio of about 100%. The policy response then was to keep interest rates pegged at the low wartime levels for several years and then to allow them to rise only gradually beginning in the 1950s. Moderate-to-high inflation did reduce the debt/GDP ratio to 33% in 1980, but this was achieved at the expense of the bondholder.

Ten-year Treasurys yielded 2.5% during the late 1940s. Bond investors suffered a double whammy during the 1950s and later. Not only were interest rates artificially low at the start of the period, but bondholders suffered capital losses when interest rates were allowed to rise. As a result, bondholders received nominal rates of return that were barely positive over the period and real returns (after inflation) that were significantly negative. We are likely to be entering a similar period today.

So what are investors—especially retirees who seek steady income—to do? I think there are two reasonable strategies that investors should consider. The first is to look for bonds with moderate credit risk where the spreads over U.S. Treasury yields are generous. The second is to consider substituting a portfolio of dividend-paying blue chip stocks for a high-quality bond portfolio.

Aside from a portfolio of blue chip stocks, Professor Malkiel recommends tax exempt bonds and foreign bonds.

I’d add that emerging market equities should also be part of one’s portfolio.

Read the rest here

20 Signs of the Unsustainable US Nanny State

From The Economic Collapse Blog

The following are 20 signs that the culture of government dependence has gotten completely and totally out of control....

#1 If you can believe it, 48.5% of all Americans now live in a household that receives some form of government benefits. Back in 1983, that number was less than 30 percent.

#2 Way too many Americans believe that the government should just swoop in and solve all of their problems. For example, the plight of a single mother named Angel Adams made national headlines recently. Over the years her relationships with three different men have produced 15 children, and she was recently found living in a single motel room with 12 of those children.

As you can see in the video below, Adams is looking for the government to come in and rescue her. The following is what Adams told one reporter....

“Somebody needs to pay for all my children and my – for all my suffering. Somebody needs to be held accountable, and they need to pay.”

#3 The amount of money paid out to individual citizens by the government today is absolutely staggering. In 1980, government transfer payments accounted for just 11.7% of all income. Today, government transfer payments account for 18.4% of all income.

#4 According to a recent ABC News report, suicides in rural America are spiking, and experts say that cuts to Medicaid are partly to blame....

“Kathie Garrett, co-chairman of the Idaho Council on Suicide Prevention, says the problem has gotten only worse since the recession. "The poor economy and unemployment—those put a lot of stress on people's lives," she explains. To save money, people skip doctor visits and cut back on taking prescribed medications. Cuts in Medicaid have reduced the services available to the mentally ill.

"I personally know people who lost Medicaid who've attempted suicide," says Garrett.

#5 By the end of 2011, approximately 55 million Americans will receive a total of 727 billion dollars in Social Security benefits. In future years, this dollar figure is projected to absolutely skyrocket.

#6 When you total it all up, American households are now receiving more money from the U.S. government than they are paying to the government in taxes.

#7 It is being projected that the federal government will account for more than 50 percent of all health care spending in 2012.

#8 Back in 1965, only one out of every 50 Americans was on Medicaid. Today,one out of every 6 Americans is on Medicaid.

#9 According to the Congressional Budget Office, the Social Security systempaid out more in benefits than it received in payroll taxes in 2010. That was not supposed to happen until at least 2016.

#10 The federal government is expected to "take care" of their workers far better than the private sector does. If you can believe it, the average federal employee in the Washington D.C. area brings in total compensation worth more than $126,000 a year.

#11 Last year, federal employees "earned" approximately 447 billion dollarsin total compensation.

#12 Spending by the federal government accounts for approximately one thirdof the GDP of the entire Washington D.C. region.

#13 The federal government spent more than 50 billion dollars on "housing assistance" in 2009.

#14 The U.S. government now says that the Medicare trust fund will run outfive years faster than they were projecting just last year.

#15 The total cost of just three federal government programs - the Department of Defense, Social Security and Medicare - exceeded the total amount of taxes brought in during fiscal 2010 by 10 billion dollars.

#16 Right now, there are more than 45 million Americans on food stamps. That means that approximately one out of every seven Americans is dependent on the federal government for food.

#17 The number of Americans on food stamps has increased 74% since 2007.

#18 Sadly, one out of every four American children is now on food stamps.

#19 In 2010, 42 percent of all single mothers in the United States were on food stamps.

#20 According to one study, "64.3 million Americans depended on the government (read: their fellow citizens) for their daily housing, food, and health care" during 2009.

The following chart from Heritage Foundation shows that by 2049, Medicare, Medicaid and Social Security will consume 100% of taxes.

This excerpt from Professor Higgs (previously at quote of the day) has been so relevant…

As the ranks of those dependent on the welfare state continue to grow, the need for the rulers to pay attention to the ruled population diminishes. The masters know full well that the sheep will not bolt the enclosure in which the shepherds are making it possible for them to survive. Every person who becomes dependent on the state simultaneously becomes one less person who might act in some way to oppose the existing regime. Thus have modern governments gone greatly beyond the bread and circuses with which the Roman Caesars purchased the common people’s allegiance. In these circumstances, it is hardly surprising that the only changes that occur in the makeup of the ruling elite resemble a shuffling of the occupants in the first-class cabins of a luxury liner. Never mind that this liner is the economic and moral equivalent of the Titanic and that its ultimate fate is no more propitious than was that of the “unsinkable” ship that went to the bottom a century ago.

The laws of economics will not allow for its persistence, whereas beneficiaries will revolt over any cuts.

The ultimate end of the welfare state extrapolates to chaos or dystopia.

European Debt Crisis: Demand for US dollar Rises amidst Signs of Funding Stress

From Reuters,

A larger-than-expected take-up of dollars at a European Central Bank tender on Wednesday reflected euro zone banks' funding stresses but the fact banks were using the facility was seen as a positive.

Banks took more than $50 billion at a three-month operation, which was the first since the world's major central banks cut the cost of using dollar swap lines with the Federal Reserve last week to help institutions struggling with the fallout from the euro zone debt crisis.

That was well above the $10 billion median forecast in a Reuters poll of money market traders. Banks also took $1.6 billion in one-week funds.

But analysts said there was no reason to panic as dollar-funding stresses were widely acknowledged already.

"We view this as a positive first step -- it leads a string of potential policy actions as authorities attempt to break the negative feedback loop from the euro zone and limit contagion back to the U.S.," said George Goncalves, head of U.S. interest rates strategy at Nomura Securities International in New York.

Morgan Stanley estimated the take-up in the ECB tender was the most since December 2008, with banks able to borrow dollars for three months at 0.58 percent compared with around 1.45 percent before the coordinated central bank action to lower the cost.

So the US Federal Reserve may have reactivated QE operations via swap line funding to the ECB, as previously discussed here and here

And today’s EU summit may grant license to the ECB to conduct more asset purchases (QE).

Shale Oil Discoveries Goes International, Easing Peak Oil Concerns

Last week, Argentina and China reported major Shale oil discoveries

From Presstv.com

Argentina's YPF oil and gas company has announced a historic oil discovery in the country's southern province of Neuquen, Press TV reports.

Yacimientos Petroliferos Fiscales (YPF) new finding includes 927 million barrels of recoverable oil and natural gas, of which 741 million barrels is shale oil.

“They [YPF] have an important discovery, and they have to expand it. The major challenge is to develop the technology and raise the capital in order to produce at reasonable prices,” Daniel Gerold, an energy market analyst told Press TV.

From Independent.co.uk

The shale gas revolution spread to China yesterday as Royal Dutch Shell struck the rock-based fossil fuel while drilling, heralding the country's first commercial production.

In a joint venture with its local partner, PetroChina, Shell has drilled two wells and discovered a good flow of gas.

"It's good news for shale gas," said Professor Yuzhang Liu, vice president of Petrochina's Research Institute of Petroleum Exploration and Development. Shale gas is fraught with controversy because it is extracted from the rock with blasts of sand, water and chemicals through a process known as hydraulic fracturing, or fracking, that has been linked to earthquakes and water pollution.

However, the discovery of vast quantities of the gas in countries such as the US, Poland and the UK has the potential to provide a relatively cheap, secure source of energy.

In April, the US Energy Information Administration estimated that China may hold 1,275 trillion cubic feet of shale gas, 12 times its conventional gas reserves and almost 50 per cent greater than in the US.

With the spate of Shale oil discoveries which should be expected to increase, as I previously wrote,

Eventually the growth of the industry will likely reach a scale enough to incentivize a structural change or reconfiguration in the distribution of demand.

This implies an easing of relevance of peak oil.

From Platts.com,

The debate over whether the world's reserves of hydrocarbons have now peaked and are in decline has lost relevance over recent years as new technology allows oil companies to find and exploit new hydrocarbon sources, the CEO of Repsol Antonio Brufau said Tuesday.

Brufau said progress made in exploring and developing ultra-deepwater areas, unconventional oil and gas sources and the move into remote areas such as the Arctic, have been key to growing global reserves of oil and gas.

"The speed at which technology changes and its consequences have taken us largely by surprise. The peak oil debate, for example, has lost a great deal of its relevance in the past three years," Brufau told the World Petroleum Congress in Doha.

"The possibility that usable resources under commercially viable terms will run out is no longer a concern in the short or medium term," he said.

(Hat tip Professor Mark Perry)

Did the US Bait Japan into Bombing Pearl Harbor?

Today is the 70th anniversary of the infamous Pearl Harbor bombing which paved way for the US to declare war against Japan.

Contrary to mainstream history, the trigger happy US President FDR allegedly provoked Japan to launch the attack.

Writes Patrick Buchanan,

On Dec. 8, 1941, Franklin Roosevelt took the rostrum before a joint session of Congress to ask for a declaration of war on Japan.

A day earlier, at dawn, carrier-based Japanese aircraft had launched a sneak attack devastating the U.S. battle fleet at Pearl Harbor.

Said ex-President Herbert Hoover, Republican statesman of the day, “We have only one job to do now, and that is to defeat Japan.”

But to friends, “the Chief” sent another message: “You and I know that this continuous putting pins in rattlesnakes finally got this country bit.”

Today, 70 years after Pearl Harbor, a remarkable secret history, written from 1943 to 1963, has come to light. It is Hoover’s explanation of what happened before, during and after the world war that may prove yet the death knell of the West.

Edited by historian George Nash, Freedom Betrayed: Herbert Hoover’s History of the Second World War and Its Aftermath is a searing indictment of FDR and the men around him as politicians who lied prodigiously about their desire to keep America out of war, even as they took one deliberate step after another to take us into war.

Yet the book is no polemic. The 50-page run-up to the war in the Pacific uses memoirs and documents from all sides to prove Hoover’s indictment. And perhaps the best way to show the power of this book is the way Hoover does it — chronologically, painstakingly, week by week.

Read the rest here

Japan to Offer Gold Coins to Debt Investors

From the Bloomberg/Businessweek

Japanese Finance Minister Jun Azumi will be rewarding investors who buy reconstruction bonds with half an ounce of gold, an added incentive that could boost the return by nearly six times.

Individual investors who purchase more than 10 million yen ($129,000) in the debt with a 0.05 percent return and keep it for three years will receive a gold commemorative coin weighing 15.6 grams (0.55 ounces), the Finance Ministry said in Tokyo today, worth about $948 based on current prices for the precious metal.

The offer suggests the return could be boosted to 89,000 yen should gold prices remain at current levels, more than the approximate 15,000 yen one would receive from the bond. Azumi, whose hometown was devastated by the March 11 disaster, said today he bought 1 million yen of the debt to support rebuilding efforts from the earthquake and tsunami.

This can be viewed as tokenism—reward for not only buying government debt (thereby keeping politicians happy) but for also keeping them.

Even at the margins, such symbolism may be seen as enhancing gold’s image as safehaven asset. Yet this could serve as more evidence where gold will likely be used as prospective collateral for government/corporate debt issuance.

Lastly, with the rate of currency debauchery being undertaken by global central backs which includes the Bank of Japan, it would not be surprising that the current price differential of the gold 15.6 grams coin ($948) and the 10 million yen debt ($129,000) will most likely narrow overtime.

Chart from ycharts.com

Prices of gold based on the yen has more than doubled over a decade.

Quote of the Day: Austrian Economics in the 20th Century

The big issue of the century in economic theory and economic policy, spanning macroeconomics and microeconomics, was the contest between central planning and markets. Hayek and Ludwig von Mises were by far the most prominent economists who argued long and loud that central planning was disastrous, not just because of the viciousness of communist dictatorships, but because even under ideal conditions it could not generate and use effectively the knowledge necessary to maintain modern standards of living. For a long time they were considered to be naive. As late as 1989, Paul Samuelson was still writing in his best-selling economics textbook, "The Soviet economy is proof that ... a socialist command economy can function and even thrive." About a hundred million people died proving that Karl Marx, his followers, and credulous souls inclined to give central planning the benefit of the doubt, such as Samuelson, were wrong, and that Mises and Hayek were right.

That’s from Kurt Schuler at the Freebanking.org defending Austrian Economics from the tirades of the Keynesian Supremo.

Adding to the contributions of Austrian economics from Professor Peter Boettke here, Professor Russ Roberts here, Greg Ransom here and Bob Wenzel here

When intellectual opponents resort to ad hominem arguments, it is a sign that they can’t deal squarely with issues.

Austrian Economics even in the face of the so-called Keynesian revolution has never been a footnote.

War on Drugs: US Authorities Launder Drug Money, Corruption Risk Increases

In the war on drugs, the dividing line between prosecuting criminals and becoming part of the crime becomes indistinct

From the New York Times (bold emphasis mine)

Undercover American narcotics agents have laundered or smuggled millions of dollars in drug proceeds as part of Washington’s expanding role in Mexico’s fight against drug cartels, according to current and former federal law enforcement officials.

The agents, primarily with the Drug Enforcement Administration, have handled shipments of hundreds of thousands of dollars in illegal cash across borders, those officials said, to identify how criminal organizations move their money, where they keep their assets and, most important, who their leaders are.

They said agents had deposited the drug proceeds in accounts designated by traffickers, or in shell accounts set up by agents.

The officials said that while the D.E.A. conducted such operations in other countries, it began doing so in Mexico only in the past few years. The high-risk activities raise delicate questions about the agency’s effectiveness in bringing down drug kingpins, underscore diplomatic concerns about Mexican sovereignty, and blur the line between surveillance and facilitating crime. As it launders drug money, the agency often allows cartels to continue their operations over months or even years before making seizures or arrests…

It is not clear whether such operations are worth the risks. So far there are few signs that following the money has disrupted the cartels’ operations, and little evidence that Mexican drug traffickers are feeling any serious financial pain. Last year, the D.E.A. seized about $1 billion in cash and drug assets, while Mexico seized an estimated $26 million in money laundering investigations, a tiny fraction of the estimated $18 billion to $39 billion in drug money that flows between the countries each year.

And in the pretext to trap the criminals for evidence, officials themselves induce or encourage the engagement of such ‘criminal’ activities.

Yet the article does not only skim over any potential conflict of interests and the increased possibility of corruption that emerges from the aforementioned police operations, but also ignores the skewed priorities undertaken by officials in following the drug money which leads to more crimes.

Nevertheless what has been obvious is that the war on drugs has been a massive failure. Instead, the war on drugs has resulted to the swelling of the drug trade and surging number of drug related deaths.

Chart from Professor Mark Perry

Drug money laundering by US authorities has corrupted many officials. This can be deduced from the enormous difference between seizures and drug money flows, considering that US narcotics agents have functioned as significant operatives for drug laundering operations.

Corruption is the innate socio-economic response to any prohibition laws, be it drug, alcohol or anti-mining laws or etc…

As Professor Mark Thornton writes, (The Economics of Prohibition, p.131)

Corruption is a function of the price of the prohibited product. As enforcement increases, the price of a prohibited product and the costs of avoiding detection rise relative to the basic costs of production. We should expect that suppliers would be willing to pay to reduce their risk. A higher price involves both a greater risk of apprehension and a greater incentive to provide monetary payments to public officials.

As enforcement increases, the risk of apprehension rises and the quantity of output decreases. The divergence between price and the basic costs of production increases. Increased enforcement therefore increases the ratio of costs of risk to the cost of production. The result is an increased profit opportunity for entrepreneurship in avoiding detection. Many avenues exist by which entrepreneurs can reduce detection risks. They can use faster boats and planes, smaller and easier-to-conceal products, or deceptive packaging. One way to shift the burden of risk is to corrupt the public officials charged with the enforcement of prohibition. As enforcement efforts increase, corruption (like potency) will gain a comparative advantage in avoiding detection over transportation, technology, and deception.

We therefore expect corruption to increase with increased enforcement efforts, whether or not total revenues in the industry increase. This assumes that the underlying demand for the product, penalties for both prohibition and corruption, and the efforts to reduce corruption are held constant.

So the unstated motto of US drug officials seem to be “if you can’t beat them, join them”, just camouflage them with entrapment operations.

Quote of the Day: Entrepreneurship is a Story of Innovation and Creativity

Entrepreneurship is a story of innovation and creativity. One may disagree with the exact terminology (i.e. “discovery”), but the essential point to take away is that entrepreneurship is not a given. It is an act of creation; production is a function of both the physical input of accumulated producers’ goods and human creativity, which is unique to the individual. In Hayekian terms, if we imagine wealth as it exists today as a mass of “known” knowledge, it is the entrepreneur’s role to essentially jump into the sphere of the “unknown.” It is not just about “discovering” what has been as of yet undiscovered, but about adding to the body of knowledge (whether known or unknown).

Excellent excerpt from Jonathan M.F. Catalán at the Mises Blog

Video: Understanding Subjective Value

Professor Don Boudreaux explains subjective value (hat tip Professor Art Carden; Mises Blog)