The RISK OFF Environment Has NOT Abated

In this issue:

The RISK OFF Environment Has NOT Abated

-Summary and Conclusion

-Dead Cat Bounce or Bottom?

-China’s Deepening Economic Slump in the face of Political Indecision

-Continuing Political Deadlock over the Euro Debt Crisis

Summary and Conclusion

Like it or not, UNLESS there will be monumental moves from central bankers of major economies in the coming days, the global financial markets including the local Phisix will LIKELY endure more period of intense volatility on both directions but with a downside bias.

I am NOT saying that we are on an inflection phase in transit towards a bear market. Evidences have yet to establish such conditions, although I am NOT DISCOUNTING such eventuality given the current flow of developments.

What I am simply saying is that for as long as UNCERTAINTIES OVER MONETARY POLICIES AND POLITICAL ENVIRONMENTS PREVAIL, global equity markets will be sensitive to dramatic volatilities from an increasingly short term “RISK ON-RISK OFF” environment.

And where the RISK ON environment has been structurally reliant on central banking STEROIDS, ambiguities in political and monetary policy directions tilts the balance towards a RISK OFF environment.

Dead Cat Bounce or Bottom?

Following the bloodbath from the other week, I partially expected a strong reaction to the current oversold conditions.

Disappointingly, the response by global equity markets seems to have been muted and mixed, where the kernel of the gains can be seen from the US and European markets.

Meanwhile many key Asian markets continue to post losses.

Credit standings as measured by Credit default swap (CDS) prices have also been affected. Doug Noland of the Prudent Bear notes that South Korea’s CDS have been 22 bps so far this month, 23 bps in China, 56 bps in Indonesia, 25 bps in Malaysia, 24 bps in Thailand and 44 bps in the Philippines[1].

While the Phisix registered a weekly advance, the actions of the market breadth has not been impressive.

Last week’s rebound came amidst tapering volume (weekly average peso volume, upper window) as declining issues still remained slightly dominant over advancing issues (weekly averaged advance-decline ratio, lower window).

The same dynamic seem to operate in the US S&P 500.

Even when all economic sectors contributed to the hefty 1.74% gain by the S&P over the week, broad market performance reveal that that most of stocks has been moving in tidal flows[2] and where the recent rebound seemed more like a reflexive recoil from severely oversold conditions[3].

Until we see substantial improvements in the market breath or market internals, last week’s market actions seem representative of a technical lingo known as Dead Cat Bounce[4]—a temporary recovery from a prolonged or intense decline.

China’s Deepening Economic Slump in the face of Political Indecision

Evidences seem to bolster my concerns over China’s economic slowdown (or possibly a bubble bust).

First, China’s factory orders posted a sharp drop last month[5], magnifying signs of a global economic slowdown. As the chart above from Danske Research shows, the Eurozone has been in rapid deceleration[6] which aggravates global economic position.

While the US economy continues to gain ground, the jury is out if the US will manage to weightlift her peers out of their current dire conditions.

On the other hand, the transmission effects from the marked slowdown in the Eurozone and China could likely drag the US or pose as significant headwind for the US economy.

Importantly, as previously pointed out[7], the US Federal Reserve remains reticent over the direction of monetary policies.

This vagueness in policy direction exacerbates or adds to the climate of uncertainty.

Next, China’s credit markets have suffered a deep contraction “for the first time in 7 years”[8].

Such credit contraction could signify revelations of the bursting of the China’s property bubble.

China’s currency, the yuan, represents a very important indicator of such event. As I pointed out last October 2011[9],

And contrary to public expectations, the unwinding of China’s bubble economy would lead to a depreciating yuan.

So far, the yuan’s recent depreciation against the US dollar appears to be the deepest since the past year, as shown by the above chart.

These may have accounted for hot money outflows. And “hot money” flows have functioned as significant driver of China’s asset markets, particularly the property markets.

In January of 2010[10] I quoted the Danske Research team on the context of the importance of hot money flows in fueling China’s property bubble. (bold emphasis mine)

…it underlines that despite China’s capital controls, capital flows has become more important and it has become more difficult for China to maintain an independent monetary policy, while simultaneously maintaining a quasi peg to USD.

And each time the yuan fell against the US dollar, the Shanghai Index staggered (see green ovals).

The Shanghai index (SSEC) has now been adrift at the crucial support level of the trend continuing pennant pattern formation. This means that should a breakdown of the SSEC occur in the coming sessions, we could see further downside pressures both on commodity markets and the yuan.

And this brings us to the third point on China’s seeming hastening economic slowdown, there have been increasing news where Chinese buyers of major commodities have been defaulting[11].

Since China represents the gorilla in the proverbial room for the global commodity markets, then slowing demand of commodities could be construed as added manifestations of China’s intensifying economic slowdown.

The Shanghai index and the major commodity benchmark have had tight correlations over the past year and a half.

This means that if this correlation should hold, and China’s economy goes into a deeper slump then commodity exporting countries, mostly emerging markets, will also be affected.

Not only will commodity producers and exporters be adversely impacted, a further risk would be a disruption in the globalization model of transnational supply chain networks[12]

So far the actions at the commodity markets and of major Asian equities appear to chime with the China slowdown theme.

But it would be misguided to fixate solely on China, as it would be imprudent to focus on the Euro crisis alone, since these plus many other factors conspire to produce the current environment[13]. There may be one or two outstanding momentary themes, but in a world where there are millions of spontaneously moving parts, to concentrate on one factor would be equivalent to resorting to heuristics.

Yet if there is any one source of social action that has the firepower to distort people’s aggregate activities, it would be through the channels of manipulation of money via inflationism.

As the great Professor Ludwig von Mises explained[14],

The social consequences of inflation are twofold: (1) the meaning of all deferred payments is altered to the advantage of the debtors and to the disadvantage of the creditors, or (2) the price changes do not occur simultaneously nor to the same extent for all individual commodities and services. Therefore, as long as the inflation has not exerted its full effects on prices and wages there are groups in the community which gain, and groups which lose. Those gain who are in a position to sell the goods and services they are offering at higher prices, while they are still paying the old low prices for the goods and services they are buying. On the other hand, those lose who have to pay higher prices, while still receiving lower prices for their own products and services. If, for instance, the government increases the quantity of money in order to pay for armaments, the entrepreneurs and workers of the munitions industries will be the first to realize inflationary gains. Other groups will suffer from the rising prices until the prices for their products and services go up as well. It is on this time-lag between the changes in the prices of various commodities and services that the import-discouraging and export-promoting effect of the lowering of the purchasing power of the domestic money is based.

So far what Chinese authorities have done has been to tepidly issue a pledge to bolster growth[15] (which many has deduced as signs of a forthcoming stimulus), as well as, plans to reduce the state’s stranglehold over the economy[16]. The latter should be terrific news and serves as increasing evidence of the growing political clout by entrepreneurs[17].

Two weeks ago, the People’s Bank of China cut the banking system’s reserve requirements[18]. Yet interest rates remain untouched.

There have been speculations that there may not be much support to expect from Chinese authorities until AFTER the national elections. The 18^th National Congress of the Communist Party of China[19] will be held this October 2012 from where delegates will be chosen to pave way for the selection of the heads of states, particularly including the President, Premier, and State Council at the March 2013 12^th National People’s Congress[20].

The bottom line is that should this be the case where there will not be material interventions, then economic uncertainty will be exacerbated by political uncertainty which increases the probability of further deterioration of China’s bubble economy.

Yet while the PBoC may likely engage in policies similar to her Western central bankers peers where inflationism has signified as an enshrined creed, it is unclear up to what degree the PBoC will be willing get exposed. That’s because China has made public her plans to make her currency, the yuan, compete with the US dollar as the world’s foreign currency reserve, which is why she has been taking steps to liberalize her capital markets[21] and China has also taken a direct bilateral financing trade route with Japan[22], which seems to have been designed as insurance against burgeoning currency risks and from the risks of trade dislocations from potential bank runs. It is important to point out that the US has some exposure on major European nations[23].

Further speculations and rumors have it that China covertly plans to even issue a Gold backed currency[24] as part of her quest to attain a foreign currency reserve status.

In short, the path towards foreign currency reserve status means having to embrace a deeper market economy (laissez faire capitalism) from which boom bust policies runs to the contrary.

Again, developments in China will MAINLY be hinged on the response by political authorities on the unfolding economic events.

Continuing Political Deadlock over the Euro Debt Crisis

In the Eurozone, it has obviously been a problem of political uncertainty.

The political impasse which has been prompting for an acceleration in the intra-region bank run, particularly in crisis affected nations of the PIIGS has NOT been out of fear of bank failures, but of out of concerns of massive devaluation from a severance of ties with the European Union. Obviously this has been the result of the populist anti-austerity sentiment.

The people’s nightmare has been in the realization that euros on their bank accounts would forcibly be converted into ‘drachmas’, ‘liras’, ‘escudos’ and ‘pesatas’ which extrapolates to massive losses relative to the euro and other currencies.

As Gavyn Davis at the Financial Times aptly points out[25]

First, the underlying fear of depositors in the periphery is not simply, or even mainly, one of bank failure. Instead, they probably fear the devaluation of their deposits relative to those in core economies if the euro should break up.

Therefore, the run is being caused by concerns about exchange rate risk, not necessarily by the fear of bank failure as such. This makes it much more complicated to deal with, since it is very difficult to offer guarantees against future exchange rate losses to today’s depositors. Germany would not want to stand behind such guarantees to Greek and Spanish citizens in the event of a euro break-up.

Such fear has not just been about exchange rate risks but likewise the inflation risks once devaluation from an exit route has been chosen.

So experts who peddle the elixir of devaluations are being exposed for their ideological quackery, as harsh reality reveals that people in these countries are having deep anxieties and apprehensions about being robbed of their savings, hence the capital flight.

People, thus, will seek the refuge in other currencies, or gold, not because this has been a “given” or part of the “intuition”, but because of the fear of the LOSS of PURCHASING POWER of the currency from which their savings has been denominated.

And add to the broadening regional risk has been ECB’s guarantees on intra-region capital flows, through the Target 2 program.

Again Mr. Davies

Second, the bank run is greatly increasing the scale of potential transfers between nation states which until recently have been disguised within the ECB balance sheet. As deposits are withdrawn from Greek banks, the ECB replaces these deposits with liquidity operations. If these are standard repo operations, such as those undertaken in the LTROs in December and February, then the ECB is directly assuming risks which the Greek private deposit holder is no longer willing to hold. If the liquidity is injected via Emergency Lending Assistance, then the Bank of Greece is theoretically assuming the risk, rather than the ECB as a whole. But in the event of a euro break-up, these losses would ultimately fall on the ECB itself.

Initially, the ECB aimed at converging interest rates (see chart above[26]) through inflationist policies. However the ensuing bust has led to the increasing use of emergency programs based on national measures particularly through the stealth Emergency Liquidity Assistance: ELA[27].

Thus the nationalisation of the regional markets gives credence to angst over the prospects of intense devaluations, from the risk exposures assumed by national central banks, once EU ties with crisis afflicted countries as Greece, have been abrogated.

Everyone seems focused on a “Greece exit”. Yet should an exit become reality, it is unclear if the Greece affair will be isolated. Thus the added uncertainty factor.

The fact is that “exit” and “default” represent two different things. What makes the public confused over the two has been the deceptive phraseology conducted as propaganda where Greece’s salvation comes with “devaluation”.

Instead, what the EU may do is to announce, according to Chicago Professor John Cochrane[28], that they will tolerate sovereign default, bank failures, and drastic cuts in government payments rather than breakup.

In reality, real reforms as liberalization of the labor markets and allowing markets to clear would have a significant impact on resolving the current crisis[29] than through the mirage of devaluation.

But the latter two measures, viz, tolerance for default and economic liberalization, seem hardly the steps politicians have been working on.

And that’s where another aspect of uncertainty lies.

And add to the potential flight to gold are the risks of forcibly converting accounts of EU citizens, even if they are located outside their home nations, into domestic currencies.

Since the ECB has the monitoring and identification capabilities over such intra-region transfers, it may not be farfetched that the ECB may consider passing some of its losses to account holders within the region, based on citizenship, which could be done by fiat.

Analyst James Turk explains through an analogy[30]

So let’s assume Nico transfers euros from his Greek bank to his bank account in Germany before the Grexit. Nico thinks his euros are now safe, but are they?

What if the Eurocrats in Brussels decide that Nico was “speculating” with the “hot money” he transferred to Germany? Even though Nico was simply acting prudently seeking what he thought was a safe-haven for his life savings, which were held in euros, the Eurocrats could easily make the claim he was speculating because he moved the money out of Greece, his home country.

So to put their words into action, the Eurocrats determine that coincident with the Grexit and re-launch of the drachma, all euros deposited in banks anywhere in Euroland by Greek nationals becomes a drachma deposit. Germany is saved because it no longer owes euros to Nico. But Nico’s life savings are not safe after all. And the same thing could happen to Juan, Paddy, Luigi and their countrymen in the PIIGS, if they think that moving their euros to Germany is safe.

All these add up to signify a problem of a festering system that has thrived on economically unsustainable redistributionist model.

There is no such thing as “credible guarantee” that will save the current system. Printing money or centralization via ‘fiscal union’ will NOT rescue or resurrect the system. All they do is to kick the can down the road. That’s because a parasitical relationship, which the EU framework has been, can only exist for as long as parasites don’t kill the host, or until the host develop ways of getting rid of or protecting themselves from parasite[31]. Thus we have both dynamics going against the EU.

People have to realize that the EU crisis has been ONGOING or CONTINUING development since 2008, yet conditions have been WORSENING despite all the intercessions.

As author and Professor Philipp Bagus rightly points out[32]

Similarly, there is the problem of TARGET2 claims and liabilities. If Germany had left the EMU in March 2012, the Bundesbank would have found TARGET2 claims denominated in euros of more than €616 billion on its balance sheet. If the euro depreciated against the new DM, important losses for the Bundesbank would result. As a consequence, the German government may have to recapitalize the Bundesbank. Take into account, however, that these losses would only acknowledge the risk and losses that the Bundesbank and the German treasury are facing within the EMU. This risk is rising every day the Bundesbank stays within the EMU.

If, in contrast, Greece leaves the EMU, it would be less problematic for the departing country. Greece would simply pay its credits to the ECB with the new drachmas, involving losses for the ECB. Depositors would move their accounts from Greek banks to German banks leading to TARGET2 claims for the Bundesbank. As the credit risk of the Bundesbank would keep increasing due to TARGET2 surpluses, the Bundesbank might well want to pull the plug on the euro itself (Brookes 1998).

Intellectual honesty requires us to admit that there are important costs to exiting the euro, such as legal problems or the disentangling of the ECB. However, these costs can be mitigated by reforms or clever handling. Some of the alleged costs are actually benefits from the point of liberty, such as political costs or liberating capital flows. Indeed, other costs may be seen as an opportunity, such as a banking crisis that is used to reform the financial system and finally put it on a sound basis. In any case, these costs have to be compared with the enormous benefits of exiting the system, consisting in the possible implosion of the Eurosystem. Exiting the euro implies ending being part of an inflationary, self-destructing monetary system with growing welfare states, falling competitiveness, bailouts, subsidies, transfers, moral hazard, conflicts between nations, centralization, and in general a loss of liberty.

In short, the easy answer to the current crisis will be to put one’s house in order: earn more than what one can spend. This represents a commonsensical and a pragmatist approach which does NOT require complex mathematical equations.

Unfortunately, when it comes to politics, ideas premised on the law of scarcity, opportunity costs and common sense have almost always been compromised and reduced to a thinking minority.

As for the financial markets, the risks of contagion from bank runs and of the prospects of losses from a Greece exit, has so far eclipsed the inflationism engaged by national central banks in Europe. As to the extent of the political pursuit of current dynamics, we can only observe through the price mechanism.

While I wouldn’t know precisely the scale of any potential contagion from anyone of the above risks, it’s hard to presume about immunity, UNTIL SOME CLARITY OVER POLICIES AND POLITICAL DEVELOPMENTS WILL SURFACE.

For now, all the abovementioned circumstances exhibit the current dominance of UNCERTAINTY. This means that the current conditions are likely aggravate or are conducive for the furtherance of the RISK OFF environment.

Again like it or not, reality tells us that we have to face the painful choice between taking more risk or wealth preservation.

---

[1] Noland Doug “Here Comes The Policy Response!” May 25, 2012 Credit Bubble Bulletin, The PrudentBear.com

[2] BespokeInvest.com All or Nothing Days on the Rise, May 24, 2012

[3] BespokeInvest.com Breadth Update on S&P 500 Sectors May 24, 2012

[4] Investopedia.com Dead Cat Bounce

[5] See Sharp Slowdown in China’s Factory Activity Amplifies the China Uncertainty Factor, May 24, 2012

[6] Danske Research Global: Waiting for the policy response, May 25, 2012

[7] See Risk ON Risk OFF is Synonym of The Boom Bust Cycle May 21, 2012

[8] See More Signs of Big Trouble in Big China as Loans Sharply Contract May 25, 2012

[9] See More Evidence of China’s Unraveling Bubble? October 16, 2011

[10] See China’s Attempt To Quash Its Homegrown Bubble, January 25, 2010

[11] See China’s Demand for Commodities Plummets as Buyers Default May 22, 2012

[12] See Black Swan Event: Has China’s Bubble Been Pricked? October 9, 2011

[13] See Is ASEAN Resilient from Euro Debt Woes? , May 25, 2012

[14] Mises, Ludwig von INTERVENTIONISM:AN ECONOMIC ANALYSIS p.36 Mises.org

[15] Bloomberg.com Wen Growth Pledge Spurs Speculation Of China Stimulus, May 21, 2012

[16] Bloomberg.com China To Smash ‘Glass Walls’ To Aid Investors, NDRC Says, May 24, 2012

[17] See China’s Coup Rumors: Signs of the Twilight of Centralized Government? March 22, 2012

[18] See China Cuts Reserve Requirement, May 14, 2012

[19] Wikipedia.org 18th National Congress of the Communist Party of China

[20] Wikipedia.org 12th National People's Congress

[21] See China Deepens Liberalization of Capital Markets April 4, 2012

[22] See China and Japan to Trade Currencies Directly May 27, 2012

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

[24] Washington Blog Will China Make the Yuan a Gold-Backed Currency? May 22, 2012

[25] Davies Gavyn The anatomy of the eurozone bank run, May 20, 2012, Financial Times.com

[26] Spiegel Online Graphics Gallery: The Most Important Facts about the Global Debt Crisis August 15, 2011

[27] See ECB’s Stealth Mechanism to Bailout Banks: Emergency Liquidity Assistance (ELA), May 25, 2012

[28] Cochrane John H. Leaving the Euro May 23, 2012 The Grumpy Economist

[29] See Germany’s Competitive Advantage over Spain: Freer Labor Markets, May 25, 2012

[30] Turk James, Preparing for the “Grexit” May 23, 2012 FGMR.com

[31] NECSI.edu Parasitic Relationships

[32] Bagus Philipp Is There No Escape from the Euro? April 23, 2012 Mises.org

China and Japan to Trade Currencies Directly

Speaking of severe credit dislocations triggered by a quasi collapse of the US banking system in 2008, bilateral trade financing has been a dynamic which emerged to fill in such a void.

Apparently, realizing the risks of another bout of a banking collapse, China and Japan will trade directly with the use of their respective currencies this June, which aims to bypass the US dollar, and the US banking system as well.

From the AFP

Japan and China are expected to start direct trading of their currencies as early as June as part of efforts to boost bilateral trade and investment, according to reports.

With the planned step, exchange rates between the yen and the yuan will be determined by their transactions, departing from the current "cross rate" system that involves the dollar in setting yen-yuan rates, Kyodo News said on Saturday.

The two governments are eyeing setting up markets in Tokyo and Shanghai, the Yomiuri Shimbun said.

The yen-yuan exchange system would help businesses in the world's second- and third-largest economies reduce risks associated with exchange rate fluctuations in the dollar and cut transaction costs, Kyodo said.

It will be the first time that China has allowed a major currency except the dollar to directly trade with the yuan, Kyodo said.

Well, this serves as another painting on the wall that heralds the twilight of the US dollar standard.

HOT: Charges of Corruption in the Vatican

Even the Vatican has not been spared from charges of corruption and from internal political power struggles.

From the Daily Mail,

Vatican police have arrested Pope Benedict XVI's personal butler following an investigation into the leaking of sensitive church documents, it emerged today.

In a scenes worthy of a Dan Brown thriller, the butler identified as Paolo Gabriele, 46, was held by gendarmes after a special commission of three top senior cardinals had been appointed by a furious Pope Benedict to identify the source of the leaks which have caused severe embarrassment.

Gabriele, who has been at the Pope's side for six years, is one of the German born pontiff's closest members of his inner circle which totals just four lay people and four nuns and he is always at his side - he is so close that he and the nuns who look after him are described as the 'pontiff's family'…

The arrest of Gabriele comes just days after author Gianluigi Nuzzi published a book on the leaked documents called Sua Santita (His Holiness).

The Vatican had condemned the book as 'criminal' and the printing of the documents were a violation of the Pope's privacy it said.

Nuzzi hit back and said that the files were not private and were documents between states and he added they had been given to him by people who work inside the Vatican and in a reference to the Bible, he said the sources wanted to 'get the moneylenders out of the temple'.

Today's arrest came just a month after Pope Benedict turned detective and appointed a special commission to investigate the series of damning and embarrassing leaks of sensitive Catholic Church documents from the Vatican as it still tries to recover from the priest sex abuse scandal.

Dozens of documents including private letters to the Pope have found themselves into the hands of the Italian media in what has been dubbed, unsurprisingly, Vatileaks.

The documents show how contracts were awarded to favoured companies and individuals and also highlight allegations of internal power struggles with the Vatican's bank known as the Institute for Religious Works.

By coincidence on Thursday the head of the bank, Ettore Gotti Tedeschi, who is already under investigation for money laundering resigned after a vote of no confidence and initially there were rumours that he was the person responsible for the leak of documents.

The scandal began in January with the publication of leaked letters from the former deputy governor of the Vatican City archbishop Carlo Maria Vigano, in which he pleaded not to be transferred after he had exposed what he said was corruption over the awarding of contracts.

Earlier the Vatican supported Occupy Wall Street over so-called “corporate greed” and even called for "sweeping reforms".

It had been apparent that the Vatican hardly considered the real political economic conditions (that led to the present juncture) from which impulsive judgment had been passed.

The Vatican hardly realized that they fell for deceptive moral trap laid out by the socialists.

And surprisingly, even the Vatican economist endorsed ECB’s inflationist policies.

I guess with the above report, the idiom “what comes around goes around” applies.

Agricultural Subsidies Keep Agricultural Commodity Prices High

Wonder why prices of agricultural commodities remain stubbornly lofty despite advances in technology?

Not all have been about "demand" growth from emerging markets.

The widely unseen forces come from central bank money printing, trade restrictions and agricultural subsidies. For instance the US government subsidizes farm owners not to farm (which contributes to a reduction in supplies).

From Wall Street Journal Blog (bold highlights original)

More farmers than expected applied to put their land in a government program that pays the farmers not to plant crops and not all of the acres could be accommodated, the U.S. Department of Agriculture said Friday.

The USDA accepted 3.9 million new acres into the Conservation Reserve Program, or CRP, in the latest sign-up period and turned away 600,000 acres.

Interest in the program was so high, a USDA spokesman said, the agency extended the time period to allow farmers to get their applications filed.

A guaranteed return on land is appealing to farmers, especially if the land isn’t well suited for planting crops, said Todd Davis, a senior economist with the American Farm Bureau Federation.

The USDA is anxious to enroll new acres in the program that is aimed at protecting environmentally sensitive land because on Sept. 30 the contracts that keep about 6.5 million acres of potential farm land idle will expire. Contracts take land out of production, thus conserving soil, for either 10 or 15 years.

About 30 million acres are now idled under the program, but the 6.5-million-acre exodus will be the largest ever. The USDA spends about $1.8 billion a year on the program, paying “rent” to land owners.

Bottom line: politics distorts demand and supply.

Obama’s Fatal Conceit: Roster of Public Investment Disasters

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.

F. A. Hayek’s famous quote from another landmark book “The Fatal Conceit: The Errors of Socialism” is best exemplified by President Obama’s horrendous track record in investing public funds in the private sector or the Keynesian dictum of “socialization of investments”.

Writes AEI fellow Marc A. Thiessen at the Washington Post (hat tip Professor Mark Perry) [bold highlights mine]

Since taking office, Obama has invested billions of taxpayer dollars in private businesses, including as part of his stimulus spending bill. Many of those investments have turned out to be unmitigated disasters — leaving in their wake bankruptcies, layoffs, criminal investigations and taxpayers on the hook for billions. Consider just a few examples of Obama’s public equity failures:

● Raser Technologies. In 2010, the Obama administration gave Raser a $33 million taxpayer-funded grant to build a power plant in Beaver Creek, Utah. According to the Wall Street Journal, after burning through our tax dollars, the company filed for bankruptcy protection in 2012. The plant now has fewer than 10 employees, and Raser owes $1.5 million in back taxes.

● ECOtality. The Obama administration gave ECOtality $126.2 million in taxpayer money in 2009 for, among other things, the installation of 14,000 electric car chargers in five states. Obama even hosted the company’s president, Don Karner, in the first lady’s box during the 2010 State of the Union address as an example of a stimulus success story. According to ECOtality’s own SEC filings, the company has since incurred more than $45 million in losses and has told the federal government, “We may not achieve or sustain profitability on a quarterly or annual basis in the future.”

Worse, according to CBS News the company is “under investigation for insider trading,” and Karner has been subpoenaed “for any and all documentation surrounding the public announcement of the first Department of Energy grant to the company.”

● Nevada Geothermal Power (NGP). The Obama administration gave NGP a $98.5 million taxpayer loan guarantee in 2010.The New York Times reported last October that the company is in “financial turmoil” and that “[a]fter a series of technical missteps that are draining Nevada Geothermal’s cash reserves, its own auditor concluded in a filing released last week that there was ‘significant doubt about the company’s ability to continue as a going concern.’ ”

● First Solar. The Obama administration provided First Solar with more than $3 billion in loan guarantees for power plants in Arizona and California. According to a Bloomberg Businessweek report last week, the company “fell to a record low in Nasdaq Stock Market trading May 4 after reporting $401 million in restructuring costs tied to firing 30 percent of its workforce.”

● Abound Solar, Inc. The Obama administration gave Abound Solar a $400 million loan guarantee to build photovoltaic panel factories. According to Forbes, in February the company halted production and laid off 180 employees.

● Beacon Power. The Obama administration gave Beacon — a green-energy storage company — a $43 million loan guarantee. According to CBS News, at the time of the loan, “Standard and Poor’s had confidentially given the project a dismal outlook of ‘CCC-plus.’ ” In the fall of 2011, Beacon received a delisting notice from Nasdaq and filed for bankruptcy.

This is just the tip of the iceberg. A company called SunPower got a $1.2 billion loan guarantee from the Obama administration, and as of January, the company owed more than it was worth. Brightsource got a $1.6 billion loan guarantee and posted a string of net losses totaling $177 million. And, of course, let’s not forget Solyndra — the solar panel manufacturer that received $535 million in taxpayer-funded loan guarantees and went bankrupt, leaving taxpayers on the hook.

Amazingly, Obama has declared that all the projects received funding “based solely on their merits.” But as Hoover Institution scholar Peter Schweizer reported in his book, “Throw Them All Out,” fully 71 percent of the Obama Energy Department’s grants and loans went to “individuals who were bundlers, members of Obama’s National Finance Committee, or large donors to the Democratic Party.” Collectively, these Obama cronies raised $457,834 for his campaign, and they were in turn approved for grants or loans of nearly $11.35 billion. Obama said this week it’s not the president’s job “to make a lot of money for investors.” Well, he sure seems to have made a lot of (taxpayer) money for investors in his political machine.

All that cronyism and corruption is catching up with the administration. According to Politico, “The Energy Department’s inspector general has launched more than 100 criminal investigations” related to the department’s green-energy programs.

Bottom line:

Politicization of investments almost always lines up in the pockets of cronies of political authorities, which have also been blemished by corruption (of course, political authorities are likely to have a share of politically mandated “beneficence”).

Worst, these so-called “investments”, which turn out to be grand sink holes, apparently ends up as added burden for taxpayers.

In effect, the public policy of “socialization of investments” represents transfers of scarce resources from the society (rich, middle class, and poor) to cronies by legislation. Talk about political inequality.

Not only has the above been a manifestation of pretentious and phony “top-down” knowledge by the political leadership, but such also signifies what the great Frederic Bastiat once warned about regarding “legal plunder”.

Quote of the Day: Hayek’s Road to Serfdom is about Resisting Change

Hayek never argued that the slightest deviation from laissez-faire capitalism launches a society on an unstoppable march toward tyranny. Instead, he reasoned that tyranny is the inevitable result of government policies aimed at preventing market competition from ever threatening anyone’s economic prospects. As long as voters demand that government protect them from all downsides of economic change, governments can oblige them only by shutting down, one after another, all avenues for economic change. Competition; entrepreneurship; innovation; consumer sovereignty; workers’ freedom to change or to quit their jobs; even changes in demographics. Government must obliterate these and all other sources of change if no one is to be exposed to the risk of losing a job or of having her wages or benefits cut.

Obviously, in reality governments cannot produce such a petrified paradise. But in the course of trying they will create hell on earth unless people come to accept the fact that widespread material prosperity is impossible without genuine change – and that change is impossible without some people suffering economic disappointment.

That’s from Professor Don Boudreaux at the Café Hayek.

This reminds me of former astronaut and engineer Frank Borman’s popular quote

capitalism without bankruptcy is like Christianity without hell

Warren Buffett’s Political Entrepreneurship Investing Paradigm

Warren Buffett has been unabashed crony for the Obama regime, to the extent that has even spited on the principles embraced by his Dad, Howard.

From an erstwhile venerable “value” investor, today Mr. Buffett’s investing formula has pronouncedly shifted into rent seeking.

Peter Schweizer of Reason reckoned in his March exposé on Warren Buffett that this folksy fellow “needed the TARP bailout more than most.”

Let’s run through the numbers. Berkshire Hathaway firms in total received $95 billion in TARP money. Berkshire, you’ll recall, held stock in Wells Fargo, Bank of America, Goldman Sachs and American Express. Not only did these companies receive TARP funds… they also dipped into the FDIC’s treasury to back their debt. Total bailout: $130 billion. TARP-enabled companies accounted for 30% of the Oracle’s publicly disclosed stock portfolio.

He’s definitely one of the top beneficiaries of the big bank bailout. And to sharpen the sting, he even got a better deal to help ailing Goldman Sachs than our own government. Buffett got a 10% preferred dividend while the Feds got all of 5%. He cleaned up with $500 million a year in dividends. Without the bailout, you can bet many of his stock holdings would have gone near-zero instead.

That’s from Addison Wiggins of the Daily Reckoning.

As I previously wrote, I think Mr. Buffett has been desperate about preserving his popularity, social privileges and political clout which seems to have mainly been latched on the sustenance of his track record, where the scale of his portfolio may have met the law of diminishing returns using his traditional "value" methods.

So instead of admitting reality, egoism has motivated him to radically shift strategies and to sacrifice principles for convenience.

Central Banks of the Philippines and Emerging Markets Ramp Up Gold Purchases

Gold prices may be falling but official or non-market entities seem to using this opportunity to stack up on gold reserves.

From Mineweb.com

The latest official Central Bank gold holding figures from the IMF confirm that Central Banks around the world are continuing to buy gold - some in pretty large quantities which should be yet another stabilising factor for the gold price - and if the trend continues suggests that the CBs will buy even more this year than last - and that's only the ones which let the world know exactly what their gold reserves are!

The latest figures not only show some substantial gold buying in April, but also a big lift in gold purchases by The Philippines which actually date back to March, but were slow in being notified to the IMF. The Phillipines' March gold purchases amounted to no less than 1.033 million ounces - 32 tonnes - of the yellow metal - the biggest volume since Mexico bought around 78 tonnes a little over a year ago - and increased tet country's gold reserves by almost 20%.

The Phillippines was not the only laggard in reporting increased gold reserves though. Tiny Sri Lanka raised its reserves by an even greater 39%, but dating back to January, with a rise of 2.177 tonnes to 7.807 tonnes - obviously far less significant in the global picture but yet another indication of the perceived significance of gold in particular in the Asian economies.

The most significant reported gold purchases in April itself included 29.7 tonnes by Turkey (a 14% increase in its reserves, but this is thought to have largely been due to its policy of acceptance of gold as collateral from commercial banks), 2.92 tonnes by Mexico, 2.02 tonnes by Kazakhstan, and 1.4 tonnes by the Ukraine.

The continued buying by Central Banks does continue to indicate an underlying unease about the sovereign debt situation and its impact on the value of some key reserve currencies- not least the dollar and the euro.

In an email to Mineweb respected New York gold analyst, Jeff Nichols, commented "The lastest IMF data on central bank gold reserves was just released earlier today -- showing gold purchases by Mexico, Kazakhstan, Ukraine, Russia, and the Philippines. Undoubtedly, China and perhaps a few other countries bought gold but did not report their purchases to the IMF." This reiterates the widespread belief that some countries - of which China is thought to be the major entity - for political reasons do not report their total holdings to the IMF, but hold new gold purchases in accounts that are not reported until it is considered politically expedient to do so. Last time China reported an increase in reserves was in 2009.

Since then there has been much speculation that China could be building up its reserves at a rate of four or five hundred tonnes a year or more given the level of domestic gold production and the big surge in imports seen.

Add to this the report of Russia’s recent gold purchases…

From Goldcore/goldseek.com

Today, the deputy chairman of Russia's central bank, Sergey Shvetsov, said that the Bank of Russia plans to keep buying gold on the domestic market in order to diversify their foreign exchange reserves.

"Last year we bought about 100 tonnes. This year it will be less but still a considerable figure," Shvetsov told Reuters on the sidelines of a financial conference in Milan

Evidently we are witnessing emerging markets take up insurance against rampant inflationist policies of the West.

If the Philippine BSP should continue with its actions of gold hoarding, then this should be very bullish for the peso over the long term.

As a side note, I am not, at present, bullish the peso or local assets in a Risk OFF environment. Since I think we are in a state of limbo, I am basically neutral but with a slight bias on the downside, but am waiting for confirmatory evidences of either a bear market or the return of the bull market to develop.

Oh by the way, given the recent moves to ban coin "hoarding", the legislative branch of the Philippine government should also consider banning the BSP's hoarding of physical gold too, as this would mean "shortage" of gold in circulation around the world. That's how logic works in politics. Pffft.

Video: Dr Marc Faber Optimisitic When Greece Exits, Sees Global Recession Very Soon

Interesting insights from Dr. Marc Faber's interview with the CNBC (hat tip Zero Hedge). Below are my notes:

-Germany will issue Eurobonds. Quality of euro will diminish

-Euro is oversold, potential to rebound along with stock market for the short term

-People are focusing excessively on Euro while ignoring the rest like India and China

[my comment: very true.]

-Danger level—any outright default by any countries. Better to take losses now than to wait for the risk of “gigantic systemic failure”

-Market will be relieved if Greece exited the Eurozone. There would be some clarity. It wouldn’t be good for bank and financial shares. The markets are oversold and on exit of Greece, I think markets would rally

[my comment:

Indeed. People hardly realize that the banking system is NOT the economy as mainstream pundits would have it.

While a banking meltdown may impact business activities over the short term (like 2008), the world does NOT operate on a vacuum, people will continue to trade and resort to other means of obtaining credit, e.g. consumer financing companies filled the niche of Japan's immobilized banking system as alternative sources of credit during post-bubble bust, in 2008 trades have been conducted through barter and through bilateral financing deals, during the recent Euro crisis, in Italy the mafia has stepped up the void as a major creditor

This will especially be true, if reforms would allow for greater economic freedom, which would allow parties to fill in the void. For instance, Walmart's application for bank license was turned down from opposition by big banks, unions and etc...]

-More and more stocks are breaking down around the world. He says that this means many economies are likely to weaken. We might see “some asset deflation”

[my comment: Dr. Faber seems to be vacillating from an oversold rebound to asset deflation.]

-We could have a global recession starting sometime in the fourth quarter of this year or early 2013—100% certainty

-Hold cash US dollars and some gold.

-Although gold prices may breakdown below the low on December 29 2011 of 1,522.

[my comment: the risks seems to be tilted towards a meaningful downdraft alright, which may signal some asset deflation or even global recession, but we can't rule out the possibility that political authorities, particularly of central bankers, may confront these with even more aggressive money printing measures, which again may defer interim trends.

Nonetheless, current environment highlights the state of uncertainty we are in]

Germany’s Competitive Advantage over Spain: Freer Labor Markets

When politics is involved, common sense is eschewed.

The vicious propaganda against “austerity” aims to paint the government as the only solution to the crisis, where the so-called “growth” can only be attained through additional government spending funded by more debt. Unfortunately, these politically confused people have forgotten that today’s crisis has been caused by the same factors which they have been prescribing: debt. In short, their answer to the problem of debt is to acquire more debt.

The same with clamors for crisis plagued nations to “exit” the Eurozone in order to devalue the currency. Inflating away standards of living, it is held, will miraculously solve the social problems caused by too much government interventionism that has led to inordinate debt loads.

Professor John Cochrane of the Chicago School nicely chaffs at statist overtures,

The supposed benefit of euro exit and swift devaluation is the belief that people will be fooled that the 10 Drachmas are not a "cut" like the 5 euros would be. Good luck with that.

Little has been given thought to what’s happening on the ground, particularly achieving genuine competitiveness by allowing entrepreneurs to prosper.

At the Mises Institute, Ms Carolina Carmenes and Professor Howden lucidly explains why Germany has been far more competitive than Spain, specifically in the labor markets .

Spain’s labor costs have been cheaper than Germany, yet the Germans get the jobs. Writes Ms. Carmenes and Prof Howden (bold emphasis added)

Spanish employment is now hovering around 23 percent, with over 50 percent of youths jobless. Only around 6 percent of Germans are without work, almost the lowest level in the country since reunification. This divide solidifies Spain's position among the worst-performing economies of the continent, and Germany's vaunted position as among the best.

Yet such a situation might seem paradoxical. One could, for example, look at the wage rates of the respective workers and find that low-cost Spaniards are much more affordable. Profit-maximizing businesses should be expanding their facilities to take advantage of the opportunity the Spanish crisis has provided and eschew higher-cost German labor.

While fixating on nominal labor costs might provide a compelling case for a bright Spanish future, delving into the details provides some darker figures.

Once again the German-Spain comparison shows of the myth of cheap labor

Little thought has also been given to the impact of minimum wage and excessive labor regulations which stifles investment and therefore adds to the pressures of unemployment

Again Ms. Carmenes and Prof Howden (bold emphasis added)

One of the main differences between Germany's and Spain's labor markets is their minimum-wage rates. A Spanish minimum-wage worker can expect to earn about €633 per month. Germany on the other hand enforces no across-the-board minimum wage except in isolated professions — construction workers, roofers, and electricians, as examples.

German employees are free to negotiate their salaries with their employers, without any price-fixing intervention by the government in the form of wage control. (This is not to imply that the German labor market is completely unhampered — jobs are cartelized by industry each with its own wage controls. While this cartelization is not perfect, it does at least recognize that a one-size-fits-all minimum-wage policy is not optimal for the whole country.)

As an example of the German approach to wages, consider the case of a construction worker. In eastern Germany this worker would make a minimum wage of around €9 per hour. His counterpart in western Germany would earn considerably more — almost €11 an hour. This difference allows for productivity differences to be priced separately or local supply-and-demand conditions to influence wages. Working for five days at eight hours a day would yield this German worker anywhere from €360 to €440.

It is obvious that the German weekly wage is almost as high as the monthly Spanish one. What is less obvious is why Germans do not move their facilities to lower-cost Spain.

As the old saying goes, "the more expensive you are to fire, the more expensive you are to hire." If a Spanish company decides to lay off an employee, the severance payment for most labor contracts (a finiquito in Spanish) will amount to 32 days for each year the employee has worked with the company. Although this process is not simple in Germany either, there is no legal severance requirement that companies must pay to redundant workers. The sole requirement is for ample notice to be given, sometimes up to six months in advance. If a Spanish company hires a worker who does not work out as intended, a substantial cost will be incurred in the future to offload the employee. Employers know this, and when hiring workers they exercise caution accordingly, lest this unfortunate and unplanned-for future materialize.

These factors make the perceived or expected cost of labor at times higher in Spain than in Germany, despite the actual monetary cost being lower in euro terms. This effect has been especially pronounced since the adoption of the common currency over a decade ago. As we can see below, the average cost of German labor is largely unmoved since 2000, while Spanish labor has increased about 25 percent over the same period.

When hiring a worker, the nominal wage is only half the story. The employer also needs to know how productive that worker will be. Even after we factor for the extra costs on Spanish labor, a German worker could be more costly. A firm would still choose to hire that worker if his or her productivity was greater.

As we can see in the two figures below, over the last decade a large divergence has emerged between the two countries. While German productivity has more or less kept pace with its small increases in wage rates, the Spanish story is remarkably different. Productivity has lagged, meaning that on a real basis Spanish laborers are much more costly today than they were just 10 years ago.

Of course, boom bust policies have also contributed to such imbalances. The EU integration which had the ECB inflating the system essentially pushed Spanish wages levels up substantially, thereby overvaluing Spanish labor relative to productivity and relative to the Germans and to other European nations…

In his book The Tragedy of the Euro, Philipp Bagus mentions a similar phenomenon. Bagus points to the combination of (1) the rising labor costs that result from eurozone inflation and (2) divergent productivity rates between the countries as a source of imbalance. Indeed, inflation has been one driver of rising (and destabilizing) wages in the periphery of Europe, and especially in Spain. Others include, as we have noted here, minimum wages, regulatory burdens, and severance packages that increase the potential cost of labor.

In either case the effect is the same: wage rates do not necessarily reflect the labor itself, but rather the regulation surrounding it. In Spain, this translates to noncompetitive wages. It is important to remember, though, that this does not imply that the labor itself is necessarily uncompetitive — it is price dependent after all.

Every good has its price, even labor. When prices are hindered from fluctuating to clear markets, imbalances occur. In labor markets those imbalances are unemployed people. Policies such as a one-size-fits-all minimum wage and high mandated severance packages keep the price of Spanish labor above what it needs to be to clear the market.

Until something is done to ease these policies, Spanish labor will remain uncompetitively priced. Until Spanish labor costs can be repriced competitively, Spain's masses will need to endure stifling levels of unemployment.

The only solution to the current crisis is to allow economic freedom to prevail. Of course, this means less power for the politicians and their allies which is why they won't resort to this. Their remedies will naturally be worst than the disease.