Quote of the Day: Intellectual Rights and Duties

Ms. Wendy McElroy at the Laissez Faire Books enumerates what she thinks constitutes our intellectual rights and duties…

The following are some intellectual rights and duties that I’ve evolved as guidelines for constructing — one person at a time — the type of intellectual society in which I want to live.

YOUR INTELLECTUAL RIGHTS

You Have the Right to Be Uninterested

When you are trapped in an unpleasant or boring conversation, you are well within your intellectual rights to state, “I don’t care to talk about this (or to you) further.” Make the statement without hostility, as a matter of fact, and then simply walk away. No one has an unconditional claim on your time or on your attention. And the assumption that you should care about every issue and event in the world is ridiculous. Don’t accept the unrealistic demand that you find everything and everyone interesting.

Everyone Has the Right Not to Understand

Most of us spend a lot of time trying to avoid uttering the sentence, “I don’t understand what you are saying.” Too often, people see this statement as an admission of ignorance or inadequacy, rather than one of self-confidence. No one understands everything, and it is folly to pretend you do. Nevertheless, the fear of appearing ignorant or stupid frequently underlies a reluctance to admit that you simply do not understand what is being said. Do not apologize. Just ask whoever is speaking to clarify what they mean. Most people are more than happy to expound at length in front of an attentive audience.

Everyone Has the Right to Make a Mistake

This is far more than a right. It is an inevitability. You will commit errors, and frequently. If this upsets you, then curse human nature. As a human being, you are a fallible creature without godlike or automatic knowledge. Yet many people will argue themselves (and everyone else) into the ground or into absurd intellectual corners, rather than admit, “I’m obviously mistaken about that one point.” There is no shame in admitting, “I made a mistake.” Indeed, there is great strength in being willing to acknowledge your errors and learning from them.

Everyone Has the Right to Change His Mind

Changing your mind or a stated position is not intellectual indecision or weakness. It is part of the learning process by which you discover errors and correct them. If someone convinces you on an issue, it is a mark of intellectual honesty and courtesy to say, “You’ve persuaded me to your point of view.” After all, what is the alternative? Holding onto an untenable position just because that is what you believed yesterday? Everyone has the right to say, “Obviously, I am wrong on that point,” and not to feel diminished by this act of intellectual honesty.

Everyone Has the Right to Disagree

Whenever you hear a statement with which you disagree, you have the right to say so. Often you are in situations in which your opinion would be unpopular if stated. Perhaps a family gathering has turned into a political discussion, and you hold the only dissenting view. Your alternatives are wider than either stewing in silence or starting an intellectual brawl. You don’t need to justify yourself. You needn’t become either hostile or apologetic. You can simply state, “I disagree,” and walk away. Or stay and argue. The option is yours.

At this point, many people will ask, “Why bother? Why cause trouble?” In some cases, you may reasonably decide that speaking out is not worth the price. But showing discretion is different than allowing silence in the face of offensive opinions to become a habit. Such habitual silence is destructive to the most-important aspect of your intellectual life: your own self-esteem. Breaking the silence and saying, “I disagree,” can be important. If it were not, most people would not feel such resistance to making the statement.

Everyone Has a Right to His or Her Own Opinion

Everyone has the right to so weighty a thing as an opinion, and to express it. You do not need a diploma, permission from your spouse, a dispensation from the church: Simply by being a human being, you have a right to reach your own conclusions and publicly state them. The more knowledge you have, the more likely your opinions are to be correct. But this does not mean that you should not refuse to reach a conclusion right now based on what you know. That is all anyone ever does: form opinions based on their current level of knowledge. After all, as noted above, you also have the right to change your mind if more or better information arrives. .

YOUR INTELLECTUAL DUTIES TOWARD OTHERS

Never Purposely Embarrass Anyone

People often make unsupported claims, contradict themselves or otherwise become vulnerable to being intellectually humiliated. Don’t do it. Argue as well as you can, but do not take psychological advantage of someone’s weakness. If you do so, then you will make an enemy of the humiliated person and win no points from onlookers who recognize an act of gratuitous cruelty when they see one. If the other person has become so irritating that you cannot continue discussion without launching into personal attacks, then walk away. Brute reason is as inexcusable as brute force.

Give the Other Person Time to Consider the Argument

Do not badger someone for an immediate response or to instantly concede a point you have established. After all, accepting what you say may mean that the person has to question other beliefs, and such a process can be extremely uncomfortable, especially if performed in public or under duress. Allow the person room to think and to change his mind gracefully.

Acknowledge Good Points

If the other person scores a point in the discussion, acknowledge it. Even if he doesn’t change your mind on the main issue, give him the credit he deserves by saying, “That’s an interesting perspective,” or, “You are obviously right about that.” This level of intellectual courtesy is so rare that you will acquire a reputation for fairness based on such remarks alone.

Freely Acknowledge When You Have Made an Error

Honesty works two ways. When you misstate a date, for example, admit the mistake without embarrassment and move on. If you “stick by your guns” and refuse to acknowledge an obvious error, the other person is likely to focus the rest of the argument on that weak spot. Once you have admitted the error, however, don’t allow the other person to hammer away on the point. If he attempts to do so, then cut him short and demand, “If this is how you treat a simple mistake, what would you do if I conceded your main point — ridicule me for agreeing with you?”

Be Tolerant of Small Slips

Don’t jump on the occasional silly statement or inane question. We all make foolish remarks at some time or other.

When You Are Uncertain of Something, Say So

If you are asked a question for which you don’t have the answer, say, “I don’t know,” or, “I haven’t given the matter any thought.” This is not only a sign of intellectual honesty, but as importantly, it is a way to keep from making a fool of yourself.

Avoid Ostentatious Displays of Knowledge

Never argue just to display your own cleverness. This is as offensive to most people as an ostentatious display of wealth, which usually causes resentment, rather than admiration.

Civility and mutual respect are the first things to go in despotic times. A regime that doesn’t trust people to manage their lives tends to undermine our own trust in others and ourselves. In the end, however, the state cannot manage our minds and our habits of thinking and communicating with each other. This we can and must control for ourselves. Let not the state take away our intellectual rights and responsibilities.

Thanks for the advice Ms. McElroy.

The Coming Global Debt Default Binge: Japan’s Government Under Financial Strains

Unwieldy welfare states and bureaucracies are cracking.

Japan’s politicians bicker about maintaining unsustainable public spending even when source of funding has been depleting fast.

From Reuters,

Japan's government could run out of money by the end of October, halting all state spending including salaries, pensions and unemployment benefits, because of a standoff in parliament that has blocked a bill to finance the deficit.

The deficit financing bill, which would allow the government to sell bonds needed to fund almost half of the budget, has languished in parliament as the ruling Democratic Party tussles with opposition parties that can use their control of the upper house to reject legislation.

"Without this bill, the budget will collapse," Finance Minister Jun Azumi said on Friday, pleading for cooperation from the two largest opposition parties.

"It doesn't matter which party is in power. I really hope that we can get a multi-partisan agreement on the deficit bill."

If the bill is not passed, government spending would grind to a halt, the world's third-largest economy would be put in jeopardy and its standing among credit ratings agencies could suffer.

Japan is not the only developed nation that is staring at an imminent fiscal crisis. Greece's debt-strapped government could run out of money within weeks unless it secures a 31.8 billion euro tranche of bailout funds from the European Union.

The U.S. economy is facing $4 trillion worth of expiring tax cuts and automatic government spending reductions at the end of the year, and a standoff in Congress makes the chance of a compromise over the so-called "fiscal cliff" look dim.

chart of Japan’s unsustainable fiscal balances (tradingeconomics.com)

Not to worry, like the US Federal Reserve, the Bank of Japan (BOJ) will most likely come to the rescue.

They are likely to announce more stimulus in supposed aid to the “export” industry.

In reality, these will about saving the banks and financial institutions who constitutes as the major financiers or creditors or owners of Japan’s Government Bonds (JGBs) with some 76% share as of 2009. [chart from Japan Bankers Association]

But the share of ownership by banking and financial institutions of JGBs has even been larger based on 2011 data

From the Wall Street Journal,

Nearly two-thirds of all JGBs are held by just two groups: major Japanese banks with 44%, and insurers with 21%. If either sector starts to sell—or simply stops buying new debt—the market could tumble quickly, since there is little sign that foreign buyers would quickly fill the gap. Foreign investment is just 5.7%, as of end-June figures, less than the share held by Japan's biggest bank, Mitsubishi UFJ Financial Group, which has 6.9%.

So Japanese politicians, like their European and American counterparts, are increasingly caught between the metaphorical devil and the deep blue sea.

Default will either be through inflation or restructuring (bankruptcy).

Contagion Risk: More Signs of Asian Economic Slowdown

As I noted last night, the nasty repercussions of bubble bust conditions have been percolating into the global economy from different directions. [Good luck to the stock market bulls]

Here are more evidences of the escalation of the transmission… (from Bloomberg)

Hong Kong and Vietnam signaled growth may fall short of government forecasts this year as Asian policy makers stepped up efforts to protect their economies and currency markets from the worsening global outlook.

Hong Kong may revise its 2012 economic forecast next month, Financial Secretary John Tsangsaid on July 7. In Vietnam, Deputy Prime Minister Vu Van Ninh said the country may miss its growth target and the central bank told lenders to cut borrowing costs on existing loans to help businesses. The Philippines unveiled plans to contain currency gains that may hurt exports.

The Philippine central bank, the Bangko Sentral ng Pilipinas (BSP) reveals of their mercantilist leanings where destruction of the Peso is seen as the elixir to prosperity. History and theory serves no lesson to political agents who uses mercantilists policies to promote the interest of cronies and the political class in the name of exports (or remittances). Good governance? Duh!

The economic growth slowdown also slams Japan hard (from another Bloomberg article)

Japan’s current-account surplus was the smallest in May since at least 1985 and machinery orders fell the most in more than five years, adding to signs a slump in demand is threatening the nation’s rebound.

The excess in the widest measure of the nation’s trade shrank 63 percent from a year earlier to 215.1 billion yen ($2.7 billion), the Ministry of Finance said in Tokyo today. The median estimate of 24 economists surveyed by Bloomberg News was for a surplus of 493.1 billion yen. Machinery orders, an indicator of capital spending, fell 14.8 percent in May from the previous month, the Cabinet Office said, the biggest drop since comparable data were made available in 2005.

Japan’s trade position has weakened due to growing energy imports after last year’s earthquake and nuclear meltdown and also the yen’s gain of 4.9 percent against the dollar since mid- March. Prime Minister Yoshihiko Noda gave approval for a restart of reactors at the Ohi nuclear plant, which resumed power generation last week, to avoid power shortages and rolling blackouts over the summer.

“Today’s machinery order drop is very large, and it may be a signal that Japanese companies are becoming cautious about investment” amid concern about a global economic slowdown, said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management in Tokyo. “Though exports have been slumping, we don’t expect Japan to have any major trade deficit.”

Given that the economic slowdown emanates from multiple fronts, which amplifies the global contagion risks, for any interventions to have short term palliative effect, they must be really huge, coordinated or in collaboration with central banks of major economies from both BRIC and G-7.

Yet if they do so, expect a major train wreck that would make the 2007-2008 episode a picnic ahead.

Why Current Market Conditions Warrants a Defensive Stance

Here is what I wrote last week[1],

Also the Phisix is likely to surf on the global ‘EU Summit honeymoon’ sentiment, as well as on the momentum from an imminent RECORD breakout.

Whether this breakaway run will be sustainable remains unclear as global markets will remain volatile on both directions.

Indeed the jubilation from the EU Summit combined with momentum powered the major local equity benchmark, the Phisix, to a fresh record high.

Of course this breakaway run will be subject to the question of sustainability given the recent developments abroad.

Nevertheless after 3 successive weeks of advances which racked up 8.53% in returns, it would be normal to see some profit taking.

Nonetheless today’s exemplary standings have more stories to tell.

The ASEAN Standout

From my radar screen of 70+ international equity benchmarks, the Phisix only ranks fourth among the best performers based on a year-to-date returns.

But the Phisix is the ONLY bellwether among the elite contenders that has been trading at record highs.

Except for Venezuela which has been drifting close to the recently etched milestone highs established last May, it is only Thailand that comes close to having a superb feat.

All the rest are still way off from their apogees set during the last 3-5 years

I do not count Venezuela’s stock market as a real contender for the simple reason that the outperformance of the Venezuelan stock market could be a reaction to the amplified risks of hyperinflation.

Due to a combination of price controls and massive imports by the government, Venezuela’s inflation rate has been down reportedly to 21.3% last June[2]. But this is likely to be temporary and designed for the reelection of President Chavez this October

Combined with falling oil prices and massively expanding government expenditures, the Venezuelan government will likely run out of hard currency or of foreign exchange which may force them to ramp up on the printing presses for financing.

Stock markets have been functioned as safehaven during episodes of hyperinflation as people jettison currency for real assets. A good example is the recent bout of horrific hyperinflation[3] endured by Zimbabwe which culminated in 2008[4].

Surging stocks amidst hyperinflation has barely been about real (investment) returns but about people trying to preserve savings through acquisition of claims on real assets (insurance against monetary disorder).

And going back to the top 11, Thailand’s stock market as measured by the major bellwether the Stock Exchange of Thailand (SET) is second only to the Phisix to demonstrate remarkable gains.

While the SET is at a milestone multi-year high, the Thai bellwether is still about 30% off from the 1994 pre-Asian crisis record.

Yet the best annual performers masks or are framed to exclude the position of the others. This shows why the use of statistics can tricky and can be tailored to fit a predetermined conclusion.

Indonesia and Malaysia may have posted moderate year-to-date returns relative to the Phisix, up only 6.1% and 5.87% respectively, but Malaysia, like Philippines, trades at record HIGHs.

Meanwhile Indonesia trades a few percentages or (3.5%) off the recent record.

So ALL four major ASEAN bourses are AT or NEAR landmark highs but so far the Phisix leads the pack.

Outside the region, I have not encountered any national stock markets that have come close to beating their 3-5 year highs.

Growing Detachment between Stock Markets and Real Events

It is obvious that any economic or financial gains would be used as political advertisement.

For instance the recent S&P upgrade of the Philippine credit rating have been painted as a puffery of good governance. The fact is that whatever gains seen in the Philippines has been a regional dynamic. They are in reality symptoms of the boom phase of the business cycle that has mainly been driven by the domestic monetary policies through the negative real rate regime and supplemented by external monetary policies which has induced a search for yield dynamic from foreign investors in response to international easing policies. This ‘search-for-yield’ can also be interpreted as capital flight.

The current market conditions of the Phisix fit the inflationary boom scenario described by the late Austrian economist Fritz Machlup[5]

If, however, we inquire into the causes of the inflow of speculative capital from abroad which is so much objected to, we shall often find that it was the boom tendencies that were already present on the stock exchange which attracted the foreign funds. La hausse amene la hausse. The beginnings of the speculative boom originated in a flow of money from domestic sources. And as it is extremely difficult domestic to conceive of a sudden epidemic of saving, we are once again driven back to credit expansion by the banks. It is the "domestic" creation of credit which usually produces that sentiment on the stock exchange and that movement of stock prices, which act as an by foreign invitation to foreign funds.

The occasions when the short-term foreign funds flowing onto the stock exchange are to be regarded with real mistrust are when these funds owe their boom is existence to a credit inflation abroad. In this case foreign they bring the foreign “business cycle germ” into the home country

Yet the much ballyhooed upgrade has been based on superficial measures. They have most likely been influenced by surging prices in the asset markets (reflexivity theory), by political Public Relations campaign, particularly the phony war against corruption (where corruption is misleadingly portrayed as a function of ethical virtuosity rather than from real cause: arbitrary statutes and regulations[6]) and could even possibly be related to dwindling stock of “safe assets” for the global banking system than from real changes or market based economic reforms as I explained earlier[7]

What the credit upgrade does is to give license to the Philippine government to lavish on public expenditures. This would only promote crony capitalism, (yes guess which parties will be awarded with the proposed $16 billion of public work spending?) and that rewarding debt would work to the detriment of the economy over the long run through the adverse effects of the crowding out phenomenon[8], higher taxes and the serial blowing of the bubble cycles.

Grandiose skyscrapers (or the Skyscraper Index) have exhibited uncanny accuracy as harbingers of the bust phase of financial bubbles.

And believe it or not, 9 of the 10 of the world’s tallest building will rise in Asia and have been slated for completion from 2015 onwards—with China having four, South Korea three and one apiece for Indonesia (3^rd largest) and Malaysia[9].

So if the skyscraper index remains a functional indicator of financial excesses then we could or we may see a regional financial crisis anytime during the time window of 2015-2017.

Yet given the extreme fluidity of current conditions, such bubble conditions may be delayed or hastened depending on the direction of external and domestic social policies mostly channeled through monetary policies, particularly the complicit war by central bankers against interest rates (or the euthanasia of the rentier).

From the prescient admonitions of the great Ludwig von Mises[10]

Public opinion is prone to see in interest nothing but a merely institutional obstacle to the expansion of production. It does not realize that the discount of future goods as against present goods is a necessary and eternal category of human action and cannot be abolished by bank manipulation. In the eyes of cranks and demagogues, interest is a product of the sinister machinations of rugged exploiters. The age-old disapprobation of interest has been fully revived by modern interventionism. It clings to the dogma that it is one of the foremost duties of good government to lower the rate of interest as far as possible or to abolish it altogether. All present-day governments are fanatically committed to an easy money policy.

Of course, I see the soaring Phisix as effects of the bubbles parlayed as symptoms of Panglossian complacency (based on the belief that the Phisix or the region will decouple) or if not Pavlov’s classic mental conditioning (of the strongly held belief that central bankers will successfully bailout financial markets) or as effects of “jockeyed” markets.

As for the latter, aggressive buying in a landscape where global political authorities have been exhibiting anxieties over global economic conditions simply does not match with the current state of exuberance.

To give some examples.

The Bloomberg quotes IMF’s Christine Lagarde’s diagnosis of the world economy[11]

“Over the past few months, the outlook has regrettably become more worrisome,” Lagarde said. “Many indicators of economic activity -- investment, employment, manufacturing -- have deteriorated. And not just in Europe or the United States.”

Or how about the “45-minute salvo” fired by 3 central banks last Thursday as acts of desperation?

From another Bloomberg article[12]

Global central banks went on the offensive against the faltering world economy, cutting interest rates and increasing bond buying as a round of international stimulus gathers pace.

In a 45-minute span, the European Central Bank and People’s Bank of China cut their benchmark borrowing costs, while the Bank of England raised the size of its asset-purchase program. Two weeks ago, the Federal Reserve expanded a program lengthening the maturity of bonds it holds and Chairman Ben S. Bernanke indicated more measures will be taken if needed.

Many major global equity markets sagged following the news of the 45 minute interval coordinated easing from 3 major central banks.

The most curious response I saw came from China.

The Shanghai index remained wobbly and even traded on the negative for almost two thirds of Friday’s session which appeared to have discounted the interest rate cuts. The above chart from Bloomberg shows of the intraday actions. It took the last minute for the Shanghai index to surge, which according to news reports had been led by the property sector[13].

That last minute adrenalin shot may not persist as China’s Premier Wen Jiabao immediately shot down the notion of the lifting property controls in a comment today[14].

This is yet another example of the confounding stance by China’s political authorities.

The weaknesses in global markets following the reported near simultaneous interventions in the bourses of major economies could be deemed as “buy the rumor, sell on news” or of reality check relative to hope based expectations.

As I wrote a few weeks back[15],

One, if central bankers FAIL to deliver in accordance to market’s expectations, then we will likely see another huge bout of downside volatility in global equity markets….

On the other hand, if markets may be temporarily satisfied with REAL actions of central banks (e.g. $1 trillion bailout) then we should see a minor or a slight “sell on news”. But this should be seen as opportunities to RE-ENTER the markets incrementally.

Considering that the Phisix has soared since, I don’t see today as a providing a buying window, unless global central bankers would bring on their vaunted bazookas or until there will be meaningful improvements in the global economic arena

When financial markets flows into the opposite direction from the economy sans support from central bankers then the risks of a crash becomes a factor to reckon with.

One thing that could be justify divergences or decoupling is the possibility of intensified capital flight. While there are little signs of these affecting ASEAN markets yet, as explained last week, Denmark’s case seems like a relevant model.

Denmark’s bond markets which earlier have exhibited negative yields have now been reinforced by Denmark’s central bank policy of negative interest rates. Capital flight from the Eurozone to Denmark has prompted for an outperformance of Denmark’s equity markets[16] and has been on my top 11 list.

However the same capital flight phenomenon has not boosted the Switzerland’s Swiss Market’s Index in the same degree as Denmark. So we need to observe this further.

Outside More Central Bank Intervention, Expect Downside Pressures

Current conditions could be ripe for a significant retrenchment for global equity markets based on ‘fundamentals’.

Nearly 80% of the world’s industrial activities have been contracting[17].

Compared to 2007-2008 which had the US property bust as the epicenter, today’s slowdown has been coming from different directions, particularly, the Euro area and the BRICs.

Even in the US, both the industrial activities[18] and non-industrial activities[19] have been exhibiting considerable signs of weakening.

These may not signal yet the imminence of recession, but the risk of recession grows if both domestic and international conditions deteriorate further.

And the global economic slowdown has shown incipient signs of filtering into US corporate profits[20].

While the distribution of revenues from S&P 500 member companies has marginally been tilted towards US, nonetheless revenues from abroad still accounts for a substantial 45% share[21].

This means that slowing global economic growth will pose as material drag to current “fundamentals”.

So in the absence of further interventions by central banks or when steroid dependent markets have been left to their own devices, broad based downturns on the world economy would hurt profits and will get reflected on the stock prices.

The alternative view is that since global weakness has been coming from different directions interventions will require global coordination similar to the 45 minutes salvo.

In addition, “liquidity” conditions in emerging markets have reportedly been faltering.

This essentially reflects on the ongoing monetary tightening or increasing manifestations of bubble bust conditions in major economies as the Eurozone and the BRICs to Emerging Markets.

The transmission mechanism of which can be seen through the deterioration in trade balances which has been exacerbated by falling commodity prices, declining foreign reserve accumulation as some EM authorities have used excess reserves to support their domestic currency and a slowdown in capital inflows (which even may risk a reversal, if current conditions worsen)[22].

I would further point out that easing through interest rate policies will have miniscule effects to economies laden with debt.

Demand for credit will be limited as hock to the eyeball indebted individuals, households or corporations will be working to pay off existing liabilities. Further, impaired credit ratings diminish access to debt. Also supply of credit will be limited as institutions whose balance sheets have been compromised by problematic assets will work on building up capital reserves. Also, slowing of economic conditions will also hamper debt activities.

This means that unless global central banks pull out another rabbit out of a hat trick of aggressive ‘delaying the day of reckoning’ interventions through money printing, money conditions will tighten, as the malinvestments from previously inflated activities will have to undergo price adjustments that would need re-coordination in the transfer of resources from non-productive to productive activities.

So debt acquired during the bubble heydays will have to be dealt with eventually through the laws of economics.

Aside from the ECB, all eyes will be on the US Federal Reserve FOMC’s meeting on July 31 to August 1, 2012[23]

It would be interesting to see how the Phisix and ASEAN bourses will react in the face of a more pronounced slowdown in the US

Stay Defensive

The principal reason why the Philippines and her ASEAN neighbors have been more receptive towards negative real rates policies is that these economies has been excised of leverage as a result of the Asian crisis as shown in the above chart[24].

But this does not mean that the Philippine and ASEAN economies will be immune from a global economic slowdown. Again the exceptionalism and resiliency of ASEAN markets will be tested with a US economic slowdown.

Again since negative real rates rewards debt and speculation, today’s low debt era may easily transform low debt ASEAN economies into speculative and consumption activities based on debt similar to conditions which plagues developed economies today.

That’s the nature of bubble cycles.

For now, unless the US Federal Reserve (and or the European Central Bank) brings out the BAZOOKA soon, expect the Phisix, ASEAN and global markets to retrench.

At record and near record highs for the Phisix and ASEAN markets, retracements should be seen as normal countercyclical process.

But since events have been so fluid, we cannot discount the risks of a global recession emanating from continuing political stalemate, dithering over monetary policies and from policy errors. Recessions can turn bullmarkets into bear markets.

Oppositely, powerful responses from central bankers may alter the risk scenario for the benefit of the bulls for another short period.

And this is why excessive volatility in both directions will continue to characterize the financial marketplace.

Yet if the Phisix continues to soar, alone or along with ASEAN, despite all the mounting risks, and without support by the FED and or by the ECB, and if they are not driven by capital flight, the tail risks of downside volatility may become magnified.

The current conditions of financial markets can be analogized to navigating in treacherous waters where one’s survival depends on skillful handling of the steep ebbs and flows of the tides, and of course guided too by lady luck. Yet chance according to Louis Pasteur favors the prepared mind.

So still, I would advise that prudence will remain a better part of valor in terms of portfolio management

---

[1] See Why has the Phisix Shined? July 2, 2012

[2] Businessweek/Bloomberg Venezuela Inflation Slows for Seventh Month on Import Surge, July 3, 2012

[3] See Zimbabwe's Hyperinflation February 25, 2009

[4] See Zimbabwe In The Aftermath Of Hyperinflation: Free Markets November 16, 2009

[5] Machlup Fritz A Digression On International Speculation Chapter 10, The Stock Market, Credit And Capital Formation William Hodge And Company, Limited p.163 Mises.org

[6] See Doug Casey On Corruption: Laws Create Corruption And Corruption Engenders Laws February 10, 2011

[7] See S&P’s Philippine Upgrade: There's More than Meets the Eye July 5, 2012

[8] Wikipedia.org Crowding out (economics)

[9] See Does the Skyscrapers Curse Signal a coming Asian Crisis?, July 6, 2012

[10] Mises Ludwig von 8. The Monetary or Circulation Credit Theory of the Trade Cycle XX. INTEREST, CREDIT EXPANSION, AND THE TRADE CYCLE Human Action Mises.org

[11] Bloomberg.com Lagarde Says IMF To Cut Growth Outlook As Global Economy Weakens, July 5, 2011

[12] Bloomberg.com, Central Banks Deliver 45-Minute Salvo As Growth Weakens, July 5, 2012

[13] Reuters.com China bank shares pull down Hong Kong HSI, property lifts Shanghai, July 6, 2012

[14] See China’s Property Controls: Mistaking Forest for Trees July 8, 2012

[15] See Dealing with Today’s Uncertainty: Patience is the Better Part of Valor June 17, 2012

[16] See Denmark Cuts Interest Rates to Negative, July 4, 2012

[17] Zero Hedge 80% Of The World's Industrial Activity Is Now Contracting July 5, 2012

[18] Yardeni.com US Manufacturing Purchasing Managers Index July 3, 2012

[19] Wall Street Journal Blog Vital Signs: Slowing in Nonmanufacturing, July 6, 2012

[20] Wall Street Journal Blog, Number of the Week: Rest of World Pulls Down U.S. Profits June30, 2012

[21] Businessinsider.com CHART: A Breakdown Of Where S&P 500 Companies Get Overseas Business, June 27, 2012

[22] See Emerging Market “Liquidity” Conditions Deteriorate July 5, 2012

[23] US Federal Reserve Meeting calendars, statements, and minutes (2007-2013)

[24] Zero Hedge, Asia's Downside Risk And The Three Big Hopes June 21, 2012

Barclay’s Libor Scandal: The US Federal Reserve as the Biggest Manipulator

Since 2008 it has been obvious that the US Federal Reserve through its manifold tools has been engaged in the manipulation of interest rates. Here is the alphabet soup of the Fed’s tools

I pointed this out earlier here

Nevertheless the Zero Hedge shows partly how the manipulation process has been done (hat tip Bob Wenzel) [bold original]

Via Peter Tchir of TF Market Advisors,

The Fed does everything it can to keep LIBOR low.

This chart says it all.

The Fed cannot affect LIBOR directly, but in general LIBOR trades in line with Fed Funds. You can see that historically as Fed Funds was changed, LIBOR responded appropriately. There was typically some small premium to reflect the "credit risk" of banks versus the Fed, but it was relatively small, and fairly stable. 3 Month LIBOR would deviate a bit as rate cuts and hikes were anticipated in the market, but in general, it was a fairly stable game.

That all started to break down in 2007. We saw the first real signs of LIBOR deviating from its normal spread to Fed Funds in the summer of 2007. The Fed responded by cutting the "penalty" rate for using the discount window, and in fact encouraged banks to use the discount window (I still can't shake the mental image of someone sitting in a dark basement with a green eye-shade doling out money to banks that request it). Then the crisis got worse. Bear needed to be rescued. Facilities such as the Term Auction Facility that had been put in earlier were increased in size. The Fed backstopped some portfolios that JPM acquired as part of the Bear Stearns deal.

As the crisis re-ignited in the late summer of 2008 and peaked after Lehman and AIG, the Fed took step after step to reduce borrowing costs. The Fed was blatantly clear that it wanted borrowing costs to go down. They had the obvious tool of reducing Fed Funds to virtually zero, but when LIBOR didn't follow, the Fed took further action. The Fed did not want bank borrowing costs to be high.

They increased dollar swap lines so foreign banks could borrow. The Fed stepped into the commercial paper market so banks wouldn't have to use money to meet drawdowns on revolvers. TALF was another creation to take pressure of bank lending.

The FDIC allowed banks to issue bonds with FDIC backing (so not quite Fed program, but who is going to quibble).

Fears that MS and GS and GE would topple the banks were alleviated by making them banks.

The list goes on. The Fed has done a lot and trying to control LIBOR as a key borrowing rate is one of the things they have worked on, both directly and indirectly.

In reality, central banks worldwide have been working round the clock to rein interest rates almost at every channel.

Bailouts are part of the umbrella mechanism of interest rate controls, as they prevent markets from revealing the real conditions of people’s time preferences over money and from the clearing of the loan markets—suppliers and demanders of loan.

And the biggest evidence is the scale of balance sheet expansions of the G-4 central banks since 2008 with the US Federal Reserve as the leader. (cumber.com)

China’s Property Controls: Mistaking Forest for Trees

Once again China’s confused policies

From Bloomberg,

China must “unswervingly” continue its property controls and prevent prices from rebounding, Premier Wen Jiabao said yesterday, after the central bank cut interest rates and triggered a surge in property stocks.

Local governments that introduced or covered up a loosening of curbs on residential real-estate must be stopped, Wen said during a visit to Changzhou city in eastern Jiangsu province, according to the official Xinhua News Agency. Restricting speculative demand and investment in property must be made a long-term policy, he said.

Wen’s comments underscore the government’s determination to maintain restrictions on housing purchases even as it cuts interest rates and boosts infrastructure spending to reverse a slowdown in the world’s second-biggest economy. China’s new-home prices rose for the first time in 10 months in June, according to SouFun Holdings Ltd. (SFUN), owner of the nation’s biggest real- estate website.

“We must unswervingly continue to implement all manner of controls in the property market to allow prices to return to reasonable levels,” Wen was quoted as saying when he met residents and local government officials in charge of affordable housing. “We cannot allow prices to rebound, or all our efforts will come to naught,” he said…

All financial institutions must continue to strictly implement a differentiated housing credit policy to continue curbing property-buying for speculation and investment purposes,” it said in its statement announcing the interest- rate cut.

China started imposing restrictions on home purchases two years ago as prices surged after the government started a stimulus package to shield the economy from the impact of the global financial crisis. Measures included raising down-payments and mortgage-rate requirements, limiting purchases in some cities and trialing a tax on homes in Shanghai and Chongqing.

Property controls are still in a “critical period” and the task remains “arduous,” Wen said yesterday. Cases of illegal acquisition of property-rights must be investigated, he said.

Property Tax

The government must “promote the study and implementation of changes to the property-tax mechanism, and to speed up the establishment of a comprehensive long-term mechanism and policy framework for controlling the property market,” Xinhua cited Wen as saying.

This is an example of the left hand doesn't know what the right hand is doing.

Premier Wen also mistakes forest for trees. Property prices are symptoms and not the source of the bubble. In reality the repeated campaign of monetary policy accommodations compounded by ‘investment spending’ fiscal policies or the Keynesian policies of perpetuating unsustainable quasi-booms has been the culprit

Another manifestation of such bubble conditions has been through China’s version of Shadow banking system which has ballooned to 1.7 trillion which has financed the property bubble.

Yet depending on the debt level conditions, recent rate cuts could reinvigorate speculations in the property sector, if not spillover or get diverted to other sectors of the economy, perhaps in the stock market, commodities or industries that may benefit from “inland development strategy” or euphemism for new pet projects of China’s political authorities.

The inconsistencies of China’s policies will only deepen the uncertainty and of the growing risks of the implosion of China’s bubble economy.

More Brain Drain Canard: When All You Have is a Hammer, Everything is a Nail

The politically colored term “Brain drain” can be seen as an example of what George Orwell labeled as “doublespeak” or language that deliberately disguises, distorts, or reverses the meaning of words.

Here is the Inquirer,

The brain drain has become a bigger problem in the last 12 years, as the yearly exodus of people trained in science and technology (S&T) grew by about two and a half times from 1998 to 2009.

According to a Bureau of Labor and Employment Statistics (BLES) report, the number of S&T workers who opted for overseas jobs rose from 9,877 in 1998 to 24,502 in 2009.

The numbers refer only to new hires or those leaving the country for jobs for the first time.

The BLES cited data from a study titled “International Migration of Science and Technology Manpower-OFWs,” which the Department of Science and Technology’s Science Education Institute (SEI-DOST) published in 2011.

S&T deployment

Results showed that during the 12-year period, S&T deployment grew by an average of 11 percent yearly, peaking at a 59-percent increase in 2001 when 17,756 professionals left, compared with 11,186 the previous year.

Based on the SEI-DOST study, S&T manpower includes physicists, chemists, mathematicians, statisticians, computing professionals, engineers, life science professionals, health professionals (except nurses), and nurses and midwives.

The study found that nurses and midwives represented the biggest group with an average of 9,348 deployed yearly, or 60 percent of the total S&T average of 15,555.

Brain drain is essentially OFWs in different attires.

How can migration be a “problem” when they are representative of individual choices and responses to the current political economic environment?

Have OFWs not been acclaimed as modern day heroes based on mainstream politics?

Whether it is about greener pastures or about career advancement or many other reasons, the point is that OFWs VOTED with their feet. Thus, the actions of science, math and technology graduates, simply reveals of the lack of income, if not career opportunities in the Philippines. These people are simply looking out for their welfare.

Are they not in a better state than becoming unemployed tertiary or college graduates which not only adds to political dependency and the government's fiscal problems but also dehumanizes or demoralizes the individual and their families?

So it is ok to send graduates of different courses or undergraduates, but it isn’t ok to send (S&T) graduates? So the government discriminates or plays favorite with different segments of OFWs? How moral is this?

I have dealt with this bromide lengthily here

Ah but of course, it said that when all you have is a hammer, everything else is a nail. When the government sees a problem they have the typical solution: spend, spend, spend and spend more of other people’s money

From the same article,

When the national budget for 2012 was pending in Congress last year and Malacañang was pushing for a 10-percent increase in allocations for state universities and colleges (SUCS), Budget Secretary Florencio B. Abad said the Executive supports the development of SUCs toward five priority areas that are expected to drive economic growth and employment.

So there you have it.

“Brain drain” has not been a problem when it gives the political authorities free advertisement, as “modern day heroes”, to advance on their political goals.

But “Brain drain” becomes a problem when the government has been itching to spend money other people’s money.

Doublespeak it is.

EU’s Growing Border Controls Undermines the Principle of Freedom of Movement

While European politicians desperately try to keep the European Union from falling apart, through frantic rescues of insolvent sovereigns and banks, the reality is that their actions have already been gnawing at the foundations of the union: freedom of movement.

Sovereign Man’s Simon Black observes of EU’s growing border patrols:

Speaking of travel restrictions and border controls, though, European authorities seem to have no qualms about implementing them.

For the last several days, I’ve been weaving between northern Italy and Switzerland checking out great places to bank, new places to store gold, and taking in these gorgeous lake views.

Every single time I’ve crossed the border, I’ve been met by rather snarly police on both sides; they’re stopping cars, turning people’s trunks inside out, and causing major traffic problems.

A friend of mine who came up on the train from Florence to meet me for lunch in Lugano said he was stopped at the border for nearly an hour as thuggish customs agents randomly questioned train passengers and demanded to see their IDs.

So much for Europe’s 26-country ‘borderless area.’

Based on Europe’s 1985 Schengen Treaty and 1997 Amsterdam Treaty, you’re supposed to be able to drive from Tallinn, Estonia to Lisbon, Portgual without so much as slowing down at the border.

This is not dissimilar from driving between states in the US or provinces in Canada.

Yet as Europe descends into greater financial and social chaos, leaders are starting to ignore these agreements which guarantee freedom of movement across the continent.

No big surprise, electing Marxists and Neo-Nazis tends to bring that sort of change. Border controls, currency controls, wage and price controls– these are the usual tactics of desperate, insolvent governments.

As times get tougher, they tighten their grip, foolishly believing that they can decree and legislate their country back to health.

In the early 4th century AD after decades of economic turmoil and social strife within the Roman Empire, Diocletian issued his infamous Edictum De Pretiis Rerum Venalium, or Edict on Prices.

In addition to setting a fixed ceiling on over 1,000 products, services, and wages, Diocletian also commanded the death penalty for currency and commodity speculators who he blamed for inflation (as opposed to the steady debasement of the currency).

Obviously very little has changed.

Capital controls usually follow; these amount to the direct confiscation of wealth by a government from its citizens.

Often capital controls take the form of legal requirements which prevent people from moving money abroad, holding foreign currencies, or buying precious metals.

Just yesterday, in fact, Argentina’s central bank formally banned people from buying US dollars– forcing them to hold rapidly depreciating pesos and watch their savings inflate away.

At some point, people finally reach their breaking points and spill out into the streets to be beaten by the police. This is when we see social controls implemented– turning off mobile and Internet infrastructure, curfews, etc.

These tactics have been all too common over the last 18-months.

And finally, if things get really bad, border controls are implemented as a way to prevent a flood of people from leaving. After all, the government needs as many milk cows as it can get.

Here is an example of principles sacrificed at the altar for politics

Yet such self contradictory policies are signs of the growing desperation by the political elites and can be seen as the proverbial writing on the wall for the EU: the ballooning social controls via various despotic measures are likely inflame regional animosity (nationalism) that leads to the breakdown of division of labor and rouse civil strife that amplifies the risks of war.

Through politics, noble intentions backfire.

Has the Higgs Boson been Discovered?

This information age will usher in more science and technological breakthroughs.

Lately media scooped at the supposed “discovery” of the Higgs Boson or the ‘God Particle’.

I believe that such breakthroughs may just be a teaser.

From Bloomberg,

Scientists seeking to explain the origins of matter discovered a particle that may support a decades-old theory of physics, bringing people closer to understanding unseen parts of the universe.

The observed particle is the heaviest boson ever found, said Joe Incandela, spokesman for one of the experiments at CERN, the European Organization for Nuclear Research, at a seminar yesterday at its Geneva headquarters. Scientists stopped short of claiming they have found the elusive Higgs boson, a theoretical particle that could explain where mass comes from.

“As a layman, I think I would say ‘we have it,’” said Rolf-Dieter Heuer, director of CERN, at a press conference in Geneva. It will take at least three to four years of research to fully understand the properties of the observed particle, Heuer said.

The announcement brings humankind closer to answering a millennia-old question that the ancient Greeks wrestled with: what is matter made of? The particle is a key to the Standard Model, a theory explaining how the universe is built, and its existence would help scientists gain a better understanding of how galaxies hold together. It also could open a door to exploring other parts of physics such as superparticles or dark matter that telescopes can’t detect.

‘Sings and Dances’

The new boson “sings and dances like” the theoretical particle, said Pauline Gagnon, a researcher on the Atlas set of experiments in Geneva, in an interview in Melbourne, where she was attending the bi-annual International Conference on High Energy Physics. “There is no doubt it comes from a different signal, different channels, with different experiments. We just need in the next few months with more data to ascertain exactly what are the properties of this particle to see if it is exactly the Standard Model Higgs boson or some variation of it."”

Particle physics is the study of the elemental building blocks that make up matter. These particles, with names such as quark, fermion, lepton and boson, can’t be subdivided. They exist and interact within several unseen ‘‘fields’’ that permeate the universe.

The field that generates mass for objects is named for U.K. physicist Peter Higgs, who in the 1960s was one of the first scientists to outline a working theory on how elemental particles achieve mass. Higgs was one of four of the theorists attending yesterday’s meeting in Geneva. He wiped a tear from his eye as the findings were presented.

Champagne for Higgs

‘‘For me, it’s really an incredible thing that it’s happened in my lifetime,” Higgs said in Geneva. In a statement, he said he would be “asking my family to put some champagne in the fridge.”

Higgs wrote that some particles -- such as photons, the basic unit of light -- don’t interact with the Higgs field, and thus don’t achieve mass. Most others do.

To put it another way, if the Higgs field were a Hollywood party, a photon would be the unknown actor who hurries through without gaining a bit of interest from others in the room. Other particles would be more like Angelina Jolie, drawing crowds of hangers-on as they move through the party.

It gets increasingly harder to stop such a cluster from moving forward and more difficult to get it moving again once it’s stopped, meeting one definition of mass.

Scientists are trying to prove the existence of the Higgs field by displaying a physical effect for the Higgs boson, a particle that lives for less than a trillionth of a second and is an excitation, or force, within the Higgs field.

Digging Deeper

Providing indirect evidence that the Higgs field exists will allow scientists to dig even deeper into the secrets of our existence, said Mark Wise, a professor of physics at California Institute of Technology.

“In some sense, this is the beginning,” Wise said of finding the boson. “Because we want to know all its properties.”

The data presented yesterday are the latest from the $10.5 billion Large Hadron Collider, a 27-kilometer (17-mile) circumference particle accelerator buried on the border of France andSwitzerland. CERN has 10,000 scientists working on the project, in which billions of subatomic particles are hurled at each other at velocities approaching the speed of light.

The collider will provide more data later this year, giving scientists a more complete picture of the observed new particle. Researchers will try to determine whether it is a Higgs boson, the particle predicted by the Standard Model.

A few years back alarmists warned us that the Large Hadron Collider (LHC) would bring about Armageddon. Yet like most of social alarmist (Malthusians, environmentalists and etc..) they have proven to be wrong.

Instead, the LHC brought us a step closer towards understanding more of nature.

While I have infinitesimal idea about particle physics, I am astounded by the accelerating rate of developments the field of sciences.

Below is a nice video explaining the Higgs Boson