Bastiat on the Twin Doctrines of Luddism and Mercantilism

The great French proto-Austro libertarian Frédéric Bastiat exposes the fallacies of the twin doctrines of Luddism (opposed to modern technology) and mercantilism, which the great Dean of the Austrian school of economics, Murray Rothbard, defines as a system of statism which employed economic fallacy to build up a structure of imperial state power, as well as special subsidy and monopolistic privilege to individuals or groups favored by the state

The following incisive excerpt, published by the Mises Institute, has been culled from an essay entitled “Human Labor and National Labor” which appeared in Economic Sophisms and in the Bastiat Collection (bold mine)

What misleads the adversaries of machinery and foreign importations is that they judge of them by their immediate and transitory effects, instead of following them out to their general and definite consequences.

The immediate effect of the invention and employment of an ingenious machine is to render superfluous, for the attainment of a given result, a certain amount of manual labor. But its action does not stop there. For the very reason that the desired result is obtained with fewer efforts, the product is handed over to the public at a lower price; and the aggregate of savings thus realized by all purchasers enables them to procure other satisfactions; that is to say, to encourage manual labor in general to exactly the extent of the manual labor which has been saved in the special branch of industry which has been recently improved. So that the level of labor has not fallen, while that of enjoyments has risen.

Let us render this evident by an example.

Suppose there are used annually in this country 10 million hats at 15 shillings each; this makes the sum which goes to the support of this branch of industry £7,500,000 sterling. A machine is invented that allows these hats to be manufactured and sold at 10 shillings. The sum now wanted for the support of this industry is reduced to £5,000,000, provided the demand is not augmented by the change. But the remaining sum of £2,500,000 is not by this change withdrawn from the support of human labor. That sum, economized by the purchasers of hats, will enable them to satisfy other wants, and consequently, to that extent will go to remunerate the aggregate industry of the country. With the five shillings saved, John will purchase a pair of shoes, James a book, Jerome a piece of furniture, etc. Human labor, taken in the aggregate, will continue, then, to be supported and encouraged to the extent of £7,500,000; but this sum will yield the same number of hats, plus all the satisfactions and enjoyments corresponding to £2,500,000 that the employment of the machine has enabled the consumers of hats to save. These additional enjoyments constitute the clear profit that the country will have derived from the invention. This is a free gift, a tribute that human genius will have derived from nature. We do not at all dispute that in the course of the transformation a certain amount of labor will have been displaced; but we cannot allow that it has been destroyed or diminished.

The same thing holds of the importation of foreign commodities. Let us revert to our former hypothesis.

The country manufactures 10 million hats, of which the cost price was 15 shillings. The foreigner sends similar hats to our market, and furnishes them at 10 shillings each. I maintain that the national labor will not be thereby diminished.

For it must produce to the extent of £5,000,000 to enable it to pay for 10 million hats at 10 shillings.

And then there remains to each purchaser five shillings saved on each hat, or in all, £2,500,000, which will be spent on other enjoyments — that is to say, which will go to support labor in other departments of industry.

Then the aggregate labor of the country will remain what it was, and the additional enjoyments represented by £2,500,000 saved upon hats will form the clear profit accruing from imports under the system of free trade.

It is of no use to try to frighten us by a picture of the sufferings that, on this hypothesis, the displacement of labor will entail.

For, if the prohibition had never been imposed, the labor would have found its natural place under the ordinary law of exchange, and no displacement would have taken place.

If, on the other hand, prohibition has led to an artificial and unproductive employment of labor, it is prohibition, and not liberty, that is to blame for a displacement that is inevitable in the transition from what is detrimental to what is beneficial.

Asian and Emerging Market Currencies Confronts the US ‘Our Currency, Your Problem’ Dilemma

Former US Treasury Secretary’s John Connally’s famous comment about the US dollar where he said was “our currency, but your problem” seems very pertinent today.

Governments of Asian and emerging economies whose currencies have been linked to the US dollar have been feeling frictions or pressures from the US Fed’s credit easing policies (as well as from the other developed economies).

From Bloomberg,

Hong Kong’s de facto central bank stepped in for the first time since 2009 to prevent the city’s currency from rising against the U.S. dollar after it touched the upper limit of a range that triggers an intervention.

The Hong Kong Monetary Authority said it bought $603 million at HK$7.75 per dollar, which is the so-called strong side of the permitted convertibility range of HK$7.75 to HK$7.85 that obligates intervention. The move, announced in an e-mailed statement yesterday, was confirmed by spokeswoman Rhonda Lam who said the HKMA acted during New York trading hours.

“Funds continue to flow into Hong Kong given the monetary easing in the U.S. and Europe,” said Kenix Lai, a currency analyst at Bank of East Asia Ltd. in Hong Kong. “That’s evident by the rising stock market and property prices. I expect HKMA will still have to intervene in the near term as capital inflows continue.”

Policy makers from around the world have bemoaned the economic threat of stronger exchange rates from the U.S. Federal Reserve’s monetary easing. At International Monetary Fund meetings in Tokyo this month, Brazil’s Finance Minister Guido Mantega vowed to shield his country from the “selfish” monetary policies of some developed nations, while Philippine central bank Governor Amando Tetangco said the Fed was causing “challenges to monetary policy in emerging markets.”

Each government have their own idiosyncratic political agenda, where the supposed lumping of threat of a “stronger exchange rate” is in truth signifies a dubious, if not devious, propositions.

The fact is that all central banks have been doing the same thing, except the difference lies on the degree or scale of inflationism and interventions. The above shows Hong Kong as no different.

The world operates in uncharted territory when it comes to government's aggressive use of monetary tools spearheaded by developed economies (chart from Zero Hedge)

Yet for some governments, the apparent passing the blame on others serve as convenient smokescreens to impose domestic social controls and to implement policies which benefits the incumbent political leaders.

As I pointed out in the past 

In a world where central banks compete to destroy their currencies through devaluation, rising currencies may signify as symptoms of relative devaluation and they could also mask the bubble policies that underpins the statistical economic growth.

Maybe emerging market or Asian central bankers would like to try a shock therapy: Link their currencies to gold and simultaneously liberalize their economies.  However, this would go against the interests of those in power or the political class, as well as, those connected to or dependent on them.

Besides, these would vastly reduce the ability for politicians to make political promises that would jeopardize their hold on power.

At the end of the day, currency wars or the dilemma of "our currency, your problem" through the threat of "stronger exchange rates" makes for great soundbites.

How the US Government Spends Money

When government lavishes away the economy’s scarce and valuable resources through the acquisition of unsustainable levels of debt for the benefit or for the interests of the political class and their cronies, then social entropy should be expected based on the predominant trend of unproductive and wealth consuming activities.

Below are excerpts on the “55 facts about the debt and U.S. government finances” from the Economic Collapse Blog 

#1 While Barack Obama has been president, the U.S. government has spent about 11 dollars for every 7 dollars of revenue that it has actually brought in. 

#2 During the fiscal year that just ended, the U.S. government took in 2.449 trillion dollars but it spent 3.538 trillion dollars. 

#3 During fiscal year 2011, over a trillion dollars of government money was spent on 83 different welfare programs, and those numbers do not even include Social Security or Medicare. 

#4 Over the past four years, welfare spending has increased by 32 percent.  In inflation-adjusted dollars, spending on those programs has risen by 378 percent over the past 30 years.  At this point, more than 100 million Americans are enrolled in at least one welfare program run by the federal government.  Once again, these figures do not even include Social Security or Medicare. 

#5 Over the past year, the number of Americans getting a free cell phone from the federal government has grown by 43 percent.  Now more than 16 million Americans are enjoying what has come to be known as an "Obamaphone". 

#6 When Barack Obama first entered the White House, about 32 million Americans were on food stamps.  Now, nearly 47 million Americans are on food stamps.  And this has happened during what Obama refers to as "an economic recovery". 

#7 The U.S. government recently spent 27 million dollars on pottery classes in Morocco. 

#8 The U.S. Department of Agriculture recently spent $300,000 to encourage Americans to eat caviar at a time when more families than ever are having a really hard time just trying to put any food on the table at all…. 

#19 The U.S. government spends more on the military than China, Russia, Japan, India, and the rest of NATO combined.  In fact, the United States accounts for 41.0% of all military spending on the planet.  China is next with only 8.2%. 

#20 In a previous article, I noted that close to 500,000 federal employees now make at least $100,000 a year. 

#21 In 2006, only 12 percent of all federal workers made $100,000 or more per year.  Now, approximately 22 percent of all federal workers do…. 

#32 When you combine all federal government spending, all state government spending and all local government spending, it comes to approximately 41 percent of U.S. GDP.  But don't worry, all of our politicians insist that this is not socialism. 

#33 As I have written about previously, less than 30 percent of all Americans lived in a home where at least one person received financial assistance from the federal government back in 1983.  Today, that number is sitting at an all-time high of 49 percent. 

#34 Back in 1990, the federal government accounted for just 32 percent of all health care spending in America.  This year, it is being projected that the federal government will account for more than 50 percent of all health care spending in the United States. 

#35 The number of Americans on Medicaid soared from 34 million in 2000 to 54 million in 2011, and it is being projected that Obamacare will add 16 million more Americans to the Medicaid rolls… 

#36 In one of my previous articles, I discussed how it is being projected that the number of Americans on Medicare will grow from 50.7 million in 2012 to 73.2 million in 2025. 

#37 If you can believe it, Medicare is facing unfunded liabilities of more than 38 trillion dollars over the next 75 years.  That comes to approximately $328,404 for each and every household in the United States. 

#38 In the United States today, more than 61 million Americans receive some form of Social Security benefits.  By 2035, that number is projected to soar to a whopping91 million. 

#39 Overall, the Social Security system is facing a 134 trillion dollar shortfall over the next 75 years. 

#40 When Barack Obama first took office, the U.S. national debt was about 10.6 trillion dollars.  Now it is about 16.2 trillion dollars.  That is an increase of 5.6 trillion dollars in less than 4 years… 

#55 Boston University economist Laurence Kotlikoff is warning that the U.S. government is facing a gigantic tsunami of unfunded liabilities in the coming years that we are counting on our children and our grandchildren to pay.  Kotlikoff speaks of a "fiscal gap" which he defines as "the present value difference between projected future spending and revenue".  His calculations have led him to the conclusion that the federal government is facing a fiscal gap of 222 trillion dollars in the years ahead.

Read the rest here

As the illustrious economist the late Milton Friedman once said, If you put the federal government in charge of the Sahara Desert, in five years there'd be a shortage of sand.

China’s Cumulative Gold Imports Surpasses ECB Holdings

China’s total gold imports has surpassed ECB holdings with imports from Australia soaring by 900%

The Zero Hedge notes (italics original)

First it was more than the UK. Then more than Portugal. Then a month ago we said that as of September, "it is now safe to say that in 2012 alone China has imported more gold than the ECB's entire official 502.1 tons of holdings." Sure enough, according to the latest release from the Hong Kong Census and Statistics Department, through the end of August, China had imported a whopping gross 512 tons of gold, 10 tons more than the latest official ECB gold holdings. We can now safely say that as of today, China will have imported more gold than the 11th largest official holder of gold, India, with 558 tons….

one unspinnable aftereffect of China's relentless appetite for gold comes from a different place, namely Australia, where gold just surpassed coal as the second most valuable export to China. From Bullionstreet: 

Australia's gold sales to China hit $4.1 billion in the first eight months of this year as it surged by a whopping 900 percent.

According to Australian Bureau of Statistics, the yellow metal became the second most valuable physical export to China, surpassing coal and only behind iron ore…. 

In other words, take the chart above, showing only Chinese imports through HK, and add tens if not hundreds more tons of gold entering the country from other underreported export channels such as Australia. One thing is certain: China no longer has any interest in buying additional US Treasurys.

I may add that the Philippine’s informal gold sector has been one of the underreported source for China’s soaring gold imports.

China seems to be preparing for a major black swan event.

Free Online Education: 100k Signs Up for Harvard’s Offer; Minnesota’s Aborted Ban

One of the top universities of the world, Harvard University, has joined the bandwagon in offering free online education.

From Boston.com 

About 100,000 students have signed up for Harvard University’s first free online courses — computer science and an adaptation of the Harvard School of Public Health’s classes in epidemiology and biostatics. The online courses, part of a joint venture called edX, begin Monday, according to Harvard.

The university’s provost, Alan Garber, said Friday that the free courses are part of an effort to educate people worldwide and that the effort will help improve education on Harvard’s own campus.

“We really think that the first courses we offer will be great, but long term, the payoff is going to come from a better understanding about how people learn,” Garber said.

Harvard and the Massachusetts Institute of Technology established edX, a nonprofit organization, in the spring, and the University of California Berkeley joined the effort over the summer.

Courses offered through edX are branded MITx, HarvardX, and BerkeleyX. Anant Agarwal, president of edX, said interest has been equally high for the courses offered by all three schools: 155,000 students registered for a course in circuits and electronics that MIT offered through edX in the spring.

Students taking the online courses hail from around the world, but Agarwal said most of those in the spring course were in the United States, India, Britain, and Colombia.

Students can take as many courses as they wish through edX, and when they demonstrate mastery of a course they can receive a certificate of completion.

Graduates of online courses will eventually challenge those of the traditional courses on the job markets. And this will ultimately pop the current education bubble and radically alter current classroom based paradigms—which have been designed from 20^th century—as well as reduce  state indoctrination, diminish the welfare state, promote competition and lay emphasis on individualization/personalization of education (one teacher per student), expand knowledge specialization and democratize knowledge--yes, education for all willing to be educated. 

Free online education, thus, represents the diffusion and acceleration of the great F. A. Hayek’s knowledge revolution.   

The knowledge revolution will undermine justifications for government interference traditionally channeled through the politicization of the "poor" and "uneducated".

Meanwhile on a related field, politicians who pretentiously claim that they are for “education for all”, and the quack “education is a right” has shown their true colors by an attempted ban on free online education for specious reasons: legal technicalities or the enforcement of a state law that requires authorization from the state government

Notes the conservative Heritage Foundation

Lifelong learners, students wanting supplemental courses, professionals, and Americans across the country interested in enrolling in physics, history, music, and a variety of other courses can do so for free from the open-source provider Coursera. But Minnesota has just informed its residents that they are now prohibited by law from furthering their own education for free through courses offered on Coursera by the likes of Stanford, Duke, Princeton, and more than a dozen other universities.

As several reports have noted, the Chronicle of Higher Education first reported the following:

Notice for Minnesota Users:

Coursera has been informed by the Minnesota Office of Higher Education that under Minnesota Statutes (136A.61 to 136A.71), a university cannot offer online courses to Minnesota residents unless the university has received authorization from the State of Minnesota to do so. If you are a resident of Minnesota, you agree that either (1) you will not take courses on Coursera, or (2) for each class that you take, the majority of work you do for the class will be done from outside the State of Minnesota.

While students who enroll in a Coursera class cannot get college credit (although they can request that a professor send an email to a prospective employer, for instance, confirming that they took the course and reporting their success), models like Coursera are beginning to change the way Americans think about higher education and provide a huge opportunity to reduce costs and improve access.

Coursera—and others such as EdX (a Harvard/MIT online collaboration), Udacity, and Udemy—represent a shift in higher education toward credentialing content knowledge. Such a shift lays the groundwork for a revolution in higher education, allowing students to attain various credentials by demonstrating content and knowledge mastery from a variety of course providers. But that (literally) free pursuit of knowledge for their own personal edification or skill attainment is no longer available to Minnesota residents.

Politicians have obviously been feeling the heat from the internet whom threatens their longstanding privileges.

Cato’s Andrew Coulson wry but relevant commentary on the ban,

One of the classes you can take at Coursera is “Principles of Macroeconomics.” Maybe the folks who lobbied for and enacted the state’s education regulations are afraid that free learning and economic literacy would threaten their phony-baloney jobs. 

Fortunately, the snowballing forces of decentralization which has been enabled and substantially facilitated and buttressed by the internet has forced the Minnesota government to backtrack.

More signs of the deepening of the information-digital age

Graphic of the Day: EUSSR

British author, journalist and politician Daniel Hannan at the Telegraph writes,

Take a close look at this promotional poster. Notice anything? Alongside the symbols of Christianity, Judaism, Jainism and so on is one of the wickedest emblems humanity has conceived: the hammer and sickle.

For three generations, the badge of the Soviet revolution meant poverty, slavery, torture and death. It adorned the caps of the chekas who came in the night. It opened and closed the propaganda films which hid the famines. It advertised the people's courts where victims of purges and show-trials were condemned. It fluttered over the re-education camps and the gulags. For hundreds of millions of Europeans, it was a symbol of foreign occupation. Hungary, Lithuania and Moldova have banned its use, and various  former communist countries want it to be treated in the same way as Nazi insignia.

Wonder why the euro, with its current thrust towards centralization (fiscal union, banking union, bank supervision), seems headed for perdition?

Will Frothy Bond Markets Drive the Phisix Higher?

The Philippine equity benchmark, the Phisix seems to be knocking on the gateway of another milestone high, as I noted two weeks back[1],

One must be reminded that bubbles come in stages. So far the Philippines seem to be at a benign phase of the bubble cycle.

Again bubbles will principally be manifested on capital intensive sectors (like real estate, mining, manufacturing) and possibly, but not necessarily, through the stock markets.

This means that for as long as the US does not fall into a recession or a crisis, ASEAN outperformance, fueled by a banking credit boom and foreign fund flows operating on a carry trade dynamic or interest rate and currency arbitrages (capital flight I might add), should be expected to continue.

And again I will maintain that ASEAN’s record breaking streak may be sustained at least until the end of the year 2012.

Friday’s substantial decline in the US stock markets may put a start-of-the-week dampener on the current momentum. However this seems unlikely a hurdle to the Bernanke-Draghi inspired Christmas or year-end rally particularly for the record setting ASEAN bourses as shown above [Philippine Phisix PCOMP orange, Indonesia JCI green, Thailand SET yellow, Malaysia FMKLCI red].

Emerging Market Bonds Outperform Equities

The price actions of the bonds of emerging market should give us a clue.

The zooming pace of the JP Morgan USD Emerging Market Bond Fund (EMB) appears to be accelerating.

In the bond fund, the Philippines and Indonesia have been among the major components of with 6.81% and 6.56% share of the pie in the total portfolio[2]. This implies that the ASEAN bond markets have been outperforming their respective equity peers.

A further clue can be seen in what appears as emerging bond markets (EMB) eclipsing the gains of emerging equity (EEM)[3] counterparts.

As caveat, the country based distribution of weightings of the bond and equity indices have been different. This means that we can’t entirely depend on its accuracy when making a comparison.

Nevertheless, for local bond currency market, the huge jump in the share distribution of the real estate (18% in June vis-à-vis 13% December 2011) and infrastructure-based industries (from insignificant to 6%) gives further evidence of the business cycle in progress.

As per the largest issuers by sector, banks and financials remain the largest but have lost 3% of the share of the pie. This is followed by the rapidly growing real estate sector and holding companies.

And for the share of the ownership of investors by type, based on % of local currency denominated government bonds issued, banks and financial institutions have been the largest, albeit on a steady marginal decline in terms of trend over the past 7 years.

Other major investors, according to the Asian Development Bond includes[4]

1) BTr-managed funds which account for Bond Sinking Fund (BSF) Securities Stabilization Fund (SSF), and the Special Guaranty Fund (SGF),

2) contractual savings and tax-exempt institutions (TEIs) which represent government pension and insurance funds (e.g., Government Service Insurance System [GSIS], Social Security System [SSS], and Philippine Health Insurance Corp. [PHIC]), private insurance companies, and tax exempt funds and corporations

3) custodians which are BSP-accredited securities custodians for investor-clients and lastly

4) other government entities such as government-owned and -controlled corporations (GOCCs), and various corporate and individual investors.

The apparent boom in emerging market bond markets may have been partly reflected on the sectoral returns in the equity markets.

The financial sector, property and holding companies—which have been heavy on both—have returned a whopping 42.54%, 40.95% and 33.32% respectively; on a year-to-date basis (see light maroon bars).

Except for the service sector, the nearly broad based weekly gains (dark maroon bars) for the rest of industry compounded on the outsized year-to-date returns (see light maroon bars).

Bonds are Less Risky or a Bubble?

The positive flows into the bond markets have not been limited to Asia, this has apparently been true even in the US, where fund flows have mostly been concentrated on fixed income related investments such as ETFs and “hybrid” balance funds with income orientation as retail investor flee equity markets[5].

Yet the idea that bonds are relatively “less risky” represents charade bestowed upon by global central bank’s tsunami of monetary inflation and financial and banking regulations that have biased towards incentivizing financial and bank institutions to hold bonds[6].

For instance, Japan’s central bank, the Bank of Japan (BoJ) recently warned the banking and financial industry of their high sensitivity to interest rate risks; where for every 1% increase of interest rates, large banks and regional banks could suffer losses of ¥ 3.7 trillion and ¥3.0 trillion respectively[7]

But the supreme irony has been that the BoJ themselves have been responsible for putting at risks the domestic banking system through their pronounced policy of supposedly fighting deflation through inflationism via asset purchases. The BoJ’s balance sheet[8] now accounts for about 30% of the IMF’s estimated economic growth rate.

Reports also suggest that the BoJ may even add to their monetary easing efforts[9] on October 30^th

Noticeably Japan’s outward investment flows, which are at near record levels[10], have supplanted China, despite the streak of failures where the batting average of outward FDIs have been unfavorable and the losses have been substantial.

About 26 trillion yen ($330 billion) have accounted for the lost market value from the 10 biggest overseas purchases by Japanese companies from 2000 to a year ago. Apparently the batting success average of Japan’s outward Foreign Direct Investments has been 1: 5 or 20%, where two posted gains while eight companies suffered losses during the said period.

And of the two winners, one is from Kirin Holdings whose acquisition of 48% of San Miguel Brewery [PSE:SMB] in 2009 has tripled in value[11].

I have been pointing out here that beyond the mainstream’s false notion of Japan’s deflation bogeyman, monetary policies, policy or regulatory (regime) uncertainties, interest rate risks and credit risks have all compounded to haunt Japan’s increasingly crony based political economy, prompting resident investors to take larger and unnecessary risks abroad for either survival or to seek out higher returns[12].

Going back to the fund flows in the US, ironically, despite the sustained outflows in the equity markets and last Friday’s slump, the US major bellwether the S&P 500 ended the week marginally on the positive note (dark violet bars).

Yet major global equity markets, led by the S&P 500, have mostly been significantly up on a year-to-date basis (light violet bars).

This fantastic but unsustainable run in the bond markets, which has exhibited symptoms of bubble dynamics, will unlikely persist.

We can either expect a shift out of bonds and into the stock markets or that the bond markets could be the trigger to the coming crisis.

In my view, the former is likely to happen first perhaps before the latter. To also add that triggers to crisis could come from exogenous forces.

Central Bank Actions Rule the Day

So far, steroids from central banks aimed at supporting the asset markets will continue to distort market price signals. And this time I am not alone saying this.

This recent commentary from Financial Times[13] seems highly relevant to the current state of affairs (bold emphasis mine)

Much of the blame for this tends to be attributed to the fact that markets now move to a drumbeat of statements from politicians and central bankers, such as the head of the US Federal Reserve. “All 500 S&P companies have the same chairman and his name is Ben Bernanke,” says Jurrien Timmer of the Fidelity Global Strategies Fund.

It is also true that securities within markets, as well as far-flung debt and equity markets have been trading more “in sync” with each other: the willingness of investors to take on risk being a common factor behind price moves.

The conditions of a parallel universe—where markets have become seemingly detached to economic reality—which I have been pounding on the table since, has even been recognized by the chief executive Mohamed El-Erian of PIMCO one of the largest fixed income firms.

At the Financial Times Mr. El-Erian writes[14] (bold mine)

Essentially, the Fed is inserting a sizeable policy wedge between market values and underlying fundamentals. And investors in virtually every market segment – including bonds, commodities, equities, foreign exchange and volatility – have benefited handsomely. In the process, many asset prices have been taken close to what would normally be regarded as bubble territory, with some already there. 

Central bank action, both real and perceived, rules the investment day, and will continue to do so for now. This is also the case in Europe.

And if central bank actions have truly become the rule for the investment world, then to what degree of relevance does traditional or conventional knowledge apply on pricing and valuing stock markets in the current setting?

Another commentary from the Lex Column of the Financial Times nails it[15],

Perhaps the most horrifying thing about the current combination of sales deceleration, margin contraction and high valuations is that it might not even be a sell signal.  The central banks of the US and Europe may well keep investors trapped in risky assets indefinitely. Those who look at the fundamentals and flee to cash had better be patient.

In reality market participants are being sucked into the vortex of speculative mania, which means another round of intensive build-up of misallocated resources or malinvestments and a future bust. We are in a boom phase of a bubble cycle.

FED policies have begun to diffuse into the US property markets which have shown significant broad based recovery[16]: particularly in existing home sales, housing starts, new home sales, building permits, builder confidence, to even a decline in shadow inventories, and signs of the inflection point of real estate loans at ALL commercial banks.

The assumption that FED policies have been successful would signify as presumptive or short sightedness or even blind belief of the capabilities of bureaucrats.

People forget that costs are not benefits. What seems as a boom today will ultimately end in tears. And bubbles, which have been growing in scale and frequency, once pricked will lead to massive capital destruction that would take years to recover especially when interventions delay them and or even make them worse.

General destruction of wealth and wealth generating activities can never be a benefit even from the Pareto optimal perspective. 

The recovering US real estate industry is being buttressed by the improving state of credit as seen by the annual % change in consumer loans and commercial industrial loans at ALL commercial banks. (Source St. Louis Fed)

Yet once the colossal excess reserves by depositary institutions held at the US Federal Reserve flows into the system, the US and the rest of the world will be faced with the risks of price inflation.

And price inflation or the market’s recognition of the unsustainability of the fiscal positions of US will likely serve as the proverbial the pin that would perforate and end the inflating bubble.

For now, the US asset bubble will likely be sustained.

Miniature Stock Bubble: Alcorn Petroleum

At the local markets, as pointed out last week, inflationary booms titillates the gambling ticks and speculative adrenalin of many participants. Punters and tyros will be seduced to the allure of easy money based on dramatic price surges, and eventually, fall prey to gruesome price collapses.

And the imprudent and those bearing the entitlement mentality will pass the blame on ‘manipulation’ or ‘fraud’ to the markets and call for regulations without accounting for the incentives brought about by bubble policies on people’s behavior.

Let me quote anew the great libertarian economist, journalist Henry Hazlitt[17]

Inflation, to sum up, is the increase in the volume of money and bank credit in relation to the volume of goods. It is harmful because it depreciates the value of the monetary unit, raises everybody's cost of living, imposes what is in effect a tax on the poorest (without exemptions) at as high a rate as the tax on the richest, wipes out the value of past savings, discourages future savings, redistributes wealth and income wantonly, encourages and rewards speculation and gambling at the expense of thrift and work, undermines confidence in the justice of a free enterprise system, and corrupts public and private morals.

More regulations will not solve the behavioral imbalances caused and rewarded by antecedent immoral policies.

Over the past two weeks Alcorn Petroleum [PSE: APM] has skyrocketed to close on Friday by an eye-popping 600+%!

The company officially disclosed that they “cannot confirm” the rumored backdoor listing by allegedly the other “retailing” businesses owned by the same of owners, although the firm “appointed a financial adviser” to submit recommendations[18]. If the rumor involved different parties then such denial would seem sensible as negotiations involve the risks of transaction failure. But in this case, the parties supposedly are the same owners.

The company also referred the excessive price fluctuations or movements to a possible “oil exploration play”. Alcorn Petroleum has a 9.32% participating interests at the Service Contract 51- covering the East Visayas Basin.

Yet since the other partners in the same service contract[19] have had mixed performance this week, particularly, Trans Asia (+5.79%) [PSE: TA] and PetroEnergy [PSE: PERC] (-.84%) one can hardly impute an oil exploration play to the astronomical price surge of APM.

Whatever the reasons behind the price spike, prudence dictates that such huge series of price surges characterizes bubble dynamics which overtime typically ends up with huge frustrations for those left holding the proverbial bag.

Property giant Century Property Group [PSE: CPG], which got listed through the backdoor from the buyout of East Asia Power Resources in August[20] of last year, had seen a similar stratospheric surge as many jumped in on the rumored backdoor play.

However when the rumor became fact, CPG retrenched most of its accrued bottom-to-peak gains. As of Friday, CPG’s prices have been down about 62% from its zenith closing price.

Today’s bullmarket, and partly CPG’s financial heft, have essentially provided support to her current price levels. 

CPG’s tale is unlike the sordid experience of another stock bubble in 2000, which again involved another backdoor listing play, particularly Philweb [PSE: WEB] through formerly listed South Seas Oil[21]. Not to mention the BW Resources scandal in 1999.

In the backdrop of a bear market and upon the realization of the deal, WEB virtually gave back all its 1,000++% gains or returned whence it came from. And many punters who took part in the play had about a decade or more to recoup part of their losses (that’s for those who can’t accept their mistakes).

WEB’s experience seems to parallel the Thailand episode during the Asian Crisis as previously discussed[22]. Bubbles take time to heal whether seen from a macro or micro level.

The bottom line is to apply the Duck Test[23] for suspected stock bubbles: if it walks like duck, swims like a duck and quacks like a duck, it must be a duck.

These are the issues to avoid and to ignore.

This wisdom quote from author C Joybell C should apply to stock picking as well

Choose your battles wisely. After all, life isn't measured by how many times you stood up to fight. It's not winning battles that makes you happy, but it's how many times you turned away and chose to look into a better direction. Life is too short to spend it on warring. Fight only the most, most, most important ones, let the rest go.

Today’s bullmarket should come with a lot of opportunities without having to expose oneself to enormous risk. And all it takes is emotional intelligence[24] and self-discipline[25]

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[1] See Phisix-ASEAN Bellwethers at Fresh Record Highs, October 8, 2012

[2] iShares.com J.P. Morgan USD Emerging Markets Bond Fund us.iShares.com

[3] iShares.com MSCI Emerging Markets Index Fund us.iShares.com

[4] ADB, Asia Bond Monitor, Asianbondsonline.org September 2012

[5] Zero Hedge R(osenberg) & B(ernstein): Two Ex-Merrill Colleagues, Two Opposing Outlooks, One Permabull Rebuttal, October 19, 2012

[6] See How Capital Regulations Contributed to the Current Crisis December 5, 2011

[7] Wall Street Journal Japanese Banks Face Huge Rate Rise Risk, Warns BOJ, October 19, 2012

[8] Pedro Da Costa Central bank balance sheets: Battle of the bulge Reuters Blog April 12, 2012

[9] Asahi Shimbun BOJ mulls further monetary easing, October 18, 2012

[10] Zero Hedge Forget China; Japan Is 'Taking Over' The World Again October 15, 2012

[11] Bloomberg.com Softbank’s Son Seeks to Skirt Cross-Border Failure History, October 17, 2012

[12] See Will Japan’s Investments Drive the Phisix to the 10,000 levels? March 19, 2012

[13] Dan McCrum End to ‘alpha’ spells trouble for fund managers Financial Times September 10, 2012

[14] Mohamed El Erian Beware the ‘central bank put’ bubble Financial Times, October 10, 2012

[15] Dave Glen Markets Remain Bid Despite Weakish Fundamentals September 18, 2012

[16] See US Federal Reserve Policies Re-Inflate US Property Bubble October 20, 2012

[17] Henry Hazlitt What You Should Know About Inflation p.18 Mises.org

[18] Alcorn Petroleum Re: Comment on Inquirer.net News Article PSE.com.ph October 16, 2012

[19] Business Inquirer.net Drillers settle dispute on farm-in deal August 10, 2012

[20]Business Inquirer.net Century Properties sets backdoor listing on Philippine Stock Exchange, August 18, 2012

[21] Newsflash.org BOI OKAYS REGISTRATION OF PHILWEB AS NEW I.T. FIRM January 29, 2001

[22] See FED-ECB’s Nuclear Policies: Risk ON is Back! September 17, 2012

[23] Wikipedia.org Duck test

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

[25] See Self-Discipline and Understanding Market Drivers as Key to Risk Management April 2, 2012