Phisix’s Inflationary Boom: Normal Profit Taking From Record Highs

The paradox of skill says that as people become more skillful in a given activity, luck becomes more important in determining the outcome. It seems backwards, but more skill equals more luck. —Michael Mauboussin, Chief Investment Strategist, Legg Mason as interviewed by Josh Wolfe

[Note: This will be my last stock market commentary for the year]

The correction from an overbought and overheated Philippine stock market has finally arrived. The Phisix fell 1.5% over the week, the first weekly decline in four.

The Phisix has already been emitting signs of having an overextended run.

As I wrote two weeks back[1]

However, given the steep ascent and overbought conditions by the Phisix, expect temporary corrections and possibly rotational activities.

I followed this up last week[2]

I believe that should an interim correction emerge from an overheated Phisix occur, then rotation dynamic will reinforce the current inflationary boom.

This week’s natural profit taking phase has indeed been accompanied by rotational activities.

The year’s only losing sector, mining-oil jumped 5% and stole the limelight from most of the previous outperformers.

This is inflationary boom at its finest. 

Despite this week’s retrenchment, the Phisix remains technically overbought as shown above. Whether it is Relative strength index (RSI), moving averages or Moving Average Convergence-Divergence (MACD), all have chimed to suggest of a still overextended Phisix despite this week’s retrenchment.

Perhaps this could mean more profit taking sessions following the recent milestone high.

However given the bullish backdrop provided by monetary authorities in the Philippines and most especially by major developed economies, one can’t discount that inflation of asset prices could be rekindled or that corrections may be short-circuited

Nonetheless this week’s rotational activities towards the mining sector will likely herald the theme for 2013. 

Although the mining oil industry did have two consecutive years of gains in 2006-2007, the mining-oil sector (blue) has practically been in an alternating leadership role with the Phisix (red) since 2007, a pattern that is likely to be extended in 2013.

Such pattern will most likely be supported from rallying international prices of commodities.

Nevertheless, the resumption of the commodity boom will be rationalized from the standpoint of a reflation of China’s bubbles, which will also likely be reinforced by a credit driven boom in emerging markets, a continuing inflation driven recovery of US real estate and from a local perspective—the possibility of political compromises between the Philippine government and the today’s politically persecuted industry which may happen after the May national elections in 2013.

Yet the biggest force that will drive the commodity prices will be continued easing policies by global central banks.

The US Federal Reserve’s Version of ‘Hotel California’

As early September, I have been saying[3] that the US Federal Reserve will aggressively expand on their balance sheet in order to finance the intractable but bulging fiscal deficits.

In spite of all the euphoria, the FED’s operations may likely be reaching a tipping point.

The combined monthly $40 billion MBS purchases by US Federal Reserve, as well as, the $45 billion long term (10-30 year) US treasury bond buying from Operation Twist means that the Fed’s balance sheet is likely to expand to about $4 trillion by the end of 2013 from $ 2.8 trillion or an increase of about $1.17 trillion, according to Zero Hedge.

Yet the sterilization measures by Operation Twist of selling $45 in short term bonds to offset the long end buying will likely end by this year as the Fed runs out of short term securities to sell.

Essentially, roughly half of the US budget deficit will be monetized by the FED.

I predicted then that with the announcement of QE 3.0, the risk ON environment has been reactivated.

This week the US Federal Reserve basically confirmed my prognosis. Operation Twist had been converted into $45 billion a month of non-sterilized purchases of US treasuries or QE 4.0 under the unlimited QE scheme[4]. This would supplement QE 3.0 which has been programmed to acquired $40 billion a month of mortgage securities.

Together the two buying programs would add up to $85 billion a month which should expand the FED’s balance sheet to around $4 trillion in 2013, $5 trillion in 2014 and $6 trillion by 2016, in the assumption of the constancy of the program. But this looks unlikely as the FED may add to on to it sooner than later.

The FED has essentially doubled down on its QE policies. (chart from Casey Research[5])

Importantly, the FED has launched the grandest and boldest experiment by continually changing the parameters guiding the implementation of the said policies.

The Fed has now adapted what many call as the Bernanke-Evans rule[6] which ties such program to employment and inflation data. Chicago Fed President Charles Evans initially proposed 7 percent unemployment and a 3 percent inflation limit, but the Fed has modified this to 6.5% for the jobless rate and an implicit inflation target at 2.5% compared to the official target at 2%.

The latest policy essentially throws the initial 2015 year[7] target off the window by making ultra-low rates indefinite or open ended.

It is ironic to see the Fed anchor its policies on employment statistics, a variable which it does not control. The elixir of inflationism designed from econometric models by academic pedants linked to the MIT clique[8], will not solve the micro real world problems of interventionism.

Money printing and zero bound rates hardly provides any redress to lost incomes from businesses that will not emerge or that has become bankrupt due to the lack of business permits, mandated standards, and etc.., all manifested as anti-business policies channeled through political institutions—regulatory, bureaucratic and tax obstacles. The problems endured by Small Businesses, the largest employers of US economy, underscore this[9].

Instead since newly created money will have to flow somewhere and affect relative prices, such policies will inflate on global asset bubbles and realign production towards malinvestments.

As the great Austrian economist Friedrich von Hayek wrote[10],

But it seems obvious as soon as one once begins to think about it that almost any change in the amount of money, whether it does influence the price level or not, must always influence relative prices. And, as there can be no doubt that it is relative "prices which determine the amount and the direction of production, almost any change in the amount of money must necessarily also influence production

In addition, such policies magnify the risks of price inflation.

The newly constructed parameters of the QE policy can be seen as explicitly promoting price inflation. The editorial of the Wall Street Journal has a provocative rejoinder[11],

That is a 2.5% inflation target by any other name, and it's striking to see a central bank in the post-Paul Volcker era say overtly that it wants more inflation

The FED’s buying program has now been estimated to constitute about NINETY percent of US treasury issuance or “net new dollar-denominated fixed-income assets” by JP Morgan[12].

While price inflation may not yet be seen as clear and present danger, deep reliance on the FED in financing of US deficits fertilizes the already sown seeds of hyperinflation.

As Professor Peter Bemholz in his book Monetary Regimes and Inflation stated[13]

there has never occurred a hyperinflation in history which was not caused by a huge budget deficit of the state.

And that the inflationary impact from the transmission of the Fed’s buying of government bonds as explained by former and now mutual fund owner Professor John Hussman[14], (italics original)

It's tempting to think that somehow printing money means an increase in spending power, while issuing bonds means that the government is taking something in return for what it spends, but it's important to focus on the general equilibrium. In both cases, regardless of whether government finances its spending by printing money or issuing bonds, the end result is that the government has appropriated some amount of goods and services, and has issued a piece of paper – a government liability – in return, which has to be held by somebody. Moreover, both of those pieces of paper – currency and Treasury securities – compete in the portfolios of individuals as stores of value and means of payment. The values of currency and government securities are not set independently of each other, but in tight competition...

To the extent that real goods and services are being appropriated by government in return for an increasing supply of paper receipts, whatever the form, aggressive government spending results in a relative scarcity of goods and services outside of government control, and a relative abundance of government liabilities. The marginal utility of goods and services tends to rise, the marginal utility of government liabilities of all types tends to fall, and you get inflation.

This is important, because it means that the primary determinant of inflation is not monetary policy but fiscal policy.

And the trillions of dollars of banks reserves held at the FED may aggravate rather than cause the expanded risks of price inflation.

Even Dallas Fed President Richard Fisher has stated concerns over what he analogizes as “Hotel California” type of monetary policy[15]. By invoking the pop rock song popularized by The Eagles, Mr. Fisher said that the Fed’s “engorged balance sheet” may extrapolate to the FED as being able to "check out anytime you like, but never leave." In other words, the Fed seems TRAPPED from its own making.

This is not to suggest of the imminence of hyperinflation, rather this is to say that the continuity of present path policies increases the risks of such scenario.

And this has not just been about the US Federal Reserve.

The ECB with their unlimited buying program already in place[16], via the Outright Monetary Transaction (OMT)[17] which will supposedly be fully sterilized (which I doubt) has now been dabbling with the idea of interest rate cut and even a negative deposit rate[18].

The FED’s doubling down on QEs simply suggests of the increasing desperation by political authorities in attempting to preserve the status quo.

Yet both programs espoused by FED and the ECB have been manifesting signs of diminishing returns.

The combined easing tools have been increasing in frequency and in size as the ‘positive effects’ have become smaller. This can be seen via the “days between unsterilized actions” where FED-ECB QE policies would likely enlarge on the size of their purchases possibly by the first quarter of 2013.

As the Zero Hedge notes[19], (italics original)

At the current average decay period of around 40% per action, we should see the ECB or Fed enact something new by around February 4th (just as the debt-ceiling comes to a head).

What to Expect: Asset Bubbles, Greater Volatility and Bullish Gold

What we can infer from the current policies:

-such policies would not affect market prices uniformly.

While newly injected money will inflate bubbles in the asset markets and in the real economy worldwide, the impact of such policies will vary across time, in scale, and in depth.

This should include the Phisix, the Peso, Philippine bond markets and the Philippine property bubble.

-financial markets could be susceptible to outsized volatility which could go on both directions but with an upside bias

-courtesy of the Fed’s policies, US bond markets have recently financed buybacks on the stock market that has led to the latter’s recent strength.

This implies that the fate of US stock markets and the bond markets and or even the housing markets may have been intertwined[20]. Tighter correlations imply greater contagion risks

-even if gold-silver has not moved as expected, this doesn’t mean that the foundations that has undergirded the 11 year bullmarket has been undermined.

To the contrary, the prospects of more increases in current expansionary policies, which should erode the purchasing power of money, should point to future gains of such hedges against currency devaluation. 

Evidence suggest that gold prices may have departed from real world activities. Sales of physical gold have exploded to record highs[21]. Moreover central bank buying has been gathering steam, which seems on path to hit new highs this year (500 tons), along with record ETF gold holdings at 2,627 tons[22].

In addition, the broadening rally of commodities, particularly energy (DJUSEN Dow Jones oil and gas), agriculture (GKX) and industrial metals (GYX) seem supportive of higher prices precious metals.

Ironically too, just recently gold seems to be tracking the US dollar (vertical line) rather than rallying along with a firming euro. US dollar gold seems to have established a new correlationship. I would guess a temporary one.

Yet to claim that the present sluggishness of gold prices, which has not moved according to bullish expectations is “wrong” seems pretty much naïve. Such view can’t see beyond the developments outside of the ticker tape.

In reality, NO trend goes in a straight line. Yet gold prices managed to score 11 straight years of gains as of the end of 2011[23]. This could be the 12^th. Year to date gold prices are up by about 8%. A year where gold underperforms doesn’t spell an end to the bullmarket.

Yet there may be some idiosyncracies (hedge fund liquidations, imbalances in the Commodity Futures’ Bank Participation Report[24] or others) that may be inhibiting current dynamics which might be resolved soon.

In the investing world, a perceived mistake should be addressed by liquidation and by moving on. If one sees gold’s current trend as having reversed, then the corresponding action should be to sell and transfer to other investments, or to short gold.

But that’s not I see things. Unless financial markets around the world start to weaken dramatically and simultaneously, current price infirmities should instead be seen as buying windows

---

[1] See Phisix at 5,600: Emergent Signs of Euphoria? December 3, 2012

[2] See E-Vat 15%: Possible Consequence from Current Quasi Boom Policies December 10, 2012

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

[4] See FED Converts Operation Twist to QE 4.0 December 13, 2012

[5] Bud Conrad, The Fed's QE4EVA Confirms Their Support for the Government's Deficit, Casey Research December 14, 2012

[6] NationalReview.com The Fed Now Playing by Its Own Rule, December 12, 2012

[7] Abcnews.go.com Federal Reserve Expects to Keep Interest Rates Low Through Mid-2015, September 13, 2015

[8] See Graphic of the Day: MIT Academes Govern World’s Money Policies December 13, 2012

[9] See Are Taxes and Regulations as Primary Business Obstacles a Myth? September 16, 2012

[10] Friedrich von Hayek, Prices and Production p.28 Mises.org

[11] Editorial of the Wall Street Journal The Fed's Contradiction, December 12, 2012

[12] Bloomberg.com Treasury Scarcity to Grow as Fed Buys 90% of New Bonds December 4, 2012

[13] Peter Bemholz Monetary Regimes and Inflation History, Economic and Political Relationships goldonomic.com p. 12

[14] John P. Hussman Ph. D. Inflation Myth and Reality, January 19, 2012 Hussman Funds

[15] CNBC.com Fisher: Fed Risks 'Hotel California' Monetary Policy December 14, 2012

[16] See ECB’s Mario Draghi Unleashes “Unlimited Bond Buying” Bazooka, Fed’s Ben Bernanke Next? September 7, 2012

[17] Guardian.co.uk ECB introduces unlimited bond-buying in boldest attempt yet to end euro crisis September 6, 2012

[18] Reuters.com ECB discusses rate cut, depicts bleak 2013, December 16, 2012

[19] Zero Hedge Chart Of The Day: The Collapsing Half-Life Of Unsterilized Central Bank Intervention December 12, 2012

[20] See How US Federal Reserve Policies Linked the Bond Markets with Equity Markets, December 13, 2012

[21] Zero Hedge The Chart That Keeps Ben Bernanke Up At Night, December 1, 2012

[22] Arabianmoney.com Central bank gold purchases to top 500 tons this year in a new record supporting prices

[23] Reuters.com Gold's 10 percent gain in 2011 extends run to 11th year, December 30, 2011

[24] Alasdair Macleod Are Precious Metals Futures Heading for a Crisis? ResourceInvestor.com December 11, 2012

War on Internet: Internet Freedom Prevails over UN Sponsored Regulations

The United Nations via the International Telecommunication Union has failed in her mission to put a centralized legal kibosh on the internet.

From Forbes.com

For the last two weeks some of the planet’s most oppressive regimes have faced off against some of the most powerful Internet advocates in an effort to rewrite a multilateral communications treaty that, if successful, could have changed the nature of the Internet and altered the way it is governed.

On Thursday night that effort failed, as a US-led block of dissenting countries refused to sign the proposed updates, handing the United Nation’s International Telecommunication Union a humbling defeat.

The United States, which framed its dissent as defending “the open Internet,” was joined by more than 80 other countries, including Australia,Canada, Chile, Costa Rica, the Czech Republic, Denmark, Egypt, Finland, Greece, Italy, Japan, Kenya, the Netherlands, New Zealand, Poland, Portugal, Qatar, Sweden and the United Kingdom. (Some of the non-signers seemed to be seeking to avoid making too overt of a political statement, saying, regrettably that they could not sign because they had to “consult with capital.”)

On Friday, the remaining members of the ITU, which is made up of 193 countries, signed the treaty, known as International Telecommunications Regulations, but the gesture in many ways was hollow.

Like other U.N. agencies, the ITU strives for consensus, and it’s within that consensus that the ITU derives its authority. The ITU can’t force a country to abide by its treaties, but if representatives of all member countries agree to a global telecommunications framework, and subsequently pass laws enforcing the framework, the ITU itself grows stronger.

Dissenting countries led by the US have not really been for defending “open internet”, as the US for instance have pursued various forms of social media censorship (some examples see here here here and more). The difference, I think, is that these supposed “open internet” faction don’t want to be tied up with or submit to a global regulator via such treaty.

They seem to prefer approaching the internet via domestic policies.

The same article seem to give such a hint,

Interpreted as a power grab by the United Nations, the secrecy rang alarm bells. Distrust of the ITU began to approach panic after the contents of more controversial proposals became known. Some of the proposals endorsed by authoritarian countries would have increased censorship, potentially restricted the free flow of information and undermined the voluntary framework that forms the basis of today’s Internet.

In addition, upholding the treaty may also extrapolate to the dilution of power by the opposing bloc to the UN consensus led by authoritarian governments which would be unacceptable to opposition many whom are developed economies.

The good news is that forces of decentralization embodied by the internet continues to sow division on governments. Such factionalism will likely be more pronounced when the next debt crisis surfaces.

Graphic: America’s Demographics: Racial and Ethnic Trends

America’s population will increasingly be dominated by non-whites

That’s according to an estimate by the US government as reported by Reuters

By 2060, non-whites will make up 57% of the U.S. population, more than doubling from 116.2 million in 2012 to 241.3 million, according to projections by the U.S. Census Bureau. A surge in Hispanics and Asians is set to dramatically change the face of the United States over the next 50 years, with no one ethnic group the majority. Today’s graphic looks at this projected demographic change in more detail.

Projecting long term trends by looking at current events is a dicey proposition. There could be many changes that may occur in between (2012-2060) to upset any balance captured by such study.

America’s future will ultimately depend on the ever dynamic interactive loop between social policies and the average American’s response on them.

Nonetheless should projected trends become anywhere close to reality, then this might spell doom for the electoral chances of the Republican party or the GOP, whose constituents are said to be mainly from whites.

As author and editor of the American Conservative Patrick J. Buchanan predicts,

If your racial and ethnic voter base is aging, shrinking and dying, your moral code is being rejected, and the tax-consuming class has been allowed to grow to equal or to dwarf the taxpaying class, the Grand Old Party has a problem. But then so, too, does the country.

Quote of the Day: Government Forecast is No Different than a Medieval Fortuneteller

The problem is that people have been deluded for so long into believing that economics is an actual science… and so it must be true. Well, for a time, so was bloodletting. Or the ‘ethnic sciences’.

We know all of these things are nonsense today. But for some reason, people still haven’t figured out that an economist with a forecast is no different than a medieval fortuneteller.

This is from Simon Black of the Sovereign Man debunking the popular romanticized fiction called government economic forecasting.

China’s Stock Markets: Sovereign Funds and Central Banks Open to Invest More

The Chinese government has a bias for international political contemporaries. 

They prefer central banks and government controlled Sovereign Wealth Funds (SWFs) to have greater exposure in their stock markets in the assumption that these entities are “long term” investors than the private sector counterparts

From Bloomberg,

China scrapped a ceiling on investments by overseas sovereign wealth funds and central banks in its capital markets, part of government efforts to encourage long-term foreign ownership and shore up slumping equities.

SWFs, central banks and monetary authorities can now exceed the $1 billion limit that still applies to other qualified foreign institutional investors, according to revised regulations posted yesterday on the State Administration of Foreign Exchange’s website.

The Shanghai Composite Index (SHCOMP) jumped the most since October 2009 yesterday after the head of the Hong Kong Monetary Authority said Dec. 13 that China may relax or abolish a rule that requires Renminbi Qualified Foreign Institutional Investors to keep most of their funds in bonds. The China Securities Regulatory Commission has cut trading fees, pushed companies to increase dividends and allowed trust companies to buy equities since Guo Shuqing took over as chairman last year.

Introducing more long-term funds from abroad will help improve market confidence, promote stable growth in capital markets and provide “robust” investment returns to domestic investors, the regulator said in May, a month after the government more than doubled the total quota for QFIIs to $80 billion from $30 billion….

QFIIs can repatriate their principal and investment returns after a lock-up period ends, though the monthly net remittances cannot exceed 20 percent of their total onshore assets as of the previous year, according to yesterday’s rules. Open-ended China funds can remit funds on a weekly basis under the new regulation, compared with monthly in the previous version announced in 2009.

The Hong Kong Monetary Authority, Norges Bank, Government of Singapore Investment Corp. and Temasek Holdings Pte.’s Fullerton Fund Management Co. have all reached the $1 billion limit as of Nov. 30, with QFIIs’ approved quotas totaling $36.04 billion, according to SAFE, the currency regulator. Foreign investors can only invest in capital markets through QFIIs.

The benefits from capital intermediation seems well understood by the Chinese government. 

It is only in the prism where the incentives driving public sector ownership appears to have been mistakenly lumped as purely profit oriented enterprises similar to private corporations which gave SWFs the precedence.

In reality, the positioning of political or public financial institutions on international capital markets are different. They are based on (political) priorities and parameters diverse from their private sector peers (such technical operating differences may due politically determined guidelines).

This article gives us a clue, from ai-cio.com

SWFs, similar to other institutional investors, are less likely to invest in private equity versus public equity internationally, according to a newly published paper, written by Sofia Johan of York University, April Knill of Florida State University, and Nathan Mauck from the University of Missouri.

However, the economic significance of this impact is surprisingly low, the paper asserted. "Unlike other institutional investors, SWFs are more likely to invest in private equity versus public equity in target nations where investor protection is low and where the bilateral political relations between the SWF and target nation are weak." The research demonstrates that contrary to non-governmental institutional investors, SWFs do not seek protection by investing in private equity in nations that provide strong investor protection.

Surprisingly, cultural differences play a marginally positive role in the choice to invest in private equity outside of a SWF's own sovereign nation. "Comprehensively, we find that SWFs act distinctively from other traditional institutional investors when investing in private equity," the authors claimed.

Furthermore, according to the paper, SWF investment in private equity may be primarily financially motivated as SWFs tend to underperform in the public markets.

As one can note the degree of bilateral relations differs and serves as example to a politically determined SWF fund management framework.

In 2009, pension funds, insurance companies and mutual funds dominated long term investing with over US$65 trillion in OECD economies. The share of SWF has also grown, given their hefty $4 trillion stockpile, but represents a fragment relative to the overall investible exposure by the private sector.

The above is a categorization of long term investors from the World Economic Forum shows that private sector remains the largest dynamic as long term investors

In addition, given the highly volatile politically charged environment, such priorities may change. Past performance may not serve as a useful guide for future actions. Long term may become short term and vice versa depending on how changes evolve.

Also, there is no technocratic magic on public investments. Bureaucrats don't outsmart the private sector.

Public funds like sovereign wealth funds are manned by people too. They are seduced to the herding effect as evidenced by their recent price chasing action of Emerging Market debt

This anecdotal evidence from Reuters.com

Sovereign wealth funds, along with other crossover investors, such as European pension funds, were in hot pursuit of EM credit in 2012, but US pension funds "missed the boat" after buying one too many underperforming EM equity trades, said Chang.

So SWFs can be short term as much as it can be long term

 

And to repeat the earlier point: The priorities of the public funds can be influenced by political circumstances whether domestic or international.

Take for instance, California Public Employees' Retirement System (CalPERS), the US largest public pension fund recently filed for bankruptcy in response to the bankruptcy proceedings made by two cities Stockton and San Bernandino. 

Bankruptcy may turn long term investments into short term.

Bottom line: While the Chinese government’s thrust to liberalize her capital markets should be seen in a good light, which I believe encapsulates her path or grand design towards the yuan’s convertibility in order to challenge the US dollar hegemony as international currency reserve, her order of priorities in favor of SWFs seems unjustified. 

Instead, China’s government should aggressively liberalize her capital markets. Capital flows are not the problem. Bubble policies are.

Finally, the above report has allegedly bolstered the Shanghai Index to break above the 50-day moving averages with Friday’s eye popping 4.32% gains

Such sharp recovery seems to indicate of a major inflection point for China's major benchmark. Part of which may be intended to paint a welcoming picture for the ushering in of the newly appointed leaders.

As I wrote last Sunday:

Given the recent record liquidity injections by the People’s Bank of China (PBoC) which coincided with the latest leadership changes, and improving signs of credit growth, perhaps from stealth stimulus coursed through State Owned Enterprises (SoE), accelerating signs of improvements on infrastructure investments, and with retail investors almost abandoning the stock market out of depression, China’s reflationary policies may yet spark new bubbles in both the stock market and the property sectors…

Recovering prices of industrial metals also seem to underpin and or portend for China’s stock market recovery.

A reflation of China’s asset bubbles will likely be supportive of the recent gains attained by ASEAN bourses.

Recent surge in industrial metals (GYX) have presaged this. And I believe that China’s market participants have been looking for an excuse to push up the stock market and found one in the liberalization report that favored SWFs.

Quote of the Day: Every Act of Entrepreneurship is Revolutionary

Every act of entrepreneurship is revolutionary and rooted in the anarchist spirit. It strikes at the heart of the status quo. It dares to be dissatisfied with what is. It imagines something new and better. It brings about unexpected, unapproved, and progressive change by adding a new dimension of experience to how we understand ourselves and how we interact with others.

Without entrepreneurship, history would lack forward motion, our understanding of the uniqueness of our time in this world would be forever undefined, and society itself would atrophy and finally die. With it, every attempt to control and freeze the world faces opposition and long-run failure.

History teaches that those who dare stand in the way of human progress will eventually be run over. Yes, there is plenty of friction and too many victims as we get from here to there. But we will get there, one creative act of disobedience at a time.

This is from the highly articulate publisher and editor Jeffrey A. Tucker of the Laissez Faire Books on the forces of decentralization founded on entrepreneurship.

Warren Buffett’s Berkshire Share Buy Backs: Do What I Say and Not What I Do

When people talk or preach about politics, the best measure of candidness is to see how they act rather than to simply adhere to what they say. In Austrian economics lingo this is called demonstrated preference.

Crony Warren Buffett is a wonderful example. As a major beneficiary of Mr. Obama’s policies, he continues to promote President Obama’s class warfare “tax-the-rich” policies. That’s because the yoke of his proposed taxation will be borne more by his peers as he deftly applies tax avoidance schemes. So taxes becomes an anti-competition or protective “moat” for his companies.

Recently, along with other cronies such as Mr. George Soros, Mr. Buffett even signed a petition to increase estate taxes.

Because of his political rhetoric you’d probably have the impression that Mr. Buffett would have no qualms with paying the US government on what he believe are his "obligations".

Yet in real life, Mr. Buffett does the opposite: he fervently avoids taxes.

From the Guardian.co.uk

Billionaire Warren Buffett's conglomerate Berkshire Hathaway spent $1.2bn buying its own shares from the estate of an unnamed investor. The anonymous purchase was made at $131,000, or 117% of book value. Berkshire said it bought 9,200 Class A shares from "the estate of a long-time shareholder". The shares represent 1% of Berkshire's Class A stock.

Buffett – known as the Sage of Omaha – has always been reluctant to conduct share buybacks and agreed to it last year only after Berkshire hit historically low valuations. In its most recent filing, Berkshire said it had not made any repurchases in the first nine months of 2012, and spent just $67.5m on buybacks in 2011.

Berkshire's Class A shares rose after its announcement, up 2.8% at $134,500.

The repurchase came less than a month before the looming "fiscal cliff", automatic tax rises and spending cuts set for 1 January that the White House and members of Congress are negotiating to avoid.

Among other levies, the estate tax is expected to rise in the new year package by as much as 20 percentage points.

Buffett was a signatory to an open letter released on Tuesday that called for a lower starting point for the tax and a higher tax rate, beginning at 45%.

So Berkshire's recent buyback has been meant to protect “the estate of a long-time shareholder” from the same estate taxes which he proposes to raise.

I'd see this as galling pretentiousness.

Quote of the Day: The Virtue of Market Inefficiency

an inefficiency exists when, for a given person at a given time and place, the cost of an action outweighs the benefit.  We’ve seen that to rationally calculate costs and benefits you need money prices of inputs and outputs, of steel and bridges.  So when government erodes private property rights, interferes with trade, distorts prices, and manipulates money, it doesn’t just make it harder to be efficient; it also pulls the rug from under the very ability to spot inefficiencies at all.

Using the rules of arithmetic, for example, it’s easy to see that the statement 1 + 2 = 4 is wrong, but what about  _ + _ = _ ?  What’s the solution to this “problem”?  Is there even a problem here?  Money prices fill in the blanks; they “create errors”—i.e., reveal mistakes that no one could see without them—that alert entrepreneurs might then perceive and correct. If mistakes and inefficiencies remain invisible, the search for better ways of doing things could never get off the ground.

An economy without inefficiencies is either one where knowledge is so perfect that no one ever makes a mistake, or it’s one in which government policy has effectively foreclosed the very possibility of inefficiency.  In a world of surprise and discovery, of experiment and innovation, the former is impossible; the latter sort of economy, as Mises showed almost 100 years ago, is impossible as well as intolerable.

So a living economy needs to “create” inefficiencies, and lots of them, to set the stage for greater efficiency and ongoing innovation.

This excerpt is from Professor Sandy Ikeda at the Freeman talking about the essence and or the significance of the price mechanism.  (hat tip Prof. Don Boudreaux)

Graphic of the Day: MIT Academes Govern World’s Money Policies

Could revolving door relationships between central banks and the highly protected banking industry signify manifestations of more than just the Goldman Sachs connection?

Central bank policies appear to have another a common denominator; they seem to be undergirded by academic pedantry from the stealth sanctums of the Massachusetts Institute of Technology (MIT). 

From the Wall Street Journal (bold mine) [hat tip zero hedge]

Of late, these secret talks have focused on global economic troubles and the aggressive measures by central banks to manage their national economies. Since 2007, central banks have flooded the world financial system with more than $11 trillion. Faced with weak recoveries and Europe's churning economic problems, the effort has accelerated. The biggest central banks plan to pump billions more into government bonds, mortgages and business loans.

Their monetary strategy isn't found in standard textbooks. The central bankers are, in effect, conducting a high-stakes experiment, drawing in part on academic work by some of the men who studied and taught at the Massachusetts Institute of Technology in the 1970s and 1980s.

How the world’s tightly knit central bank cabal operates, again from the same article:

Central bankers themselves are among the most isolated people in government. If they confer too closely with private bankers, they risk unsettling markets or giving traders an unfair advantage. And to maintain their independence, they try to keep politicians at a distance.

Since the financial crisis erupted in late 2007, they have relied on each other for counsel. Together, they helped arrest the downward spiral of the world economy, pushing down interest rates to historic lows while pumping trillions of dollars, euros, pounds and yen into ailing banks and markets.

Three of the world's most powerful central bankers launched their careers in a building known as "E52," home to the MIT economics department. Fed Chairman Ben Bernanke and ECB President Mario Draghi earned their Ph.D.s there in the late 1970s. Bank of England Governor Mervyn King taught briefly there in the 1980s, sharing an office with Mr. Bernanke.

Many economists emerged from MIT with a belief that government could help to smooth out economic downturns. Central banks play a particularly important role in this view, not only by setting interest rates but also by influencing public expectations through carefully worded statements.

While at MIT, the central bankers dreamed up mathematical models and discussed their ideas in seminar rooms and at cheap food joints in a rundown Boston-area neighborhood on the Charles River.

This gives light to the cartel-like operations of world’s central banks, who operate in consonance or in apparent collaboration with each other. 

Experimental policies, which encompasses excessive reliance on mathematical models, centralization and presumption of knowledge, are a fatal mix to the real world. 

As Nassim Taleb wrote in The Bed of Procrustes: Philosophical and Practical Aphorisms; p.72

Academics are only useful when they try to be useless (say, as in mathematics and philosophy) and dangerous when they try to be useful.

How US Federal Reserve Policies Linked the Bond Markets with Equity Markets

Fed policies have enormous impact on the financial markets. Part of this has been to interlink the actions between the bond and equity markets. Perhaps this could be part of the US Federal Reserve Chair Ben Bernanke’s Portfolio Balance channel or “once short-term interest rates have reached zero, the Federal Reserve's purchases of longer-term securities affect financial conditions by changing the quantity and mix of financial assets held by the public.”

At his blog, Dr. Ed Yardeni explains (bold mine)

The bond cult is dominated by individual and institutional investors desperate to get some yield north of zero on their fixed-income investments. This is most evident in the monthly mutual fund data compiled by the Investment Company Institute. Over the past 12 months through October, net inflows into bond funds totaled $392 billion; equity funds experienced an $80 billion net outflow. Since the start of the latest bull market in stocks during March 2009, net inflows into equity funds was virtually zero, while bond funds attracted $1.25 trillion.

Nonfinancial corporations have been borrowing money from the bond cult, whose members have been desperately scrambling to lock in yields as the Fed has driven them closer to zero. Over the past four quarters, mutual funds purchased $267 billion in corporate and foreign bonds. To the extent that some of these funds have been used to buy back shares, the bond cult has been financing the bull market in stocks. This was all masterminded by the Fed’s equity and bond cults and implemented with their NZIRP and QE programs.

Such relationship partly explains the Risk ON-Risk OFF scenarios, as well as the current recovery in US housing. 

The bottom line is that asset markets have become immensely interdependent with each other that enhances the risks of contagion. 

Oh you can bet that such interrelationships have not just been limited to the US but to the world.

FED Converts Operation Twist to QE 4.0

As expected, the US Federal Reserve via the Federal Open Market Committee (FOMC) has converted the expiring Operation Twist into a monthly $45 billion US Treasury buying program or chapter 4 of its unlimited QE program (QE 4.0).

From the Bloomberg

The Federal Reserve for the first time linked the outlook for its main interest rate to unemployment and inflation and said it will expand its asset purchase program by buying $45 billion a month of Treasury securities starting in January to spur the economy.

“The conditions now prevailing in the job market represent an enormous waste of human and economic potential,” Fed Chairman Ben S. Bernanke said in a press conference in Washington today after a meeting of the Federal Open Market Committee. The Fed plans to “maintain accommodation as long as needed to promote a stronger economic recovery in the context of price stability,” he said.

Rates will stay low “at least as long” as unemployment remains above 6.5 percent and if inflation is projected to be no more than 2.5 percent, the FOMC said in a statement. The thresholds replace the Fed’s earlier view that rates would stay near zero at least through the middle of 2015.

The move to economic thresholds represents another innovation by Bernanke, a former Princeton University professor and Great Depression expert who has stretched the bounds of monetary policy as he battled the recession and then sought to jolt the world’s biggest economy out of a subpar recovery.

How the Fed “innovates”, from the same article:

While the FOMC dropped its calendar-based guidance on interest rates, it said the new thresholds are “consistent” with the previous outlook. A majority of Fed officials don’t expect to raise the main interest rate until 2015, when the jobless rate is forecast to fall to between 6 percent and 6.6 percent, according to projections released after the statement.

The bond buying announced today will be in addition to $40 billion a month of existing mortgage-debt purchases. The FOMC said asset buying will continue “if the outlook for the labor market does not improve substantially” and hasn’t set a limit on the program’s size or duration.

The latest move will follow the expiration at the end of this year of Operation Twist, in which the central bank each month has swapped about $45 billion in short-term Treasuries for an equal amount of long-term debt. That program kept the total size of the balance sheet unchanged, while the new purchases will expand the Fed’s holdings.

The decision to embark on outright Treasury purchases doesn’t “significantly” increase the level of monetary stimulus, Bernanke said. The Fed “intends to be flexible” in setting the pace of its asset purchases, and will use “qualitative” criteria to determine the size of its bond- buying program, he said.

Markets have practically greeted this with a yawn. Gold fell, oil rose, the US stock markets closed the day mixed.

That’s practically because the FED has telegraphed this move where 48 of the 49 economists earlier polled by the FOMC expected such actions from the FED.

Fed’s communication strategy (signaling channel) has been to float a trial balloon then lather rinse and repeat the message as part of a classical conditioning approach in shaping market’s expectations.

Yes realize that the FED effectively tries to apply mind control techniques on the markets.

The implication is that the FED’s supposed “innovation”, has in reality been a grand experimentation whose unintended consequences, which should impact the entire world, has yet to be revealed.

The FED’s buying of US treasuries will account for an estimated NINETY percent (90%) of US treasury supply!!!

From another Bloomberg article,

With the Fed buying about $85 billion a month in Treasuries and mortgage bonds next year, the net supply to the private sector will be about zero as the central bank effectively soaks up about 90 percent of new issuance of those assets.

So you have the FED fertilizing the already implanted or sown seeds of hyperinflation or a currency crisis. To be clear, what I am saying is that the doubling down of current FED actions have been INCREASING the risks of such scenario.

For now, such FED purchases will provide tailwinds to global financial markets, as well as, the Philippine Phisix, which will be seen as a "boom"

I maintain my prediction:

Since price movements of gold seems aligned with global stocks which have accounted for a risk ON or risk OFF environment, a confirmation of the Fed’s expansion of the QE most likely during the FOMC’s meeting in December 11-12 will likely push gold and global stock markets higher.

So this also means that both external and domestic policies will likely serve as tailwinds in support of a higher Phisix perhaps at least until the first quarter of 2013. Of course this is conditional to the above. Emergence of unforeseen forces, most likely from the dimensions of political risks may undermine this scenario.

But do expect sharply volatile markets with an upside bias until at least the first half of 2013.

Education: The Difference Between Learning How to Think and What to Think

Professor of Law Butler Shaffer at the LewRockwell.com in the following excerpt, eloquently distinguishes between independent and conformist thinking [bold mine]

Education is an ongoing confrontation between those who want to help children learn how to think, and those who want to teach them what to think. While there are numerous variations on these themes, the contrast can most clearly be found in the distinctions between child-centered Montessori systems, and teacher- and test-centered schools. Government schools usually fall into the latter category. Homeschooling, religious schools, un-schooling, and other forms tend to emphasize either the "how" or the "what" in their efforts with children.

Those who focus on learning how to think have in mind helping children develop their own methods of questioning and analyzing the world around them; to control their own inquiries and opinions; to the end of helping children become independent, self-directed persons. The role of the teacher in such a setting is to provide new learning situations (e.g., open up new subjects of inquiry when the student is ready to do so) and to facilitate the processes of questioning so as to help the students get to deeper levels of understanding.

People who have developed the capacity for epistemological independence are not easy to control for purposes that do not serve their interests. Institutions – which have purposes of their own that transcend those of individuals – require a mass-minded population that has been conditioned to accept outer-imposed definitions of "reality." Any deviation from this systemic purpose – as would derive from students questioning how the arrangement would benefit them – would be fatal to all forms of institutionalism.

The established order has, from one culture and time period to another, insisted on educational systems that train young minds into what to think. "Truth" becomes a set of beliefs that conform to an institutional imperative, and it becomes the purpose of schools to inculcate such a mindset. Whereas "how to think" learning that finds its purpose and focus within the minds of self-directed, independent students, "what to think" education derives from outside the students’ experiences and analytical skills. As Ivan Illich so perceptively expressed it, "[s]chool is the advertising agency which makes you believe that you need the society as it is."

To this end, the established order has helped generate – with eager assistance from academia – a belief that all understanding is a quality requiring phalanxes of self-styled "experts" who, by virtue of their prescribed status, enjoy monopolies to offer opinions about their respective fields of study. Plato’s designation of "philosopher kings" has been sub-franchised into categories of "experts" to be found in "history," "physics," "psychology," "economics," "law," and seemingly endless sub-groupings that negate the role once respected for those who had received a "liberal arts" education.

Read the rest here.

Austrian Bureaucrat Loses $439 million of Taxpayers Money on Derivatives Gamble

This is a prime example of negative externalities (or cost of a mistake to the society) derived from centralized institutions has far more damaging effect than errors incurred by entrepreneurs or so called "market failures".

A mistaken decision from political authorities extrapolates to greater tax burden for the citizenry.

From Reuters (hat tip Zero Hedge)

Austria said it planned stricter controls over regional finances after a Salzburg civil servant gambled hundreds of millions of euros of taxpayers' money on high-risk derivatives.

Finance Minister Maria Fekter said on Tuesday she was preparing new national legislation to impose stricter conditions on how regional administrations could use money borrowed at preferential rates from the Federal Financing Agency (BFA).

Salzburg officials said last week they had sacked a finance director after determining she used doctored documents and false signatures to hide a trail of losses from deals that started more than a decade ago, causing a book loss of 340 million euros ($439 million).

The incident has sparked calls for fresh elections in Salzburg state and for regional financing rules to be reformed. Austrian states have 8.2 billion euros of debt, or 8.1 percent of the country's public debt.

"It can't go on that one keeps getting cheap money from the BFA and then starts gambling with it," Fekter told journalists, adding that the states could save 150 million euros per year by using the BFA for all their financing needs.

The above is another great example of knowledge problem. This shows that political agents are also human beings who possesses or embodies the same set of shortcomings as everyone else. Except that they command resources and privileges via mandated budges and guns.

Losses from “gambling” is actually fait accompli or a side issue. If the gamble paid off then this won’t have been in the news.

But even if we presume the noble intentions have guided the actions of bureaucrats, the real issue is why governments are given the latitude to put taxpayer resources at risk and why their losses means greater tax burdens instead of reducing them.

The irony of politics is that political errors have always been rewarded-- although the culprits does get sacked, the system remains in place--instead of being punished, all these comes at the expense of taxypayers—in terms of opportunity costs via resources and time, as well as, civil liberties.

HK Monetary Authority: QE is NOT a Panacea

Hong Kong’s Monetary Authority headed by Chief Executive Norman Chan appears to have come to grip with reality and indirectly censures the US Federal Reserve

From CRI English (hat tip Zero Hedge) [bold mine]

Hong Kong Monetary Authority Chief Executive Norman Chan said Monday that if the process of deleveraging is disrupted by quantitative easing, asset prices might drop sharply and remain volatile.

When delivering a speech entitled the Global Deleveraging: The Right Track at the Hong Kong Economic Summit 2013, Chan said that excessive leveraging, or over-borrowing, in major industrialized countries was the root cause of both the global financial crisis and the more recent sovereign debt crisis plaguing Europe.

Chan said quantitative easing is not a panacea, but it is the exact opposite of deleveraging. In the past three years, quantitative easing had limited stimulating effect on the real economy. "In order to solve the structural imbalances built up in the past two decades, we must get to the bottom of the problem."

There is a possibility that quantitative easing produces the desired results, which is a very desirable scenario as global economy will return to its normal growth path, he noted.

However, there is a possibility that the process of deleveraging is disrupted by quantitative easing, leading to sharp increases in asset prices in the first place. Yet, since such increases are not supported by economic fundamentals, any increase in wealth will be seen as transient.

As a result, households are unwilling to increase spending and in the end, the real economy fails to rebound, if inflationary pressure builds up alongside asset price increases, central banks may consider exiting the market and raise interest rates, the authority's head said.

When economic performance, inflation or monetary policy falls short of market expectation, asset prices might drop sharply and remain volatile, he added.

Translation to central bank vernacular: QE only buys time and further inflates current bubbles.

I may further add that by disallowing markets to clear to reflect on its real state or conditions “not supported by economic fundamentals”, imbalances will accrue “inflationary pressure builds up” to the point of greater volatility ahead. 

Euphemism aside, Mr. Chan means a bursting bubble (see last highlighted statement).

Quote of the Day: Leading Myths About Entrepreneurship and Effective Start Up Communities

What are the leading myths about building more effective startup communities?

There are there common ones: 'We need to be more like Silicon Valley,' 'We don't have enough capital,' and 'Angel investors must be organized.'

For decades, cities have been proclaiming themselves the next Silicon Valley. That’s nonsense — cities — and the entrepreneurial leaders — should focus on creating the best startup community for their city, based on the unique attributes of their city. Learn from the amazing things in Silicon Valley, but instead of trying to be like Silicon Valley, be the best Boulder, or best Chicago, or best New York, or best Portland. You already have an identity as a city — you don’t need to be Silicon Alley or Silicon Slopes.

Next, there never is a balance between supply and demand of capital. Entrepreneurs shouldn't worry about this — instead they should focus on creating amazing companies. Capital will always find amazing companies. While there are many things that can be done over time to attract more capital to a region, the biggest thing is for entrepreneurs to actually go create some significant companies.

Finally, related to this is the notion that angel investors should be organized into formal angel investor groups. While this can be helpful, it’s often extremely harmful and stifling, as many angel investor groups try to look like small venture capital firms rather than acting like helpful angel investors.

(bold original) 

This is from Brad Field and Rich Florida as quoted by Paul Kedrosky at the Kauffman Foundation’s Growthology blog.

My comments:

On the myth of the next Silicon valley.

What is needed is an intensely competitive environment that will foster and reward the virtues of failure or risk-taking that encourages innovation.

In other words, entrepreneurship thrives best on economic freedom.

On the the fantasy of the equilibrium of capital.

The same argument has been used to justify government’s role on public works or infrastructure spending.

Economic freedom nurtures capital accumulation. As the great Ludwig von Mises reminds us “Progressive capital accumulation results in perpetual economic betterment.” As noted in the above quote, capital and great companies will co-exist, given an environment that is conducive to business or business friendly.

On groupthink in terms of Angel investors.

Groupthink, as explained before, reduces critical, creative and independent thinking as well as  individual responsibility and discipline, all necessary ingredients for entrepreneurship.

Groupthink fallacy applies not only to Angel investors but to the financial markets, as well as to other social activities, specifically magnified in politics.

Remember, entrepreneurship is foremost an art before it is science.

Manny Pacquiao Didn’t Let Fans Down, Prodded by Media Fans Deluded Themselves

I empathize with boxing legend Manny Pacquiao for undeservingly feeling “guilty” over public pressures, following his stunning KO loss which he suffered from older Juan Manuel Marquez, a few days.

From MSN News

"The low morale, the sadness, I accept that. This is my job.... But the reaction of the Filipinos, the many who cried, especially my family, it really hurts me," he said in an interview on the GMA network.

The former eight-division world champion wiped tears from his eyes listening to his wife, Jinkee, make a tearful appeal on camera for her husband, who turns 34 next week, to hang up his gloves. 

Pacquio shouldn’t be so hard on himself. He lost because he is just human. 

A random one-punch shot, in a round which he so-dominated, at the last two seconds virtually changed the outcome to his opponents favor.

Nassim Taleb would have called this Pacquiao’s black swan.

Failure to adhere to reality has made Pacquiao’s loss unwarrantedly controversial. This is hardly about the lack of conditioned training, the charge on Marquez’s alleged use of steroids, and other rubbish attributions. Religion has even been absurdly imputed on this. Others have used this as pretext to try to impose political correctness on the contrasting opinion of the others.

He lost because he lost. He was at wrong place at the wrong time. Period. The rest of supposed 'expert' rationalization represents post hoc fallacy.

It has been my impression that the media has made the public believe that sheer nationalism or the force of nationalism by itself would lead to Pacquiao’s sustained invincibility, immortality and everlasting string of victories. 

Pacquiao’s decisive loss exposed such hogwash. In the same way, belief in extreme nationalism has been demolished after 60-78 MILLION lives had needlessly been lost due to World War II.

Pacquiao didn’t let his fans down. The fans have no one else to blame but themselves, for unduly placing extremely high expectations in his supposed ‘superhuman’ capabilities, and importantly, for falling prey into mainstream media’s hype. 

This is a great example of bubble psychology. The same lessons which will permeate and eventually apply to the Philippine capital markets.

As British essayist, critic, poet, and novelist Gilbert Keith Chesterton once sarcastically remarked, 

"Journalism is popular, but it is popular mainly as fiction. Life is one world, and life seen in the newspapers is another."

Reality simply dealt false dogmatism a rude and painful awakening.

Quote of the Day: Why Regulation Does Not Work

Regulations do not make markets safer, more efficient, or work better for consumers in anything but a superficial sense. Regulation only provides “confidence” and assurance that only leads to crisis. Regulation does not produce harmonization of markets or insurance for consumers.

Regulation simply does not work. It is designed with hopes of success, but with no mechanism to achieve this success. We hope for efficiency, but what we get is bureaucracy. We hope for effectiveness, but what we get is rules and red tape that serves neither producer nor consumer. We hope for safety, but what we eventually get is chaos.

This is from Austrian economics Professor Mark Thornton at the Mises Institute.

Professor Thornton cites as examples of the highly regulated financial industry that nurtured Bernie Madoff's Ponzi and the housing bubble. Yes, Washington had “over 12,000 bureaucrats devoted to financial regulation”. 

Professor Thornton also mentions stringent regulations on the oil industry which led to the BP Gulf oil spill and to the Enron scandal.

Professor Thornton concludes: (italics original, bold mine)

The regulator is portrayed as a public-spirited specialist. They know the public good. They know the results that are expected. They know how to bring about those results. It is as simple for them to regulate their corner of the economy as it is for Emeril Lagasse to make crab cakes or for Martha Stewart to make a simple doily.

The public is told that regulators do not cause problems; they prevent them. They police the economy. They are the watchmen that have been endowed with the wisdom, ability, and selfless devotion to the public good.

There are indeed many people who work as government regulators that are very smart and well-trained that have public spirit and the public good in their hearts. There are also plenty of cads and knuckleheads that work as regulators.

The problem with government regulation is that you cannot fine-tune the regulations: nor can you perfect the regulatory work force in such a way to make regulation work in anything but a superficial way. The truth is that regulation instills confidence in the public so that they let down their guard and makes them less cautious while at the same time distorting the competitive nature of firms in the marketplace.

After every economic crisis there are calls for new regulations, more funding, and more controls. Economic wisdom dictates that we be ready to contest those calls when the next crisis of the interventionist state occurs.

Chart of the Day: The Bursting of the Renewable Energy Bubble

Environmental politics expressed through “manmade global warming” or now revamped as “climate change” has basically the same intent: promote political favored energy, as well as, establish social controls to supposedly protect the climate.

Yet the public hardly realizes that when government intervenes the result has always been the same: imbalances emerge and the laws of economics ventilated through markets will correct them.  This is simply the law of unintended consequence.

The renewable energy industry, which has been the principal beneficiary from climate change policies, have been thrashed by marketplace. Moreover politicization has led to unethical practices or has exposed cronyism such as the Solyndra scandal.

The chart above consisting of the market cap of the 30 of the world’s largest renewable energy companies has plummeted by more than 90% since the 2008 peak. 

From oversupply or to a build up of high capacity, to high energy prices, to the realization of fiscal realities and the European debt crisis, and to the stalemate in global climate negotiations, as explained by the Washington Times (chart also from them, hat tip AEI’s Mark Perry), has brought such politically hyped-to-the-firmament expectations back to earth.

Such outcome has been diametric to the largely free market based Shale gas revolution.

Bottom line: the market eventually explodes the illusions brought upon by politically inflated bubbles.