Thursday, February 07, 2013

German Firm Introduces Anti Drone Laser Weapon System

Well it would seem that drones or the Unmanned Aerial Vehicle (UAVs) has met its nemesis; laser weapons ala star wars.

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From the BBC
A laser weapons system that can shoot down two drones at a distance of over a mile has been demonstrated by Rheinmetall Defence.

The German defence firm used the high-energy laser equipment to shoot fast-moving drones at a distance.

The system, which uses two laser weapons, was also used to cut through a steel girder a kilometre away.

The company plans to make the laser weapons system mobile and to integrate automatic cannon.

The 50kW laser weapons system used radar and optical systems to detect and track two incoming drones, the company said. The nose-diving drones were flying at 50 metres per second, and were shot down when they reached a programmed fire sector.
Drones have commonly been used to conduct not only surveillance but also foreign policies in terms of assassination and or bombing missions. Drone warfare has only stoked up anti-American sentiment in the Middle East that has incited more unrest.

Drone warfare has also been reportedly used to strike at suspected terrorists in the Philippines as part of the ‘war on terror’ campaign which allegedly resulted to losses of civilians

Last month, a crashed drone was fished off floating near the Masbate Islands where the US authorities denied that the discovered UAV wreckage had been used for spying or for armed military missions. The increasing reports of incidences of drones could likely be manifestations of the surreptitious deal to re-establish a US base in the Philippines or that the Philippines becomes a launchpad for militarization of Southeast Asia.

In the US, drones have been designated as the next airborne police surveillance where an estimated 30,000 drones have been slated to patrol US airspace at the end of the decade. Unfortunately for the tyrants, many states in the US have balked or expressed opposition to this. For instance, Florida voted to ban drones as an instrument for spying on the citizenry.

Well of course, drones and other forms robotic war machines may not entirely be the domain of the government, as other groups (including outlaws) may access such technology.

The important point is that innovative developments in technology reveal that the drone warfare won’t likely be as dominant as feared. There will be less need to hack on drones to countercheck on them. 

The emergence of laser warfare technology, which is expected to become mobile in the future, will surely contain the advances of drones. The above technology seems reminiscent or the modern day counterpart of the shoulder fired anti-aircraft surface to air missile (SAM), the FIM-92 stinger, which played a prominent role in the defeat of the Soviet Union in Afghanistan. 

Quote of the Day: Protection-Racket Capitalism

Let’s see.

1. The Justice Department is suing a rating agency (Standard and Poor’s). The rating agencies are creatures of the SEC (which created their oligopoly and encouraged them to be paid by the raters rather than the customers of the ratings).

2. The SEC is suing Freddie and Fannie, which are creatures of the Department of Housing and Urban Development, under which the two firms were regulated and also given lending quotas for “affordable housing.”

So, when is HUD going to sue a company that is a creature of the Justice Department, just to complete the circle?

One way to view the period 2005-2009 is as a massive destruction of property rights by the government. First, they destroy the right of Freddie, Fannie, and commercial banks to maintain lending standards. Then they confiscate the property of holders of securities in GM and Chrysler to pay off the labor unions. Then they sell off AIG’s assets in order to bail out Goldman Sachs and several large foreign banks. And of course, the government has made every effort to keep banks from enforcing mortgage contracts, while extracting large fines from banks.

It’s beyond crony capitalism. It’s protection-racket capitalism
This is from author, economist and professor Arnold Kling at the Askblog on the financial crisis.

Wednesday, February 06, 2013

Video: Milton Friedman: Only Government Create Inflation

In this video, the illustrious Nobel laureate the late Milton Friedman eloquently explains that what we hear from media and politicians are inaccurate and misleading. (source Liberty Pen)
(1:37) Any other attribution to growth in inflation is wrong. Consumers don’t produce it. Producers don’t produce it. Trade unions don’t produce it. Foreign sheiks don’t produce it. Oil imports don’t produce it. What produces it is too much government spending and too much creation of money and nothing else.

Tuesday, February 05, 2013

Inflation is Good: Argentina Imposes Price Controls Amidst Spiraling Inflation and Shortages

Some people argue that inflation is necessary. 

Well we will take the validity of such claim based on the current Argentinian experience

Argentine supermarkets, including local units of Wal-Mart Stores Inc. (WMT), Carrefour SA (CA) and Cencosud SA (CENCOSUD) agreed to freeze prices for 60 days amid inflation that accelerated last year to the highest in the hemisphere.

The United Supermarkets Association agreed to keep prices unchanged in their stores until April 1 during a meeting today with Interior Trade Secretary Guillermo Moreno in Buenos Aires, according to a statement from the Argentine Chamber of Commerce.

President Cristina Fernandez de Kirchner has defended her government’s official data that shows consumer prices rose 10.8 percent last year compared with private estimates of 25.6 percent. The government’s alleged underreporting of inflation, which began under Fernandez’s predecessor and husband, Nestor Kirchner, prompted the International Monetary Fund to censure the South American nation on Feb. 1 for the first time in the Washington-based organization’s history.

“They’re trying to hold down inflation, but we’ll see what happens once the agreement ends,” said Susana Andrada, director of Buenos Aires-based consumer watchdog Center for Consumer Education in a telephone interview. “They may be able to control prices of 300 goods, but then we may face some shortages as retailers keep goods off the shelves.”
I am reminded by the great Ludwig von Mises who wrote of the semantic maneuvering by officials and their apologists to redefine inflation to justify price controls.  [italics original, bold original]
To avoid being blamed for the nefarious consequences of inflation, the government and its henchmen resort to a semantic trick. They try to change the meaning of the terms. They call "inflation" the inevitable consequence of inflation, namely, the rise in prices. They are anxious to relegate into oblivion the fact that this rise is produced by an increase in the amount of money and money substitutes. They never mention this increase.

They put the responsibility for the rising cost of living on business, This is a classical case of the thief crying "catch the thief." The government, which produced the inflation by multiplying the supply of money, incriminates the manufacturers and merchants and glories in the role of being a champion of low prices. While the Office of Stabilization and Price Control is busy annoying sellers as well as consumers by a flood of decrees and regulations, the only effect of which is scarcity, the Treasury goes on with inflation.
And that price controls function as mechanical responses by political authorities on inflation. Again the great Mises:
The problems the world must face today are those of runaway inflation. Such an inflation is always the outcome of a deliberate government policy. The government is on the one hand not prepared to restrict its expenditure. On the other hand it does not want to balance its budget by taxes levied or by loans from the public. It chooses inflation because it considers it as the minor evil. It goes on expanding credit and increasing the quantity of money in circulation because it does not see what the inevitable consequences of such a policy must be…

The real danger does not consist in what has happened already, but in the spurious doctrines from which these events have sprung. The superstition that it is possible for the government to eschew the inexorable consequences of inflation by price control is the main peril. For this doctrine diverts the public's attention from the core of the problem. While the authorities are engaged in a useless fight against the attendant phenomena, only few people are attacking the source of the evil, the Treasury's methods of providing for the enormous expenditures. While the bureaus make headlines with their activities, the statistical figures concerning the increase in the nation's currency are relegated to an inconspicuous place in the newspapers' financial pages.
I expect such twin political reaction (inflation-price control) to become a global phenomenon.

Monday, February 04, 2013

Is the Phisix in a Mania?

The global asset boom seems to be intensifying. And it bears the characteristics of a brewing credit bubble mania.

This comes amidst the combined efforts by global central banks to adapt and coordinate aggressive easing policies.

The Grand Era of Asset Class Bubbles

The confirmation[1] of the Bernanke led FOMC’s unlimited QE 4.0 which consists of $85 billion of monthly asset purchases ($40 billion on Agency securities and $45 billion in US treasuries) has coincided with a major push key US benchmarks.

The Dow Jones Industrial Averages (DJIA)—now is at the 14,000 level—along the S&P 500, have both breached the 5 year highs, and has returned nearly an incredible 8% for the first month of 2013. 

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It’s been a broad based run though. 

If the actions of the broader Russell 2000 (RUT) and Dow Transports (DJT) should serve as clues, then we are bound to see the Dow Industrials and the S&P in new record territory soon. That’s because both the RUT (brown) and DJT (black) are at fresh milestone highs.

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Japan’s Nikkei seems head to head with the US S&P 500, similar to the ongoing race between the Philippine Phisix and Thailand’s SET.

In the meantime, China’s Shanghai index powered up a substantial 5.57% weekly rally amidst a mixed economic picture. Manufacturing indicators grew less than expected while profits of industrial companies rose by 17% from last year according to Bloomberg[2].

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But it seems most likely that the spike in China’s Shanghai index has been more about the belated effects from the ramping up of stealth government stimulus channelled through State Owned Enterprises (SOE) as accounted for by the surge in Fixed Asset Investments (FAI)[3] in 2012 and from the previous efforts by China’s central bank, the PBoC, to inject record amount of money into the system[4].

Of course the prominent features of manias are the aggravation of misperceptions between widely held beliefs—reinforced by ascendant prices and the widespread dissemination of misinformation or even propaganda—and reality, which results to the chasm of mispricing.

One would note that in today’s asset boom, there have been many evidences of what seems as a parallel universe. 

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The double dip recession in Spain’s economy has reportedly worsened during the fourth quarter of 2012[5]. Compounding on this negative sentiment includes last week’s revelation of a corruption scandal by the ruling party for operating or maintaining a slush fund from the donations of the construction industry[6].

Spain’s Madrid Index slumped by 5.7% this week but still on the positive side; up 1.8% for the year. The Madrid index lost 4.33% in 2012. Yet the above chart shows that even if we consider this week’s losses, the Spanish equity bellwether surged by about 38% from the trough of July of last year. Such rally came amidst the worsening of the economy.

And what the parallel universe truly represents are the deepening malaise of the global monetary system.

And this should hold the same for the Philippine Phisix.

Current developments have only been validating my view since late 2012 where I hold that the Phisix will have a strong performance into at least the first quarter of 2013[7],
While no trend moves in a straight line, which means there should be interim corrections, we are likely to see a reinforcement of the yearend rally which perhaps may get extended until the first quarter of 2013.
And that if the low interest rate regime remains unperturbed from either internal or external developments for the rest of the year, then we may see a blowoff phase that may bring the Phisix near my long held target of 10,000[8].
For the Phsix, if domestic interest rates continue to remain low, perhaps we may see a blowoff phase (Phisix 8,000-8,500???) by the yearend.

Such boom may be compounded by the acceleration of capital flight into ASEAN from developed economies whose central banks have been massively expanding their balance sheets such as Japan whose outflows to Emerging Markets have been ballooning
And that one of the most prominent character of an inflationary boom will be an internal rotation.
Nonetheless, for as long as the inflationary boom remains, I also expect a rotation towards last year’s laggards: the mining sector and possibly the service industry.
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We are seeing signs of rotation alright. 

But the blistering property sector just took the lead from the mining sector with a fantastic 6.56% surge this week.

Now the mines and the property sector seem to be in a tight race for the leadership.

Yet the ongoing rotation means that the general prices of securities listed in the PSE have been increasing, although at different rates and at different times: yes, all signs of an inflationary boom.

Again given the severely overbought conditions it would seem natural for profit taking to rule the day. Yet 5 weeks into 2013, the bullish sentiment, which signify as manifestations of a ballooning mania, seem relentless.

Such dynamic hasn’t been exclusive to the Philippines but covers the world as well.
image

With all the tsunami of money thrown to the US and Japan since 2008, there has been meagre impact on the real economy.

Yet one shouldn’t omit the fact that the marked decline of investments in both countries have become an attribute, not only from the recent bust, but from earlier bubble busts (1990s) for Japan and (2001 dot com bust) for the US.

The reason for the bubble bust is a predecessor bubble boom caused by interventionist policies. So if the boom has been caused by interventions, the bust has been applied with more interventions that led to another boom-bust cycle. So current policies have merely been recycling via the same prescriptions whose impact of has been one of diminishing returns.

Pimco’s Bond guru Bill Gross hits the nail in the head in his latest outlook[9],
Unless central banks and credit extending private banks can generate real or at second best, nominal growth with their trillions of dollars, euros, and yen, then the risk of credit market entropy will increase.
So central banks will either unleash more and more money or face the risk of credit market entropy.

Rising stock markets detached from the real economic developments represents a massive flaw of perception in the perspective of George Soros’ reflexivity theory

This marks the grand era of the global asset class bubbles.

Differentiating Economics from Statistics

Most people think that when they communicate by referring to statistics they are making an economic argument. The fact is that these people tend to confuse economic reasoning, which is supposed to be based on human action, with historical or ex-post activities which is what statistics truly represents. These people have been allured to view where science is seen as measurement.

But since human action is complex, this means that people respond differently to a combination of changes in social interrelationships, in people’s interaction with the environment and in changes of the stream of knowledge from such interplay of unique events. The point is the past cannot be relied on to foretell of the future simply because future circumstances are predominantly different from the past.

As the great Ludwig von Mises explained[10],
Experience of economic history is always experience of complex phenomena. It can never convey knowledge of the kind the experimenter abstracts from a laboratory experiment. statistics is a method for the presentation of historical facts concerning prices and other relevant data of human action. It is not economics and cannot produce economic theorems and theories. The statistics of prices is economic history. The insight that, ceteris paribus, an increase in demand must result in an increase in prices is not derived from experience. Nobody ever was or ever will be in a position to observe a change in one of the market data ceteris paribus. There is no such thing as quantitative economics. All economic quantities we know about are data of economic history. No reasonable man can contend that the relation between price and supply is in general, or in respect of certain commodities, constant.
The validation of my prediction of the Philippine property boom when it was yet at the fringes should be an example,

I wrote[11]:
Here is one more prediction.

The current “boom” phase will not be limited to the stock market but will likely spread across domestic assets.

This means that over the coming years, the domestic property sector will likewise experience euphoria.

For all of the reasons mentioned above, external and internal liquidity, policy divergences between domestic and global economies, policy traction amplified by savings, suppressed real interest rate, the dearth of systemic leverage, the unimpaired banking system and underdeveloped markets—could underpin such dynamics.
Then I was making a prediction predicated on how the markets will likely respond to first social policies, second, the prevailing state of the financial system and finally to the possible feedback mechanism between market forces and social policies. I was making use of theory buttressed by statistics to make my case.

When government and media chime in to say that 2012 economic growth has been “stellar”[12] which has been manifestations of “good economics” as consequence from good policies or from the political slogan of “good governance” assimilated by the incumbent authorities, they are essentially describing recent past events from where good news had been used as to generate political capital and passed off as an economic discussion

Yet hardly anyone dealt with the details to see if such ballyhooed economic growth deserves to be called good, if not sound or sustainable, economics.

Good’ economics or Bubble economics?

I have been warning about the growing risks of the shopping mall-property bubble.

Recent data sourced from the “good economics” department or from the Philippines’ National Statistics Coordination Board (NSCB) only reinforces my worries

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I have been saying that the real estate sector which has been experiencing an accelerating boom, partly via shopping malls[13] and mostly via high rise or vertical projects, has been vastly overestimating the potential growth of Filipino consumers.

In reaction to the low interest rate regime, popular theme, competition, overconfidence and mainstream ideological espousal of the ‘consumption economy’ has been prompting for an onrush to build capacity through credit expansion.

One would note that Filipino consumers as measured by the Household Financial Consumption Expenditure (HFCE)[14] in 2012 have grown 6.11% in constant prices and 9.18% in current prices. In 2011 growth was 6.3% constant and 11.41% current.

Contrast this to the growth in the real estate sector (which is part of the NSCB’s Gross Value Added in Real Estate, Rental & Business Activities[15]) where in 2012 expanded at the rate of 18.89% (constant prices) and 22.58% (current prices). In 2011, it was 16.54% constant and 21.77% current.

The difference is remarkable. The growth rate on the supply side has been more than double whether measured from constant and current prices. Basic economics tells us that at the current rate of growth, such imbalances would translate to a net doubling of supply in about 6 years. Oversupply will thus function as a symptom of the deeper problem called misallocation of resources fuelled by a credit boom.

Economic theory, particularly the Austrian Business Cycle, tells us that malinvestments, which represents distortions in the capital structure by artificially prompting for a shift in the public’s savings-consumption patterns induced by policy induced credit expansion, will lead to capital consumption via a systemic bust.

As the great dean of Austrian economics, Murray N. Rothbard wrote[16],
For businessmen, seeing the rate of interest fall, react as they always would and must to such a change of market signals: They invest more in capital and producers' goods. Investments, particularly in lengthy and time-consuming projects, which previously looked unprofitable now seem profitable, because of the fall of the interest charge. In short, businessmen react as they would react if savings had genuinely increased: They expand their investment in durable equipment, in capital goods, in industrial raw material, in construction as compared to their direct production of consumer goods.

Businesses, in short, happily borrow the newly expanded bank money that is coming to them at cheaper rates; they use the money to invest in capital goods, and eventually this money gets paid out in higher rents to land, and higher wages to workers in the capital goods industries. The increased business demand bids up labor costs, but businesses think they can pay these higher costs because they have been fooled by the government-and-bank intervention in the loan market and its decisively important tampering with the interest-rate signal of the marketplace.
Yet there are real economic risks from fallouts of bubble cycles.

The domestic hotel industry, for instance, hardly seems as a bubble. The industry has reported a growth of only 3.2% from 2004 until 2011[17] with most of the growth occurring at the upscale level which accounts for 57% of the hotel pie. Over the next five years growth will accelerate to 37% which implies 7.4% on the average. Yet the average foreign visitor growth has been at 8% a year[18], according to local economist.

Yet not all tourism is about foreign visitors. In fact, domestic tourists accounted for 59.1% share of tourism spending in 2011[19].

This implies that there is a risk of contagion from the prospects of a property-shopping mall bubble busts that can adversely impact on the tourism industry, despite being in a non-bubble state. But the impact will likely be less than her contemporaries. But again this will depend on how companies within the industry are leveraged.

This also exhibits the concentration or clustering effects of bubble cycles.

Theory likewise posits that economics cannot be treated as isolated variables, as all human actions are interconnected or deeply entwined.

For instance whether tourism, retail trade, food-agriculture, services, housing or other sectors including the government, all these sectors will compete for the limited Peso of the domestic consumers.

Aside, all these sectors will also compete for available resources in the domestic markets. The Philippine government’s proposed expenditures for Php 432.15 billion ($10.8 billion) of infrastructure projects[20] should also put strains on the available resources and labor in competition with booming sectors.

Economic theory also tells us that the competition for scarce resources from credit expansion will lead to relative increases in prices, and secondarily, but not necessarily to ‘general price levels’.

Again from the late Professor Rothbard[21],
as the early-eighteenth-century Irish French economist Richard Cantillon, that, in addition to this quantitative, aggregative effect, an increase in the money supply also changes the distribution of income and wealth. The ripple effect also alters the structure of relative prices, and therefore of the kinds and quantities of goods that will be produced, since the counterfeiters and other early receivers will have different preferences and spending patterns from the late receivers who are "taxed" by the earlier receivers. Furthermore, these changes of income distribution, spending, relative prices, and production will be permanent and will not simply disappear, as the quantity theorists blithely assume, when the effects of the increase in the money supply will have worked themselves out.
Today’s deepening of financialization reveals of how policy induced credit expansion tends to flow into asset prices and germinate into boom bust cycles rather than outright price inflation.

Moreover greater demand for credit will lead to higher interest rates that will put to risks marginal projects that have existed only because of artificially low interest rates.

Theory also suggests that faddish themes may represent as “displacements” or “new paradigms” that may be large and pervasive enough to fuel a bubble cycle as proposed by the late economist Hyman Minsky through the late author and historian Charles Kindleberger.

Mr. Kindleberger in Manias, Panics and Crashes wrote[22] (bold mine)
According to Minsky, events leading up to a crisis start with a “displacement,” some exogenous, outside shock to the macroeconomic system. The nature of this displacement varies from one speculative boom to another. It may be the outbreak or end of a war, a bumper harvest or crop failure, the widespread adoption of an invention with pervasive effects—canals, railroads, the automobile—some political event or surprising financial success, or debt conversion that precipitously lowers interest rates. An unanticipated change of monetary policy might constitute such a displacement and some economists who think markets have it right and governments wrong blame “policy-switching” for some financial instability. But whatever the source of the displacement, if it is sufficiently large and pervasive, it will alter the economic outlook by changing profit opportunities in at least one important sector of the economy. Displacement brings opportunities for profit in some new or existing lines and closes out others. As a result, business firms and individuals with savings or credit seek to take advantage of the former and retreat from the latter. If the new opportunities dominate those that lose, investment and production pick up. A boom is under way.
Moreover, faddish themes may also rely on stories to feed on the bubble cycle, as Gene Callahan and Austrian Professor Roger Garrison writes[23],
every bubble needs a story, which early investors can tell to later ones to justify rising asset price
The fictional tale of the consumption economy that underpins the shopping mall bubble fits such theories to a tee.

I have already mentioned the psychology of bubbles advocated by George Soros via the Reflexivity theory where people’s view of the market will be based on convictions or entrenched beliefs that departs from reality. Such perceptive failure will eventually be upended. So when people yammer about economic booms from zero bound rates we know how the public is being seduced by the outcome bias.

Theory also says that given the world of scarcity, we can only spend what we produce. In short, no economy can spend their way to prosperity. Artificial stimulants are likely to engender massive misallocation of the capital structure that will eventually backfire, as the Japan-US experience above.

While individuals may spend through income, or by running down on savings, or from borrowing, they can also generate spending from one-off events like winning the lottery, from inheritance or from theft.

However in the real economy, real spending growth for an economy emanates from productivity growth. Digital money entries or zero bound rates will not solve the problem of scarcity or opportunity costs. Credit based expenditures only frontloads such activities at the expense of the future.

And along that plane, since the basic economy is about people’s activities broken down into savings, consumption or investment, in looking at the potential effect of the real estate imbalances one doesn’t have to rely on government data alone, as if to imply that government statistics are infallible, accurate or even divine, one can look at real economic growth, per capita growth, wage levels and other related data, perhaps even provided by the private sector, or even the stock market to countercheck on the validity of imbalances.

So far the growth rates of the Philippine real estate sector appear to confirming the rate of the industry’s borrowings to bankroll their growth.

As I previously pointed the BSP noted[24] that last November on a year on year basis, real estate, renting, and business services borrowing soared by a hefty 24.8 percent while wholesale and retail trade by 26.9 percent.

So from the bubble theories of the Austrian school, Hyman Minsky-Charles Kindleberger, George Soros or even from the behavioral  perspective, what is said of good economics is really about bubble economics

Welcoming the Greater Fool 

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This week’s astronomical 6.56% sprint by the domestic property sector may have been parlaying the manic-blowoff phase in the Phisix and exhibiting signs of the property-shopping mall economic bubble.

The rally was actually spearheaded by Ayala Land’s [PSE: ALI; black candle] phenomenal 9.9% weekly gains combined by the exemplary performances by the other heavyweights as SM Prime Holdings [PSE:SMPH; red line] 5.89% and Megaworld [PSE: MEG; blue line].

From the market troughs of 2009, the returns of the top 4 majors, has been 510%, 287% and, 489% respectively. One of the fourth biggest property market cap Robinson’s Land Corporation [PSE: RLC] yielded 269% over the same period.

Unless there would be a major positive development in the consumer front, I don’t believe that those prices are manifesting the state of the industry’s economics.

Such accelerating gains only signify the time where the public have come to believe that stock markets are all about easy money or free lunches.

I am thus reminded by the legendary trader Jesse Livermore, whom I will quote again[25],
But the average man doesn’t wish to be told that it is a bull or bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing. He does not wish to work. He doesn’t even wish to have to think. It is too much bother to have to count the money that he picks up from the ground.
The same “something for nothing” speculative orgy has been the mirror image of the same “something for nothing” policies that has led the public astray and straight into a virtual trap of bubble cycles.

The Greater Fool theory[26] —the theory premised on hope where making money from stocks would mean buying securities, whether overvalued or not, and later selling them at a profit based on the anticipation that there will always be someone (a bigger or greater fool) who is willing to pay the higher price—which is largely momentum trading or price chasing actions will become the dominant feature of the market

Let me be clear. We are seeing increasing signs of a blowoff phase. Yet such mania doesn’t automatically mean the end of the cycle or a reversal or inflection point today, or perhaps this year. It means that the feedback loop of the market’s prices and the real economy will extrapolate to an acceleration of leverage in the economic and the financial system—which is where all the risks lies.

And as the boom prevails, people’s risk appetite grows. Lending standards will decline as borrows jump into the bandwagon to take advantage of what appears as free lunches in the stock market and the property sector.

In addition, as I have been saying if interest rates remain at current low levels throughout the year, then we may see the Phisix hit 8,000-8,500 or even more. That’s a big IF.

Yet markets will be driven ultimately by the actions policymakers.

And as previously discussed, 1993 brought about a stratospheric 154% nominal returns for the Phisix. Huge extraordinary gains are the typical outcomes of manic phases. I am not suggesting for 154% returns, I am saying that it would not be a surprise to see really enormous gains if indeed we are in such a transition. But as markets get higher, risks also becomes bigger.

And yet the build up of credit risks will likely become apparent over the coming year or two. And this will be accompanied by more entrenched belief by the public of “good governance equals good economics” charade which will be exposed when the bubble pops.

In the meantime, fasten your seatbelt enjoy your ride while it lasts.







[4] See On China’s New Leaders November 19, 2013




[8] See What to Expect in 2013, January 7, 2013

[9] William H. Gross Credit Supernova! February 2013 PIMCO



[12] Inquirer.net Stellar economic growth at 6.6%, February 1, 2013




[16] Murray N. Rothbard Economic Depressions: Their Cause and Cure, The Austrian Theory of the Trade Cycle and Other Essays Mises.org p.83


[18] Gerardo Sicat Philippine foreign tourism — promising but still behind February 10, 2012 PER SE Economics Department of UP

[19] World Travel & Tourism Council (WTTC) Travel & Tourism Economic Impact 2012 Philippines


[21] Murray N. Rothbard, The Case Against the Fed, p.25 Mises.org

[22] Charles Kindleberger Manias, Panics and Crashes John Wiley & Sons 1996 p.12. Also quoted at CyclesMan.net


[24] Bangko Sentral ng Pilipinas Bank Lending Continues to Grow in November January 17, 2013


[26] Investopedia.com Greater Fool Theory

Saturday, February 02, 2013

Lawrence Reed’s 10 Rules of Advancing Liberty

President of Foundation for Economic Education (FEE) Lawrence W. Reed offers his 10 Rules of Thumb for advancing the cause of liberty
As indispensable as liberty is to the progress of humanity, its future is never assured. Indeed, on most fronts, freedom has been in retreat for years—its light flickering against the winds of ignorance, irresponsibility, short-term gratification, and power lust. That’s why it’s all the more important that those of us who believe in liberty become more effective spokespersons. 

The Rules of Thumb

Toward that end, I offer the well-worn “top ten” list. These rules of thumb do not appear in any particular order. So I leave it to you, Dear Reader, to decide which ones are more important. (Because it’s not meant to be a final word on the matter, I also invite readers to add to the list.)

1. Get motivated. Liberty is more than a happy circumstance. It’s a moral imperative, worthy of every ounce of passion that good people can muster. It’s not just about getting keyed up in an election year, or responding to some issue of the day. It’s always the difference between choice and coercion, between living your life or others living it for you (and at your expense). If liberty is lost, it may never be restored in your time or in that of your children and grandchildren. For solving problems, avoiding conflict, and bringing people together, there’s no worse course than politics and force, and no better path than liberty for peaceful exchange and cooperation to flourish.

2. Learn. More precisely, never stop learning! To be an effective persuader, there’s no good substitute for commanding the facts and the foundations. Know our ideas backwards and forwards. You can never read or listen to too much economics, history, or philosophy to be the best persuader in your neighborhood. Let the other side talk in bumper stickers. Come armed with substance as opposed to slogans.

3. Be optimistic. It’s tiring and disheartening to hear the defeatists talk like this: “It’s over. The Republic is lost. There’s no turning back. Our goose is cooked. I’m leaving the country.” What’s the point of such talk? It certainly can’t be to inspire. Pessimism is a self-fulfilling prophecy. Pessimists only disarm themselves and dispirit others; there’s nothing to be won by it. If you truly believe all is lost, the best thing to do is defer to the possibility that you may be wrong and let the optimists lead the way. (That means leaving pessimism at the door.)

4. Use humor. Even serious business needs moments of levity. Seasoning your case with humor can make it more appealing, more human. If you can’t smile when you’re making the case for liberty—if you can’t evoke a smile or a chuckle from the person you’re talking to—then you’re on the way to losing the battle. Humor breaks the ice.

5. Raise questions. You don’t have to lecture every potential convert. Learn to deploy the Socratic method, especially when you’re conversing with a rigid statist ideologue. Most of the time, such people hold the views they do not because they’re well acquainted with libertarian thought and have rejected it, but because they just don’t know our side. A skilled line of questioning can often prompt a person to think about their premises in ways they never have before.

6. Show you care. It’s been said that people don’t care what you know if they don’t know that you care. Focus on real people when you argue for liberty. Laws and policies inimical to liberty produce so much more than bad numbers; they crush the dreams of real people who want to improve their lives and the lives of those they love. Cite examples of people and what happened to them when government got in the way of their progress. That said, don’t dwell on the negative. Be just as generous in citing examples of what specific people have accomplished when they’ve been given the freedom to try.

7. Seize the moral high ground. Liberty is the one socioeconomic arrangement that demands high standards of moral character. It cannot survive if people are widely dishonest, impatient, arrogant, irresponsible, short-term focused, and disrespectful of the lives, rights and property of others. This truth speaks volumes about the moral superiority of liberty over all other “systems.” Humanity is composed of unique individuals; it is not an amorphous, collective lump to be pushed around by elitists who fancy themselves our masters and planners. Any arrangement that purées our distinct lives in a collectivist blender is a moral offense. Use this argument to strike at the very heart of any opponent’s case.

8. Develop an appealing persona. A libertarian who knows all the facts and theories can still be repulsive and ineffective if he’s condescending, vengeful, coarse or crude, self-righteous, or often in “attack” mode. This is why Dale Carnegie’s classic, How To Win Friends And Influence People, should be on every libertarian’s “must-read” list. Do you want to change the world or just beat your breast? Talk to others or talk to yourself?

And slow down on the negativity! Some libertarians only talk about bad news. These are the folks who see nothing good happening anywhere. This attitude comes across as if they’re telling you, “Stop having fun. The only good news is that there isn’t any. If you think there is good news, we’ll tell you why it isn’t.” This attitude wears badly and rarely wins converts. Heroes and heroic stories are all around us; don’t ignore them by dwelling on the scoundrels and the disappointments.

9. Don’t demand total and immediate acceptance. Have you ever run into a libertarian who lets you know that unless you fully confess all your intellectual sins and repent on the spot, you’re a pariah? The history of progress in ideas provides few examples of wrong-on-everything transforming into right-on-everything in a momentary leap. We must be patient, inviting, and understanding. Know when the cracks are appearing in an opponent’s wall and give him room to tear it down himself. Remember that all of us hold views today that we didn’t accept in our past. None of us came out of the womb with a copy of The Road to Serfdom in our hands.

10. Make allies, not enemies. A handful of cloistered, ineffective—but noisy—libertarians fancy themselves keepers of the faith. They behave as though the greater enemy is not those who embrace no libertarian precepts at all, but rather those who embrace many, but not all, libertarian precepts. So when they find a fellow libertarian who once held different views, or departs from orthodoxy on an issue or two, they start to vilify him. It makes them feel good, but works against the larger cause. If we say we want to make the world a better, more libertarian place, we can’t make it painful for anyone to move in the right direction.
While Mr. Reed’s guidelines are ideal, it’s hard not to ruffle emotional feathers especially when dealing with entrenched political and economic beliefs. For instance, a big factor in Facebook "unfriends" have been due to politics.

Following the above will actually depend on one’s personality, depth of knowledge on liberty (philosophical, political or economics) and one's tolerance levels to emotionally charged objections. 

Nonetheless, education of the truth is the only way to uphold and preach the cause of liberty. The difference lies on the medium or the delivery of the message.

The true task of economics appears to me to be quite different, especially in a modern mass democracy.  Its unglamorous but all the more useful mission is to make the logic of things heard in the midst of the passions and interests of public life, to bring to light inconvenient facts and relationships, to weigh everything and assign it due place, to prick bubbles and expose illusions and confusions, and to counter political enthusiasm and its possible aberrations with economic reason and demagogy with truth.

Beware the Escalating Middle East Crisis

Israel’s recent airstrike on Syria could signal the escalation of geopolitical troubles in the Middle East

Historian Eric Margolis at the LewRockwell.com writes,
The Mideast is stumbling into one of its most dangerous crisis in decades. I’m just back from the region – and as an old Mideast hand, I am very worried.

This region is always tense, but right now a series of separate conflicts are rapidly beginning to intersect. We see the Mideast, North Africa and the Sahara buffeted by revolutions and counter-revolutions. Old colonial powers France and Britain, and the US, are trying to reassert their domination in the region. The jihadist are back.

In a brazen act of war, Israel launched airstrikes on Syria last Wednesday in a clear attempt to worsen the crisis in that war-torn nation and challenge Syria’s ally, Iran. Israel’s forces are on high alert and may invade Syria, whose strategic Golan Heights were seized and annexed by Israel. Will more Syrian land follow?
Read the rest here  

The worrying part is the possibility of domino effect from Israel's provocation that could morph into a world war. Mr. Margolis concludes
Russia is growling in the background. Syria, recall, is as close to Russia’s southern border as northern Mexico is to Texas. Washington is underestimating Russia’ growing anger. Israel is still determined to push the US into war against Iran. The Turks can’t decide whether to be neutrals or reborn Ottomans. Caution: danger ahead.

Friday, February 01, 2013

Graphic: How the US Government Identifies Terrorists

image
Sourced from Politifake.org (hat tip Lew Rockwell Blog)

How Regulations Deter Investments: The China-Europe Story

Many Chinese firms including State Owned Enterprises (SoE) have been considering to invest in Europe as the latter eyes $560 billion of Chinese FDIs in 5 years.

Unfortunately regulatory barriers have been a huge turn off

From Reuters:
But getting your head around European laws and visa restrictions, as well as the fear that tough economic times could spark more political instability, make Europe hard to navigate for Chinese firms.

In fact the surveyed firms perceive Africa and the Middle East as having a more favourable business environment than the EU.

Chinese firms find EU law particularly troublesome because there is no unified inbound investment approval process and some member states have their own security reviews…

Six in 10 of the firms surveyed were SOEs and the most popular EU country for Chinese investment was Germany, with France a distant second.

Chinese firms asked for more support with the operational issues they face from policymakers in Europe and back home.
Regulatory obstacles can also signify as forms of disguised protectionism via technical barriers to trade as product or safety standards as well as people protectionism which limits flow of people.

The European crisis will hardly be resolved until real reforms to promote a business friendly environment or by the liberalization of the economy.

Also the above also reflects on the Africa’s ‘globalization’ boom story which has been attracting lots of Chinese investments. Chinese FDI reportedly zoomed to $14.7 billion in 2012 up by 60% from 2009 (ChinaUSfocus.com)

Quote of the Day: The Combination of Bad Economics and Bad History is Pernicious.

Few intellectual activities are more mischievous when done poorly than economics or history.  The power of fallacious economic reasoning or fallacious historical example to damage society is obvious: the pseudo-economics of mercantilism has been reducing trade and protecting vested interests for many centuries; the pseudo-history of the Aryan “race” lent dignity to German fascism.  The combination of bad economics and bad history in bad economic history is pernicious.
The above quote is from page 453 of Deirdre McCloskey’s June 1976 article in the Journal of Economic Literature, “Does the Past Have Useful Economics? sourced from Café Hayek’s Professor Don Boudreaux

The above quote reflects on much of how the mainstream thinks and what they practice today, e.g. inflationism.  

Thursday, January 31, 2013

Video: Iceland's President: Let Banks Go Bankrupt

In the following video, Mr. Olafur Ragnar Grimsson Iceland’s president calls for banks to go bankrupt. (hat tip Mises Blog)

Interesting quips:

On the worship of the banking sector:
1:24 Why do you consider banks to be the holy churches of the modern economy?
On crony capitalism 
1:37 The theory that you have to bailout banks is the theory about bankers enjoying their own profit of success and let the ordinary people be the failure...
On how political redistribution from bailouts impacts the real economy
2:31 If you want your economy to be competitive in the innovative sector of the 21th century, a strong financial sector that takes the talent from these sectors, even a successful financial sector is in fact bad news, if you want your economy to be competitive in the areas which really are the 21st century areas Innovation Technology IT 
While virtues of bankruptcy is something to extol, I think Iceland bubble experience is unique, considering her rather small 300,000+ population. 

A smaller population could mean that vested interest groups may have lesser political influence, or perhaps, are easier to deal with compared to the more complex and hugely populated social democratic welfare states as Europe, Japan or the US where power blocs have been deeply entrenched and have significant following in the populace. 

But yes, let the banks fail.