What’s Wrong with Gold?

Gold priced in the US dollar have broken below technical levels. And some gold bears have been shouting at the top of their lungs declaring that this may be the end of the gold bull market.

They resort to appealing to authority by citing the reduced holdings of popular investors as George Soros, as example.

The real reason behind the calls for the end of the gold bullmarket is that such gold bears have been desiring to demonstrate, that in the face of massive money printing by global central banks, price inflation hasn’t been a threat. 

And since gold serves as hedge of savings against the loss of purchasing power of paper money, such lack of price inflation thereby justifies the actions of political authorities to engage in more expansionist monetary policies.

Yet citing the actions of George Soros doesn’t mean the end of the gold bullmarket. Mr. Soros has previously flipped flopped on gold. 

Considering that Mr. Soros reportedly made a huge killing ($1 billion) in shorting the Japanese yen, what may have happened was that Mr. Soros may have redeployed part of his gold holdings into the short yen position.

Mr. Soros has reduced his holdings of gold SPDRs during the 4^th quarter by 55% but this also means that he still holds 45%.

The current massive interventions by policymakers suggest that the yield chasing phenomenon has only shifted focus by big players to the currency markets.

Analyst Doug Noland at the Prudent Bear writes,

This highly unsettled backdrop forced the big macro hedge funds – and traders/speculators more generally – to keep trades on short leashes (risk control measures that chipped away at performance).  We now see indications that the big players have been unleashed, at least as far as taking – and winning – huge bets against the yen.

Given the current direction of social policies, people's orientation has been reduced to simply profiting from short term yield chasing arbitrages.

It is true that falling gold prices has not just been a US dollar affair, but through a broad spectrum of currencies such as Euro, British Pound, Canadian Loonie, Australian Dollar, Chinese Yuan and the Euro as shown in the chart below from gold.org

It is also equally true is that the latest fixation on the yen has led to record high gold prices in yen...

So does record yen prices of gold mark the end of gold bullmarket? 

Well, again reference point matters.

The concurrent yen carry trade has been a partial fulfillment of my March 2012 prediction. The next phase is to see capital flight from Japan into ASEAN.

Moreover, real demand for gold has remained vibrant, as I recently pointed out.

Furthermore, despite the seeming underperformance of the price of gold, which I believe has been actively suppressed, this time through the US Federal Reserve communications strategy in portraying the tilting of balance towards the ‘hawks’, the string of record breaking activities as evidenced by record buying of physical gold and silver in the US (first 2 weeks of 2013), record ETF holdings of gold (as of November 2012) and record gold imports of India and China (fourth quarter 2012), aside from milestone third quarter rate of growth in the gold buying of emerging market central banks (third quarter of 2012), suggests of the blatant disconnect between gold prices and real economic activities underpinning the gold markets. Yes some Fed officials have openly been chattering about risks of price inflation!

From US Global Funds

Although there may have been some slight weakness in the demand for gold in India, these may have been due to the Indian government’s relentless “war against gold” via series of hikes in import taxes and other bank regulations.

Statistics alone cannot capture gold’s real dynamics since countries like India and Vietnam have adapted restrictive policies on gold ownership that has brought the gold market underground.

This also imply that activities in the real economy and the financial markets have, like other financial markets, been operating in a parallel universe.

It’s also important to realize that prices of gold haven’t been isolated from the broader dimension of the commodity markets.

Since 1970, while there are may be differences in the degree and in the timing of short term fluctuations, the trend of commodity markets run in a general direction (black arrows).

Commodity markets rose during the stagflationary decade of the 1970 until the early 1980s, whereas globalization coincided with declining prices of commodities through two decades or until the outset of the new millennium 

The US Federal Reserve’s attempt to reflate the US economy in response to the dot.com bubble bust has generally lifted the commodity markets since 2003. Same commodities also went into a tailspin in 2008.

The above chart includes energy, industrials, precious metals, soft agriculture and the CRB Reuters index.

Are we seeing a broad based decline in prices of commodities today?

Hardly.

While Agriculture has recently been down (GKX) following an earlier spike, Energy (GJX) has been on the rise, along with the Industrial metals (GYX).

So there is little evidence to say that gold’s bull market may be at a close.

But there is one thing we can be sure of, there has been a massive build up of gold and silver shorts by US banks.

Albeit, gold shorts has been reduced along with declining prices.  But this runs opposite to silver where declining prices has led to increasing position on silver shorts.

Are the silver shorts sustainable?

Supply-demand imbalance will prove devastating to shorts, that’s according to Goldmoney’s Alasdair Macleod

We can be sure that the massive short position in silver is causing difficulties for the banks concerned, because of the lack of physical supply. Therefore, the bullion banks have an exposure which appears to be out of control. While they frequently conduct bear raids (which are more successful in gold) they face the risk in silver of themselves becoming victims of a bear squeeze. Unusually, they have got themselves into this mess on a low silver price, and it is roughly double the short position than when the silver price was over $40. This being the case, when silver turns up the banks are likely to be very badly squeezed, throwing up enormous losses. Meanwhile, the non-bank commercials have kept a level head and reduced their net short position by 2,268 contracts to 3,616.

I think this is right. But the collaborative heavy manipulation of the various aspects of the markets by global government could also imply that to paraphrase the deity of economic interventionism, JMKeynes, adulterated markets may remain intoxicated and irrational a lot longer than we can remain solvent. Nevertheless, eventually the fundamental laws of economics will prevail.

 

For me, gold’s recent weakness has been simply a revelation of the “reversion to the mean” or of the market truism where "no trend goes in a straight line".

Gold has been in a bullmarket for One, two, three, four, five , six, seven, eight nine, ten, eleven and TWELVE straight years, so a reprieve or profit taking should be natural reaction.

 

As I wrote at the year’s opening,

Although, so far, with the exception of gold, no trend has moved in a straight line, so it would be natural for gold to undergo a year of negative returns.

Nonetheless all these will also depend on the actions of monetary authorities.

Instead of merely chattering, it would be best for the gold bears to profit from their predictions by putting their money where their mouths are via shorting gold.

Phisix Amidst the Global Pandemic of Bubbles

7 consecutive weeks on the upside and 12.2% returns local currency returns. Make that 13.2% in US dollar returns. Absolutely fantastic.

Will the Phisix Go Vertical?

What you see depends on where you stand. Reference point matters.

Last week, I exhibited the chart of the Phisix in a transition to a parabolic phase.

From the longer term perspective or from the trough of post Lehman bankruptcy in March of 2009, the nearly four year chart reveals of the three stages of acceleration, represented by the steepening angle or slope of the evolving trend lines.

At the current rate of growth, the Phisix could go vertical.

I am NOT saying it will, but we simply can’t rule out such possibility.

The local benchmark yielded about 7.4% last January. At 7% a month, the Phisix at 10,000 will be reached in about 8 months. As of Friday’s close, February’s gains have accrued to about 4.4%, with 9 trading sessions to go for the month. Will February deliver another 7%?

And a Phisix 10,000 by the yearend translates to 72% returns for 2013. Of course, this would represent another fulfilment of my decade long prediction.

Again the narrative above signifies an extrapolation of the current trend into the future. Yet past performance should not be relied on as an airtight measure of the future.

Nevertheless, the intensifying boom can be seen as partly playing into the “regression to the mean” trade.

I wrote at the start of the year[1],

Average returns from 1985 to 2012 or over 27 years is about 26% based on the annual nominal local currency. The first cycle (1985-1996) generated 50% nominal returns yearly. This cycle (2003-2012) has yielded only 23.61%, still distant from the 27 year average or from the post martial law first cycle.

This is NOT to suggest that the Phisix will need to repeat the returns of the first cycle boom, whose environment has been immensely distinct from today’s cycle. The Philippines then emerged from economic stagnation, high inflation, a debt moratorium and from the clutches of the two decades of dictatorship.

But if the 27-year average should come into play, then this means that the Phisix will need to deliver far greater returns than 2012, particularly 47.45% for 2013, just to reach the mean. This assumes that the Phisix boom ends next year, which I doubt.

47% gains would translate to Phisix 8,500. This makes 10,000 not far off the radar screen.

BSP Data Reveals of the Deepening Credit Driven Mania

The real reason behind the possibility of the reinforcement of the current boom has been the evolving manic phase in the local financial markets and major parts of the real economy in response to incumbent domestic social policies, as well as, to the influences of the external equivalent.

Mania, in my definition, is the phase of the bubble cycle characterized by the acceleration of the yield chasing phenomenon, which have been rationalized by vogue themes or by popular but flawed perception of reality, enabled and facilitated by credit expansion.

Last week, I wrote[2],

Bubble cycles are not just about irrational pricing of securities, but rather bubble cycles represent the market process in response to social policies where irrationalities are fueled or shaped by credit expansion accompanied or supported by faddish themes.

The fundamental risk that underlies the cycle of manias, panic and crashes is that of the massive build-up of debt founded on malinvestments and speculative excesses that becomes a systemic issue that eventually has to unravel.

The Philippine central bank, the Bangko Sentral ng Pilipinas (BSP), recently released its loans outstanding data from the banking sector for 2012. This gave me the opportunity to do a back search on the previous years[3] from which I used to construct the chart below. 

On the surface, over the past 7 years the compounded average credit growth for the overall economy or for “Production by Economic Activity” has been at about 7.7%. 

This would seem just about normal and or in harmony with the statistical economic growth data. Nothing to see here move along.

But as they say, the devil is in the details.

Over the last 3 years, bank loan data reveals that “Aquinonomics” has been about the inflation of a) Financial Intermediation[4] (blue bar)--which represents the banking, non-bank financials (pension and provident funds), insurance and Auxiliary activities—b) Real Estate, renting and other Business Activities (maroon bar)—which covers property, ownership dwelling and rents, and lastly c) wholesale and retail trade[5] (green bar).

Notice that rate of growth for these industries have spiked to the 25% levels and above in 2012. 

I would suspect that the astounding loan growth in financial intermediation may have partly been channeled to the stock market. Thus the growth rate of this sector would seem like good proxy or bellwether for net margin debt in the stock market.

Also the stupendous growth of the wholesale and retail trade sector reinforces my concerns over the increasing risks of a shopping mall bubble[6].

Compounded annual growth rate for the 6 year period (2007-2012) for wholesale and retail trade is at 16.83%, financial intermediation 10.86%, and real estate 16.099%. However, a caveat with CAGRs is that such metric doesn’t accurately capture the inflection points or the major turns in trend dynamics. When people begin to lever up to chase for yields, CAGRs will then only manifest on such changes ex-post.

As a side note, I didn’t include the 2005-2006 data for two reasons: one categorization of financials has been lumped together with real estate, and second, household credit has been excluded. The BSP has still way much room to improve in showing to the public the necessary economic and financial information. 

Yet the cumulative loans by the booming trio, the financial intermediaries-property-retail sector, accounts for 44.32% share of the total loans issued by the banking sector on “production on economic activity” in 2012.

Independently, the share of real estate sector loans represents 18.82%, wholesale and retail trade 15.78% and financial intermediation 9.73%.

Manufacturing has the largest share at 19.42%. But one fundamental thing that makes me think that manufacturing hasn’t been a bubble is the lack of popular appeal.

Of course unlike the more concentrated property sector, manufacturing even according to national statistics has been more diversified[7]. And due to this bias and to time constraints I haven’t been able to include this in my recent calculations.

The widening disparity between the rapid growth in the abovementioned supply side sectors bankrolled by credit have likewise been reflected on the growth rate on consumer loans.

Since 2009, total household consumption credit (blue bars) has grown from 9.12% to 16.12%. 

The growth in auto loans has been in decline from a peak of 30.62% over the same period, but still at significant levels of 18.62%. Credit card, which accounts for 57% of the consumer loans, rose from single digits to a modest 12% in 2012.

The “other” category which accounts for 10% share of the consumer loans, that are likely about personal and salary loans[8] have likewise been on a sharp upswing.

I am confused with the BSP’s statistics, though.

The publicized tables on household consumption don’t include residential real estate loans. However in a first semester 2011 publication[9], residential loans have accounted for the biggest portion of consumer loans (left window). I suspect that residential real estate loans may have been incorporated as part of the supply side segment of the Real Estate classification.

Consumer spending will be determined mainly by productivity growth, by savings, and or by debt acquisition. The lopsided rate of credit growth responsible for the rapid expansion of the financial-property-shopping industries has been conspicuously disproportionate with consumption growth even seen through the lens of consumer loans (right window).

Eventually such imbalances will be vented on the marketplace. 

Don’t Underestimate the Risks from a Surge of Systemic Credit

Domestic credit provided by the banking sector as share of GDP was last reported at 51.84% according to tradingeconomics.com[10] based on World Bank’s published report in 2012.

Banking sector credit was over 80% of GDP at the onset of the Asian Financial crisis. While such data may seem distant from the pinnacle of the boom, it pays not to underestimate the possible scaling up of the pace of loan that can occur during a mania

So far, bank loans have been “bottoming out” and have only began to show marginal improvements by going above the “mean”.

And given the recent substantial rate of increase of overall banking loans relative to statistical economic growth, I expect such figures to increase to around 60% in 2012. 

During onset of the last mania in 1993 where the Phisix returned 154% in local currency terms, the share of banking loans relative to the GDP was even less than today’s level! But bank loans skyrocketed (red ellipse) as the boom progressed through the year and the succeeding years until Asian crisis.

It’s simply the same strain of crowd feeding frenzy that should be expected if loose monetary conditions remain in place. And while I am not sure when exactly this should happen, I suspect that this sooner rather than later, perhaps this year or next. Again all this will depend on feedback mechanism between social policies and the marketplace.

The boom in financial-property sector can also be seen in the other credit markets particularly corporate bonds.

While the Philippine bond market growth has been modest in 2012 and mostly directed towards government securities, by the third quarter of the same year, corporate bonds mainly from banking-financials, real estate and holding companies had been the top issuers, according to the Asian Bond Monitor[11]. And most of the corporate bond issuers have been publicly listed companies. 

This only means that many publicly listed companies have diversified in gaining access to credit through the bond markets.

Such boom continues to resonate in the Phisix.

The recent leader, the mining sector had been bogged down by another environmental headline hugging controversy of an unfortunate landslide that claimed 5 lives of workers[12] sent heavyweight Semirara [PSE:SCC] into funk, which significantly weighed on the index. So price rotation meant a shift in attention back to the finance-property companies.

The property sector now has widened its lead, as the financial sector closes the gap with mines. One possible additional interim blackeye will likely be from the recent drop of precious metal prices which I think is in a shakeout mode.

Myth of Money Flows in the PSE, Redux; Financial Investing is an Art

I recently heard people talk about how money has been flowing into domestic stocks.

In truth, there is no money flows into stocks. For every buyer of a particular security is an equivalent counterparty—a seller of the same security. The transaction or exchange only means that money shifts from the buyer to the seller of a specific security. There is no money flows.

This applies whether we reckon about board transactions, odd lots or about IPOs, secondary offerings or other forms financial securities.

I previously dwelt with this in length[13]

So when people speak of foreign money “flowing” into stocks, what they are really saying is a change in the composition of ownership. For instance when foreigners (whether individual or institution) buy, they buy from selling locals (individual or institution).

What drives prices up or down are people’s subjective valuation of specific securities. Rising prices means buyers are more aggressive. Falling prices means sellers are more forceful. Unchanged prices mean that neither buyer nor seller have been dominant, or that prices are momentarily at relative equilibrium levels.

In terms of foreign participation, any buying or selling of foreigners at the Philippine Stock Exchange will not necessarily correspond to an assumed relative corresponding rise or fall in securities as many people think.

Simply said, the presence foreign buyers don’t necessarily extrapolate to higher prices. This would depend on the valuation of every participant, whether the foreigner acts for himself or in behalf of a fiduciary fund from which his/her valuations and preferences would translate into action.

If the foreigner is aggressive then he/she may bid up prices. But again since people’s valuations differ, the scale of establishing parameters for each action varies individually.

A foreign participant can also be conservative, who may rather patiently accumulate, than bid up prices.

If an investment fund is managed by a team, then the team’s priorities, that prompts for subsequent actions, will be set according to agreement/s from the value scales of team members or from the team leader.

Such examples deal with the misimpression that the presence of foreigners imply mechanically positive for the markets or of the implicit inferiority complex where we see foreign participants as having superior force in shaping prices.

The bottom line is that every individual whether foreign or local will have their own technique or preferred means of dealing with the financial markets which are based on their subjective valuations, preferences and opinions that gets translated via actions (buy, sell or wait).

In other words, people, not nationalities, acting on individual priorities establish prices.

And this is also why financial investing is an art more than it is a science.

Global Pandemic of Bubbles

I have wanted to show you this last week but was comprised by time and space.

The general idea which I wanted to impart is that today has immensely been different than the era which culminated with a crisis represented by the 2008 Lehman bankruptcy. 

First, political authorities were reactive to the bubble bust then. Today, political authorities can be considered as having been pro-active, pre-emptive or activists, such that any incipient signs of sap in economic strength has led political authorities to utilize increasingly powerful shock therapy responses. 

However, drastic policies which results to short term equally commanding market response only dissipates over the long run. Such dynamic can be described as the Risk ON Risk OFF volatility.

Second, during the last crisis, emerging markets (China and ASEAN) and similarly developed economies as Canada, Australia or New Zealand filled some of the slack left by economies slammed hard by the crisis.

Today, what I call as the “periphery” nations appear to be enduring the same malaise or risks of fragility from the bubble pathology, even as the hangover from the crisis lingers

In short bubble cycles have become a global pandemic.

Canada, having been known to have withstood previous economic dislocations, may not seem invincible at all. Home prices in Canada may have reached bubble proportions[14]. And this has been undergirded by Bank of Canada’s (BoC) stealth balance sheet expansion which according to Zero Hedge[15] has grown by 21% year on year—the most since 2009 through 46% growth in purchases of Canadian government bonds.

And it’s not just Canada. Another commodity currency may be in trouble.

Australian banks may be in the process of seguing into a bubble bust which the BCA Research[16] euphemistically calls as “deleveraging”. The Canadian research outfit discerns that the unsustainable growth in household liabilities in both countries will impair their respective banking system soon.

My point is that there are limits to the powerful potion or shock therapy, which are seen as elixirs, applied by central banks. And once the bursting bubbles ripples and overwhelms significant parts of the world, parading or shooting policy bazookas will not guarantee the revival of the risk ON risk OFF environment.

But I am certain that such policy bazookas will be boldly and loosely used as they are today.

So I’d stick by the hedges against such repercussions.

Black Swans Around the Corner, Conclusion

For the Philippine markets, I expect the Phisix as well as local assets, bonds and the Peso to remain strong until at least the end of the first quarter. But we should expect a much needed short term reprieve to occur anytime soon.

After the first quarter, again the fate of the Phisix will be shaped by the expected direction of interest rates which mostly will be determined by domestic factors but will also be sensitive to external influences. This will depend, of course, on the feedback loop or the ping pong relationship between social policies and market responses.

Yet we are seeing more and more signs of the transition towards a credit fueled mania. If the current pace of expansion of systemic debt intensifies, then we shouldn’t discount that the hunt for yield may lead to a blowoff phase for the Phisix or for other Philippine asset markets.

In short, I wouldn’t rule out a Phisix 10,000 soon, in as much as I wouldn’t rule out a 10% correction.

But I don’t expect an inflection point to a bear market yet, perhaps not in 2013.

I also expect the hunt for yield to also generate interests from foreign investors mostly in response to the coordinated easing policies.

These intensifying yield chasing phenomenon are really about capital flight and equally natural responses to social policies that have been designed to undermine short sellers, to depreciate the purchasing power of respective national currencies, to manipulate short term booms in order to support the largely insolvent political institutions, as well as, to coax and force the public through the moral hazard “Central Banking Puts” ala the Bernanke Put and via negative real interest rates, into speculative orgies in order to support the asset markets which underpins the balance sheets of the politically privileged banking system, who are financiers of the government.

Nevertheless in the Philippine Stock Exchange, there are no money flows as buyers and sellers balance out each trade. Individuals, not nationalities, determine prices.

As we are seeing signs of bubbles in the Philippines, China and in Thailand, we are also seeing signs of bubbles in Canada and Australia. The consequence of the global pandemic of bursting bubbles will probably not be what the consensus or the mainstream expects. Since systemic fragility has only been heightening through aggressive risk taking, which has been bolstered by equally aggressive policy responses, one cannot discount huge market dislocations to abruptly occur. Black Swans are just around the corner.

Finally my advice for readers, especially to the tyros, is to avoid chasing prices.

Instead, since price level rotations has been a natural phenomenon in an inflationary boom, a less risky proposition is to position into issues that haven’t significantly moved up and hope that the rising tide eventually lifts all boats.

Of course, there is NO guarantee for anything. Many choices we make could end up as the exception rather than the rule. We live in a world where we think we can predict the effects of passing meteors/asteroids when really can’t[17].

---

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

[2] See Phisix and Global Asset Markets: More Signs of Mania, February 11, 2013

[3] Bangko Sentral ng Pilipinas LOANS OUTSTANDING OF UNIVERSAL AND COMMERCIAL BANKS (monthly) 2012, 2011, 2009-2010, 2008-2009, 2007-2008, 2006, 2005

[4] National Statistics Coordination Board Glossary Financing, Insurance, Real Estate and Business Services

[5] National Statistics Coordination Board Glossary Wholesale and Retail Trade

[6] See Philippine Economy’s Achilles Heels: Shopping Mall Bubble (Redux) January 13, 2013

[7] National Statistics Coordination Board Glossary Manufacturing

[8] Bangko Sentral ng Pilipinas, Bank Lending Standards Eased Slightly for Firms and Households in Q4 2012, February 8, 2013

[9] Bangko Sentral ng Piilpinas Status Report on the Philippine Financial System First Semester 2011 Philippine Banking System

[10] Tradingeconomics.com DOMESTIC CREDIT PROVIDED BY BANKING SECTOR (% OF GDP) IN PHILIPPINES The Domestic credit provided by banking sector (% of GDP) in Philippines was last reported at 51.84 in 2011, according to a World Bank report published in 2012. Domestic credit provided by the banking sector includes all credit to various sectors on a gross basis, with the exception of credit to the central government, which is net. The banking sector includes monetary authorities and deposit money banks, as well as other banking institutions where data are available (including institutions that do not accept transferable deposits but do incur such liabilities as time and savings deposits). Examples of other banking institutions are savings and mortgage loan institutions and building and loan associations.

[11] Asianbondsonline.org Asian Bond Monitor November 2012

[12] Philstar.com Bodies of 5 Semirara workers located February 16,2013

[13] See The Myth Of Money Flows Into The Stock Markets April 3, 2009

[14] Mark Perry Does Canada have an unsustainable housing bubble and is it headed for a major 30% price correction like the US? Carpe Diem AEI, January 30, 2013

[15] Zero Hedge, Mark Carney Leaves Canada With 'Stealth QE' Rising At Fastest Pace Since 2009 January 28, 2013

[16] BCA Research Fixed Income Strategy: Relative Value In Dollar Bloc Financials February 5, 2013

[17] See Chart of the Day: Odds of Death February 15, 2013

Video: Greenspan Says Stock Markets causes Economic Growth

In the face of US fiscal problems, former Fed chief Alan Greenspan says in the following video interview that only the stock market is truly important.

Quotable:

[3:40] data shows that not only are stock markets a leading indicator of economic activity, they are a major cause of it – the statistics indicate that 6% of the change in GDP results from changes in market values of stocks and homes.

This is just an example of experts who resort to statistics to misleadingly associate asset inflation with economic growth: a post hoc fallacy. This has been anchored on the so-called Wealth Effect myth which sees consumption as drivers of the economy.

As I previously explained real economic growth is about the acquisition of real savings or capital accumulation from production.

And that the real concealed reason for the promotion of the wealth effect has been to justify government intervention.

But of course the principal reason behind the populist consumption economy narrative has been to justify myriad government interventions via ‘demand management’ measures applied against the supposed insufficient “aggregate demand” from so-called “market failures”.

Moreover, the consumption story aims to buttress mostly indiscriminate debt acquisition as a means of attaining statistical rather than real growth based on value creation.

The central banks' serial blowing of asset bubbles is really an illusion that eventually will implode, thus the bubble cycles. 

Also a major reason for such undertaking has been to subsidize the crony banking system, who serves as agents for central banks and as financiers of the political class at the expense of the economy.

Nonetheless, inflating asset bubbles has become the de facto central banking standard adapted by the world monetary authorities, that has been articulated by Mr. Greenspan’s successor, the incumbent Ben Bernanke, as a “smart way” of protecting the economy.

Chart of the Day: Odds of Death

The Economist writes,

ON FEBRUARY 15th DA14, an asteroid 45 metres across, will sail past the Earth at 7.8km a second (4.9 miles a second). At just 27,700km away, it is well within the range of communication satellites. It will be the closest encounter on record with an asteroid this big. In 1908 an asteroid estimated to be around 100 metres in diameter destroyed 2,000 km² of forest in Siberia. Thankfully, such events are rare. NASA has identified 9,600 "near-Earth objects" since 1995, but just 861 with a diameter of 1km or more. The greatest threat to Earth is the 140-metre wide AG5; but it has just a 1-in-625 chance of hitting Earth, and not until February 5th 2040. More prosaic things are far more dangerous. According to data from America's National Safety Council, 27 people died in 2008 in America from contact with dogs (a one in 11m chance of death). The chart below compares the odds of dying in any given year from choking, cycling, being struck by lightning or stung by a bee.

While the odds of dying from a heart disease (467:1) may seem greater than dying from an asteroid impact (74,817,414:1) may be true, the basic problem with extrapolating statistics is that we really can’t determine or we simply DON’T know when that big ONE will arrive in whatever form to claim us.

Thus we can be lulled into complacency by the use of statistics from the risks of false negative errors, or specifically, result/s that appears negative when it should not. 

This reminds me of what author Nassim Taleb calls as the Black Swan Theory: the extreme impact of certain kinds of rare and unpredictable events (outliers) and humans' tendency to find simplistic explanations for these events retrospectively.

For instance, the NASA suspects that DA14’s whizzing past earth may trigger tremors on some parts of the world. Has the impact from such event been incorporated in the computation of the above probabilities? 

A meteor blast in Russia caused 400 injuries a day before DA14. The meteor incident was denied by officials as having been connected with DA14.

If the authorities are right, then this simply reveals how the Russian meteor incident can be construed as an “unpredictable-outlier event” but with limited impact. In short, no one saw this coming.  Yet the incident does not satisfy the ‘extreme impact’ conditions of the black swan model.

On the other hand, if authorities could have been wrong, then the statistical odds of death may have been underestimated, since the likely methodology in arriving at such probability may have been seen only from a direct impact from a meteor/asteroid collision and not from the ancillary events, such as Russia's meteor shower (as defined by CNN), which could have been the advance party of DA14, or from other potential ramifications from meteor or asteroid flybys.

The bottom line is that people tend to overestimate their knowledge of the world and or of the universe to the point that environmental jeremiahs or ecological-phobes use scare tactics to impose social controls on us in order to shape the world according to their false ideals. 

As discussed before the world is much larger than us, where various forms of potential black swans abound: 

While we have been made aware by media of these apocalyptic scenarios through a variety of science fiction movies that could or may occur; such as huge asteroid/s crashing on earth, super volcano eruptions, alien invasion, robot uprising and many more, there are other factors such as the black hole, gamma rays from an imploding star or the unleashing of a mighty wave of solar flares from our sun, that could send our world into oblivion, unpredictably and instantaneously.

Speaking of black holes, a science or Astrophysical journal recently asserted that black holes have been growing faster than expected and have grown beyond the sphere of traditional assumptions where black holes require “galaxy collisions”. 

Our knowledge of the environment has been incomplete and keeps changing.

Quote of the Day: The Right Minimum Wage: $0.00

But there's a virtual consensus among economists that the minimum wage is an idea whose time has passed. Raising the minimum wage by a substantial amount would price working poor people out of the job market. A far better way to help them would be to subsidize their wages or - better yet - help them acquire the skills needed to earn more on their own.

An increase in the minimum wage to, say, $4.35 would restore the purchasing power of bottom-tier wages. It would also permit a minimum-wage breadwinner to earn almost enough to keep a family of three above the official poverty line. There are catches, however. It would increase employers' incentives to evade the law, expanding the underground economy. More important, it would increase unemployment: Raise the legal minimum price of labor above the productivity of the least skilled workers and fewer will be hired.

If a higher minimum means fewer jobs, why does it remain on the agenda of some liberals? A higher minimum would undoubtedly raise the living standard of the majority of low-wage workers who could keep their jobs. That gain, it is argued, would justify the sacrifice of the minority who became unemployable. The argument isn't convincing. Those at greatest risk from a higher minimum would be young, poor workers, who already face formidable barriers to getting and keeping jobs…

The idea of using a minimum wage to overcome poverty is old, honorable - and fundamentally flawed. It's time to put this hoary debate behind us, and find a better way to improve the lives of people who work very hard for very little

This stunning quote comes from the editorial of the New York Times whom have paradoxically been mostly “interventionists” (hat tip AEI’s blogger and Professor Mark Perry).

Video: Milton Friedman on the Minimum Wage Law

In the following video, the late illustrious economist and Nobel prize winner Milton Friedman eloquently explained of the nasty side effects of the minimum wage law: (hat tip AEI's scholar and Professor Mark Perry ) [bold mine]

The fact is, the programs labeled as being “for the poor,” or “for the needy,” almost always have effects exactly the opposite of those which their well-intentioned sponsors intend them to have.

Let me give you a very simple example – take the minimum wage law. Its well-meaning sponsors there are always in these cases two groups of sponsors – there are the well-meaning sponsors and there are the special interests, who are using the well-meaning sponsors as front men. You almost always when you have bad programs have an unholy coalition of the do-gooders on the one hand, and the special interest on the other. The minimum wage law is as clear a case as you could want. The special interests are of course the trade unions – the monopolistic trade craft unions. The do-gooders believe that by passing a law saying that nobody shall get less than $9 per hour (adjusted for today) or whatever the minimum wage is, you are helping poor people who need the money. You are doing nothing of the kind. What you are doing is to assure, that people whose skills, are not sufficient to justify that kind of a wage will be unemployed.

The minimum wage law is most properly described as a law saying that employers must discriminate against people who have low skills. That’s what the law says. The law says that here’s a man who has a skill that would justify a wage of $5 or $6 per hour (adjusted for today), but you may not employ him, it’s illegal, because if you employ him you must pay him $9 per hour. So what’s the result? To employ him at $9 per hour is to engage in charity. There’s nothing wrong with charity. But most employers are not in the position to engage in that kind of charity. Thus, the consequences of minimum wage laws have been almost wholly bad. We have increased unemployment and increased poverty.

Moreover, the effects have been concentrated on the groups that the do-gooders would most like to help. The people who have been hurt most by the minimum wage laws are the blacks. I have often said that the most anti-black law on the books of this land is the minimum wage law.

There is absolutely no positive objective achieved by the minimum wage law. Its real purpose is to reduce competition for the trade unions and make it easier for them to maintain the higher wages of their privileged members.

French GDP Shrinks Amidst Surging Stock Market

More signs of today’s financial market-real economy disconnect or the parallel universe.

I earlier posted about the "surprise" recession in Japan, in spite of the “Abenomics” (aggressive monetary and fiscal interventionism), which has bizarrely been viewed by media as justifying more stimulus; after all previous attempts failed.

Add to this the latest development: the contraction in the French economy

From Bloomberg.com

The French economy shrank in the fourth quarter as manufacturers slashed thousands of jobs and President Francois Hollande struggled to keep the nation from falling back into recession for the first time since 2009.

Gross domestic product dropped 0.3 percent in the fourth quarter from the previous three months when it climbed 0.1 percent, the national statistics office Insee in Paris said today in an e-mailed statement. Economists had forecast a 0.2 percent drop, according to the median of 28 estimates in a Bloomberg News survey. GDP fell 0.3 percent from a year earlier.

France, like others among the 17 nations using the euro, is suffering in the wake of the region’s sovereign debt crisis. Yet while neighboring Germany is showing signs of recovery in confidence, exports and manufacturing, Hollande is grappling with tens of thousands of job cuts in companies such as Renault SA and an economy that has barely grown in more than a year.

Whether seen from quarter on quarter…

or annualized…

the French statistical economy has been deteriorating since 2011. (both charts from tradingeconomics.com)

But the French equity benchmark the CAC 40 apparently sees things starkly different from main street. (chart above from stockcharts.com)

One cannot really expect any significant real economic recovery when the Hollande regime has been on an onslaught against capital via class warfare policies and via various economic interventionism. This means that much of the French asset inflation will depend on the continuing bubble blowing policies by Mr. Draghi and his team at the ECB.

Nonetheless if the economic contraction deepens this may lead to a French debt crisis that may spell doom for the ill-fated EU project.