Video: Fiat Money End Game, Gold and Sound Money

Global central banks have been pushing inflationism to the limits. 

Unless curtailed, the ultimate result will be massive cascading debt defaults across the world that leads to deflation or to hyperinflaton or the terminal phase of today's paper money standard or to a combo of run-away inflation amidst defaults.

I call this the Mises Moment. From the admonitions of the great Austrian economist Ludwig von Mises:

But the boom cannot continue indefinitely. There are two alternatives. Either the banks continue the credit expansion without restriction and thus cause constantly mounting price increases and an ever-growing orgy of speculation, which, as in all other cases of unlimited inflation, ends in a “crack-up boom” and in a collapse of the money and credit system. Or the banks stop before this point is reached, voluntarily renounce further credit expansion and thus bring about the crisis. The depression follows in both instances.

(hat tip Zero Hedge)

How a 3D Printer Helped Save a Dying Baby

3D Printing makes another leap towards revolutionizing medicine

From CNN (hat tip AEI's Mark Perry) 

When he was 6 weeks old, Kaiba Gionfriddo lay flat on a restaurant table, his skin turning blue. He had stopped breathing.

His father, Bryan, was furiously pumping his chest, trying to get air into his son's lungs.

Within 30 minutes, Kaiba was admitted to a local hospital. Doctors concluded that he had probably breathed food or liquid into his lungs and eventually released him.

But two days later, it happened again. It was the beginning of an ordeal for the Youngstown, Ohio, family that continued day after agonizing day.

"They had to do CPR on him every day," said April Gionfriddo, Kaiba's mother, who later found out her son had a rare obstruction in his lungs called bronchial malacia. "I didn't think he was going to leave the hospital alive."

With hopes dimming that Kaiba would survive, doctors tried the medical equivalent of a "Hail Mary" pass. Using an experimental technique never before tried on a human, they created a splint made out of biological material that effectively carved a path through Kaiba's blocked airway.

What makes this a medical feat straight out of science fiction: The splint was created on a three-dimensional printer.

Read the rest here

The Economist: Why Americans Love the IRS

The Economist’s sarcastic takedown of the the US tax agency the IRS: (bold mine)

WHEN Barack Obama fired the acting head of the Internal Revenue Service (IRS) earlier this month, he doubtless hoped to quell the hullabaloo about its seemingly partial treatment of applications for tax-exempt status from conservative groups. The IRS selected for extra scrutiny groups whose names included conservative buzzwords, such as “tea party”, “9/12” and “patriot”. Republicans accuse the taxmen of persecuting anti-tax groups. The IRS’s defenders insist that a few low-level functionaries simply made a clumsy attempt at an administrative short-cut. But the main reason why Americans dislike dealing with the IRS is not, however, the bureaucrats’ fault. Congress keeps making the tax code more complex. It is now 4m words long, and has been changed over 4,000 times since 2001. Americans spend 6.1 billion hours a year complying with it—enough work to keep over 3m people employed full-time without producing anything. Nearly 90% of filers pay for help with their returns. The cost of all this is equivalent to 15% of the tax raised says the Taxpayer Advocate, an ombudsman. Yet change may be a long time coming. Politicians usually balk at taking on the myriad vested interests which all ferociously defend their favourite tax breaks, says Bill Gale of the Brookings Institution, a think-tank. For that reason, he argues, “tax reform is always the bridesmaid and never the bride”

To give a better picture of what the bold highlights mean

US Tax code ballooned from 400 to 72,000+ pages

Here is the basic 1040 tax form

More tax laws equals more tax breaks which serves as rewards to the politically favorite vested interest groups.

Cato’s Dan Mitchell tells us more “why the IRS bureaucracy deserves scorn”.

• It has thieving employees.
• It has incompetent employees.
• It has thuggish employees.
• It has brainless employees.
• It has protectionist employees.
• It has wasteful employees.
• And it has victimizing employees.

As Chief Justice Marshall once wrote

The power to tax is the power to destroy.

PIMCO’s El Erian’s 6 Rules for Investors

One of the world’s largest bond investment funds, PIMCO recently held an investment summit where the company’s CEO, Mohamed El Erian spoke.

Fortunately the Reformed Broker took note of Mr. El Erian’s speech. Here are Mr. El Erian’s 6 rules for investors in the world of the New Normal and Interdependence: (along with my comments)

1. Protect yourself against the haircuts that come from not-strong balance sheets, weak income statements and bad management

Mr. El Erian must be referring to countries. Haircuts will come in the form of lost purchasing power and from direct confiscatory policies (higher taxes, bank deposit haircuts, etc…)

2. Don't give up all of your liquidity just to be "in"

Financial markets have been transformed into a loaded casino by central banks. Thus saving for the rainy day should be a prerequisite

3. Risk management: People used to think that diversification was good enough, but no more. "Diversification is necessary for any investor but it is not sufficient when central banks have distorted prices."  He says the way to think about insuring tail risk is the same as you would car insurance. You maintain it at all times, not try to guess when you'll need it. He is talking about far-out-of-the-money options that hedge against unforeseeable outlier events, which is what his fund does.

Mr. El Erian says that the world has become more than interconnected, but importantly, interdependent. “In an interdependent world, if your competitor has a problem, YOU have a problem.” This, for me, makes diversification difficult. That's because interdependent relationship means risk-reward tradeoffs are tightly distributed. Such is the RISK ON or RISK OFF seen in the financial landscape.

4. Be reasonable about your return expectations. "Central banks bring growth from tomorrow into today - but markets price this future growth in quickly." He is saying that we have pulled forward a lot of future growth in the returns we've seen already.

In short, be aware of the boom-bust cycles.

5. Beware backward-looking labels. Back in the day, China and Brazil bonds were considered to be credit risks because they were emerging countries and Greek and Cypriot bonds were more interest rate risky, not credit risky, because they were considered to be "developed" countries. But that was then - nowadays China and Brazil's fundamentals mean that their bonds are more interest rate risk, it is Greece and Cyprus that become credit risks (both have defaulted). "Ask yourselves whether or not your labels still make sense as the world changes."

This is a wonderful example of the adage “past performance does not guarantee future outcomes”. History isn’t the future.

6. Be Resilient and Agile. The world is changing. The US is the sun in the solar system that is the global economy around which everything else revolves. There is nothing to replace the US just as there is no replacement for the sun. That being said, at the fringes, things are fragmenting away from the existing world order. The evidence of this can be found in the many bi-lateral agreements being struck between non-US partners (China and Brazil, Brazil and Africa etc).

Well, for now this seems true. But the essence of this advise appears also in conflict with its premise. The world is changing but Mr. El Erian holds that the US is fixed. If the world changes and are “fragmenting away from the existing world order”, then the US may or could lose its place as the “sun in the solar system”. 

Nonetheless apropos and useful insights from PIMCO's big boss.

Iceland’s Recovery: Hardly about Currency Devaluation

Alan Reynolds at the Cato Institute blog explains, (italics original, bold mine)

Iceland’s recent devaluation was highly orthodox policy condition for wards of the IMF (strings attached to a $2 bn. loan). Unfortunately, such devaluations often backfire by inflating commodity costs, interest rates and the burden of foreign debt. The Icelandic krona fell from 64 to the dollar in 2007 to 123.6 in 2009, before strengthening with the economy to nearly 116 in 2011.

Since oil, grains and metals are priced in dollars, the 2008-2009 devaluation inflated Iceland’s cost of production and cost of living.  Inflation rose from 5.1 percent in 2007 to 12 percent or more in 2008 and 2009; real GDP fell by 6.8 percent in 2009 and 4 percent in 2010.  Faced with a collapsing currency, the central bank interest rate was hiked to 18 percent by October 2008.  It could have been worse.  If Iceland’s Supreme Court had not nullified loans indexed to foreign currencies in June 2010, devaluation would have doubled the cost of repaying foreign debt.

Devaluation was supposed to boost GDP by making imports costly and exports cheap, thus narrowing the trade deficit. The current account deficit did fall after 2008, but that always happens when recessions slash imports. Ireland had a current account surplus from 2010 to 2012 without devaluation, even as Iceland’s current account deficit was still 7-8 percent of GDP.

Iceland’s economy grew by 3.1 percent in 2011 when the currency appreciated and the budget deficit was deeply cut to 4.4 percent of GDP.  Devaluation explains the previous spike in inflation and interest rates, but little else. 

Iceland’s statistical growth recovery following the 2008-2011 crisis.

Some notes from the above:

Devaluation policies serves the interests of political agents and their affiliates, allies or cronies than of the general economy.

The devaluation panacea oversimplifies a complex economy operating spontaneously on millions of independently moving parts. The natural result from such conflict: policy failure.

The devaluation snake oil therapy, which operates on the principle of getting something for nothing, also deals with solving short term quandaries that comes with larger long term costs.

Bottom line: Micro issues can hardly be resolved by using macro tools which mistakenly sees the economy as a mechanical machine. Individuals think and act on purpose. Macro economic policies assume otherwise.

Iceland’s recovery has largely been allowing for markets to clear (by not saving banks), and importantly, by the reversal of inflationist policies.

Chart of the Day: 12 technologies will drive our economic future

The Washington Post cites a chart from a study by McKinsey Quarterly:

Most of the aforementioned technologies can be summed as the entwined functionalites of the ongoing revolutions of big data, communications and smart manufacturing. Such technologies are bound to decentralize the global economy that would intensify frictions with the current state of centralized political systems. 

Yet if central bankers and power insatiable politicians have not been pushing the economic system to Hades, I would dwell heavily on the above technologies.

Ex-World Bank Insider: Corruption in the Global financial system Centered on the US Federal Reserve

One doesn’t need to be a conspiracy theorist or an insider to know this

From theNewAmerican.com

A former insider at the World Bank, ex-Senior Counsel Karen Hudes, says the global financial system is dominated by a small group of corrupt, power-hungry figures centered around the privately owned U.S. Federal Reserve. The network has seized control of the media to cover up its crimes, too, she explained. In an interview with The New American, Hudes said that when she tried to blow the whistle on multiple problems at the World Bank, she was fired for her efforts. Now, along with a network of fellow whistleblowers, Hudes is determined to expose and end the corruption. And she is confident of success.

Citing an explosive 2011 Swiss study published in the PLOS ONE journal on the “network of global corporate control,” Hudes pointed out that a small group of entities — mostly financial institutions and especially central banks — exert a massive amount of influence over the international economy from behind the scenes. “What is really going on is that the world’s resources are being dominated by this group,” she explained, adding that the “corrupt power grabbers” have managed to dominate the media as well. “They’re being allowed to do it.”

According to the peer-reviewed paper, which presented the first global investigation of ownership architecture in the international economy, transnational corporations form a “giant bow-tie structure.” A large portion of control, meanwhile, “flows to a small tightly-knit core of financial institutions.” The researchers described the core as an “economic ‘super-entity’” that raises important issues for policymakers and researchers. Of course, the implications are enormous for citizens as well.

Hudes, an attorney who spent some two decades working in the World Bank’s legal department, has observed the machinations of the network up close. “I realized we were now dealing with something known as state capture, which is where the institutions of government are co-opted by the group that’s corrupt,” she told The New American in a phone interview. “The pillars of the U.S. government — some of them — are dysfunctional because of state capture; this is a big story, this is a big cover up.”

At the heart of the network, Hudes said, are 147 financial institutions and central banks — especially the Federal Reserve, which was created by Congress but is owned by essentially a cartel of private banks. “This is a story about how the international financial system was secretly gamed, mostly by central banks — they’re the ones we are talking about,” she explained. “The central bankers have been gaming the system. I would say that this is a power grab.”

The Fed in particular is at the very center of the network and the coverup, Hudes continued, citing a policy and oversight body that includes top government and Fed officials. Central bankers have also been manipulating gold prices, she added, echoing widespread concerns that The New American has documented extensively. Indeed, even the inaccurate World Bank financial statements that Hudes has been trying to expose are linked to the U.S. central bank, she said.

Read the rest here.

All we need is to see the direction of policies, specifically from bail-outs, bail-ins, inflationism and other various forms of financial repression as well as anti-competitive measures to recognize the presence of such dynamic. In short, just follow the money trail.

Kyle Bass: BOJ will have to make buying bonds bigger

The distinguished fund manager Kyle Bass in the following audio interview calculates that the  BoJ’s actions will not be enough to a keep a lid on interest rates. (hat tip Zero Hedge)

He says that the BoJ has programmed ¥ 60 trillion over 2 years which should cover about ¥ 50 fiscal deficit (about 10% of GDP). This leaves $10 trillion room for bond purchases in order to stabilize the bond markets or interest rates. However given the quadrillion JGBs out there, and even if only 5% or $50 trillion gets sold, Mr. Bass says “it doesn’t look to me that the plan is big enough”. And in the attempt to stabilize the market, “the BOJ has to be in the marketplace every single day”

Mr. Bass believes that the BoJ actions may yield short term gains “Abenomics will generate nominal growth in the front end”. He calls Japan stock market buyers as “macro tourists” (that’s yield chasing participants in my terminology) and warns that the public that the “weak yen will not equal higher stocks” where some stocks can be expected to benefit while most will suffer.

So the BoJ will have to bump up the quantity of buying or expect the market's volatility to continue.

Super Abenomics: Japan’s Nikkei Crashes on Rioting Japanese Government Bonds

Just a few days ago, I posted the Economist magazine’s seeming worship of “Abenomics” which featured PM Shinzo Azi as a Superhero.

Sometimes magazine covers can be useful indicators of extreme sentiments or the bandwagon effect via the stages of mania or depression or of crowded trades. Occasionally they serve as key harbingers to major inflection points.

I am not sure if today’s JGB incident represents a major reversal that should usher in a risk off condition, but I am sure that this serves as my alarm bell.

Well, a riot in Japan’s Governments Bonds has sent the Yen in a spike and simultaneously a crash in her stock markets. The Nikkei dived by 7.3%!

First the upheaval in the JGBs.

From the Bloomberg:

Japanese government bonds fell, with 10-year rates touching 1 percent for the first time in a year, on speculation the Federal Reserve will curb stimulus and the Bank of Japan will tolerate an increase in yields.

Japan’s five-year note rate matched the highest in two years after Fed Chairman Ben S. Bernanke said yesterday the central bank may trim bond purchases if policy makers see indications of sustained economic growth. The BOJ injected 2 trillion yen ($19.4 billion) into the financial system to stem volatility following a circuit breaker in JGB futures trading.

The reality is that this has little to do with Ben Bernanke’s latest statement but has everything do with the much touted elixir called “Abenomics”. 

The Bloomberg chart of JGB’s 10 year yield has been climbing since the BoJ’s Kuroda announcement to double her monetary base last April. In other words, the yields has remained lofty even when Japan’s government has tried to calm her down by buying them. 

Today the BoJ bought a record number of yields in an attempt to assuage the markets, from another Bloomberg article:

The Bank of Japan injected 2 trillion yen ($19.4 billion) into the financial system today to stem volatility, as benchmark JGB yields swayed the most since the day after the central bank announced unprecedented bond buying.

The following table form Bloomberg, shows of the surge across the spectrum of the yields of Japan’s bonds, in a month’s period. This comes with the exception the 2 year yield.

I keep repeating that Abenomics is bound for failure for the simple reason that such policies have been founded on economic inconsistencies and premised on hope on the supposed magic of doing the same thing over and over again and expecting different results:

Abenomics operates in an incorrigible self-contradiction: Abenomics has been designed to produce substantial price inflation but expects interest rates at permanently zero bound. Such two variables are like polar opposites. Thus expectations for their harmonious combination are founded on whims rather from economic reality.

Next the Japan’s stock market crash has sent almost the entire Asian region in a sea of red as shown by the table above from Bloomberg, both the Nikkei and the Topix were down 7.32% and 6.87% respectively .

Here is the Bloomberg:

Japan’s Topix index tumbled almost 7 percent, the most since the aftermath of the March 2011 tsunami and nuclear disaster, as financial companies plunged amid rising bond yields. The rout triggered a halt in Nikkei 225 Stock Average futures trading in Osaka.

Consumer lenders lost 11 percent to lead declines among the Topix (TPX)’s 33 industries. Mitsubishi Estate Co., the country’s biggest developer, slid 9.3 percent. Mitsubishi Motor Corp. dropped 14 percent, falling a second day after advancing more than 50 percent in the previous three days. Tokyo Electric Power Co. plunged 13 percent.

And given the stock market’s latest near vertical ascent, the ensuing crash simply accounts as “every action has an equal and opposite reaction”, from the same article:

A measure of share swings surged to its highest in two years. The Topix’s 50-day volatility rose to 28.8, the highest since May 2011, according to data compiled by Bloomberg.

The Topix and Nikkei 225 Stock Average have risen more than 40 percent this year, outperforming all major equity indexes amid unprecedented Bank of Japan easing. The Topix trades at about 1.4 times book value, compared with about 2.5 for the Standard & Poor’s 500 Index and 1.7 for the Stoxx Europe 600 Index.

The coming sessions will be very crucial.

It isn’t the yen or Japan’s stock markets that will be the primary concern rather it is the JGB or Japan’s bond markets that will act as the driving force.

The bond markets has been in a parallel universe or in patent disconnect with the stock markets, where we just saw today the realization of a Wile E Coyote moment.

Previous soaring stock markets amidst unstable bond markets has finally led to a regression to the mean. As today has shown, stock markets are the last to know.

Yet if the BoJ will not be able to tame the bond markets in the coming sessions, despite her intensifying purchases, this increases the risks of a Japan debt crisis, as explained before.

Japan’s debt crisis may come sooner than later.  And today may just be a teaser.

The increasing prospects of a Japan debt crisis could herald a return of a global RISK OFF conditions.

On the other hand, if the BOJ continues to massively inflate; such crisis may metastasize into a currency or a yen crisis or a combo of both.

Everything now will depend on the how Japanese policymakers react and how the global financial markets will respond to them. Remember this isn’t just a Japan affair, but given the immense build up of global bubbles, including the Philippines, all it needs is a trigger for all of them to pop. Japan could play such a role.

Today’s rout in the Japanese financial markets is a taste of the blowback from populist unsustainable inflationist policies.

Moody’s on the Philippines: No Property Bubble, Move along Nothing to see here

An official of Moody’s claims that there has been “no property bubble” in the Philippines.Moving along nothing to see here.

The Businessworld writes,

Real estate has again become a hot-button topic after banks saw their exposure to the industry breach regulatory limits in 2012. At P821.7 billion and comprising 20.9% of their total loan portfolio, the amount exceeded the BSP-mandated 20% cap.

The breach, though, was due to a new definition of "exposure." Banks were required to report not just real estate loans but also investments in debt and equity securities that finance real estate activities. These activities range from the acquisition, construction and development of properties, as well as buying and selling, rental and management.

Banks also had include loans for socialized and low-cost housing developments, which were previously exempted from the reportorial requirements.

Mr. Tremblay said the figure was no cause for alarm, noting: "The new definition of ‘exposure’ includes loans to low-cost and socialized housing and these segments tend to be less susceptible to speculation."

The BSP is mulling raising the 20% cap to accommodate the new definition as well as property market growth since 1997, when the limit was first introduced.

"Prospectively, we are not too fixated on any specific numerical cap. There is no magic number that can determine the point beyond which real estate exposure becomes a credit concern," Mr. Tremblay said.

The focus, instead, should be on factors such as demand and supply, underwriting standards, loan-to-value ratios and the leverage of households and firms. These can more accurately show whether the appreciation of prices and borrowers’ behavior is driven by fundamentals or speculation, he pointed out.

"So far, trends in these areas have remained within reasonable limits," Mr. Tremblay claimed. -

The Moody’s expert says the market should focus on demand and supply. Totally agreed.

But if domestic demand has been growing at anywhere at 6-9%, part of which has been financed by debt, and that the supply side has been growing at the rate of about 25% or more bolstered mainly by credit, then are these not signs of burgeoning imbalances? Particularly the ballooning variance between demand, on one side, and on the other, the growth of credit, as well as, the supply side, are not signs of bubbles? 

And when such exemplary growth in credit and the supply side is being clustered into popular sectors (real estate, shopping malls, casino, BPO vertical offices), these do not account for as signs of asset bubbles? 

Where then is economics in the above article which the Moody’s expert supposedly preaches?

One does not establish the presence or absence of a bubble by reading only statistics and by proclaiming immense faith on authorities for managing them. 

Statistics are historical data. They don’t tell much about the future.

While governments have been pursuing activist policies, this does not ensure the sustainability of current trends for the simple reason that their actions merely signifies as "extend and pretend" or "kick the can down the road". All such actions will have serious ramifications. Japan's much ballyhooed Abenomics has as of this writing triggered riots in the Japanese bond markets. If the riots escalate then we might soon see a debt crisis in Japan that will have a domino effect around the world. Does the Moody's see this?

It’s the same reason why mainstream economists failed to see the bubble which culminated with the Lehman bankruptcy in 2008 from which UK’s Queen Elizabeth censured them. In reality most of them were cheerleading the bubble until the bubble boomeranged on their faces.

Moody’s has also not failed to see the US bubble, but even played an important part in the lowering of credit standard by becoming stamp pads for issuers of structured securities.

Yet what Moody’s ignore, is the most critical factor: the trajectory of credit growth both from the supply and demand side, not limited to real estate but to other sectors associated with them.

Importantly what needs to be established are the incentives that will drive such trajectory.

When the Philippine government promotes zero bound rates to induce “domestic demand” and at the same time reduce SDA rates purportedly for “banks to withdraw some of their funds parked in the BSP, thereby increasing money circulating in the economy” , these policies don’t incentivize or promote debt a build-up?  

And what’s the purpose of credit rating upgrades? 

Investopedia on Credit ratings:

Credit is important since individuals and corporations with poor credit will have difficulty finding financing, and will most likely have to pay more due to the risk of default.

So upgrades extrapolates to an ease of finding credit finance. In short, it is a reward for borrowers or an inducement to borrow. So current upgrades doesn’t provide incentives to further fuel a bubble through more debt?

This is basic economic logic which seem to operate in a vacuum.

Apparently in the eyes and mind of the mainstream, "economics" is a convenient word used to disguise pseudo expertise from the truth and to pander to a politically brainwashed crowd who has been mesmerized by the four most dangerous words of investing, “this time is different”.

Yet unfortunately such mentality is in itself a sign of the manic phase of a bubble cycle in motion. 

Caveat emptor.

US Government Admits: Drone Warfare Killed Innocent Americans

Imperial US foreign policies coursed through drone warfare has killed even their own citizens

From the New York Times: (hat tip Zero Hedge)

In a letter to Congressional leaders obtained by The New York Times, Attorney General Eric H. Holder Jr. disclosed that the administration had deliberately killed Anwar al-Awlaki, a radical Muslim cleric who was killed in a drone strike in September 2011 in Yemen.

The American responsibility for Mr. Awlaki’s death has been widely reported, but the administration had until now refused to confirm or deny it.

The letter also said that the United States had killed three other Americans: Samir Khan, who was killed in the same strike; Mr. Awlaki’s son Abdulrahman al-Awlaki, who was also killed in Yemen; and Jude Mohammed, who was killed in a strike in Pakistan.

“These individuals were not specifically targeted by the United States,” Mr. Holder wrote.

Are these more signs of things to come? Will drones be used against the US citizens in their homeland in the name of public safety?

Cognitive Dissonance and the US Stock Markets

Media, politicians and the US stock market operates in a cognitive dissonance. Cognitive dissonance is the confusion arising from the state of holding (Wikipedia.org) “two or more conflicting cognitions: ideas, beliefs, values or emotional reactions”

First the record run in US stocks has been been attributed to “growing confidence in the U.S. recovery” Good news is read as good for stocks, that's as of the other day.

Then today, falling stocks have been imputed to concerns over a pushback on stimulus; “will scale back its stimulus efforts if the labor market continues to improve”. 

Here good news is seen as bad news.

From the above account, one wonders whether the “growing” economy is really good or bad for stocks? Or whether “growth” has merely served as a cosmetic for the deepening addictions by the markets on the FED's steroids?

More rhetorical conflict of rhetoric from Media, Wall Street, and the US government;

On the one hand, the economy has been exhibiting strength for some of the FED officials to propose tapering of stimulus 

A number said they were willing to taper bond buying as early as the next meeting on June 18-19 if economic reports show “evidence of sufficiently strong and sustained growth,” according to the record of the April 30-May 1 gathering released today in Washington.

“Most observed that the outlook for the labor market had shown progress” since the-bond buying program began in September, according to the minutes. “But many of these participants indicated that continued progress, more confidence in the outlook, or diminished downside risks would be required before slowing the pace of purchases would become appropriate.”

On the other hand, Ben Bernanke contradicts the above by stating that the economy doesn’t seem to be strong enough for premature withdrawal of stimulus

Federal Reserve Chairman Ben S. Bernanke defended the central bank’s record stimulus program under questioning from lawmakers, telling them that ending it prematurely would endanger a recovery hampered by high unemployment and government spending cuts.

“A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further,” Bernanke said today in testimony to the Joint Economic Committee of Congress in Washington.

From Mr. Bernanke’s point of view, “premature tightening of monetary policy could lead interest rates to rise” implies the exposing of the risks of the highly leverage markets and economy. And that such tightening would extrapolate to a bubble bust or in economic gobbledygook “the risk of slowing or ending the economic recovery and causing inflation to fall further”

So essentially, people at the Fed have been talking at different wavelengths. Bernanke's discourse has been premised on the entrenched bubble conditions, whereas other Fed officials have used statistics to generate economic forecasts (or reading history as the future).

Thus Fed officials seem as clueless as to the real direction of the economy or of the markets. Or are they?

And a bollixed FED has been used by the stock markets as a reason to retrace. From intraday gains, US stocks went from green into the red yesterday (stockcharts.com)

Record setting US stocks has been on fire rising for 19 straight sessions before today’s correction and whose winning streak was cut short by cognitive dissonance.

Why is this important? Because, aside from direct and indirect interventions, the state of bewilderment of the causal process of the current environment by the media and political agents has contributed immensely to the skewing of price signals and to the accumulation of imbalances in the system. This has also been used to sabotage gold prices.

Well, Philip Coggan of the Economist Buttonwood fame points to studies reinforcing the “parallel universe” or the growing disconnect between stocks and the real economy. (bold mine)

The annualised growth rate of the US economy in the first quarter was 2.5 per cent; the annual gain in earnings per share was 5.2%; the annualised gain in the market was 46%. Of course, as has been pointed out by the assiduous Marsh, Dimson and Staunton, or by Jay Ritter, there is no clear statistical link between GDP growth and equity returns at all.

The mainstream has now been recognizing this.

And as I have been pointing out this is not your daddy or your granddaddy's stock markets.

And more on why the current environment or the parallel universe is unsustainable, again from the Buttonwood… (bold mine)

The hope is that higher share prices can eventually produce a self-fulfilling cycle via a wealth effect (and on this note, the University of Michigan survey last week showed consumer confidence at a six-year high) or indeed on business investment. Mr Makin notes that real household net worth is up by about $4 trillion over the last year, helped by houses as well as stocks. He estimates the wealth effect at about 4% over a year; thus the boost to consumer spending was $160 billion, or 1% of GDP. This may indeed explain why US consumer have shaken off the effect of the rise in payroll taxes this year.

But the offset of this wealth effect is that the household savings rate fell to 2.6% in the first quarter, down from 5.1% in 2010. As Mr Makin points out, this is ominously similar to the pre-2007 pattern of high consumption based on the hope that asset prices would stay high. The potential long-term problem here is that asset prices tend to revert to the mean; people may be saving too little for their retirement on the view that markets will do all the work. As in 2007 and 2008, they may get a nasty shock later on. One could make quite a bearish case for US equities in the long run, on the grounds that share price valuations (as measured by the Shiller p/e) are higher than average and profits are at a post-1947 high as a proportion of GDP.

The lesson is whatever statistical growth seen from today is mostly a reflection of credit driven elevated prices of financial assets rather from real economic growth. The same holds true for the Philippines. 

The mirage of statistical growth. 

Hence Ben Bernanke realizes that any pullback of steroids would expose on this sham that would undermine the banking sector’s balance sheets.

Also an ‘exit’ would also mean the pulling of the proverbial rag underneath the FED’s monetization of US debts which hardly anyone talks about.

Bottom line: The protection of the banking sector and the Fed’s financing of US government debt have been the main pillars that undergirds the FED’s credit easing policies. That’s why such “exit” or “withdrawal” blarney are what I call as poker bluff. The Fed cannot afford it.

IN withholding the truth, the Fed’s communication’s strategy seems as the guileful employment of cognitive dissonance in order to confuse the public.

As English novelist Eric Arthur Blair popularly known for his pen name George Orwell wrote in Politics and the English Language (italics original)

Political language…is designed to make lies sound truthful and murder respectable, and to give an appearance of solidity to pure wind. One cannot change this all in a moment, but one can at least change one's own habits, and from time to time one can even, if one jeers loudly enough, send some worn-out and useless phrase — some jackboot, Achilles’ heel, hotbed, melting pot, acid test, veritable inferno, or other lump of verbal refuse — into the dustbin where it belongs.

Quote of the Day: Libertarianism: Putting Justice, Truth, Goodness and Beauty into Reality

Libertarianism is not merely the intellectual contemplation of a wonderful, true and just political philosophy, it's not just the esthetic contemplation of a beautiful ideal, the ideal of a world without organized aggression, a world of harmony, of freedom, of prosperity, of mutual cooperation through voluntary activities in free markets. It is, of course, all of that. Because we become Libertarians in the first place because we fall in love, so to speak, with the goodness, the truth and the beauty of Libertarianism. But we Libertarians, it seems to me, are not content with contemplating justice, with contemplating truth, goodness and beauty. We're not playing intellectual games. We mean to change the world. We want to put this thing into reality.

This snippet from a talk given by "Mr. Libertarian", Dr. Murray N. Rothbard at the First World Libertarian convention in 1982

I posted earlier the video "The Six stages of the Libertarian movement" here.

Pls read the rest of the transcript at the lewrockwell.com

War on Coins: European Commission Proposes 1, 2 cent phase out as German Official Balks

Euro Commission officials has proposed to phase out small denomination coins. Such proposals follows other nations like Canada,  Netherland and Finland whom has similarly embarked on extinguishing coins from circulation.

From Reuters:

Saving pocket change may not end the euro zone crisis, but the European Commission hopes that scrapping the smallest coins could help penny-pinching governments cut costs.

The European Commission outlined proposals this week for the 17 euro zone countries to scrap their 1 and 2 cent coins, leaving 5-cent pieces as the smallest in circulation.

The Commission says the cost of making the coins has exceeded their face value for the past 11 years, effectively costing member states 1.4 billion euros ($1.8 billion).

More than 45 billion of the 1 and 2 cent coins have been minted since the euro entered circulation in 2002, but many are now buried behind sofas, lost in back pockets or left on the street rather than making their way to cash registers.

While scrapping them all together may appear to make sense, some consumers worry that rounding prices up to the nearest 5 cents will prove inflationary. On the other hand, rounding prices down to the nearest 5 cents might be beneficial.

Some observations:

European officials admit that these coins have greater value than the designated official face value.

Here is the content of the euro coins, according to the Wikipedia.org

The euro 1 and 2 coins are two-toned. The "gold" is an alloy, 75% copper, 20% zinc and 5% nickel. The "silver" is cupronickel, 75% copper, 25% nickel. The 10, 20 and 50-cent coins are a proprietary alloy known as "Nordic gold", consisting of 89% copper, 5% aluminium, 5% zinc and 1% tin. The 1, 2 and 5-cent coins are copper-coated steel fourrées. The copper alloys make the coinage antimicrobial.

So for the EU bureaucracy to cut further losses, it has been alleged, coin production need to be halted.

Next, EU officials imply that the public has been unintentionally hoarding coins: “buried behind sofas, lost in back pockets or left on the street rather than making their way to cash registers”.

Authorities acknowledge that such coins have higher value, but they insinuate that their constituents, the average citizens, don’t see or realize this. So the public is completely ignorant from real world affairs.

Such is an example where authorities are engaged in what seems as rhetorical sophistry which media imbibes as the gospel of truth.

In reality, such proposal has been all about political subterfuge.

Even if the ECB has been inflating less than her peers, they have been inflating. (charts from Cumber.com)

Yet by holding coins, one’s resources will affected less from the stealth transfer of being wealth conducted through inflationist policies.

In other words, coins provides refuge against policies that facilitate indirect looting of people’s savings, especially during run away inflation.

Recognizing this, the German central bank or Bundesbank president Jens Weidmann in an interview at the Bild.ge indirectly expressed opposition on such proposals…

In the German population, the desire to hold on to the coinage. Personally, I can only agree with that.

This is natural given the trauma from horrors of the Weimar hyperinflation as shown by the coin above in stating that “On 15 November 1923 1 pound of bread cost 80 billion, 1 pound of meat: 900 billion, 1 glass of beer: 52 billion”

Albeit, Mr. Weidmann leaves the decision on reducing the circulation of coins to the EU finance ministers than to central bankers.

Again whether it is cash transactions, gold and other precious metals, crypto-currencies like bitcoins or even government made coins, world governments have been working around the clock to ensure forced access on people’s savings.

An Example of Mania Thinking to Justify the US Stock Market Bubble

Look at the so-called “analysis” below from the following Bloomberg article:

A rising dollar may help push U.S. stocks higher by giving international investors more incentive to buy, according to Michael Shaoul, chief executive officer of Marketfield Asset Management.

The CHART OF THE DAY displays the performance of the Standard & Poor’s 500 Index and the Dollar Index since 1994 in the top panel. The correlation between the gauges, based on the most recent 200 weeks of trading, appears in the bottom panel.

March marked the first time since 2005 that the Dollar Index, which IntercontinentalExchange Inc. uses to track the currency’s value against the currencies of six of the largest U.S. trading partners, had a positive correlation with the S&P 500. Since then, the relationship has grown stronger each week.

“Foreign capital flows are starting to be attracted to the U.S. equity market” in a way last seen when the Internet bubble sent stocks surging in the 1990s, Shaoul wrote. The New York-based analyst added that he expects the dollar and share prices to rise together for the next few months.

One doesn’t need to be an “expert” to note of the bandwagon effect from higher financial market prices. This is not just an example of reflexivity—feedback loop between expectations and outcomes, it is an example of survivorship bias (looking only at the winners) and most importantly it is an example of the incentive to yield chase via momentum trade. People simply love to chase winners or the popular. The same applies to politics.

Here foreign capital flows serve merely as fundamental “rationalization” for the pattern and narrative seeking momentum trade behavior.

Look at the provided chart, while there are periods of extended tight positive correlations, there are also prolonged periods of negative correlations. Importantly, there have been whipsaws such as 1996 or 2002. In short, the correlation trade, between the S&P and the US dollar, has hardly been a sure thing.

Given today’s environment, a higher dollar means a bubble or credit fuelled yield chasing process is in progress. The artificial boom becomes a magnet for international speculators. Thus “foreign capital flows”. The same applies to the Philippines or ASEAN.

It also means that the race to devalue everyone’s currency has temporarily been tilted in favor of the US dollar. The marketplace temporarily expects counterparts of the US dollar to relatively devalue more. For instance Japan’s Abenomics may have made the US dollar as interim shock absorber for capital flight.

The strength of the US dollar also means that given today’s financial globalization, political-economic woes, such as the Eurozone, having been aggravated by the prospects of widening bank deposit seizures, has resulted, not only to reaching for yields for the benefit of the US dollar, but again the US dollar as interim refuge for capital from fears of confiscation.

But what this article fails to cite is the economic aspect: does higher prices lead to more demand or less? What if the booms turn into a bust? What if the FED revs up on the $85 billion a month purchases? What if the hibernating bond vigilantes in the US reawaken? What if for some reason or another, financial markets lose confidence on the US dollar? What if there will be a run on fiat money in general or across the world?

Banking on correlation without understanding the causal process signifies a hazardous undertaking.

The above oversimplified justification of buying stocks by using the US dollar correlation is an example of bubble mentality.

Caveat emptor.

First Paper Gold Exchange Casualty? Hong Kong Mercantile Exchange Closes, Settles in Cash

Is the closing of the Hong Kong Mercantile Exchange signs of things to come for paper gold exchanges?

From the Hong Kong Mercantile Exchange:  (hat tip Goldseek.com)

The Hong Kong Mercantile Exchange (HKMEx) announces today it has decided to voluntarily surrender the authorisation to provide automated trading services (“ATS”) granted by the Securities and Futures Commission (“the SFC”).

With immediate effect, no new orders may be placed and all open positions will be financially settled at the settlement price determined by HKMEx and its designated clearinghouse.

The voluntary surrender decision was made to enable the Exchange to re-align its strategy with the new industry environment since its trading revenues have not been sufficient to support operating expenses and, as a result, its inability to meet the required regulatory financial conditions.

While trading on the Exchange will discontinue, HKMEx as an organisation will continue to operate with its existing staff, and will focus on developing new products including renminbi-denominated precious and base metals contracts that will better meet customer needs. It also intends to re-apply at an appropriate time for an ATS authorization to launch these products with stronger and more effective market maker programs.

“The favourable conditions under which HKMEx was founded have not changed. Global commodity demand continues to shift towards Asia as the region undergoes sustained growth, presenting great opportunities that we will continue to exploit,” said Barry Cheung, Chairman of HKMEx. “Our priorities now are to protect members’ interests by ensuring effective closing of open positions while strengthening our shareholding base and developing new products that play to our distinctive strengths.”

In closing out the open positions, the Exchange has developed a plan in consultation with the SFC to ensure the process is orderly and that investors are well informed of the matter.

Will more default soon (out of supply shortages)? Things are really getting to be a lot interesting.