Phisix: US Debt Ceiling Deal and UNTaper Spurs a Global Melt UP

Melt Up!

Melt UP!

Suddenly stock markets metastasize into a frenetic melt-up mode.

In the US, the S&P 500, the S&P 400 Mid-caps and the small cap Russell 2000 set new record highs. 

The German Dax and the French CAC also carved fresh landmark highs. 

In Asia, Australia’s S&P ASX, and India’s Sensex shared a similar feat. Ironically just a few months back the Indian economy seemed as staring into the abyss—to borrow from German Philosopher Friedrich Nietzsche[1]. How confidence changes overnight

And knocking at the door of historic highs are New Zealand Exchange 50 Gross, South Korea’s KOSPI, Taiwan’s TWSE, Hong Kong’s Hang Seng, and Malaysia’s KLSE

Media explains the melt up as a function of the debt ceiling deal and extended US Federal Reserve ‘credit easing’ stimulus. From Bloomberg, “U.S. stocks rose, sending the Standard & Poor’s 500 Index to a record, as speculation grew that the Federal Reserve will maintain the pace of stimulus after Congress ended the budget standoff.”[2]

Thus the common denominator in explaining the melt-up has been the market’s worship of debt expressed via the orgy of the speculative hunt for yields in the asset markets, particularly the stock markets.

Will the global melt-up influence the Phisix, the likely answer is yes. But….

How the FED Alters the Priorities of US Corporations

Goldman Sach's chief US equity strategist, David Kostin has been quoted as attributing the current US stock market surge on P/E multiple expansion, “The S&P 500 has returned 22% YTD driven almost entirely by P/E multiple expansion rather than higher earnings.”[3]

 

This means record US stocks has hardly been about earnings growth but of the aggressive bidding up of the equities.

More signs of the yield chasing frenzy.

In addition, as pointed out above by Blackstone Group’s Byron Wien[4], S&P 500’s net income has been on a decline since 2010. This decline has been accompanied by a slowing of earning per share growth (y-o-y).

Yet, the modest gains in the growth rate of the S&P’s EPS have mainly been bolstered by share buybacks. 

And as previously pointed out[5], a substantial portion of corporate share buybacks has been financed by bonds which remains a present dynamic[6]. 

In other words, the FED’s easy money policies, including the “UNTaper” have been prompting many publicly listed companies to shore up or ‘squeeze’ earnings growth via debt-financed corporate buybacks meant to raise prices of their underlying stocks.

Share buybacks has essentially substituted the capital or investment based expansion or the organic earnings growth paradigm. Said differently, publicly listed corporations have joined the herd in the feverish speculation on stocks rather than investing in the real economy.

This also means that the yield chasing mentality has infected the corporate board rooms, where corporate models appear to have been reconfigured to focus on the immediate attainment of higher share prices. 

And a recent research paper has underscored such changes. Stern School of Business John Asker, Harvard’s Joan Farre-Mensa and Stern School of Business Alexander Ljungqvist finds[7], (bold mine)

Listed firms invest substantially less and are less responsive to changes in investment opportunities compared to matched private firms, even during the recent financial crisis. These differences do not reflect observable economic differences between public and private firms (such as lifecycle differences) and instead appear to be driven by a propensity for public firms to suffer greater agency costs. Evidence showing that investment behavior diverges most strongly in industries in which stock prices are particularly sensitive to current earnings suggests public firms may suffer from managerial myopia.

So short-termism, mainly brought about by the Fed’s policies, has afflicted many of the publicly listed firm’s priorities. Many executive officers and shareowners have presently elected to use the unsustainable speculative financing model of boosting earnings that yields temporal benefits for them.

This essentially defies Ben Graham’s 1^st rule of margin of safety where companies should stick to what they know or ‘know your business’ and to avoid to making ““business profits” out of securities—that is, returns in excess of normal and dividend income” as I showed last week[8].

Yet all these will depend on the persistence of easy money regime, the suppression of the bond vigilantes and the sustainability of debt financed buyback model.

So while most publicly listed US companies have yet to immerse themselves into Ponzi financing, sustained easy money policies have been motivating them towards such direction.

A Dot.com Bubble Déjà vu? Google as Symptom?

The scrapping for yields has impelled many to jump on the IPO bandwagon despite poor track record of newly listed companies. 

According to the Wall Street Journal, 19 out of 28 or 68% of the technology issues which debuted this year has been unprofitable over the last fiscal year or during the past 12 months, which has been the highest percentage since 2007 and 2001. Yet punters wildly piled on them.

The same article notes of intensifying signs of mania “The excitement over companies’ potential rather than their present results is the latest sign in the stock markets of a rising tolerance for risk. The U.S. IPO market, often seen as a gauge of risk appetite because the stocks don’t have a track record, is on pace to produce the most deals since 2007, according to Dealogic”[9]

And Art Cashin UBS Financial Services director of floor operations at a recent CNBC interview expressed worries over a remake of the dotcom bubble, “The way people are treating technology companies, it's starting to feel a bit too much like 1999 and 2000”[10]

1999, 2000 and 2007 signifies as the zenith of the dotcom (1999-2000) bubble and the US housing bubble (2007)

Has Google been leading the way?

Google’s [GOOG] stock breached past the US$ 1,000 levels (particularly $1,011.41) with a breath-taking 13.8% gap up spike last Friday.

At market cap of over $335 billion, Google surpassed Microsoft [MSFT] and is now the third largest company after Apple [APPL] and Exxon Mobile [XOM][11].

Since Google is a member of the S&P 500[12], Friday’s quantum leap materially contributed to the new record of the major S&P bellwether (SPX). 

And as shown in the same chart, the S&P 400 mid cap and the small cap Russell 2000 flew to the firmament last week.

Three of the 5 largest S&P companies are from the information technology. In addition, technology comprises the largest sectoral weighting at 17.7% on the S&P, followed closely by financials 16.5%, and from a distance, Healthcare 13.2%, consumer discretionary 12.3% and the others. 

Should the technology mania persist, this will be reflected on the relative strength of sector, as well as, through a bigger share of the same sector in the S&P 500’s sectoral weighting.

Surprise 3rd quarter revenue growth of 23% from advertising part of which came from the mobile platform and Wall Street “emotion” has been attributed to Google’s spectacular price spike.

This Yahoo article[13] says that part of adrenaline rush on Google’s share prices has been to due low exposure on stocks by institutional investors (bold mine)

Google is higher today because it reported strong numbers, but it's not a 10% better company today than it was 24 hours ago. Wall Street is in a manic phase at the moment. For all the terrific things about Google's third-quarter, the best thing about the report was that it came on a day when institutional investors are feeling like they have far too little exposure to stocks. The average hedge fund was up less than 10% through September and there weren't many people expecting this race to new highs on the S&P500 (^GSPC) on the heels of debt ceiling debacle.

In short, more signs of frantic yield chasing.

Google’s reported 3rd quarter earnings of $10.74 per share[14], which came ahead of consensus estimates of $10.34.

While I am a fan of Google’s products, I hardly see value in Google’s stocks. 

Yahoo data[15] shows that Google has a trailing PE (ttm or trailing twelve months intraday) at 27.52, forward PE (fye or fiscal year end: December 2014) at 19.42, Price/book (mrq or most recent quarter) 3.75 and enterprise multiple of enterprise/ebitda (ttm or trailing twelve months) at 16.14.

The above multiples exhibit how richly priced GOOG has been

The same applies to the general stock market

Based on the prospects of continued declining earnings growth rate and based on the trailing PE[16], as of Friday’s close, the Dow Industrials has a ratio of 17.24, from last year’s 14.47, the S&P 500 at 18.32 from 17.03 a year ago and the Nasdaq 100 at 20.88 from last year’s 15.24. 

Most shockingly, the small cap Russell 2000 has a PE ratio of 86.58 from 32.69 a year ago! The Russell PE ratio more than doubled this year. Wow.

While I have not encountered GOOG resorting to share buybacks yet, GOOG’s increasing recourse to debt to finance[17] her operations has hardly been an attraction.

What perhaps may justify GOOG’s current prices is the prospect of success from its upcoming products such as the driverless cars, Google Glass and the cloud based planning applications called the “Genie” targeted at the construction industry[18].

But this would be audacious speculation.

And overconfidence has become a dominant feature.

Aside from stock market bulls brazenly hectoring and scoffing at the bears, market participants have been conditioned to see stock markets as a one way street.

For instance, record stocks which brought about the biggest single-day decline in U.S. equity volatility since 2011 rewarded the bullish option traders who aggressively doubled down on bets that the bull market in stocks would survive the default deadline[19].

The consensus has been hardwired to see any stock market decline as opportunity to “double down”.

For the bulls, risks have vanished. The stock market’s only designated direction seems up, up and away.

Yet the bullish consensus seems oblivious to the reality of the deepening dependence the stock market (and even housing) has been to the Fed’s credit easing measures. They are ignoring the fact that corporate business models have been evolving towards speculation, rather than to productive investments. Expanding price multiples, declining net income and EPS growth rate, increasing dependence on buybacks and debt financing for speculation are symptoms of such transition.

Aside from corporations, the convictions of bullish market participants are being reinforced by evidences of more aggressive actions.

While I don’t expect the FED to take the proverbial punch bowl away, everything depends on the actions of the bond vigilantes. For now, the bond vigilantes have been in a retreat. The hiatus by the bond vigilantes provides room for the bulls to magnify on their advances. Question is for how long?

If QE 3.0 in September of 2012 pushed backed the bond vigilantes for only 3 months, will the euphoric effects of the UNtaper, Yellen as Fed Chairwoman, debt ceiling deal last longer?

The French Disconnect

As I pointed out above, the UNtaper-debt ceiling deal has incited many markets to a melt-up mode which media rationalizes as “recovery”.

The French stock market, which is also at record highs, serves as an example.

The CAC 40 has been rising since the last quarter of 2011. Yet during 2012-2013, as the CAC rose, the French economy vacillated in and out of negative growth rates or recessions. While economic growth statistics reveal of a recent recovery, sustainability of the recovery is unclear.

French industrial production was down 1.6% in August[20], Unemployment rate is at the highest level since 1998 at 10.9% at the second quarter[21]. August loans to the private sector have been trending downwards since May[22]. Fitch downgraded France last July[23]. [note to the aficionados of credit rating agencies, French downgrade coincided with higher stocks]

Yet the CAC continues to trek to new highs. What gives?

Notes on the Debt Ceiling Deal

Furloughed Federal employees will receive a back pay[24]. This means government shutdown for furloughed employees extrapolates to a paid vacation.

The bi-partisan horse trading resulted to insertions of various goodies (Pork) for politicians. This includes $174,000 death benefit for Sen. Frank Lautenberg’s widow[25]

The US treasury will be authorized to suspend the debt ceiling as I earlier posted[26]. A limitless borrowing window will be extended until February 7, 2014[27].

This marks the second time when the debt ceiling has been unilaterally suspended. The first occurred this year from February 4, 2013 to May 18, 2013[28].

What seems as an increasing frequency of the suspension of the debt ceiling (twice this year) may presage a permanent one.

A day past the US debt ceiling deal, US debt soared by a record $328 billion. This has shattered the previous high of $238 billion set two years ago as the US government reportedly replenished its stock of “extraordinary measures” used to keep debt from going past he mandated level[29]. This brings US debt to $17.075 trillion Thursday.

Two days after, US debt further expanded by $7 billion to $17,082,571,268,248.24[30].

Debt levels growing at a rate far faster than the rate of economic growth is simply unsustainable.

Since 2008, US Federal has grown past $ 7 trillion whereas the economy grew by nearly $1 trillion[31].

There is always a consequence to every action, so will the above.

Yet this is what equity market praises.

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[1] Friedrich Nietzsche CHAPTER IV: APOPHTHEGMS AND INTERLUDES Beyond Good and Evil, p 107 planetpdf.com

[2] Bloomberg.com S&P 500 Surges to Record on Fed Bets After Debt Deal, October 18, 2013

[3] Zero Hedge Goldman: Entire S&P Move Higher Is Due To Multiple Expansion; Shiller P/E Says 30% Overvalued So... Buy

[4] Business Insider Net Income is Actually Declining even as Earnings Rise, Wall Street's Brightest Minds Reveal THE MOST IMPORTANT CHARTS IN THE WORLD, October 9, 2013

[5] See Phisix: Rising Systemic Debt Erodes the Margin of Safety October 14, 2013

[6] Reuters.com Bond-backed stock buybacks remain in vogue September 6, 2013

[7] John Asker, Joan Farre-Mensa and Alexander Ljungqvist Corporate Investment and Stock Market Listing: A Puzzle? April 22, 2013 Social Science Research Network

[8] See Phisix: Rising Systemic Debt Erodes the Margin of Safety October 14, 2013

[9] The Wall Street Journal Market Pulse In Latest IPOs, Profits Aren’t the Point October 11, 2013

[10] CNBC.com Cashin: Tech valuations remind me of dot-com bubble October 17, 2013

[11] FoxNews.com Boom: Google Zooms 13% to a Record High; Market Cap Tops $335B October 18, 2013

[12] S&P Dow Jones McGraw Hill Financial S&P 500 Indices Fact Sheet

[13] Jeffe Macke Is Google Worth $1,000 a Share? Yahoo.com October 18, 2013

[14] Google Investor Relations Google Inc. Announces Third Quarter 2013 Results

[15] Yahoo Finance, Google Inc. (GOOG) Key Statistics

[16] The Wall Street Journal Market Data Center US Stocks

[17] 4-traders.com Google Inc (GOOG)

[18] Businessinsider.com Google's Secret Project 'Genie' Could Transform The Construction Industry October 18, 2013

[19] Bloomberg.com VIX 21% Tumble Means Shorts on Volatility Double Money October 17, 2013

[20] Tradingeconomics.com FRANCE INDUSTRIAL PRODUCTION

[21] Tradingeconomics.com FRANCE UNEMPLOYMENT RATE

[22] Tradingeconomics.com FRANCE LOANS TO PRIVATE SECTOR

[23] Bloomberg.com France Loses Top Credit Rating as Fitch Cites Lack of Growth July 13, 2013

[24] Fox News.com Senate budget deal provides back pay for furloughed federal workers October 16, 2013

[25] Abcnews.com $174,000 to a Senator’s Widow and Other Surprises in the Fiscal Compromise Bill October 16, 2013

[26] See Quote of the Day: There is now No Limit in government borrowing October 18, 2013

[27] US Congress H.R.2775 - Continuing Appropriations Act, 2014

[28] The Foundry Debt Ceiling with $300 Billion in New Debt, Heritage Foundation, May 19, 2003

[29] Washington post U.S. debt jumps a record $328 billion — tops $17 trillion for first time October 18, 2013

[30] Brilling.com U.S. NATIONAL DEBT CLOCK

[31] Lance Roberts The Long Game Of Hiking The Debt Ceiling STA Wealth October 11, 2013

When Will Century Properties Group Wean from her Dependence on Debt?

I have been pointing out that even in the Philippines, publicly listed companies have been increasing their exposures on unnecessary risks via increasing debt loads in the hope of extracting yields or earnings grounded in the belief that good times lasts forever.

I have pointed to SMC[1] and SM Investments[2] as examples.

Before I proceed I would like to restate my objectives for the following discussion

The following doesn’t serve as recommendations. Instead the following has been intended to demonstrate the shifting nature of business models by major firms particularly from organic (retained earnings-low debt) growth to aggressive leveraging or the increasing use of leverage to amplify or squeeze ‘earnings’ or returns, the deepening absorption of increased risks in the assumption of the perpetuity of zero bound rates, and how accrued yield chasing by the industry induced by zero bound rates has pushed up property prices

The flow of my analysis has always been patterned after “follow the money trail”. This is why I have opted to use free cash flow relative to debt as measure for risks.

Free cash flow is the lifeblood of any business[3]. The importance of free cash flows as highlighted by Q Finance[4] (bold mine)

Unlike earnings, free cash flow represents real cash. It is a very useful way to assess the financial health of a company as it is what is left after all the accounting assumptions built into the earnings have been stripped away. A company may seem to be generating high earnings, but only free cash flow indicates whether any real money has been generated in a designated period. Ultimately, the stock market’s estimate of how much free cash flow a company will generate in the future is reflected in the share price.

Benjamin Graham’s value investing[5] has essentially centered on debt, profit margins and cash flows.

It is not my intent to flaunt financial gibberish—to paraphrase Warren Buffett (the value investor and not the crony), by doing equations with Greek letters on them—just to look sophisticated. Superficial knowledge in numbers really represents negative knowledge or knowledge that is wrong and don’t work.

As the late economic historian Peter Bernstein warned[6],

Our lives teem with numbers, but we sometimes forget that numbers are only tools. They have no soul; they may indeed become fetishes.

My concern today is the growing use of leverage by elite property developer Century Properties Group [PSE: CPG]

CPG is easily one of the high profile standouts in the Philippine property development sector with signature projects tied to American celebrities such as the $150 million (Donald) Trump Tower and the Paris Hilton designed amenities of Century's Azure Urban Resort Residences—a beach club[7].

According to the CPG’s profile at the PSE

As of December 31, 2012, the Company completed 21 condominium and commercial buildings (5,530 units) with a total of gross floor area of 669,857 square meters. Among CPG's developments include the Essensa East Forbes and South of Market in Fort Bonifacio, Taguig City; SOHO Central in the Greenfield District of Mandaluyong City; Pacific Place in Ortigas, Pasig City; and a collection of French-inspired condominiums in Makati City called Le Triomphe, Le Domaine and Le Metropole.

According to CPG’s second quarter[8] cash flow statement, while income grew by 15.96% from last year, interest expenses ballooned by 416.07%. This resulted to negative cash flow from operations of 173 million pesos compared to last year’s 1.823 billion (net of interest and taxes). This year’s improvement may have been due to increased collections from sales. But still a deficit.

And in addition to the negative cash flows from operations, mostly due to investment properties, CPG generated a cash deficit of 539.7 million pesos from investing activities this first semester, as compared with 262.5 million pesos over the same period last year.

The combined deficits have been more than offset by cash flows from sale of equity shares (1.584 billion pesos) and by increasing debt (222.1 million pesos).

The same dynamics can be seen from last year sale of equity shares (2.187 billion) and by increasing debt (284.1 billion pesos)

In CPG’s 2012 annual report[9], in 2012 CPG’s income almost doubled. However interest expense jumped by 20%.

Since 2010, CPGs ‘cash used in operations’ (before interest and income charges) have been in a deficit.

In 2012 CPG added 800 million pesos worth of investments which compounded cash deficits from investing to 863 million pesos.

So how did CPG finance the 2012 cash deficit from operations of 3.077 billion pesos (before interest and taxes) and deficit from investing activities of 863 million pesos? By borrowing money 2.78 billion pesos and sale of shares worth 2.19 billion pesos.

So far CPG’s core business has been inadequate to service the company’s debts and thus has resorted to borrowing aside from relying on cash proceeds from the company’s listing in the PSE in 2011.

The company’s long term debt of 3.367 billion pesos have mostly been in bank loans and partly on CTS (contract to sell) financing.

CPG has 1.794 billion pesos in cash and cash equivalent. This represents around 53% of the total debt. This also means CPG has a significant cash cushion to burn while waiting for the core business to turn positive.

Nonetheless if the vacancy rates in the high end property sector as noted last week[10] continue to rise, which likely means the slowing of top line figures, then CPG’s cash hoard will eventually be consumed. CPG will then have to rely on more debt or further sale of her assets (or inventories at lower prices).

Of course CPG debt exposure (3.367 billion pesos) to the financial system is minute compared to San Miguel (324 billion pesos adjusted for the sale of Meralco) or CPG hardly poses as systemic risk.

But again the point here is that zero bound rates has prompted aggressive leveraging and risk taking by companies such as SMC, SM and CPG.

So yes stocks may continue rise, but if these companies continue to absorb more risks via more debt without improving core businesses, and if economic conditions change enough to expose their vulnerabilities whatever gains today may be lost in a snap of finger.

[Updated to add: correction on two numbers: 539.7 billion and 222.1 billion altered to million]

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[1] See Why San Miguel Corporation Looks Vulnerable September 23, 2013

[2] See Phisix: Moody’s Sees Bubbles as Structural Shift to Higher Growth October 7, 2013

[3] Wikipedia.org Cash flow forecasting

[4] Q Finance Understanding Free Cash Flow

[5] Investopedia.com The Greatest Investors: Benjamin Graham

[6] Peter L. Bernstein Against the Gods: The Remarkable Story of Risk John Wiley and sons p.7.

[7] Rappler.com From Paris Hilton to Donald Trump, Century Properties' celebrity ties June 26 2012

[8] PSE.com.ph CENTURY PROPERTIES GROUP INC 2^nd quarter report (as of June 30, 2012) SEC Form 17Q Report August 14, 2013

[9] CENTURY PROPERTIES GROUP INC Annual Report SEC FORM 17-A April 16, 2013

[10] See Cracks in the Philippine Property Bubble? October 7, 2013

Video: Competition, Beer & Diversity

This cool video relates market competition in the beer industry with biodiversity (hat tip Cafe Hayek)

Cheers!

Robert Wenzel warns US citizens to move their money out of the banking system

The US banking system appears to be in preparation for a Cyprus like deposit bail-in/capital controls by making withdrawals in the banking system more difficult.

Writes Austrian economist Bob Wenzel at the Economic Policy Journal: (hat tip Lew Rockwell)

I am now advising that your money be moved outside the US banking system. Within the last 24 hours, I have learned of two major banks that are making it difficult for you to send international wires or draw out large amounts of cash. Both JPMorganChase and HSBC USA have instituted new policies which will make it difficult for you to withdraw your funds in certain ways. This is not good. There are apparently some workarounds relative to these policies, but just try setting up those workarounds when you want to move your money during some kind of panic.

This is what you will face:

Bank line in California in 2008 at IndyMac Bank

Totalitarians don't take away all your freedoms at once. They do it in incremental measures. Watch the movie The Pianist to understand how many Jews ended up in gas chambers by shrugging off early totalitarian measures.

The prevention or delaying of certain customers from sending international wires, and JPMorganChase stopping some accounts from withdrawing large amounts of cash,  is a serious signal that we are well along the way to a banking sector that doesn't respect its customers and has no compunctions about preventing customers from pulling out their money, if the banks deem it in their interest to prevent such withdrawals.

Bottom line: You are playing with fire if you keep any serious amount of money in a US bank.

The above echoes Sovereign Man’s Simon Black’s warning on the imposition by the Consumer Financial Protection Bureau (CFPB) to “limit cash withdrawals and ban business customers from sending international wire transfers” as I earlier posted here.

If the US economy has indeed been booming, then why has US political authorities been resorting to discreet imposition of capital controls? Don't be misled by the market melt-up, the above are signs of desperation rather than of optimism.  

UPDATED TO ADD: To my US based readers, pls take all the necessary precaution.

Philippine Politics: South Korean War Jets Means Bigger Taxes and More Financial Repression

From Today’s Inquirer headlines

Move over. The big boys are coming.

President Benigno Aquino III said the Philippines was close to finalizing a deal with a state-owned Korean aerospace firm to buy a squadron of FA-50 fighter jets worth P18.9 billion—a move seen to bolster the country’s aerial power and defend its territory in the disputed West Philippine Sea (South China Sea).

Mr. Aquino said he discussed the procurement of 12 brand-new multirole combat aircraft from the Korea Aerospace Industries Inc. (KAI) when he met with South Korean President Park Geun-hye at the Blue House, South Korea’s seat of power.

He said it was part of the commitment of both countries to improve their military cooperation, in line with a memorandum of understanding they entered into on Thursday.

The first statement should have read 

Filipino taxpayers beware. The big taxes are coming

Funny how media glamorizes what has been sold by political agents to the public as patriotic mirage of defending domestic territories. In reality, the territorial dispute has served as smoke screen for expansionist government via bigger deficit spending, more political control (lesser civil liberties), promoting US bases and the military industrial complex (here and abroad)

As the recent Zamboanga City crisis has revealed, superiority and capability plays little in the way the Philippine military operates. The sordid Zamboanga episode exhibits how the much 'superior' Philippine military bungled their operations relative to a much ill equipped, inferior in numbers and in training insurgents (Wikipedia note; MNLF participants 500, Philippines army participants 5,000 with tanks personnel carriers, and air support—attack aircraft, helicopters). 

Yet it took 16 days for the military to crush the insurgents (casualties Philippine military: 25 dead 184 wounded, MNLF: 183 dead, 292 captured). This is hardly an example to justify the government's claim to increase defense spending.

And it seems no more than wishful thinking for anyone to believe that new ‘modern’ armaments will serve to neutralize the far superior nuclear and drone equipped Chinese army. A chart comparing the US and Chinese military in Asia, I have previously posted here.

The reality is that invoking nationalism to defend “insignificant scrubby rocks” (John Keller) which supposed ‘rich’ resource reserves will only be beneficial to politically connected allies (cronies) via service contract permits issued by the government.

Societies hardly get rich from resources, they get rich from free trade, the market economy or economic freedom. 

Natural resources have in fact been a blight to many countries. This has been known as the resource curse. Resource revenues tend to cover up on government's mismanagement. Also the ruling elite who control these resources tend to pushback on economic reforms.

Yet politicians have been agitating for war, whose benefits will accrue to a few and whose costs will be distributed and paid for by the productive agents of the Philippine society.

Spurious nationalism will be funded by bigger taxes and by more financial repression (inflationism, negative rates, deposit caps and other capital controls)

Of course in case of actual shooting encounters, it won’t be the politicians life whom will be at stake but the lowly foot soldier, who either earnestly believe they are fighting for a righteous cause or out of the lack economic opportunities. Unfortunately they serve as unwitting pawns of grandstanding politicians.

But the best way to resolve such impasse will be to deepen trade and commercial relationships that will promote deeper social interactions that would empower the citizenry rather than brinkmanship politics from politicians.

As I have been saying, all these has partly been about promoting the return of the US military bases—a legacy the incumbent administration wishes to fulfill which had been terminated in 1992 during the incumbent’s mother’s administration. 

Despite denials by the US to seek permanent presence, the US wants extended access to Philippine bases. The rehashed US-Philippine military relationship has been framed in the context to become palatable to public opinion.

The Left has alleged that the Philippine government has spent Php 500 million in building base infrastructure in Palawan to accommodate US military. If true, then this has been foreordained as popularity ratings will be used to formally bring back US bases. Except of course, the pork barrel scam has frayed into these populist ratings.

While it is true that Philippines will be buying these jets from a Korean state defense industry, what has not been revealed is that the FA-50 has essentially been powered, equipped and armed by mostly the US-Israel military industrial complex 

From the Wikipedia (bold mine)

The FA-50 is the most advanced version of the T-50. It is equipped with a modified Israeli EL/M-2032 pulse-Doppler radar with further Korean-specific modifications by LIG Nex1, and has more internal fuel capacity, enhanced avionics, a longer radome and a tactical datalink The radar selected for the FA-50 has a range two-thirds greater than the TA-50's radar. The EL/M-2032 was initially chosen over Lockheed Martin's preferred AN/APG-67(V)4 and SELEX Vixen 500E AESA radars. Other AESA radars such as Raytheon Advanced Combat Radar and Northrop Grumman's Scalable Agile Beam Radar are options for future production, and will likely be shared with the same AESA radar chosen for the USAF and ROKAF F-16 fighters. Samsung Thales is also independently developing a domestic multi-mode AESA radar for FA-50/ In December 2008, South Korea awarded a contract to Korea Aerospace Industries to convert four T-50s to FA-50 standards by 2012. In 2012, The Republic of Korea Air Force has ordered 20 FA-50 fighters to be delivered by the end of 2014 The maiden flight of FA-50 multirole fighter variant took place in 2011. The 60 FA-50 aircraft are to be produced from 2013 to 2016. Korea Aerospace Industries (KAI) received a 1.1 trillion won ($1 billion) order for FA-50 fighter aircraft in May 2013.

The T-50 is the proposed base for the more advanced F-50 fighter with strengthened wings, AESA radar, more internal fuel, enhanced electronic warfare capability, and a more powerful engine. The proposal is designated as T-50 Phase 3 program by KAI. Wing strengthening is required to support three underwing weapons pylons, compared to two underwing pylons on the TA-50 or FA-50. The AESA radar was expected to be RACR, which has 90% commonality with the AESA radar of the Super Hornet, or SABR, both of which are competing for KF-16's AESA radar upgrade program. Samsung Thales' AESA radar is also a possible option. The aircraft was altered to a single-seat configuration to allow more space for internal fuel and electronic warfare equipment. The engine could be either Eurojet EJ200 or General Electric F414, upgraded to 20,000 lb or 22,000 lb thrust, which is about 12-25% higher than the F404's thrust. The engines are already being offered for the baseline T-50 for future customers. A similar Korean-led international fighter program exists named the KAI KF-X.

TA-50/FA-50 armaments again from Wikipedia

The TA-50 version mounts a three-barrel cannon version of the M61 Vulcan internally behind the cockpit, which fires linkless 20 mm ammunition. Wingtip rails can accommodate the AIM-9 Sidewinders missile, a variety of additional weapons can be mounted to underwing hardpoints. Compatible air-to-surface weapons include the AGM-65 Maverick missile, Hydra 70 and LOGIR rocket launchers, CBU-58 and Mk-20 cluster bombs, and Mk-82, −83, and −84 general purpose bombs.

FA-50 can be externally fitted with Rafael's Sky Shield or LIG Nex1's ALQ-200K ECM pods, Sniper or LITENING targeting pods, and Condor 2 reconnaissance pods to further improve the fighter's electronic warfare, reconnaissance, and targeting capabilities. Other improved weapon systems over TA-50 include SPICE multifunctional guidance kits, Textron CBU-97/105 Sensor Fuzed Weapon with WCMD tail kits, JDAM, and JDAM-ER for more comprehensive air-to-ground operations, and AIM-120 missiles for BVR air-to-air operations. FA-50 has provisions for, but does not yet integrate, Python and Derby missiles, also produced by Rafael, and other anti-ship missiles, stand-off weapons, and sensors to be domestically developed by Korea

The South Korean army has also essentially been supported (28,000 troops) by the US, as well as armed and equipped (from army, navy, air force to marine corps mostly by the US military and US defense contractors. 

So the Korean defense industry represents a token of real defense spending $31.7 billion (2013), where according to Wikipedia arms exports totaled $183 million (2012) compared to imports at $1.131 billion (2010). 

In July 2013, the South Korean military appealed to the Parliament for an increase 13.7% of the military budget which translates to $38.5 billion to beef up the nation's missile defense. 

The point is South Korean defense industry has been deeply tied with the US military complex. So this reflects on the dynamics behind the Philippine government's proposed buying of South Korean jets.

Bottom line: The fantasy of arming for defense by the Philippine government to protect against the far more powerful China serves as economic privileges for the US-Israel defense industry (also Korea’s KAI), the Philippine bureaucracy and the Philippine military as well as the US military. 

The first three will be charged to us, the Philippine taxpayers. The US military base/s will be charged to the American taxpayers but whose subsequent social and environmental costs will a burden to local communities in the Philippines who will serve as host/s to the base/s.

China Bubble Indicator: Chinese Buying of High Profile US Properties

While I often refer to the skyscraper indicator as one important gauge to appraise the whereabouts or the stages of the bubble cycle, there seems another potential bubble indicator: foreign buying of US high profile properties.

Recently a Chinese firm reportedly bought JP Morgan’s 1 Chase Manhattan Plaza

From the Bloomberg:

JPMorgan Chase & Co. (JPM) has agreed to sell 1 Chase Manhattan Plaza, the tower built by David Rockefeller, to Fosun International Ltd., the investment arm of China’s biggest closely held industrial group, for $725 million.

Fosun, which invests in properties, pharmaceuticals and steel, is buying the 60-story, 2.2 million square-foot, lower Manhattan tower, according to a statement it filed to Hong Kong’s stock exchange.

China’s developers and companies are expanding in overseas property markets as the government maintains curbs on housing at home to cool prices. Greenland Holding Group Co., a Shanghai-based, state-owned developer, this month agreed to buy a 70 percent stake in a residential and commercial real estate project in Brooklyn.

We have seen this phenomenon before, particularly, during the "Japan Inc" bubble era of the late 1980s. 

Japan's asset bubble eventually imploded in 1990

This 1996 article on Japan's US property acquisition from the Chicago Tribune resonates on today’s buying spree of US properties by the Chinese. [bold mine]

No property epitomizes failed Japanese investment in U.S. real estate more than New York landmark Rockefeller Center.

Mitsubishi Estate Co. paid the Rockefeller family $1.4 billion for an 80 percent stake in the complex in 1989 and 1990. By early 1995, Mitsubishi had lost more than $600 million on its investment and put the property under bankruptcy protection. Late last year, it decided to hand the property over to its lenders.

Aoki Corp. of Japan, which bought the Westin Hotels and Resorts chain in 1988, hasn't fared much better. In 1988, it paid United Air Lines' parent Allegis Corp. $1.35 billion for the company. It ended up selling the chain's North American and European operations and some other assets to two U.S. investment firms for $561 million in December.

Japanese real estate developer Minoru Isutani's purchase of the Pebble Beach golf resort is another famous case. In 1990, he bought the California championship golf course for $841 million. Isutani sold the property about 18 months later to two Japanese companies at a $340 million loss.

Again as one would note that during the peak of Japan’s bubble 1988-1990, Japanese investors went into a shopping binge similar to Chinese investors today. And 'Rockefeller' properties seem like a coincidence or has been a prominent feature of extravagant transactions.

More from a 1992 LA Times article (bold mine) 

The drying up of Japanese real estate money in California was even more dramatic. Total investment tumbled 83% to $976 million, a trend the study attributes to the state's steep recession. For the first time in four years, Hawaii attracted more Japanese real estate money than California. Los Angeles was eclipsed by New York and Honolulu as the cities of choice for Japanese real estate funds.

Orange County, once one of the top 10 locations in the country, fell 95% to $32 million. Los Angeles dropped 65% to $590 million as a city of choice for Japanese funds. Japanese real estate investment fell 87% to $138 million in San Diego, and 74% in San Francisco to $127 million.

The results signal an end to a shopping spree that began in 1985 when cheap capital, the yen's exceptionally strong buying power, and loose lending standards by Japanese banks prompted scores of Japanese to pay record prices for some of the most famous office buildings and hotels in California, New York and Hawaii.

Today we have a strong Chinese yuan and massive expansion of credit in China's formal and informal banking system that has been fueling a domestic property bubble.

Yet paying for “record prices for some of the most famous office buildings and hotels” in the US seems like a variant of the skyscraper curse. Instead of the building of grandeur projects to showcase overconfidence, foreigners buy signature edifices.

Again the sale of JPM’s 1 Chase Manhattan to a Chinese investor could signify a manifestation of such symptoms.

And paying for “record prices for some of the most famous office buildings and hotels” in the US, reminiscent of the 1980s, has been a du jour dynamic or trend, not limited to 1 Chase Manhattan.

From the New York Times last June [bold mine]

And yet in recent weeks, several big deals in New York City have set real estate circles abuzz. Zhang Xin, a Chinese business magnate and chief executive of the largest commercial real estate developer in Beijing, joined forces with the Safra family of Brazil to buy a large piece of the General Motors Building in Midtown. Dalian Wanda Group, a big Chinese developer, said it intended to build a luxury hotel in Manhattan. (Wanda is also planning to build a hotel in London.)…

For the moment, the Chinese government is encouraging the investments and even helping to finance them. The state-owned Bank of China has become the largest foreign lender in commercial real estate deals in the United States, replacing big European banks. Beijing is eager to diversify its investments…

The Chinese aren’t limiting themselves to megadeals. Some purchases have been relatively small by the standards of commercial real estate. Ms. Zhang, who is the chief executive of SOHO China and one of the richest women in the world, paid about $600 million in 2011 for a 49 percent stake in the Park Avenue Plaza, a Midtown Manhattan skyscraper. That same year, the real estate arm of the HNA Group, a Chinese airline company, saved an office building at 1180 Sixth Avenue from foreclosure for $265 million. HNA also bought the boutique Cassa Hotel in Times Square.

Chinese investors or firms have also bought large hotels in California, including the Sheraton Universal in Universal City; the Crowne Plaza in Burlingame, near the San Francisco airport; and the Hilton Ontario in Ontario. They have also purchased a riverfront parcel in Toledo, Ohio, and, earlier this year, an office building in Morristown, N.J.

Chinese firms and investors are also betting that the potential returns in American commercial property markets will be higher than in other areas of the world. The market for office, industrial and retail property appears to have bottomed out. Office vacancy rates have fallen and rent prices have stabilized amid signs of economic improvement. And while competition is heating up — three Manhattan office buildings have sold for more than $1 billion so far this year — many of the big bidders and lenders from Europe have pulled back as their home economies struggle.

So we see China’s homegrown bubbles spilling over in the form of diversification through increasing exposure on US properties. And these manic buying activities has been partly bankrolled by China’s state-owned bank. 

Finally, the Chinese property buying spree appears to be contributing to the Fed inspired reflation of the US property bubble.

A case of Déjà vu?

 

Yet there seems another angle from which the JPM property deal may have been made.

Since JP Morgan’s 1 Chase Manhattan Plaza has one of the “world’s largest bank vault” which houses the company’s gold holdings. This could be related to the Chinese government’s attempt to secure gold vaults worldwide.

The Zero Hedge speculates (bold original)

So, what the real news of today is not that JPM is selling its gold vault, we knew that two months ago, or that it is outright looking to exit the physical commodities business, that too was preannounced. What is extremely notable is that in one very quiet transaction, China just acquired the building that houses the world's largest gold vault.

Why? We don't know. We do know that China's gross gold imports from Hong Kong alone have amounted to over 2000 tons in the past two years. This excludes imports from other sources, and certainly internal gold mining and production.

One guess: China has decided it has its fill of domestically held gold and is starting to acquire gold warehouses in the banking capitals of the world.

For now the reason why is unclear but we are confident the answer will present itself shortly.

While the gold aspect has been interesting, the Chinese buying of high profile US properties seems as increasing, deepening and worrying signs of bubbles that are about to mature or are likely to burst soon.

More Parallel Universes: Spain’s Bond Markets and EU Macro

Europe has been a showcase for the falsification of what seems as conventional relationships between financial markets and fundamentals or what I call as "parallel universes".

For instance, in Spain instead of the bond markets reflecting on credit quality, where soaring non-performing ‘bad’ loans should have prompted a bond selloff (higher yields), we get to see the opposite, rallying bonds (falling 10 year yields)…

From the Zero Hedge… (bold-italics original)

Despite the onslaught of confidence-inspiring flim-flam from leadership in Europe and a Spanish Prime Minister (and finance minister) desperate to distract with "soft" survey based data, the hard numbers keep coming in and keep getting worse and worse. The latest, seemingly confirming the IMF's fearsome forecast that European banks face massive loan losses in the coming years, is Spain's loan delinquency rate. Bad loans across Spanish banks amounted to $247 billion in August - a new record-breaking 12.12% of all loans outstanding (now 30% higher than any previous crisis in the history of Spain). Credit creation continues to implode with a 12.3% plunge in total loans outstanding but of course, none of that matters (for now), as Spanish bond spreads (and yields) press back towards pre-crisis lows...

This has been a product of entwined manifold political factors.

One, ECB’s Mario Draghi’s “do whatever it takes to save the euro” via a bond buying guarantee program [the unused Outright Monetary Transactions (OMT)] as well as the previous or OMT’s predecessor Long Term Refinancing Operations (LTRO). The LTRO has also functioned as credit subsidies to the banking system. The LTRO, the ECB learned lately, has entrenched the dependence of the banking industry, where the latter can hardly wean away from the LTRO without disorderly adjustments.

Also the Spanish government via Social Security Funds and other public pensions, as well as, the banking (€225bn in March) and financial sectors have been made to support sovereign bond prices. The banks likewise use these bonds as collateral to draw loans on the ECB. By keeping rates low, banks and the Spanish government benefits from these political subsidies financed by the economy.

International politics have also been a factor. For instance, Abenomics has spurred Japanese buyers to buy international bonds, including Europe, where Spain's bonds could have been a part of. 

Zero bound rates has also spurred a yield chasing dynamic for private sector funds.

As one will note politicization of markets results to a vast distortion of relationships between market prices and the orthodox view of fundamentals. 

Yet the mainstream who largely frames the above as 'recovery' either has blinded by such developments or deliberately twist or spin them to justify their actions

Such parallel universe applies to Europe's stock markets relative to ‘fundamentals’, which I have repeatedly been pointing out such as here and here

Again from another Zero Hedge article: (bold and italics original)

Goldman has, in the past, indicated how little forecasting power the soft survey data has in Europe and yet still, day after day we are treated to the herd of mainstream media types proclaiming that Europe is recovering and that their fundamentals have turned a corner. The problem with that "story" is that is that is a lie. In fact, European macro data has been sliding since the start of September and has plunged recently to 3 month lows. Of course, the reality is that a record high for European stocks is all that matters to the fast-money charging momo players and betting against divergences from fundamentals is for dummies...

Are these divergences 'This time is different'?

Video: Peter Schiff on The Myth Surrounding Janet Yellen's Forecasting Record

Mainstream media glorifies incoming Fed Chairwoman Janet Yellen's forecasting track record for supposedly having warned against the 2008 crisis. 

Using Ms. Yellen's speeches and public pronouncements as basis, financial analyst Peter Schiff, in the following video, debunks such claims as inaccurate and an exaggeration.

This is important because the consensus seems to have massively build their hopes and optimism around Ms. Yellen's leadership. In reality, what the mainstream  has been cheering about has been the prospects of bigger inflationist policies, which signify as subsidies to Wall Street and politicians at the expense of main street. This also means that the mainstream expects Ms. Yellen to accommodate bigger and bigger systemic debt.

Worst, should Ms. Yellen's administration oblige to Wall Street's desires, then we should expect a bubble bust under her watch. 

Again as pointed out in the past, outgoing Fed chief Ben Bernanke must have been cunning enough to have bailed out and passed the burden of bubbles to his successor.

(hat tip Zero Hedge)

Markets In Everything: Invest in your Star Athlete

How about investing in a financial security linked to the income stream of financial performance of your favorite professional athlete? 

From Deal Book New York Times: 

First, there was old-fashioned gambling on football. Then came the fantasy leagues. And now, thanks to Wall Street, fans can buy a stake in their favorite player.

On Thursday, a start-up company announced a new trading exchange for investors to buy and sell interests in professional athletes. Backed by executives from Silicon Valley, Wall Street and the sports world, the company plans to create stocks tied to an athlete’s financial performance.

After considering a number of possibilities for its inaugural initial public offering, the company found a charismatic candidate in Arian Foster, the Pro Bowl running back of the Houston Texans. Investors in the deal will receive stock linked to Mr. Foster’s future earnings, which includes the value of his playing contracts, corporate endorsements and appearance fees.

The company, Fantex Holdings, has grand ambitions beyond a Foster I.P.O. — it hopes to sign up more football players and other athletes, as well as celebrities like pop singers and Hollywood actors.

This is demonstrative of the market’s innovative process at work. Entrepreneurs think up ways and means to profit from what they see as economic opportunities by taking risks through the introduction of new instruments, products or services.

Innovation is a common feature of capitalist societies. As Austrian economist Robert Higgs pointed out

In his justly famous 1942 book Capitalism, Socialism and Democracy, Joseph A. Schumpeter described the dynamics of a market economy as a process of “creative destruction.” In his view, innovation—“the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates”—drives this process. Its most important result is that for the first time in history, the mass of the population in developed countries enjoys a standard of living that even the aristocrats of past ages could scarcely have imagined, much less have actually had.

In the above case, stocks linked to celebrities seem like a new form of entertainment.

Quote of the Day: There is now No Limit in government borrowing

Last night, after more than two weeks of utterly embarrassing theater, the government in the Land of the Free inked a deal to kick the can down the road a few more months. And in doing so, they set a very dangerous precedent.

As part of the bargain codified in HR 2775 (which President Obama signed into law), the Treasury Department is authorized to SUSPEND the debt ceiling. In other words, for all intents and purposes, there is now NO LIMIT government borrowing.

This limitless borrowing authority will expire on February 7, 2014. But it sets the precedent that dismissing the debt ceiling is a perfectly viable course of action.

Congress has effectively removed their handcuffs… so you can almost assuredly bet down the road that this provision will be extended, and ultimately become permanent.

This is from Simon Black of the Sovereign Man. The details of the slippery slope towards the unshackling of the debt handcuffs via HR 2775 can be found here; a summary can be found at Wikipedia. This reinforces my view that all the coming political debate on restraints on government spending will be about grandstanding, horse trading and theatrics.

The Virtue of Failure: Billionaire Sara Blakely’s Success Recipe

In the realm of capitalism, failures serve as stepping stones to success as I pointed out here here and here

Take for example, billionaire Sara Blakely, founder and owner of garment company Spanx, who in a CNBC interview said that a key ingredient to her career success emerged from her string of initial misfortunes.

CNBC’s Robert Frank reports

"What have you failed at this week?" Blakely recalled in an interview on CNBC's "Squawk Box" n Wednesday. "My dad growing up encouraged me and my brother to fail. The gift he was giving me is that failure is (when you are) not trying versus the outcome. It's really allowed me to be much freer in trying things and spreading my wings in life."

Blakely's embrace of failure has helped make her the youngest self-made female billionaire in America. The 41-year-old Florida native was selling fax machines door-to-door before she came up with the idea for Spanx, the body-shaping undergarments that have become a global sensation.

Her string of early career failures eventually led Blakely to the Spanx idea. She said wanted to be a lawyer but "basically bombed the LSAT twice," she said. "I ended up at Disney World trying out to be Goofy. They wanted me to be 5' 8", but I was 5' 6". They wanted me to be a chipmunk."

Ms. Blakely's determination in the face of the lack of knowledge and experience...

Like many entrepreneurs, Blakely said that not knowing industry practices—and the things that supposedly can't be done—is critical in starting a business.

"The fact that I had never taken a business class, had no training, didn't know how retail worked," she said. "I wasn't as intimidated as I should have been."

And a memorable gaffe...

Her rise was filled with little failures—some of them humorous. When she went to London in an early sales trip to promote the product, she was interviewed by the BBC. She described the benefits of Spanx by saying, "It's all about the fanny. It smooths your fanny, lifts and separates your fanny."

Suddenly, the interviewer lost all color in his face.

"I had no idea," Blakely said, "but fanny apparently means vagina in England."

The tolerance of or the virtue of failure is founded on learning and building from them

As American industrialist and founder of the Ford Company Henry Ford wrote as one of his Principles of Business

An absence of fear of the future or of veneration for the past. One who fears the future, who fears failure, limits his activities. Failure is only the opportunity more intelligently to begin again. There is no disgrace in honest failure; there is disgrace in fearing to fail. What is past is useful only as it suggests ways and means for progress.

On the other hand, in the world of politics, failure has frequently been used as an excuse for political agents to grab control of society.

Video: Milton Friedman on Inequality and Minimum Wage

One aspect where the late illustrious economist Milton Friedman impresses me much has been with his lucid and eloquent defense of many aspects of the free markets in public. 

The video video on inequality and minimum wage is a good example. (hat tip Cafe Hayek)

But the Austrian economic school has had many issues with Mr. Friedman (income tax, monetarism, school vouchers, anti-trust laws, flexible exchange rates, opposition to gold standard and etc...) see F.A. Hayek here, Murray Rothbard here, Walter Block here debating Friedman, Roger Garrison here, and David Stockman who accuses Mr. Friedman of opening the door to monetary central planning. 

Although Mr. Friedman in the later phase of his life seem to have changed his mind on his monetarism to eventually call for the abolition of the US Federal Reserve here and here in public.

US government’s Slippery Slope towards Capital Controls

Even as US stock market booms, the US government appears to be desperately corralling resources of their constituency by the escalating use of capital controls to prevent internal funds from flowing out of the country.

Sovereign Man’s Simon Black explains (Daily Paul.com)

The path to tyranny is almost always paved with good intentions.

And so, enter stage left, the innocuously named Consumer Financial Protection Bureau (CFPB).

These government agencies with the catchy, high-sounding names are always the most dangerous. After all, it was the 'Committee for Public Safety' that was responsible for wanton genocide during the post revolution Reign of Terror in France.

Recently, the CFPB 'encouraged' retail banks in the Land of the Free to 'help' their customers regarding international wire transfers. And by 'help', they mean prohibit.

Of course it's all for 'consumer protection'.. So under the guise of safety and security, several banks will curtail retail customers' abilities to send international wire transfers.

Chase, for example, will start to limit cash withdrawals and ban business customers from sending international wire transfers from November 17 onward.

And starting October 20th, HSBC USA's Premier clients will have to wait a minimum of five days before transferring funds to their OWN international accounts!

This is the very nature of capital controls-- restricting the free flow of capital across borders until it is trapped inside the country and forcibly denominated in a rapidly devaluing currency.

And this is exactly how it starts... making it more difficult to move money abroad.

We've been writing for years that this would happen. This isn't some tin-foil hat conspiracy. This is reality.

Throughout history, bankrupt governments have almost always resorted to these same desperate tactics.

As the US government is hours away from crossing the fiscal Rubicon, it only seems appropriate. They are bankrupt, and they are desperate.

US Politics: Despite the all the Theatrics the GOP Sells out, Debt Ceiling Raised

Today's US debt ceiling drama reminds me of a favorite Filipino proverb by my best friend and foreign client “Pagkahaba-haba man daw ng prusisyon, sa simbahan din ang tuloy” (“No matter how long the procession, it still ends up in church”)

Despite all the rhetoric, drama and theatrics about supposed "principles", the end game, as expected, has been to accommodate the perpetual propagation of debt.

As I previously noted

This means that despite the hullabaloo in the US Congress, which really is just a vaudeville, as congress people will fear the wrath of (the voting public-added Benson), losing political power and privileges from entitlement dependent-parasitical voters, eventually the debt ceiling will be raised. (charts from the Heritage Foundation).

Like actions of central banks led by the US Federal Reserve, America’s welfare state will be pushed to the brink of a crisis or will fall into a crisis first, before real reforms will be made.

In the world of politics, cost-benefit tradeoffs has been reduced to short term expediencies.

Now the compromise fires up the debt starved stock markets again, from the Bloomberg

U.S. stocks rallied, sending the Standard & Poor’s 500 Index (SPX) toward a record, as the Senate crafted a deal to end the government shutdown and raise the debt ceiling before tomorrow’s deadline.

The reported Senate deal: (bold mine)

The bipartisan leaders of the Senate reached an agreement to end the fiscal impasse and to increase U.S. borrowing authority. The Senate and House plan to vote on it later today, and the White House press secretary said President Barack Obama supports the deal.

The framework negotiated by Senate Majority Leader Harry Reid and Minority Leader Mitch McConnell would fund the government through Jan. 15, 2014, and suspend the debt limit until Feb. 7, setting up another round of confrontations.

The agreement concludes a four-week standoff that began with Republicans demanding defunding of Obama’s 2010 health-care law, and objecting to raising the debt limit and funding the government without policy concessions. House Speaker John Boehner said in a statement that Republicans won’t block the Senate compromise.

With no deal, the U.S. would exhaust its borrowing authority tomorrow and the government may start missing payments at some point between Oct. 22 and Oct. 31, according to the Congressional Budget Office. Fitch Ratings put the world’s biggest economy on watch for a possible credit downgrade yesterday, citing lawmakers’ inability to agree.

UPDATE the House of Representatives has reportedly acquiesced to the US Senate compromise.

And as I previously anticipated the GOP will sellout

And the fear of the wrath of the public which means losing political power have become a potent force in the shaping of the supposed deal…the American public has been putting the blame on the GOP (Republicans).

Here is House Speaker John Boehner statement on the Senate deal (hat tip Zero Hedge) [bold mine]

The House has fought with everything it has to convince the president of the United States to engage in bipartisan negotiations aimed at addressing our country's debt and providing fairness for the American people under ObamaCare.  That fight will continue.  But blocking the bipartisan agreement reached today by the members of the Senate will not be a tactic for us.  In addition to the risk of default, doing so would open the door for the Democratic majority in Washington to raise taxes again on the American people and undo the spending caps in the 2011 Budget Control Act without replacing them with better spending cuts.  With our nation's economy still struggling under years of the president's policies, raising taxes is not a viable option. Our drive to stop the train wreck that is the president's health care law will continue.  We will rely on aggressive oversight that highlights the law's massive flaws and smart, targeted strikes that split the legislative coalition the president has relied upon to force his health care law on the American people.

 

So the debt ceiling compromise will mark the 19th increase since March 1962. 

This also means that there will hardly be any reform until a crisis eventually hits.

At the end of the day, US politics end up where they started or from the default position of steadily raising debt. 

The Poker Bluffing circus never ends. The more things change...