Monday, August 30, 2010


...of the Paper Dragon's top central bank official going on the lam...due to losses on Treasury positions?

Nothing is impossible in the middle kingdom.

Notice... the finanacial media and cogniscenti of the world has identified the Paper Dragon as one of the world's balance points. The end of the beginning for its decline.

years from now, Africa and Central America/the Andean region will be similar flash points for the media to "discover".

Backlash over China curb on metal exports

China's draconian export curbs on rare earth minerals needed by the
rest of the world for frontier technologies is escalating into a
serious diplomatic and trade clash with the United States and other
leading powers.

By Ambrose Evans-Pritchard
Published: 9:52PM BST 29 Aug 2010

Japan's foreign minister Katsuya Okada issued what amounted to a
formal protest at top-level meeting with Chinese officials in Beijing over the weekend, saying the sudden cut-off was "affecting the global production chain".

It is the latest sign of rising pressure after angry complaints by
companies outside China that rely on this family of 17 metals for
hybrid cars, mobile phones, superconductors, navigation, and a host of high-tech industries.

China's commerce minister Chen Deming said that Beijing would not back down over the export quotas. "Mass-extraction of rare earth will cause great damage to the environment, that's why China has tightened controls," he said, repeating the official line.

Beijing set off shockwaves in early July when it announced a 72pc
reduction in rare earth exports over the second half of this year. The country has acquired a near monopoly, with 97pc of global output after under-cutting the rest of the world with Mongolian ores in the 1990s. The sudden cut-off since July has drastically restricted supplies to
the rest of world.

Wednesday, August 25, 2010

The Fed...

...betraying a lack of consensus. Remarkable given the well-publicized balance sheet decisions (and the troubling ramifications of self-reinforcing rate decreases due to reinvestment of prepayment proceeds on MBS securities into Treasuries...which of course lower rates and start the prepayment cycle over again.)

As I have stated previously, the fear is palpable.

Tuesday, August 24, 2010

Stiglitz: "Water is Wet"

A (Bank of Sweden) Nobel Prize winning economist proclaims weakness in the Euro area. Impressive.

Nobel Prize-winning economist Joseph Stiglitz said the European economy is at risk of sliding back into a recession as governments cut spending to reduce their budget deficits.

“Cutting back willy-nilly on high-return investments just to make the picture of the deficit look better is really foolish,” Stiglitz, a Columbia University professor, told Dublin-based RTE Radio in an interview broadcast today.

Euro-area governments stepped up efforts to cut their deficits to below the European Union limit of 3 percent of gross domestic product after the Greek crisis earlier this year eroded investor confidence in the 16-member currency union. While the economy expanded at the fastest pace in four years in the second quarter, the recovery is showing signs of weakening.

Repetition... the lynchpin of learning. So once again, I proclaim loudly from the economic equivalent of Speaker's Corner that the Fed has little power to combat this recession and Fiscal policy, specifically tax cuts, remains the only channel that provides remedy.

Monday, August 23, 2010

One of my former professors...

...writes eloquently about overconfidence.

Two lessons emerge from these papers. First, we shouldn’t expect that the competition to become a top manager will weed out overconfidence. In fact, the competition may tend to select overconfident people. One route to the corner office is to combine overconfidence with luck, which can be hard to distinguish from skill. C.E.O.’s who make it to the top this way will often stumble when their luck runs out.

The second lesson comes from Mark Twain: “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

The effects...

...on the Housing market (re-financing, second lien holding, option ARMs, etc.) would be catastrophic at this point.

Aug. 22 (Bloomberg) — Raghuram Rajan accurately warned central bankers in 2005 of a potential financial crisis if banks lost confidence in each other. Now the International Monetary Fund’s former chief economist says the Federal Reserve should consider raising rates, even as almost 10 percent of the U.S. workforce remains unemployed.

Interest rates near zero risk fanning asset bubbles or propping up inefficient companies, say Rajan and William White, former head of the Bank for International Settlements’ monetary and economic department. After Europe’s debt crisis recedes, Fed Chairman Ben S. Bernanke should start increasing his benchmark rate by as much as 2 percentage points so it’s no longer negative in real terms, Rajan says.

“Low rates are not a free lunch, but people are acting as though they are,” said White, 67, who retired in 2008 from the Basel, Switzerland-based BIS and now chairs the Economic Development and Review Committee at the Paris-based Organization for Economic Cooperation and Development. “There will be pressure on central banks to follow an expansionary monetary policy, and I worry that one can see the benefits, but what people inadequately appreciate are the downsides.”

Thursday, August 19, 2010


...from Falkenblog (one of my favorite "economists", a word I hesitate to use since he clearly dips his ladle into many disclipllines). Von Mises could not have warned against false precision and the use of mathematics as a legitimizing tool (as opposed to a veracity tool) with any greater clarity.

Krugman might say in his defense that his argument was meant to explain the stylized fact that trade between two large nations can hardly be explained by mere natural resources, and so how does one explain persistent German excellence in cutlery, or why Sweden exports and imports autos, except via some Guthian-inflation that occurs in certain firms. Fine, I get that, but Krugman's algebraic model is not really useful in isolating some idea in that argument. Without the faux-rigorous math model, there's no there there. Economics as a 'science' might be poorer without math, but as an understanding of our world it would have been the same.

Math helps ideas when it isolates the relationships or implications with greater parsimony or precision. In practice, economic models are abstruse arguments with mere potential for great scope, but the history of economics suggests great skepticism for this potential. What irreducible-to-words model, other than derivatives models in finance or statistical models in econometrics, have generalized to create a greater consensus on anything of economic importance? My best guess would be Ricardo's theory of comparative advantage, but note 1) that was made over 150 years ago and 2) it hasn't really convinced anyone that free trade is a good idea (it's easy to add some assumption that invalidates it).

One of the issues...

...with basing your economy (which is, inter alia, the bulwark for social order) on exports that compete chiefly on price is margin pressure. This would not be as much of an issue if China had a reputation as a vibrant, highly adaptable economy where price signals commanded markets.

Western Profits Wilt On China's Surging Wages

Earnings per share would fall 72pc for Jones Apparel, 50pc for
Maidenform Brands and Dollar Tree, 42pc for Macy's, 39pc for Target,
and 20pc for Polo Ralph Lauren. Reliance on Chinese plants is suddenly
proving double-edged. "We conclude that labour and transportation cost
pressures are a major concern for executives that may be
under-appreciated by investors," it said.

The US industrial giant General Electric raised eyebrows in May with
plans to shift production of its hybrid water heater from China back
to Kentucky next year after securing lower wages from US workers. The
company cited the narrowing pay gap, lower transport costs, and
shorter delivery times.

China's manufacturing wages have vaulted from around $1,000 annually
10 years ago, to $3,900 last year. Pay in the industrial hubs of the
Pearl River and Yangtze River deltas are much higher and likely to
rise further after a wave of industrial disputes at Foxconn, Honda,
Toyota, and Omron.

Bruce Rockowitz, head of the pan-Asian logistics group Li & Fung, said
cost pressures are rippling through the region. "It's not just China
going up: its everywhere," he said.

It is unclear whether this will drive up inflation for imported goods
in the West, reversing the benign phase of globalisation seen over the
last fifteen years, or whether multinationals will adjust to
constrained demand in the US, Europe, and Japan by slashing margins,
or a mixture of the two.

Credit Suisse's survey of executives found that 55pc of foreign firms
in China could relocate plant to Bangladesh, Vietnam, Indonesia or
other low-cost regions relatively easily, though it would be costly.
There are winners too, such as Yum Brands poised to reap the harvest
from rising Chinese consumption.

The changing landscape has major implications for Chinese exporters,
with an average profit margin of just 3pc. High-tech companies in wind
power, solar, and transmission equipment that have recently broken
into world markets will face stiffer headwinds. The Shanghai Composite
Index of Chinese equities has been lagging all year on fears of a
profit squeeze. The bourse is down 20pc since last November.

The erosion of export margins may explain why Beijing is still
dragging its feet on a revaluation of the yuan, despite ever louder
calls for retaliatory sanctions in Washington. China's currency has
fallen slightly on a trade weighted-basis since the dollar-peg was
replaced in May by a crawling band, a clear sign that the authorities
are worried that the economy is cooling too fast. Beijing has tried
cool the property boom with credit curbs but it is hard to use such
tools in a surgical fashion without collateral damage. The growth of
factory output ground to a halt in July, on a month-on-month basis.


...a continuing saga.

The claims print this a.m. coupled with the above chart is leading players to believe more Quantitative Easing is imminent.

Unfortunately, the effects they think QE will have will not come to fruition. Again, these are asset swaps between instruments of varying maturities and will not have the desired effect on Aggregate Demand.

The Fed has much less power than mainstream economists believe.

Only Fiscal policy will achieve the desired effects, but with the constant clamour from Deficit Hawks, the Goverment's role as "spender of last resort" appears weak.

The market of opinion

Both the professor in the below article and the leader of the Men of Newport Beach continue to battle over the hearts and minds of investors. The outcomes (wether stocks or bonds outperform) inure to their benefit.

Ten years ago we experienced the biggest bubble in U.S. stock market history—the Internet and technology mania that saw high-flying tech stocks selling at an excess of 100 times earnings. The aftermath was predictable: Most of these highfliers declined 80% or more, and the Nasdaq today sells at less than half the peak it reached a decade ago.

A similar bubble is expanding today that may have far more serious consequences for investors. It is in bonds, particularly U.S. Treasury bonds. Investors, disenchanted with the stock market, have been pouring money into bond funds, and Treasury bonds have been among their favorites. The Investment Company Institute reports that from January 2008 through June 2010, outflows from equity funds totaled $232 billion while bond funds have seen a massive $559 billion of inflows.

We believe what is happening today is the flip side of what happened in 2000. Just as investors were too enthusiastic then about the growth prospects in the economy, many investors today are far too pessimistic.

The rush into bonds has been so strong that last week the yield on 10-year Treasury Inflation-Protected Securities (TIPS) fell below 1%, where it remains today. This means that this bond, like its tech counterparts a decade ago, is currently selling at more than 100 times its projected payout.

Shorter-term Treasury bonds are yielding even less. The interest rate on standard noninflation-adjusted Treasury bonds due in four years has fallen to 1%, or 100 times its payout. Inflation-adjusted bonds for the next four years have a negative real yield. This means that the purchasing power of this investment will fall, even if all coupons paid on the bond are reinvested. To boot, investors must pay taxes at the highest marginal tax rate every year on the inflationary increase in the principal on inflation-protected bonds—even though that increase is not received as cash and will not be paid until the bond reaches maturity.

Today the purveyors of pessimism speak of the fierce headwinds against any economic recovery, particularly the slow deleveraging of the household sector. But the leveraging data they use is the face value of the debt, particularly the mortgage debt, while the market has already devalued much of that debt to pennies on the dollar.

This suggests that if the household sector owes what the market believes that debt is worth, then effective debt ratios are much lower. On the other hand, if households do repay most of that debt, then the financial sector will be able to write-up hundreds of billions of dollars in loans and mortgages that were marked down, resulting in extraordinary returns. In either scenario, we believe U.S. economic growth is likely to accelerate.

Furthermore, economists generally agree that the most important determinant for long-term economic growth is productivity, not consumer demand. Despite the subpar productivity growth reported for the last quarter, the latest year-over-year productivity growth of 3.9% is almost twice the long-term average. For the first two quarters of this year productivity growth, at over 6%, was the highest since the 1960s.

From our perspective, the safest bet for investors looking for income and inflation protection may not be bonds. Rather, stocks, particularly stocks paying high dividends, may offer investors a more attractive income and inflation protection than bonds over the coming decade.

Tuesday, August 17, 2010

Concentration of Power

"What do I care about law? Hain't I got the power?"
-Cornelius "Commodore" Vanderbilt

It is axiomatic that the fewer people who wield power (either coercive), the greater the liklihood violence (typically "legal" in the strict sense of the word) will be used as a tool of diplomacy.

I have been incessently studying the relationships between Church, State, society, and public order for some time now, and while I completely disagree with Niall Ferguson's delusions that the U.S. is headed for disaster, I certainly cannot be as sanguine about Europe, specifically Eastern Europe.

Democracy has had a very good run in that part of the world, and the mechanisms that should auto-correct the problem (such as the pendulum like swing of the U.S. election cycle) are showing signs of fracture.

If Nature "abhors" a vacuum, Power seeks it. Vanderbilt himself conducted a war in Nicaragua to protect his financial interests. There will be a new Holy Roman empire before there is the United Secular Europe envisioned my Monnet and his ilk.

A wonderful example...

...of the misguided reasoning using false analogy (household debt on the micro level has NO applicability to Sovereign Currency Issuers such as the U.S.)

It seem every decline in the Stock Market and/or every increase in the price of gold causes a massive inflow of opinion regarding the iminent demise of the U.S. Hogwash. The real dangers are in Europe and Asia.

My comments in Italics.

"Ah, but we will tax the rich. The rich have enough money. They will simply stop earning.

Let’s get real. Here is what the government is likely to do. Once Washington realize that the dollar is at risk and that they can no longer finance their wars by borrowing abroad, the government will either levy a tax on private pensions on the grounds that the pensions have accumulated tax-deferred, or the government will require pension fund managers to purchase Treasury debt with our pensions. This will buy the government a bit more time while pension accounts are loaded up with worthless paper.

The U.S. does not "finance" anything by "borrowing" abroad. It has no need to "get" dollars from anywhere in order to spend them. Notice the assumptions required for this string of events and the associated timing. The dollar is "at risk" and immediately thereafter Treasuries are "worthless"?

The last Bush budget deficit (2008) was in the $400-500 billion range, about the size of the Chinese, Japanese, and OPEC trade surpluses with the US. Traditionally, these trade surpluses have been recycled to the US and finance the federal budget deficit. In 2009 and 2010 the federal deficit jumped to $1,400 billion, a back-to-back trillion dollar increase. There are not sufficient trade surpluses to finance a deficit this large. From where comes the money?

As above. There is no "financing" of the deficit. From where comes the money? What is "money" and who owns, creates, and spends the "money"?.
The answer is from individuals fleeing the stock market into “safe” Treasury bonds and from the bankster bailout, not so much the TARP money as the Federal Reserve’s exchange of bank reserves for questionable financial paper such as subprime derivatives. The banks used their excess reserves to purchase Treasury debt.

Marginal purchasers of Treasuries in the secondary market now "finance" operations of the Government? I have no idea what the author is talking about regarding bank reserves and subprime derivatives.These financing maneuvers are one-time tricks. Once people have fled stocks, that movement into Treasuries is over. The opposition to the bankster bailout likely precludes another. So where does the money come from the next time?

Money for what? Spending the Government's budget? It simply debits and credits accounts for that. The Government does not need to go to an ATM and "get" cash in order to spend it. It simply re-arrange numbers on spreadsheets. That's all.

The Treasury was able to unload a lot of debt thanks to “the Greek crisis,” which the New York banksters and hedge funds multiplied into “the euro crisis.” The financial press served as a financing arm for the US Treasury by creating panic about European debt and the euro. Central banks and individuals who had taken refuge from the dollar in euros were panicked out of their euros, and they rushed into dollars by purchasing US Treasury debt."

There were/are no problems in Europe? Is the Treasury "unloading" debt when marginal purchasers buy Treasuries in the secondary market? This article truly misapplies economic relationships and conflates time to horrible effect.

The Paper Dragon has confidence in the EU...

...and supporting export markets it deems to have good growth prospects.

The nation has been buying "quite a lot" of European bonds, said Yu Yongding, a former adviser to the People's Bank of China who was part of a foreign-policy advisory committee that visited France, Spain and Germany from June 20 to July 2. Japan's Ministry of Finance said Aug. 9 that China bought 1.73 trillion yen ($US20.3 billion) more Japanese debt than it sold in the first half of 2010, the fastest pace of purchases in at least five years.

"Diversification should be a basic principle," Yu, president of the China Society of World Economy, said in an interview last week, adding a "top-level Chinese central banker" told him to convey to European policy makers China's confidence in the region's economy and currency. "We didn't sell any European bonds or assets, instead we bought quite a lot."

Saturday, August 14, 2010

The loss of power... simply unbearable to those who wield it. This reasoning is so shoddy (e.g. private accounts are not necessarily tied to stocks or any other paper asset) that there can be no other explanation other than a defacto leader of a historically government-enlargin party lashing out at the loss of power this measure would bring.

President Barack Obama said Republican proposals to have people invest Social Security benefits in private accounts would increase the U.S. budget deficit and put retirement money at risk to “the whims of Wall Street traders.”

In his weekly address on the radio and Internet, Obama marked the 75th anniversary of President Franklin Roosevelt’s signing of the Social Security Act, and said he would fight if Republicans try to convert the entitlement program to private investment accounts.

“I’d have thought, after being reminded how quickly the stock market can tumble, after seeing the wealth people worked a lifetime to earn wiped out in a matter of days, that no one would want to place bets with Social Security on Wall Street -- that everyone would understand why we need to be prudent about investing the retirement money of tens of millions of Americans,” he said.

Thursday, August 12, 2010

Bond Yields...

Self Explanatory chart given my comments here since February.

Security Deposit

Most "economists" and "investment strategists" view the dollar as merely the reserve currency of the world.

It is far more than that.

Every dollar deposited in various banks across the worlds, in addition to its economic uses, also serves as a security deposit. That is, the more dollars a given region has acquired, the more "attention due to significance" (either good or bad) the U.S. Federal Government attaches.

I have mentioned before that the number one export of the U.S. is not anything physical, but "Order".

Wednesday, August 11, 2010

Gullibility is not a function of intelligence

The very intelligent have a propensity for understanding complex abstract forms of argument and proof.

Unfortunately, this comes with a price.

Throughout history, we have observed the transition of power from states to religions, to singular individuals, to secular governments, and back again.

For example, China is not a republic, its much more similar to a religious monarchy (the God being Marx, the prophet Deng Xiaoping, the apostles and saints the various high ranking members of the "Communist Party")

And yet, the concentration of the highly intelligent within official circles still does not decrease the frequency of failure of States across the Globe. They have convinced themselves that central planning and "good policy" will guarantee a good state.

Its no different than any other system where the fantansy of the outcome severely cripples the ability to reason. Lotteries are no different.

Tuesday, August 10, 2010

Fed comments...

...ominous, and in full defense mode. Again, this are simply asset swaps, but it is increasingly clear that even the Fed is experiencing difficulty in containing credit and funding pressures, to say nothing of the impending danger in FHLBs and GSEs.

To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.1 The Committee will continue to roll over the Federal Reserve's holdings of Treasury securities as they mature.

The Players

The role of Government in the world of business is best conceived as referee between competitive entities, leveling uneven playing fields (via regulation) and punishing practices that tend towards oligarchy (via anti-trust and other legal measures).

Unfortunately, this pollyanish view of Government ignores the invitable outcome when frictions between Government and Business are high.

And at this moment they are very, very high in the United States, to say nothing of the rest of the world.

Throughout history, we have seen countless examples of the eventual outcomes of this phenomenae.

Eisenhower called this the Military-Industrial complex, even Adam Smith warned "whenever competitors gather, conversation invariably turns to price fixing". This same impetus is magnified where the process of legislation is insular and complex.

Justic Brandeis once stated "sunlight is the best disinfectant" and our Government would be well-advised to introduce strict term limits, greater transparency measures, and much less legislation, both in number and complexity.

When the entire world is buying duration...

...the big boys start selling...and just as important, ANNOUNCING that they are selling.

Warren Buffett shortened the duration of bonds held by his Berkshire Hathaway Inc. after warning that deficit spending could force inflation higher.

Twenty-one percent of holdings including Treasuries, municipal debt, foreign-government securities and corporate bonds were due in one year or less as of June 30, Omaha, Nebraska-based Berkshire said in a filing Aug. 6. That compares with 18 percent on March 31, and 16 percent at the end of last year’s second quarter.

“It may be a sign that Buffett expects interest rates to start rising, maybe sooner than the conventional wisdom,” Meyer Shields, an analyst in Baltimore at Stifel Nicolaus & Co. who has a “sell” rating on Berkshire, said in an interview.

Inflation has fallen to a 44-year low even as the Federal Reserve more than doubled its balance sheet in two years to $2.33 trillion to help draw the economy out of recession. A U.S. jobs report last week showing that companies hired fewer workers than forecast in July pushed the two-year Treasury yield to a record low. Bill Gross, founder of Pacific Investment Management Co., advised investors to buy longer-dated maturities.

Monday, August 09, 2010

Back from hiatus...

It is essential, when intensely studying any subject, to back away from the tangled web of causations, correlations, fallacies, conclusions, arguments, data, analogies and apocryphals, in order to obtain a more complete view of the totality.

I have always favored holistic approaches when analyzing and solving problems, avoiding the pitfalls of pedantism and hubris as best I can.

I will therefore be posting more often in the coming days. There is much to be discussed, as these are indeed historic times rife with Chaos...what order emerges from these next few years will determine the next fifty.