Friday, April 29, 2011

Good summation...

...of th problem and suggested prescription for recovery. I disagree that the EU can be saved by policy, and furthermore assert that the current conditions will only fester cultural animosity.

The Full article is here.

As they begin to adopt Germany’s model, or something along those lines, the other eurozone states will find it nearly impossible to use fiscal stimulus in times of crisis. And with monetary policy already in the hands of the dogmatically anti-inflationary European Central Bank, their only means of adjusting to crises will be to stand by as wages fall and unemployment soars. Ireland—with its collapsed tax revenues, massive cuts in government spending, shrinking wages, and skyrocketing unemployment—is the unhappy exemplar of rigid austerity measures in the new Europe.

This approach cannot be sustained for long. The EU has never had much popular legitimacy: many voters have gone along with it so far only out of the belief that their politicians knew best. Today, they are more suspicious. And if they come to think that further European integration is causing more economic hardship, their suspicion could harden into bitterness and perhaps even xenophobia. Ireland’s new finance minister, Michael Noonan, has told voters that the EU is a game rigged in Germany’s favor; editorials in major Irish newspapers warn of Germany’s return to racist imperialism. As economic shocks hit other EU countries, politicians in those states will also look for someone to blame.

If the EU is to survive, it will have to craft a solution to the eurozone crisis that is politically as well as economically sustainable. It will need to create long-term institutions that both minimize the risk of future economic crises and refrain from adopting politically unsustainable forms of austerity when crises do hit. They must offer the EU countries that are the worst hit a viable path to economic stability while reassuring Germany, the state currently driving economic debates within the union, that it will not be asked to bail out weaker states indefinitely.

The short-term solution is clear—even if the European Central Bank, which is still fighting the war against the inflation of the 1980s and 1990s, refuses to recognize it. The solution is a one-off combination of market purchases of bonds and other financial assets, temporarily higher inflation, and fiscal support with the issuance of a common European bond. Quantitative easing and higher inflation would help ease the pain of adjustment, and a European bond would allow the weaker eurozone states to raise money on international markets. All of this would shore up the euro long enough to allow for further-reaching reforms down the road. The major euro bondholders would have to bear some of the costs—as they should, since they lent excessively during the first years of this century—through either explicit haircuts (in effect a discount of their bonds’ value) or inflation. Germany might not enjoy experiencing temporarily higher inflation, but if this were a one-time cost, it could probably live with the results—as long as it was also reassured that the long-term gain would be stability in the eurozone.

Thursday, April 28, 2011

Say it ain't so, Jor-El

...superman now in the hands of global one-world types. Popular culture has a tenedency to be lag real sentiment, inmsho. But hey, look at the bright side, defense spending will increase leading to a nice bump in GDP...and maybe we can hire him as a contractor...

Wednesday, April 27, 2011

The Fed chair is happy to report... this wonderful gathering of reporters, that there are no material changes to anything the Fed has previously said or done. Thank you. That will be all.

What did we expect for his first official press conference? Another weapon in the inflations expectations arsenal, and a blunt, unpredictable one at that.

No wage inflation, loan activity dismal, banks still teetering, this is no time to raise interest rates. (ignoring the fact that the Rate channel of price and monetary signaling is hopelessly broken at the moment.)

The EOTers...

...the end is nigh. America is doomed. China is eating our lunch. Our currency is wortheless, our officials corrupt, there is nothing anyone can do, buy food and pray.


The End of Timers have been sounding the alarm. Readers here will note that I believe equity markets will falter in June, and prompt many to reasess their view on risk across the asset spectrum.

But the hysteria emanating from the IMF and FUND MANAGERS (whose opinion on markets are NEVER, by necessity, objective...this includes myself, which is why I typically attempt to remain somewhat general about the actual movements of markets) is intensifying. This is always the case around market turns.

Tuesday, April 26, 2011

Jeremy Grantham's latest... comments in italics as usual. The ususal anti-malthusian arguments apply (such as the implicit assumption that humanity will innovate at lower rates, etc.)

 Until about 1800, our species had no safety margin and lived, like other animals, up to the limit of the food supply,
ebbing and flowing in population.

Ancient Greece and Egypt predated this. I would also add that the germ theory and plumbing had more to do with population growth (as mortality decreased dramatically) From about 1800 on the use of hydrocarbons allowed for an explosion in energy use, in food supply, and, through the creation of surpluses, a dramatic increase in wealth and scientific progress.

Hydrocarbons were not necessarily the driver of growth, merely the by product of an age that included the above health benefits, etc.

 Since 1800, the population has surged from 800 million to 7 billion, on its way to an estimated 8 billion, at minimum.

Humanity is a growth sector. Higher life expectancy, lower infant mortality, Much greater understanding of disease control. More minds on the planet mean more genius and more innovation

 The rise in population, the ten-fold increase in wealth in developed countries, and the current explosive growth in developing countries have eaten rapidly into our finite resources of hydrocarbons and metals, fertilizer, available land, and water.

Here comes the Malthus...geometric population growth coupled with Arithmetic food growth (or in this case an increasing rate of "decay" of finite resources) must equal a crisis.

 Now, despite a massive increase in fertilizer use, the growth in crop yields per acre has declined from 3.5% in the 1960s to 1.2% today. There is little productive new land to bring on and, as people get richer, they eat more grain-intensive meat. Because the population continues to grow at over 1%, there is little safety margin.

Like Milton Friedman said "There is no cure for high prices like high prices" This is a static analysis ignoring the inevitable behavioral effects from price signals.

 The problems of compounding growth in the face of fi nite resources are not easily understood by optimistic, short-term-oriented, and relatively innumerate humans (especially the political variety).

OK, fine.

 The fact is that no compound growth is sustainable. If we maintain our desperate focus on growth, we will run out of everything and crash. We must substitute qualitative growth for quantitative growth.

Growth has a way of declining. Trees do not grow to the sky.

 But Mrs. Market is helping, and right now she is sending us the Mother of all price signals. The prices of all important commodities except oil declined for 100 years until 2002, by an average of 70%. From 2002 until now, this entire decline was erased by a bigger price surge than occurred during World War II.

In real or nominal terms?

 Statistically, most commodities are now so far away from their former downward trend that it makes it very probable that the old trend has changed – that there is in fact a Paradigm Shift – perhaps the most important economic event since the Industrial Revolution.

What would a 10% decline in growth in the BRIC countries do to this prognostication? How likely is that event considering the current conditions for growth?

 Climate change is associated with weather instability, but the last year was exceptionally bad. Near term it will surely get less bad.


 Excellent long-term investment opportunities in resources and resource efficiency are compromised by the high chance of an improvement in weather next year and by the possibility that China may stumble.

China may stumble? Have you been reading this blog?

 From now on, price pressure and shortages of resources will be a permanent feature of our lives. This will increasingly slow down the growth rate of the developed and developing world and put a severe burden on poor countries.

Chicken before the egg. Slowing growth rates will have the desired effect on commodities.

 We all need to develop serious resource plans, particularly energy policies. There is little time to waste.

OK then. Lets make Saudi Arabia the 51st state, and buy a large portion of saharan West Africa. We need breeding room.


Mr. Mosler and his MMT theory are doing their best Sheen impersonation. The below excerpt from a well-known bond trader demonstrates that Warren's ideas are percolating among the decision-makers of the world. Readers here will note the similarities.

Firstly, the most important item to understand is the USA discharges its
debt in $US. So the entire argument of rating agencies behind ‘external
funding pressures’ is moot. Functionally there is no difference between a
holder of UST’s who is domiciled in USA or abroad, as they are both $US
dominated savers. The only difference is the foreign saver has no ‘need’ to
save in $US (where a USA investors needs $US as a means of exchange and to
pay his taxes).
So, what if foreign now dump their ust’s?
Foreign investors own ust’s and $us because they WANT to own them. By
engaging in fx driven trade policies, foreigners ‘pay up’ to get $US which
allows them greater sales into the USA market. If foreigners didn’t want to
save in $US, they would change their fx policy which would result in less
market share in USA economy. Foreigners can’t be both buyers and sellers
simultaneously. If foreigners wanted to own less $US, the result would be a
smaller current account deficit in USA, which again using a financial
balance framework would either result in more private savings, or a smaller
govt deficit. Bottom line – if foreigners want to have fewer savings in $US,
either private savers must increase savings, or the govt deficit must fall.

The same way banks offer savers demand deposits and term deposits (ie
chequing accounts versus savings accounts) the USA economy offers savers the
same in the form of $US (demand assets) or UST (term asset). Foreign savers
can therefore keep their $ at their Fed Reserve account and earn basically
zero (functionally a ‘chequing’ or demand account) or buy UST’s
(functionally a ’savings’ or term account) and earn a coupon. There is no
other way to save in risk free space. As said above, foreigners who engage
in fx driven trade policies must accumulate $US demoninated assets. The only
choice they have is term vs demand assets. So indeed if foreigners declined
to own ust’s and alternatively kept their savings in $US at the Fed, the
result could be a higher and steeper term structure for USA rates. If the
Treasury decided to sell less ust’s and more tbills, this term structure
rise could be negated. Note foreigners actions are never about SOLVENCY, its
merely a function of liquidity preference.

The sound of metal fatigue...

...creaking and groaning in the edifice of the EU experiment. Deficits falling due to asuterity measures, public debt rising, and nominal and real living standards decreasing. Not good.

The euro zone's aggregated budget deficit fell last year as most countries slashed government spending to restore market confidence in public finances, but the debt still grew, Eurostat data showed.

The European Union's statistics office said on Tuesday the budget deficit in the euro zone in 2010 was 6.0 percent of gross domestic product, down from 6.3 percent in 2009.
Public debt, however, rose to 85.1 percent from 79.3 percent in 2009.
All euro zone countries except Germany, Ireland, Luxembourg and Austria improved their budget balance last year, but debt rose in all euro zone countries except Estonia.
Eurostat said Greece, which was forced to seek emergency funding from the euro zone last year because it was effectively cut off from market borrowing due to its large debt, cut its budget gap to 10.5 percent of GDP from 15.4 percent in 2009.
This is well above the initial target of the Greek austerity program of 8 percent and even above the latest estimate from the European Union and the International Monetary Fund of 9.6 percent.

Monday, April 25, 2011

The Functional difference...

...between these two fleets (one a representation of a Dutch East India Company fleet, the other a modern carrier group) is zero. This is why the following article regarding Chinese investments in jurisdictions THEY LACK THE MEANS OF SECURING will end badly for them. That this activity is occurring in the Western Hemisphere only adds to the advantage for the United States. There are no concepts of order without enforceability (either actual or coerced via implication of actual force). It is clear that China believes their Treasury holdings gurantee our complicity, but this only goes so far, and they are treading into waters they have little experience in fishing.

As Clausewitz said: "War is the continuation of politics by other means", to which I would add "politics is the continuation of economics by other means".

April 25 (Bloomberg) -- When Tele Norte Leste Participacoes SA, Brazil’s biggest land-line company, was shopping for network equipment last year, Huawei Technologies Co.’s offer had an edge: access to China Development Bank’s $30 billion credit line.
A two-year grace period on payments and an interest rate of 2 percentage points over the London interbank offered rate created an unbeatable deal, Tele Norte Chief Financial Officer Alex Zornig, 52, says.
“The Chinese are filling the space left empty by Americans and Europeans,” Zornig said in an interview. “They are very aggressive and they have a lot of money.”
China Development Bank’s support for Huawei and other Chinese companies is the cornerstone of the country’s “going out” policy, meant to nurture companies in telecommunications, alternative energy and oil. The bank’s low-interest loans dwarf those offered by U.S. and European development agencies, helping Shenzhen-based Huawei and crosstown rival ZTE Corp. increase market share.
“Our support for Huawei, ZTE and other high-technology companies has opened up the overseas market,” China Development Bank Chairman Chen Yuan, 66, wrote in the January issue of China Reform magazine. “We have become the principal source of finance of our country’s overseas investments.”

Saturday, April 23, 2011

Silver and Gold...

...are in full bubble mode...silver in particular is in parabolic Hunts brothers levels. But recall those ETF structures that I have written about before here and the incentive structure surrouding paper claims to gold or silver stored somewhere.

Now the blogosphere is getting nervous after some official statements in response to the usual "unfounded and spurious rumors".

So stay tuned, true believers, when these markets mean revert, there will be lawsuits, prospectus be damned.

Thursday, April 21, 2011

You can lead a horse to water...

...but you can't make him drink.

Deutsche Bank gets it all wrong in a macro report today, ostensibly comparing the U.S. to a peripheral Euro country. Comparisons only serve to illuminate when the objects are actually similar. In this case, the fact that the U.S. is a SOVEREIGN CURRENCY ISSUER and Eurozone countries are not, default risk is zero since nominal dollars can be used to pay whatever amount the Fed desires.

Our bottom line finding is that the relatively low
risk the market attaches to US public debt belies a
substantially higher degree of riskiness (indeed
one about on a par with the euro periphery)
indicated by standard measures of internal and
external deficit and debt. While the debt ceiling
hurdle will likely be jumped with only moderate
disruption to the Treasury market, the challenges
to a much needed fundamental reworking and
redirecting of US fiscal policy are great. Failure of
US political leadership to make substantial
progress in this area in the next few years will
substantially raise the risk of a bond market crisis.

and further down the report, this gem, which I paraphrase as "If this apple tasted like an orange, it would be more like an orange":

If the US were a Euro member, it could be the
next periphery country to go under, well ahead of Spain. It
is worth noting that Japan does not appear among the
more risky countries on this basis despite its very high level
of government debt

Wednesday, April 20, 2011

Becker on the NCAA

Delving into sports for a bit...this is a wonderful article by Gary Becker (of my alma mater) regarding the National College Atheletics Association and its competition-limiting activities. A must read for those interested in free markets and how power expands when unchecked.

Full article here.

a snippet:

Unfortunately for the NCAA, the facts are blatantly inconsistent with these defenses. Consider the recent widely publicized violation of NCAA rules by five Ohio State football players and their coach. The players’ “crime” was that they sold some of their football memorabilia, including signed autographs, for modest sums, and for tattoos. The coach’s “crime” was that he failed to report these violations in a timely fashion. All the players involved, which includes the star of the team, and the very respected coach, will have to miss the first 5 games of the 2011 season. This is almost half of the 12 games played during the regular season. Nothing done by the players involved stolen property or anything else that would violate any laws except those imposed on players by the NCAA.

A large fraction of the Division I players in basketball and football, the two big money sports, are recruited from poor families; many of them are African-Americans from inner cities and rural areas. Every restriction on the size of scholarships that can be given to athletes in these sports usually takes money away from poor athletes and their families, and in effect transfers these resources to richer students in the form of lower tuition and cheaper tickets for games.

That players are recruited as students as well as athletes applies to a considerable extent to Stanford, Duke, Notre Dame, and a few other Division I schools that have high academic standards. The NCAA points out that the overall average graduation rate is about the same for student-athletes as it is for other students. That result also applies to African American and Hispanic students. However, the graduation rates for these minority students-athletes are depressingly low. For example, the average graduation rate of Division I African American basketball and football players appears to be less than 50%.


...a/k/a "Freudian slip".

Putin laments about missed opportunities to make trouble:

April 20 (Bloomberg) -- Russia won’t employ the
“throublemaking” approach of the U.S. to bolster the economy
by printing money and buying Treasuries, Prime Minister Vladimir
Putin said.

“They turned on the printing press and are buying state
bonds -- financing the government by using a printing press --
scattering money across the dollar zone, that is, the entire
world,” Putin told lawmakers in Moscow today. “We don’t have
the same opportunity to make trouble.”

and in other news (and a major reason for the above article), anti-climactic press release of the decade":

Prime Minister Vladimir Putin should run in next year’s presidential elections, according to a senior member of Russia’s ruling party.

“As far as our position on the 2012 elections is concerned, United Russia will focus on its leader, Vladimir Putin,” said Yury Shuvalov, deputy head of the presidium of United Russia’s general council, in comments posted today on the party website. “We look at his candidacy as the priority for whom to put forward from our party in the presidential elections.”

Putin, 58, a former KGB agent, became prime minister after selecting Dmitry Medvedev, 45, to succeed him as president in 2008 because of a constitutional ban on three consecutive terms. With less than 12 months before the next presidential vote, it’s unclear which of the men will run.

Tuesday, April 19, 2011

The Zero Effect

I have written about QE2 in the past, and since QE3 now seems baked in to various asset prices, its time to revisit this chimera.

Swapping zero maturity assets (cash) for various medium and long-dated assets (primarily bonds) is a dangerous way to stimulate the economy.

The Fed believes that ZIRP (Zero Interest Rate Policy) will stimulate the economy by lowering the cost of capital. But what it does not seem to appreciate is the supply and demand factors it has intefered with, causing massive distortions that further depress whatever nascent Shumpeterian creative destruction process that was painfully progressing.

So, a given supply of bonds is converted into cash via Fed purchases. The holders of this new found largesse must re-invest. This is one of the reasons we see a "substitution effect" in stocks and commodities. When supply is constricted, the money must flow somewhere. This has exacerbated global market distortions

Another serious problem is the paucity of collateral. Bonds are posted as collateral for a myriad different transactions, and removing supply from these markets produces detrimental results. Money market rates, LIBOR, and other measures of short term lending have been seriously effected by this. This is doubly important because the INTEREST RATE CHANNEL IS BROKEN. What matters now are the credit markets, which do not need any more friction. Unfortunately, this is precisely what has happened with QE.

So, imnsho, the QE has done more harm than good...this for a program that has no net effect economically, but massive effects for otherwise competitive and efficient markets.

Monday, April 18, 2011

The United States is less stable... terms of credit rating than many countries now, such as the following:

Denmark AAA/Stable/A-1+ AAA/Stable/A-1+
Finland AAA/Stable/A-1+ AAA/Stable/A-1+
France AAA/Stable/A-1+ AAA/Stable/A-1+
Germany AAA/Stable/A-1+ AAA/Stable/A-1+
Liechtenstein AAA/Stable/A-1+ AAA/Stable/A-1+
Luxembourg AAA/Stable/A-1+ AAA/Stable/A-1+
Netherlands AAA/Stable/A-1+ AAA/Stable/A-1+
New Zealand AAA/Stable/A-1+ AA+/Stable/A-1+
Norway AAA/Stable/A-1+ AAA/Stable/A-1+

Yes, small Dutchies and Cantons in the middle of a historically unstable region of the world have better ratings than a country with 130 years of relative domestic peace and stability, to say nothing of the extremely dangerous position the entire European banking system is currently in due to the peripheral countries. Note that several of these are not SOVEREIGN CURRENCY ISSUERS, and therefore much more prone to funding crisis as they attempt to secure currency for payments. SOVEREIGN CURRENCY ISSUERS are under no such constraint.

Thowing down the gauntlet

The U.S. has been downgraded by a U.S. company with as many political ties and revolving doors as just about any company extant. So, since nothing really fundamental has occurred in the past month regarding the ability of the United States, a SOVEREIGN CURRENCY ISSUER, to simply debit and credit Treasury accounts at the Fed, The Recapitulator thinks some blatant manipulation is going on.

You see dear readers, sometimes "news" is simply fabricated for the benefit of certain market participants. This "news" of a "negative watch" by S&P manufactures a VALUABLE piece of information, one in which if it was LEAKED prior to release, would be very profitable to various players in the game. The effect cascades as more players are convinced that this information somehow changes reality itself. Its a wonderful example of how the silly assumptions raised by academics regarding the "efficiency" of markets are nothing more than hand-waiving normative musings. So, qui bono?

NEW YORK (TheStreet) -- Standard & Poor's has downgraded its long-term ratings outlook on U.S. sovereign debt, citing worries about the country's mounting budget deficits. While S&P acknowledges that the U.S. has been effective in its monetary policies, the consistent global preference for dollar over other currencies and the flexibility and diversification of the domestic economy, it proceeds with the downgrade to negative from stable because of the country's "very large" budget deficits relative to AAA peers and uncertainty over how they will be resolved.

Sunday, April 17, 2011

The vertical pedal

is now being pushed to the floor. What a predicament. Entire cities of vacant "assets" that created loans (and corresponding bank deposits) based on the ephemeral conjurings of a corrupt political leadership. Defending the currency further weakens export strength (recall the trade deficit figures and the "amazing" transition to internal demand) causing more and more concentration in the speculative areas of the Chinese economy. Unintended consequences indeed, and fasten your seatbelts.

(from Reuters)
The reserve rate rise, which followed an increase in benchmark bank interest rates on April 5, was the seventh since China stepped up efforts against inflation in October and underscored the government's determination to keep the economy on an even keel.

The move was not a surprise -- investors predicted more tightening after last week's data showed an acceleration in inflation, and more worryingly, sustained capital inflows that threaten to keep inflationary pressure high.

"This rise continues the tightening measures of the central bank," said Lin Songli, an economist with Guosen Securities in Beijing. "The first-quarter GDP shows that the whole economy is good, so there is still space for tightening."

Friday, April 15, 2011

In other news...

...looks like computers are useful, cars are more efficient than horses, and it appears plastics have many industrial applications.

This was obvious years all those who looked.

BEIJING, April 14 (Reuters) - Moody's Investors Service on Thursday downgraded its outlook for China's property sector to negative from stable on concerns about deteriorating credit conditions for developers over the next 12 to 18 months.
The downgrade came a day after Premier Wen Jiabao told a cabinet meeting that home prices were still rising overly fast in some cities and reaffirmed intentions to keep tightening policies in place against property speculators.
Moody's said in a report that reduced bank lending, rising interest rates and increasing property supply would inevitably bring down sales and profit margins while also worsening their balance sheet liquidity for some developers.
"During the next 6-12 months, Chinese property developers will face challenges in securing debt financing, as the government enforces its strategy of slowing monetary growth to reduce the risk of accelerating inflation and to manage domestic banks' exposure to the property sector," the ratings agency said.

Wednesday, April 13, 2011


Is the last thing the world needs at this point. There is nothing wrong with Keynesian stimulus given crippled credit activity and little money velocity.

Quick question: Do you think there will be more nations gracing this planet in the next decade or less?

My position given my writings here should be clear: we are going to bear witness to some fracturing of 20th century cultural collisions. Geographic areas, especially in the developing world, will gerrymander into resource areas.

Tuesday, April 12, 2011

Demand miracle in the Middle Kingdom?

Recent article about the Paper Dragon...comments in italics as usual.

By David Goldman Who would have thunk it two years ago? China’s massive trade surplus melted into a deficit during the first quarter, mainly due to unexpectedly high domestic demand. That is perhaps the best piece of news the world economy has had in a long time: it means that China has shifted from dependence on exports to sustain a 50% savings rate, to a more balanced model sustained by the internal market. We don’t yet have data, but China’s saving rate must have shrunk, and China’s relatively poor interior must be absorbing more of its output. All this is
for the good.

Much to early to call a demand miracle in Asia. Domestic demand always spikes prior to asset price collapses, and the savings rate data (if any is to be believed) is hopelessly skewed by bank lending numbers, and caution must be heeded prior to making definitive statements about the distribution of demand.

Also remarkable is that the United States is managing to import capital at a trillion-dollar annual rate despite the fact that China no longer has a trade surplus to invest in US Treasury securities. Who is buying US Treasuries? The answer is: Everyone. As the table below makes clear, a third of the total came through the United Kingdom, which means banks and hedge funds, and a sixth of the totla came through the Caribbean, which also means banks and hedge funds. Brazil accounted for $35 billion.

Of course everyone is buying. The smart money has always been in the debt markets, and they see what is (likely) on the say nothing of securing "good" collateral given the tempests ahead for other "reserve" currencies like the Euro and Yen.

That contains good news as well as bad news. The good news is that a great deal of the world’s new wealth is coming back to the US Treasury market. Despite the frightening size of the US deficit, the US Treasury market in some ways is the leper with the most fingers. Japan’s debt ratios are the worst in the world, and the European Union is held back by the PIIGS. New wealth diversifies out of risk, and some of this comes back to the US. The bad news is that some of this reflects the weakening of the US dollar and foreign exchange intervention by central banks, including Brazil, whose reserves have grown by almost $29 billion this year. The Fed prints money and foreign central banks print their own currency to slow the rate of appreciation of their own parity.

First part yes, as to the "printing"...whatever. This is not a lock-step procedure, and I have no idea what the author's point is here...that "bad news" floating currency pricing?

Monday, April 11, 2011

No real estate bubble in the Middle Kingdom...

...a continuing saga...

April 11, Chinese Premier Wen Jiabao asked local governments to
shoulder responsibilities for keeping home supplies and prices stable
in accordance with the central government’s direction.

“The central government’s goal to cool the overheated property market
is clear and that its determination is firm,” the premier said during
a visit to eastern China’s Zhejiang province.

Since the onset of this year, the Chinese government has showed
unremitting efforts to curb speculation in the property market,
including a bunch of policies to cut bank lending and restrict home

Those measures have, at least in the short term, put brakes on home
transactions in cities with home-buying restriction in place. But home
prices remain stubborn as usual, with Chongqing in southwestern China
showing the quickest rise of 107.4% week-on-week during the first week
of April, according to statistics from China Index Research Institute.

When value systems collide.

/begin relatively useless and untestable conjecture

When behavioral and moral systems based on resource scarcity (deserts) collide with societies that do not suffer the same constraints, dissonance occurs. This effect is compounded per % of population difference between the two moral systems.

/end relatively useless and untestable conjecture

Still, it seems the more zelous and intolerable the belief system, the more they seem compelled to control "their" female population. Its no wonder societies that feel more enlightened feel threatened by what they perceive as a very obtuse system of property rights. Once again, this is all about power. We, as majority, do not wish to be confronted with representations of your unenlightened perspective, and therefore said representations are against the law. This in a country at the academic forefront of "Universal human rights" (when it supports their goals.) The mechanisms for "justice" are still controlled by man...and subject (even controlled) by his prejudice.

Though only a very small minority of France's at least 5 million Muslims wear the veil, many Muslims see the ban as a stigma against the country's No. 2 religion.

About a dozen people, including three women wearing niqab veils with just a slit for the eyes, staged a protest in front of Notre Dame on Monday, saying the ban is an affront to their freedom of expression and religion.

Much larger crowds of police, journalists and tourists filled the square.

One of the veiled women was seen taken away in a police van. A police officer on the site told The Associated Press that she was detained because the protest was not authorized and the woman refused to leave when police asked her to. The officer was not allowed to be publicly named.

McIcarus understands his predicament?

Very good. The arguments presented hold some of the rational for my continued conviction that deflation is the greater risk for the U.S. and other industrialized countries...a position that me and my colleagues have been debating at great length.

(Credit to Lisa O'Carrol)
Is Ireland heading for a Japanese lost decade?There are many similarities between the recessions in Japan and Ireland but can the Irish government learn from the Japanese and avoid a lost decade? Is setting up a new 'clean' bank the answer?

Can Ireland help its current fiscal position with the creation of a new bank? Photograph: Carl De Souza/AFP
I'm a student of economic history and was recently re-reading Richard Koo, chief economist at Nomura Research Institute's The Holy Grail of Macroeconomics, a study of Japan's lost decade, I was struck by the similarities of Japan to Ireland. Of course the economies are different. Of course Japan had its own currency. Of course Ireland's fiscal and political problems would be there regardless of Ireland's banking disaster.

But still, we have the banking crisis, the asset price collapse, the vast increases in numbers of non-performing loans, the deflation, the deleveraging, the balance sheet problems in banks, businesses, and households, the rush by the private sector to pay down debt, the cosy institutional arrangements between bankers and centres of power, the repeated failed attempts at recapitalisation, and finally, the deep restructuring of the Japanese and Irish banking systems.

There are more similarities than differences in this story.

One of the crucial elements in the balance-sheet recession story is the injection of fresh capital into the system, either as a fiscal stimulus or as an increase in credit.

Ireland can't help its current fiscal position, but a new bank, financed from abroad, and designed primarily to get credit flowing to SMEs and agricultural concerns as well as other strategic priorities, might act as the injection of capital the economy needs.

No real estate bubble in the Middle Kingdom

None at all. Totally efficient capital allocation. Prices transparent and highly compeititve.


The next course of Tapas is Spain

One by one, this is better than Agatha Christie.

(credit to the great Wolfgang Munchau)

Spain had an extreme property bubble before the crisis, and unlike in the US and Ireland, prices have so far fallen only moderately. According to data from Bank of International Settlements, real house prices in Spain – price per square metre adjusted by the personal consumption deflators – rose by 106 per cent from the beginning of monetary union and to the peak in June 2007. They have since come off by 18 per cent as of end-2010. Calculations such as these are sensitive to the starting date, but Spanish real prices were relatively flat throughout the 1990s, so this is a relatively safe starting point.
Where will it stop? I would expect all of that increase to be reversed. The total peak-to-trough fall would be more than 50 per cent, and prices would have to fall by another 40 per cent fall from today’s level. Is that a reasonable assumption? In the US, real house prices stagnated for most of the 20th century. Increased demand, through immigration for example, should not affect the price level, as long as supply can adjust.
The situation is different in countries with natural or artificial supply constraints, like the UK. But in terms of supply conditions Spain is more similar to the US. I have yet to hear an intelligent reason why Spanish real house prices should be any higher today that they were 10 years ago, and indeed why they should keep on rising.
The most important housing market statistic in Spain is the number of vacant properties, about 1m, which means that the market will suffer from oversupply for several years. This will be the driver of further price declines. Given the stress in the system – recession, high unemployment, a weak financial sector, higher oil prices and rising interest rates – one might even expect house prices to overshoot below the horizontal trend line.

Saturday, April 09, 2011

In other news...

...Buffet says ice cream is good for you, McDonald's says there is no health risk from cheeseburgers, and GE says Nuclear power is perfectly safe. It is impossible to take these comments seriously and it is equally clear what positions they have...and of course they are the patrons of the Newport Beach crew as well.

"'For us, right now, it stops at Portugal,' Nikhil Srinivasan, Chief Investment Officer at Allianz, told journalists.

Srinivasan said Allianz was not increasing its exposure to Portugal, Ireland and Greece, the three euro area periphery countries that have been racked by investor worries over their government's ability to repay debt"

Friday, April 08, 2011


...the eternal enemies of principles.

All non-axiomatic arguments must be approached with caution...they are mostly rhetorical devices to guide perception at a specific point in time, and not as a statement of principle for action across the spectrum of all outcomes.

Put another way, in the immortal words of Jack Sparrow:

"The only rules that really matter are these: What a man can do, and what a man can't do."

Recall our President's pre-election position on the war powers of the President.

Which was prior to his new determinations of national interest, it seems:

April 7 (Bloomberg) -- President Barack Obama had the
constitutional authority to use military force in Libya without
congressional approval because he could “reasonably determine”
intervention was in the “national interest,” according to a
U.S. Justice Department memo.

Expropriation risk...A continuing series...

I have written about the Andean region several times on this blog, and its propensity for upheaval and traditional sympathy to communism and socialism. These events will garner the attention of the Administration very quickly. Perhaps there is hope yet (from my perspective) for a more formal delineation of the "Obama Doctrine" that I wrote about shortly after Obama's ascension.

April 8 (Bloomberg) -- Ollanta Humala campaigned for Peru's
presidency in 2006 wearing red T-shirts and expressing admiration for
Venezuelan socialist leader Hugo Chavez. This year, he's donning
business suits and vowing to expand ties with investor-favorite Brazil.
The former army officer's change in raiment and rhetoric has helped
boost him into first place in polls ahead of the first round of voting
April 10. Investors including Barclays Capital, who in December
dismissed him as a "radical" also-ran after Peru grew 8.8 percent last
year, now say the outcome of a likely runoff on June 5 is too close to
While abandoning the anti-capitalist rhetoric has allowed Humala to
build support beyond his rural base, it's unclear if he'd govern with
the same restraint, said political analyst Alvaro Vargas Llosa. Peru's
stocks, bonds and currency fell in the past three weeks as Humala
overtook congresswoman Keiko Fujimori and two other rivals who are tied
for second place.
"There is real reason to fear that Humala won't be part of the
modern left," said Vargas Llosa, a senior fellow at the Independent
Institute in Washington. "It's a real risk because we've never had it so
Humala had 26 percent support in a nationwide poll taken March 26
to April 1 by Lima-based researcher Ipsos Apoyo, up from 21 percent a
week earlier and 10 percent in January.
Fujimori, the daughter of jailed former President Alberto Fujimori,
trailed him with 18 percent support, while former President Alejandro
Toledo had 17 percent support and Toledo's former Finance Minister Pedro
Pablo Kuczynski had 16 percent.

Thursday, April 07, 2011

The Paper Dragon: Patron of the Arts

Over-paying for an easily transportable item (in the case of unfortunate events unfolding at or near your own domicile) such as art is not such a bad idea. We have seen a panic for art many times in history, and as I said, there is a certain convenience with the ability to fit 100 million dollars into a suitcase. However, it is also clear that this activity is another lens into Chins's future.

full article here.

Once again, China has surpassed the United States in a key economic number. No, it's not GDP. It's art. In four years, China has zoomed past us from the world's fourth-biggest fine art scene to the world's largest auction market for art. Just last week, Chinese buyers helped Sotheby's and Christie's set (yet another) record by bidding up the price of a Chinese vase estimated to fetch $800 all the way to $18 million -- a 22,000% mark up!

That's the kind of fever pitch the Economist captured when it reported "astonishing bidding" by wealthy Chinese across the globe as "record after record has fallen away as newly wealthy collectors from mainland China have piled into salerooms in London, New York and Hong Kong."

China's meteoric rise in the global auction world might be a sign of well-earned wealth. But periods of record bidding are scarily accurate bubble predictors, according to Vikram Mansharamani, author of the Boombustology. They're a "symptom of overconfidence and hubris" as a newly rich society spends its easy money with exponential flamboyance.

It's not hard to see signs of froth and fake wealth in China. Housing investment hit the inauspicious mark of 6% of GDP, the same level the U.S. touched in 2006 before our bubble burst. Meanwhile, the Chinese government has spent lavishly on ghost towns like Qungbashi (a city built for 1.5 million residents and occupied by only 20,000) and ghost malls like New South China Mall -- built to handle 1,500 tenants but home to only a few dozen.

China's appetite for fine art isn't a stray indicator, Mansharamani says. It's a telltale clue from a disaster movie we've seen play out at least three times before.

Wednesday, April 06, 2011

Do we really need another Top signal?

I truly admire the precision here. 38,820. Impressive. Numerologists can figure out the relations between the digits, but I do know one number regarding this prediction: .000001. That is my P value for such an still holds a slight possibility if we experience Weimar-style hyperinflation (and interestingly, the cover does not include a currency sign, so perhaps he means it will be worth that amount denominated in Yuan).

These books tend to cluster around market highs, so caveat emptor.

Who would have possibly thought Portugal...

would do THIS?

Self explanatory. Nothing changes.

Portugal will seek a bailout from the European Union after the nation’s political crisis helped push borrowing costs to record levels and forced it to become the third euro-region country to need rescuing.

“I tried everything but we came to a moment that not taking this decision would bring risks we can’t afford,” Prime Minister Jose Socrates said in a televised statement from Lisbon late yesterday. “The government decided to make the European Commission a request for financial aid.”

Portugal is aiming for a package that may be worth as much as 75 billion euros ($107 billion), according to two European officials with knowledge of the situation. Bond yields have surged since Socrates offered to resign March 23 after parliament rejected proposed budget cuts, leaving him in charge of a caretaker government with limited powers until a June 5 election.

Socrates, who leads the Socialist Party

Nice Summary...

...of some of the reasons why China is prone to speculative bubbles. In my view, institutionalized and culturally accepted corruption (guanxi) coupled with the implicit public ownership of all wealth has led to an intractable distribution of the massive wealth that was generated for 3 decades. In the United States, there are (at minimum) forums to display one's contempt for the government and demand accountability through either elections, the legal process, or social shame. In China, these forums are called "Dungeons", where you may freely talk to no-one about your views for the rest of your (short and unhealthy) life.

In a matter of days, there was a displacement, an apparent expansion of credit in the underground market, euphoric buying on expectations of ever-higher prices and finally revulsion once reality sank back in. The meteor shower of shooting salt prices over China is not an isolated example of speculation gone awry: The current stockpiling of copper in China’s ports is inflating the global price, which could collapse if regulators put restrictions on the use of the metal as collateral for bank loans. Likewise, Hong Kong’s property bubble is partly a spillover effect from the bubble in some of China’s urban high-end markets. In fact, investors are vulnerable to several factors within the Chinese system that could affect global asset prices.

First, decades of financial repression have resulted in the broad money supply (M2) expanding to 182% of GDP, providing a massive pool of potential liquidity for speculation, while negative real interest rates on deposits encourage savers to seek alternatives. There are sufficient monetary assets to fund a bubble of stupendous magnitude; no excessive loosening is required. From the end of Q3 2006 to its peak in October 2007, the Shanghai Composite Index increased 230%. In the preceding six quarters, M2 growth outpaced nominal GDP growth by less than a percentage point. It was the velocity of money that spiked, not the quantity. Velocity is more difficult for the People’s Bank of China to control, especially with banks’ required reserve ratios already at record highs, and current conditions seem ripe for a bubble.

Second, the Communist Party of China’s dominance over the press, even independent sources, results in low trust of official information, counteracting their ability to dispel unfounded speculative manias. At the same time, heavy reliance on social networks, guanxi, results in an abnormal amount of inside information sharing, and thus speculative opportunities. Positive feedback loops proliferate as investors pile into the same opportunities and bid prices up.

Third, the government’s interference in price setting distorts markets, creating potentially huge divergences from equilibrium. From vegetables to apartments, the government’s efforts to control prices only shifts the adjustment burden to the supply side as markets seek equilibrium. This also creates a whack-a-mole game between speculators and the government as liquidity shifts from one asset class to another.


They correlate very well using 3-6 month time lags. This is one of the reasons why investors should be extremely wary of claims that investments involving foreign currency risk and subject to various geo-political stressors are somehow "immune" from global turmoil and provide diversification from systemic risk. EVERYTHING IS CONNECTED, and claims of "low correlation" must be approached with a standard analogous to the SCOTUS (Supreme Court Of The United States) "strict scrutiny" standard with respect to Constitutionality challenges.

(Reuters) - While investors balk at lending to debt-laden governments across the euro zone and even question holding low-yielding U.S. Treasury credit, some of the world's riskiest governments are still finding willing lenders.

Sovereign debt from frontier markets is benefiting in part from revved-up investor desire for high yields and also diversification, given these frontier bonds tend to have a low correlation with the ebb and flow of major world markets.

Even given that rationale, some investors have had a lot of risk to absorb, considering this year's outright default by war-torn Ivory Coast and the shrinking foreign exchange reserves of Soviet-style command economy Belarus.

Expropriation risk... I have detailed on this blog on numerous ocassions, the chief export of the United States is law and order (usually obtained by power, whether soft or hard)

I have also maintained that China would be unable to hold its newly aquired land and associated massive capital investment plans in Africa. Of course, these projects could be failsafe emigration points should China become unstable...but time is running out.

And so it goes. In the relatively calm supra-saharan portion of the continent. (source unknown at present, was forwarded by trusted colleague.)

THE unrest in Libya has cost Chinese companies dearly beyond the rising price of oil.

More than 30,000 Chinese workers were working in the north African country on infrastructure construction projects such as railways and telecoms before they had to evacuate.

At least 27 Chinese construction projects had suffered directly from attacks even before NATO air strikes occurred, according to the Ministry of Commerce.

More than 50 projects by 75 state-owned Chinese companies in Libya have been suspended due to the uprising that has pitted rebel forces against the army of Moammar Gadhafi.

Among those are four listed companies: China Railway Construction Corp, China Gezhouba Group Co, Metallurgical Corp of China and China State Construction Engineering Corp, the ministry said.

The value of projects in Libya is estimated at US$18.8 billion, according to Commerce Minister Chen Deming.

Tuesday, April 05, 2011

The Fed's Gambit...

...caught between roaring ("transitory") commodity prices and the dismal bank lending activities (recall that Loans create effect banks conjure "money" from nothing when granting a loan and posting required reserves at the Fed level) the Fed is not in an enviable spot.

Bank lending is not improving.

While the rest of the investment world screams inflation, I still hold the contrary position that deflation holds the larger danger, precisely because the lower gears of government are grinding toward austerity measures. This, coupled with the commodity markets sillyness are balance points in my favor. In addition, the geo-political events in the Eastern hemisphere are in my opinion more destabiliziing than what is currently conjectured.

ECB: crisis averted

This is not the time to announce "mission accomplished" with respect to a nascent economic recovery. Japan and the middle east tensions have not been fully accounted for, and the peripheral EU countries are still embroiled in crisis. Interesing language from the EU official below regarding "normalization" as criteria for rate moves as opposed to adhering to the explicit mandates of the Treaty. (i.e., that inflation is the paramount, singular determinant for setting monetary policy. So the argument that "rates look to low historically" is somewhat strange)

PARIS (MNI) - The interest rate increase signaled by the European
Central Bank, likely to come on Thursday, is intended mainly to begin
steering its ultra-low policy rate towards non-crisis territory,
according to well-placed Eurozone monetary officials.

That suggests other interest rate hikes will follow, though not
necessarily at a rapid pace, given the uncertainty surrounding Japan and
the still volatile situation in Portugal, Ireland and Greece, these
officials told Market News International in conversations that took
place in late March and early April.

"One should not look too much at interest rates from an inflation
perspective," said a senior Eurosystem source. "The main point is the
medium-term normalization of policy. It is quite obvious 1% is a level
of rates decided in a crisis."

Now why would wealthy Chinese...

...choose to send their adolescent children to American High Schools?

More sensible planning "if" something "unfortunate" happens in the middle kingdom.

MILLINOCKET, Maine – Northern Maine is 7,000 miles and a world away
from China, but that's not stopping a school superintendent from
recruiting Chinese students to attend public high school in this
remote mill town.

Faced with declining enrollments and shrinking revenues, public school
districts from Maine to California are seeking out students from
overseas, particularly China, to attend their high schools. At least
two public schools in Maine have 10 tuition-paying Chinese students in
classes this year, and the superintendent in Millinocket is the latest
to set his sights on China.

It's a growing trend: Other schools are doing the same in Arizona,
Arkansas, California, Florida, Illinois, Massachusetts, Ohio, Virginia
and Washington, according to a student recruitment agency in San

Next fall, Millinocket Superintendent Ken Smith hopes to have at least
60 Chinese students — each paying $13,000 in tuition and another
$11,000 for room and board — at Stearns High School. Stearns at one
time had close to 700 high school students, but enrollment has fallen
over the years to under 200 this year.

Now why would wealthy Chinese...

...wish to have their children born in America, given their current citizenship in the glorious and harmonious PRC? Why would they choose to spend so much on an "insurance policy"!

Just sensible planning really.

"SAN GABRIEL, Calif. — … For months, officials say, the house was home
to ‘maternity tourists,’ in this case, women from China who had paid
tens of thousands of dollars to deliver their babies in the United
States, making the infants automatic American citizens."

"Immigration experts say they can only guess why well-to-do Chinese
women are so eager to get United States passports for their babies,
but they suspect it is largely as a kind of insurance policy should
they need to move."