History Is Not a Closed Book: Signals from Noises, Seeing Opportunities in Problems

``All political thinking for years past has been vitiated in the same way. People can foresee the future only when it coincides with their own wishes, and the most grossly obvious facts can be ignored when they are unwelcome."-George Orwell

FINANCIAL markets thrive on dissenting opinions. An exchange occurs when a buyer, who buys on the general premise that the price of the financial security will rise in the future; in contrast to a seller, who sells on usually the belief that price of the same financial product will fall, agrees to consummate a deal on an agreed price. And because markets are mostly about psychology and human action, subjective convictions are parlayed into actual risk-taking activities. Curtly said, differences in outlook make trades possible.

Since we write about the financial markets, being that “what we see depends on where we stand”, our opinions are usually subjected to validity test by MEASURE of PERFORMANCES. Markets continually give us a HUMBLING experience where we are often reminded of our vulnerabilities to countless errors from actual SUFFERING or losses. Hence, we try to avoid losses or the angst of suffering by LEARNING from our past mistakes. And in doing so, we countenance the possibility of such shortcomings by keeping an open mind or by accepting views in contradiction to our biases. Therefore, an imperative quality of a successful investor’s mindset is one’s ability to DISTINGUISH the requisite SIGNALS from the confounding NOISES. Some information matters while others don’t.

So in trying to winnow signals from noises, we go back to our assertion that Japan’s aging population will be forced to alter the construct of their “homogenous” society, the latest news from Japan Times shows us some telltale signs ``The Japan Business Federation (Nippon Keidanren) has proposed that skilled foreign workers be allowed to get temporary full-time working positions at Japanese companies in areas where Japanese workers are scarce....The federation said those foreign workers should be accepted from countries that have signed economic partnership agreements with Japan and should be limited to those with skills in areas where Japanese workers are scarce.”

Of course, this is aside from the recent FTA agreement concluded by Japan and the Philippines to test the waters of accepting nurses and caregivers to compliment their declining labor force. In short, demographic trends are gradually shaping the political and economic framework of Japan. What used to be will NOT be.

We see a similar case but from a different angle in India, whose economy seems to resemble our own, allow me to quote at length another favorite columnist of mine, MSNBC Jim Jubak. Please bear in mind that this article is imbued with political, economic and investing dimensions (emphasis mine),

``Somewhere between 30% and 40% of the country's crops rot in the fields or spoil in transit because of the country's creaky infrastructure. There simply isn't any way to get the food to market in time. What does make it through the supply chain is subject to huge markups at each stage of the process, because getting food from warehouse to distribution center to retail store to consumer is so time consuming and cumbersome. Consumers pay twice as much for wheat, for example, than do wholesale buyers. That adds another layer of inflation to food prices at a time when food inflation doesn't need any help in running wild: Wholesale wheat prices jumped 54% between April and November 2006.

``Agriculture isn't the only sector of the economy paying the price. On overcrowded highways, speeds average less than 20 mph. Major cities in some Indian states cut power to factories one day a week. Ships have to be unloaded manually and cargo manually loaded onto trucks. Getting cars the 900 miles from the factory to the port at Mumbai takes one automaker 10 days.

``India spends just 4% of its gross domestic product on infrastructure in comparison to the 9% spent in China. That disparity has existed for more than a decade. As a result, while China has 25,000 miles of expressways, India has just 3,700 miles.

``Facing what amounts to a rebellion by the rural poor over soaring food costs that is likely to cost the ruling Congress Party power in New Delhi, the government budget released in March promises to tackle the infrastructure part of the problem by raising spending on roads, bridges, airports, etc., by 40%. But the government isn't stopping there: It is promoting public-private partnerships on infrastructure projects that are projected to invest $300 billion to $500 billion over the next five years.”

Our take: The political survivorship of its ruling class DEPENDS on delivering affordable basic services to its constituents, where infrastructure bottlenecks in the face of rising demand has resulted to pressures of rising consumer prices which has affected its rural poor.

Hence, the political elite seeks to undertake projects which would facilitate MARKET FORCES by increasing ACCESSIBILITY, promoting COMPETITION and permitting FOREIGN CAPITAL to finance these in order to accomplish such goals. So what you have here is NOT your moral “virtuous” order at work but of allowing market forces to solve its economic and political problems.

On the investing dimension, it goes to show that the infrastructure boom is in GLOBAL LATITUDE which should continue to provide underlying support to the global commodity cycle.

Essentially you have been presented with TWO outstanding complementary themes, INFRASTRUCTURE and COMMODITIES. Notwithstanding, the rapid growth in key emerging markets with SIGNIFICANT POPULATION offers various LATERAL opportunities in many aspects of a rapidly changing world where a ``TRIPLE CONVERGENCE – of NEW players, on a new PLAYING Field, developing NEW processes and habits for HORIZONTAL collaboration”, to quote Thomas Friedman in his marvelous book the WORLD is FLAT, could likely be the important forces that would shape politics and economics in the 21st century.

India and Japan’s present evolutionary experience can best be observed by the following prescient quote lifted from John Maudlin’s equally magnificent book “Just One Thing” on James Dale Davidson and Lord William Rees-Mogg in the Sovereign Individual in 1997...

``In short, the future is likely to confound the expectations of those who absorbed the civic myths of 20^th century industrial society. Among them are the illusions of social-democracy that once thrilled and motivated the most gifted minds. They presuppose that societies evolve in whatever way governments wished them to-preferably in response to opinion polls of scrupulously counted votes. This was never true as it seemed 50 years ago. Now it is an anachronism, as much artifact of industrialism as a rusting smokestack. The civic myths reflect not only a mindset that sees society’s problems as susceptible to engineering solutions; they also reflect a false confidence that resources and individuals will remain as vulnerable to political compulsion in the future as they have been in the 20^th century. We doubt it. Market forces, not political majorities, will compel societies to reconfigure themselves in ways that public opinion will neither comprehend nor welcome.”

Finally we argued that the main reason why the Philippine economy has been sluggish is due to its dysfunctional markets, prompted by various forces. Although we have dealt with this in the past, our aim is to show how inadequate our financial sector has been in providing the necessary savings and investment channels for our domestic capital investments and the corresponding support for the consumer sector.

Figure 5: Barry Ritholz/Wall Street Journal: Banking on Consumers

As shown in Figure courtesy of another favorite analyst Barry Ritholtz, the Philippine banking sector represents only 55% of our GDP considering that the banking sector has been the traditional, if not the dominant source of financing for our enterprises in contrast to developed countries or to some of our neighbors.

Although the chart INTENDS to show of a probable shift from an export-driven paradigm to a consumer driven growth engine by heavyweight emerging markets as India and China, the insufficiency of their financial infrastructure and the narrow breadth and depth of its banking system makes such transition to be graduated. Even so, the massive ongoing wealth transfer from the West to Asia makes such direction almost inevitable.

In the investing spectrum, if you share the conviction that emerging market economies will advance to a level near the developed worlds then investing in the FINANCIAL INFRASTRUCTURE and its BANKING system, which may enhance the breadth and depth of its markets in support of its economic goals are the way to go, aside from the earlier themes I mentioned.

Cloaked beneath every problem are opportunities, seeing it is a matter of choice.