Thursday, April 30, 2009

Blogs Versus Traditional Media: Divergent Weights of Issues Covered

Pew Research shows how topics diverged in terms of coverage by blogs against traditional media. Read the rest here.
What seems interesting is that since social networks have been actively competing with traditional media, the divergent weightings of topics could possibly reflect on the niches of audiences or of the interests of publishers. To which media the market evolves to could win more ad spending.

Self Regulation In Child Pornography

Many have claimed that the recent crisis highlighted the failure of market's self regulation.

In contrast, we assert that markets have merely responded to the incentives brought about by the policies imposed by the regulators.

For instance in the tightly regulated banking industry, loose monetary policies and other administrative policies that encouraged moral hazard severely distorted the industry's incentives in managing its resources, which subsequently ballooned their risk appetites by taking on more leverage by circumventing regulations and erecting a "shadow" system.

And this has been compounded by authorities who were "caught sleeping at the wheel" or who were in collusion to "game" the system or what is known as the "regulatory capture".

For industries, such as the internet service, which have been less subjected to incentive skewing regulations, the self policing mechanism appears to be taking on some good effect: for instance applied to the crusade against child pornography.

According to the Economist, ``SELF-REGULATION by internet authorities and internet service providers (ISPs) may be having some effect in combatting the worst kinds of online crime. Last year there were 10% fewer websites hosting indecent images of children than in 2007, according to the Internet Watch Foundation (IWF), which deals with criminal internet content reported in Britain. Although a worrying 1,530 sites were in operation globally, this is somewhat lower than the peak of almost 2,000 in 2006, perhaps because of more effective co-operation from ISPs and better data sharing with international authorities. The IWF notes that domains are often moved around every few days, making it much harder to block them."

To quote Jeffrey Tucker in Learning from Web Commerce, ``The key feature of most internet commerce is that government is at arm's length. If the rest of the economy were permitted to work in the same way, all of the blessings of innovation, service, self-regulation, and consumer sovereignty would be everywhere, and not just on computer screens."

Wednesday, April 29, 2009

Tracking Swine Flu's Global Reach, Understanding Pandemics

The following map from New York Times shows of the areas where the contamination from the Piggy Flu has been accounted for so far.

The epicenter being in Mexico.
The map below reveals of the global reach.


So far only 7 countries have reported cases of the flu's infestation.

According to the
New York Times, ``Israel confirmed its first two cases of swine flu, which is now in at least seven countries. Ten others including China and Russia, which were set to quarantine passengers suspected of having the flu, are investigating possible cases."


Despite the global reach, this hasn't been pronounced yet as a full blown pandemic.

Anyway to give you an idea how pandemics work, the map below from Leonardo Monasterio gives a great perspective of the spread of the Bubonic plague otherwise known as the Black Death, one of the deadliest in history.

The reported casualties-75 million people worldwide. Europe suffered most having lost 30-60% of its population.

The difference in the manner of
contamination then and today is that the former has been contiguous whereas today has seen a wider dispersion.

Although I don't think we are going to get anywhere near this given the positive response of the flu to present medication. We just hope that this won't mutate into a drug resistant strain.

Besides, the alertness and swift response gained from recent experiences (e.g.
SARS and the Bird Flu or Avian influenza) aside
from the capability of technology to adopt should make us more prepared to deal with this pestilence.

Tuesday, April 28, 2009

25 Largest Companies of the World

25 largest companies in the world as compiled by Bespoke Research
According to Bespoke Invest, ``For those interested, we highlight the 25 largest companies in the world. For each company, we provide its country, sector, price (local currency), year to date change, and market cap in dollars. As shown, Exxon Mobil (XOM) is the biggest company in the world and the only one worth more than $300 billion. PetroChina ranks second and is the only other company worth more than $200 billion. The Industrial and Commercial Bank of China is the world's third largest company, giving China two of the biggest three. Wal-Mart and Microsoft round out the top five. The United States still dominates the list with 12 of the 25 spots. China ranks second with four spots. General Electric used to be the biggest company in the world, but it has slipped all the way down to the 18th spot. Google (GOOG) is also on the list at number 22."

Including China Mobile which has been classified under Hong Kong China has 5. Although the others have been spread among Japan 1, Britain 2, Brazil 1, France 1,Switzerland 1, Netherlands 1, and Australia 1.

By region North America has 12, Asia 7, Europe 5 and South America has 1.

What is interesting is that we are seeing more Asian companies in the race among the elite.

10 US Energy Facts


1 New York State per capita energy consumption is among the lowest in the nation due in part to its widely used mass transportation systems.

2 California imports more electricity from other states than any other state.

3 Iowa is the largest producer of ethanol in the United State and is a leading state in electricity generation from wind turbines.

4 Montana is one of the top hydroelectric power producers in the United States.

5 Colorado’s oil shale deposits hold an estimated 1 trillion barrels of oil—nearly as much oil as the entire world’s proven oil reserves. However, oil production from those deposits remains speculative.

6 Florida is a leading producer of oranges, and researchers are attempting to derive ethanol from citrus peel waste.

7 North Carolina is one of the top nuclear power producers in the United States.

8 Oregon is one of the nation’s leading generators of hydroelectric power, which accounts for more than one-half of state electricity generation.

9 The Henry Hub in Louisiana is the largest centralized point for natural gas spot and futures trading in the United States, providing access to major markets throughout the country.

10 The Powder River Basin, most of which lies in northeastern Wyoming, is the largest coal-producing region in the nation, accounting for approximately 40 percent of all coal mined in the United States.


Cartoon of the Day: Swine Flu or Pork Flu?

Nice one from the Investor's Daily...

Sunday, April 26, 2009

Four Reasons Why ‘Fear’ In Gold Prices Is A Fallacy

``The danger from all forms of paper money controlled and regulated by governments or their appointed central banks is that they remain creatures of the political process, and dependent upon the knowledge and policy preferences of those who have the power over the monetary printing press. The history of paper monies is a sorry story of inflations, currency depreciations, and resulting social and economic disorder.”-Richard M. Ebeling, IMF Special Drawing Right "Paper Gold" vs. a Real Gold Standard

The recent weakness in gold prices has prompted some mainstream commentaries to suggest “fear” as the main driving force behind this.

The underlying premise is that since gold competes with every other asset class for the investor’s money, the recent surge in global stock markets may have revived “risk” taking appetite or the Keynesian “animal spirits”. And since gold has been seen as less attractive alternative, investors may have possibly sold gold and subsequently bought into the stock markets. Hence the recent selloff has had “fear” imputed on gold prices.

For me, this represents sloppy reasoning unbacked by evidence which has been “framed” in very short term horizon, the anchoring bias or the ``tendency to rely too heavily, or "anchor," on a past reference or on one trait or piece of information” in their analysis and an innate prejudice against the “barbaric metal”.

Such flawed analysis omits the following perspective:

1. Prices Are Relative.

As we discussed in Expect A Different Inflationary Environment, inflation moves in stages and would likely impact asset classes in a dissimilar mode.

From our perspective the stock markets and commodities have initially been the primary the absorber of government induced “reflationary” measures.

In other words, yes, a rotation will likely be the case, but this doesn’t imply “fear”. It simply means a pause in the trend because NO trend moves in a straight line. It is that elementary.

The same analogy can be ascribed to last year’s dreadful financial markets collapse, where many left leaning analysts have imputed “capitalism is dead”. The truism is that markets aren’t fated to move in one direction, because they always reflect on the fluid pricing dynamics by the different participants in response to perpetual changes in the flow of information as reflected by the changes in the environment.

But when markets are tweaked by governments to achieve a perennial boom, they attain the opposite outcome- a short-term euphoric boom and an equally devastating bust or the bubble cycle.

Mr. Bill Bonner in U.S. Banks Overrun by Dirty, Rotten Scoundrels eloquently describes this phenomenon, ``Capitalism is not a collection of nuts and bolts, gears and switches. Instead, it is a moral 'system.' 'Do unto others as you would have them do unto you,' is all you need to know about it. And like any moral 'system,' it rarely gives the capitalists what they hope for...or what they want. It gives them what they deserve. And right now, it's giving it to them good and hard.” (bold emphasis mine)

In short, losses are inherent features of the marketplace. Hence, they are reflected in trends or in cycles see figure 1.


Figure 1: stockcharts.com: Gold: Where’s The Fear?

Over the past three years we see some correlations among different markets, yet these correlations haven’t retained a fixed balance but instead have been continually evolving in a seemingly divergent fashion.

In 2006-2007 Gold (main window) soared along with the global stock markets (DJW), as the US Dollar index (USD) had been on a decline (see blue trend lines). So from this perspective alone, the premise that gold falls on higher stock markets simply DOESN’T HOLD. One could easily make the oversimplified case where the inflationary ramifications of a falling US dollar had fueled a frenzy over gold and global stock markets until this culminated.

But the past dynamics have been reconfigured.

Late last year, the spike in the VIX or the “Fear” index coincided with a surge in the US dollar as a majority of global stock markets went into a tailspin. Gold similarly melted. But in contrast to the stock markets, gold found an early bottom which corresponded with a peak in the US dollar and the VIX index. This apparently marked the end of an INVERSE or NEGATIVE correlation between gold and the US dollar.

In this landscape marked by FEAR, one can infer that the US dollar functioned as the sole “safehaven” from the banking meltdown triggered investor exodus in global stock markets and in gold. But apparently this dynamic appears to be a short term affair and may have signified as a ‘one-time’ event that marked the extraordinary market distress or dislocation-our Posttraumatic Stress Disorder PTSD.

In 2009, these dynamics have been rejiggered anew. From the start of the year, Gold strongly rallied but “peaked” alongside the US dollar index (see red arrows) concurrent to the decline in the fear index and a revival in global stock markets.

The falling US dollar and declining gold prices have reversed the NEGATIVE correlation to a POSITIVE correlation where both have moved in the same direction. The implication is that the US dollar, the VIX “fear” index and Gold encapsulated the investor’s negative sentiment, all of which have recently declined. And subsequently, the stock market rally has been “fueled” by the revival of the animal spirits, according to the fear believers.

Hence, the swift “rationalization” that investor’s negative sentiment has reversed course and has passed on the “fear factor” burden to “gold”.

Yet, this ignores the fact that both the US dollar index and gold are still on an UPTREND from the basis of the simultaneous lows last October. To reiterate, from their lows both had been positively correlated.

Stretching the picture, gold remains entrenched in a bullmarket since 2001, while the US dollar’s newfound virility could signify as either a cyclical rally within long term bear market or as a fledging bull.

But since gold represents as the nemesis of the paper money system (as seen by Keynesians-ergo “barbaric” metal) epitomized by the US dollar hence price action should reveal an inverse correlation. But this hasn’t been the case today, or as it had similarly been in 2005, where both the US and gold rose even amidst a milieu of rising stock markets.

Yet such positive correlation between gold and the US dollar may account for many variable reasons for the aberration. Since the US dollar index is significantly weighted towards the Euro this could mean a frailer European economy than the US, investor’s perception of Europe’s banking system as relatively more vulnerable, the deleveraging process continues to manifests of sporadic US dollar shortages in the global financial system, and etc.., but this seems likely to be temporary.

Nonetheless given that gold has been in a longer and a more solid trend of 8 years, combined with the fundamentals of the growing risks of unintended consequences by the collective money printing financed spending spree by governments, our money is on gold.

2. Governments Have Been Distorting Every Market Including Gold.

It’s quite na├»ve for anyone to docilely believe that the gold markets have been efficiently reflective of the genuine market based fundamentals, when almost every financial markets have seen massive scale of interventions from global governments.

To consider, the gold markets despite its relative smaller breadth (estimated at $4 trillion of above gold stocks and $150 billion gold mining stocks measured in market capitalization) has been a benchmark closely monitored by Central Bankers. For example the speech of Federal Reserve Chairman Ben Bernanke entitled as Money Gold and the Great Depression reinforces this view.

It is because gold has functioned as money for most of the years since humanity existed. So it isn’t just your ordinary or contemporary commodity.

In fact, this has been the 38th year where our monetary system has operated outside the anchors of gold or other commodities. Alternatively, this represents as the boldest and grandest experiment of all time [see our earlier article Government Guarantees And the US Dollar Standard]. Remember, all experimentations of paper money system that has ever existed perished due to “inflationary” abuses by governments.

In other words, government distortions may cloud interim activities in the gold market, but this doesn’t suggest of a reversal of its long term trend. Thus, this isn’t fear.

The unstated overall goal of collective governments today is to revive the status quo ante environment predicated on the paradigm of borrow-spend-speculate policies. Thus an all out effort is being waged.

That’s why global central banks have geared policy interest rates towards ZERO-in the name of providing liquidity. That’s why global central banks have resorted to the printing press or in technical terms “quantitative easing” and absorbed various junks from the banking system-in the name of “normalizing” the credit process. And that’s why governments have thrown or indiscriminately spent enormous sums of money into the global financial and economic system-in the name of sustaining aggregate demand.

In essence, they want everybody to stop saving and indulge in a binge of borrowing, spending or speculating in order to drum up the “animal spirits”.

For those with common sense, we understand that these policies are simply unsustainable. And unsustainable policies eventually will unravel.

Yet why are these being practiced? Because of sundry political reasons-primarily to expand the presence of government in the system.

When gold defied the “deflationary outlook” which infected almost all asset classes, we argued that governments could have wanted a higher gold prices as signs of reviving inflation [see Do Governments View Rising Gold Prices As An Ally Against Deflation?]. With the present developments, this has changed.

Since the overall goal of governments is to revive the “animal spirits”, then rising stock markets serves as a vital instrument to project these reinvigorated investor sentiment. Now that stock markets have been sensing signs of emergent inflation, gold markets are being targeted as the traditional adversary.

Proof?

Take the publicized plan by the G-20 to sell part of IMF’s gold stash of 403 tons out of the 3,200 tons it holds which is the third largest after the US and Germany.

You’d be wondering why the efforts by the G-20 to broadcast sales, considering the substantial size, would have a negative short term impact on gold prices even prior to the actual sales.

A normal seller in the marketplace would have the incentive to get the best possible price in exchange for the goods or services being sold. Hence if the IMF aims to achieve optimum prices from its sales it should conduct its program discreetly. But this isn’t so. Obviously the announcement of proposed gold sales would result to depressed prices even prior to the action itself. Therefore, this wouldn’t account for an “economically rational” seller but one shrouded by political motivations.

Factually, this is just one of the psychological tools employed by central bankers when manipulating the currency market. They call this the “signaling channel”.

According to IMF’s Division Chief of the Research Department, in his article Turning Currencies Around, ``Through the signaling channel, the central bank communicates to the markets its policy intentions or private information it may have concerning the future supply of or demand for the currency (or, equivalently, the path of interest rates). A virtuous expectational cycle can emerge: for instance, if the central bank credibly communicates its belief that the exchange rate is too strong—and would be willing to change policy interest rates if necessary—then market expectations will lead to sales of the currency, weakening it as intended.” (bold underscore mine)

In short, G 20 policymakers have been using conventional currency manipulation tactics to put a kibosh on the gold market.

Moreover, the same article on the G 20 gold sales from CBS Marketwatch reports that the European Central bank had “completed the sale of 35.5 tons of gold” late March.

Another, there have been discussions in cyberspace on the unverified interventions by the European Central Bank to save Deutsche Bank from its short positions.

The point is you can’t ascribe fear when knowingly such markets are being cooked up for some political purposes, although the superficial nature of market manipulations ensures that the impact will be felt on a short term basis.

But even as the G-20 has been attempting to maneuver the gold markets, actions by one party appear to be offset by the actions of another.

Apparently China has been doing the opposite of the G-20. Instead of publicly airing its intent to increase gold reserves, it has tacitly been amassing gold from its domestic producers and from the domestic market (mineweb.com) to see a 75% surge in gold reserve holdings to 1,054 tonnes in 2008 from the 600 tonnes in 2003. (AFP)

While other analysts downplay the significance of this reported gold hoarding citing that China has been buying up almost everything from US treasuries, US equities to other commodities, we believe that China seems to be positioning its currency, the yuan, as a candidate to replace the US dollar as the world’s reserve currency as discussed in Phisix: The Case For A Bull Run or possibly working to provide an insurance cover on its currency against the growing risks of hyperinflation, which would translate to massive losses in its US dollar holdings on its portfolio [see Has China Begun Preparing For The Crack-Up Boom?].

In presaging for times of trouble, commodities essentially could function as the yuan’s potential “anchor”.

It makes no fundamental sense to excessively store up on gold, other metals, oil and other commodities unless severe shortages have been perceived as a potential problem.

As a political institution, China won’t be much concerned with the “convenience yield” or “the benefit or premium associated with holding an underlying product or physical good, rather than the contract or derivative product” (answers.com), even as commodities don’t generate interest income which is offered by financial assets.

Besides what’s the point of disclosing the sharp increase in gold reserves by China after 5 years of covert accumulation operations?

Thus, China’s actions can be construed as essentially more politically motivated (timed with its bleating over the increased risks of the US dollar) with economic and financial ramifications.

The other point is NOT to look at China’s holdings of US dollar assets on an absolute level but from a relative standpoint: where has China’s concentration of US assets been-in long term or short term securities? Remember although China may continue to buy US securities in order to hold its currency down, if it does so by accumulating assets in mostly short term duration, then this may be extrapolated as an attempt too reduce its currency risks exposure.

Finally, despite the ongoing official manipulations gold market isn’t just an issue for central banks as private institutions have been feverishly accumulating on gold holdings as seen in Figure 2.


Figure 2: Casey Research: Gold ETFs are rapidly catching up with top Central Banks

According to Casey Research, ``SPDR Gold Shares (GLD), an exchange-traded fund, first hit the market in November 2004 with 260,000 ounces of gold. Today, GLD is the world’s 6th largest holder of physical gold with over 35 million troy ounces in the vault. In fact, since the general market meltdown last fall, the ETF has added over 16 million ounces and ended 2008 with a 5% gain – not many investments can make that claim. Investors worldwide are sending a clear message: Gold is the safest asset in which to store wealth, not the product of the printing press.”

So even when official institutions have been attempting to control the gold markets, the interest from private investors have been strongly accelerating to possibly offset any substantial sales by top gold holders.

As Professor Gary North notes, ``Eventually, governments will run out of gold to sell, and so will the IMF. They will run out of gold to lease. While I do not think the politicians will ever catch on to the fact that their nations' gold is gone, leaving only IOUs for gold written by bullion banks that are on the verge of bankruptcy anyway, I do think that at some point the central banks will stop leasing gold.”

In short, once a substantial segment of gold from official institutions has been transferred to the investing public, governments will lose their power to manipulate gold prices.

Moreover, the relative variances in the holdings of the gold reserves among central banks underpins a possible realignment of gold distribution from crisis affected US and European nations with present heavy gold holdings to the savings and foreign currency reserve rich emerging economies.

So the potential shift likewise favors rising gold prices.

3. Ignores Seasonality Effects of Gold

Those bewailing fear have likewise been guilty of the omission of the seasonality patterns of gold see figure 3.



Figure 3: US Global Investors: Seasonal Patterns

The chart from US Global Investors manifests of the 15 and 30 year pattern of gold.

Basically, the annual trend can be identified starting with Gold’s summit during the first quarter which effectively goes downhill until the early third quarter where it bottoms, strengthens and ascends.

Even if we were to compare the movements over the last 3 years in Figure 1, the seasonality effects almost seem like clockwork but not in exactitude.

So if I were a gold trader, I’d start accumulating the benchmark precious metal during the lowest seasonal risk months of July to September and be a seller at the start of the year. Although in the interim, I should expect gold to firm up going into May where I should expect a summit and weaken into July or August.

Of course the seasonality factors have divergent depth or heights in terms of losses and gains mostly depending on the underlying long term trend. However in the present bullmarket, instead of correcting during the seasonal low months gold could simply consolidate (similar to 2007).

The point is if we understand and become cognizant of gold’s seasonality patterns, we won’t be lulled to the oversimplified anchoring of ascribing “fear” on gold prices.

Although as a caveat, considering that in the past 15-30 years gold’s annual cycle has been predicated on the demand configuration centered on mainly Jewelry (as I have shown in a chart last February), the accelerating interests on identifiable investments could diminish the seasonality effect variable.

4. Neglects the Risks of Accelerated Inflation Due To Flawed Economic Principles

Most believers of the “Fear” in gold see the risks of deflation more than the risks of inflation. That’s because they live in a simple world of known variables such as “liquidity traps”, “aggregate demands”, “animal spirits”, “current account imbalances” and “overcapacity”. On the same plane, they believe in the “neutrality” of money.

Let me remind you that the fundamental reason global governments are inflating have been due to the perceived risks of deflation, or said differently, for as long as the perceived risks of deflation is in the horizon, governments will continue to inflate, as they have been practicing what can be described as their ideology or textbook orientation-where policymaking or the decisions of a few is reckoned as better than the decisions of the billions of people operating in the marketplace.

As you can see, the irony here is that governments essentially FEAR falling prices in everything. Where falling prices are good for the individual (as it translates to more purchasing power), they are deemed bad for the society, so it is held.

And the same applies to savings; “savings” defeat consumption, so it is held, as reduced consumption equates to diminished “demand” which is equally bad for the society. Hence, to counter falling prices, means that governments and their coterie of mainstream supporters exalt on the furtherance of borrowing, spending and speculative inducing policies, the very policies that brought us this crisis.

Unfortunately the US and European banking system remains fragile as governments have kept alive institutions that needs to expire. The losses have now escalated to a sink hole-some $4.1 trillion of toxic assets, according to the revised estimates of the IMF. This means more redistributive processes is in the offing given this ideological framework, where more money especially from crisis affected nations will be used to prop up zombie institutions. The US has pledged or guaranteed a stupendous $12.8 trillion and growing (as of March 31), while UK’s support for its financial industry has already surged to a remarkable $2 trillion and counting.

Apart, every nation have been urged to do their role of printing money, borrowing and spending from which global policymakers have gladly obliged. The local crocs have been jumping with glee as Philippine stimulus spending of Php 330 billion or ($7 billion) translates to a surge in “S.O.P” (Standard Operating Procedure or other term for kickbacks).

The unfortunate part is that not every country or region has been affected by an impaired banking system. Emerging markets have primarily been affected by the transmission mechanism of the US epicenter crisis via external linkages of trade (falling exports), labor (reduced remittances) and investments. Hence, the deflationary pressures seen in nations which presently endure from busted credit bubbles and emerging markets suffering from sharp external adjustments or two distinct diseases have been administered with similar medication but in varying dosages.

Apparently, since money, for us, has relative impact on prices, these concerted government sponsored programs has begun to ‘leak out’ to the marketplace-through stock markets first then commodities next, as expected.

The recently published World Economic Outlook from the IMF gave me an eye popping jolt over the very compelling fundamentals of food!

Thus, we’d deviate from gold and discuss about food. See figure 4.

Figure 4: IMF’s WEO: Supply side dynamics for select Food

According to the WEO (p.55) , ``In the face of weaker demand from emerging economies, reduced biofuel production with declining gasoline demand, falling energy prices, and insufficient financing amid tightened credit conditions, farmers across the globe have reportedly reduced acreage and fertilizer use. For example, the U.S. Department of Agriculture projects that the combined area planted for the country’s eight major crops will decline by 2.8 percent (year over year) during the 2009–10 crop year. At the same time, stocks of key food staples, including wheat, are still at relatively low levels. These supply factors should partly offset downward pressure from weak demand during the downturn.” (bold underscore mine)

Did you see spot the fun part in the chart? Notice that the inventory cover for the world’s major Food crops (middle) has been nearly at the lowest levels since 1989!

Despite the surge in Food prices in early 2007 these hasn’t translated to a boom in the production side. Now that the crisis has been the underlying theme which has also impacted the food industry, production has further been impeded by “tightened credit conditions” which has “reduced acreage and fertilizer use”. Whereas consumption demand is expected by the WEO to be maintained at present levels (yellow line middle chart).

Remember the shelf life for food is short. Hence, surpluses are likely to be minimal.

Moreover, we have a looming structural long term demand-supply imbalance.

According to Earth Policy, ``Demand side trends include the addition of more than 70 million people to the global population each year, 4 billion people moving up the food chain--consuming more grain-intensive meat, milk, and eggs--and the massive diversion of U.S. grain to fuel ethanol distilleries. On the supply side, the trends include falling water tables, eroding soils, and rising temperatures. Higher temperatures lower grain yields. They also melt the glaciers in the Himalayas and on the Tibetan plateau whose ice melt sustains the major rivers and irrigation systems of China and India during the dry seasons.”

What is this implies is that this episode of intensive money printing on a global scale will have a tremendous impact on food prices!!! If the boom in financial markets in emerging markets does extrapolate to “reflation” then there will be a tidal wave of demand to be met by insufficient supplies!! The next crisis may even be a food crisis!

In addition, the inelasticity or poor or lagged response from the price action, possibly due to overregulation, subsidies, import tariffs, etc… , suggests of a prolonged supply side response; as I earlier noted -the boom in food prices in 2007 didn’t translate to a meaningful supply side adjustment.

So those obsessing over the “deflation” bogeyman will most likely be surprised by a sudden surge of Consumer Price Index especially when food prices hit the ceiling.

This is equally bullish for gold.

Moreover, for governments and those fearing deflation who are in support of policies operated by the printing press, it seems to be a case of “be careful of what you wish for!”


Seasonality in the Phisix and the Asian Stock Markets

``Intellectual clarity is the key to seeing the right things and doing the right things. It is a matter of knowing the shape of things even before the things take shape”. -Llewellyn H. Rockwell, Jr., Money and Our Future


Since we’ve covered gold’s seasonality factors I might as well make a short comment on the same variables from the standpoint of the emerging market stock markets, see figure 5.

Figure 5: US Global Investors: Emerging Market Monthly Performance

Since the fierce rally last March, many Emerging Market bourses have approached oversold conditions.

Together with the coming seasonal weakness, the risk over chasing momentum grows. As described by US Global Investors, ``Near-term caution may be in order given the outperformance of emerging market equities recently. Seasonality-wise, historical average returns from May to October tend to be weaker than those from November to April. The price performance pattern during the last 2001-2002 recession also indicates risks for a short-term correction.”

Of course considering the divergent performances of global bourses we’re not sure if the same dynamics would cover the Philippine Stock Exchange, although the third quarter has also been the usual weakest link (or our buying window).

Nonetheless the underperforming Philippine Phisix relative to its EM peers may consolidate than suffer from a big correction.

The important thing to ascertain is the whereabouts of the present phase of the market cycle since this would underpin both the medium to long term trend. We suspect that we are in the nascent stages of the bullmarket as discussed in the Phisix: The Case For A Bull Run.

Since the Phisix is now at the 2,100 mark, I expect the current momentum to bring it towards the 2,154 level its 200 day moving average which effectively serves as the “resistance level”, where a successful crossover should mean all systems go for a transition to a full pledged bullmarket.

Of course, no trend goes in a straight line which means the Phisix would encounter intermittent corrections possibly tracing out a similar performance as the MSCI EM in 2001 (chart at the right).

Figure 6: US Global Investors: Asia's Market Cycle Based on Price-to-Book Value

Anyway Figure 6 again from US Global Investors February 20th alert also depicts of the price to book value cycles measured from trough to trough reflective of Asia bourses ex-Japan.

If history provides any guidance and if today’s rally validates our suspicion of our transitioning towards the next phase of the market cycle then perhaps this bullmarket cycle may last anywhere from 4-6 years.

Although the conditions of the past 35 years aside from the 2001 trough cycle are greatly different than today, the market’s response to the collective money printing efforts by global government may accelerate the boom but shorten the cycle- which probably implies a departure from the past cycles.

I am not sure but will certainly keep a close vigil.


Saturday, April 25, 2009

US Recession Charts

The US Recession is turning out to be the SECOND worst in terms of magnitude -since 1973-1975.
From Floyd Norris of the New York Times,

``THE current recession has become the second-worst in the last half-century and is close to surpassing the severe 1973-75 downturn, according to the Index of Coincident Indicators, based on government data and compiled each month by the Conference Board, a private organization.

``Unlike the more widely followed Index of Leading Indicators, which is supposed to help forecast changes in the economy, the coincident index is aimed at simply recording how the economy is doing now.

``The accompanying chart shows how far that index has declined from prerecession peaks during each downturn since 1960. The figure for March, released this week, showed a decline of 5.6 percent from the high set in November 2007, the month before the recession began, according to the National Bureau of Economic Research."

And the worst in terms of duration or the longest since 1948...

Thursday, April 23, 2009

Economic Growth Equals Environmental Preservation

Present day environmentalists persist in arguing for "low economic growth" as the primary solution to the preservation of the earth's ecology. Of course they don't directly say it. (But why do you think the celebration of Earth Hour is marked by the shutting off lights? Without lights "normal" activities are displaced).

In contrast New York Times, John Tierney argues that economic growth is the answer.

We quote Mr. Tierney (all bold highlights mine),

``When the first Earth Day took place in 1970, American environmentalists had good reason to feel guilty. The nation’s affluence and advanced technology seemed so obviously bad for the planet that they were featured in a famous equation developed by the ecologist Paul Ehrlich and the physicist John P. Holdren, who is now President Obama’s science adviser.

``Their equation was I=PAT, which means that environmental impact is equal to population multiplied by affluence multiplied by technology. Protecting the planet seemed to require fewer people, less wealth and simpler technology — the same sort of social transformation and energy revolution that will be advocated at many Earth Day rallies on Wednesday.

``But among researchers who analyze environmental data, a lot has changed since the 1970s. With the benefit of their hindsight and improved equations, I’ll make a couple of predictions:

``1. There will be no green revolution in energy or anything else. No leader or law or treaty will radically change the energy sources for people and industries in the United States or other countries. No recession or depression will make a lasting change in consumers’ passions to use energy, make money and buy new technology — and that, believe it or not, is good news, because...

``2. The richer everyone gets, the greener the planet will be in the long run.

``I realize this second prediction seems hard to believe when you consider the carbon being dumped into the atmosphere today by Americans, and the projections for increasing emissions from India and China as they get richer.

``Those projections make it easy to assume that affluence and technology inflict more harm on the environment. But while pollution can increase when a country starts industrializing, as people get wealthier they can afford cleaner water and air. They start using sources of energy that are less carbon-intensive — and not just because they’re worried about global warming. The process of “decarbonization” started long before Al Gore was born.

``The old wealth-is-bad IPAT theory may have made intuitive sense, but it didn’t jibe with the data that has been analyzed since that first Earth Day. By the 1990s, researchers realized that graphs of environmental impact didn’t produce a simple upward-sloping line as countries got richer. The line more often rose, flattened out and then reversed so that it sloped downward, forming the shape of a dome or an inverted U — what’s called a Kuznets curve. (See nytimes.com/tierneylab for an example.)

``In dozens of studies, researchers identified Kuznets curves for a variety of environmental problems. There are exceptions to the trend, especially in countries with inept governments and poor systems of property rights, but in general, richer is eventually greener. As incomes go up, people often focus first on cleaning up their drinking water, and then later on air pollutants like sulfur dioxide.

``As their wealth grows, people consume more energy, but they move to more efficient and cleaner sources — from wood to coal and oil, and then to natural gas and nuclear power, progressively emitting less carbon per unit of energy. This global decarbonization trend has been proceeding at a remarkably steady rate since 1850, according to Jesse Ausubel of Rockefeller University and Paul Waggoner of the Connecticut Agricultural Experiment Station....

``Of course, even if rich countries’ greenhouse impact declines, there will still be an increase in carbon emissions from China, India and other countries ascending the Kuznets curve. While that prospect has environmentalists lobbying for global restrictions on greenhouse gases, some economists fear that a global treaty could ultimately hurt the atmosphere by slowing economic growth, thereby lengthening the time it takes for poor countries to reach the turning point on the curve.

``But then, is there much reason to think that countries at different stages of the Kuznets curve could even agree to enforce tough restrictions? The Kyoto treaty didn’t transform Europe’s industries or consumers. While some American environmentalists hope that the combination of the economic crisis and a new president can start an era of energy austerity and green power, Mr. Ausubel says they’re hoping against history.

``Over the past century, he says, nothing has drastically altered the long-term trends in the way Americans produce or use energy — not the Great Depression, not the world wars, not the energy crisis of the 1970s or the grand programs to produce alternative energy.

``“Energy systems evolve with a particular logic, gradually, and they don’t suddenly morph into something different,” Mr. Ausubel says. That doesn’t make for a rousing speech on Earth Day. But in the long run, a Kuznets curve is more reliable than a revolution."

Yes, efficiency of energy use will come with the corresponding wealth driven technology advances from market forces and not from government dictates, which only creates bubbles, inefficient distributions and unintended consequences.



Emerging Labor Protectionism In Japan

In 1850 Frederic Bastiat wrote in his prologue the magnificent must read essay, That Which is Seen, and That Which is Not Seen

``In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause - it is seen. The others unfold in succession - they are not seen: it is well for us, if they are foreseen. Between a good and a bad economist this constitutes the whole difference - the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favourable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, - at the risk of a small present evil."

In other words, laws always constitute an economic trade off between the present and the future. Policymakers are usually predisposed to respond to short term visible effects arising from crops of present concerns but ignoring the larger costs from unforeseen consequences.

We have a very good example of this phenomenon unfolding in today's crisis laden environment.

In Japan, the current deep recession has compelled policymakers to repatriate its migrant workers as reaction to widening unemployment.

According to the New York Times, ``But the nation’s manufacturing sector has slumped as demand for Japanese goods evaporates worldwide, prompting job cuts and pushing the jobless rate to a three-year high of 4.4 percent. Japan’s exports plunged 46 percent in March from a year earlier, and industrial production is at its lowest level in 25 years.

``So Japan has been keen to help foreign workers go home, thus easing pressure on domestic labor markets and getting thousands off unemployment rolls.

“Japan’s economy has hit a rainstorm. There won’t be good employment opportunities for a while, so that’s why we’re suggesting that the Nikkei Brazilians go home,” said Jiro Kawasaki, a former health minister and senior lawmaker of the ruling Liberal Democratic Party.

``“Naturally, we don’t want those same people back in Japan after a couple of months,” Mr. Kawasaki said, who led the ruling party task force that devised the repatriation plan, part of a wider emergency strategy to combat rising unemployment in Japan. “Then Japanese taxpayers would ask, ‘What kind of ridiculous policy is this?’ ”

``Under the emergency program, introduced this month, the country’s Brazilian and other Latin American guest workers are offered $3,000 toward air fare, plus $2,000 for each dependent — attractive lump sums for many immigrants here. Workers who leave have been told they can pocket any change.

The idea is, in order to ease statistical unemployment, Japan's policymakers simply decided to send the laborers away! Reduced workers equals low unemployment rates-what genius!

Next, such reactionary program possibly unmasks of Japan policymakers' narrowmindedness and antagonism to global cultural integration.

More from the New York Times, ``But Mr. Kawasaki, the former health minister, said the economic slump was a good opportunity to overhaul Japan’s immigration policy as a whole.

``“We should stop letting unskilled laborers into Japan. We should make sure that even the three-K jobs are paid well, and that they are filled by Japanese,” he said.

``“I do not think that Japan should ever become a multi-ethnic society” like the United States, which “has been a failure on the immigration front,” Mr. Kawasaki added. That failure, he said, was demonstrated by extreme income inequalities between rich Americans and poor immigrants.

Another, Japan's recent actions reflects discrimination and protectionism...

Again from the New York Times, ``Japan’s repatriation offer is limited to the country’s Latin American guest workers, whose Japanese parents and grandparents emigrated to Brazil and neighboring countries a century ago to work on coffee plantations...

``The plan to fly immigrants out of Japan has come as a shock to many here, especially after the Japanese government introduced a number of measures in recent months to help jobless foreigners, including free Japanese-language courses, vocational training and job counseling. Guest workers are eligible for limited cash unemployment benefits, provided they have paid monthly premiums.

``“It’s baffling,” said Angelo Ishi, an associate professor in sociology at Musashi University in Tokyo. “The Japanese government has previously made it clear that they welcome Japanese-Brazilians, but this is an insult to the community.”

Lastly the article showcases Japan's structural long term problems...

``The program comes despite warnings that the aging country needs all the foreign workers it can attract to stave off a impending labor shortage.

``Japan’s population has been falling since 2005, and its working-age population could fall by a third by 2050. Though manufacturers have been laying off workers, sectors like farming and elderly care still face shortages...

``Critics denounce the program as short-sighted and inhumane, and a threat to what little progress Japan has made in opening its economy to foreign workers.

``“It’s a disgrace. It’s cold-hearted,” said Hidenori Sakanaka, director of the Japan Immigration Policy Institute. “And Japan is kicking itself in the foot... we might be in a recession now, but it’s clear it doesn’t have a future without workers from overseas.”

The present recession will not last forever. And as its economy recovers, Japan's dwindling population (see the above chart from japanfocus.org) will endure strains from labor shortages.

While Japan can easily absorb more foreign workers when it is deemed as politically convenient, it would bear additional costs from the "learning curve" to integrate foreign workers to its society.

Moreover,
Japan's selective application of repatriation policy will likely incur a political backlash with affected Latin American countries which may lead to policy retaliation and even more protectionism.

Finally, Mr. Kawasaki's bigoted anti "multi-ethnic" society remarks will be faced with harsh reality. The persistence of a dwinding population will lead to societal extinction and economic regression.

Hence without raising its fertility rate, in order for Japan to maintain its status quo "society" means to adopt a culture of multi-ethnicity. (Unless cloning or other artificial scientific means of adding people comes into the script)

This noteworthy remark from Kyohei Morita chief economist at Barclays Capital in an interview with Finance Asia,

``But in Japan, the opposite is happening. Japan’s population has been shrinking since 2006, which will continue to put downward pressure on GDP. In 300 years, at the current rate of decrease, Japan’s population will be extinct." (emphasis mine)

After over a hundred years, Bastiat's message is more than relevant as it is universal.