Monday, August 31, 2009

Paper Currency And Coins In Circulation In The US

Interesting chart from Visual Economics The Value of United States Currency In Circulation breaking down the value of paper and coins in circulation in the US. (HT: Mark Perry)

Sunday, August 30, 2009

In Bullmarkets Everyone Is A Genius, Not!

``Moreover, life is not long enough;- human nature desires quick results, there is a peculiar zest in making money quickly, and remoter gains are discounted by the average man at a very high rate. The game of professional investment is intolerably boring and over-exacting to anyone who is entirely exempt from the gambling instinct; whilst he who has it must pay to this propensity the appropriate toll.”–John Maynard Keynes

I would beg of your indulgence anew because I’d be dealing with issues that would defy the wisdom of the consensus.

For some, such may deemed as blasphemy, but for us, it has been a mission to disseminate our version of the truth or reality as we see it. It’s called prudent investing in our terms.

That’s because we’d like get protected from the worst enemy that any market participant or investor has always been confronted with; that’s no less than ourselves or our inflated egos.

As Friedrich Nietzche, ``But the worst enemy you can encounter will always be you, yourself; you lie in wait for yourself in caves and woods."

Self Attribution Bias: In Bullmarkets Everyone Is A Genius

There’s an aphorism that everybody’s a genius in a bullmarket.

In a sense that would be true, that’s because bullmarkets are basically tolerant or permissive of our mistakes.

Missed the bottom? Sold “low” or too early? Bought “high” or too late? Don’t you worry, markets will eventually redeem our positions! That’s because “High prices will go higher”!

In the same dimension, we have myriad of reasons for taking on positions: corporate or economic fundamental analysis, chart patterns or momentum triggers, recommendations from an expert, a “tip” from an associate or from social circles such as stock forums or parties over an insider info on M&A, joint venture, corporate buy-in, capital infusion or etc…, or simply because a friend said so- they’ll all be proven correct for basically the same principle!

Every trading success builds on our self confidence, even if they are founded from logical mismatches. For instance, conventional fundamental analysis is a long term proposition whereas assessing or weighing on ticker tape price gyrations by typical market participants are very short term in nature-so how does short term price watching square with the long term developments?

Yet with every success comes the attribution of our skills into the performance of our trading positions or our portfolio. A clear manifestation of this would be in social gatherings, where people would bluster about having bought stock ABC at the price X (bottom or near bottom) or sold the same stock at the price Y (top or near top).

Nonetheless, our so called “genius effect” is a common psychological foible known as the Fundamental Attribution Error or the ``cognitive tendency to predominantly over-value dispositional, or personality-based, explanations (i.e., attributions or interpretations) for the observed behaviors of others, thus under-valuing or failing to acknowledge the potentiality of situational attributions or situational explanations for the behavioral motives of others. In other words, people predominantly presume that the actions of others are indicative of the "kind" of person they are, rather than the kind of situations that compels their behavior.” (

In market terms, the Fundamental Attribution Error or the Self Attribution Bias is the tendency for people to attribute success to skills and of failures to bad luck or adverse fortune, when the reality is that they have only been responding to situational developments.

Here is a matrix of how the Self Attribution Bias works…

And perceptibly this has been the same reason why during bear markets people from the industry have been in the receiving end of brickbats.

Example, in the US uproar over the executive compensation brouhaha could partly be construed as the receiving end of the attribution bias. [As an aside, the financial industry has been the primary funding conduit of the US real estate bubble as a result of government policies that has vastly skewed their operating incentives see US Home Bubble Cycle: Upside Directly Proportional To Downside. While they are partly to blame as much as those who assumed the risk, the prime culprit would be government policies that fueled such mania. In a gold standard, none of these would have transpired in spite of market irrationality.]

So instead of having to take full responsibility over one’s decisions, in bear markets where decision errors have been glaringly penalized, the attribution errors by the sundry of market participants find an outlet in the blaming of others.

Despite the armies of so-called experts [economists, risk managers, statisticians, actuarial managers, lawyers, accountants, quant modelers etc… for both the buy and sell side institutions] in assessing the risk environment, isn’t it a wonder that most of those who suffered forget that risk ever existed at all?

Now, the consequence has been a barrage of lawsuits.

Profit From Folly

To quote Edwin Lefèvre in behalf of legendary trader Jesse Livermore in the classic Reminiscences of a Stock Operator, ``In a bear market all stocks go down and in a bull market they go up...I speak in a general sense.”

I would add that the phenomenon of blaming of others can be extrapolated as “in a general sense, in the ambiance of bullmarkets, relationships are harmonious and in bearmarkets they turn acrimonious.”

Why? Because as noted above, markets are fundamentally powered by psychology. (see figure 1)

Figure 1: Market Cycle Equals Psychological Shifts

As you can see, the fundamental attribution bias segues into “overconfidence” at the apogee of the every market cycle.

However, such psychological extremes eventually swings like a pendulum as the market transitions towards the opposite end, hence the accompanying psychological frictions in between the cycles.

Let me add that I have personally envisaged some instances of such “relationship disharmony” from this crisis. So this should come naturally or even intuitively for those who understand or have been disciplined on how the market cycle works.

Nevertheless, since markets always operate over the same process, then we should learn how to take advantage of the psychological lapses than fall prey to them.

As Warren Buffett have long admonished, ``Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it."

Thereby, the underlying goal of any serious investor should be to remain composed or calculably rational over the transitional phases of the market cycles while being cognizant of the progressing dynamics of the risk spectrum and likewise be insouciant to the wild swings of market psychology.

Taking away all that ego oriented stuffs diminishes the oomph of the markets, such a killjoy isn’t it?

Situational Attribution Is All About Policy Induced Inflation

``Believe nothing just because a so-called wise person said it. Believe nothing just because a belief is generally held. Believe nothing just because it's said in ancient books. Believe nothing just because it's said to be of divine origin. Believe nothing just because someone else believes it."- Buddha, Unconscious Beliefs

If fundamental attribution bias is the “undervaluing or failing to acknowledge the potentiality of situational attributions”, then that means people overlook or substantially underprices situational developments.

For instance, some have suggested that stock market prices today as having been “overvalued”.

Well in my view, prices are relative:

1. in terms of direction: low prices can go lower and high prices can go higher,

2. valuations are always subjective and

3. prices can be seen as higher/lower in a relative sense when compared to the specifics. In the psychological context this is known as the contrast principle/effect or judgments based on relative comparisons or simply higher compared to what or whom?

Importantly, the issue of prices or valuations would greatly depend on the situational attribution or developments.

Situational Directions

So what has been the “situational” course of events?

It’s apparently not imputable to traditional or conventional specific metrics, because evidences haven’t been pointing to such direction, see Figure 2.

Figure 2: Correlation: Phisix, Euro, Emerging Markets and Oil

The Euro which comprises 57.6% of the US dollar Index according to the ICE Futures, seems to be leading the way for Emerging Market Stocks (EEM), including the Philippine Phisix (PSEC) and commodities as represented by oil (WTIC).

The highs of the Euro (vertical blue lines) have been coincident with turning points of the specified markets above, but with a lag.

In short, over the interim the rising euro, or the inversely the falling US dollar index seems tantamount to higher financial asset prices.

As we have repeatedly argued, the global inflation dynamics are apparently being transmitted into equity, commodities and property markets (ex-developed economies) via the currency channel, as described in many past issues including the latest [see last week’s Warren Buffett’s Greenback Effect Weighs On Global Financial Markets].

Therefore, if markets haven’t been driven by conventional specific metrics, then why should we utilize conventional metrics as a gauge to determine our trade positions? That would be like using sonar to track airplane movements.

Inflation Dynamics In The Phisix And The World

The beauty of any theory would lie within its applicability or by the function of factual evidences… (see figure 3)

Figure 3: PSE Sectoral Indices: Rising Tide Lifts All Boat

The sectoral indices of the Philippine Stock Exchange (PSE) depicting synchronicity in motion.

Current market activities have strongly been demonstrative of the tidal ebbs and flows (or our Livermore-Machlup model see Are Stock Market Prices Driven By Earnings or Inflation? ) of the Philippine marketplace as we have long forecasted.

Our outstanding premise has been the lesser the efficient the markets the more prone to inflation driven dynamics.

Although domestic stock prices have risen in general, price levels have been nuanced, where some sectors have been outperforming the others [see Sectoral Performance In US, China And The Philippines].

The present pecking order of outperformance: Mining (green), Holding (red), the All Index (maroon), commercial (pink), property (blue), bank (black) and services (grey).

As you can see, the “rising tide lifts all boats” phenomena compounded by the relative price level actions have all been reinforcing the symptoms of an inflationary (liquidity) driven boom.

Such situational course of events hasn’t confined locally but to the world though.

As we pointed out in the latest Global Stock Market Performance Update: Despite China's Decline, Emerging Markets Dominate, 68 (83%) of the 82 issues monitored by Bespoke Invest (based on August 20th) registered positive gains against 14 (17%) which accounted for losses.

Despite China’s Shanghai benchmark, which fumbled for the fourth consecutive week of losses (this week 3.38%) for an aggregate 4 week loss of 17.2%, China has been up 57% on year to date basis.

The Philippine Phisix as of Friday’s close seems to be closing the gap fast.

Nonetheless, the best performances have been among key emerging markets (many of which are situated from Asia), some having been beneficiaries of low systemic leverage and an unimpaired banking system, which has responded favorably to lower interest rates, while some have been reaping from rising commodity prices.

Although we expected some degree of differences relative to the US to emerge, this hasn’t been so yet.

The evolving activities in the US seem to reflect on more of the actions seen in most of the world.

According to Bespoke Invest, ``93% of stocks in the S&P 500 were trading above their 50-day moving averages. That number has come in slightly with today's declines, but it's still above 90%.” (emphasis added)

In short, macro thinkers, who fixate over the actions of the US, but negate the activities across the geographically diverse asset markets have been missing out on these developments.

The Validation Of Our Livermore-Machlup Model

More proof of more liquidity driven boom in the domestic market? (see Figure 4)

Figure 4: PSE: Daily Traded Issues (left) and Number of Daily Trades (right)

When the marketplace becomes reanimated, the speculative appetite expands.

This implies that transactions would cover issues that are less liquid (low market float), which can be found mostly among second or third tier securities.

As you can see in the left window, the daily traded issues have been broadening. This means that the advances in the Phisix are being seen in general terms, validating Jesse Livermore’s assertion.

Moreover, improving daily trades suggests of more people participating or engaging in churning activities.

Again another manifestation of a bullish breadth (right window).

It doesn’t stop here.

Figure 5: Advance Decline Spread: Broadening Gains

Another indicator would be the advance decline spread.

In the height of the selloff in 2008 (red ellipse), the advance decline spread has been obviously tilted towards huge broad based selloffs.

Today we see the opposite, since March of 2009, the internal activities in the Philippine Stock Exchange has largely been in favor of the advancing issues (light green ellipse).

To consider, local investors have usurped the role as the dominant pillar of the current state of the Phisix, a role which we presume should contribute to a sturdier trend and likewise could be deduced as having become less sensitive to the external developments, in contrast to the 2003-2007 cycle.

Added together, all these essentially have been validating our Livermore-Machlup inflation driven tidal dynamics thesis, where the collective inflationary policies by global governments will presumably take a major role in determining asset pricing conditions.

So stubbornly insisting on the idea of conventional metrics as a gauge of the market’s parameters will only lead to wide off the mark appraisals and severe underperformance.

The Economic Disconnect And Domestic Mainstream Policies

So does a 54% year to date surge in the Phisix translate to a V-shape recovery in the Philippine economy?

The Economist gives as an answer, (bold highlights mine)

``Although the return to robust quarter-on-quarter growth of 2.4%—the highest in over two years, following a first-quarter contraction of 2.1%—fits the international pattern, the economy has not contracted at all in year-on-year terms during the current global crisis. Growth of 0.6% in the first quarter appears to have marked the low point in the current cycle. Still, the recovery is far from entrenched. At just 1.5% year on year, real GDP growth in the three months to June was far below the 2004-08 quarterly average of 5.5%.

``In output terms, the service sector was the main driver of economic growth in the second quarter. Services output rose by 3.1% year on year, up from 2% in the previous quarter. Government services rose by 7.7% in real terms, reflecting stimulus spending. Trade rose by 3% on the back of strong growth in retail activity. In contrast, agricultural growth slowed sharply due to weak production of rice and some other crops. And industry contracted for the second straight quarter, falling 0.3%. Although the government's fiscal measures boosted construction, which rose by 16.9%, and mining and quarrying also recorded a big gain, growth in these areas was more than offset by the decline in manufacturing. This underlines the weakness of demand for Philippine exports, which has hit manufacturers hard.”

So seen from mainstream’s “money is neutral” perspective, then today’s Phisix, if it were to reflect on the performance of the economy, has vastly been overbought.

But seen from a perspective where the economy has been detached from the stock market and where the latter have been propelled by circulation credit expansion from a combination of government spending, low interest rate regime and a raft of other Bangko Sentral ng Pilipinas (BSP) policy instruments [as expanded peso and US dollar based repurchasing (repo) agreement, Credit Security Fund (CSF) that guarantees funding access to small cooperatives from which provides financing to small business and the easing of accounting regulations such as reclassifying “financial assets from categories measured at fair value to those measured at amortized cost” and where banks were allowed “not to deduct unrealized mark-to-market losses in computing for the 100 percent asset cover for FCDUs, effective until 30 September 2009).” (Gov. Amando Tetangco Amcham Speech August 11)], all of which could snowball into a massive source of structural misallocation of resources in the local economy, prices will be determined by the scale of leverage that will be imbued by the domestic financial system.

Yet like all policymakers globally (except for Israel which has dumbfounded the marketplace by being the first central bank to raise interest rates), Philippine BSP Governor Amando Tetangco takes on the mainstream tack, (bold emphasis mine)

``This 200 basis-point cumulative reduction in the policy rate will help stimulate economic growth or help moderate the slowdown by bringing down the cost of borrowing and reduce the financial burdens on firms and households. This will help us avoid or at least mitigate the negative feedback loop from weakening economic conditions to the functioning of the financial sector. Lower policy rates would also have the effect of shoring up business and consumer confidence.”

Business Cycle, The Philippine Version

Artificially reduced rates will only send false signals of the true amount of real savings available for lending. This would unnecessarily increase the acceptable level of risk taking activities by shifting the time preferences for both the lender and the borrowers. This in turn induces investments in the durable capital goods and or investments in the longer term process of production at the same time where consumption demand will be expanding which thus would leads to serious economic distortions and competition for resources, or in short, malinvestments.

To quote Professor John Cochran and Noah Yetter in Capital in Disequilibrium: An Austrian Approach to Recession and Recovery, ``But with a credit expansion relative reduction in the interest rate, producers are attempting to lengthen the production structure while consumers are attempting to shorten it. Longterm investment is booming at the same time as demand is growing for final consumption. Available resources are not sufficient to sustain both processes— individual business plans made in response to the interest rate change and the new pattern of consumer spending set up the problem of the ‘dueling production structures’. Thus the expansion in the money supply brings about unsustainable growth, characterized by a pattern of over consumption and over investment accompanied by malinvestment, investment inconsistent with consumers’ time preferences.” (bold highlight added)

Moreover, such policies allows the public to take on more debt than warranted which leads to systemic overleverage similar to the Asian Crisis, US housing and bubbles, as Prof, Thorsten Polleit explains in Bad News for Our Money ``It allows borrowers to issue even more debt, refund maturing debt at artificially suppressed interest rates, and reduce their real debt burden at the expense of money holders. The downward manipulation of the interest rate drives a wedge between the (real) market interest rate and the societal time-preference rate, and therefore wreaks havoc with the economy's intertemporal production structure. It leads to economic impoverishment, as it would stimulate consumption at the expense of savings and encourage malinvestment of scarce resources. What is more, suppressing the interest rate does not provide a solution to the overindebtedness problem, which is a result of government-controlled fiat money produced by banks extending credit in excess of real savings.

Moreover, such policies only borrow economic activities from the future.

Floyd Norris of the New York Times recently noted how US homes prices reflected on the degree of inflation, initially rising (boom) but falling back (bust) to the same inflation adjusted price levels where the cycle all began [see US Home Bubble Cycle: Upside Directly Proportional To Downside]. Of course, all these came at the expense of the society. Hence Mr. Tetangco’s anxiety over the negative feedback loop can only be deferred until sometime in the future when enough imbalances will force itself on the marketplace.

Figure 6: Washington Post: Banks 'Too Big to Fail' Have Grown Even Bigger

Of course, monetary inflation has moral consequences; it redistributes wealth in a way where the initial recipients would be major beneficiaries from such policies.

Similar to the US where taxpayers and small businesses and small banks today have been sacrificed for “too large to fail” institutions which has even expanded more today (see figure 6), in the Philippines, investors with liberal access to the domestic banking institutions are likely to be the capitalists benefiting from the economic rent or politically bestowed economic privileges (licenses, cartels, monopolies).

So the wealth redistribution from present economic policies is likely to benefit the political elite at the expense of rest of the society.

In addition, with the fast approaching political Presidential election season, we should expect the present expansionary monetary landscape to be sustained. Here is a clue, again from Governor Tetangco, “Lower policy rates would also have the effect of shoring up business and consumer confidence”.

Besides, government’s fiscal spending to are likely to rev up in order spruce the economic landscape and financial marketplace for a Potemkin Village effect [see previous discussion in Philippine Peso: Interesting Times Indeed].

Well, Governor Tetangco in terms of policymaking would likely seek the comfort of the mainstream crowd once such policies start to unravel.

Hence he is likely to take heed of the insights from the mainstream icon at heart, this from John Maynard Keynes, ``Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”

Anyway, comfort of the crowd it is for Asian policymakers.

From China’s Premier Wen Jiabao (Reuters) ``Therefore, we must maintain continuity and consistency in macroeconomic policies, and maintaining stable and quite fast economic growth remains our top priority. This means we cannot afford the slightest relaxation or wavering."

Or From South Korea’s Finance Minister Yoon Jeung Hyun (Bloomberg/Credit Bubble Bulletin) ``There is a risk that the economy may fall into a double dip if the government shifts the stance of policy too fast…It’s premature to discuss the timing of an exit strategy.”

However, even if Asian authorities have qualms on tightening present policies, the interest rate markets suggest that they will be tightening soon.

According to the Wall Street Journal, ``Asia's central bankers say they have no timetable for raising interest rates. But some investors already are placing bets to the contrary, speculating that India will go first, followed by China and Korea.

``The money is being put down in the huge interest-rate-swaps market, where the yields on two-year maturities across much of Asia have risen sharply in the past few months.

``This market, which had $403 trillion of contracts outstanding at the end of 2008, draws a range of investors, from hedge-fund managers to companies looking to hedge against a change in monetary policy. About a quarter of its volume is traded in Asia.”

Nonetheless even if Asian authorities begin to tighten for as long the US maintains ultra loose rates, pump the prime (deficits expected to reach $9 trillion in 2019!) and flood the global system with greenback emissions (Warren Buffett), we should expect the continued stickiness from inflation to be reflected on financial asset prices.

While markets could indeed show episodes of outsized volatility, as in the case of China or in the past in Russia, the impact from the present policies, in support of the Ponzi based global economic system, which are likely to be stretched way into the future for political motivated reasons should cushion or even give a boost to the reflation in asset prices.

Timing markets won’t be a recommended approach given the swiftness of market action.

Bottom line: Situational Attribution is all about policy induced inflation.

The US Dollar Index’s Seasonality As Barometer For Stocks

``Debtors benefit from inflation and creditors lose; realizing this fact, older historians assumed that debtors were largely poor agrarians and creditors were wealthy merchants and that therefore the former were the main sponsors of inflationary nostrums. But of course, there are no rigid "classes" of creditors and debtors; indeed, wealthy merchants and land speculators are often the heaviest debtors.”-Murray N. Rothbard A History of Money and Banking in the United States: From the Colonial Era to World War II

We have been suggesting that the fate of the US dollar will be the key to the directions of financial asset pricing.

In last week’s Gold As Our Seasonal Barometer followed up by a mid week post Gold As Our Seasonal Barometer (For Stocks) II, we offered another contrarian perspective for analyzing the direction of pricing equity securities.

Instead of ruminating over the seasonal effects of September which has been statistically inauspicious for stocks, we suggested to look at gold instead.

Since US dollar has been the traditional and ideological archrival of gold, from which the former today has been continually bludgeoned even in face of some pressures in select asset markets (say in China), and even considering the combined developments in the political and economic front, any selling pressure is likely to be felt in the US dollar than in stock markets, and thus we proposed gold as a seasonal barometer for stocks.

We finally found two charts confirming the inverse of correlation of gold and the US dollar index.

Figure 7: US Global Investors: Inverse Correlation of Gold and the US dollar Index

Mr. Frank Holmes of the US Global Investors noted that ``September is only second to December in terms of dollar weakness, the average result for the U.S. Trade Weighted Dollar Index (DXY)(13) being a 0.66 percent decline from August. Looking at the 39 Septembers going back to 1970, the dollar has seen negative performance 26 times, more than any other month of the year.” (emphasis added)

Of course I won’t deny my “guilt” of looking for information to confirm my bias over my persistent focus on the US dollar.

That’s because it seems quite naïve, for anyone in my view, to believe that events of the last quarter of 2008 will replay itself in terms of a banking system gridlock, the main source of the US dollar’s rally last year.

That’s an old passé story. Society has learned from last year’s banking shock.

Instead, it would seem like an unnecessary distraction, coming from the mainstream macro perspective, still preoccupied with the deflation bogeyman.

Managing Inflation Expectations

What seems to be more of the locus of political attention has been to keep the price level system afloat through the inflation process.

Mr. Axel Merk of Merk Investments hits the nail on its head with his latest commentary, (all bold highlights mine)

``The conclusion we draw from the Fed’s talk about exit strategies and focus on inflation is mostly just that: talk. While we understand why the Fed is talking – to manage inflationary expectations – we believe the Fed may be playing with fire at our expense.

``Indeed, following Bernanke’s textbook, our interpretation is that the Fed may want to have inflation; and to get there, he may want a cheaper dollar, a substantially cheaper dollar. Bernanke has repeatedly stressed how going off the gold standard during the Great Depression jump started economic activity by allowing the price level to rise (read inflation). Fast-forward to today and think about all those homeowners “underwater” with their mortgages. We could allow those who cannot afford their homes to downsize, i.e. allowing market prices to clear by allowing foreclosures and bankruptcies, amongst others; however, that option seems to be political suicide. An alternative is to induce inflation, allowing the price level to rise; the Fed may not be able to control what prices will rise, but seems to be betting on home price inflation.

``Looking at what at the Fed does, rather than what the Fed says, we believe it is actively working on a weaker dollar.

Indeed, action speaks louder than words!

From Bloomberg, The Federal Reserve ``bought a greater-than-average amount of mortgage bonds for a second straight week, following a period of reduced purchases…Net purchases totaled $25.4 billion in the week ended yesterday, compared with a weekly average of $23.3 billion since the Fed began the initiative in January, according to data posted on the New York Fed’s Web site today and compiled by Bloomberg.”

The US Dollar Carry Trade?

Besides, the selling pressure won’t just emanate from policy induced inflations, but this time it could be compounded from the lower interest rates spreads.

Figure 8: Wall Street Journal: Dollar Now Cheaper to Borrow Than Yen

For the first time in 17 years, Japanese rates have now popped above US rates.

According to the Wall Street Journal, ``On Wednesday, banks seeking dollars had to pay 0.37188%, which is the three-month dollar Libor, while yen borrowers needed to pay 0.38813%. It is the first time since May 1993 that the rates have flipped.” (emphasis added)

Implication? The US dollar could function as a funding currency for a global carry trade.

There have been worthwhile arguments posited against the US dollar as a funding currency due to its huge current deficits, low savings and heavy borrowing requirements since these are likely to induce relatively higher interest rates.

However, for the time being, it is likely that the US could be earnestly trying to attract capital flows into its system to finance its twin deficits by offering its currency for short term asset arbitrages in “target” (high yield) currencies.

Nevertheless even if we could be wrong here, the actions to bring down interest rates to produce inflation (nearly a Swedish nominal negative interest rate policy approach where banks have to pay interest to its central bank for them to accept deposits) simply exhibits how the US dollar remains under heavy strain.

Bottom line: Inflation is a political process. It would be difficult, if not suicidal, to take a contradictory stand against US authorities, when we recognize that the policy thrust has been to use the technology known as the printing press, to achieve a substantially reduced purchasing power for the US dollar.

In short, don’t fight the newly reappointed Ben Bernanke.

Saturday, August 29, 2009

4-Block World: Fawning Eulogies

From Tom McMahon's 4-Block World:

Let me add a quote from Professor Don Boudreaux, (all bold highlights mine)

``While Kennedy didn’t choose a life of ease, he did something much worse: he chose a life of power. That choice satisfied an appetite that is far grosser, baser, and more anti-social than are any of the more private appetites that many rich people often choose to satisfy...

``Instead, Mr. Kennedy spent much of his wealth and time pursuing power over others (and of the garish ‘glory’ that accompanies such power). He did waste his life satisfying unsavory appetites; unfortunately, the appetites he satisfied were satisfied not only at his expense, but at the expense of the rest of us. Mr. Kennedy’s constant feeding of his appetite for power wasted away other people’s prosperity and liberties".

Well learning from the above, such mawkishness (especially in the political context) should be avoided. And this should apply elsewhere including the Philippines.

Tenuous Relationship Between Presidential Approval And Stock Market Returns

In our July post, Presidential Approval Ratings and Stock Market Returns we argued that stock market returns have little causal relationship with the popularity ratings of the incumbent President.

We said ``popularity measures seem to be an inaccurate way to evaluate, gauge or predict stockmarket activities, trends or returns. That's because popularity is mostly about superficiality and inherently fickle."

In contrast to certain analysts who say that Presidential approval has important contributions in determining spending and investment choices which gets filtered into the stock market valuations, it would seem to us that the attribution of a causal link, instead, represent as a heuristic or cognitive bias known as "clustering illusions" or the tendency to see patterns where none exists (

Gallup's recent article seems to validate our thesis.

Some of the presidential approval-stock market performance correlationship charts per administration during the last two decades...

Barack Obama
George Bush Jr.
Bill Clinton
George Bush Sr.
Ronald Reagan

Jimmy Carter

In conclusion, the Gallup says, (all bold highlights mine)

``In any case, Gallup trends suggest no systematic pattern by which Democratic presidents (who may be viewed on Wall Street as more anti-business than Republicans) find their job approval ratings inversely related to job approval, nor a consistent pattern by which Republican presidents find a positive correlation.

``More generally, from president to president, and from time period to time period within presidencies, the market and job approval ratings have moved in widely varying directions, displaying no systematic relationship."

It's the policies employed that should matter more than simple popularity.

US Home Bubble Cycle: Upside Directly Proportional To Downside

Floyd Norris of the New York Times posted a chart in his most recent article which I think fittingly illuminates how the bubble (inflation) process works.

This from Mr. Norris, (all bold highlights mine)

``IN the last eight years, home prices in the United States have almost exactly kept up with inflation. But it has been a wild ride.

``During the period, the Standard & Poor’s Case-Shiller 20-city composite index of home prices rose almost 21 percent. The Consumer Price Index also rose almost 21 percent.

``The period, from June 2001 through the June 2009 figures that were reported this week, can be separated into two periods: the five-year boom and the three-year bust. There are limited indications that prices have started to rally in some areas, but the overall index’s move in June just kept up with inflation.

``During the boom, home prices outpaced inflation by 10.7 percent a year for five years. During the bust, they plunged, trailing inflation by 13.6 percent a year."

The interesting observation isn't just "what comes up must go down", but instead "the degree of ascent is almost directly proportional to the scale of decline"...very much like Newton's third law of motion:

For every action, there is an equal and opposite reaction.

This "stages in a bubble" chart has been a frequent post here to underscore how the bubble cycle culminates...

Nevertheless Mr. Norris concludes, ``Now foreclosures are still rising, even as home sales and prices seem to have stabilized. If the worst is over, it will have been a wild ride that ended very close to where it began, but with many people much worse off for the experience."


1. Property prices fundamentally reflects on the degree of the impact from inflationary policies undertaken (extremely loose monetary policies, administrative policies promoting home ownership and tax policies encouraging debt or credit take up).

2. Bubble or inflation policies has had a net negative effect on society, (consumes capital), which requires a lengthy and painful period for healing or rebalancing.

To quote Stephen Cecchetti, Marion Kohler, Christian Upper of Bank for International Settlements in a recent paper Financial Crisis and Economic Activity

``By altering attitudes towards risk, as well as increasing the level of government debt and the size of central banks’ balance sheets, systemic crises have the potential to raise real and nominal interest rates and consequently depress investment and lower the productive capacity of the economy in the long run. We looked for evidence of these effects and found that a number of crises had lasting, negative impacts on GDP. In some countries this was a result of an immediate, crisis-induced drop in the level of real output combined with a permanent decline in trend growth. In other cases, we find that the growth trend increased following the crisis but that the immediate drop was severe enough that it took years for the economy to make up for the crisis-related output loss."

Unfortunately yet, policymakers never seem to learn and continue to adopt short term oriented bubble blowing policies. This would lead us from one crisis to the next but transitioning towards a bigger scale, as the imbalances which needs to be adjusted will have simply been postponed. However, these are accumulated until the laws of nature will ultimately force an adjustment.

In essence, bubble policies are best signified by the idiom jumping out of the frying pan and into the fire.

Friday, August 28, 2009

Bank Failures: Predictions And Relativity

Predicting the number of bank failures during a crisis seem to be a fad.

Last year private equity savant Wilbur Ross forecasted 1,000 bank closures (Reuters).

Last week, Meredith Whitney projected 300 bank failures (Bloomberg) and now another private equity investor John Kanas in an interview in CNBC sees 1,000 bank closure over the next 2 years. (HT: Paul Kedrosky)

Nonetheless, John Kanas makes a noteworthy observation on the asymmetric policy approach by the Obama administration in rescuing of the big banks (financers of big corporations) at the expense of smaller banks (mom and pop enterprises), ``Government money has propped up the very large institutions as a result of the stimulus package... There's really very little lifeline available for the small institutions that are suffering."

While there have been 81 bank closures (CNN) todate out of a total of 8,195 FDIC insured banks (about 1% of US banks) where the FDIC have now raised the number of troubled banks to 416 (Marketwatch), this is far from the episodes of bank failures during the great depression (9,146) and the S&L Crisis (2,935) as shown in the chart from Professor Mark Perry.

In short, bank failures should be seen in a relative perspective.

Social Media Gains Acceptance From Older Users

An interesting observation from the Forrester on the demographics of social networking usage.

They reckon that most of the recent growth has emanated from the elder generation.

From Researchrecap on the Forrester study (bold emphasis theirs)

``Social media can no longer be dismissed as a quirky habit of young adults."

``Social technologies continue to grow substantially in 2009. Now more than four in five US online adults use social media at least once a month, and half participate in social networks like Facebook. While young people continue to march toward almost universal adoption of social applications, the most rapid growth occurred among consumers 35 and older.

``Adults younger than 35 approached universal social participation. As we noted last year, adults ages 18 to 24 and those ages 25 to 34 adopt social media similarly. Only three percent of 18- to 24-year-olds and 10% of 25- to 34-year-olds are socially Inactive. What’s more, a staggering 89% of the younger crowd are Spectators, while nearly as many are Joiners. And almost half create content, far higher than any other age group. Adults ages 25 to 34 also grew their participation across all categories — especially in social networks.

``Adults ages 35 to 54 rapidly adopted Joiner activities.
Much of the growth in social networks today comes from people older than 34. Compared with last year, this group grew its participation by more than 60%, and now more than half of adults ages 35 to 44 are in social networks. Adults ages 45 to 54 grew their Joiner behavior nearly as much, but still lag behind the 35- to 44-year-olds; 38% of those ages 45 to 54 use social network sites regularly. These consumers also increased their Creator activities to the point where one in five produce social content.

``Adults 55 and older started to share and connect with each other online.
Seventy percent of online adults ages 55 and older tell us they tap social tools at least once a month; 26% use social networks and 12% create social content.

A graphic on the technology ladder

Empirical experience suggests that this could be true even outside the US. And this likewise suggest that many traditional activities (radio, tv) could be replaced by social media networks bearing the same features.

Amazing innovation from free markets that has increasingly been advancing our standards of living.