``Resolve to serve no more, and you are at once freed. I do not ask that you place hands upon the tyrant to topple him over, but simply that you support him no longer; then you will behold him, like a great Colossus whose pedestal has been pulled away, fall of his own weight and break in pieces.”-Étienne De La Boétie
Economist Russ Roberts writes, ``One difference between economists and others is that economists tend to be less impressed by motivation and more impressed by what people actually do. Economists are also less impressed by what people say than by what they do. So they are particularly unimpressed by people who profess to be motivated by the public good, for example.” [bold emphasis mine]
Indeed people’s action significantly matter more than what they say. That’s because words and actions can be diametrically opposite or people can say one thing and do exactly the reverse. The most prominent practitioners of such duplicity are those engaged in politics, as implied above.
But this isn’t confined to politics, because such machinations, deliberate or intuitive, could easily be detected frequenting the marketplace.
Since it is political season in the Philippines, it is natural to see the public’s attention focused on the forthcoming national elections.
Unfortunately, however, the apparent product of unwarranted mawkishness over the political frontier appears to be deductions based on reductio ad absurdum, as seen in media reports[1].
Mainstream media, which accounts as the public’s main source of information, still has a commanding influence in shaping people’s perception.
And our quibble: the aggrandizement of so-called risks from elections.
Available Bias And Voter’s Irrationality
We are sympathetic with people who perceive and are wary of “uncertainties” arising from leadership transitions, given their overreliance on mainstream media as their main source of information.
Yet in contrast to conventionalism, we see media’s largely superficial treatment of the political economy, which attempts to project elections as “change” that would lead to the portals of political nirvana, as hallucinatory.
People hardly grasp that their concept of “change” has been ever elusive, and will always be, because it is simply not realizable. The people and NOT the president is the answer to prosperity.[2]
That’s because there are only two ways to generate wealth, by production “economic means” or by plunder “political means”.
As Murray N. Rothbard explains[3],
``The great German sociologist Franz Oppenheimer pointed out that there are two mutually exclusive ways of acquiring wealth; one, the above way of production and exchange, he called the "economic means." The other way is simpler in that it does not require productivity; it is the way of seizure of another's goods or services by the use of force and violence. This is the method of one-sided confiscation, of theft of the property of others. This is the method which Oppenheimer termed "the political means" to wealth. It should be clear that the peaceful use of reason and energy in production is the "natural" path for man: the means for his survival and prosperity on this earth. It should be equally clear that the coercive, exploitative means is contrary to natural law; it is parasitic, for instead of adding to production, it subtracts from it. The "political means" siphons production off to a parasitic and destructive individual or group; and this siphoning not only subtracts from the number producing, but also lowers the producer's incentive to produce beyond his own subsistence. In the long run, the robber destroys his own subsistence by dwindling or eliminating the source of his own supply. But not only that; even in the short-run, the predator is acting contrary to his own true nature as a man.” (emphasis added)
Media’s account of analyses has been bereft of the social framework that underpins the existence of the current political institutions, the legal structures and political-economic interactions of the agents involved.
For instance, people assume corruption as mainly a moral issue without appropriate scrutiny on the interface of legal, bureaucratic, enforcement, behavioural and transactional factors which impels for such dynamics.
As Ludwig von Mises explains[4], ``To be sure, public opinion is not mistaken if it scents corruption everywhere in the interventionist state. The corruptibility of the politicians, representatives, and officials is the very foundation that carries the system. Without it the system would disintegrate or be replaced with socialism or capitalism. Classical liberalism regarded those laws best that afforded least discretionary power to executive authorities, thus avoiding arbitrariness and abuse. The modem state seeks to expand its discretionary power-everything is to be left to the discretion of officials.” (bold and italics emphasis added)
In short, in contrast to popular opinion, corruption represents more of a symptom than the disease.
Nevertheless, applied to the financial markets, when people who claim to see “real” risk from such scenario, we expect them to liquidate on most of their portfolio, and perhaps, like in the past, gravitate to the US dollar as a “flight to safety” instinctive response.
And if such actions are taken then we could say that the person’s view of risks is authentic (regardless of the validity of the perception).
But when people argue that that they see “real risks” and yet remain holding on to their portfolio, essentially this would redound to a self-contradictory position. It simply implies three things:
First, convictions are not deep enough to justify a full-scale retreat.
Second, hope is in the cards (this justifies a negative-neutral bias position) and
Lastly, uncertainty is being used as a pretext to for market “timing”.
And to further argue that “policies” to be undertaken by the new set of leaders would account for as another trivial reasoning. If this is the case, then perhaps people won’t be in the markets at all because, laws and regulations, like markets, aren’t definitive and depend on stimulus response based on the economic and political landscape, aside from many factors.
First of all, leaders are hardly elected because of their assumed policies. Democracy has been a popularity contest, especially in the Philippines. Such is the reason why celebrities have been near shoo-in candidates for national or local positions.
Second, new leaders don’t myopically impose policies out of sheer idealism, unless the new leader is a stealth extremist and would risk an ouster.
Policies are thus mostly shaped by interest or lobby groups. And the influences of lobby groups are likely to be more powerful when they are small but concentrated, as William F. Shughart II writes[5],
``Small, homogeneous groups with strong communities of interest tend to be more effective suppliers of political pressure and political support (votes, campaign contributions, and the like) than larger groups whose interests are more diffuse. The members of smaller groups have greater individual stakes in favorable policy decisions, can organize at lower cost, and can more successfully control the free riding that otherwise would undermine the achievement of their collective goals. Because the vote motive provides reelection-seeking politicians with strong incentives to respond to the demands of small, well-organized groups, representative democracy frequently leads to a tyranny of the minority.” (bold highlights mine)
Based on historical ties and the list of top candidates vying for the top spot, it isn’t likely that the new president will take radical measures that would trigger upheaval, because the same personalities have long ‘waltzed with’ the same small but powerful clique. Hence there is likely to be marginal changes in the policy setting grounds for the new administration[6].
Three, based on the current political ‘democratic’, representative structure of the Philippine government, policies will be subjected to “horse trading” or compromises. This means the more haggling and compromising involved, the lesser the odds of any dramatic changes.
Lastly, public officials are self interested agents. That’s because they’re just like us, human beings, and not self-appointed saviours seeking out martyrdom. Hence they are likely to take political positions that would ensure the longevity of their tenure instead of working for long term “good”. As the above quote from William F. Shughart II, this only implies that to insure such interest they won’t likely unsettle the norm.
So why has media and their rabid followers been seeming so paranoid? A non-sequitur reply is that maybe because they’ve watched too many films of Stephen King and John Carpenter or perhaps Freddie Krueger and Jason of the Friday the 13th series.
In behaviourism, trying to connect current events with market actions is known as the available bias. That’s if they coincide.
Remarkably, they don’t!
The Media’s Blarney Unsupported By Market Action!
The last time the Phisix and the Peso encountered a real political risk was in 2005, remember the “Hello Garci” scandal? (see figure 1)
Figure 1: Phisix and Peso: What People Say And What People Do
The Phisix was already down 15% even prior to Samuel Ong’s exposé that rocked the Philippine political scene.
Mr. Ong’s tape contained a voice recording of PGMA with a Commission on Elections (COMELEC) Commissioner Virgilio Garciliano, who allegedly discussed about manipulating the presidential election results which paved way for her victory in 2004.
Subsequently, local and foreign polls exhibited that a majority of the people had expected PGMA not to complete her term and would either resign or be impeached. And repeated rumours of another revolution flourished. Yet attempts had been made to unseat her, such as the November 2007 Peninsula takeover, but this had been aborted.
From a hindsight perspective, what had been popular had been wrong again!
The immediate effect of the Garci scandal on the financial markets was obviously more pronounced on the Philippine Peso (green trend line) than on the Phisix (blue trend line).
While the Phisix fell by about 11% in reaction to the exposé, the local equity benchmark had been in a consolidation phase following a prior decline.
Meanwhile, the Peso spiked from 54 back to 56 or fell by 4%! As we earlier said, Filipinos tend to rally around the US dollar once signs of instability surfaces, and the 2008 post Lehman saga validated this phenomenon anew (in spite of growing remittances in nominal terms!).
In short, the Peso-US dollar trend accounts for as the best sentiment measure of stability or instability in the Philippines.
Now media and some people say that the election risks are real, yet markets don’t seem to concur with such an outlook.
Two red arrows, at the farthest right, above appear to be pointing at the same signs.
The Philippine Peso seem to be at the brink of breaking out of its resistance levels at 45.58, set during the first half of January, to close at 45.66 last Friday, while the Phisix did break above the resistance level on Thursday, but failed to hold on to the gains after a sharp fall on Friday. Yet the Phisix remains at arms length distance from the said pivotal threshold level.
Incidentally, the Phisix and the Peso has been up for the 5th and 4th consecutive week, respectively!
Yet as media blabbered about how election risks would spook foreign investors, last week saw the Phisix account for the highest weekly inflow from foreign money for the year-1.7 billion pesos (US $37 million)!
So hardly have any of these reported worries translated to reality.
Markets signify as people voting with their wallets. In contrast, media reports or op-eds can’t be accurately gauged because they represent the opinions or facts as interpreted by the writer or author.
In short, whether it is sensationalism or political partiality, these opinions come in conflict with reality, simply because hunches or biases have NOT been supported by facts.
Yet many still believe them. Albeit this state of disbelief is an even bullish case for us, because doubters, when convinced of the invalidity of their causes, would end up chasing prices higher.
Of course considering that the winning streaks from our financial markets may lead to a reprieve, such retracement will again be attributed to political anxieties.
Nevertheless as the markets have been saying, there has been little linkages between market actions and popular unproven assumptions.
Winnowing Real Political Risks From Spurious Conspiracy Theories
Let me add that risks from elections have now supposedly evolved to one of “election failure”.
Media seems trying to say that the incumbent President may try to extend her term by resorting to “emergency power” arising from the outbreak of power outages in parts of the nation.
This is plain cockamamie.
True, power is alluring. But a gambit to extend power only to be foiled, will translate to incarceration and ignominy or even death!
Where PGMAs political capital appears to have been substantially drained, as manifested by the numerous defections in the administration’s political party aside from her dismally low approval ratings, only a feckless and uncalculating person would engage in such bravado.
Yet the exiting President as a professional economist, has revealed that her political actions have been cautiously premised on mostly utilitarian grounds or “moral worth of an action is determined solely by its contribution to overall utility” (Wikipedia.org), e.g. holiday economics[7]. In short, she isn’t dense. On the contrary, she seems alot shrewder than most of us expect her to be.
And when the risk of failing seems greater than the rewards of success (from so called declaration of martial law or emergency powers), then obviously a crafty person won’t take the ante.
Ergo, desperate actions don’t seem to be in the cards here.
And as the public choice theory suggest, as self-interested agents, politicians are likely to act in the direction of prolonging, not only their term, but also of their career. So perhaps a more likely route for PGMA, given the current circumstances, is to work for a change the system of government into parliamentary, where she can aspire to get re-elected as the President or as Prime Minister.
Nonetheless, had she wanted to declare emergency powers, she could have easily used the crisis from Typhoon Ketsana nickname Ondoy and Typhoon Parma nickname Pepeng to declare martial law and call for a failure in elections[8]. The ripple of the adversarial effects from price controls would have been a perfect excuse to blame markets in order to reinforce greater interventionist police power. And that’s what we’ve warned about[9].
Yet during that period, the public’s expectation for the realization of elections has not been as a powerful as it has been today.
Anyway, in realizing the futility of price controls, these were lifted last November. Thankfully, such opportunity had not been utilized for devious self-serving goals.
In short, PGMA passed up a prime opportunity to arrogate power by force.
Again, actions speak louder than alleged motivations!
Civil Obedience As The Proverbial Big Stick
Finally I don’t think PGMA has underestimated the power of the people to get mobilized as a political force, in spite of the Garci Scandal.
As a reminder, the offshoot of the Garci scandal, despite of the failed attempts by the opposition to mount another people revolution against her, was an astounding backlash against the administration, whose senatorial bets had been decisively walloped in the 2007 polls. That was a powerful statement.
Nevertheless despite being the pioneer of non-violent revolution, it’s a mistake to say that the Filipinos had gotten jaded over ousting of leaders by use of civil disobedience. Incidentally, civil disobedience as a political approach had been introduced mostly by libertarians, particularly Frenchman Étienne de la Boétie[10].
Persistent manipulation by politicians of the masses to synthetically represent people power such as EDSA III, appears to have reduced the Filipino’s appetite to turn democratic ideals into a mockery for the benefit of demagogues. And reduced efficacy of people’s power is likely to end up with a violent conclusion or a despotic regime.
It would only take a legitimate tinderbox, particularly, [this I think is] the betrayal of the expectations to uphold the sanctity of the ballot box, to catalyze a reawakening of a spontaneous political movement. It’s a force, I reckon, PGMA won’t bet against.
Hence, mainstream media is wrong about the perceived risks about an election failure and has equally been exaggerating on their conspiratorial theories.
Strong Evidence Of External Influence
So let me tell you where we think the Philippine markets seem to be getting their inspiration (see figure 2)
Figure 2: Bloomberg-JP Morgan Asia Dollar Index: Asian Currencies Rising
Entertainment and market analysis are two different stuffs.
If the public likes to believe in fables as foundations for serious investigations we don’t. We talk fairytales when we deal with children. As prudent investors, our goal is to try to analyze market variables or events that truly matters and effectively assess and weigh on the risk reward equation.
As noted earlier, the Philippine peso is just a few centavos away from recovering previously lost ground, where it may attempt to possibly attain a new high over the next few days.
A successful breakout of the Peso should lead it to the next technical target, 44.80 to a US Dollar.
The rising Peso isn’t an insulated affair, in fact as the chart above shows. It has been a regional phenomenon. The Bloomberg JP Morgan Asian Dollar Index represents a basket of Asian currencies, which according to prnewswire.com.uk is the ``first U.S. dollar tradable index of emerging Asian currencies. The ADXY creates a benchmark for monitoring Asia's currency markets on an aggregate basis. The ADXY is a spot index of emerging Asia's most actively traded currency pairs valued against the U.S. dollar.”
I don’t have access to the composition and weightings of the ADXY, but if you look at the chart, both the ADXY and the PESO seem to be at the verge of a massive breaking out.
A breakout of the Peso only means one thing; there is more demand for the Peso than its traditional pair, the US dollar. If local markets are truly hounded by real political risks, then people would be flocking to the US dollar and not the other way around.
Although as a caveat, correlation does not imply causation. In other words, both the Peso and the other Asian currencies seem to be responding to external variables. For us, they are responding to the inflationism applied by major OECD economies.
The Phisix appears to chime with the Peso. This implies that both are being affected by external than by local forces (see figure 3)
Figure 3: Stockcharts.com: US Asian Markets and the Phisix
If you look at the Phisix (bottom window) and the US S&P 500 (main window) we seem to seeing the same patterns, except that Friday saw the Phisix fall steeply while the broadweighted S&P remains adrift at the resistance levels.
Nevertheless if the S&P will breakout in the same manner as its technology rich counterpart, the Nasdaq (COMPQ), then we are probably going to see the same dynamics over at the Phisix.
One would note that the Dow Jones Stoxx Asia/Pacific ex-Japan (DJP2) has lagged the both the Phisix and US market contemporaries. But again, I don’t have the composition and the weightings of the index, and it is an assumption that Chinese stocks which remain in consolidation could have been a factor behind such underperformance.
So far, global equity markets appear to be partly validating the sweetspot of inflation scenario[11].
Going back to the lessons taught by Russ Roberts, indeed studying what people do relative to what they say or what has been assumed as the motivating factor, even if unsupported by evidences, is a far better approach in the analysis of markets.
[1] See Philippine Election Update: Jitters From Election Failure Risks?
[2] See Philippine Election Myth: New President Will Determine Direction of Economy And Markets
[3] Rothbard, Murray N., The Anatomy Of The State
[4] Mises, Ludwig von, A Critique On Interventionism, p.31
[5] Shughart II, William F. Public Choice
[6] See Why The Presidential Elections Will Have Little Impact On Philippine Markets
[7] See Broken Window Fallacy: The Vicious Hidden Costs of "Holiday Economics"
[8] See Typhoon Ondoy: Market Fallacies and Risks
[9] See No To Price Controls! No To Despotism!
[10] If a minority of elites rule over, tax, and exploit the majority of the public, then this brings up starkly the main problem of political theory: what I like to call the mystery of civil obedience. Why does the majority of the public obey these turkeys, anyway? This problem I believe, was solved by three great political theorists, mainly but not all libertarian: Etienne de la Boetie, French libertarian theorist of the mid-sixteenth century; David Hume; and Ludwig von Mises. They pointed out that, precisely because the ruling class is a minority, that in the long run, force per se cannot rule. Even in the most despotic dictatorship, the government can only persist when it is backed by the majority of the population. In the long run, ideas, not force, rule, and any government has to have legitimacy in the minds of the public!
Rothbard, Murray N., A Strategy for the Right
[11] See Inflation’s Sweet Spot Augur For A Gold Breakout And Global Equity Market Rally
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