Monday, January 31, 2011

Phisix: Panicking Retail Investors Equals Buying Opportunity

“Without education we are in a horrible and deadly danger of taking educated people seriously.” G.K. Chesterton (1874-1936), English author

One of the important sentiment indicators that I use in examining short term trends is measuring the actions of small retail investors.

This group comprise mostly the unsophisticated market participants, whose decisions are mostly swayed by emotions. Market tops (greed) and bottoms (panic) are frequently associated with aggressive actions undertaken by them.

Pigs Get Slaughtered

And there’s even this famous Wall Street axiom which alludes to them: “Bulls and Bears make money, but pigs get slaughtered”.

Pigs, according to Investopedia[1], are high-risk investors looking for the one big score in a short period of time. Pigs buy on hot tips and invest in companies without doing their due dlligence. They get impatient, greedy, and emotional about their investments, and they are drawn to high-risk securities without putting in the proper time or money to learn about these investment vehicles. Professional traders love the pigs, as it's often from their losses that the bulls and bears reap their profits.

While I don’t have sufficient data to substantiate this phenomenon today, except that market breadth has considerably deteriorated, my sense is that the recent correction in the local markets may have incited some retail investor’s into panic selling.


Figure 1: Net Foreign Trade

Since the peak of the Phisix in October, foreign trade have been mixed (figure 1).

Last week foreign trade reported net buying, reversing almost half of the outflows seen from the previous week. This means that most of the selling pressure came from local investors. With the broad deterioration of the market’s breadth, this likely signals panic selling by retail investors.

And for whatever reasons which may have prompted for their actions I see this as an opportunity to accumulate rather than to flee.

Where weak hands dominate the activities, taking the contrarian stand would be the most prudent path. It seems almost the same case where we successfully called for “top” in the US bonds and the “bottom” in US stocks[2] based on the activities of the Pigs.

Phisix (and ASEAN)-Global Market Divergences

We have to remember market actions have never been a one-way street, as buyers and sellers reacting to perpetually changing conditions, always struggle to tip the scale of balance in their favor.

I’d have to admit that over the short-term even global markets may take a reprieve. As to whether this would materially influence the actions in the local equity market, which appears to have foreshadowed the global trend, is something I can hardly predict.

And gold prices, which in my view, has functioned as a very important barometer of global equities, seems to have augured for this hiatus (see figure 1).

But the point is: the major drivers of global financial marketplace, particularly inflationism and globalization, remain intact which means likely a consolidation phase first, as a consequence to last year’s fiery run up, before the next leg up.


Figure 1: Growing Divergences In The Financial Marketplace?

One thing we can observe, so far, is that the Philippine Phisix, along with our Southeast Asian contemporaries, which has been one of the world’s best performers in 2010[3], appears to be diverging from the trends of the global equity markets[4].

This can be seen in based on the actions of the Dow Jones World Index (DJW) and Dow Jones Asia Ex-Japan (P2DOW), which means bourses of major economies have been sustaining the rise of global markets, via the DJW, aside from the other non BRIC emerging markets.

In fact, many of the today’s best performers have been last year’s laggards, which only implies of the rotational effects on equity asset prices as corollary from central banks inflationism.

Yet with most countries still showing advances more than those suffering from losses measured on a year to date basis, it’s hard to argue for bearishness unless current conditions dramatically degenerate.

Peso-Phisix Divergence

Another source of a slight divergence appears to be in the tight correlation of the Phisix and the Philippine Peso (see figure 3)


Figure 3 Peso-Phisix Divergence?

Almost each time we see the Phisix fumble, the Peso follows. The chart demonstrates this relationship where a peak in the US dollar coincides with the bottom of the Phisix and vice versa.

This week we saw a sharp rally in the Peso even as the Phisix just eked out inconsequential gains. This implies that foreign investors buttressed Phisix as locals sold the market resulting to a broad based selloff.

My point is that if foreign investors increase their accumulations in the equity markets as the locals sell, we should see a consolidation (bottoming).

And where negative sentiment eases, and locals reverse from selling, we’d probably see a substantial recovery.

By then the Pigs will likely jump on the bandwagon.

[1] Stocks Basics: The Bulls, The Bears And The Farm

[2] See US Markets: What Small Investors Fleeing Stocks Means August 23, 2011

[3] see How Global Equity Markets Performed in 2010, January 14, 2011

[4] See Global Stock Market Update: Advancers Still Dominate, January 25, 2011

Gold Fundamentals Remain Positive

``Gold, on the other hand, is a much-needed safeguard against the barbarism of monetary authorities. Historically, the international monetary system, imposed after World War II by the Bretton Woods agreements, gave the dollar a central role. It was considered "as good as gold" because it was the only currency that maintained a link with the yellow metal. Gold thus acted as economic actors' safety valve against American monetary authorities' abuse of inflationary expansion.” Valentin Petkantchin Gold and the Barbarians

I have always emphasized that gold has proven to be quite a reliable thermostat of the global equity markets[1].

Gold has not escaped the short deflationary episode in 2008 nor has it eluded the recession in the early 2008. Thus gold, as we have repeatedly argued here[2], isn’t likely to function as a deflation hedge for the simple reason that gold isn’t part of the incumbent monetary architecture unlike during the Great Depression days of the 1930s. In short comparing gold in the 30s and gold today would be like comparing apples to coconuts.

The implication of this is that a sustained fall in gold prices could suggest of contracting money supply or a resurfacing of recessionary (deflationary) forces. Thus, a sustained fall or a dramatic collapse of gold prices should be mean alarm bells for us.

As a side note, not all recessions have been deflationary as alleged by some, and this has been evident in the stagflation era of the 70s (see figure 4).


Figure 4: Economagic: Stagflation

In the 70s, even as the S&P 500 (green line) fell, the consumer price (blue line) index continued to surge. Meanwhile, precious metals (red line) peaked amidst the 1980 recession.

But of course, like money, gold is also subject to demand and supply balanced by prices. Thus given the 10 successive years of gains, gold is certainly not immune to plain vanilla profit taking.

The point is—we should ascertain if any fall in the price of gold constitutes structural or countercyclical forces at work.

Monetary Disorder Remains The Dominant Theme

When we learn that China intends to issue 1 trillion yuan ($151 billion) this year[3], the the Central Bank of Ireland is financing €51bn of an emergency loan programme by printing its own money[4] and that the US monetary aggregate M2 has been surging by biggest weekly amount since 2008[5], we don’t seem to see any substantial or structural changes that should impact the long term price trend of gold materially.

In short, global central banks continue to pump money like mad, and this should be bullish for gold.


Figure 4: St. Louis Federal Reserve: Bank Credit

To add, as I have rightly been predicting[6]; the steep yield curve would influence the US credit markets positively, though at a time lag, as I previously wrote “the US yield curve cycle has a 2-3 year lag period from which we should expect it to generate “traction” by the last quarter of 2010.”[7]

And they seem to performing as expected (see figure 4), as the US credit market appear to show signs of improvements.

The risk here is that with record “excess” bank reserves or banks' base-money holdings minus required reserves that is either held in their vaults or on deposit with the Federal Reserve, given the fractional reserve system, these reserves can multiply credit and money supply that may amplify or accelerate the rate of inflation.

In other words, even what may be read as a positive ‘economic’ sign could represent a prospective hazard—an offshoot to the previous policies.

Thus, the recent volatility in gold prices for me would account for profit taking and certainly not a reason to see a reversal.

Yet part of the recent fall in gold prices has allegedly been traced to a speculator-trader, who massively levered up on huge (long- short) gold positions, which turned out to be unprofitable and had been forced to liquidate.

The ensuing liquidation resulted to what the Wall Street Journal reports as the biggest single reduction ever[8]in gold contracts.

So with the possibility that this event may have already passed and or could have been discounted, gold could regain its lustre over the coming sessions.

Gold And The Web Enabled Middle East Political Revolutions

Friday’s huge rally in gold, which media attributed to Egypt’s worsening political crisis and had likewise been adduced to the heightened risks of a regional political upheaval—where dictatorships and the entrenched aristocracy appear to be facing a comeuppance from the long disgruntled populace, a revolution apparently enabled by the web[9] and partly triggered by surging food prices—appear more like rationalization.


Figure 5: Bloomberg[10]: Political Tremors In The Middle East

Although, stock markets in the Middle East had indeed been rattled by such fears (see figure 5).

Perhaps the embattled aristocracy could be scrambling to safekeep their wealth overseas by buying gold for laundering purposes or for absconding it, similar to reports where the First Lady of the deposed President of Tunisia was alleged to have fled with 1.5 tonnes of gold (worth $55 million)[11].

The spike in oil prices should be more of a natural side effect over concerns of supply side disruptions once political standoffs become exceedingly violent. But given that the political turmoil account for as domestic issues, I am sceptical over the prospects of prolonged violent stalemate.

For me, these so-called uncertainties are icing in the cake for gold.

Yet in my view, we should see these ongoing revolts as positive.

People appear to be emboldened in asserting their sovereignty over an increasingly derelict political structure built upon vertical hierarchies predicated on central planning and or political-economic fascism.

In short, the web has functioned as a pivotal instrument in counterbalancing or levelling or reducing the concentration of political power to a few or to the once powerful elite. The likelihood is that the rule of autocrats will be diminished, unless governments would be successful in introducing and imposing controls and censorship on the cyberspace.

With over 2 billion people now wired or connected online or “With the world's population exceeding 6.8 billion, nearly one person in three surfs online”[12], add to that the 5 billion mobile phone subscriptions or about 73% of the global population, it’s no wonder how the political playing field is being reconfigured to adjust to these new realities.

Governments in the future are likely to be more attuned to the public and would likely shed a lot of bureaucratic fats.

And these ongoing revolutions represent the aforementioned structural adjustments in the political process. Hopefully, these people power revolts will be alot less bloody than their counterparts in the early to mid 20th century.

And if there should be any major force that could influence the current trend of gold it would likely be gold’s reversion to the new monetary framework which will likely be brought upon by people’s realization and intolerance of the abuses of central banking system.

So I unlike those who see a surge in the “event risks” from the current string of upheavals in the Middle East as a reason to sell, I see gold rebounding from these uncertainties, fed by the inflationism in central banks and eventually a rally in most of the global equity markets, including the Phisix.

[1] See Gold As Our Seasonal Barometer, February 23, 2009

[2] See Gold Unlikely A Deflation Hedge, June 28, 2010

[3] People’s Daily Online Central bank to print 1 trillion yuan in paper currency, January 20, 2011

[4] Central Bank steps up its cash support to Irish banks financed by institution printing own money January 15, 2011

[5] Durden, Tyler M2 Surges By Biggest Weekly Amount Since 2008 As It Hits Fresh All Time Record, Zero Hedge, January 27, 2011

[6] See Influences Of The Yield Curve On The Equity And Commodity Markets, March 22, 2010, See What’s The Yield Curve Saying About Asia And The Bubble Cycle?, January 17, 2010

[7] See Trigger To The Inflation Time Bomb, October 7, 2010

[8] Cui Carolyn and Zuckerman Gregory Small Gold Trader Makes Big Splash, Wall Street Journal, January 28, 2011

[9] See The Web Is Changing The Global Political Order, January 29, 2011

[10] Bloomberg GCC (Gulf Cooperation Council) 200; The Bloomberg GCC 200 Index is a capitalization weighted index of the top 200 equities in the GCC region based on market capitalization and liquidity. The index was developed with a base value of 100 and is rebalanced semi-annually in April and October.

[11] Tunisia: Ex First Lady Absconded With 1.5 T Of Gold Bullions, January 17, 2010

[12] Number of Internet users worldwide reaches two billion, January 26, 2011

Saturday, January 29, 2011

The Web Is Changing The Global Political Order

Here is futurist Alvin Toffler as interviewed by the Gartner fellows in 2006: (bold emphasis mine)

I also think there's going to be a great boom when we stop thinking about companies and start thinking about restructuring governments - and completely restructuring these gigantic pyramidal bureaucracies that we rely on and that no longer function. So I think that there's going to be a huge market for software in new kinds of organizations. Now, I'm not sure whether it'll still be called software or what, but as you no doubt read in the book, I expect to see one big institution after another collapse just like the Katrina experience with FEMA and the government and so on. That our corporate structures are designed for the industrial age - and that made sense then and Max Weber wrote about it in 1910 and so forth and so on - but they're clearly inappropriate to the systems that are now growing up, economic, social, cultural and all the rest.

The web became an instrumental tool in uprooting Tunisia’s dictatorship as shown here and here.

Sensing the same fate that might befall the 30 year authoritarian regime, Egypt’s President Hosni Mubarak swiftly orders communications cut as riots has escalated.


From Business Insider

From the New York Times

For the first time since the 1980s, Mr. Mubarak felt compelled to call the military into the streets of the major cities to restore order and enforce a national 6 p.m. curfew. He also ordered that Egypt be essentially severed from the global Internet and telecommunications systems. Even so, videos from Cairo and other major cities showed protesters openly defying the curfew and few efforts being made to enforce it. (emphasis mine)

Old political structures designed for the Industrial era appear to be crumbling exactly as Mr. Toffler predicted. This is only part of the ongoing adjustment towards the “knowledge economy”.


I’d like to add that the transition to the knowledge economy is being fed by the forces of decentralization brought about by connectivity and information dissemination. And this is what governments are afraid of.

Of course, another major factor that contributes to this societal discontent has been inflationism- seen through rising politically sensitive commodity prices.

As we have long been saying, these are two major forces in collision.

Commodities And The Good Life

In a book review, the ever brilliant Matt Ridley narrates how commodities has contributed to economic progress and our good life.

An excerpt…

The discovery of the elements shadows and to some extent explains this evolving history of specialisation. The ancients knew of just seven metals: gold, silver, copper, tin, iron, lead and mercury. By giving each specialised roles, they improved their living standards—tin for hardening bronze, lead for moulding, silver for coinage and so on. By the modern era only one more metal—zinc—had joined them (although platinum was known to natives of the Americas). But then came a steady flow of new metals, each of which finds its particular role in technology and society: tungsten for hardness, aluminium for lightness, chrome for polish, neodymium for magnets, barium for medicine. Each finds its niche as surely as each profession and vocation does in human society. Just as our story is one of specialisation, so the story of chemistry is one of purification.

Each metal marches into our lives along a path from novel to banal, says Aldersey-Williams. Aluminium was once so difficult to make that Napoleon III used aluminium cutlery for only his most favoured guests and gave his son, the Prince Imperial, an aluminium rattle. Then it became so cheap that it was considered, well, cheap. Titanium, once rare and exotic, is becoming ubiquitous. For niobium and tantalum, Aldersey-Williams writes, “the journey is just beginning.” This is a tantalising thought. There are so many elements whose talents we have barely begun to use.

Do Chinese Lack A Sense of Value?

Over at Minyanville, Kristin Graham makes strong and sweeping statements against the Chinese, she writes, (bold emphasis mine)

First, the Chinese lack a sense of value. Wealth is accumulated rapidly and in many cases, without taking on much risk since the government stands by its people’s side. Real estate, frequently earned via unorthodox means, turns average workers into wealthy citizens without lifting a finger. The Chinese don’t always associate high income through hard work and therefore don’t value the ability to purchase a luxury item.

Second, the lack of a distributed class system results in a consumer market where you’re either too poor to afford premium goods and services or you’re so wealthy that you can afford just about anything. With no scale of wealth, consumers do not gradually get priced out of the market as prices rise.

Third, the Chinese tend to view a direct connection between price and quality. The higher the price, the better the product. The best example is the housing market: structurally poor apartment buildings that deteriorate at rapid rates continue to escalate in value. The quality of the inside of an apartment is rarely a determining factor of its market value.

Lastly, wealthy Chinese are very materialistic and status oriented. This has a lot to do with the fact that China is all new money. For example, a young co-worker’s parents purchased her a car a few months back. She claimed she didn’t have a driver’s license and was unsure what she should actually do with the car. It was purchased purely for the fact she could say she owned it.

A recent quote from a Chinese dating game show, “I’d rather be miserable sitting in BMW rather than happy on a bicycle”, sums up the Chinese mentality.

Clearly, the Chinese mindset is far different than in the US. Regardless of level of wealth, most rich Americans will think twice before a purchase and evaluate the value of what they are paying for goods or services. In China, money is spent with little to no consideration of value. It’s spent because it can be spent.

My comments:

“Lacking a sense of value” does not seem to be the appropriate phrase here.

When people take action that ignores “risk”, based on the expectation that “government stands by its people’s side”, this is known as “moral hazard”, a common feature seen in economic bubbles.

And moral hazard doesn’t make the Chinese any different from the Americans who were the epicentre of the worldwide tremors felt from the most recent US housing bubble crash.



Besides, it isn’t just the Chinese who “became materialistic and status oriented”, as Americans levered up their houses just to speculate on McMansions and SUVs.

McMansions as defined by Urban Dictionary, is “the epitome of waste in America, and is nothing more than a status symbol for many pretentious suburban Americans who work to death trying to pay the mortgage and keep up with the Jones'.” (emphasis added)

So it isn’t the just the Chinese who seem to have lost their sense of values or where demand and supply appears “inelastic” but likewise the Americans, or for that matter, anyone else experiencing the narcotic effect of a blossoming bubble episode.

In other words, bubbles are not limited by national identity, as these signify as the sociological sideeffects of government or politically based policies.


In bubbles, what would appear irrational would look like the norm, that’s because mob psychology would be dominant enough to transform what seems rational to losing “contact with reality”. And that’s precisely what the writer has been witnessing in angst.

The bubble cycle in China has been palpable enough such that a poll recently revealed that 45% of global investors expect a bust within the next the 5 years. I share this conviction.

Unfortunately, instead of objectively examining the unfolding events, the writer applies undeservingly self-righteous prejudices.

Friday, January 28, 2011

Corruption In The Philippine Military: What Else is New?

Today’s headlines reported a 'surprise' bombshell-a corruption expose within the Philippine Military.

This from the Inquirer, (bold emphasis mine)

A retired lieutenant colonel on Thursday made a surprise appearance at the Senate and disclosed how he and his ex-bosses allegedly amassed wealth, with a large portion of the loot taken from soldiers’ salaries.

Seated on a wheelchair following a stroke, George Rabusa dropped a bombshell: that Angelo Reyes, a former Armed Forces chief of staff, received a send-off gift (“pabaon”) of “not less than” P50 million when he retired in 2001.

Rabusa said he personally delivered the cash to the “White House,” Reyes’ then quarters at Camp Aguinaldo, that year. He said he was accompanied by the then military comptroller, Lt. Gen. Jacinto Ligot.

“We had to convert [the money] to dollars because it was very bulky,” Rabusa said during the Senate blue ribbon committee’s initial hearing on the plea bargain between government prosecutors and ex-military comptroller Carlos Garcia.

On top of the purported “pabaon,” Reyes, who later became defense secretary, allegedly received a monthly take of at least P5 million—or around P100 million in his 20 months as AFP chief of staff. Rabusa said he and Ligot made the monthly deliveries.

Rabusa said Reyes’ office also received another P5 million monthly, but added that the amount was spent for office needs and was not necessarily pocketed by Reyes.


So what else is new?

Almost everyone would chime in to passionately condemn on such ‘repugnant’ act. But this perspective has been largely premised on the moral aspects of human frailties.

While people see this as something to seethe at, I see this more of a humdrum, if not an amusement. That’s because the mainstream hardly ever discusses on what incentivizes public officials to resort to such ‘detestable’ action. The assumption has always been premised on virtuosity and personality, and hardly on the system which fosters this.

People rarely see that corruption is mainly a product of the political distribution of resources.

A society whose economic opportunities have been controlled by politics would end up having the same or repeated repercussions, thus a vicious cycle—which is why there is nothing new.

As Ludwig von Mises wrote,

``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.”

And government officials as human beings are tempted by the same follies as anyone else, except that they advantageously operate with the power of legal coercion behind them.

And a bloated bureaucracy, regardless of which government agency, tends to fall into the same trap, as political favors, concessions and privileges are extended or exchanged within the bureaucracy or with select entities in the private sector, under the aegis of political mandate, that frequently leads to the same ‘perverted’ incentives.

Here is a simple (Occam Razor’s-law of parsimony) solution: starve the beast and corruption should fade naturally.

Practicing What We Preach

Robert Wenzel on how anti-gold proponent Paul Samuelson got rich

Their academic nonsense says one thing, but their real world activities are quite different. In academia, Samuelson wrote about the efficiencies of the market and was anti-gold. In the real world, he sought out traders that could find the inefficiencies in the markets, and he owned gold.

Incoherence seems to be a familiar quality that can be observed with interventionists, or simply, not practising what they preach.

I’d further add the following:

Interventionists want higher taxes, yet they refuse to pay taxes or volunteer to pay taxes (or donate their earnings) outside of government edict. They want the others, specifically “soaking the rich”, to suffer the burden of higher taxes...but never on them.

Interventionists want “self sufficiency” or local production. Yet they ride in foreign made cars, buy foreign food, use foreign appliances, clothes, and many other foreign products or services. They even travel abroad or conduct business with foreign partners.

Interventionists spite free trade: Yet they engage in voluntary exchange...everyday! They even sell their advocacies via the markets (books, journals, speaking engagements etc…)!

Interventionists declare that war is a good way to buoy the economy. Yet they are afraid to go to the front lines to engage in combat!

Interventionists want someone’s activity regulated. It’s definitely not theirs!

Interventionists preach depression economics. Yet as experts ensconced in the ivory towers, they are compensated by institutions (school, Wall Street or media), sell books (!), or receive grants from government sponsored entities and can hardly take on market positions that supports their biases, something like how Paul Samuelson made his fortune.

In one of the episodes of the comedy series, Seinfeld, Jerry Seinfeld advised his friend George Costanza who seem to get everything wrong, “If every instinct you have is wrong, then the opposite would have to be right”.

This must be the unstated rallying slogan of the interventionists. Paul Samuelson looked like one.

Thursday, January 27, 2011

Some Democrats Recognize The Value Of Free Trade

The following data and analysis comes from the website of US Democratic Party [the political party where one would hear a mouthful of anti free trade sentiment], the Democratic Leadership Council.

The article referred herein is about Russia as the largest country outside the WTO, and the prospects of increasing trade relations with her and the US through a membership in the WTO.


Here is the kicker from the (bold emphasis mine)

Altogether this would mark the largest burst of economic reforms and liberalizations certainly since Russia's independence in 1991, and likely rival only the perestroika era of the late 1980s as Russia's most ambitious attempt to rejoin the world economy since the First World War and the Revolution.

For the other new WTO members, this has meant big jumps in imports -- America's own export growth to these countries has been double the pace of export growth to new FTA partners and four times the rate to the rest of the world.

Res ipsa loquitor

Will Traffic Cameras Bring Discipline To Philippine Motorists?

Philippine authorities and the local media think that they’ve found the antidote against erring motorists-traffic cameras!

From the Philippine Star,

The MMDA said its enforcers, armed with cameras and speed tracking guns, will man strategic portions of the highway to make sure motorists observe the speed limit. Violators caught on camera and tracked by speed guns will be sent notices within seven days, following the agency’s “no contact” policy.

Unfortunately, as always they are likely to be wrong. That’s because the relationship between speed cameras and accidents have been ambiguous.

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This from the Economist, (bold emphasis mine)

TRAFFIC cameras are always controversial. Proponents maintain that an increase in their number results in fewer deaths on the roads. Opponents grumble that they are merely money spinners for local governments at the motorist’s expense. Drivers in Edmonton, Canada, will be refunded for speeding fines issued since November 2009 because of a technical glitch with a particular camera. In Britain, the government’s claims over improved safety were rebuffed by the British Medical Journal, and local councils have begun to turn off cameras. Research carried out recently in Australia by Queensland University points the other way, showing cameras do reduce accidents. The arguments will continue. Our chart shows that the effectiveness of traffic cameras is inconclusive, perhaps because many other factors contribute to road safety, such as population density, the condition of vehicles and roads, and other pedestrian-protection measures.

Authorities are likely to underestimate people’s reaction towards new rules and overestimate on their power to control or regulate people’s behavior.

Yet such “do something” attitude would likely succumb to the ningas cogon trap (enthusiasm only at the start of the project) brought about time consistency problem (popular policies are put in place due to the public’s fickle demand for it) and political grandstanding by the authorities that would lead to inconsistent and arbitrary implementation (in pursuit of popularity, new policies and its implementation will be redirected towards issues or flavors of the day).

Bottom line: Government use of taxpayer resources on these “fashionable” policies will likely end up wasted, the government will fail to accomplish its goal, and at worst, such new policies risks unforeseen consequences.

Wednesday, January 26, 2011

Nascent Signs of Stagflation?

UK may be the first country to manifest symptoms of stagflation or “a condition of slow economic growth and relatively high unemployment - a time of stagnation - accompanied by a rise in prices, or inflation” (


chart from

This from Businessweek-Bloomberg

Britain’s economy unexpectedly shrank the most in more than a year in the fourth quarter as construction slumped and the coldest weather in a century in December hampered services and retailing.

Gross domestic product fell 0.5 percent in the three months through December after increasing 0.7 percent in the previous quarter, the Office for National Statistics said in London today. Economists forecast a 0.5 percent gain, based on the median of 33 predictions in a Bloomberg news survey. Growth would have been “flattish” in the quarter without the impact of the weather, the statistics office said.

The U.K. recovery is losing momentum even before Prime Minister David Cameron’s government steps up its fiscal squeeze to cut the budget deficit. While the Bank of England left its key interest rate on hold this month to support the recovery, inflation has soared to an eight-month high and policy maker Andrew Sentance said late yesterday the “time has come to act” as price pressures intensify.

So economic contraction, which adds to unemployment amidst high inflation rates are signs of stagflation- a tradeoff which traditional Keynesian models have not incorporated.

Other developed economies are likewise seeing signs of emergent inflation


From the Economist:

Recently, however, rich-country inflation has also started creeping up: in December Britain’s consumer-price index hit 3.7%, while euro-zone inflation also rose above the ECB's target. Much of the blame has been put on the increase in commodity prices. But the impact on consumers differs widely between countries. A larger share of income is spent on food in poorer countries such as China (33%) and India (46%), so the rise in global food prices is the main driver of inflation there. By contrast, pricier energy is a bigger factor in the rich world, although it forms a relatively small component of consumer spending.

Given the near unanimity of policy directions by global central bankers, it is not deflation that we should worry about but stag- or super-inflation.

China’s New Paradigm To Economic Progress?

Some people, like Martin Jacques (see TED talk here, HT Jeff Tucker), thinks that China’s path to progress will be immensely different from that of the West. They could be right...overtime.

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Chart from the Economist

However, for as long as the Chinese read and apply Western economic theories as their own policies, I doubt that Chinese cultural “uniqueness” will hold true. (chart from the Economist shows both Chinese and Americans learning to assimilate each other)


This from yesterday's China’s People’s Daily, (all emphasis mine)

The People's Bank of China (PBC) will print 1 trillion yuan ($151 billion) worth of new bank notes this year, but officials refuted claims that the announcement had anything to do with inflation, the Xinhua News Agency reported Wednesday.

Ma Delun, deputy governor of the PBC, said Tuesday that the bank intends to replace old paper money floating in the market.

Ma said the amount of paper currency currently in the market is worth about 4.6 trillion yuan ($698 billion), and the central bank plans to replace them in five to seven years.

He said the central bank also plans to release more cash into the market during Spring Festival, but it has no plan to issue large-denomination currency and newly designed Renminbi notes.

Peng Sheng, an official with the Postal Savings Bank of China, told the Global Times that during Spring Festival, people spend more cash to buy gifts, travel, stuff them in red envelopes, while companies need cash for bonuses.

There was speculation that the PBC will print more money because of inflation.

Some points:

One, Chinese authorities justifies the policy of money printing to the perception of scarcity of money.

Second, Chinese authorities denies the causal linkages of money printing with that of inflation.

In the book When Money Dies: The Nightmare of the Weimar Collapse, authored by Adam Fergusson, we note of the following passage:

Most successful businessmen, however, stuck happily to the heresy that only by a continually falling exchange rate could Germany compete in neutral markets. After them, the deluge. Neither they, nor the politicians, nor the bankers — with distressingly few exceptions — perceived any direct connection between inflation and depreciation. And yet, as the printing presses churned out bank notes the exchange continued rapidly to fall. What impressed the ordinary politician was the danger of social unrest which would, in his opinion, inevitably arise if there were any scarcity of currency. He could not see, or intentionally ignored, the obvious danger which proceeded from continuous inflation. Social unrest appeared, just the same.

So basically, the incumbent Chinese leaders, Weimar politicians of the 1920s and the current day central bankers seem to share the same outlook, reasoning and policy directions.

While cultural quirks can influence diversity in people’s value preferences, this doesn’t mean they are immune to the laws of scarcity.

Finally, chatter about “new paradigms” scare the wit out of me because they usually herald a peaking of a bubble cycle.

Tuesday, January 25, 2011

China To Build The World’s Largest Megacity

Drunk with the recent success of combining capitalism with her “communist” political structure, the Chinese government has embarked on a grand scale of central planning—China plans to build the largest megacity in the world!


This from the Telegraph,

China is planning to create the world's biggest mega city by merging nine cities to create a metropolis twice the size of Wales with a population of 42 million.

City planners in south China have laid out an ambitious plan to merge together the nine cities that lie around the Pearl River Delta.

The "Turn The Pearl River Delta Into One" scheme will create a 16,000 sq mile urban area that is 26 times larger geographically than Greater London, or twice the size of Wales.

The new mega-city will cover a large part of China's manufacturing heartland, stretching from Guangzhou to Shenzhen and including Foshan, Dongguan, Zhongshan, Zhuhai, Jiangmen, Huizhou and Zhaoqing. Together, they account for nearly a tenth of the Chinese economy.

Over the next six years, around 150 major infrastructure projects will mesh the transport, energy, water and telecommunications networks of the nine cities together, at a cost of some 2 trillion yuan (£190 billion). An express rail line will also connect the hub with nearby Hong Kong.

China’s government seems increasingly manifesting signs of overconfidence, a harbinger of bubble bust.

As previously explained in China’s Bubble and the Austrian Business Cycle, imploding bubbles are frequently highlighted or foreordained by “grand” braggadocio (mostly real estate) projects, but instead of the private sector, this time the symptom could emerge from the government.

In addition, while many experts have been obsessed with the supposed certainty of the “deepening” of urbanization trends, I am not one of them. That’s because I see technology as a pivotal offsetting force that leads not to concentration but to decentralization. And technology induced decentralization should apply to most social activities which includes politics, economics, demographics and others.

This is one aspect, which I think, central planners in China or elsewhere seems to have overlooked. Of course, substituting their “expert” knowledge over people’s preferences is another major factor, as exhibited by some of China’s existing ghost cities

Jupiter: Giant Of The Solar System

Last year I noted that despite man's great leap in technological advancement, we are still NO match to the awesome powers of nature-the ultimate black swan.

This documentary video of the planet Jupiter presents a good example. (HT: Bob Murphy)

Jupiter has greatly contributed to life on earth by playing the role of an enormous vacuum cleaner through its massive gravity field (which serves as a defensive shield) that has, so far, kept us free from the risks of catastrophic impact from comets, asteroids and other space objects.

From this point of view, the idea that man is primarily responsible for nature's changes is a speck, irrelevant and represents fatal conceit or intellectual arrogance.

Fibonacci: Nature By Numbers

Here is a cool documentary video of the Fibonacci number sequence or the Golden Mean as seen in nature. (HT: Cafe Hayek)

Global Stock Market Update: Advancers Still Dominate

Here is an update of the performances of world stock markets courtesy of Bespoke Invest.


From Bespoke

Just over 30% of the countries shown are down so far this year. Bangladesh has been the worst performer in 2011 with a decline of 23.69% year to date. The country was the 2nd best performer in 2010 behind Sri Lanka with a gain of 82.79%. With its uprising this month, Tunisia is the only other country down more than 10%.

Of the G7 countries, Italy ranks first, followed by France (+6%), the US (+2.57%), Germany (+2.22%), and Japan (+1.14%). The UK ranks second to last of the G7 countries with a gain of 0.74%. Canada ranks dead last and is the only G7 country that is down year to date (-0.69%).

Looking at the BRICs, China continues to struggle with a year-to-date decline of 4% after falling 14.31% in 2010. India is also struggling with a decline of 6.62%, but unlike China, India saw nice gains last year. Russia is currently the top performing BRIC country with a year-to-date gain of 5.39%, and Brazil is just barely in the black at +0.12%.

My comments

Trading Places. Many of last year’s top performers are at the bottom and that includes the Philippines. Whereas many of last year’s laggards are on the upper echelon of the winner’s bracket (Italy, Spain, Greece).

Tailwind. Some of last year’s topnotchers continue to sizzle (Sri Lanka, Ukraine, Estonia), while some of last year’s tailenders continue to trail (Bermuda, Dubai, China).

Definitely NOT A Bear Market. With 30% of global equities down, the obverse side is that 70% of global equities are up. In short, gainers still dominate.

Developed world outpaces major Emerging Markets. It’s yet too early to say that this will be the central trend for the year. Though I wouldn’t bet on it.

Web Revolution. Bespoke links to a New York Times site which shows of the video that triggered the People’s Power revolution in Tunisia. The link here. It’s amazing to see how political events are being shaped by the web.

Monday, January 24, 2011

The Next Green Revolution?

Is the next green revolution upon us?

The non profit organization Philippine based International Rice Research Institute (IRRI) together with a China based institution has come up with a new variety of rice that is said to be “more robust, high yielding, and disease-resistant, yet thrive with less water, fertilizer, and pesticide”


Picture From IRRI

From Yale Global,

The world appears to be on the threshold of another green revolution in rice production as a result of an intensive, 12-year partnership between the Chinese Academy of Agricultural Sciences in Beijing and the International Rice Research Institute in the Philippines.

Called "Green Super Rice," it is the result of a project begun in 1998, involving the painstaking crossbreeding of more than 250 different potential varieties and rice hybrids, according to Dr Jauhar Ali, a senior scientist and regional project coordinator for the Development of Green Super Rice at IRRI in Los Banos, south of Manila.

The development of the process, Dr Ali said, is considered so significant that Microsoft founder Bill Gates met personally with Zhi-Kang Li who holds a dual position both with IRRI as Senior Molecular Geneticist and as Chief Scientist with the Institute of Crop Sciences at the Chinese Academy of Agricultural Sciences in Beijing and, through the Bill and Melinda Gates Foundation, presented the program with a US$18 million, three-year grant to expand the benefits to Asia and Africa.

The two institutions are seeking additional donors to be able to push the rice to undeveloped corners of Africa and other continents to help stave off the growing need for food across the planet.

The process was developed by Zhi-Kang Li, It involves the efforts of hundreds of researchers in dozens of countries across the world, seeking to isolate the desirable traits from indigenous strains and then backcross breed them to produce hardier varieties. (emphasis added)

By the above account, I am reminded of the brilliant economist Julian L. Simon who once said

The essence of wealth is the capacity to control the forces of nature, and the extent of wealth depends upon the level of technology and the ability to create new knowledge.

If markets are only allowed to do their job, we’d see less worries over scarcities of natural resources.

Thursday, January 20, 2011

Blogging Hiatus

I will be with my family along with very special friends for the weekend.

I am not sure if I can blog, but for sure regular blogging will resume by next week.

Thank you for your patronage and have a nice weekend.

"Knowledge is essential to freedom." -- William Ellery Channing (1780-1842)

The Politics of The Rice Scam

This from today’s Inquirer

An NFA audit found that 8 of the 10 awardees of the rice importation quotas in Luzon were all cooperatives with offices in Pangasinan province, said a source privy to a MalacaƱang probe of the previous administration’s massive rice importation program that the NFA said was overpriced....

In his report to Mr. Aquino last week, Banayo said the private importation deals were given to favored contractors supposedly through a questionable first-come-first-served scheme.

“Among the findings were: fictitious cooperatives and corporations were given the quotas, and qualifications standards were extremely liberal,” Banayo said in his executive summary submitted to the President.

Some comments...

In politics, the basic objective for the politicians is to grab credit (aimed at attaining high approval rating for election purposes) at the expense of another. This is usually coursed through the virtuosity (I am clean, the other is dirty) route. It represents crab mentality at its finest.

This issue is actually a revival. We dealt with this here: Government Failure: Imported Surplus Rice

The above news account exemplifies-special access or political privileges, privatizing gains while socializing losses or importantly the fundamental symptoms of the maladies of political distribution empowered or enabled by arbitrary laws. This maybe called either crony capitalism or rent seeking (state capitalism) or both.

Since it is the state who determines “who gets what” or the politically picking winners and losers (and not via the market forces through the price mechanism), the obvious result is inefficiencies, distortions, wastages (overpricing), and corruption. And who pays for all these? Obviously, the taxpayers.

Once politics is involved, economic calculation is set aside, as politics become the driver of the attendant actions by the leadership to redistribute resources. “Overpricing” thus becomes a politically subjective factor. (Based on which price level? As determined by whom? And when?)

This of course, is related to the problems of time consistency or the political sustainability of the policy over changing circumstances. The rice scam was an urgent issue during the Typhoon days of Pepeng and Ondoy. Today, with the urgency lost, wrong and questionable political decisions become a fodder for politicking.

This also represents as the knowledge problem, where the political leadership don’t know the costs and consequences of their actions (since they are just human) and the where unintended consequences of politically based actions extrapolate to a huge negative externality (side effect) on the populace.

The point is the problem isn’t mainly based on the virtues of the political leadership, but on the system that encourages such errant actions and malfeasances. Personality based politics won't solve the problem.

Lastly when the political leadership says “Let us reform the NFA. Let us reform its mandate so it will be much better”, the answer shouldn’t be in the direction of more political concentration and distribution of resources, but economic liberalization from the clutches of power hungry politicians.

In short, let the markets decide!

Tuesday, January 18, 2011

Will Falling Population (Demographic Time Bomb) Lead To A Reversal Of Globalization?

Lately I have encountered several commentaries suggesting that the “demographic time bomb” (falling population) will pose a risk to globalization by creating imbalances that would lead to political upheavals.

Here are two:

From Neil Howe and Richard Jackson in Global Aging And The Crisis Of The 2020's (bold emphasis mine)

“Rising pension and health care costs will place intense pressure on government budgets, potentially crowding out spending on other priorities, including national defense and foreign assistance. Economic performance may suffer as workforces gray and rates of savings and investment decline. As societies and electorates age, growing risk aversion and shorter time horizons may weaken not just the ability of the developed countries to play a major geopolitical role, but also their will.”

From Morgan Stanley’s Spyros Andreopoulos and Manoj Pradhan in ‘Ten for the Teens’(bold emphasis mine)

“The increase in macro instability comes at a time of major demographic transition in most DM and many EM economies. As populations become older, the demand for economic security - stable jobs, pensions - increases. This tension between higher instability and increased demand for security is likely to find its political expression in a backlash against globalisation. So far, the benefits of globalisation - higher income levels for most, i.e., the large middle class - have outweighed its drawbacks - increased competition and job instability. This has kept the globalisation show on the road until now. As this balance tips because the preferences of the middle class shift towards more security/stability, globalisation is likely to stall or reverse.”

There seems to be two separate issues here: unsustainable welfare states and globalization.

However the comments above attempt to make a connection which, for me, looks tenuous and confusingly premised on the fallacious ‘aggregate demand’.

Protectionism Equals Security?

Here is how I understand this: stripped out of the spending capacity due to old age, and with a government hobbled by fiscal straitjacket, the lack of demand (from both the private and the public) means slower economic growth which likewise would extrapolate to a political milieu that shifts from risk appetite (globalization) towards demand for ‘security and stability’ (protectionism), or in short, political stress.

For instance the Morgan Stanley tandem does an incredible turnaround, ``So far, the benefits of globalisation - higher income levels for most, i.e., the large middle class - have outweighed its drawbacks - increased competition and job instability. This has kept the globalisation show on the road until now.”

Are they suggesting that people who benefited from globalization will eventually bite the proverbial hand that feeds them? Are they suggesting too that people will see “security and stability” from lower incomes?

Will protectionism or restricting market activities make goods and services needed by the ageing society abundant and affordable? To the contrary, protectionism will only highlight on the shortages and the exorbitance of these economic goods that should lead to even more instability.

Murray N. Rothbard refuted this age old fallacy, he explained, (bold highlights mine)

It is difficult to see how a decline in population growth can adversely affect investment. Population growth does not provide an independent source of investment opportunity. A fall in the rate of population growth can only affect investment adversely if

-All the wants of existing consumers are completely satisfied. In that case, population growth would be the only additional source of consumer demand. This situation clearly does not exist; there are an infinite number of unsatisfied wants.

-The decline would lead to reduced consumer demand. There is no reason why this should be the case. Will not families use the money that they otherwise would have spent on their children for other types of expenditures?

Thus the problem of declining population can be helped by accepting immigrants or adopting to greater social mobility or the globalization of labor and by even more free trade.

We shouldn’t underestimate how people adjust to the new realities from the current underlying conditions. Importantly, we shouldn’t write off productivity of the senior citizens too (why? see below).

Illusion Or Reality?

Next would be the issue of welfare states. Once society realizes that the welfare state has been unsustainable, will people fight violently to retain the status quo (even if this is recognized as not possible) or will they cope up with the new reality?

The former would fall as part of the entitlement mentality engendered by excessive dependency or the moral hazard from political distribution while the latter will likely result from the realization that there’s no free lunch.

And perhaps in the realization that bellicosity won’t further society’s interests, they may opt for the latter (accepting harsh reality) than the former (live in a charade). And any political tensions from the succeeding reforms would signify as symptoms of ‘resistance to change’ than from a key reversal of political sentiment.

In the context of abrupt political-economic transitions from a crisis, Iceland’s violent riots from her financial crash of 2008 didn’t mechanically translate to close door ‘security’ based policies, as Iceland remains “moderately” economic free (44th), according to Heritage Foundation, even as the crisis did have some negative impact on her economic freedom ratings (due to higher taxes and government spending).


From Heritage Foundation

The point is that the notion that crisis will instigate a radical reversal of people’s sentiment from openness to protectionism seems likely misguided.

Today, Iceland has shown signs economic recovery and has even applied to join the European Union (aimed at achieving more financial and trade openness, aside from social mobility)!

Protectionism likewise did not spread like wildfire in 2008, as earlier discussed.

Ignoring Technology

Another factor would be technology.

While it may true that fertility rates may be going down (upper window), it is often ignored how the advances in technology has continually enhanced people’s living conditions.


From Google Public Data

Global Life expectancy (lower window) has lengthened from 50 years to 68.95 years over the past 50 years. Japan reportedly has some 41,000 centenarians (over 100 years old)! [But I won’t be lucky to live this long, because of my love affair with beer]

And if futurist Ray Kurzweil is correct, people’s life span may extend to 120 years (by 2030) or even more (180 years) as rate of technology advances accelerates.

Again Murray Rothbard on the importance of technological advancement

“technological progress, is certainly an important one; it is one of the main dynamic features of a free economy. Technological progress, however, is a decidedly favorable factor. It is proceeding now at a faster rate than ever before, with industries spending unprecedented sums on research and development of new techniques. New industries loom on the horizon. Certainly there is every reason to be exuberant rather than gloomy about the possibilities of technological progress.”

In short, should these advances occur then all demographic projections should be thrown to the garbage bin, as they are falsely premised and would be rendered irrelevant.

The basic problem with mainstream insights is that people are treated like unthinking automatons. And because of this they’re most likely wrong.

The ultimate threat to globalization is inflationism and not demographic trends.