Showing posts with label methodological individualism. Show all posts
Showing posts with label methodological individualism. Show all posts

Saturday, May 25, 2013

Iceland’s Recovery: Hardly about Currency Devaluation

Alan Reynolds at the Cato Institute blog explains, (italics original, bold mine)
Iceland’s recent devaluation was highly orthodox policy condition for wards of the IMF (strings attached to a $2 bn. loan). Unfortunately, such devaluations often backfire by inflating commodity costs, interest rates and the burden of foreign debt. The Icelandic krona fell from 64 to the dollar in 2007 to 123.6 in 2009, before strengthening with the economy to nearly 116 in 2011.

Since oil, grains and metals are priced in dollars, the 2008-2009 devaluation inflated Iceland’s cost of production and cost of living.  Inflation rose from 5.1 percent in 2007 to 12 percent or more in 2008 and 2009; real GDP fell by 6.8 percent in 2009 and 4 percent in 2010.  Faced with a collapsing currency, the central bank interest rate was hiked to 18 percent by October 2008.  It could have been worse.  If Iceland’s Supreme Court had not nullified loans indexed to foreign currencies in June 2010, devaluation would have doubled the cost of repaying foreign debt.

Devaluation was supposed to boost GDP by making imports costly and exports cheap, thus narrowing the trade deficit. The current account deficit did fall after 2008, but that always happens when recessions slash imports. Ireland had a current account surplus from 2010 to 2012 without devaluation, even as Iceland’s current account deficit was still 7-8 percent of GDP.

Iceland’s economy grew by 3.1 percent in 2011 when the currency appreciated and the budget deficit was deeply cut to 4.4 percent of GDP.  Devaluation explains the previous spike in inflation and interest rates, but little else. 

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Iceland’s statistical growth recovery following the 2008-2011 crisis.

Some notes from the above:

Devaluation policies serves the interests of political agents and their affiliates, allies or cronies than of the general economy.

The devaluation panacea oversimplifies a complex economy operating spontaneously on millions of independently moving parts. The natural result from such conflict: policy failure.

The devaluation snake oil therapy, which operates on the principle of getting something for nothing, also deals with solving short term quandaries that comes with larger long term costs.

Bottom line: Micro issues can hardly be resolved by using macro tools which mistakenly sees the economy as a mechanical machine. Individuals think and act on purpose. Macro economic policies assume otherwise.

Iceland’s recovery has largely been allowing for markets to clear (by not saving banks), and importantly, by the reversal of inflationist policies.

Thursday, May 23, 2013

Moody’s on the Philippines: No Property Bubble, Move along Nothing to see here

An official of Moody’s claims that there has been “no property bubble” in the Philippines.Moving along nothing to see here.

The Businessworld writes,
Real estate has again become a hot-button topic after banks saw their exposure to the industry breach regulatory limits in 2012. At P821.7 billion and comprising 20.9% of their total loan portfolio, the amount exceeded the BSP-mandated 20% cap.

The breach, though, was due to a new definition of "exposure." Banks were required to report not just real estate loans but also investments in debt and equity securities that finance real estate activities. These activities range from the acquisition, construction and development of properties, as well as buying and selling, rental and management.

Banks also had include loans for socialized and low-cost housing developments, which were previously exempted from the reportorial requirements.

Mr. Tremblay said the figure was no cause for alarm, noting: "The new definition of ‘exposure’ includes loans to low-cost and socialized housing and these segments tend to be less susceptible to speculation."

The BSP is mulling raising the 20% cap to accommodate the new definition as well as property market growth since 1997, when the limit was first introduced.

"Prospectively, we are not too fixated on any specific numerical cap. There is no magic number that can determine the point beyond which real estate exposure becomes a credit concern," Mr. Tremblay said.

The focus, instead, should be on factors such as demand and supply, underwriting standards, loan-to-value ratios and the leverage of households and firms. These can more accurately show whether the appreciation of prices and borrowers’ behavior is driven by fundamentals or speculation, he pointed out.

"So far, trends in these areas have remained within reasonable limits," Mr. Tremblay claimed. -
The Moody’s expert says the market should focus on demand and supply. Totally agreed.

But if domestic demand has been growing at anywhere at 6-9%, part of which has been financed by debt, and that the supply side has been growing at the rate of about 25% or more bolstered mainly by credit, then are these not signs of burgeoning imbalances? Particularly the ballooning variance between demand, on one side, and on the other, the growth of credit, as well as, the supply side, are not signs of bubbles? 

And when such exemplary growth in credit and the supply side is being clustered into popular sectors (real estate, shopping malls, casino, BPO vertical offices), these do not account for as signs of asset bubbles? 

Where then is economics in the above article which the Moody’s expert supposedly preaches?

One does not establish the presence or absence of a bubble by reading only statistics and by proclaiming immense faith on authorities for managing them. 

Statistics are historical data. They don’t tell much about the future.

While governments have been pursuing activist policies, this does not ensure the sustainability of current trends for the simple reason that their actions merely signifies as "extend and pretend" or "kick the can down the road". All such actions will have serious ramifications. Japan's much ballyhooed Abenomics has as of this writing triggered riots in the Japanese bond markets. If the riots escalate then we might soon see a debt crisis in Japan that will have a domino effect around the world. Does the Moody's see this?

It’s the same reason why mainstream economists failed to see the bubble which culminated with the Lehman bankruptcy in 2008 from which UK’s Queen Elizabeth censured them. In reality most of them were cheerleading the bubble until the bubble boomeranged on their faces.

Moody’s has also not failed to see the US bubble, but even played an important part in the lowering of credit standard by becoming stamp pads for issuers of structured securities.

Yet what Moody’s ignore, is the most critical factor: the trajectory of credit growth both from the supply and demand side, not limited to real estate but to other sectors associated with them.


When the Philippine government promotes zero bound rates to induce “domestic demand” and at the same time reduce SDA rates purportedly for “banks to withdraw some of their funds parked in the BSP, thereby increasing money circulating in the economy” , these policies don’t incentivize or promote debt a build-up?  

And what’s the purpose of credit rating upgrades? 

Investopedia on Credit ratings:
Credit is important since individuals and corporations with poor credit will have difficulty finding financing, and will most likely have to pay more due to the risk of default.
So upgrades extrapolates to an ease of finding credit finance. In short, it is a reward for borrowers or an inducement to borrow. So current upgrades doesn’t provide incentives to further fuel a bubble through more debt?

This is basic economic logic which seem to operate in a vacuum.

Apparently in the eyes and mind of the mainstream, "economics" is a convenient word used to disguise pseudo expertise from the truth and to pander to a politically brainwashed crowd who has been mesmerized by the four most dangerous words of investing, “this time is different”.

Yet unfortunately such mentality is in itself a sign of the manic phase of a bubble cycle in motion. 

Caveat emptor.

Friday, April 05, 2013

Happiness: A Worthwhile Purpose in Life

Experts would like to make us believe that there are objective standards in attaining happiness. From such premise, they come with all sorts of math-psychology based models or methodology, e.g. Happiness economics, to ascertain happiness. They attribute happiness mostly to well-being and wealth, from which they justify institutional coercion to supposedly attain such goals.

The fact is that happiness is subjective. Happiness comes from within us, as individuals. Happiness is distinct from person to person. As a state of mind, Happiness revolves around our preferences, value scales and ideals as expressed through expectations, goals and corresponding actions.

This means that happiness have not just been about material things, or about social acceptance or social status but of having a worthwhile purpose in life.

Libertarian author Robert Ringer explains at the Early to Rise 
Happiness has been defined in myriad ways over the centuries by some of the world’s greatest thinkers.  Aristotle described happiness as a condition rather than a destination.  Ralph Waldo Emerson referred to it as a journey.

But I think Viktor Frankl got to the heart of the matter even better when he explained that if there is a reason for happiness, happiness ensues.  Happiness, said Frankl, is a side effect of having a purpose in life.

In his book Man’s Search for Meaning, Frankl explained, “What man needs is not a tensionless state, but rather the striving and struggling of some goal worthy of him.”  In other words, man’s purpose in life is not to achieve goals, but to constantly strive toward them…
Why people look for issues to represent them:
Regardless of whether protest marches have to do with world peace, eradicating poverty, or saving whales from extinction, the reality is that they do not fill the void inherent in a meaningless life.  If man were to succeed in ridding the world of all disease, poverty, pestilence, famine, and war, what then would be the purpose of his existence?

As the struggle for man’s day-to-day survival has increasingly subsided, an important question has emerged:  survival for what?  In other words, just having the means to live is not enough; a person must have something to live for…
Finding your life’s purpose:
And if there is no purpose to an individual’s life — no meaning — then there’s no reason even to get out of bed in the morning, no reason to be alive.  In the words of the great Albert Einstein, “The man who regards his life as meaningless is not merely unhappy, but hardly fit for life.”

The more I reflect on the question, and the more I draw from my own experience and the experiences of others, the more convinced I am that striving toward goals is not a means to an end; striving is an end in itself.  Those who wish their lives away in anticipation of achieving some long-awaited goal do themselves a grave disservice…

The fact is that it’s possible to achieve all your goals in life, yet miss out on life itself.  And the best insurance policy against that happening is to have a worthwhile purpose in life and live in the present.

Saturday, March 09, 2013

Quote of the Day: Differentiating Reality from Perception of Reality: Principle versus Opinion

While it’s true that everyone perceives reality differently, reality could care less about our perceptions.  Reality does not change to adapt to our viewpoints; reality is what is.  Reality is fact.  Reality is truth.

Reality, however, is not always a known, which is where perception of reality comes in.  While reality is a fixed factor in the equation of life, perception of reality is a variable.

This is why it is so important to learn to differentiate between a principle and an opinion.  The most significant aspect of a principle is that it can neither be created nor altered.  Thus, a principle is the essence of reality.  It is what it is, and it’s up to us to discover it.

The problem arises when people refuse to accept the reality that principles can only be discovered, and instead choose to believe they can create their own principles.  Which means they believe they can create their own reality, and that’s a belief that can lead to disastrous consequences.
This is from author, entrepreneur and motivational speaker Robert Ringer at the EarlytoRise.com, discussing the apriorism of human action

Wednesday, February 20, 2013

Does Unemployment Cause Deflation?

I was apprised by a dear friend that in a part of the US, call center jobs have been migrating to the Philippines. Such phenomenon he sees as having a “deflationary” impact on the US economy. 

Such popular reasoning is fairly simple. Lack of jobs equals a fall in aggregate demand. Falling demand leads to falling prices. Falling prices result to more job losses. Thus the circular reasoning translates to an endless loop: a deflationary spiral.

The bottom line from such aggregate demand framework is that unemployment causes price deflation.

Of course, the alternative implication is that the Philippines, like China through alleged currency manipulation, has been “stealing jobs” from Americans.

And equally this means that for them, the optimal political solution is to inflate or apply protectionist measures or apply both against countries like the Philippines or China.

Have job losses or unemployment resulted to price deflation as alleged?

Here is a list of the largest world unemployment rates from Wikipedia.org.

Since there are many nations with over 10% in unemployment rates, I will only reckon with nations with over 50% in unemployment rates

Nauru 90%
Vanatu 78.21%
Turkmenistan 70%
Zimbabwe 70%
Mozambique 60%
Djibouti 59%

Given the huge unemployment rate, then we assume that these countries, according to the aggregate demand theory, to be in a deflationary depression.

Note: there is no price inflation figure for Nauru

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Vanatu’s inflation rate (chart from Index Mundi) Positive inflation.

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Turkmenistan price inflation rate (chart from tradingeconomics.com) Positive inflation.

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Zimbabwe’s post hyperinflation CPI (chart from tradingeconomics.com) Positive inflation.

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Mozambique’s inflation rate (chart from tradingeconomics.com) Positive inflation.

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Djibouti’s inflation rate (chart from tradingeconomics.com) Positive inflation.

Surprise, ALL 5 nations with the largest unemployment have ZERO account of price deflation!

So what’s wrong with such a claim or theory?

The fundamental premises are essentially misplaced:

-People all think the same or people don’t think at all. People mechanically and homogeneously follow the circular reasoning that falling demand leads to falling prices in a perpetual feedback loop to an eternal hellhole.

-People’s don't have marginal utility. All people share the same set of values, priorities, incentives and time preferences. 

-People are not human. People simply stop eating, drinking or clothing or finding shelter under a deflationary spiral. Maslow’s hierarchy of needs have been jettisoned out of the window. People are caught in a stasis, freeze like a deer caught in headlights, where demand totally evaporates.

-When people don’t think or when people think the same or when people stop being people then obviously the demand and supply curve, the law of scarcity and opportunity costs becomes inapplicable or ceases to exists.

-Capital has been nonexistent to people who act or behave in aggregates.

-Inflation is NOT a monetary phenomenon so does the consequent deflation.

In the real world, economies are vastly complex, with millions of spontaneously operating parts such that wages represents only part of the myriad of factors that influence the economic environment.

Other real factors are equally or even more important, e.g. proximity to markets, size and categories of markets, state of basic infrastructure, access to credit, connectivity, technology and labor, quality of labor force, comparative advantage/s, state of legal, political and regulatory institutions and environment, tax levels, state of economic freedom, depth of capital markets, monetary regime and much more.

Most important is property rights. When property rights are not secure, no one will dare to invest no matter the relative lower, if not the lowest costs, in terms of labor wages. Who invests in North Korea or in the above 5 nations with the largest unemployment (presumably the cheapest labor force) in the world where one's capital are likely to be arbitrarily seized by the incumbent authorities?

These are real factors that can't be seen as having neutral effects on people's incentives or which operates on a vacuum. 

How about the solution where government must step in to provide jobs, by inflation or protection? 

Well government, of course, comprises of people too.

Under the aggregate demand framework, the political class have been glorified as representing “superior” set of people in terms of knowledge and virtues, relative to the market which is seen as inferior non-political people, that lays ground for interventions on so-called “market failures”.

Such is an unalloyed myth. If the romance on politics is true, then inflation or deflation won’t exist. There won’t anything known as economics.

The reality is that inflation and protectionism represents two sides of the same coin: the political economy of destruction.

As the great Ludwig von Mises explained (bold mine)
By destroying the basis of reckoning values—the possibility of calculating with a general denominator of prices which, for short periods at least, does not fluctuate too wildly—inflation shakes the system of calculations in terms of money, the most important aid to economic action which thought has evolved. As long as it is kept within certain limits, inflation is an excellent psychological support of an economic policy which lives on the consumption of capital. In the usual, and indeed the only possible, kind of capitalist book-keeping, inflation creates an illusion of profit where in reality there are only losses. As people start off from the nominal sum of the erstwhile cost price, they allow too little for depreciation on fixed capital, and since they take into account the apparent increases in the value of circulating capital as if these increases were real increases of value, they show profits where accounts in a stable currency would reveal losses. This is certainly not a means of abolishing the effects of an evil etatistic policy, of war and revolution; it merely hides them from the eye of the multitude. People talk of profits, they think they are living in a period of economic progress, and finally they even applaud the wise policy which apparently makes everyone richer.

But the moment inflation passes a certain point the picture changes. It begins to promote destructionism, not merely indirectly by disguising the effects of destructionist policy; it becomes in itself one of the most important tools of destructionism. It leads everyone to consume his fortune; it discourages saving, and thereby prevents the formation of fresh capital. It encourages the confiscatory policy of taxation. The depreciation of money raises the monetary expression of commodity values and this, reacting on the book values of changes in capital—which the tax administration regards as increases in income and capital—becomes a new legal justification for confiscation of part of the owners' fortune. References to the apparently high profits which entrepreneurs can be shown to be making, on a calculation assuming that the value of money remains stable, offers an excellent means of stimulating popular frenzy. In this way, one can easily represent all entrepreneurial activity as profiteering, swindling, and parasitism. And the chaos which follows, the money system collapsing under the avalanche of continuous issues of additional notes, gives a favourable opportunity for completing the work of destruction.
The bottom line is that previous interventionists policies, e.g. policy induced boom bust cycles, regulatory mandates, entitlements etc..., have resulted to such lack of competitiveness which neo-mercantilists try to shift the blame onto the others. Yet they are asking for more of the same thing that led to this or they seek doing the same thing over and over again but are expecting different results.

The economics of aggregatism, thus, has mostly been about pretentious or pseudo-economics wrapped in populist anti-market politics constructed from heuristics, political religion and cognitive biases, or might I say, a grand deflation in logic.

Sunday, October 28, 2012

Phisix: Holiday Abridged Sessions Unlikely an Obstacle to the Year End Rally

Methodological Individualism Applied to Holiday Shortened Trading Sessions

Trading sessions will be limited to just three days in the coming week as two days have been declared as public holidays by the Philippine government in the tradition of paying homage to the dead.

Since not everyone practices the tradition, others have used such occasion for leisure and travel.

Yet such extended holidays are likely to divert the attention of market participants on how and what to do during the mandated respite from work.

When markets are on a vacation mode, I expect trading activities to slowdown which may be reflected on Peso volume (excluding block and special block sales).

But lethargic trading does not necessarily reduce volatility.

For the past two years, holiday abbreviated weeks with three day trading sessions have posted substantial over 1% moves

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*Aug 29 and 30 in 2011, Eidul Fitr and National Heroes Day[1]

**August 20 2012 Ninoy Aquino Day (Replaced to Monday)[2]

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The same goes with All Saint’s Day week celebrations since 2007.

The natural intuition for the mainstream would be to impute from the above facts statistical correlations and or to seek out patterns from which to project into the future.

For instance, it would be easy to deduce of the dominance of negative returns by simple observation and the employment of heuristics without examining the operating conditions which had led to such outcomes

Let’s say, the -1.43% from November of 2011 came amidst the oversold bounce from the flash September market meltdown, as most likely an offshoot to the US Federal Reserve chairman Ben Bernanke’s jilting of market’s expectations of QE 3.0[3]

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The other instances have shown to be responses to what seems as short term overbought conditions (in April and August 2012 marked by blue arrows) following new highs.

Thus, losses from Holiday shortened week have most likely accounted for profit taking.

Nonetheless the losses from the above incidentally marked the interim bottoms which eventually led to milestone highs.

Or how about the negative output during November’s of 2007 and 2008? The unfolding bear market cycle during the said period can serve as convenient explanation.

Today, considering that the Phisix has just been marginally off the record highs, along with the ASEAN peers, this means that price volatility can go in either direction.

On the downside, profit taking, possibly to fund vacations, leisure or traditional activities, could partly explain why the proclivity for negative returns.

On the upside, aggressive participants may take advantage of any new information that could eclipse such profit taking activities that may push the market higher.

In essence, there are no linear and clear cut answers to such short term events

What this implies is that even if the week’s results should turn out negative, this may not be suggests of an inflection point as the general market trend remains on the upside. This is unless of course, exogenous tail risk events may rattle the highly interconnected and intercorrelated global markets and gets transmitted to the ASEAN equity markets and to the Phisix.

The bottom line is that it would signify a serious mistake to perceive history as mechanically repeating itself for the simple reason that history is a complex phenomenon.

History as factual episodes represents heterogeneously embedded unique circumstances as consequence to “multiple causes” where “none of the factors are in constant relationship with the others” [Rothbard 1976[4]].

This also means that historical facts, according to the great Austrian Professor Ludwig von Mises[5], “cannot be used as building material for the construction of theories and the prediction of future events. Every historical experience is open to various interpretations, and is in fact interpreted in different ways”.

This also implies that while history can give us some clues, it is the understanding of science of human actions which is most important.

Again Professor Mises from the same material[6]
The subject matter of all historical sciences is the past. They cannot teach us anything which would be valid for all human actions, that is, for the future too. The study of history makes a man wise and judicious. But it does not by itself provide any knowledge and skill which could be utilized for handling concrete tasks.
Author Samuel Langhorne Clemens popularly known as Mark Twain[7] nailed it when said ‘history does not repeat itself, but it does rhyme’.

Financial Markets Are Now About Bernanke Put

Some have expressed alarm over the recent downside volatility seen in the overseas markets.
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It’s all about framing, I’d say.

This week’s retracements (blue bar) seem to be in response to last week’s gains (red bars). While the degree of price changes has been different from last week to the other week, the scale of volatility has been evident. Heightened volatility from market distortions brought about by interventionism has been the crux of the current market environment.

Yet for some, declining US markets serves as a reason for concern.

The S&P 500, which I use as a key benchmark for the US markets, have lost 1.48% this week. Add to such loss the current level of the S&P 500, which represents nearly 4% loss from the most recent or September peak, we have a short term bear market story.

But there is the other view; year-to-date the major US benchmark has still been robustly up 12.27%. This remarkable advance by the US markets as exemplified by the S&P 500 has lubricated the outperformance of the Philippine Phisix and Thai’s SET and an animated global equity markets.

There are also those who claim that declining earnings will drive US markets lower.

But this concern seems valid when markets operated on merely the platform of the barrage of promises by the FED.

Expectations of the FED’s coming steroids provided the shot in the arm that produced a risk ON environment despite material signs of disconnect with the real economy or in terms of declining earnings and of the weakening of the economy[8].

Since promises are subject to diminishing returns, they are unsustainable. Rising markets based on empty talks simply increased the sensitivity to enormous downside risks or that this represents a recipe for a market crash.

Either trapped by their own policy signalling measures, or in the realization that failed expectations could bring chaos and relive the September 2011 flash meltdown, the FED and the ECB HAD to deliver.

And they DID. Both will be flooding the world with money to the preliminary tune of $2 trillion.

Add to this that this fact that it will not just be the FED-ECB but other major central banks as well. The Bank of Japan (BoJ) just joined the bandwagon with additional stimulus[9] while the Bank of England (BoE) has once again signaled its intent to expand her balance sheet further[10].

And most importantly, the US Fed Chairman Ben Bernanke made explicit that QE Forever/QEternity has been meant to sustain asset prices[11].

Many seem to forget that it is central bank actions that really matters since the market’s price mechanism has been skewered by their repeated interventionism.

Today’s risk environment has dramatically shattered conventional thinking. In a recent “Bagehot” lecture at the Buttonwood in New York City, PIMCO’s chief Mohamed El-Erian poignantly remarked[12]
What we are ultimately talking about is an “unusually uncertain” distribution of potential baseline outcomes, as well as unusually shaped tails. This inevitably undermines the robustness of lots of conventional wisdom, as well as a range of historical contracts and entitlements. It also challenges the agility of institutions in both the public and private sectors.
If corporate earnings have hardly been a factor in driving up market prices, then why should corporate earnings become a factor in marking down prices?

Earnings have recently become a matter of concern only after central bank’s rescue mechanism has been put in place. What this really shows is of the market dynamic of “buy the rumor sell on news”.

And given the reality of the slated expansion of money supply from central banks via asset purchases, this will also mean that sales revenues of enterprises will rise faster than the costs of business, where the latter has been incurred during the time prior to additional money infusions.

This implies that inflation creates the illusion of greater ‘corporate profits or earnings’, where the more the inflation, the greater the profit margins.

As financial analyst Kel Kelly explains[13] 
Another way of looking at it is that, with more money being created through time, the amount of revenues is always greater than the amount of costs, since most costs are incurred when there is less money existing. Thus, because of inflation, the total monetary value of business costs in a given time frame is smaller than the total monetary value of the corresponding business revenues. Were there no inflation, costs would more closely equal revenues, even if their recognition were delayed…

Since business sales revenues increase before business costs, with every round of new money printed, business profit margins stay widened; they also increase in line with an increased rate of inflation. This is one reason why countries with high rates of inflation have such high rates of profit. During bad economic times, when the government has quit printing money at a high rate, profits shrink, and during times of deflation, sales revenues fall faster than do costs.
This profit mirage from monetary inflation represents the ephemeral boom phase of business cycle.
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Also as previously noted, the seeming recovery in the US real estate sector[14] will likely to be used as pretext to boost stock prices.

So far, the Dow Jones US Real Estate ($DJUSRE) and the iShares Real estate (IYR) along with Regional Bank Index (KRE) and the Philadelphia Bank Index (BKX) have all backed off from the recent highs. Although there has been little signs of any material deterioration,

Finally given the explicit goal by the FED to support asset prices via the “Wealth Effect” or Portfolio Balance Channel[15], any adjustments to the newly instituted QE Forever policies will likely be in accordance to the conditions of the financial markets.

In short, the Bernanke Put is in motion: conditions of the financial markets will dictate on the FED’s actions.

This also implies of the policy of redistributing resources from main street into the financial sector.

And any attendant tail risks will likely come from rising consumer prices (inflation risk) or the escalation of political squabbles e.g. the risks of growing secession movements in Europe[16] (political risks) or the recognition of insolvency of crisis afflicted nations or the lack of capital (credit risks), all of which will be manifested through interest rate channel.

How Interest Rate Regimes Affect Asian Stock Markets

Current easing policies by developed economies have translated into a boom through most of Asia.

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That’s because most of Asia has mimicked their developed economy counterparts but from a lesser aggressive stance.

In the region, interest rate regimes can be categorized as[17]

-rate cuts in 2012: These include China, South Korea, Singapore, Thailand, Philippines, India, Pakistan and Australia

-previous rate changes prior to 2012, but remains on hold through 2012: These includes New Zealand who cut in 2011, Taiwan increased in 2010 until July 2011, Vietnam raised rates in 2010 until early 2011, Indonesia cut rates from last quarter of 2011 until January 2012 and Malaysia increased rates in mid 2011.

-increased rates in 2012: Bangladesh, Sri Lanka, Mongolia 

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The relationship between interest rates and equity market performance has been striking.

Countries who cut rates in 2012 mostly outperformed: Pakistan, India, Philippines and Thailand. For those whose rates were unchanged, e.g. Malaysia, Indonesia and Taiwan, the benchmark equity performance has largely been the median.

The losers or the laggards are economies that have been raising rates: Bangladesh, Sri Lanka and Mongolia.

The Philippine central bank, the Bangko Sentral ng Piliipinas (BSP) appears to have succumbed to pressures from the external agents during the recent IMF-World Bank annual gathering by raising interest rates for the fourth time this year last week[18].

The BSP announced through Mr. Amando Tetangco that such measures were meant to “help ward off risks associated with weaker external demand by encouraging investment and consumption.”[19]

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Consumption does not emerge from a vacuum. Consumption would need to be satisfied through exchange via division of labor that arises out of production.

This means production has to come from capital good investments which are financed by capital or through savings, and not from printing of money or digital creation of money.

As a reminder all economic growth stems from savings. According to the great Professor von Mises[20],
At the outset of every step forward on the road to a more plentiful existence is saving--the provisionment of products that makes it possible to prolong the average period of time elapsing between the beginning of the production process and its turning out of a product ready for use and consumption. The products accumulated for this purpose are either intermediary stages in the technological process, i.e. tools and half-finished products, or goods ready for consumption that make it possible for man to substitute, without suffering want during the waiting period, a more time-absorbing process for another absorbing a shorter time. These goods are called capital goods. Thus, saving and the resulting accumulation of capital goods are at the beginning of every attempt to improve the material conditions of man; they are the foundation of human civilization. Without saving and capital accumulation there could not be any striving toward non-material end
Inflationism, thus, only dilutes the purchasing power (even Lenin and Keynes recognized this[21]), as well as, creates economic imbalances that promote bubbles and social instability.

The BSP further admits that there has been increasing risks of price inflation through “impending electricity rate increases and rising global prices for some grains could upset the inflation outlook” but recklessly assumes that “subdued global demand should temper the overall picture by easing price pressures on oil imports”

But price inflation has been creeping upward[22] in spite of “subdued global demand” and falling Philippine exports[23]. Perhaps local monetary officials have yet to discover that there exists an economic phenomenon called stagflation—high price inflation, high unemployment and economic stagnation[24]--which dominated the 1970-80s

Nonetheless with diminishing recession risks from the US despite the recent corrections in the equity markets, explicit policy support from global central bankers led by FED-ECB on the financial markets, the still “benign” domestic price inflation, the deepening domestic negative real rates regime and the recently established momentum from the breakout, we should expect domestic financial markets (the Phisix, the Peso) to outperform at least until the year end unless external shocks will derail the above dynamics

We should also expect that sluggish commodity prices in the environment of near coordinated monetary easing implemented by almost every major economy to make an eventual rally, not entirely because of ‘consumption demand recovery’ but because of reservation demand[25] or the “demand to hold stock” or “hoard” out of anticipation of higher prices or greater use of the good or more exchange opportunities of the good for other goods.

Applied to the local stock market, stocks will rise barely because of conventional wisdom of earnings or economic growth, but because of the growing urgency to chase for yields, to gamble and to punt which all represent as products of the policy regime of negative real rates. And proof of such progression has been the growing incidences of miniature bubbles[26].




[6]Mises, Ibid
[7] Wikipedia.org Mark Twain
[12] Mohamed El-Erian Mohamed El-Erian's Bagehot Lecture From Buttonwood Minyanville.com October 24, 2012
[13] Kel Kelly How the Stock Market and Economy Really Work September 1, 2012 Mises.org
[16] Atlantic Sentinel Secessionist Movements Threaten Foundation of Europe, October 17, 2012
[17] Asian Bonds Online Asia Bond Monitor September 2012
[18] ABS-CBNNEWS.com BSP ready to ease policy rates anew – Tetangco October 14, 2012
[19] Inquirer.net Philippines trims key interest rates again October 25, 2012
[20] Ludwig von Mises 2. Capital Goods and Capital XV. THE MARKET Human Action
[22] Danske Bank Brighter global outlook but every rose has it thorns, Emerging Market Briefer October 15, 2012
[24] Wikipedia.org Stagflation

Tuesday, October 09, 2012

Quote of the Day: An Empirical Law Lacks the Guarantee of Absolute Validity a Priori

Among economists the opinion often prevails that the empirical laws, ‘because they are based on experience,’ offer better guarantees of truth than those results of exact research which are obtained, as is assumed, only deductively from a priori axioms …

Testing the exact theory of economy by the full empirical method is simply a methodological absurdity, a failure to recognize the bases and presuppositions of exact research. At the same time it is a failure to recognize the particular aims which the exact sciences serve. To want to test the pure theory of economy by experience in its full reality is a process analogous to that of the mathematician who wants to correct the principles of geometry by measuring real objects. . . .

An empirical law lacks the guarantee of absolute validity a priori, i.e., simply according to its methodological presuppositions …

To want to transfer [the empirical method] to the results of exact research is, however, an absurdity, a failure to recognize the important difference between exact and realistic research. To combat this is the chief task of the preceding investigations.”
This is from founder of Austrian School of Economics Carl Menger, in Investigations into the Method of the Social Sciences  whom echoes on Professor Ludwig von Mises’ Methodological Individualism 

Sunday, May 13, 2012

Quote of the Day: The Value of Superfluous Fluff

Some economists like to believe (although this belief has blessedly faded in the recent decades) that economics is an edifice built on the rocks of mathematical theory and statistical empiricism, and everything else is superfluous fluff. McCloskey (1983) thoroughly strafed that conceit, pointing out in “The Rhetoric of Economics” that the research and analysis of economists is built on uncertain and subjective judgments, and often uses, among its rhetorical tools, analogy and metaphor, appeals to authority and to commonsense intuition, and the use of “toy models” counterbalanced with the choice of supposedly illustrative real-world episodes.

Economic arguments rooted purely in mathematical formalism or statistical analyses are superb at specifying the steps leading to the particular conclusion. However, cynical economists (but I repeat myself) know that a model can be built to illustrate any desired conclusion, and that if the data are tortured for long enough, they will confess to anything. Persuasiveness requires a multidimensional argument that reaches beyond formalism. As McCloskey (1983) wrote: “There is no good reason to to make ‘scientific’ as opposed to plausible statements.”

That’s from economist Timothy Taylor on the issue of editing economists (hat tip Professor David Henderson).

Phony and manipulated “tortured” models function as standard instruments used to justify social controls through public policies. Think anthropomorphic global warming, Keynesian stimulus, mercantilism and etc…

Wednesday, February 29, 2012

Quote of the Day: Life is More than Math…

"It's not prime enough"

"That number is too even... can you make the next one even odder?"

The thing about math is that it's right or wrong, on or off, yes or no. Seven is a prime number, there's no improving it.

The thing about life/business/culture and the things we make and do is that they are not math.

From my favorite marketing guru Seth Godin. Indeed, life is about human actions.