How the Information Age Affects Asian Banking

The McKinsey Quarterly writes, (bold emphasis mine)

Banks doing business in Asia face rapidly changing consumer behavior, with big consequences for both local and multinational institutions. Consumers increasingly prefer local banks over multinationals, are less loyal to existing banking relationships, are much more cautious about borrowing, and are more open to Internet and mobile banking. These shifts in the nature of banking relationships, product and service needs, and channels are reflected in a 2011 McKinsey survey of 20,000 consumers in 13 Asian markets...

Asian consumers are being weaned from brick-and-mortar branches: for the first time since McKinsey began conducting the survey, 13 years ago, bank branch usage has dropped, plunging by 27 percent on average across Asia between 2007 and 2011.

This drop has been matched by an uptick in Internet and mobile banking, a trend particularly pronounced in developed Asian markets, such as Hong Kong, South Korea, and Taiwan. There, consumers now use new channels, such as the Internet and mobile devices, for their banking more often than traditional ones, such as telephones and branches: the use of new channels rose to 3.2 times a month in 2011, from 2.35 in 2007, while that of traditional channels dropped to 2.57 times a month, from 3.5. In China, about 18 percent of all people who patronize banks now use Internet banking, compared with only 3 percent in 2007.

That shift arises largely from the increased penetration of remote channels. A growing number of customers across income segments are getting accustomed to and comfortable with them for both sales and service. The multichannel environment has thus become a reality: our research highlights the fact that, on average, Asian consumers are using as many as 5 channels for research and 1.8 channels for maintenance.

Some comments

The rapid shift in the preferences of Asian consumers reveals of the increasing personalization or specialization of markets. This extrapolates to an intensifying trend of de-massification of financial services towards niche markets or a transition from products and services designed for the masses towards decentralization or localization. Providers who cannot cope will this seismic development will perish. This is the forces of creative destruction at work.

And this paradigm shift is being enabled and facilitated by the internet which again exhibits how the web revolution has immensely been affecting people’s lifestyle.

In addition, this is another proof that people are getting to be more sophisticated with an extended reach or access to information.

This also means more value added services for the increasingly discriminate consumers.

The forces of centralization seems to be paving way for reign of the forces of decentralization.

The great F. A. Hayek’s knowledge revolution is underway.

P.S. My computer hasn't normalized yet so my post will remain limited

Paradigm Shift: The Growing Role of Emerging Markets

In the graphs below the Economist shows of the growing importance of emerging markets relative to the world economy.

The Economist writes, (bold highlights mine)

The combined output of the emerging world accounted for 38% of world GDP (at market exchange rates) in 2010, twice its share in 1990. If GDP is instead measured at purchasing-power parity, emerging economies overtook the developed world in 2008 and are likely to reach 54% of world GDP this year. They now account for over half of the global consumption of most commodities, world exports, and inflows of foreign direct investment. Emerging economies also account for 46% of world retail sales, 52% of all purchases of motor vehicles and 82% of mobile phone subscriptions. They still punch well below their weight in commerce and finance, but they are catching up fast. Almost a quarter of the Fortune Global 500 firms come from emerging markets; in 1995 it was only 4%. The chart below shows more detail of how the economic clout of emerging economies has risen over time:

Except for the ‘consumption of most commodities’ which functions as an effect more than the cause, “world exports, and inflows of foreign direct investments” represent as forces of globalization as further shown below.

Chart from Google’s Public Data

One would note that growth in the share of merchandise trade relative to GDP has more than doubled since 1960s and has breached the 50% level in 2007. But fell below 50% during the last crisis. (chart hasn’t been updated)

The updated chart shows that world trade has now surpassed the previous highs (courtesy of Professor Mark Perry)

And emerging markets' trade liberalization has been leading to hefty increases in the growth trend of imports (chart from ADB) and foreign direct investments.

Bottom line: World trade has played a very significant role in the convergence dynamics of emerging markets and developed economies.

Paradigm Shift: Wealthy Russians Buy US Homes

In my earlier post, I pointed out that the wealthy Brazilians, Indians and Chinese had been lending “support” to the US property sector.

Under the major emerging markets the rubric of the BRIC acronym coined by Goldman Sach’s analyst Jim O’Neil, Russia posed as the missing link.

Not anymore.

From Bloomberg, (bold emphasis mine)

Roustam Tariko, billionaire owner of Russian Standard Bank and Russian Standard Vodka, completed the most expensive home purchase in Miami Beach since 2006 when he bought a $25.5 million estate on Star Island in April.

The transaction made Tariko the neighbor of another wealthy Russian with a taste for Florida luxury living. Vladislav Doronin, chairman of Moscow-based real estate developer Capital Group, paid $16 million in 2009 for the Star Island home previously owned by Shaquille O’Neal, the now-retired professional basketball player.

“In Russia, it’s a status thing now,” Jorge Uribe, a real estate agent with One Sotheby’s International Realty Inc. in Coral Gables, Florida, said in a telephone interview. “If you’re wealthy and you say you have a place in Miami, it’s like saying back in the old days, ‘I own a place in Ibiza or Monaco.’ It’s a cocktail conversation thing.”

International investors are buying some of the priciest homes in America as the broader housing market slumps and a weak dollar makes U.S. property more of a bargain. Sales of residences above $20 million are rising in New York, California and Florida, which are popular business and vacation destinations for foreigners, according to Miller Samuel Inc., DataQuick and real estate brokers who cater to luxury buyers.

This is just one of the manifestations of the effects of globalization from fund flows (capital mobility) to the diffusion of prosperity worldwide.

The same article underscores this, (bold emphasis mine)

The precise number of foreign deals for U.S. luxury properties is difficult to calculate because many purchasers are registered as trusts or limited liability companies. Jed Smith, managing director of quantitative research for the National Association of Realtors, said the number of overseas buyers for multimillion-dollar homes is increasing, helped by the rise of emerging markets such as Russia, Brazil, China and India.

“There’s substantial growing wealth overseas,” Smith said in a telephone interview from Washington. “Just go to the Forbes list of billionaires and see that we’re no longer the only folks on it.”

Of the 214 newcomers to Forbes magazine’s annual global ranking of billionaires this year, 54 were from China and 31 from Russia. The Asia-Pacific region had more billionaires than Europe for the first time in more than 10 years and gained the most of any region, with 105 additions, according to the list. Moscow displaced New York as the city with the greatest number of billionaires with 79, compared with New York’s 58.

If there is anything that would be considered as certain or permanent, (aside from death and taxes) that would be ‘change’.

Paradigm Shift: Brazil, Indians and Chinese Invest in Overseas Properties

Past performance do not guarantee future results.

Many of today’s international property investors have not hailed from the West, but rather from the Nouveau riche of the BRICs (excluding Russia), whom have reportedly been on a buying spree.

First, the Brazilians.

From the Bloomberg, (bold highlights mine)

Surging real estate prices in Brazil and the currency’s 45 percent gain against the U.S. dollar since 2008 are sending Brazilians to South Florida in search of bargain vacation homes and property investments. That’s helping bolster Miami’s condo market, with total sales increasing 79 percent in the first five months of 2011 from a year earlier, according to data from the Florida Association of Realtors released today.

In the Miami area, Brazilians bought 9 percent of homes and apartments sold to international buyers in the 12 months through March 2010, behind only Canadians and Venezuelans, according to the Miami Association of Realtors. Since then, “anecdotal evidence certainly points to a significant increase,” said Lynda Fernandez, a spokeswoman for the group. In May, international clients bought about 60 percent of existing houses and condos and 90 percent of newly built homes, the association reported today.

Next, the Indians

From loansafe.org

Wealthy Indians are keeping the family bonhomie alive in the heart of London, buying not one but a cluster of houses or apartments for themselves, their children and small teams of personal staff. Tony areas like Kensington, Mayfair, Knightsbridge and Belgravia are some of the popular destinations for such clusters.The homes typically are a network of residential properties on a street or an apartment block. The central idea behind such purchases is that it will give the children a sense of independence, staying just a few houses away from their parents, with support staff being just a buzz away.

High networth individuals from India and the Middle East are the main cluster buyers in London. In fact, there has been a marked increase in the number of Asian buyers. “Asians are our biggest single group of purchasers now, accounting for 44 percent of sales in 2010. Of this, 17 percent were Indians. In 2008, only 7 percent of the purchases were made by Asians,” Shirley Humphrey, sales and marketing director of Harrods Estates, a property broking firm, said. According to her, a weak British pound and low interest rates have contributed to the appeal of cluster buying in prime residential areas. (bold emphasis mine)

Finally the Chinese

From China Daily (bold emphasis added)

An increasing number of China's rich are snapping up properties overseas in the expectation that domestic inflation will continue to rise after the consumer price index reached a 34-month high in May.

According to Colliers International, a real estate service provider, the proportion of Chinese buyers in Vancouver's property market is on the rise. At the end of the first quarter this year, it increased to 29 percent of all homebuyers.

In the past six months, Chinese spent 1.3 billion yuan ($200 million) through Colliers' international property department, with Canada, the UK and Australia topping the buying list.

"We are expecting a clear increase in the extent of mainland buyers' purchases of overseas properties this year because of the government's rigorous restraint on the number of homes a family can buy in key cities," said Alan Liu, managing director of Colliers International (North Asia).

Due to the latest financial push from China, the average price of a home in Greater Vancouver rose 12 percent in 2010 and is expected to rise another 3 percent this year, according to the Canada Mortgage and Housing Corporation.

Demand from mainland immigrants now accounts for 29 percent of all new homes in Vancouver.

The situation in London is similar. Last year, overseas nationals purchased 28 percent of all resale properties across all prime London sites and 54 percent by value in the prime central London area in the more than 5 million pound ($8 million) price bracket, according to a recent report by Savillsresearch.

"If the money from China were to start flowing into London at the same rate it does from billionaires in other countries, we would expect the value of ultra-prime London properties to grow by as much as 15 per cent," said Yolande Barnes, head of Savills residential research.

"The issue at present is that Chinese buyers aren't taking, or can't take, their money out of China."

The biggest increase in global billionaires since 2007 has occurred in China and the Commonwealth of Independent States (CIS). While CIS buying activity has been strong, accounting for 15 percent of prime central London purchases by value, Chinese billionaires have yet to have a real impact, accounting for just 3 percent of prime central London resale purchases by value.

More thoughts.

International and domestic monetary policies have been a significant factor in driving property investments overseas.

There is also globalization.

Finally, the irony is that the erstwhile ‘poor’ appears to be saving the traditional ‘rich’ as in the case of London and South Florida.

How times have been changing.

Energy Information Administration: Shale Gas Is A Global Phenomenon!

When people talk about Peak oil or peak anything, they only look at current prices and the available quantity of declared reserves, which they see as fixed and which they equate with neo-Malthusian insights of shortages.

They do this without comprehending the economic value of resources and without understanding the concept of human action—or that people don’t just standstill in the face problems, we react by working to resolve such unease via the price mechanism.

People, via the markets, respond to prices. This means when scarcities are projected via price signals, the market resorts to either conservation (rationing) or substitution.

This brings us to the announcement by the US EIA that shale gas production is a global phenomenon, with US having been the pioneer in its development.

The EIA writes, (bold highlights mine)

The use of horizontal drilling in conjunction with hydraulic fracturing has greatly expanded the ability of producers to profitably produce natural gas from low permeability geologic formations, particularly shale formations. Application of fracturing techniques to stimulate oil and gas production began to grow rapidly in the 1950s, although experimentation dates back to the 19th century...

The development of shale gas plays has become a “game changer” for the U.S. natural gas market. The proliferation of activity into new shale plays has increased shale gas production in the United States from 0.39 trillion cubic feet in 2000 to 4.87 trillion cubic feet in 2010, or 23 percent of U.S. dry gas production. Shale gas reserves have increased to about 60.6 trillion cubic feet by year-end 2009, when they comprised about 21 percent of overall U.S. natural gas reserves, now at the highest level since 1971

Shale gas production from the US has been exploding. (From the EIA) This accelerated progress has been buttressed by (free market induced) technological enhancements.

Shale reserves have likewise been expanding along with production. This proves the case of the growing economic value of Shale gas.

Shale Gas reveals of the substitution process in action.

Now for the global perspective, more from the EIA.... (bold highlights mine)

It appears evident from the significant investments in preliminary leasing activity in many parts of the world that there is significant international potential for shale gas that could play an increasingly important role in global natural gas markets... In total, the report assessed 48 shale gas basins in 32 countries, containing almost 70 shale gas formations...

The estimates of technically recoverable shale gas resources for the 32 countries outside of the United States represents a moderately conservative ‘risked’ resource for the basins reviewed. These estimates are uncertain given the relatively sparse data that currently exist and the approach the consultant has employed would likely result in a higher estimate once better information is available.

What does all this tell us?

The energy market is working quite well, despite numerous interventions applied by governments.

The diffusion of technological advancements combined with the attendant economies of scale enhances the commercial viability of these projects, which if the EIA is correct, would mean more nations utilizing their natural shale gas resources. This also means reserves will grow as usage grows, enabled by technology.

In short, shale gas is gradually being recognized as an economically valuable energy resource.

Shale gas is probably one of the possible candidates to compete, replace, if not compliment fossil fuel as a major energy source.

Only the markets will say.

Oh, I almost forgot: Please remember changes happen at the margins.

Tunisia’s People Power: A Combination Of Creative Destruction And The Politics of Obedience

The New York Times reports,

The fall of Mr. Ben Ali marked the first time that widespread street demonstrations had overthrown an Arab leader. And even before the last clouds of tear gas had drifted away from the capital’s cafe-lined Bourguiba Boulevard, people throughout the Arab world had begun debating whether Tunisia’s uprising could prove to be a model, threatening other autocratic rulers in the region….

Because the protests came together largely through informal online networks, their success has also raised questions about whether a new opposition movement has formed that could challenge whatever new government takes shape. (emphasis mine)

This represents another validation of our prediction when I wrote,

The growing friction between technology and the old political society is definitely taking shape; eventually one has to give. My bet: creative destruction will win.

Aside from the first People Power at an Arab nation where the changes in the political order appear to be significantly influenced by the rapidly diffusing adaption to connectivity based technology platforms, the Tunisian experience suggests that People Power as a political concept as presciently advanced by the founder of modern political philosophy in France, Etienne de la Boetie, will become more accepted from the grassroots levels or become more widespread globally as more people will learn about their inherent power over governments.

To quote Etienne de la Boetie in the Politics of Obedience

Obviously there is no need of fighting to overcome this single tyrant, for he is automatically defeated if the country refuses consent to its own enslavement: it is not necessary to deprive him of anything but simply to give him nothing; there is no need that the country make an effort to do anything for itself provided it does nothing against itself. It is therefore the inhabitants themselves who permit, or, rather, bring about, their own subjection, since by ceasing to submit they would put an end to their servitude. A people enslaves itself, cuts its own throat, when, having a choice between being vassals and being free men, it deserts its liberties and takes on the yoke, gives consent to its own misery, or, rather, apparently welcomes it.

In short, people power and the web would make a mighty combination over the tyranny of governments.

So governments will try to fight these via the introduction of regulations and control of the web which would limit the democratization of information.

As one of the five things we should worry about in 2011 Cato’s Dan Mitchell rightly observers, (bold emphasis mine)

The Federal Communications Commission just engaged in an unprecedented power grab as part of its “Net Neutrality” initiative, so we already have bad news for both Internet consumers and America’s telecommunications industry. But it may get worse. The bureaucrats at the United Nations, conspiring with autocratic governments, have created an Internet Governance Forum in hopes of grabbing power over the online world. This has caused considerable angst, leading Vint Cerf, one of inventors of the Internet (sorry, Al Gore) to warn: “We don’t believe governments should be allowed to grant themselves a monopoly on Internet governance. The current bottoms-up, open approach works — protecting users from vested interests and enabling rapid innovation. Let’s fight to keep it that way.” International bureaucracies are very skilled at incrementally increasing their authority, so this won’t be a one-year fight. Stopping this power grab will require persistent oversight and a willingness to reject compromises that inevitably give bureaucracies more power and simply set the stage for further demands.

Migration Twist: Many Britons Desire Relocation While Filipinos Want To Stay Home

It would seem as no news for us to hear people from developing nations yearn to emigrate to developed nations mostly to seek greener pastures.

For instance, the Philippines has been a major exporter of labor or manpower (OFWs), thus the popular desire by locals to work or move permanently abroad has been embedded into my expectations.

Yet recent surveys appear to contradict this—only about 1 in 10 Filipinos, according to ABS-CBN, say that they would like to migrate to another country. This has been significantly down from about 3 in 10 in 2006. The apparent optimism has been reportedly associated with high expectations on the political economy from the new political administration.

But what surprised me most was this poll from Gallup which reported that in UK, 1 in 3 Britons wanted to migrate to another country. (see below chart from Gallup)

Gallup says that this hasn’t been related to the recent crisis, where “high level of desire to migrate permanently cannot be attributed to the recent global economic crisis or the country's own recession”

And it’s not just the UK, although she ranks the highest, but also among major European contemporaries, as Germany (21%), France (23%), Sweden (19%), Netherlands (18%) and others, all of which registered high levels of desire to migrate.

For Britons, the target places for relocation are Australia, Spain, US and Canada.

While the local survey may not square with Gallup’s survey, enough for me to make a strong conclusion, I suspect that such developments appear to be indicative of a twist: people from developed nations could likely help deepen the globalization of labor or population mobility worldwide.

Importantly, this shows how people’s reaction could be fickle and can’t be aggregated and that meaningful changes could be happening at the fringes.

Nonetheless, it’s a development worth monitoring.

The Power of Slow Change: Transition To The Information Age Economy

Society evolves. Along with it the industry.

I have been saying that old paradigms always gives way to a new order. Nothing is ever static.

And in the context of the industry, where agriculture gave way to industry, today the transition to the information age seems to be deepening as we move away from the paradigm of the industrial era.

Even the stock market seems to be saying so.

The following charts are from Bespoke Invest

One would notice that the technology sector in the US has mostly led, or if not placed a very close second (except 2002) during the US mortgage bubble days, based on the market cap industry weightings since 1998.

The sustaining dominance of the technology sector has been echoing on such transition where the rapid advances in technology translates to more dispersion of knowledge, specialization and a more roundabout production process—all of which would only be sustained under free market conditions—a dynamic which globalization appears to have accommodated.

Of course, not the everybody benefits from any changes. The important thing is the NET benefit from creative destruction.

We should see more of this dynamic percolate across the world.

Consumption-Led Growth Is A Myth

Even experts from the World Bank seem to be getting it, this from Ivailo Izvorski, (East Asia & Pacific On The Rise) [bold highlights mine]

“Consumption-led” growth is a myth. Output growth results from the accumulation of factors of production – capital, labor, land and others – and from technological progress. Consumption is not a factor that drives growth, it is the residual. And at early stages of development, rapid consumption growth – as we have observed in East Asia – is possible only with rapid investment growth. Cut down on investment to boost consumption and given the low level of capital in the region, output growth will plummet, and with it consumption growth.

Read the rest here

More signs that the mainstream appears to be moving away from Keynesian economics.

Differentiating Cheerleading Biases From Predictions

``In the modern world, science and society often interact in a perverse way. We live in a technological society, and technology causes political problems. The politicians and the public expect science to provide answers to the problems. Scientific experts are paid and encouraged to provide answers. The public does not have much use for a scientist who says, "Sorry, but we don't know". The public prefers to listen to scientists who give confident answers to questions and make confident predictions of what will happen as a result of human activities. So it happens that the experts who talk publicly about politically contentious questions tend to speak more clearly than they think. They make confident predictions about the future, and end up believing their own predictions. Their predictions become dogmas which they do not question. The public is led to believe that the fashionable scientific dogmas are true, and it may sometimes happen that they are wrong. That is why heretics who question the dogmas are needed." - Freeman Dyson "The Need for Heretics"

People often confuse cheerleading for predictions.

Most mistakenly think that they are seeking for the “right” answers on specific dilemmas when in fact they are only latently searching for confirmations on particularly predetermined perspectives.

When we watch a sports game and take sides with one of the protagonists, we don’t “predict” the outcome, rather we “cheerlead” or desire that our handpicked team wins or accomplishes a particular goal, regardless of extraneous ‘analysis’. Faith precedes the rational.

So whether we apply this way of thinking into sports or into analyzing financial markets or the economy or the political spectrum; faith based preferences represent no more than our inherent biases that should not be confused with objective predictions or opinions or studies.

Causality versus Superstition

Yet everyone has their innate way of seeking for answers for real life activities, as Ludwig von Mises wrote[1] in his magnum opus,

There are for man only two principles available for a mental grasp of reality, namely, those of teleology and causality. What cannot be brought under either of these categories is absolutely hidden to the human mind. An event not open to an interpretation by one of these two principles is for man inconceivable and mysterious. Change can be conceived as the outcome either of the operation of mechanistic causality or of purposeful behavior; for the human mind there is no third way available. It is true, as has already been mentioned, that teleology can be viewed as a variety of causality.

And faith based analysis are mostly anchored on teleology or the doctrine or the belief that holds purpose and design as a part of or are apparent in nature[2].

Where people cannot ascertain or relate with the cause and effects of a phenomenon, they submit to the teleological interpretation usually by attributing these to some mysterious, cosmic or mystical forces.

As Professor Mises described[3], ``They invented deities and devils to whose purposeful action certain phenomena were ascribed. A god emitted lightning and thunder. Another god, angry about some acts of men, killed the offenders by shooting arrows. A witch's evil eye made women barren and cows dry.”

There seems little difference even in the modern world.

In making predictions, the same phenomenon seems to take effect: Where most people can’t ascertain valid causal linkages, they frequently ascribe to various mental heuristics and or use sloppy reasoning (logical fallacies)—and this applies even to institutional analysts or professionals. Have you ever wondered why the mainstream ‘experts’ had largely missed out on anticipating the occurrence of the last crisis? Mainstream economists had even been implicitly chastised by the Queen of England[4] for failure to predict and stop the crisis!

Yet since predictions are basically interpretations of current and past events which are extrapolated into the future, prediction essentially deals with methodology.

So whether it is about prophecy—via water divining, astrology, numerology, fortune telling, interpretation of dreams, and many other forms of divination or about prediction science—statistical probabilities, mathematical equations and models, computer simulated models[5] or the physici[6] or the search mechanistic explanations, the methodology for prediction matters.

Of course as stated above, objective predictions and biased faith based predictions can be distinguished.

Objective predictions are mostly premised on the methods that generate potential outcomes or using the ‘means to establish potential ends’. Whereas cheerleading or biased or analysis are mostly ‘cart before the horse’ reasoning or selectively choosing theories or facts to retrofit into a desired outcome.

As stated above, in cheerleading, analysis serves to cosmetically embellish or improve on the seeming cogency of the issue. To put bluntly, analysis acts only as a façade.

Critical Changes Occur At The Margin

Let me further state that mainstream predictions are largely mistaken for their idée fixe on current events, whose key players or factors they see as the main driving factors, which impels them to bypass the several other critical variables that affect the ongoing changes.

For instance, in the advent of the 20^th century the mainstream hardly predicted the US to supplant Britain as the world’s economic and military power.

On the other hand, hardly anyone had also seen how Argentina, one of the most prosperous nations then, degenerated into a third world country or an emerging market economy[7] as her economy was gutted by protectionism and rampant cronyism.

In the same context, when Japan became the world’s economic and financial cynosure in the 1980s, there had been little notice of how China would emerge as an economic power a decade forward. And some of the geopolitical angst then had been focused on Japan’s resurgent economy, which turned out to be an illusion.

And now that China has gotten into everyone’s radar screen, political talking points and political correctness have been transfixed towards China, as if China holds the world by the jugular.

While I do not discount the growing importance of the role of China, I see the excessive focus on her as missing out the other important variables at work.

And today, the same people (mostly the politically blind) who claim to know what should be ‘morally’ good for the world, are the same people whom has constantly misread the future.

Of course these people, who presume to hold the moral high ground, have not seen or predicted the explosion of mobile telecoms technology (see figure 1) and how it has substantially affected and altered people’s lives.

Figure 1 ITU[8]: The Rise of 3G

How big an impact of the rapid progress and evolution in the telecom world to the real economy?

This from the ITU, (bold highlights mine)

-By the end of 2010, there will be an estimated 5.3 billion mobile cellular subscriptions worldwide, including 940 million subscriptions to 3G services.

- Access to mobile networks is now available to 90% of the world population and 80% of the population living in rural areas.

- People are moving rapidly from 2G to 3G platforms, in both developed and developing countries.

-In 2010, 143 countries were offering 3G services commercially, compared to 95 in 2007.

- Towards 4G: a number of countries have started to offer services at even higher broadband speeds, moving to next generation wireless platforms – they include Sweden, Norway, Ukraine and the United States.

Question: Have these so-called experts and the political ideologues seen how the explosion of technological innovation in various fields, such as the telecoms, has transformed or revolutionized the way people has conducted commerce or the how these changes has influenced the political playing field or how 86% of the world’s wired population has reconfigured their lifestyles based on these new instrument and platforms? The simple answer is HARDLY.

Du jour politics have largely obscured the contribution of technology in today’s current developments. In other words, while substantial changes has been happening at the margins, the mainstream tunnels in on what is quite evident (trading patterns misconstrued as imbalances, debt as impeding growth).

Of course from the hindsight, everything has not only been fait accompli but looks linear or deterministic such that we simplistically presume to know how history is made, which has been used by many to make flimsy and tenuous arguments.

History is mostly narrated from the lens of a single observation, rather than taken into consideration the underlying conditions and the alternative options which had been available at the time that had led to such an outcome.

As Nassim Taleb explains[9] along the lines of assailing teleology,

``While we know that history flows forward, it is difficult to realize that we envision it backward…Our minds are not quite designed to understand how the world works, but, rather, to get out of trouble rapidly and have progeny.”

Legg Mason’s Michael J. Mauboussin[10] sees the importance of critical points (or changes at the margin) in identifying trends,

``Many complex systems, including markets, have critical points where small incremental condition changes lead to large-scale effects. Researchers in both the physical and social sciences have known about these critical points for a long time; so much so that terms like phase transition and tipping point have slipped into our day-to-day language. Still, critical points throw a monkey wrench into our mostly linear cause-and-effect thinking.

Bottom line: In a world of complex systems, predictions should be anchored on the ongoing changes at the margins that could snowball into a major trend than to excessively fixate on popular issues frequently regurgitated by media and their phalanx of experts with terrible batting averages in terms of prediction.

Here is more evidence on the evolving paradigm shifts at the margins from which the mainstream has vastly ignored (see figure 2)

Figure 2: McKinsey Global Institute[11]: Economic Freedom Spurs Growth In Africa

People today see the growing role of emerging markets in the global economy for mostly the wrong reasons: they have overlooked the role of economic freedom as fuel to economic growth.

As the McKinsey illustration shows, as many nations in Africa have undertaken vital reforms in the direction of economic freedom, trade exposure has been bolstered and vibrant economic growth has followed.

And how has progress in technology coped with the ongoing reforms in Africa? (see figure 3)

Figure 3: ITU: Africans Online Likely To Catch Up

Mobile penetration level is reportedly at an estimated 41% at the end of the 2010 compared with the global average of 76%, whereas only 21% are online compared to 71% in developed economies.

According to ITU[12], ``By the end of 2010, Internet user penetration in Africa will reach 9.6%, far behind both the world average (30%) and the developing country average (21%).”

Since Africa has lagged the world in terms of economic development, the recent economic reforms has translated to a catch up role even in the realm of connectivity. Nonetheless a promising room for growth for industries.

Yet these are examples of “changes at the margins”…important changes that may be gradual but could play a substantial role in shaping the future.

Conclusion

In conclusion:

-We should not confuse predictions with that of cheerleading or biased analyses that are influenced or shaped by political or economic dogma.

For views ossified by such biases, hardly any amount of valid or worthwhile reasoning will be sufficient to apostatize a recalcitrant ‘faith’ based outlook. It’s like debating religion which is usually a futile exercise that would only lead to strained personal relationships.

Instead, people with such biases ought to put money where their mouth is. For instance, if they believe that the world is on path to a meltdown then they should just ‘short’ the markets or the economy/-ies or just run to the hills for cover. Let convictions be parlayed into monetary votes than unduly spread political canard. Some use their ivory tower positions to spread miasma.

-Many cheerleaders look for ‘expert’ opinion only either to CONFIRM their biases or to get ENTERTAINED. If they are not pleased with what they read about, they scrounge for opinions that match with their biases.

-The framework of any forms of predictions depends on methodology. Applying the wrong method would likely bring about misdiagnosis, and consequently misguided conclusions and erroneous predictions. Being accurate then, will account for as a product of lady luck or provident coincidence, rather than having their analysis to conform with actual or the “run of mill” developments[13].

-Quality predictions avoid biases, particularly generalizations predicated on limited sample/s, data mining and selective use of theories and facts in order to justify a preconceived conclusion. Prediction analysis should consider objectively, the broader picture, aside from the micro developments that incorporates interpretation from sound theory, which are supported by evidences.

-The most important changes or ‘critical points’ are happening at the margins, something which most predictions don’t discover until they become major trends.

---

[1] Mises, Ludwig von Human Action: Chapter 1. Acting Man: The Alter Ego, Mises.org

[2] Dictionary.com Teleology

[3] Mises Ludwig von, Theory and History Positivism and Behaviorism, Chapter 11, Mises.org

[4] Guardian.co.uk This is how we let the credit crunch happen, Ma'am ... July 26, 2009

[5] Wikipedia.org, Prediction

[6] Lilburne, J. Grayson Prelude to Natural Philosophy, Mises Blog, March 17, 2010

[7] Glaeser Edward L. What Happened to Argentina?, New York Times Blog, October 6, 2009

[8] Itu.int The Rise of 3G, The World In 2010, ICT Facts and Figures

[9] Taleb, Nassim Nicolas Fooled By Randomness, Random House Trade, p.56

[10] Mauboussin Michael J. Fat Tails and Nonlinearity, Legg Mason Capital, December 20, 2007

[11] McKinsey Global Institute: Lions On The Move The Progress and Potentials of the African Economies, June 2010

[12] Itu.int, Op cit. P.4

[13] See Distinguishing Luck From Skills In The Financial Markets, September 19, 2010

Cyberspace: A Battleground Between Socialism and Free Markets

Governments are going to have a hard time trying to control the cyber space.

According to the Economist,

GOVERNMENTS are increasingly finding ways to enforce their laws in the digital realm. The most prominent is China’s “great firewall”. But China is by no means the only country erecting borders in cyberspace. The OpenNet Initiative, an advocacy group, lists more than a dozen countries that block internet content for political, social and security reasons. They do not need especially clever technology: governments go increasingly after dominant online firms because they are easy to get hold of. In April Google published the numbers of requests it had received from official agencies to remove content or provide information about users.

Based on his recent article, security expert Bruce Schneier would say that web regulation is a folly.

That’s because of three things:

1. It would mean a massive war against deepening spontaneous order, division of labor and diversity.

Internet is the largest communications system mankind has ever created, and it works because it is distributed. There is no central authority. No nation is in charge. Plugging all the holes isn't possible.

2. To engage in cyberspace control means censorship. It’s also a war waged against the spread of knowledge with stark ramifications.

The second flawed assumption is that we can predict the effects of such a shutdown. The Internet is the most complex machine mankind has ever built

3. The complexities of the cyberspace extrapolates to manifold loopholes and action-reaction dynamics.

The third flawed assumption is that we could build this capability securely. We can't. Once we engineered a selective shutdown switch into the Internet, and implemented a way to do what Internet engineers have spent decades making sure never happens, we would have created an enormous security vulnerability. We would make the job of any would-be terrorist intent on bringing down the Internet much easier.

Mr. Schneier concludes,

Computer and network security is hard, and every Internet system we've ever created has security vulnerabilities. It would be folly to think this one wouldn't as well. And given how unlikely the risk is, any actual shutdown would be far more likely to be a result of an unfortunate error or a malicious hacker than of a presidential order. But the main problem with an Internet kill switch is that it's too coarse a hammer. Yes, the bad guys use the Internet to communicate, and they can use it to attack us. But the good guys use it, too, and the good guys far outnumber the bad guys. Shutting the Internet down, either the whole thing or just a part of it, even in the face of a foreign military attack would do far more damage than it could possibly prevent. And it would hurt others whom we don't want to hurt.

At the end of the day, one of the two forces (free markets versus socialism) would have to yield. Guess who?

The Power of Slow Change: Older Adults Adapt To Social Media

In the US, older adults (ages 50-64) are now steadily adapting to social changes brought about by technology. (who says they’re luddites?)

Slowly but surely, the penetration of web usage has been diffusing into a larger segment of the US population. I’d say that this represents a worldwide phenomenon, not limited to the US.

Again the implication: changes in the way things are going to get done (commerce, social relationships, lifestyle, regulations, and more).

Read the rest from Pew Research here

The Power of Slow Change: Leadership Changes In International Ports

The power of slow change is ubiquitous.

This from the Economist, (all bold emphasis mine)

THE changes in distribution and cargo-handling capabilities of the world's biggest container ports show the shifts that the world economy has undergone over the past two decades. The volume of cargo traded through the world’s biggest container ports has increased nearly sixfold in the past 20 years as globalisation has taken hold. Singapore has now nabbed the top spot and every other big port in 1989 has moved down the list. Twenty years ago more than half of the top 20 container ports were in America or Europe reflecting imports into both regions from around the globe. Now, Asia's strength as an exporter is more in evidence. Fourteen of the top 20 container ports are in that region, with eight in China.

This is obviously has NOT been about cheap labor (otherwise Africa should have been at the top of the list), but about trade openness.

As Asia (led by China) begun to embrace economic freedom, given the inherent economies of scale emanating the largest population combined with a start from low base, volume accrued over the years and displaced the former leaders.

From US Global Funds

The Philippines which used to be in the top 20, considering our “cheap labor” relative to our ASEAN neighbours seems to have been booted out by high labor cost economies as Malaysia (has 2 in the top 20 2009 ranking) and Thailand (1 in 2009 ranking).

Besides as we always say there are many other factors that make up operational “competitive” advantages of a country. For instance in China, low taxes and a small welfare state may have been an important contributor.

As Cato’s Alan Reynolds observed,

``Lacking the equivalent of Social Security or Medicare/Medicaid, China has no payroll taxes at all, no capital gains tax, and only a 15-25% tax on corporate profits.”

Therefore, people who argue based on specious analysis from “single aggregate variable” such as cheap labor will always be wrong.

The Power Of Slow Change: The Rise Of Asian Consumers (Beer Drinkers)

China’s and the emerging market story can be seen in many aspects.

And part of these story that we seem to be seeing is the empowerment of Asian Consumers as signified by the surge in beer economics.

This from the Economist,

CHINA'S remarkable growth is as apparent in beer consumption as it is in more formal economic indicators. In the space of a couple of decades the country has gone from barely touching a drop to become the world's biggest beer market, a considerable distance ahead of America. And beer drinking in China is growing fast, by nearly 10% a year according to Credit Suisse's World Map of Beer. This might seem like good news for the four big firms that dominate global brewing. Between them ABI, SABMiller, Carlsberg and Heineken have nearly half the world market. But unlike America and other hugely profitable mature markets where beer drinking has levelled off or is in decline, China's drinkers provide slender profits. Still it remains a market with huge potential, though foreign brewers must now be rather tired of hearing that.

Trends like this are easy spot once you open your mind, but for many these changes would seem hard to grasp.

Nevertheless there are many possible ramifications here: some that come to my mind is that they provide windows of opportunity for investments, they give an insight on how many people in Asia are spending their money (cultural shift), they also reveal changes in trends that also have geopolitical and domestic political and economic implications and etc...

Interesting.

The Power of Slow Change: The China-Emerging Market Story

We learned yesterday that China has surpassed Japan as the second largest economy in the world.

But this isn’t much news to us since, as an example of the power of slow change, China has been creeping towards economic outperformance in many areas such as banking (see our 2009 post A Tectonic Shift In The Global Banking Industry!) to finally catch up with OECD nations.

Nevertheless this has been a dead giveaway—as manifested in the markets for a long time. All that is needed is to open one’s eyes to see this coming.

China’s stock market performance today isn’t at all sterling. It’s been in consolidation after the boom bust cycle of 2008.

Chart from Bloomberg

Year to date China is way down about 19%.

However over the past years, China’s gains have basically outclassed the OECD economies, even if her stock market has stagnated. Of course, most of the world followed a similar boom bust dynamic, including the Philippines.

Yet, Bespoke Invest has a great presentation of this massive paradigm shift.

Bespoke writes,

Japan's stock market capitalization is currently 7.97% of world market cap. China ranks second at 6.89%. Five years ago, Japan accounted for 10.34% of world market cap, while China accounted for just 1.10%. Back in 2005, China ranked just 17th in terms of market cap, behind countries like Saudi Arabia, Spain, Switzerland, South Korea, Taiwan, India, and the Netherlands. Now with the world's second biggest economy and third biggest stock market, it's hard to classify China as an emerging market, but it is indeed still emerging in terms of growth.

The context has to be seen in the light NOT confined to China, as the gains have been made mostly by Asia and emerging market economies.

Instead, what you are seeing is a paradigm shift of growth mostly away from developed economies to emerging markets.

No, this isn’t about cheap labor.

This is about a menagerie of factors as demographics, savings, debt burdens, urbanization and etc... all founded upon the foundations of deepening of free trade, economic freedom and globalization.

So the China-powered emerging market growth story seen in the stock market and economic performances merely epitomizes this power of slow change.

Unless there would be structural political-economic factors that would reverse engineer globalization, I won’t dare bet against this paradigm shift.

Quote of the Day: The Power Of Slow Change

Seth Godin, my favorite marketing guru, recommends that we need to watch the power of slow change,

``Cultural shifts create long terms evolutionary changes. Cultural shifts, changes in habits, technologies that slowly obsolete a product or a system are the ones that change our lives. Watch for shifts in systems and processes and expectations. That's what makes change, not big events.”

Take Facebook.

Facebook only emerged barely 6 years ago, now it has over 500 million active users. It’s a slow, but massive change.

In the same context these changes will certainly affect almost every aspect in people’s lives, i.e. people’s way of conducting commerce, personal relationships and even laws and regulatory regimes.

The point is people who value the conditions of the present without putting into perspective the underlying paradigm shifts in the system will underestimate change. They will be left behind the curve.

I am not like them, are you?