Everyone Is A Genius In An Inflation Driven Bull Market!

``Approval, though, is not the goal of investing. In fact, approval is often counter-productive because it sedates the brain and makes it less receptive to new facts or a re-examination of conclusions formed earlier. Beware the investment activity that produces applause; the great moves are usually greeted by yawns.”-Warren Buffett

Recently I’ve been drawn into some discussions about how being “right” might lead to more audience following and how being “right” may come in the face of being unpopular.

As a student of the markets, we understand that incentives drive everybody’s actions.

Conventionalism As Camouflage

Here are some examples of the divergent underlying incentives that impel for some of the actions by market participants:

-For traditional sellside analysts-generate literatures that would prompt clients to trade short term or ‘churn’ accounts.

-For conventional bankers- sell ‘one size fits all’ financial products to a diversified consumer base.

-For many subscription newsletter editors-write wild and audacious forecasts that would elicit attention and/or peddle short term snake oil ‘technical’ outlooks.

-For mainstream economists or financial experts-the need to be seen communicating on the conventional vernacular, as conventionalism secures their career reputations in terms of advancement or job shifts. As the illustrious and chief adversary of the Austrian school John Maynard Keynes once said, ``It is better for reputation to fail conventionally than to succeed unconventionally."

By seeking the comfort of the crowds, there is always the pretext behind what John Maynard Keynes says as being ``better to be vaguely right than exactly wrong.”

In other words, conventionalism is frequently used as camouflage against efficacy.

And for most of the above, divergent risks have apparently been sidelined for profit motives.

Yet, one must realize that for different market actors there are different perspectives from dissimilar incentives and these are the dynamics behind analyzes (reports or studies), communiqués or even quotes from news accounts.

As our favorite iconoclast Nassim Nicolas Taleb warned in Fooled By Randomnes of relying on mainstream media as main source for information, ``Most journalists do not take things too seriously: After all, this business of journalism is about pure entertainment, not a search for truth, particularly when it comes to radio and television”

In A Bull Market, Everyone Is A Genius

There is an old Wall Street cliché that goes “Everyone Is A Genius In A Bull Market.”

That’s exactly what we’ve been saying for the longest time.

NO matter what mainstream experts write about under present conditions; be it pertinent to the technical charting picture, micro fundamentals stories- industry, corporate (prospective merger & acquisitions or earnings) based or even from the macro dimensions, the coincident rise of the market security prices simultaneously with their Panglossian sentiments makes it appear they can’t do anything wrong. Genius has been at work.

Fundamentally these mind frames can be identified as cognitive biases; particularly,

-the fundamental self attribution bias- or the tendency to attribute positive outcomes on skills while negative outcomes on misfortune or as Nicolas Nassim Taleb describes in The Black Swan ``We attribute our success to our skills, and our failures to external events outside our control, namely to randomness. We feel responsible for the good stuff, but not for the bad. This causes us to think that we are better than others at whatever we do for a living.” We previously discussed this in Situational Attribution Is All About Policy Induced Inflation.

-and the survivorship bias or the winner’s bias-to quote Stephen Dubner of Freakonomics, ``The behaviors of winners are remembered and dissected far more thoroughly than those of losers, and given greater weight, even if the outcome was decided by a tiny margin.”

Put differently, people tend to selectively tunnel into so called “winners” at the expense of the overall picture.

Again from Nassim Nicolas Taleb, ``The mistake of ignoring the survivorship bias is chronic, even (or perhaps especially) among professionals. How? Because we are trained to take advantage of the information that is lying in front of our eyes, ignoring the information that we do not see.” (emphasis added)

In short, everyone, including experts, punters, scalpers or investors, can be right for the wrong reasons!!

Machlup-Livermore Model Applied To The Phisix and Berkshire Hathaway

This can be exemplified by looking at the Philippine Phisix from the big picture figure 1.

Figure 1: Phisix: Rising Tide Lifts All Boats

While the Commercial Industrial index (blue gray) have outperformed alongside with the mining index (green), generally ALL major sectoral indices have been on an uptrend (Phi-all violent, Property-Blue, Holding-red, Banking-black candle, Service-orange, and Phisix-gray) since bottoming out in late 2008.

As caveat we seem to be seeing some of the major indices as rolling over (possibly heralding for a temporary corrective pause)-specifically the holding, the property and service indices.

Nevertheless, any security specific underperformance relative to the general trend represents as the exception more than the rule. And it would be apt to quote a reminder from Edwin Lefèvre or a.k.a the legendary Jessie Livermore…

``I NEVER hesitate to tell a man that I am bullish or bearish. But I do not tell people to buy or sell any particular stock. In a bear market all stocks go down and in a bull market they all go up...I speak in a general sense. But the average man doesn’t wish to be told that it is a bull market or a bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing.”

In essence, Mr. Lefèvre’s empirical observation goes hand in hand with Austrian economist Fritz Machlup’s conclusion that stock markets have increasingly been driven by inflation [as previously discussed in Are Stock Market Prices Driven By Earnings or Inflation?], where inflationary policies propel investors sentiment and ultimately gets reflected on the market as seen in the rising and ebbing tide phenomenon or our Machlup-Livermore model.

Yet, even Mr. Warren Buffett’s flagship the Berkshire Hathaway which has consistently outperformed the S & P 500 for over two decades could be used as paramount yardstick (see figure 2)

Figure 2: Bigcharts.com: Berkshire Hathaway Also Reflects On Rising Tide

As you would notice, Mr. Buffett’s Berkshire has basically outperformed the S & P when the monetary landscape has been accommodative, from which has likewise been reflected on sprightly markets.

Yet, when liquidity had been drained from the system as a result of the recessionary forces (from overinvestments in technology and communications in 2000) or during the banking crisis of 2008, Berkshire has fallen almost more than the losses of the S & P 500 (both during the dot.com bust of 2000 and the Lehman meltdown in 2008).

So even the world’s most venerated investing guru has been subject to ebbs and flows of INFLATION!!!

The point is: anyone can mesmerize themselves with the delusions of market prices exhibiting conventional metrics while ignoring the fact that the impact of inflation to the prices of diverse financial markets including the currency market has been intensifying. In short, misdiagnosis leads to wrong therapy or errant investing actions.

To excerpt Agora Publishing’s Bill Bonner, “people seem to come to believe just what they need to believe – just when they need to believe it”, even if they are unsubstantiated by evidences or by facts.

And this is what distinguishes us from the mainstream.

Creative Destruction: Electronic Payments Over Cash And Checks

Creative destruction appears to be taking hold even in terms of the means to conduct payment.

In the United Kingdom, electronic payments appear to be getting the better of checks 'cheques', where the latter may be reckoned as passe.

According to Mint.com (bold highlights mine),

``This week, the British banks governing the UK Payments Council decided to phase out their check clearing system by October 2018. In effect, they set an expiration date for the use of paper checks (or “cheques” as they prefer). In a statement, the group’s chief, Paul Smee, noted: “There are many more efficient ways of making payments than by paper in the 21st century, and the time is ripe for the economy as a whole to reap the benefits of its replacement.”

``Like letters of credit, demands for payment and bills of exchange, bank drafts can trace their history to Roman times, when checks were known as “praescriptiones.” Paper drafts analogous to today’s checks were in use in the Islamic world in the 9th century and as early as the 12th century Templars honored pilgrims’ checks from one chapter house to the next. In England, clearing houses have had responsibility for settling checks since the early 1800s (before that they were often cashed in coffee houses).

``Bankers complain that many British retailers don’t accept checks anymore, that young people don’t even have checkbooks, and that it’s costing them as much as a pound (about $1.63 today) to process every check. But the decision certainly has its critics—especially advocates for the elderly and small business owners. On one hand, a generation uncomfortable with electronics will be forced to risk carrying and handling more cash. On the other, mom and pop stores have one more disadvantage against giant competitors (some of whom are starting to act as banks themselves). The move will also put the “unbanked”, who have to pay fees to cash checks but also lack access to accounts capable of electronic payments.

``The cost of cash keeps going up while the cost of using credit cards and electronic payments keeps going down. More retailers accept credit cards than checks these days. But while US banks also worry about the costs of handling cash and checks, they aren’t likely to echo the UK decision any time soon. Yes, paper checks are increasingly rare in high-tech countries—whether advanced Scandinavian nations or developing/modernizing regions such as Africa—but the US doesn’t rate as high-tech when it comes to personal finance (present company excepted of course). It has lagged dramatically in the modernization of its financial traditions, such as implementing electronic payments, even compared to Britain."

In other words, technology has been bringing about the intensifying diffusion of the electronic mode of payment as primary means to conduct transactions with reduced reliance on the traditional cash and checks.

The caveat here is that facilitating payments via electronics can translate to more debts and could function as faster conduit for the expansion of circulation or bank credit (inflation).

Nevertheless in a cash society as the Philippines, where 40% of the economy is considered informal and where the penetration level of mobile phones is far greater than people with bank accounts, the likely primary mode of electronic payment that could take shape would be that of mobile banking.

According to CGAP, ``To root the global market sizing in real world data, CGAP, GSMA and McKinsey analyzed, unbanked consumers in the Philippines, where two of the global leaders in m-banking operate (Smart, and Globe). One half (1.6 million) of active mobile banking users in the Philippines are unbanked. Furthermore, 26 percent of active users have incomes below $5 per day. On average, unbanked mobile money users spent $1.9 more per month than peers who do not. This is a considerable gain for mobile operators who saw average revenues per user (ARPU) as low as $4.04 in the 4th quarter of 2008, according to Wireless Intelligence...

``Mobile money reaches a base of financially active people. In the Philippines, more than half of the people interviewed for the study reported using at least one financial product. This mirrors findings in other countries showing the poor to be active money managers. Savings is the most common financial product in the Philippines, with low-income mobile money users and nonusers reporting that they save an average of $34. Informal mechanisms for saving dominate the market.

``Ninety-eight percent of unbanked Filipinos receive their income in cash, and overwhelmingly use informal saving instruments, such as keeping their money at home in a safe hiding place, giving money to a friend or family to hold, or joining a saving club. CGAP and GSMA estimate low-income Filipinos save an estimated $450 million in informal, actively managed with frequent deposits and withdrawals."

In other words, market in spite of government interventions has always been looking for the best interests of consumers. In this case by facilitating an easier mode of conducting transactions via electronics, be it through mobile banking, credit and debit cards or others.

And if markets are always looking for a way satisfy consumers, the recent onrush to gold has likewise brought about a new form of Automated Teller Machines (ATM)- gold ATMs in Germany.

According to the Financial Times (last June)

``Germans, long attracted to the safety of solid gold, will soon be able to sate their appetite for the yellow metal as easily as buying a chocolate bar after plans were announced yesterday to install gold vending machines in airports and railway stations across the country.

``The venture by TG-Gold-Super-Markt, a company based near Stuttgart, aims to build on soaring retail interest in gold since the financial crisis shook confidence in other investments.

``"German investors have always preferred to hold a lot of personal wealth in gold, for historical reasons," said Thomas Geissler, the owner of the company. "They have twice lost everything."

``He hopes to install "Gold to go" machines in 500 locations in German-speaking countries this year."

It's a curiosity how gold can be fused with today's rapid technology and market based innovation trends.

Could Asians Be Assimilating On Western Free Market Ideals?

Asians now comprise as the fastest growing nationalities among foreign students in America.

That's according to the Economist, ``STUDENTS flock to American universities from all over the world. But according to the OECD, a rich-country think-tank, over 40% of the 106,123 foreign students in the country during the 2007-08 academic year came from just three Asian countries: China, India and South Korea. And the 23,779 Chinese students in America far outnumbered those from India and South Korea, which each sent just under 10,000 students to America. But over the period between 1997 and 2008 the number of Indian students grew the fastest. The European presence on American campuses has grown more slowly. But between them, Germany, France and Italy still sent more students to America in 2007-08 than either India or South Korea." (bold emphasis mine)

While the terse article doesn't dwell on the details of which schools Asian students were enrolled at and likewise doesn't tackle with the post graduate life of graduate foreign students (if they remain in the US or have been repatriated ) my guess is that many Asians have been sent mainly to study and assimilate on Western (political, economic, philosophical) ideology, culture and lifestyle.

And perhaps this could be one reason why there has been some interests on Ayn Rand's Atlas Shrugged in terms of growth in web searches and book sales in India.

According to Reason.com ``Apparently, Indians perform the second most Google searches for Dame Ayn after folks in the U.S., and Ayn Rand's book have sold 50,000 copies there since 2005, about the same sales are enjoyed by John Grisham." As you would observe, Indians have been the fastest growing Asian group during the last 10 years.

Although correlation may not be causation, and 50k copies of Atlas Shrugged is definitely infinitesimal compared to India's over 1 billion in population, our point is that Asians could gradually be adapting more of free trade ideals than their US peers.


According to dlc.org, global governments imposed 155 temporary tariffs at the pinnacle of the crisis in 2008. This is way below the annual average of 189 (from 2000-2008). Nevertheless most of the tariffs have been initiated by the US.

Hence global protectionists sentiment, in spite of the recent crisis and the proddings of Western progressives, appears contained.

As Thomas Jefferson wrote, “Whenever the people are well-informed, they can be trusted with their own government.”

Could Asians be learning more of the Jeffersonian way?

Follow The Money: Web Based Ad Spending

In spite of the recent crisis, the growth of internet advertising continues to accelerate...

According to the Economist, (bold highlights mine)

``WHILE the economic downturn has hit advertising, the internet has been busy building market shares. Global ad spending is estimated to fall by over 10% this year, according to ZenithOptimedia, a media firm. The internet will account for 12.3% of all advertising spending in 2009, up from 10.1% last year, and double what it was in 2005. Online ad spending in Denmark, a country with near universal broadband penetration, overtook TV spending in 2008, and is forecast to be almost a third of the ad market by 2012. In America, television advertising still dominates, though advertisers are moving from newspapers to the internet."

This is a very significant development for it shows that the major advertising trend have simply been following where the money is.

one, it reveals of the trend towards the vastly deepening of web based connectivity worldwide.

two, web based connectivity have been founded on highly segmented or niche based-marketing or audience.

In a highly competitive free market sphere, content isn't only about "specifically tailored information" but having to tap the right "community" or "tribe".

The recent recession appears to have caused a shift in web users preference, for example, from online auctions to retail discounts.

This from 24/7,(bold highlights mine)

``Based on data from Hitwise comparing US traffic market share from January to figures from November Ebay (NASDAQ:EBAY) lost 37% of its visitors. Craigslist lost 43% of its traffic, making it the largest loser among the top 25 sites. Neither number is surprising. Ebay’s earnings have been lackluster. Classified postings for apartments and jobs at Craigslist may have been hurt by the recession.

``Other sites that had sharp drops in visits include Yahoo! (NASDAQ:YHOO), Yahoo! search, and News Corp’s (NYSE:NWS) MySpace all of which were down more than 20% during the measurement period. The MySpace figure is not surprising. The social network has been losing members to Facebook. Among the top 25 sites, Facebook has the largest gain, up 236%. The Yahoo! figures support data from other research firms covering search traffic. Yahoo! has been losing ground to Microsoft’s (NASDAQ:MSFT) Bing and Google (NASDAQ:GOOG). Google was the most visited of all sites measured by Hitwise and its traffic rose 7%.

``Among the largest e-commerce sites, Wal-Mart (NYSE:WMT), the 2oth most visited site among all US destinations, had a 64% increase in visits compared to Amazon (NASDAQ:AMZN), the No. 15 site, which had a 26% increase. Wal-Mart and Amazon are locked in struggle for holiday shoppers and both have cut prices on popular items including e-books and DVDs. Visits to Target.com (NYSE:TGT) were 69% higher. Best Buy (NYSE:BBY) visits rose 23%.

``Other notable increases among large sites were MSN, up 58% and YouTube which rose 109%, confirming the trend of improving visits to online video sites."

In short, as the global populace is being driven into the web, the prevailing economic circumstances and technological benefits appear to be driving web user's preference.

three, if Denmark is to used as prospective benchmark for ad spending then even television spending could be compromised by the web.

lastly, the internet have dramatically and immensely been changing people's lifestyles and the conduct of businesses worldwide, this implies that traditionalism or traditional metrics will fail to account for the complex and dynamic changes that drives today's information age.

This would make oversimplistic prescriptions by experts based on past paradigms filled with the risks of unintended consequences.

Moreover, the profusion and democratization of information via its accessibility would likely make markets more efficient, in spite of repeated government interventions.

Decoupling In Share of Global Stock Market Capitalization

Bespoke Invest provides us with an update of the market cap share of the global stock market pie for 2009.


According to Bespoke (bold emphasis mine),

``the US remains the biggest country with its stocks making up 29.61% of world market cap. This is more than three times Japan's representation in second place at 7.68%. At the start of the year, the US had 32.75% of world market cap, so its representation is down 9% in 2009 even though US equity markets are up. At 7.27%, China overtook the UK in third place in 2009 and is closing in on Japan.

``Brazil's percent of world market cap increased the most in 2009 at 58.2%. Its weighting has gone from 1.84% to 2.92%. Indonesia, India, Australia, Turkey, China, Russia, and Taiwan have all seen their weightings increase by 25% or more this year. On the flip side, Japan has lost the most market share of the developed countries, declining from 10.28% to 7.68%."

Additional observations:

In terms of the top 20 in market cap:

- 8 comes from Asia, 8 from Europe, 2 from Latin America.

-Except for Sweden, Canada and UK, developed countries mainly have suffered from a decline in the share of market cap

Overall, developing nations have been taking most of the growth in the share of global stock market capitalization at the expense of the developed nations.

Yet if current trend persists, then most of the action is likely to be seen in developing nations.

Apparently, this also seems to validate the actions in the global IPO market [see Decoupling In Global IPO Markets], crisis nothwithstanding.

Business Insider: How Asia Makes The U.S. Look Like A Third World Country

Interesting trivia from Business Insider...

Decoupling In Global IPO Markets

Although the chart below is from last week's article, I think this speaks volume of what has been happening today.

The chart essentially shows Hong Kong grabbing the top spot in the IPO financing market.
According to the Wall Street Journal,

``After a hiatus of several years, Hong Kong's stock exchange is again the world champion of IPOs. It probably shouldn't get too comfortable with the title.

``As of Monday, $26.81 billion has been raised through initial public offerings in Hong Kong this year, according to Dealogic. That is well above the $17.11 billion raised on the New York Stock Exchange, which stood at No. 2 in the global rankings.

``It has helped being the exchange best-positioned at the moment to connect foreign stock investors with China, a beacon of growth in a world still recovering from recession. "We've been in the right place, at the right time, in the right markets," says Ronald Arculli, chairman of Hong Kong Exchanges & Clearing Ltd., known as HKEx.

``This year's total falls far short of the $43.9 billion Hong Kong raised in 2006, when it also topped the global list for IPO issuance. But under the circumstances, it is a worthy achievement. Partly reflecting that success, HKEx's share price is up 90% this year, and more than 150% from its lows in March.

``Perhaps the bigger achievement, though, is HKEx's progress in attracting major listings from outside mainland China and Hong Kong, a goal it has pursued for years but one that has remained elusive until recently." (bold emphasis mine)

Read the rest here.

Additional observations:

-While the article focuses on Hong Kong's lead role in global IPO financing today, what seems missed is that 8 out of the 10 largest IPO markets have been spread among the major emerging markets particularly China, Brazil and India with only 2 from the developed world- 2nd placer New York Stock Exchange (NYSE) and fourth placer Nasdaq.

-European bourses appears to be absent from the contention.

-China and Brazil's bourses are closing in on the marginal lead held by both NYSE and Nasdaq. This implies that if present trends continues, then the US may lose its current standings and perhaps in 3-5 years the top 3 spots could be secured by Hong Kong and China while Brazil may squeeze ahead of the Nasdaq.

-global wealth intermediating activities appears to be concentrated on emerging markets as represented by the dominance of the emerging markets in the Global IPO markets today.

Personal Message: Dengue And Blogging

What I initially thought as an ordinary flu at the start of the week, turned into persistent high fever which eventually revealed itself as “dengue” fever.

So for the first time in 4 years, having been confined to the hospital, I was near totally detached from the market, wasn’t entirely able to access my emails or the web and spent most of the time either sleeping or watching TV series at the Hallmark, HBO movies, History Channel or National Geographic (although I occasionally did peak at financial channels against the wishes of my wife-for ‘stress reasons’).

And it is for this reason too that I haven’t been posting too.

It’s a terrible time to get downed by an ailment, since it means failing to deliver to you the updated info and analysis to mark the close of 2009. Also it implies my missing out a lot of Christmas merrymaking social activities.

And because I’m still in a recovery phase, I guess blogging will be lighter than the usual over the coming weeks and would hopefully normalize through the new year-2010.

Besides, with the upcoming holidays, another guess is that people would be less interested with serious market stuff and would be on a predominantly holiday mindset.

Thank you for your patronage,

Benson

Global Inflationism: It's Not All About Gold

Many have argued that gold is in a bubble.

Yet, given the bigger picture, gold's recent spike pales in comparison to other commodities.
According to Bespoke Invest, ``While gold is currently grabbing the headlines, it's actually up the least out of the seven major commodities that are in the black this year. As shown, Copper is up the most with a gain of 126.7%. Orange juice is up the second most with a gain of 83.3%, while oil, silver, and platinum are all up more than 50%. Coffee and gold are both up about 30%. Three commodities are down in price in 2009 -- wheat (-20.27%), corn (-17%), and natural gas (-11.6%)."

However while momentum appears to have fizzled out for gold, the other precious metals and energy commodities, according anew to Bespoke, ``the breakfast drink commodities -- coffee and orange juice -- are both in strong uptrends and are trading right at overbought territory at the moment." For us, while we expect commodities to generally benefit from the loss of purchasing power of paper money or rising inflation, the rate of advances are likely to be divergent.

However, if indeed the US dollar system is suffering from what we deem as the initial symptoms of "demonetization", precious metals are likely to be the prime beneficiaries or 'leaders', from which should spillover to the general commodities sphere.

As Ludwig von Mises explained,

``The divorce of a money, which is proving increasingly useless, from trade begins when it starts coming out of hoarding. If people want marketable goods available to meet unanticipated future needs, they start to accumulate other moneys, for instance, metallic (gold and silver) moneys, foreign notes, and occasionally also domestic notes which are valued more highly because their quantity cannot be increased by the government, such as the Romanov ruble of Russia or the "blue" money of Communist Hungary. Then too, for the same purpose, people begin to acquire metal bars, precious stones and pearls, even pictures, other art objects and postage stamps. An additional step in displacing a no-longer-useful money is the shift to making credit transactions in foreign currencies or metallic commodity money which, for all practical purposes, means only gold." (bold highlights mine)

Put differently, gold's rise while symptomatic of a monetary disorder hasn't reached the level where rampant demonetization is taking hold yet.

Albeit, the symptoms can hardly be ignored as seen from the chart above from goldmoney.com where gold is even outperforming against the Euro. To quote James Turk of gold money,

``When viewed against gold, the time-tested numéraire of all national currencies, we can see that the euro is collapsing almost as fast as the dollar, which is not too surprising. The dollar and the euro have both caught the fatal disease that inevitably inflicts and eventually kills all fiat currencies – central bank mismanagement."

How The Surging Philippine Peso Reflects On Global Inflationism

``But the administration does not want to stop inflation. It does not want to endanger its popularity with the voters by collecting, through taxation, all it wants to spend. It prefers to mislead the people by resorting to the seemingly non-onerous method of increasing the supply of money and credit. Yet, whatever system of financing may be adopted, whether taxation, borrowing, or inflation, the full incidence of the government's expenditures must fall upon the public. With inflation as well as with taxation, it is the citizens who must foot the total bill. The distinguishing mark of inflation, when considered as a method of filling the vaults of the Treasury, is that it distributes the burden in a most unfair way, overcharging those who are least able to bear it.”-Ludwig von Mises The Truth About Inflation

The Dubai Bugaboo

The recommendations of most of the local institutional analysts quoted in the media at the start of this abbreviated week had mostly been bearish. And if anyone did heed on their calls they would have regrettably stampeded out of the market for the wrong reasons. That’s because these analysts have interpreted the initial shock waves from the Dubai Crisis as having a lasting impact. Their fundamental premise: Dubai’s adverse effect on the OFW market.

I find it peculiar to read highly paid analysts to babble on false causalities based on spurious evidence. I guess they are paid not to be “right” or “profitable” instead they are there to say what people would like to hear, or to confirm on other people’s biases. Well one doesn’t need to be an “expert” (CFA) to employ “available bias”- or the fallacy of attaching recent events to market actions.

As discussed in Why Dubai’s Debt Crisis Isn’t Likely THE Next Lehman, the Dubai Debt Crisis seems to validate our outlook, which we deduced as more influenced by politics than by plain vanilla economics.

“A political struggle going on” says this New York Times article, “Analysts say Abu Dhabi has long been unhappy with Dubai’s independent, free-spending ways — and its strong trade links with Iran, which sits just across the Persian Gulf but is considered an enemy by most Sunni Arab states.” (bold highlight mine)

This from Oxford Analytica as quoted by Research Recap, ``OxAn suggests payoffs for Abu Dhabi’s bailout might be on a political level rather than commercial via, for example, a stake in Emirates Airlines: -Abu Dhabi could demand a strengthening of federal authorities, while Dubai would need to relinquish certain sovereign rights, such as the control of customs, which so far remain at the level of individual emirates. -Hints at increased centralisation are already discernible, with Abu Dhabi and federal institutions playing a more visible role in national development policy and Sheikh Mohammed increasingly appearing in his role as prime minister of the United Arab Emirates (UAE) rather than as ruler of Dubai. -In particular, centralised control of customs — in exchange for financial help — would give Abu Dhabi a firmer grip on the implementation of sanctions policies against Iran, which has been repeatedly demanded by Washington in the past. Such a move would also serve its own tough stance with regard to the regional ambitions of Iran. Interestingly, despite the blow Dubai has taken as a financial center, OxAn thinks that more regulation of capital markets, and a unification of the stock markets in Dubai and Abu Dhabi, could strengthen the position of the UAE as a niche player in international capital markets.” (bold emphasis mine)

Moreover, in addition to last week’s argument, Dubai accounts for only 26% of the UAE’s GDP (2006) with Dubai’s share of gas revenues at only 2% (wikipedia.org).

Besides, even if we tally up the remittance data, the entire Middle East accounts for only 15% of the global share (see figure 2)

Figure 2: POEA: OFW Remittances By Origin

In addition, in contrast to conventional expectations, the UAE registered the largest growth in OFW deployment in terms of new hires and rehires, in spite of the crisis year of 2008 (60.6%). UAE is followed by Qatar 49.9% and Canada 40.5% according to the POEA.

This means that to lump the Dubai Debt woes to UAE or to other Middle East countries would be terribly shortsighted and account for sloppy analysis.

Philippine Peso A Manifestation Of Global Inflationism

Besides since mainstream associates the price direction of the Philippine Peso with that of remittances, this week’s fantastic 2.55% jump of the Peso to Php 46 vis-à-vis US dollar implies that the Dubai Credit Crisis has been a discounted factor.

If indeed the Peso has a strong correlation with that of remittances then the Peso should fall and not firm up. However, we don’t subscribe to the mainstream view that the Philippine Peso is entirely about remittances [as discussed in Claims Of The Peso’s Dutch Disease Is A Symptom Of Political Hysteria or in What Media Didn’t Tell About the Peso].

Figure 3: Phisix-Peso Correlation

In spite of the 2008 crisis, the growth in OFW remittances accelerated by 13.7% (Inquirer.net), yet the Peso fell by a staggering 19% from around 40.5 to 50 (see figure 2 left scale, line chart)…so much for specious mainstream reasoning.

In contrast the Philippine Peso has mainly manifested the state of global liquidity flows during both the crisis and post crisis period. And this can clearly be seen in the Phisix-Peso chart.

The correlation between the Philippine Peso and the Phisix (black candlestick) may not be precise but the general trend is quite observable.

During the bear market of the Phisix from October 2007 to October 2008 (red descending line), the Peso likewise fell (red ascending line). Notice that the inflection point of the Peso (left blue arrow pointed up) lagged the Phisix (left blue arrow pointed down) by about 3 months.

We see the same motion during the last turning point.

As the Phisix bottomed in October of 2008, the Peso belatedly bottomed about a month after. From then, both the Phisix and the Peso has strengthened. The recent breakout of the Peso even came amidst repeated interventions by the Bangko Sentral ng Pilipinas (BSP) or the Philippine central bank to subdue the Peso’s rise aimed at promoting the mercantilist perspective of protecting exports and enhancing the purchasing power of the OFW.

Of course it is pretty naïve and myopic for our officials or mainstream “Keynesian” experts to oversimplistically associate weak currency with stronger exports or with expanded purchasing power for the OFWs. That’s because theory and experience tells us that this is NOT true.

Whatever the gains from inflating the system to weaken a currency will always be temporary, that’s because inflationism results to a lower standard of living, capital outflows and a lower purchasing power of the currency will offset any short term gains [as discussed in The Evils Of Devaluation].

Besides, inflationism only distorts a nation’s production structure that would benefit a few at the expense of the rest of society (see Joe Studwell exegesis below)

The Peso fell from Php 2 during the 60s to Php 55 in 2005 and still lags in terms of goods and service exports relative to its neighbors. Instead of goods exports, we became a major exporter of manpower, of course with the attendant social costs.

Why the Philippines failed to become an export giant? Primarily, because of the anti-market policies that protected the interests of the political and economic elite.

Joe Studwell in Asian Godfathers explains (all bold emphasis mine): ``The reaction of local business to the multinational exporters, welcomed back so soon after foreign enterprises that grew up in the colonial era had been kicked or bought out, is telling. Small firms found innumerable opportunities supplying parts and components and services to multinational investors. But their ability to move up the value chain was inhibited by a lack of scale that left them without resources for research and development. Tycoons, on the other hand, had scale and access to capital, but were rarely interested in working in the export sector. The reason is simple. Exporting is a globally competitive business. Where the godfathers outperformed was in trading on the inefficiencies of south-east Asia’s domestic economies, whether in the form of politicians’ willingness to disburse monopolistic concessions on the basis of personal relations or through the profits to be made when governments tried to micromanage industrial development. For tycoons, the benefit of EOI (Export Oriented Industrialization) was significant but indirect: the growth produced underwrote the continued relationship between political and economic elites and eased pressure for deregulation of domestic economies. Public work projects without tenders, and privatizations decided behind closed doors, where politically much more feasible when exports were driving the growth in the south-east Asian economy.”

In short, another evil promoted by inflationism is the economic fascism brought upon by complicit crony-state capitalism.

So while we can usher in a new popular president, unless the anti-market structures are dismantled, we ain’t gonna see much of an improvement on the political economic spectrum. Populist policies are likely to harm than aid the plight of Filipinos.

Instead of an organic growth, the Philippine economy will be dependent on the tidal flows that accrue to its neighbors and the impact of policies to imbue more debt.

Asian Outperformance and Path Dependency

It would also be fundamentally incorrect to suggest that the Asia can’t benefit from a policy based bubble cycle despite the slack from developed economies.

That would translate to “anchoring” or the reading past performances or interpreting past models as tomorrow’s dynamics.

Figure 4: Danske Bank: Asia Decoupling Is Back

Fundamentally Asia has led the world out of recession see figure 4. China and the rest of Asia have massively outperformed the developed country economies. As we wrote in Following The Money Trail: Inflation A Key Theme For 2010, ¾ of the economic losses of US, Europe and Japan in 2008 to the tune of $580 billion have been offset by China’s $450 billion growth. And we are seeing this outpeformance in Industrial production and domestic retail sales.

That’s basically because of low systemic leverage, high savings rate, unimpaired banking system, current account surpluses, a trend towards deepening regionalization and integration with the world economy.

Moreover, because of these inherent advantages, aside from fundamentally pegged currencies (by varying degrees) on the US dollar, monetary policies of the US are being transmitted to Asia.

As David Malpass rightly argues against zero interest rates in an article at the Wall Street Journal,

(all bold underscore mine),

``The irony of the zero-rate policy, coupled with Washington's preference for a weak dollar, is a glut of American capital in Asia (as corporations and investors shun the weakening U.S. currency) and a shortage at home. For gold and oil, the low-rate policy works, weakening the dollar so commodity prices go up and providing traders with ample funds to buy into the expanding bubble. Those markets are almost daring the Fed to try to break out of its zero-rate box….

``According to International Monetary Fund data, U.S. GDP has fallen to 24% of world GDP from 32% in 2001. And as U.S. capital escapes the weak dollar and high tax rates, the U.S. share of world equity market capitalization has fallen to 30% from 45%. This leaves the U.S. alone with Japan at the bottom of the monetary heap, with rate expectations so low they repel investment.”

Hence, US policies combined with local policies have generated significant traction. This we believe is the trigger for the policy induced Asian-emerging markets business cycle or boom-bust cycle.

Proof?

In the Philippines, the following are headlines from our Bangko Sentral ng Pilipinas: Automobile Loans Up by 5.1 Percent From Last Quarter, Credit Card Receivables Up By 4.6 Percent From Year Ago, Residential Real Estate Loans Stand at P162.5 Billion in Q3 (down 1.4% over the quarter but up 13.1% from last year), Other Consumer Loans Stood at P36.7 Billion in Q3 (down 2.6% from last quarter but up 12.8% from a year ago) and November Inflation at 2.8 Percent.

In short, systemic leverage has gradually been picking up in response to these policies.

True, markets may not move linearly but policies to reflate the system has clearly shown divergent impact on individual economies and in the marketplace. This implies that trying to read economic dynamics as one size fits all is virtually flawed.

What ailed the US in the Bear Stearns-Lehman episode in 2008 isn’t likely to be repeated soon. That’s because policy makers are likely to engage in path dependency as guiding principle for their decisions.

Path Dependence according to wikipedia.org is a ``set of decisions one faces for any given circumstance is limited by the decisions one has made in the past, even though past circumstances may no longer be relevant”. Bank Of Japan’s decision to implement a new QE program is a testament of this- due to the alleged fear of systemic deflation, the applied solution stems from the apparent triumphalism from the recent money printing nostrum utilized by their peers.

In other words, policy approach has all been directed to combat another Stearns Lehman episode at a future unseen cost. That’s why tunneling on a deflation scenario won’t be advisable.

This also means we should understand the political incentives guiding the actions of the political and bureaucratic leaders to address financial and economic issues than simply analyzing economics exclusive of political goals. For instance, as discussed in 5 Reasons Why The Recent Market Slump Is Not What Mainstream Expects, we identified why the US banking system has been in a US government guided therapy known as the ``bank as trader” model.

Conclusion

To recap, the Dubai debt crisis as an issue to be bearish would be a mistake. There are larger factors that affect the markets or even the Philippine Peso such as the cocktail mix of the US government monetary policies, local policies and intrinsic idiosyncratic traits for each economy.

Moreover, in contrast to conventional wisdom, remittances essentially have not been the prime factor that drives the direction of the Peso’s pricing levels. Instead the Peso has reflected on the policy induced decline in the US dollar, which is a manifestation of global liquidity. That’s the reason the Peso and the Phisix has had a strong correlation.

Although the Peso has been mostly a lagging indicator relative to the Phisix, the recent breakout of the Peso should augur well for the Phisix.

Finally, path dependency will likely guide the actions of policymakers. That’s why we view a Bear Sterns-Lehman episode of 2008, which caused a seizure in the US banking system, as lesser risks in contrast to a spike in inflation. In other words, governments are likely to engage in sustained inflationism.

The effect of inflationism will ultimately be unraveled but like all business cycles, this takes time and massive “clustering” misallocation of resources. Eventually, in spite of government actions, the marketplace will manifest on such strains.

For the meantime, inflationism appears to be in a sweetspot.

The Peso and the Phisix is likely to resume its ascent in 2010, with the latter likely to breach its old highs and may even attempt to reach the 5,000 level.

The US Federal Reserve Experiments On Unwinding Stimulus As Bank Of Japan Engages in QE

``The basic cause of inflation, always and everywhere, lies in the field of money and credit." -Henry Hazlitt in Newsweek, December 22, 1947

The US Federal Reserve did the unexpected this week, aside from conducting a preliminary test to unwind current stimulus by selling $180 million of reverse repurchases Friday (Wall Street Journal), the Fed’s balance sheet recorded sales of $2.7 billion in Mortgage Backed Securities (MBS) which is the first decline in the Fed’s MBS holdings since the Quantitative Easing program begun. Incidentally, since MBS represent as the “toxic” securities, it would seem improbable for anyone to actually buy them.

Figure 1: stockcharts.com: An Anomalous Response To A US dollar Spike

Nevertheless, the Fed actions has apparently coincided with the spike in the US dollar index (see figure 1) which media attributes to improving economic jobs (marketwatch) and factory orders (Wall Street Journal) data.

To add, recent concerns over the strengthening yen [as discussed in Vietnam’s Inflation Control Measures And The Japanese Yen’s Record High], has prompted Japanese officials to deploy their own version of quantitative easing with the excuse to fight “deflation” by having the Bank of Japan (BOJ) inject one trillion ($11.5 billion) into money markets and likewise introduce a 10 trillion yen facility for banks-equivalent to 2% of GDP. The BOJ would accept everything from government bonds to corporate bonds as collateral (Wall Street Journal).

The Japanese Yen which constitutes about 13.6% of the US dollar index pie, second only to the Euro (57.6%) in terms of weighting, fell by 4.18% over the week. The Euro fell by only .71% which means the chunk of the US dollar’s gains came from the Yen’s fall.

Meanwhile, Japan’s equity benchmarks celebrated on the announced QE program, the Nikkei rocketed by 10.36% while the Topix index soared 9.69%.

In short, central bank actions of Japan and the US has prompted for the heightened volatility in the price movements of US dollar index. And one may even suspect that the combined actions may have been deliberately calibrated for unspecified reasons.

Yet, in contrast to the conventional inverse relationship between the US dollar (USD) and stocks (SPX), where a rising US dollar impacted equities negatively and vice versa, the actions last week saw an anomalous synchronism. Only gold (GOLD) and oil appears as having been negatively affected. Even copper (COPPER) shrugged off the surge in the US dollar.

This implies two things: One that the US dollar’s rise has merely been a knee jerk response to the recent Fed action, which may be deemed as synthetic or a bluff and likewise reflected on Japan’s thrust to devalue its currency. And second, concerns over the US dollar “carry trade” have been vastly exaggerated [see Central Bank Policies: Action Speaks Louder Than Words, The Fallacies of US Dollar Carry Bubble and Jim Rogers Versus Nouriel Roubini On Gold, Commodities And Emerging Market Bubble], as markets didn’t suffer from a chain of losses arising from a strong US dollar.

The coming sessions will reveal if these trends will be sustained.

Graphic On The Real Cost of Buying A DVD

Here is another interesting chart from the Economist.

It shows of the "Time spent working to buy a DVD" or "the real cost of buying a DVD". Alternatively this could be seen as a measure of labor productivity.

According to the Economist, ``JAPAN was the most expensive place to buy a DVD in 2008, according to Screen Digest, a consulting firm. But if time is also money, then workers in Mexico, who had to work an extra two hours to buy the same DVD, would probably feel aggrieved. Based on data from UBS, an average worker in Japan needs to toil for around 155 minutes to buy a DVD, whereas Mexicans must put their noses to the grindstone for about 280 minutes. China's workers are best off, on the job for just over half and hour and paying a mere $1.60 for a DVD. As the average film is around 100 minutes long, workers in Brazil, Hong Kong, France and India spend around the same time working to purchase a DVD as they spend watching it."