Saturday, December 19, 2009

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?

Thursday, December 17, 2009

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.

Wednesday, December 16, 2009

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.

Monday, December 14, 2009

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.

Sunday, December 13, 2009

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

Tuesday, December 08, 2009

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 num̩raire 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 Рcentral bank mismanagement."

Sunday, December 06, 2009

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.


Saturday, December 05, 2009

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."

Global Central Banking Bureaucracy And Performance

The Economist chart below shows of the bureaucracy or the ratio of number of people employed by the world's major central banks relative to the population.

According to the Economist,

``AMERICA'S Federal Reserve may be the most important central bank in the world, but it has a smaller staff than the Reserve Bank of India and employs less than half as many people as the European Central Bank. The euro area has so many central bankers per head because many euro-zone countries have not shrunk their national central banks, even though they no longer have an independent monetary policy. With 71,200 employees, the Bank of Russia has the most employees of any central bank in the world, and the number of central bankers per head in Russia is the largest of any big economy. China has only 0.19 central bankers per 100,000 people. Even Somalia (not shown) has more central bankers per head than China does." (bold emphasis mine)

Does more central bankers translate to more effective monetary policies or more balance in the economic and financial system or price stability?

Well judging from the recent boom bust cycle, the answer is clearly a NO.

Apparently based on the above table, some of the economies that had been least affected by the crisis had been those with leaner bureaucracies.

Besides it doesn't take too much of central banking 'expertise' for a nation to accumulate heaps of debt in order to juice up economic 'growth'.


According to another article from the Economist, ``The sheer scale of their fiscal burdens may tempt governments to lighten their loads by inflation or even outright default. Inflation seems increasingly plausible because many central banks are already printing money to buy government bonds. To fiscal pessimists this is but a small step from printing money simply to pay the government’s bills. Adding to their worries, many economists argue that a bout of modest inflation would be the least painful way to ease the financial hangover.

``The rich world’s build-up of debt may also cause changes in countries’ relative creditworthiness. Investors have long viewed emerging economies as riskier sovereign borrowers than rich ones, because of their history of macroeconomic instability and more frequent defaults. But the biggest emerging economies are now by and large in better fiscal shape than their richer fellows, and that discrepancy is set to widen. The emerging members of the G20 had a ratio of public debt to GDP of 38% in 2007. By 2014, says the IMF study, this is likely to fall to 35%, less than a third of the rich world’s average. As a result the gap between the yields investors demand from rich and emerging economies’ bonds is likely to narrow." (all bold highlights mine)

Moreover, as adduced in the article, the current policies by central bankers is in the direction of the money printing nostrum.

This does not require a lot of personnel, except to churn out "studies" or "reports" that have been used to justify them. Just ask Zimbabwe's Dr. Gideon Gono.

This also implies that it doesn't also take too much of bureaucratic proficiency over the marketplace to debase a currency.

On the other hand, it could be construed that central banking have been proficient in resorting to policies that have made currencies lost its purchasing power.

From AIER

The purchasing power of the currencies of major economies have been declining since 1910 as shown in the chart above. The chart ends in 2005, the declining trend should be more accentuated today.

Bottom line: based on the above evidences, the correlation between ballooning central banking bureaucracy and economic, fiscal and monetary performance appears as inverse. This implies that a bigger bureaucracy doesn't mean more policy effectiveness, instead a bigger bureaucracy could translate to more economic fiscal or monetary underperformance.

This also extrapolates that central banking have been a monstrous boondoggle at the expense of society.

A reminder from Ludwig von Mises, ``Bureaucratic management is management of affairs which cannot be checked by economic calculation."

Thursday, December 03, 2009

Dubai's Bubble Cycle 2: The Real Estate Crash

Here's a chart from Business Insider's Clusterstock illustrating the recent real estate crash of Dubai.


From Business Insider: ``Far too much easy money flowed into Dubai during previous years, fueling a massive construction boom financed with debt. For awhile this debt looked sustainable to those involved because it was ostensibly backed by valuable property.

``Yet when the global financial crisis hit, property prices fell in many parts of the world. Dubai property prices were hit especially hard.

``Dubai property rates per square foot fell 45% from Q3 2008 to Q3 2009 according to Colliers International.

``Thus just as many American's went underwater on their mortgages due to the American property crisis, owing more to the bank than their house was worth, the same thing basically happened to the Nakheel property business of the Dubai state-owned conglomerate Dubai World.

``Combined with near-term cash flow constraints, this finally forced Dubai World to admit to its creditors that it would not be able to meet all of its debt obligations.


Dubai's Bubble Cycle

Dubai's imploding bubble is another lesson that needs to be taken heed.

Inflationism can be initially seductive and temporarily gratifying, but comes at an excruciating price as a result of non-economically feasible projects or misallocation of resources.

The chart from Bespoke Invest is a harrowing depiction of the unraveling Dubai Bubble cycle as reflected on its stock market benchmark.


Bespoke explains, ``Since 2004, Dubai's stock market has taken investors on a wild roller-coaster ride. Unfortunately, investors are at the bottom of the ride and not the top at the moment. From the start of 2004 to November 9th, 2005, the DFM General rose a whopping 748% as oil prices shot up along with the global economy. After the DFM General peaked on 11/9/05, however, it declined 57% over the next year and a half. The index staged a 72% snap-back rally from 4/3/07 to 1/15/08, but then it jumped on the global meltdown bandwagon and has declined 71% since then. Currently, the DFM General is down 78% from its peak on November 9th, 2005, but it is still up 83% since the start of 2004."

To quote Professor Ludwig von Mises, ``Continued inflation inevitably leads to catastrophe."

Wednesday, December 02, 2009

Pew Research: How The World Sees Free Trade

Post 2008 financial crisis, a chart below from Pew Research exhibits how the world perceives of free trade in 2009.


Free trade is seen as favorable by a majority of subjects surveyed for most countries except for Argentina, Japan and Indonesia. Nonetheless, this remains a big plus factor...yet.

How Long Does Gold Prices Take To Hurdle Every $100 mark?

With gold above $1,200, how long does gold prices take to hurdle every $100 mark?

That's the interesting perspective proffered by Bespoke Invest as shown in the chart below.


According to Bespoke, (bold emphasis mine) ``the amount of calendar days that transpired between century marks for the price of gold. For example, after closing above 200 for the first time on 3/6/78, gold didn't close above the $300 mark for another 459 days (6/8/79). However, after closing above $300 for the first time, gold breezed through five different century marks over a span of only 223 days. In January 1980, the price of gold closed above $700 on January 15th, and then closed above $800 two days later! [that's because this marked the euphoric stage or the end of the bubble-Benson]

``And keep in mind that with each successive century mark, the percentage rally required to get to the next hurdle declines ($300 to $400 equals a 33% gain, while a rally of only 9% is needed to get from $1,100 to $1,200). If the price of gold were to stage a rally similar to the one in 1979, $1,200 gold would seem like small peanuts."[present market action reflects a cocktail of momentum, seasonal strength and importantly, driven by the concept of gold as insurance-Benson]

Asia Leads In Web Connectivity

Asia is the largest and the fastest growing region in terms of web connectivity.

That's according to the stats from comScore as shown below

(all bold highlights mine)

``In September 2009, the Internet population in the Asia-Pacific region reached 484 million visitors age 15+ that accessed the Internet from a home or work location, an increase of 22 percent from the previous year. With nearly half a billion people online, the region now accounts for 41 percent of the total 1.2 billion person global Internet audience. China, home to the largest Internet population in the world, experienced a 31-percent increase to 220.8 million, making it the fastest-growing Internet country in the region. Japan saw its online population surge 18 percent to 68.3 million, while India climbed 17 percent to 35.8 million users. "

Here is the breakdown of the growth stats of each country...

Again from comScore,

“Asia is not only home to the largest Internet population in the world, but it is also one of the fast-growing,” said Will Hodgman, comScore executive vice president for the Asia-Pacific region. “With most markets in the region experiencing double-digit growth, marketers and advertisers have the opportunity to capitalize on the potential of the online channel to reach and engage a surging number of people engaging in a variety of consumer activities online, including reading content, watching video, playing online games, engaging with brands, conducting financial transactions and making online purchases.

To access the comScore presentation here

Let me add that web connectivity will likely enhance productivity growth and market pricing efficiency via ease of access to information thereby reducing communication, research and transaction costs.

In addition, web connectivity is likely a source of friction or can serve as deterrent against pervasive government intervention by virtue of free or liberal access to information.

With reduced government intervention web connectivity is likely to power more trade among nations.

Moral Hazard: Citibank's Dubai Loan Portfolio

Marginal Revolution's Alex Tabarrok rightly points out on how the recent bailout of the US financial system has translated to a moral hazard dilemma, as in the recent case of a government protected institution in Citibank "lending" to Dubai.

Mr. Tabarrok writes, ``The problem of moral hazard is often written off as a problem for "the future," less important than dealing with a present crisis. Not so. The bailouts may have encouraged more lending to other places that were perceived as good bailout prospects."

From New York Times' Andrew Ross Sorkin (bold underscore mine): That fact was overlooked by many investors who didn’t want to miss out on a quick buck. What about the risk? The view was, and apparently still is, that if Dubai gets in trouble, its oil-rich neighbors in
Abu Dhabi will bail everyone out to avoid damage to their collective reputation and, by extension, the region’s economy. Just as the United States stood behind its banks, in part, to avoid losing the confidence of foreign investors, Abu Dhabi might have to do the same.

``That had to be what Citigroup, with its firsthand expertise with bailouts, must have been thinking when it lent $8 billion to Dubai last year. Oh, and here’s an interesting fact:
Citigroup made the loan to Dubai on Dec. 14, 2008. Take a look at the calendar — that’s after it received tens of billions in TARP funds. Citigroup’s chairman, Win Bischoff, said at the time, “This is in line with our commitment to the U.A.E. market in general, and reflects our positive outlook on Dubai in particular.” Good call."


Should Dubai default on the $8 billion of debts to Citi, guess who's gonna pay for the losses?


Tuesday, December 01, 2009

Climate Change: The Greatest Scientific Scandal of Our Generation

Sir Ernest John Pickstone Benn once said, ``Politics is the art of looking for trouble, finding it whether it exists or not, diagnosing it incorrectly, and applying the wrong remedy."

Since the environmental science issue of climate change or man made "anthropogenic" global warming has been transposed into political policies, like any politicized issues-deception and skulduggery have been used to promote vested interests.

Christopher Booker at the Telegraph presents a neat summary of how politics has transformed the global warming episode as the "greatest scientific scandal of our generation" to quote Professor Mark Perry.

(bold highlight mine, sub titles in blue font mine)

``There are three threads in particular in the leaked documents which have sent a shock wave through informed observers across the world. Perhaps the most obvious, as lucidly put together by Willis Eschenbach (see McIntyre's blog Climate Audit and Anthony Watt's blog Watts Up With That ), is the highly disturbing series of emails which show how Dr Jones and his colleagues have for years been discussing the devious tactics whereby they could avoid releasing their data to outsiders under freedom of information laws."

1. Data Suppression


``They have come up with every possible excuse for concealing the background data on which their findings and temperature records were based.

``This in itself has become a major scandal, not least Dr Jones's refusal to release the basic data from which the CRU derives its hugely influential temperature record, which culminated last summer in his startling claim that much of the data from all over the world had simply got "lost". Most incriminating of all are the emails in which scientists are advised to delete large chunks of data, which, when this is done after receipt of a freedom of information request, is a criminal offence.

``But the question which inevitably arises from this systematic refusal to release their data is – what is it that these scientists seem so anxious to hide?"

2. Data Manipulation

``The second and most shocking revelation of the leaked documents is how they show the scientists trying to manipulate data through their tortuous computer programmes, always to point in only the one desired direction – to lower past temperatures and to "adjust" recent temperatures upwards, in order to convey the impression of an accelerated warming. This comes up so often (not least in the documents relating to computer data in the Harry Read Me file) that it becomes the most disturbing single element of the entire story. This is what Mr McIntyre caught Dr Hansen doing with his GISS temperature record last year (after which Hansen was forced to revise his record), and two further shocking examples have now come to light from Australia and New Zealand.

``In each of these countries it has been possible for local scientists to compare the official temperature record with the original data on which it was supposedly based. In each case it is clear that the same trick has been played – to turn an essentially flat temperature chart into a graph which shows temperatures steadily rising. And in each case this manipulation was carried out under the influence of the CRU.

``What is tragically evident from the Harry Read Me file is the picture it gives of the CRU scientists hopelessly at sea with the complex computer programmes they had devised to contort their data in the approved direction, more than once expressing their own desperation at how difficult it was to get the desired results."

3. Censorship

``The third shocking revelation of these documents is the ruthless way in which these academics have been determined to silence any expert questioning of the findings they have arrived at by such dubious methods – not just by refusing to disclose their basic data but by discrediting and freezing out any scientific journal which dares to publish their critics' work. It seems they are prepared to stop at nothing to stifle scientific debate in this way, not least by ensuring that no dissenting research should find its way into the pages of IPCC reports."

Read the rest of the article here.

The diagram below, from Professor Richard Lindzen shows how science have been parlayed into politics...

Read the Professor Lindzen's Global Warming power point presentation here (Hat Tip Stephan Kinsella/Mises Blog)