``The belief that a sound monetary system can once again be attained without making substantial changes in economic policy is a serious error. What is needed first and foremost is to renounce all inflationist fallacies. This renunciation cannot last, however, if it is not firmly grounded on a full and complete divorce of ideology from all imperialist, militarist, protectionist, statist, and socialist ideas.-Ludwig von Mises
The Philippine benchmark, the Phisix, remains overextended. (see figure 4) However, deep into major trends, periods of overextension happens, thus this shouldn’t be a surprise.
Figure 4 stockcharts.com: Phisix, Gold and Asian Markets On The Uptrend
And it appears that we could be, perhaps, in one of these unique periods.
I have been expecting the overheated ASEAN markets and the Philippine Phisix (see Relative Strength Index in top window) to take a breather. Apparently this hasn’t been so. My suspicion is that expectations of more monetary accommodation in developed economies may have prevented this from taking place.
Yet for some, this would seem as unsustainable, from which I agree, except that unsustainable can last several years before suffering from a major implosion or a regression to the mean.
The reason for such is that I understand global inflationism as giving rise to serial bubbles. And I don’t share the view that the world is hounded by lack of aggregate demand or liquidity traps or deflation in a world of central banking unless the later would see global monetary authorities submit to the market forces, a political dynamic of which has yielded no indications whatsoever.
And as the conditions of the Phisix (PSEC main window) and of the ASEAN bellwethers have shown, a financial asset boom signifies one of the symptoms of diffusing inflationism taking hold.
And it is also why chart reading cannot be consistently relied upon because they incorporate past data and performances which do not account for the next or prospective actions by the public and the officialdom, as well as their feedback mechanism, given the ever fluid conditions.
And as one would note, the outperformance of the Phisix shadows an equally vibrant Asian ex-Japan markets (P2DOW) and the gold market (GOLD), which means that NONE of the above has manifested the strains of what mainstream permabears calls as the “deflation menace” which is no more than a mainstream Keynesian bugbear that gives justification for authorities to engage in “inflationism”.
The Last Straw For Keynesians: Serial Bubbles
Of course, the prevailing dominance of the Keynesianism seems to be receiving a well deserved smackdown and a comeuppance in Europe as leaders there have opted to observe fiscal discipline[1] than wantonly engage in wasting taxpayer resources on non-market unproductive ‘pet’ projects of politicians in order spruce up the strawman of “aggregate demand” which for them translates to “employment”.
Contra Keynesians, needless consumption of resources on non-productive politically designated activities translates to a loss of capital, a reduction of productivity and subsequently lowered standards of living.
This may be just one of the evolving paradigm shifts that perhaps could serve as an epiphany over the limitations and the hazards of excessive government interventions.
And in contrast to permabears, the adaption of fiscal discipline is surely a path towards sound recovery and a vital source of optimism.
And as the US heads towards elections in the first week of the coming month, we may also see the same results.
Hence, the last straw for Keynesianism following the political retreat will likely be channeled towards the unelected bureaucrats, the central banks.
And for us, central banks are the clear maestros or engineers when fostering bubbles.
And bubble cycles are steeply sensitive to interest rates movements.
Emerging Markets And Fed Policy Rates
BCA Research has an interesting perspective on how emerging markets have reacted to Fed policies (figure 5).
Figure 5 US Global Funds[2]/BCA Research: Emerging Market Correlations
They posit that correlations with the US interest rates had been negative during the mid 90s and positive during the last crisis, where the BCA infers that a dismal global economic growth won’t likely buoy emerging market equities in spite of a Fed liquidity booster.
My comment is that the supposed divergences may not be all that persuasive.
One, the negative correlation in the 90s (left window) may be a function of lagged effects.
Half-way through the rising Fed rates has shown an equally strong emerging market performance which eventually peaked as the Fed rates continued to rise. Hence, the negative correlation may be skewed more towards the interpretation by the analyst more than evidence of strong correlation.
The second but most important factor is that in the 90s, bubbles were centered outside of the US particularly in Emerging Markets—the Tequila (Mexican) Crisis of 1994 and the Asian Financial Crisis of 1997. This implies that the transmission mechanism from Fed policies may have been eclipsed by unsustainable internal imbalances, seen in the said emerging markets, which imploded even as the US economy and her financial markets were left unscathed and continued to perform robustly.
It’s an entirely different story during the period of supposed positive correlation (right window), where the US had been the epicenter of the crisis which essentially rippled throughout the globe and thus the positive correlation.
In short, the major difference between the performances of the emerging markets and the US Fed policy rates, over the two time zones, has been source of the bubbles. Hence the economic growth story relative to Fed rates, for me, seems largely irrelevant.
Overall, interest rates will likely be the most critical factor in ascertaining the sustainability of financial asset inflation in emerging markets, ASEAN, the Philippines and elsewhere, as previously discussed[3].
For as long as the artificially suppressed rates stay low in real and nominal terms and remain unaffected by rising demand for credit or a surge in inflation or that the credit quality or credit ratings of crisis stricken highly levered developed nations remain beyond doubt, then these would be signs of the sweetspot of inflationism.
Interest rates will only start to impact the financial system and the markets once rising rates would render many highly levered unsound projects or speculative endeavors as unprofitable. We are nowhere near this point.
And even if there could be some interim reprieve in the markets, this means for now, party on!
[1] New York Times, Europe Seen Avoiding Keynes’s Cure for Recession, October 20, 2010, Wall Street Journal, Britain's 'Austerity' Lessons, October 22, 2010
[2] US Global Funds, Investor Alert October 22, 2010
[3] See Interest Rates As Key To Stock Market Trends, October 2010
No comments:
Post a Comment