MENA Uprisings: Iran Sends Flotilla To Bahrain

If there is one risk that seems to have been overlooked by the marketplace is this: a potential escalation of Middle East tensions.

The Reuters reports,

Shi'ite-ruled Iran sent a flotilla to Bahrain on Monday to show solidarity with mainly Shi'ite Muslim protesters, escalating tensions with the island kingdom that is home to the U.S. Navy's Fifth Fleet.

It was not clear when the convoy might reach Bahrain, which has a majority Shi'ite population but is ruled by a Sunni king.

Bahrain, which has cracked down on pro-democracy protesters in recent weeks, has criticised the decision to send the flotilla and accused non-Arab Iran of interfering its affairs.

Iran's English-language Press TV said 120 activists, including professors, students and clerics, were aboard the convoy, sent to condemn the killing of Bahraini protesters.

The MENA unrest has earlier spread to Bahrain from which Saudi Arabia earlier sent troops to help quash the mounting opposition.

Kuwait has likewise declared in the same article that

“Kuwait will not hesitate to defend the Kingdom of Bahrain against any danger that may threaten its security," the al-Watan daily quoted an unnamed senior Kuwaiti source as saying.”

Ruling autocracies has been linking arms in the face of growing dissent from her constituencies.

Moreover this isn’t about Christian-Muslim conflict but about Muslim inter-religious or sectarian schism. The point I would to make is for those who tunnel on the view that the world operates as religious black and white conflict, obviously this isn’t one of them.

In addition, the Bahrain episode is more of a consequence of foreign meddling on what is a local political disorder. And the meddling of Saudi Arabia has similarly triggered a counter response: Iran implicitly applies symbolical intervention by sending a flotilla.

What used to be a local problem has now gravitated to a regional predicament a risk I earlier pointed out.

We hope that this won’t turn into a full scale conflagration, because if it does, there will be much turmoil especially in the energy markets.

This is one development that requires vigil.

Yemeni President To Resign: Another Near Victory For ‘Kids With Stones And Facebook’

Another MENA dictator bites the dust: Yemeni President agrees to step down

From the Wall Street Journal

Yemen's president and the country's top general are hashing out a settlement in which both men would resign within days, people familiar with the situation said, raising crucial questions of who will end up leading a key, though embattled, U.S. counterterrorism ally.

The outlines of a peaceful transition, to a civilian-led transitional government, emerged amid rising tension over the standoff between Yemeni President Ali Abdullah Saleh and pro-democracy protesters backed by Gen. Ali Mohsen al-Ahmar. The general this week broke ranks and declared his support for protesters demanding that the president resign immediately.

Opposing tanks from units loyal to Mr. Saleh and to Gen. Ahmar have faced off in the streets of San'a all week and tens of thousands of antigovernment demonstrators vowed to continue their protest Friday in the capital's Change Square.

It’s almost a validation of what I earlier wrote about—rebutting critiques of MENA revolts spearheaded by “Kids with stones and Facebook”

Today’s defection of Yemen’s key army commanders partially rebuts the idea that incumbents “do not easily yield that power to kids with stones and Facebook”. Maybe not easily, but this only shows that “facebook and kids with stones” have the power to turn the army on their sides.

Don’t forget armies are composite of people---who can be swayed by influences (like networks-families, friends or culture-religion).

As a saying goes... It’s not over till the fat lady sings.

Like it or not, “Kids with stones and Facebook” will play a far crucial role in shaping the geopolitical context than most experts would expect.

As I would like to reiterate, politics is an ongoing process.

People participating in these social (MENA) revolutions may not understand liberty (private property, rule of law and voluntary exchange) enough, in as much as they would like their dictators out. As the 18th President of the US, Ulysses S. Grant, once said,

The right of revolution is an inherent one. When people are oppressed by their government, it is a natural right they enjoy to relieve themselves of the oppression, if they are strong enough, either by withdrawal from it, or by overthrowing it and substituting a government more acceptable.

But slowly and surely social media is helping them get there.

Saudi Arabia’s Unsustainable Welfare State

The Wall Street blog reports, (bold highlights mine)

Another reason to brace for higher oil prices in coming years: big oil exporters are increasingly dependent on the income.

Saudi Arabia, due to higher government spending this year, will need its oil to sell for $88 a barrel in 2011 for its government to break even–up from $68 last year, according to a new estimate from the Institute of International Finance, a global bankers’ trade group.

The kingdom, in response to the unrest spreading throughout the Middle East and North Africa, is boosting government spending to provide new social benefits for its people. The support for housing units, unemployment benefits and wage hikes for public workers (among a long list of measures) will contribute to a 31% increase in government spending in 2011 from a year earlier.

Aside from the prospects of reducing oil supply to allegedly generate more income (i.e. by manipulating markets), this exemplifies how the welfare state, which works for the benefit of a few, will NOT last.

Like substance abuse, bribing the citizenry would only grow overtime (from demographics and from the feedback loop of the deepening of the dependency culture--which translates to more demand for welfarism).

Importantly, this also shows how the welfare state contributes to inflation and to high oil prices, aside from showing more proof that the global oil markets are vastly manipulated and distorted from the ratchet effect (irreversible expansion) of government interventions.

Lastly like a house of cards, once oil prices collapse, Saudi’s political leadership will most likely suffer from a political backlash which may end their grip on power.

At the end of the day, Saudi’s welfare state could only buy the political leaders some time before the day of reckoning arrives. What is unsustainable won’t last.

Correlation Isn't Causation: Food Prices and Global Riots

The IMF says that the string of antigovernment protests worldwide are all about rising food prices.

The Wall Street Journal blog writes, (bold emphasis original)

100%: The increase in antigovernment protests associated with a 10% rise in global food prices

Despotic leaders, entrenched inequality and new forms of communication have all played their roles in the political turmoil now shaking the Middle East. But new research by economists at the International Monetary Fund points to another potential contributor: global food prices.

Looking at food prices and instances of political unrest from 1970 through 2007, the economists — Rabah Arezki and Markus Brueckner — find a significant relationship between the two in low-income countries, a group that includes Tunisia, Egypt, Sudan and Yemen. To be exact, a 10% increase in international food prices corresponds to an added 0.5 antigovernment protests over the following year in the low-income world — a twofold increase from the annual average.

Rising food prices represent a symptom and NOT the cause of these riots.

People aren’t too dumb to protest on food prices alone, they attribute events to politics (e.g. inequality and etc...) to markets (e.g. speculation, hoarding, et.al.) to economy (e.g. emerging market growth) or to other exogenous causes (climate change etc...).

While all of the above have some grain of truths in them, they aren’t reflective of the entire picture or the bigger force driving these.

In other words, rising food prices serves as the trigger to the unrest from long built in domestic imbalances.

But here is the bigger picture...

US Adjusted Monetary Base has been exploding!

Chart from St Louis Federal Reserve

US Federal Reserve balance sheet has also been ballooning!

Federal Reserve of Cleveland

Bank holdings of US government securities have also been exploding. US Banks have been speculating more than lending. (chart from St. Louis Federal Reserve)

Stock Market leverage has also been ramping up (chart from Pragmatic Capitalism)

Unless money printing has no impact at all, then all these won’t matter. But obviously, money isn’t neutral, and all these money printing have been absorbed somewhere in the financial markets or the real economy.

Surprisingly, the Bank of Japan (BoJ) recognizes this government induced phenomenon. They write,

Globally accommodative monetary conditions have become unprecedented. The relative size of global money stock (M1) measured against the real GDP has surpassed its historical trend (Chart 14). This sustained global excess liquidity not only increases physical demand for commodities thereby affecting fundamentals, but also amplifies speculative factors, both of which are contributing to the sharp rise in global commodity prices.

Incidentally they have been big practitioners of inflationism too. This seems to be a case "where right hand doesn't know what the left hand is doing".

And this only proves how the mainstream economic perspective has been utterly wrong.

In other words, monetary policies by the US, as the de facto foreign currency reserve of the world, have been filtering throughout the global financial system and to the global real economy.

And surging food prices has been aggravated by the shared central bank practice of inflationism and artificially suppressed interest rates by OTHER nations, most especially by the OECD economies.

And in terms of supply side, another key factor behind surging food prices has been due to the restricted international trade of agriculture. Agriculture has been the least globalized among other sectors.

In short, protectionism from the political toxin called “self-sufficiency” has been responsible for the aggregate imbalances of food economics globally.

Chart from Guinness Atkinson

Of course, it is equally nonsense to attribute rising inflation to China as attributed by some observers.

China isn’t the world’s foreign currency reserve. While China is an important driver in the global consumption equation, (in as much as the supply side) China hasn’t been inflating as much as the developed economies. In short, China has only served as an aggravating factor to the main dynamics behind the world’s food price triggered riots. I might add that China has also been plagued by her domestic bubble policies.

Only the politically (and or mathematical formalism) blinded people can’t see anything wrong done by the state. Their knee jerk response is to lay the blame on the doorsteps of either the marketplace or to other nations, for what actually is truly a failure in domestic policies.

To quote Forrest Gump: Stupid is as stupid does.

Gaddafi Financing Libya’s War With Gold

If there is one way to go around sanctions, then having a pile of gold could make the difference. Well, that’s how Libya’s Muammer Gaddafi has reportedly been able to finance his war.

From the Financial Times,

The international community has hit Muammer Gaddafi with a raft of sanctions and asset freezes aimed at cutting off his funding. But the embattled Libyan leader is sitting on a pot of gold.

The Libyan central bank – which is under Colonel Gaddafi’s control – holds 143.8 tonnes of gold, according to the latest data from the International Monetary Fund, although some suspect the true amount could be several tonnes higher.

Those reserves, among the top 25 in the world, are worth more than $6.5bn at current prices, enough to pay a small army of mercenaries for months or even years.

While many central banks hold their gold reserves in international vaults in London, New York or Switzerland, Libya’s bullion is in the country, said people familiar with the country’s activities in the gold market.

As I earlier pointed out, part of gold role’s in the Middle East crisis has been as “alternative ways to shelter assets”.

More from the same article,

The political turbulence in the Middle East – besides boosting the price of gold to a record $1,444 a troy ounce – has highlighted the property that has for centuries made gold so appealing to criminals, investors and dictators alike: it does not rely on a government for its value.

Following the revolution in Egypt, the country banned gold exports for four months in order to prevent officials of the former government from moving their wealth abroad.

At the same time, Iran has been quietly stocking up on gold in recent years, in an apparent attempt to shift away from the US dollar and thus protect its reserves from risk of seizure. Other significant buyers of gold include China, Russia and India.

Maverick governments are learning to see the role of Gold as an anti-establishment currency.

More signs of Gold gradually reacquiring its lost role as money.

Are Dictatorships Bullish For the Markets?

Dictatorships are bullish for the markets, David Kotok of Cumberland Advisers says so, (bold highlights mine)

In the reality check currently underway, the seats of power (Sultans-Kings-Sheiks-or their sons) do not easily yield that power to kids with stones and Facebook. The king must either be outgunned (Libya) or he wins and the kids are punished harshly. In Saudi Arabia, Bahrain and elsewhere in MENA we are witnessing an outcome that is a blend of policy discussed in two classics. For details, see Metternich and what is called “Realpolitik.” For profiles of the victors in MENA, visit Machiavelli’s “The Prince.” In MENA, bullets triumph over ballots.

Okay, freedom loses. Kids die. It is a sad day for those of us who wish it were otherwise.

But for markets, it becomes a bullish outcome. Markets like stability and predictability. Markets know that kings with armies are stable and reliable. The players in these markets would not like to be born to the common class in those countries. These players like their life in freedom.

First of all, it’s rather sad and unfortunate to hear the hue of schadenfreude undergird such seemingly ‘prejudiced’ statements. These are what give capitalism a bad reputation. [Actually what Mr. Kotok cheers for is a crony based capitalism-dancing with dictators]

Second, is Mr. Kotok suggesting that “kings with armies” represent as stable political economic arrangements? If so, then why the chain of revolts?

Below is an interactive graph from the Economist of some possible factors that may have influenced the MENA revolts

Where dictators corner the resources of a nation at the expense of the majority, does Mr. Kotok honestly expect their constituents to remain forever docilely repressed?

You guys are so fortunate NOT to be on their places!

Three, markets have not been as cooperative with the Cumberland team, since they declared that they went to raise cash holdings from the emergence of MENA’s political uncertainties.

Yet it’s more of Japan’s natural disaster issues that have rocked the boat more than the MENA issues.

Thus seeing the market’s uncooperativeness, the Cumberland shifts from bearish to fully invested.

Fourth, the issue of “Realpolitik” have not been resolved.

The Saudi-led intervention in Bahrain has not entirely quelled dissent.

Politics represents an ongoing process. Thus, whatever short-term gains achieved by the present coercive actions of the consortium of dictators may or may not last.

Today’s defection of Yemen’s key army commanders partially rebuts the idea that incumbents “do not easily yield that power to kids with stones and Facebook”. Maybe not easily, but this only shows that “facebook and kids with stones” have the power to turn the army on their sides.

Don’t forget armies are composite of people---who can be swayed by influences (like networks-families, friends or culture-religion).

As a saying goes... It’s not over till the fat lady sings.

Like it or not, “Kids with stones and Facebook” will play a far crucial role in shaping the geopolitical context than most experts would expect.

Fearing A Slap On The Face, UN Sanctions A No-Fly Zone

Faced with the prospects of a victorious comeback by Libya’s 42 year dictatorship under Muammar Gaddafi, the UN approves a No-Fly zone over Libya.

The Marketwatch reports,

The United Nations Security Council voted 10 to 0 supporting the use of "all necessary measures" including the use of a no-fly zone to protect civilians and rebel forces in Libya from forces loyal to Col. Moammar Gadhafi. Russia and China, which held veto powers, abstained from the vote, along with three other council members. The passing of the measure is expected to lead to U.N.-backed military strikes in Libya within hours, according to media reports.

UN’s action represents a response to a potential slap on the face if Gaddafi forces wins.

Writes Lew Rockwell's Eric Margolis,

In a huge embarrassment for President Barack Obama, who has been demanding Gadaffi resign, the gutsy new US national intelligence director, Gen. James Clapper, told Congress that Gadaffi’s forces were winning. Fortunately, US Defense Secretary Robert Gates put the brakes, at least for now, on Republican hawks and the-only-good-Arab-is-a-dead-Arab neocons who were urging the US impose a no-fly zone over Libya.

There will also be many red faces in Europe. Libya is a major oil supplier. If Gadaffi survives and reconsolidates his rule, Europe will have to continue buying oil from him. Germany’s Angela Merkel and her pal Sarko will look very foolish.

That means the leaders of France, Germany, and Britain, who have been calling for the overthrow of Gadaffi, may have to make nice to him again, and even, horror of horrors, go to Tripoli and be filmed holding hands with the smirking Libyan dictator, decked out in one of his Marx Brothers military outfits. Revenge, Libyan-style, will be oh so sweet.

To save face means to intervene militarily which is what the No-fly zone is all about. Libya’s civil war will now evolve into an international war.

So the UN’s foreign policy appears designed to boost the self esteem needs of political authorities by getting their soldier’s hands bloodied and also by shifting away of resources from productive activities. In short, the self interest of politicians matter more than the public.

Also, reputational needs of political heads translates to benefits for the military industrial complex. So if it isn’t the banking elites, it is the military industrial elites that mostly benefits from government interventionism. Of course the banking elite is also tied to the military industrial complex indirectly since the banking elites has been the chief financers of government expenditures.

Saudi Arabia Led GCC Intervention In Bahrain

As everyone seems fixated on Japan, which seems to have eclipsed most of the world’s problems, here is one important development: Arab dictators appear to have closed ranks.

The Bloomberg reports, (bold emphasis mine)

Saudi Arabian troops moved into Bahrain as part of a regional force from the Gulf Cooperation Council, the first cross-border intervention since a wave of popular uprisings swept through parts of the Arab world.

“This is war against the unarmed Bahraini people,” said Matar Ebrahim Ali Matar, a member of al-Wefaq, the largest Shiite opposition party.

Mainly Shiite protesters in Bahrain have been demonstrating since Feb. 14, demanding democracy through free elections from their Sunni monarch. Shiites comprise as much as 70 percent of the population. King Hamad bin Isa Al Khalifa has offered a national “dialogue” toward changes in response, which hasn’t quieted protesters. Clashes escalated on Sunday with more than 100 people injured.

The deployment signals that the Bahraini regime has lost confidence it can deal with the protests and underscores Saudi Arabian concerns about uprisings at home, according to Christopher Davidson, a scholar in Middle East politics at Durham University and author of “Power and Politics in the Gulf Monarchies,”

“It is in Saudi’s interest that nothing serious happens in Bahrain, because it would embolden similar protests in its eastern provinces,” Davidson said in a telephone interview late yesterday.

Why is this important?

We get some clues from the same Bloomberg article,

The protests in the tiny kingdom have fueled fears of a regional Shiite uprising supported by mainly Shiite Iran. Many Shiite Bahrainis retain cultural and family ties with Iran and with Shiites in eastern Saudi Arabia; Bahrain’s Sunni ruling family has close links with Saudi Arabia, which holds 20 percent of the world’s oil reserves.

The U.S. is urging Bahrain, home to the U.S. Navy’s Fifth Fleet, to allow nonviolent protests and encouraging Gulf nations to use restraint, White House spokesman Jay Carney told reporters at the White House.

If the revolutions were merely local then we would be dealing with residual common factor risks, or event risk that is limited to a specific nation.

However, when domestic events includes international political interventions, then the risk factor transforms into systematic or market risk.

This is more a problem, for me, than that of Japan’s risk of a full blown nuclear meltdown (which on my assumption would eventually be resolved as others before it).

The key difference between the event risks of Japan and Bahrain is one of technical (Japan’s nuclear power woes) relative to social (religion based geopolitics).

The GCC intervention into Bahrain could well play into rival Islam Shiite-Sunni sect belligerency, particularly Saudi versus Iran, and possibly dragging more participants. At worst, there could be a regional conflagration.

This is a very important variable that needs to be monitored because further deterioration can extrapolate to a shift in the tide of the underlying market trends.

Map of the Libyan War

A map of the ongoing Libyan War as presented by the Economist

Is the Enthusiasm for Democracy Sustainable?

Because of the ongoing revolutions in the MENA region, Pew Research attempts to distill on the sustainability of enthusiasm for democracy using past experiences.

In a recent study, using the East Europe’s experience, the Pew Research finds that enthusiasm for democracy has declined.

Pew Research’s James Bell writes,

These findings do not mean that East Europeans were inclined to abandon democracy. Publics across the region broadly endorsed the demise of communism. Rather these opinions point to the gap between what East Europeans hoped for and what they perceived in terms of political change. On one hand, East Europeans generally agreed that two decades of political and economic change had disproportionately benefited business owners and politicians, rather than ordinary people. On the other, many East Europeans felt democratization had yet to match expectations. In 2009, the median percentage in each country who said a fair judiciary, multiparty elections, uncensored media, freedom of religion, freedom of speech and civilian control of the military were very important significantly exceeded the median percentage who claimed these institutions described their country very well.

Reflecting on Mr. Bell’s statement, the issue isn’t about the loss of interest on democracy but rather the mismatch between people’s expectations on their definition or their concept of democracy and that of economic prosperity.

So when economic distribution has had “disproportionately benefited business owners and politicians” this only means that the political economic framework has segued from communism to one of crony capitalism based on a social democratic form of governance.

Furthermore, expectations for more freedom have not been met perhaps due to the same reasons.

This phenomenon seems to reflect on the Philippines too. After two People Power revolts, Filipinos have still been waiting for Godot.

Filipinos appear to be impassioned on democracy as demonstrated by the eagerness to vote. However eventually they get frustrated again. That’s because their expectations clashes with the reality: Filipinos largely see economic salvation from political distribution rather than from their own efforts.

We, Filipinos, seem to have little understanding that political distribution is a zero sum game (one gains the other losses, i.e. picking on Pedro’s pocket and giving to Mario), while economic distribution is a net value added.

Yet this doesn’t mean that any nation aspiring for democracy isn’t fit for it. It takes time for people to learn, understand and embrace the concept of economic freedom and civil liberties as this is a process of discovery.

And it all starts with the “right” education.

Will The US Fall For Osama Bin Laden’s Trap?

From Eric Margolis at the Lew Rockwell.com, (bold emphasis mine)

Bin Laden’s primary goal is overthrowing US-backed autocratic regimes across the Muslim world. Attacking western targets that supported them was only secondary.

Col. Gadaffi was not totally wrong when he blamed al-Qaida for Libya’s uprising. Bin Laden was not pulling the strings of Libya’s rebellion, but al-Qaida’s revolutionary philosophy and anti-western jihad certainly inspired many young people from Morocco to Bangladesh.

That’s Washington’s big problem. Invading Libya will intensify the fires burning in the Arab world and create yet another anti-western jihad.

This is exactly Osama bin Laden’s strategy: draw the bull in the china shop – US into many small wars in the Muslim world – and so bleed it dry. So far, the US has been cooperating with Osama’s master plan.

Video: Egypt's Wael Ghonim On The Egyptian People Power Revolt

Egypt's Wael Ghonim in a TED talk says Egypt's revolution is about People, Technology, Knowledge and Freedom. (Hat tip Mises Blog)

"The Power of the People Is Much Stronger than the People In Power"- Wael Ghonim

“I Told You So!” Moment: Being Right In Gold and Disproving False Causations

“The list of qualities [an investor should have] includes patience, self-reliance, common sense, a tolerance for pain, open-mindedness, detachment, persistence, humility, flexibility, a willingness to do independent research, an equal willingness to admit mistakes, and the ability to ignore general panic.” - Peter Lynch

Allow me for my “I TOLD YOU SO” moment!

It’s not easy writing about financial markets (or about political philosophies too). Some feedbacks occasionally do test one’s patience, especially if they are meant, not as a serious critique, but as one to nitpick. The latter is directed at testing one’s esteem rather than to test the validity or soundness of an idea.

Thus when my views are validated by the market, contra the quibblers, I think I deserve to vent...“I told you so!”

First “I Told You So!” Moment: Gold

There are two important milestones deserving of “I told you so!” this week.

First is gold.

Gold prices are now drifting at the near record nominal levels. Early this year, gold’s lackluster price performance has prompted some commentaries to call on an inflection point or a major reversal from which I argued against.

Here is what I wrote[1],

So I unlike those who see a surge in the “event risks” from the current string of upheavals in the Middle East as a reason to sell, I see gold rebounding from these uncertainties, fed by the inflationism in central banks and eventually a rally in most of the global equity markets, including the Phisix.

With a bounce in gold, a month after, I followed this up with[2],

Don’t look now, but gold is surging right back! (I have to wait for a successful test of 1,430 before I could blurt out ‘I told you so’)

If gold is surging right back, then it is likely that global equity markets will follow gold’s path.

Figure 1: I Told You So Moment No. 1: Record Gold prices (stockcharts.com)

My self-made conditions have been met. Gold has recently passed 1,430 and was last traded 1,427.9. Importantly, global equity markets appear to be in consonance, most of which appear as moving higher, if so indicated by the indices as the Dow Jones World (DJW), Dow Jones Asia ex-Japan (P2DOW) and Emerging Markets (EEM) in Figure 1.

This would appear similar to the 2008 post Lehman event where gold reversed to the upside a few months ahead of the global equity markets.

However, the conditions for my “I told you so!” moment for the Phisix, ASEAN and emerging market stocks has not been sufficiently met, as technical barriers have yet to be breached, thus would remain pending or unsettled for now.

Diminishing Returns of Information

Before I proceed to my second “I told you so!” moment which is about the unmasking of the false causation of “MENA political crisis + high oil prices = falling stock markets”, I must admit that while the attributed events, like the MENA crisis and lofty oil prices, may not posit as the main variables for today’s major market movements, they do account for some degree of influence or relevance.

Because the emergence of such unforeseen events are considered as uncertainty (immeasurable risk, and not possible to calculate[3]), the markets work to reappraise of ‘uncertainty’s’ influence or impact, which gradually digests on them. So the influence of uncertainty depends mostly on the scale and the time value of influence.

You can go back to the chart in figure 1 and see how markets did somewhat react adversely to the outbreak of the Arab revolution highlighted by the culmination of the Tunisian Jasmine revolution (downside green arrows) which swiftly spread to Egypt (2^nd to 3^rd week of January). This, I think represented as the initial reaction to the uncertainty posed by the Arab ‘People Power’ revolts.

Once the markets learned of and adjusted to such uncertainty, or to the new information, and subsequently established its cost-benefit expectations around it, uncertainty gets to be transformed into risks (measurable potential losses) via discounting. Discounting, thus, signifies as the diminishing returns of information or the marginal value theorem[4] applied to information.

So when the temporal effects of the perceived event risks have been discounted, market dynamics eventually gives way or returns to the fold of the major influences or drivers.

Second “I Told You So!” Moment: Popular False Causations

So the du jour explanations on much of today’s market action, especially for the local media and so called experts, has been the due to the causation “MENA political crisis + high oil prices = falling stock markets”.

Figure 2: “I Told You So” Moment 2: Say What? Oil and MENA Crisis Equals Falling Phisix? (stockcharts.com)

The beauty of last week’s action or the invalidation of a flawed popular theory comes with the remarkable divergence in the price actions of the global equities relative to oil and the MENA equities.

WTIC or West Texas Intermediate Crude[5] or a major benchmark representing US sweet crude oil, which is traded at the New York Mercantile exchange, closed at $104.65 over the week. Friday’s closing price accounts for over $13 a barrel from the start of the year or about $7 up from last week! (red circle)

Meanwhile, Europe’s contemporary oil bellwether, the Brent Crude[6] has even been higher, Brent Crude was last traded at $114.79 per barrel on Friday or about $10 premium to the WTIC!

Figure 3: WTI-Brent Spread At Record Variance (Bloomberg)

Brent crude mostly comes from the North Sea and is used mostly by European and Asian consumers whereas WTI originates and is used mostly in the US.

The WTI-Brent spread (figure 3) has risen to a record premium. This record spread could perhaps be due to possible variance in the relative production levels (relative depletion rate) or reportedly concerns over the the tanker shipment routes via the Suez canal[7], where 1m barrels a day pass through. But others argue that this is likely based on arbitrages[8]. So there seems to be no unison or consensus opinion on this.

It is not clear how the Middle East crisis plays into this WTI-Bremt spread anomaly. I would have to dig deeper.

Anyway, the Middle East crisis has likewise been reflected on the region’s stock markets as represented by T. Rowe Price Africa & Middle East Fund (TRAMX).

The TRAMX has currently been undergoing a dramatic liquidation or a selloff, as exhibited by the recent collapse of major MENA benchmarks.

While news say that retail and foreign investors have been mainly responsible for this, I argued otherwise[9]—entrenched (political economic) interests could be scrambling for the exit gates.

Fearing political retribution by sequestration or by a freeze on their assets, these politically connected elites (along with the political leadership) could be scurrying to convert and safekeep their wealth outside the region and or through alternative assets, that could hide their identities.

So given the above accounts, where the MENA political crisis and oil prices appear to be amplifying the so-called event risks, we should, according to the mainstream, expect the Philippine Phisix and other Emerging Market bourses, as well as developed markets to likewise feel the heat or pressure.

Ironically, we seem to be witnessing the opposite price actions.

The Phisix (PSEC) and ASEAN Equities (FSEAX) seem to be making a signifcant inroads to the upside, as shown by this week’s substantial gains in both price actions (Figure 2).

True, one week does not a bullmarket make. Or that these rallies could constitute as ‘dead cat’s bounce’, since they are yet far from establishing technical metrics to suggest of a convincing comeback (but this would mean even bigger rallies!).

Nevertheless, the important thing is that markets appears to be consistently validating on my outlook despite pressures for me to turn “short term”.

Divergent Signals Between Currencies and Equities

I’d like to add that relative to the Philippine assets, I have been making a point that the actions of the Philippine Peso and the Phisix have been diverging[10].

Falling local stocks and a strong Peso represent an incompatible relationship. That’s because given the relatively underdeveloped capital markets here, where alternative avenues to generate returns via the financial markets are deeply constrained, the traditionally route for the elite has been to export capital (a.k.a. capital flight) when endogenous market or economic conditions are weak.

Though this correlationship may not be perfect, as there accounts for some intermittent time lags, the Peso-Phisix serves as a reliable barometer for the direction of the movement of the local stock market.

So when you have a strong Peso and a weak Phisix, you can be sure that one of them is about to give way.

And by looking at the bigger picture, we see a similar correlationship between Asian currencies and Asian equity markets (figure 4).

Figure 4: Strong correlations between Asian Stocks and Asian Currencies

The Bloomberg-JP Morgan currency basket [ADXY:IND AP Dollar Index] (green line) can be seen simultaneously weakening along with the MSCI AC Asia Pacific Index [MXAP:IND MSCI AC ASIA PACIFIC] (yellow line) during key downturns over the past 3 years. The four red ellipses have exhibited the strength of such correlationship. Of course, such correlationship also works on the upside.

The important point is that when the Philippine Peso has been firming along with Asian currencies, and where East Asian equity markets as Japan have been on the upside (Asia Pacific markets as Australia and New Zealand are likewise on the upside), even when most are either consolidating or on the downside, then it is likely that ASEAN markets, including the Phisix, are not in a bear market, but rather in a hiatus, and will likely be bouncing back as they seem to be happening.

Even the local bond markets appear to be suggesting the same.

There is also the role of retail participants, whom we have been closely monitoring[11]. As previously stated, retail participants are mostly emotionally driven participants whom Wall Street refers to as the proverbial pigs who always become a fodder for the bulls and the bears. Excessive actions (buy or sell) by retail participants usually highlight the end of the ongoing trend—in this case the downside.

For all its worth, I am simply reiterating my points which I already stated but with the providence of being complimented by current market actions that appears to validate on my theories.

---

[1] See Gold Fundamentals Remain Positive, January 31, 2011

[2] See Resurgent Gold Equals Resurgent Emerging Market Bourses? February 20, 2011

[3] Wikipedia.org Knightian uncertainty

[4] Wikipedia.org Marginal value theorem

[5] Wikipedia.org, West Texas Intermediate

[6] Wikipedia.org, Brent Crude

[7] AMEINFO.com Trading opportunity WTI versus Brent, February 10, 2010

[8] Commodity online, Will WTI-Brent price difference stay? March 4, 2011

[9] See Middle East Stock Market Meltdown: Likely Driven By (Political Economic) Insider Selling March 3, 2010

[10] See Phisix: Panicking Retail Investors Equals Buying Opportunity, January, 31, 2011

[11] See Phisix: What Market Internals Are Saying, February 20, 2011

The Failure Of Centrally Planned Democracies And Of Foreign Aid Dictatorships

GMU Professor Chris Coyne over at the Coordination Problem blog has some valuable insights on the current spontaneous People Power revolutions at the Middle East.

He cites two important lessons: The failure of the foreign policy of imposing ideals (democracy) abroad, and in accessory to the first, the failure of foreign aid to promote democracies via dictatorships.

On imposing western ideals Prof Coyne writes,

what is happening in the Middle East is an indictment of U.S. 'nation building' and more specifically the idea that social change toward freedom must be initiated by outsiders. Consider that the U.S has now been in Afghanistan for nearly 10 years and have been unable to ‘win the hearts and minds’ of Afghan citizens. In Egypt it was a matter of weeks between the initial indigenous uprising and Mubarek’s resignation.

The spontaneous and unexpected events in Egypt, and the Middle East more broadly, highlight the flaws in the planning mentality that underpins most, if not all, U.S. foreign interventions. This view holds that (1) certain societies are unable to move towards freedom without outside assistance and (2) that the complex array of institutions that underpin societies are the result of some ‘grand plan’ which can be engineered by experts.

People’s actions have fundamentally been aimed at achieving the removal of unease. Thus, the political economic conditions have always been evolving as people yearn and strive to attain satisfaction or a better life.

And through trial and error, society has reflected on such perpetual discovery process as seen from the lens of the economy, and subsequently, politics.

And this is why the character of Arab revolutions has shifted from Nationalist to Islamist and now to People Power movements.

The quest for liberty may not be an immediate outcome of the recent spontaneous MENA upheavals, but from signs we see, we can be confident that the appreciation and adaption of the concept of freedom and liberty by Muslims have been gradually deepening.

As Michael Novak writes at the Wall Street Journal,

Yet it took the Jewish and Christian worlds centuries to begin cashing in their own longings for liberty. And so also it took the consciences of nonbelievers from the slave society of Aristotle and Plato until the Universal Declaration of Human Rights. The universal hunger for liberty is not satisfied in any one generation, or in all the generations put together. It is an unlimited desire. (bold highlights mine)

And such endogenous ‘universal’ freedom inspired revolutions has NOT been imposed. The failed foreign policies designed for this has essentially backfired.

And to repeat what Mr. Novak points out, the desire for freedom has also been a long painstaking process mostly accrued from generational experience. I might add that this process will likely become accelerated as the facilities that stimulates these interchanges of experience or ‘emprical’ knowledge via the web or internet will dramatically be improved and whose usage will become widespread.

In addition, the concept of propping up dictators in the name of democracy via foreign aid has also been exposed as a disastrous model.

Again Mr. Coyne, this is

an excellent opportunity to reconsider the longtime U.S. practice of giving foreign aid to the world’s worst dictators...

These are not the only cases of the U.S. providing assistance to the world’s worst governments. Every year Parade magazine compiles a list of the “World’s Worst Dictators.”...

This means that the source of the problem—the predatory state—is tasked with playing a central role in solving the problem of which its very existence is the cause. The result is the well-known pitfalls of aid such as increased corruption and issues of aid effectiveness.” (bold emphasis mine)

At the end day, freedom is a bottom up process which can only be experienced, shared, learned, and assimilated, and not imposed from a top down dynamics especially through the state, or at worst, by dictatorships. As people learn about freedom, vertical structures and power centers are bound to crumble.

MENA Revolts: Unfit For Democracy?

One of the most bigoted statements I’ve recently heard is that countries like the MENA are unfit or unprepared for democracy.

I’m glad to see New York Times’ Nicolas Kristof take up the cudgels against such arrogance.

Mr. Kristof writes,

“this line of thinking seems to me insulting to the unfree world. In Egypt and Bahrain in recent weeks, I’ve been humbled by the lionhearted men and women I’ve seen defying tear gas or bullets for freedom that we take for granted. How can we say that these people are unready for a democracy that they are prepared to die for?

“We Americans spout bromides about freedom. Democracy campaigners in the Middle East have been enduring unimaginable tortures as the price of their struggle — at the hands of dictators who are our allies — yet they persist.”

People who say this seem to think that the world owes them their privileges. They suffer from chronic delusions.

As Bill Bonner aptly writes,

World improvers are nice peo­ple. But they are ego­tis­ti­cal morons. They always want the best for humankind. How do they know what’s best for peo­ple on the other side of the planet? Well, they don’t. But they’re vain enough to assume that every­one wants to be like they are.

Exactly. World improvers are consumed by the conceit of the having to know better (when they don’t). And likewise believe that they hold the upper ground in the moral standings (again when they don’t) against the people of these nations.

They’re dead wrong.

As Mr. Kristof points out, people are actually risking life and limbs in pursuit of toppling the current political order to attain freedom.

Do these improvers honestly think that the lives of these revolutionaries are so cheap? Or that people revolting actually don’t know about what they’re doing? Or that these hapless people are better off living under tyrants?

Today’s MENA revolutionaries may not have a good grasp of what freedom really is, but this does not in anyway justify world improvers to make prejudicial claims about which nation deserves or don’t deserve democracy. “Judge not, that you be not judged.” says the Bible (Matthews 7:1)

We, in the Philippines, had our own experience of ousting a tyrant and an abusive leader. We just celebrated the 25^th anniversary last February 25^th.

Despite the less than idealistic outcome, as crony capitalism still plagues the country, chaos certainly has not been the outcome of the post-People power socio-political environment. Democracy, despite my protestations, has been a revered process here. The 2010 Presidential elections was marked by a high 75% voter turnout.

Also post-communist People Power revolutions in Romania, Georgia, Ukraine and others also did not turn these countries into failed states either.

And as human beings, we are no different from those in MENA despite cultural or religious variances—we all operate under the laws scarcity.

We have to be reminded that in contrast to the previous eons, today’s MENA revolutions have not been driven by ideology or by religion but about economics.

The outcome of these revolts may not end up entirely as a libertarian utopia, but this is just a step in the ongoing process towards decentralization.

I close anew with Nicolas Kristof, (bold highlights mine)

In the 21st century, there’s no realistic alternative to siding with people power. Prof. William Easterly of New York University proposes a standard of reciprocity: “I don’t support autocracy in your society if I don’t want it in my society.”

That should be our new starting point. I’m awed by the courage I see, and it’s condescending and foolish to suggest that people dying for democracy aren’t ready for it.

Indeed.

Confusing Freedom With Collectivism

Sometimes experts are at a seeming loss of what’s been happening in the MENA region.

PIMCO’s Mohamed El Erian at the Reuters writes,

Post-regime change countries, such as Egypt and Tunisia, are working hard to complete their revolutions and to ensure an orderly and complete transition to greater democracy and individual freedoms. Success lies in the following factors: defining a vision and associated action plan which command sufficient popular support; coordinating simultaneous progress on related economic, political and social issues; and implementing appropriate mid-course corrections as needed.

If “greater democracy and individual freedoms” means sovereignty of the individual over government then how does “defining a vision and associated action plan” happen?

Individual “plans” are much different than from those of the central planners, for the fundamental reason that the individual views the world differently and has priorities, values and preferences that are unique, thereby the individuals “plans” according to their perceived ‘unique’ interests. In short, one’s actions are one’s own.

However, since governments are composite of people, except that they are mandated to use the power coercion over the others, then “defining a vision and associated action plan” would be inconsistent with the individual sovereignty.

That’s because so-called “plans” spring from the perspective, values, preferences and priorities of the central planners and not from the collective individuals.

In essence, “greater democracy and individual freedoms” under the above context would represent a sham.

As Henry Louise Mencken once wrote, "For every problem there is one solution which is simple, neat, and wrong."

MENA’s Third Wave-Knowledge Revolts

The Heritage Foundation partly channels Alvin Toffler’s Third Wave and what I have called as the Hayekian knowledge revolution via the web/internet as previously discussed here.

Heritage’s Conn Carroll writes, (bold highlights mine)

The first wave of revolutions in the region came in the middle of the last century and was made up of nationalist revolts against European colonialism. The next wave, the Islamist revolt, came a generation later, upending corrupt monarchies and nationalist regimes set up after the colonial era. Each of these movements—nationalist and Islamist—pretended to be “pan” movements of some kind. But they never caught on because their universal claims were myths, undermined by tribal, religious, and nationalist divisions. The third wave we are witnessing today is completely different. Heritage Foundation Vice President and former Assistant Secretary of State Kim Holmes explains:

“Arab nationalism was largely an elite phenomenon that drove and exploited popular sentiments. Islamism is driven by clerics and political ideologues like the Muslim Brotherhood who likewise exploit peoples’ religious beliefs and social resentments. The current third wave of revolt is truly a bottom-up, people driven movement. It’s driven not by nationalism, Islamism or any other 20th Century “ism,” but by a 21st Century socially linked-up mass movement of people who are sick of corruption, the lack of representative government, and being poor. … Despite the unique national and tribal features of each movement, it is united by the same emotional revulsion to the ruin and corruption created by the first two waves of revolution in the Middle East. The people of Libya are no less disgusted with Qadhafi than the people of Iran are with Ahmadinejad. One may be largely Sunni Arabs and the other Shiite Persians, but both are utterly finished with the ideologies, pretentions, and results of the Middle East’s first two failed revolutions.”

The evolving political order in the Middle East can somewhat be viewed in the context of the developmental stages of the global economy.

The first wave’s “nationalist revolts against European colonialism” can be paralleled to the closure of agriculture based economy, where colonialism signified as the political economy of conquest and plunder.

The second wave’s “Islamist revolt” directed against the “monarchies and nationalist regimes” could be seen in lens of the industrial age, the age of centralization through mass production. Again these revolts perhaps reflected on the evolving desire to see a shift of political ‘centralized’ power from the failed nationalist model to an experiment with theocracies.

And the third wave’s “bottom-up, people driven movement” fundamentally an Étienne de La Boétie paradigm of grassroots based nonviolent revolution appears to represent a non-ideological backlash “sick of corruption, the lack of representative government, and being poor” against centralized institutions. And the internet has been a crucial force in providing the platform for information, inspiration and the spontaneous coordination and mobilization of these grassroots activities.

Of course one may argue that the old order (e.g. military) are the still dominant force and still would resist changes that has benefited them. While this is may be true, as all changes will be met by resistance, this ignores the point about the evolving character of how these revolutions have been taking place, which the Heritage have clearly explained.

As a caveat: since economic development varies from country to country and the timeline for these political transitions cannot be concretely established.

The Heritage Foundation raises the point that foreign policies applied by the US government have been outdated or obsolete.

I don’t think it is just the US government. I think this applies to all governments and to conventional or mainstream insights or analysis as many refuse to see how informational flows, mostly channelled through the social media, have significantly influenced the ongoing revolts against the old centralized political order.

The evolving economic order simply influences the political order. The point is that the current centralized institutions will undergo a flattening process or decentralization, which is what people power revolts have been about.

The presumption that people will simply revert to past models, simply ignores human action or the people’s capacity to LEARN and ADOPT to the changes in the environment and technology as manifested through evolving social interactions.