Politics And Markets: Bangkok Burns Edition

How are financial markets and political turmoil correlated?

Not much if you ask me.

This would largely depend on the underlying issues involved. Financial markets appear to be more sensitive to financial issues such as capital controls or debt anxieties than simply compared to domestic political turmoil.

News headlines such as this, "Bangkok Burns Amid Army Crackdown", highlight the unfolding mayhem in Bangkok, Thailand.

Photo from Star-Telegram

The common impression built upon or associated with such chaos would translate to a collapse in the markets, going by media's logic.

But how true is this?

Thailand's SETI is still up year to date as shown in the above chart from stockcharts.com and seems insouciant to the ongoing violence.

And it would seem that Thai markets are even more correlated to the gyrations in the US (as shown by the SPX below). The right vertical line reflects on the latest correlation while the left vertical line marks the start of the year performance.

And it's not just in stocks, but likewise reflected on the Thai Baht (chart from yahoo). True enough there has been a little downswing in the Baht, but this occurred before the violence, and seems likely to reflect more on external factors than the present political predicament.

Nonetheless, the Baht appears to be advancing of late in spite of the Bangkok Burning edition.

Bottom line: Financial markets and political developments don't have strong correlations or the causal link is tenuous. In most cases, they are merely subject to the available bias fallacy by media, which is why the public should learn how to distinguish between real forces and mere rationalization.

The same holds true for the Philippines, which is why the local markets surged in spite of nonsensical chatters of election "failure" risk during the campaign period of the recently completed national elections.

Philippine Elections: So Where Is The Election Failure?

Since the start of the year, we’ve been repeatedly told by mainstream media that that domestic markets had been affected by jitters arising out of a 'general election failure'.

Yet, over the months, the markets steadily climbed and signalled the opposite to what was being reported.

And we argued in Why The Presidential Elections Will Have Little Impact On Philippine Markets and Philippine Markets And Elections: What People Do Against What People Say, there is simply little incentives for the outgoing administration to destablize elections given the balance of risk-reward tradeoffs.

And any aspiring political groups are also unlikely to desire a tumultuous outcome, except probably for those who are on the extreme ends and are not in active in the present political process. But the latter would have a different version of troublemaking than the peddled automation based failure.

In short, media and the politically obsessed crowd had been forcing a causal relationship even when there was little evidence for it, a behavioural fallacy known as the available bias.

Last week, this so called election jitters had even been more pronounced [see Has Election Jitters "Caused" Falling Philippine Peso and Stocks?]. Yet media and 'experts' ignored or downplayed the role of external evidences, even if domestic markets were indeed tracking external developments more than domestic politics.

With over 50% of votes tallied, it safe to ask, where is all the brouhaha over election jitters? Apparently only in the imaginative minds of the politically frenzied crowd.

Today, we will see the same biased reporting.

Following a massive rally in the Phisix 3.85% which likely reflects on the rally in Wall Street (3%+) and in Europe (+5%) last night, aside from a rebounding Peso, in response to the monster bailout of the Euro currency, news reports will focus on associating the current gains with domestic politics-a vote for the new administration!

Of course local markets will likely have a "presidential honeymoon cycle" as with the previous, but this will be more of a rationalization fueled by a global zero bound interest rate regime and worldwide inflationism.

Bottom line: a culture obsessed with politics is likely to misread and gloss over the genuine factors driving the markets or the economy.

Has Election Jitters "Caused" Falling Philippine Peso and Stocks?

Media says yes!

It's funny but elections have long been a known issue and that markets has continually trekked higher in spite of the so-called jitters.

Yet media ought to explain this....

As you can see, the Philippine Phisix, the S&P 500, (SPX) Asia's Dow Jones ex-Japan (DJP2), and the European index (Stox5E) have near simultaneously fallen.

And this has been equally reflected on Asian Currencies as shown by Bloomberg-JP Morgan Asian Currency Index

Perhaps a more fitting rephrase of media's reasoning should have been:

"Global markets, ex-US dollar currencies fall on Philippine election jitters!!"

@#$%!!!

Available Bias, US Consumer Industries and Homebuilders

The recent stock market actions in the US should serve as fundamental example of how the "available bias" plagues mainstream reporting.

The other day, as consumer confidence hit a 10-month low , the report apparently coincided with a fall in US stockmarkets. And media hastily promoted a causal effect: market actions had been driven by current news.

Chart from Northern Trust

Bespoke Invest, for the second day, has assiduously rebutted the issue and showed that the broadbased decline had consumer discretionary and consumer staples as the least affected sectors (see here)

In contrast, materials, finance and energy had been smacked the most.


Bespoke Invest extends the rejoinder by illustrating the outperformance of US retail stocks relative to the key benchmark the S&P 500 and called on today's advances as "new bull market high"

In addition Bespoke makes a dissection of the breadth and observes that consumer sectors have, not only outclassed the key index, but also all the other sectors.

They write, (bold highlights mine)

``Consumer Discretionary and Consumer Staples are currently trading the farthest above their 50-day moving averages of the ten sectors. The other two sectors currently above their 50-days are Industrials and Financials...We provide the year-to-date change, % from 50-DMA, dividend yield, P/E ratio, price to sales ratio, and price to book ratio for the various sectors. Across the board, we use red to green as the color code from lowest to highest, but obviously for ratios, the lower the better.

``While it used to have one of the highest yields, the Financial sector currently has the second lowest yield at 1.15%. It also has the highest P/E ratio at 66.44, but it has the lowest price to book at 1.14. Consumer Staples, Consumer Discretionary, and Telecom have the lowest price to sales ratios, while Technology has the highest. Technology also has the highest price to book."

Chart from Businessinsider

If the US consumer industry's outperformance is an indication of the upcoming real activities, even amidst a fall in commercial and industrial loans at commercial banks, this suggest to us that any lagged but positive response to the steep yield curve is likely to even bolster the recent retail activities [see previous discussion Changing Dynamics In Central Bank Management, Quasi Boom Policies]
Finally as we addressed earlier, homebuilder stocks seem to be laying foundations to another bubble cycle. Bloomberg's chart of the day notes that the industry group have also bested the market, according to Bloomberg,

``As the CHART OF THE DAY shows, the Standard & Poor’s 500 Homebuilding Index -- composed of D.R. Horton Inc., Lennar Corp. and Pulte Homes Inc. -- ended last week with a 21 percent gain for the year. The advance compares with a 0.5 percent loss for the S&P 500.

``Homebuilders were the year’s third-best performers among 134 industry groups in the S&P 500, according to data compiled by Bloomberg. The groups that did better each had one member: Eastman Kodak Co. for photo products and Harman International Industries Inc. for consumer electronics."

Well it would appear that market conditions have only been responding to "bubble policies" which is likely regenerate the same cyclical conditions: A boom today for a bust tomorrow.