How Reliable is CNBC’s Rankings of the Best Countries with Long Term Growth?

CNBC recently came out with a slide show depicting that troubles in the Eurozone and in the US has been prompting investors to search for new or alternative markets to invest in. And based on their selections mainly derived from demographics, natural resources or geography they came up with the following list:

10 Algeria

9. China

8. Egypt

7. Vietnam

6. Malaysia

5. Bangladesh

4 India

3 Peru

2 Ukraine

And the winner of CNBC’s best countries for long term growth…

…is the Philippines.

Given the endowment effect or home bias I should be screaming “yehey, buy buy buy the Philippines!”

Here is what CNBC has to say on the Philippines

1. Philippines

Projected annual growth: 7%

2010: $112 billion*

2050 projected GDP: $1.688 trillion

The Philippines has one of the fastest-growing populations in Asia. The population is set to jump by almost 70 percent over the next 40 years, and HSBC believes the combination of its powerful demographics and strong fundamentals will drive the economy to become the world’s 16th largest by 2050. That would mark a jump of 27 places from its current ranking of 43.

The country is one of the world’s largest exporters of labor, with over 9 million Filipinos working abroad, according to the latest data from the Commission of Filipinos Overseas. In 2010, almost $19 billion was sent back to the Philippines as remittances from Filipinos working abroad.

More recently, the country’s fast-developing business process outsourcing (BPO) industry has helped keep some of the workforce from leaving the country. Already 350,000 Filipinos are estimated to work in call centers, compared with 330,000 Indians, according to the Contact Center Association of the Philippines. The industry is projected to provide more than 1 million jobs within two years.

The economy’s focus on the services sector and domestic consumption, as well as a lower exposure to global financial markets, helped it to escape a recession following the 2008 global financial crisis.

It would seem as reductio ad absurdum to predict on long term growth based simply on variables of natural resources, demographics and or geography.

If these variables have been instrumental in generating prosperity, then the linkages should have been evident today.

Yet in looking at the world’s top 20 wealthiest nations based on per capita income from Wikipedia.org we see limited influences of abundant natural resources, young populations (demographics) or geography.

Why?

Countries with natural resources are usually afflicted by what is known as resource curse, which according to Wikipedia.org

refers to the paradox that countries and regions with an abundance of natural resources, specifically point-source non-renewable resources like minerals and fuels, tend to have less economic growth and worse development outcomes than countries with fewer natural resources. This is hypothesized to happen for many different reasons, including a decline in the competitiveness of other economic sectors (caused by appreciation of the real exchange rate as resource revenues enter an economy), volatility of revenues from the natural resource sector due to exposure to global commodity market swings, government mismanagement of resources, or weak, ineffectual, unstable or corrupt institutions (possibly due to the easily diverted actual or anticipated revenue stream from extractive activities).

In reality, the biggest reason why the resource curse occurs has been due to the cartelization of resource based industries by politicians and their oligarchic cronies. These have mostly led to a political economic regime that have been anchored on anti-competition regulations which inhibits external and domestic trade.

Also it would be pretty naïve to focus on geography when vastly improving modes of transportation have been reducing the attendant costs.

Transport, Insurance and freight costs as share of import cost have been on a secular decline

Mark Dean of the Bank’s International Economic Analysis Division and Maria Sebastia-Barriel of the Bank’s Structural Economic Analysis Division notes in the following study,

One of the most obvious costs to international trade is the cost of transporting goods from one country to another. Transport technologies are continually improving and transport services are also becoming cheaper through increased competition. The goods transported are also changing; some goods are now transported electronically, such as newspapers and magazines, due to improvements in communication technology and others are becoming lighter, for example mobile phones. All this should be reflected in lower transport costs.

In short, falling transaction costs diminishes the impact of geographic vantages.

Finally while I agree that “go forth and multiply” should generally be positive for the global economy; that link may not be obvious.

Most of the nations with the fastest population growth (table from Wikipedia) have hardly been the best economic growth performers. To the contrary most have been economic bottom dwellers.

The fundamental reason is that commercial activities have been severely restrained due to lack of property rights, deficiency in the rule of law, failure to protect contractual rights and limitations to voluntary productive exchanges. Also the political economic environment by many of these economies can be characterized as having been plagued by despotism and socialism. So the positive effects of population growth have been stunted, instead large populations morphs into a social burden.

Next, based on population growth, Indonesia has far outsprinted CNBC’s top 10 (chart from Google Public Data).

Indonesia has likewise been a resource rich country, and as our neighbor has been endowed with geographic advantages. So it would be a curiosity for me that Indonesia has been glossed over by CNBC.

And in terms of debt management, (chart from tradingeconomics.com) Indonesia has thus far bested the Philippines.

While this is both good news for the Philippines and Indonesia, the bottom line is that CNBC’s coverage hardly seems objective. There must be some undeclared biases in their methodology, such that even considering the few specious variables they can be amiss of other major potential contenders for investors, as Indonesia or Thailand.

And finally too much reliance on domestic consumption is unsustainable. This has been the Keynesian mantra embraced by mainstream media.

When excess consumption (government and private) in the Philippines will get manifested in the current account balance, which has still been positive today due to remittance and portfolio flows, the country’s declining debt to gdp trend will reverse and deteriorate.

Current negative real rates policies have already been adding to consumption activities via an artificially stimulated boom from domestic monetary policies by the BSP.

Yet the obverse side of a boom is a bust. And that’s hardly a long term positive growth proposition.

[As a caveat I don’t trust government statistics considering that almost two fifth of the Philippine economy is considered informal or underground or shadow. There are yet many factors not captured by statistical aggregates.]

Finally it should be a reminder that the key to prosperity is through attaining trade competitiveness (chart from the WEForum) via economic freedom or a deepening of the market economy or capitalism. The most competitive nations have almost reflected on the same standings as with the most prosperous nations.

To quote the great Ludwig von Mises

Capitalism is essentially a system of mass production for the satisfaction of the needs of the masses. It pours a horn of plenty upon the common man. It has raised the average standard of living to a height never dreamed of in earlier ages. It has made accessible to millions of people enjoyments which a few generations ago were only within the reach of a small elite.

Apparently, that’s not in the equation of CNBC. When reality is dealt with a blackout occurs.

How External Forces Influence Activities of the Phisix

There are secrets to our world that only practice can reveal.-Nassim Nicolas Taleb, Anti Fragility, Chapter 4 How (Not) To Be A Profit

We definitely live in interesting times.

It has long been my position that gold and global equity markets including the Philippine Phisix have been strongly correlated where the price actions of the gold market frequently leads equity markets.

Look at the beauty of such correlationship.

The above 2- year chart represents the price actions of the Phisix (PSEC red-black candlesticks) and gold prices in US dollar (black line). The relationship even looks like a 5-wave Elliott Wave count.

One would note that the oscillations may not be in exactitude, but clearly a symmetric cadence has been in motion.

The implication is: for as long as the trend of gold prices remains to the upside, the Phisix will likely follow unless domestic factors become powerful enough to impel a disconnect.

Prices of gold have served as reliable barometer so far.

Alternatively, this also means that accrued corporate earnings or micro economics or mainstream’s macro views can hardly explain this phenomenon.

Consumption demand, which has been the popular perspective, can hardly explain the broad based increases in commodity prices along with equity prices.

Of course correlation does not imply causation or that there presents no causal relationship between gold and the Phisix.

The point is: both gold and the Phisix account for as symptoms of an underlying pathology, which has largely been an unseen factor.

The Phisix-gold phenomenon has not been isolated.

This can also be observed elsewhere.

This relationship appears evident also in the global equity markets: commodities (represented by the CCI) have strongly been correlated with the S&P 500 and the Dow Jones World (DJW).

Financial Repression and Inflationism

Anyone can say what they want but it can’t be denied that the price actions in the commodity markets have been tightly connected with actions in the global equity markets.

Meanwhile the divergences in bond markets can be explained. Bond markets have essentially been rigged, have been heavily distorted and used as main instruments by governments to conduct financial repression[1]. They hardly account for as signs of deflation as deflation exponents argue.

Government interventions have been rampant almost everywhere: in the commodity markets[2] by the precipitate doubling of credit margins over a very short time frame, on the bond markets by banning short sales[3] and even seizing of private pensions such as in Argentina, Hungary, Ireland and demanding partial control of private savings in Bulgaria and Poland[4].

Even the construction of Consumer Price statistics [CPI] in the US has been severely contorted[5] which has largely been skewed towards housing.

The general incentive appears to be to keep CPI low so as to continually justify the policy of inflationism, which benefits the banking sector and the bureaucracy most.

Furthermore, the ongoing problems in the Eurozone (fiscal reforms), in China (inflation), in Japan (aftermath of the triple whammy calamity) and in the US (fiscal reforms) will likely prompt US authorities to avoid the risk of a bond market auction failure and similarly the potential risk posed by a further downslide in the housing industry which could destabilize the balance sheets of the highly protected banking industry[6]. This suggests of the likelihood of more Quantitative Easing (QE) programs to come.

Yet clamor for more QE from the mainstream has grown louder[7] which I think is part of the mind conditioning of the public meant for its acceptance.

Incidentally, the US Federal Reserve has been the largest buyer of US treasury [8]. This implies that without the QE, and with lower purchases from foreign entities, interest rates in the US will rise.

Hence, the overall direction of policies by global governments has been to expropriate private sector savings via printing money, keeping interest rates artificially down and outright confiscation (taxation or nationalization of pensions).

The leakages from these activities have percolated into commodity and stock markets.

Yet stock markets have also served as a target[9] of government policies considering their predominant guiding policy of the “wealth effect” doctrine.

So the traditional metrics to evaluate stock markets investments has been eclipsed by the direction of government policies as I have been predicting since 2008[10].

The Currency-Equity Link

If you should doubt such transmission mechanism, there are more proofs that the Phisix has been driven mainly by external forces.

It has also been a position of mine that the Philippine Peso and the Phisix have long had a symbiotic relationship.

Such actions are apparently being reinforced anew.

On the upper window, the recent feebleness in the Phisix (black candle stick) seems also reflected on the USD-Peso (green line).

In the past, a rising Peso would mirror a buoyant Phisix and vice versa. Recently both the Phisix and Peso seems to have hit the wall simultaneously (red trend lines) at the start of May (violet vertical line)!

And this has NOT been confined to a Peso-Phisix relationship. The same equity-currency collegial relationship pervades in Asia (see lower window).

The rally in the JP Morgan-Bloomberg Asian Dollar basket (ADXY- yellow line) and the MSCI Asia Pacific (MXAP:IND) has also been foiled at the start of May! So the rallies in both Asian currencies and Asian equity markets have been thwarted also on the first week of May.

Globalization Decoupling and Political Tea Leaves

The above only exhibits the depth of the interdependence of the global financial markets.

Those who extrapolate ‘decoupling’ on this highly globalized environment, will get the analysing and predicting the directions of the markets all wrong.

Globalization should not be seen only as a function of trade, labor, investment and capital flows but also on the transmission effects of global monetary policies (financial globalization) where the US as the world’s de facto currency reserve has the most influence.

Also the above price weaknesses share a common denominator: the early days of May 2011.

It is during this period where administrative interventions against the markets transpired, such as the war on commodity markets.

So whether it is the commodity markets or Asian currencies and Asian equities the coordinated reaction from interventions has been quite evident.

The chart also suggests that a seeming reprieve in the interventions has palpably led to a bounce.

Whether this rally is a function of a dead cat’s bounce (a natural counter reaction to a previously extended action) or simply a reversion to the major trend has yet to be established. Of course governments may use such occasion to further intrude on the marketplace that may add to market’s instability.

It’s not in my crystal ball to go for short term trends. Although in the understanding that politics drives the markets today, governments could use market volatility to justify prospective money printing programs. So markets could go either way from here.

Of course, it is true that seasonal factors (such as “Sell on May and Go Away”[11]) can affect the market’s activities. These signify as statistical metrics that are subject to margins of error.

In other words, there would likely be more significant variables that may influence the markets than plain seasonality. And as said above, a major force will be politics.

Bottom line:

The actions in the Phisix reflect on its tight connection with the global financial markets. And these activities have likewise echoed the actions of commodity markets.

These conjoint motions represent as symptoms or signs of major forces operating beyond the superficial understanding of the consensus on what propel the actions in the marketplace. Such force is the policy induced boom bust cycles.

Because of this tight correlations, any extrapolations or predictions of decoupling will likely be falsified when the markets undergoes another episode of spasms. Decoupling under today’s US Dollar based system will prove to be a charade.

For now, the stalled rally in the Phisix has coincided with the weakness of global equity markets and commodity prices. Such infirmities appear to have been orchestrated, perhaps specifically designed to achieve unannounced political goals.

Yet a rally in the commodity sphere, which should manifest mostly a decline of the US dollar, will translate to a rally in the Phisix and the Peso.

This rally could happen anytime.

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[1] See Financial Repression Drives The Bond Markets, May 23, 2011

[2] See War on Commodities: Intervention Phase Worsens and Spreads With More Credit Margin Hikes!, May 14, 2011

[3] See War on Speculators: Restricting Short Sales on Sovereign Debt and Equities, May 18, 2011

[4] nation.foxnews.com Watch Out! Feds Could Seize Your Private Retirement Savings, May 23, 2011

[5] See US CPI Inflation’s Smoke and Mirror Statistics, May 18, 2011

[6] See The US Dollar’s Dependence On Quantitative Easing, March 20, 2011

[7] See Mainstream Calls For More Quantitative Easing, May 24, 2011

[8] Wood, Christopher The new bond conundrum, Greed & Fear, CLSA May 6, 2011 scribd.com

[9] See The US Stock Markets As Target of US Federal Reserve Policies, May 12, 2011

[10] See Stock Market Investing: Will Reading Political Tea Leaves Be A Better Gauge?, November 30, 2008

[11] See Global Equity Markets: Sell in May and Go Away?, May 16, 2011