Which Is the Black Swan for the Philippines: The Big One or War?

 

Never think that war, no matter how necessary, nor how justified, is not a crime—Ernest Hemingway 

In this issue: 

Which Is the Black Swan for the Philippines: The Big One or War?

Part 1. Thesis: Nature: The Big One

1A. The Wittgenstein Trap

1B. Between Tectonics and Politics

Part 2. Anti-Thesis: Human Action: Man-Made Disasters

2A. Brewing Crisis: Second ‘Ayungin’ Thomas Shoal Incident

2B. Chinese 36 Stratagems in Action

2C. Escalation Beyond the Shoals

2D. The Root of War: Human Action

2E. Thai-Cambodia Border Clash and Thai’s Domestic Policy Fissure

2F. Fatalities: Wars Eclipse Earthquakes

2G. Unknown Unknowns-Black Swan Event: The Final Trigger

Part 3. Synthesis: Nature’s Convulsions vs. Man-Made Catastrophes

3A. The Human Trigger

3B. The Shape of Future Wars and the Grey Swan

3C. War Economies and Systemic Fragility

3D. Conclusion: The Shape of the Next Black Swan

 

Which Is the Black Swan for the Philippines: The Big One or War? 

Nature versus human action—which would happen first, and which would be deadlier?

Part 1. Thesis: Nature: The Big One 

A string of significant earthquakes—magnitude 5 and above—has recently shaken the Philippines.

Figure 1 

From Cebu’s 6.9 (September 30) to Davao Oriental’s 7.4 (October 10), to Negros Occidental and Zambales’s 5.1 (October 11), to Surigao del Sur’s 6.0 (October 11), to Surigao del Norte’s 6.2 (October 17) and to Ilocos Norte’s 5.2 (October 17), the tremors have been relentless and have drawn public anxiety. Both Cebu and Davao Oriental continue to record over a thousand aftershocks. (Figure 1) 

Despite denying possible interconnections among these tremors, officials and media have begun to promote the likelihood of "The Big One" in the National Capital Region—a 7.2-magnitude quake expected to “bring catastrophic destruction” to Metro Manila. 

The Philippine Institute of Volcanology and Seismology (PHIVOLCS) bases its forecast or hazard assessments on the West Valley Fault’s recurrence interval of 400–600 years, suggesting that “its next movement may possibly happen earlier or later than 2058.”

A Japan International Cooperation Agency (JICA) study further estimates that The Big One could result in 33,500 fatalities and 113,600 injuries.

Adding to the anxiety is talk of a “Culebra Event,” coined by independent researcher Brent Dmitruk, describing a potential chain reaction of earthquakes triggered by tectonic stress transfer across fault systems—like a slithering snake (culebra in Spanish). Though unsupported by mainstream seismology, the idea captures public fear that defies conventional models and timelines.

The Philippines, of course, is no stranger to major quakes and has endured two major quakes in modern history:

The Moro Gulf Earthquake (August 17, 1976, magnitude 8.1) near Mindanao and Sulu caused 5,000–8,000 deaths, from both quake and tsunami.

The 1990 Luzon Earthquake (July 16,1990. magnitude 7.8) centered in Rizal, Nueva Ecija, killed 1,621 and injured 3,500, destroying buildings even in Metro Manila—though fatalities in the NCR were limited to three.

First, these events show that even the strongest recorded quakes—occurring decades ago and in poorer eras—produced casualties below 10,000.

Second, with today’s supposed technological advances, stricter building codes, and a “wealthier” economy, it is doubtful that "The Big One" would match JICA’s apocalyptic estimates—unless the quake’s magnitude or duration exceeds historical precedents.

Third, when PHIVOLCS says it may occur "earlier or later than 2058," it essentially admits ignorance or uncertainty, dressed up as science. The 400–600-year interval is a broad statistical range—based on paleoseismic trenching data—not a clock.  

If the Big One hits in 2058 or later, many of us won’t be around to validate the prophecy—unless futurist Ray Kurzweil’s “Singularity” delivers on its promise to merge machine intelligence and humanity in the quest for immortality.

Fourth, earthquake prediction remains closer to numerical choreography than precise science.

As Wikipedia notes: “After a critical review of the scientific literature, the International Commission on Earthquake Forecasting for Civil Protection (ICEF) concluded in 2011 that there was considerable room for methodological improvements. Many reported precursors are contradictory, lack measurable amplitude, or are unsuitable for rigorous statistical evaluation." 

Even behavioral studies of animals as predictors have failed to establish reliability—no constants, no reproducibility. 

As Wikipedia notes, many earthquake ‘predictions’ are remembered only when they appear to hit — a textbook case of selection bias. In reality, misses vanish quietly into obscurity, while lucky coincidences are framed as scientific foresight. 

To date, no model has achieved reproducible accuracy in predicting the exact timing, magnitude, or location of a major quake—anywhere in the world. 

1A. The Wittgenstein Trap 

Seen through Wittgenstein’s Ruler (as applied by Nassim Taleb): 

Unless you have confidence in the ruler’s reliability, if you use a ruler to measure a table, you may also be using the table to measure the ruler. 

Applied here, government agencies present statistical intervals as confidence. If a quake happens within the range, it validates neither the model nor the state—it only confirms that earthquakes happen eventually.

If it doesn’t, the model isn’t falsified—it’s simply "extended." 

Duh! 

That’s the Wittgenstein trap: the model (the ruler) is never truly tested by reality (the table). Every outcome is reinterpreted to preserve authority. 

The likelihood that earthquake models hit their prediction—timing, location, and magnitude—is effectively near zero. 

Their utility lies not in prophecy but in policy: infrastructure codes, disaster preparedness, funding and others. More importantly, the political need to manage fear. 

Keep this in mind, the "Big One" may eventually occur—but whether it happens as predicted is almost entirely coincidental. 

And when it does, its qualitative effects are likely to depart significantly from the scenarios sold to the public by official experts. 

1B. Between Tectonics and Politics

Figure 2

Earlier, we proposed in our October 10 post on X.com that these seismic episodes may be “coincidental geologically, yet symbolically it feels as though the ground beneath us—literally, institutionally, and metaphorically—is shifting.”  (Figure 2) 

That remark, written amid an unfolding corruption probe, captured a deeper truth: instability in governance mirrors instability in nature. Both release pressures accumulated over time—one through tectonic strain, the other through moral decay—manifesting as eroding trust, public fatigue, and cynicism toward those meant to uphold order. 

Thus, the “Big One” is not merely a geological prophecy but an allegory for a state under pressure, its faults widening both underground and within. Economic tectonics—liquidity cycles, capital migrations, and policy misalignments—converge with political fault lines, creating a landscape where what is called “resilience” may simply be the calm before the rupture. 

For while nature’s tremors follow blind physics, the greater danger lies in human volition—where pride, fear, and miscalculation can unleash catastrophes far deadlier than any fault line. 

The next rupture may not come from the earth, but from the choices of men. 

Part 2. Anti-Thesis: Human Action: Man-Made Disasters

Figure 3

2A. Brewing Crisis: Second ‘Ayungin’ Thomas Shoal Incident

While the heebie-jeebies over “The Big One” and other earthquakes often grip the public, a more insidious tremor unfolds daily in the South China Sea. Media reports chronicle near-constant confrontations between China’s military and Philippine forces: Chinese jets tailing Philippine Coast Guard aircraft over Bajo de Masinloc, warships aiming lasers at Filipino fishermen, and water cannons battering resupply missions to contested shoals. (Figure3) 

The Second ‘Ayungin’ Thomas Shoal incident on June 17, 2024 marked one of the most volatile flashpoints in recent years. 

During a resupply mission to the BRP Sierra Madre—a grounded WWII-era vessel serving as a Philippine outpost—China Coast Guard (CCG) personnel rammed, boarded, and wielded machetes and axes against Philippine Navy boats. The skirmish left several Filipino personnel injured, one severely. Some officials described it as a “near act of war.” 

Even prior to this, China’s repeated use of water cannons had already prompted warnings that a Filipino fatality could trigger the 1951 U.S.–Philippines Mutual Defense Treaty (MDT). 

Still, officials refrained from escalating the matter, citing the absence of firearms—an example of legal technicalities serving as political veneer. 

But let’s be candid: this "restraint" was not a purely local decision. 

The United States, already deeply entangled in the Russia–Ukraine war and the Israel–Palestine–Hezbollah–Iran conflict, has been supplying arms, intelligence, logistics, funding and etc., across multiple theaters, likely sought to avoid opening another front with China. With its strategic bandwidth stretched thin, Washington may have quietly signaled Manila to stand down, avoiding direct escalation with Beijing. 

2B. Chinese 36 Stratagems in Action 

China’s tactical behavior in the South China Sea mirrors or aligns with several of the Thirty Six Stratagems, a classical Chinese playbook for deception and maneuver: 

1. Beat the grass to startle the snake – China’s repeated use of water cannons, laser targeting, and close flybys—especially when Philippine vessels are accompanied by media or U.S. observers—serves as deliberate provocation to test: 

A) Philippine resolve and limits under Marcos Jr.’s more assertive maritime stance; 

B) U.S. response thresholds under the 1951 Mutual Defense Treaty—will Washington truly go to war for Manila or is this just posturing? 

C) Sphere of Influence: Test ASEAN’s cohesion, identifying weak links, wavering partners, and potential recruits for Chinese influence 

2. Sacrifice the plum tree to preserve the peach tree – Accept small losses to secure larger strategic interests. China may tolerate reputational costs (international condemnation, legal rebukes) to maintain de facto control of contested waters and normalize its presence. 

3 Make a sound in the east, then strike in the west – Create diversions to mask true objectives. While public attention centers on high-profile flashpoints like Second Thomas Shoal, China quietly fortifies other positions such as the Paracel, (Subi Reef) Spratly Islands and Luconia Shoals, expanding influence with minimal resistance U.S. Army Pacific. 

There are more, but we opted to limit it to these. 

2C. Escalation Beyond the Shoals 

Philippine leadership has also amplified its rhetoric on Taiwan, signaling a shift from territorial defense to strategic alignment with U.S. interests. Defense Secretary Gilberto Teodoro’s visit to Mavulis Island, the northernmost Philippine outpost near Taiwan, was interpreted by Beijing as a provocative move. 

The United States, for its part, has accelerated its military buildup in the Philippines—provoking sharp responses from Beijing. 

• MRC Typhon: Mid-Range missile platform capable of launching SM-6 and nuclear capable Tomahawk missiles 
• NMESIS: Anti-ship missile system
• MADIS: Air defense system designed to counter drones and aerial threats 

These deployments have drawn sharp rebukes from China, which views them as encirclement. 

2D. The Root of War: Human Action 

While wars may have complex causation, their ignition essentially boils down to human action—impulse, emotion, pride, ambition, ideology, faith, fear or the pursuit of power. 

Figure 4 

Whether it’s:

• Mythic provocation (Helen of Troy)
• Territorial hunger (Lebensraum)
• Political culture (Bushido, Spartan honor)
• Ideological clash (nationalism, communism, democracy)
• Faith and doctrine (religious wars)
• Oppression and independence (colonial revolts) 

…each war is a man-made disaster, often more devastating than nature’s fiercest convulsions. (Figure 4) 

Again, history’s wars are rarely accidents of circumstance; they are the culmination of deliberate human choices, ambitions, and fears. Each cause—territorial, ideological, or psychological—reflects a particular configuration of human action under pressure 

2E. Thai-Cambodia Border Clash and Thai’s Domestic Policy Fissure 

Take the recent case of the Thai–Cambodia border clashes, which erupted on July 24, 2025, and lasted five days. The conflict resulted in 38 confirmed deaths, over 300,000 civilians displaced, and dozens injured. A U.S.–China–ASEAN-brokered ceasefire was reached on July 28 in Putrajaya, Malaysia, though violations were reported within days.

While tensions trace back to colonial-era boundary ambiguities—notably the Franco-Siamese Treaties of 1904 and 1907—the immediate trigger was political destabilization in Thailand. A leaked phone call between Prime Minister Paetongtarn Shinawatra and Khleang Huot, Deputy Governor of Phnom Penh, exposed internal rifts between Thailand’s civilian leadership and its military establishment. The fallout led to Paetongtarn’s ouster, which reportedly emboldened the Thai military, escalating border hostilities and complicating diplomatic restraint. 

This episode exemplifies how domestic political fractures—especially civil-military dissonance—can act as a proximate cause of war, even when historical grievances simmer in the background. 

Although the engagement occurred without the direct involvement of superpowers, the casualties, displacement, and property damage were almost comparable to those from a major earthquake. 

2F. Fatalities: Wars Eclipse Earthquakes 

But this is a mere tremor compared to the tectonic toll of modern wars. In the Russia–Ukraine conflict and the Israel–Palestine–Hezbollah–Iran escalation, aggregate casualties have surged into the tens of thousands, with entire cities reduced to rubble and economies hollowed out. 

Zooming out, the 20th century offers even starker metrics:

• World War I: ~20 million deaths
• World War II: ~60–85 million deaths (approximately 500,000 to 1 million Filipinos perished)
• Korean War: ~3 million deaths
• Vietnam War: ~2–3 million deaths

 These are not just numbers.  Wars inflict far greater devastation on society—its people, its social fabric, capital, financial and economic wellbeing—than most natural disasters. 

2G. Unknown Unknowns-Black Swan Event: The Final Trigger 

Former U.S. Defense Secretary Donald Rumsfeld, defending the absence of evidence linking Iraq to weapons of mass destruction, famously invoked the concept of “unknown unknowns”—the things we don’t know we don’t know. 

In many ways, Black Swan events fall under this same category. They share three defining traits: they are unpredictable, highly improbable, and extremely consequential—whether catastrophic or transformative. 

Part 3. Synthesis: Nature’s Convulsions vs. Man-Made Catastrophes 

The fault lies not in our stars, but in ourselves—Shakespeare (Julius Caesar) 

Geological cycles and seismic displacements will inevitably occur—whether tomorrow, next year, or within our lifetime. But despite their scientific veneer, no current technology can predict their timing or magnitude with precision. And when framed within historical context, their feared impact may be less apocalyptic than media portrayals suggest. 

Still, situational awareness and preparedness should remain a universal goal—to prevent one from becoming a collateral of what Nature or Providence may unleash. 

3A. The Human Trigger 

By contrast, wars are man-made disasters—often triggered not by grand strategy, but by accidents, miscalculations, and misinterpretations, all fueled by human frailties. The daily confrontations in the South China Sea could easily escalate into a bilateral kinetic engagement, like the Thai–Cambodia or India–Pakistan border clashes.

Should escalation occur—and if the Philippines invokes the 1951 Mutual Defense Treaty with the United States—the world could awaken to the unthinkable: a third world war. This is not hyperbole—it’s a structurally plausible outcome.

And this could happen anytime. As long as belligerence dominates bilateral policy, the spark could ignite today, tomorrow, next week, or a year from now. The extent of destruction remains deeply unknown—dependent on the nature and scale of warfare employed.

3B. The Shape of Future Wars and the Grey Swan

Unlike World War II, which pursued territorial conquest, modern warfare is more strategic than expansive. In the Russia–Ukraine war, occupation has largely focused on Donetsk and Luhansk —ethnically Russian regions—with limited push toward Kyiv. In contrast, the Israel–Middle East conflict may reflect ambitions for a Greater Israel, with broader territorial implications.

Yet the Philippine public remains benumbed—desensitized by repetition and diversion, dulled by inertia. This jaded reaction blinds us to escalation, even when its architecture is already in place.

It’s not a Black Swan—it’s a Grey Swan: known, possible, but broadly discounted. 

3C. War Economies and Systemic Fragility 

Meanwhile, internal economic fragilities mirror these geopolitical tensions.

Figure 5 

The war economies of Thailand and the Philippines have been among the worst-performing Asian stock markets in 2025, down -8.97% and -6.73% year-to-date, respectively (as of October 17). Though internal fragility remains the primary concern, this also suggests that geopolitical tensions have contributed to the erosion of investor confidence. 

Despite global equities reaching record highs amid easy-money policies and the weak dollar, these two “war economies” remain laggards. 

If liquidity tightens globally, could leaders resort to military conflict—a survival mechanism cloaked in patriotism— as a means to divert public attention from political economic entropy? 

That’s our Black Swan. 

War is conscious cruelty compounded over time—the most preventable catastrophe, yet the one that most often eclipses nature’s fiercest convulsions.

3D. Conclusion: The Shape of the Next Black Swan 

In the end, both earthquakes and wars spring from ruptures—one from the shifting of tectonic plates, the other from the collision of human wills. The former is inevitable, a law of Nature; the latter is avoidable, yet repeatedly chosen. 

One humbles man before forces beyond comprehension; the other exposes the peril of his own hubris. Between Providence and pride lies the fragile equilibrium of civilization. Whether the next Black Swan rises from the earth’s crust or from the depths of human ambition, its impact will test not our technology, but our wisdom—our ability to foresee, restrain, and prepare before the unthinkable unfolds.

 

Ludwig von Mises: The Impossiblity of Economic Calculation Under Socialism

Excerpted from the great Austrian Economist Ludwig von Mises' magnum opus Human Action (source: Econolib) [bold added]

The paradox of "planning" is that it cannot plan, because of the absence of economic calculation. What is called a planned economy is no economy at all. It is just a system of groping about in the dark. There is no question of a rational choice of means for the best possible attainment of the ultimate ends sought. What is called conscious planning is precisely the elimination of conscious purposive action.

For more than a hundred years the substitution of socialist planning for private enterprise has been the main political issue. Thousands and thousands of books have been published for and against the communist plans. No other subject has been more eagerly discussed in private circles, in the press, in public gatherings, in the meetings of learned societies, in election campaigns, and in parliaments. Wars have been fought and rivers of blood have been shed for the cause of socialism. Yet in all these years the essential question has not been raised...

It is the two fundamental errors of mathematical economics that must be indicted.

The mathematical economists are almost exclusively intent upon the study of what they call economic equilibrium and the static state. Recourse to the imaginary construction of an evenly rotating economy is, as has been pointed out, an indispensable mental tool of economic reasoning. But it is a grave mistake to consider this auxiliary tool as anything else than an imaginary construction, and to overlook the fact that it has not only no counterpart in reality, but cannot even be thought through consistently to its ultimate logical consequences. The mathematical economist, blinded by the prepossession that economics must be constructed according to the pattern of Newtonian mechanics and is open to treatment by mathematical methods, misconstrues entirely the subject matter of his investigations. He no longer deals with human action but with a soulless mechanism mysteriously actuated by forces not open to further analysis. In the imaginary construction of the evenly rotating economy there is, of course, no room for the entrepreneurial function. Thus the mathematical economist eliminates the entrepreneur from his thought. He has no need for this mover and shaker whose never ceasing intervention prevents the imaginary system from reaching the state of perfect equilibrium and static conditions. He hates the entrepreneur as a disturbing element. The prices of the factors of production, as the mathematical economist sees it, are determined by the intersection of two curves, not by human action.

Moreover, in drawing his cherished curves of cost and price, the mathematical economist fails to see that the reduction of costs and prices to homogeneous magnitudes implies the use of a common medium of exchange. Thus he creates the illusion that calculation of costs and prices could be resorted to even in the absence of a common denominator of the exchange ratios of the factors of production.

The result is that from the writings of the mathematical economists the imaginary construction of a socialist commonwealth emerges as a realizable system of cooperation under the division of labor, as a full-fledged alternative to the economic system based on private control of the means of production. The director of the socialist community will be in a position to allocate the various factors of production in a rational way, i.e., on the ground of calculation. Men can have both socialist cooperation under the division of labor and rational employment of the factors of production. They are free to adopt socialism without abandoning economy in the choice of means. Socialism does not enjoin the renunciation of rationality in the employment of the factors of production. It is a variety of rational social action.

An apparent verification of these errors was seen in the experience of the socialist governments of Soviet Russia and Nazi Germany. People do not realize that these were not isolated socialist systems. They were operating in an environment in which the price system still worked. They could resort to economic calculation on the ground of the prices established abroad. Without the aid of these prices their actions would have been aimless and planless. Only because they were able to refer to these foreign prices were they able to calculate, to keep books, and to prepare their much talked about plans.

Quote of the Day: Differentiating Principle from Opinion

While it’s true that everyone perceives reality differently, reality could care less about our perceptions. Reality does not change to adapt to our viewpoints; reality is what is. Reality is fact. Reality is truth.

Reality, however, is not always a known, which is where perception of reality comes in. While reality is a fixed factor in the equation of life, perception of reality is a variable.

This is why it is so important to learn to differentiate between a principle and an opinion. The most significant aspect of a principle is that it can neither be created nor altered. Thus, a principle is the essence of reality. It is what it is, and it’s up to us to discover it.

The problem arises when people refuse to accept the reality that principles can only be discovered, and instead choose to believe they can create their own principles. Which means they believe they can create their own reality, a belief that can lead to disastrous consequences.

This excerpt is from self development author Robert Ringer at his website.

Bitcoin depends on human valuation and volition

At the Mises Blog Austrian economist Joseph Salerno brings about a very important insight on Bitcoin (bold mine)

Whether or not Bitcoin survives and whether gold returns to favor among investors and, eventually, to its traditional monetary role are, of course, purely empirical questions, which cannot be solved by theoretical arguments. At the moment both are valuable commodities and neither one can be considered as money.  Thus, tedious arguments on the blogosphere  which invoke Ludwig von Mises’s regression theorem, are completely irrelevant to the issue.  Both items are scarce commodities which are valued by consumers and command a price on the market.  As such, the regression theorem does not prevent bitcoin from being monetized or gold from being re-monetized in the event or anticipation of a fiat-money breakdown.  Rather, it is a matter of human valuations and volition which are not determined by economic law.  In this matter, our only guides are historical experience and what Mises called “thymological” insight into people’s likely choices  under varying circumstances.  Will the general public  trust and routinely accept a commodity embodied in lines of computer code or a tangible commodity that has served for millennia as the general medium of exchange?  Hmmm, I wonder.

Right. This is why I think debate on bitcoin is a waste of scarce time. What is needed is to simply observe Bitcoin’s progression via “matter of human valuations and volition”  in the face of the ‘resistance to change’ obstacles.

Many governments have thrown the kitchen sink on bitcoin, such as charging bitcoin operators with money laundering, many governments issuing warning on bitcoin usage, if we can’t beat them join them—by calling for more regulations and etc. But this should be an expected reaction since bitcoin poses a challenge to government’s monopoly control of money.

On the other hand, bitcoin’s function as a settlement medium appears to be rapidly growing. There are now more than 10,000 merchants spanning 164 countries accepting bitcoin for transactions. Some high profile examples: Online shopping Overstock.com now accepts bitcoin. Bitcoin have been accepted by some Las Vegas casinos. 

True while 10,000+ is a speck compared to millions of merchants in the global economy, again the question here is if “human valuation and volition” with regards to bitcoin usage will continue to spread. 

The ballooning merchant acceptance appears to be complimented by reports of flourishing bitcoin ATMs

Vancouver Canada opened the world’s first bitcoin ATM in October 2013. Toronto Canada has also opened an ATM this year. Helsinki Finland has the “first permanent Bitcoin ATM installation in Europe”

New York will open its first ATM soon. Bitcoin ATMs are slated to open in Hong Kong, Singapore and Australia also this year. 

And bitcoin ATM manufacturers have reportedly been rushing to take advantage of this growth momentum

In addition, there are 88 crytocurrencies in existence, 84 of which has market capitalizations. This means that bitcoin’s success has been drawing in many competitors. Such competition should extrapolate to more improvements on the quality of cryptocurrencies offered.

What the above dynamics suggest? For as long as the internet exists, and most importantly, for as long as people preferences will be expressed by actions in favor of cryptocurrenncies, then this means that cryptocurrencies, which represent as the evolving innovations from the deepening of the information age, are here to stay. 

[Disclosure: I don’t have any exposure onbitcoin or other cyrptocurrencies yet, but I am contemplating to experiment with this sometime ahead]

Video: Google Search: The Reunion (What GDP can't capture)

Hat tip Cafe's Hayek's Russ Roberts; Source Google India

Economic Forecasting: The Mainstream’s Horrible Track Record

Aside from the agency problem, here is another reason why economic and market predictions or forecasts by mainstream "experts" should be taken with a grain of salt.

From Wall Street Journal Economics Blog: (bold mine)

Last month, Singapore’s government announced the economy grew 3.8% on-year in the second quarter. But as late as June, economists polled by the city-state’s central bank were predicting growth of just 1.5%.

Economists got it wrong on exports too: They predicted a nearly flat print in the second quarter, when exports actually fell 5.0%.

The difference was even starker in the first quarter: Economists in March predicted exports would fall 0.5%, but in fact they shrank a whopping 12.5%.

The Monetary Authority of Singapore polls economists at banks and research firms every quarter on key local data such as gross domestic product, exports, currency, inflation and employment. The results are released at the start of every quarter, with the third-quarter survey landing Wednesday.

It turns out that the 20 or so economists who respond to the survey get it quite wrong, quite often.

Economic predictions are never easy. But they become even more complex in tiny Singapore, where trade is more than three times the size of GDP.

Why this is so? The great Austrian professor Ludwig von Mises explained (Human Action page 31): (bold mine)

The experience with which the sciences of human action have to deal is always an experience of complex phenomena. No laboratory experiments can be performed with regard to human action. We are never in a position to observe the change in one element only, all other conditions of the event remaining unchanged. Historical experience as an experience of complex phenomena does not provide us with facts in the sense in which the natural sciences employ this term to signify isolated events tested in experiments. The information conveyed by historical experience cannot be used as building material for the construction of theories and the prediction of future events. Every historical experience is open to various interpretations, and is in fact interpreted in different ways

Even non-Austrian analyst, statistician and author Nassim Nicolas Taleb calls such error Historical Determinism as I previously pointed out

Reading or interpreting past performance (statistics) into the future along with seeing the world in the lens of mathematical formalism (econometrics) are surefire ways to misinterpret reality. 

Quote of the Day: On the Denial of Economics: Reality is not Optiional

Economics has the same ontological status as physics --- reality is not optional --- but the "laws" of economics are derived following different epistemological procedures. This is really nothing more, or less, than what Aristotle taught about methods of analysis being chosen based on appropriateness. Economics is about human action in the face of scarcity. Human purposes and plans permeate the analysis from start to finish. When economics gets derailed --- and folks it often does due to factors such as philosophical fads and fashions, or political expediency in public policy debates --- usually the culprit is one of 3 things: (1) a denial of agent rationality, (2) a denial of scarcity, and (3) a denial of how the price system works to help us cope with scracity by aiding us in the negotion of the trade-offs we all must face. This denial can come in sophisticated form --- e.g., Keynes --- or it can come in an unsophisticated form --- e.g., man on the street. But make no mistake about it, the denial has the same impact on the "laws" of economics as the denial of the "laws" of physics would by a man about to jump off the top of building would on the inevitable impact. All his denials will not mean much when he hits the pavement.

This is from Professor Peter Boettke at the Coordination Problem Blog defending what real economics is all about.

How Financial Experts Bamboozle the Public

Money pros had been taken to the woodshed according to the Global Association of Risk Professionals. (hat tip EPJ) [bold mine]

Americans would like an apology from Wall Street for the financial crisis.

They probably aren't going to get it.

But how about giving the number crunchers and investment managers a "time out" to reflect a little on the era of financial alchemy and greed that did so much damage?

That's what was happening in Chicago this week, where about 2,000 of the financial industry's quantitative minds and investment professionals gathered for their annual CFA Institute conference. They got some verbal punishment from some of the industry's stalwarts, who were admonishing their chartered financial analyst peers to think rather than allow mindless financial models and dreams of success to drive them to endorse the kinds of aggressive investment decisions that can create riches for themselves -- and destroy wealth for others.

"If you are attracted to a job in finance because the pay is so generous, don't do it," said Charles Ellis, one of the elder statesmen of the profession. "That's a form of prostitution."

Rather, Ellis said, his profession needs to return to the days he knew in the 1960s, when the emphasis was on counseling investment clients and not on churning out esoteric products and pushing people to buy them blindly.

Today the emphasis too often is on "complexity rather than common sense," said James Montier, asset allocation strategist for investment manager GMO. "In finance, we love to complicate. We rely on complexity to bamboozle and confuse."

In the local arena, such conflict of interests has hardly been about “churning out esoteric products” but about the pervasive cheerleading of politically colored quack statistics into “pushing people to buy them blindly”. "Them" here is applied to conventional financial assets.

More on the use of aggregate model based analysis:

Too many in his profession, Montier said, are trying inappropriately to apply physics to investing, where it doesn't belong, and they are ignoring inconvenient truths. Complex mathematics is valued but not necessarily used honestly, he said.

"A physicist won't believe that a feather and brick will hit the ground at the same time, and they won't use models to game the system. But that's what finance does with models," Montier said. "They take them as though they are reality."

Montier, speaking to financial professionals who design, evaluate and sell investment products to individuals and institutions, warned that all professionals in finance need to be thinking more, rather than following the herd.

"Who could have argued that CDOs were less risky than Treasurys with a straight face?" he said. But that's what happened. "Part of the brain was switched off, and people took expert advice at face value.

True. Mathematical and statistical formalism serves as the major instrument used by “experts” to hoodwink the vulnerable public on so-called economic analysis. The public is usually awed or overwhelmed by facade of numerical equations and economic or accounting terminologies.

These experts forget that economics hasn’t been about physics but about the science of incentives, purposeful behavior or human action.

As the great dean of Austrian school of economics wrote, (italics original, bold mine)

Indeed, the very concept of "variable" used so frequently in econometrics is illegitimate, for physics is able to arrive at laws only by discovering constants. The concept of "variable," only makes sense if there are some things that are not variable, but constant. Yet in human action, free will precludes any quantitative constants (including constant units of measurement). All attempts to discover such constants (such as the strict quantity theory of money or the Keynesian "consumption function") were inherently doomed to failure.

Governments love Wall Street models too

Government regulators and the Federal Reserve are guilty, too, of blindly putting their confidence in flawed models, he said. And if his profession and the regulators continue to ignore the dangers of financial concoctions involving massive leverage and illiquid assets, financial companies again will create an explosive brew that will result in calls for another government bailout.

This means because authorities has embraced economic bubble policies as a global standard, which engenders boom bust cycles, we should expect more crisis ahead. Thus the prospective “calls for another government bailout.”

To add, in reality, the government’s love affair with models has been undergirded by an unseen motivation: the expansion of political power.

Every crisis bequeaths upon the governments far broader and extensive social control over the people via bailouts, inflation, more regulations higher taxes and etc...

This legacy quote from a politician, during the last crisis, adeptly captures its essence

You never want a serious crisis to go to waste..This crisis provides the opportunity for us to do things that you could not do before.

Bottom line: many financial experts seem to in bed with politicians to promote political agendas either deliberately or heedlessly. Thus, financial expert-client relations usually embodies the principal-agent problem.

Nassim Taleb would call such mainstream experts as having "no skin in the game", thus would continue to blather about nonsense while promoting fragility.

Finally one doesn't need to be a CFA to know this. As James Montier in the above article said it only takes "common sense" which experts try to suppresss with "complexity". 

I would add to common sense; critical thinking.

Booming Phisix-ASEAN Equities Amidst More Signs of Global Distribution

I talked about swelling signs of distribution before my dsl connection cut me off.

In spite of this week’s majestic breakaway run by the Phisix and a robust performance by ASEAN peers, there seems to be more evidence of global distribution in motion. Some would call this divergence or disconnect.

So far, ASEAN has been on the positive end and converging.

As of Friday’s close, the Philippine Phisix (Orange line) continues to provide leadership in the region up by .95% over the week or 19.69% nominal currency gains year-to-date.

Such remarkable advance accounts for an average monthly return of about 5.6%. At the current rate of gains, the Phisix 10,000 in 2013 is still very much in play. Of course that’s unless some exogenous event, such as the growing risks of a crisis in Japan, may prove to be an obstacle to the current manic phase.

Our regional counterparts have also been showing signs of buoyancy. Indonesia’s JCI (yellow) has been a distant second to the Phisix after this week’s 1.24% advance which accrues to a 15.79% return year-to-date. Thailand’s SET (red orange) has recaptured double digit gains up 1.19 for the week or 11.3% returns for 2013. Thailand’s SET, which earlier had been neck to neck with the Phisix, has been derailed by interventions from regulators who recently raised collateral requirements for margin trades. Malaysia’s KLCI (green) has officially popped to the positive side (charts from Bloomberg)

The Philippine Mania in Motion

In the Philippines, the manic phase seems in full motion.

The manic phase as aptly described by Harvard’s Carmen Reinhart and Kenneth Rogoff in chronicle of their 8 centuries of financial, banking and economic crises in This Time is Different[1]:

The essence of this-time-is-different syndrome is simple. It is rooted in the firmly held belief that financial crises are things that happen to other people in other countries at other times; crises do not happen to us here and now. We are doing things better, we are smarter, we have learned from our past mistakes. The old rules of valuation no longer apply. The current boom, unlike the many booms that preceded catastrophic collapses in the past (even in our country), is built on fundamentals, structural reforms, technological innovation, and good policy. Or so the story goes

A good example is the embarrassing gaffe by one of the leading broadsheets for publishing in the headlines a bogus or spoof pictorial of Time magazine featuring the Philippine President[2]. While the Philippine president did land in the Time’s list of 100 most influential people, he failed to grace the magazine’s cover. 

But the booboo shows exactly how media has functioned as mouthpieces for the government. 

More than that, mainstream media has been quick to hype on the supposed economic boom from alleged “good policies”.

Yet local media hardly covered World Bank’s latest implicit admission of emerging Asia’s bubble in progress, where the World Bank supposedly warned of “demand-boosting measures may now be counterproductive” (euphemism for asset bubbles) and that capital flows “may amplify credit and asset price risks”. Thus the World Bank prescribes that emerging Asia should put a break on easing policies[3].

In addition, local central bank chief also got accolades for taking the Philippine economy to the “stars”. 

The Wall Street Journal Blog reports[4]

Philippine’s central bank chief Amando Tetangco has taken to star gazing, of a kind, to guide the nation’s economy and so far he likes what he sees.

“The star of strong GDP growth and the star of low inflation,” Mr. Tetangco says in an upbeat interview during the Spring meetings of the International Monetary Fund. “This alignment of the stars is further strengthened by a healthy balance of payments surplus,” he said.

But it’s not all about the cosmic. The central bank boss also likes to draw on physics to explain how the quick growing South East Asian economy is faring between surging inward capital flows and risks posed by a sluggish global economy.

“I am not an astrologer but sometimes it is better to describe things like this,’ he says. Physics tell it best.

Amazing hubris.

Mr. Tetangco didn’t say it explicitly but his implication is that “healthy balance of payments surplus” serves as shield against a crisis. 

Mr. Tetangco does not distinguish between the various types of crises. While it is true that most crises has had the character of balance of payments deficits functioning as triggers to imbalances earlier accumulated that led to balance of payment or currency or exchange rate crises[5], there are other forms of crises.

They fall under the categories of debt crises, banking crises and serial defaults[6] (Reinhart, Rogoff 2011).

The above are examples of non-balance of payment crises. Particularly they are examples of two banking crises and a sovereign debt crisis.

Japan’s domestic asset bubbles[7] in the 1980s had been forged amidst current account surpluses. The 1990 bust led to a banking and economic crisis that still lingers 3 decades after…today.

UK’s secondary banking crisis of 1974-1975 also emanated from a prior property boom or the “last hurrah of the post war property boom” as noted by Wikipedia[8], which likewise has had a current account surplus going into the crisis.

Russia’s 1998 debt crisis[9] from unwieldy fiscal deficits that led to a massive government debt build-up was exacerbated by crashing commodity prices that led to a sovereign debt default. Going into the crisis, Russia posted current account surpluses from oil and commodity export receipts.

False assumptions and illusions brought about by a credit boom will eventually be unmasked. 

Such basking in narcissistic self-attribution glory reminds me of the Bank of Cyprus[10], one of the largest financial institutions of the recently stricken Cyprus.

In the mistaken perception that Cyprus successfully eluded the Euro crisis, and that they had become “immune” or has “decoupled” from the Eurozone, the Bank of Cyprus became a recipient of as many as 9 prestigious awards from February 2011 until September 2012[11]. As the Cyprus crisis emerged in March of 2013 or 5 months after the last award, depositors of the Bank of Cyprus may lose up to 60% of their savings[12] to bail-in the banks. Yes this is an example of a bizarre twist of fate.

I may add that for the mainstream, bubbles are after the fact knowledge.

As author Philip Coggan, and Economist contributor under the pen name of Buttonwood notes[13],

Ireland and Spain looked OK on government debt-to-GDP before the crisis but then they didn't.

And one of the haughtiest allusions has been to attribute policy success as “physics”. Such are patent symptoms of bubble mentality.

Positivist policies shaped by mathematical models will hardly extrapolate to “good policy”.

The presumption that natural science as equivalent to social science is a mistake. This has been based on faith or dogma and ego rather than reality. One cannot build on policies based on simplistic assumptions and mathematical aggregates when the fact is that the world is highly complex and where knowledge is distinct, diffused and fragmented. And because of such complexity, econometrics and statistical equations cannot model individual preferences, knowledge, emotions and value scales, since there is nothing constant in human action, especially with people’s interaction with each other or with the environment. 

Statistics are historical artifacts, relying on them means to wrongly assume the same circumstances will take hold in the future. Statistics and math alone cannot precisely foretell of the future. And policies based on statistics and math will be met with unintended consequences.

As the great Austrian economist Ludwig von Mises explained[14]

The natural sciences too deal with past events. Every experience is an experience of something passed away; there is no experience of future happenings. But the experience to which the natural sciences owe all their success is the experience of the experiment in which the individual elements of change can be observed in isolation. The facts amassed in this way can be used for induction, a peculiar procedure of inference which has given pragmatic evidence of its expediency, although its satisfactory epistemological characterization is still an unsolved problem.

The experience with which the sciences of human action have to deal is always an experience of complex phenomena. No laboratory experiments can be performed with regard to human action. We are never in a position to observe the change in one element only, all other conditions of the event remaining unchanged. Historical experience as an experience of complex phenomena does not provide us with facts in the sense in which the natural sciences employ this term to signify isolated events tested in experiments. The information conveyed by historical experience cannot be used as building material for the construction of theories and the prediction of future events. Every historical experience is open to various interpretations, and is in fact interpreted in different ways.

The postulates of positivism and kindred schools of metaphysics are therefore illusory. It is impossible to reform the sciences of human action according to the pattern of physics and the other natural sciences. There is no means to establish an a posteriori theory of human conduct and social events. History can neither prove nor disprove any general statement in the manner in which the natural sciences accept or reject a hypothesis on the ground of laboratory experiments. Neither experimental verification nor experimental falsification of a general proposition is possible in its field.

Growing Distribution or Divergences

Finally signs are pointing to a growing dynamic of divergence dynamic among global asset markets.

Among major equities, US and Japan continues to post gains even as much of the world appears to turning over. Of course this is with the exception of ASEAN. 

Despite the material year to date 9.1% gains by the S&P 500, internally the sectoral performance has diverged. Health Care, Consumer staples, utilities cyclicals and financials have boosted the S&P while materials, technology energy and industrials have weighed on the index. Perfchart from stockcharts.com

While I believe that much of the world will likely endure more pangs from growing signs of financial market weakness, it is unclear whether this will also impact the ASEAN markets whose mania phase has been running in full throttle.

This is of course unless there would be a major external financial smash up that could trigger a domino effect.

Nonetheless as market weaknesses becomes more pronounced, we should expect global authorities to jettison their “exit” meme that was really never meant to be and shift their tones to “dovish” or advocate on more inflationism. 

The recent quasi crash of gold-commodities which has been used by the mainstream as pretext to clamor for more central bank inflationism partly validates my earlier views[15].

And in contrast to the common reaction where crashes would lead to a loss of confidence and a ripple effect or a panic contagion, the quasi crash in paper gold at Wall Street, prompted for a near simultaneous frenzied or panic buying of gold in the physical markets[16] across the globe which also attained a milestone. For instance one day sales of US gold mint reached a landmark high[17]. 

In short, gold-commodity markets have also been diverging.

Yet this is hardly about “deflation” under the context of “aggregate demand”, and “liquidity traps” but about the dynamics of bubble cycles.

Navigating today’s treacherous market requires prudence, as incessant interventions has rendered markets highly susceptible to magnified volatility and whose state of fragility raises the risks of bubble busts, whose trigger may emanate from anywhere.

---

[1] Carmen M. Reinhart and Kenneth S. Rogoff This Time is Different p.15 Princeton Press 2009

[2] Rappler.com Inquirer: Fake Aquino Time cover ‘honest mistake’ but... April 20, 2013

[3] See World Bank: Developing Asia Should Put a Brake on Easing Policies April 16, 2013

[4] Wall Street Journal Blog Philippines Stars Line Up, Thailand Looks for a Lady’s Touch April 19, 2013

[5] Wikipedia.org Currency crisis

[6] Carmen M. Reinhart and Kenneth S. Rogoff From Financial Crash to Debt Crisis, Harvard University August 2011

[7] Wikipedia.org Japanese asset price bubble

[8] Wikipedia.org 1998 Russian financial crisis

[9] Wikipedia.org 1998 Russian financial crisis

[10] Wikipedia.org Bank of Cyprus

[11] See Example of the Mania Phase: Awards Received by the Bank of Cyprus March 27, 2013

[12] Bloomberg.com Bank of Cyprus Clients May Lose Up to 60% on Deposits April 2, 2013

[13] Philip Coggan Buttonwood Rotation schmotation April 18, 2013 Economist.com

[14] Ludwig von Mises 1. Praxeology and History Chapter II. The Epistemological Problems of the Sciences of Human Action Human Action Mises.org

[15] See I Told You So: Gold Slump Used as Justification for MORE QE April 17, 2013

[16] See Gold Price Crash Spurs Boom in Physical Gold Markets April 18 2013

[17] Frank Holmes Gold Buyers Get Physical As Coin and Jewelry Sales Surge US Global Investors April 19, 2013