Confirmation of the Phisix Breakout!

The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function. — F. Scott Fitzgerald

The landmark breakout by the Philippine composite benchmark, the Phisix, has been confirmed!

It’s certainly not just that the local benchmark has treaded on fresh nominal record highs, importantly, we should expect momentum to continue if not accelerate.

Attempting to time the markets under these conditions will likely leave market participants with opportunity losses and remorse (regret theory), as broad market actions will likely be defined by sharp upside swings.

Again this phenomenon has not been isolated to the Phisix but can be seen as a regional dynamic.

While major ASEAN equity markets crawled away from the losses at the start of the year, the high octane rebound appears have been a recent phenomenon which only commenced last June.

Ironically, these has been happening on a post QE 2.0 environment (but with QE 3.0 officially on the table[1]), and despite various global market interventions, that initially had jolted global financial markets.

The milestone performance by the domestic bellwether [Phisix: PCOMP, red-orange line] seems coy compared to the breathtaking bullish renditions by Indonesia [JCI: orange line] and Thailand [SET: green line].[chart courtesy of Bloomberg]

Malaysia [KLCI: red line], whom earlier took a temporary lead has, over the interim, deviated from the group and appears to be weakening. This divergence could be a temporary phenomenon.

Nonetheless, all four ASEAN bellwethers have posted advances on a year-to-date basis. And notably, the gains by ASEAN ex-Malaysia appear to be progressing swiftly.

Breakout Confirms the Long Term Direction

The most important message from such this monumental breakout is the apparent continuing confirmation of my long held view of the evolving boom-bust cycle of the Phisix[2].

Patterns don’t play out because of fate or destiny, as some mechanical chartists seem to suggest, instead patterns play out because of real underlying forces that drive them. People’s choices and NOT patterns ultimately determine market actions or cycles.

We should never confuse patterns or historical experience with deterministic action in the way natural science behaves.

As the great Ludwig von Mises reminded us[3], (bold emphasis 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.

The Philippines experienced its first modern bubble cycle which progressed during 1985-2003, an 18 year cycle. This cycle surfaced after the Philippines had been liberated from a tyrannical rule which had suppressed the local market and the economy.

The first bubble cycle saw the Phisix advance from around 150 to around 3,100 for a whopping gain of 19x. The advance had not been linear, though. Two bear markets interspersed the advance phase. These bear markets (orange and green ellipses) were both triggered by failed coup d'états.

Yet the advances coincided with then President Cory Aquino’s administration’s US $12 billion worth of bailouts of several politically connected banks that caused the old central bank to fold from the strain[4].

A topping process developed in 1994-1997, as Japan’s busted bubble redirected a gush of Japanese capital into ASEAN economies[5]. The regional or ASEAN inflation boom eventually unraveled and became known as the Asian Crisis[6].

The ensuing 6 year bear market accounted for as the market clearing process for the region and for the Philippines, part of which had been aggravated by a global recession[7] triggered by the US dot.com bubble bust[8].

Today, the Phisix has been playing out a seminal cycle.

The 2007-2008 bear market in the Phisix had been due to exogenous factors—a contagion from the US mortgage crisis. Yet the latest bear market resembles the earlier or first coup bear market of 1987 (orange ellipse).

This week’s breakout only confirms my long time claim that the recent bear market served as normative countercyclical phase representative of any major trends.

And that’s why I’ve been repeatedly saying that the Phisix will, in the fullness of time, reach 10,000.

It’s a long term trend that seems underway even for our neighbors.

With the conspicuous breakout for the Indonesia, Malaysia and the Philippines (as shown by the charts from chartrus.com), only Thailand, the hub of the Asian Crisis, has yet to reach all time highs.

My crystal ball does not have the surreal or metaphysical sophistication that would allow me to predict the exactitudes, or simply stated, “I can’t say when”. I am no Madame Auring.

All I know is that for as long as the primary forces which drives the Phisix or ASEAN markets—particularly the internal or domestic monetary policies and transmission mechanism from external monetary policies—both of which signify as bubble policies, globalization (which implies further development of the capital markets of ASEAN or of most of Asia) and the global wealth transfer (West-East) or convergence dynamics—remains intact, this advance phase should continue.

In my view, it would take an endogenous or a regional bust similar to 1997, or a reversal of one of these primary factors—through the materialization any of these ‘fat tail’ events: outbreak of global protectionism or a US dollar collapse that risks global hyperinflation or a war that involves the region or a deflationary banking collapse where central banks would not intervene or the adaption of a gold standard—that risks terminating this inflationary boom cycle.

In short, patterns are hardly ever conclusive or that they don’t play out because they have or need to. Since market actions are not historically determined, the realization of patterns would be conditional to the material similarities in the feedback mechanisms or stimulus response dynamics which operated then and which operates today.

If there is a single major nexus between then and today that could influence the fulfillment of said patterns, it is the path dependent nature of governments to inflate the system designed to safeguard the banking system and to preserve the cartelized tripartite patron-client relationship of the welfare state, banking political class and central bankers. The consequences of their actions have perennially led to business (bubble) cycles.

As to whether there will be another countercyclical trend [another provisional bear market] or that the Phisix might advance unobstructed is beyond my ken. Albeit if there will be a clear and present danger that risks another major crisis, I think this could emanate from China[9], instead of the the Eurozone or the US in contrast to mainstream’s expectation.

So far while there have been signs of strains[10] in China, they have not reached a point where I would need to increase demand for cash balances for myself and for my clients.

As far as the current signals from which price trends seem to have been telling us, the upside leg of this advance phase may not only continue, but would likely strengthen.

Breakout Confirmed by the Peso and Market Internals

The Philippine Peso has conjointly broken out of their resistance levels along with Phisix. I told you so.

The tandem’s working relationship has been pretty much solid and dependable. The correlation may not be perfect since the Peso’s action has been distorted by the sporadic interventions by the Bangko Sentral ng Pilipinas (BSP) nonetheless the causation has been strong. Both have been reacting to the relative demand for the Peso assets. The Peso has been driven more by the state of capital flux[11].

Also the Peso can be seen as pursuing less inflationary policies than the US dollar, but a lot more inflationary than the Swiss franc[12].

The simultaneous breakouts can be viewed positively.

Yet the pendulum of the market internals has swung decidedly in favor of the bulls.

This historic breakout has been backed by a hefty surge in volume (weekly volume; left window) which translates to more participation by the public and the pronounced aggressiveness by the buyers.

Foreign inflows, for the week, remained substantial but constituted only about 35% of total trades. This implies positive sentiment for both local and foreign participants.

Based on the average daily traded issues (computed on a weekly basis), the public’s trading interest reached nearly 80% of the 244 issues listed. This means that third tier formerly illiquid and dormant securities have been getting some attention and liquidity. Such spillover dynamics signals broad market bullishness.

It is rare to ever see such strongly linked or convergence of signals as this.

Except for the holding sector, every sector in the Philippine Stock Exchange posted gains.

This time the financial and the property sector tailed the overheated Mining sector both of which has contributed substantially to the advances of the Phisix.

Yet given the sharp pullback by the mining sector over the past two sessions (about 6% from the 2-day high), despite the weekly reported gains, the overstretched mining sector could enter a temporary corrective-consolidation phase.

The mining sector has been up by a remarkable 15 of the last 17 weeks. This week’s advances marked the 5^th consecutive week which has elevated the sizzling hot year-to-date returns to an eye-popping 61.45% as of Friday’s close.

While the strong breakout and the bullish tailwind could mean that the Phisix could rise further, we can’t discount profit taking sessions.

And part of this phenomenon could highlight a rotation away from the mining sector and into the other laggards, perhaps to the finance[13] and the property[14] sector as the next major beneficiaries of the percolating inflation driven boom as previously discussed.

A Journey of a Thousand Miles by Single Steps

Greece received second round bailout package 159 billion euros ($229 billion) which has been larger “shock and awe” than expected by the public.

As the Danske Bank reports[15], (bold emphasis mine)

In particular, the elements of the second rescue package for Greece: EUR109bn in official funds, a EUR12.6bn debt buy-back programme, a lowering of interest rates to 3.5%, a lengthening of the maturity on future loans to Greece to a minimum of 15 years and up to 30 years with a 10 year grace period, as well as a lengthening of the maturity on existing loans.

Burden sharing with the IMF will proceed in line with standard practice (1/3 from the IMF).

The increased flexibility of the EFSF could result in more active intervention in the secondary market. The EFSF now takes on this role, which was previously played by the ECB, but will still be supported by ECB analysis.

Such announcement appears to have lifted the global equity market’s sentiment. That’s because we have another QE in place, but this time based on the Eurozone’s rescue, which has been hardly about Greece, but of the Euro (and US) banking system.

And if global equity markets continue to recover from the recent PIIGS crisis shakeout, where the direction of global equity markets may converge, then this should further intensify the bullish proclivities at the Philippine Stock Exchange or ASEAN bourses as foreign capital seek for higher returns or as safehaven on assets of currencies that have been less tainted by inflationists policies.

Under current circumstances it would be best to use pullbacks as buying windows and to refrain from “timing the markets”.

The gist of any relative outperformance portfolio gains or Alpha[16]--return in excess of the compensation for the risk borne—frequently comes from the magnitude of returns[17] and not from frequency of marginal returns which contemporary sell side analysts design their literatures for their clients or how we are traditionally taught even by academia. (I had to challenge my son’s professor on this)

Yet before we think of the Phisix at 10,000, we will need to see the local bellwether transcend the psychological threshold at 5,000, perhaps by the end of the year.

This journey of a thousand steps, to paraphrase Confucius, will be attained through a series of single steps.

Again, profit from political folly.

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[1] See Ben Bernanke on QE 3.0: Not Now, But An Open Option, July 15, 2011

[2] See The Phisix And The Boom Bust Cycle, January 10, 2011

[3] Mises, Ludwig von Praxeology and History Chapter II. The Epistemological Problems of the Sciences of Human Action Chapter 2, Section 1 Human Action, Mises.org

[4] See Philippine Banking System: “Most Heavily Fortified Bastion of Privilege and Profit”, June 20, 2011

[5] See Capital Flows, Financial Liberalization and Bubble Cycles, July 22, 2011

[6] Wikipedia.org 1997 Asian financial crisis

[7] Wikipedia.org Early 2000s recession

[8] Wikipedia.org Dot-com bubble

[9]See Mark Twain and China’s Yuan, June 25, 2011

[10] See China’s Bubble Cycle: Shadow Financing at $1.7 Trillion June 28, 2011

[11] See I Told You So Moment: The Phisix At Milestone Highs, July 17, 2011

[12] See Is the Swiss Franc Better than Gold?, July 21, 2011

[13] See A Bullish Financial Sector Equals A Bullish Phisix? May 22, 2011

[14] See Expect a Rebound from the Lagging Philippine Property Sector, July 17, 2011

[15] Danske Bank EU summit delivers bold measures, July 22, 2011

[16] Wikipedia Alpha (investment)

[17] See Investing Guru Joel Greenblatt: Focus on the Long Term, July 9, 2011

Philippine Mining Index Nearly at 20,000, Fulfilling My Predictions

Bear and endure: This sorrow will one day prove to be for your good. -Ovid

The Philippine Mining index soared to a fresh record high as major mining issues have been on a rampage.

Over the past years, many have questioned my premises and have impatiently chastised me for the underperformance of my pet sector. For me, these people wanted excitement and satisfaction of the ego, more than they desired profits.

And I have always used Ovid’s quote to justify my calls:

Everything comes gradually and at its appointed hour.

Here is what I wrote in November 2009[1],

From this juncture, we believe that the mining index next goal would conservatively be at least 20,000.

With the Philippine mining index at 19,975 or 25 points away, it would appear that NOW is the appointed hour!

It’s not only that the 20,000 level that is in near fulfilment, but most importantly would be how these series of events are being realized.

Again me in 2009, (bold highlights original)

Actions among the mining components appear to be rotational- a classic symptom of bullmarket driven by inflation. This implies that the next major moves could likely come from those that have been in a reprieve.

Market trends are social trends. As mentioned above, the speculative label on the mining industry is a symptom of the lack of social acceptance or persistent aversion emanating from over two decades of depression. Essentially such resistance is psychologically bullish. That’s because despite present levels, only a handful have been invested. In social terms, bandwagon effect occurs when trends are reinforced by confirmation of expectations. In other words, long term trends draws in more converts.

First, today’s fiercely rallying mining issues have been broadening.

The first time the local mining index surpassed the previous record high was due to the blitzkrieg of Philex Mining. Today’s juggernaut has included many other issues as Lepanto [PSE:LC], Semirara [PSE:SCC], Atlas Consolidated [PSE:AT], PetroEnergy [PSE: PERC] and Manila Mining [PSE: MA].

Second, the broad based rally has been winning many converts. Even my mentor who has been a staunch mining critic now trades the sector.

In terms of Peso value traded, the mining sector accounts for 18% of this week’s trade which would have been larger (about 20%) if special block sales is excluded. To consider, the Philippine Stock Exchange has 6 sectors which means the share of the others have been captured by the mining sector.

In addition, the mining sector grabbed the top spot in terms of peso value, in two of the four trading days this week.

These are evidences which continues to manifest how investing in mines and resource sectors have transitioned from the fringes and into the mainstream.

The Rotation to Atlas-APO

The recent actions of the mining sector has shifted to Atlas Consolidated [PSE: AT] and the Forbes 28^th richest[2] Philippine tycoon Alfredo Ramos’ investment vehicle, Anglo-Phil Holdings [PSE: APO]

Many have attributed APO’s eye-popping 66% surge this week to the developments of the Atlas Consolidated, from which APO has an 11.67% stake in[3].

Atlas Consolidated, which gained 19% over the week, has reportedly offered to buy her Singaporean partners in a $368 million deal[4], which will be funded by debt and equity.

Some have speculated that part of this equity side of the deal has been designed to include Manny Pangilinan’s entry into Atlas via Philex Mining[5].

That would be fait accompli.

I would have a different story.

The actions of Atlas [green] and Philodrill [blue; PSE: OV], which APO has a .28% stake in, have been tightly correlated with the actions of APO. Such close correlations can be traced way back to 1998. Though the correlation has not been 100%; seen from major trend movements, the APO and AT-OV correlation seem to be in the bag.

Recently, Atlas has been moving higher along with other mining issues. I was partly concerned that the overbought conditions in major issues as Lepanto, Philex and Manila Mining could affect Atlas[6]. Apparently it didn’t.

Also, I spoke about the resurgence in the oil sector[7] which was led by Philodrill. Yet APO lagged as both Atlas and OV ascended. Such deviation presented a buying opportunity for me. [disclosure: I bought APO shares during this window and perhaps got lucky; I have long been a shareholder of LC, PERC, AT]

Then, I can’t say about the specifics of these deals which I would not ever be privy to until after the fact.

Yet since 2003 (see my initial prediction at safehaven.com[8]), I have long been saying that investments trends will favor the local mining and resource based industries considering that the Philippines is a resource rich nation which has mainly been untapped.

Yet I don’t need to know the specifics. I only need to know about the general trend.

And all these forces have been validating my long held premises.

In the 1970s, Atlas Consolidated was considered a blue chip and was traded at php 400s levels.

For me this means that most, if not all mining and resource based issues, will rise far beyond current price levels over the coming years, but will be subject to the flows and ebbs of the global boom bust cycles.

Not only because these sectors represent as investments, but importantly, because resource based securities will account for as hedges against central bank inflationism.

Once the risk of an inflationary panic becomes a reality, where physical metal will get drained from the spot markets, mining issues will likely serve as the next object of the ‘flight to value’.

For now, APO and AT could be short term sells considering the massive moves that has brought them to overbought levels. Yet momentum and bullmarket sentiment can lead them to vastly extended zones similar to what has been happening to Lepanto.

For most occasions market timing for me is about luck, unless one can spot rare arbitrage opportunities as the above.

Yet I always recommend investments in the prism of medium to longer term basis and hardly about market timing or short term scalps.

Importantly, these themes have to be backed by theories that work with evolving general conditions and not just to feed the intellectual ego.

Yet it does surely feel good to get validated anew. I thank my dear Lord for this special insight.

To close, again I quote Ovid,

Time is generally the best doctor.

Indeed.

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[1] See Prediction Fulfilled: Philippine Mining Index Tops 9,000 (Now 11,300!), November 15, 2009

[2] Forbes.com #28 Alfredo Ramos, Philippines 40 richest

[3] Anglo Philipines Holdings Corporation Business Interest

[4] Reuters.com Manila's Atlas to fully own Carmen Copper in $368 mln deal, June 24, 2011

[5] Abs-cbnnews.com Philex climbs most in 6 months on Atlas speculation, June 25, 2011

[6] See Phisix: Why I Expect A Rotation Out of The Mining Sector, May 15, 2011

[7] See The Awakening of the Philippine Oil Exploration Sector?, May 22, 2011

[8] Safehaven.com The Philippine Mining Index Lags the World, September 26, 2003

How To Go About The Different Phases of The Bullmarket Cycle

``I’m hopeful that the answer is obvious: the market reflects vastly more information than the individuals. Yet we persist in listening to individuals in order to explain the markets. Executives point to analyst reports or discussions in the media to try to understand what’s going on with their stock. The media find an esteemed strategist to explain yesterday’s market move. Don’t ask the ants, ask the colony. The market is the best source for understanding expectations.” Michael J. Mauboussin

I’d like to point out that NOT all bullmarkets are the alike.

Bullmarkets come in different phases which effectively translate to different approaches in the management of portfolios under such evolving circumstances.

Thus it would be a darned big mistake to treat bullmarkets like a one-size-fits-all or a “whack a mole”[1] game- where everytime a mole randomly pops out of the hole, one takes a whack at them with a mallet in the hope to score a point.

Unlike the whac-a-mole, the goal isn’t about scoring points. In the financial markets, the goal is about maximizing profits—unless there are more important sublime goals that supersedes the profit motive such as thrill-seeking or ego tripping (i.e. the desire to brag about the ability to “time the market”—which bluntly speaking is based MOSTLY on luck).

Nevertheless it always pays to first to identify the phases of the bullmarket before deciding on how to approach deal with it.

To borrow the bubble cycle as defined by market savant George Soros, we can note of the following phases[2]:

-the unrecognized trend,

-the beginning of the self-reinforcing process,

-the successful test

-the growing conviction, resulting in a widening divergence between reality and expectations,

-the flaw in the perceptions

-the climax

-the self reinforcing process in the opposite direction

Bubble cycles reveals of these recognizable patterns from the hindsight view (see figure 4).

Figure 4: Stages of The Boom Bust cycle

But unfolding bubbles can be identified real-time by the prevailing market actions, the psychology that undergirds market action, as well as economic data on credit dynamics. Remember, booms are always lubricated by credit—a sine qua non of all bubble cycles.

And this has been NO stranger to us.

For instance, the Philippine Phisix has had minor boom-bust cycles within the secular bullmarket cycle of 1986-1997 (right window).

One would note of the Soros boom tests in the two marked red ellipses which closely resembled the typical boom bust paradigm (left window).

In 1994-1997, the climax or the “massive flaw of perception” had been highlighted by the prominent label of “Tiger Economies”[3] (new paradigm) on the ASEAN-4, which of course, turned out to be a massive flop.

As a side note, let me tell you that the Philippines won’t be anywhere near a Tiger Economy UNTIL we learn to adapt and embrace economic freedom as a way of life. Boom bust cycles will not substitute for real growth from free trade. Instead what these policy induced actions will bring about is a false sense of prosperity and security which eventually will be unravelled.

Yet, if we read or watch media, and assume that the people imbues what media says as gospel of truths, then the prospects of a “Tiger Economy” remains an ever elusive dream. As corollary to this, the belief in the salvation by the political leadership who is assumed to take the role as economic messiah is a sign of either ignorance or immaturity or dogmatic espousal of superstition as truth.

Going back on how to read market cycles, the point I wish to make is that one should be cognizant of the operational phases of the market cycle, and adapt on the actions that befit the underlying circumstances.

At present, I would say that the Phisix has been transitioning from the “successful test” towards the “growing conviction” phase.

Figure 5: PSE Sectoral Groups: Industry Sector Rotation and Tidal Flows

And this phase will be characterized by sporadic explosive moves on select issues. But these activities will be rotated among specific issues or among issues within sectors.

So issues or sectors that may seem to have been in dormancy or has materially lagged will likewise see rejuvenated price movements overtime, while current market leaders may stall or temporarily underperform. Remember the axiom—no trend moves in a straight line, this should always apply. Otherwise those that manages to move in temporary defiance of this, would eventually pay a steep price later (Remember the BW scandal?). Hence, every action has its corresponding consequence.

And as the major benchmark continues to rise; the price levels of almost ALL issues will likewise keep in pace but differ in terms of degree, the timing and the time-motion of each price actions. But eventually, the cumulative actions would produce a net effect of having the “rising tide lifts all boats” phenomenon.

This has long been our Machlup-Livermore model.

For instance, today’s top performing sectors used to be last year’s laggard and vice versa (see figure 5).

During the last quarter of last year, the mining industry (black candle) and the service sectors (light orange) led the Phisix (red circle), and all the rest (red-banking, blue-holding, green-commercial Industrial and maroon-property) performed dismally.

And up to this point, last year’s top performers have essentially traded places with last year’s laggards, where the latter have taken much of the today’s limelight. Remember the proclivity of the crowd is to read today’s action as linear, hence while crowd may be right in major trends they are always wrong during turning points. And this applies both to specific issues and general activities on the marketplace.

And one of the latest spectacular moves has been in the property sector (maroon) which has likewise been among laggards going into July (the property sector was the third worst performer then).

But last week appears to be payback time for key property issues, as the property benchmark spectacularly skyrocketed by over 8% to nearly take the top spot which it now shares with the leaders.

And I’d venture a guess that based on the relative impact of inflation on stock market prices, today’s laggards will be doing a redux of last year’s actions soon.

To be blunt, the rotational effects will buoy the service sector and the mining industry. And a glimpse at the chart seems to show that such phenomenon may have already commenced!

Let me add that as the growing conviction phase deepens (I would presume that a break above the 2007 high should underscore this), the frequency of rotational explosive moves will increase.

Thus, trying to “time the market” will only result to missed opportunities, the chasing of higher prices and an increasing risk exposure to one’s portfolio.

Bottom line: We shouldn’t essentially “time” the market per se as the mainstream would define it, instead we should identify, read, analyse and act according to the whereabouts of the bubble cycle.

In other words, any “timing” must focus on the possibility of the emergence or rising risks of a major inflection point, in accordance to the stages of a bubble cycle. Meanwhile, all the rest of the one’s subsequent actions should be focused on the virtues of “waiting” and some “rebalancing”.

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[1] Wikipedia.org, Whac-A-Mole

[2] Soros George, The Alchemy of Finance p.58

[3] Wikipedia.org Tiger Cub Economies

What Gold’s Latest Record Prices Mean

``The struggle against gold which is one of the main concerns of all contemporary governments must not be looked upon as an isolated phenomenon. It is but one item in the gigantic process of destruction which is the mark of our time. People fight the gold standard because they want to substitute national autarky for free trade, war for peace, totalitarian government omnipotence for liberty.” Ludwig von Mises

A major trait of bullmarket is, whatever assets we sell today will climb higher tomorrow. This implies that the most regrettable course of action in a bullmarket is to sell.

And one great example would be the gold market. Gold just set a new record in terms of nominal high (see figure 1).

Figure 1: Netdania.com[1]: Gold’s Stairway To Heaven

The monthly chart reveals that gold prices have been in a bullmarket since 2000. While true enough, there have long periods of consolidation, the general trend over the last decade has been up.

And importantly, contrary to those who allege that gold functions as safehaven during recessions or during the “deflation-symptom” crisis similar to the Bear Stearns-Lehman episode of 2008, evidence has shown otherwise—gold fell during the previous two recessions of 2001 and 2008 (see black channel lines)!

Alternatively, the most recent record run only implies that the fresh milestone high, established last week, DOES NOT presage of any forthcoming market crashes or “double dip” recessions. And if gold serves as a lead indicator as previously discussed[2], then the likelihood is to see reanimated activities in global risk markets.

At the start of the year, we were told that gold wouldn’t generate investor appetite as the menace of “deflation” continues to lurk around the corner. We even read predictions stating that gold would fall back to the $800 levels[3] way until last month[4].

However, as we have always been saying--in a world of central banking, deflation is no more than a bogeyman to rationalize more inflationism, which central bankers are likely to accommodate. After all, inflation is ALL about politics. And central bankers, in spite of their supposed “independent” role, have been the main conduits in financing government expenditures. Thus all talks of “independence” are mostly demagoguery. Fact is, global banking regulations, as the Basel Accords, have all been skewed to accommodate government expenditures[5].

Of course, one major bullish factor about gold is that mainstream STILL doesn’t get it; gold isn’t just an inflation hedge, nor is it about alternative assets[6]. It’s also been starkly misguided to impute ‘conventional’ financial valuation metrics to gold when this doesn’t apply. It’s even myopic to calculate or value gold prices premised on commodity usage. And it is also faulty to appraise gold based on global mining output. Since gold isn’t being consumed, incremental additions to the above ground supplies by existing mines hardly determine the pricing model (see previous discussion[7]).

In a decadent world of fiat money, where money printing to fulfil specific political agenda have been the most convenient route resorted to by political leaders everywhere-for the simple reason that the ignorant masses hardly understands how such surreptitious redistributive activities influences their lives- gold seems to be re-establishing its role as ‘money’.

Therefore, gold’s ascendant trend in ALL currencies have simply been manifestations that demand for gold has been transforming from mere “commodity” (jewelry and industrial usage) to “money”.

Gold is being held as reserve asset not just by the central bank, but importantly by the general public. Gold’s increased function as “reservation demand” is what usually the mainstream sees as “speculation” or “speculative hoarding” or “investment demand”.

Otherwise said, money’s “store of value” is increasingly being factored into gold prices (unit of account). Hence, relative to gold pricing, this implies that reservation dynamics or the reservation model (and not consumption model) determines gold valuations or that the exchange ratio or monetary valuations relative to fiat currency applies-- where valuations are determined by the expected changes in relationship between the relative quantity of, and the demand for, gold as money vis-a-vis paper currencies.

And possibly one day, such transformation would include the deepening of “exchange demand” or gold as ‘medium of exchange’ (see previous discussion[8]). Proof of this has been the emergence of Gold ATMs in Germany[9] and in Abu Dhabi[10].

All these, of course, are ultimately dependent on the stimulus-response and action-reaction of global political leaders on the swiftly evolving political, economic and financial sphere.

And thus, periods of weaknesses, whether from recessions or from consolidations (in technical or chart lingo the “energy fields”), has served as buying windows rather than selling opportunities.

Yet for those whom have remained sceptical and or earnestly drudge to market “timing” gold’s prices, they usually end up chasing gold prices higher-- buy high and sell low.

And this is especially brutal to those in constant denial of gold’s ascendancy; they have entirely missed out the rally for ideological reasons, and vent their frustrations by continually disparaging such developments. The odd thing is that this has already been a 10-year market process.

Yet since gold rise has been threefold, all errant attempts to “time” the market has resulted to lost or missed profit opportunities.

As the legendary trader Jesse Livermore expressed by Edwin Lefevre in the classic must read for any serious investors, “Reminiscences of a Stock Operator”,

``Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can catch all the fluctuations. In a bull market your game is to buy and hold until you believe that the bull market is near its end. To do this you must study general conditions and not tips or special factors affecting individual stocks.[11]”

In short, the best returns emanate from long term investments.

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[1] Netdania.com, Forex charts

[2] See Why The Current Market Volatility Does Not Imply A Repeat Of 2008

[3] Yahoo. Finance, Gold Is "Fairly Expensive," Could Fall to $800 If Fed Moves, Midas Fund Manager Says, January 22, 2010

[4] CNN.Money, The coming gold bust

[5] See The Myth Of Risk Free Government Bonds

[6] Reuters.com, US gold sets record, ends strong as alternate asset

[7] See Gold As Our Seasonal Barometer

[8] See Financialization of Commodities: Boon Or Bane?

[9] See Creative Destruction: Electronic Payments Over Cash And Checks

[10] Financial Times Blog, Abu Dhabi’s gold ATM machine a sign of more opulence to come, May 13 2010

[11] Lefevre, Edwin, Reminiscences of a Stock Operator p.76 John Wiley and Sons

China And The Bubble Cycle In Pictures

Most of the time narratives haven't been convincing enough to present a strong case.

Hence I decided to put into pictures, some relevant data that may signal the whereabouts of China's bubble cycle.

In our earlier post [see Jim Chanos Goes From Micro To Macro With Bet Against China] we showcased the chart of a bubble cycle.

I am republishing it below for comparison purposes.


In the outset of the new millennium, the US dot.com bubble appears to have unraveled exactly as the dynamics shown above.

The Nasdaq chart (courtesy of bigchart.com) shown below went parabolic before collapsing.

Today, or nearly 10 years after, sadly the Nasdaq remains distant from its bubble highs.

And it's seems no different from the way the US real estate bubble unfolded in 2002-2006 (courtesy of the New York Times)...

...and as earlier stated bubble dynamics are manifested on asset prices via massive overvaluation and a manic 'euphoric' mood by the public.

China is alleged to be at a risk of an imploding bubble, which is deemed by some as a clear and present danger. Given such premise we should then expect some parallels with the bubble cycle template above to take shape.

In other words, China's asset markets should somewhat resemble the above dynamics.

So have these concerns been justified?

While it is true that there has been an unprecedented surge in credit expansion which has been the primary cause of concern of bears... (the following charts except indicated are sourced from World Bank China)

...these has not yet been apparent in property prices.(see below)

Even Bloomberg's own property index chart for China hasn't been frothy...yet.

We don't see the same phenomenon in China's stock markets too (unless one interprets the 2008 top as the main inflection from which today's rally accounts for merely a countertrend action)...
And so far the booming conditions experienced by China has emanated from government spending...
Although the massive credit expansion appears to be filtering into the domestic economy...
Bottom line: China's Bubble has yet to mature or transition into the mania phase. It's probably not the right time to bet against a bubble.

Yet if China is truly in a bubble but the timing of the bet is wrong, then a short position can be bloody or devastating (see bubble cycle template above) to a portfolio, since the manic phase has yet to emerge.