Russia’s Entry to World Trade Organization will have Political Repercussions

Two major positive developments emanating from Russia.

One, Russians may have come to realize that state or crony capitalism has been doing them more than enough harm.

Signs of these have become evident with the latest election results (where Putin’s Party has lost the majority) and the unfolding street protests (over the election results) which could be portentous of a ‘Russian Spring’.

While displeasure over Vladimir Putin’s autocracy has led to a surge in communist followers, I’d say that this represents a default position for many, when seen from the perspective of Russia’s history, whom has traipsed from autocracy to communism and back to autocracy.

The Western concept of classical liberalism has hardly any influence to the Russians. Thus, free markets and economic freedom may seem as an alien concept.

But this is about to change dramatically, in my opinion.

As compliment to education, one way to introduce classical liberalism is to get people to feel the benefits from its exposure. Put differently, once people come to realize the benefits of freer domestic and external trade, then more will be demanded. And this will be manifested via political actions or policies.

And changes happens on the margins.

chart from tradingeconomics.com

The deepening of globalization trends in the 1990s accompanied by the collapse of the USSR (1991) has already been boosting Russian exports and imports.

Russia’s external trade consists of exports mostly dependent on natural resources and defense equipment (80% of total) while imports have been machinery, transport equipment, plastics, medicines, iron and steel, consumer goods, meat.

Since the transition away from USSR model and the desire to tap world markets, Russia has applied for WTO in 1993.

Timeline below of Russia’s WTO application from the BBC.

Also it is important to note that benefits accrued from Russia’s gradual opening of trade with the world has led them to pursue the WTO membership.

Thus, the approval of Russia’s membership to the World Trade Organization functions as the second and most important positive change.

Writes the China Daily,

Russia finally joined the World Trade Organization (WTO) on Friday, after 18 years of effort.

The world's 11th biggest economy is the last of the G20 countries to join the WTO and became its 154th member. Russia's entry means the BRICS countries (Brazil, Russia, India, China and South Africa) are now fully represented in the WTO.

Nigerian Trade Minister Olusegun Olutoyin Aganga struck a gavel to announce that the 8thWTO ministerial meeting here had agreed to accept the bid. Russia had to first reach bilateral agreements with 57 of its current 153 members to secure their support.

Like China, there will be mounting pressures from the collision of political forces from the escalating bottom-up forces vis-à-vis those currently benefiting from top-down political institutions.

Again like in China, an inevitable decisive choice would have to be made to tailorfit the politics with the economy: Either a return to communism to reinforce current political institutional arrangements along with the closing of their economies, or an evolution to a more representative form of government that would flow along with greater economic freedom.

And technology will play a crucial role in ascertaining the path to the resolution of these transitional conflicts.

Also, if the evolving trends will flow to the latter, then the important geopolitical implications would mean lesser risk of military confrontations, as political priorities will shift towards enforcing trade activities than to engage in brinkmanship politics which are premised on the politics of plunder that has encouraged conflicts.

When goods don’t cross the border, warned the great Frédéric Bastiat, armies will.

Apparently, the world seems to exhibit more signs in the acknowledgment of Bastiat’s wisdom, thus should be applauded and welcomed.

Overtime, if political economic trends persist on the path of economic freedom then Russia should be a prospective buy.

Should Economics Be Left To The Economists? Is Economics Value Neutral?

At a recent assembly, I counselled a promising and youthful colleague, who had been rebuffed in trying to introduce classical liberalism to the economics departments of one of the elite schools in the Philippines, that since we eat, drink and sleep economics—where everyone engage in making and acting upon choices around the world of scarcity—that economics must not be left to the economists.

My point is since these elite schools have benefited from the current arrangement, there would be no incentive to assimilate changes that would only risk undermining their stature.

And I further added that politics is essentially economics, where politics signify no less than economics in morality’s clothing. Morality here, I am speaking of depends on whose sense of morality gets to be argued and or implemented; is it the minority, the majority, the despot, the King?

Thus, since economics is ubiquitous, it must be learned by everyone.

And for those in the know, it would be our civic duty to teach economics even in the non-traditional sense in our non-conventional way. In warfare, this is known guerrilla tactics.

As Ludwig von Mises once said,

Economics must not be relegated to classrooms and statistical offices and must not be left to esoteric circles. It is the philosophy of human life and action and concerns everybody and everything. It is the pith of civilization and of man's human existence.

Nevertheless the main aspect that differentiates the mainstream and classical liberalism would be the former’s emphasis on mathematical or empirical formalism vis-à-vis the latter whose analysis are based on logical deductions via praxelogical axioms or methodological individualism.

For instance, the mainstream would argue that their brand of math and statistical models based economics can be value neutral or value free when applied scientifically.

But this is would only be partly true because:

1. We are dealing with human action where every action involves subjective value preferences and ethical judgments.

As Murray N. Rothbard wrote, (bold emphasis mine)

I am not taking the position, now fashionable in many quarters, that there is no such thing as a value-free economics, that all economic analysis is inextricably shot through with value assumptions. On the contrary, I believe that the main body of economic analysis is scientific and value-free; what I am saying is that any time that economists impinge on political or policy conclusions, value-judgments have entered into their discussion. My conclusion, then, is that economists must either make their value judgments explicit and defend them with a coherent ethical system, or strictly refrain from entering, directly, or indirectly into the public policy realm.

In short, it would be inescapable for economists to fall for the value trap once they incorporate analysis based on the socio-political spectrum.

For instance, opportunity costs may not all be quantified in monetary terms as there would psychic and disutility costs. Thus, value free or value neutral can hardly be realizable except under classroom environment.

2. Economics is not the same as natural science.

Economics, as Jörg Guido Hülsmann wrote in MISES: The Last Knight of Liberalism, is a science with clear political implications, not a mere intellectual exercise.

Bottom line: Economics is human action.

Inflation And Stock Market Valuations

``A prediction, which makes judgments which are qualitative only and not quantitative, is practically useless even if it is eventually proved right by the later course of events. There is also the crucial question of timing. Decades ago, Herbert Spencer recognized, with brilliant perception, that militarism, imperialism, socialism and interventionism must lead to great wars, severe wars. However, anyone who had started about 1890, to speculate on the strength of that insight on a depreciation of the bonds of the Three Empires would have sustained heavy losses. Large historical perspectives furnish no basis for stock market speculations which must be reviewed daily, weekly, or monthly at least.- Ludwig von Mises, The Causes Of Economic Crisis

It’s been repeated here that inflation has been emerging as the most pivotal factor in driving the pricing and real returns of equity investments[1] or for that matter all other investment activities.

That’s because monetary policies shape the incentives of entrepreneurs in the allocation of resources on the marketplace. Monetary policies also help determine consumption habits of the consumers. Low interest rates, for instance, entice consumers towards an increase in time preferences by indulging in “conspicuous consumption” financed by credit. On the other hand, low interest rates beguile investors to take upon long horizon projects in the expectations of the constancy of such environment which should provide them attractive returns.

Therefore, by influencing price signals, monetary conditions from central bank policies drive business conditions, which influence all other factors including, capital inputs, operating costs, wages, earnings, revenue streams, consumption patterns and etc. Importantly, such falsified pricing signals propel malinvestments which leads to boom bust cycles.

Yet monetary policies have relative effects that creates conflicts over the flow of funds relative to production and to stock markets,

According to Mr. Ludwig von Mises[2], (bold highlight mine)

``Another case, when control of the money market is contested, concerns the utilization of funds made available to the market by the generous discount policy. The dominant ideology favors “cheap money.” It also favors high commodity prices, but not always high stock market prices. The moderated interest rate is intended to stimulate production and not to cause a stock market boom. However, stock prices increase first of all. At the outset, commodity prices are not caught up in the boom. There are stock exchange booms and stock exchange profits. Yet, the “producer” is dissatisfied. He envies the “speculator” his “easy profit.” Those in power are not willing to accept this situation. They believe that production is being deprived of money which is flowing into the stock market. Besides, it is precisely in the stock market boom that the serious threat of a crisis lies hidden.”

Here Mr. Von Mises speaks from the empirical operating conditions during his period, where agriculture remains a large part of the national economy. Although current conditions would reverse the ‘ideological’ priorities, i.e. favouring higher stock markets than higher commodities prices given the larger share of financial industry to the economy, the important message here is that the stock market and production are both highly influenced by monetary conditions and compete in placement of funds.

Therefore it would be misguided to presume that stock markets operate independently from business conditions, or that business conditions are inherently stable so as to narrowly focus on micro barometers such as price earning ratios, book value, debt to equity, return on assets or etc...

Aside from monetary policies, there are massive differences in the structural composition of a political economy that affects real returns (see figure 6)

Figure 6: World Economic Forum[3]: Enabling Trade in Greater Asia

An example can be found on the chart above (higher window), based on imports procedures (or bureaucratic red tape) and irregularities (or corruption) the Philippines ranks as the most bureaucratic and most corrupt among the ASEAN contemporaries. Note the differences of bureaucracy and level of corruption.

In addition, based on the quality of infrastructure (lower window), the differences of the stages of development is noteworthy.

And the nuances are not limited to these, there are many other variables at work, such as degree of market access, regulatory environment, tax regulations and tax rates, access to financing, access to labor, access to communications, foreign currency regulations, labor regulations, policy instability, security, legal framework, efficiency of social institutions, respect for property rights, degree of economic freedom and etc...

Therefore, the greater complexity of regulations translates to lesser efficiency in the marketplace. Alternatively, this means greater complications in establishing the cost-and-return tradeoffs. So why the heck would these economies suffer from lack of investments and high unemployment, if not for the lack of clarity on returns?

Yet the most important factor would be the political spectrum, which ultimately determines how resources are distributed in an economy. For instance, in a closed and highly regulated economy (I am thinking Venezuela), where the distribution of economic opportunities is channelled mainly through politics, returns are determined NOT by market forces but by political connections or concessions. Hence it would be naive and highly erroneous to oversimplistically apply PER, Book Value, debt equity or etc... simply because political privileges determine returns, and at worst, risk money could be arrogated out of political considerations because of the despotic tendencies of the leaders.

So an applicable rule of thumb--micro barometers are dependent on the degree of the market economy, where the more open an economy is, the more reliable these tools are and vice versa.

Bottom line: Oversimplistic assumptions based on equal application of models can be fatal because each markets, like individuals, has their own thumbprint.

MacroAsia Corporation and the Machlup-Livermore Model

MacroAsia Corporation (MAC) is likely to be a good example of what I have been talking about. Figure 7 accounts for the financial highlights of MAC along with the stock price performance.

Figure 7: MacroAsia Corporation[4]

The reason I chose MacroAsia (MAC) is due to its pleasant updated presentation of the financial highlights. As disclosure, I presently don’t own any MAC shares, although it has been part of my watchlist.

MAC is owned by one of the entrenched economic elite, tycoon Lucio Tan. The company is into what we call as “pick and shovel” play or secondary exposure to the airline industry.

Its main business is in-flight catering, ground handling, airline repair and maintenance services, property rental, supply chain management and charter services. The company has also major mining Nickel Lateral claims or concessions in Palawan which currently is undergoing exploration.

The company has one impressive balance sheet; it is very cash rich, has minimal debt, has steady top and bottom line growth, which has virtually been unscathed by the 2008 crisis, issues regular dividends and has a great moat (a monopoly (?) in its industry).

Yet if one looks at the financial graph all indicators have been pointing upwards, since 2005.

However the stock prices seem to be saying differently, MAC has seen a 50% collapse on a peak-to-trough basis even when financial conditions have NOT been affected!

And importantly, since the trough of 2008, MAC’s stock prices has traded for over one year at virtually the same level when the Phisix has jumped by nearly 100% since the 2008 nadir!

Does MAC’s corporate fundamentals reflect on the stock prices? The answer is NO. What has driven MAC’s prices has been the boom bust cycle. MAC belatedly boomed at the near climax of the bull market of 2007 and consequently fell when market sentiment collapsed along with all the rest. Hence, it is safe to discern that MAC’s financial and corporate conditions and stock prices have basically been disconnected.

One would object that, if inflation drives stocks why has MAC’s prices been stagnant? Well the answer to that is that inflation does not impact every issue simultaneously nor does it impact all issues to the same degree. Inflation’s impact is always relative.

Also, since inflation has a psychological aspect, applied to stock markets, stock prices are likely to be driven by fancy storytelling, rationalization, jockeying, the chase for yields and operating rotational effects within the market.

This implies MAC will surely rise sometime in the future, in condition that the advances of Phisix will continue. MAC will then be a beneficiary of the rising tide phenomenon (but perhaps at a much later date?).

Therefore, we have another proof that validates our Machlup-Livermore model.

Finally, from the storytelling department, of course MAC has a great future. If tourism will boom in Asia, as we expect, considering the wealth transfer dynamics from the West to the East, then MAC will definitely be a major beneficiary, since there hardly has been any competition. Let me add that I’m not sure why there hasn’t been a competitor, I would suspect that perhaps political concession could be a factor. Lastly, there is another bonus, the mining department, but full operation will probably commence sometime in the future.

Yet none of this glorious tale is new.

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[1] See Why The Philippine Phisix Will Climb The Global Wall Of Worries

[2] Mises, Ludwig von Mises The Causes of Economic Crisis, p.165

[3] World Economic Forum Enabling Trade in Greater Asia

[4] MacroAsia Corporation Corporate Website