``Now we see these qualities displayed by virtually all politicians in democracy: the constant need for status and recognition. The ends — compensating for an inferiority complex — justify whatever Machiavellian means. Because democracy is open to any and all who can get themselves elected, either through connections, personality, or personal wealth, it is a social system where leadership positions become a hotbed for sociopaths. Maslow's self-actualizing man won't have an interest in politics. But those stuck on the need for esteem are drawn to it like flies to cow pies.”- Doug French
The bullmarket has been relentless.
In the context of the Philippine Phisix, it has been a steamy 13.45% gains in 5 consecutive weeks that has produced a stupendous year-to-date return of 38.8%!
Economic Takeoff Mumbo Jumbo
Again this has nothing to do with the Philippines allegedly in an economic takeoff[1] emanating from the so-called public’s belief in the effective deliverance of the incumbent political leadership.
This messianic thinking is no more than political spin anchored on current events used to grab credit for popularity ratings (votes on issues or endorsements) and for self-esteem purposes[2].
Governments cannot generate wealth by picking on Juan’s pocket in order to give to Pedro. Shifting resources away from productive activities to non-productive activities diminishes wealth creation. There is little or no value added from coercive (tax based) reallocation of resources. In a world of scarcity, prosperity cannot emerge from “something out of nothing”.
Wealth is generated by capital accumulation, or the act or process of increasing the supply of capital goods, whereby capital can only be accumulated by producing more wealth than is consumed, i.e. savings[3]. And this can only occur when more risk-taking, profit-and-loss and market price sensitive entrepreneurial activities are allowed to legitimately flourish.
Political redistribution of scarce resources only leads to inefficiency, wastage, corruption, inflation and capital decumulation. So claims of economic takeoffs can only take place by an intensive reduction of politicization of the economy and by liberalizing economic activities in favour of the entrepreneurs.
The other way to say this it is that—in a world of tradeoffs, political power has to pave way to economic power for capital accumulation to progress. We can’t have both.
Applied to politics, you either expand political power via socialism or enhance economic power via capitalism or the market economy. And the latter is something political leaders won’t intuitively succumb to, unless forced at hand by the natural laws of economics.
Proof?
The proposed P 1.645 trillion National Budget for 2011 supposedly would include a doubling of the Pork Barrel[4], a bonanza for lawmakers.
This simply means more government spending on political pet projects, which are unproductive and not demanded by the markets (think basketball courts[5]), and whose implied effects translate to higher taxes, higher cost of doing business, rising cost of goods and services, high unemployment, and importantly increasing incidence of corruption from arbitrary dispensation of resources and further restrictions to civil liberty.
The election mantra of a corruption free government is gradually being revealed as no less than a drivel, despite the public’s current blind faith over the prospects by the incumbent administration.
So with these added obstacles to entrepreneurship growth, how does one expect the domestic economy to takeoff?
What we are certain of is that the personal economies of politicians and their affiliates or cronies will indeed takeoff. P1.645 (estimated $37 billion) or 22% of the $161 billion (nominal dollars[6]) Philippine economy is certainly alot of money being channelled or transferred from the private (productive) sector to unproductive institutions and to political agents. And surely, these massive diversion of resources, will NOT serve to the wellbeing of the general public. Instead, more will suffer from the unforeseen and indirect effects of these redistributive actions.
Applied globally, political redistribution has its limits, as recent crisis has evinced.
And this grand experiment of the paper money (US dollar) standard seems to push redistribution to its near limits as global government debt has reached over $39 trillion[7] or about 63% of the $61 trillion GDP[8].
It’s a ticking time bomb that has been camouflaged by today’s concerted efforts by central banks to flood the world with liquidity. Eventually, the pressure valve will give way. It has been this way throughout history, which means that this is a cycle which we must pay heed to.
As George Santayana who once admonished, ``Those who do not learn from history are doomed to repeat it”. We certainly cannot stop history from repeating but we can take steps to protect ourselves.
Expect Normal Profit Taking From Overextended Markets
Of course, seen the political standpoint, but looking at the bigger picture, it’s not only us whom are on a takeoff.
It’s the ASEAN or Asian emerging markets (see figure 1) aside from many emerging markets outside Asia that has been booming.
Figure 1: Bloomberg: ASEAN Bourses Takeoff
The Philippines (green line), Indonesia (yellow) and Thailand (orange) have been in a tight race for the top after successfully breaking past their most recent highs. Only Malaysia has lagged but remains on the positive.
On a year to date basis the gains of these bourses have been spectacular, with the three frontrunners posting over 30% returns.
Nevertheless, there appear to be signs of exhaustion strains from the recent breathtaking run.
And it would be ridiculous to expect the ongoing boom to streak endlessly as any overstretched gains are likely to result to the opposite action-a crash. We must remember that even in the financial markets Newton’s third law of motion[9] somewhat applies, where “To every action there is always an equal and opposite reaction”.
While I do not expect a major retrenchment in the global equity markets, a correction has long been overdue especially for the turbocharged emerging markets as ours.
And if there are any supposed signs of providence, last week’s market actions in Indonesia and Thailand could signify as pacesetters.
But any correction shouldn’t be construed as justification to raise cash balances. Rather, they should be used as entry point for those who have missed the ride or for those hoping to capitalize on the opportunities of the ASEAN-Phisix bullmarket.
What we can expect of is that any correction may unlikely be a broadmarket dynamic as last seen in the bearmarkets of 2007-2008. Instead, we should expect rotational of activities from outperformers to the laggards during the countercyclical phase.
I am not a seer who can give you the exactitudes of the potential retrenchment. Anyone who claims to do so would be a pretender. But anywhere from 5-15% from the recent highs should be reckoned as normal.
Yet, one cannot discount the potentials of a swift recovery following the corrective process. This is why trying to “market timing”, in this “growing conviction” phase of the bullmarket, could be a costly mistake.
From our standpoint, profit taking should be expected over the interim, but the main drivers of the current rally seem well entrenched enough to seemingly ensure that our markets (and those of our neighbours) are eventually headed higher in spite of the illusory political attribution and rhetoric.
[1] Philstar.net Noy: RP ready for takeoff, October 8, 2010
[2] See The Corrupting Influence of Political Power, October 9, 2010
[3] Greaves, Percy Jr. Mises Made Easier, Mises.org
[4] Inquirer.net, ‘Pork’ in budget doubled, October 9, 2010
[5] See Philippine Sports: The Craze For Basketball And The Lack Of Interest In The World Cup, June 12, 2010
[6] Wikipedia.org Economy of the Philippines
[7] See Global Debt Time Bomb, October 8, 2010
[8] Google Public Data, World GDP
[9] Wikipedia.org Newton's laws of motion
