I Just Can’t Get Enough: Philippine Phisix Emits Intensely Bullish Signals

And when it rains

You`re shining down for me

I just can`t get enough

I just can`t get enough

Just like a rainbow

You know you set me free

I just can`t get enough

I just can`t get enough

-I Just Can’t Get Enough, Depeche Mode

Last week I pointed out that signs of market divergences in the global markets and a seeming convergence of many local indicators pointed to a possible sustained momentum for a rally.

I wrote[1]

All these factors, particularly chart formation, rallying peso, improving market breadth, bullish local investors, appears to have converged to signify possibly as a significant tailwind in favor of the bulls.

With lady luck seemingly smiling at me, events have proven this short term observation to be stunningly accurate.

The Phisix (black candle) makes an all important watershed with a rousing breakout (light blue circle) from the massive 8-month reverse and shoulder formation (orange arcs).

In Bullmarkets, Everyone is a Genius

Before I proceed, I’d like to make additional comments on what I think will be forthcoming mindset that will dominate the equity markets as the bullmarket flourishes.

Bullmarkets create the impression of infallibility, smugness, invincibility and expansive risk appetite. That’s because erroneous or defective reasoning, beliefs and or strategies will be validated by prices actions regardless of the soundness of the imputed causal relationship. In short, luck determines most of successes.

Yet most will get immersed with self-attribution bias[2], particularly self-serving bias[3], where people attribute successful outcomes to their own skill, but blame unsuccessful outcomes on bad luck.

In convention, many will argue that ‘fundamentals’ will reflect on price actions. Others will argue that chart trends will serve as the critical factors in establishing fundamentals.

Both these groups essentially argue from the perspective of historical determinism, where past performances have been assumed to determine future outcomes.

Black Swan author Nassim Nicolas Taleb exposes the shortcomings of such presumptions; Mr. Taleb writes[4], (emphasis added)

When you look at the past, the past will always be deterministic, since only one single observation took place. Our mind will interpret most events not with the preceding ones in mind, but the following ones. Imagine taking a test knowing the answer. While we know history flows forward, it is difficult to realize that we envision it backwards.

Their fundamental mistake is to overestimate causality and oversimplify market’s actions as easily explainable from superficial perspectives.

Further, these groups will also fall captive to the reflexivity theory where expectations and outcomes would play a critical self-reinforcing feedback mechanism

The aspect where I agree with Mr. George Soros[5] is this theory, (bold emphasis mine)

The structure of events that have no thinking participants is simple: one fact follows another ending in an unending casual chain. The presence of thinking participants complicates the structure of events enormously: the participants thinking affects the course of action and the course of action affects the participants thinking. To make matters worst, participants influence and affect each other. If the participants’ thinking bore some determinate relationship to the facts there would be no problem: the scientific observer could ignore the participants’ thinking and focus on the facts. But the relationship cannot be accurately determined for the simple reason that the participants’ thinking does not relate to facts; it relates to events in which they participate, and these events become facts only after the participants’ thinking has made its impact on them. Thus the causal chain does not lead directly from fact to fact, but from fact to perception and from perception to fact with all kinds of additional connections between participants that are not reflected fully in the facts.

In short, hardly anyone understands that such reflexive feedback loop process, which functions as the psychological backbone or stepping stones for boom bust cycles, are shaped by actions of policymakers whose political goal has been to sustain perpetual quasi booms.

As the great Austrian economist, Ludwig von Mises writes[6], (bold highlights added)

Nothing harmed the cause of liberalism more than the almost regular return of feverish booms and of the dramatic breakdown of bull markets followed by lingering slumps. Public opinion has become convinced that such happenings are inevitable in the unhampered market economy. People did not conceive that what they lamented was the necessary outcome of policies directed toward a lowering of the rate of interest by means of credit expansion. They stubbornly kept to these policies and tried in vain to fight their undesired consequences by more and more government interference

The effect of inflationism is to distort economic or business calculations. This will further cause massive misallocation of capital or an inducement to excessive speculations which subsequently gets manifested on the marketplace, including the stock markets via a boom bust cycle.

Bottom line: Bull market geniuses will fall short of the recognition and comprehension of the true drivers of the marketplace. They would continue to latch on cognitive biases backed by technical gobbledygook (‘macro-micro fundamentals’, political-economic ideology, mechanical charting) to argue for their cases. When the bubble pops all these arguments evaporates.

‘I Told You So’ Moment on Divergences

This leads us back to the significant chart breakout by the Phisix above.

An important reminder is that while charts are representative of past actions of the market, patterns alone do not suggest of the reliability of statistical precision of repetitive occurrences for reasons cited above, such as analytics tenuously derived from historical determinism.

That’s why charts must work in consonance with other indicators. Importantly, charts must be grounded on theory as basis for such prognosis. In short, charts should only play the role of guidepost in measuring theory. It would serve as a grave mistake to interpret charts as the foundation for theory.

Friday’s upside pop (green circle) beyond the reverse head and shoulders resistance levels may have signaled the second wind or the next significant upside leg which may bring the Phisix to the 4,900-5000 level (this implies returns of 12-15%) to the yearend.

Of course, returns will vary according to the actions of specific issues but the returns of the Phisix would essentially reflect on the average of the returns from the 30 elite issues included in the local basket bellwether.

Unfortunately, the Philippine Stock Exchange does not have an Exchange Traded Fund (ETF) listed locally that may reflect on the actions of the Phisix. Nevertheless for residence abroad, the first Philippine Exchange Traded Fund, the iShares MSCI Philippines Investable Market Index Fund (EPHE) has been listed since September of last year[7] One can take advantage of the possible Phisix rally through the EPHE.

The breakout of the Phisix appears to be validated by the actions of the Philippine Peso (red candle) where the USD-Peso chart echoed on an equally sharp downside move (green circle) for the US dollar. The Peso closed at 43.175 on Friday for a .6% gain over the week.

One would note that while the Phisix exudes a bullish backdrop, the Peso’s chart has exhibits what chartists call as a “whipsaw” or a chart pattern failure or in stockcharts.com’s definition “when a buy or sell signal is reversed in a short time”[8]

Early this month, the US dollar broke to the upside against the Peso, but this breakout was essentially expunged by this week’s rally in the Peso (light blue circle).

This should be a good example how charts can’t be used as a standalone metric.

The tight Peso-Phisix correlation suggest that for the time being, the Phisix appears to lead the price actions of the Peso, as I previously noted[9]

currency traders must take heed of the activities in the PSE as part of their studies from which to derive their predictions

Again this has been premised mostly on the favorable relative demand for Peso assets, aside from the lesser inflationary path by the Peso based on the supply side.

This Phisix-Peso correlation appears as being bolstered by a spike in Foreign buying which turned positive this week (red circle).

Net foreign buying accounted for 44.46% of this week’s peso volume traded at the Philippine Stock Exchange.

Divergent external policies are likely to continue to drive foreign funds into local shores.

Market Internals Swings To Positive Zone

As an idiom goes, ‘The proof of the pudding is in the eating’.

All sectors posted gains this week with Industrials and Financials taking the leadership from the mining sector (see graphic above).

Even from the midterm basis, All sectors have been on an uptrend (Financials, Industrials and Holdings-left column; Property, Services and Mining and Oil-right column) despite the recent corrections.

What Friday’s sprightly activities did was to magnify on these gains.

Said differently, while Friday’s rally may have hallmarked a significant and symbolical turnaround, in reality, most of the sectors have already been on an upside creep way before Friday, most notably coming from the troughs in mid June.

Further, this interim rally seems to reinforce the medium term trend dynamics.

“I just can’t get enough” is a song by new wave band called Depeche Mode during the early 1980s. To borrow from Depeche Mode, I just can’t seem to get enough to further show how markets have been validating our expectations.

The advance-decline ratio (left window) has oscillated to favor of the bulls, while issues traded daily has turned to the upside backed by a seeming double bottom (red) and an interim ascendant trend.

A rising Phisix will induce more trades that will be reflected on volume expansion. That’s how reflexivity theory incentivizes people: As prices go higher more people will start chasing prices and higher prices will be read as improvements on economic and corporate output which will further lead to rationalizing of price chasing dynamics, hence, the feedback loop.

Also, an ascendant Phisix will tilt the balance of ‘frequency’ of the advance-decline differentials mostly to the positive or advancing side. So the advance decline chart would show denser on the positive column where advancing issues dominate.

From Divergence to Convergence

The current divergent phenomenon should not be misread as decoupling. We may see another series of re-convergence in global stock markets.

The US S&P 500 (SPX), Europe’s Dow Jones EURO STOXX 50 (STOX5E), Asia’s Dow Jones Asia/Pacific Index (P1DOW) and the Emerging Markets’ (MSEMF) MSCI Emerging Markets Free Index (EOD) have all bounced strongly from last week (green arrows).

With global equity markets on a heady upside explosion following the ratification of the Greece austerity vote which paves way for the Greece Bailout 2.0 (estimated at 85 billion Euros[10]), we should expect the previously divergent international signals to transition towards re-convergence.

Global markets are being flushed with liquidity once more. This time the flow will not only be coming from the Greece bailout 2.0, but likewise from the proposed bailout by Japan of the embattled nuclear industry, which would signify as an indirect bailout of her Banking industry which has massive loan exposure on the former[11].

The wave of bailouts appears as being intensified by increasing expectations for the reinstitution of asset purchases or Quantitative Easing by the Bank of England[12] (BoE)[13]. Guess who would be next?

Again the serial bailouts, divergent monetary policies by developed and emerging markets, negative real interest rates (here and abroad) and artificially low interest rates represent as key contributors to the prospective extension of the bullish momentum.

Of course, momentum won’t go straight forward, there will be interim or intermediate corrections. Yet these corrections should be seen as windows of opportunities to position.

---

[1] See Phisix: Divergences Point to a Bullish Momentum, June 26, 2011

[2] self-attribution-bias.behaviouralfinance.net, Self Attribution bias

[3] Wikipedia.org Self-serving bias

[4] Taleb Nassim Nicolas Fooled by Randomness, The Hidden Role of Chance in Life and in the Markets Random House 2005, p.56

[5] Soros George The Alchemy of Finance, John Wiley and Sons, p. 318

[6] Mises, Ludwig von, Free Banking and Contract Law, Chapter 17 Human Action, Mises.org

[7] Rowland Ron iShares Gives U.S. Investors Their First Philippines ETF, October 1, 2010, Seeking Alpha

[8] Stockcharts.com Glossary - W

[9] See ASEAN’s Equity Divergence, Foreign Fund Flows and Politically Driven Markets, June 5, 2011

[10] Bloomberg.com Euro Area Backs Greek Aid, Looks to New Bailout, July 03, 2011

[11] See Japan Mulls More Bailouts for the Nuclear Industry (and Mega Banks) June 28, 2011

[12] Express.co.uk SOFT PATCH CLOUDS OUTLOOK, July 3, 2011

[13] Bloomberg.com BIS Says Central Banks Need to Start Increasing Rates to Contain Inflation, June 27, 2011

In Bullmarkets Everyone Is A Genius, Not!

``Moreover, life is not long enough;- human nature desires quick results, there is a peculiar zest in making money quickly, and remoter gains are discounted by the average man at a very high rate. The game of professional investment is intolerably boring and over-exacting to anyone who is entirely exempt from the gambling instinct; whilst he who has it must pay to this propensity the appropriate toll.”–John Maynard Keynes

I would beg of your indulgence anew because I’d be dealing with issues that would defy the wisdom of the consensus.

For some, such may deemed as blasphemy, but for us, it has been a mission to disseminate our version of the truth or reality as we see it. It’s called prudent investing in our terms.

That’s because we’d like get protected from the worst enemy that any market participant or investor has always been confronted with; that’s no less than ourselves or our inflated egos.

As Friedrich Nietzche, ``But the worst enemy you can encounter will always be you, yourself; you lie in wait for yourself in caves and woods."

Self Attribution Bias: In Bullmarkets Everyone Is A Genius

There’s an aphorism that everybody’s a genius in a bullmarket.

In a sense that would be true, that’s because bullmarkets are basically tolerant or permissive of our mistakes.

Missed the bottom? Sold “low” or too early? Bought “high” or too late? Don’t you worry, markets will eventually redeem our positions! That’s because “High prices will go higher”!

In the same dimension, we have myriad of reasons for taking on positions: corporate or economic fundamental analysis, chart patterns or momentum triggers, recommendations from an expert, a “tip” from an associate or from social circles such as stock forums or parties over an insider info on M&A, joint venture, corporate buy-in, capital infusion or etc…, or simply because a friend said so- they’ll all be proven correct for basically the same principle!

Every trading success builds on our self confidence, even if they are founded from logical mismatches. For instance, conventional fundamental analysis is a long term proposition whereas assessing or weighing on ticker tape price gyrations by typical market participants are very short term in nature-so how does short term price watching square with the long term developments?

Yet with every success comes the attribution of our skills into the performance of our trading positions or our portfolio. A clear manifestation of this would be in social gatherings, where people would bluster about having bought stock ABC at the price X (bottom or near bottom) or sold the same stock at the price Y (top or near top).

Nonetheless, our so called “genius effect” is a common psychological foible known as the Fundamental Attribution Error or the ``cognitive tendency to predominantly over-value dispositional, or personality-based, explanations (i.e., attributions or interpretations) for the observed behaviors of others, thus under-valuing or failing to acknowledge the potentiality of situational attributions or situational explanations for the behavioral motives of others. In other words, people predominantly presume that the actions of others are indicative of the "kind" of person they are, rather than the kind of situations that compels their behavior.” (wikipedia.org)

In market terms, the Fundamental Attribution Error or the Self Attribution Bias is the tendency for people to attribute success to skills and of failures to bad luck or adverse fortune, when the reality is that they have only been responding to situational developments.

Here is a matrix of how the Self Attribution Bias works…

And perceptibly this has been the same reason why during bear markets people from the industry have been in the receiving end of brickbats.

Example, in the US uproar over the executive compensation brouhaha could partly be construed as the receiving end of the attribution bias. [As an aside, the financial industry has been the primary funding conduit of the US real estate bubble as a result of government policies that has vastly skewed their operating incentives see US Home Bubble Cycle: Upside Directly Proportional To Downside. While they are partly to blame as much as those who assumed the risk, the prime culprit would be government policies that fueled such mania. In a gold standard, none of these would have transpired in spite of market irrationality.]

So instead of having to take full responsibility over one’s decisions, in bear markets where decision errors have been glaringly penalized, the attribution errors by the sundry of market participants find an outlet in the blaming of others.

Despite the armies of so-called experts [economists, risk managers, statisticians, actuarial managers, lawyers, accountants, quant modelers etc… for both the buy and sell side institutions] in assessing the risk environment, isn’t it a wonder that most of those who suffered forget that risk ever existed at all?

Now, the consequence has been a barrage of lawsuits.

Profit From Folly

To quote Edwin Lefèvre in behalf of legendary trader Jesse Livermore in the classic Reminiscences of a Stock Operator, ``In a bear market all stocks go down and in a bull market they go up...I speak in a general sense.”

I would add that the phenomenon of blaming of others can be extrapolated as “in a general sense, in the ambiance of bullmarkets, relationships are harmonious and in bearmarkets they turn acrimonious.”

Why? Because as noted above, markets are fundamentally powered by psychology. (see figure 1)

Figure 1: Market Cycle Equals Psychological Shifts

As you can see, the fundamental attribution bias segues into “overconfidence” at the apogee of the every market cycle.

However, such psychological extremes eventually swings like a pendulum as the market transitions towards the opposite end, hence the accompanying psychological frictions in between the cycles.

Let me add that I have personally envisaged some instances of such “relationship disharmony” from this crisis. So this should come naturally or even intuitively for those who understand or have been disciplined on how the market cycle works.

Nevertheless, since markets always operate over the same process, then we should learn how to take advantage of the psychological lapses than fall prey to them.

As Warren Buffett have long admonished, ``Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it."

Thereby, the underlying goal of any serious investor should be to remain composed or calculably rational over the transitional phases of the market cycles while being cognizant of the progressing dynamics of the risk spectrum and likewise be insouciant to the wild swings of market psychology.

Taking away all that ego oriented stuffs diminishes the oomph of the markets, such a killjoy isn’t it?

Situational Attribution Is All About Policy Induced Inflation

``Believe nothing just because a so-called wise person said it. Believe nothing just because a belief is generally held. Believe nothing just because it's said in ancient books. Believe nothing just because it's said to be of divine origin. Believe nothing just because someone else believes it."- Buddha, Unconscious Beliefs

If fundamental attribution bias is the “undervaluing or failing to acknowledge the potentiality of situational attributions”, then that means people overlook or substantially underprices situational developments.

For instance, some have suggested that stock market prices today as having been “overvalued”.

Well in my view, prices are relative:

1. in terms of direction: low prices can go lower and high prices can go higher,

2. valuations are always subjective and

3. prices can be seen as higher/lower in a relative sense when compared to the specifics. In the psychological context this is known as the contrast principle/effect or judgments based on relative comparisons or simply higher compared to what or whom?

Importantly, the issue of prices or valuations would greatly depend on the situational attribution or developments.

Situational Directions

So what has been the “situational” course of events?

It’s apparently not imputable to traditional or conventional specific metrics, because evidences haven’t been pointing to such direction, see Figure 2.

Figure 2: Stockcharts.com: Correlation: Phisix, Euro, Emerging Markets and Oil

The Euro which comprises 57.6% of the US dollar Index according to the ICE Futures, seems to be leading the way for Emerging Market Stocks (EEM), including the Philippine Phisix (PSEC) and commodities as represented by oil (WTIC).

The highs of the Euro (vertical blue lines) have been coincident with turning points of the specified markets above, but with a lag.

In short, over the interim the rising euro, or the inversely the falling US dollar index seems tantamount to higher financial asset prices.

As we have repeatedly argued, the global inflation dynamics are apparently being transmitted into equity, commodities and property markets (ex-developed economies) via the currency channel, as described in many past issues including the latest [see last week’s Warren Buffett’s Greenback Effect Weighs On Global Financial Markets].

Therefore, if markets haven’t been driven by conventional specific metrics, then why should we utilize conventional metrics as a gauge to determine our trade positions? That would be like using sonar to track airplane movements.

Inflation Dynamics In The Phisix And The World

The beauty of any theory would lie within its applicability or by the function of factual evidences… (see figure 3)

Figure 3: PSE Sectoral Indices: Rising Tide Lifts All Boat

The sectoral indices of the Philippine Stock Exchange (PSE) depicting synchronicity in motion.

Current market activities have strongly been demonstrative of the tidal ebbs and flows (or our Livermore-Machlup model see Are Stock Market Prices Driven By Earnings or Inflation? ) of the Philippine marketplace as we have long forecasted.

Our outstanding premise has been the lesser the efficient the markets the more prone to inflation driven dynamics.

Although domestic stock prices have risen in general, price levels have been nuanced, where some sectors have been outperforming the others [see Sectoral Performance In US, China And The Philippines].

The present pecking order of outperformance: Mining (green), Holding (red), the All Index (maroon), commercial (pink), property (blue), bank (black) and services (grey).

As you can see, the “rising tide lifts all boats” phenomena compounded by the relative price level actions have all been reinforcing the symptoms of an inflationary (liquidity) driven boom.

Such situational course of events hasn’t confined locally but to the world though.

As we pointed out in the latest Global Stock Market Performance Update: Despite China's Decline, Emerging Markets Dominate, 68 (83%) of the 82 issues monitored by Bespoke Invest (based on August 20^th) registered positive gains against 14 (17%) which accounted for losses.

Despite China’s Shanghai benchmark, which fumbled for the fourth consecutive week of losses (this week 3.38%) for an aggregate 4 week loss of 17.2%, China has been up 57% on year to date basis.

The Philippine Phisix as of Friday’s close seems to be closing the gap fast.

Nonetheless, the best performances have been among key emerging markets (many of which are situated from Asia), some having been beneficiaries of low systemic leverage and an unimpaired banking system, which has responded favorably to lower interest rates, while some have been reaping from rising commodity prices.

Although we expected some degree of differences relative to the US to emerge, this hasn’t been so yet.

The evolving activities in the US seem to reflect on more of the actions seen in most of the world.

According to Bespoke Invest, ``93% of stocks in the S&P 500 were trading above their 50-day moving averages. That number has come in slightly with today's declines, but it's still above 90%.” (emphasis added)

In short, macro thinkers, who fixate over the actions of the US, but negate the activities across the geographically diverse asset markets have been missing out on these developments.

The Validation Of Our Livermore-Machlup Model

More proof of more liquidity driven boom in the domestic market? (see Figure 4)

Figure 4: PSE: Daily Traded Issues (left) and Number of Daily Trades (right)

When the marketplace becomes reanimated, the speculative appetite expands.

This implies that transactions would cover issues that are less liquid (low market float), which can be found mostly among second or third tier securities.

As you can see in the left window, the daily traded issues have been broadening. This means that the advances in the Phisix are being seen in general terms, validating Jesse Livermore’s assertion.

Moreover, improving daily trades suggests of more people participating or engaging in churning activities.

Again another manifestation of a bullish breadth (right window).

It doesn’t stop here.

Figure 5: Advance Decline Spread: Broadening Gains

Another indicator would be the advance decline spread.

In the height of the selloff in 2008 (red ellipse), the advance decline spread has been obviously tilted towards huge broad based selloffs.

Today we see the opposite, since March of 2009, the internal activities in the Philippine Stock Exchange has largely been in favor of the advancing issues (light green ellipse).

To consider, local investors have usurped the role as the dominant pillar of the current state of the Phisix, a role which we presume should contribute to a sturdier trend and likewise could be deduced as having become less sensitive to the external developments, in contrast to the 2003-2007 cycle.

Added together, all these essentially have been validating our Livermore-Machlup inflation driven tidal dynamics thesis, where the collective inflationary policies by global governments will presumably take a major role in determining asset pricing conditions.

So stubbornly insisting on the idea of conventional metrics as a gauge of the market’s parameters will only lead to wide off the mark appraisals and severe underperformance.

The Economic Disconnect And Domestic Mainstream Policies

So does a 54% year to date surge in the Phisix translate to a V-shape recovery in the Philippine economy?

The Economist gives as an answer, (bold highlights mine)

``Although the return to robust quarter-on-quarter growth of 2.4%—the highest in over two years, following a first-quarter contraction of 2.1%—fits the international pattern, the economy has not contracted at all in year-on-year terms during the current global crisis. Growth of 0.6% in the first quarter appears to have marked the low point in the current cycle. Still, the recovery is far from entrenched. At just 1.5% year on year, real GDP growth in the three months to June was far below the 2004-08 quarterly average of 5.5%.

``In output terms, the service sector was the main driver of economic growth in the second quarter. Services output rose by 3.1% year on year, up from 2% in the previous quarter. Government services rose by 7.7% in real terms, reflecting stimulus spending. Trade rose by 3% on the back of strong growth in retail activity. In contrast, agricultural growth slowed sharply due to weak production of rice and some other crops. And industry contracted for the second straight quarter, falling 0.3%. Although the government's fiscal measures boosted construction, which rose by 16.9%, and mining and quarrying also recorded a big gain, growth in these areas was more than offset by the decline in manufacturing. This underlines the weakness of demand for Philippine exports, which has hit manufacturers hard.”

So seen from mainstream’s “money is neutral” perspective, then today’s Phisix, if it were to reflect on the performance of the economy, has vastly been overbought.

But seen from a perspective where the economy has been detached from the stock market and where the latter have been propelled by circulation credit expansion from a combination of government spending, low interest rate regime and a raft of other Bangko Sentral ng Pilipinas (BSP) policy instruments [as expanded peso and US dollar based repurchasing (repo) agreement, Credit Security Fund (CSF) that guarantees funding access to small cooperatives from which provides financing to small business and the easing of accounting regulations such as reclassifying “financial assets from categories measured at fair value to those measured at amortized cost” and where banks were allowed “not to deduct unrealized mark-to-market losses in computing for the 100 percent asset cover for FCDUs, effective until 30 September 2009).” (Gov. Amando Tetangco Amcham Speech August 11)], all of which could snowball into a massive source of structural misallocation of resources in the local economy, prices will be determined by the scale of leverage that will be imbued by the domestic financial system.

Yet like all policymakers globally (except for Israel which has dumbfounded the marketplace by being the first central bank to raise interest rates), Philippine BSP Governor Amando Tetangco takes on the mainstream tack, (bold emphasis mine)

``This 200 basis-point cumulative reduction in the policy rate will help stimulate economic growth or help moderate the slowdown by bringing down the cost of borrowing and reduce the financial burdens on firms and households. This will help us avoid or at least mitigate the negative feedback loop from weakening economic conditions to the functioning of the financial sector. Lower policy rates would also have the effect of shoring up business and consumer confidence.”

Business Cycle, The Philippine Version

Artificially reduced rates will only send false signals of the true amount of real savings available for lending. This would unnecessarily increase the acceptable level of risk taking activities by shifting the time preferences for both the lender and the borrowers. This in turn induces investments in the durable capital goods and or investments in the longer term process of production at the same time where consumption demand will be expanding which thus would leads to serious economic distortions and competition for resources, or in short, malinvestments.

To quote Professor John Cochran and Noah Yetter in Capital in Disequilibrium: An Austrian Approach to Recession and Recovery, ``But with a credit expansion relative reduction in the interest rate, producers are attempting to lengthen the production structure while consumers are attempting to shorten it. Longterm investment is booming at the same time as demand is growing for final consumption. Available resources are not sufficient to sustain both processes— individual business plans made in response to the interest rate change and the new pattern of consumer spending set up the problem of the ‘dueling production structures’. Thus the expansion in the money supply brings about unsustainable growth, characterized by a pattern of over consumption and over investment accompanied by malinvestment, investment inconsistent with consumers’ time preferences.” (bold highlight added)

Moreover, such policies allows the public to take on more debt than warranted which leads to systemic overleverage similar to the Asian Crisis, US housing and dot.com bubbles, as Prof, Thorsten Polleit explains in Bad News for Our Money ``It allows borrowers to issue even more debt, refund maturing debt at artificially suppressed interest rates, and reduce their real debt burden at the expense of money holders. The downward manipulation of the interest rate drives a wedge between the (real) market interest rate and the societal time-preference rate, and therefore wreaks havoc with the economy's intertemporal production structure. It leads to economic impoverishment, as it would stimulate consumption at the expense of savings and encourage malinvestment of scarce resources. What is more, suppressing the interest rate does not provide a solution to the overindebtedness problem, which is a result of government-controlled fiat money produced by banks extending credit in excess of real savings.”

Moreover, such policies only borrow economic activities from the future.

Floyd Norris of the New York Times recently noted how US homes prices reflected on the degree of inflation, initially rising (boom) but falling back (bust) to the same inflation adjusted price levels where the cycle all began [see US Home Bubble Cycle: Upside Directly Proportional To Downside]. Of course, all these came at the expense of the society. Hence Mr. Tetangco’s anxiety over the negative feedback loop can only be deferred until sometime in the future when enough imbalances will force itself on the marketplace.

Figure 6: Washington Post: Banks 'Too Big to Fail' Have Grown Even Bigger

Of course, monetary inflation has moral consequences; it redistributes wealth in a way where the initial recipients would be major beneficiaries from such policies.

Similar to the US where taxpayers and small businesses and small banks today have been sacrificed for “too large to fail” institutions which has even expanded more today (see figure 6), in the Philippines, investors with liberal access to the domestic banking institutions are likely to be the capitalists benefiting from the economic rent or politically bestowed economic privileges (licenses, cartels, monopolies).

So the wealth redistribution from present economic policies is likely to benefit the political elite at the expense of rest of the society.

In addition, with the fast approaching political Presidential election season, we should expect the present expansionary monetary landscape to be sustained. Here is a clue, again from Governor Tetangco, “Lower policy rates would also have the effect of shoring up business and consumer confidence”.

Besides, government’s fiscal spending to are likely to rev up in order spruce the economic landscape and financial marketplace for a Potemkin Village effect [see previous discussion in Philippine Peso: Interesting Times Indeed].

Well, Governor Tetangco in terms of policymaking would likely seek the comfort of the mainstream crowd once such policies start to unravel.

Hence he is likely to take heed of the insights from the mainstream icon at heart, this from John Maynard Keynes, ``Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”

Anyway, comfort of the crowd it is for Asian policymakers.

From China’s Premier Wen Jiabao (Reuters) ``Therefore, we must maintain continuity and consistency in macroeconomic policies, and maintaining stable and quite fast economic growth remains our top priority. This means we cannot afford the slightest relaxation or wavering."

Or From South Korea’s Finance Minister Yoon Jeung Hyun (Bloomberg/Credit Bubble Bulletin) ``There is a risk that the economy may fall into a double dip if the government shifts the stance of policy too fast…It’s premature to discuss the timing of an exit strategy.”

However, even if Asian authorities have qualms on tightening present policies, the interest rate markets suggest that they will be tightening soon.

According to the Wall Street Journal, ``Asia's central bankers say they have no timetable for raising interest rates. But some investors already are placing bets to the contrary, speculating that India will go first, followed by China and Korea.

``The money is being put down in the huge interest-rate-swaps market, where the yields on two-year maturities across much of Asia have risen sharply in the past few months.

``This market, which had $403 trillion of contracts outstanding at the end of 2008, draws a range of investors, from hedge-fund managers to companies looking to hedge against a change in monetary policy. About a quarter of its volume is traded in Asia.”

Nonetheless even if Asian authorities begin to tighten for as long the US maintains ultra loose rates, pump the prime (deficits expected to reach $9 trillion in 2019!) and flood the global system with greenback emissions (Warren Buffett), we should expect the continued stickiness from inflation to be reflected on financial asset prices.

While markets could indeed show episodes of outsized volatility, as in the case of China or in the past in Russia, the impact from the present policies, in support of the Ponzi based global economic system, which are likely to be stretched way into the future for political motivated reasons should cushion or even give a boost to the reflation in asset prices.

Timing markets won’t be a recommended approach given the swiftness of market action.

Bottom line: Situational Attribution is all about policy induced inflation.