US Politics: Extrapolating Hope and Change to Presidential Term Realities

In politics “hope” and “change” are common catchphrases which may help serve as a useful ticket to winning elections.

According to the Economist, ``BARACK OBAMA is fond of hope and change. By one tally, he said “hope” nearly 450 times in speeches delivered on the campaign trail. (By contrast, his rival John McCain only used the word 175 times.) “Change”, too, was a campaign buzzword. In his inaugural speech Mr Obama made three mentions of hope and only one of change (plus a “changed”). He mentioned America seven times, followed by “work” and “common” (six times each).

``While hope has found a place in each of the 26 inaugural addresses, change is used more sparingly. Seven inaugural speeches did not contain the word; six more made use of it just once. Presidents coming to office during economic booms, such as Calvin Coolidge and Warren Harding in the 1920s, Dwight Eisenhower and then George Bush junior, have been heavier users of hope than those who were inaugurated during leaner times.”

The Economist list the number of times “hope” and “change” were used in all previous presidential inaugurations.

Why the prominent use of hope and/or change by politicians? To market themselves…even after elections.

As Seth Godin explains, ``The reason is simple: people need more. We run out. We need it replenished. Hope is almost always in short supply.

``The magical thing about selling hope is that it makes everything else work better, every day get better, every project work better, every relationship feel better. If you can actually deliver on the hope you sell, there will be a line out the door. Hope cures cynicism. Hope increases productivity. Hope needs no justification.”

Yet, marketing and delivering promises are two distinct things. In the political sphere, sloganeering can be possibly shaped by the prevailing economic conditions or by just plain rhetoric.

To advance this perspective, we will attempt to get some clues by comparing these to several indicators.

But we will have to narrow the Economist list starting from 1953. The abridged ranking is as follows:

1. Dwight Eisenhower (1953,1957), 2. George Bush Sr (1989), 3. George Bush Jr. (2005), 4. Richard Nixon (1969), 5. Lyndon Johnson (1965) 6. Ronald Reagan (1985), 7. John Kennedy (1961), 8. Harry Truman (1949), 9. Ronald Reagan (1981), 10. Bill Clinton (1993, 1997), 11. George Bush Jr. (2001), 12. Jimmy Carter (1977) and 13. Richard Nixon (1971).

And we will concentrate on the top 5 heavy political rhetoric (PR)…

Chart Federal Reserve of Atlanta

From the GDP standpoint there seems to be little correlation between the top PRs and economic rate of change.

What seems noteworthy however is that the GDP volatility had been materially been narrowing from the Eisenhower to the Reagan Period (1953-1981) compared to the Reagan to Bush era (1981-2009).

Chart Federal Reserve of Atlanta

The next chart is the measured against unemployment.

The top 4 out of 5 PR Presidents: Eisenhower, Bush Sr., Bush Jr. and Nixon saw unemployment surge as their inaugurals nearly coincided with the US economy’s transition to recession periods.

Only President Lyndon Johnson presided over a declining unemployment rate.

But noticeably for the two term Presidents in Eisenhower and George Bush Jr., the trend had mostly been up during their entire tenure!

Chart from Wall Street Journal

The above chart from the Wall Street Journal exhibits the approval ratings during their tenure.

Some noticeable points:

-Harry Truman and George Bush Jr. had the highest approval ratings but spectacularly collapsed at the culmination of their term.

-George Bush Sr., who also had a surge in ratings possibly due to the Iraq war, likewise saw a sharp decline but not as steep as George Bush Jr. or Harry Truman.

-Dwight Eisenhower, who oversaw a sharp rise of unemployment, managed to end his term with exceptionally high approvals rating similar to Bill Clinton. Could this be due to the Korean war?

-Except for President Bill Clinton every past Presidents saw lower exit ratings compared to when they assumed office but the degree of variances are dissimilar. Nonetheless, in his inaugural address, Bill Clinton had the highest use of the word "change" among the Presidents.

-only George Bush Jr. seemed to score low in terms of popular ratings combined with a tenure of rising unemployment.

The high approval ratings can be expressed in terms of public approval of perceived actions or satisfaction of economic conditions or influenced by nationalistic fervor (war, 9/11 etc.) or expectations of hope or change and cannot be directly measured as economic performances.

Yet high approval ratings tend to be followed by a collapse over the years.

Finally we find no strong general association between political rhetoric and economic performance or whether politicians delivered the goods they promised.

Superman Gordon Brown: The World's Savior?

In a session at the House of Commons last December, England's Prime Minister Gordon Brown goofs about saving the world....errr the banks. (source: Telegraph).

Anyway this just an example of F. Hayek's 'Fatal Conceit', or the overweening belief of one's omniscience. A good quote from Thomas Sowell, ``Politics is largely the process of taking credit and putting the blame on others-- regardless of what the facts may be. Politicians get away with this to the extent that we gullibly accept their words and look to them as political messiahs."

Low Hyperinflation Risk For the US?

According to some analysts, the risk of a Zimbabwe like hyperinflation to happen to the US dollar is slim if not implausible. Because the idea is, once 'inflation' gains a footing and eventually overcomes 'deflation' it will be easier to control.

Perhaps. But such is giving too much credit to the ability of authorities to steer us out of trouble.

But before acceding to such premises, it is best that we must try to understand Zimbabwe’s hyperinflation model.

We quoted Albert Makochekanwa of the Department of Economics of the University of Pretoria, South Africa in our Will Debt Deflation Lead To A Deflationary Environment?, who wrote in his paper “Zimbabwe’s Hyperinflation Money Demand Model” the following: ``Borrowing from Keynes (1920) suggestions, namely that ‘even the weakest government can enforce inflation when it can enforce nothing else’; evidence indicates that Zimbabwean government has been good at using the money machine print. Coorey et al (2007:8) point out that ‘Accelerating inflation in Zimbabwe has been fueled by high rates of money growth reflecting rising fiscal and quasi-fiscal deficits’. As a result of that, the very high inflationary trend that the country has been experiencing in the recent years is a direct result of, among other factors, massive money printing to finance government expenditures and government deficits.”

So, exploding DEFICITS…

From caseyresearch

Plus a jump in government payrolls which has surpassed the private sector, which further entrenches government spending...

Source: contraryinvestor.com (Fabius Maximus)

Plus, a soaring growth money supply, which according to Jeff Tucker of Mises.org seems starting to respond…And importantly a snowballing clamor for the printing press:

Previously we posted Ken Rogoff see Kenneth Rogoff: Inflate Our Debts Away!

And now:

From Peter Boone and Simon Johnson (Wall Street Journal Blog)…

``The Fed should announce that it will create inflation in 2009, i.e., it will do whatever it takes to make sure that wages and prices rise, rather than fall, in the next 12 months. And it should back that up with more aggressive monetary expansion, buying even more government and private securities. We cannot wait for a deflationary death spiral to take hold

From the Economic Times…

``There is not much government can do to accelerate the real rate of growth. The remaining option is to tolerate, even encourage, a faster rate of inflation to improve debt-service capacity. Even more than debt nationalization, inflation is the ultimate way to spread the costs of debt workout across the widest possible section of the population.

And at ZERO interest rates, ``we are entering a world with interest rates that are far too high for the economy's good," Goldman Chief U.S. Economist Jan Hatzius wrote in a Jan. 16 research note.” (Businessweek)

``The solution is obvious: The Fed needs to deliberately raise the rate of inflation—maybe not all the way to 6%, but significantly above zero. One way to do that is to print lots of money. The Fed can create money from thin air by purchasing assets such as Treasuries and mortgage-backed securities and paying for them by crediting the seller with newly created reserves at the central bank.” writes Peter Coy of Businessweek

Essentially Dr. Gideon Gono of Zimbabwe seems to be gaining quite a following among personalities in Wall Street, the academe and in the media...Aside from of course, public authorities like Mervyn King Governor of the Bank of England who will likewise do a Gono.

As for the risk of hyperinflation in the US or elsewhere, I’d rather be guided by Ludwig Von Mises in Human Action p. 427….

``But then finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against "real" goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.”

``It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last.”

Niall Ferguson: Ascent of Money

Great educational stuff on "money" and today's crisis by Niall Ferguson

The Good and Bad Sides of a Global Car Sales Slump

The recent sharp slowdown in global economies apparently had also been reflected on a crash of car sales.

According to the Economist, ``NO COUNTRY or company has been immune from the collapse in car sales. Figures released last week confirmed that the last half of 2008 saw the most savage contraction in demand for motor vehicles since the second world war. In America sales of cars and light trucks in December fell by 33.5% compared with a year ago, and in Spain they crashed by nearly half. Even in Brazil and China, where sales increased on an annual basis compared with 2007, saw sharp declines in the last quarter of 2008. Of the world's big carmakers, Chrysler is in the most trouble, thanks to poor products and a reliance on the American market, where its sales dropped by more than any other carmaker.”

So falling car sales equals an inventory pile up.

Here is a visual account or a sample of the on going slump- a parade of surplus Peugot cars.

For more pictures of unsold cars check out the Guardian.

There are two sides to every coin...

While this accounts for as BAD news for automakers and the ancillary industries…

this should signify as GOOD news for consumers as car prices fall significantly!

A Primer On Stock Markets-Why It Isn’t Generally A Gambling Casino

This article is dedicated to my friends at RC Mandaluyong.

People normally bear the misimpression that stock markets function as some variant of gambling “casino”.

Never have they realized that stock markets bear a significant financial and economic merit. Any country that desires to adopt some degree of market based economy requires the presence of a stock market. Even in places which are deemed as economically, socially or politically chaotic or unstable such as Iraq, Zimbabwe or Nigeria has an operating stock market.

Basic Function

The stock market operates similar to the markets where we buy our food. Basically both of these markets function as platforms for conducting exchanges between buyers and sellers. The difference is in the products traded. For our “conventional” markets, it is based on comestible stuffs and or other household wares, whereas for the stock market they involve corporate financial securities such as common stock or preferred stocks or Exchange Traded Funds (ETF).

Going deeper, stock markets- as part of the capital markets- often reflect the basic function of money as medium of exchange, unit of account and a store of value.

-they function as a platform to trade financial securities (medium of exchange),

-they serve as a repository of collateral since they represent ownership in companies that are backed by assets and stream of revenues (store of value) and

-they are valued through the pricing mechanism whether these are driven by momentum or emotions, corporate fundamentals or micro/macro economy as “inflation” (unit of account).

Since all financial markets are driven by the price mechanism, the following variables represent as key drivers in ascertaining prices:

-a collective assessment of the fluctuating balance between demand and supply

-accounts for the subjective value judgments by market participants

-signifies the time dimension in shaping for market participants expectations, whether it short medium or long term, and lastly

-primarily influenced by psychological dimensions (such as greed or fear) and cognitive biases (such as overconfidence, anchoring, risk aversion etc.)

And because markets are determined by divergent psychological expectations they result to a variable flux in prices as seen in the tickertape. This is known as volatility.

Yet prices are always set on the margins. What you read on the stock market section in the newspapers account for as prices determined by marginal investors, where daily traded volume represent only a fraction of total shares outstanding or market capitalization, and not the majority owners.

And the resultant price volatility set by marginal investors is what accounts for as the conventional impression of gambling “casino” like actions.

Risk and Uncertainty

The common impression of the public is that price fluctuations or volatility are a function of sheer randomness. And because of the perception of such unpredictability they are deemed to be risky, which adds to the gambling misperception.

But as market savant James Grant says, ``The truth is that no investment asset is inherently safe. Risk or safety is an attribute of price.”

Of course, whether it is stock market or any non-financial enterprise or even public governance the fundamental problem will always be tomorrow’s uncertain outcome. We can’t even be certain if we will see the sun shine tomorrow. As an old saw goes, there is nothing certain in this world except death and taxation.

The point is- the aversion to the stock market is generally not about its unpredictability, but about having an insufficient understanding of how markets operate. To quote, the world’s richest and most successful stock market investor Mr. Warren Buffett, ``Risk comes from not knowing what you are doing.”

Yet if one scrutinizes the market, it can be generally observed that markets rarely operate on random.

This makes uncertainty of the future a measurable component. The same uncertainty is what can be translated to as “risk” or a “state of uncertainty where some of the possibilities involve a loss, catastrophe, or other undesirable outcome” to quote economist Frank Knight.

In addition, compared to a dice toss, or a bet on a lottery, or a horse race which is immediately determined by the end result of one particular event, markets can be distinguished from these high return high risk activities, because they operate as a continuing process.

This makes time a significant contributor to risk assessment.

From the distinguished finance author Peter L. Bernstein, ``Risk and time are opposite sides of the same coin, for if there were no tomorrow there would be no risk. Time transforms risk, and the nature of risk is shaped by the time horizon: the future is the playing field.”

Reward Risk Tradeoff

Everyone wants to profit. But in financial or stock markets or in any “market based” entrepreneurship endeavor, profits come by as returns of investments (ROI). In other words, one has to accept some degree of risk in order to generate profits.

Applied to regular business enterprises, this also translates to same dynamics: risk capital has to be deployed, in the expectations of future stream of revenues, which fundamentally determines your return on capital. The difference is that in the stock market as a shareholder, you become a passive investor.

Yet because we are uncertain about tomorrow, there is always the risk of undesirable or adverse outcome in the marketplace.

Again like any entrepreneurial activities, success or failure in the stock market always entail offsetting risks relative to your capital to determine your expected returns. This is what is known as the Risk-Return Tradeoff.

Put differently by understanding and limiting your risk, you can amplify or optimize your returns.

This brings us to the basics of risk identification. Fundamentally, there are 3 major risks to consider;

-systematic risks or market risk- risks to the general stock market such as government policy repercussions as war, protectionism, regulatory overkill, monetary policy mistakes, excessive taxation or risks of an economic recession or risk from bubbles: asset-liability mismatch seen in domestic balance sheets or in currency framework or overleverage in the financial or economic system etc…

-residual common factor risks or risks relative to a specific industry such as industry directed regulations, tariffs, etc... and lastly,

-residual specific risks (e.g. risk relative to a particular stock or company such as profitability, management, labor, inventory, etc…)

This means that once the above risks can be assessed, which correspondingly may determine one’s risk reward profile and subsequently applied to the configuration of a portfolio mix, the much feared losses can be minimized while the profit opportunities optimized.

Let me cite a common example; some financial institutions as banks offer Unit Investment Trust Funds (UITFs). Such investment vehicle essentially accounts for as fiduciary fund generally designed to cater to an investor’s risk appetite. But the portfolio mix is standardized; it is offered in either foreign (US dollar) or domestic (Peso) denominated funds and generally split into a choice of equity, fixed income (bond or money market) or balance fund (50% equity-50% balance).

For an investor of the UITF it means 3 things:

First, passive investment-investment allocation is determined by the fund manager assigned for a particular portfolio distribution. Your risk reward ratio is subject to the fund manager’s risk distribution activities. This means your portfolios performance is also subject to management risk.

Two, since the balance of accepting risk is standardized; a choice of all fixed income (conservative risk taking), balance fund (moderate risk) and equity fund (aggressive), the unforeseen risk is the opportunity cost of being “flexible”. In short, a standardized portfolio could be deemed as rigid.

Lastly, a foreign currency denominated fund means expanding your risk spectrum to include the currency risk or volatility from currency valuations.

However in an actively managed portfolio, you can apply the same risk allocation strategies, but this time, being more malleable to your risk profile and time frame based returns expectations.

Market Cycles

Whether we talk about economics or markets, we always deal with psychology.

It is because people act, based on their perceived values or priorities or guided by incentives, to attain certain desired ends.

Thus, the prevailing social psychology, as reflected in moods and actions, underpins the economic activities of savings-consumption-investment decisions, aside from cycles in the financial markets.

Here is an example of flow of the psychological cycle that drives market and or economic cycles.

Generally speaking, since people as social beings, we tend to act in crowd like fashion. This essentially forges extreme swings from outright optimism to downright depression, brought upon by our base instincts of “fear and greed”.

Applied to the economy we see the same wavelike movement…

Thus, economic trends transit from recovery, prosperity, contraction and recession which defines the general economic cycles, and which are nearly identical with the flow of the public’s social moods or psychology.

And as mentioned earlier, stock markets are likewise driven by crowd psychology. This in essence determines the price actions. And because crowd psychology is shaped by time influences, such invariably leads to trends which determine what is known as the stock market cycles.

The stock market cycle can be identified as bottom, advance, top and decline. In the above, the Philippine Phisix chart since 1980 shows that we appear to be undergoing a second leg of a long term cycle.

Again whether it is the stock market, or real estate or any asset class subjected to price actions, they are all influenced by the general trends of psychology.

The same can be applied to boom-bust cycles.

Boom bust cycles account for as the extreme flow of fund swings to certain industries which are typically manifested or vented on financial markets. Boom cycles are usually fueled by massive credit expansion, overspeculation and euphoria, while the bust cycles are the opposite of boom cycles; credit contraction, massive losses from liquidations, liquidity constraints, retrenchment of economic activities or plain risk aversion.

The present bust in the US, preceded by a boom in its housing industry, is emblematic of this phenomenon.

Speculation and Economic Benefits of the Stock Market

Because we can’t foretell of the future accurately, any act of capital allocation basically represents as speculative activity. But where the difference lies, again, is in the degree of volatility. A dentist may have less volatile flow of patient visits compared to a businessman engaged in distribution of cellphones.

However, most speculative actions in the marketplace are always associated with short term movements. Yet, unknown to most, the speculative component helps increase the liquidity or tradeablity of a security or markets, which essentially produce greater pricing efficiency or reliability of market price signals.

Remember, price signals function as our principal incentives for deciding how to allocate resources which can be seen in the context of saving, investing or consuming.

Finally, there are other economic benefits that the stock market provides to the society:

1. The stock market is a vital part of the process from which we coordinate production. Ideally stock prices should reflect the productivity of business firm aside from market’s discernment of the entrepreneurial judgments concerning future productivity.

2. It competes with the banking sector in determining the degree of mobilization of savings into investment. From a national scale this becomes a formidable channel for economic advancement in terms of efficiency of capital deployment.

3. Unknown to many, stock markets often function as forward indicators, such that they have been known to predict upcoming recessions or prospective recoveries. Thus, movements in the financial and stock markets can give a clue to the transitioning business environment, which should help management or businessmen, in allocating resources or in applying their business strategies going forward.

4. It operates as alternative avenues for fund raising (public listing), intermediation (using shares as collateral for borrowing-lending) or liquidity generation (buying or selling a company).

5. Because the markets operate as an organized platform of exchange, the ease from a market’s liquidity allows companies to save on transaction costs: search cost (matching buyers and sellers), contracting costs (cost of negotiation) and coordination cost (meshing securities of different industries into a single platform), which frees up capital for other usage.

6. Allows wider public participation in the ownership of major companies, which expands the concept of private property ownership.

7. Allows some individuals to save from taxation (e.g. inheritance taxes)

8. Because stock markets function as repository of collateral or store of value, it can serve as protection or safehaven against hyperinflation or a severe form of a loss of purchasing power of a currency.

In the case of Zimbabwe where (hyper) inflation rate has reached an astounding 231,000,000%, its stock market has skyrocketed 960 QUADRILLION percent on a year to date basis as of November 4^th, (All Africa.com) considering more than 5 years of severe economic contraction and 85% unemployment rate. Unfortunately because of some political reasons, the Zimbabwe Stock Market has been suspended since December 17^th (Bloomberg).

Stock Market Is Generally Not A Casino Until…

The overall the goal of this article is to enlighten the public from the mistaken notion that stock markets generally represent as gambling casino.

Given that the stock market has measurable risk-reward variables, involves time continuum dynamics and value added functions (as dividends) it operates like any entrepreneurial undertaking.

Moreover, it has an economic wide and social significance which is largely unappreciated by the uninformed public.

Hence, the speculative ‘casino’ trait is often associated to individual actions or participants who engage in the markets with a short term outlook and without the proper understanding and scrutiny of risk. [Further reading please see Professor Alok Kumar of McCombs School of Business, University of Texas in a recent paper, Who Gambles in the Stock Market?]

Lastly of course government interventions can tilt or distort any markets away far from its price signaling efficiency. This is where the level of the playing field or the distribution share of the odds are skewed to favor one party over the others, mostly the recipients or beneficiaries from these interventions. Where the governments assume the role as the HOUSE and the beneficiaries as the DEALERS, then all other participants operate as PLAYERS, hence your basic description of a gambling casino.

Will “Divergences” Be A Theme for 2009?

``The Chinese use two brush strokes to write the word 'crisis.' One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger - but recognize the opportunity."-President John F. Kennedy

Doug Noland of the Prudent Bear’s Credit Bubble Bulletin rightly describes today’s market activities as a “divergence”.

Where most global economies seem to be phasing into an excruciating and punishing downside adjustment, there seems to be some signs of ``unequivocal signs of life” in select debt markets as important credit spreads have somewhat materially eased.

Although the surface may yet conceal the ``acute stress out there not visible to the naked eye,” our ‘biased’ conjecture leads us to interpret that these could be possible incipient signs of our long awaited “divergent” responses to the “convergent” policy approaches because of the “divergent” structural frameworks of each of the national political economies. In short, our “spillage effect”.

True, while most of the major equity markets remain under significant pressure. These could have been prompted by the market’s ingestion of the onslaught of the negative news, yet even in this aspect we can also see some indications “divergences”.

Visible Acute Stress In US Banking System

Last week, the developments in the US banking sector unveiled the second chapter of the massive transformation of the US banking system. The erstwhile marquee banking behemoths in the name of Citibank and Bank of America, which have been enduring the US government’s surgical knife, will undergo another major operation.

Citibank [C], like a work of karma, which ‘danced’ to the tune of the “securitization” during the pop music days of the shadow banking system, will possibly end up being ‘securitized’ itself; sliced, diced and sold to investors or as this CNN Money report calls it: “divestiture”, e.g. Citibank’s brokerage unit the Smith Barney is reportedly in a deal to be merged with Morgan Stanley.

On the other hand, Bank of America [BoA] will need to enhance and facilitate its digestive juices to reluctantly swallow, under the behest of the US government, another former investment banking titan Merrill Lynch. This deal reportedly will be backstopped by a $20 billion capital infusion and a $118 billion guarantee on the outstanding liabilities from the US government (Bloomberg). And this comes already after previous injections of $15 billion to Bank of America and $10 billion to Merrill Lynch.

All these demonstrate how the government has been dealing with the conundrum of debt overhang as aptly described by this article from the New York Times, where ``any systemic solution has to deal with the bad assets, once and for all.”

And yet the problem of managing “bad assets” is fundamentally one of valuations and asset identification from which the US government won’t allow markets to determine. This signifies as the ultimate paradox; the US government has been earnestly trying to discover an acceptable substitute for market based pricing to no avail-without having to overpay for these ‘toxic’ financial instruments (these might not qualify for as an ‘asset’ since they can be priced at zero or have negative value) at the expense of their taxpayers and the perpetuation of the perils of the moral hazard.

Meanwhile, banks have been refusing to sell these instruments because of the consternation of recognizing added losses which would further impair their already ruptured balance sheets, and most importantly, in the hope that the US government will ultimately rescue them from their miseries.

Yet expectations and government responses have been “divergent”, decrying the BoA deal the Wall Street Journal editorial wrote, ``…the feds believe that the way to calm financial markets is to force the nation's largest, and a heretofore healthy, bank to swallow toxic assets it didn't want.”

At the end of day, the US government’s effort to subdue markets forces will mean a critical choice between saving the taxpayers or the banking system, where the endgame could be the outright nationalization of its banking system or yielding to debt deflation.

And the dominant view has been fittingly enunciated by the same New York Times article, ``That is why you would need to throw more capital into the banks as part of a systemic solution…In past financial crises, it has often been the bold and brilliant stroke that has restored confidence and revived the financial system. During the German hyperinflation of the 1920s, the government actually created a new currency. During the Latin American crisis of the late 1980s, the United States government created so-called Brady bonds, which cleverly allowed banks to get their Latin American debt off their balance sheets by turning it into tradable instruments. And here we are again, in need of bold action and strategic thinking and the restoration of confidence.” (bold highlight mine)

Therefore ‘bold and brilliant strategic thinking’ extrapolates to the creation of more of the same actions that brought us here in the first place. To paraphrase the famous US Senator Everett Dickson quote, ``A trillion here, a trillion there, and pretty soon you're talking about real money.” And the painful reality is that real money is being diluted with the wave of paper money issuance.

As we have repeatedly been saying political choices will ultimately shape the rapidly evolving markets, the economic environment and geopolitical landscape.

Divergences in Asia, Select Credit Markets?

In the context of the discussion about divergences, Asian debt offering last week has been tremendously received by the debt markets following the pace setting actions of the Philippines (see last week’s Philippines Secures Funding Requirements; Return Of The Bond Vigilantes?).

According to Bloomberg (bold emphasis mine), ``Bond markets in the Asia-Pacific region are having their busiest January for at least a decade, with $32.3 billion in sales, as government guarantees and stimulus plans help boost investor appetite.

``New issues almost tripled compared with the first two weeks of last year, and more than doubled the $12.4 billion of January 2007, data compiled by Bloomberg show…

``All the bonds sold in Australia this year have sovereign backing, and all the bonds sold in Asia without government guarantees were denominated in local currencies, Bloomberg data show. Sales in Asian currencies including the Chinese yuan and Malaysian ringgit rose 41 percent this month to $4.6 billion compared to the same period a year earlier.”

Such overwhelming response to G3 denominated Asian debt issuance could possibly be construed as “knee jerk” reactions to the previous liquidity squeeze amidst the frenzied mayhem which effectively closed the global debt markets last October.

Perhaps issuers sensing a positive aura have jumped into the bandwagon to immediately work on securing foreign currency financing requirements as insurance against the risks of potential recurrent bouts of volatility seen last semester of 2008 or from a possible drought of capital considering the prospective tsunami of issuers from a world obsessed with government sponsored guarantees and stimulus.

In addition, the successes of the early movers appear to have triggered renewed appetite or unlocked anxious capital to possibly capitalize on the revitalized vigor in Asian credit markets.

Next, perhaps too, there could have been more demand for less credit risk prone Asian securities.

And lastly, possibly interest rate policies could be seen as starting to get some traction within the region.

Remember, Asia’s only link to the present crisis has been the trade and capital factor, and not balance sheets problems similar to its contemporaries in the Anglo Saxon economies. And as we have long argued, under the Austrian school of economics, interest rates tend to have different impact to economies based on the capital structure.

We quoted Arthur Middleton Hughes in our past article (see Global Market Crash: Accelerating The Mises Moment!) as saying, ``What this tells us is that the market rate of interest means different things to different segments of the structure of production.”

Figure 1: Danske Bank: Asia’s Bleak Exports and Industrial Production

It’s all gloom and doom out there. Such sentiment has been exacerbated by the preaching of the high priests of doomsday and by the negative economic data. For example, dramatic fall in China’s exports, which fell at the “fastest rate in a decade”-AFP (see figure 1 right window), have been compounded by the collapse of Industrial production seen in major Asian economies (left window). Nonetheless, all of these have eclipsed a scintilla of positive developments as evidenced by a surprising jump in China’s bank lending-WSJ (see figure 2) and an unexpected surge in China’s money supply-Forbes.

Figure 2: US Global Investors: Jump In China’s Bank Lending

According to US Global Investor’s: ``A significant rebound in money supply growth and bank lending in China during December suggests that the government’s stimulating policies may have achieved some success. However, challenges for the economy are likely to be sustained in the foreseeable future.”

We agree. And it is not just in the economic data but likewise seen from the relative strength of the equity benchmarks where from the start of the year, China’s Shanghai Index and the Philippine Phisix appears to have outperformed the region and the S&P 500 as shown in figure 3.

Figure 3: stockcharts.com: Divergences of Shanghai, Phisix vis-à-vis Asia and S & P

Since the advent of 2009, the Phisix (pane below center) is still up 4.13% alongside with the Shanghai’s Index up 7.3% (main window) while contemporary bellwethers of Asia and the US S&P 500 are all in the red.

Of course, two weeks of exemplary equity activities may not a trend make or it is simply too premature to tell. Or possibly too, China’s bank lending revival or resurgent money supply growth could merely be an anomaly. Yet these conflicting developments should make 2009 interesting as the unprecedented scale of government actions, which reflects on the grand struggle between government instituted policies and recessionary forces, will likely produce some unforeseen ‘black swan’ reactions.

And speaking of Black Swan, could the widely discredited “decoupling” a euphemism for “divergences” be the name of the game for 2009?

It has been our belief that Asia will probably recover earlier and outgrow the Western world over the coming years. This should possibly become evident once the global nexus of the forcible selling of the debt deflation process decelerates and as domestic economies adjust to the realisms of a “demand” slowdown in the West.

Many institutional analysts have been asserting that the world’s recovery will depend on the US, based on the Keynesian premise that the US comprises as the world’s only aggregate demand. We doubt so. In contrast, we believe that Anglo Saxon economies will be sternly hobbled by the gross inefficiencies brought by the stifling government interventions.

The onus of recompense on the burdensome costs of these interventions, the “crowding out” effect of government interventions on the private sector, and the reduced purchasing power from the torrent of stealth taxation policies combined could severely undermine the economic growth output potentials of the Anglo Saxon economies led by the US.

And unlike the mainstream view fixated with the aggregate demand dynamics, we believe that “supply” side adjustments (we are dissenters of the excess capacity argument) and “politically” motivated government policies will likewise militate on the highly fluid environment.

And as discussed in Phisix and Asia: Watch The Fires Burning Across The River?, we think that this crisis should serve as Asia’s window of opportunity to amass economic, financial and geopolitical clout amidst its staggering competitors. But this will probably come gradually and develop overtime and possibly be manifested initially in the activities of the marketplace.

And this spillage effect doesn’t seem contained to Asia alone, some emerging signs could be seen in the Euro zone, see Figure 4.

Figure 4: WSJ: ECB Rate Packs A Punch

The interest rate guided policies from the European Central Bank could have begun to influence bank lending rates to consumers.

According to the Wall Street Journal blog reports (bold highlight mine) ``But new data on the interest rates euro-zone banks charged households and firms in November suggest lower ECB rates did, in fact, make a difference. On Oct. 8, the ECB delivered its first rate cut of the crisis, taking its key rate to 3.75% from 4.25%. In November, they followed up with another half percentage-point cut to 3.25%. Today, the ECB noted in a statement that “almost all” average rates in November for the real-economy loans the central bank tracks “were lower than in the preceding month… Businesses also got some relief, with rates on new loans to non-bank firms falling to 5.53% in November from 5.86% in October. One month’s data, clearly, doesn’t confirm a trend.”

Again “divergences” could both signal a trend anomaly or an emerging inflection point, the path of which is unclear for the moment.

Thus from where we stand we have observed that despite the grim bleak outlook, some signs of “divergences” in Asia’s bond market, in select Asian equity markets and in some global credit risk barometers could transition to be important themes for 2009.

It is a suspicion that needs further confirmation by trend reinforcement.

We’ll keep vigil.

Has Global Warming Phased Into The Return of The ICE Age?

We have been told that by mainstream that global warming is the new reality.

In fact, policymarkers worldwide have been instituting global warming as part of the economic equation (carbon taxes, cap and trade, etc…)

Yet, evidence seems to be turning otherwise as the weather seems to be abnormally cold today. (Even in the Philippines)

This from USA Today’s article “Arctic cold grips much of nation”…

``The cold wave that stunned the nation's midsection expanded into the Northeast on Wednesday with subzero temperatures and biting wind that kept even some winter sports fans at home. The wind chill hit 33 below zero during the night at Massena, N.Y., and the National Weather Service predicted actual temperatures nearly that low in parts of the region by Thursday night.”

And there have been claims that we could be transitioning into a new ice age…

See video…



(Hat Tip: Mark Perry)

Will the faddish "liberal" trends be eventually unmasked? Will the “new religion” eventually lose its tarnish?

Stay tuned

Sovereign Debts: Let the Downgrades Begin!

Making good its warning, the US credit rating agency Standard & Poor's downgraded the credit rating of Greece amidst a deteriorating economic environment and expanding debt.

According to the Wall Street Journal (bold highlight mine),

``The one-notch downgrade to A- comes as S&P has warned of ratings cuts for some of the European Union's weaker members. Spain and Ireland are also among those which have been threatened with downgrades.

``In Greece's case, S&P pointed to the need for "necessary reforms of public spending," noting the government's ability to improve its budget position through better tax collection and higher property or income taxes is offset by the rising cost of debt servicing and public pressure for additional social spending.

It’s not just Spain and Ireland under watch, but also Portugal.

Insuring sovereign debt via Credit Default Swaps (CDS) have been materially climbing for many developed countries. This reflects growing concerns about the possibility of countries to default. Yet as governments race to provide guarantees and stimulus support programs to cushion the impact of a downward spiral of their respective national economies, more economies may be put under the credit watch. See chart courtesy of FT Alphaville.

As we earlier dealt with in Sovereign Debt The New Ponzi Finance? and Government Guarantees And the US Dollar Standard, there is no free lunch.

Guarantees and all other government spending will have to come out of real resources or real capital.

As Richard M. Ebeling of American Institute for Economic Research wrote, ``Government deficit spending and the resulting debt is a burden on both current and future generations. Today’s deficits have to be paid for out of current production and output. Those who lend the money to the government forgo the private-sector uses for which that money could have been applied. Every dollar borrowed by the government means one less dollar that a private investor could have used to expand his business, or start up a new enterprise, or spend on research and development that would have introduced product innovations for the benefit of the consuming public.”

Nevertheless, with a barrage of proposed government spending (chart courtesy of Casey Research) intended to prop the US economy, the US risks endangering its AAA credit ratings status which at the same time jeopardize its currency reserve standings.

But bureaucrats remain confident of a government maneuvered turnaround.

Stay tuned.

Clean Air Basics: Carbon Capture and Storage

Learn Carbon Capture and Storage from this interactive presentation (McKinsey Quarterly)

First word from McKinsey, ``Climate change has businesses, governments, and nonprofits examining how to stabilize atmospheric greenhouse gases while still maintaining economic growth. In plotting the course to a low-carbon economy, they will weigh a number of methods for addressing the various risks and opportunities. Carbon capture and storage (CCS)—or more accurately, the sequestration of carbon dioxide—is an important topic in the emerging field of climate change. It represents one possible approach for stabilizing atmospheric greenhouse gases—although there are many economic, technical, and legal barriers to its implementation. As background for informed discussion, we offer this interactive depiction of the technologies involved in CCS."

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