Phisix: “Fear Is A Foe Of The Faddist, But The Friend Of The Fundamentalist”

``Experience shows that, if one foresees from far away the designs to be undertaken, one can act with speed when the moment comes to execute them.” -Cardinal Richelieu, 1585-1542

Present developments continue to pose as a nightmare for local stockmarket bulls as the key Philippine benchmark effectively traversed beyond its July lows. The Phisix is down by over 24% from its zenith in October, so by definition, a 20% loss demarcates a crossover into the bear’s territory.

Like in politics, biases shape opinions. For instance, Bulls will insist that a 50% drop is a typical correction while Bears will argue that a 5% drop is sufficient evidence of an unfolding bear market. So in an effort to balance our bias, we will go by the technical definitions of the prevailing market conditions.

The Phisix fell by 4% over the week, and is down by over 7% in two consecutive weeks for an accrued year-to-date loss of a harrowing 19.74%. Ouch!

While it is a temptation to say that the domestic political maelstrom could have had a hand in these marked turnaround in sentiment, evidence suggests that it has been prompted MORE by developments abroad (see Figure 1).

Figure 1 stockcharts.com: Phisix Impacted by Global Activities

Alongside the decline in the Phisix, the Emerging Market index (EEM) is likewise down 20.94% (using the same peak-“present” trough measurement), the Fidelity Southeast Asia Index (FSEA) 31.1% and the Dow Jones Asia ex-Japan 23.8%. Thus, the activities of the Phisix appear to be a mirror image of its contemporaries in both the emerging markets rubric or relative to its neighbors.

The chart similarly shows that the Phisix (main window) closed past its July lows (as shown by the circle) and seems headed for the three year trend line support of somewhere around the 2,600 level. So if one considers the strength of a trend under technical rules (Alexander Elders-Trading for a Living-incidentally the first ‘stock market’ book my mentor asked me to read of which I am a practitioner today),

-The longer the timeframe, the more important the trendline.
-The longer the trendline, the more valid it is.
-The more contacts between prices and the trendline the more valid the line.

…this means that the 3 year secular bull market trendline remains soundly intact-Yes under this premise we are still in a structural long term bullmarket operating under an interim bear market-and is likely a better determinant of the destiny of the Phisix, as well as the maturity of its underlying trend and the validity of its present path.

So it would be important to watch how the long term trendline reacts under today’s circumstances than agonize over present day losses. As Scottish Philosopher Thomas Carlyle once wrote, ``Our main business is not to see what lies dimly at a distance, but to do what lies clearly at hand.”

And if one looks at the trend features in the charts of the other indices, we note of the same patterns; long term upside trends appear to be unblemished (yet).

Market Forecasting And The Required Winning Qualities

Of course we have met a lot of skepticism over our prognosis of a Phisix 10,000 (some even seem to think that I maybe hallucinating) in the same way when we called for a Phisix turnaround in 2002 or of the Peso’s reversal in 2004.

But as a long term trend and market cycle observer of different asset classes, we can emphasize with confidence that a secular bull market does not generally end with only 100-200% gains. You can go to chartsrus.com and look over the long term performances (over 15 years of insight rich perspectives of market cyclicality) of many world equity benchmarks and see of what I am talking about.

Just consider; we spoke about the revival of the mining industry (even published at safehaven.com) way back in 2003 when gold and oil’s was in an incipient renascence stage (oil above $40s and gold just over $300). The mining index was then drifting at historical lows of 1,000 level, where we predicted it to go over 9,000. Yes then we were even ridiculed as some sort of a wacko!

Today oil is over 10 times from its bottom and is on record highs even under inflation adjusted prices and gold is 4 times from its nominal bottom (Both of which will even go higher over the long term because of two words-government intervention).

Nevertheless, the Philippine mining index TOUCHED 9,067.26 last November 9^th (realizing our target) or eight times from its bottom when we made our prediction! Today, hovering at the 7,000 levels, the vitality of the commodity cycle will eventually reflect on state of the mining index which should push this easily to over 10,000 over the long term.

The point is to understand how market cycles evolve or operate as a significant way to reduce risks. In the same manner as comprehending how different cycles such as business, economic, commodity or credit cycles interplay to shape market cycles or vice versa (theory of reflexivity).

Remember we are not here for vanity which is an outright guarantee for prospective losses. We are here to profit from taking risks which also means accepting mistakes relative to gains.

And importantly, we attempt to imbue the winning qualities as defined by the legendary Peter Lynch, ``The list of qualities [an investor should have] includes patience, self-reliance, common sense, a tolerance for pain, open-mindedness, detachment, persistence, humility, flexibility, a willingness to do independent research, an equal willingness to admit mistakes, and the ability to ignore general panic.”

Equity Outflows Are Global As Risk Aversion Rises

Going back to the present market conditions, it is noteworthy that the common denominator for the recent selling pressures in the abovementioned benchmarks is the net foreign selling.

The degree of foreign selling has even begun to impact currency performances of some Asian countries as the Philippine Peso (-1.7%) to Php 41.54 on $69.5 million of net selling, South Korean Won (-4.2%) to 997.32 and Indonesia Rupiah (-1.6%) to 9,226 to a US dollar (Bloomberg) which could have translated into outflows. Remember net foreign selling does not automatically equate to net foreign outflows. It is when the proceeds of net selling are repatriated abroad where it impacts the currency.

Yet, outflows could reflect the present state of rising risk aversion aside from forced liquidations by institutions caught up in the credit gridlock.

Furthermore, the assumption that the US dollar in a tailspin is gaining adherents for investments in its equity market at the expense of alternative markets is unclear. The theory is that relative values are getting cheaper especially in the browbeaten Financial Industry evidenced by the recent activities or acquisitions of Sovereign Wealth Funds (SWF).

Figure 2: Emergingmarketportfolio.com: Equity Outflows is a Global Phenomenon

According to Michael Sesit of Bloomberg, ``In the past two years, sovereign wealth funds and Chinese financial institutions invested at least $77.2 billion in Western banks and money managers. About $66.6 billion of that was placed in the last three quarters of 2007, accelerated by banks' needs for capital infusions after being battered by the subprime- mortgage crisis and related credit crunch.

``The bigger deals include Government of Singapore Investment Corp.'s $9.7 billion investment in Switzerland's UBS AG, and Singapore-based Temasek Holdings Pte.'s 18 percent stake in Britain's Standard Chartered Plc for $9.2 billion. The Abu Dhabi Investment Authority paid $7.5 billion for a 4.9 percent holding in Citigroup Inc., while Temasek invested $4.4 billion in Merrill Lynch & Co. with an option to buy an additional $600 million of stock. China Investment Corp. bought $5 billion of Morgan Stanley.”

Much of the activities of sovereign wealth funds have moderated following the recent stinging reversals in the market. This suggests that following the initial forays by the SWFs in the deeply afflicted financial world, which seems to be nursing significant losses; these entities appear to have mostly stayed on the sidelines since-except in the mining industry.

Besides, there is scant evidence of rotation within the equity markets, according to amgdata.com as of March 12 (highlight mine),

``Including ETF activity, Equity funds report net cash outflows totaling -$1.430 billion in the week ended 3/12/08 with Domestic funds reporting net inflows of $1.949 billion and Non-domestic funds reporting net outflows of -$3.380 billion;

``Excluding ETF activity, Equity funds report net cash outflows totaling -$2.662 billion with Domestic funds reporting net outflows of -$1.776 billion and Non-domestic funds reporting net outflows totaling -$886 million;

``Exchange Traded (Equity) funds report net inflows of $1.231 billion with the largest flows:

$2.195 Bil to the Sel Sectr SPDRs Finl fund;

$2.01 Bil to the iShares Russell 2000 Index fund;

-$1.567 Bil from the iShares MSCI Emerg Mkt Index fund;

$592 Mil to the PowerShr QQQ fund;

``Excluding ETF activity International funds report net outflows of -$718 million as net outflows are reported in all Emerging and Developed regions except Japan ($9 Mil; 0.53% Assets);

``Excluding ETF activity Taxable Bond funds report net inflows totaling $484 million with the largest inflows going to International & Global Debt Funds ($681 Mil; 0.85% Assets);

``Money Market funds report net cash inflows totaling $9.832 billion as assets in the sector now exceed $3.4 trillion;

``Municipal Bond funds report net cash inflows of $677 million.”

So consistent with Figure 2, from emergingmarketportfolio.com, Global equity markets have generally been seeing a withdrawal of funds with the bulk of the outflows from G3 countries (US, Europe and Japan).

Whereas funds flows appear to concentrate on the Taxable Bond funds, Money Market funds, and Municipal Bonds.

Hence, there is little evidence that the debilitated US dollar has been attracting sufficient investments at the expense of the emerging market class as the Phisix. On the contrary, we see the weak state of the US dollar fostered by the unfolding changes in the monetary conditions as potential attractions to the Phisix as discussed in Monetary Conditions Remain Supportive of Emerging Market Assets.

No Bubble In the PSE, Sectoral Performances Evolves To A Dividend Play

Yet in examining the damage arising from the recent selloffs in the Philippine Stock Exchange, the irony is that instead of a pattern of “weak” linkages with the macro environment, we are seeing somewhat of a mixed message from the market activities shown in Figure 3, except for the dividend yield.

Figure 3: PSE: Sectoral Year-to-Date Performances

In developed countries the real estate and the financial industries have been the most bludgeoned sectors. This again is mostly due to the bubble built around depressed interest rates which allowed the public to speculate on real estate “flipping” funded by securitization of mortgages. Thus, when the bubble burst both sectors are today in anguish.

On the other hand, industries which catered to the US consumers, such as exporters have likewise been most impacted in other countries.

Nevertheless as explained in Global Depression: A Theory Similar To A Horror Movie?, the Philippines have entirely missed out the real estate boom as evidenced by the inconsequential growth of real estate loans relative to total loans.

Boom-busts cycles are usually triggered by negative or low real rates which cultivate on spectacular credit growth which is exacerbated by speculative tendencies by the general public. In short, credit growth spurs speculation and investor irrationality.

Martin Wolf of the Financial Times expounds lucidly (emphasis mine), ``All these crises are different. But many have shared common features. They begin with capital inflows from foreigners seduced by tales of an economic El Dorado. This generates low real interest rates and a widening current account deficit. Domestic borrowing and spending surge, particularly investment in property. Asset prices soar, borrowing increases and the capital inflow grows. Finally, the bubble bursts, capital floods out and the banking system, burdened with mountains of bad debt, implodes.”

To add, in the aftermath of the Asian Crisis, the Philippines seem to have just segued into an advancing phase in the real estate industry. This suggests that the market clearing stage from the previous excesses has allowed for such recovery. Thus, no significant margins or leverages have been built into the system yet.

Third, it would seem that the region, flushed with huge foreign exchange reserves, is steeped upon policies geared towards an infrastructure development.

Fourth, current developments abroad coupled with the recency bias or the rear view mirror syndrome following the 1997 Asian Crisis is likely to compel local lenders to be conservative with their loan portfolios. The lessons of the past and the ongoing around the world today will likely lead to stricter lending standards. A gradual expansion is likely to be sounder.

Fifth, the firming Peso is likely to repatriate domestic capital stashed overseas aside from attracting foreign investments based on growth potentials.

Finally, the BSP recently decided to hold on to the present level of interest rates despite surging the consumer price index, see my blog Philippine Inflation Rate Surge on Soaring Commodities!.

Basically this deepens the negative real interest yield environment as the rate of consumer price increases are starting to close the gap with even longer term treasury yields.

Negative real rates are not the same as nominal low interest rates regime. Negative real rates deals with the function of money as a store of value, thus the opportunity costs of holding cash.

Once the purchasing power of a currency erodes, people will be prompted to look for alternative “store of values” in the form of hard assets as property (Hong Kong, China, GCCs) or stocks (Zimbabwe), or cars (Venezuela) as previously discussed.

Negative real rates punish savers and encourage the public to go into debt to venture into speculative activities. The ensuing malinvestments are the reason why bubbles exist on the first place. This is precisely what had happened to the US.

So when a monetary policy is directed towards “growth” via suppressed real interest rates this induces for a low or negative real yield environment. Thus, you should expect some assets to go up because people will simply look for an alternative “store of value” as replacement to an eroding purchasing power of a currency.

Essentially, given the above, the Philippines or the Phisix or its domestic financial markets has not been induced into a bubble or near bubble scenario…in fact far from it.

Thus, claims that the Phisix is in a protracted bearish scenario is unjustified unless the world turns into protectionism-which should lead to global depression.

Nevertheless, the property sector has taken the most drubbing down 31% year to date. In contrast, the play on the Philippine economy’s service sector led by the telecoms has been the least impacted (-15% as of Friday). So you have two domestic oriented sectors both showing disparate activities as gauged by the index performance.

In addition the performance of the financial sector (-19.4%) exhibits general market decline when compared to the Phisix (-19.74%), which could be interpreted as having marginal or little exposure to toxic papers and has thus shown minimal impact relative to its global counterparts.

Whereas the mining sector which has remained in stupor has seen an explosion on the prices of its underlying product (we will deal with potential divergences in the future).

Instead, the sectoral performances appear reflect positions according to the industry dividend yields. Since domestic investors have been responsible for shoring up today’s market, they appear to gravitate towards industries with high dividend yields.

Based on January PSE data, the service sector index has a yield of 4.62% (telecoms has 5%) thus, the least loss (-15%). This is followed by financials with a yield of 2.7% (loss 19%), industrials 2.45% (-15%), Mining 2.06% (-15%), Holding 1.5% (-25%) and Property 1.18% (-31%). The Phisix has a yield of 2.5% and the All index 2.73%.

As a caveat, present dividend yields are not sufficient indicators for future dividend yields. Past performance does not guarantee future outcomes.

Measuring Market Sentiment: Issues Traded and Daily Trades

Finally we deal with sentiment.

Figure 4: PSE: Daily Issues Traded

Market internals tell us where sentiment lies. Figure 4 shows that even while number of issues traded daily seem dwindling, it remains above the 2003 levels (upper red horizontal line) which possibly suggest that investors remain bullish but the extent of bullishness has been on a decline.

As we would also note, as the Phisix climbed the bullish ladder from 2003 until mid 2007, the number of issues traded has also painstakingly followed. The investing public’s predisposition is to tap the broader universe of the market once risk appetite is accommodative. Thus, today’s risk aversion has reduced the number of trades but remains elevated relative to the past.

We will raise alarm bells if there is a sudden drop of issues traded, since a paucity of daily traded issues could also reflect a strike by fundamental based buyers (for us, these are the category of buyers that matters most).

Figure 5: PSE: Daily Trades: Measuring Speculative froth

Daily trades are our best measure of speculative lather, as shown in Figure 4.

Daily trades incorporate day traders or scalpers, punters, mid term traders and fundamental buyers. The red vertical line seems to be the median point of daily trades during the 2003 until early 2006 or the germinal phase of our bullmarket.

Imagine the Phisix has more than doubled from less than 1,000 to 2,200 within the said period yet daily trades averaged ONLY by around 3,000-4,000 per day with occasional bouts of trading spurts.

Noticeably, daily trades picked up ONLY at the close of 2005 which coincided with the second round attempt of the Philippine peso to move higher.

This made us construe that the firming peso has drawn local investors into the market where they actively punted (due to higher returns expectations) at the expense of the US dollar holdings…until late 2007.

Could we be seeing the same but on an inverse scale…declining trade but higher US dollar?

Today the daily trades have plummeted to near the 2003-2006 levels which limns of greatly reduced speculations within the Phisix.

This leads us to deduce that once the 3,000 level per day is met, the Phisix could mark a BOTTOMING OUT since fundamental based buyers are likely to dominate the Phisix investing space!

By then, local scalpers and punters would have turned into long investors, possibly shun the market, and remain bottled up until the market recovers.

Bottom line: the Phisix remains on an interim bear market but is certainly not under the spell of a protracted bear curse unless huge political lapses will be committed here or abroad. The Phisix under present conditions is simply evolving out of its long term cycle.

To aptly quote Warren Buffett, ``none of these blockbuster events made the slightest dent in Ben Graham's investment principles. Nor did they render unsound the negotiated purchases of fine businesses at sensible prices. Imagine the cost to us, then, if we had let a fear of unknowns cause us to defer or alter the deployment of capital ... Fear is a foe of the faddist, but the friend of the fundamentalist." (highlight mine)

Claims Of The Peso’s Dutch Disease Is A Symptom Of Political Hysteria

``The basic problem is well known and has been frequently illustrated throughout history. Democracy responds to the mob of voters; and the mob wants bread and circuses – at someone else’s expense, of course.”-Bill Bonner

The famous investor Peter Lynch tells us to use objectivity and common sense in parsing at events. However, when a person gets blinded or fanatically obsessed with a particular theme, example with politics, the underlying biases usually skews their logic to the point of losing common sense.

For example, we read an article where an expert bellyached about the Peso’s rise as a “Dutch Disease” impact to the domestic economy. Unfortunately by definition alone Dutch Disease, which is a “natural resource curse” where rising revenues from natural resource exports negatively affects the manufacturing sector via the transmission channels of currency appreciation, does not even seem to fit the bill (OFW remittance is not a natural resource-it is a human resource). Yet as a refresher, OFW remittances-which account for a substantial 10% of the GDP-does not equal to 100% of the Philippine economy in impact. Why do you think consumer spending in the Philippines continue to expand when purchasing power of the OFWs have shriveled? We discussed this in What Media Didn’t Tell About the Peso.

Besides, the US isn’t the only country which the Philippines deal with. In short, it isn’t ONLY about the Peso-US dollar. In fact as we noted in Is the Philippines Resilient Enough to Withstand A US Recession?, there has been a diminishing trend of exposure to the US which is offset by the growing transactions within the region. This means an objective perspective should be seen through the looking glass of the Peso against the rest of the world or in the context of competition with its contemporaries (emerging markets) or possibly its neighbors.

So using the Dutch Disease as an excuse for blaming policy mismanagement is equivalent to barking at the wrong tree. In fact, as noted in a recent post in my blog, The Cost of Currency Intervention: BSP Recapitalization by Issuing Bonds, our central bank the Bangko Sentral ng Pilipinas (BSP) has reportedly been suffering from heavy losses arising from intensive currency intervention-some Php 62.5 billion-which will require the Bank’s recapitalization by issuance of bonds (translation: taxpayers funding the losses!). Yet our so-called expert is exactly asking for more of these losses to protect certain groups!

As an aside 45 years ++ of peso depreciation did nothing to improve our economy, yet instead of dealing with the roots of the problem they look only at superficial solutions which will penalize the country’s future-the children-by burdening them with undue obligations (increased taxation).

It’s a pity how we use data mining and slippery slope arguments to uphold our political biases, when in truth these experts are aware that such premises are nothing but political bunk.

Figure 6: Yahoo.com: China Yuan to Peso (left) Euro to Peso (right)

True, the Peso has climbed about 18% against the Euro and about 17% against the Chinese Yuan since the Peso’s belated run in 2005 as shown in Figure 2.

But this doesn’t necessarily mean that our manufacturing is shifting entirely to these countries due to currency appreciation impelled loss of competitiveness. As pointed out in Philippine Politics: Systemic Defects of the Pork Barrel Political Economy, the ADB has alluded to our narrow industrial base as one of our economic hurdles, and this has been even when the Peso has been depreciating for 45 years!

Besides, as one can note the Peso has recently lost some meaningful ground against the Yuan and the Euro whose economies seem to have evinced little signs yet of contagion impact from the US slowdown.

So it is recommended to adhere to Cambridge University’s Joan Robinson judicious advice (highlight mine) ``The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists."

TSLF: Total Socialization Of Losses Of The Financials

``The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”-Ludwig Von Mises, Human Action

As anticipated, the US Federal Reserve has undertaken drastic measures aimed at alleviating the present circumstances.

As credit markets remain under constant pressure, benchmark yields have continued to rise seemingly irresponsive to the monetary policy actions. Thus the Federal Reserve has opened another novel program called the Term Securities Lending Facility or TSLF.

The TSLF is supposedly a compliment to the existing Term Auction Facility. This allows financial companies to trade directly with the Fed which would lend up to $200 billion and accept a wider degree of collateral including “non-agency AAA/Aaa-rated private-label residential MBS" or papers impacted by the real estate bust.

The facility also allows for a swap lines arrangement with several central banks as European Central Bank (ECB) and the Swiss National Bank (SNB).

To top it all off, the Fed even invoked a Depression era law to facilitate for extending loans to non banks as Bear Sterns via JP Morgan.

Some argue that repos extended as loans against an eligible collateral do not signify as inflationary since they will be reacquired by the Fed and secondly, they are meant to repair the capital base of the debilitated financial institutions and not utilized for normal operations-where once a normalization takes place the added liquidity is withdrawn.

True enough the repos do not expand the Fed’s liability (base money) under the assumption that the collateral has value in it. However, by accepting papers which markets has refrained to put a price into or by putting a bid on an illiquid paper with unknown value or by acting as market maker of last resort exposes the Fed to credit risks. Insufficient collateral means losses for the Fed.

Yet there are some even calling for a greater degree of Fed exposure to the market risks…by directly buying up affected mortgages or outrightly subsidizing losses of the financial institutions, which means greater socialization or nationalization of losses and increased moral hazard. Thus our revised meaning for the acronym of TSLF: Total Socialization of Losses for the Financials

According to Frankfurt School of Finance & Management Honorary Professor Thorsten Polleit in his very instructive article, Inflation is a Policy that Cannot Last (emphasis mine),

``There are basically three strategies the government can pursue to prevent a contraction of the credit and money supply caused by a breakdown of the banking sector.

``The first strategy is to inject peoples' tax money into banks, thereby socializing (part of) the domestic banking industry. Under the second strategy, the government would simply buy banks' risky assets, thereby making available (what is left of) banks' equity capital for new lending.

``However, it does not take much to see that both strategies might be highly unpopular. In particular, to finance capital injections and/or purchases of banks' risky assets, the government would have to take recourse to tax financing — using either current taxpayer money or, in the case in which the government issues bonds, future taxpayer money.

``However, there is the third strategy available to the government, a much more subtle and very powerful way of redistributing peoples' resources through the hands of the state: increasing inflation by making the central bank buy banks' risky assets. In fact, such a strategy amounts to creating inflation via monetizing banks' risky assets.

``That said, surprise inflation can lower the real interest rate burden on outstanding loans only in the short term — at the expense of creditors. However, as long as the money system is based on a relentless increase in bank credit and money supply, it would take ongoing surprise inflation to lower the real debt burden, but such a monetary policy would ultimately lead to hyperinflation.”

All three strategies appear to be at work today.

Another, the program deals with the asset side of the Fed’s balance sheet. The Fed will be changing the composition of its $873 billion in total assets from around $700+billion in treasuries to mortgages, expanding its market and credit risk.

But since the Fed’s balance sheet is materially smaller compared to emerging markets as China, Brad Setser says that the Fed can expand its balance sheets…

``But what if the Fed changes its mind and decides that it needs to expand the amount of support it offers the market? Well, nothing precludes the Fed from following the lead of emerging market central banks and issuing short-term “sterilization bills” to offset the growth of the assets on its balance sheet.

``As around $900b, the fed’s balance sheet is something like 6-7% of US GDP. With $1600b in foreign assets, the PBoC’s external balance sheet alone is more like 50% of China’s GDP.

``In a world marked by unprecedented central bank intervention, the Fed’s balance sheet is still kind of small.

``Expanding the Fed’s balance sheet dramatically to offset a massive deleveraging of the private financial system – a deleveraging that has been compared to a bank run in reverse, with the banks withdrawing credit from hedge funds and broker dealers in much the same way that households withdraw credit from the banking sector in a bank run – would be a truly radical step.”

Yet inflation seems to be the preferred policy option for the US FED, as we have been saying all along, since that the US is a net debtor financed by foreigners who are likely to be the victims of its monetary policy given the urgency of the situation. Ever heard of a Beggar thy neighbor policy?

From Martin Wolf the Financial Times, ``There are two ways of adjusting the prices of housing to incomes: allow nominal prices to fall or raise nominal incomes. The former means mass bankruptcy and a huge fiscal bail out; the latter imposes the inflation tax. In extreme circumstances inflation must be attractive. Even if it is not the Fed’s choice, it is what a reasonable outsider might fear, with obvious consequences for all asset prices.”

With the radical thrust towards increasing TSLF all these will eventually be reflected in the fate of the US dollar, as Mises prophetically observed.

Ergo, gold, oil, commodities and other hard assets are likely to serve as insurance from devaluing paper assets.

The Cost of Currency Intervention: BSP Recapitalization by Issuing Bonds

Everything action comes with a cost, and so it is with the currency intervention measures administered by the local authorities to restrain the Peso's appreciation.

According to the Philippine Daily Inquirer, ``In the period from January to November last year, the BSP incurred P84 billion in foreign exchange losses leading to a P62.5 billion in net loss. The amount was charged by the BSP against the capital accounts built over the years.”

The consequences…the domestic central bank, the Bangko Sentral ng Pilipinas (BSP) plans to recapitalize by issuing bonds, again from the Inquirer, ``Inquirer sources said the scheme would be announced in the next few days. They said the government recognized that the BSP recapitalization was an urgent matter now that the central bank was incurring huge foreign exchange losses. To avoid imposing heavy burden on the government’s finances, in view of its bid to wipe out fiscal deficits and achieve a balanced budget this year, the government is favoring the bond issuance scheme, proceeds of which would be used to recapitalize the BSP.”

``The scheme will enable the BSP to get the money immediately this year while the cost burden on the government will be staggered over a 10-year period.”

Now this assumes that the Peso won’t have to be supported further…

Socialization of the US Markets Accelerates with the Fed's latest tool the TSLF!

TAF gets tougher as it is now supplemented with the Term Securities Lending Facility or TSLF- the latest instrument which allows the Federal Reserve to lend up to $200 billion and accept as collateral- agency and private residential securities or "non-agency AAA/Aaa-rated private-label residential MBS"!!! You read it right-garbage papers!

You can read more from Bloomberg the updates including the Fed’s Text on the novel “bridge” financing.

Crude Oil Surge Past US $109!

This from CNBC: "Oil rose to a record high for the fifth day in a row on Tuesday, boosted by investor flows into oil and other commodities partly to hedge against inflation and the weak dollar.

Chart courtesy of cnbc.com

"Concerns about inflation are very strong. Hedge funds are selling stocks and buying commodities, especially oil and gold, because the U.S. dollar is weakening," said Takeda Makoto, an analyst at Bansei Securities.

The Philippines Needs Economic Freedom More Than New Laws

``Excess and inequality of taxation, however disguised in the means, never fail to appear in their effect. As a great mass of the community are thrown thereby into poverty and discontent, they are constantly on the brink of commotion; and, deprived, as they unfortunately are, of the means of information, are easily heated to outrage. Whatever the apparent cause of any riots may be, the real one is always want of happiness. It shows that something is wrong in the system of government, which injures the felicity by which society is to be preserved.” Thomas Paine (1737–1809) was an English pamphleteer, revolutionary, radical, and classical liberal. Society Is a Blessing, but Government Is Evil

Recently I stumbled upon an article descriptive of the supposed excesses of the lower house of the Philippine Congress. While the general idea-the supposed extravagance from the enormous allocation of the pork barrel funds coming at expense of the economic development- seems accurate, what prompted this response is the seeming counterfactual projection of causation: the alleged inertia of the Philippine Congress to pass laws which has resulted to our economic plight. In short, the Philippine economic malaise has been imputed as an offshoot to a dearth of laws!

Of course, the narrative comes with a tacit political slant; its dubious silence on the performance of the Philippine Senate. This seems to imply that the lower house has been inadequately doing its job (yet undeservingly gets its disproportionate share of Development “Pork” funds) because it remains supportive of the administration, while the upper house which has been conducting a series of “trial by publicity” of the recent scandals by several key figures of the administration purportedly “in aid of legislation” appears deserving of their perquisites (thus the suspicious silence).

Nonetheless, such straw man argument ignores the fundamentals of why the Philippine legislative branch or other government agencies are allotted with such humongous discretionary funds for its elected officials. The problem with most politically colored analysis is that it mostly focuses on the symptoms while discounting the roots of the problem.

Let’s revert to government basics: Every enacted law requires attendant administration personnel, logistics and corresponding police power to effect its implementation or an organization called as a bureaucracy. This means that funding for this public hierarchical entity comes from you and me or the taxpayers. In essence, ceteris paribus or all things being equal, more laws equal to more taxes!

So by sheer logical deduction; if economic nirvana would be attained by paying more taxes via more regulations then why not simply tax 100% or all of our income by regulating each and every activity? Yet, would you be willing to work your guts off under such circumstances?

We have seen the failed experimentation of such model in the nomenclature of “communism”. But, history’s lesson tell us that such paradigms simply don’t work, otherwise Mao’s China or Stalin’s USSR would still be functional and stand as the most economically prosperous…but where?

Ironically, the only remarkable achievement communism has brought upon to this world is the undue death of 94 million people- estimated 20 million in USSR, 65 million in China, 1 million in Vietnam, 2 million in North Korea, etc… (Black Book of Communism) aside from amazing feat of equality-every one is poor (of course except the leadership)!

So the argument of absolute regulation is by itself impractical.

Costs of Laws: Compliance Costs

And since everything has a cost; laws have their own costs too.

One has to deal with compliance costs-directly or indirectly-which means aside from the direct costs of paying taxes, indirect costs implies costs from the loss of productive time, efforts, expenditures in manpower or resources used in conforming to government regulations or laws, as shown in Figure 1.

Figure 1: World Bank’s Paying Taxes: Compliance Costs

From World Bank’s report on Paying Taxes 2008, ``Making the tax rules for businesses complex is unlikely to generate more revenue – quite the opposite.”

So, essentially the more complicated the regulations in the form of ambiguous laws, many laws per tax and mandatory forms, the higher the costs of compliance.

The point is that the tax structure based on the underlying laws determines the cost of compliance. High compliance costs increases the cost of doing business which basically deters investments, the primordial reason for a nation’s economic development.

Regulations In A Complex Society Leads To The Law of Unintended Consequences

And importantly, the costs associated with the laws of unintended consequences or unforeseen consequences. Alex Tabarrok of Marginal Revolution has a splendid definition of this phenomenon (highlight mine),

``The law of unintended consequences is what happens when a simple system tries to regulate a complex system. The political system is simple, it operates with limited information (rational ignorance), short time horizons, low feedback, and poor and misaligned incentives. Society in contrast is a complex, evolving, high-feedback, incentive-driven system. When a simple system tries to regulate a complex system you often get unintended consequences.

``Unintended consequences are not restricted to government regulation of society but can also happen when government tries to regulate other complex systems such as the ecosystem (e.g. fire prevention policy that reduces forest diversity and increases mass fires, dam building that destroys wet lands and makes floods more likely etc.) Unintended consequences can even happen in the attempted regulation of complex physical systems (here is a classic example involving turbulence).

``The fact that unintended consequences of government regulation are usually (but not always or necessarily) negative is not an accident. A regulation requiring apartments to have air-conditioning, for example, pushes the rental contract against the landlord and in favor of the tenant but the landlord can easily push back by raising the rent and in so doing will create a situation where both the landlord and tenant are worse off.

``More generally, when regulation pushes against incentives, incentives tend to push back creating unintended consequences. Not all regulation pushes against incentives, some regulations try to change incentives but incentives are complex and constraints change so even incentive-driven regulations can have unintended consequences.”

As you can see no matter how noble the intention of a law maybe, the laws of unintended consequences can negate whatever the anticipated positive outcome simply due to the unforeseen complexity of societal dynamics.

Simplified “moral” thinking as basis for regulation frequently backfires. Popularity does not automatically translate to righteousness. So the concept of plainly churning more laws as the magical formula to economic upliftment is grossly misguided, if not daft.

Applied to the present political scenario, what we are seeing is exactly a backlash (law of unintended consequences) on the structural strangulation of the economy by political forces operating on the platform of rent-seeking (patron-client) culture emanating from the pork barrel system of governance. Personality based politics as advocated by media ensures that the same dynamics will be repeated again and again for as long as the political structures are not overhauled.

In fact, it is more laws or regulations that have led to the intensified empowerment of the domestic political hierarchy. Going back to basics, more laws mean more financing requirements for implementation or a bigger bureaucracy, sustained by a bigger share of taxes.

The Vicious Feedback Loop

``Taxes do not result from a market process, nor do they reflect allocation decisions of resource owners . . . In other words, taxation is a method of intervening, not an alternative to intervention or nonmarket allocation” (emphasis mine), excerpted from O'Driscoll and Rizzo, cited in Efficiency and Externalities in an Open-Ended Universe.

As we previously discussed The Economics of Philippine Election Spending, the costs of winning elections have surged dramatically in line with the explosion of government spending. Everybody wants to have a piece of spending other people’s money by the very virtue of more “moralistic” government intervention! Joining politics becomes a privilege to determine where to spend taxpayer money.

Yet, unwittingly the public’s desire for increased “moral” wealth redistribution translates to this very perverted political cycle.

The vicious feedback loop as follows:

1. More clamors for “morality” equals more government meddling and thus, more Pork or government spending.

2. More Pork equals higher occurrences of abuse of power and increased degree of corruption which leads to high costs of business and more taxes.

3. High cost of business and more taxes translates to a loss of the currency’s purchasing power (via inflation), ergo more poverty and social inequality.

4. More poverty incidences and social inequality results to more political pressure for the leadership “do something” via more “Moral” redistribution.

5. Go back to step 1.

As a caveat, media, politicians and high profile experts does not even attempt to distinguish social inequality between those engendered by policies and the other shaped by productivity, e.g. some bakers will produce more output of bread than the others, some will produce better quality of bread at the expense of output, some will not produce better quality or will also be inferior in the production output.

Likewise, as previously argued, the surfeit of Countrywide Development Funds or Pork Barrel has overtly skewed the incentive structure by the voting populace and its leaders which have effectively legalized corruption via kickbacks seen from the entire level of the nation’s political structure which has concomitantly fostered a culture of dependency and deeply embedded sense of “entitlement”.

Figure 2: World Bank’s Paying Taxes: Higher Taxes Reduce Business Incentives, Broadens Informal Economy

Yet, again unknowingly to the public, a bigger share of taxes from greater government expenditures results to reduced attractiveness for investments relative to other countries, as the stratospheric costs structures require a high hurdle rate for the Return of Investments (ROI) as shown in Figure 2.

Higher taxes constitute as a major obstacle for capital investments, where it also reduces tax participation. Tax evasion, a large informal economy and tax leakages are simply symptoms of a big government-high taxation regime.

Thus, the lack of capital investments, and not the lack of laws, results to our economic woes.

This instructive quote from Stephanie Medina Cas and Rui Ota, a multilateral government institution known as the IMF in a research paper Big Government, High Debt, and Fiscal Adjustment in Small States (highlight mine), ``Controlling the size and cost of government can make government more efficient and more effective in achieving its principal functions in the delivery of goods and services.”

Economic Freedom Relative to Corruption and Wealth

Our excessive dependence on the political leadership for the economic path results to massive distortions and imbalances in the economy, the sensitivity to abuse of power, and the vulnerability to corruption. While we have a “quasi” political democracy, paradoxically we lack the economic freedom so required in today’s globalized playing field.

Figure 3: Heritage Foundation: Economic Freedom and Corruption

It is this lack of economic freedom that has been closely associated with everybody’s favorite “moral” theme of “corruption” as seen in Figure 3, courtesy of Heritage Foundation. Yet, interestingly none of our “experts” undergird its importance.

Economic freedom as defined by Heritage Foundation, ``A country’s level of economic freedom reflects the ability of ordinary citizens to make economic decisions on their own. It includes the freedom to choose a job, start a business, work where one chooses, borrow money, and use a credit card. It ranges from buying a house to having a choice in health care, from being fairly taxed to being treated justly by the courts. The higher the economic freedom in a country, the easier it is for its people to work, save, invest, and consume.

``Yet the struggle for economic freedom faces determined opposition. Tariffs are just one example of protectionism that never lacks champions, and those who want special privileges will always pressure societies to expand the size and weight of government intervention. Special privileges for the few mean less prosperity for the many.”

As we have mentioned in Philippine Politics: Systemic Defects of the Pork Barrel Political Economy, it is this special privilege acquired through as an inadvertent offshoot to the intricate “web of laws” (derivative of the law of unintended consequences) or through purposive passage of laws which has kept the competitive edge of “privileged groups” through a phenomenon called as a Regulatory capture (wikepedia.org), ``…in which a government regulatory agency which is supposed to be acting in the public interest becomes dominated by the vested interests of the existing incumbents in the industry that it oversees”, which has spawned the country’s quasi oligarchic structure and crony capitalist tendencies.

Essentially, laws have become the favorite tools of financial enrichment or economic empowerment by the political connected and by those in power and their associates or “special interest groups”.

As you can see from the chart from Heritage Foundation, countries which allow their citizens to determine their own economic destiny, who are free from choking regulations, openly embrace competition and rely more on trade and adopt an entrepreneurial culture are least likely prone to abuse of power and corruption compared to nations that are economically repressed or heavily overregulated.

To quote Ana Isabel Eiras of Heritage Foundation (highlight mine), `` To fight corruption and informality, it is essential to understand that corruption is a symptom—of overregulation, lack of rule of law, a large public sector— not the root of the problem. The perceived problem is unethical/corrupt behavior of the private sector, which leads the government to press more on private-sector activities. The real problem is the government action/regulations causing undesired behavior of the private sector. The optimal solution would be to eliminate burdensome regulations so that unethical behavior does not occur.”

This view runs starkly in contrast to mainstream spin where the conventional expectations for governance seem like a quasi socialist “be all end all” for our society whose mindset can be described as:

‘We want to be free to do what we want to do, but when faced with obstacles we want government to do it for us. Anything that evolves favorably to our convenience we ask to remain free but anything that runs against us we demand socialization.

‘Yet my barrier, your impediment and the other’s concerns are likely to be different and would most probably be in conflict with one another from which government will have to choose among us whom it would protect. Yet, whoever is accorded with government’s blessings is privileged while the rest of us cry “FOUL” (and all attendant labels-corrupt, inept, imperialists, etc. etc.)!

‘Oddly too, is that as much as we expect so much from government we are averse to pay more taxes (citing lame excuses as corruption as rationalization)!’

In essence, our expectations for freedom, government’s role in our lives and paying taxes have been entirely divergent. We don’t know exactly what we want. We expect sweeping changes by the fillip of a finger or a “quick fix” or “lotto” mentality, which we deal with under a pretentious and fallacious dissection, to our problems. Thus, the retrogression of our problems has become a frustrating illusion to many.

Figure 4: The Fraser Institute: Economic Freedom and Per Capita Income

Whereas when we are left to our own devices, we tend to act on what we perceive as the best path for us. In short, we tend to optimize our output given the conditions we are faced with if there would be less intervention from government.

Figure 4, from the Fraser Institute shows how countries which espouse economic free policies have higher per capita income relative to countries which are overregulated repressed or least free.

This goes to show that societies or nations tend to improve significantly when their constituents are allowed do their best, when they are least regulated and significantly less economically dependent on politicians.

Remember, economic freedom is a policy choice as much as it is a moral choice. It requires the realization that we can benefit if we trade competitively more than simply hide under the skirts of government. It requires us the right and the ability to fail. It requires the acceptance of income disparities. It also requires a reduction of power by the government and the accompanying cutback of government spending or Pork barrel discretionary funds through subsidies, doleouts and other welfare programs as well as greatly reduced tax rates and a simplified tax structure. It requires more private sector participation in the broader economy with a greatly diminished role for government. It requires for the development of a pervasive market oriented platform. It requires a legal protection of property and intellectual rights as well as the enforcement of contracts. It requires a streamlining of laws and the attendant pruning of the bureaucracy. Lastly, it requires a sound money policy independent of political influence.

Unfortunately, such premises for structural change signify a Sisyphean Challenge for our politicians who seem perpetually addicted to power and to our economic experts who seem obsessed with their apparent presumption of pedestal omniscience of how to infallibly manipulate the economy to meet their desired ends (Unfortunately since our independence they have been proven repeatedly wrong. Moreover, they can’t even accurately predict the markets with their supposed wisdom! It is a puzzle-if they can’t predict markets with lesser factors involved how much more can they precisely analyze a rapidly evolving highly complex society with a larger universe of moving variables and prescribe the required policy measures with less impact from the law of unintended effects?). As Albert Einstein warned, ``The attempt to combine wisdom and power has only rarely been successful and then only for a short while.”

Rising Yield Curve, Shift in Global Demand and the Gold Oil Ratio

``Everything is new if you are ignorant of history. That is why ideas that have failed repeatedly in centuries past reappear again, under the banner of ‘change,’ to dazzle people and sweep them off their feet." Thomas Sowell

As expected, we are witnessing anew the resurgence selling pressures in the financial markets as the global credit markets continue to manifest incredible strain of tightening liquidity signified by soaring interest rates of various benchmarks such as the credit default swaps of several US financial institutions trading at the highest level ever, yield spreads of US agency owned mortgaged backed securities at highest level since 1986, auction rate bond failures hit 70% as brokers and bankers withhold financing, distressed debt levels rose to its highest level since August 2003 as investor’s flee to safehaven assets, Euro zones interbank rate hit its highest since January 18 exceeding ECB’s policy rate, yield spread between 10 year German bunds and the Italian bond surged to a decade high, sales of emerging market bonds fell 65% and the a significant 21% decline in derivative trading the first time in 14 years.

This comes even prior to the US Federal Reserve’s meeting which is due on March 18, with market expectations of a Fed cut of possibly at least 50 basis points priced presently into the Fed futures market.

Nonetheless, the tensions in the credit market has successfully percolated into the equity markets as the turmoil in some hedge funds, asset liquidation by several companies aside from major repricing of companies experiencing mortgage problems, as the suspension of Carlye Capital Corp of its mortgage bond funds, suspension of investor redemption in several hedge funds, liquidation by mortgage lender Thornburg Mortgage of assets to raise capital, aside from a growing consensus of the US undergoing a recession prompted for massive liquidation across the board.

Figure 5 from Prieur Du Plessis’ Investment postcard emphasizes on the steepening of the yield curve which has exhibited a strong historical inverse correlation with the directional activities of the S & P 500.

Figure 5: Prieur Du Plessis/Stockcharts.com: Inverse Correlation of S&P 500 and the 10-year/2 year yield curve

A steepening of the yield curve has coincided with downside volatility in the S&P 500. Notes Mr. Plessis, ``The above analysis is merely one cog of the wheel, but seems to point to more downside for US stocks. However, be cognizant of the fact that the stock market is a discounting mechanism and often starts moving higher before a reversal of the yield curve (see 2002/2003). It may still be a while before we reach this stage, and investment portfolios should in the meantime emphasize capital preservation rather than opportunistic trades.” (highlight mine)

But of course even as the financial markets remain under renewed pressure of heightened volatility, commodities continue to march upwards mainly in the face of a record breaking decline of the US dollar, signs of growing emerging market domestic demand and redistribution of wealth.

Yet we gathered some important insights of how rising commodities could affect different regions of the world aside from the subtle changes in the way trade and wealth redistribution has been conducted of late as shown in Figure 6.

Figure 6 Danske Bank: Soaring Commodity prices bring shift in global demand

Danske Bank’s Chief Economist Steen Bocian observes that while stagflationary (stagnant growth and rising inflation) tendencies are being reinforced in the euro zone, there are important implications for global trade (underscore mine), ``For countries that export commodities and energy, rising commodity and energy prices are synonymous with rising real income. What we see in the global economy is not just higher inflation, but also a marked redistribution of purchasing power as expressed by movements in the terms of trade.

``The Middle East, Africa, CIS countries and Latin America have seen massive improvements in their terms of trade at the expense of the EU, the US and Asia. To some extent this is also reflected in global demand. Take Japanese exports, for example. The EU and the US together are no longer contributing to Japanese export growth. While Asia is still making a healthy contribution, the big change is that the rest of the world is carrying more and more of the load. This group consists mainly of countries which have seen improvements in their terms of trade. In January these countries accounted for almost half of Japanese export growth.”

Aside from the empirical evidence shown by the shift in trading composition of Japan’s trading partners, this redistribution of purchasing power tilted towards emerging market commodity producers seems to be a fitting explanation or perhaps a proximate reason why, despite the present pressures in the global financial markets, some equity markets appears to have ‘decoupled’ especially seen in Middle East and African equity benchmarks as Oman, Nigeria, Bahrain, Morocco Egypt and Kuwait which are trading at fresh record highs unaffected by the global tensions, while Jordan, Qatar, United Arab Emirates, Kenya, Tunisia and Namibia are at spitting distance from new record highs.

We notice the same phenomenon in some of Latin American bourses such as fresh record territory of Costa Rica’s benchmark and near record highs too in commodities heavy exports of Brazil, Bermuda and Jamaica.

The decline in Asian markets likewise appears to validate this stagflation view of rising commodity prices negatively affecting some of the region’s economy, if we base this on the recent performances of its benchmark. But our guess is that this should apply mostly to countries with insignificant natural resources exports. Indonesia among all of Asia appears to be least impacted by the recent tensions as its bellwether the Jakarta Stock Exchange remains at striking distance from its previously established highs.

So for the moment it simply isn’t true (yet) that the ongoing deflation in some vital parts of the world is likely to drag the whole globe into a deflationary morass as some depression advocates argue. For as long as commodity prices persist to benefit from the falling dollar, growing emerging market domestic demand and the redistribution of purchasing power from commodity importing countries to commodity suppliers we are likely to see the same phenomenon continue if not accelerate.

The same argument should likewise keep the Philippine Phisix from suffering a similar fate. As investments pile on into our resource industries, e.g. mines expects some $892 million from last year’s $605 million (inquirer.net) agriculture based biofuel investments from Spain Php 16.2 billion (inquirer.net) and from some companies in the US worth $55 million and $200 million (inquirer.net, manilastandard.com) or agriculture investments by China for food exports (chosun.com) and investments from UAE meant for Halal food for exports to the Middle East (khaleejtimes.com), commodity exports are likely to gain substantial market share relative to total exports and provide the unexpected support to our GDP. (Our agriculture experts can’t even seem to even make this call or perhaps are not yet convinced of these developments.)

That is why we remain long term bullish with resources related companies, simply because resource based industries are likely to benefit from the purchasing power shift which has been benefiting commodity exporters around the world.

Finally, we recently got a comment concerning which among the two major commodity bellwethers (gold or oil) appears to be more “pricier” relative to current prices.

I guess the gold oil ratio should determine this as shown in Figure 7.

Figure 7: US Global Investors: Gold Oil Ratio at Critical lows

With oil trading at inflation adjusted record high at over $105 and gold at just under $974, the 36 year chart gold-oil courtesy of US Global Investors posits that gold today buys 9.6 barrels of oil compared to its long term average of 15 barrels. This suggests that gold is relatively undervalued when compared to oil.

But as a caveat, John Derrick of Global Investors notes that gold has risen by 2 standard deviations during the last two months which has reflected similarities to the present performance of the yen relative to the US dollar.

What it means? From John Derrick (highlight mine), ``The dollar has fallen against other major world currencies and is nearing an extreme low condition, which historically suggests that a bottom could come soon. If the dollar bottoms out and then starts rising, a reversal for gold will likely follow given that these currencies tend to move in opposite directions.”

Well such is premised upon the condition that gold follows the inverse trajectory of the US dollar. But this correlation has not been strong or has not always worked under the same pattern; in 2005 both gold and the US dollar rose.

Our assumption is for as long as major central banks conducts efforts to “socialize” losses, we are likely to see rising gold relative to all currencies But we should give Mr. Derrick’s insight the benefit of the doubt since overbought levels are likely to result to cyclical profit-taking.

Remember, no trend goes in a straight line.

Pentagon’s Active Denial System: Goodbye to People Power?

Pentagon has a new weapon…a ray gun (like in the sci-fi movies!) that can stop a person in his tracks (but) without injuring or killing him.

CBS News correspondent David Martin experienced it first hand, and gives this account. The weapon is likely to be used as a crowd buster. Watch the fascinating video from CBS.

What this could mean? If our government obtains this kind of crowd dispersal arsenal it could easily disband rallies at greatly reduced risk of violence.

BUT as caveat- it doesn’t deal with why people rally in the first place, which posits of the possibly that a new form of “demonstration” could likely be hatched. I hope that this would not be of the violent strain.

Philipppine Inflation Rate Surge on Soaring Commodities!

This from the Philippine Daily Inquirer,

"Annual inflation jumped to 5.4 percent in February, the highest since October 2006 and near the top end of forecasts, dimming prospects for a further cut in key interest rates when the central bank reviews its monetary policy next week.

"Government data released Wednesday show that inflation rose last month from 4.9 percent in January, rising for the fourth straight month. Inflation in October 2006 was also 5.4 percent.

"The central bank was projecting February inflation of 4.8-5.5 percent.

Chart courtesy of the Philippine Daily Inquirer

Many experts continue to impute the recent developments to oil prices.

The peculiar part is that oil has been on an upside streak since 2000, yet our consumer price index-oil price correlation has been tenuous. (see chart above: cpi begun its ascent in October when Oil had been trading above $85!)

What we have been saying is that the surge in global commodity prices, which appears to be reflected in food prices, is likely to be more strongly associated with the recent uptick in our price index data than oil alone.

Well guess what, the same article says that the BSP seem to confirm our view; again from the Philippine Daily Inquirer,

"Tetangco said elevated prices of main food items such as rice, meat, corn and flour, which comprise around 13.5 percent of the consumer price basket, likely pushed up inflation last month."