Kentucky Derby And The Global Stock Markets

``In the stock market, as with horse racing, money makes the mare go. Monetary conditions exert an enormous influence on stock prices. Indeed the monetary climate - primarily the trend in interest rates and Federal Reserve policy - is the dominant factor.” - Martin Zweig

I used to bet on horse races. That’s why I can relate some horse racing activities to the markets.

The spectacular ‘come-from-behind’ victory by a 50 to 1 longshot, Mine That Bird, ridden by jockey Calvin Borel, in the 1^st leg of the US Triple Crown, the Kentucky Derby, held at Churchill Downs at Louisville Kentucky, greatly fascinated me.

Riding into the last quarter length of the 1 ¼ mile leg, Mine That Bird was nearly at the tail end of the 20 horse pack. Jockey Borel then deftly worked his prized horse towards the middle of the pack going into the top of the stretch, elegantly sneaked into the rail for an unobstructed view and unleashed the animal’s full might towards the finish line to rack up an astounding 6-3/4 length win- a wallop! You can watch it online here.

The wonderful partnership of Jockey Borel and Mine That Bird was significantly unexpected in both the betting world (50 to 1 odds) and even in the race track itself-a pulsating come from behind triumph. And today’s electrifying actions in the marketplace seems to match the same rendition-largely unanticipated by mainstream experts and the consensus and equally the unforeseen in speed and magnitude of market movement.

So if I were a horse race bettor I would have reaped enormous dividends had I made a serendipitous bet on that highly underappreciated underdog.

Applied to the markets, it would seem like another major vindication for us, since we had been expecting this from the start of the year. Not only had we projected a general market improvement but we clearly identified a possible outcome an Asian outperformance! (see 2009: Asian Markets Could OUTPERFORM, Will “Divergences” Be A Theme for 2009?,) See figure 1.

Figure 1: US Global Investors: Asia-Latin American Outperformance

The US Global Investors have basically echoed what we have been saying all along (emphasis added), ``So far this year, emerging markets in Asia and Latin America, as represented in blue in the chart, have generally outperformed those in the Middle East/Africa, and Eastern Europe, in yellow and green respectively. Russia and Israel are exceptions. The market has rewarded better balance sheet fundamentals and smaller external and domestic leverage in Asia and Latin America.”

The Philippine benchmark, the Phisix, surged 6.58% over the week to pad its year to date gains by 19.71%. Despite the strong showing, the Phisix’s gain has been transcended by the outstanding run in Singapore (16.56%!!!), Hong Kong (12.04%!!), Taiwan (9.87%!) or even our ASEAN neighbors Thailand (7.33%) and Indonesia (7.69%).

Of course, we are nearly halfway through the year, which means we are still far away from the homestretch, where fluid real time developments may alter present actions, either by further reinforcing our view or going against it.

But almost every indicator has now turned towards a possible fulfillment of our yearend expectations, including my last technical yardstick: the 200-day moving averages, which have become evident in a majority of Asian markets [see Asian Markets: Crossing the Bull Market Rubicon?]!

Moreover, 2010 is the Philippine Presidential election year which has been cyclically strong over the years [as discussed in Focusing On The Future: the Phisix and the Philippine Presidential Cycle].

So general market improvement PLUS next year’s Presidential honeymoon argues for more upside for the Phisix going towards the post elections in 2011.

Of course, like every trend, there will always be intermittent bumps. But what would matter would be the general or the primary trend.

Nonetheless, if the Phisix does end the year above 2,500, we may expect a full recovery (Phisix 3,800) by the end of 2010 or even an attempt at the 5,000.

Horse Racing In the Domestic Market, Noises Over Signals

And even the domestic horse racing mentality has left the starting gates! See figure 2

Figure 2: PSE’s Bull Market Breadth The Advance Decline Ratio, Traded Issues

Where your favorite sell side and mainstream analysts will constantly bombard you with the drivel that stocks are driven by “fundamentals e.g. earnings”, we have argued based on Edwin Lefèvre’s premise from his classic “Reminiscences of a Stock Operator”, ``In a bear market all stocks go down and in a bull market they go up...I speak in a general sense. But the average man doesn’t wish to be told that it is a bull or bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing.”

Mr. Lefèvre, who in behalf of the legendary trader Mr. Jesse L. Livermore, wrote from an empirical standpoint of how markets generally operated.

Nevertheless, we found that his underlying observations have been backed by theory from Mr. Fritz Machlup of the Austrian School of Economics that inflationary policies has had greater impact to stock prices as discussed in Are Stock Market Prices Driven By Earnings or Inflation? and in Phisix: The Case For A Bull Run. This is most pronounced in the Philippine Stock Exchange whose market has been “underdeveloped”.

Notice that the bullish breadth in the Phisix has now been established as seen from the substantial improvement in the advance decline spread (more incidence of positive spread-see left pane), which means today’s market has seen more advancing issues against declining issues. This week, advancers outnumbered decliners by nearly 2.5 to 1.

To add, the number of traded issues (right pane) has conspicuously picked up (red arrow). This translates to the marked broadening of gains in listed issues in the Philippine Stock Exchange.

In other words, as we predicted, even the second and third tier issues have joined the roster of advances. Incidentally, the top 10 gainers over the past sessions appears have been dominated by “speculative” stocks rather than blue chips or Phisix component issues.

In the rapidly shaping “rising tide lifts all boats” environment, which includes “shell” companies, does this landscape then extrapolate to an abrupt shift in earnings expectations to simultaneously turn positive?? The obvious answer is NO. The answer why this phenomenon has been happening is mainly about the percolation of the inflationary driven speculative spirits.

This simply reveals how the world operates.

While truth is a rational subject of interest by anyone or by everyone, it’s always about truth in the way people opt to see or expect them to be, no matter how skewed their version of truth is. As Jeffrey Tucker on a blog article A Tribute to Jack Kemp wonderfully expressed, ``In this world, no matter how firm your credentials, no matter how much capital you have built up over the years, no matter how much press you have received in the past, once you start saying things outside the mainstream, or the mainstream shifts below your feet, you are suddenly a nonperson”.

Being a nonperson is not the issue here. Aside, I am also NOT saying that I have grasped the monopoly of mundane truths. But from the market’s perspective, where there has been little evidence of correlation-causation from so called micro-fundamental driven markets (especially evident in the Philippine setting), the conventional mindset have been apparently molded by mainstream practitioner’s fanatic devotion to peddling noises based on false premises as seen on their literatures, which have only increased the public’s risk profiles.

And poor understanding of markets consequently prompts for wrong impressions and lackluster participation from the general public.

For us, what is crucial is for everyone to comprehend on the evolving market cycles in order to weigh on the risks prospects from which determines our survivability and profit opportunities.

And this requires us to operate under the understanding of the fundamental truisms of winnowing noises from signals, than one based on charades.

Effects Of Inflationary Policies Surface In Currency Markets

``America’s policy is pushing China towards developing an alternative financial system. For the past two decades China’s entry into the global economy rested on making cheap labour available to multi-nationals and pegging the renminbi to the dollar. The dollar peg allowed China to leverage the US financial system for its international needs, while domestic finance remained state-controlled to redistribute prosperity from the coast to interior provinces. This dual approach has worked remarkably well. China could have its cake and eat it too. Of course, the global credit bubble was what allowed China’s dual approach to be effective; its inefficiency was masked by bubble-generated global demand. China is aware that it must become independent from the dollar at some point. Its recent decision to turn Shanghai into a financial centre by 2020 reflects China’s anxiety over relying on the dollar system. The year 2020 seems remote, and the US will not pay attention to something so distant. However, if global stagflation takes hold, as I expect it to, it will force China to accelerate its reforms to float its currency and create a single, independent and market-based financial system. When that happens, the dollar will collapse.”- Andy Xie If China loses faith the dollar will collapse

This episode of the stock markets in a fierce rebound has brought about exhortations of “greenshoots” and “prospective” economic recovery, which we have described as the reflexivity theory at work.

And as we have repeatedly been saying, the unparalleled scale of concerted and collaborative global central bank actions will ultimately be transmitted to the currency markets which subsequently will pose as the underlying current to financial market actions.

Figure 3: stockcharts.com: Falling US Dollar And Rising Stocks, Commodities and Treasury Yields

As governments continue to distort the market pricing process by providing subsidies, guarantees, fiscal spending and other interventionist measures, the pressures accrued from the imbalances will ultimately be vented on the world’s currency market which risks a cataclysmic collapse in the present monetary system.

Let me reiterate, this grandest experiment of the unbacked paper-digital money system has been 38 years old. If one would treasure the lessons of history, ALL paper money had been extinguished out of the propensity of the rulers to inflate or destroy the currency-mostly for political survival or wars, see our previous discussion Government Guarantees And the US Dollar Standard.

So those fervently praying for governments to “print money” as a way out of the present predicament or to “avoid a Japan” have been putting undue faith on a system which had temporarily weaved “short term” magic before, but at the cost of building a riskier economic and financial structure based on the exponential growth in systemic leverage and moral hazard, which only leads to worsening cyclical bubbles or worst a collapse in the world’s monetary architecture.

Yet policies that serve to uphold the economically unsustainable borrow, speculate and spend policies will ultimately meet its comeuppance. You can dream of printing away the economic crisis similar to Zimbabwe. But that dream we know only turned into a real life nightmare.

Yet, today’s global policy directions reflect on the very essence of why paper money has failed.

The present “boom” appears to be manifesting inflation as getting some “traction”.

As figure 3 shows, the Euro-weighted US dollar index (USD) has broken below its 200-day moving averages, which signals a regression to its long term bear market.

Some will interpret today’s phenomenon as the revival of risk appetite or the reawakening of the “animal spirits” especially when seen with rising yields of the long term US treasuries (TNX).

Some others will adduce market activities especially by the performances of the global stock markets (DJW) alongside rising commodity prices (oil broke above $55 and is now $58!) to prospective global economic recovery.

We hope both of these arguments are right because this will be the ideal “goldilocks” scenario.

From our end, we understand this “goldilocks” scenario as toothfairy economics simply because of the “the marginal utility of real goods and services divided by the marginal utility (mostly for portfolio and transactions purposes) of government liabilities” or inflation as defined by Professor John Hussman in our previous discussion Expect A Different Inflationary Environment.

In short, when more paper money is produced than real goods we essentially get inflation.

But think of it, if present trends will persist and inflation is indeed gaining traction, then rising commodities will essentially squeeze purchasing power of consumers and raise the cost of production for producers.

Meanwhile, rising interest rates will jeopardize or even defeat programs instituted by governments to ease debtor angst, especially in the crisis affected nations.

Aside, rising interest will translate to higher cost of maintaining or servicing debt for the government and the private sector.

So governments seem trapped in a fix; on one hand by allowing markets to function this will translate to the much dreaded (but needed) deflation, which policymakers won’t accept.

On the other hand, policies to pump money in the system will mean more inflation which essentially will undermine most of the programs that have been put in place to mend the dislocations brought upon by the present crisis.

More proof of inflation driving the currency markets in Asia which seems being transmitted to the stock markets? See figure 4.

Figure 4: Bloomberg: Bloomberg-JP Morgan Asia Dollar Index (yellow), MSCI AC ASIA PACIFIC (green)

When Asian Markets are on a rebound as shown by the Bloomberg’s MSCI ASIA PACIFIC [MXAP:IND-green], the Asian currency benchmark Bloomberg-JP Morgan Asia Dollar Index [ADXY:IND-yellow] goes positive-meaning regional currencies appreciate against the US dollar.

There appears to be a strong correlation between the activities in the stock markets and the region’s currency values possibly influenced by portfolio flows, relative economic growth, relative inflation and or yield differential expectations.

But I would like to remind you that currency markets aren’t free markets (no markets are actually free) and are subjected to repeated government manipulations directly (direct market operations) or indirectly (domestic inflationary policies).

Yes, today’s fiat paper money currency standard is a monopoly supplied by governments.

This makes currencies values vulnerable to political interferences which may induce short term aberrations where arguably market prices do not manifest efficiency.

Nevertheless, while imbalances can be deferred for sometime, in due course they get to be exposed by the natural forces of the market.

And applied to the Philippine Peso, in contrast to mainstream and popular predictions, we argued in 2009: Phisix and Peso Will Advance!, that the Peso like the Phisix will defy bearish projections, which had mostly been anchored on remittances and exports, made by mainstream experts who remain afflicted with rear view looking, ivory tower ensconced-laboratory based economic theories and an obsession with self-importance.

The Philippine Peso has been marginally up on a year to date basis with Friday’s close at Php 47.25 and quite distant yet to the Php 50-52 level predicted by the consensus of “experts”.

And based on the above premises, we expect the Peso to similarly reflect gains in the Phisix. In my view, the Peso will possibly appreciate towards the Php 45-46 level or better by the yearend.

And as a final word today’s boom in contrast to the 2003-2007 cycle which basically lasted more than 4 years maybe swifter, steeper and shorter.

Seeds of Hyperinflation Have Been Sown

``Many false arguments are used to defend inflationism. Least harmful is the claim that a moderate inflation does not do much harm. This has to be admitted. A small dose of poison is less pernicious than a large one. But this is no justification for administering the poison in the first place. It is claimed that in times of a grave emergency the use of means may be justified which in normal times would not be considered. But who is to decide whether the emergency is grave enough to warrant the application of dangerous measures? Every government and every political party in power is inclined to regard the difficulties it has to cope with as quite extraordinary and to conclude that any means for combatting them is justified. The drug addict, who says he will abstain from tomorrow on, will never conquer the drug habit. We have to adopt a sound policy today, not tomorrow.”-Ludwig von Mises, Interventionism: An Economic Analysis, Inflation and Credit Expansion

While “greenshoots” have been more evident in Asia and emerging markets than their OECD counterparts, as evidenced by rising reports of indices based on Purchasing Managers Index and bank lending, some have questioned the sustainability of these improvements.

For instance, acquisitions of oil and petroleum products allegedly haven’t been reflective of the economy’s demand and supply, here we quote CBI China (FT Alphaville)

``Most players expected bearish gasoil market in may amid weaker speculative demand and increased supplies. Speculative demand will probably plunge if the market gains no more support in may, but end-user demand is not likely to grow much amid gloomy economy. Meanwhile, oversupply will probably remain as supplies grow. When supplies from PetroChina and Sinopec are not seen to change, CNOOC Huizhou refinery is estimated to supply 200,000-300,000mt of gasoil to East and South China per month. Without much support from international crude, PetroChina and Sinopec may cut prices to promote sales in some regions, where they failed to fulfill their sales targets in April.

``There is little possibility for China to import any gasoil in May in view of negative import margin and weak demand from the domestic market. Meanwhile, Sinopec’s and PetroChina’s gasoil exports may be little changed from the previous three months, about 200,000-300,000mt altogether.” (emphasis added)

Moreover, China’s electricity consumption which serves as a key barometer of economic activities has equally registered a decline on a year to year basis in April (Xinhua).

Furthermore, energy bears point to the growing disconnect between rising oil prices and high inventory, see figure 5.

Figure 5: FT Alphavile: US Oil Inventories Nearly At The Brim

The Financial Times Alphaville quotes Goldman Sachs; ``Commodity prices cannot diverge for long from physical fundamentals as they are largely “spot” assets….As storage bridges the gap between today and the future, commodities that are easier to store, such as metals and agriculture, are more anticipatory.

``Thus, electricity followed by natural gas are the most spot or least anticipatory commodities given the difficulties in storing these commodities while base metals are generally the least spot or most anticipatory given their ease of storage, followed by agriculture and then oil.”

In other words, given the storage issues energy prices are supposed to reflect actual demand and supply.

But as we have earlier asserted experts tend to look at ONLY demand and supply of real goods frequently disregarding the demand and supply of money relative to real goods.

Left to markets, storage issues will find a remedy. And most likely rising oil prices could a manifestation of the diffusing liquidity in the system.

Proof?

In China, the surge in bank lending has mainly been about government induced lending rather than growth in the private sector activity, according to the Wall Street Journal (bold highlight mine),

``China’s state-controlled banks are clearly leading the lending charge, accounting for 50.5% of the new credit extended during the quarter. Foreign banks are, however, behaving more like they are elsewhere, and are not following their Chinese colleagues into the lending surge. Loans by foreign financial institutions declined by 26.4 billion yuan in the first quarter.

``The central bank’s breakdown of new medium- and long-term borrowing, the kind most likely to be used to pay for investment, shows that 50.1% went to infrastructure in the first quarter. That clearly reflects how banks are being pressed to give priority to government stimulus projects. But such lending has its own risks. “Recent bank lending has been concentrated in government projects which, while helping drive rapid investment, also requires evaluation of local governments’ ability to repay the debts,” the central bank said.

``Outside of stimulus projects, demand for credit is not as strong. Only 7.9% of new medium- and long-term lending went to manufacturing, and 11.2% to real estate development.”

Moreover, China continues to massively import iron ore which jumped 24% in April.

As we discussed in The Nonsense About Current Account Imbalances And Super-Sovereign Reserve Currency and Has China Begun Preparing For The Crack-Up Boom? China appears to be heavily acquiring commodities mostly likely designed to diversify from its US dollar reserves holdings which could function as insurance against the risks of hyperinflation or have been consolidating its potential role as primary contender to the currency reserve hegemony, presently held by the US dollar or both.

But as far as the loose connections leaving experts in the quandary, for us they all seem like puzzles falling into place.

As Ludwig von Mises wrote in Interventionism: An Economic Analysis, Inflation and Credit Expansion, ``But on the other hand inflation cannot continue indefinitely. As soon as the public realizes that the government does not intend to stop inflation, that the quantity of money will continue to increase with no end in sight, and that consequently the money prices of all goods and services will continue to soar with no possibility of stopping them, everybody will tend to buy as much as possible and to keep his ready cash at a minimum. The keeping of cash under such conditions involves not only the costs usually called interest, but also considerable losses due to the decrease in the money’s purchasing power. The advantages of holding cash must be bought at sacrifices which appear so high that everybody restricts more and more his ready cash. During the great inflations of World War I, this development was termed “a flight to commodities” and the “crack-up boom.” The monetary system is then bound to collapse; a panic ensues; it ends in a complete devaluation of money Barter is substituted or a new kind of money is resorted to. Examples are the Continental Currency in 1781, the French Assignats in 1796, and the German Mark in 1923.”

For us, this means that the seeds for hyperinflation have been sown, and that those arguing for “timing” and the “inevitability” have been tunneling their market outlook based on Holy Grail economics as guide to investing.

Mr. Russell Napier, author of the Anatomy of the Bear Market seems to share our outlook, in an interview at the Financial Times quoted by FT Alphaville, we quote Mr. Napier (bold emphasis mine),

``The key three indicators that we’ve passed the risk of deflation are rising price of Treasury inflation protected securities, the rising price of commodities and the rising price of corporate bonds. This is not to say that this bounce is the end of the bear market…

And a decoupling with China?

Adds Mr. Napier, ``So I see inflation problems in a couple of years and I see problems with the Chinese not being as big a buyer of US treasuries simply because they will be having a great domestic consumption boom which means they’ll not run surpluses and buy these surpluses. And the crucial one people sometimes forget is the retirement of the babyboomers, the medicare costs in particular and the social security costs of this is going to be issuing a lot of treasuries into the future…

And the US will probably experience a fierce bear market in US treasuries aside from the excruciating effects to its economy due to rising interest rates…see figure 6.

Figure 6: Economagic: The End of the US Treasury Bull Market?

Again Mr. Napier, ``For the next couple of years people will see it as normalisation, if yields on Treasuries go to 4 or 4.5 per cent. People will say this is a normalisation of the treasury yield as we pass the deflation risk . There’ll be a great breath and sigh of relief that we’re going back into another business cycle, and when it looks like we may never get there equity prices will go up. But the final sting I believe is in the tail. The last treasury bear market lasted from 1946 -1981 and there’s no reason to suggest that this one will be any shorter.”

US Treasuries have been in a bullmarket since 1980s, the long cycle does indicate that an inflection point is imminent.

The last word from Mr. Warren Buffett during his latest Berkshire Hathaway’s Woodstock for Capitalists, ``Anybody who holds (US) dollar obligations from outside this country is going to get back less in purchasing power in the future”.

World's Most Reputable Companies

Earlier we featured the world's largest companies (25 Largest Companies of the World), now the Economist brings us the world's most reputable companies.

From the Economist, ``FERRERO, an Italian chocolate-maker, has come out top in an annual survey of the world's most reputable companies. Based on perceptions of the companies in their home markets, the Reputation Institute, a research firm, has asked the public to rate the world's 600 largest firms according to trust, admiration and respect, good feeling and overall esteem. Despite the economic turmoil, respect for business is still generally quite high. But some sectors have suffered. Banks and other financial institutions, which commanded reasonable repect in years gone by, have slipped alarmingly, though they still do better than tobacco companies"

Of the 15, the US holds 4, Asia has 4 (Japan-2, Singapore-1, India-1), Europe has 5 (Spain-2, Italy-1, Sweden-1, France-1) and Latin America has 2 (both from Brazil).

Dictatorship 101

Here is a fabulous amusing article by Paul Collier published at the foreignpolicy.com detailing on the advantages and disadvantages of policies frequently used by dictators (or even conventional politicians in "democracies").

Prologue:

``The old rulers of the Soviet Union were terrified of facing contested elections. Those of us who studied political systems presumed they must be right: Elections would empower citizens against the arrogance of government. And with the fall of the Iron Curtain, elections indeed swept the world. Yet democracy doesn’t seem to have delivered on its promise. Surprisingly often, the same old rulers are still there, ruling in much the same old way. Something has gone wrong, but what?

``To answer this question, I put myself in the shoes of an old autocrat—say, Egypt’s Hosni Mubarak—now having to retain power in a “democracy.” What options do I face? Hard as it is to bear, I have to be honest with myself: My people do not love me. Far from being grateful for the wonders that I have achieved, they may increasingly be aware that under my long rule our country has stagnated while similar countries have transformed themselves. There are even a few cogent voices out there explaining why this situation is my fault. I shake my head in disbelief that it has come to this, seize my gold pen, and start listing my options. I decide to be systematic, in each case evaluating the pros and cons. --Paul Collier

Some interesting strategies utilized by politicians/dictators from the must read article:

``Option 3: Scapegoat a minority

``Pros: This one works! I can blame either unpopular minorities within my country or foreign governments for all my problems. The politics of hatred has a long and, electorally speaking, pretty successful pedigree. In the Ivory Coast it was the Burkinabe immigrants; in Zimbabwe, the whites; in the Democratic Republic of the Congo, the Tutsi. Failing all else, I can always blame Israel America. I can also promise favoritism for my own group.

``Cons: Some of my best friends are ethnic minorities. In fact, they have been funding me for years in return for favors. I prefer doing business with ethnic minorities because, however rich they become, they cannot challenge me politically. It is the core ethnic groups I need to keep out of business. Scare the minorities too badly, and they will move their money out. So, though scapegoating works, beyond a certain point it gets rather costly....

Another common example is "Tax the Rich"!

The next two options have been commonly used in the Philippines...

``Option 4: Buy the votes to win

``Pros: Bribing voters plays to one of my key advantages over the opposition—I have more money.

``Cons: Can I trust people to honor the deal? If I pay them, will they actually vote for me? After all, there are some pretty unscrupulous people out there.

``On balance, I am not sure. I search the Web and stumble on a study by someone named Pedro Vicente at Oxford University. Vicente conducted a randomized, controlled experiment on electoral bribery in São Tomé and Príncipe. In some districts, bribery was restrained by external scrutiny, whereas in others it was not. Systematically, where bribery was unrestrained, the candidate offering bribes got more votes. Bribery works!

``In fact, bribery comes in two modes: retail and wholesale. Retail bribery is expensive and difficult but might still be worthwhile. Its advantage is that I can target pockets of voters critical for success...

``Why is this not a very effective counter? I have two points of discipline. One, paradoxically, is morality: Often, ordinary decent people feel bad if they take someone’s money but then renege. The other is fear of detection: How secret is the ballot? In Zimbabwe, President Robert Mugabe’s street boys spread the word that the government would know how votes were cast, and in the prevailing conditions of misgovernance, this warning could not be treated as an idle threat.

``But how much does it cost to bribe the typical voter? How many votes do I need to buy, and how much can I afford? Is there a cheaper way of buying votes?

``Indeed there is: wholesale bribery. Wholesale bribery works by paying for votes delivered in blocs rather than individually. Bloc voting is very common in impoverished, traditional, rural societies, where the local big shot’s advice is not seriously questioned. When votes are counted, it is common for many villages to have voted 100 percent for one candidate. If the big shot determines how individuals vote, it is obviously cheaper to buy his support directly.

``Overall, bribery is my kind of strategy. The only problem is whether I have enough money to win with it.

``Option 7: Last but not least, miscount the votes

``Pros: Finally, I have found a strategy that sounds reliable. With this one, I literally cannot lose. The tally might be: incumbent, 1; opponent, 10,000,000. But the headline will read: “Incumbent Wins Narrowly.” It also has advantages in reinforcing some of the other strategies. Once people get the sense that I am going to win anyway and that their true votes will not be counted, they have even less incentive to forgo bribes and take the risk of joining the opposition. Better still, I can also keep this strategy in reserve until I see that I am losing.

``Cons: The international community won’t like it. I’ll just have to remember not to go overboard: not 99 percent. It should not look like a Soviet election.

This reminds me of "Hello Garci"!

Hedge Fund Manager Refutes President Obama

After the hedge fund industry got slammed by US President Obama, Hedge Fund manager Clifford S. Asness makes a stirring rebuttal...

From New York Times Deal Book (all bold highlight mine)

Unafraid In Greenwich Connecticut
Clifford S. Asness
Managing and Founding Principal
AQR Capital Management, LLC

The President has just harshly castigated hedge fund managers for being unwilling to take his administration’s bid for their Chrysler bonds. He called them “speculators” who were “refusing to sacrifice like everyone else” and who wanted “to hold out for the prospect of an unjustified taxpayer-funded bailout.”

The responses of hedge fund managers have been, appropriately, outrage, but generally have been anonymous for fear of going on the record against a powerful President (an exception, though still in the form of a “group letter,” was the superb note from “The Committee of Chrysler Non-TARP Lenders,” some of the points of which I echo here, and a relatively few firms, like Oppenheimer, that have publicly defended themselves). Furthermore, one by one the managers and banks are said to be caving to the President’s wishes out of justifiable fear.

I run an approximately twenty billion dollar money management firm that offers hedge funds as well as public mutual funds and unhedged traditional investments. My company is not involved in the Chrysler situation, but I am still aghast at the President’s comments (of course, these are my own views, not those of my company). Furthermore, for some reason I was not born with the common sense to keep it to myself, though my title should more accurately be called “Not Afraid Enough” as I am indeed fearful writing this… It’s really a bad idea to speak out.

Angering the President is a mistake, and my views will annoy half my clients. I hope my clients will understand that I’m entitled to my voice and to speak it loudly, just as they are in this great country. I hope they will also like that I do not think I have the right to intentionally “sacrifice” their money without their permission.

Here’s a shock. When hedge funds, pension funds, mutual funds, and individuals, including very sweet grandmothers, lend their money they expect to get it back. However, they know, or should know, they take the risk of not being paid back. But if such a bad event happens, it usually does not result in a complete loss. A firm in bankruptcy still has assets. It’s not always a pretty process. Bankruptcy court is about figuring out how to most fairly divvy up the remaining assets based on who is owed what and whose contracts come first.

The process already has built-in partial protections for employees and pensions, and can set lenders’ contracts aside in order to help the company survive, all of which are the rules of the game lenders know before they lend. But, without this recovery process nobody would lend to risky borrowers. Essentially, lenders accept less than shareholders (means bonds return less than stocks) in good times only because they get more than shareholders in bad times.

The above is how it works in America, or how it’s supposed to work. The President and his team sought to avoid having Chrysler go through this process, proposing their own plan for reorganizing the company and partially paying off Chrysler’s creditors. Some bondholders thought this plan unfair. Specifically, they thought it unfairly favored the United Auto Workers, and unfairly paid bondholders less than they would get in bankruptcy court. So, they said no to the plan and decided, as is their right, to take their chances in the bankruptcy process. But, as his quotes above show, the President thought they were being unpatriotic or worse.

Let’s be clear, it is the job and obligation of all investment managers, including hedge fund managers, to get their clients the most return they can. They are allowed to be charitable with their own money, and many are spectacularly so, but if they give away their clients’ money to share in the “sacrifice,” they are stealing. Clients of hedge funds include, among others, pension funds of all kinds of workers, unionized and not.

The managers have a fiduciary obligation to look after their clients’ money as best they can, not to support the President, nor to oppose him, nor otherwise advance their personal political views. That’s how the system works. If you hired an investment professional and he could preserve more of your money in a financial disaster, but instead he decided to spend it on the UAW so you could “share in the sacrifice,” you would not be happy.

Let’s quickly review a few side issues.

The President’s attempted diktat takes money from bondholders and gives it to a labor union that delivers money and votes for him. Why is he not calling on his party to “sacrifice” some campaign contributions, and votes, for the greater good? Shaking down lenders for the benefit of political donors is recycled corruption and abuse of power.

Let’s also mention only in passing the irony of this same President begging hedge funds to borrow more to purchase other troubled securities. That he expects them to do so when he has already shown what happens if they ask for their money to be repaid fairly would be amusing if not so dangerous. That hedge funds might not participate in these programs because of fear of getting sucked into some toxic demagoguery that ends in arbitrary punishment for trying to work with the Treasury is distressing. Some useful programs, like those designed to help finance consumer loans, won’t work because of this irresponsible hectoring.

Last but not least, the President screaming that the hedge funds are looking for an unjustified taxpayer-funded bailout is the big lie writ large. Find me a hedge fund that has been bailed out. Find me a hedge fund, even a failed one, that has asked for one. In fact, it was only because hedge funds have not taken government funds that they could stand up to this bullying.

The TARP recipients had no choice but to go along. The hedge funds were singled out only because they are unpopular, not because they behaved any differently from any other ethical manager of other people’s money. The President’s comments here are backwards and libelous. Yet, somehow I don’t think the hedge funds will be following ACORN’s lead and trucking in a bunch of paid professional protesters soon. Hedge funds really need a community organizer.

This is America. We have a free enterprise system that has worked spectacularly for us for two hundred-plus years. When it fails it fixes itself. Most importantly, it is not an owned lackey of the Oval Office to be scolded for disobedience by the President.

I am ready for my “personalized” tax rate now.

Swine Flu: Mostly A Media Fuss

I was supposed to write something about the seeming fear mongering by media on the swine flu, but the Associated Press beat me to the punch.

Here is an excerpt (all emphasis mine)...

``The so-far mild swine flu outbreak has many people saying all the talk about a devastating global epidemic was just fear-mongering hype. But that's not how public health officials see it, calling complacency the thing that keeps them up at night.

``The World Health Organization added a scary-sounding warning Thursday, predicting up to 2 billion people could catch the new flu if the outbreak turns into a global epidemic.

``Many blame such alarms and the breathless media coverage for creating an overreaction that disrupted many people's lives.

``Schools shut down, idling even healthy kids and forcing parents to stay home from work; colleges scaled back or even canceled graduation ceremonies; a big Cinco de Mayo celebration in Chicago was canned; face masks and hand sanitizers sold out — all because of an outbreak that seems no worse than a mild flu season.

``"I don't know anyone who has it. I haven't met anyone who knows anyone who contracted it," said Carl Shepherd, a suburban Chicago video producer and father of two. "It's really frightening more people than it should have. It's like crying wolf."

``Two weeks after news broke about the new flu strain, there have been 46 deaths — 44 in Mexico and two in the United States. More than 2,300 are sick in 26 countries, including about 900 U.S. cases. Those are much lower numbers than were feared at the start based on early reports of an aggressive and deadly flu in Mexico.

``Miranda Smith, whose graduation ceremony at Cisco Junior College in central Texas was canceled to avoid spreading the flu, blames the media.

``"It's been totally overblown," she said Thursday.

Well speaking of "overblown" and "breathless media coverage" Pew Research shows of how the epidemic scare has eclipsed all other topics.
According to Pew Research, ``Yet all those stories were overwhelmed by the frantic coverage of a new flu virus that in a matter of days had made its way around the globe and was threatening to become the first influenza pandemic in four decades. From April 27-May 3, the swine flu, or H1N1 as it officially became known, accounted for nearly one-third of the newshole (31%) studied, according to the Pew Research Center's Project for Excellence in Journalism."

It is understandable for media to revolve around sensationalist news simply because its fundamental incentive is to generate more audiences. And when fear or panic is in the air, the public gropes for information to which media obliges.

But for governments, aside from the "social service" function, the unstated incentives may vary from expanding government control, desire to increased access to funding, or cronyism as discussed in Swine Flu: The Black Swan That Wasn’t and Swine Flu: The Politics of Fear and Control.


Yet according to Gallup, Americans appear nearly evenly split between those who say that media coverage of the swine flu had been exaggerated and those who say media coverage was just right.

But I don't think this will last.

The subdued impact from the swine flu infestation has reduced fear as shown by the Gallup survey above. Note that at the peak only 25% of those surveyed said they were personally worried by the Flu which means 75% were not. Now only 17% are concerned, which implies 83% aren't.

This suggests that, despite the intensive media coverage, the American public hasn't been cowed into panic. This further implies that media has indeed overhyped its coverage of the swine flu.

This declining trend of swine flu scare has likewise been apparent in Google's search trends. Thus eventually I expect more converts to the exaggerated camp for as long as the spread of the disease do not worsen.

Lastly, congratulations to world boxing legend Manny Pacquiao not only for a stunning triumph in his latest quest for glory but also for defying authorities who had been trying to curtail his civil liberty from a vastly inflated health scare.

4-Block World: Who Says Green Jobs Don't Pay Well

Great illustration of Al Gore's Green Jobs From Tom McMahon's 4-Block World

Swine Flu: The Politics of Fear and Control

The swine flu "hysteria" continues to hug the headlines where the latest Bloomberg report says,

``Swine flu, also known as H1N1, has been confirmed by laboratory tests in 1,516 patients in 22 countries, according to the WHO. Mexico has reported 942 cases, including 29 deaths, while the U.S. has 403 cases and two deaths, officials in those countries said. Canada has 165 cases."

Hysteria because fear foisted upon by media, politicians and experts has spurred irrational reactions. For instance, we read with incredulity that some of Tokyo's hospitals have reportedly refused or turned away patients exhibiting flu-like symptoms.

According to the Japan Times, ``An increasing number of patients running a fever have been rejected by Tokyo hospitals that fear they may have swine flu even though the risk of their being infected is minimal, the metropolitan government said Tuesday.

``The number of cases in which hospitals refused medical examinations for such patients totaled 92 from Saturday morning to Tuesday noon, a survey by the metropolitan government found.

``"We want hospitals to respond calmly even if they fear that patients infected with the new flu may appear or that other patients will get infected," a Tokyo official said." Those inflicted by Flu have effectively become castes.

And yet we have experts compounding these sentiments by associating flu epidemics to economic depression.

Take for instance this op-ed from Wall Street Journal by Robert Barro and Jose Ursua (emphasis added),

``Our ongoing study of economic disasters for 36 countries since 1870 suggests that this concern is well founded. In this sample, we have isolated 158 depressions -- defined as declines in a country's real per capita gross domestic product (GDP) by at least 10%. The most prominent features of these depressions are wars and financial crises. But the fourth-worst global macroeconomic event since 1870 seems to be the Great Influenza Epidemic of 1918-20. This "health shock" accounts for 13 of the depression events. In contrast, World War II is associated with 25, World War I with 23, and the Great Depression of the early 1930s with 21.

``The Great Influenza Epidemic (aka the Spanish Flu) began in spring 1918, went through three or four waves, and lasted into 1920. The spread of the disease was propelled by international travel, much of which involved troop movements in 1918 because of World War I. Estimates of world-wide flu deaths cover a wide range but are typically around 50 million.

``We have, thus far, compiled estimates of excess deaths from the flu in 1918-20 for 32 of our 36 countries. The median excess mortality rate was 0.7 per 1,000 people, with a range from 0.1 for Argentina to 4.4 for India and South Africa. (The mean rate was 1.1 per 1,000.) Spain, forever associated with the flu, had a mortality rate of 1.2 per thousand, well above the median. The United States, at 0.65, was close to the median (there were 675,000 American deaths). When applied to today's U.S. population, this rate would translate into two million fatalities....

``The troughs in macroeconomic activity that we associate with the Great Influenza Epidemic were typically in 1920 or 1921. Not all of our 36 countries showed economic declines in this period. But on average the fall in real per capita GDP from the previous peak in 1918 (or sometimes 1919 or 1920) was 6.6%. (For the 24 countries with data, the average decrease in real consumer spending per person was similar to that for real per capita GDP.) Notable declines in GDP among the 13 depression cases were Canada and South Africa at 24% and Italy at 22%. For the U.S. from 1918 to 1921, the falls in per capita GDP and consumer spending by 12% and 14%, respectively, meant that this contraction was second in size since 1870 only to the Great Depression."

The problem with looking at history is that it may be seen from a one dimensional lens.

This isn't 1918. Today's economic climate is far different from the Great Depression.

While travel and troop movements may have been accounted for as the aggravating circumstances for the spread of the disease, this hasn't been sufficient.

On the other hand, Prof. William Anderson asserts that government policies then exacerbated the pandemic. He writes (all bold highlights mine),

``Most people don’t remember 1918 as the year the flu pandemic began; they remember it as the year that World War I ended. This was the "War to End All Wars," or so it was called, when a more appropriate title might have been the "War to Permanently Expand the State." More than 10 million soldiers died on the battlefields of Europe and millions of civilians died deaths of starvation or were killed in the crossfire.

``Since war is a tool of the state, we safely and honestly can say that the calamities of World War I were state-created. Unfortunately, people did not just die from bullets, artillery shells, bombs, and even starvation. Across the globe, the war resulted in vast swaths of malnourishment as crops were diverted from civilian populations to the huge armies strung across Europe. At the same time, once-productive croplands in Europe were reduced to moonscapes as the armies obliterated the land.

``But governments were not satisfied with the sheer amount of physical and human destruction. Indeed, the government made things worse through lies, and nowhere was that more apparent that the lies told by state agents in order to "prevent panic" from the onrushing flu epidemic. As Wikipedia points out:

"The Great Influenza was the source of much fear in citizens around the world. Further inflaming that fear was the fact that governments and health officials were downplaying the influenza. While the panic from World War I was dwindling, governments attempted to keep morale up by spreading lies and dismissing the influenza. On September 11, 1918, Washington officials reported that the Spanish Influenza had arrived in the city. The following day, roughly thirteen million men across the country lined up to register for the war draft, providing the influenza with an efficient way to spread. However, the influenza had little impact upon institutions and organizations. While medical scientists did rapidly attempt to discover a cure or vaccine, there were virtually no changes in the government or corporations. Additionally, the political and military events were fairly unaffected due to the impartiality of the disease, which affected both sides alike".

``Exacerbating the crisis in this country was the crowding of American troops onto ships following the war’s end, which was guaranteed to spread the sickness and help it spread when the soldiers reached the USA. On the home front, huge war bond rallies in large cities brought people into very close proximity with each other, allowing the flu to spread rapidly. On one end, the government helped to create the conditions that spread the flu; on the other hand, agents representing the state lied about those conditions.

``By the war’s end, Germany was near starvation (and many people did starve to death during the British blockade that lasted well into 1919), and about a half-million civilians succumbed to the sickness in that country. It is estimated that 16 million people in India died of the pandemic.

``Yet, when it raises the prospect of a repeat of this very horror, governments engage in more lies. We forget that life expectancy in the United States was in the mid-50s for white males and less than 50 for black men. In countries elsewhere, and especially in Asia and Africa, life expectancy was much shorter. Medical care at that time was primitive compared to what we have today, even in poor countries, and it was not uncommon in that era for people to be exposed to epidemics that pretty much have disappeared today.

``Even with those odds, the mortality rate during the 1918–1920 pandemic was estimated at between 2.5 and 5 percent. We can be assured today that not only would fewer people become sick, but even fewer people would die. In other words, even at its worst, the current outbreak of Swine Flu, while bad, is not going to turn into a pandemic no matter what CNN and the CDC try to tell us."

In short, the swine flu seems to be more about the politics of government control than of the health hazard itself.

Professor Anderson concludes, ``I doubt seriously that any plan by government can or will lessen the impact of this current "epidemic," if we can call it that. However, I also have no doubt that if emergency plans are kicked into place, it will be much easier for the government to call for further states of emergency, with the threshold becoming lower and lower. That we should fear much more than the Swine Flu."