A Bet On Free Education 2: University Bubble, Democratizing Education Via Creative Destruction

Our sequel to A Bet On Free Education

This time Washington Monthly says that next generation of online education will "could be great for students—and catastrophic for universities."

In other words, the University Bubble (with their soaring tuition fees see:Black Swan Problem: Deflation? Not In Ivy League Schools) seem set to implode.

This will be a powerful global phenomenon, but will be met by stiff resistance.

Some excerpts from the wonderful article entitled "College for $99 a month" (all bold highlights mine, green heading-mine)

Online Education Towards A Critical Mass...

``To anyone who has watched the recent transformation of other information-based industries, the implications of all this are glaringly clear. Colleges charge students exorbitant sums partly because they can, but partly because they have to. Traditional universities are complex and expensive, providing a range of services from scientific research and graduate training to mass entertainment via loosely affiliated professional sports franchises. To fund these things, universities tap numerous streams of revenue: tuition, government funding, research grants, alumni and charitable donations. But the biggest cash cow is lower-division undergraduate education. Because introductory courses are cheap to offer, they’re enormously profitable. The math is simple: Add standard tuition rates and any government subsidies, and multiply that by several hundred freshmen in a big lecture hall. Subtract the cost of paying a beleaguered adjunct lecturer or graduate student to teach the course. There’s a lot left over. That money is used to subsidize everything else.

``But this arrangement, however beneficial to society as a whole, is not a particularly good deal for the freshman gutting through an excruciating fifty minutes in the back of a lecture hall. Given the choice between paying many thousands of dollars to a traditional university for the lecture and paying a few hundred to a company like StraighterLine for a service that is more convenient and responsive to their needs, a lot of students are likely to opt for the latter—and the university will have thousands of dollars less to pay for libraries, basketball teams, classical Chinese poetry experts, and everything else.

``What happens when the number of students making that choice reaches a critical mass? Consider the fate of the newspaper industry over the last five years. Like universities, newspapers relied on financial cross-subsidization to stay afloat, using fat profits from local advertising and classifieds to prop up money-losing news bureaus. This worked perfectly well until two things happened: the Internet made opinion and news content from around the world available for nothing, and the free online classified clearinghouse Craigslist obliterated newspapers’ bedrock revenue source, the want ads. Suddenly, people didn’t need to buy a newspaper to read news, and the papers’ ability to subsidize expensive reporting with ad revenue was crippled. The result: plummeting newspaper profits leading to a tidal wave of layoffs and bankruptcies, and the shuttering of bureaus in Washington and abroad....

Disruptive Innovation Versus Traditional Forces...

``By itself, the loss of profitable freshman courses would be devastating. And in the long run, Web-based higher education may not stop there. Companies like StraighterLine have the hallmarks of what Harvard Business School Professor Clayton Christensen and entrepreneur Michael Horn describe as “disruptive innovation.” Such services tend to start small and cheap, targeting a sector of the market that established players don’t care much about—like tutoring in introductory courses. “This allows them to take root in simple undemanding applications,” Christensen and Horn write. “Little by little, the disruption predictably improves… And at some point, disruptive innovations become good enough to handle more complicated problems and take over, and the once-leading companies with old-line products go out of business.”

``The pattern has played out in industries ranging from transistors to compact cars. When Japanese companies like Honda first began selling small, fuel-efficient cars in America, the vehicles were markedly inferior to the chrome- festooned behemoths rolling off the assembly lines of invincible Detroit giants like Ford and General Motors. But they were also inexpensive—and, when gas prices skyrocketed in the 1970s, suddenly more attractive as well. Japanese cars gradually improved while American companies lapsed into complacency, and the rest is history.

``Econ 101 for $99 is online, today. 201 and 301 will come. It’s no surprise, then, that as soon as Burck Smith tried to buck the system, the system began to push back.

``The biggest obstacle Smith faced in launching StraighterLine was a process called accreditation. Over time, colleges and universities have built sturdy walls and deep moats around their academic city-states. Students will only pay for courses that lead to college credits and universally recognized degrees. Credits and degrees can only be granted by—and students paying for college with federal grants and loans can only attend—institutions that are officially recognized by federally approved accreditors. And the most prestigious accreditors will only recognize institutions: organizations with academic departments, highly credentialed faculty, bureaucrats, libraries, and all the other pricey accoutrements of the modern university. These things make higher education more expensive, and they’re not necessary if all you want to do is offer standard introductory courses online. To compete, Smith needed StraighterLine courses to be as inexpensive as they could be...

Democratizing Education Equals A Progressive Society...

``There’s a psychological barrier as well. Most people are so invested in the idea of education-by-institution that it’s hard to imagine another way. There’s also a sense that for-profit schools are a little sleazy (and some of them are). Because Web-based higher education is still relatively new, and the market lacks information that allows students to compare introductory courses at one institution to another, consumers tend to see all online courses in the same bad light. “The public isn’t good at discriminating,” says Larry Gould. “They read ‘online course’ and they think ‘low quality,’ even when it’s not true.”

``But neither the regulatory nor the psychological obstacles match the evolving new reality. Consumers will become more sophisticated, not less. The accreditation wall will crumble, as most artificial barriers do. All it takes is for one generation of college students to see online courses as no more or less legitimate than any other—and a whole lot cheaper in the bargain—for the consensus of consumer taste to rapidly change. The odds of this happening quickly are greatly enhanced by the endless spiral of steep annual tuition hikes, which are forcing more students to go deep into debt to pay for college while driving low-income students out altogether. If Burck Smith doesn’t bring extremely cheap college courses to the masses, somebody else will.

``Which means the day is coming—sooner than many people think—when a great deal of money is going to abruptly melt out of the higher education system, just as it has in scores of other industries that traffic in information that is now far cheaper and more easily accessible than it has ever been before. Much of that money will end up in the pockets of students in the form of lower prices, a boon and a necessity in a time when higher education is the key to prosperity. Colleges will specialize where they have comparative advantage, rather than trying to be all things to all people. A lot of silly, too-expensive things—vainglorious building projects, money-sucking sports programs, tenured professors who contribute little in the way of teaching or research—will fade from memory, and won’t be missed."

Read the rest here.

Creative Destruction is coming to the world's educational arena.

7 Ways To A Dictatorship

Mr. Viv Forbes of the Carbon Sense Coalition lists 7 common traits to a dictatorship.

We quote Mr. Forbes, (bold highlights mine)

"1. Start the Scare

It can be the Yellow Horde, Inflation, Drugs, Pollution, Terrorism, Bird Flu, Peak Oil, Unemployment or Global Warming — get the people anxious and demanding protection from some terror.

2. Lay the Bait

The Utopian Vision — freedom from want, stable prices, fair trading, equality, Lebensraum, racial purity, saving the polar bears/koalas/Great Barrier Reef, balmy weather, return to a simple life, job security, world status.

3. Trumpet the Call to Arms

"Together we can beat this peril/achieve Nirvana.

4. Grab Power and Resources

"We need extra powers, more people and extra taxes to save you from this threat.

5. Spread Propaganda

Use ministerial PR offices to create "The Big Lie. Follow up with supporting half truths and subliminal messages and pictures. Use suasion and the lure of grant money to create a supportive "research industry. Then make sure the government media is well stacked with fellow travellers.

6. Divert the Masses

Arrange massive public activities that create feelings of pride, solidarity and excitement —Roman circuses, Nazi rallies, Soviet military parades, heroes, adventures, football, rock concerts and endless games and nationalistic contests. Enlist the young in exciting things like the Hitler Youth or Mao's Red Brigades.

7. Eliminate the Opposition

Start with pretending they don't exist ("we have consensus — the science is settled). If that fails, follow up with denigration, defamation, vilification, questioning of motives and intimidation. Then, for the diehards, the final solution. The hidden agenda is always the same — more power and money for central controllers and their business mates, higher taxes and less freedom and property rights for the peons."

This reminds me of F.A. Hayek's The Road to Serfdom (comic version, video)

Mr. Forbes cites historical examples,

``Let's recall the world of the 1920s:

• The League of Nations had just been set up "to prevent war.

• After years of civil war, Lenin's Bolsheviks controlled Russia and starving peasants were eating a mixture of grain, clay and twigs. When Lenin died, Stalin seized power, murdered Trotsky, turned farms into communes and announced the first of Russia's "Five Year Plans. Millions more died.

• Mussolini, leader of the National Fascists (the Black Shirts) and former editor of the Milan Socialist Party Newspaper, declared himself "Il Duce of Italy.

• Mao Tse-tung formed the Communist Party in China, and commenced setting up communes and Five Year Plans that no one believed in. Millions died in man-made famines.

• French troops occupied the Ruhr to extract reparations from Germany for World War I. The German currency and German savings were destroyed by runaway inflation caused by excessive spending financed by printing paper money.

• Adolph Hitler reorganized the National Socialist German Workers Party and his Brown Shirts attempted to seize power in Bavaria. He also published "Mein Kampf, another grand plan to remake society by force.

• The Conservation Movement was established in Germany and embraced the Nazi party. (see: Green and Brown)

• The Ku Klux Klan claimed one million members in USA.

• The British imposed a Salt Tax in India, thus provoking Ghandi to peaceful revolution. The first Hindu-Muslim riots occurred.

• In Australia there were long strikes in the coal mines, at Broken Hill and on the waterfront.

Read the rest here

As H. L. Mencken once wrote, ``The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary."

So What's Wrong With Philippine Peso?

This is just a pictorial of what I discussed at my earlier post see Not Just A Bear Market Rally For Philippine Phisix or Asia

Here is what I wrote,

``The Peso’s woes can’t be about deficits (US has bigger deficits-nominally or as a % to GDP), or economic growth (we didn’t fall into recession, the US did), remittances (still net positive) or current account balances (forex reserves have topped $40 billion historic highs) or interest rates differentials (Philippines has higher rates)."

courtesy of Deutsche Bank: EM Anti-Crisis Measures

I would say that caution should be exercised when listening to experts oversimplistically pin the blame on fiscal stimulus deficit spending.

That would be a function of available bias...looking for data to retrofit into an explanation.

If deficits have indeed been the sole determinant of a currency's price direction then Malaysia, Singapore and Thailand's currency should also be in a worst condition than ours, since they've spent more than the Philippines as % of GDP as shown in the chart above.

On the contrary they've all outperformed us.

The following are the one year chart of our contemporaries:

Thailand's Baht

Indonesia's Rupiah

Singapore Dollar

Malaysia Ringgit

Philippine Peso

Not Just A Bear Market Rally For Philippine Phisix or Asia

``Key question then: why do smart people engage in negative thinking? Are they actually stupid? The reason, I think, is that negative thinking feels good. In its own way, we believe that negative thinking works. Negative thinking feels realistic, or soothes our pain, or eases our embarrassment. Negative thinking protects us and lowers expectations. In many ways, negative thinking is a lot more fun than positive thinking. So we do it. If positive thinking was easy, we'd do it all the time. Compounding this difficulty is our belief that the easy thing (negative thinking) is actually appropriate, it actually works for us. The data is irrelevant. We're the exception, so we say. Positive thinking is hard. Worth it, though.”- Seth Godin The problem with positive thinking

For many, the basic premise for today’s global market rebound has due to a “bear market rally”.

Dem Dry Bones

This especially holds true for the advocates of the global ‘deflation’ outcome and for those who interpret markets based on conventional methodology.

Nevertheless, predictions have underlying analytical foundations.

The basic pillar for such sponsorship is that the US will remain as the irreplaceable source of demand for the world. But laden with too much debt and hamstrung by a vastly impaired banking system, US consumers will be unable to take up the slack emerging from the recent bust, while the world will unlikely find a worthy substitute, and as consequence, suffer from the excruciating adjustments from the structural excesses built around them during the boom days.

Hence, the Dem Dry bones deduction-Toe bone connected to the foot bone, Foot bone connected to the leg bone, Leg bone connected to the knee bone. BOOO! We are faced with a Global Deflation menace.

We have spilled too much ink arguing against the seemingly plausible but fallacious argument simply because all these oversimplifies human action without taking into account how people will respond to altering conditions (creative destruction), overemphasis on the rear view mirror and importantly, such arguments tremendously underestimates the role money plays in a society (inflationary policies).

Moreover, the assumption that the world has been scourged with its arrant dependence on the US seems downright exaggerated as today’s market actions have shown.

In other words, yes while increased globalization trends has indeed integrated or has deepened the interlinkages of a large segment of global economies, particularly financial and labor markets and investment flows, it hasn’t entirely converged every aspect of the marketplace or the economy.

That’s because nations have their own cultural, religious and geographical traits that are unique to themselves that function as natural barriers.

Yet all these have significant impact on the motional profile of a country’s political economy. So every country (in terms of government and its constituents) will have to deal with its inherent domestic forces as much as it has to deal with fluctuating external factors, and all these dynamics will result to different or divergent responses.

Hence, national idiosyncrasies (or decoupling dynamics) will be retained and will continue to do so because of such intrinsic barriers. This, in spite of a prospective deepening globalization trends.

So individual values and actions will significantly matter more than perceived macro assumptions advanced by sanctimonious ivory tower experts.

This also means that the assumption that markets or economies will be totally convergent or “coupled” to each other is another false concept.

Four Stages of Bear Markets

Figure 1: US Global Funds: 4 Stages Of The Typical Secular Bear Market

Many have used this chart, the “four stages in the typical secular bear market”, which has floated around in the cyberspace, to justify the significance that today’s rising markets account for as a bear market rally (see figure1).

Right at the nadir of the market meltdown, triggered by the institutional bank run in the US [see October 26^th Phisix: Approaching Typical Bear Market Traits], we described how the Philippine Phisix reached the typical bear market levels in terms of depth or degree of losses and the timeframe covered, ``We are presently 15 months into the present bear market which begun in July of 2007. The last time the Phisix shadowed the US markets it took 28 months for the market to hit a bottom. I am not suggesting the same dynamics although, seen in terms of the US markets, the recent crash seems different from the slomo decline in 2000.”

From a hindsight view, we have been validated anew- we did not match the longest “slomo” decline of 28 months during the 1999-2001 cycle, but nevertheless clocked in as an extended cyclical bear market (15 months peak-to-trough), in terms of duration compared to 1987 (13 months) and 1989 (11 months).

Nonetheless the above chart of the 4 stages of a bear market has indeed traced out the bear market dynamics of the Phisix over the 1999-2002 period (see figure 2) but on a different timeframe scale relative to the US.

Figure 2: PSE Phisix: 4 Stages of Phisix Bearmarket

The Philippine market appears to have a slightly shorter cycle than its US counterpart if we are to base it on the first 3 stages (59 months US vis-à-vis 56 months). That is to repeat, in the context of a SECULAR bear market cycle.

But, I would caution you from interpreting the same operating dynamics today as that with 2001.

Besides, I would admonish any tautology that actions in the US markets should correlate with the Philippine markets-they shouldn’t. Not because of exports and not because of remittances.

Secular Bull-Cyclical Bear, Where The Rubber Meets The Road

The Philippines (Phisix and the economy) has essentially had some mixed blessings from its less globalized economy and market; she didn’t outperform during the boom days and conversely, didn’t fare as badly during the global recession.

But overall I don’t see this as being net beneficial for the country since trade openness and economic freedom is the source of capital accumulation. The semblance of any of today’s success could be attributed to more on luck than from any policy induced measures.

However, because boom bust or business cycles are fundamentally credit driven, then our eyes must focus on where the rubber meets the road.

The Philippine economy and its banking system have currently been operating from significantly reduced systemic leverage (in fact the private sector debt has been one of the lowest in Asia see Will Deglobalization Lead To Decoupling?).

Another, the crisis adjustment pressures or the market clearing process coming off the excesses from the pre-Asian crisis boom have had most of its imbalances ventilated during the 1997-2003 cycle. That’s the essence of bear markets-sanitizing excesses and balancing imbalances.

In addition, the Philippine banking system has been extremely liquid, where total resources in the banking system as of April 2009 at Php 5.8 trillion (BSP Tetangco speech August 11^th).

Domestic banking system’s Non Performing Loans (NPL) has returned to pre-Asian Crisis levels of around 4%, which serves as evidence of the market clearing process (BSP Tetangco).

Besides, because the domestic banking system’s balance sheets have been least impaired due to largely missing out on the highly levered securitization shindig, the Philippine banking system remains adequately capitalized, well above the risk ratios as per BSP regulations (10%) and Bank of International Settlement (8%) standards (BSP Tetangco).

This low systemic leverage reflects, as well as, on our emerging Asian market peers, in contrast to the US and European counterparts.

Thus, Philippine economy and its financial markets appear to be coming off on a clean slate, enough to imbue additional leverage in the system to power the Philippine Phisix and the economy to another bubble.

Sorry to say, but central bankers, being legalized cartels, are innately enamored to blowing bubbles, due to the unlimited potentials to issue credits via the fractional reserve banking platform (or issuing of money more than bank holds in reserve) from which all global central banks operate on.

Lastly, the recent bear market cycle emanated from contagion effects than from internal adjustments from massive structural misallocations, which is what the US economy has presently been undergoing. This means that adjustments from the bust are likely to be minor.

So, distinctions matter.

In short, the last bear market cycle that the Philippine Phisix suffered WAS NOT a secular bear market but a cyclical one.

Inflation: Keys To Future Investment Returns

The same reasons are behind why the historically low interest rate regime pursued by the Bangko Sentral ng Pilipinas (BSP) has generated significant traction in the economy, as we have been anticipating.

Proof?

According to the BSP, Real estate loans have been picking up as of June 2009, so as with Automobile loans, credit card receivables and other consumer loans (appliance and other consumer durables and educational loans) over the same period.

And all these have likewise been reflected on the Phisix, which as of Friday’s close has been up 51.16% on a year to date basis, driven by local investors [as discussed in last week’s Situational Attribution Is All About Policy Induced Inflation].

This compared to the 2003-2007 cycle which had been foreign dominated. That’s another key point to reckon with.

Moreover, from a chartist viewpoint, not all the bearmarkets have the same patterns, (see figure 3)

Figure 3: Philippine PSE: 18 year Cycle

At over the 23 years from where the Philippine Phisix has undergone a full cycle (secular bull and secular bear market 1985-2003 or 18 years), the ‘cyclical’ bear market in 1987 (45% loss in 13 months) did show a short resemblance to the 4 stage bears, but the 1989 market had been a V-shaped recovery (62% loss in 11 months) [pls see blue ellipses].

The point is that there is a material difference in the performance of bear markets during secular and in cyclical trends.

In cyclical markets, while bear markets can be deep, they are likely to recover rapidly compared to secular bear markets, whose correction process takes awhile, for structural reasons stated above.

Apparently, the action in today’s market appears to account for such cyclical trend dynamics.

Because no trend moves linearly, we should expect bouts of interim weaknesses. However, this should serve, instead, as buying opportunities.

Moreover, I’d like to bring to your perspective the long term cycle of the Phisix as exhibited by the pink channels. You’d notice that the long term channel isn’t sideways or down BUT UP!!!

While other observers, especially those colored by political bias, could impute economic fortunes on this, my thesis is that the nominal long term price improvements reflect more on “inflation” than real output growth.

This is why the Phisix seems so highly sensitive to monetary fluxes. The lesser the efficient the market, the more sensitive to inflationary ebbs and flows.

And this long term chart has likewise been giving us a clue to where the Phisix is likely headed for-10,000, as emerging markets and Asia takes the centerstage of the bubble cycle.

But this inflation driven pricing isn’t relegated to the Phisix alone, but has been accelerating its influence over the world and even in the US markets.

Proof?

I am now really finding some “comfort with the crowds” (pardon me, I am also vulnerable to cognitive biases, but at least one that I am aware of) among big investing savants. Aside from Warren Buffett whom we featured in Warren Buffett’s Greenback Effect Weighs On Global Financial Markets, the world’s Bond King PIMCO’s top honcho, Mr. William Gross recently wrote about how asset pricing dynamics will be fueled by inflation.

These are the strategic scenarios which he enumerated as having a high probability of playing out:

(bold/underline highlights mine)

-Global policy rates will remain low for extended periods of time.

-The extent and duration of quantitative easing, term financing and fiscal stimulation efforts are keys to future investment returns across a multitude of asset categories, both domestically and globally.

-Investors should continue to anticipate and, if necessary, shake hands with government policies, utilizing leverage and/or guarantees to their benefit.

-Asia and Asian-connected economies (Australia, Brazil) will dominate future global growth.

-The dollar is vulnerable on a long-term basis.

In other words, US dollar vulnerability, QE and other monetary ‘bridge financing’ non interest rate tools, aside from fiscal policies and low interest rates are all inflationary policies that are “keys to future investment returns”.

Whereas Asia and Asian-connected economies, given their edge of low systemic leverage, unimpaired banking system and the thrust towards trade and financial integration with the world commerce, are likely to assimilate most of the circulation credit “inflation”, hence their likely dominance in terms of attaining the highest global economic “growth”.

I’m not suggesting that credit expansion equals sound economic growth. Instead what I am saying is that economic growth in Asia and emerging markets will be based on the public’s response to the incentives set forth by policies to sop up credit.

In short, conventional analysis will continue to find enormous disconnect as inflationary policies amalgamates its presence on the markets.

But at least Mr. Gross have been candid enough to unabashedly admit looking for opportunities to strike lucrative deals with the government based on special ‘privileges’, “shake hands with government policies, utilizing leverage and/or guarantees to their benefit”…or euphemistically this is called political entrepreneurship or economic rent seeking from the US government!

Well, more signs of the Philippinization of the America.

The Applause Goes To Inflation

I wouldn’t shudder at the thought of policy tightening given the near unison of voices from the global authorities to extend the party.

Since inflation is a political process, then let us tune in to the statements of the political authorities to get a feel on their pulse and the possible directions of the markets.

From Caijingonline, ``China's economy is at a crucial juncture in its recovery and the government will not change its policy direction, Premier Wen Jiabao was cited as saying by Xinhua news agency September 1”…``China will stick to its moderately loose monetary policy as it strives to meet economic goals, Wen said during a meeting with visiting World Bank President Robert Zoellick.” (emphasis added)

From Bloomberg, ``China’s banking regulator said it will take years to implement stricter capital requirements for banks, seeking to assuage concerns the rules will cause a plunge in new lending.”

From Wall Street Journal, ``World Bank President Robert Zoellick said Wednesday it is too early for China to roll back its stimulus measures as the country's economic recovery could still falter.”

From Bloomberg, ``European Central Bank President Jean-Claude Trichet said the bank won’t necessarily raise interest rates when the time comes for it to start withdrawing other emergency stimulus measures. The term ‘exit strategy’ should be understood as the framework and set of principles guiding our approach to unwinding the various non-standard measures,” Trichet said at an event in Frankfurt today. “It does not include considerations about interest policy.”

From Wall Street Journal, ``Dominique Strauss-Kahn, managing director of the International Monetary Fund, warned world governments against “premature exits from monetary and fiscal policies” despite signs that “the global economy appears to be emerging at last from the worst economic downturn in our lifetimes.”

From Bloomberg, ``Federal Reserve officials in their August meeting discussed extending the end-date for purchases of mortgage bonds to minimize any market disruptions, and expressed concern about the pace of a likely economic recovery.”

As presciently predicted by Ludwig von Mises in Human Action, ``The favor of the masses and of the writers and politicians eager for applause goes to inflation.”

The global political leadership sensing short term triumph from current policies will continue to exercise the same “success formula” to limn on the illusion of prosperity.

Their actuations are so predictable.

The Deflation Bogeyman

I wouldn’t be a buyer of the global deflation thesis especially under the context that deflation is a monetary phenomenon.

That’s because the only transmission mechanism from so-called deflationary pressures, via the recession channel, would be from remittances and exports, which isn’t deflationary in terms of the potential to wreak havoc on the domestic banking system or even on the 40% informal cash based economy.

Said differently: Slower or negative exports or remittances will NOT contract the money supply and won’t be a hurdle from a Central Bank determined to inflate the system!

In the US, the fact that tuition fees from Ivy League Schools have been exploding to the upside, in spite of today’s crisis, dismisses the deflationary nature in the absolute sense for the US economy [see Black Swan Problem: Deflation? Not In Ivy League Schools].

What the US has been undergoing is a statistical deflation- a price based measure from the preferred numbers by the establishment.

In terms of political dimensions, scare tactics (deflation bogeyman) has been repeatedly used by authorities to justify inflationary policies to wangle out concessions aimed at rescuing select (political interest groups) entities or industries at the expense of the society.

And I think that the ultra low inflation (BSP) in the Philippines reflects on the same statistical mirage.

Just this week my favorite neighborhood sari-sari store (retail) hiked beer prices by 5%! While beer may not be everything (it may even be a store specific issue, which I have yet to investigate), looking at oil prices at $68 today from less than $40 per barrel in March signifies a price increase of 70%!

Seen from a lesser oil efficient use economy, the transmission mechanism, whose effect may have lagged, could be more elaborate than reflected on government based statistical figures.

To consider both the US and the Philippines will have national elections in 2010, senatorial and Presidential-senatorial respectively. So it wouldn’t be far fetched that the incentive for incumbent authorities from both countries to intervene (directly or indirectly) in order to create the impression of a strong economic recovery for the sole purpose of generating votes.

The fact the Philippine Peso continues to slide against the US dollar in the face of stronger regional currencies seems so politically suspicious.

The Peso’s woes can’t be about deficits (US has bigger deficits-nominally or as a % to GDP), or economic growth (we didn’t fall into recession, the US did), remittances (still net positive) or current account balances (forex reserves have topped $40 billion historic highs) or interest rates differentials (Philippines has higher rates).

In sum, when you factor in all the major variables that could influence the Phisix- local politics (national elections), geopolitics (such US elections), the “anxiety” from global central bankers which should translate to prolonged or extended monetary inflation, continued loose domestic monetary policies, long term technical trends, inflation sensitive fundamental issues (as systemic leverage, banking system) and the potential response from the public to loose monetary policies-it would seem highly probable that the domestic stock market is likely to continue with its long term ascent.

So I would NOT reckon this to be a bear market rally especially not from the flimsy excuse of global deflation.

Figure 4: Bloomberg: Possible Bear Market Rally

Bear market rally could be a US phenomenon (see figure 4), but is unlikely for Asia and Asian Emerging Markets.

Nevertheless, I would use the US dollar index, gold and oil as my main barometers for measuring liquidity conditions.

Black Swan Problem: Deflation? Not In Ivy League Schools

Somebody uttered 'deflation'?

Well, definitely not in the tuition fees of Ivy league schools.

This interesting commentary and graph from Bloomberg's Chart of the Day

(bold highlights mine)

``Life on top means not having to lower your prices.

``The CHART OF THE DAY shows how the cost of a year as an undergraduate at Harvard and Princeton has risen through boom and bust. Tuition and fees at Harvard jumped 67.8 percent over the decade; at Princeton, they increased 43.4 percent.

``That hasn’t dented demand. Freshman applications at Harvard in Cambridge, Massachusetts, rose by 60.9 percent over the last 10 years. At Princeton in New Jersey, which started accepting the Common Application standardized form for admission in 2005 (Harvard did so in 1994), demand rose by 47.7 percent.

``The two Ivy League schools haven’t been entirely immune from the recession. Harvard this year reported that its endowment fell an estimated 30 percent; Princeton’s, 25 percent.

``“They say trees can’t grow to the sky, but apparently there’s no stopping college tuitions,” said Jay Diamond, a managing director at Annaly Capital Management, a New York real estate investment trust with total assets of $86 billion, and member of Princeton class of 1986. “It would appear that an undergraduate degree at a place like Princeton is actually a Giffen good. As a prospective college tuition-paying parent -- my kids are in 10th and eighth grades and kindergarten -- I wish that colleges competed on price, but that is certainly wishful thinking.”

``A Giffen good, first observed by British economist Robert Giffen (1837-1910), is something for which demand rises even as its price goes up."

Prices should be seen from a relative and not from an absolute perspective, where some prices (as the above) have been going up, in spite of the recession, while some prices have indeed been going down.

The point is deflation in the absolute sense isn't true.

Like the Black Swan problem, in the generalization that all swans are white, David Hume argues that a ``single black swan is sufficient to refute that conclusion."

GDP Per Capita Per Country

An interesting site on the GDP per Capita Per Country from snippets.com.

Sample graphs:

Highest World

ASEAN

Brain Drain Is Freedom And Choice

There is this popular impression that brain drain (migration outflows) signifies as a social cost.

A UN study by Michael A Clemens refutes this notion and suggests that brain drain dynamics function similar to domestic urbanization trends and is a net benefit to society.

From Mr. Clemens, (bold emphasis mine)

``All of these “best practice” policy levers have two things in common:

First, they expand the choices available to skilled workers. For example, rural service incentives reduce the tradeoff between serving underserved populations and personal hardship.

``Second, they are more effective than shaping professionals’ migration choices per se because they address the underlying causes of those choices. For example, removing barriers to professional employment at home can change decisions freely made by potential emigrants. The common trait of “worst practice” policies is that they seek to limit skill flow itself, which is to say, to limit choices by skilled workers.

``It is time to bury the unpleasant and judgmental term “brain drain”."

Read the rest of the study here

In short, the pejorative term "Brain drain" serves to allocate labor where it is needed most. And it gives people the freedom to work for personal or career advancement. Moreover, brain drain could also be seen as an escape valve from unfree economies.

Gold and the September Stock Market Seasonality Syndrome

Many have been fixated with the concept of "September is the worst month for stocks" syndrome.

Again this is an understandable concern, especially coming off last year's meltdown which has been freshly ingrained in our memories.

In behavioral finance such phenomenon can be attributed to cognitive biases or heuristics known as the hindsight bias, anchoring and the focusing effect.

Nonetheless, so far the "seasonality impact" of the September syndrome has been initially validating the merits of the case with start of the month jitters. Although suggesting that this would be the dominant theme for the month would be too early or too premature to arrive at such conclusion.

We have made a contrarian case that instead of looking at the monthly seasonal effects on the stock market, we should instead focus on the US dollar's seasonal factors as discussed in The US Dollar Index’s Seasonality As Barometer For Stocks or gold (also discussed in Gold As Our Seasonal Barometer and Gold As Our Seasonal Barometer (For Stocks) II.

Yesterday, gold prices surged.

Yet we find another interesting commentary from Bespoke Invest, which almost parallels our view.

From Bespoke, ``With the correlation of gold and the S&P 500 at its most positive levels in over three years (chart below), will equities follow suit?"

My guess is that yes they will.

Global Stock Market Performance Since The Lehman Collapse

Another interesting chart from Bespoke Invest.

This time they take the perspective of global stock market performances in the frame of the Lehman collapse-which had been used as a yardstick to compare market returns.

This from Bespoke, ``The S&P 500 is still 20.34% below its level just before the Lehman collapse, and 49 of the 82 countries shown below have done better. Also, 28% (23) of the countries are up since Lehman. As shown, China is up the most since September 12th with a gain of 30.55%, followed by Venezuela (28.35%), Indonesia (26.71%), Turkey (23.57%), Vietnam (15.06%), and Tunisia (12.04%). Three of the four BRIC countries are up, with Russia the only one down at -21.51%.

``The US ranks 2nd to last in terms of performance for the G7 countries. Even though a number of market indicators are back to their pre-Lehman levels, the market itself here in the US still has a lot of work to do. If you think we're at least headed back to September 12th levels, you're expecting a further gain of 25% for stocks." (emphasis added)

The implied assumption here is that the Lehman collapse (after Lehman syndrome) could have been an anomaly, hence stockmarkets have set course for a "reversion to the mean".

Nevertheless, the story has been the same: emerging markets have far outpaced developed markets.

This shouldn't be a surprise though, since the former had apparently been a victim of the contagion effects more than as the source of the crisis.

Structurally, emerging markets are likely to continue outperforming since developed markets are still undergoing the angst of the adjustment process coming off a bubble bust.

China Flexing Muscles Over Rare Earth Minerals For Strategic Reasons

China is tightening up on its near stranglehold over rare earth mineral exports in order to secure strategic advantages.

According to the New York Times, (all bold highlights mine)

``China currently accounts for 93 percent of production of so-called rare earth elements — and more than 99 percent of the output for two of these elements, dysprosium and terbium, vital for a wide range of green energy technologies and military applications like missiles.

``Deng Xiaopeng once observed that the Mideast had oil, but China had rare earth elements. As the Organization of the Petroleum Exporting Countries has done with oil, China is now starting to flex its muscle.

``Even tighter limits on production and exports, part of a plan from the Ministry of Industry and Information Technology, would ensure China has the supply for its own technological and economic needs, and force more manufacturers to make their wares here in order to have access to the minerals.

``In each of the last three years, China has reduced the amount of rare earths that can be exported. This year’s export quotas are on track to be the smallest yet. But what is really starting to alarm Western governments and multinationals alike is the possibility that exports will be further restricted."

``Beijing officials are forcing global manufacturers to move factories to China by limiting the availability of rare earths outside China. “Rare earth usage in China will be increasingly greater than exports,” said Zhang Peichen, the deputy director of the government-linked Baotou Rare Earth Research Institute..."

``China produces over 99 percent of dysprosium and terbium and 95 percent of neodymium. These are vital to many green energy technologies, including high-strength, lightweight magnets used in wind turbines, as well as military applications...

``The Ministry of Industry and Information Technology has cut the country’s target output from rare earth mines by 8.1 percent this year and is forcing mergers of mining companies in a bid to improve technical standards, according to the government-controlled China Mining Association, a government-led trade group.

``General Motors and the United States Air Force played leading roles in the development of rare-earth magnets. The magnets are still used in the electric motors that control the guidance vanes on the sides of missiles, said Jack Lifton, a chemist who helped develop some of the early magnets.

``But demand is surging now because of wind turbines and hybrid vehicles....

Additional commentary from Telegraph's Ambrose Evans Pritchard, (emphasis added)

``New technologies have since increased the value and strategic importance of these metals, but it will take years for fresh supply to come on stream from deposits in Australia, North America, and South Africa. The rare earth family are hard to find, and harder to extract...

``No replacement has been found for neodymium that enhances the power of magnets at high heat and is crucial for hard-disk drives, wind turbines, and the electric motors of hybrid cars. Each Toyota Prius uses 25 pounds of rare earth elements. Cerium and lanthanum are used in catalytic converters for diesel engines. Europium is used in lasers.

``Blackberries, iPods, mobile phones, plams TVs, navigation systems, and air defence missiles all use a sprinkling of rare earth metals. They are used to filter viruses and bacteria from water, and cleaning up Sarin gas and VX nerve agents.

``Arafura, Mountain Pass, and Lynas Corp in Australia, will be able to produce some 50,000 tonnes of rare earth metals by the mid-decade but that is not enough to meet surging world demand.

``New uses are emerging all the time, and some promise quantum leaps in efficiency. The Tokyo Institute of Technology has made a breakthrough in superconductivity using rare earth metals that lower the friction on power lines and could slash electricity leakage."

``The Japanese government has drawn up a “Strategy for Ensuring Stable Supplies of Rare Metals”. It calls for `stockpiling’ and plans for “securing overseas resources’. The West has yet to stir."

My comments:

1. Forcing high tech companies dependent on rare earth resources to invest in China could be a ploy to "pad" statistical economic growth in today's highly turbulent times.

2. Another reason could be to use such resources to extract technology or knowledge transfer concessions.

This applies most especially to "green" technology and importantly for security (military) reasons.

Since the US Air Force has been instrumental to the development of rare earth for its use, then it would be forced to negotiate or compromise for continued access to these.

3. Prices of rare earth metals would surge as supply is constrained as demand increases.

4. Investments in scouring for alternative sources for such exotic metals will likewise explode.

5. Technological advances could materially slow, especially for those companies unwilling to shift to China, on high prices as access to these rare metals will be severely limited.

6. Another sign of creeping protectionism which could provoke heightened geopolitical tensions.

Growing Finance Jobs In Asia: Recovery Or Bubble Symptoms?

The good news is that hiring is taking place once more again in Asia's financial sector.

chart from the New York Times

This from the New York Times, (bold emphasis added)

``Asia has already emerged more forcefully from recession than the United States and Europe, economic reports over the past month have shown. Now, that upturn here is starting — at least tentatively and in certain sectors — to feed into the job market. Hiring is starting to pick up again, recruiters and bankers say.

``Broad unemployment is still rising, a normal pattern even after economies begin to emerge from recession. But economists say that any early signs of job growth are a prerequisite for a more solid-based recovery — one in which more confident consumers, and not just huge government stimulus packages, can play a role in lifting the economy."

``Perhaps the most striking element in the new hiring: Almost a year after Lehman Brothers folded — roiling financial markets, spurring a remake of the banking landscape and feeding one of the worst recessions in modern history — it is the financial sector that is leading the way."

chart from stockcharts.com

The article didn't make any comparisons on the relative hiring rates on an industry basis.

Nevertheless, we can infer that the recent the recent spikes in the regional equity markets has had a significant influence on the emerging hiring dynamics in the region.
However, based on the FTSE Asian averages, unlike in the US where Finance has led the way, Asian Financials have had a mediocre performance on relative basis, where auto & trucks, technology and basic resources have basically assumed the role of market leaders.

Based on my understanding of the business cycles, if Asia's markets continue with its ascent over the longer period, with the same sectors leading the way, these industries would account for the long term production segment of the misallocation process whose financing would be facilitated by the financial industry. Of course, the finance sector would also cater to the consumer end.

Nevertheless the transitioning roles of the business cycle could be in play from which could signify as the initial symptom of an emerging bubble.

Milton Friedman: Most Persistent Economic Fallacy of All Time-Government Spending Creates Wealth

Milton Friedman in a lecture explains why government spending doesn't create wealth... (HT: Mark Perry)

Failed Correlation Trade Suggest China's Slump Could Be A Pause

Technically yes China's Shanghai index (SSEC) is in a bear market. Losses that reach 20% is technically defined as a bear market.

The SSEC could probably be haunted by the September-October seasonal stock market weakness.

In addition, many have used the Baltic Dry Index (BDI) as a "rational" for a major inflection point on China's stock market aside from the purported policy induced slowdown in credit flows.

Do we share the view that China's stocks will continue to collapse? No.

In contrast to the past where a decline in China's market had prompted for a rise in the US dollar index (for example see April) or our correlation trade, the recent slump have ironically been opposite-the US dollar Index fell!

Our correlation trade extrapolates to falling global stock markets and commodities along with a rising US dollar index (flight to safety) where a higher US dollar index would have signaled 'tightening liquidity'.

But this doesn't seem so. Hence the continued buoyancy in most stock markets.

The US stock markets ended lower last night but hardly reflected on SSEC's crash.

So if the US dollar index persist on weakening amidst sagging global markets, they are likely to signify an "interim pause" and not a major reason for a collapse.

And this should also apply to commodities.

As we see from the Russian experience, where the RTSI earlier fell by 30%, the Russian benchmark have managed to recover most of its loses and now trades above the 50-day moving averages.

This looks likely the paradigm for the SSEC than for a major meltdown.

Paper Currency And Coins In Circulation In The US

Interesting chart from Visual Economics The Value of United States Currency In Circulation breaking down the value of paper and coins in circulation in the US. (HT: Mark Perry)