Philippine Markets And Elections: What People Do Against What People Say

``Resolve to serve no more, and you are at once freed. I do not ask that you place hands upon the tyrant to topple him over, but simply that you support him no longer; then you will behold him, like a great Colossus whose pedestal has been pulled away, fall of his own weight and break in pieces.”-Étienne De La Boétie

Economist Russ Roberts writes, ``One difference between economists and others is that economists tend to be less impressed by motivation and more impressed by what people actually do. Economists are also less impressed by what people say than by what they do. So they are particularly unimpressed by people who profess to be motivated by the public good, for example.” [bold emphasis mine]

Indeed people’s action significantly matter more than what they say. That’s because words and actions can be diametrically opposite or people can say one thing and do exactly the reverse. The most prominent practitioners of such duplicity are those engaged in politics, as implied above.

But this isn’t confined to politics, because such machinations, deliberate or intuitive, could easily be detected frequenting the marketplace.

Since it is political season in the Philippines, it is natural to see the public’s attention focused on the forthcoming national elections.

Unfortunately, however, the apparent product of unwarranted mawkishness over the political frontier appears to be deductions based on reductio ad absurdum, as seen in media reports[1].

Mainstream media, which accounts as the public’s main source of information, still has a commanding influence in shaping people’s perception.

And our quibble: the aggrandizement of so-called risks from elections.

Available Bias And Voter’s Irrationality

We are sympathetic with people who perceive and are wary of “uncertainties” arising from leadership transitions, given their overreliance on mainstream media as their main source of information.

Yet in contrast to conventionalism, we see media’s largely superficial treatment of the political economy, which attempts to project elections as “change” that would lead to the portals of political nirvana, as hallucinatory.

People hardly grasp that their concept of “change” has been ever elusive, and will always be, because it is simply not realizable. The people and NOT the president is the answer to prosperity.[2]

That’s because there are only two ways to generate wealth, by production “economic means” or by plunder “political means”.

As Murray N. Rothbard explains[3],

``The great German sociologist Franz Oppenheimer pointed out that there are two mutually exclusive ways of acquiring wealth; one, the above way of production and exchange, he called the "economic means." The other way is simpler in that it does not require productivity; it is the way of seizure of another's goods or services by the use of force and violence. This is the method of one-sided confiscation, of theft of the property of others. This is the method which Oppenheimer termed "the political means" to wealth. It should be clear that the peaceful use of reason and energy in production is the "natural" path for man: the means for his survival and prosperity on this earth. It should be equally clear that the coercive, exploitative means is contrary to natural law; it is parasitic, for instead of adding to production, it subtracts from it. The "political means" siphons production off to a parasitic and destructive individual or group; and this siphoning not only subtracts from the number producing, but also lowers the producer's incentive to produce beyond his own subsistence. In the long run, the robber destroys his own subsistence by dwindling or eliminating the source of his own supply. But not only that; even in the short-run, the predator is acting contrary to his own true nature as a man.” (emphasis added)

Media’s account of analyses has been bereft of the social framework that underpins the existence of the current political institutions, the legal structures and political-economic interactions of the agents involved.

For instance, people assume corruption as mainly a moral issue without appropriate scrutiny on the interface of legal, bureaucratic, enforcement, behavioural and transactional factors which impels for such dynamics.

As Ludwig von Mises explains[4], ``To be sure, public opinion is not mistaken if it scents corruption everywhere in the interventionist state. The corruptibility of the politicians, representatives, and officials is the very foundation that carries the system. Without it the system would disintegrate or be replaced with socialism or capitalism. Classical liberalism regarded those laws best that afforded least discretionary power to executive authorities, thus avoiding arbitrariness and abuse. The modem state seeks to expand its discretionary power-everything is to be left to the discretion of officials.” (bold and italics emphasis added)

In short, in contrast to popular opinion, corruption represents more of a symptom than the disease.

Nevertheless, applied to the financial markets, when people who claim to see “real” risk from such scenario, we expect them to liquidate on most of their portfolio, and perhaps, like in the past, gravitate to the US dollar as a “flight to safety” instinctive response.

And if such actions are taken then we could say that the person’s view of risks is authentic (regardless of the validity of the perception).

But when people argue that that they see “real risks” and yet remain holding on to their portfolio, essentially this would redound to a self-contradictory position. It simply implies three things:

First, convictions are not deep enough to justify a full-scale retreat.

Second, hope is in the cards (this justifies a negative-neutral bias position) and

Lastly, uncertainty is being used as a pretext to for market “timing”.

And to further argue that “policies” to be undertaken by the new set of leaders would account for as another trivial reasoning. If this is the case, then perhaps people won’t be in the markets at all because, laws and regulations, like markets, aren’t definitive and depend on stimulus response based on the economic and political landscape, aside from many factors.

First of all, leaders are hardly elected because of their assumed policies. Democracy has been a popularity contest, especially in the Philippines. Such is the reason why celebrities have been near shoo-in candidates for national or local positions.

Second, new leaders don’t myopically impose policies out of sheer idealism, unless the new leader is a stealth extremist and would risk an ouster.

Policies are thus mostly shaped by interest or lobby groups. And the influences of lobby groups are likely to be more powerful when they are small but concentrated, as William F. Shughart II writes[5],

``Small, homogeneous groups with strong communities of interest tend to be more effective suppliers of political pressure and political support (votes, campaign contributions, and the like) than larger groups whose interests are more diffuse. The members of smaller groups have greater individual stakes in favorable policy decisions, can organize at lower cost, and can more successfully control the free riding that otherwise would undermine the achievement of their collective goals. Because the vote motive provides reelection-seeking politicians with strong incentives to respond to the demands of small, well-organized groups, representative democracy frequently leads to a tyranny of the minority.” (bold highlights mine)

Based on historical ties and the list of top candidates vying for the top spot, it isn’t likely that the new president will take radical measures that would trigger upheaval, because the same personalities have long ‘waltzed with’ the same small but powerful clique. Hence there is likely to be marginal changes in the policy setting grounds for the new administration[6].

Three, based on the current political ‘democratic’, representative structure of the Philippine government, policies will be subjected to “horse trading” or compromises. This means the more haggling and compromising involved, the lesser the odds of any dramatic changes.

Lastly, public officials are self interested agents. That’s because they’re just like us, human beings, and not self-appointed saviours seeking out martyrdom. Hence they are likely to take political positions that would ensure the longevity of their tenure instead of working for long term “good”. As the above quote from William F. Shughart II, this only implies that to insure such interest they won’t likely unsettle the norm.

So why has media and their rabid followers been seeming so paranoid? A non-sequitur reply is that maybe because they’ve watched too many films of Stephen King and John Carpenter or perhaps Freddie Krueger and Jason of the Friday the 13^th series.

In behaviourism, trying to connect current events with market actions is known as the available bias. That’s if they coincide.

Remarkably, they don’t!

The Media’s Blarney Unsupported By Market Action!

The last time the Phisix and the Peso encountered a real political risk was in 2005, remember the “Hello Garci” scandal? (see figure 1)

Figure 1: Phisix and Peso: What People Say And What People Do

The Phisix was already down 15% even prior to Samuel Ong’s exposé that rocked the Philippine political scene.

Mr. Ong’s tape contained a voice recording of PGMA with a Commission on Elections (COMELEC) Commissioner Virgilio Garciliano, who allegedly discussed about manipulating the presidential election results which paved way for her victory in 2004.

Subsequently, local and foreign polls exhibited that a majority of the people had expected PGMA not to complete her term and would either resign or be impeached. And repeated rumours of another revolution flourished. Yet attempts had been made to unseat her, such as the November 2007 Peninsula takeover, but this had been aborted.

From a hindsight perspective, what had been popular had been wrong again!

The immediate effect of the Garci scandal on the financial markets was obviously more pronounced on the Philippine Peso (green trend line) than on the Phisix (blue trend line).

While the Phisix fell by about 11% in reaction to the exposé, the local equity benchmark had been in a consolidation phase following a prior decline.

Meanwhile, the Peso spiked from 54 back to 56 or fell by 4%! As we earlier said, Filipinos tend to rally around the US dollar once signs of instability surfaces, and the 2008 post Lehman saga validated this phenomenon anew (in spite of growing remittances in nominal terms!).

In short, the Peso-US dollar trend accounts for as the best sentiment measure of stability or instability in the Philippines.

Now media and some people say that the election risks are real, yet markets don’t seem to concur with such an outlook.

Two red arrows, at the farthest right, above appear to be pointing at the same signs.

The Philippine Peso seem to be at the brink of breaking out of its resistance levels at 45.58, set during the first half of January, to close at 45.66 last Friday, while the Phisix did break above the resistance level on Thursday, but failed to hold on to the gains after a sharp fall on Friday. Yet the Phisix remains at arms length distance from the said pivotal threshold level.

Incidentally, the Phisix and the Peso has been up for the 5^th and 4^th consecutive week, respectively!

Yet as media blabbered about how election risks would spook foreign investors, last week saw the Phisix account for the highest weekly inflow from foreign money for the year-1.7 billion pesos (US $37 million)!

So hardly have any of these reported worries translated to reality.

Markets signify as people voting with their wallets. In contrast, media reports or op-eds can’t be accurately gauged because they represent the opinions or facts as interpreted by the writer or author.

In short, whether it is sensationalism or political partiality, these opinions come in conflict with reality, simply because hunches or biases have NOT been supported by facts.

Yet many still believe them. Albeit this state of disbelief is an even bullish case for us, because doubters, when convinced of the invalidity of their causes, would end up chasing prices higher.

Of course considering that the winning streaks from our financial markets may lead to a reprieve, such retracement will again be attributed to political anxieties.

Nevertheless as the markets have been saying, there has been little linkages between market actions and popular unproven assumptions.

Winnowing Real Political Risks From Spurious Conspiracy Theories

Let me add that risks from elections have now supposedly evolved to one of “election failure”.

Media seems trying to say that the incumbent President may try to extend her term by resorting to “emergency power” arising from the outbreak of power outages in parts of the nation.

This is plain cockamamie.

True, power is alluring. But a gambit to extend power only to be foiled, will translate to incarceration and ignominy or even death!

Where PGMAs political capital appears to have been substantially drained, as manifested by the numerous defections in the administration’s political party aside from her dismally low approval ratings, only a feckless and uncalculating person would engage in such bravado.

Yet the exiting President as a professional economist, has revealed that her political actions have been cautiously premised on mostly utilitarian grounds or “moral worth of an action is determined solely by its contribution to overall utility” (Wikipedia.org), e.g. holiday economics[7]. In short, she isn’t dense. On the contrary, she seems alot shrewder than most of us expect her to be.

And when the risk of failing seems greater than the rewards of success (from so called declaration of martial law or emergency powers), then obviously a crafty person won’t take the ante.

Ergo, desperate actions don’t seem to be in the cards here.

And as the public choice theory suggest, as self-interested agents, politicians are likely to act in the direction of prolonging, not only their term, but also of their career. So perhaps a more likely route for PGMA, given the current circumstances, is to work for a change the system of government into parliamentary, where she can aspire to get re-elected as the President or as Prime Minister.

Nonetheless, had she wanted to declare emergency powers, she could have easily used the crisis from Typhoon Ketsana nickname Ondoy and Typhoon Parma nickname Pepeng to declare martial law and call for a failure in elections[8]. The ripple of the adversarial effects from price controls would have been a perfect excuse to blame markets in order to reinforce greater interventionist police power. And that’s what we’ve warned about[9].

Yet during that period, the public’s expectation for the realization of elections has not been as a powerful as it has been today.

Anyway, in realizing the futility of price controls, these were lifted last November. Thankfully, such opportunity had not been utilized for devious self-serving goals.

In short, PGMA passed up a prime opportunity to arrogate power by force.

Again, actions speak louder than alleged motivations!

Civil Obedience As The Proverbial Big Stick

Finally I don’t think PGMA has underestimated the power of the people to get mobilized as a political force, in spite of the Garci Scandal.

As a reminder, the offshoot of the Garci scandal, despite of the failed attempts by the opposition to mount another people revolution against her, was an astounding backlash against the administration, whose senatorial bets had been decisively walloped in the 2007 polls. That was a powerful statement.

Nevertheless despite being the pioneer of non-violent revolution, it’s a mistake to say that the Filipinos had gotten jaded over ousting of leaders by use of civil disobedience. Incidentally, civil disobedience as a political approach had been introduced mostly by libertarians, particularly Frenchman Étienne de la Boétie[10].

Persistent manipulation by politicians of the masses to synthetically represent people power such as EDSA III, appears to have reduced the Filipino’s appetite to turn democratic ideals into a mockery for the benefit of demagogues. And reduced efficacy of people’s power is likely to end up with a violent conclusion or a despotic regime.

It would only take a legitimate tinderbox, particularly, [this I think is] the betrayal of the expectations to uphold the sanctity of the ballot box, to catalyze a reawakening of a spontaneous political movement. It’s a force, I reckon, PGMA won’t bet against.

Hence, mainstream media is wrong about the perceived risks about an election failure and has equally been exaggerating on their conspiratorial theories.

Strong Evidence Of External Influence

So let me tell you where we think the Philippine markets seem to be getting their inspiration (see figure 2)

Figure 2: Bloomberg-JP Morgan Asia Dollar Index: Asian Currencies Rising

Entertainment and market analysis are two different stuffs.

If the public likes to believe in fables as foundations for serious investigations we don’t. We talk fairytales when we deal with children. As prudent investors, our goal is to try to analyze market variables or events that truly matters and effectively assess and weigh on the risk reward equation.

As noted earlier, the Philippine peso is just a few centavos away from recovering previously lost ground, where it may attempt to possibly attain a new high over the next few days.

A successful breakout of the Peso should lead it to the next technical target, 44.80 to a US Dollar.

The rising Peso isn’t an insulated affair, in fact as the chart above shows. It has been a regional phenomenon. The Bloomberg JP Morgan Asian Dollar Index represents a basket of Asian currencies, which according to prnewswire.com.uk is the ``first U.S. dollar tradable index of emerging Asian currencies. The ADXY creates a benchmark for monitoring Asia's currency markets on an aggregate basis. The ADXY is a spot index of emerging Asia's most actively traded currency pairs valued against the U.S. dollar.”

I don’t have access to the composition and weightings of the ADXY, but if you look at the chart, both the ADXY and the PESO seem to be at the verge of a massive breaking out.

A breakout of the Peso only means one thing; there is more demand for the Peso than its traditional pair, the US dollar. If local markets are truly hounded by real political risks, then people would be flocking to the US dollar and not the other way around.

Although as a caveat, correlation does not imply causation. In other words, both the Peso and the other Asian currencies seem to be responding to external variables. For us, they are responding to the inflationism applied by major OECD economies.

The Phisix appears to chime with the Peso. This implies that both are being affected by external than by local forces (see figure 3)

Figure 3: Stockcharts.com: US Asian Markets and the Phisix

If you look at the Phisix (bottom window) and the US S&P 500 (main window) we seem to seeing the same patterns, except that Friday saw the Phisix fall steeply while the broadweighted S&P remains adrift at the resistance levels.

Nevertheless if the S&P will breakout in the same manner as its technology rich counterpart, the Nasdaq (COMPQ), then we are probably going to see the same dynamics over at the Phisix.

One would note that the Dow Jones Stoxx Asia/Pacific ex-Japan (DJP2) has lagged the both the Phisix and US market contemporaries. But again, I don’t have the composition and the weightings of the index, and it is an assumption that Chinese stocks which remain in consolidation could have been a factor behind such underperformance.

So far, global equity markets appear to be partly validating the sweetspot of inflation scenario[11].

Going back to the lessons taught by Russ Roberts, indeed studying what people do relative to what they say or what has been assumed as the motivating factor, even if unsupported by evidences, is a far better approach in the analysis of markets.

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[1] See Philippine Election Update: Jitters From Election Failure Risks?

[2] See Philippine Election Myth: New President Will Determine Direction of Economy And Markets

[3] Rothbard, Murray N., The Anatomy Of The State

[4] Mises, Ludwig von, A Critique On Interventionism, p.31

[5] Shughart II, William F. Public Choice

[6] See Why The Presidential Elections Will Have Little Impact On Philippine Markets

[7] See Broken Window Fallacy: The Vicious Hidden Costs of "Holiday Economics"

[8] See Typhoon Ondoy: Market Fallacies and Risks

[9] See No To Price Controls! No To Despotism!

[10] If a minority of elites rule over, tax, and exploit the majority of the public, then this brings up starkly the main problem of political theory: what I like to call the mystery of civil obedience. Why does the majority of the public obey these turkeys, anyway? This problem I believe, was solved by three great political theorists, mainly but not all libertarian: Etienne de la Boetie, French libertarian theorist of the mid-sixteenth century; David Hume; and Ludwig von Mises. They pointed out that, precisely because the ruling class is a minority, that in the long run, force per se cannot rule. Even in the most despotic dictatorship, the government can only persist when it is backed by the majority of the population. In the long run, ideas, not force, rule, and any government has to have legitimacy in the minds of the public!

Rothbard, Murray N., A Strategy for the Right

[11] See Inflation’s Sweet Spot Augur For A Gold Breakout And Global Equity Market Rally

Does Falling Gold Prices Put An End To The Global Liquidity Story?

``It is easy indeed to fall into the trap of phony economic growth; as long as capacity utilization is below the normal level, demand expansions fueled by monetary and fiscal impulses increase economic activity. But the more the economy approaches full capacity, the more the effect on the production of real goods gets weaker and the effect on prices gets stronger. Eventually, this reaches the point when the monetary expansion only has inflationary price effects, and its impact on real production becomes nil.”- Antony P. Mueller The Stimulus Scam

Part of our incomplete sweetspot of inflation scenario has been gold’s recent sluggishness.

One analyst even suggested that because gold isn’t rising, then it must be a return of “risk appetite” has been providing support to global equity markets.

One Week Does Not A Trend Make

But the weakness in the gold market alone is not sufficient to suggest that this isn’t about a global liquidity story (see figure 4).

Figure 4: stockcharts.com: Divergences in Gold, Silver, Copper and Oil

Gold has fallen quite steeply down 2.84% this week.

While it is true that we see gold as a superb indicator for global liquidity, it would be a mistake and even naive to interpret one week of price action as a continuing event.

And importantly, any markets, including gold, can be affected by short term quirks or market specific events. For instance, the unresolved gold sales of the remaining allotment of the IMF can be a factor.

Yet, gold’s alter ego, silver has not shared the same quandary.

Also the strength in copper and oil, even if they are partly underpinned by the emerging market story, has also been a story of liquidity.

Proof?

According to Bloomberg, ``Emerging-market and high-yield bond funds each took in more than $1 billion in the week ended March 10, EPFR Global said, the most since the research firm began publishing weekly data on the sectors a decade ago.

``The inflows helped reduce the yield premium investors demand to hold emerging-market debt rather than U.S. Treasuries by 25 basis points in the period to 259 basis points, according to JPMorgan Chase & Co.’s Emerging Market Bond Index Plus. The gap was 258 basis points at yesterday’s close, the least since June 2008. A basis point is 0.01 percentage point.

``Developing nations have raised $28.9 billion from global bond sales so far this year, the busiest start to a year since 2005, according to data compiled by Bloomberg.”

Major emerging markets as Indonesia, India, China and Brazil has seen turbocharged money supplies (see figure 5)

Figure 5: News N Economics: Expansionary Monetary Policies in BIICs

And it does not stop here.

Global Liquidity Story Continues

We’ve been repeatedly saying that the record steep yield curves across the globe are likely to jumpstart the credit process, even in nations beset by credit woes. However the impact will always be uneven. And as we also been repeatedly saying these are the seeds to the next bubble.

Ignore the meme about falling “money velocity” as a reason for the alleged failure to restore the credit process out of the “liquidity trap”. Aside from being a flawed model[1], these experts disregard the incentives brought about by the “profit spread” of interest rates.

Of course we can add that they have been erroneously interpreting the neutrality of money from government expenditures, as well as, underestimating the increasing share of governments’ contribution to the economy.

Murray N. Rothbard explains the profit spread[2], (bold emphasis mine)

``In their stress on the liquidity trap as a potent factor in aggravating depression and perpetuating unemployment, the Keynesians make much fuss over the alleged fact that people, in a financial crisis, expect a rise in the rate of interest, and will therefore hoard money instead of purchasing bonds and contributing toward lower rates. It is this “speculative hoard” that constitutes the “liquidity trap,” and is supposed to indicate the relation between liquidity preference and the interest rate. But the Keynesians are here misled by their superficial treatment of the interest rate as simply the price of loan contracts. The crucial interest rate, as we have indicated, is the natural rate—the “profit spread” on the market. Since loans are simply a form of investment, the rate on loans is but a pale reflection of the natural rate.”

We believe that the profit spread dynamics is beginning to kick in.

This from the Wall Street Journal[3], (bold emphasis mine)

``Companies are aggressively borrowing in the debt markets once again—a sign of renewed confidence in the world economy following recent fears that struggling European countries could have difficulty financing their budget deficits.

``In the U.S., bond sales by companies such as Bank of America Corp. and GMAC Financial Services are on pace to conclude their busiest week since the beginning of the year. In Europe, borrowing by companies so far in March is already more than 60% of February's totals.

"It tells us that financial liquidity is very much on the rise," said John Lonski, chief economist at Moody's Investors Service. "No longer do corporations suffer from a dearth of liquidity. This puts them in a better position to take advantage of opportunities that arise."

``So far in 2010, U.S. corporations have issued $195.2 billion of debt, excluding government-guaranteed bonds, according to data provider Dealogic, up from $166.8 billion during the same period in 2009. The resurgence of the corporate debt markets comes after a shaky February, when several companies were forced to delay bond sales as worries about Greece's problems sent investors fleeing to safer assets such as U.S. Treasurys. Those concerns have subsided and money is again flowing into corporate bond funds, giving managers cash to invest.”

And this can likewise be seen in Canada “on pace to issue the most debt”, in Asia “lowest relative borrowing costs in more than two years and demand from international investors is driving Asian companies to sell record amounts of dollar- denominated bonds”, in Russia “Yields on Russian dollar bonds fell to less than 5 percent for the first time as rising oil prices boosted investor confidence”, in Turkey, and even in the PIIGS “Portuguese, Italian and Spanish companies are rushing to sell bonds, taking advantage of investors’ demand for corporate debt after Greece’s budget crisis froze issuance”. [Hat tip: Doug Noland]

In short, to attribute improving financial markets plainly to restored confidence is missing out the bigger picture. Money is needed to bid up asset prices, which accounts for as increased confidence levels or what the mainstream calls as the “animal spirits”. And the steep yield curve from zero bound rates, quantitative easing and massive deficit spending have all contributing to global reflation.

Nevertheless present activities do not suggest that gold has lost its efficacy as indicator for global liquidity.

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[1] See Velocity Of Money: A Flawed Model

[2] Rothbard, Murray N. America's Great Depression p.41

[3] Wall Street Journal Credit Market Springs to Life

Example of Unintended Consequences From Tax Hikes

As we earlier noted in Competitive Global Tax Structures As Major Investment Determinant, tax policies play a significant role in shaping an economic environment.

Here is an example how policymakers underestimates the public response to tax increases.

This from the Wall Street Journal, (all bold highlights mine)

``Illinois Governor Pat Quinn is the latest Democrat to demand a tax increase, this week proposing to raise the state's top marginal individual income tax rate to 4% from 3%. He'd better hope this works out better than it has for Maryland.

``We reported in May that after passing a millionaire surtax nearly one-third of Maryland's millionaires had gone missing, thus contributing to a decline in state revenues. The politicians in Annapolis had said they'd collect $106 million by raising its income tax rate on millionaire households to 6.25% from 4.75%. In cities like Baltimore and Bethesda, which apply add-on income taxes, the top tax rate with the surcharge now reaches as high as 9.3%—fifth highest in the nation. Liberals said this was based on incomplete data and that rich Marylanders hadn't fled the state.

``Well, the state comptroller's office now has the final tax return data for 2008, the first year that the higher tax rates applied. The number of millionaire tax returns fell sharply to 5,529 from 7,898 in 2007, a 30% tumble. The taxes paid by rich filers fell by 22%, and instead of their payments increasing by $106 million, they fell by some $257 million.

``Yes, a big part of that decline results from the recession that eroded incomes, especially from capital gains. But there is also little doubt that some rich people moved out or filed their taxes in other states with lower burdens. One-in-eight millionaires who filed a Maryland tax return in 2007 filed no return in 2008. Some died, but the others presumably changed their state of residence. (Hint to the class warfare crowd: A lot of rich people have two homes.)"

At the end of the day, when the society's productive agents get fed up by the sanctions imposed by the government to pay for profligacy, misdeeds or for the maintenance of the interests of bootlickers, the law of unintended consequences applies.

Others calls this "Atlas Shrugged"

Decoupling In Global Employment?

Here is the Economist with a graph from a survey of global employment.


According to the Economist, (bold highlights mine)

``IN 27 out of 36 countries surveyed by Manpower, an employment-services firm, more companies said they expected to add jobs in the three months to the end of June than said they reckoned on reducing their workforce. The difference between the proportion of hirers and firers was highest in Brazil and India. Throughout Asia companies have become more optimistic about hiring than they were a year ago, most dramatically in Singapore but only slightly in Japan. Things look less rosy in Europe. In several countries, including Spain and Ireland, more companies expect to see cuts to their workforce than expect it to grow. Of the four countries where the outlook has darkened, three are in Europe."

My comment:

Again Asia and Emerging markets are likely to see more meaningful improvements on their domestic job markets compared to OECD economies. Such variance is especially amplified when compared to Europe.

As what we've been previously saying; fundamentally, the driving force of the macro picture appears to have shifted from the core (US and OECD) to the periphery (Emerging Markets).

The Imploding 'Man Made' Global Warming Bubble In The US

In the US, the global warming paranoia or bubble seems to be imploding. And like any social fads, bubbles eventually unravel and fade.

This from Gallup,


``The last two years have marked a general reversal in the trend of Americans' attitudes about global warming. Most Gallup measures up to 2008 had shown increasing concern over global warming on the part of the average American, in line with what one might have expected given the high level of publicity on the topic. Former Vice President Al Gore had been particularly prominent in this regard, with the publication of his bestselling book, "An Inconvenient Truth," an Academy Award-winning documentary movie focusing on his global warming awareness campaign, and Gore's receipt of a Nobel Peace Prize in 2007.

``But the public opinion tide turned in 2009, when several Gallup measures showed a slight retreat in public concern about global warming. This year, the downturn is even more pronounced."

The accompanying charts...

shows how American sentiment towards global warming appear as...

collapsing!!!

For us, climate change is a real phenomenon. It's plainly the work of mother nature than from the activities of people, the latter of which constitutes only a fraction of influence on nature.

Common sense tells us that if we can't predict earthquakes what more for us to presume the accuracy of gloom and doom predictions or the alleged adverse consequences from "carbon emissions", years ahead.

People's belief in the gospel of model derived scientific analysis had been unwarranted; if quant models failed to predict the latest financial catastrophe, and was believed to have exacerbated the crisis, how much more should we come to believe that people's presumed actions (based on models) are far potent than the influences of mother nature?

Obviously, anything unsustainable won't last.

And with climategate or the revelation where mainstream scientists had been unmasked or exposed to have 'manipulated, suppressed and or distorted' data just to be able come up with conclusion that weather changes was due to anthropogenic reasons, the mainstream scientific model has been under siege.

Gallup adds, ``Some of the shifts in Americans' views may reflect real-world events, including the publicity surrounding allegations of scientific fraud relating to global warming evidence, and -- perhaps in some parts of the country -- a reflection of the record-breaking snow and cold temperatures of this past winter. Additionally, evidence from last year showed that the issue of global warming was becoming heavily partisan in nature, and it may be that the continuing doubts about global warming put forth by conservatives and others are having an effect."

So partisan politics and empirical evidences have been mainly responsible for this change in sentiment.

Of course what's not been said is that partisan politics is the attempt to pin the blame on people actions for changes in weather so as to justify measures to control or regulate people's behavior (euphemistically called socialism).

In the Philippines, media remains reticent about the global warming bubble. That's because it seems fun to live in a fantasyworld in the belief that a political superman would come and save the day from the villains (markets) or mother nature.

Why Americans Are Jobless

Here is my reply to a joke circulating in the cyberspace blaming globalization for US job losses.

The faulty insinuation is that the world has been “stealing” jobs from the US.

This is a mercantilistic perspective that tries to shift the blame on Filipinos, Chinese, Brazilians, Russians or the world for her economic woes.

For further explanation on these see my posts here: Trade Fallacies: Big Business Sucks Out Lifeblood From The Consumers and Mercantilism: Misunderstanding Trade And The Distrust Of Foreigners

Here is why Americans have lost jobs

1. Americans lost jobs primarily due to the misdirection of resources and employment (as revealed) in the aftermath of bubble policies:

a. monetary policy-low interest rates that fueled a credit boom,

b. housing policies- encouraged speculative purchases and subsidizes mortgage indebtedness via the GSEs (fannie Freddie fha etc..), community reinvestment act,

c. tax- encouraged banks and other firms to assume and maximize debt relative to equity and

d. bank capital regulations- which prompted for regulatory arbitrage which resulted to financial innovation such as securitization (and its offspring-the shadow banking system).

Simply said, when a big segment of the population got employed as mortgage or real estate brokers, bankers, contractors or investors indulged in real estate flipping, construction or constructed related investments, traded mortgage backed securities and ancillary industries because that’s where prosperity seems to be, a burst in the bubble exposed popular delusion and rendered a massive dislocation in the economy. In short, this resulted to lost jobs and lost investments. (the retail, financial and construction sectors are the largest employers see chart below)

2. Existing circumstances such as burgeoning fiscal deficits aside from political reforms towards cap and trade and health seem to be causing regime uncertainty or anxiety in the investment environment which is assumed to entail greater risks of higher taxes, more rigidity in employment requirements and etc.

Furthermore, with over $10 trillion of expenditures and guarantees on the assets of the US banking system, this may have “crowded out” potential investments elsewhere (albeit current interest rates have not yet been validating these, on the other hand interest rate markets are being skewed by government “quantitative easing” or money printing).

And the resulting fiscal policies have a major influence in the investing decisions when considering alternatives [see my post Competitive Global Tax Structures As Major Investment Determinant]

Simply said diminishing competitiveness and [indirect] consequences from political actions may have had a substantial impact on the investing and employment dynamics.

Nevertheless in spite of the crisis, the US still is the primary recipient of Foreign Direct Investments [see my post Global Foreign Direct Investments Down; US Still Dominates]

3 . The composition of the US economy could be transitioning to a post industrial or the information age. When 20-30% of the public’s time in OECD economies (including the US) are estimated spent on social media (facebook or twitter or myspace) then such magnitude of lifestyle changes are likely to impact economic output (investment and employment decisions)

Current statistics have been designed to measure industrial era output and not metrics geared towards the information age, so employment data may not be “accurate”. But again there are evidence that implies of such transition [see my post US Leads In Global Service Exports].

Although many argue that the contribution of the technology is small, my impression is that this is being underestimated (see chart below from McKinsey Quarterly)

So while there are still many other factors that may contribute to the state of “unemployment” in the US, blaming the world for the losses is another popular delusion founded on false premises.

Philippine Election Update: Jitters From Election Failure Risks?

The problem with getting too engrossed with politics is that sensationalism frequently substitutes for sound reasoning.

Here is an example from the Philippine Inquirer, ``The possibility amid recent power outages of the first national computerized elections failing to produce a president, whether real or imagined, is sending chills to the financial community."

The article suggests of an exodus of foreign investors and mayhem in the economy in the event of an election failure.

How real is the perceived risks?

From our perspective we will let the market do the talking...
The above chart is the USD-Peso (green) and the Phisix (blue).

And here is foreign money flows in the Phisix as of March 11, based on a year to date basis.

The Phisix appears to be rising amidst "failure of election jitters" concerns supported by foreign inflows.

Moreover the Peso has been similarly appreciating, which means demand for the peso is stronger relative to its conventional pair-the US dollar.

So hardly any trace of the so-called "jitters" seem to be reflected on the financial markets, as alleged by the account.

To the contrary, the markets appear to be firming up (climbing a wall of worry??)!

So what's going on here?

We see two possible interpretations here:

one, people say one thing and act the opposite, and

second, news accounts don't exhibit real sentiment (or could be tainted with political slant).

So essentially what's reported and what's in action don't match.

In addition, the odds for the alleged risks seem remote.

Why?

Let's put it this way: if the current administration is hell bent to remain in power, then actions to perpetuate her tenure should have been implemented as early as late last year (e.g. crisis from typhoons would have been a good excuse to implement martial law).

In addition, given PGMA's nearly depleted political capital, trying to extend power by any other means would translate to a political suicide. This means that the risks of being ousted would seem larger to the point that it would losing proposition for everyone, most especially her.

So maybe markets have been thinking more like I am, and discounting less of what's being bruited about.

This reminds me of George Orwell who once said, “Early in life I had noticed that no event is ever correctly reported in a newspaper.” Definitely.

Philippine Election Myth: New President Will Determine Direction of Economy And Markets

The notion that an elected political leader will "determine the fate of the economy or the markets" is a popular myth.

It is a myth which is repeatedly peddled by government to present accomplishments. And it is an illusion because the essence of government is to redistribute and consume resources forcibly extracted from productive sectors of the economy.

In the monumental words of Frank Chodorov, ``The intrusion of politics into the field of economics is simply an evidence of human ignorance or arrogance, and is as fatuous as an attempt to control the rise and fall of tides. Since the beginning of political institutions, there have been attempts to fix wages, control prices, and create capital, all resulting in failure. Such undertakings must fail because the only competence of politics is in compelling men to do what they do not want to do or to refrain from doing what they are inclined to do, and the laws of economics do not come within that scope. They are impervious to coercion. Wages and prices and capital accumulations have laws of their own, laws which are beyond the purview of the policeman."

If government can defeat the law of scarcity then poverty and inequality would have long been vanquished from this world and everyone can just have fun! But this simply isn't so.

And applied to elections, as author and professor Steve Landsburg in his blog aptly writes, ``The primary problem with representative democracy is that our representatives are captured by special interests." (bold highlight mine)

Election is, thus, a question of, redistribution for whose benefit? Or asked differently, which among the special interest groups will the new leader be working for?

What we are trying to say is the political winds will tend to blow into three basic directions:

1. increased socialism (which is deemed high risk because the distribution of resources is heavily politicized by the leadership; this means that such actions are likely to be influenced by favoritism, affiliations, patronage, cognitive biases, subjective interpretation of events, or etc... than public weal. In short, special interest groups have big influence in shaping the economy)

2. status quo

3. increased liberalization (lesser impact on the actions of leadership, because markets play a greater role in the distribution of resources than special groups)

And it is the same set of questions that needs to be asked relative to the forthcoming Philippine elections, for whose special interest group will the new leader/s be working for?

If we exclude the "election spending" factor and instead base our extrapolation on historical trends of Philippine politics and merge this with the qualifications (or previous records) of the frontrunners and present political realities, our guess is that the policy imperatives by the new President will be to maintain the status quo and work for the changes at the margins for 'special groups'.

In addition, considering the reported "tightness" in the race for the top spot in the current presidential derby, the new President is likely to get exhaustively engaged in "horse trading" just to be able to generate a coalition from various parties to support such "changes". This means alot of political concessions.

Think of it, in the US even if the Democratic party holds the majority in both Congressional houses, political dominance hasn't equated to successfully ramming down the political reforms on the throats of public, as in the health and climate bills. What more if there is no significant political support?

Alternatively, political straddling implies heightened odds of a status quo, which chimes with our historical political trends.

As Joe Studwell rightly argues, ``The lesson of the past decade has been that the relationship between political and economic elites in Southeast Asia is more enduring than almost anyone imagined."

And how has this worked in the past?

Adds Mr. Studwell, (bold emphasis mine)

``To this day, there are precious few Southeast Asian tycoons whose wealth is not rooted in some form of state-sanctioned monopoly. (The exceptions are a couple of lesser Hong Kong billionaires, Patrick Wang of micromotor maker Johnson Electric and Michael Ying of clothing business Esprit, whose money was made in recent years in manufacturing in mainland China.) Soft-commodity monopolies for consumer items like sugar and flour produced early cash flows for Indonesia's Liem and Malaysia's Robert Kuok. Gaming licenses primed Stanley Ho in Macau and Lim Goh Tong, Ananda Krishnan and Vincent Tan in Malaysia, and lumber concessions made Mohamad (Bob) Hasan, Prajogo Pangestu and Eka Tjipta Widjaya in Indonesia.

``In Hong Kong and Singapore, real estate became an effective cartel because of the way British colonial regimes structured the land market—selling off "crown land" in large lots that created a barrier to entry for all but a few big players. In the 1990s land packages in Hong Kong were commanding prices of about US$1 billion. The city-states also restricted access to their banking markets, creating other huge rents for local players; the biggest of all went to the institution that is now known as HSBC.

``After access to concessions, access to capital was the second prerequisite of Southeast Asian tycoons. Elsewhere in the region, tycoons used their political influence to secure credit lines from state banks or opened their own institutions, which served as private piggy banks. The Philippines has lurched from one banking crisis to the next for almost a century, some based around state banks and others around private banks set up by tycoons. The country has never recovered from the financial-sector meltdown in the mid-1980s, when Marcos went into exile."

Looking at the roster of publicly listed companies in the Philippines one can observe such traits (state monopolies, cartels, and etc.).

And as a political force, the economic elite is likely to be among the top contributors to financing the present elections. So in our view, the odds for a radical transformation is not imminent and is unlikely to pose as a threat.

Finally, the direction of political winds in the Philippines is likely to get influenced more by our deepening interactions with external forces-particularly, the new free trade zone (with ASEAN and China), China's growing role as a major political force as regionalism deepens, a deeper impact from globalization buttressed by technology and OFWs (or migration flows) and deepening financial globalization which includes transmission effects of inflationism, steep yield curves, bubble policies and etc. as we previously discussed in [Why The Presidential Elections Will Have Little Impact On Philippine Markets]

Since political forces are inherently reactive, the new President will respond to and not determine economic and market actions.

McKinsey's Outlook On Global Banks: Asian And Emerging Markets To Outperform

Here is an interesting outlook on global banks from the McKinsey Quarterly team.

From McKinsey (all bold highlights mine)

One key finding is that the capital shortage triggered by the crisis and recently addressed through several rounds of massive capital raising will endure and get worse. Our scenarios model both the demand for capital (the amount needed to finance projected asset growth and meet regulatory requirements) and the supply (earnings, less the amount likely to be paid out as dividends). In every case, demand exceeds supply. Capital needs will range from small (investment banks, which have already raised significant amounts and are holding substantial buffers, anticipating regulatory change) to vast (emerging-market giants, which will need to finance their growth). In between are the universal banks, which will have modestly challenging capital needs in the midpoint scenario and a very challenging problem in the extreme one.

A second factor weighing on returns will be the high and rising cost of long-term funding.

Several factors are at work here, beginning with a shift in demand. As part of balance sheet restructuring, many banks are cutting back on short-term, unsecured funding (such as commercial paper) and seeking instead to issue longer-dated debt. Demand will also rise as the longer-dated funding currently on banks’ books expires and is renewed. On the supply side, government asset-purchase programs—quantitative easing—are already being retired. Finally, the market will see greater competition for funds, not least from governments that must finance their deficits. All this implies that prices for long-term funding will inexorably rise, shaving as much as several percentage points off ROE, depending on the scenario.

Given these drags on performance, returns will be weak by the standards of the past decade. Worse, they will be highly uncertain—our third finding. In the midpoint case, industry revenues would grow by 5 percent annually through 2014; in the extreme case, the industry would eke out much less attractive annual growth of 1 percent. Under either scenario, the emerging-markets giants come out on top. The story for the other groups of banks is mixed. In the midpoint case, the European and US universals and the investment banks would generate middling ROEs well below their pre-crisis levels. The Japaneseuniversals’ returns would suffer from a poor macroeconomic environment. In the extreme scenario, all but the emerging-market giants will find it extraordinarily difficult to return even their cost of equity. In other words, these banks will face a challenging period reminiscent of the early 1980s.

Our estimates may be cautious. We did not include, for example, the effects of a liability levy such as the one the Obama administration recently proposed. Instead we modeled this proposal separately and found that if such a tax were adopted globally and imposed on the banks in our model, the effect would be to reduce their ROEs by 0.7 to 1.2 percentage points.

A fourth finding confirms the economic evidence of the past several months: the crisis affected emerging markets, especially Asia, less severely than Western ones. Parts of Asia were the last areas to enter into recession and the first to emerge from it—indeed, China’s economy never stopped growing. Asian banks had less trouble with toxic assets and excess leverage than their counterparts elsewhere did. The crisis served to demonstrate that the balance of power shifts abruptly and powerfully rather than gradually; many Asian banks have vaulted to the top of league tables in one go.

Our research confirms that for the next several years, Asia’s economic might will continue to grow, as will the influence and power of its banks. Indeed, in these markets, banking is likely to grow much faster even than the broader economy, because so much of the population is “unbanked.” In both scenarios, all the emerging markets will grow substantially faster than the more mature markets of Europe and North America.

Our last finding stands apart from the rest—and offers a ray of light to many banks. The archetypes constitute a form of destiny: emerging-market giants, riding the back of faster GDP growth, will outperform developed-market universals. In many ways, banking is a leveraged bet on the underlying economy. Yet despite that destiny, banks can do a lot about their performance. The model suggests that within archetypes, differences in performance will be even greater in the future than they are today. The crisis has considerably ratcheted up economic volatility, putting an end to the period some have dubbed “The Great Moderation.” This volatility will amplify the existing differences in performance. Even banks that have been dealt a challenging hand can do much to outperform their peers and reward stakeholders.

Bottom line: global banking is likely to be faced with higher interest rates and an outperformance of Asia and Emerging Markets relative to their OECD peers.

WTO: Little Signs Of Protectionism

In spite of mainstream's implied agitation for "protectionist" measures aimed at alleviating concerns over "trade imbalances", evidence shows that this has hardly been the case when seen from the actions of OECD economies.

Protectionism has been a typical knee jerk reaction to previous crisis, but apparently not this time.

According to a report by WTO, (Reuters)

``The report calls on G20 leaders to reinforce recovery from the crisis by reaffirming their commitment to open markets and putting their many calls for an early conclusion of the Doha trade round into effect.``"The figures we have released today show that G20 governments have, on the whole, managed to contain protectionism. It is clear that if we are to have a sustainable economic recovery we must keep markets open," WTO Director-General Pascal Lamy told Reuters.

``The report, prepared with the Organization for Economic Cooperation and Development (OECD) and the United Nations Conference on Trade and Development (UNCTAD) at the request of the G20, notes that over 200 million people were unemployed in 2009, taking the jobless rate to record levels.``But most G20 countries are managing the political process of keeping domestic protectionist pressures under control, said the report.'

Here is a table exhibiting the tariffs erected during Sept 2009-February 2010 from the WTO

Nevertheless, earlier trade distorting policies imposed by some countries as the US, as in the case of cotton subsidies, are being challenged today.

This from Wall Street Journal, (bold highlights mine)

``Brazil won the right to trade retaliation late last year as a result of a case filed with the WTO in 2002 against an alleged $12 billion in illegal subsidies offered by the U.S. to its cotton industry between 1999 and 2002. The WTO said Brazil could retaliate up to a ceiling of $830 million.

``Brazil argued that the U.S. subsidies distorted cotton market prices and put local producers at a disadvantage, hurting potential Brazilian exports...

``On Monday, Brazil published a list of more than 100 imports from the U.S. that will be subject to higher tariffs under the WTO ruling. It's made up of mostly nonessential consumer products such as cosmetics and electronic devices, but also includes some pharmaceuticals, hospital products, food items, and some bigger ticket imports such as automobiles.

``Brazilian officials estimated the retaliation measures were worth up to $591 million annually. The country is also considering another $238 million in other forms of retaliation such as limits on royalties and intellectual-property rights.

``Jorge said Tuesday that Brazil still hopes to avoid a drawn-out conflict over the matter.

"Nobody is interested in entering a trade war," he said. "We'll be ready to negotiate when called upon."

``Brazil has given the U.S. 30 days to come up with an alternative proposal for dealing with the cotton subsidy dispute before putting the retaliatory measures into effect.

My comment: So with the blessing of WTO, Brazil will now be exerting pressure on US domestic politics. This is likely to result to a compromise at the expense of vested interest groups.

Forces of globalization appears to be gaining an upperhand.

Example Of Propaganda Masquerading As Analysis

This is another example of how economic theories are mangled in order to justify partisan political actions (I call it propaganda masquerading as analysis).

Here is Nobel winner Paul Krugman on Unemployment Benefits (hat tip: Mark Perry)

"From Paul Krugman's recent NY Times column:

``Today, Democrats and Republicans live in different universes, both intellectually and morally. Take the question of helping the unemployed in the middle of a deep slump. What Democrats believe is what textbook economics says: that when the economy is deeply depressed, extending unemployment benefits not only helps those in need, it also reduces unemployment.

``But that’s not how Republicans see it. Here’s what Senator Jon Kyl of Arizona, the second-ranking Republican in the Senate, had to say when defending Mr. Bunning’s position: unemployment relief “doesn’t create new jobs. In fact, if anything, continuing to pay people unemployment compensation is a disincentive for them to seek new work.”

``In Mr. Kyl’s view, then, what we really need to worry about right now — with more than five unemployed workers for every job opening, and long-term unemployment at its highest level since the Great Depression — is whether we’re reducing the incentive of the unemployed to find jobs. To me, that’s a bizarre point of view — but then, I don’t live in Mr. Kyl’s universe. And the difference between the two universes isn’t just intellectual, it’s also moral.

From Paul Krugman's textbook (page 210):

``Public policy designed to help workers who lose their jobs can lead to structural unemployment as an unintended side effect. In other countries, particularly in Europe, benefits are more generous and last longer. The drawback to this generosity is that it reduces a worker's incentive to quickly find a new job. Generous unemployment benefits in some European countries are widely believed to be one of the main causes of "Eurosclerosis," the persistent high unemployment that affects a number of European countries."

My comment: Like lawyers, many economists can "play" two opposing sides of the argument, depending on the "interests" of the "client", irregardless of the validity of the concept.