How Free Markets In The Telecom Industry Aids Economic Development

The global telecom industry best exemplifies how competition spurs economic development.

The growth in mobile use has been phenomenal; some 5 billion people are expected to be subscribers by the end of 2010- that's about 75% of the world population!

And mobile broadband (internet) takeup is also expected to exceed a billion users from 600 million as of 2009!

What makes this astounding is that the gist of the growth has been in the developing or poor economies. In short the poor is benefiting from free trade!

The following charts are from the World Bank's Development Indicators....
And that's because competition has prompted for a sharp decline of prices or fees for mobile services.

In short, the wonders of competition and technology based DEFLATION! (Darn the mainstream for painting deflation as evil)


And lower prices has attracted widespread demand which has led to this astounding growth!


These are emblematic of basic economic laws at work.

Competition drives prices lower, lower prices prompts for more demand, and finally widespread use indicates enhancement to people's lifestyle via enhanced connectivity, greater access to information, the lowering of transaction costs, more efficient markets, greater market breadth, influences on how politics are being shaped, introduces new services and importantly, more prosperity.

So in contrast to protectionists, who are so naively averse to competition and blame everything else to globalization, when domestic policies (bubble policies, regulatory quirks and bias, protectionism, cronyism and statism) have been the culprit for their woes, competition is and will be a MAJOR plus.

Proof?

This magnificent article from Jenny C. Aker and Isaac M. Mbiti of the Boston Review (hat tip: Mark Perry)

[bold emphasis mine]

``There are some good reasons to believe that mobile phones could be the gateway to better lives and livelihoods for poor people. While some of the most fundamental ideas in economics about the virtues of markets assume that information is costless and equally available to all, low-income countries in sub-Saharan Africa are very far from that idealization. Prior to the introduction of mobile phones, farmers, traders, and consumers had to travel long distances to markets, often over very poor roads, simply to obtain price (and other) information. Such travel imposed significant costs in time and money.

``Mobile phones, by contrast, reduce the cost of information. When mobile phones were introduced in Niger, search costs fell by half. Farmers, consumers, and firms can now obtain more and in many cases “better” information—in other words, information that meets their needs. People can then use this information to take advantage of arbitrage opportunities by selling in different markets at different times of year, migrating to new areas, or offering new products. This should, in theory, lead to more efficient markets and improve welfare.

``An emerging body of research suggests that perhaps theory is meeting reality. In many cases, these economic gains from information have occurred without donor investments or interventions from non-governmental organizations. Rather, they are the result of a positive externality from the information technology (IT) sector.

``In Niger, millet, a household staple, is sold via traditional markets scattered throughout the country. Some markets are more than a thousand kilometers away from others with which they trade. The rollout of mobile phone coverage reduced grain price differences across markets by 15 percent between 2001 and 2007, with a greater impact on markets isolated by distance and poor-quality roads. Mobile phones allowed traders to better respond to surpluses and shortages, thereby allocating grains more efficiently across markets and dampening price differences. Mobile phone coverage also increased traders’ profits and decreased the volatility of prices over the course of the year.

``The benefits of mobile phones are not limited to grain markets or to Africa. Robert Jensen, a UCLA economist, found that in the Indian coastal state of Kerala, mobile phones reduced price differences across fish markets by almost 60 percent between 1997 and 2001, providing an almost-perfect example of the “Law of One Price”: when markets work efficiently, identical goods have the same price. Even more impressive, mobile phones almost completely eliminated fisherman’s waste—the catch left unsold at the end of the day—by allowing fishermen to call around to different markets while at sea, choose the market with the best price, and sell accordingly. Mobile phones resulted in welfare improvements for both fishermen and consumers: fishermen’s profits increased by 8 percent, and consumer prices declined by 4 percent."

The article further deals with how the free market in telecoms has influenced improvements to education, health services, financial transaction (mobile banking) and governance (vigil on corruption).

Read the rest here.

Applied to the Philippines, mobile subscribers are estimated today at 72.8 million, according to the Streetinsider.com, or about 80% of the entire population!

Yet popular mobile usage is helping facilitate the introduction of new services as financial intermediation or mobile banking.


Where a big segment remains unbanked, mobile banking is helping to close this gap.

Writes the McKinsey Quarterly,

[bold emphasis mine]

``In the Philippines, for example, mobile-subscriber penetration is almost 80 percent, but banking penetration is only around 35 percent, leaving 21 million mobile subscribers with no bank account. If operators in the Philippines could bring mobile-money penetration rates among the unbanked into line with those achieved by best-practice operators elsewhere, they could acquire four million to five million new customers and add two to three percentage points of growth to their revenues. And these numbers don’t include earnings on loans and deposits, which we conservatively estimate could be a further $60 million to $80 million. Introductory mobile-money services also set the stage for additional cross-selling and up-selling in the future. In addition, eight million unbanked people in the Philippines don’t have mobile phones, and mobile money could make phone subscriptions more attractive to this segment."

From the development aspect, it is worthwhile to repeat that competition impacts the world in general positively.

In terms of investment, in the Philippines, industries that revolve around the growth of mobile banking should be a worthwhile field to consider.

The Final word from Friedrich August von Hayek,

``Competition is essentially a process of the formation of opinion: by spreading information, it creates that unity and coherence of the economic system which we presuppose when we think of it as one market. It creates the views people have about what is best and cheapest, and it is because of it that people know at least as much about possibilities and opportunities as they in fact do. It is thus a process which involves a continuous change in the data and whose significance must therefore be completely missed by any theory which treats these data as constant."

Yes, the telecom industry is essentially validating Hayek.

Commodities And Bonds Point To A Return Of Inflation

I am on a hiatus this weekend, so I'd just be posting some charts of vital interests along with my pithy comments.


The above charts from stockcharts.com reveals of near simultaneous breakouts of key commodities, in particular, Oil (WTI), Gasoline (GASO) and copper, while the industrial metal group (DJUSIM) is at the resistance levels.

Given the mainstream definition, where growth is associated with "inflation" [relative to the output gap], this perspective interprets the rise of commodity prices sensitive to the economy's growth as alluding to "recovery". As earlier commented, instead we think these are signs of a transitional formative bubble.

We'd have to admit that not every commodities has been on the run; and this has been evident in agriculture (DBA-Powershares DB Multi-sector commodity trust agriculture fund), particularly among grains, and in natural gas (NATGAS). The latter saw a recent spike, but remains on a medium term downtrend.

Albeit the performance of the Agriculture sector remains mixed to lower, with only the Livestock index (DJALI) seemingly at the outperform phase.

Meanwhile, the CRB index (CRB) remains at a trading range, despite the run in the metals and energy, to reflect on this balance.

Nevertheless, commodities do not usually move in concert. The only exception is during the 2008-2009.

As Howard Simons points out in Minyanville, (bold highlights mine)

``Note the large jump in late 2008 and early 2009; that wasn't convergence during a bull market in commodities, that was the period when all commodities along with all stocks, all real estate, all corporate bonds, and a handful of markets none of us knew could roll over and die all rolled over and died together in the financial market musical tribute to mass cyanide poisoning, Jonestown Is Your Town.

``Prior to that episode, the one-year rolling correlation of returns for these indices had never exceeded 0.51 and had, in fact, been negative. We're in the process now of moving back toward randomness."

My inference is that the difference then was that global equity markets were headed lower and much of the residual money from previous looseness found its way to commodities, which made a belated peak, even as the world economy had been contracting and money had been tightening. Perhaps this led to the anomaly of intra commodity convergence.

Meanwhile the Lehman episode, which resulted to a global banking gridlock, was the proverbial nail to coffin that brought almost all assets to its knees (except for bonds and the US dollar).

With the Bernanke Put clearly in place, which assures a continued flow of liquidity underpinned by the implied gargantuan support for her banking system, the reversion to randomness only suggest that inflation has yet to turn widespread.

This only supports our view that we are in the benign stage or in the "sweetspot" of inflation [see previous explanations in Philippine Markets And Elections: What People Do Against What People Say and Does Falling Gold Prices Put An End To The Global Liquidity Story?]

Finally, the actions in the equity, commodity and bond markets seem to be reinforcing the same story, a return of inflation.

Long term bonds as seen in the 30 year (TYX) and the 10 year yields (UST10Y) are seen inching higher.

Though the short term vis-a-vis the long term yields (UST10Y:$UST1 year-10 year versus 1 year and TNX:UST1Y 30 year versus 1 year) remain steep, they appear to have reached its zenith.

And competition to acquire materials for long term projects seem to be forcing up short term yields relative to long term yields [see Is The Recovery In Global Manufacturing A Symptom Of The Next Boom Bust Cycle?]

Yet the long end is looking at higher rates most possibly from inflation. As Morgan Stanley's Richard Berner and David Greenlaw recently wrote,

``In our view, heavy Treasury coupon issuance will combine with a revival in private credit demands to lift real yields. Moreover, uncertainty about inflation and the fiscal outlook will boost bond risk premiums."

Deflation, where?

Audio: Select Lectures on Austrian Economics

Great widget from Alex Merced

Find more music like this on Individualist Haven

Is The Recovery In Global Manufacturing A Symptom Of The Next Boom Bust Cycle?

Global manufacturing appears to positively respond to the artificially low interest rates and the record steep year curve.



Here's is the Wall Street Journal, (bold highlights minee)

``Factories around the world are ratcheting up production, fueling optimism that the global economic recovery has legs.

``The U.S. manufacturing index in March registered its best reading since 2004, and China's manufacturing sector grew for the 13th straight month. Most euro-zone nations also have seen strong factory expansion, with Germany last month posting its best manufacturing growth in a decade. Only Greece, which is struggling with debt problems, contracted."

Although the "recovery" appears uneven, much of it owes to globalization.

Again from the Wall Street Journal,

``In terms of output, manufacturing in many parts of the world remains far from its prerecession high. In the euro zone, factory output in January was 16% below its peak in April 2008, while U.S. factory output in February was 12% below its prerecession high. Only Asian output is above the level it reached before the financial crisis.

``Manufacturing often is one of the first parts of the economy to revive after a recession. But this recession was deeper and longer than any downturn since the Depression. Big parts of the U.S. and global economies—including real estate and consumer spending—show continued strain.

``Many U.S. employers remain reluctant to hire. The ISM survey showed that manufacturing employment continued to improve in March, though at slower pace than the month before. Separate data from the U.S. Labor Department showed that new jobless claims fell by 6,000 to 439,000 last week. The department releases its closely watched snapshot of the March job market on Friday.

``U.S. manufacturers remain dependent on foreign demand. "The world has gotten smaller, and a lot of us are much more global," says Tim Sullivan, chief executive of Bucyrus International Inc., a Milwaukee-based manufacturer of mining machinery. The company, which is adding about 500 workers to its 2,500 U.S. employees, is drawing about 80% of its business from abroad, mostly Brazil, Russia, India and China. ‘

``"It's really a tale of two worlds right now," Mr. Sullivan says. "The Western Europe and U.S. economies are going to recover, but they're going to recover slowly."

``China's manufacturers are the furthest along. The factory sector there turned up in March 2009 as a big stimulus program took hold. In recent months, overseas orders started to return. The nation's exports, after shrinking for 13 months, started growing again in December, and so far this year are up 31%."

And it is more than that.

The gains in US manufacturing is seen being accompanied by rising producer prices, the same symptoms that essentially plagues China today.

In short, this is inflation rearing its ugly head-globally.



According to Business Insider,

(all bold emphasis mine)

``the ISM Manufacturing Prices index jumped 8 points in March, to 75 from 67. This signals a sharp rise in inflationary pressure. According to the ISM, 17 industries reported paying higher prices on average in March and no industry reported paying lower prices." (see chart above)

``Furthermore, the Producer Price Index (PPI) for crude materials in orange below, a rise in the ISM Prices Index makes a rise in the PPI highly likely, as highlighted by Waverly Advisors. This means we should expect more confirmation of inflationary forces in the near future."

So both signs- the recovery in the manufacturing sector and the attendant inflation- appears to gradually confirm our suspicion that today's recovery is just another facet of the intertemporal process or the ongoing gradation of the Austrian Business or Trade cycle.

Here is Mr. Ludwig von Mises,

``In issuing fiduciary media, by which I mean bank notes without gold backing or current accounts which are not entirely backed by gold reserves, the banks are in a position to expand credit considerably.

The creation of these additional fiduciary media permits them to extend credit well beyond the limit set by their own assets and by the funds entrusted to them by their clients. They intervene on the market in this case as "suppliers" of additional credit, created by themselves, and they thus produce a lowering of the rate of interest, which falls below the level at which it would have been without their intervention. The lowering of the rate of interest stimulates economic activity. Projects which would not have been thought "profitable" if the rate of interest had not been influenced by the manipulations of the banks, and which, therefore, would not have been undertaken, are nevertheless found "profitable" and can be initiated. The more active state of business leads to increased demand for production materials and for labor.

``The prices of the means of production and the wages of labor rise, and the increase in wages leads, in turn, to an increase in prices of consumption goods. If the banks were to refrain from any further extension of credit and limited themselves to what they had already done, the boom would rapidly halt. But the banks do not deflect from their course of action; they continue to expand credit on a larger and larger scale, and prices and wages correspondingly continue to rise." (bold emphasis mine)

So the answer seems to be a yes. Thereby, enjoy it while it last.

Global Stock Market Update: Clearly A Bull Market Rotation

This is a fantastic update from Bespoke Invest on the performances of global equity markets for the first quarter.
From Bespoke, (all bold highlights mine)

``The average year-to-date performance of the 81 countries listed below is 6.94%. With a YTD gain of 5.27%, the US is just below average. Only 12 of the countries shown are down so far in 2010. Three Eastern European countries are leading the way this year with the biggest gains -- Ukraine (58.87%), Estonia (41.36%), and Romania (29.89%). Bermuda is down the most with a YTD decline of 31.39%.

``Looking at just the G-7 countries, Japan is up the most so far in 2010 with a gain of 6.62%. Japan is followed closely by Britain (+6.13%). The US ranks third out of G-7 countries, while Italy has been the worst of the group with a decline of 0.18%. Of the BRIC countries, only Russia is doing better than the US in 2010. Brazil, India, and China have all underperformed the US. China is one of the 12 countries that is down."

Additional comments:

1. Data and commentary above describes only the current conditions. This means they exclude prior actions which has significant influences in shaping the present state of the markets. Such exclusions thereby distorts the overall perspective or does not give a good representation of the big picture.

2. Bull market in global stocks is clearly undergoing a rotation. Former laggards ('crisis' affllicted nations) are now mostly in the higher echelon, while former leaders are now in reprieve or among the "median" or mediocre gainers.

3. While BRICs have lagged G7 nations, the differences have been marginal. In contrast the BRICs lead G7 by a mile in 2009. However this appears to be changing, as BRIC seem to be regaining momentum. We can expect the BRIC to close this gap or go ahead by the next quarter.

4. Different folks, different strokes.

China's underperformance has been more due to government's applied strong arm tactics on the markets to contain bubbles. Ergo, government intervention has prompted for China's lag.

In contrast, OECD or G7 nations have governments providing continued support to their markets (QE). In short, China is somewhat applying actual tightening measures while G7 nations are relegated to rhetorical actions. Obviously, the divergence of policy actions has resulted to this short term variance.

5. Philippines, despite its recent breakout, remains in the lower ranks and importantly trails her closest neighbors (Indonesia, Thailand and Malaysia). This implies more room for an uptrend.

6. Venezuela, which suffers from increased socialism, as measured in increased inflation (devaluation of Bolivar), remains on the upside. My point: high inflation does not necessarily mean lower markets, this depends on the state of the inflation cycle.

7. Contra Keynesians and Fisherians: Where is deflation??!!

Tom Palmer Explains Bastiat's: The Fallacy of the Broken Window

War or terrorism as economic stimulus? That's false.

Tom Palmer explains Frederic Bastiat's Broken Window Fallacy from "That Which Is Seen And That Which Is Unseen"(the book that overhauled my perspective about life)

Earth Hour: North Korean Version

Many of the locals have reportedly joined the celebration of Earth Hour.

Many have done so because like elections, they are there for "symbolism". It is more about social fad and peer pressure. Most of these participants hardly know of the economic and political implications and the attendant "costs" of what "earth hour" is about, and to whose benefit such policies would bring about.

Think of it, why does everyone seem to protest when prices of energy goes up, when high prices, in the real world, should spur "conservation" or a shift in consuming patterns?

So almost like everything else popular, seductive soundbites make it appear that the solution to environmental predicament is just a matter of allegorical representation or popular appeal, devoid of economic truths.

Nevertheless, we have a great example of earth hour as a permanent policy-North Korea!

According to a 2006 Daily Mail report, (picture above)

``The regime in the north is so short of electricity that the whole country is switched off at 9 p.m. - apart from the capital of Pyongyang where dictator Kim Jong-il and his cohorts live in relative luxury. But even there, lighting is drastically reduced.

``The result, as shown in this picture taken one night earlier this week, is a startling contrast between the blacked-out north and the south, which is ablaze with light, particularly around major cities and the capital, Seoul, in the north-west of the country." (bold highlights mine)

Professor Don Boudreaux makes this fitting comment ``the Dear Leader – like his father before him – works tirelessly to keep his nation’s carbon footprint to a bare minimum; in fact, if you look carefully you can see what is likely his, and only his, office light glimmering in Pyongyang.

``North Koreans show their reverence for mother nature not with a mere Earth Hour but, rather, with an entire “Earth Lifetime.”

Earth Hour, in the mainstream perspective, means bringing back societal order to the medieval eon. It means socialism. Just ask North Korea's Kim.

Why The Slack In Credit To Small Business In The US? Because Regulators Won't Allow Them

Politics can be characterized as a stratagem of saying one thing and doing another.

Here is a good example. US policymakers say that credit is vital to the economy and that all their efforts have been targeted at restoring the credit process.

But based on a report, what the left hand is doing seems being undone by the right hand.

From the USA Today, [hat tip: Douglas French Mises Blog] (all bold emphasis mine)

``Across the USA, banks say there's a big reason they aren't lending more: Regulators won't let them. Even as the White House exhorts banks to open the lending spigots, particularly for small-business borrowers who are key to job growth, banks say government field examiners are toughening their reviews in ways that discourage sound loans.

``Rep. Blaine Luetkemeyer, R-Mo., a former bank examiner, recently laced into top banking regulators. "We have this huge disconnect between what's going on here in D.C. (and) what's actually been going on out in the field," he told them at a joint hearing of the House Financial Services and Small Business committees. "Quite frankly, you guys are part of the problem."

``Bank examiners — including those at the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency — don't approve or deny loans. However, bank executives say examiners are downgrading the ratings of performing loanssimply because the collateral — typically, commercial real estate — has fallen in value or the borrower is located in an economically distressed state. And they're making banks exceed the minimum levels for capital and bad-loan reserves. Those practices, they say, fail to consider banks' familiarity with their communities and borrowers. And they constrict lending."

So much for lack of demand.

It makes me wonder, are these being done deliberately so as to justify more intervention and inflationism?

Popularity Ratings of World Leaders and the Pope

Here is a curious political indicator from the Economist-the Pope's popularity.
According to the Economist,

``THE pope addressed tens of thousands in St Peter’s Square on Palm Sunday (March 28th) at the start of Holy Week in the Catholic Church. Despite the crowds, Pope Benedict XVI’s popularity may be waning as a result of his handling of recent child-abuse scandals across Europe and America. Some even want him to resign for his part, before becoming pope in 2005, in a decision merely to send for therapy an alleged paedophile priest, who later returned to pastoral work. The church has said that Cardinal Ratzinger (as he then was) did not know that the priest returned to work. The pope is also accused of ignoring pleas for the removal of an American priest, who allegedly molested 200 deaf boys. Yet the pope's supporters point to his earlier efforts, reportedly ignored by his predecessor John Paul II, to launch a full inquiry into the behaviour of a cardinal in Vienna who was removed from office in 1995 after accusations of sex abuse."

While the Economist focuses on the Pope, it is noticeable that it isn't merely the Pope that has been stung by a bout of disapproval but most of the leaders of the world's major economies, particularly France's Sarkozy, (who is the most unpopular, followed by Obama, UK's Brown, EU commission's Barroso and Spain's Rodriguez Zapatero.

This is except for UN's Ki-Moon (largely neutral or marginally positive), and surprisingly Germany's Merkel which accounted for a big plus in ratings changes.

Angela Merkel is perceived to be the German version of "Maggie Thatcher".

Could it be that the world is becoming more attuned to a return of "Thatcherism" and "Reaganism" amidst today's onslaught of social democracy?

Example of Political Priorities: Politics First, You Later

This should be a good example of public choice, where officials decide on the basis of their self-interest than for the public good.

From Mary Anastasia O' Grady of the Wall Street Journal, (bold highlights mine) [hat tip: Cafe Hayek's Don Boudreaux]

``The image of House Speaker Nancy Pelosi wielding what resembled an oversized mallet while leading a mob of congressmen across Capitol Hill on the day of the health-care vote is the stuff of nightmares. It is also instructive. As a metaphor for how the Democrats view their power, the Pelosi hammer-pose could not be more perfect.

``Just ask Honduras.

``Last year, the U.S. tried to force the reinstatement of deposed president Manuel Zelaya. When that failed and Team Obama was looking like the Keystone Cops, it sent a delegation to Tegucigalpa to negotiate a compromise.

``Participants in those talks say Dan Restrepo, senior director for Western Hemisphere affairs at the National Security Council, let slip that the U.S. interest had to do with American politics. The Republicans, he said, were using the administration's support for Mr. Zelaya, an ally of Venezuelan Hugo Chávez, against the Democrats. It's not going to work, Mr. Restrepo is said to have informed the other negotiators, because "we have the power" and would be keeping it for a long time.

``It can't have been comforting for Hondurans to learn that while their country was living a monumental crisis, fueled by U.S. policy, Mr. Restrepo's concern was his party's power. For the record, an NSC spokesman says "Mr. Restrepo didn't say that." But my sources are more plausible considering what has transpired since."

Bottom line, according to Ms. O' Grady: ``It's hard to imagine what the U.S. thinks it achieves with a policy that divides Hondurans while strengthening the hand of a chavista. Revenge and power come to mind. Whatever it is, it can't be good for U.S. national security interests."

Ludwig von Mises on politics: "Political realism, that hodgepodge of cynicism, lack of conscience, and unvarnished selfishness."

Taylor Mali: "What Teachers Make"

Great poem by Taylor Mali about the role of a Teacher. (Hat tip: Seth Godin)

Is Honesty Enough For A Society To Succeed?

On my facebook, I frequently post a quote from a famous person or from an article I read or came across whose message, I THINK, is noteworthy to be remembered.

I posted this quote about 2 weeks ago from Alfred Whitney Griswold: "Certain things we cannot accomplish… by any process of government. We cannot legislate intelligence. We cannot legislate morality. No, and we cannot legislate loyalty, for loyalty is a kind of morality."

Probably in reaction to this, an indirect comment by a friend pointed out that relationships of people are best governed by honesty.

So to test the merits of the argument I responded with a question from a possible case-scenario.

“Suppose that I went to an ATM machine to do a transaction. I noticed that because it was late at night, there was nobody around the premises. So as I transacted with the machine, I noticed a 1,000 peso bill on the floor about a foot away from the ATM.

“Assuming that no one returned during the course of your transactions to claim the money, or after x minutes of wait.

“I have a set of options:

“1. ignore the money and leave the premises.

“2. pick up the money with the intent to give the money to the bank by daytime

“3. pick up the money and surrender it to the police station

“4. pick up the money and donate it to the church or to the mendicant at the next street corner

“5. pick up the money for myself

“Which of do you think among these options represent as honest which you recommend that I should take? And why?”

To my surprise two respondents made different choices on the above case. One chose 2 and the other chose 4.

This prompted me to make my reply and drive to the point.

“Going back to the issue, so what defines honesty? According to Dictionary.com, it is “truthfulness, sincerity, or frankness.” In my opinion, ‘truthfulness, sincerity, or frankness’ is rooted on upon the individual’s conscience or the moral or ethical values or principles. Simply said, the sense of right and wrong or the sense of justice that undergirds one’s thoughts and actions.

“So how do we arrive at our sense of right and wrong? We acquire these from an amalgam of factors: the teachings of our parents, the school, religion, culture, tradition, peers, what we read or watch, and the norms observed or practiced by the community.

“I would also presume that if this were to be an open survey, the answers by people will reflect on such diversity. In short, there will be NO universal single ‘honest’ answer.

“In addition, what some people will say and what they will do can differ in actual experience, as some people can be influenced by reputation, e.g. some don’t want to be seen “selfish”, or moods.

“This only illustrates that people can have different but honest opinions and intentions about how they interpret and judge specific events based on their sense of values at the time when such conditions emerge.

“Of course, lest be accused of framing, there are many alternative actions that can result from such a scenario (tearing up the money, burning the money etc.), but we will leave it to these selection to make it simple.

“The important question is, “can differences in “honesty” create conflict among people?” Unfortunately, the answer is yes.

“Here is an extension of my earlier example.

“Suppose that I have been undecided as to what to do with the money and thus brought it home, but shared this dilemma to my best friend Louie. Because of Louie’s excitement he went to tell the church, the police and the bank.

“The next day the lawyer of the bank emerges to claim the money, citing that their accountant reported that the ATM, where I transacted with, recorded a missing 1,000 pesos. The bank also cited that since the money I recovered was under their property premises, hence, it was rightfully theirs.

“[Of course, money lost by the ATM may not be the same money that I found; correlation does not imply causation.]

“A priest and the mendicant also appear on my front door to lay claim on the money. They priest cite “social justice”, which means redistribution of unowned property to the mendicant, as reasons why they deserved the money.

“A representative of the police and the central bank also surfaces. They argue that since money is a legal tender, therefore, having no claimant, the default ownership is with the government.

“On the other hand, I am thinking that since no one claimed the money, the “finders keepers” principle should apply, or the Lockean Proviso on claims to unowned resources. [‘enough as good’]

“As you can see four of us, could be honest and well-meaning, but have different opinions, divergent interpretations of truth, disparate justifications and antipodal interests. Does plain “honesty” then resolve our problem? Apparently not.

“With no fundamental parameters to rely on, our honest dispositions will only lead to an impasse.

“Why? Because the problem isn’t about honesty, but about ownership rights.

“In the above case, the worst part is for central bank through the police to arbitrarily confiscate the money I found under the threat of prosecution or under the barrel of the gun. This is called compassion (i.e. ‘honesty’) mixed with aggression, a violation of property rights.

“Bottom line: Honesty is an ideal but insufficient trait necessary for a well functioning society.

“Hence, honesty will benefit people but only under the strictures of the respect of ownership rights, the rule of law (and not the rule of men) and individual liberty from which the former two have been framed upon.

“We can all be honest under such existing conditions.

“Think of it, did honesty govern in communist Mao, or Soviet’s Stalin or North Korea’s Kim? Unfortunately, no; because people had NOT been permitted to be honest as they were treated as indentured servants deprived of ownership rights.

“[We must realize that voluntary exchange, e.g. what we buy and the services or products that we sell in exchange, are all based on property rights. Money, is essentially, about property rights, ergo medium of “exchange”-of properties.]

“In other words, “honesty” becomes an amorphous abstraction frequently used by politicians to bamboozle the public. Remember, the recent brouhaha over “I am not a thief?...sounds familiar?

The Lesson:

As Ludwig von Mises wrote, ``If history could prove and teach us anything, it would be that private ownership of the means of production is a necessary requisite of civilization and material well-being. . . . Only nations committed to the principle of private property have risen above penury and produced science, art and literature."

A Sweet Vindication And Validation As The Phisix Soar To A 25 Month High!

``Pharoah created jobs for us. Moses led us away from those jobs. Even though those jobs helped to complete public infrastructure. Even though they were green jobs, where we used our muscles and our backs instead of fossil fuels. Moses could have been part of the ruling class in Egypt. He chose freedom instead. Those of us who followed Moses also chose freedom. Freedom brings risks. But we preferred the risks of freedom to the security of bondage. Do not confuse government with G-d. Government cannot miraculously provide us with manna--or health care. When we look at government, we should not see G-d. We should see Pharoah. Government-worship is Pharoah-worship. Passover is known as the festival of freedom. To live in the Jerusalem of a free society, we have to leave the Egypt of the reach of government.”-Arnold Kling, If a Libertarian Gave a Sermon for Passover

We have pounded the table for reasons that the mainstream can’t or refuses to see.

For the local experts and media, Philippine equities simply cannot rise supposedly because of election risks[1].

Yet week after week, the momentum, market internals and the Peso has been suggesting an opposite perspective. Denial due to intense obsession over sensationalism and abstractionism seemed to have dislodged rationality from recognizing reality.

Six Impossible Things Before Breakfast

For the foreign mainstream pessimists, this simply can’t be happening.

Rising equities on low sponsorship (in the US), falling bank credit, balance sheet problems of the consumers and the banking system and high unemployment (of bubble afflicted economies), the fiscal woes of Dubai, Greece and the PIIGS, and extended valuations as seen from conventional metrics has been cited as principal reasons equivalent to Lewis Carroll’s “Six Impossible Things Before Breakfast” in Alice In Wonderland.

Yet, as Alice would say, “there is a place called wonderland”, thus, global financial markets continue with their upwards spiral. (see figure 1)

Figure 1: stockcharts.com: “Six Impossible Things Before Breakfast”

Of course, the reason for the apparent realization of such “impossibility” isn’t because wonderland exists, but because many have been fixated over a few variables which appear to be less influential in dictating the course of events.

In behavioural finance, this cognitive bias is called the “focusing effect” or when people place “too much importance on one aspect of an event; causes error in accurately predicting the utility of a future outcome”[2].

As you will note, for the Phisix (main window), the bulls ensured that the resistance at the 3,120-3,125, which has proven to be a significant obstacle, was transgressed with a mighty push, using the actions in the US as catalyst, which generated a noticeably wide gap.

Considering that the gap was backed by substantial volume (volume in pesos jumped 18% this week), one may construe this gap, in technical or chart analysis parlance as a “breakaway gap”.

A breakaway gap, in essence, is a breakout from a trading range or congestion[3].

A breakaway gap implies that the low of the breakout point should hold and serve as critical support. Likewise, this could imply of a beginning of a significant upside move.

Although we are not avid fans of charts, as they are not infallible and are subservient to patterns from past or historical performance, which may or may not unfold, [an example is the 3,120-3,125 level which formed 2 tops that would have indicated of a ‘double top’ bearish formation; however the pattern didn’t pan out]; our view today is that charts have now been in relative consonance with the underlying actions that appear to drive the market. In short, chart actions seem merely validating what we have been saying for sometime.

The Global Reflation Process

If we are correct, then global markets should extend gains over the medium term as the “animal spirits” respond to suppressed low interest rates and a still steep yield curve on a worldwide scale, including the Philippines (see Figure 2).

Figure 2: Asian Development Bank: Steep Yield Curves

The Philippines along with the US has one of the sharpest sloping curve through February 2010, as measured by the spread between the 2 year and the 10 year yields, along with the US, the European Union and Indonesia[4].

Considering the dearth of leverage in the domestic system (as that of Indonesia) compared to the West, the “borrow short invest/lend long” is likely to prompt for significantly more arbitrages and money flows into financial assets (local equities, real estate, bonds and the Peso). And perhaps it is why like Indonesia whose JKSE is up 10% year to date, the Phisix appears to be coming on strongly.

Although since the Phisix scored its eight consecutive week of advances and given the largely overbought conditions, as manifested by the local index’s sharp pullaway from the 50-day moving averages (blue line), a correction should be expected anytime.

Albeit any retracement isn’t likely to be deep and should see the support levels, from the current breakout, to hold. Nevertheless, in bullmarkets overextended upswings may continue.

Besides, given the ongoing “rotational” activities among listed issues, a correction does not likely imply that all issues will go down in synchronicity, but instead what is likely to happen would be a shift in the attention (or crowd favourites) to non-Phisix composite or third tier issues.

In addition, the Phisix, as likewise argued before, has been influenced by external forces, as exhibited by its close correlation with the performance of global equities, more than local issues. And this comes even as local participants dominate the overall market activities.

One would notice that Europe, plagued by the ongoing debt issues of Greece, Portugal and the rest of the PIIGS, appear to be, at first glance, outperforming Asia ($DJP1) and Emerging Markets (EEM) as seen by the performance of the Dow Jones Stoxx 50 ($stox50).

Of course the European Stoxx 50 is up by a measly 1.8% on a year to date basis and has been vastly outclassed by US markets (up over 4%). Incidentally, Asia (inclusive of Japan) is up 5% because it is started the year on a much lower point and has seen a more volatile ride, hence the appearance of lagging performance relative to the Stoxx 50.

In other words, what we are seeing is a global reflation process.

And this has been the core underlying dominant theme in the markets today, which has significantly been overlooked and underestimated by the mainstream pessimists.

Liquidity Seepage, Inflation Ahoy!

And where have most of the analytical loopholes by the pessimists can be found?

In the transmission effects of the collective zero bound interest rates, the lagged effects of yield curves, the idiosyncrasy of “habits” of every society[5], the impact from concerted fiscal policies or “automatic stabilizers” used [in the case of the US over $10 trillion in guarantees and spending on the banking system and other government spending on parts of the economy], the incentives from the potential impact from a stronger yuan, the varied effects of such policies to the distinct economic and capital structure of global economies, the Bernanke Put or the assurance to the financial markets of government’s continued inflationary support, which signifies as a ‘competitive advantage’ for the US in her nonpareil ability to underwrite reflationary policies through the issuance of liabilities with her own currency, and therefore provide a guarantee of liquidity to a highly complex global system vastly dependent on the US dollar.

As Doug Noland aptly observes,

``U.S. financial assets – hence the dollar – are perceived to benefit from a relative advantage versus other major currencies based upon, on the one hand, the virtual unlimited capacity for the Treasury to run massive deficits and, on the other, the Fed’s seemingly endless capacity to purchase (monetize) U.S. debt instruments and essentially peg interest-rates (short-term, and only to a lesser extent longer-term market yields). This extraordinary capacity and willingness by U.S. fiscal and monetary policymakers to inflate Credit and meddle (in the markets and economy) today bolsters marketplace confidence in the sustainability of economic recovery. As importantly, it cements the view that the soundness of Credit instruments throughout the entire system – Treasuries, mortgages, financial sector debt, corporates, munis, etc. – is underpinned by current and prospective reflationary policymaking.”[6] [bold emphasis mine]

And signs that credit takeup, even in balance sheet constrained economies as the US, seem to be gaining traction as this account from Bloomberg reveals[7],

``Investors are withdrawing from money-market funds at the fastest pace in at least two decades, reducing holdings that peaked at $3.9 trillion in January 2009… ‘The draining of cash from money-market funds shows people are becoming more comfortable taking risk, so equities are going up and bonds are also being well supported and the yield curve is flattening,’ said Christian Carrillo, a senior interest-rate strategist…at Societe Generale SA. ‘Such behavior can give some comfort to the Fed that it’s okay to reduce the size of its balance sheet, which is a pre-requisite for rate hikes.’” [emphasis added]

Rising markets are likely to spur a bandwagon effect, as these would exhibit on the reflexive nature of self-reinforcing mechanism between price signals and real events or the reflexivity theory. This means that bubbles are likely to continue to inflate and would only be compelled upon to reverse by the hands of nature. One sure sign of this would be the rising cost of inputs, higher consumer prices and increasing interest rates.

And as the report says, the hoarded liquidity in the US banking system is starting to find some leakage, as short term money market funds are regaining more confidence or “animal spirits” to redeploy cash into other asset markets in search of higher returns.

And once this seepage turns into a flood, that’s where we should start to worry. But this should take more time, and possibly, based on the cyclical effect of yield curves, inflationary pressures is likely to be more apparent by the last quarter of the year.

Hence, the idea that the current “bubble” will bust soon is likely to be inaccurate.

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[1] See Why The Presidential Elections Will Have Little Impact On Philippine Markets and Philippine Markets And Elections: What People Do Against What People Say

[2] See Anchoring, Focusing Effect, Wikipedia.org

[3] Stockcharts.com Chart School, Gaps and Gap Analysis

[4] ADB, Asian Bond Monitor, March 2010

[5] See Influences Of The Yield Curve On The Equity And Commodity Markets

[6] Noland, Doug; The Restoration of King Dollar?

[7] Ibid

Does Rising US Treasury Yields Today Suggest Sovereign Debt Concerns Or Remergent Inflation?

``By 1991, China's economy was booming because of Deng's abandonment of Marxist economics in 1978. That left only Albania, Cuba, and North Korea. The Marxists had nowhere to turn to that offered evidence of economic success. Overnight, they became a laughing stock on campus. This will be the fate of Keynesians when the governments of the West finally go bust or else abandon the deficits and the fiat money.” Gary North, Invitation to an Anti-Keynes Project, Selling Keynes Short

Many have been puzzled by the broad based surge in the coupon yields of US treasuries.

Media tries to connect the dots to the developments of Greece and Portugal, where the latter has endured a debt downgrade by a credit rating agency last week.

An upsurge in yield, says perma bears, should hurt the markets. My quick retort is, not so fast, as this would largely depend on the degree of spike and the reasons behind it.

Figure 3: Stockcharts.com: Market Turmoil From Yield Spike?

Bernanke Put and The Public Choice

It is public knowledge that the Federal Reserve is slated to end its quantitative easing program or open market purchases of mortgage backed and agency securities.

Perhaps in this instance, the Fed could be testing the market. And should any turmoil emerge from this experiment, the Fed may immediately decide to reinstate its quantitative easing program or to increase purchases of US treasuries through off-balance sheet or indirect channels (indirect bidders) to covertly support the open ended buying by Fannie and Freddie of mortgage securities on the markets.

Given the Fed’s sensitivity to the price performance of assets, which effectively affects the valuations of the assets of the balance sheets of the banking system, as discussed above, the Fed via Bernanke has long been telegraphing that they would remain ultra supportive of the markets through policy accommodation[1].

Hence, the Bernanke Put has clearly been providing implied guarantee on the system against a repeat of 2008, and will continue to do so, until the forces of nature will upend them.

The underlying predicament of policymakers as Bernanke, is that of public choice economics; by taking on politically popular policies with short or immediate term impact that helps advance their careers instead of focusing on the long term upliftment through sound policies. And the economic doctrine espoused mostly by these technocrats appears fundamentally designed for such an outcome.

As William F. Shughart II writes, ``Public choice rejects the construction of organic decision-making units, such as “the people,” “the community,” or “society.” Groups do not make choices; only individuals do. The problem then becomes how to model the ways in which the diverse and often conflicting preferences of self-interested individuals get expressed and collated when decisions are made collectively.[2]” [bold emphasis added]

For some, this is has been hard to comprehend or digest.

Playing Into The Austrian Bubble Cycle

Nevertheless, we expect the next crisis to stem from two possible scenarios: one a bubble bust in Asia and or emerging markets, or two, a sovereign debt crisis in a developed economy. (I am not saying that this is happening soon).

Although one can lead to another; a popping bubble in Asia can lead to a sovereign crisis elsewhere as overstretched and overloaded levered balance sheets of developed economies may find it difficult to engage in another round of deficit spending for “automatic stabilizers”. And if officials frantically and instinctively resort to the same actions as today, then a sovereign debt crisis becomes a clear and present danger.

As Harvard’s Carmen Reinhart in an interview with the Wall Street Journal commented, ``historically, following a wave of financial crises especially in financial centers, you get a wave of defaults. You go from financial crises to sovereign debt crises. I think we’re in for a period where that kind of scenario is very likely. I don’t think a repeat of the fall of 2008 is at stake here, where it looks like the world is going to end.[3]” [underscore mine]

And it is here where the Mises Moment will likely be unleashed. A choice of default or hyperinflation.

Going back to the recent concerns of the soaring US treasuries (TNX), it is quite obvious that there has been little “mayhem” in the markets. US equities (SPX) firmed for the 4th straight week, the US dollar strengthened (USD) largely on a Euro weakness, and importantly Credit Default Swaps (CDS) the insurance premium for debt instruments has revealed little signs of distress.

BCA Research comments on the actions of the treasury market, ``Soaring Treasury supply also appears to have played a major role. Indeed, countries with higher budget deficits tend to have narrower (or negative) swap spreads. Does this mean that investors are finally demanding a higher premium to compensate for default risk in the U.S.? CDS spreads on Treasurys did not rise much and are still well below last year’s peak, suggesting that this week’s Treasury selloff was driven by technical factors rather than by a rising default risk premium.[4]”

On the other hand, what we appears as an important development is the peaking of the yield curve (UST1Y:TNX), from which on our end, represents as a market based “backing up” or in mainstream jingoism the “normalization” of interest rates from today’s accommodative stance.

Since both the short and the long end of the yield curve has risen, but where short term end have risen faster, the market seems to be indicating signs of inflation gradually regaining foothold and diffusing in itself into the economy (a.k.a. economic growth-juiced up by liquidity), instead of a sovereign distress for now.

In short, in contrast to the outlook of deflation looking perma bears, pieces of the puzzle seems falling into place. Higher prices are beginning to manifest itself in the real economy as the reflexivity theory suggests. This is what we have labelled as inflation’s seductive ‘sweetspot’.[5]

So yes, the Austrian bubble cycle appears to be running in full steam.

And perhaps with an additional ingredient into the stew: Obamacare.

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[1] Businessweek-Bloomberg, Bernanke Says Economy Needs ‘Accommodative’ Policies

[2] Shughart, William F. II Public Choice

[3] Reinhart, Carmen Q&A: Carmen Reinhart on Greece, U.S. Debt and Other ‘Scary Scenarios’

[4] BCA Research, U.S. Treasury Issuance: Reaching The Choke Point?

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