Global CDS Update: Greece Worries Seem Increasingly Insulated

Again we have a nice update from Bespoke Invest on the state of sovereign credits, as measured by the Credit Default Swaps (CDS), as worries over Greece has recently resurfaced.

In contrast to the last episode where markets reacted violently on concerns over Greece's credit standings, today's second round of the Greek drama has seen the markets seemingly discounting the issue or has insulated the problem.

According to Bespoke, ``New concerns over Greece have caused sovereign debt default risk for the country to spike to its highest level of the crisis. But while the last spike in January caused global equity markets to pull back, this time investors (especially in the US) don't seem too worried about it. To quote the phrase that former President George Bush struggled so much with, "Fool me once, shame on you. Fool me twice, shame on me." (emphasis added)

Here are some possible reasons: the markets realizes that a resolution of the Greek dilemma is at hand (and current spike is a temporal issue), contagion risks from Greece may have been exaggerated, the markets are increasingly jaded or hackneyed over the issue and or lastly, inflationism has eclipsed other issues or has transitioned to be the most dominant theme.

As shown above the Greece problem is largely isolated.

Only four countries have seen increases in the cost of insuring debt: aside from Greece, from a reference point of February 2010, only Chile (perhaps due to the recent earthquake), Vietnam and Egypt.

Nevertheless, relative comparisons are dependent on "reference point" used, where a biased conclusion can be arrived at.

For me, the best part of the table above is to use the start of the 2008 or the last column as reference, as 2008 was the culmination of the bear markets via a collapse in October.

From that point we see emerging markets as Kazakhstan, Turkey, Brazil, Colombia, Peru, Indonesia and the Philippines as the 'best performers' considering that the respective CDS prices have only had marginal increases compared to the rest which has seen CDS rates more than doubled.

Earth Hour In The Philippines: Rotational Brownouts! The Revenge Of Economics

For domestic Earth Hour fans, your dreams just came true: Earth hour is for now a reality -via rotational brownouts in Metro Manila!

2-3 hour brownouts plagued the Philippine metropolis over the week.

Of course the news has cited many "seen" factors, such as high energy costs, "extremely high prices at the wholesale electricity spot market", the weather "With El Niño still around, hydropower facilities in Luzon were likewise not performing to capacity", and the dearth of operating capacity, "Data from NGCP, the agency tasked with transporting power from generation plants to power distributors, showed that several generation facilities were either still out of commission or producing way below capacity."

Others blame it on monopoly distributor Meralco, one analyst argues that powers generators should be held responsible.

Anything else but the government.

Earlier, some conspiracy theorists associated brownouts with surreptitious plans to "sabotage" the elections in order to declare a 'failure', thereby extend the rule of the incumbent.

YET what is not reported or the "unseen" is that the Philippine energy sector is one of the tightest regulated (and most politicized) industry, which means hardly any activities are outside the ambit of regulatory scrutiny or "oversight".

Can Meralco raise rates without the approval of ERC (Energy Regulatory Commission)? Can power plants be constructed liberally without the Department of Energy's approval? The obvious answers to these questions: No.

Yet for all the power and authority vested in the presumed "expertise" of regulators, this has to happen.

What I am saying is that in contrast to all other factors cited by talking heads and the media, brownouts are simply representative of regulatory or government failure.

Proof?

Take subsidies.

The Philippine energy sector has operated on various subsidies from which the ERC has reportedly recently waived except for lifeline subsidies for the "poor".

Yet politics is always seen as operating outside the realm of economics.

Economic 101 tells us that low prices will spur greater demand. And rising demand will create pressures on supply. In free markets, these imbalances will be vented through market price signals, from where adjustments in supply will be made in order to meet demand.

But energy prices here are not determined by market prices but by prices set by the government, particularly by the ERB (via PBR for Meralco) [see earlier discussion Bubble Thoughts Over Meralco’s Bubble].

This indicates that energy prices reflects on the bureaucratic assessments, which not only deals with the market (we don't know how they define the market), its compromises with energy producers, but for its political needs too.

Moreover, subsidies made to the "poor" or the unproductive sectors create additional demand (due to subsidized prices) which are paid for by the productive sectors.

Hence, the productive sectors are paying for higher cost of energy, from which adds to the cost of doing business, which thereby reduces the rates of domestic investment.

Here is Meralco's 3rd quarter financial statement.

The table simply shows that the income from lifeline subsidies jumped by a hefty 60% through September 2009 relative to the same period in 2008.

This is simply the laws of economics at work.

This also implies that the productive sector (investors, entrepreneurs and working class) along with the rest of society is suffering from the brownouts based on the policy to subsidize energy rates on the poor.

It's essentially a manifold blackeye for the productive sectors:
-paying for a higher cost to subsidize the poor (where the latter takes advantage of) or deadweight loss,
-production and work disruption from energy outages,
-lesser income from diminished output
-reduced economic growth from high cost of doing business and work disruptions and
-personal inconvenience!

And there's the rub. Good intentions are blighted by economic reality.

And guess what? We seem to be seeing more of a rerun of 1994. The next President is likely to preside or oversee a deluge of investments that would cater to present shortages.

And these would seem as the ripe opportunities for the Return of Investments (ROI) for the political class that rightly invested on this elections.

And this is why we have predicted there will be little material change with a new government.

It's all about human nature, in terms public choice theory.

Finally there are other factors to deal with, local regulation, environment and most importantly taxes (VAT and royalty). But we will deal with these later.

Is The Newspaper Industry Dead? Probably Not If It Is For Free

We talked about the potential fate of the newspapers in the advent of the internet [see Creative Destruction: Newspaper Industry Headed For The Dinosaur Age?], where traditional newspapers represent as the "old industrial age economy", which currently suffers from "creative destruction" from the transition to news based on the web or the "information economy'.




Nevertheless, this interesting commentary and picture from the Wall Street Journal Blog,

``If Ben Bernanke drops newspapers from a helicopter, will it save the beleaguered publishing industry?

``Probably not. But the plucky Hong Kong newspaper The Standard is using a cartoon drawing of such a fantastical occurrence to brag about the paper’s circulation, now above 200,000.

``In a so-called house ad (called that because the house, the newspaper, couldn’t sell the page to a paying advertiser), Chairman Bernanke tosses copies of the Standard from a red helicopter over Hong Kong’s skyline. The headline on the paper “WORST LIKELY OVER.”

Free newspaper will probably not end for as long as the other sources of revenues outside subscription -particularly advertisements- will be able to cover the costs of maintaining these prints, overhead and distribution.

However, competition from the web and the TV for ads will be tight as to render the sustenance of free news as suspect.

Importantly, the diminishing role of newspaper is likely to reconfigure the flow of information which is likely to impact the distribution of power held by the mainstream via mainstream news.

As Professor Gary North projects (bold emphasis mine),

``Printed daily newspapers are doomed. On-line daily paid-subscription newspapers are also doomed. Conclusion: the Establishment is about to lose one of its three major instruments for shaping public opinion: newspapers, the TV networks, and the tax-funded schools...

``The era of Establishment control over the flow of ideas is ending. That era rested on the high cost of entry. Now anyone can enter. The mammoths are in the par pits, with their huge buildings, huge staffs, and huge debts."

So creative destruction in media is likely to also affect the distribution of political power.

Global Economy: Will Turkey Eventually Overtake Germany?

While everyone seems focused on the prospects of the emergence of China as one of the world's top economic and political behemoth, one interesting headline that caught my eye is ``Turkey Overtaking Germany No Wishful Thinking on Paradigm Shift"

This from Bloomberg, (all bold emphasis mine)

``Erda Gercek spent 20 years outside Turkey, identifying stock market winners as a fund manager at Citigroup Inc. and Legg Mason Inc. Now he has moved back to his homeland, saying it’s a buy.

“In the time I was away, Turkey went from a highly volatile, boom-and-bust economy to one that’s relatively stable as inflation and interest rates came down,” Gercek, 44, said in an interview from Izmir, south of Istanbul. He said he’s “nurturing future talent,” teaching courses in fund management at Istanbul’s Bilgi University and Izmir Economy University. ``The paradigm shift, as market strategist John Lomax of HSBC Holdings Plc calls it, was engineered by a government that the military and prosecutors say is trying to turn Turkey into an Islamic state. As Prime Minister Recep Tayyip Erdogan fought off pressure from secularist generals who ousted four governments since 1960 and also a lawsuit to shut his party, he reined in government spending, sold state-owned companies and crisscrossed the region to open trade doors for Turkish business."

``The payoff has been average economic growth of 4.4 percent since he was first elected in 2002. Gross domestic product increased at an annual rate of 6 percent in the fourth quarter of 2009, lagging behind only China among the Group of 20 nations, the government said last week. Deputy Prime Minister Ali Babacan said April 2 the economy may have expanded by more than 10 percent in the first quarter.

``Turkey’s $620-billion economy could move ahead of Germany’s to become the third-biggest in Europe by 2050, behind Russia and the U.K., Goldman Sachs Group Inc. economist Ahmet Akarli wrote in a report published in 2008."

Again we see the same source of bullishness, Turkey has essentially been embracing economic freedom.

Turkey is currently ranked 67th in the 2010 Index of Economic Freedom by the Heritage Foundation and has manifested continuing interests to adapt openness since 2004 (shown below-courtesy of heritage).

More from Bloomberg...

``It’s the youth of Turkey’s 73 million people that drives much of the optimism. More than a quarter are under 15 years old and 6.3 percent are over 65, according to the 2009 census. In the U.S., 19 percent are under 15 and over-65s make up 13 percent of the 316 million population, data compiled by Bloomberg show.

``Turkey is also younger than China, where 19 percent of 1.4 billion people are under 15 and 8.4 percent over 65. In countries that share the euro, 17.5 percent are over 65 and 16 percent are under 15.

``Turkey’s demographics “can sustain very high levels of growth,” and there’s “ample potential” to put more young people to work in industries that are more productive, Gercek said. Sustaining 6 percent growth “seems to me to be perfectly achievable,” he said."

So economic freedom looks likely to convert Turkey's demographic trends as a key favorable critical factor for her economy.

Read the rest here

As for Turkey's potential to overtake Germany-that actually depends if current conditions will be sustained or improved. Nevertheless, Turkey should be a good recruit for the European Union.

Filipinos Adore Facebook and Is "Asia's Social Media Network Capital"

Developments in the cyberspace is only confirming what the world knows about the Philippines, our addiction to "connectivity".

In the SMS sphere, we have claimed the title as the "text capital of the world" (wikipedia.org), whereas in the cyberspace, the Philippines appears to annex the title as the "social media network capital of Asia" with particular particular preference for "Facebook". (how about Facebook capital of Asia?)

This from Comscore, (bold highlights mine)

``In February 2010, Internet users in the Asia-Pacific region averaged 2.5 hours on social networking sites during the month and visited the category an average of 15 times. Across markets, the Philippines showed the highest penetration of social networking usage with more than 90 percent of its entire Web population visiting a social networking site during the month, followed by Australia (89.6 percent penetration) and Indonesia (88.6 percent penetration).

``Social networkers in the Philippines also showed the highest level of engagement on social networking sites averaging 5.5 hours per visitor in February, with visitors frequenting the social networking category an average of 26 times during the month. Strong engagement was also exhibited by Internet users in Indonesia (5.4 hours per visitor and 22 visits per visitor), Australia (3.8 hours per visitor and 20 visits per visitor) and Malaysia (nearly 3.8 hours per visitor and 22 visits per visitor)."

As discussed in How The Information Age Is Changing Our Lives, the growing use of social media worldwide is also a phenomenon being unraveled in Asia and the Philippines. Otherwise said, the information age is clearly becoming the "new norm".

For the Philippines, this only means that our political economy will increasingly be influenced by the rate of scalability of our adaption to the information age, and this should prove positive for free markets, as our social nexus to the world percolates.

US Stock Markets: Rising Tide Lifts Most Boats And Is Overbought

This looks to be another proof of the effects of inflationism.

The broad market has essentially been rising, which gives credence to the "rising tide lifts 'all' (most) boats" phenomenon.
Bespoke Invest has a wonderful series of charts expressing these developments.

The first one deals with the general market where 90% of component issues have risen above their 50-day moving averages, shown above. And Bespoke also has a breakdown on the % on a per industry basis here.

Nevertheless, current string of gains has made the entire market, as represented by all 10 sectors, as "overbought".

This implies that a natural correction should be expected anytime soon.

But as a caveat, such retracement isn't likely to herald the return of the bear market as perma bears have been craving for.

Yet, it's not that I am bullish with US stocks or her economy, instead I see this a formative phase of a new bubble cycle panning out.

Quote of the Day: Mark Mobius On Shareholder Activism

Words of wisdom from Templeton's chief honcho, Mark Mobius, (bold highlights mine)

``Shareholder activism is not a privilege – it is a right and a responsibility. When we invest in a company, we own part of that company and we are partly responsible for how that company progresses. If we believe there is something going wrong with the company, then we, as shareholders, must become active and vocal.

``However, most minority shareholders tend not to be very active. One of the biggest reasons for their reluctance is that it can take a lot of time and effort, and sometimes money too, to persuade management to change. To become a strong activist, one may need to hire lawyers, which could become quite expensive. Shareholders often find that it is much easier to simply sell their position in a company that they feel is going in the wrong direction. If enough shareholders sell out, and the share price drops, the company’s management may realize that their actions are not welcomed by the market, and they may retrace these actions. However, even if a share sell-off engenders change (which itself is unlikely), the change usually comes too late for those shareholders that have already sold out. In the long term, trading in and out of a company’s shares could present a costlier and more time-consuming strategy than simply exercising your rights as a shareholder.

``We pursue shareholder activism in varying degrees of intensity. Our initial step is usually to communicate with the company’s management and directors to express our concerns and begin a dialogue. Often, that is enough. If that does not work, then more aggressive action, such as voting out the directors, may be needed. However, the latter requires many investors to get together and express the same concerns. Deciding when and if we might consider taking a shareholder activist position must be carefully weighed against how much we have invested in the company and whether we think taking aggressive action has a good chance of success to warrant the necessary time and money involved."

In my view, shareholder activism is one great way to professionalize the equity markets. Ideally, this should lead to more investment flows and a longer term orientation for stakeholders. However, other forces such as inflationism tend to distort the way investors make decisions based on false signals. Nevertheless, shareholder activism is a bottom-approach in dealing with the development of the local equity markets.

Example of Good Deflation: Productivity and Technology Improvements

If you read the economic news, you'd have this impression that falling prices or deflation is "bad" for the society. Really now?

Below is an example of "GOOD" deflation, where you get more value for your money; as seen through the evolution of computers-not just in terms of prices but importantly in the quality of the product!

From 4 Block world,
(hat tip: Professor Mark Perry)

Update On Global Art Markets As Bubble Meter

The global art market, I think, should be one very important indicator of the state of the bubble [as previously discussed in Global Art Market As Bubble Meter, China's Fast Expanding Role]


This from the Economist,

(bold highlights mine)

``IN 2008 China overtook France to become the third-biggest art market in the world, after America and Britain. France managed to reverse that setback in 2009, helped by an Yves Saint Laurent/Pierre Berge sale. But relief is likely to be temporary. The value of sales at art auctions in China reached €2.3 billion ($3.3 billion), up by 24% on the previous year. China's share of the world auction market climbed from 10% to 18%, largely at the expense of Britain and America. Chinese art has grown in popularity. Christie's Chinese sales in New York last month were its biggest ever. Sotheby's sales in Hong Kong (April 5th-8th) are also expected to reach record highs. The 20th-century Chinese art sale alone is expected to raise HK$75m ($9.7m) and the ceramics and fine art auctions could fetch more than HK$200m."

The art market simply serves as another outlet for the massive expansion in circulation credit around the world, with special emphasis on China.

The Chinese government's attempt to control the real estate bubbles only diverts them to the art markets.

According to Artzine, ``While buyers of Chinese contemporary art are still predominantly foreigners, wealthy locals are window-shopping, especially since the government has clamped down on real estate speculation. Suddenly, Chinese art seems a fail-safe investment alternative."

And it won't be long that these will also be manifested in the stock markets, as excess money will only find outlets.

Remember, trophy assets, including the art markets or colossal skyscrapers and or other mammoth projects had been major symptoms of the bubble malady, as people who benefit from these bubbles get overwhelmed by overconfidence and engage in 'braggadocio' projects. [see China's Bubble And The Austrian Business Cycle]

So perhaps until we see more instances of mass delusions of grandeur only then we can say that China's bubble cycle may have crested. Of course, we shouldn't be limited to looking at China for bubbles.

For now, enjoy it while it last.

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

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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."