Is Hungary Suffering From Debt Deflation?

For the experts at BCA Research, the answer is yes...debt deflation plagues Hungary.

According to the US Global Investors,

``Bank Credit Analyst research highlights that Hungary has been in a classic debt deflation, as its nominal GDP has been contracting while government borrowing costs have held above 6 percent. Hungary’s domestic demand has been contracting for three years and the current government is planning to reflate via massive interest rate cuts, fiscal spending, and a weaker currency."

However, we see Hungary's condition in a different light, if not the opposite circumstance.

While it is true that Hungary has been in a deep recession, as manifested by the steep decline in GDP as measured in both annual and quarterly changes, (chart courtesy of tradingeconomics.com), inflation as measured by price changes in consumer price index has been in positive zone and rising!

And it is not just in Hungary, but positive inflation is true for most of Europe, as shown in the above chart courtesy of Financial Times Blog on Money Supply, as of March. The only exception is in the Baltic states (but this has already reversed based on updated statistics).

The following is an updated chart on Hungary courtesy of tradingeconomics.com.

Fundamentally, we see the same dynamics unfolding; while Hungary's recession has been accompanied by RISING joblessness (upper window), inflation has also been RISING (lower window)!

And Hungary's currency has been falling against both the US dollar (upper window) and the Euro (lower window).

The next chart courtesy of yahoo finance.

This is in sharp contrast to the peak of the crisis in 2008, where the forint surged against both major currencies!

Then, the rising forint was symptomatic of debt deflation. Now it seems an entirely different story.

To add, while Hungary's equity bellwether the Budapest Stock Exchange fell by 3% this week on an apparent "gaffe" by the newly sworn administration, on a year to date basis, the Budapest index is still marginally up (by about 2%), and is still about 100% up or double compared to the March 2009 lows.

So all these hardly resembles a Fisherian debt deflation environment. Low bond yields in a recession doesn't automatically account for debt deflation.

Besides, Hungary has managed to turn her streak of current account deficits into surpluses.

So this should hardly make Hungary's conditions parallel to Greece's predicament. Yet Greece, like Hungary, hasn't also been suffering from debt deflation but from 'stagflation' as we have previously shown.

In November 2008, the hard hit crisis stricken Hungary received $20 billion in rescue money from the IMF, EU and the World Bank.

Meanwhile, IMF officials are set to meet with Hungarian officials early next week. The country still has an open credit line of about $2 billion dollars, according to the AP.

Bottomline: Hungary's conditions doesn't seem anywhere like debt deflation or resembles little of Greece's debt crisis. However, unless present trends make a volte-face, both Hungary and Greece appear to be in a mild stagflation.

Quote Of The Day: Market Oriented Principles Makes The Difference

That's the key criteria in selecting emerging markets, according to Templeton's chief honcho Mark Mobius, on his latest outlook, Spotlight on Southeast Asia.

His article dwells on the situation in Vietnam.

Mr. Mobius writes, (bold emphasis and italics mine)

``The big question in Vietnam remains whether the Communist government is willing to adopt a market-oriented economic model as China’s communist government had done. Lenin’s statue is still standing in Hanoi. However, more and more leaders from the market-driven and commercially oriented southern region of the country have been joining the government and influencing economic policies. In addition, many young Vietnamese who have lived, worked and studied overseas are returning home to help build up its economy and participate in the anticipated high growth in that country.

``It is important for the Vietnamese government to focus on broadening the privatization process in the economy. In this way, they can reap the potential benefits of privatization, just like other countries that have adopted similar market-oriented principles. One of Vietnam’s strengths is her people – a hardworking and ambitious local population coupled with a large population living overseas, the “viet kieu”, who are capable of contributing know-how and capital to grow the country at a faster pace."

Emerging markets aren't equal. The difference lies in the political economic trends towards market-oriented principles or free(r) markets.

A Buffet Of Negative News Haunts Major Financial Markets

Major financial markets seem to be either in a state of confusion (looking for anything to justify current actions) or are have been seeing widening of cracks that may turn into a collapse.

While yesterday's news where the sharp decline in Wall Street was linked to anaemic job data, in Europe, market anxiety has been allegedly from Hungary's politics.

This from Bloomberg,

``Credit-default swaps on sovereign bonds surged to a record on speculation Europe’s debt crisis is worsening after Hungary said it’s in a “very grave situation” because a previous government lied about the economy...

``Hungary’s bonds fell after a spokesman for Prime Minister Viktor Orban said talk of a default is “not an exaggeration” because a previous administration “manipulated” figures. The country was bailed out with a 20 billion-euro ($24 billion) aid package from the European Union and International Monetary Fund in 2008."

Bespoke Invest rightly points out that it isn't Hungary, but Spain which appears to be feeling the heat, as shown by the activities in the sovereign Credit Default Swaps markets.

Bespoke Invest writes,

``Sovereign debt worries in Europe have been elevated for a couple of months now, and today Hungary moved into the crosshairs. Sovereign debt default risk as measured by 5-year CDS prices has spiked for Hungary and the countries surrounding it today, but default risk for this region still remains well below levels seen in late 2008 and early 2009. The first two charts below of 5-year CDS for Austria and Hungary since 2008 highlights this. Greece and Portugal default risk remains elevated as well, but at the moment it is still down from its recent peaks. France also remains elevated, but it is still below highs seen in early 2009. The same can't be said for Spain, however. Spain default risk reached a new crisis high today, taking out levels seen prior to the trillion Euro bailout. And Spain matters much more than Hungary."

So like in a buffet, the link between bad news and falling markets seems a matter of choice. Take your pick: US Jobs data, Hungary or Spain? Or perhaps, the latest fashion of lengthy hemlines hold the key?

Technology Curve: Terrific Advances In Supercomputers

The technology curve has indeed been accelerating as the capacity of supercomputers continually soar.

This update from the Economist,

``AMERICA's dominance in the field of supercomputing has slipped over the past decade, according to the latest TOP500 chart, a biannual list of the world's fastest number-crunching machines. Having accounted for 56% of the top 50 machines a decade ago, America now accounts for 40%. Japan has lost ground too, while Britain and Germany have held steady. The greatest gains have been made by France, due in part to the use of supercomputers in the energy industry, and China, which had no supercomputers in the top 50 a decade ago, but now has four, including the world's second-fastest machine, at the National Supercomputing Centre in Shenzhen. Other countries have also moved up the rankings, which indicates that supercomputers are more widely distributed around the world than they used to be: the top 50 machines include computers in South Korea, Saudi Arabia, Switzerland and India."

The loss of the dominance of the US in this field does not exhibit a zero sum based competition, where one's gains translates to the loss of the others, which appear to be the undertone of the article.

What's truly happening is that the progress in technological innovation in supercomputers have been more diffused globally where more nations have been participating in the growing pie.

The general advances in the capability of supercomputing from Top500.org illustrates of the dynamics of the growing pie. The progress has been breath-taking.

In my view it's merely the motions of Moore's law at work, and possibly Ray Kurzweil's technological singularity.

And this has been fuelled by competition, globalization and collaboration.

And it would be a mistake to gloss over the implications of such remarkable progress in technology innovation to the real economy.

Read more interactive graph of supercomputers from BBC here

Outgoing President GMA's Advice To Incoming President Noynoy Aquino: Tax Your Way To Prosperity!!!

Tax your way to prosperity!!!

That's seems to be the message of elixir from the outgoing President GM Arroyo's to incoming President Benigno "Noynoy" Aquino.

This from GMA.news.tv, (bold highlights mine)

``The next government should consider imposing new taxes, President Gloria Macapagal Arroyo said on Friday, claiming that doing so will be crucial in maintaining the economic gains achieved during her nine-year presidency.

``She said sustaining the local economy’s strong start this year would hinge, among other factors, on getting enough revenues to sustain spending on social services and infrastructure.

``"We have to sustain the economic policies that we have done and build on them. But that will already be the responsibility of the next administration," Mrs. Arroyo told reporters.

"New taxes are very important to make sure we have revenues to sustain our economic growth," she added."

Amazing.

Yet this fallacious recommendation surprisingly comes from a former economic professor turned President of the Philippines.

This advice is founded on misplaced assumptions that higher taxes have no or little impact to demand and supply, it further assumes of the relative efficiency of government spending and the positive effects from the spending multipliers.

Nevertheless, one wonders if this is just a trap designed to drag down Mr. Aquino's popularity. And if this true, then again, this only reveals that in politics, it is the self-interests of the politicians that come ahead of public service.

Yet, higher or more taxes isn't the way to prosperity for the following reasons:

First of all, if this logic is valid, why not tax ALL output or have a 100% tax to perpetuate "sustained" economic growth?

Second, the linear assumption that "high taxes equals more revenues" defies basic economic fundamentals where high prices equals lower demand and vice versa.

Third, higher taxes impact both demand and supply schedules. High taxes increases the cost of business and reduce profitability of enterprises which leads to losses among the marginal producers. And closures from such losses translates to a reduction in supply which leads to higher prices. And higher prices leads to less buying power for consumers. So diminished consumer demand translates to less output for the economy.

Fourth, higher taxes distorts production patterns as the source of demand shifts from consumers to the government. Essentially this generates an economic structure known as "crony capitalism".

Fifth, since governments are net consumers, they bid away from society resources for productive uses, subsequently this leads NOT to capital accumulation (wealth) but to capital consumption.

As Henry Hazlitt wrote in Economics in One Lesson, ``for every public job created by the bridge project a private job has been destroyed somewhere else. We can see the men employed on the bridge. We can watch them at work. The employment argument of the government spenders becomes vivid, and probably for most people convincing. But there are other things that we do not see, because, alas, they have never been permitted to come into existence. They are the jobs destroyed by the $10 million taken from the taxpayers. All that has happened, at best, is that there has been a diversion of jobs because of the project. More bridge builders; fewer automobile workers, television technicians, clothing workers, farmers."

The technical word for this is "crowding out" effect.

Sixth, higher taxes can result a bigger informal economy, since the burden of compliance would render many entrepreneurs unprofitable.

Seventh, since taxes are redistributive, and where higher or more taxes leads to higher prices, lesser output and higher unemployment, this effectively translates to a fall in standard of living.

As Ludwig von Mises wrote, people will "consume their capital funds rather than to preserve them for the tax collector".

Eight, higher taxes translates to bigger risks of bureaucratic corruption as people would rather bribe officials than pay for the unjust confiscatory taxes.

Ninth, it's not just corruption but wasteful government spending.

Since government spending are NOT based on the requirements of the market, they are predicated on the whims of the politicians. And this implies a loss of productivity.

A good example is the foreign "working trips" junkets which have been part of PGMA's legacy at the expense of the Filipino taxpayers.

So how would such boondoggles enrich society?

This leads us to ask who benefits from higher or more taxes?

Naturally, the political leadership, the bureaucracy and the cronies.

As Murray Rothbard aptly explained, (bold highlights mine)

``It is clear that the primary beneficiaries are those who live full-time off the proceeds, e.g., the politicians and the bureaucracy. These are the full-time rulers. It should be clear that regardless of legal forms, the bureaucrats pay no taxes; they consume taxes. Additional beneficiaries of government revenue are those in society subsidized by the government; these are the part-time rulers. Generally, a State cannot win the passive support of a majority unless it supplements its full-time employees, i.e., its members, with subsidized adherents. The hiring of bureaucrats and the subsidizing of others are essential in order to win active support from a large group of the populace. Once a State can cement a large group of active adherents to its cause, it can count on the ignorance and apathy of the remainder of the public to win passive adherence from a majority and to reduce any active opposition to a bare minimum."

A great example of this would be the unexplained wealth of the kin of the country's top executive whom GMAnews.tv quotes as saying that these were accrued from "donations" and from good investments.

And that's why politicians love to play Gods, the political apportionment of resources extrapolates to generous "donations". And that's also why aspiring politicians extravagantly spend to buy votes directly or indirectly during elections in order to get elected.

So in contrary to Mrs. Arroyo, our unsolicited advise is for President Noynoy Aquino to basically REDUCE taxes and to REDUCE government spending. He can start out by trimming the bureaucracy, abolishing pork barrel, streamlining, rationalizing and rescinding feckless laws, and allow Filipinos more economic freedom from the clutches of overregulation, bureaucratic and welfare costs.

Of course everything comes with a risk or a tradeoff, and this implies greater career risks from such undertaking. Nonetheless, it may be worth the sacrifice if public interest is indeed a priority.

Hemline Index And Bear Markets

People are truly hardwired to seek patterns to rationalize desired outcome/s.

And some even take a cue from evolving fashions...

According to the Daily Reckoning,

``The "Hemline Index" was first developed by technical analyst/economist George Taylor in 1926. It gained popularity around the 1929 stock market crash. The theory states that the stock market rises and falls with women's hemlines. Below is a famous graphic depicting the stock market and hemlines from 1897 to 1990 constructed by Alan Shaw's legendary technical analysis group at Smith Barney."

``If this theory still holds, the story below is a bearish indicator for the stock market."

Why so? Because today's fashion reveal of the return of "lengthy" hemlines as shown by the New York Times article

The New York Times, “There is definitely a movement to a very lengthy look, especially among the young,” said Nevena Borissova, a partner in Curve, a progressive retailer with stores in New York, Los Angeles and Miami. Ms. Borissova favors radically stretched-out skirts and dresses that “drag on the floor, with raw edges, and worn with combat boots,” she said. And as she pointed out, these myriad calf- or ankle-grazing iterations of the milelong skirt bear no relation to “Big Love” or, for that matter, the Summer of Love."

Well, I wouldn't know of anyone who would buy or sell of financial securities solely based on "fashion" trends. And I don't think people buy or sell securities because they wake up on the right/wrong side of the bed too.

This makes the above correlations more coincidental and subject to the flaws of "cognitive bias". Nevertheless, an amusing anecdote.

How Populist Leadership Goes Kaput: Japan Edition

Here's another example of how populism goes down...down the sink this time.

Japan's Prime Minister Yukio Hatoyama resigned only after 9 months in office following a plunge of approval ratings.

This from Bloomberg, (bold highlights mine)

``Yukio Hatoyama quit as Japan’s prime minister less than nine months after ending a rival party’s 50- year lock on power as money scandals and a broken promise to move U.S. troops cost him the support of four in five voters...

``Hatoyama’s term was the shortest for a Japanese leader since 1994, and his resignation will force parliament to select the nation’s fifth prime minister in four years. The DPJ in August unseated the Liberal Democratic Party, which governed almost without interruption for more than 50 years...

``Hatoyama also lost support among voters because of campaign finance scandals involving himself and Ozawa, who had to step down as party leader before last year’s election. His declining popularity raised concern among his party about their electoral prospects in July...

``Three polls released this week showed Hatoyama’s approval rating at or below 20 percent, compared with 75 percent when he took office.

``Half of the 242 upper-house seats are at stake in the July vote. The DPJ and its other junior partner, the People’s New Party, have 122 legislators, and losing that majority might hinder the government’s ability to increase social welfare spending while aiming to cut the world’s largest public debt."

Of course, every political leadership is different (in terms of specific actions). Yet there is hardly any difference in the zeitgeist of political affairs.

Hence the lesson is very clear, when the rubber meets the road or where hope through symbolism clashes with grinding reality from politics, it will only be revealed that the emperor has usually no clothes...

The Injustices From Biofuel Mandates

Here is an example of environmentalist flimflam.

Lester Brown of Earth Policy writes,

``The emerging competition between the owners of the world’s 910 million automobiles and the 2 billion poorest people is taking the world into uncharted territory. Suddenly the world is facing an epic moral and political issue: Should grain be used to fuel cars or feed people? The average income of the world’s automobile owners is roughly $30,000 a year; the 2 billion poorest people earn on average less than $3,000 a year. The market says, let’s fuel the cars."

While we agree that ethanol mandates are highly distortive, to blame the markets for such framed "injustice" is totally outlandish or is simply absurd for the simple reason that governments and NOT markets have been responsible for this.

This is a case of twisting facts to fit a theory or begging the question.

First of all, nearly ALL global oil reserves have been under the control by governments or are held by state owned oil companies, where only a few percentage have been opened to private companies.

This means that the pricing for world oil markets have been influenced mostly from political considerations or reflects on the consequences of the political environment rather than actual changes in demand and supply balance.

Next, global agricultural markets have been highly protected...

The average tariffs for global agricultural products are nearly double compared to non-agricultural products (charts from ers.usda.gov or US Department of Agriculture).

And the result of this "protectionism" has been a significant lag in the growth of world trade of agricultural products relative to non-agriculture products.

Nevertheless, despite the politically instituted walls or barriers, there still have been some improvements in global trading activities. The Amber waves-USDA notes (bold highlights mine),

"Improvements in transportation and handling, such as containerization and refrigeration, have facilitated shipments of out-of-season produce from distant origins, something not possible 20 years earlier. Communication and logistical improvements have enabled shippers of bulk agricultural commodities, like grains, to respond more easily to market demands for specific types, grades, and qualities. Greater purchasing power among developing countries, which tend to spend a higher share of increased income on food, has also contributed to growth in agricultural trade. These developments have been complemented in recent years by the reductions in barriers to agricultural trade brought about through the Uruguay Round Agreement on Agriculture as well as through bilateral and regional agreements."

In other words, the improvements in the marketplace has allowed this growth to happen, in spite of the influences of the non-market politically imposed protectionist measures.

Then, there is a huge $20 billion in subsidies extended to the agricultural sector via the US Farm Bill (wikipedia.org), where such subsidies exhibits market pricing based on political accommodation to select industries than from market forces.

Yet such political subsidies hasn't been directed to alleviate the plight of the "poor" but to the select elite sector...

According to Brian Riedl of the Heritage Foundation, ``With agricultural programs designed to target large and profitable farms rather than family farmers, it should come as no surprise that farm subsidies in 2001were distributed overwhelmingly to large growers and agribusiness, including a number of Fortune 500 companies."

And strong lobby from these groups have successfully forestalled any attempts to alter current policies or waive the "unjust" political economic structure. According to the latest news from AP, (bold highlights mine)

``Lawmakers crafting a sweeping farm bill in 2008 promised it would cut government payments to wealthy farmers. Two years later, little appears to have changed.

``Data being made public Wednesday shows that the wealthiest farmers in the country are still receiving the bulk of government cash, despite claims from lawmakers that reforms in the bill would put more money in the hands of smaller farms. At the same time, a series of exemptions written into the bill has made it more difficult for the public to find out who is receiving what.

``Lawmakers writing the $290 billion bill included several provisions aimed at cutting down on government subsidies to the wealthiest farmers. They sought to eliminate a loophole that allowed farmers to collect higher payments and they set income limits for those who received subsidies. Though those new laws may have cut down on payments to some farmers, others have been able to find ways around them.

``Such subsidies to the nation's largest farms are a mainstay of congressional politics and an eternal frustration to those who want to eliminate them. A powerful coalition of farm-state members of Congress have successfully defended their constituents' interests in farm bill after farm bill."

Of course we can't ignore that the key beneficiaries of the biofuel subsidies/mandates have been basically the same groups...

From Heritage's Ben Lieberman,

``Overall, the costs of the ethanol mandate are substantial, while the benefits are small at best. The only real winners are the direct beneficiaries of this special-interest program, mainly corn farmers and ethanol producers."

So, politics and not the markets, have played as the most important contributor to the "injustices" wrought by the so-called imbalances.

Finally, Mr. Lester tries to associate some cause and effects to the actions of the oil market with that of grain market.

He says, ``The price of grain is now tied to the price of oil. Historically the food and energy economies were separate, but now with the massive U.S. capacity to convert grain into ethanol, that is changing. In this new situation, when the price of oil climbs, the world price of grain moves up toward its oil-equivalent value. If the fuel value of grain exceeds its food value, the market will simply move the commodity into the energy economy. If the price of oil jumps to $100 a barrel, the price of grain will follow it upward. If oil goes to $200, grain will follow."

While oil (WTIC-behind), grain (DJ-UBS grains) and most commodities as signified by the CRB (lower window) have moved in tandem during the commodity heydays of 2008, this relationship does not hold true today.

So the alleged correlation isn't clear.

Moreover, such assertion excludes the critical role played by the US Federal Reserve in blowing the housing bubble which apparently percolated into the commodity markets.

Bottom line: since most of today's imbalances have been due to skewed laws, regulations and political actions, the answer isn't more mandates but to allow market forces to work.

Does The Yield Curve Reflect On The Natural Rate Of Interest?

The short answer is no.

The natural rate of interest supposed to reflect on the savings, investment and consumer preferences across time.

According to Roger Garrison, (all bold highlights mine)

``So named by Swedish economist Knut Wicksell, the natural rate of interest is the rate that reflects the underlying real factors. In macroeconomic terms as applied to a wholly private economy, it is the rate that governs the allocation of resources between current consumption and investment for the future. By keeping saving and investment in balance, the natural rate guides the economy along a sustainable growth path. That is, governed by the natural rate, unconsumed current output (real saving) is used for augmenting the economy's productive capacity in ways that are consistent with people's willingness to postpone consumption.

``In the hands of the Austrian economists, the natural rate became the rate that reflects the time preferences of market participants and allocates resources among the temporally defined stages of production. The output of one stage serves as input to the next in this logical and broadly descriptive representation of the economy's production process. The temporal dimension of the economy's capital structure is a key macroeconomic variable in Austrian theory.

``Time preference is simply a summary term that refers to people's preferred pattern of consumption over time. A reduction in time preferences means an increased future-orientation. People willingly save more in the present to increase the level of future consumption. Their increased saving lowers the natural rate of interest and releases resources from the final and late stages of production. Simultaneously, the lower natural rate, which translates directly into reduced borrowing costs, makes early stage production activities more profitable. With the reallocation of resources from late to early stages of production, the preferred temporal pattern of consumption gets translated into an accommodating adjustment of the economy's structure of production."

However, where interest rates are SET by the central banks, the yield curve instead reflects on spurious market signals from monetary policies which brings about clustering malinvestments that lead to the boom bust cycles.

Dr Frank Shostak explains, (all bold highlights mine)

``Once interest rates in financial markets are lowered artificially, they cease to reflect consumers' time preferences. This in turn means that businesses, by reacting to interest rates in financial markets and embarking on investments in long term capital projects, are committing errors, which is to say, making investment decisions that are contrary to consumers' wishes.

``While the Fed has an absolute control over short-term interest rates via the federal funds rate, it has less control over the longer-term rates. It is this fact that gives rise to upward or downward sloping yield curves. The Fed’s monetary policies disrupt the natural tendency towards uniformity of interest rates along the time structure. This disruption leads to the deviation of short-term rates from the natural rate i.e. from individuals' time preferences.

``The artificial lowering of short-term interest rates by the Fed generates profit opportunities that prompt investors to borrow money at lower short-term interest rates and invest in higher yielding longer-term investments. To sustain the positive sloped yield curve the Fed must persist with its easy stance. Should the central bank cease with its monetary pumping the shape of the yield curve will tend to flatten and profits from "playing" the yield curve will disappear."

M3 Not A Valid Measure Of Money

In an earlier post [see Contracting Money Supply, Deflation Bugaboo And Dubious Statistical Models] we argued that some experts have used wrong models to fear monger about deflation and or market crashes.

Where in most occasions experts fall victim to associating correlation with causation, we argued that the actions of M3, a monetary aggregate statistic, has even had inconsequential correlations to even suggest for a meaningful causal link.

Dr. Frank Shostak points out why the use of M3 as basis for predicting the path of the economy isn't reliable.

Mr. Shostak writes, (bold highlights mine)

``It is quite possible that monetarists are reaching valid conclusions with respect to the economy in the months ahead. We are of the view however, that money M3 is not a valid measure of money.

``In order to account correctly for money, one must make a distinction between money that is deposited and money that is loaned out.

``When an individual exchanges goods for money he in fact increases his demand for money and when he lends his money he is lowering his demand for money. Individuals can exercise their demand for money in a variety of ways. For example, they can keep money in a jar, or under the mattress, or in their wallets, or place the money in a bank warehouse. From this it follows that the overall amount of money in individual holdings should be the sum of money they hold in bank warehouses also known as demand deposits plus the money they hold outside banks warehouses.

``This, in turn, means that the inclusion of various term deposits such as large time deposits and money market mutual funds deposits into the definition of money such as M3 produces an erroneous account of the amount of money in the economy.


Dr. Shostak further says that his preferred monetary statistics, the AMS, appear to be saying a different story.

Read the rest here.

The Battle For The World's Most Valuable Technology Company

The following chart from New York Times details on the rivalry of Apple and Microsoft in terms of market cap.

Apple recently grabbed the top spot as the "world’s most valuable technology company"...

Interesting comment by the New York Times:

"The rapidly rising value attached to Apple by investors also heralds an important cultural shift: Consumer tastes have overtaken the needs of business as the leading force shaping technology."

This reminds us that consumers ALWAYS play the lead role in determining how resources are allocated. And businesses only compete to satisfy consumer needs or tastes, through innovation or adaption of more efficient processes. Profits and higher market cap are consequences of the success of such pursuit. According to Ludwig von Mises,

``The economic foundation of this bourgeois system is the market economy in which the consumer is sovereign. The consumer, i.e., everybody, determines by his buying or abstention from buying what should be produced, in what quantity and of what quality. The businessmen are forced by the instrumentality of profit and loss to obey the orders of the consumers, Only those enterprises can flourish that supply in the best possible and cheapest way those commodities and services which the buyers are most anxious to acquire. Those who fail to satisfy the public suffer losses and are finally forced to go out of business."

Go to the New York Times site here to see the company milestones accompanying the chart.

However, maybe the rivalry shouldn't be limited to Apple-Microsoft. Perhaps newcomer Google should be part of it.

Google's market cap is currently at $156 billion according to yahoo finance, (chart from bigcharts.com) more than 30% off from Apple's $233.7 billion.

But again, the rewards will depend on who among these companies will satisfy the consumers most.

Venezuela's Stagflation In Graphs

In yesterday's post Why The Current Market Volatility Does Not Imply A Repeat Of 2008, I made many references to Venezuela as example.

Here are some revealing charts...(except for the Bolivar money base all the rest are from tradingeconomics.com)

Venezuela's deep recession

The crashing bolivar!

surging inflation!

caused by massive money printing!

yet a soaring stock market!

While Venezuela is clearly in a stagflation phase there seems to be a big possibility that these would transmogrify into a hyperinflation, which I think could occur anytime within the next 3 years, given the current pace by which Mr. Chavez seems to be financing his conversion of Venezuela into a socialist nation.

Jonathan Finegold Catalan at mises.org dwells deeper into the Venezuelan disease.

Here is an excerpt,

``By printing money, Venezuela's central bank and government are not creating capital, they are only funding their ability to bid it away from the private sector and squander it on uneconomical public programs. Imagine the average Venezuelan who receives nothing but a currency that is consistently falling in value in exchange for his resources. Simultaneously, his savings are confiscated, because they are progressively worth less in the face of rising prices. How can anybody consider this a basis for a rise in wealth?

``In Venezuela, entrepreneurship is condoned when it doesn't interfere with the plans of Hugo Chavez. Unsurprisingly, entrepreneurs in the utility industries are not part of Chavez's plans, and as such the Venezuelan utility market has been almost completely nationalized. While prior to the recent global depression Chavez stuck to nationalizing certain sectors at a relatively slow (yet steady) pace, the onset of global crisis accelerated the socialization of Venezuela's economy. Indeed, few foreign-owned oil companies were left untouched after Chavez decided to solve his debt problem by simply taking over those businesses he owed money to.

``Other key industries nationalized include the telecommunication and electrical markets. Admittedly, Chavez's nationalizations did not consist solely of expropriating the property of others for the benefit of the "people of Venezuela." Like any good politician, Chavez pandered to big business, offering two Spanish electrical companies, Iberdrola and Elecnor, a total of nearly two billion dollars to build a 1000Mw electrical plant in the city of Cumaná, in eastern Venezuela. The average construction cost for the specific type of plant being built was $0.75 a watt. Chavez paid Iberdrola and Elecnor $2 a watt."

Read the rest here

Financialization of Commodities: Boon Or Bane?

A Wall Street report recently highlighted on the "financialization of commodities" or the increasing role of commodities being used as investment assets.

They cite a study from Ke Tang at Renmin University in China and Wei Xiong at Princeton University which showed of the growing correlation between prices of commodities with stocks and the US dollar. Mr. Tang and Mr. Xiong writes,

``We find that concurrent with the growth of index investment, commodity prices have become increasingly correlated with the world equity index and US dollar exchange rate, and with oil. In particular, this trend is more pronounced for commodities in the two popular commodity indices, the GSCI 25 and DJ-UBS indices. As a result of the financialization process, the spillover effects of the recent financial crisis contributed to a substantial part of the large increase of commodity price volatility in 2008."

In addition, this has been used by some to cast a bearish light on commodities price trends.

Analyst Simon Hunt is bearish on copper, ``This economic scenario is not conducive to a strong trend growth in world copper consumption let alone to its declining intensity of use, a result of high and volatile copper prices. Moreover, copper’s end users, together with their fabricators, are fully aware that prices have not been driven by real fundamentals, but by the growing intrusion of the financial sector into treating copper, as for other base metals, as an alternative investment." (bold highlight mine)

Well in my view, financialization of commodities isn't a reason to be bearish.

This reflects on the deepening of capital markets in search of higher yield from relative returns, it also signifies the market process of discovering alternative havens or 'store of value' from inflationism and even possibly 'commodity as assets' could also function as sanctuary from numerous regulations.


Besides, commodities plays a minor role (.47%) in the $615 trillion derivatives [from the Bank of International Settlements] market largely dominated by interest rates (73.17%) and followed by foreign exchange (8%) and credit default swaps (5.32%). To consider that even weather plays a role in the derivatives market today as part of the growing sophistication of financial risk management.

Importantly, one mustn't forget that commodities once played the role of money, as Murray Rothbard wrote in Man, Economy and the State,

``Money is a commodity that serves as a general medium of exchange; its exchanges therefore permeate the economic system. Like all commodities, it has a market demand and a market sup­ply, although its special situation lends it many unique features. We saw in chapter 4 that its “price” has no unique expression on the market. Other commodities are all expressible in terms of units of money and therefore have uniquely identifiable prices. The money commodity, however, can be expressed only by an array of all the other commodities, i.e., all the goods and services that money can buy on the market. This array has no uniquely expressible unit, and, as we shall see, changes in the array cannot be measured."

Therefore, in today's environment where inflationism is the dominant path of policymaking, commodities can partly play the role of alternative store of value.

This means that the demand for money which consist of exchange demand (by sellers of all other goods that wish to purchase money) and reservation demand (the demand for money to hold by those who already hold it), would translate to what the mainstream sees as "speculation" or "hoarding".

In short, commodities are not just meant to be consumed (real fundamentals) but also meant to be stored (reservation demand) if the public sees the need for a monetary safehaven.

Moreover, when developments reveal heightened concerns over the accelerating loss of purchasing power in a currency, the role of commodities as money could be reinforced.

As Mr. Ludwig von Mises wrote,

``He who believes that the prices of the goods in which he takes an interest will rise, buys more of them than he would have bought in the absence of this belief: accordingly he restricts his cash holding. He who believes that prices will drop, restricts his purchases and thus enlarges his cash holding. As long as such speculative anticipations are limited to some commodities, they do not bring about a general tendency toward changes in cash holding. But it is different if people [p. 427] believe that they are on the eve of big cash-induced changes in purchasing power. When they expect that the money prices of all goods will rise or fall, they expand or restrict their purchases. These attitudes strengthen and accelerate the expected tendencies considerably. This goes on until the point is reached beyond which no further changes in the purchasing power of money are expected. Only then does this inclination to buy or to sell stop and do people begin again to increase or to decrease their cash holdings.

``But if once public opinion is convinced that the increase in the quantity of money will continue and never come to an end, and that consequently the prices of all commodities and services will not cease to rise, everybody becomes eager to buy as much as possible and to restrict his cash holding to a minimum size. For under these circumstances the regular costs incurred by holding cash are increased by the losses caused by the progressive fall in purchasing power. The advantages of holding cash must be paid for by sacrifices which are deemed unreasonably burdensome. This phenomenon was, in the great European inflations of the 'twenties, called flight into real goods (Flucht in die Sachwerte) or crack-up boom (Katastrophenhausse). The mathematical economists are at a loss to comprehend the causal relation between the increase in the quantity of money and what they call "velocity of circulation."

So in my opinion, where commodities serve as insurance against a crack-up boom, financialization of commodities is just one additional way to obtain access to such insurance. Not bad for as long as the counterparty in these contracts produces the 'real goods', when claims are presented.

Lastly, in competition with other asset classes, the financialization of commodities should likewise add to the pricing efficiency of the marketplace.

Does The Government Deserve Credit Over Philippine Economic Growth?

Definitely not.

Not the past administration, as well as, not the future administration.

Here is another outlandish example of how politicians quibble to grab credit when none is actually due them.

This also goes to show that politicians are self-interested individuals whose principal interest is to generate 'popularity' that should transform into votes rather than to perform 'public service'.

Yet all these nitpicking over the Philippine economy are founded on the myth that government runs the economy [see previous discussion in The Myths Of Government’s Managing The Economy]

We don't have to go far to look for evidence.

Take a look at the chart above from ADB's Managing Cities.

The chart reveals that the the informal economy or the shadow or the underground economy/sector, e.g. the tricycle driver, balut vendor, sari-sari stores and etc..., comprises 40% of the Philippine economy. These are the groups that don't pay taxes and whose business are not registered with the government.

And why do informal economies exist?

Professor Friedrich Schneider with Dominik Enste at the IMF website explains,

(all bold highlights mine)

Macroeconomic and microeconomic modeling studies based on data for several countries suggest that the major driving forces behind the size and growth of the shadow economy are an increasing burden of tax and social security payments, combined with rising restrictions in the official labor market. Wage rates in the official economy also play a role.

Taxes and social security contributions add to the cost of labor in the official economy and hence are key factors driving the growth of the shadow economy. The bigger the difference between the total cost of labor in the official economy and the after-tax earnings from work, the greater the incentive for employers and employees to avoid this difference and participate in the shadow economy. The difference can be very large; in Germany and Austria, for example, the tax and social security payments by firms and their workers amount to the wages that workers effectively earn. Since the difference depends broadly on the social security system and the tax regime, these are key determinants of the shadow economy.

Several studies have found strong evidence that the tax regime influences the shadow economy. In Austria, the burden of direct taxes (including social security payments) has been the biggest influence on the growth of the shadow economy, followed by the number of regulations affecting firms and workers, and the complexity of the tax system. Other studies show similar results for the Scandinavian countries, Germany, and the United States. In the United States, analysis shows that as the marginal federal personal income tax rate increases by one percentage point, other things being equal, the shadow economy grows by 1.4 percentage points. Also in the United States, holding down the top marginal income tax rate may prevent further growth of the shadow economy...

Government regulations can substantially raise the cost of labor to firms in the official economy. Such regulations include license requirements, labor market regulations, trade barriers, and labor restrictions for foreigners. Employers in the official economy who shift most of the associated additional costs on to their employees give them a strong incentive to move into the shadow economy.

In short, the informal or the shadow economy exists as a consequence to government's actions, particularly tax policies, assorted regulations, welfare programs and others.

Bottom line: The huge share by the informal or shadow economy only proves that the Philippine economy manages to grow in spite of the government. Therefore, credit is due NOT to politicians but to local entrepreneurs most especially to the shadow economy for defying all these regulatory and political obstacles.