Why The Philippine Phisix Will Climb The Global Wall Of Worries

``And this is the problem with just about every lame speech, every overlooked memo, every worthless bit of boilerplate foisted on the world: you write and write and talk and talk and bullet and bullet but no, you're not really saying anything...Most people work hard to find artful ways to say very little. Instead of polishing that turd, why not work harder to think of something remarkable or important to say in the first place?” Seth Godin, But you're not saying anything

In this issue:

Why The Philippine Phisix Will Climb The Global Wall Of Worries

-The Variable Influences Of Markets On Profits

-The Relative Effects Of Inflation To Prices And Real Returns

-Inflationism Via Deficit Spending

-The Austrian Business Cycle Applied To The Philippine Economy and Markets

-Conclusion And Short Term Outlook

IT should come as no surprise to the readers of this post that the Philippine equity benchmark, the Phisix, recently smashed its barriers to set a new 29 month high.

Simply put, this has been part of the long cycle, which we have been pointing out since 2008[1]. And not only that, we made the case that the recovery of 2009 would be anchored on today’s events[2]. Apparently the markets have been steadily validating our views.

The Variable Influences Of Markets On Profits

But what has come as a big surprise is that the recently established milestone seems to be in defiance of the prevailing doldrums seen in the global markets.

Although we have repeatedly been asserting that “decoupling” or divergences would be hard to realize (see figure 1), considering the deepening instances of globalization- in terms of trade and investment flows, labor and migration and importantly, synchronization of monetary policies - any outperformance would likely emanate from parallel, or at least, near parallel circumstances.

And where today’s markets have seen a trend towards the deepening of interrelationships, there will be little instances of disregard when local markets will be confronted by adversarial forces such as recessions from major economies, another bout of paroxysm in the global banking system and or a bear market from tightened money conditions. Here, divergences in the marketplace will hallmark exceptions, rather than the rule.

Figure 1: stockcharts.com: Tidal Flows Of Asian-US Markets

As one would note from the chart, Asian markets (ex-Japan and China) have basically exercised synchronized actions, where the motions of ebbs and flows seems to be uniform. The difference is in the extent or the degree of the surges and or the depths of the retracements. And since I can’t seem to adjust the chart on a year-to-date basis, I have instead presented this based on the available node.

Nevertheless, on a year-to-date basis, you’d be surprised to learn that emerging frontier stocks[3] have vastly outperformed the region.

Here is the pecking order of Asia’s best performers based on Bloomberg’s Asia-World Index[4] as of Friday’s close: Mongolia’s MSE Top 20 (49.32%), Bangladesh’s DSE Gen (36.76%), Sri Lanka’s Colombo All Share (28.61%), Indonesia’s JKSE (11.4%), Philippine Phisix (9.97%), Thailand’s SETI (5.02%), Pakistan’s Karachi (2.66%) and Malaysia’s KLSE (1.7%). All the rest of MAJOR Asian markets are in red led by China’s Shanghai Index (-22%).

The outlier gains can be categorized into 2 classes: Frontier South Asian markets and emerging Asia or ASEAN markets.

As a reminder, I am categorically NOT saying that decoupling can’t or won’t ever occur; that would seem like anchoring too much onto current developments. As the ubiquitous axiom goes, ‘Past performance may not guarantee future outcome’ or whatever we see today may or may not be tomorrow’s dynamics or trends. Hence interpreting today’s market activities linearly and discounting randomness is likely to be highly flawed (this should apply to perma bears).

What I am saying is that decoupling may not be ripe yet. As evidences lucidly demonstrate developed Asian markets have had tight correlations with the S&P 500, except for frontier markets and partly developing Asia.

Thereby unless we see deepening signs of “divergences” it would seem foolhardy and reckless for anyone or for any experts to allege for a “decoupling”.

Yet in a world of relative returns, where asset classes ALL compete for your or everyone else’s “scarce” money and where globalization has naturally defined boundaries, theoretically, real returns should be distinct for every country.

Globalization has its natural limits predicated on the idiosyncrasies inherent in each nation such as cultural preferences, political economic structure, political trends, degree of economic freedom, depth and sophistication of markets, demographic trends, breadth of education, quality and quantity of, as well as, access to labor, tax, regulatory and legal framework, security, maturity and effectiveness of social institutions, level of infrastructure development and many more.

And such disparateness account for as “false prices” that convey profit opportunities for entrepreneurs. Since “false prices”, according to Israel M. Kirzner[5] ``reflect the decisions of entrepreneurs who have not yet understood the correct implications of consumer preferences (present or future) for the relative values of resources today. The way in which entrepreneurial activity tends to correct such false prices is through their realization of the profit possibilities inherent in such false prices.” (bold emphasis added)

In genuinely free markets, the profit gaps tend to converge or disappear, as Ludwig von Mises wrote[6], ``If all entrepreneurs were to anticipate correctly the future state of the market, there would be neither profits nor losses. The prices of all the factors of production would already today be fully adjusted to tomorrow's prices of the products.” (bold emphasis added)

So while the proclivity of free markets has been to converge or narrow the differentials in entrepreneurial profits or as seen on real returns, the inherent obstacles to free markets function as divergent profit windows for opportunities which serve to distinguish the level of real returns.

And the variability in the performances of frontier and emerging markets vis-a-vis developed economies appear to be highly demonstrative of this phenomenon.

Since developed Asian economies have been more integrated with Western economies, the returns exhibit close correlations with the latter as compared to the less integrated economies as seen in emerging Asia and the Asian frontier markets.

The Relative Effects Of Inflation To Prices And Real Returns

Well globalization isn’t limited to only trade, finance or labor, but similarly to market’s response to the conduct of monetary policies as well (see figure 2).

Figure 2: MoneyWeekAsia[7] and ADB[8]: Annualized Total Return On Equity and Policy Rates

Yet it’s fundamentally naive to argue that markets solely reflect on the real returns from the real economy in a world of central banking or outside of politics.

As we have shown in the past, in 2007, the components of total nominal returns for the major US bellwether the S&P 500 can broken down into: 20.9% capital growth, 53.8% dividends and 25.29% inflation.

I wrote then[9],

``Notice that inflation had been a factor only since the US Federal Reserve was born in 1913. Prior to 1913, equity returns had been purely dividends and capital growth.

``And further notice that the share of inflation relative to total returns has rapidly accelerated since President Nixon ended the Bretton Woods standard by closing the gold window in August 1971 otherwise known as the Nixon Shock.

``To add, the share of inflation has virtually eclipsed the growth in real capital!!!”

And over the years, inflation as a share of equity returns has indeed been ballooning. Therefore to ignore the influence of inflation is to patently misread the markets, since inflation has been the fastest growing segment in the relative total real returns on equity markets.

And this hasn’t been a US phenomenon but a global phenomenon.

The chart in the left window of figure 3 illustrates of the contribution of inflation to the relative real returns on major global equity markets while the right window reveals of how Asian authorities responded by jointly slashing policy interest rates.

From 1900-2009, inflation composed over 50% of the annualized total returns on equity assets in Italy, Japan, Denmark and Finland, while the rest of the markets accounted for over 25%, this includes the US, except for Switzerland (CH).

Yet the mainstream misinterprets inflation as either having little effects on the real economy or having insignificant impact to earnings. This is patently false.

First of all, inflation is always political. It involves the redistribution of resources which stem from political preferences by the political instead of the consumer demands, and consequently creates favoured sectors or classes.

According to Henry Hazlitt[10], (bold emphasis mine)

``Inflation, in brief, essentially involves a redistribution of real incomes. Those who benefit by it do so, and must do so, at the expense of others. The total losses through inflation offset the total gains. This creates class or group divisions, in which the victims resent the profiteers from inflation, and in which even the moderate gainers from inflation envy the bigger gainers. There is general recognition that the new distribution of income and wealth that goes on during an inflation is not the result of merit, effort, or productiveness, but of luck, speculation, or political favoritism. It was in the tremendous German inflation of 1923 that the seeds of Nazism were sown.”

Next, the impact of inflation isn’t absolute both in terms of degree and in time scale. Instead, the effects of inflation have always been relative or dissimilar.

In other words, since inflation is a redistributive political process, groups that directly benefits from government redistribution programs are bestowed with the privilege of acquiring goods and services from yesterday’s “cheaper” prices by bidding up resources which forces up prices at the expense of those that don’t benefit from such programs.

Again Henry Hazlitt[11], (bold highlights mine)

``Inflation never affects everybody simultaneously and equally. It begins at a specific point, with a specific group. When the government puts more money into circulation, it may do so by paying defense contractors, or by increasing subsidies to farmers or social security benefits to special groups. The incomes of those who receive this money go up first. Those who begin spending the money first buy at the old level of prices. But their additional buying begins to force up prices. Those whose money incomes have not been raised are forced to pay higher prices than before; the purchasing power of their incomes has been reduced. Eventually, through the play of economic forces, their own money-incomes may be increased. But if these incomes are increased either less or later than the average prices of what they buy, they will never fully make up the loss they suffered from the inflation”

And in contrast to mainstream expectations, inflation does not impact every aspects of society at the simultaneously.

More from Henry Hazlitt[12], (bold highlights mine)

“What we commonly find, in going through the histories of substantial or prolonged inflations in various countries, is that, in the early stages, prices rise by less than the increase in the quantity of money; that in the middle stages they may rise in rough proportion to the increase in the quantity of money (after making due allowance for changes that may also occur in the supply of goods); but that, when an inflation has been prolonged beyond a certain point, or has shown signs of acceleration, prices rise by more than the increase in the quantity of money. Putting the matter another way, the value of the monetary unit, at the beginning of an inflation, commonly does not fall by as much as the increase in the quantity of money, whereas, in the late stage of inflation, the value of the monetary unit falls much faster than the increase in the quantity of money. As a result, the larger supply of money actually has a smaller total purchasing power than the previous lower supply of money. There are, therefore, paradoxically, complaints of a "shortage of money."

This uneven distributional dynamics of inflation as exhibited through the variable changes in pricing mechanism is mainly due to psychological factors based on the expectations ``concerning the future quantity as well as the future quality.”

In other words, the direction of political developments ultimately shapes social psychology which impacts inflation in the mainstream economic sense.

And this is why despite mainstream’s tautology about deflation, whether in Greece[13] or in Hungary[14] or the US[15], political economic events have been manifesting signs of emerging stagflation rather than Fisherian paradigm of debt deflation.

Inflationism Via Deficit Spending

And how has inflation been transmitted into equity assets?

We see such transmission in two major ways, one is deficit spending and the other is artificially suppressed interest rates.

Figure 3 Asian Development Bank: Fiscal Balance[16] and Yield Spread[17]

While most of the deficit spending has been attributable to infrastructure projects, perhaps some of them may have surfaced through the recently held elections, wherein part of these funds could have ended up in the local equity markets.

In the Philippine Stock Exchange, among the sectoral indices, it is the Holding index which has posted the most significant increase (up 40.49%) as of Friday’s close on a year-to-date basis, whereas the Phisix is up only by 9.97%.

And many of the component issues in the index are involved in infrastructure directly or indirectly, e.g. Aboitiz Equity Ventures (+122%), Ayala Corp (+7.44%), SM Investments (27.69%), DMC Holdings (72.68%), JG Summit (134.82%), Benpres Holdings (8.57%) and Metro Pacific (11.54%).

Nevertheless, for a local expert[18] to predict for an economic slump arising from the slack in deficit spending signifies as sheer nutcase. If printing money has been the solution to all social problems then people need NO reason to work, save and invest and Zimbabwe would have been the most prosperous in the world.

Yet such presumptuousness exhibits Kip’s Law where “Every advocate of central planning always — always — envisions himself as the central planner” and is symptomatic of the arrogance of omniscience. Friedrich A. Hayek demeans such haughtiness as “Fatal Conceit”, where he says, ``The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design”

I find Hayek comments almost accurate, as most high profile liberals, seen in media foreign or local, can’t even predict the markets accurately or has used “fear” or “pessimism” to argue for more interventionism and inflationism in order to uphold their personal or their corporate interests.

The same holds true for bureaucrats, most of them can’t prosper through markets and instead opted to use pretentious expertise to get employed in governments and have their personal interests bankrolled by taxpayers, all in the name of public service.

The Austrian Business Cycle Applied To The Philippine Economy and Markets

Going back to the second channel where inflationism appears to be taking place is in the suppressed level of interest rate.

An artificially lowered interest rate regime is a policy that punishes savers and creditors in favour of debtors. Low interest rates essentially fuels boom bust cycles. By engendering false signals through makeshift appearance of a deluge of savings, artificially suppressed rates entices businessmen to undertake long range investments, but which are not aligned with consumer preferences. Hence, such undertaking would account for as “malinvestments”.

Under free markets conditions, where rates are determined by consumer preferences, such projects won’t emerge since they won’t be viable.

And such malinvestments would run in conflict with the consumers who would use false signals from low interest rates to expand consumption.

And the ensuing collision between short term oriented consumer preferences and long term investments leads to a race to consume resources which eventually results to higher prices, higher interest rates and an eventual bust.

Thomas E. Woods Jr. observed of the typical Austrian Business Cycle in the “Forgotten depression” of the 1920s[19], (bold highlights mine)

``When the market's freely established structure of interest rates is tampered with, this coordinating function is disrupted. Increased investment in higher-order stages of production is undertaken at a time when demand for consumer goods has not slackened. The time structure of production is distorted such that it no longer corresponds to the time pattern of consumer demand. Consumers are demanding goods in the present at a time when investment in future production is being disproportionately undertaken. Thus, when lower interest rates are the result of central bank policy rather than genuine saving, no letup in consumer demand has taken place. (If anything, the lower rates make people even more likely to spend than before.) In this case, resources have not been released for use in the higher-order stages. The economy instead finds itself in a tug-of-war over resources between the higher- and lower-order stages of production. With resources unexpectedly scarce, the resulting rise in costs threatens the profitability of the higher-order projects. The central bank can artificially expand credit still further in order to bolster the higher-order stages' position in the tug of war, but it merely postpones the inevitable.”

Today, the artificially low interest rates in the region, has prompted the Philippines to account for the steepest yield curve (chart 3 right window). The Philippines has been followed by Indonesia in 2009 and by Hong Kong, India and Singapore in 2010.

A steep yield curve usually prompts for financial institutions to engage in maturity transformation where they “borrow short-lend or invest long” or the conversion of short term liabilities into long term assets[20].

And it is no coincident that Indonesia has outperformed the region followed by the Philippines in terms of today’s stock market performances while there have been ongoing concerns over brewing property bubble risks in Hong Kong[21] and Singapore[22].

Meanwhile, India has raised interest rates for the second time[23] along with China and Brazil as Indian authorities have been fretful of economic overheating as credit growth[24] has accelerated.

One very important distinction why credit response have been gaining traction in Asia compared to her contemporaries in developed economies has been due to numerous factors, which as we have previously mentioned[25], consists of “low systemic leverage, high savings rate, unimpaired banking system, current account surpluses, a trend towards deepening regionalization and integration with the world economy.”

In the Philippines, I have been receiving loan offers via text or via call center agents in countless times over a given week. This anecdotal evidence perhaps could be representative of the (yield curve) incentives guiding the domestic banking industry today.

Nevertheless, the impact of low interest rates have been almost clinically precise, according to how the Austrian Business cycle model should operate, credit growth is seen widespread, in domestic consumer loans[26] (+8%), automobile loans[27] (22.1%!), real estate loans[28] (+4.9%), credit card receivables[29] (+4%), the banking industry’s exposure to real estate[30] (+9%) and other consumer related loans[31] (+5.9%) have been variably higher on a year to date basis.

All these seem to exhibit incremental growth in long term investments (via housing or the property sector) and simultaneously an increase in consumer durable consumption via bank loans.

So credit growth alone seems more than enough to provide “traction” into the economic growth cycle which doesn’t merit more fiscal spending. Yet if a full blown bubble cycle occurs sometime in the future, where a bust is the endgame, the country will be out of ammunition to conduct policy based “automatic stabilizers” if government spending continues to swell today.

Let me further drive the point that one possible reason why the Phisix appear to be resilient is that the trend of foreign uptake has been diminishing.

In the recent past, I have demonstrated[32] how the share of foreign trade have diminished from more than 50% in (2003-2007) to about 30-40% today.

Yet in contrast to claims where foreign houses have been bullish and where foreign money are expected to balloon, the fact is, we seem to be seeing little participation from foreigners during this run (see figure 4), except for some occasions.

Figure 4: PSE: Year To Date Net Foreign Trade In (Thousands)

My guess is that foreign appetite for Philippine stocks will become apparent when the US dollar index starts to decline. And once foreign money comes in this will be a huge boost to the domestic market.

So streams of evidences suggest to us that locals have been very responsive to the monetary stimulus from an artificially low interest rate regime.

Of course the icing to the cake will always be psychology.

And people subliminally entranced by a low interest rate regime will always look for rationalization or resort to assorted cognitive biases to justify their actions, whether it is politics—“hallelujah a New incorruptible regime!!!” or through attractive valuations (see figure 5).

Figure 5: Money Week Asia[33] and ADB: P/Book Ratio (ex-Japan) and PER (Asia)

Experts may argue that low price to book ratio and modest Price Earnings Ratio for Asia would make her a buy.

The point is inflationism creates an illusion of prosperity by inflating asset bubbles in domestic market such as in the Philippines or in the Asian region, which eventually would exact toll on the society. The normative outcome of any bubble bust would be high rate of unemployment, output and capital losses, political turmoil, aside from a lowered standard of living via more incidences of poverty.

Yet many will be unaware of how these dynamics influence the real economy via market price signals and distortions in the economic structure.

On the sidelines I’d like to add that once the new Philippine President assumes office, my bet is that popularity ratings will decline as people’s “sanguine” expectations will be envisaged with political reality. However the rate of decline is something we can’t foretell.

We seem to be seeing this today in the US, and an even worst episode recently just took place in Japan, where Yukio Hatoyama[34] the former Prime Minister (PM), because of an astounding nine month collapse in popularity ratings, was forced out and had been replaced by newly elected Naoto Kan[35], who now serves as the 5^th PM in about three years!

None the less, declining popularity ratings of political leaders and stock market performances have had little correlations. Although, a seemingly attractive subject, this would make for a good discussion sometime in the future.

Conclusion And Short Term Outlook

Free markets tend to converge or merge real returns.

On the contrary, inherent obstacles to free markets serve as profit windows for entrepreneurs which prompt for “divergences” in real returns.

Such obstacles include monetary policies, which are innately inflationist or politically oriented. Thus the more inflationist a political economy is, in theory, the more “divergent” in real returns.

Yet unknown to many, inflation has continually been expanding its role in moulding real returns among risk assets, including the equity markets, across the world which ironically has been integrating via trade, investments, labor and even through coordinated monetary policies (which not only incorporates interest rates but also currency swaps[36]).

As such, inflationism and globalization have been two major but antipodal forces at work in today’s marketplace.

Hence, inflationism is being transmitted on a global scale which appears to fuse the performances of markets through tidal ebbs and flows.

So discussions over decoupling and recoupling could be construed as relative issues depending on the frame used based on these two major forces at work.

The Philippine Phisix has outperformed the market of late because local monetary policies seem to be quite effective in redirecting the public’s incentives towards absorbing more credit from an industry incented by a steepened yield curve, from an economic system with less systemic leverage and a financial system least affected by the previous global bust.

Figure 6: stockcharts.com: Divergence between The Phisix and the US S&P 500

Moreover, locals have assumed leadership in daily transactions in this cycle in contrast to the previous. And this seems likely a testament to a broad credit expansion dynamic taking place.

An outlier occurred last week where the Phisix, pole-vaulted even as US markets fell significantly last Tuesday (see figure 6-blue circle). The net result looked like a short-term decoupling!

We are not sure if such dynamic will hold as US markets sharply swooned last Friday and whose aftershocks are still to be felt and digested by the local and regional markets on the opening bell tomorrow, Monday.

My guess is that if the impact would be much less than the losses in the US, then the resilience would likely be sustained. Besides, it would seem natural for the Phisix to pause following two weeks of hefty turbocharged advances.

What’s more, I am not convinced that global markets are due to fall apart for reasons I explained last week[37] which needs no repetition.

Yet if there might be any particular major force behind the spate of weaknesses, it’s likely because the US Federal Reserve has been offloading both US mortgages over the past 3 weeks, along with some US long term treasuries (for this week only), which have been part of the recently closed “credit easing” /Quantitative Easing program.

Figure 7: Cleveland Federal Reserve: Credit Easing Tools

In short, the US markets could be reflecting the adjustments from the trial exit strategies being stealthily implemented by monetary officials, and sustained adverse actions in the markets are likely to prompt for them to desist, and at worst, reopen these defunct credit easing programmes.

The fact that markets have been fumbling to explain current losses (Greece, China, Goldman, US unemployment and now Hungary) could simply be signs of cognitive dissonance. This makes risks of a double dip recession and or risks of contagion from the Eurozone debt crisis not as significant, as seen by the perma bears.

Moreover, it would be misplaced to argue that current interest rates reflect on the natural rate[38] for the simple reason that whether the short end or the long end, as shown by the above table, central banks have been major influences in determining the yield curve.

Figure 8: Danske Bank: Credit Spreads[39] and Leading Indicators[40]

Finally, current market turmoil could also be indicative of a peaking of an overstretched growth momentum as seen in the OECD leading indicators (lower left window) and in the survey of new manufacturing orders in major economies (lower right window).

Again, despite the current string of market turmoil, we seem to be seeing little repetition of a severe credit squeeze similar to that of 2008 (upper windows) in major credit indicators.

Given all the above, the odds seem in favour of a sustained upside ascent for the Phisix at least until the end of the year, possibly in fulfilment of the loose monetary fuelled Presidential Honeymoon cycle which will likely be interspersed with retracements (like on Monday). And such weaknesses should serve as buying windows.

---

[1] See Focusing On The Future: the Phisix and the Philippine Presidential Cycle

[2] See 2009: Phisix and Peso Will Advance!

[3] Frontier markets are a subset of emerging markets, where the difference compared with developed emerging markets lies in the liquidity market depth or market depth, market capitalization and lower correlation. See Wikipedia, Frontier Markets

[4] Bloomberg World Index, Asia

[5] Kirzner, Israel M. Reflections on the Misesian Legacy in Economics, Mises.org

[6] Mises, Ludwig von, Entrepreneurial Profit and Loss, Chapter 15 Section 8 Human Action

[7] MoneyWeekAsia, Why Asian currencies will keep going up Interest rates will have to rise in Asia

[8] Asian Development Bank, Capital Markets Monitor, May 2010

[9] See Worth Doing: Inflation Analytics Over Traditional Fundamentalism

[10] Hazlitt, Henry Hazlitt, What You Should Know About Inflation p.130

[11] Ibid

[12] Hazlitt, Henry The Velocity of Circulation

[13] See Is Greece Suffering From Deflation?

[14] See Is Hungary Suffering From Debt Deflation?

[15] See Where Is Deflation?

[16] Asian Development Bank, Bond Monitor March 2010

[17] Asian Development Bank, Capital Markets Monitor, May 2010

[18] Inquirer.net, RP economy headed for slump, says former national treasurer

[19] Woods, Jr. Thomas E., The Forgotten Depression of 1920

[20] Wikipedia.org, Financial Intermediary

[21] Marketwatch.com, Is Hong Kong ready for reverse property bubble?, February 28, 2010

[22] The Temaske Review When will Singapore’s public housing bubble burst?, February 28, 2010

[23] Investors.com, Money Policy Tightens In Brazil, India, China, June 1, 2010

[24] Business Standard, Bank credit up 18%; infra sector gets lion's share June 3, 2010

[25] See What Has Pavlov’s Dogs And Posttraumatic Stress Got To Do With The Current Market Weakness?

[26] Bangko Sentral ng Pilipinas, Consumer Loans Reach P417 Billion in First Quarter 2010, June 4,2010

[27] Bangko Sentral ng Pilipinas, Automobile Loans Up by 5.5 percent From Last Quarter, June 4,2010

[28] Bangko Sentral ng Pilipinas, Residential Real Estate Loans Up By 3.5 Percent From Last Quarter, June 4,2010

[29] Bangko Sentral ng Pilipinas, Credit Card Receivables Stand at P130.7 Billion in First Quarter of 2010, June 4,2010

[30] Bangko Sentral ng Pilipinas, Exposure to Real Estate Sector Up 1.8 Percent in 1st Quarter, June 4,2010

[31] Other CLs refer to loans granted to individuals to finance other personal and household needs such as purchase of household appliances, furniture and fixtures and/or to pay taxes, hospital and educational bills. Bangko Sentral ng Pilipinas, Other Consumer Loans Stand at P39.2 Billion in First Quarter 2010, June 4,2010

[32] See External Developments Are Prime Movers of Philippine Markets

[33] Money Week Asia, Why Asian currencies will keep going up Interest rates will have to rise in Asia

[34] See How Populist Leadership Goes Kaput: Japan Edition

[35] Reuters, Obama calls to congratulate Japan's PM-elect Kan, June 5, 2010

[36] Businessweek, South Korea Urges Central Bank Currency-Swap System, May 30, 2010

[37] See Why The Current Market Volatility Does Not Imply A Repeat Of 2008

[38] See Does The Yield Curve Reflect On The Natural Rate Of Interest?

[39] Danske Bank, Weekly Credit Update, June 4, 2010

[40] Danske Bank, Global: Business Cycle Monitor, June 2, 2010

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.