Inflation And Stock Market Valuations

``A prediction, which makes judgments which are qualitative only and not quantitative, is practically useless even if it is eventually proved right by the later course of events. There is also the crucial question of timing. Decades ago, Herbert Spencer recognized, with brilliant perception, that militarism, imperialism, socialism and interventionism must lead to great wars, severe wars. However, anyone who had started about 1890, to speculate on the strength of that insight on a depreciation of the bonds of the Three Empires would have sustained heavy losses. Large historical perspectives furnish no basis for stock market speculations which must be reviewed daily, weekly, or monthly at least.- Ludwig von Mises, The Causes Of Economic Crisis

It’s been repeated here that inflation has been emerging as the most pivotal factor in driving the pricing and real returns of equity investments[1] or for that matter all other investment activities.

That’s because monetary policies shape the incentives of entrepreneurs in the allocation of resources on the marketplace. Monetary policies also help determine consumption habits of the consumers. Low interest rates, for instance, entice consumers towards an increase in time preferences by indulging in “conspicuous consumption” financed by credit. On the other hand, low interest rates beguile investors to take upon long horizon projects in the expectations of the constancy of such environment which should provide them attractive returns.

Therefore, by influencing price signals, monetary conditions from central bank policies drive business conditions, which influence all other factors including, capital inputs, operating costs, wages, earnings, revenue streams, consumption patterns and etc. Importantly, such falsified pricing signals propel malinvestments which leads to boom bust cycles.

Yet monetary policies have relative effects that creates conflicts over the flow of funds relative to production and to stock markets,

According to Mr. Ludwig von Mises[2], (bold highlight mine)

``Another case, when control of the money market is contested, concerns the utilization of funds made available to the market by the generous discount policy. The dominant ideology favors “cheap money.” It also favors high commodity prices, but not always high stock market prices. The moderated interest rate is intended to stimulate production and not to cause a stock market boom. However, stock prices increase first of all. At the outset, commodity prices are not caught up in the boom. There are stock exchange booms and stock exchange profits. Yet, the “producer” is dissatisfied. He envies the “speculator” his “easy profit.” Those in power are not willing to accept this situation. They believe that production is being deprived of money which is flowing into the stock market. Besides, it is precisely in the stock market boom that the serious threat of a crisis lies hidden.”

Here Mr. Von Mises speaks from the empirical operating conditions during his period, where agriculture remains a large part of the national economy. Although current conditions would reverse the ‘ideological’ priorities, i.e. favouring higher stock markets than higher commodities prices given the larger share of financial industry to the economy, the important message here is that the stock market and production are both highly influenced by monetary conditions and compete in placement of funds.

Therefore it would be misguided to presume that stock markets operate independently from business conditions, or that business conditions are inherently stable so as to narrowly focus on micro barometers such as price earning ratios, book value, debt to equity, return on assets or etc...

Aside from monetary policies, there are massive differences in the structural composition of a political economy that affects real returns (see figure 6)

Figure 6: World Economic Forum[3]: Enabling Trade in Greater Asia

An example can be found on the chart above (higher window), based on imports procedures (or bureaucratic red tape) and irregularities (or corruption) the Philippines ranks as the most bureaucratic and most corrupt among the ASEAN contemporaries. Note the differences of bureaucracy and level of corruption.

In addition, based on the quality of infrastructure (lower window), the differences of the stages of development is noteworthy.

And the nuances are not limited to these, there are many other variables at work, such as degree of market access, regulatory environment, tax regulations and tax rates, access to financing, access to labor, access to communications, foreign currency regulations, labor regulations, policy instability, security, legal framework, efficiency of social institutions, respect for property rights, degree of economic freedom and etc...

Therefore, the greater complexity of regulations translates to lesser efficiency in the marketplace. Alternatively, this means greater complications in establishing the cost-and-return tradeoffs. So why the heck would these economies suffer from lack of investments and high unemployment, if not for the lack of clarity on returns?

Yet the most important factor would be the political spectrum, which ultimately determines how resources are distributed in an economy. For instance, in a closed and highly regulated economy (I am thinking Venezuela), where the distribution of economic opportunities is channelled mainly through politics, returns are determined NOT by market forces but by political connections or concessions. Hence it would be naive and highly erroneous to oversimplistically apply PER, Book Value, debt equity or etc... simply because political privileges determine returns, and at worst, risk money could be arrogated out of political considerations because of the despotic tendencies of the leaders.

So an applicable rule of thumb--micro barometers are dependent on the degree of the market economy, where the more open an economy is, the more reliable these tools are and vice versa.

Bottom line: Oversimplistic assumptions based on equal application of models can be fatal because each markets, like individuals, has their own thumbprint.

MacroAsia Corporation and the Machlup-Livermore Model

MacroAsia Corporation (MAC) is likely to be a good example of what I have been talking about. Figure 7 accounts for the financial highlights of MAC along with the stock price performance.

Figure 7: MacroAsia Corporation[4]

The reason I chose MacroAsia (MAC) is due to its pleasant updated presentation of the financial highlights. As disclosure, I presently don’t own any MAC shares, although it has been part of my watchlist.

MAC is owned by one of the entrenched economic elite, tycoon Lucio Tan. The company is into what we call as “pick and shovel” play or secondary exposure to the airline industry.

Its main business is in-flight catering, ground handling, airline repair and maintenance services, property rental, supply chain management and charter services. The company has also major mining Nickel Lateral claims or concessions in Palawan which currently is undergoing exploration.

The company has one impressive balance sheet; it is very cash rich, has minimal debt, has steady top and bottom line growth, which has virtually been unscathed by the 2008 crisis, issues regular dividends and has a great moat (a monopoly (?) in its industry).

Yet if one looks at the financial graph all indicators have been pointing upwards, since 2005.

However the stock prices seem to be saying differently, MAC has seen a 50% collapse on a peak-to-trough basis even when financial conditions have NOT been affected!

And importantly, since the trough of 2008, MAC’s stock prices has traded for over one year at virtually the same level when the Phisix has jumped by nearly 100% since the 2008 nadir!

Does MAC’s corporate fundamentals reflect on the stock prices? The answer is NO. What has driven MAC’s prices has been the boom bust cycle. MAC belatedly boomed at the near climax of the bull market of 2007 and consequently fell when market sentiment collapsed along with all the rest. Hence, it is safe to discern that MAC’s financial and corporate conditions and stock prices have basically been disconnected.

One would object that, if inflation drives stocks why has MAC’s prices been stagnant? Well the answer to that is that inflation does not impact every issue simultaneously nor does it impact all issues to the same degree. Inflation’s impact is always relative.

Also, since inflation has a psychological aspect, applied to stock markets, stock prices are likely to be driven by fancy storytelling, rationalization, jockeying, the chase for yields and operating rotational effects within the market.

This implies MAC will surely rise sometime in the future, in condition that the advances of Phisix will continue. MAC will then be a beneficiary of the rising tide phenomenon (but perhaps at a much later date?).

Therefore, we have another proof that validates our Machlup-Livermore model.

Finally, from the storytelling department, of course MAC has a great future. If tourism will boom in Asia, as we expect, considering the wealth transfer dynamics from the West to the East, then MAC will definitely be a major beneficiary, since there hardly has been any competition. Let me add that I’m not sure why there hasn’t been a competitor, I would suspect that perhaps political concession could be a factor. Lastly, there is another bonus, the mining department, but full operation will probably commence sometime in the future.

Yet none of this glorious tale is new.

---

[1] See Why The Philippine Phisix Will Climb The Global Wall Of Worries

[2] Mises, Ludwig von Mises The Causes of Economic Crisis, p.165

[3] World Economic Forum Enabling Trade in Greater Asia

[4] MacroAsia Corporation Corporate Website

Philippine Sports: The Craze For Basketball And The Lack Of Interest In The World Cup

``Almost everywhere on the planet, people on Friday were stocking up on beer and food and readying themselves for long hours in front of the television set as football’s World Cup mania hit fever-pitch with the opening matches in Johannesburg, South Africa.”

This is from the Inquirer, who observed of the Filipinos’ lack of interest with the international football games.

The same article rationalizes such indifference...

``Fegidero said the continued failure of the Philippines to compete in major tournaments abroad had been the main reason football had not picked up here.

“We’re nowhere near the level of the world’s best teams, even in Asia, which is considered a weak continent in football,” he explained.

``The Philippines has never qualified for the World Cup since 1930, when the quadrennial meet began.

``This year, the country was only one of four countries that did not even bother to join the qualifying series for the tournament. The other three were Bhutan, Brunei and Laos.

“We don’t have the programs that can produce good players who can compete internationally,” Fegidero said. “We lack participation in international tournaments and local leagues.”

The Philippines has been obsessed with basketball, a sport, which unfortunately, we fail to excel in and continues to see rapid deterioration in performance based on the global or even regional competition standards.

The losing glory of Philippine men's basketball performance in the Asian Championship and the Asian Games, shown in the above table, where from the triumphant days in 60s to the early 70s, our competitive ranking continues to plunge, as time goes by.

But as consolation, at least based on South East Asia, we still remain dominant. (both charts from wikipedia) But the question is, given the underlying trend, for how long will this last?

Maybe we should ask first why Filipinos have been so fixated with a sport which we can't seem to win internationally due to structural reasons (lack of height)?

Yet this has been the case in spite of the active "participation in international tournaments and local leagues" in basketball, opposite to the reasoning of the expert as quoted above by the Inquirer article.

To consider, Philippine basketball teams have been complimented with Fil-Ams or Filipino Americans to fill in on the endemic height handicap, yet this has not been enough to reverse the degenerating trend.

The point is, it doesn't seem to be the lack of programs that determines the lack of acceptance of the World Cup. Instead, it is the lack of incentives brought about by the undue obsession on an unviable or unwinnable sport (basketball) and the attendant misdirection of investments that continues to feed on such delusion.

I see three reasons why Filipinos can't move away from basketball, in spite of the harsh reality that this is a sport which we simply can't compete in globally.

One, it seems a form of status signalling, which misleads Filipinos to believe that basketball is an irreplaceable cultural or social norm that needs to be conformed with. Otherwise said, to be IN (or to be identified as Filipino) means to patronize basketball in one way or another.

Second, it is part of the Groupthink fallacy, which Filipinos seem so entranced with.

According to Gloria Allendorfer Anderson, PhD., ``One of the dangers of our world today is group-think. It occurs as a person lets identification with a group cloud their reasoning and deliberations when reaching a position on a given issue. At best, it is a rhetorical device. At it's worst, it can be a very harmful replacement for sensible thought. In fact, it is considered one of the common fallacies of modern society." (emphasis added)

And groupthink is part of what shapes social or cultural norm, adds Ms. Anderson,

``When individuals identify with the state where they live, or a country of their heritage or origin, they relate to other individuals from the same state or country in their views of the world around them. This type of group identification indicates that they are part of a group of people who share the same life experience."(emphasis added)

Lastly basketball is a political sport or a sport used by politicians to attain political goals.

Basketball courts are one of the pet projects for pork barrel spending of local officials bent on achieving "accomplishments" for reelection or posterity or for financial purposes.

According to Gary W. Elliott,

``This year each of the 214 congressmen is allocated 60 million pesos (roughly USD1.5 million) for spending at his discretion, and each of the 24 senators receives twice that amount. With no real oversight or accountability, this institution is rife with corruption. Some of the funds intended for priority development projects in the congressmen’s districts, such as health care, clean water, and poverty alleviation, are typically spent on trivial projects which contribute nothing to the social and economic development of the country. Common examples are cement outdoor basketball courts and “waiting sheds,” small awnings or covered benches beside roads, where those waiting for a bus can get out of the rain. Large signs laud the congressman for spending government funds on the project (instead of just pocketing them?). Such projects are often accomplished just before elections, so signs touting the congressmen provide free campaign advertising for those seeking re-election." (bold highlights mine)

Since a basketball court has more player density per unit area, adding more courts on the local level draws in greater number of people to the sport. One may say that this is an example of Keynes' misinterpretation of Say's law where "supply creates its own demand"

So massive grassroot political investments in basketball courts impels more patrons relative to the other sports, hence more patrons translates to cultural acceptance, and the unwarranted fixation to basketball, in spite of the inherent handicaps, in terms of global standards. So goes the feedback mechanism driving the dynamics of basketball as a political sport.

So in my view, domestic politics represent as one of the key obstacles (if not the key hurdle) to the lack of diversity of Filipinos to engage in other more internationally competitive sports such as football.

World Cup Indicator: Boon Or Bane?

Will the World Cup games, which opened yesterday, portend of a bullish or bearish markets for the coming months?

Frank Holmes of US Global Investors argues that this should be bullish, especially from the perspective of the host country, i.e. South Africa...


So as with mint.com...

Pls click here to redirect link to mint's site to see a crispier image.

But Bespoke Invest sees the historical correlation as "negative"....

According to Bespoke, "both the US and world markets have averaged declines over both periods throughout history. The S&P 500 has averaged a decline of 1.65% during all 18 prior World Cups, and a decline of 0.37% in the three months following. The MSCI World Index, which we only have back to the 1970 World Cup, has averaged a decline of 1.25% during and 4.34% over the following three months. Historically the market has averaged gains over one- and three-month periods, so indices have definitely underperformed during World Cups. Most fans of the sport would take a couple months of declines in the market if it meant their country would win, however."

To my mind, historical patterns are not reliable measures in assessing market prospects because they can be positive and negative depending on the prevailing market and economic conditions then.

Instead, these indicators appeal to people who are only looking for patterns either to confirm their biases or to rationalize market actions.

Besides, major sporting events as the World Cup or the Olympics can only give a temporary boost to the economy. But on a larger picture such events could entail greater costs from the crowding out effect from inefficient government spending relative to private sector investments. In short, gains can be "exaggerated".

As Leander Schaerlaeckens at the ESPN writes, (bold highlights mine)

``People who are excited about hosting a World Cup, write Szymanski and Simon Kuper in "Soccernomics," "are merely expressing in extreme form a conventional belief: that hosting a big sports event can make a place rich."

``In truth, write the authors, while World Cups don't produce much monetary gain, they have been shown in several studies to be good for general happiness among the hosting population and a country's self-esteem. Thabo Mbeki, South Africa's president until September 2008, declared in a speech that the tournament would be "sending ripples of confidence from the Cape to Cairo." It doesn't look bad for a politician looking to get re-elected, either.

"FIFA and the Olympics all enjoy monopoly standings," Baade said. "And that permits them to foist enormous economic cost on those that compete for mega-events like the World Cup. They're in a position to expropriate public funds. The argument is made that we're going to bring in so many non-native spendthrifts that that will offset the expense of stadiums, but there's very little evidence to support that."

``Chances are that like many predecessors South Africa will eventually discover that hosting the World Cup was a poor choice, at least from a financial viewpoint. But by then, FIFA will have moved on to flattering some other country into believing it should pour the money it doesn't have into hosting another glorious edition of the World Cup."

As always, the temporal 'self-esteem' gains are skewed mostly towards grandstanding politicians. And at the end of the day, if revenues expected are not fulfilled, then the carrying costs of the 'country's self-esteem' will eventually be borne by the taxpayers.

In the Philippines, this is called the fiesta mentality.

An Upbeat Global Employment Picture

The prospects for global employment seems to be materially improving, that's according to the Economist.

The Economist writes, (bold highlights added)

``FEARS of a “jobless recovery” in the West have abounded ever since the world economy returned from the abyss last year. For some, the latest quarterly survey from Manpower, a global employment-services company, brings timely good news. Of the 36 countries included in Manpower’s survey, employers in 30 of them are increasingly bullish about their hiring plans for the next three months compared with the third quarter of 2009. Only in five countries, all of them in debt-laden Europe, are employers expecting negative hiring activity over the next quarter. This compares favourably, however, to the seven European countries with a negative outlook just three months ago. The survey suggests that the BICs (Brazil, India and China) bounce will continue. The three countries, along with Taiwan, report the most positive hiring plans in the survey, with China reporting its strongest hiring plans since the survey began there in 2005."

Unlike the mainstream, I'm not a stickler of "employment" as the key measure of economic progress, because employment is just one of the many factors that contribute to capital accumulation or economic prosperity.

But if the survey is accurate then much of the world seems now on a mend or on an accelerating phase of cyclical recovery.

Bloomberg Poll: BRIC Lose Out To US As Top Investment Choice

I don't know how accurate this Bloomberg's poll is, but according to them, the US has supplanted the BRIC as top investment choice.

Read the article here.

Update On Global Stock Market Performances

Bespoke has a nice update on the performances of global stock markets as of June 9th...

Bespoke Invest notes,

``While most of the world is struggling, there are 8 countries that are within 1.7% of 52-week highs. Sri Lanka, Chile, Bangladesh, and Venezuela are all basically at 52-week highs. Of the G-7 countries, Germany and Canada are closest to their 52-week highs at about -6%. The US ranks third out of seven at -12.74%, followed by Britain (-13.41%), France (-16.41%), Japan (-17.26%), and Italy (-23.63%). It's not surprising to see Greece the farthest from its 52-week high at -50.15%. Other key countries that are more than 20% away from their 52-week highs include Russia, China, and Spain.

``In terms of year to date performance (local currency), Bangladesh ranks first at +36.59%, followed by Estonia (32.86%) and Sri Lanka (31.87%). Of the G-7, Germany is doing the best with a decline of just -0.05%, followed by Canada at -1.74% and the US at -4.49%. Of the BRIC (Brazil, Russia, India, China) countries, India is holding up the best so far in 2010 with a decline of 4.62%. Brazil ranks second at -6.67%, followed by Russia at -7.54% and then China at -21.15%. Greece (-33.44%), Bermuda (-28.33%), and Spain (-26.55%) are down the most of any countries year to date."

I'd like to point out that the Philippines has been ranked 8th based on the change from a 52-week high. And that major ASEAN economies appear to defy the global selling pressures by posting year-to-date gains and seem within 'striking' distance from the 52-week highs.

I'd also like point out that Venezuela which suffers from stagflation is nearly at the 52-week high (who says stocks are about the economy?).

Meanwhile the top performers on a year to date basis have mainly been frontier markets whose subset are South Asia, Africa, and some CEE economies.

Of course one surprise is Denmark, the only major "developed" economy, who seem to have diverged from the fate suffered by her contemporaries. The Danish equity index is up 16.41% (y-t-d) and is just 6% away from the 52 week high. Denmark appears unruffled by the recent most Euro pressures.

Overall, although the general backdrop is one of "tidal" flows, there are apparent emerging incidences of "decoupling" especially visible among emerging markets.

Technology Curve: Is Mobile Commerce The Future?

Morgan Stanley's Mary Meeker thinks so. She has convincing evidence to prove her case, as shown in the presentation below. (hat tip: Research Recap)

According to Cecilia Kang of the Washington Post,

``Among the factors that are driving the mobile Web, Meeker said, 3G wireless data networks rank most highly. All major carriers introduced 3G access for Android phones, the iPhone, Blackberry and Palm Pre this year, making mobile Internet use mainstream at 20 percent of all wireless users, Meeker said. There has also been an explosion of Wi-Fi connection hot spots.

``Advertising may finally be set to take off on the Internet, she said. People are spending more time on the Web – more than they do reading print publications or listening to the radio. (But not as much as TV, which still dominates.) But even as users spend 28 percent of total entertainment time on the Internet, advertisers only spend 13 percent of their budgets on the Internet. That represents a $50 billion opportunity, she said, that advertisers are starting to seize." (emphasis added)

In my view this is one of the positive forces, along with globalization, that counterbalances the risks of bubbles from government policies.

Internet Trends 2010 by Morgan Stanley Research

View more presentations from CM Summit: Marketing in Real Time.

The Myth Of Risk Free Government Bonds

Bruce Krastings at the Zero Hedge has an interesting story to tell.

It's essentially about the sordid fate of Hungary's bearer bonds of 1924.

"Fifty years later the $500 of principal and the $1,250 of accrued interest were worth $40.", says Mr. Krastings.

Read the rest here

Yet the global banking system have been designed to hold government bonds as risk free assets and core holdings on their balance sheets. This bias towards "risk-free" government bonds effectively translates to subsidies to governments.

As Cato's Mark Calabria explains,

``Under Basel, the amount of capital a bank is required to hold against an asset is a function of its risk category. For the highest risk assets, like corporate bonds, banks are required to hold 8%. Yet for those seen as the lowest risk, short term government bonds, banks aren’t required to hold any capital. So while you’d have to hold 8% capital against say, Ford bonds, you don’t have to hold any capital against Greek debt. Depending on the difference between the weights and the debt yields, such a system provides very strong incentives to load up on the highest yielding bonds of the least risky class. Fannie and Freddie debt required holding only 1.6% capital. Very small losses in either Greek or GSE debt would cause massive losses to the banks, due to their large holdings of both." (bold emphasis added)

So unless we see a change in the mandated treatment of government bonds, which implies that subsidies to governments will need to be slashed, we will only keep jumping from one crisis to another, as shown in the chart below from the World Bank, where the incidences of banking crisis has ballooned post-Bretton Woods US dollar-gold standard.

In short, crisis are products of the inflationary central banking based-fiat money standard.

As Ludwig von Mises reminds us, ``It is always an inflationist policy, not economic conditions, which bring about the monetary depreciation. The evil is philosophical in character."

Lefties Flunk Economics

Daniel Klien in the Wall Street Journal writes, (hat tip: Mark Perry)

``Who is better informed about the policy choices facing the country—liberals, conservatives or libertarians? According to a Zogby International survey that I write about in the May issue of Econ Journal Watch, the answer is unequivocal: The left flunks Econ 101...

Why? Because ``the left has trouble squaring economic thinking with their political psychology, morals and aesthetics."

Read the rest here.

For me, the best explanation for this can be found from Immanuel Kant-- "I had therefore to remove knowledge, in order to make room for belief."

It's Official: It's A Rule Of The Significant Minority!

It's official, it's a rule of the significant minority!

The Philippine congress has finally ended the tabulations for the top post, where Noynoy Aquino and Jejomar Binay will duly be proclaimed.

See table below from Inquirer.net.

For President

For Vice President.

The official tally ended up short than my estimates.

Here is what I wrote earlier, ``With a 90.2% of the total votes tabulated, where candidate Noynoy Aquino holds a commanding lead with 13,841,583 votes, I estimate the final tally to reach 15.3-15.5 million. This should reflect a little over 40% share of total voter turnout." The final score: 15.2 million.

But voter turnout surprisingly was even much lower than declared by media at the onset of count, we said, ``total voter turnout of the recently concluded elections, at 38 million, represents 75% share of the total registered voters, which according to the Business Mirror, had been the highest since 1978"

Based on the above using the highest figures, total turnout is only at about 72%.

We also noted, ``According to the NSCB, there are 50.7 million registered voters and 56.21 million projected voting population."

``This only means that Mr. Aquino’s share of votes would be reduced or extrapolated to only signify 30.5% and 27.56% of the population, respectively."

The official figures reduces these to 29.9% and 27.01% share, clearly a rule of the minority.

Last point, 19.8 million voters didn't vote (56.21 million-36.32 million) during this election. And this is substantially far more than the 15.2 million votes generated by the winner.

Bottom line: What people see is the actions of those whom have participated, what people don't see is the actions of those whom have not participated.

As American civil rights activist Jesse Jackson once said, ``In politics, an organized minority is a political majority."

Prospective Philippine Stock Market 'Decoupling' Due To "Economic Success"?

One suggestion is that a "decoupling" of the Philippine assets with the US is likely for reasons of relative "economic success".

I doubt the cogency of this premise, for the simple reason that the rigidities from the current political economic structure has been rendering the Philippines as "less competitive", which equally translates to a high "hurdle rate" for investors.

The table from CATO.org, reveals that economic freedom has lagged or has marginally regressed in 2007 compared to the earlier years.

And worst, the Philippines ranked in the bottom half among 141 nations in the CATO study, particularly on the aspects of Legal Structure & Security of Property Rights (91th) and Regulation of Credit, Labor, and Business (102nd).

Where property rights isn't secured, the risk premium is high. That's because investment returns may be subject to political appropriation.

And the labyrinth of regulations similarly translates to high transaction and business costs.

So rigidities from an "unfree" economy results to a big informal or shadow economy and the inefficiency of wealth distribution which are mostly skewed towards the minority who operate in the ambit of the political class. This called crony capitalism.

And according to the following charts from CATO, economic freedom has been strongly correlated with.....

economic growth and

per capita income

Yet one should not mistaken rising stock markets as signs of "economic success". That's because equities may rise even if the economy slumps or is in a recession, as in the recent case of Hungary or Venezuela which was discussed earlier. Or as in the case of Zimbabwe in 2008 or in Weimar Germany in the early 1920s.

The reason is that equity prices in such instances were driven MAINLY by inflation. Equity assets, thereby, assimilate the function of money's "store of value" as governments ravage by stealth society's wealth by debasing currency's purchasing power during these circumstances.

As spelled out in my last post "Why The Philippine Phisix Will Climb The Global Wall Of Worries", decoupling is a relative term.

Barring another bout of liquidity seizure from a banking crisis elsewhere, the reason the Philippines (as well as major ASEAN economies) have been manifesting signs of partial decoupling is that the local markets and the economy seem to be more receptive to current globally coordinated "inflationist" policies.

Relative to globalization, the lack of depth in global integration appears to amplify local developments, which overshadows international events, since the country's shortcomings have turned into "blessings" by virtue of being less to susceptible to extraneous shocks.

So we may be witnessing the ramifications of inflationist policies overwhelming developments abroad where relative liquidity is proving more beneficial to the domestic asset class.

Although as we have earlier pointed out the ASEAN Free Trade Agreement along with China and major Asian nations should help bolster economic reforms and increase the breadth of market activities that should be beneficial to the Philippine economy in the long run. Again this is a medium to long term proposition and will depend on the new adminstration's willingness to abide by the pact.

Moreover, another prospect for a decoupling to occur is when Americans become ostensibly cognizant of inflationist policies that would send their local investors scampering for a safehaven outside their currency. But that has hardly been the case today yet. There is indeed a debt problem in the US (chart below from Bloomberg), but prospective policies will determine the outcome.

In short, this is an ex-ante proposition. Therefore the outcome hasn't been fixed.

Besides, what happens in this scenario is merely a transference of one bubble to another, which hardly makes the case for a sound paradigm of "economic success".

Japan, for instance, was deemed as an "economic success" story in the early 80s, until the illusion from inflationism was popped which only revealed the false sense of prosperity.

Major ASEAN nations also benefited from the bust in Japan's bubble as Japanese money reportedly sought returns in ASEAN assets, which was accommodated by loose policies in the region as well as abroad. The boom eventually imploded in 1997, popularly known as the Asian Crisis.

In sum: Economic success comes with more economic freedom. Inflationism doesn't exhibit signs of a sound and sustainable economic growth. Stock market activities don't necessarily reflect on the health of the economy. And economic development will depend on the prospective direction of policies.

Thus, the assumption that the Philippines will diverge from the US based on relative economic performance could be seen more from an angle of endowment effect- "where people place a higher value on objects they own than objects that they do not" or a form of cognitive bias rather than an objective assessment.

Quote Of The Day: We Are Inept

Responding to the negative approval ratings on President Barack Obama due to the massive oil spill as shown in the chart below from the Economist,

David Warren has this wonderful message, (hat tip: Russ Roberts) [all bold and italics emphasis mine]

``Let me mention in passing that President Barack Obama was in no way responsible for the catastrophe, and that there is nothing he can do about it. He is being held to blame for "inaction," as wrongly as his predecessor was held to blame over Hurricane Katrina, by media and public unable to cope with the proposition that, "Stuff happens."

``In a sense, Obama is hoist on his own petard. The man who blames Bush for everything now finds there are some things presidents cannot do. More deeply, the opposition party that persuades the public government can solve all their problems, discovers once in power there are problems their government cannot solve.

``Alas, it will take more time than they have to learn the next lesson: that governments which try to solve the insoluble, more or less invariably, make each problem worse.

``I like to dwell on the wisdom of our ancestors. It took us millennia to emerge from the primitive notion that a malignant agency must lie behind every unfortunate experience. Indeed, the Catholic Church spent centuries fighting folk pagan beliefs in things like evil fairies, and the whole notion the Devil can compel any person to act against his will -- only to watch an explosion of witch-hunting and related popular hysterias at the time of the Reformation.

``In so many ways, the trend of post-Christian society today is back to pagan superstitions: to the belief that malice lies behind every misfortune, and to the related idea that various, essentially pagan charms can be used to ward off that to which all flesh is heir. The belief that, for instance, laws can be passed, that change the entire order of nature, is among the most irrational of these.

``Sheer human stupidity is the cause of any number of human catastrophes -- including the stupidity of superstition itself. We need to re-embrace this concept; to hug the native incompetence within ourselves, and begin forgiving it in others."