The New Trading Platform Of The Philippine Stock Exchange

``There’s a simple and elegant test of whether there is skill in an activity: ask whether you can lose on purpose. If you can’t lose on purpose, or if it’s really hard, luck likely dominates that activity. If it’s easy to lose on purpose, skill is more important.” Michael J. Mauboussin

Mayhem struck the Philippine Stock Exchange (PSE), this week. What was expected to be a smooth transition in the migration of the old MakTrade system to the New Trading System turned out to be quite messy.

Aside from the erroneous data feed which resulted to a whopping one day 14% jump in the Phisix on the first day of the new system, news reports say that it took more than three hours[1] to correct the figures in the benchmark index.

The glitch wasn’t just seen in the major benchmark figures. This extends all the way to the data, particularly on the daily quotes. Previous computations for foreign trade seem to have been altered, so as with the breadth (daily number of issues traded-formerly sum of advance, decline and unchanged issues), this I would have to clarify with the PSE.

So unless the PSE resolves to align this week’s quote with the past, the new system will render our previous data as invalid.

Though this is a technical issue which eventually should be resolved, I am not sure how the PSE will make good the right adjustments, considering that it could be costly to reprogram (if this is included in the package).

In addition, the posting of the daily quotes at the PSE website has been way delayed. The quote for July 30^th trading session had been uploaded only this morning, August 1^st.

The Unseen Cost Of Inefficiencies

Meanwhile, a PSE official, quoted by media, rushed to exculpate the disorderly transition by insensibly claiming that such transition represents as a mere “minor” issue and emblematic of normal “birth pains”. This is not only ridiculous, but is unwarranted.

Such statement exemplifies on what we call as the stakeholder’s problem—where the urgency to know and act is fundamentally based on the perceived stake by the agent involved.

In this case, because the officer’s stake isn’t in the trading business, but as an employee of the PSE, his sentiment reveals of the seeming paucity in the urgency to patch up the system, as well as, the undeserved insensate remarks.

One should realize that distortions in the price signals engender imbalances in the capital markets.

This includes an increase in the perception of operational uncertainty which could result to heightened volatility, the expanded risk premium of holding local equities relative to other local and foreign assets, higher cost of transactions and a higher hurdle rate required by both local and foreign institutional investors for them to consider allocating their funds to Philippine equities.

In short, uncertainty translates to the risks of lesser investments!

Proof of this is that even if the Phisix bellwether did register a marginal gain this week, the average volume fell by 13% (Php 2.9 billion) and the average number of daily trades fell by 23%!

So when we are talking of billions of pesos per day (estimated at Php 3 billion or US $66 million), “minor” problems and “birth pangs” translate to Php 100 millions+ (US $2.2 million) lost in daily transactions. Think of all the multiplier effect from the lost transactions applied to the participants and to the PSE itself.

Figure 1: Bloomberg: Year To Date Performance Of The ASEAN 4

I would even suggest that the underperformance of the Phisix relative to our ASEAN neighbours amidst a seemingly sprightly market backdrop (see figure 1) could signify as the unseen ‘negative’ ramifications from the “birth pains” (see blue circle).

Except for Malaysia (orange), all three major ASEAN bourses have broken above the 2010 resistance levels, and this includes the Philippine Phisix (green). However the rally in the Phisix appears to have stalled while the others persisted.

So the lost opportunities in terms of trading volume and a higher Phisix level could have been the side effect of the unwieldy migration to the new system.

New Trading System Positioned For Derivatives Markets

The New Trading System (NTS) reportedly cost a staggering Php 197.39 million[2] (US $4.32 million-current exchange rate) whose trading platform is supposedly designed from one of the world’s largest stock market companies. According to the Inquirer.net[3],

``trading software product developed by NYSE Technologies SAS, the commercial technology unit of NYSE Euronext, which in turn operates the largest exchanges around the world including the New York Stock Exchange and Euronext.”

By concept, the NTS or the new platform seems promising, primarily because it is supposedly a system that would also service “cash, debt and derivative instruments”.

Among the major ASEAN bourses, the Philippines is a laggard in the derivatives markets as we have yet to implement one through the local stock exchange. Hence, the understandable shift to incorporate a trading platform that would allow for this expansion.

In other words, the New Trading System (NTS) is meant to position for a derivatives exchange market and not just the stock exchange.

By allowing investors the instrument to hedge, which is the main function of derivatives, this facility could enhance investor returns, which should ultimately attract more public participation.

Figure 2: Manila Bulletin: NTS Revised Ticker and Board Lot

There are many salient trading enhancements in the new program. This includes the adoption of a reduced tick size (price fluctuation) and board lot[4] (see figure 2); real-time monitoring of foreign ownership; new order and validity types; and the standardization of the account code[5].

I think some of the most noteworthy, among the many supposed new functions[6], that could be widely used are the following:

-stop order which consists of the stop-loss [order that is queued as a must be filled as soon as the trigger price is reached] and the stop limit [order that is queued as a limit order as soon as the trigger limit price is reached]

-market order [order that is filled irrespective of the price whereby the unfilled quantity will be queued into the order book.]

-market to limit order [order executed at the best opposite price for shares whatever is available; remaining unfilled quantity will be put in the order book at the execution price]

-good till date [order remains valid until the date specified by the user]

So in my view, the transition towards NTS, given the specified features, should extrapolate to a medium to long term advantage, if the PSE would use this platform to expand into financial derivatives, and most importantly, to the much needed commodity futures market.

As a side note, because of the dire lack of capital in the Philippines, despite being a relatively low wage low export country, a large part of the Philippine economy remains mired in the agricultural age. Thus, a commodity futures market should enhance pricing, logistics and distributional efficiency that should positively impact our farmers, as I have long been arguing[7] for.

In short, since I am not a Luddite (political zombies who are afraid of technological adaption), but one who embraces innovation, the NTS, based on its current features, looks enticingly positive.

How Competition Can Improve On The PSE

However, what I have cavilled about is the executional inefficiencies and the lack of sensitivity by the PSE in the migration process.

The PSE should have backtested the new platform with the MakTrade system into near precision first before formally replacing the latter that would have resulted to an orderly transition.

Birth pains serve as no justification in today’s transition towards the information age. Yet if such reasoning holds true, then technology ‘birth pangs’ should translate into catastrophic crashes for the new airplane models as the Boeing’s 787 Dreamliner and the Airbus 380. Such rationalization is effectively a non-sequitur.

Instead, what these shortcomings manifest are symptoms of companies operating, outside of the discipline of consumers (or shareholders in this setting) in a monopolistic environment, which technically is what the Philippine Stock Exchange is.

As Professor Murray N Rothbard explained[8] (bold emphasis added, italics- Professor Rothbard)

``One form of partial product prohibition is to forbid all but certain selected firms from selling a particular product. Such partial exclusion means that these firms are granted a special privilege by the government. If such a grant is given to one person or firm, we may call it a monopoly grant; if to several persons or firms, it is a quasi-monopoly grant. Both types of grant may be called monopolistic. An example of this type of grant is licensing, where all those to whom the government refuses to give or sell a license are prevented from pursuing the trade or business.

``It is obvious that a monopolistic grant directly and immediately benefits the monopolist or quasi monopolist, whose competitors are debarred by violence from entering the field. It is also evident that would-be competitors are injured and are forced to accept lower remuneration in less efficient and value-productive fields. It is also patently clear that the consumers are injured, for they are prevented from purchasing products from competitors whom they would freely prefer. And this injury takes place, it should be noted, apart from any effect of the grant on prices.”

And according to former PSE President Jose Yulo Jr.[9]

``On March 4, 1994 the Securities and Exchange Commission granted the Philippine Stock Exchange, Inc. its license to operate as a securities exchange in the country stating that “a unified Stock Exchange is vital in developing a strong capital market and a sustainable economic growth.” It simultaneously canceled the licenses of the MSE and the MKSE.

``The Philippine Stock Exchange is currently the only organized exchange in the Philippines licensed for trading stocks and warrants.” (emphasis added)

So while it is true that stock exchanges of Thailand, Malaysia, Taiwan and Korea are monopolies in a sense (all others have multiple stock exchanges[10] including Pakistan), we see these organizations as more sensitive to the interest of the shareholders due to a deeper penetration level which make them a lot more efficient than the local contemporary.

That’s because shareholders exert pressure on listed companies as well as through the stock exchanges in terms of participation and through shareholder activism—or the use of equity stake to influence corporate management.

And a deep penetration level of shareholder’s base would naturally impact the way the exchange business are operated.

Besides, since the Philippines has a minute shareholder base[11] (less than 1% of the population direct and indirect) and whose listed companies are mostly companies owned by local tycoons, the lack of minority shareholder activism is one of the contributing factor that accentuates the negative dynamics of the monopolistic structure.

Figure 3: ADB[12]: Average Foreign Holdings of Equity—2003 to 2007 and 2008 (as % of market capitalization)

Another possible variable is the competition to attract foreign investors (see figure 3).

As one would note, except for Malaysia, the other monopolist Korea, Taipei and Thailand comprise the largest in terms of the average share of foreign participation as a percentage of the market capitalization.

This means that the respective markets are seen as highly liquid or has deep public participation levels, are considered sophisticated and shareholder friendly enough to generate large following from foreign funds.

Thus, inefficient management of the trading platform will curtail the interest of foreign investors to the detriment of the economy (lack of avenues to intermediate savings and investment) and to the investment public (returns relative risks).

So the PSE management should not only look slough off the monopolistic attitude, and on the competitive side work to attract investors by having more efficient implementation and a stable upkeep of the trading platform, but likewise have a PR communiqué that won’t be seen as snooty.

As a long time shareholder of the company, which is my expression of optimism for the Phisix and for the domestic capital markets, I hope that this critique would be deemed as constructive enough to make the PSE a more shareholder (market) friendly institution.

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[1] Inquirer.net, New system throws Philippine bourse into disarray, July 27, 2010

[2] Philippine Stock Exchange, Security Exchange Commission Form 17-A, May 17, 2010

[3] Inquirer.net, loc. sit.

[4] Manila Bulletin, PSE implements new trading system, July 25, 2010

[5] Business Mirror, SEC approves PSE shift to new trading system, April 26, 2010

[6] Philippine Stock Exchange, NTS Update Session 1, October 2008

[7] See A Prospective Boom in Philippine Agriculture! and see Rice Crisis: The Superman Effect And Modern Agriculture

[8] Rothbard, Murray N. Triangular Intervention: Product Control, Man Economy & State Chapter 12

[9] Yulo, Jose Luis U. Jr. Knowing The Philippine Stock Exchange A guide for Investors

[10] tdd.lt Stock Exchanges Worldwide Links

[11] Philippine Stock Exchange, Less than half of 1% of Filipinos invest in stock market, PSE study confirms, June 16, 2008

[12] Asian Development Bank, Asia Capital Markets, May 2010

US and Global Economy: Pieces Of The Jigsaw Puzzles All Falling In Place

``Deflationary credit contraction is, necessarily, severely limited. Whereas credit can expand (barring various economic limits to be discussed below) virtually to infinity, circulating credit can contract only as far down as the total amount of specie in circulation. In short, its maximum possible limit is the eradication of all previous credit expansion.” Murray N. Rothbard

Mainstream expert analyses are mostly hinged on heuristics (mental shortcuts), except that they often argue from the context of technical gobbledygook which appeals and overwhelms the naive public to assume such abstraction as universal reality.

For instance, many go at length to argue that low interest levels in US Treasury exhibit signs of deflation. Heck, as if deflation or falling prices in the mainstream definition means the end of world. Well, falling prices also means greater purchasing power, which from the fundamental standpoint of demand and supply, it means more goods that one can acquire. So the end of the world, it is not.

For us, deflation isn’t a one size fits all dynamic. We see this market force as operating from different previous actions; one that deals with productivity growth or one that deals with government property confiscation, or bank credit contraction or cash building. So the social impact won’t be the same. Yet when the mainstream hears or reads of deflation they seem to develop a reflexive revulsion to the word.

What the mainstream actually refers to is of the credit contraction order- which according to them has a feedback mechanism which forces liquidation, reduces collateral values, curbs aggregate demand, which leads to excess supplies and subsequently falling prices which gets exacerbated by expectations of people to hoard cash and back to the loop.

It’s a story long been told even during the days of my Dad, but this has hardly occurred. Not even with Japan, which the mainstream has arrantly mislabelled[1].

Although deflation had an instance of reality in 2008, our rebuttal has been that in a world central banking, governments have the incentive and the tools to temporarily offset credit contraction by serially blowing up new bubbles. How? By keeping interest rates excessively low and by printing an ocean of money.

Yet mainstream insist that this is a demand problem and that government actions won’t have an impact.

On the contrary we persist to argue that this is mostly a supply dilemma—one where banks have been stuffed with questionable assets and that reluctance to lend is a function of some distrust.

And the disruption from the near seizure in the US banking system, which prompted for a short episode of deflation, as consequence to the Lehman bankruptcy is why the US government put to risk some $23.7 Trillion worth of taxpayer money[2], according to a US official.

In short, US officials have been acting on the current financial quandary predicated on a liquidity issue.

It’s funny how many gawk at the actions of the marketplace only to put meaning into them based on their bias or economic religion.

The mainstream refuses to acknowledge that government are people too and are driven by incentives. They see government in a paradox. On one aspect, they believe government operates like supermen whom would act on every single social problem that emerges. Yet on another aspect, particularly on the financial markets, they treat governments as passive onlookers!

From our perspective, the abnormally low yields in the US treasury markets may not be due to the fear of lending or the lack of demand to borrow, but rather from government intervention.

With the US budget deficit expected to hit $1.56 trillion in 2010[3], what better way to attract cheap private financing and create an environment of marketplace confidence (animal spirits) than by manipulating interest rates down!

Since there have been little signs of inflation in the past, then the US government can simply use its covert dealers to conduct interest rate manipulation operations.

And it may not be limited to stealth actions; it may even be reported.

In three weeks since June 30, the Federal Reserve balance sheet has registered consecutive additions to its US treasury positions by $45 billion, according to the data provided by the Federal Reserve Bank of Cleveland[4].

This seems consistent with some signs of unease from select Federal Reserve officials, such as James Bullard, president of the Federal Reserve Bank of St. Louis, who called for renewed buying of treasury securities or the resumption of quantitative easing[5].

Yet these guys seem to be looking at the wrong picture.

First of all, the banking system doesn’t represent the entire US capital markets.

Figure 4: St. Louis Fed: Consumer and Bank Credit at ALL Commercial Banks

But even if we deal with the banking system we are seeing not widespread signs of contraction but signs of credit expansion (see figure 4)!

True business and industrial loans are still down, but nominal lending in US dollars by consumers at all commercial banks have recently skyrocketed (upper window). And we seem to be seeing material improvement in credit activities of bank credit of all commercial banks, perhaps directed at consumers.

Figure 5: Yardeni.com[6]: Flow of Funds

We predicted[7] that the influence of the yield curve lags by about 2-3 year period, which if we are right we could see an acceleration in the activities in the US credit markets by this yearend, could we be seeing the seeds of this turnaround (see figure 5)? Oops....

Now as we earlier said, banks aren’t the sole source of funding for the US economy, which the mainstream loves to fixate on. And I think signs have saying they’re dead wrong.

Why? Because the corporate bond market is likewise booming!

This from Businessweek/Bloomberg[8],

``U.S. corporate bond sales soared 31 percent to $85.7 billion this month, the busiest July on record, as yields fell to the lowest in more than six years on growing investor confidence in the economic recovery. The London interbank offered rate, or Libor, which banks say they can borrow at for three months in dollars, fell the most today in almost 11 months, dropping to the least since May 14.”

And the boom in the bond markets aren’t restricted to the US markets but around the world!

According to the Wall Street Journal[9], (bold emphasis mine)

``The global corporate-bond boom is gathering steam as companies rush to take advantage of some of the lowest borrowing costs in history....

``This month has been the busiest July on record for sales by U.S. companies with junk-credit ratings. Asia's debt market is on pace for a record year, and European companies are also raising money apace.

``The low borrowing costs are the culmination of an unprecedented bond-market rally that began in the depths of the credit crisis in late 2008 and early 2009 and has defied every prediction that it would soon run out of steam. But individual and professional investors continue to plow money into the bond market, giving companies a constant source of funds to tap.”

Defied every prediction? Not for us, as we have been predicting this all along!

And in terms of bank lending guess where the gist of the activities has been? (see figure 6)

Figure 6: Yardeni.com Lending by International Banks

If you guessed the Emerging Markets and Asia, then you are absolutely correct!

Now if we examine the contribution of economic growth in the US by sector, the mainstream seems caught somewhat surprised. Growth expectations didn’t come from the sectors they’d expected them to be (see figure 7).

Figure 7: Northern Trust: Sectoral Contribution To Growth Rates

According to Asha Banglore of Northern Trust[10], (bold highlights mine)

``In the second quarter of 2010, equipment and software spending (+1.36%) made the largest positive contribution to real GDP, followed by exports (1.22%), consumer spending (1.15%), inventories (1.1%), and residential investment expenditures (0.6%).

``In terms of growth rates, equipment and software spending posted a hefty increase of 21.9% after an upwardly revised 20.4% gain in the first quarter. Consumer spending moved up 1.6% in the second quarter after a downwardly revised 1.9% gain in the first quarter.

So technology and the world economy appear to be heavy lifting the growth momentum of the US economy.

As per the technology sector, here is what I wrote last February[11],

``What I am trying to say is that the contribution of the technology sector to the real economy could perhaps be more accurately reflected on the performance of S&P, however, such contribution may have been underrepresented by conventional statistical metrics.”

Not anymore.

For us, the current developments postulates to the following:

-US economic growth dynamics seem to be shifting from the housing to the technology and export sector.

-Investment in the US and the job growth will likely gravitate into these sectors.

-The pattern of growth in the US seem to confirm the boom in the global bond markets and the bank lending patterns of international banks

-Since technology is partly tied to exports, wealth accumulation in emerging markets is likely to fuel increasing demand for tech savvy products

-the global economy should be expected to sustain momentum as globalization deepens, and this will be in stark contrast to the prediction of deglobalization advocated by PIMCO’s Bill Gross.

-Of course, this is another bubble cycle. The next bubble will likely emanate from the emerging markets or the US technology industry[12], or the US treasury. But the risk of bubble implosion would only surface as inflation accelerates and hamstrings government efforts to intervene.

Speaking of which, where inflation is thought to be non-existent, here is a little surprise (see figure 8)...

Figure 8: stockcharts.com: Commodity Laggards

Oops, even the commodity laggards seem to be generating some reanimated activities!

We seem to seeing resurgence in agricultural products (DBA-Powershares DB Multisector Commodity Trust Agricultural Fund), as well as in Natural gas (NATGAS), the Industrial metals (Dow Jones UBS Industrial Metals-DJAIN) and the broad based commodity index (Reuters-CRB).

So far, pieces of the grand jigsaw puzzle seem to be falling in their rightful place, as we have seen it.

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[1] See Japan’s Lost Decade Wasn’t Due To Deflation But Stagnation From Massive Interventionism, July 6, 2010

[2] See $23.7 Trillion Worth Of Bailouts?

[3] CNN Money U.S. deficit streak at 20 months, June 20 2010

[4] Federal Reserve Bank of Cleveland, Credit Easing Policy Tools

[5] New York Times, Fed Member’s Deflation Warning Hints at Policy Shift, July 29, 2010

[6] Yardeni.com: Flow of Funds, July 7, 2010

[7] See Influences Of The Yield Curve On The Equity And Commodity Markets, March 22, 2010

[8] Businessweek, Bloomberg: U.S. 10-Year Swap Negative for Fourth Day as Debt Sales Rise, July 30, 2010

[9] Wall Street Journal, Bonds Soar to Rare Heights, July 29, 2010

[10] Northern Trust, U.S. Economy – Q2 GDP Contained a Few Surprises Although Headline Was Close to Forecast, July 30, 2010

[11] See Statistics Don't Reveal Extent Of The Evolution To The Information Age, February 15, 2010

[12] See ASEAN Markets Surge, Where will The Next Bubble Emerge?, July 11, 2010

Privatizing PAGASA

Minimal Government Thinker's Nonoy Oplas and I propose the privatization of PAGASA.

See below

Privatizing PAGASA

Graphic: Obamacare And The Law

This is how the Obamacare is supposedly structured...

chart from Joint Economic Committee (Republican) /hat tip Daniel Mitchell of Cato

According to Frederic Bastiat, [The Law (p.69)] (all bold emphasis mine, italic original)

The mission of the law is not to oppress persons and plunder them of their property, even though the law may be acting in a philanthropic spirit. Its mission is to protect persons and property. Furthermore, it must not be said that the law may be philanthropic if, in the process, it refrains from oppressing persons and plundering them of their property; this would be a contradiction.

The law cannot avoid having an effect upon persons and property; and if the law acts in any manner except to protect them, its actions then necessarily violate the liberty of persons and their right to own property.

The law is justice--simple and clear, precise and bounded. Every eye can see it, and every mind can grasp it; for justice is measurable, immutable, and unchangeable. Justice is neither more than this nor less than this.

A law that is perplexing in complexity like the Obamacare exemplifies or embodies what we call as arbitrary law--a law opposed to the fundamental concept of clear, precise and bounded (observable), of protecting property rights and of equal treatment of application (enforceability). Hence, Obamacare is unlikely a law that would serve to promote its mission--social justice.

William Gross’ Demographic Nightmare

PIMCO's chief honcho William Gross writes,

``The danger today, as opposed to prior deleveraging cycles, is that the deleveraging is being attempted into the headwinds of a structural demographic downwave as opposed to a decade of substantial population growth. Japan is the modern-day example of what deleveraging in the face of a slowing and now negatively growing population can do.”

Mr. Gross puts the blame on declining population from which to justify government’s bubble policies...

``The lack of population growth was likely a significant factor in the leveraging of the developed world’s financial systems and the ballooning of total government and private debt as a percentage of GDP from 150% to over 300% in the United States, for example. Lacking an accelerating population base, all developed countries promoted the financing of more and more consumption per capita in order to maintain existing GDP growth rates.”

That’s because his economic ideology leads him to believe that spending alone drives the economy.

``If anything, my thesis is anti-Malthusian in its assertion that there will always be enough production to satisfy a growing population, but perhaps not enough new people to sustain growing production.” (emphasis his)

This is plain vanilla folderol!

Despite Japan’s lost decade, [see Japan’s Lost Decade Wasn’t Due To Deflation But Stagnation From Massive Interventionism], the post-market clearing phase from failed bubble policies has revealed that Japan’s per capita income has bottomed out in 2001 and appears to be on the mend. In fact, the wealth metric seems to be showing that the Japanese are getting rich anew, despite the declining population!

So Japan’s ‘deflation’ isn't a depression, but the opposite of what mainstream expects-net wealth accumulation (as shown above from google)!

Second, markets are not circularly flowing wherein people produce goods and the consumers mechanically buy them back, thus erringly conclude consumers drive the economy. This is the circular logic behind Mr. Gross' demographic nightmare where a declining population equals lesser consumption. Mr. Gross fails to appreciate that markets in essence is about the attainment of satisfaction from voluntary exchange.

Likewise, products and markets are not homogenous. Instead, the greater depth of the market economy, the greater the wealth, as people look to provide more products in a race to satisfy the consumers (themselves).

Hence, the more the purchasing power from wealth accumulation, the broader the diversity of products to choose from.

The chart above shows that as global trade deepens, per capita income is likewise growing-meaning more products to spend on from growing wealth--despite the declining rate of population growth.

In today's world, the major trend seems to be about the transition from the industrial economy to the post-industrial or information age (digital) economy, where niche markets, competition, innovation, specialization and dispersion of knowledge seem to be the predominant order.

In contrast to Mr. Gross, we see the demographic issue as non-sequitur.

Government Failure: Imported Surplus Rice

Looking at the headlines we observe that the Philippines seem to jump from one crisis to another.

I’d say such crisis is a lucid manifestation of the failure of government interventionism or government meddling.

Of course, many would make other insinuations (corruption) mostly emphasizing on the devious intent of the previous administration.

But I would argue that these are the effects and not the cause of the present problems.

The latest hullabaloo is that government imported too many rice says the headline. This from the Inquirer.net,

The group was reacting to a report on Tuesday by Banayo that the country was “swimming in rice” because the Arroyo administration had imported seven times more than the country’s needs.

Banayo said that the NFA under Arroyo had authorized the importation of some 20,000 metric tons of rice estimated at P100 million in late April or May despite the oversupply in the local market. He said that the shipment had started to arrive at Poro Point in La Union.

Mr. Aquino on Monday said that rice was rotting in warehouses while the NFA had accumulated debts totaling P177 billion.

This seems to be a wonderful example of time inconsistency or the sustainability of a policy given the changes of the circumstances over time.

Back in the October 2009, post Typhoon Ondoy and Typhoon Pepeng, headlines yelled fire! These typhoons wrought devastation on our rice production!

'Ondoy', 'Pepeng' hit areas producing 56% of RP's rice, bannered the ABS-CBN headline. And this article accompanied the table, as shown above, which depicted on the estimated scale of damages.

And because of this, the Arroyo government reacted to the calamity by...you guessed it...importing the problematic rice of today.

Below was media’s sentiment immediately during the post Typhoon days, according to GMA news,

Estoperez, however, said that while the damage caused by Ondoy and Pepeng would definitely have a negative effect on local rice farmers, a rice crisis in the coming year is a remote possibility.

“We have enough rice supply for the remainder of the year, and the DA is taking steps to mitigate the effects of the damage so we could have enough rice for next year," he said.

He said the prices of NFA rice will remain stable, including the subsidized P18.25/kilogram for qualified poor families, and the P25/kg rice.

He also said that the DA, on orders of President Gloria Macapagal Arroyo, is planning to import rice earlier than scheduled this year to prevent a possible rice supply crunch in 2010.

The article even cited an NGO study who said that the government ‘downplayed’ the impact of the typhoon on the rice fields which lent a sense of urgency to the missive.

The Arroyo Administration even tried to dramatize the impact of the calamity by declaring price controls, which I argued, could have used been as justification to declare martial law and a postponement of elections.

Yet, then, NOBODY averred that imported rice would pose as a problem because the POPULAR issue of the day was the looming risk of a RICE CRISIS.

Now, since NO rice crisis have emerged, the Arroyo government gets slammed for what is seen as an improvident or even perverted action.

To put in perspective, in 2009 importing rice was deemed as politically correct, today it is politically wrong. The change in circumstances results to a corresponding change in the political climate. So a time inconsistent policy.

I’d further add that such policy faux pas represents as government’s knowledge problem.

In other words, government simply DOES NOT know the future and the specific needs of the society enough to justify repeated interventionism.

Obviously, the miscalculation resulted to massive wastages and economic distortion which presently adversely impacts the local farmers. Hence, the crisis.

One could add icing on the cake by saying that the previous administration used the incident as political cover to profit.

Whether this is true or not, it is the nature of politics to attain credit by attributing sensationalism and discrediting foes.

In short, instead of analyzing the genuine cause of the failure, just blame the personality involved as this would be the fashionable thing. Nevertheless, the offspring of interventionism is corruption.

Yet all these three factors combine to reveal why government interventionism is not only wrong, but immoral and a waste of capital.

Of course if you listen to politicians, their solution is more of the same.

$23.7 Trillion Worth Of Bailouts?

Nassim Taleb spoke of definancialization as the main cure to the system.

However, his suggestion would be revolutionary since we cited that financialization is the heart of the US political economic system (and globally) which has operated around the central banking platform, particularly in the US, the US Federal Reserves.

Proof? This from Bloomberg,

U.S. taxpayers may be on the hook for as much as $23.7 trillion to bolster the economy and bail out financial companies, said Neil Barofsky, special inspector general for the Treasury’s Troubled Asset Relief Program.

The Treasury’s $700 billion bank-investment program represents a fraction of all federal support to resuscitate the U.S. financial system, including $6.8 trillion in aid offered by the Federal Reserve, Barofsky said in a report released today.

“TARP has evolved into a program of unprecedented scope, scale and complexity,” Barofsky said in testimony prepared for a hearing tomorrow before the House Committee on Oversight and Government Reform.

Treasury spokesman Andrew Williams said the U.S. has spent less than $2 trillion so far and that Barofsky’s estimates are flawed because they don’t take into account assets that back those programs or fees charged to recoup some costs shouldered by taxpayers.

“These estimates of potential exposures do not provide a useful framework for evaluating the potential cost of these programs,” Williams said. “This estimate includes programs at their hypothetical maximum size, and it was never likely that the programs would be maxed out at the same time.”

Barofsky’s estimates include $2.3 trillion in programs offered by the Federal Deposit Insurance Corp., $7.4 trillion in TARP and other aid from the Treasury and $7.2 trillion in federal money for Fannie Mae, Freddie Mac, credit unions, Veterans Affairs and other federal programs.

We shouldn’t forget that the US banking system has been plagued by toxic securities mostly from mortgage lenders, such as Fannie and Freddie and other private labels, thus the encompassing system wide rescue package.

This can clearly be seen in the Federal Reserve’s Balance sheet, where the bulk (brown) of the assets held comprise Federal Agency Debt Mortgage Backed Securities

This reminds us of President Woodrow Wilson who once wrote,

“A great industrial nation is controlled by its system of credit. Our system of credit is privately concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men who, even if their action be honest and intended for the public interest, are necessarily concentrated upon the great undertakings in which their own money is involved and who necessarily, by very reason of their own limitations, chill and check and destroy genuine economic freedom.”

Nassim Taleb: Government Deficits As The Next Black Swan

Speaking of political incentives Nassim Taleb has one great example, in an interview he says

The massive one is government deficits. As an analogy: You often have planes landing two hours late. In some cases, when you have volcanos, you can land two or three weeks late. How often have you landed two hours early? Never. It's the same with deficits. The errors tend to go one way rather than the other. When I wrote The Black Swan, I realized there was a huge bias in the way people estimate deficits and make forecasts. Typically things costs more, which is chronic. Governments that try to shoot for a surplus hardly ever reach it.

The problem is getting runaway. It's becoming a pure Ponzi scheme. It's very nonlinear: You need more and more debt just to stay where you are. And what broke [convicted financier Bernard] Madoff is going to break governments. They need to find new suckers all the time. And unfortunately the world has run out of suckers.

In other words, the incentive for politicians has been to run up unsustainable deficits through lavish spending.

And he thinks that definancialization should be the way to go

I think we should not need financial reform. What we need is definancialization. What we need to do is break the financial community's grip on society. And you can do it very easily by transformation of debt into equity. Banks have an interest in building debt, but equity in society is vastly more stable than debt.

But in my view, we can’t definancialize without overhauling the political system which has been tied to Central Banking. Therefore, definancialization should mean the end of central banking.

Does Government Have The Right Incentive?

Professor David Henderson writes,

``what so few advocates of government intervention even try to show us, is how a government regulator will have the right incentive to do the right thing. Will the government regulator be fired if he screws up? Not typically. Will he get a huge bonus if he does something right? Not typically. And how, with a centralized information system, will he get the information needed to make a good decision...”

Exactly.

This is in contrast to the conventional or popular expectation where political entities function as supposed saviours of mankind. Or that once people get ushered into public office, they are elevated or transformed into entities who assume omniscience and superhuman virtues. Or as Professor Henderson points out, government is expected to play the role of Deux ex Machina.

But as we keep pointing out regulators, bureaucrats, or politicos are merely human beings. They are all influenced by the knowledge problem, stakeholder’s dilemma, time consistency, cognitive bias, perceptional variance, networks, personal values and others, all of which adds up to what shapes their priorities.

With markets people are driven by mainly profit and loss incentives. How about politics? Isn’t the incentives all about power over the others? So how does power over the others or political become a better alternative in solving social and distributional problems relative to the market?

On President Aquino’s SONA: The More Things Change....

I have not heard or read the entire transcript of the First State of the Nation (SONA) address by President Noynoy Aquino yesterday. Thus I’ll be basing my comments on the content or quotes of the President Aquino by mainstream media.

Fundamentally the Inquirer ‘We can dream again’ article seems to give alot of weight on Mr. Aquino’s penchant for public-private partnerships arrangement.

So what is a public private partnership? It is basically government project/s outsourced to the private sector.

This from Wikipedia.org, ``PPP involves a contract between a public sector authority and a private party, in which the private party provides a public service or project and assumes substantial financial, technical and operational risk in the project. In some types of PPP, the cost of using the service is borne exclusively by the users of the service and not by the taxpayer. In other types (notably the private finance initiative), capital investment is made by the private sector on the strength of a contract with government to provide agreed services and the cost of providing the service is borne wholly or in part by the government. Government contributions to a PPP may also be in kind (notably the transfer of existing assets). In projects that are aimed at creating public goods like in the infrastructure sector, the government may provide a capital subsidy in the form of a one-time grant, so as to make it more attractive to the private investors. In some other cases, the government may support the project by providing revenue subsidies, including tax breaks or by providing guaranteed annual revenues for a fixed period.” (bold emphasis mine)

In other words, PPP’s signifies as politically privileged economic rent/concessions to favoured private entities that will undertake the operations in lieu of the government. They will come in the form of monopolies, cartels or subsidies that will benefit only the politically connected.

Since the private partner partnerships aren’t bound by the profit and loss discipline from the consumers, the interest of the private partners will most likely be prioritized or aligned to please the whims of the new political masters.

And because of it, much of the resources that go into these projects will not only be costly or priced above the market to defray on the ‘political’ costs, but likewise, they will be inefficiently allocated.

Moreover, PPPs risk becoming ‘milking cows’ for these politically entitled groups and could be a rich source of corruption.

Hence, PPPs are no less than emblematic of the status quo, which I had been predicting, that highlights on the legacy of crony capitalism, which seemingly, the new administration is headed for.

Of course one may argue that these projects will be transparently offered to the public. But that would be a non-sequitur. As we should know, there are many stealthy ways to maneuver the process or to ‘skin the cat’.

Going back to the SONA it is further a wishful thinking for President Aquino to assume government knows best in allocating resources,

From the same article,

``To put a stop to the wasteful use of funds, the government would eradicate “wrong projects” and adopt a “zero-based” approach to crafting the national budget, the President said.

“What used to be the norm was every year, the budget merely gets reenacted without plugging the holes,” he said. “Next month we will be submitting a budget that accurately identifies the problem and gives much attention on the right solution.”

When resources are allocated politically, they become impervious to market pricing thus, are always subjected to waste.

Even to the most well-meaning politician, it is hardly the interest of the public that comes into play, but the interest of the public as perceived by the political leaders.

Yet these perceptions can be skewed by biases, familiarity, networks, vested interest groups, and many other influences.

Lastly, not everything is bad news though, we hope that the new president will indeed not only streamline processes “to make them predictable, reliable and efficient for those who want to invest” on the PPPs, but we hope that this will be applied to the broader businesses environment.

So there you have it, more proof that the more things change, the more they stay the same.

How Money Dies-The Process

Telegraph’s Ambrose Evans Pritchard has a nice narrative on hyperinflation.

He writes, (all bold highlights mine)

Ebay is offering a well-thumbed volume of "Dying of Money: Lessons of the Great German and American Inflations" at a starting bid of $699 (shipping free.. thanks a lot).

The crucial passage comes in Chapter 17 entitled "Velocity". Each big inflation -- whether the early 1920s in Germany, or the Korean and Vietnam wars in the US -- starts with a passive expansion of the quantity money. This sits inert for a surprisingly long time. Asset prices may go up, but latent price inflation is disguised. The effect is much like lighter fuel on a camp fire before the match is struck.

People’s willingness to hold money can change suddenly for a "psychological and spontaneous reason" , causing a spike in the velocity of money. It can occur at lightning speed, over a few weeks. The shift invariably catches economists by surprise. They wait too long to drain the excess money.

"Velocity took an almost right-angle turn upward in the summer of 1922," said Mr O Parsson. Reichsbank officials were baffled. They could not fathom why the German people had started to behave differently almost two years after the bank had already boosted the money supply. He contends that public patience snapped abruptly once people lost trust and began to "smell a government rat".

The point is hyperinflation is an outcome of a political process which begins in a nondescript mode or on a benign phase but eventually turns unwieldy.

Murray Rothbard aptly described this process in Mystery of Banking

``When expectations tip decisively over from deflationary, or steady, to inflationary, the economy enters a danger zone. The crucial question is how the government and its monetary authorities are going to react to the new situation. When prices are going up faster than the money supply, the people begin to experience a severe shortage of money, for they now face a shortage of cash balances relative to the much higher price levels. Total cash balances are no longer sufficient to carry transactions at the higher price. The people will then clamor for the government to issue more money to catch up to the higher price. If the government tightens its own belt and stops printing (or otherwise creating) new money, then inflationary expectations will eventually be reversed, and prices will fall once more—thus relieving the money shortage by lowering prices. But if government follows its own inherent inclination to counterfeit and appeases the clamor by printing more money so as to allow the public’s cash balances to “catch up” to prices, then the country is off to the races. Money and prices will follow each other upward in an ever-accelerating spiral, until finally prices “run away,” doing something like tripling every hour. Chaos ensues, for now the psychology of the public is not merely inflationary, but hyperinflationary, and Phase III’s runaway psychology is as follows: “The value of money is disappearing even as I sit here and contemplate it. I must get rid of money right away, and buy anything, it matters not what, so long as it isn’t money.”

And as one would observe, the process involves a feedback loop between government actions and market responses or an action-reaction stimulus-response mechanism until everything gets out of hand—and thus, money perishes.

Of course Mr. Pritchard ends up downplaying such risks.

He concludes, ``There is a clear temptation for the West to extricate itself from the errors of the Greenspan asset bubble, the Brown credit bubble, and the EMU sovereign bubble by stealth default through inflation. But that is a danger for later years. First we have the deflation shock of lives. Then -- and only then -- will central banks go to far and risk losing control over their printing experiment as velocity takes off. One problem at a time please.”

He contravenes his earlier anecdote about the benign origins of hyperinflation.

Because inflation is a symptom of the consequences of the actions of policymakers in attempting to attain certain political goals, which as shown above are channelled through the feedback mechanism, this means that if the actions to sustain these political goals would imply the increasing application of inflationism, then the risks of hyperinflation can’t be discounted. The current benign conditions does not signify the remoteness of such risks.

One must put in mind, that what seems to drive the actions of the present batch of policymakers is the seductive appeal of the immediacy of the impact from inflationism, the economic ideological bias and path dependency from recent “successes” of such actions.

Yet Mr. Pritchard can thank his lucky stars that globalization could serve as a counterbalancing force that might be able to reduce (if not delay) the risks of any of the two extreme outcomes of deflation or hyperinflation.

Is Hyperinflation A Bogus Theory?

Ellen Brown thinks hyperinflation is a bogus theory, she writes...(bold emphasis mine)

``So long as workers are out of work and resources are sitting idle, as they are today, money can be added to the money supply without driving prices up. Price inflation results when “demand” (money) increases faster than “supply” (goods and services).”

Let’s take her assumptions and apply it to Zimbabwe (all colored charts courtesy of indexmundi.com)

Checklist number 1: Zimbabwe has 95% unemployment rate (idle workers)

Checklist number 2: Zimbabwe has also seen a successive collapse of GDP -depression! (idle resources)

1+1=2? Or unemployment + idle resources = no inflation? Of course, not.

In fact inflation skyrocketed at an annual rate of 11,200,000% (according to Index Mundi’s data) or Hyperinflation!

Based on Professor Steve Hanke’s calculation this actually much higher...

79.6 billion % for 2008! The second worst in world history.

The reason for this is that the Mugabe-Gono government financed public debt (expenditures) with seemingly endless printing of money, because the nation’s access to credit has been severed externally (international) and internally (domestic savings).

So unless the US is immune to the universal laws of economics, whereby unfettered printing of money equals no inflation and is a recipe to prosperity, which has been falsified when applied to the experience of other countries, I wonder who embraces a theory that is bogus?