Philippine Phisix In A Historic Breakaway Run!

``Genius is the act of solving a problem in a way no one has solved it before. It has nothing to do with winning a Nobel prize in physics or certain levels of schooling. It's about using human insight and initiative to find original solutions that matter. Genius is actually the eventual public recognition of dozens (or hundreds) of failed attempts at solving a problem. Sometimes we fail in public, often we fail in private, but people who are doing creative work are constantly failing. When the lizard brain kicks in and the resistance slows you down, the only correct response is to push back again and again and again with one failure after another. Sooner or later, the lizard will get bored and give up.” Seth Godin

After this week’s remarkable and historic breakout by the Philippine Phisix to a fresh all time nominal record highs, we should be having our victory lap.

Another Sweet Vindication

Sorry I can’t help but vent this pleasant and pleasurable feeling of total exoneration: I TOLD YOU SO!

That’s because it’s been years since my analysis and forecasts have been met by various incredulous expressions of scepticisms from almost all quarters.

And it’s not just the breakout that matters; it has been the operational process of the domestic and global financial markets which seems to have aligned in near precision with our analytical methodology predicated mostly upon a combination of non-mainstream theories: Austrian economics, Public choice theory, Hyman Minsky’s Financial Instability hypothesis, George Soro’s reflexivity theory, Alvin Toffler’s “Knowledge Economies”, behavioural finance (Nassim Taleb) and other theories on psychology (e.g. PTSD, Pavlov’s experiment).

Given the momentous force that had accompanied the recent breakout, wherein a whopping 9.44% of accrued gains had been established over the last two weeks, one should expect to see a reprieve over the coming week/s.

We don’t know of the scale of the pause, whether it should signify a substantial correction or a mere consolidation. But we know one thing: no trend goes in a straight line, and that the upcoming countertrend should signify as an opportunity to accumulate than for exit.

As we have previously pointed out, not all bullmarkets are like[1]. As the growing conviction phase of the bubble cycle deepens, as represented by the recent buyside calls of “Golden Era”[2], one should expect to see heightened volatility in market actions which means more frequent explosive moves.

Timing the markets, unless one is very lucky, could translate to lost opportunities, as sharp losses can equally translate to even swifter recoveries.

As a side note, attribution bias, or claiming skills as reasons for ‘trading’ successes, will predominate the coming atmosphere. This especially will be amplified for retail participants, but unknowingly for most, they would be just plain lucky, as the rising lifts most if not all boats.

In a bullmarket, as an old saw goes, everyone is a genius.

Peso Remains A Buy, Politicizing Market Success (Peso Bond Float)

Figure 1: Yahoo/Bloomberg: Milestone Phisix, Lagging Peso

The difference in today’s secular bullmarket compared with the past (1986-1997) is that this time the Phisix (right window) will be accompanied by a rising Philippine Peso. Lately the Peso has apparently lagged (left window).

In late 2007 where the Phisix made a new high, the Peso likewise belatedly caught up and peaked in January of 2008 (Php 40 to a US dollar).

And perhaps we can expect the same trailing performance by the Peso as foreign fund flows (compounded by immigrant and OFWs) into local assets magnify the demand for the Peso.

Meanwhile, the monetary accommodation by the US government and other developed economies will enlarge relative supply scale of the money supplies in favour of ASEAN and Asian currencies.

Importantly, the sustainability of the relative outperformance between asset prices of developed economies and that of the ASEAN (or emerging Asia) powered by the divergences of monetary policies will prompt for more inflows into the region.

And one of the glaring example of the unfolding of such dynamics has been the recent success by the $1 billion Peso bond float.

Yet like always, unfortunately events like this will always be tainted with political colour, as political personalities speedily associate these events with populism.

As we have argued this administration has been so image conscious, such that it would seem that the elections have never ended. To impute the successful bond float to “landslide vote of confidence[3]” for the new administration is no less than PR work meant at propping up imagery of the administration, even if the relevance of the purported linkages were less than half true or constitutes a logical fallacy.

Figure 2: AsianBondsonline.adb.org[4]: Size and Composition of Emerging East Asian Local Currency Bond Markets

The alleged “vote of confidence” does not consider the larger spectrum which would show that the region’s local currency bonds markets have been vastly improving (see figure 2).

In fact, the Philippines have lagged our Asian neighbours and falls below the average performance of the total Emerging Asia, (perhaps even if we add the latest US $1 billion float).

So on a relative scale, the vote of confidence on the Philippines isn’t that impressive, because investors have voted with more confidence on the markets of Thailand (which ironically just experienced a nasty city-wide riot[5] last May), Indonesia and has only been at par with Malaysia.

Given the above picture, I would dare argue that even under the past unpopular regime, the bond issuance would have had a similar magnitude of “warm” reception.

That’s because in a world where prices have been distorted by government’s manipulation of the interest rate (price of time), people conjure up all sorts of excuses, valid or not, just to chase for yields. In short, as the reflexivity theory would say, prices shape opinions.

Yet politicians are quick to grab credit for any actions as their own doing even if these are unrelated, unsupported or has little correlations.

And evidence from the above exhibits that politics have had little effect on the supposed “vote of confidence” of the latest Philippine bond float (or even applied to Thailand).

Another reason why the Philippine Peso has lagged has been due to domestic politics[6]. Particularly that of the politics of OFWs, and secondarily, of the exporters.

So yes, the Peso remains a buy and should be expected to appreciate towards the 40-levels by the yearend, barring any unforeseen circumstances (e.g. war on Iran) and unless our central bank will match the US Federal Reserve in inflating the system (our tail risk).

Unlikely A US Double Dip Recession

These sanguine forecasts are likewise predicated on the conditions that there will be NO double dip recession in developed economies, as a recession will likely drain liquidity in the global financial system despite the proclivity of central banks to counteract such dynamics by flooding the system with money.

Unless we can see further proof where domestic liquidity can get insulated from a liquidity drain abroad, it would be imprudent to bet against “convergence”, which apparently have been the hallmark of globalization.

And a recession is NOT inevitable for earlier reasons cited[7] plus some additional inputs:

1. Global central banks have placed under their stringent sponsorship the banking industry.

Unlike the Great Depression where collapsing banks had a domino effect throughout the economy, today global central banks led by US has backstopped their banking system (specifically creditors) with trillions of taxpayer money. This signifies as a pyrrhic short term victory whose enormous costs would certainly emerge sometime in the future.

Yet it would be a folly for the mainstream to declare victory on what is clearly a short-term panacea. Paying the Piper will be different from what the mainstream expects.

2. Globalization continues to progress.

In contrast to the Great Depression, collapsing banks, protectionism and regime uncertainties via a slew of massive regulatory obstacles caused a standstill and a decline in trade and investments. This is hardly today’s picture.

During the height of the recent crisis, marked by the Lehman bankruptcy, the near seizure of the US banking system rippled throughout the global banking system. However, many entities persisted to trade and channelled them via barter[8] and local currency[9]. And this empirically disproved the mainstream notion that the crisis was one of the failures of aggregate demand. Thus, the mainstream had been caught unaware of the 2009 “recovery” which was likewise supported by the Fed’s (Quantitative Easing) printing press.

Importantly, while the banking system of crisis affected areas like the US have resulted to large scale deterioration in the credit conditions as the crisis culminated, there appears to be material improvement over some aspects of the credit markets as previously discussed[10]. It is likely that the credit markets in the US could finally be responding to the yield curve dynamics which cyclically has had a 2-3 year lag period[11].

Another feature of globalization has been the financing dynamics outside of the banking system, or in particular the explosive growth of the bond markets.

According to Bloomberg[12],

``Global high-yield bond sales are poised to exceed 2009’s record issuance as the riskiest companies take advantage of plunging borrowing costs and investor demand to refinance debt.”

So while the permabears continue to tunnel onto the credit growth as a reason to argue for another recession, the complexities brought about by globalization is certainly keeping them on the wrong side of the fence.

Finally, in contrast to conventional wisdom, credit isn’t the foundation growth, savings is.

As the great Professor Ludwig von Mises wrote[13],

The only source of the generation of additional capital goods is saving. If all the goods produced are consumed, no new capital comes into being.

Figure 3: Deutsche Bank[14]: The Rising Impact Of Asia On The Global Economy

Flushed with savings, emerging markets have not optimized the utility of savings into investments due to their underdeveloped state of the markets (see figure 3). However, globalization appears to be reconfiguring this role as markets are liberalized to accommodate on foreign investments.

Yet of course, artificially suppressed interest rates have been also been a major factor into generating policy “traction” or having to accelerate such dynamics.

And for as long as interest rates will remain at über-accommodative levels in developed economies, emerging markets, like the Philippines, should generally be expected to outperform compared to the debt hobbled counterparts in developed economies.

3. More signs of transition to the Information Age.

The transition to the information age is no more than an extension of the highly competitive and increasingly diversified markets brought about globalization that has spurred massive technological innovation.

Most experts still use industrial age metrics to measure economic activities, which has increasingly become obsolescent. To analogize, the mainstream still think in terms of analog instead of digital, even when many of them increasingly use digital instruments to transact or engage in commerce or conduct many activities in their lives.

In the US, since the adjustment process from a bubble economy to a rediscovery phase takes a longer period, especially in the light of a growing specialization of trade patterns, government intervention only delays these rediscovery phase.

Nevertheless, signs of such transitions have become manifest as seen in the growing mismatch between job availability (high skilled) and manpower supply (labor exposed to malinvestments) as we have pointed out earlier[15].

It isn’t necessarily that there has been a paucity of jobs, but in many instances, the skills required for specialized jobs have been inadequate or have been in a mismatch. And this has mainly been due to the distortive effects from previous inflationary policies that has caused massive misdirection of use in terms of labor and resources. And currently, interventionist policies (unemployment benefits, Obamacare, prospects of higher taxes et.al.) have proven to be an obstacle in the retooling process required for their labor force to adapt to the new reality.

Additionally the latest trade data shows that capital spending has led the economic growth of the US, which has mostly been seen in the industrial machinery and computer exports sectors.

As this Wall Street Journal article illustrate[16],

``While capital projects abroad, especially in emerging economies, are designed to expand production capacity, U.S. businesses are spending to modernize existing facilities and to boost productivity in their work force. Business spending on equipment accounted for one-third of gross domestic product growth in the first quarter and almost all of second-quarter GDP growth.

``The increased foreign demand, coupled with spending here in the U.S., is why business equipment is leading economic growth. U.S. output of business equipment jumped 11.7% in the year ended in July, compared with a 7.7% gain for all manufacturing production.

So specialization, division of labor and comparative advantages highlight substantial part of the economic conditions in the US.

In short, for the mainstream there is alot more for them to chew on, which apparently they refuse to do.

---

[1] See How To Go About The Different Phases of The Bullmarket Cycle, August 23, 2010

[2] See The Rationalization Phase Begins: ‘Golden Era’ Equals The ‘New Paradigm’?, September 8, 2010

[3] Inquirer.net Peso bond sale nets $1B, September 11, 2010

[4] AsianBondsonline.adb.org, Asian Bond Monitor: Summer Issue Bond Market Developments in the First Quarter of 2010

[5] See Politics And Markets: Bangkok Burns Edition, May 20, 2010

[6] See Global Policy Divergences Favors A Rising Peso, August 22, 2010

[7] See Why Deflationists Are Most Likely Wrong Again, August 15, 2010

[8] See What Posttraumatic Stress Disorder (PTSD) Have To Do With Today’s Financial Crisis, February 1, 2009

[9] See Emerging Local Currencies In The US Disproves The 'Liquidity Trap’, February 16, 2010

[10] See The Road To Inflation, August 29, 2010

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

[12] Bloomberg.com, Treasury 10-Year Note Yields Climb to One-Month High on Economy, September 10, 2010

[13] Mises, Ludwig von The Anti-Capitalistic Mentality by Ludwig von Mises, Section 4

[14] Lanzeni Maria Laura Lanzeni The Rising Impact Of Asia On The Global Economy June 2010

[15] See US Unemployment: It’s Partly About Skills-Jobs Mismatch, August 10, 2010

[16] Madigan Kathleen, Trade Data Show Importance of Capital Goods Wall Street Journal Blog, September 10, 2010

The Upcoming Boom In The Philippine Property Sector

``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.” Ludwig von Mises

Here is one more prediction.

The current “boom” phase will not be limited to the stock market but will likely spread across domestic assets.

This means that over the coming years, the domestic property sector will likewise experience euphoria.

For all of the reasons mentioned above, external and internal liquidity, policy divergences between domestic and global economies, policy traction amplified by savings, suppressed real interest rate, the dearth of systemic leverage, the unimpaired banking system and underdeveloped markets—could underpin such dynamics.

As one would note from the ADB chart[1], following the Asian Crisis, ASEAN economies have had little exposure to property loans.

And despite the recent surge in property prices in developed Asia[2], this hasn’t reached frothy levels yet, except for Hong Kong.

Thus the environment of low leverage and prolonged stagnation in property values is likely to get a structural facelift from policy inducements, such as suppressed interest rates which are likely to trigger an inflation fuelled boom by generating massive misdirection of resources-or malinvestments.

Of course many would argue on a myriad of tangential or superficial reasons: economic growth, rising middle class, urbanization and etc... But these would mainly signify as mainstream drivels, as media and the experts will seek to rationalize market action on anything that would seem fashionable.

And the business cycle will be left unheard of until perhaps the realization of a bust.

As Murray N. Rothbard explained[3] (bold emphasis mine)

``For businessmen, seeing the rate of interest fall, react as they always would and must to such a change of market signals: They invest more in capital and producers' goods. Investments, particularly in lengthy and time-consuming projects, which previously looked unprofitable now seem profitable, because of the fall of the interest charge. In short, businessmen react as they would react if savings had genuinely increased: They expand their investment in durable equipment, in capital goods, in industrial raw material, in construction as compared to their direct production of consumer goods.

``Businesses, in short, happily borrow the newly expanded bank money that is coming to them at cheaper rates; they use the money to invest in capital goods, and eventually this money gets paid out in higher rents to land, and higher wages to workers in the capital goods industries. The increased business demand bids up labor costs, but businesses think they can pay these higher costs because they have been fooled by the government-and-bank intervention in the loan market and its decisively important tampering with the interest-rate signal of the marketplace.”

If I read into the price actions of the major components of the publicly listed Philippine property sector, arranged according to biggest weighting: Ayala Land (ALI-black candle), SM Prime Holdings (SMPH-gray line), Megaworld (MEG-blue line), Robinsons Land (RLC-maroon line), Filinvest Land (FLI-green), Belle Resources (BEL-pink) Vista Land (VLL-red) and SM Development Corp (SMDC-orange) they seem to chime on the same tune—a forthcoming property boom.

And please don’t insist of any outlandish and unproven micro-fundamental based actions (earnings, dividends and etc...) because the picture clearly shows that in the uniformity of price actions, there isn’t any.

Instead it has clearly been my Machlup-Livermore paradigm at work.

---

[1] ADB.org Asian Economic Monitor, July 2010

[2] Deutsche Bank, Asian property markets: No significant bubbles – yet!, June 23, 2010

[3] Rothbard, Murray N. Economic Depressions: Their Cause and Cure

3 Philippine Firms Among Forbes Asia’s Top 200 Smallest and Midsize Companies

Forbes magazine issued its index of the 200 top small scale and midsized companies of Asia (with $1 billion revenues and below)

Some highlights presented by Forbes:

-China maintains the most with 71 but is down from 78 last year

-Indian companies shot up to 39 from 20 last year

-Vietnam made a debut with Vinamilk

-only 2 Japanese companies made cut down from 24 last year

-151 names are new compared to 2009 list

-technology companies (hardware and software) seem to be making the growth inroads as well health care issues

Additional comment:

Among the ASEAN 4: Thailand has 11, Malaysia has 7, Philippines has 3 while Indonesia has one

See the complete list here

For the Philippines: They include Lopez Holdings (classified as media), Pacific Online system (household products) and Philweb (software services)

See charts below: (note: this does NOT in anyway represent a stock TIP)

Lopez Holdings (LPZ)

Pacific Online (LOTO)

Philweb (WEB)

Cyberspace: A Battleground Between Socialism and Free Markets

Governments are going to have a hard time trying to control the cyber space.

According to the Economist,

GOVERNMENTS are increasingly finding ways to enforce their laws in the digital realm. The most prominent is China’s “great firewall”. But China is by no means the only country erecting borders in cyberspace. The OpenNet Initiative, an advocacy group, lists more than a dozen countries that block internet content for political, social and security reasons. They do not need especially clever technology: governments go increasingly after dominant online firms because they are easy to get hold of. In April Google published the numbers of requests it had received from official agencies to remove content or provide information about users.

Based on his recent article, security expert Bruce Schneier would say that web regulation is a folly.

That’s because of three things:

1. It would mean a massive war against deepening spontaneous order, division of labor and diversity.

Internet is the largest communications system mankind has ever created, and it works because it is distributed. There is no central authority. No nation is in charge. Plugging all the holes isn't possible.

2. To engage in cyberspace control means censorship. It’s also a war waged against the spread of knowledge with stark ramifications.

The second flawed assumption is that we can predict the effects of such a shutdown. The Internet is the most complex machine mankind has ever built

3. The complexities of the cyberspace extrapolates to manifold loopholes and action-reaction dynamics.

The third flawed assumption is that we could build this capability securely. We can't. Once we engineered a selective shutdown switch into the Internet, and implemented a way to do what Internet engineers have spent decades making sure never happens, we would have created an enormous security vulnerability. We would make the job of any would-be terrorist intent on bringing down the Internet much easier.

Mr. Schneier concludes,

Computer and network security is hard, and every Internet system we've ever created has security vulnerabilities. It would be folly to think this one wouldn't as well. And given how unlikely the risk is, any actual shutdown would be far more likely to be a result of an unfortunate error or a malicious hacker than of a presidential order. But the main problem with an Internet kill switch is that it's too coarse a hammer. Yes, the bad guys use the Internet to communicate, and they can use it to attack us. But the good guys use it, too, and the good guys far outnumber the bad guys. Shutting the Internet down, either the whole thing or just a part of it, even in the face of a foreign military attack would do far more damage than it could possibly prevent. And it would hurt others whom we don't want to hurt.

At the end of the day, one of the two forces (free markets versus socialism) would have to yield. Guess who?

Even Fidel Castro Seems To Have Given Up On Socialism

Still dreaming of the magic of socialism?

Even practitioner Cuba’s former president Fidel Castro seems to have given up on the failed model.

This from Yahoo news.

Fidel Castro told a visiting American journalist that Cuba's communist economic model doesn't work, a rare comment on domestic affairs from a man who has conspicuously steered clear of local issues since stepping down four years ago.

The fact that things are not working efficiently on this cash-strapped Caribbean island is hardly news. Fidel's brother Raul, the country’s president, has said the same thing repeatedly. But the blunt assessment by the father of Cuba's 1959 revolution is sure to raise eyebrows.

Jeffrey Goldberg, a national correspondent for The Atlantic magazine, asked if Cuba's economic system was still worth exporting to other countries, and Castro replied: "The Cuban model doesn't even work for us anymore" Goldberg wrote Wednesday in a post on his Atlantic blog.

To put things in perspective, Cato’s Dan Mitchell observes that economic growth in Cuba has stagnated throughout the years of socialism. This is sharply in contrast to Chile whose economic growth has exploded following the latter’s embrace of economic freedom.

From Mr. Mitchell, (bold emphasis mine)

This chart, comparing inflation-adjusted per-capita GDP in Chile and Cuba, is a good illustration of the human cost of excessive government. Living standards in Cuba have languished. In Chile, by contrast, the embrace of market-friendly policies has resulted in a huge increase in prosperity. Chileans were twice as rich as Cubans when Castro seized control of the island. After 50 years of communism in Cuba and 30 years of liberalization in Chile, the gap is now much larger.

Thus, I am reminded by the prescience of Mr. Ludwig von Mises who again has been validated when he wrote... (bold emphasis mine)

All efforts to realize Socialism lead only to the destruction of society. Factories, mines, and railways will come to a standstill, towns will be deserted. The population of the industrial territories will die out or migrate elsewhere. The farmer will return to the self-sufficiency of the closed, domestic economy. Without private ownership in the means of production there is, in the long run, no production other than a hand-to-mouth production for one's own needs...

It might so happen that some nations would remain socialistic while others returned to Capitalism. Then the socialist countries alone would proceed towards social decline. The capitalist countries would progress to a higher development of the division of labour until at last, driven by the fundamental social law to draw the greatest number of human beings into the personal division of labour, and the whole earth's surface into the geographical division of labour, they would impose culture upon the backward nations or destroy them if they resisted. This has always been the historical fate of nations who have eschewed the road of capitalist development or who have halted prematurely upon it.

Socialism is ever the elusive utopia which appears to thrive successfully only in the mindset of those who refuse the functionalities of the real world.

Are Food Shortages The Result of Extreme Weather?

This news from yahoo says so,

Deadly riots in the streets of Mozambique over sharply higher food prices have left 13 dead. Anger is growing in Egypt and Serbia as well. Panicked Russian shoppers have cleared the shelves of staple grains. And the devastating floods that have left as many as 10 million Pakistanis homeless are also raising concerns about the country's ability to feed itself.

A series of isolated disasters? Not at all. The common thread: extreme weather, which is putting pressure on food supplies around the globe.

Like any politically biased article, this seems focused on a post hoc fallacy (after this, therefore because of this) argument.

Extreme weather conditions has exacerbated but not caused the existing imbalances or shortages.

In almost every instance, shortages happens when the price mechanism isn’t allowed to function.

And because agriculture is one of the most, if not the most, politically sensitive sector in any economy, it has been the least open to international commerce, hence, the inherent imbalances from the lack of trade and investments which extrapolates to reduced output or the lack of supply. In short, supply constrains have been caused by government policies which has distorted the price mechanism.

This is especially accentuated in developing economies whom lacks capital to develop idle lands which has been aggravated by aforementioned protectionist measures.

Subsequently this has resulted to a massive loss in productivity from the underlying mismatch in the yield gaps and the land availability (abundance of fallowed lands) as shown below by the most recent World Bank Study Rising Global Interest In Farmlands.

Of course, the law of demand and supply has always been at work, such that in the recent episode where food prices spiked in 2007-8 combined with the recent trends of globalization, governments have used current dynamics to exploit on these gaps by allowing for crossborder investments (seen below).

So obviously the answer to the problem of shortages is to allow markets to function, which hopefully the du jour acceptance of globalization might diffuse openness into the world’s agriculture sector.

And of course, no one has been talking about the way global governments have been printing money which has been artificially boosting demand for food and obversely depreciating value of currency relative to real goods.

For the mainstream, what is NOT sensational but real, hardly matters.

Quote of the Day: The Future of Labor

Here is a great post labor day quote from marketing guru Seth Godin,

In a world where labor does exactly what it's told to do, it will be devalued. Obedience is easily replaced, and thus one worker is as good as another. And devalued labor will be replaced by machines or cheaper alternatives. We say we want insightful and brilliant teachers, but then we insist they do their labor precisely according to a manual invented by a committee...

Companies that race to the bottom in terms of the skill or cost of their labor end up with nothing but low margins. The few companies that are able to race to the top, that can challenge workers to bring their whole selves--their human selves--to work, on the other hand, can earn stability and growth and margins. Improvisation still matters if you set out to solve interesting problems.

The future of labor isn't in less education, less OSHA and more power to the boss. The future of labor belongs to enlightened, passionate people on both sides of the plant, people who want to do work that matters.

In the ongoing transition to the information age, investments, trade and jobs will require increasing patterns of diversity and specialization. And as pointed out by Mr. Godin, those who focus on the mediocre will suffer from commoditized wages and profit margins and will be subjected to rigors of tight competition.

Finally, this also shows how labor, like capital, isn’t homogeneous.

The Rationalization Phase Begins: ‘Golden Era’ Equals The ‘New Paradigm’?

As George Soros would probably say this would represent as the ‘growing conviction’ phase, as prices begin to influence fundamentals and people’s outlook by rationalizing price action for real changes.

This from Bloomberg,

Philippine and Malaysian stock markets may soon end 16 years of stagnation and enter a “golden era,” according to CLSA Asia-Pacific Markets technical analysts.

The Philippine Stock Exchange Index is testing its record high reached on Oct. 8, 2007, after fluctuating between support at 975 to 1,075 and resistance at 3,447 to 3,896 since 1993, CLSA analysts led by Laurence Balanco said. The FTSE Bursa Malaysia KLCI Index is also poised for a breakout after it “drifted net-sideways” below the 1,332 to 1,524 range since 1994, the analysts wrote in a report.

The “secular bear markets” in the two Southeast Asian countries may be similar to ones in South Korea from 1989 to 2005, Indonesia from 1990 to 2004, India from 1992 to 2004, Singapore from 1994 to 2006, and the U.S. from 1966 to 1982, according to CLSA. Since then, benchmark indexes in the five countries have rallied at least 51 percent and posted gains of as much as 282 percent, the analysts said.

“If the PSE index and the KLCI are to adhere to these common secular bear market patterns, then both markets are on the cusp of entering a new long-term bull market phase,” the analysts wrote.

A “conclusive” breakout above 3,896 could take the Philippine gauge to 6,752 “in the years to come,” according to the analysts. Still, they said the market may yet pause as it approaches the resistance zone and as the benchmark index completes a five-wave sequence from the October 2008 low.

Golden Era equals the “New Paradigm”?

Should Your Housemaid Invest In The Stock Market?

``Demanding immediate success invariable leads to playing the fads or fashions currently performing well rather than investing on a solid basis. A course of investment, once charted, should be given time to work. Patience is a crucial but rare investment commodity. The problem is not as simple as it may appear; studies have shown that businessmen and other investors abhor uncertainty. To most people in the market place, quick input-output matching is an expected condition of successful investing.” David Dreman, Contrarian Investment Strategies: The Next Generation

Should your housemaid invest in the stock market?

All Actions Are A Function Of Tradeoffs

Recently, I chance upon a message advocating housemaids to invest their money in the stock market. The supposed goal is to help the underprivileged financially by capitalizing on the rising markets.

While I would agree with the underlying motive, the basic problem with this idea is that purported intentions hardly square with reality.

In the real world, all actions have consequences. And actions are driven by the preferences (value scale) and incentives of individuals to seek relief from discomfort.

In short, people’s actions represent purposeful behaviour.

As the great Ludwig von Mises explains[1], (all bold highlights mine)

``Acting man is eager to substitute a more satisfactory state of affairs for a less satisfactory. His mind imagines conditions which suit him better, and his action aims at bringing about this desired state. The incentive that impels a man to act is always some uneasiness. A man perfectly content with the state of his affairs would have no incentive to change things. He would have neither wishes nor desires; he would be perfectly happy. He would not act; he would simply live free from care.”

``But to make a man act, uneasiness and the image of a more satisfactory state alone are not sufficient. A third condition is required: the expectation that purposeful behavior has the power to remove or at least to alleviate the felt uneasiness. In the absence of this condition no action is feasible. Man must yield to the inevitable. He must submit to destiny.”

This means that the consequences of everyone’s action for betterment can have short term or long term effects. Hence, in a world of scarcity, everyone’s action is a consequence of a tradeoff in personal values and preferences.

And one cannot isolate actions taken by individuals from these underlying influences, even from the perspective of impulses.

Again from von Mises[2],

``He who acts under an emotional impulse also acts. What distinguishes an emotional action from other actions is the valuation of input and output. Emotions disarrange valuations. Inflamed with passion, man sees the goal as more desirable and the price he has to pay for it as less burdensome than he would in cool deliberation. Men have never doubted that even in the state of emotion means and ends are pondered and that it is possible to influence the outcome of this deliberation by rendering more costly the yielding to the passionate impulse.”

Take for instance in the recent infamous hostage taking[3] (at the Luneta Grandstand in the Philippines), which has now become a political controversy.

Some have suggested that the actions of the criminal signified that of a fit of rage. True, but again it was choice made from a tradeoff of what the culprit sees as a better way to resolve a personal unease or predicament.

In other words, a choice had been made based on short term time horizon (immediate gratification) which alternatively meant the failure of the felon’s emotional intelligence which paved way for a severe miscalculation that proved to be fatal for him, the victims and politically strained the relations diplomatic between the nationalities involved in the unfortunate incident.

Also there is a suggestion that the perceived depravity of the due process which prompted for the criminal’s misdeeds should be detached. False. Again people are driven by purposeful behaviour where actions and motives are inseparable, interrelated or intertwined, again from the Professor Mises[4], “It is impossible for the human mind to conceive a mode of action whose categories would differ from the categories which determine our own actions”

The point of the above is to show you that people’s choices are ALWAYS based on tradeoffs, all of which comes with intertemporal (occurring across time) consequences, positive or negative, where good intentions can lead to the opposite of the desired goals.

Housemaids And The Bubble Cycle

And how does this apply to the wisdom of housemaids investing in the markets?

The fundamental reason for such advocacy is predicated on the broadening expectation of the linearity of the ongoing trend (see figure 1).

Figure 1: Bloomberg: The ASEAN Bull Market

As earlier explained[5], the ASEAN bullmarket appears to be segueing into what billionaire George Soros calls as the “growing conviction” phase of the boom cycle.

This simply means that as the uptrend becomes more entrenched, people will intuitively flock to where the returns are. In behavioural finance this is called the herding effect or the Herd Behavior.

Indonesia (JCI, green) is the first among the contemporaries to surpass the 2007 highs. All the rest, particularly Philippines, (PCOMP yellow), Malaysia (KLSI, orange) and Thailand (SET, red) appear to be at the threshold of testing their 2007 highs.

The point of my showing the synchronous action of ASEAN markets is to demonstrate that this hasn’t been mainly because of national political-economic issues, but because of other variables UNSEEN by the public or by even most of the experts. Yet among the popular experts, who at the start of the year, predicted that the Phisix will likely break 3,800?

Here is what I wrote in May 2009[6],

``Nonetheless, if the Phisix does end the year above 2,500, we may expect a full recovery (Phisix 3,800) by the end of 2010 or even an attempt at the 5,000.”

5,000 may seem too optimistic but one can’t discount the acceleration of the speed and depth of the shaping bullmarket. Sri Lanka and Bangladesh for instance on a year to date basis is up astoundingly by 73% and 49% respectively, compared to the Phisix at 22%[7] which makes ASEAN bourses look dismal. At any rate, my predictions are mostly becoming a reality.

And where money is seen as being picked up on the streets, even housemaids will, by their volition, perhaps prodded or influenced by their peers or their household employers, will gravitate to “easy money”.

Remember the stock market is a social phenomenon driven by expectations, whether these expectations are valid or not[8].

And the rising tide compels people to make various attributions to market actions, such as economic growth or earnings or mergers and acquisitions, no matter how loosely correlated they are or how little relevance they are with the genuine market drivers. Most of this account for as popular dogmatic fables or widely held superstitions as evidences does not support the causality nexus from such premises.

What has been driving today’s stock markets has been the tsunami of liquidity, or what I have long called as the Machlup-Livermore[9] paradigm, from the coordinated monetary policies by global central banks in an attempt to forestall the “deflation” bogeyman.

And these policies have had relative effects on the marketplace, where areas largely unblemished from the recent bubble implosion appear to have been “positively” influenced. This seems quite evident in the markets of the periphery more than that of the developed economies, from which most of these policies have been directed.

I say positive, in the context, where rising markets are being misconstrued as signs of rising prosperity, which is illusory, when in fact what such dynamic account for is the tacit depreciation of the currency, but presently seen in the dynamic of “asset price inflation”. As we have long said, these are symptoms of the seductive sweet-spot phase of inflation. Heck, why has gold been rising against ALL currencies[10], if this hasn’t been so?

Eventually this illusion morphs into nasty bubbles (see figure2), or at worst, inflation spiralling out of control.

Figure 2: World Bank: Paper Money and Banking Crisis

And it is NO coincidence that since the world went off the quasi gold standard of the Bretton Woods system in 1971 the account of banking crisis globally have exploded.

Why?

Because inflation, as a short term fix is like narcotics, is addicting.

Again Professor Mises[11],

``The popularity of inflation and credit expansion, the ultimate source of the repeated attempts to render people prosperous by credit expansion, and thus the cause of the cyclical fluctuations of business, manifests itself clearly in the customary terminology. The boom is called good business, prosperity, and upswing. Its unavoidable aftermath, the readjustment of conditions to the real data of the market, is called crisis, slump, bad business, depression. People rebel against the insight that the disturbing element is to be seen in the malinvestment and the overconsumption of the boom period and that such an artificially induced boom is doomed. They are looking for the philosophers' stone to make it last.

In short, the paper money-fractional reserve central banking system induces boom bust cycles only shifts around the world. And ASEAN economies, as well as other peripheral emerging economies, seem like candidates to a formative bubble.

And this is why we also have long been saying of a Phisix 10,000[12] or the potential of the Philippine Phisix to reach bubble proportions sometime in the future.

If experts hardly grasp the dynamic of bubble cycles, how the heck do you expect housemaids to understand?

The Housemaid Indicator

Housemaids investing in the stock markets have NOT been unusual. During the acme of the bubble cycle in China in 2008, the onrush of retail punters into stocks, which included housemaids, signified the peak of frenzied activities.

As Shujie Yao Dan Luo of The University of Nottingham wrote in their recent study[13], (emphasis added)

``Most of these investors, which included farmers, cleaners, taxi drivers and house maids, knew little about stock markets and how share prices were determined. Many of these people started investing in the stock markets when prices had already risen rapidly to peak levels, just before the market bubble burst. The participation of these ‘envious’ investors artificially prolonged the bullish market and created a much larger market bubble than would have occurred had they not become involved.”

In short, retail investors GOT SINGED and were left HOLDING THE EMPTY BAG. They accounted for as the FOOL in the Greater Fool Theory.

Former Morgan Stanley analyst Andy Xie describes the “Maid Indicator” as great way of looking at market tops, he says[14],

``Now housemaids are in the market. Who else? Never underestimate 1.3 billion people. In China, they say you should take the shoeshine boy’s advice. Many would listen to him. Welcome to China, the land of getting rich quick.”

In other words, retail money represents unintelligent money. Retail money is mostly drawn into the prospects of free lunches and who turn stock markets into casino-like gambling orgies. They signify as the culmination of irrational behaviour.

A most recent example has been in the US markets, where there has been a pronounced shift of retail investors OUT of stocks and INTO bonds.

And guess what? It would appear that the counterpart of the Maid Indicator or the RETAIL money indicator is accurate (figure 3).

Figure 3: Retail Investors Hardly Gets Investing Right

As the New York Times highlighted on this monumental shift, markets immediately sprung to the opposite direction against the bets of retail money.

As I recently wrote[15], ``I’d suggest that, like always, they are wrong and betting against them (in stocks) would likely be a profitable exercise.”

By the way things are developing, I could be validated anew.

And like my son’s finance professor who initially required that he and his classmates to invest in the stock markets for the semester (four months), to which I argued against, and instead told my son that his professor speak to me, it must be understood that profiting from stock markets is NOT a function of three or four months exposure unless one is positioned as a PUNTER than an investor.

Stock Market investing, like all other successful endeavours requires diligence, perseverance, perceptiveness and patience. And importantly, unlike other professions, it also requires the ability to think independently and to resist social or peer pressures, which alternatively means going against the crowd or popular wisdom even to the risk of ostracism.

For instance the world’s most successful stock market investor Mr. Warren Buffett, at the height of the dot.com boom was labelled a “dinosaur” for avoiding investments in technology companies. In hindsight, he was vindicated. His advice[16], “If you’re applauded, worry. Great moves are usually greeted by yawns.”

The same holds true with the fallacious notion of learning from simulated stock market games. When one deals with “monopoly” play money, the tendency is to GET aggressive because there is no real cost. To lose is simply a game. Yet repeated exposure to simulated games could amplify risk tolerance and aggressiveness at the expense of profit opportunities.

In other words, simulated trading games impart the wrong traits or attitudes in dealing with the financial markets. Since the market is a function of social actions, the understanding of people’s behaviour and the direction of such actions is a MUST.

Yet one must be reminded that since everyone has different value scales and preferences, these can’t be quantified or seen in aggregates, which has been the major flaw of mainstream economics.

Investing Is NO Free Lunch

Let me be clear with my position, I am not opposed to ANYONE, including maids, from engaging the markets. What I am vehemently opposed with is the idea of free lunches as path to prosperity.

Anyone who engages in the markets must be capable to deal with the intertemporal tradeoffs between risks and rewards.

Because every action has a consequence, the inability to reckon with such tradeoffs could translate into future losses far greater than any interim gains.

Another thing which I am rabidly opposed with is the pretentious morality of uplifting the underprivileged by advocating unnecessary exposure on the stock markets when the participants are under qualified to comprehend or imbue on the attendant risks involved.

To expose people to future losses which could be far greater than the current gains defeats the goal of social advancement.

Just ask the horde of speculators of the US housing bubble who had been apparent “victims” of Federal Reserve and US government policies. They who profited at first have now been suffering from the losses out of excessive speculations. These gullible participants were lured and abetted by the immoral policies of turning stones into bread.

Yet failed policies do NOT exonerate the individual’s recklessness because many have seen the potential impact of bubble policies prior to the bust per se. Warnings were unheeded because of the enticements of social pressure and the seeming perpetuation of rising prices.

And such consequentialist notion where “the ends justify the means” or the consequences of actions serving as moral propriety also fails to account for the tradeoff between present and future ramifications from such actions. Teaching housemaids to engage in risky ventures without the necessary understanding of risks is tantamount to gambling.

Another way to say it is that the reorientation of people’s behaviour towards reckless undertakings which is likely to result to adverse consequences is not morally justifiable nor is gambling, in anyway, going to create financial upliftment.

If the retail under qualified entities (housemaids, drivers or low skilled workers) insists on investing in the financial markets, then the right approach would be to let experts handle their money via mutual funds or UITF (Unit Investment Trust Funds) or through pooled discretionary accounts with able and qualified fund managers.

Yet, even if the experts do manage their accounts, the communication of the tradeoffs between risks and rewards should be a prerequisite or a sine qua non for the simple reason of harmonizing the expectations of the client and managers.

Unmatched expectations are often the root of most conflicts. In the financial markets, expectations in time preferences could be a principal source friction for a principal-agent relationship.

Thus, we go back to the simple operating precept: investing is NO Free lunch, period. That has to be understood by both retail investors (housemaids) and fund managers. Anybody who says otherwise is either being untruthful or deceiving oneself or the other party.

Beware of false prophets.

---

[1] Mises, Ludwig von The Prerequisites of Human Action, Human Action Chapter 1 Section 2

[2] Ibid

[3] See The Bloodbath At Rizal Park Hostage Drama Demonstrates The Pathology of Government, August 24, 2010

[4] Mises, Ludwig von The Alter Ego Human Action Chapter 1 Section 6

[5] See How To Go About The Different Phases of The Bullmarket Cycle, August 23, 2010

[6] See Kentucky Derby And The Global Stock Market, May 10 2009

[7] See Global Stock Markets Update: Peripheral Markets Take Center Stage, September 4, 2009

[8] See A Primer On Stock Markets-Why It Isn’t Generally A Gambling Casino, January 9, 2009

[9] See Are Stock Market Prices Driven By Earnings or Inflation?, January 25, 2009

[10] Gold.org, Daily gold price in a range of currencies since January 2000

[11] Mises Ludwig von, The Market Economy as Affected by the Recurrence of the Trade Cycle, Chapter 20 Section 9

[12] See Phisix 10,000:Clues From Philippine Bond Offering, July 15, 2009.

This has been a long held prediction of mine even prior to the last bubble cycle. The 2007-2008 bearmarket I had interpreted as a countercyclical trend in a secular uptrend. The current underlying secular trend reverses once the bubble dynamic, cultivated domestically, implodes. This has NOT been the case in the 2007-2008, which was largely a function of global contagion. This also why fundamentals (economic performances, earnings, etc..) and market actions went on the opposite ways serves as proof of the disconnect between popular wisdom and reality.

[13] Yao, Shujie and Lou, Dan Chinese Stock Market Bubble: Inevitable Or Incidental? University of Nottingham

[14] Investmentmoats.com, Andy Xie: Housemaid indicator says Chinese Bubble near to burst, April 28, 2010

[15] See US Markets: What Small Investors Fleeing Stocks Means, August 23, 2010

[16] KPMG.com "If you're applauded, worry"

Global Stock Markets Update: Peripheral Markets Take Center Stage

Going into the last quarter of the year, Bespoke Invest has a great snapshot of what has been happening in global stock markets.

From Bespoke Invest, (bold highlights mine)

The average year to date change for all 82 countries is 5.39%, while the median change is 2.23%. The S&P 500's year to date change of -1.24% is obviously below both of these. The US currently ranks 53rd out of 82 in terms of 2010 performance. At the top of the list is Sri Lanka with a 2010 gain of 73.69%. Bangladesh ranks second at 49.37%, followed by Estonia (41.94%), Ukraine (40.86%), and Latvia (40.26%).

India has been the best performing BRIC country so far this year with a gain of 4.33%. Russia ranks second at 1.42%, Brazil ranks third at -2.43%, and China is down the most at -18.97%. Canada is currently the top G7 country with a gain of 3.26%. Germany and Britain are the other two G7 countries that are up year to date, while Japan is the G7 country that is down the most year to date (-13.58%). Overall, Bermuda has seen the biggest losses this year with a decline of 38.25%. Greece is the second worst at -24.56%.

Additional comments:

1. Global stock markets are MOSTLY higher from a year-to-date basis, be it in terms of average or median changes or in nominal distribution (53 up against 29 down). This hardly evinces of the ballyhooed “double dip”.

2. The best performance has been at the periphery (as previously discussed), particularly in emerging South Asia, the Baltic States (Estonia have been a favourite since she has adapted a laissez faire leaning approach in dealing with the most recent bubble bust) and ASEAN.

This appears to be manifestations of the “leash effect” from policy divergences.

3. The BRICS has underperformed, but that’s because of last year’s outperformance. This excludes China, whose markets have repeatedly been under pressure from government intervention. I expect the BRICs to likewise pick-up, perhaps at the end of the year or in 2011 (perhaps including China).

4. Major East Asian economies have likewise underperformed. But this appears to reflect on the actions of major OECD economies.

Overall, what we seem to be seeing has been a spillover dynamic from the prodigious liquidity generated from coordinated global monetary policies into the peripheral markets. It’s the impact of inflation on asset prices on a relative scale. In addition, this also reflect signs of the allure of inflation’s “sweet spot” phase, especially for the peripheral markets.

As a caveat, while stock markets do resemble some signs of “decoupling”, such divergences can be deceiving.

Decoupling can only be established once the US goes into a recession while peripheral markets and their respective economies ignore this.

Yet, I doubt this will occur.

The Inflating Bubble In The Global Currency Markets

The mainstream says there has been NO inflation or inflation hardly poses as a risk.

Unfortunately this view ignores the relative and uneven effects of inflation on the markets and the economies.

Usually, the initial manifestations are seen in the asset markets.

And at present, the currency markets looks like a key absorber of inflationism (aside from US treasuries).

According to the Wall Street Journal,

``The $4 trillion mark represents a 20% gain from $3.3 trillion in 2007, the last time the global foreign-exchange markets were surveyed, according to the Bank for International Settlements. While the survey found continued growth in currency trading, it did reflect a slowdown in the market's growth from the prior survey, when trading volumes had soared 69% from $1.9 trillion in 2004.”

So money printing worldwide seems to be getting a new outlet as more and more people trade a wider dimension of currencies.

Again from the WSJ (bold emphasis mine)

The survey showed how investors are seeking out faster-growing economies and big commodity producers. Trading volume between the U.S. dollar and the Australian dollar rose 35% from 2007, and volume with the Canadian dollar was up 44%. Trading also jumped in the Indian rupee, Chinese yuan and Brazilian real. In contrast, trading in the U.S. dollar against the British pound, a mainstay of the currency markets, fell 6%. Trading in the euro against the dollar rose 23%.

It’s not just globalization of trade, but globalization of asset inflation.

Of course, the US dollar remains as the de facto currency pair of most currency trades.

Again the WSJ (bold highlights mine)

Overall, the U.S. dollar remained the dominant global currency. It accounted for 84.9% of transactions, down from 85.6% in 2007. The euro's share rose to 39.1% from 37%. The share count data add up to 200%, to reflect the fact that there are two currencies in each transaction.

One should note that the trading the currency market means exposing oneself to highly leveraged positions.

The WSJ,

Currently, investors can borrow $100 for every dollar they invest. The Commodity Futures Trading Commission, which regulates foreign-exchange trading in the U.S., tried to cut that amount to $10.

And that again they are mostly used by financial institutions, the WSJ... (bold emphasis added)

The foreign-exchange market is actually a network of bank dealers and electronic-trading systems. At its core are investors or corporations needing to convert one currency into another, either as they buy or sell a stock or bond from another country or bring home profits earned abroad. For example, any time a U.S. investor buys a Japanese stock or a German company buys parts from a Korean supplier, a foreign-exchange trade occurs.

Banks are also heavy users of the currency markets to convert cash they borrow from foreign investors. Mutual-fund managers overseeing portfolios of foreign stocks may use currency derivatives to offset the impact of exchange-rate swings on those investments. And finally, there are speculators, such as hedge funds and mutual funds, who place bets on whether individual currencies will rise or fall.

Derivatives, carry trade and all those sophisticated and complex arbitrages which played a major role in the last bubble bust seems to be a significant contributor to the explosion of the volume trades in the currency markets.

For a broader perspective, the WSJ provides us with a comparison of the currency markets with other financial markets...

The currency market is by far the world's largest financial market. It dwarfs U.S. stock trading, which in April averaged about $134 billion a day, down from a daily average of $148 billion in 2007, according to data compiled by the Securities Industry and Financial Markets Association. Even trading in U.S. Treasurys, among the biggest markets in the world, averaged $456 billion a day in April, down from an average of $570 billion for all of 2007.

Now small investors are increasing their foreign-currency exposure. They are piling into mutual funds which make bets on currencies as a core part of their strategy. More broadly, U.S. stock mutual funds that invest overseas have taken in $42 billion over the past year, according to Morningstar Inc.

So the ingredients of a bubble seem all in place: high leverage, massive interventions, complex instruments and irrational behavior.