Philippine Phisix: Ongoing Rotational Process Amidst Overbought Conditions

For the week, the Philippine Phisix had been one of a few bourses that had escaped the interim cyclical correction. The bullish momentum appears to have prevailed, which eked out marginal gains.

On a year to date basis, the Phisix grew by 1.2% as of Friday, coming off this week’s .25% advance. Remember that in early 2011, the Phisix was down by about 15%.

Parsing on market internal activities, despite this week’s marginal gains, profit taking appears to have taken hold as decliners led advancers by a modest margin.

Yet the market leadership in the Philippine Stock Exchange (PSE) has clearly shown an ongoing process of rotation.

Two weeks ago the service sector became the market’s darling. Last week, the property sector grabbed the spotlight. This week, market leadership had been shared by the mining & oil and the holding sector.

The holding sector had been lifted by the material gains of the peripheral components: property, energy and mining holding company DM Consunji [DMC +9.14%], property banking and agricultural Filinvest Development Corporation [FDC +7.06%] and property, water, road and infrastructure based Metro Pacific Investment [MPI +3.93%].

Meanwhile, the mining sector has been singlehandedly buoyed by Lepanto Consolidated (LC +15.7%, LCB +17.54%).

On the losing side, the Industrial sector posted hefty losses (-2.45%) mostly due to energy company San Miguel Corporation [SMC-11.56%] which voluntarily suspended trading its shares as the company undertakes a fund raising program via sale of convertible bonds and shares[1].

San Miguel’s loss had been accompanied by electric utility Meralco [MER] which likewise shed 4.61% over the week.

Daily Trades As Sentiment Guidepost

One would note that even when the Phisix underwent a correction phase (blue vertical line) during November of 2010, the number of daily trades remained significantly above the levels during the first half of 2010.

This only implies that the correction then had NOT been a general phenomenon, and that there had been significant activities over the broader markets.

During full blown bear markets, the fall in equity values are transmitted to trading activities which likewise would exhibit substantial declines, as the public losses interest on “speculative” activities. So a feedback loop mechanism occurs, falling equity prices equate to falling trades and falling trades amplifies the price declines.

The reverse is true in bullmarkets: Higher prices translate to more trading activities and more trading activities are likely to magnify gains of equity prices. I say “likely” because there are exceptions to the rules.

The point is daily trades function as indicators of the sentiment of trading participants or of the general market.

Resolving The Overbought Levels of the Phisix

The Phisix seen from a technical viewpoint is still largely overbought.

Almost all indicators, I use, suggest that this has been so: The Phisix trades way above the 50 day Moving Averages (MA) shown in the main window, the Relative Strength Index (RSI), MACD (moving average convergence diverge) and the Full stochastic (Full STO) shows of overextended levels.

So it would not be a surprise for us to see some profit taking activities that may take hold.

But the technically overbought levels of the Phisix might also be resolved through a consolidation phase. This means the Phisix could go rangebound but the overbought levels will be resolved by specific issue related actions, as expounded last week[2].

And this week’s actions appear to reflect on these dynamics. Issues that had been overbought were sold, while issues that have lagged became market darlings. This defines the rotational dynamics.

Obviously the general trend determines the specific issue performance, but the actions are dissimilar (degree of movements) and spread through time (shown by diverse intervals—some issues take long before market attention shifts on them or some are inherently volatile or etc.).

But again if any hiatus surfaces, then this should likely be ephemeral, which should present as buying opportunities for traders, punters or long term investors.

Otherwise, attempting to catch short term waves might lead to missed opportunities.

As Publius Ovidius Naso the Roman Poet popularly known as Ovid once wrote,

“Chance is always powerful. Let your hook always be cast; in the pool where you least expect it, there will be fish.”

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[1] Finance Asia San Miguel gives price guidance for $850 million fundraising, April 14, 2011

[2] See Phisix-Philippine Peso Back In Rhythm, April 10, 2011

The Philippine Stock Exchange and Financial Globalization

Last week’s spike in the prices of the Philippine Stock Exchange [PSE], the publicly listed monopoly franchise that operates the domestic stock exchange and allied services, brought to light some of the ongoing developments of the world stock markets.

The PSE Makes A Big Move

First, I’ll deal with the Philippine Stock Exchange.

The PSE flew on the account of the 1:1 stock dividend[1] which the company declared last week. (Disclosure: I have long been a shareholder of PSE)

The chart formations presage many bullish signs in the PSE price actions.

One, there is the bullish reverse head and shoulders pattern by the blue descending line which signify as the neckline. And secondly, an uptrend channel (marked by the green lines) over the past two years, signifying a mid term trend.

The recent breakout only highlights of the fulfilment to these patterns (of course subject to the buoyancy of the overall market sentiment)

In addition, the PSE reached over php 700 per share when the Phisix topped at 3,800 in 2007. Today, the Phisix trades at over 4,200.

Aside from being a monopoly, the kismet of PSE depends on the general actions of the Phisix and of the broader domestic market. Thus, higher Phisix should equally be reflected on the share values of the PSE.

So for me, the PSE functions like an index fund or the equivalent of an Exchange Traded Fund (ETF) representative of the Phisix. Thus, for as long as the Phisix is headed higher so should the PSE. It’s almost like a no-brainer investment theme.

And that’s the domestic perspective.

Mergers & Acquisition, Collaboration and IPOs

Next, I have written about the prospects of consolidation or integration of global stock markets.

In 2007 I wrote[2],

With the revolutionary advances in the field of communications and information technology-the advent of on-line electronic trading platforms makes it possible for real-time electronic transactions regardless of the geographical distance.

Grounded on this premise, the major exchanges appears to be in a rush to integrate financial services, to diversify and expand their market coverage, reduce transaction (bookkeeping, clearing and settlement) costs by achieving the economies of scale, to eliminate further inefficiencies by way of human intervention, provide for financial depth by attracting global investors (to augment the demand side), traders and listing companies (to increase supply side), to improve on liquidity by easily matching buyers and sellers, and finally, adapt to the ongoing changes in marketplace by being accessible to the growing significance of institutional investors [pension funds, hedge funds, mutual funds and insurance companies] as compared to retail investors in the past.

With the global trade and economic structure presently favoring Asia, as evidenced by its exploding foreign exchange reserves and rapidly rising per capita and middle class, its largely fragmented and underdeveloped financial markets makes it a potential ground for an explosive expansion.

Apparently events are validating my earlier observations anew as many stock markets around the world are in the process of consolidation.

One channel is by mergers & acquisitions.

Though much to my dismay, the Australian government recently blocked Singapore’s Stock Exchange (SGX; SIN: S68) takeover bid of the Australia Stock Exchange (ASX:ASX) on absurd nationalist grounds[3].

If the objective is to reduce transaction costs, maximize on the economies of scale, expand market access and supply, and increase market efficiency by globalizing the channels of savings and investments then upholding “national interests” essentially defeats such ideals.

If the ASX rejects SGX out of financial or economic reasons, then there won’t be any opposition from me, but for politicians to pretend to know better of the interests of the stockholders or of the nation represents repression.

Besides, despite the setback, there has been a raft of ongoing mergers in the pipeline.

There has been an ongoing deal for a merger of the New York Stock Exchange (NYSE) with Deutsche Börse of Germany, where U.S.-based Nasdaq OMX Group Inc. and IntercontinentalExchange Inc. have also been waiting on the wings and have been interested to buy into the NYSE[4].

In addition, the London Stock Exchange Group PLC's have also proposed a takeover of TMX Group Inc owner of Toronto Stock Exchange.

And as world markets continue to recover, we should expect mergers & acquisitions deals to pick up steam.

Chart from Allen & Overy[5]

And such deals will include stock market M & A.

Well the integration process doesn’t stop with mergers.

Stock exchanges have also been rushing to push for alliances and collaboration.

One good example is the recent ASEAN deal which promotes the regional equity markets. The aim here is to provide link gateways to the region’s exchanges[6] in line with plan to promote free capital movements within the region, or the 2015 ASEAN Economic Community.

Individual bourses have been in play too.

The London Stock Exchange is likewise reported to be negotiating with Bursa Malaysia for a partnership[7]. Hong Kong has reportedly been open to accept partnerships. And so with Taiwan, who seeks regional alliances via Exchange Traded Funds[8].

And as global stock markets respond to inflationism and financial globalization, we should expect more Initial Public Offerings (IPO) to surge too.

Asia has so far led IPO deals into the recovery.

In the 2011 Global IPO trends outlook, financial services company Ernst & Young observes[9], (chart by Ernst & Young) [bold highlights mine]

In 2011, global IPO markets continue to recover and gain momentum. Global investors seeking to capitalize on the emerging markets growth story have been fueling stock market rallies and new listings world-wide. The lack of exit routes, shortage of capital-raising opportunities, and numerous IPO postponements since 2007 have led to a growing IPO pipeline worldwide. Many key drivers of 2011 global IPO markets reflect a continuation of 2010’s key trends including emerging markets growth, state privatizations, multinational company spin-offs, and fast-growth companies in the energy, industrial, materials and technology sectors.

Despite market volatility exacerbated by the Eurozone sovereign debt crisis, in 2010, global IPO fundraising gradually recovered to pre-crisis levels, buoyed in particular by a record-breaking fourth quarter. In 2010, emerging market issuers, particularly in China, maintained their fundraising leadership, driven by rapid economic growth, market liquidity, and foreign fund inflows.

Again we see a feedback mechanism where rising stock values have fuelled global IPOs and where IPOs tend to magnify gains in global equity markets.

As stock markets continue to advance these should be reflected in IPOs and in mergers & acquisition activities, as well as deals for free capital movement via alliances and other forms of collaboration.

All these simply represent the deepening thrust towards financial globalization.

And it’s quite obvious that the PSE will be a part of this deal making process, as already evidenced by the ASEAN collaboration.

I think more deals will come in the future that should involve the PSE. But all these are anchored upon the whereabouts of the current state of the bubble cycle.

So yes for as long as the boom phase of this cycle persists, I remain mostly bullish on global equity platform providers. And this includes the PSE.

---

[1] pse.com.ph Philippine Stock Exchange: Declaration of 100% Stock Dividends April 13, 2011 AN092-002557

[2] See Unifying Global Stock Markets; Asia Looks Next!, January 14, 2007

[3] BBC.co.uk Australia rejects Singapore's bid for stock exchange, April 8, 2011

[4] Wall Street Journal Asia, Stock-Exchange Mergers Fan Nationalism, April 15, 2011

[5] Allen & Overy, The Allen & Overy M&A Index Q1 2011

[6] See ASEAN Integration: Regional Stock Exchange Website Launched, April 12, 2011

[7] Dailymail.co.uk TAKING STOCK: LSE in scramble for partners as mergers boost competition, April 16, 2011

[8] Reuters.com, Taiwan exchange aims alliances, no M&A plans, April 16, 2011

[9] Ernst & Young Global IPO trends 2011

World Economic Forum on Global Network Readiness (Info Tech) and Global Competitiveness

The World Economic Forum (WEF) recently published two significant reports: one on Information Technology (IT), particularly on the ranking of Network Readiness, and the other, on Global Competitiveness.

In terms of the IT world, according to the WEF, Network Readiness Index (NRI) “mapped out the enabling factors driving networked readiness, which is the capacity of countries to fully benefit from new technologies in their competitiveness strategies and their citizens’ daily lives”.

The index, according to the WEF, has further “allowed private and public stakeholders to monitor progress for an ever-increasing number of economies all over the globe, as well as to identify competitive strengths and weaknesses in national networked readiness landscapes.”

A partial view of the global ranking of the NRI can be found below

The Philippines ranks 86^th in Network Readiness.

Read the report here

The second is the Global Competitiveness report.

A partial view of the WEF Global Competitiveness table shown below.

One would notice that the order of rankings of competitiveness seem to parallel that of the NRI.

The Philippines ranks 85^th here.

In measuring competitiveness based on the WEF methodology, technology readiness is just one of the 12 pillars.

In my view, as the world economy transitions into knowledge-based, and away from the industrial era configuration, competitiveness will greatly depend on the use of technology, which should bring about greater business process and organizational efficiency via increased specialization and on the tapping of niche markets.

Read the report here.

The Global Competitiveness Report 2010-2011

Gold As Safehaven From Currency Devaluation: Belarus Edition

From Reuters.com (hat tip Bob Wenzel)

Belarus' central bank has stopped selling gold to local retail customers for Belarussian roubles BYR=, it said on Friday, after demand for precious metals soared due to expectations of a currency devaluation.

The bank did not explain its decision.

The explanation:

This represents an instinctive response by Belarussians against the expectation of their government’s debauchery of money.

Such action can be read as “flight to real values”.

War on Economics: China Imposes Price Controls!

The war on economics has begun.

After four interest rate increase, and having failed to curtail inflation, China has started to impose price controls!

From the Financial Times, (bold highlights mine)

China has imposed strict price controls on basic consumer items and is expected to allow faster appreciation of its currency in the coming months after annual inflation in the country reached its highest level in nearly three years in March.

In a speech this week to the governing State Council, Chinese Premier Wen Jiabao said Beijing would, along with other policy measures, “further improve the yuan exchange rate mechanism and increase yuan exchange rate flexibility to eliminate inflationary monetary conditions”...

The price department of China’s powerful state planning agency – the National Development and Reform Commission – met earlier this month with 17 industry associations and ordered them to delay or cancel planned price increases.

The quasi-government industry associations included those overseeing agriculture, pharmaceuticals, fisheries, home appliances, cosmetics, meat, vegetables and many other basic consumer items.

In the past week or so the NDRC has also directly ordered flour and cooking oil producers to delay price increases, according to state media reports, and has even applied price controls to large global groups operating in China, such as Unilever

Price controls, which implies limits on production (yes, who will sell at a loss?, Who will work for free???), will only aggravate shortages rather than solve the problem.

From Wikipedia.org

As Wikipedia explains

Suppliers find they can't charge what they had been. As a result, some suppliers drop out of the market. This reduces supply. Meanwhile, consumers find they can now buy the product for less, so quantity demanded increases. These two actions cause quantity demanded to exceed quantity supplied, which causes a shortage—unless rationing or other consumption controls are enforced.

This serves as a politically convenient short-term approach but nonetheless a foolish one because it defies basic economics that comes nasty repercussions (rationing, long lines, more political instability).

The Romans tried it, US President Nixon tried it and many political authorities spanning 4 centuries tried it but all of them failed. Venezuela’s Hugo Chavez has also recently implemented this but has even worsened inflation and shortages.

And these have been so predictable.

First politicians create inflation by debasing the currency.

Next, politicians blame the market for self inflicted ills, thereby, superficially react to such imbalances by imposing price controls which eventually backfires.

As the great Ludwig von Mises wrote,

those engaged in futile and hopeless attempts to fight the inevitable consequences of inflation — the rise in prices — are masquerading their endeavors as a fight against inflation. While fighting the symptoms, they pretend to fight the root causes of the evil. And because they do not comprehend the causal relation between the increase in money in circulation and credit expansion on the one hand and the rise in prices on the other, they practically make things worse.

The policy of price control is where George Santayana’s damning admonition...“Those who cannot remember the past are condemned to repeat it”...reverberates.

World Bank Blames Higher Food Prices on Everything Else But Central Bank Policies

World Bank says elevated food prices are driving many people to poverty.

From the World Bank’s press release

Driven in part by higher fuel costs connected to events in the Middle East and North Africa, global food prices are 36 percent above their levels a year ago and remain volatile, pushing people deeper into poverty, according to new World Bank Group numbers released today.

“More poor people are suffering and more people could become poor because of high and volatile food prices,” said World Bank Group President Robert B. Zoellick. “We have to put food first and protect the poor and vulnerable, who spend most of their money on food.”

According to the latest edition of the World Bank’s Food Price Watch, a further 10 percent increase in global prices could drive an additional 10 million people below the $1.25 extreme poverty line. A 30 percent price hike could lead to 34 million more poor. This is in addition to the 44 million people who have been driven into poverty since last June as a result of the spikes. The World Bank estimates there are about 1.2 billion people living below the poverty line of US$1.25 a day.

The World Bank’s food price index, which measures global prices, is 36 percent above its level a year earlier and remains close to its 2008 peak. Key increases compared to a year ago include maize (74 percent), wheat (69 percent), soybeans (36 percent) and sugar (21 percent), although rice prices have been stable. In many countries, vegetables, meats, fruits and cooking oil continued to rise with potentially adverse nutritional consequences for the poor.

Aside from high fuel costs, the World Bank blames higher food prices on other factors as the weather.

Food prices have soared due to severe weather events in key grain exporting countries, export restrictions, the increasing use for biofuel production, and low global stocks. The food price hike is also linked to surging fuel prices -- crude oil increased 21 percent in the first quarter of 2011as a result of unrest in the Middle East and North Africa.

chart from World Bank’s Food Price Watch "Correlation isn't causation"

The World Bank isn’t being forthright.

Since agricultural products have been the least globalized this means that any localized imbalances should translate to local and not to higher global prices.

Say a drought happens in country A, then A suffers higher food prices (and possibly some trading partners who depend on A for specific agri or food based products) but not the world and certainly not most of the commodities.

Furthermore, if price signals work in the domestic markets then such imbalances should translate to an anomaly or an ephemeral event and not sustained price increases.

Alternatively, general price increases in commodity prices won’t happen if the imbalance engendered have been caused mainly by non-monetary factors. That's because higher spending in some areas will be offset by lower spending in others. Only central bank inflationism can bring about generalized price increases.

Obviously, like almost all governments, all the blame will fall on the weather, corporate greed, Middle East crisis, fuel prices, and etc… but never on the inflationism applied by central banks. (The Bank of Japan is an exception in admitting monetary policies as responsible for food price hikes, but they have been responsible for inflationism too)

The World Bank mentions ‘exports restrictions’ (which deserves applause) but keeps mum on who has instituted "increased biofuel production". This only implies that distortive administrative policies (subsidies, tariffs, price controls et. al.) have partly been responsible (as aggravating factors).

All these “anything-but-the-government/central bank-to-blame” appears to be part of the public conditioning for the next step—massive price controls.

US Budget Debate: The Path Towards “Running Out of People’s Money”

It is tax deadline day today, which makes a good day to deal with some du jour tax related issues.

In the US, there has been ‘fierce’ ongoing budget- budget deficit cutting debate which has apparently been used as a staging point for the 2012 Presidential elections.

The Wall Street Journal has this budget cutting table showing the Ryan-Obama square-off.

Given these, Professor Walter E. Williams, has a timely and apropos article, where he makes an assumption that considering President Obama’s “class warfare-soak the rich” rhetoric, the US government appropriates

ALL earnings of the “rich” income group $250K and above ($1.4 trillion) +

Fortune 500 corporate profits ($400 billion) +

the assets of US Forbes 400 billionaires ($1.3 trillion) =

The $3.1 trillion won’t be enough to pay for the President proposed $3.7 trillion budget for 2012.

The Business Insider has a breakdown of these proposed budget

Professor Williams writes, (bold highlights mine)

Politicians, news media people and leftists in general entertain what economists call a zero elasticity view of the world. That's just fancy economic jargon for a view that government can impose a tax and people will behave after the tax just as they behaved before the tax, and the only change is more government revenue. One example of that vision, at the state and local levels of government, is the disappointing results of confiscatory tobacco taxes. Confiscatory tobacco taxes have often led to less state and local revenue because those taxes encouraged smuggling.

Similarly, when government taxes profits, corporations report fewer profits and greater costs. When individuals face higher income taxes, they report less income, buy tax shelters and hide their money. It's not just rich people who try to avoid taxes, but all of us – liberals, conservatives and libertarians.

What's the evidence? Federal tax collections have been between 15 and 20 percent of the nation's Gross Domestic Product every year since 1960. However, between 1960 and today, the top marginal tax rate has varied between 91 percent and 35 percent. That means whether taxes are high or low, people make adjustments in their economic behavior so as to keep the government tax take at 15 to 20 percent of the GDP. Differences in tax rates have a far greater impact on economic growth than federal revenues.

So far as Congress' ability to prey on the rich, we must keep in mind that rich people didn't become rich by being stupid.

That’s why former UK Prime Minister Margaret Thatcher once said in a TV interview (which became a famous quote-bold highlights mine)

Socialist governments traditionally do make a financial mess. They always run out of other people's money. It's quite a characteristic of them. They then start to nationalise everything, and people just do not like more and more nationalisation, and they're now trying to control everything by other means. They're progressively reducing the choice available to ordinary people.

Political interests and ambitions masquerading as noble intentions eventually will get unraveled. In short, it’s all about economics—what is unsustainable economically won’t last.

So the next step will be for US politicians to go for budget plugging actions. All accrued these actions will impact financial markets and the US and global economy.

Greece Default Risk At New Record, No Contagion

The default risk of Greece, represented by the Credit Default Swaps (CDS), has just traded at new record highs.

The elegant chart and subsequent table below from Bespoke Invest.

With the current surge, Greece has now supplanted Venezuela as the riskiest nation with the likelihood of a default, as shown below.

Additional comments

1. The credit risk table shows that it has been a bipolar world. Emerging markets have mostly been down (diminishing perception of credit risks), since December 31, 2009, while developed economies have been up (higher credit risks mostly from the after effect of the 2008 crisis).

2. The Greece episode which used to haunt the world markets (in 2010) appears “contained” or has become uncorrelated today.

(from stockcharts.com) Move along, nothing to see here

So far the Euro, the Europe’s Stoxx 50 (Stox50) and major global equity index (DJW) has virtually ignored the Greece rumpus unlike in 2010.

The lessons:

This highlights the dynamic where:

Past performance do not guarantee future outcome.

Markets learn to discount risks.

Global central bank’s flooding of money has so far temporarily masked whatever credit woes that have plagued the PIIGS.

It’s a complex market with variable interplaying factors. Oversimplification leads to misdiagnosis

Video: Amazing Virtual Choir

Whether you call this Peer2Peer or collaboration, globalization via technology have been linking people from all over the world for different interests. The video below exhibits an amazing global ensemble of a youtube based virtual choir.

I cannot resist quoting Prof Russ Roberts:

We are just beginning to tap the extraordinary potential for human creativity and how we can use the internet to harness that creativity. This is stunning both in concept and execution. Beautiful.

Indeed. Watch it.

Much Ado Over Nothing On US Budget Cuts, Debt Ceiling Next

As we previously argued the brouhaha over US budget cuts signified nothing but symbolism.

From the Washington Post, (bold emphasis mine)

A new budget estimate released Wednesday shows that the spending bill negotiated between President Barack Obama and House Speaker John Boehner would produce less than 1 percent of the $38 billion in promised savings by the end of this budget year.

The Congressional Budget Office estimate shows that compared with current spending rates the spending bill due for a House vote Thursday would cut federal outlays from non-war accounts by just $352 million through Sept. 30. About $8 billion in immediate cuts to domestic programs and foreign aid are offset by nearly equal increases in defense spending.

When war funding is factored in the legislation would actually increase total federal outlays by $3.3 billion relative to current levels.

To a fair degree, the lack of immediate budget-cutting punch is because the budget year is more than half over and that cuts in new spending authority typically are slow to register on deficit tallies. And Republicans promise that when fully implemented and repeated year after year, the cuts in the measure would reduce the deficit by $315 billion over the coming decade.

So instead of cuts, we have budget increases. And prospective cuts only apply to projected spending which are decades away.

As Lew Rockwell writes, (bold emphasis mine)

In other words, this is all political play, which is obvious from the numbers and the norms. In the first place, no one is talking about actual cuts, not even the supposedly radical Republicans. These are cuts in projected spending, meaning that everyone is dealing with symbolic changes in a future that is just as symbolic. Even on paper, the only way to consider these cuts is to compare them with the GDP and the national debt -- both of which are slated to rise. Forgetting those two metrics, and looking at the actual numbers, there are no cuts at all and only increases.

Even the dating of the Republican’s balanced budget is ridiculous. So the budget will be fully balanced in 2040? That’s three decades from now. Few of the people in office will still be in office, and many will be dead. To see how viable this is, consider how many political plans of the year 1982 still survive today.

The Republican plan proposes domestic cuts in these gargantuan programs like Social Security and Medicare with nothing specific beyond the old prattle about establishing bi-partisan commissions and sending block grants to the states. There is nothing specific here beyond a numbers-laden pipe dream. No programs are abolished, no benefits are slashed or even trimmed, and although the propagandists claim to attack the culture of spending in Washington, there is not one word about taking on the money-printing machine that made the $14 trillion national debt possible in the first place.

This brings back my earlier observation where...

Stripping away control and spending other people’s money is so addictive that politicians can’t seem to do away with it and would fight heaven and hell to avoid it.

And so it has been.

The next step will be a vote FOR raising the debt ceiling.

Prediction Market Intrade suggests that the odds for raising the debt ceiling by June 2011 seem to be at 75% as of the moment.

The usual, government authorities will raise the spectre of fear of a prospective mayhem (bogeyman) to justify the actions of politicians.

From Marketwatch.com (bold highlights mine)

Treasury Secretary Timothy Geithner on Thursday said Congress will act to raise the debt ceiling because they realize the consequences for not doing so. "We're only two years from a cataclysmic financial crisis, and the huge damage to credibility and huge loss of confidence," he said before a Bertelsmann Foundation conference. "The idea that Washington would court that risk is inconceivable." Publicly and privately, Congressional Republicans have indicated they understand the implications of not raising the debt ceiling, Geithner said. Geithner added that markets have confidence that Congress will cut deficits. "The world basically believes that problems are manageable, and the system will solve it," he said

Could Mr. Geithner be utilizing the power of suggestion or is he conditioning the public?

This reminds me of General Douglas MacArthur who once said,

Our government has kept us in a perpetual state of fear -kept us in a continuous stampede of patriotic fervour -with the cry of grave national emergency. Always, there has been some terrible evil at home, or some monstrous foreign power that was going to gobble us up if we did not blindly rally behind it.

Of course, a further move will be by the US Federal Reserve who will bring forth QE 3.0 by the latter half of 2011.

Politicians (everywhere) and bureaucrats are nearly cut from the same cloth.

So far, everything seem to jibe.

Global Job Markets: Specialized (Value Added) Work Means Higher Pay

Here is my favourite marketing guru, Seth Godin’s take on cheap labor… (bold emphasis mine)

When something is scarce, it's valuable. MBA's with buzzwords and the ability to raise a million dollars around some web idea are not scarce. They are fungible.

People who understand technology and are willing to bend it to their will, on the other hand, are scarce. They can't be found with a classified ad on Craigslist or in a blind project ad on eLance.

The job of the smart business person isn't to fish in waters where coders are cheap. It's to have enough initiative and vision that the best coders in the world will realize that they'll do better with you than without you.

Business people add value when they make things happen, not when they seek to hire cheap.

Cheapness isn’t everything. Job markets are a function of demand and supply. In today’s climate where global economies have been transitioning from mass production to niche markets, specialization (division of labor and comparative advantage) will be playing a much greater role in shaping job markets.

Courtesy of Kauffman Foundation

Thus, people who specialize will command higher pay. To argue that “cheapness” steal away jobs represent squishy thinking.

Does Statistical Measure of Unpaid Work Accurately Represent Human Values?

Below is another example of statist obsession with statistical aggregates.

The OECD writes, [chart included bold highlights mine]

Most unpaid work is housework. Mexicans do the most, at more than 3 hours per day, and Koreans the least, at 1 hour and 19 minutes. Much of this time is spent cooking. Americans spend the least time cooking each day (30 minutes) and Turks the most in the OECD (74 minutes). Most people spend around 50 minutes a day cooking.

Shopping also makes up a big part of unpaid work. Most people in OECD countries spend 23 minutes a day shopping, with the French spending the most (32 minutes) and the Koreans the least (13 minutes).

The report also attempts to estimate how much unpaid work is worth as a percentage of GDP for the 25 OECD countries for which data are available. It finds that the value of unpaid work is considerable, equivalent to about one-third of GDP in OECD countries, ranging from a low of 19% in Korea to a high of 53% in Portugal.

My comment

First, cooking or washing clothes may not be “paid work”, but this should NOT be seen in such simplistic dimensions. Question is who does the unpaid housework, how is unpaid work financed (how is cooking financed) and how does unpaid work affect productivity?

In the Philippine context, usually household chores are done by either family members or contracted informal labor (household helps). Thus, the productive household members are mostly gainfully employed who finances these “unpaid” jobs. (yes subcontracting to laundry shops or buying from "carinderia" eatery are alternatives but becomes paid work)

Yet unpaid work may not necessarily be measured in money terms because payment can be coursed through non-money benefits (shelter, grocery goods, meals, education and etc...). And monetary stipend may not be based on salaries but on allowances (thus not reflected on government statistics because payments isn’t formal or declared).

In other words, unpaid work isn’t free, it's a form of voluntary exchange coursed through informal means. Instead unpaid work represents division of labor too.

An important point is highlighted by this great video from Hans Rosling, which I earlier posted, which essentially shows of the introduction of the washing machine that has magnified the benefits of division of labor.

Mr. Rosling’s presentation elaborated on the indirect and intangible benefits particularly freeing of invaluable time for the household moms to educate their children, which has eventually enhanced productivity and added to economic growth.

Basically it’s too naive to narrow down “work” to just dollars and cents. There are many other aspects or unseen cost-benefit tradeoffs surrounding human actions. Point is, statists overlook opportunity costs.

Second, if shopping, which could be deemed as a leisure activity, is reckoned as unpaid work, then how about sex, watching tv, sports, fellowship, playing computer/internet games and others..., must they be reckoned as unpaid work too? What differentiates work and leisure?

This just shows that if you like chocolates and I like beer, statist experts will extrapolate these into dollars and cents from which they configure an economic model and subsequently apply political undertones.

This means that if government sees equality as forcing me to have chocolates instead of beer, and on the other hand, forcing you to have beer instead of chocolates then we both achieve equal satisfaction. BS...

The point is statists apply the reductio ad absurdum fallacies in lieu of people’s value preferences or marginal utilities.

The second point is, it’s always their preferences or tastes or ethical virtues that should be upheld...not yours.

Daniel Griswold: Debunking the Belief that Imports and Trade Deficits Are a "Drag on Growth"

Cato's Daniel Griswold rebuts popular myths about trade deficits in the research journal below.

Abstract:

A nearly universal consensus prevails that the goal of U.S. trade policy should be to promote exports over imports, and that rising imports and trade deficits are bad for economic growth and employment.

The consensus creed is based on a misunderstanding of how U.S. gross domestic product is calculated. Imports are not a "subtraction" from GDP. They are merely removed from the final calculation of GDP because they are not a part of domestic production.

Contrary to the prevailing view, imports are not a "leakage" of demand abroad. In the annual U.S. balance of payments, all transactions balance. The net outflow of dollars to purchase imports over exports are offset each year by a net inflow of foreign capital to purchase U.S. assets. This capital surplus stimulates the U.S. economy while boosting our productive capacity.

An examination of the past 30 years of U.S. economic performance offers no evidence that a rising level of imports or growing trade deficits have negatively affected the U.S. economy. In fact, since 1980, the U.S. economy has grown more than three times faster during periods when the trade deficit was expanding as a share of GDP compared to periods when it was contracting. Stock market appreciation, manufacturing output, and job growth were all significantly more robust during periods of expanding imports and trade deficits.

The goal of U.S. trade policy should not be to promote exports at the expense of imports, but to maximize the freedom of Americans to trade goods, services, and assets in the global marketplace.

The Trade-Balance Creed: Debunking the Belief that Imports and Trade Deficits Are a "Drag on Growth", Cato ...

Ranking of Nuclear Accidents, Japan’s Fukushima is Second So Far

Where does the Fukushima nuclear leak stand among the past nuclear power plant accidents?

From the Economist,

JAPAN'S authorities have said that the ongoing problems at the Fukushima Dai-ichi plant now justify a rating of 7 on the International Nuclear and Radiological Event Scale (INES), the highest possible. But INES can be confusing: it takes into account many different factors, from the level of radiation released to the effects on the environment and how severely safety systems are stretched. Categories 4-7 are classed as “accidents”, 1-3 as mere “incidents”. The scale is subjective, which makes labelling nuclear incidents as much an art as a science; in theory, at least, it is also logarithmic, meaning that a Level 4 “accident” is in some sense ten times worse than a Level 3 “incident”. Although the Fukushima accident is now rated at the same level as the Chernobyl disaster in 1986, in terms of casualties and effects on the environment, it is far less significant. Our chart presents a selection of nuclear incidents and their ranking on the scale

Federal Reserve’s Pandora’s Box: Some Wives of Wall Street’s Head Honchos Were Loan Beneficiaries Of Bailout Program

Today we seem on a roll with the subject of crony capitalism.

Now we turn to the US Federal Reserve.

Earlier we noted that ally turned adversary Libya’s Muammar Qaddafi had been one of the ‘unexpected’ beneficiaries of the Fed’s post Lehman stabilization programs.

It appears that more controversial recipients are surfacing from the opening of the Fed’s equivalent of the mythical Pandora’s box.

This time wives of some of Wall Street’s head honchos had reportedly been granted with political privileges in the form of ‘bailout’ loans.

From Rolling Stone Magazine’s Matt Tibbi, (bold highlights mine) [hat tip Bob Wenzel]

Now, following an act of Congress that has forced the Fed to open its books from the bailout era, this unofficial budget is for the first time becoming at least partially a matter of public record. Staffers in the Senate and the House, whose queries about Fed spending have been rebuffed for nearly a century, are now poring over 21,000 transactions and discovering a host of outrages and lunacies in the "other" budget. It is as though someone sat down and made a list of every individual on earth who actually did not need emergency financial assistance from the United States government, and then handed them the keys to the public treasure. The Fed sent billions in bailout aid to banks in places like Mexico, Bahrain and Bavaria, billions more to a spate of Japanese car companies, more than $2 trillion in loans each to Citigroup and Morgan Stanley, and billions more to a string of lesser millionaires and billionaires with Cayman Islands addresses. "Our jaws are literally dropping as we're reading this," says Warren Gunnels, an aide to Sen. Bernie Sanders of Vermont. "Every one of these transactions is outrageous."

But if you want to get a true sense of what the "shadow budget" is all about, all you have to do is look closely at the taxpayer money handed over to a single company that goes by a seemingly innocuous name: Waterfall TALF Opportunity. At first glance, Waterfall's haul doesn't seem all that huge — just nine loans totaling some $220 million, made through a Fed bailout program. That doesn't seem like a whole lot, considering that Goldman Sachs alone received roughly $800 billion in loans from the Fed. But upon closer inspection, Waterfall TALF Opportunity boasts a couple of interesting names among its chief investors: Christy Mack and Susan Karches.

Christy is the wife of John Mack, the chairman of Morgan Stanley. Susan is the widow of Peter Karches, a close friend of the Macks who served as president of Morgan Stanley's investment-banking division. Neither woman appears to have any serious history in business, apart from a few philanthropic experiences. Yet the Federal Reserve handed them both low-interest loans of nearly a quarter of a billion dollars through a complicated bailout program that virtually guaranteed them millions in risk-free income…

In August 2009, John Mack, at the time still the CEO of Morgan Stanley, made an interesting life decision. Despite the fact that he was earning the comparatively low salary of just $800,000, and had refused to give himself a bonus in the midst of the financial crisis, Mack decided to buy himself a gorgeous piece of property — a 107-year-old limestone carriage house on the Upper East Side of New York, complete with an indoor 12-car garage, that had just been sold by the prestigious Mellon family for $13.5 million. Either Mack had plenty of cash on hand to close the deal, or he got some help from his wife, Christy, who apparently bought the house with him…

It's hard to imagine a pair of people you would less want to hand a giant welfare check to — yet that's exactly what the Fed did. Just two months before the Macks bought their fancy carriage house in Manhattan, Christy and her pal Susan launched their investment initiative called Waterfall TALF. Neither seems to have any experience whatsoever in finance, beyond Susan's penchant for dabbling in thoroughbred racehorses. But with an upfront investment of $15 million, they quickly received $220 million in cash from the Fed, most of which they used to purchase student loans and commercial mortgages. The loans were set up so that Christy and Susan would keep 100 percent of any gains on the deals, while the Fed and the Treasury (read: the taxpayer) would eat 90 percent of the losses. Given out as part of a bailout program ostensibly designed to help ordinary people by kick-starting consumer lending, the deals were a classic heads-I-win, tails-you-lose investment….

This is the deal of a lifetime. Think about it: You borrow millions, buy a bunch of crap securities and stash them on the Fed's books. If the securities lose money, you leave them on the Fed's lap and the public eats the loss. But if they make money, you take them back, cash them in and repay the funds you borrowed from the Fed. "Remember that crazy guy in the commercials who ran around covered in dollar bills shouting, 'The government is giving out free money!' " says Black. "As crazy as he was, this is making it real."…

In the case of Waterfall TALF Opportunity, here's what we know: The company was founded in June 2009 with $14.87 million of investment capital, money that likely came from Christy Mack and Susan Karches. The two Wall Street wives then used the $220 million they got from the Fed to buy up a bunch of securities, including a large pool of commercial mortgages managed by Credit Suisse, a company John Mack once headed. Those securities were valued at $253.6 million, though the Fed refuses to explain how it arrived at that estimate. And here's the kicker: Of the $220 million the two wives got from the Fed, roughly $150 million had not been paid back as of last fall — meaning that you and I are still on the hook for most of whatever the Wall Street spouses bought on their government-funded shopping spree.

Read the rest here.

Another anecdotal evidence where government’s supposed public service is seemingly a fraud.

Enervate Crony Capitalism: Cut Their Financing

Speaking of crony capitalism, Professor and author Thomas Sowell suggests how to enervate them—cut their financing!

Here is Professor Sowell, (townhall.com) [bold emphasis mine]

Trying to reduce the deficit by cutting spending runs into an old familiar counter-attack. There will be all kinds of claims by politicians and sad stories in the media about how these cuts will cause the poor to go hungry, the sick to be left to die, etc.

My plan would start by cutting off all government transfer payments to billionaires. Many, if not most, people are probably unaware that the government is handing out the taxpayers' money to billionaires. But agricultural subsidies go to a number of billionaires. Very little goes to the ordinary farmer.

Big corporations also get big bucks from the government, not only in agricultural subsidies but also in the name of "green" policies, in the name of "alternative energy" policies, and in the name of whatever else will rationalize shoveling the taxpayers' money out the door to whomever the administration designates, for its own political reasons.

The usual political counter-attacks against spending cuts will not work against this new kind of spending cut approach. How many heart-rending stories can the media run about billionaires who have lost their handouts from the taxpayers? How many tears will be shed if General Motors gets dumped off the gravy train?

It would also be eye-opening to many people to discover how much government money is going into subsidizing all sorts of things that have nothing to do with helping "the poor" or protecting the public. This would include government-subsidized insurance for posh and pricey coastal resorts, located too dangerously close to the ocean for a private insurance company to risk insuring them.

Below is a timely example (hat tip Filipino libertarian colleague Jep Chu) of what Mr. Sowell calls as ‘sad stories in the media’ which projects the image of government as ‘helping the poor and protecting the public’.

The fact is that “subsidizing all sorts of things” signify no less than political propaganda for the benefit of the politically privileged vested interest groups that feeds on government revenues forcibly extracted from the public.

Unfortunately, sad stories sell to irrational voters.