Do Filipinos Need a New Attitude on Entrepreneurship?

I received a promotional email for an entrepreneurship seminar which comes with a column from Brian Quebengco entitled “Championing Philippine Ideas: The Rise of Silicon Valley in the Philippines”

Mr. Quebengco writes, (no link included in the email),

It is not an evolution that we need, nor is it a revolution. Rather, what we need is a transformation. Since the glory days of Semi Conductors and the Filipino entrepreneurs that championed them, we have evolved a great deal up to our present state. And as we are witnessing right now, a revolution in technology and communication has made the world flat. But what is lacking, and I feel the most important, is for us, the individual Filipino, to transform our attitude and ways to give rise to the Filipino Entrepreneur. We don't need mechanisms, infrastructures, or even the presence of a strong venture capital community to do this. In my own view, business is about people first, and everything else second. That transformation must and can only start with the individual Filipino.

He further says entrepreneurs should be individually motivated which should permeate to culture and subsequently to infrastructure. And from this he advocates the promotion of “a new kind of Enterpreneur”, one who will “challenge the global arena”.

I am delighted that there are local experts advocating entrepreneurship which functions as the cornerstone for any market economy.

However, I would suggest that any “new kind of entrepreneur” hardly matches the operational concept of entrepreneurship.

Entrepreneurs are those who allocate factors of production (labor, capital goods and natural resources) in the service of consumers. (Mises wiki)

Further, entrepreneurs employ “discovery” or “alertness” to profit opportunities in scanning the market horizon which can bring about innovation, better quality of goods or services or cheaper prices. (Israel M. Kirzner)

So aside from Silicon Valley which he seems to see as a paradigm to emulate, homegrown entrepreneurs are the balut vendors, carinderia operators, laundry services and etc… to the bigwig who compete internationally like Jollibee, San Miguel Brewery and others.

Each of them offers specific goods or services to serve their consumers in return for profit opportunities. These voluntary exchanges constitute the free markets.

What I am trying to say is that the marketplace hardly operates on “new” entrepreneurs founded on “new attitudes” but rather on individual specialization.

As the great Austrian economist Ludwig von Mises wrote, (bold emphasis mine)

The selection of the market does not establish social orders, castes, or classes in the Marxian sense. Nor do the entrepreneurs and promoters form an integrated social class. Each individual is free to become a promoter if he relies upon his own ability to anticipate future market conditions better than his fellow citizens and if his attempts to act at his own peril and on his own responsibility are approved by the consumers. One enters the ranks of the promoters by spontaneously pushing forward and thus submitting to the trial to which the market subjects, without respect for persons, everybody who wants to become a promoter or to remain in this eminent position. Everybody has the opportunity to take his chance. A newcomer does not need to wait for an invitation or encouragement from anyone. He must leap forward on his own account and must himself know how to provide the means needed.

It must be understood too that the entrepreneurship ethos is also hardly acquired from formal educational training.

Again from von Mises, (highlights added)

In order to succeed in business a man does not need a degree from a school of business administration. These schools train the subalterns for routine jobs. They certainly do not train entrepreneurs. An entrepreneur cannot be trained. A man becomes an entrepreneur in seizing an opportunity and filling the gap. No special education is required for such a display of keen judgment, foresight, and energy. The most successful businessmen were often uneducated when measured by the scholastic standards of the teaching profession. But they were equal to their social function of adjusting production to the most urgent demand. Because of these merits the consumers chose them for business leadership.

There is NO holy grail to successful entrepreneurship, as it takes sustained “keen judgment, foresight, and energy” to compete in the marketplace, even in the global arena.

What needs to be transformed is NOT the individual attitude towards entrepreneurship but rather the Filipinos’ seeming dependence on political means of dispensing economic opportunities.

In the environment where...

-taxes are high,

-red tapes are byzantine,

-bureaucracy is bloated

-regulatory compliance costs are numerous, time consuming and burdensome,

-corruption is rampant,

-competition is restricted,

-economic opportunities are distributed as political concessions (subsidies, monopolies, private-public partnership, cartel, and etc.)

-redistribution programs are plentiful (which essentially transfers productive resources to non-productive activities and at worst, induces people toward entitlements and subsequently takes away the drive for entrepreneurship)

-and many more,

...so even if most Filipinos would want to become entrepreneurs they can’t. That’ because the Philippine government (regardless of who is in power) prevents them from doing so. The cost of doing business or the risk premium is prohibitive enough to require high hurdle rates for entrepreneurs to generate decent returns.

All these signify as the Filipinos’ aversion to free markets which is what genuinely inhibits the Filipino entrepreneurial discovery process from taking hold.

We are Living in the Best Years in over Two Thousand Years

The Economist has this interesting population weighted chart which shows that much of human history and progress has been happening during the 20^th century up to the present.

The Economist writes, (bold emphasis mine)

Since there are almost 7 billion people alive today, it follows that they are making seven times as much history as the 1 billion alive in 1811. The chart below shows a population-weighted history of the past two millennia. By this reckoning, over 28% of all the history made since the birth of Christ was made in the 20th century. Measured in years lived, the present century, which is only ten years old, is already "longer" than the whole of the 17th century. This century has made an even bigger contribution to economic history. Over 23% of all the goods and services made since 1AD were produced from 2001 to 2010, according to an updated version of Angus Maddison's figures.

The chart reveals how growth in population has coincided with economic output expansion.

And second and most importantly, that human progress from the last century through the current millennium has been exponential.

Perhaps Professor Deirdre McCloskey’s “Bourgeois Revaluation” accounts for as the pivotal factor for such astounding acceleration in the rate of progress.

As Professor Don Boudreaux writes of Professor McCloskey’s thesis, (bold emphasis mine)

Only when merchants, tinkerers and practical seekers of profit in markets came to be respected -- and to be widely spoken of with respect, even with admiration -- did the social status of the bourgeoisie increase enough to make membership in that group desirable to large numbers of people. And when this Bourgeois Revaluation happened, innovation skyrocketed.

It's this innovation -- mad, fevered, historically off-the-charts amounts of innovation -- that really is what we today call "capitalism."

I am glad to have lived in this generation and to be a part of and witness such magnificent phenomenon unfold before our eyes.

And I guess that despite all the risks and the prospective afflictions which could interrupt or disrupt on such trends, the best is yet to come. I think that we are transitioning towards the information age that should characterize even faster rate of innovations under more decentralized settings (governance included).

Remember, such feat came in spite of the 2 World Wars and the gruesome tragedies of the failed experiment of communism in the 20^th century.

The above should serve as good tidings for our progenies.

China’s Bubble Cycle: Shadow Financing at $1.7 Trillion

The US mortgage bubble had substantially been financed by Shadow Banking system, where major private financial firms arbitraged around existing regulations in complicity with regulators.

China’s bubble has been progressing with the same symptoms but with different players.

This time local government agencies have relied on unofficial sectors to fund the blossoming property mania.

From the Bloomberg

China’s first audit of local government debt found liabilities of 10.7 trillion yuan ($1.7 trillion) at the end of last year and warned of repayment risks, including a reliance on land sales.

Financing vehicles set up by regional authorities already had more than 8 billion yuan in overdue debt, while more than 5 percent of such companies used new bank borrowing to repay loans, according to the audit, posted on the National Audit Office’s website and submitted to China’s cabinet.

“Some local government financing platforms’ management is irregular, and their profitability and ability to pay their debt is quite weak,” Liu Jiayi, the country’s auditor-general said in speech published today.

Premier Wen Jiabao ordered the first audit of local- government borrowing in March, amid concern spending designed to support the economy following the 2008 global financial crisis would leave a legacy of bad debt. As much as 30 percent of bank loans are expected to turn sour and they are likely to be the biggest source of non-performing assets for the industry, Standard & Poor’s said in April.

Local governments, barred from selling bonds or borrowing directly from banks, had set up 6,576 financing vehicles by the end of 2010 to raise money, the audit showed, accounting for 4.97 trillion yuan, 60 percent of which governments have responsibility to repay. Some governments have offered illicit guarantees to such companies, while others rely on land sales to help them repay, Liu said.

UBS AG estimated in a June 7 report that local government debt could be 30 percent of gross domestic product and may generate around 2 to 3 trillion yuan of non-performing loans. Credit Suisse AG economist Tao Dong said it was the biggest “time bomb” for China’s economy.

The Austrian business (bubble) cycle seems to be buttressed by the Hyman Minsky Ponzi financing dynamics or financial instability hypothesis.

A refresher quote from Professor Minsky, (bold emphasis mine)

“Three financial postures for firms, households, and government units can be differentiated by the relation between the contractual payment commitments due to their liabilities and their primary cash flows. These financial postures are hedge, speculative, and ‘Ponzi.’ The stability of an economy’s financial structure depends upon the mix of financial postures. For any given regime of financial institutions and government interventions the greater the weight of hedge financing in the economy the greater the stability of the economy whereas an increasing weight of speculative and Ponzi financing indicates an increasing susceptibility of the economy to financial instability.”

Many who see the fallacious “global imbalances” symptom will be proven wrong once China’s bubble bursts. We will see China's currency the yuan collapse the way the Thai baht did in 1997

Has the Tensions over Spratly’s Islands been about US Weapons Exports?

At the Lew Rockwell Blog, Butler Shaffer writes,

As the Philippines and China continue their conflict over sovereignty in the South China seas, the United States announced that it will provide the Philippines with additional military weaponry. Wars — and the sale of tools of death and destruction with which to conduct them — remain America’s principal exports to the rest of the world!

The big boys club continues to show how they pledge cooperation with one another. China, yesterday, has once again reaffirmed her commitment to help save Europe by offering to buy bonds of crisis affected European countries, as I recently posted.

If big boys seem to be in cahoots over highly sensitive geopolitical affairs, then it would be an oddity to see continuing antagonism on the Spratly’s issue when the same big boys are directly (China) or indirectly (US) involved.

Perhaps, it could be read that China has been bullying the Philippines. Yet perhaps not.

Or that China could be using Spratly’s as diversion to domestic political problems as evidenced by sporadic riots.

But, Professor Butler’s comment provoked a ‘naughty’ idea on my part represented by this question:

Has China been acting as a shill for the US military-industrial complex?

Or stated differently, has the tensions over the Spratly’s Island been all about boosting US weapons exports?

My earlier thoughts on the Spratly’s dispute here and here. Yet, this seems like a new angle to explore.

Japan Mulls More Bailouts for the Nuclear Industry (and Mega Banks)

As I have been saying, governments around the world would look for any excuses to print money and or extend bailouts or other political-financial privileges to pet sectors at the expense of the economy.

Japan mulls on extending new loans purportedly aimed at supporting her nuclear industry and to other sectors tied to the recent disaster.

Reports the Bloomberg, (bold emphasis mine)

Japan’s government is considering about 230 billion yen ($2.8 billion) in outlays for aid to Tokyo Electric Power Co. and radiation monitoring in its planned extra budget, according to a draft outline prepared by the Finance Ministry.

Prime Minister Naoto Kan’s government has yet to release details of the 2 trillion yen supplementary budget, which will need parliamentary approval. Officials will apply 1.8 trillion yen in tax revenue left over from the last fiscal year to help fund the package, according to the document, a copy of which was obtained by Bloomberg News.

The spending would be aimed at a nuclear crisis that remains unresolved more than three months after Japan’s record earthquake and ensuing tsunami crippled Tokyo Electric’s Fukushima Dai-Ichi reactor north of Tokyo. The utility, which has seen almost $37 billion of its market value erased, will hold its annual general meeting today...

Another 78 billion yen will be used to set up a fund for health care costs of people that were affected by radiation or live near the damaged reactor, the document said.

The cost of dismantling the Fukushima plant may reach 20 trillion yen, and compensation for households in a 20-kilometer evacuation zone may total 630 billion yen over 10 years, according to the Japan Center for Economic Research.

The draft budget also earmarked about 80 billion yen to help households that were indebted before the quake and now need to borrow more for repairs. Additional funds will be devoted to small companies affected by the natural disaster that left more than 23,000 dead or missing, according to the proposal.

Damage to buildings, roads and infrastructure will be around 16.9 trillion yen, the lower end of the government’s initial 16 trillion to 25 trillion yen forecast, the Cabinet Office said last week.

The government pledged 4 trillion yen in spending it its first extra budget, which was used to build temporary homes and clean up debris from the earthquake and tsunami.

As I earlier posted, Japan’s maintains a patronage crony relationship with the nuclear industry, and thus the proposed actions.

Second, I smell another indirect bailout of the domestic banking system. Japan’s mega banks have huge loan exposures on TEPCO which credit rating agency Moody’s recently threatened to downgrade.

From Businessweek.com

“About 2 trillion yen of loans to Tepco from megabanks and life insurance companies offered before the March quake would virtually fall to a default status if the financial institutions were to write them off,” Moody's analysts led by Tetsuya Yamamoto, Tokyo-based vice president of the financial institutions group, said in a report today.

Like any governments, politicians have no qualms on spending of other people’s money, especially for the benefit of their related or politically affiliated interests.

The Anatomy of False Economics as Revealed by the Greece Crisis

We have been told by economic ideologues that spending translates to prosperity especially if this is done by government via ‘free lunch’ socio-welfare programs.

The Greece debt and entitlement crisis should be one good example of how quant economics gets it so badly.

From the Daily Mail, (all bold highlights mine) [ht: Prof William Anderson]

There is another bonus for users of this state-of-the-art rapid transport system: it is, in effect, free for the five million people of the Greek capital.

With no barriers to prevent free entry or exit to this impressive tube network, the good citizens of Athens are instead asked to 'validate' their tickets at honesty machines before boarding. Few bother.

This is not surprising: fiddling on a Herculean scale — from the owner of the smallest shop to the most powerful figures in business and politics — has become as much a part of Greek life as ouzo and olives.

Indeed, as well as not paying for their metro tickets, the people of Greece barely paid a penny of the underground’s £1.5 billion cost — a ‘sweetener’ from Brussels (and, therefore, the UK taxpayer) to help the country put on an impressive 2004 Olympics free of the city’s notorious traffic jams.

The transport perks are not confined to the customers. Incredibly, the average salary on Greece’s railways is £60,000, which includes cleaners and track workers - treble the earnings of the average private sector employee here.

The overground rail network is as big a racket as the EU-funded underground. While its annual income is only £80 million from ticket sales, the wage bill is more than £500m a year — prompting one Greek politician to famously remark that it would be cheaper to put all the commuters into private taxis.

‘We have a railroad company which is bankrupt beyond comprehension,’ says Stefans Manos, a former Greek finance minister. ‘And yet, there isn’t a single private company in Greece with that kind of average pay.’

Significantly, since entering Europe as part of an ill-fated dream by politicians of creating a European super-state, the wage bill of the Greek public sector has doubled in a decade. At the same time, perks and fiddles reminiscent of Britain in the union-controlled 1970s have flourished.

Ridiculously, Greek pastry chefs, radio announcers, hairdressers and masseurs in steam baths are among more than 600 professions allowed to retire at 50 (with a state pension of 95 per cent of their last working year’s earnings) — on account of the ‘arduous and perilous’ nature of their work.

We are further told that by devaluation Greece would solve its problems.

From Wall Street Journal’s Holman Jenkins Jr., (bold highlights mine) [ht: Dan Mitchell]

Whether Greece gets debt relief now or later, the Greeks will not escape sweeping structural reform of their economy—one of the most corrupt, crony-ridden, patronage-ridden, inefficient, silly economies in Christendom. Its tax system operates on voluntarism and fine judgments about whether the bribe or the tax would be more burdensome to pay. The state railroad maintains a payroll four times larger than its ticket sales. When a military officer dies, his pension continues for his unwed daughter as long as she remains unwed. Various workers are allowed to retire with a full state pension at age 45.

Those who say if only Greece still had its own currency, so much pain would have been avoidable, exaggerate. Under no possible currency regime would Greece have been able to go on forever borrowing money from foreigners to live beyond its means or its willingness to work. The same is true to lesser degree of other troubled European economies, including Portugal and Spain.

All along, the challenge of the euro was the challenge that undid the gold standard—to make "the law of one price" prevail across multiple countries in the age of interest group democracy. "One price" in one country works—Americans will pick up and move 3,000 miles for a job, but even in America, not without pain.

Yet the nostalgia for a Europe of independent currencies is mostly nostalgia for an illusory shortcut—even more so as services, rather than tradable goods, become the overwhelming source of employment in modern economies. Greece, with its sun and history, has every potential to make a happy, privileged existence inside the euro zone. Today's growth gap between Europe's north and south, which some say proves the unwisdom of a common monetary policy, is hardly organic—it's the product of their common mistake in loading too much debt on unreformed southern economies in giddy expectation of euro-based prosperity.

Putting into perspective the scale of Greece’s predicament from the accrued free lunch policies, from the Foxnews.com (bold emphasis mine)

Greece's Finance Ministry estimates that, on its current track, government debt will reach €501 billion by 2015. That comes to a debt of over $66,000 per person, and Greece’s personal income is only about two-thirds our own. Greater deficits and 17 percent interest rates can cause difficult problems to grow into impossible ones very quickly.

Greece can and should do much more. Both the European Central Bank and the IMF estimate that Greece can pay off €300 of the €347 billion debt by selling off shares the government owns in publicly traded companies and much of its real estate holdings. The government owns stock in casinos, hotels, resorts, railways, docks, as well as utilities providing electricity and water. But Greek unions fiercely oppose even partial privatizations. Rolling blackouts are promised this week to dissuade the government from selling of even 17 percent of its stake in the Public Power Corporation.

It takes common sense and self-discipline to realize that:

-Spending more than what one earns cannot happen indefinitely

-Redistribution has its limits. Picking on someone’s pocket is a zero sum game.

-Welfare programs engender a culture of entitlement and dependency.

-Printing money won’t solve the problems of insufficient production. Greece’s problem has been about the chronic or deep-seated culture of over-dependency from political-welfare programs than from the lack of ‘aggregate demand’.

-Where politics determines economics, or where zero sum (free lunch) political economics is applied, poverty is the outcome.

Economic reality eventually exposes false economics.

US Money Market Funds likely the Contagion Link to the PIIGS crisis

How vulnerable is the US to the PIIGS debt and entitlement crisis?

From Bloomberg, (bold emphasis mine)

U.S. money funds eligible to buy corporate debt had about $800 billion, or half their assets as of May 31, in securities issued by European banks, Fitch Ratings estimated. European lenders held more than $2 trillion at year-end in loans to Greece, Portugal, Ireland, Spain and Italy, the most indebted European countries, the Bank of International Settlements estimated...

European Union leaders vowed June 24 to prevent a Greek default as long as Prime Minister George Papandreou pushes a $78 billion euro ($111 billion) package of budget cuts and asset sales through Parliament this week. Greece needs to cover 6.6 billion euros ($9.4 billion) of maturing bonds in August.

“Money-market mutual funds still remain vulnerable to an unexpected credit shock that could cause investors to doubt the ability to redeem at a stable net asset value,” Eric Rosengren, president of the Federal Reserve Bank of Boston, said in a June 3 speech. Some funds have “sizable exposures” to European banks through short-term debt, he said.

The $2.68 trillion money-fund industry is the biggest collective buyer in the commercial paper market.

The bankruptcy of Lehman Brothers Holdings Inc. led to the Sept. 16, 2008, closure of the $62.5 billion Reserve Primary Fund when it suffered a loss on debt issued by the bank. Reserve Primary triggered a wave of redemption requests when it became the first money-market fund in 14 years to expose investors to losses.

Customers were denied access to most of their cash for months as the fund liquidated. Investors, fearing that other funds might fail, withdrew $230 billion from the industry by Sept. 19 in a run that threatened to cripple issuers of short- term debt.

Money market funds are limited to securities that can be converted into cash within 13 months.

JPMorgan’s Roever and Peter Rizzo, senior director of fund services at credit rater Standard & Poor’s in New York, said U.S. managers have been reducing their European bank holdings and shortening the average maturities of those remaining. That would allow them to withdraw more quickly without having to sell securities into a potentially illiquid market.

S&P estimated that 80 percent of European bank holdings is limited to three months or less, and 95 percent to six months or less among the 500 U.S. and European money funds it rates.

And this is partly why news feeds of proposed continued buying by the US Federal Reserve of US treasuries continue to stream

From another Bloomberg article,

The Federal Reserve will remain the biggest buyer of Treasuries, even after the second round of quantitative easing ends this week, as the central bank uses its $2.86 trillion balance sheet to keep interest rate slow.

While the $600 billion purchase program, known as QE2, winds down, the Fed said June 22 that it will continue to buy Treasuries with proceeds from the maturing debt it currently owns. That could mean purchases of as much as $300 billion of government debt over the next 12 months without adding money to the financial system.

As I earlier noted, even if QE 2.0 does officially end this month, this proposed reinvestment program serves as transitional QE. Eventually whether it is QE or another name, asset purchasing programs by the US Federal will continue.

This also lends credence to the view that QE 2.0 may have been put in place to save foreign (European) banks in order to diminish contagion risks.

At the end of the day, it’s been all about saving the international banking cartel under the guise of saving the economy.

Political Interventions has Led to the Widening of Divergences in Global Asset Markets

By creating illusory profits and distorting economic calculation, inflation will suspend the free market's penalizing of inefficient, and rewarding of efficient, firms. Almost all firms will seemingly prosper. The general atmosphere of a "sellers' market" will lead to a decline in the quality of goods and of service to consumers, since consumers often resist price increases less when they occur in the form of downgrading of quality. The quality of work will decline in an inflation for a more subtle reason: people become enamored of "get-rich-quick" schemes, seemingly within their grasp in an era of ever-rising prices, and often scorn sober effort. Inflation also penalizes thrift and encourages debt, for any sum of money loaned will be repaid in dollars of lower purchasing power than when originally received. The incentive, then, is to borrow and repay later rather than save and lend. Inflation, therefore, lowers the general standard of living in the very course of creating a tinsel atmosphere of "prosperity.- Murray N. Rothbard

The fascinating thing about markets is that we can always expect the unexpected.

When events don’t play out according to expected patterns, this only shows how people respond differently to even similar conditions. That’s because many variables affect or influence people’s response to evolving conditions.

As the great Ludwig von Mises wrote, (bold emphasis mine)[1]

Epistemologically the distinctive mark of what we call nature is to be seen in the ascertainable and inevitable regularity in the concatenation and sequence of phenomena. On the other hand the distinctive mark of what we call the human sphere or history or, better, the realm of human action is the absence of such a universally prevailing regularity. Under identical conditions stones always react to the same stimuli in the same way; we can learn something about these regular patterns of reacting, and we can make use of this knowledge in directing our actions toward definite goals. Our classification of natural objects and our assigning names to these classes is an outcome of this cognition. A stone is a thing that reacts in a definite way. Men react to the same stimuli in different ways, and the same man at different instants of time may react in ways different from his previous or later conduct. It is impossible to group men into classes whose members always react in the same way.

This is not to say that future human actions are totally unpredictable. They can, in a certain way, be anticipated to some extent. But the methods applied in such anticipations, and their scope, are logically and epistemologically entirely different from those applied in anticipating natural events, and from their scope.

And based on logical and epistemological observations one can observe that the current market conditions are being defined by the deepening signs of divergences.

Divergences in Global Equity Markets

As global markets continue to wobble, most of Asian markets caught fire this week.

Despite Asia’s seeming reanimated equities, individual performances based on recent price actions have been idiosyncratic. In other words, some bourses have recoiled strongly from sharply oversold conditions while the other outperforming bourses have merely shed some the recent languor and could be poised for another upside run.

I would think the Philippine Phisix as representing the second category.

Most of the major bourses, the US S&P 500 [SPX], iShares MSCI All Country Asia ex Japan Index Fund [AAXJ] and the MSCI World (ex USA) Index (EOD) [MSWORLD] have all been on a downdraft almost synchronically since May.

In the past, all markets would have chimed as one.

In contrast the Phisix has swung like a pendulum to erase last week’s losses and post a positive (+2.15%) year to date gains.

Yet based on chart formations, the Phisix appears to be emitting significantly bullish signals. A reverse head and shoulder pattern, which once transgressed or encroached, could possibly send the local benchmark to the 4,900-5,000 level by the year end.

On the other hand, the actions of the BRICs represent the first category where some of the recent gains of Asian bourses signify more of oversold bounces.

China’s (SSEC) and India’s (BSE) spectacular rallies this week, appears to have broken the intermediate downtrend. As to whether the upside breakaway from the current downturns signify as key inflection points remains to be seen.

This will likely be reflected on the commodity markets too.

Divergence in Commodity Markets

Again divergences have likewise been apparent over at the commodity markets.

The recent rally in gold seems to have been thwarted and this has been coincidental to the forcible or manipulated tanking of oil prices which have been due to the International Energy Agency’s [IEA] declaration to release oil reserves in the markets over the coming month[2].

This has been part of the concerted efforts to depress commodity prices since May.

So far the gold and silver remains on the uptrend while oil and the CRB Reuters [CCI] index appears to have broken down.

With the Belgian central bank reportedly having to lease out 41% of their gold reserves, which effectively represents as shorting of gold[3], another political angle with which to manipulate the commodity markets, aside from the setting up for the conditions required for the next wave of asset purchasing program[4], would be to limit the losses being suffered by central banks that have been ‘short’ gold.

But this, in my view, signifies as the secondary order.

On the other hand, the current distortions in the commodity markets brought about by these variable interventions will likely only worsen the commodity economic imbalances and would likely signify a fleeting impact.

To the contrary, this could even setup the gold market for a possible trailblazing run!

Signs of such dynamic can be seen in the unfolding Greece debt crisis where ordinary Greeks have reportedly been stampeding into gold (to even eschew gains from interest rates) just to safeguard their savings from the fear of a collapse of their banking system[5].

QE 2.0 as Bailout of Foreign Banks?

And speaking of the European debt and entitlement crisis, US Federal Reserve Chairman Ben Bernanke recently downplayed the contagion risks of US banks because US banks haven’t been “significantly exposed”. Although Mr. Bernanke admits that US banks have “very substantial exposure to European banks in the so-called core countries, Germany, France”[6].

Given Mr. Bernanke’s very dismal track record and his admission that they “don’t have a precise read” of the performance of the US economy[7], I am pretty confident that his public statements conceals the true nature of intended political actions.

Tyler Durden of Zerohedge.com exposes evidences where money from QE 2.0 have been redirected or diverted to foreign or mostly European banks operating in the US.

Cash holdings of foreign banks based on the US have risen almost in proportion with the US Federal Reserve’s $600 billion QE 2.0.

These intricate diversions have been coursed indirectly through the Eurodollar market via US primarily dealers, US and foreign banks. The US Federal Reserve do not buy assets directly, they are done through agents.

The beneficiary international banks had supposedly been in trouble and require these excess reserves to neutralize the growing risks from the ongoing crisis at the Eurozone.

To quote Mr. Durden[8] (bold emphasis mine, above chart from Zerohedge)

In other words, foreign banks operating in the US have an artificially pumped up cash balance creating a false sense of security, with the fungible cash having been borrowed from abroad. This also means, that when and if European banks realize they need the cash "lent out" to US-based subsidiaries, and demand the $600 billion+ in dollars, all they will see is a white flag of surrender, as the US-operating banks disclose they have pledged the cash for one thousands and one uses, and its sudden withdrawal would end up crashing the capital markets. It also means that explanations that this cash was used by European banks to satisfy regulatory capitalization shortfalls are absolute gibberish. And yes, if and when there is a surge in dollar needs out of Europe, the Fed will have two choices: QE(x) and FX liquidity swaps.

If such claim is true, then we should even expect more QEs to come...and quite soon, given the current tumultuous conditions of the Eurozone.

Also, such actions imply that the US has been very concerned with the developments in Europe enough to engage in QE 2.0 for this reason.

Also, this only goes to show that the US has surreptitiously been in rescuing or bailing out banks across the globe.

Fitting pieces of the puzzle together, we can easily see why a Goldman Sachs alumni has been appointed as the European Central Bank president[9] and why Bank of Japan (BoJ) has imported Ben Bernanke’s dogma of propping up her domestic stock markets by asset purchases as policy[10]—all of which has been meant to rescue the teetering banking system of the world.

If the overall undeclared aim is to survive the current central bank-banking cartel, then there will be NO alternative but for central banks to maintain the asset purchasing programs.

Apparently, the myriad political interventions in the marketplace have led to different effects or the widening of divergent price actions across the global asset markets.

---

[1] Mises, Ludwig von Regularity and Prediction, Theory and History; Introduction

[2] See War on Commodities: IEA Intervenes by Releasing Oil Reserves, June 24, 2011

[3] See Belgian Central Bank ‘Lends’ 41% of Gold Reserves, Growing Role of Gold as Money, June 21, 2011

[4] See Poker Bluff: No Quantitative Easing 3.0?, June 5, 2011

[5] See Greeks Go For Gold, June 22,2011

[6] Bloomberg.com Bernanke Sees Small Impact on U.S. Banks of a Greek Default (1), June 22, 2011

[7] See Ben Bernanke Admits to the Knowledge Problem, June 23, 2011

[8] Durden, Tyler The Eurodollar Missing Link: Explaining The QE2-Related Cash Surge In US-Based Foreign Banks, Zerohedge.com June 22, 2011

[9] See Revolving Door Syndrome: European Central Bank’s New Head was Goldman Sach’s Honcho, June 25, 2011

[10] See Bank of Japan’s Interventions in Japan’s Stock Markets, June 23, 2011

Phisix: Divergences Point to a Bullish Momentum

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

As pointed out above, the Philippine Phisix along with her ASEAN peers, has, so far, been major beneficiaries of the deepening accounts of global market divergences.

I would like to reiterate, we should NOT misconstrue divergences with DECOUPLING.

As I previously wrote[1],

Signs of decoupling will be manifested once the next crisis emerges. Yet given the depth or scale of today’s globalization or social interconnectedness which has not been limited to trade, labor, capital flows or to even monetary policies, I strongly doubt that this should transpire.

And since there have been little signs yet of intensified deterioration in the global economic and financial sphere, except for cyclical slowdown, part of which seems orchestrated[2], there hardly has been substantial evidence to read current events as prelude to the next recession or crisis. [Yes there will be a coming crisis, which will be far worse than 2008, yet I don’t think we have approached this eventuality yet. Not unless a black swan/fat tail occurs]

This gives me the confidence to say that divergences can or may be sustained for the time being.

And along with a significantly bullish reverse head and shoulders as shown earlier, this week’s rally has largely been broadmarket based.

As gains had been manifested on every sector, market breadth ostensibly recovered. The advance-decline spread turned positive, the number of trades improved and foreign trade remained nearly neutral (slight outflows-as shown below chart).

This implies that the recent rally has been fueled by local participants.

Again the mining index, after a two week reprieve, has regained market leadership.

The service and financial sector which registered gains above the Phisix also buoyed or contributed to the overall advances of the major local equity benchmark.

The service sector was led by PLDT which gained 8.63% for the week, while the financial sector was led by last week’s big losers BPI (+6.21%) and BDO (+5.98%).

Interestingly, BPI and BDO erased the losses from the anomalous last minute selling during Friday of the other week, June 17^th.

Add to this bullish backdrop was the rally in the Peso.

The correlationship between the Peso (blue line chart) and the Phisix (black candle) appears to be tight (red direction lines).

The underlying causal link of this relationship has been demand for the Peso assets which has partly been evidenced by foreign fund flows and monetary policy divergences and artificially low rates.

All these factors, particularly chart formation, rallying peso, improving market breadth, bullish local investors, appears to have converged to signify possibly as a significant tailwind in favor of the bulls.

Should the Phisix successfully encroach on the reverse head and shoulders resistance level at 4,318, then we could be looking at 4,900-5,000 by the yearend.

As caveat, this prognosis has been based on exegesis of current market conditions and on assumptions of future actions of the drivers of the marketplace—specifically politicians and central bankers. If my assumptions or an exogenous shock occurs, then my scenario could get upended.

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[1] See ASEAN’s Equity Divergence, Foreign Fund Flows and Politically Driven Markets June 5, 2011

[2] See Falling Markets, QE 3.0 and Propaganda, June 12, 2011

Philippine Mining Index Nearly at 20,000, Fulfilling My Predictions

Bear and endure: This sorrow will one day prove to be for your good. -Ovid

The Philippine Mining index soared to a fresh record high as major mining issues have been on a rampage.

Over the past years, many have questioned my premises and have impatiently chastised me for the underperformance of my pet sector. For me, these people wanted excitement and satisfaction of the ego, more than they desired profits.

And I have always used Ovid’s quote to justify my calls:

Everything comes gradually and at its appointed hour.

Here is what I wrote in November 2009[1],

From this juncture, we believe that the mining index next goal would conservatively be at least 20,000.

With the Philippine mining index at 19,975 or 25 points away, it would appear that NOW is the appointed hour!

It’s not only that the 20,000 level that is in near fulfilment, but most importantly would be how these series of events are being realized.

Again me in 2009, (bold highlights original)

Actions among the mining components appear to be rotational- a classic symptom of bullmarket driven by inflation. This implies that the next major moves could likely come from those that have been in a reprieve.

Market trends are social trends. As mentioned above, the speculative label on the mining industry is a symptom of the lack of social acceptance or persistent aversion emanating from over two decades of depression. Essentially such resistance is psychologically bullish. That’s because despite present levels, only a handful have been invested. In social terms, bandwagon effect occurs when trends are reinforced by confirmation of expectations. In other words, long term trends draws in more converts.

First, today’s fiercely rallying mining issues have been broadening.

The first time the local mining index surpassed the previous record high was due to the blitzkrieg of Philex Mining. Today’s juggernaut has included many other issues as Lepanto [PSE:LC], Semirara [PSE:SCC], Atlas Consolidated [PSE:AT], PetroEnergy [PSE: PERC] and Manila Mining [PSE: MA].

Second, the broad based rally has been winning many converts. Even my mentor who has been a staunch mining critic now trades the sector.

In terms of Peso value traded, the mining sector accounts for 18% of this week’s trade which would have been larger (about 20%) if special block sales is excluded. To consider, the Philippine Stock Exchange has 6 sectors which means the share of the others have been captured by the mining sector.

In addition, the mining sector grabbed the top spot in terms of peso value, in two of the four trading days this week.

These are evidences which continues to manifest how investing in mines and resource sectors have transitioned from the fringes and into the mainstream.

The Rotation to Atlas-APO

The recent actions of the mining sector has shifted to Atlas Consolidated [PSE: AT] and the Forbes 28^th richest[2] Philippine tycoon Alfredo Ramos’ investment vehicle, Anglo-Phil Holdings [PSE: APO]

Many have attributed APO’s eye-popping 66% surge this week to the developments of the Atlas Consolidated, from which APO has an 11.67% stake in[3].

Atlas Consolidated, which gained 19% over the week, has reportedly offered to buy her Singaporean partners in a $368 million deal[4], which will be funded by debt and equity.

Some have speculated that part of this equity side of the deal has been designed to include Manny Pangilinan’s entry into Atlas via Philex Mining[5].

That would be fait accompli.

I would have a different story.

The actions of Atlas [green] and Philodrill [blue; PSE: OV], which APO has a .28% stake in, have been tightly correlated with the actions of APO. Such close correlations can be traced way back to 1998. Though the correlation has not been 100%; seen from major trend movements, the APO and AT-OV correlation seem to be in the bag.

Recently, Atlas has been moving higher along with other mining issues. I was partly concerned that the overbought conditions in major issues as Lepanto, Philex and Manila Mining could affect Atlas[6]. Apparently it didn’t.

Also, I spoke about the resurgence in the oil sector[7] which was led by Philodrill. Yet APO lagged as both Atlas and OV ascended. Such deviation presented a buying opportunity for me. [disclosure: I bought APO shares during this window and perhaps got lucky; I have long been a shareholder of LC, PERC, AT]

Then, I can’t say about the specifics of these deals which I would not ever be privy to until after the fact.

Yet since 2003 (see my initial prediction at safehaven.com[8]), I have long been saying that investments trends will favor the local mining and resource based industries considering that the Philippines is a resource rich nation which has mainly been untapped.

Yet I don’t need to know the specifics. I only need to know about the general trend.

And all these forces have been validating my long held premises.

In the 1970s, Atlas Consolidated was considered a blue chip and was traded at php 400s levels.

For me this means that most, if not all mining and resource based issues, will rise far beyond current price levels over the coming years, but will be subject to the flows and ebbs of the global boom bust cycles.

Not only because these sectors represent as investments, but importantly, because resource based securities will account for as hedges against central bank inflationism.

Once the risk of an inflationary panic becomes a reality, where physical metal will get drained from the spot markets, mining issues will likely serve as the next object of the ‘flight to value’.

For now, APO and AT could be short term sells considering the massive moves that has brought them to overbought levels. Yet momentum and bullmarket sentiment can lead them to vastly extended zones similar to what has been happening to Lepanto.

For most occasions market timing for me is about luck, unless one can spot rare arbitrage opportunities as the above.

Yet I always recommend investments in the prism of medium to longer term basis and hardly about market timing or short term scalps.

Importantly, these themes have to be backed by theories that work with evolving general conditions and not just to feed the intellectual ego.

Yet it does surely feel good to get validated anew. I thank my dear Lord for this special insight.

To close, again I quote Ovid,

Time is generally the best doctor.

Indeed.

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[1] See Prediction Fulfilled: Philippine Mining Index Tops 9,000 (Now 11,300!), November 15, 2009

[2] Forbes.com #28 Alfredo Ramos, Philippines 40 richest

[3] Anglo Philipines Holdings Corporation Business Interest

[4] Reuters.com Manila's Atlas to fully own Carmen Copper in $368 mln deal, June 24, 2011

[5] Abs-cbnnews.com Philex climbs most in 6 months on Atlas speculation, June 25, 2011

[6] See Phisix: Why I Expect A Rotation Out of The Mining Sector, May 15, 2011

[7] See The Awakening of the Philippine Oil Exploration Sector?, May 22, 2011

[8] Safehaven.com The Philippine Mining Index Lags the World, September 26, 2003

Mark Twain and China’s Yuan

The brilliant nanotech investor and analyst Josh Wolfe of Forbes offers three invaluable investment insights premised on the maxims of literary and philosophy luminaries: F. Scott Fitzgerald, Mark Twain and Arthur Schopenhauer

The wisdom from the select quotes of the three wise men seem representative of openmindedness (Fitzgerald), the risks of overconfidence and comfort of crowds or the contrarian stance (Twain) and innovation (Schopenhauer).

Read them here

I’d like to make a brief comment on the Mark Twain situation applied to the Yuan

Mr. Wolfe writes, (bold emphasis mine)

Mark Twain said that: “it ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just aint’ so.”

Twain Situations are those where the consensus is near certain about something. But as Buffett has noted, you pay a high price for a cheery consensus. These are situations with payoff structures that Nassim Taleb would call Black Swans. The opposite of the consensus is often entirely unrecognized, unappreciated and massively underpriced. If they are wrong, it’s a massive blow-up. Buying puts and expressing a contrarian view, with cheap insurance may be ways to express this “Twain” view. And this is precisely where the prescient Cullen Thompson and Bienville Capital Management LLC has done along with Mark Hart of Corriente Advisors LLC (who correctly nailed the huge asymmetric payoff with a contrary to consensus view on subprime housing, when all others believed housing prices could only rise). Here is Thompson quoted in today’s WSJ:

“Given the magnitude of China’s credit problems, it’s at least a possibility the yuan drops sharply. The potential of the trade is so great, and when there’s cheap insurance in today’s environment it’s silly not to buy it”

Everybody I speak: politicians, pundits and principal investors all believe, nay they “know” that the Yuan is undervalued and must rise. It just must! And therein lies the opportunity.

Like Mr. Wolfe, I have been saying that the consensus expectations of an overvalued yuan have been misplaced.

That’s because the mainstream’s macro analysis and prescription over ‘global imbalances’ has been premised on flimsy and tenuous grounds.

First, global imbalances have been a diversion (if not a patent misdiagnose) from the true problem: the US dollar paper money system that abets inflationism and interventionism.

Second, the currency valve policy resolution is too oversimplistic and naive, which essentially views the global economy as homogenous.

Lastly, the excessive fixation over these two supposed cause and effect dynamic overlooks the bubble nature of China’s economy.

This reminds me of the Asian crisis where the Thai baht largely operating on a fixed or pegged exchange rate blew up as the Asian crisis emerged (above window).

China’s quasi pegged currency trend looks alot like the Thai baht prior to the Asian crisis (below window). [Charts courtesy of Thai Baht Tradingeconomics.com and Yuan forecastchart.com]

Inflationism only obscures the way the public reads or analyze markets.

As Murray N. Rothbard wrote,

Inflation has other disastrous effects. It distorts that keystone of our economy: business calculation.

Revolving Door Syndrome: European Central Bank’s New Head was Goldman Sach’s Honcho

It has been a revolving door affair between the banking industry, particularly the ‘Too Big to Fail’ cabal, and the government/central bankers.

This goes for the recent appointment of the new president of the European Central Bank

From BBC.co.uk

Mario Draghi takes the helm of the European Central Bank (ECB) at the most difficult period in its 13-year history.

With a number of eurozone economies straining under the weight of massive government debt levels, some observers have even suggested the very future of the euro is at stake.

Much will depend on the 63-year old Italian central banker.

"Super Mario", as he is known, is well respected and widely recognised as the best person to head the ECB.

He certainly has impeccable credentials. A graduate of the University of Rome, he holds a PhD in economics from the Massachusetts Institute of Technology and served as professor of economics at the University of Florence between 1981 to 1991.

But Mr Draghi is no dry academic. He went on to become managing director and vice-chairman of Goldman Sachs International, giving him a vital insight into how financial markets work in practice.

He has also worked as an executive director of the World Bank, director general of the Italian Treasury and, perhaps most importantly in the eyes of investors, head of the Financial Stability Board.

Ever noticed why the interests of privileged bankers and governments/central banks have been intertwined?