Confirmation of the Phisix Breakout!

The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function. — F. Scott Fitzgerald

The landmark breakout by the Philippine composite benchmark, the Phisix, has been confirmed!

It’s certainly not just that the local benchmark has treaded on fresh nominal record highs, importantly, we should expect momentum to continue if not accelerate.

Attempting to time the markets under these conditions will likely leave market participants with opportunity losses and remorse (regret theory), as broad market actions will likely be defined by sharp upside swings.

Again this phenomenon has not been isolated to the Phisix but can be seen as a regional dynamic.

While major ASEAN equity markets crawled away from the losses at the start of the year, the high octane rebound appears have been a recent phenomenon which only commenced last June.

Ironically, these has been happening on a post QE 2.0 environment (but with QE 3.0 officially on the table[1]), and despite various global market interventions, that initially had jolted global financial markets.

The milestone performance by the domestic bellwether [Phisix: PCOMP, red-orange line] seems coy compared to the breathtaking bullish renditions by Indonesia [JCI: orange line] and Thailand [SET: green line].[chart courtesy of Bloomberg]

Malaysia [KLCI: red line], whom earlier took a temporary lead has, over the interim, deviated from the group and appears to be weakening. This divergence could be a temporary phenomenon.

Nonetheless, all four ASEAN bellwethers have posted advances on a year-to-date basis. And notably, the gains by ASEAN ex-Malaysia appear to be progressing swiftly.

Breakout Confirms the Long Term Direction

The most important message from such this monumental breakout is the apparent continuing confirmation of my long held view of the evolving boom-bust cycle of the Phisix[2].

Patterns don’t play out because of fate or destiny, as some mechanical chartists seem to suggest, instead patterns play out because of real underlying forces that drive them. People’s choices and NOT patterns ultimately determine market actions or cycles.

We should never confuse patterns or historical experience with deterministic action in the way natural science behaves.

As the great Ludwig von Mises reminded us[3], (bold emphasis mine)

The experience with which the sciences of human action have to deal is always an experience of complex phenomena. No laboratory experiments can be performed with regard to human action. We are never in a position to observe the change in one element only, all other conditions of the event remaining unchanged. Historical experience as an experience of complex phenomena does not provide us with facts in the sense in which the natural sciences employ this term to signify isolated events tested in experiments. The information conveyed by historical experience cannot be used as building material for the construction of theories and the prediction of future events. Every historical experience is open to various interpretations, and is in fact interpreted in different ways.

The Philippines experienced its first modern bubble cycle which progressed during 1985-2003, an 18 year cycle. This cycle surfaced after the Philippines had been liberated from a tyrannical rule which had suppressed the local market and the economy.

The first bubble cycle saw the Phisix advance from around 150 to around 3,100 for a whopping gain of 19x. The advance had not been linear, though. Two bear markets interspersed the advance phase. These bear markets (orange and green ellipses) were both triggered by failed coup d'états.

Yet the advances coincided with then President Cory Aquino’s administration’s US $12 billion worth of bailouts of several politically connected banks that caused the old central bank to fold from the strain[4].

A topping process developed in 1994-1997, as Japan’s busted bubble redirected a gush of Japanese capital into ASEAN economies[5]. The regional or ASEAN inflation boom eventually unraveled and became known as the Asian Crisis[6].

The ensuing 6 year bear market accounted for as the market clearing process for the region and for the Philippines, part of which had been aggravated by a global recession[7] triggered by the US dot.com bubble bust[8].

Today, the Phisix has been playing out a seminal cycle.

The 2007-2008 bear market in the Phisix had been due to exogenous factors—a contagion from the US mortgage crisis. Yet the latest bear market resembles the earlier or first coup bear market of 1987 (orange ellipse).

This week’s breakout only confirms my long time claim that the recent bear market served as normative countercyclical phase representative of any major trends.

And that’s why I’ve been repeatedly saying that the Phisix will, in the fullness of time, reach 10,000.

It’s a long term trend that seems underway even for our neighbors.

With the conspicuous breakout for the Indonesia, Malaysia and the Philippines (as shown by the charts from chartrus.com), only Thailand, the hub of the Asian Crisis, has yet to reach all time highs.

My crystal ball does not have the surreal or metaphysical sophistication that would allow me to predict the exactitudes, or simply stated, “I can’t say when”. I am no Madame Auring.

All I know is that for as long as the primary forces which drives the Phisix or ASEAN markets—particularly the internal or domestic monetary policies and transmission mechanism from external monetary policies—both of which signify as bubble policies, globalization (which implies further development of the capital markets of ASEAN or of most of Asia) and the global wealth transfer (West-East) or convergence dynamics—remains intact, this advance phase should continue.

In my view, it would take an endogenous or a regional bust similar to 1997, or a reversal of one of these primary factors—through the materialization any of these ‘fat tail’ events: outbreak of global protectionism or a US dollar collapse that risks global hyperinflation or a war that involves the region or a deflationary banking collapse where central banks would not intervene or the adaption of a gold standard—that risks terminating this inflationary boom cycle.

In short, patterns are hardly ever conclusive or that they don’t play out because they have or need to. Since market actions are not historically determined, the realization of patterns would be conditional to the material similarities in the feedback mechanisms or stimulus response dynamics which operated then and which operates today.

If there is a single major nexus between then and today that could influence the fulfillment of said patterns, it is the path dependent nature of governments to inflate the system designed to safeguard the banking system and to preserve the cartelized tripartite patron-client relationship of the welfare state, banking political class and central bankers. The consequences of their actions have perennially led to business (bubble) cycles.

As to whether there will be another countercyclical trend [another provisional bear market] or that the Phisix might advance unobstructed is beyond my ken. Albeit if there will be a clear and present danger that risks another major crisis, I think this could emanate from China[9], instead of the the Eurozone or the US in contrast to mainstream’s expectation.

So far while there have been signs of strains[10] in China, they have not reached a point where I would need to increase demand for cash balances for myself and for my clients.

As far as the current signals from which price trends seem to have been telling us, the upside leg of this advance phase may not only continue, but would likely strengthen.

Breakout Confirmed by the Peso and Market Internals

The Philippine Peso has conjointly broken out of their resistance levels along with Phisix. I told you so.

The tandem’s working relationship has been pretty much solid and dependable. The correlation may not be perfect since the Peso’s action has been distorted by the sporadic interventions by the Bangko Sentral ng Pilipinas (BSP) nonetheless the causation has been strong. Both have been reacting to the relative demand for the Peso assets. The Peso has been driven more by the state of capital flux[11].

Also the Peso can be seen as pursuing less inflationary policies than the US dollar, but a lot more inflationary than the Swiss franc[12].

The simultaneous breakouts can be viewed positively.

Yet the pendulum of the market internals has swung decidedly in favor of the bulls.

This historic breakout has been backed by a hefty surge in volume (weekly volume; left window) which translates to more participation by the public and the pronounced aggressiveness by the buyers.

Foreign inflows, for the week, remained substantial but constituted only about 35% of total trades. This implies positive sentiment for both local and foreign participants.

Based on the average daily traded issues (computed on a weekly basis), the public’s trading interest reached nearly 80% of the 244 issues listed. This means that third tier formerly illiquid and dormant securities have been getting some attention and liquidity. Such spillover dynamics signals broad market bullishness.

It is rare to ever see such strongly linked or convergence of signals as this.

Except for the holding sector, every sector in the Philippine Stock Exchange posted gains.

This time the financial and the property sector tailed the overheated Mining sector both of which has contributed substantially to the advances of the Phisix.

Yet given the sharp pullback by the mining sector over the past two sessions (about 6% from the 2-day high), despite the weekly reported gains, the overstretched mining sector could enter a temporary corrective-consolidation phase.

The mining sector has been up by a remarkable 15 of the last 17 weeks. This week’s advances marked the 5^th consecutive week which has elevated the sizzling hot year-to-date returns to an eye-popping 61.45% as of Friday’s close.

While the strong breakout and the bullish tailwind could mean that the Phisix could rise further, we can’t discount profit taking sessions.

And part of this phenomenon could highlight a rotation away from the mining sector and into the other laggards, perhaps to the finance[13] and the property[14] sector as the next major beneficiaries of the percolating inflation driven boom as previously discussed.

A Journey of a Thousand Miles by Single Steps

Greece received second round bailout package 159 billion euros ($229 billion) which has been larger “shock and awe” than expected by the public.

As the Danske Bank reports[15], (bold emphasis mine)

In particular, the elements of the second rescue package for Greece: EUR109bn in official funds, a EUR12.6bn debt buy-back programme, a lowering of interest rates to 3.5%, a lengthening of the maturity on future loans to Greece to a minimum of 15 years and up to 30 years with a 10 year grace period, as well as a lengthening of the maturity on existing loans.

Burden sharing with the IMF will proceed in line with standard practice (1/3 from the IMF).

The increased flexibility of the EFSF could result in more active intervention in the secondary market. The EFSF now takes on this role, which was previously played by the ECB, but will still be supported by ECB analysis.

Such announcement appears to have lifted the global equity market’s sentiment. That’s because we have another QE in place, but this time based on the Eurozone’s rescue, which has been hardly about Greece, but of the Euro (and US) banking system.

And if global equity markets continue to recover from the recent PIIGS crisis shakeout, where the direction of global equity markets may converge, then this should further intensify the bullish proclivities at the Philippine Stock Exchange or ASEAN bourses as foreign capital seek for higher returns or as safehaven on assets of currencies that have been less tainted by inflationists policies.

Under current circumstances it would be best to use pullbacks as buying windows and to refrain from “timing the markets”.

The gist of any relative outperformance portfolio gains or Alpha[16]--return in excess of the compensation for the risk borne—frequently comes from the magnitude of returns[17] and not from frequency of marginal returns which contemporary sell side analysts design their literatures for their clients or how we are traditionally taught even by academia. (I had to challenge my son’s professor on this)

Yet before we think of the Phisix at 10,000, we will need to see the local bellwether transcend the psychological threshold at 5,000, perhaps by the end of the year.

This journey of a thousand steps, to paraphrase Confucius, will be attained through a series of single steps.

Again, profit from political folly.

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[1] See Ben Bernanke on QE 3.0: Not Now, But An Open Option, July 15, 2011

[2] See The Phisix And The Boom Bust Cycle, January 10, 2011

[3] Mises, Ludwig von Praxeology and History Chapter II. The Epistemological Problems of the Sciences of Human Action Chapter 2, Section 1 Human Action, Mises.org

[4] See Philippine Banking System: “Most Heavily Fortified Bastion of Privilege and Profit”, June 20, 2011

[5] See Capital Flows, Financial Liberalization and Bubble Cycles, July 22, 2011

[6] Wikipedia.org 1997 Asian financial crisis

[7] Wikipedia.org Early 2000s recession

[8] Wikipedia.org Dot-com bubble

[9]See Mark Twain and China’s Yuan, June 25, 2011

[10] See China’s Bubble Cycle: Shadow Financing at $1.7 Trillion June 28, 2011

[11] See I Told You So Moment: The Phisix At Milestone Highs, July 17, 2011

[12] See Is the Swiss Franc Better than Gold?, July 21, 2011

[13] See A Bullish Financial Sector Equals A Bullish Phisix? May 22, 2011

[14] See Expect a Rebound from the Lagging Philippine Property Sector, July 17, 2011

[15] Danske Bank EU summit delivers bold measures, July 22, 2011

[16] Wikipedia Alpha (investment)

[17] See Investing Guru Joel Greenblatt: Focus on the Long Term, July 9, 2011

Philippines Small Business: Unfortunate Victims of Political Distribution

When, then, does plunder stop? It stops when it becomes more painful and more dangerous than labor. It is evident, then, that the proper purpose of law is to use the power of its collective force to stop this fatal tendency to plunder instead of to work. All the measures of the law should protect property and punish plunder.- Frédéric Bastiat

In a few hours the Philippine President, Benigno Aquino Jr. will be making his second state of the nation’s address (SONA).

Yet like most speeches, much of what we will likely hear will be founded on emotive platonic rhetoric, mostly founded on logical fallacies and empty promises whose solution would require expanded political redistribution and more control over the economy and the sacrifice of civil liberties.

And most likely, the important real factors will be glossed over.

Nevertheless, the following charts shows where the Philippines have gotten policies so wrenchingly astray.

The heart of any market economy is the small businesses.

In the US, small businesses have functioned as an indispensable force.

According to the US Small Business Association[1]

-Represent 99.7 percent of all employer firms.

-Employ just over half of all private sector employees.

-Pay 44 percent of total U.S. private payroll.

-Have generated 64 percent of net new jobs over the past 15 years.

-Create more than half of the nonfarm private gross domestic product (GDP).

-Hire 40 percent of high tech workers (such as scientists, engineers, and computer programmers).

-Are 52 percent home-based and 2 percent franchises.

-Made up 97.3 percent of all identified exporters and produced 30.2 percent of the known export value in FY 2007.

-Produce 13 times more patents per employee than large patenting firms; these patents are twice as likely as large firm patents to be among the one percent most cited.

China’s majestic renaissance also shares the same dynamics

Ms. Lydia So of Matthews Asia writes[2], (bold emphasis mine)

With the diminishing dominance of state-owned enterprises (SOEs), China’s private sector is increasingly becoming an important driving force for economic growth. Over the past few decades, these private businesses have been a large contributor to providing consumer-oriented goods and services, generating employment, and leading to innovation as well as increased productivity in China. These changes didn’t occur overnight. A favorable business environment is essential in fostering entrepreneurship in any country. While entrepreneurs in China got a relatively "late" start compared to their global counterparts, its achievements and contributions in driving the private economy have been impressive. To date, small and medium enterprises (SMEs) have become the dominant growth driver and a critical source of China’s expanding and evolving economy. In 2007, SMEs accounted for 55% of GDP, 60% of China’s industrial output, 65% of patent registrations and 70% of employment in urban areas.

Now, in contrast, the Philippines have shown a tremendous decline in registered small and medium sized business over the past decade.

Such dismal outcome have been in place despite the so-called manifold government assistance via (chart above and quote from ADB[3])

extension of financial support, enhancement of managerial and technological capabilities, tapping domestic and international markets, streamlining systems and institutions, and providing infrastructure and incentives

We understand that small businesses have not entirely vanished but have mostly gone underground or have operated beyond formal government.

This we know or call the informal economy.

The chart above from the ADB[4] shows that 43.4% of the Philippine economy has been operating underground or informally.

The other way to say this is that 2/5 of the Philippine economy exists outside of the ambit of government.

The multifarious reasons for the existence of an informal economy as I earlier pointed out are[5]

-high taxes,

-high welfare payments (social security)

-restrictions, mandates in the official labor market

-minimum wages

-a smothering web of government regulations (license requirements, labor market regulations and trade barriers)

-compliance and other regulatory related costs

In other words, an overdose of government regulations and tax and welfare burdens has pushed small businesses out to operate in the informal economy which has surmounted any trivial incentives by the government to promote them. What the left hand giveth, the right hand taketh away!

The simple reason is that operating in the formal economy has been so politically and economically exacting whose cost benefit rewards informal operations. Talk about the Philippine government sowing the seeds of self destruction!

The ADB chart shows almost the same concerns.

Corruption, as expressed by the surveys, is seen as the fundamental problem.

Yet the public has been virtually deluded to think that the roots of corruption have been about all about personal virtuousness.

Little realize that corruption, inefficient government bureaucracy, inadequate supply of infrastructure, policy instability, tax regulations, crime and theft and tax rates or at least 84% of the aforementioned obstacles for doing business have all been intertwined. You can even count in coups, labor regulations, inflation and foreign currency regulations as part of this.

Many people (vendors) pay bribe money just to be able to operate the informal economy which makes corruption an informal way of governance too. Except that bribe money goes directly into the pockets of the enforcers than the coffers of the government.

Yet people hardly realize that all these obstacles are consequences of predatory laws, as governments have been all about the power to plunder others and not about moral uprightness[6].

I reprise my previous quotation of the legendary investor Doug Casey on corruption[7] (bold emphasis mine)

As Tacitus said in the second century A.D., "The more corrupt the state, the more numerous the laws." It's absolutely predictable that as all these governments around the world – and I mean all of them – respond to the ongoing crisis with an ever-accelerating onslaught of new laws, there will be more and more corruption – and frustration with that corruption.

Tacitus was right. But he could just as accurately have said, "The more numerous the laws, the more corrupt the state," because lots of laws engender lots of corruption. In other words, corruption isn't the problem. The state and its laws are the problem, to which corruption is an unsavory and unaesthetic – but necessary – solution. Laws create corruption, and corruption engenders laws.

Anyone can operate on utopian illusions and fantasies, yet economic reality eventually prevails and slaps us in the face.

Don’t we ever realize why self appointed messiahs in uniforms always pop out somewhere with their reformist rhetoric[8] but whose goal is to only seize power?

Personality based politics which operates on the principle of plunder represents a vicious cycle that deals with the superficial or the symptom and won’t solve whatever ills we have.

The only way to improve the Filipinos’ standard of living is to adapt and promote economic freedom through the repeal of these byzantine arbitrary anti-competitive laws and regulations, by vastly reducing bureaucracy and government spending, by having an economic system based on sound money, by pruning political stranglehold over the economic distribution of resources, by promoting property rights and the upholding the sanctity of contract through the rule of law.

---

[1] SBA.gov How important are small businesses to the U.S. economy?

[2] So Lydia, China's New Generation of Entrepreneurs, Matthews International Capital Management July 1, 2011

[3] Paderanga, Jr. Cayetano W. Private Sector Assessment Philippines 2011 ADB.org

[4] Martinez-Vazquez Jorge, Taxation in Asia 2011 ADB.org

[5] See Does The Government Deserve Credit Over Philippine Economic Growth?, May 31, 2011

[6] See Video: The Myth of Good Government, July 23, 2011

[7] See Doug Casey On Corruption: Laws Create Corruption And Corruption Engenders Laws, February 10, 2011

[8] Inquirer.net Marine colonel calls for Aquino’s ouster, July 16, 2011

Video: The Myth of Good Government

The animated video below explains the myth of good government, from the simulated perspective of a "King" [hat tip Jeff Tucker]

Capital Flows, Financial Liberalization and Bubble Cycles

Professor Arnold Kling excerpted the latest edition from the classic Charles Kindleberger book, “Manias, Panics, and Crashes”

One of the themes of this book is that the bubbles in real estate and stocks in Japan in the second half of the 1980s, the similar bubbles...in the nearby Asian countries in the mid-1990s, and the bubble in U.S. stock prices in the second half of the 1990s were systematically related. The implosion of the bubble in Japan led to an increase in the flow of money from Japan; some of this money went to Thailand and Malaysia and Indonesia and some went to the United States....When the bubbles in the countries in Southeast Asia implode, there was another surge in the flow of money to the United States...

The increase in the flow of money to a country from abroad almost always led to increases in the prices of securities traded in that country as the domestic sellers of the securities to foreigners used a very high proportion of their receipts from these sales to buy other securities from domestic residents...It's as if the cash from the sale of securities to foreigners was the proverbial 'hot potato' that was rapidly passed from one group of investors to others, at ever-increasing prices.

Harvard economists Carmen Reinhart and Kenneth Rogoff places the culpability of the global banking crises on financial liberalization

They write

Periods of high international capital mobility have repeatedly produced international banking crises, not only famously as they did in the 1990s, but historically.

There are vast dissimilarities between political economic conditions of today and the yesteryears to simplistically impute the causal relationship of capital mobility and banking crises.

For instance, the pre-20^th century had mostly operated from precious metal based monetary system and had largely been without central banks compared to the 20^th century. Also today’s era can be characterized as having assimilated the Bismarckian welfare structured state than the pre-20^th century, which implies of a starkly different operating political system.

The economic environment had also been different. The pre-20^th century hallmarked the transition of the agricultural epoch to the industrial age. The 20^th century was the culmination of the industrial era which currently has been transitioning to the information age. There are so many many many more variables to consider.

For me, correlations like this should be meticulously scrutinized rather than just taken as “given”.

Although I won’t deny that liberalization could have been one of the many factors which may have contributed to historical episodes of banking crisis, perhaps this has not been the principal one.

However going back to the chart, one can note of the huge concentration in the incidences of banking crises (green circle) during the post-Bretton Woods; the de facto US dollar standard system of today. This comes after the Nixon Shock, a monumental event eponymous to President Nixon’s closing of gold convertibility in 1971.

The degree of concentration of banking crisis has been unprecedented when compared the cumulative interspersed banking crises of 1800-1970.

This lends credence to the “hot potato” dynamic as narrated by Robert Aliber co-author of the Charles Kindleberger’s classic.

As I have been saying here, the gamut of modern day or contemporary global bubble cycles represent as mainly the consequences of the central banking induced business cycles, the welfare state and the intensifying frictions or strains from the Triffin Dilemma that continues to plague the global fiat money system founded on the US dollar.

This “deficit without tears” paper money system which has privileged the US for the past 40 years has been unsustainable and won’t likely last (unless there would be drastic reforms on the political system).

The trend of gold prices has been showing the way.

Video: The Spend Your Way to Prosperity Drug

This LOL (laugh out loud) video from the Concerned Women for America Legislative Action Committee on the new miracle drug (hat tip Cato's Dan Mitchell)



Spending your way to prosperity signifies a snake oil remedy peddled by politicians and ever knowing self righteous socialist adherents everywhere.

Grading Ben Bernanke: Fail!

The great Murray N. Rothbard have presciently warned on this long time ago,

It is little known, however, that there is a federal agency that tops the others in secrecy by a country mile. The Federal Reserve System is accountable to no one; it has no budget; it is subject to no audit; and no Congressional committee knows of, or can truly supervise, its operations. The Federal Reserve, virtually in total control of the nation's vital monetary system, is accountable to nobody — and this strange situation, if acknowledged at all, is invariably trumpeted as a virtue.

Now, Professor Rothbard’s vindication as seen from the Daily Bail’s enumeration of Ben Bernanke’s failures

As you will hear in the collection of videos and stories linked below:

• B-52 failed to recognize asset bubbles of all types, and even encouraged irresponsible 2/28 mortgages and low teaser rates in 2007 at the start of the sub-prime implosion.

• Failed to shut off the free-money spigot still gushing from the Greenspan years.

• Failed to provide a framework for adequate regulatory oversight of Wall Street (yet Obama now wants to give the Fed more oversight and regulatory authority).

• Failed to control or even understand the build-up of risk within the system caused by derivatives and securitization.

• Failed to reform the inherently conflicted credit-rating structure that perpetuated the risk and securitization build-up.

• Failed to understand the nature of the crisis when it first broke in the Spring of 2007 (Bear Stearns sub-prime, hedge fund implosion). The famous meltdown clip from Cramer on Bernanke sums this failure up rather nicely.

• Failed to understand that housing prices might actually decline in value after such a dramatic rise (seriously, even my mother knew that banks providing new mortgages on massively-inflated housing was not going to turn out well)

• Failed to negotiate with AIG counterparties; instead choosing to pay all claims at 100 cents on the dollar without asking for any compensation (preferred shares) in return.

• Failed the American people with his decision to support and reward the failed banks and the bankers for their malfeasance, excessive risk-taking and criminality.

• Failed to protect taxpayer's interests in deals with AIG, JPM, and Bear Stearns, (withMaiden Lane I, II and III) and the still un-detailed asset guarantees given to Citigroup and Bank of America.

• Ultimately Benjamin Bernanke, the Chairman of the Federal Reserve failed by choosing to reward failure in others.

We can sum it up to: POLITICS—being accountable to no one, arbitrarily choosing winners and losers by using and exposing taxpayer money to unnecessary risks and the presumption of superior knowledge (fatal conceit) from which enables experimentation of untested policies that imposes unmeasured externality risks to the global economy.

The sham of independence.

I further include Bernanke’s policies of expanding the Fed’s balance sheets: (both charts from St. Louis Federal Reserve chart which ironically is under Bernanke’s umbrella)

has led to this:

which has done little to the economy.

chart from Money and Markets

But to bolster commodity prices…

and elevate inflation risks…

chart from tradingeconomics.com

…and of course, fueling worldwide excess speculation in financial markets which should bring about the imminence of another crisis.

Again to close with Mr. Rothbard,

It was not enough, however, for the new statist alliance of Big Business and Big Intellectuals to be formed; they had to agree, propound, and push for a common ideological line, a line that would persuade the majority of the public to adopt the new program and even greet it with enthusiasm. The new line was brilliantly successful if deceptive: that the new Progressive measures and regulations were necessary to save the public interest from sinister and exploitative Big Business monopoly, which business was achieving on the free market. Government policy, led by intellectuals, academics and disinterested experts in behalf of the public weal, was to "save" capitalism, and correct the faults and failures of the free market by establishing government control and planning in the public interest.

And thus the (big) banking industry, the US Federal Reserve and the government cartelized system.

Is the Swiss Franc Better than Gold?

For the Economist the answer seems to be a yes

WHEN the going gets tough, investors buy two assets: gold and the Swiss franc. Gold's all-time peak in real terms was in 1980 when inflationary fears were particularly intense. That followed a long period of Swiss-franc strength in the 1970s, which forced the government to impose negative interest rates in a bid to dissuade foreigners from opening bank accounts in the currency. With investors now worried about European sovereign debt and the crisis over the American debt ceiling, it is not surprising that both assets are popular again. Gold has been hitting nominal highs, while the Swiss franc has reached a record in real trade-weighted terms (ie, against the country’s trading partners). The Swiss have both a fiscal and a current-account surplus, a low inflation rate and a relatively low debt-to-GDP ratio.

The Swiss Franc-gold correlation seems to be playing out a cycle.

In the two decades of the gold bear market during the early 80s until the late 90s, the Franc (CHF) has substantially outperformed gold. The middle green circle highlights this phenomenon by exhibiting the widest variance.

However, the recent rally in gold prices has been closing this gap, as shown by the gold ellipse on the right.

In the early 70s we saw a similar gap-closing dynamic by gold. This eventually culminated with gold topping out in the early 80s (red oblong-left).

It can be argued that based on the above chart, where in the stretch of 4 decades the Franc (CHF) has predominated gold, the Swiss currency has indeed been a ‘better’ safehaven option.

And a major additional reason, which the Economist above didn’t cite, is that Switzerland has the largest gold reserves per person (shown below)

Chart from the Economist

In short, the strength of the Franc can partly be attributed to its gold reserves.

Nonetheless, it is unclear if history would repeat or rhyme.

Given that the Swiss Central Bank has shown to be equally susceptible to inflating their currency, as recently prompted for by the Greece crisis, and like any nation operating on the central bank system, I am doubtful of the Franc-gold correlation “returning to the mean”.

This would depend entirely on monetary politics or how the Swiss Central Bank -government would respond to the unfolding events

The gap-closing trend by gold relative to the Franc, as indicated above, can be seen more clearly in this 3 year chart from stockcharts.com.

Bottom line: Since I am leery of central banking whom are prone or inclined to use their vaunted weapon (of money printing), I’d stick to gold.

Post Script:

The Philippine Peso seems no match to the Franc. (chart from Yahoo finance)

This just exhibits how relatively more inflationary the Peso (undergirded by obnoxious Philippine politics) has been.

Quote of the Day: Problem Solving as an Enabling Force of Innovation

When we fight constraints and eliminate them, we often gain access to new insights, new productivity and new solutions. It also makes it easier to compete against people who don't have those constraints.

There's a useful alternative: embrace the constraints you've been given. Use them as assets, as an opportunity to be the one who solved the problem. Once you can thrive in a world filled with constraints, it's ever easier to do well when those constraints are loosened. That's one reason why the best filmmakers learn their craft making movies with no budget at all.

That’s from marketing guru Seth Godin.

I would further add that this would work best in a competitive decentralized profit and loss driven environment.

Graphic: World’s Largest Armed Forces

Because of the Spratly’s brouhaha, many Filipinos seem to be searching the web for the odds of winnability for the Philippines, in case of a military escalation that could lead to a war with China.

I think these people, whom have not experienced the horror of wars, seem to desire it, perhaps in the doltish presumption that any war won’t get them involved or that wars function as some form of sporting event.

In wars, the losers have always been the people, as both combatants and non-combatants get slaughtered, aside from the economic hardship, physical dislocation and the psychic or mental trauma that arises from such hellish events.

Worst, people from opposing camps shoulder the burden of paying for such outrageous exercise.

Yet if there are any winners, they have always been the politicians, who see people fighting and dying in their behalf and paying for their reckless adventures in the false name of nationalism.

This graphic from the Economist.

The above graph only shows that a war with China is suicidal.

The better alternative is to engage them in more trading activities that should ease geopolitical pressures. Trade and not war is the answer.

Quote of the Day: The Limits of Innovation

Advancement is limited only by the extent of individual creativity. A decade or two from now you will enjoy the fruits of someone else’s idea, that you yourself simply could not have imagined prior to its development.

So, while the future is not necessarily picturesque, neither is it as dark as some people suggest it may be. We live in an age that places a premium on knowledge. This represents a giant step forward.

This is from Jonathan M.F. Catalán at the Mises Blog with bold emphasis mine. Mr. Catalán seems to be on a roll with a series of impressive articles as this

Bottom line:

For as long as people are allowed to unleash their creativity on the marketplace, innovation and economic progress will continue in spite of government intrusions

Free Education Now A Reality

I have been saying that the internet would enable free markets to provide free education. This is now a reality. And this will radically reshape the education industry which has been founded on the industrial era template.

The ball just got rolling with University of People. (pointer to Jeff Tucker Mises Blog)

University of the People (UoPeople) is the world’s first tuition-free online academic institution dedicated to the global advancement and democratization of higher education. The high-quality low-cost global educational model embraces the worldwide presence of the Internet and dropping technology costs to bring university-level studies within reach of millions of people across the world. With the support of respected academics, humanitarians and other visionaries, the UoPeople student body represents a new wave in global education.

UoP’s Mission

University of the People (UoPeople) is a non-profit organization devoted to providing universal access to quality, online post-secondary education to qualified students.

The vision of University of the People is grounded in the belief that universal access to education is a key ingredient in the promotion of world peace and global economic development.

Spiraling costs of industrial era education is about to crater, whether in the US or in the Philippines. And so will public (tax payer funded) education. Credentialism via certification will likewise be transformed.

Urbanization and the Knowledge Economy

Investing guru Templeton’s Mark Mobius, reflecting on the mainstream view, believes that “Urbanization” will drive emerging market investments. ADB, for instance, has a literature on managing Asian cities here

Mark Mobius writes, (bold emphasis mine)

Over the next few decades, I believe we are likely to see an increase in several types of infrastructure investments due to rapid urbanization, which drives the increasing global demand for resources, mainly from emerging markets. I expect there will likely be many opportunities, particularly in the energy and materials sectors. Rapid urbanization in emerging markets, driven by rural populations migrating to cities in search of work and better opportunities, has put pressure on resources and prompted governments to pump money into a range of urban infrastructure-related sectors such as housing, transportation, sanitation, water, electricity and telecommunications.

I am a skeptic of the urbanization theme.

That’s because urbanization oversimplifies on the evolving trend of the global economic structure. Urbanization puts emphasis on past economic (industrial age) paradigms which it assumes will be carried forward.

Urbanization basically neglects the rapidly growing contribution and the deepening of the knowledge economy which has been reconfiguring people’s lifestyle and commerce.

Essentially urbanization focuses on the economies of scale from concentration and centralization, whereas the knowledge economy has been decentralizing socio-economic activities as a consequence of decreasing trend of communication, connectivity and transaction costs.

The Wikipedia explains the forces of the Knowledge Economy,

there are various interlocking driving forces, which are changing the rules of business and national competitiveness:

-Globalization — markets and products are more global.

-Information technology, which is related to next three:

Information/Knowledge Intensity — efficient production relies on information and know-how; over 70 per cent of workers in developed economies are information workers; many factory workers use their heads more than their hands.

New Media – New media increases the production and distribution of knowledge which in turn, results in collective intelligence. Existing knowledge becomes much easier to access as a result of networked data-bases which promote online interaction between users and producers.

Computer networking and Connectivity – developments such as the Internet bring the "global village" ever nearer.

As a result, goods and services can be developed, bought, sold, and in many cases even delivered over electronic networks.

I would add that increasing specialization will hallmark the knowledge economy. And specialization will diminish the economics of urbanization.

The changing nature of work can be exemplified by the telecommuting jobs, which have been rapidly growing.

These jobs are based on the web, are flexible and are not location sensitive (working from home, or elsewhere).

Wikipedia estimates

that over fifty million U.S. workers (about 40% of the working population) could work from home at least part of the time, yet in 2008, only 2.5 million employees (not including the self-employed) considered their home their primary place of business.

Occasional telecommuters— those who work remotely (though not necessarily at home) —totaled 17.2 million in 2008.

Very few companies employ large numbers of home-based full-time staff. The call center industry is one notable exception to this; several U.S.-based call centers employ thousands of home-based workers. For most employees, the option to work from home is granted as an employee benefit; most do so only part of the time.

In 2009 the Office of Personnel Management reported that approximately 102,000 Federal employees telework.

In the next three years, public and private sector IT decision makers expect telework to increase by 65% and 33%, respectively.

I, for one, am a Philippine based telecommuter.

As society evolves towards the knowledge economy, the incentive will largely focus on diversity dynamics from localized knowledge and commerce.

A study from McKinsey Quarterly seems to validate this perspective as local champions have been outperforming multinationals

we have found that high-performing global companies consistently score lower than more locally focused ones on several critical dimensions of organizational health—direction setting, coordination and control, innovation, and external orientation—that we have been studying at hundreds of companies over the past decade.

That’s how the knowledge economy has been changing the nature of commerce and will continue to do so.

So while I agree that infrastructure will highlight growth of emerging markets because of increased economic freedom and greater degree of free trade, emphasis on urbanization should translate to a lot of misdirected resources—yes they account for as emerging bubbles similar to China’s ghost cities and Potemkin Malls

If free markets will determine where infrastructure trends are headed for, then a more widespread development that caters to the growing forces of technology enabled specialization and diversity should be expected.

Government sponsored urbanization, thus, represents a symptom of bubble cycles at work.

In Venezuela, Price Controls have Resulted to a Shortage of Doctors

In Venezuela price controls has not only brought widespread shortages in many goods at worst it has been causing doctors to flee.

From the eloquent Mary O’ Grady of Wall Street Journal

Yet it is in health care where Venezuelans are feeling the inflation pain most. Hospital services are up 39.7% year over year, doctor and paramedic services are up 21.5%, and the cost of medicines and medical equipment has risen 17.4%.

These cost increases refer, of course, to private clinics and goods that are not subject to price controls. Wherever prices can't be raised, both quality and supply are deteriorating rapidly...

In its 2010 annual report, the ministry of health acknowledged the shortage of doctors, particularly in specialties such as anesthesiology, neonatal care, cardiovascular surgery, neurosurgery and child cardiology. Private hospitals are also deteriorating now as the poor turn up for care with government medical insurance, but the insurer doesn't fulfill its obligation to pay.

The government has admitted that a large number of doctors have fled, but it says it's not worried. More than 25,000 Venezuelan students are now enrolled in Venezuela's new Bolivarian medical schools or in medical schools in Cuba. Unfortunately the curriculum is not public, and Venezuelans are worried that the students spend more time studying revolutionary politics than anatomy. Mr. Chávez seems to understand this, if nothing else. His surgeon hails from Spain

That’s the magic of socialism: equality in hardship.

Video: Understanding Human Action (Praxeology)

Here is a short video explaining human action (praxeology) [sourced from Mises Blog]

From Ludwig von Mises (bold emphasis mine)

Choosing determines all human decisions. In making his choice man chooses not only between various material things and services. All human values are offered for option. All ends and all means, both material and ideal issues, the sublime and the base, the noble and the ignoble, are ranged in a single row and subjected to a decision which picks out one thing and sets aside another. Nothing that men aim at or want to avoid remains outside of this arrangement into a unique scale of gradation and preference. The modern theory of value widens the scientific horizon and enlarges the field of economic studies. Out of the political economy of the classical school emerges the general theory of human action, praxeology. The economic or catallactic problems are embedded in a more general science, and can no longer be severed from this connection. No treatment of economic problems proper can avoid starting from acts of choice; economics becomes a part, although the hitherto best elaborated part, of a more universal science, praxeology.

Quote of the Day: Is Expertise Posture or Knowledge?

Another thought provoking article from my favorite marketing guru Seth Godin [bold emphasis mine]

What I discovered, though, was that domain knowledge, edge to edge knowledge of a field, was incredibly valuable. It helped me understand where the edges were, and it gave me the confidence to be selective, to develop a taxonomy, to see what was going on.

As the deluge of information grows and choices continue to widen (there's no way I could even attempt to cover science fiction from scratch today, for example), it's easy to forget the benefits of acquiring this sort of (mostly) complete understanding in a field. I'm not even sure it matters which field you pick.

Expertise is a posture as much as it is a volume of knowledge.

Reading every single trade journal, for example, or understanding the marketing, engineering and sales of your field--there are countless ways to go deep instead of merely paying lip service to the current flavor of the moment.

To me, the importance of domain knowledge (specialized) is especially relevant for those in the financial markets (or in stock markets).

Instead of acquiring the necessary ‘signals’ that could deliver the ‘edge to edge knowledge’, most get lost in the din or cacophony of ‘noises’, which Mr. Godin describes as the “current flavor of the moment”.

The latter can be characterized by the pervasive use or application of cognitive biases and logical fallacies, except that they are masqueraded in numerical or technical methodologies which are completely dependent on past or historical activities or on some presupposed constants which operates on aggregated formulas.

Popular or consensus wisdom usually represents what Black Swan theorist and author Nassim Taleb calls as the negative knowledge (wrong and doesn't work).

For many, thus, expertise signify more as social signaling (posturing or seeking social acceptance) and or “telling people what they want to hear” but predicated on certain technically based paradigms which produces an aura of supposed superiority rather than representative of the true domain knowledge.

We should learn how to separate the proverbial “wheat from the chaff”

James Grant on Faith based Paper Money and the Gold Standard

Wall Street Journal’s Holman W Jenkins Jr. interviews James Grant (hat tip Laird Smith) [bold emphasis mine]

The gold standard, he says, citing the "late, great" libertarian economist Murray Rothbard, was the "people's system. If you didn't like the currency, you could exchange your paper for gold and that sent a message."

More from Mr. Jenkins interview of James Grant

The "fiat" dollar, he adds ruefully, "is one of the world's astounding monetary creations. That a currency of no intrinsic value is accepted as money the world over is an achievement that no monetary economist up until not so many decades ago could have imagined. It'll be 40 years next month that the dollar has been purely faith-based. I don't believe for a moment it's destined to go on much longer. I think the existing monetary arrangements are so precarious, so ill-founded and so destructive of the economic activity they are supposed to support and nurture, that they will be replaced by something better."

How exactly the transition to a new gold standard might take place is a puzzle, but Mr. Grant says he's seen many "impossible" things come to pass in his career. A certain "social spontaneity" might take a hand. He points to GLD—the ticker symbol for an exchange-traded fund whose gold holdings now make it equivalent to the world's 10th largest central bank. "At the margin," he says, "people are registering dissent from the judgment of our central bankers by bidding up the price of gold."

Read the rest here

Chart from Sharelynx/goldchartrus.com

Anyone who thinks that today’s economic climate poses little risk for dramatic transitions in today’s monetary architecture should look at my post below on Dead Currencies.

They are likely to be overestimating the strength of today’s system which have increasingly been based on serial bailout policies, especially in developed economies.

Once the tipping point from the accretion of political mistakes have been reached, we are likely to see a hastening of the implosion of today’s money system.

And as a popular Wall Street maxim goes:

Past performance does not guarantee future results.

As for the return of the gold standard, that’s something unclear for now. But as history has shown, economic forces could compel us to drastically embrace this option once the motion of monetary collapse becomes entrenched and accelerates.

Gold and the precious metal group, based on the price trends relative to the incumbent 'faith based' currencies of major economies, seem to be showing their revitalized role as man's default currency or the public's dissent over the judgment of central bankers as Mr. Grant rightly observes.

Ultimately, the fate of our currency system depends on the direction of monetary politics which constitutes a substantial tail risk that the mainstream continues to ignore.

Graphic: Dead Currencies

Below is a deck of pictures, courtesy of Casey Research, showing various currencies from different parts of the world that have expired or have been abandoned.

It is foolish or naïve, for some, to believe that political actors willed or deliberately engineered the demise of these currencies, or that these have been the responsibility of the private sector.

Instead, the spate of currency extinction overtime signifies as the outcome of a series of actions undertaken by political leaders which essentially collided with economic reality and failed.

In other words, hyperinflation or war, which had been mainly responsible for the demise of most of these currencies, represents as the unintended effects from the desire to preserve or expand of political power by incumbent political leaders during their era.

As the great Ludwig von Mises reminds us, (bold emphasis mine)

But then, finally, the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against "real" goods, no matter whether he needs them or not, no matter how much money he has to pay for them.

Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.

It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German Mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last forever.