7 Billion People: Boon or Bane?

The United Nations says that world population have reached 7 billion.

In attempting to visualize the impact of 7 billion people The Economist writes,

THE UN's doughty demographers have declared that October 31st is the day on which the world's population reached 7 billion. They may be wrong (the UN got the timing of the 6 billionth birth out by a couple of years) but no matter: the announcement has triggered celebrations in maternity wards around the globe and a hunt for the 7 billionth child. Yet the growth in the world’s population is actually slowing. The peak was in the late 1960s, when it was rising by almost 2% a year. Now the rate is half that. The last time it was so low was in 1950, when the death rate was much higher. The result is that the next billion people will take 14 years to arrive, the first time that a billion milestone has taken longer to reach than the one before. The billion after that will take 18 years. Where will all these people fit? The chart below, worked out on a maximum population density of six Economist staffers per square metre, gives the space needed to accommodate the world's population at various points in history, expressed in multiples of the borough of Manhattan. Looked at another way, each of us now has the equivalent of Red Square to ourselves.

7 billion represents merely a statistical estimate which most likely is an inaccurate measure of the real number of the world’s population.

Yet, the UN’s declaration seems loaded with political inferences.

For instance, the Economist article above tries to project maximum land allocated per individual or a population density. But this would be a chimera for the simple reason that all land area are not the same (e.g. mountains are different from coastline or from hills or from plateau; there are private owned and public owned) and that each individual does not use up or require as much space as what the Economist implies.

So the framing from the 7 billion figure could essentially foster political alarmism over a potential conflict from growing population relative to the scarcity of land which is fundamentally not only false but unrealistic.

The other implication of the UN’s hype is to give neo-Malthusians (who falsely believed that overpopulation would translate to a catastrophe for mankind or the Malthusian Catastrophe) room to advocate for more political controls on everyone. Their focal point has been centered on the strains to access scarce resources and to the environmental impact from a growing population.

Following charts from World Bank-Google Public Data

Yet even if there is some semblance of truth to the claim that we are now 7 billion people, the $7 billion question is that how have we been able to successfully reach this state in defiance of the doom mongers’ expectations of a ‘catastrophe’? And importantly if such factors will continue to support even a larger population?

The Economist rightly points out that world fertility rate have been going down.

If this slowing fertility trend should continue, then population growth trends would imply for a slowdown or even a potential peaking.

Nevertheless, another very important aspect that has supported today’s 7 billion people has been a huge jump in GDP per capita that coincides with the slowing fertility growth

The substantial improvement in per capita GDP has mostly been because of globalization and a more pervasive adaption of economic freedom.

Competition in free markets has been cultivating and accelerating the rate of technological innovations that has helped in resolving the scarcity problem in many aspects such as in the science and medicine, information and communications, business process and etc..

Largely uncelebrated hero Norman Borlaug discovered high yielding wheat varieties which he combined with modern agricultural techniques which paved way for the green revolution. Mr. Borlaug was eventually awarded the Nobel Peace Prize and was known as the ‘father of green revolution’ who has been credited with saving over a billion people from starvation

And further advancements in technology whose costs have materially decreased have became available to a wider range of people which has increased people's lifespans

The very impressive author Matthew Ridley wearing his Julian Simon hat (the famous free market economist who made a controversial bet against Malthusian Paul Elrich and won) sums up at the Wall Street Journal on why population growth trends will slow

(bold emphasis mine)

Birth rates have gone down because of prosperity, not poverty. Everywhere it has occurred, it has followed a fall in child mortality and famine and an increase in income and education. The wider availability of contraception has been necessary, even vital, for this shift, but it has not been sufficient.

To a biologist, the demographic transition is both surprising and intriguing. No other species drops its birth rate when its food supply increases. Frankly, no expert has yet fully explained the phenomenon. It remains something of a demographic enigma.

The best guess is that modern society causes human beings to switch their reproductive strategy from quantity to quality. Thus, once child mortality drops and paid work becomes available to the children of subsistence farmers, parents become more interested in getting one or two children into education or jobs than in begetting lots of heirs and spares for the farm.

Whatever the explanation, history shows that top-down policies aimed directly at population control have generally proved less successful than bottom-up ones aimed at human welfare, which get population control as a bonus. The faster poor countries can grow their economies, the slower they will grow their populations.

While present developments has generated much progress, there are still many afflicted by poverty. That’s because there continues to be meaningful resistance in embracing a bottom up approach in dealing with socio-economic development.

It's really not about the number of people but the process or the means by which people use to sustain their living. This means, in general, the world is much better off with MORE PRODUCTIVE people.

Bank of Japan posts $281m losses from QEs

This seems as poetic justice at work.

From Bloomberg,

The Bank of Japan has lost more than 22.4 billion yen ($281.7 million) purchasing exchange-traded funds as the Topix Index approaches a 27-year low.

The central bank’s stock holdings have fallen about 4 percent since buying began on Dec. 15, 2010, according to estimates calculated by Bloomberg using government filings. Losses climbed above 67.6 billion yen in September as equities plunged amid concern Europe’s debt crisis would trigger a global recession, the data show.

The purchases are part of a 20 trillion yen BOJ plan to stimulate economic growth and boost investor confidence by buying securities, such as government debt, commercial paper and real estate investment trusts. The central bank expanded the program last week by 5 trillion yen after the country’s currency reached a postwar record against the dollar, threatening the export-led economy.

“This is not what a central bank should be doing,” said Masaaki Kanno, the Bank of Japan’s former chief foreign-exchange dealer and now chief Japan economist at JPMorgan Chase & Co. Parliament needs “to debate if the program can get backing from the public after running a loss like this," he said…

This isn’t the first time the central bank has bought stocks. The BOJ in October 2002 purchased shares that financial firms owned in other companies to stem losses at banks after the Topix plunged 52 percent from a peak in February 2000. The BOJ’s investment foreshadowed a rally in the Topix, which bottomed in March 2003 and more than doubled over the next four years.

The BOJ’S ETF purchases accelerated this year after concern over Europe’s sovereign-debt crisis triggered a global equity rout and sent the Nikkei Stock Average Volatility Index on Aug. 9 to the highest level since the aftermath of Japan’s March 11 earthquake and tsunami. The central bank spent 403.5 billion yen on ETF shares tracking the Nikkei 225 or Topix since August, compared with 340.4 billion yen in the previous eight months, filings show.

The purchases, which are listed on the BOJ’s website, have taken place when Japanese stocks declined and have signaled better performance the next day. The Nikkei 225 fell an average of 1.9 percent on days when the BOJ bought, slipping 0.1 percent the following day, data compiled by Bloomberg show.

The investments represent a small part of Japan’s ETF market. The central bank spent 17.3 billion yen buying shares on Oct. 18, less than 1.5 percent of the total value traded in either Nomura’s Nikkei 225 or Topix ETFs, according to data compiled by Bloomberg.

The red arrow shows when the asset purchases began, which again seem to have worked over the short term, and how the Topix has been discounting Japan’s QEs over the longer term or during the one year period.

The $281 million loss may seem negligible to the above report, but it is important to point out that those who made these decisions that led to these ‘hefty’ losses which will eventually be distributed to the average Japanese via taxes, have not been held accountable.

That’s the way politics works; squandering people’s money has always been assumed away, and thus, the propensity to keep making the same mistakes over and over again. Ultimately taxpayers picks up the tab for the mess created by a few. Yes, political insanity.

Of course as earlier pointed out, the public (including the world) is being hoodwinked to believe that these mercantilist measures has been about supporting the “export-led” economy, which in reality isn’t. Exports account for only less than 15% of the GDP, so how can exports lead Japan's economy?

Instead, the whole saga of interventionism and applied inflationism (via QEs) has been meant to shore up Japan’s debilitating political institutions.

Eventually all these anticapitalistic actions will meet its destiny.

Poetic justice.

Competitive Devaluations: Japan Intervenes to Curb Yen gains for the Third Time this year

Japan intervened in the currency market today, to allegedly halt a rising yen. Today’s action is the third intervention this year.

From Bloomberg

The yen dropped by the most in three years against the dollar as Japan stepped into foreign-exchange markets to weaken the currency for the third time this year after its gains to a postwar record threatened exporters.

“I’ve repeatedly said that we’ll take bold action against speculative moves in the market,” Japanese Finance Minister Jun Azumi told reporters today in Tokyo after the government acted unilaterally. “I’ll continue to intervene until I am satisfied.”

The yen weakened against the more than 150 currencies that Bloomberg tracks as Azumi said that he ordered the intervention at 10:25 a.m. local time because “speculative moves” in the currency failed to reflect Japan’s economic fundamentals. Today’s drop reversed this month’s previous gain by the yen against the greenback, which came amid speculation the Federal Reserve may add to stimulus measures as the U.S. economic recovery stagnates.

Statements like this “I’ll continue to intervene until I am satisfied’” might mislead people to think that political authorities really have the power to control the markets.

It is true enough that their actions may have a momentary or short term impact.

That’s the yen headed lower following today’s intervention.

But from a one year perspective, the first two interventions eventually resulted to a HIGHER and NOT a lower yen (blue uptrend)! The initial intervention was in March 18 where the BoJ bought $1 billion and the second was in August 4, both interventions are marked by green ellipse.

Talk about hubris.

Nevertheless, the inflationism or competitive devaluations being undertaken by Japan has hardly been about exports—why prop up exporters when this sector account for only less than 15% of Japan’s GDP?

Instead, like her contemporaries, the devaluation has been meant to prop up Japan’s rapidly decaying debt laden political institutions of the welfare state-banking system-central banking.

Japan’s government has the largest share and has the biggest growth of Japan’s overall debt (McKinsey Quarterly)

And as the great Ludwig von Mises wrote

The devaluation, say its champions, reduces the burden of debts. This is certainly true. It favors debtors at the expense of creditors. In the eyes of those who still have not learned that under modern conditions the creditors must not be identified with the rich not the debtors with the poor, this is beneficial. The actual effect is that the indebted owners of real estate and farm land and the shareholders of indebted corporations reap gains at the expense of the majority of people whose savings are invested in bonds, debentures, savings-bank deposits, and insurance policies.

It is sad know how politicians misrepresent what they stand for and use class warfare or supposed underprivileged sectors to rationalize the imposition of what are truly designed as self preservation measures.

Put another way, the BoJ’s serial devaluations has actually been meant to illicitly transfer the resources of the average Japanese citizens to the political class and her banking system. Incidentally, the latter, like the Euro counterparts, has been under strain.

From Bloomberg (Topix Banks index)

Share prices of Japan's banks have slumped since 2007.

So much for blabbering about public interest. Devaluations are all about political greed.

Philippine 100 Peso Commemorative Bills and the Philippine Political Economy

Yesterday I was surprised to see the freshly printed moneys I received as change from a popular fast chain came with an embossed stamp from an elite law school.

I looked up the web and discovered that such stamp had supposedly been meant as commemorative to the 75^th Diamond Jubilee anniversary as shown below.

Ateneo alumni President Aquino was a guest speaker and received the plaque of special issue from the Philippine central bank, Bangko Sentral ng Pilipinas (BSP) honcho Mr. Amando Tetangco at a recent ceremony

And this has not just been for Ateneo but also for state school University of the Philippines (100 peso bill pictures of Ateneo and UP from rightonthemark)

People don’t seem to see anything wrong with this but I do. I see these actions as symptoms of a deeply seated social disorder which continues to plague the Philippine society.

My point of inquiries:

1. Why Ateneo and University of the Philippines (UP) and NOT other competing law schools such as San Beda, UST, FEU, UE, Pamantasan ng Lungsod ng Manila, University of San Carlos, Arellano, Lyceum or St. Louis University? What's so special with UP and Ateneo?

2. Why law schools instead of engineering, computer science, sciences, liberal arts, culinary or other schools with different specialization? What's so special with law schools?

3. Why schools and not some other private sector interests (charity, socio-civic groups etc)? Why the predilection for schools?

4. Yet are these commemoratives signs of independence from political and private sector influences?

The privilege of central bank’s monopoly in the issuance of money clearly reveals of its political bias in favor of the political and economic elite and their interests.

Commemoratives are thus emblematic of the incumbent policy structure and the prospective direction of political policies.

Moreover, the impression that central banks are independent of political influences is entirely a myth.

Even more, the preference for ‘elitist’ law schools signify as symptoms of the crony capitalist framework of the Philippine political economy. As pointed out before, elite schools (including my alma mater—saying this cost me many facebook ‘school’ friends) serve as breeding, training and recruitment grounds for the political class and their politically privileged economic clients.

A subordinate polemic is that the Peso bills are used as implicit advertisement space which again depends on political connections and the attendant political interests of the political stewards.

Finally, the pathetic commemoratives on the 100 Peso bill only exposes the true essence of legal tender based paper funny money—the existence of which (New Central Bank Act) ironically have been based on unilateral regulations drafted by lawyers and legitimated by legislators.

Global Risk Environment: The Transition from Red Light to Yellow Light

One of the foremost concerns of all parties hostile to economic freedom is to withhold this knowledge from the voters. The various brands of socialism and interventionism could not retain their popularity if people were to discover that the measures whose adoption is hailed as social progress curtail production and tend to bring about capital decumulation. To conceal these facts from the public is one of the services inflation renders to the so-called progressive policies. Inflation is the true opium of the people and it is administered to them by anticapitalist governments and parties. Ludwig von Mises

Remember what I have been saying about financial markets being dependent on policy steroids?

Here’s what I wrote during mid-September[1]

If team Bernake will commence on a third series of QE (dependent on the size) or a cut in the interest rate on excess reserves (IOER), I would be aggressively bullish with the equity markets, not because of conventional fundamentals, but because massive doses of money injections will have to flow somewhere. Equity markets—particulary in Asia and the commodity markets will likely be major beneficiaries.

As a caveat, with markets being sustained by policy steroids, expect sharp volatilities in both directions.

Global financial markets, from equities, commodities and currencies have been playing out almost exactly as I have described.

The difference is that instead of being driven by the US Federal Reserve’s credit easing policies, last week’s ferocious global stock market rally appears to have been impelled by the Eurozone’s bailout which came with both a 50% ‘voluntary’ haircut on Greek bondholders and the $1.4 trillion expansion of the European Financial Stability Fund (EFSF).

Insanity: Doing The Same Thing Over And Over Again

Some experts have even been so perplexed by the heft, scale and breadth of the market’s rally to even label this ‘crazy’[2]. However what is seen as ferly to others has long been understood by us as transitional episodes of boom bust cycles. And flouncing markets could even serve as an indicator of major trend reversals[3].

My problem then was that without concrete actions and commitments from policymakers, markets were functionally fragile or vulnerable to a crash.

The Eurozone’s bailout deal fundamentally confirms my earlier exposition on the mechanics of the proposed bailout[4]. But the deal covered more conditions, aside from the conversion of the bailout fund into an insurance-derivative mechanism, this included the ‘voluntary’ 50% haircut of Greece bondholders, the creation of a Special Purpose Vehicle (SPV) which allows private and other non-EU investors (such as the IMF or possibly China and other emerging markets) to participate in the financing of the bailout, bank recapitalization—where banks capital ratio would be increased to 9% by June of 2012, and importantly the continuation of the European Central Bank’s asset purchasing program.

The unfurled package has ostensibly been way beyond the markets expectations and had been warmly received. This exhibits the state of the current markets—deep addiction to policy steroids.

The deal’s insurance-derivative model provides guarantees to investors on the initial (20%?) tranche of debts issued by select EU governments that would allow four to fivefold increase of the debt issuance through leverage; where the details of which has yet to be threshed out[5].

There are valid reasons to be skeptical on the final mechanics of the supposed bailout scheme.

One, questions as to the actual available resources to implement these programs. For instance, the EFSF supposedly will be used as insurance to guarantee debt issuance AND also as last resort financing access to bank recapitalization, so how will the fund be apportioned? Are EU leaders assuming that these resources will only function as contingent resources? Wouldn’t this be too optimistic?

Next the supposed leveraging of debt issuance will likely come from already debt distressed nations.

As the Bloomberg chart of the day rightly points out[6]

the average rating for the bloc, calculated by Bloomberg from the assessments of the three main evaluators, has worsened to 3.14, representing the third-best grade, from 2.12 in May 2010 when the European Financial Stability Facility was designed. The measure fell 0.23 point in the previous 15 months. The average is calculated by giving a numerical grade for each grading, where 1 is the highest, and adjusting it for each country’s share of the EFSF guarantee.

Seven of the 17 euro-sharing nations have had their ratings downgraded since the announcement of the facility, which maintains a top grade from Standard & Poor’s, Moody’s Investors Service and Fitch Ratings. As the contagion has spread to banks, prompting governments to work out recapitalization plans, further cuts, mainly for the top-rated countries, may reduce the strength of the fund.

So the EU bailout is essentially applying what Albert Einstein defines as Insanity: doing the same thing over and over again while expecting different results. More debt will be compounded on existing debt.

A major credit rating agency Fitch Ratings sees the proposed deal on Greece bondholders as a default that would not remove the risk of further downgrades for other sovereigns[7].

However my general impression behind all the ‘smoke and mirrors’ promoted as a comprehensive rescue strategy is that these measures fundamentally stands on the ECB’s monetization of government debt.

In short, the EU’s Bazooka bailout deal represents as an implicit license for or as façade to the ECB’s massive money printing program.

Global Market Responses

And the commodity markets appear to have responded to the grandiose measures in terms of increasing expectations of the inflationary implications

Gold has regained its bullish momentum (top most chart), while oil (WTIC) appears to be testing the 200-day moving averages where a breach would mean a reversal of the ‘death cross’. On the other hand, copper has reclaimed the 50-day moving averages.

The coming sessions will be very crucial as they will either reinforce the formative uptrend or falsify the recent recovery.

Importantly, as I have been repeatedly saying, I don’t see the imminence of a recession risk for the US economy for the simple reason that money supply growth has been exploding.

And a possible evidence of the diffusion of money supply growth has been the very impressive record breaking growth of US capital spending[8]. Capital spending growth should be seen as a leading indicator which should mean more improvement in the employment data ahead. Besides, record capital spending growth demolishes the popular mythical idea of a liquidity trap[9].

China remains as my focal point in my assessment of risk.

Again it is unclear whether China has merely been experiencing a cyclical slowdown or a bubble bust. Signs of piecemeal bailouts including the latest rescue of Ministry of Railways[10] could be signs of a popping bubble.

However signals generated from global equity markets seem to indicate that developments in both the Eurozone and the US could likely influence China, than the other way around.

Major global equity markets appear to have reaccelerated to the upside.

The US S&P 500 has broken above the 200-day moving averages, where a continuation of this upside momentum would extrapolate to the inflection of the ‘death cross’ into a bullish ‘golden cross’.

And it would seem that my hunch of a non-recession short-lived US bear market ala the Kennedy Slide of 1962 and 1987 Black Monday crash may come to fruition[11].

Meanwhile Europe’s Stoxx 50 appears to also trail the price actions of the US S&P 500 along with China’s Shanghai index whose recent bounce off the new lows has brought the index to test the 50-day moving averages.

Of the three major equity market bellwethers, the US seems to provide the market’s leadership, although it has yet to be determined if the momentum of China’s market can be sustained.

Overall, the impact of the collective inflationary policies being undertaken by the developed nations seems to permeate on both global equity markets and the commodity markets.

And in downplaying the predictive value of mechanical chart reading I recently wrote[12], (bold emphasis original)

The prospective actions of US Federal Reserve’s Ben Bernanke and European Central Bank’s Jean-Claude Trichet represents as the major forces that determines the success or failure of the death cross (and not statistics nor the pattern in itself). If they force enough inflation, then markets will reverse regardless of what today’s chart patterns indicate. Otherwise, the death cross could confirm the pattern. Yet given the ideological leanings and path dependency of regulators or policymakers, the desire to seek the preservation of the status quo and the protection of the banking class, I think the former is likely the outcome than the latter.

Events appear to be turning out in near precision as predicted

In addition, while the markets may have been discounting a QE 3.0 from the coming Federal Open Market Committee (FOMC) meeting this November 2^nd, any surprise from team Bernanke could even escalate the current surge in the inflationary boom momentum.

Remember, US Federal Reserve Chair Ben Bernanke has repeatedly been dangling QE 3.0 or has been emphasizing that QE 3.0 remains an option[13], which could readily be redeployed as conditions warrant.

To add, except the US almost every major economy central banks have recently undertaken to expand on their respective versions of QE (chart from Danske Bank[14]). Aside from Bank of England[15] (BoE) whom earlier this month has announced the expansion of their QE policies, last week the Bank of Japan (BoJ) also increased their asset purchasing program[16].

Thus, the dramatic shift in sentiment to my interpretation epitomizes a transitional phase that can be analogized to the shifting in traffic light signal from red to yellow.

I would reckon the current climate as a gradual phasing-in or a cautious buy for risk assets.

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[1] See Definitely Not a Reprise of 2008, Phisix-ASEAN Equities Still in Consolidation, September 18, 2011

[2] See Global Stock Markets: The Euro Bazooka Deal and the Boom Bust Cycle, October 28, 2011

[3] See Sharp Market Gyrations Could Imply an Inflection Point, October 16, 2011

[4] See More Evidence of China’s Unraveling Bubble? October 16, 2011

[5] See Euro’s Bailout Deal: Rescue Fund Jumps to $1.4 Trillion and a 50% haircut on Greece bondholders, October 27, 2011

[6] Bloomberg.com Euro Region’s Debt Quality Is Worsening at Record Pace: Chart of the Day, October 25, 2011

[7] Wall Street Journal Fitch: Greek Debt Deal a Default, October 28, 2011

[8] Wall Street Journal Blog Vital Signs: Capital Spending Hits Record, October 27, 2011

[9] See No Liquidity Trap, US Economy Picks Up Steam, October 27, 2011

[10] See China Bails Out the Ministry of Railways, October 25, 2011

[11] See Phisix-ASEAN Market Volatility: Politically Induced Boom Bust Cycles, October 2, 2011

[12] See How Reliable is the S&P’s ‘Death Cross’ Pattern?, August 14, 2011

[13] International Business Times, Market, FOMC Officials Suggest ‘Increasing Likelihood’ QE3 is Coming, October 26 2011

[14] Danske Research Preview: Bank of Japan Further easing likely, renewed intervention close, October 26, 2011

[15] See Bank of England Activates QE 2.0, October 6, 2011

[16] See Bank of Japan Expands QE, October 27, 2011

Phisix: Repositioning for a ‘Risk On’ Environment

Bubble behavior can be seen as rational, even if market participants know they are seeing a bubble. After all, as long as one catches a bubble on the way up, buying low and selling high, one can make money. Furthermore, bubbles burst precisely because investors recognize that the asset prices at the top of the bubble are out of balance with market fundamentals; it is just that these things do not happen with the mathematical precision and smoothness of the mathematical models, so many academic economists simply turn away from looking at things as they really are. Professor William L. Anderson

The parameters for my repositioning or for undertaking additional risk exposure to markets has been specified last week[1]

To see signs of improvement, we need a significant expansion of Peso volume trades, a broad based bullish or optimistic market breadth which should be supported by an improvement in chart price actions.

But most importantly, outside the local context, we need to see strong evidences of recoveries from our neighbors’ bourses, and similarly from the commodity markets.

Such recovery should likely be accompanied by signs of consolidation or parallel enhancements of the price actions in developed economy contemporaries.

Only from the above developments can we say that we have successfully sailed through the Greek mythological treacherous waters of Scylla and Charybdis

The notable improvements in the commodity and developed nation’s equity markets seem to have satisfied two very significant conditions.

Regional Confirmation

Now we need to see how our neighbors have been responding to the recent “shock and awe” policy steroids

Like their developed economy contemporary, the ASEAN-4 bourses have all been manifesting material signs of recuperation even prior to the Euro Bazooka bailout deal.

The Philippine Phisix seems as having the best chart picture among the four. The PSEC is the only chart that has yet to transition to a bearish ‘death cross’ pattern. The current buoyant actions by the domestic bellwether will likely widen the spread of the 50-day (blue line) and 200 moving averages (red line) that should signal a clearance from the bear market hurdle or a pivotal move away from the recent critical test. Importantly, sustained upside momentum should highlight the resumption of the bull market.

Three of our neighbors have still been scourged by the bearish ‘death crosses’ patterns, where only Indonesia’s IDDOW have successfully breached both 50 and 200 day moving averages. The implication is that, like the PSEC, should the IDDOW persist to the upside, the ‘death cross’ pattern will transform into a whipsaw, which serves as another evidence of chart pattern failure.

And I believe that a buoyant PSEC and IDDOW will eventually translate to the same market actions for benchmarks of Malaysia (MYDOW) and Thailand’s (SETI)

Moreover, Asian currencies as reflected by the ADXY or Bloomberg-JP Morgan’s basket of Asian currencies have likewise made a dramatic turnabout.

Again the above only reinforces my repeated assertions that actions of global policymakers have been directing price movements of international markets.

The external environment as seen by the price actions of the commodity markets, developed equity markets and ASEAN-Asian markets have resonated conditions that seem to justify an environment increasingly ripe for renewed risk taking activities.

More Confirmations: Market Internals and the Philippine Peso

At the Philippine Stock Exchange, market internals appear to be on the mend too.

This week’s average volume has exploded to the upside. But this has mostly been due to the special block sales which accounted for 56% of the total.

The market breadth has also gradually been improving.

Sectoral performances have all strongly recovered from the recent lows. Services (bright green) lifted by PLDT appears to lead the way, with the other sectors Mining (teal) Property (brown), Holding (orange) and Banking (blue) also up but whose performances has relatively varied.

What seems as the most impressive has been the action of the Philippine Peso

The Euro Bazooka bailout deal may have prompted for a stunning breakaway gap for the Philippine Peso. The jump in the Peso essentially reflects on the Asian currencies.

Nevertheless the Peso has been firming up even prior to Friday’s breakaway run (in spite of BSP’s interventions). The gap, if sustained, could signal even more strength for the Peso and the Phisix ahead.

I would reckon that the Peso’s improvement has been immensely supported by expanding net foreign inflows to the PSE.

ALL of the parameters or conditionalities on my checklist appear to have been satisfied. This implies for a graduated re-entry for me.

Although I would still deem that China’s highly uncertain environment could pose as a black swan risk worthy of continuing vigil, inflationary developments globally may be providing a cushion from which may have alleviated the risk environment in China. Again this has to be proven or established.

Learning from this episode, what worries me is that many people seem to have acquired the mentality where all selloffs should be seen as buying opportunities, premised on what seems to be a deepening assumption that governments will always successfully moderate any prices decline.

We understand this outlook as representative of moral hazard, or even as the Bernanke Put[2]—the expectations that central banks will ‘fight market falls’.

This is also symptomatic of the market’s intensifying bubble psychology shaped by intensifying bubble-bailout policies[3].

In the fullness of time, again markets will be prove that interventions as unsound, tenuous and subject to bust dynamics similar to 2008.

It must be impressed upon everyone that inflation is a policy that cannot last.

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[1] See The Philippine Phisix at Crossroads, October 23, 2011

[2] Bernanke Put Wikipedia.org, Greenspan Put

[3] See A Primer On Stock Markets-Why It Isn’t Generally A Gambling Casino, January 18, 2009

Video: Richard Epstein on US Inequality

New York University Law Professor Richard Epstein at the PBS Hour talks about "inequality"...

Watch Does U.S. Economic Inequality Have a Good Side? on PBS. See more from PBS NewsHour.

Here are some noteworthy quotes, (transcript here)

Inequality as drivers for innovation...

What's good about inequality is if, in fact, it turns out that inequality creates an incentive for people to produce and to create wealth, it's a wonderful force for innovation. So let's just go and take somebody like Bill Gates again or any entrepreneur.

Guy earns $50 billion, right? How much consumer welfare has he created by selling products? We can estimate the amount of gains to purchases, because everybody who buys one of his products or one of Steve Jobs' products, in effect, values it more than he receives.

The social gain from inequality to consumers of those goods probably dwarfs the entrepreneurial gain by a factor of 10-1 or 20-1.

Non-neutrality of tax policies.

You can tell the difference between a liberal and conservative by the following test. A liberal believes that changes in taxes have very little effect on production, but huge effects favorable on distribution.

Folks like myself believe it's exactly the opposite. Very high tax rates or even small changes in taxes have very adverse effects on production, and they do very little to produce redistribution, because the money gets dissipated and taken away through the political process in the ways that even the most ardent supporters of redistribution will not like.

Difference between then and now...

First of all, the highest marginal tax rates were also accompanied with tax shelters for everybody in those rates. The second thing is that the monies that were being spent in those days were being spent in much more intelligent ways. That is, if you go and you look at either state or federal budgets and see the amount of money that is spent on what we would call standard infrastructure improvements, and spent well, like the interstate highway program in 1956, that was very high.

The money that is spent today on infrastructure improvements of a good variety is a tiny fraction of what it was then. And the amount of money that is spent essentially on transfer payments has mushroomed enormously.

The fundamental truth is, the tax system is more redistributive than it was before, which will lead to a reduction in efforts, and the regulatory burden on the economy is vastly greater, and we would expect lower levels of growth.

How profits advance overall welfare...

It's the possibility of earning a high rate of return which does it.

And what happens is, if you let people go through voluntary transactions that produce mutual gain, you will increase overall welfare, you will improve the position of those on the bottom. But increased overall welfare will produce greater skews in income, because in a world with genuine opportunities, you will create billionaires.

In a world without it, the people at the bottom will remain where they were, there will be nobody at the top to subsidize them, so everybody will turn out to be worse off.

The Myth of the Poor as Borrowers, Rich as Lenders

“The Poor are Borrowers and the Rich are lenders” has been one of the enduring myths which the left uses to champion the Keynesian policies of the “euthanasia of the rentier” and central banking.

David Gordon quotes the great Murray Rothbard,

Often, this turns out to be the reverse of the truth. "Debtors benefit from inflation and creditors lose; realizing this fact, older historians assumed that debtors were largely poor agrarians and creditors were wealthy merchants and that therefore the former were the main sponsors of inflationary nostrums. But of course, there are no rigid 'classes' of creditors and debtors; indeed, wealthy merchants and land speculators are often the heaviest debtors" (p. 58).

Even the conditions of nations today do not support this argument.

Based on the 2010 NIIP or Net International Investment Position statistics by the IMF, which has been defined as a country’s domestically owned assets minus foreign assets, the table above reveals that the US stands as the world’s largest borrower or debtor. (source: Financial Sense)

Yet there has been NO rigidity in classes—some rich countries are creditors while some rich countries are debtors.

Class based borrowing and lending is simply based on fantasy.

As individuals, we act (save, consume or invest) based on our unique value scales and time preferences and not because of the abstraction of being “rich or poor”.

Also it would be equally naïve to say that rescuing Wall Street was about “the poor”, that’s because Wall Street thrived upon unsustainable debt acquired from rampant speculation.

It is the reason why the largest US investment banks vanished from planet earth in 2008, and is the reason for the Troubled Asset Relief Program (TARP) and the explosion of the US Federal Reserve’s balance sheet in 2008, who absorbed toxic assets from the banking and finance industry by transferring the risk to US taxpayers.

From the US Federal Reserve of Cleveland

These debts were held NOT by the poor but the real estate, financial and banking class elites who profited from Keynesian policies of the euthanasia of the rentier aimed at attaining “permanent quasi booms”, which eventually backfired.

Besides, current political institutions have NOT been designed to protect the poor.

Apart from taxes, the banking system funnels savings of ordinary citizens to finance the government through sovereign securities (treasuries) as mandated by bank capital regulations. Central banks puts a backstop on this.

And politicians spend the savings of the average citizenry partly on vote generating welfare programs and substantially on special interest groups (e.g. green jobs, military industrial complex, banking and finance, foreign dictators) which have not mainly been about the protection of the poor. The poor have perennially been used as an unfortunate tool to justify the political mulcting of society.

Going back to rescuing Wall Street, coincidentally, Wall Street houses the largest number of people who are considered as super rich.

From the Wall Street Journal Blog

Bottom line: to argue that the “euthanasia of the rentier” is required to redistribute wealth from the rich to the poor has exactly been the reverse—the politically endowed rich benefits from “privatize profits and socialize losses” policies at the expense of society.

As a reminder not all of the rich are cronies. Those who depend on political privileges should be distinguished from those who generate wealth by serving the consumers.

Importantly, those who argue from the above faulty premises are either engaged in self-deception, or if, not hopelessly bereft of reasoning arising from the obsession to politics.