The internet has been reconfiguring the way we do things or our social lifestyles
The internet have become a key dynamic in forging romantic relationships, supplanting the traditional modes of networking (referred by family, referred by or met as friends, met in bars, referred by or met as co-workers, met in college/school, met as neighbor or in church). Study here (hat tip NYU’s William Easterly)
Excess cash from Iraq’s oil wealth have led to massive spending on the property sector.
The New York Times observes, (bold highlights mine)
American-style malls, fixtures in most of Iraq’s wealthy Persian Gulf neighbors, have come late to war-torn Baghdad, but Iraqis are taking to them now like Valley Girls, as a consumer society fueled by the country’s booming oil profits begins to flourish here.
Big malls are being built across the capital. The largest will include a five-star hotel and a hospital, and at one already in operation, a truck arrives each week carrying frozen Big Macs from a McDonald’s in Amman, Jordan.
The construction boom is generally hailed as proof of Iraq’s progress and return to normalcy, more than nine years after the American invasion and six months after the last combat troops departed. But economists and other experts see a dark side. They say the emerging consumer culture masks fundamental flaws in an economy that, like those of other energy-rich countries like Saudi Arabia and Qatar, stifles productive enterprise by relying almost solely on oil profits and the millions of government salaries those profits finance as part of the country’s vast patronage system.
“Basically, Iraq is trying to build a consumer society, not on state capitalism like in China, but on socialism,” said Marie-Hélène Bricknell, the World Bank’s representative in Iraq.
One of Washington’s principal aims was to develop a free-market economy here. Yet with so much oil wealth at hand, Iraq’s leaders have taken few steps to develop a private sector. More than 90 percent of Iraq’s government revenues derive from oil, and with oil production rapidly expanding, the country’s annual revenues could triple over the next five years, to more than $300 billion. With that kind of wealth rolling in, one of the greatest questions the country faces is what it will do with all that cash.
Given the statist mentality of most top Iraqi officials and widespread corruption, diplomats are generally pessimistic that the expected boom in government revenues will be used either to help develop a private sector or to pay for an ambitious public works program — something the country, where 40 percent of the population still lacks access to safe drinking water, desperately needs. Instead, experts worry it will finance more of what Iraq already has: corruption and a huge government work force.
Most of the major industries remain in the hands of the state, and the greatest ambition of many Iraqis is to secure a government job. According to statistics from the Iraqi Ministry of Planning, almost a third of the labor force works for the government. That is more than five million people, and the number is rising, as political parties that run government ministries use paychecks to expand their constituencies.
“The state’s payrolls have massively expanded, not with technocrats but with party functionaries, because the state has become a way of funding party loyalty,” said Toby Dodge, a professor at the London School of Economics, at a recent panel discussion in London about Iraq. “That’s directly undermined and hindered the state’s ability. So we have a huge state.”
Because government salaries are much higher than those in the private sector, independent businesses operate at a disadvantage because, among other disincentives, would-be entrepreneurs cannot afford to hire the most skilled workers. The World Bank ranks Iraq 153rd out of 183 countries on the ease of doing business.
“Building a consumer society on top of nothing is like building a bubble that will burst in the future,” Ms. Bricknell said. With the shopping malls, she said, “you are putting a veneer over a rotting core, basically.”
This is an example of what has typically been called as the resource curse.
According to Wikipedia.org a resource curse is the paradox that countries…with an abundance of natural resources, tend to have less economic growth and worse development outcomes than countries with fewer natural resources.
For as long as there remains resources from which politicians can prey and feast on, channeled through the welfare state, the bureaucracy and state spending, then there will be less incentive to liberalize or make the economy competitive and productive. For now this has been free lunch to the political leaders, bureaucracy, technocrats and their political allies.
To the contrary, oil revenues leads to growing dependency on government and the accompanying spendthrift behavior by political agents, which also contributes to the economic imbalances.
Yet the combination of rapid expansion of parasitical relationship and finite resources (oil) eventually extrapolates to a speed bump or the law of diminishing returns.
Aside from the crowding out effect, government spending undermines the private sector by pricing them out.
Iraq’s resource based economy are reminiscent of the fabled Potemkin Villages or a façade of prosperity or progress.
In reality, Iraq’s oil generated progress from statism and cronyism constitutes no more than a property bubble, again from government policies, which like always, will have a tragic outcome.
Goldman Sachs’ Jim O’Neill is bullish BRICs
From Bloomberg,
The biggest emerging markets are contributing more than ever to the global economy as their proportion of the world stock market shrinks, leaving investors with the widest valuation gap in seven years.
Brazil, Russia, India and China, known as the BRICs, will comprise 20 percent of the world economy this year after growing more than four-fold in the past decade, International Monetary Fund data show. At the same time, their combined stock-market value has dropped to a three-year low of 16 percent of the total invested in equities, according to data compiled by Bloomberg.
To Jim O’Neill, the chairman of Goldman Sachs Asset Management who coined the term BRIC in a 2001 research report, the 4 percentage point difference makes stocks in these markets irresistible. The last time the gap was this wide, in 2005, the MSCI BRIC Index (MXBRIC) jumped 53 percent in 12 months, more than double the gain in the MSCI All-Country World Index. (MXWD)
“Unless we are seeing a major collapse of those economies, it’s a huge opportunity for investors,” O’Neill, who helps oversee $824 billion, said in a June 28 phone interview. The BRIC stock markets may double by 2020 as their share of world gross domestic product increases to about 27 percent, he said.
Combined GDP in the BRICs will rise to more than $14 trillion this year from $2.8 trillion in 2002, according to the IMF. Their equity value, which includes locally-traded shares and companies based in the BRIC nations with primary listings abroad, has dropped to $7.6 trillion from $9.5 trillion a year ago, when they made up 18 percent of the global total, according to data compiled by Bloomberg.
History is not a reliable indicator of the future. Otherwise to paraphrase Warren Buffett, the best investors or the richest people would have been librarians.
Contra O’Neill foreigners have become defensive and have taken the home bias stance.
Again from the same article…
Fund Outflows
Petroleo Brasileiro SA (PETR4), Brazil’s state-controlled oil company, fell to the world’s 39th-largest company by value from the 10th-biggest in July 2011. China Construction Bank Corp. (939)’s rank dropped to 20 from 12 while OAO Rosneft,Russia (INDEXCF)’s largest oil producer, sank to 106 from 70.ICICI Bank Ltd. (ICICIBC), India’s second-biggest lender, has lost 17 percent during the past year, compared with an average gain of 9 percent for global peers.
The retreat has pared what was a 180 percent increase in the MSCI BRIC index since October 2008 and reflects concern that economic growth is slowing, according to John-Paul Smith, an emerging-market strategist at Deutsche Bank AG in London. Mutual funds that invest in BRIC equities, which recorded about $70 billion of inflows in the past decade, have posted 16 straight weeks of withdrawals, losing a net $5.3 billion, EPFR Global data show.
Why?
Downside Risk
While the BRIC economies expanded by 4.8 percent on average during the first quarter, more than double the pace in the U.S., their growth decelerated from 6.8 percent a year earlier.
Falling stock markets suggest the slowdown will worsen because share prices are a leading indicator of economic growth and corporate profits, said Michael Shaoul, the chairman of Marketfield Asset Management in New York. The $2 billion Marketfield Fund (MFLDX) has topped 99 percent of its peers this year in part because of bets that emerging-market shares will retreat.
“Equity markets have started to anticipate much more difficult economic times in these countries,” Shaoul said in a June 28 phone interview from New York. “The balance of risks is to the downside.”
The balance of risks has indeed been to the downside.
Here’s Zero Hedge to prove that point. (bold original)
The sea of red just got even redder as Japan, Korea, Norway, South Africa and Taiwan all dropped below 50, i.e., into contraction territory. From Bank of America: "Overnight and early this morning, a bevy of global manufacturing PMI reports were released. This provides us with an early reading on the state of manufacturing. Out of the 24 countries reporting so far, 10 saw month-over-month improvements in their manufacturing PMIs, while fourteen countries saw their PMIs worsen in June. Seventeen of the manufacturing PMIs were below the 50 breakeven level that divides expansion (+50) from contraction (+50). A majority of the below-50 PMI indices are located in the Euro area. The ongoing sovereign debt and banking crisis continues to weigh on the region’s economic activity and sentiment. The Euro area slowdown is beginning to impact the rest of the world."
I believe this is more than just about the Euro debt crisis, but also of the slowdown (or bubble bust) in China.
So far what has been kept the markets buoyant has been the repeated doping of the markets with minor bailouts and of the torrent of pledges of more bailouts.
In reality, markets remain highly fragile.
As I wrote last weekend
But the dicey cocktail mix of political deadlock, escalating economic woes and the uncertain direction of political (monetary) policies contributes to the aura of uncertainty that may induce a fat tail event.
A recovery in the BRICs and emerging markets will likely be reinforced by a recovery in commodity prices. This has not yet been established.
Until perhaps central bankers of major economies makes major moves, I don’t think the time for positioning on the BRICs is ripe.
Austrian economist Bob Wenzel explains. (bold emphasis mine)
It's clear that, under Obamacare, premiums will go through the roof, especially for the young. It will be cheaper for almost everyone to pay the penalty rather than buy insurance. And since, Obamacare requires that insurers take on those who already have pre-existing conditions, there is no risk for those who simply pay the penalty. If a penalty payer comes down with a catastrophic condition, he can simply buy "insurance" at that point.
This will eventually collapse the system, unless penalties are made higher than the cost of insurance (which would require congressional approval--imagine that circus).
Signs of economic slowdown has percolated to the US, but global stock markets remain buoyant.
From Bloomberg,
Manufacturing in the U.S. unexpectedly shrank in June for the first time since the economy emerged from the recession three years ago, indicating a mainstay of the expansion may be faltering.
The Institute for Supply Management’s index fell to 49.7, worse than the most-pessimistic forecast in a Bloomberg News survey, from 53.5 in May, the Tempe, Arizona-based group’s report showed today. Figures less than 50 signal contraction. Measures of orders, production and export demand dropped to three-year lows.
Treasury yields fell on concern Europe’s debt crisis and a slowdown in Asia are taking a bigger toll on the world’s largest economy and hurting manufacturers like DuPont Co. (DD) and Steelcase Inc. (SCS) Assembly lines are at risk of slowing further as consumers temper purchases and companies cut back on investment…
The ISM index, which dropped to its lowest level since July 2009, was less than the median forecast of 52 in the Bloomberg survey. Estimates of 70 economists ranged from 50.5 to 53.5. The gauge averaged 55.2 in 2011 and 57.3 the prior year.
No Recession
Today’s reading is well above the 42.6 level that generally indicates the economy as a whole is expanding, according to ISM…
Manufacturing is also weaker in the rest of the world. The industry in the euro-area contracted for an 11th straight month in June as Europe’s debt crisis sapped demand. A measure of the region’s factories held at 45.1, London-based Markit Economics said.
No worry, bad news has never been a problem as central banks are expected to ride like the fabled knights to save the damsel in distress.
From another Bloomberg article,
Japanese and Australian stock futures rose on expectations that a contraction in U.S. manufacturing may encourage the Federal Reserve to ease monetary policy as the European Central Bank cuts interest rates to help contain the region’s sovereign-debt crisis.
Yet another article from Bloomberg,
Asian stocks climbed for a fifth day, the longest rising streak on the regional benchmark index since March, on expectations that central banks from Washington to Frankfurt may ease monetary policy to spur economic growth…
“The prospect for central banks easing policy gives us a good setup for equity markets globally,” said Mikio Kumada, a global strategist in Singapore at LGT Capital Management, which manages more than $20 billion globally…
The weakness in manufacturing may encourage more accommodative policies from the Federal Reserve, Princeton University economist Alan Blinder said in an interview on Bloomberg Television’s “Market Makers” with Erik Schatzker and Scarlet Fu.
The mantra of money printing as the Holy Grail have always been popular. As the great Professor Ludwig von Mises observed
The popularity of inflation and credit expansion, the ultimate source of the repeated attempts to render people prosperous by credit expansion, and thus the cause of the cyclical fluctuations of business, manifests itself clearly in the customary terminology. The boom is called good business, prosperity, and upswing. Its unavoidable aftermath, the readjustment of conditions to the real data of the market, is called crisis, slump, bad business, depression. People rebel against the insight that the disturbing element is to be seen in the malinvestment and the overconsumption of the boom period and that such an artificially induced boom is doomed. They are looking for the philosophers' stone to make it last
Yet 5 years of sustained inflationism have only worsened the crisis.
Inflationism is like religion, it is based on faith.
Absent real actions, until when can stock markets rise on mere ‘talk therapy’ or on expectations that central banks will deliver the ‘Bernanke PUT’? When will reality collide with hope?
Be careful out there.
Bad news on China’s property sector is good news for media and the Chinese equity markets.
From Bloomberg
China’s new home prices rose for the first time in 10 months as the government eased its monetary policies to bolster the economy, according to SouFun Holdings Ltd. (SFUN), the nation’s biggest real estate website owner.
Home prices increased 0.1 percent from May to 8,688 yuan ($1,367) per square meter (10.76 square feet), SouFun said in an e-mailed statement today, based on its survey of 100 cities. Beijing led gains among the nation’s 10 biggest cities, climbing 2.3 percent from May, followed by the southern business hub of Shenzhen, which added 0.8 percent.
China’s Vice Premier Li Keqiang asked for curbs on speculative home demand to be continued and called for more efforts to build affordable housing units, Xinhua News Agency reported yesterday. While the government maintained its housing curbs, it helped ease funding by lenders and vowed to support first-home buyers. The central bank cut the benchmark one-year lending rate last month for the first time since 2008.
“The rate cut played a big role changing the sentiment on the market,” said Jeffrey Gao, a Shanghai-based property analyst for Macquarie Capital Securities. “The government hasn’t changed the overall direction of the property policy, but it probably will be less stringent on the easing in smaller cities.”
Round off .1 percent and you get zero. Ok, give them the benefit of the doubt that zero is better than negative.
What such news attempts to frame to the public’s mind is that low interest rates equals recovery. The implication is that debt is growth. That’s hooey.
As the great Ludwig von Mises warned,
Public opinion is prone to see in interest nothing but a merely institutional obstacle to the expansion of production. It does not realize that the discount of future goods as against present goods is a necessary and eternal category of human action and cannot be abolished by bank manipulation. In the eyes of cranks and demagogues, interest is a product of the sinister machinations of rugged exploiters. The age-old disapprobation of interest has been fully revived by modern interventionism. It clings to the dogma that it is one of the foremost duties of good government to lower the rate of interest as far as possible or to abolish it altogether. All present-day governments are fanatically committed to an easy money policy.
To paraphrase Professor Mises, All present-day governments are fanatically committed to boom bust cycles, erosion of capital for civil society and the transfer of wealth to politicians
China’s equity markets are modestly up as of this writing.
Could this be in response to zero growth or could this be a carryover from the EU Summit bacchanalia or both?
Yet commodity prices are down.
Nevertheless, One day does not a trend make.
Economic fascism is the doctrine that there is a government-business alliance that makes the nation wealthy or strong militarily. This idea has never had a judicial basis before. Now it does.
A tax in America prior to last week was a payment by the citizen or legal entity to an agency of civil government. Not so in the new, improved American fascism, as articulated by Chief Justice Roberts. In fascism, a compulsory payment to a private, profit-seeking entity is considered a tax. You can pay it to an insurance company, or you can pay a fine to the federal government. Take your pick. They are both taxes.
(bold emphasis original)
This from Professor Gary North on the recent validation of Obamacare by US Supreme Court. (lewrockwell.com).
Intense global market volatility continues. Today’s ambiance seems conducive for adrenaline seeking high rollers.
The Philippine Phisix has been experiencing sharp volatility too. But contrary to my expectations, gyrations has swung mostly to an upside bias.
Along with Pakistan, the local benchmark has been outperforming the rest of the Asian region. The Philippine Phisix ranks as the sixth best performer based on year-to-date nominal currency benchmark returns.
Of the 71 international bourses on my radar screen, about a hefty majority or 67% posted gains on a year-to-date basis as of Friday’s close.
This hardly has been representative of a bearish mode.
In addition, the Phisix is just about a fraction or spitting distance away (1%) from the May record highs at the 5,300 level. And considering that equity markets of the US and European markets skyrocketed Friday, a new Phisix milestone record seems to be a “given”.
Repeated Doping of the Markets Triggered a RISK ON Environment
Yet global stock markets appear to be detached from real world events.
Bad news has prominently been discounted and bizarrely treated as good news. It’s a sign of abnormal conditions, as well as, the amazing complexity of the nature of markets behaving in response to massive price distortions from political actions.
Global equity markets began with their creeping ascent in June. This excludes China’s Shanghai (SSEC) index though.
Each week since, global equity markets rose on a barrage of bailout related developments. The evolving events can be categorized as actualized bailouts and events that accommodated a prospective bailout.
Spain’s bailout[1], the extension[2] of Operation Twist by the US Federal Reserve and the latest EU summit[3] could be seen as examples of the actualized bailouts. They account for as promises made good through actions.
The culmination of the Greece elections[4], the easing of collateral rules[5] and pledges for stimulus[6] signifies as both market conditioning, and of the prospective accommodation for future bailouts. People saw these events as indicators of prospective political actions
I drew and noted of the timeline of the actualized bailout events along with the chart of the major indices. Clearly we see Europe’s STOX 50, the US S&P 500 and Dow Jones Asia (P1Dow) responding to political actions.
Friday’s supposed “breakthrough” from the EU summit sent global markets into a frenzied RISK ON spiral.
The deal reportedly[7] facilitates a direct injection mechanism into stricken banks by EU’s rescue funds, particularly the temporary European Financial Stability Facility (EFSF) and the permanent European Stability Mechanism (ESM). The rapprochement also included the option of intervening in the bond markets, the waiving of preferred creditor status on ESM’s lending to Spanish banks and the creation of a “single banking supervisor” which marks the first step towards a banking union and an allegedly a backdoor route towards a fiscal union.
Since the deal has been seen as a “shock and awe” policy, and went beyond market’s expectations and partly fulfilled the mainstream’s yearnings for a union, global financial markets went into a shindig
The soaring Phisix has given some the impression of decoupling. This hasn’t been accurate. While there have been some instances of short-term divergence, decoupling or lasting divergence may not be in the cards.
What has distinguished the Phisix is her OUTPERFORMANCE. The repeated doping of the markets which has been inciting the current “recovery” benefited the Phisix and the top performers most.
Yet both developed economy markets and ASEAN markets (Thailand’s SETI, Malaysia’s MYDOW and Indonesia’s IDDOW) have virtually and coincidentally “bottomed” during the start of June and ascended in near consonance from then. The point is that the underlying trend has been similar but the returns have been different.
And since shindig from Friday’s EU summit has yet to be priced in on ASEAN markets, perhaps Monday’s open will likely reflect on the newfound euphoria.
The elation from the EU Summit deal has not been limited to the global stock markets but was likewise ventilated on the commodity markets and on the currency markets.
Gold, Oil (WTIC), Copper and the benchmark CRB or an index accounting for a basket of 17 commodities all scored hefty one day gains.
Non-US dollar currencies like the Euro likewise posted a huge one day 1.83% gain. The Philippine Peso also firmed by .7% to 42.12 to a US dollar. The Peso is likely to break the 42 levels if this momentum continues.
Overall, this is your typical RISK ON environment.
EU Summit’s Honeymoon: Sorting Out the Cause and Effects
The ultimate question is does all these represent an inflection point that favors the bulls?
Candidly speaking this “rising tide lifting all boats” scenario are the conditions that would make me turn aggressively bullish. BUT of course, effects shouldn’t be read as the cause.
In the understanding that the markets have thrived throughout June on REPEATED infusions of bailouts and rescues, my question is what happens if markets are allowed to float on its own? What happens when the effect of the bailouts fade? Or outside real political actions of bailouts, will markets continue to rise on the grounds of mere pledges or from hopes of further rescues?
The current environment seems so challenging.
Yet there seems to be many kinks or obstacles to the supposed EU deal.
First, while the premises of the EU deal have been outlined, the details remain sketchy.
Second, a change in the lending conditions of Spain’s bailout may also trigger demand for changes of other bailed out nations to seek similar terms. This may lead to more political squabbling.
Third, the ESM has yet to be ratified[8] by members of the Eurozone
Fourth, EU’s combined capacity for the EFSF and ESM, even if complimented by the IMF, represents a little over half of the total funding requirements[9]. Thus, the proposed therapy from the EU summit will likely only buy sometime.
Fifth, the controversial deal rouse a popular backlash against Germany’s “surrender” or “blackmailed” into accepting the conditionality set by the EU. Such views have been ventilated by major media outfit[10].
Even after the German parliament immediately passed bailout pact, several German lawmakers along with opposing political groups responded swiftly by filing suites to challenge the accord at the Federal Constitutional Court[11]. Since the German President President Joachim Gauck said that he would withhold the passage of the new laws pending the resolution of lawsuits, the rescue mechanism may suffer risks of delay, or at worst, a reversal from the courts.
Sixth, the preferred path towards centralization will likely exacerbate the problems caused by regulatory obstacles and by deepening politicization of the marketplace[12]. Politicians don’t seem to get this. They have been inured to treat the symptoms and not the causes.
Yet the problems have not been confined to the EU. There remains uncertainty over China’s seemingly intensifying economic woes. The local Chinese government have reportedly resorted to selling cars to raise finances[13]. As of this writing, a new report shows that China’s manufacturing conditions have been worsening[14]. Most importantly Chinese authorities seem to be in dalliance over demand by the media for more rescues.
Developments in the US have not been upbeat either. The Supreme Court’s upholding of the Obamacare will have massive impacts to the economy and to US fiscal balances[15]. “Taxmaggedon” or massive tax increases[16] slated for 2013 out of the expiration of tax policies may also impact the economy. There is also the contentious US debt ceiling debate. All three are likely to become critical issues for the coming US elections, this November.
Importantly the rapid deceleration of money supply is likely to pose as a headwind for the US markets as well as the economy.
Bottom line:
Yes momentum may lead global markets climb the wall of worry over the interim. But the dicey cocktail mix of political deadlock, escalating economic woes and the uncertain direction of political (monetary) policies contributes to the aura of uncertainty that may induce a fat tail event.
[1] See Expect a Continuation of the Risk ON-Risk OFF Environment June 11, 2012
[2] See US Federal Reserve Extends Operation Twist, Commodities Drop June 21, 2012
[3] See Markets in Risk ON mode on Easing of EU’s Debt Crisis Rules June 29, 2012
[4] See Shelve the Greece Moment; Greeks are Pro-Austerity After All, June 18, 2012
[5] See ECB Eases Collateral Rules as Banking System Runs out of Assets, June 23, 2012
[6] See From Risk OFF to Risk ON: To Stimulus or Not?, June 7, 2012
[7] Reuters.com EU deal for Spain, Italy buoys markets but details sketchy, June 29, 2012
[8] Wikipedia.org, Ratification European Stability Mechanism
[9] Zero Hedge Last Night's Critical Phrase "No Extra Bailout Funds", June 29, 2012
[10] Telegraph.co.uk EU Summit: How Germany reacted to Merkel's 'defeat', June 30, 2012
[11] Bloomberg.com Germany’s ESM Role, EU Fiscal Pact Challenged in Court June 30, 2012
[12] See What to Expect from a Greece Moment, June 17, 2012
[13] See Out of Cash, Local Chinese Governments Sell Cars, June 27, 2012
[14] See Deeper Slump in China’s Manufacturing, Will Bad News Become Good News? July 1, 2012
[15] See Obamacare’s 21 New or Higher Taxes for the US economy, July 1, 2012
[16] Heritage Foundation Taxmageddon: Massive Tax Increase Coming in 2013, April 4, 2012
Negative Real Rates and the Business Cycle
Negative real interest (91 day T-Bill rate 2.174%, May 2012 Inflation rate 2.9% from the latest BSP data) may continue to whet the appetite of local investors to speculate or gamble** on the stock markets even when confronted by the increasing risks of economic and earnings based downswing.
By punishing savers and rewarding borrowers and speculators, excessive risk taking or what people call as “greed” are also symptoms of the distortions of people’s incentives, behavior and ethical values through the politicization of interest rate markets.
A brewing property bubble[1] prompted for by the negative real rates appear to be confirming my prognosis of the business cycle in motion, as bank loans to the industry has been ballooning.
From the Bangko Sentral ng Pilipinas[2],
As of end-March 2012, the combined exposure to the real estate sector of universal and commercial banks (U/KBs) and thrift banks (TBs) reached its highest level yet at P538.1 billion. This was up by 3.8 percent from previous quarter’s P518.6 billion and by 21.0 percent from last year’s P444.9 billion. Additional exposure during the quarter came from real estate loans (RELs), which grew by 3.6 percent (P18.3 billion) to P524.1 billion, and investments in securities issued by real estate companies which grew by 9.9 percent (P1.3 billion) to P14.0 billion.
Yet rose-colored glass punters think that the Philippines have become immune to external influences or that they have been ingrained with the notion that interventions would always save the day for the markets.
Such sloppy thinking needlessly exposes oneself to outsized risks.
While it may true that the Philippines may be less affected by an exogenous downturn relative to the others, this does not mean that the domestic stock markets won’t factor them.
Major economic downturns or recessions are manifestations of violent market based adjustments of malinvestments borne out of earlier monetary and fiscal policies and from other forms of government interventions on the marketplace. They represent policy-induced boom bust cycles.
As the great dean of Austrian economics Professor Murray N. Rothbard explained[3],
The inflationary boom thus leads to distortions of the pricing and production system. Prices of labor and raw materials in the capital goods industries had been bid up during the boom too high to be profitable once the consumers reassert their old consumption/investment preferences. The "depression" is then seen as the necessary and healthy phase by which the market economy sloughs off and liquidates the unsound, uneconomic investments of the boom, and reestablishes those proportions between consumption and investment that are truly desired by the consumers. The depression is the painful but necessary process by which the free market sloughs off the excesses and errors of the boom and reestablishes the market economy in its function of efficient service to the mass of consumers. Since prices of factors of production have been bid too high in the boom, this means that prices of labor and goods in these capital goods industries must be allowed to fall until proper market relations are resumed.
The 2007-2008 bear market should be a reminder. The Philippines escaped recession, earnings were hardly scathed, but prices of local stocks more than halved. That’s mainly because of contagion. Yet conventional analysis cannot explain this.
True, today is not 2008. Then, foreign money dominated trading activities. For this cycle, local participants have taken over the leadership role. Nonetheless the share of foreign money remains substantial in terms of trading activities and equity ownership.
So writing off the contagion risk could be hazardous to one’s portfolio.
Foreign Money: Neither Yield Chasing nor Capital Flight
I have also said in the past that capital flight[4] from economies enduring monetary inflation may likely bolster equities of local and of the ASEAN region.
Yield chasing may be a euphemism for capital flight when applied to foreign money.
The Phisix posted a huge jump in net foreign inflows last Friday.
But this had been due to the special block sales of San Miguel Corporation shares which news report attribute to the sale by Eduardo “Danding” Cojuangco Jr. to his trusted allies led by Ramon S. Ang for P37 billion[5].
With a 28 billion pesos NET foreign buying on Friday, this either means that part of Ramon Ang’s allies have been foreign entities or that these ‘allies’ are locally owned corporations with foreign addresses. The human factor behind numbers cannot be explained by statistics alone.
Besides should a capital flight dynamic take hold I believe that this will be a regional phenomenon for the simple reason that no single ASEAN markets can absorb the potentially huge inflows from developed economies.
The Philippines lags the region in terms of traded value and market capitalization. So we are likely to be the least preferred by huge foreign funds in search of safe haven or of greater yields based on their volume.
When viewed from the Asian perspective[6], the Philippine Stock Exchange ranked SECOND to the SMALLEST in terms of traded value (left window). Relative to our ASEAN peers, the PSE is the least liquid.
And similarly the Philippines have been the SECOND to the SMALLEST in terms of market cap in Asia (right window). The relative lack of market depth implies of quantity (lesser number of publicly listed companies) or quality issues (smaller market cap companies listed) or both.
The shortcomings from the lack of market depth and of the dearth of liquidity[7] (the degree of tradability) subjects foreign investors to greater volatility risks[8].
To analogize, the Philippines is like a third tier issue on a stock market exchange.
True, there will always be a distinct story to tell for every political economy, but market exposures by foreign funds are driven by manifold market parameters as liquidity, market depth, transaction costs, hurdle rates, regulations on capital movements and many other factors.
Considering the major constraints on liquidity and market depth issues, fund managers are likely to go for the more liquid and for markets with greater depth as the priority. However they could also possibly deploy a smaller degree of risk exposures on high beta[9] or more volatile issues.
Bring Home the Bacon
I still harbor the suspicion that the local markets have recently been propped up for some unstated (perhaps political) reasons.
The recent strength of the domestic market could be interpreted as having been based on politically colored rationalization[10]: Near record highs shows that the administration successfully delivered the international investment ‘bacon’! (yeah, bring home the bacon are done deals cooked earlier and formalized through Photo Ops)
Perhaps these may have been meant to justify the recent overseas junkets or to generate more approval ratings in preparation for the coming national elections.
So far, the strength of the Phisix seems less about yield chasing from foreign money but more of yield chasing and speculation from domestic investors seduced by the allure of quick buck from a negative interest rate regime. Also I think that current markets have partly been propped up perhaps for political reasons.
Anyway, market sentiment has shown belated signs of improvements along with the rise of the Phisix. The spread of the weekly advance-decline ratio has been widening in favor of the bulls. This extrapolates to a favourable short term momentum.
Also the Phisix is likely to surf on the global ‘EU Summit honeymoon’ sentiment, as well as on the momentum from an imminent RECORD breakout.
Whether this breakaway run will be sustainable remains unclear as global markets will remain volatile on both directions.
The Phisix may continue to outperform but will be subject to the ebbs and flows of political and economic developments abroad.
Avoid from the belief that the Phisix can decouple. We need to operate on proof and theory rather than from faith. Deductive logic says that in today’s globalization, the odds for sustainable divergence seem remote.
Also we need further evidence that in absence of central bank interventions, global economies are on a path to recovery.
Evidence has not been reinforcing this yet.
In fact we have the reverse, that markets are being bolstered by bailouts and pledges even as global economic momentum grinds nearly to a halt.
So do take a cautious or defensive stance.
**In essence stock markets are not about gambling. However the stock market may be transformed into gambling when government interventions distort the pricing efficiency and tilts the benefits to patrons and friends. As I previously wrote[11],
government interventions can tilt or distort any markets away far from its price signaling efficiency. This is where the level of the playing field or the distribution share of the odds are skewed to favor one party over the others, mostly the recipients or beneficiaries from these interventions. Where the governments assume the role as the HOUSE and the beneficiaries as the DEALERS, then all other participants operate as PLAYERS, hence your basic description of a gambling casino.
[1] See The Upcoming Boom In The Philippine Property Sector, September 12, 2010
[2] BSP.gov.ph Exposure to Real Estate of U/KBs & TBs Continues to Rise, June 29, 2012
[3] Rothbard Murray N Economic Depressions: Their Cause and Cure June 25, 2012 Mises.org
[4] See Will Japan’s Investments Drive the Phisix to the 10,000 levels? March 19, 2012
[5] Inquirer.net Cojuangco sells 15% SMC stake to allies June 29, 2012
[6] Asianetrading.com 2010 Exchange Statistics For Asia February 11, 2011
[7] Wikipedia.org Liquidity risks
[8] Wikipedia.org Volatility Risks
[9] Investopedia.com Beta: Know The Risk
[10] Manila Bulletin PNoy’s $2-Billion ‘Bacon’, June 8, 2012
[11] See A Primer On Stock Markets-Why It Isn’t Generally A Gambling Casino, June 18, 2009
Fresh from Bloomberg,
China’s manufacturing expanded at the weakest pace this year as new orders and export demand dropped, adding to evidence the nation’s economic slowdown is deepening, a government report showed today.
The Purchasing Managers’ Index fell to 50.2 in June from 50.4 in May, the Beijing-based National Bureau of Statistics and China Federation of Logistics and Purchasing said. That compares with the 49.9 median estimate in a Bloomberg News survey of 24 economists. A reading above 50 indicates expansion.
Today’s data increase the odds Premier Wen Jiabao will introduce more stimulus to stem a deceleration in the world’s second-biggest economy that may have extended into a sixth quarter. The central bank will fine-tune economic policies in a “timely and appropriate” manner, central bank Governor Zhou Xiaochuan said on June 29.
“The weaker reading should trigger more-aggressive policy easing,” Sun Junwei, a Beijing-based economist with HSBC Holdings Plc, said before the release. “Economic growth will rebound to over 8.5 percent in the second half once these additional easing measures filter through,” she said.
Steps may include a reduction in interest rates, four cuts in banks’ reserve requirements, more fiscal spending on public works and tax cuts, according to Sun, who forecasts second- quarter economic growth may have slid to 7.8 percent from a year earlier, after slowing to 8.1 percent in the first three months of the year.
When I say bad news is good news, I am talking about the mind conditioning of the financial marketplace. Basically market participants have been programmed to expect of a Bernanke Put or automatic backstops from governments, particularly from central banks, as reflected by this statement “increase the odds Premier Wen Jiabao will introduce more stimulus”.
The problem is that China’s political authorities remains tentative towards aggressive interventions so far.
The compromise at the EU summit seems to have temporarily put a floor on the Shanghai index, last Friday. But this comes after a technical break down in spite of the repeated assurances by politicians and the media.
And one important thing that many people don’t seem to realize: rescues and bailouts policies are unsustainable, they cannot and will not be self-perpetuating.
The Supreme Court’s upholding of Obamacare will translate to 21 new or higher taxes for the US economy.
Ryan Ellis enumerates them (hat tip Bob Wenzel)
1. Individual Mandate Excise Tax(Jan 2014)
2. Employer Mandate Tax(Jan 2014)
3. Surtax on Investment Income ($123 billion/Jan. 2013)
4. Excise Tax on Comprehensive Health Insurance Plans($32 bil/Jan 2018)
5. Hike in Medicare Payroll Tax($86.8 bil/Jan 2013)
6. Medicine Cabinet Tax($5 bil/Jan 2011)
7. HSA Withdrawal Tax Hike($1.4 bil/Jan 2011)
8. Flexible Spending Account Cap – aka“Special Needs Kids Tax”($13 bil/Jan 2013)
9. Tax on Medical Device Manufacturers($20 bil/Jan 2013)
10. Raise "Haircut" for Medical Itemized Deduction from 7.5% to 10% of AGI($15.2 bil/Jan 2013)
11. Tax on Indoor Tanning Services($2.7 billion/July 1, 2010)
12. Elimination of tax deduction for employer-provided retirement Rx drug coverage in coordination with Medicare Part D($4.5 bil/Jan 2013)
13. Blue Cross/Blue Shield Tax Hike($0.4 bil/Jan 2010)
14. Excise Tax on Charitable Hospitals(Min$/immediate)
15. Tax on Innovator Drug Companies($22.2 bil/Jan 2010)
16. Tax on Health Insurers($60.1 bil/Jan 2014)
17. $500,000 Annual Executive Compensation Limit for Health Insurance Executives($0.6 bil/Jan 2013)
18. Employer Reporting of Insurance on W-2(Min$/Jan 2011)
19. Corporate 1099-MISC Information Reporting($17.1 bil/Jan 2012)
20. “Black liquor” tax hike(Tax hike of $23.6 billion)
21. Codification of the “economic substance doctrine”(Tax hike of $4.5 billion).
Read the explanation or details here
All these will negatively impact corporate profits, business investments, employment and productivity.
Yet all these means more bureaucracy, greater government spending, MORE Fiscal DEFICITS and SURGING DEBTS.
Add Obamacare to the existing welfare, warfare and other growing spending programs, a Greece crisis seems like a destiny.
This means that the US Federal Reserve will only continue to pump massive amounts of money to system into prevent interest rate from rising. An upward trend of interest rates will jeopardize funding for all these social spending programs.
This possibly extrapolates to continuation of the US Federal Reserve as the buyer of last resort.
Put differently, inflationism will function as the lipstick on the pig for these economically unsustainable programs. One would already note that interest on debt already exceeds many spending programs. (charts from Heritage Foundation)
Sometimes you’ve got to wonder: Are these purposely designed to destroy society?
Updated to add: Since the Heritage chart embed didn't work out as I expected, I had to redo the entire post.
From Marian Tupy of the Cato Institute
Dematerialization, in other words, should be welcome news for those who worry about the ostensible conflict between the growing world population on the one hand and availability of natural resources on the other hand. While opinions regarding scarcity of resources in the future differ, dematerialization will better enable our species to go on enjoying material comforts and be good stewards of our planet at the same time. That is particularly important with regard to the people in developing countries, who ought to have a chance to experience material plenty in an age of rising environmental concerns.
Maybe I am too much of an optimist, but dematerialization could also lead to a greater appreciation of capitalism. Namely, the “profit motive” can be good for the environment. No, I am not talking about dumping toxic chemicals into our rivers, which is illegal and should be prosecuted. Rather, I am talking about the natural propensity of firms to minimize inputs and maximize outputs. Take the humble soda can. According to the Aluminum Association, “In 1972… a pound of aluminum yielded 21.75 cans. Today, as a result of can-makers’ use of less metal per unit, one pound of aluminum can produce 33 cans.”
Aside from the benefits of dematerialization, consumer surpluses from the added convenience, connectivity and productivity or a better standard of living are consequences of one of capitalism’s key driving force: innovation.
The information age is bound to accelerate on the monumental transformations of innovation.
