Phisix: Why The Correction Cycle Is Not Over Yet

A delirious stock-exchange speculation such as the one that went crash in 1929 is a pyramid of that character. Its stones are avarice, mass-delusion and mania; its tokens are bits of printed paper representing fragments and fictions of title to things both real and unreal, including title to profits that have not yet been earned and never will be. All imponderable. An ephemeral, whirling, upside-down pyramid, doomed in its own velocity. Yet it devours credit in an uncontrollable manner, more and more to the very end; credit feeds its velocity- Garet Garett

Portfolio Pumping at the Philippine Stock Exchange

Friday’s session, which marked the last trading day for the month of August, manifested another probable sign of the politicization of Philippine equity market.

95% of Friday’s trading activities saw the sluggish Phisix in the red, albeit modestly. That was until the last few minutes where a spike occurred, as shown by the intraday chart from Bloomberg. Such fantastic comeback accounted for a hefty 1.4% move from bottom to the session’s close.

On social media, market participants occasionally yammer or bellyache about supposed price manipulations on certain issues, but Friday’s action makes them pale by comparison.

Because the event happened on the month end, I earlier noted[1] that the typical rationalization will be that of ‘window dressing’. And perhaps too some may say that last minute flow of new information might have prompted some fund managers with sizeable portfolios to urgently position based on an anticipated boom.

But I see none of the above. From the flow of circumstantial empirical evidences, the last minute juggernaut seems to have been well crafted, through coordinated executions.

For starters, it usually takes a handful of heavyweight blue chip issues to move the Phisix. Of course being that they are blue chips this entails huge amount of money as these issues are the most liquid or frequently the most heavily traded

However, a push based on select heavyweights, while providing a lift to the Phisix, would not be reflected on all sectors.

This is why Friday’s action has been remarkable. As illustrated by the intraday charts from citiseconline.com, the resurgent Phisix was not limited to Phisix component leaders but to the major market caps of ALL the sectors.

Coordinated and synchronized buying has been adeptly executed which targeted heavyweights of every sector.

The systematic buying activities, thus, projected a broad based advance. (table from the Philippine Stock Exchange)

Among the sectoral benchmarks, the service sector, led by PLDT, promptly stood out. PLDT remains as the largest free float market cap constituting 14.62% of the Phisix basket as of Friday’s close. PLDT closed 2.16% on Friday (see red arrow below).

Ironically, there were some major issues that closed in the red such as Ayala Corp and Metrobank.

But again, the well contrived buying operation ensured that their losses had been neutralized by gains on some other heavyweights. For instance, in the holding sector, Ayala Corp’s losses had been offset by the gains of larger market cap Aboitiz Equity Ventures [PSE: AEV] and SM Investments [PSE: SM]. Also in the banking sector, Metrobank’s losses were countered by material gains of Bank of the Philippine Islands [PSE: BPI] and BDO Union Bank [PSE: BDO]

In short, the strategy’s centrepiece was that PLDT ensured the gains of the benchmark, while other blue chips were meant to “paint the town red”.

Peso volume net of special block sales, for the day, accrued to a substantial 6.9 billion pesos (US 165 million).

Since foreign money posted substantial net outflows (Php 1.8 billion; USD 43 m) during the session, this means that the local institution/s, channelled through a variety of leading brokers, were responsible for the synchronized buying spree.

It would seem senseless, if not irrational, for money managers with substantial portfolios to undertake what seems as dicey actions, considering the current risk environment and given the recent correction phase the Phisix has been undergoing.

This also means that the parties involved may not be after pursuing Alpha (investment) returns[2] but intended to garnish the Phisix for whatever non-financial reasons.

Importantly, in the absence of economic incentives, the likelihood is that the hefty risk money used could have been third party money.

If such actions have been limited to a single issue, then this would be known as “marking the close” which under Philippine laws are considered illegal[3]

In the US “marking the close” is defined[4] as “the practice of buying a security at the very end of the trading day at a significantly higher price than the current price of the security”.

Even if these acts has been engineered for so-called “window dressing”, they are reckoned as unethical, if not illegal, through Portfolio Pumping[5]

The illegal act of bidding up the value of a fund's holdings right before the end of a quarter, when the fund's performance is measured. This is done by placing a large number of orders on existing holdings, which drives up the value of the fund.

Nonetheless because “marking the close” is technically hard to prove, the elaborate broad index “management” scheme may have also been designed to elude legal technicalities.

Such “marking the close” manipulation was part of the insider trading charge[6] levelled against crony Dante Tan on the BW Resources scam but whose twin cases were eventually dropped by the Supreme Court[7].

Bottom line is that whatever gains accrued from Friday’s ploy to artificially boost stock prices should be taken as temporary and with a grain of salt. Eventually markets will prevail.

Global Equities on a Correction Mode

Most of the weekly 1.03% gain by the Philippine benchmark, the Phisix, can be traced to Friday’s extraordinary recovery of .91%.

For the week, among major international bellwethers, only the Phisix posted positive results.

The rest of the world seems to be in a correction mode.

However, the emerging market majors, particularly the BRICs, endured the heaviest losses.

What seems even more worrisome is that backed by a string of negative developments, such as Saturday’s post-trading announcement where Chinese manufacturing activities shrank or contracted (and not reduced growth) for the first time in nine months[8], China’s Shanghai index continues to fathom new depths. This may point to greater possibility of a hard landing for China.

Ignoring developments in China would be a reckless proposition. Aside from being the second largest economy in the world, China assumes very important roles in many aspects of global trade. This only means that a sharp unexpected downturn in China may amplify the risks of contagion.

It would also seem foolhardy to become overly optimistic on the sustained narrative by mainstream media that Chinese authorities would eventually come to the rescue. Chinese markets have so far dispelled the torrent of propaganda.

Well, the global equity market downturn seems to have affected even the streaking hot Thailand equity bellwether, the SET. Thailand’s SET sizzled even as the other ASEAN peers fumbled over the past few weeks.

Thailand SET (green) now joins the Phisix (PCOMP, red orange), Indonesia’s JCI (orange) and Malaysia (FBMKLCI, red) in rolling over to what seems as a downside bias.

If the SET should continue to correct, then this goes to prove that the forces of “reversion to the mean” are at work. This should also debunks the anachronistic idea of decoupling.

Risks to Ben Bernanke’s Political Career Points to Fed Action Soon

On the other hand, the cumulative weekly losses by US markets has been apparently been mitigated by a strong Friday close.

Again, the one day rally came amidst promises made by the US Federal Reserve’s Ben Bernanke for more policy stimulus in his Jackson Hole speech.

The Bloomberg gives us a good account on the Pavlovian behavior adapted by the markets[9],

U.S. stocks rallied with commodities and Treasuries as Federal Reserve Chairman Ben S. Bernanke said he wouldn’t rule out more stimulus to lower a jobless rate he described as a “grave concern…

Bernanke’s 24-page speech at the Kansas City Fed’s symposium made the case for further monetary easing and concluded that the central bank’s non-traditional policy tools such as bond purchases have been effective in boosting growth and improving financial conditions. He said that declines in the unemployment rate would continue only if growth picks up above its longer term trend.

Mr. Bernanke’s speech seems to impart subtle political implications.

Mitt Romney, Republican presidential candidate, lately announced that should he win the presidency this November, according to a Bloomberg article[10], “he wouldn’t reappoint Bernanke, raising questions about the succession more than a year before Bernanke’s term expires in January 2014.”

And as noted last week[11], the performance of the US stock market has had a strong correlationship with the outcome of the presidential elections. Strong stocks mostly led to the re-election of the incumbent (chart from yahoo[12]). This again may be due to public’s interpretation of rising markets as signs of economic “progress” even if in reality such artificially tweaked gains were mainly due to bank credit expansions.

This from USA News[13],

InvestTech Research, an investment firm out of Montana, says the stock market is the most reliable indicator of who will win the presidency and has been for more than 100 years.

"The election is a reaction to the stock market. If you see strength in the market, consumer sentiment and confidence among the voters is higher. If you see volatility, you are going to see investors take that out on the incumbent," says Eric Vermulm, an InvestTech Research senior portfolio manager.

Gains of the US stock markets have essentially been built around the slew of policy steroids or from repeated interventions by US Federal Reserve. This essentially postulates to the deepening politicization of US financial (equity) markets.

And as I pointed out in the recent past[14] the New York Federal Reserve even blustered about successfully boosting the US stock markets. Thus, the fate of equity markets seems largely beholden to the Fed’s sustained infusion of steroids.

In the knowledge that the Fed can tweak policies to favor the stock markets, and in the prospects that Mr. Bernanke will be out of work from a Romney presidency, then the most likely guiding incentive for Mr. Bernanke will be to work to retain his tenure by promoting the re-election of President Obama through “stock market friendly” policies in September or October.

Besides Mr. Bernanke seems to have a strong backing from FOMC members, according to the Carl Tannenbaum of Northern Trust[15], “more than half of the current FOMC members would be amenable to additional easing”

I previously said that the Mr. Bernanke may likely wait for the ECB to move first[16]. Now I am more inclined to the scenario or the probability that Fed action this September or in October may become a reality.

Two major variables yet could prevent Mr. Bernanke from doing so; one is a sustained surge in food prices, and the other, would be a more vocal opposition by the public on expanded Fed policies.

All Eyes On Central Bankers

Global equity markets have generally been on a correction mode, a dynamic which is likely to continue, until perhaps central banks lay down their cards.

Only the US markets seem to contradict this. Yet the strength of the US markets has been mainly erected from expectations of further policy easing by the US Federal Reserve.

On the other hand, the ECB may finalize the rescue mechanism within the first half of the month. This in spite of incipient signs of stagflation[17]; elevated inflation, high unemployment and contracting economic growth.

Mounting expectations and deepening dependence from central banking opiate, which has been clashing with the unfolding economic reality, will prompt for more price volatility on both directions. The Bank of America posits that QE 3.0 has been substantially priced in[18].

Eventually stock markets will either reflect on economic reality or that central bankers will have to relent to the market’s expectations. Otherwise fat tail risks may also become a harsh reality.

Market direction now depends on the details of central bank actions.

Mounting Stagflation Risks

Rising commodity prices appear to be factoring in the imminence of such actions. Gold’s recent recovery leads other commodities, Energy ($GKX-S&P GSCI Energy Index) and Industrial metals ($GYX-S&P GSCI Industrial metals) except Agriculture ($GKX-S&P GSCI Agricultural Index) which seems to have presaged the commodity rally.

For emerging markets, sustained high levels of food prices, which incidentally have now become a global phenomenon according to the World Bank, raises the risks of stagflation[19] which will force their respective central banks to tighten.

An environment plagued by stagflation will not be friendly to the stock market in general.

Perhaps China’s procrastination to pursue further aggressive stimulus has been due to the supposed huge disconnect between statistical CPI index and on the ground real food prices[20].

Surging food prices have been prompting many Asians to stockpile.

According to Wall Street Journal[21],

Reduced availability and higher prices are spurring importers to buy more, not less, as a hedge against even higher prices in the future. China, which accounts for more than 60% of the world's soybean imports, is also buying cargoes several months before shipment. Demand there is driven mainly by double-digit annual growth in dairy-product consumption, 5% to 6% growth in poultry consumption and 3% growth in pork consumpion, said Christopher Langholz, the business unit leader at Cargill Investments (China) Ltd.'s animal protein division in Shanghai.

Yet the prospects of Fed and the ECB simultaneously easing in the coming days, weeks or months will likely intensify not only on stagflation risks but the risk of a global food crisis as well.

Incipient stagflation, aside from micro bubble busts, may have been a principal reason why major emerging markets continue to underperform.

Correction Mode: PSE Capital Flows and the Peso US Dollar Trend

For the Philippine equity markets, the ongoing episode of correction has also been evident in the foreign fund flows.

Net foreign flows have begun to turn negative over the past weeks.

And negative foreign fund flows may have been influencing on the decline of the Peso.

According to an IMF paper[22], foreign capital flows dynamic via stock market transactions influence exchange rates more than the bond markets.

when it comes to external capital flows, it is foreign investors’ private information related to the stock market and not the bond market which drives the exchange rate.

This may hold some relevance to the relationship between the Phisix and the Philippine Peso

The correction phase of the Phisix (red candle), partly influenced by increasing net foreign sales, has likewise been manifested through the weakening of the Peso vis-à-vis the US dollar (black candle). The Phisix and the Peso exhibits strong correlations which may partly validate the theory that flows in and out of the stock market influence more the direction of the exchange rates.

So far, the Phisix correction cycle seems largely intact and could intensify

Domestic market technical picture and internal market dynamics, two items I discussed last week, along with capital flows and the trend of the Peso have converged to suggest that the correction phase of the Phisix has unlikely been over.

Add to these the external based dynamics which are likely to be transmitted to the local financial markets and to the real economy.

Don’t get lulled into the mainstream idea that the domestic central bank, the Bangko Sentral ng Pilipinas (BSP), will be able to successfully achieve so-called “inflation targeting” or contain price inflation through macro ‘policy toolkits[23]’ and that the statistical economic growth will remain robust as mainstream economists predict.

Had these policy toolkits “worked” then the world would not be experiencing what has been a lingering and worsening crisis since 2008. Technical gobbledygook has only been meant to project an aura of pretentious superiority in knowledge to justify the existence of unsound political institutions, even if they really don’t work.

Once price inflation accelerates through food and energy channels, which is likely to be accentuated by current easy money policies, and where stagflation becomes a clear and present threat, statistical economic growth, like a bubble, will simply pop. Then, the BSP will be in a state of panic. The public will discover that the emperor has no clothes.

---

[1] See Phisix: Another Fantastic Last Minute Upward Push August 31, 2012

[2] Wikipedia.org Alpha (investment)

[3] Security and Exchange Commission, CHAPTER VII Prohibitions on Fraud, Manipulation and Insider Trading Securities Regulation Code

[4] USLegal.com Marking the Close Law & Legal Definition

[5] Investopedia.com Definition of 'Portfolio Pumping'

[6] Philstar.com SEC favors random closing time for PSE December 3, 2002

[7] Manila Bulletin SC oks dismissal of Dante Tan charges in BW Resources case August 1, 2010

[8] Bloomberg.com China Manufacturing Unexpectedly Contracts As Orders Drop, September 1, 2012

[9] Bloomberg.com Stocks Rise With Commodities, Treasuries On Stimulus Bets, September 1, 2012

[10] Bloomberg.com Bernanke Makes Case For Further Stimulus To Help Jobless September 1, 2012

[11] See Phisix: The Correction Cycle is in Motion August 27, 2012

[12] Yahoo.com Obama’s Re-Election Odds Are Better Than You Think Says Hirsch, August 15, 2012

[13] USA News Stock Market Picks 90 Percent of Presidential Elections February 24, 2012

[14] See Bernanke Doctrine: New York Fed Boasts of Pushing Up the US Stock Markets, July 14, 2012

[15] Carl R. Tannenbaum The Message from Jackson Hole, Northern Trust Augst 31, 2012

[16] See Phisix: Managing Through Volatile Times August 6, 2012

[17] See Eurozone’s Nascent Signs of Stagflation September 1, 2012

[18] Zero Hedge, Chart Of The Day: With All Of QE3 Priced In, The Only Way Is Down Should Bernanke Disappoint, August 31, 2012

[19] See Stagflation Risk: Food Price Inflation is Worldwide August 31, 2012

[20] Zero Hedge, Big Outflow Trouble In Not So Little China? August 25, 2012

[21] Wall Street Journal Soybean Worries Spur Asian Buying August 29, 2012

[22] Jacob Gyntelberg, Mico Loretan, and Tientip Subhanij Private Information, Capital Flows, and Exchange Rates IMF Working Paper September 2012

[23] Businessonline.com BSP ready to tweak policy August 30, 2012

Eurozone’s Nascent Signs of Stagflation

Stagflation according to Wikipedia.org is a situation in which the inflation rate is high, the economic growth rate slows down, and unemployment remains steadily high

This Bloomberg article entitled Euro-Area Unemployment At Record, Inflation Quickens: Economy suggests that the Eurozone is now suffering from stagflation.

Euro-area unemployment rose to a record and inflation quickened more than economists forecast as rising energy costs threaten to deepen the economic slump.

The jobless rate in the economy of the 17 nations using the euro was 11.3 percent in July, the same as in June after that month’s figure was revised higher, the European Union’s statistics office in Luxembourg said today. That’s the highest since the data series started in 1995. Inflation accelerated to 2.6 percent in August from 2.4 percent in the prior month, an initial estimate showed in a separate report. That’s faster than the 2.5 percent median forecast of 31 economists in a Bloomberg survey.

A 12.4 percent surge in crude-oil prices over the past two months is leaving consumers and companies with less money to spend just as governments seek ways to contain the debt crisis. European economic confidence dropped more than economists forecast to a three-year low in August and German unemployment increased for a fifth month, adding to signs the euro-area economy continued to shrink in the third quarter.

“The whole euro zone is undergoing negative growth developments,” Don Smith, a London-based economist at ICAP Plc, told Ken Prewitt on Bloomberg Radio yesterday. “The sense is that increasingly the euro-zone crisis is bearing down on countries in northern Europe and Germany in particular and this is really forcing officials’ hands toward coming up with a firm solution.”

Europe’s nascent stagflation in pictures,

All three elements of stagflation, namely, elevated CPI or price inflation, contracting economic growth and high unemployment rates appear to be intact. (chart from trading economics)

And the so-called “firm solution” for policymakers translates to even more inflationism by the European Central Bank (ECB).

From the same article…

The ECB, which in July cut its benchmark interest rate to a record low of 0.75 percent, is working out details of a plan to purchase government bonds of distressed nations along with Europe’s rescue fund. So far, neither Italy nor Spain has asked for help from the bailout facility, the European Stability Mechanism.

The central bank, led by Mario Draghi, will hold its next meeting on Sept. 6 in Frankfurt.

“There may be a little bit of disappointment,” Piero Ghezzi, head of global economics at Barclays Plc, told Mark Barton on Bloomberg Television’s “On the Move” on Aug. 29. “A solution in Europe could be coming from the ECB if they were willing to do unlimited and unconditional purchases.”

Policymakers are fighting the last war. Incipient signs of stagflation will likely turn into intractable inflation or a deepening phase of stagflation once the next round of “unlimited and unconditional purchases” becomes a reality.

The ECB’s actions will then be likely complimented by the US Federal Reserve this September, and perhaps by other central banks such as BoJ, SNB and the BoE or even possibly China's PBoC soon.

These concerted inflationism by global central bankers could bring about the "worst of both worlds" for the global economy.

China-EU Deal: China may Buy EU Bonds, Bilateral Trade to be Settled in Yuan or Euro

China’s government promises to support the Eurozone by proposing to buy EU government bonds in return for expanded economic relations.

From Reuters,

China is prepared to buy more EU government bonds amid a worsening European debt crisis that is dragging on the world economy, Premier Wen Jiabao said, in the strongest sign of support for its biggest trading partner in months.

The debt crisis, which has dented demand for Chinese exports and dragged China into its worst downturn in three years, was the primary focus of talks between Wen and German Chancellor Angela Merkel who arrived in Beijing on Thursday.

The pair also concluded a flurry of business agreements, including a deal by China to buy 50 Airbus worth $3.5 billion, and multi-million-dollar investment deals involving Volkswagen AG and Chinese telecoms equipment maker ZTE.

But China’s pledge to backstop the Eurozone has been conditional.

More from the same article.

Wen said Beijing is willing to continue supporting the debt-stricken euro zone, and will step up talks with the European Union, the European Central Bank and the International Monetary Fund -- also known as the troika -- to help struggling EU nations.

"China is willing, on condition of fully evaluating the risks, to continue to invest in the euro zone sovereign debt market, and strengthen communication and discussion with the European Union, the European Central Bank the IMF and other key countries to support the indebted euro zone countries in overcoming hardships," he said after meeting Merkel.

Wen, who did not elaborate, said he remained worried about the crisis in the euro zone.

"Recently, the European debt crisis has continued to worsen giving rise to serious concerns in the international community. Frankly speaking, I am also worried," Wen told a news conference.

"The main worries are two-fold: first is whether Greece will leave the euro zone. The second is whether Italy and Spain will take comprehensive rescue measures. Resolving these two problems rests with whether Greece Spain, Italy and other countries have the determination for reform."

China’s government made the same promise before but domestic politics proved to be an obstacle

China Central Bank Governor Zhou Xiaochuan said Beijing would continue buying European government debt in February, but various Chinese agencies, including the sovereign wealth fund, countered the remarks by saying such investments were not wise due to risks.

The article does not elaborate whether China’s central bank pursued to fulfill on the pledge, or deferred until a comprehensive package has been contrived at.

My guess is that the kernel of the current deal of support by China to the EU, may have been set on the condition that bilateral trade will be settled mostly with the use of the yuan and or the Euro.

Both countries also agreed to settle more bilateral trade in the euro and yuan, as Beijing welcomed investments in China's interbank bond market by German banks, and the issuance of yuan-denominated financial products in Germany.

In short, the EU-China accord will work on bypassing the US dollar.

Given the marked slowdown or increasing signs of hard landing in China, it is not clear if China's government will undertake to buy significant amounts of EU bonds.

Nonetheless my guess is that the pact lays the foundation for the expanded use of China’s currency, the yuan, as international medium of exchange and as potential reserve currency, the reduced role of the US dollar, and the evolving balance of geopolitical power.

US Foreign Policy Backlash: Egypt’s President Morsi Defies the US

The US seems to be losing allies with her militant foreign policies. The well attended Non Aligned Movement held in Tehran Iran included US protégé Egypt’s President Mohammed Morsi, who apparently flouted pressures from the Washington.

Writes Eric Margolis at the lewrockwell.com,

To Washington’s further annoyance, Egypt’s new president, Mohammed Morsi, shrugged off threats of a cut in US aid and flew to Tehran. Under the 30-year Mubarak dictatorship, Egypt had been a bulwark against Iran. But no more. The increasingly assertive, independent Morsi made clear that Egypt would follow its own foreign policy interests rather than those of the US and Israel, as in the past.

Morsi has surprised just about everyone. When he stumbled into power earlier this year he was regarded as a plodding nobody, selected by the all-powerful military to do its bidding and not make trouble. The Muslim Brotherhood leader, a former space engineer, threw off his cloak of humility and quickly proceeded to muzzle Egypt’s bullying US-backed military, the key to US domination of Egypt for the past 40 years.

How Morsi pulled this off without facing a military coup remains a mystery. But he certainly had the backing of most Egyptians. It took Turkey’s Islamist Lite government a decade to push the swaggering generals back to their barracks and bring real democracy.

The Egyptian leader stunned everyone by openly blasting the Syrian regime of Bashar Assad, calling for its replacement by an elected, democratic government. Egyptian intervention in the bloody Syrian conflict may help pave a way to a peaceful settlement. It could also rekindle ancient Egyptian-Syrian rivalry for leadership of the Arab world.

In spite of issuing dulcet banalities about Egypt’s turn to democracy, Washington is extremely unhappy with Egypt’s newly elected government. Egypt will no longer be a discreet defender and ally of Israel, as under Mubarak, but a rival power that genuinely demands a Palestinian state and sees no reason to confront Iran or other US foes.

The US is responding to Egypt’s newfound independence by muttering about cuts to its annual $1.3 billion donations to Egypt’s military and millions more in secret payments. However, the Saudis and Gulf Arabs are lending cash-strapped Cairo $3 billion and the US-run IMF another $4.8 billion in loans. Interestingly, President Morsi just visited China where he received pledges of aid.

In past years, most non-aligned conferences, whose objective was to find a middle way between the West and Soviet Empire, produced only hot air, often quite anti-American. As America’s world power declines after the loss of two wars and deep recession, the NAM meeting in Tehran maybe a step, albeit small, towards moving away from today’s unipolar world towards a more balanced, equitable international system.

Egypt’s supposed disobedience and the success of the Non-Aligned Movement (NAM) has very important implications

One, the US seems to be losing geopolitical capital.

The motivation by incumbent political class to stir up conflicts around the world has been getting the opposite response than intended by Washington.

Part of the militant imperial policies has been meant to divert public’s attention from the steepening deterioration of the domestic fiscal and economic conditions. Part of these has been designed to justify and protect the businesses interests of the military industrial complex and of the imperial or geopolitical ambitions of neoconservatives.

Yet the apparent success of the NAM also exhibits of the implied impact of globalization, where trade rather than war have become the key domestic agenda for many, if not most, of developing countries. (For instance Russia became the 156th member of World Trade Organization last August 22)

Second, the erosion of the imperial status, through the prospective realignment of geopolitical power or “towards a more balanced, equitable international system”, extrapolates to the decline of the US dollar standard.

Current policies of inflationism embraced by the US along with her Western peers, which radically conflicts with globalization, will compel more developing countries to cooperate as regional or as specific nation trading blocs than depend on the US. Thus realignments will not just be within the context of geopolitics, but also in the currency spectrum.

The increasingly desperate political-economic power cabals working behind the scene may force the issue by pushing the Washington to go to war with either Syria or Iran. But such wars will not do away with the deepening trend towards economic, financial, political and moral bankruptcy the US has been challenged with. Instead wars will continue to nibble away at the social fabric and the political economic foundations of the US.

As a side note, interestingly China pushes forward with the Non Aligned Movement plank

At the Xinhua, Ma Zhaoxu, Assistant Minister of Foreign Affairs was quoted, (bold emphasis mine)

Non- aligned movement is an important platform for developing countries to move forward together. China supports the non-aligned movement for its positive role played in international affairs. China and other developing countries share similar histories, and face the common task of keeping world peace and boosting development. China will work together with the members of non-aligned movement to push the international order in a more fair and rational direction. China's attendance at the NAM summit also delivers an important message that China will always deepen traditional friendships and expand mutually beneficial cooperation, as well as maintain common interests with other developing countries.

More signs of China’s Dr. Jekyll and Mr. Hyde relationship with ASEAN.

Indian Banks Reduce Exposure on US Banks

More signs of anxiety in the global financial markets: Indian banks reportedly reduced deposits with US Banks

From Financial Chronicle (mydigitalfc.com)

India banks’ deposits with US banks dipped in June, reflecting heightened risk aversion. This showed up in a fall in custodial liabilities of American banks to counterparties in India, which shrank by over $2 billion in June.

According to the US treasury data released, custodial liabilities of American banks payable in US dollars in June was $13.059 billion. A year ago, the holdings were $15.288 billion.

The custodial liabilities included foreign currency deposits by Indian banks in American banks. Indian banks hold dollar deposits with US counterparts for settlement of international liabilities.

Andhra Bank currency trader Vikas Babu said, “There is some risk aversion on US banks. So, banks have shifted to short-term US treasuries for less than one year for liquidity purposes.”

The shift to US treasuries, however, was not necessarily driven by interest earnings. Short-term holdings in US treasuries earned barely 0.5 per cent. Correspondent account balances, that are technically current accounts, earned zero interest. But the shift was partly on account of the fact that foreign institution balances in US banks are not covered by the US federal deposit insurance company (FDIC). FDIC provides insurance cover for bank deposits only to US entities and residents.

The shift to US treasuries was also apparent from a steep $9.5 billion rise in holdings to $50.8 billion by Indian institutions, including the RBI. The increase in holdings was despite compression in India’s external reserves by $26.5 billion in June from the corresponding period of the previous year.

Aside from possible concerns over the health of the US banking sector, the shift to short term securities could also mean that Indian banks may be expecting a spike in US interest rates, perhaps in anticipation of another round of asset purchases by the US Federal Reserve.

Also Indian banks may be under pressure from the recent economic slowdown. Indian banks have been required to raise 1.75 trillion capital by 2018 in order to comply with Basel III capital adequacy standards (yahoo)

Stagflation Risk: Food Price Inflation is Worldwide

The surge in food price inflation has been worldwide, that’s according to the World Bank

From Reuters.com

World food prices jumped 10 percent in July as drought parched crop lands in the United States and Eastern Europe, the World Bank said in a statement urging governments to shore up programs that protect their most vulnerable populations.

From June to July, corn and wheat prices rose by 25 percent each, soybean prices by 17 percent, and only rice prices went down, by 4 percent, the World Bank said on Thursday.

Overall, the World Bank's Food Price Index, which tracks the price of internationally traded food commodities, was 6 percent higher than in July of last year, and 1 percent over the previous peak of February 2011.

However, World Bank officials impliedly prescribes statist “know it all” solutions that may even may exacerbate on such shortages, (bold added)

"We cannot allow these historic price hikes to turn into a lifetime of perils as families take their children out of school and eat less nutritious food to compensate for the high prices," World Bank Group President Jim Yong Kim said. "Countries must strengthen their targeted programs to ease the pressure on the most vulnerable population, and implement the right policies."…

"However, negative factors -- such as exporters pursuing panic policies, a severe El Nino, disappointing Southern hemisphere crops, or strong increases in energy prices -- could cause significant further grain prices hikes such as those experienced four years ago," the bank said

Well in reality, drought has only served as a catalyst to the economic imbalances caused by different global policies such as ethanol or biofuel subsidies, still elevated agricultural tariffs despite WTO (see chart below), agricultural subsidies, price controls and most importantly central bank credit easing policies…

from CAPREFORM.EU

The good thing is that other world officials recognize that protectionism will only amplify food price inflation that may unravel into a crisis.

Again from the same Reuters article,

Separately, finance ministers from the 21-member Asia Pacific Economic Cooperation (APEC) group issued a statement at their meeting on Thursday in Moscow urging countries "to avoid export bans" in response to food price concerns.

I have pointed out last week that high food prices will likely impact emerging market monetary policies,

High commodity prices are likely to influence emerging markets consumer price inflation more. Food makes up a large segment of consumption basket for emerging Asia including the Philippines. This would prompt for their respective central banks to reluctantly tighten. Monetary tightening will put pressure on the stock market.

Stagflation, thus, also represents both a contagion and internal (political and market) risk for the Philippines and for emerging Asia

In the Philippines, officials of the domestic central bank, the Bangko Sentral ng Pilipinas’ (BSP) have indicated that the bank’s likely direction of policy actions may be confirming my prognosis.

From the Philippine Star,

Strong second-quarter growth may prompt the Bangko Sentral ng Pilipinas (BSP) to pause on easing monetary policy, a central bank official said yesterday, stressing that inflation and global developments will also be considered in deciding policy rates.

“Robust growth means the economy may not need additional stimulus,” BSP Deputy Governor Diwa Guinigundo told The STAR in a text message.

As always, political agents intuitively resort to alibis in the form of euphemisms. In reality, higher food prices (food price inflation) will gnaw away at statistical “robust growth”. The real reason why the BSP has taken a neutral stance is that easing policies will lead to higher food crisis, through artificial stoking of demand, that eventually could risks a domestic food crisis.

The answer to food price inflation should be for central banks to stop inflating, and importantly, for governments to allow markets to work

As Professor Steve Horwitz rightly explains,

globalization has nearly eradicated famines. All the market processes I have identified are even more effective when the area of trade expands. When commodity markets are global, countries facing droughts and bad harvests have a whole world from which they can attract new supplies. The United States is not limited to tapping farmers in Washington and Virginia. It can attract corn from around the world. In fact, Canadian farmers have had a much better year and are already seeing higher prices for their exports to the United States. Canadians will pay a bit more for their grains as a result, but prices in the United States will be significantly lower than they would be without the Canadian imports.

As Pierre Desrochers and Hiroko Shimizu point out in their wonderful new book, The Locavore’s Dilemma, the belief that making food production and distribution more local and less global will increase “food security” has it exactly backward. The most important thing we can do to ensure a secure food supply in the face of droughts and other threats to the harvest is to allow markets to work freely and extend that freedom globally.

We cannot control the weather, so the threat of drought is always present. But we can unleash the market and further globalize food production to avoid the human disaster of famines when harvests go bad. The conquering of famine is one of the great human accomplishments of the last century. That no one is starving because of the drought this summer is evidence of that victory. Let’s not let the forces of locavorism reverse those gains

Otherwise, agricultural protectionism will only magnify risks of global stagflation which may morph into a food crisis.

Quote of the Day: To Be Governed

To be GOVERNED is to be kept in sight, inspected, spied upon, directed, law-driven, numbered, enrolled, indoctrinated, preached at, controlled, checked, estimated, valued, censured, commanded, by creatures who have neither the right, nor the wisdom, nor the virtue to do so…

To be GOVERNED is to be at every operation, at every transaction noted, registered, enrolled, taxed, stamped, measured, numbered, assessed, licensed, authorized, admonished, forbidden, reformed, corrected, punished.

It is, under pretext of public utility, and in the name of the general interest, to be placed under contribution, trained, ransomed, exploited, monopolized, extorted, squeezed, mystified, robbed; then, at the slightest resistance, the first word of complaint, to be repressed, fined, despised, harassed, tracked, abused, clubbed, disarmed, choked, imprisoned, judged, condemned, shot, deported, sacrificed, sold, betrayed; and to crown all, mocked, ridiculed, derided, outraged, dishonored.

That is government; that is its justice; that is its morality.

This is from French mutualist philosopher Pierre-Joseph Proudhon in The General Idea of the Revolution in the 19th Century, 1851 p.294

Phisix: Another Fantastic Last Minute Upward Push

The stock market operators may have been at work again.

The Phisix down by about 95% of the session suddenly finds “enlightenment” during the last few minutes and soars by about 1.3% from the day's bottom. The Phisix closed .91% for the day.

The chart from Citiseconline.com tells it all—a spike at the session’s close.

Many may or will rationalize this as window dressing. Yet such peculiarities appear to have become more frequent.

If these have been meant to embellish the “More Fun in the Philippines” image, then this represents more signs of the politicization of the Philippine equity markets.

Distorted markets magnify boom-bust cycles.

Is Financial Knowledge Key to Successful Investing?

The public doesn’t know how to manage their finances, that’s according to a study commissioned by the US SEC.

From the Wall Street Journal Blog,

Good news for those intent on committing fraud. Bad news for most everyone else. American investors apparently don’t know much about anything financial.

According to a review released Thursday of years of surveys of individual investors, they are presumably ripe for the picking by fraudsters because they don’t have much knowledge to counteract any outlandish offerings.

Here’s the key and rather astonishing quote: “These studies have consistently found that American investors do not understand the most basic financial concepts, such as the time value of money, compound interest and inflation. Investors also lack essential knowledge about more sophisticated concepts, such as the meaning of stocks and bonds; the role of interest rates in the pricing of securities; the function of the stock market; and the value of portfolio diversification…”

That is from the Library of Congress, which conducted the review on behalf of the Securities and Exchange Commission. The SEC, for its part, needed to study Americans’ financial literacy and assess what investors wanted to know about investments and advisers and how they wanted to receive the information. The SEC had a mandate for all that from the 2010 Dodd-Frank Act.

This generalized lack of knowledge (there certainly are plenty of exceptions) is particularly worrisome since more and more people are responsible for their own investment decisions as part of defined-contribution retirement plans, usually 401(k)s.

The Library of Congress said: “If employees do not have the requisite knowledge, they will not be prepared to make informed decisions regarding the management of their financial affairs, including investing for a secure retirement.”

The public (not limited to Americans) may not be technically sophisticated in the realm of finances but to claim that they are “not be prepared to make informed decisions regarding the management of their financial affairs” looks outrageously untrue.

This misleading assertion presupposes that government should play a role to compel people to get educated "financially".

In reality, America’s standard of living has been higher than most of the world because of capital accumulation.

As the great Ludwig von Mises wrote,

The average standard of living is in this country higher than in any other country of the world, not because the American statesmen and politicians are superior to the foreign statesmen and politicians, but because the per-head quota of capital invested is in America higher than in other countries. Average output per man-hour is in this country higher than in other countries, whether England or India, because the American plants are equipped with more efficient tools and machines. Capital is more plentiful in America than it is in other countries because up to now the institutions and laws of the United States put fewer obstacles in the way of big-scale capital accumulation than did those foreign countries.

Americans not only knew but appropriately acted to manage their state of affairs through the productive balancing of savings and investments which resulted to such high levels of capital accumulation

Moreover, having financial knowledge does not necessarily translate to having the expertise for “investing for a secure retirement”

In reality, financial knowhow does not make one infallible from loses.

In debunking the idea that financial success comes out of high IQs, I recently wrote,

The landmark bankruptcy by Long Term Capital Management in 1998 had been a company headed by 2 Nobel Prize winners. The company’s failure has substantially been due to flawed trading models.

In 2008, the 5 largest US investment banks vanished. These companies had an army of economists, statisticians and quant modelers, accountants, lawyers and all sort of experts who we assume, because of their stratospheric salaries and perquisites, had high IQs.

When Queen Elizabeth asked why ‘no one foresaw’ the crisis coming, the reply by the London School of Economics (LSE)

"In summary, Your Majesty," they conclude, "the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole."

Imagination had been scarce because the same army of experts heavily relied on mathematical models in dealing with investments. They did not follow the common sense advise by the real experts.

These people had all the supposed “expertise” yet they all burned investor's money.

The failure of pseudo financial mastery explodes the idea that “generalized lack of knowledge” will not enable people “to make informed decisions”.

To add, if one looks at the list of the victims of fraud committed by scam artist Bernie Madoff, they had hardly been about financial ignorance

Again I wrote,

Thus, it is no different when Bernard Madoff bamboozled $50 billion off from the who’s who list which includes top rated financial institutions among them banks, (e.g. BNP Paribas,Banco Santander, Fortis Bank Netherlands, HSBC Holdings, Nomura Holdings, Royal Bank of Scotland and etc.) insurers (CNP Assurances, Clal Insurance, Harel Insurance) and Hedge funds (Tremont Group Holdings, Fairfield Greenwich).

To consider, these institutions account for as supposedly smart money outfits since they are backed by an army of “elite professionals”, e.g. economists, accountants, risk managers, quants etc…). Yet at the end of the day, smart money seemed like everybody else; they got what they deserved because they substituted prudence with fad

In reality, inflationist “bubble” policies, which obscures price signals and whets the speculative or gambling appetite, have been the principal influence to fraud.

As a side note: even the most successful stock market investor Warren Buffett admits of occasional investing mistakes.

In Manias, Panics and Crashes Charles Kindleberger’s insight has been highly relevant, (I quoted from my previous article)

Commercial and financial crisis are intimately bound up with transactions that overstep the confines of law and morality shadowy though these confines be. The propensities to swindle and be swindled run parallel to the propensity to speculate during a boom. Crash and panic, with their motto of sauve qui peut induce still more to cheat in order to save themselves. And the signal for panic is often the revelation of some swindle, theft embezzlement or fraud

Bottom line: having financial knowledge is necessary but not sufficient reason for securing financial success.

Relevant theory backed by quality information from the desire to profit (stakeholder's dilemma) has to be used as framework for such analysis.

Morris Cohen in his 1944 book, A Preface to Logic provides a useful insight (quoted by Professor Don Boudreaux)

There can be no doubt that statistics deals with actuality, and that knowledge of actualities is always empirical, i.e., that we cannot obtain knowledge by purely a priori methods. There is, however, no genuine progress in scientific insight through the Baconian method of accumulating empirical facts without hypotheses or anticipation of nature. Without some guiding idea we do not know what facts to gather. Without something to prove, we cannot determine what is relevant and what is irrelevant.

And this should be complimented by emotional intelligence and self-discipline.