Philippine Economy’s Achilles Heels: Shopping Mall Bubble (Redux)

Early December, my daughter went with her cousins to watch a movie at one of the long established popular mall. I went to fetch my daughter after. And as we exited the mall, my wife’s relative made a striking remark, “This is strange. It’s December. But the crowd seems distinctly sparse compared to last year.”

Such observation doesn’t seem to meld with the overall atmosphere which is supposed to showcase an economic boom. Thus my initial intuitive response was to ignore this, thinking that perhaps this had been merely been a mall and time specific quirk.

And given the holiday ambiance, I didn’t have the motivation to pursue further research on this fresh micro perspective. Yet somehow, her piquant observation stuck into my mind: has there been a shopping mall bubble in the Philippines?

The perspective of the shopping mall bubble got rekindled and reinforced when I came across an article which narrated of the demolishment and of the impending deconstruction of some shopping malls in the US.

It dawned on me that the Philippines could be faced with a real risk of a shopping mall bubble bust. So I delved further.

Shopping Malls have not just been a way of life for the Philippines.

Instead, the Philippines have become the shopping mall mecca of the world, hosting 9 of the world’s largest 38 malls, according to Wikipedia.org[1]. The Philippines essentially beat the US and China or any developed economy for that matter.

Moreover, the Philippine international marquee malls are mostly located in the Metro Manila area. To consider, these 7 Metro Manila establishments are collectively larger than the combined 8 biggest malls in the US, considering that on a per capita basis[2], the US has $48,112 (World Bank 2011) or $48,328 (IMF 2011) which dwarfs the Philippines at $4,1119 (World Bank 2011) or $4,080 (IMF 2011).

And we are just talking of the largest malls, which are manifestations of the broader picture/pathology: a shopping mall bubble. There are countless of smaller scale malls which compete for the same peso from the Filipino consumer.

Aside from the publicly listed SM and Ayala, other competitors[3] are publicly listed Robinsons, Gaisano, Megaworld Lifestyle, Walter Mart Malls, Ortigas Malls, Starmalls, Greenfield Development, the NCCC Mall and many more

In short, while the public has been mesmerized by financial and economic growth prospects from a supposed ‘consumption economy’, nobody seems to even question the basic economic premises: How can a consumption based economy be sustained?

Everybody has been made hardwired or brainwashed to believe that consumption has been an incontrovertible ‘given’ or a fact. Nobody dares question the limits of the Philippine consumer.

This reminds me of the logical fallacy of the proof of assertion[4] embodied by Vladmir Lenin’s famous quote “A Lie told often enough becomes the truth”

And the behavioral reason why people readily embrace myths is the intuition to seek certainty via ‘cognitive ease’ or ‘coherence’

As Nobel Prize winner Daniel Kahneman explains[5],

An unbiased appreciation of uncertainty is a cornerstone of rationality-but it is not what people and organizations want. Extreme uncertainty is paralyzing under dangerous circumstances, and the admission that one is merely guessing is especially unacceptable when the stakes are high. Acting on pretended knowledge is often the preferred solution.

Thus political agents and their academic and institutional accomplices has mastered on how to indoctrinate society via plausibly coherent but false theories which essentially feeds on the bubble mentality.

But basic economics suggests that the rate of Shopping Mall boom relative to consumer spending or demand seems unsustainable.

ON the demand side, based on the consumer spending trend chart from Tradingeconomics.com[6] (sourced from National Statistics Coordination Board) from 1998 to early 2012, the average growth rate has been about plus or minus 6%.

ON the supply side, which is guesswork on my part—based from past growth rates, estimates on future growth rates and capex announcements of some the largest malls, perhaps we can deduce that the Philippine shopping mall industry operate on a baseline rate of 10%.

In 2012, SM Malls in the Philippines expanded by 10% according to SM Investment’s 3^rd Quarter media and analysts briefing presentation[7] (based on Gross Floor Area).

Yes, SM [PSE: SM] has exposure to China which we exclude from this analysis.

In 2010, in a speech[8] by Teresita Sy-Coson, eldest child of magnate and SM founder Henry Sy Sr., Ms. Coson noted that SM malls have grown from 23 in 2005 to 37 in 2010 or an average growth rate of 12%.

In addition, SM Investment’s reported capex which will fund shopping mall and other property projects has been slated to increase[9] by 16% to Php 65 billion in 2013 from Php 56 billion in 2012.

So the SM group will likely expand their shopping mall business at the baseline rate of at least 10%.

On the other hand, Ayala Land [PSE:ALI] will like raise capex to SM levels.

Ayala has reportedly been targeting a capex of P70 billion in 2013 from the original target of P37 billion due to “unbudgeted property acquisitions”, according to the Manila Standard[10]. Of the Php 34.9 billion capex for 2012, 11% has been allotted for shopping malls.

Ayala’s “unbudgeted property acquisitions” reveals of the current accelerated pace of snapping or bidding up of land areas to increase inventory for prospective development. Property developers seem to be in a frenzied pace of momentum land acquisition.

Robinson’s Land Corporation [PSE: RLC] has also reported an increase shopping malls by 11%, that’s according to their analyst briefing last August 15 2012[11]. The planned mall expansion will translate to over a million of sqm of Gross Leasable Area (GLA) [see right window]. This has been backed by a reported Php 20 billion in capex[12] over two years, which does not cover the $1 billion gaming complex recently concluded partnership with Japanese gaming tycoon Kazuo Okada. 

The bottom line is that from the supply side perspective, major malls, as benchmark for the industry’s growth, seem to have set the 10% level as the baseline growth for the retail shopping mall industry.

If the rate of supply grows faster than the rate of demand then eventually we will have an oversupply, Economics 101. Applied to the above, theoretically, if consumer spending demand grows at a sustained rate of 6% per year, while supply swells at a constant 10% over the same period, then, whether you like it or not, there is bound to be an oversupply and the consequential undesirable effects that go along with it.

And at the rate of 6% growth, Filipino consumers would need to nearly double consumption in the hope to fill in such a chasm. This means we should expect a miracle in productivity growth in the domestic real economy and in the global economy (to increase the rate of remittances from our OFWs). This may well be a delusion considering that this government, like all the rest, seeks every opportunity to tax away productive opportunities.

The other means is to resort to the depletion or of the running down of savings rate, and or by massively resorting to the use of credit, which represents the frontloading of consumption at the expense of the future.

Of course, foreigners may be lured to compliment spending, but this will still remain small given current political environment.

As I recently posted on my blog[13], (italics original)

The current shopping mall boom will not only depend on a sustained low interest rate environment but will likewise depend on the greater rate of growth of income—via economic output from both formal and informal economy and from remittance transfers—relative to rate of growth of supply of malls. Debt will temporary augment spending, but has its limits.

Once supply of malls grows faster than the consumer’s capacity to spend (income and debt), then trouble lies ahead.

I don’t know yet how much of the banking industry’s loan portfolio are exposed to these malls. But given that the Philippine retail industry from which the shopping malls are categorized, accounts for approximately 15% of the domestic economy and 33% of the service sector and employs some 5.25 million people, representing 18% of the Philippines' workforce (according to Wikipedia.org), there is a possibility of significant exposure.

This also implies that shopping malls will be faced with stiff competition among themselves. While this should be a good thing since competition should mean lower rental prices and provide more quality services, unfortunately the policy induced boom has clouded the effects of competition—giving the incentive for both consumer and investors to jump on the debt bandwagon which magnifies on such errors.

It’s one thing to have bankruptcies as a result of failing to satisfy the consumers via competition, and it’s another thing when the public has been enticed to a cluster of business errors (malinvestments) which accrue from price signaling distortion brought upon by manipulated policy rates and from other forms of policy interventions.

Once the tipping point has been reached where an oversupply becomes apparent, and where markets begin to awaken to such economic reality, then we are likely to see an increase in bankruptcies at the margin. Smaller malls are likely to suffer first.

If such insolvencies are funded merely be cash flows from retained earnings or from equity, or from bond markets then this won’t be much of a problem because the impact would likely remain isolated. Those who will suffer the losses would be the shareholders of the malls or bondholder-non bank creditors.

However, it’s a vastly different story when these projects are bankrolled by debt from the banking system as repercussion to artificially low interest rate regime, and or, if bonds used to finance shopping mall expansions have used as collateral to acquire related or non-related loans, and or, if such liabilities have been acquired or held by banks in their balance sheets.

The likely consequences will be a contagion via an increase in the number of foreclosures, a tightening of lending standards, calling in of loans, negative feedback loop via sharp downside adjustments in prices of equities and collateral values and higher interests rates or a chain link of effects from a bursting bubble as accurately identified by the late economist Irving Fisher as debt deflation[14] (italics original)

(1) Debt liquidation leads to distress setting and to

(2) Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes

(3) A fall in the level of prices, in other words, a swelling of the dollar. Assuming, as above stated, that this fall of prices is not interfered with by reflation or otherwise, there must be

(4) A still greater fall in the net worths of business, precipitating bankruptcies and

(5) A like fall in profits, which in a " capitalistic," that is, a private-profit society, leads the concerns which are running at a loss to make

(6) A reduction in output, in trade and in employment of labor. These losses, bankruptcies, and unemployment, lead to

(7) Pessimism and loss of confidence, which in turn lead to

(8) Hoarding and slowing down still more the velocity of circulation.

The above eight changes cause (9) Complicated disturbances in the rates of interest, in particular, a fall in the nominal, or money, rates and a rise in the real, or commodity, rates of interest.

And such ensuing bubble bust will likely hit the banks, malls and the property hardest, but the negative effects will spillover to consumer spending too, aside from the business channels, the transmission mechanism will be felt through labor via rising unemployment, falling wages and restrained access to credit.

However, instead of a swelling of the US dollar, as noted by Prof Fisher, we will likely encounter capital flight and a meltdown of the local currency, the Peso, ala the 1997 crisis.

Again, all these will depend on the degree of leverage by the industry, and or, of their exposure to the banking system.

Finally, shopping malls exist to serve the consumer, and thus, are subject to the market discipline of profits and losses.

This also implies that programs undertaken by malls to draw in crowd, signifies as means to an end—serving the consumer through sales of goods and services—where the social benefits of ‘assembly’ or ‘gathering’ are ancillary.

No shopping malls exist to provide free lunches unless these are subsidized from other more profitable lines of other businesses by the same company, or as redistribution from social policies via the taxpayer funding.

Let me be clear: This is NOT to say that the current inflation of the shopping mall bubble will extrapolate to a BUST tomorrow, perhaps not in 2013 yet.

Rather this is to say that IF the current trend (or growth rate) of the industry persists without substantial improvements in the demand side via real economic growth—and not statistical growth from government spending or zero bound rates or credit expansion, then economic imbalances will continue to mount or worsen which essentially increases the risk of a bubble bust sometime ahead.

Prudent investing means that we should scrutinize at potential risks instead of swallowing mainstream disinformation hook, line and sinker.

I end this article with a poignant warning from French social psychologist, sociologist and author[15] Gustave Le Bon on paying heed to the wisdom of the Crowd[16] 

The masses have never thirsted after truth. They turn aside from evidence that is not to their taste, preferring to deify error, if error seduce them. Whoever can supply them with illusions is easily their master; whoever attempts to destroy their illusions is always their victim.

---

[1] Wikipedia.org List of largest shopping malls in the world

[2] Wikipedia.org List of countries by GDP (PPP) per capita

[3] Wikipedia.org List of shopping malls in the Philippines

[4] Wikepedia.org Proof by assertion

[5] Daniel Kahneman Thinking, Fast and Slow Farrar Straus and Giroux p 263

[6] Tradingeconomics.com PHILIPPINES - NATIONAL STATISTICS

[7] SM Investment Corporation 3^rd Quarter Media and Analyst Briefing Presentation

[8] Teresita Sy-Coson Keynote Address Philippine Stock Exchange 06 May 2010

[9] Manila Standard Today SM Group allots P65b in 2013, November 9, 2012

[10] Manila Standard Today Ayala Land increases capex target to P70b November 12, 2012

[11] Robinson’s Land Corporation QUARTERLY INVESTORS’ BRIEFING August 15, 2012

[12] Philstar.com Robinsons Land sets P20-billion capex for 2 years, January 7, 2013

[13] See A Philippine Shopping Mall Bubble? January 7, 2013

[14] Irving Fisher THE DEBT-DEFLATION THEORY OF GREAT DEPRESSIONS St. Louis Federal Reserve

[15] Wikipedia.org Gustave Le Bon

[16] Gustave Le Bon The Crowd: A Study of the Popular Mind, Google Books Page 53

Is the US Federal Reserve Indirectly Putting Down Gold Prices?

Have US Federal Reserve officials been indirectly trying to take down gold prices?

In barely 2 weeks of 2013, gold prices attempted twice to move higher (See ellipses). One peaked during New Year just right after the fiscal cliff deal. The second was during Thursday of this week.

However, both gains had been cut short. This appears coincidentally timed with two occasions where Fed communications (FOMC minutes) had been released and when Fed officials went on air expressing doubts over QE 4.0.

The first came with the announcement of the FOMC minutes which revealed of growing dissension over unlimited asset purchases, a day after the fiscal deal.  I earlier wrote that this signifies another of the Fed’s serial Poker bluff. 

Last night, while switching channel after watching another TV program, I happen to stumble upon Federal Reserve Bank of Philadelphia President Charles Plosser’s Bloomberg interview, where he hinted of his bias against pursuing more balance sheet expansion. If memory serves me right, prices of gold was then trading at $1,669-1,670. Bloomberg seem to have featured this interview in a follow up article

Then I learned today that other Fed officials featured by mainstream outlets also covered the FED hawks.

And in both occasions where hawkish sentiments by FED officials were aired, the earlier gains scored by gold prices had nearly been erased.

Gold has been marginally up this week.

Considering that FED employs communication strategies to influence market behavior called as “signaling channel”, my suspicion is that this has been part of the implicit tactic to mute the public’s inflation expectations, expressed via gold prices.

Nonetheless, I expect such mind manipulation ploys to be ephemeral.

That’s because as I pointed out during my last stock market commentary for 2012

Evidence suggest that gold prices may have departed from real world activities. Sales of physical gold have exploded to record highs. Moreover central bank buying has been gathering steam, which seems on path to hit new highs this year (500 tons), along with record ETF gold holdings at 2,627 tons.

It seems that only after a month, we are getting more proof on this

In the US, sales of physical gold and silver has been exploding: The US mint reports 57,000 gold ounce sales for the first two days of the year and sale of silver coins tripled from December.

In the meantime, India’s gold imports reportedly surged amidst fears that the Indian government may continue to act to suppress demand for gold. According to Mineweb.com, after two earlier hikes of import duties, gold smuggling has also reached new levels. Smuggling is a typical reaction to prohibitions or quasi-prohibitions edicts via tax increases.

In addition, central bank gold buying have also been ramping up. According to International Business Times

In the third quarter, according to the World Gold Council (WGC), the world's central banks bought a total 97.6 metric tons of gold.

In six out of the last seven quarters, central bank demand has been around 100 metric tons, which is a sharp increase from as recently as 2010, the bank said in a statement, adding that through the third quarter of this year, total central bank buying was up 9 percent.

Moreover, China's government via the PBoC reportedly will increase gold acquisition to diversify from her foreign exchange holdings.

The China Daily notes,

China may decide to increase the percentage of gold holdings in its monetary reserves in the next few years, said the report, an analysis of the world monetary system commissioned by the World Gold Council.

Demand for gold is likely to rise amid the uncertainty about the stability of the US dollar and the euro, the main assets held by central banks and sovereign funds, it added.

China almost doubled its gold reserves in the last five years. The country had holdings of 1,054metric tons in July 2012 and is now the sixth-largest holder of monetary gold.

In 2011, gold accounted for 14.4 percent of the world's total monetary reserves.

In a country-by-country comparison, the figure was 1.6 percent in China, while it was 74.5percent in the United States, 71.4 percent in Germany and 71.1 percent in France, according to data from the World Gold Council and the International Monetary Fund.

China holds the world's largest foreign exchange reserves, which were worth more than $3.31trillion by the end of 2012, according to figures from the People's Bank of China, the country's central bank.

China has been approaching gold with “talk the talk” as November gold imports have doubled from October.

According to Zero Hedge, (italics original)

at 90.8 tons, this was the second highest gross import number of 2012, double the 47 tons imported in October (which many saw,incorrectly, as an indication of China's waning interest in the yellow metal), and brings the Year to Date total to a massive 720 tons of gold through November. If last year is any indication, the December total will be roughly the same amount, and will bring the total 2012 import amount to over 800 tons, double the 392.6 tons imported in 2011.

Meanwhile, ETF holdings of gold remain at record levels

 

According to my digital financial chronicle,

Exchange traded funds (ETFs), with gold as the underlying asset, have contributed to its prices. Institutional and retail inflows into global gold ETFs are at record levels. ETF holdings have been a key indicator of price movements in the recent years. Reports suggest that at November end last year ETF holdings were at an all-time high of over $150 billion. Till November, holdings in ETFs had risen by 12 per cent to 2,630 tonnes.

In short, the strings of record highs from various activities such as buying of physical gold, ETF holdings, record imports of China and India (two largest gold consumers) and lastly central bank buying simply doesn’t square with current consolidation phase.

Interventions to suppress gold prices are likely to have short term impact.

Video: How to Debate with Inflationists

Austrian economist Dr. Hans-Hermann Hoppe explains how to effectively debate with inflationists, particularly the Keynesian persuasion (hat tip Lew Rockwell Blog)

Cigarette ‘Sin’ Taxes Equals Smuggling: US Edition

The populist pseudo-moralistic legislation or quasi-prohibition regulations known as “Sin taxes” have spurred growth of alcohol smuggling in the United Kingdom.

I guess the same effects can be said of cigarette taxes in the US.

Here is Joseph Henchman and Scott Drenkard of the Tax Foundation (bold mine)

Public policies often have unintended consequences that outweigh their benefits. One consequence of high state cigarette tax rates has been increased smuggling, as criminals procure discounted packs from low-tax states to sell in high-tax states. Growing cigarette tax differentials have made cigarette bootlegging both a national problem and a lucrative criminal enterprise.

Every two years, scholars at the Mackinac Center for Public Policy, a Michigan think tank, use a statistical analysis of available data to estimate smuggling rates for each state. Their most recent report uses 2011 data and finds that smuggling rates generally rise in states after they adopt large cigarette tax increases. Smuggling rates have dropped in some states, however, often where neighboring states have higher cigarette tax rates. Table 1 shows the data for each state, comparing 2011 and 2006 smuggling rates and tax changes.

New York is the highest net importer of smuggled cigarettes, totaling 60.9 percent of the total cigarette market in the state. New York also has the highest state cigarette tax ($4.35 per pack), not counting the local New York City cigarette tax (an additional $1.50 per pack). Smuggling in New York has risen sharply since 2006 (+170 percent), as has the tax rate (+190 percent).

Smuggling takes many forms: counterfeit state tax stamps, counterfeit versions of legitimate brands, hijacked trucks, or officials turning a blind eye. The study’s authors, LaFaive and Nesbit, cite examples of a Maryland police officer running illicit cigarettes while on duty, a Virginia man hiring a contract killer over a cigarette smuggling dispute, and prison guards caught smuggling cigarettes into prisons. Policy responses have included banning common carrier delivery of cigarettes, greater law enforcement activity on interstate roads, differential tax rates near low-tax jurisdictions, and cracking down on tribal reservations that sell tax-free cigarettes. However, the underlying problem remains: high cigarette taxes that amount to a “price prohibition” of the product in many U.S. states.

The ramifications of ‘Sin taxes’ appear to be parallel to direct prohibition regulations such as the war on drugs, e.g. fraud, corruption and violence.

My guess is that the same dynamics will apply to the recently enacted law in the Philippines, which will magnify accounts of the surge of incidences in general smuggling.

By the way, cigarette and alcohol bootlegging and smuggling will likely extrapolate to the Philippine government’s failure to attain revenue goals. That’s my prediction. 

On the other hand, smuggling means a shift to, and the subsequent growth of, the informal economy (the gangster "Godfather" type). 

This also implies the expansion of political and bureaucratic corruption, as well as, the greater risks of potential violence, all of which have accounted for as the typical unintended consequences from such noble sounding but unrealistic, uneconomic and immoral quasi-prohibition laws as “Sin Taxes”.   

I might add that since bootlegging means black market production of alcohol and cigarettes, one may also expect an increase of illness of health problems related to these products.  

It has been said that the path to hell is paved with good intentions. This applies to Sin Taxes

Why Kashmir is Tinderbox for a Nuclear War

Historian Eric Margolis at the lewrockwell.com warns that the contested Kashmir region should always be in one’s radar screen since the area is a flashpoint that can precipitately trigger a world war with the pronounced risks of nuclear exchanges.

India and Pakistan have fought three wars and some very large battles over Kashmir. Both claim the entire mountain state. Pakistan’s intelligence service, ISI, has waged a long covert campaign to insert guerillas into Indian Kashmir to aid a series of spontaneous rebellions against Indian rule by the state’s Muslim majority…

Muslim Kashmiris have been in almost constant revolt against Indian rule since 1947 when the British divided India. Today, 500,000 Indian troops and paramilitary police garrison rebellious Kashmir. Some 40,000-50,000 Kashmiris are believed to have died over the past decade in uprising.

India blames the violence in Kashmir on "cross-border terrorism" engineered by Pakistani intelligence. Human rights groups accuse Indian forces of executions, torture, and reprisals against civilians. Large numbers of Hindus and Sikhs have fled strife-torn Kashmir after attacks by Muslim Kashmiri guerillas. It’s a very bloody, dirty war.

The Kashmir conflict poses multiple dangers. First is the very likely chance that local skirmishing can quickly surge into major fighting involving air power and heavy artillery. In 1999, a surprise attack by Pakistani commandos into the Indian-ruled Kargil region provoked heavy fighting. The two nations, with more than one million troops facing one another, came very close to an all-out war. I have on good authority that both sides put their tactical nuclear weapons on red alert. Angry Indian generals called on Delhi to use its powerful armored corps to cut Pakistan in half. India’s cautious civilian leadership said no.

Second, the Kashmir conflict also involves India’s strategic rival, China. Beijing claims the entire eastern end of the Himalayan border separating India and China, which Chinese troops occupied in a brief 1963 war. China also occupied, with Pakistan’s help, a high strategic plateau on the western end of the Himalayas known as Aksai Chin that was part of historic Tibet.

China is Pakistan’s closest political and military ally. Any major Indian attack on Pakistan would risk intervention by Chinese air, ground and missiles forces in neighboring Tibet.

Third, in the midst of all these serious tensions, India and Pakistan’s nuclear weapons – delivered by air and missile – are on hair-trigger alert. This means that during a severe crisis, both sides are faced with "use it, or lose" decision in minutes to use their nuclear arsenals.

The strategic command and control systems of India and Pakistan are said to be riddled with problems and often unreliable, though much improvement has been made in recent years.

A false report, a flight of birds, and off-course aircraft could provoke a nuclear exchange. By the time Islamabad could call Delhi, war might be on. A US Rand Corp study estimated an Indo-Pakistani nuclear exchange would kill two million immediately, injure or kill 100 million later, pollute the Indus River and send clouds of radioactive dust around the globe.

Given the recent skirmishes and the suspension of trade links, as well as the increasing use of territorial claims by governments as camouflage or as diversion to homegrown economic malaise and of the increasing political recourse towards policies of redistribution via financial repression, this area seems more geopolitically sensitive or more fragile than the East Asia’s territorial dispute.

Reasons for US Insourcing

Mercantilists previously argued that in order for the US to regain competitiveness expressed via investments outsourced to China, the US needs to devalue. How misguided this perspective had been.  

While the US has indeed by inflating (devaluing) everyone else has been doing the same including China’s PBoC.

From Mao Money, Mao Problems

The net effect has been to negate each other inflationist policies and instead such seemingly collaborative actions has spawned a global asset boom.

Recently, reports suggest that the US has now been experiencing greater degree of reverse outsourcing, or insourcing. In a verbose report, the Atlantic suggests the following reasons:

-Oil prices are three times what they were in 2000, making cargo-ship fuel much more expensive now than it was then.

-The natural-gas boom in the U.S. has dramatically lowered the cost for running something as energy-intensive as a factory here at home. (Natural gas now costs four times as much in Asia as it does in the U.S.)

-In dollars, wages in China are some five times what they were in 2000—and they are expected to keep rising 18 percent a year.

-American unions are changing their priorities. Appliance Park’s union was so fractious in the ’70s and ’80s that the place was known as “Strike City.” That same union agreed to a two-tier wage scale in 2005—and today, 70 percent of the jobs there are on the lower tier, which starts at just over $13.50 an hour, almost $8 less than what the starting wage used to be.

-U.S. labor productivity has continued its long march upward, meaning that labor costs have become a smaller and smaller proportion of the total cost of finished goods. You simply can’t save much money chasing wages anymore.

While the above may be true, this seems insufficient.

I may add that numerous wealthy Chinese have likewise been seemingly anxious about China’s political economic conditions, such that they have been looking elsewhere to shelter their capital.

From Reuters

In short, US insourcing relative to China may not have been entirely about economic issues but also about politics. 

The risk of an economic bust from China’s assimilation of Western Keynesian policies, that has ballooned a huge shadow banking industry and skyhigh debts, which have intensely increased the risks of a financial and economic bust. This implies that concerns over political instability may have been prompting China’s wealthy and capitalist class (along with cronies) to consider safehaven alternatives abroad. The increasing political risks may serve as a major reason for the US insourcing.

And political risks has also been manifested in China’s gunboat  diplomacy with Japan and Southeast Asia over territorial issues, which has been most likely a diversion from her brewing economic woes.

I might add advances in technology may be a factor too. For instance, advances in 3-D printing may eventually bring manufacturing to the household, which may reduce cross border FDIs relative to manufacturing.

The bottom line is looking at US insourcing relative to China may not signify as an accurate picture of global investment flows. That’s because there is a whole world of other options via many other capable emerging markets than China alone.

Public Choice at Work: French Taxman Charged with Dodging Taxes

Outside the public’s glamorized view, political agents are innately self-interested people. That’s the essence of the Public Choice theory propounded by the late distinguished economist James M. Buchanan together along with Gordon Tullock.

As Professor William Shughart II explains

...public choice, like the economic model of rational behavior on which it rests, assumes that people are guided chiefly by their own self-interests and, more important, that the motivations of people in the political process are no different from those of people in the steak, housing, or car market. They are the same human beings, after all. As such, voters “vote their pocketbooks,” supporting candidates and ballot propositions they think will make them personally better off; bureaucrats strive to advance their own careers; and politicians seek election or reelection to office. Public choice, in other words, simply transfers the rational actor model of economic theory to the realm of politics.

For real life examples, we need to look no further than the recent reports, where a big league French bureaucrat, supposedly in charge of pursuing tax evaders, has been accused with the same offense.

From the CNBC.com,

The man at the forefront of France's fight against fiscal fraud is now one of those being investigated.

Budget Minister Jerome Cahuzac has spent months singling out corporate multinational tax dodgers, citizens who live abroad to avoid taxes and those within France who stash money in overseas accounts.

Now he is ensnared in just the sort of investigation he thought would help turn France's finances around, as prosecutors take a close look at an online journal's allegations that he transferred money from a Swiss account into one in Singapore.

That's why the world of politics involves numerous of conflict of interests. In the case above, the proverbial fox guards the hen house.

More Magic from Abenomics: 10.3 Trillion Yen in Fiscal Stimulus

Not content that the Bank of Japan (BoJ) has increased monetary stimulus by 50 trillion yen ($595 billion), partly as a result of political pressures and mostly from ideology and peer pressure, the Shinzo Abe led Japanese government will expand fiscal stimulus from the earlier 1 trillion yen ($12.3 billion) to 10.3 trillion ($116 billion)

From Bloomberg,

The Japanese government will spend 10.3 trillion yen ($116 billion) to drive a recovery from a recession in Prime Minister Shinzo Abe’s first major policy initiative to end deflation and boost growth.

Around 3.8 trillion yen will be for disaster prevention and reconstruction, with 3.1 trillion yen directed to stimulating private investment and other measures, according to a statement released today by the Cabinet Office. Extra spending will increase gross domestic product by about 2 percentage points and create about 600,000 jobs, the government said.

PM Abe’s elixir of inflationism will achieve its goal of having price inflation. But as I explained earlier, the desperate attempts to try old ineffective ways but with more of it to achieve new effects is plain absurd.

Given Japan's government's huge debt levels (the world's largest), compounded by major factors as demographics (shrinking population or fertility rate), falling savings rate—which has been manifested through declining support by domestic investors on Japan’s sovereign bonds (JGBs) and where Japan's government has become increasingly reliant on the BoJ’s monetization—and the reversal of current account balance from surpluses to deficits, the ultimate outcome from all these short term nostrum will be one of debt crisis, sooner rather than later.

The initial effect of the combined aggressive interventions via inflationism has been to create a stock market boom…

…but such artificially constructed boom, as manifested by a falling yen, will have to rely on accelerated expansion or the infusions of credit and money which is unsustainable, and which should translate to a future bust—and this will be accompanied by a debt crisis.

Abenomics is really founded on the Philosopher's stone.

As the great Ludwig von Mises warned,

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.

The real goal of the alleged radical "Abenomics" is the transfer of wealth from the average Japanese to the political class and their allies.

So aside from the bust, one of the expected consequence from such policies will be capital flight, incipient signs which we are already seeing today but masked as Portfolio flows or FDIs

Quote of the Day: The State Owes its Existence to Civilization

Primitive (“tribal”) societies are primitive not because they don’t have states, but because they don’t have a developed tradition of private property. This necessarily results in economic autarky and extreme poverty. Autarky and poverty in turn result in both inter-tribal biological competition (constant warfare) and the fact that there is not enough wealth to support a parasitic state. It is private property and the division of labor that led both to a decline in inter-tribal warfare and enough wealth in societies for parasitic states to feed off.

The state owes its existence to civilization, not vice versa.  And the wars that interrupt the process of civilization have been made more frequent and more bloody by the encroachment of the state on market-and-civil society.

This is from Mises Institute editor Daniel James Sanchez at the Mises Blog logically refuting the misleading comparison of the levels of violence between state and pre-state societies.

Violence from Prohibition Laws: Atimonan Killing

I have been repeatedly pointing out here that prohibition statutes engender unnecessary violence. Worst, violence have always been arbitrary instituted by political authorities in the name of supposed moral uprightness. 

Today’s headlines shows of a good example, from the Inquirer.net

The gun battle in Atimonan town, Quezon province, that left 13 people dead on Sunday was the culmination of a three-month police operation approved by the Presidential Anti-Organized Crime Commission (PAOCC) headed by Executive Secretary Paquito Ochoa Jr.

But Ochoa denied there was any mission order from the commission authorizing the police-military operation in Atimonan.

The operation, code-named “Coplan Armado,” had only one target: Victor “Vic” Siman, operator of the numbers racket “jueteng” disguised as government-sanctioned Small Town Lottery (STL) in Laguna and Batangas provinces in southern Luzon…

A Philippine Daily Inquirer source in the Philippine National Police described the 12 others killed  in the alleged shootout between security forces and Siman’s group as “collateral damage.”

Such violence has been exercised against alleged crimes based on “vices” or what American individualist and anarchist Lysander Spooner calls as “Vices are not crimes”

It is a maxim of the law that there can be no crime without a criminal intent; that is, without the intent to invade the person or property of another. But no one ever practices a vice with any such criminal intent. He practices his vice for his own happiness solely, and not from any malice toward others.

Unless this clear distinction between vices and crimes be made and recognized by the laws, there can be on earth no such thing as individual right, liberty, or property — no such things as the right of one man to the control of his own person and property, and the corresponding and coequal rights of another man to the control of his own person and property.

For a government to declare a vice to be a crime, and to punish it as such, is an attempt to falsify the very nature of things. It is as absurd as it would be to declare truth to be falsehood, or falsehood truth.

Jueteng is about gambling and personal vice. The ban on this has created a shadow industry, like all others, prostitution, drugs and etc... Ironically, on the other hand, the Philippine government promotes the "casino" industry.

Yet the war on jueteng has been an endless crusade by the Philippine government that has hardly attained proximity to its stated political ‘moral’ goals.

As pointed out in the past, the downfall of the ousted administration in EDSA II, has been tied to this. The difference is that because the involved had been the top political brass, then “no killing” had been dispensed with.

But of course, application of laws has been different with people with lower levels of political power.  I call this political inequality.

Unfortunately, the public has been benumbed or inured to “collateral damage”, which echoes on the my edited version of Stalin’s axiom “one death is a tragedy, one million dozen is a statistic”, or that “collateral damage” has been perceived as “reasonable” for as long as government does it, or has been carried out with good intentions, and or for as long as this happens to the others (and not to them)

The tragedy here is that the public doesn’t realize which has been more immoral: violence as a means to a (questionable) end or personal vices.

Yet the above example exhibits the institutional violence inherent in all governments, as the great Austrian economist Ludwig von Mises once pointed out (bold mine)

It is important to remember that government interference always means either violent action or the threat of such action. The funds that a government spends for whatever purposes are levied by taxation. And taxes are paid because the taxpayers are afraid of offering resistance to the tax gatherers. They know that any disobedience or resistance is hopeless. As long as this is the state of affairs, the government is able to collect the money that it wants to spend. Government is in the last resort the employment of armed men, of policemen, gendarmes, soldiers, prison guards, and hangmen. The essential feature of government is the enforcement of its decrees by beating, killing, and imprisoning. Those who are asking for more government interference are asking ultimately for more compulsion and less freedom.

To draw attention to this fact does not imply any reflection upon government activities. In stark reality, peaceful social cooperation is impossible if no provision is made for violent prevention and suppression of antisocial action on the part of refractory individuals and groups of individuals. One must take exception to the often-repeated phrase that government is an evil, although a necessary and indispensable evil. What is required for the attainment of an end is a means, the cost to be expended for its successful realization. It is an arbitrary value judgment to describe it as an evil in the moral connotation of the term. However, in face of the modern tendencies toward a deification of government and state, it is good to remind ourselves that the old Romans were more realistic in symbolizing the state by a bundle of rods with an ax in the middle than are our contemporaries in ascribing to the state all the attributes of God.

In upholding an unjust populist edict, the recourse to violence means that government creates more victims via repression than attaining its political goal. It also means the government has hardly been about the fiction of social justice but about the preservation, expansion and the showcase of political power.

Public Choice Theorist James Buchanan R.I.P.

Nobel prize winner and Public Choice theory co-founder James M. Buchanan passed away yesterday at the age of the age of 93 yesterday. Gordon Tullock has been Mr. Buchanan's partner in developing Public Choice.

I join the exponents of free markets in paying tribute to Mr. Buchanan with this resonant quote on “government failure”, which Mr. Buchanan embellished as Politics without Romance:

Public choice then came along and provided analyses of the behavior of persons acting politically, whether voters, politicians or bureaucrats. These analyses exposed the essentially false comparisons that were then informing so much of both scientific and public opinion. In a very real sense, public choice became a set of theories of governmental failures, as an offset to the theories of market failures that had previously emerged from theoretical welfare economics. Or, as I put it in the title of a lecture in Vienna in 1978, public choice may be summarized by the three-word description, 'politics without romance'.

“Politics without romance” included Mr. Buchanan’s strident aversion to public debt finance as summarized by the Independent Institute’s Jeremy H. Tempelman (italics mine)

1. The burden of public debt falls on future generations.
2. Public debt constitutes negative capital formation.
3. Ricardian equivalence does not hold because of fiscal illusion.
4. Keynesian macroeconomics is the principal cause of the disappearance of the unwritten balanced-budget norm that existed prior to the 1930s.
5. Barring constitutional constraints, public deficits will be a permanent phenomenon.
6. Public debt is immoral because future generations bear a financial burden as a result of spending and borrowing decisions in which they did not participate.
7. A constitutional balanced-budget amendment is required to remedy the tendency in elective democracy for government to borrow and spend rather than to tax and spend, and to spend much rather than little.

Such lessons have increasingly been valid and or applicable in today’s world which has been undergoing tremendous friction from the ongoing collision between deepening politicization and the forces of decentralization from the information age.

Thanks for the wonderful insights.

Rest in Peace.

Quote of the Day: The Essence of the Ponzi Scheme is Not Statistical; it is Psychological

The essence of the Ponzi scheme is not simply its statistical unsustainability. The essence of the Ponzi scheme is that it is like an addictive drug. Once someone enters into it, he finds it psychologically impossible to face the reality of the unsustainable statistics of the program. He refuses to get out in time. His participation in the scheme fundamentally changes his outlook toward reality. He is no longer capable of being persuaded that he has made a fool of himself by entering into such a scheme. This includes the founder of the scheme.The essence of the Ponzi scheme is not statistical; it is psychological. It creates belief in that which is statistically impossible, and the degree of belief is so strong that anyone who points out the statistical impossibility of the scheme risks being cut off personally by the victim. Ponzi scheme economics creates the classic attitude: shoot the messenger.

(bold original)

This is from Austrian economist Gary North at his website on the Ponzi Welfare State economy. 

Let me add that financial bubbles are also Ponzi schemes which ultimately depends on unsustainable credit and monetary accelerated expansions that eventually backfires. This is why they are called bubble cycles.

A famous Wall Street idiom emblematic of this pathology is “left holding the empty bag”

In analyzing America’s Great Depression, dummies.com uses such phrase as description for the one of the major excruciating chapters of US economic and financial history

Many more had borrowed money from banks to buy stock, and when the stock market went belly-up, they couldn't repay their loans and the banks were left holding the empty bag.

The point is that market risks escalates when the public begins to manifest snowballing symptoms of espousing nirvana fallacies or delusions of grandeur by shunning economic reasoning and basic mathematical or even statistical realities, or at worst, common sense--or the Ponzi psychology. 

Will Higher Rents lead to Higher US Consumer Inflation?

Rental markets appear to be the next phase of the broadening property inspired boom sponsored by the US Federal Reserve 

The Wall Street Journal reports

Apartment landlords continued to impose hefty rent increases as 2012 drew to a close, although there are some early indications they could be losing their leverage with tenants.

The average nationwide monthly apartment rent was $1,048 in the fourth quarter, up 0.6% from the third quarter and up 3.8% from a year earlier, according to a report set to be released Tuesday by real-estate research firm Reis Inc. The year-over-year increase was the largest since 2007 and a sign that landlords still have the upper hand they regained in 2010.

The nation's apartment vacancy rate, which has declined since hitting 8%in the aftermath of the financial crisis, fell to 4.5% from 4.7% in the third quarter. The rate is the lowest since 2001's third quarter.

Despite the team Bernanke's aggressive policies, US Consumer Price inflation (CPI) rates have been modest…until now.

Chart from Tradingeconomics.com

This is not to suggest of the absence of inflation, but rather that given today’s financialization (dominance of the financial industry over the real economy), most of the flows from central bank’s monetary inflation has been absorbed by the asset markets, which has brought about boom bust cycles, in spite of the moderate CPI figures.

The other factor is that much of the money created have stashed by the banking system with the US Federal Reserve

chart from St. Louis Federal Reserve

But all these may change soon. Rising rental prices will likely spillover to the US CPI basket considering that housing represents the largest share.

Chart from Doug Short’s Advisor Perspectives

As the US Bureau of Labor Statistics notes

Shelter, the service that housing units provide their occupants, is a major part of the CPI market basket—the goods and services that people need for day-to-day living.  Two CPI indexes, Owners’ equivalent rent of primary residence (OER) and Rent of primary residence (Rent), measure the change in the shelter cost consumers receive from their primary residences.  

Housing units are not in the CPI market basket.  Like most other economic series, the CPI views housing units as capital (or investment) goods and not as consumption items.  Spending to purchase and improve houses and other housing units is investment and not consumption.  Shelter, the service the housing units provide, is the relevant consumption item for the CPI.  The cost of shelter for renteroccupied housing is rent. For an owner-occupied unit, the cost of shelter is the implicit rent that owner occupants would have to pay if they were renting their homes.

In other words, if the US CPI index will begin to register higher CPI because of higher rents, then both Fed policies and the current environment of low interest rates may be jeopardized. This is assuming the constancy of the current methodology (or is premised on the assumption that US government won't change the way the CPI has been calculated)

US 10 year treasuries (TNX) appear to be signaling this.

Bernanke's FED seems boxed into a corner.

Video: Gun Debate between Alex Jones and Piers Morgan; the Behavioral Perspective

Marquez-Pacquiao move over: Alex Jones of the Infowars.com and PrisonPlanet.TV and CNN’s Piers Morgan in an impassioned debate over gun control at the CNN  (hat tip: Bob Wenzel)

Video 1 

Video 2 

Many will be turned off by the mercurial stance of Mr Jones in handling the debate.

But from the behavioral point of view, the debating tactic employed by CNN’s Piers Morgan’s seems hinged on the devious ploy called the “power of suggestion” or the "priming effects". Mr. Morgan repeatedly attempts to oversimplify what truly has been a complex issue through the selective use of statistics or by framing the argument on specific instances. This is an example of a debate where people talk past each other.

Writes Daniel Kahneman in Thinking, Fast and Slow (p.128) “our behavior are influenced, much more than we know or want, by the environment of the moment”, such that priming makes the audience “susceptible to the biasing influence”(p.127).

In short, by anchoring the debate on issues of the moment, Mr. Morgan’s technique appeals to the emotions of the gullible audience.

How to deal with this negotiation or debating strategy?

Mr. Kahneman advices (p.126)

If you think the other side has made an outrageous proposal, you should not come back with an equally outrageous counteroffer, creating a gap that will be difficult to bridge…Instead you should make a scene, storm out or threaten to do so…

This seems exactly how Mr. Jones deftly eluded Mr. Morgan’s traps.

This debate reminds me of the chilling words of Germany's Adolf Hitler whose Nazism was responsible for the death of about 25 million people during World War II (including the Holocaust),

The most foolish mistake we could possibly make would be to allow the subject races to possess arms. History shows that all conquerors who have allowed the subject races to carry arms have prepared their own downfall by so doing. Indeed, I would go so far as to say that the supply of arms to the underdogs is a sine qua non for the overthrow of any sovereignty...

Quote of the Day: GDP Measure Will Never Be Correct

'Valid,' talking about the GDP measure, would be the question whether the GDP estimate is correct. Does it capture the real economy 100%? Now we know that a GDP measure of the U.S. economy, the Germany economy, the Norwegian economy, will never be correct. It will always be a little bit off. Some data–there will be some cheating, there will be some data which are questionable. But we know we are more or less within bounds, off a couple of percentage here and there. And so that would be the question of validity. As we’ve seen from recent events in Ghana, and also forthcoming events in Nigeria, the validity question is really huge in sub-Saharan Africa. We are talking about plus-minus 50 to 100% on GDP levels. This would maybe not be a problem if you were interested in change, as we were talking about: what one type of change has a causal effect on another, such as GDP, liberalization, and parity. The problem is if you have that the validity of the measure changes through time. So that would be if you equated this with your bathroom scale at home–it wouldn’t be such a big problem if your personal scale was off a pound or two, if you were basically just interested in measuring yourself on a weekly basis to see if you are gaining or losing. The problem that comes in is that of reliability, and that is if someone changes your scale in the middle of the night. And therefore you have a scale that shows an error in a different direction. And there you will have different problems talking about time series or changes over time. Another problem is that validity still remains with us even if the data was reliable, in that if you started comparing your own weight with that of the neighbor, who uses a different scale, then it would still be very different to determine who is the heaviest or lightest.

(bold mine)

This is from Simon University Professor Morten Jerven in a podcast discussion with Russ Roberts of the Café Hayek on the unreliability of GDP as a measure to determine a nation's accessibility to multilateral aid or “concessional lending through the International Development Association (IDA), the concessional arm of the World Bank”, applied mostly to African countries.

Two points here: statistical GDP can hardly be relied on to reflect on the real or genuine economic conditions since it is subject to significant statistical errors, and importantly, vulnerable to manipulation. If an analysis is based on an inaccurate tool, then the result would most likely be misdiagnosis. So I'd be leery about mainstream's unwavering or pious devotion to statistical growth.

Second, liberalization is the best alternative to economic development