Monday, May 12, 2014

Showbiz S&P Upgrade & BSP Actions Sends Phisix and the Peso into a Frenzied Blow off Top

The power of accurate observation is frequently called cynicism by those who don't have it.–George Bernard Shaw

In this issue

Showbiz S&P Upgrade & BSP Actions Sends Phisix and the Peso into a Frenzied Blow off Top
-Mounting ASEAN Risks
-Thailand’s Conundrum: Will Blowing Bubbles Offset Political Woes?
-Peso and the Phisix Zoom on Showbiz S&P Upgrade and BSP Jawboning
-Reserve Requirements: Has the BSP Pulled A Rabbit Out of the Hat Trick?
-On Philippine Trade Balance and Gross International Reserves
-Behind the Philippine Education Inflation
-Phisix: Déjà vu 2013? Déjà vu 1994-1997?

S&P Upgrade & BSP Actions Sends Phisix and the Peso into a Frenzied Blow off Top

Current developments have been a marvel of crowd behavior dynamics.
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Stock markets—not limited to the Philippines—have been in a frantic parabolic melt-up phase. Malaysia’s KLCI drifts at record highs, Indonesia’s JCI seems fast approaching June 2013 highs and Singapore’s STI has seen an amazing resurgence. Only Thailand’s SET has seen a curtailment of the feverish speculative momentum enveloping ASEAN. 

Such developments, for me, serve as reminder of the wisdom of the crowds.

The improbable writes French psychologist, sociologist and author Gustave Le Bon noted that does not exist for a crowd.

Why? More from Mr. Le Bon[1] (bold mine)
Just as is the case with respect to persons in whom the reasoning power is absent, the figurative imagination of crowds is very powerful, very active and very susceptible of being keenly impressed. The images evoked in their mind by a personage, an event, an accident, are almost as lifelike as the reality. Crowds are to some extent in the position of the sleeper whose reason, suspended for the time being, allows the arousing in his mind of images of extreme intensity which would quickly be dissipated could they be submitted to the action of reflection. Crowds, being incapable both of reflection and of reasoning, are devoid of the notion of improbability; and it is to be noted that in a general way it is the most improbable things that are the most striking.

This is why it happens that it is always the marvellous and legendary side of events that more specially strike crowds. When a civilisation is analysed it is seen that, in reality, it is the marvellous and the legendary that are its true supports. Appearances have always played a much more important part than reality in history, where the unreal is always of greater moment than the real. Crowds being only capable of thinking in images are only to be impressed by images. It is only images that terrify or attract them and become motives of action.

Crowds being only capable of thinking in images are only to be impressed by images. It is only images that terrify or attract them and become motives of action.
In short, as I pointed out last week, to paraphrase a quote from Jackie Chan who played the role of mentor Mr. Han in the movie Karate Kid 2010, the crowd thinks with their eyes, so they are easily fooled.

Mounting ASEAN Risks

Recall that I raised Warren Buffett’s favorite stock market metric, market capitalization to GDP, which when applied to ASEAN equities reveals that except for Singapore, all of ASEAN majors have either reached (Thailand and Indonesia), surpassed (Philippines) if not has been drifting within the proximity (Malaysia) of critical inflection points that lead to major bear markets.

Of course aside from market cap-to-gdp, ASEAN valuations whether in Price to Book Value or Price Earnings Ratio, particularly for the Philippines, have surpassed pre-Asian Crisis 1995-1996 levels. Yet hardly any from the mainstream has come forward to explain how such valuations have come into being and how such valuations are sustainable except to utter incantations of “growth”.

Such frenetic buying spree comes even as three of the four ASEAN majors have signaled a policy tightening. Notes the Wall Street Journal[2], “Central banks in the Philippines, Malaysia and Indonesia held benchmark interest rates steady Thursday but signaled that further policy tightening is on the cards, reflecting building price pressures throughout the region”. Only the Philippines moved to raise reserve requirements for the second time.

The article says the Philippine central bank, the Bangko Sentral ng Pilipinas balked at raising rates for “for fear of driving the peso to uncompetitive levels and discouraging foreign investment at a time when Manila desperately needs outside help to upgrade infrastructure.” I don’t think that this is an accurate representation of the actions by the BSP.

Based on a recent World Bank study[3], I noted that the Philippines “in October 2012, expanded the number of restricted sectors and activities” in the list of Foreign Ownership Restrictions (FOR), only to partially lessen FORs to casinos and large retailers. Beats me, but how does expanding restricted sectors and activities encourage investments?

And obviously partial liberalization of casinos and large retailers has been designed as part of accommodation for the grand pirouette from diminishing dependence on external demand towards increasing exposure to “domestic demand” through bubble blowing policies. Even the most recent FDI data (as of January 2014[4]) reveals that equity based FDIs have been mostly directed to bubble sectors, specifically financial and insurance; wholesale and retail trade; real estate; manufacturing and information and communication activities.

The real reason why the BSP refrains from either enforcing her own self-imposed rule of banking cap on real estate loans* and or raising rates, is that financial repression conducted mainly through bubble blowing paradigm—that supports the government’s lifeblood through inflated taxes and repressed debt servicing rates that has been subsidized by peso holders—will be jeopardized by a bubble bust.

*Recent banking loan data continues to show significant loan growth to the real estate sector.

In short, governments promote bubbles or “something for nothing” in order to gain access to credit, especially cheap credit to finance their boondoggles, junkets, pork and other welfare-warfare based political projects. The Philippines government has been addicted to such subsidies coursed through demand based monetary policies, thus will resist such changes until forced by the markets.

The same article further notes that the Indonesia’s central bank, the Bank of Indonesia (BI) will “maintain its tightening bias”, in spite of the accrued 175 bps interest rate hike in 2013 in response to the “taper tantrum”.

Nonetheless in the acknowledgement of the effects of tightening, the BI “expects GDP to grow 5.1%-5.5% this year, down from a previous forecast of 5.5%-5.9%”. Indonesia’s statistical GDP slowed to 5.21% in the 1st quarter of 2014 from the highs of 6.5-6.9% in 2011.

So while Indonesia’s statistical consumer price inflation rate has indeed declined from a high of 8.79% in September 2013 to April 2014’s 7.25%, as loans to the private sector and money aggregate M2 seem to have plateaued, Indonesia’s stocks have spiraled upwards! As of Friday, the JCI runs second to the Philippine Phisix, with a year-to-date return of 14.6%!!

Meanwhile yields of Indonesia’s 10 year bonds have been off by only 84 bps from the September high of 8.889%. Indonesia’s currency the rupiah following a ferocious rally against the US dollar in February to March appears to be foundering anew.

In effect, Indonesia’s inflation moved from consumer prices into the stock market.

Yet declining statistical growth, leveling growth in money supply and credit, uncooperative bonds and the currency and a central bank signaling a tightening—in the face of skyrocketing stocks looks like a recipe for a Wile E. Coyote moment for Indonesia’s immensely mispriced and overvalued stocks as well as the economy dependent on credit, too.

The chronic addiction to easy money has Indonesian stock market participants bamboozled into believing in the return of the old environment.

Meanwhile, Malaysia’s central bank, the Bank Negara Malaysia, seems anxious of the growing risk of a bubble, and has reportedly “reiterated an earlier warning that financial imbalances are growing” as “Household debt has risen to nearly 87% of Malaysia’s gross domestic product, with the loan-to-GDP ratio at a multi-year high” according to the same report.

Aside from the stock market (KLCI unchanged for the year) and property bubbles, being fueled by household credit inflation which can be seen through her money supply aggregate M3 growth trend, Malaysia’s statistical consumer price inflation has reached 2011 highs which seems consistent with yields of Malaysia’s 10 year bonds also at 2011 highs.

The central bank’s hawkish statements have boosted the ringgit against the US dollar this week. The USD-ringgit fell 1.16% second only to the USD-Philippine peso. The ringgit has been rallying against the US dollar since her trough in February. Unless forced by the markets, central banks can’t be expected to impose radical measures. Thus so far, the Bank Negara Malaysia has been resorting to the signaling channel. Nonetheless, rising inflation and higher rates materially increases risks in the Malaysian economy and her stock markets.

Thailand’s Conundrum: Will Blowing Bubbles Offset Political Woes?

It’s been a different dimension for Thailand. Political ruckus continues to plague the Thai political economy. This week the Thai Prime Minister along with some cabinet members has been ousted from her office by the Supreme Court for “relatively obscure offense of improperly removing a senior bureaucrat from his job three years ago” according to another Wall Street Journal report[5].

Central bankers think that bubble blowing will do away with real social problems. Last March despite rising statistical consumer price inflation and deteriorating statistical economic growth rate, the Thai central bank the Bank of Thailand cut official interest rates by a quarter of a % point to 2%[6]. Loans to the private sector in February (prior to the rate cut) and money supply growth in March (post cut) continue to ascend.

Credit creation means fresh nominal spending power. If credit has not been used in the real economy, they will be used somewhere. Part of this can be seen in fueling the Thai stock market bubble. However Thai’s stock market which earlier mirrored the Philippine Phisix appears to have lost momentum. The SET lost 3.1% this week, as the Thai PM was ousted, paring down a third of her annual gains to 6.05% as of Friday’s close.

When the property rights have been rendered unclear due to uncertainty in the political climate, then it is natural for investors to dawdle at undertaking long term investments. Return of investments is a subsidiary priority to the return of one’s money. So the Bank of Thailand’s actions will not only increase the risks of a bubble cycle, but will lead to more political and economic uncertainties that would fortify the current predicament.

Curiously yields of Thai’s 10 year bonds have fallen nearly to 2013 lows as the Thai currency the baht—also after a strong February to March rally—appears to be flagging anew. Has some of the money borrowed help in pushing up of bond prices or has these been sent elsewhere abroad?

Thai’s financial markets and statistical economy appear to have been sending mixed signals. Rising inflation, slowing economic growth rate and a weak baht appear as signaling deeper stagflation, while rising bonds could be indicative of asset deflation.

Clearly whether it is Indonesia, Malaysia or Thailand, signs are that market risks have materially been increasing due to higher consumer inflation, unwieldy growth rate of debt, prospective tightening or even policy errors.

Thinking with your eyes can lead to severe losses.

Peso and the Phisix Zoom on Showbiz S&P Upgrade and BSP Jawboning

This week the peso appears to have eclipsed the Phisix. The US Dollar-Philippine peso stumbled by a whopping 1.91% over the week, where the gist—64% of the week’s losses by the US dollar occurred on Friday alone (USD fell by 1.22%).

Going into Friday, the peso has already been gaining momentum. Almost daily the BSP has been in the news from pressures to raise interest rates.

This quote from the BSP governor is an example[7]: “We will not hesitate to make preemptive adjustments to any of our policy levers in measured pace if the inflation target would be at risk or financial stability pressure heightens” (bold mine)

Past trading hour Thursday, the BSP made a move as they announced that interest rates will remain as they are but raised reserve requirements by one percentage point for the second time this year.

Friday morning, Philippine headlines screamed “Philippine credit ratings upgraded-the highest ever given to the country”. Boom. The peso and the Phisix went into an orgy.

I will deal first with the S&P upgrade.

The S&P awarded the Philippine government a BBB rating.

The Inquirer headline story says[8] “The S&P said it expected recent reforms that had paved the way for the country’s economic boom to be sustained beyond President Aquino’s term…A sovereign rating is the credit rating of a government and serves as an indicator for the perceived health of a national economy as well as its attractiveness to foreign investors. This is in addition to the more immediate effect of lowering the interest costs of the government and local corporations whenever they borrow funds from overseas.” (bold mine)

As I have been saying the ultimate goal of bubbles has been government access to credit, particularly cheap credit, the S&P upgrade only proves this point. What the Philippine government has so far succeeded to do has been to create the illusions of sustainability of the credit financed boom. This has been enough to beguile institutions such as the credit rating agencies to buy into the subterfuge with an upgrade.

But my fidgety and naughty mind also tells me that the timing looks suspicious and there may be other factors involved.

Has this been associated with President Obama’s recent visit to the Philippines? In particular, has this been implicitly linked with the military bases agreement reached by executive offices of the both governments? Has this been part of the reward for the bases agreement and also possibly an appeasement by the US government, where after the signing of the agreement, President Obama gave “no categorical commitment” on the 62-year-old Mutual Defense Treaty (MDT)[9]? In other words, following the sellout by the Philippine government on the US-Philippine military bases agreement, in order to reverse negative sentiment from this, the S&P pulls the proverbial wool over the public’s eyes with a credit rating upgrade.

Funny but nowhere in the report have I seen how the S&P treated 30+% money supply growth. Does the S&P think that 30+% can “be sustained beyond” the current administration? Does the S&P with their whole army of economists, actuarial analysts, accountants and statisticians understand the impact of fantastic growth rates of money supply on the economy? Does the S&P know that sustained escalation of money supply growth rates leads to hyperinflation? 

Another outlandish comment from the same article: “The government has a more ambitious growth target of 6.5 to 7.5 percent. By 2016, it aims to drive economic growth to as much as 8.5 percent. “The Philippines proved that it is able to sustain high economic growth despite external volatility and in the case of last year, successive domestic natural disasters,” Bangko Sentral ng Pilipinas Governor Amando M. Tetangco Jr. said in a statement. (bold mine)

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I actually try to avoid repeating charts I have shown as to reduce the size of my literature but necessity requires its re-exhibition.

But the above data shows where the 6.5-7.5% growth has been coming from and how they are being financed. The above shows why the goal of 8.5% is utter fantasy.

The basic difference between the mainstream and the business cycle observes like me, is in the treatment of debt. For the mainstream, debt has always been a function of growth. No if and no buts. That’s why debt has been a sideshow to the panoply of statistics they always show.

For instance the mainstream will depict on the relative debt levels of countries. Seen from a contrast effect, because Philippines debt levels are nominally low, relative to the others, they immediately write-off or dismiss any risks. The mainstream hardly explains of the distinctive political, legal, economic, financial, geographic and cultural characters of each country necessary for the construction of a debt profile.

As example the reason why Philippine debt levels are relatively low is that only 2 to 3 out 10 households are banked or have access to the formal banking system. How useful will be a comparison between the Philippines with a 20% penetration level in the formal banking system with that of other nations with 50% or more penetration levels?

And as I have previously shown, debt tolerance level differs from country to country as seen when a crisis hit. Even during the onset of the Asian crisis, statistical figures like bank lending to the property sector, property exposure and non-performing loans or even vacancy rates had all been different for ASEAN nations. The Philippines has generally the “lowest” among all these variables. Paradoxically lowest does NOT translate to immunity.

Such comprises on the category errors of the mainstream

For business cycle observers, while debt can be consequence of growth, growth can also be a function of debt, particularly in response to suppressed interest rate regimes. When governments desire to attain subsidies for their deficit spending programs by imposing negative real rates via interest rate caps, such redistributive policies alters the incentives of people which creates imperceptible imbalances that eventually unravels. This is what bubble cycles are made of.

As the great Austrian Economist Ludwig von Mises warned[10]: (bold mine)
But increases in the quantity of money and fiduciary media will not enrich the world or build up what destructionism has torn down. Expansion of credit does lead to a boom at first, it is true, but sooner or later this boom is bound to crash and bring about a new depression. Only apparent and temporary relief can be won by tricks of banking and currency. In the long run they must land the nation in profounder catastrophe. For the damage such methods inflict on national well-being is all the heavier, the longer people have managed to deceive themselves with the illusion of prosperity which the continuous creation of credit has conjured up
What I consider as the main bubble sectors specifically trade, financial intermediation, real estate and hotel constitutes 44.84% of the 2013 Philippine statistical economic formal economy growth which came at 7.2%. Yet the same sectors absorbed 49.61% of banking sector loans of general production loans (left window). This is outside the manufacturing sector where parts of the said industry have catered to the bubble industries. In short, the risks of bubbles may be understated given the above data.

The explosion of banking loan growth translated into soaring 30+% money supply growth rate for the second semester of the 2013. As of March 2014, loans to these sectors continue to swell and have now gobbled up 50.31% share of overall production banking loans (right window). This has been accompanied by 30+% money supply growth rate, particularly 34.8% for the NINTH straight month!

As I noted last week[11], “Where exactly has the bulk of money supply flowed into? Let us read this from the Philippine central bank, the Bangko ng Sentral ng Pilipinas (BSP) report, “Domestic claims rose by 12.4 percent in March as bank lending accelerated further, with the bulk going to real estate, renting, and business services, utilities, wholesale and retail trade, manufacturing, as well as financial services.” [italics mine] 

And just look at how the massive bank credit expansion into these sectors translated into statistical GDP. The three sectors real estate, construction and hotel have been borrowing 2-3 pesos for every peso statistical output generated. As you can see this is a sign not only of inefficient use and patent misallocation of resources, but importantly, how growth has been a consequence of debt rather than vice versa. The above data shows what the mainstream like the S&P sorely misses, that current demand springs from supply side leveraging. Curtail this leveraged based demand and the sand castle washes away.

What does the above points at? What the mainstream touts as “the perceived health of a national economy” has actually been a growing concentration of risks in the system as both resources and debt are being massively diverted or funneled into bubble sectors. And those risks are now being manifested via price inflation. 

And for the idea that Philippine economic growth would reach 8.5% based on the current growth model, is the BSP proposing to have money supply growth rates balloon from the current 30+% levels to 40% or 50%? That’s would be suicide for the peso holders and for the residents of the Philippines, including me.

Reserve Requirements: Has the BSP Pulled A Rabbit Out of the Hat Trick?

This brings me to the second point, the risks of price inflation.

And as I wrote last week, “if the supposed “robust domestic demand” is hardly matched by an equally “robust” domestic supply growth then systemic risks are being magnified through the inflation, interest rate and credit channels. Yet the longer such outrageous rate of money supply growth is maintained, the larger the build up of imbalances and the bigger risks of a financial and economic destabilizing “shock”

Remember 68% of money supply growth has largely been from these areas. Why do you think the BSP raised reserve requirements last Thursday?

Here is the BSP’s official statement[12] “At the same time, the Monetary Board noted that the balance of risks to the inflation outlook continues to lean toward the upside, with potential price pressures emanating from the possible uptick in food prices, as a result of expected drier weather conditions, as well as pending petitions for adjustments in transport fares and power rates. The adjustments in the reserve requirements are expected to help mitigate potential risks to financial stability that could arise from the strong growth in domestic liquidity. The Monetary Board believes that solid domestic economic activity provides room for the hike in the reserve requirements.’ (bold mine)

As you can see, the BSP acknowledges the growing risks of inflation which they say “continues to lean toward the upside”, but downplays its significance with assurance that the BSP’s magic wand will “help mitigate potential risks”

Yet such disclosure reveals that the BSP’s inflation figures hardly captures on the real economic inflation. The growing black market in the cement industry which has prompted the DTI to “intensify monitoring” of the regulated product is an example I cited last week. This signifies a symptom of such simmering inflation underneath the statistical numbers. And that’s why the BSP have been forced to act.

Moreover, look at the BSP’s waffling. The BSP traces “potential price pressures” from the supply side (food, utilities and transport). Yet the “adjustments in the reserve requirements” has been aimed at the demand side supposedly “to help mitigate potential risks to financial stability”. How does one square raising the issue of potential price pressures” from the supply side with demand side policies supposedly “to help mitigate potential risks to financial stability? Puff. They never explain.

Yet the financial markets bought into the gimmickry that consumer price inflation will be subdued by mere raising of the reserve requirements and from the vote of approval by the S&P who again blindly ignores of the shocking 9 months of 30+% money supply growth rates, thus sending the peso to the sky as if all the above risks have suddenly vanished.

And again as I previously wrote incremental increases in bank reserves requirements have mostly been symbolic[13].

Add to this the possibility that modern central banking has been said to be unconstrained by fractional banking. In other words, banks can lend for as long as there is demand and that mandated bank reserves will merely be supplied by the central bank. So from fractional banking modern central banks phase in infinity banking.

Ironically, I will be quoting S&P’s chief economist Paul Sheard[14] (bold mine).
Central banks don't constrain the amount of bank reserves they supply. Rather they supply whatever amount of reserves that the banking system demands given the reserve requirements and the amount of deposits that have been created.

Why is this?

Because modern central banks, in normal times (such as before the crisis and the forays into QE) target a short-term (usually overnight) interest rate in the interbank money market (the market in which banks lend and borrow central bank reserves). They do this by adjusting the amount of reserves on their balance sheet (in the banking system) to ensure that the interest rate is in line with their announced policy rate (the federal funds rate in the case of the Federal Reserve).

The adjustment takes the form of ensuring that there are neither too few reserves (which would put upward pressure on the interest rate) nor too many (which would put downward pressure on it, assuming that the central bank does notnegate that by paying interest on excess reserves). If the central bank wants to hit its interest-rate target, it has to supply the amount of reserves consistent with that, and that amount (normally) corresponds to the amount of reserves given by minimum reserve requirements.

If bank lending increases and the associated increase in bank deposits leads, as it will, to a higher level of minimum required reserves, the central bank will naturally supply those reserves. Otherwise there will be a central bank-induced shortage of reserves, and the overnight interest rate will go up, meaning that the central bank will not be hitting its interest-rate target. Central banks, in normal times, cannot target an interest rate and independently restrict the amount of reserves they supply"
If Mr. Sheard’s view is correct where central banks supply the reserves to conform with the mandated reserves rather than banks restraining their loans predicated on required reserves, then the BSP seems to have pulled one heck of bluff via the reserve requirement policy tool.

Nonetheless, since all these loan creation extrapolates to additional nominal spending power which will stream into the real economy that will affect money prices, economic coordination, production process and trading patterns, this means that in spite of the artifices employed, economic reality will ultimately prevail. As the great Mises pointed out above, “Only apparent and temporary relief can be won by tricks of banking and currency.”

On Philippine Trade Balance and Gross International Reserves

And speaking of more tricks. One of the factors that has helped boosted the peso lately has been an abrupt narrowing of the Philippine trade balance as growth of imports suddenly collapsed from 26% y-o-y in January to a mere .3% last February. Based on the National Statistics Office this has mostly been due to a decline in Mineral fuels, Lubricant and Related materials.

There are possible explanations to this, seasonality-February tends to be a weak month for imports or the huge January imports constituted advanced orders which took the share of February’s activities or smuggling has taken the upper hand and or smuggling crackdown has led to diminished imports. There could be more but such factors have been off the top of my head for now.

The February trade balance statistics does not diminish the case for a weak peso over the long term. The fact that 30+% of money supply growth rate represent a huge additional nominal demand for resources means that the specific supply side requirements has to grow as much as with demand, for price inflation to be tempered. If domestic supply doesn’t match demand for specific items then prices will rise and supplies would need to be imported. The sheer requirements of the bubble industry ensure that supply from imports will be substantial and would sway the trade balance towards sizeable deficits—thereby affecting the peso. What can happen is that most of these imports may be channeled through smuggling. Yet smuggling still would require more dollars. Statistics will not alter such fundamental economic flows.

And if the import route will be obstructed say by a smuggling crackdown then we will see shortages. Such shortages will put a “shock” to the bubble industries that will ripple through the formal economy.

Aside from trade deficits, domestic inflation brought about by the credit fueled massive demand—expressed through the sustained 30+% money supply growth rate—serves as the primary force of inflation. Both would signify a one-two punch against the peso.

The fact that the Philippine money supply growth has vastly outpaced developed economies undertaking QE, as I previously wrote, “Even with the Fed’s aggressive QE and Bank of Japan’s even bolder Abenomics year on year change of M2 has been at 5% for the Fed and 4.5% for the BoJ. China’s M2 comes at 13.2% in 2013 according to the People’s Bank of China[15]”…means that based on supply, the peso should weaken against these currencies.

So far because of publicity stratagem mounted by the government, demand for the peso has temporarily overwhelmed supply. Such demand is not fundamentally grounded and thus won’t last.

Finally, the BSP posted the Gross International Reserves (GIR) for April[16], here is what they reported, “Preliminary data showed that the country’s gross international reserves (GIR) reached US$79.61 billion as of end-April 2014, Bangko Sentral ng Pilipinas (BSP) Officer-in-Charge Nestor A. Espenilla, Jr. announced today. This level was slightly lower by US$0.04 billion than the end-March 2014 GIR of US$79.65 billion.”

The reason the data has been considered “slightly lower” is because March data have been revised[17] from $79.8 to $79.65 billion. I know this would seem as pettifogging but that’s how governments operate, they shift and manage data for them make them look favorable than they are supposed to be.

But here is one more thing. GIRs consist of money or asset “stocks”, particularly Reserve Position in the Fund, Gold, SDRs, Foreign Investments and Foreign Exchange. The fact that foreign money “flows” continue to post positive balances, particularly OFW remittances, BPO foreign revenues, FDIs and portfolio flows means these should have flowed into the GIR as money or asset “stocks”. But they haven’t. So a fall in GIR reserves implies that GIR money and asset “stocks” PLUS foreign money flows from the current-capital account balances have been used to manage the Peso. Thus the BSP interventions in support of the peso have been far larger than what is seen by looking solely from the GIR data.

Behind the Philippine Education Inflation

I usually put my personal experience with consumer price inflation as my prologue to highlight the effects of 30+% money supply growth rate.

But for today I moved this down because I wanted to emphasize on the snowballing hysteria on the supposed Philippine economic boom.

My daughter just gave me her tuition bill. And this is 10+% more than from last year.

I came across this article noting that 353 universities have sought for government approval for tuition hike. So I guess my daughter’s school hasn’t been isolated.

So while the article didn’t mention of the current rate of adjustment desired by the universities, it noted that “the average tuition increase per unit for school year 2013-2014 was P37.45 or 8.5 percent nationwide[18]

This means regional areas have most likely asked for less than 8.5% while increases in the National Capital Region must be vastly higher than 8.5%. So 8.5% could serve as a minimum threshold for the recent increases which I expect to be a lot higher.

Artificial demand from supply side leverage has contributed to recent increases. But school tuition inflation has long been in place even ahead of the BSP’s bubble blowing policies.

A simple reason: government imposed subcontracting of public school students (grade 7 and high school students) to private schools in exchange for paltry subsidies. This government program is called Educational Service Contracting (ESC) which falls under the Republic Act 8545 (amending R.A. 6728), or the “Expanded Government Assistance to Students and Teachers in Private Education, or GASTPE[19]

Here is the Department of Education’s definition[20]: ESC is a scheme under the Government Assistance to Students and Teachers in Private Education (GASTPE) wherein the government subsidizes the tuition fee of students who enroll in private schools because public secondary schools cannot accommodate them anymore. It is jointly implemented by DepEd and the Fund for Assistance to Private Education (FAPE). The subsidy is P6,500 per student in participating schools outside the National Capital Region and P10,000 per student in private schools in the NCR. [As a side note I discussed this in 2010[21]]

Think of it. A private school in NCR has an annual tuition fee of Php 50,000 for students where 20% are earnings or profits. This entails that the cost to maintain a student for the year will be Php 40,000. But the government gives a subsidy of only Php 10,000 to the school. This means there would be a Php 30,000 deficit. If the private school shoulders this, then the school will likely lose money and close shop or vastly reduce earnings which imply lesser expansion or improvement of facilities. Such isn’t a viable option. So what would a school owner do? They will spread the cost by charging these deficits to their private sector enrollees. And the tuition hikes would spread to cover not only in high school but to the private owner’s affiliated college or grade school. So tuition fee hikes embody both price inflation from bubble blowing policies AND government subcontracting. (As a side note, such lethal combination has hammered the education pre-need industry which media blames on many other effects rather than causes)

For school year 2013, the DepEd added 24% slots or a total of 310,709 slots for public students nationwide. The DepEd chief said that this would “democratize access to quality education”. I say that the DepEd will not only see the opposite—a deterioration in quality education—but this would add to the list of uneducated.

The DepED program impinges on the constituents that they intend to protect in two ways. The increased subsidy means higher taxes for consumer that will translate to a reduction of people’s disposable income that could have been spent for education. Moreover, higher tuition fees reduce affordability, thereby putting more prospective students out of school or force off students from private schools and into public schools. So added pressures for public schools would mean even more interventions or more subsidies. So we go back to into a loop; keep people poor so they will continue to depend on the government. At the end of the day, this program is like a dog chasing its own tail.

And contra government data which shows the education share of a typical Filipino household at only 4%, to my experience education expenditures eat up about 20-30% of my budget if your children are in the private school. So education inflation will hurt the middle class.

Again the education sector has been a beneficiary from bubble blowing policies. This means that for now, artificial demand brought about by mostly supply side leveraging has been supportive of this arrangement, but this isn’t going to last. Yet it’s sad to see more people suffer from a backlash of self-destructive policies from political social engineers.

Nonetheless I am optimistic that the web will introduce more online competition against the traditional system which should lower the cost of education and truly democratize learning[22].

Phisix: Déjà vu 2013? Déjà vu 1994-1997?

Global Investment management firm GMO’s Edward Chancellor[23] identifies the 8 characteristics of a stock market mania: 1) This-time-is-different mentality. 2) Moral hazard—strong belief in government support 3) Easy money. 4) Overblown growth stories—the industry chant. 5) No valuation anchor—valuation who cares? 6) Conspicuous consumption (e.g. fastest growth in car sales) 7) Ponzi finance and 8) Irrational exuberance

I think all of these can be bundled to characterize the Philippine Phisix where participants see a singular direction or a one way trade, deeply entrenched groupthink (thinking with the eyes), and exceptionally irrational exuberance.

Proof? The Phisix has risen for SEVEN consecutive weeks…even profit taking seems now a taboo.

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Two patterns seem to be playing out.

First is the Déjà vu 2013, where we see same parabolic moves, same marking the close in February 28th, and a similar short and shallow correction cycle in early March[24]. Eerily the March correction began only 1 day apart.

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A second pattern could be the Déjà vu 1994-1997. In 1994-1997 there had been three bear market strikes (20+%) and a huge final leg rally that ended with the Phisix reaching the early 1994 high. The breakout failed, the rest is history.

Today there are some similarities but with variations. Instead of bear market strikes, there have been 3 visits to the bear market territory. Currently the Phisix as noted above is on a one way lift off mode.

While I am not a fan of patterns, these patterns recur due to the patent desire by many participants to bring back the old boom days even if such conditions have not been the same.

In finale, grotesquely priced bonds and outrageously mispriced stocks, rising inflation pressures, massive debt accumulation, and 30+% money supply growth rates serve as ingredients to a Wile E. Coyote or a Black Swan moment

As Aldous Huxley said, Most ignorance is vincible ignorance. We don’t know because we don’t want to know.



[1] Gustave Le Bon The Crowd A Study of the Popular Mind Batoche Books p.40 (link)



[4] Bangko Sentral ng Pilipinas Foreign Direct Investments Inflows Reach US$1 Billion in January 2014 April 10, 2014




[8] Inquirer.net PH credit rating upgraded, May 9, 2014


[10] Ludwig von Mises 8 Inflation PART V  DESTRUCTIONISM Chapter 34 The Methods of Destructionism Socialism An economic and sociological analysis Mises.org






[16] Bangko Sentral ng Pilipinas End-March 2014 GIR Stands at US$79.8 Billion April 7, 2014

[17] Bangko Sentral ng Pilipinas End-March 2014 GIR Stands at US$79.8 Billion April 7, 2014

[18] Philstar.com 353 universities seek tuition hike May 10, 2014

[19] Funds for Assistance to Private Education DepEd’s GASTPE Program FAPE.org

[20] Philippine Department of Education, DepEd increases tuition fee subsidy for Grade 7 students May 6, 2013



[23] Edward Chancellor Looking for Bubbles Part Two: A Sentimental Approach GMO Quarterly Report 1st Quarter 2014

Sunday, May 11, 2014

Video: Jeff Deist on the Corruption of Economic Language

Mises Institute's President Jeff Deist explains how the mainstream corrupts English, and most importantly, the economic language.(Mises Blog)



A very relevant part is how Philippine media uses the word "sustainable" which is vogue today with reference to the Philippine economy. Mr. Deist says the implicit meaning of "sustainable" is "centralized planning" (2:18) or "Some centralized group of bureaucrats or politicians are going to decide whether some economic activities to be engaged in is permissible". Well, blowing bubbles are "sustainable"?

Saturday, May 10, 2014

Video: Myth of the Rational Voter: Make Progress, Not Work

Econolog economist, professor and blogger Bryan Caplan explains why free markets (and not labor protectionism) leads to progress



From Learn Liberty
As technological developments increased farm yields over the last two centuries, the share of the US population employed in agriculture fell from around 90 percent to around 2 percent. The lay American public supposes that when workers lose their jobs, we become worse off — they suffer from what economist Bryan Caplan calls the 'make-work' bias. But would anyone prefer to live in a society in which many went hungry and no one enjoyed the wealth, financial security, job growth, and innovation created as all those workers lost their farm jobs? Follow Caplan, author of The Myth of the Rational Voter, as he explains the gap between the public's opinion and the economist's facts. In this video, Caplan talks about the merits and demerits of 'making work' - instead of letting individuals find work. 

► Learn More: 

-Frederic Bastiat contends that to aim to increase the proportion of effort to output is to imitate Sisyphus in his hopeless attempt to move a stone up a hill: http://mises.org/daily/6157/Industry-... 

-Daniel J. Mitchell explains the fallacy that government creates jobs: http://www.cato.org/publications/comm...

Quote of the Day: Tenets of Individualism

Metaphysically, individualism holds that the person is unique, not a sample of the mass, owing his peculiar composition and his allegiance to his Creator, not his environment. Because of his origin and existence, he is endowed with inalienable rights, which it is the duty of all others to respect, even as it is his duty to respect theirs; among these rights are life, liberty, and property. Following from this premise, society has no warrant for invading these rights, even under the pretext of improving his circumstances; and government can render him no service other than that of protecting him against his fellow man in the enjoyment of these rights. In the field of economics (with which libertarians are rightly concerned because it is there that government begins its infringement), the government has no competence; and the best it can do is to maintain a condition of order, so that the individual may carry on his business with the assurance that he will keep what he produces. That is all.
This is from libertarian editor and author Frank Chodorov at the Mises Institute
 
Bonus quote from the same article regarding the difference between self interest and selfishness... 
But self-interest is not selfishness. Self-interest will impel the manufacturer to improve upon his output so as to attract trade, while selfishness will prompt him to seek the special privileges and state favor that in the end destroy the very system of economic freedom on which he depends. The worker who tries to improve his lot by rendering better service could hardly be called selfish; the description rather fits the worker who demands that he be paid for not working. The subsidy seeker is selfish, and so is every citizen who uses the law to enrich himself at the expense of other citizens.

Friday, May 09, 2014

Simon Black: No Money Loans Down are signs of Philippine Bubbles

Just as the S&P blindly upgrades Philippine credit ratings again (which they will reverse soon), Sovereign Man’s Simon Black sees bubbles in the Philippines

Mr. Black writes: (bold mine)
My partner Tim Staermose and I were talking about it this morning, as he’s currently traveling in the Philippines.

When he went to collect the mail at his old office address yesterday, one of those credit card offers was waiting.

It was sent by a local bank, according to them because Tim is a long-standing customer.

Curiously, though, his account at the bank has less than $400. They know nothing about his ability to repay. They have no clue if he is gainfully employed, or even where he lives. But they sent a pre-approved credit offer regardless.

Another bank– a Philippine branch of a large US bank, mailed him an offer for a “no questions asked” cash loan of about US$11,000, to be paid back over a period of time of his choosing.

And of course, real estate agents are out all over town flogging Philippine investment properties, offering ‘no money down’ deals.

People only make such an offer if they

1) Expect everything to keep rising forever [which is a really baaaaad notion], or

2) They have so much money to deploy, they are forced to make rash decisions and assume tremendous risk just to be able to invest.

Both of these are incredibly dangerous and lead to disastrous consequences.

We remember the last time people thought that ‘real estate can only increase in value…’ Or the last time banks were making no money down loans.

Yet markets, bankers, central bankers, and politicians all have very short memories. This time, it always seems, will be different.

It never is.

But everything is now so interconnected that a credit unwinding in a place as small as the Philippines could actually have a substantial impact on the rest of the world.

It was the same during the Asian Financial Crisis in the late 90s, and exactly the same in 2008 nuclear banking meltdown.

The dominos in the global financial system are spaced so closely together you can hardly see any daylight between them. And a tiny central banking elite is lording over them all, clumsily and hastily cramming even more dominos onto the table.

This isn’t an environment where traditional financial thinking is going to prevail.

From ‘buy and hold’ index investing to the solvency of our banks to the basic premise of paper currency, nothing can be taken for granted any longer.

Real assets– productive land, precious metals, private businesses, etc. are much safer alternatives right now.

One of these days, someone is going to bump the table and all the dominos will start to fall. You won’t want your savings anywhere near it when that happens.
Deterioration of lending standards and one way trade are indeed symptoms of a bubble, but there's even more signs--Mr. Black and Mr. Price can know more of the details here.

How the Nazi Regime’s Gun Prohibition lead to the Holocaust

At the Mises Institute, associate professor of economics at the University of Louisville, Audrey D. Kline does a splendid book review of a book by Independent Institute’s Stephen P. Halbrook’s Gun Control in the Third Reich: Disarming the Jews and “Enemies of the State
 
Ms Kline summarizes Mr. Halbrook’s account of how Nazi Germany conducted a step by step approach—beginning with gun control laws then to emergency decrees (which suspended various civil liberties) to centralized control over police et.al. —in the imposition of repression and genocide against the Jews.

This signifies what Austrian economist Robert Higgs calls as the “ratchet effect”—seemingly irreversible expansion of government in times of crisis. The Nazi’s serial mission creep of restricting civil liberties particularly for the Jews lead to a disarmed and defenseless populace and eventually paved way for their extermination or the Holocaust.

Here is the intro… (bold mine)
There is no shortage of theories or writings related to the rise of the Third Reich and the subsequent Holocaust. Stephen Halbrook’s 2013 book, Gun Control in the Third Reich offers a compelling and important account of the role of gun prohibition in aiding Hitler’s goals of exterminating the Jews and other “enemies of the state.” While much of the early gun prohibition was created with supposedly good intent, Halbrook carefully and meticulously details how a change in political regime facilitated manipulating some well-intentioned gun registration laws and other gun prohibition to be used in inconceivable ways.

Students of history as well as Second Amendment enthusiasts will find this a fascinating book and will find parallels between gun prohibition in pre-Nazi and Nazi Germany, and attempts to prohibit types of gun ownership and implement other forms of gun prohibition in the United States today. The current climate in the United States surrounding gun prohibition combined with a president who uses his office to impose executive order in ways not historically common gives many citizens pause, especially when looking at the era of the Third Reich. While certain states have imposed gun registration laws recently, enforcement of the laws remains unclear.

While Halbrook is careful to point out that a combination of factors led to the events of the Holocaust, there is no denying that many of the pre-war activities contributed to Hitler’s ability to disarm targeted groups, particularly the Jews. The rapid pace with which Hitler disarmed the populace in Germany is startling. Halbrook’s account is gripping, thorough, and full of legal documentation, leading the reader through the sometimes-daily changes in gun prohibitions that furthered Hitler’s agenda. Ultimately, the prohibitions enacted by the Nazi regime led to monopoly control of firearms by the Nazis and eliminated the ability of many groups in society to defend themselves. A similar progression in contemporary society related to government control of firearms and the firearms industry is a concern of many gun owners in the United States today.
Read the rest here

The bottom line is that governments act to attain political goals hardly in a sweep but via a series of arbitrary edicts, legislations, decrees and etc. … or the ratchet effect. Gun controls or inflating bubbles serve as stepping stones for government repression.

Quote of the Day: Tobin’s Bathtub Economics

when it comes to interest rates, Tobin did not teach economics; he lectured about monetary plumbing. Under bathtub economics, the Federal funds rate is a dumb plumbing control—-the pavlovian lever you pull when you want more aggregate demand. But here’s a news flash.  Its actually the smartest thing in the financial firmament—that is, its the price of hot money. 

Indeed, its the most important single price in all of capitalism because it regulates the protean and  combustible force of speculation—that is, the deeply embedded human instinct to chase something for nothing if given half the chance. Accordingly, the very last lever the Fed should toy with is the price of money;  and the very last economic precinct it should try to “stimulate” is the money markets of Wall Street. That’s where the demons and furies of short-run, lightening fast financial speculation lurk, work and mount their momentum trading campaigns—ripping, dipping and re-ripping as they go.

Stated differently, the Federal funds rate is the price of trading risk—the regulator that drives the carry trades. It is the mechanism by which credit is expanded in the Wall Street gambling channel through the process of re-hypothecationWhen the funds rate is ultra low for ultra long it massively expands the carry trades. That is, any financial asset with a yield or short-run appreciation potential gets leveraged one way or another through repo, options or structured trades—- because re-hypothecation produces a large profit spread from a tiny sliver of equity.

Needless to say, the massive carry trades minted in the Fed’s Wall Street gambling channel are a deep and dangerous deformation of capitalism. In money markets that are not pegged by the central banking branch of the state, outbreaks of fevered speculation drive short-term market rates skyward in order to induce more true savings from the market or choke off demand for funds. The money market rate is therefore the economic cop which keeps the casino in check.

Accordingly, the carry trade profit spread can go from positive to negative quickly and drastically, meaning that there are always two-way markets in the underlying financial assets. There is no shooting fish in a barrel full of free money. There are no hedge fund hotels where carry-traders can drive in-the-money strike prices higher and higher because premiums are dirt cheap.

Needless to say, the Fed’s 30-year encampment in the heart of the money markets has destroyed them; it has turned price discovery into the primitive, computerized act of red-green-and-orange-lining the Fed’s latest meeting statement to see which word, tense or adjective has changed.

At the end of the day, the Fed has been implanted in the money markets for so long that it does not even recognize it own handiwork. The speculative disorders and financial bubbles which are the inherent results of its interest rate pegging are seen as exogenous forces which emanate from almost any place on the planet except the Eccles Building. And even if some ultimate responsibility is acknowledged as to errors inside the great house of monetary central planning it’s always put off to failures on its regulatory and supervisory desks, and always after the fact.
(italics original, bold mine)

This is from David Stockman’s appraisal of Fed Chair Janet Yellen’s latest speech at his Contra Corner.

Oh mind you, this observation applies not only to the US FED but also to contemporary central banking, including the Philippine BSP, where the latter believes blowing bubbles uplifts ‘aggregate demand’ with a cavalcade of 9 months 30+% money supply growth!

Russia Flaunts Nuclear Arms Capability...as Deterrent?

In World War I, the Maginot Line has been emblematic of a failed military strategy which was once proven effective. This has been characterized by the adage, “generals always fight the last war, especially if they have won it” 

And I have been saying, any confrontation involving major powers will likely involve using new or modern technology built armaments: nuclear weapons. 

Governments comprise a select group of politically mandated people authorized to use force. In combat, particularly with external forces, where the goal is to subjugate or defeat the opponent, governments with access to deadly weapons will likely choose to use them to reach such objective. Thus instead of conventional warfare, the risks of future wars will be one of nuclear exchanges.

The escalating stalemate in Ukraine has prompted Russia to flex her nuclear muscles against the West with a showcase of her nuclear capabilities

First a test launch of ICBM missiles...

Russia’s strategic missile forces test launched an intercontinental ballistic missile (ICBM) during a training exercise on Thursday under the leadership of President Vladimir Putin.

The RS-12M Topol ICBM was launched from the country's northern Plesetsk space center.

Prelaunch operations and the launch and flight of the missile followed a strictly planned procedure. The Russian Ministry of Defense said the missile struck the practice target at the Kura ballistic range in the country’s Far East within the prescribed accuracy.

On Thursday, President Putin as Russia’s commander-in-chief held a planned training exercise of the armed forces. The presidents of Collective Security Treaty Organization (CSTO) member countries – Belarus, Armenia, Tajikistan and Kyrgyzstan – observed the training process at the national defense control center.
Next the following video shows how Russia is “NOT” preparing for a nuclear war (hat tip zero hedge

'

This seems like a reprise of the Cold War...yet increases the risks of World War III. 
Nuclear Weapons: Who has what? ... according to the CNN
image

No worries, stocks will continue to soar.

Thursday, May 08, 2014

Along with the French, Chinese Police to Patrol Paris

From the Guardian
Paris police are to draft in reinforcements from China to help patrol the French capital during the summer tourist boom.

The foreign officers will be deployed to key landmarks to prevent Chinese visitors – around 1 million of whom come to France every year – being targeted by pickpockets and muggers.

A plan originating from the French Interior Ministry proposed that Chinese police officers would patrol with their French counterparts in Paris tourist spots. A ministry spokesperson refused to give details or numbers, but said their role would be preventative, and that they would operate as part of a global operation to protect tourists across the city.

Police say Chinese tourists often carry large amounts of cash, making them a target for attacks. Tourists from China are estimated to spend an average of €1,300 during their holidays, much of it on designer goods.

The move follows a rise in assaults by thieves on tourists from China. In March last year a group of 23 Chinese visitors were robbed in a restaurant shortly after arriving in Paris. The group was on a 12-day tour of Europe but stopped for dinner at Le Bourget in one of Paris's northern suburbs, where they were robbed of €7,500 cash, plane tickets and passports. The group leader was injured in the attack…

In central Paris, officers struggle to deal with organised gangs of thieves and pickpockets, many of them children, from the Balkans and eastern Europe, who harass tourists with fake "petitions" or demands for charity donations.
Some thoughts

Given how the Philippine government has been eager to embrace US bases, will the Philippine government do a copycat and ask US police to patrol the streets of Manila for the "protection of American tourists"?

Chinese cash rich tourists as targets by domestic thieves and Chinese police presence in Paris exude a crucial shift in the balance of economic and geopolitical power

The above also demonstrates the incompetence of centralized political institutions that are supposed to protect people within their defined political boundaries.

The French socialist government’s drafting of external police force exhibits such patent government failure.

If the French government “struggle to deal with organised gangs of thieves and pickpockets”, how will the Chinese police help solve such problems when the latter seems hardly familiar with the French geography, the political, legal and or cultural system?  

Yet the Chinese police seem to have a handful of domestic criminal issues to deal with.

The Chinese police may “help victims to make a police complaint” but farther than these they are unlikely to succeed, unless the French are convinced of a Jet Li solution.

Private Police anyone? 

 

7 Ways to Protect Oneself from the Media Circus

Based on the Donald Sterling controversy, self development author Robert Ringer at the LewRockwell.com writes: (bold mine) 
Personally, whenever there’s a big media blitz about some perceived wrongdoing, I prefer to ignore the hysteria and think about what I can learn from the situation that could be useful to me.  Off the top of my head, following are a handful of lessons that I believe are worth gleaning from the Sterling media circus — lessons that you can use to improve yourself and your own life.
  1. People say negative things behind your back all the time.  If you don’t already know that, wake up!  If you do know it, don’t let it bother you.  Whenever I hear that someone has said something unflattering about me, I opt to take the rationally selfish approach and do my best to ignore it — especially when I know it’s patently false.  I hope, for your sake, that you do the same.
  2. Don’t buy into the hate-speech scam.  People have opinions, some of which you may like, some of which you may not like.  Best to leave all that nonsense up to the PC Police, who achieve mental orgasms by harassing (perceived) evil speakers.  You don’t have time to get bogged down in group protests if you’re interested in bettering your life.
  3. “They” say that hate speech is bad, but what’s worse is the idea that someone actually believes he has the moral authority to decide what constitutes hate speech in the first place.  Of course, if someone hurls a remark directly at you, and you, in your sole judgment, consider it to be “hateful,” that’s your prerogative.  As an individual, you have a right to make a determination about speech that is aimed specifically at you.  But before you get yourself all worked up over it, remember what mom taught you about sticks and stones.
  4. Learn to reject hypocrisy and hypocrites.  In the Sterling saga, the hypocrisy is so thick it’s stifling, as you already know if you’ve been following the story at all.  The world is full of hypocrites, especially in politics (which is really what hate speech is all about).  Best you focus on policing yourself to make sure that you are not guilty of hypocrisy.
  5. Never forget that friends and sweethearts have a way of becoming enemies.  Make sure your mouth understands that.  Talk is not cheap.  On the contrary, it has proven to be quite capable of destroying lives.  Think before you open your mouth.
  6. In the same vein, be vigilant about not making The Big Mistake.  We all make little mistakes on a daily basis, but be careful about making a mistake so big that it can threaten your very survival.In Donald Sterling’s case, maybe he’s a terrible person — I have no idea — but I suspect his remarks (which, while not nearly as bad as those that have been made by some of his most vocal critics) were nothing more than the angry rants of an old guy who was mad at his middle-school girlfriend.This is where mom’s advice comes in handy again:  If you can’t say something nice about someone, don’t say anything at all.  There’s a reason why aphorisms like this have been around forever:  They’re true.  Instead of wasting time fretting over Donald Sterling’s remarks, concentrate on what comes out of your mouth.
  7. The best protection against becoming Sterlingized (a form of sterilization performed by the loud crowd) is to follow a simple rule:  Live every moment as though the whole world were watching and write every e-mail as though the whole world were going to be reading it — something politicians never seem to learn.
Finally, of course, never — EVER — try to persuade people to change their fundamental beliefs, no matter how misguided you may think they are.  Why?  Because you will fail, and you’ll waste a lot of valuable time in the process.  It’s called opportunity cost. [to my experience this observation is so very relevant. Thanks Mr. Ringer—Benson]

Use your time to focus on your own life.  The only person over whom you have total control is you.  Put your efforts into purifying your own life, and forget about the Donald Sterlings of the world and the rabble-rousers who live for the thrill of trying to destroy them.

5 Nobel Prize Winners Call for the End of the War on Drugs

More experts are jumping into the bandwagon against the war on drugs 

From the London School of Economics and Political Science: (hat tip lewrockwell.com blog)
Five Nobel Prize economists call for an end to the 'war on drugs' in a new report from the London School of Economics and Political Science (LSE).

Ending the Drug Wars: Report of the LSE Expert Group on the Economics of Drug Policy outlines the enormous negative outcomes and collateral damage from the ‘war on drugs’ and includes a call on governments from five Nobel Prize economists[1] to redirect resources away from an enforcement-led and prohibition-focused strategy, toward effective, evidence-based policies underpinned by rigorous economic analysis
The 5 Nobel Prize winners are Professor Kenneth Arrow (1972 Nobel Prize in Economics),  Professor Sir Christopher Pissarides (2010 Nobel Prize in Economics), Professor Thomas Schelling (2005 Nobel Prize in Economics), Professor Vernon Smith (2002 Nobel Prize in Economics) and Professor Oliver Williamson (2009 Nobel Prize in Economics)

The other signatories for the said report are Professor Paul Collier, CBE, University of Oxford, Professor Jeffrey Sachs,  Luis Fernando Carrera Castro, Minister of Foreign Affairs, Guatemala, Nick Clegg, Deputy Prime Minister of the United Kingdom. George Shultz, US Secretary of State (1982 – 1989) and Dr. Javier Solana, EU High Representative for Common Foreign and Security Policy (1999 – 2009), and others.

At the end day, economics will determine social policies.


Wednesday, May 07, 2014

Quote of the Day: Gary Becker’s Economic Approach

My research uses the economic approach to analyze social issues that range beyond those usually considered by economists. . . . Unlike Marxian analysis, the economic approach I refer to does not assume that individuals are motivated solely by selfishness or gain. It is a method of analysis, not an assumption about particular motivations. Along with others, I have tried to pry economists away from narrow assumptions about self interest. Behavior is driven by a much richer set of values and preferences. 

The analysis assumes that individuals maximize welfare as they conceive it, whether they be selfish, altruistic, loyal, spiteful, or masochistic. Their behavior is forward-looking, and it is also consistent over time. In particular, they try as best they can to anticipate the uncertain consequences of their actions. Forward-looking behavior, however, may still be rooted in the past, for the past can exert a long shadow on attitudes and values. Actions are constrained by income, time, imperfect memory and calculating capacities, and other limited resources, and also by the available opportunities in the economy and elsewhere. These opportunities are largely determined by the private and collective actions of other individuals and organizations.

Different constraints are decisive for different situations, but the most fundamental constraint is limited time. Economic and medical progress have greatly increased length of life, but not the physical flow of time itself, which always restricts everyone to twenty-four hours per day. So while goods and services have expended enormously in rich countries, the total time available to consume has not. Thus, wants remain unsatisfied in rich countries as well as in poor ones. For while the growing abundance of goods may reduce the value of additional goods, time becomes more valuable as goods become more abundant. Utility maximization is of no relevance in a Utopia where everyone’s needs are fully satisfied, but the constant flow of time makes such a Utopia impossible.
This is from University School of Chicago’s the late Gary Becker’s Nobel Prize Lecture in 1992 (hat tip Tim Taylor). I used to read regularly Professor Becker and his partner Richard Posner’s blog until I got overwhelmed by financial reading materials.

Japan’s Nikkei Tumbles 2.93%; Will the 13,750 Support Hold?

Typically vacations should give people time and space to relax and or de-stress. The Japanese celebrated four days of holidays from May 3-May 6.

But instead of returning with a sanguine outlook, Japanese stock market participants went into an equity dumping mode.

image

The Nikkei 225 tumbled 2.93% today. The Topix got drubbed 2.58%

Here is what I wrote last Sunday:
For political economies that seeks to see price inflation like Japan, did Prime Minister Shinzo Abe order supply side constrains to boost inflation? The answer is no. What PM Abe did was to have the Bank of Japan’s governor Haruhiko Kuroda generate a 2 percent target inflation rate through quantitative easing by doubling the monetary base
[clip_image005%255B3%255D.jpg]
The initial result has been to balloon a stock market bubble. Unfortunately given that one of the three arrows—the monetary policy arrow—has been halfway the target, Japan’s year on year M2 growth seem to have fizzled out. And the creature of the doubling of monetary base—the Japanese stock market bubble via the Nikkei (right)—seem to have corresponded nearly symmetrically with the year on year changes of the money supply. 

Now Japan’s Wall Street has been desperately hoping that BoJ’s Kuroda will introduce more quantitative easing if not an extension!

But with the recent imposition of sales taxes last April which most likely will have a negative impact on Japan’s economy over the long run combined with likely scenario that the BoJ withholds from expanding Abenomics…watch out! As a side note I think that the BoJ will eventually extend but again there is no free lunch and inflationism will hit a natural [economic or political] limit
The above excerpt seems like a coincidence relative to today’s outcome.

But as I pointed out, Japanese money supply has been in a deceleration. This indicates that the monetary force that has previously pushed the Nikkei up appears to have reversed, and so with previous stock market boom. Yet today’s selloff may be just one of the symptoms. 

image

Today's sell down paints dreary picture for the Nikkei. 

The green trend line reveals of the support level at around 13,750. The blue channel looks like a bearish descending triangle. A breakdown of the two support levels would signal trouble as they would signify a volte-face of the “animal spirits”

image

And this does not also augur positively for PM Abe and BoJ’s Kuroda’s monetary arrow of attaining an inflation target of 2%. The USD-yen has been in consolidation for the past 4 months as the Nikkei has weakening. In short, the yen has stopped declining.

Will the mini-boom reverse morph into a grand bust? Or will PM Abe and BoJ’s Kuroda save the day for Japan’s Wall Street with more easing?   

This is getting to be a lot interesting

OECD follows IMF in the Downgrade of Global Economic Growth due to Emerging Market Woes

Last February I wrote
If emerging markets has been attributed by some as having pulled out the global economy from the recession of 2008, now will likely be the opposite dynamic, the ongoing mayhem in emerging markets are likely to weigh on the global economy and equally expose on the illusions of strength brought upon by credit inflation stoked by inflationist policies.
Mainstream institutions have only begun to recognize the contagion aspect of the above quote. 

From Reuters:
Advanced economies will increasingly have to drive the recovery as formerly fast-growing developing economies falter, the OECD said on Tuesday, as it downgraded its outlook for growth.

The world economy is set to grow 3.4 percent this year before accelerating to 3.9 percent next year, the Paris-based Organisation for Economic Cooperation and Development said.
The OECD follows the IMF whom also trimmed its outlook fro global economic growth in early April due to “ anemic output in Europe and Japan hobble the recovery and emerging markets struggle with rising borrowing costs”.

The OECD "hopes" that advanced economics will offset growth woes of emerging markets. This is unlikely because—again as I wrote last February: (bold original)
if the adverse impact of emerging markets to the US and developed economies won’t be offset by growth (exports, bank assets and corporate profits) in developed nations or in frontier nations, then there will be a drag on the growth of developed economies, which would hardly be inconsequential. Why? Because the feedback loop from the sizeable developed economies will magnify on the downside trajectory of emerging market growth which again will ricochet back to developed economies and so forth. Such feedback mechanism is the essence of periphery-to-core dynamics which shows how economic and financial pathologies, like biological contemporaries, operate at the margins or by stages.
We have already seen clues of such feedback mechanism with the US barely posting a positive growth (.1%) during the first quarter.

image

But the mainstream continue to cheer on the data that the U.S. added 288,000 jobs in April, “the biggest spike since January 2012”.

But this florid growth figures comes with a kink; a large number of Americans have been dropping out of the work force 

Reports the Marketwatch Blog
Yet the size of the labor force sank by 806,000. That’s the biggest drop since a 848,000 plunge in October and you have to go all the way back to 1981 to find another 800,000-plus decline. Labor-force changes are measured by the “household” survey that interviews Americans directly.
The chart above from Northern Trust reveals to us the secret of how the US economy will reach a full employment—a zero bound work force!

Yet analyst Peter Schiff tells us that the basis for the big boost in jobs have been questionable, Mr Schiff notes “that more than 80% of the 288,000 jobs came from birth/death assumptions the government makes about the net number of new companies that formed during the month and the number of people those companies would have been expected to hire”. 


image

And Mr. Schiff’s observation seem to be consistent with a study from Brooking institutions that exhibits “US businesses are being destroyed faster than they're being created” as quoted by the Zero Hedge.

In other words, the basis for the mainstream's "hope" via the birth/death assumptions may not be representative of actual conditions.

In addition, the quality of where jobs have been added, according to Mr. Schiff have been in the “in low-paying service sector and retail jobs”

These are manifestations of the transitions of the periphery to core dynamic of the bubble cycle in progress.

OECD’s "hope" seems now anchored entirely on the US whom has been weightlifting the world from a global Black Swan. 

Yet much of the global financial markets (particularly the stock markets) have been in a one way trade founded on the same hopium. The US now holds the key as to whether the one way trade will be sustained or not. 

All eyes on the US now.

Tuesday, May 06, 2014

Video: Milton Friedman on the Robin Hood Myth

The late Nobel Prize winner Milton Friedman explains via the "Director's law" why the popular perception of the Robin Hood role of governments is a myth. 

(hat tip Cafe Hayek)