Dow Jones to Underperform Relative to Emerging Markets Over the Coming Years

Even with the recent bounce in the US equity markets it is my view that over the coming decade or so they will underperform relative to Emerging Markets.

Dow Jones 200 Year chart courtesy of BCA Research

Looking at the BCA Research 200-year chart, the US Dow Jones Industrial Averages periodically hits critical points and fluctuates within the level for a span of years before advancing. This suggests that returns would likely be in low single digits or even negative. BCA expects the 10,000 to hold gyrate within the decade. Quoting BCA, “This level has been a barrier this decade, and a broad trading range around the 10,000 level should persist for many years. We are cyclically bearish on U.S. equities, and the Dow should drop below 10,000 before a Fed rate pause and lower bond yields provides relief. The longer-term outlook remains uninspiring, because stocks are not cheap, and the post-1981 era of plunging interest rates and rising P/E ratios is mature. Bottom line: equity investors must play the cycles in order to generate decent returns, and our current advice is to stand aside.”

Where money moves where it is treated best, it looks as if emerging market assets would benefit from a US underperformance



 

The Cure Is Worse Than The Disease

The Cure Is Worse Than The Disease

``A government that is big enough to give you all you want is big enough to take it all away.” - Barry Goldwater, (1909-1998) ex-US Senator

I would like to point out that in spite of the bunch of incorrigible weenies crying for the scalp of the government, the firming Peso and the buoyant Philippine Stock Market is proving these naysayers wrong, thus far.

Yes, we Filipinos are soooOOOooo endemically fragmented to find pleasure in intrigues and controversies such that a foreign writer once labeled us as having a ‘Damaged Culture’. Why so? Not simply because bad news sells, but in the Philippine setting, perpetual gloom and doom is deeply ingrained in our culture because alot of us try to be self styled improvers.

Like political butterflies that jump from one party to the other, there won’t be satisfaction unless power is bequeathed upon them. As Eric Hoffer wrote in his book the True Believer (p.14), ``A man is likely to mind his own business when it is worth minding. When it is not, he takes his mind off his own meaningless affairs by minding other people's business.' This minding of other people's business expresses itself in gossip, snooping and meddling, and also in feverish interest in communal, national, and racial affairs. In running away from ourselves we either fall on our neighbor's shoulder or fly at his throat.” Yes for a start maybe we should comprehensively identify and accept our shortcomings, and work for the collective betterment instead of simply minding someone else’s business.

Take the case of the recent group of improvers or messiahs agitating for an ouster of the incumbent government. These seditious buttheads offer NO CONCRETE viable alternative programs on how to manage the government yet, in the pursuit of power, they would opt to risk the already tenuous financial position that the country is into.

Let me cite an example, because high energy prices have percolated to the consumer goods and services (headline inflation), they clamor for a repeal of the Oil Deregulation Act and to either reinstitute the defunct Oil Price Stabilization Fund (OPSF) or worst, Nationalize the oil industry to head off higher consumer prices.

They expect the government to takeover the buying and selling functions of oil at prices fixed or predetermined and not on market terms. If oil prices in the world market falls below the pegged levels oil companies then will have to pay the difference so the government could shore up its buffer, and if oil prices moved higher than the pegged prices then the government would have to draw out from its buffer to pay the oil companies. The idea looks theoretically plausible but is predicated upon a stable/less volatile global oil price environment. For if oil prices continue to race higher and the buffer is depleted then the government’s recourse would be, needless to say, to borrow money to cover the buffer.

In effect, they are asking for more government subsidies in an era of RISING oil prices (Crude Oil is in a bullmarket for already about 5 years~ with more to come!!!). This translates to BOATLOADS of ADDITIONAL DEBTS for a country at the throes of an economic ‘crisis’. They are prescribing short term gains (relief) at the cost of the future. It is a case of the ‘cure is worst than the disease’.



3 year Chart of New York’s Crude Oil WTIC

Even while their representative economist acknowledges that India and Indonesia have been undertaking policy changes to lift energy subsidies, their pronounced leader have steadfastly espoused on this feckless government interventions.

Yet, in the same mold they refuse to bite bullet with increased taxes (VAT) while the members of clergy included in the group are staunchly opposed to the MINING Act. Imagine, crying for an ouster of the government on xenophobic grounds, of course, they have not directly said it (albeit outspoken detractors during the recently ratified Mining Act of 1995 last December) but instead used the public’s angst on higher consumer prices to promote their outmoded leftist ideals. Nonetheless, the typical scapegoat of corruption remains as the byword for the touted radical change.

So what solutions do they offer?

On the revenue side, they refuse the direly needed additional Taxation and yet reject access and development to an industry that may uplift and alleviate the country’s economic status.

On the spending side, they espouse on more government subsidies to pacify the public’s present predicament which is a result of an intricate WORLDWIDE phenomenon and NOT of a domestic one, and cries to expand government presence to cleanse itself.

The probable result, La plus ca change, la plus c'est la meme choses. The more things change, the more things stay the same.

In addition, how can they curb the de rigueur culprit the ‘corruption’ malaise when expansive government is one of its major causes? According to economist Christopher Lingle, in his article Graft Goes Hand in Hand With Big Government (also posted at my blogsite)…

``Instead of expanding political power to eradicate corruptive practices, the opposite is needed. An essential problem with corruption is that it most often promotes excessive government power, so reducing political intervention in people's lives is the right direction. A distrust of the private sector and unfettered markets invites regulation by public officials that issue licences and permits. But these monopolistic powers meant to serve citizens create power imbalances that can impose harm on citizens that face incentives to protect themselves through bribery. Instead of moralising to prevent public graft, it is better to undertake legal reform of the institutional infrastructure. A fundamental change in political culture combined with a shift away from granting governments with extensive powers of intrusion can help root out corruption.”

Finally, these self-righteous imbeciles should as well train their guns on the following:

1. US Federal Reserve for expanding credit to an unprecedented scale and its negative real interest rate policy which fueled massive speculative positions globally,

2. The excess printing of paper monies by the collective governments stoking an inflationary environment,

3. The OPEC members for nationalizing their respective oil industries thereby misallocating capital investments that led to the present underinvestments,

4. The Chinese government for adapting a market-based economy (from less than 100,000 cars in 1994 to over 2 million cars 2004),

5. The US dollar-remimbi peg that accelerated an infrastructure and real estate boom thereby increasing demand for oil,

6. The war on terror that has disrupted oil supplies,

7. The Bush administration for the continually loading up the Strategic Petroleum Reserve, and

8. The lawyers and environmentalists for increased regulations on explorations and oil refinery requirements.

Does a change in the administration alter any of these landscapes? I guess not.

 

Christopher Lingle: Graft Goes Hand in Hand With Big Government

In the local arena, media brims with dreary news articles spotlighting on widespread and endemic corruption as the major deterrent to the Philippines economy. Yet, for all these self-righteous cavilers, it appears that the only known solution to the current predicament is an outright change of government (Quo Vadis?). In other words, self-styled messiahs preaching motherhood solutions, which practically reinforces corruption's vicious cycle. It is a case of having a 'cure that is worse than the disease'.

This propitious article from Christopher Lingle singles out Big Government as the main culprit to the systemic graft culture…

Graft Goes Hand in Hand With Big Government

By Christopher Lingle*
Bangkok Post

March 22, 2005

Some of the most corrupt governments in the world are in Asia, according to Transparency International. Bangladesh is second from the bottom with Indonesia, Pakistan, Vietnam, Papua New Guinea, India and the Philippines hovering near the abyss. An annual survey of executives by Hong Kong-based Political and Economic Risk Consultancy, or Perc, identifies the most corrupt Asian governments. While Indonesia tops the chart for the region, India is close behind, with oppressive bureaucracies demanding bribes at all levels of government that range from payment for admission to better schools to payment for installation of basic services.

While China is third on the Perc list, it falls in the middle of the Transparency International ranking. In all events, Beijing reports that there are record inflows of foreign direct investment despite costs of corruption estimated at 3-5% of gross domestic product. Official Chinese sources cite cases of more than 4,000 corrupt officials that absconded with a total of at least $600 million (23.2 billion baht). Managers of the Guangdong branch of the Bank of China stole over $483 million (18.6 billion baht) in 2001 before fleeing the country. Other senior managers, including the head of the Bank of China, authorised large loans to friends or family members that became non-performing.

This sort of corruption is also a structural and deep-rooted problem in many emerging market economies outside of Asia. In some countries, illicit payments had a benign beginning that was interpreted as an expression of generosity. This perception probably contributed to a general tolerance of low levels of corrupt and illegal actions. A wide agreement on corruption points to the abuse of authority and misuse of discretionary power in pursuit of personal interests. However, considerable confusion and disagreement exists over the impact of corruption.

One flawed perception of bribery is that it acts as a lubricant to facilitate the management of political affairs. This bizarre view suggests that bribing officials can be beneficial to economic activity and increases the efficiency of the bureaucratic system. But corruption tends to undermine political stability. Japanese prime ministers and other high officials have been forced from office and President Joseph Estrada of the Philippines was jailed for corruption. China executed two top officials for taking bribes, and South Korea has recorded many high-level bribery scandals.

Similarly, corruption pollutes society by lowering the authority of public officers. And it offends a sense of social justice, since a disproportionate burden of corruption falls upon lower income groups that are most vulnerable to rapacious public officials. What is perhaps worse is that corruption can reinforce the survival of dishonest officials or dictators by providing them with illicit funds. And allowing corruption can be a means for despots to control their citizens since those that engage in corrupt activities are less likely to object to abuse of power by rulers.

It is a mistake to characterise the economic effects of bribery as beneficial. This nonsense ignores large economic costs. For example, corruption reduces economic efficiency by destroying the notion of fair competition and by imposing costs on the private sector that include higher costs for international credit. According to officials with the Asian Development Bank, as much as one-third of public investment in some Asia-Pacific nations has been lost to corruption. A UN report estimated that eliminating corruption would boost India's economic growth by 1.5 percentage points a year.

The financial turmoil in Asian emerging markets in 1997-98 can be attributed to a reassessment of risk that resulted in a crisis of confidence and net outflows of capital. Governments unable to provide an environment to protect asset values or with domestic financial institutions seen as non-responsive to market signals were punished.

There is also confusion over how to end corruption. Many observers see corruption as a moral issue and blame greed. This moralistic perspective emphasises the increased moral standards of public servants or the imposition of severe punishment on violators to eliminate graft. But self-righteous pleas to end corrupt practices do not alter flawed incentive structures that arise from legal and cultural institutions. Even moral people may act improperly when facing warped incentive structures. Similarly, immoral and imperfect individuals tend to act more appropriately if the incentive structure rewards them for doing so.

Instead of expanding political power to eradicate corruptive practices, the opposite is needed. An essential problem with corruption is that it most often promotes excessive government power, so reducing political intervention in people's lives is the right direction. A distrust of the private sector and unfettered markets invites regulation by public officials that issue licences and permits. But these monopolistic powers meant to serve citizens create power imbalances that can impose harm on citizens that face incentives to protect themselves through bribery. Instead of moralising to prevent public graft, it is better to undertake legal reform of the institutional infrastructure. A fundamental change in political culture combined with a shift away from granting governments with extensive powers of intrusion can help root out corruption.

Corruption and other abuses of government are more likely to occur when individual rights and freedoms are sacrificed to promote collective goals or collective rights. For example, apartheid excluded blacks from political and economic participation by giving special rights to the South African white community. These abuses could not have occurred if individual rights were protected. Individuals wishing to live in a free and open society with less corruption should promote free and open economies with less government involvement in their lives. Competition in open markets involves legitimate actions and not unlawful means, so that corruption between consumers and suppliers is unlikely with both parties having equal power. When governments are constrained by the rule of law that protects individual rights, there will lead to less corruption and greater freedom of actions for all citizens.

About the Author: Christopher Lingle is global strategist for eConoLytics.

World Bank Press: Support Deal 'Could Become Asian IMF'

World Bank Press: Support Deal 'Could Become Asian IMF'

The currency swap agreements in East Asia providing mutual protection from financial emergencies could develop into an Asian monetary fund (AMF), Masahiro Kawai, a leading Japanese proponent of regional financial integration, said yesterday, The Financial Times reports.

Agreed after the 1997-98 Asian financial crisis, and known as the Chiang Mai Initiative, the $39 billion in bilateral support arrangements between Japan, China, South Korea and 10 south-east Asian countries are expected to double in value and may be transformed into a multilateral system, Asian finance ministers said on Wednesday. "The Chiang Mai Initiative has the potential to become an Asian monetary fund," said Kawai, a former Japanese finance ministry official and World Bank economist who will head a new regional financial integration office at the Asian Development Bank (ADB). He was speaking in Istanbul, where the ADB was holding its annual meeting until Friday. Kawai is an adviser to Haruhiko Kuroda, the ADB president who has made it his mission to promote financial co-operation in Asia.

The suggestion of an AMF is controversial because it was proposed by Japan and others after the Asian crisis but rejected by the US and the International Monetary Fund. Critics argued that a regional fund would duplicate the IMF's work and might be unwilling to impose the harsh financial conditions on Asian governments that could be required in an emergency. Kawai said the idea of a secretariat for the Chiang Mai Initiative - a first step in the creation of a fund - was "clearly on the table", although there would inevitably be arguments about where it should be based.

East Asian governments have already begun loosening their adherence to IMF "conditionality". The finance ministers agreed this week to double the proportion of emergency funds that could be disbursed without the beneficiary implementing an IMF program to 20 percent from 10 percent. Kawai acknowledged that the Chiang Mai states did not yet have the bureaucratic structure to conduct the sort of detailed economic surveillance done by the IMF.

Despite receiving multi-billion dollar bail-outs, some Asian governments criticized the IMF for its handling of the 1997-98 crisis, and Kawai said the IMF's expertise in monitoring national economies could be complemented by a fund with an understanding of the region and how it interacted. "The Asian crisis experience told us that this purely country-focused approach doesn't work, because of contagion (between one crisis-hit country and another)," Kawai said. Among the next steps suggested by Kuroda and Kawai was the creation of a mechanism to link Asian currencies, as the European currencies were in the run-up to European monetary union.

Kyodo (Japan) reports that East Asian countries achieved a major milestone on a long road to a European Union-type regional monetary union at the ADB Annual Meeting. A principal pillar of their agreement is to substantially increase the total amount available for bilateral currency swaps. Ministers said in a joint statement that they agreed on a "significant increase in the size of swaps" and that they "favored an enhancement of up to 100 percent increase of the existing individual arrangements."

"When it comes to expanding the size, we must try to conclude bilateral negotiations as soon as possible, because we need to send a clear message that we will never let a crisis like the Asian crisis, or a liquidity crisis, happen again," Japanese Finance Minister Sadakazu Tanigaki said. Another is to evolve the network of currency swaps into one to be operated multilaterally, rather than bilaterally, so as to prevent any future financial crisis in one country from spreading into a regional one.

****

Prudent Investor says…

It would be natural for the US to oppose any form of regional financial integration, considering that its economy, particularly the consumers which makes up about 70% of the country’s GDP, have been indirectly subsidized by Asian Central Banks. With more than a trillion dollars in cumulative foreign exchange reserves, the purported financial integration means less demand for US dollars which also translates to diminished economic, financial and political hegemony.

On the other hand, Asia stands to benefit from increasing trades and growing capital flows within its borders, which could be accentuated by the proposed integration.

In a nutshell, the denouement of the current wealth redistribution from the US to Asia would take its form via Asia's economic and financial integration.

Reuters: Emerging debt-Market shrugs off GM, Ford downgrades

During the past month or so, while rising interest rates anxieties increased the risk aversion profiles of investors thereby affecting emerging assets values, flagging US corporate debt status as that of General Motors and Ford exacerbated these conditions. However, with the recent downgrade of the debt ratings of GM by S & P 500 the sentiment appears to have shown that investors have learned to distinguish between the fundamental profiles of US corporate debt from emerging market assets as demonstrated by emerging markets holding ground in spite of the downgrades.

Quoting a Reuters report…

"Today encapsulated the scene of the last few months, which is a tug of war," said Mohamed El-Erian, who manages $23 billion in emerging market debt as chief emerging markets portfolio manager at PIMCO, the world's largest bond fund.

"On the one hand you have pressure on the market coming from external factors ... the other side of the tug of war is improving fundamentals and the general maturation of the asset class, which is bringing in more investors."

"The selloff, which was the typical kneejerk to bad credit news, immediately produced buyers," he said. "We snapped right back and we're ending the day stronger."

"The more internal resilience the asset class shows, the less willing hedge funds are to short the asset class," he said. "The roller coaster (rides) are becoming much shorter."

World Bank: Manila Ponders Securitization Of Remittances.

Finally, an innovative way to access unexploited reserves.....

World Bank: Manila Ponders Securitization Of Remittances.

The Philippine government is looking to use securitization to tap into the billions of dollars of foreign currency sent home each year by the 7.5 million Filipinos living or working overseas, The Asian Wall Street Journal reports.

Among the ideas being touted by foreign and local banks, as well as supranational bodies such as the Manila-based Asian Development Bank and the World Bank, is securitization whereby future remittance flows would provide the assets behind a bond issue. The structure has been used successfully in places such as Mexico, Brazil and Turkey, but never before in Asia -- surprising, perhaps, since India and the Philippines are the world's largest recipients of remittances after Mexico.

In February, Filipinos working outside the Philippines sent back $720 million to their families, 19 percent more than a year earlier. The Philippine central bank projects remittances to reach $9 billion this year, compared with a record $8.54 billion set in 2004, as more Filipinos seek work overseas and are increasingly taking higher-paid jobs as nurses, engineers or musicians. Repatriated funds last year accounted for about 10 percent of nominal gross domestic product and 15 percent of total current-account receipts.

For decades, that cash has gone -- through banks, remittance centers or in suitcases -- back to workers' families to be spent on food, education and homebuilding or, if there is any left over, on excess consumption or to idle in the bank. But the government, for one, has been considering a better use for the remittances. Iluminada Sicat, officer-in-charge in the Economic Statistics department at the Finance Ministry, suggested they could be channeled to invest in small businesses. Overseas workers' earnings also could be used to finance the country's foreign-exchange requirements, she said. The ADB also is pushing the Philippines to find ways of harnessing the cash flows to support developmental needs. In 2003, one-quarter of the 86 million Philippine population still lived below the poverty line. National Treasurer Omar Cruz said last month the government was again studying the idea.

Bloomberg's John Berry: U.S. Shows Some Parallels With Argentina of '90s

While the Philippines’ economic and financial landscape may be vulnerable to a cataclysmic debt default ala Argentina, it represents only an iota to the building seismic movements underneath the global financial and economic setting. Bloomberg Federal Reserve analyst John Berry notes that a book ``And the Money Kept Rolling In (And Out)'' (published by Public Affairs) written by his colleague, Washington Post financial reporter Paul Blustein, of the US turning into an Argentina ``It could happen here,'' Blustein writes.

``The words of Miguel Kiguel, Argentina's former finance undersecretary, are apropos: `Once you know the markets are there, and there is financing, you behave as if financing will be there forever.' This is a stark reminder of the current complacency among incumbent political and administrative leaders.

China Signs Trade and Investment Deals With Philippines Worth $1.5 billion

China sealed a $1.5 billion trade and investment deal with the Philippines today. Most of which were centered on the MINING and Energy and OIL exploration industry. Yet if you look at our Phisix these are the main issues being jettisoned and disgorged by local investors as if these industries are condemned to perpetual damnation. I wonder who is accursed? This is the report from BBC...

That includes agreeing investments and loans worth more than $1.5bn, to fund Philippine infrastructure and mining projects.

Mining is a key growth area as President Arroyo tries to cut debt, improve the economy and restore investor confidence.

The government says the Philippines is home to vast reserves of mining wealth, most of it unexploited.

China's state oil firm also agreed to a possible $10m investment to look for oil off the coast of Palawan island in the western Philippines.

As Chinese firms look to fuel an economy that is expected to grow 8.5% this year, the Philippines hopes to benefit from that enormous appetite for resources.

World Bank: Nigeria At Risk Of $33 Billion Default

It has been a de rigueur to brand the Philippine economic setting as having segued into a state of crisis or of concerns of the possibility of ending up in an Argentinean-like morass. While the domestic financial balance sheets do reflect an exigent impasse requiring urgent reforms, it is not time to push on the panic button.

Because most of us are too confined with the domestic perspective this press release from World Bank would show that there are countries that have even more pressing problems than us…take for example Africa’s largest oil producing country, Nigeria…

World Bank: Nigeria At Risk Of $33 Billion Default

Nigeria is heading towards an Argentinean-style default on its $33 billion of overseas debt unless western creditors accept a deal to alleviate the country's financial burden, The Guardian (UK) reports a delegation from west Africa's biggest economy said in London yesterday.

As part of a four-country visit, the senior politicians warned that public unrest was growing over the hard-line approach adopted by the west and that time was running out for negotiations. Farouk Lawan, the chairman of the finance committee in Nigeria's house of representatives, said: "It is unconscionable that Nigeria has paid GBP3.5 billion in debt service over the past two years but our debt burden has risen by GBP3.9 billion - without any new borrowing. We cannot continue. We must repudiate this debt." Lawan, who moved a resolution last month calling on the government of president Olusegun Obasanjo to repudiate the debt, said parliament might trigger a crisis by refusing to sanction the funds to pay creditors.

"We are getting close to saying that we won't pay."

Britain is Nigeria's largest creditor, with 21 percent of its debt, and Gordon Brown has been backing an initiative to use Nigeria's windfall from higher oil prices to pay the creditors a fraction of what they are owed. Treasury sources in the UK said that no figures were at present on the table, although the starting point for negotiation has been a paper from a Washington think-tank suggesting that Nigeria should pay 30 cents for every dollar owed. That would mean Nigeria paying around $9 billion from its $17 billion reserves. The UK believes a strong Nigeria is vital for growth in the whole of west Africa, and has been seeking to broker a deal.

Other creditors have questioned whether Nigeria has really overcome the corruption that has bedeviled the country for decades and have expressed concerns about the lack of an International Monetary Fund economic reform program.

The group said Nigeria's plight was far worse than that of Argentina, which this year presented its creditors with a take it or leave it offer to pay 30 cents for each dollar owed. Lawan said 79,000 children under five were dying every month through a lack of healthcare, clean water, food and shelter. Todd Moss, of the Center for Global Development in Washington which came up with the proposals for the debt write-down, said the creditors should accept an offer. "In 2005 Nigeria has an unusual amount of cash on hand and an opportunity finally to resolve its problem. The creditors also have solid political, strategic and humanitarian reasons to cut a deal. Missing this opportunity will not only lose creditors their best chance to collect this debt but could also threaten the economic and democratic reforms in one of Africa's largest and most pivotal countries."

Meanwhile, in a special report on Nigeria, The Financial Times writes that the stakes have been rising in Nigeria's bid for relief on its foreign debt which, at almost $36 billion, is the largest in Africa. The government wants a deal from the Paris Club of bilateral government creditors, which holds the bulk of the debt, for a two-thirds reduction.

But arguing the case for debt forgiveness has been hard at a time when Nigeria has been using high oil export prices to build record foreign exchange reserves, now equivalent to abut 60 percent of its outstanding external debt. But Ngozi Okonjo-Iweala, finance minister, insists: "We don't want to wait until oil prices crash." Britain, the leading creditor with about $8 billion outstanding, has been Nigeria's chief supporter.

Nigerian negotiators say the US has also been sympathetic, with the strongest reservations coming from the Netherlands, Germany and Japan. Paris Club negotiators, however, want first to see proven results of Nigeria's reforms, especially in tackling corruption.

The Financial Times also writes in a separate piece that Nigeria has been growing in real terms at an annual rate of six percent or more but is still searching for a more diversified economy that would create jobs and make a decisive impact on poverty. The counterweight to Nigeria's position as Africa's largest oil producer is its growing population of more than 130 million. Oil revenue per head is less than any of the other top exporters. Last year's, after deduction of its share of production costs, worked out at $0.53 per day for each Nigerian. The windfall from oil prices last year brought savings of $5.9 billion from revenues above the budgeted price level of $25 a barrel. Half of this is earmarked for priority spending areas this year, such as education, health and vital infrastructure facilities, the remainder kept as a buffer against future oil price volatility, in an effort to avoid the zigzag growth pattern Nigeria has suffered in the past.

Philippine Crisis Pales in Comparison to Exploding Global Imbalances

Philippine Crisis Pales in Comparison to Exploding Global Imbalances

Yes, the Philippines does look as if it is in a perennial state of quagmire. However if one would compare the current global imbalances with that of the Philippines, our so called ‘crisis’ pales in comparison to whatever we are facing internationally. In a strongly worded article ex-Fed Chairman Paul Volker warns that “We (US) are skating on THIN ICE” which I strongly suggest that you read.

Moreover, if Argentina, which we are unjustifiably lumped with (according to diverse views of various renowned economists-pegged exchange rate, raising taxes during economic slowdown, rigid IMF conditionalities as possible culprits for its default-totally dissimilar to our economic landscape), is the paragon of the economic turmoil that we are currently faced with, then Buenos Aires’ successful renegotiation of its debt default, the largest ever in the world of more than $100 billion, makes one wonder if this default option would also present to be viable for the Philippines. For your information about 76% of the total sovereign creditors accepted a haircut of about 30 cents to a US dollar. This means that creditors took in about 70 cents loss!

And to think that this should lead Argentina to an economic pariah is certainly a misconception! Well, the debt negotiation resulted to IMF infusing $3billion, post negotiations we note that China, South Korea and several regional private firms have been investing, and remittance from its overseas workers are ballooning, it looks as if Argentina, despite its economic woes has progressed a lot and beyond any expert’s expectations!

Let me quote Larry Rohter of New York Times, ``The Brazilian oil company Petrobras bought a stake in a leading energy company. Another Brazilian company, AmBev, has acquired a large interest in Quilmes, Argentina's leading beer brand, and a Mexican company has bought up control of a leading bread and cake maker…Asian countries, with China and South Korea in the lead, have begun to move in. During a state visit last month, the Chinese president, Hu Jintao, announced that his country plans to invest $20 billion in Argentina over the next decade…But the bulk of the new investment comes from Argentines who are beginning to spend their money at home, either bringing their savings back from abroad or from under their mattresses. For the first time in three years, more money is coming into the country than is leaving it.”

Just look below at Argentina’s key benchmark index, does it manifest of a crisis after its debt default in December 2001?

Argentina Merval Index

In fact Argentina has been bouncing back strongly on strong commodity prices and investments from foreign private and state firms, and local overseas remittance money as stated above.

So if you guys really want to consider the Argentine option then I would suggest that you read an article by Grant Nülle of the Ludwig Von Mises institute who advocates debt repudiation for the Philippines in ``Raiders of the Taxpayer’s Money”, although I do not support such moves because it is fraught with risks, especially in a global monetary environment which appears to be slowing in liquidity growth.

Finally, the appreciating peso should help alleviate our debt burdens. (Haven’t you noticed the paradox, despite the worrisome debt burdens the peso continues to appreciate?)

Again global macro developments call for Asian currencies to adjust relative to the overvalued US dollar to be able to mitigate the growing current account imbalances and bubbly credit markets worldwide, and thus the Peso should benefit from the regional flows despite being by plagued by its domestic debt burden.

Vital fiscal and governance reforms are thus required. However, worst comes to worse there is always an option for some kind of settlement (restructuring) and we must not to be hoodwinked by spooky headlines.

The Economist: Unrest that riles Tokyo and worries Beijing

Growing tensions between China and Japan underscores emerging geopolitical risks...According to the Economist…

China’s government worries that if it is seen as too weak towards Japan, or cracks down too hard, the protesters could turn against the party. In the last century, pro-democracy unrest in China was often closely linked with patriotic demonstrations. Many participants in the recent protests have been university students, a group kept under particularly close watch by the authorities since the student-led protests in Tiananmen Square in 1989. The internet and mobile phones have enabled rapid mobilisation (organisers say more than 20m people have signed an electronic petition against Japan’s UN bid). The nationalist genie, once unbottled, could prove hard for China to restrain.

Is China showing signs of losing grip?

A Whiff of Stagflation?

Too much rate hikes pricks the bubble, a slowdown would probably compel the US Fed to ease; the probable consequence…stagflation. Discerning excerpts from Mr. Paul Krugman published on the New York Times entitled “A Whiff of Stagflation”

``What's driving inflation? Not wages: labor costs have been falling, because wages are growing less than productivity. Oil prices are a big part of the story, but not all of it. Other commodity prices are also rising; health care costs are once again on the march. And a combination of capacity shortages, rising Asian demand and a weakening dollar has given industries like cement and steel new "pricing power."

``It all adds up to a mild case of stagflation: inflation is leading the Fed to tap on the brakes, even though this doesn't look or feel like a full-employment economy…Can the Fed stop raising interest rates and go back to rate cuts without causing the dollar to plunge and inflation to soar?

``Or suppose that there's some kind of oil supply disruption - or that warnings about declining production from Saudi oil fields turn out to be right. Suppose that Asian central banks decide that they already have too many dollars. Suppose that the housing bubble bursts. Any of these events could easily turn our mild case of stagflation into something much more serious.”

How serious, hyperinflation or deflation?

Newsday's James Pinkerton: 3 signs of impending 'Asian Century'

James Pinkerton: 3 signs of impending 'Asian Century'

James Pinkerton writes in the Newsday that geopolitics have been shaping into `three wheels’, ``First, China gets closer to India, as the two nations seek a New Asian Order. Second, China grows more hostile to the United States and Japan. Third, China bolsters nuke-crazy North Korea.

In Favor of A National ID System?

In Favor of A National ID System?

The following presentation of a fictional pizza ordering scenario demonstrates of how GOVERNMENTS intends to run our lives. Turn on your speaker and click on link:

http://georgetoft.com/presentations/information_privacy/pizza_order.swf

Christopher Lingle: Excessive Asian Reserves?

Excessive Asian Reserves

Christopher Lingle argues that excessive Asian reserve currencies risks can pose distress in the financial monetary system as he argues that ``This untenable condition can lead to the sort of turmoil in foreign currency markets last seen in 1997-98. Massive currency realignments and high volatility devastates balance sheets, especially in those countries with weak financial sectors and poor corporate governance.”

Further he suggests that instead of the uneconomical allocation of capital in accumulating US dollar assets by central banks, this be diverted into financing private entrepreneurs ``They would lower unexpected currency risks by divesting US assets that already have low interest rates. And the costs of holding foreign reserves can be reduced if lent to private entrepreneurs since private investors always seek the highest returns for a given risk while governments do not.”

Ex- US Federal Reserve Chairman Paul Volker: "We are skating on increasingly thin ice."

Former Fed Chairman Paul Volker, as a keynote speaker in Stanford for Economic Policy Research last February 11^th, goes on the record to lambaste his successor’s policies, and highlighted the growing risk that may that may turnout to be catastrophic to the financial markets and global economy…

"Below the favourable surface [of the economy], there are as dangerous and intractable circumstances as I can remember.... Nothing in our experience is comparable…But no one is willing to understand [this] and do anything about it…"

"We are consuming… about six per cent more than we are producing. What holds the world together is a massive flow of capital from abroad… it’s what feeds our consumption binge... the United States economy is growing on the savings of the poor… A big adjustment will inevitably become necessary, long before the social security surpluses disappear and the deficit explodes."

"We are skating on increasingly thin ice."

Prudent Investor: Possibly ABN AMRO's downgrade triggered the Exodus

If you’d ask me, I think that today’s excruciating selloffs was an outlier, we took the biggest loss in the region where most of the bourses were up.

What would have caused this? Certainly for one, today’s activities manifested a huge foreign outflow, some P 364.404 million. Further the liquidations had been broad based meaning more issues encountered foreign selling than buying. So what would have prompted a selloff? Has there been any fundamental deterioration in the economic and political sphere that merited today’s carnage? Some say looming interest rate hike, I would argue that these had been floated for during the past weeks, and the latest rise in Philippine Treasuries would have had the market factored this in. In fact, according to a Businessworld report last month, it was foreign funds pressuring the BSP to raise interest rates. So how can foreign funds be selling when they themselves were asking for the rate increase?

Methinks that it is NOT the looming interest rate hike responsible for the bloodletting but yesterday’s disclosure on YAHOO news that ABN AMRO Holdings ``downgraded its rating on the Philippines to “neutral” from “overweight” citing the country's vulnerability to an outflow of foreign funds” (click on link). Apparently this “downgrade” on stockholdings came as a surprise and foreign money reacted violently to the susceptibility of the market to the whims of foreign funds. What is ironic about this is that ABN AMRO knows that the Philippine Market has been driven largely by foreign buying since June 2003, and because of the recent dollar squeeze it issued what is called as ``stating the obvious”. A Knee Jerk reaction.

Bloomberg's William Pesek: In Manila, Downgrades Are Good for Bonds

Bloomberg Asian Analyst William Pesek, finds it ironic that after two recent credit rating downgrades investment bank ING sees the Philippine debt as the “most attractive” in Asia. Citing economic growth, stabilizing politics, opportunities to fiscal reform, outsourcing opportunities, and tourism as strong selling points, Mr Pesek thinks that this administration has the window of opportunity to prove these bullish outlook right `` Like all windows of opportunity, this one may not stay open for very long. If the Philippines uses it wisely, its bondholders could be a happy bunch.”

The Philippines is into energy conservation mode

The Philippines is into energy conservation mode. Aside from the 4 day work week, the private sector is enticed to shift working hours to the evening via the price of time formula which according to energycentral, “time-of-use pricing formula which offers cheaper rates for electricity purchased at night until early morning when electricity demand is at its lowest.” Aside, to promote the use of alternative energy some 200 buses will be on the road using compressed natural gas. There are also reports that the government will be employing new traffic management scheme as well as a possible increases on vehicle taxes.

Commodities' Q1 rally puts other assets at risk in Q2

Commodities greatly outperformed stocks and bonds after the CRB Index hit a 25-year high in March, and it seems that the trend is likely to continue, according to a Reuters report by Nick Edwards, ``…their strength could intensify the downside risks for stocks and the global economy in the months ahead, money managers say… If similar patterns are repeated in the second quarter, the inflation risks that rampant rises in commodity markets stoke up in the broad economy could bring big trouble -- especially as they coincide with slowing company earnings and shrinking productivity gains.” Is this the beginning of the unfolding divergence???