Energy and Food Crisis: The Fallacy of Government Heroism

``The genius of capitalism lies in its ability to make self-interest serve the wider interest. The potential of a big financial return for innovation unleashes a broad set of talented people in pursuit of many different discoveries. This system driven by self-interest is responsible for the great innovations that have improved the lives of billions.” –Bill Gates

I’d like to profusely thank profound thinker and international fund manager, Mr. Louis Vincent Gave, CEO of the Hong Kong based Gavekal Capital for bequeathing two of their latest marvelous books to your lowly analyst, the Roadmap for Troubling Times and Jesus: The Unknown Economist. It feels wonderful to be in good graces with people whom I wish to emulate.

****

Over the week we came across an article where a high ranking church personality, South Cotabato Bishop Dinualdo Gutierrez, threatened to withhold communion rites to rice hoarders because of “greed” and correspondingly called on the Philippine President to impose “political will” to resolve the crisis.

GMANews quotes Bishop Guiterrez ``Something is wrong. The reason is greed of the businessmen. Some people are hoarding and the others are taking advantage of the crisis to get more money….She has all the power, so use the power to solve the rice crisis because there is supply but the price is critical. There is rice so it’s only a matter of will power of the president."

In a world of villains and heroes, Bishop Guiterrez espouses “hook line and sinker” the government propaganda that business people are “evil” and government as the “savior”.

And since rice is only a “matter of willpower of the president” this implies that Philippine government has an infinite stash, or like money, can “print up” the supply of rice that the people requires-where all PGMA needs to do is to wave the magical fairy wand and everybody’s problem will be settled. What Hooey!

This is exactly the oversimplistic socialist fantasy that has brought about the present predicament. When absurd politicking overwhelms economic reality or commonsense, then populist solutions will only lead to short term appeasement at the expense of greater and prolonged pain.

In a skewed sense, Bishop Guiterrez is right. More government “power” leads…not to resolve the crisis but to further exacerbate it.

Since the food crisis is related to the soaring oil and energy prices we might as well give some illustrations on why more government “heroism” or euphemism of interventionism is nothing but a fallacy.

Saudi’s King Abdullah, US President Bush Does Not Need The Bishop’s Communion

Hoarders and speculators have been vilified by the government, the pious and the populace as having “caused” today’s troubles.

But at $135 oil who is doing the hoarding?

From Reuters last April 13^th (highlight mine),

``Saudi Arabia's King Abdullah said he had ordered some new oil discoveries left untapped to preserve oil wealth in the world's top exporter for future generations, the official Saudi Press Agency (SPA) reported.

``"I keep no secret from you that when there were some new finds, I told them, 'no, leave it in the ground, with grace from god, our children need it'," King Abdullah said in remarks made late on Saturday, SPA said.

``The U.S. President George W. Bush in January urged the Saudi king to help tame soaring prices by encouraging OPEC to pump more oil. On separate trips to Saudi Arabia this year, the U.S. energy secretary also asked for more oil, while the vice president discussed high prices with the king.

``The kingdom has spent billions on building over 2 million bpd of spare crude capacity and is the only country in the world able to bring online large volumes of crude supply quickly to deal with unexpected supply shortages.”

More from the Business Intelligence, ``During the meeting, King Abdullah highlighted the significance of oil revenue and said that as long as there is oil, the Kingdom would not experience economic problems. “I told them once, 'may God give it long life'... they asked me what is that... I told them petrol. As long as petrol is there, we will remain well. Our country will not have any problems,” he said.

So not only has the request of the US President, the world’s most powerful nation, been rebuffed, the world’s largest oil producer has openly declared that it has purposely been withholding supplies because “their children need it”.

According to Swaminathan S. Anklesaria Aiyar of the Cato Institute, ``But countries imposing export controls, have, in effect, become hoarders themselves, creating an artificial scarcity in the world market, and an artificially high world price.” (underscore mine)

This simply epitomizes the escalating symptoms of the politics of RESOURCE NATIONALISM where government themselves have been the major hoarders and price manipulators of oil! Stated differently, the world’s oil or food crisis has been MOSTLY about geopolitics, or global governments’ attempt to control natural resources as an instrument to exercise the political heft.

From this perspective it wouldn’t be a farfetched notion to expect the increasing likelihood of prospective military conflicts emanating from heightening resource competition.

Of course the recent volatility in the marketplace has prompted the Saudi leadership to moderate its outlook, according to the New York Times, ``Saudi Arabia is currently pumping 9.45 million barrels a day, which is an increase of about 300,000 barrels from last month.

``While they are reaping record profits, the Saudis are concerned that today’s record prices might eventually damp economic growth and lead to lower oil demand, as is already happening in the United States and other developed countries. The current prices are also making alternative fuels more viable, threatening the long-term prospects of the oil-based economy.”

As you can see, when the winds of the political interest shifts, the Saudi leadership has shown its willingness to adjust accordingly in order to maintain its advantage.

But this is not just about Saudi, the US is the MOTHER of all “hoarders” with an above ground oil stockpile of 702.7 million barrels or representing 97% of capacity which is more than twice the size of private crude inventories with enough reserves to cover against 58 days of supply disruptions (AFP) through its Strategic Petroleum Reserves. Nevertheless, the US congress recently compelled the Bush administration to halt its shipments to the SPR.

And this is not restricted to the US alone, above ground stockpiles or strategic oil/petroleum reserves in China has been estimated at 292 million barrels or 30 days of import (eMediawire) and keeps growing.

Coming from both the supply-export side to the demand-import side, the proverbial 800 lb gorilla in the room has been global governments in the race to corral oil stockpiles! Yet it has been the small fries, who have been simply responding to the incentives set by the authorities, who always take the blame.

Unfortunately, for our beloved Bishop Saudi’s King Abdullah, US President George Bush and China’s Premier Wen Jiabao won’t need his blessings.

The Tragedy Of The Commons

Has the world run out of oil to justify today’s price?

Figure 1: BP: World Oil Reserves in 2007 at 1237.9 billion barrels!

Not if you ask British Petroleum, see figure 1.

From BP’s website, ``Reserves have grown 107.8 billion barrels since 2001 and 168.5 billion barrels, or 14%, over the last decade.” Proven Oil Reserves are estimated at 1.23 TRILLION barrels! Wow that’s a lot of oil out there.

So why has oil prices been climbing?

Like us, British Petroleum chief honcho, Tony Hayward argues that it is due to policy instituted distortions.

From the Economist (highlight mine), ``Mr Hayward blames poor policy-making or, in his florid phrase, “the madness of men”. Some 80% of the world’s oil reserves, he says, are in the hands of state-owned oil firms, which tend to allow firms like his only limited access. He believes that if these riches were fully exploited, the world could easily produce 100m barrels a day (b/d) or more. That’s a big increase on last year’s figure of 82m b/d, and a level that other oilmen, such as the boss of Total, another big Western firm, think impossible.”

Figure 2: API: Myth of Big Oil, 80% of Oil Reserves are Controlled by National Oil companies!

Figure 2 from API shows that government owned companies control 80% of oil supplies!

Since global government owned companies control 80% (some says more) of the world’s proven reserves, any speculation or hoarding can handily be counteracted upon simply by the release surpluses or by producing more supplies as previously discussed in If Oil Is A Bubble, Then It Is A Government Sponsored Bubble!, but has this happened? Unfortunately for us the answer is a NO.

In theory, in a well functioning market, rising prices should trigger supply side responses by attracting and increasing investments that should lead to more production output that would meet demand thereby lowering prices in the future. But, with national governments essentially CONTROLLING and RESTRICTING ACCESS to oil for political (resource nationalism, environmentalism et. al.) or other reasons (lack of capital or technology, unrest and etc…), this hasn’t happened.

And this applies within the US too. High prices simply mean demand far exceeds supply, so much so as bidders are willing to bid up prices for whatever reasons. In corollary, this means that the solution to high prices is to introduce more supplies.

Figure 3: Prof. Mark Perry: Environmental Restrictions

Figure 3 courtesy of Professor Mark Perry at the University of Michigan demarcates the areas from which the US government has restricted oil or energy drilling because of environmental concerns.

To consider, even the world’s premiere capitalist country can be shackled by politics.

CNSNews notes that there are about 279 million acres under Federal management with a potential 117 billion barrels broken down into onshore 31 billion barrels onshore (19 billion barrels inaccessible & 2 billion barrels for standard lease) and offshore 85.9 billion barrels (all off limits).

This is a concrete example of how political based regulations have basically stymied the supply equation contributing to the imbalances reflected in today’s record high oil prices!

Nonetheless, the distortions are also seen from the demand side, Christof Rühl author of the BP’s Statistical Review of World Energy 2008 says taxes and subsidies likewise impact the demand dynamics, again from the Economist, ``According to Mr Rühl, consumption is falling in countries with heavy taxes and rising only sluggishly where taxes are moderate. But in countries with subsidies, it is rising faster than normal, and fastest of all in the countries with the highest subsidies.”

RGE Monitor quotes CIBC (Hat Tip: Craig McCarty), ``Fuel subsidies breed soaring rates of domestic fuel consumption, particularly in OPEC countries, where gasoline is 25 cents/gal in Venezuela and 50-60cents/gal in Saudi Arabia, Kuwait and Iran. No sign of plans to remove subsidies soon in any of these countries.”

Yes, with oil prices drifting at near record levels, additional revenues for oil exporters is expected to reach $400 billion while official assets of oil exporting economies could expand by $800 billion at a conservative estimated average oil price of $115 bbl (Brad Setser), thus curbing consumer subsidies is indeed an unlikely scenario.

True enough, some countries mostly in Asia have acted to ease the government’s fiscal burden by passing the price increases to its consumers at some political costs as previously discussed in Philippine Politics: The Nationalist Hysteria Over Energy Issues.

But overall, where it counts most, like China which accounted for 50% of the global energy consumption growth in 2007 (Tanser-Kiplinger), gasoline prices remain heavily subsidized ($2.6 per gallon-LA Times), which means they are unlikely to get negatively impacted compared to other countries with less subsidies. Let us not forget China’s forex reserved climbed to a new record $1.76 trillion at the end of April (AFP) which also means China can afford to sustain such subsidy for a longer period. This is bad news for us because China and the other Oil exporting countries will continue to ravenously consume oil from which the pain of higher prices will be felt by those incapable of subsidies.

The Economist concludes, ``In other words, the root of the high oil price in BP’s view is not a mismatch between strong demand and feeble supply, but failure on the part of various governments to allow markets to work their magic. There are hints of an improvement on the demand side: several Asian governments have recently decided they can no longer afford subsidies. But it is hard to imagine the world’s ardent energy nationalists suddenly throwing their doors open to foreign investment.”

Politics, Not Greed Result To Higher Food Prices!

Basically, the same dynamics apply to food crisis seen in rice or the wheat markets but with an additional twist,

This quote again from Swaminathan S. Anklesaria Aiyar of the Cato Institute,

``International rice and wheat prices have doubled or tripled in the last two years, but world grain production will reach a record high this year. So how come millions are falling into poverty and starting food riots across the world? The answer lies not in any outsized surge in world demand or fall in world supply, but in the fact that several countries have imposed duties, quotas and outright bans on agricultural exports. This has reduced the amount of grain available for world trade.

``The United Nations Food and Agriculture Organization estimates that world production of cereals was a record 2,108 million tons in 2007, and will hit a new record of 2,164 million tons in 2008. Rice production will rise by 7.3 million tons and wheat by 41 million tons. World cereal consumption has been growing slightly faster (3%) than production (2%) for a decade, so global stocks have fallen to 405 million tons. But this is not a disaster scenario, and it hardly explains skyrocketing prices.

``In the U.S., one-fifth of the corn crop has been diverted to ethanol, and in Europe, some vegetable oil has been diverted to biodiesel. These ill-conceived policies have induced farmers to switch significant acreage from wheat to corn, soybeans and rapeseed, but world wheat output has nevertheless risen from 596.5 million tons in 2006 to an estimated 647.3 million tons in 2008. Corn-based ethanol cannot explain the runaway increase in the price of rice, which grows in very different conditions.”

Yes the added twist comes with the subsidies to biofuels, which was nobly aimed at reducing dependence on fossil based fuels. Of course since regulations by nature are responses to unfolding predicaments then the great tendency for the lack of indepth appraisal. Hence, unintended consequence occur, in this case biofuel subsidies distorts the farmer’s incentives for cropping, see Figure 4.

Figure 4 courtesy of Prof. Mark Perry: Corn From Food to Gas

Figure 4 courtesy of Professor Mark Perry at the University of Michigan shows of how agriculture as signified by corn production originally intended for food to feed people now has to compete with feeding the gas tank…US Corn production for ethanol is expected to climb to nearly 30% of total harvest in 2008!

Nonetheless, since growing corn requires fertilizers- about 90% of the cost of manufacturing nitrogen fertilizer depends on natural gas prices- this leads to a parallel increase in demand for natural gas which means higher prices for natural gas!

From James Finch (highlight mine), ``Nearly 95 percent of U.S. ethanol distilleries use natural gas boilers. Citigroup analyst Gil Yang estimated 28 billion cubic feet of natural gas would be consumed for every one billion gallons of ethanol produced. Cumulative ethanol production could surpass 12 billion gallons. Some analysts are predicted a natural gas demand increase up to one percent from the ethanol boom. But their estimates do not include increased fertilizer demand to increase corn yields.”

``Corn acreage is one of the largest consumers of nitrogen-based fertilizer. And because of the recent ethanol subsidies, more corn will be planted this year than in the past six decades. According to the U.S. Department of Agriculture, corn growers intend to plant 90.5 million acres in 2007. Because forecasts of ethanol production are expected to increase, expect more corn to be grown. In 2008, about 25 percent of U.S. corn production is planned to produce ethanol. By 2012, 4.3 billion bushels of corn are anticipated for ethanol production. It takes about 450 pounds of corn to produce 25 gallons of ethanol fuel to power an SUV.”

So by tweaking on one sector’s incentives, i.e. corn for biofuels, via policy directives, this creates a feed back loop- where more demand for natural gas equals higher energy-and a vicious chain effect of rising energy and food prices!

Moreover, the US corn based ethanol story doesn’t here.

Brazil’s sugar based ethanol, the world’s largest and the most efficient producer (Ethacane is twice as productive as ethacorn -- 6,800 liters per hectare for the former and 3,100 liters per hectare for the latter. It also produces 24 percent more fuel per hectare than the beet- or wheat-based ethanol common in Europe.-Alexandre Marinis) has been restricted entry to the US by virtue of a tariff of 54 cents per gallon. The tariff was introduced in 1980 with the intention of protecting US corn based ethanol producers.

Yet who benefits from the tariffs and farm subsidies instituted by the US government?

Figure 5: Heritage Foundation: Subsidies for the Rich, Famous and the Elected

The rich, the famous and the elected as shown in Figure 5 by the Heritage Foundation.

According to Heritage Foundation’s Brian M. Riedl, ``Eligibility for farm subsidies is determined by crop, not by income or poverty standards. Growers of corn, wheat, cotton, soybeans, and rice receive more than 90 percent of all farm subsidies: Growers of nearly all of the 400 other domestic crops are completely shut out of farm subsidy programs. Further skewing these awards, the amounts of subsidies increase as a farmer plants more crops.

``Thus, large farms and agribusinesses--which not only have the most land, but also are the nation's most profitable farms because of their economies of scale--receive the largest subsidies. Meanwhile, family farmers with few acres receive little or nothing in subsidies. Farm subsidies have evolved from a safety net for poor farmers to America's largest corporate welfare program.”

The recent passage of the expanded subsidies of the Farm bill has generated uproar among other WTO member countries. Why? According to Reuters, ``Critics say high U.S. farm subsidies distort the world trading system and squeeze poor-country farmers out of their markets, as well as putting a burden on U.S. taxpayers and giving incentives to U.S. farm businesses that do not need them.”

So again you have governments subsidizing the rich and maligning market signals (which impacts spending investment cropping etc) to the detriment of less fortunate American farmers or the taxpayers as well as farmers in the emerging markets as the Philippines.

Of course, subsidies in the US or Europe (Common Agriculture Policy) isn’t the only story. It’s almost everywhere. And collectively speaking such imbalances have been building overtime.

An example, Steve Hanke of Forbes magazine on Japan’s subsidies, ``Japan announced last month that it wants to export rice. The Japanese rice industry is superprotected, and the government holds huge stockpiles. Part of these stocks are accumulated because Japan agreed, as part of a World Trade Organization deal, to make regular purchases from foreign producers, mainly the U.S. To keep domestic rice prices high, the Japanese government hoards its WTO-mandated imports. Now that Japan wants to unload some of its rice, opposition is flaring up in Washington and other capitals, claiming that re-exports are not allowed under the agreement. When it comes to filling or releasing government stockpiles, politics clearly rules the roost.”

Again with politics as the top agenda for global governments instead of allowing market forces to seek direction, we can be assured that energy and food prices will continue with its upward trek until market forces will ultimately prevail via a recession or crisis of sorts.

The belief that governments can micromanage an economy in a highly globalized world is an illusion. Why? Because, to quote Steve Hanke, ``it assumes that government bureaucrats possess the same knowledge of market fundamentals and face the same incentives as well-financed, farsighted private traders. It also assumes that politics will not raise its ugly head. Both of these heroic assumptions are not met in the real world. Government buffer-stock schemes are rife with politics, and instead of generating profits from buying low and selling high, they tend to generate losses.”

So we suggest that our venerable bishop visit instead the embassies of the countries mentioned above and deliver his sermon of “greed” on the politicos.

Inflation The Bogeyman; An Asian Liquidity Crunch?

``Interventionism generates economic nationalism, and economic nationalism generates bellicosity. If men and commodities are prevented from crossing the borderlines, why should not the armies try to pave the way for them?”-Ludwig von Mises

Last week we opined that the unexpected hawkish statement from European Central Bank’s Jean Claude Trichet may have negatively impacted markets as huge short positions were unwound which led to the largest single day jump in oil prices ever since the futures market contract begun.

This week’s heavy lashing of mostly the Asian markets could be an extension of last week’s maelstrom. While we can’t deny that the bogeyman, as hyped by media, had been rising inflation, as Asian bonds had been severely hemorrhaged, aside from the precipitate fall in most Asian currencies, there is a deep skepticism on our part if inflation was indeed the culprit.

As an inflation or crisis hedge, inexplicably gold is steeply down for the week (-2.8%) tracing the decline of the US dollar index heavyweight counterpart the Euro (-2.48%). On the other hand, gold’s nemesis, the US dollar index soared 2.42% and strengthened sizably against all the currencies in the basket. In other words, as global investors fled the bond and equity markets only the US dollar took the role of a safehaven status.

Figure 6: stockcharts.com: Inflation Bogey?

Figure 6 shows how global equity markets turned the corner as the US dollar pivoted higher. The Dow world (center red line), Dow Jones Asia ex Japan and Emerging Markets index all in a simultaneous downturn as the US dollar (center-behind) vaulted higher.

Next, only Asian markets took the brunt of most of the losses, followed by some equity benchmarks of Eastern Europe. While a big majority of global indices suffered losses this week, the emerging markets of Africa and Latin America with inflation rates known higher than Asia similarly fell but to a lesser degree! Is the market suggesting that Africa is a better option than Asia?

Some MENA bourses have even traded at RECORD levels despite soaring inflation rates such as Tunisia, Oman (11.56% inflation March), Qatar (14.75%-March) and Bahrain! Of course, one can’t argue that this outperformance is about oil revenues, since many of the major oil exporters are far from the record highs, e.g. Saudi Arabia and Kuwait.

Table 1: Jim Jubak: Inflation From Asia: The Next Crisis

It’s odd that many analysts (including institutional analysts) use the recent past performance to explain causality and make projections into the future. Put differently, just because Asian markets have cratered while headline news screams INFLATION, the market performance has been explained as being plagued by inflation. And that the next global crisis should befall in Asia!

This exactly what George Soros calls as the reflexivity theory, a two way feed back loop which grapples investors into shaping expectations and outcomes. As the above example it is cognitive function where outcomes shape expectations.

Figure 7 from stockcharts.com: Performance of Asian bourses

We can test the validity of this inflation-sell Asia hysteria thesis: If the degree of inflation linearly determines the performance of the equity benchmark, then a similar ranking of inflation should be reflected in the equity benchmark performance. In other words, the nation with the least inflation should outperform and vice versa.

Figure 7 courtesy of stockcharts.com shows that the worst losers to be China (-45.59%), the Phisix (-29.37%) and India (-25.78%). Of course India and the Philippines have the one the worst inflation data. But ironically, the country with the highest inflation rate, Indonesia at 10.4% see table 1 courtesy of MSN’s Jim Jubak, outperforms even Malaysia at 3% with the least inflation rate!

As you can see a single observation can disprove or invalidate a general assumption. That is why we would have to be careful in making generalizations.

Figure 8 stockcharts.com: Dow Jones Asia/Pacific Industry Year On Year Performance

It’s the same argument we can suggest with the Phisix.

As you can see in figure 8 under the Dow Jones Asia/Pacific industry context, the oil and gas sector, basic materials and telecoms have outperformed the general market since the bear market struck in 2007.

In fact, even after the recent selloffs, they remain in positive territory. Again as we have repeatedly argued, since inflation is a loss of the currency’s purchasing power against energy, commodities and food, then issues supporting these themes should benefit from the relative price adjustments.

Theoretically in a high “goods and services inflation” environment, since people’s incomes are limited then spending patterns tend to shift towards the basics/necessities or on perceived safehaven instruments.

And the performance as shown above seems to validate our view. Aside from oil and gas, basic materials and telecoms signifying the outperformers, the healthcare, consumer goods and utilities make up the next best performers although they are in negative territory.

Yet the recent carnage in Asia seems to heavily impact all the sectors or have been across the board. Again this is unlikely to be representative of an inflation induced selloff. As a bogeyman yes, but not as a genuine cause.

On the contrary, the patterns of activities resemble the initial outburst of selling pressures in July and October, which means liquidity prompted pressures but whose epicenter this time seems to be in Asia.

Instead, the other potential cause could be a China driven selloff whose staggering losses reached over 13% for the week!

If both of these turn out to be false negatives then it should be unearthed soon.

As for the Phisix, except for the mines which has accounted for the least losses, these Asian sectoral trends haven’t been similarly reflected. To the contrary, the region’s worst performer, the Financials, is the Phisix second best performer.

Likewise, we believe that the Philippine benchmark’s lagging performance have been due to intense politicking compounded with the dreary external sentiment. The biggest losses have been suffered by the Lopez group who is now in engaged in a legal tussle with the administration.

In the Fil-Am friendship day celebration the Philippine Supreme Court justice added to the latest outbreak of nationalistic sentiment by taking on “economic colonizers” something we will deal with possibly in the future.

As we learned from Louis Vincent Gave, aside from bubbles, bear markets can be induced by governments. To quote Mr. Gave, ``The bear market created by governments usually because one or several of what we have called in our research The FIVE Cardinal sins- protectionism, tax increases, monetary policy mistakes, regulatory overkill or war.”

The mounting nationalistic undertones are definitely signs of increasing protectionism. We hope that those in the leadership or those who are aspiring to do so will use economic commonsense than simply succumb to well meaning popular sentiment freedom themed prose but whose walls they propose to erect would lead to the unintended consequence of long term economic bondage. We never seem to learn from the past.

The Politicking the Philippine Energy Sector

This is my reply to a foreign client on the state of the Philippine Energy (edited/revised version) and how government actions have been impacting the financial markets. I think it deserves a wider audience…

How can the Philippines attract investments when government is making the joint foreign chambers and the private sector a scapegoat for our problem? How does one attract investments when we have been threatening capitalists?

We supposedly have an Energy Policy (EPIRA) which was meant to deal with Napocor's problem by selling its assets and the liberalization of industry to attract investments.

Now intervention via "patriotism" is threatening to stall if not alter the entire process. Yet there is NO template for a viable alternative scheme! The recent proposals are nothing but patchy stop gap measures!

The administration have been passing the buck to private ownership by accusing them of overcharging the populace because of "greed"/similar to windfall profit tax on oil companies in the US.

On the first place, the "take or pay" provisions of which has been the bitter point of argument is a carryover from the Ramos Regime, where in due haste to resolve the daily 8-hour brownouts, Former President Fidel Ramos executed contracts unduly in favor of IPPs. In short, the policy mistakes of Ramos regime is the object of GMAs ire but directed to the IPPs and distribution utilities. Who signed or implemented this in the first place?

Look at the administration’s present proposals (Businessworld):

“The Finance chief said the task force had agreed to recommend:

-asking distribution utilities to absorb the value-added tax (VAT) on system losses;

-a review of the cap on systems losses to lessen the burden for consumers;

-that state-owned National Power Corp. (Napocor) offer flat rates of P4.11/kWh to Manila Electric Co. (Meralco); and

-ensuring that local government units (LGUs) allocate part of their tax share for lifeline subsidies…

- Renegotiate existing government contracts with IPPs."

It basically highlights TWO features:

one-SUBSIDIES by Napocor and LGUs and

two-asks that private companies (distribution utilities and IPPs) ABSORB Losses! Huh? Our government officials now seemingly think that the role of private institutions is similar to that of public institutions-to provide subsidies to consumers? If the private sector losses money will they be subsidized by taxpayer money??? Hellloooo???

Yet the true story is that NO MATTER what the administration does with such past contracts, it won't solve our energy predicament. It won't lower prices over the long run. Such actions WILL ONLY RESTRICT SUPPLIES! It will only create friction with the investors who will eventually refrain from investing, leading to A REPEAT of the Ramos era Brownouts and the repeat of the entire vicious cycle of supplication when we become desperate. It seems that we have not learned from our past.

Our government has failed miserably in its attempt to centrally plan the industry at a humongous cost of estimated $7.2 billion Napocor debts!

You see, the entire episode is nothing but a Public Relations stunt. And I believe the administration is aware of this and is likely to be a tactically designed political action for unstated political reasons.

In essence, the attempt to prove to the poor that the administration is "doing something", will mean RESTRICTING supply or HIGHER PRICES and or ROLLING BROWNOUTS in the future. Pretending to do something today means WORSENING OUR SITUATION TOMORROW.

Yet the administration knows that taxpayers cannot afford to shoulder any nationalization or continued subsidies of the industry because the Philippines is hobbled by debts, which ironically the industry have contributed immensely. Not to mention that this means higher taxes tomorrow in an already onerous tax regime. Besides, hostility towards foreign principals also means REDUCING ACCESS TO CAPITAL even in the international markets. So if you don’t get financing and restrict supply, what happens next? HIGHER Energy Prices or HIGHER Taxes!

So yes, the Philippines have abundant endemic non electric energy sources (think geothermal-we are second or third in the world in terms of reserves). But no, trying to win the votes or sentiment of the public by creating scapegoats and squeezing profits of energy companies will even do as more harm than good.

So investments are at risks and supply will be a future problem. Politicking which is all about the short term means more poverty and hardship for us.

The lesson here is that government intervention always distorts the distribution process of efficient resource allocation and aggravates the situation than help solves it. Even the privatization of US Senate dining services basically proves how markets function more efficiently than government actions.”

Philippine Politics: The Nationalist Hysteria Over Energy Issues

``Nine-tenths of the economic fallacies that are working such dreadful harm in the world today are the result of ignoring this lesson. Those fallacies all stem from one of two central fallacies, or both: that of looking only at the immediate consequences of an act or proposal, and that of looking at the consequences only for a particular group to the neglect of other groups.” Henry Hazlitt (1894-1993), libertarian philosopher and economist, Economics in One Lesson

Some economists propound that global demand for petroleum products will perhaps moderate enough to lower oil and petrol prices, as governments around the world work to reduce subsidies.

Subsidies mean that government absorbs the difference between the costs from market prices relative to significantly lowered prices sold to the public. If the government doesn’t have enough wherewithals to sustain the losses or subsidies then it would have to print or borrow money which eventually would rack up deficits and mean higher taxes and lower standards of living.

But, the raging acceleration of oil prices (WTIC crude benchmark skyrocketed to $139 per barrel last Friday) has been fast inflicting damage to government fiscal conditions. For instance according to the Financial Times (highlight mine),

``Government officials said Malaysia was in danger of spending M$50bn ($15bn, €10bn, £7.9bn) on fuel subsidies this year if government-set prices for petrol and diesel were not raised to reflect the surge in global crude oil prices to about $130 a barrel.

``Before today’s increase, Malaysia’s fuel subsidy ac­counted for nearly a third of total government spending and was equivalent to about 7 per cent of gross domestic product, one of the highest proportions in the world.”

So in weighing on the tradeoffs between the costs to political stability against restoring some sense of fiscal uprightness, some governments will and have opted for the latter. Indeed, Malaysia recently raised petrol prices by 40%! And this has been followed by price increases in India and Taiwan.

After all the distinction between subsidies and a pass through from market prices is all in the timeframe- subsidies are basically SHORT TERM pacification in exchange for LONGER TERM pain.

For as long as energy prices keep climbing, where governments have no revenue source to fund subsidy programs, consumers will ultimately be facing the reality of higher energy bills. In short, governments have a choice of having its consumers accept reality NOW or at a greater pain, TOMORROW.

Figure 1 Morgan Stanley: Global Oil prices as of Early 2008

For politically stable countries, the most likely path will be to lift subsidies. But this does not seem to apply to the Philippines even if petrol prices seem to be lower than the rest of the world, as shown in Figure 1 courtesy of Morgan Stanley.

While petrol prices haven’t been subsidized, which has been a plus factor for now, the trend towards subsidies or even the risks of “nationalization” appears to be gaining momentum as the incumbent government has increasingly trained its guns on the private sector.

For instance in the case of Meralco, government has used a flanking attack (this time using Energy Regulatory Commission, after the GSIS and SEC) towards squeezing the Meralco management to increase payout for a whole lot of myriad reasons (e.g. deposits). Perhaps the idea is if Meralco gets effectively hemorrhaged, stockholders will be swayed to allow government allies to assume control of the firm.

While it is true, that the Philippine government has not directed a frontal takeover of the said energy distribution monopoly by EDICT (Presidential Decree or via Franchise in Congress-yet) and has done so by corporate maneuvering, the fact that it is bleeding dry Meralco gives the public the wrong impression that the private sector has been responsible for rising electric bills! The government has even prohibited the energy (LPG) companies from making public announcements for price increases! Incredible.

At worst, the administration representatives in the Senate has even disparaged at the members of the joint foreign chambers of commerce on the latter’s appeal to reconsider changes to EPIRA.

Figure 2: IMF: Philippine Debt to Foreigners Is Half of Outstanding Liabilities

The overweening self righteous attitude of our officials assumes of the profuseness of capital in the Philippines (if we have so much capital why then are we poor?). We do not imply that they should fawn over to foreign capitalists, but rather negotiate diplomatically or cordially and not out of highhandness.

Should the Philippines undergo another financial or capital crisis; do we not supplicate on foreigners for capital as we have done in the past? The fact is Philippine foreign liabilities comprise HALF of the countries total or outstanding debt, see figure 2 from IMF, meaning much of our local spending programs in the past have been financed by foreigners. Yes, it also infers that a lot of the “corruption” by government officials has been indirectly due to foreign funding. Thus, we find intellectual dishonesty (if not a travesty) in invoking a nationalistic hysteria when dealing with energy issues.

The fact is that energy prices have been RISING around the world ENSURES of higher energy bills to Philippine consumers. Period. In addition, since we are NOT self reliant or produce enough energy to standalone- we are reportedly importing 99% of our gasoline and diesel requirements (manilastandardtoday.com)- thus are subjected to global market forces. This reality means pain at the pump and at our electric bills. No amount of political grandstanding will lower prices, even if the government or its factotums does succeed to takeover Meralco or other public utility firms -again if the aim is to subsidize, subsidies temporarily lowers bills but will be more costly to the consumers in the future. Moreover, we must be reminded that our fiscal position is still in a precarious state.

Further yet, “evil” profits which are meant to be stanched and public subsidies (the fleecing of the country’s productive sector to the unproductive) are both delusions that it is being peddled to the public as a panacea, from which the latter will want more and more of it. Anyway, the government keeps feeding on them, e.g. fertilizer (P 1,500 per farmer), energy (P 500 per family) and student loans programs. We should even doubt the efficacy of these programs if they are indeed meeting their desired targets which we suspect could end up more in the hands of the disbursers of such legal bequest, i.e. the politicos, the affiliates and their followers.

Hence, instead of a thrust towards fiscal balancing which is seen in many parts of the world, the Philippines seem on the path towards fiscal remission if not an outright regression. Yes, Philippine financial markets have borne the onus of such politicization, as seen in the state of the “depreciating” Peso, the “falling” Phisix and the “soaring” bond yields.

The next Presidential elections (if there would be any) will probably be marked by demagoguery of even more intense socialist tendencies. Don’t forget many of the world’s tyrants/despots emerged during the heydays of oil and commodity prices in the late 60s-80s. This has probably been due to the increasing clamor for social safety nets under pressures of higher cost of living and or to revenues derived from surpluses of commodity exports as a docile form of redistributive channel for more social spending programs. Today since forex surpluses have been flowing to non-democratic regimes, there has been a tendency to adopt on such paradigm e.g. Bolivia, and Venezuela.

We suspect that all these collective actions have mainly been efforts to deflect on political pressures on the administration (ZTE scandal), which has decided to turn the table against its opponents and use the present economic environment as staging point for a Public Relations (PR) Offensive.

Yes, we can also say that the administration through its subsidy programs has been attempting to buy its way to popularity or to win back favorable sentiment from the populace for allegedly “social” intents but apparently cloaked with undisclosed political reasons.

Nonetheless, the potential emerging risks arising from the actions of our public officials could also be construed as seemingly a prologue for a transitory government, from one of a political “democracy” to a prospective “statist autarky” from 2010 and beyond. I just hope the latter is just a figment of my imagination.

Post script:

A possible unintended consequence arising from the nationalistic hysteria will of course be investors withdrawing from financing of our new energy projects. This means that LIGHTS GO OUT IN THE FUTURE. (Environmentalist should love this!)

And possibly when brownouts worsen like in the Ramos Regime, we will be forced anew to embrace foreign capitalists at disadvantageous terms for us. (But advantageous for the dealmakers though! Could this be the reason behind the sudden reappearance of the virtues of patriotism?) Thus vicious cycle repeats all over again. Haven’t we learned from the past?

Politicking Weighs On Phisix, Inflation Problems Have Been Policy Induced

``For far too long, we have accepted the idea that government can and should take care of us. But that is not what a free society is all about. When government gives us something, it does two bad things. First it takes it from someone else; second, it causes dependency on government. A wealthy country can do this for long periods of time, but eventually the process collapses. Freedom is always sacrificed and eventually the victims rebel. As needs grow, the producers are unable or unwilling to provide the goods the government demands. Wealth then hides or escapes, going underground or overseas, prompting even more government intrusion to stop the exodus from the system. This only compounds the problem.” Congressman Ron Paul Challenge to America: A Current Assessment of Our Republic

The Phisix has been bedraggled by administration led politicking which has led to its recent rout (down 3.1% over the week). Yet, the efforts by the mainstream media have been to affix the culpability to inflation which recently rose to a 9 year high. This mindless penchant to attribute false causes has been misleading the public compounded by blabbermouth experts.

Attribution To Inflation Woes Don’t Add UP!

As we argued in my recent post, Phisix Breakdown: Politics Not Inflation Related, goods and services inflation means the loss of purchasing power by the domestic currency to mostly fuel and food (which is what the news report says). Alternatively, this means that rising fuel and food prices have been getting a far larger share of expenses out of household or business budgets from which comes at the expense of non-fuel and non-food items. In short, spending on food and fuel crowds out other items. This is called relative price adjustments.

So in the perspective of relative prices applied to the equity markets, share prices of energy issues should benefit from the expectations of rising share of fuel expenditures and so with food related firms at the expense of other issues if “inflation” is the concern. Relative to the performance of energy companies, except for Petron Corporation, which amazingly soared by 17.65%, the rest of issues slumped such as Aboitiz Power (-3.57% w-o-w), Aboitiz Equity Ventures (-1.39%), PNOC EDC (-5.36%), First Gen (-1.43%), First Philippine Holdings (-3.03%) and Meralco (-4.07%)! So the so called inflation woes don’t add up.

Yet, inflation figures reported in the news reckon of past performance-particularly of last May. This means markets acting as a forward discounting mechanism should have discounted the past and read into the future.

If in the past (say last month or in May which read on the April figures) the market believes food and fuel inflation will continue to impact spending patterns in the future (which is today) then share prices of these issues would have likewise adjusted. This means at this point, shares of energy and food issues should be on an uptrend. But this isn’t the case.

And when the same deduction will be applied tomorrow or if once again the energy group is extrapolated to reflect on the continuing adjustments of consumption patterns then they should be expected to trend higher. This means prospective higher prices for energy issues!

But have we been seeing such dynamics? The reality is energy issues have either been consolidating (AEV, PCOR, AP and FGEN) or seem headed for the sewer (Meralco, FPH and EDC). Again, this inflation themed anguish doesn’t rhyme at all.

So why have energy issues (or the Phisix in general) been collapsing in the face of spending pattern adjustments arising from higher costs of fuel and food?

Because foreigners have been selling the Phisix! This week, foreign money has sold the most (Php 1.273 billion) since end of April. Coincidentally, the bulk or 68% of the foreign selling came at the time when the joint foreign chamber of commerce was being excoriated by our sanctimonious politicians.

A foreign chamber of commerce is a business organization representative of foreign owned enterprises in the Philippines. The benefits or costs accrued by their companies are transmitted to their countries which may induce or reduce incentives for future capital investments locally. Hence, any negative projection imparted by our leaders or by our political economy will negatively impact our image which may lead to foreign capital efflux aside from inhibiting future capital investments-our future jobs and taxes. So it becomes a paradox to brag about our “sovereignty”, especially under today’s “globalization” or increasing trends of cooperation and integration, when we can’t produce for ourselves enough capital to make enough jobs for our countrymen.

Besides, if as a foreigner you are invested in the country, having come to the realization that your equity ownership is at risk from political intervention, will you not sell and pull out? The answer is pretty obvious. Hence, the political risk arising from the administration’s continued assault on the private sector has been impairing the country’s attractiveness as a business destination. In effect, we have been shooting ourselves in the foot anew. We just hope and pray that sanity will be restored to our leadership.

Finally, the cause and effect between inflation and equities doesn’t necessarily have a linear correlation as we have always argued. To see an example, let us base it on recent global events-Kenya’s massive rise in its inflation data was equally met with a strong response in its stock market as shown in my post Kenya’s Mixed Message: Soaring Inflation Rates and Rising Stock Market.

Of course, Kenya is unlike Zimbabwe whose currency has practically collapsed down 84% since May and whose inflation rates is said to have vaulted to 1.8 MILLION PERCENT in May (Reuters). Of course, Zimbabwe’s hyperinflationary refuge has been its stock markets where its industrial index is up 261.15% in just ONE week while its mining index is also up 379.23% in just THREE days (allafrica.com)! In these we find that equity investments can become the corollary store of value when trust over a currency loses its foundation.

Yet, if there is any little trace of inflation based positioning in our domestic markets, well Figure 3 tells it best…

Figure 3 PSE data: Philippine Mining Index Diverges From the Phisix!

The Philippine Mining index (red line) has greatly outperformed the Phisix up 2.68% amidst the harrowing decline of the Phisix (black candle) over the week.

If inflation is defined as a loss of purchasing power against hard assets then naturally, resource based issues are likely to outperform under a massively devaluing currency reserve standard of the world, the US dollar.

Besides, since the Mining industry is the administration’s baby, (hopefully they won’t change minds), it is likely that there will be continued rotation towards such resource based sectors.

Figure 4 stockcharts.com: Resource based Assets Survive the US onslaught

And it’s not just here.

The major US benchmarks fell by about 3% last Friday, as the US dollar crumbled, to which some have associated the market’s reaction to the surprising stance by European Central Bank Jean Claude Trichet indicating the possibility of raising interest rates in July.

This unexpected declaration by Mr. Trichet allegedly prompted for a forced massive short covering across the Euro and commodities-particularly the oil benchmark which jumped by 8% the biggest increase since oil futures started trading in 1983 (NYT), aside from liquidation sales in the broad equity for margin calls. On the other hand, commodity related international stocks fell at a much subdued clip while mining and oil bellwethers in the US jumped (see figure 4)!

The Dow Jones Latin American Index (main window) slipped by 1.9% but still trades at near its recent highs, while the Dow Jones US mining index (pane below main window) shot to fresh record heights amidst the market turmoil.

Meanwhile, the Dow Jones Oil and Gas Services (middle pane) similarly leapt, as the Dow Jones Gold index (lowest pane) pivoted higher following the recent doldrums which has basically reflected the price action of gold.

As you would observe, except for the US Gold mining index which we think would follow suit higher, all three indices have been moving to the upside despite the increased volatility in the main US markets of late. This is “inflation” at its finest. In short, the loose correlation with the general market makes commodity based investments very attractive diversifiers.

Politically Induced Policy Measures Assures Of Prolonged Inflation Pains

All these market signals indicates too that the commodity and the “goods and services” inflation pressures being generated by the massive imbalances imposed upon by collective governments in skewing the global marketplace will continue to persist and risks even exacerbating. It is unhealthy to discount the possibility of a US dollar crisis.

In fact, our local politicos and the administration’s actions will likely compound on their dilemma with a slew of unintended consequences arising from their growing hostility towards the market instead of utilizing them for efficient allocation.

To give you an example the recent land conversion ban of agricultural properties ensures of the rising values of real estate which will likewise be reflected on rising rental prices as the supply of non-agricultural properties gets restricted in the face of growing urbanization and expanding population growth.

Figure 5: ADB’s Hyon H Son: Has Inflation Hurt the Poor?

As shown in Figure 5 courtesy of Hyon H. Son of ADB, rental comprises the largest of the non food expenditures for the Philippine poor and also for the non-poor.

So essentially, our government is simply shifting from one form of “popular” burden to another form of “unpopular” burden which eventually will get us slammed overtime anyway. Of course, the trick here is to understand how to cash in from the opportunities presented by the government’s populist impulsive driven policy gaffes.

Government’s Time For Self Introspection

And like all trends, commodities and good and services inflation doesn’t move in a straight line.

And as we also expected, inflationary pressures abroad has filtered to the domestic scene and will continue to do so until perhaps a global stagflationary recession occurs or a policy induced slowdown (tightening) by key Central Banks or nations collectively drop policy distorting measures (quite an impossibility).

Yes, another fulfilled expectations too is our (Bangko Sentral ng Pilipinas) BSP’s tepid response to rising “inflation” by increasing its headline borrowing and lending rates by a measly 25 basis points.

The unfortunate part is that increasing policy rates will do little good because-ONE, our inflation is basically imported, as University of Columbia’s Joseph Stiglitz recently wrote against inflation targeting, ``Inflation in these countries is, for the most part, imported . Raising interest rates won’t have much impact on the international price of grains or fuel. Indeed, given the size of the US economy, a slowdown there might conceivably have a far bigger effect on global prices than a slowdown in any developing country, which suggests that, from a global perspective, US interest rates, not those in developing countries, should be raised” and-SECOND, raising rates on baby steps doesn’t remove the accommodativeness of the Philippine monetary landscape.

Come to think of it even after raising rates, the margin of our inflation index has been growing wider compared to 1) the country’s economic growth rate or 2) the nominal rates set by the central bank or 3) the yields of our treasury bills, which means like many other central banks around the world, the BSP seems to be fostering an “inflation friendly” negative real rate environment, again another policy induced problem.

Of course not to mention that March money supply growth rate is nearly double or 9.6% of the recent economic growth clip-another prospective contributor to domestic inflation.

So essentially the problem with our government is that they have been looking for scapegoats at the wrong places and have been caviling on the private sector’s contribution to our economic woes, when in fact, it is time for them to do some self-introspection.

Faltering Phisix Issues, Firming Broader Market

``Successful speculation requires staying on top of changes in industries and companies that either create new industries or improve on existing industries. The majority of your profits will come from these two … The shrewdest traders throughout history all adapted the skill of reactionary change, as the market constantly presents new and different opportunities.” -Bernard Baruch (1870-1965), Financer, Speculator Statesman and Presidential Adviser

In a typical bear market, broad market issues are expected to fall faster than Phisix heavyweights, but recently a peculiarity emerged; Phisix issues seem to be falling faster than the broad market.

Figure 6: PSE: Advance Minus Decline Spread: Narrowing Volatility Over the Broadmarket

Figure 6 from the PSE data reveals that the daily advancing issues - declining issues spread from June 1, 2007 until Friday’s close, suggests that the downside volatility coming from certain issues are NOT being shared by the rest of the market or by the broader market as seen by the narrowing range of advance decline spread (see arrows).

The largest series of frenzied selling pressures occurred in July and in October of 2007 where the spread has reached nearly 150 issues. After which, there had been a sporadic bout of sharp selling episode seen in January and in March but at much lower incidence and degree compared to the initial burst.

Whereas last week, despite the steep decline of the Phisix (-3.1%), the spread has only gone beyond 50 issues!

This means the selling breadth has been narrowing and has been undergoing selective and not a broad market phenomenon. In other words, the concentration of mass based selling has eased considerably.

This should be seen as a POSITIVE factor as most issues appear to be holding ground even amidst a weakening Phisix.

Ironically too, the weakest link appears to be issues held most by foreigners or Phisix composite issues.

Figure 7: stockcharts.com: PLDT A Drag to the Phisix?

A prime example would be Philippine Long Distance Telephone (PLDT).

The (Philippine Stock Exchange) PSE’s largest listed company is likewise listed in NYSE under PHI symbol is shown sizably underperforming the Phisix in Figure 7.

PLDT commands about 26.5% of the Phisix free float adjusted market cap index, which means a single fluctuation from the largest telecom company is enough to jolt the Phisix towards its direction. Unfortunately, where from 2003 PLDT led the Phisix to its recent high and even cushioned the market during the recent decline until February 2008, today, PLDT appears to have reversed its role and signify as a drag to the Phisix.

Said differently, the recent fall of the Phisix has been greatly influenced by the declining telecom giant. Could our officials be responsible for this too (see Why Forcible “Free Texting” Will Only Lead To Increased Poverty)?

Friday’s formidable decline in the US markets took a heavy toll on PLDT down by 7.23%. We don’t know if US markets will recover on Monday, as the PSE is on a holiday, but certainly some of PLDT’s decline in NYSE will likely be felt as the Phisix opens on Tuesday. This probably means that both the Phisix and PLDT could break from its recent low (support levels) and possibly carve out a new low near or at the new support levels of 2,400 and 2,600 respectively before bouncing back. Over the short term yes, some selling pressure remains but this should be seen as an opportunity than stampeding out of fear itself.

Again given the improving market breadth, this new low could represent mostly a knee jerk reaction towards the recent politicking aggravated by the adverse reactions in the US markets. If our leaders simply bark with no accompanying bites, then our market will learn how to discount these and eventually recover. However, if talks will come with attendant action, then portfolio rebalancing is thus required or rotating to issues less likely held by foreign money or less sensitive to political intervention.

Remember, under inflationary-negative real rates environment, holding cash or money market instruments or bonds are likely to present as a losing proposition considering that inflation rates are far more pernicious (concealed taxes) and punitive for savers. Your cash purchasing power loses value overtime! Aside, interest income recovers only a segment of your cash holdings.

The next likely option is to invest directly on tangible assets or equity issues with tangible assets or to invest in other forex reserve rich and current account surplus currencies or equities.

Kenya’s Mixed Message: Soaring Inflation Rates and Rising Stock Market

Mainstream media tell us that “rising inflation” (goods and services) and stock markets don’t mix well. Our usual retort is it depends…

Just last week Kenya’s benchmark, the Nairobi Stock Exchange rocketed 5.83%...

Kenya's NSE 3 year chart Courtesy of Bloomberg

According to Indexmundi.com, Kenya’s annual historical and estimated inflation rate…

But just as its stock market surged, Kenya’s inflation rates reportedly likewise escalated beyond estimates:

Annual inflation rates spiraled 31.5% (reuters Africa) in May on the account of soaring food prices 44% (FT.com)!

Since we have sparse idea behind Kenya’s market dynamics we suspect this to be perhaps to be related to its oil exports or tea prices.

You see, Kenya’s main exports are tea, horticultural products, coffee, petroleum products, fish and cement (indexmundi.com).

Although it registered crude oil production of a measly 9,627 barrels a day in 2006, of which exports accounted for 7,377 barrels a day in 2006 according to the Energy Information Administration.

It could be that since Africa is a hotbed for the next generation of oil and gas exploration, the sprightly stock market activities could be oil related or if not due to soaring TEA prices. Of course all of these are just conjectures on my part.

The point being: Rising “goods and services” inflation DOES NOT ALWAYS EQUAL to slumping equities.

Phisix Breakdown: Politics Not Inflation Related

Philippine “Inflation” surged to its highest level in 9 years and got blamed for the Phisix breakdown. Nonsense.

First, the Phisix had been falling even prior to such news. In fact it has dropped in 6 out of the last 7 sessions. On the other hand, the Phisix rallied prior to the strings of losses even as “inflation” reached an “unexpected” (for our authorities) high. So inflation is nothing but an excuse.

Two, the biggest damage today were seen in Lopez owned companies…Benpres (-8.91%), First Philippine Holdings (-7.35%) and Meralco (-4.1%), all of which had borne the brunt of the selling pressures since the wrangling over the Meralco management emerged.

Phisix black candle, BPC blue, Meralco red and First Philippine Holdings green

True, the broadmarket fell but what needs to be understood is that this is more of a contagion related than inflation instigated carnage.

Third, as a matter of irony inflation means loss of purchasing power relative to high food and energy cost. Thus why has energy related investments plunged?

When government harangues or puts the blame on the market for any particular reason with threats to “intervene” by restraining property ownership rights for pretentious social purposes, then it is natural to expect market participants to flee from the market out of the fear of loss of equity ownership from its socialistic tendencies.

The blame should be on politics and not inflation.

World Bank’s Doing Business in the Philippines 2008

Some important highlights from the World Bank’s Doing Business in the Philippines 2008

Best equity returns belong to countries with the most number of positive reforms.

Since many emerging markets have likewise been undertaking reforms, the competition to attract investments should be a continuing dynamic. Increasing competitiveness means constant in-depth reforms relative to our competitors. Tentativeness or lackluster actions translate to a decline in relative performance or our attractiveness as a place for viable investments decreases.

Aside from the national levels, reforms can also start with the local (LGU) levels.

The table above shows of the best performing “Doing Business” categories in the Philippines. At the right side of the table is the equivalent ranking based on global standards. This shows that there is much room for needed improvements.

For our leaders and prospective leaders this should be a great starting point for a meaningful governance agenda.

Good luck to them.

Noteworthy Quotes and Top life tips from favorite iconoclast Nassim Nicolas Taleb

Mr. Nassim Nicolas Taleb is the author of best selling books must read investment books as Fooled by Randomness: The Hidden Role of Chance and the Black Swan: The Impact of the Highly Improbable.

Short background:

-Mr. Taleb charges about $60,000 per speaking engagement and does about 30 presentations a year to ``to bankers, economists, traders, even to Nasa, the US Fire Administration and the Department of Homeland Security” according to Timesonline’s Bryan Appleyard.

-He recently got $4million as advance payment for his next much awaited book.

-Earned $35-$40 MILLION on a huge Black Swan event-on the biggest stockmarket crash in modern history-Black Monday, October 19,1987.

Some of Mr. Taleb’s noteworthy quote in the Mr. Appleyard’s Timesonline article...

“Scientists don’t know what they are talking about when they talk about religion. Religion has nothing to do with belief, and I don’t believe it has any negative impact on people’s lives outside of intolerance. Why do I go to church? It’s like asking, why did you marry that woman? You make up reasons, but it’s probably just smell. I love the smell of candles. It’s an aesthetic thing.”

“Complex systems don’t allow for slack and everybody protects that system. The banking system doesn’t have that slack. In a normal ecology, banks go bankrupt every day. But in a complex system there is a tendency to cluster around powerful units. Every bank becomes the same bank so they can all go bust together.”

“Governments and policy makers don’t understand the world in which we live, so if somebody is going to destroy the world, it is the Bank of England saving Northern Rock. The biggest danger to human society comes from civil servants in an environment like this. In their attempt to control the ecology, they don’t understand that the link between action and consequences can be more vicious. Civil servants say they need to make forecasts, but it’s totally irresponsible to make people rely on you without telling them you’re incompetent.”

“Let’s be human the way we are human. Homo sum – I am a man. Don’t accept any Olympian view of man and you will do better in society.”

Finally, Taleb’s Top life tips…

1 Scepticism is effortful and costly. It is better to be sceptical about matters of large consequences, and be imperfect, foolish and human in the small and the aesthetic.

2 Go to parties. You can’t even start to know what you may find on the envelope of serendipity. If you suffer from agoraphobia, send colleagues.

3 It’s not a good idea to take a forecast from someone wearing a tie. If possible, tease people who take themselves and their knowledge too seriously.

4 Wear your best for your execution and stand dignified. Your last recourse against randomness is how you act — if you can’t control outcomes, you can control the elegance of your behaviour. You will always have the last word.

5 Don’t disturb complicated systems that have been around for a very long time. We don’t understand their logic. Don’t pollute the planet. Leave it the way we found it, regardless of scientific ‘evidence’.

6 Learn to fail with pride — and do so fast and cleanly. Maximise trial and error — by mastering the error part.

7 Avoid losers. If you hear someone use the words ‘impossible’, ‘never’, ‘too difficult’ too often, drop him or her from your social network. Never take ‘no’ for an answer (conversely, take most ‘yeses’ as ‘most probably’).

8 Don’t read newspapers for the news (just for the gossip and, of course, profiles of authors). The best filter to know if the news matters is if you hear it in cafes, restaurants... or (again) parties.

9 Hard work will get you a professorship or a BMW. You need both work and luck for a Booker, a Nobel or a private jet.

10 Answer e-mails from junior people before more senior ones. Junior people have further to go and tend to remember who slighted them.