A Sweet Vindication And Validation As The Phisix Soar To A 25 Month High!

``Pharoah created jobs for us. Moses led us away from those jobs. Even though those jobs helped to complete public infrastructure. Even though they were green jobs, where we used our muscles and our backs instead of fossil fuels. Moses could have been part of the ruling class in Egypt. He chose freedom instead. Those of us who followed Moses also chose freedom. Freedom brings risks. But we preferred the risks of freedom to the security of bondage. Do not confuse government with G-d. Government cannot miraculously provide us with manna--or health care. When we look at government, we should not see G-d. We should see Pharoah. Government-worship is Pharoah-worship. Passover is known as the festival of freedom. To live in the Jerusalem of a free society, we have to leave the Egypt of the reach of government.”-Arnold Kling, If a Libertarian Gave a Sermon for Passover

We have pounded the table for reasons that the mainstream can’t or refuses to see.

For the local experts and media, Philippine equities simply cannot rise supposedly because of election risks[1].

Yet week after week, the momentum, market internals and the Peso has been suggesting an opposite perspective. Denial due to intense obsession over sensationalism and abstractionism seemed to have dislodged rationality from recognizing reality.

Six Impossible Things Before Breakfast

For the foreign mainstream pessimists, this simply can’t be happening.

Rising equities on low sponsorship (in the US), falling bank credit, balance sheet problems of the consumers and the banking system and high unemployment (of bubble afflicted economies), the fiscal woes of Dubai, Greece and the PIIGS, and extended valuations as seen from conventional metrics has been cited as principal reasons equivalent to Lewis Carroll’s “Six Impossible Things Before Breakfast” in Alice In Wonderland.

Yet, as Alice would say, “there is a place called wonderland”, thus, global financial markets continue with their upwards spiral. (see figure 1)

Figure 1: stockcharts.com: “Six Impossible Things Before Breakfast”

Of course, the reason for the apparent realization of such “impossibility” isn’t because wonderland exists, but because many have been fixated over a few variables which appear to be less influential in dictating the course of events.

In behavioural finance, this cognitive bias is called the “focusing effect” or when people place “too much importance on one aspect of an event; causes error in accurately predicting the utility of a future outcome”[2].

As you will note, for the Phisix (main window), the bulls ensured that the resistance at the 3,120-3,125, which has proven to be a significant obstacle, was transgressed with a mighty push, using the actions in the US as catalyst, which generated a noticeably wide gap.

Considering that the gap was backed by substantial volume (volume in pesos jumped 18% this week), one may construe this gap, in technical or chart analysis parlance as a “breakaway gap”.

A breakaway gap, in essence, is a breakout from a trading range or congestion[3].

A breakaway gap implies that the low of the breakout point should hold and serve as critical support. Likewise, this could imply of a beginning of a significant upside move.

Although we are not avid fans of charts, as they are not infallible and are subservient to patterns from past or historical performance, which may or may not unfold, [an example is the 3,120-3,125 level which formed 2 tops that would have indicated of a ‘double top’ bearish formation; however the pattern didn’t pan out]; our view today is that charts have now been in relative consonance with the underlying actions that appear to drive the market. In short, chart actions seem merely validating what we have been saying for sometime.

The Global Reflation Process

If we are correct, then global markets should extend gains over the medium term as the “animal spirits” respond to suppressed low interest rates and a still steep yield curve on a worldwide scale, including the Philippines (see Figure 2).

Figure 2: Asian Development Bank: Steep Yield Curves

The Philippines along with the US has one of the sharpest sloping curve through February 2010, as measured by the spread between the 2 year and the 10 year yields, along with the US, the European Union and Indonesia[4].

Considering the dearth of leverage in the domestic system (as that of Indonesia) compared to the West, the “borrow short invest/lend long” is likely to prompt for significantly more arbitrages and money flows into financial assets (local equities, real estate, bonds and the Peso). And perhaps it is why like Indonesia whose JKSE is up 10% year to date, the Phisix appears to be coming on strongly.

Although since the Phisix scored its eight consecutive week of advances and given the largely overbought conditions, as manifested by the local index’s sharp pullaway from the 50-day moving averages (blue line), a correction should be expected anytime.

Albeit any retracement isn’t likely to be deep and should see the support levels, from the current breakout, to hold. Nevertheless, in bullmarkets overextended upswings may continue.

Besides, given the ongoing “rotational” activities among listed issues, a correction does not likely imply that all issues will go down in synchronicity, but instead what is likely to happen would be a shift in the attention (or crowd favourites) to non-Phisix composite or third tier issues.

In addition, the Phisix, as likewise argued before, has been influenced by external forces, as exhibited by its close correlation with the performance of global equities, more than local issues. And this comes even as local participants dominate the overall market activities.

One would notice that Europe, plagued by the ongoing debt issues of Greece, Portugal and the rest of the PIIGS, appear to be, at first glance, outperforming Asia ($DJP1) and Emerging Markets (EEM) as seen by the performance of the Dow Jones Stoxx 50 ($stox50).

Of course the European Stoxx 50 is up by a measly 1.8% on a year to date basis and has been vastly outclassed by US markets (up over 4%). Incidentally, Asia (inclusive of Japan) is up 5% because it is started the year on a much lower point and has seen a more volatile ride, hence the appearance of lagging performance relative to the Stoxx 50.

In other words, what we are seeing is a global reflation process.

And this has been the core underlying dominant theme in the markets today, which has significantly been overlooked and underestimated by the mainstream pessimists.

Liquidity Seepage, Inflation Ahoy!

And where have most of the analytical loopholes by the pessimists can be found?

In the transmission effects of the collective zero bound interest rates, the lagged effects of yield curves, the idiosyncrasy of “habits” of every society[5], the impact from concerted fiscal policies or “automatic stabilizers” used [in the case of the US over $10 trillion in guarantees and spending on the banking system and other government spending on parts of the economy], the incentives from the potential impact from a stronger yuan, the varied effects of such policies to the distinct economic and capital structure of global economies, the Bernanke Put or the assurance to the financial markets of government’s continued inflationary support, which signifies as a ‘competitive advantage’ for the US in her nonpareil ability to underwrite reflationary policies through the issuance of liabilities with her own currency, and therefore provide a guarantee of liquidity to a highly complex global system vastly dependent on the US dollar.

As Doug Noland aptly observes,

``U.S. financial assets – hence the dollar – are perceived to benefit from a relative advantage versus other major currencies based upon, on the one hand, the virtual unlimited capacity for the Treasury to run massive deficits and, on the other, the Fed’s seemingly endless capacity to purchase (monetize) U.S. debt instruments and essentially peg interest-rates (short-term, and only to a lesser extent longer-term market yields). This extraordinary capacity and willingness by U.S. fiscal and monetary policymakers to inflate Credit and meddle (in the markets and economy) today bolsters marketplace confidence in the sustainability of economic recovery. As importantly, it cements the view that the soundness of Credit instruments throughout the entire system – Treasuries, mortgages, financial sector debt, corporates, munis, etc. – is underpinned by current and prospective reflationary policymaking.”[6] [bold emphasis mine]

And signs that credit takeup, even in balance sheet constrained economies as the US, seem to be gaining traction as this account from Bloomberg reveals[7],

``Investors are withdrawing from money-market funds at the fastest pace in at least two decades, reducing holdings that peaked at $3.9 trillion in January 2009… ‘The draining of cash from money-market funds shows people are becoming more comfortable taking risk, so equities are going up and bonds are also being well supported and the yield curve is flattening,’ said Christian Carrillo, a senior interest-rate strategist…at Societe Generale SA. ‘Such behavior can give some comfort to the Fed that it’s okay to reduce the size of its balance sheet, which is a pre-requisite for rate hikes.’” [emphasis added]

Rising markets are likely to spur a bandwagon effect, as these would exhibit on the reflexive nature of self-reinforcing mechanism between price signals and real events or the reflexivity theory. This means that bubbles are likely to continue to inflate and would only be compelled upon to reverse by the hands of nature. One sure sign of this would be the rising cost of inputs, higher consumer prices and increasing interest rates.

And as the report says, the hoarded liquidity in the US banking system is starting to find some leakage, as short term money market funds are regaining more confidence or “animal spirits” to redeploy cash into other asset markets in search of higher returns.

And once this seepage turns into a flood, that’s where we should start to worry. But this should take more time, and possibly, based on the cyclical effect of yield curves, inflationary pressures is likely to be more apparent by the last quarter of the year.

Hence, the idea that the current “bubble” will bust soon is likely to be inaccurate.

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[1] See Why The Presidential Elections Will Have Little Impact On Philippine Markets and Philippine Markets And Elections: What People Do Against What People Say

[2] See Anchoring, Focusing Effect, Wikipedia.org

[3] Stockcharts.com Chart School, Gaps and Gap Analysis

[4] ADB, Asian Bond Monitor, March 2010

[5] See Influences Of The Yield Curve On The Equity And Commodity Markets

[6] Noland, Doug; The Restoration of King Dollar?

[7] Ibid

Does Rising US Treasury Yields Today Suggest Sovereign Debt Concerns Or Remergent Inflation?

``By 1991, China's economy was booming because of Deng's abandonment of Marxist economics in 1978. That left only Albania, Cuba, and North Korea. The Marxists had nowhere to turn to that offered evidence of economic success. Overnight, they became a laughing stock on campus. This will be the fate of Keynesians when the governments of the West finally go bust or else abandon the deficits and the fiat money.” Gary North, Invitation to an Anti-Keynes Project, Selling Keynes Short

Many have been puzzled by the broad based surge in the coupon yields of US treasuries.

Media tries to connect the dots to the developments of Greece and Portugal, where the latter has endured a debt downgrade by a credit rating agency last week.

An upsurge in yield, says perma bears, should hurt the markets. My quick retort is, not so fast, as this would largely depend on the degree of spike and the reasons behind it.

Figure 3: Stockcharts.com: Market Turmoil From Yield Spike?

Bernanke Put and The Public Choice

It is public knowledge that the Federal Reserve is slated to end its quantitative easing program or open market purchases of mortgage backed and agency securities.

Perhaps in this instance, the Fed could be testing the market. And should any turmoil emerge from this experiment, the Fed may immediately decide to reinstate its quantitative easing program or to increase purchases of US treasuries through off-balance sheet or indirect channels (indirect bidders) to covertly support the open ended buying by Fannie and Freddie of mortgage securities on the markets.

Given the Fed’s sensitivity to the price performance of assets, which effectively affects the valuations of the assets of the balance sheets of the banking system, as discussed above, the Fed via Bernanke has long been telegraphing that they would remain ultra supportive of the markets through policy accommodation[1].

Hence, the Bernanke Put has clearly been providing implied guarantee on the system against a repeat of 2008, and will continue to do so, until the forces of nature will upend them.

The underlying predicament of policymakers as Bernanke, is that of public choice economics; by taking on politically popular policies with short or immediate term impact that helps advance their careers instead of focusing on the long term upliftment through sound policies. And the economic doctrine espoused mostly by these technocrats appears fundamentally designed for such an outcome.

As William F. Shughart II writes, ``Public choice rejects the construction of organic decision-making units, such as “the people,” “the community,” or “society.” Groups do not make choices; only individuals do. The problem then becomes how to model the ways in which the diverse and often conflicting preferences of self-interested individuals get expressed and collated when decisions are made collectively.[2]” [bold emphasis added]

For some, this is has been hard to comprehend or digest.

Playing Into The Austrian Bubble Cycle

Nevertheless, we expect the next crisis to stem from two possible scenarios: one a bubble bust in Asia and or emerging markets, or two, a sovereign debt crisis in a developed economy. (I am not saying that this is happening soon).

Although one can lead to another; a popping bubble in Asia can lead to a sovereign crisis elsewhere as overstretched and overloaded levered balance sheets of developed economies may find it difficult to engage in another round of deficit spending for “automatic stabilizers”. And if officials frantically and instinctively resort to the same actions as today, then a sovereign debt crisis becomes a clear and present danger.

As Harvard’s Carmen Reinhart in an interview with the Wall Street Journal commented, ``historically, following a wave of financial crises especially in financial centers, you get a wave of defaults. You go from financial crises to sovereign debt crises. I think we’re in for a period where that kind of scenario is very likely. I don’t think a repeat of the fall of 2008 is at stake here, where it looks like the world is going to end.[3]” [underscore mine]

And it is here where the Mises Moment will likely be unleashed. A choice of default or hyperinflation.

Going back to the recent concerns of the soaring US treasuries (TNX), it is quite obvious that there has been little “mayhem” in the markets. US equities (SPX) firmed for the 4th straight week, the US dollar strengthened (USD) largely on a Euro weakness, and importantly Credit Default Swaps (CDS) the insurance premium for debt instruments has revealed little signs of distress.

BCA Research comments on the actions of the treasury market, ``Soaring Treasury supply also appears to have played a major role. Indeed, countries with higher budget deficits tend to have narrower (or negative) swap spreads. Does this mean that investors are finally demanding a higher premium to compensate for default risk in the U.S.? CDS spreads on Treasurys did not rise much and are still well below last year’s peak, suggesting that this week’s Treasury selloff was driven by technical factors rather than by a rising default risk premium.[4]”

On the other hand, what we appears as an important development is the peaking of the yield curve (UST1Y:TNX), from which on our end, represents as a market based “backing up” or in mainstream jingoism the “normalization” of interest rates from today’s accommodative stance.

Since both the short and the long end of the yield curve has risen, but where short term end have risen faster, the market seems to be indicating signs of inflation gradually regaining foothold and diffusing in itself into the economy (a.k.a. economic growth-juiced up by liquidity), instead of a sovereign distress for now.

In short, in contrast to the outlook of deflation looking perma bears, pieces of the puzzle seems falling into place. Higher prices are beginning to manifest itself in the real economy as the reflexivity theory suggests. This is what we have labelled as inflation’s seductive ‘sweetspot’.[5]

So yes, the Austrian bubble cycle appears to be running in full steam.

And perhaps with an additional ingredient into the stew: Obamacare.

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[1] Businessweek-Bloomberg, Bernanke Says Economy Needs ‘Accommodative’ Policies

[2] Shughart, William F. II Public Choice

[3] Reinhart, Carmen Q&A: Carmen Reinhart on Greece, U.S. Debt and Other ‘Scary Scenarios’

[4] BCA Research, U.S. Treasury Issuance: Reaching The Choke Point?

[5] See Inflation’s Sweet Spot Augur For A Gold Breakout And Global Equity Market Rally

What Obamacare and Rising Yields Mean

``The public will think the health-care system is what Democrats want it to be. Dissatisfaction with it will intensify because increasingly complex systems are increasingly annoying. And because Democrats promised the implausible -- prompt and noticeable improvements in the system. Forbidding insurance companies to deny coverage to persons because of preexisting conditions, thereby making the risk pool more risky, will increase the cost of premiums. Public complaints will be smothered by more subsidies. So dependency will grow.” George F. Will, A battle won, but a victory?

One of the seemingly uneventful but seismic political shifts just occurred in the US.

Last week, President Obama’s signature health reform program, the Obamacare, had finally been forced into a law through procedural manipulations, in both the House of Congress dominated by President’s Obama’s party.

With over a year in power, and with elections drawing nearer, the risks of a decline in the political power held by the Democratic Party eventually prompted a desperate power manuever. As an old saw goes, what are we in power for? Or to quote Emmanuel Rahm, White House’s Chief of Staff popular view on the last crisis, `` it's an opportunity to do things you think you could not do before.” That could have been the rallying cry of the progressives, in passing a highly unpopular law, regardless of the public’s opinion, as manifested in almost every polls.

So only after a year in office has President Obama successfully convinced several dissent partymates to shift sides, after several horse trading and compromises, from initially opposing his European style welfarism.

There could be several reasons why the market seemed to have discounted the enactment of Obamacare.

One, markets already expected the eventuality of this program considering the dominance in the political spectrum by President Obama’s Democratic Party.

Two, markets assumed that since many parts of the law will take place years from now, the adverse affects will unlikely have an impact soon. Besides, with Senate elections slated this year, there could be manifold amendments that result to a massive facelift.

Three, markets may not be the normal functioning markets as we know of. Like most US markets today, they could be under the influence of various agencies of government, just possibly in disguise.

Fourth, the initial impact of the Obamacare, ignored mostly by mass media and the experts, could possibly be the surge in yields of the US treasuries, which came a day late.

Obamacare Equals Greater Risks Of Fiscal Wreck

How can Obamacare be related to rising yields? In essence; increased government spending.

There is one thing we can be sure of; when government promises to curb deficits or produce savings with massive new redistribution program, it is likely to be unfulfilled.

In the case of the US Medicare, which was signed into a law in July 30, 1965[1], the initial estimates and actual expenditures turned out to be…you guessed it, was a mile apart. (see figure 4)

Figure 4: Cato.org: Huge Disparities in Projection and Actual Spending

Cato’s Daniel Mitchell refers to the testimony of Robert J Myers to the Joint Economic Committee as evidence, ``The federal government’s ability to predict healthcare spending leaves much to be desired. When Medicare was created in the 1960s, the long-range forecasts estimated that the program would cost about $12 billion by 1990. It ended up actually costing $110 billion that year, or nine times more than expected.[2]”

Government estimates that Obamacare’s spending will be modest, ``The CBO estimates the bill would cost $940 billion over a decade and that it would cut the deficit by $130 billion in the first 10 years and some $1.2 trillion in the second 10 years” notes the MSNBC.

However, Alan Reynolds of Cato argues otherwise, saying that government spending will vastly accelerate after the next 4 years[3], [bold emphasis mine, italics his]

``In fact, new spending is negligible for four years. At that point the government would start luring sixteen million more people into Medicaid’s leaky gravy train, and start handing out subsidies to families earning up to $88,000. Spending then jumps from $54 billion in 2014 to $216 billion in 2019. That’s just the beginning.

``To be unduly optimistic (more so than the CBO), assume that the new entitlement schemes only increased by 7% a year. At that rate spending would double every ten years — to $432 billion a year in 2029, $864 billion a year in 2039, and more than $1.72 trillion by 2049. That $1.72 trillion is a conservative projection of extra spending in one year, not ten. How could that possibly not add to future deficits?

``Could anyone really imagine that the bill’s new taxes and fines could possibly grow by 7% a year? On the contrary, most of the claimed revenues are either a timing fraud (such as treating $70 billion for long-term care premiums as newly found treasure) or self-defeating. The hypothetical tax on Cadillac plans (suspiciously postponed until 2018), for example, is designed to discourage such plans from being offered by employers or wanted by employees — that is, it’s designed to yield less and less over time.”

Figure 5: US Treasury on Government Debt Estimates and Heritage.org on welfare programs

In the Secretary of the Treasury’s ‘2009 Financial Report of the United States Government’ report which does not include the Obamacare in its estimates, it recently warned (see figure 5 left window), ``But the Government must simultaneously address the medium- and long-term fiscal imbalance resulting from past budget deficits, the impact of the economic downturn, and demands on the nation’s social programs, notably Medicare, Medicaid, and Social Security. As currently structured, the Government's fiscal path cannot be sustained indefinitely and would, over time, dramatically increase the Government's budget deficit and debt.[4]” [emphasis added]

So Obamacare is likely to shorten the reckoning period for the current unsustainable path of growing fiscal risks from a vastly expanding welfare program.

Politicization of US Healthcare

Moreover, the 2,400 page law is a quagmire of bureaucracy[5]. This means much of the America’s healthcare will be politicized and effectively rationed by the unelected officials. And the traditional symptoms from increased bureaucracy will likely adversely impact health care distribution via more red tape, cost overruns, risks of fraud, risks of corruption, shortages, delays in payment, higher taxes on the wealthy, delayed or waiting list treatment, possibly reduced payments to hospitals and physicians, diminished competition and innovation and etc.

Hence, rising taxes, added regulatory compliance and more bureaucracy is likely to lead to lesser productivity, reduced incentives for entrepreneurship and competition or an increase in the cost of doing business or higher economic cost structures.

Protectionists are likely to blame other countries for job losses anew, when redistribution programs as massive as this would likely be a major factor in reducing investments.

This, is aside from, the prospects of heightened inflation and credit risks which may have seminally manifested itself on the treasury markets, last week. Of course as explained above, the sweetspot of inflation may blur such risks for now.

As Robert Higgs aptly explains[6], ``because health-care-related economic activity is such a huge part of the overall economy, what happens in this sector will have significant consequences for the operation of other sectors. For example, when Obamacare turns out to be much more costly than the government has claimed it will be, the government’s demand for loanable funds will be greatly increased, with far-reaching effects on interest rates, investment spending, economic growth, and even the U.S. Treasury’s creditworthiness. It is not inconceivable that the burden of supporting this health-care monstrosity will prove to be the (load of) straw that breaks the back of the government camel in the credit markets, where the U.S. Treasury has long been able to borrow the greatest amounts at the lowest rates of interest because its bonds were considered virtually riskless” [bold highlights mine]

Nevertheless one of the investment opportunities from the pollicisation of American health care, which concerns us non-Americans, should be off shore or medical tourism.

The rest will just be more like today, more offshoring and outsourcing and diversification in search for cost effective ways to maximize profits.

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[1] Medicare, Wikepidia.org

[2] Mitchell, by Daniel J Will Federal Health Legislation Cause the Deficit to Soar? [Joint Economic Committee, “Are Health Care Reform Cost Estimates Reliable?” July 31, 2009. The JEC cites 1967 testimony by Robert J. Myers.]

[3] Alan Reynolds, Cato.org, It’s NOT a Health Bill, NOT a Medicare Tax and It Can’t Possibly Cost Only $940 Billion

[4] Secretary of the Treasury, Director of the Office of Management and Budget (OMB) and and Acting Comptroller General of the United States, “2009 Financial Report of the United States Government,”

[5] Businessweek, Obamacare's Cost Scalpel

[6] Higgs, Robert The Health-Care Reform Act: Que Paso?, Independent.org

Reason TV on Obamacare: 3 Reasons Healthcare Legislation Won't Reduce The Deficit

From Reason TV.

Are Inventory Buildups Meant For Government or For Consumers?

Quotes of the day are occasionally featured in this space, to put a spotlight on outstanding words of wisdom. However, today we will quote what may seem as an outlandish idea.

This from Finance Asia, ``Inventory is a crucial element to the global recovery because of the need for the corporate sector to spend in order to alleviate the government sector from the existing debt bubble."

Put yourself in the shoes of the producer-corporate president, entrepreneur, proprietor or etc... and reply to this question:

Do you spend on building up inventory to "alleviate the government sector" and thereby assure yourself of capital losses? Or do you spend on inventory in the expectations to profit from sales to customers?

It's a wonder, is such an observation reflective of the activities from another planet? Or is this a typo error?

Global Poverty Rates: Slumdog Declines On Deepening Globalization

The Economist gives us a good news: poverty rates (in %), as signified by slum dwelling, has been declining around the world, since 1990.


According to the Economist,

``THE proportion of the world’s urban population living in slums has fallen from nearly 40% a decade ago to less than a third today. China and India have together lifted 125m people out of slum conditions in recent years. North Africa’s slum population has shrunk by a fifth. But the absolute number of slum dwellers around the world, estimated to be some 830m, is still rising. And in a few countries the share of the urban population in slums has also grown. In Zimbabwe, economic collapse and the forced relocation of urban dwellers have lifted the urban slum population. In Iraq, as a result of conflict, the number of people living in slums tripled in ten years." (emphasis added)

True, the absolute numbers have been rising but the % rates have materially declined.

However, since trade and the GDP has been highly correlated, the principal cause of such decline is most likely due to economic freedom or greater trade (globalization).

According to the WTO, ``Data in real terms show that world gross domestic product (GDP) and world merchandise exports not only move in tandem, but that export growth exceeds GDP growth. Growth of world GDP is associated with an even higher growth in international trade."

Here are some WTO charts...

Merchandise exports and GDP in % annual change (line chart)

Merchandise Exports and GDP (same data but in bar charts)

The distribution or ratio of exports and goods and commercial services to GDP 2007 as seen in via map
Finally, from Heritage Foundation the relationship of economic freedom (freer trade) to GDP.

This is what the protectionists want to reverse, yet sanctimoniously claim the moral high grounds!

Lessons From China-Google Schism

The China Google rift has given us some interesting insights.


This from the New York Times, (all bold highlights)

``The story behind the success of these companies is a simple one, some analysts say. The young people who dominate Web use in China are not just searching for information; they’re searching for a lifestyle. They are passionate about downloading music, playing online games and engaging in social networking.

``“Sixty percent of the Internet users here are under the age of 30,” said Richard Ji, an Internet analyst at Morgan Stanley. “In the U.S., it’s the other way around. And in the U.S. it’s about information. But in China, the No. 1 priority is entertainment.”

``Experts say American companies have largely failed here because they don’t have local expertise, are too slow to adapt and don’t know how to deal with the Chinese government.

``“Internet companies in China have to work so closely with the government,” said Xiao Qiang, of the China Internet project at the University of California, Berkeley. “And that means the government’s political agenda can become the company’s business agenda.”

``The need to censor Web sites, for example, can overwhelm smaller companies, Mr. Xiao said. “This becomes a growing business cost. So often, small companies don’t develop.”

``At this stage, analysts say the Web in China is less about innovation than about quickly delivering on the latest online trend.

``“People here are quick to see trends, and to clone and innovate,” said William Bao Bean, a former Internet analyst who is now a partner at Softbank China & India Holdings. “If one company is doing well, other companies will quickly clone it and roll it out.”...

My observations:

1. cultural difference in the use of the web: "And in the U.S. it’s about information. But in China, the No. 1 priority is entertainment.”

2. American companies outside the China's intrusion has failed to grab a substantial share because of the lack of local knowledge or expertise.

This is very Hayekian. From the Use of Knowledge in Society, ``But a little reflection will show that there is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others because he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active cooperation."

How does this relate to macroeconomics-alot!

Google's failure involves one of risk money plus a real attempt to establish or gain a foothold in China's market. Whereas people or even officials condemning China, have not been there nor have they a real or working knowledge of how things operate in China. All they base their polemics is on aggregate assumptions. If Google can be wrong how much more with personalities suffering from "fatal conceit".

3. Government intervention have limited competition to the locals and may have even politicized the distribution.

More insights from the New York Times, (bold highlights mine)

``One advantage local companies have is government protectionism. Because the Communist Party wants to maintain tight control over communication and the media, foreign Internet companies come under suspicion.

``For instance, YouTube has been blocked inside the country for over a year, ever since a user uploaded a video that was said to show human rights violations in Tibet.

``YouTube, which is owned by Google, had a large following here. But now online video in China is being championed by companies like Youku.com and Tudou.com. They may have dominated anyway, analysts say, but it certainly helps to have few big competitors.

``And without competition here from Facebook, which has not yet tried to develop a site for the Chinese market, a social networking site called Kaixin001.com has managed to register over 70 million users.

``But some experts say Google’s departure will leave Internet users here with fewer options, making the country’s Internet market less competitive and less open.

“The biggest loser is Netizens,” says Fang Xingdong, chief executive of Chinalabs.com, a research firm. “Google is a multilinguistic search engine, but Baidu is a Chinese-language one. Chinese information only occupies a small fraction of the Internet.”

Additional observations:

4. It's odd that the New York Times can be promoting competition (selectively though), apparently this depends on which interest groups benefits.

5. As the article suggests, government protectionism is considerably hindering the development of social networking sites. This translates to endemic disadvantages or obstacles from developing the local market (even if the Yuan appreciates!) and from attaining productivity enhancing facilities that would enable them to even be more competitive in terms of value-added products.

Put differently, in a world being revolutionized by Web 2.0, China will unlikely match the level of capital structure of economies that fosters open competition in the cyberspace that would lead to more innovation.

So unless China opens up, the pace of growth will be constrained by the current industrial framework. But she will lag in the advances of technology, which I think will be a significant growth driver for the world over the coming years.

Distinguishing Political Indentity From Ideology

This is excellent stuff from Brink Lindsey on Partisanship published at the Cato Unbound. (Pointer to Bryan Caplan of Econlog).

Here, Mr. Lindsey observes that partisanship is much about identity more than ideology.

Here is an excerpt: (bold highlights mine)

``It’s not just that partisans are vulnerable to believing fatuous nonsense. It’s that their beliefs, whether sensible or otherwise, about a whole range of empirical questions are determined by their political identity. There’s no epistemologically sound reason why one’s opinion about, say, the effects of gun control should predict one’s opinion about whether humans have contributed to climate change or how well Mexican immigrants are assimilating — these things have absolutely nothing to do with each other. Yet the fact is that views on these and a host of other matters are indeed highly correlated with each other. And the reason is that people start with political identities and then move to opinions about how the world works, not vice versa."

``So yes, most partisans are “better informed” than most independents, because they have a political identity that motivates them to have opinions and then tells them which ones to have as well as the reasons for having them. Consequently, partisans may have more information in their heads, but their partisanship ensures that this information is riddled with biases and errors and then shields those biases and errors from scrutiny. This is not a state of affairs worth defending.

``Virtue as well as truth is a casualty of partisan zeal. Even when partisans know what the score is, they’re constantly tempted to shade the truth, or at least keep silent, in order to be a good team player. Recall, for example, the fury unleashed this past fall on the handful of conservative commentators who were willing to admit the obvious: Sarah Palin was obviously, embarrassingly unprepared for the office she was seeking. In coalitional psychology, the only thing worse than an infidel is a heretic, and that fact ensures that most partisans keep their heterodox opinions to themselves. Good for the team, perhaps, but bad for the soul — and the republic."

My comment:

Mr. Lindsey' observation, in my opinion is spot on.

In the Philippines, the partisan crowd think that they argue about issues, but all the while their arguments revolve around identity or personality. Definitely not ideology. That's why I call this Personality Based politics, where leadership preferences are based mainly on popularity, symbolism or connections.

For example, the public's impression of corruption appears mainly a moral issue. Lost in the argument is the interrelationship between regulatory structure and how these affects behavior of affected agents, the bloated bureaucracy, the quality and web of laws, the incentives governing the officials and the bureaucracy, patronage system, election spending, restrictions, and many more.

And it's why the elixir of "clean" government won't happen. Not when the critical decisions affecting the economy are determined politically.

It's just that democracy allows people to vent changes in terms of hope-even when they are false hopes.

In addition, it is also true that highly partisan people engage in analysis that are highly biased and full of logical errors. Although this would seem like economic creed, perhaps identity indeed is more the culprit for such incoherence. The confusion perhaps stems from forcing to fit data mined facts to the belief adhered to by the leaders.

Mr. Lindsey sees a change in the shape of politics as a sign of hope,

``In America until relatively recently, and in less developed democracies today, the predominant form of partisanship has been a concrete, personal loyalty to specific leaders and comrades. This is the partisanship of patronage and clientelism — of the Jacksonian spoils system, Tammany Hall, and the Chicago machine. In the twilight of this phase of American democracy, 64-year-old Illinois state legislator John G. Fary won a seat to Congress and made this statement of his plans: “I will go to Washington to help represent Mayor Daley. For twenty-one years, I represented the mayor in the legislature, and he was always right.”

``In the newer style of partisanship, which has emerged with a richer and better educated electorate, loyalty has grown more abstract. Now shared allegiance to broad principles of public policy is the defining element of party ID. Parties have grown more ideological, and so have partisans. Polarization is the name we’ve given to this development.

``I regard the shift toward a more ideological politics as progress. Broadly speaking, we have been moving away from politics as an amoral struggle between rival gangs and in the direction of politics as a contest of competing values. Because people have differing values, and assign different weights to the values they share, there can never be an end to politics. Accordingly, even in an ideal world where all citizens are completely rational and equally public-spirited, a politics and thus a partisanship of values would still be necessary. Here, then, in the realm of values, is the purest and most durable source of political identity."

My comment: Somehow, the web should be able to amplify on such shift as people learn more about ideals and form groups 'tribes' that eventually command the public's attention, draw a larger following and eventually acquire political heft.

Albeit perhaps, this would take longer to happen in the Philippines. Nevertheless, as a Confucian saying goes, a journey of a thousand miles begin with a single step.

US Protectionist Pressures: India Is Feeling The Heat Too

One of the misguided notions held by the liberal view in the US is that the proposed protectionist measures targeted to resolve so-called "global imbalances" will likely be confined to a US-China affair.

Unfortunately, this view, which panders to sensationalism, fails to take to account the repercussions of rabble rousing. In the other words, the likely side effect from demagoguery is to fuel a nationalist hysteria that would brook xenophobia and or racism. (These people seem to have forgotten the ultra-nationalism of Nazism which triggered World War II during the last century)

And it appears that India has also been taking the heat from such pressures.

India's commerce minister has been reported by Financial Chronicle as rebutting allegation that India has been taking away American jobs.

Here is the Financial Chronicle,

``Urging the US to reform its visa policies, commerce minister Anand Sharma said here today that the paranoia of the Americans about Indians taking away their jobs, especially in the IT and services sectors, is a myth.

``There is an incorrect perception in the US that Indians are taking away the jobs of Americans, which is driven more by the fast-paced growth India in the IT and services sectors, Sharma told newsmen.

``Citing three recent reports, including one by PricewaterhouseCoopers and International Business Forum, Sharma said, "contrary to popular perception, Indian BPO companies have created income worth USD 106 billion inside the US in the past three years ending 2009, and generated 3,00,000 jobs out of which 2,50,000 were filled by Americans."

"These are jobs for Americans created in America but by Indian companies. This is a myth that jobs are being taken away by Indians," Sharma said"

There seems to be a sense of desperation that has been creeping into the progressive camp as seen in the recent actions of politicians and their intellectual followers as election season nears.

This desperation appears to have been manifested yesterday when the liberals finally got into the act to successfully ram down the throats of the American public, the highly controversial and unpopular Obama Health reform legislation in the House of Congress, a year after President Obama's assumption to office.

And such impetuousness appears to be 'throwing the gauntlet' to any party that crosses path with their desired political agenda. And India appears to be a victim of such emergent antagonistic sentiment.

Nevertheless the apparent anxiety is likely to be reflected on the outcome of the next elections.

So, the current crop of leaders are doing whatever they can to generate a sense of emergency for them remain in power, regardless of the consequences of their actions. It's a case of when "push comes to shove".

Be careful what you wish for.

US-China Trade Imbalance? Where?

Mercantilists claim that the huge trade imbalance between China and the US serves as justification for enabling protectionist measures.

Well not so fast.

Even based on accounting, where financial securities are added to the equation, such claims are shown to be unfounded.

Professor Mark Perry elaborates,

``1. In 2009, the U.S. imported more from China ($354 billion) than it exported ($93 billion), resulting in a "trade deficit" of -$263 billion on our "current account" (data here).

``But that is only part of the international trade story, since there are also financial transactions that have to be accounted for, and that deficit on the current account has to be offset somehow, since all international trade has to balance (it's based on double-entry bookkeeping).

``2. The offsetting balance came from the $263 billion capital account surplus in 2009, as a result of $263 billion of net capital inflow to the U.S. from China to buy our Treasury bonds and other financial assets.

``3. The $263 billion capital account surplus exactly offsets the current account deficit.

Bottom line:

Professor Perry: ``There really is NO trade imbalance, when we account for: a) exports and imports of goods and services, AND b) capital inflows/outflows. Stated differently, the balance of payments is always ZERO. We buy more of China's goods than they buy of ours, but then China buys more of our financial assets (bonds and stocks) than we buy of theirs. So in the end, international trade with China, is balanced, not imbalanced." (emphasis original)

My comment: Experts twist facts to provide intellectual cover to populist politics. It's called political hysteria.

Learning From Sweden's Free Market Renaissance

The popular impression of Sweden is that her success had brought about by big welfare government.

In the following video, the Center for Freedom and Prosperity gives a succinct economic history on how Sweden attained her wealth based on limited government, rule of law and property rights, and how Sweden's success had been stalled by the emergence of big government.

And in learning from the recent mistakes, Sweden has embarked on a reform to scale down big government. (hat tip: Cafe Hayek)

After The Philippine Peso’s Breakout, Is The Phisix Next?

``Every restriction on the freedom of entry into a trade reduces the security of all those outside it.” Friedrich A. Hayek, Road To Serfdom

It didn’t take long for our expectations to happen.

Last week we argued that while the local mainstream media and the public have been overly fixated on politics, which they presumed as THE overwhelming force that would drive the domestic markets, external forces seemed to have a greater influence[1].

In contrast to the local mainstream mindset where many have argued for “election risks” and henceforth suggested a “sell” we have been taking the opposite stance, the PESO and the PHISIX have, in colloquial, been “rarin’ to go”-ergo a BUY!

And true enough, the first phase of the impact of our external influence theory have manifested in the markets as the Philippine PESO hit a 19 month high!

And local media appears lost for explanations!

One outfit imputed the Peso’s rise to the recent actions of the US Federal Reserve. Another pointed to a firming US recovery. A foreign report alluded to an alleged arbitrage between offshore and onshore funds and finally the Bangko Sentral ng Pilipinas (BSP) reportedly said that the strengthening Peso has been due to “country’s higher export earnings, in spite of jitters about the coming elections and sovereign debt concerns in some European countries”[2].

My reply: DUH!

Since the Peso’s gain have been in a winning streak, instead of just an outsized aberration or anomaly as signified by a one week jump, hardly any of these explanations “fit” the actuations from which underpins the true dynamics of a buoyant Peso.

Say for example, if a strong peso had been a result of an arbitrage, then the impact is likely to be a short-term reaction. But why a 4 straight week of gains?

In addition, how can ‘jitters about elections’ explain the gains of export earnings? If global consumers see the output from local producers as being ‘affected’ or disrupted by elections, then the former would have probably coursed their transactions with producers of some other nations than from the Philippines. But has this been so? Based on the reply of the BSP official, the answer is an obvious NO! The official’s reply reveals of the apparent self-contradiction or cognitive dissonance.

So how can we SQUARE election jitters with, not only advances in the Peso, but also of export earnings?

Moreover, if these have all been about the US, then an outperformance by the US relative to Asia or the Philippines should translate to a gain in the US dollar vis-a-vis the Peso. What a dichotomy!

Available bias is an intuitive attribution of activities in the marketplace to current events. Unfortunately, market signals appear to have completely diverged from popular sentiment to even warrant the use of such behavioural lapse.

In short, popular sentiment has been so confounded. Yet media, and even officials, obstinately insist on the claptraps of false linkages!

In essence, popular sentiment is all about SENSATIONALISM!

Commons sense is, thus, sacrificed for irrational passion.

To further exacerbate the mainstream anguish of cognitive dissonance, the Philippine equity benchmark, the Phisix, added another week of gains to score its SIXTH straight.

The Phisix is just about [less than] 1% away from a breakaway run.

And if we earlier exhibited how the Peso tracked Asian currencies, then this week’s first chart features Asian equities (see Figure 1)

Figure 1: Bloomberg: ASEAN and the MSCI Asia Pacific Index

At the upper window is the performance of our main ASEAN neighbours.

One would note that Thailand (SETI-orange) and Indonesia (JCI-red) appear to be on a turbocharged performance following recent resistance breakouts.

Singapore [FSSTI-yellow] echoes the price activities or the chart of the Phisix [not included] and appears poised to test on the resistance levels set last January.

Only Malaysia [KLSI-green], which also broke out earlier, seemed to have lost momentum. While bears may take the Malaysian case to argue that this could serve as an indicator for the rest of the region, in my opinion, this isn’t likely so.

Why?

Because the actions of the MSCI Asia Pacific index, a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the developed and emerging markets in the Pacific region. As of June 2007, the MSCI AC Pacific Free Index consisted of the following 12 developed and emerging market countries: Australia, China, Hong Kong, Indonesia, Japan, Korea, Malaysia, New Zealand, Philippines, Singapore, Taiwan, and Thailand[3], suggest that Malaysia is an exception rather than the rule.

The MSCI, as exhibited in the lower window, replicates the actions of the Phisix and Singapore and appears in position for the same momentum as we have seen in Thailand, and Indonesia and somewhat in Malaysia.

In short, the overall story that can be gleaned from the region’s equity markets today is one of RISING and not falling markets!

Besides, the foundering momentum in Malaysia may not last long, given the constructive general ambiance, unless of course there is an untoward quirk which we have yet to identify.

Finally, only one article seemed to have referenced on what truly mattered most, a Chinese yuan/renmimbi revaluation as we will discuss below.

In essence, two factors, one structural and one cyclical, will drive the global financial markets over the medium to long term; specifically, the record steep yield curves and the prospects of a rising Chinese yuan.

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[1] see Philippine Markets And Elections: What People Do Against What People Say

[2] Manila Times, March 13, 2010 Foreign money in RP financial assets keeps flowing

[3] MSCI Barra, Index Definitions