The Tipping Point Of The Industrial Age Political Order

Politics has been shifting along with the evolution in the economy. The problem is that most people’s mindset has still been stuck with archaic models and or of visions of the previous order.

Old One Horse Shay (Wikimedia)

Walter Russell Mead captures neatly this intuitive ‘resistance to change’.

Mr. Mead writes, (bold highlights mine)

Krugman and the Times editorial board are both examples of something important in American life today: left-liberal intellectuals are increasingly able to understand that individual supports of the blue social model are crumbling. But they are still so captivated by the blue model, so profoundly convinced that the Progressive movement’s solutions to America’s social ills in 1910 are still valid today, that they cannot yet look beyond the blue model to imagine a different and brighter future for the United States....

If, as Krugman posits, demand for US workers will be falling in both manufacturing and the professions, how exactly will labor unions get higher wages for their members? Factories will be closing in Krugman’s world and law firms will be turning more and more work over to computers or shipping it overseas. Perhaps stronger unions could make it harder for companies to do this for a while, but ultimately facts speak. Stronger unions making tougher wage demands will not exactly persuade American (and foreign) investors to create new jobs in this country — or to slow down their efforts to reduce their US workforce by outsourcing and automation. When human workers receive rising wages, become harder to fire, and are governed by ever more convoluted and expensive work rules, replacing them with computers becomes more attractive, not less.

Unions tend to flourish when demand for workers is rising (as in China today); they do not and cannot protect the situation of workers as a whole against a background of falling long-term demand for their work.

The problem isn’t that this or that piece of the blue social model is breaking down and needs to be fixed so that the rest of the model can go on working well. It’s not that the university system is broken and that if we fix that the model still works. Ditto the public sector unions or the situation of the labor movement as a whole. Mandating an expensive new set of health care entitlements at a time of looming insolvency won’t help either.

The problem with the blue social model today is systemic. It’s not a problem with one piece or another. The pieces are all falling down and breaking apart at once. It is what happened to the “One Hoss Shay” in Oliver Wendell Holmes’ poem about, they used to teach us back in Pundit High, the breakdown of Calvinist religion in New England.

Read the rest here.

Like the transition of the economic order from agriculture to industry, we are seeing also the same transition from industrial era to the information age. And since the economy drives politics, so will the political structures shift accordingly.

The important point is that these ‘political-economic’ transitions represent a discovery process. It will NOT happen overnight. It will come with painful episodes of trial and errors with many fine tuning along the way.

It will also come with the auto response mechanism known as “resistance to change” especially from entrenched parties that had long benefited from the old order. Walter Mead’s take down of left-liberal intellectuals go along this line of thought.

Labor unions can be compared to current government budget deficits modelled after Bismark’s welfare states. All have been based on the industrial age top-down concept.

And the same top-bottom dynamic goes along with information flows as seen through the previous mainstream media model. But the web has been providing intense competition such that the old force appears to be breaking down. And unlike governments and their apologists, who seem plagued by intellectual stasis, many in the media appear as trying to cope with the changes of the current trends.

While the welfare construct could be seen to have worked earlier, these economically unsustainable platforms have been giving way. In short, the politics of the industrial age may have reached its tipping point.

And as the revolutions in Greece or the MENA, or the standoff in Wisconsin manifests, they operate on a common denominator—the political economic structure of the industrial age has been crumbling.

Many will struggle to maintain the old order, and that’s why transitions are never smooth. But at the end of the day, we are likely to learn how to adjust to these new realities in spite of the conflicts. Alternatively, this extrapolates to "don't fight the trend".

And I close with Mr. Mead’s conclusion...

This is the essence of progress: as we move forward less of our society’s time and energy goes into just staying alive; more of it goes into living better. The key to that now is to move as quickly as possible to reshape these critical professions with the full power of information technology

Amen.

Graphic On Social Signaling

Here is an awesome graphic representation of social signaling from the ever insightful Jessica Hagy. (published on her website Indexed as “So Who’s Winning”)

The Crucial Role of Entrepreneurship To Economic Prosperity

The US Economic Report of the President acknowledges the crucial role played by entrepreneurship in wealth generation...

America’s small businesses are an essential building block to economic growth and prosperity, in part because entrepreneurs create a disproportionate share of net new jobs in the U.S. economy.

The report includes the following data. (bold highlights mine)

One particularly important contribution of small firms to the Nation’s well-being is the jobs they create. According to the SBA’s Office of Advocacy, small firms accounted for 9.8 million of the 15 million net new private sector jobs created between 1993 and 2009—nearly two out of every three of the period’s net new jobs. In normal times, new small businesses account disproportionately for employment growth. Although many new firms fail, surviving Supporting America’s Small Businesses | 145 firms create enough jobs to offset those lost to firm exits, so that most jobs created by firm births persist. A recent Kauffman Foundation study, for example, shows that startup firms created 3.1 million gross jobs in the United States in 2000. By 2005, about half of the initial firms had failed, but the survivors still employed 2.4 million people (Kane 2010).

(source Tim Kane, Growthology.org Kauffman The Foundation of Entrepreurship)

I am reminded of the great Ludwig von Mises who wrote,

In the capitalist system of society's economic organization the entrepreneurs determine the course of production. In the performance of this function they are unconditionally and totally subject to the sovereignty of the buying public, the consumers. If they fail to produce in the cheapest and best possible way those commodities which the consumers are asking for most urgently, they suffer losses and are finally eliminated from their entrepreneurial position. Other men who know better how to serve the consumers replace them.

Entrepreneurs, aside from the capitalists, are the heroes of the modern capitalist (market) economy.

Gender Equality: Women's Growing Role In The Society

Below is an interesting chart from the Economist.

The Economist writes,

A CENTURY ago, women were scarcely allowed to vote, let alone stand for

election. Today women hold seats in parliaments across the world, and in one case are even in a majority. This is one of many achievements that will be celebrated on March 8th 2011, which marks the 100th anniversary of International Women's Day. Policies and quotas have helped women in politics and in business. In Norway, women make up nearly 40% of board members of the largest listed companies. Yet on average across Europe they only occupy one in every ten board seats. This may improve, with more women than ever now in the global business-school pipeline. In 2010, nearly 106,000 women sat the GMAT exam, an MBA entrance exam, accounting for over 40% of examinees. In the OECD, a club of mostly rich countries, 61% of women are active in the labour force. But the difference in male and female employment rates in many countries is still large and persistent. While progress has been made, there is a long way to go before gender equality is reached.

As people around the world learn to embrace the tenets of the division of labor, women will certainly play a greater role in the society.

The Government Owns YOU!

The government presumes to own what you earn, and you are a tax evader!

That’s what the new tax regulation implies.

From the Inquirer.net

Every private citizen earning at least P500,000 annually will now have to file the equivalent of a statement of assets and liabilities and net worth (SALN)—previously required only of public officials.

The Bureau of Internal Revenue (BIR) said the new rule was meant to give regulators “the whole income picture of [an individual] taxpayer” and to help improve collections by clamping down on tax evasion.

The order, Revenue Regulation No. 2-2011, was signed and issued on March 1 by Finance Secretary Cesar V. Purisima.

Every citizen making at least P38,461 a month (assuming he receives 13 months’ worth of salaries each year) will be required to file a personal SALN to justify his or her gross income to the BIR.

The Philippine Government wants to control you.

Of course, the middle class and the politically unconnected will be the hardest hit, since this is a slippery slope or prelude towards MORE taxes.

And obviously this is being done for the benefit of the politicians and the bureaucracy. See the difference between political and so-called market "greed"?

Maybe these guys don’t know what is going on in the Middle East and Africa.

UPDATE: My friend Paul How deals with the same problem here

Will The US Fall For Osama Bin Laden’s Trap?

From Eric Margolis at the Lew Rockwell.com, (bold emphasis mine)

Bin Laden’s primary goal is overthrowing US-backed autocratic regimes across the Muslim world. Attacking western targets that supported them was only secondary.

Col. Gadaffi was not totally wrong when he blamed al-Qaida for Libya’s uprising. Bin Laden was not pulling the strings of Libya’s rebellion, but al-Qaida’s revolutionary philosophy and anti-western jihad certainly inspired many young people from Morocco to Bangladesh.

That’s Washington’s big problem. Invading Libya will intensify the fires burning in the Arab world and create yet another anti-western jihad.

This is exactly Osama bin Laden’s strategy: draw the bull in the china shop – US into many small wars in the Muslim world – and so bleed it dry. So far, the US has been cooperating with Osama’s master plan.

“I Told You So!” Moment: Oil-Stocks Correlation Breakdown

Great graphic from Bespoke Investment

Bespoke Invest writes,

As shown, the correlation between the stock market and oil remained positive up until just recently, but the breakup between the two has been swift and extreme. At the moment, the one-month correlation between the two stands at -0.70.

As to whether US stocks will continue to fall as oil prices move higher or if the current retracement can be interpreted as just as a normal correction has yet to be determined or resolved.

Putting on too much emphasis on the present action of the US equity markets could mislead because these markets seem to be digesting on new information or simply undergoing a normal profit-taking environment. Remember, no trend moves in a straight line.

Bottom line: the oil-equity causal relationship can't be read as a reliable indicator.

The Low Correlation Between the Stock Market And Economic Growth

Analyst John Mauldin cites Crestmont Research’s Ed Easterling who argues “stock market is not correlated with economic growth”.

They say “secular bear markets even have higher nominal GDP growth than secular bulls”, with the chart below as proof…

And also say “34% of the years since 1950 with economic growth have experienced declining earnings per share (EPS) growth!” Again a series of chart below as proof…

I am puzzled.

If “low correlation” means economic growth has not functioned as a good indicator of the direction of the stockmarket price trends, then why the heck, do these experts keep talking about various aspects of “economic growth” at all? This is obviously a cognitive dissonance.

One factor for the insistence of the “economic growth” conversation could be that they don’t agree with the referenced opinion.

A second factor could be entertainment value. Experts write to entertain more than to disseminate positive knowledge.

A third factor could be to use of such contrarian evidence as cover to their earlier misdiagnosis of the markets and the attendant mistakes in prediction.

Finally this could all be about social signalling.

Yet this just goes to show how more and more ‘experts’ appear to be getting lost or confused about what’s been going on. In other words, traditional methodologies and metrics are becoming more dysfunctional.

And all this provides more credence to what I’ve been saying all along.

Why Global Labor Unions Have Been On A Decline

Labor unions have been on a declining trend, not just locally but internationally.

Trade or Labor Unions, according to the Wikipedia, is “organisation of workers that have banded together to achieve common goals such as better working conditions. The trade union, through its leadership, bargains with the employer on behalf of union members (rank and file members) and negotiates labour contracts (collective bargaining) with employers. This may include the negotiation of wages, work rules, complaint procedures, rules governing hiring, firing and promotion of workers, benefits, workplace safety and policies. The agreements negotiated by the union leaders are binding on the rank and file members and the employer and in some cases on other non-member workers.”

Labor unions, for me, function as political force, which uses government laws for extracting economic privileges, at the expense of the company owners, non-labor union workers and taxpayers indirectly (such as the GM bailout) or directly (government unions).

The main goal of the labor union is to restrict manpower supply and to raise wages and benefits above market levels. And in doing so, labor unions add to the imbalances in the labor markets, which results to higher unemployment levels and the lack of competitiveness among many others.

For public unions the desire is for more taxpayer funded privileges.

In other words, labor unions thrive on a non-competitive environment.

As shown in the above (interactive) chart by the New York Times, since the 1980s labor or trade union around the world has seen a sharp decline except for a few, e.g. Iceland.

The main reason: rising international competitiveness or globalization.

Cato’s Dan Griswold explains (bold highlights mine)

Economic theory offers a number of reasons why growing international competition would be damaging to the interests of labor unions. More competition in product markets means greater elasticity of demand for labor—that is, global competition means that demand for labor is more sensitive to any change in wages.

Employers competing in global markets cannot simply pass higher wage costs along to consumers in the form of higher prices because consumers themselves can choose to buy substitute products from lower-cost, often nonunionized producers.

Expanding capital mobility means that employers are more able to shift production to lower-wage countries if necessary. A more mobile company is better able to threaten or employ an “exit” option in response to union demands. In the face of product competition and capital mobility, union demands for higher wages can lead instead to fewer domestic union jobs, as has been the case in a number of firms and industries.

In contrast, in markets insulated from robust competition, unions can more readily demand a share of a company’s or industry’s profits without fear of compromising the survival or competitiveness of the employer. Insulated markets create rents in the form of abovemarket profits that unions can then bargain with management to divide between them at the expense of the consuming public.

In short, the more a country is open to trade, the bigger likelihood of the diminished role of labor unions.

There are other non trade factors are involved too.

They include, adds Mr. Griswold, more rapid growth of certain categories of workers, such as women, southerners, and white-collar workers, who are less favourable to unionization; the deregulation of transportation industries; declining efforts of unions to organize new members; government activity that substitutes for union services, such as unemployment insurance, industrial accident insurance, leave policies, and other workplace regulations; the decline in pro-union attitudes among workers; and increased resistance among employers

For me, another very critical factor second to globalization has been the ongoing transition from industrial era to the information age.

Labor unions had basically been tailored for vertical organizational structures. But times are changing. As technology (via the web) becomes more entrenched, the nature of work has gradually been reconfiguring. And this provides lesser opportunity for unionization to take place, aside from the financial incentive or viability to maintain one.

As Alvin Toffler writes in Revolutionary Wealth,

Work is increasingly mobile, taking place on airplanes, in cars, at hotels and restaurants. Instead of staying in one organization, with the same co-workers for years, individuals are moving from project team to task force and work group continually losing and gaining teammates. Many are ‘free agents’ on contract, rather than employees as such. Yet while corporations are changing at a hundred miles per hour, American unions remain frozen in amber, saddle with the legacy organizations, methods and models left over from the 1930s and the mass production era.

In other words, digitalization, automation, robotics and other technology enhancements which raises productivity are taking many people out of the industrial era work. The more outsourcing and specialization takes place the lesser role played by the labor unions.

Investing guru Doug Casey also sees the same,

The good news, however, is that coercive unions are on the way out. They're anachronisms. They're leftovers from the time when people were like interchangeable parts in the giant factories they worked in. People were so replaceable that one person was little better or worse than another – because they were basically biological robots. In the early industrial era, labor was in over-supply, society was poor, and conditions were harsh everywhere. It's understandable why workers felt they had to band together for self-protection. But the industrial era is gone. The assembly line with thousands of workers is totally outmoded. In the global information age, trying to extort high wages for manual labor is pointless. Soon robots will be doing almost everything, then nanomachines will replace the robots. People will only be doing work that requires thought, judgment, and individuality. Those aren't things that can be unionized.

It pays to look at the big picture.

Labor union trends worldwide have not been declining because of culture or politics, but because of economics.

Video: Egypt's Wael Ghonim On The Egyptian People Power Revolt

Egypt's Wael Ghonim in a TED talk says Egypt's revolution is about People, Technology, Knowledge and Freedom. (Hat tip Mises Blog)

"The Power of the People Is Much Stronger than the People In Power"- Wael Ghonim

Will The US Bring Back The $1 Coin?

The US Congressional watchdog, the Government Accountability Office (GAO) says bringing back the $1 coin in replacement of the $1 note seems viable.

The GAO writes, (HT Mark Perry) [bold emphasis mine]

According to GAO’s analysis, replacing the $1 note with a $1 coin could save the government approximately $5.5 billion over 30 years. This would amount to an average yearly discounted net benefit—that is, the present value of future net benefits—of about $184 million. However, GAO’s analysis, which assumes a 4-year transition period beginning in 2011, indicates that the benefit would vary over the 30 years. As shown in the figure below, the government would incur a net loss in the first 4 years and then realize a net benefit in the remaining years. The early net loss is due in part to the up-front costs to the U.S. Mint of increasing its coin production during the transition. GAO’s current estimate is lower than its 2000 estimate, which indicated an annual net benefit to the government of $522 million. This is because some information has changed over time and GAO incorporated some different assumptions in its economic model. For example, the lifespan of the note has increased over the past decade, and GAO assumed a lower ratio of coins to notes needed for replacement. GAO has noted in past reports that efforts to increase the circulation and public acceptance of the $1 coin have not succeeded, in part, because the $1 note has remained in circulation. Other countries that have replaced a low-denomination note with a coin, such as Canada and the United Kingdom, stopped producing the note. Officials from both countries told GAO that this step was essential to the success of their transition and that, with no alternative to the note, public resistance dissipated within a few years.

My added comments:

-The previous unsuccessful efforts to replace notes because of simultaneous circulation of both notes and coins is a vivid example of Gresham’s Law at work.

Gresham's law, according to wikipedia.org, is an economic principle "which states that when government compulsorily overvalues one money and undervalues another, the undervalued money will leave the country or disappear into hoards, while the overvalued money will flood into circulation." It is commonly stated as: "Bad money drives out good", but is more accurately stated: "Bad money drives out good if their exchange rate is set by law."

In short, undervalued coins are hoarded and overvalued notes remain in circulation.

-We seem to be seeing more signs from the political authority to float trial balloons or ‘conditioning’ of the public of the possible return of the precious metals as part of the monetary system.

Add to the above a milestone, Utah recently passed in the House a bill recognizing gold and silver as a legal tender. (hat tip Mises Blog)

Reply To A Free Banking Critic: People’s Actions Represent Choices From Alternatives

A critic of free banking, asks

How much of the world’s problems are due to

Fiat money? Bailouts, Subsidies? Deregulation? Government deficits?

I’d say,

First, laws or policies shapes people’s behaviour

Second, people act for a purpose.

If a go to a burger store, I don’t usually ask how much of the burger I ordered consisted of

Mayonnaise, Tomato, Hamburger patty, Salt, Mustard, bread etc...

My purchase of a burger in that particular store represented my action out of the following possible alternatives:

-I am hungry (need to eat),

-I just want to eat (perhaps want to try out this new store),

-I am in a meeting

-I’ll buy it for someone else

Or etc...

In short, I acted on a ‘bundled’ product as a result of my choice from the above set of alternatives

As Ludwig von Mises explained (bold emphasis mine)

Action does not measure utility or value; it chooses between alternatives. There is no abstract problem of total utility or total value. There is no ratiocinative operation which could lead from the valuation of a definite quantity or number of things to the determination of the value of a greater or smaller quantity or number. There is no means of calculating the total value of a supply if only the values of its parts are known. There is no means of establishing the value of a part of a supply if only the value of the total supply is known. There are in the sphere of values and valuations no arithmetical operations; there is no such thing as a calculation of values. The valuation of the total stock of two things can differ from the valuation of parts of these stocks.

The simple message is that people’s actions are intertwined with the presented alternatives from where we make choices. One cannot draw the “valuation of a definite quantity or number of things”.

We cannot isolate one variable from the other. People’s actions are responses to an ever dynamic “bundled” environment shaped by laws, markets, culture, environment, etc...

So applied to central banking, for every transaction we make, half of it represents money issued by the government.

Thus if the central bank decides to inflate, people’s alternatives will be shaped by the changing state of the purchasing power of money. So it will be a feedback loop which spreads or ripples to most of human activity or the society covered by such policies.

As argued here, the central bank, inflationism, government deficits, welfare state, bailouts and political privileges can be seen as a holistic interconnected network of political economic arrangement. But you can’t isolate one from the other because these factors are sustained upon by each other.

And that’s also why the alter ego to inflation is usually price control. Because people’s response will likely be met by populist political policies which tries to mitigate the short term predicaments.

If people’s action can be isolated, then hyperinflation won’t result to societal devastation. And we would probably be still under the Roman empire.

The above is an example of an intellectual strawman. The logic tries to argue from an intellectual state, but in reality represents irrelevance to actual human conditions.

Finally it is further a non sequitur to say “no system is perfect” as an excuse to argue for central banks. It is NOT about being perfect, it is about being the most efficient.

Professor Ludwig von Mises has seen through such red herring...

The analogy with the state of perfection is obvious. The fully satisfied individual is purposeless, he does not act, he has no incentive to think, he spends his days in leisurely enjoyment of life. Whether such a fairy-like existence is desirable may be left undecided. It is certain that living men can never attain such a state of perfection and equilibrium.

It is no less certain that, sorely tried by the imperfections of real life, people will dream of such a thorough fulfillment of all their wishes. This explains the sources of the emotional praise of equilibrium and condemnation of disequilibrium.

We can chose to live in a perpetual state of (social utopianism) fantasy, or we can act to improve our lives based on economic reality.

“I Told You So!” Moment: Being Right In Gold and Disproving False Causations

“The list of qualities [an investor should have] includes patience, self-reliance, common sense, a tolerance for pain, open-mindedness, detachment, persistence, humility, flexibility, a willingness to do independent research, an equal willingness to admit mistakes, and the ability to ignore general panic.” - Peter Lynch

Allow me for my “I TOLD YOU SO” moment!

It’s not easy writing about financial markets (or about political philosophies too). Some feedbacks occasionally do test one’s patience, especially if they are meant, not as a serious critique, but as one to nitpick. The latter is directed at testing one’s esteem rather than to test the validity or soundness of an idea.

Thus when my views are validated by the market, contra the quibblers, I think I deserve to vent...“I told you so!”

First “I Told You So!” Moment: Gold

There are two important milestones deserving of “I told you so!” this week.

First is gold.

Gold prices are now drifting at the near record nominal levels. Early this year, gold’s lackluster price performance has prompted some commentaries to call on an inflection point or a major reversal from which I argued against.

Here is what I wrote[1],

So I unlike those who see a surge in the “event risks” from the current string of upheavals in the Middle East as a reason to sell, I see gold rebounding from these uncertainties, fed by the inflationism in central banks and eventually a rally in most of the global equity markets, including the Phisix.

With a bounce in gold, a month after, I followed this up with[2],

Don’t look now, but gold is surging right back! (I have to wait for a successful test of 1,430 before I could blurt out ‘I told you so’)

If gold is surging right back, then it is likely that global equity markets will follow gold’s path.

Figure 1: I Told You So Moment No. 1: Record Gold prices (stockcharts.com)

My self-made conditions have been met. Gold has recently passed 1,430 and was last traded 1,427.9. Importantly, global equity markets appear to be in consonance, most of which appear as moving higher, if so indicated by the indices as the Dow Jones World (DJW), Dow Jones Asia ex-Japan (P2DOW) and Emerging Markets (EEM) in Figure 1.

This would appear similar to the 2008 post Lehman event where gold reversed to the upside a few months ahead of the global equity markets.

However, the conditions for my “I told you so!” moment for the Phisix, ASEAN and emerging market stocks has not been sufficiently met, as technical barriers have yet to be breached, thus would remain pending or unsettled for now.

Diminishing Returns of Information

Before I proceed to my second “I told you so!” moment which is about the unmasking of the false causation of “MENA political crisis + high oil prices = falling stock markets”, I must admit that while the attributed events, like the MENA crisis and lofty oil prices, may not posit as the main variables for today’s major market movements, they do account for some degree of influence or relevance.

Because the emergence of such unforeseen events are considered as uncertainty (immeasurable risk, and not possible to calculate[3]), the markets work to reappraise of ‘uncertainty’s’ influence or impact, which gradually digests on them. So the influence of uncertainty depends mostly on the scale and the time value of influence.

You can go back to the chart in figure 1 and see how markets did somewhat react adversely to the outbreak of the Arab revolution highlighted by the culmination of the Tunisian Jasmine revolution (downside green arrows) which swiftly spread to Egypt (2^nd to 3^rd week of January). This, I think represented as the initial reaction to the uncertainty posed by the Arab ‘People Power’ revolts.

Once the markets learned of and adjusted to such uncertainty, or to the new information, and subsequently established its cost-benefit expectations around it, uncertainty gets to be transformed into risks (measurable potential losses) via discounting. Discounting, thus, signifies as the diminishing returns of information or the marginal value theorem[4] applied to information.

So when the temporal effects of the perceived event risks have been discounted, market dynamics eventually gives way or returns to the fold of the major influences or drivers.

Second “I Told You So!” Moment: Popular False Causations

So the du jour explanations on much of today’s market action, especially for the local media and so called experts, has been the due to the causation “MENA political crisis + high oil prices = falling stock markets”.

Figure 2: “I Told You So” Moment 2: Say What? Oil and MENA Crisis Equals Falling Phisix? (stockcharts.com)

The beauty of last week’s action or the invalidation of a flawed popular theory comes with the remarkable divergence in the price actions of the global equities relative to oil and the MENA equities.

WTIC or West Texas Intermediate Crude[5] or a major benchmark representing US sweet crude oil, which is traded at the New York Mercantile exchange, closed at $104.65 over the week. Friday’s closing price accounts for over $13 a barrel from the start of the year or about $7 up from last week! (red circle)

Meanwhile, Europe’s contemporary oil bellwether, the Brent Crude[6] has even been higher, Brent Crude was last traded at $114.79 per barrel on Friday or about $10 premium to the WTIC!

Figure 3: WTI-Brent Spread At Record Variance (Bloomberg)

Brent crude mostly comes from the North Sea and is used mostly by European and Asian consumers whereas WTI originates and is used mostly in the US.

The WTI-Brent spread (figure 3) has risen to a record premium. This record spread could perhaps be due to possible variance in the relative production levels (relative depletion rate) or reportedly concerns over the the tanker shipment routes via the Suez canal[7], where 1m barrels a day pass through. But others argue that this is likely based on arbitrages[8]. So there seems to be no unison or consensus opinion on this.

It is not clear how the Middle East crisis plays into this WTI-Bremt spread anomaly. I would have to dig deeper.

Anyway, the Middle East crisis has likewise been reflected on the region’s stock markets as represented by T. Rowe Price Africa & Middle East Fund (TRAMX).

The TRAMX has currently been undergoing a dramatic liquidation or a selloff, as exhibited by the recent collapse of major MENA benchmarks.

While news say that retail and foreign investors have been mainly responsible for this, I argued otherwise[9]—entrenched (political economic) interests could be scrambling for the exit gates.

Fearing political retribution by sequestration or by a freeze on their assets, these politically connected elites (along with the political leadership) could be scurrying to convert and safekeep their wealth outside the region and or through alternative assets, that could hide their identities.

So given the above accounts, where the MENA political crisis and oil prices appear to be amplifying the so-called event risks, we should, according to the mainstream, expect the Philippine Phisix and other Emerging Market bourses, as well as developed markets to likewise feel the heat or pressure.

Ironically, we seem to be witnessing the opposite price actions.

The Phisix (PSEC) and ASEAN Equities (FSEAX) seem to be making a signifcant inroads to the upside, as shown by this week’s substantial gains in both price actions (Figure 2).

True, one week does not a bullmarket make. Or that these rallies could constitute as ‘dead cat’s bounce’, since they are yet far from establishing technical metrics to suggest of a convincing comeback (but this would mean even bigger rallies!).

Nevertheless, the important thing is that markets appears to be consistently validating on my outlook despite pressures for me to turn “short term”.

Divergent Signals Between Currencies and Equities

I’d like to add that relative to the Philippine assets, I have been making a point that the actions of the Philippine Peso and the Phisix have been diverging[10].

Falling local stocks and a strong Peso represent an incompatible relationship. That’s because given the relatively underdeveloped capital markets here, where alternative avenues to generate returns via the financial markets are deeply constrained, the traditionally route for the elite has been to export capital (a.k.a. capital flight) when endogenous market or economic conditions are weak.

Though this correlationship may not be perfect, as there accounts for some intermittent time lags, the Peso-Phisix serves as a reliable barometer for the direction of the movement of the local stock market.

So when you have a strong Peso and a weak Phisix, you can be sure that one of them is about to give way.

And by looking at the bigger picture, we see a similar correlationship between Asian currencies and Asian equity markets (figure 4).

Figure 4: Strong correlations between Asian Stocks and Asian Currencies

The Bloomberg-JP Morgan currency basket [ADXY:IND AP Dollar Index] (green line) can be seen simultaneously weakening along with the MSCI AC Asia Pacific Index [MXAP:IND MSCI AC ASIA PACIFIC] (yellow line) during key downturns over the past 3 years. The four red ellipses have exhibited the strength of such correlationship. Of course, such correlationship also works on the upside.

The important point is that when the Philippine Peso has been firming along with Asian currencies, and where East Asian equity markets as Japan have been on the upside (Asia Pacific markets as Australia and New Zealand are likewise on the upside), even when most are either consolidating or on the downside, then it is likely that ASEAN markets, including the Phisix, are not in a bear market, but rather in a hiatus, and will likely be bouncing back as they seem to be happening.

Even the local bond markets appear to be suggesting the same.

There is also the role of retail participants, whom we have been closely monitoring[11]. As previously stated, retail participants are mostly emotionally driven participants whom Wall Street refers to as the proverbial pigs who always become a fodder for the bulls and the bears. Excessive actions (buy or sell) by retail participants usually highlight the end of the ongoing trend—in this case the downside.

For all its worth, I am simply reiterating my points which I already stated but with the providence of being complimented by current market actions that appears to validate on my theories.

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[1] See Gold Fundamentals Remain Positive, January 31, 2011

[2] See Resurgent Gold Equals Resurgent Emerging Market Bourses? February 20, 2011

[3] Wikipedia.org Knightian uncertainty

[4] Wikipedia.org Marginal value theorem

[5] Wikipedia.org, West Texas Intermediate

[6] Wikipedia.org, Brent Crude

[7] AMEINFO.com Trading opportunity WTI versus Brent, February 10, 2010

[8] Commodity online, Will WTI-Brent price difference stay? March 4, 2011

[9] See Middle East Stock Market Meltdown: Likely Driven By (Political Economic) Insider Selling March 3, 2010

[10] See Phisix: Panicking Retail Investors Equals Buying Opportunity, January, 31, 2011

[11] See Phisix: What Market Internals Are Saying, February 20, 2011

Knowledge Acquisition: The Importance of Information Sourcing and Quality

“The Pen Is Mightier Than The Sword”- coined by Edward Bulwer-Lytton English author, (also attributed to Dr. Jose P. Rizal)

Any serious or prudent investors in the financial markets would normally try to look for ways to improve on one’s returns. That’s if one recognizes what is workable and what isn’t. Thus, the main task of prudent investors in the financial markets is to screen information and theories and test them, and apply those that would seem as the most cogent, accordingly.

But again this isn’t true for many as returns might seem as a secondary importance. That’s because these economic agents obstinately adhere to biased or selectively chosen data (selective perception) which they interpret as applying to the whole (fallacy of composition), fixate on what is current (survivalship bias) while ignoring the rest, apply misleading definitions and embrace self contradictory and inconsistent theories.

I am just repeating what I said before. Sometimes it takes a deluge of information before the message sinks in.

Ignorance versus foolishness

Ignorance is one thing, foolishness is another. People who fail based on ignorance could be looked upon with compassion. They perhaps hardly knew of the consequences of their actions, which were most likely guided by wrong quality or sources of information.

But it’s different when people lose despite being informed or forewarned. This may be called as doggedness or practising financial religion.

For instance, when people refuse to heed of the inherent risks of conflict of interests that may arise among interacting agents[1], they are likely to fall into the Agency problem trap. Information embellished with statistics and presented as facts could mislead investors. It’s clearly an intangible or unseen risk, that’s because investors are likely to be unaware of the underlying incentives behind these presentations, which may shape or influence the way we think and how we allocate our resources.

And for non-exclusive reasons, boom-bust cycle happens because of information too. Credit fuels greed which impels people to look for information that would confirm on their preconceived notions. Bias, thereby, seeks information or analysis which performs the way dopamine functions, to serve the pleasure centers. So like drugs, misleading information will always have a market.

Also, in as much as price distortions from government policies affect the way people think, these are likewise exhibited through literatures. That’s because the mainstream usually focuses on the symptoms which are read as the cause and transmitted to the public as valid information or facts. This is also because mainstream information caters to short term orientation. In short, boom bust cycles occur also when people gorge on too much of false information.

Stakeholder’s Problem, If Birds Can Write

Most have been unwittingly seduced to the oversimplification of reading current events into market prices, for the reason that being wrong may have little consequence to them. In short, it’s usually a stakeholder’s dilemma or stakeholder’s problem[2]—where the incentives to secure knowledge are driven by the degree of stakeholdings.

Take for instance, a person who dabbles with the stock market, as sideline or for entertainment, will likely have a lesser intensity of incentives to acquire knowledge relative to an individual who lives by the stock market. The latter’s perceived risk factor is greater than the former who has other lines of revenues.

The varying situational incentives, thus, become crucial factors in determining knowledge acquisition.

Yet luck also plays a crucial role. Because no matter how wrong one’s ideas can be, for as long as such errors are made on the side of the general trend where the market is headed, market trends eventually remedies on such errors. And as a result, false ideas could lead to a self-attribution or self serving bias which according to Wikipedia.org[3], people attribute their successes to internal or personal factors but attribute their failures to situational factors beyond their control.

And this also applies even in academics, where wrong models can be seen as “workable”.

Prodigious author of the bestselling book, the Black Swan, Mr. Nassim Taleb writes of a marvellous example of in his forthcoming book[4],

Think of the following event. A collection of priestly persons from Harvard or some such place lecture birds how to fly. The bird flies. They write books, articles, and reports that in fact the bird has obeyed them, an impeccable causal link. They even believe their own theories. Birds write no such books, conceivably because they are birds, so we never get their side of the story. Meanwhile, the priests broadcast theirs.

Behind Media’s Altruisms And Biased Information

And as stated above, the quality and source of information matters.

The most likely source of information are usually the popular ones, such as mainstream media. They cater too our brain’s desire to get fed with visible, emotional, sensational, shocking or graphic linkages.

Take for instance, in the event of a disaster, media routinely appeals to the public to ask for donations. They appeal to the emotions by advocating charity work for the unfortunate victims. Media outfits create an aura where they are seen as doing purely social work. They become instantaneous heroes especially when celebrities lead them.

But this is only half true, what’s not seen is that by connecting to the public’s emotions and wallets they increase viewership on their medium. And the key to their revenues—advertisement—largely depends on the number of audiences. So media’s missives have almost always been attuned towards winning the public’s viewership. It’s like politics in a private format.

Thus for media, intention can be interpreted two ways, social work to help the community or self interests camouflaged by altruism.

In covering political philosophy, this is the same manner why socialism sells, it appeals to emotional center of the brain but are bereft of how “intentions” parlay into reality.

In terms of investment, it’s also the been same. Most people are continually deceived by information aired or disseminated by the media and their cohorts of experts, which for most instances have little value or are irrelevant.

As Rolf Dobelli writes[5],

Out of the approximately 10,000 news stories you have read in the last 12 months, name one that – because you consumed it – allowed you to make a better decision about a serious matter affecting your life, your career, your business – compared to what you would have known if you hadn’t swallowed that morsel of news.

The point is: the consumption of news is irrelevant to the forces that really matter in your life. At its best, it is entertaining, but it is still irrelevant.

Bottom line: information is vital to one’s decision making process, whether applied to the financial markets or in many other vital aspects of life.

The beauty of today’s technological advances is that information is not restricted or centralized but operates from a free market competitive environment.

And I am just part of the multitude of lowly voices here in the cyberspace trying to speak out what I see as true.

And unknown to most, revolutions begins with ideas.

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[1] See Dealing With Financial Market Information, February 27, 2010

[2] See Philippine Elections: Why I Will Vote For President "None Of The Above”, May 5, 2010

[3] Wikipedia.org, Self-serving bias

[4] Taleb, Nassim Nicolas, Birds Do Not Write Books on Birds, Chapter 8, Anti Fragility

[5] Dobelli Rolf Avoid News, Towards a Healthy News Diet Dobelli.com (hat tip Bryan Caplan)

Video: Lawrence White On Free Banking, Gold Standard and Central Banking

GMU Professor Dr. Lawrence White speaking at a monetary conference at the Cato Institute deals with free banking, the Gold Standard Banking and Central Banking. (hat tip: Tom Palmer)

The Failure Of Centrally Planned Democracies And Of Foreign Aid Dictatorships

GMU Professor Chris Coyne over at the Coordination Problem blog has some valuable insights on the current spontaneous People Power revolutions at the Middle East.

He cites two important lessons: The failure of the foreign policy of imposing ideals (democracy) abroad, and in accessory to the first, the failure of foreign aid to promote democracies via dictatorships.

On imposing western ideals Prof Coyne writes,

what is happening in the Middle East is an indictment of U.S. 'nation building' and more specifically the idea that social change toward freedom must be initiated by outsiders. Consider that the U.S has now been in Afghanistan for nearly 10 years and have been unable to ‘win the hearts and minds’ of Afghan citizens. In Egypt it was a matter of weeks between the initial indigenous uprising and Mubarek’s resignation.

The spontaneous and unexpected events in Egypt, and the Middle East more broadly, highlight the flaws in the planning mentality that underpins most, if not all, U.S. foreign interventions. This view holds that (1) certain societies are unable to move towards freedom without outside assistance and (2) that the complex array of institutions that underpin societies are the result of some ‘grand plan’ which can be engineered by experts.

People’s actions have fundamentally been aimed at achieving the removal of unease. Thus, the political economic conditions have always been evolving as people yearn and strive to attain satisfaction or a better life.

And through trial and error, society has reflected on such perpetual discovery process as seen from the lens of the economy, and subsequently, politics.

And this is why the character of Arab revolutions has shifted from Nationalist to Islamist and now to People Power movements.

The quest for liberty may not be an immediate outcome of the recent spontaneous MENA upheavals, but from signs we see, we can be confident that the appreciation and adaption of the concept of freedom and liberty by Muslims have been gradually deepening.

As Michael Novak writes at the Wall Street Journal,

Yet it took the Jewish and Christian worlds centuries to begin cashing in their own longings for liberty. And so also it took the consciences of nonbelievers from the slave society of Aristotle and Plato until the Universal Declaration of Human Rights. The universal hunger for liberty is not satisfied in any one generation, or in all the generations put together. It is an unlimited desire. (bold highlights mine)

And such endogenous ‘universal’ freedom inspired revolutions has NOT been imposed. The failed foreign policies designed for this has essentially backfired.

And to repeat what Mr. Novak points out, the desire for freedom has also been a long painstaking process mostly accrued from generational experience. I might add that this process will likely become accelerated as the facilities that stimulates these interchanges of experience or ‘emprical’ knowledge via the web or internet will dramatically be improved and whose usage will become widespread.

In addition, the concept of propping up dictators in the name of democracy via foreign aid has also been exposed as a disastrous model.

Again Mr. Coyne, this is

an excellent opportunity to reconsider the longtime U.S. practice of giving foreign aid to the world’s worst dictators...

These are not the only cases of the U.S. providing assistance to the world’s worst governments. Every year Parade magazine compiles a list of the “World’s Worst Dictators.”...

This means that the source of the problem—the predatory state—is tasked with playing a central role in solving the problem of which its very existence is the cause. The result is the well-known pitfalls of aid such as increased corruption and issues of aid effectiveness.” (bold emphasis mine)

At the end day, freedom is a bottom up process which can only be experienced, shared, learned, and assimilated, and not imposed from a top down dynamics especially through the state, or at worst, by dictatorships. As people learn about freedom, vertical structures and power centers are bound to crumble.