Are The Current External Event Risks Signals or Noise?

The twin result of the Federal Reserve’s increase in the money supply, which pushes interest rates below that market-balancing point, is an emerging price inflation and an initial investment boom, both of which are unsustainable in the long run. Price inflation is unsustainable because it inescapably reduces the value of the money in everyone’s pockets, and threatens over time to undermine trust in the monetary system. The boom is unsustainable because the imbalance between savings and investment will eventually necessitate a market correction when it is discovered that the resources available are not enough to produce all the consumer goods people want to buy, as well as all the investment projects borrowers have begun. The unsustainability of such a monetary-induced investment boom has been shown, once again, to be true in the latest business cycle.-Richard Ebeling

Libya’s civil war, the ongoing MENA People Power revolts, $100 oil and record food prices, recent credit downgrades of Greece and Spain[1], and just the other day, the 1-2 punch (earthquake-tsunami) disaster that slammed on Japan have all been buffeting on the markets which gives some good and noteworthy pitches to be on the bearish camp.

But one has to distinguish between noise and signal. Noises tend to have short term effects while signals tend to underpin the market’s fundamental drivers.

Noise and Signals

Are the above events representatives of as noise or as signals?

If one looks at the broad performances of the global financial markets, what you read in the news isn’t exactly the sentiments that appear as being ventilated on the markets; whether it is the global stock markets, commodity, currency or bond markets.

True, markets have been showing some indications of volatility but this does not automatically mean that they account for as evidence of signals.

In other words, media sentiment and the voting public represented by the market actions don’t seem to match.

Figure 1 Bloomberg: ASEAN Equities

ASEAN bourses seem to be good examples of demolishing misguided popular wisdom.

The year-to-date chart of the major ASEAN equity bellwethers-Malaysia KLSE (yellow), Philippine Phisix (green), Indonesia (JCI), and Thailand’s SET (SET) shows of a consolidation phase.

Yet the actions of the last three (Phisix, JCI and the SET) seems to parallel what you can see in an Olympic sporting event known as synchronized “swimming”. In short, ASEAN bourses have manifested strong or tight correlations.

Let me add that such tight correlations do not represent causation nor are they designed or engineered actions. The point is that certain underlying forces have been prompting market participants to act spontaneously but almost in the same manner.

The mainstream has lately been saying that the weakness of ASEAN markets reflected on high oil prices and the spreading unrest in the Middle East. Yet ASEAN markets have began to reverse to the upside even as Oil peaked (at $107.34 on March 7^th) and as MENA events has seemingly worsened, validating my argument that the mainstream tend to fixate on the available information[2] rather than indulge in critical analysis.

Yet in reflecting on the actions of the Philippine Phisix:

-where foreign trade has accounted for only 40.69% of overall trade (accrued year to date basis)

-where foreign trade has registered a substantial net negative figure year to date (6.3 billion pesos or about USD $144 million @43.65), and

-where the Peso has slightly firmed from the start of the year (43.84 at the close of 2010), and 43.65 last Friday

I can see a paradox—a strong Peso and equity outflows—or a meaningful divergence.

A side note: the bulk of the foreign selloff came in January but this has signficantly turned positive last week (1.954 billion pesos or USD $44.8 million @43.65).

What we can glean from these:

-local investors have been providing the crucial support to the markets during the past 2 months

- importantly, even as foreign trade in equity markets accounted for a negative, overall portfolio flows as reported by the BSP revealed a positive figure $428 million for January or a net $193 million[3]. These figures are lower than the past, but nonetheless STILL positive.

These variables appear to imply that the negative foreign trade in the PSE had NOT been repatriated abroad, but possibly rotated into other local assets.

And this perhaps explains the continued strenght of the Peso despite a weak equity market environment. Again, a divergence that is likely to be resolved soon.

Rotation To Property Sector and A Booming Credit Environment

Figure 2: IMF[4]: Philippine Real Estate Market

Further observation tells us that the local equity market rally over the past 2 weeks had been spearheaded by the property sector (+9.7% in 2 weeks) which could highlight on such rotational dynamics.

The actions in the local property market seem to have mirrored on the actions of the Philippine Stock Exchange (see figure 2).

The local property sector appears to be bottoming out (left window) following a short bout of credit boost during the climax of the global crisis in 2008. I am not sure why such boost has occurred, but I would suspect that this could be part of a government related stimulus spending.

But today, with a recovering credit environment emerging from the artificially suppressed interest rates, it isn’t far fetched to the suggest that long range capital intensive projects will be the principal beneficiaries of low interest rate regime. And it is why I see an imminent property boom here[5] if not in Asia.

And ASEAN property prices likewise appear to be recovering from the 2008 contagion (right window).

And speaking of the domestic credit enrivonment, many aspects seem to playout exactly as the Austrians have seen it through their Austrian Business Cycle Theory...

Credit growth has expanded to a 21 month high[6] from which the Manila Bulletin breaksdown the details[7] as,

Of the total, production loans, which account for more than four-fifth of commercial banks’ (KBs) loan portfolio expanded year-on-year by 12.4 percent over last December’s 10.1 percent.

The growth of consumer loans was almost steady at 8.7 percent, the BSP said.

The central bank traced the strong growth in production loans to higher lending extended to the manufacturing, which rose by 26.7 percent; electricity, gas and water, 21.3 percent; real estate, renting and business services, 17.7 percent; wholesale and retail trade, 14.2 percent; and agriculture, hunting and forestry, 6.4 percent.

Loans extended to construction sector also grew but at a slower pace of 7.8 percent compared to the 15.6 percent last December.

On the other hand, negative growth was registered in lending to financial intermediation at -5.7 percent and education at -13.1 percent.”

All these credit activities, mainly interpreted as demand based economic growth, will likely continue to energize the domestic financial markets, as well as, stoke consumer price inflation hidden from the eyes of the public[8].

As Friedrich von Hayek once wrote of the Austrian Business cycle[9]. (bold emphasis mine)

Now the chief effect of inflation which makes it at first generally welcome to business is precisely that prices of products turn out to be higher in general than foreseen. It is this which produces the general state of euphoria, a false sense of wellbeing, in which everybody seems to prosper. Those who without inflation would have made high profits make still higher ones. Those who would have made normal profits make unusually high ones. And not only businesses which were near failure but even some which ought to fail are kept above water by the unexpected boom. There is a general excess of demand over supply-all is saleable and everybody can continue what he had been doing. It is this seemingly blessed state in which there are more jobs than applicants which Lord Beveridge defined as the state of full employment-never understanding that the shrinking value of his pension of which he so bitterly complained in old age was the inevitable consequence of his own recommendations having been followed.

Conclusion

Going back to the equity markets, it is true that the above ASEAN bourses have been in the NEGATIVE zone as of Friday’s close, based on a year to date basis, following a downdraft that began in early November of 2010.

But when you input ALL of the aforementioned event risks, the comparative correlations reveal that the string of bearish news have been tenously linked to the activities of the region’s stock markets, and even possibly to the local property markets. Thus, it is likely that these negative events or what is perceived as exogenous event risks represents as more of noise than of meaningful signals that could impact the markets for long, unless these events turnout for the worse.

In other words, domestic factors such as the credit induced boom from an artificially suppressed interest rates seem to undergird the search for yield dynamics which is likely the key driver of the local financial financial markets (not limited to the equities) and perhaps of the ASEAN markets as well.

And the palpably auspicious local climate seems to be complimented by a still accommodative (policy divergent) global monetary environment as seen by the shifting nature of corporate activities worldwide—a boom in merger activities of emerging markets, primarily in the BRICs.

The Bloomberg reports[10],

The merger boom that started in 2010 isn’t looking like any of the past three. The takeover binge of the 1980s was fueled by Michael Milken’s junk bonds; the late- 1990s wave of Internet and telecom deals, by inflated stock prices; and the private-equity frenzy that produced a record year for deals in 2007, by leveraged loans.

The more recent surge comes from the expanding BRIC economies -- Brazil, Russia, India and China -- and beyond. Deals are rising among the companies that supply raw materials to these countries. Worldwide deals in energy, power and basic materials made up about a third of the merger and acquisition market in 2010, compared with about 20 percent in the previous decade, according to data compiled by Bloomberg. Companies with headquarters in emerging markets played a role in more than a third of 2010 takeovers, about twice their historical share.

Bottom line: Markets hardly ever move in a straight line (unless during episodes of hyperinflation). For as long as the key conditions that drives the current market trends persist, volatility can be read or construed as natural countercyclical flows present in every functioning markets. Hence, loosely correlated external event risks likely signify as false signals which largely appeals to the brain’s emotion processing mechanism—the amgydala[11] than as critical analysis.

---

[1] Barley Richard, Europe's Ratings Rage Is Misdirected, Wall Street Journal, March 11, 2011

[2] See “I Told You So!” Moment: Being Right In Gold and Disproving False Causations March 6, 2011

[3] Abs-cbnnews.com January hot money inflow of $428-M lowest in 6 months, February 18, 2011

[4] IMF.org Philippines: 2010 Article IV Consultation—Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Philippines March 2011

[5] See The Upcoming Boom In The Philippine Property Sector, September 2010

[6] Abs-cbnnews.com January bank lending at 21-month high, March 11, 2011

[7] Manila Bulletin, Banks' lending grows double-digit in January 2011, March 11, 2011

[8] See The Code of Silence On Philippine Inflation, January 6, 2011

[9] Hayek, Friedrich August Can We Still Avoid Inflation? The Austrian Theory of the Trade Cycle

[10] Bloomberg.com Goldman Heads M&A Rankings Spurred by Commodities Demand in BRIC Economies, March 7, 2011

[11] Wikipedia.org Amygdala. Shown in research to perform a primary role in the processing and memory of emotional reactions, the amygdalae are considered part of the limbic system

Will Japan’s Earthquake-Tsunami Be Market Bearish Or Bullish?

The glazier's gain of business, in short, is merely the tailor's loss of business. No new "employment" has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.-Henry Hazlitt, The Broken Window, Economics in One Lesson

Next week’s front running issue will likely be the double whammy of the earthquake-tsunami that struck Japan.

There might be a third factor—risks of a nuclear meltdown[1] as consequence to the above.

Capital Accumulation As Life Preserver

The largest of the massive earthquakes had been one for the record books.

Figure 3: Economist: World Largest Earthquake

According to the Economist[2],

ON Friday March 11th a huge earthquake of magnitude 8.9 struck off the north-east coast of Japan's main island, triggering a tsunami seven metres tall. The earthquake is thought to be the largest ever to hit Japan, and the fifth-largest since decent records began in 1900. According to the US Geological Survey, 15 of the 16 largest earthquakes occurred in and around the Pacific "Ring of Fire". Fortunately, many of the biggest, known as "megathrust" earthquakes, as one tectonic plate is forced under another, have occurred in sparsely populated areas.

While it may be true that megathrusters have occurred in sparse areas, the terrifying aspect is when the body counts begin to pile up. And the issue isn’t about the magnitudes of earthquakes but about how wealth from capital accumulation[3] has prepared society for such contingencies.

The 2010 earthquake in Haiti which only had a 7.0 magnitude took an estimated 92,000 to 220,000 lives[4]. However, the Philippines lost about 1,621 lives when a 7.8 tremblor struck in Northern Luzon on July 16^th 1990[5]. Strict building codes can’t be enforced if there is no wealth to fund it. That’s basic.

Earthquakes compounded by tsunamis increases the casualty rate. The 2004 Indian Ocean earthquake and tsunami took some estimated 227,000 lives across 15 countries and is considered as one of the ten worst earthquakes in recorded history[6]. Indonesians bore the brunt of the death toll (130,736) or about 70% of fatalities.

Outside the escalation of a nuclear radiation disaster, I am hopeful that Japan’s fatality will be fraction of Haiti and or the 2004 Indian Ocean earthquake and tsunami incident.

Framing The Impact of the Earthquake-Tsunami

Some say that the Japan tragedy is market bearish. Others see this as market bullish.

My position is that while the initial reaction could be negative, this woeful episode would be a neutral or a nonevent over the medium to the long term.

Basically it’s all about the issue of risk and uncertainty.

While it is true that such large scale devastation would likely impact the insurance industry the most, as insurance companies would have to indemnify insured claims, looking solely at the damage-indemnity framework wouldn’t be sufficient or won’t reveal market dynamics in action.

My presupposition is that these companies have factored in the Japan’s geographic risk profile, and naturally, the calamity risk that Japan is faced with, as Japan is situated in the Pacific ring of fire[7] where 10% of the most active volcanoes are.

In other words, most of them would have assumed on the risk-reward balance of actualizing insurance contracts. Otherwise failure to do so means the risk of bankruptcy.

And if there are any clues towards Japan’s earthquake risks, many geologists have spent so much time and money to predict the “big one” coming but apparently failed to do so[8]. The point is the Japanese or the insurers are most likely well aware of such risks.

Nor do I agree with the suggestion that such disaster would trigger a fiscal crisis in Japan. All Japan would need is to open its doors to rehabilation and reconstruction to domestic and international private investors, as well as, to liberalize labor.

The assumption that reconstruction should be undertaken solely by Japan’s government represents as analytical myopia.

What we should also look at instead is if Japan or Japan’s financial companies would repatriate funds from abroad, and how this might put pressure on the US dollar, as well as, US Treasuries.

To add, I think Japan will, from this event, be forced to import labor or liberalize migration given its declining population due to rapidly falling fertility rates[9].

Figure 4: Bespoke Invest[10]: Framing The Kobe Earthquake

Many charts will frame peoples thoughts as Figure 4. By looking at the Kobe incident also known as the Great Hanshin earthquake[11] without ascertaining the backround would possibly mislead people into thinking that the past performance equals the future.

The Nikkei has already been in a downtrend following the 1990 bubble bust. Thus, the Kobe Earthquake only became an aggravating circumstance rather than the key driver.

Figure 5: Jakarta Composite Index and Thailand’s SET Post 2004 Tsunami

To balance the perspective, the 2004 Indian Ocean earthquake hardly put a dent on the Indonesia’s (upper window) or even Thailand’s (lower window) stock markets, see figure 5. While both did suffer from a very short term decline they eventually proceeded higher.

Also economic data proved that the Kobe earthquake had been much less of an impact.

Figure 6: Kobe Earthquake had limited impact (Danske Bank)

According to Danske Bank[12]

From a macroeconomic point of view, the overall impact from the Kobe quake in January 1995 was limited. Industrial production dipped in February in the wake of the quake not least because of Kobe’s importance as a distribution centre, but recovered in the following two months as reconstruction started. It is harder to see any visible impact on GDP growth in 1995, but on balance we believe the impact will be positive because of the positive impact from reconstruction. Hence, the quake today is unlikely to derail the current recovery in Japan. If anything it will be a short-term boost to growth.

As you can see, when viewed from many comparisons, and from other angles, the source of “pessimism” fades.

Critical Analysis Matters

Eventually the issue boils down to uncertainty versus risk.

Event uncertainty, unless further worsened by more unseen untoward events (such as the risk of nuclear meltdown), will tend to get discounted. People learn to weigh in on the risk-reward balance as they see through the events unfold.

The diminishing returns of information or marginal value of information as I previously wrote[13],

Because the emergence of such unforeseen events are considered as uncertainty (immeasurable risk, and not possible to calculate), 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...

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 applied to information.”

And this is why critical analysis matters alot.

Broken Window Fallacy and Conclusion

On the other hand, I can’t see how such reconstruction can be positive overall.

Numerous people lost their precious lives which also mean lost human capital. Damaged property also equates to capital losses. And such capital losses are NOT captured by statistics on nominal GDP.

Capital meant for increasing productivity will now have to be redirected towards replacement. And replacement adds no value, and that’s why there’s no growth in the overall.

But what I wouldn’t deny is that there will be some sectors or entities who will profit from these. I think Filipino labourers will see an opportunity to grab. And yes, statistics could register a short term boost. But again statistics don’t capture the human experience.

On balance, the negative impact of disasters on the financial markets tends to be short term as effects of disasters get to be discounted overtime.

The underlying market trends will likely be determined by the general market direction overtime and not from a lasting impact of Japan’s earthquake-tsunami.

---

[1] See Aftermath of Japan’s Earthquake: Risk of A Nuclear Reactor Meltdown, March 12, 2011

[2] Economist Daily Charts, Terrifying tremors, March 11, 2011

[3] See Economic Freedom And Natural Disasters: Haiti's Tragic Earthquake, January 15, 2010

[4] Wikipedia.org 2010 Haiti earthquake

[5] Wikipedia.org 1990 Luzon earthquake

[6] Wikipedia.org 2004 Indian Ocean earthquake and tsunami death toll and casualties

[7] Wikipedia.org Pacific Ring of Fire Japan

[8] See Science Models Fail To Predict Japan’s Earthquake, March 12, 2011

[9] Japan Times, Population decline worsening January 15, 2010

[10] Bespoke Invest, Japan's Stock Market Post Kobe Earthquake in 1995, March 11, 2011

[11] Wikipedia.org Great Hanshin earthquake

[12] Danske Bank, Japan: Impact from quake should prove limited, March 11, 2011

[13] See “I Told You So!” Moment: Being Right In Gold and Disproving False Causations, March 6, 2011

Aftermath of Japan’s Earthquake: Risk of A Nuclear Reactor Meltdown

The aftermath of Japan’s horrible 1-2 earthquake-tsunami punch has brought to light another potential catastrophe: growing risk of an outbreak of radioactive contamination from a meltdown in one of the affected nuclear reactors.

From Marketwatch.com:

Japanese nuclear authorities warned of a meltdown Saturday of the core of a nuclear reactor at a plant in Fukushima operated by Tokyo Electric Power Corp., also known as Tepco, according to Kyodo News. Authorities said that there was a high possibility that nuclear fuel rods at the reactor of Tepco's Daiichi plant may be melting or have melted, Reuters reported, citing Jiji news. The Daiichi No. 1 nuclear reactor is about 240 kilometers (150 miles) north of Tokyo. Friday's 8.9-magnitude earthquake damaged the plant's cooling mechanism, leading to overheating that reportedly damaged the fuel rods in the reactor's core

Should this become a sad reality, expect a global political backlash on Nuclear energy. The debate have already began as this link shows.

A breakdown of Japan Energy Sources from Wikipedia.org and MutantFrog.com

Meanwhile, demand for traditional oil, natural gas and coal is expected to take up the slack from Japan’s debilitated nuclear energy (Bloomberg).

Science Models Fail To Predict Japan’s Earthquake

If you think man has acquired enough expertise to know the environment, think again.

From the Washington Post, (bold highlights mine)

They have long been ready for the Big One in Japan. But when it arrived Friday, it was still surprising, still utterly devastating, and it left scientists around the world humbled at how unpredictable the heaving and lurching earth can be.

Japanese geologists have long forecast a huge earthquake along a major plate boundary southwest of Tokyo, and have poured enormous resources into monitoring the faint traces of strain building in that portion of the earth's crust. They have predicted in great detail the amount of property damage and the number of landslides such a tremor would generate. They have even given the conjectured event a name: The Tokai Earthquake.

Lesson: Despite the massive advances in technology, there is a limit to the knowledge man can acquire from the innate complexity of nature.

As aptly pointed out by Friedrich von Hayek in his Nobel Prize speech ‘The Pretence of Knowledge’… (bold emphasis mine)

The chief point we must remember is that the great and rapid advance of the physical sciences took place in fields where it proved that explanation and prediction could be based on laws which accounted for the observed phenomena as functions of comparatively few variables - either particular facts or relative frequencies of events. This may even be the ultimate reason why we single out these realms as "physical" in contrast to those more highly organized structures which I have here called essentially complex phenomena. There is no reason why the position must be the same in the latter as in the former fields. The difficulties which we encounter in the latter are not, as one might at first suspect, difficulties about formulating theories for the explanation of the observed events - although they cause also special difficulties about testing proposed explanations and therefore about eliminating bad theories. They are due to the chief problem which arises when we apply our theories to any particular situation in the real world. A theory of essentially complex phenomena must refer to a large number of particular facts; and to derive a prediction from it, or to test it, we have to ascertain all these particular facts. Once we succeeded in this there should be no particular difficulty about deriving testable predictions - with the help of modern computers it should be easy enough to insert these data into the appropriate blanks of the theoretical formulae and to derive a prediction. The real difficulty, to the solution of which science has little to contribute, and which is sometimes indeed insoluble, consists in the ascertainment of the particular facts.

And this applies to sociology too.

Bottom line: We should be leery of anyone who peddle to us the reliability of predictions based on science or math models, especially those who advance the policy of interventionism.

And this applies to whether we deal with the financial markets and the economy or with environmental issues such as global warming.

Japan’s Earthquake-Tsunami In Pictures

Below is an awesome picture which virtually illustrates of how man is seemingly helpless against wrath of nature. (please spare me the climate change drivel)

It’s just one of the 40 incredible tragic images captured by the Boston’s The Big Picture from yesterday’s 1-2 punch of earthquakes compounded by tsunamis that struck Japan.

See the rest here (ht: Mark Perry)

Map of the Libyan War

A map of the ongoing Libyan War as presented by the Economist

Okun’s Law: A Failing Industrial Age Economic Model

A popular traditional economic model has reportedly been losing its efficacy.

That’s according to the Wall Street Journal Blog, (bold emphasis mine)

In 1962, Yale professor Arthur Okun laid out in very clear and understandable terms a long-standing relationship between economic growth and the behavior of unemployment. If the economy dropped one percentage point below its long-term growth rate in a given year, the unemployment rate tended to rise by about a third as much. So a recession that pulled economic output three percentage points below the economy’s long-run trend would push the unemployment rate up by a percentage point.

Okun’s law has been a staple tool for economists ever since, but it’s been driving them crazy lately because it doesn’t seem to be working all that well.

The blog gives some possible reasons why the popular model can’t seem to explain today’s environment.

But they seem to overlook what matters.

Anyway here’s a clue from the same article...

Productivity – or output per hour worked by a country’s labor force — continued to rise in 2008, unusual for a recession, and surged by 3.7% in 2009

My bet is that economic models based on the industrial age will fall massively short of explaining the radical changes being brought about by the dramatic advances in technology that has been shaping the current economic framework.

It’s The Spending, Not Debt Stupid!

In excoriating mainstream media’s miasmatic logic, author and Professor Steven Landsburg eloquently explains why government debt isn’t the problem.

Instead, government spending is.

Writes Professor Landsburg, (bold emphasis mine)

This is economic illiteracy in spades. The fact is that every single dollar of interest we pay on the national debt comes right back to the pockets of American taxpayers. If you don’t understand that, then you’re not thinking clearly about the national debt.

Suppose the government owes $100 and pays $3 a year in interest. The alternative to paying that interest is to raise current taxes by $100 and pay down the debt. If you do that, taxpayers are going to have $100 less in assets, and will therefore earn less interest on their savings. That costs them (roughly) the same $3 a year.

In other words, the damage was done back when the government spent that $100 in the first place. (Of course, if the $100 was spent wisely, the damage might have been worth doing. Or not.) Once that $100 has been spent, the taxpayers are out $3 a year forever regardless of whether the debt is ever paid off.

That’s why I say that the government’s interest payments come right back to the pockets of American taxpayers. The government pays $3 a year as an alternative to taxing you $100 and paying down the debt. The choice to do that puts an extra $100 in your savings account, which earns you $3 a year. There’s the $3 a year coming right back to you. Notice that it comes back to you regardless of whether the government makes its interest payments to Americans, Chinese or Martians. All of the benefits come back to American taxpayers.

Of course, you might choose not to save that $100 the national debt is saving you. That’s fine. Then presumably you’re spending it on something that you value more than an interest flow of $3 a year. Congratulations. You’re a winner.

Or you might grumble that you have no savings vehicle that will pay you the same rate as the government’s paying on its debt. That’s where you’re wrong. You can save by buying government bonds. That will get you exactly the same rate the government’s paying on its debt.

Bottom line

Again Professor Landsburg,

If the government borrows an extra $10 trillion dollars tomorrow in order to cut taxes by $10 trillion, it will have to make, say, an extra $300 billion a year in interest payments (for which we are collectively responsible) and at the same time, we’ll collectively earn an extra $300 billion on our savings portfolios. No favor to the taxpayers, but no harm done either.

It’s important to understand this in order not to be bamboozled by tricksters who try to misdirect every conversation about government spending into a conversation about government debt. It’s spending, not debt, that can impoverish us, and that’s what we should be talking about.

This serves as another vivid example of how the mainstream (deliberately or unwittingly) misreads the effects as the cause, and of ignoring the alternative paths or choices of action (here taxes versus borrowing). For the latter, it has been a predilection for most to focus on the tangible (debt) and dismiss the intangible (tax). Unless you are aware of it, this part of our mental heuristics.

Applied to financial market analysis, this is a fundamental reason why many celebrity gurus got it so bad—most of them misread debt as the primary driver of people’s action via the “aggregate demand” channel. They ignored or underrated money's non-neutral role and the impact of globalization.

Of course, the Landsburg lecture on borrowing and taxation is universally applicable, which means such tradeoff applies to the Philippine government as well.

To paraphrase the famous US Bill Clinton quote, It’s the spending, not the debt stupid!

The World’s Top Billionaires: List of Emerging Market Billionaires Grows

A little over half of the world’s new billionaires hail from Emerging Markets, particularly from the BRIC (Brazil,Russia, India, China)

According to Forbes,

Brazil, Russia, India and China produced 108 out of the 214 new names added. Lakshmi Mittal of ArcellorMittal fame topped the list at No. 6 among the rich guys in the BRIC countries. His net worth was put at $31.5 billion. ArcellorMittal is the world’s largest steel maker. Brazilian investor and owner of a number of oil and mining companies, Eike Batista, will probably forever be known as the man who helped bring the 2016 Summer Olympics to Rio de Janeiro. His net worth is around $30 billion. Not bad being the son of the guys behind the world’s leading iron ore exporter, Brazilian multinational Vale.

Others in the Top 20:

9. Mukesh Ambani, India, Reliance Industries, $27 billion
11. (This name is perfect…with a name like this, you have to be filthy rich) Li Ka-Shing, China, Hutchinson Whampoa, $26 billion
14. Vladimir Lisin, Novolipetsk Steel, $24 billion

see list here

Let me add that among the top 500, there are lots of non-BRIC emerging markets billionaires. The distribution appears diffused where some are from Latin America (Columbia, Chile, Mexico, Argentina) MENA (Saudi Arabia, South Africa) and ASEAN.

For ASEAN region we have:

Malaysia: Robert Kuok, Lee Shin Cheng, Quek Leng Chan, Teh Hong Piao, Syed Mokhtar AlBukhary and Yeoh Tiong Lay & family

Philippines: Henry Sy (ranked 173rd)

Indonesia: Michael Hartono, Peter Sondakh, Martua Sitorus and Low Tuck Kwong

Thailand: Charoen Sirivadhanabhakdi

The growing list of Emerging Market billionaires are just symptomatic of the wealth convergence happening from today’s ‘globalized’ environment.

Celebrity Gurus Who Missed The Markets Quite Badly

The Business Insider presents a list of celebrity gurus whose predictions flunked badly.

The Business Insider writes,

Today marks the two-year anniversary of the bull market. In the past twenty four months, the S&P has nearly doubled, from 666 up to 1320.

During this period countless gurus have said it was a sucker's rally and told you to sell.

We hope you didn't listen to them.

Read it all here

My take: what is popular is mostly wrong.

More: wrong information+ inaccurate assumptions + misleading theories =misdiagnosis and subsequently wrong predictions or market actions.

If these people can't read the markets right, then how much more can they be relied on to prescribe the right policies.

Is the Enthusiasm for Democracy Sustainable?

Because of the ongoing revolutions in the MENA region, Pew Research attempts to distill on the sustainability of enthusiasm for democracy using past experiences.

In a recent study, using the East Europe’s experience, the Pew Research finds that enthusiasm for democracy has declined.

Pew Research’s James Bell writes,

These findings do not mean that East Europeans were inclined to abandon democracy. Publics across the region broadly endorsed the demise of communism. Rather these opinions point to the gap between what East Europeans hoped for and what they perceived in terms of political change. On one hand, East Europeans generally agreed that two decades of political and economic change had disproportionately benefited business owners and politicians, rather than ordinary people. On the other, many East Europeans felt democratization had yet to match expectations. In 2009, the median percentage in each country who said a fair judiciary, multiparty elections, uncensored media, freedom of religion, freedom of speech and civilian control of the military were very important significantly exceeded the median percentage who claimed these institutions described their country very well.

Reflecting on Mr. Bell’s statement, the issue isn’t about the loss of interest on democracy but rather the mismatch between people’s expectations on their definition or their concept of democracy and that of economic prosperity.

So when economic distribution has had “disproportionately benefited business owners and politicians” this only means that the political economic framework has segued from communism to one of crony capitalism based on a social democratic form of governance.

Furthermore, expectations for more freedom have not been met perhaps due to the same reasons.

This phenomenon seems to reflect on the Philippines too. After two People Power revolts, Filipinos have still been waiting for Godot.

Filipinos appear to be impassioned on democracy as demonstrated by the eagerness to vote. However eventually they get frustrated again. That’s because their expectations clashes with the reality: Filipinos largely see economic salvation from political distribution rather than from their own efforts.

We, Filipinos, seem to have little understanding that political distribution is a zero sum game (one gains the other losses, i.e. picking on Pedro’s pocket and giving to Mario), while economic distribution is a net value added.

Yet this doesn’t mean that any nation aspiring for democracy isn’t fit for it. It takes time for people to learn, understand and embrace the concept of economic freedom and civil liberties as this is a process of discovery.

And it all starts with the “right” education.

$1.1 Trillion Spent On Arms Is $1.1 Trillion of Wasted Resources

$1.1 trillion was spent by nations for defense.

According to the Economist, (bold highlights mine)

THE ten biggest defence budgets for 2010 add up to a total of more than $1.1 trillion, according to the latest Military Balance report from the International Institute for Strategic Studies (IISS), a think-tank. The defence budget of America alone, at $693 billion, accounts for more than 60% of the total. But when defence spending is compared to the overall size of each country's economy, Saudi Arabia tops the list. It spends over 10% of GDP on defence, more than double the proportion spent by America. China ranks second in the world's biggest defence budgets (spending some $76 billion) and also boasts the largest armed forces. Only America, India, Russia and North Korea (not shown) have more than 1m military personnel. Defence budgets have grown since 2005, but the balance of military power may be shifting. Western countries, many of which are engaged in Afghanistan, now face budget constrains and cuts, whilst emerging economies, such as Brazil and China, have increased military spending in line with economic growth.

That’s $1.1 trillion of resources wasted on whimsical government actions designed to promote self interests of the politicians.

Then US President Dwight Eisenhower’s “Chance for Peace” Speech poignantly reverberates on this dilemma. (pointer Robert Higgs) [all bold highlights mine]

The worst to be feared and the best to be expected can be simply stated.

The worst is atomic war.

The best would be this: a life of perpetual fear and tension; a burden of arms draining the wealth and the labor of all peoples; a wasting of strength that defies the American system or the Soviet system or any system to achieve true abundance and happiness for the peoples of this earth.

Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed.

This world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children. The cost of one modern heavy bomber is this: a modern brick school in more than 30 cities. It is two electric power plants, each serving a town of 60,000 population. It is two fine, fully equipped hospitals.

It is some 50 miles of concrete highway. We pay for a single fighter with a half million bushels of wheat. We pay for a single destroyer with new homes that could have housed more than 8,000 people.

This, I repeat, is the best way of life to be found on the road the world has been taking.

This is not a way of life at all, in any true sense. Under the cloud of threatening war, it is humanity hanging from a cross of iron.

Bottom line: Politicians use the threat of war to expand control over us. Yet unknown to many, most of these military expenditures represents nothing more than a waste of valuable resources.

The Real Economic Effects Of Monetary Policy Distortions

At the Thinkmarkets blog, Professor Andreas Hoffmann and Gunther Schnabl explains lucidly the real economic effects of monetary policy distortions.

Mr Hoffmann and Schnabl write, (all bold highlights mine.)

Speculative capital inflows and accelerating reserve accumulation in emerging markets are counteracted with sterilization measures and capital controls. In Brazil capital controls prevent a free allocation of capital to the best uses. In China non-market based sterilization and credit rationing is used to further stimulate the already overinvested export sector. While sterilization keeps credit generally tight (for instance for consumers), the export industries and state owned enterprises enjoy low-cost credit to keep the capital stock growing. As sterilization operations also hold inflation low, the real exchange is kept undervalued what helps to clear the overproduction on international markets.

Even worse: In countries with large raw material sectors, the global liquidity driven raw material price inflation causes huge public surpluses, which are distributed by mostly autocratic governments ad libitum. Rising public expenditure and/or thriving stabilization funds replace “competition as a discovery procedure” by guided structural change and state funded economic development. Dubai loves to invest in a palm shape island and Babylon towers. Russian bureaucrats see potential in pharmaceutical and military industries. Venezuela and Algeria pump money into social security systems to create political stability. The Saudi Arabian General Investment Authority sets up glamorous new cities that shall create more jobs in the name of the King.

While all these policies may be well intended, they distort markets, as public investment in subsidized industries misguides private investment decisions. Investment in industries, which are picked by the government, is risky. Once the golden rain stops, the readjustment will set in. This may happen, once the advanced economies exit from easy money policies as growth prospects lighten up or inflation accelerates. Only then, it will be obvious which of the many economic miracles which we currently observe is real and which is an illusion.

My comment

Notice the distributional effects?

The sectors that benefit from these policies are primarily those connected with the government or the government itself, as I also explain here and here.

And it is why policies of monetary authorities have systemic (externality costs) impact and can’t be ignored or dismissed by free market advocates.

The welfare-based political structure, crony capitalism and central banking have all been intertwined or all interconnected.

Has China’s Competition For Brides Led To Global Imbalances?

Competition for brides, due to gender imbalance, has led to China’s huge savings. That’s according to a study reported by Wall Street Journal Blog.

Writes the Wall Street Journal, (bold emphasis original italics mine)

Too few brides may be contributing to China’s trade imbalance.

That’s because “desperate parents” are using education and wealth to make their sons stand out as catches in an increasingly competitive marriage market, Professor Wei said.

Speaking on a panel at the Council on Foreign Relations in New York on the U.S.-China trade imbalance, Professor Wei said that China’s efforts in the past ten years to step up the social safety net haven’t reassured consumers enough to ease their savings.

Most Chinese consumers save for their children and for retirement, Professor Wei said, a finding put forth in a paper he wrote with Xiaobo Zhang, “The Competitive Saving Motive: Evidence from Rising Sex Ratios and Savings Rates in China.”

Acknowledging that the marriage market was somewhat “outside macroeconomic thinking,” Professor Wei said that his research shows a “very clear pattern” of household savings rates — as well as entrepreneurship — rising as the competition for brides becomes more keen. He and Mr. Zhang, a senior research fellow at the International Food Policy Research Institute, elaborated on the phenomenon in another paper, published last month by the National Bureau of Economic Research, “Sex Ratios, Entrepreneurship, and Economic Growth in the People’s Republic of China.”

The most recent paper explains that areas in China with an acute imbalance of young men seeking wives tend to benefit economically from a high level of hard work and entrepreneurship. The authors attribute this initiative to the competitive marriage market. Young men who want to begin businesses have to turn to their families for start-up money; parents and relatives prepare for that by saving.

My comments:

While there may be some truth to this, which is why this study came about, this seems more of an example of Nassim Taleb’s narrative of Birds do not write books on birds

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.

I don’t think the desire of every Chinese family to save is about securing a “bride”.

If this is true then once a groom marries, the couple tends to wind down savings as the incentive to acquire a bride has already been achieved. But of course the argument extends to the next generation, thus becomes circular.

Marriage is just a part of our manifold social activities, surely there many other factors involved such the state of undeveloped capital markets, uncertainties over health, cultural quirks, and government policies among many others.

The above is also a good example of the predilection to aggregate people with numbers and of the experts’ tendency to fall for the clustering illusion trap-seeing patterns where there is none.

Moreover, the study also puts into context Jessica Hagy’s graph of social signalling here.

Of course for me global imbalances is no more than another charade where experts try to pass the blame of their national policies to the others.

This is aside from the folly of applying reductio ad absurdum arguments into people’s trading activities, which has been seen and argued in the context of politics, based on statistical figures rather than trading activities as seen from the human dimensions.

Bottom line: Patterns or correlations does not imply causation.

Does Higher Education Pay Off?

Higher education is not only in a bubble, but is fast becoming an unviable activity or unworthy of personal investments—meaning costs exceeds the returns.

So argues Professor Laurence Kotlikoff at the Bloomberg, (bold highlights mine)

The notion that education pays and that better education pays better is taken for granted by almost everyone. For college professors like me, this is a very convenient idea, providing a high and growing demand for our services.

Unfortunately, the facts seem to disagree. A recent study by economists Stacy Dale and Alan Krueger showed that going to more selective colleges and universities makes little difference to future income once one accounts for the underlying ability of the student. Their work confirms other studies that find no financial benefit to attending top-tier schools.

It’s good to know that Harvard applicants can safely attend Boston University (my employer), and that "better" higher education doesn’t pay better. But does higher education pay in the first place?

The answer seems obvious. On average, doctorate holders earn more than those with master degrees, who earn more than those with bachelor degrees, who earn more than high school graduates. How can education not pay?

The answer is that education isn’t free. Top undergraduate programs are now charging students $50,000 a year to eat, sleep and, hopefully, attend class. But that’s just the direct cost. Education’s hidden cost is the time spent learning rather than earning.

Read the rest here

Again the soaring costs of education are largely due to government’s numerous interventions, which renders what used to be a stepping stone personal development, as unfeasible.

Moreover, rising costs of education also reflects on the old political economic order. This is going to change see here and here.

The Economic Basics of Protectionism

This is great stuff from Professor Mark Perry. Economics 101 of Protectionism versus Free trade.

Professor Perry writes, (bold emphasis mine)

The graphical analysis above shows what happens economically to a country that moves from: a) free trade with the rest of the world, with consumers paying the world price for a given product, to a b) protectionist trade policy and a new higher price that includes a tariff (tax) that reduces the amount of trade that takes place. Here are the key outcomes of this protectionism:

1. The domestic producers are now better off because they are protected from more efficient foreign competition, and can charge higher prices and increase output. Economically, they have converted consumer surplus (gains) to producer surplus (gains) because of the tariff, and that transfer is represented by the yellow area labeled "Producer Surplus" above. Nothing lost there on net because of the tariff, although domestic producers have used the political process to gain at the direct expense of domestic consumers, who now pay higher prices and purchase fewer units.

2. With a tariff (tax) on imports, the government is now able to generate "Tax Revenue" in an amount represented by the blue rectangle above. This is also a transfer, this time from what used to be consumer surplus (gains from trade) to the federal government. Nothing necessarily lost here either on net, assuming that the government will transfer the tax revenue back to the consumers in the form of beneficial government spending (maybe) or lower taxes elsewhere (maybe).

3. However, the two pink triangles labeled "Societal Loss" are the amount of losses to the consumers and the economy (society) from the protectionist tariffs that are NOT offset by a gain to some other group: producers or government, and represent what economists call the "deadweight loss" or "deadweight cost" of protectionism.

Bottom Line: The deadweight losses from protectionism mean that the economy is worse off on net, or that there has been a reduction in total economic welfare, the total number of jobs, wealth, prosperity, and/or national income. You could argue about the size of the deadweight loss triangles, but it would be really hard to argue that they don't exist. Protectionism has to make the country worse off, on net, and that proposition is supported by 200 years of economic theory and hundreds of empirical studies.

Two additional comments:

-You get economic lessons free on the web.

-When you get to hear people babble about the benefits of protectionism, you can be assured that they’re not dealing with economic realities. Instead, protectionism is grounded on emotionally charged politics—characterized by the rhetoric of good intentions (social signaling or arguing for social conformity purposes or for getting votes), rather than what truly works.