Energy Information Administration: Shale Gas Is A Global Phenomenon!

When people talk about Peak oil or peak anything, they only look at current prices and the available quantity of declared reserves, which they see as fixed and which they equate with neo-Malthusian insights of shortages.

They do this without comprehending the economic value of resources and without understanding the concept of human action—or that people don’t just standstill in the face problems, we react by working to resolve such unease via the price mechanism.

People, via the markets, respond to prices. This means when scarcities are projected via price signals, the market resorts to either conservation (rationing) or substitution.

This brings us to the announcement by the US EIA that shale gas production is a global phenomenon, with US having been the pioneer in its development.

The EIA writes, (bold highlights mine)

The use of horizontal drilling in conjunction with hydraulic fracturing has greatly expanded the ability of producers to profitably produce natural gas from low permeability geologic formations, particularly shale formations. Application of fracturing techniques to stimulate oil and gas production began to grow rapidly in the 1950s, although experimentation dates back to the 19th century...

The development of shale gas plays has become a “game changer” for the U.S. natural gas market. The proliferation of activity into new shale plays has increased shale gas production in the United States from 0.39 trillion cubic feet in 2000 to 4.87 trillion cubic feet in 2010, or 23 percent of U.S. dry gas production. Shale gas reserves have increased to about 60.6 trillion cubic feet by year-end 2009, when they comprised about 21 percent of overall U.S. natural gas reserves, now at the highest level since 1971

Shale gas production from the US has been exploding. (From the EIA) This accelerated progress has been buttressed by (free market induced) technological enhancements.

Shale reserves have likewise been expanding along with production. This proves the case of the growing economic value of Shale gas.

Shale Gas reveals of the substitution process in action.

Now for the global perspective, more from the EIA.... (bold highlights mine)

It appears evident from the significant investments in preliminary leasing activity in many parts of the world that there is significant international potential for shale gas that could play an increasingly important role in global natural gas markets... In total, the report assessed 48 shale gas basins in 32 countries, containing almost 70 shale gas formations...

The estimates of technically recoverable shale gas resources for the 32 countries outside of the United States represents a moderately conservative ‘risked’ resource for the basins reviewed. These estimates are uncertain given the relatively sparse data that currently exist and the approach the consultant has employed would likely result in a higher estimate once better information is available.

What does all this tell us?

The energy market is working quite well, despite numerous interventions applied by governments.

The diffusion of technological advancements combined with the attendant economies of scale enhances the commercial viability of these projects, which if the EIA is correct, would mean more nations utilizing their natural shale gas resources. This also means reserves will grow as usage grows, enabled by technology.

In short, shale gas is gradually being recognized as an economically valuable energy resource.

Shale gas is probably one of the possible candidates to compete, replace, if not compliment fossil fuel as a major energy source.

Only the markets will say.

Oh, I almost forgot: Please remember changes happen at the margins.

US Homeownership Program Had Been Meant To Promote Financialization

Cato’s Mark Calabria says that mortgage subsidies in the US has not materially improved homeownership but has instead promoted a culture of debt.

Mr. Calabria writes, (bold highlights mine)

One of the rationales commonly given for massively subsidizing our mortgage market is that without such homeownership would be out of reach for many households. Such a rationale implies that more debt should be associated with more homeownership. (Let's set aside the obvious, how are you actually an owner without any equity?)...

By 1960, the homeownership rate was already over 60%, yet debt-to-value was less than 30%, half of the current value. Even in 1990, when homeownership reached over 64%, debt-to-value was still under 40%. From 1990 until today, the percentage of mortgage debt to value increased by over 50%, all to gain a 2 percentage point increase in homeownership. So it seems the story of the last 20 years has been a massive increase in home debt with very little increase in actual homeownership rates. The converse should also hold: reducing homeowner leverage should have little, if any, impact on homeownership rates.

Increasing debt hasn’t substantially lifted homeownership. This represents a failure of the program.

I have been saying that intentions and actions are two different things. People may say one thing, but do another. Since politicians and bureaucrats are people too, they are likely to fall into the same intent-action disparity trap.

Importantly, many people, especially those in the political arena, rake in the dough out of deliberately fudging the relationship of intent and action. They say one thing which would sounds politically correct, but applies actions that covertly benefit another party using the former as a cover.

I’d say that homeownership has merely been a strawman meant to boost another sector’s profits.

The sector I am referring to is the US financial sector which has benefited greatly from government sponsored homeownership programs. Some calls this the financialization or financial capitalism.

According to Wikipedia.org, (bold highlights mine)

Financialization is a term that describes an economic system or process that attempts to reduce all value that is exchanged (whether tangible, intangible, future or present promises, etc.) either into a financial instrument or a derivative of a financial instrument. The original intent of financialization is to be able to reduce any work-product or service to an exchangeable financial instrument, like currency, and thus make it easier for people to trade these financial instruments.

Workers, through a financial instrument such as a mortgage, could trade their promise of future work/wages for a home. Financialization of risk-sharing makes all insurance possible, the financialization of the U.S. Government's promises (bonds) makes all deficit spending possible. Financialization also makes economic rents possible.

The GDP share of the US Financial Industry has been exploding. Recently even after the crisis, profits from the financial industry now accounts for ONE third of all operating profits.

Notes the Wall Street Journal Blog, (bold highlights mine)

During the darkest days of the financial crisis, when Lehman Brothers and Washington Mutual went belly up and the U.S. government had to bail out other institutions, the finance sector reported an annualized loss of $65.2 billion in the fourth quarter of 2008. It was the only quarterly loss recorded in the government data.

Since then, the sector has come roaring back. The GDP report shows finance profits jumped to $426.5 billion. While profits haven’t returned to their high levels of 2006, the gain in finance profits last quarter more than offset a drop in profits posted by nonfinancial domestic industries.

After rising like the Phoenix, the financial industry now accounts for about 30% of all operating profits. That’s an amazing share given that the sector accounts for less than 10% of the value added in the economy.

Wall Street and banking critics have pointed out the finance industry enjoys government supports not given to other companies. That includes the low cost of funds from the Federal Reserve. As a result, critics say, the U.S. economy is overly skewed toward finance.

From Yardeni.com

In my view, homeownership is a (political) means aimed at promoting an end (crony capitalism of the financial industry)

US Federal Reserve Lent To (or Bailed Out?) Libya’s Qaddafi in 2009

Part of the US Federal Reserve’s post Lehman market stabilizing scheme included loans to Libya’s state owned bank, the Bloomberg reports, (bold emphasis mine)

Arab Banking Corp., the lender part- owned by the Central Bank of Libya, used a New York branch to get 73 loans from the U.S. Federal Reserve in the 18 months after Lehman Brothers Holdings Inc. collapsed.

The bank, then 29 percent-owned by the Libyan state, had aggregate borrowings in that period of $35 billion -- while the largest single loan amount outstanding was $1.2 billion in July 2009, according to Fed data released yesterday. In October 2008, when lending to financial institutions by the central bank’s so- called discount window peaked at $111 billion, Arab Banking took repeated loans totaling more than $2 billion.

Fed officials say all the discount window loans made during the worst financial crisis since the 1930s have been repaid with interest.

The U.S. government has frozen assets linked to the regime of Libyan ruler Muammar Qaddafi and engaged in air strikes against his military forces, which are battling a rebel uprising in the North African country. Arab Banking got an exemption that allows the firm to continue operating while barring it from engaging in any transactions with the Libyan government, according to the U.S. Treasury Department.

Some comments:

This represents as the continued the love-hate relationship between the US and Libya’s Qaddafi

The Federal Reserve has been bailing out the world, which included despots, and not just US banks.

No wonder the US Federal Reserve has been getting brickbats not only from Americans but also from some other authorities elsewhere in the world.

Remarkable Welfare Gains From The Power of Computing Represent Signs Of Things To Come

Two economists project that the welfare benefits from Personal computers adds up to $1,700 per person annually. And this represents a tremendous growth from the previous years.

The Wall Street Journal Blog reports, (bold emphasis mine)

Despite all the wrenching change the computer age has brought, humanity is probably better off than it would have been if the PC had never been invented. Now, economists have taken a stab at figuring out exactly how much better off we are.

The economists — Karen Kopecky of the Federal Reserve Bank of Atlanta and Jeremy Greenwood of the University of Pennsylvania — traced the history of the computer market back to the introduction of the Apple II in 1977 to calculate how much value, or “utility”, American consumers derive from a given amount of computing power. They then looked at how much we actually paid for that computing power, in the form of desktop PCs, laptops, notebooks, software and so on. The difference, known as the “welfare gain”, is the benefit we get from personal computers above and beyond what we pay for them.

Back in the days of magnetic-tape memory, the annual benefit was pretty small — somewhere between zero and about $6 for the average American, adjusted for inflation, depending on the method of calculation. But by 2009, the price of computing power had fallen more than 99.8% and personal computers had become a lot better and more widely used. As a result, the welfare gain rose to somewhere between $1,300 and $2,100 per person, the economists’ estimates suggest. Ballpark average: $1,700.

That’s a massive benefit, adding up to about $500 billion, or 5% of total consumer spending in 2009.

To be sure, the economists’ estimates are based on some assumptions that, while common in the world of economics, are open to debate. For one, they assume that people are extremely rational, and always buy exactly the number of personal computers that maximizes their utility. To the extent that irrational impulses drive people to buy computers, or to the extent that the use of computers entails costs people don’t recognize (say, attention-span deficits or Internet addiction), then the actual benefit could be significantly smaller.

My comments:

First of all, I am flabbergasted that the article would resort to the word “probably” as to ascribe the personal computer’s benefit to mankind, as if such benefits have not been conspicuous.

Second, while I agree that the personal benefits from these computers have been immense, given that the article does not say how or what sort of utility had been measured or rated, I would posit that the figures had been vastly underestimated.

Had the PC been assessed solely from PC sales and turnover? How about time saving gains from added productivity and work process efficiency via diversified applications?

How about savings or value added derived from declining communication costs or from diminishing [Coase’s laws—search costs, contracting and coordination costs or otherwise known as] transaction costs, or the enhancement of business processes or even organizational capital (Garrett Jones)?

And how about the benefits of leisure (e.g. games, etc…) and other intangible gains such as real time connectivity with parents, relatives, friends and associates? Or how about the virtue or non-virtue of self-expression via social networking media?

Three, all these go to show why economists fall for the aggregate trap. They tend to quantify things even if they can’t.

Lastly, nonetheless the above only gives more proof that the world has been transitioning to the age of digitization or the information age, where more and more activities of our lives are becoming decentralized (Third Wave) enabled by technology.

Chart from Ray Kurzweil: Law of Accelerating Returns

I’d add that should the trend of innovations of applications and devices accelerate, this will even deepen and make this transition more widespread.

As Law Professor and author Butler Shaffer writes, “Decentralized technologies are causing us to rethink and redefine what we mean by "society."

The welfare gains of the PC are just signs of things to come.

Video: Tom Woods on the Basics of the Military Industrial Complex

In the video below, Professor and author Tom Woods explains the military industrial complex in 5 minutes (hat tip: Bob Wenzel)

Video: John Stossel Interviews Jeffrey Tucker "Society Can Manage Itself"

In this interview by John Stossel, Mises Institute editor and author Jeffrey Tucker shows how government intervention impedes on our choices, which affects even the routinary things we do, that ultimately impacts the quality of our lives.

(Hat tip: Professor Robert Murphy)

Agency Problem: David Sokol’s Controversial Resignation From Warren Buffett’s Berkshire Hathaway

A good running example of the principal-agent or the agency problem in play has been the unravelling controversy over Warren Buffett’s supposed “would be” successor-David Sokol.

David Sokol recently resigned from Berkshire Hathaway following allegations of unethical practice.

According to Steve Shaefer of Forbes,

Berkshire Hathaway executive David Sokol, who served as chairman of MidAmerican Holding Company and Johns Manville as well as Chairman and CEO of NetJets, resigned from the company in a letter to Warren Buffett Monday.

Buffett announced his departure in a press release Wednesday, which also noted that Sokol owned shares in Lubrizol, a company Berkshire recently agreed to acquire for some $9 billion. The departure of Sokol comes as a shock to Berkshire watchers who figured the executive was one of the potential successors for Buffett.

In the announcement, Buffett stressed that he and Sokol do not feel there was anything illegal in his trades of Lubrizol shares.

Although both David Sokol and Warren Buffett via Berkshire Hathaway denied that this has been the cause of his resignation, media has been all over what has been perceived as ethical impropriety.

The Sokol affair simply highlights what we have been talking about as the conflict of interests by participating agents—based not only from asymmetric information but from asymmetric interests or incentives that drives people’s actions.

Principal Agent Problem Diagram from Wikipedia.org

Mr. Sokol, who acquired shares of Lubrizol before pitching it to his boss, Mr. Buffett, saw nothing wrong with this. In fact, in a CNBC interview Mr. Sokol cites Mr. Charles Munger, Mr. Buffett’s close friend and vice chairman of Berkshire Hathaway of doing the same.

“I don’t believe I did anything wrong. Charlie Munger owned 3% of BYD before he asked me to go look at it.” [dawnwires.com]

In the stock market, when agents or brokers pre-empt their clients by taking positions for his/her account, in the expectations that the clients orders could affect the price movements of specific stocks, is known as “frontrunning” (investopedia.com) an illegal practise that is punishable by law.

Although Mr. Sokol’s case hardly resembles frontrunning, because he bought the shares before he offered it to Mr. Buffett, this goes to show how such practices has punctured on the current laws.

Notes Mr. Jason Zweig at the Wall Street Journal, (bold emphasis mine)

Mr. Sokol's trading falls under what Stephen Bainbridge, an expert on securities at the UCLA School of Law, calls "an enormously gray area of the law." It also is a reminder that a basic principle of securities law—disclosure cures conflicts—is nonsense.

"Even assuming that [Mr. Sokol] did nothing illegal, [his action] is typical of the kinds of conflicts of interest permitted by our financial system that undermine the integrity of markets," says Max Bazerman, an ethicist at Harvard Business School and co-author of the new book "Blind Spots."

Most people have what Mr. Bazerman calls an ethical blind spot. Faced with a potential conflict of interest, you automatically conclude that it couldn't possibly offer any temptation to someone of superior character—like you or those closest to you.

While I agree that this seems like an issue of ‘ethical blind spots’, I don’t share the impression that “conflicts of interest permitted by our financial system that undermine the integrity of markets” or of the insinuation that ‘ethical’ laws are needed to keep the “integrity of markets”. That would be misstating the case.

And that’s because it is the nature of people to be guided by self-interest based on the individual’s distinctive value preferences or priorities. And people’s diversified self interests always conflict with each other, but still could represent benefits for all the concerned, though not equally.(This is the essence of trade)

What has actually undermined the financial system is the conflict of interest (agency problem) between the political agents along with their regulatory patrons and their economic clients. Regulatory arbitrages, regulatory capture, revolving door politics, bailouts to name a few, has been significant contributors to the political-economic inequality.

And as one can see from the above account, current disclosure laws can’t stop people from circumventing them.

Besides, if Mr. Sokol’s allegation of Mr. Munger is accurate, then Mr. Buffett has been obviously tolerant of such practice.

To see why, Mr. Buffett probably sees this as a way to reward his underlings, who by diligent scrutiny over the target companies, takes on risks directly to emphasize their vote of confidence. It’s not even sure that what the underlings buy will be bought by Mr. Buffett.

As Mr. Buffett stressed on Berkshire’s recent press release,

Dave’s purchases were made before he had discussed Lubrizol with me and with no knowledge of how I might react to his idea. In addition, of course, he did not know what Lubrizol’s reaction would be if I developed an interest. (bold emphasis mine)

Thus such actions represent risks borne solely by both Mr. Munger and Mr. Sokol.

Perhaps, for Mr. Buffett this could have signified as parallel to a finder’s fee, that’s if he ever agrees with their investment concept.

This also highlights on the differences of what is seen as an ethical issue. What may seem wrong to the others may seem right to Mr. Buffett (although I would assume that he would distance himself from this controversy)

I think the editorial of Financial Times captures this well, (bold highlights mine)

That Mr Sokol has left to build his own investment portfolio is more than unintentionally ironic. The whole affair highlights Berkshire’s informal style of operation. This is possible because of the high degree of confidence reposed in the company by investors. Mr Buffett and his team can scour the world for opportunities untrammelled by investment mandates and other bureaucratic restraints.

The licence exists, of course, because of Mr Buffett’s superior investment record. He has beaten the stock market indices by a broad margin since the mid-1960s. But it will be harder for Berkshire to continue outperforming given its now-vast size, as even Mr Buffett has admitted. This should give investors pause. The risk of executives abusing informal processes is greatest at times when operational performance is under pressure.

In short, this hasn’t been an issue to Berkshire’s investors because of the rewards these investors have been showered with over these years. It would all be a different story if Berkshire lost money or has underperformed.

The other point is that people should be self-vigilant over their investments in the knowledge that there will always be conflict of interest issues at hand.

To rely on government to resolve ethical issues will only bring about dependency, complacency, and equally, conflict of interest issues but not between private agents but among public and private agents, which should even complicate and worsen the case, as manifested during the last crisis. In other words, more problems will arise from regulations meant to address ethical issues.

The market mechanism for discipline enforced by such perceived misconduct is social stigma or ostracism or reputational risk.

Finally, the public trial faced by Berkshire Hathaway and Mr. Sokol simply highlights of the uniqueness of Mr. Buffett’s management style.

Once Mr. Buffett goes, perhaps Berkshire would most likely lose its magic. All these seem ominous with Moody’s projecting the “Sokol affair” as negative for Berkshire’s credit rating standings (Reuters).

Berkshire’s Corporate Structure and Investment Holdings From theofficialboard.com

Still yet, the complexity of Warren Buffett’s flagship Berkshire Hathaway’s organizational structure operating on her vast investment holdings also underscores the FT’s editorial observations of Berkshire at “now-vast size” or perhaps reaching its growth limit.

And that’s why I have argued here that Mr. Buffett has resorted to political entrepreneurship perhaps out of the desperation to maintain public’s high expectations from a Warren Buffett managed Berkshire.

Bottom line: the principal-agent problem is an inherent feature of the marketplace, which has been immensely underappreciated but must be understood by all.

Video: Don Boudreaux On Understanding Trade Deficits

Professor Donald Boudreaux explains why trade deficits shouldn't be feared (HT: Mark Perry)

Phisix and ASEAN Equities: The Tide Has Turned To Favor The Bulls!

A good trader has to have three things: a chronic inability to accept things at face value, to feel continuously unsettled, and to have humility. -Michael Steinhardt, American investor and philanthropist

The tide must have turned immensely to favor the bulls.

Figure 1: Bloomberg: Jumpstarting the ASEAN Equity Markets

ASEAN markets appear to have been jumpstarted.

We have been repeatedly pounding on the table saying that this turnaround was about to happen. The bulls have been knocking on the door, but few had the grit to pay heed.

And that the previous weakness was not a manifestation of an inflection point nor was it representative of a reversal back to the bear market days. Instead, such market infirmities accounted for as a normal countercyclical process called profit-taking. The basic market lesson is that trends do not move in a straight line.

Yet the profit taking theme seemed unacceptable for the consensus. First because it is boring stuff. And second, because it would seem unworthy of conversations. Part of social conformity requires contemporaneous expressions. And unstylish themes don’t fit such bill.

Social signalling is prioritized more than the relevance of the returns on investments.

Moreover, because people’s intuitive desire is for the graphic, the controversial and the sensational, mainstream experts fed on this false attribution by fixating on the current exogenous factors—the political crisis in Middle East and Africa and Japan’s triple whammy calamity—which they interpreted as having driven markets.

Never mind if evidences hardly supported such assertions, the important thing was to blabber on what seemed fashionable and conversational.

Hardly anyone appear to realize that applying mental shortcuts or heuristics (such as available bias) draped with technical gobbledygook, which would look good from the outside or from the surface, are hardly the pertinent factors when accounting for real investment returns.

In reality, risks and uncertainties stare at our faces at every moment of our lives. Yet, it is just a matter of managing the diversified degree of risk-uncertainty environment that makes the difference. The proverbial wheat is, thus, separated from the chaff.

And as predicted, markets have gradually been digesting on the uncertainty-risk environment from these events. The constant stream of variable, localized, fragmented and frequently contradictory information, which allows markets to discount[1] the uncertainty-risk factor[2], has apparently reduced the perception of the event risk.

The aesthetics of the marketplace is the scintillating evidence of the perpetual flow of the great F. A. Hayek’s description of knowledge[3] and its indispensible role in breathing life to the marketplace via the pricing mechanism and the coordination and discoordination process underpinning the dynamism of prices.

We are now in the process of being vindicated anew!

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[1] See Managing Risk and Uncertainty With Emotional Intelligence, March 20, 2011

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

[3] Hayek, Friedrich von The Use of Knowledge in Society, econolib.org, 1945

Some Thoughts On The PLDT’s Buyout Of Digitel

Investing without research is like playing stud poker and never looking at the cards. - Peter Lynch

The story of the week belongs no less than to the buyout of Taipan Gokongwei owned Digitel Telecommunications [DGTL] by the largest phone company and publicly listed firm Philippine Long Distance Telecommunication [TEL].

PLDT’s Buyout of DGTL Provides Bulls The Excuse To Bid Up Markets

Figure 2: Recovering Phisix Buttressed By PLDT Buyout Story

It would be inaccurate to say that the PLDT-DGTL story entirely drove the domestic market higher.

The fact that MAJOR ASEAN markets were significantly higher this week, only suggests that bullish sentiment underpinned the markets in the Philippines and among our ASEAN contemporaries.

In addition, the Phisix (red bar chart in Figure 2) has been recovering even prior to the recent spike in PLDT (black candle) share prices last week.

Figure 3: Weekly Sectoral Performance

Besides, while the service sector vastly outperformed the general market led by PLDT rival Globe Telecoms [GLO] (up 22.3%) which ironically eclipsed PLDT’s superb (16.4%) gains over the week, even if Globe had been outside the buyout story, the Phisix which surged by an astounding 6.5% was also driven by advances from the broader market.

Yes, all sectors registered positive gains (figure 3). But only the service sector posted gains far above the Phisix while the financial sector was nearly at par with that of the Phisix. All the rest underperformed.

This means that the extraordinary surge in PLDT prices has materially influenced the gains of the Phisix, given that PLDT commands the largest share in terms of market cap weightings of the Phisix basket.

In other words, the PLDT-DGTL buyout story has nudged the overall market higher. Bulls, whom have been looking for a crucial excuse to bid up the markets (as shown by the gradual ascent prior to last week), appears to have found one in the PLDT-DGTL narrative.

Figure 4: Rotational Effects In Play

Yet this week’s exemplary actions have nearly closed the year-to-date deficits of the various sectors in the Philippine Stock Exchange including the Phisix.

As of Friday’s close, the Phisix is just down 1.7% from the start of the year.

But the more important story is one of the rotational effects.

The tale of the two sectoral outperformers (service and financials) for this week is a splendid manifestation of the Livermore-Machlup model[1] in action-where stock price movements are largely or mainly influenced by inflationist policies (Machlup) which can be empirically observed by relative price actions (rotations) but results to increases in general price levels overtime (Livermore).

Both these sectors have alot of catching up to do, considering that both have lagged the general market as shown above. In short, erstwhile laggards have turned into leaders.

This is further evidenced by the turnaround in the ALL shares index which has popped to the positive zone. This also means that the broader market has been substantially outperforming key Service and Financial issues until last week.

Yet if the tailwinds should persist to fuel the bull’s newfound momentum in the coming sessions or weeks, where the former laggards, many of which constitute as the core Phisix heavyweights, should spearhead an accelerated recovery, then we should see the Phisix clamber out of the rut and possibly post hefty positive returns by the end of April.

Stake In PLDT: Taipan Gokongwei’s Dream Come True

As we earlier said, the bulls found a pretext to fillip the markets, which was through the announcement of PLDT’s buyout of rival company Gokongwei owned Digitel [DGTL].

Here are some information on the buyout as per PSE disclosure[2]

Almost the entire transactions for the buyout (or 51.5% of DGTL) will be executed and financed via share swaps.

A tender offer will be made to the minority shareholders at a ratio of 2,500 pesos or 1 PLDT share for the equivalent number of DGTL shares held—valued at 1.60 per share.

The value of transactions for the Gokongwei owned shares are at php 69.2 billion. If an all cash outlay for the minority tender will be incorporated, the transaction value would rise to php 74.1 billion. If it will be an all share swap transaction minority plus the Gokongwei group will own 13.7% of PLDT. Definitely, the tender offer will translate to somewhere in between (cash tenders or PLDT swaps).

The completion of the buyout would mean that the Gokongwei flagship company JGS summit would hold 12.8% of PLDT.

Ascertaining the derivative value per share of the PLDT’s acquisition of DGTL seems ambiguous because it includes other matters that had not been appropriately detailed—such as the treatment of DGTL’s zero coupon convertible bonds which represents an approximate 18.6 billion of shares (or php 29.76 billion @1.6 per share-my estimates) and DGTL’s intercompany cash advances of 34.1 billion.

If we add both the intercompany cash advance with the estimated convertible bond equivalent, then the net value of the transaction would tally to php 63.86 billion. Thus, the variance between the broadcasted prices of the deal at php 69.2 billion and the above (cash advances plus bond convertible) or php 5.34 billion could have represented as goodwill money.

Digitel’s current outstanding shares is at 6,356,976,310 (PSE data) while the 51.5% stake involved in the PLDT buyout transaction is declared at 3,277,135,882 shares.

Simply dividing the net declared amount of php 69.2 billion with the outstanding or with the 51.5% stake or even including the 18.6 billion shares (from zero bond convertible) would result to prices far above the current share value. This is not to imply of an undervaluation, but of the black area arising from the incompleteness of the divulged or disclosed information.

The more important issue for me is that the Gokongwei group has been eyeing a significant stake in PLDT since October of 2002. The botched attempt in 2002 had been predicated on conflict of interest issues from the former’s ownership of Digitel[3].

Apparently this time around, the conflict of interest issue has been circumvented or resolved by using DGTL as the key vehicle for Gokongwei’s long wish to gain a foothold at PLDT.

I am partly puzzled by the seeming obsession of Taipan Gokongwei to secure a stake on PLDT despite some makeover in PLDT’s business model from the 2002 and today.

PLDT has branched out to the energy industry through a substantial claim on Meralco’s equity[4].

Meralco, as we have earlier written[5], epitomizes the Philippine brand of state capitalism. Meralco’s legalized monopoly translates to economic rents for the economic clients of the high echelon political patrons. Remember, Meralco’s pricing system is controlled by the Energy Regulatory Board (ERB) an agency which is directly under the Office of the President. In short, the President of the Philippines decides on how much these private sector owners of the energy monopoly franchise earns[6].

Though of course, Gokongwei’s passion for PLDT could also be due to the latter’s stranglehold of having the significant majority in the market share of the mobile business in the Philippine telecom industry.

Figure 5: nadventures.com[7] mobile market share

My naughty (outside the box) mind whispers to me that this buyout, which has its roots since 2002, could also have been incented from either flows of political money trying to find a legitimate front or that such acquisition could have operated from more from political incentives than from an economic one.

Nevertheless, my suspicions are just that...suspicions until evidence can back these up.

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[1] See Are Stock Market Prices Driven By Earnings or Inflation? January 25, 2009

[2] Digitel Telecommunications, JG Summit To Acquire Stake In PLDT In All-Share Transaction, Philippine Stock Exchange, March 29, 2011

[3] CNN.com Gokongwei still eyeing PLDT stake, October 3, 2002

[4] Philstar.com PLDT buys 20% Lopez stake in Meralco, March 14, 2009

[5] See Bubble Thoughts Over Meralco’s Bubble August 2, 2009

[6] See Has Meralco’s Takeover Been A Good Sign?, March 22, 2009

[7] Zita, Ken Philippine Telecom Brief (Network Dynamics Associates) nadventures.com

Philippine Telecom Industry: Buyouts And Mergers Don’t Kill Competition, Laws Do

“The consumers suffer when the laws of the country prevent the most efficient entrepreneurs from expanding the sphere of their activities. What made some enterprises develop into big business was precisely their success in filling best the demand of the masses.”-Ludwig von Mises

One thing we can be sure of is that the PLDT buyout of Digitel will reduce the mobile network providers to two major players (Figure 5).

This comes to fore the next important issue: Some politicians have been pondering on expanding political power to avoid “killing a strong competitor”[1] by impliedly calling for the institution of anti-trust laws.

This represents sheer hooey.

Figure 6: ITU/DOTC: Regulatory Framework On Philippine Telecoms

The path towards the monopolistic character of our telecom industry is a product of our existing laws[2]. (see figure 6)

One, there is a constitutional limitation on foreign ownership in public utilities to 40%.

Two, licenses per se are not issued to telecom service operators in the Philippines unlike many countries. Instead, operators are required of a legislative franchise (issued by Congress).

Three, another requirement is the certificate of Public Convenience and Necessity issued by the National Telecommunication Commission (NTC), and

Lastly, approval to provide telecom service via grant authority for operation also from the NTC, which usually covers a provisional period of 5 years.

The above is a manifestation of the huge structural obstacle imposed against companies wishing to enter and compete with present participants in the telecom industry.

Such regulatory labyrinth represents as the anti-competitive anti-business nature of the Philippine business climate that enables such monopolistic character to take place because it substantially raises the barriers to entry, increases the hurdle rate for investors just to comply with these web of statutes and whose success to secure license-to-operate would depend on the whims of venal politicians.

Imagine, any business entity wishing to enter and compete with the entrenched bigwigs would need huge sums of lobby money to get a franchise, and to outbid the existing companies protected by these laws, who would likewise spend enormous amounts of lobby money to oppose their entry!

And that’s not all. There are other administrative regulatory compliance costs such as the NTC requirements et. al. with which prospective new players need to deal with.

So in effect, alot of productive capital will go down the drain just to acquire licenses, pay regulatory fees, and also to oppose entry of competition! And alot of those wasted money would only go to the pockets of these grandstanding politicians and the bureaucrats. And this doesn’t even count on the productive time lost to secure licenses and to comply with such regulations.

The point is: Buyouts and mergers don’t kill competition, (anti-competition) laws do.

These politicians are barking at the wrong tree!

Yet by adding more layers of legal impediments to an environment already stultified by barriers of anti-competitive laws will only punish consumers and reward politically connected persons (Could this also be the reason why Gokongwei is very much interested with PLDT?)

What these politicians should instead do to enhance competition is to dismantle the constitutional restrictions on foreign ownership of the domestic telecom industry, liberalize investments by revoking the need for Congressional franchise, and to streamline administrative regulations. I might add that income and capital gains taxes should likewise be substantially reduced, if not abolished.

Surely, in a blink of an eye competition will flourish.

Also, for politicians to claim that they can politically impose competition is nothing but sheer absurdity.

Using monopolistic coercion to induce competition only translates to institutionalizing crony capitalism and corruption.

Investors operate on the discipline and incentives of profit and loss. An unviable project will not be undertaken by free market agents. Coercing institutions to “compete” would only translate to endowments of political privileges to ensure the viability of favoured political economic agents.

Thus, crony capitalists have little intention to please the consumers but would work steadfastly to satisfy the desires of their political masters whom they owe their economic rent privileges.

Nevertheless competition is not about the number of companies.

Competition, according to Murray Rothbard[3], is a process, whereby individuals and firms supply goods on the market without using force. To preserve "competition" does not mean to dictate arbitrarily that a certain number of firms of a certain size have to exist in an industry or area; it means to see to it that men are free to compete (or not) unrestrained by the use of force.

In short, even if there are only two players in the industry, for as long as they are free to compete without political restraints then marketplace competition will prevail. All politicians have to do is to lay their hands-off these firms.

But with the huge profits the industry has been raking (even if they have recently been declining[4]), the temptation for politicians to dip into them seems so irresistible. That’s one of the reasons why politicos have been looking at various ways to intervene and call for more regulation of the industry; remember proposals by politicos to impose free texting[5]? Or how about recent clamor to have prepaid cards registered[6] in the name of security?

For politicians, profits signify signs of evil or misconduct. Only they deserve to profit by pocketing on more revenues (legit or otherwise) by forcibly extracting or extorting from productive agents. And it is one reason why publicly listed companies would be incentivize to dampen income or profit reporting by padding on expenses (or spend on lobbies)—to keep away from the prying eyes of the envious the political class. Achieving inefficiencies translate to lost productivity which means reduced capital accumulation or wealth and more unemployment and poverty.

Like in most cases, politicians and their apologists always put up a strawman, embellished by noble intentions, to justify their interventionist desires. Yet like in most instances unintended consequences defeats such noble intentions.

We should be vigilant against these forces who always work to curb our freedom.

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[1] Inquirer.net Solons fear monopoly to rise from PLDT purchase of Digitel, March 31, 2011

[2] International Telecommunication Union (ITU) Pinoy Internet: Philippine Case Study, March 2002

[3] Rothbard, Murray N. Abolish Antitrust Laws, Mises.org

[4] Inquirer.net PH telecom companies facing tough challenges, February 26, 2011

[5] See Why Forcible “Free Texting” Will Only Lead To Increased Poverty, June 1, 2008

[6] Abs-cbnnews.com NTC powerless vs SMS rumourmongers, March 15, 2011

A Nation Of Takers Is A Path Towards Poverty

Wall Street Journal’s Stephen Moore in an Op-Ed suggests that the US is becoming more of a nation of takers than a nation of makers or producers.

Mr. Moore writes (bold emphasis mine)

If you want to understand better why so many states—from New York to Wisconsin to California—are teetering on the brink of bankruptcy, consider this depressing statistic: Today in America there are nearly twice as many people working for the government (22.5 million) than in all of manufacturing (11.5 million). This is an almost exact reversal of the situation in 1960, when there were 15 million workers in manufacturing and 8.7 million collecting a paycheck from the government.

It gets worse. More Americans work for the government than work in construction, farming, fishing, forestry, manufacturing, mining and utilities combined. We have moved decisively from a nation of makers to a nation of takers. Nearly half of the $2.2 trillion cost of state and local governments is the $1 trillion-a-year tab for pay and benefits of state and local employees. Is it any wonder that so many states and cities cannot pay their bills?

Every state in America today except for two—Indiana and Wisconsin—has more government workers on the payroll than people manufacturing industrial goods. Consider California, which has the highest budget deficit in the history of the states. The not-so Golden State now has an incredible 2.4 million government employees—twice as many as people at work in manufacturing. New Jersey has just under two-and-a-half as many government employees as manufacturers. Florida's ratio is more than 3 to 1. So is New York's.

Policy induced bubble cycles, bailouts, subsidies, welfarism, government fostered cartels (banking, military complex, green energy) and the palpable redistribution of power from the markets to the political sphere signifies as a mission creep towards a more socialized society in the US.

For the many statists who sees every imbalances as the fault of China, this clearly is an internally induced economic distortion. In short, the Chinese have little to do with the mistakes of American policymaking.

Chart from Heritage Foundation

And over the years, US politicians have used each crisis as an opportunity to expand government intervention in the name of security. Remember this quote popularized by Rahm Emanuel, "You never let a serious crisis go to waste. And what I mean by that it's an opportunity to do things you think could not do before."

The obvious outcome from the continued pursuit of such policies is likely a transition towards the Philippinization or emerging marketization or simply a material reduction of America’s living standards.

That’s because the welfare state represents an unsustainable model of governance—picking on someone’s pocket is a zero sum game that rewards non-productive agents at the expense of productive agents. Thus the welfare state breeds and nurtures political parasitism.

Ludwig Erhard, Vice-Chancellor and Minister for Economic Affairs of the German, who presided over the post war West German recovery known as the ‘German Miracle’ (Wirtschaftswunder) has this to say of the welfare state (Mises.org) [bold emphasis mine]

In recent times I have frequently been alarmed by the powerful call for collective security in the social sphere. Where shall we get to and how are we to maintain progress if we increasingly adopt a way of life in which no one wants any longer to assume responsibility for himself and everyone seeks security in collectivism? I have drastically described this flight from responsibility when I said that if this mania increases we shall slide into a social order under which everyone has one hand in the pocket of another. The principle would then be this: I provide for someone else and someone else provides for me.

The blindness and the intellectual inertia that are pushing us toward a welfare state can only bring disaster. This, more than any other tendency, will serve slowly but surely to kill the real human virtues — joy in assuming responsibility, love for one's fellow being, an urge to prove oneself, and a readiness to provide for oneself — and in the end there will probably ensue not a classless but a soulless mechanical society.

This process is particularly incomprehensible because, with the spread of prosperity and the growth of economic security, our economic basis becomes increasingly solid; the need to safeguard the achievements from all future dangers overshadows all other considerations. Here there exists a truly tragic mistake, for one meets with an apparent refusal to recognize that economic progress and prosperity based on effort cannot be combined with a system of collective security.

This call for security, which naturally must permit more state intervention, shows up the contradictions contained in this dishonest policy. If the words of these demands are reduced to a simple formula then what is being demanded is no more and no less than a lowering of taxation simultaneously with a greater demand on the public purse.

Politicians can fool MOST people for MOST of the time, but politicians CANNOT fool ALL the people ALL of the time. That’s because the laws of economics ensures that such deception or dishonest policies will be exposed for what they truly are.

Imbalances from unsustainable policies eventually implodes--the MENA political crisis should serve as a concrete example.

At the end of the day, redistributive policies camouflaged by noble intentions delivers the opposite outcome. A nation of takers will eventually drudgingly scuttle under the weight of debt, fiscal deficits and or inflationism.

Saudi Arabia’s Unsustainable Welfare State

The Wall Street blog reports, (bold highlights mine)

Another reason to brace for higher oil prices in coming years: big oil exporters are increasingly dependent on the income.

Saudi Arabia, due to higher government spending this year, will need its oil to sell for $88 a barrel in 2011 for its government to break even–up from $68 last year, according to a new estimate from the Institute of International Finance, a global bankers’ trade group.

The kingdom, in response to the unrest spreading throughout the Middle East and North Africa, is boosting government spending to provide new social benefits for its people. The support for housing units, unemployment benefits and wage hikes for public workers (among a long list of measures) will contribute to a 31% increase in government spending in 2011 from a year earlier.

Aside from the prospects of reducing oil supply to allegedly generate more income (i.e. by manipulating markets), this exemplifies how the welfare state, which works for the benefit of a few, will NOT last.

Like substance abuse, bribing the citizenry would only grow overtime (from demographics and from the feedback loop of the deepening of the dependency culture--which translates to more demand for welfarism).

Importantly, this also shows how the welfare state contributes to inflation and to high oil prices, aside from showing more proof that the global oil markets are vastly manipulated and distorted from the ratchet effect (irreversible expansion) of government interventions.

Lastly like a house of cards, once oil prices collapse, Saudi’s political leadership will most likely suffer from a political backlash which may end their grip on power.

At the end of the day, Saudi’s welfare state could only buy the political leaders some time before the day of reckoning arrives. What is unsustainable won’t last.