China Bails Out the Ministry of Railways

From Forbes’ Gordon Chang, (bold emphasis mine)

Last week, the powerful National Development and Reform Commission saved the country’s Ministry of Railways from default by announcing that the bonds of the troubled agency have “government support.” The announcement followed a decision earlier this month to cut taxes on interest paid on railway bonds. Moreover, the Railways Ministry reached agreement with the central government to force state banks to support its nationwide building program. Reports indicated that some of these financial institutions had previously cut their quota of loans to the debt-ridden ministry.

The series of steps saved the country’s railroad-building program, which had been floundering. Due to a cash crunch, contractors had stopped payments to cement and steel companies, migrant workers had not received wages for months, and projects to build thousands of kilometers of track had been put on hold.

Beijing in 2008 embarked on a gargantuan program, the world’s largest high-speed rail network. By the end of last year, the Railways Ministry had overseen the construction of 8,358 kilometers of high-speed rail track. It is building lines totaling a little more than 10,000 kilometers.

The centerpiece of the program is, by itself, the most expensive civil engineering project in history, the Beijing-Shanghai line, costing an estimated 221 billion yuan, about $34.6 billion. That overtakes the second-place Three Gorges Dam, which cost a mere 203.9 billion yuan. The line connecting the two cities is 1,318 kilometers, including 16 kilometers of tunnels. The service opened this July, about a year ahead of schedule.

The high-speed train cuts travel time between the two cities from 10 hours to less than five—when it is running. A series of power outages have plagued the showcase project since it began operating. Yet the repeated service interruptions are not nearly as bad as the collision in Wenzhou on July 23 on another line. The two-train accident, according to official statistics, killed 40 people and injured 177…

Zhao, perhaps China’s foremost critic of the high-speed rail system, points out that the low usage has created a debt crisis. The Beijing Jiaotong professor argues that if the Railways Ministry goes ahead and spends 4 trillion yuan as planned, it “will have absolutely no ability to repay.” Even now, the agency is having difficulty meeting its obligations. It has issued a series of bonds this year, in part to pay off maturing obligations and partly to pay suppliers.

The financial difficulties of the Railways Ministry have begun to affect state enterprises, such as China CNR Corporation, a train maker. CNR is now issuing bonds to meet its obligations to repay short-term debt. It has short-term debt because its accounts receivable skyrocketed due to “delayed payments” by the Ministry of Railways. As a result of mounting debt, CNR’s stock is among the worst performers in Asia. And the markets have also punished the shares of its competitor, CSR Corporation, the other state train maker.

The Railways Ministry is expected to issue 100 billion yuan of bonds this year, but some analysts think the agency has severely underestimated its cash needs. The ministry says it needs to raise 45.5 billion yuan for fixed assets this year when others think the actual figure is closer to 1.05 trillion yuan.

In any event, MOR, as the Railways Ministry is known, now has 2.1 trillion yuan of debt. Before the NDRC’s vague announcement of support last week, analysts were quietly talking about the ministry’s default. A bailout, perhaps in the form of the Ministry of Finance assuming the railway debt, is still necessary. The rescue effort will be costly: the Railways Ministry’s obligations are more than 5% of China’s GDP.

Beijing has the financial resources to save the ministry, but unfortunately it is not the only debtor that can use a hand. Chinese officials decreed the construction of most of the infrastructure built in the last three years because they wanted to create GDP. Now, however, they are busy thinking about how they will pay for all the “ghost cities” and train tracks to nowhere they have just built for this purpose.

In China, broadening signs of bailouts have not been signs of stabilization. Instead, the whack a mole or piecemeal approach signify as indications of a broadening deterioration of her economy. As I earlier said, expect more bailouts to come.

Importantly, these are risks that can't be ignored.

Occupy Wall Street: More Signs of President Obama’s Re-election Campaign Strategy

From Washington Post (bold emphasis mine)

Labor groups are mobilizing to provide office space, meeting rooms, photocopying services, legal help, food and other necessities to the protesters. The support is lending some institutional heft to a movement that has prided itself on its freewheeling, non-
institutional character.

And in return, Occupy activists are pitching in to help unions ratchet up action against several New York firms involved in labor disputes with workers…

The coordination represents a new chapter for the anti-Wall Street activists, who have expressed anger at establishment forces in both major political parties and eschewed the traditional grass-roots organizing tactics long deployed by labor unions.

It also suggests an evolution for organized labor, which retains close ties to President Obama and the Democratic Party but sees the Occupy protests as a galvanizing moment. Some union officials concede that their efforts to highlight income inequality and other economic concerns have fallen short, scoring few victories with a White House that many on the left see as too close with Wall Street.

President Obama’s job approval rating hits NEW record lows

From Gallup

This seems to validate polls which shows that the theme espoused by the ‘noisy minority’ have not been supported by the general public.

Such gimmickry seem as telltale signs that for the Obama administration, desperate times calls for desperate measures

Vatican supports Occupy Wall Street

From the Reuters

The Vatican called on Monday for sweeping reforms of the world economy and the creation of a ethical, global authority to regulate financial markets as demonstrations against corporate greed continued to spring up in major cities across the globe.

An 18-page document from the Vatican's Justice and Peace department said the financial downturn had revealed behaviours like "selfishness, collective greed and hoarding of goods on a great scale," adding that world economics needed an "ethic of solidarity" among rich and poor nations.

Urging Wall Street powerbrokers to examine the impact of their decisions on humanity, the Vatican called on those who wanted to change economic structures to "not be afraid to propose new ideas, even if they might destabilise pre-existing balances of power that prevail over the weakest."

The document was released as "Occupy Wall Street" protests this month sparked similar anti-capitalist movements around the world with demonstrators angry over government bailouts of big banks, corporate bonuses, and economic inequality.

Vatican wants the governments to impose “heaven on earth” policies in the delusional belief that governments are essentially ‘immaculate’ and has the power to repeal the law of economics by the use of force. This only shows how Vatican has NO idea of the origins of the evil she decries of, and the complicit role of governments in the current political order.

The Pope needs to know that the Governments has been masterminding the current “collective greed” political arrangements. The Vatican needs to answer who has been conducting bailout policies and most importantly WHY this are being done?

Second, Vatican prefers the use of more violence through the “creation of a ethical, global authority” to discipline or “to regulate” the markets.

It is ironic that the Vatican has been proposing actions which runs contrary to what she preaches.

Just how can love or ‘ethic of solidarity’ be attained through the enforcement of redistributionist policies that have been anchored on violence?

Heaven on Earth.

Numerical Probabilities as Metaphorical Expressions

In an earlier post I argued that assigning numerical probability to what has been a constantly changing environment can be a dangerous undertaking because this either depends on presumptive omniscience or requires heavy reliance on unrealistic assumptions that replaces people’s choice.

I would like to add the allegation where numerical probabilities serve as “framework for communication” does not improve the efficacy of numerical based probabilities because the basis of such communication would be ABSTRACTION.

Professor Ludwig von Mises calls this metaphorical expression(bold emphasis mine)

It is a metaphorical expression. Most of the metaphors used in daily speech imaginatively identify an abstract object with another object that can be apprehended directly by the senses. Yet this is not a necessary feature of metaphorical language, but merely a consequence of the fact that the concrete is as a rule more familiar to us than the abstract. As metaphors aim at an explanation of something which is less well known by comparing it with something better known, they consist for the most part in identifying something abstract with a better-known concrete. The specific mark of our case is that it is an attempt to elucidate a complicated state of affairs by resorting to an analogy borrowed from a branch of higher mathematics, the calculus of probability. As it happens, this mathematical discipline is more popular than the analysis of the epistemological nature of understanding.

There is no use in applying the yardstick of logic to a critique of metaphorical language. Analogies and metaphors are always defective and logically unsatisfactory. It is usual to search for the underlying tertium comparationis. But even this is not permissible with regard to the metaphor we are dealing with. For the comparison is based on a conception which is in itself faulty in the very frame of the calculus of probability, namely the gambler's fallacy.

In short, numerical probabilities serve to gratify one’s cognitive biases which in essence is a form of self-entertainment rather than a dependable methodology for risk analysis.

Higher Education in the Information Age

How higher education may look like in the future

From Mark Weedman (hat tip Professor Arnold Kling)

A school in this Google model derives its identity from its faculty and curriculum, or its “software” while de-emphasizing the importance of its infrastructure, such as its classroom, library and other campus facilities. In other words, it is possible to provide a first-class education in a school without a full range of campus facilities (or maybe even a school without a traditional campus) as long as the curriculum gives students access to the right kind of critical thinking, formation and training. It used to be that to provide a first-class education required institutions to assemble all three components: faculty, library and classrooms. The Google model suggests that it is possible to re-conceive that structure entirely by shifting the focus to curriculum (and the necessary faculty to teach it) and then adapting whatever “hardware” is available to give the curriculum a platform.

The key to this model is the curriculum. There are a number of reasons why traditional higher education institutions have gotten away with fairly generic curricula (i.e., a series of courses taught in classrooms via lectures and discussion), but one of the most important is that the other components offset the inadequacies of curriculum. Stripping away the infrastructure exposes the curriculum and demands that it be effective and have integrity on its own. Stripping away the infrastructure, however, also frees the curriculum to provide new and dynamic ways of learning. If you have a classroom or library, you have to use it. If you do not have a classroom, then entirely new educational opportunities present themselves.

The information age will transform the way we live.

Promises of Bailouts: How Sustainable will Positive Market Expectations Be?

The following news account[1] from the Bloomberg on Friday’s discernible jump in the US equity markets reasonably encapsulates what has been driving the global markets for a long time—financial markets highly dependent on political actions.

U.S. stocks advanced, giving the Standard & Poor’s 500 Index its longest streak of weekly gains since February, amid speculation of an agreement to contain Europe’s debt crisis and further Federal Reserve stimulus.

How Strong will the Market’s Expectations be?

So let me play the devil’s advocate: what if the market’s deepening expectations of the political resolutions from the above predicaments does not materialize?

These may come in many forms:

-adapted political actions may be inadequate to satisfy the market’s expectations (possibly from divergences in commitments or the inability to ascertain the optimal adjustments required)

-expected political actions don’t take place (possibly due to schisms or continuing disagreements over the measures or dissensions over the enforceability, degree of participations and or divisions over the efficacy of proposed measures)

-the festering crisis unravels faster than the applied political measures (possibly from miscalculations by the political authorities on the scale of the crisis or from unintended effects of their actions)

-sanguine markets expectations for an immediate resolution erode from either procrastination or persistent irresolution or indecisions (possibly from a combination of the above factors—divergences in calculations, variances in tolerable commitments and doubts on enforcement procedures and dissimilar political interests in dealing with the above junctures or more…)

October 1987 Risk Paradigm

I am in the camp that says that current dynamics suggest that the risks of a US are not as material as many mainstream experts have been projecting. Most of their projections have political implications, the desire for more government interventions.

But there could be a marked difference; stock markets may not be reflective of the actual developments in the real economy. In other words, actions in the stock market may depart from the economy.

Has there been an instance where there had been an adverse reaction to the stock markets from unfulfilled expectations from policymakers which had not been reflected on the economy?

Yes, the global stock market crash of October 19, 1987.

From the US Federal Reserve of Boston[2],

While in hindsight the data provide no evidence that interventions in foreign exchange markets were used to signal policy changes, it is possible that, at the time, market participants interpreted interventions as signals of future policy. If so, significant movements in the exchange rate would be expected at the time of interventions. Central banks actively intervened in foreign exchange markets after the Plaza Accord. Evidence suggests that combined interventions to increase the value of the dollar during this period did result in a significant decline in the deutsche mark/dollar exchange rate. As it became apparent that intervention was not signalling monetary policy changes, market participants apparently stopped interpreting intervention as a signal.

In short, market expectations diverged from the results intended from such political actions.

Many tenuous reasons have been imputed on non-recession stock market crash of 1987. However, the major pillar to this infamous event has been the boom policies of the Plaza Accord of 1985[3] which had been meant to depreciate the US dollar against G-7 economies via coordinated foreign exchange interventions, and the subsequent Louvre Accord of 1987[4], which had been aimed at arresting the decline of the US dollar or the reversal of the policies of Plaza Accord.

What had been initially perceived by policymakers as a US dollar problem, emanating from the advent of globalization, technological advances and the gradual transitory recovery of major Western from the recession of the early 80s, which affected the ‘goods’ side of the global economy, and the increasing financial globalization of the US dollar from the hyperinflationary episodes of some emerging markets (e.g. Latin American Debt Crisis[5]) which affected the ‘money’ side of the global economy, essentially transformed into a problem of policy coordination of interest rates[6] that led to an abrupt tightening of previously loose monetary policies which eventually got vented on global stock markets.

The decline of the trade weighted US dollar (apple green) stoked a boom in the US S&P 500 and similarly on the CRB Precious commodity metals sub-index (red) and an increase in inflation expectations as measured by the 10 year yield of US Treasuries (green). The yield relationship difference between stocks and bonds became unsustainable[7] which consequently culminated with the historic one day decline.

True, the dynamics of 1987 has been starkly different than today. We are experiencing a contiguous banking-welfare based crisis today which had been absent then in 1987.

But one striking similarity is how market expectations, which have been built on political actions, had completely diverged from what had been expected of the directions of policymaking.

Nevertheless the recent temblors experienced by the global financial markets following US Federal Reserve Chair Ben Bernanke’s no ‘QE’ stimulus[8] during last September 21^st resonates on a ‘1987 moment’ but at a much modest scale.

This is NOT to say that another 1987 moment is imminent. Rather, this is to say that the sensitiveness to such market risks increases as political actions meant to resolve on the current issues remain ambiguous or will remain in an indeterminate state.

And this is to further emphasize that while a grand “aggressive” “comprehensive” strategy may forestall any major market convulsion for the moment, they are likely to be temporary measures targeted at buying time for the policymakers from which another crisis would likely unravel in the fullness of time.

For now, it would be best to watch closely on how policymakers will react.

I believe that a monumental buying opportunity may arise soon.

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[1] Bloomberg.com S&P 500 Caps Longest Weekly Gain Since Feb., October 12, 2011

[2] Klein Michael Rosengen Eric Foreign Exchange Intervention as a Signal of Monetary Policy US Federal Bank of Boston, June 1991

[3] Wikipedia.org Plaza Accord

[4] Wikipedia.org Louvre Accord

[5] Mises Wiki Latin American debt crisis

[6]Ryunoshin Kamikawa The Bubble Economy and the Bank of Japan Osaka University Law Review, 2006 In the U.S., on the other hand, the new FRB Chairman Alan Greenspan raised interest rates in September. However, the dollar depreciated. Then, the U.S. government requested Japan and West Germany to reduce interest rates. Both countries declined and the Bundesbank performed an operation for increasing in the short-term interest rates in the market. Secretary Baker resented this and stated that the U.S. tolerated a weaker dollar on October 16. Investors recognized that this statement meant the failure of international policy coordination and they moved their financial assets out of the U.S. for fear of collapse of the dollar. This caused the heavy fall in the New York Stock Exchange on October 19 (Black Monday). The depreciation of the dollar continued after that and inflated asset prices and bond prices collapsed in the U.S. Then, Secretary Baker persuaded West Germany to lower the short-term interest rates)

[7] Mises Wiki Black Monday (1987)

[8] See Bernanke Jilts Markets on Steroids, Suffers Violent Withdrawal Symptoms September 22, 2011

Can China’s Slowdown Trigger a 1987 moment?

A very important feature that distinguishes the epic 1987 crash from modern equity market meltdowns has been that the cataclysmic ‘1987 moment’ originated overseas than from the US, as the Wikipedia.org describes[1],

The crash began in Hong Kong and spread west to Europe, hitting the United States after other markets had already declined by a significant margin. The Dow Jones Industrial Average (DJIA) dropped by 508 points to 1738.74 (22.61%).

Ignoring China’s Woes

Much of the concentration of the public’s attention has been in the developments of Europe or the US functioning as the major drivers of the price actions of global equity markets.

Again, most have been ignoring the developments in China.

This week, China’s Shanghai index expunged all gains previously acquired from the declared rescue efforts by the Chinese government’s sovereign wealth fund, Central Huijin to buy shares of major Chinese banks to demonstrate support for her banking and financial sector as well as the stock market, aside from the recently announced bailout measures which extended liberal financing to small scale enterprises following deepening signs of economic weakness[2]

The Shanghai index broke down from her immediate support. Importantly, momentum suggests that a meaningful test or even a possible encroachment of the 15-month critical support levels could happen anytime soon.

Again whether the current conditions signify as plain vanilla economic slowdown or have been symptomatic of a bubble bursting phase of China’s puffed up real estate sector, current events ostensibly exhibits a liquidity contraction process at work as consequences to earlier policies to contain inflation via increases in interest rate and reserve requirement channels and through the appreciation of her currency, the yuan.

China’s policies have shown little difference from the policies of the West, Keynesian attempts to perpetuate quasi-booms that are eventually met with busts.

And as previously mentioned, since China has been a major consumer of commodities, a liquidity contraction will likely extrapolate to price declines over a broad spectrum of commodities. At worst, a bursting bubble could mean a price collapse.

Thus far, the commodity sphere appears to be confirming the China liquidity contraction theme as commodities have shown sharp declines almost in conjunction with recent selloffs in the Shanghai Index.

Industrial metals (GYX), Precious Metals (GPX), Energy (DJAEN) and Agriculture (GKX) have all stumbled markedly and have mostly been drifting in bear market territories except for the Precious metals.

Can China Withstand the Financial Storm Unfazed?

For many there has been much optimism over China’s ability to conduct a successful bailout of the affected segments of her economy. Some say that China has been equipped with ‘financial tools’ and or the wherewithal to arrest the current decline.

While it may be true that China’s government has a lot of savings, estimated at 8% of the GDP, and similarly holds sizeable deposits, where government savings has been estimated at 8% of the GDP[3], it is not clear if these deposits have remained in the banking system or had been lent out as various forms of loans that could have been exposed as off-balance sheet liabilities that has propped up the property bubble.

Also, my skepticism applies to the alleged large pool of state owned assets estimated at 15 times GDP that could serve as cushion to any ‘systemic meltdown’[4].

In short, I am doubtful of these statistical premised presumptions. Further, I am a cynic to the credibility and reliability of the actual metrics used to calculate accurately the existence of these assets.

And speaking of credibility, China’s accounting system has remained partly abstruse, whose transparency should be reckoned as questionable. China has yet to fully adapt and integrate to the world’s standard of generally accepted accounting principles or International Accounting Standards[5]. Up to February of 2010 China’s accounting standards has still been under Chinese standards.

Moreover, much of China’s foreign exchange surpluses have been representative of monetary or credit expansion and thus vulnerable to any credit contraction-hot money outflows from a bursting of her property bubble.

Foreign reserve surpluses are equally vulnerable as Austrian economist Dr. Anthony P. Mueller explains[6],

The expansion of debt by the issuer of the international reserve medium augments the stock of international reserves and the increase of the reserves works like a growth of the global money supply. Central bank balance sheets show that the circulating domestic money forms a debit item, while foreign reserves are part of the credit side. All other things being equal, an increase in foreign reserves implies money creation. This way, foreign debt accumulation by the issuer of a global reserve currency impacts monetary demand through two channels: in the debtor country by the domestic spending of foreign savings, and in the creditor country by the accumulation of foreign exchange reserves which augment the money supply….

And the engagement of further bailouts would only shift the burden to government which would accumulate more debts that ultimately becomes unsustainable

Again Dr. Mueller,

Governmental debt accumulation and monetary expansions tend to go the extremes until they will collapse. While it has taken many years for the capital structures of the economies involved to adapt to these conditions, the catastrophic event of the debt collapse will abruptly confront the capital structure with a new and very different setting. International capital flows driven by government possess the same general features like a debt cycle caused by monetary expansion that is not funded by savings.

For as long as China’s government will persists on with various interventionist policies, bailouts, bubbles, and an expansion of the welfare system, this should lead to capital consumption activities which would undermine whatever supposed advantages accrued from the foreign reserves.

The lingering debt crisis in the Eurozone has only increased the indebtedness of the region, which according to reports has boosted the region’s debt average to 85.4 percent of gross domestic product from 79.8 percent in 2009[7]. The continuing growth of debt has been corollary to the increase of ‘budget deficits’ and of ‘bank-recapitalization costs’.

The attendant strains from the transference of scarce resources from productive sectors to unproductive or politically privileged sectors as banks eventually weighs on the creditworthiness standings of foreign reserve surplus nations such as Germany and France as shown in the above chart by Danske Bank[8].

In addition, I am dubious of any implied sophistication of China’s central banking, whose supposed financial tools like any conventional modern central banks have been merely about printing of money. Transferring liabilities from one pocket and to another only to be camouflaged by fiat money from the PBOC will eventually will get exposed when the proverbial tide subsides.

Inflation is a policy that will not last.

Questioning China’s Crisis Management Experience

Furthermore, China’s experience with handling a major banking crisis should be viewed with skepticism. The last time China had a major banking crisis was in the late 90s where China rescued her major state owned banks that had been complimented by recapitalizations through the Hong Kong Stock Exchange[9].

Also China has only had a major recession over the past two decade. The last recession seem to have coincided with the banking crisis in 1998-99, where real growth fell to 5% while reported growth dipped only slightly below 8% according to the Economist[10].

The point that needs to be stressed here is that given the dramatic changes in the scale, the scope and the complexity of the global economy which includes China’s economy which has in the recent years catapulted to the 2^nd largest in the world[11], I would have sincere doubts about her ability to conduct an orderly rescue outside the scope of massive reflating the system.

By the same token, it would signify as reckless assumptions to believe that the developed world will be insulated from the risks of a further deterioration of China’s economy.

If the world has supposedly been lifted out of the recession in 2009, led mainly by China and India with the help of the rest of Asia[12], where the region’s share of the economic pie has been rapidly expanding, then we would likely have a reverse contagion effect where a slowdown in China and Asia will exacerbate on the protracted economic pressures being endured by the fragile economies of the crisis affected Western nations.

The degree of contamination will most likely depend on the strength of the internal dynamics of the respective local economies. Thus, it remains to be seen if the massive growth in money supply in the US can offset the liquidity contraction being experienced by China.

China’s Crisis will likely Impact ASEAN Bourses

It would equally be foolish to presume that the ASEAN 4, whom has been outperforming the world in terms of equity markets, would remain unsullied by a China liquidity contraction.

The transmission mechanism from a China crisis postulates that the rapid growth of ASEAN exports to China which has been driven mainly by commodities, information technology and regional supply chain integration[13] would be confronted with tremendous pressures that would have real untoward economic effects.

And despite my bullish bias it would be hard to argue against empirical evidence.

Although the ASEAN majors have not yet violated the 20% threshold level or the technical demarcation for a bear market, chart patterns appear to corroborate such anxious global market sentiments where Indonesia (IDDOW), Malaysia (MYDOW) and Thailand (SETI) bellwethers have transitioned into a bearish ‘death cross’.

People’s actions shape chart trends, this only implies that current market climate has been imbued with too much uncertainty whose present state seems opaquely identifiable. In other words, I am uncertain if we are in a consolidation phase or in a transition to bear market or a pause from a bull market.

Thus, the global equity markets, inclusive of the ASEAN bourses, appear to be much in limbo.

Conclusion

Market signals today appear to be reflective of the rampant uncertainties brought about by the amorphous political environment which has held global financial markets hostage.

Again, the state of extreme fluidity of the events implies that anything may happen in the transition. Equity markets will likely remain sharply volatile in both directions.

And this will remain so until we see major ‘concrete’ actions from global policymakers, including the political stewards of China, the Eurozone, and importantly, from the US Federal Reserve Chief Ben Bernanke, who bizarrely keeps incessantly dangling on variations of his preferred policy action—quantitative easing[14].

The October 1987 crash signified a low probability high impact event or a Black Swan where such event transpired unanticipated by the mainstream.

Such an event risk may seem partly applicable today and could be magnified if the current impasse in policymaking or the stalemate in the political domain remains in place.

On the other hand, for the global financial market greatly dependent on government steroids, concrete or specific actions by policymakers will likely turn the tide that would recalibrate the bubble cycle.

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[1] Wikipedia.org Black Monday (1987)

[2] See More Evidence of China’s Unraveling Bubble?, October 16, 2011

[3] US Global Investors Investor Alert - Do Bullish Investors Have an Ace in the Hole?, October 21, 2011

[4] Huang YiPing, Is China's Economy Headed for Trouble? October 12, 2011, Wall Street Journal

[5] Wikipedia.org Chinese accounting standards

[6] Mueller Antony P. Do Current Account Deficits Matter? Mises.org Journals

[7] Bloomberg.com Euro-Area Debt Reaches Record 85.4% of GDP as Turmoil Deepens, October 21, 2011

[8] Danske Bank Preview EU summit: The moment of truth, Strategy October 20, 2011

[9] Xie Andy Here We Go Again, September 10, 2009 China International Business

[10] The Economist, Reflating the dragon, November 13, 2008

[11] The Telegraph China is the world's second largest economy, February 14, 2011

[12] Singh Anoop, Asia Leading the Way IMF Finance and Development June 2010

[13] IMF.org Navigating an Uncertain Global Environment While Building Inclusive Growth, Regional Economic Outlook, October 2011

[14] See Bernanke’s Doctrine: Fed Mulls Purchases of Mortgage Backed Securities, October 22, 2011

The Philippine Phisix at Crossroads

From a technical perspective, the Phisix shown above seems to be drifting towards a crucial point, whose destiny will be shaped either by a major reversal or will constitute as a continuation of the current bullmarket.

That’s because the Phisix seems to be moving towards a transition into what has been popularly known as a ‘death cross’ pattern[1] where the long term moving averages could move to break above the short term averages that would imply of a major trend reversal whose trend bias will favor the bears.

But since charts represent as only a guidepost for me, which means that such instruments are not only infallible, but in fact are susceptible to statistical inconsistencies, it is important to emphasize that trends are not propelled mechanically by the patterns itself, but by people’s action.

From here we can say that the current trends demonstrated by the Phisix are manifestations of externally influenced price dynamics that likewise are reflective of the ongoing apprehensions from global political vacillations.

The actions of the Phisix seem congruent with the actions of her neighbors as shown earlier.

To repeat, even if there should be any downside thrust that could be manifested in the chart of the Phisix over the coming sessions, which may suggest of a bear market in motion, any major moves undertaken by global policymakers can or may undo such chart formations.

This would be similar to the much bruited ‘death cross’ formation of the US equity markets highlighted by the S&P 500 in 2010, which had been vanquished by Ben Bernanke’s announcement of QE 2.0[2].

Nonetheless the current oversold rebound by the Phsix signifies much of indecisiveness.

As the Phisix has bounced off its latest lows, the recent rebound has been accompanied by diminishing volume (as shown by the Peso volume averaged on a weekly basis)

The advance decline-spread computed on a weekly basis seem to have equally been damaged by the recent sell-offs.

Both variables above reveal a lot of tentativeness among market bulls.

The good news, so far, is that the current market carnage has mostly been a locally driven phenomenon as net foreign outflow has remained minimal.

The paucity of foreign outflow has kept the Peso from a substantial drop and has likewise buoyed current sentiments.

Bottom line: The current sentiment exhibits that there has been continued signs of uneasiness from both local and foreign participants who appear to have been revealingly traumatized by the recent bloodbath.

To see signs of improvement, we need a significant expansion of Peso volume trades, a broad based bullish or optimistic market breadth which should be supported by an improvement in chart price actions.

But most importantly, outside the local context, we need to see strong evidences of recoveries from our neighbors’ bourses, and similarly from the commodity markets.

Such recovery should likely be accompanied by signs of consolidation or parallel enhancements of the price actions in developed economy contemporaries.

Only from the above developments can we say that we have successfully sailed through the Greek mythological treacherous waters of Scylla and Charybdis[3].

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[1] Investopedia.com, Death Cross

[2] See How Reliable is the S&P’s ‘Death Cross’ Pattern?, August 14, 2011

[3] Mythagora.com Kirke

Applying Methodological Individualism to the Financial Markets

I recently received a suggestion for me ‘quantify’ the probabilities of my risk scenarios.

While this may represent the conventional practise by the mainstream, I see this as a foolish undertaking.

Putting numbers assumes that I KNOW the nitty gritty or the minutest details of the risk events that I have been investigating. It also means that I KNOW how people think and their corresponding responses to the changes in the economy, the environment or the financial marketplace. Otherwise, I would be making irresponsible assumptions that may be out of touch with reality.

Besides, I don’t see the need to ‘signal’ or project my expertise just to get plaudits from any institutions. All I aim to do is to excel at my current undertakings in order to survive.

Anyway the prediction markets such as Intrade.com exhibits the probabilities of specific events based on actual risk money or bets and not merely from mathematical models.

For instance, the odds of a US recession in 2012[1] has been quite volatile.

The odds of a recession began to recede since the last quarter of 2010 and began to bottom out in the first quarter of 2011. But this trend reversed to the upside and currently stands at the highest level since the last quarter of 2009.

As of this writing, the odds of a recession by the betting public is at 43.6% and constantly changes depending on the risk perception of the betting public.

The above simply shows that there is NO constancy in people’s actions or that the only thing constant in the real world is change.

Therefore to apply probabilities based on math or econometric constructed ‘models’ from faulty and flawed assumptions would not be only ridiculous but dangerous, especially to our management of portfolio.

Class and Case Probabilities

A better option would be to apply what the Austrian School of economics calls as Class and Case Probabilities.

Class probability, as the great professor Ludwig von Mises defined is[2]

We know or assume to know, with regard to the problem concerned, everything about the behavior of a whole class of events or phenomena; but about the actual singular events or phenomena we know nothing but that they are elements of this class.

We know, for instance, that there are ninety tickets in a lottery and that five of them will be drawn. Thus we know all about the behavior of the whole class of tickets. But with regard to the singular tickets we do not know anything but that they are elements of this class of tickets.

On the other hand, Case probability according again to Professor Mises means:

We know, with regard to a particular event, some of the factors which determine its outcome; but there are other determining factors about which we know nothing.

Case probability has nothing in common with class probability but the incompleteness of our knowledge. In every other regard the two are entirely different.

Let me apply these probabilities to the recent typhoon that hit Metro Manila. [As a caveat I don’t know exactly the details of the typhoon but am comparing the major hits from a typhoon in the metropolis.]

Class probability means that we know some generalized information of the risk event.

-Typhoons can result to loss of lives, injuries or damage to properties as a result of flooding, strong winds and other related or ancilliary consequences (landslide, health hazards as leptospirosis, snake bites, E. coli and etc..).

-We can predict the path of typhoons using satellites.

-We know for instance that around 19 cyclones or tropical storms enter the Philippine area of responsibility every year[3].

From the above, we can even parallel class probabilities or “the behavior of a whole class of events or phenomena” to former US secretary of defense Donald Rumsfeld theory of uncertainty called ‘known knowns’[4]

Yet if there are ‘known knowns’ then the antipode would be the ‘unknown unknowns’.

This would represent as the Case probabilities or fragmented, dispersed and localized information on specific risk events.

Back to typhoons, we don’t know the exactitude and the variability of the typhoon’s strength (only estimates) and or its impact to particular affected localities.

While the Typhoon Nesat[5] [code name: Pedring] recently hit Northern Luzon’s Aurora and Isabela provinces the hardest, in Metro Manila, the famous Manila district of Roxas Boulevard got slammed by a barrage of extremely high storm surges that caused flooding at a public hospital, a five-star hotel and the US embassy.

This is in contrast to Typhoon Ketsana[6] [code name: Ondoy] in 2009 where strong continuous rains basically submerged Metro Manila’s Marikina City that led to many fatalities.

Think of it, about 19 typhoons hit the Philippines every year, yet we hardly know much about the prospective destruction or the scale of calamity these typhoons would bring about and where they will hit for us to apply precautionary measures.

But if you listen to the self-righteous blarneys of prominent media broadcasters, who base their comments on ex post analysis of ‘case’ events, you’d bear the impression that if the government only does as they propose the next typhoon won’t have an impact to the nation at all. Duh!

Yet fallacies from such presumptive omniscient gibberish can be applied to the most recent triple whammy calamity of Japan: the 2011 Tohoku earthquake, tsunami and the nuclear reactor meltdown[7].

Japan’s geographical location[8] makes her exceedingly vulnerable or prone to earthquakes. Thus Japan has lavished in putting up scientific prediction models, which only has proven to be a massive failure in predicting the latest catastrophe[9].

The moral: While it would seem as intellectually comforting to be guided by math based models in predicting the probabilities of the markets or the economy or of any people based risk events, unfortunately, they almost always fail to achieve their goals. The problem is that the social science isn’t physics or natural sciences that are quantifiable and work on some constants.

As Professor Mises wrote[10],

People would like to find in an economics book knowledge that perfectly fits into their preconceived image of what economics ought to be, viz., a discipline shaped according to the logical structure of physics or of biology. They are bewildered and desist from seriously grappling with problems the analysis of which requires an unwonted mental exertion.

Another notable example would be how the 2008 crisis exposed the travesty of quant[11] models[12]. UK’s Queen Elizabeth even questioned the economic profession[13] on why they haven’t seen the crisis coming.

To insist on applying something that doesn’t work is an exercise of self-deception or delusion.

Using Methodological Individualism on Uncertainty

The best methodology will always be to apply the understanding of human action or methodological individualism on social problems

Again from Professor Ludwig von Mises, (bold highlights mine)

Praxeological knowledge makes it possible to predict with apodictic certainty the outcome of various modes of action. But, of course, such prediction can never imply anything regarding quantitative matters. Quantitative problems are in the field of human action open to no other elucidation than that by understanding.

We can predict, as will be shown later, that — other things being equal — a fall in the demand for a will result in a drop in the price of a. But we cannot predict the extent of this drop. This question can be answered only by understanding.

The fundamental deficiency implied in every quantitative approach to economic problems consists in the neglect of the fact that there are no constant relations between what are called economic dimensions. There is neither constancy nor continuity in the valuations and in the formation of exchange ratios between various commodities. Every new datum brings about a reshuffling of the whole price structure. Understanding, by trying to grasp what is going on in the minds of the men concerned, can approach the problem of forecasting future conditions. We may call its methods unsatisfactory and the positivists may arrogantly scorn it. But such arbitrary judgments must not and cannot obscure the fact that understanding is the only appropriate method of dealing with the uncertainty of future conditions.

Understanding of how individuals interact with one another and with the environment should give us a better insight than sloppy thinking based on hypothetical numerical aggregates which attempts to substitute for people’s choices.

---

[1] Intrade.com The US Economy will go into Recession during 2012

[2] Mises Ludwig von Uncertainty Mises.org

[3] Wikipedia.org Typhoons in the Philippines

[4] Wikipedia.org There are known knowns

[5] Wikipedia.org Typhoon Nesat (2011), Philippines

[6] Wikipedia.org Typhoon Ketsana

[7] Wikipedia.org 2011 Tōhoku earthquake and tsunami

[8] Wikipedia.org Seismicity in Japan

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

[10] Mises Ludwig von Blue-Collar Anticapitalism, Mises.org

[11] See How Math Models Can Lead To Disaster, February 25, 2009

[12] See Beware Of Economists Bearing Predictions From Models, May 27 2009

[13] The Telegraph The Queen asks why no one saw the credit crunch coming, November 5, 2008

Euro Debt Crisis hastens development of Bond Capital Markets

Opportunities emerge in every crisis. Though I am not referring to political opportunities (ala Emmanuel Rahm)

The Euro debt crisis has been shifting funding dynamics of the Eurozone's corporate world from the banking sector to the corporate bond markets.

From the Henrik Art of Danske Research

A recent report by Fitch confirms that European companies are increasingly relying on bond markets for their financing as bank lending becomes less attractive. By the end of 2010, corporate bonds represented 73% of the EUR1.3trn in debt used by 161 large European companies examined by Fitch.

Going forward, the trend towards US-style funding, where debt capital markets are a more important source of corporate funding than traditional bank loans, is likely to continue. The ongoing fundamental and regulatory challenges for the European banks that translate into persistent higher funding and capital costs are the key reasons for this development. In this respect, investment grade blue-chip corporates have access to cheaper funding in the bond market than their peers in the financial sector. As such, the critical mass required for a company to go to the capital market is getting lower.

According to Fitch, the European bond market continues to broaden and deepen and thus the trend towards increased funding disintermediation is occurring across virtually all industries and rating categories. To illustrate this point, for the first time, the high yield companies in Fitch’s sample group ended a year (2010) with more bonds than bank loans.

Economically unsustainable institutional political platforms are being forcibly reconfigured by the markets.

The stranglehold of the central banking cartel financed and facilitated welfare state is in a process of erosion.

Quote of the Day: Stupidity Not an Excuse for Laziness

Stupidity is not an excuse for laziness, so argues my favorite marketing guru Seth Godin (bold emphasis mine)

(Is it that you can't do it or perhaps you don't want to do the work?)

When I was in college, I took a ton of advanced math courses, three or four of them, until one day I hit the wall. Too many dimensions, transformations and toroids for me to keep in my head. I was too stupid to do really hard math so I stopped.

Was it that I was too stupid, or did I merely decide that with my priorities, it wasn't worth the work?

Isn't it amazing that we'd rather call ourselves stupid than lazy? At least laziness is easy to fix.

People say that they are not gifted/talented/smart enough to play the trumpet/learn to code/write a book. That's crazy. Sure, it may be that they don't possess world-class talent, the sort of stuff that is one in a million. But too stupid to do something that millions and millions of people can do?

I'm not buying it. Call it as it is and live with it (or not). I'm just not willing to believe we're as stupid as we pretend to be.

Instead of stupidity, my encounters with such genre of an excuse often times are packaged as self-imposed handicaps or even as fear of failures, e.g. I am not a college graduate, I am not an economics graduate, I am just a small investor, I am not good looking, work is too overwhelming and etc.

But as Mr. Godin rightly points out most of these are in essence as signs of laziness or sloth which can be rectified.

After all, mental attitude is about our desire and our corresponding actions which can be directed either to strive for success or to condescend to failure.

The sad part is that for many, failure is seen as endemic trait even without lifting a single effort to go for success.

Video: Political Economy Basics "My Friend Sarah"

From the winner of the 2009 Fraser Institute Video Contest (hat tip David Henderson)