Year of the Dragon: A Stock Market Boom?

The Economist says that the year of the Dragon will bring good fortune to stock market investors.

That would be nice to hear.

Here’s the Economist,

CHINESE people across the world ushered in their new year on January 23rd, which according to 3,000 year-old Chinese astrology is the year of the dragon. This critter is not a mythical beast. Physignathus cocincinus, to give its Latin name, is associated with power, authority and good fortune. For those looking for good news among the grim January headlines, this could bode well for stockmarket fortunes over the coming year. Between 1900 and 2011, the nine previous dragon years have seen America's Dow Jones Industrial Average price index increase by an average of 7.7% in real terms, the second-best historical record of the 12 zodiac animals. Such fortune may be short-lived however; next year's animal, the snake, has the second-worst historical record.

My view is that the illustrated stock market returns has been coincidental, and has little to do with the fortune cookie from the year of the Dragon.

This is an example of the penchant to look for patterns or correlations to justify or rationalize a bias. Other daffy examples are: Sports Illustrated Swimsuit Issue, Skirt Theory, Super Bowl, Lipstick and more...

Instead, the politicized nature of the global stock markets implies that the collective actions of the US Federal Reserve's Ben Bernanke, ECB’s Mario Draghi, BoE’s Mervyn King, BoJ’s Masaaki Shirakawa and the central bankers of other major economies will serve as one of the major pillars in shaping investor returns this year.

The others you can read here

Coming War on Iran: Europe Bans Oil Imports from Iran

The US has been tightening the screw around Iran’s neck.

And as earlier postulated, part of the bailout package of the Eurozone comes with conditions for Europe to apply sanctions on Iran. I seem to have been validated

From the Wall Street Journal

The European Union approved a ban on oil imports from Iran, overcoming misgivings about the economic hardship of its members to take its strongest measures yet to press Tehran into concessions on its nuclear program.

News of a coming embargo by Iran's largest oil-export market shocked the country's troubled economy. Iran's currency, the rial, fell 10% to a record low on Monday, while gold prices rose.

The ban is set to take effect on July 1, following a review to ensure the weaker EU economies can find, and afford, new sources of oil. The EU also agreed to freeze the assets of Iran's central bank, the conduit for the country's oil revenue, and ban trade with its petrochemical industry.

"Our message is clear. We have no quarrel with the Iranian people," the leaders of France, Germany and the U.K. said. "But the Iranian leadership has failed to restore international confidence in the exclusively peaceful nature of its nuclear program. We will not accept Iran acquiring a nuclear weapon."

Iran's Deputy Foreign Minister Abbas Araghchi said sanctions made Iran's conflict with the West tougher to resolve.

"The more they go down this path, the more obstacles we will have for reaching a final agreement," Mr. Araghchi told IRNA, Iran's official news agency.

The Obama administration applauded the EU decision on Monday and backed it up by blacklisting Iran's third-largest bank, Bank Tejarat, one of Tehran's few remaining conduits for trade with the West.

And instead of pressuring the leadership, as Presidential aspirant Ron Paul predicted, the average Iranians appear to be redirecting their frustrations at the US.

Again from the same article,

Iranians contacted Monday reacted with anger at news of the embargo, saying the people would suffer more than the government, amid rising inflation levels.

"These sanctions are affecting everyone's daily lives. I wish our government would put the good of 75 million people ahead of its pride and compromise," said an engineer in Tehran.

What the US (and Israel) would now be waiting for now is a Casus Belli (justification for acts of war: Wikipedia.org). And a beleaguered Iran may just oblige.

War is a diversionary ploy used by politicians to advance their self-interests.

I see the US political brinkmanship as an important variable to the coming US presidential election, and importantly, as pretext or justification to raise debt ceiling levels and to monetize US debts.

Keystone Pipeline Controversy: Warren Buffett Profits from Obama’s Policies

From Bloomberg,

Warren Buffett’s Burlington Northern Santa Fe LLC is among U.S. and Canadian railroads that stand to benefit from the Obama administration’s decision to reject TransCanada Corp. (TRP)’s Keystone XL oil pipeline permit.

With modest expansion, railroads can handle all new oil produced in western Canada through 2030, according to an analysis of the Keystone proposal by the U.S. State Department.

“Whatever people bring to us, we’re ready to haul,” Krista York-Wooley, a spokeswoman for Burlington Northern, a unit of Buffett’s Omaha, Nebraska-based Berkshire Hathaway Inc. (BRK/A), said in an interview. If Keystone XL “doesn’t happen, we’re here to haul.”

The State Department denied TransCanada a permit on Jan. 18, saying there was not enough time to study the proposal by Feb. 21, a deadline Congress imposed on President Barack Obama. Calgary-based TransCanada has said it intends to re-apply with a route that avoids an environmentally sensitive region of Nebraska, something the Obama administration encouraged.

The rail option, though costlier, would lessen the environmental impact, such as a loss of wetlands and agricultural productivity, compared to the pipeline, according to the State Department analysis. Greenhouse gas emmissions, however, would be worse.

If completed, Keystone XL would deliver 700,000 barrels a day of crude from Alberta’s oil sands to refineries along the Gulf of Mexico, crossing 1,661 miles (2,673-kilometers) over Montana, South Dakota, Nebraska, Kansas, Oklahoma and Texas.

I am more convinced that Mr. Buffett’s investing strategy has been overhauled, from value to political entrepreneurship (cronyism).

Considering Mr. Buffett’s age, perhaps his desire to get continued accolades from the investing world by generating exemplary returns on investment, has become the highest priority. In short, I think Mr. Buffett’s ego has been prevailing over his former style. And a higher time preference for Mr. Buffett’s translates to a portfolio with greater exposures on short term positions (theoretically extrapolates to higher risks).

And aside from the narrowing windows of patience, Mr. Buffett perhaps recognizes the potential blowback from the economic medicine analogy which he often uses to justify government’s intervention in the economy.

In his flagship company, Berkshire Hathaway’s 2009 shareholder meeting Mr. Buffett said,

Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once unthinkable dosages will almost certainly bring on unwelcome after-effects. Their precise nature is anyone's guess, though one likely consequence is an onslaught of inflation.

Such environment would stymie ROIs.

So given the current circumstances, one major way to preserve his reputation would be to take on the political route to squeeze out ALPHA [return in excess of the compensation for the risk borne-wikipedia.org]: lobby and use the government policies to put a kibosh on prospective competition.

At the same time, political privileges not only reduces the short term risks but also provides profits to his company whom has been positioned to profit from policies of 'economic medicines' running on huge dosages (inflationism).

We have accounted for Mr. Buffett’s embrace of cronyism where has previously profited from bank bailouts.

Obama’s policy of “picking winners” in denying the permit for Keystone pipeline project has favored Mr. Buffett’s interests.

And to reciprocate, it’s no wonder the Sage of Omaha has been fervently campaigning for President Obama’s reelection bid, where Mr. Buffett has been one of Obama's major fundraiser.

Nassim Taleb on the Party Skills of Entrepreneurs

Why are entrepreneurs less glib in party conversations? Because they are doers and less of talkers. That’s how I interpret the impromptu and thought provoking post of one of my favorite author, Nassim Taleb on his Facebook wall.

I believe that education is mostly what make individuals more polished dinner partners. The British government documents, as early as fifty years ago, present another aim for education than the one we have today: raising values, making good citizens, and “the intrinsic value of learning”, not economic growth.

Likewise in ancient times, learning was for learning’s sake, to make someone a good person, worthy talking to; it was not for the vulgar aim to enhance the stock of gold in the city’s coffers. I will say it bluntly: entrepreneurs, particularly those in technical jobs are not necessarily the best people to have dinner with —the better at they are doing, the worst they tend to be (with some exceptions, of course).

I recall a heuristic I used in my previous profession when hiring people (called in Fooled by Randomness “separate those who when they go to a museum look at the Cézanne on the wall from those who focus on the contents of the trash can”): the more interesting their conversation, the more cultured they were, the more we are trapped at thinking that they are effective at what they were doing (something psychologists call the halo effect, the mistake in thinking that skills in, say, skiing translate into skills in managing a pottery workshop or a bank department). Clearly, it is unrigorous to judge the skills at doing from the skills at the talking (the same conflation of event and exposure, or knowing with doing, or, more mathematically, mistaking the x for f(x)), good traders can be totally incomprehensible —they do not put much energy in turning their insights and internal coherence into elegant style.

Entrepreneurs are selected to be just doers, not thinkers, and doers do, don’t talk, and it would be unfair, wrong, and downright insulting to measure them at the talk department. The same with artisans: the quality lies in their product, not their conversation —in fact they can easily have false beliefs that lead them to make better products, so what? But we should avoid the mental leap of going from the idea that making people interesting dinner partners to the notion that it creates economics growth, or that we should increase the stock of bureaucrats for that. Bureaucrats on the other hand, because of the lack of objective metric of success and absence of market forces, are selected on “hallo effects” of shallow looks and elegance —just say that a dinner with empty suits working for the World Bank would be more interesting than one with some of Fat Tony’s cousins.

The prolific Mr. Taleb seems to be distinguishing substance from form where he opines that measuring people by their social skills can be misleading or deceiving.

Doers (entrepreneurs, particularly technical entrepreneurs) may not be socially impressive but play a more prominent role in the economy. The tradeoff for the entrepreneurs: scarce time (and resources) are devoted to delivering the satisfaction of the consumers or clients than to spend unproductive time at social affairs. (though, we can’t generalize this, as some entrepreneurs can be sleek conversationalists and not all glib talkers are unproductive)

This is especially true compared to “halo effects” projected by bureaucrats and politicians who use emotionally driven rhetorical abstractions to gain sympathy and approbation of the unenlightened and of the boobus voters. Yet ironically these political agents lives off from the blood of their hosts—the entrepreneurs.

Also this quote may reflect on Mr. Taleb’s personal circumstance as a mathematician-philosopher. Perhaps if I read Mr. Taleb right, then I would share his frustrations: Talkers (like celebrity guru and insider Mr. Nouriel Roubini) get the chicks! [But that represents a choice: perhaps one needs to balance between social life and delivering value to clients/consumer.]

To summarize: in parties or in social gathering, what you see or hear isn’t what you get (in most instances).

Sweden’s Free No-Classroom Schools

A private school in Sweden jettisons the conventional classroom based education

From the Businessinisder,

A new school system in Sweden eliminated all of its classrooms in favor of an environment that fosters children's "curiosity and creativity."

Vittra, which runs 30 schools in Sweden, wanted learning to take place everywhere in its schools -- so it threw out the "old-school" thinking of straight desks in a line in a four-walled classroom (via GOOD).

Vittra most-recently opened Telefonplan School, in Stockholm. Architect Rosan Bosch designed the school so children could work independently in opened-spaces while lounging, or go to "the village" to work on group-projects.

All of the furniture in the school, which looks like a lot of squiggles, is meant to aid students in engaging in conversation while working on projects.

The school is non-traditional in every sense: there are no letter grades and students learn in groups at their level, not necessarily by age.

Admission to the school is free, as long as the child has a personal number (like a social security number) and one of the child's parents is a Swedish tax payer.

As I have been continuously pointing out, the information or digital age will radically change the way we live or do things.

And the secular trend will evolve towards the personalization of educational services. And moving away from the classroom model, as the above, is just an example of such transition. Aside, online platforms, and other competition-driven innovations will drive such transformations that will send the current firmament high costs of (industrial era designed) education spiraling down.

Pivotal changes happen at the fringes. As I earlier pointed out the Khan Academy’s P2P collaborative tutoring, free online education as the University of People and Stanford University’s expanding online courses could be representative of the early movers.

And as the cost of education falls, knowledge will surge. Thus, the knowledge revolution will serve as the critical backbone to decentralization trends.

Quote of the Day: Wealth is about Value

Wealth is merely the ability to get things that we want. Since most of us are not independently wealthy, we have to work to create things that other people want in order to get what we want. The most common way to do this since the dawn of the industrial revolution has been to work for someone who needs human labor to accomplish some end–an end that is valued by consumers…

The point is, our goal should never be to “create jobs”. Our goal should be to enable people to contribute something valued by other people. The value is the point, not the work. If someone finds a way to provide value to hundreds of millions of people and it requires no more effort from them than batting their eyelashes, that would be a win.

That’s from Adam Gurri (hat tip Don Boudreaux). We should emphasize on providing values and not just jobs.

Kung Hei Fat Choi!

Wishing everyone the best of the year of the lunar Dragon.

Happy New Year! Kung Hei Fat Choi [in Cantonese]! Kiong Hee Huat Tsai [in Hookien]! and Gong Xi Fa Cai [in Mandarin]!

Thanks to my grade school classmate Edward Li for the dainty image which he posted at facebook.

An Inflationary Boom Powered Phisix Bullmarket

It is important, first, to distinguish between business cycles and ordinary business fluctuations. We live necessarily in a society of continual and unending change, change that can never be precisely charted in advance. People try to forecast and anticipate changes as best they can, but such forecasting can never be reduced to an exact science. Entrepreneurs are in the business of forecasting changes on the market, both for conditions of demand and of supply. The more successful ones make profits pari passus with their accuracy of judgment, while the unsuccessful forecasters fall by the wayside. As a result, the successful entrepreneurs on the free market will be the ones most adept at anticipating future business conditions. Yet, the forecasting can never be perfect, and entrepreneurs will continue to differ in the success of their judgments. If this were not so, no profits or losses would ever be made in business. Murray N. Rothbard

The mainstream view where the turbocharged performance by the Philippine Phisix is largely seen as representative of mainly a domestic affair and accounting for signs of economic “progress” is misguided.

The reality is what we observe as significant advances by the local stock market have instead signified as a global development.

Importantly, these magnificent gains account for as symptoms or illustrative of market’s reactions to easing policies adapted by global central bankers, whom has been promoting a negative real rate environment and has been engaged in massive interventions in the bond markets to provide political support to crisis afflicted governments and the banking system.

The Intensifying Rising Tide Phenomenon

The Phisix ranked an impressive second (based on nominal currency year to date returns) among the world’s top performers[1], last week. Not this time though. Bourses from developed economies to the BRICs to emerging markets and the frontier markets have advanced almost at a frenetic pace.

About 43% of the 72 global benchmarks I monitor posted year-to-date gains of 4% and above. That’s an incredible feat considering we are only 3 weeks into 2012.

Of course, these gains have distinct or individual stories to tell. While most of them seem to be in a recovery mode following last year’s pummelling, only a few bourses has broken into record highs or are within the ambit of previous record highs. The Philippines and slow starting Indonesia seem to fall into the latter two categories.

On the other hand, only about 20% of global equities have posted negative returns where many of them emanate from the MENA Middle East North African region.

While Argentina remains as the market leader on a year-to-date basis, the Philippine Phisix which posted an amazing 2.91% weekly gains this week, has been eclipsed by several major bourses.

Based on year-to-date nominal currency returns, aside from Argentina, the Phisix now trails Germany, Hungary, Brazil, Russia and Hong Kong. India’s BSE 30 is currently neck to neck with the Phisix.

And seen from the region’s performance, over the past 6 months the Philippine Phisix has dramatically displaced Indonesia and Thailand as the region’s trailblazer.

Chart from Bloomberg

It’s important to point out what you see depends on where you stand. Applied to the above, the 6 month perspective changes when we adjust for different time referenced starting points.

On a one year basis (not in chart) the Phisix has slightly surpassed Indonesia, while on a three month basis (not in chart) the Phisix still marginally trails Thailand.

The point is perspectives can be used to advance an observer’s subjective bias rather than to make an objective presentation.

Nevertheless in all three periods, the Phisix has either led the pack or has been slightly behind the leader. As to whether the Phisix can maintain such exemplary performance has yet to be ascertained. And as we have noted in the recent past, the leadership role among the ASEAN-4 bourses has been alternating.

And to give us a clue on what’s been driving the Phisix, we go to the year to date performance of each sector.

The property sector seems to have commanded the lead from last year’s run away leader, the mining sector which now ranks third. The service sector lead by the telecoms has taken the second spot while financials placed fourth.

Except for the service sector, the current rankings seem to fulfill my observations that capital intensive projects (mining, manufacturing, real estate related projects) are likely to benefit from artificially suppressed interest rates, whom will be financed mostly by loans via the banking sector (who will also account for as a beneficiary).

As I previously wrote[2],

Although I am not sure which sector should give the best returns over the short term, I am predisposed towards what Austrian economics calls as the higher order stages of production or the capital goods industries, which are likely the beneficiaries of the business cycle, specifically, mining, property-construction and energy, as well as financials whom are likely to serve as funding intermediaries for these projects.

Of course telecom companies are capital intensive projects too and became subject of an earlier boom bust cycles abroad—the dotcom bubble.

Yet the above dynamics looks like the interlocking and tessellating jigsaw puzzles all falling into their respective places, all of which seem to account for the business cycle.

And for a broader view of which issues from the Phisix basket has contributed much to the recent advances, the top ten largest free float market cap issues ranked according to their respective weights, based on year-to-date as of Friday’s close, can be seen in the above chart (largest to smallest market cap from left to right).

Combined, these issues account for about 61% weighting of the Phisix composite.

So far, the property majors have assumed the leadership role. Ayala Land (ALI) and SM Prime Holdings (SMPH), posted the best gains followed by holding firm Ayala Corporation (AC) and telecom titan PLDT (TEL). These firms have delivered the gist of the gains of the Phisix.

And it is further important to point out that the uptrend in net weekly foreign buying appears to support the case where foreign investors may have likely been loading up or has been providing a boost on these issues.

And as pointed out last week, it would be a mistake to ascribe current market actions as driven solely by corporate fundamentals or by micro factors when, in reality, general market sentiment has been revealing of a rising tide lifting all boats phenomenon.

Advance decline spread (weekly basis; upper window) has materially surged reflecting on broad bullishness of the marketplace. This has largely been due to the breakout of weekly advancing issues (lower window) from the consolidation phase. Given the limited number of issues listed, the ceiling or the maximum upside may have already been attained which means that we should expect rangebound actions but based on the current elevated levels.

What has essentially been happening on a global scene appears to parallel the developments being reflected on the internal market actions in the Philippine Stock Exchange (PSE).

Austrian Business Cycle In Progress

And as I have been reiterating, global central banks have slashing rates in near concert. The Philippines, this week, has joined the bandwagon of promoting policies which represents the euthanasia of the savers via a negative real rate environment[3].

Such policies are designed to stimulate aggregate demand, which have been couched and camouflaged in academic terms, when in reality, have been meant to advance the interests of the banking sector (as intermediaries of savers and borrowers) and the political class.

With nominal interest rates below consumer price inflation (CPI) levels, the public will be incented to shift money from fixed income instruments towards undertaking speculative activities and for entrepreneurs to invest on long range capital intensive projects.

Part of the effects of such policies, would be a boom in the stock market, which has already validated my thesis where negative rates will drive a stock market boom[4] as well as a boom in capital intensive projects such as in the real estate. I have been pointing out that we should expect a boom in the Philippine real estate industry[5].

And most of the funding of the latter’s project will likely be channelled through the banking sector (ergo expanding the latter’s profits).

As an aside, Philippine property sector has been showing signs of a vigorous recovery both in terms of annual price changes in Philippine housing and in luxury 3 bedroom units[6]

Also, at near record low rates, governments will be motivated to increase fiscal spending via more interventionists projects peddled or justified as “infrastructure” or “social” investments, which will be financed through the acquisition of more debts, and which subsequently will be sold and financed by the public through higher taxes or inflation.

Also, suppressed interest rates will impel consumers to spend more using credit cards and other credit programs or mechanism that leads to more consumptive activities.

Combined with higher government spending, and greater appetite for consumers to spend, not only does such activities lead to an overall growth in systemic leverage, thereby increasing fragility and risks, but likewise reduces the incentives for the local economy to produce more and tilts the balance of incentives towards greater consumption activities. Eventually this should unwieldy trade deficits.

Of course, adding to the systemic leverage will include entrepreneurs whom have been lured to invest in capital intensive projects.

Nonetheless, the initial burst of spending and speculation will be seen as a boom (as we are seeing today)

However, the competition for the use and consumption of resources (by government, consumers and entrepreneurs), as well as the misalignment between demand of consumers and investments in the production of capital goods will eventually get exposed through the interest rate channel.

As Professor Steve Horwitz explains[7]

The theory argues that the boom is generated by some exogenous factor that has caused market interest rates to diverge from the natural rate that accurately reflects the time preferences of consumers and producers. That exogenous factor is normally thought to be an excess supply of money, which is normally thought to be the product of bad central bank policy or problematic government regulations on the banking system. Once that bad interest rate signal is in place, intertemporal discoordination will result. The nature of money and the time-ladenness of production mean that we don't see that discoordination at first, as it is masked by the boom. The increased activity at both the higher orders of goods and the consumption level looks like growth until the fact that there is insufficient real savings to support the increased (now "mal") investment at the highest orders makes itself known.

Once interest rates level render many of these capital intensive projects unfeasible, the boom segues into a bust.

Yet countenanced with the prospects of depression, governments and their central banks has greater proclivity to resort to the same measures that has led to such problems—perhaps out of ideology, the interest to preserve the status quo, shared creed or dogma, groupthink, political pressures to apply policies that has immediate impact and path dependent actions—which ultimately becomes unsustainable.

As the great Nobel Prize winner Friedrich von Hayek wrote[8],

And since, if inflation has already lasted for some time, a great many activities will have become dependent on its continuance at a progressive rate, we will have a situation in which, in spite of rising prices, many firms will be making losses, and there may be substantial unemployment. Depression with rising prices is a typical consequence of a mere braking of the increase in the rate of inflation once the economy has become geared to a certain rate of inflation.

We don’t have to look far to identify where the global inflation cycle is being conducted. Since 2008, the balance sheets of major central banks of the world continues to balloon[9]! Inflation is being progressively compounded by through balance sheet inflation in order to keep asset prices afloat and to assure liquidity flows of the global banking sector.

And stepping on the brake by central bankers would extrapolate to a reversal of boom conditions in a disorderly manner.

Widespread Empirical Evidences

Over the past few years we have seen the same cycles being played out even outside the crisis afflicted developed economies, whether in Bangladesh[10], Brazil[11], India[12], Vietnam[13] or China[14].

Every time governments adapt easy money policies, we see booms in the stock market and or in real estate projects. And each time governments tightens the grip on monetary conditions in response to resurgence of consumer price inflation, we see the same weakness or discoodination pressures being reflected on the prices of their respective stock markets.

The great Ludwig von Mises reminds us that imbalances arising from policy intrusions can be reflected on the actions of the stock market[15]

The moderated interest rate is intended to stimulate production and not to cause a stock market boom. However, stock prices increase first of all. At the outset, commodity prices are not caught up in the boom. There are stock exchange booms and stock exchange profits. Yet, the “producer” is dissatisfied. He envies the “speculator” his “easy profit.” Those in power are not willing to accept this situation. They believe that production is being deprived of money which is flowing into the stock market. Besides, it is precisely in the stock market boom that the serious threat of a crisis lies hidden.

Yet it would seem bizarre for the public to bet on the stock market of a slackening economy, but that’s how these things play out, especially when the economy is seen to hit the proverbial wall.

A good example is China, where her stock markets have surged this year when economic figures has been revealing signs of marked deterioration.

Why the surge?

Because market participants have been conditioned or trained to react to signals where policymakers will likely resort to massive measures to reflate of the system, if and when the pace of deterioration reaches alarming levels that risks inciting political upheavals.

And indeed not only do we see a spike in the 3 month rate of change of China’s money supply late last year[16], but there has also been increasing reports, or say speculative expectations of planned stimulus in both financial[17] and fiscal dimensions[18].

While my concerns over a possible bubble implosion in China persist, which prompts me to remain vigilant, I would submit that a massive stimulus program, like her Western counterparts, could buy her time or defer on the day of reckoning.

Moreover rampaging money supply has been permeating into the US economy giving the impression of a ‘broad based recovery’

For instance analyst Ed Yardeni says that the recovery could be broad based[19].

This time, key sectors of the economy haven’t participated in the initial economic rebound, but finally may be on the verge of doing so. The second recovery could take off as the pace of hiring quickens, housing activity finally picks up, auto sales head higher, and state and local governments stop retrenching. If so, then the US would finally enjoy the benefits of a broader-based recovery.

Such appearance of a inflation induced time lag ‘recovery’ has been signalled by the US stocks markets.

Conclusion: Phisix Upside Momentum Should Continue Amidst Interim Corrections

In the face of economic slowdown and the risks of a contagion from the continuing crisis in Europe, global central bankers seems to have tactically implemented a defensive cordon or firewall by massively easing credit conditions partly in coordination with one another. This has led to near record low global interest rates[20] compounded by a surge in liquidity from the various asset purchasing programs being undertaken.

These measures, along with the hiatus in the Euro crisis and the noteworthy inflation induced economic recovery in the US—backed by a surge in money supply growth and recovering credit conditions—have been powering the recent gains of the global stock markets.

The Philippines has undertaken a similar policy route. And considering the still relatively low consumer price inflation, which has yet to trigger political outcry, negative real rates, which have been one of the key factors responsible for the recent monumental and historic breakout of the Phisix, will continue to influence the bullish momentum of the local bellwether, perhaps going into first semester.

But since no trend goes in a straight line, we should expect interim corrections which should serve as windows of opportunities to accumulate.

At the Philippine Stock Exchange, it is important to reiterate that the mining index has been outperforming other sectors in the PSE on a one year alternating interval basis[21]. And since 2011 was yet another stellar year for the sizzling hot sector, and if the alternating trend persists, then there could be another rotation process at work, partly away from the mines and into the broader market as the liquidity driven boom percolates.

But it is not necessary for the mining sector to register losses for a rotation to occur. What we are likely to see is that the variances in the distribution of returns will not likely be as distant as last year.

Since history may not repeat and may not serve as a useful guide in making predictions, and where the public’s recognition of the mining sector seemed to have reached a critical mass only at the current bullmarket cycle which began in 2009, I can’t discount the possibility that the alternating pattern might be rendered irrelevant. So diversifying could probably be the best solution under such scenarios.

Yet if there should be a rotation where gains will be spread out to the other sectors, I think that the best way to diversify would be to use the clues from the Austrian business cycle where capital intensive sectors (most likely property or real estate) and the finance industry could be the major beneficiaries of an inflationary boom (aside from the mines).

Finally, it is worth repeating that there has hardly been any sign of decoupling. As one would observe, local policies have been strongly influenced by policymaking trends in the developed world. We may call this globalization of central banking actions where central bankers not only seem to act in the same manner, but also coordinate or synchronize their activities and extend assistance to one another via swap facilities. And the transmission effect of the other factors of globalization—finance and capital flows, trade, labor and culture—remain as the other major force in shaping market conditions.

And as 2011 has shown, what has made the Phisix and ASEAN markets outperform has been the non-recessionary environment in the US, in spite of the Euro crisis, as well as, the relatively low debt levels compared with her western peers. This relationship is expected to continue through 2012 unless the world deglobalizes or adapts protectionist measures.

---

[1] See Global Equity Markets: Philippine Phisix Grabs Second Spot January 14, 2012

[2] See Phisix-ASEAN Equities: Awaiting for the Confirmation of the Bullmarket November 13, 2011

[3] See Philippine Government Applies Keynesian Remedies, Boom Bust Cycle Ahead, January 20, 2012

[4] See Investing in the PSE: Will Negative Real Rates Generate Positive Real Returns? November 20, 2011

[5] See The Upcoming Boom In The Philippine Property Sector, September 12, 2010

[6] Global Property Guide Philippine property prices rising again!, December 5, 2011

[7] Horwitz Steve Austrian Cycle Theory is Not a Morality Play, March 3, 2011 CoordinationProblem.org

[8] Hayek Friedrich A. von Can We Still Avoid Inflation? The Austrian Theory of the Trade Cycle, p. 89 Mises.org

[9] Danske Bank A deal for Greece is near, Weekly Focus January 20, 2012

[10] See Bangladesh Stock Market Crash: Evidence of Inflation Driven Markets, January 11, 2011

[11] Moneycontrol.com Brazil cuts interest rates for 4th time to restore growth, January 19, 2012

[12] Wall Street Journal India Adviser: Monetary Tightening Can End as Inflation Is Cooling, December 20, 2011

[13] See Vietnam Stock Market Plunges on Monetary Tightening, May 24, 2011

[14] See Has China’s Bubble Popped? May 29, 2011

[15] Mises, Ludwig von 3. DRIVE FOR TIGHTER CONTROLS, CONTROL OF THE MONEY MARKET p.145 The Causes of the Economic Crisis

[16] Holmes Frank Investor Alert - It May Take a Dragon to Breathe Fire into Markets, January 20, 2012 US Global Investors

[17] Bloomberg.com Chinese Officials Said to Weigh Easing Constraints on Banks, January 19, 2012

[18] China Real Time Report China Eyes Stimulus Targeted at Boosting Consumption, January 20, 2012 Wall Street Journal Blog

[19] Yardeni Ed A Double Recovery? January 17, 2012 Blog.yardeni.com

[20] See Global Central Banks Ease the Most Since 2009 November 28, 2011

[21] See Graphic of the PSE’s Sectoral Performance: Mining Sector and the Rotational Process, July 10, 2011

Quote of the Day: Blaming Capitalism

It would be correct to describe this state of affairs in this way: Today many or some groups of business are no longer liberal; they do not advocate a pure market economy and free enterprise, but, on the contrary, are asking for various measures of government interference with business. But it is entirely misleading to say that the meaning of the concept of capitalism has changed and that "mature capitalism"--as the American Institutionalists call it--or "late capitalism"--as the Marxians call it--is characterized by restrictive policies to protect the vested interests of wage earners, farmers, shopkeepers, artisans, and sometimes also of capitalists and entrepreneurs.

The concept of capitalism is as an economic concept immutable; if it means anything, it means the market economy. One deprives oneself of the semantic tools to deal adequately with the problems of contemporary history and economic policies if one acquiesces in a different terminology. This faulty nomenclature becomes understandable only if we realize that the pseudo-economists and the politicians who apply it want to prevent people from knowing what the market economy really is. They want to make people believe that all the repulsive manifestations of restrictive government policies are produced by "capitalism."

The great Ludwig von Mises clarifies and defends what capitalism is all about.

And exactly as Prof von Mises describes, present day detractors equivocate and fudge on the terminology, and importantly, misrepresents on the causation of events. Critics usually point to effects of massive interventionisms, which they impute to as the cause of what for them constitutes as "market failures". They mistakenly imply that incumbent policies have had neutral effects on the markets.

All these signify as vain attempt to mislead people.

Infographics: The Big Mac Index

This is a neat infographics on the Big Mac index from onlinemba.com

(hat tip Scott Lincicome)

click on this link: onlinemba.com to see the original image

Marc Faber Predicts World War III in 5 years

Dr. Marc Faber sees World War III that features cyber warfare coming anytime during the 5 year horizon.

From Business Intelligence,

He sees a shift in economic and military power from West to East and is increasingly convinced that the end game will be war. But, so far, he had avoided giving a time frame to the war scenario. Not any longer.

Dr. Faber was amongst 10 investment experts assembled by Barron's last week at the Harvard Club of New York for the Barron’s 2012 Roundtable. The members of the Roundtable discussed the economy, China, Europe, market volatility, investment picks and World War III.

"On an optimistic note, World War III will occur in the next five years," Faber announced to the other members of the Roundtable, in his characteristic contrarian manner.

"That means the Middle East will blow up," he said, without providing any details about specific countries.

When this happens, "new regimes there will be less Western-friendly," he reckons.

"The West has figured out it can’t contain China, which is rising rapidly and will have more military and naval power in Southeast Asia," he explains.

The only way for the West to contain China is to control the oil tap in the Middle East, Faber argued.

The prelude to war will be a "big bust that will see the end of credit expansion," he said in a recent interview. But before this happens, "governments will continue printing money which in time will lead to a very high inflation rate, and the economy will not respond to stimulus".

Cyber war?

"This war will be different from World War I where troops faced each other in trenches or World War II where tank divisions faced each other, he said. This will be Cyber War. A war where you can turn a switch and turn the London electricity supply off. This will be a war where you can stop airplanes from flying and bring the whole financial system of a country to a halt," Faber said in an August 2011 interview.

And during war times, "commodities go up strongly,” he argued.

"If you want to hedge against war, you don't want to own derivatives in UBS and AIG, but you have to own them physically, like farmland and agricultural commodities. That is something to consider for you as a personal safety and hedge. You have to own some commodities," he stressed.

But sees this as having a positive impact on equity prices,

Asked if war will be positive for stocks, Faber told the Baron's Roundtable it would be very positive for stocks and negative for bonds, "because debt will grow dramatically. There will be massive monetization of debt."

"When the U.S. entered World War II total credit equaled 140% of GDP, and there were no unfunded liabilities. Now total credit-market debt is 380% of GDP, and unfunded liabilities make that 800%," he added.

Speaking to CNBC Thursday Faber went further: "Relax. I don’t think that equities will collapse. I think we have major support going back to August 2010 when the S&P was at 1010," he said.

It would seem that the government’s or the nation state’s default option when countenanced with a decadent society emanating from failed policies has been to resort to war. That’s because war has the tendency to divert or distract the public’s attention which pushes the masses to rally around the flag in the name of patriotism.

As Nazi Germany’s Hermann Goering Commander-in-Chief of the Luftwaffe, President of the Reichstag, Prime Minister of Prussia and, as Hitler's designated successor once said in a conversation with Gustave Gilbert during the Nuremberg trial (an Allied appointed psychologist)

Why of course the people don't want war. Why should some poor slob on a farm want to risk his life in a war when the best he can get out of it is to come back to his farm in one piece? Naturally the common people don't want war neither in Russia, nor in England, nor for that matter in Germany. That is understood. But, after all, it is the leaders of the country who determine the policy and it is always a simple matter to drag the people along, whether it is a democracy, or a fascist dictatorship, or a parliament, or a communist dictatorship. Voice or no voice, the people can always be brought to the bidding of the leaders. That is easy. All you have to do is tell them they are being attacked, and denounce the peacemakers for lack of patriotism and exposing the country to danger. It works the same in any country.

Although war is a possibility (I earlier noted that the risk of military confrontation with Iran seem to be increasing here and here), in my opinion, World War III may not be inevitable.

I think that nation states will likely suffer more from internal strife (e.g. revolutions or secessions) which eventually leads to their collapse than from a global war in the scale of World War II. But the latter is an option that cannot be written off.

And if in case this should happen, it is unclear if equity markets will remain unscathed by a warfare dominated by cyberspace engagements. To quote Dr. Faber’s conflicting points: “This will be a war where you can stop airplanes from flying and bring the whole financial system of a country to a halt”. [italics added]

Perhaps Dr. Faber refers to other countries but not the US. But what if the US is the object of such cyber assaults such as the recent case of the FBI and the Department of Justice along with the websites of the entertainment industry (which perhaps could partly reflect on the protest to censor the web)?

The fate of financial assets will entirely depend on how World War III plays out. Thus, there is no straight cut answer to Dr. Faber’s scenario.

Philippine Government Applies Keynesian Remedies, Boom Bust Cycle Ahead

The Philippine government will be applying Keynesian measures of “euthanasia of the rentier” and the “socialization of investments” to prop up economic “growth” (permanent quasi-booms)

The euthanasia of the rentier as reported by the Bloomberg

The Philippines cut interest rates for the first time since July 2009, joining emerging markets from Thailand to Indonesia in easing monetary policy as a deteriorating global economy threatens growth.

Bangko Sentral ng Pilipinas lowered the rate it pays lenders for overnight deposits by a quarter of a percentage point to 4.25 percent, according to a statement in Manila today. The decision was predicted by 13 of 17 economists in a Bloomberg News survey, with the rest expecting no change. The central bank maintained the reserve requirement ratio at 21 percent.

“The Philippine economy is likely to face external headwinds in 2012,” Governor Amando Tetangco said in the statement. “The benign inflation outlook allowed some scope for a reduction in policy rates to help boost economic activity and support market confidence.”

Asian policy makers are under mounting pressure to protect growth after the World Bank cut its global economic forecast this week, saying a recession in the euro region could exacerbate a slowdown in countries such as India and China. Lower borrowing costs and slowing price gains may aid Philippine President Benigno Aquino’s efforts to boost expansion as he increases spending and seeks investment for roads and airports.

Socialization of Investments, again from the Bloomberg

President Aquino is increasing spending this year to a record 1.83 trillion pesos ($42 billion) to help bolster growth to as much as 8 percent annually. The government also plans to offer as many as 16 projects to investors this year, compared with one contract awarded in 2011.

Ayala Corp., leading a consortium that won a contract last month to build a four-kilometer, four-lane paved toll road leading to provinces south of the capital, may bid for two road projects and a contract to run an airport, Managing Director Eric Francia said Dec. 15.

Aquino has won sovereign-rating upgrades from Fitch Ratings and Moody’s Investors Service after intensifying efforts to narrow the budget gap from a record 314 billion pesos in 2010.Standard & Poor’s raised its outlook on the country’s debt rating last month.

Chart from Danske Bank

So the Philippine government via the BSP will push real interest rates deeper into negative territory (left window) that will punish the saving public and the average fixed income investors. This represents a policy which redistributes resources from creditors (again savers) to borrowers (I would guess would be mostly cronies), that benefits the politically privileged banking system (as intermediaries), aside from encouraging the public to take on speculative activities (stock market boom as previously predicted) and a misdirection of capital towards long range investments. Such policies also will promote consumption activities which will likely lead to trade deficits.

These are composite ingredients to the business cycle or boom bust cycle.

The BSP’s adapted measure rhetorically represents an appeal to the popular that has been ensconced by the herding or bandwagon effect, as central banks of major economies has embarked on a similar easing cycle. As earlier pointed out, global interest rates are now in 2009 levels. The other way to see the current global easing cycle is that central banks could be in coordination with one another, and or that this represents as the central bankers dogmatic approach in dealing with any perceived threats to statistical growth.

In addition, consumption of capital will only be amplified by the massive fiscal spending of the Aquino administration ($42 billion) which would mostly end up in inefficient use, wastage and in the pockets of politicians and bureaucrats and their cronies.

I would further that the BSP’s easing process could have been synchronized with the prospective fiscal policies, aimed at providing funds to cronies, who will undertake most of the private-public partnerships, and to the government whom will be requiring these funds that will probably be obtained from the local markets, as earmarked for boosting growth.

And I would propound a political spectrum in these actions—these could be meant to shore up the public’s support for the administration who currently has pushed for an impeachment trial of the Supreme Court Chief Justice.

Public support for the administration means pressure for the Senate, whom has been adjudicating the impeachment trial, to deliver a verdict that is favorable to the administration.

Nevertheless, while this would have temporal benefits for the stock market, and for the economy as measured by spending based statistics, the evil effects of high inflation and malinvestments point to an eventual bust sometime ahead (I can’t determine the exact frame, but we can observe this via interest rates).

For now profit from political folly.