S&P’s Philippine Upgrade: There's More than Meets the Eye

From Bloomberg,

The Philippines’ debt rating was raised to the highest level since 2003 by Standard & Poor’s, taking President Benigno Aquino nearer his goal of attaining investment grade.

The nation’s long-term foreign currency-denominated debt was raised one level to BB+ from BB, S&P said in a statement yesterday. That’s one step below investment grade and on a par with neighboring Indonesia. The outlook on the rating is stable.

The foreign currency rating upgrade reflects our assessment of gradually easing fiscal vulnerability,” Agost Benard, a Singapore-based analyst at Standard & Poor’s, said in the statement. “The rating action also reflects the country’s strengthening external position, with remittances and an expanding service export sector continuing to drive current- account surpluses.”

Emerging nations from Brazil to Indonesia have won credit- rating upgrades in the past year as governments contained budget deficits. A higher assessment for the Philippines will help Aquino as he moves to boost spending to a record this year and seeks $16 billion of investment in roads, bridges and airports to shield the economy from Europe’s sovereign-debt crisis.

This is exactly the reflexivity theory at work. Here is how I described it earlier

The foundation of this theory seems to be anchored on the confirmation bias, where changes in prices that reinforces the underlying trend, gives confidence or strengthens the convictions of people to undertake action in the direction of the same trend. Such action feeds into the price mechanism and thus the feedback loop.

Applied to the Philippine equity market, many people will interpret the current state of the Phisix, which is at fresh record levels, as positive changes in the real economy. Believers would see this as having raised confidence levels, which that merits further actions through additional investments. Again this eventually feeds into higher prices.

The reality is that whatever appearance of progress the Philippines has been experiencing has been impelled by internal (negative real rates) and external (negative real rates through Zero Interest Rate Policy, QEs and other forms of inflationism) monetary policies rather than real changes in the economy.

It would be a mistake to generalize surging prices asset markets as “economic improvement” when they are veiled symptoms of underlying bubble policies.

The other factor is about perceptions management. This can be called as PR work, or in political vernacular, propaganda.

Campaign to weed out corruption have mostly been superficial as these have not addressed the roots: arbitrary statutes. Unknown to the public, corruption is not about virtuosity but about the tentacles of crooked laws.

The huge informal sector and the reliance on OFW remittance are really NOT signs of progress. They are symptoms of regulatory failure.

The plight of the OFWs have converted into a publicity stunt meant to evince of a positive political light, when they are manifestations of the failure to create domestic jobs through stagnant investments and falling standards of living.

Look at media’s exaltation from the S&P upgrade…“higher assessment for the Philippines will help Aquino as he moves to boost spending to a record this year and seeks $16 billion of investment in roads, bridges and airports”…this is proof of the dearth of investments. Investors have been reluctant to provide capital, therefore jobs.

Yet the implication is that government spending is an elixir to the economy. In reality, this $16 billion of government spending will be taken off from the private sector. And this also means $16 billion money funneled to the cronies or political favorites of this administration. Also that would extrapolate to $16 billion of tax onus to the productive sector

So the S&P upgrade actually rewards cronyism and advocates more burden for the taxpayers.

What the S&P upgrade does is to SOW the seeds for future downgrades as the current administration goes into a spending binge.

Credit upgrades means only MORE debt acquisition by the Philippine government. This will be financed by the mostly the domestic banking sector and partly by foreign money (foreign banks). So more of local savings will be channeled into unproductive political ventures as public liabilities expand.

In the light of concerns over the growing shortages of global “safe assets”—government bonds, which in reality is a myth, I believe that credit rating agencies have been rushing in aid to the banking system of major economies in order to provide bridge “safe assets”.

Since the banking system of major economies have been in dire straits, they will be in need of “safe assets” to bolster their balance sheets. So emerging market debts, such as the Philippines, could provide temporarily some of the supply of “safe assets”.

Have we forgotten too that credit agencies had been party (or may I say functional stamp pads) to the US property and mortgage bubble which blew up in 2007-2008?

Also government debt spree will likely be accompanied by a private sector debt expansion on the belief of the sustainability of a boom or from capital flight from economies inflating away their debt problems or from “bridge” collateral or a combination of these.

So will likely there be a surge in hot money.

This would seem like a déjà vu of the Asian Crisis of the 90s (Wikipedia.org)

Thailand's economy developed into a bubble fueled by "hot money". More and more was required as the size of the bubble grew. The same type of situation happened in Malaysia, and Indonesia, which had the added complication of what was called "crony capitalism". The short-term capital flow was expensive and often highly conditioned for quick profit. Development money went in a largely uncontrolled manner to certain people only, not particularly the best suited or most efficient, but those closest to the centers of power

Eventually the entire thing collapses.

Only when the tide goes out, to quote Warren Buffett, do you discover who's been swimming naked.

Party on. But be aware that this is a bubble and not about politically driven progress. Politics is about redistribution or a zero sum game--where someone's gains comes at the expense of another.

It is the markets that provide real growth.

Updated to add:

Below is an example of why credit rating agencies cannot be trusted:

From Bloomberg,

Morgan Stanley successfully pushed Standard & Poor’s and Moody’s Investors Service Inc. to give unwarranted investment-grade ratings in 2006 to $23 billion worth of notes backed by subprime mortgages, investors claimed in a lawsuit, citing documents unsealed in federal court.

According to the plaintiffs, the documents reveal that what the ratings companies describe as independent judgments were actually unsupported by evidence and written in collaboration with the bank that was packaging the securities. Morgan Stanley and the ratings companies deny the allegations.

Declaring Independence from Big Government

A splendid message from Dr. Richard Ebeling,

Never before in history had a people declared and then established a government based on the principles of the individual’s right to his life, liberty, and property. Never before was a society founded on the ideal of economic freedom, under which free men may peacefully produce and exchange with each other on the terms they find mutually beneficial without the stranglehold of regulating and planning government.

Never before had a people made clear that self-government meant not only the right of electing those who would hold political office and pass the laws of the land, but also meant that each human being had the right to be self-governing over his own life. Indeed, in those inspiring words in the Declaration, the Founding Fathers were insisting that each man should be considered as owning himself, and not be viewed as the property of the state to be manipulated by either king or Parliament.

It is worth remembering, therefore, that what we are celebrating every July 4 is the idea and the ideal of each human being’s right to his life and liberty, and his freedom to pursue happiness in his own way, without paternalistic and plundering government getting in his way.

I hope that the torch of the freedom and the principle of upholding individual’s right to his life, liberty, and property will not just be an American ideal but for the entire world to espouse.

To my American readers, Happy Independence Day!

Don’t Expect the Government to Solve Social Problems Caused by Weather

Spot the mistakes of this article.

From Sunstar.com.ph (bold emphasis mine)

MALACANANG appealed for understanding from the public following another confusion in the announcement of class suspension in Metro Manila and nearby provinces that have experiencing heavy rains since Monday night.

Deputy presidential spokesperson Abigail Valte said since there is no storm signal, the responsibility of suspending classes is left to the discretion of the local chief executives.

“We will be asking for a little bit of your patience because it is a new devolved system and our local government units will need to also get used to that system,” she said.

To remind the local officials with their task, Malacañang again posted on the Official Gazette Executive Order 66, which authorizes municipal mayors, as respective chairpersons of respective Local Disaster Risk Reduction and Management Councils (LDRRMC), to cancel classes and work of government offices during inclement weather.

“We would like to take this opportunity to remind them that the responsibility to suspend classes in times of inclement weather when there is (sic) no storm signals belongs now to the local government officials,” Valte said.

She added it is stated in the EO that suspension of morning classes must be announced by 4:30 a.m. so as not to inconvenience students, school staff and parents.

Classes from pre-school to high school levels in Metro Manila were cancelled Tuesday morning due to continuous rains caused by a low pressure area last seen at 40 kilometers west of the capital.

Several parents, however, complained about the late announcement of class suspension as their children were forced to go to school early in the morning despite the flooding.

Local Government Secretary Robredo, in a radio interview, admitted the need to improve the local government units’ announcement of class suspension.

Robredo said mayors, village chiefs, and school principals should coordinate in making the necessary announcement regarding cancellation of classes during heavy rains since they are the ones who see the situation on the ground.

Ok this news is an ex-post observation of the recent flood. Hindsight is 20/20. It’s easy to finger point based on the past.

Yet the problem is tomorrow. The problem is accurately anticipating the weather and its potential impact in both quality and quantity dimensions to affected areas and the social policy response.

The next problem is that families expect schools to make the necessary announcements. Unfortunately schools have NO EXPERTISE in forecasting weather. So it will be judgment call for schools.

The same problem plagues the local government units, hardly any of them have the ADEQUATE knowledge of the impact of nature’s challenges. So it will be judgment call for LGUs.

This leads us back to the national government through the government weather bureau PAG-ASA. Again unfortunately, outside conventional storms, it seems that PAG-ASA hardly can forecast accurately the nitty gritty of the weather changes. So it will be judgment call for the national government through PAG-ASA.

Even in conventional storms, PAG-ASA has hardly been successful in accurately predicting the exactitudes of nature's disturbances.

All these reveal that the fundamental problem is the failure of centralization in weather forecasting. But media's and the political approach has been to finger point.

Two more important things to drive at:

The first is the KNOWLEDGE problem.

The fact is that while there are instruments to help predict the changes in the weather, that knowledge is limited. This means that policy responses will ALWAYS be insufficient, no matter what they do.

The second point is that these has been all about the HOT POTATO problem—everyone seems to toss the responsibility to another party.

Everyone has been HARDWIRED to EXPECT that the government must and shall deliver us from environmental disruptions and disasters.

Yet no matter the horrible track record, we maintain this illusion of infallibility.

People cannot seem to accept that government are composed by people, and like everyone else, has limitations in the possession of knowledge.

In reality, people should NOT depend on government for making these calls.

Everyone should take the responsibility to assess and act upon the tradeoff of allowing you and your family members to go to school or work during inclement weathers.

There are many risks attendant to bad weather e.g. leptospirosis and other diseases, potential accidents (falling trees, open manhole, electrocution among the many). This should be done individually and depending on the circumstances of the environment one operates on.

Government will never know the details of each and everyone of our lives.

Of course there are institutional solutions to these, such as not only the privatization of PAG-ASA but importantly to de-politicize them or subject them to market competition.

People or social institutions, such as schools, can reward or punish private institutions for providing accuracy in weather forecasting through the profit and loss system. Under the government monopoly, sustained mistakes should be expected.

Weather derivatives can also be used as an insurance against tail events or weather based calamities. Institutions can now make their calls based on appropriate assessment of cost and benefits.

There are many REAL things the markets can do that may alleviate the current predicament. But under the current popular mindset, such is a state of vacuum so the problem becomes reiterative or self-reinforcing

Thus the biggest among all the fundamental flaws is the public’s mysticism of government.

As Professor Don Boudreaux wrote,

Too many people, including otherwise very smart people, believe in secular magic. They believe that words written on paper by people, each of whom receive a majority of votes on certain days of the year of adult citizens living in certain geographic areas, and who utter ritualistic pronouncements under marble domes in buildings conventionally called “capitols,” are somehow endowed with greater understanding of society’s complexities and with superhuman capacities to care about the welfare of strangers. These priests preach devotion, dedication, and sacrifice to the One True State (your own government), even while each recognizes that legitimate disputes about the details of the dogma divide various cliques of the secular clergy. When they speak and act in their official roles, they expect – usually correctly – that the laity pay their words special heed as if these words have extraordinary power.

We will never improve on our approach to solve the weather predicament, until we come to realize of the existence of other alternatives…the markets.

Quote of the Day: Dignity is Worth Nothing Unless You Earn It and Pay the Price for It

A half-man (or, rather, half-person) is not someone who does not have an opinion, just someone who does not take risks for it.

My greatest lesson in courage came from my father — as a child, I had admired him before for his erudition, but was not overly fazed since erudition on its own does not make a man. He had a large ego, immense dignity, and required respect. But he was once insulted by a militiaman at a road check during the Lebanese war. He refused to comply, and got angry at the militiaman for being disrespectful. As he drove away, the gunman shot him in the back. The bullet stayed in his chest for the rest of his life so he had to carry an X-ray through airport terminals. This set the bar very high for me: dignity is worth nothing unless you earn it, unless you are willing to pay a price for it.

A lesson I learned from this ancient culture is the notion of as Megalopsychon (a term expressed in Aristotle’s ethics), a sense of grandeur that got superseded by the Christian values of “humility”. There is no word for it in Romance languages; in Arabic it is called Shhm —best translated as nonsmall. If you take risks and face your fate with dignity, there is nothing you can do that makes you small; if you don’t take risks, there is nothing you can do that makes you grand, nothing. And when you take risks, insults by half-men (small men those who don’t risk) are similar to barks by nonhuman animals: you can’t feel insulted by a dog.

This inspirational treasurable quote is from my favorite iconoclast and the profound thinker and philosopher Nassim Nicolas Taleb post at Facebook

Thank you Mr. Taleb.

My father (who was not a libertarian but I think had libertarian leanings) paid the price of dignity by steadfastly refusing to profit from politics--even when presented with such conditions.

I am carrying his principle over today.

Will France’s Fairness Doctrine Save the EU?

From Zero Hedge

With the Great June Socialist Revolution spilling over into July, here are some details as they become available from France:

• FRANCE TO HAVE NEW TAX RATE OF 45% FOR WEALTHY
• FRANCE TO TAX INCOME OF MORE THAN EU1 MLN AT 75%, AYRAULT SAYS
• FRANCE TO TAX CAPITAL INCOME AT SAME LEVEL AS WAGES
• FRANCE TO RAISE TAXES FOR LARGE COMPANIES, BANKS, OIL FIRMS

But... FRANCE TO ANNUL PLANNED VAT INCREASE PLANNED BY SARKOZY

After all, it's only fair. In other news, we are rotating our secular long thesis away from Belgian caterers and into tax offshoring advisors, now that nobody in the 1% will pay any taxes ever again.

Politicians believe the path to prosperity is only through confiscation and redistribution. They also believe that growth comes with subtraction and division and not from addition and multiplication

They further think that the wealthy are dingbats whose actions are limited by the dictates of politicians.

Professor Ludwig von Mises was right…

Nothing is more calculated to make a demagogue popular than a constantly reiterated demand for heavy taxes on the rich…

Confiscations of capital through the legal form of taxation are neither socialistic nor a means to Socialism. They lead, not to socialization of the means of production, but to consumption of capital. Only when they are set within a socialist system, which retains the name and form of private property, are they a part of Socialism.

So the French government will spend MORE and get LESSER revenues as productive segments of society either reduces productive activities and or flee to other havens. Capital will be consumed at a more faster rate.

After all, money goes where it is best treated.

Yet under the sustainment of such political conditions, the Euro’s death warrant has been sealed.

Asia should welcome with open arms the prospective diaspora of French capital by implementing policies opposite to those embraced by the French politicians. Yes, such policy is known as economic freedom.

Barclay’s LIBOR Scandal: Is the Bank of England the Culprit?

Barclays chief executive Bob Diamond recently resigned over allegations of the manipulation of the LIBOR (London Interbank Offered Rate) or the average interest rate estimated by leading banks in London that they would be charged if borrowing from other banks (Wikipedia.org)

From Reuters (bold highlights mine)

Barclays chief executive Bob Diamond suddenly quit on Tuesday over an interest rate-rigging scandal that threatens to drag in a dozen more major lenders but suggested the Bank of England had encouraged his bank to manipulate the figures.

"The external pressure placed on Barclays has reached a level that risks damaging the franchise - I cannot let that happen," said Diamond, 60. The terms of his severance were not announced, though Sky News said the bank would ask Diamond to forfeit almost 20 million pounds ($30 million) in bonuses.

Politicians and newspapers have zeroed in on the scandal - which revealed macho e-mails of bankers congratulating each other with offers of champagne for helping to fiddle figures - as an example of a rampant culture of wrongdoing in an industry that stayed afloat with huge taxpayer bailouts.

Barclays released an internal 2008 memo from Diamond, then head of its investment bank, suggesting that the deputy governor of the Bank of England, Paul Tucker, had given Barclays implicit encouragement to massage the interest figures lower during the peak of the financial crisis in order to present a better picture of the bank's financial position.

Here is the principle, central banks are the only entities permitted to manipulate interest rates…

…but they need accomplices.

More from Zero Hedge

Wonder who was pushing Barclays to manipulate its rate? Why none other than the English Fed. From BBG:

• BARCLAYS SAYS BANK OF ENGLAND CALLED ON OCT. 29, 2008 ON LIBOR
• BARCLAYS SAYS DIAMOND MADE NOTE OF CALL
• BARCLAYS SAYS DIAMOND RECEIVED CALL FROM PAUL TUCKER
• BARCLAYS SAYS TUCKER SAID `CERTAIN' BARCLAYS DIDN'T NEED ADVICE
• BARCLAYS SAYS TUCKER SAID DIDN'T ALWAYS NEED TO BE SO HIGH (Supposedly LIBOR)
• BARCLAYS PROVIDES COPY OF DIAMOND'S CALL NOTE
• BARCLAYS SAYS DIAMOND DIDN'T BELIEVE HE HAD GOT INSTRUCTION
• BARCLAYS SAYS DEL MISSIER CONCLUDED INSTRUCTION HAD BEEN GIVEN
• BARCLAYS SAYS DEL MISSIER TOLD RATE SETTERS TO LOWER RATES

In other words, a central banks was directly and indirectly involved in manipulating interest rates. Say it isn't so. Fast forward two months when the BOE's Tucker testifies that the Chairsatan made him do it.

Hoping to take the political heat off what seems obvious, Barclay’s and Bob Diamond has served as BoE’s fall guy.

Chinese Builds Ghost City in Angola

China seems to have (allow me the metaphor) ‘exported’ her bubble policies to Africa

From the BBC, (hat tip Bob Wenzel)

A giant new Chinese-built city has sprung up on the outskirts of Angola's capital Luanda.

Nova Cidade de Kilamba is a brand-new mixed residential development of 750 eight-storey apartment buildings, a dozen schools and more than 100 retail units.

Designed to house up to half a million people when complete, Kilamba has been built by the state-owned China International Trust and Investment Corporation (CITIC) in under three years at a reported cost of $3.5bn (£2.2bn).

But on a recent trip back to Luanda, the BBC's former Angola correspondent Louise Redvers discovered that most of the buildings currently lie empty, as this footage she recorded shows.

Watch the footage from BBC here

RISK ON Environment: Expectations for ECB to Lower rates

Markets continue to climb on mounting expectations of central bank doping.

From Bloomberg,

Asian stocks headed for their longest winning streak this year and the Japanese yen declined as speculation grew central banks will act to spur economic growth and U.S. factory orders beat estimates. Gold advanced to a two- week high.

The MSCI Asia Pacific (MXAP) Index climbed for the sixth day and was up 0.4 percent as of 9:01 a.m. in Tokyo, while Standard & Poor’s 500 Index futures were little changed. The yen weakened 0.1 percent to 79.84 per dollar, the South Korean won strengthened 0.3 percent to 1,135.18 per dollar and New Zealand’s currency strengthened 0.1 percent to 80.47 U.S. cents. Gold for immediate delivery rose 0.1 percent to $1,619.15 an ounce.

The European Central Bank is forecast by economists to cut interest rates tomorrow and the International Monetary Fund said further monetary policy easing by the Federal Reserve may be needed. Factory orders in the world’s largest economy rose in May for the first time in three months.

“The ECB story itself will do wonders to keep the risk on for a little bit longer,” said Gavin Stacey, Sydney-based chief rate strategist at Barclays Plc.

The ECB will lower its main refinancing rate by a quarter- percentage point to 0.75 percent, economists in a Bloomberg survey forecast. The Bank of England’s Monetary Policy Committee will raise its target for bond purchases by 50 billion pounds ($79 billion) to 375 billion pounds tomorrow, a Bloomberg survey forecast.

Central bankers better make good of their pledges, otherwise eventually expectations will experience diminishing returns and hope will collide with reality, the outcome of which is not going to be pleasant.

Updated to add:

Perhaps as precursor for tomorrow's highly expected interest rate move (as well as for future injections ala LTRO, where the lowering of collateral terms means more assets to use), the ECB further loosened collateral terms.

From Deutsche Bourse Market News (hat tip zerohedge)

The European Central Bank Governing Council on Tuesday adopted a further change to ECB rules on the eligibility of collateral for Eurosystem refinancing operations.

In its preamble to the new rule, the Governing Council said "counterparties participating in Eurosystem credit operations should be allowed to increase current levels of own-use of government-guaranteed bank bonds subject to the ex-ante approval of the Governing Council in exceptional circumstances."

As a result, the Governing Council adopted the following change to its collateral rules, effective immediately:

"The following Article 4b is inserted in Decision ECB/2011/25:

Acceptance of government-guaranteed bank bonds

1. Counterparties that issue eligible bank bonds guaranteed by an EEA public sector entity with the right to impose taxes may not submit such bonds or similar bonds issued by closely linked entities as collateral for Eurosystem credit operations in excess of the nominal value of these bonds already submitted as collateral on the day this

Decision enters into force.

2. In exceptional cases, the Governing Council may decide on derogations from the requirement laid down in paragraph 1. A request for a derogation shall be accompanied by a funding plan."

So the ECB's balance sheet will be stuffed with even more garbage.

Video: Will Taxing the Rich Fix the Deficit?

Thanks to Tim D. Hedberg from LearnLiberty.org.

Chart of the Day: Information Age and Romantic Relationships

The internet has been reconfiguring the way we do things or our social lifestyles

The internet have become a key dynamic in forging romantic relationships, supplanting the traditional modes of networking (referred by family, referred by or met as friends, met in bars, referred by or met as co-workers, met in college/school, met as neighbor or in church). Study here (hat tip NYU’s William Easterly)

Resource Curse: Iraq’s Property Bubble

Excess cash from Iraq’s oil wealth have led to massive spending on the property sector.

The New York Times observes, (bold highlights mine)

American-style malls, fixtures in most of Iraq’s wealthy Persian Gulf neighbors, have come late to war-torn Baghdad, but Iraqis are taking to them now like Valley Girls, as a consumer society fueled by the country’s booming oil profits begins to flourish here.

Big malls are being built across the capital. The largest will include a five-star hotel and a hospital, and at one already in operation, a truck arrives each week carrying frozen Big Macs from a McDonald’s in Amman, Jordan.

The construction boom is generally hailed as proof of Iraq’s progress and return to normalcy, more than nine years after the American invasion and six months after the last combat troops departed. But economists and other experts see a dark side. They say the emerging consumer culture masks fundamental flaws in an economy that, like those of other energy-rich countries like Saudi Arabia and Qatar, stifles productive enterprise by relying almost solely on oil profits and the millions of government salaries those profits finance as part of the country’s vast patronage system.

“Basically, Iraq is trying to build a consumer society, not on state capitalism like in China, but on socialism,” said Marie-Hélène Bricknell, the World Bank’s representative in Iraq.

One of Washington’s principal aims was to develop a free-market economy here. Yet with so much oil wealth at hand, Iraq’s leaders have taken few steps to develop a private sector. More than 90 percent of Iraq’s government revenues derive from oil, and with oil production rapidly expanding, the country’s annual revenues could triple over the next five years, to more than $300 billion. With that kind of wealth rolling in, one of the greatest questions the country faces is what it will do with all that cash.

Given the statist mentality of most top Iraqi officials and widespread corruption, diplomats are generally pessimistic that the expected boom in government revenues will be used either to help develop a private sector or to pay for an ambitious public works program — something the country, where 40 percent of the population still lacks access to safe drinking water, desperately needs. Instead, experts worry it will finance more of what Iraq already has: corruption and a huge government work force.

Most of the major industries remain in the hands of the state, and the greatest ambition of many Iraqis is to secure a government job. According to statistics from the Iraqi Ministry of Planning, almost a third of the labor force works for the government. That is more than five million people, and the number is rising, as political parties that run government ministries use paychecks to expand their constituencies.

“The state’s payrolls have massively expanded, not with technocrats but with party functionaries, because the state has become a way of funding party loyalty,” said Toby Dodge, a professor at the London School of Economics, at a recent panel discussion in London about Iraq. “That’s directly undermined and hindered the state’s ability. So we have a huge state.”

Because government salaries are much higher than those in the private sector, independent businesses operate at a disadvantage because, among other disincentives, would-be entrepreneurs cannot afford to hire the most skilled workers. The World Bank ranks Iraq 153rd out of 183 countries on the ease of doing business.

“Building a consumer society on top of nothing is like building a bubble that will burst in the future,” Ms. Bricknell said. With the shopping malls, she said, “you are putting a veneer over a rotting core, basically.”

This is an example of what has typically been called as the resource curse.

According to Wikipedia.org a resource curse is the paradox that countries…with an abundance of natural resources, tend to have less economic growth and worse development outcomes than countries with fewer natural resources.

For as long as there remains resources from which politicians can prey and feast on, channeled through the welfare state, the bureaucracy and state spending, then there will be less incentive to liberalize or make the economy competitive and productive. For now this has been free lunch to the political leaders, bureaucracy, technocrats and their political allies.

To the contrary, oil revenues leads to growing dependency on government and the accompanying spendthrift behavior by political agents, which also contributes to the economic imbalances.

Yet the combination of rapid expansion of parasitical relationship and finite resources (oil) eventually extrapolates to a speed bump or the law of diminishing returns.

Aside from the crowding out effect, government spending undermines the private sector by pricing them out.

Iraq’s resource based economy are reminiscent of the fabled Potemkin Villages or a façade of prosperity or progress.

In reality, Iraq’s oil generated progress from statism and cronyism constitutes no more than a property bubble, again from government policies, which like always, will have a tragic outcome.

Is it Time to be Bullish BRICs and other Emerging Markets?

Goldman Sachs’ Jim O’Neill is bullish BRICs

From Bloomberg,

The biggest emerging markets are contributing more than ever to the global economy as their proportion of the world stock market shrinks, leaving investors with the widest valuation gap in seven years.

Brazil, Russia, India and China, known as the BRICs, will comprise 20 percent of the world economy this year after growing more than four-fold in the past decade, International Monetary Fund data show. At the same time, their combined stock-market value has dropped to a three-year low of 16 percent of the total invested in equities, according to data compiled by Bloomberg.

To Jim O’Neill, the chairman of Goldman Sachs Asset Management who coined the term BRIC in a 2001 research report, the 4 percentage point difference makes stocks in these markets irresistible. The last time the gap was this wide, in 2005, the MSCI BRIC Index (MXBRIC) jumped 53 percent in 12 months, more than double the gain in the MSCI All-Country World Index. (MXWD)

“Unless we are seeing a major collapse of those economies, it’s a huge opportunity for investors,” O’Neill, who helps oversee $824 billion, said in a June 28 phone interview. The BRIC stock markets may double by 2020 as their share of world gross domestic product increases to about 27 percent, he said.

Combined GDP in the BRICs will rise to more than $14 trillion this year from $2.8 trillion in 2002, according to the IMF. Their equity value, which includes locally-traded shares and companies based in the BRIC nations with primary listings abroad, has dropped to $7.6 trillion from $9.5 trillion a year ago, when they made up 18 percent of the global total, according to data compiled by Bloomberg.

History is not a reliable indicator of the future. Otherwise to paraphrase Warren Buffett, the best investors or the richest people would have been librarians.

Contra O’Neill foreigners have become defensive and have taken the home bias stance.

Again from the same article…

Fund Outflows

Petroleo Brasileiro SA (PETR4), Brazil’s state-controlled oil company, fell to the world’s 39th-largest company by value from the 10th-biggest in July 2011. China Construction Bank Corp. (939)’s rank dropped to 20 from 12 while OAO Rosneft,Russia (INDEXCF)’s largest oil producer, sank to 106 from 70.ICICI Bank Ltd. (ICICIBC), India’s second-biggest lender, has lost 17 percent during the past year, compared with an average gain of 9 percent for global peers.

The retreat has pared what was a 180 percent increase in the MSCI BRIC index since October 2008 and reflects concern that economic growth is slowing, according to John-Paul Smith, an emerging-market strategist at Deutsche Bank AG in London. Mutual funds that invest in BRIC equities, which recorded about $70 billion of inflows in the past decade, have posted 16 straight weeks of withdrawals, losing a net $5.3 billion, EPFR Global data show.

Why?

Downside Risk

While the BRIC economies expanded by 4.8 percent on average during the first quarter, more than double the pace in the U.S., their growth decelerated from 6.8 percent a year earlier.

Falling stock markets suggest the slowdown will worsen because share prices are a leading indicator of economic growth and corporate profits, said Michael Shaoul, the chairman of Marketfield Asset Management in New York. The $2 billion Marketfield Fund (MFLDX) has topped 99 percent of its peers this year in part because of bets that emerging-market shares will retreat.

“Equity markets have started to anticipate much more difficult economic times in these countries,” Shaoul said in a June 28 phone interview from New York. “The balance of risks is to the downside.”

The balance of risks has indeed been to the downside.

Here’s Zero Hedge to prove that point. (bold original)

The sea of red just got even redder as Japan, Korea, Norway, South Africa and Taiwan all dropped below 50, i.e., into contraction territory. From Bank of America: "Overnight and early this morning, a bevy of global manufacturing PMI reports were released. This provides us with an early reading on the state of manufacturing. Out of the 24 countries reporting so far, 10 saw month-over-month improvements in their manufacturing PMIs, while fourteen countries saw their PMIs worsen in June. Seventeen of the manufacturing PMIs were below the 50 breakeven level that divides expansion (+50) from contraction (+50). A majority of the below-50 PMI indices are located in the Euro area. The ongoing sovereign debt and banking crisis continues to weigh on the region’s economic activity and sentiment. The Euro area slowdown is beginning to impact the rest of the world."

I believe this is more than just about the Euro debt crisis, but also of the slowdown (or bubble bust) in China.

So far what has been kept the markets buoyant has been the repeated doping of the markets with minor bailouts and of the torrent of pledges of more bailouts.

In reality, markets remain highly fragile.

As I wrote last weekend

But the dicey cocktail mix of political deadlock, escalating economic woes and the uncertain direction of political (monetary) policies contributes to the aura of uncertainty that may induce a fat tail event.

A recovery in the BRICs and emerging markets will likely be reinforced by a recovery in commodity prices. This has not yet been established.

Until perhaps central bankers of major economies makes major moves, I don’t think the time for positioning on the BRICs is ripe.

How Obamacare will Self Destruct

Austrian economist Bob Wenzel explains. (bold emphasis mine)

It's clear that, under Obamacare, premiums will go through the roof, especially for the young. It will be cheaper for almost everyone to pay the penalty rather than buy insurance. And since, Obamacare requires that insurers take on those who already have pre-existing conditions, there is no risk for those who simply pay the penalty. If a penalty payer comes down with a catastrophic condition, he can simply buy "insurance" at that point.

This will eventually collapse the system, unless penalties are made higher than the cost of insurance (which would require congressional approval--imagine that circus).

Bad News is Good News: US Manufacturing Activity Contracts

Signs of economic slowdown has percolated to the US, but global stock markets remain buoyant.

From Bloomberg,

Manufacturing in the U.S. unexpectedly shrank in June for the first time since the economy emerged from the recession three years ago, indicating a mainstay of the expansion may be faltering.

The Institute for Supply Management’s index fell to 49.7, worse than the most-pessimistic forecast in a Bloomberg News survey, from 53.5 in May, the Tempe, Arizona-based group’s report showed today. Figures less than 50 signal contraction. Measures of orders, production and export demand dropped to three-year lows.

Treasury yields fell on concern Europe’s debt crisis and a slowdown in Asia are taking a bigger toll on the world’s largest economy and hurting manufacturers like DuPont Co. (DD) and Steelcase Inc. (SCS) Assembly lines are at risk of slowing further as consumers temper purchases and companies cut back on investment…

The ISM index, which dropped to its lowest level since July 2009, was less than the median forecast of 52 in the Bloomberg survey. Estimates of 70 economists ranged from 50.5 to 53.5. The gauge averaged 55.2 in 2011 and 57.3 the prior year.

No Recession

Today’s reading is well above the 42.6 level that generally indicates the economy as a whole is expanding, according to ISM…

Manufacturing is also weaker in the rest of the world. The industry in the euro-area contracted for an 11th straight month in June as Europe’s debt crisis sapped demand. A measure of the region’s factories held at 45.1, London-based Markit Economics said.

No worry, bad news has never been a problem as central banks are expected to ride like the fabled knights to save the damsel in distress.

From another Bloomberg article,

Japanese and Australian stock futures rose on expectations that a contraction in U.S. manufacturing may encourage the Federal Reserve to ease monetary policy as the European Central Bank cuts interest rates to help contain the region’s sovereign-debt crisis.

Yet another article from Bloomberg,

Asian stocks climbed for a fifth day, the longest rising streak on the regional benchmark index since March, on expectations that central banks from Washington to Frankfurt may ease monetary policy to spur economic growth…

“The prospect for central banks easing policy gives us a good setup for equity markets globally,” said Mikio Kumada, a global strategist in Singapore at LGT Capital Management, which manages more than $20 billion globally…

The weakness in manufacturing may encourage more accommodative policies from the Federal Reserve, Princeton University economist Alan Blinder said in an interview on Bloomberg Television’s “Market Makers” with Erik Schatzker and Scarlet Fu.

The mantra of money printing as the Holy Grail have always been popular. As the great Professor Ludwig von Mises observed

The popularity of inflation and credit expansion, the ultimate source of the repeated attempts to render people prosperous by credit expansion, and thus the cause of the cyclical fluctuations of business, manifests itself clearly in the customary terminology. The boom is called good business, prosperity, and upswing. Its unavoidable aftermath, the readjustment of conditions to the real data of the market, is called crisis, slump, bad business, depression. People rebel against the insight that the disturbing element is to be seen in the malinvestment and the overconsumption of the boom period and that such an artificially induced boom is doomed. They are looking for the philosophers' stone to make it last

Yet 5 years of sustained inflationism have only worsened the crisis.

Inflationism is like religion, it is based on faith.

Absent real actions, until when can stock markets rise on mere ‘talk therapy’ or on expectations that central banks will deliver the ‘Bernanke PUT’? When will reality collide with hope?

Be careful out there.

Bad News is Good News: China Property Prices Barely Budge, Media and Markets Cheer

Bad news on China’s property sector is good news for media and the Chinese equity markets.

From Bloomberg

China’s new home prices rose for the first time in 10 months as the government eased its monetary policies to bolster the economy, according to SouFun Holdings Ltd. (SFUN), the nation’s biggest real estate website owner.

Home prices increased 0.1 percent from May to 8,688 yuan ($1,367) per square meter (10.76 square feet), SouFun said in an e-mailed statement today, based on its survey of 100 cities. Beijing led gains among the nation’s 10 biggest cities, climbing 2.3 percent from May, followed by the southern business hub of Shenzhen, which added 0.8 percent.

China’s Vice Premier Li Keqiang asked for curbs on speculative home demand to be continued and called for more efforts to build affordable housing units, Xinhua News Agency reported yesterday. While the government maintained its housing curbs, it helped ease funding by lenders and vowed to support first-home buyers. The central bank cut the benchmark one-year lending rate last month for the first time since 2008.

“The rate cut played a big role changing the sentiment on the market,” said Jeffrey Gao, a Shanghai-based property analyst for Macquarie Capital Securities. “The government hasn’t changed the overall direction of the property policy, but it probably will be less stringent on the easing in smaller cities.”

Round off .1 percent and you get zero. Ok, give them the benefit of the doubt that zero is better than negative.

What such news attempts to frame to the public’s mind is that low interest rates equals recovery. The implication is that debt is growth. That’s hooey.

As the great Ludwig von Mises warned,

Public opinion is prone to see in interest nothing but a merely institutional obstacle to the expansion of production. It does not realize that the discount of future goods as against present goods is a necessary and eternal category of human action and cannot be abolished by bank manipulation. In the eyes of cranks and demagogues, interest is a product of the sinister machinations of rugged exploiters. The age-old disapprobation of interest has been fully revived by modern interventionism. It clings to the dogma that it is one of the foremost duties of good government to lower the rate of interest as far as possible or to abolish it altogether. All present-day governments are fanatically committed to an easy money policy.

To paraphrase Professor Mises, All present-day governments are fanatically committed to boom bust cycles, erosion of capital for civil society and the transfer of wealth to politicians

China’s equity markets are modestly up as of this writing.

Could this be in response to zero growth or could this be a carryover from the EU Summit bacchanalia or both?

Yet commodity prices are down.

Nevertheless, One day does not a trend make.

CNBC: We are Slaves to Central Banks

It appears that the mainstream has awaken to reality; markets have become totally dependent on government steroids. (hat tip Charleston Voice)

Quote of the Day: Legalizing Fascism

Economic fascism is the doctrine that there is a government-business alliance that makes the nation wealthy or strong militarily. This idea has never had a judicial basis before. Now it does.

A tax in America prior to last week was a payment by the citizen or legal entity to an agency of civil government. Not so in the new, improved American fascism, as articulated by Chief Justice Roberts. In fascism, a compulsory payment to a private, profit-seeking entity is considered a tax. You can pay it to an insurance company, or you can pay a fine to the federal government. Take your pick. They are both taxes.

(bold emphasis original)

This from Professor Gary North on the recent validation of Obamacare by US Supreme Court. (lewrockwell.com).

Global Financial Markets: Will the EU Summit’s Honeymoon Last?

Intense global market volatility continues. Today’s ambiance seems conducive for adrenaline seeking high rollers.

The Philippine Phisix has been experiencing sharp volatility too. But contrary to my expectations, gyrations has swung mostly to an upside bias.

Along with Pakistan, the local benchmark has been outperforming the rest of the Asian region. The Philippine Phisix ranks as the sixth best performer based on year-to-date nominal currency benchmark returns.

Of the 71 international bourses on my radar screen, about a hefty majority or 67% posted gains on a year-to-date basis as of Friday’s close.

This hardly has been representative of a bearish mode.

In addition, the Phisix is just about a fraction or spitting distance away (1%) from the May record highs at the 5,300 level. And considering that equity markets of the US and European markets skyrocketed Friday, a new Phisix milestone record seems to be a “given”.

Repeated Doping of the Markets Triggered a RISK ON Environment

Yet global stock markets appear to be detached from real world events.

Bad news has prominently been discounted and bizarrely treated as good news. It’s a sign of abnormal conditions, as well as, the amazing complexity of the nature of markets behaving in response to massive price distortions from political actions.

Global equity markets began with their creeping ascent in June. This excludes China’s Shanghai (SSEC) index though.

Each week since, global equity markets rose on a barrage of bailout related developments. The evolving events can be categorized as actualized bailouts and events that accommodated a prospective bailout.

Spain’s bailout[1], the extension[2] of Operation Twist by the US Federal Reserve and the latest EU summit[3] could be seen as examples of the actualized bailouts. They account for as promises made good through actions.

The culmination of the Greece elections[4], the easing of collateral rules[5] and pledges for stimulus[6] signifies as both market conditioning, and of the prospective accommodation for future bailouts. People saw these events as indicators of prospective political actions

I drew and noted of the timeline of the actualized bailout events along with the chart of the major indices. Clearly we see Europe’s STOX 50, the US S&P 500 and Dow Jones Asia (P1Dow) responding to political actions.

Friday’s supposed “breakthrough” from the EU summit sent global markets into a frenzied RISK ON spiral.

The deal reportedly[7] facilitates a direct injection mechanism into stricken banks by EU’s rescue funds, particularly the temporary European Financial Stability Facility (EFSF) and the permanent European Stability Mechanism (ESM). The rapprochement also included the option of intervening in the bond markets, the waiving of preferred creditor status on ESM’s lending to Spanish banks and the creation of a “single banking supervisor” which marks the first step towards a banking union and an allegedly a backdoor route towards a fiscal union.

Since the deal has been seen as a “shock and awe” policy, and went beyond market’s expectations and partly fulfilled the mainstream’s yearnings for a union, global financial markets went into a shindig

The soaring Phisix has given some the impression of decoupling. This hasn’t been accurate. While there have been some instances of short-term divergence, decoupling or lasting divergence may not be in the cards.

What has distinguished the Phisix is her OUTPERFORMANCE. The repeated doping of the markets which has been inciting the current “recovery” benefited the Phisix and the top performers most.

Yet both developed economy markets and ASEAN markets (Thailand’s SETI, Malaysia’s MYDOW and Indonesia’s IDDOW) have virtually and coincidentally “bottomed” during the start of June and ascended in near consonance from then. The point is that the underlying trend has been similar but the returns have been different.

And since shindig from Friday’s EU summit has yet to be priced in on ASEAN markets, perhaps Monday’s open will likely reflect on the newfound euphoria.

The elation from the EU Summit deal has not been limited to the global stock markets but was likewise ventilated on the commodity markets and on the currency markets.

Gold, Oil (WTIC), Copper and the benchmark CRB or an index accounting for a basket of 17 commodities all scored hefty one day gains.

Non-US dollar currencies like the Euro likewise posted a huge one day 1.83% gain. The Philippine Peso also firmed by .7% to 42.12 to a US dollar. The Peso is likely to break the 42 levels if this momentum continues.

Overall, this is your typical RISK ON environment.

EU Summit’s Honeymoon: Sorting Out the Cause and Effects

The ultimate question is does all these represent an inflection point that favors the bulls?

Candidly speaking this “rising tide lifting all boats” scenario are the conditions that would make me turn aggressively bullish. BUT of course, effects shouldn’t be read as the cause.

In the understanding that the markets have thrived throughout June on REPEATED infusions of bailouts and rescues, my question is what happens if markets are allowed to float on its own? What happens when the effect of the bailouts fade? Or outside real political actions of bailouts, will markets continue to rise on the grounds of mere pledges or from hopes of further rescues?

The current environment seems so challenging.

Yet there seems to be many kinks or obstacles to the supposed EU deal.

First, while the premises of the EU deal have been outlined, the details remain sketchy.

Second, a change in the lending conditions of Spain’s bailout may also trigger demand for changes of other bailed out nations to seek similar terms. This may lead to more political squabbling.

Third, the ESM has yet to be ratified[8] by members of the Eurozone

Fourth, EU’s combined capacity for the EFSF and ESM, even if complimented by the IMF, represents a little over half of the total funding requirements[9]. Thus, the proposed therapy from the EU summit will likely only buy sometime.

Fifth, the controversial deal rouse a popular backlash against Germany’s “surrender” or “blackmailed” into accepting the conditionality set by the EU. Such views have been ventilated by major media outfit[10].

Even after the German parliament immediately passed bailout pact, several German lawmakers along with opposing political groups responded swiftly by filing suites to challenge the accord at the Federal Constitutional Court[11]. Since the German President President Joachim Gauck said that he would withhold the passage of the new laws pending the resolution of lawsuits, the rescue mechanism may suffer risks of delay, or at worst, a reversal from the courts.

Sixth, the preferred path towards centralization will likely exacerbate the problems caused by regulatory obstacles and by deepening politicization of the marketplace[12]. Politicians don’t seem to get this. They have been inured to treat the symptoms and not the causes.

Yet the problems have not been confined to the EU. There remains uncertainty over China’s seemingly intensifying economic woes. The local Chinese government have reportedly resorted to selling cars to raise finances[13]. As of this writing, a new report shows that China’s manufacturing conditions have been worsening[14]. Most importantly Chinese authorities seem to be in dalliance over demand by the media for more rescues.

Developments in the US have not been upbeat either. The Supreme Court’s upholding of the Obamacare will have massive impacts to the economy and to US fiscal balances[15]. “Taxmaggedon” or massive tax increases[16] slated for 2013 out of the expiration of tax policies may also impact the economy. There is also the contentious US debt ceiling debate. All three are likely to become critical issues for the coming US elections, this November.

Importantly the rapid deceleration of money supply is likely to pose as a headwind for the US markets as well as the economy.

Bottom line:

Yes momentum may lead global markets climb the wall of worry over the interim. But the dicey cocktail mix of political deadlock, escalating economic woes and the uncertain direction of political (monetary) policies contributes to the aura of uncertainty that may induce a fat tail event.

---

[1] See Expect a Continuation of the Risk ON-Risk OFF Environment June 11, 2012

[2] See US Federal Reserve Extends Operation Twist, Commodities Drop June 21, 2012

[3] See Markets in Risk ON mode on Easing of EU’s Debt Crisis Rules June 29, 2012

[4] See Shelve the Greece Moment; Greeks are Pro-Austerity After All, June 18, 2012

[5] See ECB Eases Collateral Rules as Banking System Runs out of Assets, June 23, 2012

[6] See From Risk OFF to Risk ON: To Stimulus or Not?, June 7, 2012

[7] Reuters.com EU deal for Spain, Italy buoys markets but details sketchy, June 29, 2012

[8] Wikipedia.org, Ratification European Stability Mechanism

[9] Zero Hedge Last Night's Critical Phrase "No Extra Bailout Funds", June 29, 2012

[10] Telegraph.co.uk EU Summit: How Germany reacted to Merkel's 'defeat', June 30, 2012

[11] Bloomberg.com Germany’s ESM Role, EU Fiscal Pact Challenged in Court June 30, 2012

[12] See What to Expect from a Greece Moment, June 17, 2012

[13] See Out of Cash, Local Chinese Governments Sell Cars, June 27, 2012

[14] See Deeper Slump in China’s Manufacturing, Will Bad News Become Good News? July 1, 2012

[15] See Obamacare’s 21 New or Higher Taxes for the US economy, July 1, 2012

[16] Heritage Foundation Taxmageddon: Massive Tax Increase Coming in 2013, April 4, 2012