Quote of the Day: Market Failures Does Not Justify Government Interventions

Market failure is a tricky topic even for professional economists. And when non-economists raise the examples of market failure that we discussed here, matters become even trickier. Not only do all of these terms have technical meanings that often do not match what the non-economist thinks the terms mean, but most non-economists also are unaware of the various criticisms that have been raised in the literature on these topics. Most important, non-economist critics of the market are frequently unaware of the comparative institutional analysis that public choice theory has made a necessary part of thinking about the role of government in the economy. Pointing out imperfections in the market does not ipso facto justify government intervention, and the only certain way that market "failures" are "failures" is by comparison to an unreachable theoretical idea. Market imperfections are not magic wands that make market solutions and government imperfections disappear. Real understanding of comparative political economy begins rather than ends with the recognition that markets are not always perfect.

This is the conclusion of Professors Art Carden and Steve Horwitz at the Econolog in discussing why so-called market failures in the context of externalities, public goods, asymmetric information, and market power (or monopolies) represent as “necessary—but insufficient—conditions for intervention to be justified”.

Thanking Business Mirror’s John Mangun

I was surprised by the gush of traffic to this blog from the website of the leading local business daily, the Business Mirror. 

And I found out that the prolific business columnist John Mangun had quoted me.

Here is a snippet:

One of the sharpest macroeconomic analysts I know is Benson Te, who writes at prudentinvestornewsletters.blogspot.com. This Maundy Thursday morning, he wrote that the rating upgrade “only reveals the deepening of the manic phase of Philippine asset bubbles.” He argues that the recent stock-market rise should have been factored into the prices. Instead, the market explodes on the news and ignored the common “buy the rumor, sell the news” idea.

Thank you very much for your compliment and endorsement, John. 

Bitcoins Goes Past $100, Doubles Since Cyprus Crisis

Bitcoin, the virtual or digital currency, has been generating substantial public interest. Bitcoin prices has practically doubled since the outbreak of the Cyprus crisis.

Notes the Zero Hedge, (bold emphasis original)

From a January 2nd price of $13.16, the price of a Bitcoin in USD had risen to $46 on March 16th - right before the Cyprus 'solution' was announced. Since then, in two short weeks, the price of a Bitcoin has more than doubled, reaching $101 today. This 'exuberance' in non-fiat currency, should perhaps warrant caution as we noted here, the US is now not only actively monitoring but has commenced regulating the Bitcoin market and those who participate should be well aware that when uncle Sam is involved, things tend to have an unhappy ending for pretty much everyone involved.

Events in Cyprus seem to be prompting people to look for currency alternatives to safeguard their savings from the predations of government, and thus Bitcoin's newfound popularity. 

I would even suspect that some of the interest in gold and precious metals may have been diverted to bitcoins.

[Note: I am not in anyway promoting bitcoins. I have no exposure in bitcoin yet. But considering how political events have been unfolding, the search of safehaven means bitcoins as an alternative should be explored]

Neverthelesss here is an insightful audio interview of Erik Voorhees of Bitinstant who spoke with Austrian economist Tom Woods on the basics of bitcoins.

CNN: 3D Printed Assault Weapons Available by End of April

The technology is there and continues to improve, so applications will also continue to expand to cover wide ranges of products, including controversial guns.

Assault weapons from 3-D Printing will be available by the end of April according to this report from CNN (hat tip lewrockwell.com)

Firearms 3D printer Cody Wilson of Defense Distributed and the Wiki Weapon project has been making wave after wave with every one of his statements, updates, videos and blog posts. He’s been making the circles, with an interview with Vice Magazine and now CNN.

His most recent proclamation is will alarm many, bring hope to a few, but leaves us with our heads scratching. Wilson has said that they will have the technology to 3D print a firearm by “the end of April.”

“Well to have a printable gun — it’s my intention to have that done by the end of this month and we’re at the end of March now so it’s my intention to have it done by April,” he said. This would, in theory, prompt a new era in personal firearm manufacturing and a new paradigm for gun control.

“The assumption is one day the technology will become more ubiquitous and widespread,” Wilson said on “The Lead with Jake Tapper.”

“It will fall in price, and materials will be developed in a better place than they are now, so yes, if you were to have one in your home and you have the gun file, you can just click print and have the gun.”

The rate of advance of 3D technology will only render prohibition and other regulatory statutes obsolete. Of course, we expect government eventually to attempt to "regulate" 3D. But again such measures are bound to lag and thus fail.

3D technology in combination with others (mobile computing, nanotech and etc...) will change the way we do things and force us to specialize. A wider adaption of the 3D technology also means the path towards social decentralization.

Chart of the Day: Unintended Effects of Currency Devaluation

The unique political economic structure of each nation will extrapolate to different effects from the du jour trend of central banking inflationism (mainstream terminology: currency devaluation or depreciation). The above chart shows of the interplay between three forces: imports as % of GDP, year on year change of price inflation and the weight of the indicated developed economy relative to the world.

 

Notes the politically influential US think tank the Council of Foreign Relations CFR,

Currency depreciation is likely to have a much more adverse effect on inflation in the UK than in the United States, the eurozone, or Japan, owing to much higher imports relative to GDP. UK consumer price inflation is already running at a relatively high 2.8%, and the Bank of England’s own analysis suggests that a 20% sterling depreciation risks pushing the price level up 6 percentage points higher than it would otherwise be.

Of course, the degree (intensity and time period of implementation) of such inflationist policies will matter too. And so with other incumbent and prospective policies such as capital/currency controls, wage and price controls, taxes, bureaucratic regulations, and others.

Nonetheless, the long term impact from the latest creed of “something for nothing” policies from global central banks will be the opposite of the expectations or the goals of policymakers. 

This means that gambits of policymakers to preserve current political economic systems will eventually translate to our suffering, whether via boom bust cycles (financial crises) or stagflation.

Australia to Embrace China’s Yuan

Australia may use China’s Yuan more for international trade and finance than the US dollar.

From the Australian 

BUSINESS groups and economists have welcomed the prospect of direct convertibility of the Australian dollar and Chinese yuan, which would cut foreign exchange costs and bolster Australia's growing trade with China.

The Coalition also said yesterday it supported a proposal by Julia Gillard, revealed in The Weekend Australian, to secure the currency deal with the Chinese.

The Prime Minister is expected to put forward the plan, to make the Australian dollar and Chinese yuan freely convertible, when she visits China this weekend, an outcome that would save Australian and Chinese businesses from having to deal in US dollars or Japanese yen when trading with each other.

Greg Evans, director of policy at the Australian Chamber of Commerce and Industry, said "direct convertibility is expected to provide a practical business benefit for both small and large companies doing business with China". He said closer currency arrangements made sense as trade with China, which exceeded $120 billion last year, continued to grow…

Australia would become the third country, after the US and Japan, to secure such an arrangement from China, for which Australia is the fifth-biggest source of imports.

At present, companies doing business with China must pay the added cost of converting their Australian dollars into US dollars or yen, and then again from there into yuan. Fortescue director and former Australian ambassador to China Geoff Raby has called for Australia to become more involved in the internationalisation of the yuan and to make Sydney a trading centre for the currency.

Internationalization or convertibility of the yuan would require more trade, finance and currency/capital liberalization, factors which China’s government needs to address than just via bilateral agreements.

Nonetheless, Australia’s move to embrace the yuan serves as writing on the wall for the US dollar standard.

Quote of the Day: EU’s Market Destroying Institutions

As the EU moved from a free trade zone to a political system after the ratification of the Maastricht Treaty in 1992, it also (among many other things) progressively collectivized the risks associated with public spending. Until the euro came along, countries with bad public policies would simply devaluate their currencies. The French government, for instance, devaluated the franc twice (in 1981 and 1982) under Mitterrand’s presidency and in 1983 the Deutsche mark and the florin were reevaluated against all the other European currencies. Under this system the consequences of bad public policies are internalized to a large extent. The euro changed that. Bad policies are now either kept in check at the country level because no currency devaluation is possible (that’s the positive scenario), or the consequences of bad policies are born by the entire system. This, of course, is only if EU authorities want to keep the euro zone intact, otherwise they could simply let Greece and Cyprus out of the euro zone, but this would be to admit the failure of their grandiose currency plan. This is why the European Central Bank is resorting to Stalinist methods to make sure the government in Cyprus does what the EU wants it to do…

The EU today is a case in point of “market-destroying” federalism. As Barry Weingast pointed out in a series of great papers on federalism (The Economic Role of Political Institutions, Federalism as a Commitment to Preserving Market Incentives), the institutions of federalism lead to political competition and the weeding out of bad policies (it is “market preserving”). But if this mechanism is attenuated through transfers from the federal state to lower jurisdictions, the incentives to maintain one’s fiscal house in order disappear. Ultimately the entire system collapses as a result of collectivized risks. This has been slowly happening in the United States throughout the 20^th century, but it is taking place at an even bigger level in the EU because the EU is a hybrid federal system. This is why many want to centralize political and policy powers in the EU so as to make the place more like the US (a European banking union would be a first step in that direction according to the defenders of greater centralization).

It is likely, however, that greater centralization would fail because at the end of the day, EU institutions are not geared towards market-preserving federalism. The dominant thinking is one of indicative planning, regulation, and neo-mercantilism. In my opinion, the only course of action to save the EU would be to return to the original free-trade zone agreement of the 1950s and 60s. Trade zones enable political competition, which leads to virtuous outcomes such as lower taxes and lower public spending. Moreover, free trade zones with freely competing currencies, even if they remain government produced (one could adopt the Deutsche mark anywhere in the zone for instance), would bring vast positive benefits to Europeans. This would imply a complete reversal of policies, which shows how far we are from solving the problems in Europe. Ultimately, of course, governments should get out of money production, but that’s maybe for another century.

(bold mine)

This is from Austrian economist Frederic Sautet at the Coordination Problem Blog

Family of Cyprus President Moved Money Out; Politicians Benefit from Loan Write offs

Previously I posted about how money leaked out of Cyprus during the bank bail-in negotiations and of the Cyprus president having ”warned” his friends of imminence of the crisis.

It turns out that money has been flowing out of Cyprus even earlier or 2 months prior to the crisis. (chart from Zero Hedge)

And part of such outflows could have been made by the family of the president of Cyprus.

From the RT:

A company owned by in-laws of Cypriot President Nicos Anastasiades wired €21 million from Laiki Bank to London days before the Eurogroup’s crisis-triggering levy proposal, claims a Cypriot newspaper. The president demands an investigation.

During two days, 12 and 13 of March, the company A.Loutsios & Sons Ltd., co-owned by Loutsios John, the husband of Nikos Anastasiadis’ daughter, Elsa, took five promissory notes worth €21 million from Laiki Bank. The money was then transferred to London, reported Cypriot newspaper Haravgi, affiliated to the communist-rooted AKEL party.

The withdrawal was fulfilled just three days before the Eurogroup meeting when euro finance ministers agreed a 10 billion euro ($13 billion) bailout for Cyprus.

The company, however, has firmly denied the reports.

So many people "knew" or anticipated the crisis.

 

Yet the report says that the President demands an investigation of his family’s action? Unless there is a feud, this would be like proverbial fox guarding the henhouse.

It also figures that the alleged beneficiaries of the recent loan write-offs have been the political class and their cronies.

From the Telegraph:

Lawmaker Mavrides, meanwhile, confirmed that a committee appointed by President Nicos Anastasiades would investigate a list published by Greek media of Cypriot politicians who allegedly had loans forgiven.

The Bank of Cyprus, Laiki and Hellenic Bank reportedly forgave millions of euros in loans over the past five years to lawmakers, companies and local company authorities, newspapers in Greece said.

The allegations would likely be discussed in parliament next week, Mavrides added.

Developing events in Cyprus just reveals that while the public gets squeezed, it pays to be a part of the insider or the political class, the well connected and the cronies.

The Bible and the Austrian Business Cycle

 From Luke 14:28-33 (Biblegateway.com)

Suppose one of you wants to build a tower. Won’t you first sit down and estimate the cost to see if you have enough money to complete it?  For if you lay the foundation and are not able to finish it, everyone who sees it will ridicule you, saying, ‘This person began to build and wasn’t able to finish.’

The great Ludwig von Mises on the consequences of cheap money or the Austrian Business cycle

The whole entrepreneurial class is, as it were, in the position of a master builder whose task it is to construct a building out of a limited supply of building materials. If this man overestimates the quantity of the available supply, he drafts a plan for the execution of which the means at his disposal are not sufficient. He overbuilds the groundwork and the foundations and discovers only later, in the progress of the construction, that he lacks the material needed for the completion of the structure. This belated discovery does not create our master builder's plight. It merely discloses errors committed in the past. It brushes away illusions and forces him to face stark reality.

Happy Easter!

Video: Gary North on the World's Transition to the Modern Economy

Via BBC's Hans Rosling, I have previously posted a video showing the modern economy's dramatic growth transformation which begun during the 18th century, from the agricultural age to the industrial era to today's post industrial information/digital epoch.

In the following video, Austrian economist Gary North expounds on Deidre McCloskey's theme that "ideas" or "rhetoric" or the "Bourgeois Dignity or Virtue" as the major force behind such monumental progress. 

As per Mr. North, Ms. McCloskey's theme signifies as, 

a change of attitude regarding entrepreneurship, and a change in attitude regarding innovation and personal wealth derived from innovation and entrepreneurship...

The argument is people’s attitude for the first time radically changed on the question of the legitimacy of personal wealth through entrepreneurial activities 

Mr. North adds two additional factors to the ideas or virtues of the pursuit of self-interests: one is ethics (view of right and wrong), which may have played a significant shift in the public's opinion, where acquisition of personal wealth became legitimate. Second is a shift of the view of the future (based on religious influences or what Mr. North calls as the "post millennialist eschatology"). 

In short, people's values and beliefs evolved overtime to reflect on the marginal changes on the course of actions undertaken which compounded to manifest on such progress.

War on Drugs: Mexican Vigilantes Takeover Town, "Arrest" Police

When the citizens are fed up with the incumbent political system, they take things into their own hands. Mexico’s war on drugs seem to have produced such an effect.

From New York Post (hat tip EPJ)

Hundreds of armed vigilantes have taken control of a town on a major highway in the Pacific coast state of Guerrero, arresting local police officers and searching homes after a vigilante leader was killed. Several opened fire on a car of Mexican tourists headed to the beach for Easter week.

Members of the area's self-described "community police" say more than 1,500 members of the force were stopping traffic Wednesday at improvised checkpoints in the town of Tierra Colorado, which sits on the highway connecting Mexico City to Acapulco. They arrested 12 police and the former director of public security in the town after a leader of the state's vigilante movement was slain on Monday…

The vigilantes accuse the ex-security director of participating in the killing of vigilante leader Guadalupe Quinones Carbajal, 28, on behalf of local organized crime groups and dumping his body in a nearby town on Monday. They reported seizing several high-powered rifles from his car, and vigilantes were seen toting a number of sophisticated assault rifles on Wednesday, although it was not clear if all had been taken from the ex-security director's car.

"We have besieged the municipality, because here criminals operate with impunity in broad daylight, in view of municipal authorities. We have detained the director of public security because he is involved with criminals and he knows who killed our commander," said Bruno Placido Valerio, a spokesman for the vigilante group…

The groups say they are fighting violence, kidnappings and extortions carried out by drug cartels, but concerns have surfaced that the vigilantes may be violating the law, the human rights of people they detain, or even cooperating with criminals in some cases.

Sensitive over their lack of ability to enforce public safety in rural areas, official have largely tolerated vigilante groups.

War on Cash and Informal Economy: Russia to ban Transactions over $10,000

Since the financial crisis of 2008, governments around the world have taken financial repression to a higher level. 

Russia’s government plans to restrict cash transactions supposedly to increase bank reserves, as well as, to curtail her informal economy which allegedly has grown to at 50%-65% of national output.

From Russia Beyond the Headlines (hat tip Zero Hedge) [bold mine]

Russia may ban cash payments for purchases of more than 300,000 rubles (around $10,000) starting in 2015. The move is expected to boost banks’ cash reserves and put a damper on Russia’s shadow economy. However, the middle class will most likely end up having to pay the price for the scheme.

Moscow is looking to kill two birds with one stone: Firstly, it wants to bring some of the population’s “grey” income out of the shadow; secondly, it wants to increase the volume of cash reserves in the banks. The government’s bill will introduce the new rule to the State Duma. The document was prepared by the Ministry of Finance and approved by the government.

The proposed transition, from the same article.

The restrictions on cash transactions will develop in two phases. In 2014, a ban on cash payments for purchases worth more than 600,000 rubles (about $19,500) will be introduced; the limit will then be halved to 300,000 rubles in 2015. Furthermore, the document introduces mandatory, cash-free, salary payments.

Smaller companies with fewer than 35 employees will be the only exception, and trade companies will be able to pay salaries in cash if they employ no more than 20 people on staff.

Informal economies are basically products of an anti-business regimes based on over-regulations and various forms of social and economic controls, bureaucratic morass, high taxes, rampant inflationism and high welfare economies or simply said a highly politicized economic environment. 

Informal economies are what I would call guerrilla capitalism. 

Yet the desire to simply restrict cash transactions will likely fail, and the produce outcomes opposite of the intentions. 

Such restrictions will likely provide a huge disincentive for Russian firms to expand beyond 35 employees (20 for trading firms) that would limit attaining competitiveness. 

Russian firms are also likely take advantage of such legal loopholes to maintain numerous small companies than to consolidate them. 

In short, more restrictions promote the incentives to remain in the informal or shadow economy.

More from the report:

Even now, cash withdrawals on payday account for around 85 percent of all ATM transactions. Moreover, in 2005–2011, cash flows more than quadrupled. According to Bank of Russia estimates, more than 90 percent of all commodity purchases in Russia are paid for in cash.

The government is now trying to bring the shadow economy into the light and increase money flows into the treasury, according to Investcafe analyst Yekaterina Kondrashova. In her words, as soon as the new rules come into effect, those using unofficial wage payment schemes will encounter certain difficulties, although there could be some ways to circumvent the law.

Governments are against informal economy simply because they defy political control and in so doing the private sectors retain their resources or savings, which the government desires to tap or to confiscate via taxation or various fees, so governments naturally come up with the usual excuses to justify their actions, such as money laundering…

The Ministry of Internal Affairs and the National Anticorruption Committee estimate the market for money laundering and cash conversions at somewhere between 3.5 and 7 trillion rubles ($113–230 billion) — about 60 percent of the Russian federal budget.

Rosstat reports that the volume of the shadow economy (“grey” money from tax evasion, compensations paid as “cash in envelopes” and violations of currency and foreign trade regulations) is at least 15 percent of the GDP, according to Ricom-Trust senior analyst Vladislav Zhukovsky.

Given the substantial criminal activity and illegal entrepreneurship, the grey and black economies account for 50–65 percent of GDP. Even former Central Bank Chief Sergey Ignatyev had to admit that about $50 billion was taken out of Russia illegally in 2012 alone.

Russia’s informal economy has been expanding during the post-USSR era, the informal economy grew from an estimated 23% in 1993 to 46.6% in 2006, and now 50-65% based on the above report.

Yuriy Timofeyev of the Frankfurt School in a a paper “The Effects of the Informal Sector on Income of the Poor in Russia” notes that Russia’s informal economy “played a significant role in stimulating the country’s  economic activities and in educating the new businessmen in many skills”. 

And that “In some sense, the shadow economy has been a place where many economic entities have gained initial experience and entrepreneurial skills and have accumulated the initial capital needed for a transfer into the official sector. The shadow economy, to some extent, has played a positive role, stimulated overall economic activities, and has generated employment and additional income, which is especially important for the poor part of the population”. 

In other words, restricting cash flows will prevent productive "informal" enterprises from flourishing and from transferring to the official sector. Such policies would only defeat its purpose.

So the Russian government will squeeze wealth from productive sector and transfer them to the politically privileged banking system via building up of cash reserves. Of course, the Russia's banking system serves as main intermediaries to the funding needs of the government (foreign ownership of Russian bonds are low), aside from direct financing.

I would also like to add that the informal economy is not necessarily "free". They principally include informal arrangements with many authorities via bribery or other forms of business easing concessions or popularly known as "corruption". 

If measured from Transparency International, Russia ranks as one of the most 'corrupt" countries in the world (133 out of 176 in 2006). Bribes accounted for 20% of GDP as of 2005. 

So "corruption" is tightly linked with the informal economy.  In short, "corruption" represents as another offshoot to economic repression, aside from the informal economy.

Yet more politicization and cronyinsm from the same article:

There is another side to the move toward plastic, however. Cash-free payments will result in higher prices for some goods and services. The middle class will suffer the most, because the “risk group” includes property and automobile transactions. The luxury segment will also be affected, including customized tours.

The problem is that Russian banks charge commissions ranging from 2–4 percent of the total amount of cash-free transfers. Sberbank charges up to 2 percent, says Irina Tyurina, spokesperson for the Russian Union of Travel Agencies.

Well so much for the bullishness in emerging market economies who punishes productive activities.

BBC on Bitcoin

The spike in the public's interests over bitcoins, particularly during the latest Cyprus crisis, have been generating much publicity, albeit mostly negative.

In the following video, the British media outfit the BBC tries to balance the views between users and advocates against detractors. Nonetheless BBC seems troubled by the rise of  "stateless virtual money". (hat tip lew rockwell blog)

Income Inequality: The Austrian Perspective

Roger Koppl at the Thinkmarkets blog explains the controversial issue of income inequality from the Austrian school perspective;

This indifference to income distribution is all the more mysterious because pro-market thinkers generally support a theory of politics that tells us to watch out for ways the state can be used to create unjust privileges for some at the expense of others. We should expect the distribution of income to be skewed toward the politically powerful and away from the poor and politically weak. In a representative democracy “special interests” engage in “rent seeking” to get special favors. Those special favors enrich some at the expense of others. That’s what they are meant to do!

Liberal political theory tells us to expect that sort of thing as a sort of disease to which the body politic is subject under representative democracy. Our presumption, then, should be that much of the inequality of any epoch is produced by tariffs, licensing restrictions, bailouts, and other specific acts of governments. Most of the time the game is rigged more or less. (The trick of constitutional design is to minimize this evil bathwater without tossing out freedom or democracy.) The more a society’s income distribution is determined by politics and not markets, the more it will be skewed away from whatever pattern would emerge in a less fettered market economy. And in general, that skew will be toward greater inequality. As the political component grows, we can expect power to be concentrated in fewer and fewer hands and income distribution be more and more unequal. If political power is growing, we should strongly suspect that some of the rich are using the state to squeeze money from most of the poor.

Mr. Koppl identifies four ways governments create such inequality: Privatizing profits and socializing losses, Regulation, Collapse of the rule of law and Public Schools

Pls read the rest here

Quote of the Day: The Roots of the Too Big To Fail Doctrine

For fractional reserve banking can only exist for as long as the depositors have complete confidence that regardless of the financial woes that befall the bank entrusted with their “deposits,” they will always be able to withdraw them on demand at par in currency, the ultimate cash of any banking system. Ever since World War Two governmental deposit insurance, backed up by the money-creating powers of the central bank, was seen as the unshakable guarantee that warranted such confidence. In effect, fractional-reserve banking was perceived as 100-percent banking by depositors, who acted as if their money was always “in the bank” thanks to the ability of central banks to conjure up money out of thin air (or in cyberspace). Perversely the various crises involving fractional-reserve banking that struck time and again since the late 1980s only reinforced this belief among depositors, because troubled banks and thrift institutions were always bailed out with alacrity–especially the largest and least stable. Thus arose the “too-big-to-fail doctrine.” Under this doctrine, uninsured bank depositors and bondholders were generally made whole when large banks failed, because it was widely understood that the confidence in the entire banking system was a frail and evanescent thing that would break and completely dissipate as a result of the failure of even a single large institution.

(italics original) 

This is from Austrian economics professor Joseph Salerno at the Mises blog

Cancer treatment that kills every kind of cancer tumor

The information age will continue to bring about massive technological breakthroughs in various aspects of life. 

The “one drug that rules them all” in terms of cancer treatment may have just been discovered

From NY Post (hat tip EPJ)

Researchers might have found the Holy Grail in the war against cancer, a miracle drug that has killed every kind of cancer tumor it has come in contact with.

The drug works by blocking a protein called CD47 that is essentially a "do not eat" signal to the body's immune system, according to Science Magazine.

This protein is produced in healthy blood cells but researchers at Stanford University found that cancer cells produced an inordinate amount of the protein thus tricking the immune system into not destroying the harmful cells.

With this observation in mind, the researchers built an antibody that blocked cancer's CD47 so that the body's immune system attacked the dangerous cells.

So far, researchers have used the antibody in mice with human breast, ovary, colon, bladder, brain, liver and prostate tumors transplanted into them. In each of the cases the antibody forced the mice's immune system to kill the cancer cells.

"We showed that even after the tumor has taken hold, the antibody can either cure the tumor or slow its growth and prevent metastasis," said biologist Irving Weissman of the Stanford University School of Medicine in Palo Alto, California.

Fitch Credit Upgrade: Phisix Mania Phase in Full Throttle

(no stock market commentary this weekend)

Contrary to mainstream expectations, the US credit rating agency Fitch Ratings’ upgrade of the Philippines to “investment status” only reveals of the deepening of the manic phase of  Philippine asset bubbles.

Financial markets are supposed to function as discounting mechanisms. This means that when expectations have been heavily anchored on a specific factor to influence the market, usually when such event occurs, markets do the opposite. Such serves as the typical force behind the axiom “buy the rumor, sell the news”

But local markets seem to be saying “this time is different”.

The local market has been expecting such an upgrade. As I wrote during at the end of the year:

Many factors have been rationalized for Phisix 6,000 and beyond for 2013; among them, strong economic growth, election spending, strong corporate earnings, reforms by the PSE to become Sharia compliant or open to Muslim investors, potential credit upgrades, bulging interests from residents, potential capital flows from foreign investors due to the above and etc…

The domestic financial market became delirious when the news broke out. The Philippine equity benchmark, the Phisix zoomed by 2.74% Wednesday, while the Peso reversed losses and advanced from yesterday’s 41.07 to 40.8 or a .6% gain.

Yesterday’s move, plus the gains from the last two days add up to 5.04% returns for the holiday abbreviated week. The Phisix essentially erased two weeks of profit taking and has swiftly recovered its latest highs. This extrapolates to the Phisix 10,000 for 2013 is back in play.

I anticipated that the recent correction would likely be short-lived, a week back I wrote,

This week’s correction mode in the Phisix may possibly continue, perhaps headed towards a 5-10% level from the recent peak. However, such retrenchment phase is likely to be one of a short duration.

The upgrade report from Bloomberg

An exit from so-called junk status bolsters Aquino’s drive to transform the nation into one of the region’s fastest-growing economies 15 years after the Asian financial crisis of 1997-98. The upgrade may also boost capital inflows and complicate the job of the central bank as it tries to rein in an appreciating peso and curb asset bubbles.

Curb asset bubbles?

I also noted that the lowering of interest rate of special deposit accounts (SDA) will help fuel this rebound.

And the manic phase will be accompanied by an intensive accumulation of systemic credit which will most likely be supplemented by last week’s easing of the 1.86 trillion peso Special Deposit Accounts (SDA) by the BSP.

Remember, the BSP explicitly desires that the banking system’s money deposited at the BSP be “withdrawn” and “circulated” in the economy, since according to them SDA money will hardly extrapolate to inflation risks.

In other words, the BSP’s recent SDA policies will account for as providing implicit support to the domestic asset markets, in addition to its current record low interest rates.

This doesn't seem to be "reining" asset bubbles. Instead the BSP has been providing fuel to the combustion.

 

And since mania, for me, signifies as the yield chasing phenomenon that have been rationalized by voguish themes or by popular but flawed perception of reality, enabled and facilitated by credit expansion

Well the so-called upgrade on local debt only means MORE debt and MORE yield chasing.

Here is the latest debt figures from the Bangko Sentral ng Pilipinas (BSP):

Loans for production activities—which comprised more than four-fifths of banks’ aggregate loan portfolio—grew at a slower pace of 15.2 percent in February from 16.0 percent (revised) in January. Similarly, the growth in consumer loans eased slightly to 12.0 percent in February from 12.4 percent (revised) in January due mainly to the slowdown in credit card receivables and other household loans.

The expansion in production loans was driven primarily by increased lending to the following sectors: real estate, renting, and business services (25.1 percent); financial intermediation (27.2 percent); wholesale and retail trade (14.2 percent); manufacturing        (7.3 percent); and, electricity, gas and water (12.7 percent). Meanwhile, declines were observed in lending to agriculture, hunting, and forestry (-13.3 percent) and in other community, social and personal services (-3.9 percent).

Putting it in perspective:

The BSP omitted (purposely or accidentally) in their press release the construction debt data, which skyrocketed by 57% year on year. 

But both financial intermediary and real estate loans are above 25%, which has been more than 3x statistical economic growth. 

Household leverage (demand) has also been ballooning but at a much slower pace than the supply side. But again growth in household debt essentially is double the rate of economic growth.

And the jump in debt figures has translated to a substantial growth in money supply, again from the BSP (bold mine)

Domestic liquidity (M3) grew by 9.9 percent year-on-year (y-o-y) in February to reach P5.0 trillion. This growth was slightly slower than the 10.2 percent (revised) expansion recorded in the previous month. On a monthly basis, seasonally-adjusted M3 expanded at a slower pace of 0.6 percent compared to the 0.8 percent (revised) month-on-month growth in January.

The growth in money supply was driven largely by the expansion in net domestic assets (NDA). NDA grew by 19.7 percent y-o-y in February from 21.9 percent (revised) in the previous month following the sustained increase in credits to the private sector, buoyed by the robust lending activity of commercial banks. Claims on the private sector increased by 14.9 percent in February. By contrast, claims on the public sector contracted at a slower pace of 4.3 percent in February compared to the decline of 4.6 percent (revised) in the previous month, as the growth of National Government deposits continued to slow down.

Move along, nothing to see here. No asset bubbles according to the government and their apologists.

 

Of course the upgrade will also inspire more debt, not only from the private sector but also from the government. As I recently pointed out

I may add that credit rating upgrades by international credit rating agencies will further whet on the appetite of domestic political authorities to wantonly engage in more public spending that may indeed help propel an artificial boom but at the bigger cost to the society in the future through an economic bust, higher taxes and higher costs of living.

So you have debt growing a lot faster than the economy. Also supply side debt has been outpacing the demand side.

The Philippine credit bubble has likewise been reflected on the Philippine Stock Exchange via sectoral performance.

This week’s action reveals that the main beneficiary of sharp bounce has been the property sector.

On a year to date basis, the property-financial-holding sectors remain as the biggest winners.

One must be reminded that the troika of US credit rating agencies (Fitch, Moody’s and S&P) not only failed to see the US crisis, but were part of the problem; they played a significant role in advancing economic and financial imbalances that led to the crisis.

The credit rating upgrade just shows how the mania phase of Philippine asset bubbles has been running on full throttle. 

It also suggests of more miseries ahead. As I previously wrote,

Remember massive government spending means more debt or higher taxes or higher consumer prices in the future. And credit upgrades only add to this incentive to borrow rather than to institute real reforms.

Instead of a blessing, such development represents a blight. It is a Trojan horse.

Why Entrepreneurship is an Art

Marketing guru Seth Godin says it best

Studying entrepreneurship without doing it...

...is like studying the appreciation of music without listening to it.

The cost of setting up a lemonade stand (or whatever metaphorical equivalent you dream up) is almost 100% internal. Until you confront the fear and discomfort of being in the world and saying, "here, I made this," it's impossible to understand anything at all about what it means to be a entrepreneur. Or an artist.

That’s why you don’t learn entrepreneurship in classrooms.

Stagflation will Add to Cyprus, Eurozone woes

Contra to the mainstream meme that the world has been faced with deflation*, stagflation has been the current problem. 

*the definition of inflation and deflation has been mangled to mean alot of different things.

That’s according to Zero Hedge (bold and italics original)

Even more bad news for Cyprus, which now has not only a depression to look forward to but a depressionary stagflation to boot. Bloomberg has ranked countries based on their risk of stagflation based on the following methodology: First, the average real Gross Domestic Product and average Consumer Price Index was calculated for each country from 2012 to 2014. Then the Stagflation Score was determined by multiplying average real GDP by average CPI if the average real GDP was negative or by dividing average real GDP by average CPI if the average real GDP was positive. The lower the score, the greater the risk of stagflation. The winner, or loser at the case may be? Cyprus was found to be most at risk of stagflation with a Stagflation Score of -4.733, followed by Portugal (-2.671), Italy (-2.133), Spain(-1.745) and Greece (-1.366). Switzerland was ranked least at risk with a score of (7.560), followed by China (2.612) and Japan (2.446).

If stagflation becomes a real menace, then this will impact the “risk ON” phase of global financial markets.  And gold and commodities will recapture the public’s attention

Example of the Mania Phase: Awards Received by the Bank of Cyprus

Euphoric sentiment is one principal trait of the manic phase; particularly the feeling of overconfidence, grandeur,invincibility and or infallibility. 

As I previously pointed out it had been no different in Cyprus whose banking system thought they were “immune” or "decoupled" to the euro crisis such that they even passed the “stress test” conducted by the European Banking Authority in 2011.

Chris Rossini at the Economic Policy Journal enumerates the string of awards that Bank of Cyprus received during their heyday or the pinnacle/climax of the bubble cycle.

The Bank of Cyprus, which is stealing up to 40% of deposits from those with more than 100k Euros, had quite a veil of legitimacy. 

Check out the prestigious awards that the bank recently earned:

Feb 25 2011 - The Banker magazine ranked the Bank of Cyprus amongst the leading banks of the world.

Apr 4 2011 - The prestigious Global Finance financial magazine honours the Bank of Cyprus with the title of Best Bank in Cyprus.

Jun 15 2011 - The Bank of Cyprus has succeeded in being included in the category of «Best Banking Organizations» worldwide at the annual World Finance Banking Awards of the internationally acclaimed financial magazine World Finance.

Sept 13 2011 - In the framework of its annual “Awards for Excellence 2011”, the Bank of Cyprus was named Best Bank in Cyprus by the international financial magazine EUROMONEY.

Nov 1 2011 - The Bank of Cyprus was awarded the ‘JP Morgan Chase Quality Recognition Award’ for its funds transfer operations for the eleventh consecutive year.

Dec 1 2011 - The Bank of Cyprus was named “Bank of the year 2011” in Cyprus by the prestigious international financial affairs publication The Banker, during its annual “Bank of the Year Awards 2011.”

Feb 9 2012 - Bank of Cyprus has been named as the Best Bank for Private Banking in Cyprus, by the internationally acclaimed magazine EUROMONEY.

Mar 23 2012 - The international financial magazine ‘Global Finance’ has named the Bank of Cyprus the best banking institution in Cyprus in the Developed Markets category of “World’s Best Banks Awards”.

Sep 26 2012 - Bank of Cyprus has been awarded the ‘2011 Citi Performance Excellence Award’ by the world-renowned financial organization Citibank, for global electronic payments leadership and excellence.

Notice that the accolades flowed from 2011 until September of 2012, which was only a few months back.

Then events unhinged or unglued pretty fast.

It has been part of the mainstream’s propaganda to say that current system based on fiat money has been hunky dory and functioning well. The reality is that it hasn’t.

Yet when aura of superiority, augustness and opulence have been propped up by a credit bubble, watch out. 

This applies to any country or region, Asia and the Philippines notwithstanding.