Monday, October 07, 2013

Phisix: Moody’s Sees Bubbles as Structural Shift to Higher Growth

As compared with liberal democracy, a system of social democracy offers greater political profit for policy measures that promote poverty and dependence.  A system of social democracy creates two sets of people who have interests that support the maintenance of poverty and dependence to a greater extent than would be true under liberal democracy.  One set is the recipients of state-supported services, who are content with the terms of the trade by which they replace independence with state support and who might offer their voting support in return.  The other set is the providers of those services, for whom the continuation of poverty and dependence is a source of income--Richard Wagner

In a trifecta of credit rating upgrades, the Moodys rationalizes last week’s upgrade of the Philippines as “The Philippines’ economic performance has entered a structural shift to higher growth, accompanied by low inflation”[1]
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Figure 1: Credit and Statistical growth

Speaking of “structural shift”, behind whatever statistical growth extolled by Moodys lurks the perils which has been overlooked and dismissed by the mainstream, including the big 3 credit rating agencies…a credit bubble.

As I have repeatedly been pointing out, the supposed “structural shift” in the economic growth dynamics represents an escalation of imbalances between supply and demand financed by a credit boom.

The domestic central bank, the Bangko Sentral ng Pilipinas (BSP) recently released the August data of the banking system’s credit growth[2]. The August figures reveals that the financial market meltdown during the last week of the said month has largely been discounted and that credit growth appears to be reaccelerating upwards, specifically in what I call as the bubble sectors: property, construction, trade (shopping mall bubble) and hotel and restaurant (casino bubble).

Credit growth on a year to year basis in the construction sector zoomed to its highest level for the year at an incredible 58.03%. Credit growth in the hotel and restaurant sector spiked to 35.11%, wholesale and retail trade was steady at 14.32% while real estate, renting and business services, as well as, financial intermediation bounced from the July lows to grow by 21.89% and 4.09% respectively over the same period as shown in the top right window of Figure 1.

Credit from these industries account for 49.17% of total banking economic production loans.

Credit growth in the manufacturing sector, which I don’t see as in a bubble, expanded 10.1% also the highest level for the year but the rate of growth has oscillated between 1-10%, or for an average growth rate of 5.845%.

This is unlike the growth rate in the bubble sectors where, with the recent exception of financial intermediation, has grown steadily beyond the growth rate of the demand side.

Consumer credit growth has only grown 11.52% in August largely led by car sales which inflated by 15.9% (y-o-y).

Remember only about 21% of the Philippine households has access to the formal banking system. This means that unless the banking penetration level magically multiplies exponentially or that the informal economy massively booms, demand side growth will be inadequate to keep pace with the supply side. And this also means that big players who constitute the supply side and who has access to credit markets (banking and bond markets) have far greater sway on statistical growth figures than the consuming public[3].

This is why the mainstream like the New York Times article on Moodys upgrade on the Philippines has, like the rest of ivory tower based experts, been lost in understanding or explaining the Philippine political economy “Surging growth has yet to translate to wealth for the country’s millions of poor”. Zero bound rates represent a transfer of resources or subsidy to the wealthy via asset bubbles. Yet interpreting statistics as economic analysis is mistaking the forest for the trees.

As a side note: A massive boom in the informal economy signifies impossibility. The informal sector exists in response, or as avoidance to the burdens of regulations and taxes. If the informal booms then they will obviously lose their cloak of invisibility from political authorities. The curse of informal economy is that their growth will be limited vertically or on the upside but whose scalability in growth will be horizontal (there can be more informal players as taxes and regulations increase)[4].

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Figure 2 Demand side Growth

And this flagrant imbalance can be seen from the perspective of household final consumption expenditure[5] (HFCE), see figure 2, which in the second quarter only expanded by 5.2% (in constant prices) relative to the supply side growth say construction 17.4%, real estate, renting and business services 9.5%, financial intermediation 9.5% and trade 7.3% (at constant prices) see bottom window of Figure 1.

Another note: The credit growth figures I cited are of August, while NSCB’s data are as of the 2nd quarter’s, but it is important to point out that August figures are most likely to translate to spending activities for the month or for September. This means that if the August credit trends will be maintained and reflected on September data then statistical growth will remain at the consensus expectations. But the longer the artificial boom is, the greater the imbalances, the bigger the destabilizing adjustments.

Such relative oversupply particularly on the bubble sectors are symptoms of an outrageous misallocation of resources, the Php 64 billion question is how will such ‘structural’ imbalances be resolved?

The Philippine government has been lucky that remittances (both informal and formal) and foreign currencies revenues from BPOs has masked the adverse effects from its bubble blowing policies for now.

Yet how are blowing bubbles which Moody’s sees as “structural shift to higher growth” sustainable?

Credit Rating Upgrades: Those whom the gods wish to destroy they first make mad

Latin writer Publilius Syrus once wrote[6] “Whom Fortune wishes to destroy she first makes mad”. This is a variant of a popular quote “those whom the gods wish to destroy they first make mad” misattributed to a Greek playwright Euripides[7]

The Bible warns how this takes place:
Pride goes before destruction, a haughty spirit before a fall. (Proverbs 16:18)[8]
Yet even the Bible warns about the hazards of overconfidence as expressed by pride via the “This time is different” outlook

While credit rating upgrades has reinforced on the optimism bias by the mainstream, little is appreciated how ‘blessings’ from credit rating agencies signify as ‘kiss of death’ for the supposed beneficiaries.

Hasn’t it not just been in January of 2012, when Moody’s joined the bandwagon of upgrades on India and Indonesia?

Indonesia in January 2012 “regained its investment grade ratings in 14 years” says the Bloomberg[9].’

I have pointed out earlier how Indonesia seemed like a ASEAN’s Canary in the Coal Mine[10]

Also in January of 2012, India's rating for short-term foreign currency bank deposits has also been upgraded from speculative to investment grade by Moody’s according to India’s Economic Times[11]

Have not the same countries been the focal point of the recent selloffs?

Warren Buffett and many major investors have already cut their losses in India. Some fear of the heightened risks of an Indian sovereign debt crisis[12].

India has already an inverted yield curve which usually precedes a recession or a crisis.

And even as India’s financial markets has stunningly recovered from the recent bout of volatility (yes India’s equity benchmark even broke to new highs recently) in the real economy, “Restructured loans” according to a recent report from Bloomberg[13] “are defaulting at a record rate at Indian banks”

The markets appear to be buying into absurdity that the FED un-taper will serve as antidote to India’s real economic problems. Beats me, but an inverted yield curve and record defaults on the banking system are hardly signs of optimism. They are in contrary ingredients for a market shock and or a crisis.

Meanwhile S&P raised Indonesia’s credit rating in April of 2011 to the highest level since the Asian Crisis in 1997 due to supposedly a “resilient economy” and “improving finances”[14]. In two years or in May of 2013, the S&P apparently changed their minds and downgraded Indonesia to stable from positive[15]. So what happened to resilient economy and improving finances? 

After the Indonesian downgrade, this September, the S&P warned that India’s has greater chances of a downgrade than Indonesia[16]. Whatever happened to their earlier accolades? Fun times is over? Why?

Curiously the S&P warns that an Asian banking crisis shouldn’t be ruled out if China’s credit bubble implodes which poses as a “threat to the region’s financial stability”[17]

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Figure 3: Foreign banking claims on Asian Borrowers

I guess from the Moody’s actions on the Philippines, the US credit rating agency may have come to believe in the tooth fairy of “decoupling” which is in contravention to today’s highly globalized economy

Yet evidence proves otherwise. Cross-border credit to borrowers in Asia Pacific or intra-regional borrowings as shown via its growth rates in Figure 3 left window, remain a significant dynamic in the Asia and the global banking system. The same holds true for credit provided by foreign banks’ offices located in Asia Pacific which stood at end 2012 at $2.4 trillion[18] (right window)

This implies that should a China meltdown occur as the S&P fears, dismissing the risks of a contagion would signify a ridiculous and reckless assumption. The trade, banking-financial and labor channels are all potential transmission mechanisms for a contamination. 

ASEAN’s June and August financial market meltdown has already provided clues that contagion risks are for real and represents a clear and present danger despite the proclamations of ivory tower experts.

Yet it’s not just Moody’s though. Despite a horrible track record of predictions, late September, the IMF declared of the Philippine as immune to a FED tapering[19]

Lately, the Asian Development Bank joined the ranks of the “all hail the Philippine economy”, where they claim that the Philippine economy is “expected to continue to perform strongly”[20] relative to weaker neighbors.

“Strongly” really depends on the actions of the global bond vigilantes.

Interestingly here is ADB’s 2007 outlook for the US and Asia in 2008[21] (bold mine)

If growth in the United States (US) lurches down, developing Asia would not be immune. But the tremors from a downturn in the US are likely to be modest and short-lived even if it falls into recession. Available evidence suggests that, depending on timing, severity, and duration, a US recession could clip growth in developing Asia by 1–2 percentage points. If a synchronous steep downturn in the US, euro zone, and Japan were to occur—an event that currently seems improbable— growth in developing Asia would be at greater risk. But stout reserves, improved financial systems, and scope for policy adjustments put the region in a better position to weather any storm.
Interesting because the ADB correctly assessed of the contagion, but briskly veered away from embracing such position and opted to dismiss such risks as “seems improbable” by raising the same pretext which the mainstream has been using today “stout reserves, improved financial systems, and scope for policy adjustments put the region in a better position to weather any storm”

We know that from the hindsight, contra ADB’s rationalization, the “Great Recession spread to Asia rapidly and has affected much of the region” to quote the Wikipedia[22].

Then, maybe the ADB just talked on the interests of their fund providers or the “members' contributions” where the US and Japan represent as the biggest voting members of the ADB[23] with 12.78% weight each. In short despite the recognition of risks, the ADB worked as a spinmeister for their clients.

Going back to what seems as the curse of the credit rating agencies; credit rating agencies have almost always been the last to know or has functioned reactive agents to an unfolding event. They hardly saw risks.

Writing at the Project Syndicate New York University Professor Roman Frydman and University of New Hampshire Professor Michael D. Goldberg asked why credit agencies tend to underappreciate risks[24]
Until six days before Lehman Brothers collapsed five years ago, the ratings agency Standard & Poor’s maintained the firm’s investment-grade rating of “A.” Moody’s waited even longer, downgrading Lehman one business day before it collapsed. How could reputable ratings agencies – and investment banks – misjudge things so badly?
In the last crisis such late reaction by the big 3 seems understandable. 

That’s because these agencies played a big role in the inflation of the mortgage-securitization bubble. They functioned as the stamp pad for issuers of slicing dicing and mixing of toxic securities to sell into a market restricted by law to hold the safest AAA securities.

These credit rating agencies were responsible for giving the highest ratings to “over three trillion dollars of loans to homebuyers with bad credit and undocumented incomes through 2007. Hundreds of billions dollars worth of these triple-A securities were downgraded to "junk" status by 2010, and the writedowns and losses came to over half a trillion dollars. This led "to the collapse or disappearance" in 2008-9 of three major investment banks (Bear Stearns, Lehman Brothers, and Merrill Lynch), and the federal governments buying of $700 billion of bad debt from distressed financial institutions”, notes the Wikipedia.org[25]

The 3 biggest credit rating agencies were essentially in rabid denial of their mistakes as manifested in the collapse of the institutions that bought into their deception.

The last to know reactions by credit rating agencies had equally been apparent during the boom bust cycle that led to the Great Depression in the 1930s

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Figure 4: Credit ratings changes during the Great Depression

As one would note from figure 4, credit rating upgrades dominated in 1929-1930 even when the October 29, 1929 Black Tuesday crash in Wall Street signalled the advent of the Great Depression[26]

In a paper presented to the seminar sponsored by the Bank of International Settlements last January, University of Geneva’s Professor Marc Flandreau enunciates the role of the credit rating agencies[27] (bold mine)
An interesting difference is between the reaction of credit agencies and Crédit Lyonnais. In the middle of the Russian confidence crisis, Crédit Lyonnais told investors, “Oh, Russia is really safe. What we told you was correct”. And they kept lending to Russia, and things were sorted out for a while at least. On the eve of WWI the Russian economy was booming again and it took the First World War and a few other things occurring a number of years later for default to eventually come. But in the case of the interwar crisis, rating agencies just ran away. When trouble started, they began downgrading massively. In the case of Moody’s, for instance, in one week, after the sterling crisis in September 1931, 80% of the sovereigns it rated were being downgraded. When you look at the profile of sovereign upgrades and downgrades by Moody’s, you have a line that is very similar to what we have seen in the most recent crisis. Suddenly, beliefs are updated and it often means massive downgrades. It’s not who you are, it’s who makes your reputation.
In and of itself, the big 3 credit rating agencies have not been entirely a jinx. Like momentum or yield chasers, these credit rating agencies tend to piggyback on a blossoming fad whether to the upside or to the downside. 

On the upside, they frequently misinterpret inflationary booms as positive structural economic changes. They hardly foresee the risks involved and their upgrades compound on the manic “this time is different” outlook.

And the frequency of vacillation of credit rating changes only underscores how an army of experts dependent on econometric models usually misreads real economic developments.

It has been a different story for 2007-2008 crisis. These agencies played a critical principal-agent conflict-of-interest role in the parlaying toxic “structured finance” securities to the public as they had been paid by the issuers which meant that determination of credit ratings worked in the interest of the issuers.

The curse from the credit rating upgrades has mostly been in the political arena. Credit rating upgrades emits a wrong impression on policymakers. Policymakers interpret upgrades as licenses to engage in irresponsible borrowing and spending policies. Upgrades also extrapolate as rewards for policymakers to maintain bubble policies.

Since credit ratings influence social policies, credit ratings are susceptible to politicization. The countersuit between the US government, which charged the S&P of supposed ignoring of the company’s own standards during[28], and the S&P which countercharged that the US lawsuit signified as an harassment or retaliation for the S&P’s downgrade of the US government in August of 2011[29] is an example.

So could the trifecta of credit rating upgrades have been a reward for the government’s plan to allow US bases in the Philippines[30]?

At the end of the day, credit rating upgrades seem like whom the credit rating gods wish to destroy they first make mad

SMC and the Confidence Game

The big 3 credit rating agencies have failed to account for the evolving business models underpinning the “structural shift into higher growth” via increased leveraging.

The following doesn’t serve as recommendations. Instead the following has been intended to demonstrate the shifting nature of business models by major firms particularly from organic (retained earnings-low debt) growth to aggressive leveraging or the increasing use of leverage to amplify or squeeze ‘earnings’ or returns, the deepening absorption of increased risks in the assumption of the perpetuity of zero bound rates, and how accrued yield chasing by the industry induced by zero bound rates has pushed up property prices

Two weeks back I brought to the surface the issue of what seems as the increasing use of what economist Hyman Minsky coined as the “Ponzi financing” or the increasing dependence on the use of debt and/or asset sales in order to finance existing principal and interest liabilities which funds from operations have been inadequate to service[31]. I call this debt based Ponzi-financing as Debt IN, Debt OUT

I pointed to San Miguel Corporation [PSE: SMC] as my initial example of a company undergoing such change, which not only increases the company’s risk profile but as well as systemic financial risks, which authorities irresponsibly ignores.

Last week, SMC reportedly a struck deal with the Gokongwei-led JG Summit where the latter will buy the remaining 27.1% equity of the former’s holdings in legislated monopoly electric distribution franchise Meralco[32] [PSE: MER].

Combined with SMC’s sale of 5.7% Meralco shares last July, which reportedly raised Php 17.4 billion, SMC’s exit on Meralco extrapolates to about Php 100+ billion of proceeds. If SMC decides to use this to pay what they disclosed as Php 424 billion worth of debt, then this means SMC will still have an enormous debt burden of Php 324 billion.

With the Meralco sale, SMC has yet a long way to go to bring her business back to the conservative fold.

Since the company’s free cash flows remain a speck or fraction of the huge debt burden, this means that SMC will need to hastily sell more assets and or increase free cash flows to mitigate her risk profile. Otherwise continued dependence on the debt markets mean that SMC’s liabilities will continue to balloon overtime which again would only magnify on her vulnerabilities.

Yet like all forms of Ponzi schemes, Ponzi financing is unsustainable.

Some suggested that SMC’s quandaries represent a ‘liquidity’ problem. Perhaps. The liquidity-solvency dilemma really depends on how much of SMC’s assets have been attached as collateral to existing debt, and importantly the ‘valuation’ of assets in times when the distress occurs.

In other words, we will never know of SMC’s real conditions until the realization of the tail event. But relying on current financial figures from today’s boom to generalize of a liquidity problem rather than a solvency problem would signify as severe underestimation of risks while simultaneously overestimation of rosiness from statistical figures.

In this regards we can say that despite losing 99% of his $30+ billion in just over ONE year, the former Brazilian billionaire Eike Batista, chairman of conglomerate EBX group who was ranked by Forbes as seventh wealthiest man in early 2012, is still liquid since he still has $200 million left[33]. Except that there are still claims to his remaining $200 million.

Mr. Batista lost his fortune due to a combination of factors: crash in the precious metals industry, botched oil exploration project and huge debt[34]

But to Mr. Batista’s OGX Petroleo & Gas Participacoes SA bond holders (who are left with 5.3 to 15 cents to a US dollar[35]) and to shareholders of Batista’s 3 listed companies[36], OGX, LLX and MMX, and perhaps even to the laid off employees and unpaid suppliers of Mr. Batista’s companies, the Batista case surely hasn’t been a liquidity one, regardless of the technicalities, because losses endured by counterparties have been for real.

Yet even solvent firms can also be brought down by illiquidity as in the case of United Kingdom’s Northern Rock during the 2007-8 crisis.

Northern Rock was reportedly “solvent” but had been impaired by her overreliance on money market funds. When the money markets froze, Northern Rock was compelled to approach the Bank of England (BoE) for liquidity support. Learning of this, depositors went into a panic. Northern Rock experienced a bank run or as Wikipedia.org explains, the first bank in 150 years to suffer a bank run after having had to approach the Bank of England[37]

However, the Bank of England mismanaged their role as lender of last support which led to the bank’s collapse, Cato’s Steve Hanke argues[38],
In a flash, Northern Rock went from being solvent (if temporarily illiquid) to bust. Indeed, it was government failure – the BoE’s bungled attempt to provide emergency liquidity – that transformed the Northern Rock affair from a minor, temporary liquidity problem to a major solvency crisis.
In a world of fractional reserve central banking system which promotes debt based spending as a primary tool of growth, the confidence game serves as THE critical component in the delineation between illiquidity and insolvency

As Harvard economist Carmen Reinhart and Kenneth Rogoff rightly explains of the vacillation of the confidence game[39], (bold mine)
Economic theory tells us that it is precisely the fickle nature of confidence, including its dependence on the public’s expectation of future events, that makes it so difficult to predict the timing of debt crises. High debt levels lead, in many mathematical economics models, to “multiple equilibria” in which the debt level might be sustained –or might not be. Economists do not have a terribly good idea of what kinds of events shift confidence and of how to concretely assess confidence vulnerability. What one does see, again and again, in the history of financial crises is that when an accident is waiting to happen, it eventually does. When countries become too deeply indebted, they are headed for trouble. When debt-fueled asset price explosions seem too good to be true, they probably are. But the exact timing can be very difficult to guess, and a crisis that seems imminent can sometimes take years to ignite. Such was certainly the case of the United States in the late 2000s. As we show in chapter 1, all the red lights were blinking in the run-up to the crisis. But until the “accident,” many financial leaders in the United States-and indeed, many academics-were still arguing that “this time is different.”
SM Investment’s Shift to Debt In, Debt Out?

Any entity that relies heavily on debt for finance will subject to the whims of the confidence game.

The same condition holds true for the flagship company, SM Investments [PSE: SM], of the richest family of the Philippines, Mr. Henry Sy & Family who at $12 billion worth (2012) has been also ranked 68th in the world according to Forbes[40].

At the Philippine Stock Exchange[41] [PSE: PSE] SM covers five core businesses through its subsidiaries, namely: shopping mall development and management (SM Prime Holdings, Inc.), retail (SM Department Stores, SM Supermarket, SM Hypermarket and SaveMore Stores); financial services (BDO Unibank Inc. and China Banking Corporation) and real estate development and tourism (SM Land, Inc., SM Development Corporation, Costa Del Hamilo, Inc. Highlands Prime, Inc. and Belle Corporation) and hotels and conventions (SM Hotels, SMX Convention Specialists, Hotel Specialists - Tagaytay, Cebu and Pico).

SM currently ranks second biggest market capitalization in the main 30 company benchmark of the PSE, the Phisix, with Php 650.324 billion as of Friday’s close. Two of SM’s subsidiaries BDO Unibank [PSE: BDO] and SM Prime Holdings [PSE: SMPH] have also been part of the Phisix and has free float capitalization weighting of 4.55% and 3.26% respectively (as of Friday)

Again this is a reminder that this analysis serves not as recommendations but to demonstrate of the evolving character of business models brought about by zero bound rates.

For me, the best place to spot signs of troubles has been in the cash flow department.

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Figure 5: SM 2nd Quarter Cash Flow Statement


In the first semester of this year[42], SM Investments spent Php 7.4 billion for project expansions. Free cash flows from SM’s operations netted only Php 2.9 billion pesos. However, SM paid for Php 71 billion on debt servicing (Php 30.942 billion long term, Php 34.28 billion on bank loans, and Php 5.844 on interest payments). The lack of free cash prompted SM to resort to borrowing long term Php 88.353 billion pesos (Php 35.341 billion long term debt and Php 39.3 in bank loans).

For the same period in 2012, SM Investments undertook a massive expansion, spending Php 50.299 billion, posted negative free cash flow from operations of Php 13.865 billion. SM also paid for Php 30 billion in debt servicing. With hardly any cash flowing in SM raised debt Php 88.354 billion to finance these liabilities.

While income before taxes grew 18.67% from 2013 to 2012, growth in interest payments (16.15%) and depreciation (21%) chipped away at income before working capital changes which only grew by 7.5%.

Nonetheless free cash from operations has been eclipsed by a 32% jump in debt payments even as availments of new debts fell by 14.8%.

From the first semester’s free cash activities, cash short SM seems to have taken SMC’s path of Debt IN, Debt OUT but at a more modest scale.

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Figure 6: SM 2012 Annual Cash Flow Statement

From the 2012 annual report[43], SM’s income before taxes grew 14.72% in 2012 and 17.88% in 2011. However, SM’s has been aggressively investing having seen a doubling and a tripling of investment spending in 2011 and 2012.

While the first semester free cash flow in the June 2013 report showed a negative Php 13.865 billion, the 2012 statement says that free cash flow ballooned to Php 30.967 billion.

Nonetheless the free cash flow has been inadequate to service debt which added up to Php 80.324 billion in 2012. So SM borrowed Php 133.678 billion in 2012 to cover for the deficits.

Availment of new debt spiked by 162% in 2012 coming from a decline of 10.16% in 2011, whereas debt servicing bulged by 64.4% in 2012 nearly double the growth of 36.1% in 2010.

However free cash as % of debt service has been at 38.55% in 2012, 38.5% in 2011 and 31.84% in 2010.

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Figure 7 SM Long Term Debt

SM long term debt picture reveals that floating rates account for 21.6% of the Php 169.376 billion liabilities. US dollar denominated loans constitutes a bigger segment or 57.06% of the total.

While SM seems hardly in the same boat as San Miguel yet, the trend so far has been to extract earnings growth or returns from aggressive debt financed expansion. Such massive expansion reveals how SM anticipates a prolonged period of zero bound rates and an extended economic boom, by taking on more leverage and at the same time increasing interest rate, currency and credit risks. So far under present booming conditions, SM’s cash flows have been significant enough to pay for the leverage.

SM may become vulnerable to her debt exposure from a business or economic slowdown or when the interest rate environment alters or when there will be substantial fluctuations in the peso (although SM declares that it uses derivatives long-term currency swaps, foreign currency call options, interest rate swaps, foreign currency range options and non-deliverable forwards to hedge the risks).

With regards to asset valuation, SM also discloses[44] that “The valuation of investment properties was based on market values using income approach for income-generating properties and cost approach or market data approach for nonincome-generating properties, depending on whether there is an active market for these properties. The fair value represents the amount at which the assets can be exchanged between a knowledgeable, willing seller and a knowledgeable, willing buyer in an arm’s length transaction at the date of valuation, in accordance with International Valuation Standards as set out by the International Valuation Standards Committee”.

In short current valuations are based on inflated values.

So Moody’s structural shift to higher growth is really higher growth from bigger acquisition of debts even seen from a micro or company-to-company perspective.

Sure markets may continue to rise, but so will risks.

To paraphrase John Maynard Keynes, markets can remain irrational longer than one can stay solvent




[2] Bangko Sentral ng Pilipinas Bank Lending Expands Further in August September 30, 2013



[5] National Statistical Coordination Board Household Final Consumption Expenditure 2nd Quarter 2013 Gross National Income & Gross Domestic Product by Expenditure Shares



[8] Biblegateway.com Proverbs 16:18 (New International Version)



[11] Economic Times Moody's raises India to investment grade January 11, 2013





[16] Businessworld India India Downgrade Risk Higher Than For Indonesia: S&P – September 3, 2013

[17] Wall Street Journal Real Times Economics Don’t Rule Out an Asia Banking Crisis, S&P Says. October 3, 2013

[18] Bank of International Settlements BIS Quarterly Review International banking and financial market developments June 2013 p.17-18


[20] Asian Development Bank Developing Asia Slowing Amid Global Financial Jitters October 2, 2013

[21] Asian Development Bank Developing Asia Slowing Amid Global Financial Jitters October 2, 2013


[23] Asian Development Bank FINANCIAL REPORT 2012 p 54-55

[24] Roman Frydman and Michael D. Goldberg Did Capitalism Fail? Project Syndicate September 13, 2013



[27] Marc Flandreau Do good sovereigns default? Lessons of history p.21 Sovereign risk: a world without risk-free assets? Proceedings of a seminar on sovereign risk including contributions by central bank governors and other policy-makers, market practitioners and academics Basel, 8–9 January 2013 Monetary and Economic Department July 2013

[28] Wall Street Journal U.S. Sues S&P Over Ratings February 5, 2013




[32] Inquirer.net Gokongwei buys 27% stake in Meralco September 30, 2013

[33] Wikipedia.org Eike Batista



[36] Business Insider And as went Eike, so went Brazil. The Complete Story Of How Brazilian Tycoon Eike Batista Lost 99% Of His $34.5 Billion Fortune October 3, 2013


[38] Steve H. Hanke A Threadneedle Street Kerfuffle Cato Institute February 10, 2013

[39] Carmen Reinhart and Kenneth Rogoff This Time is Different Eight Centuries of Financial Folly xlii-xliii Princeton University

[40] Forbes.com Henry Sy & family Profile


[42] PSE.com.ph SM Investments Corporation 2nd Quarter Report SEC Form 17-Q June 30, 2013

[43] PSE.com.ph SM Investments Corporation 2012 Annual Report SEC Form 17-A Annual Report December 31, 2012

[44] Ibid SM 2nd Quarter Report p .38

Cracks in the Philippine Property Bubble?

The race to build real estate projects funded by debt by property developers and by the government has been rapidly inflating domestic property prices.

I was surprised to have read an article[1] citing a Jones Lang LaSalle (JLL) research as saying with unabashed confidence that despite soaring prices and massive supply growth there is no glut in the property sector (bold mine)
A sharp increase in new supply began in 2005. Since then, supply growth has averaged more than 30% annually. The total stock of condominiums jumped from 7,000 at the beginning of the millennium, to around 90,000 units by end of 2011, according to JLL. But Jll sees no glut, and CBRE Philippines’ executive director for global research and consultancy, Victor Asuncion, shares the same viewpoint….

Vacancy rates in Makati rose to 11.7% in Q1 2012 from 9.4% a year earlier, according to Colliers. The rise is attributable to new condominiums adjacent to, but not in, Makati - and in regions near Metro Manila.
This is a prime example of Warren Buffett’s advice of “never ask a barber if you need a haircut”. People will continue to talk up their industry regardless of the risks and of reality.

Common sense tells us that if economic growth stands at 7%, and supply side growth is at 30% annually for the last 8 years, unless the law of economics grind to a halt, eventually there will be a glut.

But the statistical economic growth which the article relies on as demand for burgeoning supplies has exactly been driven by the supply side growth of the property sector.

The article says that a remittance based demand is likely to slow due to factors which they refer to World Bank as -Stricter Implementation of the migrant workers’ bill of rights; -Political uncertainties in host countries; and -The slowdown in the advanced economies. The Pollyannaish article also pins on the growth of BPO industry as potential source of demand.

Yet the rise in vacancy rates in Makati by 11.7% from 9.4% while seemingly statistically small represents a 24.45% increase! And this could be the periphery to the core process.

I have pointed out in the past that the Asian crisis was partly triggered when Thailand’s vacancy rates soared to 15%[2].

The article only confirms my observation of a debt driven property bubble.
Total real estate loans country-wide soared by 42% to PHP546.51 billion (US$12.47 billion) in 2012 from the previous year, based on figures from the Bangko Sentral ng Pilipinas (BSP), the country’s central bank. Despite the spectacular growth, the size of the mortgage market remains small at about 5.5% of GDP in 2012.
Of course, the mortgage market is small and will likely remain small because of the limited penetration level by the population on the formal banking industry. This isn’t Singapore or Hong Kong. We should see a bigger enrolment of the population on the banking industry first before we can expect the mortgage markets to expand. And the banking industry would have to downscale regulations for more people to enrol. 

The property market reflects on the conditions of the stock market. 

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Figure 8 World Bank Market Cap as % of GDP

The boom in local stocks which in 2012 market capitalization of listed companies according to World Bank accounts for 105.6% of the GDP[3] has only added 22% for a total of 525,850 accounts for the entire PSE brokerages from 2007[4]. This means that booming stocks benefits less than 525,850 accounts (individuals or corporations) or particularly the 83% of market capitalization controlled by a few families whom are now using aggressive leveraging.

The article also notes that “Most houses are sold for cash or pre-sold. Property buyers also face high transaction costs, corruption and red tape, fake land titles and substandard building practices.” The cash transactions are manifestations of clout of the informal economy and the dearth of access to the formal banking sector. And part of the preselling has been financed by developers themselves which the World Bank calls as the domestic shadow banking industry[5].

Finally here is the kicker, from the same article “Recovery from the subsequent crash has been slow. Nominal prices are now back above 1997 levels, but prices are still 46% below pre-Asian crisis peak levels in real terms (Q1 2012) – an astonishing reminder of how much the crash cost.”

Real terms (based on government statistics) don’t seem as an adequate or accurate representation property values.

My neighbourhood store raised the prices of my favorite merienda lumpia by 20% about 2 weeks ago. My daughter’s favorite pie Banoffee recently jumped by 10%. My favorite vendor who maintains his fishball price at 50 cents has shown a considerable shrinkage in the size of his products. I asked why this is so, he says that his supplier can’t raise prices so they deflate the size of their products. Real time economics from the man on the street. Even government’s lotto prices has recently been doubled which accounts for 3.93% lotto inflation. My neighbourhood rental prices have increased by about 10%.

The statistical world is far from the real world. It seems ivory tower economists don’t ever spend at all to know of this reality.

And by the way, a domestic central banker admits that CPI prices don’t accurately reflect on real inflation. At a Bank of International Settlements paper BSP Deputy Governor Diwa C Guinigundo writes[6] (bold mine)
Excluding asset price components from headline inflation also has little effect. Currently, the CPI includes only rent and minor repairs. The rent component of the CPI is, however, not reflective of the market price because of rent control legislation. The absence of a real estate price index (REPI) reflects valuation problems, owing largely to the institutional gaps in property valuation and taxation. While the price deflator derived from the gross value added from ownership of dwellings and real estate could represent real property price, it is also subject to frequent revisions, making it difficult to forecast inflation.
There you have it. The cat is out of the bag. Philippine CPI inflation is NOT a reliable indicator of inflation.

Importantly, real estate nominal prices have reached the 1997 highs.

And lastly I often hear officials say how much a backlog in demand for property in the low end market as a retort against suggestions of bubbles. They have suggested that the shortage of the housing industry is as much as 7 million units[7].

The problem with this concept is that low cost and socialized housing is not a market based demand, but rather a political demand for housing.

The basic assumption is that lack of housing is mainly a pecuniary factor caused by inequality or the lack of social justice. So the government undertakes programs to expand homeownership via socialized or subsidized housing.

So for instance when the BSP claims that 68% of households owns or co-owns their houses[8], this leaves 32% of households who don’t own their homes. This includes me. 

So from the government perspective this represents “demand”. Since there are 20.2 million household according to Bureau of Census estimates as of 2010[9], 32% equals 6.4 million!

But homeownership has not just been a function of income. It is also a choice. I personally know of a family who rents their residence at a posh exclusive village in Makati for years even when they can afford to buy 10 of them.

So the reality is that when vested interest groups ask the government to undertake mass housing projects to fill in an imagined demand gap for a cosmetic goal of social justice, the real issue is the transfer of resources from taxpayers to politically connected business firms, bureaucrats and to some welfare beneficiaries.

My guess is that the ongoing leveraging by players in the property sector whom has access to the banking system may be acquiring properties from the 68% of households and selling these projects to the same high end sector whom have been speculating both in stocks and in properties

image
Figure 9 US Homeownership rates

At the end of the day political demand via interventions to attain homeownership goals by blowing bubbles usually end up with the opposite effect. This can be seen in Figure 9[10]

The US experience should be a valuable example where homeownership rate has plunged to almost the 1995 levels even as homeownership programs spanned from different administrations[11].

Property bubbles will hurt both productive sectors and the consumers. Property bubbles increases input costs which reduces profits thereby rendering losses to marginal players but simultaneously rewarding the big players, thus property bubbles discourage small and medium scale entrepreneurship. Property bubbles can be seen as an insidious form of protectionism in favor of the politically privileged elites.

Property bubbles also reduces the disposable income of marginal fixed income earners who will have to pay more for rent and likewise reduces the affordability of housing for the general populace.

Outside the ethics of the property bubbles, the mania as shown by chronic overconfidence by industry participants, nominal prices of real estate at 1997 highs and signs of rising vacancy rates could be seen as a potential red flag especially if the bond vigilantes will reassert their presence.




[1] Global Property Guide House price rises accelerating in the Philippines September 11, 2013





[6] Diwa C Guinigundo Measurement of inflation and the Philippine monetary policy framework Bank of International Settlements

[7] Business Mirror Developers see housing woes worsening September 28, 2013

[8] Bangko Sentral ng Pilipinas 2012 Annual Report



Government Shutdown, Debt Ceiling, Obamacare Showdown and Imaginary Hobgoblins

A short note on the government shutdown, debt ceiling and Obamacare issue which for me has been nothing more than histrionics
Officials of the US treasury[1] and the IMF[2] warns that should there be no increase in the debt ceiling there will crippling effects on economy and financial markets.
While such threats may turn out to be true, it hasn’t been for now
image
Figure 10 US Treasury in the face of the US Government Shutdown

I believe that the bond markets in combination with other markets will determine if such threats are for real.

If there will be a threat of default then markets will be selling bonds first. So far this hasn’t been the case, as US treasury prices (falling yields) has rallied across the curve. Prices of 10 year notes, 2 year (USTU), 5 year (USFV) and 30 year (USB) has mostly rallied from the government shutdown.

Again if the threat of default is real, then we should expect a reversal from the above. Prices fall yields rise. And because political uncertainty will haunt the bond markets this is likely to spillover to the equity markets. So bonds and stocks are likely to drop as US credit default swaps and volatility indices soar. We will see a risk OFF phase if this becomes a reality.

And so with the US dollar to remain pressured as investors are likely to scamper for alternative foreign currency reserve alternatives. I believe that gold will remain mixed until a resolution on this matter occurs.

But unless we see the above scenario, all the politicking amounts to stoking fear as a conventional ploy of the politics of control. In the moving words of the great libertarian H. L. Mencken[3]
Civilization, in fact, grows more and more maudlin and hysterical; especially under democracy it tends to degenerate into a mere combat of crazes; the whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, most of them imaginary. Wars are no longer waged by the will of superior men, capable of judging dispassionately and intelligently the causes behind them and the effects flowing out of them. They are now begun by first throwing a mob into a panic; they are ended only when it has spent its ferine fury. Here the effect of civilization has been to reduce the noblest of the arts, once the repository of an exalted etiquette and the chosen avocation of the very best men of the race, to the level of a riot of peasants. 



[1] Marketwatch.com Treasury warns of dire consequences of default October 3,2013

[3] H. L. Mencken 13. Women and the Emotions IN DEFENSE OF WOMEN gutenburg.org

Saturday, October 05, 2013

Study: Political Power breeds Egotism

If “Power tends to corrupt, and absolute power corrupts absolutely” (Lord Acton), then this is likely to germinate from the ego via the psychological ego’s desire for more power and the consequent actions to acquire it.

Political power, says a study, drives politicians to acquire a hubris syndrome.

From DailyMail.com.uk (hat tip LewRockwell.com) [bold mine]
Dubbed Hubris syndrome, it has been suggested that a number of Prime Ministers may have developed the personality disorder - known as Hubris syndrome - while in power.

Researchers at St George's, University of London have discovered that this personality change was reflected in both Blair's and Thatcher's use of language.

Hubris, say the researchers, is commonly associated with a loss of contact with reality and an overestimation of one's own competence, accomplishments or capabilities.

It is characterised by a pattern of exuberant self-confidence, recklessness and contempt for others, and is most particularly recognised in subjects holding positions of significant power.

Fourteen clinical symptoms of Hubris syndrome have been described. People who show at least three of these could be diagnosed with the disorder.
Power, literally, goes to their head…
Dr Peter Garrard, the lead researcher, from St George's, University of London, said: 'Hubris syndrome represents a radical change in a person's outlook, style and attitude after they acquire positions of power or great influence.

'They become obsessed with their self-image, excessively confident in their own judgement and dismissive of others, often leading to rash, ill thought-out decisions.

'In other words, the acquisition of power can bring about a change in personality: it is as if power, almost literally "goes to their head".
The other way to see this is that egotists desire political power whose ego inflates further once in position. 

Also, political power is a magnet for sociopaths, which seems complimentary to the hubris syndrome.

Obamacare Exchanges Opens with a Trickle of Enrollment

The inaugural of Obamacare’s health insurance exchanges in every state has been met with public apathy.

The Washington Post reports Obamacare has had a trickle of enrollees…
Health insurers and individuals began reporting a trickle of enrollments in the new online marketplaces created by the health-care law, as federal and state officials scrambled to try to fix technical problems that have prevented many consumers from buying coverage.

The White House has declined to release any national statistics on sign-ups, saying complete information was not yet available.

“We don’t have that data,” White House press secretary Jay Carney told reporters Thursday.

Several insurers said that they are recciving at least sporadic enrollment reports from the Department of Health and Human Services, which is running the insurance marketplace for 34 states that have declined to set up their own exchanges.
A reporter in Texas found no enrollees so far

Bloomberg’s columnist Megan McArdle asks if the first enrollees could even be bogus

10 Most Common Biases affecting the Psychology of Investing

ConvergEx's Nick Colas has an interesting list of the “10 most common biases affecting the psychology of investing” (via the Zero Hedge)
1) Anchoring & Adjustment:  This combination occurs when initial information unduly influences decisions by shaping the view of subsequent information.  Once the “anchor” or initial information is set, there exists a bias for interpreting other information around the anchor.  Car salesmen frequently use this tactic when presenting an initial sales price, making the subsequent negotiated prices seem lower than the initial price even though they are still higher than what the vehicle is actually worth.

2) Attribution Asymmetry: The concept here involves people’s tendency to attribute success to internal characteristics (such as talent and innate abilities) and to attribute failures to external factors (like simple bad luck).  Research has shown the reverse to be true when evaluating the successes and failures of others.  The lesson here is most valuable when you hit a “hot streak.”  When you experience speed bumps, don’t be quick to write them off as poor luck – there could be a fundamental problem with your strategy.

3) Choice-Supportive Bias:  By distorting recollections of chosen courses of action versus the rejected courses of action, people tend to make the chosen outcomes seem more attractive that the foregone ones.  Just as people more frequently remember “good” memories than they do “neutral” or “bad” memories, the belief that “I chose this option therefore it must have be superior” can lead to a false recollection of the ultimate outcome.  Learn from your mistakes – don’t forget them.

4) Cognitive Inertia: This is just psychological speak for the unwillingness to change thought patterns in light of new circumstances.  Quite simply, do your homework and keep up on your investments.  If a company slashes guidance, for example, perhaps you should consider altering your investment accordingly.
5) Incremental Decision Making & Escalating Commitment:  These biases occur when people view a decision as a small step within a larger process, rather than as a singular choice.  As a result, this viewpoint perpetuates a series of similar decisions, when perhaps many of those decisions should be evaluated with a fresh mind.
6) Group Think: Grown-up lingo for peer pressure, group think occurs when one feels compelled to adhere to opinions held by a larger group.  This one’s easy – don’t let others sway your opinion.  Groups tend to form a singular opinion based on the opinion of the loudest or most influential person in the group.  Doesn’t mean he’s right.

7) Prospect Theory: This theory explains that people are more likely to take on risk when evaluating potential losses; though in looking at potential gains, humans have the tendency to be risk-averse.  In other words, losses feel worse than gains feel good.

8) Repetition Bias: The bias results from the willingness to believe what one has been told most often and by the greatest number of different sources.  Remember all the hoopla over Facebook’s IPO?  And then its year one performance?  Yeah, everybody though it was a hot stock and only now has it drifted above its IPO price.

9) Sunk-Cost Fallacy: If someone makes a decision about a current situation, based all or in part on what they have previously invested (money, time or otherwise) in the situation, they are suffering from sunk-cost fallacy.  Not matter how much you’re down on an investment, if it’s likely to never be recovered, then cut your losses and let it go.

10) Wishful Thinking: This “problem” happens when people are too optimistic; wanting to see things in a positive light can distort perception and objective thinking.  Just because you really really really want your investment to appreciate, doesn’t mean it will.  Investing should not be treated as gambling.
I would 10 more to this list

1.confirmation bias—search for information that confirms on embedded beliefs rather than objective analysis (related to selective perception)

2.endowment effect—ascribing more value on things or ideas that are owned or possessed (related to sunk-cost)

3.optimism bias—the tendency for people to believe that bad things will happen to everyone else but them (Nassim Taleb calls this the denigration of history)

4.regret theory—reaction to opportunity loss (I should have done this…)

5.status quo bias—preference for the status quo, rejection of change

6.clustering illusion—the tendency to see patterns where there is none or the intuition for pattern seeking

7.gambler’s fallacy--mistaken belief that if something happens more frequently than normal during some period, then it will happen less frequently in the future or (Nizkor) a departure from what occurs on average or in the long term will be corrected in the short term

9.hindsight bias the presumption of knowledge from something that has already occurred or the “knew-it-all-along effect”

10.survivorship bias—tendency to focus on winners while overlooking the others due to lack of visibility


Cognitive biases and heuristics signify as the "law of least effort"- the tendency to desire more rewards with lesser efforts or costs. 

As Nobel Prize psychologist and author Daniel Kahneman, wrote in Thinking, Fast and Slow (p.35) 
A general “law of least effort” applies to cognitive as well as physical exertion. The law asserts that if there are several ways of achieving the same goal, people will eventually gravitate to the least demanding course of action. In the economy of action, effort is a cost, and the acquisition of skill is driven by the balance of benefits and costs. Laziness is built deep into our nature.

Friday, October 04, 2013

Jim Rogers: US Stock Markets in a “Fool's Paradise”

The CNBC recently interviewed the legendary investor Jim Rogers who warned US stock market investors to “be careful”

The mania phase:
The U.S. is the largest debtor nation in the history of the world…We may well have a big, big rally in the U.S. stock market, but it's not based on reality. I would encourage investors to know you're in a fool's paradise, be careful, and when people start singing praises, say, 'I've been to this party before, and I know know it's time to leave.
The Fed Backlash
it is only a matter of time until the U.S. stock market runs into devastating problems due to the Fed's quantitative easing program and the prevalence of similar stimulative programs around the world.
Seasonal patterns + bigger imbalances
First of all, throughout American history, we've always had slowdowns every four to six years. That means that sometime in the next couple of years—three years, maximum—we are going to have problems again, caused by whatever reason,..For instance, there was 2001 and 2002, and then 2007 and 2009 was much worse. Well, the next time it's going to be worse still, because the level of debt is so, so, so much higher. Every country is increasing its debt at the same time.
Unsustainability of Fed Policies
This is the first time in recorded history that we have every major central bank in the world printing money, so the world is floating on an artificial sea of liquidity. Well, the artificial sea is going to disappear someday, and when it does, the catastrophe will be even worse. Yes, it's coming..If I was smart enough to tell you when it's going to happen, I would get rich.
Sitting and watching for now
I don't see any reason to rush out and sell stocks now, because of these artificial currents which are taking place. I'm not buying U.S. shares at the moment, but I'm not shorting either, because I am concerned this may turn into a huge bubble. So I'm sitting and watching.

Video: Peter Klein on Goverment Shutdown, Spending Cuts and other Media Spins

Mises Institute's Peter Klein smokes out Media's spin (propaganda-Orwellian doublespeak) on the Shutdown, Spending cuts and etc...

Obamacare Adds 10,350 pages to Existing Regulations

From Austrian economist Gary North at the Tea Party Economist
When the government passes a law, it must be enforced. The executive branch of the government then makes up the actual enforcement rules. It interprets the law and translates it into actual regulations.

The ObamaCare law was 2,000 pages long. That is just the beginning. Now the executive branch is building on its foundations.

The specific interpretations are published in the Federal Register, which is published daily by the federal government. It publishes about 80,000 pages of regulations a year. Each page is three columns of rules that can be understood only by very specialized and very expensive lawyers in a particular field.

CNS news sent a reporter to interview Democrat Congressman Henry Waxman. He asked Waxman if he had read all 10,535 pages. Waxman refused to answer. He said it was a propaganda question. He refused to answer.

You owe it to yourself to see one page in the Federal Register. Few Americans ever have. Go here. You will see a highlighted link: Today’s Issue of the Federal Register. Click it. You will see articles. Click the PDF of any article.  Then read just one column. You will not have to read all three to get the picture. Multiply this one column by 240,000. That is one year’s output.
Burdens from more regulations or mandated social controls translates to higher costs of compliance, higher taxes, more restrictions of commerce and civil liberty, regulatory arbitrages (loopholes-shadow activities) and regulatory capture, redistribution of resources and power from markets to the political class and their cronies equals increased politicization and social tensions, corruption, and lesser commerce which all leads to a lower standards of living

Thursday, October 03, 2013

Video: Who are the real victims of the War on Drugs?

One major opportunity cost from the war on drugs, as explained by Professor of Criminal Law Alex Kreit, is the justice system.

From LearnLiberty.org (hat tip Cafe Hayek)
Fewer than half of all violent crimes were resolved in 2011, but over 7 million people are serving time in U.S. prisons. The majority of prisoners were arrested on drug charges, and 81 percent of those are in prison for simple possession. While the United States spends billions of dollars and millions of man hours fighting a war on drugs, 59 percent of rapists and 36.2 percent of murderers are never brought to justice. What do we get for that time and money? It has never been easier to buy drugs. The war on drugs isn't working, and victims and survivors of violent crimes deserve more thorough investigations. Whatever your stance on drug policy, Prof. Alex Kreit says, shouldn't we allocate resources to provide for investigations for all violent crimes? Shouldn't victims come first? Who are the real victims of the war on drugs? What do you think should be done about it?

Quote of the Day: Young people get the sharp end of the (political) stick

This underscores an important point that I’ve been writing about for a long time: young people in particular get the sharp end of the stick.

They’re the last to be hired, the first to be fired, the first to be sent off to fight and die in foreign lands, and the first to have their benefits cut.

And if they’re ever lucky enough to find meaningful employment, they can count on working their entire lives to pay down the debts of previous generations through higher and higher taxes.

But when it comes time to collect… finally… those benefits won’t be there for them.

You see, every government has multiple obligations– whether to creditors and bondholders in the form of interest payments, or citizens in the form of benefits.

And when a government has to borrow money just to be able to pay interest on the money it’s already borrowed, it’s nearly a mathematical certainty that they’re going to default on at least -some- of their obligations.

For some of these obligations, it’s politically palatable to default.

Youth benefits, for example. No one is going to raise a big fuss. So you can absolutely count on governments unilaterally wiping themselves with these contractual obligations.

Case in point: the British government has just announced a new push to eliminate benefits for young people. And this is just step 1.

What a pathetic excuse for a social contract. There has to be a better way. And for young people, there is.

Youth is a gift. It’s a time in your life where you have tremendous energy and very little to lose. You’re not tied down by a mortgage or a family to support.

And rather than follow the conventional path of indebting yourself for 13-years so that you can attend university for four, and then fork over the bulk of your pay to the government, instead focus on learning tangible, valuable skills overseas.
This is from Simon Black at the Sovereign Man

Wednesday, October 02, 2013

Matthew Ridley on IPCC’s Global Lukewarming

The prolific scientist and author Matthew Ridley writes about the IPCC’s backsliding from alarmist anthropogenic global warming. (bold mine)
Yet read between the lines of yesterday’s report from the Intergovernmental Panel on Climate Change (IPCC) and you see that even its authors are tiptoeing towards the moderate middle. They now admit there has been at least a 15-year standstill in temperatures, which they did not predict and cannot explain, something sceptics were denounced for claiming only two years ago. They concede, through gritted teeth, that over three decades, warming has been much slower than predicted. They have lowered their estimate of “transient” climate sensitivity, which tells you roughly how much the temperature will rise towards the end of this century, to 1-2.5C, up to a half of which has already happened.

They concede that sea level is rising at about one foot a century and showing no sign of acceleration. They admit there has been no measurable change in the frequency or severity of droughts, floods and storms. They are no longer predicting millions of climate refugees in the near future. They have had to give up on malaria getting worse, Antarctic ice caps collapsing, or a big methane burp from the Arctic (Lord Stern, who still talks about refugees, methane and ice caps, has obviously not got the memo). Talk of tipping points is gone.
Read the rest here

Murray Rothbard on the Budget Crisis and the Government Shutdown

The great dean of the Austrian school of economics, Murray Rothbard on the budget crisis and the shutdown from Making Economic Sense (hat tip Mises Blog) [bold mine]
In politics fall, not spring, is the silly season. How many times have we seen the farce: the crises deadline in October, the budget "summit" between the Executive and Congress, and the piteous wails of liberals and centrists that those wonderful, hard-working, dedicated "federal workers" may be "furloughed," which unfortunately does not mean that they are thrown on the beach to find their way in the productive private sector.

The dread furlough means that for a few days or so, the oppressed taxpaying public gets to keep a bit more of its own money, while the federal workers get a rare chance to apply their dedication without mulcting the taxpayers: an opportunity that these bureaucrats invariably seem to pass up.

Has it occurred to many citizens that, for the few blessed days of federal shutdown, the world does not come to an end? That the stars remain in their courses, and everyone goes about their daily life as before?

I would like to offer a modest proposal, giving us a chance to see precisely how vital to our survival and prosperity is the Leviathan federal government, and how much we are truly willing to pay for its care and feeding. Let us try a great social experiment: for one year, one exhilarating jubilee year, we furlough, without pay, the Internal Revenue Service and the rest of the revenue-gathering functions of the Department of Treasury.

That is, for one year, suspend all federal taxes and float no public debt, either newly incurred or even for payment of existing interest or principal. And then let us see how much the American public is willing to kick into, purely voluntarily, the public till.

We make these voluntary contributions strictly anonymous, so that there will be no incentive for individuals and institutions to collect brownie-points from the feds for current voluntary giving. We allow no carryover of funds or surplus, so that any federal spending for the year--including the piteous importuning of Americans for funds--takes place strictly out of next year's revenue.

It will then be fascinating to see how much the American public is truly willing to pay, how much it thinks the federal government is really worth, how much it is really convinced by all the slick cons: by the spectre of roads falling apart, cancer cures aborted, by invocations of the "common good," the "public interest," the "national security," to say nothing of the favorite economists' ploys of "public goods" and "externalities."

It would be even more instructive to allow the various anonymous contributors to check off what specific services or agencies they wish to earmark for expenditure of their funds. It would be still more fun to see vicious and truthful competitive advertising between bureaus: "No, no, don't contribute to those lazy louts in the Department of Transportation (or whatever), give to us." For once, government propaganda might even prove to be instructive and enjoyable.

The precedent has already been set: if it is proper and legitimate for President Bush and his administration to beg Japan, Germany, and other nations for funds for our military adventures in the Persian Gulf, why shouldn't they be forced, at least for one glorious year, to beg for funds from the American people, instead of wielding their usual bludgeon?

The 1990 furlough crisis highlights some suggestive but neglected aspects of common thinking about the budget. In the first place, all parties are talking about "fair sharing of the pain," of the "necessity to inflict pain," etc. How come that government, and only government, is regularly associated with a systematic infliction of pain?

In contemplating the activities of Sony or Proctor and Gamble or countless other private firms, do we ask ourselves how much pain they propose to inflict upon us in the coming year? Why is it that government, and only government, is regularly coupled with pain: like ham-and-eggs, or . . . death-and-taxes? Perhaps we should begin to ask ourselves why government and pain are Gemini twins, and whether we really need an institution that consists of a massive engine for the imposition and administration of pain and suffering. Is there no better way to run our affairs?

Another curious note: it is now the accepted orthodoxy of our liberal and centrist establishment that taxes must be raised, regardless of where we are in the business cycle. So strong is this article of faith that the fact that we are already in a recession (and intelligent observers do not have to wait for the National Bureau of Economic Research to tell us that retroactively) seems to make no dent whatever in the thirst for higher taxes.

And yet there is no school of economic thought--be it New Classical, Keynesian, monetarist, or Austrian--that advocates raising taxes in a recession. Indeed, both Keynesians and Austrians would advocate cutting taxes in a recession, albeit for different reasons.

So whence this fanatical devotion to higher taxes? The liberal-centrists profess its source to be deep worry about the federal deficit. But since these very same people, not too long ago, scoffed at worry about the deficit as impossibly Neanderthal and reactionary, and since right now these same people brusquely dismiss any call for lower government spending as ipso facto absurd, one suspects a not very cleverly hidden agenda at work.

Namely: a love for higher taxes and for higher government spending for their own sake, or, rather, for the sake of expanding statism and collectivism as contrasted with the private sector.

There is one way we can put our hypothesis to the test: shouldn't these newfound worriers about the deficit delight in our modest proposal one year with no deficit at all, one year with no infliction of pain whatever? Wanna bet?

New Zealand Regulators on Bubbles: A worrisome déjà vu?

Bubbles have become a ubiquitous phenomenon.

Regulators in New Zealand superficially act to stem to what they see as growing risks of inflating homegrown bubbles

From the Wall Street Real Economics Blog: (bold mine)
It just got harder to swing a mortgage in New Zealand.

For homebuyers seeking to place a first foot on the property ladder, that’s bad news. For the central bank, however, it’s an attempt to head off a property bubble that would threaten the health of one of the best-performing developed economies.

Starting Oct. 1, banks have less leeway in making home loans to buyers who can make only a small down payment.

“It’s like taking medicine when you’re not well,” Prime Minister John Key said in a television interview Tuesday.

The rules are having an immediate impact, with one bank canceling mortgages that had already been approved.

New Zealand’s efforts are being closely watched as central banks across the globe experiment with steps targeting specific pockets of financial excess — particularly housing, which played such a prominent role in the global financial crisis.

Late last month, Australia’s central bank advised lenders against being too eager to offer mortgages to customers, saying record-low interest rates risked fueling a surge in speculative home buying.
Nice to see regulators acknowledging the untoward effects of their policies. Yet it's one thing to admit and it's another thing to act. The dilemma: Preventing a populist artificially inflated boom will extrapolate to a political backlash.

Yet zero bound rates induced mania…
Lawmakers here remember the last time lending was allowed to grow largely unchecked in New Zealand.

Easy credit in the early 2000’s fueled a housing bubble that the Reserve Bank of New Zealand tried to control — with little success — by boosting the policy interest rate. With so much of the country’s wealth tied up in housing, when prices did eventually fall the economy dipped into recession even before the global financial crisis.

Now, with New Zealand’s interest rates at record lows since March 2011, the housing sector could be heading down the same path again.  House prices in Auckland, a city experiencing rapid population growth, rose 13% on-year in August, while prices in Christchurch rose 11% amid a continuing housing shortage following devastating earthquakes. Nationwide, prices are up 8.5% on-year.

image

Cool stuff. 

The above exhibits New Zealand’s interest rate vis-à-vis annual GDP. Rising rates coincides with lower GDP in 2001-2008. 

So a boost to the GDP means that authorities implemented Zero bound rates in 2008.

This means pumping bubbles produce statistical growth rather than real economic growth.
image

New Zealand’s deteriorating balance of trade is another manifestation of a bubble economy. New Zealanders have recently been spending more than they produce financed by ballooning debt.

image

Zero bound rates have fueled a surge in domestic credit to private sector (% of gdp) which is over 140%. The above data is from 2010, the World Bank has no updates yet on New Zealand. This has got to be a lot higher today for regulators to raise the alarm bells.

Notice too that when interest rates moved up in 2001-2007 loan growth contracted which coincides with the declining trend in the annualized GDP.

image 
New Zealand’s stock market zoomed from 2003 even as interest rate trended higher—amidst slowing loans—the Wile E. Coyote moment.

New Zealand’s stock market faced reality with a crash along with the world in 2008.

image

Finally New Zealand’s housing index: For regulators, is this the worrisome déjà vu?