Courtesy of the Economist's Kal...
The art of economics consists in looking not merely at the immediate hut at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups—Henry Hazlitt
Saturday, August 16, 2008
Thursday, August 14, 2008
House Sold in the US for $1 or P45 Pesos ONLY!
You want to see how dire it is in the
Detroit News says a house in an impoverished area was sold for only $1 or about 45 Pesos! (Squatter rights here, as I previously know of, costs nearly 500-1000x more!)
Not only that the house took 19 NINETEEN days in the market for it to find a buyer, and worst, the seller a bank has had to throw in $10,000 just to get the home sold (commission, bonus and fees)!
Amazing!
“This house at 8111 Traverse in
This only goes to show how desperate it is in many parts of the
But in the currency markets, the floated story is different--the Philippine Peso is said to be weighed by US led global slowdown.
Oh really? Maybe our “poor” is now “wealthier” than the poor over there? At least they are not drowning in debt to reach such state of desperation.
And for a little hyperbole...maybe too they can afford better to buy houses over there?
Monday, August 11, 2008
A Government Cardinal Sin That Results To A Bear Market? War!
What is one of the government prompted cardinal sins that results to a bear market? The answer is War! We have dealt with this in our past article, Phisix: Learning From the Lessons of Financial History.
So now it appears we have a LIVE unfolding showcase: Russian assets have been collapsing since the military conflict with
``Meanwhile, Russian share indexes have hit their lowest levels for almost two years.
``Going forward, the Russian markets will remain under pressure for as long as there is no move towards a resolution of the conflict. In addition, further falls in oil prices could add to the downward pressure on Russian assets. Caution is thus clearly warranted in the Russian financial markets.”
Additional observation…
From the New York Times,
``Mr. Saakashivili, the Georgian president, said
“They need control of energy routes,” Mr. Saakashvili said. “They need sea ports. They need transportation infrastructure. And primarily, they want to get rid of us. ”
Hmmmm. It seems to sound more like a conflict premised on commodity geopolitics!
Sunday, August 10, 2008
Global Economic Slowdown And Central Bank Interventions PUMP UP The US Dollar!
``Economists, when faced with a conflict between theory and evidence, discard the theory. Stockbrokers discard the evidence.”-Andrew Smithers and Stephen Wright, authors of "
In one of our back issues (see Global Markets: The End Of The World? Or Overestimating Global Consequences?) we discussed how falling oil and commodity prices reflect the weakening of global economic growth as well as how contracting US current account deficits imply the tightening of liquidity in the global financial marketplace which tends to bolster the US dollar and elevate general risk levels.
Moreover, we also discussed of the rotating absorption points of the global inflationary background (see Relative Economic Growth, Lack of Access to Capital and Global Depression) where we said,
``But since the advent of the global credit crunch, much of the real estate financed securities have been deflating, thus, the inflation absorption has shifted towards hard assets. Hence, the accentuated surges in food, energy and commodity prices (which is why it gets political mileage). Now that commodity and oil prices are in a respite, our suspicion is that some asset classes are likely to takeover or benefit from these relative price adjustments or the rotating inflation.
``Remember, these processes won’t come to a halt, especially under political imperatives to save the system or the poor or the society or the economy. There will always be some justifications (cloaked by technical jargons-or ‘intelligent nonsense’ as Black Swan savant Mr. Nassim Taleb would say) for such politically based actions.
``Overall, if the popularly held inflation menace will be less of a threat to the global economy, aside from global markets having priced in MOST of the decline in economic growth aspects as reflected in the financial markets (markets indeed serve as great discounting mechanism) then it is likely that we should see the rotation of this inflationary assimilation into new conduits; let me guess-Asia.”
Well the subject of our analysis has been revealed in the markets see figure 1…
Figure 1: stockcharts.com:
As a reminder we are dealing here with the US dollar index (+3.3%) in relative terms of the Euro (-3.43%), Japanese Yen (-2.26%), Canadian Loonie (-3.65%), the British Pound (-2.74%), Swedish Krona (-2.69%) and the Swiss Franc (-2.91%), and NOT of the Philippine Peso. Note that a weekly 2-3% move in the currency markets, especially applied to a broad universe of relative currencies are rare or signifying “fat tail” high sigma events, and can be particularly devastating, since future currency markets are largely based leveraged contracts.
But overall, the gain of the US dollar had been broad based and equally reflected in
This fantastic run by the US dollar also seem to coincide with the outbreak of war in
Some claim that this is about the turning point in the interest rate cycle. This means that the deteriorating economic conditions apparently ricocheting across the globe will compel global central banks to cut rates thereby reducing the yield premium seen in many of the world currencies relative to the US dollar.
Doomsters, on the other hand, interpret this as signifying the world segueing into a “deep” recession, where emerging markets will likely account for the proverbial “last shoe to drop”.
However, James Turk of goldmoney.com says this is all about central banks in a coordinated effort to prop the flagging US dollar, ``So central banks were accumulating dollars over the past three weeks at a rate far above what one would expect as a result of the US trade deficit. The logical conclusion is that they were intervening in currency markets. They were buying dollars for the purpose of propping it up, to keep the dollar from falling off the edge of the cliff.”
Meanwhile, Brad Setser of the Council of Foreign Relations calls it the “quiet bailout” which can be deduced from the strong surge in the Fed’s custodial holdings (New York Fed holds in behalf of foreign banks). Writes Mr. Setser (highlight mine),
``Right now there are only three countries adding to their reserves at a rate than could explain this kind of growth:
``And it is striking that all the increase went into Treasuries.”
So in a sense, yes we agree that decelerating fundamental conditions spreading over to the world have had a considerable contribution to the recent outstanding performance of the US dollar, although what could be seen as different is in the interpretation of “doom” relative to the perspective of a “bailout”. The former means a destined condemnation, while latter means somebody is being saved or rescued by someone which in effect doesn’t translate to a disaster for both parties.
Nonetheless, the remarkable ascent of the US dollar (candlestick chart in the main window) came at the expense of oil (pane below main window) and commodity (CRB index-lowest pane) prices but in the face of a vertiginous rollercoaster ride in the US equity markets (represented by the S&P 500-line chart) which appears to have broken out of the consolidation phase and had practically outperformed most of the MAJOR global benchmarks.
One notable feature in the chart is that the inflection points of Oil, the US dollar index and the S&P appears to be in simultaneous fashion, but in inversely correlated. The US dollar-Oil correlation seems more accentuated.
Of course, there is a great distinction between a market operating under “bailout” conditions and that which is ascertained by unalloyed market forces. A market distorted by government interventions basically reflects artificial price signals whose eventual outcome (success or failure) would be revealed once the applied stimulus fades.
So yes, given the technical picture and the yield arbitrage, the US dollar may likely see a sustained rally over the interim against its major trading partners but this should signify a cyclical rebound (similar to 2005) within a secular bear market instead of a major reversal.
However, we don’t see how the same principle should apply to the Philippine Peso which should recover from the bogeys of falling food and fuel prices as discussed in Tale of The Tape: The Philippine Peso Versus The US Dollar and Philippine Economy: The Micro Impact of Inflation, Bullish on the Peso.
Decoupling Recoupling Debate As A Religion
``The highest intellects, like the tops of mountains, are the first to catch and to reflect the dawn.” - Thomas Babington Macaulay (1800-1859), British Poet, historian and Whig politician
If we accept the US-OECD-Asia-Emerging Market sequencing of the global slowdown as proposed by the doomsayers, then by the chain of logic, the
But this is unlikely to be the case since, aside from a busted financial-real estate sector, NET exports have been a key factor to the apparent resilience of the
This is where we part from the doomsayers whom have made the decoupling-recoupling debate as a religion or as some form of abstractionism similar to “If you are not with me then you are against me.” Such rigidity makes us unconvinced.
Merrill Lynch’s Richard Bernstein (HT: Craig McCarty) notes that “only 32% of the world’s equity markets are outperforming the S&P 500 so far this year (in local currency). With that performance backdrop, an appreciating dollar could attract “momentum” capital to the
In such a case where then is the recoupling? With 1/3 of the equity markets outperforming the
Think of it another way, if oil and food prices will remain depressed over the interim wouldn’t we be seeing some reprieve to the headline inflation pressures of non-commodity export emerging market economies from which they may be allowed room for a recovery and possibly see a reacceleration of economic growth?
Besides, if Mr. Bernstein is right and a strong dollar could push up the
Commodity Prices Reflect Fundamentals Aside From Monetary Factors
Another, we find it puzzling how the logic of “commodities-will-decouple-but-emerging markets-won’t” will prevail. The cornerstone of such theme is US dollar-paper money oriented.
True, we agree that the US dollar has been an important variable in shaping oil or commodities prices. But again, the world doesn’t seem to operate in simple cause and effect clauses, see figure 2.
From the CFTC report, ``The key driver of oil demand has been robust global economic growth, particularly in emerging market economies….world gross domestic product (GDP) growth (with countries weighted by oil consumption shares) has averaged close to 5 percent per year since 2004, marking the strongest performance in two decades.”
In other words, the price dynamics reflected the imbalances derived from variance in the pace of world economic growth against global oil production output more from than speculative activities. Oil production simply couldn’t keep up with global economic growth especially from emerging economies.
In the recent downturn in oil and commodity prices we see the same phenomenon at work, see figure 3 from BCA Research.
Figure 3: BCA Research:
BCA’s view buttresses our position on the slowing economic world growth and the sensitivity of the
So as we mentioned above, the US-OECD-Asia-Emerging Market sequencing on the recent economic downshift could be the case today, but from a recovery perspective the market leadership will unlikely come from the same order.
The Acceleration Phenomenon: A Key Emerging Market Dynamic
Now take a look at this commentary from Bloomberg (highlight mine),
``In the past, when the
``That didn't happen this time. The world expansion barely slowed last year and oil prices surged, even as the
And such outlook seems to square or match with the idea the world has been significantly less correlated with the
This very important observation from Mohamed El-Erian, author of When Markets Collide: Investment Strategies for the Age of Global Economic Change and co-CEO of bond-investing giant Pimco (emphasis mine),
``In the old days, if the
And perhaps the economic principle that underpins such dynamic is called “The Acceleration Phenomenon”, which was developed by Aftalion a French economist as shown in Figure 4.
Figure 4: Gavekal: The Acceleration Phenomenon
``In
``If, in China, the purchasing parity adjusted average income in 1998 was US$2,000/year, then the number of people earning more than US$10,000 was have been quite small. But if, by 2003, the average income had risen to US$3,000 per person, then the number of people earning more than US$10,000 will have probably increased by a lot more than 50%.
The above chart shows a hypothetical case. If a country’s average per capita is $10,000 where the elite class (having over $15,000 per annum) comprises 2.28% of the population, an average income growth of 25% will push those in the higher echelon from 2.28% to 15.87% of the population!
The significance, again from the eloquent Mr. Gave,
`` Because we know that when it comes to the buying of certain goods and services, the historical evidence seems to suggest the existence of ‘’thresholds’’.
``For example, if the average income in a country is below US$1,000, nobody owns a television; when the income moves above US$1,000, then almost everybody buys one. For the automobile industry, the critical level seems to be US$10,000/year. For university education US$20,000, etc… Today, as
While indeed international channels through trade, capital flows, labor and financial linkages or even monetary pegs could combine to impact an economy, especially in today’s more globalized settings, they don’t constitute everything.
Other significant variables as political, monetary and economic framework similarly determines the internal savings and investing patterns of a country and can present itself as the defining difference to a boom or gloom. As in
Thus, it is possible that the prospective recovery could even come from a MIRROR progression of the proposed US-OECD-Asia-Emerging Market ranking. Likewise, monetary aspects cannot totally be distinct from economic fundamentals.
Overall, recoupling and decoupling debate should not be seen from an absolutist stand. There will be no perfect decoupling as much as there won’t be perfect recoupling.
The Pleasure of Partial Vindication, Personal Tips
``
Yes, the most difficult part from a contrarian perspective is to be unpopular. Since our insights deal with independent systemic based analysis than from outright simplification of the causality variables as espoused by almost a majority in our field, our ideas tend to be ignored. People like to be told stories that are easy to comprehend or easy to visualize or tales that attached to present prominent events or if we quote Bill Bonner of the Agora Publishing fame, ``People come to believe what they must believe when they must believe it.”
Since we don’t sell anything to anybody, my goal has always been to be as objective as possible, even if it comes at a cost of non-patronage. Sometimes in soliciting our advice, some may have probably felt offended when we dealt them the glacial realities from the functionalities of marketplace, but overtime I hope they come to realize that what we told was for their own good. Sorry it is not my role to confirm your biases.
As a student of the market we try to learn from the deeds of those whom have succeeded in the field and so attempted to assimilate the same traits tailored in accordance to one’s personality.
And as an example of such traits, we learned that independent thinking is crucial to long term investment success, so in adherence to Mr. Warren Buffett’s words of wisdom, ``You can't do well in investments unless you think independently. And the truth is, you're neither right nor wrong because people agree with you. You're right because your facts and your reasoning are right. In the end, that's all that counts. And there wasn't any question about the facts or reasoning being correct.”
Nevertheless, we don’t pretend to know everything, nor do we pretend to pinpoint the exactitudes of peaks and troughs of markets. In the years of learning, it has been a painful realization that trying to engage in market timing is almost like playing a game of vanity. Yes, at times, it comes with accompanying thrills alright; insider treats, forum whispers, support-resistance trade and gossip mongering does add up to the adrenalin. And when the tide turns in our favor we feel infallible or overconfident, never realizing that the rising tide allowed us to benefit than from what we assumed as our inherent “skills”.
But once the tide has turned against us, the pain of losses is almost always greater than the short term successes. We tend to get consumed by regrets, and worst, pass the blame on others instead of admitting and learning from our mistakes.
Besides, in contrast to the simplistic notion that financial market investments is a no-risk, no-failure model is likewise delusional. Some people think that success in the marketplace requires a magic wand. Some people think that the function of analyst is to be a soothsayer or astrologer. This is a no-no or a disconnect from reality.
Exposure in the capital markets always entail risk taking. The truth is we can’t grow trees from the sky. Maybe if you are in the government, but not in the markets. Since we can’t exactly predict tomorrow, we will have to learn how to face the hard facts and correspondingly deal with the risks with appropriate action when conditions so require.
Thus, from the understanding of the cyclicality of the markets we can use our best guessestimates on the whereabouts of the phases of the cycle. Since we lack the market sophistication tools for hedging, from here we can work with what we have by balancing our portfolio in accordance to the risk environment and to one’s risk profile. In short, we get ourselves exposed to the market in the degree where we can have a good night sleep regardless of the daily fluctuations.
Remember, we can’t get married to the market too. We will have to understand that market returns always reflect a tradeoff between risk and returns. The mainstream or my counterparts rarely touches on these aspects. That’s why horse racing sells, you are trained to look at gains and ignore losses. In other words, we learned that investment success has the golden rule-to know your risk. So before putting money in the any endeavor always know how much risk you can afford to take and position accordingly.
We will have to always keep ourselves open to the diversity in opinion or perspectives since it is one way to extract or collapse built in complacencies or biases. Since the market is a channel of exchange thus it is always about diversity-that’s how transactions get consummated. Buyers need sellers in as much as sellers need buyers. That’s the beauty of the market, satisfaction is usually attained by virtue of exchanges.
Finally, understanding the thought process is also another very important factor for us. That is why it has been an obsession for us to study the behavioral framework in terms of finance or economics. From Bernard Baruch (1870-1965), Financer, Speculator Statesman and Presidential Adviser, ``“Only as you do know yourself can your brain serve you as a sharp and efficient tool. Know your own failings, passions and prejudices so you can separate them from what you see.”
Phisix: Understanding Benchmarks; Tidal Flows and Ebbs
``I don't set trends. I just find out what they are and exploit them." - Dick Clark, American Entertainer
Recently we were asked why we chose 2,650 as our threshold benchmark for a transition to a bottom cycle than 2,600.
Figure 5: stockcharts.com: Phisix Does This Like A Recoupling?
The next blue line (2) signifies the second downtrend line at 2,600, which we thought acted as a minor resistance with the most recent high at 2,650 (blue horizontal line) or a margin of 50 points as enough cushion for false breakouts.
Well the Phisix performed exceptionally well this week. Our benchmarks were significantly overrun. All downside jolts from the
In fact, the Phisix appeared to have acted out the script we presented last week in Phisix: Knocking At The Exit Gates of the Bear Market!...to a tee!
Moreover, the Phisix strongly outperformed the
True, foreigners remain net sellers but they have been reduced to a significant minority (44% week on week) as local money has now dominated the upside action. If the forcible liquidation coming from abroad has diminished thus it is understandable for the locals to take on the destiny of Phisix on their own hands. It is HOME BIAS working at its finest (for the year and since October of 2007) so far.
In short, compared to May, today’s rally seem have stronger legs which should imply what we have been looking for- a transition cycle.
For the bottom phase, we expect one of the two scenarios: one a consolidation or base formation, or two, gradual ascension. If the Phisix should move abruptly higher we might see a sizeable retracement but the recent lows or the former resistance now support should hold, if we are correct about the market in a bottom cycle. And in a bottom the appropriate action would be to accumulate on issues to position for a recovery.
By the way we shouldn’t expect so much for this cycle. The Phisix is still faced with severe external risks, and could be weighed by storms from shocks. Nonetheless, a bottom suggests of a base in spite of the tempest. Anyway, our idea is that if some markets in
Some have asked me on what issues to buy.
Allow me to quote my favorite from Edwin Lefevre from the classic book Reminiscences of a Stock Operator, ``I never hesitate to tell a man that I am bullish or bearish. But I do not tell people to buy or sell any particular stock. In a bear market all stocks go down and in a bull market they go up...I speak in a general sense. But the average man doesn’t wish to be told that it is a bull or bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing. He does not wish to work. He does not even wish to have to think. It is too much bother to have to count the money that he picks up from the ground.”
Proof? Look at Figure 6.
Of course one may argue that one industry could outperform the other. That is true. But generally speaking, they flow or ebb like a tide on the beach.
The last bear market saw almost all stocks fell beyond the 20% threshold bear market levels, except for a few which we identified in Phisix: Learning From the Lessons of Financial History.
If we are right about the Phisix’s new cycle, then the next cycle should see the same characteristics.
Saturday, August 09, 2008
Wall Street Journal: Professor Johnson’s Medal Standing Prediction; Philippine Olympic Delegates of ONLY 15 Aspirants Reduces Odds For Gold!
The Wall Street Journal recently published the predictions of economist Daniel Johnson, a professor at
As for the basis of Professor Johnson’s model?
From WSJ, ``five basic pieces of data for each participating nation: GDP per capita, total population, political structure (democratic, authoritarian, military or communist), climate (the number of frost days) and home-nation bias.”
In short, economics, politics and environment were mainly used as gauges to predict outcome.
His prediction for the
Courtesy of Wall Street Journal
According to Professor Johnson as quoted by WSJ, ``what matters most isn’t comparing the take-home medal count of one nation compared to another but instead measuring it against the nation’s own expected performance, based on his metrics. “This is more of a benchmarking analysis than anything else,” he said, to gauge which nations are over- or under-performing their expected totals. Plus, the overall tally is obviously influenced by the size of each nation and how many athletes they train and send to the games. “One reason
Why?
Aside from economics and the sports itself, the quest for the Olympic gold is also about statistical probabilities as qualified by Professor Johnson.
In short, to INCREASE the odds of realizing such dream we need MORE qualified delegates to represent us. The more the entries, the bigger the chances.
Anyway, good luck to our athletes. We will need alot of them.
Gender Barrier Coming Down In The Olympics: A Reflection of World Socioeconomic Progress?
Evolving important social and economic global trends can be seen in the Olympics-female participation in the games have been getting broader.
From the Economist,
Courtesy of the Economist
Courtesy of gulfinstitute.org
Technology Changing The Way Games Are Played (Swimming)
Technology seems to have altered the competitive dimensions in the sport of swimming. Skills will now have to be complimented by hydrodynamic designed swimwear (fabrics with least drag) in order to gain an edge…(yes even in sports, gains can be set at the margins).
Courtesy of menstyle.com
``But technology matters even more in the swimming pool. The body suits worn by swimmers today reduce drag through the water—especially after a start and following a turn—by as much as 10% compared with suits worn at the last Olympics.
“The most popular body suit this year—the $550 Speedo LZR Racer—is credited with some 46 world records since it was introduced just six months ago. Comparable bodysuits have since been rushed out by Arena, Adidas and Mizuno in time for the
“Speedo gets its edge from a space-age “pulse” fabric and the way it’s welded together rather than sewn to create a smooth, streamlined shape in the water. Engineers at NASA’s Langley Research Centre in
“The researchers at
Speedo LZR Racer in Action Courtesy of the Economist
*of course, one should expect retail prices to be lower so as to gain a 'critical mass'-often the hallmark of technological innovations
Sunday, August 03, 2008
Global Markets: The End Of The World? Or Overestimating Global Consequences?
``I cannot find a single convincing argument that tells me that astrologers won’t do better than economists…The problem is the arrogance of these economists, they’re making people rely on theories that have not worked, do not work, and are really dangerous.” Nassim Nicholas Taleb
If you look at today’s prevailing sentiment, especially from those within the
Of course, such sentiment has been bolstered by falling asset prices, which if we borrow George Soro’s “reflexivity theory” basically means irrational beliefs or convictions reinforced by market actions can help shape reality- or that market trends have the tendency of molding fundamentals than the other way around.
In the US signs of a deepening economic slowdown, tighter access to credit, rising cost of money, declining collateral prices, forcible liquidations, rising bankruptcies and foreclosures, the seeming paucity of capital, diminishing consumer spending, decreasing business spending, falling corporate profits and a continuing gridlock in the global financial system compounded by high food and energy costs have combined to impinge on the country’s socio-ecosystem.
And the inference is that trade, finance, credit and labor linkages, aside from unpredictable tide of capital flows, effects from intertwined currency regimes and consumer sentiment channels in a more intensified and interlinked world raises the risks of a contagion-a global recession or even a world depression. (The latter has been a popular topic searched at my blog. Besides, google search shows 3,020,000 links, compared to world recession of 546,000-meaning a surge of topical resource materials)
Meanwhile, emerging markets former darlings of global investors predicated on economic growth outperformance appears to have now been consumed by the conflagration of soaring food and fuel prices or mainstream’s definition of “inflation”.
So, from the chain of linkages shown above, the world “recouples”.
Add to this dimension is that since globalization has so far bolstered the faltering US economy via the underlying strength of the global economy fed by the transmission link of dollar links and currency pegs, manifested through via the export and financial assets channels; thus, a softening of the ex-US economic growth tends ricochet back to the US economy, reinforcing a vicious countercyclical trends around the world.
Shrinking US Deficits Mean Lower Liquidity and Higher Risks
Figure 1: Gavekal: Shrinking Global Liquidity via US Trade Deficit (HT: John Maudlin)
However, the recent decline in Oil and commodity prices seem indicative of two important dynamics: one global economic growth could be in decline (see Philippine Economy: World Financial Markets Allude To Diminishing Risks of Inflation) and second, diminishing trade or current account deficits have translated to reduced US dollar based liquidity circulating throughout the world financial system.
Since most of the world transactions remain anchored to the US dollar the
Figure 2: Economagic: US Current Account, S&P 500 and US Dollar Index
We have been seeing many of these factors in motion-recession still unofficial, faltering US equity benchmarks, global credit crunch, and consolidation of trade weighted US dollar index-as the current account balance deficits have markedly improved.
So the point is global liquidity have been greatly impacted by the ongoing deleveraging process in some of the major developed economies and the pronounced transfer of wealth from oil consumers and oil producers which can equally be seen as a transfer of wealth from the private sector to the public sector (which likewise adds to the tightening). Thus, the risk environment remains elevated for MOST of the world’s financial markets.
But When The Parasite Is Removed, The Host Will Thrive.
It can also be said that we can’t disagree with the analysis that the world risks transiting into a recession, considering that OECD economies constitute nearly 2/3 of GDP (nzherald.co.nz).
But then again, given the high levels of risk aversion and the impact from contracting liquidity, we can’t also read too much of the aggregate as representative of all the parts, lest be engaged in the fallacy of division- what must be true of a whole must also be true of its constituents, because of the following:
1. There are inherent nuances in the risks profiles of every nation due to the idiosyncratic political, economic and financial/capital markets structure or in the policy directions by respective authorities, see table 1.
Table 1 Economist: Country Risks Scores
Thus, the different risk profiles will result to diverse outcomes relative to economic wellbeing or financial market performance.
2. Doomsayers could be overestimating the risks associated with the chain effects from global linkages while underestimating other variables such as domestic investment and consumption patterns aside from regionalization trends or policy levers available to authorities.
Figure 3: ADB: Emerging Asian Regionalism
In addition, learning from the Asian Financial Crisis of 1997, it is noteworthy to cite the region’s attempt to undertake insurance measures such as monetary cooperation like the Chiang Mai Initiative (CMI), or a resource pooling strategy consisting of bilateral currency swap arrangements to cushion potential recurrence of external shocks. Another is the Manila framework, “a regional surveillance mechanism to monitor economic development and issues that deserve attention by the participating members.” (ADB)
Next, in the perspective of policy leverage, the humongous currency reserves of China ($1.81 trillion as of June 2008- Bloomberg) and the rest of the emerging market rubric which accounts for 76% of the $4.9 trillion global reserves in 2007 (Michael Sesit-Bloomberg) allows for much leg room for domestic investment spending or stimulus.
Investment bank Merrill Lynch estimates that Emerging Markets are expected to pour a huge amount of these reserves into infrastructure expenditures as shown in Figure 4.
Figure 4: US Global Investors: Expected Share of EM Infrastructure expenditures
``The company's latest forecast said EM infrastructure spending would rise from US$ 1.25 trillion to US$ 2.25 trillion annually over the next three years, thanks to more aggressive government spending programmes, fuelled by decades of under-investment in power, transportation, and water, and higher analyst estimates.” (highlight mine).
So while the much dreaded consumer goods and services inflation wanes in the following months, we can expect EM governments to address its policy leverage by renewing its focus to build internal productive capacity.
Here in the
From the investor's point of view, areas where such huge investment undertaking will take place should translate to massive growth potentials and outsized prospective returns.
3. As we have repeatedly been saying, the problem of systemic overleveraging and the attendant market prompted deleveraging process has been mostly an Anglo Saxon or US-Europe affair with very little or minimal exposure in Asia or in the Emerging Market economies see figure 5.
Figure 5: IMF Global Financial Stability Report Update: Bank Writedowns and Capital Raised
Thus, it is essential to understand the distinction among countries baggaged by cyclical or by structural variables. This also means countries affected by countercyclical factors are likely to experience shorter term pain compared to the structurally impaired markets whose recovery are likely to be protracted due to the sizable market clearing process coming out of severe malinvestments.
So we can’t buy on the notion that the world will evolve towards absolute “convergence” based on financial market performance and or in the economic outlook in as much as we can’t expect total “divergence”.
Under today’s environment, economic and financial market performances will likely be discriminatory than a holistic episode as seen during the recent past.
To quote Peter Schiff of Euro Pacific Capital (emphasis mine), ``The world is over-reacting to our problems, almost to the extent that we are under-reacting. Investors are over-estimating the global consequences of the collapse of the American consumer. I have long argued that American consumers have been functioning as global economic parasites, feeding off the productivity of the rest of the world. When the parasite is removed, the host will thrive. While those who have loaned us money will finally recognize their losses, the truth (belatedly recognized) will set them free. Once they move on, the world will enjoy enhanced growth, as it reclaims the savings, resources and consumer goods previously sent to