Thursday, April 23, 2009

Emerging Labor Protectionism In Japan

In 1850 Frederic Bastiat wrote in his prologue the magnificent must read essay, That Which is Seen, and That Which is Not Seen

``In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause - it is seen. The others unfold in succession - they are not seen: it is well for us, if they are foreseen. Between a good and a bad economist this constitutes the whole difference - the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favourable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, - at the risk of a small present evil."

In other words, laws always constitute an economic trade off between the present and the future. Policymakers are usually predisposed to respond to short term visible effects arising from crops of present concerns but ignoring the larger costs from unforeseen consequences.

We have a very good example of this phenomenon unfolding in today's crisis laden environment.

In Japan, the current deep recession has compelled policymakers to repatriate its migrant workers as reaction to widening unemployment.

According to the New York Times, ``But the nation’s manufacturing sector has slumped as demand for Japanese goods evaporates worldwide, prompting job cuts and pushing the jobless rate to a three-year high of 4.4 percent. Japan’s exports plunged 46 percent in March from a year earlier, and industrial production is at its lowest level in 25 years.

``So Japan has been keen to help foreign workers go home, thus easing pressure on domestic labor markets and getting thousands off unemployment rolls.

“Japan’s economy has hit a rainstorm. There won’t be good employment opportunities for a while, so that’s why we’re suggesting that the Nikkei Brazilians go home,” said Jiro Kawasaki, a former health minister and senior lawmaker of the ruling Liberal Democratic Party.

``“Naturally, we don’t want those same people back in Japan after a couple of months,” Mr. Kawasaki said, who led the ruling party task force that devised the repatriation plan, part of a wider emergency strategy to combat rising unemployment in Japan. “Then Japanese taxpayers would ask, ‘What kind of ridiculous policy is this?’ ”

``Under the emergency program, introduced this month, the country’s Brazilian and other Latin American guest workers are offered $3,000 toward air fare, plus $2,000 for each dependent — attractive lump sums for many immigrants here. Workers who leave have been told they can pocket any change.

The idea is, in order to ease statistical unemployment, Japan's policymakers simply decided to send the laborers away! Reduced workers equals low unemployment rates-what genius!

Next, such reactionary program possibly unmasks of Japan policymakers' narrowmindedness and antagonism to global cultural integration.

More from the New York Times, ``But Mr. Kawasaki, the former health minister, said the economic slump was a good opportunity to overhaul Japan’s immigration policy as a whole.

``“We should stop letting unskilled laborers into Japan. We should make sure that even the three-K jobs are paid well, and that they are filled by Japanese,” he said.

``“I do not think that Japan should ever become a multi-ethnic society” like the United States, which “has been a failure on the immigration front,” Mr. Kawasaki added. That failure, he said, was demonstrated by extreme income inequalities between rich Americans and poor immigrants.

Another, Japan's recent actions reflects discrimination and protectionism...

Again from the New York Times, ``Japan’s repatriation offer is limited to the country’s Latin American guest workers, whose Japanese parents and grandparents emigrated to Brazil and neighboring countries a century ago to work on coffee plantations...

``The plan to fly immigrants out of Japan has come as a shock to many here, especially after the Japanese government introduced a number of measures in recent months to help jobless foreigners, including free Japanese-language courses, vocational training and job counseling. Guest workers are eligible for limited cash unemployment benefits, provided they have paid monthly premiums.

``“It’s baffling,” said Angelo Ishi, an associate professor in sociology at Musashi University in Tokyo. “The Japanese government has previously made it clear that they welcome Japanese-Brazilians, but this is an insult to the community.”

Lastly the article showcases Japan's structural long term problems...

``The program comes despite warnings that the aging country needs all the foreign workers it can attract to stave off a impending labor shortage.

``Japan’s population has been falling since 2005, and its working-age population could fall by a third by 2050. Though manufacturers have been laying off workers, sectors like farming and elderly care still face shortages...

``Critics denounce the program as short-sighted and inhumane, and a threat to what little progress Japan has made in opening its economy to foreign workers.

``“It’s a disgrace. It’s cold-hearted,” said Hidenori Sakanaka, director of the Japan Immigration Policy Institute. “And Japan is kicking itself in the foot... we might be in a recession now, but it’s clear it doesn’t have a future without workers from overseas.”

The present recession will not last forever. And as its economy recovers, Japan's dwindling population (see the above chart from japanfocus.org) will endure strains from labor shortages.

While Japan can easily absorb more foreign workers when it is deemed as politically convenient, it would bear additional costs from the "learning curve" to integrate foreign workers to its society.

Moreover,
Japan's selective application of repatriation policy will likely incur a political backlash with affected Latin American countries which may lead to policy retaliation and even more protectionism.

Finally, Mr. Kawasaki's bigoted anti "multi-ethnic" society remarks will be faced with harsh reality. The persistence of a dwinding population will lead to societal extinction and economic regression.

Hence without raising its fertility rate, in order for Japan to maintain its status quo "society" means to adopt a culture of multi-ethnicity. (Unless cloning or other artificial scientific means of adding people comes into the script)

This noteworthy remark from Kyohei Morita chief economist at Barclays Capital in an interview with Finance Asia,

``But in Japan, the opposite is happening. Japan’s population has been shrinking since 2006, which will continue to put downward pressure on GDP. In 300 years, at the current rate of decrease, Japan’s population will be extinct." (emphasis mine)

After over a hundred years, Bastiat's message is more than relevant as it is universal.

Decoupling in Global Pay Rates?

The Economist publishes a chart depicting planned rates of pay hikes across the globe.

The Economist says, ``THE annual pay letter is usually a time of hotly-awaited anticipation for most employees. In the midst of a global recession, however, simply keeping your job may have to be reward enough. In a survey of 2,000 companies in over 80 countries, at least 25% of employers say they are freezing pay this year, according to Hay Group, a consultancy. Where increases are planned, they will be most miserly in rich countries. British and German employers plan to give rises of under 1.5%, on average, with American, Italian and Canadian firms offering workers under 2%." (bold highlight mine)

We look at the same data but see a different theme: Decoupling. The expected pay rates increases manifests of a yawning gap between emerging markets and G7 economies.

Decoupling a myth?


Wednesday, April 22, 2009

Corruption Is A Symptom of BIG Government!

Filipinos have long been seduced to the notion that the only way to get rid of corruption is to elect or put in place a "virtuous" or "moral" leader or what I call "personality based" politics. Hence, the political cycle of hope and despair: great hope in a new leader and eventual despair from the unrealized expectations on the incumbents.

And this vicious cycle has seemingly translated to a perpetual fantasy or the ever elusive goal of good governance.

Unfortunately, hardly anyone including media and our experts in the academe or in private institutions would deal with political realities.

As the following video from Daniel Mitchell of Cato.org would show, corruption is only a symptom of excessive government interventions, welfare system wrought dependency culture, bloated bureaucracy, stifling web of regulations, scores of counterproductive hardly implementable laws, and government policy instituted handpicking of winners and losers.

In short, big government puts in the incentives that rewards corruption which leads to economic bondage. Ergo, the bigger the government the bigger risks of corruption. We partly dealt about this in our previous post
The Economics of Philippine Election Spending.

Although the following video is referenced to Americans, this big government -corruption causality has a universal application. Just replace Malacanang with Washington and the political dynamics are all the same.

Anyway this introductory quote by Mr. Mitchell from Cato.org,

``Washington is riddled with both legal and illegal corruption, but why?

``Perhaps it is because government is too big and has too much power. The federal budget redistributes $3.5 trillion through more than 1,800 subsidy programs. The regulatory burden is $1.2 trillion and there have been 51,000 new regulations since 1995. And there are more than 70,000 pages of tax law and regulations.

``These are the reasons why Washington is a hornet’s nest of deal-making, influence-peddling, and back-scratching."






Tuesday, April 21, 2009

Bickering And Skepticism Among Federal Reserve Officials Weaken Their Odds of Success

Aside from the unsound and questionable economic and monetary policies pursued by the US Federal Reserve, another reason to bet against the success of the US Federal Reserve's policy measures seems to be an irony-Federal Reserve officials themselves have been doubting on their efficacy or have been quibbling about it.

This from David Wessel of Wall Street Journal Economic blog...

``The Federal Reserve has been fighting the persistent global credit crisis with a proliferation of lending programs that producing acronyms even faster than the Pentagon can. “I think the facilities have worked quite well,” the new president of the Federal Reserve Bank of New York, Bill Dudley, said in a speech over the weekend. “But the facilities haven’t been a panacea for three reasons.”

His three: (italics mine)

  • (1) Fed lending can’t solve “the fundamental problem — the shortage of capital in the banking system.” He added that “until the banking system is viewed as being sufficiently well-capitalized and is able to expand its lending activity significantly” the economy will suffer.
  • (2) Legal limits require the Fed to lend only when the would-be borrower offers sufficient collateral; it can’t lend unsecured or provide guarantees. (The Treasury can, however.)
  • (3) Initiatives such as TALF (Term Asset-Backed Securities Loan Facility) are off to a slow start because of “the reluctance of investors to participate” in part because of “worries about what participation might lead to” given the political environment. Dudley pronounced these worries “misplaced.”
Not enough, recently Paul Volker, the former US Federal Reserve chairman, had a public debate with the incumbent officials led by Donald Kohn, the vice chairman.

Again from Brian Blackstone of the Wall Street Journal economics blog...

``Former Fed Chairman Volcker, who along with Kohn was at a conference honoring former Fed governor Dewey Daane, questioned how the Fed can talk about both 2% inflation and price stability.

``“I don’t get it,” Volcker said, leading to a lively back and forth between the two central-bank heavyweights.

``By setting 2% as an inflation objective, the Fed is “telling people in a generation they’re going to be losing half their purchasing power,” Volcker said. And if 2% is the best inflation rate, and the economic recovery lags, does that mean that 3% becomes the ideal rate, he asked....

If it’s any consolation for Kohn, he wasn’t the only one on the business end of Volcker’s barbs. Volcker told New York Fed President William Dudley, who also spoke at the conference, that he doesn’t understand what the Fed’s trying to accomplish by paying interest on excess reserves.

“Now I’m more confused,” Volcker said after Dudley addressed the topic in his speech.


What happens When The US Runs Out of Financing For Its Bailout Programs

North Korea: The Land of No Smiles

View the slide deck of pictures which depicts the gulag-like experience of North Korea taken by Tomas van Houtryve and posted at the foreignpolicy.com by clicking here.

From Foreignpolicy.com's Land of No Smiles

``Renowned documentary photographer Tomas van Houtryve entered North Korea by posing as a businessman looking to open a chocolate factory. Despite 24-hour surveillance by North Korean minders, he took arresting photographs of Pyongyang and its people—images rarely captured and even more rarely distributed in the West. They show stark glimmers of everyday life in the world’s last gulag."

Hat Tip: Mark Perry

A Booming Blogging Industry!

Speaking of advances in the technology sector, guess what particular field in the said sector has been benefiting from today's downturn?

The answer is blogging.

In comparing relative additions of JOB numbers in the US, bloggers have scored the second in terms of adding employment.

According to Mark Penn in the Wall Street Journal (all bold highlights mine), ``In America today, there are almost as many people making their living as bloggers as there are lawyers. Already more Americans are making their primary income from posting their opinions than Americans working as computer programmers, firefighters or even bartenders.

``Paid bloggers fit just about every definition of a microtrend: Their ranks have grown dramatically over the years, blogging is an important social and cultural movement that people care passionately about, and the number of people doing it for at least some income is approaching 1% of American adults.

``The best studies we can find say we are a nation of over 20 million bloggers, with 1.7 million profiting from the work,and 452,000 of those using blogging as their primary source of income. That's almost 2 million Americans getting paid by the word, the post, or the click -- whether on their site or someone else's. And that's nearly half a million of whom it can be said, as Bob Dylan did of Hurricane Carter: "It's my work he'd say, I do it for pay."

``This could make us the most noisily opinionated nation on earth. The Information Age has spawned many new professions, but blogging could well be the one with the most profound effect on our culture. If journalists were the Fourth Estate, bloggers are becoming the Fifth Estate."

I've never realized that this hobby can have significant income generating potentials or can function as an alternative career.

More from Mr. Penn but with some of my comments interposed, ``Demographically, bloggers are extremely well educated: three out of every four are college graduates. Most are white males reporting above-average incomes. One out of three young people reports blogging, but bloggers who do it for a living successfully are 2% of bloggers overall. [am definitely a long long way to go -comment mine] It takes about 100,000 unique visitors a month to generate an income of $75,000 a year [woah!]. Bloggers can get $75 to $200 for a good post, and some even serve as "spokesbloggers" -- paid by advertisers to blog about products."

Now, at least I have some numbers.

Other benefits of blogging again from Mr. Penn, ``As a job with zero commuting, blogging could be one of the most environmentally friendly jobs around -- but it can also be quite profitable. For sites at the top, the returns can be substantial. At some point the value of the Huffington Post will no doubt pass the value of the Washington Post.

``The barriers to entry couldn't be lower. Most bloggers for hire pay $80 to get started, do it for about 35 months, and make a few hundred dollars. But a subgroup of these bloggers are the true professionals who work at corporations, serve as highly paid blogging consultants or write for sites with substantial traffic.

``Pros who work for companies are typically paid $45,000 to $90,000 a year for their blogging. [wow!-comment mine] One percent make over $200,000. [even more wow!!!] And they report long hours -- 50 to 60 hours a week [more in my experience].

``As bloggers have increased in numbers, the number of journalists has significantly declined [economics is about tradeoffs, so blogs are replacing the dinosaur newspapers, clearly Schumpeter's creative destruction in operation]. In Washington alone, there are now 79% fewer DC-based employees of major newspapers than there were just few years ago. At the same time, Washington is easily the most blogged-about city in America, if not the world.

``Almost no blogging is by subscription; rather, it owes it economic model to on-line advertising. [true-comment mine] Bloggers make money if their consumers click the ads on their sites [readers pls do]. Some sites even pay writers by the click, which is of course a system that promotes sensationalism, or doing whatever it takes to get noticed."

Lastly education directed at the industry underscores growth and is the icing in the cake as a fully blooming industry.

``It is hard to think of another job category that has grown so quickly and become such a force in society without having any tests, degrees, or regulation of virtually any kind. Courses on blogging are now cropping up, and we can't be far away from the Columbia School of Bloggerism. There is a lot of interest now in Twittering and Facebooking -- but those venues don't offer the career opportunities of blogging. Not since eBay opened its doors have so many been able to sit at their computer screens and make some money, or even make a whole living."

From now on, my calling card will highlight as my occupation "BLOGGER"!!!

A Future Race Between Energy and Technology For Market Leadership?

Bespoke Invest has another set of great charts shown below. They reveal of the fluid dynamics of the composite weightings of the S & P 500.

Since the latest rally, the mangled financial sector has made a significant move to regain some of its lost grounds.

Although what really caught our eyes is the seeming emergence of a new leadership seen in the technology sector.

From Bespoke, ``After representing nearly a quarter of the S&P 500 at its peak, the Financial sector's weighting in the index fell all the way to 8.88% on March 9th. Since then, however, the sector has regained some market share and now represents 11.78% of the index. This share gain of 32.66% is by far the biggest jump for any sector off the 3/9 lows. Consumer Discretionary increased its weighting by 11.34%, followed by Industrials (6.52%), Technology (3.24%), and Materials (0.32%) on the upside. The Energy sector has seen its representation in the S&P 500 fall the most during the rally with a decline of 12.27%. Telecom, Utilities, Consumer Staples, and Health Care are the other sectors with declines in market share. Technology still holds the title for the biggest sector at 18.15%, with Health Care in 2nd place and Consumer Staples and Energy in a race for 3rd." (bold highlight mine)

As presented in a table...

Bespoke also illustrates the historical trending of each sector of the S&P 500.

Adds Bespoke, ``Below is a historical look at S&P 500 weightings for each sector. The red line represents the average weighting for the sector since 1990. As shown, Financials moved sharply below average at the end of 2008, but have bounced slightly recently. Technology is just above its historical average, while Health Care and Energy are well above average but headed lower. Consumer Discretionary, Industrials, and Materials are below average but appear to be headed higher." (bold emphasis mine)


We have been looking at the energy and material sector as possible market leaders over the longer term since they've been depressed for quite sometime. (yes decades)

Nonetheless, technology has also been a downtrodden sector since the dot.com bust during the advent of the millienium. But given the rapid explosion of technological advances, it wouldn't be a surprise for this sector to have a shorter cycle relative to the others.

So a question popped into my mind, could the next bubble be a race between the energy and technology industry?

Stay tuned.

Poll Trends: Americans Fret Over Big and Too Much Government and High Taxes

From Gallup
From Rasmussen Reports
From Google Trends

High Taxes significantly leads Big government, big business or even global warming










Monday, April 20, 2009

10 Investing Guidelines From Richard Bernstein

Prolific blogger and fund manager Prieur Du Plessis profiles former Merrill Lynch strategist Richard Bernstein in his website, Investment Postcards.

We’ll quote the article interspersed with my comments in green (all bold highlights are mine).

``Respected Global Investment Strategist Richard Bernstein left Merrill Lynch this week after 20 years at the firm.

``Bernstein, who also wrote Navigate the Noise: Investing in the New Age of Media and Hype, was voted to the Institutional Investor All-America Research Team in each of the last 14 years.

``Writing his last Investment Strategy Update, Bernstein listed what he views as ten of the most important investment guidelines he has learned over the past 20 years. These guidelines are shared below.

1. Income is as important as capital gains. Because most investors ignore income opportunities, income may be more important than capital gains.

[my interpretation: in the stock market, dividends matter a great deal]

2. Most stock market indicators have never actually been tested. Most don’t work.

[my interpretation: “holy grail” investing is a mirage and a hokum.]

3. Most investors’ time horizons are much too short. Statistics indicate that day trading is largely based on luck.

[my interpretation: this is where the stock market becomes a personal casino. Combined with no.2 you don’t need fundamental or technical analysis when scalping or engaging in day trades. Over the short term, noise dominates signals. And when playing for luck, you can do the Burton Malkiel’s blindfolded monkey throwing darts approach]

4. Bull markets are made of risk aversion and undervalued assets. They are not made of cheering and a rush to buy.

[my interpretation: For the average stock market participants, this “cheering” and chasing prices during bull markets are very common. During bear markets, panic selling at the bottom and or blaming everyone else but themselves are familiar traits. Yet as Mr. Bernstein recommends, the opposite is required- buying on fear and selling on cheers. Nevertheless going against the crowd requires the aptitude of emotional intelligence.]

5. Diversification doesn’t depend on the number of asset classes in a portfolio. Rather, it depends on the correlations between the asset classes in a portfolio.

[my interpretation: the present crash tells us that only gold and the US dollar managed to diverge from the generally tightly correlated assets.]

6. Balance sheets are generally more important than income or cash-flow statements.

[my interpretation: the disintegration of the major US investment banking institutions are vivid examples]

7. Investors should focus strongly on GAAP accounting and should pay little attention to “pro forma” or “unaudited” financial statements.

[my interpretation: mainstream analysts tend to utilize analytical methodologies that suits or conforms to their biases.]

8. Investors should be providers of scarce capital. Return on capital is typically highest where capital is scarce.

[my interpretation: the current environment can be construed as having scarce capital.]

9. Investors should research financial history as much as possible.

[my interpretation: people make the same mistakes through the ages. That’s why we should learn from history]

10. Leverage gives the illusion of wealth. Saving is wealth.

[my interpretation: AMEN!!!]

Phisix: The Case For A Bull Run

``Joseph Schumpeter analysed the Great Depression in terms of "creative destruction". He thought that cyclical recessions and depressions wiped away obsolete economic systems and allowed them to be replaced by fresh structures. Recessions are necessary to speed up the capitalist forces of change. For the last 33 years, the Chinese economy has been growing two to three times as fast as the United States, and that has continued even in a year of recession. The Asian economy has been taking over the lead from the Western economy, though the performance of the Japanese economy has been disappointing. I expect that this Chinese outperformance will continue as the world moves into recovery. We can now see the pattern of the three centuries: 1815–1914 the British Empire; 1945–2008, the American era; about 2030–2100 or beyond, the new Chinese era. China is overtaking the West and the process has been accelerated by the recession. William Rees-Mogg The New Chinese Era

It’s a refreshing return from an extended vacation.

Not only have most people have recharged their energies, but even our Philippine Stock Exchange appears to have been rejuvenated as well.

Amidst persistent gloom, this analyst has been reiteratively asserting the case for a return of the bullmarket. For instance last March in Why An Increasingly Asset Friendly Environment Should Benefit The Phisix we outlined the reasons as: 1. Extremely Depressed Mainstream Sentiment, 2. Creative Destruction, 3. Perspective Shift from the Macro to Micro environment, 4. Policy Incentives Are Directed Towards Aggressive Risk Taking, 5. Signs of Improving Trends in the Marketplace, 6. Phisix: Learning From Market Cycles.

Already substantial segments of these variables have begun to sink in the collective psyche.

Global markets have been on a tear lately principally led by Emerging Markets and Asia. Key emerging markets (BRIC) have tallied double digit gains on a year to date basis [see Global Stock Market Performance Update: The BRICs and Emerging Markets Dominate Gains] against G-7 economies (except Canada) who still are on the red (as of April 16th), despite the March 9th rally using the US markets as the reference point.

This glaring disparity of performance in both the financial markets and economic growth rate (China registered a first quarter growth of 6.1% growth in 2009 while India reportedly grew less than 7% for 2008 relative to negative growth in G-7 economies) appears as significant validation of the much derogated or demeaned “decoupling” theme in 2008.

The Policies of Greed

Against mainstream macroeconomists and their coterie of followers, who tend to “tunnel” their visions of a world rigidly driven solely by US demand, and of the misguided worries of “deflation” given the premise of intractable debt, oversupplies and excess capacity as their elementary case for a global “stagdeflation” bust setting, the ping pong surges between global stock markets and commodities have been corroborating our case of a market response towards a collective policy overdrive from inflationary actions by global governments.

Put differently, inflationary policies in many parts of the world have started to offset losses from the financial and economic system and has begun to “leak” or percolate into financial assets as the stock markets and the commodities.

For as long as global government will continue to “print money” and adopt negative real rates, savers will be penalized, and “printed money” (if not from the private sector then by government spending) will find its way into assets as speculation have been the order of the day. Where unlimited money will be chasing limited goods or assets, the end result will be inflation.

For our blessed dear Pope Benedict XVI, let it be known that GREED is the OFFICIAL POLICY of collective governments. The seeds for the next crisis are patently being legally sown. People are being impelled to borrow and speculate than to save and produce. Hence, blame not greed on the public when the next crisis arrives because people would be simply responding to the incentives set forth by policymakers in order to survive. Otherwise, defiance to these policies translates to a loss of purchasing power.

And as day follows night, inflation will be succeeded by deflation. Last year’s collapse in the economic and financial system was a manifestation of a market response to an unsustainable system. Today’s government induced efforts to revive the marketplace with too much debt charged to the expense of the citizenry will ultimately end up with the same results- a crisis.

For as long as people continue to trust governments, governments will have the ability to counter deflationary forces with “money from thin air” or the printing press. But as history shows, the grandest experiment with the paper money system will ultimately reach a limit.

Nonetheless, the genesis of the next crisis begins almost always with a government sponsored boom.

Who Will Finance This Boom?

In contrast to 2003-2007 boom, which saw much of the easy money policies absorbed by real estate industry in developed economies which had been facilitated or greased by financial alchemy by both the banking system and the moneyness of Wall Street’s “shadow banking system”, this boom will probably be financed by financial conduits that would cater to the stock market and commodities boom.


Figure 1: US Global Investors: Credit as % of GDP

Aside from global governments, it is not apparent yet where the private sector funding will emanate from, but our guess is that the scope of debt absorption will be greater for economies in the emerging markets where the leverage in the system have been low relative to developed economies see figure 1.

This is a chart I’ve shown in Will Deglobalization Lead To Decoupling?.

For instance the Philippines have one of the lowest exposures to credit by households. This explains why there have been aggressive marketing efforts to sell credit cards which I can attest to (I receive many offers to subscribe to bank credit cards).

Since most emerging markets are bank financed more than capital market financed, then we should see substantial growth in activities in these lagging but high growth areas. Although, for emerging markets to further capitalize in the speculative fever, we should equally expect a tremendous surge in non-banking finance to complement the growth in the banking system.


Figure 2: US Global Investors: Exploding Loan Growth in China

We have already been partly witnessing the emergence of this phenomenon in China, as loan growth amidst loose monetary policies has been exploding at a vertiginous pace see figure 2.

From Wang, Yam, Zhang and Tai of Morgan Stanley, ``In particular, policy-driven monetary expansion drove money and loan growth to record highs in March, up 25.5% and 29.8%Y, respectively, with new loans made in 1Q09 totaling Rmb4.6 trillion, almost 3.5 times the amount in the year-ago period, or 93% of 2008’s total.” Apparently the present policies have buttressed urban fixed asset or real estate investments and domestic consumption even as the external environment (exports) remains feeble.

The fact that such dramatic pace of growth in loans is unsustainable means that at some point this year these trends will need to moderate which likewise suggests of a meaningful correction in Shanghai’s index (up 37.5% year to date).

In addition, if China tacitly expects to expand the use of its currency, as possible challenger to the reign of the US dollar as the world’s international reserve currency, then it would have to make its currency convertible by liberalizing its capital account and importantly by deepening its capital markets. Importantly in terms of politics, it would have to expand its military might, which it has been doing reticently. According to the Wall Street Journal, ``The Pentagon views China as the country most to acquire the capacity to challenge the U.S. likely, at some point down the road, military on a global scale.” But this is a discussion for another day.

Hence, ASEAN and East Asian markets will likely revolve around the progress of China to augment the liberalization and the integration process of its markets and its economy to the region and to the world.

Has correlation an implied causation? Perhaps. See figure 3.


Figure 3 US Global Investors: Chinese Demand a Driver for Emerging Europe?

According to US Global Investors, ``Rapid monetary expansion in China would not only provide fundamental support for government-mandated fixed asset investment vital to reinvigorate domestic growth, but could also serve as a precursor to global economic recovery and sustain positive investor sentiment toward emerging markets in general. That Chinese money supply growth has been leading Emerging European equities in the past four years should not be mere fortuity.”

Hence, this crisis has only begun to show of China immensely expanding leverage in the global economy. As we wrote last October in Phisix and Asia: Watch The Fires Burning Across The River? ,

``In the “Secrets Of War: The 36 Stratagems” published by an unknown writer during the Ming Dynasty 300 years ago, one of the war stratagems include “Watch the Fires Burn Across the River”, which means to watch over your enemies wreak havoc upon themselves before making your move. As senseis.xmp.net interprets ``This is a kind of long-term, strategic version of the idea behind an inducing move. Before you intervene, see that the flow of the game started by action elsewhere brings the opportunity to its peak.

``If the US took the hegemon away from the UK after the latter had suffered immensely from the harrowing years of devastation wrought by World War II, could Asia be in a seemingly parallel position in terms of fortuitously eluding the systemic calamity of a banking crisis besetting the West?”

Or has China used today’s opportunities to position herself for prospective strategic dominance?

Locally Driven Global Markets

Another important difference from the 2003-2007 boom: This emerging boom seems to be driven locally.


Figure 4: Danske Emerging Briefer: Phisix and Peso Lagged Emerging Markets in March

The Philippine Peso and the Philippine Phisix have lagged its emerging market peers last March.

One possible reason for this is that the Philippine Peso hasn’t been pummeled as the rest of its contemporaries during the most recent rout, where much of the recent spike in global equity markets have equally translated to a marked rebound in these downtrodden emerging market currencies. Said differently, the sharp volatile downturn resulted to an equally rapid upturn. This is in contrast to the Peso which had been impacted less and has similarly had muted improvements.

The other possible reason is that foreign participants remain as significant net sellers. The volume to push blue chip issues higher is relatively sizable, hence considering the low penetration level of local participants in the stock market (less than 1% percent directly invested, according to the PSE; our estimates at 1% including indirect placements), the market improvements have been seen mainly broadbased or spilling over to second or third tier issues- where less volume is required to spark upside volatility- but moderated in terms of blue chip issues or issues composing the Phisix.

Last week’s foreign selling had been substantial (Php 2.25 billion), such degree of volume foreign liquidation usually coincides with significant downsides in the Phisix. Yet the Phisix climbed 1% over the week.

In addition, the recent controversial “political” deals might have partly contributed to the persistent foreign disinterest to hold local equity assets.

In short, for the meantime there has been a dearth of firepower from local investors to sturdily power up blue chip issues. Yet foreign selling has weighed on both the Phisix and the Peso. But this is likely to change in the future as confidence or improving market sentiment gets reinforced. Perhaps local investors will be increasing their or we could see a return of foreign investors, possibly from Asia than from the West.

Has the Philippine experience likewise been reflected on its contemporaries? Perhaps.

An article from US Today appears to have misread an emerging market flow data because of its misleading headline “Emerging markets funds up, but rely on developed world”. The article reports that,

``This year, investors have put $5.5 billion of net new money into emerging market stock funds, says Brad Durham, managing director of Emerging Portfolio Fund Research, which tracks the funds.

``To put that into perspective, the funds have attracted new money equal to about 2% of their assets each week for the past month, according to TrimTabs.com, which also tracks fund flows.”

According to FP Trading Desk the market capitalization of Emerging Markets is around $12.8-trillion in March of 2008. Considering that half of this has been lost, this takes market cap to around $6.5 trillion, yet it is inconsistent to see how $5.5 billion or even 2% of assets could have made emerging markets “rely” on developed world.

Figure 5: US Global Investors Russia’s Investor’s Profile

Well Russian markets appear to be confirming the developments in the Phisix-local investors are driving the market.

According to US Global Investors, ``There was a significant increase in activity recently in Russian equity markets, mainly driven by domestic buyers. As the chart from J.P. Morgan shows, local activity outnumbers long international money by a two-to-one ratio.”

A locally driven stock market boom will be less susceptible to global gyrations and strengthen our case for decoupling.

Phisix: Rising Tide From Inflationary Forces

As we have noted earlier, the Philippine Stock Exchange have been experiencing a broad based recovery.

This can be seen in virtually ALL of our market internal indicators: advance-decline spread, number of traded issues, number of trades, peso volume or even the seeming emergence of a “rising tide lifts all boats” among sectoral trends see figure 6.


Figure 6: PSE: Rising Tide Lifts All Boats?

As you will note in the chart, ALL of the indices have turned positive, whereas only two of them, particularly the Industrial and Mining indices were on the upside early this year.

And leading the pack anew is the Industrial index, which has been up 35.01% year to date (pink), followed by Mining index up 28.26% (green), the Banking index 15.05% (black candle), the Sunlife and Manulife dominated ALL index 13.53% (maroon), the Holding index 13.11% (red), the Service Index 4.32% (silver) and the Property index 4.18%.

And as opposed to mainstream domestic analysts who are paid to peddle the uncorrelated, unproven and unconfirmed premise that “fundamentals” drive the stock prices, we have long argued from a contrarian standpoint that stock prices have essentially been propelled by mostly INFLATION and INFLATION DRIVEN SENTIMENT, with accentuated influence for the underdeveloped Philippine market setting. Hence the “rising tide lifts all boats phenomenon”.

All the rest are mere nattering nabobs of cognitive biases disguised as expert opinions.

Some of the previous concluding quotes by Vienna Professor Fritz Machlup (1902-1983) from his invaluable paper The Stock Market, Credit and Capital Formation I cited in our January article Are Stock Market Prices Driven By Earnings or Inflation?, which I’d like to reemphasize (all bold highlights mine):

-A continual rise of stock prices cannot be explained by improved conditions of production or by increased voluntary savings, but only by an inflationary credit supply.

-Extensive and lasting stock speculation by the general public thrives only on abundant credit.

-Abundant funds, especially those of inflationary origin, may not find ready outlets in real investment.

-Any decrease in the effective supply of money capital is likely to cause disturbances in the production process.

-An inflated rate of investment can probably be maintained only with a steady or increasing rate of credit expansion. A set-back is likely to occur when credit expansion stops.

And if this is the genuine incipient boom phase of the next chapter of the imminent bubble cycle as we think it is, we’d most likely see “basura” issues or third tier highly speculative issues to SPECTACULARLY OUTPERFORM blue chips.

The Hazards and Relevance of Chart Reading, My Technical Outlook

Lastly as we have previously mentioned, the cogency of our bullmarket can be identified from several indicators, particularly: signals from market internal activities, regional performances, benchmark credit spreads and finally technical picture.


Figure 7: Stockcharts.com: PHISIX: Missing One Element To A Full Blow Bullmarket

A short notice on chart reading: Although I began my market analyst work as a chart reader, I came to realize that charts depend only on past information and the subsequent pattern recognition as basis for predictions.

Despite the so-called “market efficiency” where all necessary information as supposedly imbued in the depicted prices, this isn’t accurate at all. Considering that markets have been repeatedly distorted by government intervention, with accelerating emphasis today, markets hardly convey price “efficient” signals as many dogmatic practitioners infer them to be. Hence, they have been highly vulnerable to “tail” risks.

Moreover, charting as a primary device for market reading is a tool beneficial for those who benefit from churning trades than from those working to achieve or generate ALPHA returns. Besides, by assuming only past information as the principal basis for market analysis, this represents, for me, as highly prone to cognitive biases, since our reflexes would be oriented towards spotting pattern recognition through the significance of the historically determined path dependent outcome (hindsight bias) and the oversimplification in the understanding of events as related to unfolding market action.

Thereby, I’d recommend the use of charts as vital guidepost for determining phases of the market cycle, as confirmation metric of inter-market developments to ascertain the whereabouts of the market cycle or of the stages of an investment theme and as for entry-exit parameters for a defined trade and NOT as primary “investment” or “HOLY GRAIL” formula for determining the risk reward tradeoffs.

Institutions that accustom clients towards short term trades are only subjecting the latter to low-return high-risk exposure, which serve nothing more than a euphemism for punts, especially for momentum trades. That’s where we always warn of the perils of the “agency problem” or the conflict of interest issues.

Going back to the market, the Phisix alongside the Asian bourses ex-Japan (DJP2), the Emerging Market (EEM) index and the Southeast Asian (FSEAX) index appears to have carved a similar basing feature which may be indicative of the bottoming phase of the present market cycle (double bottom?).

Moving forward, all four indices have simultaneously broken above their resistance levels which could be indicative of an advancing momentum tilted towards a transition to a full blown bullmarket. The Phisix recently overcame its hurdle (see green circle) at Friday’s close by going over the resistance (red horizontal line).

Although, only the EEM index has had a material breach above the resistance level, it remains to be seen if the other indices will suffer from a “head fake” or sustain a breakout that validates the advent of a nascent bullmarket for regional and emerging market equities. This will be evident in the coming sessions.

Given the near convergence of the motions of the major indicators, particularly market internal signals, regional performance, credit spreads and technical picture; it seems to be the first time in nearly two years where the alignment of these forces strongly suggests of a continuity of the present trend than of a reversal.

In addition, except for the Shanghai index which is not shown in the chart above, all four indices above are likewise closing in on their respective 200-day moving averages (for the Phisix the red descending line at approximately the 2,200 level), which serves as my last major obstacle for the Phisix (and the other equity benchmarks) to officially reclaim the next phase of the market cycle.

And after a successful breach of the 200-moving averages we can expect the Phisix to perhaps to recapture or regain some of the lost grounds in between the two targets (2,289 or 2,300 and 2,750 or 2,800) by the yearend. And optimistically, a full recovery and even an attempt at 5,000 during the market friendly Presidential election cycle year.

Because there seems to be no other asset class in Western nations that can absorb much of the paper money being thrown into the global financial system, as the tug of war between deflation and inflation will persist to generate extended market volatility, perhaps the inflation in the stock markets in Asia and Emerging Markets and in the commodities frontier will accelerate faster than the previous, as the ``inflated rate of investment can probably be maintained only with a steady or increasing rate of credit expansion” as Professor Machlup explains. Governments at the moment will resist a setback in the credit expansion that may reverse the present trends simply because rescues by printing money have become a political trend.

In short, the odds are greatly favoring a bull run for the Phisix, Asia, Emerging Markets and commodities going forward.