Philippine Remittance Trends: Half Full or Half Empty?

The recent divergent reportage on Philippine remittance trends is an illustration of selective perception or how facts are presented or framed in media according to the biases of the reporter or the news outfit.

Is it a case of being Half Full?

The Inquirer.net bannered with ``Remittances hit record high in March Q1 total up 2.7% at $4.06 B"

chart from abs-cbnnews.com

Or it is a case of Half Empty?

The abs-cbnnews.com headlines flashed, ``Pace of remittance growth slows to 3% in March"

chart from abs-cbnnews.com

As shown above, both have been dealing with stated "facts"- slowing year on year growth but nominal volume is at record highs, yet news headlines from different mainstream media outfits portrayed an antipodal stance.

So a reader may ask which truly reflects the state of remittance trends?

Well, based on the expectations of the economic "consensus" whose sentiment or analysis has been reflected by the chart above from World Bank, the general trend for world remittances has been expected to decline because of the present crisis. Obviously by comparing the chart above and the previous chart this downshift in growth expectations have been essentially validated.

But the same consensus had also expected remittance trends to go negative. And this is where the 'positive' surprise or defying the consensus came in. 

The positive surprise can be construed as a Black Swan (in terms of expectations and possibly on the impact to the domestic economy), therefore, in my view merits a positive angle.

Why is this important? Because how information are framed can materially influence one's biases or analysis. 

It can be seen as some form of "power of suggestion" or sublime indoctrination or shaping the public's outlook in the manner how media wants you to see it. And biased or inaccurate analysis may lead to misdiagnosis, wrong prescriptions or decisions and eventual losses and angst. 

For instance, the consensus have latched their predictions on the fate of the Peso's value mainly on remittances. Thus, for them, falling remittances equals a weaker Peso (against the US dollar). The fact that remittances hasn't nominally collapsed and whose growth hasn't turned negative suggests that their projections have also been wayward. 

For us, aside from other "unseen" factors such as portfolio flows, expectations on inflation, yield differentials and economic growth, systemic low leverage, improving state of the financial markets, greater regional integration and others; the "positive surprise", which contradicts the consensus, further boosts the Peso's chances against the US Dollar over the medium to long term.

One must keep in mind that information doesn't automatically translate to knowledge.

Investing "Ins" and "Outs": US led Global Economic Recovery and Decoupling a "Myth"

Fads also do go by the investment world.

Last year, the opinion pages had been dominated by two main themes:

one, that any economic recovery from the present crisis would emanate first from the US and

second, decoupling was a myth.

Chart from Financial Times

Recovery appears to be an ex-US phenomenon.

As for decoupling from the perspective of economic growth...

From US Global Investors

I guess these experts must have read too much from the rear view mirror.

Mark Mobius Latest Outlook on Emerging Markets

Templeton's Mark Mobius gives us why he's bullish with Emerging Markets.

This from Franklin Templeton's April Outlook

Q&A on Emerging Markets with Mark Mobius

What's your assessment of the global economy?

The global economy is in a situation where individuals, companies and economies are in a strong position to overcome the global crisis with support from their governments and central banks. We also believe that emerging markets will play a much greater role in the global economy. Countries such as China and India are expected to emerge as leaders due to their relatively stronger macroeconomic and financial positions.

In which regions are you most optimistic about investment opportunities?

Since it’s usually possible to find at least a few bargains in most markets, all emerging market regions are looking exciting; this is especially the case now, in view of the recent corrections. While global growth has slowed, emerging markets are still expected to grow at a much faster rate than developed markets. The accumulation of foreign exchange reserves also puts emerging economies in a much stronger position to weather external shocks with reserves, for example, in China, totaling nearly US$2 trillion. More importantly, for us as value investors, the current valuations of emerging markets are attractive. Certain countries such as Turkey and Russia are now trading at single-digit price to earnings ratios.

Asia is the largest emerging market region in the world. Asian countries are also growing relatively fast. They include countries like China and India with very large populations whose per capita income is growing, and capital markets in those countries are undergoing rapid development. Economic growth remains relatively high, per capita incomes have been rising, valuations remain attractive and reforms continue, thus improving the region’s business and investment environment.

Valuations in Eastern European markets are also attractive, very attractive in some markets such as Hungary and Turkey which are trading at low single-digit P/Es. Poland is one of the few countries in the region that is expected to record positive GDP growth in 2009. Its valuations are, however, are not as attractive as some of its regional peers. Russia is another interesting market. With its huge land mass, large population and abundant natural resources, the country could become one of the fastest-developing economies in the longer-term.

Most Latin American economies are faring relatively well taking into account the current global macroeconomic conditions. There are selective countries which are more prone to the global downturn. For example, Mexico, but greater inter-regional trade has offset some of the adverse impact of lower export demand from the U.S. One of the region's main attractions is its huge consumer market with pent-up demand for goods and services and world-class companies that are at the same time under-leveraged and inexpensive. In addition, the region’s natural resources are among the largest in the world. Countries such as Chile and Peru which are among the world’s leading copper producers. Mexico is a net exporter of oil. Brazil is a major exporter of iron ore, and soft commodities such as soybeans and coffee as well. Colombia is also exports commodities such as oil, coffee, coal, and so on. While commodity stocks have been negatively affected by the recent decline in commodity prices, many companies are still profitable at current price levels.

In addition, frontier markets, which are the emerging markets of the future, are starting to look interesting. For example, the Middle East is of great interest and we believe the potential for economic growth and development remains considerable, especially if the current trend toward the implementation of political and economic reforms remains on course. Africa is another area we’re excited about. In addition to South Africa, regional economies are also beginning to look attractive.

In your opinion, what are the biggest threats to the global economy?

- loss of confidence
- excessive or poor regulation
- adoption of protectionist measures
- abandonment of the market economy philosophy

Why are you so positive about the outlook for emerging markets?

One key reason is the rapid growth of money supply, not only in the U.S. but all over the world. Governments are trying their best to avoid deflation by pumping money into the economic system. This money must find a home and current savings interest rates, for example, for the US dollar, is not very warm and cozy. Investors have already begun to show renewed confidence and are seeking better returns. The obvious choice is equities. (italics added)

Specifically for emerging markets, we are optimistic because emerging markets:

- are undervalued, trading at extremely attractive valuations and have strong fundamentals
- have undervalued domestic currencies
- are expected to grow, in aggregate, faster than the developed countries
- will emerge as leaders due to their relatively stronger macroeconomic and financial positions.
- have strong holdings of foreign reserves, allowing them to better withstand any external shocks
- follow prudent fiscal policies
- have expanding trade and economic relations with each other; lowering their dependence on developed markets
- represent a huge consumer market as well as a large labor force
- have abundant natural reserves in countries such as Russia, Brazil and South Africa
- have strong potential for development in areas such as infrastructure

Food Crisis Watch: Has The Recent Spike In Coffee and Sugar Prices Been Ominous of Food Inflation?

A recent article from the Financial Times caught my eye. It highlighted on the "shortages" in sugar and coffee which according to the report triggered an attendant surge in prices.

Quoting the Financial Times (emphasis added), ``Caffeine addicts face higher prices for their daily fix as the wholesale cost of both coffee and sugar rise sharply because of poor crops and robust demand.

``“We are in a dangerous situation,” Andrea Illy, chief executive of Italy’s leading coffee company, told the Financial Times, warning that prices could “explode” due to supply shortages.

``His comments echo those of other industry players – and point to a sharp shift in sentiment among analysts.

``Until recently, it was widely assumed that the global economic crisis would damp consumption and prices for coffee. However, that forecast proved wrong, since demand for coffee has remained high, even while consumers have moved from cafés to home drinking."

And since we think that the ocean of money flooding the world today would need to flow into assets or goods or services, we suspect that such surges have been part of the "inflationary seep through".

So far, traces of rising food prices seems generally contained. Nonetheless there seems some signs that food inflation may have just begun.

in Pig and Feeder Cattle prices (courtesy of Danske)...

and in wheat, soybeans and corn, aside from sugar

Meanwhile, rice prices appear to be "bottoming"

From ino.com

Credit Suisse's Top 10 Investment Themes

Giles Keating head of Credit Suisse Economics and Strategy group recently published their top 10 investment themes for 2009 at their emagazine.

It's a curiosity though that these predictions came already half way through 2009. Anyway here is the list:

1. Short to Medium-Dated Bonds

2. Guaranteed bank bonds

3. Inflation-linked bonds

4. Solid Blue Chip Equities

5.Tech Stocks

6. China

7. Consumers Trading Down

8. Infrastructure

9. Hedging out the US dollar

10. Gold

For details read the rest here

Howe’s Tom Jeffries interviews Marc Faber

Some Highlights
Part 1:
-Lots of stocks & commodites have bottomed out
-Short term overbought
-Escalating deficits and easy money=inflation
-No deflation
-Problem is when economy recovers and inflation pressures arise, US federal reserve should increase rates forcefully
-Federal Reserve will be reluctant to do so because they hold so much bonds
-By being reluctant to do so they will below the rate of inflation, below the rate of GDP growth, that will be very inflationary
-Next 20 years US bonds will be in a bear market
-No green shoots only better bad news-government massaged figures
-Inflationary policies to support asset markets may be temporarily successful –you will get a lot of volatility
-Markets peak out on good news and they bottom out in bad news if someone doesn’t understand that he shouldn’t invest
-Lots of commodities are very attractive
-If they print money they will drive commodity prices up more than equities


Part 2:
-Corporate moves are fragmented, selective opportunities
-Deposit rate is ZERO
-The FED is encouraging speculation
-Credit cycles tend build up over a number of years
-People are beginning to recognize gold as the ultimate cash where supply can’t be increased
-I didn’t sell my physical gold because I don’t trust central banks, I want to be my own central bank, my only worry is that central bankers and governments have now proven how dishonest they are that they will take your gold away one day
-There is enough food in the world it’s the distribution problems and it's the ability to pay for food, but the tragedy is that the world has much money to build total waste of arsenal of weapons to fight and kill each other but they don’t have money to distribute the world equally.
-Lots of mining stocks still inexpensive
-Indices are more overbought and you have to be selective
-Nibble on real estate around the world
-Mr. Obama is a total disaster personally
-The US has really had real bad luck: first Bush and now Obama, normally 2 and 2 equals four, Bush and Obama equals ZERO

Video on Bureaucratic Failure: Federal Reserve Inspector Doesn't Know What's Going On

Would you entrust governments to serve the best interest of the public when they can't seem to even know what is happening within their bureaucracy?

This video from Huffington Post reveals of a shocking example of blatant government incompetence or complicity.

If it can happen in the US, then it should apply elsewhere.

Quoting the Huffington Post (bold highlight mine):

``The inspector general tasked with overseeing and auditing the Federal Reserve knows pretty much nothing about what the Fed is doing. That's the conclusion that comes from watching the exchange Tuesday between Rep. Alan Grayson (D-Fla.) and inspector general Elizabeth A. Coleman.

``Coleman could not tell Grayson what kind of losses the Fed has so far suffered on its $2 trillion portfolio, which has greatly expanded since September.

``She appeared unaware that the Fed engages in trillions of dollars in off-balance-sheet exchanges.

``She is not investigating the role of the Fed in allowing the collapse of Lehman Brothers.

``She did not know where the Fed has invested its $2 trillion on the liability side of the balance sheet. "I do not know. We have not looked at that specific area at this particular point on," she said.

"We do not have jurisdiction to directly go out and audit reserve bank activities specifically," she said, though the IG's Web site proudly declares that her office "conducts independent and objective audits, inspections, evaluations, investigations, and other reviews related to programs and operations of the Board of Governors of the Federal Reserve System."

From the standpoint of today's crisis, either incompetence or deliberate opaqueness, you can be sure that present policy actions have less chances to be successfully reversed once inflation accelerates.

We are, thus, reminded of Ludwig von Mises who warned, ``Success and failure are of lesser importance than formal observance of the regulation. This is especially visible in the hiring, treatment, and promotion of personnel, and is called "bureaucratism." It is no evil that springs from some failure or shortcoming of the organization or the incompetence of officials; it is the nature of every enterprise that is not organized for profit."

Video: Seth Godin on Why Tribes Will Change The World

Marketing Guru Seth Godin on why Tribes will change the future... (source: ted.com)...

Mr. Godin's message: Challenge The Status Quo, Build Culture and Commit!

US Mortgage Rates versus Treasury Yields: Does Divergence Signal An Anomaly or A New Trend?

Interesting observation from Northern Trust...

According to Northern Trust's Ms. Asha Banglore, ``The Fed’s announcement of enhanced purchases of agency debt (total purchases as of 5/6/09 is $71.47 billion) and of mortgage-backed securities (total purchases as of 5/7/09 is $365.8 billion) have resulted in bringing down mortgage rates. The 10-year Treasury note yield and mortgage rates are moving in opposite directions, a new record for the history books." (emphasis added)

The US Federal Reserve had earlier announced plans to buy $300 billion of agency debt and $1.25 trillion of mortgage backed securities, so far such interventions has resulted to the divergence between mortgage rates and treasury yields.

The MAIN concerns will be: if this newfangled divergence signifies an anomaly or a new trend? Or how sustainable will this trend be?

My bet: government interventions have short-term influences, market forces will eventually prevail.

Kentucky Derby And The Global Stock Markets

``In the stock market, as with horse racing, money makes the mare go. Monetary conditions exert an enormous influence on stock prices. Indeed the monetary climate - primarily the trend in interest rates and Federal Reserve policy - is the dominant factor.” - Martin Zweig

I used to bet on horse races. That’s why I can relate some horse racing activities to the markets.

The spectacular ‘come-from-behind’ victory by a 50 to 1 longshot, Mine That Bird, ridden by jockey Calvin Borel, in the 1^st leg of the US Triple Crown, the Kentucky Derby, held at Churchill Downs at Louisville Kentucky, greatly fascinated me.

Riding into the last quarter length of the 1 ¼ mile leg, Mine That Bird was nearly at the tail end of the 20 horse pack. Jockey Borel then deftly worked his prized horse towards the middle of the pack going into the top of the stretch, elegantly sneaked into the rail for an unobstructed view and unleashed the animal’s full might towards the finish line to rack up an astounding 6-3/4 length win- a wallop! You can watch it online here.

The wonderful partnership of Jockey Borel and Mine That Bird was significantly unexpected in both the betting world (50 to 1 odds) and even in the race track itself-a pulsating come from behind triumph. And today’s electrifying actions in the marketplace seems to match the same rendition-largely unanticipated by mainstream experts and the consensus and equally the unforeseen in speed and magnitude of market movement.

So if I were a horse race bettor I would have reaped enormous dividends had I made a serendipitous bet on that highly underappreciated underdog.

Applied to the markets, it would seem like another major vindication for us, since we had been expecting this from the start of the year. Not only had we projected a general market improvement but we clearly identified a possible outcome an Asian outperformance! (see 2009: Asian Markets Could OUTPERFORM, Will “Divergences” Be A Theme for 2009?,) See figure 1.

Figure 1: US Global Investors: Asia-Latin American Outperformance

The US Global Investors have basically echoed what we have been saying all along (emphasis added), ``So far this year, emerging markets in Asia and Latin America, as represented in blue in the chart, have generally outperformed those in the Middle East/Africa, and Eastern Europe, in yellow and green respectively. Russia and Israel are exceptions. The market has rewarded better balance sheet fundamentals and smaller external and domestic leverage in Asia and Latin America.”

The Philippine benchmark, the Phisix, surged 6.58% over the week to pad its year to date gains by 19.71%. Despite the strong showing, the Phisix’s gain has been transcended by the outstanding run in Singapore (16.56%!!!), Hong Kong (12.04%!!), Taiwan (9.87%!) or even our ASEAN neighbors Thailand (7.33%) and Indonesia (7.69%).

Of course, we are nearly halfway through the year, which means we are still far away from the homestretch, where fluid real time developments may alter present actions, either by further reinforcing our view or going against it.

But almost every indicator has now turned towards a possible fulfillment of our yearend expectations, including my last technical yardstick: the 200-day moving averages, which have become evident in a majority of Asian markets [see Asian Markets: Crossing the Bull Market Rubicon?]!

Moreover, 2010 is the Philippine Presidential election year which has been cyclically strong over the years [as discussed in Focusing On The Future: the Phisix and the Philippine Presidential Cycle].

So general market improvement PLUS next year’s Presidential honeymoon argues for more upside for the Phisix going towards the post elections in 2011.

Of course, like every trend, there will always be intermittent bumps. But what would matter would be the general or the primary trend.

Nonetheless, if the Phisix does end the year above 2,500, we may expect a full recovery (Phisix 3,800) by the end of 2010 or even an attempt at the 5,000.

Horse Racing In the Domestic Market, Noises Over Signals

And even the domestic horse racing mentality has left the starting gates! See figure 2

Figure 2: PSE’s Bull Market Breadth The Advance Decline Ratio, Traded Issues

Where your favorite sell side and mainstream analysts will constantly bombard you with the drivel that stocks are driven by “fundamentals e.g. earnings”, we have argued based on Edwin Lefèvre’s premise from his classic “Reminiscences of a Stock Operator”, ``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.”

Mr. Lefèvre, who in behalf of the legendary trader Mr. Jesse L. Livermore, wrote from an empirical standpoint of how markets generally operated.

Nevertheless, we found that his underlying observations have been backed by theory from Mr. Fritz Machlup of the Austrian School of Economics that inflationary policies has had greater impact to stock prices as discussed in Are Stock Market Prices Driven By Earnings or Inflation? and in Phisix: The Case For A Bull Run. This is most pronounced in the Philippine Stock Exchange whose market has been “underdeveloped”.

Notice that the bullish breadth in the Phisix has now been established as seen from the substantial improvement in the advance decline spread (more incidence of positive spread-see left pane), which means today’s market has seen more advancing issues against declining issues. This week, advancers outnumbered decliners by nearly 2.5 to 1.

To add, the number of traded issues (right pane) has conspicuously picked up (red arrow). This translates to the marked broadening of gains in listed issues in the Philippine Stock Exchange.

In other words, as we predicted, even the second and third tier issues have joined the roster of advances. Incidentally, the top 10 gainers over the past sessions appears have been dominated by “speculative” stocks rather than blue chips or Phisix component issues.

In the rapidly shaping “rising tide lifts all boats” environment, which includes “shell” companies, does this landscape then extrapolate to an abrupt shift in earnings expectations to simultaneously turn positive?? The obvious answer is NO. The answer why this phenomenon has been happening is mainly about the percolation of the inflationary driven speculative spirits.

This simply reveals how the world operates.

While truth is a rational subject of interest by anyone or by everyone, it’s always about truth in the way people opt to see or expect them to be, no matter how skewed their version of truth is. As Jeffrey Tucker on a blog article A Tribute to Jack Kemp wonderfully expressed, ``In this world, no matter how firm your credentials, no matter how much capital you have built up over the years, no matter how much press you have received in the past, once you start saying things outside the mainstream, or the mainstream shifts below your feet, you are suddenly a nonperson”.

Being a nonperson is not the issue here. Aside, I am also NOT saying that I have grasped the monopoly of mundane truths. But from the market’s perspective, where there has been little evidence of correlation-causation from so called micro-fundamental driven markets (especially evident in the Philippine setting), the conventional mindset have been apparently molded by mainstream practitioner’s fanatic devotion to peddling noises based on false premises as seen on their literatures, which have only increased the public’s risk profiles.

And poor understanding of markets consequently prompts for wrong impressions and lackluster participation from the general public.

For us, what is crucial is for everyone to comprehend on the evolving market cycles in order to weigh on the risks prospects from which determines our survivability and profit opportunities.

And this requires us to operate under the understanding of the fundamental truisms of winnowing noises from signals, than one based on charades.

Effects Of Inflationary Policies Surface In Currency Markets

``America’s policy is pushing China towards developing an alternative financial system. For the past two decades China’s entry into the global economy rested on making cheap labour available to multi-nationals and pegging the renminbi to the dollar. The dollar peg allowed China to leverage the US financial system for its international needs, while domestic finance remained state-controlled to redistribute prosperity from the coast to interior provinces. This dual approach has worked remarkably well. China could have its cake and eat it too. Of course, the global credit bubble was what allowed China’s dual approach to be effective; its inefficiency was masked by bubble-generated global demand. China is aware that it must become independent from the dollar at some point. Its recent decision to turn Shanghai into a financial centre by 2020 reflects China’s anxiety over relying on the dollar system. The year 2020 seems remote, and the US will not pay attention to something so distant. However, if global stagflation takes hold, as I expect it to, it will force China to accelerate its reforms to float its currency and create a single, independent and market-based financial system. When that happens, the dollar will collapse.”- Andy Xie If China loses faith the dollar will collapse

This episode of the stock markets in a fierce rebound has brought about exhortations of “greenshoots” and “prospective” economic recovery, which we have described as the reflexivity theory at work.

And as we have repeatedly been saying, the unparalleled scale of concerted and collaborative global central bank actions will ultimately be transmitted to the currency markets which subsequently will pose as the underlying current to financial market actions.

Figure 3: stockcharts.com: Falling US Dollar And Rising Stocks, Commodities and Treasury Yields

As governments continue to distort the market pricing process by providing subsidies, guarantees, fiscal spending and other interventionist measures, the pressures accrued from the imbalances will ultimately be vented on the world’s currency market which risks a cataclysmic collapse in the present monetary system.

Let me reiterate, this grandest experiment of the unbacked paper-digital money system has been 38 years old. If one would treasure the lessons of history, ALL paper money had been extinguished out of the propensity of the rulers to inflate or destroy the currency-mostly for political survival or wars, see our previous discussion Government Guarantees And the US Dollar Standard.

So those fervently praying for governments to “print money” as a way out of the present predicament or to “avoid a Japan” have been putting undue faith on a system which had temporarily weaved “short term” magic before, but at the cost of building a riskier economic and financial structure based on the exponential growth in systemic leverage and moral hazard, which only leads to worsening cyclical bubbles or worst a collapse in the world’s monetary architecture.

Yet policies that serve to uphold the economically unsustainable borrow, speculate and spend policies will ultimately meet its comeuppance. You can dream of printing away the economic crisis similar to Zimbabwe. But that dream we know only turned into a real life nightmare.

Yet, today’s global policy directions reflect on the very essence of why paper money has failed.

The present “boom” appears to be manifesting inflation as getting some “traction”.

As figure 3 shows, the Euro-weighted US dollar index (USD) has broken below its 200-day moving averages, which signals a regression to its long term bear market.

Some will interpret today’s phenomenon as the revival of risk appetite or the reawakening of the “animal spirits” especially when seen with rising yields of the long term US treasuries (TNX).

Some others will adduce market activities especially by the performances of the global stock markets (DJW) alongside rising commodity prices (oil broke above $55 and is now $58!) to prospective global economic recovery.

We hope both of these arguments are right because this will be the ideal “goldilocks” scenario.

From our end, we understand this “goldilocks” scenario as toothfairy economics simply because of the “the marginal utility of real goods and services divided by the marginal utility (mostly for portfolio and transactions purposes) of government liabilities” or inflation as defined by Professor John Hussman in our previous discussion Expect A Different Inflationary Environment.

In short, when more paper money is produced than real goods we essentially get inflation.

But think of it, if present trends will persist and inflation is indeed gaining traction, then rising commodities will essentially squeeze purchasing power of consumers and raise the cost of production for producers.

Meanwhile, rising interest rates will jeopardize or even defeat programs instituted by governments to ease debtor angst, especially in the crisis affected nations.

Aside, rising interest will translate to higher cost of maintaining or servicing debt for the government and the private sector.

So governments seem trapped in a fix; on one hand by allowing markets to function this will translate to the much dreaded (but needed) deflation, which policymakers won’t accept.

On the other hand, policies to pump money in the system will mean more inflation which essentially will undermine most of the programs that have been put in place to mend the dislocations brought upon by the present crisis.

More proof of inflation driving the currency markets in Asia which seems being transmitted to the stock markets? See figure 4.

Figure 4: Bloomberg: Bloomberg-JP Morgan Asia Dollar Index (yellow), MSCI AC ASIA PACIFIC (green)

When Asian Markets are on a rebound as shown by the Bloomberg’s MSCI ASIA PACIFIC [MXAP:IND-green], the Asian currency benchmark Bloomberg-JP Morgan Asia Dollar Index [ADXY:IND-yellow] goes positive-meaning regional currencies appreciate against the US dollar.

There appears to be a strong correlation between the activities in the stock markets and the region’s currency values possibly influenced by portfolio flows, relative economic growth, relative inflation and or yield differential expectations.

But I would like to remind you that currency markets aren’t free markets (no markets are actually free) and are subjected to repeated government manipulations directly (direct market operations) or indirectly (domestic inflationary policies).

Yes, today’s fiat paper money currency standard is a monopoly supplied by governments.

This makes currencies values vulnerable to political interferences which may induce short term aberrations where arguably market prices do not manifest efficiency.

Nevertheless, while imbalances can be deferred for sometime, in due course they get to be exposed by the natural forces of the market.

And applied to the Philippine Peso, in contrast to mainstream and popular predictions, we argued in 2009: Phisix and Peso Will Advance!, that the Peso like the Phisix will defy bearish projections, which had mostly been anchored on remittances and exports, made by mainstream experts who remain afflicted with rear view looking, ivory tower ensconced-laboratory based economic theories and an obsession with self-importance.

The Philippine Peso has been marginally up on a year to date basis with Friday’s close at Php 47.25 and quite distant yet to the Php 50-52 level predicted by the consensus of “experts”.

And based on the above premises, we expect the Peso to similarly reflect gains in the Phisix. In my view, the Peso will possibly appreciate towards the Php 45-46 level or better by the yearend.

And as a final word today’s boom in contrast to the 2003-2007 cycle which basically lasted more than 4 years maybe swifter, steeper and shorter.

Seeds of Hyperinflation Have Been Sown

``Many false arguments are used to defend inflationism. Least harmful is the claim that a moderate inflation does not do much harm. This has to be admitted. A small dose of poison is less pernicious than a large one. But this is no justification for administering the poison in the first place. It is claimed that in times of a grave emergency the use of means may be justified which in normal times would not be considered. But who is to decide whether the emergency is grave enough to warrant the application of dangerous measures? Every government and every political party in power is inclined to regard the difficulties it has to cope with as quite extraordinary and to conclude that any means for combatting them is justified. The drug addict, who says he will abstain from tomorrow on, will never conquer the drug habit. We have to adopt a sound policy today, not tomorrow.”-Ludwig von Mises, Interventionism: An Economic Analysis, Inflation and Credit Expansion

While “greenshoots” have been more evident in Asia and emerging markets than their OECD counterparts, as evidenced by rising reports of indices based on Purchasing Managers Index and bank lending, some have questioned the sustainability of these improvements.

For instance, acquisitions of oil and petroleum products allegedly haven’t been reflective of the economy’s demand and supply, here we quote CBI China (FT Alphaville)

``Most players expected bearish gasoil market in may amid weaker speculative demand and increased supplies. Speculative demand will probably plunge if the market gains no more support in may, but end-user demand is not likely to grow much amid gloomy economy. Meanwhile, oversupply will probably remain as supplies grow. When supplies from PetroChina and Sinopec are not seen to change, CNOOC Huizhou refinery is estimated to supply 200,000-300,000mt of gasoil to East and South China per month. Without much support from international crude, PetroChina and Sinopec may cut prices to promote sales in some regions, where they failed to fulfill their sales targets in April.

``There is little possibility for China to import any gasoil in May in view of negative import margin and weak demand from the domestic market. Meanwhile, Sinopec’s and PetroChina’s gasoil exports may be little changed from the previous three months, about 200,000-300,000mt altogether.” (emphasis added)

Moreover, China’s electricity consumption which serves as a key barometer of economic activities has equally registered a decline on a year to year basis in April (Xinhua).

Furthermore, energy bears point to the growing disconnect between rising oil prices and high inventory, see figure 5.

Figure 5: FT Alphavile: US Oil Inventories Nearly At The Brim

The Financial Times Alphaville quotes Goldman Sachs; ``Commodity prices cannot diverge for long from physical fundamentals as they are largely “spot” assets….As storage bridges the gap between today and the future, commodities that are easier to store, such as metals and agriculture, are more anticipatory.

``Thus, electricity followed by natural gas are the most spot or least anticipatory commodities given the difficulties in storing these commodities while base metals are generally the least spot or most anticipatory given their ease of storage, followed by agriculture and then oil.”

In other words, given the storage issues energy prices are supposed to reflect actual demand and supply.

But as we have earlier asserted experts tend to look at ONLY demand and supply of real goods frequently disregarding the demand and supply of money relative to real goods.

Left to markets, storage issues will find a remedy. And most likely rising oil prices could a manifestation of the diffusing liquidity in the system.

Proof?

In China, the surge in bank lending has mainly been about government induced lending rather than growth in the private sector activity, according to the Wall Street Journal (bold highlight mine),

``China’s state-controlled banks are clearly leading the lending charge, accounting for 50.5% of the new credit extended during the quarter. Foreign banks are, however, behaving more like they are elsewhere, and are not following their Chinese colleagues into the lending surge. Loans by foreign financial institutions declined by 26.4 billion yuan in the first quarter.

``The central bank’s breakdown of new medium- and long-term borrowing, the kind most likely to be used to pay for investment, shows that 50.1% went to infrastructure in the first quarter. That clearly reflects how banks are being pressed to give priority to government stimulus projects. But such lending has its own risks. “Recent bank lending has been concentrated in government projects which, while helping drive rapid investment, also requires evaluation of local governments’ ability to repay the debts,” the central bank said.

``Outside of stimulus projects, demand for credit is not as strong. Only 7.9% of new medium- and long-term lending went to manufacturing, and 11.2% to real estate development.”

Moreover, China continues to massively import iron ore which jumped 24% in April.

As we discussed in The Nonsense About Current Account Imbalances And Super-Sovereign Reserve Currency and Has China Begun Preparing For The Crack-Up Boom? China appears to be heavily acquiring commodities mostly likely designed to diversify from its US dollar reserves holdings which could function as insurance against the risks of hyperinflation or have been consolidating its potential role as primary contender to the currency reserve hegemony, presently held by the US dollar or both.

But as far as the loose connections leaving experts in the quandary, for us they all seem like puzzles falling into place.

As Ludwig von Mises wrote in Interventionism: An Economic Analysis, Inflation and Credit Expansion, ``But on the other hand inflation cannot continue indefinitely. As soon as the public realizes that the government does not intend to stop inflation, that the quantity of money will continue to increase with no end in sight, and that consequently the money prices of all goods and services will continue to soar with no possibility of stopping them, everybody will tend to buy as much as possible and to keep his ready cash at a minimum. The keeping of cash under such conditions involves not only the costs usually called interest, but also considerable losses due to the decrease in the money’s purchasing power. The advantages of holding cash must be bought at sacrifices which appear so high that everybody restricts more and more his ready cash. During the great inflations of World War I, this development was termed “a flight to commodities” and the “crack-up boom.” The monetary system is then bound to collapse; a panic ensues; it ends in a complete devaluation of money Barter is substituted or a new kind of money is resorted to. Examples are the Continental Currency in 1781, the French Assignats in 1796, and the German Mark in 1923.”

For us, this means that the seeds for hyperinflation have been sown, and that those arguing for “timing” and the “inevitability” have been tunneling their market outlook based on Holy Grail economics as guide to investing.

Mr. Russell Napier, author of the Anatomy of the Bear Market seems to share our outlook, in an interview at the Financial Times quoted by FT Alphaville, we quote Mr. Napier (bold emphasis mine),

``The key three indicators that we’ve passed the risk of deflation are rising price of Treasury inflation protected securities, the rising price of commodities and the rising price of corporate bonds. This is not to say that this bounce is the end of the bear market…

And a decoupling with China?

Adds Mr. Napier, ``So I see inflation problems in a couple of years and I see problems with the Chinese not being as big a buyer of US treasuries simply because they will be having a great domestic consumption boom which means they’ll not run surpluses and buy these surpluses. And the crucial one people sometimes forget is the retirement of the babyboomers, the medicare costs in particular and the social security costs of this is going to be issuing a lot of treasuries into the future…

And the US will probably experience a fierce bear market in US treasuries aside from the excruciating effects to its economy due to rising interest rates…see figure 6.

Figure 6: Economagic: The End of the US Treasury Bull Market?

Again Mr. Napier, ``For the next couple of years people will see it as normalisation, if yields on Treasuries go to 4 or 4.5 per cent. People will say this is a normalisation of the treasury yield as we pass the deflation risk . There’ll be a great breath and sigh of relief that we’re going back into another business cycle, and when it looks like we may never get there equity prices will go up. But the final sting I believe is in the tail. The last treasury bear market lasted from 1946 -1981 and there’s no reason to suggest that this one will be any shorter.”

US Treasuries have been in a bullmarket since 1980s, the long cycle does indicate that an inflection point is imminent.

The last word from Mr. Warren Buffett during his latest Berkshire Hathaway’s Woodstock for Capitalists, ``Anybody who holds (US) dollar obligations from outside this country is going to get back less in purchasing power in the future”.