Wednesday, June 24, 2009

Global Stock Market Performance Update: Rotational Effects and Tight Correlations

Another fantastic chart from Bespoke Invest giving us an update on the recent turn of events.

According to Bespoke (bold highlight mine),``Bloomberg's World Index made a rally high on June 2nd. Below we highlight the stock market performance for 83 countries since June 2nd and year to date. Since the 2nd, 14 countries have seen stock prices continue to rise, while the other 69 have seen prices fall. Lebanon, Kenya, Sri Lanka, and Mauritius are the only countries with double-digit percentage gains. The biggest country to show gains during a time when global stocks have struggled is China. China's Shanghai Composite has rallied 6.18%. The other three BRIC countries have not fared as well. India is down 3.7%, Brazil is down 7.82%, and Russia is down a whopping 21%. Russia has been the second worst performing country during the recent downturn.

``Looking at G-7 countries, Japan has held up the best since June 2nd with a decline of 1.59%. The US has been the second best at -5.21%, followed by the UK, Canada, France, Germany, and then Italy."

My comment:

If global markets have been driven by liquidity or monetary forces or inflation dynamics then it is quite obvious that there will be rotational effects and secondly, for the early movers some tight correlation, as global liquidity transmission interlinks divergent markets.

Notice that most of the today's (from June 2nd) topnotch performers (e.g. Kenya, Bangladesh, Latvia, Slovakia, Oman, Morroco, Bostwana et. al.) have had sluggish year to date gains or had earlier underperformed.

Additionally, the decline of the BRICs (except China) have been in parallel with the decline of the front running EM leaders, as well as, having tracked OECD market performance in terms of price direction over the interim.

Russia's hefty decline exhibits overheating. The Russian benchmark is still the 5th best year to date performer IN SPITE of the recent (21%) downturn. It trails Peru, Sri Lanka, China and India.

This implies of an ongoing rotation, where previous laggards are now ahead, while former leaders appear to undergo a hiatus.

Next, despite the recent correction, Emerging Markets continue to outperform developed economies, albeit at different rates-again an obvious impact from inflation dynamics-as that of being relative.

Inflation or Deflation? The Global Perspective

The following chart from Bespoke is quite revealing. It shows of the present inflation rates around the world.

We quote Bespoke (underscore mine), ``For those interested, below we highlight a big bar chart showing the most recent inflation rates for 77 countries. The average unweighted inflation rate for all of the countries is 4.11%. Fifty-nine countries are currently seeing prices rise versus a year ago, 14 are seeing prices decline, and 4 are flat. Venezuela has the highest inflation rate at 27.7%, followed by Kenya, Iran, Ukraine, Pakistan, Guatemala, and Russia. Ireland is seeing the most deflation with a year over year decline in prices of 4.7%. China has the third biggest decline in prices at -1.4%, while the US is right behind at -1.3%. Whether or not you use this chart to make any investment decisions, it does provide a good look at where each country stands in regards to price movements."

Our observations: one in four countries have been experiencing inflation in the face of the crisis.The average inflation rate is 4%.

Nonetheless, Two things clearly standout:

One, inflation is relative. Common policy programs aimed to address national problems which have been structurally idiosyncratic apparently results to different levels of inflation.

Two, for those arguing about global deflation, these chart appears to strongly refute such an argument.

To add further, consider that the present climate has yet been operating under a "benign" phase of the inflation, what more if inflation secures a strong foothold in countries impacted by debt deflation??!!!

As Edward Chancellor of GMO aptly wrote in the Financial Times, ``There is no question that a determined central bank can get rid of deflation. It is simply a question of printing enough money. Economists have another term to describe the monetisation of government debt. The history of “seigniorage” goes back to the debasement of the coinage under the Roman emperors. Seigniorage is really a tax on holders of money and government debt which is paid via inflation. When carried to excess, it leads to hyperinflation."

You've got a serious inflation crisis ahead!

Tuesday, June 23, 2009

Depression Stories: Are We Worst Off?

With stock markets melting around the world, what would seem more timely than to compare today's conditions with that of the Great Depression.

Here are two articles showcasing sundry charts dealing with such comparisons.

First, comes from Barry Eichengreen and Kevin O'Rourke's A Tale of Two Depressions (Hat tip: safehaven.com/John Maudlin)


Volume of World Trade worst than the Great Depression

Falling world industrial output in line with the Great Depression

See the rest of the charts here

Mssrs. Eichengreen O'Rourke concludes (underscore mine): ``To summarise: the world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the US leads one to overlook how alarming the current situation is even in comparison with 1929-30."

``The good news, of course, is that the policy response is very different. The question now is whether that policy response will work."

Council of Foreign Relations' Paul Swartz makes the same comparison but this time it's more US centric.


Industrial production hasn't fallen in the scale of the Depression

"Although the labor market has deteriorated more than at any time since World War II, it is much healthier than during the Great Depression."

"The federal budget has deteriorated far more rapidly than in any past recession, in part due to the first economic stimulus and bank bailouts.The current stimulus implies an even larger and more prolonged deficit in the future."


See the rest of the charts here

Concluding remarks from Paul Swartz, ``The collapse in the federal government’s finances is unprecedented, raising questions about how the government deficit will be brought under control.

``By most measures, the current recession is far milder than the Great Depression. But the appendix shows that house prices have recently fallen much more sharply than in the 1930s."

So essentially we have two opposing opinions.

Eichengreen-O'Rourke sees Depression like developments for the world and cheers on government policy actions while Mr. Swartz sees it otherwise and worries over government deficits.

That's the nature of economics, divergences in interpretations. What you see depends on where you stand-perhaps influenced politically or ideologically or from personal bias.

Monday, June 22, 2009

Marc Faber: Risk of Hyperinflation Is Very High

Marc Faber says that in 5-10 years, US inflation rates will hit 10-20%. And equities and real estate would perform better than US Treasuries.











Sunday, June 21, 2009

Global Stock Markets: Finally A Reprieve, Ivory Tower Syndrome And Ipse-Dixitism

``Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one” -Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds

Finally after 6 weeks consecutive weeks and a dazzling 21.64% of gains, the Philippine benchmark, the Phisix, finally succumbed to a hefty 7.72% “profit taking” streak over the week.

Yeah, cower in fear because the big bad bear is back in picture! But is it?

Figure 1: Global Profit Taking

Anyone looking for a simplified answer should get this…we aren’t alone. See Figure 1

While the domestic losses may have the biggest in Asia, perhaps exacerbated by the uncertainties over the political front or just plain momentum-sentiment based panic, the carnage in the region had been nearly equally as steep. For instance, Vietnam, Thailand, Indonesia, Hong Kong and India suffered losses anywhere in the range of 5%-7%. That has been the rule.

The chart shows how the Dow Jones World, Asia Ex-Japan and Emerging Markets simultaneously turning down.

And again, China has again been the exception with both indices (Shanghai and Shenzhen) gaining nearly an astounding 5%.

But it isn’t China alone this time, the recently concluded longstanding Tamil insurgency problem in Sri Lanka appears to have brought about a stockmarket honeymoon.

The Colombo Index has spiked by nearly 9% this week, and is the first of among Asian markets to have reached the pre-crisis levels and is just off by about 20% from the 2007 high see Figure 2.

Figure 2: Bloomberg: Sri Lanka’s Colombo: Honeymoon

And I am predisposed to think that Asian bourses will follow suit.

Additionally, I’d like to point out that the Sri Lankan Colombo index has defied the tide because of an extraordinary development.

Going further, the scale of the recent losses has extended throughout most of Europe and to the Americas. Nevertheless, it has been a mixed showing for the Middle East and African region.

G-8 Communiqué As Catalyst?

So what has spurred this so-called global profit taking?

Technically speaking, under normal circumstances, no trend goes in a straight line.

Empirically, we have been witnessing excess volatility from a massive liquidity driven environment.

Fundamentally, I am predisposed to view this event, the G-8 meeting in Italy last weekend where leaders spoke about plans (actually blarneys) to unwind rescue program-as having been the main catalyst.

This from the Wall Street Journal (bold highlights mine), ``World financial leaders are starting to examine how they will unwind their emergency spending packages and bank rescues as signs emerge that the economic crisis may have hit bottom.

``Finance ministers from the Group of Eight leading countries on Saturday asked the International Monetary Fund to research strategies to slim budget deficits and reduce government presence in the financial sector, but in a way that wouldn't reignite the crisis.”

Three observations from these meaty statements:

One, governments have engaged in massive scale of emergency programs without the benefit of studying the possible unintended effects of such programs.

Two, along with this is the NO contingent or NO exit plans.

Gadzooks! Governments have been operating on mere BLIND FAITH on the feasibility of mainstream economic models!

And lastly, asking the IMF to “research strategies to slim budget deficits” is downright and strikingly preposterous! It resonates of the addiction by governments on boondoggles (spending binges) without considering the financing or all other aspects for that matter.

Commonsense says that you either need to cut spending or raise revenues! How complex or difficult could that be? And you don’t need the IMF for that. Qué Horror! Maybe the G8 leaders need to bankroll me for a lot cheaper price.

Markets, acting apparently on cue, shuddered from the thought of such exit plans! This goes to show how increasingly dependent our financial markets have become to money printing dynamics.

The Ivory Tower Syndrome?

Yet for some, commonsensical thinking or basic economic reasoning isn’t the preferred view.

Ironically commonsensical thinking has been perceived as tantamount to the Ivory Tower Syndrome.

The comments of Professor James K. Galbraith of the Lyndon B. Johnson School of Public Affairs at the University of Texas relates to its definition, ``I don’t detect any change at all. [Academic economists are] like an ostrich with its head in the sand.”

Experts afflicted with the Ivory Tower Syndrome simply means losing touch with reality.

It’s because these experts mostly live in a theoretical world filled with quant or econometric models, with virtually no hands-on exposure at risking their own money. Nonetheless they survive under the stipend of institutions and by NOT getting their hands dirty. In other words, perspectives of Ivory Tower analysts are most likely to be unrealizable, if not delusional and unworthy to be heeded.

As the global financial markets endured from a meltdown during the last quarter of 2008, we pointed out that some significant signs, such as the emergence of barter trade (which signified as an impasse on trade finance more than an economic problem) and an appearance of a bottoming market in China, defied the “realistic” consensus view that the world would fall apart.

At the heat of the panic we even declared a buy! [see October 12, 2008 The Bullish Case: It’s Blood On The Streets!].

Then, except for a few experts as Warren Buffett, Jeremy Grantham and John Hussman whose outlook we explicitly covered, other prominent value investors joined the contrarian bandwagon as Steve Leuthold, Anthony Bolton, Vanguard’s John Bogle and Rob Arnott we mentioned in The Rise of Value Investors Amidst A Prevailing Fear and Loss Environment. All of these elite savants, along with my humble perspective, challenged the interpretation of reality by the consensus as the imminence of deflationary depression!!!

Further, we even found evidences of a bottom in commodities last November 2, 2008, see More Compelling Evidence For An Inflection Point in Commodities!.

Moreover, as signs of improvements got reinforced, we repeatedly pounded on the table that stock markets and commodity markets will eventually be driven by government printing presses around the world, which has collectively been operating on 24/7 basis.

And instead of getting tied with economic gobbledygook, we focused on the inflation dynamics which in our view should give us a better glimpse of the market’s direction [see November 30, 2008, Stock Market Investing: Will Reading Political Tea Leaves Be A Better Gauge?]

This means that, in contrast again to the consensus, whom has opted to fixate on mainly the economic template, our fundamental area of concern has been to scrutinize on the actions of global political leaders and central bankers with its possible ramifications or impact on the markets and the economy.

Simply stated, we DIDN’T DEAL with esoteric mathematical models or flamboyant statistical artifacts seemingly aimed to mostly impress gullible audiences as employed by most mainstream analysts with their highly flawed models, we simply dealt with plain vanilla economic reasoning.

As Gerard Jackson in Economic commentators still clueless about the recession so aptly put, ``Unfortunately there are no mathematical relationships in economics. This means that economics is qualitative and not quantitive, despite the obvious importance of statistics.”

The point of this rant is not to accept or deny the pejorative imputation of Ivory Tower analyst, since that would be subjective. People can just say anything about anybody, true or untrue. It’s all a matter of consistency or inconsistency between the allegation and the performance.

Importantly, the perception of reality has always been a preconception out of individual biases. Alternatively, this means ``People believe what they need to believe, when they need to believe it”, a favorite quote of mine excerpted from Bill Bonner of the Daily Reckoning fame. Otherwise, this is also known as the confirmation bias-or the proclivity to look for or interpret data which confirms to inherent beliefs.

Ipse Dixit: Fundamental Driven Markets

In the present circumstances what seems to be the predilection of the mainstream?

Since the markets have shown signs of “life”, many have extrapolated current price levels as an attribution to “fundamental” driven market-economy dynamics.

In other words, the George Soros’ reflexivity theory seems to be getting even more entrenched- many now insist that fundamentals matter more than liquidity. Why? Because prices say so!!!

Funny, but 9 months ago or even at the start of the year, we haven’t heard arguments of such genre. Now market actions appear to calcify on the biases of many market observers.

Let us put it this way, since we believe that this episode has been tightly driven by the interlinkages of global liquidity channels, then it is likely that stock market and commodity market performance will be reflective of the state of inflation absorption as well as the degree of monetary inflation across the global economic and financial system.

In other words, inflation is always relative. As Henry Hazlitt in What You Should Know About Inflation [p.130] wrote, ``Inflation never affects everybody simultaneously and equally. It begins at a specific point, with a specific group. When the government puts more money into circulation, it may do so by paying defense contractors, or by increasing subsidies to farmers or social security benefits to special groups. The incomes of those who receive this money go up first. Those who begin spending the money first buy at the old level of prices. But their additional buying begins to force up prices. Those whose money incomes have not been raised are forced to pay higher prices than before; the purchasing power of their incomes has been reduced. Eventually, through the play of economic forces, their own money-incomes may be increased. But if these incomes are increased either less or later than the average prices of what they buy, they will never fully make up the loss they suffered from the inflation.”

Applied to the current setting, I would deduce that that the stock market and commodity markets have been the secondary recipients of global government spending, central bank lending, direct grants and US Federal Reserve purchases of US sovereigns and mortgage bonds. This has prompted some corners to baptize a moniker for this phenomenon as the bailout bubble, as earlier discussed in Monetary Forces Gaining The Upper Hand Equals The "Bailout Bubble"?.

Whereas circulation credit or bank lending from emerging markets or in Asia or in parts of the US (such as federally insured mortgages) or elsewhere could account for as primary or also secondary channels. The Wall Street Journal gives as this clue, ``Because businesses can't put trillions of new dollars to work in such a short time, the money is finding its way into financial markets.” (bold emphasis mine)

Since markets always operate on the basis of expectations, then a synchronic decline in global markets suggest of four possible causes, outside the technical and sentiment based considerations:

One, markets could probably be discounting a peak in government sponsored programs. Given the addiction of governments as shown by the G-8 news, this isn’t the likely route. Governments have been relishing both the spending spree and the apparent initial favorable effects on the markets.

Two, markets could also be factoring in a culmination in bank lending thru policy induced tightening or a by an aggregate private institutional policy curbs.

This isn’t likely so too. Since the US Federal Reserve has been providing leadership and guidance to global central bankers’ action, then its policy rates could serve as bellwether to the interest rate policy direction of other major central banks see figure 3.



Figure 3: St. Louis Fed: Fed Fund Rates futures

We note that while the Fed rates futures have indeed seen a marginal increase to the upper band of the official Fed Rates, it hasn’t succeeded in breaking out yet.

Three, a combination of both.

Fourth, false negative or also a trial balloon. Here the market may have misread the government actions or communications on the threats to unwind or reverse emergency programs, where the official G-8 communiqué may have been unintentional or intentional, possibly targeted at testing markets response.

While I am not certain on the true state of the markets now, the G-8 pronouncements most probably embodies the fourth variable.

Governments given their ideological underpinnings and the present conditions are unlikely to further discomfit the markets. So any further weaknesses by the stock markets are likely to prompt for “dovish” or market friendly communications from the officialdom.

This brings us back to the revitalized arguments of the ‘fundamentalist’, if markets have been moving based on fundamental factors and not from liquidity transmission channels, then why is it then that global markets continue to act almost uniformly? Why are correlations high among regional markets (except for China and Sri Lanka) or even relative to global markets?

The reaction seen in the global markets hasn’t been seen only on Phisix component issues but also in the internal market actions as seen in the market breadth and in the sectoral performance, of the Philippine Stock Exchange (PSE) see figure 4.


Figure 4: PSE: Sectoral Performance, Fundamentals, Where?

The Banking index (black candle), Service (Gray), Commercial Industrial (pink), Holdings (red), property (blue), All index (maroon) and mining (green) have all been down.

The most recent carnage has almost been in the scale of the climax of the October-November 2008 rout, where advance-decline balance has almost been 1:4 ratio!

Further deterioration of market internals at the same rate as last week would translate to the same tsunami that would sink all ships afloat!

So fundamentals, where?

Focus On Issues That Matter

People are unarguably entitled to their perception of reality. If anybody wants to believe in the “reality” of Santa Claus or Peter Pan and tinkerbell or Superman or a living Elvis, no one will stop them.

Although we are open to exchanges of ideas in the same way markets operate on the exchanges of goods or services based on voluntarism and the availability and expected informational changes, my preference for cerebral stimuli are based on merits and show proofs or evidences and not on Ipse-dixitism or an unsupported assertion.

That’s because to operate on hunches or base intuition is likely to be a very risky endeavor where cognitive biases can function as fatal traps. And this applies not only to the investment sphere but to real life non-investment decision making.

A misdiagnosis that leads to a wrong cure risks worsening of the conditions of a patient possibly by complications. In investments, the same misdiagnosis could translate to heavy losses.

And that’s why we try to avoid dealing with gossip or trivia based market actions. Sensationalism, which connects to the majority, only reinforces cognitive biases. And what usually are deemed as popular issues or causes are frequently flawed or even illusory. For instance, politicians sell free stuffs-health, education, jobs, including bailouts and etc. especially during election seasons. In a world of scarcity, there is no such thing as free lunch. Another, some people equate stocks to horse racing, hence, they get what they deserve.

And by the omission of the sensational, it doesn’t matter if our viewpoints aren’t popular. What matters for us is survivability and feasibility.

Conclusion

Despite the harrowing performance of the Phisix or of global stock markets, which may have been prompted for by market’s realization that the good party days may be cut short perhaps based on the conveyed communication by the G-8 meeting or possibly due to overextended or overheated winning streak, it is highly likely that these setbacks could be temporary.

Governments sensing the latest streak of triumphs aren’t likely to upset the present gains, in spite of pressures applied by certain quarters. The present environment has been ideal for the governments as they benefit from both their spendthrift ways and an ephemeral favorable market condition which illuminates on the vainglories of the fictitious centrally based solutions to national economic problems. Maybe Murphy’s Law applies here: If it ain’t broken, don’t fix it.

If today’s markets have been responding to the expectations of culminating inflationary actions then governments will most likely change tones and revert to dovish themes while simultaneously re-inflating the system. That’s our bet.

Besides mainstream experts adhering to the predominant ideology would constantly use technical jingoism of “output gaps” and “idle resources” to rationalize or justify further money printing activities through-quantitative easing, deficit spending, Zero bound policies, negative real interest rates and etc.

So I’d go against the technical outlook which is in present emitting signals in conflict with the probable effects from government policies. Stock markets could go lower or consolidate but won’t probably retest the old lows.

Finally, what appeals to people is what they like or want to hear, read or see premised on their underlying biases.

Biases are inherent to human nature, as it had been hardwired to us by our ancestors. It has been programmed into our genes. Although, the best way to manage bias is by keeping an open mind.

After all, in the markets, it isn’t about being “right” in terms of convictions, it is essentially about being profitable by adopting the “right” flexible mindset and discipline.

So from our end, if the Ivory Tower syndrome equates to survivability, feasibility and performance, then it’s no shame to be labeled as one.

Unfortunately, the idiom, which means to lose touch with reality, would lose its relevance.


Philippine Peso: Interesting Times Indeed

``There are more borrowers who vote than creditors who vote. This is why democratic politics always favors long-term price inflation.” Gary North, Pushing On A String

We noted how the Peso’s performance has been a riddle, as discussed in Philippine Phisix at 2,500: Monetary Forces Sows Seeds Of Bubble

Figure 5: Danske Emerging Market Briefer: Peso Underperformance

The Philippine Peso has been underperforming its peers both in the Emerging Markets and its neighbors see figure 5 and 6.

Figure 6: Bloomberg: Bloomberg-JP Morgan Asia Dollar Index. AP Dollar Index

The Bloomberg-JP Morgan Asia Dollar Index which tracks 10 of the most actively traded currencies in Asia shows that since March of this year, Asian currencies have mostly been up while the Peso has lagged severely.

Recently, an email supposedly from an anonymous official from the World Bank reportedly said that the Philippine government has been manipulating the Peso to keep it below Php 52 to a US dollar-were it should be.

Of course the allegation was not only spurious and politically slanted, but it had little economic or expertise tacked on the assertion which supposedly emanated from a financial expert.

But if there has been any manipulation, it would be to bring the Peso down, this by expanding government liabilities by virtue of deficit spending.

While the Phisix has seen some improvements in foreign inflows over the past weeks, this hasn’t been extrapolated to the attendant firmness in the Philippine Peso. Yet last week’s carnage accounted for a modest net outflow, so this could add to the onus on the Peso.

Ideology of Policymakers Likely Tilted Towards Interventionism

The incentives aren’t for the Bangko Sentral ng Pilipinas [BSP] to appreciate the Peso; the market fundamentally determines the Peso’s strength.

Instead, it is the mainstream ideology based on a consumption modeled economy which gives the authorities the predisposition to depreciate the currency by intervention.

For instance, increased concerns over a material slowdown of remittance growth which may even post negative (-4%), according to the IMF [Manila Standard], risks weighing on the Philippine economic growth to negative (-1%).

So the BSP, in order to keep the economy from seeking its true levels, will increase the purchasing power of foreign based OFWs at the expense of the residents through higher prices. That’s because mainstream economists fixates on OFW remittances which constitutes only about 11-12% of the GDP and has been assumed to carry the onus of consumption expenditures.

Up to this point, I have yet to see a research which provides estimates on the share of OFW spending (direct and indirect or including the so-called multiplier) to total consumption. All the rest have merely been suppositions (and exaggerations in my view).

The fact that economic growth has materially slowed in the face of still positively growing OFW remittances suggests that manufacturing and agriculture could be a larger weight than the OFW remittances but which the mainstream economists and policymakers tend to ignore.

Deficit Spending For Elections, Mano a Mano

Moreover, pre-election spending by frontloading expenditures to spruce up economic figures going into the election could be another possible angle.

The Philippine Government says it is deeply committed to preserving its fiscal discipline, but expects deficit spending target up to 3.2% of the GDP (Philstar.com). Heck, it is election time and many vested interests are positioning for 2010, so it would be natural to expect an overshoot.

DBS along with ING estimates deficits to hit 4.5% of the GDP (GMAnews.tv). No question here about Philippine deficits. But from this premise they predict bearishness on the Peso.

Hello.

Currencies are basically valued by pairs. If the primary concern for the Philippines has been its fiscal deficits, then relative to the US dollar this should be minor.

The US fiscal deficit is expected to reach 13% of GDP see figure 7!

Figure 7: Heritage Foundation: Exploding US Deficits

Think of it, 13% versus 4.5%, that’s a yawning gap in favor of the Peso!

Ok, the US will be borrowing from its own currency, that’s their privilege. And that’s the added risk premium for the Philippines. But the margin has extremely been one sided. Moreover, the key issue would be sources of funding and not just deficits.

Will the US economy rebound strongly enough to generate revenues to pay for these debts? Will there be enough local and foreign savers to finance these humongous public liabilities? Will official sources to continue to fund US government spending sprees? Or will the US monetize its debts?

Remember it isn’t just new issuance but present rollover financing for maturing debts that needs to be taken into account!

The recent activities in bond market hasn’t been optimistic for foreign buying activities of US treasuries, according to the Wall Street Journal, ``The closely watched figure, excluding transactions that don't occur on an open market, recorded net purchases of $11.2 billion in long-term U.S. securities, after purchases of $55.4 billion in March, according to the monthly Treasury International Capital report, known as TIC.” That’s nearly an 80% drop in foreign buying!

Yet this week, the US treasury will hold another record offering to the tune of $104 billion (CNBC.com). So record upon record issuance will test the limits of the global pool of capital. Losing the ability to raise financing will likely prompt for debt monetization or the US will be faced with the risk of a default.

Moreover, deficits are expected to be still relatively larger than the Philippines even in 2010.

Notwithstanding, the unraveling of the next wave of mortgage resets, other credit woes (credit card, auto loans, Commercial Mortgages, leveraged debts) and deficits from states that would necessitate for Federal bailouts are likely to generate pressures for additional deficit financing.

Hey guys, when looking at the Peso, the US dollar isn’t neutral or fixed. It’s like a tale of the tape of a boxing match, mano a mano.

The Last Barrier Standing

Ok there hasn’t been concrete evidence in terms of declining US dollar reserves (which continues to modestly expand in May) or admission from the BSP of any market intervention. So here we are merely making wishy washy conjectures. Maybe we could try to see the outstanding gold holdings.

But as far as BSP intervention is concerned, there seems to be a stronger incentive for such actions on concerns over the sagging consumer spending from declining remittances of OFWs and from election spending that could weigh down on the Peso. That’s the bearish case.

But the last word on the US dollar from Doug Noland in his latest Credit Bubble Bulletin ``Our foreign Creditors may be content to recycle dollar flows back into Treasuries, but they are thus far in no mood to return to financing our business or household sectors. This may prove a major factor contributing to an altered flow of finance throughout the U.S. economy. It can also be read as a warning that the crucial process of dollar recycling rests increasingly on market perceptions of the soundness of one single market – U.S. Treasuries.” (bold highlight mine)

Remarkably, only a single barrier stands between success and doom. You may call it credibility, but I call it FAITH.

Interesting times indeed.


Saturday, June 20, 2009

Lost On Oil: False Reality Or Inflation Dynamics In Play?

This is another evidence on how regulators and the public seems lost on what has been happening in the markets and the real economy.


According to the Economist, ``THE oil market is behaving like a bucking bronco again, and politicians are once more blaming speculators for careening prices. It is difficult to assemble a definitive explanation for the rally: a weak dollar helps oil prices, but evidence for improving supply and demand remains thin. Positions held on NYMEX, the New York commodities exchange, have indeed soared. In 2008 America’s Commodity Futures Trading Commission (CFTC), which regulates NYMEX, examined how the changing positions of hedge funds affect prices. It found correlation, not causation, but its investigations were hampered by the fact that it could not examine intra-day trades. Nor could it monitor certain derivatives, such as those traded via London’s InterContinental Exchange (ICE), in which Wall Street dealers are particularly prominent. But in a sign of things to come in the oil market, on June 12th the CFTC said it had launched a public investigation to see whether the biggest natural-gas contract traded on ICE was moving prices around in the more regulated futures markets." (bold highlight mine)

Essentially regulators as much as the mainstream can't find sufficient answers to the conundrum of rising oil prices and weak fundamentals.

Instinctively, regulators always blame such predicament on speculators, when in the contrary, "speculation" has signified as direct responses to the policies imposed.

We have been saying repeatedly that this has been mostly monetary forces dominating both the financial markets and the real economy or inflationary dynamics in motion.

As we earlier quoted Ludwig von Mises in his Stabilization of the Monetary Unit? From the Viewpoint of Theory, at an earlier post, Our Mises Moment Answers Mainstream’s Conundrum of Market-Fundamental Disconnect

``If people are buying unnecessary commodities, or at least commodities not needed at the moment, because they do not want to hold on to their paper notes, then the process which forces the notes out of use as a generally acceptable medium of exchange has already begun. This is the beginning of the “demonetization” of the notes. The panicky quality inherent in the operation must speed up the process. It may be possible to calm the excited masses once, twice, perhaps even three or four times. However, matters must finally come to an end. Then there is no going back. Once the depreciation makes such rapid strides that sellers are fearful of suffering heavy losses, even if they buy again with the greatest possible speed, there is no longer any chance of rescuing the currency. In every country in which inflation has proceeded at a rapid pace, it has been discovered that the depreciation of the money has eventually proceeded faster than the increase in its quantity.”

All these constitute an evolving process known "demonetization". Where sooner or later a seemingly "benign" environment may turn into mayhem, if the inflationary process isn't halted.

And additional regulations won't be enough to curtail this process as the public has virtually been responding only to inflationary policies being effected.