Should We Follow Wall Street?

``There are two requirements for success in Wall Street. One, you have to think correctly; and secondly, you have to think independently." - Benjamin Graham

For some, there is the impression that the workings of Wall Street have to be piously followed by the letter.

The general notion is that Wall Street has devoted unremitting years of research on the subjects of risk management, portfolio allocation and asset pricing or valuations such that these need to be incorporated into conventional analysis.

That is the reason why guild like certification standard as the Chartered Finance Analyst (CFA) has emerged.

Hence, should we follow what Wall Street does?

While technically Wall Street can be identified as a symbolic location for the operating platforms of the various asset markets, it has been generally been associated with the investment community.

However, Wall Street, for me, is a broad, vague and complex issue.

Wall Street Models Are For Convenience, Myth of Blue Chip Investing

From the recent crisis, we learned that Wall Street has been ground zero for the financial alchemy crisis of turning the proverbial stones into bread via the traditional models of mortgage credit risk management of “originate and hold” into the latest model of “originate and distribute”. Where risks had been passed like a hot potato the impact has been contagion-globalized crisis.

It has been likewise the birthplace of the Shadow Banking System, which encompassed the circumvention of regulations and signified as the gaming of the system (regulatory arbitrage) in cahoots with credit ratings agencies, whose mandated revenue model had been derived from the issuers- than from the risks buyers-from whose interests it protected (Agency Problem), and regulators (regulatory capture)-who refused to take the proverbial punch bowl away.

Wall Street has most importantly played a critical role in the transmission of the US Federal Reserve policies in overextending the credit system intermediation…globally.

Here we quote Prudent Bear’s Doug Noland, ``to create Trillions of instruments (chiefly Treasuries, agency debt, MBS, and “Repos”) perceived as safe and liquid by our foreign trading partners that accommodated our massive current account deficits (and attendant domestic and international imbalances). It was contemporary risk intermediation at the heart of a historic mispricing of finance for, in particular, mortgages and U.S. international borrowings. And it was the potent interplay of contemporary risk intermediation and contemporary monetary management/central banking (i.e. “pegged” interest rates, liquidity assurances, and asymmetrical policy responses) that cultivated unprecedented financial sector and speculator leveraging.” (emphasis added)

It had likewise operated on the psychology predicated on the Greenspan or Bernanke Put or the principle of Moral Hazard that has emboldened speculation or expanded risk taking capacity.

In sum, Wall Street has been THE EPICENTER and THE EPITOME of bubble dynamics- where the rigors of long term discipline has been exchanged with short term profit and fun at the expense of the US and global economy.

The great value investor Benjamin Graham, Warren Buffet’s mentor once sardonically remarked on the same shortsightedness, ``That concerns me, doesn't it concern you?... I was shocked by what I heard at this meeting. I could not comprehend how the management of money by institutions had degenerated from the standpoint of sound investment to this rat race of trying to get the highest possible return in the shortest period of time. Those men gave me the impression of being prisoners to their own operations rather than controlling them... They are promising performance on the upside and the downside that is not practical to achieve.” (emphasis mine)

So how effective has Wall Street been to predict and respond to the crisis?

From Bruce Bartlett, author and former US Treasury department economist in a recent Forbes article, ``Economists were slow to see a recession coming and often didn't see one at all until we were already well into it.”

From Robert Samuelson, economist and contributing editor of Newsweek in his latest article Economist Out Of Lunch (bold highlights mine), ``Well, if you de-emphasize financial markets and financial markets are decisive, you're out to lunch. Financial markets pumped up the real estate bubble; greater housing and stock market wealth inspired a consumer spending boom; losses on "subprime" mortgage securities triggered a collapse of confidence. Some economists have grudgingly, if obscurely, conceded error. A study by the International Monetary Fund called "Initial Lessons of the Crisis" admits: There "was an under-appreciation of systemic risks coming from . . . financial sector feedbacks onto the real economy." That's an understatement.

``Overshadowing the misunderstanding of finance is a larger mistake: ignoring history. By and large, most economists don't care much about history. Introductory college textbooks spend little, if any, time exploring business cycles of the 19th century. The emphasis is on "principles of economics" (the title of many basic texts), as if most endure forever. Economists focused on constructing elegant, mathematical models.”

Or how about from one of my favorite contrarians Black Swan author Nassim Taleb with Mark Spitznagel in an article at the Financial Times “Time to tackle the real evil: too much debt”, ``Relying on standard models to build policies makes us all fragile and overconfident. Asking the economics establishment for guidance (particularly after its failure to see the risk in the economy) is akin to asking to be led by the blind – instead we need to rebuild the world to make it resistant to the economist’s mystifications.”

Considering the vast armies of financial experts (accountants, CFAs, economists, quant risks modelers and managers, statisticians, actuarial, research and security analysts and etc…) employed in the banking and financial industry, common sense inference suggest that we wouldn’t have seen the disappearance of the US Investment Banking Sector (bankruptcy of Lehman Bros, the acquisition of Bear Stearns and Merrill Lynch and the conversion to Bank holding companies of Goldman Sachs and Morgan Stanley) and the government takeover of AIG-once largest insurance company in the US and the 18^th largest in the world, had these models or theories worked.

The fact that the crisis occurred and heavily impacted the US financial system occurred demonstrates that as the experts quoted above, Wall Street failed!

This also utterly demolishes the MYTH of BLUE CHIP investing- where the public have been ingrained to believe that investing in blue chips are safe and sound and least subjected to risks.

In bubble cycles, particularly with growing relevance today [see last week’s Worth Doing: Inflation Analytics Over Traditional Fundamentalism!], industries exposed to the extremities of misallocation due to policy based distortion are all subjected to heightened risks regardless of their stature.

The oldest of the 30 elite members of Dow Jones Industrials (Answers.com) are the Proctor and Gamble (1932), United Technologies (1939), Exxon Mobil (1928) and Du Pont (1935). All the rest have been included in since 1959 and above, and where the 30 member composite index has undergone several changes- 49 alterations according to wikipedia.org (since May 26,1896).

This means that in the US, blue chips aren’t exactly “blue” in the sense that they been exposed to the variable changes in technology or management or bubbles or other factors which prompted for the restructuring of the blue chip index.

So what has been the problem with Wall Street?

As noted in the past in How Math Models Can Lead To Disaster and in the above, “elegant” mathematical and or scientific models that has reinforced the public’s tendencies to rely on heuristics or mental shortcuts.

Like government policies, the theoretically or math constructed models served as intellectual justification or cover to advance on their biases.

Essentially it isn’t about what works or not, it is about what needs to be believed that counts. In short, it has all been about convenience.

For instance, in a bullmarket you need an excuse to push up stocks, instead of relying on gossip based information, the public embraced Wall Street’s models.

Value investor Ben Graham in his 1949 classic the Intelligent Investor castigated on the industry’s inclination towards this, when he wrote, ``security analysts today find themselves compelled to become most mathematical and 'scientific' in the very situations which lend themselves least auspiciously to exact treatment." (bold highlight mine)

Stocks For The Long Run?

One of the hardcore or popular beliefs in Wall Street is that investing in stocks would have led to an outperformance of a portfolio relative to Treasury Bonds, Bills or Gold as shown in Figure 1.

Figure 1: Jeremy Siegel: Stocks For The Long Run

Recently at a Wall Street Journal article Mr. Jason Zweig wrote to challenge the conventional Wall Street conviction which has relied on Siegel’s chart. He stated that the data used during the earlier days had been cherry-picked (or data mined) and were therefore NOT accurate.

``There is just one problem with tracing stock performance all the way back to 1802: It isn't really valid,” wrote Mr. Zweig, ``What, then, are the odds that stocks will continue to lag behind bonds for the long run? The sad truth is that history can't tell us the answer. The 1802-to-1870 stock indexes are rotten with methodological flaws. So we have only the period since then, or four distinct and complete 30-year stretches of stock returns, to base our long-term investment decisions on. Another emperor of the late bull market, it seems, has turned out to have no clothes.” (emphasis added)

If Mr. Zweig is correct then imprecise data alone could shatter the very foundations of Wall Street’s most consecrated canon.

And this doesn’t end here.

Contrarian investor Rob Arnott has also confronted the alleged supremacy of the returns of stocks over bonds in the long run, see figure 2

Figure 2: IndexUniverse.com: Stocks Lacks Real Appreciation

In the Journal of Portfolio Management (published by indexuniverse.com), Mr. Arnott, wrote, ``Stocks for the long run? L-o-n-g run, indeed! A mere 20 percent additional drop from February 2009 levels would suffice to push the real level of the S&P 500 back down to 1968 levels. A decline of 45 percent from February 2009 levels— heaven forfend!—would actually bring us back to 1929 levels, in real inflation-adjusted terms.”

In short, stocks could invariably underperform bonds if it continues to fall in real adjusted terms.

If Wall Street icon and guru, Fidelity Investment Peter Lynch once said that, ``In stocks you've got the company's growth on your side. You're a partner in a prosperous and expanding business. In bonds, you're nothing more than the nearest source of spare change. When you lend money to somebody, the best you can hope for is to get it back, plus interest,” on the contrary, Mr. Arnott concludes, (all bold highlights mine), ``Many cherished myths drive our industry’s equity-centric worldview. The events of 2008 are shining a spotlight, for professionals and retail investors alike, on the folly of relying on false dogma.

-For the long-term investor, stocks are supposed to add 5 percent per year over bonds. They don’t. Indeed, for 10 years, 20 years, even 40 years, ordinary long-term Treasury bonds have outpaced the broad stock market.

-For the long-term investor, stock markets are supposed to give us steady gains, interrupted by periodic bear markets and occasional jolts like 1987 or 2008. The opposite—long periods of disappointment, interrupted by some wonderful gains—appears to be more accurate.

-For the long-term investor, mainstream bonds are supposed to reduce our risk and provide useful diversification, which can improve our long-term risk-adjusted returns. While they clearly reduce our risk, there are far more powerful ways to achieve true diversification—and many of them are out-of mainstream.”

So NO, there isn’t any universally accepted Wall Street wisdom, instead they seem to be conditional (cycles) and subject to time referenced debate. This also means that despite the years of drudging research, such insights risks being defective or if not outmoded.

The fact that they are constantly vulnerable to policy induced business cycles exemplifies such shortcomings.

Bluntly put, Holy Grail investing is a delusion even in Wall Street standards.

The Significance Of Policy Based Or Inflation Analytics

Today’s crisis has provoked rapid policy responses among governments.

This entails a material shift in the operating economic and financial environment which should impact the underlying drivers to the risk reward tradeoffs or to the asset pricing mechanics of diverse financial markets.

And any analysis that foregoes these changes and sticks to the old paradigms will likely misinterpret the risk return environment see Figure 3.

Figure 3: CSFI: The Road To Long Finance

Take for instance this splendid observation from Centre for the Study of Financial Innovation CSFI’s Michael Mainelli and Bob Giffords ``Unexpected regulatory intervention may destroy a long-short market neutral hedge, as when short selling was suddenly restricted in several jurisdictions in late 2008. The efficiency of a diverse portfolio may similarly morph into something quite different in a bear market panic. At night all cats are black, no matter how colourful and distinctive they may appear in the daylight.” (emphasis added)

The problem is that risk managers frequently respond only to ex-post (after the fact) events rather than preparing for the ex-ante (before the event).

From the same authors, ``Most risk managers deal with the bottom loop of reacting to accidents and danger. "A one-sided concern for reducing accidents without considering the opportunity costs of so doing fosters excessive risk aversion – worthwhile activities with very small risks are inhibited or banned. Conversely, the pursuit of the rewards of risk to the neglect of social and environmental ‘externalities’ can also produce undesirable outcomes," wrote Adams [John Adams “Risks”, UCL Press London 1995]. This illustrates how easy it is for risk management to yield unexpected consequences.” (emphasis added)

In other words, risk managers like any human being tend to get swayed by emotions that foster extreme pendulum swings of fear and greed.

And why the difficulties in analyzing the dynamics of government policies? Because of the complexities derived from the interweaving feedback loops of human interactions from the web of regulations.

According to Jeffrey Friedman in his paper, A Crisis of Politics and Not Economics: Complexity, Ignorance and Policy Failure, ``The task of researching such interactions, however, illustrates the practical difficulties of minimizing the disasters to which they might lead. Just as a major problem that regulators face is their ignorance of the effects of their actions, especially in conjunction with past regulatory actions, the main problem scholars of regulation may face is that there are so many regulations, and so many historical circumstances explaining them—and so many theories about their effects—that inevitably, the scholars will, here as everywhere, be compelled to overspecialize. The predictable cost is that most scholars will overlook interactions between the rules in which they specialize and the rules studied by specialists in a different subfield—even if they are deliberately attempting (like the super-systemic regulator) to keep the big picture in mind.” (bold highlight mine)

That’s why any risk return analysis from today’s rapidly evolving conditions should always take into the account the evolving policy dynamics.

And policy dynamics tend to differ from country to country, which implies that the impact to markets or the economy could be expected to be dissimilar.

Another favorite iconoclast, Jim Rogers, hits the nail on the head in an interview at the Economic Times, ``I don't pay any attention to things like emerging markets premium. You talk about it on TV, but every market is different. Why can't I just go out and buy emerging markets when it is likely to go broke. Every market is different, every country is different, every economy is different and every sector of the economies is different. Just because you are in an emerging country does not mean you are going to make money if you get the wrong sector.”

Words of Wisdom On The Pursuit Of Holy Grail Investing

``Whatever method you use to pick stocks or stock mutual funds, your ultimate success or failure will depend on your ability to ignore the worries of the world long enough to allow your investments to succeed. It isn't the head, but the stomach that determines the fate of the stock-picker." - Peter Lynch

In stock markets, the implication that the public buys stocks because of entirely valuation purpose is a fallacy.

People buy or sell stocks for myriad of reasons, aside from valuations, namely, monetary policy induced responses (yield chasing), momentum, charting, punting or even to the most trivial reasons such as social pressures, gossip based or ‘my neighbor/TV/guru says so’ and etc.

Valuations, as presented by typical sell side institutions, frequently represents as fodder for cognitive biases for participants in search of a fillip or stimulant to take or justify actions (confirmation, available or information bias) or ownership (post purchase rationalization).

It’s almost commonplace to see people act (buy) supposedly based on “fundamentals” and act (sell) oppositely based on intuition. Time would, in essence, be the defining or distinguishing factor, as short term trades HARDLY REFLECT on the changes in the so called “micro” or “macro” fundamentals which are mostly long term driven.

Hence, rationalizations over the direction of actions don’t match and serve as concrete evidence of cognitive dissonance or disorientation on the part of the short term punter.

In an off track horse betting station, these would be the routine responses when a punter loses a bet… “I had that horse on my list, but”, “I was about to bet on that horse, but”, the “teller changed the number”, the “jockey took a dive!”, the “race was rigged!” and etc…

For the winner, I am GOOD!!!

This practically is a feel good thing or about self importance, more than risk-reward tradeoffs over the odds of the racing event as horse punters essentially disregard the cumulative effects (ratio of losses over wins) and look at day to day outcomes.

In behavioral finance lingo this is called fundamental attribution error or the attribution of success to oneself and failures to external or other sources.

The same errors can be observed with most market participants with short term expectations and perspectives.

And that’s why short term perspectives seem almost always in search of the ever elusive Holy Grail, because goals, required information, emotions of the moment and actions don’t square.

And Dr Janice Dorn, in her magnificent article Trading Lessons: There Is No Magic Bullet published at the minyanville.com, eloquently articulates on the psychological framework behind these (bold highlights mine),

``Most traders are looking for the Holy Grail, the keys to the kingdom, the one great book. They want the magic indicator, the chart pattern, thing, or person that will tell them what's going to happen, and what to do.

``It's a natural human tendency to want to know what's going to happen next. Chart patterns, indicators, fundamental analyses, or technical analyses are constructs we build in an attempt to bring order to uncertainty. We do this in part because we're afraid that, without a detailed roadmap, we may have no future.

``In the process of building these models, we become them. We want to believe what our eyes are seeing, when what we're really seeing are our own limitations. Charts are emotions plotted on a grid: When emotions change, the charts do, too. We can't control that, just as we can't control what others believe, or how they act on their beliefs.

``We can control only one thing: how we respond to the situation that's right in front of us. In order to do this with consistent success, we must adopt an attitude of flexibility, and rid ourselves of all our rigid assumptions.

``In the final analysis, those things we've seen on paper or had in our heads before we enter the markets are illusions. They may be useful illusions, but they're illusions nonetheless. We have no idea whether they're true or not until the markets tell us. If there's any absolute truth in trading, it's that, with 2 possible exceptions, the markets are always right. Traders ignore this at their own peril. If there's a technique for winning, it's to stop believing in so many things that are wrong. In order to do this, we must learn to harness the villains of pride and greed that speak falsely to us, telling us that we've already won. We haven't won if the markets say we've lost. By eliminating what's false, we open ourselves to the truth.”

In short, biases are illusions and pride and greed are obstruction to goals, which ultimately reveals that the basic problem, in the financial markets, is in dealing with the self. Ergo, any serious traders or investors would need to subdue or minimize these frailties and develop a strong sense of self discipline instead of looking for external attributions or excuses.

This goes similar to the prescriptions of Peter Lynch of the traits of a successful investor, ``The list of qualities [an investor ought to have] include patience, self-reliance, common sense, a tolerance for pain, open-mindedness, detachment, persistence, humility, flexibility, a willingness to do independent research, an equal willingness to admit mistakes, and the ability to ignore general panic.”

Since the world is highly complex, where we can’t discount the contribution of luck in any endeavor we opt to undertake, I’d like to add, the ability to harness and manage luck!

China In A Bubble, ASEAN Next Leg Up?

``The margin of safety is the central concept of investment. A true margin of safety is one that can be demonstrated by figures, by persuasive reasoning and by reference to a body of actual experience". Benjamin Graham

Recently I stumbled upon some quants predicting (ZeroHedge) a crash in China’s stock markets over the next few days.

Although there have been many doing so, what attracted my attention is that they had the temerity to quantify the period for the said event-particularly, July 17 to July 27.

This group seems to have a good track record of predicting events, in contrast to most of their genre (whom were caught with the recent market meltdown), albeit mostly way TOO early based on their site.

I have no idea whether these will occur or not, but I won’t bet on their side.

Although based on Figure 4 by US global Investors, China is clearly operating in bubble territory.

Figure 4: US Global Investors: Monetary Expansion in China

As caveat, bubbles normally take time to reach a climax. For instance, the US real estate bubble ballooned from 2002-2006, while global stock markets inflated from 2003-2007. True, today’s China bubble could risk being pricked hastily or abruptly, but in my view, this may seem too early.

It’s because normal bubble cycles need sustained massive infusions (we seem to be seeing the first phase) and the vast concentrations or clustering of resource misallocations that could either become huge enough to be extremely sensitive to interest rate hikes or would require continued exponential amplification of credit to maintain present price levels or a pyramiding dynamics…until the structure in itself can’t be sustained (usually interest rates from market or policy induced does the trick).

I doubt if we have reached that point.

Besides, I think that the risks seem more tilted towards government debt bubbles as global governments appear predisposed to activating money printing solutions at any signs of renewed weakness or distress in their respective domestic economies.

Remember, the present environment, for the officialdom, is construed as signs of policy based accomplishments, hence, more of the same treatment will likely be applied but at higher dosages, if asset (stock) markets fall.

Unfortunately, such policies seem to direct people into speculating more than investing.

Global policymakers, as we have reiteratively been asserting, appear to target the stock markets as the preferred signaling channel to communicate “recovery” to the public.

Figure 5: US Global Funds: Strong Loan Growth in China

And global central banks appear willing to inflate more by maintaining loose money policies to encourage bank lending growth, rather than to tighten in order to support sentiment (albeit mostly speculative) or the “animal spirits”.

In the case of China (see figure 5), the surge in loan growth appears to have triggered some alarm bells in the officialdom, as the People’s Bank of China (PBoC) had reportedly been mulling to “switch to more direct lending controls” to temper growth and where recent sales of Chinese Treasury bills saw the government accepting higher rates (Forbes). Given ample evidences of sustained economic growth, it is believed that China would begin to increase interest rates by 2010 (Bloomberg).

Hence we see the odds seem likely for a correction from severely overbought levels than from a prospect of a crash as foreseen by the quants.

However, Chinese policymakers, like their US counterparts seem to be increasingly in a bind. An early tightening (increase rates or bank reserves) or if the market sees the need for higher rates, could set off renewed volatility hence, the likelihood for both the governments to press for asset friendly bubble blowing policies.

Figure 6: Russia’s RTSI: A Probable Path For China’s SSEC

Nonetheless, in figure 6, China’s (black) trajectory could probably follow Russia (black red), where the latter saw its stock benchmark fell by 80% during the recent crisis and rebounded by 129% and has corrected by 29% at its most recent trough and appears to be on a path to recovery.

Since March of this year, China’s Shanghai Index has shown no pause from its winning streak- a valid cause of concern.

For the meantime, financial systems that have been less leveraged than their counterparts in the developed countries seem likely to absorb more of the inflationary policies adopted by their national governments and or transmitted by the US Federal Reserve.

Last week, perhaps due to this, several Asian bellwethers either broke their resistance levels or are adrift at these levels attempting for a breakout see figure 7.

Figure 7: Stockcharts.com: ASEAN Bourses

So far only Malaysia (MYDOW) has successfully cleared the hurdle while Singapore (STI), Korea (KOSPI) and Indonesia (IDDOW) are almost over the threshold point.

Meanwhile other bourses such as Taiwan, Hong Kong and Pakistan are likewise approaching their respective resistance levels with a probable test to break these barriers soon. Next week perhaps?

From where we stand, momentum appears to tell us that the next leg could likely be up for most of Asian bourses mostly led by ASEAN bellwethers.

And this should include the Philippine Phisix.

Example Of Chart Pattern Failure

As we always say chart patterns can’t be relied upon for that pivotal decision, most especially the short term ones.


The May-July S&P 500 Head and Shoulders pattern (blue curves) which had been used by the bears to call for a market crash appears to have been invalidated.

However, there is another longer term reverse Head and Shoulders (red curves) from which a break off the 950 neckline level would suggest of a vital upward thrust. Technically a break from the 950 should lead towards the 1,234 target. I doubt this to occur unless governments inflate extensively anew (second round stimulus?).

I have no opinion on where the US markets will be headed over the short or medium term. Although given the inflationary tendencies of the US government, it may seem that the recent lows could have likely served as the bottom or the floor, unless proven otherwise. But we're not saying its gonna be a bull market too.

Remember, inflation as a component of US equity returns, [see last week’s Worth Doing: Inflation Analytics Over Traditional Fundamentalism!] are likely to grow at a much faster clip than dividends or real capital returns.

And the US government has been practically inflating to support asset (stock and real estate) prices.

Big Mac Index Update: Asia Cheapest, Europe Priciest

The Economist has recently released its Big Mac Index as a guide to valuing currencies based on purchasing power parity.

Basically, the idea is, leveraging from McDonald's global presence and its best selling product Big Mac and its worldwide reach to consumers, the Economist uses the Big Mac as a benchmark to estimate on the worth of national currencies compared to the US dollar-since the US dollar has functioned as the world's international currency standard.

According to the Economist, ``WHICH countries has the foreign-exchange market blessed with a cheap exchange rate, and which has it burdened with an expensive one? The Economist's Big Mac index, a lighthearted guide to valuing currencies, provides some clues. The index is based on the idea of purchasing-power parity (PPP), which says currencies should trade at the rate that makes the price of goods the same in each country. So if the price of a Big Mac translated into dollars is above $3.57, its cost in America, the currency is dear; if it is below that benchmark, it is cheap. A Big Mac in China is half the cost of one in America, and other Asian currencies look similarly undervalued. At the other end of the scale, many European currencies look uncompetitive. But the British pound, which was more than 25% overvalued a year ago, is now near fair value." (emphasis mine)

Why Purchasing power parity (PPP) as the selected gauge?

Perhaps using the wikipedia.org explanation, `` Using a PPP basis is arguably more useful when comparing differences in living standards on the whole between nations because PPP takes into account the relative cost of living and the inflation rates of different countries, rather than just a nominal gross domestic product (GDP) comparison." (bold highlight mine)

Of course, PPP is simply a statistical construct that doesn't take into the account the capital structure or the operating framework of the political economies of every nation, which is impossible to qualify and or quantify.

Left to its own devices, theoretically, the currency markets should have closed such discrepancies. But again, national idiosyncrasies and much government intervention to maintain certain levels in the marketplace, as policy regimes embraced by many countries with a managed float or fixed/pegged structure, hasn't allowed markets to work in such direction.

Nonetheless, present trends indicate of a growing chasm in the currency values (based on PPP) where continental Europe has been getting pricier while Asia has been getting cheaper.

As per July 13th based on the currencies monitored by the Economist, Hong Kong is the cheapest currency against the US dollar (-52%) , followed by China, Sri Lanka, Ukraine (-49%), Malaysia, Thailand (-47%), Russia, Indonesia (-43%) and the Philippines (-42%) using the % variance against the US dollar from where the abovementioned currencies are 40%+ below.

Based on the Big Mac Index alone, it would appear that Asia's currencies have much room to appreciate against the most expensive Euro or against the US dollar.

Despite Lesser Wealth, Philanthropic Activities Grows

In an environment where the world's richest have become materially less richer...

This from the Economist, ``THE wealth of the world’s richest people fell by almost a fifth last year to $33 trillion, according to the World Wealth Report from Merrill Lynch and Capgemini. A rich person is defined as having at least $1m of assets besides his main home, its contents and collectable items. The number of rich people shrank by 15% to 8.6m, or 0.1% of the world's population. Their wealth declined by more than 20% in North America, Europe and Asia, but by a bit less in Africa and the Middle East. Latin America’s rich were the least affected: they lost 6% of their wealth, and the number there fell by less than 1%. In North America, which had a large proportion of people just above the $1m threshold, the ranks slimmed by 19%." (emphasis added

Growth in philanthropic activities remain less affected...

According to the Economist, ``THE global recession has failed to dampen philanthropic spirit, with many rich people increasing their charitable giving, according to a new report from Barclays Wealth. Among the 500 British and American individuals with at least $1m of investable assets, only education was considered a more important expense than charitable commitments. Some 28% of Americans say they are giving less money compared with 18 months ago, though 26% are giving more. A similar pattern is seen among those givers from both countries who inherited their fortune. But entrepreneurs are more likely to give their cash away—31% say they have increased their giving and only 17% have reduced it."

The spirit of charity doesn't vanish along with the crisis. On this account, it even increases them.

Global CDS Markets: Goldilocks Is Back?

Is the world headed for Inflation or Deflation?

From the Credit Default Swap (CDS) market perspective…

NEITHER.

Instead, it has been a GOLDILOCKS time, as the cost of insuring debt has materially declined for most of the world except Japan, Israel and Iceland!

Markets have been pricing in reduced risks of sovereign credit defaults despite massive stimulus expenditures engaged by global governments as shown by the updated table of CDS standing by Bespoke.

Chart from Bespoke

And the best performers have been emerging markets.

This from Bespoke Invest, `Russia and China are in the top five of countries that have seen default risk decline the most. Germany and France haven't seen their default risk decline by much, but it also didn't rise nearly as much as other countries during the height of the crisis. Germany, France, and the US have the lowest default risk in the world.”

The Philippine sovereign has been ranked 13th among the best performers. No wonder the huge demand on its recent offering.

Well it is likely that this has been a short-term honeymoon, as the US Federal deficits have now exceeded US $1,000,000,000 9 months into the fiscal year.

Chart from John Maudlin/safehaven.com

And this seems more likely to be the proverbial calm before the storm.

Phisix 10,000:Clues From Philippine Bond Offering

When we talk about investing, it is universally about the expectations of the shifting balances of demand and supply in specific markets.

And the recent issuance of the Philippine bonds should give us a clue.

From Finance Asia, The Philippines returns with $750 million deal

Here is an excerpt (bold emphasis mine)

``At the time of pricing, the yield resulted in a spread of 332.6bp over the 10-year US Treasury maturing in May 2019. This marked a sharp tightening versus the 599.9bp spread that was required when the Republic of thePhilippines sold $1.5 billion of 10-year bonds due in June 2019 in January this year and shows how much the market has improved since then. The yield on the 2019 bonds has dropped to about 6.4% now from 8.5% at the time they were issued.

``Even more impressively though, sources said the new bonds priced right in line with the implied Philippines curve as interpolated from the yield levels of the Philippines 2019s and 2024s. In other words, investors received no new issue premium at all.

``Not that this seemed to worry them. The offering attracted $4.4 billion worth of demand split on 202 orders, even though the term sheet clearly stated that the $750 million deal size would not be increased. As usual for Philippine issues (this is after all the country that "gave a name to the Asian bid", as noted by one analyst), a large chunk of that demand came from domestic investors, and in the end, 40% of the deal was allocated to Philippine accounts. Investors based in the rest of Asia took another 20%, while 25% went to the US and 15% toEurope.

``In terms of investor type, funds took 50%, banks 39% and retail investors 6%. The remaining 5% went to insurance companies and "others".

Some notes:

-Tightening spreads means greater demand for local debt over US treasuries.

-Investors received no premium yet the offering had been oversubscribed.

-Locals commanded the bulk 40% of the financing, which demonstrates of the immense liquidity (source of financing) of the system.

In a world of Zero Bound Policy, where yields (Peso and US dollar) on fixed income has been going down and the US dollar-Philippine Peso trades in a tight range-essentially narrows the choices for local institutions and investors as to where they should allocate savings.

And the above conditions which is an unambiguous manifestation of the loose monetary landscape is essentially shaping an environment for greater yield searching dynamics backed by a prospective expansion of credit from a system that has been largely underleveraged.

This shifts the risk premium from financial markets to real business investing.

All said, you are looking at a prospective boom (bubble) in the local equity market!

Phisix 10,000, anyone?

Has Lack Of Regulation Caused This Crisis? Evidence Says No

We find it odd when experts argue of the lack of regulation as the cause of this crisis.

Evidence simply don't support such claims...

Chart From Casey Research

According to Casey Research, ``The Federal Register is a daily publication of all the proposed and final rules and regulations of the U.S. government. The size of the register is often used to gauge the scope of regulation, and it’s been on steroids for decades.

``According to the Washington, DC-based Competitive Enterprise Institute’s 2009 edition of “Ten Thousand Commandments” by Clyde Crews, the cost of abiding federal regulations is estimated at $1.172 trillion in 2008 – 8% of the year’s GDP. This “regulation without representation,” says Crews, enables the funding of new federal initiatives through the compliance costs of expanded regulations, rather than hiking taxes or expanding the deficit."

Imagine, compliance costs at an estimated 8% of the GDP and growing!!! This represents as tremendous burden, since it reduces the productive capacity of the US economy. Money that would have gone into capital investments have been lost due to sheer compliance on the massive regulatory structure.

To add, the Federal Tax Code (see below) which is also incorporated in the Federal Register has also seen a ballooning of pages-67,506.

chart from Don't Mess with Taxes

The tax code had only 400 pages in its inception in 1913!

More from George Reisman [The Myth That Laissez Faire Is Responsible For Our Crisis] (bold highlights mine)

1. Government spending in the United States currently equals more than forty percent of national income, i.e., the sum of all wages and salaries and profits and interest earned in the country. This is without counting any of the massive off-budget spending such as that on account of the government enterprises Fannie Mae and Freddie Mac. Nor does it count any of the recent spending on assorted "bailouts." What this means is that substantially more than forty dollars of every one hundred dollars of output are appropriated by the government against the will of the individual citizens who produce that output. The money and the goods involved are turned over to the government only because the individual citizens wish to stay out of jail. Their freedom to dispose of their own incomes and output is thus violated on a colossal scale. In contrast, under laissez-faire capitalism, government spending would be on such a modest scale that a mere revenue tariff might be sufficient to support it. The corporate and individual income taxes, inheritance and capital gains taxes, and social security and Medicare taxes would not exist.

2. There are presently fifteen federal cabinet departments, nine of which exist for the very purpose of respectively interfering with housing, transportation, healthcare, education, energy, mining, agriculture, labor, and commerce, and virtually all of which nowadays routinely ride roughshod over one or more important aspects of the economic freedom of the individual. Under laissez-faire capitalism, eleven of the fifteen cabinet departments would cease to exist and only the departments of justice, defense, state, and treasury would remain. Within those departments, moreover, further reductions would be made, such as the abolition of the IRS in the Treasury Department and the Antitrust Division in the Department of Justice.

3. The economic interference of today's cabinet departments is reinforced and amplified by more than one hundred federal agencies and commissions, the most well known of which include, besides the IRS, the FRB and FDIC, the FBI and CIA, the EPA, FDA, SEC, CFTC, NLRB, FTC, FCC, FERC, FEMA, FAA, CAA, INS, OHSA, CPSC, NHTSA, EEOC, BATF, DEA, NIH, and NASA. Under laissez-faire capitalism, all such agencies and commissions would be done away with, with the exception of the FBI, which would be reduced to the legitimate functions of counterespionage and combating crimes against person or property that take place across state lines.

4. To complete this catalog of government interference and its trampling of any vestige of laissez faire, as of the end of 2007, the last full year for which data are available, the Federal Register contained fully seventy-three thousand pages of detailed government regulations. This is an increase of more than ten thousand pages since 1978, the very years during which our system, according to one of The New York Times articles quoted above, has been "tilted in favor of business deregulation and against new rules." Under laissez-faire capitalism, there would be no Federal Register. The activities of the remaining government departments and their subdivisions would be controlled exclusively by duly enacted legislation, not the rule-making of unelected government officials.

5. And, of course, to all of this must be added the further massive apparatus of laws, departments, agencies, and regulations at the state and local level. Under laissez-faire capitalism, these too for the most part would be completely abolished and what remained would reflect the same kind of radical reductions in the size and scope of government activity as those carried out on the federal level.

It's incredible to discover how the gullible public falls for such deceptions.