Friday, October 09, 2009

King Canute Effect: Lagging Peso A Consequence Of Central Bank Intervention

For a while, we have been in a quandary about the status of the Philippine Peso, as the Peso has severely lagged the region in terms of performance.

Notwithstanding, based on conventional metrics, there doesn’t seem to be any persuasive parameters to argue for a stronger US dollar, especially under today's extraordinary loose or highly liquid environment.

We have argued in Not Just A Bear Market Rally For Philippine Phisix or Asia that ``The Peso’s woes can’t be about deficits (US has bigger deficits-nominally or as a % to GDP), or economic growth (we didn’t fall into recession, the US did), remittances (still net positive) or current account balances (forex reserves have topped $40 billion historic highs) or interest rates differentials (Philippines has higher rates)."

And we have ascribed the lag in the Peso to local central bank manipulation- out of political motives in order to paint a strong economy going into elections, as well as for a grand exit for the incumbent (if the election pushes through).

And possibly too, for the desire to keep the Peso down, as prescribed by our mainstream economic experts, who mostly tow the 'mercantilist' persuasion, to sustain the purchasing power of OFWs (who account for ONLY 10% of the economy at the expense of the rest).

Well, the idiomatic "cat is out of the bag". In anecdotal terms (not direct evidence), the BSP could have indeed been manipulating the Peso...

This from Wall Street Journal (emphasis mine),

``Many of America's trading partners, however, are pushing the other way. In Asia, traders said central banks in South Korea, Taiwan, the Philippines, Thailand, Indonesia and Hong Kong again intervened to slow the dollar's fall against their currencies.

``Asian officials fear that the dollar's fall could crimp their export-driven economies. "The [Thai] baht has appreciated a little too rapidly compared with our fundamentals," said Suchada Kirakul, assistant governor of the Bank of Thailand."

In other words, despite the interventions, the Peso's latest strength simply signifies as too much market pressure against the US dollar for the BSP (local central bank) to control.

Reminds me of King Canute (or Gnut the Great) who, according to a legend, ordered the ocean waves to stop advancing. (King Canute wanted to prove to the courtier- sycophants that his power is limited).

Lesson: Market is immensely larger and more powerful than central banks.

Thursday, October 08, 2009

Gold's Record Run Is A US Dollar Affair So Far

Another interesting outlook from Bespoke Invest on Gold

Justify FullAccording to Bespoke, ``While gold is at record highs in dollar terms, the commodity is still down 10% from its highs when priced in Euros and Yen. As shown in the charts, the price of gold is up considerably over the last five years, but the recent run has only been strong in dollar terms. This indicates that the strength is solely a function of a weaker dollar rather than any real pickup demand." (emphasis added)

Additional comments:

As Bespoke noted, gold's rise so far has been a 'pass through' effect from a weak dollar.

Alternatively, this means that gold has so far underperformed the Euro and the Yen.

Also, this appears to be an "interim" trend than a secular trend.

Lastly, given that this short term phenomenon has been insulated to a seeming "US dollar event" so far, this also implies that the impact from policies to collectively devalue currencies (a.k.a. global currency war) hasn't been evident yet.

Applied to asset markets, this could suggest that inflation is still on a 'sweet spot', and would thus, seem favorable for further upside moves.





Wednesday, October 07, 2009

Successful Investing Is Boring

I fancy Jessica Hagy's Indexed blog. That's because Ms. Hagy can depict life 's paradoxes in simple but thought provoking art-like graphics.

This Normal is Boring is an example.

We can apply this to investing.



Simply substitute "Weird" with "Depression" and "Beautiful" with "Euphoria" then we come up with up with the theme: Successful investing is BORING!

Why?

Because successful investing should go against pulsating high risk momentum, sound bytes and popular opinion predicated on superficialities.


To quote on Warren Buffett (Tilsonfunds),

``I've seen nothing to improve on Graham and Fisher. Just think about stocks as a business and then evaluate that business. This requires insulating yourself from popular opinion." (emphasis added)

And to further quote John Maynard Keynes,

``Moreover, life is not long enough;- human nature desires quick results, there is a peculiar zest in making money quickly, and remoter gains are discounted by the average man at a very high rate. The game of professional investment is intolerably boring and over-exacting to anyone who is entirely exempt from the gambling instinct; whilst he who has it must pay to this propensity the appropriate toll." (bold emphasis mine)

In short, one should focus on minimizing risks and optimizing profits which require equanimity and the avoidance of gambling instincts, all of which would should make investing...quite a boring stuff.

Tuesday, October 06, 2009

US Dollar Looks Increasingly Like An Orphan

I don't know how valid this report is, but if this true, then behold we could be witnessing the end of the US dollar as the world's currency reserve regime sooner than anyone expects.

This from Robert Fisk of
The Independent

(all bold emphasis mine)

``In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

``Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

``The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years."

What used to be an isolated move by Iran to price oil transactions in US dollar appears to be generating a different flavor of the same theme, but this time with a broader following.




More from Mr. Fisk
``The Americans, who are aware the meetings have taken place – although they have not discovered the details – are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs. Against the background to these currency meetings, Sun Bigan, China's former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East. "Bilateral quarrels and clashes are unavoidable," he told the Asia and Africa Review. "We cannot lower vigilance against hostility in the Middle East over energy interests and security."

``This sounds like a dangerous prediction of a future economic war between the US and China over Middle East oil – yet again turning the region's conflicts into a battle for great power supremacy. China uses more oil incrementally than the US because its growth is less energy efficient. The transitional currency in the move away from dollars, according to Chinese banking sources, may well be gold. An indication of the huge amounts involved can be gained from the wealth of Abu Dhabi, Saudi Arabia, Kuwait and Qatar who together hold an estimated $2.1 trillion in dollar reserves."

Again if this report is anywhere true, it would suggest not only a momentous shift away from the US dollar regime but likewise, an abandonment of ertswhile allies of their patron, or importantly, a seeming realignment of geopolitical forces that depends less on the US.

I recall John F. Kennedy's remark, "Victory has a thousand fathers, but defeat is an orphan."

From the development cited above, the US dollar looks increasingly like an orphan.

Sunday, October 04, 2009

Typhoon Ondoy: Market Fallacies and Risks

``The controls are deeply and inherently immoral. By substituting the rule of men for the rule of law and for voluntary cooperation in the marketplace, the controls threaten the very foundations of a free society. By encouraging to spy and report on one another, by making it in the private interest of large numbers of citizens to evade the controls, and by making actions illegal that are in the public interest, the controls undermine individual morality.”-Milton Friedman, An Economist’s Protest

Nothing captures the human mind more than the huge events.

And huge events frequently spawn oversimplistic explanations on everything that accompanies this.

For instance in the realm of the stock market, natural catastrophe or disasters have often been equated to lower prices, for the simple reason that such dislocations are deemed to “hurt” earnings or the domestic economy.

Plausible as it seems, however this exemplifies our populist “ipse dixitism”.

Fallacy of Natural Disaster Equals Lower Stock Prices

The Philippines is home to typhoons or tropical cyclones or “Bagyo” in local vernacular, where about an average 6-7 of them lay scourge to the country annually.


The table above from wikipedia.org enumerates on the deadliest and the most destructive of the typhoons that had afflicted the country in terms of deaths and estimated damages in Peso (albeit the estimates of Peso damage doesn’t specify whether prices are reckoned from current or constant “real” terms).

However this interesting trivia from wikipedia.org, (bold highlights mine)

``The most active season, since 1945, for tropical cyclone strikes on the island archipelago was 1993 when seventeen tropical cyclones moved through the country. There was only one tropical cyclone which moved through the Philippines in 1958. The most frequently impacted areas of the Philippines by tropical cyclones are northern Luzon and eastern Visayas. A ten year average of satellite determined precipitation showed that at least 30 percent of the annual rainfall in the northern Philippines could be traced to tropical cyclones, while the southern islands receive less than 10 percent of their annual rainfall from tropical cyclones.”

So how did the top 3 worst typhoons, which occurred mostly during the early 90s, impact the domestic stock market?


The worst in terms of fatalities would be Typhoon Thelma or codenamed Uring, which slammed the country in November 1991 with an estimated 5,000-8,000 death.

However in terms of estimated property damages, Typhoon Mike or codenamed Ruping (November 1990) and Typhoon Angela codenamed Rosing (November 1995) had been recorded as the largest, with over Php 10.8 billion each (with a marginal spread between the two).

Three noteworthy observations from these typhoons on the Phsix:

One, over the short term, the impact from these typhoons had generally been a carryover of the interim trend.

Typhoon Mike and Thelma traded sideways reflecting on the trends prior to their occurrences, while Typhoon Angela traded downhill also reflecting on the prior trend.

Second, in the wake of the three worst catastrophic typhoons, in the medium term (1-2 years) the Phisix surged!

A Pollyanna could even make a misleading conclusion that typhoons are ‘beneficial’ to the stock market! However, as a word of caution: correlation doesn’t imply causation.

And lastly, over the longer term, these typhoons merely reflected on the secular trend of the market.

Since all three typhoons were at that time operating under the secular bull market cycle from 1986-1997, hence the general trend was up.

In short, in contrast to the popular “available bias” of equating “calamity equals poor stock market”, the typhoon’s impact to the stock market has largely been immaterial over all timeframes considered and tends to reflect on the major trends from which undergirds the stock market cycle.

Typhoon Milenyo And 2004 Indian Ocean Earthquake As Added Exhibits

More proof.

Conditions of the 90s have been significantly less similar than today in the age of the iPod, twitter, facebook or the internet and the epoch of globalization (in spite of the recent crisis).

So we’d make two recent comparisons: one local and an international event.

The latest typhoon that appears to have an almost parallel degree of havoc to last week’s fateful Typhoon Ketsana or codename Ondoy, to the National Capital Region of the Philippines was Typhoon Xangsane or codenamed Milenyo in late September of 2006.

Again according to wikipedia.org, ``In all, Milenyo was responsible for 197 deaths and 5.9 billion Philippine pesos ($118 million, 2006 USD) in damage, mostly to personal property and agriculture.”

The difference is that most of the destruction and loss from today’s tempest had emanated from intensive rainfall that had induced massive instantaneous flooding than from Milenyo’s calamitous winds.

In addition, the death toll from Ondoy has now reached 280 as of October 1, according to the Inquirer. This would be larger than the Milenyo experience, but would still account as vastly lower than 9 out of 10 of the list in the top 10 of the most devastating typhoons to slam the Philippines.

Typhoon Ondoy seems closing in on Typhoon Babs or codenamed Loleng during October 1998 which ranked 6th which tallied 303 deaths.


Typhoon Milenyo had basically the same traits as cited above from the “worst” predecessors as reflected in the Phisix.

The precursor trend determined the short term actions. The medium term move was a significant advance and the long term manifested the secular trend-up.

Incidentally, Typhoon Loleng of 1998 had the same short and medium term impact albeit the long term reflected anew on the major trend-down (that’s because 1997-2002 was the bear market cycle).

And fundamentally the same dynamics would even apply to one of the worst or deadliest natural disasters in recorded history over the world: December 2004 Indian Ocean earthquake.

Fatalities in the 2004 Indian Ocean Earthquake approximated 443,929, according to the wikipedia.org, which makes it the fifth worst.

The pecking order of the 5 worst disasters ever to hit human history ahead of the Indian Ocean Earthquake are: China’s 1931 Floods which took some 1-4 million lives, China’s 1887 Yellow River Floods which had some 900k-2 million deaths, 1556 Shaanxi earthquake again in China which tallied 830k of lives lost, and the 1970 Bhola Cyclone in Bangladesh which claimed 500k lives.

Indonesia took the brunt of the casualties from the December 2004 Indian Ocean earthquake which had been propelled by the secondary effect of the earthquake-a destructive tsunami.

According to wikipedia.org, ``The Sumatran province of Aceh was severely damaged by the earthquake and resulting tsunami. An estimated 167,736 Indonesians were killed and 25% of Achenese lost their source of livelihood. Banda Aceh, Aceh's capital, was the closest major city to the earthquake's epicenter, and many of its major libraries suffered extensive damage.” (bold emphasis mine)

[I would like to further disclose that wikipedia’s account of statistical figures varies: the list of natural disasters by death toll page indicates an estimated 443,929, while 2004 Indian earthquake page lists 230,000]

Nevertheless the important point is, while the impact of catastrophes is real which has significant economic implications, stock markets seem to have discounted the effects from such human losses and property destruction.


Jakarta’s major bellwether, the JKSE, even immediately rose in the aftermath of the disaster but traded sideways for most of 2005 until it eventually took off by the end of 2005.

Moreover, the devastating earthquake in Indonesia last Thursday which has exacted 1,100 as of this writing left JKSE virtually unchanged as of Friday’s close.

So whether it is typhoon Thelma, Mike, Angela, Xangsane or today’s Ketsana (Ondoy) or the tsunamis from the December 2004 Indian Ocean Earthquake or even the Spanish Flu in 1918-1919 [as discussed in Swine Flu: The Black Swan That Wasn’t], these tragedies have had minor impact to the price movements of the stock markets.

Human Action And Monetary Policies Matter

So why would stock markets seem to overrule the popular impression that “calamity equals lower stock prices”?

We offer two explanations:

One is that this signifies the dynamics of human action.

It is natural for people to speedily work for the restoration of the economic structure.

John Stuart Mill has a magnificent explanation:

``This perpetual consumption and reproduction of capital affords the explanation of what has so often excited wonder, the great rapidity with which countries recover from a state of devastation; the disappearance, in a short time, of all traces of the mischiefs done by earthquakes, floods, hurricanes, and the ravages of war. An enemy lays waste a country by fire and sword, and destroys or carries away nearly all the moveable wealth existing in it: all the inhabitants are ruined, and yet in a few years after, everything is much as it was before.” (bold emphasis added)

While restitution from the natural disasters in rich countries can be financed by medical or insurance coverage on properties affected or on lives harmed or lost, in the poor nations, people rely mostly on social network for aid.

As in the wake of Typhoon Ondoy, it is why tremendous amounts of “private” sector charity (here and abroad) have poured into those afflicted areas.

It is also why there has been a large participation from the wide spectrum of the society to assist in the distribution of relief goods.

Unseen by most, these acts of social cooperation dynamics or the “bayanihan” spirit in local lingo is more than just a manifestation of self esteem or social work goals.

It represents exhaustive efforts towards swift societal rehabilitation for the economic interest of the community [as we explained in Typhoon Onyok's Aftermath: Charity Is The Province of the Marketplace]. It is in the interest of almost everyone to see the reversion to a semblance of ‘normalization’ of the community.

In other words, marketplace charity signifies as complimentary function to the recovery of capital impaired by the calamity.

Again John Stuart Mill, ``The possibility of a rapid repair of their disasters mainly depends on whether the country has been depopulated. If its effective population have not been extirpated at the time, and are not starved afterwards; then, with the same skill and knowledge which they had before, with their land and its permanent improvements undestroyed, and the more durable buildings probably unimpaired, or only partially injured, they have nearly all the requisites for their former amount of production.” (bold emphasis added)

Hence, markets could have discounted the adverse impact from these disasters as possibly representing an anomaly than from a permanent structural impairment in the economy.

In addition, markets may also have anticipated a relatively quick recovery from the collective rehabilitation efforts to restore the economy as reasons for valuation insouciance.

Another important unseen factor, which has always and seemingly intentionally been glossed over by the mainstream, is the impact of monetary policies on asset prices.

This appears true even amidst the turmoil brought about by natural disasters.


The red arrows in the chart courtesy of the economagic shows of the “Greenspan Put” policies instituted in response by the US Federal Reserve in the face of specific global crisis or to combat US recessions, such as the 1990-91 US Recession (left most shade) and Japan’s Bubble Bust (1990), the Mexican Tequila Crisis (1995), the Asian Crisis (1997), the LTCM (1998) and Millennium Bug scare (1999).

In other words, the easing of the monetary policies in the US which had been indirectly transmitted to Philippine equity assets by way of a secular boom cycle phase. Portfolio flows, which underpinned most of the secular trend, may have offset or cushioned the large scale of losses in the real economy exacted by the natural disaster shocks.

As one would note: The rallies in the Phisix, in spite of the calamity shocks, came in conjunction with the easing cycle of the US Federal Reserve.

It is likely that today’s market environment will trigger the same response as in the past, most especially that monetary easing isn’t just a conduct exclusive of the US Federal Reserve but from global central banks which means this includes the local central bank, the Bangko Sentral ng Pilipinas (BSP).

Further in the wake of the tragedy, I expect local monetary policies to further extend their easing cycle to politically justify on lending to the disaster victims.

Price Controls As Backdoor Entry To Tyranny

The real risks to the market arise NOT from the disaster itself, but from policies assumed by the incumbent government in the face of the calamity.

Considering that the stretch of the damage of Typhoon Ondoy has been significantly less than the damage from similar typhoons in the past, it would normally be a puzzle why a nationwide “state of calamity” had been promulgated by the government.

One of the alleged reasons for the nationwide scope of the state of calamity is because earlier impositions of price controls at selected typhoon affected areas haven’t worked. Producers or traders naturally opted to sell in places which had been free of regulatory controls.

Hence, a nationwide price control policy has been instituted, all aimed at controlling the “greed” of traders. Duh!

Given that our president hails from a respected economic professional background, such reactions wouldn’t be a stranger to her.

In addition, we wouldn’t question her familiarity with the hazards of employing the repeated historical precedents of the failure of price controls.

But alas! Political season is before us. And political expediency has taken precedence over economic priorities, thereby heightening the risks of exacerbating today’s crisis.

Yet mainstream media has virtually been stultified by discounting such government act as being connected to some other tangential electoral issues [see No To Price Controls! No To Despotism!]

Mainstream media have basically neglected the implication that a national price control implicitly “seizes” control of the factors of production.

This means that if such policies further get entrenched, we could be transitioning into etatism or a different flavor of “state” socialism.

In etatism, the largest industries will risk nationalization, especially those producing political goods or services. While the small and medium industries will probably retain their private identity, they will, in effect, eventually become extensions of government operations, whereby the amount of production and prices will all be ascertained by the government.

Further, the failure to control prices from nationwide price fixing would lead next to widespread rationing, universal price fixing (This means expanding the coverage of price controls from politically sensitive goods to general goods. Since shortages will force the public to consume substitutes outside of government controls which will likewise cause price increases, these will be areas which government will expand controls) and massive subsidies, all of which, I repeat, would only substantially aggravate today’s crisis.

Yet, any further signs of these occurring in the political theater, over the coming days, will be foreboding.

Media and the academic economic experts seemed to have forgotten that one way for a prospective tyrant to emerge is through the extensive use of price control instruments as political tool to grab power!

In short, price controls could serve as a backdoor entry into tyranny. Will we risk relapsing into a dictatorship or will we assimilate the socialist models of Latin America?

As Robert Shuettinger, Eamon Butler, Forty Centuries of Wage and Price Controls, ``In Egypt, government controls over the grain crop led gradually to ownership of all the land by the state. In Babylon, in Sumeria, in China, in India, in Greece and in Rome various kinds of regulations over the economy were tried and usually either failed completely or produced harmful effects. One of the most well-known cases of wage and price controls in the ancient world occurred in the time of the Emperor Diocletian. Thousands of people throughout the Empire were put to death before these futile laws were finally repealed.” (bold emphasis added)

And by taking over the reins of the major segments of the economy from the control of the “greedy” private sectors, our political leaders will then require extended police powers for the pervasive enforcement of such political objectives.

And the feedback mechanism between more price controls and more police power would accelerate to cover more and more economic areas and eventually snowball into martial law powers as the whole economy falls into the ramparts of government control.

Considering the twilight of the incumbent political regime, emergency powers aimed to addressing calamity woes could function as fitting rationalization to short-circuit the electoral process.

Effects From Price Controls, Hoping Over Hope

Besides, we should realize that there is no getting around the natural law of economics which principally operates on the world of scarcity.

Eventually, out of the façade of short term fixes will surface the strains from the imbalances built upon superficial structures-the unintended consequences. And this could be vented through a political upheaval.

Moreover, increased used of price controls would eventually translate to heightened risks of inflation-where the real economy will suffer from specific and relative real good shortages combined with mass subsidies and an upsurge in fiscal expenditures for the expanded imposition and enforcement of regulations.

All these would also be expressed in the financial markets.

Although widespread use of said policies would naturally imply for a weaker currency or a weak peso, the Peso’s fate would greatly depend on the relative dimension, or which of the country will do least worst in the race to the bottom. In the Philippines, the conventional exchange rate pair is the US dollar-Philippine Peso.

In addition, we should expect to see below par economic growth, spikes in unemployment, political restiveness and perhaps a lagging stock market-in view of nationalization risks, as investors turn risk averse.

We can only hope that forthright “sensibilities” will sink into consciousness of our political leadership.

And that the temptations of egotistically extending political tenures, by means of maneuvering economic policies as political instruments, would immediately be abandoned.

Aside from lifting price controls, the only way to rebalance the calamity distorted prices is by the liberalization of local trade barriers so that interim shortages will met by a barrage of supplies in response to temporary surges in price signals, which would bring back prices to normal levels.

Hence, the risks of wastage will all be borne by “greedy” entrepreneurs.

And for the genuinely concerned political leadership, these measures would mitigate the burdens of taxpayers by minimizing extravagant and unproductive redistribution and ultimately shield society from the ravages of inflation.

Politics Dictating The Affairs Of The Market, Outlook

For market observers and participants, while many continue to look for entertainment value instead of the real drivers of the marketplace, the role of politics has increasingly deepened its entanglement here and abroad, thereby generating more marketplace distortions that affect both the real and financial dimensions.

Hence we suggest that policy actions will continue to strongly determine the fate of the local and global markets, the local and global economy and even our society’s agility to recover from the recent disaster.

Traditional way of thinking has been loaded with theoretical lapses (e.g. devaluations doesn’t solve disequilibrium simply because currency values are not everything, instead inflationary actions aggravates them), confused definitions (e.g. macro thinking sees the world as operating from one kind of good or product, labor and capital, hence prescribe on simplistic set of solutions cloaked with technical jargon) and selective facts to confirm on tenuously held biases (e.g. rising US unemployment is deflationary to the Philippines!!?? Excuse me).

Domestic political uncertainty, as clearly shown above, and not the deflation menace is the risk for the local financial markets. A move towards a Honduras (political turmoil) or Venezuela (deepening socialism) risks upending present gains.


While Venezuela’s IBVC appears to be up over the past 5 years as seen from the chart above from Bloomberg, the tragedy is that stock market gains are wiped out by the huge spikes of inflation as seen from the chart below from tradingeconomics.com.


This should serve as a basic example on how inflationary policies from socialism will harm investors and the rest of the population or the economy alike than to enable them to achieve fraudulent “noble” social goals.

And political risks equally apply to the international marketplace than from the premises of traditional valuation. (e.g. growing murmurs of a military strike on Iran)

While we still remain net positive on asset prices mostly from the transmission effects from global and local monetary policies, we will have to keep a close vigil over the direction of the present political winds where the risk towards a recidivist dictatorship could constitute as political shock and rattle local markets regardless of exogenous developments, or if present actions have been cosmetically designed at embellishing the highly unpopular political credibility over the interim.



Saturday, October 03, 2009

Jim Rickards: Federal Reserve needs to cut US Dollar in half over next 14 years

Jim Rickards managing director of market intelligence for scientific consulting firm Omnis, sees the US dollar cut in half over the next decade or so, in a CNBC Interview. [Hat Tip: TruthFN]

Some notes and excerpts:

Expect: 4% inflation in 14 years that will cut the US Dollar in half
Explains SDRs as solution to the Triffin Dilemma
recommends 10% gold 90% cash
SDRs-printing money but still nothing behind it
No solution for national security implications
Central banks are hoping for a "stable steady" decline of the US dollar and not a collapse


“Unannounced product of G20, the IMF anointed as global Central bank...
"IMF is issuing Debt for the first time in history"
“Displace the dollar with SDRs
“If you own Gold you are fighting central banks in the world. Central banks hate gold because it limits their ability to print money. But the market is the market, the market will do what it wants even the central banks are not bigger than the market.”



My comment:

It seems odd for an expert to prescribe a portfolio of 90% cash and 10% gold when the risk of a dollar collapse is construed as significant.

A dollar collapse means the loss of the basic function of the currency as medium of exchange, store of value and the unit of account on an international scale.

That would only mean inflation going berserk. Who would want to hold cash (US dollar) in an environment where money is rapidly losing purchasing power?

This would seem self contradictory.

Paul Volker: Growth In Emerging World Is Like The US In Terms of Impact To The World

Former Federal Chairman Paul Volker recently interviewed by Charlie Ross at the PBS discussed sundry of topics from the US economy, global economy, global imbalances, the US banking system, emerging markets, US dollar, the Obama administration, taxation and etc...

Here are some excerpts on emerging markets and the US dollar:

``It’s pretty unusual but symbolic in the change of the world, instead of the emerging world being the hardest hit by this crisis, emerging world has been coming out pretty well. Now they’ve built out big reserves so they weren’t financially hit…

``But the growth in the emerging world is quite remarkable and amidst of this turmoil the emerging world together, you know, is like the United States in terms of the impact on the world economy, you couldn’t have dreamed of that 20 years ago, 30 years ago…

``It’s good, on the other hand, it is symbolic or more than symbolic of the relative, less dominant position the United States has, not just in the economy but in leadership, in terms of intellectual

``“I don’t know how we accommodate ourselves to it…You cannot be dependent upon these countries for three to four trillion dollars of your debt and think that they’re going to be passive observers of whatever you do.”

``They want to be at a table, but coming to table doesn’t create consensus.

``We will wanna import from China we will export to China, we gotta get more balanced relationship too but I don’t think that balanced relationship is inherently antagonistic…[Not a zero sum game] not at all

``But I don’t think no substitute to the Dollar now, unless we screw up and I hope we don’t, but that will the real danger for the dollar…

``The world needs a currency, the financial world is globalized, they are very much interconnected…


``It’s very convenient to have something that you can use right away for another payment and that’s what the dollar serves and that’s why people hold so many dollars…because it is convenient. And it is reasonably stable and convenient and useable and it won’t go away in a hurry."

Part 1 (if video won't activate pls click on the "part 1" link)



Bloomberg has also an account of the interview here.
Part 2 (if video won't activate pls click on the "part 2" link)

No To Price Controls! No To Despotism!

Here’s a letter I sent to the editor in chief of the Inquirer7.net.

It’s a modified version of my earlier blog post: Price Freeze Policies Will Hurt Consumers

While I don’t expect to have my longish letter published, my intent is to nudge mainstream media of government’s creeping attempt to utilize today’s calamity via the declaration of the State of Calamity as an opportunity to expand despotism.

Mainstream media's fear appears misdirected, it is less likely about having to "raise funds for next year’s general election". But the worst possible risk is to use today's calamity as an opportunity to extend their political tenure.

Ergo, the right question that needs to be asked is: c
ould the Presidential 2010 elections be in jeopardy?

Permit me to express my disenchantment over our government’s thrust to resolve today’s crisis in the face of Typhoon Ondoy’s calamity via the repeatedly failed age-old political tool of price controls. As an old saw goes, ``the road to hell is paved with good intentions.”

In mainstream media, entrepreneurs or business entities have been predominantly depicted as generally "greedy" while government portrayed as “equitable”.

This isn’t generally true; some indiscreetness by capitalists doesn’t apply to all. Beside, consumers are inherently empowered to render discipline to errant entrepreneurs via competition.

In contrast our government had been ranked as one of the worst in corruption in Asia, which would make our government relatively “greedier”.

Yet the important difference largely unappreciated by the public is that given the police power derived monopolistic function of governments, greedy entrepreneurs would have less of an impact to undermine society than a greedy official…unless the entrepreneur have been mandated by government privileges via state capitalism.

Next, officials try to make the public believe that they can subvert the natural laws of economics and allocate resources better than the marketplace.

They refuse to admit that governments are the least effective way to direct resources for its optimal use. They should learn from the recent lessons of Cuba's failed collective agricultural policies or from forty centuries history on price controls.

Price controls or "anti price gouging regulations" in contrast to popular wisdom worsens, and does not enhance, society's predicament.

How?

One, these regulations are likely to serve as disincentive for producers or providers of goods and services to sell. Probably, they would rather hoard their stuff instead.

Two, it prevents pricing signals to spur production or supply side responses to changes in demand. This would lead to more shortages.

Three, when prices of goods or services are legally constrained to sell below market levels, the tendency is to induce significant increases in demand.

As Henry Hazlitt explains in Economics in One Lesson,

``Now we cannot hold the price of any commodity below its market level without in time bringing about two consequences. The first is to increase the demand for that commodity. Because the commodity is cheaper, people are both tempted to buy, and can afford to buy, more of it. The second consequence is to reduce the supply of that commodity. Because people buy more, the accumulated supply is more quickly taken from the shelves of merchants. But in addition to this, production of that commodity is discouraged. Profit margins are reduced or wiped out. The marginal producers are driven out of business. Even the most efficient producers may be called upon to turn out their product at a loss.

``If we did nothing else, therefore, the consequence of fixing a maximum price for a particular commodity would be to bring about a shortage of that commodity. But this is precisely the opposite of what the government regulators originally wanted to do. For it is the very commodities selected for maximum price-fixing that the regulators most want to keep in abundant supply."

Fourth, since demand and supply balance can’t respond through pricing signals, black markets are likely to emerge out of the shortages.

Fifth, more regulations will breed more corruption. Some officials will probably keep a blind eye on entities selling at "high" prices but with a "take", or by themselves undertake such actions, directly or indirectly.

Lastly, restrictions in the marketplace will even lead to further restrictions, distortions and shortages in the economy.

This means that a feedback loop mechanism will arise from existing price controls as the shortages exacerbates.

And this would lead to expanding more government controls over production, via rationing, subsidies, cost-controls and or universal price fixing, all at the expense of entrepreneurs and capitalists, the latter of which understands how resources should be better allocated from their “local knowledge” through the marketplace.

Importantly, all these economic distortions will compound to translate to inflation, a concealed tax to the population.

Now when governments own and control the factors of production this is known as socialism.

It is unfortunate that while we would like to believe that our society operates under the political process known as “democracy”, we seem to deceive ourselves into believing that economic freedom function disparately from our political “democratic” process.

Worst, the raft of economic controls signifies our incremental retrogression into the morass of despotism, placing our fragile democracy at heightened risk. What’s next, martial law?

Lastly, such knee jerk regulatory responses may not even be targeted at attaining the enhancement of our economic weal, but as political advertisement for the coming elections.

In analyzing government policies, noble motives must always be matched with economic reality, failing to do so, we should go for reality.

I say NO to Price controls.

Benson J. Te

Update: Email address to the editor I sent has expired.





Thursday, October 01, 2009

Typhoon Ketsana (Ondoy) In Pictures

Boston.com's The Big Picture captures the wrath of Typhoon Ketsana (Ondoy) in a deck card of pictures.

Here are two samples:

See the rest here

Ron Paul On The Daily Show with Jon Stewart

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BRIC Horse Race: Russia Leads, China Trails

Bespoke Invest shows of the relative (horse racing) performances of BRIC countries.

According to Bespoke, ``After leading the BRIC countries (Brazil, Russia, India, China) in year-to-date performance by a wide margin a few months ago, China is now doing the worst... Russia's stock market is now doing the best in '09 with a gain of nearly 100% (98.5%). India is up the second most at 77.5%, followed by Brazil at 62.4%, and finally China at 52.6%. And while the other three BRIC countries remain in nice uptrends, China looks quite the opposite."

It would appear that Bespoke likes to "pick" on China for unknown reasons.

Nonetheless, we would like to add that Russia's RTSI earlier fell almost 30% from its MAY 2009 high prior to this recent outperformance. So the May decline served as a "bear trap" for any BRIC skeptics.

And considering the still loose monetary environment, China's market via the Shanghai index could replicate Russia's performance.


Ticker tape reading today's activities into the future isn't guaranteed.

Wednesday, September 30, 2009

Typhoon Onyok's Aftermath: Charity Is The Province of the Marketplace

This cordial comment from Dave Llorito of World Bank practically captures how the local community has responded to the recent calamity brought about by typhoon Ondoy,

``Despite the difficulties, the response to the crisis was immediate and heartwarming. Government, in particular the National Disaster Coordinating Council, immediately mobilized its rescue teams. Citizens’ groups, media organizations, civil society, universities, church organizations, and private business—organized through text messages and social media websites like Facebook and Twitter—responded by organizing their own volunteer teams to rescue trapped victims or bring food, water, clothes, medicine, and blankets. Help from the international community also poured in." (bold emphasis mine)

So have the entrepreneurs been "greedy" as earlier depicted by media and politicians? The answer is clearly no.

Remember it is in the vested interest of the private sector to be charitable.

This is not only due to self esteem or social purposes but for sustaining the economic environment.

Think of it, if retail store ABC's customer base have been blighted by the recent mass flooding, where a massive dislocation- population loss through death or permanent relocation to other places- would translate to an economic loss for the store, then, it would be in the interest of owners of store ABC to "charitably" or voluntarily provide assistance of various kind to the neighborhood in order to prevent such dislocation from worsening, or as a consequence from indifference, risks economic losses.

Hence, such acts of charity is of mutual benefit.

Moreover, charity is the province of the marketplace. That's because markets produce and provides the goods and services required by society to operate on. Whereas government essentially don't produce goods or services but generates revenues by picking on somebody else's pocket.

As Murray Rothbard wrote, ``it is hardly “charity” to take wealth by force and hand it over to someone else. Indeed, this is the direct opposite of charity, which can only be an unbought, voluntary act of grace."

Hence acts of government to redistribute reflects on politics and not of charity.