Zimbabwe In The Aftermath Of Hyperinflation: Free Markets

We have published so much about the negative aspects of Zimbabwe, such that we even made her as model for government abuses.

The quest for the preservation of political power by President Robert Mugabe eventually led to hyperinflation.

But things do change.

It would be understandable that after enduring the worst, there is no way but up.

But it is Zimbabwe's reform transition that makes it all the while striking-from tyranny to free market.

This article from Alf Field "Zimbabwe's Fresh Start" is a must read... (Thanks to Jeff Tucker of the Mises Blog)

(bold highlights mine)

``In February 2009 Zimbabwe was the only country in the world without debt. Nobody owed anyone anything. Following the abandonment of the Zimbabwe Dollar as the local currency all local debt was wiped out and the country started with a clean slate.

``It is now a country without a functioning Central Bank and without a local currency that can be produced at will at the behest of politicians. Since February 2009 there has been no lender of last resort in Zimbabwe, causing banks to be ultra cautious in their lending policies. The US Dollar is the de facto currency in use although the Euro, GB Pound and South African Rand are accepted in local transactions.

``Price controls and foreign exchange regulations have been abandoned. Zimbabwe literally joined the real world at the stroke of a pen. Money now flows in and out of the country without restriction. Super market shelves, bare in January, are now bursting with products."

Read the rest here.

Some additional important quotes:

Here are the common sins (not only in Zimbabwe but everywhere- the difference is that Zimbabwe went to the extremes) and their consequences...

``There are common denominators in all hyperinflations. Generally government finances reach a point where large budget deficits cannot be financed by taxes or borrowings. The choices come down to austerity (with the government cutting back its spending) or by funding the deficit by creating local currency through the printing press, leading to the inflation tax. This is always a political decision, but the line of least resistance is the printing press. Cutting government expenditures and laying off bureaucratic staff is anathema to most politicians.

``The worst trauma for ordinary people during the hyperinflation was lack of food. This was due mainly to the imposition of price controls. If the cost of production of an item was $10 and the price controllers instructed that the item could only be sold for $5, the business would soon go bankrupt if they sold at the controlled price. The result was that production and imports just dried up, hence the empty shelves in the supermarkets. People survived by shopping in neighboring countries and relied on assistance from South Africa and the aid agencies.

``Companies survived the hyperinflation with great difficulty and often by ignoring laws. Although companies were left without debt post February 2009, they were also left deficient in working capital and had dilapidated plant and equipment. Regular repairs and maintenance could not be afforded. Most companies now require urgent recapitalization.

``The causes were those always present in these events. A weak economy, large government budget deficits, inability to borrow funds combined with the political decision not to cut Government spending. Governments are reluctant to lay off government employees, especially those related to the armed forces. The latter might invite a military coup. The only source of funding left is the creation of new money.

As to how one hedges against hyperinflation from the Zimbabwe nightmare...

``Having seen the impact of hyperinflation at close quarters, my view is that this is the least desirable method for eliminating excessive debt. The population has been traumatized physically (starvation), mentally and financially. Most people did not have foreign assets or local tangible assets, so lost virtually everything. The companies survived using unusual skills, ignoring laws and protecting working capital by holding foreign currency or purchasing equities"

Foreign currencies, equities, unusual "survival" skills and IGNORING LAWS...

Final quote...

``It is fascinating to see how rapidly the economy is recovering. It is a great testament to what can be achieved in a free enterprise environment by the elimination of controls combined with the institution of new money that people trust. It needs to be money that their Government cannot create via the printing (or electronic) press."

Amen

Graphic on Cell Size and Scale

Here is a dandy graphic on the size and scale of a cell from University of Utah-Genetic Science Learning Center. (HT: Paul Kedrosky)

Press on the image to redirect link.

Prediction Fulfilled: Philippine Mining Index Tops 9,000 (Now 11,300!)

``A cynic is a man who knows the price of everything but the value of nothing.”-Oscar Wilde

WAY back in 2003, I turned bullish on gold and wrote a series called the “Rip Van Winkle in Gold”. (No blogging yet for me)

Not content with newsletters to our clients, I submitted my article entitled, “The Philippine Mining Index Lags the World” to two international websites (see link: safehaven.com and goldseek.com) who promptly published my outlook. Of course, I would like to thank safehaven’s Mr. Bruce Stratton and Goldseek’s Mr. Peter Spina for this.

My underlying message: Philippine mining industry, which should benefit from a secular global bullmarket in gold prices, will eventually become a dominant theme for the PSE. In addition, not only in terms of stock prices, but likewise from an increasing share of contributions to the domestic economy.

The last time I followed up my prediction for the Philippine Mining Industry to test the 9,000 level was in May 6, 2007 [see Philippine Mining Index: Reliving The March to 9,000!]

How time flies!

Anyway, the red arrow in 2003 shows that the Philippine Mining Index was at around 1,500 when I made the audaciously unorthodox call. The light orange arrow, where the Philippine Mining Index reached its high in 1987, served as my benchmark. The blue arrow marks today’s milestone breakout.

It’s isn’t easy to be a contrarian. Aside from being ostracized for espousing unpopular unconventional views, we occasionally get ridiculed or scoffed or mocked at. I never realized that publication can also be a humbling experience, aside from the self-effacing trait one has learned and gleaned from dealing with markets.

Speculative Stigma, Resource Curse

Anyway, the sharp downside volatility of 2008 meltdown likewise placed into a stern ordeal my beliefs. The mining index got bludgeoned the hardest. This goes to show local investors have yet to assimilate on the risk reward prospects of the industry aside from the realization of the diminishing risk premium relative to the reckless policies engaged by policymakers that enhances the value of mining products.

Moreover, the speculative stigma has yet to be eschewed by public. This has been quite evident even in the political context where populist politics have equated mining as anti-environment. This is where reason has been blinded by unthinking populism predicated on ipse dixitism and of the farcical nobility from the socialist mindset.

By prohibiting trade, supply is taken off the markets from which, in the face of limitless fiat currency issuance by global governments, would only provoke a supply shock that would send prices spiraling higher.

And a spillover of high prices to a wider basket of goods would only result to increased economic hardship in the name of environmental preservation. Moreover there are other opportunity costs from preventing commercial operations (such as increased employment and livelihood, technology transfers and other business opportunities).

Yet if mining has been generalized as totally environmentally destructive then it follows that we should expect economies as Australia, Canada, Chile, New Zealand and others to be vast wastelands. Conversely, considering that the domestic mining industry has largely been in the doldrums due to two decades of falling commodity prices, then the Philippines must have been an environmental model. Unfortunately, none of the two arguments are valid, demagoguery has been unsupported by facts. To add, environmentalism has been converted to religion-where reasoning is proscribed.

At the end of the day, high commodity prices would only compel for a “resource curse”. This means that eventually the political elite and their supporters or the economic rent seeking interests tied to them will use state power to engage in resource extraction. And by preventing trade and competition and by monopolizing commercial activities by the greasing of the public officials, these actions will effectively undermine social and political institutions which should impede growth-the recipe for the resource curse.

Examining The Mining Index

Going back to the mining index, compared to the previous boom, which had been premised on foreign investors buying into the local industry, today’s mining index breakout seems to have been based on several Godfathers’ (to borrow Joe Studwell moniker of domestic economic elite) interests on the publicly listed mines. Perhaps the dynamics mentioned above could be in play.

Principally the mining index boom has mainly been prompted for by the recent explosion of Philex Mining [PX] prices.

PX, a gold mining company, which price per share almost doubled from last month constitutes more than 60% of the Philippine Mining index weighting. In addition Philex’s market cap as a Phisix composite member has stormed to 4.19% as of Friday’s close.

Philex, which has surprisingly surpassed Metrobank [MBT], Globe Telecoms [GLO], Banco De Oro [BDO] and etc., is now among the top 10 or among the Phisix big leaguers.

Although as a caveat, the recent price action of Philex appears to have reached bubble like proportions. PX’s turnover this week constituted about 25% of the Philippine Stock Exchange’s total. The hefty turnover somehow replicates the Meralco saga [see Bubble Thoughts Over Meralco’s Bubble] which makes us leery of the attention PX has been getting.

But don’t get me wrong. Whether it is Meralco or PX they are all headed higher over the longer term. In a bullmarket-generally- all stocks go up to paraphrase Edwin Lefevre.

It is just that the unwarranted short term attention that could pose as a barrier for sustained new interim highs following a record breathtaking run.

It is true that size and heft matters, and this has been the reason for what we might call “survivorship bias” or the tendency to focus on winners at the expense of the mediocre.

The fact of the matter is Nihao Minerals Resources [NI], another mining outfit which could be classified as exploratory since the company has yet to make a buck from actual mine operations, has been a far stellar performer than PX.

NI’s chart has been parabolic or vertical (black candle), has returned almost 5x or 500% since the first quarter of this year and has breached to a new record high prices along with PX.

Moreover given the chart above of the other mining components as part of the local mining index, we can note that all the mines-Apex Mining (light orange) [APX], Lepanto Consolidated (dark green) [LC], Manila Mining (light green) [MA], Atlas Consolidated (blue) [AT] and Geograce Resources (gray) [GEO] have all made substantial moves, but unlike PX and NI are still far from the 2007 highs.

The chart excludes other mining index members particularly Omico Mining [OM] and oil companies Philodrill [OV] and Oriental Petroleum [OPM]

My Two Cents On The Domestic Mining Industry

So here are my thoughts on mining industry:

1. Given the recent explosion of NI and PX, corporate or mine product price fundamentals does not appear to be the key drivers but from alleged interests from new class of investors [including Godfathers] to partake of key stakes in the firm. Of course, loose monetary policies have been the unseen or unrecognized factor behind the reanimation of local equities in general.

2. Since the domestic mining industry remains broadly underinvested and where current crops of mining firms lack the capital to expand or operate, the major catalysts for prospective runs would be speculations on joint ventures and or prospective M&A developments from new investors (they could be foreign or local godfathers)

3. Actions among the mining components appear to be rotational- a classic symptom of bullmarket driven by inflation. This implies that the next major moves could likely come from those that have been in a reprieve.

4. A sustained bullmarket in commodities- arising from monetary “pass through” or from BRIC and emerging markets demand- is likely to underpin the secular case for investing in local mines.

5. Compared to other sectors mines are likely to generate ALPHA. As in the case of PX which traded at about .50 cents (dividend adjusted) per share in 2005, and closed 16.75 per share last Friday or a 3,300% for 4 years (285% p.a,) in spite of the volatility, should be very rewarding for long term investors.

That’s because using the “follow the money trail” analysis underinvestment in a world where money is given for free should translate to a gush into the industry which equally becomes rife for M&A rumors.

6. Market trends are social trends. As mentioned above, the speculative label on the mining industry is a symptom of the lack of social acceptance or persistent aversion emanating from over two decades of depression. Essentially such resistance is psychologically bullish. That’s because despite present levels, only a handful have been invested. In social terms, bandwagon effect occurs when trends are reinforced by confirmation of expectations. In other words, long term trends draws in more converts.

It’s when commodities or the mining industry is seen as “risk free” or deemed as blue chips or becomes the public’s favorite object of discussion- is where the red flag should be raised. As far as we are concerned, such social dynamic seems distant.

From this juncture, we believe that the mining index next goal would conservatively be at least 20,000.

Important disclosure: I am not fortunate to own any of today’s star performers. So it would seem like a pyrrhic victory-right in essence but less lucky in selection.

Following The Money Trail: Inflation A Key Theme For 2010

``Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat”-Sun Tzu

WAY past the self imposed $300 billion and October deadline, the US Federal Reserve continues to load up on long dated US treasuries this week.

Figure 1 Cleveland Federal Reserve: Credit Easing Policy Tools

Notably the amount of purchases has doubled to $ 7 billion from last week’s $2.8 billion. These Quantitative Easing activities have coincided with a new watermark high among global equity benchmarks (see figure 2).

Importantly, US Treasury purchases by the US Federal Reserve which commenced in the week of March 18^th of this year, has nearly been concomitant with the March 6^th lows of the US stock market.

Figure 2: Stockcharts.com and Cleveland Fed: Inflection Points Coincide With QE

This posits that after the US markets set a floor in March of this year (vertical blue line left window), the subsequent long dated Treasury purchases (light green arrow left window) by the US central bank combined with the earlier and larger purchases of agency debts have been tightly correlated with the revitalized actions in global stock markets which has likewise been reflected on the inverse price movement of the US dollar Index! (see figure 2)

Evidence and logical argument tells us that this has been more than just a tight correlation but one of causational influence.

So while the “desperately looking for normal” camp continues to pattern their analytics to the conventional economic sphere to predict for a “normalization”, the movements in the markets have increasingly been detached from the underlying motions in the real economy. And the evolving events have repeatedly and derisively contravened such expectations.

For instance, unemployment rates have soared to 10.2% in October (yahoo Finance) with the growling bear camp predicting unemployment rates to reach 12-13% (WSJ Blog) yet US markets continue to crescendo.

And such blatant disparity between surging stocks and improving but tepid economic growth activities has left the mainstream deeply discombobulated.

US Government’s Primary Political Goal: Save The Banking System

Two principal reasons for such confusion:

One, imprisoned by walls of conventionalism, this camp obstinately refuses to acknowledge and or reckon with the political objectives of the incumbent political leadership and their respective bureaucratic authorities, and their consequent actions or measures thereof.

This camp also refuses to digest or internalize on the reality that political objectives have NOT been primarily directed at rehabilitating unemployment, output gaps (excess capacity), idle resources or economic growth, which appears to be secondary, but on the PRESERVATION of the banking system!

The morbid fear out of a massive wave of near simultaneous banking closures or banking collapse (ala the Great Depression) that would lead an eventual systemic deflation has prompted the US Federal Reserve to engage in a massive and unprecedented scale of operations to buttress its banking system.

And it is for this reason that the Federal Reserve has reconfigured bank earnings from its traditional “deposit and lend” operating model, in the face of a disinclined market hobbled by over indebtedness, to a “bank as trader” model.

The Fed has engaged in a massive manipulation of market conditions to the benefit of the “Too Big To Fail” Banks in order to attain such goals [see our expanded explanation in 5 Reasons Why The Recent Market Slump Is Not What Mainstream Expects].

A recovery in earnings is sine qua non to ensure the industry’s survivability and so far the financial sector appears to have positively responded to the Fed’s programs in terms of ameliorating the industry’s balance sheets via earnings growth (See figure 3)

Figure 3: Bespoke Invest: The Financial Sector’s Explosive Earnings Recovery

The bank as trader model has singlehandedly turbocharged the earnings of the S & P 500 despite a broad based sectoral decline in the third quarter on a year on year basis (left column). This is a concrete evidence of the outcome of state capitalism, where political officialdom selects the beneficiaries of its actions.

Meanwhile elevated stock prices appear to have somewhat reanimated the animal spirits that seem to have filtered into the earnings expectations of some sectors as the Technology and Materials in the 4^th quarter.

To quote Bespoke Investment, ``The Financial sector is currently expected to see growth of 133.8% in Q4 '09 versus Q4 '08. This high estimate in the Financial sector helps put estimates for the entire S&P 500 at +65.2% in the fourth quarter. Ex-Financials, the S&P 500 is expected to see Q4 earnings actually decline by 7.6%. Technology is expected to see growth of 21.5% in Q4, while estimates for the Materials sector are currently at 97.5%.”

As you can see stock prices have been on an overdrive while earnings have only gradually begun to recover, except for the Financial sector. This unique market-real economy divergence has long been prompting bears to call for a reversion to the mean. Unfortunately for them the market continues to scathingly defy their convictions.

Following The Money Trail Analytics

Moreover, the “desperately seeking normal camp” which mainly sees current policies as a “one size fits all” remedial approach to both the banking sector and the US economy is a highly misguided diagnostic.

The fact that the US has spent more and provided gargantuan guarantees for its banking system than for the economy conspicuously reveals of its political priorities.

As we previously quoted a Bloomberg report, `` The U.S. has lent, spent or guaranteed $11.6 trillion to bolster banks and fight the longest recession in 70 years, according to data compiled by Bloomberg. That’s a 9.4 percent decline since March 31, when Bloomberg last calculated the total at $12.8 trillion.”

For the real economy only $132.5 billion or roughly 17% of the $787 US fiscal stimulus have been spent as of November 10^th (recovery.gov)

Yet what seems obvious based on evidence hasn’t been given an appropriate weighting. Instead, experts have opted to selectively choose or data mine facts based on a preferred conclusion.

On our part analysis based on “follow the money trail” has been more effective.

And the money trail tells us that political reality translates to inflation as having been the chosen recourse to salvage the US dollar standard system pillared by the US banking system. The economy, despite the official pronouncements, is a secondary concern.

For as long as economic strains poses as threat to the survival of its banking system, the US political leadership will err on the side of an inflation risk and public sector credit risk than with the risk posed by deflation from a banking collapse. Hence, the sustained QE purchases on long dated treasuries, in spite of the self declared deadline and equally the sustained guarantees on the market mechanism conditioned by the US Federal Reserves that would allow the earnings of the banking system to recover.

This renders talks of “exit strategies” as mainly some sort of communication signaling ruse-meaning central bankers feign interest aimed at controlling the surge in asset prices. As we have been repeatedly saying, economic ideology and recent policy triumphalism has boosted the confidence of policymakers to undertake policies in the same direction. Any proposed “tightening” changes will likely be conservative.

Yet, in contrast to mainstream expectations, QE or “money printed from thin air” buying of US treasuries and US agency debt instruments from private institutions, have been flowing into commodities and equity markets and has likewise exerted pressure on the US dollar-giving a semblance of a US dollar carry.

Nonetheless misreading effects as a cause would seem like a sign of incomprehension or outright denial as a result of either economic ideological zealotry or blind spot biases.

The Folly Of Money’s Neutrality

The second reason for such confusion is the widespread or popular fallacious wisdom of the neutrality of money.

Conventionalism treats money has having a minor impact on its purchasing power or in the economy as transmitted by such inflationist policies. This is the reason why the mainstream can’t seem to reconcile on the dynamics behind rising asset prices and the divergence seen in the real economy.

Professor Mr. Ludwig von Mises explains the flaw in populist wisdom (bold emphasis mine), ``It is a popular fallacy to believe that perfect money should be neutral and endowed with unchanging purchasing power, and that the goal of monetary policy should be to realize this perfect money. It is easy to understand this idea as a reaction against the still-more-popular postulates of the inflationists. But it is an excessive reaction, it is in itself confused and contradictory, and it has worked havoc because it was strengthened by an inveterate error inherent in the thought of many philosophers and economists.”

``These thinkers are misled by the widespread belief that a state of rest is more perfect than one of movement. Their idea of perfection implies that no more perfect state can be thought of and consequently that every change would impair it. The best that can be said of a motion is that it is directed toward the attainment of a state of perfection in which there is rest because every further movement would lead into a less perfect state.”

In short, economic activity is seen as fundamentally independent from money supply growth.

Furthermore, asset prices have been deemed to operate on the premise of ‘efficient’ market price signaling brought about by disparate entrepreneurial assessments, estimates and evaluation. This is hardly true today.

And such perceptions of market efficiency will unlikely reflect on the same performances of yesteryears, as global governments have taken to the center stage in the propping up of financial markets.

The Periphery As Global Economic Locomotive

A recent rundown on the performance of global stock markets can be seen in Global Stock Market Performance Update: BRICs Firmly In Command. What seems obvious is the relativity or the variability of performances from the collective pace of global reflationary activities.

Major emerging markets have monstrously been outperforming developed economies equities for several crucial reasons: a largely unimpaired banking system, low systemic leverage and high savings, from which monetary and fiscal policies seem to have generated a visible efficacy-read my lips-seminal bubbles.

This also means that the transmission mechanism of inflation has been segueing from the core (developed economies) to the periphery (emerging markets) -where the periphery is now expected to lift the economic conditions of the core.

Figure 4: World Bank Asia Pacific Update: China’s Powerlifting The Developed Economies

The recent crisis has triggered the reshuffling economic might. China’s economy offset the economic losses from developed economies as shown in figure 4.

According to the World Bank, ``Thanks to China, East Asia remains the fastest growing developing region in the world. Although China’s economy accounts for less than a tenth of the global economy, the increase in China’s GDP in 2009 will offset three-fourths of the decline in G3’s GDP. This number underlies China’s markedly increased global role, but also reveals the limits to what China alone can do, because this year’s outcome was achieved through a huge monetary and fiscal stimulus that the authorities will find neither prudent nor necessary to sustain for an extended period of time. Take China out of the equation, however, and the remainder of the region is set to expand at a slower pace than the Middle East and North Africa, South Asia, and only modestly faster than Sub-Saharan Africa (Table 4). This reflects the openness of East Asia and the fast transmission of shocks through production networks serving the U.S., Japan and other global markets.” (bold highlights mine)

In short, conventionalism continues to embrace myopically a US centric world, even as global growth dynamics appears to be shifting to a very important theme: the periphery as the world’s economic growth locomotive.

In addition, conventionalism can’t seem to grasp the encompassing dynamics where government has practically been THE market. The US Government has been the market because the political authorities deem the “Too Big To Fail” segment of its banking system as indispensable to the economy or for unspecified purposes (known only to the authorities-saving friends perhaps?).

This means that when government as policy, prints money to buy assets from private institutions that owns these securities to shore up its financial sector; money from the proceeds of the sale of assets circulates in the economy or is imbued by the financial market.

Why? Because according to Professor Mises, ``Money is an element of action and consequently of change. Changes in the money relation, i.e., in the relation of the demand for and the supply of money, affect the exchange ratio between money on the one hand and the vendible commodities on the other hand. These changes do not affect at the same time and to the same extent the prices of the various commodities and services. They consequently affect the wealth of the various members of society in different ways.”

In short, inflationism is fundamentally a redistribution of wealth.

From the US perspective, since the advent of the crisis, US taxpayers have been funneling wealth into its financial sector, which is being precariously upheld by the government policies.

On a global scale, the ongoing QE process by the US government has been facilitating for capital outflows from the US. Conversely, such outflows have translated to influx into emerging markets channeled via a vastly weakening US dollar-ergo, the immense disparity in the equity performances between emerging markets and developed economies.

So while we may not have seen generalized inflation yet, what we are seeing today has been a colossal flow of money into assets or “asset inflation” mostly in terms of rising prices of stock markets and possibly in real estate markets of some emerging economies aside from commodity inflation.

Myths and Fallacies, Inflation A Predominant Theme For 2010

Figure 5: Danske Bank: Euroland Loans Picking Up

In addition the vast excess reserves held by the banking system in the developed economies, given today’s buoyant sentiment, is NOT a guarantee that the reserves won’t be converted into private sector loans (see figure 5)

Even as money supply year on year change on the Euroland has been on a decline (right window) since 2007, the loans to non-financial institutions and households have been resurgent (left window). Given the fractional reserve nature of our banking system, sustained loan growths would eventually translate to a surge in money supply growth.

Essentially, more of the continued central bank money printing activities and circulation credit from global zero interest rate regime will transpose to even more systemic inflation.

Remember, it would be a fallacious argument to read ‘deflation’ as contracting money supply in debt plagued economies and apply a different definition to emerging markets (mostly in terms of surplus capacity).

Such inconsistency makes the global deflation theme highly vulnerable or flawed.

Figure 6: World Bank: Different Structures, Different Impact

As seen in figure 6, credit growth has been relatively nuanced among Asian economies and has impacted the region’s economies distinctly.

Therefore, oversimplifying inflation or deflation without fully understanding the fundamental individual political economic constructs of each nation would seem nebulous.

Moreover, it is likewise another fallacious argument to predicate the “containment” of inflation on lofty bond prices alone. As earlier discussed, applied to the US, US treasuries have been one of the key markets supported and manipulated by the US government aimed at bolstering its banking system.

Where price controls can create temporary conditions favorable to policymakers, imbalances from market distortions are fostered from within that would eventually unravel once the system can’t absorb more of these at the margins.

Yet, to assume that current market conditions accurately paint today’s economic environment would be a monumental folly. To be sure, this view critically fails to contrast on the political dynamics from economic metrics.

Moreover, this view seems like a perilous miscomprehension on the operating dynamics of inflation. Inflation does not just randomly pop up where central banks can do a whack-a-mole. Inflation is a political process that operates and is manifested on the markets in stages. [see What Global Financial Markets Seem To Be Telling Us]

Hence, market action is conditional on the direction of global government policies where so far political authorities have been predisposed towards the global reflation context.

This, in essence, also suggests that inflation, as expressed in mainstream definition as higher consumer prices, will likely surprise to the upside and will be a key theme for 2010.

Mark Mobius On Russia's Stock Market: Significant Upside Potential And Remains An Attractive Investment Destination

Emerging Market Guru Mark Mobius of Templeton Funds features Russia in his latest commentary...(bold highlights mine)

``During 2008, Russia was among the weakest stock market performers in the emerging market universe, losing more than 70% in US$ terms. But this year, the market has staged an impressive rally surging nearly 100% in the year-to-October period. The Russian market is among the cheapest in the emerging market universe and is trading at a discount of around 50% to its counterparts.

``Today, Russia and many other emerging markets are now being driven by an excess in money supply in the international markets which means that these markets are experiencing an inflow of money for investments. Consequently, as Russia was more depressed than other markets, the upside is greater. At Templeton, we continue to find attractive opportunities in most sectors despite the recent rally as valuations remain undervalued. The Templeton Emerging Markets team continues to study individual companies and maintain a long-term investment outlook. Of course general factors such as trends in regional consumer expenditure, commodity prices and corporate governance policies are also taken into account.

We believe that Russia’s equity markets are poised to climb significantly higher because even among Russia’s blue chips you can still find undervalued stocks relative to global and sector peers. Take for example, Gazprom and Lukoil. Gazprom is the largest producer of gas in the world by reserves and production. The company’s reserves account for nearly a fifth of the world’s supply. It is also the biggest gas supplier to Europe and makes up for a majority of the gas production in Russia. Its valuations, however, remain extremely attractive with a P/E of just 4.5x and P/BV of 0.9x.

Lukoil is the second largest vertically integrated oil company in Russia and one of the largest in the world in terms of reserves. The company is engaged in exploration, development, production and refining of crude oil and marketing and distribution of crude and oil products. Lukoil is also trading at very attractive valuations with a P/E of 5.3x and P/BV of 1.0x.

However, there are still risks involved with Russia. The short-term risk is a downturn in money supply and a political event which could impact market sentiment while in the longer-term, it is a change in government attitudes towards privatisation and a market economy.

There are some sectors that we prefer over others within Russia. At the moment we like commodities and in particular the oil companies. We also like consumer sector given that it is a growing market in Russia. In particular we are finding good value in consumer products and distribution companies.

In general, our long-term outlook for Russia remains positive. The country has the world’s third largest foreign exchange reserves at more than US$400 billion. Meanwhile, inflation has been trending down and due to timely and adequate support from the government to the domestic banking system, a new equilibrium for the Ruble has been established. As a result, the authorities were able to cut interest rates. Moreover, Russia owns large proportion of the world’s natural resources and many of the country’s commodity companies are among the world’s low-cost producers.

``Last but not least, it is interesting to note that based on current valuations, the Russian market is among the cheapest in the emerging market universe. With Price to Earnings (P/E) of just 9.8x and a Price to Book Value (P/BV) of just 1.2x, the Russian market is trading at a discount of about 50% to its emerging market counterparts. This gap should eventually narrow, which is why we believe that Russia could outperform its emerging market peers in the future. In addition, Russia is also trading at a discount to its BRIC peers (as represented by the MSCI BRIC index), which have a P/E of 15.8x and P/BV of 2.2x. Thus, the Russian market has significant upside potential and remains an attractive investment destination."

Global Migration Trends: 700 Million Desire To Live Overseas Permanently

If migration would be liberalized, some 700 million people is likely move overseas permanently. That's based on Gallup's estimates...

``Gallup finds about 16% of the world's adults would like to move to another country permanently if they had the chance. This translates to roughly 700 million worldwide -- more than the entire adult population of North and South America combined."

And the most preferred destination for global immigrants would be the US.

Again from Gallup, The United States is the top desired destination country for the 700 million adults who would like to relocate permanently to another country. Nearly one-quarter (24%) of these respondents, which translates to more than 165 million adults worldwide, name the United States as their desired future residence. With an additional estimated 45 million saying they would like to move to Canada, Northern America is one of the two most desired regions.

But of course, while the US would be the most desired destination, one would have to reckon with their prospective emigrants. Simply said, while the world sees the US as their prime location for immigration, several Americans would opt to to live overseas.

Here Gallup measures prospective net migration flows via Potential Net Migration Index.

According to Gallup, ``The Potential Net Migration Index is the estimated number of adults who would like to move permanently out of a country subtracted from the estimated number who would like to move into it, as a proportion of the total adult population. The results are based on nationally representative surveys of more than 260,000 adults worldwide. The higher the resulting positive PNMI value, the larger the potential net adult population gain. In Turkey, for example, subtracting the estimated 7 million adults who would like to move abroad from the 2 million adults who would like to move to Turkey and dividing that number by the total adult population (52 million) results in a PNMI value of -10%."

``Across the 135 countries surveyed between 2007 and 2009, Singapore posts the highest Potential Net Migration Index of all countries and areas, with a net migration index value of +260%. Saudi Arabia (+180%), New Zealand (+175%), Canada (+170%), and Australia (+145%) round out the top five.

``Interestingly, the United States, which is the top desired destination among all potential migrants, does not make the top five in terms of potential net population growth. The United States' net migration value of +60% places it farther down the list, after Canada and several other developed nations that dominate the top of the list. One important caveat to consider, however, is that the population size of a destination country is related to its ranking.

``Developing countries, in contrast, dominate the bottom of the list. The countries with the highest negative Potential Net Migration Index values are the Democratic Republic of the Congo (Kinshasa) (-60%), Sierra Leone (-55%), and Zimbabwe (-55%), Haiti (-50%), and El Salvador (-50%)."

Gallup estimates a potential net migration index for the Philippines as -20.

The top 5 nations with the largest positive net migration index are commodity exporting countries except for Singapore. Moreover, 4 of the 5 are in Asia (except Saudi-maybe the preferred choice for most of Muslim Migrants) and are economies that have been ranked as economically free, i.e. Saudi Arabia 59th, Singapore 2nd, Australia 3rd, New Zealand 5th and Canada 7th (Heritage Foundation)

Decoupling In Oil Markets: Asia's Developing Thirst

Decoupling in oil markets as seen by the Economist.


According to the Economist, ``GLOBAL demand for oil is set to rise from 84.7m barrels per day (bpd) in 2008 to 105m bpd in 2030, says the International Energy Agency in its latest annual energy report. Transport will account for 97% of this increase as rising numbers of cars hit the roads of the developing world. Demand from these countries will overtake that of the industrialised OECD nations by 2030. By then, America, Japan and Europe will be using less oil than in 1980. But the thirst for oil will balloon in Asia—and in India and China in particular—where demand is predicted to rise by as much as 400% compared with 2008."

See our earlier June post:

Decoupling in Oil Markets: The Centre of Gravity in Energy Markets Has Shifted To Emerging Markets

Global Stock Market Performance Update: BRICs Firmly In Command

The following is an updated year to date stock performance among 82 countries monitored by Bespoke Investment.
According to Bespoke, ``So far this year, 71 of the 82 countries are in positive territory, and the average change of all countries is 33.27%. With a gain of 20.76%, the S&P 500 is 13 percentage points below the average, yet it's the second best G-7 performer behind Canada so far in 2009.

``The BRIC countries (Brazil, Russia, India, China) have been standouts this year. Russia is up the most out of all countries with a gain of 126.71%. Brazil, China, and India are all up more than 70%. Along with Russia, the Ukraine, Argentina, and Peru are up more than 100% year to date.

``Eleven countries are down so far in 2009. Ghana is down the most at -48.26%, followed by Puerto Rico (-40.56%), Bermuda (-38.36%), and Costa Rica (-35.37%)."(bold emphasis mine)

My additional comments:

Asia constitutes half of the 20 best performers including the Philippines (16th).

Yet if one includes Israel (Western Asia) that should translate to 55%. Moreover, Turkey and Russia are both Euro-Asian countries.

It's fundamentally a rising tide lifts all boats dynamic except for the 9 outliers.

Latin American bourses have been mixed- Peru and Brazil are top performers while 4 are among the worst (Ecuador, Costa Rica, Bermuda and Puerto Rico)

The gap between the BRICs and G7 economies are miles apart.

In addition if the average gain is 33% then G7 economies fall below the average despite the positive performance.

The wide chasm accounts for the divergent impact of the crisis as well as the varying impact of the reflationary policies adopted.

Europe's Cannabis Usage and Drug Decriminalization

The Economist gives us a perspective on the state of Cannabis usage in Europe.


According to the Economist, ``OVER a fifth of Europeans have taken cannabis at some point in their lives, according to new report on illegal drug use from the EMCDDA, the EU's drug-monitoring arm. Over 30% of Danes, French and Italians aged between 15 and 64 have puffed on a joint. But perhaps for Danes it is just a phase: the Italians, Spanish, French and Czechs are most likely to have dabbled with cannabis in the recent past. Levels of cannabis use are still high but may be declining, says the report. Recent studies suggest that the drug's popularity is waning among the younger generation."

While it is good news to know that Cannabis usage have generally been declining especially among the younger generation, what seems noteworthy is that both Netherlands and Portugal, which has partly decriminalized drug use, is shown to have relatively low instance of usage. This defies common objections where legalization would lead to a drug use explosion.

See our earlier related posts:
Drug Decriminalization: Regulation Versus Prohibition,
Drug Decriminalization Caravan Gets Rollin',
War on Drugs: Learning From Portugal's Drug Decriminalization

20th Anniversary Of The Fall Of Berlin Wall

20 years ago today marked the fall of the Berlin Wall.

Here is an article from the Bloomberg's chart of the day

(all bold highlights mine)

``The toppling of the Berlin Wall 20 years ago sparked a surge in German stocks and bonds, confounding economists who’d predicted the cost of unifying East and West Germany would stunt economic growth.

``The CHART OF THE DAY shows the benchmark DAX Index of equities and the REX Performance Index, a measure of German government bonds, since 1989. Both outperformed gold and the pan-European Dow Jones Stoxx 600 Index. The chart also shows Germany’s annual per-capita gross domestic product until the end of last year.

``The cost of unifying East and West Germany was 2 trillion euros ($2.97 trillion), according to a study by Klaus Schroeder, professor at Berlin’s Free University, published Oct. 28. Investors say that cost has paid off as the fall of Europe’s Iron Curtain boosted global trade.

“It opened up economies in Eastern Europe,” said Trudbert Merkel, manager of Deka Investment GmbH’s $5 billion Dekafonds in Frankfurt. “Germany was able to maintain its top spot in the export business and become less dependent on the U.S. The beginning of globalization helped soften the costs of the reunification.”

``The DAX has more than tripled since Nov. 9, 1989, when the East German government allowed Berliners to breach the wall that had divided their city for 28 years.'"

I would presume that economic experts, whom were allegedly baffled by the huge progress in the aftermath of the Fall of the Berlin Wall, grossly underestimated the impact of capitalism. They seem to have focused on the rebuilding and integration cost aspects rather than the potentials from unleashing the explosive force of productive capacity as consequence to embracing a market economy.

Furthermore, the lessons of the Berlin Wall is shared with the failure of the essence of communism. Professor Paul Hollander in a recent commentary at the Washington Post captures the zeitgeist,

``The failure of Soviet communism confirms that humans motivated by lofty ideals are capable of inflicting great suffering with a clear conscience. But communism's collapse also suggests that under certain conditions people can tell the difference between right and wrong. The embrace and rejection of communism correspond to the spectrum of attitudes ranging from deluded and destructive idealism to the realization that human nature precludes utopian social arrangements and that the careful balancing of ends and means is the essential precondition of creating and preserving a decent society."

The video below showcases the victory of the individual against the collective following long years of oppression. This should serve as a reminder for us to keep the torch of freedom burning. [Hat Tip: Peter Boettke]

Ludwig von Mises: The Man Who Predicted the Depression

One of a rare instance where Mr. von Mises gets deservingly featured in mainstream press.

Except from the Wall Street Journal's Op Ed ``The Man Who Predicted the Depression" by Mark Spitznagel, a hedge fund manager

``Ludwig von Mises was snubbed by economists world-wide as he warned of a credit crisis in the 1920s. We ignore the great Austrian at our peril today.

``Mises's ideas on business cycles were spelled out in his 1912 tome "Theorie des Geldes und der Umlaufsmittel" ("The Theory of Money and Credit"). Not surprisingly few people noticed, as it was published only in German and wasn't exactly a beach read at that.

``Taking his cue from David Hume and David Ricardo, Mises explained how the banking system was endowed with the singular ability to expand credit and with it the money supply, and how this was magnified by government intervention. Left alone, interest rates would adjust such that only the amount of credit would be used as is voluntarily supplied and demanded. But when credit is force-fed beyond that (call it a credit gavage), grotesque things start to happen.

``Government-imposed expansion of bank credit distorts our "time preferences," or our desire for saving versus consumption. Government-imposed interest rates artificially below rates demanded by savers leads to increased borrowing and capital investment beyond what savers will provide. This causes temporarily higher employment, wages and consumption.

``Ordinarily, any random spikes in credit would be quickly absorbed by the system—the pricing errors corrected, the half-baked investments liquidated, like a supple tree yielding to the wind and then returning. But when the government holds rates artificially low in order to feed ever higher capital investment in otherwise unsound, unsustainable businesses, it creates the conditions for a crash. Everyone looks smart for a while, but eventually the whole monstrosity collapses under its own weight through a credit contraction or, worse, a banking collapse.

``The system is dramatically susceptible to errors, both on the policy side and on the entrepreneurial side. Government expansion of credit takes a system otherwise capable of adjustment and resilience and transforms it into one with tremendous cyclical volatility.

``"Theorie des Geldes" did not become the playbook for policy makers. The 1920s were marked by the brave new era of the Federal Reserve system promoting inflationary credit expansion and with it permanent prosperity. The nerve of this Doubting-Thomas, perma-bear, crazy Kraut! Sadly, poor Ludwig was very nearly alone in warning of the collapse to come from this credit expansion. In mid-1929, he stubbornly turned down a lucrative job offer from the Viennese bank Kreditanstalt, much to the annoyance of his fiancée, proclaiming "A great crash is coming, and I don't want my name in any way connected with it." [my favorite excerpt]

Read the rest here

A Case Of Economic Freedom: Texas

Texas, the second largest US state next to California (in terms of GDP), has benefited from low taxes and low government spending (measure of government intervention) that has translated to economic resiliency even during the recent recession.

This from analyst Martin Spring: (bold emphasis mine)

``Interesting to see how successful the US state of Texas has been through policies such as cutting public spending, cutting taxes and implementing tort reform (limiting the damages courts may award in product, medical and similar liability cases).

``Texas has no state taxes on income or capital gains – yet it continues to run a budget surplus despite the recession.

``Between 2000 and 2007, more than half-a-million people moved into Texas, compared to the 1.2 million who exited notoriously high-taxed California.

``Last year Texas created more jobs than all the other 49 states combined – 70 per cent of net new jobs of the entire nation."

This from Bruce Kellison of IC² Institute (University of Texas)

``The real story behind the jump in GNP, then, might not be the dependency of consumers on government programs like “Cash for Clunkers” and the first-time home buyers’ tax credit, but the resiliency of firms to remain innovative, nimble, and competitive in a still-globalized economy. Texas was among the last states to feel the effects of the current recession, and many economists believe it will lag in recovery. But exports might mean Texas will lead, not lag, coming out of the recession." (bold highlights mine)

Some research sites for Texas: Tax Foundation.org, Texas Policy.com, Nelson Rockefeller.org