Saturday, March 20, 2010
Friday, March 19, 2010
The Delusion Of The Mercantilist Miracle
“As I’ve written many times in various contexts since the crisis began, being in a liquidity trap reverses many of the usual rules of economic policy. Virtue becomes vice: attempts to save more actually make us poorer, in both the short and the long run. Prudence becomes folly: a stern determination to balance budgets and avoid any risk of inflation is the road to disaster. Mercantilism works: countries that subsidize exports and restrict imports actually do gain at their trading partners’ expense. For the moment — or more likely for the next several years — we’re living in a world in which none of what you learned in Econ 101 applies." (bold emphasis mine)
Well the Pope of Keynesianism believes [and prescribes policies] that by slapping protectionist measures on China, US jobs will return and the US economy will boom.
Even if such absurdity is deemed as a calculated gambit to 'coerce' China to reform her policies, Mr. Krugman apparently is playing the game of chicken or brinkmanship.
Mr. Krugman and his ilk forgets that once these fulminations become real, where actions will lead to counteractions, then protectionism is likely to spread outside the US-China sphere.
Now one can't help but notice that the US is presently heavily dependent on oil imports to sustain her economy.
According to wikipedia.org, ``American dependence on oil imports grew from 24% in 1970 to 65% by the end of 2005. At the current rate of unchecked import growth, the US would be 70% to 75% reliant on foreign oil by the middle of the next decade. Transportation has the highest consumption rates, accounting for approximately 68.9% of the oil used in the United States in 2006, and 55% of oil use worldwide as documented in the Hirsch report." (bold highlight mine)
This only means that the unforeseen consequences of a fallout from protectionism is so massive that it would defeat whatever "noble" goals (but ludicrous), it is set to accomplish. This also implies that the US is terribly dependent on global trade as to even harbor the notion of "protectionism" (which would be tantamount to national suicide)
One may argue that the US may resort to invading nations that refuses to provide her with oil, but that in essence would validate Frederic Bastiat who once said that "When goods don't cross borders, armies will" .
Since protectionism translates to a closing of borders to trade, finance, investments and possibly even migration, this also means the imposition of capital controls too.
Hence the US is likely to default on her debts while engaging massive inflation to fund her war interests.
Does this lead to anywhere to near an economic boom? Hardly. Instead, it points to a reverse: a global depression plagued by war, needless deaths and poverty, courtesy of deceitful mercantilists fanatics.
So we agree with Stephen Roach, who just harshly rebuked Mr. Krugman, as quoted in Bloomberg,
“We should take out the baseball bat on Paul Krugman -- I mean I think that the advice is completely wrong,” Roach said in an Bloomberg Television interview in Beijing when asked about Krugman’s call, characterized as akin to taking a baseball bat to China. “We’re lashing out at China rather than tending to our own business,” which is raising U.S. savings, Roach said."
Or perhaps, by taking on such seemingly reckless policy prescriptions, could Mr. Krugman be unwittingly be helping advance Osama Bin Ladin's cause of bankrupting America?
Thursday, March 18, 2010
Natural Gas: Alternative Energy Of The Future
The article goes to show that the world isn't running out of energy. It's just a matter of markets aided by technology, adapting to the current conditions.
Here's an excerpt, (all bold highlights mine)
``The source of America’s transformation lies in the Barnett Shale, an underground geological structure near Fort Worth, Texas. It was there that a small firm of wildcat drillers, Mitchell Energy, pioneered the application of two oilfield techniques, hydraulic fracturing (“fracing”, pronounced “fracking”) and horizontal drilling, to release natural gas trapped in hardy shale-rock formations. Fracing involves blasting a cocktail of chemicals and other materials into the rock to shatter it into thousands of pieces, creating cracks that allow the gas to seep to the well for extraction. A “proppant”, such as sand, stops the gas from escaping. Horizontal drilling allows the drill bit to penetrate the earth vertically before moving sideways for hundreds or thousands of metres.
``These techniques have unlocked vast tracts of gas-bearing shale in America. Geologists had always known of it, and Mitchell had been working on exploiting it since the early 1990s. But only as prices surged in recent years did such drilling become commercially viable. Since then, economies of scale and improvements in techniques have halved the production costs of shale gas, making it cheaper even than some conventional sources.
More from the Economist,``The Barnett Shale alone accounts for 7% of American gas supplies. Shale and other reservoirs once considered unexploitable (coal-bed methane and “tight gas”) now meet half the country’s demand. New shale prospects are sprinkled across North America, from Texas to British Columbia. One authority says supplies will last 100 years; many think that is conservative. In 2008 Russia was the world’s biggest gas producer; last year, with output of more than 600 billion cubic metres, America probably overhauled it. North American gas prices have slumped from more than $13 per million British thermal units in mid-2008 to less than $5. The “unconventional”—tricky and expensive, in the language of the oil industry—has become conventional.
``The availability of abundant reserves in North America contrasts with the narrowing of Western firms’ oil opportunities elsewhere in recent years. Politics was largely to blame, as surging commodity prices emboldened resource-rich countries such as Russia and Venezuela to restrict foreign access to their hydrocarbons. “Everyone would like to find more oil,” says Richard Herbert, an executive at Talisman Energy, a Canadian firm using a conventional North Sea oil business to finance heavy investment in North American shale. “The problem is, where do you go? It’s either in deep water or in countries that aren’t accessible.” This is forcing big oil companies to get gassier."
Read the rest here
My comments:
As we have repeatedly said, politics has been the fundamental reason for the elevated prices in oil, caused mainly by geological restrictions or limited access (mentioned by the article) combined with artificial demand from inflationism and or policies, such as subsidies (not mentioned in the article).
Nevertheless, because people adjust to the circumstances they are faced with, such as the pain of higher prices and political constrains, the perpetual desire to satisfy human needs makes possible for ingenuity to pave way for innovative technology which would allow for more access to supplies or substitution.
In the case of natural gas, since there is a recognition, out of the existing technologies, of the abundance of reserves, higher oil prices will likely compel producers to compete to convert erstwhile uneconomical resources into utilizable reserves, ergo "forcing big oil companies to get gassier" as the article mentioned.
And if successful, which I am optimistic of, this will have a spillover effect to the midstream (processing, storage, marketing and transportation) and the downstream (retail outlets, derivative products, etc...). In other words, part of the transformation would likely see global transportation evolve to natural gas as default fuel.
So in the future, we should expect natural gas to also play a big role in the transition to diversify energy sources.
The following chart caught my eye. If the technology to access shale oil becomes universally commercial, guess where the bulk of reserves are?
In Asia Pacific!Funds Rotating Back To The US Equities A Long Term Trend?
Although in some instances, they'd seem a bit bias (especially against China).
From Bespoke, ``One of the easy ways to see how a country is performing relative to other countries is to look at its market cap as a percentage of world market cap. In the early stages of the global rebound off of the March lows, the US rose significantly, but other countries were gaining even more. In recent months, however, the tide has turned, and the US is now outperforming the rest of the world. As shown, US stock market cap as a percentage of world market cap has been steadily rising since last November. During the 2003-2007 bull market, emerging markets and other countries really outperformed the US. If this bull market continues and the US continues to gain share, it will represent a very big trend change that will make a huge impact on portfolio performance depending on an investor's domestic versus international equity allocation." 
Nevertheless, this observation is true for today, according to Livemint,``Funds are being rotated to the US—a fact corroborated by EPFR Global’s report that flows into US equity funds have been positive for four straight weeks, their longest winning streak since the third quarter of 2008. The paring of overweight positions not only protects against the risk of a sharp pullback, but also leaves the door open for positive surprises."
The reason China has been down is that she has been deliberately attempting to fight her "inner" devils (a.k.a bubbles).
In contrast, the US still is in an "inflationary" mode.
To add, last year saw emerging markets including China massively outperform the US, which is the reason why the US share of global market cap declined materially.
The recent outperformance of the US relative to emerging markets seems more of hiatus than of a "longer trend".
The axiom, "no trend moves in a straight line" for emerging markets should apply here.
Besides, it is also observable that the outperformance of the US has been in sync with the strength of the US dollar index (perhaps to reflect on the fund flows).As the US equity markets regained their share of the global market cap beginning last November, the US dollar firmed as well.
But this can be interpreted differently, the vitality of the US dollar index isn't because the USD has been technically or economically "strong", but in the instance where both the US dollar and the euro (which weighs 57.6% in the US dollar index basket) have been weak, the euro has been relatively weaker than the US, ergo the strength of the US dollar. And this is why commodities have remained resilient even in the face of a strong US dollar (where is the US dollar carry?).
This also implies that the current trends isn't likely to last because of the problems that continues to ail the US. The relative strength especially applies to Asian and emerging market currencies.
This will be amplified if the oversold euro will see a sharp bounce. And this should also be reflected on the rest of the global equity markets.
Hence, in contrast to the projection that fund flows to the US will be a long term trend that would extend US equity outperformance, we see this as a short term phenomenon. Enjoy them as it last.
Big Mac Index And The Furor Over China's Yuan
In other words, the relative purchasing power of a currency measured in terms of Big Mac prices.
According to the Economist, (bold highlights mine)``RECENT renewed American calls for China to revalue its currency have so far fallen on deaf ears. China has rejected accusations that America's huge trade deficit with it is caused largely by an artificially weak yuan, which has been pegged to the dollar since July 2008. Economists point out that a depreciation of the yen did little to help reduce America's trade deficit with Japan in the 1980s. But the yuan is unquestionably undervalued. Our Big Mac index, based on the theory of purchasing-power parity, in which exchange rates should equalise the price of a basket of goods across countries, suggests that the yuan is 49% below its fair-value benchmark with the dollar. "
While it may be true that the Chinese yuan may be "artificially weak", it is inaccurate to entirely blame the yuan for the America's deficits.
As you can see, US trade deficit is largely a world phenomenon, except that China takes up most of the load (see below)
In addition, outside of the oil exporters and China, the US has substantial deficits with Canada, Ireland and Japan even when the currencies of the 'developing economy' group are mostly "dearer" [or 'at par' with the US as with Japan].
Several additional observations:
-It is a fallacy to assume that weak currencies automatically extrapolate to strong exports or increased jobs.
As the Economist rightly points out, the strength of the Japanese Yen over the past decades didn't automatically transform Japan into a "consuming" class. To this day Japan is known as an "exporter".
-All furor over the Yuan, ignores the role played by the US dollar as the world's de facto currency reserve.
In short, the US has to produce dollars, required not only at home, but to fund global transactions and thus contributing to deficits. [see the Triffin Dilemma as previously discussed in The Nonsense About Current Account Imbalances And Super-Sovereign Reserve Currency]
-If the Chinese have indeed been subsidizing their export sector, it does so to keep Americans buying their product.
In a subsidy one group is favored over another, which means redistribution of resources from other sectors to the favored sector.
China's exports account for 35% of the GDP, alternatively this means the rest of her economy is shouldering the burden of the subsidies.
In addition, if China is subsidizing her exports then it also means that by keeping the yuan "artificially cheap", her subsidies extend to the American consumers. So how bad can it be for Americans?
And such dynamic is seemingly being reflected on the growing clout of US discount behemoth Walmart to influence the production methods of her Chinese suppliers,
This from the Washington Post,
``Wal-Mart has more than 10,000 suppliers in China. In addition, about a million farmers supply produce to the company's 281 stores in China. If Wal-Mart were a sovereign nation, it would be China's fifth- or sixth-largest export market. So the company hopes that small measures taken by all suppliers start to add up. Its 200 biggest suppliers in China have already trimmed 5 percent of their energy use.
``In the past, environmental concerns have taken a back seat to growth in China and to costs for Wal-Mart. And China and Wal-Mart have come under sharp criticism for conditions in factories. Yet pollution now threatens China's growth; as a result, awareness of climate change and energy security has spread in China. Likewise, as consumers grow more environmentally aware, Wal-Mart's executives have responded. On Thursday, the company pledged to reduce its greenhouse gas emissions by 2015."
In short, politicos when caviling over currencies are looking only looking at superficial and not on structural issues.
-The problem of US joblessness isn't an issue of China stealing jobs but instead of domestic bubble policies as earlier explained in Why Americans Are Jobless
-Lastly, it is simply foolish and highly pretentious to believe that foreign policies based on antagonism or belligerency will alleviate US economic woes.
Even if we assume that China yields to Americans, as shown above, this won't solve their problems. So failure to do so would only prompt blood lusting politicians to ask for more interventionism that may lead not only to a trade war but to a risks of military confrontation.
Importantly, it would seem that egotism has overwhelmed rationality such that by threats to slap protectionism aggravates and not helps the US predicament. Remember the Smoot-Hawley Tariff Act?
It is such hypocrisy for these dunces to proclaim that they are working for the common good when they are, in fact, agitating for a great depression.
As the UNCTAD recently wrote, (all bold highlights mine)
``Amidst continued financial crisis, the question of the global trade imbalances is back high on the international agenda. A procession of prominent economists, editorialists and politicians have taken it upon themselves to “remind” the surplus countries, and in particular the country with the biggest surplus, China, of their responsibility for a sound and balanced global recovery. The generally shared view is that this means permitting the value of the renminbi to be set freely by the “markets”, so that the country will export less and import and consume more, hence allowing the rest of the world to do the opposite. But is it reasonable to put the burden of rebalancing the global economy on a single country and its currency? This policy brief contends that the decision to leave currencies to the vagaries of the market will not help rebalance the global economy....
``It is time to break with a sterile polemic that ignores the increasing evidence from a range of experiences showing that both absolutely fixed/pegged and fully flexible/floating exchange rate systems are suboptimal. These so-called “corner solutions” have added to volatility and uncertainty and aggravated the global imbalances . With this as a starting point, the debate can move forward to explore new common formulas for exchange rate management that increase consistency between trade and financial flows in a globalized economy.
``In order to address global imbalances coherently, governments need to act in the same spirit of multilateralism that characterized the international fiscal response to the crisis at its most critical moments in 2008. A coherent approach to restoring balanced trade calls for policies that address and prevent currency speculation at the global level. Even those who criticize governments for stabilizing exchange rates and intervening in financial markets generally recognize that a viable long-term solution to the problem of massive trade distortions and global imbalances cannot be expected from individual central banks trying to find a unilateral solution to a multilateral problem like the exchange rate."
Tuesday, March 16, 2010
Evidence of Liquidity Boom: "The Market Loves Trash"
This phenomenon seems evident including in the US, where small cap stocks have outperformed the big cap stocks.
From the Wall Street Journal, (Thanks to Bespoke for the pointer) [bold emphasis mine]
``After a brief swoon in January and early February, the riskier end of the stock market is back in favor.
``That includes small stocks, stocks badly hurt by the financial crisis and those most dependent on global economic growth. Safer stocks, including those that offer steady dividends, are out.
``That wasn't the case between Jan. 19 and Feb. 8, when the Dow Jones Industrial Average fell 8% amid fears that the global recovery could stall.
``Since then, the Dow is up 7%. And in most cases, investors are turning to the same stocks that led the market higher in last year's big rally.
"It seems like the lower-quality, smaller-sized names are taking the lead," says Jack Ablin, chief investment officer at Harris Private Bank in Chicago. "We are getting a junk dominance again."
``By a variety of measures, lower-quality stocks are out-gaining higher-quality stocks, says Paul Hickey, co-founder of Bespoke Investment Group in Harrison, N.Y.
"In the words of Oscar the Grouch," says Mr. Hickey, "the market 'loves trash.' "
``He has ranked the quality of stocks in the Standard & Poor's 500-stock index based on their market size, price/earnings ratio and credit rating. He even sorted them based on which get the most attention from short sellers, the bearish investors who bet that stocks will decline by borrowing the stocks and selling them.
"No matter how you look at it, so-called low-quality stocks in the S&P 500 have outperformed high-quality stocks" since Feb. 8, Mr. Hickey says.
``The 50 smallest S&P stocks have risen 13%, compared with a gain of 9% for the 50 largest stocks. Companies whose bonds are rated as junk have risen more than those with investment-grade ratings. The 50 stocks with the highest prices, compared with analysts' expectations for their 2010 profits, are up 16%. Those with the lowest price-to-earnings ratios are up 10%. The most heavily shorted are up 15%. The least-shorted are up 7%."
My comment:
Essentially the outperformance of small stocks appear to be driven by momentum, as punters pile in on the winners in the expectations of continued strength.
As we previously pointed in Are Stock Market Prices Driven By Earnings or Inflation?, a refresher on some of the valuable insights of Fritz Machlup on the stock market.
-A continual rise of stock prices cannot be explained by improved conditions of production or by increased voluntary savings, but only by an inflationary credit supply.
-Extensive and lasting stock speculation by the general public thrives only on abundant credit.
Monday, March 15, 2010
McKinsey Quarterly On The New Japanese Consumers
1. A shift to value.
Japanese consumers have been switching preference from classy and branded products to discount stores and online retailers. The reason according to McKinsey Survey: expensive products, “annoying stuff” and “inability to shot at my own pace”
And shifting to value also means bulk buying
[my comment: an aging population is expected to spend less on material things and spend more on health, as noted below this appears to be compounded by economic stagnation.]
2. Home entertainment.
Japanese have also been more “home” oriented in terms of entertainment. And part of the homeward bound lifestyle is that the Japanese have gradually embraced digital revolution through online shopping
Japan is said to lag the US and UK in spite of high penetration level of broadband, and the past reasons for this according to McKinsey have been,
-Japanese consumers love the physical shopping experience;
-mobile-phone screens are too small;
-the density of retail establishments means that online shopping has less of a convenience advantage;
-credit card penetration is low.
However this seem to be changing as more Japanese spend online.
The online market for physical goods (excluding ticket sales and electronic downloads of media such as music, movies, and software), notes McKinsey, is estimated to be nearly $30 billion, compared with only $1.3 billion in 1999
A noteworthy quote ``It’s worth underscoring the tight relationship between online shopping and broader shifts in consumer behavior. In a consensus-driven society where individual choice and expression have historically been frowned upon, the ability to browse products, compare prices, and make purchases relatively anonymously is creating new attitudes and empowering consumers.” (bold highlights mine)
[my comments:
-Online activities are growing not only in Japan but in most parts of the world. Perhaps the reason for the shift to value is that online provides more opportunities for comparison and thus end up with least expensive but still high quality value products choices.
-In addition, since our assumption is that Japanese have broadband connectivity at home, social activities by the youth are conducted online, than in malls.
-Third, the online experience is promoting "individual choice and expression", which probably means more appreciation of freedom]
3. More Travel.
They’ve been more willing to travel more to take advantage of discounters. And one apparent beneficiary of this shift has been private label products.
4. Individualized healthcare
The new trend also suggest that the Japanese are also “directing their own healthcare” spending or that Japanese are spending more for health.
According to McKinsey ``One effect of the greater interest of the Japanese in directing their own health care has been the growing popularity of drugstores, which have been Japan’s fastest-growing retail channel since 2000: store numbers have increased by 4 percent and sales by 8 percent.”
[my comment-Politically perhaps this implies the trend towards less dependence on government welfare.]
5. They have reportedly been receptive to affordably priced “environmental consciousness” products.
Reasons for the shift:
Mckinsey says part of this comes from the recent downturn compounded by the economic weakness in the past 2 decades where the consequences has been the “disappearance of life-long jobs and the increase in part-time and temporary labor”.
McKinsey adds that the emergence of a new generation which characterize “Less materialistic youngsters” had possibly been a product of an era “never knowing the boom times the two previous ones experienced.”
The new lifestyle has “prompted the nickname the hodo-hodo zoku, or “so-so folks” (or, even worse, “slackers” or “herbivore men”).”
[my comment-that's likely plus the web 2.0 factor]
A third of final factor possibly contributing to such changes in behaviour have been a “series of small, largely unrelated” regulatory adjustments
McKinsey notes that ``Japan’s government reduced the maximum freeway toll on weekends to ¥1,000 regardless of the distance traveled—a huge discount that encouraged trips outside Tokyo to big-box discounters and large-format retailers such as Costco and Ikea. Other examples include regulations allowing the wider sale of over-the-counter drugs; a mandate that all employees over the age of 40 (about 50 million people) take a test to determine whether they are at risk for conditions such as diabetes and high blood pressure and, if they are, requiring them to exercise and diet; and recent changes to reduce underage smoking. The Japanese government has also pushed to increase awareness of and access to health remedies, in part to address the challenge of paying to treat these conditions.”
Sunday, March 14, 2010
Philippine Markets And Elections: What People Do Against What People Say
``Resolve to serve no more, and you are at once freed. I do not ask that you place hands upon the tyrant to topple him over, but simply that you support him no longer; then you will behold him, like a great Colossus whose pedestal has been pulled away, fall of his own weight and break in pieces.”-Étienne De La Boétie
Economist Russ Roberts writes, ``One difference between economists and others is that economists tend to be less impressed by motivation and more impressed by what people actually do. Economists are also less impressed by what people say than by what they do. So they are particularly unimpressed by people who profess to be motivated by the public good, for example.” [bold emphasis mine]
Indeed people’s action significantly matter more than what they say. That’s because words and actions can be diametrically opposite or people can say one thing and do exactly the reverse. The most prominent practitioners of such duplicity are those engaged in politics, as implied above.
But this isn’t confined to politics, because such machinations, deliberate or intuitive, could easily be detected frequenting the marketplace.
Since it is political season in the Philippines, it is natural to see the public’s attention focused on the forthcoming national elections.
Unfortunately, however, the apparent product of unwarranted mawkishness over the political frontier appears to be deductions based on reductio ad absurdum, as seen in media reports[1].
Mainstream media, which accounts as the public’s main source of information, still has a commanding influence in shaping people’s perception.
And our quibble: the aggrandizement of so-called risks from elections.
Available Bias And Voter’s Irrationality
We are sympathetic with people who perceive and are wary of “uncertainties” arising from leadership transitions, given their overreliance on mainstream media as their main source of information.
Yet in contrast to conventionalism, we see media’s largely superficial treatment of the political economy, which attempts to project elections as “change” that would lead to the portals of political nirvana, as hallucinatory.
People hardly grasp that their concept of “change” has been ever elusive, and will always be, because it is simply not realizable. The people and NOT the president is the answer to prosperity.[2]
That’s because there are only two ways to generate wealth, by production “economic means” or by plunder “political means”.
As Murray N. Rothbard explains[3],
``The great German sociologist Franz Oppenheimer pointed out that there are two mutually exclusive ways of acquiring wealth; one, the above way of production and exchange, he called the "economic means." The other way is simpler in that it does not require productivity; it is the way of seizure of another's goods or services by the use of force and violence. This is the method of one-sided confiscation, of theft of the property of others. This is the method which Oppenheimer termed "the political means" to wealth. It should be clear that the peaceful use of reason and energy in production is the "natural" path for man: the means for his survival and prosperity on this earth. It should be equally clear that the coercive, exploitative means is contrary to natural law; it is parasitic, for instead of adding to production, it subtracts from it. The "political means" siphons production off to a parasitic and destructive individual or group; and this siphoning not only subtracts from the number producing, but also lowers the producer's incentive to produce beyond his own subsistence. In the long run, the robber destroys his own subsistence by dwindling or eliminating the source of his own supply. But not only that; even in the short-run, the predator is acting contrary to his own true nature as a man.” (emphasis added)
Media’s account of analyses has been bereft of the social framework that underpins the existence of the current political institutions, the legal structures and political-economic interactions of the agents involved.
For instance, people assume corruption as mainly a moral issue without appropriate scrutiny on the interface of legal, bureaucratic, enforcement, behavioural and transactional factors which impels for such dynamics.
As Ludwig von Mises explains[4], ``To be sure, public opinion is not mistaken if it scents corruption everywhere in the interventionist state. The corruptibility of the politicians, representatives, and officials is the very foundation that carries the system. Without it the system would disintegrate or be replaced with socialism or capitalism. Classical liberalism regarded those laws best that afforded least discretionary power to executive authorities, thus avoiding arbitrariness and abuse. The modem state seeks to expand its discretionary power-everything is to be left to the discretion of officials.” (bold and italics emphasis added)
In short, in contrast to popular opinion, corruption represents more of a symptom than the disease.
Nevertheless, applied to the financial markets, when people who claim to see “real” risk from such scenario, we expect them to liquidate on most of their portfolio, and perhaps, like in the past, gravitate to the US dollar as a “flight to safety” instinctive response.
And if such actions are taken then we could say that the person’s view of risks is authentic (regardless of the validity of the perception).
But when people argue that that they see “real risks” and yet remain holding on to their portfolio, essentially this would redound to a self-contradictory position. It simply implies three things:
First, convictions are not deep enough to justify a full-scale retreat.
Second, hope is in the cards (this justifies a negative-neutral bias position) and
Lastly, uncertainty is being used as a pretext to for market “timing”.
And to further argue that “policies” to be undertaken by the new set of leaders would account for as another trivial reasoning. If this is the case, then perhaps people won’t be in the markets at all because, laws and regulations, like markets, aren’t definitive and depend on stimulus response based on the economic and political landscape, aside from many factors.
First of all, leaders are hardly elected because of their assumed policies. Democracy has been a popularity contest, especially in the Philippines. Such is the reason why celebrities have been near shoo-in candidates for national or local positions.
Second, new leaders don’t myopically impose policies out of sheer idealism, unless the new leader is a stealth extremist and would risk an ouster.
Policies are thus mostly shaped by interest or lobby groups. And the influences of lobby groups are likely to be more powerful when they are small but concentrated, as William F. Shughart II writes[5],
``Small, homogeneous groups with strong communities of interest tend to be more effective suppliers of political pressure and political support (votes, campaign contributions, and the like) than larger groups whose interests are more diffuse. The members of smaller groups have greater individual stakes in favorable policy decisions, can organize at lower cost, and can more successfully control the free riding that otherwise would undermine the achievement of their collective goals. Because the vote motive provides reelection-seeking politicians with strong incentives to respond to the demands of small, well-organized groups, representative democracy frequently leads to a tyranny of the minority.” (bold highlights mine)
Based on historical ties and the list of top candidates vying for the top spot, it isn’t likely that the new president will take radical measures that would trigger upheaval, because the same personalities have long ‘waltzed with’ the same small but powerful clique. Hence there is likely to be marginal changes in the policy setting grounds for the new administration[6].
Three, based on the current political ‘democratic’, representative structure of the Philippine government, policies will be subjected to “horse trading” or compromises. This means the more haggling and compromising involved, the lesser the odds of any dramatic changes.
Lastly, public officials are self interested agents. That’s because they’re just like us, human beings, and not self-appointed saviours seeking out martyrdom. Hence they are likely to take political positions that would ensure the longevity of their tenure instead of working for long term “good”. As the above quote from William F. Shughart II, this only implies that to insure such interest they won’t likely unsettle the norm.
So why has media and their rabid followers been seeming so paranoid? A non-sequitur reply is that maybe because they’ve watched too many films of Stephen King and John Carpenter or perhaps Freddie Krueger and Jason of the Friday the 13th series.
In behaviourism, trying to connect current events with market actions is known as the available bias. That’s if they coincide.
Remarkably, they don’t!
The Media’s Blarney Unsupported By Market Action!
The last time the Phisix and the Peso encountered a real political risk was in 2005, remember the “Hello Garci” scandal? (see figure 1)
Figure 1: Phisix and Peso: What People Say And What People Do
The Phisix was already down 15% even prior to Samuel Ong’s exposé that rocked the Philippine political scene.
Mr. Ong’s tape contained a voice recording of PGMA with a Commission on Elections (COMELEC) Commissioner Virgilio Garciliano, who allegedly discussed about manipulating the presidential election results which paved way for her victory in 2004.
Subsequently, local and foreign polls exhibited that a majority of the people had expected PGMA not to complete her term and would either resign or be impeached. And repeated rumours of another revolution flourished. Yet attempts had been made to unseat her, such as the November 2007 Peninsula takeover, but this had been aborted.
From a hindsight perspective, what had been popular had been wrong again!
The immediate effect of the Garci scandal on the financial markets was obviously more pronounced on the Philippine Peso (green trend line) than on the Phisix (blue trend line).
While the Phisix fell by about 11% in reaction to the exposé, the local equity benchmark had been in a consolidation phase following a prior decline.
Meanwhile, the Peso spiked from 54 back to 56 or fell by 4%! As we earlier said, Filipinos tend to rally around the US dollar once signs of instability surfaces, and the 2008 post Lehman saga validated this phenomenon anew (in spite of growing remittances in nominal terms!).
In short, the Peso-US dollar trend accounts for as the best sentiment measure of stability or instability in the Philippines.
Now media and some people say that the election risks are real, yet markets don’t seem to concur with such an outlook.
Two red arrows, at the farthest right, above appear to be pointing at the same signs.
The Philippine Peso seem to be at the brink of breaking out of its resistance levels at 45.58, set during the first half of January, to close at 45.66 last Friday, while the Phisix did break above the resistance level on Thursday, but failed to hold on to the gains after a sharp fall on Friday. Yet the Phisix remains at arms length distance from the said pivotal threshold level.
Incidentally, the Phisix and the Peso has been up for the 5th and 4th consecutive week, respectively!
Yet as media blabbered about how election risks would spook foreign investors, last week saw the Phisix account for the highest weekly inflow from foreign money for the year-1.7 billion pesos (US $37 million)!
So hardly have any of these reported worries translated to reality.
Markets signify as people voting with their wallets. In contrast, media reports or op-eds can’t be accurately gauged because they represent the opinions or facts as interpreted by the writer or author.
In short, whether it is sensationalism or political partiality, these opinions come in conflict with reality, simply because hunches or biases have NOT been supported by facts.
Yet many still believe them. Albeit this state of disbelief is an even bullish case for us, because doubters, when convinced of the invalidity of their causes, would end up chasing prices higher.
Of course considering that the winning streaks from our financial markets may lead to a reprieve, such retracement will again be attributed to political anxieties.
Nevertheless as the markets have been saying, there has been little linkages between market actions and popular unproven assumptions.
Winnowing Real Political Risks From Spurious Conspiracy Theories
Let me add that risks from elections have now supposedly evolved to one of “election failure”.
Media seems trying to say that the incumbent President may try to extend her term by resorting to “emergency power” arising from the outbreak of power outages in parts of the nation.
This is plain cockamamie.
True, power is alluring. But a gambit to extend power only to be foiled, will translate to incarceration and ignominy or even death!
Where PGMAs political capital appears to have been substantially drained, as manifested by the numerous defections in the administration’s political party aside from her dismally low approval ratings, only a feckless and uncalculating person would engage in such bravado.
Yet the exiting President as a professional economist, has revealed that her political actions have been cautiously premised on mostly utilitarian grounds or “moral worth of an action is determined solely by its contribution to overall utility” (Wikipedia.org), e.g. holiday economics[7]. In short, she isn’t dense. On the contrary, she seems alot shrewder than most of us expect her to be.
And when the risk of failing seems greater than the rewards of success (from so called declaration of martial law or emergency powers), then obviously a crafty person won’t take the ante.
Ergo, desperate actions don’t seem to be in the cards here.
And as the public choice theory suggest, as self-interested agents, politicians are likely to act in the direction of prolonging, not only their term, but also of their career. So perhaps a more likely route for PGMA, given the current circumstances, is to work for a change the system of government into parliamentary, where she can aspire to get re-elected as the President or as Prime Minister.
Nonetheless, had she wanted to declare emergency powers, she could have easily used the crisis from Typhoon Ketsana nickname Ondoy and Typhoon Parma nickname Pepeng to declare martial law and call for a failure in elections[8]. The ripple of the adversarial effects from price controls would have been a perfect excuse to blame markets in order to reinforce greater interventionist police power. And that’s what we’ve warned about[9].
Yet during that period, the public’s expectation for the realization of elections has not been as a powerful as it has been today.
Anyway, in realizing the futility of price controls, these were lifted last November. Thankfully, such opportunity had not been utilized for devious self-serving goals.
In short, PGMA passed up a prime opportunity to arrogate power by force.
Again, actions speak louder than alleged motivations!
Civil Obedience As The Proverbial Big Stick
Finally I don’t think PGMA has underestimated the power of the people to get mobilized as a political force, in spite of the Garci Scandal.
As a reminder, the offshoot of the Garci scandal, despite of the failed attempts by the opposition to mount another people revolution against her, was an astounding backlash against the administration, whose senatorial bets had been decisively walloped in the 2007 polls. That was a powerful statement.
Nevertheless despite being the pioneer of non-violent revolution, it’s a mistake to say that the Filipinos had gotten jaded over ousting of leaders by use of civil disobedience. Incidentally, civil disobedience as a political approach had been introduced mostly by libertarians, particularly Frenchman Étienne de la Boétie[10].
Persistent manipulation by politicians of the masses to synthetically represent people power such as EDSA III, appears to have reduced the Filipino’s appetite to turn democratic ideals into a mockery for the benefit of demagogues. And reduced efficacy of people’s power is likely to end up with a violent conclusion or a despotic regime.
It would only take a legitimate tinderbox, particularly, [this I think is] the betrayal of the expectations to uphold the sanctity of the ballot box, to catalyze a reawakening of a spontaneous political movement. It’s a force, I reckon, PGMA won’t bet against.
Hence, mainstream media is wrong about the perceived risks about an election failure and has equally been exaggerating on their conspiratorial theories.
Strong Evidence Of External Influence
So let me tell you where we think the Philippine markets seem to be getting their inspiration (see figure 2)
Figure 2: Bloomberg-JP Morgan Asia Dollar Index: Asian Currencies Rising
Entertainment and market analysis are two different stuffs.
If the public likes to believe in fables as foundations for serious investigations we don’t. We talk fairytales when we deal with children. As prudent investors, our goal is to try to analyze market variables or events that truly matters and effectively assess and weigh on the risk reward equation.
As noted earlier, the Philippine peso is just a few centavos away from recovering previously lost ground, where it may attempt to possibly attain a new high over the next few days.
A successful breakout of the Peso should lead it to the next technical target, 44.80 to a US Dollar.
The rising Peso isn’t an insulated affair, in fact as the chart above shows. It has been a regional phenomenon. The Bloomberg JP Morgan Asian Dollar Index represents a basket of Asian currencies, which according to prnewswire.com.uk is the ``first U.S. dollar tradable index of emerging Asian currencies. The ADXY creates a benchmark for monitoring Asia's currency markets on an aggregate basis. The ADXY is a spot index of emerging Asia's most actively traded currency pairs valued against the U.S. dollar.”
I don’t have access to the composition and weightings of the ADXY, but if you look at the chart, both the ADXY and the PESO seem to be at the verge of a massive breaking out.
A breakout of the Peso only means one thing; there is more demand for the Peso than its traditional pair, the US dollar. If local markets are truly hounded by real political risks, then people would be flocking to the US dollar and not the other way around.
Although as a caveat, correlation does not imply causation. In other words, both the Peso and the other Asian currencies seem to be responding to external variables. For us, they are responding to the inflationism applied by major OECD economies.
The Phisix appears to chime with the Peso. This implies that both are being affected by external than by local forces (see figure 3)
Figure 3: Stockcharts.com: US Asian Markets and the Phisix
If you look at the Phisix (bottom window) and the US S&P 500 (main window) we seem to seeing the same patterns, except that Friday saw the Phisix fall steeply while the broadweighted S&P remains adrift at the resistance levels.
Nevertheless if the S&P will breakout in the same manner as its technology rich counterpart, the Nasdaq (COMPQ), then we are probably going to see the same dynamics over at the Phisix.
One would note that the Dow Jones Stoxx Asia/Pacific ex-Japan (DJP2) has lagged the both the Phisix and US market contemporaries. But again, I don’t have the composition and the weightings of the index, and it is an assumption that Chinese stocks which remain in consolidation could have been a factor behind such underperformance.
So far, global equity markets appear to be partly validating the sweetspot of inflation scenario[11].
Going back to the lessons taught by Russ Roberts, indeed studying what people do relative to what they say or what has been assumed as the motivating factor, even if unsupported by evidences, is a far better approach in the analysis of markets.
[1] See Philippine Election Update: Jitters From Election Failure Risks?
[2] See Philippine Election Myth: New President Will Determine Direction of Economy And Markets
[3] Rothbard, Murray N., The Anatomy Of The State
[4] Mises, Ludwig von, A Critique On Interventionism, p.31
[5] Shughart II, William F. Public Choice
[6] See Why The Presidential Elections Will Have Little Impact On Philippine Markets
[7] See Broken Window Fallacy: The Vicious Hidden Costs of "Holiday Economics"
[8] See Typhoon Ondoy: Market Fallacies and Risks
[9] See No To Price Controls! No To Despotism!
[10] If a minority of elites rule over, tax, and exploit the majority of the public, then this brings up starkly the main problem of political theory: what I like to call the mystery of civil obedience. Why does the majority of the public obey these turkeys, anyway? This problem I believe, was solved by three great political theorists, mainly but not all libertarian: Etienne de la Boetie, French libertarian theorist of the mid-sixteenth century; David Hume; and Ludwig von Mises. They pointed out that, precisely because the ruling class is a minority, that in the long run, force per se cannot rule. Even in the most despotic dictatorship, the government can only persist when it is backed by the majority of the population. In the long run, ideas, not force, rule, and any government has to have legitimacy in the minds of the public!
Rothbard, Murray N., A Strategy for the Right
[11] See Inflation’s Sweet Spot Augur For A Gold Breakout And Global Equity Market Rally
Does Falling Gold Prices Put An End To The Global Liquidity Story?
``It is easy indeed to fall into the trap of phony economic growth; as long as capacity utilization is below the normal level, demand expansions fueled by monetary and fiscal impulses increase economic activity. But the more the economy approaches full capacity, the more the effect on the production of real goods gets weaker and the effect on prices gets stronger. Eventually, this reaches the point when the monetary expansion only has inflationary price effects, and its impact on real production becomes nil.”- Antony P. Mueller The Stimulus Scam
Part of our incomplete sweetspot of inflation scenario has been gold’s recent sluggishness.
One analyst even suggested that because gold isn’t rising, then it must be a return of “risk appetite” has been providing support to global equity markets.
One Week Does Not A Trend Make
But the weakness in the gold market alone is not sufficient to suggest that this isn’t about a global liquidity story (see figure 4).
Figure 4: stockcharts.com: Divergences in Gold, Silver, Copper and Oil
Gold has fallen quite steeply down 2.84% this week.
While it is true that we see gold as a superb indicator for global liquidity, it would be a mistake and even naive to interpret one week of price action as a continuing event.
And importantly, any markets, including gold, can be affected by short term quirks or market specific events. For instance, the unresolved gold sales of the remaining allotment of the IMF can be a factor.
Yet, gold’s alter ego, silver has not shared the same quandary.
Also the strength in copper and oil, even if they are partly underpinned by the emerging market story, has also been a story of liquidity.
Proof?
According to Bloomberg, ``Emerging-market and high-yield bond funds each took in more than $1 billion in the week ended March 10, EPFR Global said, the most since the research firm began publishing weekly data on the sectors a decade ago.
``The inflows helped reduce the yield premium investors demand to hold emerging-market debt rather than U.S. Treasuries by 25 basis points in the period to 259 basis points, according to JPMorgan Chase & Co.’s Emerging Market Bond Index Plus. The gap was 258 basis points at yesterday’s close, the least since June 2008. A basis point is 0.01 percentage point.
``Developing nations have raised $28.9 billion from global bond sales so far this year, the busiest start to a year since 2005, according to data compiled by Bloomberg.”
Major emerging markets as Indonesia, India, China and Brazil has seen turbocharged money supplies (see figure 5)
Figure 5: News N Economics: Expansionary Monetary Policies in BIICs
And it does not stop here.
Global Liquidity Story Continues
We’ve been repeatedly saying that the record steep yield curves across the globe are likely to jumpstart the credit process, even in nations beset by credit woes. However the impact will always be uneven. And as we also been repeatedly saying these are the seeds to the next bubble.
Ignore the meme about falling “money velocity” as a reason for the alleged failure to restore the credit process out of the “liquidity trap”. Aside from being a flawed model[1], these experts disregard the incentives brought about by the “profit spread” of interest rates.
Of course we can add that they have been erroneously interpreting the neutrality of money from government expenditures, as well as, underestimating the increasing share of governments’ contribution to the economy.
Murray N. Rothbard explains the profit spread[2], (bold emphasis mine)
``In their stress on the liquidity trap as a potent factor in aggravating depression and perpetuating unemployment, the Keynesians make much fuss over the alleged fact that people, in a financial crisis, expect a rise in the rate of interest, and will therefore hoard money instead of purchasing bonds and contributing toward lower rates. It is this “speculative hoard” that constitutes the “liquidity trap,” and is supposed to indicate the relation between liquidity preference and the interest rate. But the Keynesians are here misled by their superficial treatment of the interest rate as simply the price of loan contracts. The crucial interest rate, as we have indicated, is the natural rate—the “profit spread” on the market. Since loans are simply a form of investment, the rate on loans is but a pale reflection of the natural rate.”
We believe that the profit spread dynamics is beginning to kick in.
This from the Wall Street Journal[3], (bold emphasis mine)
``Companies are aggressively borrowing in the debt markets once again—a sign of renewed confidence in the world economy following recent fears that struggling European countries could have difficulty financing their budget deficits.
``In the U.S., bond sales by companies such as Bank of America Corp. and GMAC Financial Services are on pace to conclude their busiest week since the beginning of the year. In Europe, borrowing by companies so far in March is already more than 60% of February's totals.
"It tells us that financial liquidity is very much on the rise," said John Lonski, chief economist at Moody's Investors Service. "No longer do corporations suffer from a dearth of liquidity. This puts them in a better position to take advantage of opportunities that arise."
``So far in 2010, U.S. corporations have issued $195.2 billion of debt, excluding government-guaranteed bonds, according to data provider Dealogic, up from $166.8 billion during the same period in 2009. The resurgence of the corporate debt markets comes after a shaky February, when several companies were forced to delay bond sales as worries about Greece's problems sent investors fleeing to safer assets such as U.S. Treasurys. Those concerns have subsided and money is again flowing into corporate bond funds, giving managers cash to invest.”
And this can likewise be seen in Canada “on pace to issue the most debt”, in Asia “lowest relative borrowing costs in more than two years and demand from international investors is driving Asian companies to sell record amounts of dollar- denominated bonds”, in Russia “Yields on Russian dollar bonds fell to less than 5 percent for the first time as rising oil prices boosted investor confidence”, in Turkey, and even in the PIIGS “Portuguese, Italian and Spanish companies are rushing to sell bonds, taking advantage of investors’ demand for corporate debt after Greece’s budget crisis froze issuance”. [Hat tip: Doug Noland]
In short, to attribute improving financial markets plainly to restored confidence is missing out the bigger picture. Money is needed to bid up asset prices, which accounts for as increased confidence levels or what the mainstream calls as the “animal spirits”. And the steep yield curve from zero bound rates, quantitative easing and massive deficit spending have all contributing to global reflation.
Nevertheless present activities do not suggest that gold has lost its efficacy as indicator for global liquidity.
[1] See Velocity Of Money: A Flawed Model
[2] Rothbard, Murray N. America's Great Depression p.41
[3] Wall Street Journal Credit Market Springs to Life