Hugh Hendry: 'I would recommend you panic'

Here is an interesting discussion on Newsnight with Hedge Fund manager Hugh Hendry, economist Jeffrey Sachs and Financial Times' Gillian Tett.

The fascinating part is the engagement between Mr. Hendry, supposedly a fan of Austrian economist Jesus Huerta de Soto, and the mainstream camp whose views seem to be represented by academist Mr. Sachs. (hat tip Mises Blog, Jeffrey Tucker)



Some important comments by Mr. Hendry (courtesy of the comments posted at the Mises Blog)

~2:30 “When you bring on a professor and when you bring on a politician, they are unaccountable. If Jeffery’s wrong, he will survive in tenure. If I’m wrong, I go bankrupt. Who do you want to bet with?”

And,

~4:50 “I don’t know, was Jeffrey skiing two months ago? Because I was working and Julian was working. So we can tell you about the real world, because it doesn’t look like two months ago.” To which Sachs responded “please watch your language.”

Again more reasons not to trust presumptuous mainstream (ivory tower) views.

Update on Global Stock Markets

Here is a rundown of the performances of select stock markets around the world.


The table, from Bespoke, is calculated in US dollar and local currency terms, but ranked according to returns based on the US dollar.

According Bespoke,

``European equity markets look much worse in terms of dollars given the weak performance of the Euro so far in 2010. Spain is down 21.06% in local currency year to date, but it's down 32.36% in dollar terms. It's been a tough, tough year already for Spain. Italy is down the second most in dollars of the countries highlighted at -28.22%. China, which pegs its currency to the dollar, is down 18.96% in yuans this year, which is the second worst when looking at local currency performance. Mexico and Malaysia are the only two countries that are up year to date in dollars. Sweden is the only country up in local currency. Finally, Germany is the fifth worst country year to date in dollars, yet it's the second best in local currency. Oh the Euro. Don't worry Germany, the US can certainly feel your pain."

The Philippine Phisix as of Friday's close was up 6.55% both in local currency and US dollar terms, that's because the Peso has almost been unchanged at 46.19 where at the end of 2009 it was at 46.2. This should make the Phisix one of the top performers.

While it is true major markets are down, this seems hardly a replica of 2008.

Contracting Money Supply, Deflation Bugaboo And Dubious Statistical Models

In a recent article UK Telegraph's Ambrose Evans Pritchard cites the risks from contracting money supply to the economy and quotes an expert for reference to amplify these on concerns,

``"It’s frightening," said Professor Tim Congdon from International Monetary Research. "The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly," he said."

Of course these experts have long used contracting money supply to argue for a deflation scare, in order to justify more inflation or money printing as a cure.

Here is a relevant chart of different money supplies from John Williams' Shadow Government Statistics

And compare them to the movements of asset markets below...
If you look at the money supply chart, although mostly positive, the monthly rate of changes have been on a decline since 2008 (except for M3-now negative)! So given the trend of declining money supply, theory goes that markets ought to be collapsing (!) or at the very least we won't be seeing any material rallies in the markets!!

The chart above shows of the 2 year trends of the global stock market index (DJW), the commodities index (CCI), an index of US government securities (USGAX) and an emerging market debt fund (XESDX).

Despite the falling rate of money supplies, all of these asset classes, which competes for everyone's money, have been on the rise in spite of the recent volatility--a scenario in stark contrast to what's being painted.

This only goes to show that there must be some major loopholes or that global dynamics must have changed alot for these statistics not to capture the developments in the asset markets.

Yet the mainstream has been using the same models to anchor their bugaboos and argue for more zombie-fication of the markets.

We earlier dealt with the lack of reliability of models in Beware Of Economists Bearing Predictions From Models, and this seems like a good example.

In Greece, Gold Prices At US $1,700 Per Ounce!

In Greece, Gold prices are reportedly being traded at nearly 40% premium of current spot prices.

According to Coin Update News, (bold highlights mine)

``The fear running through the Greek populace is that the nation’s government may default on some of its debts."

``Since 1965, the Greek government has imposed restrictions on trading British Sovereign gold coins (gold content .2354 oz). Despite those restrictions, the Bank of Greece reports that it is selling an average of more than 700 coins per day to worried Greeks.

``In the first four months of 2010, the Greek central bank sold more than 50,000 sovereigns at its main downtown Athens office. Bank officials estimate that at least 100,000 other coins changed hands on the black market. The Bank of Greece has received as much as $409 per coin, which works out to a price of more than $1,700 per ounce of gold! Prices paid on the black market are reckoned to be even higher. A popular spot for street vendors to sell their coins is near the Athens Stock Exchange. There the traders wait for citizens to bring payments received from unloading their paper assets like stocks and bonds.

``The US government and some state governments such as California are in financial straits as bad as or even worse than Greece. How long will it take before American buyers will have to wait in lines to pay outrageous premiums for what are now bullion-priced gold and silver coins? More than one analyst thinks those days will come within a few months or sooner."

So how does "panic over default" translate to a stampede towards gold, considering that for the mainstream, these events are deemed as "deflationary"?

In a deflationary environment, gold isn't likely to be seen as 'safehaven' because gold isn't money in the sense similar to the function of paper money today, which have been imposed via legal tender laws, and subsequently used as the predominant medium of exchange by the consuming public worldwide.

Yet, one can't make an apples-to-apples comparison with the Great Depression era to highlight the case of gold's supposed refuge status under deflation. Then, gold was part of the medium of exchange known as the Gold standard. Today we have the paper money standard or the Fiat Money standard, where gold remains as reserve assets only for central banks.

In a deflationary environment, the real price of the currency or money's purchasing power increases or that the demand for cash relative to other assets is significantly greater. Hence, deflation and gold as an asset of sanctuary would seem inconsistent under the present fiat money conditions.

And Robert Blumen explains why the assumption that debt defaults leading to deflation isn't necessarily true,

``The only way that debt default is deflationary is if the debt that is defaulting was created out of nothing by a fractional reserve bank. The default of that sort of debt is deflationary. Because the price system is an integrated single market, all debt competes against all other debt, and all money supply changes affect all prices. So in a system like ours where some debt is created by banks as bank deposits, while other debut, such as bonds only transfers existing money, default of non-bank debt will eventually work its way through the price system and have some effect on bank debt." (emphasis added)

In other words, not all debts are created equal or derived from the fractional reserve banking, which is why it would be overly simplistic to account for deflation under concerns over debt default.

Moreover, following the monster Euro bailout by the Euro and the world, surging gold prices in Greece could likely exhibit symptoms of growing Monetary disorder, more than just inflation. Perhaps in the anticipation that a default may risk an expulsion from the Eurozone, which with the reintroduction of the drachma would extrapolate to massive inflation.

Another way to see this is that prices of Gold in Greece could be portentous of gold prices in all other currencies, as we see the same feedback mechanism applied by policymakers towards the global debt problem.

European Debt Crisis Explained

This spoof is hilarious. (hat tip Steve Horwitz)

Beware Of Economists Bearing Predictions From Models

Max Borders explains (emphasis added)

"So what do all these macroeconomic models have in common?

-They’re rendered either in impenetrable math or with sophisticated computers, requiring a lot of popular (and political) faith.

-Politicians and policy wizards hide behind this impenetrability, both to evade public scrutiny and to secure their status as elites.

-Models vaguely resemble the real-world phenomena they’re meant to explain but often fail to track with reality when the evidence comes in.

-They’re meant to model complex systems, but such systems resist modeling. Complexity makes things inherently hard to predict and forecast.

-They’re used by people who fancy themselves planners—not just predictors or describers—of complex phenomena."

The point is, according to Richard Ebeling, ``The inability of the economics profession to grasp the mainsprings of human action has resulted from the adoption of economic models totally outside of reality. In the models put forth as explanations of market phenomena, equilibrium — that point at which all market activities come to rest and all market participants possess perfect knowledge with unchanging tastes and preferences — has become the cornerstone of most economic theory."

Yet many people stubbornly refuse to learn from the lessons of the last crisis.

The mainstream hardly saw the last crisis from ever occurring:

This is why the Queen of England in 2009 censured the profession's failure to anticipate the crisis.

This also why US investment banks became an extinct species in 2008 as remnant banks were converted into holding companies, as losses strained the industry's balance sheets, which forced these banks into the government's arms.

This also why Ponzi artist Bernard Madoff gypped, not only gullible wealthy individuals but importantly a slew of international financial companies.

And this is also why contrarian John Paulson was able to capitalize on shorting the housing bubble via Goldman Sachs, which became a recent controversy, because the other side of the trade had been 'sophisticated' financial companies.

In retrospect, not only was the mainstream composed of highly specialized institutions, which were not only model oriented, but had an organization composed of an army of experts that have not seen, anticipated, predicted or expected these adverse events.

It is also important to point out that not only are the models unrealistic but those making these models are people with the same frailties whom they attempt to model. These people are also subject to the same biases that helped skew the models, which they try to oversimplify or see constancy in a dynamic world. They are also subject to Groupthink and the influences of Dopamine in their decision making process.

Adds Mr. Borders, (emphasis added)

``What does this mean for economics as a discipline? I think it’s time we admit many economists are just soothsayers. They keep their jobs for a host of reasons that have less to do with accuracy and more to do with politics and obscurantism. Indeed, where do you find them but in bureaucracies—those great shelters from reality’s storms? Governments and universities are places where big brains go to be grand and weave speculative webs for the benefit of the few.

``And yet “ideas have consequences.” Bureaucracies are power centers. So we have a big job ahead of us. We’ve got to do a seemingly contradictory thing and make the very idea of complex systems simple. How best to say it? Economists aren’t oracles? Soothsaying is not science? Ecosystems can’t be designed?

“The very term ‘model’ is a pretentious borrowing of the architect’s or engineer’s replica, down-to-scale of something physical,” says Barron’s economics editor, Gene Epstein. “These are not models at all, but just equations that link various numbers, maybe occasionally shedding light, but often not.”

Bottom line: Incentives and stakeholdings largely determine the mainstream's fixation to models.

Many are driven by ego (desire to be seen as superior to the rest), others are driven by politics (use math models to justify securing the interests of particular groups), some by groupthink (the need to be seen in the comfort of crowds), some because of personal benefits (defense of political or academic career, stakeholdings in institutions or markets or businesses) and possibly others just for the plain obsession to mathematical formalism.

At the end of the day, logic and sound reasoning prevails.

Quote of the Day: Lula da Silva: “Before being a socialist, you have to be a capitalist”

Here is Brazil's Lula da Silva in an interview,

“The country had no credit, had no working capital or financing or income distribution. What kind of capitalism was that? A capitalism without capital. I decided then that it was necessary to first build capitalism, then make socialism, we must have something to distribute before doing so."

In this vein, the president added that “if the country does not have anything, there is nothing to distribute, and employers need to know that they have to pay slightly higher wages so that people can buy the products they manufacture. Henry Ford already has said this in 1912. “

Translation: Fatten them before the slaughter.

Lesson: Lula's admission is that capitalism leads to wealth creation. However he has another unstated political agenda--which is to keep power by redistribution of wealth through votes.

As Ayn Rand once said, ``Whoever claims the right to redistribute the wealth produced by others is claiming the right to treat human beings as chattel."

On North Korea's Brinkmanship

One of main "reasons" attributed to the recent turbulence in the markets have been due to the brinkmanship stance shown by North Korea's leadership.


This from the Economist,

``ONE of the odd features of the dispute between North and South Korea since the torpedoing of the Cheonan by North Korea in March, is that the non-military responses available to the South and its allies are rather puny. Only a few hawkish South Koreans think a military response is desirable. Hillary Clinton, America's secretary of state, said that “the international community has a responsibility and a duty to respond” when she arrived in Seoul at the end of her Asian tour. For the international community, read China, which is reluctant to censure Kim Jong Il. The North's shortfall in everything from food to energy has been met by a mixture of trade with its southern neighbour and presents from China. The suspension of inter-Korean trade now leaves the poor North more dependent than ever on Beijing." (emphasis added)

This leaves us the following question can a North Korea wage a war against South Korea?

The answer is yes, but this would be suicidal for the following reasons:

Because this would unlikely benefit the heir of President Kim to which allegedly was the reason for the bellicosity. A losing war won't be in their interest simply because North Korea is so poor and isolated as to win a full scale war.

Next, considering that North Korea is in "shortfall in everything" waging war means it can only happen with China's consent.

Considering that it would not appear to be in the interest of China to escalate the region's troubles which could only ruffle her "successful" economic and geopolitical momentum, North Korea could only be trying to extract some marginal concessions.

Unless of course, China could be using the North to divert possibly international attention (e.g. from pressure to appreciate the Yuan).

Third, like most of the past troubles, North Korea as said earlier, may be just using the incident to extract more deals. Considering the diminishing returns from recent actions (missile test and etc.), this seem like a new approach, but again would be subject to China's approval or rebuke.

In short, unless North Korea's leadership has gone berserk the odds for a Korean Peninsula military conflict seems remote.

However, the longevity of the incumbent regime in North Korea is almost totally dependent on China. This only means that once China decides for a change in North Korea's leadership, there is little the Kims can do, and maybe could also serve as reason for this unfortunate event.

Finally, North Korea's predicament only reveals how socialism is a very inferior way of distributing resources to a society as exhibited by the "shortage in everything" and near utter dependence on China for most of her needs.

The lack of pricing signals and economic calculation in determining profit and loss factors has led to massive misallocation of resources (mostly to military spending).

Of course, there is also the issue of the paucity of motivation or incentives for her people to work which has been subject to collective distribution.

As Ludwig von Mises explained, ``What must be realized is that within a market society organized on the basis of free enterprise and private ownership of the means of production the prices of consumers’ goods are faithfully and closely reflected in the prices of the various factors required for their production. Thus it becomes feasible to discover by means of a precise calculation which of the indefinite multitude of thinkable processes of production are more advantageous and which less. “More advantageous” means in this connection: an employment of these factors of production in such a way that the production of the consumers’ goods more urgently asked for by the consumers gets a priority over the production of commodities less urgently asked for by the consumers. Economic calculation makes it possible for business to adjust production to the demands of the consumers. On the other hand, under any variety of socialism, the central board of production management would not be in a position to engage in economic calculation. Where there are no markets and consequently no market prices for the factors of production, they cannot become elements of a calculation."

This is a real time experiment failing right before our very eyes and should serve as a lesson, especially to the mainstream who frequently romanticize the role of government.

In my view, the current North Korean regime (Kim and his heir) isn't likely to last in the next 3-5 years. Either hyperinflation will undo North Korea or China forces a change in leadership. But the regional political volatility will remain until such transition occurs.

Gary North On Why Asia Will Surpass The West

Here is Professor Gary North on Why Asia will Overtake the West,

``How is it that Asia has had a huge trade surplus with the United States? Because its people work long hours. They are finally getting access to capital. This capital increases their productivity. The tools they need to compete are made available through thrift. Then they put capital to use in a long work week. They have little time for leisure. They are at work many hours per day.

``In contrast, Americans are losing capital through consumer debt and withdrawal from the labor force. I don't mean unemployed people. I mean underemployed people. The person who watches TV for 4 hours a day is consuming his most precious capital: time.

``When we see a society committed to work, we see a society that has the basis for economic growth. If people work hard to get ahead, they will accumulate capital. Their work will become more efficient. If they work merely to buy spare time for play, then they will not experience economic growth.

``Asia is growing economically, because of the people's future-orientation. The United States is barely growing, because of its present-orientation. We see this in the waste of time associated with entertainment. This is a culture-wide phenomenon. It has been accelerating in the West for at least 85 years. The rise of radio and the movies marked the transition. World War II delayed the advent of the entertainment culture. The 1950s produced the first teenage subculture. It had its own movies, music, and entertainment. Why? Disposable income from parents and part-time jobs. The money went into our pockets. That was my generation. We spent as children spend, but we spent more money than children ever had spent in history. We got used to entertainment. The counter-culture, 1965–70, was even more committed to entertainment. It even turned cultural revolution into entertainment.

``This happened all over the West. It was not a uniquely American phenomenon. The student revolt in France in 1968 was worse than anywhere else.

``We now live in a nation that has suffered capital consumption. Foreigners are providing capital for us. Asians buy something like 40% of Treasury debt sold to the public. This will not go on indefinitely.

``When we learned to waste time and money in our youth, we developed bad habits. These bad habits are not easily broken. Asians never developed these bad habits. The youth of Asia headed for the cities to get jobs, not entertainment."

While it is true that attitude, behavior and time preference are key factors necessary to an Asian outperformance, I think these are insufficient.

Accumulation of capital can only come from a political and economic environment that permits it to do so. As Ludwig von Mises wrote, ``The masses, in their capacity as consumers, ultimately determine everybody's revenues and wealth. They entrust control of the capital goods to those who know how to employ them for their own, i.e., the masses', best satisfaction."

In other words, Asia will be able to surpass West only if Asians pursue and maintain a more capitalist society or an environment of greater economic freedom which allows her people save and accumulate capital, from competition and production of more goods and services to serve the masses, whom as Mr. von Mises said, determines the wealth of the society.

Why Are Intellectuals Pessimistic?

Author Matt Ridley in an interview says,

"my answer is that pessimism gets attention – from funders, from the media, from governments. Also, for reasons I do not fully understand, it sounds wiser than optimism." (emphasis added)

I'd add that aside from personal interests in terms of attention and reputation, political agenda can always be a major motivating factor for advancing pessimistic agenda by the intellectuals.

Fear, brought about by intense pessimism, are often justification for interventionism or inflationism. As 2nd US President John Adams once said "Fear is the foundation of most governments; but it is so sordid and brutal a passion, and renders men in whose breasts it predominates so stupid and miserable..."

Matt Ridley has great insights in the interview (on technology and the environment). And here is an example where pessimism could be used as a political tool...

Again Mr. Ridley, ``Many times in history, promising bursts of openness, trade, innovation and growth have been snuffed out by the erection of barriers to the free flow of things and thoughts. It happened to Phoenician Tyre, classical Greece, Mauryan India, Ming China, Abbasid Arabia, imperial Rome, golden-age Holland. It happened to America in the 1930s, to Latin America and India after the second world war, to China after the communist take-over. Protectionism, tariffs, piracy, war, or imperial plunder – they all have the same impoverishing effect if they interrupt trade. Liberalization, by contrast, dramatically raised the standard of living of Hong Kong, China after 1980, India after 1990, South Korea versus North Korea and so on. And there are always short-term incentives pushing people to recommend protectionist or plundering measures." (emphasis added)

Yet most of the current interventionist policies are rooted on such pessimism (which ironically have been caused by the same set of prior actions).

Can Governments Be Trusted To Implement Self-Discipline?

If past performance is to be reckoned with, based on the Euro Zone, the answer is NO.

This from Bloomberg, (bold emphasis mine)

``Euro-area governments breached their own fiscal rules more than half of the time since they began trading the single currency, according to data compiled by Bloomberg News.

``With Greece’s debt crisis now exposing the weakness of fiscal oversight in the 16-nation economy, governments missed one or both of the European Union’s two budget requirements 57 percent of the time since they adopted the euro. Those rules limit debt to 60 percent of gross domestic product and budget deficits to 3 percent of GDP, as set out in the 1997 Stability and Growth Pact.

``The pledge by countries to meet their fiscal rules turned out to be “rhetoric rather than reality” and contributed to the debt crisis, David Blanchflower, a Bloomberg News contributor and former Bank of England policy maker, said in an interview from Dartmouth College in Hanover, New Hampshire, where he teaches economics.

``Of the economies that have been in the euro since it started trading in 1999, Belgium and Italy missed one or both of the targets in all 11 years. Greece failed in all nine years in which it used the euro. Finland and Luxembourg satisfied both goals every year."

Read the rest here (hat tip: Professor Antony Mueller)

Here is a Bloomberg interactive graph:

click on the image to direct you to the interactive graph at Bloomberg or click here

As the illustrious Milton Friedman explains about the 4 ways money is spent -where the fourth way is about people spending other people's money on other people,

``In this case, the buyer has no rational interest in either value or quality. Government always and necessarily spends money in this fourth way. This guarantees inefficient public spending because the spenders have no vested interest in efficiently allocating those funds." (bold highlights mine)

So in absence of discipline the next recourse is to print money! So who says we're in a crisis?

The Zombie-fication Of Financial Markets

World markets appear to be increasingly transmogrifying into zombie markets.

This from the New York Times,

``A week after rattling global bourses and annoying allies with a unilateral ban on some forms of financial market speculation, Germany went much further Tuesday, proposing a law that would greatly broaden restrictions on several instruments that investors use to bet against stocks, bonds and currencies.

``Despite criticism that market regulation will be toothless unless it is enacted globally, the German finance minister, Wolfgang Schäuble, on Tuesday proposed extending a ban on what the draft legislation called “certain transactions that amplify the crisis.”

``There is broad support for such measures among leaders on both sides of the Atlantic, and some of the proposed rules are already in effect in the United States. Other European nations, however, have complained about Germany’s decision to act alone.

``“What the Germans are doing would be all the more effective if it were done at a coordinated European level,” Chantal Hughes, a spokeswoman for Michel Barnier, the European Union internal markets commissioner, said Tuesday.

``The draft law, released Tuesday by the German Finance Ministry, expands a ban on so-called naked short-selling to all stocks that have their primary listing in Germany, as well as on government bonds issued by euro countries.

``The law, which will take at least until September to win passage in Parliament, would also ban naked short-selling of the euro, and enshrine a ban on use of so-called credit default swaps to bet against European government bonds."

What the news reveals is how mainstream politicians think. They believe they can:

1.control or manipulate the markets at will, with no unintended effects. (yes, they seem to think that as deified entities, they are far superior to market forces and above the laws of scarcity)

2. prevent markets from revealing their natural state by controlling price signals. Thus, a market collapse markets isn't in their books. (yet the markets have been collapsing)

3. paper over solvency issues with massive liquidity injections and price control measures.

More demand for zombification...

From BCA Research,

``History shows that whenever authorities limit the commitment to a particular value, it encourages investors to quantify their worst case scenario (which during times of financial sector strains can be horrific), leading to a panic and meltdown. It is only once policymakers provide a credible unconditional commitment to put an end to the turmoil that investors’ fears calm, allowing financial markets to stabilize. Unfortunately, the “open-ended” nature of European policmakers’ commitment has come into question: German authorities moved to prevent speculative attacks by banning naked short selling for 10 German bank stocks as well as for CDS on regional government debt. Similarly, the ECB continues to reiterate their intent to sterilize purchases of public and private debt securities, i.e. not quantitative easing. The decision on short selling should not be a large surprise given that the primary motive of German politicians to participate in any rescue package has been to protect their domestic banks. The only good news is that German lawmakers have approved its country’s share of the $1 trillion bailout package. Still, the ECB will need to be much more forceful in its reflationary efforts. Bottom line: The ECB should reassure markets that any expansion of its balance sheet will be unwound in an orderly fashion once the economy is on a stable footing. In the meantime, substantial quantitative easing must be undertaken."

First of all, the claim of "history" as reference is dubious. That's because all these debt binges, rescue efforts and reflationary measures, have been unprecedented in scale and in scope, so there is basically no basis for comparison.

Besides in our own Asian crisis, an open-ended rescue was not an option, instead we were prescribed to adapt "austerity" programs via structural adjustment programs (SAP).

Only today, do we see the "need" for massive or aggressive substantial quantitative easing. In short, money printing as a policy is selective and conveniently applied, where it involves the developed nations. It becomes not only a fashion but a false sense of entitlement.

Yet as we keep pointing out, even Keynesian Hyman Minsky believes that massive government intervention leads to systemic bubbles by engendering the moral hazard conditions that sow the seeds of a bubble.

And likewise, as noted above, substantial QE's or money printing won't solve the solvency issues. They merely "kick the can" or defer and even aggravate the day of reckoning. Yet, history has never been quite digested, but misrepresented.

In the words of Thomas Paine, ``I remember a German farmer expressing as much in a few words as the whole subject requires; "money is money, and paper is paper."

``All the invention of man cannot make them otherwise. The alchemist may cease his labors, and the hunter after the philosopher's stone go to rest, if paper can be metamorphosed into gold and silver, or made to answer the same purpose in all cases."

If printing money is, indeed, the elixir to the world's problem, then Zimbabwe should have been the most prosperous and the world's largest exporter.

Besides, based on this line of reasoning, why do we or anyone need to work, if, at all, money printing can solve the issue of scarcity? Why do we even need the markets?

Evidence Of Inflationism: Competitive Devaluation In The Eurozone

Here is an example why the paper money-central banking regime is in peril or can't be expected to last. And also why we should expect inflation, in spite of the recent market volatility.

This from Bloomberg, (bold highlights mine)

``Swiss central bank president Philipp Hildebrand is finding himself in a tug of war with currency markets and he may be on the losing side.

``Concern that the Greek fiscal crisis will spread through the euro area is pitching the Swiss National Bank against investors, forcing the Zurich-based central bank to sell francs at an unprecedented pace to fight the currency’s appreciation against the euro. With the SNB’s foreign-currency holdings now accounting for 68 percent of its balance sheet, economists say Hildebrand may have to spend even more to maintain the resistance.

“Greece is giving the SNB a major headache,” said David Kohl, deputy chief economist at Julius Baer Holding AG in Frankfurt. “We expect the SNB to continue to lean against the appreciation for as long as possible, but they won’t be able to keep up the pace of currency purchases much longer.”

``Hildebrand is already stepping up the fight as the franc strengthened to a record 1.4003 per euro on May 17, 14 months since the SNB began its intervention campaign to insulate Swiss exports and deflect deflation threats. The central bank added 28.5 billion francs ($24.6 billion) to its currency reserves in April, the biggest increase in at least 13 years, as Greece’s turmoil undermined the euro."

``The franc has strengthened 5 percent against the currency of the 16-nation region in the last six months."

Global central banks like the US Fed, the ECB and the SNB as shown above, are not only printing money in massive scale but absorbing assets of dubious quality...

Swiss Franc-Euro Trend

...with the aim of maintaining certain exchange rate levels for whatever goals (yes interventionism is always politically designed, but camouflaged by economic intent).

The problem is that market interventions almost always lead to unintended consequences.

A warning from Ludwig von Mises, (bold highlights mine)

``If one looks at devaluation not with the eyes of an apologist of government and union policies, but with the eyes of an economist, one must first of all stress the point that all its alleged blessings are temporary only. Moreover, they depend on the condition that only one country devalues while the other countries abstain from devaluing their own currencies. If the other countries devalue in the same proportion, no changes in foreign trade appear. If they devalue to a greater extent, all these transitory blessings, whatever they may be, favor them exclusively. A general acceptance of the principles of the flexible standard must therefore result in a race between the nations to outbid one another. At the end of this competition is the complete destruction of all nations' monetary systems."

When the public awakens to the reality that central bank balance sheets represents as the "emperor with no clothes" and that the power to tax has reached its limit, then the crack-up boom is likely to emerge.

In The US, New Businesses Surge in 2009!

In the US, the Kauffman Institute claims a record surge of new business activities in 2009.
Here is an excerpt of the press release "Despite Recession US Entrepreneurial activity Rate Rises In 2009 To Highest Rate in 14 years" (hat tip: Mark Perry)

"Rather than making history for its deep recession and record unemployment, 2009 might instead be remembered as the year business startups reached their highest level in 14 years – even exceeding the number of startups during the peak 1999-2000 technology boom.

"According to the Kauffman Index of Entrepreneurial Activity, a leading indicator of new-business creation in the United States, the number of new businesses created during the 2007–2009 recession years increased steadily year to year. In 2009, the 340 out of 100,000 adults who started businesses each month represent a 4 percent increase over 2008, or 27,000 more starts per month than in 2008 and 60,000 more starts per month than in 2007.

"Challenging economic times can serve as a motivational boost to individuals who have been laid-off to become their own employers and future job creators,"said Carl Schramm, president and CEO of the Kauffman Foundation. "Because entrepreneurs drive the economy, the growth in 2009 business startups is encouraging and hopefully points to a hopeful trend in terms of our economic recovery.”

Read the rest of Kauffman's press release here.

My comment: While the Kauffman institute does provide some details over geographical distribution of entrepreneurial activities (press releases naturally provides limited info), it doesn't make a breakdown on the industries where these activities have seen the surges.

My suspicion is that they'd probably be centered on technology or technology related activities.

But the point is, it's simply wrong to write off the elan of entrepreneurs, in spite of all the troubles (aftereffects of bubbles cycles, government intervention, bailouts, prospective high taxes, growth of government relative to the economy and etc..).

The ramifications of the deepening knowledge based economy is one of the x factors that can sustain free enterprise.

Plus Ca Change: President Aquino's Policy On Jueteng

It's been argued in this space that the new administration will unlikely provide a meaningful change in the way current things are being done.

For instance, the declaration of war against corruption will be unmasked as nothing more than demagoguery or posturing, for the simple reason that we cannot solve "corruption" by mere virtuosity because governance is about laws. And laws affect the way people conduct their business or individual actions. And in most occasions, official malfeasance function as a product of arbitrary laws.

Well, events are indeed turning out the way we see it.

President Aquino seems likely to begin his term by taking upon a populist stance.

This from the Inquirer,

``Presumptive president-elect Benigno “Noynoy” Aquino III has thumbed down a proposal by his uncle to legalize “jueteng,” a numbers racket that brings in millions of pesos in cash to operators and their protectors.

“Jueteng is against the law and we will enforce the law,” Aquino told reporters."

Nice.

Whether it is the church, media or politicians, the simpleminded solution to any social problem will always be the visible...in the case of jueteng, a numbers game used for grassroots gambling--by prohibition.

There has been nary an attempt by the domestic academe or by any institutions to study or analyze the impacts of these laws on society or how prohibitions can lead to corruption.

Incidentally, accepting jueteng money had been used as the main basis for the indictment of former President Joseph Estrada's plunder trial in 2001 to 2007.

For the mainstream, enforcement issues are merely a matter of virtue.

And it is why for the economically misinformed public, the solution is to change the people in charge, rather than to examine the net effects of the law. And it is also why eradicating corruption has been an ever elusive task.

And President Aquino's actions seem no better than his priors.


The fundamental problem with prohibition laws is that it does not deal with demand.

It mistakenly assumes that if you do away with supply, so will demand. That's where things go awry. Demand does not go away, but supply is now controlled by illegal elements through the backdoor with apparent blessings by those in charge. The huge profits from restricted supply and monopoly, thus, allows for mass payoffs along the layers of government's bureaucracy and to media.

Here is Professor Mark Thornton on the supply side impact of the Economics of Prohibition.

"Prohibition is a supply-reduction policy. Its effect is felt by making it more difficult for producers to supply a particular product to market. Prohibition has little impact on demand because it does not change tastes or incomes of the consumers directly. As supply is decreased, however, the price of the product will rise, the quantity demanded will fall, and demand will shift to close substitutes. For example, consumers of narcotics might shift their demand to alcohol and tranquilizers as their prices become lower in relation to narcotics as a result of prohibition."

In the case of jueteng, or the poor man's gambling game, this represents as an alternative (substitute) to horse racing or casino or Jai Alai which are legalized.

Ironically, the disparity of application of laws makes it appear that the poor have no right to engage in the same activity as the rich or the middle class. Hence, in my view, such laws are not only arbitrary and unenforceable but also discriminatory.

So whether rich or poor, where some people are inclined to gamble, the choice of horse racing, jai-alai or jueteng becomes an issue of accessibility or as substitutes to the poor.

Jueteng, in short, is a niche market for grassroots gamblers.

Nevertheless another negative effect of prohibition laws: waste of resources.

Again Professor Thornton,

"Efficiency in economics is the search to equate the marginal cost of an activity with its marginal benefit. For the individual, this means that the number of apples consumed depends on each apple's being valued at more than its cost. In public policy the situation is more problematic.

"In simple terms, the marginal cost of prohibiting one unit of a product is the cost of the law enforcement necessary to bring about this result. Every dollar spent on prohibition enforcement means one less dollar that can be spent on alternative public policies such as national defense, shelters for the homeless, or Congressional postal privileges. If taxes are increased to fund prohibition enforcement, individuals will have less to spend on food, medical insurance, and lottery tickets. Initially, the declaration of prohibition, the use of excess law-enforcement capacity, and the existence of marginal users make expenditures on prohibition enforcement highly productive.

"Also, these resources can be diverted away from the least important policies or consumer expenditures and therefore can be obtained at a low cost. After these initial conditions, the price of additional enforcement increases, its productivity declines, and the cost of expended resources increases."

So resources that could be spent on worthier social programs are wasted on law enforcement which has little benefit to the society. In short, society suffers from a net loss/deadweight loss (cost greater than benefit) on jueteng prohibition.

And here is the corrupting influence of prohibition laws...

Again Professor Thornton,

``Another motive for enacting prohibition legislation is to reduce corruption of both public officials and the democratic process. People have sold their votes for money or drugs, and the alcohol industry tried to influence elections and public policy. Politicians could also be subject to corruption and blackmail because of alcohol and drugs, and drug use can have a corrupting influence on the actions of political leaders. For these reasons, prohibition was promoted as a means to maintain the integrity of democracy and government.

[my comment: same here, the only difference is that good intentions backfires]

``In general, however, prohibition results in more, not less, crime and corruption. The black markets that result from prohibitions represent institutionalized criminal exchanges. These criminal exchanges, or victimless crimes, often involve violent criminal acts.

``Prohibitions have also been associated with organized crime and gangs. Violence is used in black markets and criminal organizations to enforce contracts, maintain market share, and defend sales territory. The crime and violence that occurred during the late 1920s and early 1930s was a major reason for the repeal of Prohibition (Kyvig 1979, 123, 167). The nondrug criminal activity of heroin addicts has been associated with the economic effects of prohibition laws and is viewed by Erickson (1969) and others as a major cost of heroin prohibition.

``Corruption of law-enforcement officers and other public officials is also a familiar manifestation of prohibited markets. Experience with prohibition has shown it to be a major corrupting influence. The corruption of the Prohibition Bureau proved to be a major stumbling block to the effective enforcement of Prohibition and was also cited as a reason for repeal. Most important, this corruption penetrates beyond the enforcement bureaucracy to government in general. Recent experience has shown that worldwide multidrug prohibition is a major corrupting force in several national governments, such as Colombia and Mexico."

So whether it is about drugs, abortion or jueteng, these issues have fundamentally the same grounds: Prohibition induces corruption but does not stop or limit these activities or that the unintended effects are greater than the supposed benefits the law aims to achieve.

So President Aquino's first act demonstrates more of the same things, an administration that seeks popularity or desires to look and feel good (public choice theory again!) but seems tolerant of law induced corruption and wastage of government resources from feckless Prohibition laws.

More On "Are People Inherently Nihilistic?"

I stumbled upon this interesting interview with Yale Professor James C. Scott who teaches political science and anthropology.

Here is an interesting piece... (bold highlights mine)

``The state, or centralized political organization, has been with us for the last 4000 years. Even when this state was not all-pervasive or all-powerful everywhere, it was always there. So even if certain spaces or people were ‘outside’ the state—in the so-called state of nature—they always coexisted with the state and interacted with it dialectically. So saying that there are people living inside and with the state, and others outside and without it, and that supposedly they will behave completely different, is a difficult hypothetical.

``I have, for instance, the idea that life was not ‘brutish, nasty and short’ outside of the state as Hobbes argued, partly because the population levels were so low that the way of dealing with conflict was simply moving out of the way. A lot of the things people struggled and died over, were essentially commodities. So if by the state of nature we mean people living outside the state in a world in which states already exist so they are at the periphery of states, then this is a completely different thing.

``We know, for instance, that pastoralism is in fact always organized in order to trade with agrarian states; it is not some previous form of subsistence that is superseded by agriculture. Another example: in the 9th century the people in Borneo were considered to be very backward and they were a typical example of a hunting and gathering society. What were they gathering? Certain kinds of feathers and resins and the gall bladders of monkeys, all stuff hugely valuable in China at the time! So they were gathering these things for international trade with an already existing state; their hunting and gathering is a hunting and gathering performed in the shadow of states. So which ‘state of nature’ are we referring to? When Rousseau speaks of the savages he has met, he sees people that strategically respond to representatives of an organized state, pursuing their interests and behaving politically. So the concept, perhaps, hides more than it reveals."

read the rest of the interview here

my comment:

Professor Scott, who ironically is a "'Marxist' inclined towards anarchism by convictions", suggests that people operate in the same manner in and out of the state, aside from the groups at the periphery ("living outside the state") interacting with the state.

In other words, people instinctively operate on the basis of trade under a spontaneous political order, similar to what we pointed out in our earlier post, Are People Inherently Nihilistic.

Again, arguments that assert that people are endemically atavistic and self destructive beings that require government is simply not proven by facts.

Multiple Intelligence And Human Freedom

Marketing guru Seth Godin makes another fantastic insight about the multiple intelligence of the individual which he calls ironically calls multiple dumbness.

``About twenty five years ago, Howard Gardner taught us his theory of multiple intelligences. He described the fact that there's not just one kind of intelligence, in fact there are at least seven (1 Bodily-kinesthetic, 2 Interpersonal, 3 Verbal-linguistic, 4 Logical-mathematical, 5 Intrapersonal, 6 Visual-spatial, 7 Musical, 8 Naturalistic). This makes perfect sense—people are good at different things." (emphasis added)

In other words, dumbness or intelligence depends on the relative comparison of traits, as no person can claim a monopoly or absolute superiority in all traits.

And such uniqueness makes man superior and complimentary, which highlights the case for human freedom.

Quoting Murray N. Rothbard from Inequality,

``If men were like ants, there would be no interest in human freedom. If individual men, like ants, were uniform, interchangeable, devoid of specific personality traits of their own, then who would care whether they were free or not? Who, indeed, would care if they lived or died? The glory of the human race is the uniqueness of each individual, the fact that every person, though similar in many ways to others, possesses a completely individuated personality of his own. It is the fact of each person's uniqueness, the fact that no two people can be wholly interchangeable, that makes each and every man irreplaceable and that makes us care whether he lives or dies, whether he is happy or oppressed. And, finally, it is the fact that these unique personalities need freedom for their full development that constitutes one of the major arguments for a free society." (bold emphasis added)

Quote of the Day: Capitalism Ended Slavery

Another gem from Professor Don Boudreaux, (bold highlights mine)

"Slavery was common throughout history until the age of industrial capitalism. Only then did this heinous institution disappear. Slavery was killed by capitalism because that institution puts a premium on creativity, initiative, and good judgment (which even the mightiest slave-master’s whip cannot extract from its victims), and because the ethos that gives life to capitalism – free-market liberalism – is hostile to the ownership of man by man. That the first-to-industrialize English were the first abolitionists is no coincidence.

"In North America, pressure brought by capitalism to end slavery was countered by the very agency that you praise as slaves’ liberator: government. From 17th and 18th century slave codes to the Fugitive Slave Acts of 1793 and of 1850, government in America actively deployed force on behalf of slaveholders. Without this force, slavery would never have taken root as deeply as it did in the U.S. and would have died away sooner and with less bloodshed."

Philippine Election Aftermath: Goodbye Illusion, Welcome Reality!

``Their final objective toward which all their deceit is directed is to capture political power so that, using the power of the state and the power of the market simultaneously, they may keep the common man in eternal subjection.” -Henry A. Wallace

First of all I’m gratified that the Philippine elections are nearly over with, as we are just awaiting the formality of official proclamations. The Philippine elections according to the Business Mirror had been the “most peaceful” since 2004[1].

Naturally, I presume that the goals of the automated polling system has been to facilitate for a swift and accurate tabulation of results and reduce chances of manipulation and human error, all of which should diminish tensions that could spur violence as traditional methods has. And quite obviously, technology has been critically instrumental in this successful transformation.

Second, I am glad that the Filipinos appear to have accepted the results and would like to congratulate everyone for the success of the exercise.

Of course, I’d also like to extend this congratulatory note to the new President, President Noynoy Aquino, as well as all other newly elected officials in both national and public offices.

Third, contra to the many commentators who romanticize or glamorize on the results of the poll, e.g. People power victory, we’d like to put the current events into perspective.

Political Leadership Determined By A Significant Minority

With a 90.2% of the total votes tabulated[2], where candidate Noynoy Aquino holds a commanding lead with 13,841,583 votes, I estimate the final tally to reach 15.3-15.5 million. This should reflect a little over 40% share of total voter turnout.

By the way, total voter turnout of the recently concluded elections, at 38 million, represents 75% share of the total registered voters, which according to the Business Mirror, had been the highest since 1978[3].

Figure 1: NSCB: Philippine Voting Distribution

According to the NSCB[4], there are 50.7 million registered voters (see figure 1), and 56.21 million projected voting population.

This only means that Mr. Aquino’s share of votes would be reduced or extrapolated to only signify 30.5% and 27.56% of the population, respectively.

Yet, I am not sure how the NSCB arrived at 56.21 million, considering that the present count of the Philippine population stands 92.2 million with 35.2% of the population at ages 0-14[5]. Statistical errors can dramatically swing the size of potential voters.

What I am driving at is that the political leadership in the Philippines have been determined by only a third (or even less) of the eligible voting (registered and non registered) population.

So how can we adduce ‘people power’ when today’s Philippine political exercise represents a vote of the plural minority?

Remember 18 million (56.21 million minus 38 million) voters did not participate in this exercise, for one reason or the other, and that’s even more than the votes accrued by candidate Aquino [estimated at 15.5 million]!

18 million votes could have swung the election results either way, or yet pejoratively seen, 18 million could have represented disenchantment with the process [!] or have been thought as a non-bearing activity or of lesser import to their lives [!].

One possible anticipated objection from this is that- it is the fault of the 25% of the registered voters, as well as the other 6 million who didn’t register and similarly vote.

But this would be a non-sequitor, it doesn’t deal with the fact- why our representative government ‘represents’ only the voice of the significant minority and certainly not Vox Populi, Vox Dei.

The other possible rebuttal is that People Power represents symbolism of the winning candidate as legacy from the parents. Well, in this case, I would agree, elections function nothing more than as symbolism.

Think of it, in 2001 President Joseph Estrada was ousted by a second edition ‘People Power’ revolution yet in this election candidate Estrada has garnered a substantial 25.5% of the voting share among those who voted! Whatever happened to the so called principles of People Power 2?

Yet if one ponders at the polling trends prior to the filing of candidacy of the contenders until the culmination of elections, deducing the poll data would only reveal that the cornerstone of today’s elections have been the struggle between pro-Aquino and anti-Aquino camps[6].

Since candidate Aquino’s share of votes have been little changed from start to the end, most of the variability or fluctuations from poll figures came from among the opposition. This only implies that the unfortunate part for the anti-Aquino camp is that the votes had been split or divided into 8 aspirants!!

Had the Philippine electoral platform been structured on a two party system or if we had a run-off elections for the top spot, candidate Aquino’s victory won’t be anywhere near assured. Based on economist Kenneth Arrow’s Impossibility Theorem[7], and given the share distribution of election returns, there would have been a big chance for an upset!

Populist Symbolism And Celebrities

Moreover, all one has to do is to take a look at the composition of the winners of the Senate to determine the quality of votes or how Filipino voters chose.

The rosters of winners can be broken down into two categories, one, celebrities turned politicians, and second, the political class, incumbent or inherited. Apparently, no exceptions this time around.

In other words, Filipinos on a national level did NOT vote based on “relevant issues” as misleadingly propounded by some inebriated commentators, but mostly on familiarity and perceived symbolism.

The fact that the antagonists from past people power revolution versions 1 & 2, who were represented in the national levels in the Presidency and the Senate, reaped considerable votes only reveals how people have abridged memories or have very little sense of history.

One may argue that celebrities didn’t fare all that well in the current elections[8]. But this would be mistaking the forest from trees.

The contest for local positions, where celebrities have not fared as well relative to national positions, have more direct impact on voters, such as annual doleouts, transfers, ‘free’ health or hospital use, ‘free’ movie passes, various freebies for the elderly and etc... Hence, popularity may not work its magical wonders relative to magnified effects of redistribution through local social programs. In short, patronage politics is likely to overwhelm the celebrity status on a local level.

In the national levels, where the impact of redistribution has been perceived as indirect, thus the conspicuous the dominance of popularity based votes.

Besides, it would also be a mistake to assume celebrities have equal stardom effect to the populace, as this would be more of a local issue (level of perception of a celebrity’s popularity transformed into social programs), political associations or affiliations [since people think based on symbolism, associations matter] and the contrast effect principle relative to the other challengers, including the incumbents.

Moreover, another vital issue will always be that of financing (a.k.a. direct or indirect vote buying), which could be a chink in the armor of celebrities relative to the incumbents.

Such dynamics, while strong in the local levels, may have a little less significance relative to the national level. And this seems how the national elections took hold.

Political Reality Seeps In

What’s shaping up is that the Aquino presidency appears likely to be confronted by an opposition (GMA) appointed Supreme Court Chief Justice and possibly an opposition dominated Congress (both in the Senate and the House of Representatives).

For those who believe that Aquino’s regime will be founded on virtuosity that would lead to corruption free governance, this will be the first supreme test [yes, even before the official inauguration!].

For President Aquino to be able to put his programs at work, he would need the collaboration of the Congress. Yet he is caught in a dilemma. He would need to attract significant segment of the opposition to his side or forge an alliance or otherwise risk becoming ineffectual. It’s a battle between supposed “principle” versus political convenience, where a looming tradeoff in President Aquino’s political stance would reveal of the harsh reality of Philippine politics.

In essence, the next phase of the electoral process can be characterized by horse trading and vote buying in Congress (via Pork barrel)[9].

Can President Aquino resist the allure of annexing power or risks being rendered into a lameduck president? Here based on public choice theory, the answer will be no. Like all presidents before him, there will be much dirty politics in play. Maintaining popular appeal translates to high profile “president in action” regardless of the validity of the prop act.

Yet once President Aquino embarks on this process, as the 1980 song by the Fixx goes, “One Thing Leads To Another”!

This only means: Goodbye Illusion, Welcome Reality!

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[1] Business Mirror, Polls ‘most peaceful’ since 2004

[2] ABS-CBN, Partial Results of votes for President; “official data from the Commission on Elections (Comelec) and the Parish Pastoral Council for Responsible Voting (PPCRV), which did a parallel vote count”

[3] Business Mirror, 38-million voter turnout highest since 1978

[4] National Statistical Coordination Board (NSCB) Did you know that … Region IV-A has the highest number of registered voters for the 2010 elections?

[5] Wikipedia.org, Demography of the Philippines

[6] See Philippine Post Election Analysis: 2010 Election Theme and The Runoff Theory

[7] See Philippine Elections: In A Hypothetical Runoff Elections, Will Noynoy Aquino Still Be The Winner?

[8] GMANews.tv, Celebrity winners and losers in May 2010 polls

[9] See Quote of the Day on Philippine Politics: Changing Parties To Get So Many Benefits Under A Sitting President

External Developments Are Prime Movers of Philippine Markets

``The key to making money in stocks is not to get scared out of them."-Peter Lynch

If there are any lessons learned from the events of last week, it is what we have earlier observed: markets are mostly externally driven and alternatively local ‘political’ activities have less an impact.

And as previously noted[1], ``So I am not as confident of a decoupling until we see more elaborate evidences from this.”

As long as politics revolve around non-financial or market issues, they will likely have lesser influence than from developments in capital markets abroad.

So whether it is political tumult in Thailand where headlines scream “Bangkok Burns”[2] or from the recent electoral finis in the Philippines, it’s been little about local events.

Proof? (see figure 2)

Figure 2: Global Market Rout Spillover To The Phisix And The Peso

When local analysts and media babble about election failure jitters, and where the Peso continues to firm, that would seem like foisting one’s desired opinion as the aura of truth, even in the absence of evidences. This essentially begs the question. It is like observing in a horse race where horse X is ahead of horse Y even if in reality Y is way ahead of X with only a foot away from the tape.

Following the elections everyone seems optimistic about markets due to a change in leadership. In contrast, our upbeatness on the domestic markets emanate from different reasons.

Yet market reaction and political developments appear to be diverging.

Currency Markets Bears The Brunt As The Phisix Remains Resilient

The market rout in the Europe and Chinese markets appears as being transmitted into sundry market channels, most notably through the currency markets.

This week alone, the Philippine Peso fell by a whopping 3.8% (green line in the chart), which seems like a prayer answered to a local exporting group, whom has been calling for a 46 to a US dollar level!

Unfortunately for this myopic exporting group, if markets continue to stumble as reflected on the falling Peso, a lower peso won’t translate to ‘better business’ or added demand simply because markets appear to be suggesting exactly the opposite--a prospective fall in demand, hence reflected on the fall in the Peso.

In short, this may be called as the return of risk aversion—for the moment.

Mainstream must be wondering, with a newly elected “People Power” president why the sudden stampede away from the Peso? The answer is that elections have had little influence on the markets.

Yet this isn’t just a Peso phenomenon. Asian’s currencies were mostly in a swan dive; the Korean won crashed by 8.6%, the Malaysian ringgit 4%, New Zealand dollar and the Australian Dollar 4% and 6% respectively. And only the Thai baht seemed little changed this week in spite of the Bangkok burning event.

As you can see above, the S&P 500 (blue line) plummeted by 4.23% this week after the ugly plunge 3.8% last Thursday. From a peak to trough basis the S&P has lost some 10.7% based on Friday’s close.

Meanwhile, the Philippine Phisix lost 4.54% over the week. One peculiar behaviour has been that the Phisix fell by only 1% in reaction to the hefty over 3.5% decline in the US, last Thursday. Moreover, the Phisix is down 4.54%, following a newly established high or zenith the other week. This compared to the 10% decline, from the peak in the US markets, last end of April.

While one week doesn’t a trend make, the seeming resiliency seen in the local market relative to the Phisix can be traced to a shift in dominance in terms of transactions from foreign to the locals. This has been the case since 2009 (see figure 3)

Figure 3: PSE: % Share Of Foreign Trade

The red line marks the 50% threshold. In 2008, most transactions have been dominated by foreigners, this changed in 2009 where most transactions have been shown below the trend line.

So while we don’t believe that there will be a decoupling yet, continued marked improvements like this could function as a foundation.

Nevertheless, this implies that the state of international markets remain as key factors in ascertaining local trends or even individual local issues.

The idea that corporate fundamentals will defy general trends seems like a misconception. Even the deeper and more sophisticated US markets seem to be showing the same symptoms[3], where tidal fluxes shape psychology and affect individual issues which eventually determines the general state of the markets.

So unless we can establish that global markets are not headed for a free fall, only from then can we work on the significance of micro dynamics.

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[1] See Phisix: The Philippine Presidential Honeymoon Cycle Is On

[2] See Politics And Markets: Bangkok Burns Edition

[3] See More Evidence On Liquidity Driven Markets