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!

---

[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.

---

[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

Global Markets Violently Reacts To Signs Of Political Panic

``Obviously the thing to do was to be bullish in a bull market and bearish in a bear market.”-Jesse Livermore

We don’t share the view with the Perma bears that this is the return of the bear market.

A technical trend break in chart trends does NOT automatically translate to a bear market. Besides charts are a menagerie of past information which does not suggest any infallible concept about the future outcomes.

And neither was last week about world credits being repriced nor about the adverse debt developments in the US.

Figure 4: Danske Bank: German short-sell ban rattles markets

To the contrary, sovereign debt papers of the US, Germany and Denmark were chief beneficiaries of last week’s turmoil (see figure 4 right window). So while we are seeing some emerging tensions in money markets via interbank funding rates (left window), they are yet substantially distant from the cataclysmic heights in post Lehman episodes of 2008.

Of course the $64 billion question is, are we headed there? My reply is a likely no.

Why?

Because most of adherents to this school sees markets as being immobilized by debt, which is simply not true.

To quote Murray Rothbard[1], (bold highlights mine)

``What deflationists always overlook is that, even in the unlikely event that banks could not stimulate further loans, they can always use their reserves to purchase securities, and thereby push money out into the economy. The key is whether or not the banks pile up excess reserves, failing to expand credit up to the limit allowed by legal reserves. The crucial point is that never have the banks done so, in 1990 or at any other time, apart from the single exception of the 1930s. (The difference was that not only were we in a severe depression in the 1930s, but that interest rates had been driven down to near zero, so that the banks were virtually losing nothing by not expanding credit up to their maximum limit.) The conclusion must be that the Fed pushes with a stick, not a string.”

UNLESS this time is different I simply can’t see how Zero interest rates combined with suppressed inflation will prompt for catastrophic markets.

Throughout Japan’s lost decade, as we previously discussed[2], we haven’t seen her market’s crash when interest drifts at the zero level.

While it may be true that government actions in solving today’s predicaments may be reaching diminishing returns, zero interest rates and dampened inflation provides government extended leeway to conduct activities as noted by Mr. Rothbard above.

And while Eurozone[3] and the UK[4] have been witnessing accounts of rising consumer price inflation to a 16 and 17 month highs respectively, they haven’t reached levels that could stymie government actions.

Moreover, as previously noted[5], the premise of diminishing returns is exactly the main reason why the scale of rescues have been constantly swelling. Unless we see global governments willing condescend to market forces, and accept the limits of central banking, this isn’t likely to happen yet.

But recent events only prove that this is exactly in the opposite direction.

Germany’s Signs Of Desperation

Just last week, the arrogance of trying to prevent markets from revealing the true nature of balance sheet impairments of subprime Europe prompted Germany’s chancellor, Angela Merkel, to slap a ban on naked short selling on credit derivatives, euro bonds and select financial equities[6].

European authorities similar to Filipino voters have little incentives to learn from past experiences. Never mind that the US tried the same approach in the wake of the Lehman bankruptcy that exacerbated if not helped triggered the October 2008 crash.

And we seem to be seeing the same market response.

According to the Danske Research Team[7], ``The reason for introducing the ban on naked short-selling is that BaFin wants to reduce the extraordinary volatility that has been witnessed but the immediate market reaction suggests that the contrary has been accomplished and the euro has weakened further against the dollar. In the credit market, sovereign CDS tightened dramatically (short covering) whereas the corporate indices widened – the reason probably being the uncertainty that has been created in the playing field.” (bold highlights mine)

So regulatory risks has been exacerbating the market’s meltdown.

To wit, there have been accounts of massive capital flight[8] from Germany to Switzerland, which according to some reports, prompted heavy foreign exchange intervention[9] by the Swiss National Bank (SNB).

Moreover, there have also been emerging signs of political schism in the Eurozone, the surprise ban on short sales, which had purportedly been meant to shore up political support for Germany’s approval of the Euro’s bailout, hasn’t been well received by France[10], while other EU nations remain undecided. The following day the Germany approved of the bailout[11].

Earlier much of EU’s actions have been tilted in favour of France; where Germany argued for Greece to solve her own problems while France favoured a bailout and where Germany was initially in favour of marginal support while France’s Sarkozy wanted a “shock and awe”.

According to Gordon Long[12], ``It's in Sarkozy’s interest to fight for a US-like Keynesian solution with excess money printing. This would "kick the can down the road" and avoid an impossible "austerity cuts" war with French unions and workers.”

Obviously we seem to be witnessing public choice theory at work anew, where political self-interest interests among policymakers continue to trump the markets.

So political risks from the discordant and unilateral policies seem to be worsening the uncertainties in the marketplace. And this has led to last week’s market carnage.

Moreover, one can infer that these actions signify as signs of panic and act of desperation by EU authorities. So while governments in panic can be indicative of a bottom or present itself as buying opportunities, the obverse side is that desperate actions can lead to reckless policies that could backfire. The ban in naked short selling is an example.

But as we have long been pointing out[13], politics will be the order of the day. And to this point we are being validated anew.

So until we see signs of restoration of order and confidence in terms of policymaking, the likelihood is for continued volatility in global markets.

But I’d like to reiterate that that this isn’t the 2008 meltdown, where most of the actions from last week seem to emanate from regulatory risks and from political risks rather than from a seizure in the banking system caused by quasi ‘electronic’ bank runs and the subsequent drying up of trade finance.

In short, the nature of market stress has been entirely a different animal.

Even the Federal Reserve’s swap facilities which it has recently reopened, has had less takers, if not entirely “no new demand”[14]. This hardly implies of credit stress but again most likely from political and regulatory oriented strains.

Furthermore, there is a chasm of a difference between administrative politics and the politics in the financial-economic sphere. The latter is where markets have been greatly influenced as the drama in the Eurozone has exhibited.

Contrasting China And EU’s Predicament

Finally I’d like to point out that there’s a big difference between the developments in China and the Eurozone.

In China, governments have been fighting a brewing bubble by attempting to contain surging asset prices, particularly property prices, from credit expansion. (see figure 5)

Figure 5: US Global[15]/ Danske Bank[16]: Money Supply and Inflation

In Europe, governments have been trying to contain the debt crisis by inflating the system.

In other words, you have two (set of) governments fighting different monsters with slightly opposite measures.

As you can see in the left chart, China’s money supply appears to be shrinking. And this may have prompted for the recent collapse in Shanghai Stock Exchange (SSEC) and a possible easing of her property markets.

And as pointed above, the bubble strains isn’t just being manifested in surging property prices but also in consumer price inflation (right chart).

Hence in my view, the odds of a bust look greater in China than in Europe at the present moment, considering that rising consumer price inflation and asset bubbles are likely to retrain the hand of the authorities. Although markets appear to be saying that both are in a bust now, I wouldn’t bet on it.

As noted above, governments coordinating to pump massive amounts of money into the system will have to go somewhere.

Moreover, austerity measures that should affect economies such as Greece is only a sliver to the economic recovery being seen in most of the Euroland, Spain and Italy included (see figure 6)

Figure 6: Danske Bank[17]: Euroland: Between robust data and political risk

Europe’s manufacturing indices PMI appears to be at an upside momentum while business surveys IFO remain positive, in spite of the unravelling crisis.

So unless you expect the markets to suffer from more convulsions out of concerted shrinking of supply of money, which will be the only way for a coordinated meltdown, possibly through simultaneous collapses in the banking system, I highly doubt this scenario would occur.

Especially not with governments putting implicit, if not explicit guarantees, in the banking system, and especially not with governments frantically throwing money at every known social problem.

Of course, the other major risk would be to severely impede or even restrict movements in the capital markets, but that would be opposing the interests of the banking system from which global governments have toiled so hard to save.

As previously shown, governments can put them to public trial for theatrics, but at the end of the day, they’d scamper to rescue once signs of distress emerge.

The recently passed new financial regulation bill in the US will hardly change the politics of banking cartels and the central banking system.

And as the EU drama shows, rules will be bent for political conveniences.

---

[1] Rothbard, Murray N. Lessons of the Recession Making Economic Sense p.220

[2] See What Has Pavlov’s Dogs And Posttraumatic Stress Got To Do With The Current Market Weakness?

[3] Bloomberg, European Inflation Accelerates, Exports Increase

[4] BBC.co.uk, UK inflation hits 17-month high

[5] See The Euro Bailout And Market Pressures

[6] See Germany Bans Short Selling, Another Scapegoating The Markets

[7] Danske Bank, German ban on short−selling dampens the mood

[8] Pritchard, Ambrose Evans Germany's 'desperate' short ban triggers capital flight to Switzerland

[9] Alloway, Tracy, Swiss franc intervention cost a billion a day in April, FT Alphaville

[10] Wall Street Journal, Taking the Naked Ban to a New Level

[11] BBC.co.uk, Germans approve euro rescue plan

[12] Long, Gordon T., What Will Come of the Euro Experiment?

[13] See Why The Greece Episode Means More Inflationism

[14] Wall Street Journal, Lack Of Demand For Fed Currency Swaps Plus For Markets

[15] US Global Investors, Investor Alert, May 14, 2010

[16] Danske Bank, China: Solid growth and higher inflation clear the way for revaluation

[17] Danske Bank: Euroland: Between robust data and political risk

KPMG on Tax Competitiveness

Here is an interesting report on Tax competitiveness from KPMG.

Using the US as the benchmark, KPMG finds that among 10 countries Mexico has the lowest total taxes (taxes include corporate, sales, property, capital, miscellaneous business taxes, statutory labor costs)

The above is the ranking....

Below is the composition of taxes...

The study incorporates 41 cities from these 10 nations.

Read the rest of the report here

A Speech That Will Inspire My Vote

One day I dream** to see Filipino politicians talk and act in this direction...

``This government is going to transform our politics so the state has far less control over you, and you have far more control over the state.

``This government is going to break up concentrations of power and hand power back to people, because that is quite simply how we can build a society that is fair....

``Landmark legislation, from politicians who refused to sit back and do nothing while huge swathes of the population remained helpless against vested interests.

``Who stood up for the freedom of the many, not the privilege of the few.

``And it's that spirit this government will draw on as we deliver our programme for political reform:

``A power revolution.

``A fundamental resettlement of the relationship between state and citizen that puts you in charge.

``Today I want to talk about how we'll get there.

``Three major steps, that will begin immediately:

``One: we will repeal all of the intrusive and unnecessary laws that inhibit your freedom.

``Two: we will reform our politics so it is open, transparent, decent.

``Three: we will radically redistribute power away from the centre, into your communities, your homes, your hands.

``Big, sweeping change.

``Not incremental, not bit by bit.

``Our democracy has suffered at the hands of encroaching centralisation and secrecy for decades.

``Take citizens' rights: eroded by the quiet proliferation of laws that increase surveillance, quash dissent, limit freedom.

``Take executive authority: consistently increased by successive administrations to the point that we now have a neutered parliament and government that enjoys almost untrammelled control - over precisely the people who are meant to keep it in check.

``Take the welfare state: one of modern society's greatest liberators - now utterly different to that envisaged by Beveridge because of the sheer degree of centralised control and micromanagement.

``Britain was once the cradle of modern democracy."

That's a snippet from Deputy Prime Minister Nick Clegg's recent speech on political reform. (all bold emphasis mine)

Where liberty and freedom becomes the issue of focus, along the line of Mr. Clegg's speech, then I know the Philippines will be on path to true prosperity.

And that will be also the time when I will be an active voter.

**At the first statement of this post, I purposely used "dream" instead of "hope" for the reason that espousing politics of principles would be a near impossibility given the tendencies of almost all local politicians to resort to messianic nostrums as motivation to generate votes by popularity or enhance approval ratings.

Liberty and economic freedom is basically alien here. Everyone likes to be personally free, but desires the others to be unfree.

Moreover, Filipinos want to believe that they are free by virtue of elections, never knowing that after elections freedom shrivels.

When political freedom isn't accompanied by economic freedom and personal liberty, then I understand this to be an artifice; an illusion.

Hernando De Soto: Unclear Property Rights And Complex Rules Led To Market Crashes

In a recent interview, the illustrious economist Hernando De Soto, author of The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, suggests that complicated and opaque laws, which muddles up the property rights issue, has prompted for the latest market crashes.

On the rule of law...

"when it comes to property rights: most of the world is still in the 19th century. During that time period, the US put all their property information on paper. These "rule of law" standards identified who owned what property - this system is still viable today...

"when independence, solidarity and individuality function under the "Rule of Law, all players are on the same playing field; that is the rules apply the same to all [but note, this concept is non-existent in many parts of the world]. South American and African nations borrowed their laws from their colonizers. In contrast, anarchy has many laws within the same territory.

my comment: In an earlier post Are People Inherently Nihilistic?, we said that the term "anarchy" comes with different references. Here, Mr. De Soto appears to imply that anarchy (or perhaps defined as market turmoil) was caused by the many intricate laws within the same territory, which brings us to the next topic...

De Soto's view on property rights and rule of law's role in today's market crash...

``The basic problem with the financial meltdown today is that with all the convoluted derivatives, trades, bundling, etc. the US does not know where its financial paper is. Thus, the US cannot define who is solvent and who is not. The "Rule of Law" comes into play because property ownership is based on a paper trail. Since the paper trail is incomplete regarding detailed ownership of the property underlying the complex derivatives that were sold in the financial industry, no one knows who owns exactly what and what it is worth. As a result, trust plummets."

my comment: so the questionable application of the "rules" which has led to the ambiguous stance on ownership rights has prompted for a lost of trust or "anarchy".

Besides, excess and poorly defined regulations have prompted for regulatory arbitrage, regulatory capture, administrative lapses by regulators (because of sheer volume of laws, enforceability issues and possible confusion) and amplifies conflict of interest among participants or agency problems. And all these get to be reflected on distorted price signals. I'd like to add that inflation, as a hidden tax, is a major contributor to De Soto's property rights-rule of law dilemma.

In Greg Ransom's Hayek Center (where I sourced this, thanks Greg...) adds that... (bold highlight mine)

``My ancestors recorded property right claims with a central registrar in the no-mans land of Oregon when the region had no legitimately recognized government. The people of the region followed customs of law and governance share among the English and Americans, with the anticipation that their property rights claims would later be recognized by the U. S. government when the region became part of the United States. The story is recounted in Nimrod: Courts, Claims and Killing on the Oregon Frontier by Ronald Lansing of the Lewis & Clark School of Law. Yes, remarkably enough, the story is a murder mystery."

my comment: more evidence that property rights had been observed outside of the realm of government.

More Evidence On Liquidity Driven Markets

We have long asserted that markets have hardly been driven by 'fundamentals' but by either rising or ebbing tides prompted by inflation and inflation fueled psychology.

Today's market downside volatility appears to be showing the same manifestations in the US markets.

Let me quote Bespoke (bold highlights mine)

``One day in early April, 93% of stocks in the S&P 500 were trading above their 50-day moving averages while 7% were below their 50-days. Now the exact opposite is true -- 7% are above their 50-days, while 93% are below. And just like the reading rarely stays above the 90% level for long, it also rarely stays below the 10% level. As shown in the chart below, the indicator is currently at its lowest level since March 2009 when it hit 5%. During the depths of the collapse in late 2008, the reading got down to zero percent. At this point, investors have to decide whether or not they think things could get as bad as they did in late 2008."

So whether an upside or a downside, we seem to be seeing the same dynamics--where most of the movements of stock prices seem to be reflecting ebbs and flows of liquidity rather than individual performances based on micro dynamics.

To consider, US markets are deeper and more sophisticated as to supposedly exhibit more market pricing efficiencies, yet they appear to remain prone to changes in liquidity levels.

How much more with bourses of the lesser developed markets.

This reminds us of a quote from the legendary trader Mr. Jessie Livermore in Edwin Lefevre classic the Reminiscences of a Stock Operator

``Nowhere does history indulge in repetitions so often or so uniformly as in Wall Street. When you read contemporary accounts of booms or panics the one thing that strikes you most forcibly is how little either stock speculation or stock speculators today differ from yesterday. The game does not change and neither does human nature."

Yet, this seems to be another affirmation of our Machlup-Livermore paradigm

Japan's Deflation: Evidence of Rising Productivity

Is deflation a menace?

Not if we take it from Japan's recent economic performance.

This from Japan Times, (bold highlights mine)

"The economy grew at its fastest pace in three quarters as an export surge prompted companies to increase capital spending even as the nation endures persistent deflation at home.

"Gross domestic product rose 4.9 percent pace in the first three months of 2010 at an annual rate, less than forecast, a Cabinet Office report showed Thursday. So-called nominal GDP, which is unadjusted for price changes, increased 1.2 percent on a quarterly basis, the most in a decade.

"The Cabinet report shows that more than half of growth came from trade, with consumer spending contributing less than one-fifth to the expansion. Finance Minister Naoto Kan warned within minutes of the release that the economy continues to be in a deflationary state and kept up his pressure on the Bank of Japan to sustain its efforts to halt the slide in consumer prices."

Chart from Trading Economics

Falling consumer prices means MORE purchasing power. Stated differently, if you can buy more goods with the same amount of money how can deflation be bad?

Proof?

Again from the same report,

"The export-fueled rebound also started feeding into wages and the labor market. Earnings rose for the first time in 22 months in March and the ratio of job openings to applicants advanced for a third month."

So rising earnings, wages and more employment seem to be manifesting a productivity driven deflation dynamics or people are producing more than money is being printed by the authorities.

Yet mainstream experts and the media seem to be seeing it differently,

"The reliance on overseas demand may also be a vulnerability as Europe's debt crisis sparks concern about the durability of the global economic recovery.

"The best thing Japan can do is to bring inflation back to their economy," said Huw McKay, a senior international economist at Westpac Banking Corp. in Sydney.

As shown above, media through quoted mainstream analysts prescribe that the Japanese should earn less, pay for higher prices for consumer goods and services, go for debt driven expansion, see a boom-bust cycle and become less productive, which all translates to less prosperity.

As Ludwig von Mises rightly argued,

``Deflationary policy is costly for the treasury and unpopular with the masses. But inflationary policy is a boon for the treasury and very popular with the ignorant. Practically, the danger of deflation is but slight and the danger of inflation tremendous."

Politics And Markets: Bangkok Burns Edition

How are financial markets and political turmoil correlated?

Not much if you ask me.

This would largely depend on the underlying issues involved. Financial markets appear to be more sensitive to financial issues such as capital controls or debt anxieties than simply compared to domestic political turmoil.

News headlines such as this, "Bangkok Burns Amid Army Crackdown", highlight the unfolding mayhem in Bangkok, Thailand.

Photo from Star-Telegram

The common impression built upon or associated with such chaos would translate to a collapse in the markets, going by media's logic.

But how true is this?

Thailand's SETI is still up year to date as shown in the above chart from stockcharts.com and seems insouciant to the ongoing violence.

And it would seem that Thai markets are even more correlated to the gyrations in the US (as shown by the SPX below). The right vertical line reflects on the latest correlation while the left vertical line marks the start of the year performance.

And it's not just in stocks, but likewise reflected on the Thai Baht (chart from yahoo). True enough there has been a little downswing in the Baht, but this occurred before the violence, and seems likely to reflect more on external factors than the present political predicament.

Nonetheless, the Baht appears to be advancing of late in spite of the Bangkok Burning edition.

Bottom line: Financial markets and political developments don't have strong correlations or the causal link is tenuous. In most cases, they are merely subject to the available bias fallacy by media, which is why the public should learn how to distinguish between real forces and mere rationalization.

The same holds true for the Philippines, which is why the local markets surged in spite of nonsensical chatters of election "failure" risk during the campaign period of the recently completed national elections.

Philippine Post Election Analysis: 2010 Election Theme and The Runoff Theory

My earlier post about election runoffs and the impossibility theorem have led me to ponder more about counterfactuals or how elections would have resulted if we had a majority based way of selecting our leaders.

Taking a glimpse at the survey leading to the elections, we find that Presidential candidate Noynoy Aquino as practically having maintained the same share level in voter preference from November to May, as shown by the chart courtesy of Social Weather Survey
And it would be further interesting to note that there seems little change in the distribution even prior to the declaration of candidacy by the other contenders last November.

This from Pulse Asia,

``Compared to the October 2009 Ulat ng Bayan survey, the support for Sen. Aquino III remains virtually unchanged. On the other hand, there is a significant improvement in voter preference for former President Estrada (8 percentage points, from 11% to 19%) and marginal increases in the support for Sen. Villar (+4 percentage points, from 19% to 23%) and Lakas-Kampi-CMD standard bearer Gilbert ‘Gibo” Teodoro (by 3 percentage points, from 2% to 5%)."

In short, the 2010 Presidential election THEME appears to have revolved around a pro-Aquino versus anti-Aquino camp. Unfortunately, the votes of the latter had been distributed among 8 contending parties. Therefore, the landslide victory by candidate Aquino.

While the elections did show the rankings of first preference of every voter, it doesn't reveal the second or third preferences needed to ascertain a mathematical estimate on the possible alternative outcome.

But the distribution presented in our original post and the discerned dynamics from the voting patterns (pro Aquino versus anti Aquino) seems to echo an outcome from Mr. Arrow's Impossibility Theorem.

Bottom line: under an election runoff or if the elections were reduced just to two participants, Mr. Aquino's victory isn't all that certain.

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

Perhaps not.

That's if we base this on Kenneth Arrow's Impossibility Theorem.

Just a reminder, in the Philippines we have a plurality and not a majority representative government, therefore, runoff elections are precluded.

Runoff elections by definition is a "two-round system (also known as the second ballot, runoff voting or ballotage) is a voting system used to elect a single winner."

In other words, if we were to pursue a majority representation, then the top two contenders, Aquino and Estrada would have to compete again in a second round of elections to secure the top spot through a majority vote.

Perhaps we can talk about more of this once the final outcome have been declared.

Anyway, what may be popular may not be the actual. Professor Don Boudreaux lucidly explains how under the "Impossibility Theorem" the outcome of the popular elections may dramatically change, under a runoff.

And when applied to Philippine national elections the outcome may be a surprise.

Here is Professor Boudreaux,

Suppose there are nine voters.

Voters 1, 2, 3, and 4 each prefer candidate A to candidate C and candidate C to candidate B. That is, each of these four voters ranks the three candidates as such: A>C>B.

Voters 5, 6, and 7 rank the candidates like this: B>C>A.

Voters 8 and 9 rank the candidates like this: C>B>A.

In the general elecation, A will receive 44.4 percent of the vote (4 of 9 votes cast); B will receive 33.3 percent of the vote (3 of 9 votes cast); and C will receive 22.2 of the vote (2 of the 9 votes cast).

[my comment- this looks somewhat like the distribution share of the still pending final count for Presidential election results- where Aquino has 40.19%, Estrada has 25.46% and Villar has 14.22% (wikipedia.org). To consider the above theory is based on 3 contenders while we have 9 contenders for the recent election!]

Because no candidate won a majority of the vote in the general election, a runoff election is held between the top two vote-getters from the general election: candidates A and B.

In the runoff election, candidate B will win 55.6 percent of the vote (5 of 9 votes cast). B will then be sworn into office, presumably as the voters’ preferred candidate.

But look more closely. Suppose that the candidate who received the fewest votes in the general election – candidate C – were to run against candidate B in a runoff election. Which of these two candidates would win? Answer: C. In such an election, C would win 66.7 percent of the vote (6 of 9 votes cast), thus trouncing candidate B! (Also note that if a runoff election were to pit C against A (the candidate who received the most votes in the general election), C would also defeat A: C would get 55.6 percent of the vote (5 of 9 votes cast) to A’s 44.4 percent (4 of 9 votes cast).

So is it correct to say that candidate B is the voters’ most-preferred candidate? Clearly not.

Nevertheless, Professor Don Boudreaux concludes, ``The point of this exercise is to make clear that describing the winner of any fair and honest election as being the ‘choice of the voters’ is fraught with potential inaccuracies."

Indeed.

Germany Bans Short Selling, Another Scapegoating The Markets

Governments almost always believe that market has been the culprit for most of the ills in society. And that when push comes to shove, their instinct is to resort to palliatives: throw money at the problem, regulate or tax.

Since the markets has not stabilized even after the Bazooka or Shock and Awe monster $1 trillion bailout, of the not only of Greece, but the entire Euro Union, last night, Germany banned short selling in European bonds and credit default swap and shares of select industries in the stock market.

This from Bloomberg,

``Germany prohibited naked short- selling and speculating on European government bonds with credit-default swaps in an effort to calm the region’s financial markets, sparking anxiety among investors about increasing government regulation.

``The ban, which took effect at midnight and lasts until March 31, 2011, also applies to the shares of 10 banks and insurers, German financial regulator BaFin said late yesterday in an e-mailed statement. The step was needed because of “exceptional volatility” in euro-area bonds, BaFin said."

The problem is that these bans introduces more risks by not allowing the markets to reflect on the fundamentals via price signals.

Besides, excessive government spending financed by debt coupled with insufficient revenue, which is the source of the Euro's problem, hasn't been caused by the markets but by extant policies.

So the German government is simply looking for another scapegoat.

While the stockmarkets in Europe did react positively, perhaps due to some short covering on the issues affected by the ban, US stocks got slammed and the Euro cratered!

Regulators don't seem to realize that banning naked shorts hardly produces the intended effects and instead creates an aura of heightened uncertainty.

So aside from regulatory risks, these actions may suggests of an act of desperation or act of concealment of problems.

At the near climax of the Lehman episode in 2008, the US government reacted the same way, by instituting a ban on naked short selling in mid September as Lehman filed for bankruptcy.

And instead of the consequences going in the way of the regulators, the US markets collapsed! See below...

The blue arrows mark the time where naked short bans had been imposed.

Japan followed in November of the same year (above window), yet the results were the same...a failure to stem the hemorrhage.

The more governments manipulate the markets, the unstable they will be.

Banking System And Global Imbalances

This is an interesting observation from the Economist,


``The finances of banks are a mirror of the economies where they are based. In emerging markets, the surplus of customer deposits over loans (ie, excess savings) at listed banks was about $1.6 trillion in 2008, compared with a deficit of about $1.9 trillion at rich-world banks. Banks in emerging markets, which have vast branch networks to suck in deposits from thrifty families and companies, park their surplus with the state, by buying government bonds or keeping it in central banks. The state in turn acts as the international recycling agent for those excess savings: it lends them to Western countries through its foreign reserves or through a sovereign-wealth fund. Meanwhile, overextended Western banks do the exact opposite: they borrow from capital markets to plug the hole created by having more loans than deposits. In 2009, the funding gap was smaller, reflecting the slow rebalancing of Western banks' finances." (all bold highlights mine)

My comment:

The above shows the following:

-trade imbalances are offset by capital account transfers [see US-China Trade Imbalance? Where?]

-governments are shown here to be very inefficient intermediaries in the allocation of resources (finance or real). Allocations are fundamentally politically motivated, e.g. in the US, the homeownership bias in the 1990s to 2007 (ergo the bubble bust of 2008); today, the focus is on deficit spending.

-moral hazard from sustained subsidies to government (as recycling mechanism) has partly caused bubbles and will likely continue to do so.

-the overall problem basically seems due to the architecture of our monetary system, which have been premised on a cartelized banking system that revolves around central banking.