Buy The Peso And The Phisix On Prospects Of A Euro Rally

``The euro will survive, the shorties won't. A sound analysis of the fundamentals clearly shows that the euro's external position does not warrant its demise. The eurozone has no current account deficit and no net external debt and the global competitive position of many euro countries is strong. Even more so: the highly indebted "Club Med" countries along with Ireland have implemented the measures to get clean. This by itself is a global rarity.”-Antony P. Mueller, Euro Shorties Take Care

Coming from oversold levels, I believe that the Euro is ripe for a major bounce. And this should have a tremendous impact on global asset classes.

First of all let me point out that that I’m no fan of the Euro or for that matter any paper currency, including the Chinese Yuan or Philippine Peso. Like the fate of all previous paper currencies throughout man’s existence, they are all destined to meet their eventual doom.

That’s because the Fiat currency system functions as principal instruments of governments, through central banks, to advance on political goals of the political leadership which are mostly incompatible or clash with the universal economic laws.

As Friedrich Hayek wrote[1], (italics his)

What we should have learned is that monetary policy is much more likely to be a cause than a cure of depressions, because it is much easier, by giving in to the clamour for cheap money, to cause those misdirections of production that make a later reaction inevitable, than to assist the economy in extricating itself from the consequences of overdeveloping in particular directions. The past instability of the market economy is the consequence of the exclusion of the most important regulator of the market mechanism, money, from itself being regulated by the market process.

Hence most of the collapse of politically mangled currencies had been due to war or hyperinflation[2].

Reasons Why Euro Isn’t Going To Collapse, For Now

Having said so, this brings us to the next point; the allegations of the imminence of the death of the Euro, which in my view, seem highly exaggerated and representative of extreme pessimism.

Yes the Euro is bound to meet its inevitable demise, along with the US dollar and the others, somewhere down the road, but I don’t see it unravelling soon-not this year, or the next.

The fundamental reason is that interest rates globally remain at very low levels, from which allows governments to conduct inflationist rescue packages such as the recent nearly $1 trillion bailout of the Euro[3].

And low interest rates are emblematic of mitigated effects of inflation, for the time being.

Moreover, as we have earlier discussed, today’s globalization trends have NOT been restricted to trade, investment and financial, and labor flows, but such trend also incorporates monetary policies and government collaborative actions[4]. An example would be the recently reactivated currency swap arrangements and multilateral loans extended as part of the Euro rescue deal.

The point is, for as long as governments have the leeway to cross finance or accommodate each other, any talk of currency dissolution seems like wishful thinking.

In other words, what will immobilize governments from the present collaborative stance will be the series of dramatic interest rate responses to an accelerating rate of increases in inflation.

Under this scenario, the debt burdens of the financial system of those economies that are highly leveraged would be amplified and this effectively reduces the space for policy collaboration among governments and significantly lessens the accommodation for domestic government financing.

And it is under such juncture, where governments fighting their own domestic demons would forcibly either resort to the reglementary strictures of fiscal discipline (default or restructuring, a.k.a. partial default) or to hyperinflate. And the death knell or the survival of any currency will be determined by the accompanying critical policies made, when faced under such circumstances. Yes, we have long called this the Mises Moment.

International Uniformity Of Inflation

Yet if you read the many expert opinions, the above risks are simply ignored for the simple reasons of having too much blind faith on the efficaciousness of printing money, with less consideration of the unintended consequences from such actions, and too much reliance on short-term goals.

Figure 1: Danske Bank/BCA Research: ECB Quantitative Easing

For instance, one can find the excessive fixation to deflation by the mainstream as a pretext to advancing the cause of turning stones into bread by inflationism.

This from BCA Research[5],

``In our opinion, deflation is a much greater threat, especially if the central bank moves too slowly to limit contagion within the region. We sympathize with the concern that monetary policy in the euro area is set for the region as a whole and efforts to set interest rates to support the weakest members will over-stimulate the Germany economy. Unfortunately, relatively low trade-openness in the weaker nations means that currency depreciation will provide disproportionate support to the stronger regional members. As a result, the only way to stimulate the Med-4 successfully is to quantitative ease and ramp up asset purchases.”

Never mind the reality that the Eurozone isn’t being plagued by consumer price deflation in spite of the enormous debt problems because inflation has remained positive and has been climbing.

In May of 2010, according to news reports, Eurozone posted a positive 1.5% inflation rate[6]. While it is true that the Eurozone did experience a short bout of slight or marginal CPI deflation in June to October 2009, inflation has been more of the dominant story in this crisis.

Moreover, the deflation scare mongering is a matter of “data mining” or using selective statistics to rationalize a bias, such as in the right window of Figure 1.

The general idea is; since the European Central Bank’s (ECB) balance sheet have shown to be less engaged in activist policymaking via quantitative easing, the recommendation, hence, is to match the degree of aggressiveness employed by the US and UK.

This has been a fallacy predicated on having “uniform” inflationism, similar to the one exposed by Henry Hazlitt anent the Bretton Woods standard.

Mr. Hazlitt, who accurately predicted the collapse of Bretton Wood, warned[7], (all bold highlights mine)

``A provision for uniform inflation in all major countries would increase the temptation to inflate in each country by removing some immediate penalties. When the currency of a single country begins to sag because of inflationary policies, two embarrassing results follow. One is the immediate loss of gold, unless the Government prohibits its export (which makes the currency sag more); the other is the humiliation of seeing the country's currency quoted at a discount in other nations. A uniform inflation in the world's most important countries would avoid both of these embarrassments.”

And today’s near similar, coordinated and or convergent monetary policy actions seen in most nations and the policy collaboration among governments which have marked the current globalized environment seem to illustrate the same stance in the imposition of inflation on a “uniform” scale.

In addition, the metric commonly used to mount such a scare tactic has been monetary aggregates, which appears to have departed from the actions in the financial markets[8]. Plainly put, where statistics say deflation, real world prices say inflation.

Legendary investor Jim Rogers has a better refutation to this. In an interview, when asked about the effectiveness of monetary aggregates in measuring the risks of inflation or deflation, Mr Rogers replied[9], ``Is M3 something you buy in a shop? M3 can lead to changes in the price structure, but M3 is not price inflation or deflation.”

So it’s all a matter of choice, choose to live in the real world and see inflation or elect to live in a make-believe world which says deflation.

One mustn’t forget that the European integration had been longstanding pet project for European bureaucrats for over 50 years.

Whether the EU’s existence has been meant to achieve the following political goals:

-“Roman Empire” socialist democratic construct of modern Europe, instead of a liberal “Christian Europe”, as asserted by GaveKal’s Charles Gave[10] or

-in Stratfor’s Papic and Zeihan[11] view designed at projecting regional power in the geopolitical sphere where national power has been on a decline and or to reduce the odds of the repeated slant for warfare given the Eurozone’s geographical structures;

...it is important to stress that the European political ideology has been skewed to sustain the EU system at almost all conceivable costs.

Proof?

This from Bloomberg[12],

``European Union President Herman Van Rompuy said the 750 billion-euro ($905 billion) rescue package would be expanded if it doesn’t quell the debt crisis, becoming the first EU leader to float the idea of a larger fund.

``“Currently there isn’t even the hint of a request to put this rescue plan into practice,” Van Rompuy told Belgium’s Trends magazine. “And if the plan were to prove insufficient, my answer is simple: in this case, we’ll do more.”

And so the alleged barriers of the ECB’s purported independence from political influences is being gradually eroded or unravelled as a farce.

Betting On ‘This Time Is NOT Different’

THE weekly purchases by the ECB of financial assets meant to buoy the banking system appear to have slowed (figure 1 left window) as global financial markets appear to have calmed (see figure 2).

Figure 2: Danske Bank: Improving Sentiment

Aside from credit default swaps of the crisis affected PIIGS (right window), signs are showing of a marked broad based improvement in the money market metrics as exhibited by the LIBOR OIS [spread between the LIBOR and overnight swap rates-an indicator of banking health[13]] and FRA/OIS [the spread between future interbank rates and overnight indexed swaps] seen in the right window from Danske Bank Research[14]

The implication is, since there will likely be reduced anxieties over credit risk, we could probably see a resumption of recovery in the credit markets, considering the scope of actions being conducted by the monetary authorities in the EU area and elsewhere (Japan?), combined with continued fiscal spending by many global governments, aside from the steep yield curve which is likely to generate sundry borrow short-lend/invest long “carry” arbitrages.

None of these is meant to suggest that any impending recovery would be sound.

But we have always bear in mind that under a Fiat money standard, the reality is that boom-bust (Austrian Business) cycles have been repeatedly fuelled by the manipulation of interest rates which engenders malinvestments and distorts the production structure of the economy which subsequently leads to volatility from an ensuing market clearing process. And this cycle is further buttressed by moral hazard issues from government intervention even seen by neo-Keynesian Hyman Minsky.

Yet all these money printing and interest rate manipulations are likely to incentivize people to spend, speculate or search for added returns.

And I don’t think this cycle is going to be different. The only difference is likely to be the OBJECT or character of the bubble but not the dynamic that fuels the bubble.

Figure 3: stockcharts.com: Euro led meltdown

Yet when people or experts speak about “this time is different”, mostly represented as “new paradigm” during the electric atmosphere at the peak of a boom, or “death” of an asset in the depression phase, they usually signify as sentiment based or “comfort of the crowd” analysis.

In short, they can serve as manifestations of a major forthcoming inflection point.

So when we read about predictions of the ‘demise’ of the Euro over the next 5 years by a significant number[15] or 48% or 12 out of the 25 economists surveyed (!!), our contrarian reflexes suggests that a turning point for the Euro could be just around the corner.

To reminisce, last year they said that it could have been the death[16] of the US dollar[17], which apparently did NOT take place. On the contrary, the US dollar became one of today’s safehaven!

The lesson is once mainstream begins to sing in chorus on issues with questionable grounds, we tend to take the opposite stand.

Buy The Philippine Peso, Asian Currencies and The Phisix

In Figure 3 the falling Euro (XEU) began only to impact global markets by mid-April, via a convergence, where global stocks (DJW), commodities (CCI), emerging sovereign bonds (JEMDX) synchronically fell (blue vertical line and downward arrow in red).

Earlier, the falling Euro wasn’t much of a factor, as global markets had been indifferent (except commodities).

Yet the kernel of the apprehension seen in the financial markets came about when the Greece bailout was announced which apparently was construed as inadequate.

Now the tide seems to be turning (see blue vertical line guided by the green upside arrow).

It’s been the same dynamic with Asian currencies (see Figure 4).

Figure 4: Bloomberg-JP Morgan Asian Dollar Index[18]: Euro Convergence

The Euro’s decline hasn’t been a factor at the onset of 2010, where Asian currencies rose strongly against the US dollar, especially after the first round appearance of the Greece debt crisis episode last February.

However, the tremors following the “insufficient” Greece bailout turned nasty as Asian currencies fell concomitant with global financial markets.

But this trend appears to be likewise bottoming in conjunction with market activities in the commodities, bonds and stock markets.

Since the negative sentiment over credit risks appear to be abating, the current oversold Euro conditions, technical (chart) considerations, the massive pessimism over the Euro and the apparent bottoming of several asset classes, we are likely to see a significant rebound in Asian currencies as market sentiment improves.

For me, these factors should accrue to a strong buy on ex-US dollar currencies including the Philippine PESO, which last stood at 46.64 based on Friday’s close and other Asian currencies.

Naturally a rallying Peso should add to more levity in the Phisix.

Why? (see figure 5)

Figure 5: Philippine Peso and Net Foreign Trade

A rising Peso has mostly been accompanied by surges in foreign trade activities. This has been evident as the Peso reached its zenith (44.23) at the end of April to early May (see blue oval).

Lately as the Peso fell, it’s been mostly Net foreign outflows. This has been true for most of May until the second week of June, where in 6 weeks, only 2 accounted for inflows.

And as the Peso’s fall is likely to reverse, we could the same phenomenon take place.

Importantly, since foreign funds are likely to deal with Phisix issues, or the 30 component issues that comprise the Phisix benchmark, the prospective re-entry of foreign funds could translate to a big jump on the Phisix.

Although I’m not sure of the precise timing of the Euro reversal play, my suspicion is that it could happen over the coming weeks. But if I am lucky enough, it could even happen by next week.

There is another point I’d like to emphasize, if the relative valuation of a monetary unit is based ``on the relationship between the quantity of, and demand for, money[19]” then the lack of “inflationism” by the ECB relative to the US Federal Reserve and the Bank of England (go back to figure 1) should translate to the ‘quantity’ factor in favour of the Euro.

This leaves us with the demand for money, which is currently being driven by the mostly dour sentiment on the Euro. Therefore, the lack of demand has so far offset the quantity factor advantage. But this is likely to change once the turbulence over European credit markets breezes over.

Bottom line: There is likely to be a tremendous “leash effect” on global financial markets on a Euro rally vis-a-vis the US dollar. And if I am right, the Euro appears to be at an inflection phase of this market cycle.

---

[1] Hayek, Friedrich August, Denationalisation Of Money p.102

[2] Dollardaze.org, Demonetized Currencies

[3] See $1 Trillion Monster Bailout For The Euro!

[4] See Why The Philippine Phisix Will Climb The Global Wall Of Worries

[5] BCA Research, ECB: Hesitation Is Lethal

[6] Associated Press, Eurozone official inflation edges up to 1.6% in May, May 31,2010

[7] Hazlitt, Henry From Bretton Woods To World Inflation, A Study Of Causes And Consequences p.40

[8] See M3 Not A Valid Measure Of Money

[9] Hera Research, Interview: Jim Rogers on Currencies and Inflation, goldseek.com, June 3, 2010

[10] See Was The Greece Bailout, A Bailout of The Euro System?

[11] See Inflationism And The Bailout Of Greece

[12] Bloomberg, EU to Expand Rescue If Package Fails, Van Rompuy Says, June 10, 2010

[13] Wikipedia,org LIBOR OIS Spread

[14] Danske Bank, Weekly Focus Another week in the shadow of the debt crisis

[15] Conway, Edmund, Euro 'will be dead in five years' Telegraph.co.uk, June 5, 2010

[16] Conway, Edmund Is this the death of the dollar? Telegraph.co.uk, June 20, 2009

[17] Fisk, Robert, The demise of the dollar, independent.co.uk, October 6, 2009

[18] Bloomberg Bloomberg-JP Morgan Asian Dollar Index (ADXY)

[19] Mises, Ludwig von Stabilization Of The Monetary Unit, On The Manipulation of Money And Credit, p.25

Inflation And Stock Market Valuations

``A prediction, which makes judgments which are qualitative only and not quantitative, is practically useless even if it is eventually proved right by the later course of events. There is also the crucial question of timing. Decades ago, Herbert Spencer recognized, with brilliant perception, that militarism, imperialism, socialism and interventionism must lead to great wars, severe wars. However, anyone who had started about 1890, to speculate on the strength of that insight on a depreciation of the bonds of the Three Empires would have sustained heavy losses. Large historical perspectives furnish no basis for stock market speculations which must be reviewed daily, weekly, or monthly at least.- Ludwig von Mises, The Causes Of Economic Crisis

It’s been repeated here that inflation has been emerging as the most pivotal factor in driving the pricing and real returns of equity investments[1] or for that matter all other investment activities.

That’s because monetary policies shape the incentives of entrepreneurs in the allocation of resources on the marketplace. Monetary policies also help determine consumption habits of the consumers. Low interest rates, for instance, entice consumers towards an increase in time preferences by indulging in “conspicuous consumption” financed by credit. On the other hand, low interest rates beguile investors to take upon long horizon projects in the expectations of the constancy of such environment which should provide them attractive returns.

Therefore, by influencing price signals, monetary conditions from central bank policies drive business conditions, which influence all other factors including, capital inputs, operating costs, wages, earnings, revenue streams, consumption patterns and etc. Importantly, such falsified pricing signals propel malinvestments which leads to boom bust cycles.

Yet monetary policies have relative effects that creates conflicts over the flow of funds relative to production and to stock markets,

According to Mr. Ludwig von Mises[2], (bold highlight mine)

``Another case, when control of the money market is contested, concerns the utilization of funds made available to the market by the generous discount policy. The dominant ideology favors “cheap money.” It also favors high commodity prices, but not always high stock market prices. The moderated interest rate is intended to stimulate production and not to cause a stock market boom. However, stock prices increase first of all. At the outset, commodity prices are not caught up in the boom. There are stock exchange booms and stock exchange profits. Yet, the “producer” is dissatisfied. He envies the “speculator” his “easy profit.” Those in power are not willing to accept this situation. They believe that production is being deprived of money which is flowing into the stock market. Besides, it is precisely in the stock market boom that the serious threat of a crisis lies hidden.”

Here Mr. Von Mises speaks from the empirical operating conditions during his period, where agriculture remains a large part of the national economy. Although current conditions would reverse the ‘ideological’ priorities, i.e. favouring higher stock markets than higher commodities prices given the larger share of financial industry to the economy, the important message here is that the stock market and production are both highly influenced by monetary conditions and compete in placement of funds.

Therefore it would be misguided to presume that stock markets operate independently from business conditions, or that business conditions are inherently stable so as to narrowly focus on micro barometers such as price earning ratios, book value, debt to equity, return on assets or etc...

Aside from monetary policies, there are massive differences in the structural composition of a political economy that affects real returns (see figure 6)

Figure 6: World Economic Forum[3]: Enabling Trade in Greater Asia

An example can be found on the chart above (higher window), based on imports procedures (or bureaucratic red tape) and irregularities (or corruption) the Philippines ranks as the most bureaucratic and most corrupt among the ASEAN contemporaries. Note the differences of bureaucracy and level of corruption.

In addition, based on the quality of infrastructure (lower window), the differences of the stages of development is noteworthy.

And the nuances are not limited to these, there are many other variables at work, such as degree of market access, regulatory environment, tax regulations and tax rates, access to financing, access to labor, access to communications, foreign currency regulations, labor regulations, policy instability, security, legal framework, efficiency of social institutions, respect for property rights, degree of economic freedom and etc...

Therefore, the greater complexity of regulations translates to lesser efficiency in the marketplace. Alternatively, this means greater complications in establishing the cost-and-return tradeoffs. So why the heck would these economies suffer from lack of investments and high unemployment, if not for the lack of clarity on returns?

Yet the most important factor would be the political spectrum, which ultimately determines how resources are distributed in an economy. For instance, in a closed and highly regulated economy (I am thinking Venezuela), where the distribution of economic opportunities is channelled mainly through politics, returns are determined NOT by market forces but by political connections or concessions. Hence it would be naive and highly erroneous to oversimplistically apply PER, Book Value, debt equity or etc... simply because political privileges determine returns, and at worst, risk money could be arrogated out of political considerations because of the despotic tendencies of the leaders.

So an applicable rule of thumb--micro barometers are dependent on the degree of the market economy, where the more open an economy is, the more reliable these tools are and vice versa.

Bottom line: Oversimplistic assumptions based on equal application of models can be fatal because each markets, like individuals, has their own thumbprint.

MacroAsia Corporation and the Machlup-Livermore Model

MacroAsia Corporation (MAC) is likely to be a good example of what I have been talking about. Figure 7 accounts for the financial highlights of MAC along with the stock price performance.

Figure 7: MacroAsia Corporation[4]

The reason I chose MacroAsia (MAC) is due to its pleasant updated presentation of the financial highlights. As disclosure, I presently don’t own any MAC shares, although it has been part of my watchlist.

MAC is owned by one of the entrenched economic elite, tycoon Lucio Tan. The company is into what we call as “pick and shovel” play or secondary exposure to the airline industry.

Its main business is in-flight catering, ground handling, airline repair and maintenance services, property rental, supply chain management and charter services. The company has also major mining Nickel Lateral claims or concessions in Palawan which currently is undergoing exploration.

The company has one impressive balance sheet; it is very cash rich, has minimal debt, has steady top and bottom line growth, which has virtually been unscathed by the 2008 crisis, issues regular dividends and has a great moat (a monopoly (?) in its industry).

Yet if one looks at the financial graph all indicators have been pointing upwards, since 2005.

However the stock prices seem to be saying differently, MAC has seen a 50% collapse on a peak-to-trough basis even when financial conditions have NOT been affected!

And importantly, since the trough of 2008, MAC’s stock prices has traded for over one year at virtually the same level when the Phisix has jumped by nearly 100% since the 2008 nadir!

Does MAC’s corporate fundamentals reflect on the stock prices? The answer is NO. What has driven MAC’s prices has been the boom bust cycle. MAC belatedly boomed at the near climax of the bull market of 2007 and consequently fell when market sentiment collapsed along with all the rest. Hence, it is safe to discern that MAC’s financial and corporate conditions and stock prices have basically been disconnected.

One would object that, if inflation drives stocks why has MAC’s prices been stagnant? Well the answer to that is that inflation does not impact every issue simultaneously nor does it impact all issues to the same degree. Inflation’s impact is always relative.

Also, since inflation has a psychological aspect, applied to stock markets, stock prices are likely to be driven by fancy storytelling, rationalization, jockeying, the chase for yields and operating rotational effects within the market.

This implies MAC will surely rise sometime in the future, in condition that the advances of Phisix will continue. MAC will then be a beneficiary of the rising tide phenomenon (but perhaps at a much later date?).

Therefore, we have another proof that validates our Machlup-Livermore model.

Finally, from the storytelling department, of course MAC has a great future. If tourism will boom in Asia, as we expect, considering the wealth transfer dynamics from the West to the East, then MAC will definitely be a major beneficiary, since there hardly has been any competition. Let me add that I’m not sure why there hasn’t been a competitor, I would suspect that perhaps political concession could be a factor. Lastly, there is another bonus, the mining department, but full operation will probably commence sometime in the future.

Yet none of this glorious tale is new.

---

[1] See Why The Philippine Phisix Will Climb The Global Wall Of Worries

[2] Mises, Ludwig von Mises The Causes of Economic Crisis, p.165

[3] World Economic Forum Enabling Trade in Greater Asia

[4] MacroAsia Corporation Corporate Website

Philippine Sports: The Craze For Basketball And The Lack Of Interest In The World Cup

``Almost everywhere on the planet, people on Friday were stocking up on beer and food and readying themselves for long hours in front of the television set as football’s World Cup mania hit fever-pitch with the opening matches in Johannesburg, South Africa.”

This is from the Inquirer, who observed of the Filipinos’ lack of interest with the international football games.

The same article rationalizes such indifference...

``Fegidero said the continued failure of the Philippines to compete in major tournaments abroad had been the main reason football had not picked up here.

“We’re nowhere near the level of the world’s best teams, even in Asia, which is considered a weak continent in football,” he explained.

``The Philippines has never qualified for the World Cup since 1930, when the quadrennial meet began.

``This year, the country was only one of four countries that did not even bother to join the qualifying series for the tournament. The other three were Bhutan, Brunei and Laos.

“We don’t have the programs that can produce good players who can compete internationally,” Fegidero said. “We lack participation in international tournaments and local leagues.”

The Philippines has been obsessed with basketball, a sport, which unfortunately, we fail to excel in and continues to see rapid deterioration in performance based on the global or even regional competition standards.

The losing glory of Philippine men's basketball performance in the Asian Championship and the Asian Games, shown in the above table, where from the triumphant days in 60s to the early 70s, our competitive ranking continues to plunge, as time goes by.

But as consolation, at least based on South East Asia, we still remain dominant. (both charts from wikipedia) But the question is, given the underlying trend, for how long will this last?

Maybe we should ask first why Filipinos have been so fixated with a sport which we can't seem to win internationally due to structural reasons (lack of height)?

Yet this has been the case in spite of the active "participation in international tournaments and local leagues" in basketball, opposite to the reasoning of the expert as quoted above by the Inquirer article.

To consider, Philippine basketball teams have been complimented with Fil-Ams or Filipino Americans to fill in on the endemic height handicap, yet this has not been enough to reverse the degenerating trend.

The point is, it doesn't seem to be the lack of programs that determines the lack of acceptance of the World Cup. Instead, it is the lack of incentives brought about by the undue obsession on an unviable or unwinnable sport (basketball) and the attendant misdirection of investments that continues to feed on such delusion.

I see three reasons why Filipinos can't move away from basketball, in spite of the harsh reality that this is a sport which we simply can't compete in globally.

One, it seems a form of status signalling, which misleads Filipinos to believe that basketball is an irreplaceable cultural or social norm that needs to be conformed with. Otherwise said, to be IN (or to be identified as Filipino) means to patronize basketball in one way or another.

Second, it is part of the Groupthink fallacy, which Filipinos seem so entranced with.

According to Gloria Allendorfer Anderson, PhD., ``One of the dangers of our world today is group-think. It occurs as a person lets identification with a group cloud their reasoning and deliberations when reaching a position on a given issue. At best, it is a rhetorical device. At it's worst, it can be a very harmful replacement for sensible thought. In fact, it is considered one of the common fallacies of modern society." (emphasis added)

And groupthink is part of what shapes social or cultural norm, adds Ms. Anderson,

``When individuals identify with the state where they live, or a country of their heritage or origin, they relate to other individuals from the same state or country in their views of the world around them. This type of group identification indicates that they are part of a group of people who share the same life experience."(emphasis added)

Lastly basketball is a political sport or a sport used by politicians to attain political goals.

Basketball courts are one of the pet projects for pork barrel spending of local officials bent on achieving "accomplishments" for reelection or posterity or for financial purposes.

According to Gary W. Elliott,

``This year each of the 214 congressmen is allocated 60 million pesos (roughly USD1.5 million) for spending at his discretion, and each of the 24 senators receives twice that amount. With no real oversight or accountability, this institution is rife with corruption. Some of the funds intended for priority development projects in the congressmen’s districts, such as health care, clean water, and poverty alleviation, are typically spent on trivial projects which contribute nothing to the social and economic development of the country. Common examples are cement outdoor basketball courts and “waiting sheds,” small awnings or covered benches beside roads, where those waiting for a bus can get out of the rain. Large signs laud the congressman for spending government funds on the project (instead of just pocketing them?). Such projects are often accomplished just before elections, so signs touting the congressmen provide free campaign advertising for those seeking re-election." (bold highlights mine)

Since a basketball court has more player density per unit area, adding more courts on the local level draws in greater number of people to the sport. One may say that this is an example of Keynes' misinterpretation of Say's law where "supply creates its own demand"

So massive grassroot political investments in basketball courts impels more patrons relative to the other sports, hence more patrons translates to cultural acceptance, and the unwarranted fixation to basketball, in spite of the inherent handicaps, in terms of global standards. So goes the feedback mechanism driving the dynamics of basketball as a political sport.

So in my view, domestic politics represent as one of the key obstacles (if not the key hurdle) to the lack of diversity of Filipinos to engage in other more internationally competitive sports such as football.

World Cup Indicator: Boon Or Bane?

Will the World Cup games, which opened yesterday, portend of a bullish or bearish markets for the coming months?

Frank Holmes of US Global Investors argues that this should be bullish, especially from the perspective of the host country, i.e. South Africa...


So as with mint.com...

Pls click here to redirect link to mint's site to see a crispier image.

But Bespoke Invest sees the historical correlation as "negative"....

According to Bespoke, "both the US and world markets have averaged declines over both periods throughout history. The S&P 500 has averaged a decline of 1.65% during all 18 prior World Cups, and a decline of 0.37% in the three months following. The MSCI World Index, which we only have back to the 1970 World Cup, has averaged a decline of 1.25% during and 4.34% over the following three months. Historically the market has averaged gains over one- and three-month periods, so indices have definitely underperformed during World Cups. Most fans of the sport would take a couple months of declines in the market if it meant their country would win, however."

To my mind, historical patterns are not reliable measures in assessing market prospects because they can be positive and negative depending on the prevailing market and economic conditions then.

Instead, these indicators appeal to people who are only looking for patterns either to confirm their biases or to rationalize market actions.

Besides, major sporting events as the World Cup or the Olympics can only give a temporary boost to the economy. But on a larger picture such events could entail greater costs from the crowding out effect from inefficient government spending relative to private sector investments. In short, gains can be "exaggerated".

As Leander Schaerlaeckens at the ESPN writes, (bold highlights mine)

``People who are excited about hosting a World Cup, write Szymanski and Simon Kuper in "Soccernomics," "are merely expressing in extreme form a conventional belief: that hosting a big sports event can make a place rich."

``In truth, write the authors, while World Cups don't produce much monetary gain, they have been shown in several studies to be good for general happiness among the hosting population and a country's self-esteem. Thabo Mbeki, South Africa's president until September 2008, declared in a speech that the tournament would be "sending ripples of confidence from the Cape to Cairo." It doesn't look bad for a politician looking to get re-elected, either.

"FIFA and the Olympics all enjoy monopoly standings," Baade said. "And that permits them to foist enormous economic cost on those that compete for mega-events like the World Cup. They're in a position to expropriate public funds. The argument is made that we're going to bring in so many non-native spendthrifts that that will offset the expense of stadiums, but there's very little evidence to support that."

``Chances are that like many predecessors South Africa will eventually discover that hosting the World Cup was a poor choice, at least from a financial viewpoint. But by then, FIFA will have moved on to flattering some other country into believing it should pour the money it doesn't have into hosting another glorious edition of the World Cup."

As always, the temporal 'self-esteem' gains are skewed mostly towards grandstanding politicians. And at the end of the day, if revenues expected are not fulfilled, then the carrying costs of the 'country's self-esteem' will eventually be borne by the taxpayers.

In the Philippines, this is called the fiesta mentality.

An Upbeat Global Employment Picture

The prospects for global employment seems to be materially improving, that's according to the Economist.

The Economist writes, (bold highlights added)

``FEARS of a “jobless recovery” in the West have abounded ever since the world economy returned from the abyss last year. For some, the latest quarterly survey from Manpower, a global employment-services company, brings timely good news. Of the 36 countries included in Manpower’s survey, employers in 30 of them are increasingly bullish about their hiring plans for the next three months compared with the third quarter of 2009. Only in five countries, all of them in debt-laden Europe, are employers expecting negative hiring activity over the next quarter. This compares favourably, however, to the seven European countries with a negative outlook just three months ago. The survey suggests that the BICs (Brazil, India and China) bounce will continue. The three countries, along with Taiwan, report the most positive hiring plans in the survey, with China reporting its strongest hiring plans since the survey began there in 2005."

Unlike the mainstream, I'm not a stickler of "employment" as the key measure of economic progress, because employment is just one of the many factors that contribute to capital accumulation or economic prosperity.

But if the survey is accurate then much of the world seems now on a mend or on an accelerating phase of cyclical recovery.

Bloomberg Poll: BRIC Lose Out To US As Top Investment Choice

I don't know how accurate this Bloomberg's poll is, but according to them, the US has supplanted the BRIC as top investment choice.

Read the article here.

Update On Global Stock Market Performances

Bespoke has a nice update on the performances of global stock markets as of June 9th...

Bespoke Invest notes,

``While most of the world is struggling, there are 8 countries that are within 1.7% of 52-week highs. Sri Lanka, Chile, Bangladesh, and Venezuela are all basically at 52-week highs. Of the G-7 countries, Germany and Canada are closest to their 52-week highs at about -6%. The US ranks third out of seven at -12.74%, followed by Britain (-13.41%), France (-16.41%), Japan (-17.26%), and Italy (-23.63%). It's not surprising to see Greece the farthest from its 52-week high at -50.15%. Other key countries that are more than 20% away from their 52-week highs include Russia, China, and Spain.

``In terms of year to date performance (local currency), Bangladesh ranks first at +36.59%, followed by Estonia (32.86%) and Sri Lanka (31.87%). Of the G-7, Germany is doing the best with a decline of just -0.05%, followed by Canada at -1.74% and the US at -4.49%. Of the BRIC (Brazil, Russia, India, China) countries, India is holding up the best so far in 2010 with a decline of 4.62%. Brazil ranks second at -6.67%, followed by Russia at -7.54% and then China at -21.15%. Greece (-33.44%), Bermuda (-28.33%), and Spain (-26.55%) are down the most of any countries year to date."

I'd like to point out that the Philippines has been ranked 8th based on the change from a 52-week high. And that major ASEAN economies appear to defy the global selling pressures by posting year-to-date gains and seem within 'striking' distance from the 52-week highs.

I'd also like point out that Venezuela which suffers from stagflation is nearly at the 52-week high (who says stocks are about the economy?).

Meanwhile the top performers on a year to date basis have mainly been frontier markets whose subset are South Asia, Africa, and some CEE economies.

Of course one surprise is Denmark, the only major "developed" economy, who seem to have diverged from the fate suffered by her contemporaries. The Danish equity index is up 16.41% (y-t-d) and is just 6% away from the 52 week high. Denmark appears unruffled by the recent most Euro pressures.

Overall, although the general backdrop is one of "tidal" flows, there are apparent emerging incidences of "decoupling" especially visible among emerging markets.

Technology Curve: Is Mobile Commerce The Future?

Morgan Stanley's Mary Meeker thinks so. She has convincing evidence to prove her case, as shown in the presentation below. (hat tip: Research Recap)

According to Cecilia Kang of the Washington Post,

``Among the factors that are driving the mobile Web, Meeker said, 3G wireless data networks rank most highly. All major carriers introduced 3G access for Android phones, the iPhone, Blackberry and Palm Pre this year, making mobile Internet use mainstream at 20 percent of all wireless users, Meeker said. There has also been an explosion of Wi-Fi connection hot spots.

``Advertising may finally be set to take off on the Internet, she said. People are spending more time on the Web – more than they do reading print publications or listening to the radio. (But not as much as TV, which still dominates.) But even as users spend 28 percent of total entertainment time on the Internet, advertisers only spend 13 percent of their budgets on the Internet. That represents a $50 billion opportunity, she said, that advertisers are starting to seize." (emphasis added)

In my view this is one of the positive forces, along with globalization, that counterbalances the risks of bubbles from government policies.

Internet Trends 2010 by Morgan Stanley Research

View more presentations from CM Summit: Marketing in Real Time.

The Myth Of Risk Free Government Bonds

Bruce Krastings at the Zero Hedge has an interesting story to tell.

It's essentially about the sordid fate of Hungary's bearer bonds of 1924.

"Fifty years later the $500 of principal and the $1,250 of accrued interest were worth $40.", says Mr. Krastings.

Read the rest here

Yet the global banking system have been designed to hold government bonds as risk free assets and core holdings on their balance sheets. This bias towards "risk-free" government bonds effectively translates to subsidies to governments.

As Cato's Mark Calabria explains,

``Under Basel, the amount of capital a bank is required to hold against an asset is a function of its risk category. For the highest risk assets, like corporate bonds, banks are required to hold 8%. Yet for those seen as the lowest risk, short term government bonds, banks aren’t required to hold any capital. So while you’d have to hold 8% capital against say, Ford bonds, you don’t have to hold any capital against Greek debt. Depending on the difference between the weights and the debt yields, such a system provides very strong incentives to load up on the highest yielding bonds of the least risky class. Fannie and Freddie debt required holding only 1.6% capital. Very small losses in either Greek or GSE debt would cause massive losses to the banks, due to their large holdings of both." (bold emphasis added)

So unless we see a change in the mandated treatment of government bonds, which implies that subsidies to governments will need to be slashed, we will only keep jumping from one crisis to another, as shown in the chart below from the World Bank, where the incidences of banking crisis has ballooned post-Bretton Woods US dollar-gold standard.

In short, crisis are products of the inflationary central banking based-fiat money standard.

As Ludwig von Mises reminds us, ``It is always an inflationist policy, not economic conditions, which bring about the monetary depreciation. The evil is philosophical in character."