Privatize Pag-Asa or Open Weather Forecasting To Competition

Weather forecasting personnel from the government institution are reportedly in mass exodus.

According to the Inquirer,

The Philippine Atmospheric, Geophysical and Astronomical Services Administration (PAGASA) has lost 24 key personnel, most of them experienced weather forecasters, in the past 10 years to lucrative offers from abroad, the Inquirer has learned.

Brain drain is not the only disturbance beclouding the state agency, on whose forecasts depend the lives of countless Filipinos. The problem of outdated equipment has battered it for years.

According to PAGASA personnel who talked on condition of anonymity, most of the weather forecasters have accepted offers from the state weather agency in Dubai, which is strengthening its forecasting system in its bid to attract investors and tourists.”

This is to be anticipated for the following reasons:

One, PAGASA is just one of the many tentacles of government agencies and thus becomes the object of concern only when political expediency calls for it.

Two, because PAGASA’s priority is based on political whims, thus, her financing is also subject to political priorities.

[I’d like to add that “brain drain” is a non-sequitur here, brain drain is the result of government or bureaucratic failure.]

Evidence from the same article,

After 1998, PAGASA decided to chuck the master plan.

But Nilo said the Arroyo administration was more supportive of PAGASA’s plan calling for much-needed equipment improvement.

In 2005, Nilo and PAGASA embarked on a new plan that included the upgrading of PAGASA’s existing Doppler radars.

Unfortunately, the Arroyo administration toward the end of its term slashed PAGASA’s budget for 2010.

The agency had submitted a P1.7-billion budget covering personnel and maintenance expenses and including capital outlay for the purchase of new equipment. But it was told by the Palace to stay within the ceiling of P614 million.

For 2009, PAGASA got a P757-million budget that included some amount for capital outlay.

Three, because government bureaus are likewise subject to public opinion, PAGASA serves as a favorite whipping boy or “passing the hot potato” (blame) for political leaders. In politics, which essentially is a zero sum game, someone has to take blame, hence if it is not greedy entrepreneurs it is the small fry (bureaucrats). Never will the blame fall on themselves or the bureaucracy or the legal system that supports it.

From the same article,

PAGASA has been under a microscope after failing to accurately track Typhoon “Basyang” (international codename: Conson) and its officials were publicly reprimanded by no less than President Benigno Aquino III.

The agency has upgraded the capability of two of its Doppler radars to improve storm tracking. Aside from that, the new radars can now provide information on wind speed, wind direction and rainfall amount.

The agency is set to upgrade five more radars in the coming months.

As shown above, government always are almost always reactive in approaching social problems, and that’s because the primary concern of politicos have been to generate favorable public opinion, since the essence of the preservation of their politically privileged status is in the substance of a popularity contest . Hence, since social issues are fungible or concerns which varies on a fleeting day to day affair, so goes with the political priorities.

Finally what people don’t see is that weather forecasting services could be better offered by the private sector.

In the US private companies are reportedly much better or more accurate in weather forecasting.

This from the Fox,

Private companies with a lot at stake would often rather pay for private forecasts than rely on the “free” forecasts from the government. Hugh Connett, the president of Bridgeline, a gas pipeline company in Louisiana, claims that the government’s hurricane forecasts are too imprecise. He says that private companies such as AccuWeather do it better, because they give more accurate predictions and provide hour-by-hour forecasts of a storm’s path.

His position is not ideological – Connett’s firm monitors the past accuracy of hurricane forecasters to make sure paying extra for the private service is worth it.

It is not just for hurricanes that private forecasting comes out on top. A new study by Forecast Watch, a company that keeps track of past forecasts, found that from Oct. 1, 2006, through June 30, 2007, the government’s National Weather Service did very poorly in predicting the probability of rain or snow. Comparing the National Weather Service to The Weather Channel, CustomWeather, and DTN Meteorlogix, Forecast Watch found that the government’s next-day forecast had a 21 percent greater error rate between predicted probability of precipitation and the rate that precipitation actually occurred.

In looking at predicting snow fall from December 2006 through February 2007, the National Weather Service’s average error was 24 percent greater.

“All private forecasting companies did much better than the National Weather Service,” the report concludes.

The government doesn’t do any better with forecasting temperature. For the largest 50 cities in the U.S. over the last year, ForecastAdvisor.com ranks the National Weather Service’s overall predictions for high and low temperatures as well as precipitation as dead last among the six weather forecasting services they examined.

It has only been in the last several years that comparisons between government and private weather companies have been possible, as the National Weather Service has made its data more readily available. But none of this should be very surprising. Incentives matter. If the private companies don’t do a good job, they go out of business. Government agencies never even shrink.

The key difference? Private sector is subject to profit or losses, thereby are incented to produce accurate or precise forecasting or risk losing capital, whereas the public sector’s performance goes only on the spotlight, when problems emerges.

Thus, from motivational issues, the lack of incentive to serve consumers, scant funding to shifting public priorities by political leaders, the mass personnel exodus from the government agency should be expected. The alternate solution isn't for government to spend more but to open weather forecasting to competing private enterprises.

Ludwig von Mises laid out the premise why governments are no better in providing "public services" needed by the people (bold emphasis mine).

In public administration there is no connection between revenue and expenditure. The public services are spending money only; the insignificant income derived from special sources (for example, the sale of printed matter by the Government Printing Office) is more or less accidental. The revenue derived from customs and taxes is not “produced” by the administrative apparatus. Its source is the law, not the activities of customs officers and tax collectors. It is not the merit of a collector of internal revenue that the residents of his district are richer and pay higher taxes than those of another district. The time and effort required for the administrative handling of an income tax return are not in proportion to the amount of the taxable income it concerns.

In public administration there is no market price for achievements. This makes it indispensable to operate public offices according to principles entirely different from those applied under the profit motive.

US Stock Markets and Animal Spirits Targeted Policies

The BCA Research writes,

``The sharp drop in the University of Michigan’s survey of consumer confidence late last week is somewhat worrisome because consumer confidence was already historically depressed. But the University of Michigan survey is highly correlated with the performance of stock prices and given the recent losses, the drop in confidence is hardly surprising.”

The tone of the commentary reminds us why US policymakers see the actions of the stockmarkets as vital indicators of the economy...

In 2000, yet as member of the academe, incumbent Federal Chair Ben Bernanke gave us a clue of his policy directions.... (bold emphasis mine)

A closer look reveals that the economic repercussions of a stock market crash depend less on the severity of the crash itself than on the response of economic policymakers, particularly central bankers....

There’s no denying that a collapse in stock prices today would pose serious macroeconomic challenges for the United States. Consumer spending would slow, and the U.S. economy would become less of a magnet for foreign investors. Economic growth, which in any case has recently been at unsustainable levels, would decline somewhat. History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse.

Of course the basic reason for this is anchored on the belief that confidence is fundamentally a function of “animal spirits”.

Thus, as we have been saying before, the Fed is sensitive to the actions of the stock market, and will use its alleged bureaucratic “smartness” in terms of policy response to influence its directions in order to manage the animal spirits.

The simple and more direct way to say it is that any sustained meaningful retrenchment in the price levels of the US stock markets would prompt for the liberal use of the printing press.

And the net effect of such actions is to have distinct relative pricing elsewhere in the economy or financial markets.

Lessons From The Crisis: From Public Goods To Private Services

Every crisis tends to expose many of the folklores held by the mainstream. One of which is the ability by political authorities to manipulate the markets to perpetuate a boom, by which signifies as an attempt to rescind the laws of economics, that always backfires, and thus the business cycles.

Yet it’s so odd how people simply refuse to learn from these events, which happen almost like clockwork.

And there is another myth which is closely linked to the above and may likewise get deflated —that the (efficient/effective) delivery of public goods or public services exclusively belongs to the province of the state or of governments.

This New York Times article illustrates, through an example, how “public services” gets to be “outsourced” to the private sector, as part of the austerity measures, which “surprises” the community acutely habituated to the state services.

(bold highlights mine)

Chalk up another Maywood resident who approves of this city’s unusual experience in municipal governing. City officials last month fired all of Maywood’s employees and outsourced their jobs.

While many communities are fearfully contemplating extensive cuts, Maywood says it is the first city in the nation in the current downturn to take an ax to everyone.

The school crossing guards were let go. Parking enforcement was contracted out, City Hall workers dismissed, street maintenance workers made redundant. The public safety duties of the Police Department were handed over to the Los Angeles County Sheriff’s Department.

At first, people in this poor, long-troubled and heavily Hispanic city southeast of Los Angeles braced for anarchy.

Senior citizens were afraid they would be assaulted as they walked down the street. Parents worried the parks would be shut and their children would have nowhere to safely play. Landlords said their tenants had begun suggesting that without city-run services they would no longer feel obliged to pay rent.

The apocalypse never arrived. In fact, it seems this city was so bad at being a city that outsourcing — so far, at least — is being viewed as an act of municipal genius.

“We don’t want to be the model for other cities to lay off their employees,” said Magdalena Prado, a spokeswoman for the city who works on contract. “But our residents have been somewhat pleased.”

That includes Mayor Ana Rosa Rizo, who was gratified to see her husband get a parking ticket on July 1, hours after the Police Department had been disbanded. The ticket was issued by enforcement clerks for the neighboring city of Bell, which is being paid about $50,000 a month by Maywood to perform various services.

The reaction is all the more remarkable because this is not a feel-good city. City Council hearings run hot, council members face repeated recall efforts and city officials fight in public. “You single-handedly destroyed the city,” the city treasurer told the City Council at its most recent meeting.

Read the rest here

In my view, this scenario presages what is likely to become a common dynamic once government debt morphs into “Keynesian” debt crisis. Of course, the extreme alternative will be hyperinflation.

Top Secret America: How Big Government Feeds On Fear

The Washington Post investigates how the infamous 9/11 has nurtured a leviathan.

Here is the Washington Post, (all bold highlights mine)

The top-secret world the government created in response to the terrorist attacks of Sept. 11, 2001, has become so large, so unwieldy and so secretive that no one knows how much money it costs, how many people it employs, how many programs exist within it or exactly how many agencies do the same work.

These are some of the findings of a two-year investigation by The Washington Post that discovered what amounts to an alternative geography of the United States, a Top Secret America hidden from public view and lacking in thorough oversight. After nine years of unprecedented spending and growth, the result is that the system put in place to keep the United States safe is so massive that its effectiveness is impossible to determine.

The investigation's other findings include:

* Some 1,271 government organizations and 1,931 private companies work on programs related to counterterrorism, homeland security and intelligence in about 10,000 locations across the United States.

* An estimated 854,000 people, nearly 1.5 times as many people as live in Washington, D.C., hold top-secret security clearances.

* In Washington and the surrounding area, 33 building complexes for top-secret intelligence work are under construction or have been built since September 2001. Together they occupy the equivalent of almost three Pentagons or 22 U.S. Capitol buildings - about 17 million square feet of space.

* Many security and intelligence agencies do the same work, creating redundancy and waste. For example, 51 federal organizations and military commands, operating in 15 U.S. cities, track the flow of money to and from terrorist networks.

* Analysts who make sense of documents and conversations obtained by foreign and domestic spying share their judgment by publishing 50,000 intelligence reports each year - a volume so large that many are routinely ignored.

More:

This is not exactly President Dwight D. Eisenhower's "military-industrial complex," which emerged with the Cold War and centered on building nuclear weapons to deter the Soviet Union. This is a national security enterprise with a more amorphous mission: defeating transnational violent extremists.

Much of the information about this mission is classified. That is the reason it is so difficult to gauge the success and identify the problems of Top Secret America, including whether money is being spent wisely. The U.S. intelligence budget is vast, publicly announced last year as $75 billion, 21/2 times the size it was on Sept. 10, 2001. But the figure doesn't include many military activities or domestic counterterrorism programs.

At least 20 percent of the government organizations that exist to fend off terrorist threats were established or refashioned in the wake of 9/11. Many that existed before the attacks grew to historic proportions as the Bush administration and Congress gave agencies more money than they were capable of responsibly spending.

The Pentagon's Defense Intelligence Agency, for example, has gone from 7,500 employees in 2002 to 16,500 today. The budget of the National Security Agency, which conducts electronic eavesdropping, doubled. Thirty-five FBI Joint Terrorism Task Forces became 106. It was phenomenal growth that began almost as soon as the Sept. 11 attacks ended.

Nine days after the attacks, Congress committed $40 billion beyond what was in the federal budget to fortify domestic defenses and to launch a global offensive against al-Qaeda. It followed that up with an additional $36.5 billion in 2002 and $44 billion in 2003. That was only a beginning.

With the quick infusion of money, military and intelligence agencies multiplied. Twenty-four organizations were created by the end of 2001, including the Office of Homeland Security and the Foreign Terrorist Asset Tracking Task Force. In 2002, 37 more were created to track weapons of mass destruction, collect threat tips and coordinate the new focus on counterterrorism. That was followed the next year by 36 new organizations; and 26 after that; and 31 more; and 32 more; and 20 or more each in 2007, 2008 and 2009.

In all, at least 263 organizations have been created or reorganized as a response to 9/11. Each has required more people, and those people have required more administrative and logistic support: phone operators, secretaries, librarians, architects, carpenters, construction workers, air-conditioning mechanics and, because of where they work, even janitors with top-secret clearances.

The response by a former military official:

Underscoring the seriousness of these issues are the conclusions of retired Army Lt. Gen. John R. Vines, who was asked last year to review the method for tracking the Defense Department's most sensitive programs. Vines, who once commanded 145,000 troops in Iraq and is familiar with complex problems, was stunned by what he discovered.

"I'm not aware of any agency with the authority, responsibility or a process in place to coordinate all these interagency and commercial activities," he said in an interview. "The complexity of this system defies description."

The result, he added, is that it's impossible to tell whether the country is safer because of all this spending and all these activities. "Because it lacks a synchronizing process, it inevitably results in message dissonance, reduced effectiveness and waste," Vines said. "We consequently can't effectively assess whether it is making us more safe."

Read the rest here

As General Douglas MacArthur once said,

"Our government has kept us in a perpetual state of fear -kept us in a continuous stampede of patriotic fervour -with the cry of grave national emergency. Always, there has been some terrible evil at home, or some monstrous foreign power that was going to gobble us up if we did not blindly rally behind it."

The End of Economic Freedom For Hong Kong?

Hong Kong is a special place for me.

First of all, it’s where my beloved mom has emigrated to decades ago and is now a resident. Next, it’s a short distance very convenient plane ride away from the Philippines (yes I have to admit, plane rides give me ‘flight anxiety’, so I travel infrequently).

Besides, Hong Kong’s a dandy, spunky, fast paced modern lifestyle, emblematic of the prosperity from capitalism. Of course, one can’t miss out the exquisite array of delicacies which also serves as a haven for gastronomes (5 among the world’s best 100 restaurants are in Hong Kong).

Importantly, Hong Kong has been a beacon of economic freedom having earned the title as the freest economy for 15 consecutive years (a title she might be relinquishing soon).

However, I was distressed to learn that with the introduction of minimum wage Hong Kong appears to be in a slippery slope towards a welfare state as this Economist article has revealed.

One paragraph from the lengthy article struck me,

``Underlying them is a shift in officialdom’s view of the economy. In 2008 Mr Tsang announced that he had succeeded in having Hong Kong included within China’s five-year plans. Last year he said that in light of the global financial crisis, “we have to revisit the government’s role in promoting economic development” and special efforts would be made to encourage the growth of six industries.”

My interpretation of this is that China could be in a path towards policy convergence with that of Hong Kong, which means an eventual closure to the One Country, Two Systems platform.

It is unclear what motivates or what prods mainland China’s authorities for this, but one of the factors I’d suspect is the illegal immigration issue.

The other factor could be politics--Chinese official may want to get the heat off internal policy failures by aligning Hong Kong’s economic performance with that of the mainland. Of course this means taking away part of the success formula. There must be more (perhaps gradualism towards an alignment of the currency system?), but ideas elude me for this moment.

Nevertheless, this is one important development to keep vigil on.

Financial Reform Bill And Regime Uncertainty

``But the law is made, generally, by one man, or by one class of men. And as law cannot exist without the sanction and the support of a preponderant force, it must finally place this force in the hands of those who legislate. This inevitable phenomenon, combined with the fatal tendency that, we have said, exists in the heart of man, explains the almost universal perversion of law. It is easy to conceive that, instead of being a check upon injustice, it becomes its most invincible instrument.” Frédéric Bastiat, The Law

Yo-yo Markets And The Financial Reform Bill

Writing in the Wall Street Journal, hedge fund manager and author Andy Kessler seems right; the actions of the US markets, which directly affects other financial markets, will be in a state of a Yo-yo for as long as the US government continually intervenes to suppress market forces from revealing its true conditions.

Mr. Kessler writes[1],

``Call it the yo-yo market—from the top of the wall to the bottom of the pit and back—and you better get used to it. It's hard to tell which market moves are real and based on prospects for better profits, as opposed to moves that are driven by all the extraordinary government measures to prop up the world economy. Until a few things are resolved, you'd better learn the yo-yo sleeper trick—that is, keep spinning at the bottom without going up.”

Mr. Kessler appears to echo what we’ve been saying all along[2]---that politics has and will shape the outcome of the markets.

Mr. Kessler cites the pervasive impact of the Zero Interest Rate Policy (ZIRP), the assorted “crutches” or the guarantees, stimulus packages, and money printing, and importantly, the impact of the changes in the regulatory environment.

Since we had exhaustively discussed on the first two factors, in the light of the passage of the Financial Reform Bill[3], we’d tackle more on the aspects of the regulatory environment.

After having a rather promising start for the week, the US markets fell hard Friday after the ratification Financial Reform Bill. The losses virtually expunged on the early gains made whereby the net weekly result for the US S&P 500 had been a net loss of 1.21% (see figure 1).

Figure 1: US Global Investors[4]: Sectoral Performance

Nevertheless the degree of losses had been uneven, where some sectors of the S&P 500 have managed to escape the clutches of the selling pressures, such as the Consumer staples and the Technology sector.

True, correlation doesn’t automatically translate to causation. The Financial Reform bill may or may not have directly affected Friday’s performance.

However, given that the largest victim of the selloff had been in the financial sector, which is the target of the slew of new regulations, then I must argue that there could have been a substantial connection in the way the markets perceive how these purported reforms would affect the industry.

In other words, markets may have seen more downside risks to the industry, as a result of the law, and these perceptions have filtered into the other sectors.

Yet it’s simply amazing how some mainstream analysts fail to acknowledge of the vital role played by the regulatory environment in shaping the allocation of resources.

They seem to think that investment is merely consequence of waking up on a particular side of the bed which determines their “animal spirits”, or that, confidence is simplistically established as a function of random temperaments or moods—and largely detached from the coordination of consumers and producers in the marketplace.

Thus, many make specious arguments that new regulations won’t affect the business operations.

Importantly, the same experts fail to take into account that entrepreneurs invest with the aim to profit from providing or servicing the needs or desires of the consumers. Thus, a material change in the regulatory environment may affect the fundamental profit and loss equation. And the ensuing changes could also alter the feasibility of the operations of any enterprises, to the point which could lead to either closures, or impair the business operations. The net effect should be more losses and rising unemployment.

In short, business confidence is a function, not of some mood swings, but of property rights. Likewise confidence relative to investment should be predicated not just with the return ON capital, but with the return OF capital.

Regime Uncertainty From Arbitrary Laws

Economist Robert Higgs calls this reduced confidence factor as “regime uncertainty” where he argues[5] (bold emphasis mine)

``To narrow the concept of business confidence, I adopt the interpretation that businesspeople may be more or less “uncertain about the regime,” by which I mean, distressed that investors’ private property rights in their capital and the income it yields will be attenuated further by government action. Such attenuations can arise from many sources, ranging from simple tax-rate increases to the imposition of new kinds of taxes to outright confiscation of private property. Many intermediate threats can arise from various sorts of regulation, for instance, of securities markets, labor markets, and product markets. In any event, the security of private property rights rests not so much on the letter of the law as on the character of the government that enforces, or threatens, presumptive rights.”

Thus, to allege that new regulations will hardly be a factor in the investment environment would redound to utter detachment with reality.

Well, what can we expect from so-called ivory tower “experts” who seem to think that they own the monopoly of knowledge, via mathematical models and aggregates, when their sources of income depends on wages than from wagering on the dynamic trends of the marketplace? (Pardon me for the ad hominem, but perspectives are mostly shaped by interests)

Take the Great Depression (GD) of 1930s, which many prominent bears have anchored their projections as the probable direction of today’s market.

From the monetarist viewpoint, the GD had been all about monetary contraction, whereas from the Keynesian perspective this had been about falling aggregate demand. Both of which has been diagnosed by the incumbent Federal Reserve chief Ben Bernanke[6] as the major causes from which current policies have been designed to address. Yes—the solution? The printing press!

While both did have a role to play, the oversimplistic account of the GD fails to incorporate the havoc generated by the legion of intrusive laws enacted by the US government’s New Deal program, aimed at keeping prices at status quo ante or from adjusting to the realities of the unsustainable misdirection of capital from the inflation boom induced depression. These policies, which threatened property rights, had greatly exacerbated and prolonged the grim conditions then.

These laws included[7]:

1933 Agricultural Adjustment Act, National Industrial Recovery Act, Emergency Banking Relief Act, Banking Act of 1933 Act, Federal Securities Act, Tennessee Valley Authority Act, Gold Repeal Joint Resolution, Farm Credit Act, Emergency Railroad Transport Act, Emergency Farm Mortgage Act National Housing Act, Home Owners Loan Corporation Act

1934 Securities Exchange Act, Gold Reserve Act, Communications Act, Railway Labor Act

1935 Investment Company Act, Revenue Act of 1940, Bituminous Coal Stabilization Act, Connally (“hot oil”) Act, Revenue Act of 1935, National Labor Relations Act, Social Security Act, Public Utilities Holding Company Act, Banking Act of 1935, Emergency Relief Appropriations Act, Farm Mortgage Moratorium Act

1936 Soil Conservation & Domestic Allotment Act, Federal Anti-Price Discrimination, Revenue Act of 1936

1937 Bituminous Coal Act, Revenue Act of 1937, Act Enabling (Miller-Tydings) Act

1938 Agricultural Adjustment Act, Fair Labor Standards Act, Civil Aeronautics Act, Food, Drug & Cosmetic Act

1939 Administrative Reorganization Act

1940, Second Revenue Act of 1940

Figure 2: Wikipedia.org[8]: US Income Tax (left window), Higgs: Government Purchases (Current$) and Gross Private Investment (Current$) Relative to Gross Domestic Product (Current$), 1929–1950

For instance, one should also take into account how the surge in taxation (left window) to fund the explosion in government expenditures during the Great Depression (right window) contributed to stymie investments or production (see figure 2)

As Henry Hazlitt aptly described how taxes affect investment or production[9]

``When the total tax burden grows beyond a bearable size, the problem of devising taxes that will not discourage and disrupt production becomes insoluble.”

In other words, when the expectations for profits are reduced, borne out of the expectations of higher taxes or from other regulatory interdictions which places property rights at risks, then investments will obviously follow—and decline.

Therefore the regulatory and tax regime functions as crucial factors to the conditions of confidence in the marketplace.

Paradoxically, one function of the law is the avoidance of this “regime uncertainty”. But when the state is unclear about the direction of policies and regulation, the “means” can contradict the “end”. So, instead of stability, such laws could engender or promote “regime uncertainty”. Yet, these are commonplace feature of many arbitrary laws.

Take the recently enacted Financial Reform Bill, it has been reported to contain 2,319 pages (see figure 2)

Figure 2: Mark Perry[10]: Major Financial Legislation: Number of Pages

The sheer mountain of pages by itself would make the reformist law seem like a regulatory quagmire and appears appallingly political relative to the enforcement issues.

Heritage’s Conn Carroll explains[11],

``With the single stroke of a pen, President Barack Obama signed the Dodd-Frank financial regulation bill that set in motion 243 new formal rule-makings by 11 different federal agencies. Each of the 243 rule-makings will employ hundreds of banking lobbyists as they try to shape what the final actual laws will look like. And when the rules are finally written, thousands of lawyers will bill millions of hours as the richest incumbent financial firms that caused the last crisis figure out how to game the new system.”

The implication is that where financial firms compete, not to please customers, but to gain the favour of regulators, this essentially represents as the hallmarks of corporatism or crony capitalism.

Thus, the financial reform bill is likely to foster political privileges which entrenches the “too big too fail” institutions, who will profit from economic rent.

The litany of adverse effects from such ambiguous bill will be one of expanded corruption, lack of credit access for consumers, reduced consumers protection (in contrast to the purported letter of the law), regulatory capture, regulatory arbitrages, higher risks to taxpayers on greater risk appetite for the politically privileged firms (moral hazard issue), increased red tape via an expanded bureaucracy, higher compliance costs, more government spending and reduced competition which overall translates to broad based economic inefficiencies.

Yet the reformist law is also said not only to be opaque, but gives undue confiscatory power based on the whims of regulators.

Mr. Kessler writes[12], ``What is even more troubling is the prospect of government seizures built into the Dodd-Frank financial bill. This is much like the seizure of property from auto industry bond holders (denounced as speculators) in the bankruptcy of GM and Chrysler.

``Dodd-Frank also provides government leeway to seize firms it considers a systemic risk, without really defining what that systemic risk is. Why anyone would provide debt to large financial institutions (or auto makers) is beyond me, certainly not without demanding a huge premium for the seizure risk. The cost of capital for the U.S. economy is sure to rise, slowing growth.”

This means that Financial Reform bill also entails that the political favoured institutions are likely to become veiled instruments for political agenda of those in power.

And laws of this nature is what Frédéric Bastiat long admonished[13],

``But, generally, the law is made by one man or one class of men. And since law cannot operate without the sanction and support of a dominating force, this force must be entrusted to those who make the laws.

``This fact, combined with the fatal tendency that exists in the heart of man to satisfy his wants with the least possible effort, explains the almost universal perversion of the law. Thus it is easy to understand how law, instead of checking injustice, becomes the invincible weapon of injustice. It is easy. to understand why the law is used by the legislator to destroy in varying degrees among the rest of the people, their personal independence by slavery, their liberty by oppression, and their property by plunder. This is done for the benefit of the person who makes the law, and in proportion to the power that he holds.”

In short, arbitrary laws, as the Financial Reform bill, can function as instruments of injustice.

Thus, it is NOT impractical or improbable to argue that in the wake of the enactment of the Financial Reform Bill, the ambiguity and arbitrariness of the law and the increased politicization of the financial industry would likely result to greater perception of risks which may be reflected on the “Yo-yo” actions or a more volatile US markets.

At the end of the day, regulatory obstacles will likely compel capital to look for a capital friendly environment from which to flourish.

---

[1] Kessler, Andy, The Yo-Yo Market and You, Wall Street Journal, July 16, 2010

[2] See How Political Tea Leaves Will Shape The Investment Landscape

[3] Bloomberg, U.S. Congress Passes Wall Street Regulation Bill, July 15, 2010

[4] US Global Investors, Investor Alert, July 16, 2010

[5] Higgs, Robert Regime Uncertainty, Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War

[6] Bernanke, Ben Deflation: Making Sure "It" Doesn't Happen Here, Speech Before the National Economists Club, Washington, D.C. November 21, 2002

[7] Higgs, Ibid

[8] Wikipedia.org, Income tax in the United States

[9] Hazlitt, Henry Taxes Discourage Production, Chapter 5 Economics In One Lesson

[10] Perry, Mark ‘I Didn’t Have Time to Write a Short Bill, So I Wrote a Long One Instead,’ Part II The Enterprise Blog July 16

[11] Carroll, Conn Morning Bell: The Lawyers and Lobbyists Full Employment Act, Heritage Blog, July 16, 2010

[12] Kessler, Andy Ibid.

[13] Bastiat, Frédéric The Law

The Window Is Closing For A Double Dip Recession In 2010

``The charm of history and its enigmatic lesson consist in the fact that, from age to age, nothing changes and yet everything is completely different.” -Aldous Huxley

Markets make opinion, as a Wall Street axiom goes. This means that people tend to rationalize or provide, rightly or wrongly, oversimplistic explanations for current market actions.

A good example of this is that during the first half of the year, the prevalent opinion was that the Euro was headed for its early demise and that this likewise entailed the political disintegration of the European Union.

Considering that the Euro has massively rallied and had already touched or is within spitting distance of our yearend target (1.30-1.32)[1], the du jour opinion has now shifted to the prospects of a US led global double dip recession following signs of weaknesses in the global equity markets (see figure 3).

Figure 3: stockcharts.com: Euro and Global Equity Markets

While equity markets in Europe (STOX50) and the US (SPX) seem lethargic, this has had little effect on Asian markets ex-Japan (DJP2) so far.

One important thing that I have learned about dealing with financial markets is not to get emotionally swayed by popular opinions, especially the half-truths espoused and expressed by the highly articulate mainstream experts.

Yet when market opinion seems to grope for explanations to project a deeply-held belief rather than to objectively appraise the current conditions, our inclination is to think in the opposite direction.

While it is true that equity benchmarks in developed markets have been sluggish, they are likely to account for a liquidity driven slowdown more than a double-dip recession.

Yet it would be misguided to look solely at economic variables and assume its independence from political actions because since both politics and economics account for social actions they are all systematically interconnected and interdependent on each other.

As Ludwig von Mises wrote[2], (bold emphasis mine)

``Economics does not allow any breaking up into special branches. It invariably deals with the interconnectedness of all phenomena of acting and economizing. All economic facts mutually condition one another. Each of the various economic problems must be dealt with in the frame of a comprehensive system assigning its due place and weight to every aspect of human wants and desires. All monographs remain fragmentary if not integrated into a systematic treatment of the whole body of social and economic relations.”

Hence given the current conditions, combined with the prevailing orientation and dogma espoused by policymakers, we expect any reemergent signs of sustained economic weakness in the US to be met with the reopening and the reactivation of the monetary spigot. This is simply what is known as the “path dependency”.

Working amidst the deepening trends of globalization, the transmission effects of the de facto monetary policies in developed economies will likely impact distinctly emerging economies due to the inherent structural idiosyncrasies.

Thus, as we previously pointed out[3], policy divergences will likely result to diversified market actions, for as long as there won’t be any liquidity seizure similar to 2008 post Lehman syndrome.

More proof of policy divergence?

According to Morgan Stanley’s Manoj Pradhan[4],

``Compared to the early part of 2010 when the roaring recoveries in the AXJ region were accompanied by monetary silence, the normalisation of the monetary policy stance that is well underway now is much more consistent with a sensible exit sequence for monetary policy globally. The beginning of tightening in Latin America initiated by the central bank of Brazil and echoed by the central bank of Peru highlights the game of catch-up that LatAm economies and central banks seem to be playing with their AXJ counterparts. And finally, the G10 economies which house the epicentre of sovereign risks and the CEEMEA economies with their close links to the euro area are at the back of the tightening pack. The AAA liquidity regime in the major economies is thus set to stay in place for longer, with growing risks that an eventual reversal of that regime may need to be stronger.”

In other words, while many in the west are having anxiety over the prospects of double dipping (sounds like ice cream), policymakers in emerging markets and in Asia have already engaged in policy tightening in fear of economic overheating.

Besides, I find it a bizarre reasoning for people to argue for another recession if indeed Asia and emerging markets have been responsible for the recent “cyclical recovery” (see figure 4). My idea is that the flow should depend on the leadership unless any shock would be deep enough to unsettle the current dynamics.

Figure 4 DBS Bank: Asia Drives Global Demand Growth

As the DBS Economic Research team boldly argues[5],

``So what is driving the global recovery then? Who is putting money on the table? The answer is Asia. Asia is where the world’s new demand is being generated-demand that is the very measure of growth. This is the real bailout of the global economy and it is being financed in Asia.”

While I agree that Asia has been a significant driver of growth, I disagree that the true measure of growth is about demand. Instead real growth is where capital is being accumulated, and where increased demand is merely a symptom of these actions.

Demand growth financed by unproductive debt is no less than a putting lipstick on a pig as evidenced by the recent bubble bust, therefore is not a “genuine measure of growth”.

Nevertheless the DBS Research team lends proof to these demand growth...

``In Asia it is 17% higher. This isn’t government spending on factories and roads. It’s private consumption-household purchases of pots and pans and bread and butter and shoes and rent and gadgets and gas and movies and music and…-and it has grown by 17 percent in Asia since the crisis began. In the G3, on average, consumption hasn’t grown one iota.

``That’s not what people said would happen. Most said that when the US stopped buying, Asia would too. Because Asia didn’t produce any final demand of its own or not “enough” anyway. Asia depended on US demand for its growth. Thankfully-for the US and the EU and Japan as much as for Asia-that turned out not to be true.”

Well the DBS team is correct to say that mainstream expectations have failed to anticipate this rebound since the mainstream’s insights had been weighted towards the sins of aggregatism, which had been mostly deduced from a US centric trade and investment flows to the detrimental exclusion of the other important variables.

While I would also tend to agree that Asia is likely to lead the global economy along with many emerging markets for many reasons such as deepening trend of free trade (or trade integration) in contrast to the west, high savings rate, less systemic leverage, and etc…, I’d say also say that aside from economic matters, my bias tells me that the business cycle could also be shifting from the West to the East.

And that DBS’ optimism could also signify as an endowment effect where “People often demand much more to sell an object than they would be willing to pay to buy it”[6] or what I call as “ownership premium”.

From the above premises I’d suggest that any signs of weakness should be considered as a buying window for Asian stocks particularly the Phisix and her Asean neighbors.

Some of those prominent experts whom has hollered for “deflation” and or “double dip from the start of the year, seem to be seeing the windows have been gradually close as we have entered the second semester. That’s why some of them have now shifted their time frames to 2011.

Having missed one and a half years is bad record enough. Though eventually they’ll be right that would be tantamount to missing the entire upside cycle. In essence, a broken clock can be right twice a day.

---

[1] See Three More Reasons Why The Euro Rally Should Continue

[2] Mises, Ludwig von Human Action Scholar’s Edition

[3] See Why The Sell-Offs In Global Markets Are Unlikely Signs Of A Double Dip Recession

[4] Pradhan, Manoj Appetite for Restriction, Morgan Stanley, July 16, 2010

[5] DBS Group Research, Economics Markets Strategy

[6] Wikipedia.org Endowment effect

The Philippine Peso’s Lagging Performance

``The Philippines has a very strong external position. The current account surplus has remained resilient, not least because remittances from Filipinos working abroad have continued at a high level. FX reserves have improved substantially in recent months as the central bank has tried to stem PHP appreciation.”- Danske Bank on the Peso

If there is anything that seems to defy my expectation that would be the market price actions of the Philippine Peso.

The Peso still lingers nearly unchanged from the start of the year even if it had managed to cross into the 44.5 levels in late May, prior to the second round revelation of the Greek Debt Crisis.

Figure 5: Yahoo Finance: Philippine Peso The ASEAN-4’s ODD Man

The Peso appears to be the sole ASEAN-4 currency that has not appreciated (right lower window). Our key neighbors Thailand baht (upper left window), the Indonesia rupiah (right upper window) and the Malaysian ringgit (left lower window) have all been up. The Malaysian ringgit is up over 5%.

Even if we take a look at the Peso in the lens of the mainstream, remittances was at the highest level last July[1]. Portfolio inflows have been up 245% for the first semester[2] while June recorded the highest level in gross international reserves[3]. Again, there seems hardly any connection between remittances and the Peso.

Figure 6: DBS Bank: Peso’s External Balance And International Reserve Exchange

So most of these factors appear to offset the surging fiscal deficit emanating from a record Php 1.58 trillion (US $34.7 billion) government spending, last year[4].

Since currency valuation shouldn’t be seen from a single dimension, this implies that the Philippines should be in a much better position relative to the US dollar based on these aspects.

This should even be accentuated if we consider “the relationship between the quantity of, and demand for, money” to quote Professor Mises, where we expect the US to likely engage in Ben Bernanke’s printing press as nostrum against the Great Depression paradigm at heightened signs of economic weakness.

In addition, the rising Euro[5] which implies of less worry over the sovereign issues seen early this year should translate to greater risk appetite which the Phisix and our Asean neighbors has been exhibiting.

Moreover, the currency regime shift to a managed float by the Chinese yuan[6] should equally be positive for the Peso.

So I am quite a bit puzzled by the underperformance of the Peso.

Nevertheless the populist tendencies of the new administration could be a factor to suppress the Peso’s rise for the purposes of promoting certain sectors as the OFWs or exports.

In addition, the populist proclivities can be seen in this article[7], (emphasis added)

``AFTER ditching the previous administration’s balanced-budget goal, the Aquino government plans to give the state a greater role in business by investing the proceeds of asset sales in lucrative industries, the Department of Finance (DOF) said…

``Purisima said that he does not see the urgent need to balance the budget as there are “more important things to look into in order to generate more profit for the government.”

``The new finance chief, said that areas that the government needs to do a lot of frontloading include infrastructure, education, and agriculture.”

Like almost every political leaders, the incentive to spend and conduct short term “photo op” policies is just too compelling.

[1] Bsp.gov.ph OF Remittances in May Reach the Highest Level at US$1.6 Billion, July 15, 2010

[2] Bsp.gov.ph Foreign Portfolio Investments Post Net Inflow For the First Semester of 2010, July 16, 2010

[3] Abs-cbnNEWS.com June forex reserves at new record, July 7, 2010

[4] Philstar.com, Fiscal deficit in May hits nearly $70 million, June 22, 2010

[5] See Buy The Peso And The Phisix On Prospects Of A Euro Rally

[6] See Why China’s Currency Regime Shift Is Bullish For The Peso

[7] Manila Times, Aquino govt mulls new state-owned enterprises, July 2, 2010

Proof That Gold Is Unlikely A Deflation Hedge

Here is an anecdotal proof showing that gold isn’t a deflation hedge…

``Deflationary forces lie in the push factors that send a steady flow of people there to convert their gold-based valuables into cash, either through collateralized loans or outright sales. They are the victims of a moribund economy whose modest recovery from last year’s recession is failing to produce jobs or small business revenue growth.”

This from an article at the Wall Street Journal’s Blog which takes into the account the booming businesses of ‘New York’s Diamond District on West 47th Street between Fifth and Sixth avenues’ which serves as a battleground between inflation and deflation.

To rephrase, the battle is actually between market forces and government interventionism.

Achieving Peace Via Free Trade

Many people incessantly babble about “compassion” as means of attaining peace and prosperity.

Ironically, most of them align such advocacy towards organized violence or forced redistribution (government), which produces the opposite outcome, instead of voluntary exchange.

Dr. Tom Palmer of the Atlas Economic Research Foundation, in this video “Bridges of Peace”, shows how free trade accomplishes peace.

Incidentally, representatives of Atlas Economic Foundation led by Dr. Palmer, will be in the Philippines and will hold an assembly tonight, which I will be attending. I hope it will be fruitful experience.

Validated On The Goldman Sachs-SEC Episode

I had repeatedly argued here that the Goldman-SEC row had been nothing but a slick political publicity stunt, some excerpts:

“Moreover, it also seems ridiculous to perceive of a sustained path of attack, considering that Goldman Sachs has been more than a political ally to the Democratic Party. In fact the company has constantly played the role of key financier of the Democratic Party”

See Why The US SEC-Goldman Sachs Hoopla Is Likely A Charade

“We have long known that the global financial system have been "gamed" by the elite in cahoots with politicians. And part of the game is the borrow and spend policies, that actually benefits the banking cartel.

“As we earlier said, it won't take long for this political masquerade to be unraveled...

“What I have been saying is that this has been a political ruse meant to either shore up somebody's electoral image or an attempt to control the gold markets.”

See SEC-Goldman Sachs: Hindsight Bias, Staged For Political Advantage

“And this gives even more motivation for the ruling political class to use the Goldman caper as a likely prop as the "fall guy" role for political ends.

“We just don't oversimplistically regulate cartels out of existence, not when the cartel itself is lead by the government via the Federal Reserve.”

See: SEC-Goldman Sachs Row: The Rising Populist Tide Against Big Governments

“Moreover, there have been pressures for Goldman to amicably settle with the SEC even if “they’re right on the merits of the case”.

“And surprisingly, President Obama despite earlier reports to verbally assail Wall Street turned up with a conciliatory voice at a recent speech ``Ultimately, there is no dividing line between Main Street and Wall Street,” Obama said in his speech at Cooper Union, about two miles from the financial district. “We will rise or we will fall together as one nation.”

See: Markets Ignore US SEC-Goldman Sachs Tiff, More Political Dirty Dancing

It appears that this has been the case, as the Goldman-SEC row has officially been settled.

This from Bloomberg/Businessweek,

``Goldman Sachs Group Inc.’s $550 million settlement with U.S. regulators yesterday will benefit the firm by ending three months of uncertainty at an affordable price. Now the rest of Wall Street begins calculating the cost.

``Investors welcomed the deal with the Securities and Exchange Commission, saying the company won key points: The cost was below some analysts’ estimates of at least $1 billion; no management changes were required; and Goldman Sachs said the SEC indicated it doesn’t plan claims related to other mortgage- linked securities it examined. The stock’s late surge on anticipation of a settlement yesterday added more than $3 billion to the company’s market value, and it climbed further after New York trading closed.

“You’d have to look at it as a victory for Goldman,” said Peter Sorrentino, senior portfolio manager at Huntington Asset Advisors in Cincinnati, which manages $13.3 billion including Goldman Sachs shares. “This takes a cloud off the stock.”

``In the settlement, unveiled less than two hours after the Senate passed legislation to reform the financial system and avert future crises, Goldman Sachs acknowledged that marketing materials for the 2007 deal at the center of the case contained “incomplete information.” In its April 16 suit, the SEC accused the firm of defrauding investors in a mortgage-backed collateralized debt obligation by failing to tell them that hedge fund Paulson & Co., which was planning to bet against the deal, had helped to design it.” (bold emphasis added)

Quid pro quo?

Oil Drilling Activities Shift To Asia

This should be an interesting development in the oil frontier.

The BP oil spill and the attendant political squabble over the drilling moratorium sanctioned by the Obama administration but contravened by the Federal Courts have prompted oil rigs and or drilling activities to shift to Asia.

According to Bloomberg’s chart of the day,

The CHART OF THE DAY shows monthly totals in the Middle East and Asia Pacific, with the 271 rigs deployed on and and sea in Asia, the most since December 1991, according to data compiled by Bloomberg from Baker Hughes Inc. The lower panel tracks China’s crude imports since December 2003.

“Asia is looking more and more attractive because of a rush for natural gas,” said Tony Regan, a consultant in Singapore with Tri-Zen International Ltd. “Oil companies are wary about the Gulf of Mexico after the drilling ban, and the Atlantic basin doesn’t look good because of lower gas prices.”

Explorers deployed 14 percent more rigs in Asia in June, compared with January last year as China, India, Australia and Indonesia opened up areas. China and India are seeking fuel for economies growing at more than 8 percent a year. The almost doubling of crude prices since January 2009 has also spurred the quest for oil and gas, said Regan, a former executive at Royal Dutch Shell Plc.

Reliance Industries Ltd. discovered India’s biggest gas field in 2002, and LNG projects in Australia valued at more than A$80 billion ($71 billion) are scheduled for final investment decisions in 2010, according to Goldman Sachs Group Inc. in February. The A$43 billion Gorgon LNG project was approved last year by partners Chevron Corp., Exxon Mobil Corp. and Shell.

Asia’s oil-demand growth has risen 27 percent since 1999, compared with a 2 percent decline for North America and Europe, according to data from BP. Oil-product demand in Asia’s emerging-market nations will rise by about 3.8 percent a year on average to 23 million barrels a day in 2015, the International Energy Agency said in a report. The number of rigs in the Gulf of Mexico plunged to the lowest level in 16 years last week, Baker Hughes, a Houston-based oilfield-services firm, said last month.

Some thoughts:

This is an example where the cost of interventionism means a redirection of the use of resources to where it is more “valued”.

Nevertheless what has been “lost” for the US should translate to “gains” for Asia.

From BBC

Although Asia isn’t much of a big player in terms of oil and conventional gas reserves, Asia is the largest in terms of unconventional gas as previously discussed.

The other implication is that more drilling activities should bring life to the stocks of Asian oil-gas exploration companies.

Chinese Credit Agency Downgrades Western Nations

A leading Chinese credit rating agency has downgraded the credit ratings of major Western economies.

Telegraph’s Ambrose Evans Pritchard writes

``Dagong Global Credit Rating Co used its first foray into sovereign debt to paint a revolutionary picture of creditworthiness around the world, giving much greater weight to "wealth creating capacity" and foreign reserves than Fitch, Standard & Poor's, or Moody's.

``The US falls to AA, while Britain and France slither down to AA-. Belgium, Spain, Italy are ranked at A- along with Malaysia.

``Meanwhile, China rises to AA+ with Germany, the Netherlands and Canada, reflecting its €2.4 trillion (£2 trillion) reserves and a blistering growth rate of 8pc to 10pc a year.

Reason for the downgrade? (bold highlights mine)

``Chinese president Hu Jintao said in April that the world needs "an objective, fair, and reasonable standard" for rating sovereign debt. Dagong appears to have stepped into the role, saying its objective was to assess countries using methods that would "not be affected by ideology".

"The reason for the global financial crisis and debt crisis in Europe is that the current international credit rating system does not correctly reveal the debtor's repayment ability," said Guan Jianzhong, Dagong's chairman.

``The agency, known in China for rating companies, said its goal is to "correct the defects" of the existing system and offer a counter-weight to Western agencies.

``Dagong appears to base growth potential on past performance but this can be misleading, especially in states enjoying technology catch-up. Japan was a high-flyer in 1970s and 1980s before stalling when the Nikkei bubble burst. It has been trapped in near perma-slump ever since.”

Some thoughts

China is possibly signaling to the West of a seismic change in the way things are being done or a structural transformation in the economic and political sphere.

Perhaps this will begin with a reduction in US treasury purchases, as China would possibly use her surpluses to fund more (ex-US) overseas acquisition or hedge them on real assets.

China may also use this to finance her integration with Asia and or as leverage to deepen her relationship with key emerging markets.

All these should put pressure to the du jour US dollar standard system.

This action seems representative of China's flaunting of her newfound economic might which should also filter into geopolitics.

If the US dollar should lose her international currency status, then this also should translate to an erosion of the US geopolitical hegemony.

Maybe this is just one of the the indications to what some has called as the Asian Century.