Phisix-Philippine Peso Back In Rhythm

Upon examining the curves developed by institutes using the Harvard method, it becomes apparent that the movement of the money market curve (C Curve) in relation to the stock market curve (A Curve) and the commodity market curve (B Curve) corresponds exactly to what the Circulation Credit Theory asserts. The fact that the movements of A Curve generally anticipate those of B Curve is explained by the greater sensitivity of stock, as opposed to commodity, speculation. The stock market reacts more promptly than does the commodity market. It sees more and it sees farther. It is quicker to draw coming events (in this case, the changes in the interest rate) into the sphere of its conjectures. Ludwig von Mises

The Philippine Phisix made another substantial rally this week (+2.7%) to finally move up to the positive column.

Rotation, Improving Market Breadth and Bull Market Rules

And as we have been saying we see lots of ongoing rotational dynamics in place.

Figure 6: PSE Weekly Performance

Where last week we saw the telecom sectors take the center stage, this week it had been a story of the Property, Industrial and the Mining sector which has elevated the gains of the Phisix.

Last week’s front runner, the service sector led by the telecoms, had a lackluster but still posted a positive performance. The drab performance of this sector could have signified a natural reprieve following the other week’s sizzling performance.

This week’s broad market gains basically lifted most of the sectoral performance which left only the finance and service sector in the red on a year to date basis.

If the bullish momentum should continue over the medium term, which I expect it would, then I expect to see these laggard sectors to do some catching up which should equally lend a boost to the Phisix.

In addition, we see material progress in the market breadth.

Aside from a huge jump in net foreign buying which mostly came from block sales last April 5, we see broader gains through more trades and number of issues traded. Importantly the advance-decline spread has been tilted in favor of the bulls (see figure 7).

Figure 7: Advance-Decline Spread Shows Bullish Breadth

Thus, the rotational dynamics plus several progress in the market internal activities appear to highlight the Philippine Stock Exchange’s current intrinsic bullishness.

Of course mechanical chartists may argue that given the overbought conditions we may see some profit taking. That’s possible. Resolving short term movements, for me, is a matter of luck (noise) than of (signals) skills.

Nevertheless, major trends of bull and bear markets have some shared characteristics which could be translated into one of the many guideposts for market participants.

As prominent US chartist Carl Swelin notes[1], (bold emphasis mine) writes,

In a bull market oversold conditions are seen as a buying opportunity and will usually result in a rally to relieve the condition. When a bull market becomes overbought, it is not usually cause for concern, because corrections from these conditions are often small, and sometimes the market will continue to rally, while the overbought conditions are relieved internally.

In other words, even if the Phisix does correct, it is likely to be short, and it is likely to see internal rotations that would relieve issue specific conditions (not all issues will go down).

The Phisix-Peso Symmetry

Of course the rising Phisix has also been in conjunction with the firming Peso whose dissonance appears to have been finally resolved.

As I earlier wrote[2],

I can see a paradox—a strong Peso and equity outflows—or a meaningful divergence...

These variables appear to imply that the negative foreign trade in the PSE had NOT been repatriated abroad, but possibly rotated into other local assets.

And this perhaps explains the continued strenght of the Peso despite a weak equity market environment. Again, a divergence that is likely to be resolved soon

Figure 8: Phisix-Peso Back in Rhythm

Given the realities of the Philippine financial markets, the Phisix can’t go on a full downswing cycle on a firming Peso. It’s either a bear market that goes with a falling peso or the weakness in the Phisix represents an anomaly relative to the Peso. And that’s the essence of the recent paradox.

Obviously, the asymmetry appears as being resolved in the way have seen it.

Figure 9: Yardeni.com[3]: Non Gold Philippine Foreign International Reserves Surge Anew

Nevertheless with the country’s foreign international reserves on a new milestone high, and with the BSP’s reluctance to see the Philippine Peso appreciate meaningfully for political reasons, this only means lots of liquidity[4] will be sloshing throughout the domestic financial system.

This together with artificially suppressed interest rates should also imply that much these money will find their way into various Peso based assets such as those listed in the Philippine stock exchange, real estate or local bonds.

Of course, after financial markets, we get higher (CPI) inflation in the mainstream definition and subsequently public unrest.

---

[1] Swenlin, Carl, Bull/Bear Market Rules Apply Decisiopoint.com

[2] See Are The Current External Event Risks Signals or Noise?, March 13, 2011

[3] Yardeni.com, (subscription required) Global Liquidity, April 7, 2011

[4] See Questions and Answers on Philippine Monetary and Fiscal Issues, April 8, 2011

Earth’s Possible Close Encounter With An Asteroid This November

Earth might have a close encounter with a huge asteroid this November, that’s according to Space.com [bold emphasis mine]

Mark your calendars for an impressive and upcoming flyby of an asteroid that’s one of the larger potentially perilous space rocks in the heavens – in terms of smacking the Earth in the future.

It’s the case of asteroid 2005 YU55, a round mini-world that is about 1,300 feet (400 meters) in diameter. In early November, this asteroid will approach Earth within a scant 0.85 lunar distances.

Due the object’s size and whisking by so close to Earth, an extensive campaign of radar, visual and infrared observations are being planned.

Asteroid 2005 YU55 was discovered by Spacewatch at the University of Arizona, Tucson’s Lunar and Planetary Laboratory on Dec. 28, 2005. En route and headed our way, the cosmic wanderer is another reminder about life here on our sitting duck of a planet

Read the rest here

This article hasn’t been meant to scare anyone, but as Space.com says our planet looks like a sitting duck.

And gloomy environmental stories about climate change seem to pale against the prospects of a wayward asteroid hitting us-the ultimate Black Swan.

President Obama’s Use of Regime Uncertainty and the Political ‘Government Shutdown’ Blackmail

All of a sudden, President Obama embraces the Austrian perspective of Regime Uncertainty (Robert Higgs).

From the Washington Post, (hat tip Russ Roberts)

At a town hall meeting near Philadelphia on Wednesday, President Obama warned that the uncertainty of a shutdown could slow the economic recovery.

“Companies don’t like uncertainty, and if they start seeing that suddenly we may have a shutdown of our government, that could halt momentum right when we need to build it up — all because of politics,” Obama said.

Of course, the use of uncertainty here is all about political convenience. This have been predicated on the ongoing battle over proposed budget cuts from the Republicans.

The administration appears to use “government shutdown” as leverage to negotiate to prevent or mitigate these.

Graphics from Cato’s David Boaz

Yet what is being argued looks inconsequential relative to the budget (government spending) gains over the years.

And based on the Cato’s graphics, the Republican proposal would seem not as a NET reduction, but rather a reduction of expansion.

As Jacob Sullum of the Reason foundation writes,

The cuts represent less than 2 percent of the total budget, less than 4 percent of the deficit, and less than 5 percent of discretionary spending, which rose in real terms by 75 percent from 2000 to 2010 and by about 9 percent in each of the last two fiscal years.

Yet the administration is trying to spook (blackmail) the public with the prospects of mayhem from a prospective government shutdown.

US government shutdowns have not been rare.

Below is a table from Bespoke Invest showing previous shutdowns.

Bespoke writes, (bold highlights mine, table above from Bespoke)

“funding gaps in the federal government are hardly rare. While we all remember the two shutdowns in 1995, there have actually been a total of 17 shutdowns going back to 1975. However, due to their length as well as changes in federal law over the years, not all funding gaps are created equal. For starters, of the seventeen funding gaps highlighted, only eight lasted longer than three days. In other words, in most cases the shutdown was a one day affair or else it occurred over a weekend.

“As shown in the table, however, funding gaps prior to 1980 all lasted one week or more, and then from 1980 to 1995 all funding gaps lasted three days or less. The reason for this change is the fact that beginning in 1980 the US Attorney’s Office ruled that any time there was a funding gap, non essential federal agencies were required to begin terminating activities and ‘shutdown.’ Once that opinion was issued, funding gaps took on added urgency forcing lawmakers to come to an agreement. This is why the shutdown in 1995 was so notable.

Bottom line:

This serves as a lucid example that when it comes to cutting government (privileges) in terms of spending and control, you can hear the shrill of cry OUCH from politicians! Even if the proposed spending cuts seem inconsequential or even perhaps symbolical.

And in desperation or as a political maneuver, politicians employ various ‘strawmen-bogeyman’ tactics to scare the wits out of the public so that the public would be stampeded to approve their desires.

As former US President John Adams once wrote [The Foundation of Government],

Fear is the foundation of most governments; but it is so sordid and brutal a passion, and renders men in whose breasts it predominates so stupid and miserable, that Americans will not be likely to approve of any political institution which is founded on it.

Milton Friedman’s 4 ways money is spent

Stripping away control and spending other people’s money is so addictive that politicians can’t seem to do away with it and would fight heaven and hell to avoid it.

Update: Bespoke appears to have been proven right, a deal has been reached according to marketwatch.com. Details have yet to come in.

Cartoon of the Day: Econometrics Work! Not.

Here is a nice parody of how economic 'math or econometric' models are contrived and sold to the public as “workable”.

From xkcd.com, [click on this link to go to original site for clearer illustration]

(hat tip: Russ Roberts)

EU’s Bailout Structure, Behind The Scene Role of the US

Speaking of the policy of bailouts (possibly financed by inflationism), here is nice graphic from the Economist.

The Economist writes,

PORTUGAL’S bail-out means another stage in Europe’s debt crisis and another call on non-European coffers. The total €865 billion ($1.2 trillion) pot available for euro-area rescues looks enormous, more than enough to cope with Greece, Ireland and Portugal’s anticipated needs besides. Almost half of that comes from the European Financial Stability Facility, a €440 billion euro-zone fund whose major contributors are Germany, France and Italy. But the EFSF’s effective lending capacity is only €250 billion, because only six of its 17 members have a AAA credit rating. European leaders have pledged to bring the fund’s actual firepower up to €440 billion by the summer but in the meantime the IMF has more cash on hand, at €280 billion. If all that money were used (a very big if), America would end up lending indebted euro-zone nations €50 billion.

Oops, the last statement shows why the US dollar will likely keep falling…the US appears to be bailing out the rest of the world! (this included Libya’s Gaddafi in 2009)

ECB Raises Rates, Global Monetary Policy Divergences Magnifies

The European Central Bank lifted policy rates yesterday.

From the Bloomberg, (bold highlights mine)

European Central Bank lifted interest rates for the first time in almost three years to quell inflation even as Portugal became the third nation to succumb to the region’s sovereign debt crisis.

ECB policy makers meeting in Frankfurt today raised the benchmark interest rate to 1.25 percent from a record low of 1 percent, as predicted by all 57 economists in a Bloomberg News survey. It also raised the marginal lending rate to 2 percent from 1.75 percent and increased the deposit rate to 0.5 percent from 0.25 percent, maintaining 75 basis-point corridors either side of the benchmark....

The ECB is joining China, India, Poland and Sweden in raising interest rates even as the Federal Reserve remains reluctant to tighten amid divisions among its policy makers.

Today’s ECB rate increase is the first since July 2008 and also the first time in 40 years that Europe’s benchmark has risen before the U.S. equivalent.

The ECB has repeatedly been forced to delay the withdrawal of emergency policy settings put in place during the global financial crisis as Europe’s debt woes threatened to tear the 17-nation currency bloc apart.

The ECB has raised rates alright but continues to pump money into the system.

From the same article,

The ECB has also said it will keep providing banks with as much liquidity as they need at least through the second quarter, and has left its bond-purchase program in place.

So we revert to the proverbial, ‘the left hand doesn’t seem to know the right hand is doing’.

Well this just underscores the vast monetary policy divergences across the globe highlighted by this fantastic interactive chart by the Wall Street Journal Blog.

Proceed to the Wall Street Journal Blog to see original interactive chart.

Bottom line: Great deal of countries are still at ultra-accommodative phases (which provides fuel to commodity inflation)

Questions and Answers on Philippine Monetary and Fiscal Issues

The following is my to answer some of the questions that my colleagues have posted on facebook group which they say is required for their research.

Role of Central Bank and Currency Interventions

With reference to the record $66.2 billion Gross International Reserves (GIR) the Philippines has tallied for the first quarter of 2011, this can be broken down into Foreign Investments, Gold, Special Drawing Rights (SDRs), foreign exchange and Reserve position in the fund.

Breakdown of Gross International Reserves (Bangko Sentral ng Pilipinas)

Reserve assets can further be broken down into securities mostly in foreign bonds and notes and secondly in foreign currency cash and deposits.

Reserve asset breakdown Bangko Sentral ng Pilipinas

The role of the BSP, like all other central banks, is to manage exchange rate fluctuation and or the state of balance of payments.

They do this by either indirect foreign currency intervention (tweaking money supply) or indirect foreign currency intervention (buy or sell foreign currencies with local currency) [Steven M. Suravonic, International Finance Theory and Policy]

And in managing capital inflows they can be sterilized or non-sterilized. Non sterilized intervention can result to inflation.

Jang-Yung Lee explains [IMF 1997 Sterilizing Capital Inflows]

Capital inflows result in a buildup of foreign exchange reserves. As these reserves are used to buy domestic currency, the domestic monetary base expands without a corresponding increase in production: too much money begins to chase too few goods and services.

To ease the threat of currency appreciation or inflation, central banks often attempt what is known as the "sterilization" of capital flows. In a successful sterilization operation, the domestic component of the monetary base (bank reserves plus currency) is reduced to offset the reserve inflow, at least temporarily. In theory, this can be achieved in several ways, such as by encouraging private investment overseas, or allowing foreigners to borrow from the local market. The classical form of sterilization, however, has been through the use of open market operations, that is, selling Treasury bills and other instruments to reduce the domestic component of the monetary base. The problem is that, in practice, such sterilization can be difficult to execute and sometimes even self-defeating, as an apparently successful operation may raise domestic interest rates and stimulate even greater capital inflows. Unfortunately, many developing countries also lack the tools available to run a classical sterilization policy, or find it simply too costly to do so. This is often the case wherever the financial system is not fully liberalized.

The Philippines has undertaken both measures with questionable results.

From the ADB Institute,

As described earlier, the BSP has engaged in both sterilized and unsterilized intervention. A simple correlation analysis indicates that intervention, as measured by the percentage of international reserves, has limited impact on the exchange rate’s level, percentage change, and volatility (Table 11 [ PDF 53.5KB | 1 page ]).¹⁰ The results indicate that intervention had a modicum of success in reducing exchange rate volatility in the Philippines between 1993 and 1996. Meanwhile, intervention prevented a rise in the exchange rate (measured in US$/peso) after the crisis, particularly during the period 2003–2007. In many instances the results are counter-intuitive, i.e. the correlation coefficient is positive, similar to the result of the impulse response function that was presented in Section III (Figure 4 [ PDF 42.8KB | 1 page ]). ADB Institute, Evaluation of Policy Responses, March 5, 2008

External Debt (Fiscal and Monetary Issues)

The question of debt has also been raised.

External debt as defined by the BSP covers all short-term and medium-term obligations of the BSP, commercial banks, public and private sectors payable to non-residents.

One must be reminded that external debt which covers by the national government is a fiscal issue whose repayment is allocated by the Philippine Congress. The 2011 php 1.645 trillion budget allocates 23% to debt servicing (dateline Philippines, President Aquino’s Budget message—Office of the President’s Official Gazette)

The BSP’s role according to Manila Bulletin/Cuervo Far East is to set “internal annual debt ceiling to monitor foreign borrowings, either from commercial sources or from official development assistance funds or donor aids.”

External Objectives and the Role of Forex Currency Reserves

Now domestic monetary policy is about domestic political and economic issues, and is hardly about coordinating inflation with external sources.

External issues are assumed by currencies that play the role of foreign currency reserves, where the conflict of interest between domestic and international objectives engenders what is known as the Triffin Dilemma.

IMF During the 1997 Asian Crisis and the Philippine Debt Moratorium in 1970-80s

During the Asian crisis the left has blamed liberalization, pegged currency and high interest rates (Walden Bello) when the problem has been a global rotational issue of bubble cycles.

Paper money has never been about sound money. It has been about political objectives.

As to whether the restricting Peso ‘inflation’ would hurt the US dollar hegemony, US dollar’s hegemony depends largely on the sustainment of its inflationist policies. If the US recklessly pursues a dollar debasement as their main policy thrust, countries will either jointly devalue (race to the bottom or competitive devaluation) or abandon the US dollar as a foreign currency reserve.

Finally, with regards to the role played by the IMF during the Philippines during the Philippine debt moratorium

Country-data com provides some clue: (bold emphasis mine)

On October 17, 1983, it was announced that the Philippines was unable to meet debt-service obligations on its foreign-currency debt of US$24.4 billion and was asking for a ninety-day moratorium on its payments. Subsequent requests were made for moratorium extensions. The action was the climax of an increasingly difficult balance of payments situation. Philippine development during the decade of the 1970s had been facilitated by extensive borrowing on the international capital market. Between 1973 and 1982, the country's indebtedness increased an average of 27 percent per year. Although government-to-government loans and loans from multilateral institutions such as the World Bank and Asian Development Bank were granted at lower-than-market rates of interest, the debt-service charges on those and commercial loans continued to mount. In 1982 payments were US$3.5 billion, approximately the level of foreign borrowing that year and greater than the country's total debt in 1970. The next year, 1983, interest payments exceeded the net inflow of capital by about US$1.85 billion. In combination with the downturn in the world economy, increasing interest rates, a domestic financial scandal that occurred when a businessman fled the country with debts estimated at P700 million, escalating unrest at the excesses of the Marcos regime, and the political crisis that followed the Aquino assassination, the debt burden became unsustainable (see table 16, Appendix).

The Philippines had turned to the IMF previously in 1962 and 1970 when it had run into balance of payments difficulties. It did so again in late 1982. An agreement was reached in February 1983 for an emergency loan, followed by other loans from the World Bank and transnational commercial banks. Negotiations began again almost immediately after the moratorium declaration between Philippine monetary officials and the IMF. The situation became complicated when it came to light that the Philippines had understated its debt by some US$7 billion to US$8 billion, overstated its foreign-exchange reserves by approximately US$1 billion, and contravened its February 1983 agreement with the IMF by allowing a rapid increase in the money supply. A new standby arrangement was finally reached with the IMF in December 1984, more than a year after the declaration of the moratorium. In the meantime, additional external funds became nearly impossible to obtain.

In each of these arrangements with the IMF, the Philippines agreed to certain conditions to obtain additional funding, generally including devaluation of the peso, liberalization of import restraints, and tightening of domestic credit (limiting the growth of the money supply and raising interest rates). The adjustment measures demanded by the IMF in the December 1984 agreement were harsh, and the economy reacted severely. Because of its financial straits, however, the government saw no option but to comply. Balance of payments targets were met for the following year, and the current account turned positive in FY (fiscal year--see Glossary) 1986, the first time in more than a decade. But there was a cost; interest rates rose to as high as 40 percent, and real GNP declined 11 percent over 1984 and 1985. The dire economic situation contributed to Aquino's victory in the February 1986 presidential election.

Hope this helps,

Benson

P.J. O’Rourke On Atlas Shrugged (Movie): A Hundred Years Spent Proving Classical Liberalism Right

Libertarian author P.J. O’Rourke reviews Atlas Shrugged The Movie (source Wall Street Journal Blog; bold emphasis mine)

But I will not pan “Atlas Shrugged.” I don’t have the guts. If you associate with Randians—and I do—saying anything critical about Ayn Rand is almost as scary as saying anything critical to Ayn Rand. What’s more, given how protective Randians are of Rand, I’m not sure she’s dead.

The woman is a force. But, let us not forget, she’s a force for good. Millions of people have read “Atlas Shrugged” and been brought around to common sense, never mind that the author and her characters don’t exhibit much of it. Ayn Rand, perhaps better than anyone in the 20^thcentury, understood that the individual self-seeking we call an evil actually stands in noble contrast to the real evil of self-seeking collectives. (A rather Randian sentence.) It’s easy to make fun of Rand for being a simplistic philosopher, bombastic writer and—I’m just saying—crazy old bat. But the 20^th century was no joke. A hundred years, from Bolsheviks to Al Qaeda, were spent proving Ayn Rand right.

Then there is the audacity of bringing “Atlas Shrugged” to the screen at all. Rand devotees, starting with Rand herself, have been attempting it for 40 years. The result may be as puzzling as a nude sit-in anti-Gadhafi protest in Tripoli’s Green Square, but you have to give the participants credit for showing up.

In “Atlas Shrugged” Rand set out to prove that self-interest is vital to mankind. This, of course, is the whole point of free-market classical liberalism and has been since Adam Smith invented free-market classical liberalism by proving the same point. Therefore trying to make a movie of “Atlas Shrugged” is like trying to make a movie of “The Wealth of Nations.” But Adam Smith had the good sense to leave us with no plot, characters or melodramatic clashes of will so that we wouldn’t be tempted to try.

Patching it all up, P.J. O’Rourke simply says that a hundred years had been spent proving classical liberalism right.

I Told You So Moment: Emerging Markets Mounts A Broad Based Comeback!

Early this year, I was told that I did not predict the ‘correction’ in emerging markets.

Of course, I didn’t. I have to admit I am just human. I can’t predict or KNOW ALL events (human or environmental) that may affect the financial markets over the short term.

I won’t even pretend to do something close to it.

The expectation of omniscience is sheer absurdity. Sometimes some people (who have been mostly wrong in reading the markets) just like to engage in nitpicking, perhaps to look for company (misery loves company) or to look for conversation (signaling).

As an avid watcher of markets based on the boom bust cycle, I always say that NO trend moves in a straight line and have argued repeatedly on this space that the so-called unpredictable spontaneous events (MENA political crisis and Japan’s calamities) represented no less than profit taking. [But who would listen to uncontroversial non-faddish non-current event related ideas?]

And that I further argued that emerging markets, including the Philippine Phisix, will eventually move higher once uncertainty would have been discounted to as risk.

Well I guess, broader signs suggest that I’ve been right all along...

These beautiful looking charts from Bespoke Invest reveal that Emerging Markets have been making a HUGE broadbased comeback!!!!

If you want to know what’s keeping up this streak, well, I would suggest for you to study the Austrian Business Cycle Theory (ABCT). While there are other boom bust cycle theories too such as George Soros, Hyman Minsky, Charles Kindelberger et.al., all of whom are relevant, I would say that the Austrians have mostly nailed it.

Of course, the ABCT isn’t mainstream thinking (which means there are attendant social ‘conformity’ risks that goes with it and that you won't need credentialism as CFA or an MBA for this but simply go to mises.org for self study--as I--or take Mises academy online course).

And neither is the ABCT about the Holy Grail investing (which is why you won’t see or predict the interim volatilities).

Rebecca Black’s ‘Friday’ and Demonstrated Preference

Yesterday, while I was watching and listening to this video posted at the Mises Blog my daughter stepped in my room and yelled, “don’t watch it, Pa, it’s a lousy video!”

Initially the rap pop music sounding video indeed seemed quite unimpressive. And for that moment I agreed with my daughter. Yet, instead of leaving the page, I marveled at the 86 million hits!

More interestingly, the video showed a lopsided number of dislikes compared to the likes by almost 6:1. And this has even been reflected on the comment page where many, if not the majority, of the audiences were shouting pejoratives such as “BACON!” (I really don’t know what this idiom meant.)

Wikipedia has even a short history of the viral propelled popularity of Rebecca Black’s Friday music video.

What struck me is that if the video has it so bad as critics (as my daughter and even my youngest son) would have it, what could have prompted 80+ million people to watch it or to keep watching it???!!!

Fittingly, Jeffrey Tucker at the Mises Institute cleared these puzzles in my mind with his article. An excerpt, (bold emphasis mine)

The astonishing popularity of Rebecca Black's "Friday" video — which became the YouTube meme of all memes in the course of a wild six weeks — has mystified many critics.

Was it shared and watched so wildly because it was so bad? Certainly the overwhelming judgement on the part of viewers is that it is atrocious — and yet it is hard to know what that means, since 85 million people not only watched the video but also downloaded the song, bought the ring tone, and devoured every available bit of news about the singer and the song.

Using the principle of "demonstrated preference," this music video ranks as the most popular in human history.

Perhaps it is the digital-age version of Mel Brooks's smash Broadway play The Producers, a story about an attempt to write a play so bad that it flops on the first night. But, in Brooks's hilarious telling, the results were the opposite: the play was so bad that it was brilliant, and it became a smash success, however inadvertently.

Lovers of liberty are often drawn to such scenarios because they highlight the unknowability of the future, the unpredictability of human choice, and the way in which the intentions of the planners (in this case, the producers and writers) are easily upended by consumer choice, which is the driving force of economic progress.

The concept of Demonstrated Preference, according to Murray N. Rothbard, is simply this: that actual choice reveals, or demonstrates, a man’s preferences; that is, that his preferences are deducible from what he has chosen in action. Thus, if a man chooses to spend an hour at a concert rather than a movie, we deduce that the former was preferred, or ranked higher on his value scale. Similarly, if a man spends five dollars on a shirt we deduce that he preferred purchasing the shirt to any other uses he could have found for the money. This concept of preference, rooted in real choices, forms the keystone of the logical structure of economic analysis, and particularly of utility and welfare analysis.

In other words, demonstrated preference applied to this case means that there may have been many critics alright, but apparently there have been more admirers, who may not have been as vocal as these critics.

Besides, one can't claim disliking the music video but keep returning to it as there are thousands of video to choose from. The marginal effort to keep going back simply means that there is a demonstrated preference for this video relative to others.

And perhaps most of these admirers were expressing their tacit approval by clicks (or views) to this music video. Simply said, they voted with the mouse clicks. (It’s now 87.4 million and growing as of this writing!).

This simply signifies the free market process (as expressed by the silent majority) at work!

Nevertheless Mr. Tucker expounds on the music’s allegory for libertarianism. Read the entire article here.

Bottom line: What people say can always be tested by their actions!

Global Poll: Free Trade Sentiment Gains In Emerging Markets, World

I am delighted to say that despite some short term setbacks, global sentiment on free trade appears to be gaining significant ground over the long term, and importantly, remains a dominant theme for the world.

This from the Economist, (bold emphasis mine)

FAITH in the free market is at a low in the world's biggest free-market economy. In 2010, 59% of Americans asked by GlobeScan, a polling firm, agreed "strongly" or "somewhat" that the free market was the best system for the world's future. This has fallen sharply from 80% when the question was first asked in 2002. And among poorer Americans under $20,000, faith in capitalism fell from 76% to 44% in just one year. Of the 25 countries polled, support for the free market is now greatest in Germany, just ahead of Brazil and communist China, both of which have seen strong growth in recent years. Indians are less enthusiastic despite recent gains in growth. Italy shows a surprising fondness for markets for a place that is uncompetitive in many sectors. In France under a third of people believe that the free market is the best option, down from 42% in 2002.

While free trade sentiment has skidded to low in the US, as a consequence of the crisis, the poll shows of an offsetting surge over most parts of the world.

A broader view of the poll shows this:

From Global Scan

Globescan.com writes, (bold highlights mine)

The results mean that a number of the world’s major emerging economies have now matched or overtaken the USA in their enthusiasm for the free market. The Chinese and Brazilians, 67 per cent of whom regard the free market system as the best on offer, are now more positive about capitalism than Americans, while enthusiasm in India now equals that in the USA, with 59 per cent rating the free market as the best system for the future.

Among the 20 countries polled in both 2009 and 2010, an average of 54 per cent today rate the free market economy as the best economic system, unchanged from 2009.

I am even more pleasantly surprised to see that the Philippines seems more “free market” oriented than some developed economies (e.g. Japan, Australia, France) or to some EM contemporaries (e.g. Indonesia).

Although operating from ground zero, I’d say that the free market sentiment may not be significantly accurate: many (even in the business community or in the elite academe or the media) don’t seem to understand or even resists the notion of free markets at all!

Some local 'free trade' experts see free markets more of a convenience or perhaps even a fad.

But there’s got to be some truth to this. that’s because probably the benefits of free trade (seen via globalization)—broader array of choices, cheaper and more affordable and quality and technologically enhanced products and services plus social mobility (tourism, migration) and more job or earning opportunities from external exposures (trade and remittances)—may have sublimely filtered to the sensibilities of the domestic populace.

Simply said, much of the world, including the Philippines, has been benefiting from increasing exposure to market economies and globalization.

And this has remarkably helped improved free market sentiments, mostly seen on the emerging markets which has been major beneficiaries of trade liberalization.

I am reminded of one of the champions of capitalism and free trade, the great Milton Friedman, in this historic interview about greed who said, (bold highlights mine)

Well first of all tell me, is there some society you know that doesn’t run on greed? You think Russia doesn’t run on greed? You think China doesn’t run on greed? What is greed? Of course none of us are greedy. It’s only the other fella that’s greedy. The world runs on individuals pursuing their separate interests. The greatest achievements of civilization have not come from government bureaus. Einstein didn’t construct his theory under order from a bureaucrat. Henry Ford didn’t revolutionize the automobile industry that way. In the only cases in which the masses have escaped from the kind of grinding poverty that you are talking about, the only cases in recorded history are where they have had capitalism and largely free trade. If you want to know where the masses are worst off, it’s exactly in the kind of societies that depart from that.

Socialized Healthcare: Intentions versus Reality

Socialized healthcare always seem as politically correct. That's because it is easy to sell compassion as a political theme. Gullible economically ignorant voters elect politicians who seem to connect with the needs of their constituents.

Unfortunately, free stuff in a world of scarcity is a fraud.

This from BBC, (bold highlights mine)

Surgeons say patients in some parts of England have spent months waiting in pain because of delayed operations or new restrictions on who qualifies for treatment.

In several areas routine surgery was put on hold for months, while in many others new thresholds for hip and knee replacements have been introduced.

The moves are part of the NHS drive to find £20bn efficiency savings by 2015.

The government said performance should be measured by outcomes not numbers.

Surgeons have described the delays faced by patients as "devastating and cruel". Peter Kay, the president of the British Orthopaedic Association (BOA), says they've become increasingly frustrated that hip and knee replacements are being targeted as a way of finding savings.

"We've started to get reports over the last nine months that access to these services are being restricted.

From Daily Mail, (hat tip: Dan Mitchell)

A former NHS director died after waiting for nine months for an operation - at her own hospital.

Margaret Hutchon, a former mayor, had been waiting since last June for a follow-up stomach operation at Broomfield Hospital in Chelmsford, Essex.

But her appointments to go under the knife were cancelled four times and she barely regained consciousness after finally having surgery.

Her devastated husband, Jim, is now demanding answers from Mid Essex Hospital Services NHS Trust - the organisation where his wife had served as a non-executive member of the board of directors.

Healthcare consumes scarce resources. The problem is, who determines the resources to be used: us (via the marketplace) or bureaucrats (rationed based on political guidelines or connections).

For the latter, apparently good intentions end up with bad outcomes.

Ron Paul’s Ten Principles of a Free Society

Here is US Congressman Ron Paul’s 10 Principles of a Free Society (from Lew Rockwell.com; bold emphasis mine)

This is the Appendix to Ron Paul's new book, Liberty Defined.

1. Rights belong to individuals, not groups; they derive from our nature and can neither be granted nor taken away by government.
2. All peaceful, voluntary economic and social associations are permitted; consent is the basis of the social and economic order.
3. Justly acquired property is privately owned by individuals and voluntary groups, and this ownership cannot be arbitrarily voided by governments.
4. Government may not redistribute private wealth or grant special privileges to any individual or group.
5. Individuals are responsible for their own actions; government cannot and should not protect us from ourselves.
6. Government may not claim the monopoly over a people's money and government's must never engaged in official counterfeiting, even in the name of macroeconomic stability.
7. Aggressive wars, even when called preventative, and even when they pertain only to trade relations, are forbidden.
8. Jury nullification, that is, the right of jurors to judge the law as well as the facts, is a right of the people and the courtroom norm.
9. All forms of involuntary servitude are prohibited, not only slavery but also conscription, forced association, and forced welfare distribution.
10. Government must obey the law that it expects other people to obey and thereby must never use force to mold behavior, manipulate social outcomes, manage the economy, or tell other countries how to behave.

Will Younger Political Leaders Translate to an Overhaul in the Welfare System of the West?

I came across this Economist chart which says that the age of western leaders appear to be getting younger.

The Economist writes,

THE developed world is getting older. But oddly enough, its leaders are getting younger. The chart shows the average age of the leaders of four Western countries (America, Britain, France and Germany) since 1950. In the 1950s, voters were happy to elect venerable leaders like Winston Churchill and Konrad Adenauer. The election of Jack Kennedy was the first sign that the cult of youth was flowering but then came the dominance of Ronald Reagan and Francois Mitterrand in the 1980s. Now the West’s leaders, including 40-somethings Barack Obama (just) and David Cameron, have never been younger. If the trend continues, the leaders will end up younger than the average citizen.

It dawned upon me that if the age trend of western leaders is indeed getting younger while their welfare programs (like in the US) has been benefiting seniors almost disproportionately, could these young leaders spearhead a radical change in the current welfare system?

For example in the US, a writer proposed that the future holds not for “class” warfare but for an “intergenerational” warfare—where the young will be pitted against the old.

Bruce Krastings at Businessinsider writes, (bold highlights mine)

As if on cue, the Congressional Budget Office has thrown out some numbers to fire up this emotive issue. The CBO report confirmed (to me) that age warfare is in our future.

CBO looked at all of the scenarios regarding Social Security. They ran a total of 500 simulations that reflect the different variables of the puzzle. The analysis assumed that there would be no changes in current law on SS. The objective of the exercise was to quantify the probabilities of which generation would most likely not get the benefits they were (A) paying for, (B) entitled to and (C) expecting.

The results of the CBO analysis is that there is societal/economic trouble in front of us on this issue. It should come as no surprise to readers that if you are young, you have a problem. The CBO report defines which generation(s) will be hurt and by how much. I found their conclusions to be very troubling.

If you were born in the 1940’s the probability that you will receive 100% of your scheduled benefits is nearly 100%. The people in this age group will die before SS is forced to make cuts in scheduled benefits.

If you were born in the Sixties things still do not look so bad. Depending on how long you will live the odds (76+%) are pretty good that you will get all of your scheduled benefits. However, if you were born in the Eighties you have a problem. The numbers fall off a cliff if you are between 30 and 40 years old today. In only 13% of the possible scenarios you will get what you are currently expecting from SS. If you were born after 1990 you simply have no statistical chance of getting what you are paying for. The full CBO report can be found here. This (hard to read) chart is from that report.

Could it be that the proverbial shot across the bow to reform the unsustainable welfare system has already been fired with the recent proposal of Congressman Paul Ryan?

Read Paul Ryan’s proposed Path to Prosperity here

As a caveat, I know the young Mr. Obama represents the other side of political fence which favors the continuation of the unsustainable system. But the point is, what cannot be sustained cannot last. And no amount of political prestidigitation will work for long because the laws of economics will make sure it doesn't.

And perhaps in the realization that this system can only mean imminent destabilization, thus young leaders might have the mettle to undertake drastic measures to reform the system.

Bottom line: The proverbial “kick the can down the road” for the West’s welfare system has perhaps has reached its near limits. And it might be possible that the trend of younger political leaders might just presage the required change to an unsustainable system.

Energy Information Administration: Shale Gas Is A Global Phenomenon!

When people talk about Peak oil or peak anything, they only look at current prices and the available quantity of declared reserves, which they see as fixed and which they equate with neo-Malthusian insights of shortages.

They do this without comprehending the economic value of resources and without understanding the concept of human action—or that people don’t just standstill in the face problems, we react by working to resolve such unease via the price mechanism.

People, via the markets, respond to prices. This means when scarcities are projected via price signals, the market resorts to either conservation (rationing) or substitution.

This brings us to the announcement by the US EIA that shale gas production is a global phenomenon, with US having been the pioneer in its development.

The EIA writes, (bold highlights mine)

The use of horizontal drilling in conjunction with hydraulic fracturing has greatly expanded the ability of producers to profitably produce natural gas from low permeability geologic formations, particularly shale formations. Application of fracturing techniques to stimulate oil and gas production began to grow rapidly in the 1950s, although experimentation dates back to the 19th century...

The development of shale gas plays has become a “game changer” for the U.S. natural gas market. The proliferation of activity into new shale plays has increased shale gas production in the United States from 0.39 trillion cubic feet in 2000 to 4.87 trillion cubic feet in 2010, or 23 percent of U.S. dry gas production. Shale gas reserves have increased to about 60.6 trillion cubic feet by year-end 2009, when they comprised about 21 percent of overall U.S. natural gas reserves, now at the highest level since 1971

Shale gas production from the US has been exploding. (From the EIA) This accelerated progress has been buttressed by (free market induced) technological enhancements.

Shale reserves have likewise been expanding along with production. This proves the case of the growing economic value of Shale gas.

Shale Gas reveals of the substitution process in action.

Now for the global perspective, more from the EIA.... (bold highlights mine)

It appears evident from the significant investments in preliminary leasing activity in many parts of the world that there is significant international potential for shale gas that could play an increasingly important role in global natural gas markets... In total, the report assessed 48 shale gas basins in 32 countries, containing almost 70 shale gas formations...

The estimates of technically recoverable shale gas resources for the 32 countries outside of the United States represents a moderately conservative ‘risked’ resource for the basins reviewed. These estimates are uncertain given the relatively sparse data that currently exist and the approach the consultant has employed would likely result in a higher estimate once better information is available.

What does all this tell us?

The energy market is working quite well, despite numerous interventions applied by governments.

The diffusion of technological advancements combined with the attendant economies of scale enhances the commercial viability of these projects, which if the EIA is correct, would mean more nations utilizing their natural shale gas resources. This also means reserves will grow as usage grows, enabled by technology.

In short, shale gas is gradually being recognized as an economically valuable energy resource.

Shale gas is probably one of the possible candidates to compete, replace, if not compliment fossil fuel as a major energy source.

Only the markets will say.

Oh, I almost forgot: Please remember changes happen at the margins.

US Homeownership Program Had Been Meant To Promote Financialization

Cato’s Mark Calabria says that mortgage subsidies in the US has not materially improved homeownership but has instead promoted a culture of debt.

Mr. Calabria writes, (bold highlights mine)

One of the rationales commonly given for massively subsidizing our mortgage market is that without such homeownership would be out of reach for many households. Such a rationale implies that more debt should be associated with more homeownership. (Let's set aside the obvious, how are you actually an owner without any equity?)...

By 1960, the homeownership rate was already over 60%, yet debt-to-value was less than 30%, half of the current value. Even in 1990, when homeownership reached over 64%, debt-to-value was still under 40%. From 1990 until today, the percentage of mortgage debt to value increased by over 50%, all to gain a 2 percentage point increase in homeownership. So it seems the story of the last 20 years has been a massive increase in home debt with very little increase in actual homeownership rates. The converse should also hold: reducing homeowner leverage should have little, if any, impact on homeownership rates.

Increasing debt hasn’t substantially lifted homeownership. This represents a failure of the program.

I have been saying that intentions and actions are two different things. People may say one thing, but do another. Since politicians and bureaucrats are people too, they are likely to fall into the same intent-action disparity trap.

Importantly, many people, especially those in the political arena, rake in the dough out of deliberately fudging the relationship of intent and action. They say one thing which would sounds politically correct, but applies actions that covertly benefit another party using the former as a cover.

I’d say that homeownership has merely been a strawman meant to boost another sector’s profits.

The sector I am referring to is the US financial sector which has benefited greatly from government sponsored homeownership programs. Some calls this the financialization or financial capitalism.

According to Wikipedia.org, (bold highlights mine)

Financialization is a term that describes an economic system or process that attempts to reduce all value that is exchanged (whether tangible, intangible, future or present promises, etc.) either into a financial instrument or a derivative of a financial instrument. The original intent of financialization is to be able to reduce any work-product or service to an exchangeable financial instrument, like currency, and thus make it easier for people to trade these financial instruments.

Workers, through a financial instrument such as a mortgage, could trade their promise of future work/wages for a home. Financialization of risk-sharing makes all insurance possible, the financialization of the U.S. Government's promises (bonds) makes all deficit spending possible. Financialization also makes economic rents possible.

The GDP share of the US Financial Industry has been exploding. Recently even after the crisis, profits from the financial industry now accounts for ONE third of all operating profits.

Notes the Wall Street Journal Blog, (bold highlights mine)

During the darkest days of the financial crisis, when Lehman Brothers and Washington Mutual went belly up and the U.S. government had to bail out other institutions, the finance sector reported an annualized loss of $65.2 billion in the fourth quarter of 2008. It was the only quarterly loss recorded in the government data.

Since then, the sector has come roaring back. The GDP report shows finance profits jumped to $426.5 billion. While profits haven’t returned to their high levels of 2006, the gain in finance profits last quarter more than offset a drop in profits posted by nonfinancial domestic industries.

After rising like the Phoenix, the financial industry now accounts for about 30% of all operating profits. That’s an amazing share given that the sector accounts for less than 10% of the value added in the economy.

Wall Street and banking critics have pointed out the finance industry enjoys government supports not given to other companies. That includes the low cost of funds from the Federal Reserve. As a result, critics say, the U.S. economy is overly skewed toward finance.

From Yardeni.com

In my view, homeownership is a (political) means aimed at promoting an end (crony capitalism of the financial industry)

US Federal Reserve Lent To (or Bailed Out?) Libya’s Qaddafi in 2009

Part of the US Federal Reserve’s post Lehman market stabilizing scheme included loans to Libya’s state owned bank, the Bloomberg reports, (bold emphasis mine)

Arab Banking Corp., the lender part- owned by the Central Bank of Libya, used a New York branch to get 73 loans from the U.S. Federal Reserve in the 18 months after Lehman Brothers Holdings Inc. collapsed.

The bank, then 29 percent-owned by the Libyan state, had aggregate borrowings in that period of $35 billion -- while the largest single loan amount outstanding was $1.2 billion in July 2009, according to Fed data released yesterday. In October 2008, when lending to financial institutions by the central bank’s so- called discount window peaked at $111 billion, Arab Banking took repeated loans totaling more than $2 billion.

Fed officials say all the discount window loans made during the worst financial crisis since the 1930s have been repaid with interest.

The U.S. government has frozen assets linked to the regime of Libyan ruler Muammar Qaddafi and engaged in air strikes against his military forces, which are battling a rebel uprising in the North African country. Arab Banking got an exemption that allows the firm to continue operating while barring it from engaging in any transactions with the Libyan government, according to the U.S. Treasury Department.

Some comments:

This represents as the continued the love-hate relationship between the US and Libya’s Qaddafi

The Federal Reserve has been bailing out the world, which included despots, and not just US banks.

No wonder the US Federal Reserve has been getting brickbats not only from Americans but also from some other authorities elsewhere in the world.