The Remarkable Phisix-ASEAN Resiliency Amidst the Global Financial Storm

“Keynesians tend to assume that government spending has a big positive effect on economic growth. Others disagree. But if the impact of increasing government spending is large, then the impact of removing it is also. So policy makers better be sure that the boom is around the corner. And all these are just short-run considerations. Here's the real dirty secret of Keynesian policies: They are sure to have a negative effect in the fullness of time.” Kevin Hassett

So how has the global markets affected ASEAN benchmarks and Philippine Phisix during last week’s furor?

ASEAN’s Gradual Discounting of Global Equity Market Meltdown

Except for Monday and Tuesday, where the bears launched a ‘blitzkrieg’ that has resulted to two day cumulative loss of 6.3%, broken down to 2.3% and 4% respectively, the diminishing marginal (time) value of information has stunningly prompted for an exceptional performance by the Phisix and the ASEAN region.

Astonishingly, the Phisix has managed to shrug off or IGNORE the 6% loss by the US last Thursday and went on to even close marginally higher[1]!

The recovery during the last three sessions of the week accrued to a net loss of 2.61% by the Phisix, still significant but the figures hardly reveal everything.

The actions of the Phisix basically have been identical with most of our neighbors.

Except for Indonesia (JCI) which saw a measly .79% decline for the week and while the Phisix (-2.61%) and the Thailand’s SET (-2.86%) fell by more than the US, the latter two still posted positive returns on a year to date basis, respectively 2.87% and 2.84%. Only Malaysia which fell by 2.67% over the week, has been down by 2.3% on a year to date.

Yet there are some noteworthy developments here and in the region:

1. Again Indonesia, Thailand, and the Philippines remain on the positive territory, despite the global meltdown. Only Malaysia among the ASEAN tag team has been on the negative.

2. Regional volatility appears to be decreasing even as global markets continue to roil.

If such trend should persist then convergence in the performance of ASEAN bourses could deepen or could reflect on higher correlations of emerging Asian equities.

The statistical correlations may seem ambiguous, but from the above charts courtesy of the ADB[2] we can see how least correlated we are with US equities in relative terms.

Among ASEAN bourses only Malaysia has had above half a percent of correlations (left window). Indonesia (.38) has the least correlation followed tightly by the Thailand (.39) and the Philippines (.4).

So well into 2011 the correlations have tightened among ASEAN bourses which have also been reflected on the right window (emerging Asia-emerging Asia correlations, green line). Whereas correlations of emerging Asia with the US has clearly departed or has significantly diminished, where previous correlations .62 in 2009 has recently been only .46.

The implication is that global or US investors who seek to diversify away from high correlations performance with US assets may likely consider Emerging Asia or the ASEAN region as an alternative.

This is why the recent US downgrade is unlikely a net negative for Phisix or the ASEAN region as global diversification play could be a looming reality.

And this could also be why regional policymakers appear to be “bracing” for a possible onslaught of foreign capital flows[3].

3. Domestic participants appear to be learning how to discount events abroad.

In the Phisix, the seeming resiliency from the recent global market rout has primarily been an affair dominated by domestic participants.

Net daily Foreign trade (averaged on a weekly basis) exhibits net outflows last week (left window). Nonetheless, total outflows have yet to reach the May levels, in spite of this week’s dramatic volatility. This has likewise been reflected on the Philippine Peso which was nudged lower (.14%) to close at 42.64 to a US dollar this week.

The share of foreign investors to total trade has spectacularly declined as domestic investors has taken over or dominated (right window) trading activities. Local investors accounted for about 65% of this week’s trade.

I think the current trend of local bullishness can be buttressed by recent empirical evidence. Philippine bank lending in June has reportedly been strongly expanding[4]. Although official statistics say that most of the loan growth has been directed to ‘production activities’ led by power (62.3%) and financial intermediation (31.9%), I would surmise that many of these loans may have been redirected to the Phisix.

The Bangladesh stock market crash should be a noteworthy example to keep in mind where were substantial amount of bank loans had been rechanneled to the stock market. And when the government imposed tightening measures (both monetary and administrative), the Dhaka Stock Index collapsed[5]by about 40% in January of this year. Since, the Dhaka has hardly made a significant headway in recovering.

Nevertheless the Philippines maintains the steepest yield curve in Asia, which should even boost the appetite of banks to lend. This should serve as an impetus for the boom phase of the domestic business cycle which the Phisix seems to be part of the transition.

Importantly, policy rates remain very accommodative with only two marginal increases in the BSP’s policy rates as of June 2011. Meanwhile Indonesia’s rates are at record low (no wonder the outperformance).

Phisix and Market Internal Divergence

3. Market internals despite this week’s drastic swings has not been entirely negative.

Daily traded issues averaged on a weekly basis (left window) seem to validate the remarkable actions by local investors as this sentiment indicator continues to climb.

The advance decline spread computed on a weekly basis reveals of the same developments; lopsided lead by declining issues during the early selloff has partly been offset by the asymmetric difference by the advancing issues during days where the Phisix rebounded.

Proof of this week’s astounding resilience is that the early devastation from global market carnage hasn’t reached the intensity of the 1^st quarter storm marked by the Arab Spring-Japan triple whammy calamity selloffs.

In essence, the losses of the Phisix may have overestimated the actual actions in the general market or the Philippine Stock Exchange.

Said differently, the Phisix reflected on foreign outflows (selling of Phisix heavyweights) in contrast to the general market which manifested a much buoyant of local investors, an apparent divergence!

I argued of a potential ASEAN Alpha play at the end of July[6], here is what I wrote,

So it is unclear whether ASEAN and the Phisix would function as an alternative haven, which if such trend continues or deepens, could lead to a ‘decoupling’ dynamic, or will eventually converge with the rest. The latter means that either global equity markets could recover soon—from the aftermath of the Greece (or PIIGS) bailout and the imminent ratification of the raising the US debt ceiling—or that if the declines become sustained or magnified, the ASEAN region eventually tumbles along with them. My bet is on the former.

Therefore, I would caution any interpretation of the current skewness of global equity market actions to imply ‘decoupling’. As I have been saying, the decoupling thesis can only be validated during a crisis.

In the meantime, we can read such divergent signals (between ASEAN and the World) as motions in response to diversified impact from geopolitical turbulence.

For this week, the function of the Phisix (or ASEAN) as alternative haven has been demonstrably true for the domestic participants but unsubstantiated by foreigners fund flows.

My divergence theory seems as gradually being validated by the marketplace!

Again let me remind you, that divergence only thrives in a global scenario that doesn’t signify a real crisis or a recession, most likely from a global liquidity drain. For if the imminence of an overseas recession should emerge, we have yet to see how the local and regional markets would react.

Remember this is no 2008! This time the activist approach by the conventional ‘modern’ central bankers has been paving way for different outcomes on different markets.

Gold as Refuge, Also Played Being Out via Domestic Mining Issues

4. As Gold, the Japanese yen, and the Swiss franc has functioned as the du jour flight to safety assets during the current market distress, we seem to be witnessing the same phenomenon taking hold even in the local equity markets where gold mining issues have taken the center stage!

Whether from year to date (below window) or from last week’s amplified volatility, the market psychology of domestic investors on mining issues have ostensibly turned from the fringe to the mainstream.

One would note that in the sectoral charts above, Tuesday’s carnage only dented the mining sector (violent) which again found footing or used this decline as leverage to recoil higher. All the rest of Phisix (green) sectors, namely bank (blue), Commercial Industrial (grey), Holding (red), Services (light green) and Property (black candle), went in the direction of the mining sector but has been hobbled by the steep losses.

All I can say is that since the Philippines have NO physical markets for gold in terms of spot or futures or even Exchange Traded Funds (ETF), mining issues could have likely served as a proxy or representative asset.

That’s why in the face of the current market inconstancy or turbulence, despite the hefty gains, I would recommend a partial shift of asset exposures to gold mines as hedge. This is not a momentum play but rather a possible flight to safety move as we seem to be seeing here and abroad.

Conclusion

Mimicking the US Federal Reserve, my closing will be a reprise of my statement from last week[7] but with some alterations, enclose by brackets [ ]

The Phisix and the ASEAN-4 bourses have not been unscathed by the brutal global equity market meltdown.

However, excluding Friday’s [Monday and Tuesday’s] emotionally charged fallout and despite the weak performances of developed economy bourses during the week, the Phisix and ASEAN bourses has managed to keep afloat and has even demonstrated significant signs of relative strength, signs that could attract more divergent market activities in a non recessionary setting.

As global policymakers continue to engage in a whack-a-mole approach to the acute problems facing the developed economies’ banking-welfare based government system, the path dependent solution, as demonstrated during this tumultuous week, has been the age old ways of printing money and selective price controls.

The same foreseeable actions can be expected over the coming days, more patchwork with unintended consequences overtime.

And the outcome to the marketplace should be variable as the current conditions reveal.

Lastly, downgrades for Asia and possibly for Europe which may have a short term effect on Asian assets should actually be a plus for the region over the long run. This is not only from the possible diversification move but also from real capital flows.

That is if we adapt relatively sounder money approach and embrace economic freedom.

However if we continue to act in concert with global policy trends then we could expect these downgrades to eventually export boom bust cycles anew to Asia.

---

[1] See Philippine Phisix: What An Incredible Turnaround! (Global Equity Markets Update), August 11, 2011

[2] Asian Development Bank Asia Capital Markets Monitor August 2011

[3] Bloomberg.com Asia braces for capital flows as currencies rise, gulfnews.com August 9, 2011

[4] BSP.gov.ph Bank Lending Continues to Accelerate in June, August 10, 2011

[5] See Bangladesh Stock Market Crash: Evidence of Inflation Driven Markets, January 11, 2011

[6] See The Phisix-ASEAN Alpha Play, July 31, 2011

[7] See Phisix-ASEAN Outperformance Despite Global Meltdown, August 7, 2011

Quote of the Day: Path Dependency

From Professor Arnold Kling,

…most respectable people think that Bernanke and Paulson and TARP and such SAVED THE WORLD, and so that is now the model going forward for handling any situation involving shaky large banks.

Information Age Investing: Entrenching Technology Sector Leadership

Bespoke Invest shows us some very important developments in the US stock markets during the recent sharp volatility: Technology Sector’s market leadership has been intensifying

Bespoke Invest writes

As shown, the Technology sector, which was already the largest sector in the index, has seen the biggest gain in weighting since the bull market peaked. On April 29th, Tech had a weighting of 18.07%. As of now, its weighting is 19.06%. The gain in Tech is even more impressive because the only other sectors that have seen increases in their weightings since the bull market peaked are non-cyclical in nature (Cons. Staples, Utilities, Health Care, Telecom).

Additionally, the technology sector has been outpacing the industrials.

Again from Bespoke Invest

While Industrials have been slumping, the Technology sector has been ramping. Although there have been numerous calls to avoid the sector during this downturn, Tech stocks have been handily outperforming the market. In fact, heading into today, Technology was the least oversold of the ten sectors.

My thoughts

Recent volatility has been proving to be more of a shakeout than a genuine inflection point.

The underlying change of market leadership or divergent actions in the sectoral performances, which reveals of an ongoing rotation towards the technology sector, shows that this has not been a debt deflation driven financial market sell down, as global central bankers have been applying aggressive activists measures.

The gap in the market cap weighting of the technology and other sector has been widening. In the Philippines, the Mining sector has been assuming this role.

As I have been saying, as the information age deepens, the pie of the technology sector relative to the economy will continue to expand.

Global production process will continue to lengthen or experience enhanced specialization as more technology products and services will be offered and provided to the marketplace. Competition led innovation will be the major driving force for this dynamic.

People hardly notice that the internet search industry is one big example of this ongoing dynamic.

The technology market leadership dynamic will continue to be reflected on prices of technology equities, which should be expected to have a greater share in the US equity market’s sectoral weightings as time goes by.

Essentially, a bet on the information age should translate to a bet on the technology sector.

But as caveat, since policies of central bankers have led to periodic bubble cycles, the capital intensive technology sector could be in a formative bubble cycle process. Although I guess this has yet to reach a maturity phase.

Of course, US treasuries are the ultimate bubble in the US, which I think is in a near maturity or blowoff phase. The global bond bubble applies to many developed economies based on the 20th century designed welfare system.

And so goes the US treasury securities and other bond bubbles (EU, Japan), so with the US dollar and the US dollar system.

I’d stick to precious metals and the technology sector.

More Endorsement for the Prudent Investor Newsletters

Businessmirror’s prolific financial columnist John Mangun tweets last August 10^th,

I hardly open my twitter, but had to discover this from another reader. Thus my late reaction.

Anyway, my profuse thanks, John.

Follow John Mangun's twitter address here

Information Age: The Blooming Internet Search Industry

In today’s rapidly evolving society, many people tend to overlook the contributions of the web in the economy.

McKinsey Quarterly in a new report outlines the fast expanding internet search industry. (bold emphasis mine)

A new McKinsey study, The impact of Internet technologies: Search, takes a more comprehensive view of this phenomenon and its rising value. We looked at five key developed and developing economies—Brazil, France, Germany, India, and the United States—indentifying nine activities that are primary sources of search value, as well as 11 private, public, and individual constituencies that reap the benefits.Among the key findings:

• Using country-level analysis as a base, we estimated that the total gross value of Internet search across the global economy was $780 billion in 2009, equivalent to the GDP of the Netherlands or Turkey. By this estimate, each search is worth about $0.50.
• Of that value, $540 billion—69 percent of the total and 25 times the annual value added (profits) of search companies—flowed directly to global GDP, chiefly in the form of e-commerce, advertising revenues, and higher corporate productivity. Search accounted for 1.2 percent of US and for 0.5 percent of India’s GDP.
• The remaining $240 billion (31 percent) does not show up in GDP statistics. It is captured by individuals rather than companies, in the form of consumer surplus, and arises from unmeasured benefits, such as lower prices, convenience, and the time saved by swift access to information. We estimate those benefits at $20 a month for consumers in France, Germany, and the United States and at $2 to $5 a month for their counterparts in Brazil and India.
• Among retailers, the value of search in 2009 equaled 2 percent of total annual revenues in developed nations and 1 percent in developing ones. That value stemmed directly from online shopping, as well as from online research that led to an in-store sale. US retailers saw as much as $67 billion in search-related revenues, Brazil’s retailers as much as $2.4 billion.
• In the five countries we studied, knowledge workers experienced search-related productivity gains of up to $117 billion, flowing from faster and more accurate access to information.
• Our research also identified emerging sources of search-related value. One is the rise of new niche (or “long tail”) retailing, as search techniques help consumers access ever-narrower product segments. Another is new business models, such as those keyed to the needs of consumers who search via mobile devices.

Read the rest here

As pointed out in the above, many of the web’s consumer surpluses are not being reflected on the GDP statistics, computations of which are based on the industrial age era.

In addition, as more and more people get wired, the complexion of our social activities will dramatically change. And this will be manifested on commerce and the economy. The above is just the start.

War against Short Selling: France, Spain, Italy, Belgium Ban Short Sales

Regulators/Policymakers maintain a delusion of control.

From Bloomberg, (bold highlights mine)

France, Spain, Italy and Belgium will impose bans on short-selling from today to stabilize markets after European banks including Societe Generale SA hit their lowest level since the credit crisis.

“While short-selling can be a valid trading strategy, when used in combination with spreading false market rumors this is clearly abusive,” the European Securities and Markets Authority, which coordinates the work of national regulators in the 27- nation European Union, said in a statement after talks ended late yesterday. National regulators will impose the bans “to restrict the benefits that can be achieved from spreading false rumors or to achieve a regulatory level playing field.”

The watchdogs are trying to stem a rout that sent European bank stocks to their lowest in almost 2 1/2 years and quell concern that European lenders may be struggling to fund themselves. Banks’ overnight borrowings from the European Central Bank jumped to the highest in three months yesterday, a sign some lenders may have need for emergency cash. Regulators imposed similar limits on short sales in September 2008 following the collapse of Lehman Brothers Holdings Inc.

Politicians and regulators want you believe that prices can be fixed by edict or fiat.

They make you believe that a worthless or junk piece of security should have value because they say so.

The countries planning to impose the ban on short sales have all seen their stock prices crashing.

Essentially France (CAC; orange), Spain (MADX; green), Italy (FTSEMB; light orange) and Belguim (BEL20; red) have been in bear market territories. The performance or % yield from the above chart is seen from the year-to-date perspective. This means that the above does not reflect on the peak-trough returns, which should amplify the degree of losses.

As I pointed out in the same recent case as Korea:

1. Bans hardly have been effective. Instead they are mostly symbolical as the “need to be seen as doing something”

2. Regulators react almost always too late in the game (which means that their markets may be at the process of nearly bottoming out.)

3. I would further add current policies have clearly or overtly been in support of the banking system and the stock market.

4. This only validates the theory that the policy direction of governments and global central bankers has primarily been anchored upon the Bernanke ‘crash course for central bankers’ doctrine of saving the stock market.

5. Importantly, applied policies have been meant to preserve the tripartite cartelized system of the welfare state, central banks and the crony banking system.

Despite Globalization, US Still a ‘Closed’ Economy

Some important figures from Cato’s Dan Ikenson

-Despite globalization, the U.S. economy “actually remains relatively closed.” (By “relatively closed,” the authors mean that imports are puny compared to the size of the economy—not that U.S. policies are relatively restrictive of imports.)

-The vast majority of goods and services purchased by U.S. consumers (88.5%) is produced in the United States

-When accounting for the value of foreign content in final U.S. production of goods and services, 86.1% of U.S. consumer purchases of goods and services is produced in the United States.

-Of the 11.5% of total U.S. consumer spending on imports, 64% accounts for the goods and services produced abroad and 36% accounts for transportation, wholesaling, retailing and other activities performed in the United States.

-Only 2.7% of U.S. consumer spending is devoted to goods labeled “Made in China.”

-Of the 2.7% of U.S. consumer spending on imports from China, only 45% is for the foreign-produced good and 55% goes to transportation, wholesaling, retailing, and other activities performed in the United States. In other words, $.55 of every dollar spent on imports from China directly supports economic activity in the United States.

This Cato paper gives broader perspective to the findings of the aforementioned studies.

Added thoughts:

US trade with the world has been less than 20% of the world’s GDP. Given the heft of the US economy, this low % has brought down the average % of world trade. In other words, many nations have merchandise exports at vastly over 50% of their respective GDPs.

Chart from Google Public Data

The popular anti-trade mercantilist rhetoric about China’s significance (or usurping jobs and trade) has been vastly exaggerated. This only exposes politicians, who advocate protectionism, are engaged in the power of suggestion to dupe gullible masses.

Another way to look at this is that for the US economy to have a stronger recovery, she has to open her trading doors wider to the world, instead of using the printing press which only diverts resources to politicians and their allies and cronies.

In short, there is immensely more room for genuine and sound economic growth via free trade.

Global Equity Markets Meltdown: Global Central Banks Gropes For A Fix

Central bankers are racing to shield their economies from fiscal tightening and lopsided currency swings that threaten a new global recession.

In the 72 hours after a Group of Seven conference call on Aug. 7, the Federal Reserve pledged to keep interest rates near zero through at least mid-2013, the European Central Bank intervened in bond markets and the Bank of England indicated it’s ready to add more stimulus if needed. Japan signaled renewed concern about the yen and Switzerland yesterday stepped up its fight to curb an “overvalued” franc…

Today, the Bank of Korea kept interest rates unchanged for a second month and government officials planned a 2 p.m. local time media briefing in Seoul on the stock market rout. The MSCI Asia Pacific Index sank 1.1 percent as of 9:42 a.m. in Tokyo.

Finance ministers and central bankers from the G-7 nations, which include the U.S., U.K. and Germany, said in a statement Aug. 7 that they will “take all necessary measures to support financial stability and growth in a spirit of close cooperation and confidence.”

That’s from Bloomberg.

The insufficiency of current measures applied by central banks is likely to be the main source of the market’s recent violent reaction, as I recently said.

Remember, the global financial markets has been propped up and has been habituated to inflationism. Today they crave for more.

A comment from Wall Street celebrity echoes this sentiment. From the same Bloomberg article

“Central banks are trying to get their act together,” said Mohamed El-Erian, chief executive officer at Pacific Investment Management Co., the world’s largest manager of bond funds.

“But we have to recognize that what they do is necessary but not sufficient,” El-Erian said yesterday on Bloomberg Television’s “In the Loop” with Betty Liu. “We need other agencies, whether in the U.S. or in Europe, to get their act together.”

The same set of remedy has been applied to the same set of problems, which appear to be worsening.

Problems of which essentially signifies as unintended consequences to prior central bank actions.

From the same article,

In the U.S., Fed Chairman Ben S. Bernanke signaled that the central bank may consider a third round of large-scale asset purchases, even after the first two rounds totaling $2.3 trillion failed to secure sufficient job growth and sustain the two-year-old recovery. This week’s decision to leave its benchmark interest rate near zero through at least mid-2013 provoked three dissents from policy makers, the most opposition since Bernanke took office in 2006.

At the end of the day, central banks don’t know how and what to do to solve these problem, except to apply age old solution of inflationism.

From the same article,

Even as they take action, central bankers “don’t know the panacea” and have disagreement within their ranks, Deutsche Bank’s Schneider said. “It’s increasingly unclear who can stop this spiral.”

Well if the ECB and the FED’s latest move hasn’t been enough, then we should expect more of the same therapy to be applied, but at a vastly larger scale. The result will be the same--speculative excess, moral hazard, malinvestments, crony capitalism, corruption, capital consumption and boom bust cycles.

War on Gold: CME Raises Credit Margins on Gold Futures

This time the interventionist war is being directed on the gold futures markets

From Bloomberg,

Gold declined from its record above $1,800 an ounce after CME Group Inc. (CME) boosted margins on futures contracts, prompting some investors to sell the metal after a four-day rally.

Bullion for immediate delivery dropped as much as 0.8 percent to $1,779.20 and traded at $1,788.25 at 12:58 p.m. in Singapore. Earlier, the metal rallied as much as 1.2 percent to $1,814.95 on concern that global economic growth is stalling as governments in the U.S. and Europe remain constrained by debt.

CME, the world’s largest futures market, raised margins on gold contracts by 22 percent with effect from the close of business today, according to a statement on its website. The initial-margin requirement, or the minimum amount of cash that speculators must keep on deposit, will rise to $7,425 per contract from $6,075, CME said. The margin for hedging will also increase 22 percent, rising to $5,500 from $4,500, it said.

For governments and their allies, desperate times calls for desperate measures.

Philippine Phisix: What An Incredible Turnaround! (Global Equity Markets Update)

Amazing, the Philippine Phisix simply shrugged off the US-European market rout yesterday.

Chart from technistock.net

The actions of the market can’t be argued as having been boosted from US Federal Reserve assurances as alleged by some, for the following reasons:

One, the Phisix opened down only less than 2% (81.47 points). This represents evidence that even with heightened uncertainty overseas, investors put an immediate floor on the Phisix from the opening bell.

Two, Japan’s Nikkei is still down more than 1% as of this writing. This hardly means Fed assurance factor.

Three, except for Indonesia which is down about 1%, Malaysia and Thailand are slightly lower. In other words, today's action is another validation of the ASEAN divergence process at work.

Fourth, the mining issues spearheaded this magnificent intraday recovery.

The mining index surged by 4.2% and carried the weight of the Phisix rebound!

Nevertheless, the big picture tells us that the Fed’s (stealth QE) and the ECB’s QE may have been interpreted by the world markets as an antidote with insufficient potency to overwhelm the prevailing negative factors

Second, the Eurozone’s crisis continues to affect global markets

And that’s why Ben Bernanke came out last night swinging at the notion that dissensions from within the ranks of the US Federal Reserve board of governors would stop him from declaring another round of overt Quantitative Easing.

We will see.

In my view, I believe that despite today's superb performance by the Phisix, caution is highly warranted until we see:

-concrete or definitive actions by the US Federal Reserve. Again, stealth QE by the Fed and the ECB’s overt QE has been essentially eclipsed or overpowered by the banking-PIIGS meltdown in Eurozone.

-signs of stability in global equity markets (where large swings or gyration dissipates), even if most of the world markets continue to decline.

Though yes, $1,800 gold appears to be lending support to the Phisix as I have been arguing here.

Just to show how the Phisix-ASEAN seems to metaphorically defy gravity, this great year to date chart is from the Bespoke Invest is telling.

As of yesterday, of 78 nations monitored by Bespoke Invest, there are only 10 gainers so far.

Two of them hails from ASEAN, particularly Thailand and Indonesia. The Philippines (12^th) and Malaysia (14^th) are still ranked in the top 20 of the world's best performers despite marginal losses.

The US is ranked 19^th in spite of the series of recent blood bath.

If you look at the overall performance, one would note that global equities have mostly been in the sea of red, with more countries joining the ranks of bear market losses (20% or more) rather than of the gainers’ column.

Such broadening losses should be seen as a source of caution, nevertheless, cautious optimism.

Britain’s Riots: Symptoms of the Disease called Welfare State

The psychology of entitlement or dependency derived from the welfare state brings with it the propensity for violence once this privilege is seen as being taken away. The political beneficiaries think that there is an inexhaustible Santa Claus fund always there to serve them.

Add to the baneful effect of this dependency psychology is the lack of respect for the sanctity of private property rights.

And Britain’s riots appear to have been manifesting these symptoms.

Writes Allister Heath cityam.com (hat tip Dan Mitchell)

The cause of the riots is the looters; opportunistic, greedy, arrogant and amoral young criminals who believe that they have the right to steal, burn and destroy other people’s property. There were no extenuating circumstances, no excuses. The context was two-fold: first, decades of failed social, educational, family and microeconomic policies, which means that a large chunk of the UK has become alienated from mainstream society, culturally impoverished, bereft of role models, permanently workless and trapped and dependent on welfare or the shadow economy. For this the establishment and the dominant politically correct ideology are to blame: they deemed it acceptable to permanently chuck welfare money at sink estates, claiming victory over material poverty, regardless of the wider consequences, in return for acquiring a clean conscience. The second was a failure of policing and criminal justice, exacerbated by an ultra-soft reaction to riots over the past year involving attacks on banks, shops, the Tory party HQ and so on, as well as an official policy to shut prisons and reduce sentences. Criminals need to fear the possibility and consequence of arrest; if they do not, they suddenly realise that the emperor has no clothes. At some point, something was bound to happen to trigger both these forces and for consumerist thugs to let themselves loose on innocent bystanders.

But while all three main parties are responsible for flawed policies that have fuelled this growing underclass at a time of national prosperity – 5.5m-6m adults now on out of work benefits, a number that has been roughly constant for over two decades – the argument made by some that the riots were “caused” or “provoked” by cuts, university fees or unemployment is wrong-headed. Just because someone is in personal trouble doesn’t give them the right to rob, attacks or riot.

In any case, the state will spend 50.1 per cent of GDP this year; state spending has still been rising by 2 per cent year on year in cash terms. It has never been as high as it is today – in fact, it is squeezing out private sector growth and hence reducing opportunities and jobs. Many of the vandals were school children not yet in the labour market; unemployment is a tragedy that must be fought but 9, 10 or 14 year olds can’t be pillaging because of it. Equally tragically, most of the older rioters would never have any hope of going to university, regardless of cost, such is their educational poverty.

What they wanted is free money and free goods and so they helped themselves. They were driven by greed, a culture of entitlement, of rights without responsibility, combined with a complete detachment from traditional morality, generalised teenage anger and a sense that anything goes in the current climate. This wasn’t a political protest, it was thievery.

read the rest here

War Against Market Prices: South Korea Imposes Ban on Short Sales

Regulators generally have deep aversion for falling prices (deflation), or applied to financial markets, they fear bear markets.

So they apply all sorts of price control measures to prevent the required adjustment in prices that essentially reflects on the underlying fundamentals of the securities or markets.

Today, South Korea copycats Greece.

Here is Bloomberg, (emphasis mine)

South Korea banned equity short sales for three months while the two biggest state-run funds said they may boost investments as the government seeks to shore up a market that’s had its biggest six-day drop in three years.

The Financial Services Commission said it will ban short selling on all shares until Nov. 9 from today. The National Pension Service, the country’s biggest investor, said yesterday it plans to buy more stocks this month than it originally targeted. Korea Teachers Pension said it purchased about 70 billion won of stocks amid the sell-off and may buy more.

South Korea joins Greece this week in banning short selling after the Kospi Index (KOSPI) slumped 17 percent in six days. The gauge reached an intraday level yesterday that was 24 percent below its May 2 record close. Domestic institutions should play a bigger role to contain volatility that is often caused by sell- offs by overseas investors, the FSC’s Chairman Kim Seok Dong told lawmakers in parliament yesterday.

The current ban exhibits the same attempt made in September 2008.

From the same article,

South Korea imposed a ban in 2008 on short sales following similar actions taken by U.S. and U.K. regulators in the aftermath of Lehman Brothers Holdings Inc.’s collapse. Korea lifted the rule from June 2009, while keeping the ban for financial stocks. The nation already bans so-called naked short sales, where investors don’t need to borrow the shares.

How effective has the been the ban which South Korean authorities imposed in September 30^th of 2008?

Apparently a big failure as the Kospi index’s crash even accelerated when the ban was imposed (blue arrow).

Korea wasn’t alone, she was accompanied by Taiwan and Indonesia who also imposed short trading prohibitions.

And the results were identical.

Like South Korea, both Taiwan (TSEC black candle) and Indonesia (JKSE-blue candle) fell sharply during the final phase of the bear market of 2008, in spite of the short selling ban. In short, regulators failed to control their respective equity markets.

The good news is that actions of regulators are almost always mechanically reactive to unfolding events (present and past events). Usually the failed policies they implement occur during the culmination of major inflection points.

Another good example of this was UK’s Gordon Brown infamous “bottom” selling of the Bank of England’s gold reserves in 1999. BoE’s loss has been the market gains.

An important lesson is that actions of politicians may function as good or reliable contrarian indicator.

Applied to the short selling ban by South Korean authorities, if the past will rhyme, short-term market pressures may still proceed, but this may also signal the near conclusion of the current selling pressure (mid term) cycle.

US Federal Reserve Goes For Subtle QE

Excerpt from the FOMC Statement (bold emphasis mine)

To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings.

The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate. The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.

Read the entire statement here

So the Fed’s support comes in a cryptic template:

QE 2.5 (maintain reinvesting of principal payments) + ensured a prolonged low interest rate regime by identifying a specified period (at least through mid-2013) instead of “extended period” + proposed an open ended action on the Fed’s balance sheet.

All these translates to, as Bob Wenzel of Economic Policy Journal writes,

The Fed will print whatever quantity of money is necessary to prop up the Treasury market and stock market. The Fed is in full inflation mode.

With growing dissent from FOMC members, the Fed’s intervention appears to have transitioned to communication or language management but still headed for the same direction--monetary easing (inflationism).

D-Day for the US Federal Reserve’s QE 3.0

This is the day where the Fed will likely be announcing QE 3.0 or another asset purchasing program under a new format, template or name.

Wall Street has been bleeding profusely and the sentiment can be captured by this comment by Harvard’s Kenneth Rogoff

From Bloomberg,

Federal Reserve policy makers are likely to embark on a third round of large-scale asset purchases, moving “more decisively” to secure the U.S. recovery, said Harvard University economist Kenneth Rogoff.

“They certainly should do something right away,” said Rogoff, a former International Monetary Fund chief economist who attended graduate school with Fed Chairman Ben S. Bernanke. It’s “hard to know” if Bernanke would immediately be able to gain the support of Federal Open Market Committee members, Rogoff said in an interview today on Bloomberg Television.”

This validates what I earlier wrote

Besides, who would like to see a market crash with them on the helm, and not be seen as “doing something”? Today’s politics, embodied by the Emmanuel Rahm doctrine has mostly been about the need to be seen “doing something” even if such actions entail having adverse long term consequences. Actions by the ECB, SNB and BoJ have all revealed and exemplified such tendencies. Even the debt ceiling bill was forged from the need to do something to avert an Armageddon charade.

Danske Bank’s Research team also sees a FED QE today: (bold emphasis original)

Developments have moved significantly in the wrong direction for the US economy over the past months. We believe this will be enough for Fed to launch new stimulus measures at its meeting today. The main arguments are the following:

1. Growth will be significantly lower than Fed forecast in June.

2. Unemployment is very far from target and not coming down.

3. Fiscal tightening in coming years leaves Fed as the only entity to support growth

further and counter the significant drags on the US economy.

4. Action is needed to fight the current confidence crisis in the markets.

Of course, I see this as a setup meant to save the tripartite cartel of welfare state-central bank and banking system.

Now here is how I think the market’s possible reaction to a QE 3.0 (or its variety)

For the market to respond positively to the Fed’s QE 3.0, this will likely be another huge “shock and awe” delivery type. Otherwise, they may end up like the ECB’s sputtering Bazooka (perhaps they used the 2^nd world war type-L.O.L!) where the stock market fell hard despite actual bond purchases.

Today gold will most likely fall from its lofty record perch. Gold may fall because of profit taking from the "buy the rumor sell the news" dynamic, a smaller than expected QE delivery package or NO QE.

But the difference will be in the degree of decline. Profit taking off a significantly packaged QE will still be substantial perhaps back to the 1700 level, but this would come amidst a backdrop of sharply rebounding global equity markets. Some will misread this as eroding "fear premium". It isn't.

However a market perceived insufficient QE, or a “NO” QE would translate to bigger fall for gold prices along with another round of crashing equity markets.

As of this writing US futures are modestly up while Europe’s 3.5% decline has been reduced to less than 1%.

This is the day.

Here is a 1980s MTV 'This is the Day' from a band called The The.

The lyrics appear suited for the Wall Street cartel and the Bernanke Team,

THIS IS THE DAY -- Your life will surely change.
THIS IS THE DAY -- Your life will surely change.
You could've done anything -- if you'd wanted
And all your friends and family think that you're lucky.
But the side of you they'll never see
Is when you're left alone with the memories
That hold your life together like
Glue...

Again, it's time to profit from political folly.

Quote of the Day: Spending Utopia

From Thomas Sowell

Amid all the concerns about the skyrocketing government debt, a front-page headline in the Wall Street Journal said: "Families Slice Debt to Lowest In 6 Years." It is remarkable how differently people behave when they are spending their own money compared to the way politicians behave when spending the government's money.

I would add that it’s also remarkable how the consensus expect people who work for governments as morphing into supernatural entities by operating above and beyond economic laws.

When we apply utopianism to reality we either get lost, confused and frustrated or become mental slaves (zombies) to the fantasies of a transcendental state.

Global Debt Crisis: Rotation from Global Equities ($7.8 trillion losses) to Bonds ($132 billion gains)

The global debt crisis experienced another rotation: Global equity markets posted whopping losses estimated at $7.8 trillion as bonds gained $132 billion.

From Bloomberg, (bold emphasis mine)

The worldwide retreat from stocks and commodities following Standard & Poor’s unprecedented cut of the U.S. AAA credit rating has driven the value of the global bond market to a record high.

The market value of Bank of America Merrill Lynch’s Global Broad Market Index has increased $132.4 billion since the end of July to $42.1 trillion, the most in data going back to 1996. The index, containing more than 19,000 bonds sold by governments, banks and the world’s biggest companies, returned 1.09 percent this month as yesterday’s stock rout wiped out about $2.5 trillion in global equity values, extending total losses since July 26 to $7.8 trillion.

While S&P said the credit worthiness of the U.S. was diminished when it cut the rating to AA+ on Aug. 5, Treasuries have surged. The yield on the benchmark 10-year note dropped today to as low as 2.27 percent, the least since January 2009. Investors are seeking the safest assets amid growing concern that debt crises in the U.S. and Europe and a manufacturing growth slowdown in the world’s two biggest economies may cause the global recovery to falter.

Point is: there always will be a bullmarket somewhere. This functional rotation should also take into the context the actions of gold, the Japanese Yen and the Swiss franc whom have, like bonds, has served as ‘flight to safety’ assets.

Nevertheless, this puts into perspective the negative correlation of bonds and stocks.

Minyanville’s Howard Simons observed of this widening bond-equity correlation in June and wrote,

Interestingly enough a rolling three-month correlation of returns between the two indices shows we are at a level normally visited only during a bear market. As the bonds’ returns are rising and stocks’ have been falling, we must conclude the debt claim on corporate cash has become quite expensive while the equity claim has become cheaper. Who is the starry-eyed cheerleader now?

The present state of affairs can be restated as bond investors over-paying for the perception of safety and stock investors underpaying for a dollar of dividend income. Viewed on this basis, stock investors remain chastened while bond investors are eager participants in a bubble driven by excess financial liquidity.

I add my two cents

Asset correlations changes over time. Negative correlations between bond and equities become pronounced during sharply volatile markets (today-the equity markets).

I guess this correlation should apply with other assets such as gold too. This should give us windows to trade developing correlations or correlation trade.

Next, Mr. Simons’ observations resonates more today than in June where stocks have been heavily oversold while bonds have been sharply overbought.

Finally, if this has truly been about a debt crisis, then both bonds and equities should have been equally in a downturn. Bond vigilantes would have haunted debts of nations whose paying capability has been put to question.

Such dissonant actions tell me that financial markets are either confused (distorted by heavy interventions) or has not been telling us the entire story.

Cartoon of the Day: The Krugman Elixir

Hat tip: Mises Blog and sourced from mugnaini.tumblr.com