Global Financial Markets Party on the Palm of Central Bankers

It’s has been a “Risk On” frenzy out there. And I’m not just talking about Philippine financial or risk assets, I’m alluding to global financial markets.

From the global stock market perspective, the bulls clearly have been in charge.

The Global Asset Rotation

Most of this week’s modest gains virtually compounds on the advances of the last three weeks.

Among the majors, the US S&P 500 and the Japan’s Nikkei appeared to have assumed the leadership on a year-to-date return basis, which looks like a rotational process at work too.

Last year’s developed market leader, the German DAX which generated a 2012 return of about 29% has now underperformed relative to the US S&P 500 (11.52% in 2012) and the last minute or mid-December spike by the Nikkei (22.94% in 2012). The huge push on the Nikkei has been in response to the Bank of Japan’s (BoJ) increasingly aggressive stance to ease credit by expanding her balance sheet.

The BoJ is set to target 2% inflation and may follow the US Federal Reserve and the ECB’s unlimited option or commitment on the coming week[1]

For the ASEAN majors, the Philippine Phisix has taken the helm with a 5.62% return over the same period. The milestone or records highs have been reached following three successive weeks of phenomenal gains.

Yet ASEAN’s peripheral economies, Vietnam and Laos, have eclipsed the remarkable performance of the Phisix, with 9.77% and 15.91% in nominal currency returns covering the same period. Incidentally, the Laos Securities skyrocketed by 11.61% this week contributing to the gist of her 2013 returns.

It is important to point out that rotational process which is a manifestation of the inflationary boom has not just been a domestic episode but a global one too.

First, my prediction that the domestic mining sector will lord over the Phisix in 2013 appears to have been reinforced this week. The mining sector has stretched its lead away from the pack, up by 13.65% in three weeks.

Last year’s other laggard, the service sector, also has taken the second spot.

So aside from some signs of rotation within the local stock market, there seems to be signs of an ongoing rotation dynamic operating among global equity markets.

This brings us to the next level

The rotational process across asset markets: Specifically, there has been a meaningful shift in money flows towards equities.

Since the start of 2013, during the second week of the year, money flows into global equities has reached historic highs[2] (left window).

The yield chasing dynamic has essentially reversed investor sentiment on the equity markets. Investors have mostly shunned the stock markets and have flocked into bonds. This has been particularly evident with the US stock markets[3] since 2007.

Nonetheless despite the still robust flows towards fixed income, initial manifestations of the so-called “great rotation” exhibited the outperformance of global equities relative to global bonds[4], two weeks into 2013 (right window).

Yet such phenomenon has not been a stranger to us. I predicted a potential rotation from the bond markets into the stock market in October of last year[5].

We can either expect a shift out of bonds and into the stock markets or that the bond markets could be the trigger to the coming crisis.

In my view, the former is likely to happen first perhaps before the latter. To also add that triggers to crisis could come from exogenous forces.

It is important to realize that financial markets are essentially intertwined. For instance, stock markets have been closely tied to bond markets since many companies have used the bond markets to finance stock buybacks[6], as well as, to finance the property sector which has prompted for today’s booming assets.

In other words, the RISK ON environment prompted by monetary policies have made the asset rotational process a global dynamic.

Rotation Pumped Up by Releveraging

We are seeing massive systemic “releveraging” which has been inciting a speculative mania that is being greased by a credit boom.

Proof?

In the US, Hedge funds have reportedly been upping the ante by the increasing use of leverage to increase stock market exposures. From Bloomberg[7] (chart from Zero Hedge[8] as of December 29^th) [bold mine]

Hedge funds are borrowing more to buy equities just as loans by New York Stock Exchange brokers reach the highest in four years, signs of increasing confidence after professional investors trailed the market since 2008.

Leverage among managers who speculate on rising and falling shares climbed to the highest level to start any year since at least 2004, according to data compiled by Morgan Stanley. Margin debt at NYSE firms rose in November to the most since February 2008, data from NYSE Euronext show.

Traditional instruments of leverage haven’t been enough. Wall Street has essentially resurrected financing via securitization or the innovative pooled debt instruments called Collateralized Debt Obligations or CDOs, which played a pivotal role in the provision of finance to the previous housing bubble which resulted to a crisis.

From Bloomberg article[9], [bold mine]

What’s old is new again on Wall Street as banks tap into soaring demand for commercial real estate debt by selling collateralized debt obligations, securities not seen since the last boom.

Sales of CDOs linked to everything from hotels to offices and shopping malls are poised to climb to as much as $10 billion this year, about 10 times the level of 2012, according to Royal Bank of Scotland Group Plc. (RBS) Lenders including Redwood Trust Inc. are offering the deals for the first time since transactions ground to a halt when skyrocketing residential loan defaults triggered a seizure across credit markets in 2008.

The rebirth of commercial property CDOs comes as investors wager on a real estate recovery and as the Federal Reserve pushes down borrowing costs, encouraging bond buyers to seek higher-yielding debt. The securities package loans such as those for buildings with high vacancy rates that are considered riskier than those found in traditional commercial-mortgage backed securities, where surging investor demand has driven spreads to the narrowest in more than five years.

The search for yield extrapolates to a search of alternative assets to speculate on. This is why investors have also been piling into state and municipal fixed income bonds. From Bloomberg[10]

Investors are pouring the most money since 2009 into U.S. municipal debt, putting the $3.7 trillion market on a pace for its longest rally versus Treasuries in three years.

Demand from individuals, who own about 70 percent of U.S. local debt, rose last week after Congress’s Jan. 1 deal to avert more than $600 billion in federal tax increases and spending cuts spared munis’ tax-exempt status. Investors added $1.6 billion to muni mutual funds in the week ended Jan. 9, the most since October 2009 and the first gain in four weeks, Lipper US Fund Flows data show.

Companies have once again commenced to tap unsecured short term fixed income security commercial markets usually meant to finance payroll and rent. 

From Bloomberg [11]

The market for corporate borrowing through commercial paper expanded for a 12th week as non- financial short-term IOUs rose to the highest level in four years.

The seasonally adjusted amount of U.S. commercial paper advanced $27.8 billion to $1.133 trillion outstanding in the week ended yesterday, the Federal Reserve said today on its website. That’s the longest stretch of increases since the period ended July 25, 2007, and the most since the market touched $1.147 trillion on Aug. 17, 2011.

This hasn’t just been a US dynamic, but a global one.

For instance, China has been exhibiting the same credit driven pathology too, as local governments go into a borrowing binge.

From the Wall Street Journal[12]

Bonds issued by local-government-controlled financing vehicles totaled 636.8 billion yuan ($102 billion) in 2012, surging 148% from 2011, the central bank-backed China Central Depository & Clearing Co. said in a report published earlier this month.

Moreover, lending from China’s non-banking institutions Trust companies, which is said to be the backbone of the ($2 trillion) Shadow Banking system—via loans to higher risks entities as property developers and local government investment vehicles—have likewise zoomed.

From Bloomberg[13],

A seven-fold jump in last month’s lending by China’s trust companies is setting off alarm bells for regulators to guard against the risk of default.

So-called trust loans rose 679 percent to 264 billion yuan ($42 billion) from a year earlier, central bank data showed on Jan. 15. That accounted for 16 percent of aggregate financing, which includes bond and stock sales. The amount of loans in China due to mature within 12 months doubled in four years to 24.8 trillion yuan, equivalent to more than half of gross domestic product in 2011, and the People’s Bank of China has set itself a new goal of limiting risks in the financial system.

Reports of the credit boom appears to have jolted China’s Shanghai index to soar by 3.3% this week. This brings China’s benchmark into the positive territory up 2.7% year-to-date. In 2012, the Chinese benchmark eked out only 3.17%, most of the recovery came from December which erased the yearlong losses.

In India, soaring loan growth by the banking system, (chart from tradingeconomics.com[14]) now at almost 80% of the economy, has prompted the IMF to raise the alarm flag citing risks of “a deterioration in bank assets and a lack of capital as the economy slowed”[15]. 

India’s major stock market index, the BSE 30, seems on the verge of a record breakout. Also, India purportedly has a property bubble[16].

The Brazilian government’s directives to improve on credit accessibility have likewise led to a surge in lending.

From Bloomberg/groupomachina.com[17]

President Dilma Rousseff's insistence that Banco do Brasil SA boost lending is helping the state-controlled bank almost double its bond underwriting, giving the government a record share of the market.

International debt sales managed by the bank surged to 10 percent of offerings last year from 5.6 percent in 2011, the biggest jump in the country. With Brazilian issuers leading emerging markets by selling a record $51.1 billion in bonds, Banco do Brasil advanced six positions to become the third- largest underwriter, overtaking Bank of America Corp., Banco Santander SA and Itau Unibanco Holding SA, data compiled by Bloomberg show.

Banco do Brasil, Latin America's largest bank by assets, is profiting from the government's push to expand credit as policy makers cut interest rates to revive an economy that had its slowest two-year stretch of growth in a decade. The bank's total lending, which includes loans, bonds on its books and other guarantees to companies, surged 21 percent in the year through Sept. 30 to 523 billion reais ($257 billion) as it piggybacked off existing relationships and bolstered a team of bankers dedicated to pitching borrowers on debt sales.

Following last year’s 7.4% gain, the Bovespa has been up by a modest 1.65%. Like almost everywhere, there have been concerns over the growing risk of a bubble bust[18] in Brazil.

The point is that all these synchronized and cumulative push to create “demand” via massive credit expansion has been driving leverage money into a speculative splurge that has elevated asset markets relatively via the rotational process.

Asset Bubbles and the Mania Phase

The impact of asset inflation has been different in terms of time and scale but nonetheless most assets generally rise overtime. Of course, such will need to be supported by greater inflationism which central banks have obliged.

Eventually all these will spillover to the real economy either via higher input prices or via higher consumer prices that will entail higher rates that may reverse current environment.

Even FED officials have raised concerns anew that “record-low interest rates are overheating markets for assets from farmland to junk bonds, which could heighten risks when they reverse their unprecedented bond purchases.”[19]

Of course, the problem is HOW to reverse without materially affecting prices of financial assets deeply DEPENDENT on the US Federal Reserves and or global central bank easing policies.

The likelihood is that each time market pressures or downside volatility resurfaces, policymakers will resort to even more easing. Threats to withdraw such policies have merely been symbolical.

And a further point is that while overextended runs usually tend to usher in a natural correction or profit taking phase, a blowoff phase may yield little correction. Instead, any transition to a manic phase of a bubble cycle will generally mean strong continuity of the upside.

We have seen this happen in 1993 when the Phisix posted an astounding 154% yearly return.

Moreover, the 1986-2003 era basically epitomized the full bubble cycle in motion as shown by the bubble cycle diagram (left) and the Phisix chart (right).

I am not saying that this manic phase is imminent, but rather a possibility considering the current behavior of global and the domestic financial markets.

And I would like to reiterate, I believe that the returns of the Phisix will depend on the expected direction of, and actual actions by policymakers on, interest rates.

If the current boom will not yet impel for a higher rates soon, then such inflationary boom may continue. The Phisix I believe will remains strong, at least until the first quarter of this year.

All these goes to show that financial markets essentially have been dancing on the palm of the central bankers.

---

[1] Reuters.com BOJ eyes open-ended asset buying, agrees new inflation goal January 18, 2013

[2] Business Insider The Most Amazing Thing About This Week's Historic Shift Into Equities January 11, 2013

[3] Mike Burnick When to Consider Going Against the Grain with Your Investments, money andmarkets.com January 17, 2013

[4] Business Insider CHART OF THE DAY: The Historic Surge Into Stock Mutual Funds That Has Everyone Talking About The 'Great Rotation' January 11, 2013

[5] see Will Frothy Bond Markets Drive the Phisix Higher? October 22, 2012

[6] see How US Federal Reserve Policies Linked the Bond Markets with Equity Markets December 13, 2012

[7] Bloomberg.com Hedge-Fund Leverage Rises to Most Since 2004 in New Year January 15, 2013

[8] Zero Hedge Margin Debt Soars To 2008 Levels As Everyone Is "All In", Levered, And Selling Vol, December 29, 2012

[9] Bloomberg.com Wall Street Returns to Property CDOS in Yield Hunt January 15, 2013

[10] Bloomberg.com Go-Go Market Beating U.S. Treasuries Most Since ’10: Muni Credit January 16, 2013

[11] Bloomberg.com Commercial Paper Market in U.S. Expands for 12th Week, Fed Says, January 18, 2013

[12] Wall Street Journal, China's Local Governments Boost Borrowing, January 14, 2012

[13] Bloomberg.com Default Alarm Rings as Trust Loans Jump Sevenfold: China Credit, January 17, 2013

[14] Tradingeconomics.com DOMESTIC CREDIT PROVIDED BY BANKING SECTOR (% OF GDP) IN INDIA

[15] Bloomberg.com India Banks System Face Worsening Asset Quality, IMF Says, January 16, 2013

[16] Wikipedia.org Indian property bubble

[17] Bloomberg.com Rousseff's Bond Business Booms After Lending Push: Brazil Credit, groupomachina.com January 16, 2013

[18] BrazilianBubble.com IPEA’s Economists: “Brazil’s property bubble will burst when interest rates rise” and “it’s all the government’s fault” September 18, 2012

[19] Bloomberg.com Fed Concerned About Overheated Markets Amid Record Bond Buys, January 18, 2013

Shopping Mall Bubble: Will Remittances, BPOs and the Informal Economy Save the Day?

Investing Against Popular Wisdom

In the world of investing, the wisdom of the crowds, especially during inflection periods, represents as a potential hazard to one’s portfolio. This is where the Wall Street axiom applies, “bulls make money, bears make money, but pigs get slaughtered”.

This happens for the simple reason that abdicating independent reasoning or analysis for groupthink increases the risks of overconfidence, which tends to influence people’s decision making by underestimating risks while simultaneously overestimating rewards.

Moreover, as I wrote on crowd thinking[1],

Groupthink fallacy is the surrender of one’s opinion for the collective. This accounts for as a loss of critical thinking and is reflective of emotional impulses in the decision making of the crowd. When groupthink becomes the dominant mindset of the crowd, an ensuing volatile episode can be expected to occur applied to both markets and politics (bubble implosion or political upheaval).

Veteran, battle hardened and successful investing gurus have all recommended to avoid populism. For them the herding effect signifies unsustainable crowded trades and or that the most profitable opportunities lie within themes that have hardly been seen by the crowds.

For instance, the billionaire George Soros via his reflexivity theory[2] wrote that we should be alert to the crucial psychological features of boom bust sequence; particularly

-The unrecognized trend,

-The beginning of the self-reinforcing process

-The successful test

-The growing conviction, resulting in the widening divergence between reality and expectations

-The flaw in perceptions

-The climax and

-The self-reinforcing process in the opposite direction

The point is that during the pinnacle or the troughs of booms and bubble bust episodes, people’s perception of reality become greatly distorted by biases.

One of the distinguished mutual fund investor John Neff similarly advised that[3]

It's not always easy to do what's not popular, but that's where you make your money.

Warren Buffett also said

Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well.

The bottom line is that when everyone thinks the same then no one is thinking. And when we do not think, we lose money.

The Myth of the Consumption Economy

When everyone thinks that today’s boom is sustainable, since the public has been made to believe that current market dynamics have been founded on sound social policies and genuine economic growth, then this for me represents Mr. Soros’ “the growing conviction, resulting in the widening divergence between reality and expectations and the flaw in perceptions” which eventually leads to the “climax”.

And part of today’s Philippine boom has been predicated on supposedly a ‘consumption economy’, where the popular narrative holds that consumption, which has been portrayed as an independent force from producers, drives the economic prosperity.

In reality, every producer is a consumer. The world is interconnected such that production and consumption represent as people’s activities for survival and for progress. But not every consumer is a producer. The government is an example.

As the great Austrian economist Professor Ludwig von Mises wrote[4],

Economics does not allow of any breaking up into special branches. It invariably deals with the interconnectedness of all the phenomena of action. The catallactic problems cannot become visible if one deals with each branch of production separately. It is impossible to study labor and wages without studying implicitly commodity prices, interest rates, profit and loss, money and credit, and all the other major problems. The real problems of the determination of wage rates cannot even be touched in a course on labor. There are no such things as "economics of labor" or "economics of agriculture." There is only one coherent body of economics.

The reason people work is to earn (or implied production) in order to consume. In today’s modern economy one’s earnings, as expressed by money, indirectly represents real savings from our production or services provided.

Yet simple logic holds that if everyone consumes and no one produces then there will be nothing to consume. Thus we can only consume what we produce. In short, real prosperity arises from the acquisition of real savings or capital accumulation from production.

As the great French economist Jean Baptiste Say wrote[5], (italics original)

That which is called productive capital, or, simply, capital, consists of all those values, or, if you will, all those advances employed reproductively, and replaced in proportion as they are destroyed.

It is easy to see that this term capital has no relation to the nature or form of the values of which capital is composed (their nature and form vary perpetually); but refers to the use, to the reproductive consumption of these values: thus a bushel of corn forms no part of my capital if I employ it to make cakes to treat my friends, but it does form part of my capital if I use it in maintaining workmen who are employed on the production of that which will repay me its value. In the same manner a sum of money is no longer a part of my capital if I exchange it for products which I consume: but it does form part of my capital if I exchange it for a value which is to remain and augment in my hands…

Capital is augmented by all that is withdrawn from unproductive consumption, and added to aconsumption which is reproductive.

Importantly consumption does not increase wealth, instead unproductive consumption destroys wealth

Again Jean Baptiste Say[6],

It must be remembered that to consume is not to destroy the matter of a product: we can no more destroy the matter than we can create it. To consume is to destroy its value by destroying its utility; by destroying the quality which had been given to it, of being useful to, or of satisfying the wants of man. Then the quality for which it had been demanded was destroyed. The demand having ceased, the value, which exists always in proportion to the demand, ceases also. The thing thus consumed, that is, whose value is destroyed, though the material is not, no longer forms any portion of wealth.

A product may be consumed rapidly, as food, or slowly, as a house; it may be consumed in part, as a coat, which, having been worn for some months, still retains a certain value. In whatever manner the consumption takes place, the effect is the same: it is a destruction of value; and as value makes riches, consumption is a destruction of wealth.

So to argue that consumption leads to wealth is like pulling a wool over one’s eyes.

But of course the principal reason behind the populist consumption economy narrative has been to justify myriad government interventions via ‘demand management’ measures applied against the supposed insufficient “aggregate demand” from so-called “market failures”.

Moreover, the consumption story aims to buttress mostly indiscriminate debt 

acquisition as a means of attaining statistical rather than real growth based on value creation.

Since politics is mainly short term oriented, thus populist short term policies via inflationism and via assorted interventions only distorts and obstructs the economy from its natural path. Instead, the typical ramification has been wealth consumption, part of it as consequence from boom bust cycles.

The implicit design behind the debt consumption policies has been to support the politically privileged banking system, whom provides financing to the redistributionist government through bond purchases, and the government and the political class, who not only profits from continued forcible extraction of resources from the private sector but likewise resort to debt generation to fund pet projects to ensure their hold on power.

Central banks, essentially, act as guarantor and as lender of last resort to both government and the banking system.

The same fiction of the consumption economy has been used to rationalize not only credit financed domestic property bubble[7] but also a shopping mall bubble. 

By the way property and shopping mall are of the same lineage.

Will Remittances Sustain the Consumption Story?

Last week in dealing with the shopping mall bubble I concentrated on the supply side of the industry[8].

For this week, my focus will be on the consumption side.

As previously explained, there are three ways to finance consumption, through productivity growth, through consuming of savings or through contracting of debt.

On the productivity side, one of the popular mainstream meme is that remittances from Overseas Foreign Worker (OFW) have been responsible for most of the economic growth expressed via the consumption economy.

For most news accounts, consumption has been strongly associated with remittances, or said differently, remittances drives Philippine consumption.

According to the BSP[9], remittances in November of 2012 grew by 7.6% over the same period, totalling $21.6 billion for 11 months or 6.1% from last year.

The Philippine economy according to World Bank Development indicator in 2011, as cited by the Wikipedia.org[10], was at nominal $224.8 billion, this effectively means remittances through November translates to about 10% of the economy.

Only in media do we see 10% as mathematically greater than 90%. Even if we assume that all money sent by overseas workers are spent on consumption and or partially on investments (sari sari stores and etc…), there is little to show that the supposed multiplier effect of remittances will lead to 50% of current consumption levels.

Yet of course, I would posit that some of the remittances could have partially been “saved” in the banking system and perhaps even through the non-bank system. This is what media and their experts consistently ignore.

While the BSP did not provide the average growth, Yahoo Singapore[11] quotes one of the Singaporean financial institution, the DBS Bank as estimating the monthly average growth based on October data, at 5.8%. 

Granting that media and their experts have been indeed correct in saying that remittances serves as the core force for consumption, then unfortunately 5.8% would hardly cover the gap with the supply side’s or shopping mall operator or developer’s baseline growth of 10%.

One may add that there hardly has been a nominal or real sustained 10% growth based on Peso or US dollars since 2009 based on World Bank’s chart[12].

And given that remittances is essentially latched to the productivity growth of the global economy, which means that wages of OFW workers and OFW deployment depends on the domestic economies the OFWs are employed at, the prospects of lower economic growth would hardly transform into magic for remittances.

Note that the global remittance growth trend[13] has essentially tracked the remittance growth trend of the Philippines and the World GDP’s past growth[14].

Even if we add up the estimated 30-40% of remittance channelled through the informal economy, which is according to the Asian Bankers Association[15], where the real remittance level balloons to $31 billion (to include both formal and informal avenues), this will account for only 14% of the GDP. Remember informal remittances have not been a onetime event but a longstanding factor.

And if the consensus is right that global economic growth will remain sluggish, then remittances will hardly fill the void unless the growth in the informal remittances will intensely surprise to the upside.

So even if there should be a change in preferences in consumption and savings patterns by OFWs to favor more remittances (or transfers), the consumption story funded by mainly remittances will remain inadequate.

How about BPOs?

Another less popular but more potent consumption story is the Business Process Outsourcing (BPO)

The BPO industry has reportedly generated foreign exchange revenues of about $11 billion in 2011[16] and the industry’s growth has been expected to earn more than double to $25 billion in 2016. This translates to a Compounded Annual Growth Rate (CAGR) of 17.85%. If true, then BPO will surpass remittances in no time. But I believe that such projections seem wildly optimistic.

The National Economic and Development Authority (NEDA) also estimates the industry’s growth at 15%[17] 

Depending on the analyst, estimates of growth for the BPO industry have had wide divergences. 

The Philippine BPO association along with the Philippine government says they expect a 15% compounded annual growth rate for the global BPO market[18] (right window). Whereas Slovakia’s Soften-Accenture quoting the estimates of technology research giant Gartner[19] says that BPO and IT CAGR to grow 6.3% and 5.9% respectively. Research firm AT Kearney seems to conform to the Gartner estimates[20].

I believe that the fundamental reason for such patent disparity is that the association of the local BPO industry along with the government simply reads past performance into the future.

Nevertheless, where I believe they gone astray is that they have ignored the S-Curve cycle of the technology industry

The S-Curve as defined by Wikipedia.org[21]

The s-curve maps growth of revenue or productivity against time. In the early stage of a particular innovation, growth is relatively slow as the new product establishes itself. At some point customers begin to demand and the product growth increases more rapidly. New incremental innovations or changes to the product allow growth to continue. Towards the end of its life cycle growth slows and may even begin to decline. In the later stages, no amount of new investment in that product will yield a normal rate of return

In short, unless there will be assimilation of more productivity through newer innovation, the industry’s growth diffusion levels, as it ages, is bound to slowdown. I have used this curve to rightly predict the slowdown in telecom penetration levels.

Further, the Philippine competitive advantage has not been etched on the stone. While Philippine adaptation of the American English language has represented as the main competitive edge for her to supplant India on BPOs as global leader[22], but not in the ITOs, labor costs could be a factor.

In addition, the outsourcing industry is highly competitive, highly sensitive to technological changes and is likewise anchored to global growth. So while we might see more businesses adapt to the digital environment, it isn’t clear that BPOs can deliver the consumption story to cover the deficiencies from the formal economy and from the remittances.

So while I am highly optimistic on the technology industry, I have great reservations on industry estimates, which I hope will prove me wrong.

Will the Informal Economy Surprise?

This leads me to the informal economy.

Informal economy, for me, covers all the sectors that elude the government, whether they are the small scale vendors, manufacturers, service industry or smugglers and also those in formal industries that resort to tax avoidances.

Money excluded from forced redistribution can mean savings, investment and or consumption.

So far the statistical measures of the informal economy has been through labor which accounts for about 50% of the Philippine work force.

Agriculture is said to constitute the largest informal sector estimated at 64% according to a study[23] by the National Statistical Coordination Board. While I believe that statistics have most likely downplayed the important role played by agriculture, I believe much of the consumption story may have been from this sector which has partly piggybacked on the global commodity bullmarket. I say partly, because the sector has been tightly regulated and this applies not only to the Philippines but abroad too[24]

And given that the different estimates of banking penetration level, nonetheless all of them reveals of the lack of access by the average Filipinos to financial institutions, I believe that government statistics may not have captured the off banking savings rate which may have contributed to the consumption story.

The US Agency for International Development[25] suggests that only 26.56 percent of Filipinos aged 15 years old and above have accounts with banks or financial entities whereas the McKinsey Quarterly[26] estimates that only 35% of Filipinos has bank accounts or accounts with a financial institution.

In other words while I believe that there has been more savings for the consumption story, I think that productivity growth even in the informal economy may not sustain the supply side growth of the shopping malls.

So unless the government will dramatically liberalize the agricultural sector given its tightly controlled conditions, there is unlikely the possibility for a fill in the gap role for the informal sector considering the steep projected growth in the shopping mall supply.

The other way is for the bulls to hope that all statistics are wrong.

Finally the Philippine productivity growth story over 4 decades has hardly shown the stuff required to support the consumption story. Growth of over 10% has been an outlier.

The good news is that the author of the study makes the case for the openness of the economy[27] as one of the pillars to improve on productivity, something which today’s government does not see as a priority.

I will end this rather lengthy report with an update[28] from the Bangko ng Pilipinas on domestic banking credit conditions, which again reported a strong credit growth in November (14%) but has been modestly down from October (15.8%) [bold mine]

Loans for production activities—which comprised more than four-fifths of banks’ aggregate loan portfolio—grew by 14.6 percent in November from 16.4 percent in the previous month. Similarly, the growth of consumer loans eased to 12.1 percent from 13.9 percent in October, reflecting the slowdown across all types of household loans.

The expansion in production loans was driven primarily by increased lending to the following sectors: real estate, renting, and business services (24.8 percent); wholesale and retail trade (by 26.9 percent); financial intermediation (37.3 percent); manufacturing (13.6 percent); transportation, storage, and communication (26.5 percent); and public administration and defense (48.9 percent). Meanwhile, declines were observed in lending to mining and quarrying (-39.5 percent) and agriculture, hunting, and forestry (-41.8 percent).

The growth rate reported by the BSP on the banking sector’s credit growth for real estate and retail trade seems consistent with the baseline of 10% supply side growth for the shopping malls. Shopping malls are essentially real estate business, while the retail segment are the lessees of the malls (aside from ex-mall outlets). So developers and retail operators continue to see double digit consumer growth for them to indulge in a massive buildup of debt.

Yet if the loans by the real estate and retail trade sectors grow by 20% per year as baseline, then their exposures with the banking sector effectively doubles in the fourth year. Of course this view excludes the past loans that have already been incurred.

The bottom line is that while there are many imponderables which this analysis may not secure, the seeming amplification of the asymmetric growth between demand and the supply malls may lead to serious economic imbalances which eventually will be reflected on the markets through a tumultuous backlash. Entrepreneurial errors, mostly fed by social (central banking) policies via distorted prices, and from popular but flawed theories, have only worsened the situation. The fingerprints of the (Austrian) business cycle seem everywhere.

As a final note, bubble cycles are market processes influenced by social policies and are shaped over time. The persistence of the trend will be conditional to the forces that have triggered them. If the current supply side trend persists without accompanying material real growth in productivity (i.e. not based on credit and from government expenditures) and if both sides will continue to accrue more debt in response to the present suppression of the interest rate environment, then the risks of a bubble bust will loom larger as time goes by. The other factor will be how authorities respond to changing conditions.

---

[1] See The UNwisdom Of The Crowd August 15, 2010

[2] George Soros The Alchemy of Finance p.58

[3] Businessinsider.com 22 Insights From The Most Successful Investors In History, January 15,

[4] Ludwig von Mises, XXXVIII. THE PLACE OF ECONOMICS IN LEARNING 4. Economics and the Universities Human Action Mises.org

[5] Jean Baptiste Say Catechism of Political Economy Mises.org

[6] Ibid

[7] See Philippine Overseas Workers Help Fuel Philippine Property Bubble, June 14, 2012

[8] See Philippine Economy’s Achilles Heels: Shopping Mall Bubble (Redux) January 13, 2013

[9] Bangko Sentral ng Pilipinas Remittances Sustain Growth in November 2012, January 15, 2013

[10] Wikipedia.org Economy of the Philippines

[11] Yahoo Singapore Philippines' remittances from overseas workers spike by 8.5%, January 15, 2013

[12] World Bank PHILIPPINE QUARTERLY UPDATE INVESTING IN INCLUSIVE GROWTH AMID GLOBAL UNCERTAINTY

[13] World Bank Outlook for Remittance Flows 2012-14 Migration and Development unit December 1, 2011

[14] The Economist World GDP Graphic detail January 15, 2013

[15] Businessmirror.com ‘Informal’ OFW remittances P242 billion higher, November 14, 2012

[16] Rappler.com BPO industry welcomes Obama win despite anti-outsourcing threat, November 10, 2012

[17] East Vantage.com 15% in Annual Growth in BPO Philippines Says NEDA

[18] NCC.gov.ph Philippine IT-BPO Road Map 2016: Driving to Global Leadership

[19] Softec.sk Global Off Shoring and Outsourcing Market Dynamics

[20] Avaya Blog Statistics of the Global BPO Industry

[21] Wikipedia.org Diffusion Innovation

[22] New York Times A New Capital of Call Centers, November 25, 2011

[23] Jose Sibal Measuring the Informal Sector in the Philippines and the Trends in Asia National Statistical Coordination Board October 2007

[24] See Agricultural Boom Fuels Farmland Protectionism, May 28, 2011

[25] Inquirer.net Philippines lags behind peers in bank penetration, survey shows, May 3, 2012

[26] See The Rise of Mobile Banking, May 23, 2012

[27] Gilberto M. Llanto Philippine Productivity Dynamics in the last 5 decades Philippine Institute for Development Studies and factors influencing

[28] Bangko Sentral ng Pilipinas Bank Lending Continues to Grow in November, January 17, 2013

How Foreign Interventionism Has Incited West Africa’s Political Woes

Government operation to free hostages ensnared by an al-Qaeda-linked group in a natural gas plant in a remote area in Southeastern Algeria apparently ended up in a fiasco: most hostages were slain along with their captors.(Bloomberg)

Historian Eric Margolis at the LewRockwell.com sheds us  insightful historical compendium of the recent revival of the political turmoil at West Africa.

I categorized his essay into different headings

1. Not an endemic Islam Story

Western governments and media have done the public a major disservice by trumpeting warnings of an "Islamist threat" in Mali. It’s as if Osama bin Laden has popped up on the Niger River. Our newest crisis in Africa is not driven primarily by religion but by a spreading uprising against profoundly corrupt, western-backed oligarchic governments and endemic poverty.

2. The Repercussions of Libya War and the French Client States

Mali’s troubles began last year when it shaky government was overthrown. Meanwhile, heavily-armed nomadic Tuareg tribesmen, who had served Libya’s late Col. Gadaffi as mercenaries until he was overthrown by French and US intervention, poured back into their homeland in Mali’s north. A major unexpected consequence. Fierce Tuareg warriors, who battled French colonial rule for over a century, were fighting for an independent homeland, known as Azawad.

They, a small, violent jihadist group, Ansar Din, and another handful of obscure Islamists drove central government troops out of the north, which they proclaimed independent, and began marching on the fly-blown capital, Bamako.

France, the colonial ruler of most of West Africa until 1960, has overthrown and imposed client regimes there ever since. French political, financial and military advisors and intelligence services ran West Africa from behind a façade of supposedly independent governments. Disobedient regimes were quickly booted out by elite French troops and Foreign Legionnaires based in West Africa that guarded France’s mining and oil interests in what was known as "FrancAfrique."

3. Contagion and Diversion from Domestic Political-Economic Affairs.

Overthrowing African regimes was OK for France, but not for locals. When Mali’s French-backed regime was challenged, France feared its other West African clients might face similar fate, and began sending troops to back the Bamako regime. President Francois Hollande, who had vowed only weeks ago not to intervene in West Africa, said some 2,500 French troops would intervene in Mali. But only on a "temporary basis" claimed Hollande, forgetting de la Rochfoucauld’s dictum "there is nothing as permanent as the temporary!"

Other shaky western-backed West African governments took fright at events in Mali, fearing they too might face overthrow at the hands of angry Islamists calling for stern justice and an end to corruption. Nigeria, the region’s big power, vowed to send troops to Mali. Nigeria has been beset by its own revolutionary jihadist movement, Boko Haram, which claims Muslim Nigerians have been denied a fair share of the nation’s vast oil wealth, most of which has been stolen by corrupt officials.

France’s overheated claim that it faces a dire Islamic threat in obscure Mali could attract the attention of numbers of free-lance jihadists, many who are now busy tearing up Syria. Paris was better off when it claimed its troops were to protect ancient Muslim shrines in Timbuktu. Or it could have quietly sent in the Foreign Legion, as in the past.

Instead, Mali has become a crisis with the US, Britain, West African states and the UN involved in this tempest in an African teapot. A nice diversion from budget crisis.

4. Hostage taking in Algeria and the Expansion of the Theater of War by Interventionists.

Another Algerian jihadist group just attacked an important state gas installation in revenge for France’s assault on Mali. This bloody action has awoken Algeria’s hitherto quiescent Islamic resistance groups. They waged a ten year war against Algeria’s US and French backed military regime, one of the continent’s most repressive regimes, after Algeria’s armed forces crushed Islamists after they won a fair election in 1991.

Over 250,000 Algerians died in a long, bloody civil war. The Algiers government often used gangs of its soldiers disguised as rebel fighters to commit gruesome massacres to blacken the name of the opposition. Algeria may again be headed for a new bloodbath, this time with minority Berber people calling for their independent state.

US air forces and small numbers of Special Forces from its new Africa Command are now entering action in Mali and Algeria. More are sure to follow as West Africa smolders

My comments

As diversionary ploy to distract the public’s attention, wars has usually been the recourse of economically strained nations to drum up political support (via nationalism), as well as, to “suppress dissension among members of the productive class” (Salerno)

Wars has been typically used as justification for further inflationism and for expansionary government or the “opportunity to intensify economic exploitation” (Salerno)

Wars have been used to promote the financial and political interests of vested interested groups represented by military industrial complex “the acquisition of unwarranted influence, whether sought or unsought, by the military industrial complex” (President Eisenhower), as well as, the neoconservative cabal through the ideological role of “global policeman” which formerly had been based on “global struggle against communism” (Gordon) and neocon goals of “continuing privileged hierarchical rule, and to continue to worship the nation-state and its war-making machine” (Rothbard).

Most likely today’s imperial foreign policies as evidenced by West Africa’s conflicts signify as cauldron of the factors above.

Quote of the Day: The Ethics of Free Enterprise Capitalism is Value Creation

With few exceptions entrepreneurs who start successful businesses don't do so to maximize profits. Of course they want to make money, but that is not what drives most of them. They are inspired to do something that they believe needs doing. The heroic story of free-enterprise capitalism is one of entrepreneurs using their dreams and passion as fuel to create extraordinary value for customers, team members, suppliers, society, and investors…

This is what we know to be true. Business is good because it creates value, it is ethical because it is based on voluntary exchange, it is noble because it lifts people out of poverty and creates prosperity.

This is from Whole Foods co-CEO John Mackey and Raj Sisodia, a marketing professor at Bentley College in their recently launched book Conscious Capitalism: Liberating the Heroic Spirit of Business as excerpted by a Wall Street Journal Book review (hat tip Carpe Diem's Professor Mark Perry)

  

Video: Doug Casey: We are Living in the Middle of the Biggest Bubble in History

In the following video, Goldmoney’s Andy Duncan interviews, one of my favorite investing savant, Doug Casey. 

At the final minutes, Doug Casey predicts that “There will be many bubbles created in the years to come especially bubbles that has been created by trillions of dollars”, which will filter over or permeate to different parts in the economy and to the world.

Importantly Mr. Casey notes (28: 04) "Right now, we are living in the middle of the biggest bubble in history and when this bubble burst it’s going to be a catastrophe for most people"  

[Yes, I agree, all one needs to is to see how bubbles have morphed into a mental pandemic as the public's addiction to artificial booms have seemingly become deeply entrenched. Hardly any thoughts have been given to possible adverse consequences or myriad risks from all the cumulative inflationism and interventionism implemented by global central banks and their respective political authorities, including the BSP and the Philippine government]  

Mr. Casey point outs that bonds are right now at the peak of the bubble cycle (a view which I have been saying) and further predicts a coming bubble on gold stocks, particularly Gold exploration stock. 

Watch the interview.

Quote of the Day: Money is an Invention of the Marketplace

Money is an invention of the marketplace of exchange, brought into being by traders who discovered that a reliable medium could facilitate trades that were more difficult or even impossible by barter alone. It developed from one form to a better one, one evolutionary trade at a time. Parliaments, Congresses and Emperors came along later and stole it, pure and simple if not fair and square… 

Private coinage was banned not because it didn’t work, but because it did. Governments just don’t care much for competition or for sound and honest money. The Civil War ban on private coinage has remained the law of the land since June 1864—a hallmark on the shameful path of monetary debasement.

This is from Lawrence W. Reed President of the FEE or The Freeman

Information Age: Individual Job Outsourcing

Outsourcing has been largely thought as mainly company based commercial operations. However in the real world, given today’s deepening of the digital economy or information age, the application of outsourcing has been broadening to include individual operations.

The oxymoronic account  of where a company caught an employee  outsourcing one’s job, from CNN.com, which led to his termination, seems like a manifestation of such snowballing dynamic

After a U.S.-based "critical infrastructure" company discovered in 2012 its computer systems were being accessed from China, its security personnel caught the culprit ultimately responsible: Not a hacker from the Middle Kingdom but one of the company's own employees sitting right at his desk in the United States.

The software developer is simply referred to as "Bob," according to a case study by the U.S. telecommunications firm Verizon Business.

Bob was an "inoffensive and quiet" programmer in his mid-40's, according to his employee profile, with "a relatively long tenure with the company" and "someone you wouldn't look at twice in an elevator."

Those innocuous traits led investigators to initially believe the computer access from China using Bob's credentials was unauthorized -- and that some form of malware was sidestepping strong two-factor authentication that included a token RSA key fob under Bob's name.

Investigators then discovered Bob had "physically FedExed his RSA token to China so that the third-party contractor could log-in under his credentials during the workday," wrote Andrew Valentine, a senior forensic investigator for Verizon.

Bob had hired a programming firm in the northeastern Chinese city of Shenyang to do his work. His helpers half a world away worked overnight on a schedule imitating an average 9-to-5 workday in the United States. He paid them one-fifth of his six-figure salary, according to Verizon.

Some thoughts

Programmer Bob’s offense has really not been about outsourcing but of the unauthorized disclosure of what has been internal corporate affairs to a third party.

In the digital economy or the information age, non-contiguous work requirements enable outsourcing on an international scale. The non-sensitivity to geographic confines means that work can be delegated to a specialty agent wherever access to connectivity is present. This translates to job  decentralization or semi-autonomous jobs or jobs that allows for “home based” work or telecommutation.  I may add that semi-autonomous work may not really be “home based” or static work location but about mobility.

Deepening decentralization of industries and jobs will translate to decentralization of living areas. Thus, the incompatibility of mainstream concept of industrial age “urbanization” with decentralization.

Outsourcing, which contributes to the informal economy, should continue to grow as the world’s economy gravitates towards technology inspired specialization.