Monday, March 04, 2013

More Signs of Manic Phase in The Phisix, ASEAN and the US

Finally a much needed reprieve for the Philippine Phisix. Yet this week’s .34% loss can hardly be seen as the required “correction” or “profit-taking” phase following EIGHT successive weeks of advances that has brought about a magnificent 14.27% of returns in 2013.

Yet there has been much reluctance for profit taking to occur.

Last Thursday, we saw another major “marking the close” session where the listed heavyweights of the financial, property, industrial and holding sectors were pushed substantially higher at the close of the session[1]. Although much of the session had been modestly up, perhaps about 60% of the day’s 1.59% gains were attained through last minute buying binge which I suspect could have emanated from political money.

Early week profit taking combined with Friday’s 1.18% decline basically neutralized Thursday’s astonishing gains that have led to this week’s measly retrenchment.

Nonetheless, this week’s marginal profit-taking has barely changed the parabolic phase and near vertical picture which the local bellwether has transitioned to.

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Indonesia’s Stock Market and Property Mania

And the manic phase of the stock market has not just been a Philippine phenomenon (candlestick).

Apparently, Indonesia’s bellwether, the Jakarta Composite Index (JCI; IDDOW-behind line chart) caught fire too. The JCI made a magnificent 3.45% move this week. Such record smashing move pole-vaulted her to overtake Thailand and narrow the gap with the Philippines.

For 2013, and as of Friday’s close, Indonesia’s JCI has returned 11.47% on a year to date basis compared to the Philippines’ 14.27% and Thailand’s SET at 10.61%.

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The JCI’s fresh record highs[2] have been mostly powered by the same sectors that have driven the Phisix, specifically real estate/property (which includes infrastructure), finance and mining. (charts from Indonesia Stock Exchange Market Index[3])

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The stock market-real economy boom in Indonesia comes from the same pedigree as with the Philippines or Thailand[4]: a credit boom.

Loans to the private sector[5] jumped by about 54% in 2 years (or 27% annual-averaged). Since May of 2002, the same measure posted a CAGR of 22.52%.

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Indonesia’s bubble cycle plays into my account of the bubble process where a consumption credit fueled boom will eventually lead to the deterioration of the nation’s trade balance which will likewise be reflected on her current account.

As I earlier noted, external deficits “will need to be offset by capital accounts or increasing claims on local assets”[6].

Increasing dependence on foreign financing of domestic credit boom will make a nation such as Indonesia highly vulnerable to “sudden stops” or reversal of private foreign capital inflows[7].

Indonesia’s economy recorded its first current account deficit[8] in 2012 since the pre-Asian crisis days (top window).

Recent deficits, according to the mainstream, have partly been traced to growth of imports having outpaced growth of exports where the latter has been attributed to “restrictive trade policies”[9] on the exports of unprocessed minerals, while the former has been imputed to outsized growth in fuel imports due to “fuel subsidies”[10].

A report further says that the risk of “overheating”[11] from central bank’s accommodative policies could weigh on Indonesia’s currency the rupiah.

At the start of the year, I predicted of the mainstream’s narrative of the current booms[12]
Eventually, the current boom will get out of hand, which will be manifested through rising interest rates, which the mainstream vernacular will call “economic overheating”…
The competition for resources from private sector activities funded by credit inflation and from the Indonesian government’s proposed $200 billion infrastructure spending through 2014[13] has begun to place pressure on consumer prices.

Indonesia’s statistical inflation rate has popped to 5.31% in February of 2013[14] (see bottom window). Indonesia’s consumer price inflation has been on the rise since January 2012 and may have commenced to accelerate further.

Eventually a sustained rise in price inflation will pressure interest rates higher. Higher interest rates will then strain all activities founded or established based on a low interest rate environment.

Rising price inflation also means that the expansions of activities which misallocates resources powered by credit far exceeds the productivity gains from the wealth generating real economic activities.

Like the Philippines, the Indonesian government’s desire to increase public sector infrastructure spending has prompted for plans to tighten collection of taxes by cracking down on supposed “tax evaders”[15]. Such measures would result to a meaningful shift in activities towards consumption—which will mostly be financed by debt and inflation than by taxes—at the expense of productivity, which thereby increases systemic risks.

Malaysia’s Property Bubbles

Property bubbles have not confined to the Philippines, Thailand or Indonesia.

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Malaysia has likewise been revealing similar symptoms.

Even as Malaysia’s stock markets have underperformed, the KLCI has been at a loss—down 3.05% as of Friday on a year to date basis, housing prices has been skyrocketing.

Household debt-to-GDP (lower right pane) continues to ascend partly from the jump in the growth of loans from Islamic banks (lower left pane). Yet the fastest growth segment of both commercial and Islamic banks has been from unsecured loans or loans based on borrowers creditworthiness rather than backed by collateral[16]

The housing boom has been defiant of the various measures imposed by the Malaysian authorities, such as revision of eligibility requirements for credit cards, tightening of lending conditions based on the loan-to-value (LTV), reintroduction of Real Property Gains Tax (RPGT) for houses sold within 5 years from purchase and the doubling of minimum price for home purchases made by foreigners[17].

So the failure of added regulations to stymie the housing bubble only means that zero bound rates remains to be a critical force in blowing Malaysia’s property bubbles.

The most striking aspect is how the IMF has patently miscalculated with its econometric models in predicting the rapid accumulation of current imbalances in the property-banking sector (top chart).

At least they have been candid to admit this.

As a final note, Malaysia reportedly plans to embark on a huge 10-year $444 billion infrastructure program[18] which in my view, will add to malinvestments and systemic fragility.

Blossoming Philippine Asset Mania

Going back to the Philippines, the manic phase of bubbles—which I described as last week as yield chasing phenomenon that are essentially underpinned by voguish themes unquestioningly embraced by the public and most importantly enabled, facilitated and financed by credit expansion[19]—seems to be well intact.


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The Philippine central bank, the Bangko Sentral ng Pilipinas (BSP) reports that for January[20] systemic credit continues to be vigorous, albeit at a slightly lower pace on a month to month basis, 15.6% December and 16.6% for January.

Nevertheless the key sectors which has been the object of faddish themes and whose growth has been funded by lavish credit inflation remains robust: real estate, renting, and business services ballooned by 25.9% (see left window, blue bars); financial intermediation swelled by 41.9% (see right window, orange bars) and wholesale and retail trade moderated but still at 12.9%.

It’s amazing how the fantastic growth in financial intermediation (41.9%) appears to coincide with the spectacular advances of the Phisix over the same time frame (33.33%)

How much of debt or margin trade have underpinned positions on the Phisix???

Meanwhile, the credit expansion in the domestic banking system has also been reflected on the money supply conditions:

Let us read it straight from the BSP[21]:
Domestic liquidity (M3) increased further by 10.8 percent year-on-year (y-o-y) in January to reach P5.0 trillion. This growth was broadly similar to the 10.6 percent expansion recorded in the previous month. On a monthly basis, seasonally-adjusted M3 expanded by about  1.3 percent, almost unchanged  compared to the rate in December.

Money supply grew by 23.3 percent y-o-y in January from 19.2 percent in the previous month, driven by the expansion in net domestic assets (NDA) following the sustained increase in credits to the private sector consistent with the robust lending activity of commercial banks.
The pace of credit expansion undergirding the supply side growth is almost three times the rate of economic growth. This is the tooth fairy from the populist “Aquinomics”: a credit bubble that will soon be unmasked along with the other central planning fantasies masqueraded as economic policies.

The Mania from the Perspective of Market Internals

Despite this week’s paltry correction, the PSE’s market breadth exhibits signs which shows how the bulls have become increasingly intransigent. They seem to refuse any idea of retrenchment, or have been in denial of the need for one, or simply thrives in a delusion that growth will be perpetual (justified as “structural”) or that convictions have become deeply embedded such that the economy and the stock market is a one way street: up up and away!

The inflationary boom continues to exhibit sectoral and intra-sector rotations.

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For this week, the mining and the service sectors became the center of attraction anew as the current leaders, the sizzling hot property and financial sectors, took a breather. The mining sector recaptured the fourth spot while services remain in third position.

The mining’s comeback has partly been rationalized on the resumption of the operations[22] of heavyweight Philex Mining Corporation [PSE: PX] after the company’s recent settlement with the government by paying the Php 1 billion indemnity[23].

The reality is that market participants have been looking for any excuses to justify their feverishly bidding up of equity prices. Rotations, thus, are symptoms of such disorder.

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The number of daily trades (averaged weekly) has spiked to, I would presume, record highs. Again I have no comparison with 1993, which I believe, resembles today’s manic episode.

As I pointed out in the past, the number of daily trades serves as a key sentiment indicator which measures the state of the public’s confidence.

Record highs in the number of daily trade means the burgeoning of “new” participants, or of the increasing frequencies of trade churning by existing participants, or both.

A vertical ascent extrapolates to deepening overconfidence through relatively much aggressive actions on the equity markets than in the past.

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The growth in the daily number of trades appears to be supported by the daily Peso volume (averaged weekly).

More people trading the stock market or increased churning of trades extrapolates to higher Peso volume.

This week’s supposed trivial correction comes with a spike in volume. This shows how bullish participants has gobbled up on profit takers—again a possible sign of refusal to correct or of the entrenched expectations of a sustained upside streak.

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There are 344 publicly listed issues in the Philippine Stock Exchange as of 2012 according to Wikipedia.org[24].

The actions in the daily traded issues (averaged weekly) validates or chimes with both the activities in the number of daily trades and the daily Peso volume.

The increasing trend in the number of daily traded issues simply means that more listed firms are becoming tradeable or liquid. Bullish actions have been spreading into the domestic stock market at relatively different rates and time scales.

Current levels of daily issues traded represent 60% of available board issues. I cannot make any meaningful comparisons with past since I don’t have the data on the inclusion or exclusion of board issues or of its trend.

The bottom line is that from the perspective of market internals, belief of the sustainability of today’s rising market is being reinforced by the feedback loop of prices (outcome bias) and expectations that leads to actions (yield chasing). Such dynamic accentuates the flawed perception of reality as the public fails to comprehend that credit bubbles are unsustainable.

I am reminded by the wisdom of the value investor turned political entrepreneur, one of the richest and most successful stock market investor, Warren Buffett who once said that[25]
A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful
I am not saying that current events should translate to an inflection point or a reversal of the current market, as I believe that the manic phase will likely steepen or intensify.

I am saying that caution is required when signs of greed have apparently been mounting.

Since bubble cycles account for as policy induced market process and given the continued policies in place, we are, thus, approaching the time where such misallocation of resources will be revealed in the marketplace: the day of reckoning.

As the great Ludwig von Mises warned[26],
But the boom cannot continue indefinitely. There are two alternatives. Either the banks continue the credit expansion without restriction and thus cause constantly mounting price increases and an ever-growing orgy of speculation, which, as in all other cases of unlimited inflation, ends in a “crack-up boom” and in a collapse of the money and credit system. Or the banks stop before this point is reached, voluntarily renounce further credit expansion and thus bring about the crisis. The depression follows in both instances.
But perhaps not in 2013.

The Serial Blowing of US Bubbles 

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As the major US equity benchmark, the Dow Jones Industrial flirts with the all-time record highs, margin debt at the NYSE has also been soaring[27]

A bubble in the credit markets have also been ballooning which has been marked by broad based issuance and refinancing which are at record highs.

From the Bloomberg[28],
Corporate and sovereign borrowers issued $3.69 trillion in debt in 2012, generating $19.2 billion of fees for banks, both records, according to data compiled by Bloomberg. Investor demand for debt was so strong that banks were able to revive collateralized loan obligations, the bundles of securities that helped inflate the credit bubble that burst in 2008.
Credit standards have started to fall anew as riskiest companies have been accessing credit markets at a rate exceeding the height of 2007 bubble bust.

From Bloomberg/Between the Hedges[29]
The riskiest U.S. companies are tapping institutional investors for loans at the fastest pace ever, as some Federal Reserve governors warn of excesses developing in the market. Borrowers obtained more than $88 billion in loans last month from non-bank lenders, exceeding the pre-crisis peak of $55 billion in April 2007 and more than tripling the $26.7 billion received in January, according to JPMorgan Chase.
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US households appears to have shed their inhibitions of accessing the credit markets[30] to buy houses and cars, following years of downsizing and deleveraging. 

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Central bank policies of financial repression via negative real rates[31] have sparked housing bubbles in the past, and could be in the process of blowing a new one today.

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US Housing data continue to exhibit of a US Federal Reserve manipulated boom[32].

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And given that housing represents a significant weight on the US statistical measurement of inflation, or through the consumer price index (CPI), then a sustained boom in housing will likely increase inflation pressures that will lead to higher interest rates as I earlier noted[33].

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We have seen such an uptick in inflation rates[34] and interest rates during the 2002-2006 housing boom (red line).

This time will not be different.

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Nonetheless despite all the pandemic of bubble blowing by global central banks, economic strains remain apparent.

Major global economies as measured by manufacturing conditions have shown mixed performances in January with a downside tilt.

The global manufacturing PMI index reveals[35] that more than half or 12 countries of the 22 countries that have reported have been contracting while 10 countries have been expanding.

So all the cumulative money printing by global central bankers has done little to cushion or provide help to the real economy. On the contrary such policies have made them worse.

Yet I expect that more signs of economic weakness will likely translate to greater chances of more inflationism by central bankers. This means more systemic fragility ahead that leads to capital consumption and productivity losses.

The great dean of the Austrian school of economics, Murray Rothbard warned[36],
Superficially, it seems that credit expansion greatly increases capital, for the new money enters the market as equivalent to new savings for lending. Since the new “bank money” is appar­ently added to the supply of savings on the credit market, busi­nesses can now borrow at a lower rate of interest; hence infla­tionary credit expansion seems to offer the ideal escape from time preference, as well as an inexhaustible fount of added capital. Actually, this effect is illusory. On the contrary, inflation reduces saving and investment, thus lowering society’s standard of living. It may even cause large-scale capital consumption.
Productivity losses from capital consumption simply translate to greater sensitivity to price inflation if central bankers persist on the current mode of policies.

And should the next crisis arise, there will hardly be any counterbalancing force as such crisis will likely mean a global domino effect of bursting bubbles.

The interesting part will be how policymakers will respond to such market conditions. Will they work to undermine the current currency system?






[3] Indonesia Stock Exchange Market Index

[4] See Thailand’s Credit Bubble January 26, 2013





[9] CascadeAsia.com 2012 CURRENT ACCOUNT DEFICIT – SURPRISE, SURPRISE, February 15, 2013



[12] See What to Expect in 2013 January 7, 2013


[14] Tradingeconomics.com INDONESIA INFLATION RATE


[16] Investopedia.org Unsecured Loan




[20] Bangko Sentral ng Pilipinas Bank Lending Sustains Growth in January February 28, 2013

[21] Bangko Sentral ng Pilipinas Domestic Liquidity Continues to Expand in January February 28, 2013


[23] Rappler.com Philex settles P1-B mine leak fine February 19, 2013



[26] Ludwig von Mises Inflation III. INFLATION AND CREDIT EXPANSION Interventionism An Economic Analysis, Mises.org

[27] Zero Hedge Bubble On The Margin, March 1, 2013


[29] Between the Hedges Today's Headlines Hedgefundmgr.blogspot, March 1, 2013

[30] WSJ News Graphics Debt Load Twitpic March 2, 2013

[31] Michael Cembalest, Fifty Trades of Grey: an illustrated story of investment, temptation, addiction and the cost of money J.P. Morgan Asset Management, ritholtz.com, March 2, 2013

[32] Ed Yardeni US Home Prices (Excerpt) Dr. Ed’s Blog, February 26, 2013


[34] Tradingeconomics.com UNITED STATES INFLATION RATE

[35] Zero Hedge Global PMI Summary March 1, 2013

Saturday, March 02, 2013

Here Comes 3D Printed Cars


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From Wired.com
Picture an assembly line not that isn’t made up of robotic arms spewing sparks to weld heavy steel, but a warehouse of plastic-spraying printers producing light, cheap and highly efficient automobiles.

If Jim Kor’s dream is realized, that’s exactly how the next generation of urban runabouts will be produced. His creation is called the Urbee 2 and it could revolutionize parts manufacturing while creating a cottage industry of small-batch automakers intent on challenging the status quo.

Urbee’s approach to maximum miles per gallon starts with lightweight construction – something that 3-D printing is particularly well suited for. The designers were able to focus more on the optimal automobile physics, rather than working to install a hyper efficient motor in a heavy steel-body automobile. As the Urbee shows, making a car with this technology has a slew of beneficial side effects.

Jim Kor is the engineering brains behind the Urbee. He’s designed tractors, buses, even commercial swimming pools. Between teaching classes, he heads Kor Ecologic, the firm responsible for the 3-D printed creation.

“We thought long and hard about doing a second one,” he says of the Urbee. “It’s been the right move.”

Kor and his team built the three-wheel, two-passenger vehicle at RedEye, an on-demand 3-D printing facility. The printers he uses create ABS plastic via Fused Deposition Modeling (FDM). The printer sprays molten polymer to build the chassis layer by microscopic layer until it arrives at the complete object. The machines are so automated that the building process they perform is known as “lights out” construction, meaning Kor uploads the design for a bumper, walk away, shut off the lights and leaves. A few hundred hours later, he’s got a bumper. The whole car – which is about 10 feet long – takes about 2,500 hours.
Pls. read the rest here.

The problem I see with the competition poised by 3D Printing could be that incumbent companies may lobby to impose regulatory obstacles (e.g. safety and energy standards, etc…) on them.

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Nevertheless, 3D Printing seems yet at the fringe of the technology adaption cycle. (chart from evocator.org)

Video: Is America Becoming Europe? Security over Freedom?

This interesting video asks whether the evolving trend of social policies in the US will lead her to assimilate Europe's "promises of security over freedom" (hat tip Dan Mitchell)



I am reminded by Benjamin Franklin, founding father of the US, who said
They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety.

Patriotism is the last refuge of a scoundrel: Senkaku Islands Dispute Edition

“Patriotism is the last refuge of a scoundrel” has been a popular quote attributed to English writer Samuel Johnson

Well, in desiring to prop up unsustainable political economic systems, politicians have resorted to the use of “patriotism” or “nationalism” to mask internally generated entropic policies.

Such seem to apply to the recent territorial dispute covering the Senkaku Islands.

Writes author and editor of the American conservative Patrick Buchanan at the LewRockwell.com (bold mine)
With victory in the civil war with the Nationalists in 1949, Mao claimed to have liberated China from both Japanese imperialists and Western colonialists, and restored her dignity. "China has stood up!" he said.

His party's claim to absolute power was rooted in what it had done, and also what it must do. Only a party with total power could lead a world revolution. Only an all-powerful party could abolish inequality in a way that made the French Revolution look like a rebellion at Berkeley.

Xi Jinping's problem? The Cold War is over. China is herself in the capitalist camp, a member of the G-8, and inequality in the People's Republic resembles that of America in the Gilded Age.

How does the Chinese Communist Party justify control of all of China's institutions today – economic, political, military and cultural?

If Marxism is mocked behind closed doors by a new economic elite and tens of millions of Chinese young, what can cause the nation to continue to respect and obey a Communist Party and its leaders, besides the gun?

The answer of Europe in the 1930s is China's answer today.

Nationalism, tribalism, patriotic war if necessary, will bring the masses back. If the Chinese nation is being insulted, if ancestral lands are occupied by foreigners as in olden times, the people will rally around a regime that stands up for China. Nationalism will keep Chinese society "under control while you go forward."

Japan's Prime Minister Shinzo Abe traces the aggressiveness of Beijing in the Senkaku Islands dispute to a "deeply ingrained" need to appeal to Chinese nationalism in the form of anti-Japanese sentiment dating to the Sino-Japanese War of 1937-1945.

Chinese nationalism, says Abe, is also behind China's quarrels with Vietnam and other nations over islands of the South China Sea.

If Beijing is unable to deliver economic growth, "it will not be able to control the 1.3 billion people ... under the one-party rule," Abe told The Washington Post. He is now denying those quotes.

But China is not alone in stoking the flames of nationalism to maintain legitimacy.

Abe has himself taken a firm stand against China in the Senkakus and is moving rightward on patriotism, security and a defense of Japan's history in the 20th century, and he is rising in the polls. The apologetic and pacifist Japan of yesterday is no more.
As I previously wrote, when the nations engage in massive inflationism, the risk of war increases.

Why? Because as the great Ludwig von Mises warned,
The most important economic element in this war ideology was inflationism.
Inflationism have not been a standalone policy. Accompanying these includes all sorts of social or commercial restrictions—foreign exchange or currency controls, trade controls, price and wage controls, migration and border controls and others—mostly or usually justified in the name of "nationalism" These of course, increases geopolitical tensions and the risks of war.

So from the above, nationalism signifies a tool used by politicians to divert people’s attention from real problems, as well as, to promote their self-interests.

Knowledge Problem and the US Housing Bubble

The great Austrian economist Friedrich August von Hayek explained of the fundamental reason why central planning can’t work: the knowledge problem—or the limitations on what people can know.

In his Nobel Prize speech “The Pretense of Knowledge” Mr. Hayek said, (bold mine)
If man is not to do more harm than good in his efforts to improve the social order, he will have to learn that in this, as in all other fields where essential complexity of an organized kind prevails, he cannot acquire the full knowledge which would make mastery of the events possible. He will therefore have to use what knowledge he can achieve, not to shape the results as the craftsman shapes his handiwork, but rather to cultivate a growth by providing the appropriate environment, in the manner in which the gardener does this for his plants. There is danger in the exuberant feeling of ever growing power which the advance of the physical sciences has engendered and which tempts man to try, "dizzy with success", to use a characteristic phrase of early communism, to subject not only our natural but also our human environment to the control of a human will. The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson of humility which should guard him against becoming an accomplice in men's fatal striving to control society - a striving which makes him not only a tyrant over his fellows, but which may well make him the destroyer of a civilization which no brain has designed but which has grown from the free efforts of millions of individuals.
Alex Pollock, of the American Enterprise of Institute writing at The American exposes on such knowledge problem by political authorities who blatantly misdiagnosed and consistently made failed predictions during the recent US housing bubble.
How much can you trust the word of government officials? How much about the financial future can central bankers or anybody know? Consider the lessons of the following 10 quotations:

1. About whether Fannie and Freddie’s debt was backed by the government: “There is no guarantee. There’s no explicit guarantee. There’s no implicit guarantee. There’s no wink-and-nod guarantee. Invest and you’re on your own.” — Barney Frank, senior Democratic congressman, notable Fannie supporter, later chairman of the House Financial Services Committee

It would be difficult to imagine a statement more wrong.

2. “We do not believe there is any government guarantee, and we go out of our way to say there is not a government guarantee.” — John Snow, Republican and secretary of the Treasury

Saying it did not make it so, unfortunately.

3. “The facts are that Fannie and Freddie are in sound situations.” — Christopher Dodd, senior Democratic senator, prominent Fannie supporter, chairman of the Senate Banking Committee

Pronounced two months before Fannie and Freddie collapsed.

4. “We have no plans to insert money into either of those two institutions [Fannie and Freddie].” — Henry Paulson, Republican and secretary of the Treasury

Stated one month before the Treasury started inserting money into Fannie and Freddie.

5. “Home prices could recede. A sharp decline, the consequences of a bursting bubble, however, seems most unlikely.” — Alan Greenspan, chairman of the Federal Reserve Board

The common wisdom of the bubble years. At the time of this statement in 2003, the Fed was in the process of dramatically reducing short-term interest rates and stimulating house-price increases.

6. “Global economic risks [have] declined.” — International Monetary Fund

Observed four months before the international financial panic started in August 2007.

7. “More than 99 percent of all insured institutions met or exceeded the requirements of the highest regulatory capital standards.” — Federal Deposit Insurance Corporation

This statement was made in the second quarter of 2006, at the peak of the housing bubble. More than 400 such institutions later failed and others were bailed out in the ensuing bust. The FDIC failed its own required capital ratio, reporting negative net worth.

8. “The risk to the government from a potential default on GSE [Fannie and Freddie] debt is effectively zero.” — Joseph Stiglitz, Nobel Prize–winning economist, Peter Orszag, a future White House budget director, and Jonathan Orszag

Conclusion after considering “millions of potential future scenarios” — but obviously not the scenario which then actually happened.

9. "'Not only didn’t we see it coming,' but once the crisis started, central bankers 'had trouble' understanding what was happening." — Remarks by Donald Kohn, vice chairman of the Federal Reserve Board

A candid statement of the truth.

10. Finally: “Libenter homines id quod volunt credunt.” That is: “People easily believe that which they want to believe.” — Julius Caesar

Nothing has changed in this respect since Caesar’s day, and his dictum applies to government officials, central bankers, economists, and experts — just as it does to you and me.

The US Government Budget Smoke and Mirrors Sequestration

The world of politics is really about smoke and mirrors.

Take the supposed deadlock over the “sequestration” deal or as per CNN “series of automatic, across-the-board cuts to government agencies, totaling $1.2 trillion over 10 years. The cuts would be split 50-50 between defense and domestic discretionary spending”, which officials peddle as cataclysmic to the economy.

The debate is over this…
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…a “$44 billion reduction in actual federal outlays for 2013” according to Cato’s Tad DeHaven, or a niggardly 1.2% of total spending.
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Or from another perspective, spending cuts means that “that the US government budget will grow by “only” $2.4 trillion over the next 10 years” according to Cato’s Dan Mitchell
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Which hardly means any cut at all, the conservative Heritage Foundation further explains, (italics original)
Federal spending is projected to grow from $3.6 trillion in 2013 to more than $6 trillion by 2023, a 69 percent increase without sequestration. Even with sequestration, federal spending would still grow by 67 percent. Sequestration barely even slows the growth in spending, let alone cuts any spending out of the overall budget.
The bottom line is that the sequestration is about the reduction of rate of growth of government spending. There will be no real spending cuts at all.

Nonetheless, all the ruckus about spending cuts, ironically, has been offset by one day of acquired debt.

From the Zero Hedge, (bold and italics original)
if one listens to Obama whose idea it was in the first place, an unprecedented $85 billion spending cuts will be sequestered, unleashing famine, pestilence, the apocalypse and grizzly bears (as all park rangers will be dead from starvation). Which is why we applaud the administration's desire to preempt this tragic for the nation outcome, by issuing, in one day alone: February 28, $80 billion in Treasurys sending debt to (obviously) what is a new all time high $16,687,289,180,215.37.
In other words, the entire apocalyptic impact of the sequester for 2013 was offset by one day's debt issuance
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As the great libertarian H.L. Mencken lucidly expressed (In Defense of Women)
Civilization, in fact, grows more and more maudlin and hysterical; especially under democracy it tends to degenerate into a mere combat of crazes; the whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by an endless series of hobgoblins, most of them imaginary. 
Politics wantonly make a fool out of the public.

Remembering Murray Rothbard on his 87th Birthday

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The great dean of the Austrian school of economics and “Mr. Libertarian”, Murray N. Rothbard (March 2, 1926-January 7, 1995)
Civilization and human existence are at stake, and to preserve and expand it, high theory and scholarship, though important, is not enough. Especially in an age of galloping statism, the classical liberal, the advocate of the free market, has an obligation to carry the struggle to all levels of society, to government, to the general public, to political parties.
Quoted from Mises and the Role of the Economist in Public Policy
Find the list of his works here 

Friday, March 01, 2013

Mexico’s Trade Comeback Largely Due to Liberalization

Mexico’s economy has regained trade competitiveness largely due to productivity enhanced trade openness or liberalization. 

That’s according to an article published at the IMF Finance.

Here is the intro
The U.S. market has long been critical to Mexico—not only to its manufacturing sector, but to its overall economic strength. When Mexico signed the North American Free Trade Agreement (NAFTA) nearly two decades ago, the greater access it provided to the U.S. market was a boon to the country’s manufacturing base, whose share of the country’s GDP grew by almost 4 percentage points in the five years following the signing of the treaty. In turn, Mexico’s share of the U.S. manufactured goods import market increased from slightly above 7 percent in 1994 to nearly 13 percent in 2001.­

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Other factors such as the narrowing gap of labor costs and proximity to the US also contributed significantly in recouping markets previously lost to China’s influence

Nonetheless liberalization has been pivotal dynamic, again from the same article:
Mexico’s manufacturing base has also been buttressed by the economy’s openness. Mexico’s trade agreement network is one of the world’s largest; it has free trade or preferential trade agreements with 44 countries and has shown a strong commitment to avoiding the use of trade restrictions and ensuring unrestricted access to markets and intermediate inputs to companies operating in Mexico. Moreover, Mexico has signed international standards and quality agreements that facilitate the participation of local manufacturing companies in global supply chains, particularly in the automotive and aerospace industries.­

A number of the factors that have contributed to Mexico’s increased competitiveness and its recovery of U.S. market share are likely to be long lasting—or structural, as economists say. These include the locational advantage, improved unit labor costs from enhanced manufacturing productivity and increased labor participation, and trade openness that appear to have underpinned Mexico’s improved competitiveness in the U.S. market in recent years.
Mexico’s revived fortunes is an example that contradicts the views of mercantilism which relies on protectionism via inflation (currency devaluation), trade controls and myriad regulations. Economic freedom and not political control of the economy is the recipe to prosperity.

Quote of the Day: Sins to Remember

Muscles without strength, friendship without trust, opinion without risk, change without aesthetics, age without values, food without nourishment, power without fairness, facts without rigor, degrees without erudition, militarism without fortitude, progress without civilization, complication without depth, fluency without content; these are the sins to remember.
This is from Black Swan theorist and author Nassim Nicolas Taleb at Facebook

Thursday, February 28, 2013

With Ben Bernanke, Who Needs Conspiracy Theories?

Populist economic writer John Mauldin is contemptuous of conspiracy theorists. He writes, (bold mine)
I find the belief that there is a “Plunge Protection Team” simply bizarre. You know, the guys who are supposed to control the stock market? The “Working Group on Financial Markets”? If there is one somewhere, deep in the bowels of government, they are the most incompetent conspirators ever assembled. And no one has come forth and spilled the beans in a memoir after 25 years? Puh-leeze!
A conspiracy theory, according to Wikipedia.org, purports to explain an important social, political, or economic event as being caused or covered up by a covert group or organization.

On the other hand, the “Plunge Protection Team” (PPT) or otherwise known as the “Working Group on Financial markets” was created by ex US President Ronald Reagan via Executive Order 12631 which according to Wikipedia.org, “was used to express the opinion that the Working Group was being used to prop up the markets during downturn”. 

Of course, technically speaking the EO 12631 didn’t explicitly say direct control.

One of the main the stated purpose of the group according to the Federal Register 
Recognizing the goals of enhancing the integrity, efficiency, orderliness, and competitiveness of our Nation's financial markets and maintaining investor confidence, the Working Group shall identify and consider:

(1) the major issues raised by the numerous studies on the events in the financial markets surrounding October 19, 1987, and any of those recommendations that have the potential to achieve the goals noted above; and  

(2) the actions, including governmental actions under existing laws and regulations (such as policy coordination and contingency planning), that are appropriate to carry out these recommendations.

(bold added)


In short, the US government can justify her actions to “carry out” “any of those recommendations that have the potential to achieve the goals” through opaque legal semantics.

So contra Mr. Mauldin, by edict, the Working Group on Financial Markets, a.k.a  PPT, is a legally constituted entity which therefore exists, unless a new edict has been made to repeal them.

As to whether or not this group represents “a conspiracy theory” is another matter.

And it would likewise be equally misguided to look into “the deep in the bowels of government” for attempts to control the stock and or financial markets. All one needs is to open one's eyes.

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The above chart exhibits the tight correlation between the Fed’s balance sheet and the S&P 500 as I earlier pointed out

Have Fed policies not caused or contributed to the rising stock markets?

Last July, the New York Fed even bragged about how Fed policies has had “an outsized impact on equities relative to other asset classes” that has boosted returns by 50% as I earlier posted here.

Let us read directly from the incumbent Fed Chair Ben Bernanke, first when he still was in the academia: (bold mine)
There's no denying that a collapse in stock prices today would pose serious macroeconomic challenges for the United States. Consumer spending would slow, and the U.S. economy would become less of a magnet for foreign investors. Economic growth, which in any case has recently been at unsustainable levels, would decline somewhat. History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse.
So Mr. Bernanke believes then that supporting the stock market has been a requirement for “smart” central bankers.

From Bernanke’s 2010 Jackson Hole speech on the Portfolio Balance channel (bold mine)
I see the evidence as most favorable to the view that such purchases work primarily through the so-called portfolio balance channel, which holds that once short-term interest rates have reached zero, the Federal Reserve's purchases of longer-term securities affect financial conditions by changing the quantity and mix of financial assets held by the public. Specifically, the Fed's strategy relies on the presumption that different financial assets are not perfect substitutes in investors' portfolios, so that changes in the net supply of an asset available to investors affect its yield and those of broadly similar assets…
So current policy has been meant to cause, if not influence, the “quantity and mix of financial assets held by the public.” Mr. Bernanke’s belief then has now been actualized through ZIRP and QE policies.

Two days ago Ben Bernanke on the wealth effect at the semi annual monetary policy report to the Congress (bold mine)
Monetary policy is providing important support to the recovery while keeping inflation close to the FOMC's 2 percent objective. Notably, keeping longer-term interest rates low has helped spark recovery in the housing market and led to increased sales and production of automobiles and other durable goods. By raising employment and household wealth--for example, through higher home prices--these developments have in turn supported consumer sentiment and spending.
In short, whether the stock and/or housing markets both of which constitutes household wealth, FED policies have been designed to control or to influence prices in support of these sectors.

Central bankers all over the world, in fact, has mimicked or assimilated the Greenspan-Bernanke doctrine.

In May of 2012 the Bank of Japan reportedly bought record amounts of ETFs. Central banks from Israel, South Korea and Czech Republic have jumped also into the stock market buying bandwagon. Whether as investment or as policy, government intervention on stock markets or financial markets serves to support them. 

Is this a conspiracy theory? Apparently not. Because such policies have become explicit (and not covert), from which again, the intent has been to cause or attempt to control prices of financial markets—as the stock and the housing markets—supposedly to promote the wealth effect theory. (In reality the wealth effect theory is a camouflage to advance the interests of welfare warfare state and the banking cartel whose relationship is underwritten by the US Federal Reserve)

In short, we don’t need conspiracy theories, the continued enforcement of Bernanke’s creed has been enough to tell those who are willing to listen that financial markets including the stock markets are being administered, managed or manipulated for political and secondarily economic objectives.

Wealth effect policies are, in reality, unsustainable asset bubble inflation policies.

Phisix: Another Marking the Close Day?

Just a few minutes before the closing bell today, suddenly the Phisix explodes to the upside!

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chart from technistock

On a per sector basis, here is how the intraday trade looked like for today, February 28th
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Financials 

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Industrial

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Holding

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Property

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Service

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Mining and oil

(all charts from Citiseconline)

Except for Mining and Services sector, which have been up earlier than the rest, industrial, financial, property and holding companies had all been pushed up at the closing minutes.

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So at the end of the day gains became lopsided in favor of the bulls or became broad based. (table from the PSE)

Some will rationalize this as end of the month so-and-so (blah blah) activities.

Peso volume today was substantial at Php 18.5 billion with about 60% coming from cross trades and special block sales. Foreign participation was a modest net selling at Php 951 million.

Nevertheless you just got to be amazed at how big money (could it be political money?) have been desperately “pushing up” the markets (chart from technistock)

Here is what I wrote last Sunday
Either way, yield chasing or politically motivated actions to artificially prop markets arrive at a similar conclusion: a policy induced mania.
Bottom line is that today’s move represents additional signs of brewing mania.

Ben Bernanke’s Best Inflation Record

Defending the US Federal Reserve's policy at the US Senate committee a few days back, Fed Chair Ben Bernanke says that he has the best tract record in terms of inflation.

From the CNBC,
In criticizing the central bank's easy monetary policy, Sen. Bob Corker, a Republican from Tennessee, called Bernanke the biggest dove since World War II.

Bernanke was quick to push back. "You called me a dove, well maybe in some respects I am, but on the other hand my inflation record is the best of any Federal Reserve chairman in the postwar period – or at least one of the best," he said, citing the 2 percent average inflation rate.

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What Mr. Bernanke refers to is the statistical inflation by the FED. (from tradingeconomics.com)

Yet what you see depends on the where you stand.

Here is another perspective of Bernanke’s best inflation record. (chart courtesy of Zero Hedge)

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Statistical consumer price inflation may have been suppressed but commodity inflation has been the highest since he assumed the role as Fed chairman in 2006!

Some "best" record eh.

Quote of the Day: Elections Are and Always Mostly a Sham

Scholars have been slow to appreciate that elections are and always have been for the most part a sham – a mere ceremony intended to make people believe they have some control over their fate even as they are mercilessly bullied, bamboozled, and fleeced by their rulers.
This is from Robert Higgs’s 2004 volume, Against Leviathan; particularly from the “Escaping Leviathan?” as quoted by Professor Don Boudreaux at Café Hayek

Chart of the Day: Careers of Political Leaders

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The Economist writes
A POLITICIAN, a businessman, a comedian and an economist walk into a room. Unfortunately, this is not a joke—they all vie for the position of Italy's next prime minister. At an election this week the politician received the most votes, but not enough to govern. A deadlock now ensues. The career background of Italy's previous prime ministers is similarly eclectic. Between 1973 and 2010, the two main jobs held by prime ministers before they came to power were split roughly equally between lawyer, professor, and politician or civil servant. Economists featured only three times out of 23. And elsewhere, prime ministers with an economics background are also rare.

According to a paper by Mark Hallerberg of the Hertie School of Governance in Berlin, and Joachim Wehner of the London School of Economics and Political Science, policymakers with "technical competence" are more likely to hold office during a crisis. The authors found that a banking crisis increases the probability of having an economist as prime minister; a professor is more likely to hold the position during stockmarket crashes or inflation crises. Italy's Mario Monti and Greece's Lucas Papademos are recent examples. Unfortunately, voters seem inclined to get rid of them at the earliest opportunity.
Let us see how such a theory applies to the Philippine setting.
The record shows that the civil servant and lawyer background played a significant role in the Philippines political system for a vast majority of Presidents.

However recent trends reveals of a change. Since 1986, the trend of Philippine presidents appears to have gone against the lawyer experience.

11th Philippine president Corazon Aquino had been a housewife to a popular politician Ninoy Aquino. Mrs Aquino rose to political prominence after the assassination of her husband, which resulted to the ouster of the Marcos dictatorship and her presidency. So this seems to go in contrast with the notion of "technical competence" holding political office due to a political economic crisis 

Another EDSA revolution figure, Fidel V Ramos, served as the 12th Philippine president had a career as military officer before ascending to the presidency. Mr. Ramos  graduated as a civil engineer and has a Masters in Business Administration in Business Administration for his educational background.

Popular film actor and 13th Philippine president Joseph Estrada has been a product of the Asian Crisis. 

Mr. Estrada’s career has mostly been as an actor and as local government official who rose through the national political scene. Mr. Estrada was ousted in January of 2001 in a popular revolution due to charges of corruption. Ironically, despite the EDSA II revolution, Mr. Estrada placed 2nd in the 2010 presidential elections

The Estrada election seems as another example that defies the study of the "technical competence" as post-crisis political leader.  Instead such reveals of the populist character of Philippine democratic politics.

I would think that this idiosyncrasies in elections is a country specific rather than generalized view.

The 14th and the 15th Presidents had “economics” as educational background. 

14th Philippine president Gloria Macapagal Arroyo, beneficiary of the EDSA II revolution, had been an academic economist prior to becoming a politician. She was vice president to the ousted Estrada. Ms Arroyo won the 2004 presidential elections that has been clouded by scandals.

While Arroyo’s former student, and the incumbent 15th Philippine president Benigno Aquino III graduated as Economics major, but whose career had mostly been as local official.

The economists backgrounds of two recent presidents are hardly due to political responses from post-banking crisis. I may say that the logic runs backwards. Two presidents with economic backgrounds may have increased the risks of an economic crisis by embracing bubble policies.
 
Rather, since the Philippine presidency has mostly been about the spur of the moment politics, I think that the recent non lawyer trend may have been a happenstance. 

Sidestepping the professor-economist experience, the lawyer, civil servant and celebrity career records remain a dominant force in Philippine politics.

Nonetheless the increasing role played by economists and university profession (this applies according to the study cited by the Economist) in the field of politics tell us why we should distrust mainstream experts, as their mostly statist views could have been motivated by the desire to enter politics or to obtain careers in political institutions or agencies.