Monday, November 25, 2013

Phisix: Are ASEAN Markets Signalling Trouble?; More on Typhoon Yolanda

My concluding statement in the epilogue section of last week’s reports looks prophetic. I wrote[1],
If the Philippine market does experience a convulsion in response to a possible deterioration of regional conditions, expect Typhoon Yolanda to be a favorite scapegoat.
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Equity benchmarks of the region had been mostly lower this week, with Thailand’s SET and the Philippine Phisix posting losses of over 4%.

The Typhoon Yolanda Bogeyman

Yet some examples[2] of Typhoon Yolanda as post hoc scapegoat “Investors were on profit-taking mode following the downgrade of the country's economic outlook because of the impact of Typhoon 'Yolanda'” ; “adding to those worries was the gradual stream of reports indicating the cost of damage due to Typhoon Yolanda” and “Typhoon has provided overseas investors a good excuse to continue taking profit.”

The other issue rationalized as contributing to the loss in the Phisix has supposedly been concerns over the Fed’s “tapering”.

As an update, estimated damages tallied by the National Disaster Risk Reduction and Management Council has now reached P22,659,851,383.76[3]. This would represent 53.7% of the Php 42.2 billion economic costs by the reigning “most destructive” storm to hit the Philippines, Typhoon Pablo. Typhoon Yolanda currently ranks third after Typhoon Pablo (December 2, 2012) and Typhoon Pepeng (October 2-10, 2009). My guess is that we will know whether Typhoon Yolanda will surpass the degree of devastation by Typhoon Pablo possibly by next week which I believe should spotlight the peak of the damage assessments.

Despite the “Typhoon equals lower stocks” meme, as I have pointed out last week and two weeks back, empirical evidences exhibits a smidgen or an iota of causal relationship between Typhoons and the stock market performance or even the economy[4].

But obviously, conducting meaningful investigations to establish realistic representations has hardly been a concern for “experts”, instead the same “experts” simply feed on the public’s desire for popular convenient excuses regardless if such relationship stands on tenuous grounds.

In the context of behavioral science, ‘experts’ employ availability bias[5]—ranking of importance of information based on easiest to be recalled—to satisfy the demand for confirmation bias of the gullible public.

Nevertheless Typhoon Yolanda has snared the lead from Typhoon Uring (November 4-7, 1991) as the “deadliest” of all Typhoons to have hit the Philippines. As of the latest count, Typhoon Yolanda has claimed 5,235 lives with 1,613 missing[6]. If we add missing to the death count this adds to 6,848.

As far as Typhoon classification goes, “deadliest” has not necessarily equated to “destructive”, so far only Typhoon Yolanda has been running consistent on both categories.

More Politicization of Typhoon Yolanda

Last week, I also pointed out how the popularity addicted Philippine President scoffed at projections of 10,000 casualties from the storm saying that such estimates have been ‘too much’. At an interview with a foreign media outfit, he publicly insisted on a range of 2,000-2,500 as maximum fatality count. He even sacked the Police officer who gave the initial estimates.

Within the week, the National Disaster Risk Reduction and Management Council (NDRRMC) reportedly stopped the death count due to changes in “the policy on accounting”[7] as the death estimates surpassed the 4,000 level, but immediately reversed this on public clamor. The NDRRMC chief denied “receiving orders to stop releasing the death toll” or the involvement of politics[8].

Has insisting on a statistical threshold and the sacking of the Police officer not been an act of politics?

With the death count careening farther away from the President’s estimates and fast approaching the 10,000 estimates, will the Philippine President reinstate the Police officer and or make a public apology? How about if the deaths reach 10,000, will the President resign?

By publicly announcing a threshold level, not only does this reveal of the administration’s PR Public Relations gaffe, this unfortunate and sordid event exposes on the administration’s obsession for approval ratings, where as noted above, reports showed of an attempt at the suppression of the official death count via censorship.

This essentially highlights the administrations use of Joseph Stalin’s “a single death is a tragedy a million death a statistic”. 

Where every death is a tragedy, even more tragic is the use of disasters to promote political self-interests.

And politicization hasn’t been exclusively the realm of the Presidency, this applies to other officials such as the Vice President as well as spouse of an incumbent official whom have reportedly used political “branding” in the distribution of relief goods[9].

ASEAN Currencies: Signs of Trouble Ahead?

Also in the closing segment of last week’s report I warned that instead of focusing Typhoon Yolanda we should rather be vigilant on the activities within the region
I would rather be watching two neighbors, Indonesia and China, who seem to be experiencing re-emergent signs of financial market ‘tremors’ which poses as potential risks for a shock…

The last time the rupiah hit a milestone this coincided with the turmoil in the ASEAN financial markets.
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Figure 1: ASEAN-4 Currencies

ASEAN currencies have been enduring re-emergent signs financial pressures see figure 4.

Within the week, the USD-Indonesian rupiah (via one year chart, see Figure 1) breached the September highs to set fresh milestone. Last Friday, the USD rupiah closed at a 5-year high.

The Philippine peso has also manifested signs of renewed weakening against the US dollar. The Peso fell .4% this week and closed Friday at June highs. The peso has been in consolidation since the Fed’s UN-taper from September through the first week of November.

The Malaysian ringgit and the Thai baht has equally been losing ground against the US dollar.

Going back to the Peso, the Bangko Sentral ng Pilipinas reported net foreign portfolio inflows in October at US$969 million which has been “much higher than the US$683 million recorded in September and US$40 million a year ago.”[10] Foreign money flowed into PSE-listed securities (52.6 percent), Peso GS (44.0 percent) and Peso time deposits (3.4 percent).

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Figure 2: Net Foreign Portfolio Flows (BSP)

The data I accumulate via daily PSE quotes reveals of net selling (Php 7.545 billion) which varies from the BSP October figures. Given the benefit of the doubt that my data may not be reliable, it’s seems unusual to see the Peso firming by a marginal .75% in October when in September a much smaller portfolio inflow resulted to a 2.4% gain in the Peso. The red circle shows of the net foreign portfolio flow last October (Figure 2) at US $969 million as against the $682.72 million last September.

Aside from statistical reporting difference or anomalies, could this underperformance by the peso have been due to the BSP’s selling of US dollar Gross International Reserves in October (which resulted to a lower US $.1 billion to $83.4 billion[11]) or could the private sector residents accumulated on US dollars to enough offset these alleged substantial foreign net inflows?

The recent bout of infirmities in the peso has already began to hamper “earnings growth” conditions of many publicly listed firms such as San Miguel Corporation[12], Aboitiz Power[13] and parent Aboitz Equity Ventures[14], PLDT[15], JG Summit[16], Philex Petroleum[17], Cebu Pacific[18], Energy Development Corp[19] and Atlas Corporation[20]

Though the extent of impact varies from company to company, earnings impairment from foreign currency losses—due to one quarter of currency volatility—exposes on the vulnerabilities of these companies to currency risks due to foreign currency debts. As I have been pointing out, zero bound rates have impelled many publicly listed companies to increase leverage exposure, many of them on foreign exchange debentures.

The 64 billion peso question is what if the peso continues to fall further? How will these impact the earnings of these companies? Will the recourse be more borrowing to offset the losses and hope for a peso recovery? What if foreign liabilities become substantial enough to put credit quality on the line?

The ASEAN 4’s currency frailties signify just one of the aspects.

Bond Vigilantes Harries ASEAN Bond Markets

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Figure 3: ASEAN-4 10 Year Local Currency Bonds

The global bond vigilantes have been romping at the ASEAN 4 except the Philippines.

The 5 year high in the rupiah has been reflected on Indonesia’s sovereign 10 year bonds whose yield fast approaches (24 basis points away from) the September highs.

Malaysia’s 10 year bond yield has just been 5 basis points away from the July high at 4.14%.

Yields of Thailand’s 10 year bonds have likewise been soaring and now signify just 19 basis points away from the August highs.

Philippine 10 year bonds remain in a temporary tranquil state.

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Figure 4: ASEAN Debt Outstanding

And with ASEAN debt inflation as the principal engine of economic growth, rising rates will increase the cost of servicing debt, prove to be an obstacle to present debt based growth dynamic (by slowing expansion and diminishing demand) while at the same time increasing credit risks.

Let me cite an example. The third quarter rampage by the bond vigilantes in Thailand has tellingly slowed the Thai statistical economy which grew 2.7% on an annualized basis.

From the Wall Street Journal Real Time Blog[21]
The NESDB — the government’s economic planning agency — blamed the weaker-than-expected results on falling household spending and consumption after the expiration of the government’s First Car tax rebate last December resulted in a significant drop in auto purchases. Declining farm income and weaker consumer confidence also hurt consumption.

Growth was also hurt by a slowdown in construction, a fall in machinery and equipment investment, a slow recovery in global demand for Thai goods and sluggish shrimp production owing to an unresolved spread of a disease among shrimp stocks.
Go look at the Thai bond yields during the 3rd quarter on figure 3. Rising yields and the falling Thai baht or the volatility spike in Thai’s financial market has apparently crimped on the Thai economy. The article omits mentioning this.

And ASEAN’s debt profile as shown in Figure 4[22] reveals that the region’s debt distribution has been asymmetric. 

While Thailand and Malaysia have been both vulnerable to household debt, the risks to the Philippines have been in the financial sector which has been the primary source of funding for the government and non-financial institutions while household debt represents a speck of the overall. 

As a side commentary, this is what the mainstream fails to see: How the banking and financial system in the Philippines have been ‘concentrated’ to a few, given the still low penetration levels of banking access and credit access in the household level, despite the so-called boom.

So when the Philippine government issues statistical growth, they tend to exaggerate economic activities in the formal sector as representative of the whole. These numbers hardly account for the huge part of the Philippine economy which remains informal.

Based on the definition of the informal sector by Wikipedia, “not taxed, monitored by any form of government, or included in any gross national product (GNP), unlike the formal economy”[23], this means that many segments of the Philippine economic data are subject to substantial statistical errors.

Meanwhile, Indonesia which presently has been the focal point of ASEAN’s weakness, oxymoronically has generally, the smallest exposure on debt. 

Two insights we can see from the recent developments.

One the level of debt tolerance has not been relatively based, as fallaciously argued by some officials and mainstream experts defending the current credit boom, but on creditor—per country relationship basis.

Two, while Indonesia may function as catalyst for a potential crisis, Thailand and Malaysia appear to be even more vulnerable to a sudden shift in the confidence levels of creditors.

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Figure 5 ASEAN LCY Bond Foreign Ownership

Figure 5 reveals how fragile or how ASEAN bonds are sensitive to foreign sentiment, given the substantial level of foreign ownership of local currency bonds. Foreign money accounts for nearly 30% of local currency bonds in Indonesia and Malaysia while Thailand has about 15%.

Given today’s global wild and rampant yield or momentum chasing activities, combined with massive cumulative build-up of economic distortions from central bank policies, sudden shifts in foreign sentiment may spur extensive dislocations in the marketplace again exposing all the amassed imbalances.

The Philippine contemporary, as previously discussed has been a relatively closed and illiquid market. As I wrote in September[24]
The investor profile of the domestic bond market reveals of a seeming proportional distribution of the outstanding bonds between the resident private sector institutions and various domestic government agencies. In other words, the Philippine government and their private sector allies have been able to ‘manage’ bond markets.
This doesn’t mean that closed and illiquid markets serve as free passes for bubbles. If ASEAN markets will undergo sustained turbulence, there will most likely be a spillover to Philippine bond and financial markets. Since the Philippine bond markets have been grotesquely mispriced, I expect the volatility in the bond markets to be magnified.

ASEAN’s financial turmoil will be evinced by extended episodes of liquidity shortages that will expose on accrued malinvestments concealed by the recent boom. Companies desperate for funding will frantically compete from the diminishing pool of supply amidst dramatically receding confidence and a shift to fear. Such dynamic will eventually force up domestic bond yields at a rate even faster than the more liquid counterparts.
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Figure 6 Indonesia’s yield curve

Indonesia’s rapidly flattening yield curve seems like a good example see figure 6[25].

Above, I pointed on how Indonesia’s 10 year yield seems to be swiftly approaching September highs. But the flattening yield curve reveals that short term yields have been rising more hastily than the longer end. This is a sign of an advancing stage of a liquidity crunch. The liquidity crunch will be magnified when yield curve inverts. Inverted yield curves have usually been accurate indicators of recessions or crisis. 


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Figure 7: ASEAN Default Probabilities

Indonesia’s rising bond yields and speedily falling rupiah have also been reflected on the default risks via 5 year Credit Default Swaps (CDS) Probability of Default (PD)[26].

While Indonesia’s annualized probability of default 3.3% (based on recovery rate of 40%) is far from Argentina (15.6%) or Venezuela (12.8%), we seem to be seeing a formative upside move. 

Meanwhile ASEAN’s bond vigilantes have yet to influence the CDS default probabilities of Thailand, Malaysia and the Philippines. Nonetheless ASEAN’s CDS probabilities remain elevated relative to the pre-Abenomics levels which demonstrate languishing concerns over financial stress.

ASEAN Stock Markets: Patterns and Pairs

This leads us to the stock markets.

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Figure 8: Clustering Illusions? Phisix-SET and the Nikkei

I bring up again the peculiar similarities in figure 8 first between the Philippine Phisix (upper left window) and Thailand’s SETI (upper right window).  Since the start of the year the Phisix-SET has acted in an uncanny resemblance with each other. This can be identified through their recent inflection points (green arcs). Well this week’s near identical fall 4+% seems even creepier. 

A second bizarre pattern can be traced to the similitude of the Phisix-SET with Japan’s Nikkei 225 during the latter’s boom bust transition over a 10 year period (red rectangle). While the Nikkei’s pattern may not be as precise as the Phisix-SET, the Nikkei’s chart exudes of a full scale bear market that followed a manic boom.

The likeness of the Phisix-SET and the Nikkei can be seen via the major inflection points as highlighted by the green arcs.

While I hardly am a believer in chart patterns, my question is will a repetition of the Nikkei’s pattern be expressed via the Phisix-SET? Considering the similarities in the extensive build up of systemic debt (although distinctly distributed), I guess the answer will entirely depend on the bond vigilantes.

And compared to the earlier surges in ASEAN bond yields, where ASEAN stocks responded forcefully as seen via sharp volatilities, today’s stock market actions seem to be more subtle and partially different.

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Figure 9 ASEAN stocks: Malaysia’s KLCI Indonesia’s JCI and Singapore STI

Aside from the seemingly steep deterioration in the nearly self-same Phisix-SETI, Indonesia’s JCI seems to be in a slow but steady decline see figure 9

ASEAN stocks go against Malaysia’s KLCI, ASEAN’s odd man out, which recently even etched record highs. Malaysia’s flagging bond markets and the falling ringgit have only dented the KLCE marginally.

Meanwhile the ASEAN developed economy equity market benchmark of Singapore, via the STI, uncharacteristically seems to approximate movements of Indonesia’s JCI. The inflection points of JCI-STI again reveals of the noteworthy similarities

So ASEAN equities appear to trade in pairs: Singapore’s STI-Indonesia’s JCI and Philippine Phisix-Thailand SETi

As a side note Singapore’s 10 year bond markets and currency, the Singapore Dollar, seem to also exhibit signs of relapse.

Will Malaysia’s KLCI lead the rest of ASEAN out of the woods? Or will the bond vigilantes spoil the KLCI’s party and bring her to tow the line along with the rest of her neighbors?

ASEAN’s Fed Taper Bugaboo

Aside from the Typhoon Yolanda bogeyman, I find comments by highly paid local “experts” attributing the relative underperformance of ASEAN equities on the Fed’s taper as signs of cluelessness.

When outgoing Fed chief Ben Bernanke surprised the markets heavily expecting a tapering with an UN-taper last mid-September[27], the rebound in ASEAN markets failed to keep pace with advances counterparts in the US, Europe and Japan and eventually faltered. Then tapering was off the table but ASEAN markets floundered and disappointed.

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Figure 10: Yardeni.com Retail Investors Leads the Yield Chasing Momentum[28]

Recently incoming Fed Chairwoman Janet Yellen has signalled continuity of Bernanke’s dovish policies or the retention of easy money environment. This has been celebrated by stock market participants who pumped US stocks to a Wile E Coyote running off the cliff momentum[29]. Unfortunately ASEAN markets fumbled anew

Retail investors have been piling up on US stocks see figure 10

While there have recent been chatters over the Fed’s taper, “tapering” will hardly be a reality soon, particularly for a steroid asset bubble dependent economy. This also means the Fed’s taper has hardly been the current source of ASEAN’s sustained underperformance.

As far as June 2013[30], I have been saying that the Fed’s tapering signifies a “poker bluff”, as yields of US treasuries have been rising since July 2012. Even Mr. Bernanke’s QE 3.0 in September 2012 failed to stem the rising yields.

Here is what I wrote[31]
But treasury yields have been rising since July 2012. Treasury yields have been rising despite the monetary policies designed to suppress interest rates such as the US Federal Reserve’s unlimited QE in September 2012, Kuroda’s Abenomics in April 2013 and the ECB’s interest rate cut last May.

Rising treasury yields accelerated during the second quarter of this year, which has now been reflected on yields of major economies, not limited to G-4.
Mr. Bernanke’s tapering bluff was called last September.

Aside from tapering expectations, rising rates of US treasuries (USTs) have been partly reflecting on a combination of the following factors 

-inflationary boom gaining traction which has spurred accelerating demand for credit thus pushing up interest rates.

-erosion of real savings or the diminishment of wealth generators or growing scarcity of real resources due to the massive misallocation of resources prompted by central bank inflationist policies.

-diminishing returns of central bank policies where continued monetary pumping has led to higher rates.

-inflation premium, despite relatively low statistical CPI. Perhaps markets have been pricing inflation of asset bubbles

-growing credit risks of the US government

-Triffin Dilemma or Triffin Paradox[32] where improving US trade deficits have been reducing US dollar liquidity flows into the global economy.

As for the underperformance by ASEAN, such has been partly been in response to the above dynamics combined with the possible peaking of internally generated “homegrown” bubbles as manifested by the unsustainable convergence trade[33]

I even find signs of massive denials and intensifying desperation by experts to even seek a Manny Pacquiao victory in the hope that such would boost the domestic stock market[34].

Well the oversold markets will surely experience bounce. Mr Pacquiao’s victory or the coming announcement on Philippine GDP which I expect to be in line with the mainstream’s expectations given the late spurt of credit growth will have little do with it.

As shown above the actions of the Phisix appear to be anchored to the developments of her neighbors. This means that the region recovers and the Phisix will rise with the tide or a tsunami will sink all boats.

In my view risks seems very high and will continue to do so for sometime.






[4] See Typhoon Yolanda and the Phisix November 11, 2013







[10] Bangko Sentral ng Pilipinas Foreign Portfolio Investments Yield Net Inflows in October November 14, 2013

[11] Bangko sentral ng Pilipinas End-October 2013 GIR Stand at US$83.4 Billion November 7, 2013

[12] Businessworld Online Forex losses weigh on San Miguel November 11, 2013


[14] Inquirer.net Aboitiz reports 8% decline in net income October 30, 2013

[15] Businessworld Online PLDT profit growth sustained as of Sept. November 5, 2013

[16] Manila Bulletin Forex losses trim JGS’ net income November 11, 2013





[21] Wall Street Journal Real Times Economic Blog Thai Economy Disappoints and More Risk Ahead, November 19,2013

[23] Wikipedia.org Informal sector





[28] Yardeni.com US Flow of Funds: Equities November 22, 2013






Saturday, November 23, 2013

Phisix and the Manny Pacquiao Post Hoc

The boxing legend Manny Pacquiao 35 will try to regain lost glory with a return bout against Brandon Rios 27 for the vacant WBO welterweight bout at Macau SAR.

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The Bloomberg presents an interesting “chart of the day” on how the Phisix reacts to Mr. Pacquiao’s historical fight performances
The CHART OF THE DAY shows the Philippine Stock Exchange Index has risen 73 percent of the time in the first trading day after a Pacquiao win, compared with 52 percent for all days since 2007. The gauge climbed an average 0.5 percent the day after fights, versus an average 0.04 percent increase for the entire period.

“Pacquiao’s victory in the ring creates a nationwide euphoria that things will get better -- positive sentiment, positive investment,” said Jonathan Ravelas, chief market strategist at BDO Unibank. “A victory by Pacquiao will help lift the Philippine spirit at a time when it’s facing the impact of calamities. The nation definitely needs to hear something positive right now.”
In my view this represents a great example of the cognitive bias called clustering illusion—or looking for patterns where there have been none, which also serves as a convenient “post hoc” rationalization for the relationship between Mr. Pacquiao fights and the Phisix.

Some facts...

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Mr. Pacquiao unfortunately lost his two last bouts in 2012 (Tim Bradley June 9, 2012 and to Juan Miguel Marquez December 8, 2012—Box Rec

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And a coincidence is that Mr. Pacquiao’s surprise loss to Marquez in 2012 coincided with the Typhoon Pablo December 2-9 2012, which turned out to be the “most destructive” storm for the Philippines-which Typhoon Yolanda has been widely expected to top.

The final tally from Typhoon Yolanda has yet to be reported. For now agricultural losses (php 10.59 billion) and infrastructure damage (php 1.98 billion) which adds up to php 12.57. The government estimates production losses at Php 8.6 billion. So total losses is at Php 21.7 billion halfway from Typhoon Pablo. (inquirer)

While it may be true a day after Pacquiao’s victories resulted to mostly gains in the Phisix in terms of frequency (73%) and scale (.5%), Mr. Pacquiao’s alleged contribution in “uplifting the Philippine spirit” has not been supported by trends seen from the longer frame. [Note I did not bother to take a look at the Phisix returns post Bradley and Marquez fights]

Proof?

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The Phisix roared to its highest level in May 2013 despite the twin losses by Mr. Pacquiao to Mssrs Bradley and Marquez. Again the loss to Marquez has been coincidental with Typhoon Pablo. 

In short, there has hardly been a relationship between Mr. Pacquiao’s performance (or Typhoon Pablo) and the Phisix which media and the experts try to associate and sensationalize by appealing to emotions.

The above also shows how desperate industry participants have become since the losses from June (which have been Non-typhoon or Pacquaio related but about the renascence of the global bond vigilantes) 

The Phisix has posted losses for three consecutive weeks, namely 3.5% week ending November 8, .14% November 15, and this week’s 4.12%, for a total of 7.76%. 

My hunch: unless Monday should turn out with a surprise deterioration from our neighbors, Indonesia and Thailand (which I believe have signified as the key sources for the weakness in the Phisix), the oversold conditions of the Phisix should translate to a temporary bounce, whether Pacquiao wins or losses.

As for Pacquiao’s boxing career, whether he wins or he losses, I believe that he has reached his peak, and is on the way to a decline for the simple reason that Mr. Pacquiao is human and mortal

Mr. Pacquiao’s insistence to refrain from retirement is I think not only about money and prestige but about the denial of this reality. The same denial we see in industry participants facing what seems as increasing risks of a full scale bear market for ASEAN. 

As a former boxing aficionado, while I respect Mr. Pacquiao as one of the greatest boxers ever, that respect remains limited to the four corners of the boxing ring.

Friday, November 22, 2013

Quote of the Day: Four Old Fashioned Monetarist Heresies

1) For any given growth rate of aggregate spending, lower actual rates of price and wage inflation mean higher levels of output and employment;

2) For any given growth rate of aggregate spending, higher expected rates of price and wage inflation mean lower levels of output and employment;

3) An increase in the growth rate of aggregate spending is not the same as an increase in the equilibrium rate of inflation;

4) An increase in aggregate spending succeeds in raising the rate of inflation only in so far as it fails to increase output and employment.

I submit these old-fashioned monetarist heresies for the consideration of all those who think that an increased target rate of inflation will help us out of our present economic quagmire.
(italics original)

This is from economics Professor and Cato Institute senior fellow George Selgin at the FreeBanking.org.  In short, Inflation ≠ Real Economic Growth

Self Promotion: Forbes’ Jesse Colombo Endorses My View: The Philippines' Economic Miracle Is Really A Bubble In Disguise

Forbes’ columnist the articulate Jesse Colombo emails (published with Mr. Colombo’s permission)
I’m a Forbes columnist and economic analyst who is a fan of your newsletter/blog.

I thought you may be interested in a report that I wrote about the Philippines’ economic bubble…

I linked to your piece about the Philippines’ mall bubble in my report.
Thank you Jesse.

I am reluctant to write about the Philippines’ economic bubble after the devastation that the country has endured due to the recent typhoon. My heart goes out to all of the victims and their families. Please visit this page to learn how you can donate and help the victims of typhoon Haiyan. I have been writing a series of reports about bubbles in Southeast Asia, and the Philippines is one of the economies that I have been warning about even before the typhoon. My goal is to warn about economic bubbles to prevent humanitarian crises that result when bubbles pop.

The archipelago nation of the Philippines is part of the overall emerging markets bubble that has been inflating since 2009 after China launched a $586 billion economic stimulus plan to counter the negative effects of the global financial crisis on their economy. China’s stimulus plan called for an aggressive credit-driven infrastructure and residential real estate-based economic growth strategy that resulted in the building of scores of cities and other projects – many of which are still empty or unused – across the entire country. The stimulus plan succeeded in temporarily boosting economic growth, and drove a global raw materials boom (and bubble) that benefited commodities exporters such as Australia and emerging market nations. Very soon, investors the world over were clamoring into emerging market investments to diversify away from investments in troubled Western economies.

Record-low interest rates in the West and Japan, along with the U.S. Federal Reserve’s multi-trillion dollar quantitative easing or QE programs led to an epic $4 trillion surge of speculative “hot money” into emerging market investments from 2009 to 2013. A global carry trade developed in which traders borrowed large amounts of capital at cheap interest rates from the U.S. and Japan, and reinvesting the proceeds into high-yielding assets in emerging markets for the purpose of earning the “spread” or favorable interest rate differential. The explosion of demand for emerging market investments helped to inflate bubbles in those countries’ assets, particularly in bonds, which resulted in incredibly low borrowing costs for EM governments and corporations. Ultra-low interest rates have enabled government-driven infrastructure booms, as well as dangerous credit and property bubbles across the emerging world.
Read the rest here

 

Thursday, November 21, 2013

Paul Krugman's "capitulation" on Obamacare

Economic Policy Journal’s Chris Rossini showcases on the transitional capitulation by the popular economist Paul Krugman on Obamacare (hat tip Bob Murphy). 

From the EPJ: (bold original)
As an update to a previous post, I'm proud to announce that Truth and Paul Krugman have crashed into one another. It's in regards to Healthcare.gov, but hey, when worlds collide, it's only right to recognize it.

So let's look at the timeline (my emphasis):
Oct. 1 - "The glitches will get fixed."
Oct. 14th - "Obviously they messed up the programming big time, which is kind of a shock.But this will get fixed..."
Nov. 6 - "If the bugs in healthcare.gov get fixed..."
AND NOW .... Drumroll please!
Nov. 20 - "But the future of the reform depends not on policy per se but on whether the IT issues can be fixed well enough soon enough, a subject on which I have zero expertise."
There we go...Krugman has no clue. He had no business saying that anything would work. It took almost 2 months, but he got there.

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Krugman’s changing view in the context of the Kubler Ross grief cycle.

This also serves as a wonderful example of today’s quote of the day.

Quote of the Day: Economists are about as useful as a fork in a sugar bowl

If you suspected that mainstream economists are useless at the job of seeing a crisis in advance, you would be right. Dozens of studies show that economists are completely incapable of forecasting recessions. But forget forecasting. What's worse is that they fail miserably even at understanding where the economy is today. In one of the broadest studies of whether economists could predict recessions and financial crises, Prakash Loungani of the International Monetary Fund wrote very starkly, "The record of failure to predict recessions is virtually unblemished." This was true not only for official organizations like the IMF, the World Bank, or government agencies but for private forecasters as well. They're all terrible. Loungani concluded that the "inability to predict recessions is a ubiquitous feature of growth forecasts." Most economists were not even able to recognize recessions once they had already started.

In plain English, economists don't have a clue about the future.

If you think the Fed or government agencies know what is going on with the economy, you're mistaken. Government economists are about as useful as a fork in a sugar bowl. Their mistakes and failures are so spectacular you couldn't make them up if you tried…

Why do people listen to economists anymore? Scott Armstrong, an expert on forecasting at the Wharton School of the University of Pennsylvania, has developed a "seer-sucker" theory: "No matter how much evidence exists that seers do not exist, suckers will pay for the existence of seers." Even if experts fail repeatedly in their predictions, most people prefer to have seers, prophets, and gurus with titles after their names tell them something—anything at all—about the future.
This is from John Mauldin and Jonathan Tepper at the Casey Research.

Developing… Indonesia’s Rupiah testing new 5 Year lows

Instead of focusing at Typhoon Yolanda, I said that we should focus on our neighbors. Here is what I wrote last weekend
I would rather be watching two neighbors, Indonesia and China, who seem to be experiencing re-emergent signs of financial market ‘tremors’ which poses as potential risks for a shock…

The last time the rupiah hit a milestone this coincided with the turmoil in the ASEAN financial markets.

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The rupiah is at the Rubicon…

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Earlier the rupiah touched 11, 730, the intraday high early September.

As one would note from today’s intraday chart the rupiah seems upward bound. 

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Will the breakout to new USD-rupiah highs occur today?

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Strains in Indonesia’s currency market appear to be reflected on the yield of 10 year sovereign bonds.

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The Jakarta Composite Index is still closed, but Indonesia’s stock markets have already been weakening.

Should the fresh rupiah lows (or USD-rupiah high) become a reality, brace for downside turbulence for ASEAN markets.

Wednesday, November 20, 2013

Video: Google Search: The Reunion (What GDP can't capture)

Hat tip Cafe's Hayek's Russ Roberts; Source Google India

Bitcoin’s Future is in Asia and More

Well bitcoin has been under sustained fire from authorities who see cryptocurrencies as undermining the monopoly of central bank fiat money.

Sovereign Man’s Simon Black explains why bitcoin’s future is in Asia
Senator Tom Carper (Delaware) is confused about Bitcoin.

As Chairman of the Senate Committee on Homeland Security and Governmental Affairs, this is how Carper framed his opening remarks yesterday at a hearing about digital currencies– with complete, incoherent confusion.

Carper’s hearing went on for several hours as one witness after another testified about the potential evils of digital currencies. They hailed from agencies and organizations like:
  • The Homeland Security committee
  • Criminal Division of the US Attorney General’s Office
  • US Secret Service Criminal Investigative Division
  • The Financial Crimes Enforcement Network
  • The International Centre for Missing & Exploited Children
Based on the way they stacked the witness list, the message they’re sending is clear: digital currencies like Bitoin equate to crime, terrorism, and child exploitation.

But the height of absurdity in yesterday’s hearing probably came during the testimony from the Financial Crimes Enforcement Network (FinCEN), in which the agency’s chief cited the BENEFITS of digital currencies, including:
  • anonymity
  • simple, easy to navigate
  • lower fees than the conventional financial system
  • globally accessible
  • can be used as both a store of value and medium of exchange
  • security
etc.

Yet in listing all of these benefits, FinCEN’s chief was actually trying to make a case AGAINST Bitcoin! In her mind, only criminal terrorists want low-fee, secure, globally accessible money.

All of these politicians and bureaucrats can’t wait to get their arms around digital currency to regulate the hell out of it. They don’t understand it… therefore they think it’s dangerous.

Even the World Bank president (a US government-appointed stooge) weighed in on digital currencies. It’s obvious they’re all afraid.

And their entire argument begins with the deeply flawed premise that financial privacy is somehow wrong, immoral, and nefarious.

I’d add that if bitcoin is a manifestation of declining trust on the US dollar standard or even fiat money, then bitcoin will flourish not only in Asia but around the world despite sustained harassment by governments around the world.

As proof of this, the world’s first bitcoin ATM was launched 3 weeks back in Vancouver Canada.

Fiatleak.com has a real time counter which tracks global bitcoin trades.

And curiously as government’s continue to tighten their grip on bitcoin, the web’s response has been to introduce an bitcoin based “assassination market” where RT.com “Barack Obama, Ben Bernanke and the prime minister of Finland are already on the hit list.” 

Bitcoin is also a manifestation of the transition to the information age where much of people’s 'decentralized' activities will revolve around the web.

As Laissez Faire Book’s Jeffrey A Tucker notes
How long will it take before the full implications reveal themselves?  It took email some 20 years to go from obscure to common. Digital phone technology needed about the same swath of time. Bitcoin, however, could be different. Information travels farther and faster than ever before. Adoption could be led by peoples who are currently excluded from the existing cartelized system of privilege. Every currency crisis, whether national or international, could be a catalyst for advances.

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Here is an update of bitcoin prices in US dollars which been exploding amidst amidst intense scrutiny from public officials.

US Jobs Statistics Allegedly Manipulated Prior to Obama Re-election in 2012

The official "knee jerk" response has been to always deny and to call for investigation on charges of statistical manipulation.

From the Bloomberg:
There is no sign U.S. jobs statistics have been compromised by broad-based employee fabrication of data, according to the Census Bureau.

“We have no reason to believe that there was a systematic manipulation of the data described in media reports,” the agency said today in a statement.

An article in the New York Post alleged employment figures heading into the 2012 presidential election were manipulated. Under pressure from supervisors to boost response rates in the Philadelphia region, Julius Buckmon, a former Census Bureau employee, said he made up information for people he couldn’t reach two years before the 2012 election, according to the Post.

The newspaper, citing an unnamed source, then said the practice went beyond a single employee, escalated in the year of the election and continues to this day. Attempts by Bloomberg to locate Buckmon were unsuccessful.
The US congress has been reported to open an inquiry on this matter.

The link to the NY Post here

If true, then this would validate Jack Welch, former chief executive officer of General Electric Co. who in October of 2012 raised eyebrows when he went on air to question labor statistics saying that the numbers “defied logic”

This adds to the number of growing instances as in EU, Asia, Japan, China, Argentina among the many where fabricating statistics has been a political ploy. Even in the Philippines, I recently quoted an admission by a BSP official on the credibility of domestic CPI data.

This also goes to show why the public should always be leery or skeptical of the accuracy of government statistics since they can be or has been used to reflect on political agenda or the self-interests of political agents rather than the actual state of the economy. The worship of statistics is like the worship of untruths

Tuesday, November 19, 2013

Chart of the Day: A Gold to Bitcoin Rotation?

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Bitcoin has more than doubled during the past two weeks. 

Bitcoin was last traded at 784 per USD dollar (Mt. Gox) while gold at $1,275 (stockcharts.com).

Monday, November 18, 2013

Quote of the Day: The difference between Typhoon Haiyan (Yolanda) and Hurricane Camille

The difference, which is more than an order of magnitude, is largely (but not completely) due to poverty. Despite experiencing roughly five landfalling tropical cyclones per year, Philippine infrastructure simply isn’t as sound as it is in wealthier countries. As a grim example, a number of Haiyan’s casualties actually occurred in government-designated shelters that collapsed in the roaring eyewall. 

In addition, the transportation infrastructure simply couldn’t handle a mass evacuation. If a similar situation applied to the U.S. Gulf Coast, Camille would have killed thousands at landfall, a fact noted in the Hurricane Center’s report on the 1969 season. Where Haiyan hit in the Philippines, there simply weren’t any roads capable of evacuating the citizens of Tacloban City safely inland, forcing them to ride it out dangerously close to the invading ocean and exposed to winds that pulverized most structures.

So, while we really don’t know which storm had higher winds, we do know that more affluent societies are much less affected by even the strongest storms. As Indur Goklany, (who writes frequently for Cato) has pointed out, if left to develop, the entire world will be much more resilient to climate change than it would be if the ineffective policies to “stop” it slowed economic growth.
This from Patrick J Michaels, climatologist and director of the Center for the Study of Science at the Cato Institute