Friday, February 12, 2016

Japan's Nikkei Crash 4.84%, Hong Kong's HSI Plummets 1.22% and Korea's Kosdaq Halted After 8% Crash!

Woe to Japan's pensioners. Continuing stock market losses might just bleed Japan's Government Pension Investment Fund (GPIF) dry. The GPIF had been pressured by the Abe administration in 2014 to makeover its portfolio by increasing its exposure in the stock markets (domestic and global). Now stock market losses have been mounting.

It has been a brutal week for the Japanese stock market. Today, the Nikkei 225 suffered another 4.84% crash! Today's slump marks the third consecutive day of heavy losses for the key benchmark this week.


From Bloomberg:
Stocks plummeted in Tokyo, with the Topix index posting its biggest weekly loss since 2008, as global equities plunged into a bear market and the yen rose to its highest level in 15 months.

The Topix sank 5.4 percent to 1,196.28 at the close in Tokyo as trading resumed after a holiday, capping a 13 percent weekly decline. The Nikkei 225 Stock Average fell 4.8 percent to 14,952.61. The yen traded at 112.45 per dollar after touching 110.99 on Thursday, the strongest level since Oct. 31, 2014, when the Bank of Japan eased policy.

“We’ve entered a different phase in the market,” Juichi Wako, a senior strategist at Nomura Holdings Inc. in Tokyo, said by phone. “Dollar-yen movements are at the center as it is now the foreign-exchange market that is in the driver’s seat. We’re at the mercy of how currencies move.”

The currency’s surge is intensifying speculation the BOJ may intervene to arrest gains that threaten to undermine almost three years of monetary stimulus. Finance Minister Taro Aso said Friday the government is watching market movements and will take any action necessary. Following a regular meeting with Prime Minister Shinzo Abe, BOJ Governor Haruhiko Kuroda said he also would watch market moves closely.
Part of the crash has been due to margin calls...
Investors said this week’s declines to below key levels have triggered margin calls among retail traders in Japan, who are being automatically forced to close souring bets. That’s adding to the selling pressure, according to Miki Securities Co.
The Nikkei 225 hemorrhaged a stunning 11.1% in a holiday abbreviated week.


Curiously,  this week's string of losses has brought the Nikkei back lower than when the Abenomics 2.0 was launched in 4Q of 2014. 

So the Abenomics stock market bubble has almost entirely been erased! This should be another wonderful example of the proportionality of bursting bubbles. Or as I previously noted, the bust will be roughly proportional to the imbalances acquired during the inflationary boom

And if the GPIF pushed the stocks all the way to the recent top, then today's downside breach of the 15,000 level must translate to heavy losses for the fund.

Well, most of Asian bourses have been under the spell of bears

Yesterday I noted that Hong Kong's Hang Seng index greeted the year of the Monkey (really year of the bears) with a selloff.  A follow thru session was seen today.


From Bloomberg
The Hang Seng Index lost 1.2 percent to 18,319.58, its lowest close since June 2012. HSBC was the biggest drag, capping a 8.1 percent two-day drop, amid concern over the perceived creditworthiness of European banks. Tencent Holdings Ltd., which has the largest weighting on the index, sank 1.9 percent. Hong Kong stocks have lost almost $2 trillion in market value from an April peak, data compiled by Bloomberg show, while a measure of equities around the world fell into a bear market this week.

“Global sentiment isn’t that great and with the world conditions worsening, the Hong Kong market will tag along with that downtrend," said Jackson Wong, associate director at Huarong International Securities Ltd. in Hong Kong. “We didn’t see any panic selling, but we don’t have any extremely positive catalyst to push up the stock market."

Hong Kong stocks extended their worst start to a lunar new year since 1994 as a global equity slump compounded concern that capital outflows, a slumping property market and China’s economic slowdown will hurt earnings. The Hang Seng Index has tumbled 16 percent this year, while the Hang Seng China Enterprises Index is trading at its lowest level since March 2009. Mainland markets resume trading on Monday after a week-long break.
The Hang Seng index fell 5.02% in a holiday truncated trading week.

This week's selloff in Hong Kong's equities maybe a bad omen for the resumption of trading activities in mainland China next week. Will stocks of mainland China crash too? Or will the national team will be active next week to prevent this?

And another noteworthy event today has been the crash of Korea's small cap index the Kosdaq, which prompted for a trading halt.

From Bloomberg:
Trading in South Korea’s Kosdaq exchange for smaller stocks was temporarily halted after the benchmark gauge plunged more than 8 percent on concern valuations were excessive relative to earnings prospects.

Trading was suspended for 20 minutes at 11:55 a.m. in Seoul after the measure dropped 8.2 percent. The index pared declines to 6.1 percent at the close. Celltrion Inc. was the biggest drag on the small-cap measure after the stock almost tripled in the past 12 months. The Kospi gauge of larger companies closed at its lowest level since August.

The Kosdaq index of more than 1,100 companies jumped 26 percent to outperform the large-cap gauge last year as investors piled into biotech shares and other smaller companies in search of earnings growth as smokestack industries stagnated. Celltrion, which developed an arthritis medicine, trades at 42 times projected 12 month profits, four times the Kospi’s 10.5 times.

Investors are selling small-cap stocks as they look for havens amid the global market turmoil, said Choi Kwang Kook, a senior fund manager at Assetplus Investment Management in Seoul.

World equities entered a bear market on Thursday amid concern over the strength of the global economy, while the yen and gold rallied. Korean markets were closed for the first three days of this week for holidays. Today’s 8.2 percent intraday decline by the Kosdaq is the biggest since December 2011.
The Kosdaq closed down by still a huge 6.06% today! 

Nonetheless, Korea's major benchmark the Kospi was spared of the carnage and was down by just 1.41% for the day and 4.3% for the week.


As noted in the report above, bears have now gained control of the world markets. 

For this week, ASEAN majors were spared from the bloodletting suffered by other regional peers. 

Will China's resumption of trading next week induce a uniformity of actions?

Thursday, February 11, 2016

Sweden's Riksbank Panics: Sends Interest Rates Deeper Into Negative Zone!


As turmoil slams global stock markets (see Europe's major bourses above--as of this writing) anew, the Swedish central bank the Riksbank seems to have panicked. The Riksbank slashed its interest rates further into NEGATIVE territory.

From the Telegraph
Swedish interest rates have been pushed deeper into negative territory, as the country’s central bank became the latest to introduce monetary stimulus in a world of falling oil prices.

The Riksbank elected to cut its policy rate from minus 0.35pc to minus 0.5pc on Thursday, lower than the 0.45pc anticipated by analysts. Policymakers said that the decision reflected a “stronger economy, but longer period of low inflation”. 

“The Riksbank’s very expansionary monetary policy has helped to strengthen the economy and reduce unemployment,” the central bank said, adding that more stimulus had nonetheless become necessary, as “the upturn in inflation is still not on a firm footing”.

Officials cited disappointingly weak inflation data, and slashed their own inflation forecasts. The Riksbank now expects Swedish inflation to rise to just 0.7pc by the end of the year, as opposed to the 1.3pc it had predicted last December. It also cut its estimates for inflation for 2017 and 2018.

So far, the announcement only spiked the USD-Swedish Krona for a short time as the USDSEK has practically returned to earth....

Deepening of the NIRP has done little, so far, to help the Swedish stock market as seen via the intraday Stockholm 30 index. 

What was supposed to be magic from the Central Bankers seem as being discounted or ignored.




Hong Kong Opens New Year Trading with a 3.85% Slump! Australian Equity Benchmark in Bear Market!

China remains on a week long holiday to celebrate their New Year. Yet curiously, in Hong Kong where financial markets has re-opened today, the latter's stock market greeted the New Year with a slump!

The major bellwether the Hang Seng index plummeted 3.85%. What a way to meet the New Year!

From Bloomberg:
Hong Kong stocks fell in their worst start to a lunar new year since 1994 as a global equity rout deepened amid concern over the strength of the world economy.

The Hang Seng Index slumped 3.9 percent at the close in Hong Kong as markets reopened following a three-day trading closure, during which the MSCI All-Country World Index dropped 2.1 percent. The last time the gauge fell so much on the first day of the lunar new year, investors were worried about the health of former Chinese leader Deng Xiaoping...

Hong Kong’s benchmark equity gauge tumbled 12 percent this year through Friday amid concern that capital outflows, a slumping property market and China’s economic slowdown will hurt earnings. Tuesday’s violence in the shopping district of Mong Kok threatens to deter mainland visitors and worsen a drop in retail sales, according to UOB Kay Hian (Hong Kong) Ltd.


The Hang Seng index have been in a full blown bear market down 34.79% from its April 2015 peak.


Yet today's selloff had been broad based. Such selloff had already been signaled by recent developments at the property sector.

Last week, media reported that Hong Kong's property bubble have begun to hiss...

From another Bloomberg report
In a city that saw demand propel property prices to a record last year, the estimate that transactions reached a 25 year-low in Hong Kong shows how quickly sentiment has turned.

Home prices have slumped almost 10 percent since September and monthly sales in January fell to the lowest since at least 1991, according to Centaline Property Agency Ltd. Amid a spike in flexible mortgage rates this month and anemic demand for new developments, the low transactions volume for January is the latest evidence that prices have further to fall.
The point here is that frail conditions in China's economy has now spread to Hong Kong. Additionally, if equity markets performance of Hong Kong remains weak tomorrow, then this could foreshadow China's trading activities next week.

Worst, the feedback mechanism from Hong Kong's bursting property-stock market bubbles reinforces the emerging economic weakness that will amplify credit problems and which will feed on the ongoing asset deflation. 

So China and Hong Kong's fragile and deteriorating economic and financial conditions are likely to intensify and spread within the region.

Increased social frictions are likewise ramifications of a bursting bubble. The recent riots (called as "fishball revolts") are likely to escalate too.

And speaking of contagion from China, the Australian equity bellwether the S&P/ASX 200 fell into the bear market yesterday.


Today's .95% rebound has brought the index slightly above the bear market threshold. 

Yet this has not just been about contagion, but likewise signs of the unraveling of Australia's domestic asset bubbles.


More and more bourses have been falling into the clutches of the grizzly bears. The escalation of contagion only presages the imminence of a Global Financial Crisis 2.0.


Wednesday, February 10, 2016

Quote of the Day: Against Political Romanticism

At the Cafe Hayek, Professor Don J Boudreaux explains why he isn't a political romanticist
I’m afraid that I don’t share your enthusiasm for politics, be they democratic or not. Where you “see citizens [at the polls] selecting our leaders,” I see people voting on which power-mad person will crack the whip over those same people and brand and herd them like cattle. Where you are “inspired by candidates campaigning openly to win the election,” I am frightened to realize that one of those hubris-slathered men or women will actually come to possess such power that no man or woman is, or ever will be, fit to possess. Where you are “charged” by the “vigorous debates” among candidates, my stomach is sickened and my intelligence is insulted by the economics-free, fact-strained, and too-often-vacuous talking (and shouting) points that pass for a serious discussion of issues.

And where you say that you “trust voters” more than I trust them, that depends. You’re correct that I distrust people as voters, for in that capacity they largely express opinions on how other people’s (their fellow citizens’) money should be spent and on how other people’s lives should be led. But I trust – perhaps more than you do, and certainly more than do any of the candidates – those same voters as individuals each to spend his or her own money wisely and to lead his or her life well, each according to his or her own lights, without interference or direction from any of the officious, arrogant, and venal candidates seeking power over the lives of other people.

Tuesday, February 09, 2016

Japan’s Stock Market Crashes 5.4%! Yen Surges! 10 Year JGBs Turn Negative!

I noted last weekend that global central bankers have lost control of stock markets, in spite of recently imposed central bank measures, as well as, promises for more "easing" policies.

I said that “financial markets have apparently grown weary of these central bank elixirs!”

I pointed out how Japan’s stocks, which have been a prime target for NIRP subsidies, has reversed on its early gains. This means that the BoJ's NIRP policy has essentially backfired. 

Well, it appears that my observation had been reinforced today as Japan's major equity bellwether Nikkei 225 crashed 5.4%

From Bloomberg: (bold mine)
Japanese stocks plunged amid a global equity selloff as the yen surged to the highest level against the dollar in more than a year, while financial companies plummeted on growing global unease over profitability and credit quality.

The Topix index sank 5.5 percent to 1,304.33, closing in Tokyo with the largest decline since August. Brokerages and banks led the rout as all of the gauge’s 33 industry groups fell. The Nikkei 225 Stock Average lost 5.4 percent to 16,085.44, its biggest drop since June 2013. The yen surged 1 percent to 114.75 per dollar, the strongest level since November 2014.

“We had a bubble in people’s expectations of the power of central banks. And now we’re seeing that bubble burst,” said Soichiro Monji, chief strategist at Tokyo-based Daiwa SB Investments Ltd. in Tokyo. “Investors are pricing in the fact that central banks can no longer control markets. That became apparent after the Bank of Japan’s last stimulus, and now a similar view is strengthening about the ECB.”
Now even the mainstream admits to the BoJ's failure!


The BoJ’s NIRP was likewise intended to weaken the yen in order to ignite inflation. Well, much to the BoJ's dismay, the Japanese yen has been surging today.

From the same article
Japan’s currency has strengthened against the dollar despite diverging policies taken by each nation’s central bank, with the Bank of Japan last month introducing negative interest rates while the Federal Reserve raised borrowing costs in December and signaled more increases this year. Slowing global growth has pared back trader expectations for at least one U.S. rate hike this year to 30 percent, down from 93 percent at the end of 2015


Another spillover from the BoJ’s NIRP has been to spread negative rates or bond yields to now cover 10 year JGBs

From the same report
Japan’s benchmark 10-year government bond yields dropped below zero for the first time, underscoring the challenge for banks to make money from lending in the world’s third-largest economy. It fell 7 1/2 basis points to a record minus 0.035 percent as of 3:05 p.m. in Tokyo.
Today’s stock market crash was led by banks.



The Topix bank index crashed by a shocking 8.18%!

Also today’s crash basically wiped out the ECB inspired the 5.9% monster rally and has brought the Nikkei back to January 21 lows. 

As I noted then, the fiery rally was nothing more than a dead cat's bounce.


Yet intensifying signs of the reemergence of a global financial crisis can be seen via soaring credit risk.

Credit markets are grappling with a global selloff that’s sending the cost to protect against company defaults to the highest level in almost four years as investors become increasingly nervous that global growth is slowing.

In the U.S., the risk premium on the Markit CDX North America Investment Grade Index, a credit-default swaps benchmark tied to the debt of 125 investment-grade companies, jumped six basis points to about 120 basis points at 4:02 p.m. in New York, the highest since June 2012. A similar measure for borrowers in Europe jumped to the highest level since June 2013...

Banks and insurers in Europe led a surge in the cost of insuring corporate bonds to the highest levels since 2013.

The Markit iTraxx Europe Subordinated Financial index of credit-default swaps on the junior debt of 30 firms soared for an eighth day, rising 47 basis points to 312 basis points, the highest since March 2013, according to data compiled by Bloomberg. The senior benchmark jumped 18 basis points to 137 basis points, while a measure of U.S. corporate bond risk rose four basis points to 119 basis points, the highest since June 2012...

 
All these reveal to us why bear markets dynamics have been spreading, and intensifying. And if the current momentum will be sustained, then we should the same bubble bursting dynamics in the global financial markets to percolate to the real economy.



 The obverse side of every mania is a crash!

Monday, February 08, 2016

Headline of the Day: The Political Tool Called the OFWs

From today's Inquirer

A belated recognition of risk by the establishment?



Yet from my December 2014 warning:
Yet if oil prices remain at below the cost to maintain the GCC’s and oil producing welfare states which may end up with the cutting of social services, how far before Arab Springs or popular revolts emerge?

And yet how will the blowing up of the Middle East bubble extrapolate to Philippine OFW remittances? More than half or about 56% of OFWs according to the Philippine Overseas Employment Administration (POEA) have been deployed to this region. Will OFWs (and their employers) be immune from an economic or financial crisis? This isn’t 2008 where the epicenter of the crisis was in the US, hence remittances had been spared from retrenchment. For this crisis, there will be multiple hotbeds. The ongoing crashes in oil-commodity spectrum have already been showing the way.
Saudi Arabia is state of economic funk. As evidence, she has declared a cut on political spending in response to ‘record’ budget deficit, have been drawing from her foreign currency reserves to bridge this record deficit (forex reserves has plunged 11% from August 2014 highs), Saudi’s sovereign wealth fund has been selling equities (mostly European equities) also designed to shore up her government’s finances, and lastly, statistical GDP has been falling and has been expected to fall further.

Saudi’s plight has not entirely been about oil, but also about her huge welfare state. She has been an active geopolitical player in the Middle East where Saudi forces have been militarily involved in the Yemen civil war against Iran supported Shia Houthi insurgents.

And it has been more than Yemen. The Saudi Arabia government has long helped in the plotting of the overthrow of the Syria’s Assad regime which she has been forthright

Syria’s civil war, which is an extension of the proxy war between the US and Russia (aside from Ukraine), has become an enormous humanitarian disaster.

And Saudi’s anti Assad stance brings her directly against the alliance of supporters of the Syrian regime: Russia, Iran, Iraq and China which raises the risks of escalation of war in the region...

In short, if my suspicions are correct, given the economic and political deterioration in the region, hiring trends in the Middle East may have been on a downswing.
This may not even be a recognition of risk.

Why?


Because such headline seems intended to impress upon or mentally condition the public to lay blame the surfacing internal or domestic problems to external forces. 

Yet once this becomes a reality, such dynamic will not prevent the expose of economic and financial imbalances brought about by sins of omission and commission of the government via the BSP's bubble blowing policies.


Moreover, the emergence of such crisis will only be used to impose more interventions to expand the power of the state. As a famous statist dictum goes: Never let a serious crisis go to waste. It's an opportunity to do things you could not do before. 


Finally, in the season of political circus, what more than to use "modern day heroes" or the OFWs as a source for political grandstanding or to generate votes! As if the government can do anything to substitute prospective job losses with their "planning" and "programs"


Yet why worry? Based on government statisticians, economic contributions from OFWs have become inconsequential



Said differently, in 2015, all of a sudden, the role OFWs remittances have become trifle to the touted consumer spending meme! Or OFWs have been stripped of their role as " heroes".


Yet as for the consumer spending populist dogma, visit the most popular malls (as I had during the past days) and see how much store turnovers and vacancies have grown! Yet the OFW crisis has yet to arrive.




Sunday, February 07, 2016

Happy Chinese New Year!

Wishing you a...
Thanks to my beloved daughter for the graphics

Phisix 6,800: Global Central Banks Lose Control! Chart Porn of Fast and Furious PSEi Bear Market Rallies

the turning of a financial cycle can be quite abrupt due to another feature of debt: its close link with risk-taking and the amplification of market dynamics. During boom times, when asset prices are rising and financial markets are tranquil, borrowers may be lulled into a false sense of security. We could dub this the “illusion of sustainability” whereby even large debt levels appear sustainable when credit conditions are easy and asset prices soar. The illusion of sustainability blinds both borrowers and lenders. But as the cycle turns, the combination of falling asset prices and more turbulent markets means that what was viewed previously as sustainable levels of debt begins to look much more challenging. The decline of profitability, mentioned before, is particularly relevant here. This realisation may elicit deleveraging and outflows that amplify the downward cycle. Policymakers can try to stem the decline in asset prices by loosening monetary policy to turn back the tide, but the already large stock of debt means that monetary policy becomes less effective.—Jaime Caruana General Manager, Bank for International Settlements

I recently wrote that due to my computer predicament I might not be writing this week. But current events have been so compelling for me to miss out. Nevertheless a condensed outlook

In this issue

Phisix 6,800: Global Central Banks Lose Control! Chart Porn of Fast and Furious PSEi Bear Market Rallies

-Central Banks Lose Control as Developed Economy Stocks Nosedive!
-NIRP has Failed; Why NIRP will Crash the Markets!
-Chart Porn: Fast and Furious Bear Market Rallies (1994-2016)

Phisix 6,800: Global Central Banks Lose Control! Chart Porn of Fast and Furious PSEi Bear Market Rallies

Central Banks Lose Control as Developed Economy Stocks Nosedive!

Unlike most of the establishment, at the least one of the highest official of the central bank of central banks, the Bank for International Settlements (BIS), Mr Carauana1, understands: Balance sheets matter!

This means that regardless of central bank’s sustained ramming down into the public’s throats of its credit easing policies, for entities that have been hocked to its eyeballs, you can lead the horse to the water, but you cannot make it drink. In short, credit expansion is limited by the capacity of an entity to earn and pay for such liabilities.

Yet private sector balance sheet expansion through excessive leveraging embodies a major symptom of unproductive activities or the misallocation of resources. And for as long as real savings remain enough to fund the capital consumption or the wealth transfer process, the “boom” phase will account for as the “illusion of sustainability” that masks on the progressing entropy of malinvestments or the almost wholesale blinding of borrowers and lenders. The blinding from the “illusion of stability” includes regulators, politicians and media as well.

However, if something can’t go on forever, it will stop. The laws of economics will force such uneconomic activities to surface. Real savings will be consumed. And the reversal of the “illusion of sustainability” will be evident in the character of self-reinforcing “turbulent markets”, particularly the feedback mechanism of financial losses, deleveraging or liquidations, outflows, and credit strains.

Recent attempts by central banks to subsidize stock markets through negative interest rates appear to have hit a wall

Last week I wrote2, (italics original)

My point is that these central bank policies to subsidize the stock markets via monetary policies, as shown by the experiences of Japan, China and Germany, have conspicuously been increasingly afflicted by the laws of diminishing returns.

The narrowing windows of gains only punctuate on the risk of severe or dramatic downside ‘flight’ actions overtime. Yet central banks refuse to heed reality. But they continue to focus instead on the short term. The result should be the worsening of the unintended consequences from present day ‘rescue’ actions…

While there may be residual vestiges of the BoJ NIRP’s honeymoon effect, given this week’s asymmetric responses, signs are that last two week’s central bank panacea may not last. Perhaps not even a month.

If so, in the next transition from fight to flight, then this would mean that the ensuing cascade should be sharp and fast as central banks have effectively lost control!

Just what happened to the much ballyhooed magic of central bank intervention last week?

Equity markets of nations under NIRP were in a funk! Much of the year to date losses came from last week’s amazing meltdown.

And most importantly, the deficits incurred by Japan’s Nikkei 225 emerged even prior to the announcement of the dismal US jobs report.

Recall that the Bank of Japan (BoJ) has been the latest developed economy to embrace Negative Interest Rate Policy (NIRP). It did so in response to its crashing stock markets.

Yet part of the BoJ’s stock market rescue mission has been implicitly directed at the world’s largest pension fund, the Japan’s Government Pension Investment Fund (GPIF). As noted before, the Abe administration nudged or pressured the GPIF to makeover its portfolio by selling its JGBs or government bond holdings in order to replace them with domestic and global equities.

And because of the GPIF’s accommodation of the Abe administration, its portfolio switch has caused the pension fund to report a quarterly loss of 5.59% in the second quarter as equities underperformed. This according to the Japan Times accounts for “its worst quarterly result since at least 2008”.

Yet lower equity prices mean more losses for the pension fund to come. And more losses imperil funds for Japan’s retirees.

Moreover, the opportunity cost for such portfolio switch has been to give up on significant gains in bonds as the NIRP adaption has spurred Japanese Government Bonds (JGB) from the shortest end up to 9 years into sub-zero yields! As of last week, nearly $6 trillion of Japanese and European sovereign bonds have traded at sub-zero yields!

So as stock markets wilt, financial market participants gravitated to treasuries for safehaven. And don’t forget gold’s surge!

Additionally, by reversing its stance from an earlier denial to employ such policy, the BOJ intended to deliver a “shock and awe” to risk assets, as well as, to the USDJPY (yen).

Talk about the law of unintended consequences.

The Nikkei’s honeymoon period from the NIRP turned out to be just a three day tryst!

As of Friday, the Nikkei traded lower than when the NIRP was announced (middle window). Yet Nikkei 225 futures point to a 3% meltdown on Monday’s opening.

Yet last week’s jawboning by the BoJ last week “to expand stimulus further and is prepared to cut interest rates deeper into negative territory, signalling a readiness to act again to hit his ambitious inflation target”, as well as, by the ECB’s Mario Draghi who said anew that the ECB “will not surrender to low inflation” and vowed to ease further in March, apparently fell into deaf ears as stock markets went into a selling binge.

Financials markets have apparently grown weary of these central bank elixirs!

And as with the Nikkei, the USDJPY was dumped (upper window).

I warned thatJapan’s aging pensioners will serve as the ‘greater fool’ when stock market collapses”. And this may soon come true as sustained stock market losses will likely widen on the GPIF’s deficits.


NIRP has Failed; Why NIRP will Crash the Markets!

And here’s more. When central bank magic fails, its repercussions will spread throughout the global financial markets.

One of the unintended consequences of ZIRP-NIRP activist monetarism has been to put tremendous pressure on banking industry.

Last week, the banking index of Japan’s Topix bank, the US BKX and the Euro Stoxx 600 Bank index profusely bled! The indices shed a shocking -13.74%, -3.9% and -6.2% respectively! The three indices are now in bear markets.

Yet a furtherance of such dynamic entails further tightening in the global financial system. And yes this, in spite of the NIRP!

NIRP will not only crimp on bank margins, it massively skews on the pricing signals of the credit and risk markets, distort on the functionality of payment and settlements (such policies would encourage early payments, excess payments and deferred collection as warned by the NY FED), increase administrative cost of maintaining bank accounts as banks looks for alternative fees to make up for lost income from interest rate arbitrages (e.g. higher fees on ATM and etc…), disrupt on wholesale financing (e.g. repos, money markets) or banking system’s liquidity and compel the public to eventually hold cash. This comes even if governments impose cash controls. Last week the German goverment proposes to limit cash transaction to €5,000 (USD 5,450) while the EU also plans to expand cash controls.

Worst, NIRP attempts to destroy the essential financial concept of “time value of money” or as Investopedia defines “money available at the present time is worth more than the same amount in the future” or present discounted value.

In the context of Austrian economics, “time value of money” is equivalent to orginary interest or the “discount of future goods as against present goods” which accounts for the tradeoff between “want-satisfaction in the immediate future and the value assigned to want-satisfaction in remote periods of the future”

And this is why NIRP will fail. As the great Ludwig von Mises presciently warned3.(bold mine)

If there were no originary interest, capital goods would not be devoted to immediate consumption and capital would not be consumed. On the contrary, under such an unthinkable and unimaginable state of affairs there would be no consumption at all, but only saving, accumulation of capital, and investment. Not the impossible disappearance of originary interest, but the abolition of payment of interest to the owners of capital, would result in capital consumption. The capitalists would consume their capital goods and their capital precisely because there is originary interest and present want-satisfaction is preferred to later satisfaction.

Therefore there cannot be any question of abolishing interest by any institutions, laws, or devices of bank manipulation. He who wants to "abolish" interest will have to induce people to value an apple available in a hundred years no less than a present apple. What can be abolished by laws and decrees is merely the right of the capitalists to receive interest. But such decrees would bring about capital consumption and would very soon throw mankind back into the original state of natural poverty.

Now you see the truth behind the push for ‘financial inclusion’ in emerging markets like the India or the Philippines?

First, bring the majority into the formal banking system. Next, impose ZIRP and NIRP. Then Ban cash. Also, impose all forms of capital controls.

The end result (or the ultimate goal) is the (full) CONTROL by the establishment of private sector’s savings! Authorities and their establishment agencies can charge myriad fees at will, monitor every movement of funds of the account holder, eventually they will direct monetary flows (control transactions or everyone’s business), they will garnish accounts which they see as acting against their mandates or rules, and or simply confiscate or tax private sector’s resources during times of distress.

Events at the developing world have been showing the way!

Yet the basic laws of economics ensure that financial totalitarianism will be met by mountains of obstacles.

Proof? The global banking system’s dilemma in the face of ZIRP-NIRP has been spotlighted by this news report from the Financial Times4. (bold mine)

Share prices of major banks have plunged this week, with Credit Suisse hitting a 24-year low and Deutsche falling to 2009 prices. Santander, BBVA and UniCredit also traded at levels last seen during the eurozone crisis.

Bank weakness is truly global. US banks were downbeat on fourth-quarter earnings and the S&P financials are down more than 12 per cent in 2016. Indices for European and Japanese banks have lost nearly a quarter of their value this year.

Ultra-loose monetary policy, including the adoption of negative rate policy in Japan and expectations of further easing in Europe, has heightened fears for global economic growth. Lower long-term interest rates also reduce the earning power of banks. US financials have been hit hard by a lower net interest margin outlook while investors worry that the commodity plunge will intensify credit losses for the sector.

“This is totally linked to the rates environment,” said Lloyd Harris, a credit analyst at Old Mutual Global Investors. “At the end of last year, you were positioned for a rising rate environment. The equity market this year reflects that those expectations around higher rates have diminished.”

Bradley Golding, managing director at Christofferson, Robb & Co, highlighted that bank profitability is reduced as leverage and capital constraints leave lenders competing for the same business opportunities.

“The yield curve used to steepen in a recession and spreads used to widen, so even if you lost money on your existing book, new loans were done at a profitable level. Quantitative easing really hasn’t allowed that to happen,” said Mr Golding.

In mid-January, Italy provided an early indicator of the trauma ahead for bank investors, with Monte dei Paschi hitting a record low on the back of concerns about non-performing loans.

Weakness in equity prices has extended to the riskiest bank bonds. The €95bn market for so-called additional tier 1 bonds, which convert to equity or are written down when a bank’s capital falls, has endured dramatic losses this year.

Policies from panicking central banks have now caused disorder, distress and a tizzy at the financial markets. Curiously, these policies have been designed to protect them. Now it appears to have backfired.

And stock market anxiety has now spread. In the US, the once crowd or momentum favorites or the index drivers, the FANG (Facebook, Amazon, Apple, Netflix and Google) has likewise fallen to the strains from recent wave of selling. Linkedin crashed an astounding 44% last Friday! [there is more to discuss but I’m short of time]

And interestingly, all these have been occurring even as the USD has weakened. The USD sank by a hefty 2.6% this week.

Of course, the USD has signified today’s most crowded trade. And any reversal from a crowded trade will imply extended and amplified volatility.


And with massive shorts against EM currencies, the unwinding of the crowded trade positions (short EM) translated to big rallies. Asian currencies rallied strongly. And part of the rallying Asian currencies got reflected on stocks. Indonesian JKSE soared 3.98%, Philippine Phisix jumped 1.16% and the Thai Set added .41%. Meanwhile the Malaysian KLSE lost -.32% this week.

The Indonesian rupiah gained 1.12%, the Philippine peso .14% and the Thai baht +.29%. On the other hand the Malaysian ringgit slid .13%.



Aside from the intense pushbacks by financial markets on NIRP and on assurances by central banks of Japan and the EU, the much tempered expectations that the FED will further raise rates, the massive short covering on EM currencies, the Chinese government made sure that they celebrate this week’s New Year Spring Festival by stinging offshore yuan (CNH) shorts.

Many high profile hedge funds have announced short positions on the yuan. Billionaire crony George Soros have engaged China’s president Xi Jinping in a public debate as the former declared a short position against the Chinese currency at the year’s start.
The PBoC reported a massive decline to its foreign currency hoard to the tune of $118 billion last January. This brings the Chinese government’s forex reserves to just $3.2 trillion from a pinnacle of nearly $4 trillion in early 2014.

So the likelihood that last week’s state intervention on the CNH market would redound to even lower reserves in February as the Chinese government desperately puts on a fa├žade on her financial assets, stocks, bonds, and the currency.

Chinese financial markets will be closed for the week in celebration of the Chinese New Year, so they will hardly be a factor.

Yet despite her absence, with central banks appears to effectively been losing control! This only means that the selling pressures on risk asset will likely crescendo!

To repeat my warning last week,

If so, in the next transition from fight to flight, then this would mean that the ensuing cascade should be sharp and fast as central banks have effectively lost control!

Decoupling anyone?

Chart Porn: Fast and Furious Bear Market Rallies (1994-2016)

Below is the table that highlights all the bear market rallies from 1994-2016.

The oversold bounce of the previous two weeks has signified as one of the most intense bear market rallies since 1994. In 11 days, the average daily % gains totaled 1.02%!

Yet the most powerful and the swiftest bear market rallies, aside from the most incidences which had the two traits, occurred in 2007-2008.

Since no two bear markets are the same, it would be futile to report on statistical correlation.

What matters are the causal linkages that led to them.


There had been 3 bear market strikes in 1994-95.

The 3 bear markets were a natural response to the blistering 179% skyrocketing of the PSEi in 1993! The bear markets wanted to profit take, yet the easy money environment prevented this from happening. So from the deferment of the market clearing process, imbalances mounted.

During the 3 bear market strikes, bulls feverishly and violently pushed the PSEi back up 24.46%, 24.5% and 31.57%, respectively, in very short periods of time. Thus the W shaped activities.

It was in the fourth attempt that bulls managed to prevail…for a limited period: 1 year and 2 months. However, the 1996 rally marked the last before the expiration of the 1986-1997 11 year secular bull market cycle.



The 1997-8 Asian crisis bear market saw two massive bull market rebellions or fierce countercyclical rallies during its first wave down, 18.64% and 52.2% correspondingly.

Yet those bear market rallies accounted for as false positives in terms of the return of the bull market.

The bear market cycle that started in 1997 had four major cyclical rallies on the path to its culmination. Aside from the above, the spurned rallies of 1998-1999, 2000-2001 and 2001-2002. Rallies during these cycles declined in scale and duration.


The GFC inspired 5 fast and furious countercyclical rallies that all went down the drain.

All 5 eventually surrendered to the bears.

However, the 2009 return of the bulls, mainly due to BSP easy money policies led to the bull market which was rattled by 2013 taper tantrum chapter.


The rally from taper tantrum bear market resonated with 1994-1995 cycle. But unlike 1994-95 which responded to a fantastic one year 179% spurt, the 2013 episode came in response to the 320% return in 3 years and 2 months.

Nonetheless the rate cut by the BSP in October 2012, which combusted a 10 month 30%+++ money supply growth from massive credit expansion, salvaged the PSEi taper tantrum away from bear market and back into the fold of the bulls.


Most events do not happen out of random, as they represent consequences of previous actions.

And this is why we have a 2016 bear market.

And the 2016 bear market will unmask “the illusions of stability”. 

As history shows, the most recent vicious rally only reinforces the denial phase that foreshadows the demise of the 2003-2015 bullmarket.

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1 Jaime Caruana General Manager Bank for International Settlements, Credit, commodities and currencies Lecture at the London School of Economics and Political Science February 5, 2016

3 Ludwig von Mises Originary Interest, Part Four: Catallactics or Economics of the Market Society, Chapter XIX. The Rate of Interest, Human Action Mises Institute


4 Financial Times Global financial stocks slide to new lows February 5, 2016