Sunday, January 25, 2015

Quote of the Day: Get ready for negative interest rates in the US

I predict that the Fed will start charging negative interest rates on bank reserve accounts, which will ripple through the markets and result in negative interest rates on savings at banks. I make this prediction only because it is the logical action of the Keynesian managers of our economy and monetary policy. Our exporters will scream that they can’t sell goods overseas, due to the stronger dollar. So, what is the Fed’s option? Follow the lead of Switzerland and Denmark and impose negative interest rates in order to drive down the foreign exchange rate of the dollar.

It is the final tool in the war on savings and wealth in order to spur the Keynesian goal of increasing “aggregate demand”. If savers won’t spend their money, the government will take it from them.
This from Austrian economist Patrick Barron at the Mises Canada

Saturday, January 24, 2015

Infographics: The Bre-X Scandal: A History Timeline

From Visual Capitalist
Courtesy of: Visual Capitalist

Phisix: Draghi’s Bazooka Sends Philippine, Indonesian, Indian and New Zealand Stocks to Record Highs!

Here is the Philippine Stock Exchange’s press release on Phisix 7,500+ (bold mine)
"With the moderate slowdown in China's economy, coupled with Japan's economic recession and Europe’s debt crisis, and notwithstanding the US economic resurgence, emerging markets such as the Philippines will stand out due to its strong macro-economic fundamentals and sustainable growth story. The positive sentiments by the market as regards the European Central Bank quantitative easing program further propelled our market to an all-time high," said PSE COO Roel A. Refran.

"I believe that our stock market will remain resilient amidst the global realities buoyed by investors’ continued confidence in our economy," Refran added.

Year-to-date, the PSEi is already up by 4.4 percent.
Let us put in to perspective this week’s record run.

Asian stocks flew this week with the Philippine Phisix registering one of the (surprise!) underperformers ex-China on a weekly basis. The domestic benchmark rose by only .77% week on week.

With the exception of a few bourses, weekly gains of other Asian national benchmarks have been at a stunning 3% and above!!!

Yet the best performers year to date as of Friday posted over 6% returns. The topnotch position have been shared by Vietnam (+6.74%), Thailand (+6.72%), and India (+6.47%) (see green rectangles). 

Yet despite the relative underpeformances, bourses of New Zealand, Indonesia and the Philippines set record highs (with stars, see also above).

India’s Sensex stole the limelight by outclassing the rest this week PLUS a record high. Or stated  differently, record high has been a product of a carryover from last week’s gains PLUS this week’s fiery performance

Equity bellwethers of Pakistan, Singapore and Taiwan have now been just off record highs.

Meanwhile Thailand’s bellwether has completely recovered the steep December losses and seems as headed for a landmark high. 

Ironically, Thailand’s dazzling performance comes with a stagnating statistical economy whose GDP in 2014 has been less 1% as of 3Q. As I earlier pointed out, Thailand’s stocks reported record stock market trading volume in 2014 as abundant liquidity fueled a massive bidding spree on stocks and real estate than on investments on the real economy plagued by overleverage and political uncertainty.

The Malaysian KLCE, on the other hand, maybe far off the record levels, but has rallied strongly this week. This comes even as the Malaysia’s PM went on air this week to talk about and deny a crisis!!!

Underperformance of Chinese stocks hasn’t been what it seems. 

Apparently shaken by the market’s reaction, the Regulatory Commission backed off in the succeeding days. And helped by PBoC’s injection of funds to troubled companies, the Shanghai Index recovered almost entirely Monday’s crash through the weekend.

And if one glimpses at the chart of the Shanghai index the Chinese bellwether currently drifts at a milestone 2009 high! So despite a  “moderate slow down in China’s economy”, Chinese stocks are at watermark highs. So how has the growth story been consistent with record stocks? 

It’s been noted too that Japan has been in a recession. So what explains soaring stocks in a recession

And in the order of year-to-date performance of  Asian bourses, the Phisix ranks fifth in the region after 4th placer Hong Kong.

The bottom line is that there has been little to do about being a “stand out due to its strong macro-economic fundamentals and sustainable growth story” but about a massive and indiscriminate regional pump which characterizes a risk ON environment in expectations of abundance of liquidity from the ECB operations.

The recognition that there have been problems with China, Japan and Europe aside from oil and commodity producing emerging markets suggest that “strong macro-economic fundamentals and sustainable growth story” represents a fantasia unless the Philippines is a closed economy.

The fact that there are trade, capital and investment and remittance links means that a slowdown from these major economies will have relative impact depending on the transmission linkages to an economy with exposure to them. The impact will be (again) relative to the specifics of the industries involved. Writing off risks by stereotyping only begs the question.

Draghi’s Bazooka has pumped up European stocks to record levels even when corporate fundamentals have been sluggish or even collapsing in terms of estimates of annual and forward earnings (via MSCI ex-UK)

The Nikkei Asia quotes an expert on the record highs of Indonesia and the Philippines:  "The ECB decision will definitely ease liquidity pressure" on Association of Southeast Asian Nations markets, said Mixo Das, a Singapore-based equity strategist at Nomura.

And this has exactly been what the region’s stock market pump has been about: expectations of a plethora of liquidity from the ECB’s action. The ECB repeated pronouncements during the last quarter of 2014 has paved way for most of the region’s pump from the onset of 2015.

Feel good rationalization is the order of the day

Just take a look at the headlines from yesterday’s business section of the Inquirer: Market Seen to Hit 8,000 Mark, Corporate Earnings May Grow By 16% in 2015 from last year’s 6%

Corporate earnings grew by only 6% in 2014??? Huh? The market returned or paid 22.76% last year for only 6% growth??? Said differently, punters paid nearly THREE times more than the actual growth rates! 

And this has been why the Phisix has reached absurd valuation levels via multiple expansions.

Let us extend mainstream logic. 2014 performance translates to 3.79% gains for every 1% earnings growth. If the past should extend to the future, then at 16% growth, the Phisix should return 61% or be way past 10,000 (11,640)! So why stop at 8,000? Because the target looks more rational than the logical basis of its premises?

Now what happens if the 16% growth does NOT emerge? PERs will jump from the current 30,40,50 to 60,70,80? And this is sensible or normal?

As I have been saying here, G-R-O-W-T-H has served nothing more than to rationalize or justify outrageous bidding up of risk assets. It’s not  about G-R-O-W-T-H, it’s about GAMBLING. Gambling financed by bank credit and liquidity that has been rationalized by G-R-O-W-T-H!

I wrote about Warren Buffett’s favorite stock market indicator the  market cap to gdp last September.

Given that the Phisix generated 22.76% in 2014 and has been up 4.4% as of Friday, while say, 2014 GDP will be as what mainstream expects at 6%, here is what I wrote last September which should be relevant today:
Total Market capitalization as % of GDP has reached 105.6 in 2012 as per the World Bank, chart from In 2013 since the Phisix yielded only 1.33% as compared to a statistical 7.2% GDP, a back of the envelop calculation posits that the said ratio must have declined to possibly 99.73. However, considering the 1H GDP at 6%, coming amidst a 26.8% return at the end of June, this implies a market cap to GDP at a stunning record of 120.53 way way way past the pre-Asian Crisis!
Yet what happens when mainstream expectations of GDP will be unfulfilled like in 3Q? If the markets don’t make the necessary adjustments then at current price levels, the market cap to GDP will spike  to even more ridiculous levels! And if markets continue to rise we get the same outcome—patent mispricing!

And this has been about “strong macro-economic fundamentals”? Or has this been about flagrant misappreciation of risks that signifies as symptoms of financial destabilization in progress?

Every time the mania deepens this warning from Harvard’s Carmen Reinhart and Kenneth Rogoff becomes increasingly relevant: 
The essence of the this-time-is-different syndrome is simple. It is rooted in the firmly held belief that financial crisis is something that happens to other people in other countries at other times; crises do not happen here and now to us. We are doing things better, we are smarter, we have learned from past mistakes. The old rules of valuation no longer apply. The current boom, unlike the many previous booms that preceded catastrophic collapses (even in our country), is built on sound fundamentals, structural reforms, technological innovation, and good policy. Or so the story goes …
Or how about the central bank of Central banks, Bank for international Settlement’s General Manager Jaime Carauna’s admonition last November
Credit booms can act as a smokescreen. They tend to mask the sectoral misallocations that I just described, making it difficult to detect and prevent these misallocations in time. Boom times also tend to hide other slow-moving forms of deterioration in real growth potential.
Asian currencies has been less indiscriminate relative to stocks.

But still traces of the Asian Risk ON landscape has been evident. The peso rallied strongly this week, up 1.1%. Year to date the peso has been up 1.2% or about 90% of year to date gains came from last week.

On a year to date basis, aside from India’s rupee, the Thai baht, Taiwan dollar and the South Korean won has been up despite uneven performance this week. This means that the Philippine peso’s rally has been belated or a catch up move.

The Indonesian rupiah rebounded strongly too, but this only shaved off the year to date losses.

Ironically strong stock market performances failed to filter into the Singapore dollar and the Malaysian ringgit. So there has been signs of divergence between the stock market and the currency market.  Asymmetric performance suggests of ephemeral conditions—either the currencies of Singapore and Malaysia’s will strengthen or stocks will weaken.

And paradoxically too, Singapore’s near record stocks comes in the light of increasing alarmism by the mainstream over signs of growing cracks in the city state’s credit and housing bubbles.

And in the Philippine record stocks hasn’t been transmitted to the bond markets.

Despite the $2 billion of bonds raised from the international markets, and the supposed “seasonality” of the yield curve, Philippine bond markets hardly improved going into the end of January or after 3 weeks.

While the yields of 3 months bills did markedly decline, it still remains at May 2013 levels, yet the (10-25 year) bonds have declined even more. Yields of one month, 6 months and one and 2 year had been marginally higher.


The result has been to aggravate the flattening of the curve. The spread between the 10 and 20 years relative to the 6 months, 1 and 2 years continues to narrow. Some of last week’s seeming marginal improvement seems to have reversed.

And curiously the inversion of yields of the 5 year with 4 and 3 year counterparts has only deepened. Yields of one month bills at 2.379% has inverted with the 3 months at 2.136%. Though these are minor inversions they are symptoms that the tightly controlled bond markets  have not been as healthy as what the establishment  and media wants the public to believe.

So how can corporations grow at a rate of 16% when a flattening of the yield curve postulates to lesser credit activities for the economy and subsequently lesser profits for the banks?

At the end of the day, all these rationalizations have been no more than pat on the back or feel good self serving bias—attribute success to skills and failures to external factors.

Such rationalizations have been common traits during market tops similar to Japan’s Nikkei when it peaked at 39,000+ in December 29, 1989.

Finally, how has Friday's fresh record closing been attained?

Well by the methods considered as illegitimate but now has become regular: marking the close. About a third of Friday's gains have been etched by the last minute pump! 

Index managers have been panic buying and accumulating outrageously valued index issues in thinking that today's world risks has been expunged out of existence.  

Sometime soon reality will arrive in the form of a rude awakening.

Friday, January 23, 2015

Quote of the Day: What is this War on Terror?

But what is France fighting for in this war on terror? For terrorism is simply a tactic, and arguably the most effective tactic of the national liberation movements of the 20th century.

Terrorism was used by the Irgun to drive the British out of Palestine and by the Mau Mau to run them out of Kenya. Terrorism, blowing up movie theaters and cafes, was the tactic the FLN used to drive the French out of Algeria.

The FALN tried to assassinate Harry Truman in 1950 at Blair House, shot up the House of Representatives in 1954, and, in 1975, blew up Fraunces Tavern in New York where Washington had bid his officers farewell. The FALN goal: Independence from a United States that had annexed Puerto Rico as the spoils of war in its victory over Spain.

What did the FLN, FALN, Mau Mau, Irgun and Mandela’s ANC have in common? All sought the expulsion of alien rule. All sought nations of their own. All used terrorism for the same ends as Uighurs do in China and Chechens do in the Caucasus.

Osama bin Laden, in his declaration of war upon us, listed as his casus belli the presence on the sacred soil of Saudi Arabia of U.S. troops and their “temple prostitutes.” He wanted us out of his country.

What are Valls’ terrorists, jihadists and radical Islamists fighting for? What are the goals of ISIS and al-Qaida, Boko Haram and Ansar al-Sharia, the Taliban and al-Shabab?

All want our troops, our alien culture and our infidel faith out of their lands. All seek the overthrow of regimes that collaborate with us. And all wish to establish regimes that comport with the commands of the Prophet.

This is what they are recruiting for, killing for, dying for. We abhor their terror tactics and deplore their aims, but they know what they are fighting for. What are we fighting for?

What is our vision that will inspire Muslim masses to rise up, battle alongside us, and die fighting Islamists? What future do we envision for the Middle East? And are we willing to pay the price to achieve it?

Comes the reply: America is fighting, as always, for democracy, freedom and the right of peoples to rule themselves.

But are we? If democracy is our goal, why did we not recognize the election of Hamas in the Palestinian territories, or of Hezbollah in Lebanon? Why did we condone the overthrow of the elected regime of Mohammad Morsi in Egypt? Why do we not demand democracy in Saudi Arabia?

But hypocrisy is the least of our problems. The real problem is that hundreds of millions of Muslims reject our values. They do not believe all religions are equal. They do not believe in freedom of speech or the press to blaspheme the Prophet. Majorities in many Islamic countries believe adulterers, apostates, and converts to Christianity should be lashed, stoned and beheaded.

The entire article is a recommended read.

ECB’s QE Effect; Danish Central Bank Cuts Interest Rates Twice this week

Here is one interesting ramification from the ECB’s QE, the Danish central bank cut interest rate twice this week:

Denmark cut its main interest rate on Thursday for the second time this week as it sought to dampen interest in its currency among investors selling the euro after the European Central Bank announced a stimulus package.

The Danish central bank lowered its deposit rate to minus 0.35% from minus 0.2% after cutting from minus 0.05% on Monday. It left its other main interest rates unchanged.

The Danish move came ninety minutes after ECB President Mario Draghi announced an expansion of an ECB bond-buying program aimed at supporting growth and lifting inflation expectations in the eurozone. Mr. Draghi said the ECB will buy a total of €60 billion ($69 billion) a month in assets including government bonds, debt securities issued by European institutions and private-sector bonds.
The Danish currency the krone has been pegged to the euro, which means that Denmark has de facto part of the EMU via the ECB’s policies

And considering that the Swiss SNB abandoned the franc-euro cap last week, speculations have been rife that Denmark might do the same.

Back to the article:
Since last week’s surprise retreat by the Swiss central bank from its policy of limiting the rise of the Swiss franc against the euro, analysts have been wondering who might be next and focus has been on Denmark.

“It’s very clear that the Danish central bank is feeling the pressure,” said Peter Kinsella, a foreign-exchange strategist at Commerzbank. “The fact that they have acted twice in the space of just a single week shows that they are indeed very concerned.”

Some have wondered if Denmark’s peg might be vulnerable and the central bank has been quick to show it won’t shy away from cutting its main rate well into negative territory and intervening in the currency market if that is what is needed.

“We have the instruments necessary to maintain the peg, we have done today what we have done on previous occasions,” said central bank spokesman Karsten Biltoft by phone from Copenhagen. “First we intervene in the foreign exchange market, then we change the interest rate,” Mr. Biltoft said.

Interestingly, for Denmark household debt has been the largest in the OECD.

From a January 2014 Bloomberg report
Denmark is reining in its $550 billion home loan industry, the world’s biggest per capita, after cheap credit fed a borrowing spree. Danes owe their creditors 321 percent of disposable incomes, a world record and a level that warrants a policy response, the Organization for Economic Cooperation and Development said in November.

Denmark’s consumers are backed by some of Europe’s biggest pension savings, at about 1 1/2 times gross domestic product, central bank figures show. While the structure of the nation’s housing market and pension system mitigates some of the credit risks, Noedgaard said debt levels are hampering consumer spending, which makes up half Denmark’s $340 billion economy…

Household borrowing from mortgage lenders and banks stood at 1.88 trillion kroner ($345 billion) in October, the majority of it home loans, after peaking at 1.91 trillion kroner in December 2012, according to central bank statistics.
Media notes that Denmark's debt levels have been hampering consumer spending. Of course, debt enables the frontloading of spending to the present. This has a cost: future spending. But the future has arrived, debt has to be paid at the cost of present spending. There is no such thing as a free lunch. If income doesn't grow debt levels will be a problem.

And according to a report from the European commission (March 2014):
Denmark's mortgage system is characterised by a high share of variable-rate and deferred amortisation loans. The share of variable-rate (or "adjustable rate") loans by mortgage banks remains high at 72% of total lending in November 2013. The variable rate loans are particularly widespread among families in the top 10% and the bottom 10% of the income distribution. The share of deferred-amortisation loans, i.e. loans with interest-only payments in the initial phase of the contract, is also high, amounting to 53% of total mortgage lending in November 2013.
The above highlights the sensitivity by Denmark's household balance sheets to changes in interest rates even if part of this has been "backed by pensions".

In other words, a surge in inflation expectations may spike interest rates which may may render Denmark’s economy vulnerable to a margin call. Add to this the fragile confidence on Denmark’s credit conditions which increases the possibility of markets to speculate against the peg.

This one reason why the Danish central bank will eventually follow the SNB.

ECB Draghi’s “Do Whatever It Takes” Promise Now a €60 billion a month Reality, Global Stocks Parties

So the widely anticipated ECB Mario Draghi’s “do whatever it takes” promise of Quantitative Easing has become a € 60 billion a month reality beginning March 2015 until September 2016.

22 January 2015 - ECB announces expanded asset purchase programme:

-ECB expands purchases to include bonds issued by euro area central governments, agencies and European institutions

-Combined monthly asset purchases to amount to €60 billion

-Purchases intended to be carried out until at least September 2016

Programme designed to fulfil price stability mandate

The Governing Council of the European Central Bank (ECB) today announced an expanded asset purchase programme. Aimed at fulfilling the ECB’s price stability mandate, this programme will see the ECB add the purchase of sovereign bonds to its existing private sector asset purchase programmes in order to address the risks of a too prolonged period of low inflation.

The Governing Council took this decision in a situation in which most indicators of actual and expected inflation in the euro area had drifted towards their historical lows. As potential second-round effects on wage and price-setting threatened to adversely affect medium-term price developments, this situation required a forceful monetary policy response.

Asset purchases provide monetary stimulus to the economy in a context where key ECB interest rates are at their lower bound. They further ease monetary and financial conditions, making access to finance cheaper for firms and households. This tends to support investment and consumption, and ultimately contributes to a return of inflation rates towards 2%.

The programme will encompass the asset-backed securities purchase programme (ABSPP) and the covered bond purchase programme (CBPP3), which were both launched late last year. Combined monthly purchases will amount to €60 billion. They are intended to be carried out until at least September 2016 and in any case until the Governing Council sees a sustained adjustment in the path of inflation that is consistent with its aim of achieving inflation rates below, but close to, 2% over the medium term.

The ECB will buy bonds issued by euro area central governments, agencies and European institutions in the secondary market against central bank money, which the institutions that sold the securities can use to buy other assets and extend credit to the real economy. In both cases, this contributes to an easing of financial conditions.

The programme signals the Governing Council’s resolve to meet its objective of price stability in an unprecedented economic and financial environment. The instruments deployed are appropriate in the current circumstances and in full compliance with the EU Treaties.

As regards the additional asset purchases, the Governing Council retains control over all the design features of the programme and the ECB will coordinate the purchases, thereby safeguarding the singleness of the Eurosystem’s monetary policy. The Eurosystem will make use of decentralised implementation to mobilise its resources.

With regard to the sharing of hypothetical losses, the Governing Council decided that purchases of securities of European institutions (which will be 12% of the additional asset purchases, and which will be purchased by NCBs) will be subject to loss sharing. The rest of the NCBs’ additional asset purchases will not be subject to loss sharing. The ECB will hold 8% of the additional asset purchases. This implies that 20% of the additional asset purchases will be subject to a regime of risk sharing. 
The press release includes a technical annex.

Here is the official statement issued by ECB president Mario Draghi (bold original)
Based on our regular economic and monetary analyses, we conducted a thorough reassessment of the outlook for price developments and of the monetary stimulus achieved. As a result, the Governing Council took the following decisions:

First, it decided to launch an expanded asset purchase programme, encompassing the existing purchase programmes for asset-backed securities and covered bonds. Under this expanded programme, the combined monthly purchases of public and private sector securities will amount to €60 billion. They are intended to be carried out until end-September 2016 and will in any case be conducted until we see a sustained adjustment in the path of inflation which is consistent with our aim of achieving inflation rates below, but close to, 2% over the medium term. In March 2015 the Eurosystem will start to purchase euro-denominated investment-grade securities issued by euro area governments and agencies and European institutions in the secondary market. The purchases of securities issued by euro area governments and agencies will be based on the Eurosystem NCBs’ shares in the ECB’s capital key. Some additional eligibility criteria will be applied in the case of countries under an EU/IMF adjustment programme.

Second, the Governing Council decided to change the pricing of the six remaining targeted longer-term refinancing operations (TLTROs). Accordingly , the interest rate applicable to future TLTRO operations will be equal to the rate on the Eurosystem’s main refinancing operations prevailing at the time when each TLTRO is conducted, thereby removing the 10 basis point spread over the MRO rate that applied to the first two TLTROs.

Third, in line with our forward guidance, we decided to keep the key ECB interest rates unchanged.

As regards the additional asset purchases, the Governing Council retains control over all the design features of the programme and the ECB will coordinate the purchases, thereby safeguarding the singleness of the Eurosystem’s monetary policy. The Eurosystem will make use of decentralised implementation to mobilise its resources. With regard to the sharing of hypothetical losses, the Governing Council decided that purchases of securities of European institutions (which will be 12% of the additional asset purchases, and which will be purchased by NCBs) will be subject to loss sharing. The rest of the NCBs’ additional asset purchases will not be subject to loss sharing. The ECB will hold 8% of the additional asset purchases. This implies that 20% of the additional asset purchases will be subject to a regime of risk sharing.

In the question and answer portion, asked whether Greek debt and  bonds with negative yields will be included in the program?

Mr. Draghi’s reply:  
Second question, the answer is yes. And to the first question, let me say one thing here. We don't have any special rule for Greece. We have basically rules that apply to everybody. There are obviously some conditions before we can buy Greek bonds. As you know, there is a waiver that has to remain in place, has to be a program. And then there is this 33% issuer limit, which means that, if all the other conditions are in place, we could buy bonds in, I believe, July, because by then there will be some large redemptions of SMP bonds and therefore we would be within the limit.

And by the way, let me add, if there is a problem, if there is a waiver, all these are not exceptional rules. They were rules that were already in place before. So we're not creating.
It’s important to point out here that the ECB's buying of negative yields will mean that as part of the program, the ECB will be absorbing losses.

In addition, as noted above the ECB has a risk sharing provision; the risk sharing component essentially attempts downplay the politics of redistribution from the ECB program. But at the end of the day, the burden of transfer will fall on the shoulders of the productive nations.

And this is why the ECB’s 60 billion QE has hardly been unanimous, as again German representatives reportedly expressed opposition. From the Wall Street Journal: The 25-member governing council’s wasn’t unanimously in favor of the new program. While the vote breakdown will not be published, it’s likely the decision was opposed by the two German members, and possibly others. German policy makers don’t believe there is a risk of deflation in the eurozone, while Germans also worry that QE is a form of central bank financing of government deficits, a taboo in the eurozone’s largest members. German policy makers also fear it will ease pressure on governments to press ahead with painful economic reforms.

Yet today’s ECB action represents a product of a series of previous actions that has not worked but has not deterred seemingly desperate central banks, along with the BoJ, from trying.

As I wrote last November,
Yet the ECB has been easing since 2008. The ECB has pared down interest rate from 4.25% in 2008 to merely .05% today. The ECB cut the Eurozone’s interest rate twice this year.

Not only that, the ECB has imposed negative deposit rates on banks last June in order to “stimulate lending”. Along with the negative deposit rates, the ECB likewise pumped liquidity to the banking system to promote loans to small and medium enterprises via the Targeted Long Term Re-financing Operations (TLTRO). The ECB expected at least €100 billion to be availed of by the banking system. Unfortunately, last September the first tranche of TLTRO only induced €82.6 billion worth of borrowings from 255 banks.

Obviously all these hasn’t worked, so despite interest rate cuts, negative deposit rates and the TLTRO, the ECB finally embarked on asset purchases initially involving covered bonds and asset backed securities (ABS) during the height of October’s selloff. In realization that that markets has been unsatisfied, the ECB floated the idea to include corporate bonds.

With Thursday’s unpalatable data comprising a contraction or stagnation in the Eurozone’s largest economies, specifically the shriveling of French manufacturing PMI and services PMI, the flat lining of Germany’s manufacturing PMI while services PMI was sharply lower than expected, such has been manifested on the Eurozone’s manufacturing PMI which hardly grew, while the services PMI came below consensus expectations. These may have prompted Mr. Draghi to unleash the bazooka—implicit promises to buy of government debt.
So today’s actions have merely doing the same things over and over again, expecting different results. Some people call this “insanity”. Yet today, insanity has been embraced as economic policies.

The reason why this won’t work?  Simple it represents invisible redistribution. Growth comes from addition not subtraction and one can’t print the real economy.

Even the mainstream’s idol John Maynard Keynes clearly recognized this:
Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.

Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become "profiteers," who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

Let me repeat: There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. 

The euro-usd has been collapsing along with consensus expectation of the Eurozone’s gdp.(chart from zero hedge)


And who will be the lucky enriched some from the stealth transfer or the “hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose”?  

Well of course the establishment, via the direct beneficiaries or biggest owners of European debt ranging mostly from foreign governments, domestic banks and domestic non banks (chart from Wall Street Journal) and indirectly the domestic government through subsidized debt via suppressed interest rates.

QE is part of Financial repression policies. Financial repression introduced in 1973 by Edward Shaw and Ronald McKinnon as per states of "policies that result in savers earning returns below the rate of inflation" in order to allow banks to "provide cheap loans to companies and governments, reducing the burden of repayments”

Of course the financial markets love this, that’s because these surreptitious transfers have been channeled through financial assets which artificially boosts the balance sheets of these beneficiaries and which has been sold to the public as to benefit the economy via the “wealth effect” transmission.

Unfortunately, speculative activities represent unproductive activities therefore are temporal and unsustainable. Such activities instead signify capital consumption process which leads to depression.

Those previous actions have already been showing this, why change today because the bailout is bigger?


Stock markets celebrated Draghi’s “best way to destroy the capitalist system” by debauching the currency (from Bloomberg)


Yet milestone highs of European equities have hardly been accompanied by earnings and dividend growth (chart above from zero hedge). On the contrary, as shown by the second chart below from, annual and forward estimates of earnings and revenues per share of Europe ex-UK MSCI have been collapsing! 

This means that European stock markets have become Frankensteins of the ECB, whose false confidence has been entirely based on inflation subsidies (ECB’s liquidity) that has only led to massive multiple expansions, ergo a bubble.

At the end of the day, these booms will morph into busts. And the bust will confirm the ECB’s actions that “the best way to destroy the capitalist system” is by debauching the currency.

Thursday, January 22, 2015

The Untold Story of November’s Philippine Remittance Data

I belatedly stumbled on the BSP’s November remittance data.

The official disclosure on personal remittances: Personal remittances from overseas Filipinos (OFs) reached US$2.3 billion in November 2014, higher by 1.8 percent than the year-ago level. This brought the cumulative remittances for the period January-November 2014 to US$24.4 billion, representing a year-on-year growth of 6.2 percent, Bangko Sentral ng Pilipinas Governor Amando M. Tetangco, Jr. announced today.  The steady growth in personal remittances for the first eleven months of the year was supported by the sustained expansion of remittance flows from land-based workers with work contracts of one year or more (5.3 percent) as well as sea-based and land-based workers with work contracts of less than one year (7.3 percent).

The framing looks glossy of course, but here’s what the BSP didn’t say…


As the old saw goes: a picture is worth a thousand words.

On cash remittances, again the BSP:  Likewise, cash remittances from OFs coursed through banks rose by 2 percent year-on-year to US$2.1 billion in November 2014. For the period January-November 2014, cash remittances increased by 5.7 percent to US$22 billion, compared to the US$20.8 billion registered in the same period in 2013. Cash remittances from land-based and sea-based workers reached US$16.9 billion and US$5.1 billion, respectively.  The bulk of cash remittances came from the United States, Saudi Arabia, the United Arab Emirates, the United Kingdom, Singapore, Japan, Hong Kong, and Canada.

Again here is what the BSP didn’t say…


It’s their data.

Both personal and cash remittances reveal of a sharp drop in remittance growth rate  as of November on a monthly basis. It’s the lowest since 2009!

Considering that November has over the past 5 years been one of the strongest months (most likely due to pre-Christmas seasonality), the collapse in November growth looks disconcerting. 

On a cumulative basis, growth trends of both cash and personal remittances appears to have peaked in January 2013 and has seemingly been on a downtrend since.

So the cumulative data series (green trend lines on both personal and cash remittances charts) suggest that this may not be an anomaly but perhaps an incipient trend. 


I am tempted to impute that this could be part of the repercussions of the collapse in oil prices and crashing stock markets in the Middle East.

As I recently warned: 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.

But I will withhold judgment until more confirmation.


Yet the collapse in the growth rates of remittances seems to align or appears to be consistent with the government’s contracting or negative month on month consumer spending or consumer price inflation (CPI) data for two successive months through December  (from

This implies of a materially slowing internal (domestic output) and external (remittances) financed consumer demand. By the way, contraction in the m-o-m in CPI means ‘deflation’ in technical lingo.

All these reveals that 4Q 2014 GDP, which will be released next week, will be very interesting.

China’s Stock Market Vaudeville: Powerful Two Day Rally Almost Offsets One Day Crash


Over the past two days the China’s equity benchmark the Shanghai Composite mounted a powerful rally (6.56%) that has thus far erased about 85% of losses from Monday’s 7.7% crash.

First I noted of what looked like a conflict in policies between Chinese central bank, the PBOC and the Regulatory Commission
The Chinese central bank, the PBoC wants to more credit into the system--yet  part of these funds finds its way to the stock markets--while the Regulatory Commission desires to curtail speculative credit flows into the stock markets.

So which agency will prevail, the PBoC or the Regulatory Commission?
Here is how media sees yesterday’s 4.74% comeback. From Bloomberg: (bold mine)
Chinese stocks posted the biggest two-day rally since 2009, led by financial companies, as investors speculated Monday’s rout was overdone given prospects for further monetary stimulus…

Stocks rebounded after China’s securities regulator said it isn’t trying to curb equity trading.
Perhaps, the Regulatory Commission had been surprised by the market's intense reaction, and consequently, has eluded the burden of responsibility from the ramifications of their policies, so the regulatory commission folded.

The two day rally has apparently been indirectly supported by the PBoC.

Just a day back, the PBoC injected funds to troubled companies 

From Bloomberg:
The People’s Bank of China rolled over a medium-term lending facility to Shanghai Pudong Development Bank Co. today, and lent additional money to the bank, according to people familiar with the matter, who asked not to be identified because they aren’t authorized to speak publicly.

The central bank extended 20 billion yuan ($3.2 billion) of matured MLF to the Shanghai-based lender, and gave an additional 20 billion yuan via the same facility, reported today, citing unidentified people. Industrial Bank Co. was granted an additional 20 billion yuan, after the PBOC extended 30 billion yuan that matured.
So a stealth bailout by the PBoC.

As I noted during the one day crash
Given the huge growth of stock market credit or the record levels of margin debt, losses from today’s crash will likely lead to margin calls which may prompt for even more selling. And absent access to new credit many heavily levered firms will see their balance sheets impaired from sustained stock market losses.

But if regulators are here just to put a brake, or in effect, a façade at it, then today crash could just be part of the script to a manipulated boom.
And perhaps, the other way to look at it is that the seeming clash in policies has really been part of the theatrics to contain the stock market mania which apparently has failed.
Of course, Chinese stocks have dependent on PBOC’s policies where expansionary credit will find ways (like the Shadow Banking system) to chase yields. Again as I noted the other day:
For as long as the PBoC promotes financial repression (zero bound) policies via expansionary credit into the system, yield chasing via asset speculation will be funded via different channels whether it is the formal or the informal system. There will always be novel ways to go around the curbs.
What the current episode reveals has been the intense buildup of volatility which implies of very unstable markets or that stock markets that have morphed into grand casinos.

Wednesday, January 21, 2015

Wow. Malaysian Prime Minister Talks and Denies a Crisis!

Who says Malaysia is in a crisis (or could be heading for one) anyway as to warrant the attention of Malaysia’s PM to publicly address the issue?

Writes the Nikkei Asian Review: (bold mine)
In a live television address on Tuesday, Prime Minister Najib Razak said Malaysia is "not in crisis" but needs "proactive measures" to counter the changing economic environment that has caused the ringgit to fall 12% against the US dollar in six months and fuelled a foreign capital flight on the stock market.

Last week, foreign investors sold 1.42 billion ringgit in equities, the "highest level since August 2013", according to brokerage MIDF Equity Research.

Razak's government responded on Tuesday by announcing it will trim 5.5 billion ringgit ($1.5 billion) from the 273.9 billion budget allocated for 2015.

The belt-tightening measures include reducing grants to state-owned companies worth 3.2 billion ringgit, and cuts of 1.6 billion on overseas travel and other government expenses.
What has PM Razak been reacting to?


Has it been due to the domestic currency, the ringgit? The USD-Ringgit currently trades at 2008 levels!


Or has been due to this?

Malaysia’s equity markets as measured by the FMBKLCI have been under pressure. As of Friday’s close, the formerly hot KLCI has been down 1% year to date. In 2014 the KLCE was down by 5.6%

Or this?

The cost to insure government debt via Credit Default Swaps, based Deutsche Bank’s calculations, has been spiking for Malaysia, Thailand and the Philippines (left window). But to a lesser degree Indonesia (right window).

Or a combination of the above?

Media refers to the stock markets, but definitely it has not just been stocks.

Something 'wrong' has been brewing in Malaysia’s political economy, for incipient signs of capital flight to surface. As shown above, such has been presently ventilated on her financial markets.  

Late last year, even the BBC highlighted on Malaysia's Savings Retirement Crisis, as I posted here

So it appears that Malaysia's woes have also been generating wider mainstream recognition.

In response, Malaysia's PM goes to public to deny the existence of a crisis.

Well, "denials" signify a symptom of any crisis in progression.

In a working paper comparing the Asian Crisis with the European Crisis, Edwin Truman of the Peterson for Institute for International Economics wrote about the transition of the stages of financial crisis which underpinned both the 1997 Asian crisis and the recent European crisis (bold and italics mine) 
Financial crises with significant international ramifications are generally preceded by credit booms. The booms turn into busts with severe negative consequences for the real economy. During the boom period, irrational exuberance takes hold. Policymakers and domestic and foreign investors, as a group, inevitably believe that this time is different. All countries are different in their precise circumstances, but certain regularities are evident. Various indicators give warnings of crisis (as well as false positives), but when a crisis occurs, most policymakers and many market participants are surprised and unprepared. For policy-makers, the surprise tends to manifest itself in denial that there is a crisis until the evidence is irrefutable.

For market participants—domestic as well as foreign—the response is a rush to exit from investments and markets in the country and, often, exit from countries perceived to be in similar circumstances…
All crises involve surprise, denial, and delay essentially by definition. If markets and outside authorities were not surprised, they would have sounded an alarm and, one would hope, the country’s policymakers would have taken some preventative action. Of course, some voices can always be identified ex post that issue warnings of crises, but in general they are soft voices and, again by definition, are largely ignored. 
In short, even the mainstream now recognizes that the seminal phase towards a transition to a crisis has always been "denial" by the establishment.

Yet announced reforms by the PM will be good (if implemented), but will it be enough to offset imbalances accumulated from the previous credit boom? 

Now that Malaysian's housing bubble has been slowing, how will this affect credit quality and credit risks of domestic institutions?

Déjà vu 1997?