Wednesday, September 30, 2015

IMF Warns on $18 Trillion in Emerging-Market Corporate Debt, Saudi Arabian Government Sells Equity Holdings

Yet again even the mainstream can see the world’s most vulnerable spots. And the surging dollar will continue to expose this weak link.

Emerging markets should brace for a rise in corporate failures as a debt-bloated firms struggle with souring growth and climbing borrowing costs, the International Monetary Fund warned Tuesday in a new report.

From sugar firms in Brazil to pipe makers in Russia, firms in developing countries bulked up on cheap debt as central banks gassed the easy-money pedal in the wake of the financial crisis.
Then, emerging markets were the drivers of global growth. Developing-country firms quadrupled their borrowing from around $4 trillion in 2004 to well over $18 trillion last year, with China accounting for a major share.

Now, prospects in industrializing economies are weakening fast even as the U.S. Federal Reserve is getting set to raise interest rates for the first time in nearly a decade, a move that will raise borrowing costs around the world. The burden of 26% larger average corporate debt ratios and higher interest rates come as commodity prices plummet, a staple export for many emerging-market economies. Compounding problems, many firms borrowed heavily in dollars. As the greenback surges against the value of local currency revenues, it makes repaying those loans increasingly difficult.

That massive debt build-up means it is “vital” for authorities to be increasingly vigilant, especially to threats to systemically important companies and the firms they have links to, including banks and other financial firms, the IMF said.

“Monitoring vulnerable and systemically important firms, as well as banks and other sectors closely linked to them, is crucial,” said Gaston Gelos, head of the fund’s global financial stability division.

Shocks to the corporate sector could quickly spill over to the financial sector “and generate a vicious cycle as banks curtail lending,” the IMF said.

And emerging markets should also be prepared for the eventuality of corporate failures, it warned: “Where needed, insolvency regimes should be reformed to enable rapid resolution of both failed and salvageable firms.”
Oh by the way the IMF reported substantial outflows from emerging markets last quarter

From the same report
The Institute of International Finance on Tuesday estimated global investors have sold roughly $40 billion worth of emerging-market assets in the third quarter of the year, which would make it the worst quarter of net-capital outflows since late 2008. The IIF represents around 500 of the world’s largest banks, hedge funds and other financial firms.

Besides the petroleum sector, where borrowing didn’t anticipate the nosedive in prices, the construction industry is particularly exposed to the changing business climate, the IMF said.

Worried about the building risks, investors have been selling out of many emerging markets, pushing down equity and exchange-rate prices, and pushing up borrowing costs. That market turmoil is exacerbating their economic woes.

In Latin America’s six largest economies, for example, the average growth rate has fallen from 6% in 2010 to around 1% this year. Brazil’s central bank last week said the country’s recession is far worse than expected.

China’s recent market turmoil and faster-than-expected economic slowdown is in large part fed by worries over the massive rise in China’s borrowing and whether the economy is vulnerable to a host of credit-driven bubbles in real estate, construction and other sectors.

Rapid credit growth has been a harbinger of previous emerging market crises. While economists say many countries have learned from the past by building up currency reserves and allowing flexible exchange rates to buffer against downturns, the mounting risks for many emerging markets are fueling worries across the globe.

Further complicating emerging market problems, the changing structure of financial markets leaves many developing economies exposed to major outflows of capital as investors scramble to exit. That can lead to fire sales and a breakdown in markets.
And to compound to the stream of emerging market outflows, pressured by how low oil prices has been impacting their fiscal conditions, the Saudi government has not only been selling forex reserves, they have reportedly been pulling out its money from global equities.

From the Financial Times
Saudi Arabia has withdrawn tens of billions of dollars from global asset managers as the oil-rich kingdom seeks to cut its widening deficit and reduce exposure to volatile equities markets amid the sustained slump in oil prices.

The Saudi Arabian Monetary Agency’s foreign reserves have slumped by nearly $73bn since oil prices started to decline last year as the kingdom keeps spending to sustain the economy and fund its military campaign in Yemen.

The central bank is also turning to domestic banks to finance a bond programme to offset the rapid decline in reserves.

This month, several managers were hit by a new wave of redemptions, which came on top of an initial round of withdrawals this year, people aware of the matter said.

“It was our Black Monday,” said one fund manager, referring to the large number of assets withdrawn by Saudi Arabia last week.

Institutions benefited from years of rising assets under management from oil-rich Gulf states, but are now feeling the pinch after oil prices collapsed last year.

Nigel Sillitoe, chief executive of financial services market intelligence company Insight Discovery, said fund managers estimate that Sama has pulled out $50bn-$70bn over the past six months.
Step by step, the obverse side of a credit fueled mania is a crash-bust.

Quotes of the Day: How Four Popes Viewed Socialism

From AEI’s Mark Perry: (bold and italics original)
Some historical perspective on what four of the last five previous popes had to say about socialism over the last 50 years (emphasis added)……

1. Pope John XXIII (1958-1963)
Pope Pius XI further emphasized the fundamental opposition between Communism and Christianity, and made it clear that no Catholic could subscribe even to moderate Socialism. The reason is that Socialism is founded on a doctrine of human society which is bounded by time and takes no account of any objective other than that of material well-being. Since, therefore, it proposes a form of social organization which aims solely at production; it places too severe a restraint on human liberty, at the same time flouting the true notion of social authority.
~Radio message to the Katholikentag of Vienna, September 14, 1952 in Discorsi e Radiomessaggi, Vol. XIV, p. 314

2. Pope Paul VI (1963-1978)
Too often Christians attracted by socialism tend to idealize it in terms which, apart from anything else, are very general: a will for justice, solidarity and equality. They refuse to recognize the limitations of the historical socialist movements, which remain conditioned by the ideologies from which they originated.
~Apostolic Letter Octogesima Adveniens, May 14, 1971, n. 31

3. Pope John Paul II (1978-2005)
The fundamental error of socialism is anthropological in nature. Socialism considers the individual person simply as an element, a molecule within the social organism, so that the good of the individual is completely subordinated to the functioning of the socio-economic mechanism. Socialism likewise maintains that the good of the individual can be realized without reference to his free choice, to the unique and exclusive responsibility which he exercises in the face of good or evil. Man is thus reduced to a series of social relationships, and the concept of the person as the autonomous subject of moral decision disappears, the very subject whose decisions build the social order. From this mistaken conception of the person there arise both a distortion of law, which defines the sphere of the exercise of freedom, and an opposition to private property. A person who is deprived of something he can call “his own,” and of the possibility of earning a living through his own initiative, comes to depend on the social machine and on those who control it. This makes it much more difficult for him to recognize his dignity as a person, and hinders progress towards the building up of an authentic human community.
Encyclical Centesimus Annus − On the 100th anniversary of Pope Leo XIII’s Rerum Novarum, May 1, 1991, n. 12

4. Pope Benedict XVI (2005 – 2013)
The State which would provide everything, absorbing everything into itself, would ultimately become a mere bureaucracy incapable of guaranteeing the very thing which the suffering person—every person—needs: namely, loving personal concern. We do not need a State which regulates and controls everything, but a State which, in accordance with the principle of subsidiarity, generously acknowledges and supports initiatives arising from the different social forces and combines spontaneity with closeness to those in need. The Church is one of those living forces.
~Encyclical Letter of Pope Benedict XVI

Bonus..
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Cato Institute’s graph comparing Pope Francis’ Argentina and the US. Writes Cato’s  Ian Vasquez 
It shows that in 1896, income per person in the United States and Argentina, two of the richest countries in the world, was about identical. Argentina subsequently eschewed the free market, replacing it with trade protectionism and other corporatist policies intended to help the poor by redistributing wealth. By 2010, Argentine income was a third of that of the United States.

Sunday, September 27, 2015

Phisix 6,900: 7 Reasons Why The Belief In A 2015 Santa Claus Rally Is A Delusion; Manipulators Lose Significance

Man is free to choose not to be conscious, but not free to escape the penalty of unconsciousness: destruction. Man is the only living species that has the power to act as his own destroyer—and that is the way he has acted through most of his history. –Ayn Rand, The Objectivist Ethics

In this Issue:

Phisix 6,900: 7 Reasons Why The Belief In A 2015 Santa Claus Rally Is A Delusion; Manipulators Lose Significance

-Phisix Round Trips Back to 6,900, The Eroding Significance of Market Manipulators
-7 Reasons Why The Belief In A 2015 Santa Claus Rally Is A Delusion

Note: I am not supposed to be writing today. However I changed my mind and opted instead to make an abridged version from my regular weekly ‘tomes’.

Phisix 6,900: 7 Reasons Why The Belief In A 2015 Santa Claus Rally Is A Delusion; Manipulators Lose Significance

Phisix Round Trips Back to 6,900, The Eroding Significance of Market Manipulators

Wow. That was incredibly fast! Just like that, almost all of the other week’s furious low volume panic pumping and pushing of the index, evaporated like vapor.

This week’s 3.01% loss by the Phisix virtually erased the other week’s 3.19% advance. 94% of gains just went pfft!


The weekly losses would have been a lot larger, perhaps at 3.5% or more, but thanks to the index managers, Friday’s fantastic “marking the close” pump virtually expunged 80-85% of the day’s losses which shaved off the weekly loss to just 3.01%.

Friday’s “marking the close” could have most likely been designed to defend the 6,900 level which may have some technical significance.


Index managers are probably concerned that a breakdown of the 6,890 (green) support level would lead to a test of the August 24 low of 6,790. And a subsequent failure to hold 6,790 would mean dire straits for them.

Presently, the PSEi seem to be moving in a “rectangle” continuation pattern. Current actions appear to replicate the pre-August 24 crash conditions.

And since an approach towards 6,790 could mean a repeat of August 24, index managers pulled an orchestrated massive last minute move to keep a safe distance.

Said differently, an approach towards the 6,790 makes the PSEi highly vulnerable to another market crash, hence the marking the close.

As I have pointed out in the past, market crashes have hardly been isolated events. During the taper tantrum of 2013, there were two occurrences where the PSEi suffered 6%+ meltdowns. So index managers are doing their darn best to prevent this from happening.

Unfortunately, they fail to realize that their very actions have been part of the cause of the developing or progressing bursting phase of the domestic stock market bubble.


By destroying the stock market’s fundamental price discovery function, they have spawned massive ‘misalignment of asset prices’.

Even at 6,900, those ridiculously high PERs of PSEi composite members, which were all justified in the name of delusional G-R-O-W-T-H, have signified as manifestations of such deeply embedded maladjustments.

Yet changes have been happening at the margins. 

The ‘E’ in the PER or the ‘earnings’ were arrived in an environment where the USD-Php traded at a range of 44-45. The USD-PHP was quoted last Friday at 46.86. Since the ascendant US dollar implies of the tightening of systemic liquidity, then those earnings will likely come under strain. And a fall in earnings will even balloon PERs (at present price levels), therefore magnifying valuation excesses. The high PER curse.

And a risk aversion landscape will magnify on the unsustainability of speculative excesses.

The above also reveals that contra media’s frequent drivels; there is NO bargain to HUNT.


Moreover, given the downswing in the headline index, the PSEi, speculative mania has enveloped some of the third tier stocks. 

Explosive price actions can be seen in Ionics (ION), Minerales Industrias (MIC), Doubledragon (DD) and MEDCO Holdings (MED)! Their respective PERs (as of September 23) have similarly rocketed to the galaxy at 62.4, 91.1, 75.5 and -65.5!

This reminds me of the terminal phase of the 2007 mania where the “basura queen” was even featured in a TV documentary!

This exposes on how PSE has been transformed into a virtual casino! These desperation pumps also reveals of the terminal phase of the rapidly decaying Philippine stock market bubble boom cycle.

And naturally, since financial misalignment represents critical deviations on valuations based on claims on the stream of future cash flows, as well as from the market’s long term earnings trajectory, a major realignment of prices should be expected. In short, financial misalignment will impel for a market clearing process. And such process has already been in motion!

And considering the severity of mispricing, the market clearing phase will most likely entail several incidents of VIOLENT price actions! Yes, August 24 represents the appetizer.

So this only reveals that the more the manipulations, the greater the risk of violent price actions from the amplification of asset price misalignments!

Media will portray downside price actions as “volatility”, while project upside actions as “stability”. In other words, for media and their beloved bubble apologists, stock markets represent a ONE way street! In reality, ‘volatility’ represents severe price action in BOTH directions (“tending to fluctuate sharply and regularly” as defined by dictionary.com).

Also stock markets operate on cycles…an inconvenient truth that has to be vehemently denied by the establishment.

Curiously, from last week’s actions, manipulators seem to be significantly losing resources or ammunition for them to mount their previous maneuvers: the afternoon delight and panic buy day pumps. So they have been left with marking the close.

But marking the close wouldn’t be enough.

Aside from the U-turn or the roundtrip of the key equity index, signs that these manipulators have been losing access to support the index can be seen in the peso volume.


Last week, daily peso volume (averaged weekly) traded was at Php 7.154 billion.

Since June, the daily peso volume (averaged weekly) traded have ranged at Php 6.5 to Php 7.5 billion. This excludes the outliers like last week’s Php 18.8 billion (due to AEV’s special block sales) and two accounts of below Php 6 billion trades (one in August and another in September).

So the lack of peso volume in support of the bids at 7,000-7,100 caused sellers to find volume only at 6,900. Yet at Php 7 billion, volume remains thin...and has been thinning. And diminishing volume bolsters the odds and the risks of another big downside move. All it takes for this to happen would be another major headline event.

A dear friend had an anecdote last week of a client loudly protesting to a bank officer of the reduced value of an equity fund acquired from the same bank. While this may be hearsay, such incidences should be expected to swell.

A feedback mechanism will plague on stock market losses and the public’s exposure on equity. Deepening of losses will prompt for fund withdrawals. On the other hand, fund withdrawals will lead to further losses.

So indirect exposure on domestic equity markets through various funds, such as UITF, ETFs, mutual funds and insurance-fund hybrids, will likely see significant downsizing. And a reduction of fund exposure means lesser access to resources to pump up the markets.

Moreover if credit has been involved in the carving of the recent string of index record (false) highs, then margin calls or increase in collateral will be required to maintain such positions. Failure to add collateral will likely lead to liquidations, which should compound on the stock market’s woes.

Of course, losses will not just entail fund withdrawals and liquidations to satisfy credit requirements, they are likely to provoke increased instances of acrimonious finger pointing. Given what seems as hard selling techniques employed by some banks/financial institutions in the marketing their various funds, such may even lead to legal proceedings.

So a sustained market downturn will not only translate to losses, social frictions will likely follow.

All these tell us why manipulators and complicit media will likely become even more desperate in their attempts to support a fast fading mirage.

The noose on the false boom is tightening.

7 Reasons Why The Belief In A 2015 Santa Claus Rally Is A Delusion

For those afflicted by the hopium and have been pining or yearning for a Santa Claus rally, I have bad news. The bad news: It is NOT statistics or seasonality which drives market action. Rather it is the market’s risk appetite or risk aversion that ultimately determines the outcome


I made the same case in 2013 and had been validated: The last quarter delivered -4.88% for the PSEi in 2013. In 2014, the last quarter was also a negative (-).72 (see left).

General impressions can be fatal.

Seven reasons why risk aversion will likely dominate through the yearend and thereby frustrate any expectations of a Santa Claus rally.

First, serious technical chart damage.

The first Phisix chart above has already been a revelation of the massive technical damage from the recent selloff.

Add the following the analysis of MSCI Philippines from a point and figure chart perspective (right). The Gavekal team wrote, “EPHE is our first ETF showing a topping formation. EPHE was in a nice uptrend from 2011 to 2014. However, it has since broken through the bullish support line and that line looks like it has now become resistance. Unless EPHE can consolidate and push higher, EPHE is in the early stages of a downtrend.” (italics mine)

In other words, the odds for more downside seem greater than the odds for a recovery.

Moreover, it takes time for the market to heal as 2013 episode teaches us. That’s if there should be any recovery at all in the current cycle.

Second, as discussed above, volume in support of the bids at present levels continues to substantially attenuate. Unless there will be extensive improvements in peso volume, the risks is for volume to be found at significantly lower, rather than from upper, price levels of the index.

Lower volume implies, not only reduced liquidity, but heightened risk aversion as well.

Third, despite the wild pumps on SOME third tier issues, general market breadth remains tilted towards risk aversion!


For this week, all sectoral indices closed lower (left). This implies that the majors supporting these indices dragged these lower.

The property sector which led last week’s rally also spearheaded the reversal.

SMPH’s previous scintillating record breaking 14.03% run prompted for a near complete reversal with an -11.23% loss for this week. The service sector placed second where both telecom titans had been hammered (TEL -2.99% and GLO -5.85%) along with the crash in port operator giant ICT -9.31%.

When the PSEi rallied 3.19% the other week, advancers led decliners 19 against 9 with 2 unchanged issues. This week, decliners led advancers on a 21-7 differential with 2 unchanged issues. In short, selling have remained the dominant sentiment.

Sentiment has radically been altered even at the broad markets. Decliners led advancers with an aggregate margin of 128, a U-turn from last week’s 164 margin in favor of advancers.

From the start of the year going to record highs, the PSE universe has already been diverging from the headline index. Record highs were made via a rotational pump on 10 out of the top 15 issues. The pseudo record highs came about with about half of the PSE issues in bear markets!

Current developments have even widened the lead of decliners relative to advancers on a weekly basis. From the record April 10 high through last Friday, there had been 18 weeks were losers dominated as against 6 weeks in favor of gainers with one week unchanged. The accrued advance decline spread during the past 25 weeks is NEGATIVE 1,807! 


Bear markets have dominated the PSEi index. 16 issues are in bear markets. 5 of the top 15 are in bear markets. 5 issues seem to be approaching the bear market zone. Overall, bears have ruled the PSEi. The PSEi has been kept afloat through selective pumps on a narrowing window of big cap issues.

Previous divergent forces have been converging. Or conflicting internal forces are being resolved into a single force.

Risk aversion has clearly been in charge.

Fourth, overall market liquidity has been shrinking.

Low volume and other stock market trading indicators have been declining.

And it’s not just stock markets, even Philippine bonds have been continually exposing signs of a flattening yield curve.


Despite persistent pumps to steepen the curve, this week through pumps on the 1, 3 and 6 months bills, domestic bond markets have remained porous as to reveal of built-in imbalances. 

The spread of the major benchmark 2 year and 10 year (ADB’s favorite) has been narrowing significantly, again.

This implies of a tightening of net interest margins for banks which also suggests of reduced credit activities. Consequently these should translate to diminished G-R-O-W-T-H (especially for an economy hooked on credit)!

Perhaps next week someone will attempt to widen the spread.

This brings us to the fifth factor, receding liquidity entails that the headlines will unlikely be supportive of a major upside move

Less rosy headlines in the face of foundering markets will hardly restore C-O-N-F-I-D-E-N-C-E or the animal spirits. Journalistic spin will unlikely mask all the deteriorating data.

Sixth, a significant domestic stock market rally will unlikely occur if Asian currencies continue to get clobbered.

Whatever big gains by the Malaysian ringgit last week had been more than entirely erased. The USD ringgit soared by a shocking 4.5%!

The Indonesian rupiah remains under pressure. The USD rupiah soared by 2.2%! The Indonesian central bank has reportedly been slated to unveil new measures in support of the rupiah. This won’t be the first time. They have recently imposed capital or forex controls which evidently didn’t work.

Taiwan’s central bank also panicked. The central bank cut rate for the first time since 2009 as exports faltered. The result was for the USD-Taiwan dollar to surge by 1.84%. The Korean won and Singapore dollar had also been battered. [As a side note Norway’s central bank also panicked, they cut rates to a record low]

Official rates saw the USD PHP (peso) climb by 1% to 46.86. Like the Phisix, USD-PHP losses had been almost entirely reversed.

Seventh, a significant domestic stock market rally will unlikely occur if global stocks will remain under selling pressure.

Surging USD or tumbling Asian currencies have been transmitted into stock market pricing. It’s has not just been the Phisix but most of Asian have been bleeding. (right)

In an apparent realization of the faux pas from not having to raise rates, US Federal Reserve Janet Yellen backpedaled to speak of a rate hike at the end of the year (bold mine): Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter. But if the economy surprises us, our judgments about appropriate monetary policy will change.

So once again Ms Yellen straddles the fence by saying one thing but also suggesting another.

US stocks have been under pressure. Apparently the US Fed didn’t expect this from its recent decision to stay the course. So the half spirited volte face by Ms. Yellen…tacitly premised in the hope to rekindle the stock market animal spirits.


Unfortunately instead of just energy, biotechs (left) and small caps (right) have been smoked lately. 

And not only that, Ms Yellen now continues to mention negative rates: (bold mine) “As a result, the Federal Reserve has less room to ease monetary policy when inflation is very low. This limitation is a potentially serious problem because severe downturns such as the Great Recession may require pushing real interest rates far below zero for an extended period to restore full employment at a satisfactory pace. For this reason, pursuing too low an inflation objective or otherwise tolerating persistently very low inflation would be inconsistent with the other leg of the FOMC's mandate, to promote maximum employment

It is as if the Fed has been conditioning the public to a prospective negative interest rate regime.

All these mixed or confused messages have been increasing uncertainty on the marketplace, thereby aggravating on the diminishing US dollar liquidity.

And it’s not just the US, despite Friday’s monster rally, the German Dax has now fallen into the clasps of the bear market.

Hence, if global stocks remain under pressure then the belief that the PSEi can decouple should represent a hallucination, balderdash, if not propaganda.

Unless all or most of the above issues will be resolved, a Santa Claus rally will hardly occur. Instead, all the above suggest for us to batten down the hatches.

A belief in a Santa Claus rally under the current conditions should imply “a fool and his money are soon parted”.

Caveat emptor.

Saturday, September 26, 2015

Infographics: 'Probability' in the Eyes of an Investment Banker

This graph shows of a probability distribution...


And this is how the above graphic applies to the "probability of destroying the economy"  as seen from the eyes of an investment banker...


(hat tip Econolog's Prof B. Caplan)
How incredibly true.

Proof? Here is a quote from a domestic banker on the rapidly deflating Philippine casino bubble as I previously posted here.
Says a domestic bank fund manager “The chain reaction from Macau hit everyone…Expectations VIP players will come in large numbers didn’t happen. The stocks have fallen quite significantly but not everyone is rushing back in, and there’s no clear light at the end of the tunnel.” 
"The chain reaction...hit everyone" and "expectations...didn't happen" equals "no one could have foreseen this". 

This resonates with JM Keynes' "sound banker" strategy:
A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him
Expect more of this kind of Keynesian escape hatch gibberish to become the norm.  
 


Venezuela’s Socialist Disaster: Stock Market Crashes as Recession Deepens, Heightened Risk of War with Columbia

While updating on the end of week quotes of global stocks, I discovered that the once sizzling hot Venezuelan stock market has recently crashed.

image
The Caracas Stock Exchange Index cratered 8.61% this week. But the benchmark remains up for 214.13% for the year! From end 2012, the index has returned a fantastic 25.7 times!

Of course, the Venezuelan stock market episode isn’t what it seems.

Venezuela interests me, not only because of their gorgeous looking women, but because the nation have been a modern day or real-time epitome of the socialist disaster currently being manifested as hyperinflation. And the other symptoms of hyperinflation can be seen in the previous streak of record breaking stock market index and a crashing currency.

As previously discussed, unlike the popular establishment myth that sees rising stocks as equivalent only to G-R-O-W-T-H, since stocks are titles to capital goods, they also serve as safehaven to a system benighted by monetary abuse. And the Venezuela experience represents an extreme account of such dynamic.

So my guess was that the crash in Venezuelan stocks must have also reflected on the currency and CPI.

image
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Well yes, the charts of implied inflation (top) and the bolivar (bottom) from Cato’s troubled currency project have coincided with the recent stock market crash.

This means the Maduro regime’s easy money has now transformed into tight money!

Perhaps Venezuela’s deepening economic downturn may be offsetting the hyperinflationary environment.

Bloomberg has an article on Barclay’s take on the Venezuelan economy:
Venezuela is suffering the deepest economic crisis in its history with output expected to contract 9.1 percent this year, Barclays Plc said Friday.

The economic contraction will likely reach 16.5 percent between 2014 and 2016, while inflation over that period will exceed 1,000 percent, Barclays wrote in a note to clients.
Moreover, the government may be relying more on asset sales than from more money pumping.
Instead of taking fiscal measures, the government is selling all its liquid assets to maintain an “extremely inefficient” exchange rate system and pay the external debt, Barclays said, adding that it would likely have enough money to pay its foreign debt at least through the first quarter of next year with a moderate increase in oil prices and further cut in imports.
If the above is true, then this could likely mean a hiatus in Venezuela’s hyperinflationary chapter.

Asset liquidations have limits. So unless the government overhauls its political system which has led to the deepening fiscal woes, those balance sheet problems will resurface again and spur more reliance by the government on the printing press or its digital equivalent.

But Venezuela’s socialist disaster doesn’t just stop with CPI, the bolivar, stocks and the economy. Since everything is interconnected, her economic woes has spread to escalate or drum up tensions with her neighbor Colombia, which has raised the risk of war. 

That’s partly because subsidized gasoline prices in Venezuela has found its way to be commercially sold in Colombia. And as previously pointed out, aside from gas, many of the other free or subsidized goodies that the Venezuelan government imported to give to her constituents has only flowed out into Colombia. Also, the deepening economic crisis may impel Venezuelans to emigrate to her neighbor.


So Venezuela’s socialist made economic crisis may even lead to war!

(updated to add: there has been ongoing peace talks between the two nations, which includes plans to reopen the border, as well as, to send their ambassadors  back into respective posts. The question is, given Venezuela's deteriorating economic conditions, will such peace agreement hold or last?)

Friday, September 25, 2015

Quote of the day: Mainstream Economy Slowly Cooked Alive while Central bankers Focus on their Taylor Models

Because zero bound interest rates destroy the savings function of capitalism, which is a necessary and in fact synchronous component of investment. Why that is true is not immediately apparent. If companies can borrow close to zero, why wouldn’t they invest the proceeds in the real economy? The evidence of recent years is that they have not. Instead they have plowed trillions into the financial economy as they buy back their own stock with a seemingly safe tax advantaged arbitrage. But more importantly, zero destroys existing business models such as life insurance company balance sheets and pension funds, which in turn are expected to use the proceeds to pay benefits for an aging boomer society. These assumed liabilities were based on the assumption that a balanced portfolio of stocks and bonds would return 7-8% over the long term. Now with corporate bonds at 2-3%, it is obvious that to pay for future health, retirement and insurance related benefits, stocks must appreciate by 10% a year to meet the targeted assumption. That, of course, is a stretch of some accountant’s or actuary’s imagination.

Do central bankers not observe that Detroit, Puerto Rico, and soon Chicago, Illinois cannot meet their promised liabilities? Do they simply chalk it up to bad management and inept governance and then return to their Phillips Curves for policy guidance? Do they not know that if zero were to become the long-term norm, that any economic participant that couldn’t print its own money (like they can), would soon “run on empty” as Blackstone’s Pete Peterson once expressed it in describing our likely future scenario? The developed world is beginning to run on empty because investments discounted at near zero over the intermediate future cannot provide cash flow or necessary capital gains to pay for past promises in an aging society. And don’t think that those poor insurance companies and gargantuan pension funds in the hundreds of billions are the only losers. Mainstream America with their 401Ks are in a similar pickle. Expecting 8-10% to pay for education, healthcare, retirement or simply taking an accustomed vacation, they won’t be doing much of it as long as short term yields are at zero. They are not so much in a pickle barrel as they are on a revolving spit, being slowly cooked alive while central bankers focus on their Taylor models and fight non-existent inflation.
This is from bond guru Bill Gross from his monthly outlook at Janus Capital

Thursday, September 24, 2015

Judge Andrew Napolitano: Is the Pope a False Prophet?

At the LewRockwell.com. Judge Andrew Napolitano questions the regime of Marxist leaning* and rock star /celebrity Pope Francis: (bold mine)
The papacy is an office created personally by Our Lord. Its occupants are direct descendants of St. Peter. Its role and authorities have evolved over the centuries, but the core of its responsibilities has always been the preservation of traditional teachings about faith and morals and safeguarding the sacraments. While the papacy is a monarchy, the teaching authority in the Church is “the bishops under the pope.” This means that a pope intent on change ought to consult with his fellow bishops.

Before the monumental Church changes of the 1960s and 1970s that trivialized the Mass and blurred the distinctions between the clergy and the laity, Popes John XXIII and Paul VI consulted their fellow bishops at Vatican II. The consultations were fractious and belligerent, but both popes got what they wanted: a watering down of liturgical practices and an easing of rules safeguarding the sacraments, so as to make the Church more appealing and accessible to former and non-adherents.

The result was a disaster. Fewer Catholics went to Mass, confusion about former theological norms reigned, and a general tenor pervaded the faithful that the Church never really meant what it preached. Former Catholics continued to stay away, new Catholics barely showed up, and many traditional faithful became demoralized.

Popes John Paul II and Benedict XVI attempted to roll this back. They succeeded in part by emphasizing traditional orthodoxy and personal piety to youth. Today, Catholic seminaries throughout the world are filled with young men who are more faithful to traditional practices and beliefs than many of their professors are.

Comes now Pope Francis to use moral relativism to take the Church in two dangerous directions. The first is an assault on the family, and the second is an assault on the free market — two favorite political targets of the left.

In the past month, without consulting his fellow bishops, the pope has weakened the sacrament of matrimony by making annulments easier to obtain. The Church cannot grant divorces because Our Lord used his own words to declare valid marriages indissoluble. But it does grant annulments.

An annulment is a judicial finding that a valid marriage never existed. This generally requires a trial, at which the party seeking the annulment must prove the existence of the marital defect from the beginning.

Fair annulment trials are costly and time consuming, often taking years from the initial filing to the final appeal. Until now. Last week, Pope Francis arbitrarily ordered the entire process to be completed in 45 days or fewer. For contested matters, a fair trial in 45 days is impossible. So, to meet his deadline, more annulments will be granted administratively, not on the merits.

It gets worse.

The Church has taught for 400 years that abortion is murder. Because the victim of an abortion is always innocent, helpless and uniquely under the control of the mother, abortion removes the participants from access to the sacraments. Until now. Last week, Pope Francis, without consulting his fellow bishops, ordered that any priest may return those who have killed a baby in a womb to the communion of the faithful. He said he did this because he was moved by the anguished cries of mothers contemplating the murder of their babies.

I doubt he will defend these decisions before Congress. He will, instead, assault the free market, which he blames for poverty, pollution and the mass migrations into Europe away from to worn-torn areas in the Middle East.

* as for Marxism, let me quote Austrian economist Thomas DiLorenzo last January (bold mine, italics original)
Is the old Marxist ideologue (a.k.a. “a Jesuit”) just trying to deceive everyone when he says that “markets and financial speculation” operate “in absolute autonomy” with no government regulation at all?  He said that yesterday in yet another  Nixonian “I am not a crook”-style denial that he is a Marxist.  (Was that a thunder bolt I just heard?)

In reality, markets have long been swamped in regulation from all levels of government.  As George Reisman pointed out, in the U.S., for beginners, we have a government that spends almost 50% of GDP; there are 15 cabinet departments that exert controls over markets; there are more than 100 federal regulatory agencies and more than 75,000 fine-print pages of regulation of markets in The Federal Register.  Then there’s almost as much regulation of markets from all the state an local governments as well.

And there’s the Fed, which in addition to regulating the money supply, regulates all aspects of all financial markets as well.  And the SEC, the FDIC, Office of Thrift Supervision, etc., etc.

The pope ignores all of this reality to once again repeat the main theme of his papacy:  That “world resources” should be allocated according to the dictum of “from each according to his ability, to each according to his need.”  This is the Jesuit version of Catholic doctrine, but of course it is in reality propaganda from The Communist Manifesto.  No wonder Pope John Paul II criticized “liberation theology,” the “bible” of Jesuit political activists, as a danger to the teachings of the church because it is little more than Marxism masquerading as Catholicism.
I have been saying here that the Pope keeps denouncing 'trickle down economics' which he blames to capitalism. This isn't true. Trickle down economics exists nowhere in Laissez-faire capitalism. Instead it is a practice of state capitalism mainly channeled through financial repression (central bank monetary policies) or government spending (PPPs, infrastructure) where the latter breeds cronyism and corruption.

The Fallacy of the Real Estate Sales Pitch "Buy Land — They’re Not Making Any More"

Back in the pre Asian Crisis boom during the mid 90s when I was a practicing licensed real broker, the common sales pitch by my contemporaries had been “buy land, because land supply is limited”. Even when I wasn’t into economics, I didn’t buy into this simply because I sensed something wrong with it. 

And given today's climaxing Philippine property bubble, aside from G-R-O-W-T-H, such spiel could most likely be part of the bubble promotion.

Anyway, at the Mises.org, Peter St. Onge eloquently explains the economic reasons why “buy land because supply is fixed” is a myth. (bold mine)
“Buy land — they’re not making any more!” is an old investing chestnut, and a common sense one to boot. Economically, it’s also completely false.

As counterintuitive as it may seem, we make land all the time. It just doesn’t look like land.

Why? Because land’s value doesn’t come from its ability to cover up the naked earth. Land’s value comes from its economic usefulness.   From the value of things that can be done using that land (Rothbard’s “marginal revenue product” of the land). And that value is, indeed, changing all the time. Economically, from a price perspective, then, we make land all the time.

Step back a moment and ask why land has value anyway. Why do people want land? Well, obviously, because you can put stuff there — including yourself — plus buildings, swimming pools, and factories.

Now, anybody who’s visited West Texas knows there is plenty of building space in the world. You could drive for hours and meet nobody. There’s lots of space for that factory of yours. But it’s not really space itself that makes land valuable. It’s location. As in, there’s only so much room in Manhattan. Or Central London.

Once again, though, it’s not the actual space that matters. It’s the access. Put a strip mall on Manhattan surrounded by crocodile-filled moats and snipers and it will have low value. The value is in access. So Manhattan is valuable because it’s easy to get to other parts of Manhattan. And it’s easy for other people to get to you. Customers, partners, and friends can all easily visit you if your apartment or office is in Manhattan, moatless and sniperless.

So if it’s the access that matters, are they making new access? Of course. They’re doing it all the time.

New highways, new exits, new streets, mass transit, pedestrian malls are being regularly constructed. These all effectively “make new land” because they offer access to existing space. They turn relatively “dead zones” into "useful zones," or new land.

What are some of the meta-trends on land as investment, then?

First: roads. This was a bigger value-driver a generation ago in the US, as new roads made the suburbs more accessible, helping to drain many cities even as US population grew. Outside the US (Mexico, Thailand, Russia), new roads are still a big deal, and even in the US, new highways can reshape values — draining old neighborhoods and building value in new ones. The decline of cities like Baltimore or Detroit are partly thanks to those beautiful roads that redistribute access to the suburbs.

Second: population. In the US “rust belt” of declining manufacturing, many regions have dropped in price simply because people are leaving. Detroit homes for $100 is emblematic, although of course there are also political reasons some cities are so cheap — in particular, taxes and crime.

And that brings us to politics. Real estate can be cheapened shockingly quickly by taxes and crime, and those traditional drivers have been joined in recent decades by environmental politics.

Environmentalists, by taking land off the market, effectively squeeze the remaining accessible locations. Driving up the price. Regions like Seattle or San Francisco are poster children of this environmental squeeze, with modest homes even in remote suburbs costing upward of a million dollars. On the other extreme, cities like Dallas or Houston have kept prices down despite exploding populations by allowing farmland to be converted to residential, commercial, or industrial use.

Beyond the access and political angles, land is also vulnerable to “network effects.” In other words, the neighbors matter. Gentrification or urban decay can be hard to predict. Even in a compact city with rising population like Washington, DC, it can be hard to predict where the middle class or rich want to colonize, and where they want to flee.

There are clues, of course — in large US cities, gays moving into a neighborhood, new coffee shops or art galleries are some leading indicators that property prices might swing up. But gentrification has it’s own mind; even in a booming city it might go into some other neighborhood. New York’s Harlem or Silicon Valley’s East Palo Alto are two very accessible locations with low prices because of perceptions of the neighbors.

So, while they’re not “making” land, they are constantly making things that affect land price. Access, regulations, changing neighbors. These are the kinds of factors that make land valuable, not it’s ability to cover the earth.

And so land comes back to earth, joining boring old commodities like wheat or copper. Just as vulnerable to changing supply and demand factors.

And if you are looking for something they’re not “making more of?” Well, gold does come close. Hence its appeal. They do mine new gold all the time, but the costs are high enough that gold is a very “inelastic” commodity. It comes close to “they’re not making more.”

Beyond that? Develop your ultimate resource: yourself.
Of course, land prices can also be influenced by central bank's cheap money policies.
 
Oh besides, technically speaking, it isn’t true that land is not being made.

United Arab Emirates looks like a "factory" of land through various land reclamation projects

A few notable examples…

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UAE’s the Palm Island

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In short, technology allows people to expand or “make” land out from its economic usefulness.

The Philippines has its own land reclamation area the Bay City

It's not just economics, many controversial land reclamations have been completed or in near completion for political purposes. 

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The above pictures are ‘before and after’ aerial shots of the contested Fiery Cross Reef at South China Seas (photos courtesy of Zero Hedge)

These have become tinderboxes for war.

Perhaps one day these islands will be sold and transformed as tourist destination…

“Buy land because they’re not making any more”?