War on Gold: Pakistan Temporarily Bans Gold Imports

Intervention begets intervention.

Such ratchet effect or mission creep applies not only within a state defined national boundary but could diffuse into the neighbors or the region as well.

The Indian government’s war on gold is an example. Such anti-tradition policies has incited massive smuggling across her borders. Pakistan responds by mimicking the Indian government albeit temporarily.

From Mineweb.com:

India's neighbour Pakistan has decided to temporarily ban the import of gold for one month, to save its foreign currency reserves and to curtail the rampant smuggling going on in the nation.

On Wednesday, July 31, Pakistan imposed a temporary ban on the import of gold.

Following the Indian government’s decision to discourage gold import by imposing 8% duties, buyers have reportedly shifted to Pakistan where the precious metal is allowed to be imported duty free since 2001.

(below charts from tradingeconomics.com)

Pakistan’s government passes the blame on her faltering currency, the rupee, on gold imports. USD-Rupee has been on an uptrend since 2008.

But the reality is that, gold imports has hardly been responsible for Pakistan’s predicaments.

Pakistan’s government continues to run a deficit. (I don’t know why a vacuum exist in the graph above)

Never the less, Pakistan’s government spending has been growing at a rate of 18.33% in 10 years, even when the GDP annual growth rate averaged of 4.73% over the same period. Since 1952, Pakistan’s annual gdp growth rate has been 4.94% according to Trading Economics

Pakistan have also been posting negative balance of trade since 2003 which has prompted for serial current account deficits over the same period

These twin deficits have been financed partly by external debt. 

Pakistan’s external debt nearly doubled since 2008, but has marginal declined in 2012

A big portion of the twin deficits have been financed via monetary inflation where M3 has grown by CAGR of 14.74% which is nearly double the average annual rate of growth her statistical economy. 

This has essentially been responsible for the weakness in her currency which her government scapegoats on gold.

Nonetheless Pakistan’s perfervid monetary activities has pumped up her stock markets.

The Karachi 100 has been one of the best performers in 2013 up by 36.29% in nominal currency terms. Chart from Bloomberg.

The Karachi appears to have hardly been jolted by Bernanke’s “taper” as frontier markets have been in vogue.

If the attack against tradition reach a critical point in a society’s tolerance level, the current passive resistance expressed via smuggling, may transform into social unrest, again Egypt, Brazil, and Turkey are du jour examples.

All these concerted anti-tradition policies are bound for failure.

Charts: Stock Market Boom Bust Cycles and Interest Rates

I’ve been saying that stock market boom bust cycles have principally been driven by manipulations of interest rates or as consequence to interest rate policies by central banks.

Here are some charts to exhibit their correlations

Going into the close of 2012, this year’s crown holder as the best stock market performer has been Turkey whose main benchmark has been up by nearly 50% (as of last Friday’s close).

[Note: I excluded Venezuela's case since her stock market's nearly 300% gains appear as part of the symptoms of a brewing hyperinflation]

Like the Philippines, Turkey’s central bank has aggressively been pruning interest rates. Most of which has been implemented during the third quarter of the year which has coincided with the last quarter spike for Turkey’s stock market.

Asia’s uncontested star: Pakistan has been up by almost 50% (as of last Friday’s close) and has been in a spitting distance with Turkey.

Pakistan has also been in an interest rate cutting spree since 2011. This year, particularly during the last half, Pakistan’s central bank serially trimmed interest rates to a 5-year low.

Mexico hasn’t been in the roster of this year’s best (up by about 17% as of Friday), but since her bellwether trades at record highs I included this.

All three shares some common characteristics

1. Bold reduction of interest rates have spurred stock market booms

2. When interest rates have been marginally raised, stock markets consolidated

3. When interest rates have been significantly raised, stock markets decline meaningfully (as depicted in 2008).

One of Asia’s laggards Bangladesh’s Dhaka down by 20% this year, shows of the other half of story above…

Since Bangladesh began tightening in January of 2011, which I featured here, her stock market has lost nearly half from peak to-trough

Note: All charts above from tradingeconomics.com

Inflationary booms create the misimpression or the illusion of prosperity (which are adapted by governments for political reasons), but in reality they are unsustainable for the simple reason that they signify as unsound economic policies.

As the great economist and professor Ludwig von Mises admonished,

But increases in the quantity of money and fiduciary media will not enrich the world or build up what destructionism has torn down. Expansion of credit does lead to a boom at first, it is true, but sooner or later this boom is bound to crash and bring about a new depression. Only apparent and temporary relief can be won by tricks of banking and currency. In the long run they must land the nation in profounder catastrophe. For the damage such methods inflict on national well-being is all the heavier, the longer people have managed to deceive themselves with the illusion of prosperity which the continuous creation of credit has conjured up

And another thing…

China’s Shanghai index has rallied markedly yesterday to erase her year to date losses.

Going into China’s stock market boom bust cycle-interest rate policies, we see the same story playout

Snap Shot of Asian Bourses

So how have Asia's equity benchmarks been performing of late? All charts from Bloomberg.com

For the major ASEAN markets (Malaysia's KLSE-blue, Philippine Phisix-green, Thailand's Seti-yellow, Indonesia's JKSE- orange), we notice some consolidation or possible indications of a "bottom" formation.

For South Asia, only Pakistan's Karachi 100 in green remains visibly weak while the rest seems to be in rangebound. India's BSE 30 (yellow) appears to be drifting at the near lows. On the other hand, Bangladesh's Dhaka in orange and Sri Lanka's Colombo in Blue seem significantly off their lows.

The industrialized export driven economies of Asia seem mostly coasting along the lows (Singapore's STI-blue, Taiwan's Taiex-green and Nikkei-yellow). Only crisis stricken Korea (orange) seems to have improved substantially.

Finally we see contrasting performances in Australia's S&P ASX 200 (green) also wafting near the lows while New Zealand's NZ 50 seems to be testing its resistance level.

Overall, performances have been mixed albeit those with less exposure to global ex-intraregion trade appear to be performing better.

Increasing Signs of Pakistan's Depression?

Last July we posted in Does The Violence In Pakistan’s Stock Market Signify Signs of Panic? indications of "panic" from rioting retail investors.

With the Karachi 100 down only about 40% from the peak (compared to others), domestic retail investors appear to have given up hope.

This week's quote reveals much of the rapidly sinking sentiment...

“There are no longer any small investors left in the stock market, they have all been destroyed,” said Kausar Qaimkhani, chairman of the Small Investors Association, leading a group of about 50 shareholders outside the Karachi Stock Exchange. (New York Times).

courtesy of Danske Bank

To consider Karachi's decline has been relatively muted when the country seems faced with a typical Emerging Market "balance sheet crisis" of exploding current account deficits which in times of external turmoil and lack of global liquidity has led to a rapid reduction of foreign currency reserves, sharply rising inflation, swooning currency (down about 30%) , debt downgrade on rising default fears and even fears of national bankruptcy (some have been "cleaning out their bank lockers and dollar accounts" on rumors of the possibility of government freeze on withdrawals). This has been aggravated by a weakening economy and deteriorating political atmosphere.

Pakistan has even approached China to solicit for economic aid. (Who won't? With 1.9 trillion in reserves, China could be the world's counterpart of JP Morgan ,the legendary financier who was credited to have rescued the US economy during the 1907 Panic.).

Nonetheless, all these point towards a near despondency- depression scenario.

Interesting times indeed.