Showing posts with label signaling channel. Show all posts
Showing posts with label signaling channel. Show all posts

Saturday, June 22, 2013

Why Bernanke’s Taper Talk is another Poker Bluff

Since 2010, I have been saying that FED “exit strategies” or the du jour “taper talk” represents no more than “poker bluffs”.  Each time the FED signaled about “exit”, the eventual consequence has been to expand easing policies.

Today’s “taper talk” by the Bernake-led US Federal Reserve essentially signifies as the same dynamic.

Bernanke’s “Taper talk” is really a tactical communication maneuver to REALIGN their actions with that of the current developments in the US bond markets. The FED wants the public to believe that they are in control of the markets when they are not.


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As one would note, yields of the 10 year note has been ascendant since July 2012.

The Fed expanded unlimited QE 3.0 which only had a 3 month effect of bringing down rates.

Last May, yields began to move sharply upward a month after Kuroda’s announced one of the three arrows of Abenomics. Even the interest rate cut by the ECB had no effect on the global trend of rising yields

The impact from such polices has been one of narrowing durations, and this has been expressed by rising yields amidst unlimited and boldest monetary experiments which are indications of diminishing returns. 

Global central banks, led by the FED, will need another “shock and awe”, but effects of which may also be short-term.

The "Taper talk" as aggravating factor has only intensified the ascent of the treasury yields.

All these only reveals of the growing contradictions between monetary policies aimed at  maintaining “downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative” and rising rates as indicated by the bond markets. 

So in order to maintain credibility, the exigency by the FED has been to recalibrate policies to reflect on market’s actions, thus the taper talk.

In short, Bernanke’s taper talk really is a “face saving” act for the US Federal Reserve. Unfortunately face saving has been met by a dramatic revulsion in the marketplace.

Peter Schiff at the Euro Pacific Capital articulates why Bernanke’s Taper Talk is another Poker Bluff (bold mine)
As usual the Federal Reserve media reaction machine has fallen for a poorly executed head fake. It has fallen for this move many times in the past, and for its efforts, it has tackled nothing but air. Yet right on cue, it took the bait once more. Somehow the takeaway from Wednesday's release of the June Fed statement and Chairman Ben Bernanke's press conference was that the central bank is likely to begin scaling back, or "tapering," its $85 billion per month quantitative easing program sometime later this year, and that the program may be completely wound down by the middle of next year.

Although this scenario is about as likely as an NSA-sponsored ticker tape parade for whistle blower Edward Snowden, all of the market segments reacted as if it were a fait accompli. The stock market - convinced that it will lose the support of ultra-low, long-term interest rates and the added consumer spending that results from a nascent housing bubble - sold off in triple digits. The bond market, sensing that its biggest and busiest customer will be exiting the market, followed a similarly negative trajectory. The sell-off in government and corporate debt pushed yields up to 21 month highs. In foreign exchange markets, the dollar rallied off its four-month lows based on the belief that Fed tightening will support the currency. And lastly, the gold market, sensing that an end of quantitative easing would eliminate the inflationary fears that have partially fueled gold's spectacular rise, sold off nearly five percent to a new two-and-a-half year low.

All of this came as a result of Bernanke's mild commitments to begin easing back on permanent QE sometime later this year if the economy continued to improve the way he expected. The chairman did not really elaborate on what types of improvements he had seen, or how much farther those unidentified trends would need to go before he would finally pull the trigger. He was however careful to point out that any policy shift, be it for less or more quantitative easing, would not be dependent on incoming data, but on the Fed's interpretation of that data. By stressing repeatedly that its data goalposts were "thresholds rather than triggers," the chairman gained further latitude to pursue any stance the Fed chooses regardless of the data.
Yet the mere and obvious mention that tapering was even possible, combined with the chairman's fairly sunny disposition (perhaps caused by the realization that the real mess will likely be his successor's problem to clean up), was enough to convince the market that the post-QE world was at hand. This conclusion is wrong.  

Although many haven't yet realized it, the financial markets are stuck in a "Waiting for Godot" era in which the change in policy that all are straining to see will never in fact arrive. Most fail to grasp the degree to which the "recovery" will stall without the $85 billion per month that the Fed is currently pumping into the economy.

What exactly has convinced the Fed that the economy is improving? From what I can tell, the evidence centered on the rise in stock and real estate prices, and the confidence and spending that follow as a result of the wealth effect. But inflated asset prices are completely dependent on QE and are likely to reverse course even before it is removed. And while it is painfully clear that expectations about QE continuance have made a far bigger impact on the stock, bond, and real estate markets than any other economic data points, many must be assuming that this dependency will soon end.

Those who hold this belief have naively described QE as the economy's "training wheels." (In reality the program is currently our only wheels.) They are convinced that the kindling of QE will inevitably ignite a fire in the larger economy. But the big lumber is still too dampened by debt, government spending, regulation, and high asset prices to catch fire - all we have gotten is smoke instead. A few mirrors supplied by the Fed merely completed the illusion. The larger problem of course is that even though the stimulus is the only wheels, the Fed must remove them anyways as we are cycling toward the edge of a cliff.

Although Bernanke dodged the question in his press conference, the Fed has broken the normal market for mortgage backed securities. While it's true that the Fed only owns 14% of all outstanding MBS (the "small fraction" he referred to in the press conference), it is by far the largest purchaser of newly issued mortgage debt. What would happen to the market if the Fed were no longer buying? There are no longer enough private buyers to soak up the issuance. Those who do remain would certainly expect higher yields if the option of selling to the Fed was no longer on the table. Put bluntly, the Fed is the market right now and has been for years.

A clear-eyed look at the likely consequences of a pull-back in QE should cause an abandonment of the optimistic assumptions behind the Fed's forecast. Interest rates are already rising rapidly based simply on the expectation of tapering. Imagine how high rates would go if the Fed actually tried to sell some of the mortgages it already owns. But the fact is the mere anticipation of such an event has already sent mortgage rates north of 4%, and without a lifeline from the Fed in the form of more QE, those rates will soon exceed 5%. This increase will greatly impact the housing market. Speculative buyers who have lifted the market will become sellers. More foreclosure will hit the market, just as higher home prices and mortgage rates price any remaining legitimate buyers out of the market. Housing prices will fall to new post bubble lows, sinking the phony recovery in the process. The wealth effect will work in reverse: spending and confidence will fall, unemployment will rise, and we will be back in recession even before the Fed begins to taper.

In fact, the rise in mortgage rates seen over the last month has already produced pain in the financial world, with banks reporting a rapid decline in refinancing applications. By the time rates hit 5%, the current rally in real estate will have screeched to a halt. With personal income and wage growth essentially stagnant, individual buyers are extremely dependent on the affordability allowed by ultra-low rates. A near 50% increase in mortgage rates, which would result from an increase in rates from 3.25% to 5.0%, would price a great many buyers out of the market. Higher rates would also cool much of the housing demand that has been coming from the private equity funds that have been a factor in pushing up real estate prices in recent years. Falling home prices would likely trigger a new wave of defaults and housing related bankruptcies that plunged the economy into recession five years ago.

A similar dynamic would occur in the market for U.S. Treasury debt. Despite Bernanke's assurances that the Fed is not monetizing the government's debt, the central bank has been buying nearly 70% of the new issuance in recent years. Already, rates on 10-year treasury debt have creeped up by more than 50% in less than two months to over 2.5%. Any actual decrease or cessation in buying - let alone the selling that would be needed to unwind the Fed's multi-trillion dollar balance sheet - would place the Treasury market under extreme pressure. Since low rates are the life blood of our borrow and spend economy, it is highly likely that higher rates will lead directly to lower stock prices, lower GDP growth, and higher unemployment. Since rising asset prices and the confidence and spending they produce is the basis for Bernanke's rosy forecast, new lows in house prices and a bear market in stocks will likely reverse those forecasts on a dime.

Lost on almost everyone is the effect higher interest rates and a slowing economy will have on federal budget deficits. As unemployment rises, tax revenues will fall and expenditures will rise. In addition, rising rates will not only make it more expensive for the Fed to finance larger deficits, it will also make it more expensive to refinance maturing debts. Furthermore, the profit checks Fannie and Freddie have been paying the Treasury will turn into bills for losses, as a new wave of foreclosures comes tumbling in.

It's fascinating how the goal posts have moved quickly on the Fed's playing field. Months ago the conversation focused on the "exit strategy" it would use to unwind the trillions in bonds and mortgages that it had accumulated over the last few years. Despite apparent improvements in the economy, those discussions have given way to the more modest expectations for the "tapering" of QE. I believe that we should really be expecting a "tapering" of the tapering conversations.

As a result, I expect that the Fed will continue to pantomime that an eventual Exit Strategy is preparing for a grand entrance, even as their timeline and decision criteria become ever more ambiguous. In truth, I believe that the Fed's next big announcement will be to increase, not diminish QE. After all, Bernanke made clear in his press conference that if the economy does not perform up to his expectations, he will simply do more of what has already failed.

Of course, when the Fed is forced to make this concession, it should be obvious to a critical mass that the recovery is a sham. Investors will realize that years of QE have only exacerbated the problems it was meant to solve. When the grim reality of QE infinity sets in, the dollar will drop, gold will climb, and the real crash will finally be upon us. Buckle up.
Bottom line: High interest rate amidst a greatly leveraged system will sink asset prices heavily dependent on Fed steroids. This will impair the balance sheets of 1) politically privileged banking industry, main financing intermediaries of the US government, and 2) most importantly the heavily indebted US government.

The FED is trapped. Fed policies can now be said as “damned if you “taper”, damned if you “ease”.  

Yet like Mr. Schiff, since 2010 my bet has been on the latter. Crashing markets will only give the FED the eventual justification to ease. But again the potential outcome will hardly be a risk ON environment.

Thursday, May 23, 2013

Cognitive Dissonance and the US Stock Markets

Media, politicians and the US stock market operates in a cognitive dissonance. Cognitive dissonance is the confusion arising from the state of holding (Wikipedia.org) “two or more conflicting cognitions: ideas, beliefs, values or emotional reactions”

First the record run in US stocks has been been attributed to “growing confidence in the U.S. recovery” Good news is read as good for stocks, that's as of the other day.

Then today, falling stocks have been imputed to concerns over a pushback on stimulus; “will scale back its stimulus efforts if the labor market continues to improve”. 

Here good news is seen as bad news.

From the above account, one wonders whether the “growing” economy is really good or bad for stocks? Or whether “growth” has merely served as a cosmetic for the deepening addictions by the markets on the FED's steroids?

More rhetorical conflict of rhetoric from Media, Wall Street, and the US government;

On the one hand, the economy has been exhibiting strength for some of the FED officials to propose tapering of stimulus 
A number said they were willing to taper bond buying as early as the next meeting on June 18-19 if economic reports show “evidence of sufficiently strong and sustained growth,” according to the record of the April 30-May 1 gathering released today in Washington.

“Most observed that the outlook for the labor market had shown progress” since the-bond buying program began in September, according to the minutes. “But many of these participants indicated that continued progress, more confidence in the outlook, or diminished downside risks would be required before slowing the pace of purchases would become appropriate.”
On the other hand, Ben Bernanke contradicts the above by stating that the economy doesn’t seem to be strong enough for premature withdrawal of stimulus
Federal Reserve Chairman Ben S. Bernanke defended the central bank’s record stimulus program under questioning from lawmakers, telling them that ending it prematurely would endanger a recovery hampered by high unemployment and government spending cuts.

“A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further,” Bernanke said today in testimony to the Joint Economic Committee of Congress in Washington.
From Mr. Bernanke’s point of view, “premature tightening of monetary policy could lead interest rates to rise” implies the exposing of the risks of the highly leverage markets and economy. And that such tightening would extrapolate to a bubble bust or in economic gobbledygook “the risk of slowing or ending the economic recovery and causing inflation to fall further”

So essentially, people at the Fed have been talking at different wavelengths. Bernanke's discourse has been premised on the entrenched bubble conditions, whereas other Fed officials have used statistics to generate economic forecasts (or reading history as the future).

Thus Fed officials seem as clueless as to the real direction of the economy or of the markets. Or are they?

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And a bollixed FED has been used by the stock markets as a reason to retrace. From intraday gains, US stocks went from green into the red yesterday (stockcharts.com)


Why is this important? Because, aside from direct and indirect interventions, the state of bewilderment of the causal process of the current environment by the media and political agents has contributed immensely to the skewing of price signals and to the accumulation of imbalances in the system. This has also been used to sabotage gold prices.

Well, Philip Coggan of the Economist Buttonwood fame points to studies reinforcing the “parallel universe” or the growing disconnect between stocks and the real economy. (bold mine)
The annualised growth rate of the US economy in the first quarter was 2.5 per cent; the annual gain in earnings per share was 5.2%; the annualised gain in the market was 46%. Of course, as has been pointed out by the assiduous Marsh, Dimson and Staunton, or by Jay Ritter, there is no clear statistical link between GDP growth and equity returns at all.
The mainstream has now been recognizing this.

And as I have been pointing out this is not your daddy or your granddaddy's stock markets.

And more on why the current environment or the parallel universe is unsustainable, again from the Buttonwood… (bold mine)
The hope is that higher share prices can eventually produce a self-fulfilling cycle via a wealth effect (and on this note, the University of Michigan survey last week showed consumer confidence at a six-year high) or indeed on business investment. Mr Makin notes that real household net worth is up by about $4 trillion over the last year, helped by houses as well as stocks. He estimates the wealth effect at about 4% over a year; thus the boost to consumer spending was $160 billion, or 1% of GDP. This may indeed explain why US consumer have shaken off the effect of the rise in payroll taxes this year.

But the offset of this wealth effect is that the household savings rate fell to 2.6% in the first quarter, down from 5.1% in 2010. As Mr Makin points out, this is ominously similar to the pre-2007 pattern of high consumption based on the hope that asset prices would stay high. The potential long-term problem here is that asset prices tend to revert to the mean; people may be saving too little for their retirement on the view that markets will do all the work. As in 2007 and 2008, they may get a nasty shock later on. One could make quite a bearish case for US equities in the long run, on the grounds that share price valuations (as measured by the Shiller p/e) are higher than average and profits are at a post-1947 high as a proportion of GDP.
The lesson is whatever statistical growth seen from today is mostly a reflection of credit driven elevated prices of financial assets rather from real economic growth. The same holds true for the Philippines. 

The mirage of statistical growth. 

Hence Ben Bernanke realizes that any pullback of steroids would expose on this sham that would undermine the banking sector’s balance sheets.

Also an ‘exit’ would also mean the pulling of the proverbial rag underneath the FED’s monetization of US debts which hardly anyone talks about.

Bottom line: The protection of the banking sector and the Fed’s financing of US government debt have been the main pillars that undergirds the FED’s credit easing policies. That’s why such “exit” or “withdrawal” blarney are what I call as poker bluff. The Fed cannot afford it.

IN withholding the truth, the Fed’s communication’s strategy seems as the guileful employment of cognitive dissonance in order to confuse the public.

As English novelist Eric Arthur Blair popularly known for his pen name George Orwell wrote in Politics and the English Language (italics original)
Political language…is designed to make lies sound truthful and murder respectable, and to give an appearance of solidity to pure wind. One cannot change this all in a moment, but one can at least change one's own habits, and from time to time one can even, if one jeers loudly enough, send some worn-out and useless phrase — some jackboot, Achilles’ heel, hotbed, melting pot, acid test, veritable inferno, or other lump of verbal refuse — into the dustbin where it belongs.

Friday, May 17, 2013

Gold as a foreign policy tool: US Government Bans Gold Sales to Iran

The US government overtly intervenes in the gold markets when it uses gold as a foreign policy tool.

From the Economic Times:
WASHINGTON: The United States is working to block sales of gold to Iranians in order to undermine their currency the rial and to step up pressure on Tehran over its nuclear program, officials said on Wednesday.

From July 1, the US will ban sales of gold by anyone to either the Iranian government or to Iranian citizens, a senior US Treasury official said. Washington has warned Iran's neighbors Turkey and the United Arab Emirates, key regional centers of the gold trade, to stop gold sales to Iran, said David Cohen, treasury under-secretary for terrorism and financial intelligence.
Embargoes and trade sanctions are acts of war. The US has been provoking Iran into a war ever since.

Yet the US government’s arbitrary ban gold sales are really an attack on the average Iranians whom has gravitated to gold and to bitcoins due to Iran’s simmering hyperinflation

This shows how ruthless governments are, in wanting to starve or sacrifice innocent civilians in order to serve the political (neocons) and economic (military industrial complex) interests of the powerful elites. 

And I don’t think gold has just been a foreign policy tool but a monetary signaling channel or central bank communications tool as well.

Wall Street versus the world” attempts to impress upon the main street and the real economy that gold has lost its luster as inflation hedge. The Iranian ban seem to also suggest of the same. The same article quotes the above US official: (bold mine)
The move to block gold sales is part of the effort to further weaken the rial, he explained. "There's a tremendous demand for gold among private Iranian citizens, which in some respects is an indication of the success of our sanctions."

"They are dumping their rials to buy gold as a way to try to preserve their wealth. That is I think an indication that they recognize that the value of their currency is declining."
So from the political authority’s perspective, the ban on gold means that Iranians would have to revert to the rapidly diminishing value of the rial and die alongside with the decaying currency.

Nonetheless the average Iranians know better thus the “dumping their rials to buy gold as a way to try to preserve their wealth”. 

Gold, not an inflation hedge? Only in Wall Street.
 
Like all forms of prohibitions they are most likely to fail.

Thursday, May 02, 2013

More Poker Bluffs: FED will Cut QE by Yearend

Since 2010, each time the US economy showed some signs of strength, Fed officials talk about “exit” strategies or the communications strategy proposing policy changes by the reduction on the amount of stimulus applied to the economy. Such farcical routine I have repeatedly called as “poker bluffing”. 

Recent record stock market highs, a conspicuous rebound in the housing markets and some indications of economic “recovery” has again prompted Fed officials to blather anew about paring down stimulus.

From Bloomberg
Chairman Ben S. Bernanke will probably reduce the Federal Reserve’s monthly bond buying in the fourth quarter to $50 billion from $85 billion as he begins to unwind record stimulus, economists said in a Bloomberg survey.

Policy makers must find a way to slow the pace of purchases enough to signal confidence the economy is strengthening without prompting a sudden rise in interest rates, said former Fed economists Michael Feroli and Joseph LaVorgna. They said that probably means the Fed, which concludes a policy meeting today, will follow a three-step strategy to wind down bond buying.

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How it seems so simple.

Yet since 2010, each exit blarney has led to the opposite outcome. The US Federal Reserve’s stock holding of US treasuries for instance continues to balloon. The recent jump includes QEternity.


As explained before, the exit talk is likely a sham because there are hardly enough savings (domestic or foreign) that the US government can tap to finance her spendthrift ways. 

Whatever recovery seen in the US economy are symptoms of inflationary boom rather than a genuine economic growth. Yet another economic bust would mean more debt from more bailouts and more inflationism.

Besides, US financial markets have become almost entirely dependent on government support which signifies as a byproduct of the wealth effect theory that undergirds such easing policies.

The removal or even a reduction of such stimulus essentially would “pull the rug from under” the inflationary boom and undermine the current government debt financing mechanics that would stir such massive market and economic disorder and volatility. This would raise the spectre of the “deflation”, a market phenomenon which incumbent authorities have a rabid phobia on, as well as, raise the risks of a default.

Also such policy reversals would undermine the interests of the political class and those dependent on them, which is why incumbent political officials aren’t likely to resort to them, except as trial balloon or as part of the manipulation scheme for the continued suppression of gold prices

Nevertheless, Simon Black of the Sovereign Man eloquently enunciates why US Federal Reserve has been TRAPPED by their own actions on financing the US government or the monetization of US treasuries.
Now, bear in mind that US debt already exceeds 100% of GDP.

Even using the US government’s own ridiculous budget projections (which assume 3.5% REAL GDP growth) Uncle Sam will still accumulate over $5 trillion in debt over the next decade.

But here’s the thing– the current $16.75 trillion of US debt has an average maturity of just 65 months. This means that the US government will be on the hook to repay a huge chunk of its debt within the next 5 1/2 years.

So in addition to issuing $5 trillion (optimistically) in new debt, they’ll also have to re-issue trillions more in existing debt.

Someone is going to have to mop up all that debt. The question is… who?

The Chinese are actually REDUCING their Treasury exposure as a percentage of total US debt (see chart). This is consistent with their objective to strengthen the renminbi.

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The story is the same with Japan at the moment, whose nominal US debt holdings have actually been decreasing.

The US Social Security trust fund is also a major holder of US debt. Yet, according to the Washington Post, roughly 10,000 people EACH DAY become eligible to receive Social Security pension benefits.

Given the increased outflows and high level of US unemployment (fewer people paying into the system), it’s doubtful that the Social Security trust fund will have sufficient cash to bail out the Federal government.

This leaves the US Federal Reserve as the lone player to mop up all this debt. There simply are no other options; the US government will default in all likelihood, unless the Fed continues debauching the currency to buy Treasuries.
Yet the recent flash crash in gold has been used to justify calls from some quarters to indulge more rather than less inflationism.  

Fed officials and their apologists will continue with their blandishments of steroid withdrawals but real political economic conditions suggests that all these represent as mere bluffs.

Wednesday, April 17, 2013

I Told You So: Gold Slump Used as Justification for MORE QE

Expect this selloff in gold-commodity sphere to increase risks towards a transition to a global crisis, and for central banks to engage in more aggressive inflationism.
Well media’s rationalization or the Fed’s implicit public conditioning strategy (signaling channel) through media to generate public support for more QE seems to have been initiated.

From Bloomberg: (bold mine)
The slump in gold may hand activist central bankers more reasons to pursue the easy monetary policy that helped drive up the metal’s price in the first place.

Among many explanations for the biggest drop in more than 30 years: a fourth annual global growth scare as data disappoint from China to the U.S. and investors fold long-held bets that monetary stimulus will ultimately unleash inflation. Other reasons for the drop range from a view that the price reached so-called technical levels to concerns that Cyprus could start a rush by indebted nations to sell their supplies of the metal.

The combination of growth jitters and reduced inflation anxiety boosts the case of Federal Reserve Chairman Ben S. Bernanke and counterparts elsewhere to keep pump-priming their economies in the hope they will finally secure traction. It also may help them beat back critics, including some U.S. Republican lawmakers.
From Wall Street Journal Blog (bold mine)
Tuesday’s inflation data reported by the Labor Department gives the Federal Reserve a new reason to keep its easy money policies in tact – inflation could be slowing.

The consumer price index was up 1.5% in March from a year earlier, the fourth time in five months that it has been below the Fed’s 2% inflation goal. The index for consumer prices excluding volatile food and energy was up 1.9% for the fourth time in five months. Readings like that are likely to get the attention of central bank officials.

The Fed has been debating when to begin winding down an $85 billion-per-month bond-buying program. The Fed has linked the bond buying to developments in the job market, saying it would gradually reduce the amount of the monthly purchases once the job market improves substantially.
No conspiracy?

Saturday, January 12, 2013

Is the US Federal Reserve Indirectly Putting Down Gold Prices?

Have US Federal Reserve officials been indirectly trying to take down gold prices?

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In barely 2 weeks of 2013, gold prices attempted twice to move higher (See ellipses). One peaked during New Year just right after the fiscal cliff deal. The second was during Thursday of this week.

However, both gains had been cut short. This appears coincidentally timed with two occasions where Fed communications (FOMC minutes) had been released and when Fed officials went on air expressing doubts over QE 4.0.

The first came with the announcement of the FOMC minutes which revealed of growing dissension over unlimited asset purchases, a day after the fiscal deal.  I earlier wrote that this signifies another of the Fed’s serial Poker bluff

Last night, while switching channel after watching another TV program, I happen to stumble upon Federal Reserve Bank of Philadelphia President Charles Plosser’s Bloomberg interview, where he hinted of his bias against pursuing more balance sheet expansion. If memory serves me right, prices of gold was then trading at $1,669-1,670. Bloomberg seem to have featured this interview in a follow up article

Then I learned today that other Fed officials featured by mainstream outlets also covered the FED hawks.

And in both occasions where hawkish sentiments by FED officials were aired, the earlier gains scored by gold prices had nearly been erased.

Gold has been marginally up this week.

Considering that FED employs communication strategies to influence market behavior called as “signaling channel”, my suspicion is that this has been part of the implicit tactic to mute the public’s inflation expectations, expressed via gold prices.

Nonetheless, I expect such mind manipulation ploys to be ephemeral.

That’s because as I pointed out during my last stock market commentary for 2012
Evidence suggest that gold prices may have departed from real world activities. Sales of physical gold have exploded to record highs. Moreover central bank buying has been gathering steam, which seems on path to hit new highs this year (500 tons), along with record ETF gold holdings at 2,627 tons.
It seems that only after a month, we are getting more proof on this

In the US, sales of physical gold and silver has been exploding: The US mint reports 57,000 gold ounce sales for the first two days of the year and sale of silver coins tripled from December.

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In the meantime, India’s gold imports reportedly surged amidst fears that the Indian government may continue to act to suppress demand for gold. According to Mineweb.com, after two earlier hikes of import duties, gold smuggling has also reached new levels. Smuggling is a typical reaction to prohibitions or quasi-prohibitions edicts via tax increases.

In addition, central bank gold buying have also been ramping up. According to International Business Times
In the third quarter, according to the World Gold Council (WGC), the world's central banks bought a total 97.6 metric tons of gold.

In six out of the last seven quarters, central bank demand has been around 100 metric tons, which is a sharp increase from as recently as 2010, the bank said in a statement, adding that through the third quarter of this year, total central bank buying was up 9 percent.
Moreover, China's government via the PBoC reportedly will increase gold acquisition to diversify from her foreign exchange holdings.

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China may decide to increase the percentage of gold holdings in its monetary reserves in the next few years, said the report, an analysis of the world monetary system commissioned by the World Gold Council.

Demand for gold is likely to rise amid the uncertainty about the stability of the US dollar and the euro, the main assets held by central banks and sovereign funds, it added.

China almost doubled its gold reserves in the last five years. The country had holdings of 1,054metric tons in July 2012 and is now the sixth-largest holder of monetary gold.

In 2011, gold accounted for 14.4 percent of the world's total monetary reserves.

In a country-by-country comparison, the figure was 1.6 percent in China, while it was 74.5percent in the United States, 71.4 percent in Germany and 71.1 percent in France, according to data from the World Gold Council and the International Monetary Fund.

China holds the world's largest foreign exchange reserves, which were worth more than $3.31trillion by the end of 2012, according to figures from the People's Bank of China, the country's central bank.
China has been approaching gold with “talk the talk” as November gold imports have doubled from October.

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According to Zero Hedge, (italics original)
at 90.8 tons, this was the second highest gross import number of 2012, double the 47 tons imported in October (which many saw,incorrectly, as an indication of China's waning interest in the yellow metal), and brings the Year to Date total to a massive 720 tons of gold through November. If last year is any indication, the December total will be roughly the same amount, and will bring the total 2012 import amount to over 800 tons, double the 392.6 tons imported in 2011.
Meanwhile, ETF holdings of gold remain at record levels
 
Exchange traded funds (ETFs), with gold as the underlying asset, have contributed to its prices. Institutional and retail inflows into global gold ETFs are at record levels. ETF holdings have been a key indicator of price movements in the recent years. Reports suggest that at November end last year ETF holdings were at an all-time high of over $150 billion. Till November, holdings in ETFs had risen by 12 per cent to 2,630 tonnes.
In short, the strings of record highs from various activities such as buying of physical gold, ETF holdings, record imports of China and India (two largest gold consumers) and lastly central bank buying simply doesn’t square with current consolidation phase.

Interventions to suppress gold prices are likely to have short term impact.

Thursday, December 13, 2012

FED Converts Operation Twist to QE 4.0

As expected, the US Federal Reserve via the Federal Open Market Committee (FOMC) has converted the expiring Operation Twist into a monthly $45 billion US Treasury buying program or chapter 4 of its unlimited QE program (QE 4.0).

From the Bloomberg
The Federal Reserve for the first time linked the outlook for its main interest rate to unemployment and inflation and said it will expand its asset purchase program by buying $45 billion a month of Treasury securities starting in January to spur the economy.

“The conditions now prevailing in the job market represent an enormous waste of human and economic potential,” Fed Chairman Ben S. Bernanke said in a press conference in Washington today after a meeting of the Federal Open Market Committee. The Fed plans to “maintain accommodation as long as needed to promote a stronger economic recovery in the context of price stability,” he said.

Rates will stay low “at least as long” as unemployment remains above 6.5 percent and if inflation is projected to be no more than 2.5 percent, the FOMC said in a statement. The thresholds replace the Fed’s earlier view that rates would stay near zero at least through the middle of 2015.

The move to economic thresholds represents another innovation by Bernanke, a former Princeton University professor and Great Depression expert who has stretched the bounds of monetary policy as he battled the recession and then sought to jolt the world’s biggest economy out of a subpar recovery.
How the Fed “innovates”, from the same article:
While the FOMC dropped its calendar-based guidance on interest rates, it said the new thresholds are “consistent” with the previous outlook. A majority of Fed officials don’t expect to raise the main interest rate until 2015, when the jobless rate is forecast to fall to between 6 percent and 6.6 percent, according to projections released after the statement.

The bond buying announced today will be in addition to $40 billion a month of existing mortgage-debt purchases. The FOMC said asset buying will continue “if the outlook for the labor market does not improve substantially” and hasn’t set a limit on the program’s size or duration.

The latest move will follow the expiration at the end of this year of Operation Twist, in which the central bank each month has swapped about $45 billion in short-term Treasuries for an equal amount of long-term debt. That program kept the total size of the balance sheet unchanged, while the new purchases will expand the Fed’s holdings.

The decision to embark on outright Treasury purchases doesn’t “significantly” increase the level of monetary stimulus, Bernanke said. The Fed “intends to be flexible” in setting the pace of its asset purchases, and will use “qualitative” criteria to determine the size of its bond- buying program, he said.
Markets have practically greeted this with a yawn. Gold fell, oil rose, the US stock markets closed the day mixed.

That’s practically because the FED has telegraphed this move where 48 of the 49 economists earlier polled by the FOMC expected such actions from the FED.

Fed’s communication strategy (signaling channel) has been to float a trial balloon then lather rinse and repeat the message as part of a classical conditioning approach in shaping market’s expectations.

Yes realize that the FED effectively tries to apply mind control techniques on the markets.

The implication is that the FED’s supposed “innovation”, has in reality been a grand experimentation whose unintended consequences, which should impact the entire world, has yet to be revealed.

The FED’s buying of US treasuries will account for an estimated NINETY percent (90%) of US treasury supply!!!

From another Bloomberg article,
With the Fed buying about $85 billion a month in Treasuries and mortgage bonds next year, the net supply to the private sector will be about zero as the central bank effectively soaks up about 90 percent of new issuance of those assets.
So you have the FED fertilizing the already implanted or sown seeds of hyperinflation or a currency crisis. To be clear, what I am saying is that the doubling down of current FED actions have been INCREASING the risks of such scenario.

For now, such FED purchases will provide tailwinds to global financial markets, as well as, the Philippine Phisix, which will be seen as a "boom"

I maintain my prediction:
Since price movements of gold seems aligned with global stocks which have accounted for a risk ON or risk OFF environment, a confirmation of the Fed’s expansion of the QE most likely during the FOMC’s meeting in December 11-12 will likely push gold and global stock markets higher.

So this also means that both external and domestic policies will likely serve as tailwinds in support of a higher Phisix perhaps at least until the first quarter of 2013. Of course this is conditional to the above. Emergence of unforeseen forces, most likely from the dimensions of political risks may undermine this scenario.
But do expect sharply volatile markets with an upside bias until at least the first half of 2013.

Monday, September 03, 2012

Asian Stocks: Bad News is Good News Redux

Here we are again, Asian stocks supposedly have risen due to bad news being interpreted as good news. (Below is a run down on Asian stocks as of this writing from Bloomberg)

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First the bad news…

Fresh report says China’s manufacturing has contracted

This from Bloomberg,

In China, the Purchasing Managers Index fell to 49.2 in August from 50.1 in July, the National Bureau of Statistics and China Federation of Logistics and Purchasing said Sept. 1. It’s the first time in nine months that the measure has fallen below the 50 level that signals contraction.

A separate report released today by HSBC Holdings Plc and Markit Economics showed China’s manufacturing contracted last month at the fastest pace since March 2009.

China should “decisively” expand the strength of its policy fine-tuning based on economic developments and market changes, according to a front-page commentary published in China’s People’s Daily newspaper.

Next, more negative data from other Asian economies…

In Japan, a report showed companies’ capital spending gained less than expected. In South Korea, inflation slowed to the weakest pace in 12 years last month. Australia’s retail sales fell in July by the most in almost two years. In New Zealand, a gauge of the country’s terms of trade dropped for a fourth consecutive quarter.

Now the supposed good news… (bold added)

Asian stocks rose, reversing earlier losses, as economic reports from China, Japan, South Korea and New Zealand fueled speculation that central banks will boost stimulus measures

The MSCI Asia Pacific Index added 0.5 percent to 118.32 as of 1:44 p.m. in Tokyo after earlier falling as much as 0.5 percent. U.S. Federal Reserve Chairman Ben S. Bernanke said on Aug. 31 that further monetary easing is an option.

Bernanke “is defending the case that quantitative easing and unconventional policy have been effective, and that could be a controversial statement,” said Tim Leung, a portfolio manager who helps manage about $1.5 billion at IG Investment Ltd. in Hong Kong, referring to the Fed’s large-scale asset purchases. “If in the future the economy is not performing as good as they expect, they still have room” for more stimulus.

I’d say that for China, the today’s reaction seems more of a dead cat’s bounce than from “bad news is good news” phenomenon

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China’s Shanghai index has been under pressure for the past few weeks, so today’s bounce should come as a natural response. But this may have been misinterpreted by media

But I don’t think this applies with the rest.

What really has been happening is that the seduction of marketplace from promises of central bank steroids has been intensifying. As I noted last night,

Eventually stock markets will either reflect on economic reality or that central bankers will have to relent to the market’s expectations. Otherwise fat tail risks may also become a harsh reality.

Yes central banks will either have to deliver on their promises soon enough, or that financial markets will react violently if expectations have not been met or if economic data continues to exhibit pronounced deterioration.

A quote from the same Bloomberg articles gives a clue on the diminishing returns from central bank promises.

“It’s going to be difficult for the market to keep rallying on the promise of QE and other measures without some improvement in the data,” said Donald Williams, chief investment officer at Sydney-based Platypus Asset Management Ltd. that manages about $1 billion.

Inflationism distorts the pricing system which eventually spawns bubble cycles. The above accounts accounts for anecdotal evidences.

Friday, August 31, 2012

Contagion Risk: Japan’s Industrial and Consumer Prices Falls

Yesterday, I noted that despite the interventions by the Bank of Japan, retail sales have fallen markedly. Apparently, like China, Japan’s economic deterioration has been intensifying and spreading.

From Bloomberg,

Japan’s industrial production unexpectedly fell in July, adding to signs that faltering global demand is undermining the economy’s recovery.

Production slid 1.2 percent in July from June, when it advanced 0.4 percent, the Trade Ministry said in Tokyo today. The median estimate of 27 economists surveyed by Bloomberg News was for a 1.7 percent increase.

A slowdown in exports and the winding down of subsidies for car purchases are dimming the outlook for manufacturing and growth in the world’s third-biggest economy. Bank of Japan (8301) Governor Masaaki Shirakawa said on Aug. 24 that demand related to reconstruction from last year’s earthquake and tsunami is “gradually gaining momentum” and may help to sustain growth.

“Looking ahead, Japan’s economy will probably lose steam,” Kohei Okazaki, an economist at Nomura Securities Co. in Tokyo, said before the report. “Overseas demand is slowing, affecting production and capital spending.”

It’s really not about the lack of demand which has been more a symptom than the cause, but rather that much of productive capital have been diverted into unproductive undertakings through political rescues of the banking and other politically favored zombie companies.

Thus the ensuing dearth of capital spending means less output, less jobs and less demand.

And as much as Japan’s political economy has been tainted or economically weighed by crony capitalism so goes with the Western peers, thus a transmission of a global slowdown which amplifies the contagion risks.

Yet a substantial part of the economic adjustments brought about by the previous artificially inflated boom, has been liquidations of misallocated capital. Combined with lack of capital spending, the slowdown in economic activities has resulted to reduced consumer prices.

From another Bloomberg article,

Japan’s consumer prices fell for a third month in July, underscoring concern that the central bank is too optimistic about the outlook for achieving its 1 percent inflation goal.

Consumer prices excluding fresh food dropped 0.3 percent from a year earlier, the statistics bureau said in Tokyo today. That matched the median estimate in a Bloomberg News survey of economists. The jobless rate stayed at 4.3 percent, a government report showed.

Today’s data may reinforce doubts over the central bank’s efforts to reverse more than a decade of deflation as the European debt crisis hurts Japan’s economy by dragging down exports. Central bank Governor Masaaki Shirakawa last week said that it’s likely the inflation goal will be realized after the end of fiscal 2013.

“Japan is still in a deflationary phase,” Masayuki Kichikawa, Tokyo-based chief economist at Bank of America Merrill Lynch, said before today’s release. “The bad news is that the global slowdown has been prolonged so the BOJ will probably have to delay its time line to achieve the inflation goal.”

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Despite bouts of negative consumer prices, which in a free economy means higher purchasing power of money out of more production, Japan’s supposed “deflation”, which has misled mainstream, has truly been about disinflation.

Notice that since the bubble bust in 1990, the Japan’s CPI index has wavered, and in times when it turned negative, the index hardly breached 1% except in 2009 to early 2010 which came in the aftermath of a global recession. (chart from tradingeconomics.com).

This is hardly “deflation” in the context of the US Great Depression which many try to erroneously correlate.

(From the Economist’s View).

The above is an example of the CPI "deflation" of the US Great Depression whose conditions are immensely dissimilar from Japan and today.

Instead, the vacillating inflation-deflation signifies as stagnation out of Japan’s sustained policies to prop up unsound and unprofitable but politically connected enterprises which has prompted for the “lost decades”, as I previously discussed.

Nonetheless the negative CPI will give the Bank of Japan (BoJ), whom will be pressured by Japan’s politicians, more excuses to expand monetary intervention via asset purchases.

So far, most of global equity markets have not factored in the intensification of a global economic slowdown which has become evident in China and Japan. Recession in the Eurozone compounds the dire global economic conditions. The US seems likely to follow.

Yet the simultaneous economic deterioration extrapolates to increasing risks of a world economic recession.

Global equity markets have artificially bolstered by the charm offensive made by central bankers on promises of rescue. But until now they have refrained from making any major moves.

If the current dynamic will worsen, and without or with less than expected central bank interventions, market expectations may shift swiftly and dramatically to incorporate the real risk environment.

Be careful out there.

Monday, August 20, 2012

Phisix: Choosing The Ideology behind Profitable Actions

We have been trained to look for godliness, virtue, direction, and truth outside ourselves, in some agency external to ourselves. Such beliefs have been generated largely by those who have either a religion or a political system to fasten upon the necks of their fellow beings. It is through such thinking that some have been able to control the thoughts and actions of others by attacking their victims' sense of self-capacity and worthiness to function in the world.-Butler Shaffer

There will be only 3 trading sessions in the coming week because of the extended holidays (on Monday Eidul Fitar and Tuesday Ninoy Aquino Day).

This means that the public will likely be in a vacation mode. So unless some externally driven event will incite unusual volatility that may trigger a local response, I expect the market’s mood to be largely lackadaisical. So whatever direction the Phisix closes the week, the average trading volume will likely be weaker.

Since momentum in the global markets appear sprightly; the odds for a shock seem unlikely.

But given the fragility of current conditions, no one can really tell.

Update on Holiday Economics

As a side note, the string of political holidays only depletes productivity from the economy. The mainstream will argue that “holiday economics” promotes tourism and tourism related industries from which should support the economy. But again, costs are not benefits.

While holidays indeed promote tourism and allied industries, such thinking ignores the unseen costs borne by such political holiday statutes.

As I previously wrote[1],

local policies are counterproductive, privileges one sector (4% direct 10% indirect) over the entire economy, raises cost of doing business, reduces output, promotes idleness, hedonism and wrong virtues (spending instead of saving) and importantly the "elitist" tendencies of the powers that be.

For an update, according to World Travel & Tourism Council[2], the direct contribution of Travel & Tourism to GDP was PHP194.7bn (2.0% of total GDP) in 2011, the total contribution of Travel & Tourism (meaning tourism related industries) to GDP was PHP830.8bn (8.5% of GDP) in 2011. In terms of employment, direct employment from the industry accounted for 778,000 jobs or 2.1% of total employment and the total contribution of the industry to employment, including jobs indirectly was 9.6% of total employment (3,547,500 jobs).

Back of the napkin calculation tells us that ‘Holiday economics’ means supporting 8.5% (of GDP) against the 91.5% of the economy, and in terms of employment, 9.6% as against 90.4% of the labor force.

Holiday economics has been premised on promoting the interests of the elite at the expense of the underprivileged or the ‘poor’.

Market Internals Suggests of Healthy Correction Phase

In the Philippine equity markets, part of what I expected occurred last week.

The recent selloff in the mining sector seems to have percolated into the broader markets.

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The Phisix languished, down 1.07% this week, weighed by all major sectoral indices except for the mining and oil which defied the broad market correction

As I wrote last week[3],

I lean on condition (B) or where the bear market of the mining sector will likely percolate into the general market, due to growing risks of contagion.

However everything really depends on how and what future policies will be conducted, especially in the US, as previously discussed.

So the correction phase appears to be another rotational process which essentially shifts the flow of sentiment from the mining sector to the general market and vice versa.

I seriously doubt that the domestic mining sector as having reached an inflection point or has “bottomed” out. I would like to be convinced based on evidences from internal and external forces. Instead I suspect that this week’s rally has been more of a dead cat’s bounce, from a vastly oversold position, than from a recovery.

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The correction phase can be seen in the modest deterioration of the market breadth. The rotational process, as well as, the modest decline of the general market should be seen as a healthy profit taking process.

The continuity of the benign conditions, as I have repeatedly been pointing out, will depend on external developments.

Superstitious Beliefs versus Rigorous Analysis

Many have assigned the current weakness in the local equity market as having been influenced by the Chinese tradition of the “Ghost Month” (August 17 to September 15, 2012)[4]

The tradition suggests that many activities such as evening strolls, traveling, moving house, or starting a new business or even swimming can bring about bad luck, thus believers refrain from doing them.

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People’s beliefs are acquired mostly through three ways[5], through tradition (handed down through generations), through persons of authority (whose opinions people take as truth and accept or assimilate them, e.g. parents, teachers, religious leaders, politicos, experts and etc…) and or from reason and evidence.

Based on reason, there has been little empirical evidence to support such claims.

While I don’t have the exact figures for the said periods, I used the annual % monthly returns of August (left window) and September (right window) of the Phisix since 1985 to see its validity.

As one would note that in the above chart, from both August and September windows, negative returns have not been a predominant feature. Instead we see sporadic fluctuations between positive and negative zones.

Examining further, one would note that the direction of returns have largely been driven by the dominant trend of the marketplace: Returns have either been negative or marginally positive during cyclical bear market periods, while in bull markets, returns have mostly been positive.

One interesting aspect is that sharp market volatilities has characterized September returns, where gains and losses have been magnified.

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I think this seem to square with the seasonal activities in the US where September tends to be the worst month for stocks as exhibited by the Average Monthly gain by the Dow Jones Industrials since 1950[6].

And the sharp volatility compounded by negative returns could have been due to the simultaneous large liquidations of savings, which includes sales of stocks, to fund major consumption expenses by US households, particularly spending for new school clothes for children, winter clothes and other weather related consumption activities. Fueled by tight monetary conditions, the massive outlays for consumption may have served as catalyst for the notorious September-October window which has been seasonally prone to market crashes[7]

The lesson that can be gleaned from the above is that beliefs based on superstitions and or the tendency of many to employ the availability heuristics—mental shortcuts based on what we can remember rather than from complete data[8]—are hardly useful substitutes for thorough investigation and rigorous analysis of the marketplace from which to project the future or even explain markets on an ex-post basis.

On the contrary, I would say that the recent weakness of the Phisix can be traced to a single axiom: NO Trend Moves in a Straight Line.

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Given that the Philippine Phisix, which has outperformed most of the world’s equity benchmarks on a year to date basis, has shown signs of being overbought and overextended, then a salutary reprieve should be a natural state.

In short, profit taking is an inherent process of the financial markets.

Year-to-date, Thailand seems to have successfully passed the Philippines (19.37 versus 19.1% respectively) to take the region’s leadership. Yet both managed to keep some distance from last year’s leader Indonesia, as well as, Malaysia who remains the laggard among the ASEAN majors.

Meanwhile Malaysia’s year-to-date returns largely understates the real action—Malaysia has been the only bourse in the region (if not the world) trading at record highs.

I think that in as much as rotations occur within the domestic market, the same dynamic will likely influence activities of the region’s equity bourses.

As I previously noted[9],

given the rotational dynamics, we might see some “catch up” play or the narrowing of the recent wide variance between the laggards and leaders overtime. But this doesn’t intuitively mean that such gaps will close.

So far, only the Phisix has backtracked while Thailand’s SET has still been in high Octane. On the other hand, Indonesia has slightly narrowed the gap with the Phisix.

Risk ON Stands on Perpetual Promises of Rescues

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The reason why the world’s bourses have turned conspicuously positive has been due to the recent return of the RISK ON environment.

The following represents mainstream media’s attribution of the strong performance of global equity markets for the week.

European stocks, from Businessweek/Bloomberg[10]

European stocks rose to the highest level since July 2011, extending gains for an 11th week, as investors anticipated policy makers will stimulate the euro-area economy and German growth retreated less than forecast.

Asian stocks, from another Businessweek/Bloomberg[11]

Asian stocks rose this week, with the benchmark index posting its longest weekly winning streak since March, after China’s Premier Wen Jiabao said there’s more room to adjust monetary policy and U.S. economic reports signaled strength in the world’s largest economy.

In spite of indefatigable pledges by Chinese authorities, China’s bellwether, the Shanghai index remains in doldrums seemingly unaffected by the global RISK ON landscape.

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In fact, China’s authorities have admitted to recent signs of outflows of hot money[12] as domestic banks became net sellers of foreign exchange or 3.8 billion yuan ($597 million), which for me could be worrying signs of a popping bubble.

Meanwhile US stock markets according to the Reuters[13]

The S&P 500 held near a four-year high on Friday, and the market's key gauge of anxiety sank to its lowest since 2007, suggesting a belief that the problems stressing investors might be closer to a resolution…

The S&P 500 made a solid move above the closely watched 1,400 level in the last session, posting its biggest gain in two weeks. But trading volume remained low…

The S&P 500 has risen 2.8 percent in August and about 11 percent since a year low in June as traders eye some encouraging U.S. jobs data and highly anticipated policy meetings at the European Central Bank and the Federal Reserve in September.

In essence, the gist of today’s rally in the global stock markets has been galvanized around intensifying expectations that global central banks and governments will effectively rescue the markets.

And tidbits of good news are seen as signs of selective confirmation of a recovery. On the other hand, bad news have been interpreted as having to add pressure on governments to intervene, the result of which is to supposedly deliver good news—a recovery.

In other words, today’s global equity markets investors seem to have been strongly conditioned to carry expectations that markets can only move in one direction: UP. It can be said that the circularity of this logic entails a “heads I win, tails you lose” market environment from political guarantees. Such is the confirmation bias which intensely embodies the mainstream view.

Such has also been the reason why markets everywhere have increasingly been politicized as participants have been oriented to see rising markets as a form of political entitlement.

Divergences Aplenty

It has been interesting to note that, yes corporate fundamentals may have posted some positive signs but again everything depends on the reference points.

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From the big picture, the positive signs emitted by the S&P 500 have not been convincing.

Aside from low volume, the divergences I previously mentioned, such as earnings, global economy, industrial and non-industrial activities[14], market internals, divergent signs on sub-sectors such as Transportation (Dow Theory)[15] or even the Russell 2000, have shown marginal and not substantial improvements, in spite of the near four year highs by the S&P 500.

A good example is the current divergence in the % of companies beating earnings and revenue estimates. While the above has shown positive results, it seems that US markets have been cheering what seems like diminishing returns or a decline in positive developments. (chart above from Bespoke Invest[16])

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chart from Bespoke Invest

Again recent highs of the US markets have been accompanied by narrowing market breadth.

This means the drivers responsible for lifting the equity benchmarks have mainly been big cap issues. Yet the accounts of publicly listed companies at 52-week highs have also been diminishing. If such trend should continue then this entails limited upside for the S&P[17].

Finally the current rally in the US markets seems to have departed from the previous trend relative to gold.

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In the past, rallying US markets (represented by the S&P 500) came at the heels of a more powerful run in gold (see lower window) and in other major commodities. So even as the S&P rose, gold climbed faster, thus the declining ratio between the S&P and gold.

The implication is that the RISK ON environment then had been broader which also meant that the rally had a firmer footing.

Today’s RISK ON environment seems to be concentrated on the equity markets and the junk bond markets where Gold and commodities has vastly underperformed, thus, the rising ratio between S&P and gold.

Junk bonds have been posting record issuance. Companies have been taking advantage of zero bound rates and strong demand which has brought down yields of speculative bonds to a few points away from the record lows reached during May of 2011[18]. Such yield chasing phenomenon exhibits the nature of today’s yield chasing rampant punting and speculations.

This means that gold’s modest rise has not been consistent with a strong RISK ON landscape.

The selective risk appetite and the apparent narrowing of asset selections mean that the markets could be highly susceptible to sudden changes of expectations or to mood swings: thus elevating the current risk profile of would be buyers.

Current Conditions Remain Highly Fragile

I have long been making this point: For as long as the US won’t fall into a recession or won’t suffer from a financial shock that could lead to a global recession, the recent decline in the Phisix extrapolates to a healthy profit taking process.

That said, a five to ten percent decline from the peak or the range at 4,825-5,080 could prove to be a spring board for the next record high. This is all conditional on the unfolding events abroad, and should not be read as one-size-fits all analysis.

Given the nature from which the recent global rally has been anchored, i.e. expectations from promises of rescues, I still remain highly apprehensive, or I will not write off the risks of possible sharp changes in expectations that may precipitate the current moderate RISK ON conditions to a swift and dramatic RISK OFF environment.

The contagion risks are real, which means current conditions remain highly fragile. Rising markets have not smoothened out all the underlying stresses.

Given the enormous distortions of the markets from repeated interventions, the best is to watch the interplay of stimulus-response between markets and policymakers.

To close, let us not forget our beliefs essentially drive our actions, rightly or wrongly. As the great Ludwig von Mises wrote[19],

In acting man is directed by ideologies. He chooses ends and means under the influence of ideologies. The might of an ideology is either direct or indirect. It is direct when the actor is convinced that the content of the ideology is correct and that he serves his own interests directly in complying with it. It is indirect when the actor rejects the content of the ideology as false, but is under the necessity of adjusting his actions to the fact that this ideology is endorsed by other people. The mores of their social environment are a power which people are forced to consider. Those recognizing the spuriousness of the generally accepted opinions and habits must in each instance choose between the advantages to be derived from resorting to a more efficient mode of acting and the disadvantages resulting from the contempt of popular prejudices, superstitions, and folkways.


[1] See The Economics of Holidays, October 22, 2009

[2] World Travel & Tourism Council Travel & Tourism Economic Impact 2012 Philippines

[3] See Philippine Mining Index: Will The Divergences Last?, August 13, 2012

[4] Mandarin Language Ghost Month and Ghost Festival About.com

[5] Green Alexander, The Noblest Expression of the Human Spirit, Early To Rise, October 6, 2010

[6] Chart of the Day Dow-Average Monthly Gains

[7] See Austrian Business Cycle and September Market Crashes, June 27, 2012

[8] Changingofminds.org Availability Heuristic

[9] See Phisix and ASEAN Equities in the Shadow of Contagion Risks July 22, 2012

[10] Businessweek/Bloomberg, European Stocks Rise for 11th Week on Stimulus Bets, GDP August 17, 2012

[11] Businessweek/Bloomberg, Asia Stocks Rise for a Third Week on Wen Comments, U.S. Economy August 17, 2012

[12] Wall Street Journal Investors Shift Money Out of China August 14, 2012

[13] Reuters.com US STOCKS-S&P 500 up for 6th week; fear index hits 5 yr low, August 18, 2012

[14] See Why Current Market Conditions Warrants a Defensive Stance, July 9, 2012

[15] See Phisix: Managing Through Volatile Times, August 6, 2012

[16] Bespoke Invest Final Earnings and Revenue Beat Rates August 17, 2012

[17] Bespoke Invest Wanted: More New Highs August 17, 2012

[18] Bloomberg.com Junk-Bond Sales Soar To Record In August: Credit Markets, August 17, 2012

[19] Mises, Ludwig von 2. The Role of Power XXIII. THE DATA OF THE MARKET Human Action, Mises.org