In Pictures : Sign of Times: Euphoria!

What a week. Global stocks on a record ramp.

The above represents the performance charts of the Philippine Phisix, Japan's Nikkei, the German Dax and Hong Kong's Hang Seng from stockcharts.com. I chose 2013 as reference point in order to highlight the effects of Japanese government's Abenomics, China's multiple easing measures and the ECB's do whatever it takes QE.

All stocks indicated have been at various records or milestone highs!

The following pictures highlights on the prevailing sentiment.

The Nikkei Asia cheers on Japan's Nikkei's touching the 20,000 milestone last April 10

Mainland Chinese stock market retail participants stampeded to aggressively bid up Hong Kong's stocks as the state run China Security Journals called for a buy! (image from the Financial Times)

German publication Deutsch Welle celebrates the Dax's 15 year high!

The Philippine Stock Exchange believes that economic nirvana has been attained  as the Phisix broke through 8,000

All of the above have been expressive of the following:

Harvard's Carmen Reinhart and Kenneth Rogoff documented and chronicled all financial crises in the world during the last two centuries (1810-2010) and found a common denominator:

The essence of the this-time-is-different syndrome is simple. It is rooted in the firmly held belief that financial crises are things that happen to other people in other countries at other times; crises do not happen to us, here and now. We are doing things better, we are smarter, we have learned from past mistakes. The old rules of valuation no longer apply. The current boom, unlike the many booms that preceded catastrophic collapses in the past (even in our country), is built on sound fundamentals, structural reforms, technological innovation, and good policy. Or so the story goes.

This time is different!

JP Morgan’s Jaime Dimon Warns of a Coming Crisis

Another day, another warning from either experts or political authorities. This comes as global stock markets and bonds race to record or milestone highs. 

Risks from mounting imbalances have become so evident such that many from the mainstream have been jumping into the bandwagon.

Here is JP Morgan’s top honcho Jaime Dimon on the coming crisis. 

From Marketwatch.com (bold mine)

You ain’t seen nothing yet, when it comes to market wreckage from a financial crisis, according to J.P. Morgan boss Jamie Dimon.

In his annual letter to shareholders, the bank’s chief executive warned “there will be another crisis” — and the market reaction could be even more volatile, because regulations are now tougher.

He argued the crackdown on the financial sector, added to more-stringent requirements for capital and liquidity, will hamper banks’ capacity to act as a buffer against shocks in financial markets. Banks could become reluctant to extend credit, for example, and less likely to take on stock issuance through rights offering, which would essentially create a shortage of securities.

Such factors “make it more likely that a crisis will cause more volatile market movements, with a rapid decline in valuations even in what are very liquid markets,” Dimon said in the letter. “Recent activity in the Treasury markets and the currency markets is a warning shot across the bow.”

The J.P. Morgan JPM, +0.05%  CEO pointed to the 40 basis-point move in Treasury securities on Oct. 15 as one of those warning shots. The move — though “unprecedented” and “an event that is supposed to happen only once in every 3 billion years or so” — was still relatively easily absorbed in the market and no one was significantly hurt by it, he noted.

“But this happened in what we still would consider a fairly benign environment. If it were to happen in a stressed environment, it could have far worse consequences,” Dimon said.

There’s also the issue of clearinghouses. Clearinghouses sit between the two sides of financial trades and have, since the financial crisis, worked as risk managers for global markets. But that could also exacerbate the next crisis, according to the J.P. Morgan chief.

“Clearinghouses are a good thing, but not if they are a point of failure in the next crisis,” he said. “It is important to remember that clearinghouses consolidate — but don’t necessarily eliminate — risk.”

But here’s for the good news. Banks won’t be at the center of the next crisis, Dimon believes. His view is that while they may not be able to act as a shock absorber because of tight regulations, they are overall safer and stronger than before.

Interesting.

Yet more excerpts from Jaime Dimon’s letter to shareholders (bold original, bold-italics mine)

Recent activity in the Treasury markets and the currency markets is a warning shot across the bow 

Treasury markets were quite turbulent in the spring and summer of 2013, when the Fed hinted that it soon would slow its asset purchases. Then on one day, October 15, 2014, Treasury securities moved 40 basis points, statistically 7 to 8 standard deviations – an unprecedented move – an event that is supposed to happen only once in every 3 billion years or so (the Treasury market has only been around for 200 years or so – of course, this should make you question statistics to begin with). Some currencies recently have had similar large moves. Importantly, Treasuries and major country currencies are considered the most standardized and liquid financial instruments in the world.

The good news is that almost no one was significantly hurt by this, which does show good resilience in the system. But this happened in what we still would consider a fairly benign environment. If it were to happen in a stressed environment, it could have far worse consequences.

Some things never change — there will be another crisis, and its impact will be felt by the financial markets

The trigger to the next crisis will not be the same as the trigger to the last one – but there will be another crisis. Triggering events could be geopolitical (the 1973 Middle East crisis), a recession where the Fed rapidly increases interest rates (the 1980-1982 recession), a commodities price collapse (oil in the late 1980s), the commercial real estate crisis (in the early 1990s), the Asian crisis (in 1997), so-called “bubbles” (the 2000 Internet bubble and the 2008 mortgage/housing bubble), etc. While the past crises had different roots (you could spend a lot of time arguing the degree to which geopolitical, economic or purely financial factors caused each crisis), they generally had a strong effect across the financial markets.

While crises look different, the anatomy of how they play out does have common threads. When a crisis starts, investors try to protect themselves. First, they sell the assets they believe are at the root of the problem. Second, they generally look to put more of their money in safe havens, commonly selling riskier assets like credit and equities and buying safer assets by putting deposits in strong banks, buying Treasuries or purchasing very safe money market funds. Often at one point in a crisis, investors can sell only less risky assets if they need to raise cash because, virtually, there may be no market for the riskier ones. These investors include individuals, corporations, mutual funds, pension plans, hedge funds – pretty much everyone – each individually doing the right thing for themselves but, collectively, creating the market disruption that we’ve witnessed before. This is the “run-on-the-market” phenomenon that you saw in the last crisis

Frank Shostak: How Easy Money Drives the Stock Market

Austrian economist Frank Shostak explains at the Mises Institute how easy money (not G-R-O-W-T-H) sends stocks to the moon (bold mine)

In a market economy a major service that money provides is that of the medium of exchange. Producers exchange their goods for money and then exchange money for other goods. 

As production of goods and services increase this results in a greater demand for the services of the medium of exchange (the service that money provides). 

Conversely, as economic activity slows down, the demand for the services of money follows suit. 

Prices and the Demand for Money 

The demand for the services of the medium of exchange is also affected by changes in prices. An increase in the prices of goods and services leads to an increase in the demand for the medium of exchange. 

People now demand more money to facilitate more expensive goods and services. A fall in the prices of goods and services results in a decline in the demand for the medium of exchange. 

Now, take the example where an increase in the supply of money for a given state of economic activity (i.e., production) has taken place. Since there wasn’t any change in the demand for the services of the medium of exchange, this means that people now have a surplus of money or an increase in monetary liquidity. 

No individual wants to hold more money than is required, and an individual can get rid of surplus cash by exchanging the money for goods. 

All the individuals as a group, however, cannot get rid of the surplus of money just like that. They can only shift money from one individual to another individual. 

The mechanism that generates the elimination of the surplus of cash is the increase in the prices of goods. Once individuals start to employ the surplus cash in acquiring goods, it pushes prices higher. 

As a result the demand for the services of money increases. All this in turn works toward the elimination of the monetary surplus. 

Note that what has triggered increases in the prices of goods in various markets is the increase in the monetary surplus or monetary liquidity in response to the increase in the money supply. 

Price Deflation and the Money Supply 

While increases in the money supply result in a monetary surplus, a fall in the money supply for a given level of economic activity leads to a monetary deficit. 

Individuals still demand the same amount of services from the medium of exchange. To accommodate this they will start selling goods, thus pushing their prices down. 

At lower prices the demand for the services of the medium of exchange declines and this in turn works toward the elimination of the monetary deficit. 

A change in liquidity, or the monetary surplus, can also take place in response to changes in economic activity and changes in prices. 

For instance, an increase in liquidity can emerge for a given stock of money and a decline in economic activity. 

A fall in economic activity means that fewer goods are now produced. This means that fewer goods are going to be exchanged, implying a decline in the demand for the services of money. 

Once, however, a surplus of money emerges, it produces exactly the same outcome with respect to the prices of goods and services as the increase in the money supply does. That is, it pushes prices higher. 

An increase in prices in turn works toward the elimination of the surplus of money — the elimination of monetary liquidity. 

Conversely an increase in economic activity while the stock of money stays unchanged produces a monetary deficit. 

This in turn sets in motion the selling of goods thereby depressing their prices. The fall in prices in turn works toward the elimination of the monetary deficit. 

These dynamics can affect a wide variety of markets unequally, but one market in which we can see the relationship between prices and money supply is the stock market.

A Time Lag Between Peak Liquidity and Peak Stocks?

There is a time lag between changes in liquidity, i.e., a monetary surplus, and changes in asset prices such as the prices of stocks.

(The reason for the lag is because when money is injected it doesn’t affect all individuals and hence all markets instantly. There are earlier and later recipients of money.)

For instance, there could be a long time lag between the peak in liquidity and the peak in the stock market.

The effect of previously rising liquidity can continue to overshadow the effect of currently falling liquidity for some period of time. Hence the peak in the stock market emerges once declining liquidity starts to dominate the scene.

Read the rest here

Hong Kong Stock Exchange CEO Warns Against Panic Buying!

Unlike the Philippine contemporary, whom would use every single opportunity to rationalize from price changes of record highs via the following publicity template—Today marks the Nth record highs, and x% gains for the year, from which represents investor confidence from corporate and economic growth…blah blah—thereby signifying total disregard of risks and blind adoration of the inflationary boom, given the latest milestone highs of Hong Kong stocks as a result of the spillover from the mania in Chinese stocks, Hong Kong Stock Exchange CEO Charles Li expresses concern over the current developments and writes to subtly warn of the developing mania in his article “A Little Advice to Investors”

From Charles Li via hkex.com.hk (hat tip zero hedge) [note the following has been translated by google] (bold-italics mine, bold original)

This is a few days after Easter, the Hong Kong stock market sentiment particularly active, the Hang Seng Index rose continuously, the total market capitalization, trading volume and turnover of Shanghai and Hong Kong through both record highs. When the market cheered the piece, I was asked the most questions investors are: 1. Hong Kong stocks to buy now time? 2. The Hong Kong and Shanghai through full amount can not buy into the old how to do? 3. Will the Hong Kong stock market trading volume magnified more volatility?

I do not have a crystal ball can predict the future direction of the market, but as one of many bridges were Hong Kong and Shanghai through the bridge, I want to give everyone a little investment advice.

Do not worry!

Shanghai and Hong Kong through the opening of the bridge is a long-term, it is for the next ten or twenty years built, there is no "after this village do not have this shop" issue. You can also be based on their actual situation and needs of arrangements ready before starting your journey from leisurely to invest. Do not have to hurry, not to join in the fun. You can always find valuable stock, but anxious often inviting risk. You know, as in the holiday get together, like travel, get together and can easily lead to congestion or bridge stampede, but also very personal experiences influence.

Do not panic!

Shanghai and Hong Kong through the north and south have a total degree of two-way daily limit, its main purpose is to ensure the smooth operation of the early start. Hong Kong stocks through these two days in advance the amount of daily afternoon run, so many investors due to inability to approach and confusion, there are many voices called for an early expansion.

At this point, I would ask my friends do not panic, be patient, the regulatory authorities have been closely watching the development of the market, it will at the appropriate time to consider expansion. The reason I have confidence in this regard, based on the following two points:

First, although the Shanghai and Hong Kong through popular these days, but the total amount of funds through the Shanghai and Hong Kong through and out of the mainland is still very small. So far only the total degree of Hong Kong stocks through the use of 47.9 billion yuan (not including Hong Kong shares through trading on April 9 in), or 19%. Shanghai shares of the total through the use of only 1,157 million yuan, or about 39%. Mainland A-share market since late last year, the average daily turnover has remained at more than one trillion. Relatively speaking, the size of funds pass through Hong Kong and Shanghai and out of it is very limited.

Second, Hong Kong and Shanghai through the clearing and settlement throughout the closure, regulators can fully monitor risks. All transactions are within the exchanges, clearing the company's systems, have a clear record. Under such a system arrangement, funds are not in great disorderly capital A shares or Hong Kong stocks traded in the stock sold and then backtrack along the main market.

So closed and transparent system designed to protect the next Hong Kong and Shanghai can be closely monitored through both regulatory agencies and prudent risk control of the premise of carrying a huge cross-border transactions.

Countless opportunities, risks often!

Shanghai and Hong Kong through open interoperability between the Mainland and Hong Kong market, but also to respect the value of the investment philosophy of international institutional investors and retail investors dominated the mainland population began "historic crossroads." This historic intersection will emit a lot of reminders "chemical effect", and create a new era of China's capital market development.

In this new era, endless opportunities, but often at risk. Hong Kong investors, new investors in the mainland market has brought unprecedented vigor and trading opportunities. At the same time, differences between the two sides in the investment ideas and risk awareness for Hong Kong investors (particularly retail), bringing new challenges and risks. How to keep the excitement of the market conditions calm and cautious, every investor must consider.

For many mainland retail investors, the Hong Kong and Shanghai through the first step of their investments overseas, naturally requires caution. Investment is like swimming as the water if you do not, you will never learn to swim, but the water is often the first time beginners are bound to choke a few saliva. Therefore, investors must do their homework, careful decision-making, should follow suit.

As market operators and regulators, we know that the rising volume means more responsibility, we will continue efforts to ensure a stable and reliable system, we will always monitor the market closely and take appropriate risks when necessary management measures to maintain the orderly functioning of markets.

Shanghai and Hong Kong through is designed to provide an opportunity for everyone is not made quick fortune, but to help the early realization of China's national wealth diversified international configuration, we provide long-term wealth preservation and appreciation of channels.

I wish every investor mindful of the risks of investment success!

The obverse side of every mania is a crash

Chinese Tech Bubble Dwarfs US Dotcom Bubble as Manic Buying Spreads to Hong Kong and to Macau’s Casino Stocks!

In addition to my late March post of “price to whatever ratio” where I show how the current Chinese stock bubble seem as integral to the government’s political actions which has resulted to valuations being blown out of proportions, this Bloomberg article finds that valuations of Chinese technology stocks has now dwarfed the US dotcom bubble of 1997-2000. (bold mine)

The world-beating surge in Chinese technology stocks is making the heady days of the dot-com bubble look tame by comparison.

The industry is leading gains in China’s $6.9 trillion stock market, sending valuations to an average 220 times reported profits, the most expensive level among global peers. When the Nasdaq Composite Index peaked in March 2000, technology companies in the U.S. had a mean price-to-earnings ratio of 156.

Like the rise of the Internet two decades ago, China’s technology shares are being fueled by a compelling story: the ruling Communist Party is promoting the industry to wean Asia’s biggest economy from its reliance on heavy manufacturing and property development. In an echo of the late 1990s, Chinese stocks are also gaining support from lower interest rates, a boom in initial public offerings and an influx of money from novice investors. 

The good news is the technology sector makes up a smaller portion of China’s equity market than it did in the U.S. 15 years ago, limiting the potential fallout from a selloff. The bad news is that any reversal in the industry will saddle individual investors with losses and risk putting an end to the Shanghai Composite Index’s rally to a seven-year high.

Wow 220 PERs!!! Philippine index managers must be drooling for local stocks to attain such levels.

Well overvaluations don’t just happen. Rather they are consequences from prior actions, or in particular, such are symptoms of deeper problems. And one of the major problem stems from government policies. And this has duly been imputed by the article which cites “lower interest rates”, and consequently, government support to the technology sector. 

The article shows how government subsidies feeds into the current mania.

China’s government is boosting spending on science and technology as a faltering industrial sector drags down economic growth to the weakest pace in 25 years. In March, Premier Li Keqiang outlined an “Internet Plus” plan to link web companies with manufacturers. Authorities also plan to give foreign investors access to Shenzhen’s stock market, the hub for technology firms, through an exchange link with Hong Kong.

Among global technology companies with a market value of at least $1 billion, all 50 of the top performers this year are from China. The sector has the highest valuations among 10 industry groups on mainland exchanges after the CSI 300 Technology Index climbed 69 percent in 2015 through Tuesday, more than three times faster than the broader measure…

Technology companies have posted the biggest gains among Chinese IPOs during the past year, helped by a regulatory ceiling on valuations for new share sales. Beijing Tianli Mobile Service Integration Co. is the top performer among 147 offerings during the period after surging 1,871 percent from its offer price to trade at 379 times earnings… 

Valuations in China are now higher than those in the U.S. at the height of the dot-com bubble just about any way you slice them. The average Chinese technology stock has a price-to-earnings ratio 41 percent above that of U.S. peers in 2000, while the median valuation is twice as expensive and the market capitalization-weighted average is 12 percent higher, according to data compiled by Bloomberg.

The idea that technology represents a small segment of the equity markets misappreciates the perspective that risks of imbalances have been a systemic issue.

Proof? From the same article

The use of margin debt to trade mainland shares has climbed to all-time highs, while investors are opening stock accounts at a record pace. More than two-thirds of new investors have never attended or graduated from high school, according to a survey by China’s Southwestern University of Finance and Economics.

Money has flowed into Chinese stocks in part because the central bank is cutting interest rates to support growth, something the U.S. Federal Reserve did in 1998 to revive confidence amid Russia’s sovereign debt default and the collapse of the hedge fund Long-Term Capital Management.

Symptoms of policy induced credit fueled asset (stock market) manias have been ubiquitous: margin trade are at all time highs combined with massive formal banking loans and shadow banking funds being funneled into stocks as retail punters enroll in record rates. Market participants then stampede into the price bidding hysteria or indulge in excessive speculation to pump up asset (stock market) prices to levels where valuations don’t seem to matter at all.

Yet systemic issues will have systemic ramifications.

To add icing to the cake, media portrays Chinese stock market irrationality on the increased participation from societal strata with lower educational background.

While education may somewhat help, the reality is that what demarcates between lemmings or people falling for the herding behavior trap and independent thinking is self-discipline which is a personal trait.

As I have pointed out numerous times here, throngs of well-educated or even high IQ people have been mesmerized by the illusions of prosperity from government sponsored bubbles or have even fallen victim to Ponzi schemes. As example, Queen Elizabeth chastised the economic industry for being blind to the 2008 crisis. 

Bubbles essentially pander to the emotions and egos rather than to logic. Thus self-discipline has mainly been about controlling emotions and egos (this is theoretically known as Emotional Intelligence) and hardly about education.

Anyway, to compound on the Chinese version of the modern day dotcom bubble has been an IPO bubble that includes small and medium scale enterprises

From Nikkei Asia (April 3; bold mine)

On Thursday, the China Securities Regulatory Commission approved an unprecedented 30 companies for listing on the Shanghai and Shenzhen stock exchanges. It previously had maintained a moderate pace of initial public offerings to avoid upsetting market dynamics. But the frenzied run-up in stock prices seems to have eased oversupply concerns and encouraged the regulator to let loose.

Investors responded by lifting the Shanghai index to a seven-year high Friday. Bullishness is particularly apparent in the Shenzhen market. Seventeen of the 30 companies approved for IPOs will list on its ChiNext board for startups. The ChiNext index advanced 1.4% to a record 2,510. The average component is trading at nearly 100 times earnings.

ChiNext is a benchmark patterned after the NASDAQ listed at the Shenzhen Stock Exchange.

Wow average PERS at 100x!

Yet aside from monetary easing, price manipulation of IPOs have been used by the government to ramp up the public's interest in the stock market last year.

So even while another Chinese company, Cloud Live Technology group reportedly defaulted on her domestic debt last week, where the Chinese government via the PBOC injected 20 billion yuan ($3.28 billion dollars) most likely to ease pressures in response to such default, the stock market mania has been intensifying.

Chinese stocks used to be correlated with price actions of commodities (chart yardeni.com). Not anymore. Chinese stocks have mutated into mainly a central bank-Chinese government liquidity play with little relevance on the real economy. Such signifies another sign where the stock market fundamental functions of price discovery, and as discounting mechanism, has almost entirely broken down.

And Chinese stock market bubble has even percolated to Hong Kong. Hong Kong’s stocks as measured by the Hang Seng Index have virtually exploded to record highs!

Aside from the rationalized gap between mainland and Hong Kong stocks, fund flows via the Shanghai-Hong Kong connect, the Chinese government again has been attributed as a major influence. 

From the Wall Street Journal: Adding to investor confidence Thursday was an article in the state-run China Securities Journal headlined “Go! Buy Hong Kong Stocks!”, signaling to some analysts that the mainland government is encouraging the rally.

And to include today’s gains (+3.8% yesterday and +2.7% today), in two days, Hong Kong’s stocks has spiked by 6.5% and by over 10% since mid March!

The mania appears to be spreading.

Stocks of Macau’s casinos have also skyrocketed by about a stunning 10% in two days!

Aside from yesterday's dramatic twist of events, today MGM China Holdings (HK:2282) closed +5.44%, Galaxy Entertainment Group (HK:27) +5.56%, Melco Crown Entertainment (HK: 6883) +2.21%, Sands China Ltd. (HK: 1928) +5.92%, Wynn Macau Ltd. (HK: 1128) +8.69% (!!), and SJM Holdings Ltd. (HK:880) owner of Grand Lisboa, +5.13%.

Spectacular volatility!

Paradoxically, this has been happening even as Macau's gaming industry in March suffered another monumental collapse in terms of monthly gross and accumulated gross revenues!

It’s becoming clearer that the Chinese government appears to be bent on substituting or replacing a bursting property bubble with a stock market bubble. They seem to be buying time and anchoring on hope that new bubbles will not only offset the old ones but generate real growth.

Unfortunately, all bubbles end in tears.

Yet the above events represent added accounts of record stocks in the face of record imbalances at the precipice.

Japan Times: Abenomics Drives the Destruction of the Middle Class

For one of the members of the establishment to stridently denounce of the ill effects from incumbent policies known as Abenomics, such would seem as indicative of how bad developments in Japan’s real economy have been. 

In their essay “Under ‘Abenomics,’ rich thrive but middle class on precipice”, the Japan Times holds that record stocks signifies as a key force in driving the wedge of inequality that may even lead to the destruction of the middle class.

From the Japan Times (bold mine)

What became clear was that in a society long dominated by families of moderate means — the top 1 percent of wealthy people account for a mere 10 percent of overall incomes — Japan’s middle class is now facing an existential crisis. 

According to Akio Doteuchi, a senior researcher at the NLI Research Institute, what is threatening people here is that, under the current social structure, virtually anyone in the middle class is at risk of falling into poverty.

“It’s like walking in a mine field. Many risks lie ahead of you,” Doteuchi said. “Even if you are in the middle class, if something unexpected happens, you could slip into poverty.”

Such risks could include contracting diseases such as cancer and being unable to work, the failure to land a job soon after graduation, or an ill parent who needs looking after.

The growing dependence on welfare state…

The big problem in Japan is that there are few social safety nets for such situations. In the past, workers had been shielded by the guarantee of lifetime employment at companies. When they retired, they were supported by family members, Doteuchi noted.

But now, there is an increasing number of nonregular workers, particularly younger ones, whose financial situations are unstable. More and more single-person households are vulnerable to serious health problems.

Data back this up. According to labor ministry figures announced April 1, the number of households living on welfare hit a record 1,618,817 in January. This figure has been on the rise for the last two decades.

The country’s relative poverty rate has also edged up over the last 30 years, especially with single mothers and fathers raising children, although the latest data are for 2012.

Yet record stocks fuels inequality…

On the other hand, data also show that the rich became even wealthier under Abe’s tenure.

Their numbers and the amount of their assets surged in 2013 and are still rising mostly due to sharp gains in stocks triggered by the Bank of Japan’s aggressive monetary easing, which started in April 2013, experts said.

According to the Nomura Research Institute, the number of wealthy households jumped 24.3 percent, with the amount of their total financial assets rising 28.2 percent in 2013, compared with 2011 figures. 

And as the stock market uptick continues, so too will the number of wealthy people grow.

“Since stocks account for a larger portion of their assets, both the number of wealthy people and their assets are on the rise,” said Hiroyuki Miyamoto, general manager of Nomura Institute’s financial business consulting department.

Households on average are believed to have a majority of their assets either in bank accounts or in cash. But the wealthy hold risk assets such as real estate, stocks and bonds — assets more likely to grow in value faster than mere savings accounts, Miyamoto said.

But at the same time, the wealthy in Japan are less dominant in terms of overall assets when compared with the rich in the U.S., partly because income levels of top corporate leaders are not as high as those in the U.S. and the tax system levies heavier income taxes on wealthy people than in many other countries, he said.

Experts have said the widening gap between haves and have-nots could be an economic driver when a country is rapidly growing. However, once it matures, any wide disparity can hamper economic growth, NLI’s Doteuchi said.

Well the above essentially affirms my repeated arguments here where Abenomics represents a redistribution of resources in favor of the elites and foreigners at the expense of the average individuals that leads to lower standards of living for the Japanese.

 

A reprise from my February 2015 post: (bold added)

It’s also an example of the ongoing parallel universe—surging stocks in the light of a struggling and stagnating real economy

Japan’s stock market penetration level tells us that only about 20% of Japanese households have been invested in stocks according the 2014 Fact Book by Japanese Securities Dealers Association as of 2013

As a share of financial assets, equities represented only 9.4% of the household balance sheet according to the BOJ’s fund flows based on the 3Q 2014 report.

And if one accounts for the latest activities, it appears that Japanese households have been NET SELLERS of equity securities consistently during the past 3 years (2012-14), again based on data from Japanese Security Dealers Association.

The implication is that Japanese households have hardly been beneficiaries of the latest stock market run. This reveals that based on demonstrated preference or actions by market participants, Japanese households have hardly been positive about Abenomics.

Instead because of the deliberate attempt to crash the Japanese currency, the yen, as part of the Abenomics three arrows, Japanese households have been in a capital flight as seen by the jump in the holdings of outward investments in securities and investment trusts according to the BoJ as of the 3Q.

These outflows or capital flight seem to affirm my predictions way back in 2012-13

So the biggest beneficiaries of the 15 year high Nikkei have mostly been foreigners, followed by domestic investment trusts and financial institutions. And this has been why Abenomics seems to be having a field day with international cheerleaders.

Abenomics’ attempt to push stocks to record upon record levels has only widened the disparities between financial assets and real economic performance. And such divergences has been revealed by the street survey.

Thus, whatever recovery that will be seen in the future will mostly be about statistics and hardly about progress in the real economy

Price distortions from sustained currency debasement will continue to have an adverse impact on the domestic entrepreneurs' economic calculation thereby filtering to the process of economic coordination or allocation of resources. Redistribution via inflationism won’t create economic value added but instead increases the misallocation of resources which results to the erosion of productivity and capital consumption.

By the way, today the Bank of Japan showed that foreign buying of Japan’s equities has surged to late 2014 levels when the BoJ announced QE 2.0.

Ever wonder why foreign establishment persist to lavish praises on Japan's politics?

Even from the statistical economy we see manifold signs of weakness.

Industrial developments remain sluggish. 

Latest (April 1) PMI manufacturing has been slowing while 1Q Big Industry capex has turned down. Worst, small business capex has collapsed!

From the consumer side, household spending (February) and retail sales (March) continue to reveal signs of contraction.

And the decline in consumer activities has been attributed to a slump in statistical inflation.

The Zero Hedge points at the latest substantial revisions admitted by Japan’s Labor Ministry which initially puffed up wage growth data. Yet a string of negative cash earnings growth for the past 20 months represents “the longest period in Japanese history without a single month of real wage growth!” (bold original)

The government’s price destabilization activities has not only been intensifying local residents’ exodus or capital flight out of Japan assets, now even domestic institutional investors has been shifting their portfolio exposures overseas.

From Nikkei Asia (March 26; bold mine)

Data from the Bank of Japan show pension funds, investment trusts and insurance companies bought more than 13 trillion yen ($107 billion) in foreign securities than they sold in 2014.

That represents the largest net purchase tally since 1998, the first year for which comparable data is available. Each type of investor was a net buyer by more than 4 trillion yen.

Pension funds engaged in a major shift, since in 2013 they sold nearly a net 8 trillion yen in such securities. The Government Pension Investment Fund sharply increased foreign investment in the latter half of 2014, changing tack from a previous focus on domestic bonds. Corporate pension funds followed suit.

Investment trusts had the biggest annual net purchases of foreign securities in four years, putting money in high-yield corporate bonds and real estate investment trusts. The funds had an influx of money to manage once individuals started putting savings into NISA tax-free investment accounts, introduced in 2014.

Insurance companies moved money from low-yield Japanese government bonds to European and U.S. government bonds.

Heavy buying of overseas assets is continuing this year. By March 14, net purchase of foreign securities by Japanese topped 7 trillion yen, according to data from the Finance Ministry. "Foreign investment will likely increase in fiscal 2015, too," says Yunosuke Ikeda, chief foreign exchange strategist at Nomura Securities.

For as long as the politics of inflationism persist such process will accelerate and intensify.

The accrual of negative numbers seem to converge. The Wall Street Journal estimates that statistical GDP for February has contracted anew, down by 2.1%.

All of the above demonstrates that in nearly 2 years since the grand experiment called Abenomics, the entropic process of the Japanese political economy seem as being accelerated by current policies.

The chief icon of inflationism JM Keynes presciently declared

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

The mainstream’s emerging revulsion to inequality looks like an affirmation that “this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.”

Record stocks in the face of record imbalances at the precipice.

Financial Times: The UK economy is a ticking time bomb

Sovereign Man’s Simon Black quotes of the “scathing assessment” by the Financial Times on the UK’s political economy

(bold original)

Despite being an otherwise staid, traditional news service, the professional banking division of the Financial Times recently released an utterly scathing assessment of the British economy.

It was entitled, “The UK economy is a ticking time bomb,” and the editor didn’t pull any punches in completely shattering the conventional fantasy that ‘all is well’, and that advanced economies can simply print and indebt their way to prosperity.

I’ll quote below, emphasis mine:

“What is the problem? Quite simply, the key numbers are terrible. According to the OECD, after five years of ‘austerity’ the UK’s budget deficit is 5.3%, down from 11.2% in 2009.

“In other words, it has gone from being close to meltdown to a situation that is merely dreadful.

“Since the government is spending more than it earns, it is hardly surprising that it is borrowing more, and that the debt-to-GDP has risen from 68.95% in 2009 to 93.30% in 2013, again according to OECD figures.

“As the UK is currently growing it should really be running a budget surplus, providing it with the means to run deficit financing during the next downturn.

“This is one of the tenets of the Keynesian philosophy that underpins a lot of left-of-centre economic thinking.

“Unfortunately Europe’s political parties of all persuasions have bastardised Keynes’ ideas – running deficits in both good and bad times – so as to render them almost meaningless.

“To make matters worse the UK, again similar to most advanced economies, is an ageing society with pension, welfare and healthcare systems that are wrongly structured and financially unsustainable.”

“We can blame the politicians for failing to be honest with the electorate about the challenges ahead.

“Or we could blame the voters who punish at the ballot box any party that tells them anything other than good news and wants to hear that taxes can be cut, spending raised and the budget balanced all at the same time.”

Warren Buffett: Do as I say, Not as I Do: No Bubble, but Berkshire Hathaway’s Cash Hoard Soars

At a CNN interview, US President Obama crony Warren Buffett denies a bubble in US stocks: Buffett said stocks "might be a little on the high side now, but they've not gone into bubble territory."

Yet he further stated that:  "I don't find cheap stocks to buy either," he said, adding after follow-up questions that there were "very little" and "very few" bargains out there right now.

For Mr. Buffett, the framing of bubble in the context of portfolio management matters. 

In Berkshire’s 2014 annual report, Mr. Buffett wrote: (bold mine)

There is an important message for investors in that disparate performance between stocks and dollars. Think back to our 2011 annual report, in which we defined investing as “the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power – after taxes have been paid on nominal gains – in the future.”

The unconventional, but inescapable, conclusion to be drawn from the past fifty years is that it has been far safer to invest in a diversified collection of American businesses than to invest in securities – Treasuries, for example – whose values have been tied to American currency. That was also true in the preceding half-century, a period including the Great Depression and two world wars. Investors should heed this history. To one degree or another it is almost certain to be repeated during the next century. 

Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments – far riskier investments – than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray. 

It is true, of course, that owning equities for a day or a week or a year is far riskier (in both nominal and purchasing-power terms) than leaving funds in cash-equivalents. That is relevant to certain investors – say, investment banks – whose viability can be threatened by declines in asset prices and which might be forced to sell securities during depressed markets. Additionally, any party that might have meaningful near-term needs for funds should keep appropriate sums in Treasuries or insured bank deposits. 

For the great majority of investors, however, who can – and should – invest with a multi-decade horizon, quotational declines are unimportant. Their focus should remain fixed on attaining significant gains in purchasing power over their investing lifetime. For them, a diversified equity portfolio, bought over time, will prove far less risky than dollar-based securities

Yet action speak louder than words.

Berkshire Cash and Cash Equivalents since 1995

Berkshire cash at US$ 60.98 billion or 17% of market cap as of yesterday (based on Yahoo Finance).

The cash holdings of Mr. Buffett’s flagship Berkshire Hathaway has been skyrocketing.

From an annualized basis, Berkshire’s biggest gain in cash equivalent has been in 2014. Yet since 2008, Berkshire has been stockpiling cash reserves.

And the crux has been, Berkshire has done little to use those cash hoard!

While it may be true that “a multi-decade horizon, quotational declines are unimportant”, buying at a elevated prices will have an impact on portfolio returns even at the long run. 

And what Mr. Buffett didn’t say has been that most of Berkshire’s holdings has been from long term positions, rather than from current investments.

It’s true that Berkshire Hathaway recently bought $560 million in the automotive sector through Axalta Coating System, a 145-year old seller of coatings for cars, SUV’s and commercial vehicles, but this hardly signifies a dent on the $60 billion stash.

At least Mr. Buffett has been candid to admit that he is just human and has been subject to miscalculations and losses.

In the same annual report he shares the sad experience of Berkshire’s position with Tesco.

Attentive readers will notice that Tesco, which last year appeared in the list of our largest common stock investments, is now absent. An attentive investor, I’m embarrassed to report, would have sold Tesco shares earlier. I made a big mistake with this investment by dawdling.

At the end of 2012 we owned 415 million shares of Tesco, then and now the leading food retailer in the U.K. and an important grocer in other countries as well. Our cost for this investment was $2.3 billion, and the market value was a similar amount.

In 2013, I soured somewhat on the company’s then-management and sold 114 million shares, realizing a profit of $43 million. My leisurely pace in making sales would prove expensive. Charlie calls this sort of behavior “thumb-sucking.” (Considering what my delay cost us, he is being kind.)

During 2014, Tesco’s problems worsened by the month. The company’s market share fell, its margins contracted and accounting problems surfaced. In the world of business, bad news often surfaces serially: You see a cockroach in your kitchen; as the days go by, you meet his relatives.

We sold Tesco shares throughout the year and are now out of the position. (The company, we should mention, has hired new management, and we wish them well.) Our after-tax loss from this investment was $444 million, about 1/5 of 1% of Berkshire’s net worth. In the past 50 years, we have only once realized an investment loss that at the time of sale cost us 2% of our net worth. Twice, we experienced 1% losses. All three of these losses occurred in the 1974-1975 period, when we sold stocks that were very cheap in order to buy others we believed to be even cheaper

Finally, yet some very useful advise from the annual report (bold italics mine)

If the investor, instead, fears price volatility, erroneously viewing it as a measure of risk, he may, ironically, end up doing some very risky things. Recall, if you will, the pundits who six years ago bemoaned falling stock prices and advised investing in “safe” Treasury bills or bank certificates of deposit. People who heeded this sermon are now earning a pittance on sums they had previously expected would finance a pleasant retirement. (The S&P 500 was then below 700; now it is about 2,100.) If not for their fear of meaningless price volatility, these investors could have assured themselves of a good income for life by simply buying a very low-cost index fund whose dividends would trend upward over the years and whose principal would grow as well (with many ups and downs, to be sure).

Investors, of course, can, by their own behavior, make stock ownership highly risky. And many do. Active trading, attempts to “time” market movements, inadequate diversification, the payment of high and unnecessary fees to managers and advisors, and the use of borrowed money can destroy the decent returns that a life-long owner of equities would otherwise enjoy. Indeed, borrowed money has no place in the investor’s tool kit: Anything can happen anytime in markets. And no advisor, economist, or TV commentator – and definitely not Charlie nor I – can tell you when chaos will occur. Market forecasters will fill your ear but will never fill your wallet.

The commission of the investment sins listed above is not limited to “the little guy.” Huge institutional investors, viewed as a group, have long underperformed the unsophisticated index-fund investor who simply sits tight for decades. A major reason has been fees: Many institutions pay substantial sums to consultants who, in turn, recommend high-fee managers. And that is a fool’s game

Well, the above insight brings us back to Mr. Buffett’s old adage: 'You want to be greedy when others are fearful. You want to be fearful when others are greedy. It's that simple.'

So there you have it, for Mr. Buffett the term "bubble" seems as a political sensitive word. So he fudges this by framing the market over the long term versus the short term. 

Updated to add: Of course uttering the word 'bubble' may just deflate Mr. Buffett's glory, prestige and esteem, as the investing public would refrain from pushing up Berkshire Hathaway or assets held by Berkshire.

Yet in his 2014 annual report Mr. Buffett made lots of caveats in citing "borrowing has no place in the investor's tool kit" when US non-financial companies has been in a borrowing splurge, that makes markets susceptible to "anything can happen anytime in the markets".

And if one looks at Mr. Buffett's Berkshire’s Hathaway cash stash, they seemed positioned for a coming fat pitch…

So do as I say, not as I do.