Happy 2015!

Wishing you a happy, healthy, fruitful and peaceful New Year!

Welcome 2015!

(image source)

yours in liberty,

Benson

How Mania Looked Like When Japan’s Nikkei 225 Reached Record Highs in 1989

In documenting financial and or economic crises over 200 years Harvard’s Carmen Reinhart and Ken Rogoff noted of a common psychological denominator: This time is different

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

“This time is different” circa 1989 as the Nikkei reached record highs.

From the Wall Street Journal Japan Real Time Blog (hat tip/chart from Zero Hedge) [bold mine]

After the Japanese stock market hit its all-time high on Dec. 29, 1989, analysts were still looking forward to another strong year for shares in 1990, despite some signs of danger.

The following is a Wall Street Journal article by Marcus W. Brauchli looking at the likely direction of the Japanese stock market following its record finish in 1989. The article was published Jan. 2, 1990.

Tokyo Stocks: Japan’s Believers Expect Surge in Stocks to Continue

TOKYO–Japan’s stock market spawns two kinds of investors: believers and skeptics. The believers are getting rich. The skeptics are getting sore.

For much of the past decade, the world’s biggest stock market has stumped the skeptics. Price-earnings ratios are astronomical. The differential between interest rates and corporate earnings is wide. Yet just when the market seems most top-heavy, it heads even higher.

The skeptics’ experience has been a litany of missed opportunities, and last year was no exception. The year-end rout many analysts feared in the bumpy days after the Oct. 13 slump turned into a record-stomping rally.

For believers, Japan’s stock market has been a money-spinner. Daiwa Securities Co. estimates that $100 invested in Japan’s market in 1981 would have generated capital gains worth nearly $650 today at prevailing exchange rates. The same amount invested on Wall Street would have earned $185 above the initial $100 invested.

As Tokyo’s market gallops into the Year of the Horse, the skeptics once again are wondering how long the market’s advance can continue. The believers are betting that it won’t slow anytime soon-and the consensus emerging from 1990 forecasts supports them. Even cautious predictions call for the Nikkei Index to end 1990 above the 45000-point level, climbing from its 1989 close of 38916. Other markets may perform better — and many did in 1989 — but few trend so chronically higher.

“We’re looking for another good year,” says Lawrence S. Praeger, chief strategist for Nikko Securities Co. Adds Christopher Russell, manager of research at Jardine Fleming Securities Co.: “The market looks well set.”

Behind such uniform optimism are many of the same fundamental struts that supported the 1989 market. The economy is expected to grow nearly 5% in the year ending March 30, and many economists already are predicting growth of more than 4% for the following year. Also, recurring corporate profits will grow about 11% in both years, according to forecasts by Nomura Research Institute 4307.TO -2.60%.

“The outlook is extremely good,” says Pelham Smithers, a research analyst at Shearson Lehman Hutton Inc.’s Tokyo office. Even the risk of a long-term decline, he notes, appears more limited than it was in 1989.

That’s mainly because some of the key negatives that sapped the market’s strength at times won’t recur. Last year, for instance, the market was hurt by a prolonged slowdown in market speculation and economic activity caused by the January death and February funeral of Emperor Hirohito. The market was then dragged lower at midyear by a series of political scandals. And external events took a toll, with the crackdown in Beijing weakening investor confidence in companies with ties to China.

Most of those market pitfalls were temporary. True, there is the chance of political trouble in February, when Prime Minister Toshiki Kaifu is expected to call a general election. But polls suggest his Liberal Democratic Party has been getting stronger, not weaker. Any gain by the party surely would aid market sentiment.

Yet there are a handful of danger signs that investors must guard against, analysts say. “The biggest negative for the market would be if the dollar picks up,” says Shearson’s Mr. Smithers. A weaker yen would increase the price of imports, fueling consumer-price inflation — which is expected to rise more than the government’s estimate of 2% this year in Japan. That might force the Bank of Japan to raise interest rates, which would tend to discourage stock market investment.

Moreover, some analysts worry that a weaker yen would exacerbate Japan’s trade surplus with the U.S. and might trigger protectionist measures by Washington. That kind of fight could hurt a lot of companies and send the market into a slide.

Any signs of these factors could be enough to send Japan’s institutional investors scurrying into cash. And because big investors, who tend to act in unison in Japan, are such major forces, that could set off a broad decline.

It’s that vulnerability that has caused some skeptics to miss out on some of the Tokyo market’s broad gains.

The skeptics fret that the price of Japanese stocks averages more than 60 times the issuing company’s per-share earnings. That price-earnings ratio is more than four times the U.S. average. And the differential between the yield available on short-term interest-bearing instruments, such as certificates of deposit, and the average earnings yield of Japanese stocks, is nearly 4% — high by historical standards.

These days, though, instead of analyzing why those numbers point to a collapse in share prices, more analysts are trying to explain how, with no wires apparently attached, stocks are still flying.

For instance, Paul H. Aron, vice chairman emeritus of Daiwa Securities America Inc., is the beacon of a movement that aims to show that differences in corporate accounting and business practices account for most of Japan’s high P-E ratios. If the ratios were adjusted for the differences, he says, Japan’s average P-E ratio would have been about 17.5 at the end of August, against a U.S. average of 13.5.

Another factor that boosts stocks is rotational buying. Instead of buying across all sectors, Japanese investors tend to look for special circumstances that will help one sector or another. Stocks that might benefit from a reduction in tensions with the East bloc or from economic cooperation with the Soviet Union rallied strongly in the last quarter of 1989 and are expected to continue advancing.

“In between the sector rallies, there could be some cooling down,” says Robert Jameson, an executive at Dresdner Bank’s Tokyo brokerage unit. “But a year is a long time in the Tokyo market, and it won’t stay cool for long.”

Overconfidence, bandwagon effect/appeal to majority, rationalization, vehement denial of risks, linear thinking (anchoring), and  voracious risk appetite—hallmarks of the “this time is different” mania.

Yet the battle between the skeptics and the believers highlight Dr. John Hussman’s Exit Rule for Bubbles: you have to decide whether to look like an idiot before the crash or an idiot after it. 

The bottom line: the obverse side of every mania is a crash.

Philippine Bonds Close the Year with a Rally; Flattening Yield Curve as Business Cycle Indicator

Philippine bonds ended the year with a rally that partly offset some last week’s selloffs.

Given the tightly controlled bond markets, this would be natural; the establishment would like to give the bond markets a facelift from current pressures. Besides, the Philippine government will be raising from the international market dollar bonds early January 2015, so domestic bond yields would have to reveal of "confidence". 

Also since no trend goes in a straight line and given the sharp moves of the past weeks, a rally should be expected.

Today’s yearend rally has normalized the 4 and 5 year inversion from last week.

However, today’s rally hasn’t changed the dramatic flattening of the domestic yield curve seen over the past month.

Let me deal with an objection that I have recently received.

Obviously annoyed by my post, an internet troll recently wrote: “Yields spiked simply because of the long holiday. A lot of traders wanted to sell, and few wanted to buy, because of fears that something might happen between Dec 3 and Jan 5 (many of them would probably take Dec 29 off). Basic supply and demand. If/When nothing happens, expect rates to fall back in the new year.”

The troll ended with snide ad hominems.

The above suggests that the current spikes in the yield curve have been about the “long holiday”.

As a side note I already dealt with this, but let me expound.

In celebration of Christmas, there are at least 5 public holidays in the last two weeks of December. I say “at least” because the government tends to declare unilaterally some in-between working days as holidays. This means long holidays has been a tradition in the Philippines. So fundamentally, to imply of ‘seasonality’ from long holidays means that turmoil in Philippine treasuries should consistently occur as an annual event!

A glimpse at the chart of yields of various Philippine treasury maturities will expose of the general invalidity of this claim (as shown below).

Paradoxically, the current turbulence in Philippine bond markets has been attributed to “fear” out of the long holidays. 

What has not been specified has been the motivation of the “fear” which produced such actions, except to declare in conclusion that this should signify an anomaly. Why “fear” the long holidays if everything has been hunky dory? Because traders woke up with a hangover from their holiday bacchanalia and decided to become fearful to go into a selling spree???

So in the absence of the identification of cause/s, yet a generalization was made: Yields must go down because the claimant says so! See the wonderful self-proclaimed economic logic?!

Bluntly stated, nothing can ever go wrong with this boom! Warts, wrinkles and all blemishes have to be passionately denied out of existence!

Normally I would ignore such trolls, but the comment showcases what's wrong with the current conditions. They represent rabid denials which has part of the bubble psychology as indicated the anatomy of the bubble cycle above.

As a side note, in mainstream media, there seems to be a code of silence in recent developments at the domestic bond markets.

For instance this Bloomberg December 12 article reports on the big bond market gains in response to Moody’s upgrade: “The yield on peso bonds due November 2024 fell 16 basis points this week, the most since the five-day period ended Oct. 25 last year, to 4.17 percent in Manila, according to noon fixing prices from Philippine Dealing & Exchange Corp. The yield dropped 18 basis points, or 0.18 percentage point, today. That move was also the biggest since October 2013"

The following day, the “biggest” move “since October 2013” had been more than completely obliterated, yet media’s deafening silence on the event. 

Good news reported, bad news censored? Why? Have bad developments not been real?

Going back to the objection, Dictionary.com defines “fear” as a distressing emotion aroused by impending danger, evil, pain, etc., whether the threat is real or imagined; the feeling or condition of being afraid.

In short, fear arises from a sense of heightened risk and or uncertainty. So how the heck can seasonality, which implies regularity, routine and predictability, generate “fear”?

If people are driven by incentives from subjective values, preferences and expectations, then the predictable end-of-the-year increased demand for liquidity should make financial institutions prepare for mundane events. Financial institutions may avail of interbank borrowing or BSP facilities (e.g. repos/ rediscounting) among the many modern tools in the financial toolkit. There won’t be need for abrupt liquidations of bonds.

And if bond markets have been reckoned as an option, the actions would be limited to some maturities, which has been the case for some yearend episodes. It is for this reason that Philippine bond markets have hardly demonstrated annualized turbulence as today.

In a nutshell, to rationalize current mayhem in the Philippine bond markets via proof of assertion, post hoc and begging the question— a bundle of flagrant logical fallacies—represents a rickety and inferior, if not a ridiculous way, to explain current events.

And because such comments have been predicated on faulty assumptions and premises they account for as blind faith to the perils of “This time is different” mentality which fits to a tee on the psychological aspect of what Harvard’s Kenneth Rogoff and Carmen Reinhart observed as common denominator of every financial crises from 1800-2010 which they documented in their book

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

What has been the relationship among these key factors—exploding credit growth in both the banking system and the bond markets, declining statistical economic G-R-O-W-T-H, tumbling money supply growth rates and rising credit risks, as revealed by the resurgence in Philippine (and ASEAN) CDS spreads—to current bond market turbulence?

How about prospective US Federal Reserve policies? How will US interest rates impact domestic rates? Has all these been unrelated to the actions in Philippine bond markets? How about the soaring US dollar? 

Again what incentives or expectations or events has triggered the “fear” via a scramble for liquidity in the bond markets?

We have also witnessed an inversion of 4 and 5 year yields last week, when was the last time the Philippine bond markets experienced this?

Does the following yield spreads from 2011 to 2014 (based on December monthly close from Investing.com) indicate that the Philippine bond markets have been about “long holidays”?

Except for the 10 year minus 2 year, even if we exclude this year’s actions, the short term-long term spread has exhibited a general flattening dynamic from 2011-2013. 

This year's actions seems to only amplify an ongoing trend. 

Yet the periodical December flattening dynamic resonates with the current activities over the past  month.

Instead of an anomaly, the flattening of the yield curve is an indication of the business cycle in progress. 

It has been a sign of monetary produced imbalances that has prompted credit markets to arbitrage on the asset liability mismatches via the spread differentials—whose windows have now been closing. It has been a sign of how credit expansion has engendered massive pricing distortions in the economy that has been demonstrated by inflationary pressures* which have now been reflected on the bond markets. And it has also been a sign that such credit expansion fueled boom has been backed by a lack of savings.

*As for relative inflation pressures, retail beer prices has risen 8%, my favorite fish ball vendor has not only had a decrease in size of the product, (value deflation or shrinkflation) recently the price has gone by 33%! (Previously Php 2 for every 4 pieces or 50 cents each now Php 2 for every 3 pieces or 66 cents each)

As Austrian economists Philip Bagus and David Howden explained: (bold mine)

Lacking adequate savings for the terms of the projects, these malinvestments must be liquidated. But when exactly will the recession set in? Two cases may be distinguished. In the first, the disturbance directly affects productive ventures. In the second case, financial intermediates first enter distress and only later affect productive enterprises.

In the first case, companies finance additional long-term investments with short-term loans. This is the case of Crusoe getting a short-term loan from Friday. Once savers fail to roll over the short-term loans and commence consuming, the company is illiquid (assuming other savers also curtail their lending activities). It cannot continue its operations to complete the project. More projects were undertaken than could be completed with the finally available savings. Projects are liquidated and the term structure of investments readapts itself to the term structure of savings.

In the second case, companies finance their long-term projects with long-term loans via a financial intermediary. This financial intermediary borrows short and grants long-term loans. The upper-turning point of the cycle comes as a credit crunch when it is revealed that the amount of savings at that point in time is insufficient to cover all of the in-progress investments. There will be no immediate financial problems for the production companies when the rollover stops, as they are financed by long-term loans. The financial intermediaries will absorb the brunt of the pain as they will no longer be able to repay their short-term debts, as their savings are locked-up in long-term loans. The bust in this case will reverberate backward from the financial sector to the productive sector. As financial intermediaries go bankrupt, interest rates will increase, especially at the long end of the yield curve, lacking the previous high-degree of maturity mismatching driving them lower. Short-term rates will also increase due to a scramble for funds by entrepreneurs who try to complete their projects. This will place a strain on those production companies that did not secure longer-term funding, or rule out new investment projects that were previously viable under the lower interest rates. Committed investments will not be renewed at the higher rates

Current developments in the Philippine bond markets suggest that yields have been rising across the curve but the pressure of increases has been in the short (bills) maturities than the longer bonds…thus the flattening. The flattening of the yield curve thereby signals the ongoing tightening of monetary conditions. Rising short term yields are symptoms of emergent strains in the Philippine financial system.

Let me further add that if the current ruckus in the bond markets will be sustained, the BSP will be forced to intervene. They may inject funds into pressured financial institutions, they may cut interest rates (contra mainstream expectations of higher rates), or at worst, if the problem spirals out of control, they may resort to bailouts. 

The BSP will likely impose the same policies as her international peers: I recognize the problem of addiction but a withdrawal syndrome would even be more cataclysmic.

Yet interventions from the BSP won’t bring back “normality”, rather they’d be pushing the progressing credit problems down the road. So BSP actions may prompt for the current stress in Philippine bonds to temporarily backoff, but the deepening addiction and dependence by credit hooked institutions would mean more accumulation of systemic debt based problems overtime. 

Via the law of scarcity, this means that eventually the developing entropy in the domestic credit markets, presently being ventilated in the bond markets, will reach a point to expose on the Potemkin Village pillared on a credit bubble; an inflection point from which the BSP won’t be able to control.

The great Austrian economist Ludwig von Mises warned: 

All governments, however, are firmly resolved not to relinquish inflation and credit expansion. They have all sold their souls to the devil of easy money. It is a great comfort to every administra­tion to be able to make its citizens happy by spending. For public opinion will then attribute the resulting boom to its current rulers. The inevitable slump will occur later and burden their successors. It is the typical policy of après nous le déluge. Lord Keynes, the champion of this policy, says: "In the long run we are all dead." But unfortunately nearly all of us outlive the short run. We are destined to spend decades paying for the easy money orgy of a few years.

This blog has not been intended to join the selling of “their souls to the devil of easy money” by the consensus. Instead, in spite of social signaling costs, this blog has been intended to warn of its perils

With or without me, the Aldous Huxley rule will apply “facts do not cease to exist because they are ignored”.

History, economics and finance tell us that the obverse side of every credit fueled mania is a crash.

In spite of the above, have a wonderful new year!

China’s PBOC Offers More Easing, Fuels a Wild Stock Market Ramp

More evidences of the tightening embrace by the Chinese government of “I recognize the addiction problem but a withdrawal syndrome would even be more cataclysmic” where existing debt problems will be solved by more encouraging acquisition of more debt!

The PBOC has reportedly signaled easing restrictions on banking system’s deposit requirements to encourage more credit activities.

From Dow Jones Business Nasdaq:

China's central bank is allowing banks to lend more out of their deposits as the world's second-largest economy struggles to gain momentum, according to banking officials with knowledge of the matter.

At a closed-door meeting on Wednesday, officials at the People's Bank of China told representatives from two dozen banks and other financial firms that the central bank will soon relax a major restraint on banks' abilities to make loans, according to the banking officials. The move would essentially allow them to include more money in their deposit base, giving them more room to lend…

Analysts estimate the move is roughly equivalent to injecting 1.5 trillion yuan--or about $242 billion--into the banking system. PBOC officials didn't respond to requests for comment.

Unlike her counterparts who attempt to project transparency in policy communication, the PBOC has undertaken monetary stimulus via the stealth measures

From Bloomberg: (bold mine)

Contrary to the Federal Reserve’s forward guidance, the Bank of England’s increased transparency and a Group of 20 Nations vow to clearly communicate policies, China has added liquidity by stealth at least four times in the past four months. One proxy it has been using is China Development BankCorp., the nation’s biggest policy lender.

Balancing the need to buoy an economy set for its slowest full-year expansion since 1990 and efforts to contain a debt pile that’s almost doubled in six years, China’s leaders have sought a targeted monetary path that’s deviating from advanced economy peers. Problem is, by keeping in the shadows, speculators have jumped in, pushing the stock market up over 20 percent since the PBOC’s benchmark interest rate cut on Nov. 21 in anticipation of more monetary easing…

The PBOC will lower the benchmark one-year lending rate by 25 basis points to 5.35 percent in the first quarter and by another 15 basis points by the end of June, according to economists surveyed by Bloomberg from Dec. 18-23. The central bank may cut banks’ required reserve ratio by a total of 1 percentage point in the first half, the survey found.

The PBOC rolled over at least part of a 500 billion yuan ($80 billion) three-month lending facility to the largest Chinese lenders last week, days after it injected 400 billion yuan via CDB, according to people familiar with the steps. Neither move, nor an offer of short-term liquidity to banks, has been officially announced.

Targeted easing means choosing winners and losers for monetary largesse by the PBOC.

And as I have been saying here stock markets have been about liquidity and credit that fuels fragile (false) confidence. The prospects of more easing compounded by the government’s IPO management has incited an orgy of speculation. 

From the wall Street Journal:

Chinese stocks rose Thursday on the news of corporate-finance deregulation in otherwise quiet Asian trading as the end of the year nears.

Shanghai Composite Index rose 3.4% to 3072.54, driven by financial stocks, following the announcement by China’s State Council Wednesday that it would scrap geographic restrictions for Chinese companies and commercial banks issuing yuan bonds abroad. The council also said it would make it easier for companies to offer shares, conduct mergers and acquisitions, and open branches overseas.

It could be possible that the PBOC has been channeling those loans to stock market, indirectly (bank loans to brokerages?)

Yet all these latest "easing" measures has done the opposite, it has raised interest rates based on 7 days repo moving averages.

Media has blamed this on demand for IPOs and stock market activities, but as previously explained for every security transaction represents a buyer and a seller. Money passes only from the buyer to the seller, so there should be no liquidity pressures.

Yet record high of margin trades last December 22nd of 670.6 billion yuan hardly has been indicative of liquidity strains at the stock market. 

The credit crunch has been in the real economy where China’s flow of credit has been diminishing.

I believe that the stock market serves as a convenient camouflage for the monetary tightening occurring in the real economy emanating from deepening signs of debt deflation.

So like governments almost everywhere, where stock markets have been used as policy communications tools to conceal real economic problems, to buy time from a violent market clearing adjustments and to promote a spurious G-R-O-W-T-H model based on the trickle down from the “wealth effect”, the PBOC desperately pins her hope based policies that stock market boom will do the wonders of exorcising her debt woes.

Has the Philippine Black Swan Event Arrived? Panic Selling in the Philippine Bond Markets!!!

I am reluctant to be a bearer of bad news especially as Christmas eve approaches, but silence won’t stop reality from happening.

I have also written about the risk of a Black Swan event occurring in the Philippines at the start of the year, except that my focus has been on Phisix and bubble industries. 

Well, the Philippine Black Swan event may have just arrived: Today Philippine bond markets suffered a horrific meltdown!

Yields across the curve has shockingly spiked! This adds to yesterday, as well as piggybacks on the turmoil that began two weeks ago!

Short and medium maturities skyrocketed at a tremendous rate to incredibly flatten the domestic yield curve! The yields of 4 and 5 year treasuries has even INVERTED!!!

Let me present the domestic bond market rout! [All charts from investing.com]

Yields of 1 month and 3 month surged 5.04% and 4.05%, respectively!!! Even the one month yield has moved significantly away from June 2013 taper tantrum highs.

Yields of 6 months and 1 year treasures soared 4.93% and 4.88% correspondingly! Again yields of both have short term securities has been racing farther away than the June 2013 taper tanturm levels.

Yields of 2 year and 3 treasuries vaulted by a staggering 6.5% and 4.43%!

2 year treasuries now at January 2014 and June 2013 taper tantrum levels. 3 year Philippine securities now beyond taper tantrum levels

Yields  of 4 year bonds spiked 3.8% as 5 year yields inched higher by only .83%

Yields of 7 year and 10 year bonds rose by a more moderate 1.36% and .94%

Yields of 20 year and 25 year bonds also rose  modestly at .18% and +1.08%

As one would note, increasing yields across the curve means a general selloff in Philippine bond markets.

And as the short term yields of 1 year and less crescendoed, the upside spiral of 2-4 year yields means a catching up or a spillover from the actions in the short term sphere.

Yields of 4 year (3.661%) and 5 year (3.659%) bonds have even inverted (see box) or 4 year yields are HIGHER than the 5 year equivalent! 

A stunning rate of flattening can be seen via the narrowing  or collapsing yield spread of 20 year and 10 year MINUS 1 year! Simply astonishing!

Let me repeat what I said yesterday: “Philippine treasuries essentially represent a tightly held or controlled markets by the government and the domestic banking system” such that “for any strains in Philippine treasuries to emerge means that some formal economy institutions, perhaps in the financial sector, have already been feeling pressures.”

Also from yesterday, 

Soaring bond yields comes in the face of exploding credit growth, declining statistical economic G-R-O-W-T-H and a sharply decelerating money supply growth rate! Where has all the money from the explosion of credit growth been funneled to??? Mostly to paying debt, perhaps??? Borrowing to rollover debt has now segued into a frantic jostle for short to medium term funds even at higher rates???

For the generally controlled domestic bond markets, why has there been deepening signs of wilting under financial pressures? Who among the financial institutions have been feeling the heat? Does the stock market know? Has the rigging of the index been designed to raise cash by drawing greater fools into momentum to pave way for the operators to gain from spreads to pay off heavy debt burdens? Has today's bond selloff and the 3 week dramatic tightening of the yield curve been circumstantial evidence of the unraveling of Hyman Minsky's Ponzi finance?

Since bond prices moves in opposite direction to yields, the current streak of treasury yield spikes translates to real time financial losses for mostly financial institutions that owns or holds Philippine treasuries as part of their portfolios.

Ironically, panic buying in the stock market comes in the face of panic selling in domestic bonds! Who will be caught swimming naked, the panicking bond market seller or hysteric stock market buyer??

The current Philippine bond market havoc will have ramifications on the domestic credit markets, to systemic liquidity, to  economic and credit risks conditions and to interest rate directions, as explained here, here, here and here

In January of 2013 I wrote that interest rates will determine the fate of asset prices and of an economy deeply dependent on credit:

Let me repeat: the direction of the Phisix and the Peso will ultimately be determined by the direction of domestic interest rates which will likewise reflect on global trends…

Yet interest rates will ultimately be determined by market forces influenced from one or a combination of the following factors as I wrote one year back: the balance of demand and supply of credit, inflation expectations, perceptions of credit quality and of the scarcity or availability of capital.

And as noted last week, if financial and the real estate markets are driven by liquidity and if the flattening of the yield curve have indeed been about liquidity constrains then this might be the calm before the economic storm.

Given the recent momentum of bond market rout, and if sustained, such would only extrapolate to a looming domestic economic storm ahead!

To my dear friends, if you are exposed to variable interest rate debt, pls try to reduce or settle them or if not convert them into fix rates.

Wow. Today's Philippine Bonds Selloffs Exhibit Intensifying Yield Curve Flattening!

Wow. The selloff in Philippine bond markets today seems to have spread to the entire yield curve spectrum, viz. from short end to long end!

All charts below from investing.com

Yields continue to spike in the short end, from the one and three months…

…to the 6 month and 1 year.

Again all of the above (with the exception of the 1 month) have now significantly exceeded the June 2013 Taper Tantrum levels…then a period of financial market turbulence. Yields of 1 month Philippine bills have now reached June 2013 highs.

But today’s yield spikes has been more intense in the mid end.

Two year and three year making pivotal substantial ‘catch up’ moves.

Four year yields has also been shown having a big move today. 

To much of a lesser extent, the 5 and 7 year bonds.

Meanwhile yields in the long end, particularly the 10 year and  20 year, posted moderate increases while the 25 year registered a material move.

Again the above demonstrates a general sell-off in  the Philippine bond markets.

The interesting part has been that, as I noted last week, “Philippine treasuries essentially represent a tightly held or controlled markets by the government and the domestic banking system” such that “for any strains in Philippine treasuries to emerge means that some formal economy institutions, perhaps in the financial sector, have already been feeling pressures.”

Also an even more curious development has been that yield surges from the short end (1 year and below) seems to have now spread to the middle maturities  (2-4 years) relative to the longer end (10-25 year). This underscores of the intensification of the dramatic flattening of the yield curve of Philippine bond markets

In short, today’s actions exhibits escalating signs of a scramble for liquidity!!!

Yet how will the BSP react to the current developments? Will they infuse money to the banks?

Will they suspend operations in support of the peso as exhibited by the rapidly depleting Gross International Reserves and for those inflows (e.g. personal remittances) that didn’t turn up in the GIRs (as previously discussed)? 

In short, will the BSP save the banks at the expense of the peso? Has it now reached a case of a damned if you, damned if you don’t?

You see, all those façade made to exhibit how “transformational” or how “this time is different” this credit fueled phony boom has been, seems as being unglued.

And this appears to be happening at the most sensitive aspect of the Philippine financial markets.

The irony has been that statistical inflation has been declining yet rising yields implies of pressures on interest rates!!! Why???

Soaring bond yields comes in the face of exploding credit growth, declining statistical economic G-R-O-W-T-H and a sharply decelerating money supply growth rate! Where has all the money from the explosion of credit growth been funneled to??? Mostly to paying debt, perhaps??? Borrowing to rollover debt has now segued into a frantic jostle for short to medium term funds even at higher rates???

For the generally controlled domestic bond markets, why has there been deepening signs of wilting under financial pressures? Who among the financial institutions have been feeling the heat? Does the stock market know? Has the rigging of the index been designed to raise cash by drawing greater fools into momentum to pave way for the operators to gain from spreads to pay off heavy debt burdens? Has today's bond selloff and the 3 week dramatic tightening of the yield curve been circumstantial evidence of the unraveling of Hyman Minsky's Ponzi finance?

Warren Buffett once said, only when the tide goes out do you discover who’s been swimming naked. 

What happens when the liquidity and credit tide ebbs, will bubble industries and the bubble stock market be exposed as swimming naked?

Ron Paul: Janet Yellen's Christmas Gift to Wall Street

Fed Chairwoman Janet Yellen has been a Santa Claus for Wall Street (paid for by the main street).

The great Ron Paul explains at his website (bold mine)

Last week we learned that the key to a strong economy is not increased production, lower unemployment, or a sound monetary unit. Rather, economic prosperity depends on the type of language used by the central bank in its monetary policy statements. All it took was one word in the Federal Reserve Bank's press release -- that the Fed would be “patient” in raising interest rates to normal levels -- and stock markets went wild. The S&P 500 and the Dow Jones Industrial Average had their best gains in years, with the Dow gaining nearly 800 points from Wednesday to Friday and the S&P gaining almost 100 points to close within a few points of its all-time high.

Just think of how many trillions of dollars of financial activity occurred solely because of that one new phrase in the Fed's statement. That so much in our economy hangs on one word uttered by one institution demonstrates not only that far too much power is given to the Federal Reserve, but also how unbalanced the American economy really is.

While the real economy continues to sputter, financial markets reach record highs, thanks in no small part to the Fed's easy money policies. After six years of zero interest rates, Wall Street has become addicted to easy money. Even the slightest mention of tightening monetary policy, and Wall Street reacts like a heroin addict forced to sober up cold turkey.

While much of the media paid attention to how long interest rates would remain at zero, what they largely ignored is that the Fed is, “maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.” Look at the Fed's balance sheet and you'll see that it has purchased $25 billion in mortgage-backed securities since the end of QE3. Annualized, that is $200 billion a year. That may not be as large as QE2 or QE3, but quantitative easing, or as the Fed likes to say “accommodative monetary policy” is far from over.

What gets lost in all the reporting about stock market numbers, unemployment rate figures, and other economic data is the understanding that real wealth results from production of real goods, not from the creation of money out of thin air. The Fed can rig the numbers for a while by turning the monetary spigot on full blast, but the reality is that this is only papering over severe economic problems. Six years after the crisis of 2008, the economy still has not fully recovered, and in many respects is not much better than it was at the turn of the century.

Since 2001, the United States has grown by 38 million people and the working-age population has grown by 23 million people. Yet the economy has only added eight million jobs. Millions of Americans are still unemployed or underemployed, living from paycheck to paycheck, and having to rely on food stamps and other government aid. The Fed's easy money has produced great profits for Wall Street, but it has not helped -- and cannot help -- Main Street.

An economy that holds its breath every six weeks, looking to parse every single word coming out of Fed Chairman Janet Yellen's mouth for indications of whether to buy or sell, is an economy that is fundamentally unsound. The Fed needs to stop creating trillions of dollars out of thin air, let Wall Street take its medicine, and allow the corrections that should have taken place in 2001 and 2008 to liquidate the bad debts and malinvestments that permeate the economy. Only then will we see a real economic recovery.

As I have been saying, stock markets have been about liquidity and credit that nurtures tenuous or highly fragile (false) confidence being provided by central banks.

Yet sand castles on beaches eventually will get washed away.