Chart of the Day: China’s Housing Bubble Unraveling Faster than pre Lehman US Housing Episode

Great chart from Fathom Consulting at the Alpha Now Thomson Reuters with the following observation: (bold mine)

Data published on last week showed that house prices have now fallen for nine months in a row – the longest run on record, under this relatively new measure. Mudanjiang, one of the 67 Chinese cities that registered house prices falls over the past twelve months for second-hand residential buildings, experienced a 13.9% fall. The US entered recession around two years after house price inflation had peaked. After nine months of recession, Lehman Brothers collapsed. As our chart illustrates, house price inflation in China has slowed from its peak in January 2014 at least as rapidly as it did in the US.

Should the US housing bubble bust experience serve as a model, then a sustained housing deflation in China means that the latter's economy may fall into recession by mid 2016. 

But if the rate of the unwinding of the Chinese housing bubble accelerates, then this may shorten the time window. 

However, the Chinese government has been preemptively easing. The Chinese government has been joined by many other global central banks who appears to have also been frantically easing. 

Will such joint actions help extend or delay the process? Hmmmm.

It’s a complex world with manifold factors. But the writing is clearly on the wall.

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

Japan’s “Where is the Recovery” As Seen From Today’s Economic Numbers

Just a few days back I posted here that despite the Japanese equity benchmark,  the Nikkei 225, drifting at fresh 15 year highs and a supposed 4Q 2014 turnaround, an overwhelming number of Japanese—based on a recent survey—have shown skepticism of the much touted “recovery”.

I guess that the skepticism from the ‘man in the street’ can be seen in today’s government economic numbers

All data are from investing.com

Japanese household spending month on month has been on a sharp decline since the BOJ’s pump last November 2014

The decline in Household spending year on year seems at even worst degree than from the Lehman incited global financial crisis in 2008

And the poor showing of household spending chimes with retail activities.  Retail sales (y-o-y) has been sluggish since the 2Q 2014

The deliberate attempt to combust inflation and to tax consumers has led to the distortion of (core) consumer prices…

...that has also been manifested in National CPI

On a month on month basis, only Food has considerably increased (+1.6%). Four out of ten categories posted declines, namely clothes and footwear (-5%), culture and recreation and transportation according to the latest data from the statistics bureau of the Ministry of Internal Affairs and Communications. The rest had zero or marginal increases.

Such are signs of depressed leisure activities from the average Japanese.

And unemployment has spiked in January. Officials rationalize this as “a rise in the number of people seeking jobs”

Nonetheless there seem as one good news.

Industrial production (month on month) rose to its highest level since 1q 2014

However as seen from a longer time frame, since the introduction of Abenomics, industrial production growth rates have been sharply oscillating. In addition, growth expectations for February has been at only .2% and at –3.2% in March, thus hardly a basis for optimism.

Bottom line: Abenomics continues to drive a wider wedge between the real economy and financial assets—a parallel economy.

The above will only add pressures for the BoJ to ease from vested interest groups.

Yet the latest promise by BoJ’s Kuroda to further stimulate has pacified the recent rebellion in the JGB markets. But question is how long will bond vigilantes be kept sidelined without real actions by the BoJ?

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

Central Bank Easing and Record Stocks: Two different responses to divergent perceptions

There are about 20 national central banks that just eased via cut rates (17), lower reserve requirements, QEs et. al.

Just to be make clear what the streak of central bank rates have been about, I posted below some of the news covering these actions

[all bold mine]

India (January 2015)

From BBC

The RBI cited a "sharper-than-expected decline" in the price of fruits and vegetables since September last year as one reason for the policy shift.

It also said "ebbing price pressures in respect of cereals and the large fall in international commodity prices, particularly crude oil" had played a part in the move.

The RBI has been under pressure from government and businesses to reduce its interest rate to give the struggling economy a boost.

China (February 2015)

Reuters:

China's central bank made a system-wide cut to bank reserve requirements on Wednesday, the first time it has done so in over two years, to unleash a fresh flood of liquidity to fight off economic slowdown and looming deflation.

The announcement cuts reserve requirements - the amount of cash banks must hold back from lending - to 19.5 percent for big banks, a reduction of 50 basis points that would free up 600 billion yuan ($96 billion) or more held in reserve at Chinese banks - which could then inject 2-3 trillion yuan into the economy after accounting for the multiplying effect of loans.

Indonesia (February 2015)

Bloomberg:

The country’s economy shrank last quarter from the previous three months, capping the weakest year since at least the global financial crisis on falling commodity prices and cooling investment. Policy makers are cutting borrowing costs before potential interest-rate increases in the U.S. this year raise the risk of fund outflows from emerging markets….

“The policy is in line with efforts by Bank Indonesia to manage the deficit in the current account toward a healthier level,” the central bank said in its statement. “The recovery of the global economy is expected to still be ongoing, although uneven.”

Russia (January 2015)

New York Times:

The rate cut suggested that Russia viewed the banking troubles as a more pressing worry than the high inflation caused by the declining value of the ruble. Inflation is now about 13 percent.

“Today’s decision,” said Elvira Nabiullina, the governor of the Bank of Russia, “is intended to balance the goal of curbing inflation and restore economic growth.”

Russia is fighting a swirl of forces. The oil-dependent economy has been battered by the low price of crude, which is down more than 50 percent since this summer. Western sanctions over the Ukraine crisis only complicate matters, particularly for Russia’s banks. The economy is expected to fall into recession this year.

Israel (February 2015)

Bloomberg:

The Bank of Israel is pushing rates toward zero and considering alternative tools as it seeks to revive an economy growing at the slowest pace for five years, and halt the decline in consumer prices. Last year’s growth rate of 2.9 percent was the weakest since 2009, and the country has experienced several months of deflation, with consumer prices falling 0.5 percent in 12 months through January.

The rate cut “is a preventative measure meant to avoid a slide into a deflationary reality,” Yaniv Pagot, chief strategist at Ayalon Group Ltd. in Ramat Gan, said by phone. “Quantitative easing steps in the not so distant future cannot be discounted.”

Turkey (February 2015)

Bloomberg:

Prime Minister Ahmet Davutoglu said the reduction should have been bigger, extending the feud between the country’s politicians and technocrats that has unnerved investors.

The bank in Ankara reduced its benchmark one-week repo and overnight borrowing rates by 25 basis points each on Tuesday, to 7.50 percent and 7.25 percent respectively. It trimmed the overnight lending rate by 50 basis points to 10.75 percent, according to a statement on its website. Analysts had forecast cuts to all three rates, according to Bloomberg surveys.

The government has persistently called for Basci to lower borrowing costs to boost economic growth since the bank more than doubled the main rate in an emergency meeting in January last year, to halt a run on the currency. Basci has so far only partially unwound that increase, saying that a cautious policy stance is necessary until there is a marked improvement in the inflation outlook.

Denmark (February 2015)

Wall Street Journal

Denmark’s central bank scrambled to defend its currency peg Thursday, cutting its benchmark interest rate for the fourth time in less than three weeks.

The krone’s peg to the euro has been under strain since the European Central Bank announced a large-scale bond-buying program in January, sending the shared currency spiraling downward.

Singapore

Bloomberg/Bangkok Post

"Since the last Monetary Policy Statement in October, developments in the global and domestic inflation environment have led to a significant shift in Singapore's CPI inflation outlook for 2015," the MAS said. "MAS has assessed that it is appropriate to adjust the prevailing monetary policy stance."

The central bank guides the local dollar against a basket of currencies within an undisclosed band and adjusts the pace of appreciation or depreciation by changing the slope, width and centre of the band. Singapore's consumer prices fell for a second straight month in December.

Singapore will keep a "modest and gradual appreciation" in its currency policy band, the central bank said. It made no change to the width and level at which it is cantered.

"This measured adjustment to the policy stance is consistent with the more benign inflation outlook in 2015 and appropriate for ensuring medium-term price stability in the economy," the MAS said.

Has the above easing measures been about responses to ‘strong’ economic growth or to ‘slowing’ economic growth? 

Has the above easing measures been about responses to the risk of inflation (defined by media as rising consumer prices) or deflation (falling consumer prices)?

Record high stocks have spawned an ocean of misimpression that such dynamic has been about G-R-O-W-T-H and the ebbing of risk. 

But on the other hand, the rush to ease by many central banks extrapolate that these monetary institutions have seemingly been in a panic mode. Insufficient G-R-O-W-T-H has been exposing credit risks that have only been pressuring central banks to lower the cost of servicing debt through policies.

Two different responses to divergent perceptions.

Remember that the global central banks has largely been on an easing trend since 2008. And like narcotics, financial markets have become totally addicted to it.

Yet global debt has swelled by $57 trillion from 2007 to reach 286% of the global GDP in 2Q 2014 based on estimates by McKinsey Quarterly. The mainstream belief has been that debt is a free lunch

So one of this divergent perceptions will be proven wrong. Perhaps soon.

For Many Greeks, Taxes have been seen as Theft…

…and thus massive tax avoidance and the huge informal economy.

The Wall Street Journal explains: (bold mine)

Of all the challenges Greece has faced in recent years, prodding its citizens to pay their taxes has been one of the most difficult.

At the end of 2014, Greeks owed their government about €76 billion ($86 billion) in unpaid taxes accrued over decades, though mostly since 2009. The government says most of that has been lost to insolvency and only €9 billion can be recovered.

Billions more in taxes are owed on never-reported revenue from Greece’s vast underground economy, which was estimated before the crisis to equal more than a quarter of the country’s gross domestic product.

The International Monetary Fund and Greece’s other creditors have argued for years that the country’s debt crisis could be largely resolved if the government just cracked down on tax evasion. Tax debts in Greece equal about 90% of annual tax revenue, the highest shortfall among industrialized nations, according to the Organization for Economic Cooperation and Development.

Greece’s new government, scrambling to secure more short-term funding, agreed on Tuesday to make tax collection a top priority on a long list of measures. Yet previous governments have made similar promises, only to fall short.

Tax rates in Greece are broadly in line with those elsewhere in Europe. But Greeks have a widespread aversion to paying what they owe the state, an attitude often blamed on cultural and historical forces.

During the country’s centuries long occupation by the Ottomans, avoiding taxes was a sign of patriotism. Today, that distrust is focused on the government, which many Greeks see as corrupt, inefficient and unreliable.

“Greeks consider taxes as theft,” said Aristides Hatzis, an associate professor of law and economics at the University of Athens. “Normally taxes are considered the price you have to pay for a just state, but this is not accepted by the Greek mentality.”

The above article manifests of rich political economic insights.

 

One, the typical approach by political agents in addressing economic disorders has mainly been to focus on superficiality or the immediacy—in particular “could be largely resolved if the government just cracked down on tax evasion”. 

Political solutions that fail to understand the incentives guiding the average Greeks has been the reason why tax policies continue to falter.

Two, just to be sure that non-payment of taxes hasn’t been the reason why Greeks have been struggling…

Nominal government spending based on tradingeconomics.com and Eurostat data

The above represents Greek’s government spending relative to GDP

Greece’s government debt relative to GDP (tradingeconomics and Eurostat)

Greece and Europe’s welfare state in % of GDP based on OECD data

As one can see in the above, the controversial “austerity” exists only in the mindset of the statist occult. The Greek government continues to spend at a rate more than the statistical economy and thus the ballooning debt which consequently translates to heightened economic burden on the Greek society.

Three, Greece’s (and the Eurozone’s) boom bust cycle have only exposed on the chink in the armor of Greece’s big government.

The dilemma facing Greece today exemplifies the paragon of radical changes in fiscal conditions when the bust phase of the boom cycle emerges.

This can be seen from the article: (bold mine) 

The reason isn’t just political, but economic. The country’s depression has already pushed many small businesses to the brink of collapse. Forcing them to pay more in taxes would put even more out of business—and more Greeks out of work.

“The Greek economy would collapse if the government were to force these people to pay taxes,” one senior government official said.

So the above data shows why many Greeks see their government as “corrupt, inefficient and unreliable” for them to “consider taxes as theft”

It doesn’t require a libertarian of the Rothbardian persuasion to see how taxes are theft. 

All it takes is for one to see with two eyes the real nature of how governments operates. This has been best described in the article as “corrupt, inefficient and unreliable”. 

Nonetheless here is the dean of Austrian Economics, the great Murray N. Rothbard on taxes. (For A New Liberty, The Libertarian Manifesto, p.30 )

Take, for example, the institution of taxation, which statists have claimed is in some sense really “voluntary.” Anyone who truly believes in the “voluntary” nature of taxation is invited to refuse to pay taxes and to see what then happens to him. If we analyze taxation, we find that, among all the persons and institutions in society, only the government acquires its revenues through coercive violence. Everyone else in society acquires income either through voluntary gift (lodge, charitable society, chess club) or through the sale of goods or services voluntarily purchased by consumers. If anyone but the government proceeded to “tax,” this would clearly be considered coercion and thinly disguised banditry. Yet the mystical trappings of “sovereignty” have so veiled the process that only libertarians are prepared to call taxation what it is: legalized and organized theft on a grand scale.

For the Greeks, the logical solution would seem as to dramatically pare down government spending and taxes or real austerity. These should ease tax burdens on the entrepreneurs or the productive agents that would allow them to channel resources to productive means. This should entail real economic growth.

In doing so, the informal economy should flourish and grow for the latter to integrate with the formal economy voluntarily.

But it’s not just taxes, there is the exigency to incentivize entrepreneurial activities via liberalization from excessive politicization of economic activities, specifically regulations, mandates, controls and all other politically erected anti-competition obstacles favoring entrenched interests. 

Importantly, the Greeks should embrace sound money by preventing the government from tinkering with interest rates, and the currency via the central bank and allow real competition in both the currency and the banking system.

Of course, given the size of the debt burden, debt that had benefited politicians and cronies of the past, such debt has to be defaulted on. Creditors who took the risk in financing the previous government excesses should pay their dues.

But of course, parasites would not want to end their privileges so this will hardly be the route taken. 

Politicians will continue to sell free lunch politics in order to get elected and stay the course. 

So after winning on such populist platform, the Tsipras government’s sellout to the Troika and the Eurogroup reinforces this dynamic

But since Greek’s problem has been about economics, the solution will always be about economics. Yet political solutions that fails to address the real (and not statistical) economic issues will have inevitable economic consequences.

I am reminded by this gem from author and professor Thomas Sowell:

The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.

Yet my ideal solution is the Rothbard solution; end organized theft.

Phisix: Profit Taking now is a Taboo

I have repeatedly been pointing out here that given the recent sharp run up, the Phisix have been exhibiting signs of ‘exhaustion’ where normal profit taking should take hold. But apparently corrections now appear to be a taboo. Index managers see any downside as intolerable. The Philippine benchmark has now been engineered to move in a single direction! And this applies to everyday activities!

For the day, following a strong start, the Phisix found itself succumbing to profit taking thus has been in the red through most of the session. That’s until the pre-run off period where again the ‘marking the close’ not only virtually reversed the day’s losses but importantly, set another fresh high record session for the domestic benchmark!(charts from technistock.net and colfinancial.com)

Again the modus remains the same. The pump revolves around 3-5 biggest market caps whose weights add up to about 20% of the Phisix basket. 

Those significant last minute major pumps can be seen in three sectors, service, property and finance. The holding sector also contributed but to a lesser degree compared to the above.

These are the top 20 most active issues of the day based on the table from the PSE. Some of the above have been subjects of the closing session pump.

Peso volume was only about Php 7.6 billion but the special block sales from AC (Php 7.5 billion) and SM (Php 1.6 billion) bloated the day’s volume to Php 17.234 billion.

As evidence of the profit taking mode, aside from sluggish (ex-special block sales) peso volume  decliners led advancers by about 20 issues. Even the top 20 traded issues reveal of 9 decliners relative to 8 advancers and 3 unchanged.

Additionally, today’s number of trades fell below 50,000. This means less churning activities compared to the average bristling pace of 50-60k a day from December 2014 onwards.

Since February, the advance decline spread seems to favor decliners (10 days against 7 days for advancers), hence emitting signals for ‘correction’.

But again correction has now become a taboo.

Yet this reveals of the lamentable quality of record highs.

US Fed Chief Janet Yellen’s Irrational Exuberance Warnings 2015 Edition

In July 2014, in reporting to both houses of the US Congress, US Federal Reserve chairwoman Ms. Janet Yellen mimicked Alan Greenspan’s "irrational exuberance" warning in 1996, with an admonition that some segments of the equity markets have been “substantially overstretched”.

Given that stocks have reached record upon record highs after this appearance, this only means the markets has been ignoring or fighting the FED. 

Another way to see this is that the FED has “lost control” over the asset bubbles.

Yet in the same appearance before the US congress, yesterday, Ms. Yellen reiterates her irrational exuberance warning for 2015.

From Ms. Yellen’s Monetary Policy Report to the US Congress dated February 24

From page 22 (bold and italics mine)

Over the second half of 2014 and early 2015, broad measures of U.S. equity prices increased further, on balance, but stock prices for the energy sector declined substantially, reflecting the sharp drops in oil prices (figure 32). Although increased concerns about the foreign economic outlook seemed to weigh on risk sentiment, the generally positive tone of U.S. economic data releases as well as declining longer-term interest rates appeared to provide support for equity prices. Overall equity valuations by some conventional measures are somewhat higher than their historical average levels, and valuation metrics in some sectors continue to appear stretched relative to historical norms. Implied volatility for the S&P 500 index, as calculated from options prices, increased moderately, on net, from low levels over the summer.

From page 24

The financial vulnerabilities in the U.S. financial system overall have remained moderate since the previous Monetary Policy Report. In the past few years, capital and liquidity positions in the banking sector have continued to improve, net wholesale shortterm funding in the financial sector has decreased substantially, and aggregate leverage of the private nonfinancial sector has not picked up. However, valuation pressures are notable in some asset markets, although they have eased a little on balance. Leverage at lower-rated nonfinancial firms has become more pronounced. Recent developments in Greece have rekindled concerns about the country defaulting and exiting the euro system. 

With regard to asset valuations, price-to-earnings and price-to-sales ratios are somewhat elevated, suggesting some valuation pressures. However, estimates of the equity premium remain relatively wide, as the long-run expected return on equity exceeds the low real Treasury yield by a notable margin, suggesting that investors still expect somewhat higher-than-average compensation relative to historical standards for bearing the additional risk associated with holding equities. Risk spreads for corporate bonds have widened over recent months, especially for speculative-grade firms, in part because of concerns about the credit quality of energy-related firms, though yields remain near historical lows, reflecting low term premiums. Residential real estate valuations appear within historical norms, with recent data pointing to some cooling of house price gains in regions that recently experienced rapid price appreciation. However, valuation pressures in the commercial real estate market may have increased in recent quarters as prices have risen relative to rents, and underwriting standards in securitizations have weakened somewhat, though debt growth remains moderate

The private nonfinancial sector credit-to-GDP ratio has declined to roughly its level in the mid-2000s. At lower-rated and unrated nonfinancial businesses, however, leverage has continued to increase with the rapid growth in high-yield bond issuance and leveraged loans in recent years. The underwriting quality of leveraged loans arranged or held by banking institutions in 2014:Q4 appears to have improved slightly, perhaps in response to the stepped up enforcement of the leveraged lending guidance. However, new deals continue to show signs of weak underwriting terms and heightened leverage that are close to levels preceding the financial crisis.

As a result of steady improvements in capital and liquidity positions since the financial crisis, U.S. banking firms, in aggregate, appear to be better positioned to absorb potential shocks—such as those related to litigation, falling oil prices, and financial contagion originating abroad—and to meet strengthening credit demand. The sharp decline in oil prices, if sustained, may lead to credit strains for some banks with concentrated exposures to the energy sector, but at banks that are more diversified, potential losses are likely to be offset by the positive effects of lower oil prices on the broader economy. Thirty-one large bank holding companies (BHCs) are currently undergoing their annual stress tests, the results of which are scheduled to be released in March.

Leverage in the nonbank financial sector appears, on balance, to be at moderate levels. New securitizations, which contribute to financial sector leverage, have been boosted by issuance of commercial mortgage-backed securities (CMBS) and collateralized loan obligations (CLOs), which remained robust amid continued reports of relatively accommodative underwriting standards for the underlying assets. That said, the risk retention rules finalized in October, which require issuers to retain at least 5 percent of any securitizations issued, have the potential to affect market activity, especially in the private-label residential mortgage-backed securities, non-agency CMBS, and CLO sectors.

Reliance on wholesale short-term funding by nonbank financial institutions has declined significantly in recent years and is low by historical standards. However, prime money market funds with a fixed net asset value remain vulnerable to investor runs if there is a fall in the market value of their assets. Furthermore, the growth of bond mutual funds and exchange-traded funds (ETFs) in recent years means that these funds now hold a much higher fraction of the available stock of relatively less liquid assets—such as high yield corporate debt, bank loans, and international debt—than they did before the financial crisis. As mutual funds and ETFs may appear to offer greater liquidity than the markets in which they transact, their growth heightens the potential for a forced sale in the underlying markets if some event were to trigger large volumes of redemptions.

Again we see authorities dishing out warnings after warnings on asset bubbles albeit on a sanitized basis—there is a growth in the risk environment but the economy is strong yada yada yada…

And for me, current imbalances have been so apparent that it can't be ignored anymore. And these warnings seem more about escape outlets, so that when the real thing occurs, authorities will jump in defense: I saw and warned about it...so it is not my fault—a veneer.

And speaking of former Fed chief Alan Greenspan. At one of the latest investment conference, Alan Greenspan had a dire outlook for the markets.

Here is Mac Slavo on Alan Greenspan’s gloomy predictions (bold and italics original)

Greenspan recently joined veteran resource analyst Brien Lundin at the New Orleans Investment Conference to share some of his thoughts. According to Lundin, the former Fed chairman made it clear that the central bank is facing a serious problem and one that will have significant ramifications in the future.

We asked him where he thought the gold price will be in five years and he said “measurably higher.”

In private conversation I asked him about the outstanding debts… and that the debt load in the U.S. had gotten so great that there has to be some monetary depreciation. Specially he said that the era of quantitative easing and zero-interest rate policies by the Fed… we really cannot exit this without some significant market event… By that I interpret it being either a stock market crash or a prolonged recession, which would then engender another round of monetary reflation by the Fed.

He thinks something big is going to happen that we can’t get out of this era of money printing without some repercussions – and pretty severe ones – that gold will benefit from. 

Record stocks in the face of record imbalances and record warnings from authorities

While Asia Central Bankers Need to Go Easy on Rate Cuts, They will Cut Rates Anyway

Frederic Neumann co-head of HSBC’s Asian economic research counsels Asian monetary authorities to go slow with interest rate cuts. Writing at the Nikkei Asia “Asia needs to go easy on rate cuts”, he provides three reasons: (bold mine)

The trouble is, it will prove only mildly effective and, in some cases, possibly counterproductive. That interest rate cuts help to ease the debt servicing burden of indebted consumers and companies is not in doubt. But, in most economies, it seems unlikely they will exert a lift through their second, more potent channel: faster credit growth. Take India. State banks, which dominate the financial system, are saddled with non-performing loans. Many large companies, too, are stuck with too much debt. Rate cuts alone, therefore, may not boost spending. Thailand, Malaysia and South Korea face similar challenges.

Translation: When company balance sheets have been hocked to the eyeballs with debt, borrowing will about debt rollovers rather than capex. And that's if there will be borrowings at all. You can lead the horse to the water, but you cannot make it drink.

The second point is that rate cuts, to the extent that they spur lending, may fuel growing imbalances that could ultimately push economies deeper into a disinflationary, if not deflationary, trap. Leverage in Thailand, for example, is already high, especially among consumers. Cutting interest rates could provide a temporary boost to spending, but at the cost of driving debt ratios even higher. In Australia, too, further easing will add fuel to the booming housing market without curing the underlying problem: a deflating mining investment boom. China also comes to mind, with blanket easing doing little to correct imbalances.

Translation: When company balance sheets have been hocked to the eyeballs with debt, borrowing will about debt rollovers rather than capex. More companies will resort to Hyman Minsky’s Ponzi financing. With insufficient cash flows for debt servicing, companies become heavily reliant on using debt to service existing debt. Asset sales function as a compliment. In short, Ponzi finance=Debt IN debt OUT + asset sales. And this is why the need to spike asset values as they provide bridge financing for debt.

Unfortunately as Mr. Neumann rightly points out, increasing use of Ponzi finance signifies heightens the risk of ‘debt’ deflationary trap.

Third: Easing monetary policy exposes countries to greater financial volatility down the road. The Fed, of course, may raise rates only gradually in the coming years. But the dollar looks set to strengthen further. In itself, this may not be enough to drive capital out of the region. Still, if local central banks overplay their hand and ease too aggressively, especially with no improved growth prospects to show for it, investor jitters might return. The "taper tantrum" of 2013, when investors dumped risky assets, was a painful reminder of the vulnerability of emerging markets when the Fed starts to move. Indonesia, especially, looks exposed.

Translation: In a financial and economic landscape where asset sales become complimentary to debt IN debt OUT, today’s asset market pump have likely been about the use of inflation in asset markets to generate cash flows to service debt.

And because asset market inflation are unsustainable this leads to “greater financial volatility”. 

In addition, a general use of Ponzi financing can become a systemic issue. 

From Wikipedia (bold mine): If the use of Ponzi finance is general enough in the financial system, then the inevitable disillusionment of the Ponzi borrower can cause the system to seize up: when the bubble pops, i.e., when the asset prices stop increasing, the speculative borrower can no longer refinance (roll over) the principal even if able to cover interest payments. As with a line of dominoes, collapse of the speculative borrowers can then bring down even hedge borrowers, who are unable to find loans despite the apparent soundness of the underlying investments.

So even mainstream can see what I am seeing.

While the advise to monetary authorities of the diminished use of zero bound rates has been commendable, I doubt if such will be heeded.

Reasons?

Political agenda will dictate on monetary policies. Incumbent political leaders would not want to see volatilities happen during their tenure, so they are likely to pressure monetary authorities to resort to actions that will kick the can down the road. Here is an example, Turkish central bank yielded to the Prime Minister’s repeated demand for interest rate cuts. The Turkish  central bank trimmed 25 basis points for both overnight lending and borrowing rates yesterday

In short, authorities are likely to be concerned with short term developments. And political agenda will most likely revolve around popularity ratings and or the next election—or simply preserving or expanding political power.

Next, there is the social desirability bias factor. Monetary authorities won’t also want to be seen as “responsible” for a volatile environment. They don’t like to be subject to public lynching from market volatilities.

Third, there is the appeal to majority and path dependency. Since every central banker has been doing it and have long been doing it, they think that they might as well do it and blame external factors for any untoward outcomes. Again the cuts of central banks of Turkey and the record low rates by Israel two days back brings a tally of 21 nations on an easing path in 2015. 25 actions if we consider the multiple actions by some countries (Romania and Denmark) as I noted last weekend.

Asian central bankers are likely to embrace the “sound banker” escape hatchet as propagated by their political economic icon—JM Keynes: 

A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him.

So expect more rate cuts ahead.

As a side note: Indonesia "vulnerable"? Hasn't Indonesian stocks been at record upon record highs? Has record highs not been about a risk free environment? Of course, opposite record high stocks have been a milestone high USD-Indonesian rupiah.

15 year High Nikkei , 4Q GDP 2014 Recovery: Survey says 81% of Japanese asks “Where’s the Recovery?”

Since February 18th, Japan’s equity bellwether the Nikkei 225 has been drifting at a 15 year high. Additionally the Japanese government recently released data that the economy has been pulled out of the recession in the 4Q.

Yet the man on the street remains puzzled of the so-called recovery. A poll conducted last weekend says that 81% of the average Japanese who participated in the survey have been wondering where the headline recovery has taken hold?

From Nikkei Asia

The recovery in Japan's economy has yet to reach the public, according to Nikkei Inc.'s latest opinion poll, with 81% of respondents saying they have not sensed any tangible improvement.

Merely 13% said that the economic recovery has been felt in their daily lives. The weekend survey was conducted jointly with TV Tokyo.

Preliminary figures for the October-December quarter point to the Japanese economy having expanded for the first time since last April's consumption tax hike.

"The economy is expected to recover on the strength of private-sector demand," says Akira Amari, minister of state for economic and fiscal policy.

Support for the cabinet of Prime Minister Shinzo Abe edged 1 point lower from the January poll to 50%, while those expressing disapproval climbed 1 point to 34%. Among the cabinet supporters, 73% said that an improvement in the economy has not been felt, with 23% indicating that they have sensed a recovery. For those dissatisfied with the cabinet, the percentages came to 96% and 3%.

If the survey has been accurate, then such divergence would be an example of the difference between statistical economy and real economic performance.

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.

Additionally Abenomics seem as in trouble. A reported rift between PM Shinzo Abe and BoJ Kuroda may be brewing.

From another NIkkei Asia report: (bold mine)

It is hard to say what, exactly, is going on between Prime Minister Shinzo Abe and Bank of Japan Gov. Haruhiko Kuroda, but one thing is clear: The once rock-solid relationship between the nation's leader and its central banker is starting to crack.

Signs of this strain were evident during a Feb. 12 meeting of the Council on Economic and Fiscal Policy.

Kuroda, in an unusual move, requested permission to speak and offered straightforward advice for the prime minister, according to a person informed about the matter. The BOJ governor stressed that interest rates could soar in the future if the fiscal credibility of the government is called into doubt.

But the minutes of the meeting, released five days later, included little of what Kuroda actually said. Only vague phrases such as "We need to have serious discussions [on fiscal rehabilitation]" were left in the document.

The report speculates that the split may have been due to the differences in views of tax policies. I am not here to speculate on this

Nonetheless, such development seems to coincide with the latest spike by the Japanese Government Bonds across the curve.

From a record low of .207% January 19 2015, yield of the 10 year JGB soared to .45% on February 16 as shown by the chart above from investing.com

I have noted this weekend that BoJ’s assurances of more easing may have temporarily quashed the JGB rebellion. Thus the yield has recently backed off.

Yet more signs of fissures between the two political leaders, the principal architects of Abenomics, could possibly mean a revival of the JGB rebellion.

And if this happens big trouble looms, not just in the financial markets but in the real economy, and more importantly, raises risks of Japan’s precarious fiscal conditions as well. Japan's outstanding national debt has reached 1,029 trillion yen ($8.62 trillion) as of 2014 according to the Asahi Shimbun

And such trouble will have transmission links abroad.

Record stocks stares at the face of record imbalances.

Quote of the Day: Accounting Magics

Back then, just as today, few people really understood it. And those who did were often clever enough to find loopholes in the system to hide their fraud. Especially banks.

There are some really stunning (and sometimes hilarious) examples of early banks who learned how to cook their books and misstate their capital using Pacioli’s system.

Curiously very little has changed. Banks still use accounting tricks to hide their true condition.

Bloomberg showcased one such technique last year, exposing the way that many US banks are rebooking their assets from “available for sale (AFS)” to the “held-to-maturity (HTM)” designation.

This is a very subtle move that means nothing to most people.

But to banks, it’s a highly effective way of concealing losses they’ve suffered in their investment portfolios.

Banks ordinarily buy bonds and other securities with the purpose of generating a return on that money until they have to, you know, give it back to their depositors.

That’s why they’re called “available for sale,” because the bank has to sell these assets to pay their depositors back.

But here’s the problem– many of these investments have either lost money, or they soon will be. And banks don’t want to disclose those losses.

So instead, they simply redesignate assets as HTM.

It’s like saying “I don’t care that these bonds aren’t worth as much money as when I bought them because I intend to hold them forever.”

Thing is, this simply isn’t true. Banks don’t have the luxury of holding some government bond for the next 30-years.

This is money they might have to repay their customers tomorrow, which makes the entire charade intellectually dishonest.

That doesn’t stop them.

JP Morgan alone boosted its HTM mortgage bonds from less than $10 million to nearly $17 billion (1700x higher) in just one year. This is a huge shift.

Nearly every big bank is doing this, and is doing it deliberately. This is no accident. And there’s only one reason to do it—to use accounting minutia to conceal losses.

But the accounting tricks don’t stop there. And in many cases they’re fueled by the government.

One recent example is how federal regulators created a new ‘rule’ which allows banks to consciously reduce the risk-weighting they assigns their assets.

The Federal Financial Institution Examination Council recently told banks that, “if a particular asset . . . has features that could place it in more than one risk category, it is assigned to the category that has the lowest risk weight.” 

This gives banks extraordinary latitude to underreport the risk levels of their investments. 

Bankers can now arbitrarily decide that a risky asset ‘has features’ of a lower risk asset, and thus they can completely misrepresent their investments. 

Bottom line, it’s becoming extremely difficult to have confidence in western banks’ financial health.

They employ every trick in the book to overstate their capital ratios and understate their risk levels.

This, backed by a central bank that is borderline insolvent and a federal government that is entirely insolvent.

It certainly begs the question—is it really worth keeping 100% of your savings in this system?

(bold mine)

This is from Simon Black from his website the Sovereign Man.

Such statistical charade can be epitomized by the recent experience of Hong listed Kaisa Group. As I wrote last weekend:

The camouflaging of debt reminds me of the Kaisa Group, a property and shopping mall developer in China but whose shares are listed in Hong Kong.

The once “fundamentally” strong company suddenly surprised the market when they announced of their inability to pay interest rates on foreign denominated loans. So the Chinese government worked behind the scenes to find a buyer to bailout the beleaguered company.

Last week, the company’s debt suddenly DOUBLED. Since the company didn’t disclose why the debt has swelled, media has been speculating on its possible causes. They point out that “home buyers may have unwittingly turned into lenders” where advance proceeds and deposits were converted into debts. They also attributed the possibility of debt from trade credit (credit to suppliers and contractors) and from legal actions, or even from off balance sheet debts.

The obvious lesson is that credit booms have always masked the disease. It’s when the loans have been called in, when the proverbial Pandora’s Box gets to be opened.

Beware of those embellished statistics.