Interesting Pre- Trump Inauguration News: The Trump Duterte Secret Link as Foundation to Bilateral Ties? JP Morgan Capitulates to Widodo and Libertarian Xi Jinping?

Tomorrow marks Mr. Trump’s inauguration. Yet many fascinating unfolding developments.

Will this define US-Philippines bilateral relations? From Quartz (“Donald Trump is likely on the payroll of a Filipino government official thanks to his new Manila skyscraper” January 16, 2017)

The Trump Organization’s partners around the world have been seen as potential conflicts of interest ever since Donald Trump announced he was running for US president. With his inauguration just days away, more attention is being paid to these conflicts, and the head of the Office of Government Ethics insists that Trump must sell off his business in order to be an ethical president.

One of the most most glaring conflicts is set to open up this quarter: Trump Tower Manila, a 57-floor skyscraper inside Century City, in a gentrifying area of Manila’s business district. It’s a joint project with Century Properties Group, Inc. (CPGI), a Filipino real estate development company owned by Jose E.B. Antonio, who is also a special trade envoy to the United States. If the partnership between Trump and Antonio is structured like many of his other business deals, with Trump licensing his name in exchange for ongoing payments, Trump will essentially be on the payroll of a member of controversial Philippines president Rodrigo Duterte’s government.

While Trump has vowed to turn over the running of his business to his two sons, ethics experts say that isn’t enough to prevent potential conflicts of interest. Only by completely selling off his business will Trump match the ethics standards set by other presidents, and required of other employees of the executive branch of the US government.

I withhold from further extrapolation.

Speaking of conflict of interests, recall the Indonesian government’s war against stock market bears which I raised this weekend?

Well, JP Morgan made a volte face, which came to the delight of the Widodo government.

From Bloomberg (January 17):

JPMorgan Chase & Co. upgraded its assessment of the Indonesian stock market, reversing an earlier bearish call that prompted Jakarta to stop doing business with the U.S. bank.

The bank’s analysts raised their "tactical" view of Indonesian equities one level to “neutral” in a report dated Monday, saying volatility in emerging-market bonds following Donald Trump’s U.S. election victory in November should now subside. The upgrade came two weeks after Indonesia’s government cut business ties with JPMorgan, citing a two-notch equities downgrade by the bank in November.

“Our tactical downgrade two months ago was driven by the risk of Indonesia underperforming the Asia Pacific ex Japan and EM indices as investors de-risked," analysts led by Adrian Mowat said. "Redemption and bond volatility risks have now played out, in our view.”

Indonesia welcomed JPMorgan’s new assessment. The neutral recommendation is more in line with fundamentals, Coordinating Minister for Economic Affairs Darmin Nasution told reporters in Jakarta on Monday. The finance ministry had earlier said it would stop using JPMorgan as a primary dealer and an underwriter for sovereign bonds.

Such would signify a sterling example of the agency problem. Yes, this should be one for the textbooks.

Why? Because JP Morgan’s interests have been demonstrated to promote that of their political patron than that of their clients and or of the investing public. Or the latter will be sacrificed for the former.

Remember, the Indonesian government’s interest (access to cheap credit) is different than from the investing public (return on capital invested/savings)

So move aside fake news, like the Philippines, now we have "fake analysis", "fake prices" and "fake markets".

Next.

Here is an awesome quote from Davos (CNN)

We must remain committed to free trade and investment. We must promote trade and investment liberalization…No one will emerge as a winner in a trade war.

No, that wasn’t from a libertarian kook or from a classical liberal fruitcake. 

That was from China’s president Xi Jinping; the recently anointed ‘core leader’ of the ruling communist party which essentially puts him at par with Mao ZeDong and Deng Xiaopeng.

The communist 'core leader' used libertarian premises to defend globalization (against the incoming Trump regime)

How I wish that the intent has been as good as the rhetoric.

But sadly, since politics represents a smokescreen, this just hasn’t been so.

Proof?

Action speaks louder than words (or in economics ‘demonstrated or revealed preferences’)

From Reuters [Capital curbs push Chinese firms to risky, costly dollar bonds, January 17, 2017] (bold added)

China's efforts to support its currency and cool its hot property market are encouraging more Chinese companies, including many state firms, to take on extra cost and risk by raising foreign-currency bonds in Hong Kong and other offshore locations.

Despite the yuan's nearly 7 percent slump against the dollar in 2016, Chinese companies including state-owned Bank of China (601988.SS) raised a record $111 billion in offshore dollar bonds, according to data from Dealogic, up from $88 billion in 2015.

JPMorgan analysts, using their own dataset, are forecasting another rise this year, even though many economists expect the yuan to fall further, making the loans more expensive to service and repay.

The list includes issuers who need dollars to pay for overseas acquisitions and deals but are unable to use their yuan after China tightened its grip on capital outflows last year to support the currency.

"It's getting increasingly difficult to move money out," said Shen Weizheng, fund manager at Ivy Capital, which invests in stocks and bonds in Hong Kong. "So for Chinese companies eager to invest overseas, the dollar bond market becomes an easier funding avenue."

State firms are also doing so because the government has made it easier for them to tap offshore markets, and there is pressure on them to bring more dollars onshore, investment bankers said.

Some property firms have also been left with little choice but to raise money offshore as government measures to contain a property bubble have included lending restrictions onshore.

Both the Shanghai and Shenzhen stock exchanges have tightened bond issuance rules for real estate firms since October, and regulators have repeatedly urged Chinese lenders to restrict property lending.

Chinese property developers have $7.9 billion in loans falling due in 2017, according to Thomson Reuters data, which could push more into offshore markets if they need refinancing.

On top of the exchange risks, the borrowers also have to swallow much higher borrowing costs.

As one would note, the above represents the ramifications of Mr. Xi’s anti-libertarian regime characterized by the explosion of stringent capital controls.

Chinese firms including state-owned firms have been intensely leveraging up with US dollar liabilities overseas in response to such controls (law of unintended consequences), thus increasing balance sheet risks, US dollar shorts (currency risks) AND market risks despite the huge rally by the yuan. 

The yuan rally was more than in response to the drastic capital controls, it was further aggravated by Mr. Trump’s comments on the US dollar: “too strong…killing us” and on the yuan’s “dropping like a rock” “because they don’t want us to get angry.”

Shibor rates (interbank loan rates) have been going out of whack or have gone really berserk, despite record injections by the PBoC!

 

No such has hardly been about holidays. Shibor rates have been soaring since 4Q 2016!

Capital controls signify an assault on property rights. Or such political controls denotes of the limitations of choice on one’s property. Such include, sending money overseas, investing overseas, conversion to foreign exchange for household or corporate savings, choices on the assets to own (domestic or international), constraints on trading activities and more (slippery slope controls, eventually social controls).

Such proscriptions also represent FORCED choices on the path of actions for the public or actions restricted to which the government wants or desires.

Indirectly, capital controls serve as protectionist tool—it is intended to safeguard the interests of the Chinese government at the expense of its citizenry, as well as exogenous forces. Of course, again, this is channeled through the implicit confiscation (financial repression) or redistribution of assets owned by the public for the benefit of the powers-that-be.

Sadly protectionism signifies the de rigueur geopolitical and domestic trend, that’s even before the advent of Trump administration!

Why the Duterte Government’s “Build, Build, Build” Signifies a Recipe for a Crisis

Last weekend, I wrote

The NEDA just did NOT get the memo. Like the war on drugs, political mega deals with the Chinese government will be beyond the scope of edicts, legislation and mandates—or even the constitution.

Confirmed!

From the Friday’s proposed massive infrastructure spending program (Inquirer November 4, 2016)

“Build, build, build” is the battlecry of the Duterte administration as it intends to ramp up infrastructure spending to the tune of P8 trillion in the next five years, according to Transportation Secretary Arthur Tugade.

Cabinet members on Thursday called on Congress to grant President Duterte emergency powers on transportation projects as they presented the administration’s planned infrastructure program to spur development and ease traffic congestion in the country.

Without the emergency powers, the projects, which include new roads, bridges, railways, and the improvement of airports, will  be delayed, Tugade said.

Selective bidding

“Is the population willing to wait some more?” he said at a press briefing in Malacañang.

The emergency powers being sought for the President would allow him to conduct selective bidding, direct contracting, or negotiated procurement for materials or services for projects intended to deal with the transport problem.

The bill that would authorize these powers would also bar lower courts from issuing temporary restraining orders or injunctions against the projects. Only the Supreme Court would be given the authority to issue such an order.

First, emergency powers simply omit or bypass the check and balances provided by the extant institutional and legal framework. Through centralization, the executive imbues or absorbs MORE political control over the economy.

Short circuiting the defective check and balances would entail of even MORE abuses than less. Greater risks of abuses have been sidelined due to the populist embrace of the superhero syndrome. Or the public’s blind faith on the strong man government to deliver promises. Yet the public forgets that the leadership is NO god and is just a human being who is subject to mortal frailties.

Second, it is pretty much obvious that martial law would NOT be required at all for the current drift to an ochlocratic leftist dictatorship.

The executive only requires a stamp pad legislative branch and a supine supreme court to put in effect its pet projects.

By virtue of complete control over the other branches of government, the executive branch can unilaterally impose whatever it desires.

Third, transforming the consciousness of the society requires a strong command of language that gains popular acceptance.

And this has easily been attained by virtue of indoctrinating fallacies as reality.

Government infrastructure spending equals G-R-O-W-T-H has signified a shibboleth for the majority, including so-called experts.

Benefits are seen, but never the cost.

Mao’s China, USSR, Cuba and North Korea have all relied on government spending including infrastructure, but where are they now?

The Japanese government has embarked on a series of fiscal infrastructure stimulus since its bubble imploded in 1990s. Yet more than two decades after, the Japanese economy still wobbles from economic stagnation while the cost of such undertaking has catapulted its debt conditions to the largest in the world. It’s why Abenomics embarked on a grand NIRP experiment which also includes never ending infrastructure spending. So Abe-Kuroda’s grand experiment has now translated to greater risks of instability more than G-R-O-W-T-H. [I dealt with this in Philippine Peso Tumbles 1.4% the Largest Weekly Loss Since 2014; Why the Weak Peso Signifies a Long Term Trend September 18, 2016]

Modern day China or “Communism with Chinese characteristics” has been no different.

Even the Chinese government’s addiction to credit intended just to inflate GDP statistics has become so evident for the mainstream to ignore

From Bloomberg (November 2 2016; bold mine)

In the five fastest-growing provinces, total fixed-asset investment exceeded the sum of their gross domestic product in the first three quarters of this year, according to new data from 29 of 31 provincial governments. In Chongqing, Guizhou, Tianjin, Jiangxi and Anhui, combined total investment was 6.56 trillion yuan ($969 billion) versus their combined economic output of 6.37 trillion yuan, the data show.

Despite a transition toward services and consumer-led growth, investment by the government, developers, or companies is still the engine fueling the fastest expansion rates. While the economy looks resilient for now -- the latest evidence of strength coming Tuesday with data showing the official manufacturing gauge jumped to a two-year high -- the addiction to investment and rapid credit growth needed to fund it is a growing concern.

China’s government has vowed break its stimulus addiction by boosting services, which accounted for more than half of the overall economy’s output last year for the first time, and consumption, a major prop this year. But quitting the old build-it-and-they-will-come mentality is proving harder to do at the provincial level as it remains the quickest way to juice GDP.

The reason why the Chinese economy seems “buoyant” today has been due to the astounding skyrocketing of social financing costs to the tune of $2.6 trillion (Yardeni.com). Bank loans have shot to the moon with a stunning $1.9 trillion of credit growth in a YEAR! That’s T-R-I-L-L-I-O-Ns!

It’s a grand stimulus which has been DWARFED the 2008 (US $586 billion) scale. The IMF warned last August that China’s 254% debt to GDP is unsustainable and must "urgently address the problem." (CNN MoneyAugust 12)

Such massive infusion of credit has only stoked a runaway bubble in property that may spillover to stocks.

Yet the Chinese government cannot wean away from credit, because doing so would mean a collapse of the house of cards entirely DEPENDENT or built on credit expansion.

Government infrastructure spending does NOT represent the HOLY GRAIL.  

Since resources are scarce, government spending would entail resources taken away from the productive economy. The significance of the proposed “Build, build, build” project is the expansion of the government at the expense of the productive economy.

Another is that since the said infrastructure projects are political, then distribution of benefits would favor the politically well-connected parties from the private sector. Chinese and Japanese sponsors are likely to benefit from the administration’s doleouts.

Yet once China and or Japan will be engulfed by a crisis those deals with Philippine government can be expected to vaporize.

Third, with government growing faster than the private sector, this entails more debt, higher taxes and increased inflation which will all be manifested through a weaker peso. Yet more politicization would postulate to greater risks of instability and crisis.

Finally, all it takes to increase investments is to respect and uphold private property or property rights and its ramifications: promote voluntary exchanges and sanctity of contracts. The short of this is to implement Economic FREEDOM.

But since HUMAN LIFE is the ESSENCE of property rights, and since life has NOT been respected—having been subjected to political fetishes by playing the role of god—then NO amount of government spending will translate to an avalanche of investments.

That’s because investors would not only seek a Return on Investments (RoI), but more importantly, desire an assurance of the Return OF Investments as a fundamental feature of a commercial environment. If the latter can’t be secured, then there would hardly be any investments at all.