Has the Hong Kong Protests been Part of the US Pivot to Asia?

The Russian government accuses her US contemporary of plotting Hong Kong’s pro-democracy protests...

First, here is a spectacular coverage of the rally by a drone (source vox)

Next, the alleged orchestration from the US government. From the Wall Street Journal

Russian state news outlets have begun airing reports casting the pro-democracy protests in Hong Kong as a U.S.-organized plot, echoing previous Russian coverage of similar demonstrations that have cropped up far closer to home.

The coverage reflected the Kremlin's contention that pro-democracy protests in Moscow and Kiev in recent years amounted to Western schemes designed to undermine the Russian government, as opposed to bona fide outpourings of popular discontent.

On Monday, when the demonstrations in Hong Kong dominated headlines around the world, Russia's main news broadcast on the state-controlled First Channel skipped the story. State-controlled NTV aired a brief report on the protests and little more. But by Tuesday, state-controlled channels—the primary source of news for the vast majority of Russians—were presenting the Hong Kong protesters as agents of a U.S.-organized revolt just like their counterparts in Kiev.

"According to the Chinese press, the leaders of the movement received special training from the American intelligence services," the anchor on state-owned Rossiya 24 said during a segment on the Hong Kong protests.

Later in the day, the anchor on state-controlled First Channel introduced the report from Hong Kong by suggesting the U.S. was behind the protests. "Beijing has said the protest organizers are linked to the American State Department," the anchor said. The Chinese government, however, hasn't explicitly made such an accusation.

Are these connected to the US imperial policy known as the “pivot to Asia” or the encirclement strategy or the setting up of military bases surrounding powers that have been opposed to the US hegemony? 

The Business Insider gives us some clues (bold mine) 

But China still has a military presence on the island. The protest movement is driven by concern over the mainland rolling back Hong Kong's autonomy — but in terms of hard power, Beijing has already established some crucial facts on the ground.

Beijing has had its military Hong Kong from the moment Great Britain handed the island over to China in 1997 — Beijing sent 21 armored personnel carriers and 4,000 soldiers carrying assault rifles into the territory the morning of the handover.

China has been making efforts to build up its military infrastructure in Hong Kong, including Beijing's approval of a controversial naval port in Victoria Harbor this past February. But from a purely strategic perspective, Beijing's garrison of Hong Kong might serve more as a statement of Chinese sovereignty than as a real base of operations.

We'd never know what the Chinese government's strategic perspective is.

Nevertheless, Daniel McAdams at the Lew Rockwell Blog sees more US fingerprints (bold mine)

Nevertheless, it seems Washington may have decided to execute that pivot after all — while keeping its other foot precariously planted in the Middle East and Europe. But it appears the pivot has begun in an unexpectedly aggressive manner: a US-backed full frontal assault on Chinese rule in Hong Kong.

A student protest in Hong Kong has finished its first week, taking on all the appearances of the numerous US-backed color revolutions that have unseated governments with which Washington has a beef from Georgia to Ukraine to Egypt and beyond. The protesters demand that existing portions of the Basic Law agreed upon when Hong Kong was handed back to China from former British imperial control be changed to allow sooner direct election of the chief executive of the Hong Kong Special Administrative Region.

As with previous color revolutions, protesters represent a tiny minority of the actual population yet they claim to speak with the voice of “the people.”

These voices of the people again seem to have been trained by Washington, however.

As the Moon of Alabama blog has pointed out, the US government-funded National Endowment for Democracy — AKA “regime-change central” — has poured hundreds of thousands of dollars into stoking the regime change flame in Hong Kong. For example, in 2012 alone the US government sent half a million dollars to support these regime-change movements in Hong Kong. Here is the grant listing:

National Democratic Institute for International Affairs
$460,000
To foster awareness regarding Hong Kong’s political institutions and constitutional reform process and to develop the capacity of citizens – particularly university students – to more effectively participate in the public debate on political reform, NDI will work with civil society organizations on parliamentary monitoring, a survey, and development of an Internet portal, allowing students and citizens to explore possible reforms leading to universal suffrage.

In addition, Joshua Wong, the 17 year-old leader of main student group Scholarism has beenaccused of maintaining close US government ties, including regular meetings at the US Consulate in Hong Kong.

The US Consulate and other US government bodies also fund the Hong Kong-America Center, which is run by a former US diplomat and brings Chinese students to the United States to “study” about democracy (and perhaps how to launch a color revolution?). The Ford Foundation, long associated with the US Central Intelligence Agency, is also a major sponsor of the organization’s student exchange programs.

As pointed out by color revolution observer Tony Cartalucci, leaders of the main Hong Kong protest group, Occupy Central, have long ties to US government regime change money.Writes Cartalucci:

Occupy Central’s self-proclaimed leader, Benny Tai, is a law professor at the…University of Hong Kong and a regular collaborator with the NDI-funded Centre for Comparative and Public Law (CCPL)…

Recent events in Hong Kong follow a pattern of US-engineered regime change operations, where naive students and other youth are encouraged to be the public face of protests, which start out preaching non-violence only to be very soon shunted aside by far more radical elements who provide the real muscle behind the regime change. This happened in Egypt, with the US-sponsored April 6 Movement, it happened in Syria with the initial peaceful protests soon taken over by armed (and also US-backed) radicals, and it happened in Ukraine, where the Maidan protests soon gave way to violent, armed groups sporting neo-nazi tattoos and radical ideologies.

If the pattern is repeating in Hong Kong, we will soon see an uptick in violence, meant to provoke authorities into a crackdown. This will be followed by strong condemnation from the United States government, which urges foreign authorities to refrain from what US police routinely do during such situations: exercise extreme violence. US sanctions may follow if the situation can approach terminal velocity.

And, because Color Revolutions 2.0 have adopted extreme violence as a critical element, look for a great deal of bloodshed. Finally, some observers have said that the Chinese government would never let this situation get out of hand. Don’t be fooled. The exercise is well practiced. The sclerotic Chinese authorities will likely not see what has hit them. Nobody expects regime change.

Remember, the HKMA have already raised “risks” concerns on their economy from “rising interest rates” due to “historic credit growth”. This means the ongoing protests may serve as a trigger for her domestic bubble to burst as her economy goes into a standstill. 

And bursting of Hong Kong’s bubble will ricochet to the mainland thereby aggravating China’s struggling debt burdened economy that may lead to the mainland’s economic and financial disaster.

If this has been part of the covert “low intensity conflict” being waged by Washington’s war mongers, then they may be underestimating the catastrophic impact from a possible Hong Kong-China economic collapse, which is likely spread not only to the region but to the world.

Given the vulnerability of the global markets and economy to risks, an escalation of Hong Kong’s protest may lead to the global Black Swan event.

More importantly, if the Chinese government will be convinced that the US has a hand on these, then we may expect more indirect reprisals via increased heated confrontations in South China Sea thereby increasing risks of war.

Nonetheless, the US has an indirect hand in the inflation of Hong Kong’s bubble, as I recently noted “Interest rate increases would only expose on the massive malinvestments spawned, nurtured and accumulated from the US Fed’s zero bound rates which has been imported by Hong Kong’s economy and financial markets via the US dollar peg.”

And Hong Kong’s property bubble has been part of the protesters agenda which reveals how bubbles weigh on social stability.

From another Wall Street Journal article: "another frequent gripe among Hongkongers, and especially young residents, is that property prices are too high and are inflated by money from mainland Chinese investors"

Bubbles lead to social instability and become fertile grounds for manipulations from external political forces

Phisix: The Untold Story of the Two Faces of the 7,400 Historic Highs

Sometimes people hold a core belief that is very strong. When they are presented with evidence that works against that belief, the new evidence cannot be accepted. It would create a feeling that is extremely uncomfortable, called cognitive dissonance. And because it is so important to protect the core belief, they will rationalize, ignore and even deny anything that doesn't fit in with the core belief. ― Frantz Fanon, psychiatrist, philosopher and writer

In this issue

Phisix: The Untold Story of the Two Faces of the 7,400 Historic Highs

-The Financial Market Warning Bandwagon: G-20, HKMA, ADB Joins Club

-The Pavlovian Orgasmic Scramble to September 2014’s 7,400

-The Two Faces of 7,400

-Has The Stock Market Permanently Lost Its Fundamental Function As A Discounting Mechanism?

Phisix: The Untold Story of the Two Faces of the 7,400 Historic Highs

I am not supposed to be writing this weekend but developments have been so compelling enough for me to resist sharing my contrarian and unorthodox thoughts.

The Financial Market Warning Bandwagon: G-20, HKMA, ADB Joins Club

Times have been indeed changing. There has clearly been an aura of intensifying apprehension which has been spreading to international political institutions.

Political agencies appear to be in a rush to issue warnings against market risks; although these alarm bells come with varying character.

The striking question is why the seeming concerted actions??

Remember I noted that the in their paper to the G-20 the IMF warned of “Valuations in virtually all major asset classes are stretched relative to past norms”[1]? I guess the G-20 has only partly assimilated the IMF’s position.

Here is the G-20’s official communique[2] (bold mine): We welcome the stronger economic conditions in some key economies, although growth in the global economy is uneven and remains below the pace required to adequately generate much needed jobs. Downside risks persist, including in financial markets and from geopolitical tensions. The global economy still faces persistent weaknesses in demand, and supply side constraints hamper growth…We are mindful of the potential for a build-up of excessive risk in financial markets, particularly in an environment of low interest rates and low asset price volatility. We will monitor these risks and continue to strengthen macroeconomic, structural, and financial policy frameworks, and other complementary measures, as the best response to managing risks, and meet our G20 exchange rate commitments.

In contrast to the IMF who made a declarative statement, the G-20 injected the adjective “potential” in their official statement which essentially downplays or sterilizes the risk dimension.

This would look natural from the standpoint of a conglomeration of mostly central bankers whom have been responsible for the current low interest rates regime.

Yet this validates my point when I wrote (bold and italics original)[3]: “The point is the IMF, like many other global political or mainstream institutions or establishments, CANNOT deny the existence of bubbles anymore. So their recourse has been to either downplay on the risks or put an escape clause to exonerate them when risks transforms into reality which is the IMF position.”

The admission of bubbles may not be direct, as they focus mostly on symptoms.

And a further point is that central bankers would have indulged in self-incrimination had they adapted the IMF’s position. Additionally a hardline stance would have compelled the G-20 monetary planners to reverse the current monetary zero bound policies, policies which most of them would hardly surrender.

And it has not just been the G-20, the ADB has jumped on the bandwagon with their version of sanitized financial market sirens. 

Here is the ADB as I earlier noted[4]: Emerging East Asian local currency (LCY) bond markets continued to perform well as global financial conditions have remained relatively benign thus far in 2014. The region, however, should prepare for possibly tighter liquidity as United States (US) quantitative easing is expected to end in October. More expansionary monetary actions from the eurozone and Japan could offset some of the impact on liquidity conditions caused by the end of US quantitative easing. While the region’s LCY bond markets have been calm in 2014, the risks are rising, including (i) earlier-than-expected interest rate hikes by the US Federal Reserve (ii) geopolitical tensions that push up oil prices; and  (iii) a slowdown in the People’s Republic of China’s (PRC) property market.

The ADB doesn’t seem to explain how Asian bond markets should be at risk from tighter liquidity. Here is my two cents, Asian economies have become overleveraged.

Credit Bubble Bulletin’s ever meticulous Doug Noland provides some of the details[5] (emphasis mine)

Total EM International (“external”) Borrowings increased almost $1.9 TN (59%) in five years to surpass $5.0 TN. Never have EM governments, corporations and banks piled on so much debt, much of it denominated in dollars or other foreign currencies. And keep in mind that this borrowing and lending binge unfolded in a world anticipating aggressive Federal Reserve stimulus, ongoing dollar devaluation, rising commodity prices and a general global reflationary backdrop. It just didn’t play out as expected, so there will now be a huge price to pay.

Looking first to Asian data, outstanding Asia (ex-Japan) external bonds jumped 112% in five years to $921bn. By country, we see China’s external bonds were up $194bn, or 421%, to $240bn. Including bank international forex borrowings, total China external debt jumped $642bn, or 310%, since the end of 2008 to $849bn. Hong Kong external bonds jumped $49bn, or 71%, to $117bn (total up $223bn, 63%). Elsewhere in Asia, Indonesian external bonds jumped 197% to $70bn (total up $67bn, 101%), Singapore 82% to $93bn, Malaysia 59% to $53bn, South Korea 58% to $179bn and India 73% to $74bn (total up $86bn, 54%).

That’s just bonds alone.

And ADB’s concerns have partly been manifested by the Hong Kong Monetary Authority (HKMA) who curiously has also piggybacked on the warning chorus stating at the Hong Kong economy faces “very high" risks from rising interest rates. 

The HKMA’s apparent aversion to increases in interest rates once again validates the central bank conundrum which I analogize as “I recognize the problem of addiction but a withdrawal syndrome would even be more cataclysmic.”

HKMA’s problem hasn’t really been high interest rates, but rather the “near-historic levels of credit growth”. 

Interest rate increases would only expose on the massive malinvestments spawned, nurtured and accumulated from the US Fed’s zero bound rates which has been imported by Hong Kong’s economy and financial markets via the US dollar peg.

As I recently wrote[6]:

Zero bound rates has allowed marginal unviable projects, that would have NOT existed under normal conditions, to exist. In short, zero bound has democratized credit activities which has spread to include a vast number of subprime or less credit worthy borrowers.

And because subprime borrowers have been DEPENDENT on zero bound, an increase in interest rates will expose on such financial vulnerability.

And when credit concerns become an issue on a wider scale (or affects many firms), this may cause systemic liquidity to ebb as borrowers delay payments or if they default, while lenders suffer balance sheet and capital losses.

So the HKMA problem has been one of credit risk, where raising rates will undermine marginal subprime borrowers that causes a liquidity contraction that risks a spillover to the other parts of the economy.

And why wouldn’t the HKMA be disturbed? About a year ago they raised the issue of deteriorating quality of the fast expanding corporate debt[7]. That’s even at zero bound. What more when interest rates increase!

Hong Kong’s property bubbles are taking toll not just in finance, but most importantly in social stability terms. Bubbles have recently fueled anti-market sentiment, and as of this writing the once peaceful city state has now been rattled by violent riots, as the Hong Kong government attempts to quash the swelling pro-democracy movement.

Why the torrent of warning from the establishment?

I guess since we are talking of political institutions as well as their technocratic supranational supporters, the increasing account of cautionary communications, aside from escape valve function, can also be interpreted as manifestations of increasing apprehension from the politically influential financial elites.

Here’s a clue, a recent report suggests that world billionaires have been hoarding boatloads of cash. Notes the CNBC[8]: According to the new Billionaire Census from Wealth-X and UBS, the world's billionaires are holding an average of $600 million in cash each—greater than the gross domestic product of Dominica. That marks a jump of $60 million from a year ago and translates into billionaires' holding an average of 19 percent of their net worth in cash…Indeed, billionaires' cash holdings far exceed their investments in real estate. Their real-estate holdings average $160 million per billionaire, or about one-fifth of their cash holdings… "The apparent safety of cash, reinforced by the painful psychological experience of the 2008-09 global financial crisis and the subsequent troubles within the European Monetary Union, likely reinforces the tendency to favor this cautious allocation strategy," Smiles said in the report.

Increased uncertainty functions as the crucial incentive for people to hold onto cash. As Austrian economist Hans-Hermann Hoppe[9] explains: If a person then adds to his cash balance, he does so because he is confronted with a situation of (subjectively perceived) increased uncertainty regarding his future. The addition to his cash balance represents an investment in presently felt certainty vis-à-vis a future perceived as less certain. In order to add to his cash balance, a person must restrict his purchases or increase his sales of nonmoney goods (producer or consumer goods). In either case, the outcome is an immediate fall in certain nonmoney goods' prices.

So if world billionaires have been giving us hints on the direction of financial markets or of the real economy, then optimism, which the Pavlovian consensus expects, isn’t likely the outcome.

And perhaps acting as proxies, the political establishment has been expressing the elite’s sentiments.

If you haven’t noticed, it’s odd that more and more of the establishment have been jumping into my bandwagon. Eventually these concerns will be parlayed into policy actions. Changes always happens at the margins

Oh by the way, the BSP chief in a speech last week[10], once again raised sanitized alarm bells on the domestic financial markets and the economy with foreigners being conditioned as scapegoat: “Having said these, I will be the first to say that risks to growth remain.  External factors -- including the uneven growth in major economies, uncertainties surrounding monetary policy in the advanced countries, and  geopolitical concerns  --  could impact the Philippine economy through trade and volatilities in domestic financial markets.  Here at home, weather disturbances and recurring concerns about power rates and supply could also affect growth.”

The BSP governor’s consistent warnings looks very much like the G-20 statement above, e.g. “global economy is uneven” and “downside risks persist, including in financial markets and from geopolitical tensions”. Has this been scripted?

And given the increasing frequency of the citation of a heightened risk environment, is the BSP chief really expecting fireworks soon???

The Pavlovian Orgasmic Scramble to September 2014’s 7,400

In referring to the Pavlovian classical conditioning response, which I analogized with World War Z zombies, I explained that instead of zombies having been conditioned to seek out humans for them to infect through the latter’s noise, the conditioning for domestic stock market participants has been to hear the utterance of G-R-O-W-T-H from public officials or from industry leaders to spark a buying stampede.

As I recently wrote[11],

Market participants has not only been disregarding risks and flagrantly overpaying for excessively overvalued securities predicated on the “g-r-o-w-t-h” signals, importantly markets appear to have been conditioned to believe that prices will not only rise forever but will EXPLODE to the firmament soon. At any rate, the snowballing psychology from the 'fear-of-missing out' has been prompting for an orgasmic scramble to bid up prices AT ANY LEVEL!

Wednesday’s actions look very much like a Pavlovian World War Z zombie stampede.

Perhaps all it took was for mainstream media to air articles of a major property developer announcing another expansion coupled with a bullish outlook on the real estate industry issued by an industry representative. These G-R-O-W-T-H themed literatures essentially fired up a Pavlovian property led buying hysteria or “orgasmic scramble to bid up prices AT ANY LEVEL”!

The one day 1.15% post lunch break push practically brought the bulls near the May 2013 threshold historic high of 7,400.

Given that the 7,400 target was virtually on the horizon, the buying panic was carried over the following day during the early session. Yet after 16 long months of wait, the intraday record high of 7,413 was finally reached but then profit taking prevailed through the end of the session.

It has been interesting to see that the one day (plus the carry over) push had essentially been again led by the property sector, buttressed by the Industrial and Holding sectors. This means that the bidding frenzy was hardly an across the board phenomenon but a seemingly concerted action targeted at some heavyweight market caps leaders of the said sectors. Yet the following day, selling had been broad based.

And the most interesting development was the day’s fantastic irony— yes the Phisix finally touched the 7,400 level anew alright, but at the same day, the peso endured a .7% meltdown!

Because most of the region’s currencies fell modestly, this may be partly attributed to the rising dollar. But the peso was the day’s worst performer by a mile! And the gist of this week’s loss came also from the day the Phisix reclaimed the old highs.

This is just one of the many paradoxes between the 7,400 highs of May 2013 and September 2014.

The Two Faces of 7,400

It’s interesting to see that Phisix 7,400 in September 2014 has starkly been different with its earlier counterpart May 2013.

The daily quote from the PSE of the two milestones sheds some light on the character of the recent stock market blitz, particularly on the peso volume.

In May 15 when 7,403 was reached, the traded volume was at a stunning Php 21.4 billion. Last week’s ramp to 7,413 had only Php 9.5 billion. This represents only 44% of the May 2013 highs!

The path towards these landmark highs shares the same story. The volume of the current run has been significantly less than its antecedent as I previously observed[12], “The average Daily Peso volume has been about 30-35% off the 2013 average.”

Think of it, if those who bought at the previous (2013) peak haven’t sold and awaits for the 7,400 level to be reached before they sell just to even out, then this would translate to a massive resistance level.

And based on the closing prices of 15 May 2013 and 25 September 2014, it appears that only two sectors that has gone beyond or surpassed May 2013 levels.

This gives us two insights on the quality of the journey to Phisix 7,400:

First, between the two highs only two sectors, the Industrials and the Service have outclassed its predecessors. This means that the Phisix 7,400 circa September 2014 has largely been due to them.

And like the 24 September Pavlovian one day vault, 7,400 has been reached because of targeted actions on some key heavyweight issues.

This isn’t a conspiracy theory but the numbers (volume, sectoral performances or even the increased frequency or even the regularity of “marking the close”) implies that 7,400 may have been stage managed. Why the concentration? Why the fixation on some key market index heavyweight issues?

As of Friday’s close, the year to date the sectoral returns are as follows

Finance	18.63%
Industrial	31.2%
Holding	17.4%
Property	29.34%
Service	16.7%
Mining	48.35%
All Shares	19.01%
Composite	23.29%

Those numbers are a fantastic sight. Yet only the mining, industrial and property sector have generated returns above the composite index which means the industrials and the property have been responsible for September’s Phisix 7,400. The outperformance of the mining industry has been in a response to last year’s crash, so I wouldn’t include them, besides they have a miniscule weighting in the PSE basket.

Yet if we match the year to date returns with that of the 7,400s of May 2013-September 2014 performance, the damage caused by the June 2013 bear market strike has been striking! Except for the industrials, those marvelous year to date returns have hardly filled the void caused by the bear market as finance, holding and ironically even the property sector still has underperformed the May 2013 run. You see, more ironies.

Alternative to the concentration of gains perspective, the current 7,400 exposes the underbelly of the current run-up a weak market breadth relative to the 2013.

I would add that if one looks at the disparity in the performance of the service sector between two time frames, one may discern that the sector’s outperformance vis-à-vis May 2013 has been a result of its underperformance during the first romp to 7,400.

So we have substantially low volume plus underperformance by major sectors suggesting of the inferior quality of the September 7,400 with that of its May 2013 counterpart.

I mentioned earlier that the peso has been pummeled even as 7,400 has been reached.

When the May 2013 milestone 7,400 high was crafted, the peso, which was largely on a firming trend, closed on the same day at 41.2 relative to the US dollar. (see upper window)

Based on Friday’s official close of USD PHP 44.72, between the two Phisix highs of 7,400 in 2013 and 2014, today’s peso has been down by about 8% against the May 2013 version! Just amazing. But that's an example of divergence or one of the many other ironies between the two 7,400s.

While the correlation has not been perfect, the Phisix used to rise ALONG with the peso. This has been true even during 2014 (see lower window). Since September when the peso came under duress, such correlation appears to have been ‘broken’, as the Phisix hit 7,400 on a WEAK peso. Strange.

It is as if a weak peso WON’T have any impact on earnings and profits or the economy. Juxtaposed with still hefty money supply growth, the weak peso serves as a one-two punch that would compound on domestic inflationary pressures whose nasty side effect includes a demand slowdown and higher business costs. Add to this the issue of debt servicing where more peso will be required to finance foreign denominated liabilities.

In a hysteric world of G-R-O-W-T-H who cares about reasoning.

Has The Stock Market Permanently Lost Its Fundamental Function As A Discounting Mechanism?

And speaking of peso and inflation, the May 2013 high was carved out of declining official inflation rates. Today’s run up has been the opposite, the Phisix has ascended in the face of official inflation rates at the upper end of official target.

Additionally, in the May 2013 highs such era highlighted on falling interest rates. Today the BSP has been panicking to tighten, two weeks back the BSP imposed its sixth and seventh tightening measure in only SIX months[13].

Additionally the proxy to interest rates, yields of 10 year government local currency bonds then set NEW record LOWS, today yields have been going up!

All these reveal of the antipodal nature of the 7,400 of September 2014 and May 2013. In 2013 the Phisix rose on the tailwind of EASY money as against TODAY’s relatively TIGHTENING monetary environment. I would bet on the former and not the latter, as the former signifies a key ingredient for an asset bubble collapse.

Meanwhile the inability to push many major caps back to the former highs has instead prompted for wild punts across second and third tier issues. The average daily trades reveals of the increased turnovers by participants on lower volume relative to 2013.

Average total traded issues suggest of the breadth of the euphoric wagering which has bulged to include many illiquid issues. This reveals of the intensity of the build up of the adrenaline to gamble

The 2013 7,400 was mainly due to major caps. The 2014 7,400 was mainly due to SELECT major caps PLUS second and third tier euphoric mindless scramble for yields.

Finally the 7,400 September 2014 edition has been part of the manic transition process which I called the “denial rally” and the déjà vu

During the appearance of the bear in June I wrote[14], “Denial” rallies are typical traits of bear market cycles. They have often been fierce but vary in degree. Eventually relief rallies succumb to bear market forces. The denial rally of 2007 virtually erased the August bear market assault but likewise faltered and got overwhelmed.

And as the 2014 rally progressed early in the year to take a similar shape of the early 2013 dynamic I observed[15], Well, actions in the Philippine stock exchange seem like a déjà vu of the manic phase of February to early March of 2013

The consensus may think that a crossover of the 7,400 marks a nirvana pillared by “this time is different”, history tells us this isn’t so.

	Old high	New high	% gains	2014 equivalent (base: 7,400)
August 1969-January 1979	482.24	531.13	10.14	8,150
Jan 6, 1994-Feb 3, 1997	3,293.33	3,447.6	4.68	7,746
July 5 2007-October 9, 2007	3,791.42	3,873.5	2.16	7,560

The two generational or secular highs (1969-79 and 1994-97) during the topping process showed how previous highs had been exceeded. The cyclical top of 2007 likewise reveals of the same dynamic but at a more muted dimension.

As I have been saying the issue is about financial instability rather than of reaching specific price levels. The two generational/secular stock market bubble cycles did not only result to a stock market crash but metastasized into financial crises.

The cyclical top of 2007 only resulted to a stock market crash but not to an economic event. But the 2007 top which has been a cyclical phenomenon has connected with current developments from which originated in 2003. 2003-2014 marks the secular bull market to the topping phase.

In the economic context, 2014 has been associated with 2007 because the policies implemented then (automatic stabilizers) to forestall a recession on the formal economy and the ensuing shift to aggregate demand (monetary easing)[16] paved way for both the 7,400s of 2013 and 2014 undergirded by the property and property related bubbles.

In short, the higher the price levels, the greater the financial instability. 

Logic also tells us why the current stock market conditions are unsustainable: Has the stock market permanently lost its fundamental function as a discounting mechanism for it to permit or tolerate a perpetual state of severe mispricing as seen by excessive valuations of securities???

If the answer is YES, then PEs of 30, 40,50, 60 and PBVs 3,4,5,6,7 can reach, in the words of cartoon Toy Story character Buzz Lightyear “to infinity and beyond”!!! 

If the answer is NO, then the obverse side of every mania is a crash.

My bet is on theory, logic and history.

---

[1] See Phisix: ASEAN Currencies Dive as the BIS, IMF, OECD Warns About Bubbles! September 22, 2014

[2] G-20 Communiqué Meeting of G20 Finance Ministers and Central Bank Governors Cairns, 20-21 September 2014

[3] See Phisix: Will the Global Black Swan Be Triggered by Economic Sanctions? August 11, 2014

[4] See ADB Warns on Rising Risk Environment September 23, 2014

[5] Doug Noland, What We Know Credit Bubble Bulletin Prudentbear.com September 26, 2014

[6] See Hong Kong Monetary Authority Warns of High Risk from Interest Rate Hikes September 25, 2014

[7] See Hong Kong Regulators Worry Over Growing Risk from Corporate Debt September 26, 2013

[8] CNBC.com Billionaires are hoarding piles of cash September 22, 2014

[9] Hans-Hermann Hoppe "The Yield from Money Held" Reconsidered May 14, 2009 Mises.org

[10] Governor Amando M. Tetangco, Jr. Banking on Social Safety Nets Bangko Sentral ng Pilipinas September 25, 2014

[11] see Phisix: As Risks Mounts, PANIC BUYING Grips the PSE! September 8, 2014

[12] See Phisix: 7,000 Breaks on Regional Melt-UP; The Natural Limits of Inflationism August 18, 2014

[13] See Phisix: BSP Panics, Raises BOTH Official and SDA Rates!!!! September 15, 2014

[14] See Phisix: Don’t Ignore the Bear Market Warnings June 30, 2013

[15] See Phisix: A Deeper Look at the Philippine and Indonesian Stock Market Mania March 17, 2014

[16] See Phisix: In 2009, the BSP Engineered a Crucial Pivot to a Bubble Economy April 14, 2014

Hong Kong Dollar-US Dollar Peg Under Pressure

The Hong Kong US dollar peg appears to be under pressure.

The Zero Hedge writes (bold and italics original): "Yesterday saw something quite unusual in the New York trading session. The Hong Kong Monetary Authority bought $715 million (selling HKD) in the FX markets to manage its currency peg, injecting the money into the banking system (and expanding its balance sheet) to prevent HKD from rising above its permitted range. HKMA projects its balance sheet to grow to the end of July, but as Simon Black (of Sovereign Man blog) notes, this could well be the start of a bigger shift - an end to the US Dollar peg..."The US is no longer the undisputed superpower it once was. The US dollar is dragging them down. Hong Kong is easily strong enough to stand on its own." HKMA's balance sheet is surging - HKD demand pressuring peg, thus buying USD (and selling HKD) to manage peg..."

Sovereign Man's Simon Black also suggest that this could represent a speculative attack on the peg: "The reasons are unclear, though it’s entirely possible that investors are attacking the peg, similar to what happened to the pound back in the 1990s. We could be in the early stages of such an assault." (Mr. Black’s article is a recommended read)

The HKD-USD peg basically means that Hong Kong's has been importing the US Federal Reserve's monetary policies. 

As I wrote back in 2009: Since the Hong Kong currency has been pegged to the US dollar it implies that Hong Kong has essentially been importing its monetary policy. Yet, the inflationary path undertaken by the US government suggest that Hong Kong is equally importing inflation-hence the rapid monetary expansion that has been fueling booming property and stocks.

And fuelling asset bubbles has indeed been the case.

Hong Kong’s Hang Seng Index approaches the 2010 highs but has been still about 20% off from the 2008 highs. Hong Kong’s valuation has been about 39 times historic earnings  according to this Bloomberg report!

And cognizant of risks of property bubbles, Hong Kong authorities imposed additional property curbs in 2013. A 15% flipping tax was first reportedly introduced in November 2010 as with doubling of stamp duties. Eventually the Hong Kong government introduced a 15% tax on foreign purchase according to a report from Bloomberg

Recently such restrictions appears to have been eased, perhaps in conjunction with the recent loosening of China’s monetary policies.  

[As a side note: the Chinese central bank the PBOC have launched a 1 trillion yuan ($171 billion) stimulus (or QE?) via the “Pledged Supplementary Lending" (PSL) which has spurred the  recent surge in China’s stocks. This fills in the gap—”this implies a Xi-Zhou PUT (from China’s President Xi Jin Ping and PBoC governor Zhou Xiaochuan) in motion”—of my Sunday’s commentary]

The ramifications of the present easing has been a dramatic resurgence in Hong Kong New Residential loans and to accelerated record loans to the private sector.

As I also noted in the past, Fed inflated bubbles has impelled and fostered recent outcries against growing inequality that has led many Hong Kong residents to embrace populist anti-market politics and which has partly ushered in a welfare state: "The point is that not only has the easy money policies of the US Federal Reserve been blowing Hong Kong’s bubble cycles, at worst such policies have been gnawing at Hong Kong’s relative free market environment by whetting or stoking on populist anti-market sentiment and the promotion of the mixed economy-welfare state. In short, bubble policies function like a political Trojan horse for destabilization"

And this is why the HKD-USD pegged is numbered. 

Again from my 2012 article: Hong Kong authorities should deal with the US dollar peg rather than intervene in the marketplace. Perhaps they should consider the proposal, which I earlier noted here, by Prof Joseph Yam, the former head of the Hong Kong Monetary Authority (HKMA), who is also one of the architects of Hong Kong-US dollar peg through a monetary board, to alter Hong Kong’s monetary system by shifting from US dollar peg towards China’s yuan or through a basket of other currencies. They could also consider Yuanization or using mainland currency by scrapping the Hong Kong dollar altogether.

The recent pressure on the HKD-USD peg suggest that markets, rather than HK authorities, will determine when this untenable relationship ends.

Will the current currency speculation break the peg? Or will a bursting bubble do the job?

HK Monetary Authority: QE is NOT a Panacea

Hong Kong’s Monetary Authority headed by Chief Executive Norman Chan appears to have come to grip with reality and indirectly censures the US Federal Reserve

From CRI English (hat tip Zero Hedge) [bold mine]

Hong Kong Monetary Authority Chief Executive Norman Chan said Monday that if the process of deleveraging is disrupted by quantitative easing, asset prices might drop sharply and remain volatile.

When delivering a speech entitled the Global Deleveraging: The Right Track at the Hong Kong Economic Summit 2013, Chan said that excessive leveraging, or over-borrowing, in major industrialized countries was the root cause of both the global financial crisis and the more recent sovereign debt crisis plaguing Europe.

Chan said quantitative easing is not a panacea, but it is the exact opposite of deleveraging. In the past three years, quantitative easing had limited stimulating effect on the real economy. "In order to solve the structural imbalances built up in the past two decades, we must get to the bottom of the problem."

There is a possibility that quantitative easing produces the desired results, which is a very desirable scenario as global economy will return to its normal growth path, he noted.

However, there is a possibility that the process of deleveraging is disrupted by quantitative easing, leading to sharp increases in asset prices in the first place. Yet, since such increases are not supported by economic fundamentals, any increase in wealth will be seen as transient.

As a result, households are unwilling to increase spending and in the end, the real economy fails to rebound, if inflationary pressure builds up alongside asset price increases, central banks may consider exiting the market and raise interest rates, the authority's head said.

When economic performance, inflation or monetary policy falls short of market expectation, asset prices might drop sharply and remain volatile, he added.

Translation to central bank vernacular: QE only buys time and further inflates current bubbles.

I may further add that by disallowing markets to clear to reflect on its real state or conditions “not supported by economic fundamentals”, imbalances will accrue “inflationary pressure builds up” to the point of greater volatility ahead. 

Euphemism aside, Mr. Chan means a bursting bubble (see last highlighted statement).

Hong Kong’s Parking Lot Bubble

I previously pointed out how Hong Kong’s recently imposed property curbs, which essentially are capital controls, would compound or intensify on the distortions and nasty side-effects from its currency peg on the US dollar.

We seem to be getting more evidence on this

Sovereign Man Chief Investment Strategist Tim Staermose notes of how Hong Kong’s currency peg and property curbs (capital controls) have found a new, if not an additional object of policy induced bubbles: Parking Lots.

In another absurd example of what happens when unrestrained money printing meets idiotic government taxes, the price of parking spaces at a suburban apartment complex some 40 minutes from central Hong Kong is now HK$1.3 million, or approximately US$168,000.

There are two key factors driving this lunacy–

1) the tidal wave of money from across the Pacific as a result of the Federal Reserve’s QE infinity policy; and,

2) the Hong Kong government’s misguided attempts to control the property bubble here.

A few weeks ago, as we reported, the government snuck in 15% stamp duty tax affecting foreign buyers, plus a property tax increase, in hopes of snuffing out property speculation. Yet all they did was send the speculative money flows into things such as parking spaces instead, which are not affected by the tax hikes.

Hong Kong is flush with liquidity. The Hong Kong dollar is pegged to the US dollar at the rate of 7.80 +/- a very narrow band, which means that whenever the US Federal Reserve prints money, the Hong Kong Monetary Authority must also print money in order to keep up.

Interest rates here are effectively zero. And there are consequences to making money available for nothing.

All of the hundreds of billions of new Hong Kong dollars floating around in the system has to end up somewhere, and in recent years, much of it has ended up in Hong Kong’s property market.

Property prices in Hong Kong are the most expensive in the world. Recently a 6,200 square foot apartment sold for $62 million (USD), a mind boggling $10,000 per square foot.

Both the US dollar peg and capital controls through property curbs signify as a fatal cocktail mix to Hong Kong's free market economy. As I previously wrote, 

Inflationism essentially sow the seeds for protectionism through various forms of interventionism as capital controls. On the other hand, protectionism fosters antagonism. Central banking policies, thus, promotes social instability even in what used to be economically free nations.

Now if for every action there is an equal and opposite reaction according to Sir Isaac Newton's third law of motion, then expect that for every (artificially induced) boom, a bust will be the natural reaction. 

That's the nature of the fiat paper money system, promoted and operated by central banks.

Bernanke’s Open Ended QE: More Property Curbs in Hong Kong

Hong Kong introduces more regulatory property curbs which are indirect form of capital controls.

From Bloomberg,

Hong Kong has widened efforts to cool home prices that have gained almost 90 percent since early 2009, as the U.S. Federal Reserve’s third round of quantitative easing risks fueling asset bubbles in the city.

The Hong Kong Monetary Authority will limit the maximum term on all new mortgages to 30 years, Norman Chan, the de-facto central bank’s chief executive, told reporters on Sept. 14. Mortgage payments for investment properties can’t be more than 40 percent of buyers’ monthly incomes, from the current 50 percent, he said.

The curbs came after the Hang Seng Property Index completed a six-day, 11 percent rally on optimism the Fed’s QE3 program would fuel inflows to the city, which tracks U.S. monetary policy because of a currency peg to the dollar. Record low mortgage rates, an influx of buyers from other parts of China and a lack of new supply have underpinned the housing market, prompting Hong Kong Chief Executive Leung Chun-ying to announce plans in the past month to accelerate land sales and give preference to local buyers in some projects.

More:

The introduction of QE3 “will create the potential for renewed influx of capital into Hong Kong,” Chan said. “We have to stand ready for it.”

The central bank also raised the minimum down payment on investment properties for buyers who derive their income from outside Hong Kong. Investors using their assets -- not income -- to borrow can now only take out loans for as much as 30 percent of a property’s value, Chan said. The restrictions are effective immediately.

Inflationism essentially sow the seeds for protectionism through various forms of interventionism as capital controls. On the other hand, protectionism fosters antagonism. Central banking policies, thus, promotes social instability even in what used to be economically free nations.