Explaining Soros' Move: South Korea's Central Bank Panics, Chops Interest Rates to Record Lows

And speaking of Developed Economy's NIRP and a Global ZIRP, South Korea’s Bank of Korea (BoK) just panicked, it chopped interest rates to record low! Korea's Zirp now looking for a NIRP! 

http://www.bbc.com/news/business-36486454

you can see the interest rate chart here

http://www.tradingeconomics.com/south-korea/interest-rate

South Korea’s external trade have been taking a hit…

Exports have been trending down…

http://www.tradingeconomics.com/south-korea/exports

As with imports…

http://www.tradingeconomics.com/south-korea/imports

Since merchandise trade account for nearly 80% of GDP, a slowdown in external trade affects their GDP

http://data.worldbank.org/indicator/TG.VAL.TOTL.GD.ZS/countries/1W-KR?display=graph

Also industrial production has also been down…

http://www.tradingeconomics.com/south-korea/industrial-production

so again the net result has been a slowdown in gdp…

http://www.tradingeconomics.com/south-korea/gdp-growth-annual

yet private sector loans continue to materially grow…

http://www.tradingeconomics.com/south-korea/loans-to-private-sector

And this only aggravates the balance sheet conditons of South Koreans households whom have already been heavily leveraged.

http://www.tradingeconomics.com/south-korea/households-debt-to-gdp

So why wouldn’t the BoK panic? With the economy trending down, given the huge debt level, just how will heavily leveraged households be able to meet their financial obligations?

Thus the BoK slashed rates in order to ease such debt burden (which represents a subsidy to borrowers) while at the same time allow borrowers easier access to credit (in the hope that balance sheets of banks have been impervious to the likelihood of increasing accounts of bad credit). Again HOPE is not a strategy.

As a side note, I do not share the view that such actions have been designed as to engage in acurrency war.

Aside, housing prices have begun to sink.

http://www.tradingeconomics.com/south-korea/housing-index

And this would reduce collateral values, as well as, diminish household option to use the housing channel to raise financing (by sales). If Koreans resort to further selling, then housing deflation will only accelerate. Additionally falling collateral values could mean that financiers may ask debtors to either increase collateral inputs or force a call on loans. This will also put pressure on housing prices.

You see, the BoK’s room to further kick the proverbial can down the road appears to be narrowing fast. So the increasing recourse to a desperation policy.

Well at least there still is a buoyant stock market, which is likely the remaining option for Koreans to eke some returns. Perhaps much of the latest borrowing have been funneled here.

http://stockcharts.com/h-sc/ui?s=$KOSPI

That’s of course, until such windows also shuts too

You see now why George Soros sees a global market crash and Asia equally a sell????

Japan's Nikkei Crash 4.84%, Hong Kong's HSI Plummets 1.22% and Korea's Kosdaq Halted After 8% Crash!

Woe to Japan's pensioners. Continuing stock market losses might just bleed Japan's Government Pension Investment Fund (GPIF) dry. The GPIF had been pressured by the Abe administration in 2014 to makeover its portfolio by increasing its exposure in the stock markets (domestic and global). Now stock market losses have been mounting.

It has been a brutal week for the Japanese stock market. Today, the Nikkei 225 suffered another 4.84% crash! Today's slump marks the third consecutive day of heavy losses for the key benchmark this week.

From Bloomberg:

Stocks plummeted in Tokyo, with the Topix index posting its biggest weekly loss since 2008, as global equities plunged into a bear market and the yen rose to its highest level in 15 months.

The Topix sank 5.4 percent to 1,196.28 at the close in Tokyo as trading resumed after a holiday, capping a 13 percent weekly decline. The Nikkei 225 Stock Average fell 4.8 percent to 14,952.61. The yen traded at 112.45 per dollar after touching 110.99 on Thursday, the strongest level since Oct. 31, 2014, when the Bank of Japan eased policy.

“We’ve entered a different phase in the market,” Juichi Wako, a senior strategist at Nomura Holdings Inc. in Tokyo, said by phone. “Dollar-yen movements are at the center as it is now the foreign-exchange market that is in the driver’s seat. We’re at the mercy of how currencies move.”

The currency’s surge is intensifying speculation the BOJ may intervene to arrest gains that threaten to undermine almost three years of monetary stimulus. Finance Minister Taro Aso said Friday the government is watching market movements and will take any action necessary. Following a regular meeting with Prime Minister Shinzo Abe, BOJ Governor Haruhiko Kuroda said he also would watch market moves closely.

Part of the crash has been due to margin calls...

Investors said this week’s declines to below key levels have triggered margin calls among retail traders in Japan, who are being automatically forced to close souring bets. That’s adding to the selling pressure, according to Miki Securities Co.

The Nikkei 225 hemorrhaged a stunning 11.1% in a holiday abbreviated week.

Curiously,  this week's string of losses has brought the Nikkei back lower than when the Abenomics 2.0 was launched in 4Q of 2014. 

So the Abenomics stock market bubble has almost entirely been erased! This should be another wonderful example of the proportionality of bursting bubbles. Or as I previously noted, the bust will be roughly proportional to the imbalances acquired during the inflationary boom. 

And if the GPIF pushed the stocks all the way to the recent top, then today's downside breach of the 15,000 level must translate to heavy losses for the fund.

Well, most of Asian bourses have been under the spell of bears

Yesterday I noted that Hong Kong's Hang Seng index greeted the year of the Monkey (really year of the bears) with a selloff.  A follow thru session was seen today.

From Bloomberg

The Hang Seng Index lost 1.2 percent to 18,319.58, its lowest close since June 2012. HSBC was the biggest drag, capping a 8.1 percent two-day drop, amid concern over the perceived creditworthiness of European banks. Tencent Holdings Ltd., which has the largest weighting on the index, sank 1.9 percent. Hong Kong stocks have lost almost $2 trillion in market value from an April peak, data compiled by Bloomberg show, while a measure of equities around the world fell into a bear market this week.

“Global sentiment isn’t that great and with the world conditions worsening, the Hong Kong market will tag along with that downtrend," said Jackson Wong, associate director at Huarong International Securities Ltd. in Hong Kong. “We didn’t see any panic selling, but we don’t have any extremely positive catalyst to push up the stock market."

Hong Kong stocks extended their worst start to a lunar new year since 1994 as a global equity slump compounded concern that capital outflows, a slumping property market and China’s economic slowdown will hurt earnings. The Hang Seng Index has tumbled 16 percent this year, while the Hang Seng China Enterprises Index is trading at its lowest level since March 2009. Mainland markets resume trading on Monday after a week-long break.

The Hang Seng index fell 5.02% in a holiday truncated trading week.

This week's selloff in Hong Kong's equities maybe a bad omen for the resumption of trading activities in mainland China next week. Will stocks of mainland China crash too? Or will the national team will be active next week to prevent this?

And another noteworthy event today has been the crash of Korea's small cap index the Kosdaq, which prompted for a trading halt.

From Bloomberg:

Trading in South Korea’s Kosdaq exchange for smaller stocks was temporarily halted after the benchmark gauge plunged more than 8 percent on concern valuations were excessive relative to earnings prospects.

Trading was suspended for 20 minutes at 11:55 a.m. in Seoul after the measure dropped 8.2 percent. The index pared declines to 6.1 percent at the close. Celltrion Inc. was the biggest drag on the small-cap measure after the stock almost tripled in the past 12 months. The Kospi gauge of larger companies closed at its lowest level since August.

The Kosdaq index of more than 1,100 companies jumped 26 percent to outperform the large-cap gauge last year as investors piled into biotech shares and other smaller companies in search of earnings growth as smokestack industries stagnated. Celltrion, which developed an arthritis medicine, trades at 42 times projected 12 month profits, four times the Kospi’s 10.5 times.

Investors are selling small-cap stocks as they look for havens amid the global market turmoil, said Choi Kwang Kook, a senior fund manager at Assetplus Investment Management in Seoul.

World equities entered a bear market on Thursday amid concern over the strength of the global economy, while the yen and gold rallied. Korean markets were closed for the first three days of this week for holidays. Today’s 8.2 percent intraday decline by the Kosdaq is the biggest since December 2011.

The Kosdaq closed down by still a huge 6.06% today! 

Nonetheless, Korea's major benchmark the Kospi was spared of the carnage and was down by just 1.41% for the day and 4.3% for the week.

As noted in the report above, bears have now gained control of the world markets. 

For this week, ASEAN majors were spared from the bloodletting suffered by other regional peers. 

Will China's resumption of trading next week induce a uniformity of actions?

Why Asia is in Trouble: Corporate Savings Under Assault

For the government and the mainstream, the only thing that matters for the political economy is spend, spend, spend to infinity and beyond, regardless of the quality and financing of such activities.

So they endorse almost any policies that assails on savings--which is seen as a scourge.

This Keynesian myth has practically been embraced by Asian governments to the point that some of have directly imposed penalties on corporate cash hoard.

From the Wall Street Journal Real Times Economics Blog

Investors have long criticized many of Asia’s corporate giants for hoarding billions of dollars. Now those cash piles are under attack from governments that want them put to better use driving economic growth.

Last month, Korea announced that as part of a $40 billion economic stimulus package, it would impose a tax on companies that keep piling up savings instead of paying them out to workers or shareholders.

In Japan, Prime Minister Shinzo Abe has pushed companies to raise payouts to shareholders and workers, and Beijing has ordered state-owned behemoths to boost their dividends to the government to help pay for expanded social-welfare programs.

The International Monetary Fund took aim at the issue this month in its latest report on Japan, calling on Friday for better corporate governance to help “unstash Japan’s corporate cash.” The IMF estimates Japanese companies are sitting on record amounts of cash, equivalent to more than 9% of gross domestic product.

The idea is that by unleashing these corporate cash lodes onto shareholders and employees, they will either invest it more profitably in other parts of the economy, or simply spend it – either of which is better for growth than having it sit in the bank.

While such policies may temporarily be a boost to shareholders and employees these will have nasty side effects over the long run that has been unseen or neglected by the consensus. 

[Note: I exclude China's State Owned Enterprises in the discussion below]

One major reason why corporations hold cash is due to “uncertainty” (perhaps in reaction to social policies, to changes in the risk environment or to changes in profit opportunities) and or in relation this, the possible waiting for the right opportunities to deploy these surplus reserves. 

Yet by forcing companies to spend, such incentivize companies to wade into or speculate on unproductive ventures that risks financial losses. This would hardly be a boost to shareholders and employees. 

In addition, if many companies engage in politically induced 'forced' speculation such will lead to massive mis-allocation of capital, thus poses as a systemic risk. Combined with easy money policies, such will compound on bubble formation.

By forcing companies to pay employees more than what the company sees as their marginal productivity contribution to the company’s product/s, such increases business costs (decreases productivity) that could lead to a scrimp in profits or even to financial losses.

By forcing companies to shell out dividends, the opportunity cost of such actions will be investment opportunities when they emerge. These companies won’t have the resources to invest without recourse to debt. Subsequently, this also means that forcing companies to reduce cash reserves would increase balance sheet risks via debt accumulation.

This obsession with the crucifixion of savings and spending as panacea signals trouble ahead. 

As Austrian economist Gerald Jackson recently wrote: (bold mine)

Unfortunately economic thinking has now deteriorated to the point that one of the major economic fallacies the classical economists refuted is now presented on a daily basis in universities, colleges and the media as an irrefutable fact. The result is that governments the world over are implementing policies that direct economic activity to increased consumption at the expense of gross investment. As the Austrians are forever pointing out, it is gross investment, expenditure on all future-goods factors, that maintain the capital structure: not net investment or consumer spending

We are thus left with the conclusion that fighting a recession by encouraging consumption will prolong and perhaps even deepen it. One thing is certain from an Austrian perspective: if the critical point is reached where increased consumption spending continues to drive down gross investment then real wages must eventually fall if the phenomenon of permanent widespread unemployment is to be avoided.

Overall, the spending nostrum is all about temporary gratification at the expense of the future. This signifies what politics has been all about: Get votes today, voters be damned after.

South Korea: Mini Skirt Regulation Provokes Outrage

All sorts of civil restrictions seem to be cropping up from governments worldwide.

In South Korea, new regulations on mini skirt, which domestic officials label as “excessive” public exposure, have prompted for public outrage.

From Korea Times

A decree to fine those who engage in “excessive” public exposure passed at a Cabinet meeting presided over by President Park Geun-hye ignited controversy Monday.

The decree is expected to go into effect starting March 22.

People were outraged by the 50,000 won fine, as it brought back memories of similar restrictions on skirt lengths in the 1970s under the rule of the late President Park Chung-hee.

Many netizens criticized the decree as a signal of a return to the authoritarian era.

Social networks services, such as Twitter and Facebook, were buzzing with critical comments ― ranging from who decides the standards of decency to whether the decree will apply to swimming pools and gymnasiums.

Considering that South Korea ranks as one of the most wired or web connected nation in the world, it would be interesting to watch the forces of decentralization “netcitizens” square off with her centralized government.

The trend to regulate everything seem also an offshoot to bubble cycles, where the expanding sphere of political control represent growing signs of desperation by political forces over failed policies. Such also signifies the attempt to divert the public's attention from real problems.

A Video Tale of Two Koreas

Economic Freedom defines the difference (hat tip Art Carden at the Division of Labor) 

North Korea

  

South Korea