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!

Signs of Coming Tighter Capital Controls: Ban on Cash; Board Game Monopoly Bans Cash

Panic. Desperation.

There has been no clearer signs of panic and desperation by governments to gain greater access of the public’s funding, through, not only of the necessity of Negative Interest rates (NIRP), but most importantly, to prevent any escape from NIRP via the war on cash.

So aside from the crescendoing advocacy by establishment experts to ban cash, they have even initiated the conditioning of the public through cash bans on the popular board game the “Monopoly” 

From the Independent

Monopoly-makers Hasbro have declared war on cheating players everywhere with their latest edition of the game.

Monopoly Ultimate Banking does away with cash entirely.

Instead, players scan cards using a tiny ATM machine.

Monopoly made the move to speed up the game, which is famous for taking several hours if many players are involved.

But it will also prevent cheaters from secretly stashing away fistfuls of notes to spring on other players.

The "tiny ATM" featured in the Ultimate Banking edition of the game is able to scan bar codes on each player's credit card, property cards and chance cards.

To buy a property, players scan their credit card and the property card and the price is deducted from their funds. Players also pay "rent" to one another when they land on a hotel by scanning property and credit cards.

Condition the public first. When popular resistance fades, implement.

Sovereignman’s Simon Black sees such a trend as a dire writing on the wall, Mr Black warns (bold mine)

This is starting to become very concerning.

The momentum to “ban cash”, and in particular high denomination notes like the 500 euro and $100 bills, is seriously picking up steam.

On Monday the European Central Bank President emphatically disclosed that he is strongly considering phasing out the 500 euro note.

Yesterday, former US Treasury Secretary Larry Summers published an op-ed in the Washington Post about getting rid of the $100 bill.

Prominent economists and banks have joined the refrain and called for an end to cash in recent months.

The reasoning is almost always the same: cash is something that only criminals, terrorists, and tax cheats use.

In his op-ed, Summers refers to a new Harvard research paper entitled: “Making it Harder for the Bad Guys: The Case for Eliminating High Denomination Notes”.

That title pretty much sums up the conventional thinking. And the paper goes on to propose abolishing, among others, 500 euro and $100 bills.

The authors claim that “without being able to use high denomination notes, those engaged in illicit activities – the ‘bad guys’ of our title – would face higher costs and greater risks of detection. Eliminating high denomination notes would disrupt their ‘business models’.”

Personally I find this comical.

I can just imagine a bunch of bureaucrats and policy wonks sitting in a room pretending to know anything about criminal activity.

It’s total nonsense. As long as there has been human civilization there has been crime. Crime pre-dates cash. And it will exist long after they attempt to ban it.

Perhaps even more hilarious is that many of these bankrupt governments have become so desperate for economic growth that they now count illegal drug activity and prostitution in their GDP calculations, both of which are typically transacted in cash.

So, ironically, by banning cash these governments will end up reducing their own GDP figures.

What’s really behind this? Why is there such a big movement to ban something that is used for felonious purposes by just a fraction of a percent of the population?

Cash, it turns out, is the Achilles’ Heel of the financial system.

Central banks around the world have kept interest rates at near-zero levels for nearly eight years now.

And despite having created massive bubbles and enabled extraordinary amounts of debt, their policies aren’t working.

Especially in Europe, the hope of stoking economic growth (and even the sickening goal of inflation) has failed.

So naturally, since what they’ve been trying hasn’t worked, their response is to continue trying the same thing… and more of it.

Interest rates across the European continent are now negative.

Japanese interest rates are now negative.

And even in the United States, the Federal Reserve has acknowledged that negative interest rates are being considered.

They have no other choice; raising rates will bankrupt the governments they support and derail any fledgling economic growth.

Look at how low interest rates are in the US– and yet 4th quarter GDP practically ground to a halt. They simply cannot afford to raise rates.

As global economic weakness continues to play out, central banks will have no other option but to take interest rates even further into negative territory.

That said, negative interest rates will be the destruction of the financial system.

Because sooner or later, if banks have to pay negative wholesale interest rates to each other and to the central bank, then eventually they’ll have to pass those negative rates on to their customers.

Many banks have already started doing this, especially on larger depositors.

We’ve seen this in Europe where some banks charge their customers negative interest to save money, and in some extraordinary circumstances, pay other customers to borrow money.

It’s total madness.

There’s a certain point, however, when interest rates become so negative that no rational person would hold money in the banking system.

Eventually people will realize that they’re better off withdrawing their money and holding physical cash.

Sure, cash doesn’t pay any interest. But it doesn’t cost any either.

If you have a $200,000 in your savings account at negative 1%, you’d have to pay the bank $2,000 each year.

Clearly it would make more sense to buy a safe and hold most of that money in cash.

Problem is, the banks don’t have the money.

For starters, there’s literally not enough cash in the entire financial system to pay out more than a fraction of all bank deposits.

More importantly, banks (especially in the US and Europe) are extremely illiquid.

They invest the vast majority of your deposit in illiquid loans or securities of dubious long-term value, whatever the latest stupid investment fad happens to be.

And many banks have been engaging in a substantial balance sheet shift, rotating bonds from what’s called “Available for Sale” to “Hold to Maturity”.

This is an accounting trick used to hide losses in their bond portfolios. But it also means they have less liquidity available to support bank customer withdrawal requests.

The natural side effect of negative interest rates is pushing people to hold money outside of the banking system.

Yet it’s clear that a surge of withdrawal requests would bring down that system.

Banks don’t want that to happen. Governments don’t want that to happen.

But since central banks have no other choice than to continue imposing negative interest rates, the only logical option is to ban cash and force consumers to hold their money within the banking system.

Make no mistake, this is absolutely a form of capital controls. And it’s coming soon to a banking system near you.

From indirect (inflationism) to direct confiscation (wealth tax, bank deposit haircuts, forex and market controls, NIRP and war on cash). 

And such intensifying signs of panic and desperation are indications why the world is headed for a crisis bigger than 2008