"The Fed is Done:" Asian-Pacific Currencies, Bonds and Stocks Soar!

  

Credit expansion cannot increase the supply of real goods. It merely brings about a rearrangement. It diverts capital investment away from the course prescribed by the state of economic wealth and market conditions. It causes production to pursue paths which it would not follow unless the economy were to acquire an increase in material goods. As a result, the upswing lacks a solid base. It is not real prosperity. It is illusory prosperity. It did not develop from an increase in economic wealth. Rather, it arose because the credit expansion created the illusion of such an increase. Sooner or later it must become apparent that this economic situation is built on sand—Ludwig von Mises 

 

In this issue 

"The Fed is Done:" Asian-Pacific Currencies, Bonds and Stocks Soar! 

I. "The Fed is Done" Spurred a Revival of a Global Asset Mania 

II. The Plunge in the US Dollar Powered Asian Currencies and the Philippine Peso 

III. Global Risk ON: Asian Bonds Rallied, But Philippine Treasury Yields Increased  

IV. Global Stock Market Mania Spills Over to Asia-Pacific 

V. The Philippine PSEi 30’s Tepid Gains 

VI. Manic Markets Can Only Disguise Risk  

 

"The Fed is Done:" Asian-Pacific Currencies, Bonds and Stocks Soar! 

 

Sensing the comeback of the easy money regime, rampaging bulls powered a meltup in global and Asian currencies, bonds, and stocks. 

I. "The Fed is Done" Spurred a Revival of a Global Asset Mania 

The Fed is 'done,' a Bloomberg email headline noted. 

 

The Fed’s pause absent its hawkish undertones, a supply shift in US Treasuries towards T-bills, and a disappointing payroll report, among other unimpressive economic data, spurred this week's remarkable upside volatility in the US and global equity markets.   

 

Figure 1  

The S&P 500 vaulted 5.85% this week for its best showing since November 2022.   Simultaneously, the USD dollar index (DXY) plunged 1.47% while the 10-year UST yield also dived by 5.54%. (Figure 1) 

 

Or, interpreted as a crucial shift into an easing of financial conditions, US capital markets roared.    

 

The week's precipitate boom incited a massive squeeze of shorts, prompted the closures of hedged positions, and revved the trend-following momentum (FOMO). 

 

It also reveals the heft, breadth, and dominance of the US dollar standard system, projected by expectations of Fed policies transmitted into market actions, responses by global central banks, the eurodollar system and the depth of global financialization, which altogether manifests the mounting fragility from a system anchored on escalating leverage from the socialization of financial markets via central bank policies.  

 

Why, then, has the global financial community been fixated or obsessed with the Fed's policies?  

 

Figure 2 

 

And why have many global central banks been on a rate-cutting spree ahead of the FED?   Have they "defeated" inflation?  Or have their economies been in trouble? See my tweet above. (Figure 2, upper window) 

 

Though the latest numbers of central banks slashing rates are in the non-crisis range experienced in 2013-15 or still way below the spikes of the Great Financial Crisis (2008-2009) and the Pandemic recession (2020-2021), one cannot discount further rate cuts since easy money policies are the only mechanism that contemporary central bankers use to address economic downturns and financial stresses.  

 

Also, the last decade or so can't be a relevant template because it operated on a backdrop of disinflation. 

 

II. The Plunge in the US Dollar Powered Asian Currencies and the Philippine Peso 

  

As proof and in validation of our thesis that the latest BSP rate hike was about the Philippine peso, the Bank for International Settlement recently published the tools of Asian central banks. (Figure 2, graph) 

 

Facing the dual challenges of tight global financial conditions and high inflation since 2022, most Asian EMEs have raised policy rates, but more modestly than in other regions. They have also relied more on a variety of complementary policy tools (eg FX intervention and bond market intervention (BIS, November 2023) 

 

Figure 3 

 

The easing wave hit the global financial sphere; the best-performing currencies in Asia-Pacific included the Philippine peso.  (Figure 3, topmost chart)

 

Even with just two trading sessions in a holiday abbreviated week, the spread abruptly and sharply widened from the serendipitous plunge in the 10-year UST yield in the face of a jump in domestic counterpart.  (Figure 3 middle window)

 

The Philippine peso had its 5th best week since 2020 as the USDPHP plummeted (-1.5%).  (Figure 3, lowest graph)

Figure 4 

 

While the Australian and New Zealand dollar rocketed by 2.8% and 3.2%, the cliff dive of the DXY resonated not only with the USDPHP but also with USDTHB (Thai baht).  (Figure 4, upper and lower windows)

 

In any case, the week's drastic moves have yet to become decisive.  Or, the mid-term trends remain intact. 

 

Nonetheless, momentum and Friday's added decline of the DXY and 10-year US Treasury yields point to a breach below the USDPHP 56 level.  

 

One week doesn't a trend make.  Importantly, domestic fundamentals should eventually reassert their force over market impulses. 

 

III. Global Risk ON: Asian Bonds Rallied, But Philippine Treasury Yields Increased

 

Figure 5 

In the meantime, the rally of the 10-year US Treasury (declining yield) reverberated in Asia.  Except for the Philippines and Japan, yields of 10-year sovereign bonds fell.  (Figure 5, topmost pane) 

 

This week's steep volatility has barely altered the yield uptrend in most of the 10-year ASEAN bonds. (Figure 5, middle chart) 

 

In the Philippines, the weekly increases in local Treasuries—primarily on the front through the belly—flattened the curve.  (Figure 5, lowest window left) 

 

Again, as a caveat, two trading days this week translate to possible distortions as many participants may be on holiday. 

 

In addition, the re-emergence of risk-ON sent Asia's credit default swaps CDS tumbling, which implies reduced concerns over the region's credit risks.  (Figure 5, lowest graph, right) 

 

IV. Global Stock Market Mania Spills Over to Asia-Pacific 

Figure 6 

 

The Asian-Pacific region's equity markets also resonated with the sudden boom in the bond markets.   

 

Of the 19 national bellwethers, 17 closed the week higher, with an average return of 1.51%.   

Outside Pakistan, the benefits of the perceived financial easing fell on the laps Developed Asian bourses.  

 

As the IMF and Pakistan negotiated the 2nd tranche of the $3 billion package, its benchmark KSE 100 soared to an all-time high.  

 

And even as the 2nd biggest weekly gainer, New Zealand's NZ50 remained in a downtrend, while Japan's Nikkei 225 drifted on a flag formation. 

 

China's SSEC (+.43%), Indonesia's JKSE (+.44%), and the Philippine PSEi 30 (+.46%) were among the lesser recipients of the easing conditions.  

 

On the other hand, the euphoria eluded the indices of Laos (-2.58%) and Bangladesh (-.13%).  

 

V. The Philippine PSEi 30’s Tepid Gains 

 

At the PSE, the breadth was slightly positive for the broad market (200 advancers versus 144 decliners) and the main index, the PSEi 30 (18-10 and 2 unchanged). 

 

Mainboard volume jumped 24.9% (average daily) from a week ago to Php 3.59 billion.   Yet despite its increase, it has been a long-term downtrend—a reflection of the sordid state of decadent savings.  

 

The coming week should be data-heavy as authorities announce October's statistical inflation (CPI) and the national account (GDP) for the 3Q.  

 

VI. Manic Markets Can Only Disguise Risk  

 

All that said, the easing of financial conditions may goose up the global capital markets for a while. Seasonal factors may contribute to it.    

 

But a capital markets boom defeats the Fed and central bankers' goal of arresting inflation because this would result in the opposite—combust demand in the face of deglobalization and malinvestments.  

 

If markets are expecting "bad news" (slowing or recessionary economy) to transform into good news (asset boom), this could mean a "watch out below" moment. 

 

The world seems to operate in two dimensions (Duoverse).  The first thrives on a blissful oblivion (a bubble) unfazed by reality.  Or, as the preeminent statistician, author, and philosopher Nassim Taleb described, "denigration of history," where "gamblers, investors, and decision-makers feel that the sorts of things that happen to others would not necessarily happen to them." (Taleb, 2001)

 

This week's mania rekindled the hope of a credit-driven asset bubble from the crowd desperate for inflationism. 

 

The next is ground reality: mounting socio-economic strains partly vented as bellicose geopolitical relationships and its feedback mechanism on the back of unprecedented credit-financed malinvestments. 

  

Manic markets can only disguise risk but not avoid or eliminate it. It would only exacerbate financial and economic maladjustments.   

 

More than ever, risks from existing and developing imbalances should reveal themselves in the fullness of time.  

 

 

_____ 

References: 

Prudent Investor, BSP’s Off-Cycle/Emergency Hike was about Protecting Deficit Spending via the Philippine Peso October 29, 2023 

 

Pietro Patelli, Jimmy Shek and Ilhyock Shim, Lessons from recent experiences on exchange rates, capital flows and financial conditions in EMEs BIS Bulletin November 2, 2023 Bank for International Settlements 

 

Nassim Nicholas Taleb Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets, Random House Paper Back, p.26  

 

The Historic Gold and Bond Bull-Market Tango

Under the Gold Standard, or any other metallic standard, the value of money is not really derived from gold. The fact is, that the necessity of redeeming the money they issue in gold, places upon the issuers a discipline which forces them to control the quantity of money in an appropriate manner; I think it is quite as legitimate to say that under a gold standard it is the demand of gold for monetary purposes which determines that value of gold, as the common belief that the value which gold has in other uses determines the value of money. The gold standard is the only method we have yet found to place a discipline on government, and government will behave reasonably only if it is forced to do so--Friedrich A. Hayek 

The Historic Gold and Bond Bull-Market Tango 

Remember my outlook on Gold last February? 

What you are about to see is a defining monumental process in financial history!  

Lo and Behold, Gold’s phenomenal rise against central banking’s Fiat Money standard! 

Aside from all other (fiat) currencies, gold prices broke to record highs this week against the last holdover, the USD.  

Oh, Gold!!!! February 23, 2020  

 

From the US perspective, record USD gold prices have been attained as USTs hit record low yields amidst a flattening curve. Furthermore, gold prices have surged along with a resurgent buildup of global negative-yielding bonds, even as personal savings rate hit record highs.  

There are those who want to excoriate Nobel Laureate Milton Friedman for saying that inflation was everywhere and always a monetary phenomenon. But he also proposed the Permanent Income Hypothesis. The Permanent Income Hypothesis, according to the Wikipedia, supposes that a person's consumption at a point in time is determined not just by their current income but also by their expected income in future years—their "permanent income". In its simplest form, the hypothesis states that changes in permanent income, rather than changes in temporary income, are what drive the changes in a consumer's consumption patterns. Its predictions of consumption smoothing, where people spread out transitory changes in income over time, depart from the traditional Keynesian emphasis on the marginal propensity to consume. It has had a profound effect on the study of consumer behavior, and provides an explanation for some of the failures of Keynesian demand management techniques. 

Though the monetary mechanism is necessary for inflation to occur, it is insufficient. Other real factors are material to its existence. 

The surge in personal savings appears to reinforce Friedman’s PIH theory.   

The deflationary impact of a recession must be remedied by an increase in savings.  

Wrote the dean of the Austrian school Murray N. Rothbard*,  

Furthermore, deflation will hasten adjustment in yet another way: for the accounting error of inflation is here reversed, and businessmen will think their losses are more, and profits less, than they really are. Hence, they will save more than they would have with correct accounting, and the increased saving will speed adjustment by supplying some of the needed deficiency of savings. 

*C. Secondary Developments of the Business Cycle; Man, Economy, and State, with Power and Market 

Even in the Philippines, the same process is in motion. This excerpt showcases how businesses are likely to react to the disruptions caused by work stoppage policies to contain the virus. 

From Philstar (August 2): Enterprises hit by the pandemic may have to pause operations temporarily once their cash flow turns negative and consider other opportunities in agriculture and digital space, Presidential Adviser on Entrepreneurship and Go Negosyo founder Joey Concepcion said. “My advice to many of our MSMEs (micro, small and medium enterprises) and I always share this with them: You have to have a plan. You have to remain cash flow positive and if you turn cash flow negative, at a certain point in time, don’t wait until it depletes your entire working capital or even your family’s savings.” “Close the business for the time being because it’s not going to be worth wasting all your family’s savings and it will create more problems for you. That’s my advice to many of our entrepreneurs,” he said in an interview on the The Chiefs aired on One News.” This counsel goes against the mainstream ivory tower based ludicrous prescription that one should take advantage of low rates and borrow to spend. 

Furthermore, based on the analysis of sectoral balances, fiscal deficit equates to net private saving or private sector surplus. So the financing of the US record deficit would translate to massive increases in domestic and or foreign private savings. 

That buildup of savings appears to be consistent with the recent spike in deficits. 

However, the US isn’t the only nation experiencing unprecedented deficits. Most of the world have ramped up public spending such that McKinsey and the IMF expect the global deficit to reach a historic $11 trillion in 2020! That’s about 12% of the $90 trillion global GDP. 

So if sopping up of savings wouldn’t be sufficient, global central banks are likely to be filling in the vacuum through debt monetization. Global debt hit a record of $258 trillion or 331% of the Global GDP in the 1Q. But debt issuance picked up speed in the 2Q, according to the Reuters, "Overall gross debt issuance hit an “eye-watering” record of $12.5 trillion in the second quarter, compared with a quarterly average of $5.5 trillion in 2019, the IIF said. It noted that 60% of those issues came from governments". 

Nevertheless, the current amount of money printing may be inadequate to offset structural deflationary forces embedded in the system, such as excessive debt, overcapacity in several significant sectors, and zombie financing, as well as, recent policies used to constrict the spread of the pandemic.   

For instance, even after the $2.2 trillion bailout package called the Cares Act and the $3 trillion expansion of the Federal Reserve’s assets, the US GDP suffered a 9.5% YoY (32.9% quarter annualized)! But their stock markets rocketed instead. 

For a broader purview of the economic damage caused by recent policies to contain Covid-19:  Singapore suffered a 41.2% contraction quarter on quarter and 12.6% year on year. Hong Kong shrank by 9% YoY. The Euro-zone area declined by 12.1% YoY while the US suffered a 9.5% YoY (32.9% quarter annualized) even after the $2.2 trillion Cares Act and the $3 trillion expansion of the Federal Reserve’s assets. China escaped a recession by posting a positive 3.2%. 

As an aside, the Philippines will be reporting its 2Q GDP on August 6th. Based on the PSA’s data on Gross Regional Domestic Product, the NCR and CALABARZON area contributes about 52% of the total statistical economy (2018).  Along with the rest of Luzon, during the ECQ or MECQ period, economic activities were mostly suspended within these areas.  And strict quarantine policies were also implemented in parts of Visaya and the Mindanao region.  If only 30% of the capacity of the CALABARZON and NCR had been in operations in 2Q, not counting other parts of the nation, how much loss of output will these translate to?    

Lastly, inflation is not set on the stone by Federal Reserve asset purchases or QE as exhibited by the immediate post World War II era. Though monetary actions matter, again, many other factors will determine inflation’s appearance.   

 

As the Eurodollar wiz Alhambra Partner’s Jeffrey Snider wrote of the Fed’s inflationary panic episodes post-World War II:  

Like the 1947-48 bond buying episode (the Fed’s inflation panic), we’re supposed to believe that the central bank played the pivotal role in keeping the financial situation orderly, trading off that priority by risking an inflationary breakout. Bullshit. That’s the myth that has been conjured, hardly in keeping with the reality of the situation. 

Sure, the Fed monetized the bills during WWII, but so what? The depressionary conditions rampant throughout the markets and economy led the private system to easily monetize everything else, the vast majority. Even the Fed’s inflation panic in bond buying was a tiny drop in the bucket. 

Yields said so. 

Furthermore, record money supply’s transmission into street inflation represents a time-consuming complex process that will have to confront opposing forces that may offset its impact. And there will be action-reaction feedback loops that contribute to the process.   For instance, if money creation adds to the money supply, debt defaults subtract to it. 

That is, should global central banks succeed in the re-combusting of inflation, this would only happen when inflationary monetary forces overwhelm deflationary structures, which would take time. 

As I concluded last February, 

Whether street inflation surges or not, in reaction to the massive supply-side disruptions from a crucible of real adverse forces in the face of central bank actions, the escalating uncharted experiments on monetary inflation have pointed to the magnification of uncertainty on a global scale. 

The bottom line: Gold's uprising against central banking fiat currencies warn that the world is in the transition of entering the eye of the financial-economic hurricane!