Phisix-ASEAN Market Volatility: Politically Induced Boom Bust Cycles

It’s hard enough for politicians to face the music, to dispense bad news, to make hard choices, allocate pain to constituencies whether it’s spending cut or tax increase. But when the Fed destroys the bond market, which is the benchmark for the whole capital market, and tells the Congress that you can borrow money for two years at eighteen basis points, which is -- as far as Washington’s concerned -- that’s a rounding error. It’s the same as free. When you’re giving that kind of signal, then there is no incentive, there’s no motivation for people to walk the plank and face down this monster of a fiscal deficit and imbalance that we have. Washington thinks you can kick the can down the road, the debt is more or less free, and we’ll get around to solving the problem. But today, let’s not make any tough choices. That’s where we are. - David Stockman

It’s the Boom Bust Cycle, Stupid

Why would global markets fall in sync in September 22^nd?

It would appear an idiotic idea to suggest that most people woke up on the wrong side of the bed and thus abruptly decided to dump equity holdings en masse.

It would also seem myopic to suggest that this has been a byproduct of liquidity trap[1], where monetary stimulus—low interest rates and an increase in money supply—had been the cause of this.

The chart above of the ASEAN markets has been emblematic of what I have been repeatedly saying long ago—the message of which has been encapsulated from my earlier remarks[2] during the bear market embers of November 2008, (bold highlights original)

The other important matter is that of the understanding of the mutually reinforcing dynamics of inflation and deflation. Deflation and inflation is like assessing the virtues of right and wrong- an ex-post measure of a previous action taken. An action and an attendant reaction. Yet, you can’t have deflation when there have been no preceding inflation. At present times, the reason government has been massively inflating is because they have been attempting to combat perceived threats of equally intense debt deflation…

Thus, reading political tea leaves seem likely a better gauge in determining how to invest in the stock markets.

Since 2009, ASEAN markets had climbed on the back of the intensive inflationism employed by global central banks mostly led by the US Federal Reserve, through its zero bound rates and asset purchases or Quantitative Easing (see black arrow).

If this has been about a global liquidity trap then obviously there would have been no antecedent boom in ASEAN or global market equities during the stated period (2009-2010).

Yet during the past quarter where the Eurozone debt crisis has escalated, exacerbated by visible signs of an economic slowdown in the US and parts of the global economy, global financial markets has been strained.

Yet financial market expectations, whom have been deeply addicted towards bailout policies, have increasingly embedded expectations of another US Federal Reserve rescue.

Such expectation had not been realized.

The Liquidity Trap Canard

Before proceeding, it is important to point out that despite the current financial market turmoil, the Eurozone has not been suffering from ‘deflation’ as a result of lack of ‘aggregate demand’.

On the contrary, the EU has exhibited symptoms of stagflation[3].

In the US, aside from exploding money supply, consumer and business loans have been materially improving.

5 year chart of Business Loans from St. Louis Federal Reserve

5 year chart of Consumer Loans from St. Louis Federal Reserve

Both charts depict that the current problem or market meltdown hasn’t been about liquidity traps.

Importantly consumer spending in the US has remained robust.

To quote Angel Martin [4]

real personal consumption expenditures have recovered from pre-recession levels. This recovery can be clearly seen in this graph, which shows quarterly data from the first quarter of 2006 to the second quarter of 2011.

So the recent downdraft seen in the financial markets has NOT been about liquidity traps, which has been fallaciously and deceptively peddled by some.

Politically Induced Monetary Paralysis

So what has been the market ruckus all about?

In a September speech prior to the Federal Open Meeting Committee[5] (FOMC) meeting, which decides on the setting of monetary policy, Federal Reserve chief Ben Bernanke hinted that he would consider the lengthening the duration of bond purchases and possibly include further Quantitative Easing as part of the measures to further ease credit conditions[6].

Apparently going into the FOMC meeting on September 22^nd, opponents of Bernanke’s asset purchasing program mounted a publicity assault which included several Republican legislators[7], and most importantly, even Mr. Bernanke’s predecessor Mr. Paul Volker at the New York Times[8].

Even the outcome of the FOMC meeting, where Mr. Bernanke’s telegraphed policy of manipulating the yield curve via “Operation Twist” had been formalized or announced, the decision arrived at had not been unanimous and reflected internal political divisions.

Except for the inattentive or those blinded by bias, it has been obvious that only half of what had been impliedly promised by the Mr. Bernanke became a reality.

The net result has been a global financial market jilted by Mr. Bernanke[9].

Lately, even Federal Reserve of the Bank of Dallas President Richard Fisher acknowledged that their institution has been under siege “from both ends of the political spectrum”[10].

Such political impasse is not only seen in the US Federal Reserve, but also over fiscal policies in Washington, as well as, the schisms over prospective measures required to deal with debt crisis in the Eurozone. A good example has been the rebuff US Treasury Secretary Tim Geithner received from the German Finance Minister[11].

This has been coined by some as ‘political paralysis’ which continues to plague the markets[12].

As proof of politically driven markets, this week’s furious rally in global markets has been bolstered by renewed expectations of bailouts, as the German parliament overwhelmingly voted to beef up their contributions to the European Financial Stability Facility bailout fund. There are still 6 of the 17 euro zone countries[13] whom will need to pass the agreement reached in July 21^st.

Rumors have also floated that IMF might expand her exposure towards Euro’s bailout to a whopping tune of $3.5 trillion[14], which means the world, including the Philippines, will be part of the rescue team to uphold and preserve the privileged status of Euro and US bankers as well as the Euro and US political class.

Yet all these seem to have helped market sentiment and partly reversed earlier losses.

The point of all of the above is to exhibit in essence, how global financial markets have been substantially dependent on policy steroids. In other words, markets have been mainly driven by politics than by economic forces or that the current state of financial markets has been highly politicized and whose price signals has been vastly distorted.

And most importantly, the latest financial market meltdown represents as convulsions over failed embedded expectations from the apparent withholding of the expansion of rescue programs from which the financial markets have been operating on.

To analogize, today’s jittery volatile markets are manifestations of what is usually called as ‘withdrawal syndromes’ or symptoms of distress or discomfort from a discontinuation of a frequented or regularized activity.

In addition, financial markets appear to be blasé on merely promises, and seem to be craving for concrete actions accompanied by “big package approach[15]” from global policymakers. In short, policymakers will have to positively surprise the markets with even larger dosages of bailouts.

Non-Recession Bear Markets

I would like to further point out that it is not a necessary condition where recessions presage bear markets.

While some global equity indices have broken into bear market territory[16], the US and ASEAN markets have not yet reached the 20% loss threshold levels enough to be classified as bear markets.

Bear markets occur mainly because of political actions that creates boom bust conditions. This has been the case of China and Bangladesh[17].

The US has also experienced TWO non-recession bear markets.

The first instance was in 1962 which was known as the Kennedy Slide[18] where the S&P fell 22.5%.

Ironically the Kennedy Slide coincided with the failed original experiment of Operation Twist in 1961, as Ben S. Bernanke, Vincent R. Reinhart, and Brian P. Sack wrote in a 2004 paper[19],

Operation Twist does not seem to provide strong evidence in either direction as to the possible effects of changes in the composition of the central bank’s balance sheet.

Except that the authors thought that the limits to the size had been responsible for this policy inadequacy, and Ben Bernanke today is conducting this experiment in a very large scale.

The Kennedy Slide’s boom phase appears to be triggered by the dramatic lowering of interest rates following the recession of 1960-61.

The bear market turned out to be short lived as the S & P 500 had fully recovered in a about a year later.

The second non-recession bear market is the notorious Black Monday Crash of October 1987.

The expansionary policies of the Plaza Accord[20] which represented coordinated moves by major developed economies to depreciate the US dollar, fuelled a boom bust cycle which eventually paved way for the lurid global one day crash.

As the great Murray N. Rothbard wrote[21],

To put it simply: the reason for the crash was the credit boom generated by the double-digit monetary expansion engineered by the Fed in the last several years. For a few years, as always happens in Phase I of an inflation, prices went up less than the monetary inflation. This, the typical euphoric phase of inflation, was the "Reagan miracle" of cheap and abundant money, accompanied by moderate price increases.

By 1986, the main factors that had offset the monetary inflation and kept prices relatively low (the unusually high dollar and the OPEC collapse) had worked their way through the price system and disappeared. The next inevitable step was the return and acceleration of price inflation; inflation rose from about 1% in 1986 to about 5 % in 1987.

As a result, with the market sensitive to and expecting eventual reacceleration of inflation, interest rates began to rise sharply in 1987. Once interest rates rose (which had little or nothing to do with the budget deficit), a stock market crash was inevitable. The previous stock market boom had been built on the shaky foundation of the low interest rates from 1982 on.

The crash had been a worldwide phenomenon according to the Wikipedia.org[22]

By the end of October, stock markets in Hong Kong had fallen 45.5%, Australia 41.8%, Spain 31%, the United Kingdom 26.45%, the United States 22.68%, and Canada 22.5%. New Zealand's market was hit especially hard, falling about 60% from its 1987 peak, and taking several years to recover. (The terms Black Monday and Black Tuesday are also applied to October 28 and 29, 1929, which occurred after Black Thursday on October 24, which started the Stock Market Crash of 1929. In Australia and New Zealand the 1987 crash is also referred to as Black Tuesday because of the timezone difference.) The Black Monday decline was the largest one-day percentage decline in the Dow Jones. (Saturday, December 12, 1914, is sometimes erroneously cited as the largest one-day percentage decline of the DJIA. In reality, the ostensible decline of 24.39% was created retroactively by a redefinition of the DJIA in 1916.)

Yet many experts had been misled by the false signal from the flash crash to predict a recession, again from the same Wikipedia article,

Following the stock market crash, a group of 33 eminent economists from various nations met in Washington, D.C. in December 1987, and collectively predicted that “the next few years could be the most troubled since the 1930s”. However, the DJIA was positive for the 1987 calendar year. It opened on January 2, 1987, at 1,897 points and would close on December 31, 1987, at 1,939 points. The DJIA did not regain its August 25, 1987 closing high of 2,722 points until almost two years later.

And in typical fashion, central banks intuitively reacted to crash by pumping mass amounts of liquidity into the system[23].

It took 2 years for the S&P to return to its pre-crash level.

The non-recession bear markets reveal that in the case of the US, such an occurrence would likely be shallow and the recovery could be swift.

But it would different story in China as the Chinese government continues to battle with the unintended effects of their policies which has spilled over to the real estate or property markets. Apparently, China’s tightening policy drove money away from the stock market, which continues to drift near at September 2009 lows, but shifted them into the real estate sector.

In short, like the crisis afflicted West, the current depressed state of China’s stock market signifies as an extension of the bubble bust saga which crested in October 2007, a year ahead of the Lehman episode. China’s cycle remains unresolved.

Should the US equity markets suffer from a technical bear market arising from the current stalemate in Federal Reserve policies, but for as long as a recession won’t transpire from the current market distress, then the downside may be mitigated.

So far, the risk for a US recession has not been that strong and convincing as shown by the above recovery in lending.

Conclusion: Navigating Turbulent Waters Prudently

And as I concluded two weeks ago[24],

I would certainly watch the US Federal Reserve’s announcement and the ensuing market response.

If team Bernake will commence on a third series of QE (dependent on the size) or a cut in the interest rate on excess reserves (IOER), I would be aggressively bullish with the equity markets, not because of conventional fundamentals, but because massive doses of money injections will have to flow somewhere. Equity markets—particulary in Asia and the commodity markets will likely be major beneficiaries.

As a caveat, with markets being sustained by policy steroids, expect sharp volatilities in both directions.

The point of the above was that my expectations had conditionally been aligned to the clues presented by Ben Bernanke of putting into action further bailouts which apparently did not occur.

And since Mr. Ben Bernanke appears to be politically constrained to institute his preferred policies, it is my impression that he would be holding the financial markets hostage until political opposition to his policies would diminish that should pave way for QE3.0. This means that the balance of risks, in my view, have now been tilted towards the downside unless proven otherwise.

Remember, it has been a dogma of his that the elixir to US economy emanates from asset value determined ‘wealth effect’ spending via the transmission mechanism which he calls the Financial Accelerator[25]

To quote the BCA Research[26],

But until QE3 is credibly articulated by Bernanke, there could be more downside for risky assets and further upside for the dollar.

And converse to my abovestated condition or premises, and because I practice what I preach, I materially decreased exposure in the local markets, as I await further guidance from the actions of policymakers.

Although I still maintain a bullish bias, in order to play safe, I would presume a worst case scenario—current global bear markets are signifying a recession—as the dominant forces in operation.

It’s easy to falsify the worst case scenario with incoming policy actions, data and unfolding market events.

Alternatively, this means that for as long as a non-recession scenario becomes evident then it would be easy to position incrementally, hopefully with limited downside risks.

In other words, for as long as there remains no clarity in the policy stance, I see heightened uncertainty as governing the markets. Thus I would need to see the blanc de l'oeil or the French idiom for seeing ‘the white of their eyes’ before taking my shots.

Bottom line: In the understanding that incumbent markets have been driven by politics, reading political tea leaves or the causal realist approach will remain as my principal fundamental analytical methodology in ascertaining my degree of market level risk-reward exposure.

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[1] Wikipedia.org Liquidity trap

[2] See Stock Market Investing: Will Reading Political Tea Leaves Be A Better Gauge?, November 30, 2008

[3] See Stagflation, NOT DEFLATION, in the Eurozone, October 1, 2011

[4] Martin Angel The Stagnant U.S. Economy: A Graphical Complement to Higgs’s Contributions, Independent.org, September 23, 2011

[5] US Federal Reserve Federal Open Market Committee

[6] See US Mulls ‘official’ QE 3.0, Operation Twist AND Fiscal Stimulus, September 9, 2011

[7] Yahoo News Republican lawmakers warn Federal Reserve against action on economy, September 21, 2011

[8] See Paul Volker Swings at Ben Bernanke on Inflationism, September 20, 2011

[9] See Bernanke Jilts Markets on Steroids, Suffers Violent Withdrawal Symptoms, September 22, 2011

[10] Bloomberg.com Fisher Says Central Bank Is Under Attack From Ron Paul, Barney Frank, September 28, 2011

[11] See German Minister Calls Tim Geithner’s Bailout Plan ‘Stupid’, September 28, 2011

[12] New York Times, Stocks Decline a Day After Fed Sets Latest Stimulus Measure, September 23, 2011

[13] New York Times, Germany Approves Bailout Expansion, Leaving Slovakia as Main Hurdle, September 29, 2011

[14] See Will IMF’s bailout of Euro Reach $ 3.5 trillion? September 30, 2011

[15] Johnson Simon What Would It Take to Save Europe?, New York Times September 29, 2011

[16] Bloomberg.com Global Stocks Drop 20% Into Bear Market as Debt Crisis Outweighs Profits, September 23, 2011

[17] See Can Bear Markets happen outside a Recession? China’s Shanghai and Bangladesh’s Dhaka Indices October 1, 2011

[18] Wikipedia.org Kennedy Slide of 1962

[19]Bernanke Ben S., Reinhart Vincent R., and Sack Brian P. Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment, 2004 US Federal Reserve

[20] Wikipedia.org Plaza Accord

[21] Rothbard, Murray N. Nine Myths About The Crash, Making Economic Sense Mises.org

[22] Wikipedia.org Black Monday (1987)

[23] Lyons Gerard, Discovering if we learnt the lessons of Black Monday, thetimesonline.co.uk, October 19, 2009

[24] See Definitely Not a Reprise of 2008, Phisix-ASEAN Equities Still in Consolidation, September 18, 2011

[25] Bernanke Ben S. The Financial Accelerator and the Credit Channel, June 15, 2007 US Federal Reserve

[26] BCA Research U.S. Dollar: Waiting For More Policy Action, September 27, 2011

Ben Bernanke Wants You to Beg For More Stimulus

From Marketwatch.com (bold emphasis mine)

The nation's weak labor market was "a national crisis" that required attention from the White House and Congress, Federal Reserve Chairman Ben Bernanke said Wednesday. "We've had close to 10% unemployment now for a number of years, and of the people who are unemployed, about 45% have been unemployed for six months or more. This is unheard of," Bernanke said in a question-and-answer session following a speech in Cleveland. He called for policies "that could help them find work, train for work and retain their skills." Bernanke also urged policy makers to consider "strong housing policies to help the housing market recover." Better housing policies would "clearly be very useful," and would allow the low mortgage rates stemming from easy Fed policy to have more effect and help the economy recover.

Ben Bernanke, as well as the US government, has been applying ‘strong policies’ even prior to this crisis which has essentially led to the current bubble bust conditions… through cheap credit, tax policies which skewed financing towards borrowing than equity, administrative policies via mortgage subsidies which encouraged speculation and bank capital regulation which rewarded securitization that spawned the shadow banking system

Additionally, the policy response to the current crisis has been for the Fed to buy $600 billion worth of mortgage securities in QE 1.0

The current Operation Twist has also partly been designed for this. Yet this innovative measure, will likely be another futile exercise, and at worst, with possible unintended effects.

Bloomberg’s chart of the day commentary,

The Federal Reserve’s effort to reduce borrowing costs is unlikely to help the housing market enough to bolster the economy, according to Andrew Milligan, Standard Life Investments Ltd.’s head of global strategy.

“Mortgage refinancing remains little different” from last year even though the Fed’s plan to buy longer-term debt and sell shorter-term securities sent rates on home loans to record lows, Milligan wrote two days ago in a report.

The CHART OF THE DAY compares the Mortgage Bankers Association Refinancing Index with the average rate on 30-year refinancings, as compiled by Bankrate.com. The index’s reading for the week ended Sept. 16 was about the same as last November, while the 30-year rate dropped to 4.10 percent this month, the lowest in eight years of data and down from last year’s 4.75 percent average.

Fannie Mae and Freddie Mac are doing too little to aid refinancings, according to Edinburgh-based Milligan. The mortgage-finance firms have operated under U.S. conservatorship for the past three years after loan defaults pushed them close to collapse. The lack of support is among “structural impediments to the housing market” that will limit the effectiveness of the Fed’s so-called Operation Twist, he wrote.

It’s not really about doing “too little” but rather after having done soooo sooo much with hardly any impact means that these policies have not met their targets (policy failure) and are not neutral too.

On the contrary, these policies may have lasting negative consequences.

As Professor Steve Horwitz observes (bold emphasis)

if we look at the loanable funds market, we might get a handle on the situation. If this program is designed to increase investment by driving down rates, it's not going to work if that demand for loanable funds curve is highly inelastic. Borrowers are just not going respond to the lower interest rate if they have major concerns about the future…

In other words, we shouldn't be twisting yield curves to increase the quantity of loanable funds demanded, we should be adopting a better policy regime so that the demand for loanable funds increases.

And ‘concerns about the future’ are likely to have been exactly prompted by these political interventions that has only heightened “regime uncertainty” or as per Professor Robert Higgs,

widespread inability to form confident expectations about future private property rights in all of their dimensions

Bottom line: All the measures thrown have only forestalled the necessary adjustments in the marketplace. The market’s function of discoordination and coordination has been obstructed by increasing concerns over future private property rights via various interventionist policies.

And this also reveals how the law of economics (or price controls) can’t be rescinded by political policies. And measures designed to mitigate effects of prior bubble policies, represent as band aid solutions that only defers on the day reckoning. Notice that when political intervention has been withheld, exactly the same set of problems resurfaces.

However for Mr. Bernanke, who seem to have been hobbled by mounting political opposition, appear to be using the markets as leverage. He would have you beg for more short term patches ["a national crisis" that required attention from the White House and Congress] before giving it to you. Fear signifies as the best tool to justify political intervention.

Definitely Not a Reprise of 2008, Phisix-ASEAN Equities Still in Consolidation

Note: I am in a hurry so this week's outlook will be abbreviated.

This year’s top-notch performers among global stock markets[1] (based on year-to-date) accounted for biggest losers in the region this week: I am referring to ASEAN equities.

Correction and NOT a Reversal

ASEAN markets had recently been defying ‘gravity’ but as I noted last week[2] there seems to be signs of tightening correlations.

Over the short term or during past two months, the correlation of Phisix and ASEAN indices with that of distressed global equity markets have evinced formative signs of tightening or reconvergence.

As I have been saying, divergences in market performance may persist for as long as a global recession is not in the horizon.

One must remember that decoupling signifies as an unproven thesis that can only be validated during a full-blown crisis. It’s a theory that I have been sceptical of, considering the concurrent interconnectedness and interdependence of global economies.

So the previous downside volatility of the global financial markets appears to have been carried over during this week, which had adversely affected ASEAN markets.

Yet reports of China-led BRIC (Brazil, Russia and India) proposed rescue[3] of the Eurozone by buying of Euro bonds, and most importantly, the joint or coordinated liquidity infusions by major central banks[4] as the U.S. Federal Reserve, the Bank of England, Bank of Japan, and the Swiss National Bank through foreign currency swap lines or exchanging of an agreed amount of currencies (see the basics here[5]), underpinned a fierce rally in major global equity markets.

We seem to be witnessing another variety of quantitative easing (QE) or money printing measures at work.

Perhaps one unstated objective for the synchronized liquidity injections has been to finance $800 billion derivatives[6], where 40% of which has been accounted for by “equity” options, whose expiration on during last week would have reportedly triggered tremendous pressure on the marketplace. Also such interventions could have been meant to forcibly cover equity ‘shorts’ via the derivatives market which signifies another war against the markets and alternatively represents as policies aimed to bolster equity markets.

As I have repeatedly been pointing out, what I call as the Bernanke’s doctrine[7] has been about inducing a stock market boom that would serve as a wealth effect transmission to the economy.

Furthermore, the violent pendulum gyrations seen in the market breadth[8] of US markets resonates how today’s financial markets have behaving—boom bust cycles.

Essentially, emanating from the embers of the 2008 meltdown, global equity markets have increasingly been steroid dependent which means MORE boom bust cycles ahead.

Again as I projected last week

Friday saw big declines in Asian currencies as the US dollar fiercely rebounded over a broad number of major currencies. This US dollar rally may see an extension this Monday (unless there will be declarations for major actions by US and European policymakers over the weekend).

The unfolding crisis in the Eurozone has been prompting for short term funding predicaments that has led to liquidations across financial markets worldwide, including Asia.

This has been reflected on Asian currencies as well as the Peso.

This terse quote from a Bloomberg article summarizes the week’s action in Asia’s currency markets[9]

Losses for the won, rupee, ringgit and Taiwan dollar were the worst since mid-2010.

As with most of Asia, the Philippine Peso lost a hefty 1.91% over the week.

This Is NOT 2008, Redux

I would disagree to imputations that current environment is about rising risk aversion. Such description would likely apply to financial markets of crisis afflicted economies but not to Asia markets.

Proof?

The Euro debt crisis and fears of another recession has indeed been increasing overall market anxieties around, but for Asia such concern has been muted, relative to 2008.

The above graph of Credit Default Swap prices representing debt default risks of Asian sovereigns from ADB[10] shows that credit concerns in the region subdued.

In addition, net foreign trade in the Philippine Stock Exchange has been inconsequential despite emergent signs of selling pressures so far.

It could be that local investors may seem to have been more ‘traumatized’ (Post Stress Traumatic Disorder) by the last crisis to stampede into US dollars, relative to foreigners.

Moreover, while emerging markets in general have endured equity outflows from the recent volatility, this has partly been offset by inflows to the bond markets[11].

And there is even more evidence that risk environment has been conspicuously nuanced compared to 2008—the continuing lofty levels of prices of gold and other precious metals and even of oil.

Notice that the recent downside actions of the S&P 500 (SPX) has been accompanied by downswings of gold, precious metals (DJGSP) and oil (WTIC), yet the former two has basically risen above the levels from where the declines were triggered.

Furthermore, oil at $87 hardly accounts for a ‘recessionary’ environment.

And there have been some insinuations that bullion banks have been significantly hurt by the recent upsurge in gold prices, such that manipulation of the gold-precious metal markets downwards has been undertaken to ease on the losses of these banks under the camouflage of central bank actions.

As Goldmoney.com Alasdair Macleod writes[12],

In common with dealers and market makers in all markets, bullion traders run short positions in bull markets. The turnover on the bullion markets is massive, and a dealer active on behalf of its customers and its own trading book can make substantial dealing profits. So long as those profits exceed the losses on their short positions, all is well. This is why the greatest threat to the bullion market is not the bull market itself, but prices rising too rapidly.

In the last two months, the market for gold has been particularly strong, erasing trading profits for many bullion dealers. Central bankers see this as the result of financial flows building due to the difficulties in the euro area. The targets for these flows out of the euro are the Swiss franc and gold, so the SNB’s move is designed to take the heat out of both of them.

The whopping $2 billion trading losses racked up by Swiss bank UBS[13] from supposedly unauthorized trade by a ‘rogue’ trader, Kweku Adoboli, has allegedly been due to voluminous exposure in “shorting” silver[14].

All machinations to manipulate the metals market will prove to be a temporary event. We should see metals rally significantly in the light of intensifying interventions (via assorted money printing measures) in the marketplace.

With the team Ben Bernanke meeting this week (September 21^st) for an extended 2 days[15], we should expect Operation Twist, a pioneering measure telegraphed by Mr. Bernanke in his last speech[16], which aims to lower interest rates on the longer duration securities, to be formally in operation.

This could be backed by another formal QE 3.0 or by a significant interest rate cut on excess reserves (IOER) meant to disincentivize banks from parking their excess reserves at the Fed.

And considering that much of the developed world has been already been immersed into various forms of QE, we should expect improvements in global equity markets that should filter over to ASEAN markets.

Again, to repeat, this has NOT been 2008. There are hardly signs of deflationary risks that warrant an increase of cash holdings. In the US, money supply has been rampaging along with improving signs of credit conditions[17]. Elsewhere, we should expect policy directions towards an accommodative stance by keeping current levels of interest rates or perhaps even by lowering policy rates.

Central bank activism essentially differentiates today’s environment from that of 2008.

PSE Still in Consolidation Mode

The local market has indeed been under pressure, but again there have hardly been signs of major deterioration.

True, every sector has been marked by declines this week with the ALL sector suffering the largest loss due to Manulife (-6.02%).

Mining, being overextended, suffered most from last week’s profit taking. Again I view this as a fleeting event.

The Phisix has been rangebound. However, trading indicators seem to suggest of partially oversold conditions (MACD). This implies that a rebound could be in the offing.

And peso volume has been dropping as the Phsix consolidates. This serves as indication of the diminishing strength of sellers.

Market internals, despite last week’s significant profit taking, has not materially deteriorated.

If US markets will continue to rebound, then we should see the current consolidation trend in the Phisix to segue into an ascending trend.

I would certainly watch the US Federal Reserve’s announcement and the ensuing market response.

If team Bernake will commence on a third series of QE (dependent on the size) or a cut in the interest rate on excess reserves (IOER), I would be aggressively bullish with the equity markets, not because of conventional fundamentals, but because massive doses of money injections will have to flow somewhere. Equity markets—particulary in Asia and the commodity markets will likely be major beneficiaries.

As a caveat, with markets being sustained by policy steroids, expect sharp volatilities in both directions.

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[1] See Global Equity Market Performance Update: ASEAN Equity Markets as co-Leaders, September 13, 2011

[2] See Phisix-ASEAN Equities: Staying Afloat Amidst Global Financial Market Hurricane, September 11, 2011

[3] See BRICs Mulls Bailout of the Eurozone September 14, 2011

[4] See Hot: Major Central Banks to Jointly Offer US Dollar Liquidity, September 15, 2011

[5] See How Does Swap Lines Work? Possible Implications to Asia and Emerging Markets, October 30, 2008

[6] Naked trader.com Almost 40% of S&P 500 Options Expire Sept. 16, JPMorgan Says

[7] See US Stock Markets and Animal Spirits Targeted Policies, July 21 2010

[8] See US Equity Markets: Signs of Intensifying Boom Bust Cycles, September 17, 2011

[9] Bloomberg.com Asian Currencies Fell in Week on Concern Europe’s Debt Crisis Will Worsen, September 17, 2011

[10] Asianbondsonline.org Emerging East Asia CDS - Senior 5-year

[11] Wall Street Journal Emerging Market Local Currency Bonds Funds Continue To Draw Money, September 16, 2011

[12] Macleod Alasdair Central banks and the gold price goldmoney.com September 11, 2011

[13] Washington Post, UBS says rogue trader caused $2 billion loss, September 15, 2011

[14] Keiser Max BREAKING: UBS rogue trader was trying to exit a naked silver short…. [UPDATED], maxkeiser.com September 15, 2011

[15] IBTimesFX The Week Ahead September 16, 2011

[16] See US Mulls ‘official’ QE 3.0, Operation Twist AND Fiscal Stimulus, September 9, 2011

[17] See US in a Deflationary Environment, NOT! (In Charts) September 16, 2011

US Mulls ‘official’ QE 3.0, Operation Twist AND Fiscal Stimulus

Again, it’s almost too predictable that the path dependency of political authorities have been to resort to more central bank activism and to apply additional government spending on emergent signs of economic weakness.

In the US, the QE 2.0 has still been in motion despite the official program for its closure last June.

Yet, over the interim there have been modified actions which can be extrapolated to stealth QE 3.0: such as extended zero bound rates until 2013 and the reinvesting of principal payments (whose mix of asset purchases would be altered partly to induce mortgage refinancing).

This news account gives light to the potential course of action by Team Ben Bernanke after his speech last night, from Bloomberg, (bold highlights mine)

Federal Reserve Chairman Ben S. Bernanke said policy makers will discuss the tools they could use to boost the recovery at their next meeting this month and stand ready to use them if necessary.

Policy makers “are prepared to employ these tools as appropriate to promote a stronger economic recovery in the context of price stability,” Bernanke said today in Minneapolis, echoing points from his Aug. 26 remarks in Jackson Hole, Wyoming.

The Fed chief, in a speech to economists, stopped short of signaling what he believes is the central bank’s best option to aid the economy. He said in previous remarks that the Fed’s measures to bolster growth include lengthening the duration of securities in its $1.65 trillion Treasury portfolio and buying more government bonds.

Media calls this portfolio rebalancing towards the lengthening of the duration of securities held as ‘Operation Twist’ which apparently aims to lower long term interest rates in order to induce the marketplace to get exposed into more risk assets. This has been part of Bernanke’s dogma of the wonkish Financial Accelerator where

changes in interest rates engineered by the central bank affect the values of the assets and the cash flows of potential borrowers and thus their creditworthiness, which in turn affects the external finance premium that borrowers face

The constant alterations of monetary policy reveal of how the previous QEs has failed. And such experiment/s will likely be put in place ahead of another official QE. The next FOMC meeting will be on the third week of September.

Of course, Ben Bernanke sees inflation as having little risk for him to have the mettle to toy around with such experimental measures.

From Marketwatch.com

see little indication that the higher rate of inflation experienced so far this year has become ingrained in the economy

The perceived low risk inflation regime has partly been because of the way the bond markets have been structured which many ideologically biased experts use as measure for inflation, and also of the constant manipulations of the commodity markets as part of their signaling channel to manage ‘inflation expectations’. Even gold markets have been subjected to price suppression scheme according to the Wikileaks

And the barrage of QE in the headlines of late, which I read has been part of this communications management tool being employed to condition the public for the next official QE.

Of course, the last act won’t come from the Bernanke’s Federal Reserve, as President Obama has offered to join in by introducing more government spending coupled with temporary tax cuts to please the opposition (Republicans).

This from the Bloomberg,

President Barack Obama called on Congress to pass a jobs plan that would inject $447 billion into the economy through infrastructure spending, subsidies to local governments to stem teacher layoffs, and cutting in half the payroll taxes paid by workers and small-business owners.

The package is heavily geared toward tax cuts, which account for more than half the dollar value of the stimulus, and administration officials said they believe that will have the greatest appeal to Republican members of Congress.

“The question is whether, in the face of an ongoing national crisis, we can stop the political circus and actually do something to help the economy,” Obama told a joint session of Congress tonight, according to a text of the address released by the White House.

A $105 billion infrastructure proposal includes money for school modernization, transportation projects and rehabilitation of vacant properties. Most of the economic impact from the infrastructure spending would be next year though some of it would come in 2013, an administration official said.

“Ultimately, our recovery will be driven not by Washington, but by our businesses and workers,” the president said. “But we can help. We can make a difference.”

The administration estimated that $35 billion it’s seeking in direct aid to state and local governments to stem layoffs of educators and emergency personnel would save the jobs of 280,000 teachers, according to a White House fact sheet.

It has never been the question whether past policies worked. It’s just doing the same thing over and over with practically the same results which represents as plain insanity and the misplaced belief on miracles from centrally planned actions.

Economic reality will eventually unmask the charade of shifting resources from productive activities to non-productive activities that will not only lead to capital consumption but also lead to cronyism, corruption, regime uncertainty, economic and financial fragility and political instability. Obviously Obama's is desperately trying to shore up his re-election odds, whose popularity rating has fallen to new lows.

Nonetheless we will be seeing expanded stimulus from all fronts in the US and the world which means a vastly distorted financial markets. More stimulus on top of the existing ones which means increasing systemic risks from artificial boosters or substance dependency.

This also means traditional metrics in the assessment of the financial marketplace will hardly be effective.