In the US, Rising Input Prices are Symptoms of Deepening Malinvestments

The great Austrian economist Ludwig von Mises analogizes on how malinvestment develops. Professor von Mises:

The whole entrepreneurial class is, as it were, in the position of a master builder whose task it is to erect a building out of a limited supply of building materials. If this man overestimates the quantity of the available supply, he drafts a plan for the execution of which the means at his disposal are not sufficient. He oversizes the groundwork and the foundations and only discovers later in the progress of the construction that he lacks the material needed for the completion of the structure. It is obvious that our master builder's fault was not overinvestment, but an inappropriate employment of the means at his disposal.

Such “lack of the material needed for the completion of the structure” represents the developing resource crunch which will be expressed via higher input costs—and higher interest rates.

The New York Times/Associated Press reports:

Rising costs for materials and labor appear to be putting pressure on businesses, according to a quarterly survey by the National Association for Business Economics. During the first quarter, 31 percent of businesses surveyed reported higher material costs, more than double the 15 percent that said costs rose in the previous survey. In addition, 35 percent reported rising wages and salaries at their businesses in the last three months, up from 23 percent in the fourth-quarter survey. Yet those who said they raised their prices in the last three months remained unchanged at 20 percent, according to the survey, which was conducted from March 18 through April 1.

Oh by the way this comes as reports of more closure of retail outlets which the Zero Hedge says represents the “worst year for conventional discretionary spending since the start of the great financial crisis!” The Zero Hedge quotes a study from the Credit Suisse:

Since the start of 2014, retailers have announced the closure of more than 2,400 units, amounting to 22.6 million square feet, more than double the closures at this point in 2013…

Even dollar stores and drug stores, which combined have consistently built out hundreds of stores per year, are beginning to reel back on expansion, with Family Dollar and Walgreens both planning to shutter  underperforming stores.

While retail closures have partly signified changes in consumer preferences in terms of a shift towards online sales and on changes in physical location of retail outlets as previously discussed, a bigger force has been a reduction of disposable income due to deleveraging from previous debt financed consumption spree (chart from St. Louis Fed).

And depressed consumer spending can be seen via the durable goods spending as % of the GDP where spending has collapsed during the last recession as US consumers deleveraged or gave priority to paying down debt. 

So if businesses continues to get squeezed by higher input costs in the face of an unimpressive comeback by consumer still hobbled by debt, then whatever stock market boom we have been seeing will eventually be dealt with harsh reality. 

In Pictures: Starved Global Investors Reaching for Yields

In his latest outlook, Dr. John Hussman writes

The Federal Reserve’s policy of quantitative easing has starved investors of all sources of safe return, provoking them to reach for yield in more speculative assets, including equities, leveraged loans, covenant-lite debt, and other securities. Having stomped on the pedal for years, all of these asset classes are valued at levels that are strenuously elevated from a historical perspective, and as a result, offer strikingly poor prospective returns for long-term investors.

I’d compliment Mr. Hussman’s observation by showing the updated 1^st quarter 2014 charts from the Institute of International Finance—a global trade group or association (cartel?) with over 450 members comprising world leading banks and financial houses, headquartered in 70 countries (Wikipedia)

From the IIF:

Global bond issuance continues with its record breaking streak led by Euro area bonds. While the Eurozone’s banking system remains broken as manifested by contracting banking loans and falling money supply, most of the Eurozone’s asset chasing dynamic have been financed by the rapidly growing bond markets.

Next global high risk mezzanine financing called “payment in kind” loans are at “a striking record highs”! Again a lot of this growth comes from the Eurozone.

Meanwhile another global high risk loan called “leveraged loans” (loans to highly indebted entities) have been running at growth rates at par with 2013. 

Indeed markets, starved for returns have been desperately chasing markets by expanding debt exposure. Yet such exposure has extrapolated to a substantial decline in credit quality

The IIF conveys her worries and noted that 

a rising proportion of corporate issuance has been done  by high-yield issuers, increasingly of lower credit quality such as CCC and rising proportion of corporate issuance has been done by high-yield issuers, increasingly of lower credit quality

Aside from high yield (lower credit rating) loans or what are known as junk bonds, Covenant lite loans are loans with less restrictions on collateral, payment terms and level of income. 

Any impression that emerging markets “reformed” following the latest tremors have been misplaced. While emerging market corporate bond issuance has marginally leveled off, government bond issuance soared to its highest level since 2005, mostly due to Eastern Europe.

In addition, international loan exposure by emerging market corporates led by the banks have materially increased since 2010.

So what we are seeing today has been a confluence of contradictory forces: rising risk asset markets being funded by ballooning debt—whose quality have been in a substantial deterioration—as bond yields suggest rising rates soon.

Such lethal combination inevitably indicates a forthcoming Wile E. Coyote moment.

Quote of the Day: What Easter Means

Freedom is the ability of every person to exercise his own free will, rather than be subject to the will of the government or anyone else. Free will is a characteristic we share in common with God. He created us in His image and likeness. As He is perfectly free, so are we.

When the government takes away our free will, the government steals a gift from God; it violates the natural law; it prevents us from having and utilizing the means to the truth. The moral ability to exercise free will to seek the truth is a natural right that all humans possess, and the government may only morally interfere with the exercise of that right when one affirmatively has given it away by using fraud or force to interfere with the exercise of someone else’s natural rights.

We know from the events 2,000 years ago, which Christians commemorate and celebrate this week, that freedom is the essential means to discover and unite with the truth. And to Christians, the personification, the incarnation, the perfect manifestation of truth is Jesus — who is the Christ, the Son of God and the Son of the Blessed Virgin Mary.

On the first Holy Thursday, Jesus attended a traditional Jewish Passover Seder. Catholics believe that at His last supper, He performed two miracles so that we could stay united to Him. He transformed ordinary bread and wine into His own body, blood, soul and divinity, and He empowered His disciples and their successors to do the same.

On the first Good Friday, the Romans executed Jesus because they were persuaded that by claiming to be the Son of God, He might foment a revolution against them. The revolution He fomented was in the hearts of men and women. The Romans had not heard of a revolution of the heart; nevertheless they feared a revolution that would disrupt their worldly power, and so they condemned Him to death by crucifixion.

Jesus had the freedom to reject this horrific event, but He exercised His freedom so that we might know the truth. The truth He manifested is that His acceptance of the destruction of His body would enable Him to die so that He could rise from the dead. On Easter, three days after He died, that manifestation was complete when He rose from the dead. By doing that, he demonstrated to us that while living we can liberate our souls from the slavery of sin and our free wills from the oppression of the government, and after death we can rise to be with Him.

Easter — which manifests our own immortality — is the linchpin of human existence. With it, life is worth living, no matter its costs or pains. Without it, life is meaningless, no matter its fleeting joys or triumphs. Easter has a meaning that is both incomprehensible and simple. It is incomprehensible that a human being had the freedom to rise from the dead. It is simple because that human being was and is God.

Jesus is the hypostatic union: not half-God and half-man, not just a godly good man, but truly and fully God and at the same time truly and fully man. When the Romans killed Jesus, they killed God. When the dead Jesus rose from His tomb, God rose from the dead.

What does Easter mean? Easter means that there is hope for the dead. If there’s hope for the dead, there’s hope for the living. But, like the colonists who fought the oppression of the king, we the living can only achieve our hopes if we have freedom. And that requires a government that protects freedom, not one that assaults it.

This is from Judge Andrew P. Napolitano at the LewRockwell.com

Happy Easter! (image source)

Quote of the Day: War is a Racket

War is just a racket. A racket is best described, I believe, as something that is not what it seems to the majority of people. Only a small inside group knows what it is about. It is conducted for the benefit of the very few at the expense of the masses.

I believe in adequate defense at the coastline and nothing else. If a nation comes over here to fight, then we'll fight. The trouble with America is that when the dollar only earns 6 percent over here, then it gets restless and goes overseas to get 100 percent. Then the flag follows the dollar and the soldiers follow the flag.

I wouldn't go to war again as I have done to protect some lousy investment of the bankers. There are only two things we should fight for. One is the defense of our homes and the other is the Bill of Rights. War for any other reason is simply a racket.

There isn't a trick in the racketeering bag that the military gang is blind to. It has its "finger men" to point out enemies, its "muscle men" to destroy enemies, its "brain men" to plan war preparations, and a "Big Boss" Super-Nationalistic-Capitalism.

It may seem odd for me, a military man to adopt such a comparison. Truthfulness compels me to. I spent thirty- three years and four months in active military service as a member of this country's most agile military force, the Marine Corps. I served in all commissioned ranks from Second Lieutenant to Major-General. And during that period, I spent most of my time being a high class muscle- man for Big Business, for Wall Street and for the Bankers. In short, I was a racketeer, a gangster for capitalism.

I suspected I was just part of a racket at the time. Now I am sure of it. Like all the members of the military profession, I never had a thought of my own until I left the service. My mental faculties remained in suspended animation while I obeyed the orders of higher-ups. This is typical with everyone in the military service.

I helped make Mexico, especially Tampico, safe for American oil interests in 1914. I helped make Haiti and Cuba a decent place for the National City Bank boys to collect revenues in. I helped in the raping of half a dozen Central American republics for the benefits of Wall Street. The record of racketeering is long. I helped purify Nicaragua for the international banking house of Brown Brothers in 1909-1912 (where have I heard that name before?). I brought light to the Dominican Republic for American sugar interests in 1916. In China I helped to see to it that Standard Oil went its way unmolested.

During those years, I had, as the boys in the back room would say, a swell racket. Looking back on it, I feel that I could have given Al Capone a few hints. The best he could do was to operate his racket in three districts. I operated on three continents.

(bold mine)

This excerpt is from a speech delivered in 1933, by two time medal of honor the late Major General Smedley Butler, USMC. (hat tip Marc Faber/Daily Reckoning). War is a racket has been transcribed by Mr. Butler into a book you can read it here. And you can see a video of his speech here.

Frédéric Bastiat on the Philippine Government’s Massive Infrastructure Spending Program

Today’s headline from one of the major newspapers screams that the Philippine government will undertake a massive infrastructure spending program (worth about Php 113 billion about  US $ 2.55 billion), “to make economic growth inclusive and lift millions out of poverty”

Last weekend I noted that aside from the critical pivot by the BSP in 2009 to reconfigure the direction of the domestic economy from a supposed 'external dependent' economy to a 'domestic demand' based economy via monetary blowing bubble policies and through fiscal expenditure projects (which is this massive spending program), I pointed out how the BSP chief also misstated the context of the great French free market champion Frédéric Bastiat on the latter's message from his work “what is  seen and what is unseen”.

Now I quote Bastiat’s  view of public work spending programs: (bold mine, italics original)

Nothing is more natural than that a nation, after making sure that a great enterprise will profit the community, should have such an enterprise carried out with funds collected from the citizenry. But I lose patience completely, I confess, when I hear alleged in support of such a resolution this economic fallacy: "Besides, it is a way of creating jobs for the workers."

The state opens a road, builds a palace, repairs a street, digs a canal; with these projects it gives jobs to certain workers. That is what is seen. But it deprives certain other laborers of employment. That is what is not seen.

Suppose a road is under construction. A thousand laborers arrive every morning, go home every evening, and receive their wages; that is certain. If the road had not been authorized, if funds for it had not been voted, these good people would have neither found this work nor earned these wages; that again is certain.

But is this all? Taken all together, does not the operation involve something else? At the moment when M. Dupin pronounces the sacramental words: "The Assembly has adopted, ...." do millions of francs descend miraculously on a moonbeam into the coffers of M. Fould and M. Bineau? For the process to be complete, does not the state have to organize the collection of funds as well as their expenditure? Does it not have to get its tax collectors into the country and its taxpayers to make their contribution?

Study the question, then, from its two aspects. In noting what the state is going to do with the millions of francs voted, do not neglect to note also what the taxpayers would have done—and can no longer do—with these same millions. You see, then, that a public enterprise is a coin with two sides. On one, the figure of a busy worker, with this device: What is seen; on the other, an unemployed worker, with this device: What is not seen.

The sophism that I am attacking in this essay is all the more dangerous when applied to public works, since it serves to justify the most foolishly prodigal enterprises. When a railroad or a bridge has real utility, it suffices to rely on this fact in arguing in its favor. But if one cannot do this, what does one do? One has recourse to this mumbo jumbo: "We must create jobs for the workers."

This means that the terraces of the Champ-de-Mars are ordered first to be built up and then to be torn down. The great Napoleon, it is said, thought he was doing philanthropic work when he had ditches dug and then filled in. He also said: "What difference does the result make? All we need is to see wealth spread among the laboring classes."

Let us get to the bottom of things. Money creates an illusion for us. To ask for co-operation, in the form of money, from all the citizens in a common enterprise is, in reality, to ask of them actual physical co-operation, for each one of them procures for himself by his labor the amount he is taxed. Now, if we were to gather together all the citizens and exact their services from them in order to have a piece of work performed that is useful to all, this would be understandable; their recompense would consist in the results of the work itself. But if, after being brought together, they were forced to build roads on which no one would travel, or palaces that no one would live in, all under the pretext of providing work for them, it would seem absurd, and they would certainly be justified in objecting: We will have none of that kind of work. We would rather work for ourselves.

Having the citizens contribute money, and not labor, changes nothing in the general results. But if labor were contributed, the loss would be shared by everyone. Where money is contributed, those whom the state keeps busy escape their share of the loss, while adding much more to that which their compatriots already have to suffer.

There is an article in the Constitution which states:

"Society assists and encourages the development of labor.... through the establishment by the state, the departments, and the municipalities, of appropriate public works to employ idle hands."

As a temporary measure in a time of crisis, during a severe winter, this intervention on the part of the taxpayer could have good effects. It acts in the same way as insurance. It adds nothing to the number of jobs nor to total wages, but it takes labor and wages from ordinary times and doles them out, at a loss it is true, in difficult times.

As a permanent, general, systematic measure, it is nothing but a ruinous hoax, an impossibility, a contradiction, which makes a great show of the little work that it has stimulated, which is what is seen, and conceals the much larger amount of work that it has precluded, which is what is not seen.

From Mr. Bastiat’s point of view, the supposed populist aim to ‘lift of millions out of poverty’ through massive public work projects has been a ‘ruinous hoax’ that has been recycled overtime (Remember Mr. Bastiat lived during the 19th century). And that the only ‘inclusivity of economic growth’ here will be a NET transfer of resources from society to politicians and the cronies through 'foolishly prodigal enterprises', thereby lifting economic benefits again to a select politically privileged and politically connected few. Woe to the taxpayers and to the politically unconnected peso holders.

[As a side note: It's lenten holiday season so I will abbreviate my comment on this.]

Infographics: Taxes Around the World

(hat tip zero hedge)

Source: Online-Accounting-Degrees.net

Possibly one of the reasons for rising food prices in the world can be also be traced to Denmark's bizarre "Cow flatulence tax". 

Anyway, global tax on wages reportedly rose in 2013. The Reuters says that total world taxes on wages rose to 35.9% in 2013 from 35.7% a year earlier based on OECD data. 

You can see the graphic on tax wedge and unemployment rate of the OECD countries by clicking on the link here.

In the US, Food Prices have been Rising FAST

If you talk to members or read articles of the mainstream economic faith, they often imply to you that money printing does NOT lead to inflation. Aside, any discussion about consumer price inflation has mechanically been viewed as strictly a “supply side” issue.

Of course despite their rabid denials, price inflation has been very much present given that central banks around have been jointly blowing bubbles to ensure that bankrupt governments stay afloat.

The mainstream hardly recognizes that first we see monetary inflation expressed via booming asset prices, next we see the same dynamic eventually spillover to consumer inflation.

Since inflation is a political process and represents part of the grand political scheme of financial repression, the effects on the markets and the economy runs in different phases or stages too. Central bank manipulation of money and credit affect specific prices of assets and of goods and services in relative scale and time periods.

We are seeing such phenomenon at work even in the US

Cost of fresh produce are expected to move significantly higher according to a Wall Street Journal report. This supposedly has been  to a “three year drought in California” where the report adds that higher cost of fresh produce will lead to “overall food cost gains are expected to accelerate this year”

The Zero Hedge shows of spiraling prices beef, pork and shrimp. Note these are long term trends. But the recent rate of increases seem to have accelerated.

Another Wall Street Journal chart shows the spreading price inflation in basic commodities

In the US, food accounts for 14.9% of the CPI basket according to Doug Short.

The US Bureau of Labor reported last April 15th of the changes in US CPI stating that the “increases in the shelter and food indexes accounted for most of the seasonal adjusted all items increase. The food index increased 0.4 percent in March, with several major grocery store food groups increasing notably”

In early 2013 I predicted that rising home prices and rents will contribute to higher US CPI. So the US housing bubble is adding to CPI strains.

Finally rising food prices has not just been a US or Philippine phenomenon but a also global one. Again the mainstream blames this on the supply side particularly to weather and to deteriorating events in Ukraine

While this is not to deny that supply have contributed to rising prices, what has been a standard operation procedure for the mainstream has been to deliberately omit or obscure the demand side—which seems to operate in a vacuum—particularly demand that has been influenced by central bank policies 

For instance, as one would note from the FAO chart, dairy prices have been rising prior to the polar vortex or to the escalation of the Ukraine conflict.

The bottom line is that central bank inflationism has been increasingly spilling over to the real economy via rising food prices. And this is being aggravated by supply chain disruptions. This also means incidences of global hunger and poverty will rise. Such also implies of growing risks of a global food crisis.  

And importantly this signals why the era of asset inflation boom is bound to reverse soon as sustained pressures on consumer prices will eventually reflect on interest rates (whether in the US, Philippines or elsewhere).

Asia’s Richest Man Li Ka Shing has been in an asset selling binge in China

Watch what smart money does rather than what they say.

Asia’s richest man has been in an asset selling spree in China. Sovereign Man’s Simon Black explains:

Here’s a guy you want to bet on– Li Ka-Shing.

Li is reportedly the richest person in Asia with a net worth well in excess of $30 billion, much of which he made being a shrewd property investor.

Li Ka-Shing was investing in mainland China back in the early 90s, way back before it became the trendy thing to do. Now, Li wants out of China. All of it.

Since August of last year, he’s dumped billions of dollars worth of his Chinese holdings. The latest is the $928 million sale of the Pacific Place shopping center in Beijing– this deal was inked just days ago.

Once the deal concludes, Li will no longer have any major property investments in mainland China.

This isn’t a person who became wealthy by being flippant and scared. So what does he see that nobody else seems to be paying much attention to?

Simple. China’s credit crunch.

After years of unprecedented monetary expansion that has put the economy in a precarious state, the Chinese government has been desperately trying to reign in credit growth.

The shadow banking system alone is now worth 84% of GDP according to an estimate by JP Morgan. The IMF pegs total private credit at 230% of GDP, jumping by 100% in the last few years.

Historically, growth rates of these proportions have nearly always been followed by severe financial crises. And Chinese leaders are doing their best to engineer a ‘soft landing’.

If they’re successful, the world will only see major drops in global growth, stocks, property, and commodity prices.

If they fail, the spillover could become pandemic.

This isn’t important just for Asian property tycoons like Li Ka-Shing. Even if you don’t know Guangzhou from Hangzhou from Quanzhou, there are implications for the entire world.

Read the rest here

Mr. Li Ka Shing’s last sale concluded last week, from wantchinatimes.com (bold mine)

Despite claims by Asia's richest man that he has not offloaded his mainland investments, Hong Kong multi-billionaire Li Ka-shing has got rid of over 20 billion yuan (US$3.23 billion) in Chinese property holdings since August last year.

The latest is the HK$7.2 billion (US$930 million) sale of Beijing's Pacific Century Place shopping center by Pacific Century Premium Developers, a company headed by son Richard Li. When the sale is completed in August, the company will have no more major investments in the mainland.

This comes amidst more signs of big trouble in the big China.

Officials of a local government have reportedly been scrambling to settle a troubled steel maker’s debt.

From Caixin online:

Officials in a city in northern China have been busy recently sorting out a steelmaker's debt mess that could involve as much as 20 billion yuan, even as the firm's owner avoids attending meetings on the matter, sources close to the situati0n say.

Highsee Iron and Steel Group Co. Ltd., which is based in Yuncheng City's Wenxi County, ceased production on March 18. It has seen a host of creditors including big banks line up to get their money back.

And the fractures from the humungous credit financed property boom has been accelerating or intensifying as vacancy rates have been ballooning even in prime areas. From South China Morning Post: 

According to property firm Jones Lang LaSalle, vacancies in Grade A office buildings in the area's major cities will stay high in the coming years due to weaker-than-expected demand.

While a loan default by a developer in Zhejiang sparked fears of a collapse of the residential property sector, the situation in the office sector appears to be even worse . Residential property developers can at least slash prices to dispose of flats to recover part of their investment. Half-empty buildings, however, are not just white elephants but financial black holes.

Jones Lang LaSalle found that at the end of last year, occupancy rates for Grade A office buildings stood at 58 per cent in Wuxi, Jiangsu, and 30 per cent in the Zhejiang capital, Hangzhou . In other major delta cities, which together make up the most vibrant and developed regional economy on the mainland, occupancy rates also hovered around 30 per cent last year.

In Wuxi, the vacancy rate was expected to stand at 48 per cent in 2016, it said. By the end of that year, the stock of prime office space in the city would nearly triple from last year's amount to 565,000 square metres

And here is what delusions that spawns a boom-bust cycle have been made of: (bold mine)

Over the past decade, delta cities have pulled out all the stops to launch one new town one after another. Located on the suburban fringes of each city, they are designed to accommodate millions of residents and attract more corporate investors.

The boom was based on officials' unshakeable faith that sustainable growth of delta cities would last for decades.

Developers splashed out billions of yuan to build office buildings, shopping malls and entertainment complexes in the new towns, believing an affluent population of 75 million would be enough to support their businesses. Unfortunately, reshuffles of municipal officials led to dramatic changes in urban development plans. New leaders would map out their own blueprints, earmarking more untapped land for new high-rise residential areas or industrial zones.

This resonates with what’s been going around in ASEAN including the Philippines. The difference is that China seems at an inflection point while the ASEAN contemporaries are approaching the inflection point where troubles in China (Japan, Ukraine or elsewhere) can hasten the process.

Nonetheless the estimated risks of transmission or contagion via merchandise trade with China from George Magnus (Business Insider)

The bottom line is that the mainstream has been severely underappreciating the risks from China’s boom bust cycle which could also be a major source for a global economic and financial Black Swan.

Weak Philippine Peso: It’s hardly about Smuggling, it is about Excessive Money Supply Growth (Credit Bubble)

The mainstream remains incredibly flummoxed by the weak peso which they continue to blame on ‘smuggling’. 

From the Wall Street Journal Real Time Economic Blog: 

Several years of sound economic management have left the Philippines with what appears to be one of the strongest government balance sheets in Asia: a current account surplus of nearly 5% of gross domestic product and enough foreign reserves to cover more than a year’s worth of imports.

So why has the peso been among Asia’s weakest currencies this year?

One reason could be a smuggling problem that has resulted in significant irregularities in the country’s trade data. Some analysts say a proper accounting might show that the country’s current account is actually in deficit – at a time when skittish investors have been punishing developing economies that are too dependent on foreign funding.

Wow. Did you see the heading of the chart? "False Advertising"? Now this is getting to be quite interesting.

 

The mainstream have come to question on the credibility of the accuracy of government statistics. Something which I have been repeatedly pounding at.

Yet if the scrutiny over the statistical numbers will be sustained then eventually whatever de facto cosmetic strength will soon reveal its true colors.

And the WSJ excerpted the BSP response last March.

Central bank Gov. Amando Tetangco Jr., in a March interview with The Wall Street Journal, defended the official data and called the studies questioning the Philippines’ current-account position “more sensational rather than rigorous.”

“I’m not saying they’re trying to discredit us, but they should do more analysis,” he said.

Any discrepancies between the Philippine data and those of its trading partners can be explained by different valuation methods, Mr. Tetangco said.

Ah, let me re-quote a favorite from Dr. Marc Faber on government statistics (bold original)

Governments will always publish the statistics that they wish to show irrespective whether that is in China or in other countries. Governments control basically the statistical offices, so they can show whatever they want. As Stalin said, it’s not important who votes but who counts the votes. And the government counts the statistics.

One should ask: who has the incentive to publicize rosy data? For what reasons? Who benefits from these?

Here is my reply:

the Philippines has sold to the domestic and international audiences—a boom story—in order for the government to have easy access to credit. The central bank engineered credit boom combined with the government publicity ‘anti-corruption’ stunt paid off, the Philippines got three credit rating upgrades in 2013.

And the relationship between smuggling and the weak peso? Again as I wrote last March 31, 2014 (footnote tags omitted, bold original)

And why should “smuggling” extrapolate to a weak peso?

The popular argument indicates that “smuggling” enervates the Philippine financial standings via the trade and current account “deficit” channel. This is partly true but hardly provides a sufficient explanation for the rest.

Based on the accounting identity called Balance of Payments (BOP) which “record of all monetary transactions between a country and the rest of the world” the total has to be ZERO

According to Wikipedia.org “When all components of the BOP accounts are included they must sum to zero with no overall surplus or deficit. For example, if a country is importing more than it exports, its trade balance will be in deficit, but the shortfall will have to be counterbalanced in other ways – such as by funds earned from its foreign investments, by running down central bank reserves or by receiving loans from other countries.”

The accounting identity:

BOP = CURRENT ACCOUNT + CAPITAL ACCOUNT = CREDITS - DEBITS= 0

In and of itself, this means that deficits are hardly the cause of a currency’s travails, if they are sufficiently funded.

Deficits become a source of concern when the deficit nation’s funding has been perceived as increasingly becoming inadequate or deficient and or when creditors’ confidence are shaken due to an observed deterioration in the nation’s capacity or the ability or the willingness to pay on her liabilities.

Wikipedia.org describes the balance of payment crisis or a currency crisis:

A BOP crisis, also called a currency crisis, occurs when a nation is unable to pay for essential imports and/or service its debt repayments. Typically, this is accompanied by a rapid decline in the value of the affected nation's currency. Crises are generally preceded by large capital inflows, which are associated at first with rapid economic growth. However a point is reached where overseas investors become concerned about the level of debt their inbound capital is generating, and decide to pull out their funds. The resulting outbound capital flows are associated with a rapid drop in the value of the affected nation's currency.

So the agonizing peso has hardly been about “deficits” per se but rather about the 38.6% M3 growth last January which according to the BSP has been “due to higher demand for credit”.

Yet it has been simply amazing at how the mainstream experts see money and debt as operating in a black hole when discussing exchange rate values.

Read the rest here.

Nonetheless my conclusion: (bold original)

So this means that for as long as the BSP permits the inflation of credit fueled asset bubbles, surging price levels compounded by deteriorating or massive expansion of debt conditions will persist to manifest on a corrosion of the much vaunted external conditions of the Philippine economy that will be expressed on interest rates and on the peso.

The mainstream will continue to desperately rummage at statistics to explain or rationalize what they can’t see, which ironically, has been staring at them for quite sometime.

US Stocks in V-Shape Intraday Recovery as Bad News is Good news

European stocks got clobbered yesterday reportedly due to the escalation in Ukraine crisis. Ukraine’s government has launched a military offensive against separatist militants sympathetic to the government of Russia from cities in the eastern Donetsk region (Bloomberg). Ukraine is increasingly at risk of a civil war. And worse, if both Russia and the NATO-US intervenes this raises the risks of world war III.

While such sentiment initially plagued US stocks, all these abruptly reversed when a  report saying that the Japanese government is about to release its outlook that will downgrade its ‘overall assessment’ of the economy as private consumption takes a hit from April sales taxes (I must add and inflation). This sent US stocks recovering from the depths of a selloff!

As you can see all three US major stock market indices (Dow Industrial, S&P 500 and the Nasdaq) fashioned out a fantastic simultaneous V-shape intraday recovery. 

Ah, don’t you see? Bad news is good news because the Wall Street’s of the world, like sharks, have smelled blood. They expect that the Bank of Japan to impose additional easing to address faltering Abenomics.

As of this writing Japan’s Nikkei is now on a ramp up by more than 1.5% as the USD-yen soar past 102

Financial journalist Michael Lewis recently raised a controversy saying the stock markets has been rigged in favor of High Frequency Trading. Well, this would seem as  speck considering how central banks “manage” the financial markets.

Ghana to Use Chinese yuan to ease burden of the local currency; other implications

I have recently noted that Ghana has been in the league of nations  that has pumped up money supply growth rate at over 30% in 2011 and or  2012.  (The Philippines may be included in this list where money supply rate has been above 30% for the past 8 months!)

The World Bank chart has been unavailable so I show the table instead. The above table reveals why Ghana currency, the cedi, has been in trouble. The Bank of Ghana has been printing money relentlessly since 2009.

Now reports say that the government of Ghana will now liberalize the use of the yuan in order to relieve the stress of the cedi.

From Citifmonline:

Bankers have hailed the imminent trading of the Chinese Yuan as a move that will help ease demand for the US dollar in the country’s forex market.

The value of the cedi, which has plummeted in recent times as a result of the pressure put on traders’ demand for the dollar, will see some recovery when the yuan comes in.

This will mean, businesses and traders dealing in the Sino region will not need to convert to any major currency before transacting business.

Dr. Benjamin Amoah, Head of Financial Stability at the Bank of Ghana (BoG), has said that the central bank has made significant progress in getting the yuan into the country’s currency trading system.

“Work is far advanced in getting the yuan into the system because we have seen that it is needed – and demand always creates supply, so we are trying to make it available and we are working on it; very soon it will start. I don’t want to put a time on it.

“Currently, the demand is for the yuan because a lot of people go to China,” he added.

There are two aspects to cover here. One is the role of money printing in determining the health of the domestic currency and second is the role of the US dollar as international reserve.

Of course the real reason why the demand for the US dollar has been exceedingly strong in Ghana has been due to the frenetic pace of money pumping by the central bank, the Bank of Ghana from 2009-2012, as I noted above.

But since money supply growth has reportedly  declined to 17.7% in 2013, then this should ease some of the cedi woes, with or without liberalization of the yuan. 

However such liberalization will only function as a secondary cause. Considering the competition from the yuan, the Bank of Ghana will now be forced to considerably restrain money printing, otherwise the average Ghanian will gravitate to use the yuan as store of value.

So a recovery in the cedi will come as money printing by the Bank of Ghana eases. But, imbalances brought about by previous money printing will likely surface.

The second aspect in the above story is the role of the US dollar. 

The liberalization of yuan or increased used by the Chinese currency by people in Ghana will deepen the yuan’s role as foreign currency reserve. 

Aside from Ghana, Zimbabwe has reportedly added the Chinese currency as one of the four Asian based legal tender that includes the Australian dollar, the Japanese yen and the Indian rupee (Business Day Live).

The internalization of the yuan can be seen via broadening of dim sum bond floats, numerous swap agreements with various nations, trade in yuan with trading partners as Russia. The yuan is now the eight most traded currency in the world according to the wikipedia.org

This shows why the US feels threatened by China, as the increasing exposure by the yuan in world trade and finance risks diminishing the US dollar’s privilege as the world de facto currency reserve.

Yet brinkmanship foreign policies adapted by US authorities will only accelerate the US dollar’s decline.

How Abenomics distorts the JGB markets

More signs of contortions in the Japan Government Bond (JGB) markets emanating from Bank of Japan’s (BoJ) implementation of 'Abenomics' as reported by the Wall Street Journal Real Time Economics blog

First, the draining of liquidity

On Monday, the newest 10-year Japanese government bond — the yield on which is used as a benchmark for bank loans and a barometer of trust in government finances — didn’t trade even once.

Traders say it is another sign of how the Bank of Japan’s massive bond buying program has silenced the market.

If the 10-year JGB goes a full 24 hours without being traded, it will be the first time since Dec. 26, 2000, according to the Japan Bond Trading Co., which publishes rates. That seems likely, since most investors close their books at 3 p.m. Tokyo time.

Second the skewering of the market's incentives:

Investors say it is more costly to trade than to sit on the sidelines with rates so low and supply scarce due to the BOJ purchases.

The central bank has also been buying a disproportionate amount of the most recent issues as dealers sell JGBs they buy at auction almost immediately to the BOJ to earn something, in what traders call “the BOJ trade.”

At the end of March, the BOJ owned about 33% of the current No. 333 10-year bond, the one that didn’t trade Monday.

Japan Macro Advisor’s estimate that as of April 7, 2014, the share of JGBs held by the BoJ has now climbed to 22%

Finally how Abenomics has mangled “price discovery”.

It’s not the first time that a scarcity of JGBs caused by the BOJ has created some unusual market milestones. At the end of March, rates in one funding market briefly fell below zero for the first time, as market participants basically offered short-term cash loans at negative interest just to borrow JGBs.

Such massive misalignment in the JGB markets entails magnified unseen risks in Japan’s banking and financial system who owns a bigger share of JGBs. And the possible channels for these could cover collateral, capital adequacy and more…

In addition, the flagrant mispricing of JGBs also reflects on bank loan rates and other financial instruments. This extrapolates to a collosal distortion of resource allocation in the financial system and in the real economy, which has also been ventilated via the currency the yen

And such is what makes Japan a ticking time bomb, one of the potential sources of the global financial Black Swan.

Interventionism: Using Legal Coercion to Get Ahead in Life

Mainstream media (especially in the Philippines) never ceases to inculcate upon her audience of the need to have the "right" morals (mainly based on collectivism) for the political economy to prosper. Yet what they either ignore or omit to explain is how most of the unethical or unscrupulous behaviors have been products of the interventionist policies previously implemented. They also fail to deal with the potential ethical distortions from populist policies they advocate in addressing real time social problems.

At the Epic Times, Austrian economist, Dr. Richard Ebeling explains why this is so (ht: Bob Wenzel) [bold mine]

In an environment in which “public policy” determines individual lives and fortunes and in which social and economic life has become politicized, it is not surprising that many Americans have turned their attention to politics to improve their market position and relative income share. Legalized coercion has become the method by which they get ahead in life.

And make no mistake about it: Every income transfer, every tariff or import quota, every business subsidy, every regulation or prohibition on who may compete or how a product may be produced and marketed, and every restraint on the use and transfer of property is an act of coercion. Political force is interjected into what would otherwise be a system of peaceful and voluntary transactions.

Over time, interventionism blurs the distinction between what is moral and what is not. In ordinary life, most people take for granted that certain forms of conduct are permissible while others are not. These are the Golden Rules we live by. Government’s task in human society is to enforce and protect these rules, which are summarized in two basic principles: Neither force nor fraud shall be practiced in dealings with others; and the rights and property of others must be respected. In the moral order that is the free market economy, these principles are the wellspring of honesty and trust. Without them, America is threatened with ultimate ruin – with a war of all-against-all in the pursuit of plunder.

When individuals began to ask government to do things for them, rather than merely to secure their individual rights and honestly acquired property, they began asking government to violate other’s rights and property for their benefit.

These demands on government have been rationalized by intellectuals and social engineers who have persuaded people that what they wanted but didn’t have was due to the greed, exploitation, and immorality of others. Basic morality and justice has been transcended in the political arena in order to take from the “haves” and give to the “have not’s.” Theft through political means has become the basis of a “higher” morality: “social justice,” which is supposed to remedy the alleged injustices of the free market economy.

But once the market becomes politicized in this manner, morality begins to disintegrate. Increasingly, the only way to survive in society is to resort to the same types of political methods for gain as others are using, or to devise ways to evade the controls and regulations. More and more people, therefore, have been drawn into the arena of political intrigue and manipulation or violation of the law for economic gain. Human relationships and the political process have become increasingly corrupted.

In the 1920s, Ludwig von Mises explained a crucial aspect of this corruption of morality and law:

“By constantly violating criminal laws and moral decrees [people] lose the ability to distinguish between right and wrong, good and bad. The merchant, who began by violating foreign exchange controls, import and export restrictions, price ceilings, etc., easily proceeds to defraud his partners. The decay of business morals . . . is the inevitable concomitant of the regulations imposed on trade.”

Mises was, of course, repeating the lesson that the French classical economist Frederic Bastiat had attempted to teach in the 1850s in his famous essay, “The Law.” When the state becomes the violator of liberty and property rather than its guarantor, it debases respect for all law. People in society develop an increasing disrespect and disregard for what the law demands. They view the law as the agent for immorality in the form of legalized plunder for the benefit of some at the expense of others. And this same disrespect and disregard sooner or later starts to creep into the ordinary dealings between individuals. Society verges on the brink of lawlessness.

Read the rest here

So proposals to implement more interventionist solutions is like a dog chasing their own tail.