JGB Watch: Stable Instability: Japan’s Nikkei, Philippine Phisix, Thailand’s SET and China’s Shanghai Nosedives

Back to my JGB-Japan debt crisis watch.

Bank of Japan (BoJ) board member Sayuri Shirai, a former IMF economist said today that bond yields are expected to stabilize overtime, where it would be “natural and desirable for bond yields to gradually rise in the next two to three years on prospects of an economic recovery and rising prices.”

The long term essentially represents an accretion of short term actions.

Based on today or since the Kuroda announcement to double monetary base in April, there has been hardly any signs of stability. To the contrary, the volatility in Japan’s financial markets appear to be accelerating or intensifying.

Early today 10 year JGB yields had been pushed back to below .8% for the first time in nearly a month. But this wasn’t meant to last, as yields bounced back near to yesterday’s anxiety point.

I guess I spoke to soon, yesterday I noted that JGB reached levels that previously caused a crash in Japan’s stock market but didn't. 

Well the crash did happen belatedly today. 

Japan’s major benchmark the Nikkei 225 tanked by 6.35% to officially close at bear market territory, and gave up the entire 4.9% rebound last Monday as the yen rose.

BoJ’s policies so far represents stable instability, or what seems stable or constant today has been high volatility. 

Developments in Japan’s may not be the entire culprit, yesterday’s new highs for 30 (top) and 10 (bottom) US Treasury yields compounded the stampede out of Asian stock markets.

Heck today was a bloodbath in Asian stock markets

Aside from the Nikkei, Thailand, China  and most especially the Philippines collapsed. The rest of Asia were in red.

Mainstream media predicted that today would be bargain hunting. (chart from technistock.com)

But as I warned a few days ago:

“Bargain” means cheap, hence bargain hunting is a loaded word underpinning a bullish bias. Unfortunately, “bargain hunting” even became more of a bargain today. And if the current selloffs intensifies, bargain hunting will transpose into catching of falling knives.

Bargain hunting became a flurry of falling knives.

It’s amazing how lost or confused or clueless mainstream experts have been with the recent crash of ASEAN stocks. All they can say is that this signifies foreign exodus, has been a regional dynamic and a result of the Fed’s tapering talk.

They have mistakenly been reading effects as the cause.

Hardly anyone realizes that such has been about rioting bond markets and the return of bond vigilantes or of markets indicating of a rise in interest rates. Rising rates in a deeply leveraged or highly indebted financial world would mean a bubble bust.

The actions by Indonesia’s central bank today validates my point.

From Bloomberg:

Indonesia’s central bank unexpectedly raised its key interest rate for the first time since 2011 as Governor Agus Martowardojo accelerates efforts to boost confidence in the currency and cool inflation expectations.

Bank Indonesia policy makers increased the reference rate by a quarter of a percentage point to 6 percent, the central bank said in Jakarta today. All 19 economists surveyed by Bloomberg News expected no change.

Zero mainstream experts saw this coming.

It’s a black swan day for them. Not for us.

Quote of the Day: Why using moral suasion as a policy tool is a bad thing

When you cast policy issues in moral terms, you degrade the character of public discourse. You lead people to see conflicting priorities as an occasion for battle, rather than an occasion for compromise. You send the message that policy is best decided by appeals to one’s inner conscience (or, more likely, to the polemics of demagogues), rather than by appeals to impersonal cost-benefit analysis. And this is a very bad thing… 

If we’re determined to instill blind moral instincts that make people behave better most of the time, I’d like to nominate a blind moral instinct to respect price signals and the individual choices that underlie them—an instinct, for example, to recoil from judging and undercutting other people’s voluntary arrangements.

This is from Professor and author Steven Landsburg at the Cato Unbound in a debate over recycling. 

Populist-personality based politics have almost always centered their policy discussions based on the moral "feel good noble sounding" context. The appeal to the moral is practically an appeal to the emotion; no matter how coercive, impractical or how short term oriented policies can lead to long term pain. That's the reason why the use of "moral suasion as a policy tool" signifies as "the polemics of demagogues".

Video: In 1984 The Prescient Ron Paul Warned of US Government Computer Surveillance

Something special with 1984? 1984 was the title of George Orwell's classic book about big brother dystopia.

In 1984, a video of Ron Paul's speech at the US house of representatives admonished of the use of computer or electronic surveillance by US government to attack on civil liberties. 

The latest whistleblowing of former insider Edward Snowden on the massive NSA spying serves as a validation of Ron Paul (hat tip Zero Hedge)

What life is like in a Sovereign Default and Currency Collapse

Simon Black of the Sovereign Man quotes the experience of his friend during the Argentina economic crisis of 1999-2001.

During the crisis, the Argentine government froze bank accounts for 12 month (known as Corrallito).  This engendered an environment known as confiscatory deflation first, and when such restrictions were lifted, a burst of inflation

Such nightmare has been neatly captured in “what it’s like to live through a sovereign default and currency collapse” (bold original)

On December 1, 2001, Argentina’s economy was in trouble. Unemployment was high, debt was high, and recession had taken hold. But life was somewhat ‘normal’.

Basic services still functioned. And no one had to really worry about… food. Or water. Then it all changed. Literally within a day.

On December 2nd, our bankrupt government imposed measures that essentially froze everyone’s bank accounts. You can just imagine– one day having access to your funds, and the next day being completely cut off.

Within a matter of days, people were out in the streets doing battle with the police. The government soon defaulted on its debt, and the currency went into freefall.

I was doing some post-graduate work in Boston at the time. As a foreigner in the US, I wasn’t really able to work… so I was living on a tight budget from my savings.

Yet, overnight, I went from being able to pay my rent and living expenses to being completely cut off from my funds. I had nothing.

But when I spoke to my family back in Argentina, I realized that they had it even worse.

Everything became scarce. The electricity went out all the time. Even food on the grocery store shelves ran low. You would eat what you had available at home.

And in a way, food became a medium of exchange. Within just a few days, people went from having confidence in their currency to not trusting it at all. No one wanted to accept paper money anymore, especially for something as valuable as food.

And if they did, it would be at 2-3 times the normal price. With all of this unfolding, I flew back down to see my family.

My father called me and said he had stashed his life savings in US dollar cash in a bank safety deposit box. He needed my help getting it out.

When we arrived to the bank, there were thousands of people in the streets rioting. The police were there in paramilitary gear. It was so tense, we had to bribe someone just to get inside the bank.

Fortunately we were able to get access to the box. But… we had to walk 3 or 4 blocks to the car. It was half panic, half adrenaline rush walking past an angry crowd with my father’s life savings shoved down our pants.

Looking back, this was crazy. But at the time, it was the only way. Then came the even harder part– getting it out of the country.

We had friends who would take rowboats full of cash to neighboring Uruguay. But this was incredibly risky.

At the time, the only legitimate way to get money out of the country was buying ADRs (Argentine public companies listed on the New York Stock Exchange). And the only reason we were even able to do this was because we had the contacts.

But we got killed on the fees. The commission alone was 20%, and then, of course, the stocks we purchased took a dive.

So my father ended up losing about half of his savings trying to get it out of the country at the wrong time.

What’s funny is that we eventually ended up suing the government. They had destroyed everyone’s life savings, and even seized pensions as well.

The government dragged out the legal process for years, almost a decade. They were hoping that all the retirees who were suing them would simply die off, and the problem would go away.

Eventually, we won the case (along with thousands of others). But the judge gave the government a ‘suspended sentence’. So, no penalty.

There are so many more stories to tell about this… and fortunately I can laugh about it all now. But at the time, it was beyond stressful.

The best way I can describe it is despair. And this is really the worst emotion you can have. Because when you’re in a state of despair, you’re hopeless. It’s a terrible position to be in.

Life becomes hell because you do not know whether you are going to be able to put food on the table the next day.

And in such a state of despair, you’re not in a position to make good decisions. It’s all about survival.

Of course, we kept thinking, “why didn’t we see this coming? Why didn’t we do something sooner?”

If only we had moved some money out of the country before, or taken steps to safeguard his pension, life would have turned out much differently.

It’s like that old saying– better to be a year (or decade) too early than a day too late. Because one should never underestimate the speed with which things can unravel.

The vicarious anecdote above exhibits the agony from deteriorating events during a crisis. This happens especially when political authorities scalps on people’s savings to bailout themselves and their friends. And importantly this becomes an affliction when people fail to prepare for such eventuality.

While every crisis will be distinct, in as much as every economy is like a thumbprint, the common feature will be entrenched hardship.

Realize that for every artificially inflated boom the consequence will be an economic bust that could lead to sovereign debt crisis or even a currency collapse. The Argentine economic crisis should be a paradigm to learn from.

Yet ironically, the Argentines fail to pay heed to such harrowing episode; their fascist-crony political economy have been enduring the transition from stagflation to hyperinflation.

JGB Watch: BoJ Unfazed by Rising Yields?

Back to my JGB-Japan debt crisis watch.

Yields of 10 and 30 year Japanese Government Bonds (JGB) have been trading higher today.

30 year GB yields has been climbing during the past 3 days.

The same holds true for 10 year JGB yields.

Previously such levels would have sent Japan’s equity markets in a panic. But perhaps market participants may have become jaded to this. 

The Nikkei closed today marginally lower despite a substantial rise in JGB yields.

Or perhaps the markets have fallen into mainstream media’s magical spell. This article, for instance, suggests that current yield levels “tell you just why the central bank isn't panicking yet.”

But as exhibited by the above chart, yields of the 10 year JGBs appear to be building an upside momentum (blue arrow), since the BoJ’s announcement of the program to double Japan’s monetary base in 2 years.

Importantly, real events point to higher yields/ interest rates.

From Reuters:

Japan's home buyers are rushing for fixed-rate mortgages to lock in on what they consider rock-bottom rates, in a sign of early victory for the central bank as it attempts to reflate the world's third-largest economy with a burst of monetary stimulus.

The bold monetary expansion which aims to achieve 2 percent inflation in less than two years has sparked a rise in bond yields and fanned worries among home owners that interest rates are set to rise sooner or later.

Fierce competition for banks is only likely to intensify at the expense of profit margins, analysts and bankers say, as mortgage lending is one of the few areas of growth amid prolonged weakness in corporate loan demand.

Taking advantage of historically low rates thanks to years of ultra-easy monetary policy, roughly nine out of 10 people in recent years took out floating-rate mortgages.

Notice the oxymoron?

The article says that this represents “a sign of early victory for the central bank as it attempts to reflate”. But this has “fanned worries among home owners that interest rates are set to rise sooner or later”. However, BoJ’s Kuroda confidently thinks that JGBs “will eventually regain stability”

Essentially, perceptions and actions of Japanese home buyers in expectations of higher interest rates will challenge BoJ Kuroda’s expectations of JGBs regaining stability.

Unfortunately too, whatever statistical “domestic demand” economic gains that has buoyed Abenomics appear as being offset by sluggish business or capital spending.

From another Reuters article:

Japan's core machinery orders fell in April from the previous month, down for the first time in three months as companies remain hesitant to boost capital spending despite Prime Minister Shinzo Abe's sweeping stimulus policies.

Cabinet Office data showed core machinery orders, a highly volatile series regarded as a leading indicator of capital spending, fell 8.8 percent, compared with a 8.5 percent decline in a Reuters poll of analysts.

Policymakers and the mainstream fail to realize that inflationism skewers the coordinative functions of economic calculations. How would an investor or entrepreneur invest in an environment of unstable prices and where profitability is uncertain?  

Without capex growth, how will demand be funded, except by depleting on current savings and or by borrowing, all of which will prove to be temporary and unsustainable?

And considering the growing risks of a bank deposit haircuts, the likelihood is that Japanese savers will seek safety in overseas assets.

Again Abenomics has been pillared on a self-contradictory expectations of igniting inflation in an environment of “stable” interest rates. These forces are simply incompatible.

Given the upside breakout of US treasury yields and the recent collapse of EM risks assets (stocks, bonds and currencies), “not panicking” may transition into a “horror show”.

Quote of the Day: Government is not to be trusted. Ever.

Repeat after me: Government is power.  Government is not to be trusted.  Ever.  Even if you believe that some government is and will always be necessary, that ‘necessary’ piece of government should always be regarded as a prudent lion tamer regards the big carnivorous cats that are ‘necessary’ for him to make a living.  To imagine that seemingly subdued purring lions can be trusted to be dealt with in any ways that do not include the use of strong cages, leashes, ceaseless and deep suspicion, and escape hatches is the height of romantic absurdity – wishful thinking of the most extreme and inexcusable sort.  Government is by its very nature a dangerous, untrustworthy, dishonest, arrogant, slippery entity – characteristics that are by no means reduced anywhere near to insignificance by a wide franchise, regular elections, and sturdy ink-on-parchment documents called “constitutions.”

Unless you are a high-ranking government official, government - no government – is ever “Us.”  It is always “Them.”  And They are not to be trusted.  Ever.

(italics original)

This is from Café Hayek’s Professor Don Boudreaux on Edward Snowden NSA spying expose

NSA Spying sends George Orwell’s 1984 Books Sales Soaring; The Age of the Leakers

Whistleblower Edward Snowden’s expose of the NSA’s spying on Americans has sent sales of George Orwell’s 1984 soaring.

From the Bloomberg:

Sales of George Orwell’s novel “1984,” featuring a futuristic totalitarian state, jumped on Amazon.com Inc. (AMZN)’s website following reports of a classified program that lets the U.S. government collect personal data.

One edition of the book, which was originally published in 1949, moved to the No. 5 spot on Amazon’s Movers & Shakers list, which tracks dramatic increases in sales volume over a 24-hour period. That makes it the 125th-best-selling book on the site, an increase from its previous rank of 7,397.

The sales gains come after the revelation of a top-secret electronic-surveillance program that allows the National Security Agency and the Federal Bureau of Investigation to access data from audio and video chats, photographs, e-mails, documents and connection logs from the biggest U.S. Internet companies. The Washington Post and the U.K.-based Guardian reported the program’s existence last week.

Orwell’s novel portrays a dystopian society where individuals are monitored through ubiquitous television screens and overseen by a leader called Big Brother.

(mask of British renegade Guy Fawkes)

I am reminded of the movie  V-for Vendetta  which looks apropos on the theme of neutralizing of the tyranny of Big Brother.

Nonetheless, the Snowden-NSA episode exhibits the shifting of the balance of power of media and whistle blowers which has been undergirded by the information age.

Austrian economist Gary North calls this the age of leakers:

Edward Snowden is now the talk of the town — and the world. His story on the NSA’s PRISM spying system has given exposure to a story that NSA expert James Bamford had exposed in 2008, but which no one in the mainstream media bothered to promote.

Snowden went to the Washington Post first, but when the Post waffled, he dropped them and went to Glenn Greenwald, a pro-civil rights lawyer who lives in Brazil and writes for The Guardian, a British newspaper/website. Greenwald wrote up the story as Snowden gave it to him, thereby scooping the world. He gets 100% credit, as does The Guardian. The Washington Post gets also-ran status.

These days, a leaker with a story can get his story out his way. There is always a journalist somewhere who will run it. If it’s in a major publication, which The Guardian is, the story will get coverage.

A leaker no longer has to do it anyone else’s way. He can do it his way.

This has put governments on the defensive. Because the Web acknowledges no borders, a story gets picked up and sent around irrespective of where it was published. The Guardian does not operate in the USA. It is not in the shadow of the U.S. government. It owes the U.S. government nothing. It is not dependent in any way on the U.S. government. So, the Administration’s spin-meisters have no leverage over The Guardian.

This is the age of the leakers. They can get their stories out to the public by doing an end run around their nation’s fearful mainstream media.

There are no more national gatekeepers. If a newspaper reporter wants a scoop, he will have to do it the leaker’s way — otherwise, he will be an also-ran.

The above only exhibits of the erosion of mainstream media’s centralized control over information and likewise political power.

The age of the leakers include Wikileaks and the Anonymous and myriad forms of social media.

Told You So: Japanese Government will Resort to Deposit Confiscations

Japanese authorities has been reported as now considering deposit confiscation. Yet this serves as another I told you so moment

Here is what I wrote early June:

And given the constrained options of the Japanese government, I think that they could or most likely resort to the Cyprus bail-in model. They may be targeting part of the ¥1,230 trillion for bank deposits haircuts. Poor households

Writes the Zero Hedge: (bold highlights original)

As Nikkei reports, Japan's Financial Services Agency will enact new rules that will forced failed bank losses on investors, if needed, via a mechanism known as a "bail-in."

The FSA report also notes that Mitsubishi UFJ (MTU), Mizuho Financial (MFG) and Sumitomo Mitsui (SMFG) are among those proposing amendments to allow them to issue the types of preferred shares or subordinated bonds that would be used in such cases.

So not only will Japanese banks suffer VaR shock-driven needs to reduce JGB holdings but a weaker deposit base will further exacerbate the delveraging.

Abenomics has essentially underwritten economic Japan’s death warrant. Expect more pressure on Japan’s banking system.

JGB Watch: 10 Year Yields Nears Critical Levels, ASEAN Stocks Smashed

Back to my JGB-Japan debt crisis watch.

Yesterday’s fantastic one day 4.94% rebound by the Nikkei erased 3/4 of last week’s 6.51% losses.

Post mortem analysis by the mainstream holds that this has largely been attributed to “strong” 4.1% annual statistical growth—a growth ironically, where capital investments continue to fall.

Some have even attributed (post hoc) the substantial 2.59% bounce in the Phisix stocks to actions in Japan.

The reality is that as pointed out in last Sunday’s outlook, Japan’s stocks has been deeply oversold, and that the Japanese government has urged their public pension fund to support their stock markets. The Japanese government has been targeting assets principally the JGBs and secondarily stocks but hardly the currency, where the latter's actions have been coincidental with such interventions.

In addition, market participants heavily expected today that the BoJ will provide additional measures such as “extending the maximum duration of cheap, fixed-rate funds it offers via market operations to two years from the current one year” (Reuters)

Unfortunately today the BoJ balked. The result? The Nikkei 225 fell by 1.45%.

From the CNBC:

Japan's benchmark Nikkei shed as much as 1.5 percent on Tuesday after the Bank of Japan (BOJ) disappointed investors by failing to address recent market volatility in its monetary policy statement.

The selling pressure extended to the JGBs.

Notes the Reuters:

Japanese government bond prices extended losses on Tuesday after the Bank of Japan left policy unchanged, refraining from announcing a new long-dated funding operation some investors had hoped.

As of this writing JGB 10 year yields appear to be knocking on the .9% door (trading in between .87-.89%) which seemed to have served as the previous threshold indicative for the recent past dives seen in the Nikkei.

And as of this writing too, the Nikkei futures have been drifting vastly lower such that if sustained, this will mean a gap down opening tomorrow. 

Current losses in the Nikkei future points to surrendering most of Monday’s gains.

Of course, current market spasms hasn’t been entirely about JGBs now. US Treasuries pierced their critical boundaries, which adding to Abenomics, has sent many emerging markets such as ASEAN majors to a tailspin. 

Thailand’s SET dived by 4.97%

Indonesia’s JCI slumped by 3.5%

The Philippine Phisix crashed by 4.64% which essentially eviscerated in the entirety yesterday’s 2.59% bounce.

Emerging market bonds such as South Africa, Turkey and Mexico have also been razed

Two of what I see as the three of the world's most critical bond markets have already convulsed. 

Should the French 10 year bond yield surpass the critical levels (2.3%) interest rate, this will make a trifecta that would usher in the perfect storm.

One domestic analyst quoted by mainstream media said yesterday’s rally signified as “bargain hunting” amidst receding foreign selling.

“Bargain” means cheap, hence bargain hunting is a loaded word underpinning a bullish bias. Unfortunately, “bargain hunting” even became more of a bargain today. And if the current selloffs intensifies, bargain hunting will transpose into catching of falling knives.

As I pointed out last Sunday, foreign money represents the 800 lb gorilla: 

If foreign money turns sour on emerging markets including the Philippines, it seems wishful thinking to be bullish on the Phisix in the knowledge of the disproportionate or lopsided balance in favor of foreign investors (15-16%) vis-à-vis local participants (about 1%).

The erstwhile “value” investor Warren Buffett once said, never ask a barber if you need haircut. Such lesson should apply to so-called clueless mainstream experts who provides the confirmation bias to gullible participants, and where the latter end up losing money and blaming the industry.

Quote of the Day: Only the IRS (taxman)

Only the IRS can attach 100% of a tax debtor's wages and/or property.

Only the IRS can invade the privacy of a citizen without court process of any kind.

Only the IRS can seize property without a court order.

Only the IRS can force a citizen to try his case in a special court governed by the IRS.

Only the IRS can compel the production of documents, records, and other materials without a court case being in existence.

Only the IRS can with impunity publish the details of a citizens debt.

Only the IRS can legally, without a court order, subject citizens to electronic surveillance.

Only the IRS can force waiver of statute of limitations and other citizen's rights through the threat of Arbitrary assesment.

Only the IRS uses extralegal coercion. Threats to witnesses to examine their taxes regularly produces whatever evidence the IRS dictates.

Only the IRS is free to violate a written agreement with a citizen.

Only the IRS uses reprisals against citizen and public officials alike.

Only the IRS can take property on the basis of conjecture.

Only the IRS is free to maintain lists of citizen guilty of no crime for the purpose of harassing and monitoring them.

Only the IRS envelops all citizens.

Only the IRS publicly admits that it's purpose is to instill fear in the citizenry as a technique of performing it's function.

This is from former US House of Representative of Idaho George Vernon Hansen. Sourced from the Liberty-Tree.ca

The confiscatory power of the taxman applies everywhere. 

Ron Paul on Government Spying: Should We Be Shocked?

Given the furor over the NSA spying exposé by whistleblower Edward Snowden, former US congressman Ron Paul says that spying is supposed to be expected from an increasingly desperate government. 

From the great Ron Paul (Ron Paul Institute)

Last week we saw dramatic new evidence of illegal government surveillance of our telephone calls, and of the National Security Agency’s deep penetration into American companies such as Facebook and Microsoft to spy on us. The media seemed shocked.

Many of us are not so surprised.

Some of us were arguing back in 2001 with the introduction of the so-called PATRIOT Act that it would pave the way for massive US government surveillance—not targeting terrorists but rather aimed against American citizens. We were told we must accept this temporary measure to provide government the tools to catch those responsible for 9/11. That was nearly twelve years and at least four wars ago.

We should know by now that when it comes to government power-grabs, we never go back to the status quo even when the “crisis” has passed. That part of our freedom and civil liberties once lost is never regained. How many times did the PATRIOT Act need renewed? How many times did FISA authority need expanded? Why did we have to pass a law to grant immunity to companies who hand over our personal information to the government?

It was all a build-up of the government’s capacity to monitor us.

The reaction of some in Congress and the Administration to last week’s leak was predictable. Knee-jerk defenders of the police state such as Senator Lindsey Graham declared that he was “glad” the government was collecting Verizon phone records—including his own—because the government needs to know what the enemy is up to. Those who take an oath to defend the Constitution from its enemies both foreign and domestic should worry about such statements.

House Intelligence Committee Chairman Mike Rogers tells us of the tremendous benefits of this Big Brother-like program. He promises us that domestic terrorism plots were thwarted, but he cannot tell us about them because they are classified. I am a bit skeptical, however. In April, the New York Times reported that most of these domestic plots were actually elaborate sting operations developed and pushed by the FBI. According to the Times report, “of the 22 most frightening plans for attacks since 9/11 on American soil, 14 were developed in sting operations.”

Even if Chairman Rogers is right, though, and the program caught someone up to no good, we have to ask ourselves whether even such a result justifies trashing the Constitution. Here is what I said on the floor of the House when the PATRIOT Act was up for renewal back in 2011:

“If you want to be perfectly safe from child abuse and wife beating, the government could put a camera in every one of our houses and our bedrooms, and maybe there would be somebody made safer this way, but what would you be giving up? Perfect safety is not the purpose of government. What we want from government is to enforce the law to protect our liberties.”

What most undermines the claims of the Administration and its defenders about this surveillance program is the process itself. First the government listens in on all of our telephone calls without a warrant and then if it finds something it goes to a FISA court and get an illegal approval for what it has already done! This turns the rule of law and due process on its head.

The government does not need to know more about what we are doing. We need to know more about what the government is doing. We need to turn the cameras on the police and on the government, not the other way around. We should be thankful for writers like Glenn Greenwald, who broke last week’s story, for taking risks to let us know what the government is doing. There are calls for the persecution of Greenwald and the other whistle-blowers and reporters. They should be defended, as their work defends our freedom.

Shades of George Orwell’s 1984?

The Wile E. Coyote Moment: US Treasury Yields Spikes!

Last night, the yield of 10 year US treasury spiked to the highest level in 16 months.

The recent streak of bond losses/ yield gains has been amazing, according to the Bloomberg:

Yields on 10-year U.S. Treasuries have advanced for six weeks, the longest stretch in four years.

Yields of US treasuries have been climbing almost across the maturity spectrum. This is with the exception of the 3 and 6 month T-Bills. The increase in the longer end has been in double digits over the month.

The ensuing response: a tumult in Emerging Market stock and bond markets

Example today: Singaporean bonds has been reportedly getting slammed. From the same article:

The price of Singapore’s 3.125 percent note due in September 2022 tumbled to S$110.42 as of 2:41 p.m. local time from S$110.98 June 7, based on data compiled by Bloomberg and supplied by the Monetary Authority of Singapore. The yield rose six basis points, or 0.06 percentage point, to 1.89 percent. It was the highest level since Aug. 2, 2011, based on the MAS data.

And so with the ongoing carnage of ASEAN equity markets as of this writing.

The Bespoke invest notes that there has been increases in US default risks of major US banks and brokers. But they downplay this as “still very low relative to where they've been trading over the past couple of years.” Of course reference point matters. But what may seem as relatively “very low” could also become “very high” in the future. Such observation can be called the anchoring bias.

As I pointed out last Sunday, underneath the surging US stock markets and aside from the tremors being experienced by most emerging markets, some segments of the US financial markets has also been adversely impacted by recent turmoil in the US (and global) bond markets.

Media has been awash with the adverse ramifications of the rioting bond markets. High yields funds has posted the biggest record outflows, US credit default swaps rises to a two month high along with deepening losses from junk-bond exchange-traded funds and carry trades endures from deepening losses.

The US financial markets appear to be in a Wile E. Coyote moment: buoyant stocks amidst as the seeming deterioration in interest rate sensitive industries or sectors and of the narrowing positive market breadth of world markets.

It is also important to point out that a sustained rise in yields in the bond markets will bring to fore counterparty and market risks from the interest rate sensitive derivatives markets as I explained last month.

IN the US, according to the US OCC, 80% of the $223 trillion notional derivatives markets have been concentrated in interest rate products as of the fourth quarter of 2012

So the humongous derivatives markets would seem as highly vulnerable to the ongoing bedlam in the interest rate markets.

Money Market’s Mike Larson eloquently summarized of the the risks of the implosion of the US bond bubble last January.

To understand how huge this is, let’s first add up the value of all the stocks of all the listed companies on all the exchanges in the United States: That’s $25.8 trillion, according to the Fed.

Plus, to make sure we’re not missing anything, let’s also add up the value of stock futures, stock options and other stock instruments: According to the U.S. Comptroller of the Currency, that’s another $2 trillion.

Total equities in America: $27.8 trillion.

Now, let’s do the same for bonds and other debt instruments:

The total outstanding debt right now is $55.3 trillion. And that’s already twice as big as all the stock markets combined.

But it’s just the tip of the iceberg. Because in addition, U.S. banks hold a whopping $179 trillion in derivatives that are based on bonds and the like. Grand total of bonds and debt instruments: $234.3 trillion.

That’s 8.4 times the size of all U.S. stock markets combined!

The plain truth is that today’s debt bubble dwarfs the bubble in tech stocks and the bubble in housing stocks combined.

At the peak of the tech stock bubble in 2000, the entire Nasdaq index was worth $5 trillion.

At the peak of the housing bubble in 2007, the entire real estate and financial sectors were worth $8 trillion.

But today’s market in actual debt instruments is $55.3 trillion: That’s FOUR times larger than the tech stock bubble and the housing bubble COMBINED!

Rising rates signifies lethal mix with, or a contradiction to, low interest rate dependent asset bubbles: elevated asset markets which has been edificed around a colossally leveraged system.

Again it is important to reiterate that a persistence or an intensification of this trend magnifies the risks of a Wile E. Coyote moment: a devastating financial market accident.

Caveat emptor.

10 things economists won’t tell you (why you shouldn’t listen to them)

The above can be restated as “10 reasons why you shouldn’t trust economists”

From Marketwatch.com (hat tip Professor Mark Thornton)

1. “We can’t predict the next crisis...”
2. “...but we may help cause it.”
3. “We’re not above a little guesswork.”
4. “Those bold predictions? Blame the testosterone.”
5. “Our measures of prosperity don’t work.”
6. “Ours is a dismal science, but not an exact one.”
7. “We lean to the left.”
8. “We might have an agenda.”
9. “We may as well be speaking Klingon.”
10. “We sell you what you already know.”

Read the explanations here