Poland Government Seizes Half of Pension Funds

Desperate debt burdened governments will resort to the brazen confiscation of the savings of their constituents. 

In the case of Poland almost half of private pensions have been nationalized.

Notes the Zero Hedge (bold original)

By way of background, Poland has a hybrid pension system: as Reuters explains, mandatory contributions are made into both the state pension vehicle, known as ZUS, and the private funds, which are collectively known by the Polish acronym OFE. Bonds make up roughly half the private funds' portfolios, with the rest company stocks.

And while a change to state-pension funds was long awaited - an overhaul if you will - nobody expected that this would entail a literal pillage of private sector assets.

On Wednesday, Prime Minister Donald Tusk said private funds within the state-guaranteed system would have their bond holdings transferred to a state pension vehicle, but keep their equity holdings.  The funds would effectively be left with only the equities portions of their assets, even this would be depleted, and there will be uncertainty about the number of new savers joining.

But why is Poland engaging in behavior that will ultimately be disastrous to future capital allocation in non-public pension funds (the type that can at least on paper generate some returns as opposed to "public" funds which are guaranteed to lose)? After all, this is a last ditch step which no rational person would engage in unless there were no other option. Simple: there were no other option, and the driver is the same reason the world everywhere else is broke too - too much debt.

By shifting some assets from the private funds into ZUS, the government can book those assets on the state balance sheet to offset public debt, giving it more scope to borrow and spend. Finance Minister Jacek Rostowski said the changes will reduce public debt by about eight percent of GDP. This in turn, he said, would allow the lowering of two thresholds that deter the government from allowing debt to raise over 50 percent, and then 55 percent, of GDP. Public debt last year stood at 52.7 percent of GDP, according to the government's own calculations.

To summarize:

1. Government has too much debt to issue more debt

2. Government nationalizes private pension funds making their debt holdings an "asset" and commingles with other public assets

3. New confiscated assets net out sovereign debt liability, lowering the debt/GDP ratio 

4. Debt/GDP drops below threshold, government can issue more sovereign debt

The seizure of private sector savings to lower debt levels only whets government’s appetite to go into a spending binge.

The Polish government’s spending extravaganza as seen via chronic budget deficits

 

Nationalization of pensions funds means that the Polish government sees a growing risk of diminished access to external financing as external debt has been swelling to finance lavish government spending habits.

The actions of the Polish government appear to have slammed her equity markets as seen via the WIG benchmark.

And with it, Polish bonds has been sold off (along with the world)

Actions by Polish policymakers may aggravate the dour sentiment on emerging markets.

As Reuter’s analyst Sujata Rao at Global Investing observed: (bold mine)

If the backdrop for global emerging markets (GEM) were not already challenging enough, there are, these days, some authorities that step in and try to make things even worse, writes Societe Generale strategist Benoit Anne. He speaks of course of Poland, where the government this week announced plans to transfer 121 billion zlotys ($36.99 billion) in bonds held by private pension funds to the state and subsequently cancel them. The move, aimed at cutting public debt by 8 percentage points,  led to a 5 percent crash yesterday on the Warsaw stock exchange, while 10-year bond yields have spiralled almost 50 basis points since the start of the week. So Poland, which had escaped the worst of the emerging markets sell-off so far, has now joined in.

But worse is probably to come. Liquidity on Polish stock and bond markets will certainly take a hit —the reform removes a fifth of  the outstanding government debt. That drop will decrease the weights of Polish bonds in popular global indices, in turn reducing demand for the debt from foreign investors benchmarked to those indices. Citi’s World Government Bond Index, for instance, has around $2 trillion benchmarked to it and contains only five emerging economies. That includes Poland whose weight of 0.55 percent assumes roughly $11 billion is invested it in by funds hugging the benchmark.

As the US dollar liquidity is being drained off the world, governments will become increasingly exposed on their dependence on debt, and subsequently on their debt based economies.

Such dynamic are presently being ventilated mainly via the currency markets where many emerging markets including the ASEAN region have been facing a currency storm.

Nonetheless, pension funds have increasingly become targets for government’s financial repression as in the case of Argentina and Spain.

Pension funds have also transformed into tools for market interventions in order to support political objectives such as in the Philippines.

And the seeming political trend in response to the US dollar scarcity has been knee jerk reactions to indulge in more direct and harsher financial repression or savings confiscation measures. 

Hardly a positive sign.

In Pictures: Global Bond Vigilantes Go Wild

Global equity markets remain complacent even as the rampaging bond vigilantes have been prompting for mounting losses on the vastly larger interest rate and related (even derivatives) markets.

Last night the US and Euro based bond markets endured a massive selloff as manifested by substantial spikes in bond yields.

The contagion appears to have spread to Asian markets as of this writing.

Yields of 10 year US treasuries have fast been approaching 3%.

10 year UK bond yields pierced the 3% level and now has been at 2 year highs

Yields of German 10 year bonds are at one year highs

French 10 year bond yields soar past June highs and now also has been at 1 year highs.

Italian bonds seem as catching up.

And so with the yields of Spanish bond equivalent.

Yields of Japan’s 10 year bonds appear to be making a reversal.

China’s bond markets has also been reflecting on the global contagion where yields are at 2 year highs.

Mainstream media and the bulls say that we should “move along nothing to see here” promulgating a continuation of a risk on environment because rising bond yields are signs of “normalization”.

But there hardly seems anything "normal" with the unprecedented scaling up of debt levels as shown by government debt.

Government external debt levels and the average government debt as % of GDP seen from another perspective. Have you seen anything “normal”?

The only “normal” I can see has been one of an exploding global debt build-up amidst a low interest rate environment. The latter environment is facing a radical change as manifested by the actions in the global bond markets.

The broad increases of bond yields now effectively covers almost the entire spectrum of the US $ 99 trillion global bond markets where government bonds account for 43% share.

Global interconnectivity or interdependence (financial globalization) serves as transmission mechanism that would imply relative rising interest rates  across the world.

And as I previously pointed out

This means that changes in global bond yields will also influence all these dynamics. That’s unless the Philippines operates in a vacuum or an imaginary world where prices have been stuck in a stasis.

The bottom line is that changes in global bond markets, especially by the bond markets covering the big 4, will also influence domestic bond markets as well as interest rates.

When interest rates soar or when the cost of debt servicing grow faster than the ability of debtors to pay them, watch out.

The Wile E. Coyote moment is upon us. Expect the unexpected.

India Crisis Watch: Is it Panic Time?

Have the average Indians been in a panic?

Sovereign Man’s Simon Black says current indicators point to a yes:

For the last 24-hours, banker and fund manager friends of mine have been telling me stories about oil refinery deals in North Korea, their crazy investments in Myanmar, and the utter exodus of global wealth that is finding its way to Singapore.

My colleagues reported that in the last few weeks they’ve begun seeing two new groups moving serious money into Singapore– customers from Japan and India.

Both are very clear-cut cases of people who need to get their money out of dodge ASAP.

In Japan, the government has indebted itself to the tune of 230% of GDP… a total exceeding ONE QUADRILLION yen. That’s a “1″ with 15 zerooooooooooooooos after it.

And according to the Japanese government’s own figures, they spent a mind-boggling 24.3% of their entire national tax revenue just to pay interest on the debt last year!

Apparently somewhere between this untenable fiscal position and the radiation leak at Fukishima, a few Japanese people realized that their confidence in the system was misguided.

So they came to Singapore. Or at least, they sent some funds here.

Now, if the government defaults on its debts or ignites a currency crisis (both likely scenarios given the raw numbers), then those folks will at least preserve a portion of their savings in-tact.

But if nothing happens and Japan limps along, they won’t be worse off for having some cash in a strong, stable, well-capitalized banking jurisdiction like Singapore.

India, however, is an entirely different story. It’s already melting down.

My colleagues tell me that Indian nationals are coming here by the planeful trying to move their money to Singapore.

Over the last three months, markets in India have gone haywire, and the currency (rupee) has dropped 20%. This is an astounding move for a currency, especially for such a large economy.

As a result, the government in India has imposed severe capital controls. They’ve locked people’s funds down, restricted foreign accounts, and curbed gold imports.

People are panicking. They’ve already lost confidence in the system… and as the rupee plummets, they’re taking whatever they can to Singapore.

As one of my bankers put it, “They’re getting killed on the exchange rates. But even with the rupee as low as it is, they’re still changing their money and bringing it here.”

Many of them are taking serious risks to do so. I’ve been told that some wealthy Indians are trying to smuggle in diamonds… anything they can do to skirt the controls.

(This doesn’t exactly please the regulators here who have been trying to put a more compliant face on Singapore’s once-cowboy banking system…)

The contrast is very interesting. From Japan, people who see the writing on the wall just want to be prepared with a sensible solution. They’re taking action before anything happens.

From India, though, people are in a panicked frenzy. They waited until AFTER the crisis began to start taking any of these steps. As a result, they’re suffering heavy losses and taking substantial risks.

Indian’s financial markets have been in a terrible mess.

The rupee has been taking it to the chin down by 21.6% year to date and counting.

Yields of the Indian government’s 10 year bonds has touched US crisis 2007 highs but has retraced. 

If the panic in the rupee escalates, India’s bonds will take more damage.

India’s equity markets the Sensex has been under pressure but has not encroached into the bear market yet, unlike ASEAN peers

The run in the rupee comes amidst India’s huge forex reserves. Another proof that reserves alone are not enough to prevent a run.

The reason for the rupee’s fall, desperate government unwilling to undertake reforms but has instead turned the tables on the private sector via gold sales prohibition and expanded capital controls. Thus the panic.

With free market champion Raghu Rajan assuming office only in September 4th, media has been optimistic that the new governor will be able to institute reforms. One of the early reforms which will supposedly be undertaken by Mr. Rajan has reportedly been to allow trade settlement in rupees. But mainstream media repeatedly calls for “expansionary policies” which ironically has been one of the main causes of India’s predicament.

Mr. Rajan will be faced with a huge stumbling block as I previously noted.

While it may be true that Mr. Rajan has a magnificent track record of understanding central banks and the entwined interests of the banking system coming from the free market perspective, in my view, it is one thing to operate as an ‘outsider’, and another thing to operate as a political ‘insider’ in command of power.

Mr. Rajan will be dealing, not only conflicting interests of deeply entrenched political groups, but any potential radical free market reforms are likely to run in deep contradiction with the existing statutes or legal framework from which promotes the interests of the former.

The other source of media optimism has been in reports that the BRIC will forge a $100 billion currency swap pool. All these arrangements will be futile and only symbolical unless the real sources of India’s economic malaise are dealt with.

But if the panic in rupee will spread and incite major damages in the domestic banking system, where loans from the banking system represents 75% exposure on the economy, a crisis may be in the offing

And considering what appears as skyrocketing bond yields globally led by the US, time may be running out. 

No wonder the legendary investor Jim Rogers has been short India.

Yet if the rupee meltdown persist and worsen, such will compound on the gloomy environment for Asia. 

Caveat emptor.

Chinese Province Padded Economic Growth Data by 150% in 1st half of 2013

More evidence why we should not trust government statistics. 

Earlier, the Chinese government has admitted to hiding, editing and censoring economic data, now a province in China has been alleged to have severely bloated economic data by 125% in 2012 and 150% in 2013.

From Sina (hat tip Zero Hedge) [bold mine]

China's National Bureau of Statistics (NBS) on Thursday announced it had uncovered a serious case involving the faking of economic data by a county government in southwest China's Yunnan Province.

According to the NBS's publicized report, the government of Luliang had coerced local companies to report inflated industrial output value, resulting in artificially high economic figures.

Twenty-eight sampled local companies reported a total of 6.34 billion yuan (1.03 billion U.S. dollars) in industrial output value in 2012; however, the actual value was only 2.82 billion yuan, based on initial calculation, according to the report.

Similarly, 25 sampled local companies reported 2.74 billion yuan of industrial output value in the first half of 2013, but the NBS initially verified the actual value to be only 1.06 billion yuan.

Meanwhile, the county was also found to have faked investment data.

Companies complained that if they did not fraudulently report higher data, their reports would be returned by local government departments. They also said that fake reports would ensure they would enjoy favorable policies such as securing bank loans.

The NBS said that the misconduct has seriously affected the authenticity and independence of company data.

The NBS did not specify the reasons behind the county's faking of data but it is a well-known fact that local government leaders are assessed for their performances based on economic data. Nice-looking data sheets mean promotion opportunities.

Here is what I wrote early August

Many private companies are vehicles used by the local state to promote the political objectives of the national government, as well as, the career goals of local politicians. Thus as previously discussed, the interests of the private sector and the state has been complexly interwoven. Yet the same sectors have acquired huge debts from boondoggles as the above that has put the Chinese economy in jeopardy or has raised the risks of a China bubble bust with far reaching ramifications.

When governments increaslngly resort to the fudging of statistical data to spruce up their economic growth figures, then such may be construed as indications of heightened desperation. Caveat emptor

Quote of the Day: I, Coffee

For instance, even the relatively simple GVC [global value chain] of Starbuck's (United States), based on one service (the sale of coffee), requires the management of a value chain that spans all continents; directly employs 150,000 people; sources coffee from thousands of traders, agents and contract farmers across the developing world; manufactures coffee in over 30 plants, mostly in alliance with partner firms, usually close to final market; distributes the coffee to retail outlets through over 50 major central and regional warehouses and distribution centres; and operates some 17,000 retail stores in over 50 countries across the globe. This GVC has to be efficient and profitable, while following strict product/service standards for quality. It is supported by a large array of services, including those connected to supply chain management and human resources management/development, both within the firm itself and in relation to suppliers and other partners. The trade flows involved are immense, including the movement of agricultural goods, manufactured produce, and technical and managerial services.

This version of Leonard Read's "I, Pencil" or in the above "Nobody knows how to make a coffee" is from UNCTAD, World Investment Report 2013, p. 142. (hat tip Econolib's Professor David Henderson)

Economic Forecasting: The Mainstream’s Horrible Track Record

Aside from the agency problem, here is another reason why economic and market predictions or forecasts by mainstream "experts" should be taken with a grain of salt.

From Wall Street Journal Economics Blog: (bold mine)

Last month, Singapore’s government announced the economy grew 3.8% on-year in the second quarter. But as late as June, economists polled by the city-state’s central bank were predicting growth of just 1.5%.

Economists got it wrong on exports too: They predicted a nearly flat print in the second quarter, when exports actually fell 5.0%.

The difference was even starker in the first quarter: Economists in March predicted exports would fall 0.5%, but in fact they shrank a whopping 12.5%.

The Monetary Authority of Singapore polls economists at banks and research firms every quarter on key local data such as gross domestic product, exports, currency, inflation and employment. The results are released at the start of every quarter, with the third-quarter survey landing Wednesday.

It turns out that the 20 or so economists who respond to the survey get it quite wrong, quite often.

Economic predictions are never easy. But they become even more complex in tiny Singapore, where trade is more than three times the size of GDP.

Why this is so? The great Austrian professor Ludwig von Mises explained (Human Action page 31): (bold mine)

The experience with which the sciences of human action have to deal is always an experience of complex phenomena. No laboratory experiments can be performed with regard to human action. We are never in a position to observe the change in one element only, all other conditions of the event remaining unchanged. Historical experience as an experience of complex phenomena does not provide us with facts in the sense in which the natural sciences employ this term to signify isolated events tested in experiments. The information conveyed by historical experience cannot be used as building material for the construction of theories and the prediction of future events. Every historical experience is open to various interpretations, and is in fact interpreted in different ways

Even non-Austrian analyst, statistician and author Nassim Nicolas Taleb calls such error Historical Determinism as I previously pointed out

Reading or interpreting past performance (statistics) into the future along with seeing the world in the lens of mathematical formalism (econometrics) are surefire ways to misinterpret reality. 

Video: The Syrian War What You're Not Being Told

(hat tip Zero hedge)

China’s Inflation Rears its Ugly Head

For many, “cheapness” has been perceived as the key competitive advantage of the Chinese economy 

Cheap is really relative. The following article shows how inflationism by Chinese authorities has led to expanding relative “expensiveness” on many goods.

From Wall Street Journal (hat tip Zero Hedge)

In China, consumers pay nearly $1 more for a latte at Starbucks than their U.S. counterparts. A Cadillac Escalade Hybrid Base 6.0 costs $229,000 in China, compared to just over $73,000 in the U.S.

Welcome to China's modern retail world, where the price of many goods is far higher than in many other countries, a disparity that is all the more stark considering the income differences. A basic iPad 2 is priced at $488 in China, where average per capita income is around $7,500. The same tablet is $399 in the U.S., where average per capita personal income totals $42,693.

Clothing and other apparel is on average 70% more expensive for consumers in China than in the U.S., according to data from SmithStreet, which compared the prices of 500 items of 50 brands in both countries.

Government taxes and import tariffs are to blame for a lot of the price discrepancy, but for years the burgeoning Chinese middle class also seemed willing to pay more for products with consumer cachet, particularly imported goods. And companies happily charged what the market would bear, even finding high prices could help provide a quality halo effect, winning customers psychologically. In many cases, when foreign manufacturers charged more, Chinese producers followed suit.

Many Chinese turn to the internet’s eCommerce as alternative to pricier domestic goods. From the same article...

But today more Chinese consumers are pushing back, weary of sticker shock—and enlightened by the ability to compare prices elsewhere, thanks to the Internet and increased travel abroad.

Disgruntled shoppers like Guan Honglei, a 30-year-old finance worker who will shop only on overseas websites or in Hong Kong, have big implications for retailers that have raced to expand brick-and-mortar stores in mainland China.

"It's not worth shopping in China," said Mr. Guan, adding, "If you can wait, do it elsewhere."

It’s worth noting that while China’s statistical inflation rate has been tamed, domestic prices for many goods has been rising faster than the world. 

The implication is that Chinese authorities have been inflating at a faster pace compared with the others (chart from Mao Money Mao Problems).

The other interpretation is that statistics are hardly trustworthy since in the recent case, Chinese statistics which has been unfavorable to the powers that be has been censored, deleted or hidden.

It can be both

Should Chinese consumers elect to shift trade towards eCommerce based imports, then Chinese economy’s trade balance will likely transition from surpluses to deficits which will have to be funded by a reduction of savings or a build up on debt.

And as a result from all interventions (inflationism, government taxes and import tariffs—of course credit fueled property bubbles) Chinese productivity will shrink.

These are hardly signs that bolsters the case of a “Chinese century”

Oil Prices and The Possible Black Swan Risk from a Syrian War

Columnist Philip Coggan of the Buttonwood’s Notebook at the Economist writes (registration may be required) that risks from the escalation from a Syrian military strike shouldn’t be dismissed.

Analysts have been quick to point out that markets often wobble in the run-up to military interventions but then recover quickly as soon as they start; this was the case in the two Iraq wars. It may well be that a much more limited intervention in Syria (if, as is by no means certain, Congress approves it) will follow a similar pattern. What worried investors in the past, of course, was the wider ramifications of military action; whether the region would be set ablaze and oil supplies disrupted.

That remains the concern today. The Arab spring seems to have turned into an Islamic version of the Cold War, with proxy battles taking place between Sunni nations, led by Saudi Arabia and the Shia camp, led by Iran. (Syria is a predominantly Sunni nation but Assad draws his support from the Alawites, a branch of Shia). An attempt to dislodge Assad by the West could intensify this conflict, leading to an upsurge in terrorist incidents, attacks on Israel and so on; on the other hand, advocates of intervention argue that the long-running nature of the Syrian conflict has already destabilised the region.

Just because previous interventions did not lead to a wider war, does not mean the same will apply in Syria; if you juggle with a grenade long enough, it may go off. This is one of those scenarios where there are no clean outcomes, and it is foolish to predict which way events will turn out. But investors are well aware of this problem, which makes them uncertain at the prospect of western involvement.

Such palpable complacency from the lack of escalation is one reason why war mongers keep pushing for wars.

Of course wars are good businesses for the political class, their favored cronies (military industrial complex and banking) and welfare beneficiaries. And part of this agitation for war comes from ideology. 

As David Stockman writes at the Lew Rockwell.com

Indeed, the tragedy of this vast string of misbegotten interventions—from the 1953 coup against Mossedegh in Iran through the recent bombing campaign in Libya —-is that virtually none of them involved defending the homeland or any tangible, steely-eyed linkages to national security. They were all rooted in ideology—that is, anti-communism, anti-terrorism, humanitarianism, R2Pism, nation-building, American exceptionalism. These were the historic building blocks of a failed Pax Americana. Now the White House wants authorization for the last straw: Namely, to deliver from the firing tubes of U.S. naval destroyers a dose of righteous “punishment” that has no plausible military or strategic purpose. By the President’s own statements the proposed attack is merely designed to censure the Syrian regime for allegedly visiting one particularly horrific form of violence on its own citizens.

Well, really? After having rained napalm, white phosphorous, bunker-busters, drone missiles and the most violent machinery of conventional warfare ever assembled upon millions of innocent Vietnamese, Cambodians, Serbs, Somalis, Iraqis, Afghans, Pakistanis, Yemeni, Libyans and countless more, Washington now presupposes to be in the moral sanctions business?  That’s downright farcical.  Nevertheless, by declaring himself the world’s spanker-in-chief, President Obama has unwittingly precipitated the mother of all clarifying moments.

Nonetheless policy actions based on complacency increases the likelihood of a black swan event as Nassim Taleb posted in his facebook….

Something people don't realize about fat-tailed probabilities: We may accept to take risks with .00001 pct chance of blowing up the planet. May be OK for some. But the inconsistency is that we do serially and collectively take A LOT of "one-off" risk. If nothing happens, we may do it again. And again. Or we may take many of these at the same time. Merely allowing such action will eventually mean that we will have 100% chance of blowing up the planet.

Just change blowing up the planet with Middle East, this describes exactly how US foreign policy have worked.

Brandon Smith enumerates the potential contagion from the explosion of the Middle East Powder Keg here

And trouble in the Middle East has already been putting upside pressure on oil prices as shown by the US WTI (above) and Europe’s Brent (below)

But welfare states of the Gulf States and other oil producing nations will be comforted by rising oil prices since their welfare based political economies has been tied to oil prices (see above graphs).

In other words, politicians of the many Arab and other oil producing nations have been buying off their mandates or their political privileges via increasing welfare benefits on the population that requires high oil prices. And this serves as another reason why governments will keep on printing money. And this is one of the probable reasons why some Middle East countries secretly desire for more conflict in the region.

And unfolding events in the Middle East and other factors will like mean higher oil prices, as the independent research outfit BCA Research writes,

Risks to oil prices remain strongly skewed to the upside for the rest of 2013. Middle East tensions have removed significant spare capacity, at a time when the market is seasonally tight. Hence, any further supply disruption would be damaging.

Another upside risk is the potential “product-pull” on crude prices. Strong diesel demand may already be challenging U.S. refinery capacity. U.S. distillate production is at its highest level in absolute terms and relative to gasoline. High distillate crack spreads motivate refiners to bid up oil grades with the highest distillate output. As a result, crude prices get pulled up.

The U.S. consumer will not feel the pinch until oil prices are much higher, because gasoline cracks are likely to absorb most of the increase in crude. This would support oil demand despite higher prices.

It's not clear if oil price dynamics will merely be 'consumption demand' based. There is a possibility that sustained inflationism by governments and increasingly fragile risk environment could extrapolate to an increase in 'reservation demand' for commodities. The public may want to hold commodities out of fear of a fall in purchasing power amidst a risk off milieu.

The bottom line:

Underestimating the potential contagion from a Syrian war could mean trouble for one’s portfolio. 

High oil prices are likely to magnify rising bonds yields and thus put a lid on risk appetite.

Gold and oil prices are likely beneficiaries from the current environment.

Lessons from Singapore’s Central Bank: Central Banks are Vulnerable to Bankruptcies

Mainstream media and their favorite experts continue to impress upon the gullible public that foreign currency reserves acts as a shield against the risks of a crisis.

Well based on this theory, Singapore’s humongous forex reserves (more than twice the Philippines) imply that the current meltdown suffered mostly by emerging markets should have Singapore the least affected. 

 

Reality has shown otherwise. 

10 Year Singapore government bond yields continue to unsettle now at 3 year highs

The Singaporean Dollar has been sold off. The USD-SGD on an uptrend since December 2012.

The ASEAN meltdown has Singapore’s STI reeling from the ASEAN bear market forces.

While Singapore has technically not yet in a bear market, the break below the June lows and the recent ‘reprieve’ or tepid ‘suckers’ rally reveals of the STI’s vulnerabilities.

In my view, the stress in Singapore’s markets exhibits an ongoing deterioration of trade and financial linkages with ASEAN.

Now Sovereign Man’s prolific Simon Black propounds on how central banks can go bankrupt using the recent Singapore experience. (bold mine)

A few months ago, the Monetary Authority of Singapore (MAS), the country’s central bank, released its annual report for the fiscal year ending 31 March 2013.

And the results were ‘shocking’, at least for those of us who read central bank annual reports cover to cover like a Harry Potter novel.

The bottom line for MAS showed a mind-boggling S$10.2 BILLION loss (roughly $8 billion USD), about as much as General Motors lost in its worst year.

This is the antithesis of what one would expect from Asia’s dominant financial center. And it begs the question– how can a central bank, which has the power to conjure money out of thin air, even suffer a loss, let alone such a heavy one?

Simple. MAS was desperately trying to hold back the Singapore dollar’s rise against the US dollar.

Because Singapore is a trade-based economy and the US dollar is so central in international trade as the world’s reserve currency, MAS has been trying to keep the Singapore dollar somewhat restrained vs. the US dollar.

Essentially MAS was buying US dollars and then intentionally selling them at a lower price in order to create artificial demand for US dollars.

This was a completely failed strategy.

Singapore’s ultra-healthy economy attracts investment from around the world, and the natural tendency is for the Singapore dollar to rise.

This rise has been even more pronounced given Ben Bernanke’s journey into monetary madness over the last several years.

Since 2008, the Singapore dollar steadily appreciated by more than 20% from peak to trough as investors sought a more stable currency alternative. After all, Singapore is a very strong, growing economy with zero net debt.

Because of these factors, MAS lost a prodigious sum trying to prevent its currency’s natural rise; the S$10.2 billion they lost constitutes roughly 3% of GDP.

In fact, Singapore’s economy only grew by S$11.5 billion from 2012-2013… so MAS managed to blow through 87% of the country’s economic growth last year fighting Ben Bernanke. Crazy.

This is something that is clearly not sustainable. And while that term is a bit overused today, such losses cannot continue indefinitely.

A central bank CAN go bankrupt, often creating a major currency crisis. And this is what suggests to me, above all else, that the fiat system is on the way out.

Fiat currency has been the greatest monetary experiment in the history of the world. Four men control over 70% of the world’s money supply, giving them control over the price of… everything.

And this system is so absurd that, healthy nations like Singapore are forced to lose billions in order to keep playing the game.

That’s exactly what it is– a game. Like most nations, Singapore has been playing this game for decades while the US changes the rules whenever it sees fit.

And it’s becoming obvious that the cost of playing is now far exceeding the benefit it receives. The hard numbers are very clear on this point.

This spells one inexorable conclusion: game over.

Another interrelated consequence of this US dollar recycling (vendor finance scheme) by Singapore’s central bank has been to blow homegrown bubbles 

Growth in the loans to the private sector has virtually been skyrocketing

Singapore’s surging housing index has passed the 1997 Asian crisis highs!

And domestic credit to the private sector at 112% of GDP is about the highs of the 1980s and similarly approaches the Asian crisis highs of 1997.

I don’t have data on the claims to the banking system on ASEAN by Singapore and vice versa, but I suspect that there may be significant private sector exposures on the ASEAN investment corridor, as well as ASEAN investments in Singapore

Should the ASEAN meltdown continue or deepen then the risks of a regional crisis grows. 

We should thus be vigilant on the conditions ASEAN markets

And despite the denials of media and their clueless highly paid mainstream experts, we should expect the unexpected 

Mounting losses compounded by economic slowdown or recession will place central banks on the spotlight.

Caveat emptor

Marc Faber on US Meddling: Middle East is a powder keg and it will go up in flames

In a recent CNBC interview, Dr. Marc Faber thinks of the possibility that a big fall in US stocks may prompt asset allocators to flow back into the badly beaten emerging markets given the assumption of the world has been "swimming in the pool of liquidity"

He says that “In the US, the cycle isn’t favourable” and thinks a rally in US Treasuries will happen due to the return of “off risk trade”

Dr Faber: Interest rates are no longer a tail-wind, a headwind, the earnings growth is not there, the emerging economies…shows no growth. Where are earnings going to come from?

[my impression is that the world is presently undergoing a periphery-to-core bubble bust process such that instead of a rotation, a steep fall in US stocks will exacerbate conditions in emerging markets. In other words, the “swimming pool of liquidity” has already been draining and will continue to shrink as losses continue to mount. This leaves little room for rotations. And the worsening of real economies will only exacerbate this. Yet if the convulsion in asset markets persists or even intensifies, then it would be intuitive to expect a global recession anytime between 2014-2015]

Dr. Faber views deteriorating events in the Middle East as enhancing market risks

Middle East is a powder keg and it will go up in flames because the western arrogance imperialistic powers they still meddle in the local affairs and supply all kind of people including Al Qaeda related parties with weapons. It is going to be a disaster. It is gonna spread from Syria and Egypt into Saudi Arabia into the Emirates eventually so forth and so on. We are going to have a huge mess

The message from Dr. Faber’s interview: Deteriorating global economic conditions plus increasing geopolitical risks are hardly “bullish” for risk assets, like equities.

While US treasuries may indeed rally amidst a risk off trade, I doubt if we will be seeing a replay of 2007-8. Instead I expect combination of 2007-2008 bubble bust dynamics along with a 1970s stagflation scenario.