Phisix: Another Last Minute Pump Eases Today’s Loses; Europe Stocks soar on Expected ECB Pump

To my valued email subscribers: two posts which will not be included in your mailbox,

-Deposit Confiscation via Negative Interest Rates: German Bank Sets Trend

-Abenomics: Has Blowing the World’s Biggest Bond Bubble been an Act of a Genius?

Back to the regular programming...

Massaging of the index has really become almost a daily affair.

I wrote two weeks back…

Moreover, the recent rebound amidst swooning volume comes in the visage of support from undefined or unidentified stock market operator/s. These faceless entities appear to have been responsible for most of the rallies over the past two consecutive weeks…

Nonetheless, the common trait in the massaging the index, either via intraday “pump” or “marking the close” have been to massively push up prices of at least 3 issues with combined market cap weighting of 15-20%. In panic buying episodes, (September 24 and October 16), the kernel of these activities transpire after lunch break.

Well today’s version of index management has been another fantastic marking the close.

Unlike most in past where momentum aided the last minute push, today’s action was in absence of momentum. The Phisix has been significantly down by about .52% a minute prior to the runoff when operators “pumped” the index to erase 65% of today’s losses. The Phisix ended the day off by only .18%.  (charts from technistock and colfinance)

The same modus has been at work; the pump involved three major heavy weights from 3 industries. 

BDO’s push has been less evident since this has been strongly up for the day (first breakout among the majors?). BDO soared 5.86% today. On the hand URC was down .58% for the day, but this came from a lot deeper decline until the pump. Meanwhile, AC seems as the star of the day, where most of today’s 2.31% gains emanated from the last minute pump.

Nonetheless here is Monday November 3rd's spectacular intraday afternoon delight pump PLUS marking the close. 

As I have been saying the implicit objective of the stock operators has been to push the index back to the 7,400 by moving 50 or by 100 points. Yet Monday’s thrust towards 7,400 came with unimpressive volume.

Instead of an afternoon delight, yesterday (left window) turned out to be a Tuesday ‘down in the dump’ marked by an afternoon ‘dump’.

Mainstream experts had been quick to put a blame on PLDT’s lower than expected earnings. I understand that PLDT has the biggest market cap weighting in the Phisix basket but why should this drag the entire market sentiment down? In addition, PLDT remains profitable despite marginal downscaling of earnings.

Well here is the answer as I spelled out before: The market has been overpaying for PLDT!

The public has been buying into the promise for more “g-r-o-w-t-h”. Yet history suggests that PLDT’s EPS growth rate has been consistently within less than 5% rate (or less than statistical GDP). Over the past 3 years (2011-13), PLDTs EPS CAGR has been at 3.77%. If 2010 will be included, the 4 year CAGR drops to a negative (-9.83%)!

PLDT’s prices have become disconnected with reality.

And it’s not just PLDT but most of the index issues has been absurdly overpriced! So highly distorted prices incited the market to react to unexpected bad news with vehemence.

But here is one seeming parallel; yesterday’s dump seemingly resembles the latest attempt to breach the 7,400 last September 25th—an early day push that melted away (right window)!

I would guess that given BDO’s ‘breakout’ the strategy for the stock operators  now may shift to focus on a one-by-one push for a breakout for major caps for them to succeed a crossover beyond the 7,400. This banks on no bad news that will impede their desperate actions.

As a reminder, the obverse side of every mania (and market manipulation) is a crash.

While I am writing this it is fascinating to observe that European stocks has been surging despite a raft of bad news:

German Services PMI are down, Eurozone’s composite PMI are likewise negative, Europe’s PMI services also in red aside from a collapse in retail sales. (from investing.com)

Well the reason for the semi melt-up? The headlines says it all

From Bloomberg: This month’s data make for grim reading, painting a picture of an economy that is limping along and more likely to take a turn for the worse than spring back into life,” said Chris Williamson, Markit’s chief economist. “The combined threat of economic stagnation and growing deflationary risks will add to pressure on the ECB to do more to stimulate demand in the euro area, strengthening calls for full-scale quantitative easing.”

Markets have seen a string of bad news as signs for more steroids from the ECB. Bad news is good news.

Sad to see how markets have become depraved and has lost their function of price discovery.

Geopolitical Risk Theater Links—Ukraine Elections, Nato’s Claim: Russian Troop Build Up, Unraveling US Strategy versus ISIS? and more…

Updates on the geopolitical risk theater

1 Ukraine crisis: President Poroshenko's threat after rebel polls, BBC.com November 4, 2014

US double standard on Ukraine...2 Daniel McAdams In Ukraine, A Tale of Two Elections Ron Paul Institute November 1, 2014

The US government loves to “promote democracy” overseas, often at the barrel of a gun. Strangely enough, however, it often “deplores” actual elections being held in such places. Take Ukraine, for example. An election held last week by a group that forcibly seized power from a legitimately-elected government was hailed by the US administration as a great democratic achievement…

However in eastern Ukraine, which refused to recognize February’s US-backed coup in the western part of the country, parliamentary and presidential elections scheduled for tomorrow are scorned and even “deplored” by the US administration.

3 NATO: Russia Moves Troops Closer To Ukraine Border Reuters.com November 4, 2014

Russia has moved troops closer to the border with Ukraine and continues to support rebels in the country's east, NATO's chief said on Tuesday, after an election held by the pro-Russian separatists and condemned by Kiev and Western leaders.

Ukraine's president said Sunday's vote flouted terms of a plan to end a war that has killed more than 4,000 people, and that newly formed army units would be sent to defend a string of eastern cities against a possible new rebel offensive.

4 Russia snubs nuclear security meeting Guardian.com November 4, 2014

5 Russia test-fires Topol-M intercontinental ballistic missile November 1, 2014

6 The Secret Life of an ISIS Warlord Daily Beast October 27, 2014

Abu Omar al-Shishani has a fierce, gorgeous Chechen bride. He learned intelligence operations from the U.S. And his older brother may be the real genius of ISIS.

7. Iraq Confirms ISIS Massacre of Sunni Tribe Time.com November 4, 2014

8 Inside Kobane: First pictures from the Syrian front line battle between Kurds and Islamists emerge after ISIS reveal images of their fighters within the city Daily Mail November 4, 2014

Despite superior airpower… 9. Pentagon denies US strategy to defeat Isis is unravelling Guardian.com November 4, 2014

The Pentagon has denied that the US strategy against Islamic State (Isis) is in disarray after a series of setbacks as the war known as Operation Inherent Resolve stretches into its fourth month.

10 Russia Weaponizes The Arctic: Will Build 13 Airfields And 10 Radar Stations To Meet "Unwelcome Guests" Zero Hedge October 27, 2014

11 Al-Qaeda reportedly seizes US anti-tank rockets after defeating rival Syrian rebels RT.com November 3, 2014

12 China unveils anti-drone laser weapon able to shoot down 'small aircraft' within 5 seconds RT.com November 3, 2014 (bold mine)

China has developed and successfully tested a highly accurate laser defense system against light drones. The homemade machine boasts a two-kilometer range and can down "various small aircraft" within five seconds of locating its target.

Boasting high speed, great precision and low noise, the system is aimed at destroying unmanned, small-scale drones flying under an altitude of 500 meters and at speeds below 50 meters per second, the official Xinhua news agency reported, citing a statement by one of the developers, the China Academy of Engineering Physics (CAEP).

13 Even the Portuguese Air Force has intercepted and photographed Russian bombers wandering across Europe Aviationist November 2, 2014

14 Why are two Russian Il-78 Midas tankers deployed to Egypt? Are Moscow’s bombers heading to the Mediterranean Sea? Aviationist November 3, 2014

Was it just a practice for future missions or perhaps the Russians are intending to route Tu-95MS Bear Hs into the Mediterranean?

If so, maybe we are going to see some shots of the Russian bombers as those taken by the Italian air force pilots during their Cold War intercepts.

15 Iran: U.S. Is Still ‘Number One Enemy Freebeacon.com November 2, 2014

The United States remains “the great Satan” and Iran’s “number one enemy,” Iranian military and defense officials said over the weekend in statements that also called for “the prosecution, trial, and punishment of the White House.”

The inflammatory comments, released over the weekend by Iran’s Defense Ministry and the Revolutionary Guard Corps (IRGC), come as nuclear negotiations between the United States and Iran reach a critical juncture.

Quote of the Day: Statistical Economy is a Fictitious Device to Justify Interventions

In a free market environment free of government interference the “economy” doesn’t exist as such. A free market environment is populated by individuals, who are engaged in the production of goods and services required to sustain their life and well being i.e. the production of real wealth. Also, in a free market economy every producer is also a consumer. For convenience sake we can label the interaction between producers and consumers (to be more precise between producers) as the economy. However, it must be realised that at no stage does the so called “economy” have a life of its own or have independence from individuals.

While in a free market environment the “economy” is just a metaphor and doesn’t exist as such, all of a sudden the government gives birth to a creature called the “economy” via its constant statistical reference to it, for example using language such as the “economy” grew by such and such percentage, or the widening in the trade deficit threatens the “economy”. The “economy” is presented as a living entity apart from individuals.

According to the mainstream way of thinking one must differentiate between the activities of individuals and the economy as a whole, i.e. between micro and macro-economics. It is also held that what is good for individuals might not be good for the economy and vice-versa. Within this framework of thinking the “economy” is assigned a paramount importance while individuals are barely mentioned.

In fact one gets the impression that it is the “economy” that produces goods and services. Once the output is produced by the “economy” what is then required is its distribution among individuals in the fairest way. Also, the “economy” is expected to follow the growth path outlined by government planners. Thus whenever the rate of growth slips below the outlined growth path, the government is expected to give the “economy” a suitable push.

In order to validate the success or failure of government interference various statistical indicators have been devised. A strong indicator is interpreted as a success while a weak indicator a failure. Periodically though, government officials also warn people that the “economy” has become overheated i.e. it is “growing” too fast.

At other times officials warn that the “economy” has weakened. Thus whenever the “economy” is growing too fast government officials declare that it is the role of the government and the central bank to prevent inflation. Alternatively, when the “economy” appears to be weak the same officials declare that it is the duty of the government and central bank to maintain a high level of employment.

By lumping into one statistic many activities, government statisticians create a non-existent entity called the “economy” to which government and central bank officials react. (In reality however, goods and services are not produced in totality and supervised by one supremo. Every individual is pre-occupied with his own production of goods and services).

We can thus conclude that so called macro-economic indicators are fictitious devices that are used by governments to justify intervention with businesses. These indicators can tell us very little about wealth formation in the economy and thus individuals’ well-being.

(bold mine)

This is from Austrian economist Dr. Frank Shostak at the Cobden Center.

Deposit Confiscation via Negative Interest Rates: German Bank Sets Trend

When Keynes wrote then that “Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some", confiscation via inflation then has been imposed tacitly or "secretly and unobserved".

Not anymore. Government’s confiscation has become an upfront policy tool. [isn't it a wonder, considering record stocks, isn't today supposedly a boom, but why have policymakers been panicking?]

Prior to the last month’s QE, the ECB launched their negative deposit rates last June. Well ECB’s policies have now been transmitted to the banking system. Last November 1, a German bank embarked on imposing negative rates on consumer deposits.

From Sovereign Man’s Simon Black

On November 1st, the first European bank has passed along these negative interest rates to its retail customers.

So if you maintain a balance of more than 500,000 euros at Deutsche Skatbank of Germany, you now have the privilege of paying 0.25% per year… to the bank.

We’ve already seen this at the institutional level: commercial banks in Europe are paying the ECB negative interest on certain balances.

And large investors are paying European governments negative interest on certain bonds.

Now we’re seeing this effect bleed over into retail banking.

It’s starting with higher net worth individuals (the average guy doesn’t have half a million euros laying around in the bank). But the trend here is pretty clear– financial repression is coming soon to a bank near you.

It almost seems like an episode from the Twilight Zone… or some bizarre parallel universe. That’s the investment environment we’re in now.

Bottom line: if you’re responsible with your money and set some aside for the future, you will be penalized. If you blow your savings and go into debt, you will be rewarded.

If we ask the question “cui bono”, the answer is pretty obvious: heavily indebted governments benefit substantially from zero (or negative) rates.

Case in point: the British government just announced that they would pay down some of their debt that they racked up nine decades ago.

In 1927, then Chancellor of the Exchequer Winston Churchill issued a series of bonds to consolidate and refinance much of the debt that Britain had racked up from World War I and before.

This debt is still outstanding to this day. And the British government is just starting to pay it down– about $350 million worth.

Think about it– $350 million was a lot of money in 1927. Thanks to decades of inflation, it’s practically a rounding error on government balance sheets today.

This is why they’re all so desperate to create inflation… and why they’ll stop at nothing to make it happen. (It remains to be seen whether they’ll be successful, but they are willing to go down swinging…)

What’s even more extraordinary is how they’re trying to convince everyone why inflation is necessary… and why negative rates are a good thing.

On the ECB’s own website, they say that negative interest rates will “benefit savers in the end because they support growth and thus create a climate in which interest rates can gradually return to higher levels.”

I’m not sure a more intellectually dishonest statement could be made; they’re essentially telling people that the path to prosperity is paved in debt and consumption, as opposed to savings and production.

These people either have no idea how economies grow and prosper, they’re outright liars, or they’re completely delusional.

Negative rates will serve as a precursor to the widespread adaption of deposit confiscation via haircuts or wealth taxes especially when the global crisis emerges. 

Yet the desperate desire by governments to "create inflation" means only to survive or maintain the status quo for the political establishment (troika welfare-warfare state, politically connected too big to fail banks and central banking) charged to their respective citizens by inflating debt away. 

All those supposed growth thing are no more than propaganda smokescreens. This means that the promotion of wanton consumption financed by destroying savings through indiscriminate debt acquisition represents a fundamental recipe towards depression as resources continue to be misallocated. 

Thus the thrust by governments to generate inflation is to balloon systemic risk on overleveraged systems.

Nonetheless, the article above reveals of signs of desperation by governments to confiscate resources in the facade of debt financed consumption that should allegedly serve as elixir to real economic activities. 

As the great Austrian economist, Ludwig von Mises presciently warned,

Credit expansion is the governments' foremost tool in their struggle against the market economy. In their hands it is the magic wand designed to conjure away the scarcity of capital goods, to lower the rate of interest or to abolish it altogether, to finance lavish government spending, to expropriate the capitalists, to contrive everlasting booms, and to make everybody prosperous…

It is a fact that today measures aimed at lowering the rate of interest are generally considered highly desirable and that credit expansion is viewed as the efficacious means for the attainment of this end. It is this prepossession that impels all governments to fight the gold standard. All political parties and all pressure groups are firmly committed to an easy money policy.

Unfortunately politically incited quasi booms always morphs into an economic bust, again the great Mises

But the boom cannot continue indefinitely. There are two alternatives. Either the banks continue the credit expansion without restriction and thus cause constantly mounting price increases and an ever-growing orgy of speculation, which, as in all other cases of unlimited inflation, ends in a “crack-up boom” and in a collapse of the money and credit system. Or the banks stop before this point is reached, voluntarily renounce further credit expansion and thus bring about the crisis. The depression follows in both instances.

How we live in very interesting times

Abenomics: Has Blowing the World’s Biggest Bond Bubble been an Act of a Genius?

The mainstream apparently gets into the Abe-Kuroda pantomime.

At the Bloomberg, Asian columnist William Pesek asks whether BoJ’s inflation of the world’s greatest bond bubble is an act of a genius or a madman? (bold mine)

Ten years from now, will Bank of Japan Governor Haruhiko Kuroda be regarded as a genius or a madman?

Kuroda's shock-and-awe stimulus move on Oct. 31 delighted markets and won him plaudits as a monetary virtuoso. Japan, the conventional wisdom tells us, has finally gotten serious about ending deflation, and isn't it wonderful. But what happens when a central bank buys up an entire bond market? We're about to find out as Kuroda, like some feverish hedge fund manager, corners Japan's. Neglected in all the celebrating: To reach a 2 percent inflation goal that's both arbitrary and meaningless, the BOJ is destroying Japan's standing as a market economy.

Now to the world’s biggest bond bubble…

In announcing that it will boost purchases of government bonds to a record annual pace of $709 billion, the central bank has just added further fuel to the most obvious bond bubble in modern history -- and helped create a fresh one on stocks. Once the laws of finance, and gravity, reassert themselves, Japan's debt market could crash in ways that make the 2008 collapse of Lehman Brothers look like a warm-up. Worse, because Japan's interest-rate environment is so warped, investors won't have the usual warning signs of market distress. Even before Friday's bond-buying move, Japan had lost its last honest tool of price discovery. When a nation that needs 16 digits in yen terms to express its national debt (it reached 1,000,000,000,000,000 yen in August 2013) sees benchmark yields falling, you've entered the financial Twilight Zone. Good luck fairly pricing corporate, asset-backed or mortgage-backed securities.

Considered in relation to gross domestic product, Kuroda's purchases make the U.S. Federal Reserve's quantitative-easing program look quaint. The Fed, of course, is already ending its QE experiment, while Japan is doubling down on one that dates back to 2001. Kuroda's latest move means Japan's QE scheme could last forever. The BOJ has willingly become the Ministry of Finance's ATM; reversing the arrangement will be no small task.

The wish that Japan's QE scheme "could last forever" represents Kuroda’s Hail Mary Pass.

However as the April 2013 initial doubling of monetary base reveals, there is no such thing as a free lunch. The failure of the first phase (QE 1.0) thus leads to the second wave (QE 2.0)…

As I recently wrote

There you go: the BoJ’s ¥50 trillion a year down the drain. Now if one fails with ¥50 trillion, perhaps will 60% more or ¥80 trillion serve as a magic number and do the trick?

I believe that 2% inflation signifies as the headline objective presented by Mr. Kuroda, however the real goal must be to monetize Japan’s gargantuan unsustainable debt problems…

…and this includes the financing of the government’s reckless fiscal activities which has all been supported by debt (charts above from Zero Hedge). 

Runaway government spending can't be funded by stagnating tax revenues as the fiscal deficit gap continues to widen (top). This comes as the share of interest rate and debt servicing (bottom) continues to grab a bigger piece of the tax revenue pie. So there is no way Japan's economy can pay back all those loans under current political economic conditions except to monetize them (inflate the debt away!).

Again I as commented,

So the BoJ may have expanded her QE to accommodate more monetization of fiscal deficits aside from possibly including the possible shift by GPIF out of domestic bonds. Of course the latter could function as a decoy as to shield the Japanese government from revealing its anxieties.

Back to the money illusion…

All this liquidity has made for surreal events in Tokyo. Take the news that Japan's $1.2 trillion Government Pension Investment Fund will dramatically rebalance its portfolio away from bonds. Japan has enormous public debt and a fast-aging population, and now the world's biggest pension pool is shifting to stocks. Yet somehow, 10-year yields are just 0.43 percent. The explanation, of course, is that the parts of the market the BOJ doesn't already own are sedated by its overwhelming liquidity. The BOJ is now on a financial treadmill that's bound to accelerate, demanding ever more multi-trillion-dollar infusions to keep the market in line.

To Japan bulls, the end justifies the means. If Kuroda changes the deflationary mindset that's stalked Japan for 17 years now, then his gambit was worth it. One problem with this argument is that deflation isn't the cause of Japan's malaise, but a side-effect. Consumer prices rising at 2 percent or more will be a big problem if Prime Minister Shinzo Abe doesn’t push ahead with plans to deregulate the economy and prod companies to raise wages. That's doubly true as Tokyo mulls another growth-denting rise in the consumption tax.

Realize that the BoJ’s supposed goal to “reach a 2 percent inflation” is diametrically opposite to how inflation influences interest rates. So the BoJ’s incoherent act simply implies that their policies are self defeating; either this leads to boom-bust cycle or to hyperinflation. Kuroda's has adapted policies that has essentially boxed themselves into a corner, there is no middle ground.

In addition, by draining JGB liquidity from the marketplace this would magnify Japan’s risk of financial system’s instability 

Now, the BoJ overhauled into a hedge fund…

Another problem is that Kuroda is turning the BOJ into the world's biggest asset-management company. The BOJ won't admit it, but it's monetizing Japan's debt on a massive scale, and probably even retiring large blocks of it -- just as the government did in the 1930s. What happens when the BOJ decides Japan needs a credible and functioning bond market in the years ahead? Kuroda's successors face terrible odds disengaging from a market he's effectively nationalized.

Well, if we are to describe bubble as a product of unsustainable ‘something for nothing’ policies which leads asset pricing to vastly deviate from pricing of market activities outside such (political) interventions then creating the world’s biggest bond bubble isn’t likely a work of a 'genius'. 

And there won't be any orderly fixes because of the massive scale of imbalances that has already been built into the system. And this is why Abe-Kuroda has been doubling down in the hope to kick the proverbial can down the road. Hope is now Abe-Kuroda's ONLY strategy.

In addition, the sustained assault on the economy by the government will most likely lead to more disruption in economic activities.

And the path to hyperinflation is the overwhelming destruction of the economy's production capacity through the total distortion of price signals from sustained money printing. Such dynamic will be compounded by other interventions like price controls, raising taxes, currency controls, et. al., in response to the government's desperate recourse to the use of the printing/digital press to finance fiscal requirements or fiscal monetization that leads to a loss of confidence on the currency. 

There are real time examples of hyperinflationary governments: Venezuela, Argentina...previously Zimbabwe

Will Japan be next???

For now Japan’s advantage is that they are still open or still have access to the global markets. But this may change.

Media has already been already speculating that the Abe administration will squelch growing opposition to Abe-Kuroda policy in the BoJ by replacing dissidents with pro-administration henchmen. 

The next step may be to increase protectionism.

PM Abe’s reluctance to expand trade by the Trans Pacific Partnership as well as the promotion of other policies in favor of vested interest groups gives a hint on PM Abe’s proclivity for protectionism.

A full scale ‘beggar thy neighbor’ currency war would imply protectionism and could be reinforced by other economic warfare policies again through currency and trade controls or more.

For those who think today’s Nikkei ramp from BoJ-GPIF's direct intervention will be sustainable, history gives us a clue. 

The first wave of 50 trillion yen had a 7 month euphoric effect after which the Nikkei went rangebound. Yet much of the post 2013 QE 1.0 trading range support has been in anticipation of today’s QE. 

The 64 Quintillion Question is: will 80 trillion be the last or will there be more? 

If 80 trillion ends, the stock- (greatest) bond market bubble boom will turn out to be a colossal historical bust. 

However if 80 trillion will be added or if the "financial treadmill" is bound to accelerate, then the Nikkei, as Dylan Grice puts it, may hit 63,000,000 or may be alot higher than the current levels.

Realize too that all episodes of hyperinflation has been accompanied by soaring stocks which runs alongside domestic currency collapses. 

The unfortunate part is that any stock market gains from hyperinflation will have limited purchasing power. In the case of Zimbabwe, thousands of percentage stock market returns can only buy 3 eggs!!!

ASEAN's Hissing Bubbles: Thailand Non Performing Loans Swell as Malaysia’s Property Markets Cools

Those booming stock markets appear to be increasingly masking surfacing signs of troubles in ASEAN’s real economy

The Bank of Thailand (BoT) projects a mild recovery in her sluggish economy predicting a 1.5% growth this year and 4.8% next year banking on recently announced stimulus. The Thai government announced a 364 billion baht (US $11 billion stimulus last October. 

The Thai economy has recently endured a significant downshift aggravated by the tumultuous politics which culminated with a coup last May. 

2Q GDP of a  marginal +.4 growth in GDP spared the Thai economy from a technical recession (chart from tradingeconomics.com)

Given the stagnant 1H, it would take about 3% growth for the 2H in order to meet the BoT’s 1.5% target this year. Yet the BoT admits that debt burdened consumers have been marginally improving.

From Bernama.com.my(bold added) Demand in the private sector play a greater role in driving the economy but low prices of farm products and high household debt are limiting consumption. In addition, slow government spending is limiting investment in the private sector, said Roong…However, spending on durable goods, especially automobiles, has not recovered due to high household debt and strict lending controls by financial institutions.

As a side note to the biased report, slow government spending isn't an obstacle to private sector investment. It is those immense debt levels spent on bubble projects that has impeded investments. Importantly all government spending are anchored on forcible transfers from the private sector money/resources which means growth in government spending stymies private sector investments. This is an economic concept called crowding out.

To add, exports have reportedly fallen too, from the same article: According to Roong, the value of Thai exports fell by 1.7 per cent in the third quarter although it rose in September by 2.2 per cent.

So banking on government spending to spike the economy to meet the 1.5% target is like promising the moon. Of course there is such a thing called statistical massaging for the Thai government to meet their targets.

But the optimistic growth by the Thai government seems faced with a major headwind: ballooning non performing loans (NPL)

From Nikkei Asia: (bold mine)

Loan growth at Thailand's four major banks slowed in the third quarter through September, reflecting the slow recovery in the country's business and consumer confidence since the political turmoil deepened in the country earlier this year. Nonperforming loans increased, on the other hand, as household debt continued to grow.

According to the banks' recently released third quarter results, nonperforming loans rose at all four banks. The combined amount was 190 billion baht ($5.8 billion) as of the end of September, up more than 10% from the end of December 2013. High household debt level is one factor for the bad loans. The ratio of household debts to gross domestic product was 83.5% as of the end of June, a 4 percentage point increase on the year.

Despite the marked slowdown in the Thai economy, and the reported recent slowdown in bank lending, it is still surprising to see lofty levels in credit expansion in the private sector in 1H of 2014 (left), but money supply seems to have plateaued for the year.

The leveling of money supply in the face of sustained credit expansion gives a clue that part of the money being borrowed may be used to pay off existing liabilities: Debt IN Debt OUT. Such dynamics would seem as consistent with the NPL growth being experienced by major Thai banks as some entities may not have been able to sustain maintaining onerous debt levels.  Debt payments and defaults destroys money.

As I pointed out last May, a material slowdown in the Thai economy will expose on her banking system’s huge debt problem. 

And given the substantial debt exposure by the Thai economy, such stimulus won’t seem enough to shield her economy from any intensification of debt problems which has likewise been amplified by the deceleration of Thailand’s property bubble. 

The Global Property Guide on Thailand’s housing prices: housing prices rose by 2.28% during the year to Q2 2014, down from 3.76% the previous year. Housing prices dropped by 0.25% q-o-q in Q2 2014.

Aside from Thailand, the Malaysian economy seems faced with same predicament. Malaysia like Thailand has the highest household debt exposure among the ASEAN majors, chart from the World Bank.

Perhaps worried about a runaway property bubble Malaysia’s government has embarked policies to rein property prices, the effects have now become apparent

From Nikkei Asia (bold mine)

Uncertainty is growing about the future of Malaysia's housing market because of government measures to curb speculation and excessive competition in urban areas.

In Kuala Lumpur, high-rise condominiums are being built everywhere, even though many new apartment blocks are half-empty. Malaysia's leading property developer, Gamuda, says the country's real estate market is losing steam. Another major developer, UEM Sunrise, has cut its 2014 sales target from 3.2 billion ringgit ($962 million) to 2 billion ringgit.

A survey by the Real Estate and Housing Developers' Association Malaysia paints a grim picture. Between January and June this year, 10,189 new condos went on sale, up 9% from the July to December period last year. However, the ratio of purchases fell in the first half of 2014 by 4 percentage points to 49%.

The survey found 35% of respondents are pessimistic about prospects for Malaysia's housing market for the second half of this year, while 46% are pessimistic about the first half of next year. Despite this, developers plan to sell 15,820 condos in the July to December period, a nearly 70% increase from the same period last year. Analysts see this as optimistic.

Bank Negara Malaysia, the country's central bank, last July implemented a more stringent housing loan policy to cool the overheating real estate market. And the government will in April introduce a 6% consumption tax, which is expected to include property transactions. While it is hoped these measures will help prevent a property bubble, concern is growing they could also quickly dampen investors' enthusiasm for real estate.

There is also the problem of a supply glut. High-rise condos continue popping up in big cities, but their prices are declining in some areas.

Aside from taxes and increased stringent lending guidelines, the Malaysian government has increased official interest rates last July by 25 basis points.

Nonetheless despite government actions, loans to the private sector continues to skyrocket even as money supply levels appears to be inflecting—signs of debt in debt out. 

NPLs growth should eventually follow while the Malaysian economy should start to downshift. It’s when the slowdown has been magnified when bad debts become pronounced. And both economic slowdown and bad debts will function as a feedback mechanism.

At the end of the day, ASEAN has been revealing increasing signs of credit strains.  As I pointed out at the start of the year, ASEAN is a candidate for a global black swan event. All it takes is for a trigger to expose on all the accrued unsustainable imbalances.

Don’t worry be happy, stocks will rise forever. As of the close of October 31, year to date gains of Thailand’s equity bellwether the SET has been at a phenomenal 21.98%! In today’s world the more the risks, the higher returns. Whereas Malaysia’s KLSE has been down –.63%.

Foreign Affairs’ Richard Katz: Why Abenomics is Voodoo Economics

I have written extensively about the Japanese government’s Hail Mary Pass in the form of Friday’s QE 2.0 last weekend, now this article from the Richard Katz at the Foreign Affairs entitled ‘Voodoo Abenomics: Japan's Failed Comeback Plan’ provides helpful insights of some of the micro-defects of Abenomics: particularly the focus on short term superficial gains at the expense of instituting real reforms 

1 Abenomics fails to ease rigid labor laws (all bold emphasis mine)

Japan’s rigid labor laws make it nearly impossible to lay off permanent employees in downtimes, companies now tend to fill open slots with part-time or temporary workers, and they typically pay them a third less. Today, 17 percent of Japanese men aged 25 to 34 hold such second-class jobs, up from four percent in 1988. Low-paid temps and part-timers now make up 38 percent of Japanese employees of all ages and both sexes -- a stunning figure for a society that once prided itself on equality.

Prime Minister Shinzo Abe promised to revive Japan when he took office in December 2012, and he often boasts of all the jobs he has added since. But all the gains have been for irregular work; regular jobs have fallen by 3.1 percent. Consequently, the average wage per worker in real terms has fallen by two percent under Abe. No wonder consumer spending is anemic…

What counts as a personal tragedy for each worker translates into an economic disaster for Japan as a whole. The country’s reliance on irregular workers eats away at its main resource: its human capital, meaning the skills that enable workers to use the most up-to-date technology and methods. Because irregular workers don’t acquire the skills employers seek, the longer they stay stuck in their dead-end jobs, the harder it becomes to ever get a regular one -- and the more human capital erodes. The low marriage rate among irregular workers accelerates Japan’s demographic decline. That, in turn, amplifies economic strains, such as the shrinking number of workers to support the growing ranks of retirees…

2 The policy of inflationism supposedly aimed at surreptitiously boosting ‘real wages’ fails due to real micro problems.

Since 1997, wages in Japan have fallen by nine percent in real terms. They are expected to continue falling, despite highly advertised wage hikes by a few hundred giant firms whose profits from overseas sales have been artificially boosted by the weaker yen. Abe claims that wages will rise once workers and firms come to expect inflation. In reality, deflation is not the cause of Japan’s problems but a symptom. Trying to cure Japan’s malaise by generating inflation is like trying to cure a fever by putting ice on the thermometer

3. Once again, invisible confiscations—arbitrary confiscation for the benefit of the few (here the external transfers)…

Unfortunately, most of that increase stems from a 25 percent drop in the value of the Japanese yen, which raised prices on imports of everything from electronic gadgets to food to raw materials such as oil, as well as on products made from those imports. The devaluation effectively transfers income from Japanese consumers and firms to foreign oil sheiks, farmers, and manufacturers. Besides, since the yen has more or less stabilized, the inflationary effect of the depreciation is likely to ebb…

The primary beneficiary has been no more than the government. Boosting the stock market and real estate represents hidden transfers to these domestic vested interest groups at the expense of the yen holders.

4. Abenomics is an example of the explosion of the populist myth of where cheap currency equals strong exports

Currency depreciation can cheapen the price of exports in overseas markets, helping a country export more. But the flip side is that imports become more costly, and in Japan’s case, the harm suffered by consumers and companies has vastly outweighed the benefits enjoyed by exporters. The real volume of exports -- tons of steel, number of cars, and so on -- has barely risen since the start of Abe’s term.

It’s really more than this: it’s about distortion of the pricing mechanism that leads to the skewing of economic calculation by commercial participants and its attendant discoordination of the market process, as well as, the loss of purchasing power by the consumers.

4. Pork Barrel aspect of Abenomics does not stimulate consumers.

The second arrow, fiscal stimulus, was supposed to give people the money they needed to spend more. Either tax cuts or the right kind of spending could do the trick. Yet while Abe has put one foot on the gas pedal, he has put a heavier foot on the brake. His new spending measures, mostly of the pork-barrel variety, have been more than offset by his raising of the consumption tax from five percent to eight percent this past April. Another hike, to ten percent, is scheduled for October 2015. How can people spend more when Abe leaves them with less money to spend?

5 Abenomics has been more of the same: resist introducing competition by adapting protectionist policies that favors entrenched crony interests…

But the lion’s share of the economy is domestically oriented, and much of it is shielded from both international and domestic competition by domestic regulations and cartel-like business practices. In these sectors, Japan lags far behind its peers. To take one tiny but characteristic example, regulations currently restrict online sales of nonprescription drugs because if unrestricted, such sales would hurt brick-and-mortar pharmacies; one corporate member of an Abe advisory panel on reform quit when bureaucrats emasculated his proposal to lift this regulation.

Or look at Japan’s inefficient dairy industry, which the government has refused to open up to foreign competition -- holding up negotiations for the Trans-Pacific Partnership, a proposed free-trade deal among 12 countries, in the process. Japan’s milk market isn’t even open to domestic competition. The powerful farm cooperative known as Japan Agriculture uses its stranglehold on distribution to protect inefficient farmers in the main part of Japan by hindering shipments of milk from the larger, more efficient farms in the northern island of Hokkaido. Tokyo turns a blind eye because Japan Agriculture is a powerful electoral ally of Abe’s political party and because rural voters are disproportionately represented in the Diet. A real reformer would scrap Japan Agriculture’s exemption from the Antimonopoly Act, a law passed in 1947 designed to encourage competition, and use the act to crack down on such practices.

6 Abe’s proposed reforms are as good as media hype. In substance these proposals protects the status quo and amplifies the doling out of political favors to some groups at the expense of the rest…

His proposed agricultural reform, for example, would merely replace a subsidy focused on production levels with one focused on income, while giving no incentives for tiny inefficient farms to consolidate or for agribusiness to expand sufficiently. His talk of increasing career opportunities for women omits any mention of the main obstacle: that most of them get taken off the promotion track once they become pregnant. And while Abe has raised taxes on consumers, he is talking about cutting taxes on corporations. His claim that this would promote investment is false, as even the Ministry of Finance acknowledges. Japan’s corporate giants already have far more cash than they choose to invest at home. But a corporate tax cut might raise stock prices and gain Abe more corporate support.

His plans for the electricity sector, meanwhile, would ostensibly allow room for newcomers by separating generation from transmission. In reality, the existing regional electric monopolies will be allowed to form a holding company that controls both parts. He has done nothing to force rectification in the nuclear utilities, some of which falsified their safety records with the connivance of the regulators in the lead-up to the 2011 Fukushima nuclear accident. As a result, a justifiably distrustful population has so far blocked a restart of the reactors that previously supplied a third of the country’s electricity. The resulting electricity shortfall and higher energy costs are propelling automakers and other efficient exporters to shift even more of their capacity overseas. All told, the third arrow has turned out to be nothing more than a bunch of nice-sounding goals for growth, job creation, and investment -- without a plan for achieving any of them.

The most obvious litmus test of the third arrow is Abe’s handling of the negotiations for the Trans-Pacific Partnership. In recent months, these talks have stalled largely because Abe’s team has insisted on keeping tariffs and other barriers high in a few agricultural sectors (such as beef, dairy, and pork) that employ less than 100,000 households but where high prices boost Japan Agriculture’s income. As of mid-May, an agreement had not been reached. Even if a deal is eventually signed, Abe’s capitulation to small interest groups means that it won’t be used as a catalyst for domestic reform, unlike the way South Korea used its trade agreements with the United States and Europe, and as reformist officials in the Ministry of Economy, Trade, and Industry have urged Japan to do as well. 

The bigger the imbalances from political interventions, the greater the scale of collapse

Dallas Fed Richard Fisher: QE3—Gift of Free Money for Speculation, (for the benefit of the Wealthy)

Even a high ranking official of Fed recognizes how incumbent financial repression policies confiscates arbitrarily, secretly and unobserved, an important part of the wealth of their citizens in which such “process impoverishes many, it actually enriches some”.

 

Here is an excerpt from yesterday’s speech of Richard W. Fisher, president and CEO of the Federal Reserve Bank of Dallas, before the Shadow Open Market Committee Manhattan Institute New York City. (bold mine)

What of the expansion of the Federal Reserve’s holdings of longer-term Treasury securities under QE3? Fed purchases of longer-term Treasuries amount to nothing more than the transformation of long-term Treasury obligations into short-term obligations of the Federal Reserve. Essentially, long-term government obligations are transformed into short-term government obligations. The government benefits from lower interest costs in the near term, but its future net revenues become more sensitive to future interest-rate increases. Government finance problems are reduced today, at a cost of potential future problems. The larger bank reserves become, the greater is the government’s future interest-rate exposure.

Chairman Ben Bernanke famously said that “the problem with QE is that it works in practice, but it doesn’t work in theory”—QE3 seemed to succeed in pushing interest rates lower out along the yield curve, energizing the bond market and lowering the hurdle rate for discounting cash flows and earnings of companies whose shares traded in stock markets.This came, of course, at the expense of savers who kept their money in the most basic of short-term investments. But this was a cost that the committee felt was exceeded by the expected wealth effect.

Well before last week’s FOMC meeting, it seemed to me that QE3’s effectiveness had waned while its current and potential future costs were mounting. I was thus an enthusiastic supporter of killing the program.

Indeed, I would rather we had never had QE3 in the first place. To this day, I feel that the costs of accumulating another $1.7 trillion of Treasuries and MBS will be shown to exceed the benefits. And yet, as I have said on countless occasions, drawing on former Dallas Fed board Chairman Herb Kelleher’s love for bourbon, once we had QE3 in place, I considered it unwise to go directly from Wild Turkey to cold turkey for fear of getting the financial equivalent of delirium tremens; indeed, we saw that with the “taper tantrum” the markets threw in May of 2013. So I was an eager proponent of the tapering program the FOMC initiated in January of this year.

I want to be clear here. Especially at the beginning of QE3, when the nonsense term “QE infinity” was being broadcast by otherwise responsible analysts, journalists and pundits, rates dipped to lows that helped creditworthy businesses bolster their balance sheets and strengthen their wherewithal for future expansion. Again, even if you were living under a rock, you know that this gift of near-cost-free debt as measured in inflation- and tax-adjusted terms has thus far been used primarily to finance stock buybacks, increase dividends and fatten cash reserves, and recently, finance mergers by the most creditworthy companies. For those with access to capital, it was a gift of free money to speculate with. (One wag—I believe it was me—quipped that there was, indeed, a “positive wealth effect… the wealthy were affected most positively.”)…

Invisible subsidies to the government via manipulated interest rates also signifies as a subsidy to the wealthy, and the politically connected financial elites.

Let me add, Mr. Fisher said: The government benefits from lower interest costs in the near term, but its future net revenues become more sensitive to future interest-rate increases. Government finance problems are reduced today, at a cost of potential future problems.

Last April I wrote of a similar context applied to Philippines:

The principal cost to attain lower public debt has been to inflate a massive bubble. The current public debt levels have been low because the private sector debt levels, specifically the supply side, have been intensively building. 

And yet the secondary major cost from inflating a bubble in order to keep debt levels low has been to diminish the purchasing power of citizenry, so aside from domestic price inflation, this can now be seen in the falling peso. Government debt has been and continues to be subsidized by the private sector in possession of the currency, the peso.