Has the Philippine Black Swan Event Arrived? Panic Selling in the Philippine Bond Markets!!!

I am reluctant to be a bearer of bad news especially as Christmas eve approaches, but silence won’t stop reality from happening.

I have also written about the risk of a Black Swan event occurring in the Philippines at the start of the year, except that my focus has been on Phisix and bubble industries. 

Well, the Philippine Black Swan event may have just arrived: Today Philippine bond markets suffered a horrific meltdown!

Yields across the curve has shockingly spiked! This adds to yesterday, as well as piggybacks on the turmoil that began two weeks ago!

Short and medium maturities skyrocketed at a tremendous rate to incredibly flatten the domestic yield curve! The yields of 4 and 5 year treasuries has even INVERTED!!!

Let me present the domestic bond market rout! [All charts from investing.com]

Yields of 1 month and 3 month surged 5.04% and 4.05%, respectively!!! Even the one month yield has moved significantly away from June 2013 taper tantrum highs.

Yields of 6 months and 1 year treasures soared 4.93% and 4.88% correspondingly! Again yields of both have short term securities has been racing farther away than the June 2013 taper tanturm levels.

Yields of 2 year and 3 treasuries vaulted by a staggering 6.5% and 4.43%!

2 year treasuries now at January 2014 and June 2013 taper tantrum levels. 3 year Philippine securities now beyond taper tantrum levels

Yields  of 4 year bonds spiked 3.8% as 5 year yields inched higher by only .83%

Yields of 7 year and 10 year bonds rose by a more moderate 1.36% and .94%

Yields of 20 year and 25 year bonds also rose  modestly at .18% and +1.08%

As one would note, increasing yields across the curve means a general selloff in Philippine bond markets.

And as the short term yields of 1 year and less crescendoed, the upside spiral of 2-4 year yields means a catching up or a spillover from the actions in the short term sphere.

Yields of 4 year (3.661%) and 5 year (3.659%) bonds have even inverted (see box) or 4 year yields are HIGHER than the 5 year equivalent! 

A stunning rate of flattening can be seen via the narrowing  or collapsing yield spread of 20 year and 10 year MINUS 1 year! Simply astonishing!

Let me repeat what I said yesterday: “Philippine treasuries essentially represent a tightly held or controlled markets by the government and the domestic banking system” such that “for any strains in Philippine treasuries to emerge means that some formal economy institutions, perhaps in the financial sector, have already been feeling pressures.”

Also from yesterday, 

Soaring bond yields comes in the face of exploding credit growth, declining statistical economic G-R-O-W-T-H and a sharply decelerating money supply growth rate! Where has all the money from the explosion of credit growth been funneled to??? Mostly to paying debt, perhaps??? Borrowing to rollover debt has now segued into a frantic jostle for short to medium term funds even at higher rates???

For the generally controlled domestic bond markets, why has there been deepening signs of wilting under financial pressures? Who among the financial institutions have been feeling the heat? Does the stock market know? Has the rigging of the index been designed to raise cash by drawing greater fools into momentum to pave way for the operators to gain from spreads to pay off heavy debt burdens? Has today's bond selloff and the 3 week dramatic tightening of the yield curve been circumstantial evidence of the unraveling of Hyman Minsky's Ponzi finance?

Since bond prices moves in opposite direction to yields, the current streak of treasury yield spikes translates to real time financial losses for mostly financial institutions that owns or holds Philippine treasuries as part of their portfolios.

Ironically, panic buying in the stock market comes in the face of panic selling in domestic bonds! Who will be caught swimming naked, the panicking bond market seller or hysteric stock market buyer??

The current Philippine bond market havoc will have ramifications on the domestic credit markets, to systemic liquidity, to  economic and credit risks conditions and to interest rate directions, as explained here, here, here and here

In January of 2013 I wrote that interest rates will determine the fate of asset prices and of an economy deeply dependent on credit:

Let me repeat: the direction of the Phisix and the Peso will ultimately be determined by the direction of domestic interest rates which will likewise reflect on global trends…

Yet interest rates will ultimately be determined by market forces influenced from one or a combination of the following factors as I wrote one year back: the balance of demand and supply of credit, inflation expectations, perceptions of credit quality and of the scarcity or availability of capital.

And as noted last week, if financial and the real estate markets are driven by liquidity and if the flattening of the yield curve have indeed been about liquidity constrains then this might be the calm before the economic storm.

Given the recent momentum of bond market rout, and if sustained, such would only extrapolate to a looming domestic economic storm ahead!

To my dear friends, if you are exposed to variable interest rate debt, pls try to reduce or settle them or if not convert them into fix rates.

Wow. Today's Philippine Bonds Selloffs Exhibit Intensifying Yield Curve Flattening!

Wow. The selloff in Philippine bond markets today seems to have spread to the entire yield curve spectrum, viz. from short end to long end!

All charts below from investing.com

Yields continue to spike in the short end, from the one and three months…

…to the 6 month and 1 year.

Again all of the above (with the exception of the 1 month) have now significantly exceeded the June 2013 Taper Tantrum levels…then a period of financial market turbulence. Yields of 1 month Philippine bills have now reached June 2013 highs.

But today’s yield spikes has been more intense in the mid end.

Two year and three year making pivotal substantial ‘catch up’ moves.

Four year yields has also been shown having a big move today. 

To much of a lesser extent, the 5 and 7 year bonds.

Meanwhile yields in the long end, particularly the 10 year and  20 year, posted moderate increases while the 25 year registered a material move.

Again the above demonstrates a general sell-off in  the Philippine bond markets.

The interesting part has been that, as I noted last week, “Philippine treasuries essentially represent a tightly held or controlled markets by the government and the domestic banking system” such that “for any strains in Philippine treasuries to emerge means that some formal economy institutions, perhaps in the financial sector, have already been feeling pressures.”

Also an even more curious development has been that yield surges from the short end (1 year and below) seems to have now spread to the middle maturities  (2-4 years) relative to the longer end (10-25 year). This underscores of the intensification of the dramatic flattening of the yield curve of Philippine bond markets

In short, today’s actions exhibits escalating signs of a scramble for liquidity!!!

Yet how will the BSP react to the current developments? Will they infuse money to the banks?

Will they suspend operations in support of the peso as exhibited by the rapidly depleting Gross International Reserves and for those inflows (e.g. personal remittances) that didn’t turn up in the GIRs (as previously discussed)? 

In short, will the BSP save the banks at the expense of the peso? Has it now reached a case of a damned if you, damned if you don’t?

You see, all those façade made to exhibit how “transformational” or how “this time is different” this credit fueled phony boom has been, seems as being unglued.

And this appears to be happening at the most sensitive aspect of the Philippine financial markets.

The irony has been that statistical inflation has been declining yet rising yields implies of pressures on interest rates!!! Why???

Soaring bond yields comes in the face of exploding credit growth, declining statistical economic G-R-O-W-T-H and a sharply decelerating money supply growth rate! Where has all the money from the explosion of credit growth been funneled to??? Mostly to paying debt, perhaps??? Borrowing to rollover debt has now segued into a frantic jostle for short to medium term funds even at higher rates???

For the generally controlled domestic bond markets, why has there been deepening signs of wilting under financial pressures? Who among the financial institutions have been feeling the heat? Does the stock market know? Has the rigging of the index been designed to raise cash by drawing greater fools into momentum to pave way for the operators to gain from spreads to pay off heavy debt burdens? Has today's bond selloff and the 3 week dramatic tightening of the yield curve been circumstantial evidence of the unraveling of Hyman Minsky's Ponzi finance?

Warren Buffett once said, only when the tide goes out do you discover who’s been swimming naked. 

What happens when the liquidity and credit tide ebbs, will bubble industries and the bubble stock market be exposed as swimming naked?

Ron Paul: Janet Yellen's Christmas Gift to Wall Street

Fed Chairwoman Janet Yellen has been a Santa Claus for Wall Street (paid for by the main street).

The great Ron Paul explains at his website (bold mine)

Last week we learned that the key to a strong economy is not increased production, lower unemployment, or a sound monetary unit. Rather, economic prosperity depends on the type of language used by the central bank in its monetary policy statements. All it took was one word in the Federal Reserve Bank's press release -- that the Fed would be “patient” in raising interest rates to normal levels -- and stock markets went wild. The S&P 500 and the Dow Jones Industrial Average had their best gains in years, with the Dow gaining nearly 800 points from Wednesday to Friday and the S&P gaining almost 100 points to close within a few points of its all-time high.

Just think of how many trillions of dollars of financial activity occurred solely because of that one new phrase in the Fed's statement. That so much in our economy hangs on one word uttered by one institution demonstrates not only that far too much power is given to the Federal Reserve, but also how unbalanced the American economy really is.

While the real economy continues to sputter, financial markets reach record highs, thanks in no small part to the Fed's easy money policies. After six years of zero interest rates, Wall Street has become addicted to easy money. Even the slightest mention of tightening monetary policy, and Wall Street reacts like a heroin addict forced to sober up cold turkey.

While much of the media paid attention to how long interest rates would remain at zero, what they largely ignored is that the Fed is, “maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.” Look at the Fed's balance sheet and you'll see that it has purchased $25 billion in mortgage-backed securities since the end of QE3. Annualized, that is $200 billion a year. That may not be as large as QE2 or QE3, but quantitative easing, or as the Fed likes to say “accommodative monetary policy” is far from over.

What gets lost in all the reporting about stock market numbers, unemployment rate figures, and other economic data is the understanding that real wealth results from production of real goods, not from the creation of money out of thin air. The Fed can rig the numbers for a while by turning the monetary spigot on full blast, but the reality is that this is only papering over severe economic problems. Six years after the crisis of 2008, the economy still has not fully recovered, and in many respects is not much better than it was at the turn of the century.

Since 2001, the United States has grown by 38 million people and the working-age population has grown by 23 million people. Yet the economy has only added eight million jobs. Millions of Americans are still unemployed or underemployed, living from paycheck to paycheck, and having to rely on food stamps and other government aid. The Fed's easy money has produced great profits for Wall Street, but it has not helped -- and cannot help -- Main Street.

An economy that holds its breath every six weeks, looking to parse every single word coming out of Fed Chairman Janet Yellen's mouth for indications of whether to buy or sell, is an economy that is fundamentally unsound. The Fed needs to stop creating trillions of dollars out of thin air, let Wall Street take its medicine, and allow the corrections that should have taken place in 2001 and 2008 to liquidate the bad debts and malinvestments that permeate the economy. Only then will we see a real economic recovery.

As I have been saying, stock markets have been about liquidity and credit that nurtures tenuous or highly fragile (false) confidence being provided by central banks.

Yet sand castles on beaches eventually will get washed away.

ASEAN Credit Default Swap (CDS) Spreads Spike!

Credit default Swaps (CDS) are the cost to insure debt from default risks.

It appears that ASEAN’s CDS spreads has spiked this week. In other words, market’s perception of ASEAN default risks has sharply risen (all charts below from Deutsche Bank—based on recovery rate of 40%).

Philippine CDS fast approaches the October highs! Yields of 10 year peso government bonds climbed 17.6 bps week-on-week. More importantly, short term yields have been soaring for three successive weeks. Has the dramatically flattening yield curve been the reason behind the CDS ramp? Or has this been due to a EM contagion or a combo?

Malaysian CDS passed October levels and now swiftly nears the January 2014 highs, or then, during the climax of the EM taper tantrum turmoil. Yields of Malaysian 10 ringgit bonds marginally slipped this week, but still drifts at the highs of the 2010 levels

Has current pressures in Malaysian’s currency and stock markets functioned as the trigger? 

Indonesia CDS have reached October highs. Yields of 10 year rupiah bonds closed the week marginally changed but had a short bout of sharp intraweek volatility. 10 Year yields are just off the January taper tantrum highs. Has the CDS spike been perhaps due to the record low of the rupiah and or contagion?

Thailand CDS has also passed October 2014 highs, but has partly backed off the past days. Yields of 10 year baht climbed by some 10 bps this week. However current yield levels remain at the lows equivalent to 2010 levels.

Aside from the baht drifting at January levels, Thai’s stock markets just suffered a stunning intraday crash last Monday which it had mostly recovered this week.

If debt markets continues to price in higher ASEAN default risks, will this be positive for stocks?  Those January 2014 CDS peaks coincided with the stock market lows during the EM taper tantrum that commenced in May 2013. Will this time be different?

We truly live in interesting times!

Ex-BIS Chief Economist William White Warns “The system is dangerously unanchored”

Here are juicy excerpts from an interview of former Bank for International Settlements chief, William White, by Finanz and Wirtschaft where the former expresses alarm bells over the Swiss SNB’s negative deposit rates and the de facto global easing policies. (all bold mine; italics interviewer) [hat tip zero hedge] 

By the way, Mr. White predicted the crisis of 2008. [note this isn't to say past is the future, rather, Mr. White's ability to foresee the future has been grounded on relatively "sound" analysis compared with the mainstream]

Will the rate cut of the SNB lower the domestic interest rate level in Switzerland even further?

WW: Maybe yes, maybe no. One argument is, if you lower the rate set by the central bank, then all the other rates will follow. My reaction is: Not so fast, my friend! The Swiss banks are now suffering losses on their reserves at the SNB. Banks could reduce interest rates on deposits to recoup these losses. But this has clear limits: People do not have to hold money at banks, they can ask for their money in notes. The banks could also recoup their losses in a different way, and this is something to be concerned about: They could raise the rates on loans. Far from encouraging lending and spending, negative interest rates at the central bank might work in the opposite direction.

So negative interest rates could actually increase the cost of borrowing?

WW:When interest rates cannot go lower anymore, when they hit the Zero Lower Bound, monetary policy might work like quantum mechanics. Take this simple example from the world of physics: Classical Newtonian mechanics only work when the mass of a body is big enough. When the mass is too small, you are in quantum mechanics. These are completely different ways of looking at the world. The Zero Lower Bound might be the quantum mechanics of monetary policy. Things just do not operate in the same fashion. If you think things do operate the same way, you might make a very dangerous mistake.

But will Swiss banks really increase loan rates now?

WW: I do not know. The banks might swallow the losses for some time. They may decide, as the SNB likes them to, to put their money in some other currency in which they do get a positive return.

By holding a one-sided peg of the Franc to the Euro, the SNB has in effect linked its monetary policy to the ECB. How will the SNB ever be able to decouple from the ECB?

The hope is that at some time the pressure on the Franc will come off, when interest rates rise elsewhere. Then the SNB could gradually reduce their exposure to the Euro. That may be a while.

Do you have an idea who will win or lose from negative interest rates?

WW: The banks will lose as they have to pay rates on their excess reserves they hold at the central bank. The public sector, the SNB, will gain. If the banks do not push down deposit rates, but increase the loan rates, the borrowers will pay the price. And when interest rates go down, savers will suffer.

The SNB has to follow the ECB in its monetary policy. Is it not dangerous when the monetary policy of one country affects another?

WW: Currently we have an international monetary non-system. Nobody has to follow any rules. Everybody does what they consider is in their own short-term best interest. The real difficulty is: What is in their short-term interest – for example, following ultra-easy monetary policy – could well backfire somewhere. It might be not in their long-term best interest. And as the easy monetary policy influences the exchange rates, it influences other countries. Almost every country in the world is in easing mode, following the Fed, and we have absolutely no idea how it will end up. We are in absolutely uncharted territory here. This worries me the most. The SNB has been doing well in what it was forced to do by this international monetary non-system. The Swiss have to do the best they can, because that is what everybody else is doing.

What are the risks of this non-system?

WW: There is no automatic adjustment of current account deficits and surpluses, they can get totally out of hand. There are effects from big countries to little ones, like Switzerland. The system is dangerously unanchored. It is every man for himself. And we do not know what the long-term consequences of this will be. And if countries get in serious trouble, think of the Russians at the moment, there is nobody at the center of the system who has the responsibility of providing liquidity to people who desperately need it. If we have a number of small countries or one big country which run into trouble, the resources of the International Monetary Fund to deal with this are very limited. The idea that all countries act in their own individual interest, that you just let the exchange rate float and the whole system will be fine: This all is a dangerous illusion.

I interpret Mr.White’s point as one of saying that 

-central bankers have indulged in a grand gambit with the monetary system from which they have been pushing these monetary tools to the limits (“we are in absolutely uncharted territory here”), 

-the average citizens are guinea pigs (in the case of the SNB's negative deposit rates; banks, borrowers and savers lose as the public sector gains--arbitrary confiscation that benefits a few at the cost of many), 

-that such gambit has signified an act of desperation (“forced to do”) predicated on path dependency and the bandwagon effect (“because that is what everybody else is doing”) and 

-that central banks have entirely been clueless of the risks and ramifications of their actions, where the policy trend have been focused on short term fixes (“The system is dangerously unanchored. It is every man for himself. And we do not know what the long-term consequences of this will be”)

Stocks may be at record levels for NOW, but at what costs in the future?

The Current Dramatic Flattening of the Philippine Yield Curve Means Risk Ahead!

I’m not making any formal writing anymore until 2015.

Anyway here is the weekend update of the Philippine yield curve.

The above represents the entire yield curve based on Friday’s quote for the past 6 weeks. 

As one would note, the short end of the curve has been rapidly ascending relative to the long end. This means that the domestic yield curve has been dramatic flattening.

A better expression of the curve would be the spread between the long end and the short end, where I compare the yields of 10 and 20 year minus the 1 year.

Again a dramatic flattening has been in place for the past 6 weeks for either the 10 or the 20 year curves.

There are two ways to look at this. First, why has there been a sharp rise in the short end?

The second is what are the implications?

I offer an answer to the WHY.

The fundamental premise is that current highly leveraged firms or institutions who have been starved of cash could be desperately borrowing at higher rates to fund operational financing gaps in order to maintain current projects or positions. And this applies to both stock market speculators/market manipulators and entities which mostly belong to the bubble industries.

Remember, Philippine treasuries essentially represent a tightly held or controlled markets by the government and the domestic banking system (see above from ADB’s November Bond Monitor at ASIAN Bonds Online). 

As argued before, this is why both have used the bond markets to drive down rates towards a convergence with US treasury yields. I called this the “convergence trade”. 

Financial repression policies led to the corralling of resources of depositors enrolled in the formal banks through zero bound rates. Most importantly, such invisible transfer also covered the currency holders or mostly the informal economy.

Thus, these policies represented subsidies to both banks (and their clients) and the government at the expense of the average resident.

This has been a wonderful example of what inflationism does: 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. (JMKeynes)

Resources, intermediated by the banking system, have been funneled to the real economy via a “pump” on bubble industries to mostly firms of elites where G-R-O-W-T-H happened. 

The subsidy to the banks and their clients inflated tax revenues that bankrolled ballooning government spending, thus an indirect subsidy to government. 

Additionally by repressing interest rates, maintaining government liabilities had been below market rates. Thus the two-pronged subsidies in favor of the government.

The above represents the insatiable spending appetite by the Philippine government as exhibited by the 2015 budget, which was recently passed. 

The second chart signifies the historical revenues, expenditures and deficits as of 2013. 

Despite the boom deficits continue, wait until the slowdown occurs and deficits and public debt will swell!

There is a third non-financial or political benefit: high public approval ratings. This allows the incumbent to impose more populist political whims.

Just think of all the recent colossal bond issuance from major companies that practically returned nearly zero (or even negative) to investors, net of inflation and taxes. Those surreptitious transfers not only meant free money for banks, bubble industries and the government, they also translated to a massive transfer of risk.

This implies that a substantial segment of depositor’s resources have now been exposed to various risk factors: interest rate, market, and credit. For foreign based loans, currency risks.

In a nutshell, for any strains in Philippine treasuries to emerge means that some formal economy institutions, perhaps in the financial sector, have already been feeling pressures.

So despite all the hallelujahs from government statistics, the bond market has been implying of developing cracks in the credit driven phony boom.

I also wrote of the possible implications: higher short term financing costs, a symptom of liquidity squeeze and could even signify seminal indications of a developing credit crunch!

Yet there is more: pressure on banking system’s balance sheets.

A flattening yield curve discourages borrowing short and lending long or the maturity transformation or profits from asset-liability mismatch arbitrages. A flattening of the yield curve may squeeze on interest rate margins. This means that credit expansion will slow or at worst, could even grind to a halt.

Since the Philippine G-R-O-W-T-H story has been one pillared by credit expansion (as previously discussed), any slowing of the credit boom extrapolates to a slowdown in statistical G-R-O-W-T-H.

And as the credit expansion fades, credit risk rises. If statistical G-R-O-W-T-H slows where will levered firms get money to pay for newly acquired loans? Here’s a guess: by borrowing more.

This could already be happening which is why short term bond yields have spiked.

Look at the Philippine banking system’s income statement from BSP data. Domestic banks are heavily dependent on interest rate income which accounts for about 2/3 of the banking system’s income. 

A flattening of the yield curve may likely put a squeeze on domestic bank’s interest rate margins. So slowing credit growth and prospective decline in interest income will eventually hurt bank’s profits.

Additionally even if we are to look at the banking system’s non –interest income; fees and commissions almost accounts for half. So the banking system’s non-interest income indirectly depends on the sustained G-R-O-W-T-H in bubble industries and in asset markets (specifically stock markets) which ironically depends on credit growth!

So the yield curve says that credit growth will slow, thereby affecting G-R-O-W-T-H and increasing risks of banking system’s loan portfolio which accounts for half of banking system’s total assets!

Take away the illusions from credit growth, the entire house of cards crumbles

So unless there will be material improvements in the yield curve soon, the one way trade mentality held by the consensus will get another sting!

But if the yield curve continues to materially flatten or even exhibit inversion, then big big big trouble lies ahead.

Don’t worry be happy. Perhaps when economic Typhoon Yolanda arrives, affected banks may be bailed out  by the government financed by the average citizenry through higher taxes and inflations. So stocks will rise forever!

But as the great Austrian economist Ludwig von Mises warned

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.

Have a great weekend!

Russia’s Collapsing Ruble is a Textbook Example of Fiat Inflation

Last February I noted that “Russia suffers from both property bubble fuelled by credit inflation and runaway local government debt”, such that a domestic turmoil had already been occurring even outside the current collapse of crude oil (which began last July) and sanctions imposed by Western nations. Economic sanctions came a month after. 

The Russian ruble has already been plagued by capital flight from residents rather than from foreigners. I warned too “The point worth repeating is that every conditions are unique and that there are no “line in the sand” or specific thresholds before a revulsion on domestic credit occurs”

Presently, as the ruble collapse continues, the average Russians have reportedly been concerned over the risks of  bank runs

At the Mises Blog, Carmen Elena Dorobăț lucidly explains the growing risk of what  I warned earlier as “revulsion on domestic credit” on Russia as textbook symptom of fiat inflation (bold mine)

In January 2014, 33 Russian rubles exchanged for one US dollar. In December 2014, the amount has more than doubled, reaching 77.2 rubles per dollar on December 16^th, a day some dubbed Russia’s Black Tuesday. Russian central bankers raised interest rates by 6.5% overnight, and spent $2 billion to stave off the depreciation. In total, propping up the currency has cost $10 billion since the beginning of the month, and $70 billion since the beginning of the year.

In spite of it all—or because of it all—Russia’s problems are far from over. Default looms closer, as its foreign (public and private) debt is estimated at around $600 billion, and foreign-currency reserves only at $300 billion. The government appealed to the public to be ‘calm and rational’, stressing the need to keep rubles and sell foreign currency. Russians did however go to buy more durable goods, such as cars and home appliances; and although there’s no flight into real goods yet, the tendency is forming in that direction.

The media, economists, and Putin himself blamed Western financial sanctions over the Ukraine conflict—together with other ‘nuisances’ such as oil prices—for Russia’s woes. Indeed, these factors precipitated the slide in purchasing power: sanctions made many local companies unable to refinance their dollar debts, and low oil prices drained some of Russia’s foreign currency reserves. With fewer (and more expensive) imports, rubles were spent and re-spent on domestic goods, where they bid up prices and led to double-digit inflation. But at the bottom of it lie, as you’d expect, mainly monetary factors. Over the last 16 years, the Bank of Russia’s balance sheet rose from about 9 billion rubles to 2.1 trillion this month (an all-time high), while monetary aggregates increased up to a factor of 30 over the same period. Part of the new money was printed to directly fund (military) industries or state-owned companies.

In this light, Russia’s case isn’t special, but just a textbook example of currency collapse due to fiat inflation. It resembles the more recent experiences in Argentina or Venezuela, as well as a possible future of the United States, if for some reason or another the dollar can no longer make its way into foreign (Chinese) bank vaults. But it is nevertheless an interesting development for two reasons. First, it shows just how important international central bank cooperation is for the inflationary policies of national governments. At the moment, Russia cannot rely on other monetary authorities to pressure their banking systems into rolling over its debts. Nor can it rely on an IMF loan, as it did in the 1998 emerging market crisis. Its tensioned political relations have left it alone to pick up the pieces of its reckless monetary policy.

Second, it would seem that both the media and the general public are most disillusioned with a government that loses control over the monetary system. As a result, this week has been perhaps the only time over the last year when Putin’s grip on power has been in doubt. It’s no surprise, however, given that in a world of fiat currencies, bank notes are only backed by other bank notes, and by a fickle, passing trust.

As I wrote below “Take away credit and liquidity, confidence dissipates which means that the whole structure collapses.” This applies not only to stocks but to the incumbent monetary system.

"Patient" Fed and SNB's Negative Rates Sparks Monster Stock Market Rally as Oil Prices Crumble

So who says stock markets have been about G-R-O-W-T-H?

From CNBC: (all bold emphasis on articles quoted are mine)

A surging U.S. stock market rallied to its best two-day gains in three years Thursday.

The monster rally, which kicked off Wednesday after Federal Reserve Chairwoman Janet Yellen assured the markets that the central bank would be patient about lifting interest rate, burst into an all-out bull run late in Thursday trading.

The move caps a two-day charge higher, bringing the Dow back to within shouting distance of 18,0000, after rocky trading days.

The Dow Jones Industrial Average DJIA, +2.43%  soared 421 points, or 2.4%, to 17,778.15, its biggest one-day gain in three years, a day after the Federal Reserve said it “can be patient” about the timing of its first rate hike, signalling increases will be slow and steady.

From Bloomberg:

After their biggest six-day tumble in three years, European shares have regained more than half of their losses, jumping the most since November 2011 today.

The Stoxx Europe 600 Index rallied 3 percent to 339.05 at the close of trading in London, with banks contributing the most to the advance. The Swiss Market Index (SMI) posted its biggest jump since January 2013 after the nation’s central bank introduced its first negative deposit rate since the 1970s. The announcement came after Chair Janet Yellen said the Federal Reserve will probably hold rates near zero at least through the first quarter and that they may not return to more normal levels until 2017.

From Reuters:

Global equities markets rallied on Thursday, with Wall Street surging nearly 2.5 percent, as investors buoyed by policy comments from the U.S. Federal Reserve moved into riskier holdings.

The Swiss franc tumbled after the country's central bank announced a surprise charge on deposits, wary of a flood of money exiting Russia and likely inflows from the euro zone if the European Central Bank starts full-scale money printing early next year.

Wall Street powered higher, with the S&P 500 putting up its best two days of gains since November 2011, according to Reuters data. Health and technology shares were among the strongest U.S. sectors..SPLRCT .SPXHC

All these rallies comes in the face of crumbling oil prices  WTIC –1.65% and Brent -3.21%

This reminds me of 2006-7.  Then, US housing markets markets diverged from US stocks. US housing markets deteriorated as stocks soared.  Subprime housing loans which used to signify just a minor share of overall loans eventually contaminated the entire spectrum. Then the crisis surfaced. Today will the energy sector serve as the US housing subprime equivalent?

Anyway the above just reveals how, like Pavlovian dogs, central banks triggers manic delirium episodes on financial markets.

As I previously discussed, stocks are about liquidity and credit and the (false) confidence it spawns. Take away credit and liquidity, confidence dissipates which means that the whole structure collapses.

And that’s why from ECB to BoJ-GPIF to PBoC and now to the SNB and the FED, tenuous confidence has to be maintained by sustained assurances of liberal access to credit and guarantees of abundance of central bank provided liquidity via financial repression policies in the form of different tools—interest rate cuts, QEs, outright support on stock markets  (Japan’s GPIF), negative deposit rates or even merely assurances to implement them.

Rigged financial markets means castles built on sands. Eventually the ocean tide will wash them away.

Phisix: A Rollercoaster Session Backed by the Return of Index Managers as Short Term Yields Soar (again)!

What a day!

Today’s market volatility has been fantastically a rare event!

First, yields of Philippine short term treasuries continue to spike!

It’s a second day of the week where yields of 3 month, 6 month (above charts) and 1 year (below left, 1 month included but not in charts) Philippine treasuries have moved sharply upwards. Current two day gains add to the previous two weeks of yield expansion.

Surging yields effectively translates to higher short term financing costs, a symptom of liquidity squeeze and could even signify seminal indications of a developing credit crunch!

As one would note, yield levels of short term government papers have breached June 2013 taper tantrum highs. Then, the spike in yield signaled a contagion from a mostly emerging market selloff. This time, it has been a domestic affair.

Additionally, with short term yields increasing more than the longer spectrum, there has been a dramatic flattening of the Philippine yield curve. Yield of 10 year Philippine peso bonds even declined today (right window).

And even from a mainstream perspective, I previously noted that flattening yield curves have been precursor to an economic growth slowdown.

Even more, if the current rate of the yield increases will be sustained, then this could lead to a yield curve inversion—where short term rates will be higher than the longer term—a reliable indicator of recessions.

Yesterday I wrote of how this could be reached.

The fundamental premise is that current highly leveraged firms or institutions who have been starved of cash could be desperately borrowing at higher rates to fund operational financing gaps in order to maintain current projects or positions. And this applies to both stock market speculators/market manipulators and entities which mostly belong to the bubble industries.

If my suspicions are right, then not only will stock market manipulators have impaired balance sheets, but they will be NET sellers of stocks (at vastly lower prices)!

The same liquidations will be resorted to by cash strapped bubble industries (keep an eye on casinos, and the property industry)

So the populist G-R-O-W-T-H theme will transmogrify into LOSSES and eventual LIQUIDATIONS.

Yet the feedback loop between accruing losses and increasing credit strains will extrapolate to higher demand for short term loans which should drive short term yields to even higher levels relative to the longer end.

If such dynamic is sustained then this will eventually lead to a yield curve inversion. The inversion will now signal a recession, if not a crisis!

So current Philippine yield curve conditions have likely been signaling emerging perils in the real economy.

Even more exciting today has been the activities in the domestic stock market.

The Philippine Stock Exchange today experienced a really wild rollercoaster ride which may be one for the books.

Today’s session had been marked by two roundtrips (see right window from technistock.net) and the spectacular return of the market riggers!

Following last night’s Fed chair Janet Yellen sponsored stock market party, where US stocks surged to its “best session of the year as investors celebrated…the Federal Reserve's pledge to be patient in raising interest rates” (CNBC) the Phisix gapped up to an early morning peak with gains of 111.04 points or 1.6%!

About a little more than an hour’s time, the entire 1.6% of gains shockingly evaporated! This marks the first roundtrip.

Not only has gains dissipated, the Phisix broke the 6,950 and 6,900 levels in the late morning dump! The dump translated to a maximum loss of 84 points or a 1.2% decline!

Yet following lunch break, the “afternoon delight” aspect of OPLAN Phisix 7,400 went on stream. Operators coupled with domestic bulls went on a bidding mania, where the 84 points or 1.2% morning loss had been entirely recovered through the last minute. This marks the second roundtrip. 

A minute towards the run off, the Phisix was up by only 4.71 points. (see left window from colfinancial) Yet at the closing bell, the Phisix surged by 63.07 points or .91%!

What an incredible day. The two roundtrips meant that the Phisix moved by 453 points or a staggering 6.5%!!! Importantly, almost the entire of the gains of the day, specifically 92.5% of the .91%, was due to the marking the close!

Given the wild pendulum swings, volume was relatively heavy at Php 9.47 billion. With special block sales this expanded to Php 10.98 billion. (PSE Quote)

Foreigners sold a sizeable net Php 1.095 billion worth of shares.

Decliners beat advancers by almost 2:1 or by 121 to 68. This signifies another sign that the Phisix wanted to correct but which the desperate market manipulators will not permit.

Today’s index manipulation has basically been a three industry rendition.

While all 5 sectoral indices posted pumps at different degrees, the biggest came from the holdings, the all-time favorite property, and the services sector (see above)

And the bulk of those last minute panic buying came from SM, AEV and SMPH.

Last minute pumps are hardly about profits. Rather they are about setting impressions.

Yet market manipulators continue to accumulate severely overvalued securities at record prices or near record high prices in the hope that some “greater fools” would buy what they will sell.

The problem is what happens if the markets go down?  These operators function with no margin for errors.

Former Morgan Stanley analyst and now hedge fund manager Stephen Jen recently warned of a coming emerging market crisis. He says that today’s experts have little knowledge of 1990s.

From Bloomberg,

If the 48-year-old native of Taiwan, with a PhD from Massachusetts Institute of Technology, sounds a little jaded now, it’s not without some reason. He says he worries that many emerging-market analysts are too young to remember the late 1990s. Instead they learned the ropes in an era dominated by the rise of Brazil, Russia, India and China -- a supposed one-way bet to prosperity.

“Many became EM specialists after the term ‘BRIC’ was coined in 2001 and don’t know any serious crisis,’’ says Jen, who now runs the London-based hedge fund SLJ Macro Partners LLP.

The youngsters are about to be schooled. Jen says echoes of 1997-1998 may be at hand.

I believe that his warnings will also apply to the “youngsters” of the Philippine markets, who may be part of team OPLAN Phisix 7,400 or if not the lemmings enamored with easy money or those who merely find comfort by running with horde and prioritize social signaling (particularly those in the internet circles). 

A lot of them will also get "schooled".