Greece’s Alex Tsipras to Germans: Greece will End the Brussels Extend and Pretend Policies

In desperation, the average Greeks has turned to the radical left party Syriza for economic salvation. The Syriza handily won almost a majority of the parliamentary seat in the recently concluded elections.

As I have noted here: The anti-bailout leftist group the Syriza which has been said to “promise everything to everyone” by reneging on deals for bailout, halting austerity, restoring social spending, continue to receive subsidies from the Eurozone, IMF and labor protection reportedly leads in the opinion polls. In short, the popular leftist group wants a bankrupt nation to revive free lunch policies and expect to get a free pass on the economy.

Syriza’s, whose party represents a coalition of “just one step away from full communism” rode on coattail to electoral victory via this message: “Screw Germany” according to Jared Dillian of the 10th Man

 

Well party’s designated leader Alex Tsipiras, the new Prime Minister, writes to “reach out” on the Germans

From the Syriza (ht: Stockman’s contra corner/bold mine)

Alexis Tsipras' "open letter" to German citizens published on Jan.13 in Handelsblatt, a leading German language business newspaper

Most of you, dear Handesblatt readers, will have formed a preconception of what this article is about before you actually read it. I am imploring you not to succumb to such preconceptions. Prejudice was never a good guide, especially during periods when an economic crisis reinforces stereotypes and breeds biggotry, nationalism, even violence

In 2010, the Greek state ceased to be able to service its debt. Unfortunately, European officials decided to pretend that this problem could be overcome by means of the largest loan in history on condition of fiscal austerity that would, with mathematical precision, shrink the national income from which both new and old loans must be paid. An insolvency problem was thus dealt with as if it were a case of illiquidity.

In other words, Europe adopted the tactics of the least reputable bankers who refuse to acknowledge bad loans, preferring to grant new ones to the insolvent entity so as to pretend that the original loan is performing while extending the bankruptcy into the future. Nothing more than common sense was required to see that the application of the 'extend and pretend' tactic would lead my country to a tragic state. That instead of Greece's stabilization, Europe was creating the circumstances for a self-reinforcing crisis that undermines the foundations of Europe itself.

My party, and I personally, disagreed fiercely with the May 2010 loan agreement not because you, the citizens of Germany, did not give us enough money but because you gave us much, much more than you should have and our government accepted far, far more than it had a right to. Money that would, in any case, neither help the people of Greece (as it was being thrown into the black hole of an unsustainable debt) nor prevent the ballooning of Greek government debt, at great expense to the Greek and German taxpayer.

Indeed, even before a full year had gone by, from 2011 onwards, our predictions were confirmed. The combination of gigantic new loans and stringent government spending cuts that depressed incomes not only failed to rein the debt in but, also, punished the weakest of citizens turning people who had hitherto been living a measured, modest life into paupers and beggars, denying them above all else their dignity. The collapse of incomes pushed thousands of firms into bankruptcy boosting the oligopolistic power of surviving large firms. Thus, prices have been falling but more slowly than wages and salaries, pushing down overall demand for goods and services and crushing nominal incomes while debts continue their inexorable rise. In this setting, the deficit of hope accelerated uncontrollably and, before we knew it, the 'serpent's egg' hatched – the result being neo-Nazis patrolling our neighbourhoods, spreading their message of hatred.

Despite the evident failure of the 'extend and pretend' logic, it is still being implemented to this day. The second Greek 'bailout', enacted in the Spring of 2012, added another huge loan on the weakened shoulders of the Greek taxpayers, "haircut" our social security funds, and financed a ruthless new cleptocracy.

Respected commentators have been referring of recent to Greece's stabilization, even of signs of growth. Alas, 'Greek-covery' is but a mirage which we must put to rest as soon as possible. The recent modest rise of real GDP, to the tune of 0.7%, signals not the end of recession (as has been proclaimed) but, rather, its continuation. Think about it: The same official sources report, for the same quarter, an inflation rate of -1.80%, i.e. deflation. Which means that the 0.7% rise in real GDP was due to a negative growth rate of nominal GDP! In other words, all that happened is that prices declined faster than nominal national income. Not exactly a cause for proclaiming the end of six years of recession!

Allow me to submit to you that this sorry attempt to recruit a new version of 'Greek statistics', in order to declare the ongoing Greek crisis over, is an insult to all Europeans who, at long last, deserve the truth about Greece and about Europe. So, let me be frank: Greece's debt is currently unsustainable and will never be serviced, especially while Greece is being subjected to continuous fiscal waterboarding. The insistence in these dead-end policies, and in the denial of simple arithmetic, costs the German taxpayer dearly while, at once, condemning to a proud European nation to permanent indignity. What is even worse: In this manner, before long the Germans turn against the Greeks, the Greeks against the Germans and, unsurprisingly, the European Ideal suffers catastrophic losses.

Germany, and in particular the hard-working German workers, have nothing to fear from a SYRIZA victory. The opposite holds. Our task is not to confront our partners. It is not to secure larger loans or, equivalently, the right to higher deficits. Our target is, rather, the country's stabilization, balanced budgets and, of course, the end of the grand squeeze of the weaker Greek taxpayers in the context of a loan agreement that is simply unenforceable. We are committed to end 'extend and pretend' logic not against German citizens but with a view to the mutual advantages for all Europeans.

Dear readers, I understand that, behind your 'demand' that our government fulfills all of its 'contractual obligations' hides the fear that, if you let us Greeks some breathing space, we shall return to our bad, old ways. I acknowledge this anxiety. However, let me say that it was not SYRIZA that incubated the cleptocracy which today pretends to strive for 'reforms', as long as these 'reforms' do not affect their ill-gotten privileges. We are ready and willing to introduce major reforms for which we are now seeking a mandate to implement from the Greek electorate, naturally in collaboration with our European partners.

Our task is to bring about a European New Deal within which our people can breathe, create and live in dignity.

A great opportunity for Europe is about to be born in Greece on 25th January. An opportunity Europe can ill afford to miss.

Well given the socialist backdrop of the new government, if pushed through, Greece’s great opportunity seems one of the path to a debt default which risks unraveling the EU. Measures to rollback “anti-austerity” have been announced.

In addition, political extremism has been surging in the Eurozone.

As Austrian economist Frank Hollenbeck recently wrote:

Europe saved Greece to bail out its bankers. Without the bailout, Greece would have defaulted and returned to the drachma. It would have been forced to drastically slash government salaries and payrolls. It would have had to cut the wage increases that got it into debt trouble in the first place. Instead, the bankers walked away, with private debt replaced by public debt. Now, Greece could sink all of Europe, with the European taxpayer and citizen unaware of the hardship he will shortly endure: all of this to transfer wealth from the have-nots to the haves.

Unfortunately, the economic platform of the left-leaning Syriza will make the economic situation much worse. You cannot repeal the law of scarcity. The same is true of the economic platforms of Podemos in Spain and the National Front in France. Hold on to your hats since we are in for a turbulent future in Europe. It did not have to be this way.

Greece’s equity benchmark crashed right after the election but rallied yesterday as measured by the ATG (stockcharts.com)

Greece’s 5 year bond yield spirals…

…as well as Greece’s 3 year bond yields (note of the inversion or higher yields of the 3 year vis-à-vis the 5 year)

Will Draghi's QE offset political developments in the Eurozone?

 

Quote of the Day: Why the Welfare State Grows

The welfare state grows because there is no clear line (and there can be no clear line) between those who are supposedly “entitled” to benefits and those who are not. There will always be those who fall just fractionally outside the needs-based entitlement. So the entitlement line gradually gets moved to include more and more recipients. The real issue is how state welfare can be justified in a society based on the rule of law that ensures individual liberty. Welfare entitlements are a “taking” from Peter to give to Paul at the point of a supposedly legal gun. But how is state confiscation any different or more just than private robbery? That amorphous entity called the state decides that it will shirk its duty to protect our property and do exactly the opposite. No majority can make such an unjust act legal through the legislative process.

This is from Austrian economist Patrick Barron at the Mises Canada

Breaking: Philippine 4Q GDP 6.9%, 6.1% 2014

From the NSCB:

For the Fourth Quarter of 2014, the country’s Gross Domestic Product (GDP) accelerated to 6.9 percent from 6.3 percent in the same period of last year.  This followed three consecutive quarters of decelerated growth. The robust performance of Industry sector particularly by Manufacturing and Construction and supported by the Trade, Real Estate, Renting & Business Activities, and Transport, Storage & Communication, boosted the fourth quarter performance and paved the way for the annual GDP to post a growth of 6.1 percent.

Government statistics is a puzzle. 

For instance, the government recently reported of plummeting prices of construction materials. Yet statistical gdp shows of a big jump in construction growth (21%)!  So based on the logic of government statistics, supply side growth have been relatively significantly larger than the demand growth, thus the dramatic drop in prices. Yet a glimpse at manufacturing, growth rate has been at only 10.5% while imports grew by only 5.3%. Those numbers just don't square.

Since government makes the data they can show whatever they want.

So all these pumping and pushing of financial assets will be fueled more by government statistical GDP.

I’ll wait for the BSP’s disclosure on banking loans and liquidity metrics to see how banking sector contributed to the GDP pump.

Ron Paul: Lessons to Be Learned from Failed Central Bank Policies

The great Ron Paul tackles on the failure of central banking in the lens of the US Federal Reserve.

Mr. Paul’s article is entitled “Two Percent Inflation and the Fed’s Current Mandate” is published at his website the Ron Paul Institute

 

(bold mine)

Over the last 100 years the Fed has had many mandates and policy changes in its pursuit of becoming the chief central economic planner for the United States. Not only has it pursued this utopian dream of planning the US economy and financing every boondoggle conceivable in the welfare/warfare state, it has become the manipulator of the premier world reserve currency.

As Fed Chairman Ben Bernanke explained to me, the once profoundly successful world currency – gold – was no longer money. This meant that he believed, and the world has accepted, the fiat dollar as the most important currency of the world, and the US has the privilege and responsibility for managing it. He might even believe, along with his Fed colleagues, both past and present, that the fiat dollar will replace gold for millennia to come. I remain unconvinced.

At its inception the Fed got its marching orders: to become the ultimate lender of last resort to banks and business interests. And to do that it needed an “elastic” currency.  The supporters of the new central bank in 1913 were well aware that commodity money did not “stretch” enough to satisfy the politician’s appetite for welfare and war spending. A printing press and computer, along with the removal of the gold standard, would eventually provide the tools for a worldwide fiat currency. We’ve been there since 1971 and the results are not good.

Many modifications of policy mandates occurred between 1913 and 1971, and the Fed continues today in a desperate effort to prevent the total unwinding and collapse of a monetary system built on sand. A storm is brewing and when it hits, it will reveal the fragility of the entire world financial system. 

The Fed and its friends in the financial industry are frantically hoping their next mandate or strategy for managing the system will continue to bail them out of each new crisis.

The seeds were sown with the passage of the Federal Reserve Act in December 1913. The lender of last resort would target special beneficiaries with its ability to create unlimited credit. It was granted power to channel credit in a special way. Average citizens, struggling with a mortgage or a small business about to go under, were not the Fed’s concern. Commercial, agricultural, and industrial paper was to be bought when the Fed's friends were in trouble and the economy needed to be propped up. At its inception the Fed was given no permission to buy speculative financial debt or U.S. Treasury debt.

It didn’t take long for Congress to amend the Federal Reserve Act to allow the purchase of US debt to finance World War I and subsequently all the many wars to follow. These changes eventually led to trillions of dollars being used in the current crisis to bail out banks and mortgage companies in over their heads with derivative speculations and worthless mortgage-backed securities.

It took a while to go from a gold standard in 1913 to the unbelievable paper bailouts that occurred during the crash of 2008 and 2009.

In 1979 the dual mandate was proposed by Congress to solve the problem of high inflation and high unemployment, which defied the conventional wisdom of the Phillips curve that supported the idea that inflation could be a trade-off for decreasing unemployment. The stagflation of the 1970s was an eye-opener for all the establishment and government economists. None of them had anticipated the serious financial and banking problems in the 1970s that concluded with very high interest rates.

That’s when the Congress instructed the Fed to follow a “dual mandate” to achieve, through monetary manipulation, a policy of “stable prices” and “maximum employment.” The goal was to have Congress wave a wand and presto the problem would be solved, without the Fed giving up power to create money out of thin air that allows it to guarantee a bailout for its Wall Street friends and the financial markets when needed. 

The dual mandate was really a triple mandate. The Fed was also instructed to maintain “moderate long-term interest rates.” “Moderate” was not defined. I now have personally witnessed nominal interest rates as high as 21% and rates below 1%. Real interest rates today are actually below zero.

The dual, or the triple mandate, has only compounded the problems we face today. Temporary relief was achieved in the 1980s and confidence in the dollar was restored after Volcker raised interest rates up to 21%, but structural problems remained.

Nevertheless, the stock market crashed in 1987 and the Fed needed more help. President Reagan’s Executive Order 12631 created the President’s Working Group on Financial Markets, also known as the Plunge Protection Team. This Executive Order gave more power to the Federal Reserve, Treasury, Commodity Futures Trading Commission, and the Securities and Exchange Commission to come to the rescue of Wall Street if market declines got out of hand. Though their friends on Wall Street were bailed out in the 2000 and 2008 panics, this new power obviously did not create a sound economy. Secrecy was of the utmost importance to prevent the public from seeing just how this “mandate” operated and exactly who was benefiting. 

Since 2008 real economic growth has not returned. From the viewpoint of the central economic planners, wages aren’t going up fast enough, which is like saying the currency is not being debased rapidly enough. That’s the same explanation they give for prices not rising fast enough as measured by the government-rigged Consumer Price Index. In essence it seems like they believe that making the cost of living go up for average people is a solution to the economic crisis. Rather bizarre!

The obsession now is to get price inflation up to at least a 2% level per year. The assumption is that if the Fed can get prices to rise, the economy will rebound. This too is monetary policy nonsense.

If the result of a congressional mandate placed on the Fed for moderate and stable interest rates results in interest rates ranging from 0% to 21%, then believing the Fed can achieve a healthy economy by getting consumer prices to increase by 2% per year is a pie-in-the-sky dream. Money managers CAN’T do it and if they could it would achieve nothing except compounding the errors that have been driving monetary policy for a hundred years.

A mandate for 2% price inflation is not only a goal for the  central planners in the United States but for most central bankers worldwide. 

It’s interesting to note that the idea of a 2% inflation rate was conceived 25 years ago in New Zealand to curtail double-digit price inflation. The claim was made that since conditions improved in New Zealand after they lowered their inflation rate to 2% that there was something magical about it. And from this they assumed that anything lower than 2% must be a detriment and the inflation rate must be raised. Of course, the only tool central bankers have to achieve this rate is to print money and hope it flows in the direction of raising the particular prices that the Fed wants to raise.

One problem is that although newly created money by central banks does inflate prices, the central planners can’t control which prices will increase or when it will happen. Instead of consumer prices rising, the price inflation may go into other areas, as determined by millions of individuals making their own choices. Today we can find very high prices for stocks, bonds, educational costs, medical care and food, yet the CPI stays under 2%.

The CPI, though the Fed currently wants it to be even higher, is misreported on the low side. The Fed’s real goal is to make sure there is no opposition to the money printing press they need to run at full speed to keep the financial markets afloat. This is for the purpose of propping up in particular stock prices, debt derivatives, and bonds in order to take care of their friends on Wall Street.

This “mandate” that the Fed follows, unlike others, is of their own creation. No questions are asked by the legislators, who are always in need of monetary inflation to paper over the debt run up by welfare/warfare spending. There will be a day when the obsession with the goal of zero interest rates and 2% price inflation will be laughed at by future economic historians. It will be seen as just as silly as John Law’s inflationary scheme in the 18th century for perpetual wealth for France by creating the Mississippi bubble – which ended in disaster. After a mere two years, 1719 to 1720, of runaway inflation Law was forced to leave France in disgrace. The current scenario will not be precisely the same as with this giant bubble but the consequences will very likely be much greater than that which occurred with the bursting of the Mississippi bubble.

The fiat dollar standard is worldwide and nothing similar to this has ever existed before. The Fed and all the world central banks now endorse the monetary principles that motivated John Law in his goal of a new paradigm for French prosperity. His thesis was simple: first increase paper notes in order to increase the money supply in circulation. This he claimed would revitalize the finances of the French government and the French economy. His theory was no more complicated than that. 

This is exactly what the Federal Reserve has been attempting to do for the past six years. It has created $4 trillion of new money, and used it to buy government Treasury bills and $1.7 trillion of worthless home mortgages. Real growth and a high standard of living for a large majority of Americans have not occurred, whereas the Wall Street elite have done quite well. This has resulted in aggravating the persistent class warfare that has been going on for quite some time.

The Fed has failed at following its many mandates, whether legislatively directed or spontaneously decided upon by the Fed itself – like the 2% price inflation rate. But in addition, to compound the mischief caused by distorting the much-needed market rate of interest, the Fed is much more involved than just running the printing presses. It regulates and manages the inflation tax. The Fed was the chief architect of the bailouts in 2008. It facilitates the accumulation of government debt, whether it’s to finance wars or the welfare transfer programs directed at both rich and poor. The Fed provides a backstop for the speculative derivatives dealings of the banks considered too big to fail. Together with the FDIC's insurance for bank accounts, these programs generate a huge moral hazard while the Fed obfuscates monetary and economic reality.

The Federal Reserve reports that it has over 300 PhD’s on its payroll. There are hundreds more in the Federal Reserve’s District Banks and many more associated scholars under contract at many universities. The exact cost to get all this wonderful advice is unknown. The Federal Reserve on its website assures the American public that these economists “represent an exceptional diverse range of interest in specific area of expertise.” Of course this is with the exception that gold is of no interest to them in their hundreds and thousands of papers written for the Fed.

This academic effort by subsidized learned professors ensures that our college graduates are well-indoctrinated in the ways of inflation and economic planning. As a consequence too, essentially all members of Congress have learned these same lessons.

Fed policy is a hodgepodge of monetary mismanagement and economic interference in the marketplace. Sadly, little effort is being made to seriously consider real monetary reform, which is what we need. That will only come after a major currency crisis.

I have quite frequently made the point about the error of central banks assuming that they know exactly what interest rates best serve the economy and at what rate price inflation should be. Currently the obsession with a 2% increase in the CPI per year and a zero rate of interest is rather silly. 

In spite of all the mandates, flip-flopping on policy, and irrational regulatory exuberance, there’s an overwhelming fear that is shared by all central bankers, on which they dwell day and night. That is the dreaded possibility of DEFLATION. 

A major problem is that of defining the terms commonly used. It’s hard to explain a policy dealing with deflation when Keynesians claim a falling average price level – something hard to measure – is deflation, when the Austrian free-market school describes deflation as a decrease in the money supply. 

The hysterical fear of deflation is because deflation is equated with the 1930s Great Depression and all central banks now are doing everything conceivable to prevent that from happening again through massive monetary inflation. Though the money supply is rapidly rising and some prices like oil are falling, we are NOT experiencing deflation.

Under today’s conditions, fighting the deflation phantom only prevents the needed correction and liquidation from decades of an inflationary/mal-investment bubble economy.

It is true that even though there is lots of monetary inflation being generated, much of it is not going where the planners would like it to go. Economic growth is stagnant and lots of bubbles are being formed, like in stocks, student debt, oil drilling, and others. Our economic planners don’t realize it but they are having trouble with centrally controlling individual “human action.” 

Real economic growth is being hindered by a rational and justified loss of confidence in planning business expansions. This is a consequence of the chaos caused by the Fed’s encouragement of over-taxation, excessive regulations, and diverting wealth away from domestic investments and instead using it in wealth-consuming and dangerous unnecessary wars overseas. Without the Fed monetizing debt, these excesses would not occur.

Lessons yet to be learned:

1. Increasing money and credit by the Fed is not the same as increasing wealth. It in fact does the opposite.

2. More government spending is not equivalent to increasing wealth.

3. Liquidation of debt and correction in wages, salaries, and consumer prices is not the monster that many fear. 

4. Corrections, allowed to run their course, are beneficial and should not be prolonged by bailouts with massive monetary inflation.

5. The people spending their own money is far superior to the government spending it for them.

6. Propping up stock and bond prices, the current Fed goal, is not a road to economic recovery.

7. Though bailouts help the insiders and the elite 1%, they hinder the economic recovery.

8. Production and savings should be the source of capital needed for economic growth.

9. Monetary expansion can never substitute for savings but guarantees mal–investment.

10. Market rates of interest are required to provide for the economic calculation necessary for growth and reversing an economic downturn.

11. Wars provide no solution to a recession/depression. Wars only make a country poorer while war profiteers benefit.

12. Bits of paper with ink on them or computer entries are not money – gold is.

13. Higher consumer prices per se have nothing to do with a healthy economy.

14. Lower consumer prices should be expected in a healthy economy as we experienced with computers, TVs, and cell phones. 

All this effort by thousands of planners in the Federal Reserve, Congress, and the bureaucracy to achieve a stable financial system and healthy economic growth has failed. 

It must be the case that it has all been misdirected. And just maybe a free market and a limited government philosophy are the answers for sorting it all out without the economic planners setting interest and CPI rate increases.

A simpler solution to achieving a healthy economy would be to concentrate on providing a “SOUND DOLLAR” as the Founders of the country suggested. A gold dollar will always outperform a paper dollar in duration and economic performance while holding government growth in check. This is the only monetary system that protects liberty while enhancing the opportunity for peace and prosperity.

Singapore’s Central Bank Panics! Goes on an Easing Mode

Last November, Singapore’s central bank the Monetary Authority of Singapore, raised alarm bells by citing the financial system's record levels of corporate debt to gdp, aside from household debt to income ratio.

In the second week of this year, mainstream media has raised anew concerns over cracks in the city state’s debt financed housing bubble expressed in terms of declining property prices in the light of still ballooning debt, rising rates, falling currency, signs of capital flight and growing incidences of loan defaults.

Well I guess all these has led to today’s ‘emergency’ action.

From Bloomberg: (bold mine)

Singapore unexpectedly eased monetary policy, sending the currency to the weakest since 2010 against the U.S. dollar as the country joined global central banks in shoring up growth amid dwindling inflation.

The Monetary Authority of Singapore, which uses the exchange rate as its main policy tool, said in an unscheduled statement Wednesday it will seek a slower pace of appreciation against a basket of currencies. It cut the inflation forecast for 2015, predicting prices may fall as much as 0.5 percent.

The move was the first emergency policy change since one following the Sept. 11, 2001 attacks for the MAS -- which only has two scheduled policy announcements a year -- reflecting how the plunge in oil has changed the outlook in recent months. Singapore becomes at least the ninth nation to ease policy this month, as officials from Europe to Canada and India contend with escalating disinflation and faltering global growth…

The European Central Bank announced quantitative easing plans this month while Canada, Denmark and India cut interest rates. More may come -- the Bank of Japan chief said the country may need to get creative in any further monetary stimulus and Thai policy makers face growing pressure to lower borrowing costs.

In view of the previous events, in Singapore’s case, the MAS’ emergency action today has hardly been about “shoring up growth amid dwindling inflation” but rather about the mitigation of the growing burden of debt to an increasingly debt constrained society.

But of course, while easing may lower rates, which temporarily may alleviate the debt onus, easing also allows levered companies heavily dependent on debt to rollover debt. In short, monetary easing entails solving debt problem through MORE debt buildup.

Thus the MAS’ actions have been intended to buy time from a painful reckoning from previous speculative excesses financed by debt. But the kick-the-can-down-the-road policies simply means accretion of more imbalances.

The USD-Singapore dollar currently trades at 2010 highs. Yet Singapore’s stock market as measured by the STI nears record highs (stockcharts.com).

Perhaps debt constrained entities have pumping up stocks (by using leverage too?) in order to generate a bandwagon effect. And because rising stocks may bring about trading profits, cash flows from speculative stock punts may allow debt constrained entities to rollover existing debt.

So Singapore’s bubble dynamics spreads from property to the stock market.

And once again we seem to be seeing a divergence between the real economy (increased signs of economic stress)-monetary policies (panicking central bank) and the stock market: Singapore edition

Finally, the article notes that 9 nations have undertaken easing measures. If everything has been salutary as manifested by record stocks, and as what media has been saying, then why the need to ease?

Or has these been symptoms of the inability to wean away from overdependence on debt?

Periphery to Core Transmission? Earnings Growth Estimates in North America and Europe Plummets!

In February of last year, I proposed that the volatility incited by the Bernanke "Taper Talk" would have a feedback loop transmission mechanism to developed economies: (bold original)

if the adverse impact of emerging markets to the US and developed economies won’t be offset by growth (exports, bank assets and corporate profits) in developed nations or in frontier nations, then there will be a drag on the growth of developed economies, which would hardly be inconsequential. Why? Because the feedback loop from the sizeable developed economies will magnify on the downside trajectory of emerging market growth which again will ricochet back to developed economies and so forth. Such feedback mechanism is the essence of periphery-to-core dynamics which shows how economic and financial pathologies, like biological contemporaries, operate at the margins or by stages.

Let us see how this may have been applied anent earnings growth.

First 12 forward EPS growth estimates for MSCI Emerging markets and Pacific…

EPS growth has declined in 2013, rallied in the 1Q of 2014 (green trend line) and has cascaded through the yearend. There seems to be innate signs of recovery. But recoveries look as if it has been driven by seasonal yearend forces (green boxes)

Nonetheless the general trend looks headed south interspersed with gains.

Now here is the more interesting part.

The same EPS estimates for MSCI North America and Europe has collapsed.

Notes the prolific Gavekal Team (charts theirs too)

Without delving into the multitude of reasons for the drop, we just point out that EPS estimates for next twelve months are falling like a stone in North America and Europe and for these two regions the bottom line estimates point to the lowest growth rate since late 2009. It doesn't matter whether we look at average EPS growth estimates or median, as the fall in both series is becoming concerning.

Thankfully, the estimated EPS growth rate for developed Asia and EMs has remained stable.

Will the feedback loop from the developed economies magnify on the downside trajectory of emerging market growth which again will ricochet back to developed economies and so forth?

Also record stocks in the face of collapsing EPS!

Very interesting.

Quote of the Day: Get ready for negative interest rates in the US

I predict that the Fed will start charging negative interest rates on bank reserve accounts, which will ripple through the markets and result in negative interest rates on savings at banks. I make this prediction only because it is the logical action of the Keynesian managers of our economy and monetary policy. Our exporters will scream that they can’t sell goods overseas, due to the stronger dollar. So, what is the Fed’s option? Follow the lead of Switzerland and Denmark and impose negative interest rates in order to drive down the foreign exchange rate of the dollar.

It is the final tool in the war on savings and wealth in order to spur the Keynesian goal of increasing “aggregate demand”. If savers won’t spend their money, the government will take it from them.

This from Austrian economist Patrick Barron at the Mises Canada

Infographics: The Bre-X Scandal: A History Timeline

From Visual Capitalist

Courtesy of: Visual Capitalist

Phisix: Draghi’s Bazooka Sends Philippine, Indonesian, Indian and New Zealand Stocks to Record Highs!

Here is the Philippine Stock Exchange’s press release on Phisix 7,500+ (bold mine)

"With the moderate slowdown in China's economy, coupled with Japan's economic recession and Europe’s debt crisis, and notwithstanding the US economic resurgence, emerging markets such as the Philippines will stand out due to its strong macro-economic fundamentals and sustainable growth story. The positive sentiments by the market as regards the European Central Bank quantitative easing program further propelled our market to an all-time high," said PSE COO Roel A. Refran.

"I believe that our stock market will remain resilient amidst the global realities buoyed by investors’ continued confidence in our economy," Refran added.

Year-to-date, the PSEi is already up by 4.4 percent.

Let us put in to perspective this week’s record run.

Asian stocks flew this week with the Philippine Phisix registering one of the (surprise!) underperformers ex-China on a weekly basis. The domestic benchmark rose by only .77% week on week.

With the exception of a few bourses, weekly gains of other Asian national benchmarks have been at a stunning 3% and above!!!

Yet the best performers year to date as of Friday posted over 6% returns. The topnotch position have been shared by Vietnam (+6.74%), Thailand (+6.72%), and India (+6.47%) (see green rectangles). 

Yet despite the relative underpeformances, bourses of New Zealand, Indonesia and the Philippines set record highs (with stars, see also above).

India’s Sensex stole the limelight by outclassing the rest this week PLUS a record high. Or stated  differently, record high has been a product of a carryover from last week’s gains PLUS this week’s fiery performance

Equity bellwethers of Pakistan, Singapore and Taiwan have now been just off record highs.

Meanwhile Thailand’s bellwether has completely recovered the steep December losses and seems as headed for a landmark high. 

Ironically, Thailand’s dazzling performance comes with a stagnating statistical economy whose GDP in 2014 has been less 1% as of 3Q. As I earlier pointed out, Thailand’s stocks reported record stock market trading volume in 2014 as abundant liquidity fueled a massive bidding spree on stocks and real estate than on investments on the real economy plagued by overleverage and political uncertainty.

The Malaysian KLCE, on the other hand, maybe far off the record levels, but has rallied strongly this week. This comes even as the Malaysia’s PM went on air this week to talk about and deny a crisis!!!

Underperformance of Chinese stocks hasn’t been what it seems. 

The Shanghai index crashed 7.7% last Monday due to a crackdown by the Regulatory Commission on margin trades.

Apparently shaken by the market’s reaction, the Regulatory Commission backed off in the succeeding days. And helped by PBoC’s injection of funds to troubled companies, the Shanghai Index recovered almost entirely Monday’s crash through the weekend.

And if one glimpses at the chart of the Shanghai index the Chinese bellwether currently drifts at a milestone 2009 high! So despite a  “moderate slow down in China’s economy”, Chinese stocks are at watermark highs. So how has the growth story been consistent with record stocks? 

It’s been noted too that Japan has been in a recession. So what explains soaring stocks in a recession? 

And in the order of year-to-date performance of  Asian bourses, the Phisix ranks fifth in the region after 4th placer Hong Kong.

The bottom line is that there has been little to do about being a “stand out due to its strong macro-economic fundamentals and sustainable growth story” but about a massive and indiscriminate regional pump which characterizes a risk ON environment in expectations of abundance of liquidity from the ECB operations.

The recognition that there have been problems with China, Japan and Europe aside from oil and commodity producing emerging markets suggest that “strong macro-economic fundamentals and sustainable growth story” represents a fantasia unless the Philippines is a closed economy.

The fact that there are trade, capital and investment and remittance links means that a slowdown from these major economies will have relative impact depending on the transmission linkages to an economy with exposure to them. The impact will be (again) relative to the specifics of the industries involved. Writing off risks by stereotyping only begs the question.

Draghi’s Bazooka has pumped up European stocks to record levels even when corporate fundamentals have been sluggish or even collapsing in terms of estimates of annual and forward earnings (via MSCI ex-UK)

The Nikkei Asia quotes an expert on the record highs of Indonesia and the Philippines:  "The ECB decision will definitely ease liquidity pressure" on Association of Southeast Asian Nations markets, said Mixo Das, a Singapore-based equity strategist at Nomura.

And this has exactly been what the region’s stock market pump has been about: expectations of a plethora of liquidity from the ECB’s action. The ECB repeated pronouncements during the last quarter of 2014 has paved way for most of the region’s pump from the onset of 2015.

Feel good rationalization is the order of the day

Just take a look at the headlines from yesterday’s business section of the Inquirer: Market Seen to Hit 8,000 Mark, Corporate Earnings May Grow By 16% in 2015 from last year’s 6%

Corporate earnings grew by only 6% in 2014??? Huh? The market returned or paid 22.76% last year for only 6% growth??? Said differently, punters paid nearly THREE times more than the actual growth rates! 

And this has been why the Phisix has reached absurd valuation levels via multiple expansions.

Let us extend mainstream logic. 2014 performance translates to 3.79% gains for every 1% earnings growth. If the past should extend to the future, then at 16% growth, the Phisix should return 61% or be way past 10,000 (11,640)! So why stop at 8,000? Because the target looks more rational than the logical basis of its premises?

Now what happens if the 16% growth does NOT emerge? PERs will jump from the current 30,40,50 to 60,70,80? And this is sensible or normal?

As I have been saying here, G-R-O-W-T-H has served nothing more than to rationalize or justify outrageous bidding up of risk assets. It’s not  about G-R-O-W-T-H, it’s about GAMBLING. Gambling financed by bank credit and liquidity that has been rationalized by G-R-O-W-T-H!

I wrote about Warren Buffett’s favorite stock market indicator the  market cap to gdp last September.

Given that the Phisix generated 22.76% in 2014 and has been up 4.4% as of Friday, while say, 2014 GDP will be as what mainstream expects at 6%, here is what I wrote last September which should be relevant today:

Total Market capitalization as % of GDP has reached 105.6 in 2012 as per the World Bank, chart from Tradingeconomics.com. In 2013 since the Phisix yielded only 1.33% as compared to a statistical 7.2% GDP, a back of the envelop calculation posits that the said ratio must have declined to possibly 99.73. However, considering the 1H GDP at 6%, coming amidst a 26.8% return at the end of June, this implies a market cap to GDP at a stunning record of 120.53 way way way past the pre-Asian Crisis!

Yet what happens when mainstream expectations of GDP will be unfulfilled like in 3Q? If the markets don’t make the necessary adjustments then at current price levels, the market cap to GDP will spike  to even more ridiculous levels! And if markets continue to rise we get the same outcome—patent mispricing!

And this has been about “strong macro-economic fundamentals”? Or has this been about flagrant misappreciation of risks that signifies as symptoms of financial destabilization in progress?

Every time the mania deepens this warning from Harvard’s Carmen Reinhart and Kenneth Rogoff becomes increasingly relevant: 

The essence of the this-time-is-different syndrome is simple. It is rooted in the firmly held belief that financial crisis is something that happens to other people in other countries at other times; crises do not happen here and now to us. We are doing things better, we are smarter, we have learned from past mistakes. The old rules of valuation no longer apply. The current boom, unlike the many previous booms that preceded catastrophic collapses (even in our country), is built on sound fundamentals, structural reforms, technological innovation, and good policy. Or so the story goes …

Or how about the central bank of Central banks, Bank for international Settlement’s General Manager Jaime Carauna’s admonition last November

Credit booms can act as a smokescreen. They tend to mask the sectoral misallocations that I just described, making it difficult to detect and prevent these misallocations in time. Boom times also tend to hide other slow-moving forms of deterioration in real growth potential.

Asian currencies has been less indiscriminate relative to stocks.

But still traces of the Asian Risk ON landscape has been evident. The peso rallied strongly this week, up 1.1%. Year to date the peso has been up 1.2% or about 90% of year to date gains came from last week.

On a year to date basis, aside from India’s rupee, the Thai baht, Taiwan dollar and the South Korean won has been up despite uneven performance this week. This means that the Philippine peso’s rally has been belated or a catch up move.

The Indonesian rupiah rebounded strongly too, but this only shaved off the year to date losses.

Ironically strong stock market performances failed to filter into the Singapore dollar and the Malaysian ringgit. So there has been signs of divergence between the stock market and the currency market.  Asymmetric performance suggests of ephemeral conditions—either the currencies of Singapore and Malaysia’s will strengthen or stocks will weaken.

And paradoxically too, Singapore’s near record stocks comes in the light of increasing alarmism by the mainstream over signs of growing cracks in the city state’s credit and housing bubbles.

And in the Philippine record stocks hasn’t been transmitted to the bond markets.

Despite the $2 billion of bonds raised from the international markets, and the supposed “seasonality” of the yield curve, Philippine bond markets hardly improved going into the end of January or after 3 weeks.

While the yields of 3 months bills did markedly decline, it still remains at May 2013 levels, yet the (10-25 year) bonds have declined even more. Yields of one month, 6 months and one and 2 year had been marginally higher.

The result has been to aggravate the flattening of the curve. The spread between the 10 and 20 years relative to the 6 months, 1 and 2 years continues to narrow. Some of last week’s seeming marginal improvement seems to have reversed.

And curiously the inversion of yields of the 5 year with 4 and 3 year counterparts has only deepened. Yields of one month bills at 2.379% has inverted with the 3 months at 2.136%. Though these are minor inversions they are symptoms that the tightly controlled bond markets  have not been as healthy as what the establishment  and media wants the public to believe.

So how can corporations grow at a rate of 16% when a flattening of the yield curve postulates to lesser credit activities for the economy and subsequently lesser profits for the banks?

At the end of the day, all these rationalizations have been no more than pat on the back or feel good self serving bias—attribute success to skills and failures to external factors.

Such rationalizations have been common traits during market tops similar to Japan’s Nikkei when it peaked at 39,000+ in December 29, 1989.

Finally, how has Friday's fresh record closing been attained?

Well by the methods considered as illegitimate but now has become regular: marking the close. About a third of Friday's gains have been etched by the last minute pump! 

Index managers have been panic buying and accumulating outrageously valued index issues in thinking that today's world risks has been expunged out of existence.  

Sometime soon reality will arrive in the form of a rude awakening.

Quote of the Day: What is this War on Terror?

But what is France fighting for in this war on terror? For terrorism is simply a tactic, and arguably the most effective tactic of the national liberation movements of the 20th century.

Terrorism was used by the Irgun to drive the British out of Palestine and by the Mau Mau to run them out of Kenya. Terrorism, blowing up movie theaters and cafes, was the tactic the FLN used to drive the French out of Algeria.

The FALN tried to assassinate Harry Truman in 1950 at Blair House, shot up the House of Representatives in 1954, and, in 1975, blew up Fraunces Tavern in New York where Washington had bid his officers farewell. The FALN goal: Independence from a United States that had annexed Puerto Rico as the spoils of war in its victory over Spain.

What did the FLN, FALN, Mau Mau, Irgun and Mandela’s ANC have in common? All sought the expulsion of alien rule. All sought nations of their own. All used terrorism for the same ends as Uighurs do in China and Chechens do in the Caucasus.

Osama bin Laden, in his declaration of war upon us, listed as his casus belli the presence on the sacred soil of Saudi Arabia of U.S. troops and their “temple prostitutes.” He wanted us out of his country.

What are Valls’ terrorists, jihadists and radical Islamists fighting for? What are the goals of ISIS and al-Qaida, Boko Haram and Ansar al-Sharia, the Taliban and al-Shabab?

All want our troops, our alien culture and our infidel faith out of their lands. All seek the overthrow of regimes that collaborate with us. And all wish to establish regimes that comport with the commands of the Prophet.

This is what they are recruiting for, killing for, dying for. We abhor their terror tactics and deplore their aims, but they know what they are fighting for. What are we fighting for?

What is our vision that will inspire Muslim masses to rise up, battle alongside us, and die fighting Islamists? What future do we envision for the Middle East? And are we willing to pay the price to achieve it?

Comes the reply: America is fighting, as always, for democracy, freedom and the right of peoples to rule themselves.

But are we? If democracy is our goal, why did we not recognize the election of Hamas in the Palestinian territories, or of Hezbollah in Lebanon? Why did we condone the overthrow of the elected regime of Mohammad Morsi in Egypt? Why do we not demand democracy in Saudi Arabia?

But hypocrisy is the least of our problems. The real problem is that hundreds of millions of Muslims reject our values. They do not believe all religions are equal. They do not believe in freedom of speech or the press to blaspheme the Prophet. Majorities in many Islamic countries believe adulterers, apostates, and converts to Christianity should be lashed, stoned and beheaded.

This is from Patrick J. Buchanan, author of Churchill, Hitler, and “The Unnecessary War”: How Britain Lost Its Empire and the West Lost the World at the antiwar.com

The entire article is a recommended read.

ECB’s QE Effect; Danish Central Bank Cuts Interest Rates Twice this week

Here is one interesting ramification from the ECB’s QE, the Danish central bank cut interest rate twice this week:

From the Wall Street Journal:

Denmark cut its main interest rate on Thursday for the second time this week as it sought to dampen interest in its currency among investors selling the euro after the European Central Bank announced a stimulus package.

The Danish central bank lowered its deposit rate to minus 0.35% from minus 0.2% after cutting from minus 0.05% on Monday. It left its other main interest rates unchanged.

The Danish move came ninety minutes after ECB President Mario Draghi announced an expansion of an ECB bond-buying program aimed at supporting growth and lifting inflation expectations in the eurozone. Mr. Draghi said the ECB will buy a total of €60 billion ($69 billion) a month in assets including government bonds, debt securities issued by European institutions and private-sector bonds.

The Danish currency the krone has been pegged to the euro, which means that Denmark has de facto part of the EMU via the ECB’s policies

And considering that the Swiss SNB abandoned the franc-euro cap last week, speculations have been rife that Denmark might do the same.

Back to the article:

Since last week’s surprise retreat by the Swiss central bank from its policy of limiting the rise of the Swiss franc against the euro, analysts have been wondering who might be next and focus has been on Denmark.

“It’s very clear that the Danish central bank is feeling the pressure,” said Peter Kinsella, a foreign-exchange strategist at Commerzbank. “The fact that they have acted twice in the space of just a single week shows that they are indeed very concerned.”

Some have wondered if Denmark’s peg might be vulnerable and the central bank has been quick to show it won’t shy away from cutting its main rate well into negative territory and intervening in the currency market if that is what is needed.

“We have the instruments necessary to maintain the peg, we have done today what we have done on previous occasions,” said central bank spokesman Karsten Biltoft by phone from Copenhagen. “First we intervene in the foreign exchange market, then we change the interest rate,” Mr. Biltoft said.

Denmark’s business leaders have reportedly appealed to the Danish central bank to maintain the peg.

Interestingly, for Denmark household debt has been the largest in the OECD.

From a January 2014 Bloomberg report

Denmark is reining in its $550 billion home loan industry, the world’s biggest per capita, after cheap credit fed a borrowing spree. Danes owe their creditors 321 percent of disposable incomes, a world record and a level that warrants a policy response, the Organization for Economic Cooperation and Development said in November.

Denmark’s consumers are backed by some of Europe’s biggest pension savings, at about 1 1/2 times gross domestic product, central bank figures show. While the structure of the nation’s housing market and pension system mitigates some of the credit risks, Noedgaard said debt levels are hampering consumer spending, which makes up half Denmark’s $340 billion economy…

Household borrowing from mortgage lenders and banks stood at 1.88 trillion kroner ($345 billion) in October, the majority of it home loans, after peaking at 1.91 trillion kroner in December 2012, according to central bank statistics.

Media notes that Denmark's debt levels have been hampering consumer spending. Of course, debt enables the frontloading of spending to the present. This has a cost: future spending. But the future has arrived, debt has to be paid at the cost of present spending. There is no such thing as a free lunch. If income doesn't grow debt levels will be a problem.

And according to a report from the European commission (March 2014):

Denmark's mortgage system is characterised by a high share of variable-rate and deferred amortisation loans. The share of variable-rate (or "adjustable rate") loans by mortgage banks remains high at 72% of total lending in November 2013. The variable rate loans are particularly widespread among families in the top 10% and the bottom 10% of the income distribution. The share of deferred-amortisation loans, i.e. loans with interest-only payments in the initial phase of the contract, is also high, amounting to 53% of total mortgage lending in November 2013.

The above highlights the sensitivity by Denmark's household balance sheets to changes in interest rates even if part of this has been "backed by pensions".

In other words, a surge in inflation expectations may spike interest rates which may may render Denmark’s economy vulnerable to a margin call. Add to this the fragile confidence on Denmark’s credit conditions which increases the possibility of markets to speculate against the peg.

This one reason why the Danish central bank will eventually follow the SNB.