Phisix 7,800: Peso Smashed, January Remittance Growth Rates Plunges, Short Term Treasury Yields Spike!

And as man cannot bear to be without the miraculous, he will create new miracles of his own for himself, and will worship deeds of sorcery and witchcraft, though he might be a hundred times over a rebel, heretic and infidel ― Fyodor Dostoyevsky, The Brothers Karamazov

In this issue:

Phisix 7,800: Peso Smashed, January Remittance Growth Rates Plunges, Short Term Treasury Yields Spike!

-US Dollar’s Domino Effect: Philippine Peso and Malaysian Ringgit Smoked!

-OFW Remittances: Growth Rates Crash in January! Structural Headwinds Compounded by Event Risks

-Short-Term Philippine Treasury Yields Spike as Yields Flatten! Basel Standards are No Guarantee of Adequate Risk Measurement

-Capital Flight from Local Elites? Asian Currencies and CDS Spreads Show Why This Time Won’t Be Different

-Sweden Cuts Rate Announces QE as BIS and OECD Warns on Low Interest Rates!

Phisix 7,800: Peso Smashed, January Remittance Growth Rates Plunges, Short Term Treasury Yields Spike!

Marking the close occurred in a stunning 4 out of the 5 trading days this week!

It’s just horrifying to see how the Philippine stock market has transmogrified into a broken system characterized by mass hysteria and rampant manipulation!

US Dollar’s Domino Effect: Philippine Peso and Malaysian Ringgit Smoked!

In noting of the Philippine pesos’ outperformance, last week I asked, “For now, the Philippine peso now takes on the leadership but for how long?”

The currency markets appeared to have answered my question.

Although the US Federal Reserve’s FOMC dropped the word “patient” from their recent policy meeting, a “surprisingly downbeat outlook” and Fed Chairwoman Ms. Janet Yellen’s implied assurances of stretching an interest rate hike via “doesn’t mean we are going to be impatient” sent the US dollar tumbling. The US dollar even experienced a flash crash! (see right window). Growing accounts of real time flash crashes represents another sign how fragile and vulnerable the current financial markets have been.

Compounding the US dollar’s plight has been reports that the Chinese government’s central bank, the PBOC, massively intervened in support of her currency, the yuan.

So these factors—the Fed’s dovish stance and PBOC intervention—sent Asian currencies rallying hard (see right also see JP Morgan Bloomberg’s Asian Currency Index ADXY). The same factors have likewise accommodated a risk ON environment.

Yet the Philippine peso and the Malaysian ringgit defied the general regional sentiment. Against the US dollar, the peso plummeted 1.19% while the ringgit has been once again crushed, down by 1.3%. 

This week’s meltdown has not only erased the gains of the year, but has dragged down the peso to a year to date loss of .2%. Current momentum suggests that the USD-peso may break the 45 levels soon (see right)

Meanwhile, the ringgit’s sustained losses have brought the USD MYR pair to the peak of 2008! (see left)

Aside from the US dollar’s relative strength over most currencies, there are likely internal factors that have led to the pesos’ decline.

OFW Remittances: Growth Rates Crash in January! Structural Headwinds Compounded by Event Risks

This week the BSP came out with a report on personal and cash remittances for the month of January. 

Strikingly, personal and cash remittances inched up by ONLY .2% and .5% respectively! This marks the second below 2% growth rate in 3 months!

January’s growth rate crash represents the worst level since January 2009!

Yet the trends of the rate of growth of personal and cash remittances have been on a downhill as noted above.

It would be facile to blame seasonality for this. I can also add the Dodd-Frank ACT 1073 remittance-transfer as potential obstacle to remittance flows as previously discussed.

But a showcase of the January activities since 1990 reinforce the downside trend of growth rates in remittance flows. As one would note from the left graph, since 1998, remittance growth rates have been on a steady decline.

It would appear that the law of compounding and diminishing returns likewise affects remittance trends. Nominal remittance levels have reached size and scale where growth rates have become incremental.

Yet January’s nominal remittance trend may have even broken its long term trend.

While seasonality and Dodd Frank may have contributed, they are likely to be secondary (epiphenomena) or aggravating factors. But January activities show that seasonal dynamic appear as minor events.

And current conditions like crashing oil prices may have likely been another more significant contributing cause too. As I warned last December[1]

And yet how will the blowing up of the Middle East bubble extrapolate to Philippine OFW remittances? More than half or about 56% of OFWs according to the Philippine Overseas Employment Administration (POEA) have been deployed to this region. Will OFWs (and their employers) be immune from an economic or financial crisis? This isn’t 2008 where the epicenter of the crisis was in the US, hence remittances had been spared from retrenchment. For this crisis, there will be multiple hotbeds. The ongoing crashes in oil-commodity spectrum have already been showing the way.

So the above suggests that the structural declining trend in remittance growth rates seems as being reinforced by secondary causes such as oil prices and possibly the Dodd-Frank statute.

What is the implication of the remittance slowdown?

Well, as I wrote this week[2]:

This partly explains the ongoing pressures in retail activities and the weakening of the consumer household activities (HFCE) as revealed by the 4Q 2014 GDP data provided by the government, as explained here.

The rising account of store vacancies at shopping malls appear as real world (not statistical) symptoms of this.

Yet ironically, the supply side (housing, shopping malls, hotel and related industries) continues to project consumer trends as perpetually headed to the sky for them to borrow and build with ferocity. For instance, the daughter of the Philippines' richest tycoon anchors her firm's expansion projects largely on remittances as posted here

The end result from the widely divergent expectations and activities will be a huge or massive excess capacity mostly financed by debt!

And yet the sellside industry, expects earnings growth rate for the Phisix in 2015 to be at the mid teens. If current trends continue, then they will not only miss by a mile or by an ocean but by a galaxy!

And whatever strength by the peso, or its outperformance in the region, will be further exposed if such trends continue.

Is it a wonder why the BSP chief adamantly insists of deflationary risks in his latest speeches?

Short-Term Philippine Treasury Yields Spike as Yields Flatten! Basel Standards are No Guarantee of Adequate Risk Measurement

There could have been another factor to last week’s peso meltdown. 

Yes symptoms of funding pressures have reappeared in the Philippine treasury markets. Short term rates have massively spiked to return to December levels! That’s just two months after the Philippine government raised $2 billion overseas. The $2 billion loans may have helped temporarily improve February Gross International Reserves now at $81.3 billion.

Yet to apply the BSP chief’s splendid advice to journalists (whom I previously quoted[3]):

Economic numbers rarely tell the complete story when taken at face value. Therefore, a responsible journalist who seeks to offer readers a fuller appreciation of the information will examine the figures within a broader context or against an array of other relevant indicators.

So even if the BSP declares that the Philippine banking system as having “adequate capital levels against risks” for commercial and universal bank and for rural and coop banks, “figures within a broader context or against an array of other relevant indicators” in the prism of the treasury markets suggests that the alleged diminished risk outlook has been inconsistent or incompatible. Said differently, what statistics say and what the treasury markets have signaled have diverged.

Further, the obsession towards statistical or quant models as measures of risks as to declare the system safe has been vastly misplaced. 

Proposed changes at the Basel standards or ‘Basel IV’ have already been raising a hubbub at the international banking world.

An officer from the American Bankers Association exposes on the flaws of the Basel standards (as excerpted by Euromoney)[4]. [bold mine]

"As Basel III was an admission that Basel II got things wrong, Basel IV is a clear recognition that there is much that is wrong with Basel III," he says. "Yet the folks at Basel have not yet looked in the mirror and asked whether what is mostly wrong might be happening in Basel, that the simple concept of Basel I, to have some basic global capital standards, has been lost in an effort to over-engineer and micromanage at the global level the fine details of capital standards."

Yet why have some bankers been pushing back on Basel Committee on Banking Supervision’s (BCBS) proposals?

BCBS wants to end the practice of risk-weighting lenders’ exposures by reference to external credit ratings and instead suggests using measures such as capital adequacy and asset-quality metrics on exposures to other banks, for example. For corporates, the BCBS argues a given borrower’s revenue and leverage should determine credit risk weights rather than ratings, with the latter typically discriminating between industries and local-accounting standards. 

Bankers see plenty of problems. Since this way of risk-weighting exposure to other banks is determined by common tangible equity ratios and the non-performing assets ratio, it does not adequately take into account divergent liquidity and business-risk profiles, nor differences in supervisory processes under Pillar 2 of the Basel regime, says a senior regulatory adviser to the CEO of a large European universal bank.

The adviser adds: "Credit rating agencies look at a multitude of factors and these metrics are always richer, incorporating thorough timely reviews, and engagement with counterparties and agencies. You can also never empirically replace these qualitative assessments. 

The answer to the push back; because there is no uniformity in the risk profile of each loan portfolio.

To repeat “You can also never empirically replace these qualitative assessments”. Hmmm

Doesn’t this resonate with what I wrote back in October 2014[5]?

Because the BSP doesn’t really know of the viability or credit worthiness of each of the loans that have been extended throughout the system. And this lack of knowledge is what they admit as “uncertainty” and thus the warning “risks that could challenge… financial stability pressures from repricing of credit; sharp downward adjustments in prices of real and financial assets; and, capital flow volatility”.

They have practically NO idea what happens when there will be a “repricing of credit” and or how intense and scalable will “sharp downward adjustments in prices” and or how volatile capital flow will be.

Even bankers and regulators see Basel standards as inadequate measures of risk. So the citation of accounting metrics or statistics does nothing to uphold the supposed soundness of the system.

Going back to the Philippine treasury markets, the spike in short term yields has once again steepened the yield curve flattening dynamics.

Such flattening dynamic posits for an implied tightening of the liquidity environment as banks has less incentives to lend in an economy that has become increasingly dependent on debt.

Again considering that the Philippine treasury markets have been tightly held or controlled by the Philippine government and their banking sector vassals, those short term yield spikes signify as signs of growing fissures in the system.

And could the peso selloff have been also prompted by increasing concerns over risks build up despite the government and media’s attempt to whitewash them?

Capital Flight from Local Elites? Asian Currencies and CDS Spreads Show Why This Time Won’t Be Different

Two more items.

Has the local elites been seeking refuge away from the peso and domestic equities?

The BSP’s Balance of Payment report[6] says that in 4Q 2014 and in the entire 2014, the financial accounts registered net outflows.

I quote below the BSP’s explanation per category and put an emphasis on the activities of residents

4Q Direct investments (bold added): The direct investments account yielded higher net outflows of US$977 million in Q4 2014, more than double the net outflows of US$471 million in Q4 2013. Residents’ net acquisition of financial assets of US$2.4 billion exceeded their net incurrence of liabilities (foreign direct investments in the Philippines or FDI) of US$1.4 billion. This developed as equity capital placement abroad by resident non-banks surged to US$1.7 billion from US$226 million.

4Q Portfolio investment holdings: The portfolio investments account posted net outflows of US$1.2 billion in Q4 2014, 7.5 percent higher than the net outflows in Q4 2013. This development was reflective of the prevailing volatility in financial markets amid lingering uncertainty over the global growth prospects. Residents’ net acquisition of financial assets amounted to US$930 million, a reversal of the US$81 net disposal of financial assets in Q4 last year on account of net placements by domestic deposit-taking corporations (US$777 million) and the central bank (US$171 million) in debt securities issued by non-residents.

4Q Other investment accounts: The other investment account recorded net outflows amounting to US$2.3 billion in Q4 2014, more than five times the US$426 million registered in the comparable quarter last year. Net outflows stemmed mainly from higher net acquisition of financial assets which reached US$4 billion from US$1.2 billion in Q4 2013, due largely to higher residents’ deposit placements (US$2.7 billion) and net lending (US$1.4 billion) abroad.

The same Balance of Payment report for 2014 reveals the same dynamics.

Direct investments: The direct investment account reversed to net outflows of US$789 million from net inflows of US$90 million a year ago. This developed on account of the 91.7 percent rise in residents’ net acquisition of financial assets to US$7 billion from US$3.6 billion due to resident corporations’ net placements in both equity capital (US$2.9 billion) and debt instruments (US$4 billion) abroad.

Portfolio Investments: Portfolio investment account recorded net outflows of US$2.5 billion during the period, a reversal of last year’s net inflows of US$1 billion. This was due to residents’ net acquisition of financial assets of US$2.5 billion, from a net disposal of assets amounting to US$638 million combined with non-residents’ net withdrawal of investments amounting to US$3 million, a reversal from the net placements of US$363 million in 2013.

Other accounts: The net outflows in the other investment account doubled to US$6.9 billion from US$3.4 billion in 2013 on account of increased net placements in currency and deposits abroad by resident banks and non-bank corporations, amounting to US$2.7 billion and US$1.4 billion, respectively), and to higher resident banks’ net lending of US$2.7 billion.

Have domestic elites been bullish on the outside, but bearish in the inside? Have they been engaged in ‘do as I say, but not as I do’? So why the seeming outgrowth in capital exodus?

Finally, a lot of people from the formal sector have come to believe that the Philippines have become invincible to exogenous factors as to price domestic financial assets to perfection.

This week’s peso activity shows why this won’t be true, and add to this the above, the cost of insuring government debt via ASEAN 5 year CDS spread from Deutsche Bank.

While so far the Philippines has outperformed, the seeming near synchronized movements of CDS spreads shows of the relevance of the region’s influence.

The above only shows that this time won’t be different.

Sweden Cuts Rate Announces QE as BIS and OECD Warns on Low Interest Rates!

As I have been saying, central banks have aggressively embarked on crisis resolution measures even as global stock markets have run amuck.

The Swedish central bank cut rates into negative territory last week, as well as, announced the Swedish version of QE. 

From the New York Times[7]:

The executive board of the Swedish Riksbank said that it had cut its main rate target by 0.15 percentage point to minus 0.25 percent, and that it would buy government bonds valued at 30 billion kronor, or about $3.5 billion, over the next few months.

The bank said in a statement that it saw signs “that inflation has bottomed out and is beginning to rise,” but that the strength of the currency “risks breaking this trend.” The measures on Wednesday were intended “to support the upturn in inflation,” said the Riksbank, which signaled its “readiness to do more at short notice.”

The actions of the Swedish Riksbank marks the seventh rate cut by global central banks for the month of March and 25th for the year based on the tabulation of the CentralBankRates.com. This has been a count for rate cuts alone and excludes other non interest rate actions.

Central banks seem as in a panic mode in the face of abruptly falling economic indicators as financial markets party! 

It is as if we exist in two different worlds

Yet when the crisis emerges, global central banks would have little or no ammunition left to mount rescues as they have been desperately frontloading them.

Yet in a follow up to their September call, the OECD once again issues a brief warning on low interest rates[8].

“Lower oil prices and widespread monetary easing have brought the world economy to a turning point, with the potential for the acceleration of growth that has been needed in many countries,” said OECD Chief Economist Catherine L. Mann. “There is no room for complacency, however, as excessive reliance on monetary policy alone is building-up financial risks, while not yet reviving business investment. A more balanced policy approach is needed, making full use of fiscal and structural reforms, as well as monetary policy, to ensure sustainable growth and public finances over the longer term.”

The Bank for International Settlements has been consistently, persistently determined to warn of a risk buildup since 2014.

In the media briefing for the BIS Quarterly Review[9], Mr Claudio Borio, Head of the Monetary & Economic Department, goes on the record to caution the world from current set of policies. (bold mine)

In the process, central banks have shown that the so-called zero lower bound on interest rates is quite porous. Negative policy rates at the short end, coupled in some cases with large-scale asset purchases at the longer end, have pushed both term premia and nominal yields firmly and farther into negative territory. If this unprecedented journey continues, technical, economic, legal and even political boundaries may well be tested. The consequences should be watched closely, as the repercussions are bound to be significant, on the financial system and beyond.

The unforeseen technical, economic, legal and even political boundaries repercussions from inflationism reminds me of this majestic quote from the high priest of inflationism[10] (bold mine)

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.

Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become "profiteers," who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

How so very relevant such quote have been today.

Has central banks implicitly functioned as communist Trojan horses whose policies could have been engineered to destroy the residual capitalist structure of the world?

---

[1]See Phisix: The October Syndrome is Back! Philippine Casinos as the Causa Proxima? December 15, 2014

[2] See Wow, Philippine Remittance January Growth Rates Collapse to Near Zero or Post 2009 Crisis Levels! March 17, 2015

[3] See Phisix 7,800: Record Phisix as the BSP Continues with Deflation Spiel! March 9, 2015

[4] Euro Money Bank regulation: ‘Basel IV’ sparks banker fury March 2015

[5] See Phisix: 7,400 is not the Technical Hurdle, the BSP Governor Is October 6, 2014

[6] Bangko Sentral ng Pilipinas Q4 2014 BOP Position Yields US$574 Million Surplus; Full-Year 2014 Registers US$2.9 Billion Deficit March 20, 2014

[7] New York Times Sweden Cuts Key Interest Rate to Minus 0.25% March 18, 2015

[8] OECD Newsroom Low oil prices and monetary easing triggering modest acceleration of global recovery March 18, 2015

[9] Mr Claudio Borio BIS Quarterly Review March 2015 - media briefing BIS.org

[10] John Maynard Keynes The Economic Consequences of the Peace 1919. pp. 235-248. PBS.org

Public Choice Theory Applied to the Political Economy of US Ethanol

A great example of the public choice theory in action

Writes Randall Holcombe at the Mises Blog (bold mine)

This article notes that in 2000 about 5% of the corn crop went to the production of ethanol, and by 2013, 40% of the corn crop was devoted to ethanol production. The increased demand for corn resulted in a doubling of the per bushel price of corn.

The U.S. Department of Agriculture says in 2011 the total value of the corn crop was $63.9 billion, and that there were 400,000 corn farms in the United States. Because the price of corn has doubled due to the mandate, half of that revenue, or $31.95 billion, is a transfer from consumers to corn farmers in the form of higher prices.

Dividing that $31.95 billion cost among 319 million Americans, the cost to each American from the ethanol mandate is just about $100 a year. That includes not only the price of ethanol, but the higher price of corn in all its other uses.

That $31.95 billion is shared among the 400,000 corn farmers, so the average benefit to each farmer is $79,875.

This is a good example of how legislation providing concentrated benefits to an interest group and imposing disbursed costs on everybody can maintain political support. There is much less incentive to for individuals to mount political opposition against a program that costs them $100 a year than there is for individuals to support a program that nets them $79,875 a year.

As Housing Prices Crash at Record Speed, Chinese Government Bails Out Developer, Injects Liquidity

And the Chinese government declared that they would supposedly conduct reforms. But the reforms they have currently embarked on has been to save the status quo.

The Chinese government just rescued a major property developer.

From the New York Times:

Chinese banks have extended $16 billion in credit lines to shore up one of the country’s largest and most heavily indebted home builders, as pressure mounts on developers short of cash in a slumping property market.

The move by a group of mainly state-run banks to bolster the builder, Evergrande Real Estate Group, which is controlled by the billionaire Hui Ka Yan, is the latest sign of tumult in China’s sprawling housing sector.

Developers are rushing to secure financial support as sales volumes and housing prices plunge, weighed down by a growing overhang of unsold homes. The Kaisa Group, once a favorite of foreign investors, nearly defaulted on its offshore debt this year before being rescued by another developer.

Evergrande said on Tuesday that since February, it had secured new credit lines totaling 100 billion renminbi, or $16.2 billion. Those included a new 30 billion renminbi commitment on Monday from the Bank of China, which regards the developer as “its most important bankwide long-term partner,” Evergrande said in a news release.

The current measures has been meant as band-aid to a hemorrhage...

Analysts said the support from the banks — which also include the Agricultural Bank of China, Postal Savings Bank of China and the privately controlled China Minsheng Bank — would provide temporary relief but would fall short of addressing the company’s deeper problems.

Mounting debts and slumping sales “are fundamental challenges that can’t be resolved short term by government’s bailing them out on ‘too big to fail’ pretense,” said Junheng Li, the head of research at JL Warren Capital in New York.

“The company has been under financial distress for a long time,” she added.

Whether it is short term or not, resources redistributed to non-productive activities would worsen the current conditions going forward.

 

And this comes as the crash in Chinese home prices has even been intensifying.

From Investing.com (bold mine)

Property prices fell again in most major Chinese cities in February, amid continuing anxiety about the state of the country’s real estate sector. New house prices declined in 66 of 70 large- and medium-sized cities surveyed, according to China’s National Bureau of Statistics (NBS). Prices fell an average of 0.4 percent on the previous month, ending 5.7 percent lower than a year earlier, according to Reuters. It is the biggest year-on-year fall since the national survey began in 2011.

The only major cities that did not see a drop were the southern special economic zone of Shenzhen, where prices rose 0.2 percent, and the central industrial city of Wuhan, which saw no change. Prices for the secondary market also fell in 61 cities, though there were rises in five cities. The bureau blamed the sharp fall partly on February’s week-long Chinese New Year vacation, and predicted that prices would rebound this month. That did not stop the figures attracting widespread attention, however: one Chinese-language news website blared the headline: “Hangzhou house prices back to their level of five years ago?”

From CNBC (bold mine)

China new home prices registered their sixth straight month of annual decline in February, as tepid demand continued to weigh on sentiment despite the government's efforts to spur buying. 

New home prices fell 5.7 percent on year in February, according to Reuters calculations based on fresh data from the National Bureau of Statistics on Wednesday. The reading was worse than January's 5.1 percent decline and marks the largest drop since the current data series began in 2011.

Meanwhile, both Beijing and Shanghai clocked home price declines. In Beijing, prices fell 3.6 percent on year following a 3.2 percent drop in January, while prices in Shanghai fell 4.7 percent, following January's 4.2 percent drop.

So pressures from housing problems has filtered into the credit system, thereby manifesting strains in the repo markets.

The government’s response? Well, to inject money.

From Bloomberg: (bold mine)

China’s interest-rate swaps dropped the most in six weeks after the central bank took extra steps to boost liquidity to cushion an economy grappling with capital outflows and slowing growth.

The People’s Bank of China said it auctioned seven-day reverse-repurchase agreements at 3.65 percent, down from 3.75 percent last week. The central bank also rolled over 350 billion yuan ($73 billion) of loans it extended to banks via its medium-term lending facility in December, according to a person with knowledge of the matter, who asked not to be identified because the information hasn’t been made public. An unknown amount of lending was also added, the person said.

So reforms have actually been about the preserving the status quo.

The Chinese government reported that credit in February unexpectedly ballooned

From Bloomberg (bold mine)

Aggregate financing was 1.35 trillion yuan ($215.5 billion) in February, the People’s Bank of China said in Beijing Thursday, above economists’ median estimate of 1 trillion yuan. New yuan loans totaled 1.02 trillion yuan and M2 money supply rose 12.5 percent from a year earlier. 

With two interest-rate cuts and one reduction to the percentage of reserves banks have to set aside in the past four months, the central bank is seeking to cushion China’s slowdown. Industrial output, investment and retail sales growth missed analysts’ estimates in January and February, suggesting more stimulus is needed to boost the world’s second-largest economy.

“We see continued pretty solid core bank lending but a further slowdown in shadow banking,” said Louis Kuijs, Royal Bank of Scotland Group Plc’s chief Greater China economist in Hong Kong. “Authorities are trying to push liquidity into the system, but in terms of real economic entities, demand for credit is not very strong.”

But obviously the sponges for those credit expansion have likely been via State Owned Enterprises or politically controlled private institutions. 

As for the real economy, the disparity between credit expansion in the light of “demand for credit is not very strong”, crashing housing prices, and stagnating real economy implies that the Chinese economy has been plagued by substantial balance sheet impairments. You can lead the horse to the water but you cannot make him drink. 

However Chinese stocks continue to deviate from reality with its sustained upside move.

Of course it could most likely be that part of the credit expansion being foisted by the government to the system has been finding their way to chase yields via stocks.

So reforms has been about blowing one bubble after another. All temporary measures intended to kick the can down the road.

And naturally, because credit infused into the system will spillover to some areas of the real economy, there will be an outlet for this.  A clue to this has been that aside from retail punters, the shadow banking system have most likely been another major driver of the Chinese stock market mania.

From Reuters: (bold mine)

China's trust firms, with total assets of $2.2 trillion, are shifting more cash into frothy capital markets and over-the-counter (OTC) instruments instead of loans - blunting regulators' efforts to reduce shadow banking risk.

By redirecting money into capital markets and OTC products like asset-backed securities (ABS) and bankers' acceptances, trusts are acting less like lenders and more like hedge funds or lightly regulated mutual funds.

And the shift - a response to a clampdown last year on trust lending to risky real estate and industrial projects - means a significant chunk of shadow banking risk is migrating rather than shrinking…

Previously, people who bought into opaque wealth management products, many of which were peddled by banks but actually backed by trust assets, found themselves heavily exposed to real estate loans. Trust firms' changing asset mix means these investors may now instead find themselves exposed to high-yield corporate debt (junk bonds), volatile stock funds or risky short-term OTC debt instruments.

Oh, as for the pace at which housing prices have been crashing, they appear to be shortening the path to a Chinese recession/crisis. 

So there should be more defaults ahead.  Yet can the Chinese government fill in every defaulter's shoe? If not, market developments are likely to even deteriorate further.

As I previously noted:

Should the US housing bubble bust experience serve as a model, then a sustained housing deflation in China means that the latter's economy may fall into recession by mid 2016. 

But if the rate of the unwinding of the Chinese housing bubble accelerates, then this may shorten the time window. 

However, the Chinese government has been preemptively easing. The Chinese government has been joined by many other global central banks who appears to have also been frantically easing. 

Will such joint actions help extend or delay the process? Hmmmm.

It’s a complex world with manifold factors. But the writing is clearly on the wall.

Record stocks in the face of record imbalances at the precipice.

And once a recession/crisis has surfaced expect volatility in Chinese politics.

So what will the Chinese government do aside from reforms that has actually meant preserve the status quo?

Beat the drums of war to divert public attention from economic travails and to shore up domestic political capital, perhaps?

Statistical Inflation Diverges from Reality: In UK, e-Cigarettes and Craft Beers have been included

Governments arbitrarily conjure up statistical numbers to show what they want to show…

So e-cigarettes, craft beers, streaming music among other items have been included in the UK’s government statistical measure of inflation.

From the BBC (bold mine)

E-cigarettes and specialist "craft" beers have been added to the basket of goods used to measure the UK's inflation rate.

The additions are part of the Office for National Statistics' (ONS) annual revision of the basket.

The cost of music streaming services has been added as well, but sat-navs have been dropped.

The basket of goods currently contains 703 items and services, of which 13 are new this year after eight were removed.

The inflation rate currently stands at a record low of 0.3%, as measured by the Consumer Prices Index.

Price survey

The ONS said that e-cigarettes had been added because many smokers were using them.

Sales of "craft" beers have been brought in because more money is being spent on them, along with a rise in the shelf space devoted to those beers in shops and supermarkets.

Although only around 700 items have their prices tracked each month, many are measured in several places. So 110,000 prices are collected from 20,000 shops in the UK, with another 70,000 prices measured online.

Revisions to this year's basket continue to reflect the fast-moving change in the use of technology.

For 2015, the cost of music streaming services has been included, along with subscriptions to online console computer games.

Headphones have been added too, as well as mobile phone accessories such as covers and chargers.

So the average UK residents have now been shown as being smokers and craft beer drinkers, yet pity the non-smokers and non craft beer drinkers.

Yet how “many” is “many” as to merit the inclusion of e-cigarettes in the basket? Even among craft beer drinkers, not everyone spends the same. Some spend more than the others. What if the monied class have been spending more on craft beers for retail outlets to devote shelf space on them? If this supposition holds true then this skews the weighting of the inflation basket to the expenditures by the monied class. Or said differently, the CPI basket may reflect more on expenditures by the elite than by the average.

The point of the above hasn’t been about e-cigarettes or craft beer drinkers but about how statistics accurately reflect on the individual’s spending patterns.

This differentiates between statistics—aggregation of numbers based on arbitrary parameters set by political agents—and economics—how resources are allocated subjectively by individuals.

US Dollar Standard In Jeopardy: Australia, Germany, France and Italy to Join China’s Infrastructure and Investment Bank

I have recently blogged  about out how the US government has been losing political capital. In the context of geopolitics, UK has decided to join China’s $50bn Asian Infrastructure Investment Bank, the first among the G-7 nations despite American protests.

But bad news appear to be mounting for the US as many other nations appear to be jumping aboard China’s project.

First, Australia warms up to the Chinese  project.

From the Australian Financial Review:

The Australian Industry Group has urged the federal government to push ahead with joining China's specialist infrastructure bank declaring this would make the country an active participant in the changing economic landscape of the region rather than just a bystander.

The business group's chief executive Innes Willox welcomed signs the government was changing its mind on the institution saying this would position Australia as a player in strategic decision making in regional infrastructure investment and further its regional trade activities.

Treasurer Joe Hockey signalled last Friday that Australia was reconsidering its opposition to the US$50 billion Asian Infrastructure Investment Bank (AIIB) after decisions by New Zealand and the United Kingdom to join.

Today Germany, France and Italy reportedly announced plans to also hop into the Chinese bandwagon

From the Guardian:

Gap widens between US and allies on new China-led lending body, with Britain among other countries already taking part in AIIB and Australia considering it

A senior US diplomat said it was up to individual countries to decide on joining a new China-led lending body, as media reports said France, Germany and Italy have agreed to follow Britain’s lead and join the Asian Infrastructure Investment Bank (AIIB).

A growing number of close allies were ignoring Washington’s pressure to stay out of the institution, the Financial Times reported, in a setback for US foreign policy.

In China the state-owned Xinhua news agency said South Korea, Switzerland and Luxembourg were also considering joining.

The Financial Times, quoting European officials, said the decision by the four countries to become members of the AIIB was a blow for Washington, which has questioned if the new bank will have high standards of governance and environmental and social safeguards.

The US dollar standard looks very much in jeopardy

Charts of the Day: The Uber Effect: New York Taxi Bubble Deflates

Both charts from AEI’s Mark Perry

Austrian economist Thomas DiLorenzo on Uber via the Lew Rockwell Blog:

New York City’s taxicab monopoly “kingpin” can’t pay his debts, thanks to competition from lower-priced/higher quality Uber drivers.  Citibank is foreclosing on 90 of his monopoly “medallion” loans.  Go, Uber Go!

New York’s decades-old taxicab “medallion” crony-capitalist scheme was set up to limit competition in the business, thereby creating monopoly profits for then-existing cab companies.  It’s the urban version of mercantilist agricultural policies that pay farmers for NOT growing crops or raising livestock.  The current price of one of these medallions is around $800,000, down from over $1 million in June of last year thanks to competition from Uber.  Let’s hope that every last one of these “kingpins” is driven from the market by Uber (and other free-market competitors).

Bubbles have always been a product of government interventions.

Wow, Philippine Remittance January Growth Rates Collapse to Near Zero or Post 2009 Crisis Levels!

Here is the Bangko Sentral ng Pilipinas BSP’s sanitized remittance report for January 2015

 

See BSP’s table here, a longer version of the table can be acquired from the BSP's statistics page

First personal remittances…(bold mine)

Personal remittances from overseas Filipinos (OFs) in January 2015 amounted to US$2.0 billion, higher by 0.2 percent than the year-ago level, Bangko Sentral ng Pilipinas Governor Amando M. Tetangco, Jr. announced today.  Personal remittances from land-based workers with work contracts of one year or more registered inflows of US$1.5 billion. Meanwhile those from sea-based and land-based workers with work contracts of less than one year totaled US$0.5 billion.

A picture speaks a thousand words.

Here is what the BSP didn’t say or refused to say…

Next cash remittances…

Cash remittances from OFs coursed through banks reached US$1.8 billion in January, representing a 0.5 percent year-on-year growth. Cash remittances from land-based and sea-based workers posted inflows of US$1.4 billion and US$0.5 billion, respectively.  The bulk of cash remittances came from the United States, Saudi Arabia, the United Arab Emirates, the United Kingdom, Japan, Singapore, Hong Kong, and Canada.

Again here is what the BSP didn’t say or avoided from saying…

January's remittance growth rates has crashed to almost January 2009 levels (.1% growth for both personal and cash remittances)! To recall, 2009 was the aftermath of the 2008 Great Financial Crisis!  

 

Yet this doesn’t seem to be an anomaly, remittance growth trend has been showing some strains even prior to the November 2014 meltdown where monthly personal remittances growth rates sunk to 1.8% while cash remittances growth rates tanked to 1.5% (adjusted) from the 5.5% to 8% range, as I pointed out here. 

The January trend seems to have only reinforced the current dynamic. Yet if the current momentum persists, then remittance growth rates might turn negative or contract over the coming months. Wow!

I have warned that collapsing oil prices would likely impact remittances last December.

And yet how will the blowing up of the Middle East bubble extrapolate to Philippine OFW remittances? More than half or about 56% of OFWs according to the Philippine Overseas Employment Administration (POEA) have been deployed to this region. Will OFWs (and their employers) be immune from an economic or financial crisis? This isn’t 2008 where the epicenter of the crisis was in the US, hence remittances had been spared from retrenchment. For this crisis, there will be multiple hotbeds. The ongoing crashes in oil-commodity spectrum have already been showing the way.

Again it’s a writing on the wall for the public hype called “consumer driven” economic boom.

This partly explains the ongoing pressures in retail activities and the weakening of the consumer household activities (HFCE) as revealed by the 4Q 2014 GDP data provided by the government, as explained here.

The rising account of store vacancies at shopping malls appear as real world (not statistical) symptoms of this.

Yet ironically, the supply side (housing, shopping malls, hotel and related industries) continues to project consumer trends as perpetually headed to the sky for them to borrow and build with ferocity. For instance, the daughter of the Philippines' richest tycoon anchors her firm's expansion projects largely on remittances as posted here

The end result from the widely divergent expectations and activities will be a huge or massive excess capacity mostly financed by debt! 

And yet the sellside industry, expects earnings growth rate for the Phisix in 2015 to be at the mid teens. If current trends continue, then they will not only miss by a mile or by an ocean but by a galaxy!

And whatever strength by the peso, or its outperformance in the region, will be further exposed if such trends continue.

Is it a wonder why the BSP chief adamantly insists of deflationary risks in his latest speeches?