Phisix 8,100: A Story of 10 of the 15 Biggest Market Cap Heavyweights and the Combustion of the Global Risk ON Moment

Humans are not wired to take the road less traveled. They continually look for the safety and security that is provided by being a member of a larger group. Being part of the consensus crowd doesn’t mitigate the risk of loss or prevent failure, but it does go a long way to easing the mind and the wrath of clients, in the event of failure. Human beings tend to believe mistakes are valid if so many others make the same mistake. This herd mentality overrides rationality and common sense and changes the motives behind our decision making process. As investors demonstrate this phenomena, they end up harboring a greater concern of acting differently and lose focus of the risks they bear. The predominant difference on this occasion as compared with the two previous market bubbles (2000/2008) is the Federal Reserve’s role as an agent encouraging such reckless group-think.-- 720 Global Courage

In this issue:

Phisix 8,100: A Story of 10 of the 15 Biggest Market Cap Heavyweights and the Combustion of the Global Risk ON Moment

-Massive Interventions at the Short End of Philippine Treasury Markets Repulsed!

-The Coming Surprise from the Sharp Flattening of the Yield Curve

-The Global Risk ON Moment as Financial Markets Diverge from Economies; The Incredible China Stock Market Bubble Goes Berserk!

-Bubble Risks Spreads into Mainstream Thinking

-Phisix 8,100: A Story Of 10 of the 15 Biggest Market Cap Heavyweights

A) Inequality of Returns

B) Inequality of Valuations via PERs

-Record Phisix and Market Internal Divergences Reveals More Signs of Index Rigging

Phisix 8,100: A Story of 10 of the 15 Biggest Market Cap Heavyweights and the Combustion of the Global Risk ON Moment

Massive Interventions at the Short End of Philippine Treasury Markets Repulsed!

While everyone seems fixated on record Phisix 8,100, a tremendous earthshaking activity shook the Philippine treasury markets last week which mainstream or the consensus seems to have entirely missed out.

I have been saying here that the Philippine treasury have represented a tightly held or controlled market by the government and their agents the banking system.

To the point that they have been tightly controlled, I have long expected dramatic interventions to occur given the incipient signs of funding pressures and of the sustained and accelerated flattening of the yield curve since late last year.

April 7 Tuesday, my long held suspicion became a reality.

Faceless treasury bulls launched a broad based orchestrated strike against the bears to massively pull down yields of practically all of the short term yields—from 1 month to 2 years.

The scale of the price or yield change has been so intense where one can infer such phenomenon as a high sigma or a fat tail event! Yields have crashed by 97 bps for 1 month bills, 60 bps for 3 months, 75 bps for 1 year and 65 bps for 2 years!

There had been minor changes at the long end.

Such actions appear directed at fomenting a steepening of the yield curve and to project an image of easing of funding pressures.

Yet here are some reasons why I believe the tail event intervention took place.

First, the growth trend of banking loans continues to slump!   

February’s banking data from the BSP marked the sixth consecutive decline in the banking loans to the general economy (left) which peaked last July 2014. 

The growth rate of system wide banking loans has decelerated to December 2013 levels.

It’s a wonder, has activities in the trade sector picked up in 1Q 2015?

Wholesale and retail lending growth rate continues to plunge (right); they have now descended to January 2014 levels.

If loan conditions to the very popular sector have been retrenching then how will inventory restocking and retail spending be financed? Will consumers yank savings out of their pockets, jars or bank savings accounts? Or will they expand the use of bank credit? 

But bank credit has severely been limited to the few with access to the formal banking system? Besides growth in consumer loans appear to be plateauing. The thrust of consumer loans appear to have been funneled into auto loans which has been surging at a spectacular clip.

As an aside, has the surge in auto loans been due to the uber effect and other online taxi apps?

On the other hand, has the slump OFWs growth rate of remittances suddenly reversed and zoomed? Or has income growth been magnified to offset the decline in credit activities? But where will income growth come from?

Has the decline in loans to the trade industry also reflect on the surplus inventories racked up during 4Q 2014?

If loan conditions to the trade sector serve as indication of its health condition, then what does slumping credit activities mean…a growth revival or a sustained deepening slack?

As I will repeat here, the government can arbitrarily create numbers which they think would necessitate to paint whatever scenario they intend to exhibit for political purposes. But those numbers will not put food on the table or will not be representative of real economic developments.

Second, while the BSP noted that February domestic liquidity data produced an M3 rebound to 7.7% and a month on month gain of 1.4%, statistical inflation eased once again to 2.4% year on year last March.

On a month on month basis, BSP’s statistical inflation relapsed to negative .1%—DEFLATION!!! CPI deflation for the second time in six months (see right chart from tradingeconomics.com)!!

Given the continued weakness in banking loan growth, has the M3 performance of February represented a dead cat’s bounce?

I posted Austrian economist Frank Shostak’s explanation of the relationship between money supply, prices and economic activity to punctuate such development[1]: (bold mine)

While increases in the money supply result in a monetary surplus, a fall in the money supply for a given level of economic activity leads to a monetary deficit.

Individuals still demand the same amount of services from the medium of exchange. To accommodate this they will start selling goods, thus pushing their prices down.

At lower prices the demand for the services of the medium of exchange declines and this in turn works toward the elimination of the monetary deficit.

A change in liquidity, or the monetary surplus, can also take place in response to changes in economic activity and changes in prices.

Has record upon record Phisix been representative of the transition process towards the elimination of the residual ‘monetary surplus’ from the previous 30+% money supply growth through the asset pricing mechanism, while simultaneously signifying the emergence of declining in economic activity that eventually leads to a ‘monetary deficit’? 

In short, has current intertwined dynamics of money supply, prices, and economic activities been a manifestation of a major inflection point?

Besides hasn’t it been that the BSP chief remains transfixed with the risks of ‘deflation’ as revealed via his various recent speeches? So could the interventions at the Philippine treasury been the handiwork of the BSP?

If so, then whom has the BSP been attempting to bailout? Hmmm.

I thought that such interventions would hold on for awhile. Apparently my expectations would be frustrated.

The interventions seemed to have speedily been unwound. 

Friday, Treasury bears mounted a much profound counterstrike than the offensive earlier launched by the bulls.

The powerful counterattack has instead sent short term rates to milestone highs!!! The reversal comes with the exception of 6 month bills.

Yields of 1 and 3 month bills skyrocketed by an astounding 125 bps and 82 bps! Yields of 1 and 2 year treasuries also vaulted by an equally dazzling 134 bps and 73 bps!

Yields of the aforementioned treasuries have all cleared through the taper tantrum levels in May 2013! 

The intended effect of the intervention has been to force up or widen the spread of the yield curve as shown by the 10 and 20 year minus 6 months (right). 

However the unintended consequence had been a fantastic collapse in 10 and 20 year minus 1 year spreads! If we include the 1 and 3 months into the equation, the dramatic flattening would have been accentuated and widespread!

The yield disparity between the 10 and 20 year and 2 year has likewise flatten but at a tempered pace.

At the end of the day, the intervention resulted to what seems an anomaly. The unwinding of the intervention had missed out yield spread between 6 month and 10 and 20 years, though generally short term spreads against 10 and 20 year have all narrowed, with 1 year, 1 month and 3 months in what seems as a collapse mode.

The Coming Surprise from the Sharp Flattening of the Yield Curve

Stock market bulls, particularly the index manipulators, seem to have an enormous problem. 

They have been fiercely trying to prop up the index to show that the Philippine economy has been impregnable from risks whether internal or external.

However, actions at the bond markets which have been dominated by establishment financial institutions seem to have, behind the scenes, been vehemently pushing back. There are 18 accredited PDS Treasury (PDST) fixing banks responsible for domestic bond market transactions

In short, Philippine treasuries and domestic stocks continue to walk on opposite directions. Considering that the diametric flow from these financial assets will have influence to the real economy, eventually one of which will be proven wrong.

Yet those milestone highs of short term rates have most likely represented symptoms of intensifying short term funding pressures.

The accelerated flattening of the yield curve have also likely most evinced symptoms of liquidity tightening as a result from developing balance sheet impairments, presently and most likely being shielded through accounting flimflam. The declining banking loan growth trend appears to manifest such dynamics in motion.

Nevertheless magnified demand for short term funding seems as being reflected on the soaring yields of short term treasuries.

Also the flattening of the yield curve signifies as an “excellent indicator of a possible recession”.

The yield curve according to the New York Fed[2], “significantly outperforms other financial and macroeconomic indicators in predicting recessions two to six quarters ahead.”

So while the government can churn out whatever statistics to broadcast what they intend the public to see, yet if the current hastening pace of the yield curve flattening continues, then the bulls will get a surprise of their lifetime.

To extend the quote of Austrian economist Frank Shostak from the same post who warned, (bold mine)

The effect of previously rising liquidity can continue to overshadow the effect of currently falling liquidity for some period of time. Hence the peak in the stock market emerges once declining liquidity starts to dominate the scene.

Rings a bell?

The Global Risk ON Moment as Financial Markets Diverge from Economies; The Incredible China Stock Market Bubble Goes Berserk!

Now back to the record Phisix

In context, it’s not just the Phisix, rather the world has been witnessing a renewed risk ON moment.

Numerous national benchmarks have recently reached various record or milestone highs. 

Hong Kong’s Hang Seng has spearheaded this week’s Asian stock market ramp. The Hang Seng index has been up by an astounding 7.9%, as Chinese mainlanders have reportedly been stampeding to bid up share prices not only of Chinese benchmarks, but likewise of stocks in Hong Kong.

Chinese stocks as measured by the Shanghai index also soared by 4.4%!

Yet valuations of Chinese stocks would make Philippine stocks “cheap” by comparison!

Chinese technology stocks reportedly posted PERs of 220 from reported profits to dwarf the US equivalent, the 1997-2000 US dotcom, where PERs had been priced at 156!!! The Nasdaq version of the Chinese stocks, the ChiNext, a benchmark which comprises a basket of technology and other small and medium scale businesses has an average PER of a fantastic 100 for member firms!!![3]

The broad based buying which has reported to include housewives and uneducated traders has even massively pumped Macau’s casino stocks which soared by 10% or more this week. Macau’s casinos stocks has surged even as March earnings continue with its horrific collapse!

Analyst from Deutsche Bank adds a comment on the deepening absurd valuations of Chinese stocks[4]

Bubble watchers point out median earnings multiples for Chinese technology stocks are twice US peer valuations at their dot.com peak. More worrying perhaps is a health-goods-from-deer-antlers producer on 70 times, the seamless underwear manufacturer on 90 times or those school uniform and ketchup makers on 330 times!

And more signs of insane levels of Chinese stocks; the median company forward PER for Shanghai has been at 30x and 39x for Shenzhen! 

To add, in Shenzhen, half of stocks have a forward PE above 50 while 18% of stocks have a forward PE above 100(analyst estimates)! In Shanghai, over a third of stocks have a forward PE above 50 (analyst estimates) while a tenth of stocks have a forward PE above 100!

Philippine index managers must be frothing over the prospects of China’s celestial valuation levels!

The government sponsored stock market mania has been attracting retail participants like a bee swarming over a beehive. 

Based on my compilation of data from the China Securities Depository and Clearing Corporation Limited (CSDC), there have been 4.3 million new accounts over the past 3 weeks, and 8.725 million neophyte punters from the start of the year. This year to date number is about to surpass the 9.028 million new accounts for the entire 2014!

In addition, the pace of which Chinese stocks has been drawing new participants seem to almost match the momentum of the growth rate of the Shanghai bubble which peaked in October 2007. The Chinese stock market bubble then inflated by about 5x before imploding. The ensuing bubble bust erased 66% of the gains from the peak! 

At 4,034, the Shanghai index has still been off by 31% from the October 2007 pinnacle. This is not to suggest that Shanghai index will reach the said levels.

But even with the deluge of enrollments on stocks, equity assets only account for 20% of financial assets of Chinese households compared with cash and bank deposits at 45% based on Charles Schwab survey released last January according to a report Bloomberg.

It would be a mistake to extrapolate that underexposure by Chinese population on stocks would equate to a free lunch for a stock market bubble. As 2007 and its ramification shows, people gravitate to stocks until a certain point where the levels of stocks and or the level credit exposure would weigh on bubble for it to implode on its own weight. Of course government policies like tightening can serve as a prick to any bubble.

Yet I believe that this represents the last straw which the Chinese government has been desperately clinging to. What they have done has been to replace one bubble after another.

The Chinese government seems to be hoping that the stock market boom may provide the economy an alternative of finance. They must be hoping that equity may replace credit as a source of financing for credit trouble firms, thus the stock market frantic pump matched by an avalanche of IPOs.

In addition, rising stocks could have been seen by the Chinese government as having the “wealth effect” enough to ameliorate the downturn in the property sector, spur consumer spending and create the impression that the Chinese economy has been recovering.

Little have they learned from their recent experience that the same credit bubble on the property sector has only incited for a huge imbalances. Huge imbalances that has to be paid for, which has been the reason for the recent downturn in the economy.

Yet once the Chinese stock market bubble crash, such will only aggravate and accelerate the ongoing downswing in the property bubble. 

The lesson is: Two wrongs don’t make a right.

Asia’s magnificent gains have actually been overshadowed by those in Europe’s, where the latter’s advances have made China’s Shanghai index year to date advance of 24.72% look only like a median. 

Week on Week, a big segment of European stocks basking from the ECBs QE has inflated by 3% or more. Year to date, gains of many European stocks has ranged from 18% to over 25%.

Curiously the Institute of International Finance, a trade association of global finance and banking institutions reckoned that the current market sanguinity has hardly been matched by the economic indicators.

They point out that Emerging Market (EM) coincident indicators fell to 1.8% in Q1, the “slowest quarterly growth rate since early 2009 and continues the slowdown of last year when growth fell to 3.6%q/q, saar in Q4 from 4.4% in Q3.”[5]

They also say that except for financial markets, overall growth trend has been disappointing, “trade data declined sharply across regions, industrial production was mixed but generally weak, and business sentiment took a big turn for the worse.”

In addition Manufacturing PMIs has fallen below the 50-threshold mark which means contraction. This has largely been due to “Sharp declines in Brazil, Russia, Turkey and Indonesia contributed to this decline and more than half of the countries we track now have PMI readings below 50”, with an exception of a supposed few bright spot which includes India and CEE (central or eastern Europe) economies.

Finally, the global stock market boom has been propagating euphoria to the extremes. Now publications have been wildly celebrating record breaking stocks. See the pictures here.

I am reminded by the late legendary investor, Sir John Templeton who once said, 

Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.

Those pictures seem portentous of things to come.

Bubble Risks Spreads into Mainstream Thinking

By the way, there seems to be growing recognition from the mainstream of the heightened risks of a global crisis.

JP Morgan’s Jaime Dimon predicts a coming crisis. 

Pimco’s former founder and now Allianz chief economic adviser, Mohamed El Erian likewise sees rampant bubbles everywhere from central bank policies which is why he says he is mostly into cash.

Finally, US President Obama’s major crony, the former value investor Warren Buffett, denies a US stock market bubble. 

Yet paradoxically his flagship Berkshire Hathaway has been amassing cash at the fastest rate since 2003. Also Mr. Buffett recently warned in his recent annual report that “Indeed, borrowed money has no place in the investor’s tool kit: Anything can happen anytime in markets.” Curiously the US stock market has been afflicted by the immense absorption of borrowed money! Yet no bubble! Another progressive thinking characterized by "Do as I say, not as I do".

Phisix 8,100: A Story Of 10 of the 15 Biggest Market Cap Heavyweights

A) Inequality of Returns

At the local front, there’s more than meets the eye for the record-after-record Phisix.

Record Phisix 8,100 has really been more about headline number than representative of the whole market sentiment. 

To emphasize, headline numbers have usually been intended exhibit form or symbolism rather than of substance.

Let us go through the numbers.

Based on market cap weighted Phisix, the year to date return this week has been 12.4%.

Of the top 15 issues, 10 or two third has delivered 12.4% or more. 

Of the next 15 issues, only 5 or one third generated 12.4% or more.

Overall, one half of the issues delivered gains at par or more than 12.4% while the other half produced lower than the benchmark returns.

Let us dive deeper into the details.

Of the half that outperformed, the average returns had been a stunning 20.3%! Of the half that underperformed the average returns had been at a shocking only 1.96%! So the average returns for the 30 composite members of Phisix registered only 11.124% compared to the 12.4% market weighted returns

The huge disparity (20.3% vis-à-vis 1.96%) represents a sign of growing concentration of trading activities!!!

And for the 10 outperforming issues from the upper 15 bracket, returns have been at an average of 18.43%! The average returns of the top 15 Phisix members had been at 13.6% relative to the latter half of 8.7%.

This means that Phisix 8,100 has mostly been a story of the 10 issues from the 15 biggest market cap heavyweights!!! The other 5 issues at the lower half of the Phisix have merely played a complimentary role.

And for those with the impression that blindly investing in any of the Phisix members would generate returns equal to the Phisix will be up for a big disappointment; that’s because as the above shows “inequality” dominates the distribution of returns!

Despite 8,100, the rising tide has apparently not lifted all boats.

B) Inequality of Valuations via PERs

The distribution of Price Earning Ratios (PER) confirms on the huge tilt in trading activities and price actions towards the most popular issues.

The average PERs of the upper strata of the Phisix has been at a whopping 31.06 as against a still expensive 21.94 of the latter half!

The average PERs of the outperformers from the overall index has been at a staggering 30.59 as against the underperformers at which has been at a dear 22.44. (note I omitted in my calculation Bloombery due to negative PERs so denominator has been reduced to 14 for the latter half)

The average PERs of the 10 top performers from the upper level of the Phisix has been at a colossal 32.9! The distribution of which are as follows: 3 issues with PERs of 20+ (AGI, GTCAP and SM), 3 with 30+(SMPH, ICT and AC) and 4 with PERs at an incredible 45-50 (JGS, ALI, URC, JFC)!

Record Phisix and Market Internal Divergences Reveals More Signs of Index Rigging

Nonetheless, Phisix 8,100 appears to have been divergent from actions of general market activities.

For this year, there has only been one week where advancers took complete command of the stock markets. 

In general, of the 14 weeks through April 10, 2015, declining issues dominated 64% (9/14) weekly trading. 

From this perspective, record Phisix 8,100 implies less support from the broader market than has been conveyed by the headline numbers.

Also such signify as signs that the general market has been looking for a correction from which have been written off by the index managers.

Additionally, the serial record after record stocks has been accompanied by a material decline in peso volume trade (left). 

This week’s the average daily Peso volume has ranked the fourth lowest of the year considering that Friday Php 12.873 billion has helped pumped up this week’s numbers.

As you would notice, record highs have been accompanied by falling volume—this seems hardly signs of broad based optimism.

And I would suspect that the bulk of the daily peso volume may have been cornered by these elite issues.

If only I have time to get the total volume of the 10 issues relative to the overall market from 2014 to date. This would have likely shown the share weights and depict of the influence of these issues on the PSE.

And foreign buying has hardly been a factor in driving the serial record highs.

Based on my tabulation of daily PSE quotes, foreign net buying has been diminishing; specifically January Php 23.6 billion, February Php 16.4 billion and March Php 7.5 billion. As of April 10, net foreign buying posted only Php 940.4 million. In total, net foreign buying accounted for Php 48.444 billion, or a paltry 7.13% of the total peso volume of Php 679.263 billion. 

Also a big portion of foreign buying seems to signify special block sales than from regular board transactions.

So record 8,100 Phisix has been a story of mostly local investors pumping up select issues for the seeming purpose of symbolism.

Working alone gives me little time to delve or pry into more detailed data such as issues above or below 50-day moving averages or number of issues at record highs versus number of issues in bear markets or peso volume per issue relative to total volume. This perspective would surely have added depth to this insight.

Bottom line: Market breadth generally in favor of declining issues, peso volume on a seeming downtrend, measly foreign buying, the deepening concentration of trade activities towards popular issues comprising 10 of the 15 largest market cap which has been supported by increasingly grotesque valuations via PERs on mostly the same issues implies that Phisix 8,100 hardly seems about broad based optimism but about the consolidation of trading and price pumping activities from actions of the index managers.

And such increasing compression of trading activities towards popular issues underscores, matches, and partially affirms my earlier point that the popular perception about sustained generalized phenomenal earnings has been outrageously overrated or exaggerated and instead represents the representative bias, the survivorship bias and the fallacy of composition than from real developments.

Three of the four trading days this week had minor “marking the close” which again reveals of the rampancy of stock market rigging.

So while in the past the bullmarket had almost been a purely market phenomenon, today, record after record Phisix has accounted for the mutation of the Philippine stock market into brazen market manipulation.

---

[1] See Frank Shostak: How Easy Money Drives the Stock Market April 10, 2015

[2] Arturo Estrella and Frederic S. Mishkin, The Yield Curve as a Predictor of U.S. Recessions Federal Reserve Bank of New York June 1996

[3] See Chinese Tech Bubble Dwarfs US Dotcom Bubble as Manic Buying Spreads to Hong Kong and to Macau’s Casino Stocks! April 9, 2015

[4] James MacKintosh This is *really* nuts. When’s the crash? FT Alphaville April 10, 2015

[5] IIF.com Weekly Insight: Sunnier Mood, Clouds Remain April 9, 2015

In Pictures : Sign of Times: Euphoria!

What a week. Global stocks on a record ramp.

The above represents the performance charts of the Philippine Phisix, Japan's Nikkei, the German Dax and Hong Kong's Hang Seng from stockcharts.com. I chose 2013 as reference point in order to highlight the effects of Japanese government's Abenomics, China's multiple easing measures and the ECB's do whatever it takes QE.

All stocks indicated have been at various records or milestone highs!

The following pictures highlights on the prevailing sentiment.

The Nikkei Asia cheers on Japan's Nikkei's touching the 20,000 milestone last April 10

Mainland Chinese stock market retail participants stampeded to aggressively bid up Hong Kong's stocks as the state run China Security Journals called for a buy! (image from the Financial Times)

German publication Deutsch Welle celebrates the Dax's 15 year high!

The Philippine Stock Exchange believes that economic nirvana has been attained  as the Phisix broke through 8,000

All of the above have been expressive of the following:

Harvard's Carmen Reinhart and Kenneth Rogoff documented and chronicled all financial crises in the world during the last two centuries (1810-2010) and found a common denominator:

The essence of the this-time-is-different syndrome is simple. It is rooted in the firmly held belief that financial crises are things that happen to other people in other countries at other times; crises do not happen to us, here and now. 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 booms that preceded catastrophic collapses in the past (even in our country), is built on sound fundamentals, structural reforms, technological innovation, and good policy. Or so the story goes.

This time is different!

JP Morgan’s Jaime Dimon Warns of a Coming Crisis

Another day, another warning from either experts or political authorities. This comes as global stock markets and bonds race to record or milestone highs. 

Risks from mounting imbalances have become so evident such that many from the mainstream have been jumping into the bandwagon.

Here is JP Morgan’s top honcho Jaime Dimon on the coming crisis. 

From Marketwatch.com (bold mine)

You ain’t seen nothing yet, when it comes to market wreckage from a financial crisis, according to J.P. Morgan boss Jamie Dimon.

In his annual letter to shareholders, the bank’s chief executive warned “there will be another crisis” — and the market reaction could be even more volatile, because regulations are now tougher.

He argued the crackdown on the financial sector, added to more-stringent requirements for capital and liquidity, will hamper banks’ capacity to act as a buffer against shocks in financial markets. Banks could become reluctant to extend credit, for example, and less likely to take on stock issuance through rights offering, which would essentially create a shortage of securities.

Such factors “make it more likely that a crisis will cause more volatile market movements, with a rapid decline in valuations even in what are very liquid markets,” Dimon said in the letter. “Recent activity in the Treasury markets and the currency markets is a warning shot across the bow.”

The J.P. Morgan JPM, +0.05%  CEO pointed to the 40 basis-point move in Treasury securities on Oct. 15 as one of those warning shots. The move — though “unprecedented” and “an event that is supposed to happen only once in every 3 billion years or so” — was still relatively easily absorbed in the market and no one was significantly hurt by it, he noted.

“But this happened in what we still would consider a fairly benign environment. If it were to happen in a stressed environment, it could have far worse consequences,” Dimon said.

There’s also the issue of clearinghouses. Clearinghouses sit between the two sides of financial trades and have, since the financial crisis, worked as risk managers for global markets. But that could also exacerbate the next crisis, according to the J.P. Morgan chief.

“Clearinghouses are a good thing, but not if they are a point of failure in the next crisis,” he said. “It is important to remember that clearinghouses consolidate — but don’t necessarily eliminate — risk.”

But here’s for the good news. Banks won’t be at the center of the next crisis, Dimon believes. His view is that while they may not be able to act as a shock absorber because of tight regulations, they are overall safer and stronger than before.

Interesting.

Yet more excerpts from Jaime Dimon’s letter to shareholders (bold original, bold-italics mine)

Recent activity in the Treasury markets and the currency markets is a warning shot across the bow 

Treasury markets were quite turbulent in the spring and summer of 2013, when the Fed hinted that it soon would slow its asset purchases. Then on one day, October 15, 2014, Treasury securities moved 40 basis points, statistically 7 to 8 standard deviations – an unprecedented move – an event that is supposed to happen only once in every 3 billion years or so (the Treasury market has only been around for 200 years or so – of course, this should make you question statistics to begin with). Some currencies recently have had similar large moves. Importantly, Treasuries and major country currencies are considered the most standardized and liquid financial instruments in the world.

The good news is that almost no one was significantly hurt by this, which does show good resilience in the system. But this happened in what we still would consider a fairly benign environment. If it were to happen in a stressed environment, it could have far worse consequences.

Some things never change — there will be another crisis, and its impact will be felt by the financial markets

The trigger to the next crisis will not be the same as the trigger to the last one – but there will be another crisis. Triggering events could be geopolitical (the 1973 Middle East crisis), a recession where the Fed rapidly increases interest rates (the 1980-1982 recession), a commodities price collapse (oil in the late 1980s), the commercial real estate crisis (in the early 1990s), the Asian crisis (in 1997), so-called “bubbles” (the 2000 Internet bubble and the 2008 mortgage/housing bubble), etc. While the past crises had different roots (you could spend a lot of time arguing the degree to which geopolitical, economic or purely financial factors caused each crisis), they generally had a strong effect across the financial markets.

While crises look different, the anatomy of how they play out does have common threads. When a crisis starts, investors try to protect themselves. First, they sell the assets they believe are at the root of the problem. Second, they generally look to put more of their money in safe havens, commonly selling riskier assets like credit and equities and buying safer assets by putting deposits in strong banks, buying Treasuries or purchasing very safe money market funds. Often at one point in a crisis, investors can sell only less risky assets if they need to raise cash because, virtually, there may be no market for the riskier ones. These investors include individuals, corporations, mutual funds, pension plans, hedge funds – pretty much everyone – each individually doing the right thing for themselves but, collectively, creating the market disruption that we’ve witnessed before. This is the “run-on-the-market” phenomenon that you saw in the last crisis

Frank Shostak: How Easy Money Drives the Stock Market

Austrian economist Frank Shostak explains at the Mises Institute how easy money (not G-R-O-W-T-H) sends stocks to the moon (bold mine)

In a market economy a major service that money provides is that of the medium of exchange. Producers exchange their goods for money and then exchange money for other goods. 

As production of goods and services increase this results in a greater demand for the services of the medium of exchange (the service that money provides). 

Conversely, as economic activity slows down, the demand for the services of money follows suit. 

Prices and the Demand for Money 

The demand for the services of the medium of exchange is also affected by changes in prices. An increase in the prices of goods and services leads to an increase in the demand for the medium of exchange. 

People now demand more money to facilitate more expensive goods and services. A fall in the prices of goods and services results in a decline in the demand for the medium of exchange. 

Now, take the example where an increase in the supply of money for a given state of economic activity (i.e., production) has taken place. Since there wasn’t any change in the demand for the services of the medium of exchange, this means that people now have a surplus of money or an increase in monetary liquidity. 

No individual wants to hold more money than is required, and an individual can get rid of surplus cash by exchanging the money for goods. 

All the individuals as a group, however, cannot get rid of the surplus of money just like that. They can only shift money from one individual to another individual. 

The mechanism that generates the elimination of the surplus of cash is the increase in the prices of goods. Once individuals start to employ the surplus cash in acquiring goods, it pushes prices higher. 

As a result the demand for the services of money increases. All this in turn works toward the elimination of the monetary surplus. 

Note that what has triggered increases in the prices of goods in various markets is the increase in the monetary surplus or monetary liquidity in response to the increase in the money supply. 

Price Deflation and the Money Supply 

While increases in the money supply result in a monetary surplus, a fall in the money supply for a given level of economic activity leads to a monetary deficit. 

Individuals still demand the same amount of services from the medium of exchange. To accommodate this they will start selling goods, thus pushing their prices down. 

At lower prices the demand for the services of the medium of exchange declines and this in turn works toward the elimination of the monetary deficit. 

A change in liquidity, or the monetary surplus, can also take place in response to changes in economic activity and changes in prices. 

For instance, an increase in liquidity can emerge for a given stock of money and a decline in economic activity. 

A fall in economic activity means that fewer goods are now produced. This means that fewer goods are going to be exchanged, implying a decline in the demand for the services of money. 

Once, however, a surplus of money emerges, it produces exactly the same outcome with respect to the prices of goods and services as the increase in the money supply does. That is, it pushes prices higher. 

An increase in prices in turn works toward the elimination of the surplus of money — the elimination of monetary liquidity. 

Conversely an increase in economic activity while the stock of money stays unchanged produces a monetary deficit. 

This in turn sets in motion the selling of goods thereby depressing their prices. The fall in prices in turn works toward the elimination of the monetary deficit. 

These dynamics can affect a wide variety of markets unequally, but one market in which we can see the relationship between prices and money supply is the stock market.

A Time Lag Between Peak Liquidity and Peak Stocks?

There is a time lag between changes in liquidity, i.e., a monetary surplus, and changes in asset prices such as the prices of stocks.

(The reason for the lag is because when money is injected it doesn’t affect all individuals and hence all markets instantly. There are earlier and later recipients of money.)

For instance, there could be a long time lag between the peak in liquidity and the peak in the stock market.

The effect of previously rising liquidity can continue to overshadow the effect of currently falling liquidity for some period of time. Hence the peak in the stock market emerges once declining liquidity starts to dominate the scene.

Read the rest here

Hong Kong Stock Exchange CEO Warns Against Panic Buying!

Unlike the Philippine contemporary, whom would use every single opportunity to rationalize from price changes of record highs via the following publicity template—Today marks the Nth record highs, and x% gains for the year, from which represents investor confidence from corporate and economic growth…blah blah—thereby signifying total disregard of risks and blind adoration of the inflationary boom, given the latest milestone highs of Hong Kong stocks as a result of the spillover from the mania in Chinese stocks, Hong Kong Stock Exchange CEO Charles Li expresses concern over the current developments and writes to subtly warn of the developing mania in his article “A Little Advice to Investors”

From Charles Li via hkex.com.hk (hat tip zero hedge) [note the following has been translated by google] (bold-italics mine, bold original)

This is a few days after Easter, the Hong Kong stock market sentiment particularly active, the Hang Seng Index rose continuously, the total market capitalization, trading volume and turnover of Shanghai and Hong Kong through both record highs. When the market cheered the piece, I was asked the most questions investors are: 1. Hong Kong stocks to buy now time? 2. The Hong Kong and Shanghai through full amount can not buy into the old how to do? 3. Will the Hong Kong stock market trading volume magnified more volatility?

I do not have a crystal ball can predict the future direction of the market, but as one of many bridges were Hong Kong and Shanghai through the bridge, I want to give everyone a little investment advice.

Do not worry!

Shanghai and Hong Kong through the opening of the bridge is a long-term, it is for the next ten or twenty years built, there is no "after this village do not have this shop" issue. You can also be based on their actual situation and needs of arrangements ready before starting your journey from leisurely to invest. Do not have to hurry, not to join in the fun. You can always find valuable stock, but anxious often inviting risk. You know, as in the holiday get together, like travel, get together and can easily lead to congestion or bridge stampede, but also very personal experiences influence.

Do not panic!

Shanghai and Hong Kong through the north and south have a total degree of two-way daily limit, its main purpose is to ensure the smooth operation of the early start. Hong Kong stocks through these two days in advance the amount of daily afternoon run, so many investors due to inability to approach and confusion, there are many voices called for an early expansion.

At this point, I would ask my friends do not panic, be patient, the regulatory authorities have been closely watching the development of the market, it will at the appropriate time to consider expansion. The reason I have confidence in this regard, based on the following two points:

First, although the Shanghai and Hong Kong through popular these days, but the total amount of funds through the Shanghai and Hong Kong through and out of the mainland is still very small. So far only the total degree of Hong Kong stocks through the use of 47.9 billion yuan (not including Hong Kong shares through trading on April 9 in), or 19%. Shanghai shares of the total through the use of only 1,157 million yuan, or about 39%. Mainland A-share market since late last year, the average daily turnover has remained at more than one trillion. Relatively speaking, the size of funds pass through Hong Kong and Shanghai and out of it is very limited.

Second, Hong Kong and Shanghai through the clearing and settlement throughout the closure, regulators can fully monitor risks. All transactions are within the exchanges, clearing the company's systems, have a clear record. Under such a system arrangement, funds are not in great disorderly capital A shares or Hong Kong stocks traded in the stock sold and then backtrack along the main market.

So closed and transparent system designed to protect the next Hong Kong and Shanghai can be closely monitored through both regulatory agencies and prudent risk control of the premise of carrying a huge cross-border transactions.

Countless opportunities, risks often!

Shanghai and Hong Kong through open interoperability between the Mainland and Hong Kong market, but also to respect the value of the investment philosophy of international institutional investors and retail investors dominated the mainland population began "historic crossroads." This historic intersection will emit a lot of reminders "chemical effect", and create a new era of China's capital market development.

In this new era, endless opportunities, but often at risk. Hong Kong investors, new investors in the mainland market has brought unprecedented vigor and trading opportunities. At the same time, differences between the two sides in the investment ideas and risk awareness for Hong Kong investors (particularly retail), bringing new challenges and risks. How to keep the excitement of the market conditions calm and cautious, every investor must consider.

For many mainland retail investors, the Hong Kong and Shanghai through the first step of their investments overseas, naturally requires caution. Investment is like swimming as the water if you do not, you will never learn to swim, but the water is often the first time beginners are bound to choke a few saliva. Therefore, investors must do their homework, careful decision-making, should follow suit.

As market operators and regulators, we know that the rising volume means more responsibility, we will continue efforts to ensure a stable and reliable system, we will always monitor the market closely and take appropriate risks when necessary management measures to maintain the orderly functioning of markets.

Shanghai and Hong Kong through is designed to provide an opportunity for everyone is not made quick fortune, but to help the early realization of China's national wealth diversified international configuration, we provide long-term wealth preservation and appreciation of channels.

I wish every investor mindful of the risks of investment success!

The obverse side of every mania is a crash

Chinese Tech Bubble Dwarfs US Dotcom Bubble as Manic Buying Spreads to Hong Kong and to Macau’s Casino Stocks!

In addition to my late March post of “price to whatever ratio” where I show how the current Chinese stock bubble seem as integral to the government’s political actions which has resulted to valuations being blown out of proportions, this Bloomberg article finds that valuations of Chinese technology stocks has now dwarfed the US dotcom bubble of 1997-2000. (bold mine)

The world-beating surge in Chinese technology stocks is making the heady days of the dot-com bubble look tame by comparison.

The industry is leading gains in China’s $6.9 trillion stock market, sending valuations to an average 220 times reported profits, the most expensive level among global peers. When the Nasdaq Composite Index peaked in March 2000, technology companies in the U.S. had a mean price-to-earnings ratio of 156.

Like the rise of the Internet two decades ago, China’s technology shares are being fueled by a compelling story: the ruling Communist Party is promoting the industry to wean Asia’s biggest economy from its reliance on heavy manufacturing and property development. In an echo of the late 1990s, Chinese stocks are also gaining support from lower interest rates, a boom in initial public offerings and an influx of money from novice investors. 

The good news is the technology sector makes up a smaller portion of China’s equity market than it did in the U.S. 15 years ago, limiting the potential fallout from a selloff. The bad news is that any reversal in the industry will saddle individual investors with losses and risk putting an end to the Shanghai Composite Index’s rally to a seven-year high.

Wow 220 PERs!!! Philippine index managers must be drooling for local stocks to attain such levels.

Well overvaluations don’t just happen. Rather they are consequences from prior actions, or in particular, such are symptoms of deeper problems. And one of the major problem stems from government policies. And this has duly been imputed by the article which cites “lower interest rates”, and consequently, government support to the technology sector. 

The article shows how government subsidies feeds into the current mania.

China’s government is boosting spending on science and technology as a faltering industrial sector drags down economic growth to the weakest pace in 25 years. In March, Premier Li Keqiang outlined an “Internet Plus” plan to link web companies with manufacturers. Authorities also plan to give foreign investors access to Shenzhen’s stock market, the hub for technology firms, through an exchange link with Hong Kong.

Among global technology companies with a market value of at least $1 billion, all 50 of the top performers this year are from China. The sector has the highest valuations among 10 industry groups on mainland exchanges after the CSI 300 Technology Index climbed 69 percent in 2015 through Tuesday, more than three times faster than the broader measure…

Technology companies have posted the biggest gains among Chinese IPOs during the past year, helped by a regulatory ceiling on valuations for new share sales. Beijing Tianli Mobile Service Integration Co. is the top performer among 147 offerings during the period after surging 1,871 percent from its offer price to trade at 379 times earnings… 

Valuations in China are now higher than those in the U.S. at the height of the dot-com bubble just about any way you slice them. The average Chinese technology stock has a price-to-earnings ratio 41 percent above that of U.S. peers in 2000, while the median valuation is twice as expensive and the market capitalization-weighted average is 12 percent higher, according to data compiled by Bloomberg.

The idea that technology represents a small segment of the equity markets misappreciates the perspective that risks of imbalances have been a systemic issue.

Proof? From the same article

The use of margin debt to trade mainland shares has climbed to all-time highs, while investors are opening stock accounts at a record pace. More than two-thirds of new investors have never attended or graduated from high school, according to a survey by China’s Southwestern University of Finance and Economics.

Money has flowed into Chinese stocks in part because the central bank is cutting interest rates to support growth, something the U.S. Federal Reserve did in 1998 to revive confidence amid Russia’s sovereign debt default and the collapse of the hedge fund Long-Term Capital Management.

Symptoms of policy induced credit fueled asset (stock market) manias have been ubiquitous: margin trade are at all time highs combined with massive formal banking loans and shadow banking funds being funneled into stocks as retail punters enroll in record rates. Market participants then stampede into the price bidding hysteria or indulge in excessive speculation to pump up asset (stock market) prices to levels where valuations don’t seem to matter at all.

Yet systemic issues will have systemic ramifications.

To add icing to the cake, media portrays Chinese stock market irrationality on the increased participation from societal strata with lower educational background.

While education may somewhat help, the reality is that what demarcates between lemmings or people falling for the herding behavior trap and independent thinking is self-discipline which is a personal trait.

As I have pointed out numerous times here, throngs of well-educated or even high IQ people have been mesmerized by the illusions of prosperity from government sponsored bubbles or have even fallen victim to Ponzi schemes. As example, Queen Elizabeth chastised the economic industry for being blind to the 2008 crisis. 

Bubbles essentially pander to the emotions and egos rather than to logic. Thus self-discipline has mainly been about controlling emotions and egos (this is theoretically known as Emotional Intelligence) and hardly about education.

Anyway, to compound on the Chinese version of the modern day dotcom bubble has been an IPO bubble that includes small and medium scale enterprises

From Nikkei Asia (April 3; bold mine)

On Thursday, the China Securities Regulatory Commission approved an unprecedented 30 companies for listing on the Shanghai and Shenzhen stock exchanges. It previously had maintained a moderate pace of initial public offerings to avoid upsetting market dynamics. But the frenzied run-up in stock prices seems to have eased oversupply concerns and encouraged the regulator to let loose.

Investors responded by lifting the Shanghai index to a seven-year high Friday. Bullishness is particularly apparent in the Shenzhen market. Seventeen of the 30 companies approved for IPOs will list on its ChiNext board for startups. The ChiNext index advanced 1.4% to a record 2,510. The average component is trading at nearly 100 times earnings.

ChiNext is a benchmark patterned after the NASDAQ listed at the Shenzhen Stock Exchange.

Wow average PERS at 100x!

Yet aside from monetary easing, price manipulation of IPOs have been used by the government to ramp up the public's interest in the stock market last year.

So even while another Chinese company, Cloud Live Technology group reportedly defaulted on her domestic debt last week, where the Chinese government via the PBOC injected 20 billion yuan ($3.28 billion dollars) most likely to ease pressures in response to such default, the stock market mania has been intensifying.

Chinese stocks used to be correlated with price actions of commodities (chart yardeni.com). Not anymore. Chinese stocks have mutated into mainly a central bank-Chinese government liquidity play with little relevance on the real economy. Such signifies another sign where the stock market fundamental functions of price discovery, and as discounting mechanism, has almost entirely broken down.

And Chinese stock market bubble has even percolated to Hong Kong. Hong Kong’s stocks as measured by the Hang Seng Index have virtually exploded to record highs!

Aside from the rationalized gap between mainland and Hong Kong stocks, fund flows via the Shanghai-Hong Kong connect, the Chinese government again has been attributed as a major influence. 

From the Wall Street Journal: Adding to investor confidence Thursday was an article in the state-run China Securities Journal headlined “Go! Buy Hong Kong Stocks!”, signaling to some analysts that the mainland government is encouraging the rally.

And to include today’s gains (+3.8% yesterday and +2.7% today), in two days, Hong Kong’s stocks has spiked by 6.5% and by over 10% since mid March!

The mania appears to be spreading.

Stocks of Macau’s casinos have also skyrocketed by about a stunning 10% in two days!

Aside from yesterday's dramatic twist of events, today MGM China Holdings (HK:2282) closed +5.44%, Galaxy Entertainment Group (HK:27) +5.56%, Melco Crown Entertainment (HK: 6883) +2.21%, Sands China Ltd. (HK: 1928) +5.92%, Wynn Macau Ltd. (HK: 1128) +8.69% (!!), and SJM Holdings Ltd. (HK:880) owner of Grand Lisboa, +5.13%.

Spectacular volatility!

Paradoxically, this has been happening even as Macau's gaming industry in March suffered another monumental collapse in terms of monthly gross and accumulated gross revenues!

It’s becoming clearer that the Chinese government appears to be bent on substituting or replacing a bursting property bubble with a stock market bubble. They seem to be buying time and anchoring on hope that new bubbles will not only offset the old ones but generate real growth.

Unfortunately, all bubbles end in tears.

Yet the above events represent added accounts of record stocks in the face of record imbalances at the precipice.

Japan Times: Abenomics Drives the Destruction of the Middle Class

For one of the members of the establishment to stridently denounce of the ill effects from incumbent policies known as Abenomics, such would seem as indicative of how bad developments in Japan’s real economy have been. 

In their essay “Under ‘Abenomics,’ rich thrive but middle class on precipice”, the Japan Times holds that record stocks signifies as a key force in driving the wedge of inequality that may even lead to the destruction of the middle class.

From the Japan Times (bold mine)

What became clear was that in a society long dominated by families of moderate means — the top 1 percent of wealthy people account for a mere 10 percent of overall incomes — Japan’s middle class is now facing an existential crisis. 

According to Akio Doteuchi, a senior researcher at the NLI Research Institute, what is threatening people here is that, under the current social structure, virtually anyone in the middle class is at risk of falling into poverty.

“It’s like walking in a mine field. Many risks lie ahead of you,” Doteuchi said. “Even if you are in the middle class, if something unexpected happens, you could slip into poverty.”

Such risks could include contracting diseases such as cancer and being unable to work, the failure to land a job soon after graduation, or an ill parent who needs looking after.

The growing dependence on welfare state…

The big problem in Japan is that there are few social safety nets for such situations. In the past, workers had been shielded by the guarantee of lifetime employment at companies. When they retired, they were supported by family members, Doteuchi noted.

But now, there is an increasing number of nonregular workers, particularly younger ones, whose financial situations are unstable. More and more single-person households are vulnerable to serious health problems.

Data back this up. According to labor ministry figures announced April 1, the number of households living on welfare hit a record 1,618,817 in January. This figure has been on the rise for the last two decades.

The country’s relative poverty rate has also edged up over the last 30 years, especially with single mothers and fathers raising children, although the latest data are for 2012.

Yet record stocks fuels inequality…

On the other hand, data also show that the rich became even wealthier under Abe’s tenure.

Their numbers and the amount of their assets surged in 2013 and are still rising mostly due to sharp gains in stocks triggered by the Bank of Japan’s aggressive monetary easing, which started in April 2013, experts said.

According to the Nomura Research Institute, the number of wealthy households jumped 24.3 percent, with the amount of their total financial assets rising 28.2 percent in 2013, compared with 2011 figures. 

And as the stock market uptick continues, so too will the number of wealthy people grow.

“Since stocks account for a larger portion of their assets, both the number of wealthy people and their assets are on the rise,” said Hiroyuki Miyamoto, general manager of Nomura Institute’s financial business consulting department.

Households on average are believed to have a majority of their assets either in bank accounts or in cash. But the wealthy hold risk assets such as real estate, stocks and bonds — assets more likely to grow in value faster than mere savings accounts, Miyamoto said.

But at the same time, the wealthy in Japan are less dominant in terms of overall assets when compared with the rich in the U.S., partly because income levels of top corporate leaders are not as high as those in the U.S. and the tax system levies heavier income taxes on wealthy people than in many other countries, he said.

Experts have said the widening gap between haves and have-nots could be an economic driver when a country is rapidly growing. However, once it matures, any wide disparity can hamper economic growth, NLI’s Doteuchi said.

Well the above essentially affirms my repeated arguments here where Abenomics represents a redistribution of resources in favor of the elites and foreigners at the expense of the average individuals that leads to lower standards of living for the Japanese.

 

A reprise from my February 2015 post: (bold added)

It’s also an example of the ongoing parallel universe—surging stocks in the light of a struggling and stagnating real economy

Japan’s stock market penetration level tells us that only about 20% of Japanese households have been invested in stocks according the 2014 Fact Book by Japanese Securities Dealers Association as of 2013

As a share of financial assets, equities represented only 9.4% of the household balance sheet according to the BOJ’s fund flows based on the 3Q 2014 report.

And if one accounts for the latest activities, it appears that Japanese households have been NET SELLERS of equity securities consistently during the past 3 years (2012-14), again based on data from Japanese Security Dealers Association.

The implication is that Japanese households have hardly been beneficiaries of the latest stock market run. This reveals that based on demonstrated preference or actions by market participants, Japanese households have hardly been positive about Abenomics.

Instead because of the deliberate attempt to crash the Japanese currency, the yen, as part of the Abenomics three arrows, Japanese households have been in a capital flight as seen by the jump in the holdings of outward investments in securities and investment trusts according to the BoJ as of the 3Q.

These outflows or capital flight seem to affirm my predictions way back in 2012-13

So the biggest beneficiaries of the 15 year high Nikkei have mostly been foreigners, followed by domestic investment trusts and financial institutions. And this has been why Abenomics seems to be having a field day with international cheerleaders.

Abenomics’ attempt to push stocks to record upon record levels has only widened the disparities between financial assets and real economic performance. And such divergences has been revealed by the street survey.

Thus, whatever recovery that will be seen in the future will mostly be about statistics and hardly about progress in the real economy

Price distortions from sustained currency debasement will continue to have an adverse impact on the domestic entrepreneurs' economic calculation thereby filtering to the process of economic coordination or allocation of resources. Redistribution via inflationism won’t create economic value added but instead increases the misallocation of resources which results to the erosion of productivity and capital consumption.

By the way, today the Bank of Japan showed that foreign buying of Japan’s equities has surged to late 2014 levels when the BoJ announced QE 2.0.

Ever wonder why foreign establishment persist to lavish praises on Japan's politics?

Even from the statistical economy we see manifold signs of weakness.

Industrial developments remain sluggish. 

Latest (April 1) PMI manufacturing has been slowing while 1Q Big Industry capex has turned down. Worst, small business capex has collapsed!

From the consumer side, household spending (February) and retail sales (March) continue to reveal signs of contraction.

And the decline in consumer activities has been attributed to a slump in statistical inflation.

The Zero Hedge points at the latest substantial revisions admitted by Japan’s Labor Ministry which initially puffed up wage growth data. Yet a string of negative cash earnings growth for the past 20 months represents “the longest period in Japanese history without a single month of real wage growth!” (bold original)

The government’s price destabilization activities has not only been intensifying local residents’ exodus or capital flight out of Japan assets, now even domestic institutional investors has been shifting their portfolio exposures overseas.

From Nikkei Asia (March 26; bold mine)

Data from the Bank of Japan show pension funds, investment trusts and insurance companies bought more than 13 trillion yen ($107 billion) in foreign securities than they sold in 2014.

That represents the largest net purchase tally since 1998, the first year for which comparable data is available. Each type of investor was a net buyer by more than 4 trillion yen.

Pension funds engaged in a major shift, since in 2013 they sold nearly a net 8 trillion yen in such securities. The Government Pension Investment Fund sharply increased foreign investment in the latter half of 2014, changing tack from a previous focus on domestic bonds. Corporate pension funds followed suit.

Investment trusts had the biggest annual net purchases of foreign securities in four years, putting money in high-yield corporate bonds and real estate investment trusts. The funds had an influx of money to manage once individuals started putting savings into NISA tax-free investment accounts, introduced in 2014.

Insurance companies moved money from low-yield Japanese government bonds to European and U.S. government bonds.

Heavy buying of overseas assets is continuing this year. By March 14, net purchase of foreign securities by Japanese topped 7 trillion yen, according to data from the Finance Ministry. "Foreign investment will likely increase in fiscal 2015, too," says Yunosuke Ikeda, chief foreign exchange strategist at Nomura Securities.

For as long as the politics of inflationism persist such process will accelerate and intensify.

The accrual of negative numbers seem to converge. The Wall Street Journal estimates that statistical GDP for February has contracted anew, down by 2.1%.

All of the above demonstrates that in nearly 2 years since the grand experiment called Abenomics, the entropic process of the Japanese political economy seem as being accelerated by current policies.

The chief icon of inflationism JM Keynes presciently declared

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.

The mainstream’s emerging revulsion to inequality looks like an affirmation that “this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.”

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

Financial Times: The UK economy is a ticking time bomb

Sovereign Man’s Simon Black quotes of the “scathing assessment” by the Financial Times on the UK’s political economy

(bold original)

Despite being an otherwise staid, traditional news service, the professional banking division of the Financial Times recently released an utterly scathing assessment of the British economy.

It was entitled, “The UK economy is a ticking time bomb,” and the editor didn’t pull any punches in completely shattering the conventional fantasy that ‘all is well’, and that advanced economies can simply print and indebt their way to prosperity.

I’ll quote below, emphasis mine:

“What is the problem? Quite simply, the key numbers are terrible. According to the OECD, after five years of ‘austerity’ the UK’s budget deficit is 5.3%, down from 11.2% in 2009.

“In other words, it has gone from being close to meltdown to a situation that is merely dreadful.

“Since the government is spending more than it earns, it is hardly surprising that it is borrowing more, and that the debt-to-GDP has risen from 68.95% in 2009 to 93.30% in 2013, again according to OECD figures.

“As the UK is currently growing it should really be running a budget surplus, providing it with the means to run deficit financing during the next downturn.

“This is one of the tenets of the Keynesian philosophy that underpins a lot of left-of-centre economic thinking.

“Unfortunately Europe’s political parties of all persuasions have bastardised Keynes’ ideas – running deficits in both good and bad times – so as to render them almost meaningless.

“To make matters worse the UK, again similar to most advanced economies, is an ageing society with pension, welfare and healthcare systems that are wrongly structured and financially unsustainable.”

“We can blame the politicians for failing to be honest with the electorate about the challenges ahead.

“Or we could blame the voters who punish at the ballot box any party that tells them anything other than good news and wants to hear that taxes can be cut, spending raised and the budget balanced all at the same time.”