Phisix-ASEAN Bellwethers at Fresh Record Highs

Prior to my quasi two weeks ago vacation due to my mom’s visit, I wrote[1], 

I believe that the interim response from the FED-ECB policies, designed to prop up financial assets, will likely provide strong support to the global stock markets including the Philippine Phisix perhaps until the yearend, at least…

In a world where central bank policies become the dominant factor in establishing price levels, the new normal is to expect dramatic price swings in both directions and of the amplification of risks…

But given the projected substantial infusion of steroids, the current environment strongly favors an upswing. That’s until real problems will resurface such as concerns over the quality of credit, and or price inflation becomes more pronounced and or if politics becomes an obstacle to the central banks inflationism and or a combination of the above.

First I believe that this dynamic will continue to prevail.

Second, so far, two weeks into the US Federal Reserve’s announcement of QE forever, the global markets have largely been mixed.

Bernanke Policies Bolsters ASEAN Markets

The actions of the US Federal Reserve have thus far benefited mostly ASEAN bourses, led by the Philippine Phisix. The Philippine benchmark acquired most of the two weeks of gains from this week’s phenomenal 1.75% advance (red bar-weekly advance, blue bar-two week performance).

Major emerging markets, however, like Brazil, Russia and China posted the largest losses among major markets during the said two week period. But trading in the Chinese equity markets had been abbreviated due to last week’s weeklong celebration of National Day. India, despite the flash crash on Friday[2] where the Nifty fell by 16% in 8 seconds due to a computer trading glitch, accrued weekly modest gains. 

Meanwhile, the stock markets of developed economies had varied showings too. This week’s advances seen in the US S&P 500 and the German DAX clipped the losses of the other week, while Japan’s Nikkei continued to wobble.

FED policies have driven ALL major ASEAN bellwethers to a milestone breakout from which three of them, the Philippine Phisix (red orange), Indonesia’s JCI (green) and Malaysia’s FBMKLCI (orange) set FRESH nominal RECORD highs.

Only the Thai’s SET remains below the 1997 highs, still off still by about a hefty 25%[3]. Nevertheless, as of Friday’s close, Thailand’s SET has etched a 15-year landmark.

To reiterate the lessons which I mentioned two weeks ago, the Thai’s experience simply exhibits how the bursting of bubbles takes extended period to replace capital consumed from the unwinding of malinivestments.

Misallocated capital cannot be seen as “benefits” since at the end of the cycle, misdirected capital will be exposed as wasted or consumed capital through a bubble bust or a financial crisis. In short, boom bust cycles destroy capital, lowers society’s standard of living or impoverishes people.

The ASEAN outperformance, as I have also been pointing out in the past, has largely been due to the relatively fewer fiscal baggage, as consequence to the market clearing process endured by them during the post-Asian Crisis of 1997, along with the gradualist embrace of globalization. 

In addition, my prognostications of a blossoming homegrown property bubble seem to be progressing. I pointed out last August[4], 

One of the big factors that has, so far, worked in favor of domestic stock market, as I have repeatedly been pointing out, has been the negative real rates which has impelled for a domestic version of yield chasing dynamic.

This yield chasing dynamic in the domestic financial market and the economy has been supported by a steep yield curve, which is likely to accelerate a credit driven boom. The Philippines has the steepest yield curve in Asia

The above is an updated chart from the ADB[5] continues to exhibit that the Philippines have still the steepest yield curve in Asia.

Such steep yield curve incentivizes banks to take advantage of asset-liability mismatches or maturity transformation[6] where banks borrow short and lend long or a credit boom. 

Proof of the bubble process or a credit boom in motion?

Real estate loan exposures by the domestic banking sector; particularly the universal, commercial and thrift banks, according to the Bangko Sentral ng Pilipinas (BSP) or the local central bank has “reached its highest level yet”[7]. Property loans grew by 19% annualized and 4.4% from last quarter. 

Although, the BSP adds that the real estate segment of the total loan portfolio remains at 14-15%, such only implies that there has been sizeable expansion of systemic debt that matches the growth of real estate loans, and or, that loans to the property sector may have been channeled through other avenues (e.g. misdeclaration of loans use, off balance sheets and etc…)

Additional evidence of systemic debt expansion can also be seen in the vigorous expansion of Foreign Currency Deposit Unit (FCDU) mostly to the private sector which grew by 7.3% quarter-on-quarter and 23% year-on-year[8]. 

Thus, artificially suppressed interest rates that have brought about a domestic negative real rates regime, as well as, foreign capital flow movements influenced by external credit easing policies (negative real rates and Quantitative Easing), are likely to further inflate bubble dynamics in the country and in the region, far more than their developed economy and BRIC counterparts.

Yet such credit driven boom will be interpreted by the mainstream as “economic growth” when in reality they represent a bubble cycle or systemic misallocation of capital in progression.

One must be reminded that bubbles come in stages. So far the Philippines seem to be at a benign phase of the bubble cycle.

Again bubbles will principally be manifested on capital intensive sectors (like real estate, mining, manufacturing) and possibly, but not necessarily, through the stock markets.

This means that for as long as the US does not fall into a recession or a crisis, ASEAN outperformance, fueled by a banking credit boom and foreign fund flows operating on a carry trade dynamic or interest rate and currency arbitrages (capital flight I might add), should be expected to continue.

And again I will maintain that ASEAN’s record breaking streak may be sustained at least until the end of the year 2012.

Yet such streak will strictly be conditional to the political-economic developments abroad, as well as, on the monetary engagements by major central banks.

Price inflation will play a significant role of the sustainability of the bubble cycle and will also influence on the direction of domestic financial asset price movements where any signs of mounting price inflation will likely compel regional central banks, including the BSP, to initially tighten which will likely put pressure on the bullish momentum of the markets.

Sustained price inflation will likely usher in a stagflationary environment which represents an Achilles heels for emerging Asia.

As I recently wrote[9], 

High commodity prices are likely to influence emerging markets consumer price inflation more. Food makes up a large segment of consumption basket for emerging Asia including the Philippines. This would prompt for their respective central banks to reluctantly tighten. Monetary tightening will put pressure on the stock market.

Stagflation, thus, also represents both a contagion and internal (political and market) risk for the Philippines and for emerging Asia

ASEAN’s interest rate swap markets have already been signaling growing inflation risks[10] from supposed overheating or “expanding at a faster rate”—euphemism for a credit boom. 

Thus stagflation or an acceleration of the region’s bubble cycle (if price inflation remains contained) will become big influences for 2013-2014.

Nonetheless, when pushed to the wall, central bankers will likely resort to fighting price inflation with even more attempts to ease credit or through executive-legislative actions of price controls. Abolition of interest rates has become an entrenched part of the central banking doctrine.

For investors, once stagflation—elevated price inflation and stagnant growth—should emerge and become a dominant variable, I expect to see a shift in the market leadership in the equities.

Sell on News, Asset Inflation is the Main Central Bank Goal 

As for the lagging performance of major bourses, my guess is that this has mainly been due to the “buy the rumor sell the news” dynamic.

As I pointed out last June[11] 

if markets may be temporarily satisfied with REAL actions of central banks (e.g. $1 trillion bailout) then we should see a minor or a slight “sell on news”. But this should be seen as opportunities to RE-ENTER the markets incrementally.

Remember, much of the world’s bourses have been ascending out of expectations of central banking steroids in spite of an ongoing slowdown in the real economy. I even called such events as “bad news is good news”, “detachment from reality” or even “parallel universe”.

Thus, given the confirmation of expectations from the FED-ECB actions, natural profit taking could be at work.

As proof, with the exception of China, Japan and Brazil, all other major bellwethers has registered substantial year to date gains as of Friday’s close. This means that the declines during the past two weeks hardly scratched on the surface of the extensive year to date gains.

Of course I can be wrong and global markets can go lower.

But it is very important to understand the fundamental position for the FED’s actions, which has mainly been about the promotion of the “wealth effect” through the portfolio balance channel.

To emphasize on this, I will re-quote FED chair Ben Bernanke’s statement in a TV conference, post QE Forever announcement[12] 

The tools we have involve affecting financial asset prices. Those are the tools of monetary policy. There are a number of different channels. Mortgage rates, other rates, I mentioned corporate bond rates. Also the prices of various assets. For example, the prices of homes. To the extent that the prices of homes begin to rise, consumers will feel wealthier, they’ll begin to feel more disposed to spend. If home prices are rising they may feel more may be more willing to buy home because they think they’ll make a better return on that purchase. So house prices is one vehicle. Stock prices – many people own stocks directly or indirectly. The issue here is whether improving asset prices will make people more willing to spend. One of the main concerns that firms have is that there is not enough demand…if people feel their financial position is better they’ll be more likely to spend….

In the assumption that Mr. Bernanke has been forthright about the objectives of the Federal Reserves, any idea which puts into Ben Bernanke’s mouth that the FED’s policies has been about Keynesian “devaluation” to deal with “sticky wages” has been outrageously out of touch with reality or simply delirious.

Last week, Mr. Bernanke defended his policies anchored on the strong US dollar policy, as excerpted from Reuters[13]:

He also downplayed fears that the central bank's policies would damage the long-run value of the dollar, saying the stronger growth that Fed officials are trying to engender would actually support the currency.

I don't see any inconsistency with our policy and maintaining a strong dollar," he said.

While it is true that FED policies will naturally lead to a weaker dollar if taken on their own, the fact is that the entire world has basically mimicked the FED, and where the difference lies on the degree of balance sheet expansions.

Even the Philippines and her major ASEAN peers have been massively growing their balance sheets over the past decade[14].

A recent paper from the Bank of International Settlements notes that currency interventions have had similar effects to central bank’s Large Scale Asset (bond) Purchases (LSAP) in lowering long term interest rates in a wide range of countries including Japan. This according to the authors[15] was triggered by the investment of the intervention proceeds in US bonds and that a global portfolio balance effect spread the resulting decline in US yields to other bond markets, thus easing global monetary conditions.

Essentially Ben Bernanke’s principles have been assimilated as the de rigueur central banker’s policy dogma.

And it is further a ludicrous claim by some to suggest that the FED’s actions represent “beggar thy neighbor” policies which has been designed to undermine the world by transmitting inflation where such policies would eventually allow for a repricing of US wages. 

Such mechanistic-mercantilistic perspective with a singular focus or obsession on the levels of wages fails to account of the reality where central bankers have standardized the “beggar thy neighbor” approach to deal with present crisis.

Devalue against whom (see chart[16] above)? Everyone has been racing to devalue.

Proposals for further financial repression would only nurture domestic bubble cycles and or price inflation. Compounded by the arbitrary imposition of restrictive regulations, centralization or dilution of market forces and confiscatory taxes, all these extrapolate to the weakening of the productive capacities of the world economies which undermines capital formation. .

Inflating of supposed “sticky” and “overvalued” wages will not solve the issue of productivity obstacles from the politicization of the business environment.

But this has not even been the issue for the FED. Proof?

Writing at the Wall Street Journal Senior fellows of the Stanford Univesity’s Hoover Institution[17] Professors George P. Shultz, Michael J. Boskin, John F. Cogan, Allan H. Meltzer and John B. Taylor aptly warns of the conditions established by the FED,

The Fed has effectively replaced the entire interbank money market and large segments of other markets with itself. It determines the interest rate by declaring what it will pay on reserve balances at the Fed without regard for the supply and demand of money. By replacing large decentralized markets with centralized control by a few government officials, the Fed is distorting incentives and interfering with price discovery with unintended economic consequences.

Did you know that the Federal Reserve is now giving money to banks, effectively circumventing the appropriations process? To pay for quantitative easing—the purchase of government debt, mortgage-backed securities, etc.—the Fed credits banks with electronic deposits that are reserve balances at the Federal Reserve. These reserve balances have exploded to $1.5 trillion from $8 billion in September 2008.

With the FED centralizing control of the financial markets, these not only leads to the distortion of the markets (price signals, coordination process and the allocation of resources) but likewise increases systemic fragility.

To add, burdens from policy uncertainty, overregulations and compliance costs—which all boils down to an assault on private property through regime uncertainty—the same experts write,

Did you know that funding for federal regulatory agencies and their employment levels are at all-time highs? In 2010, the number of Federal Register pages devoted to proposed new rules broke its previous all-time record for the second consecutive year. It's up by 25% compared to 2008. These regulations alone will impose large costs and create heightened uncertainty for business and especially small business.

Oversimplifying the nature of economic problems leads to misdiagnosis and to wrong prescriptions. Labor reforms could start with the emancipation from regulations and welfare statutes such as minimum wage law and unemployment insurances and other laws that unilaterally protects labor unionism at the expense of non-union labor and the consumer.

In reality, all these collective central bank measures basically signify as price controls or price manipulations designed to curtail short selling (liquidity injections leads to the burning of short sellers) and or to avoid price discovery which would expose on massive insolvencies of public and politically connected private institutions. Hence, relative devaluation represents a side-effect rather than a principal objective for them.

And this is why gold for instance is at either record highs or near record highs against ALL major currencies[18] which is why it would be misleading for political dogmatists to allege that there has been “no visible sign of inflation”, when even the OECD admits to emergent price inflation pressures[19].

Common sense tells us that if central banks will admit to the threat of price inflation then this essentially eliminates all justifications to inflate the system. Like a philandering spouse caught red handed in tryst with a paramour, the intuitive reaction by the guilty spouse has been to deny the existence of an illicit relationship.

The bottom line is that financial asset inflation signifies as the true objective of du jour central bank policies.

And as indicated two weeks back, both the FED and ECB through QE forever will likely be expanding their combined balance sheets by $2 trillion or more, from last month until sometime 2015.

QE forever means that based on political objectives, central banks can be expected to simply add to the quantity of asset purchases.

This also suggests that any foregoing weaknesses in asset prices will prompt the FED, the ECB and other central banks to increase the amount of steroid dosages.

Since central banks have been “all in” with their chips, the next prudent step is to observe how all these tsunami of new money would diffuse into the asset markets and eventually into the real economy.

Finally the view where the destruction of the world economy via inflation, as having to benefit the US, is not only irrational but represents a miasmic mentality contaminated by brain deadening politics.

If economic isolation represents as the elixir to prosperity, then North Korea and Cuba would be one of the world’s wealthiest nations, and perhaps only next to the Stalinist USSR and China’s Mao’s “Cultural revolution” which would still have been in existence. Incidentally, North Korea suffered hyperinflation in 2009-2011 according to Cato’s Steve Hanke[20]. This should even make North Korea prosperous based on the inflationists doctrine.

Besides, how moral can it be to wish and pray for the misery of others?

A race to devalue would not bring about economic wealth. To the contrary this will hasten the collapse of the incumbent currency system that would not only create domestic social instability but likewise heightens the risks of World War III.

Will the Mining Index Recapture Leadership in 2013? 

Perhaps one day, people will learn to see the mining sector as blessing than a populist political curse. That’s probably just around the corner or when people awaken to Voltaire’s rule—“Paper money eventually returns to its intrinsic value — zero.”

These will likely become a reality if the belief in the salvation from money printing becomes a self-fulfilling political dynamic where the unexpected effect, a crack-up boom, would mean a general stampede towards commodities and perhaps to mining issues.

Lately some commodities of late have been under selling pressure. 

Take oil, despite ongoing geopolitical turmoil at Middle East which should give oil a higher premium, over the past two weeks oil prices plunged from nearly $100 a barrel to $89.98.

The dramatic decline may have been due to crowded trade where a huge volume of large speculators have piled up massive positions[21] or to the “buy the rumor sell the news”, or some unexpected downside developments on the global economy.

Over the interim lower oil prices may have been drag to other commodities, such as gold.

Yet if central banks aim to manage asset prices by throwing into the pot over $2 trillion over the next year or so, then some of these monies will likely find their way into the commodity markets. And this is why I don’t believe any selling pressure will last. Although given the massive distortions in the marketplace, sharply volatile environment should be the norm.

Usually an inflationary boom means a rising tide lifts all boats. But this hasn’t been the case today in the Philippines. The boom in the general markets has yet to filter into the domestic mining index.

Yet I think that mainstream’s fascination with chasing prices leaves a great opportunity to position for the mining renaissance.

I have plotted again[22] the annual returns of each sector since 2007.

The following will show the alternating leadership by the mining sector.

In 2007, mining issues returned by a lopsided 80% relative to other sectors while the great recession of 2008 prompted the sector to fall most by about 60%. 

The mining index spearheaded the recovery post great recession with a monster 234% return. In 2010, the resource based sector lagged anew but closed on the positive.

Last year, the mines proved to be a runaway winner with a 68.52% return leaving all other sectors biting the dust. 

While 2012 hasn’t ended, the resource based sector has struggled anew, but unlike before, the mines has posted substantial losses of more than 10%.

Much of the current sluggishness in the industry has been traced to Philex Mining’s tailing leakage controversy[23], as well as, to the surrounding controversies on the supposed ambiguities of Executive Order 79. The latter have been revised by the Philippine president to partially accommodate the pleadings of the industry[24].

The 32% year to date decline of Philex Mining has practically reduced the gold mining company’s weightings on the sector’s index where the free float market cap now accounts for just 15.02% of the index as of Friday’s close.

I would add that outside the popular explanations which for me has been more of an aggravating circumstance than of the real cause, the alternating annual leadership of the mining sector are driven by  three factors: one rotational process, two Wall Street’s axiom “no trend moves in a straight line”, and or lastly, the reversion to the mean. 

In terms of charting, the mining index may be signaling a bullish falling wedge which could imply of a rebound soon. But again chart patterns are subordinate to the real drivers—human action.

While I am also not a fan of seasonal performances, I believe that the mining alternating annual leadership pattern fits, what I see as the fundamental drivers of the big picture, to a tee.

Moreover, the political and legal hurdles, faced by the industry which are based on technicalities, will likely be overturned not only due to the political interests of the incumbent government[25] to see statistical growth (among other political reasons), but most importantly, by the unfolding developments in the global monetary and financial sphere.

So why chase prices lofty prices when opportunity presents a great potential from an industry largely ignored and dumped by the public?

Disclosure: I have been gradually accumulating on the sector.

---

[1] See FED-ECB’s Nuclear Policies: Risk ON is Back! September 17, 2012

[2] See Electronic Errors Caused a Flash Crash In India’s Stock Markets October 6, 2012

[3] Chartsrus.com Thailand SET

[4] See Phisix: Managing Through Volatile Times August 6, 2012

[5] Asian Development Bank Asia Bond Monitor September 2012

[6] Wikipedia.org Economic functions, Banks

[7] Bangko Sentral ng Pilipinas Exposure to Real Estate of U/KBs and TBs Continues to Grow September 28, 2012

[8] Bangko Sentral ng Pilipinas FCDU Loans Sustain Growth in the Second Quarter of 2012 September 28, 2012

[9] See Phisix: The Correction Cycle is in Motion August 27, 2012

[10] See ASEAN’s Interest Rate Swap Markets Signals Stagflation Risks October 3, 2012

[11] See Dealing with Today’s Uncertainty: Patience is the Better Part of Valor, June 17, 2012

[12] Pragmatic Capitalism A Disturbing Look Inside the Mind of Ben Bernanke, September 13, 2012

[13] Reuters.com Bernanke tackles critics of Fed's growth push October 1, 2012

[14] Andrew Filardo and James Yetman Key facts on central bank balance sheets in Asia and the Pacific, p.11 Bank of International Settlements, September 2012

[15] Petra Gerlach-Kristen, Robert N McCauley and Kazuo Ueda Currency intervention and the global portfolio balance effect: Japanese lessons October 2012 Bank of International Settlements 

[16] Zero Hedge Who Is Winning The Race To Debase? October 5, 2012 

[17] George P. Shultz, Michael J. Boskin, John F. Cogan, Allan H. Meltzer and John B. Taylor The Magnitude of the Mess We're In, September 16, 2012

[18] See Charts: Gold versus Major Fiat Currencies October 2, 2012

[19] See In Fantasyland Price Inflation has been Imaginary October 4, 2012

[20] See Hyperinflation in Iran October 4, 2012

[21] Ed Yardeni Wicked, September 25, 2012 Dr. Ed’s Blog

[22] See Graphic of the PSE’s Sectoral Performance: Mining Sector and the Rotational Process July 10, 2011

[23] GMAnetwork.com Philex Mining may lose ECC on tailings leak October 2, 2012

[24] Abs-cbnnews.com Aquino OKs revised mining-policy rules October 5, 2012 

[25] See Philippine Mining Index: Will The Divergences Last? August 13, 2012

Quote of the Day: Passing a Point of NO Return

We cannot count on problems elsewhere in the world to make Treasury securities a safe haven forever. We risk eventually losing the privilege and great benefit of lower interest rates from the dollar's role as the global reserve currency. In short, we risk passing an economic, fiscal and financial point of no return.

Suppose you were offered the job of Treasury secretary a few months from now. Would you accept? You would confront problems that are so daunting even Alexander Hamilton would have trouble preserving the full faith and credit of the United States. Our first Treasury secretary famously argued that one of a nation's greatest assets is its ability to issue debt, especially in a crisis. We needed to honor our Revolutionary War debt, he said, because the debt "foreign and domestic, was the price of liberty."

History has reconfirmed Hamilton's wisdom. As historian John Steele Gordon has written, our nation's ability to issue debt helped preserve the Union in the 1860s and defeat totalitarian governments in the 1940s. Today, government officials are issuing debt to finance pet projects and payoffs to interest groups, not some vital, let alone existential, national purpose.

The problems are close to being unmanageable now. If we stay on the current path, they will wind up being completely unmanageable, culminating in an unwelcome explosion and crisis.

The fixes are blindingly obvious. Economic theory, empirical studies and historical experience teach that the solutions are the lowest possible tax rates on the broadest base, sufficient to fund the necessary functions of government on balance over the business cycle; sound monetary policy; trade liberalization; spending control and entitlement reform; and regulatory, litigation and education reform. The need is clear. Why wait for disaster? The future is now.

(bold emphasis added) 

This admonition, published at the Wall Street Journal, on America’s fiscal and political conditions have jointly been authored by Professors George P. Shultz, Michael J. Boskin, John F. Cogan, Allan H. Meltzer and John B. Taylor, all senor fellows of Standard University’s Hoover Institution (hat tip Bob Murphy)

Just to add that those who think that ASEAN markets and economies would be immune from any crisis that emerges out of the US will be proven devastatingly wrong.

More on Iran’s Hyperinflation, Venezuela Next?

Professor Steve Hanke has more on the developing hyperinflation in Iran. 

From Prof. Hanke’s 10 facts on Iran’s hyperinflation (Cato Institute) [bold original] 

1. Iran is experiencing an implied monthly inflation rate of 69.6%. For comparison, in the month before the sanctions took effect (June 2010), the monthly inflation rate was 0.698%. 

2.. Iran is experiencing an implied annual inflation rate of 196%. For comparison, in June 2010, the annual (year-over-year) inflation rate was 8.25%. 

3. The current monthly inflation rate implies a price-doubling time of 39.8 days. For certain goods, such as chicken, prices may be doubling at an even faster rate. 

4. The current inflation rate implies an equivalent daily inflation rate of 1.78%. Compare that to the United States, whose annual inflation rate is 1.69%. 

5. Since hyperinflation broke out, Iran’s estimated Hanke Misery Index score has skyrocketed from 106 (September 10^th) to 231 (October 2^nd).   See the accompanying chart.

6. Iran is the first country in the Middle East to experience hyperinflation.  It is the seventh Muslim country to experience hyperinflation. 

7. Iran’s Hyperinflation is the third hyperinflation episode of the 21^st century.  The first was Zimbabwe, in 2008. The second was North Korea, whose episode lasted from 2009-11. 

8. Since the sanctions first took effect, in July 2010, the rial has depreciated by 71.4%. In July 2010, the black-market IRR/USD rate was very close to the official rate of 10,000 IRR/USD. The last reported black-market exchange rate was 35,000 IRR/USD (October 2^nd). 

9. At the current monthly inflation rate, Iran’s hyperinflation ranks as the 48^th worst case of hyperinflation in history. Iran currently comes in just behind Armenia, which experienced a peak monthly inflation rate of 73.1%, in January 1992. 

10. The Iranian Rial is now the least-valued currency in the world (in nominal terms). In September 2012, the rial passed the Vietnamese dong, which currently has an exchange rate of 20,845 VND/USD.

To add, as I have repeatedly been saying—symptoms of hyperinflation have likewise been manifested or ventilated on the stock market. 

The public’s reaction to the destruction of a currency’s purchasing power has been to seek refuge through securities backed by real assets. 

Traditional financial metrics in a hyperinflation ravaged economy has hardly been a concern because “cash” is under fire. When half of what has been used for transactions or when the conditions of the domestic medium of exchange is being questioned by the markets, then this represents a dysfunctional economy. We don't use conventional measures on an abnormal situation.

Thus, under a hyperinflationary environment, hedges or the stampede for safety or preservation of savings against a run on the domestic currency prompts for what would look like a stock market boom 

The same dynamic seems apparent in Iran. The one year chart of Iran’s bellwether the TEDPIX at the Tehran’s Stock Exchange reveals of a 3-month spike as Iran segues into a hyperinflation mode. 

Over 5 years the TEDPIX has risen nearly twofold even as real GDP growth in constant dollars exhibits a stagnation.

Iran’s GDP at constant prices (Index Mundi). 

So monetary inflation brings about a parallel universe: rising stocks, stagnating economy.

And another important point: Iran’s experience shows that the emergence of hyperinflation has not been gradual but precipitate. Price inflations as manifestations of monetary disorder always appear suddenly and unexpectedly. 

People who vastly underestimate the current dynamics of price inflation, as a result of concerted inflationism by global central banks, may likely be surprised by price inflation’s impetuous appearance.

I believe that similar symptoms are being exhibited in Venezuela.

Yesterday, the Venezuela’s Caracas benchmark, the IBVC, zoomed by an eye popping 7.98%!! This adds to the amazing weekly gain of 30.98%, and for a year to date return of a whopping 244.78!!! (see chart above from Bloomberg)

Some suggests that this week’s Venezuelan presidential elections have been breathing life into the markets. 

Yet a huge 67% jump in the incumbent’s the socialist populist Hugo Chavez spending in August may have been instrumental in driving the frenzied boom in Venezuela’s stock markets.

This September Bloomberg article gives us a clue, 

Chavez’s August spending surge is swelling the budget deficit that will compel him to devalue the currency after the vote to bolster revenue from oil exports and shore up government finances, according to Barclays Plc and Bank of America Corp., which said in a report yesterday that spending grew 41 percent on an inflation-adjusted basis…

“The market is pricing in an imminent currency devaluation in 2013 regardless of who wins,” said Carlos Fuenmayor, the Miami-based chief executive officer of BancTrust & Co., an investment advisory firm

So Mr. Hanke may want to train his eyes on Venezuela, a likely candidate for the next Iran.

Quote of the Day: True Privatization

As Sheldon Richman explains, what American politicians pass off as “privatization” is usually merely government contracting. Government outsourcing now permeates the military establishment, schools, social service agencies, prisons, and even regulatory enforcement. Hiring private contractors, as Richman points out, does not shrink the size of government or the scope of government services; if anything, it expands it by allowing the government to do ever more. The “privatization” that is merely government outsourcing creates incentives for private firms to lobby for the expansion of the relevant government services—besides the private prison operators lobbying for longer sentences and more criminalization, other entrepreneurs lobby for the state to start new social service programs that the contractors expect to run, and so on. Such contracting has the additional insidious result of skewing tangential markets in the private sector, because the large firms that get lucrative government contracts can then underprice (and eventually eliminate) their competitors in other markets, using the taxpayer dollars they receive as leverage rather than competing fairly.

Worse, outsourcing often is a bad deal for the taxpayers—one-quarter of federal contracts have no competitive bidding (thus, no competitive pricing), and many firms that lock in a government contract can later raise the price dramatically, knowing that the agency involved cannot easily switch to another contractor. The government is certainly less efficient than the private sector; but less efficient still is the government hiring the private sector to do the government’s job. True privatization is the government withdrawing from a field and leaving it entirely to the private sector. 

(italics original, bold mine)

This superb insight is from South Texas College Professor of Law Dru Stevenson at the Cato Unbound on the discussion about Privatization.

Government outsourcing or pseudo privatization, e.g. Public Private Partnerships, leads to the gaming of the system that leads to the the feedback mechanism of the expansionist state and crony capitalism.

Has the CIA Sponsored Some of the Pirates and Terror Groups in Somalia?

US foreign or imperial policies “spawn” their own “monsters” which they eventually end up fighting against.

They never seem to learn from their experience with Al Qaeda, or perhaps these have been part of the undercover scheme to promote foreign interventions and wars abroad in the interests of neoconservative politics and of the Wall Street backed military industrial complex.

From the Business Insider,

An attempt by CIA-connected trainers to create a sophisticated counter-piracy force in Somalia turned into hundreds of half-trained and well-armed Somali mercenaries being left to their own devices in the desert, Mark Mazzetti and Eric Schmitt of The New York Times report.

The Puntland Maritime Police Force, trained by dozens of South African mercenaries from sometime in 2010 to June 2012, was run by a Dubai-based company called Sterling Corporate Services that seems to be connected to the CIA.

The Times reports that in July a United Nations investigative group uncovered that the force shared some facilities with the Puntland Intelligence Service, a spy organization that answers to the president of the semi-autonomous Somali region of Puntland and has been trained by the CIA for more than a decade.

Michael Shanklin, a former C.I.A. station chief in Mogadishu, was reportedly hired to work his contacts both in Washington and East Africa to build support for the force while Erik Prince, the founder of the private security firm Blackwater, made several trips to the Puntland camp to oversee the training of the counter-piracy force.

It is important to emphasize that the “private company” has not only been backed by the CIA, the UAE government had considerable involvement in them. According to the New York Times “millions of dollars in secret payments by the United Arab Emirates”. So the private sector contractor is in reality a crony or a politically connected firm operating on stealth political goals.

In addition, the unintended consequences of interventionism have not merely been that these abandoned highly trained and armed groups have been left to their devices, but rather, as the NYT points out they may have joined up with “the pirates or Qaeda-linked militants or to sell themselves to the highest bidder in Somalia’s clan wars — yet another dangerous element in the Somali mix”. So in essence, the CIA trained possible and or potential, if not current, members of future pirates and terror groups.

The above signifies as further evidence that the perpetual foreign interventions, which ironically fostered her pirate industry has, contrary to mainstream expectations, induced the vicious cycle of violence in “stateless” Somalia.

However, Somalia isn’t “stateless” anymore. Repeated foreign interventions has finally resulted to the installation of a new Western backed government for the first time in four decades. As for the longevity of this US sponsored government, this remains to be seen.

Charles Goyette: Are the Central Bank Vaults Empty of Gold?

Do Western Central bankers hold anymore gold in their bank vaults as they claim they have?

Charles Goyette at the lewrockwell.com elaborates on the queries posed by Eric Sprott’s piece "Do Western Central Banks Have Any Gold Left???"

New mine supply of gold this year is estimated to be just under 2,700 tons. But gold demand, growing rapidly over the last 12 years, amounts to an additional 2,268 tons of new gold demand a year today that didn’t exist in 2000.

That number was derived from the buying of just five sources: non-western central banks (Russia, Turkey, Kazakhstan, Ukraine and the Philippines), the mints of the U.S. and Canada, ETFs, and Chinese and Indian consumption.

This increase in gold demand seems to actually understate the matter, since it doesn’t include huge private investment purchases of physical gold from around the world. For example, Sprott cites China’s Hong Kong gold imports, expected to reach 785 tons this year, as just one additional source of net investment that sees real total demand exceeding new mine supply.

But the private investment demand amounts to much more than the Hong Kong gold imports he cites.

Other substantial purchases of physical bullion include those by hedge funds and other institutions (the University of Texas endowment fund alone purchased and took delivery of $1 billion of physical gold in 2011), as well as purchases by Russian plutocrats and Persian Gulf petrocrats.

The bull market in gold has, after all, been a global event.

In short, Sprott concludes there is a big discrepancy between real physical gold demand (own any gold bars yourself? If so, they don’t show up in the demand numbers!) and the purported supply.

Where Is All the Gold Coming from?

Who is selling the gold that fills the gap between supply and fast-growing demand? Who is releasing physical gold to the market without it being reported, Sprott asks? 

"There is only one possible candidate: the Western central banks. It may very well be that a large portion of physical gold currently flowing to new buyers is actually coming from the Western central banks themselves. They are the only holders of physical gold who are capable of supplying gold in a quantity and manner that cannot be readily tracked …

"Under current reporting guidelines, therefore, central banks are permitted to continue carrying the entry of physical gold on their balance sheet even if they’ve swapped it or lent it out entirely. You can see this in the way Western central banks refer to their gold reserves.

"The UK government, for example, refers to its gold allocation as, ‘Gold (including gold swapped or on loan).’ That’s the verbatim phrase they use in their official statement.

"Same goes for the U.S. Treasury and the ECB, which report their gold holdings as ‘Gold (including gold deposits and, if appropriate, gold swapped)’ and ‘Gold (including gold deposits and gold swapped),’ respectively.

"Unfortunately, that’s as far as their description goes, as each institution does not break down what percentage of their stated gold reserves are held in physical, versus what percentage has been loaned out or swapped for something else.

"The fact that they do not differentiate between the two is astounding." 

Loans? Swaps? Repurchase agreements? A house of cards by any other name would topple as fast.

It is impossible to know exactly what shenanigans are afoot at the Federal Reserve. Have the gold reserves held by the Fed, the property of the American people, been loaned out? Have the banksters and other Fed cronies borrowed U.S. gold, sold it to China, and left an IOU in the Fed’s vaults?

In an age rich with banking and other institutional, credit, and counterparty failures and frauds, such transactions are anything but prudent. Especially since whatever gold the Fed holds is not its property.

In a one-time partial audit that the Federal Reserve resisted mightily, the Government Accounting Office found that from Dec. 1, 2007, through July 21, 2010, the Federal Reserve provided more than $16 trillion – a sum equal to America’s entire visible national debt – in secret loans to some of the world’s most politically powerful banks and companies.

Among the major recipients of the windfall were Citigroup, Morgan Stanley, Merrill Lynch, Bank of America, Bear Stearns and Goldman Sachs. But the beneficiaries weren’t just American financial institutions.

Central Banker to the World?

At one point (in October 2008), 70% of Fed loans were to foreign banks. Foreign recipients of the windfall included powerful European banks: Barclays, Royal Bank of Scotland, Deutsche Bank, UBS, Credit Suisse and others.

Among the disclosures the Fed was forced to make is that it extended 73 separate loans for an aggregate $35 billion to Arab Bank Corp., owned in substantial part by the Central Bank of Libya.

The Fed is a hot bed of cronyism: The discount window, bond purchasing, its primary dealer system and pricing structure, currency and gold swaps and repurchase agreements, Open Market Committee operations, and so on.

The light of a full and thorough audit is likely to find all kinds of cronies lurking in these dark corners of the Fed.

And with the new, third round of quantitative easing under way, it may not be long before the money-printing game collapses entirely. At that point the calamity will compound if Americans turn to the vaults where the gold was purported to be, and find that the gold has long since been loaned out or otherwise cleaned out.

Markets eventually reveal any attempts to manipulate any scarce goods most especially gold. 

All these, if true, will eventually be ventilated on the marketplace.

Senkaku Dispute Controversy: News versus On the Ground Observation

Writes analyst Sherwood Zhang of Matthews Asia Funds (bold highlights mine)

It’s no wonder some pundits began calculating the potential economic impact that strained China-Japan relations may have on Japanese firms. But during my recent week-long visit in Shanghai, my on-the-ground observations following the protests left me feeling as if the concerns might be overstated. An executive of a Japanese restaurant chain operator told me that physical damage to the firm’s stores during the protest was actually quite limited compared to the impact that followed anti-Japan protests in 2005, which were sparked by controversies surrounding a shrine for Japan’s war dead. I also visited a popular Japanese retail store where customers were picking through the season’s new arrivals with no obvious concern for politics. In this globalized economy, boycotting Japanese business interests is no small feat as so many firms are intertwined. One Taiwanese leasing company I met with, which provides much-needed funding for small businesses in China, actually counts a Japanese financial institution as a strategic shareholder. These types of partnerships and joint ventures exist in nearly every sector in China, spanning food and beverage to auto manufacturing.

At the end of my trip, I noticed one last bit of encouragement—a wedding ceremony held at my Shanghai hotel. Seeing the photograph of a happy union between a Japanese bride and her Chinese groom on a television monitor in the hotel lobby gave me some hope for greater harmony between the people of China and Japan.

I have been pointing out that the Senkaku-Scarborough controversial disputes have been about concealed national political agenda and how the Chinese government has had a hand in agitating nationalist uproar, for reasons other than history and oil-gas-natural resources than as cover to or as distraction of the current economic woes, to suppress dissent and as pretext to inflate the system.

The world of politics is a world of smoke and mirrors.

Electronic Errors Caused a Flash Crash In India’s Stock Markets

Electronic malfunction caused a flash crash in India’s stock market yesterday.

From Bloomberg,

The plunge and rebound in Indian stocks that pushed the S&P CNX Nifty (NIFTY) Index down 16 percent over eight seconds underscored concern about financial markets.

Trading in the Nifty and some companies stopped yesterday in Mumbai for 15 minutes after the 50-stock gauge tumbled as much as 16 percent. A brokerage that mishandled trades for an institutional client was to blame, according to the National Stock Exchange of India.

Regulators around the world are probing market structure and electronic trading after a series of malfunctions. In May 2010, high-frequency orders worsened the so-called flash crash, which briefly wiped $862 billion from U.S. stocks. The Nasdaq Stock Market in May this year was overwhelmed by order cancellations and trade confirmations were delayed in the public debut of Facebook Inc. (FB), 2012’s largest initial public offering.

“Everyone is very sensitive to these electronic errors,” Adam Mattessich, head of international trading at Cantor Fitzgerald LP, said by phone in New York. “It’s the kind of thing that could be nothing or it could become a financial calamity.”

Orders entered by Emkay Global Financial Services Ltd. (EMKAY) that led to trades valued at 6.5 billion rupees ($126 million) caused the drop, NSE spokeswoman Divya Malik Lahiri said from New Delhi.

Circuit breaker limits enforced by the NSE get activated “after existing orders are executed,” Ravi Varanasi, head of business development at the exchange in Mumbai, said by phone. “We are investigating the reason behind the wrong orders and how checks and balances at the member’s end failed.”

Admittedly flash crashes from electronic errors can be a source of anxiety.

Intraday performance of the NIFTY

But as the above shows, markets eventually smooth out any anomalies.

Despite the intraday flash crash, India NIFTY was down only .7% yesterday and posted 1.9% gain over the week. From the start of the year the NIFY is up 24.28% as of Friday.

All charts from Bloomberg

Bottom line: Bugs happen. Politicization of the electronic flash crash isn’t required and won’t guarantee perfection. At worst, it may work to the contrary.

Imploding Solar Energy Bubble Even in China

Government sponsored renewable “green” energy (predicated on climate change) has been imploding, not only in the US (e.g. Solyndra scandal) and Europe but in China as well.

From the New York Times (bold highlights)

China in recent years established global dominance in renewable energy, its solar panel and wind turbine factories forcing many foreign rivals out of business and its policy makers hailed by environmentalists around the world as visionaries.

But now China’s strategy is in disarray. Though worldwide demand for solar panels and wind turbines has grown rapidly over the last five years, China’s manufacturing capacity has soared even faster, creating enormous oversupply and a ferocious price war.

The result is a looming financial disaster, not only for manufacturers but for state-owned banks that financed factories with approximately $18 billion in low-rate loans and for municipal and provincial governments that provided loan guarantees and sold manufacturers valuable land at deeply discounted prices. 

China’s biggest solar panel makers are suffering losses of up to $1 for every $3 of sales this year, as panel prices have fallen by three-fourths since 2008. Even though the cost of solar power has fallen, it still remains triple the price of coal-generated power in China, requiring substantial subsidies through a tax imposed on industrial users of electricity to cover the higher cost of renewable energy.

The outcome has left even the architects of China’s renewable energy strategy feeling frustrated and eager to see many businesses shut down, so the most efficient companies may be salvageable financially.

$18 billion and counting of China’s taxpayers money now in jeopardy.

As always, eventually economic reality expressed through the markets upend governments’ grand delusions, more from the same article:

Chinese companies have struggled even though a dozen solar companies in the United States and another dozen in Europe have gone bankrupt or closed factories since the start of last year. The bankruptcies and closures have done little to ease the global glut and price war because China by itself represents more than two-thirds of the world’s capacity.

To reduce capacity, foreign rivals have clamored for China to subsidize the purchase of more solar panels at home, instead of having Chinese companies rely so heavily on exports. But the government here is worried about the cost of doing so, because the price of solar power remains far higher than for coal-generated power.

The average cost of electricity from solar panels in China works out to 19 cents per kilowatt-hour, said Mr. Li. That is three times the cost of coal-fired power. But it is a marked improvement from 63 cents per kilowatt-hour for solar power four years ago.

China’s official goal is to install 10 gigawatts of solar panels a year by 2015, using 20-year contracts to guarantee payment for electricity purchased from them. If costs stay where they are now, the subsidies would be $50 billion over 20 years for every 10 gigawatts of solar power installed, based on figures supplied by Mr. Li.

Even if solar power costs fall by a third, as the government hopes, he said, “it’s big money.”

China’s government’s goal may or may not be attained, but one thing is for sure: costs are not benefits. China’s force feeding of solar energy will come at a great costs to her taxpayers and to the development of other possible alternatives, most prominently shale gas.

Alternatively, the explosive global growth of free market based Shale gas will add to the economic and financial woes of the solar and other government sponsored renewable industry.