Tanking Gold and Commodities Prices and the Theology of Deflation

One of the bizarre and outrageously foolish or patently absurd commentary I have read has been to allude to the current commodity selloffs to what I call as the theology of deflation, particularly the cultish belief that money printing does not create inflation. 

Yet if we go by such logic, then hyperinflation should have never existed.

Doug Noland of the Credit Bubble Bulletin debunks such ridiculousness:

With global central bankers “printing” desperately, the collapse in gold stocks and sinking commodities prices were not supposed to happen. Is it evidence of imminent deflation? How could that be, with the Fed and Bank of Japan combining for about $170bn of monthly “money printing.” Are they not doing enough? How is deflation possible with China’s “total social financing” expanding an incredible $1 Trillion during the first quarter? How is deflation a serious risk in the face of ultra-loose financial conditions in the U.S. and basically near-free “money” available round the globe?

Well, deflation is not really the issue. Instead, so-called “deflation” can be viewed as the typical consequence of bursting asset and Credit Bubbles. And going all the way back to the early nineties, the Fed has misunderstood and misdiagnosed the problem. It is a popular pastime to criticize the Germans for their inflation fixation. Well, history will identify a much more dangerous fixation on deflation that spread from the U.S. to much of the world.

I see sinking commodities prices as one more data point supporting the view of failed central bank policy doctrine. For one, it confirms that unprecedented monetary stimulus is largely bypassing real economies on its way to Bubbling global securities markets. I also see faltering commodities markets as confirmation of my “crowded trade” thesis. For too many years (going back to the 90’s) the Fed and global central bank policies have incentivized leveraged speculation. This has fostered a massive inflation in this global pool of speculative finance that has ensured too much market-based liquidity (“money”) has been chasing a limited amount of risk assets. Speculative excess today encompasses all markets, including gold and the commodities. Over recent months, these Bubbles have become increasingly unwieldy and unstable. Commodities are the first to crack.

In the theology of deflation espoused by monetary cranks, financial markets and the economy operates like spatial black holes, they are supposedly sucked into a ‘liquidity trap’ premised on the ‘dearth of aggregate demand’ and on interventionists creed of "pushing on a string" or of the failure of monetary policies to induce spending. Thus the need for government intervention to inflate the system (inflationism) to encourge spending.

Further money cranks tells us there has been no link between inflation and deflation.  Or that there are hardly any relationship of how falling markets could have been a result of prior inflation. 

Bubbles are essentially nonexistent for them. Inflationism has been seen as operating in a vacuum with barely any adverse consequences because these represent the immaculate acts of hallowed governments. Whereas deflation has been projected as “market failure”.

Yet we see plummeting commodity prices, contradictory to such obtuse view, as representing many factors. 

Global financial markets (stocks and bonds) have been seen as having implicit government support (e.g. the Bernanke Put or Bernanke doctrine), thus the safe haven status may have temporarily gravitated towards government backed papers rather than commodities.

Notice that safe haven alternatives as gold and bitcoins have recently been sold down.

Yet this doesn’t entail that endless money printing will not or never generate price inflation. Again such logic anchored on free lunch, simply wishes away the laws of economics.

Second, falling commodity prices doesn’t mean the absence of price inflation but rather monetary inflation has been manifested via price inflation in assets or asset bubbles so far. 

The “don’t fight the central banks” mantra has led the marketplace to go for yield hunting by materially racking up credit growth.

The surge in Japan’s stocks via “Abenomics” policies has prompted for massive jump in margin trades in Japan’s equity markets (chart from Zero Hedge). This mirrors the record performance of US equity markets. 

Both markets suggests that government policies has heavily influenced market actions to chase yields by absorbing or accruing more unsustainable debt.

China’s massive money growth backed by financial expansion have masked the marked deterioration in her economy.  This perhaps supports the essence of the broad based gold led commodity panic.

And as Mr. Noland points out, cracking commodity prices may be portentous of the periphery to the core symptom of a coming crisis.

Falling commodity prices will initially hurt the emerging markets and could likely spread through the world. 

Commodity exports plays a substantial role in emerging economies (IMF)

This means that global growth will be jeopardized thereby increasing the risks of bubble busts from the periphery (emerging markets and frontier markets)

Emerging markets are supposed to comprise nearly 50% of global growth this year. (chart from the Daily Bell)

I also earlier pointed out that Indonesia's boom has been popularly attributed to commodity exports, even when latest developments suggests more of a property bubble. The Financial Times warns of an ASEAN bubble and notes of an unwieldy boom in Indonesia's luxury real estate projects.

Ciputra Development, which builds luxury condominiums, said that while prices in central Jakarta, the capital, had been growing at a rapid clip – about 30-40 per cent a year – a new trend had emerged.

If woes from Indonesia's commodity exports will spread through the property sector, then the Indonesian economy will become highly vulnerable. This makes the region including the Philippines susceptible too.

Boom will segue into a bust.

 

Yet the recourse to eternal money printing will one day set another path. (chart from Zero hedge).

Inflationism comes in stages. Thus every stage commands a different outcome.  We are still operating on bubble cycles from which the current gold-commodity pressures signify as the typical the denial stage from inflation risks provoked by Fed policies.

As the great Ludwig von Mises predicted. (bold mine)

This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services.

These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy.

But then, finally, the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against "real" goods, no matter whether he needs them or not, no matter how much money he has to pay for them.

In short we are in a stage where people have yet to become aware of a price revolution ahead even when policies have been directed towards them.

We have seen such setting before.

Gold prices surged from $35 in 1971, which began during the Nixon Shock or after the closing of gold window based on the Bretton Woods gold exchange standard, to about $190 in 1975 or 4.4x the 1971 level. Following the peak, gold prices plunged by about 45% to around $105 in 1976. (chart from chartrus.com)

The returns from Gold’s recent boom from $ 300 to $ 1,900 has been about 5.3x before today’s dive. So there may be some parallel.

Then, the interim collapse has served as springboard for gold’s resurgence. Gold prices evenutally hit $850 in the early 80s. (chart from chartrus.com)

Of course, the stagflation days of 1970-80s has vastly been different than today.

Debt levels of advanced economies has already surpassed the World War II highs. (from US Global Investors) This is why advanced economies has resorted to derring-do or bravado policies of unprecedented inflationism from central banks.

Most of which has been meant to finance fiscal deficits, increasing the likelihood of the risks of price inflation and debt default over time. Such has been the typical outcome based on EIGHT centuries of crises according to non-Austrian Harvard economist Carmen Reinhart (along with Harvard contemporary Kenneth Rogoff).

Monetary cranks essentially tells us that “this time is different”. They believe that they are immune from the rules of nature. They denigrate history.

Moreover there has been a global pandemic of bubbles, which simply means that the path dependency for governments policies will be directed towards sustaining them.

Authorities will resort to bailouts, rescues and further inflationism in fear of  bubble busts in order to maintain the status quo.

This will not be limited to advanced economies but will apply to emerging markets including the Philippines as well.

Another difference is that, then, US monetary policies had been severely tightened which caused a spike in interest rates and two recessions. US Federal Reserve’s Paul Volcker had been credited to have stopped the inflationary side of stagflation or the “disinflationary scenario”, according to the Wikipedia.org

Today, there has been a rabid fear of recessions

Globalization too, from the opening of China, India and many emerging markets, led to increased productivity which essentially offset inflation levels. A 2005 study from the Federal Reserve of Kansas City notes that

Rogoff also credits the “increased level of competition—in both product and labor markets—that has resulted from the interplay of increased globalization, deregulation, and a decreased role for governments in many countries” as contributing to the reduction in global inflation.

Today with almost every economy indulging in bubble policies and therefore serially blowing bubbles, capital consumption leads to decreased productivity, heightening the risks of price inflation.

The Royal Bank of Scotland recently pointed out that Asia’s credit bubble has been accompanied by decreasing labor productivity. When the public’s activities having been directed towards financial market speculation than production, then evidently labor productivity has to decline.

Of course, direct confiscation of people’s savings via the banking system ala Cyprus will also become a key factor for the prospective search for monetary refuge.

Third, in the world of financial globalization, speculative bubbles translates to immensely intertwined markets, such that volatility in global markets, particularly in JGBs may have prompted for massive reallocation or a shift in incentives towards government backed securities.

This Reuters article gives us a clue:

"The scale of the decline has been absolutely breathtaking. We tried to rally and that just didn't get anywhere ... there hasn't been any downside support, it's like a knife through butter," Societe Generale analyst Robin Bhar said.
The pace of the sell-off appeared tied to volatility in the price of Japanese government bonds, which has forced certain holders to sell other assets to meet the risk modeling of their investment portfolios.

Fourth is that such selloffs has deliberately been engineered by Wall Street most possibly to project support on Fed policies for more inflationism. Wall Street, thus peddles the inflation bogeyman to spur political authorities to maintain or deepen inflationism which benefits them most

In my edited response to a friend on the recent record levels of US markets, I explain the redistribution of Fed Policies to Wall Street to the latter's benefits

Given the relative impact (Cantillon Effects) from the Fed’s money printing, those who get the money first, particularly Wall Street, e.g. primary dealers and bondholders who sell bonds to the FED via QE, the 2008 bailout money (TARP), proceeds from the Fed’s Interest Rate on Excess Reserves and etc, may have used such to speculate on the stock markets and the credit markets (e.g. junk bonds, revival of CDOs) rather than to lend to main street. Thus the parallel universe: economic growth has been tepid, but financial market booms.

There has also been the interlocking relationship between bond and stock markets as I earlier pointed out here

Since December the politically connected Goldman Sachs has called for the selling of gold which has been followed by a coterie of Wall Street allies

From the Star Online:

Several renowned global financial institutions such as Credit Suisse Group AG, Goldman Sachs Group Inc, Nomura Holdings Inc, Deutsche Bank AG, UBS Ag, and Socit Gnrale SA (SocGen) have already turned bearish on gold in recent weeks, and cut their gold-price forecast for 2013 and 2014.

So current selloff cannot be dismissed as having been a purely market dynamic and not having been influenced by a grand design to promote further inflationism.

Lastly, as I noted during the start of the year, gold’s 12 year consecutive rise has been ripe for profit taking.

Although, so far, with the exception of gold, no trend has moved in a straight line, so it would be natural for gold to undergo a year of negative returns.

Expect this selloff in gold-commodity sphere to increase risks towards a transition to a global crisis, and for central banks to engage in more aggressive inflationism. 

Such transition will eventually bring about the risks of stagflation.

China’s M2 Surge and the Stealth Stimulus

The explosive surge of China’s M2

From WantChinatimes.com

Data released by the People's Bank of China reveals that China's broad money supply grew by 15.7% in March, boosting the outstanding M2 to 103 trillion yuan (US$16.5 billion).

Analysts are worried that the rapid surge in M2 is unhealthy for the economy and that the authorities should check the money supply and cut down the ratio of currency to GDP, according to the state newswire Xinhua.

M2 is a measure of money supply that includes coins, currency, checking account balances, savings and short-value time deposits. With more than 100 trillion yuan (US$16 trillion) circulating in the market, analysts believe it is fueling inflation.

M2 climbed from 13 trillion yuan (US$2 trillion) in 2000 to nearly 50 trillion yuan (US$8 trillion) in 2008, and to 97.4 trillion yuan (US$15.6 trillion) or 190% of the nation's GDP in 2012, the central bank data showed.

 New regime, more intrepid interventions

In perspective, the article says that China’s M2 has grown an average of 53.25% or 17.26% CAGR since 2000 and 21% or 15.55% CAGR since 2008. This can partly be seen from the 1 year year-on-year change of China’s M2. (Chart from Bloomberg)  

The CAGR growth rate represents almost double the rate of China’s economic growth. 

Such pick up in the pace of M2 simply means that Chinese authorities have been using the printing press to camouflage on the liquidation pressures from her bubble plagued economy. 

Yet this also shows how Chinese authorities have already engaged in stealth or publicly undeclared ‘bold’ stimulus, most of which I suspect have been channeled through State Owned Enterprises (SoE).

From the Bloomberg

New local-currency lending in March was 1.06 trillion yuan ($171 billion), the People’s Bank of China said today in Beijing. That compares with the 900 billion yuan median estimate in a Bloomberg News survey of 34 economists and 620 billion yuan in February…

China’s foreign exchange reserves rose to a record $3.44 trillion at the end of March from $3.31 trillion in December. The median estimate in a Bloomberg survey was for $3.36 trillion.

For the first quarter, aggregate financing surged about 58 percent from a year earlier to 6.16 trillion yuan, according to central bank data. New local-currency loans in the first three months were 2.76 trillion yuan, the most for a first quarter since the global financial crisis, and 12 percent higher than the same period last year.

Note of the diminishing returns from China’s printing press: statistical economic growth has been in a decline despite the increasingly aggressive use of monetary tools. (chart from tradingeconomics.com) 

China’s statistical economic growth was reportedly significantly lower at 7.7%, during the first quarter in 2013, than the what the consensus expected.

The surge in M2 via record financing has marginally impacted price inflation rates. This comes in the face of China’s attempt to curtail property bubbles via piecemeal approach through regulations (e.g. 20% tax on new homes regulations)

So while authorities have been pumping money briskly on one hand, they are trying to suppress bubbles on the other hand. Such conflict in policies signifies as the proverbial left hand doesn’t know what the right hand is doing.

Again this demonstrates of the ongoing stresses or frictions from bubble liquidations within the economy running in conflict with China’s bold recourse towards inflationism as shield to an economic meltdown (chart from Danske)

The Shanghai index, China’s major equity benchmark continues to exhibit pressures from the downdraft of bubble liquidation pressures in spite of the stealth stimulus.

Perhaps the China story may have partly contributed to the recent rout in commodities. But I guess this should be short lived as all major governments will embark to drastically shore up statistical economy via the printing press.

We are either going to see a bubble bust (crisis) or stagflation or combination perhaps sooner than later.

DSL Down, No Stock Market Commentary

What used to be infrequent interruptions has become frequent. Now my dsl has totally stopped functioning. From the periphery to the core; my version. So I am doing this advisory from a neighborhood internet cafe.  

Yet my dsl provider has been giving me superficial patches even during the sporadic phase of disruption. When companies are protected from competition by law (legal franchise), they hardly provide the services to meet consumer satisfaction. Yes competition technically exists, but the choice seem to be limited between bad or bad.

I don't think I will be provided with the remedial service required this weekend. So I will have to wait until regular working days for them to do another patchwork.

Thank you for your patronage. Have a nice weekend.

In Liberty

Benson

Quote of the Day: Income Tax: Its unpopularity will grow with its life

POPULARITY OF THE INCOME TAX.

The Chamber of Commerce has directed an inquiry into the administrative feature of the income tax after a debate in which it was said that the tax would not affect 99 per cent. of the citizenship. It was suggested that this deprived the bill of general interest, and that it was sure to be unpopular on account of the narrowness of its application.

[...]

The case is worse than this. It will tax the honest and allow the dishonest to escape. The administrative features which the Chamber is to investigate are so complicated that those who understand them will make their taxes light at the cost of those less well informed about the law. The income tax law may be considered good nevertheless by some, but even those who approve the tax despite its faults cannot contend that the same sums could not have been raised more certainly, more equitably, and with less trouble to both payers and collectors by a stamp tax.

The experience with the tariff shows how hard it is to reduce or remove a tax once laid. It always seems better and easier to devise ways to spend the money than to repeal the tax. This fact will be better appreciated as the years pass, and particularly when the time shall come when this extraordinary tax–as it ought to be–shall be needed for an emergency. Then it will appear that this resource has been utilized and that the tax must be doubled instead of imposed initially. The tax was most popular before it was laid. Its unpopularity will grow with its life.

This is from the New York Times published in April 12, 1913 when the income tax had been made a permanent fixture in the US tax system via the Sixteenth amendment to the US constitution (hat tip Mises Blog)

Chart of the Day: How Americans Feel About Paying Income Taxes

From a study by Pew Research:

As April 15 approaches, a majority of Americans (56%) have a negative reaction to doing their income taxes, with 26% saying they hate doing them. However, about a third (34%) say they either like (29%) or love (5%) doing their taxes.

I wonder how many of those who say they like doing taxes are being honest on themselves, and how many may have been simply social signaling.

I wonder too how these "like-love" camps will feel with a slew of new or higher taxes, especially from Obamacare.

 

Here is a noteworthy quote from former Commissioner of Internal Revenue T. Coleman Andrews.

I don't like the income tax. Every time we talk about these taxes we get around to the idea of 'from each according to his capacity and to each according to his needs'. That's socialism. It's written into the Communist Manifesto. Maybe we ought to see that every person who gets a tax return receives a copy of the Communist Manifesto with it so he can see what's happening to him.

Here is the link on 10 planks of the communist manifesto

On the US Federal Reserve’s Information Leak

If the Fed had entirely been a private company, they will likely be charged with "insider trading", which based on Wikipedia’s definition, is "trading of a corporation's stock or other securities (such as bonds or stock options) by individuals with access to non-public information about the company."

From Bloomberg:

Citigroup Inc. (C), Goldman Sachs Group Inc. and JPMorgan Chase & Co. were among at least 15 financial companies that received potentially market-moving Federal Reserve information 19 hours before the public in a release the central bank called a mistake.

Brian Gross, a member of the Fed’s congressional liaison staff, distributed the March 19-20 minutes of the Federal Open Market Committee meeting at 2 p.m. Washington time on April 9, according to an e-mail obtained by Bloomberg News. The list also included congressional staff members and trade groups. Gross referred questions to Fed spokeswoman Michelle Smith.

FOMC minutes, which include comments on the committee’s discussions about the direction of monetary policy and its outlook for the economy, are among the most closely scrutinized Fed documents as the panel debates when to stop its third round of bond purchases. The inadvertent release raised questions about the central bank’s internal controls among attorneys and disclosure experts.

The US Federal Reserve has partly been owned by the private sector or by “US member banks”, although Fed isn’t a publicly listed central bank, unlike the Bank of Japan (Jasdaq 8301). 

Importantly unlike private companies, the Fed functioning as a central bank, operates as a mandated monopoly which “derives its authority from the Congress of the United States” In other words, Fed policies, which are politically determined, greatly influence the markets, the domestic economy, as well as international economies (given the US dollar standard). 

Such distinction magnifies the importance between privileged access to information via firms operating in a market environment and firms benefiting from political institutions such as the FED.

While I don’t believe in market based “insider trading”, privileged access on political institutions serves as “picking winners and losers”. In short, access to badges and guns serves as a moat against competition.

Thus, special insider access to the FED tilts the balance of market resource allocation (both in financial markets and the market economy) towards those whom the political gods favor, particularly in today’s highly volatile conditions caused by financial repression. This represents the ultimate insider trading.

This also demonstrates of the insider-outsider, cartelized and crony relationships operating within the corridors of the US Federal Reserves.

Harvard’s Carmen Reinhart: Pensions are Screwed, Higher Inflation is a Safe Bet

Harvard economist and professor Carmen Reinhart, who along with co-Harvard peer authored a book chronicling world crises in the bestseller, This Time is Different has recently been interviewed by the Der Spiegel. (bold mine, hat tip zero hedge)

On the real reason for negative interest rates and QEs… 

Reinhart: No central bank will admit it is keeping rates low to help governments out of their debt crises. But in fact they are bending over backwards to help governments to finance their deficits. This is nothing new in history. After World War II, there was a long phase in which central banks were subservient to governments. It has only been since the 1970s that they have become politically more independent. The pendulum seems to be swinging back as a result of the financial crisis.

Oops. Financing government deficits has indeed become the norm. This is an essential ingredient to the risks of hyperinflation

On the difference between today and World War II…

Reinhart: No, but after World War II austerity was easier to pursue, because you had a younger population and therefore less entitlements. Furthermore, military expenditure was easier to reduce. So, the build-up in debt we have seen since the crisis is very rare. Usually you get that kind of build-up when there is a war.

Why huge debt has been a burden…

Reinhart: I am not opposing this change, I am just stating it. You have to deal with the debt overhang one way or the other because the high debt levels are an impediment to growth, they paralyze the financial system and the credit process. One way to cope with this is to write off part of the debt.

Why governments resort to plundering of people’s savings by financial repression…

Reinhart: The technical term for this is financial repression. After World War II, all countries that had a big debt overhang relied on financial repression to avoid an explicit default. After the war, governments imposed interest rate ceilings for government bonds. Nowadays they have more sophisticated means..

Monetary policy is doing the job. And with high unemployment and low inflation that doesn't even look suspicious. Only when inflation picks up, which is ultimately going to happen, will it become obvious that central banks have become subservient to governments.

Financial repression policies only adds to the debt stock, real austerity is required.

Reinhart: No. Restructuring, inflation und financial repression are not substitutes for austerity. All these measures reduce your existing stock of debt. Unless you do austerity you keep adding to the debt. There is no either-or. You need a combination of both to bring down debt to a sustainable level.

Why we should expect higher inflation…

Reinhart: There are no silver bullets. If central banks try to accommodate and buy debt, there are risks associated with it. Somewhere down the road you are going to wind up with higher inflation. That is a safe bet -- even in Japan …

Again financing deficits heightens risks of hyperinflation.

Surprisingly Ms. Reinhart offers an implied Austrian school solution (except for the higher inflation advice)…

Reinhart: The best way of dealing with a debt overhang is to never get into one. Once you have one, what can you do? You can pray for higher growth, but good luck! Historically it doesn't happen -- you seldom just grow yourself out of debt. You need a combination of austerity, so that you don't add further to the pile of debt, and higher inflation, which is effectively a subtle form of taxation …

Why savers are screwed…

Reinhart: No doubt, pensions are screwed. Governments have a lot of leverage on what kinds of assets pension funds hold. In France, for example, public pension funds have shifted money from shares (on the stock market) to government bonds. Not because their returns are great, but because it is more expedient for the government. Pension funds, domestic banks and insurance companies are the most captive audiences, because governments can just change the rules of the game.

The morality of financial repression…

Reinhart: Let me be a little blunter: A haircut is a transfer from the creditor to the borrower. Who would get hit by a haircut? French banks, German banks, Dutch banks -- banks from the creditor countries. So you can see why this is politically torched. This is why it is not done, it's a redistribution. But ultimately it is going to happen, because the level of debt is too high.

The US will default too but by the inflation route…

Reinhart: Yes, but who are the large holders of government bonds? Foreign central banks. You think the Bank of China is going to be repaid? The US doesn't have to default explicitly. If you have negative real interest rates, the effect on the creditors is the same. That is also a transfer from China, South Korea, Brazil and other creditors to the US.

Why the system will keep continuing until it can’t…

Reinhart: Why do we have such low interest rates? The Federal Reserve Bank is prepared to continue buying record levels of debt as long as the unemployment situation isn't satisfying. And China's central bank will also continue to buy treasuries, because they don't want the renminbi to appreciate.

Record High US Equities: The Credit Bubble in Pictures

Major US equity bellwether have reached milestone highs

the Dow Jones Industrials

the S&P 500

the Nasdaq broke above the 2007 highs but still way below the 5,000 levels in 2000

the Russell 2000 also in record levels (all charts from bigcharts.com)

All these have been going on since the US Federal Reserve’s open-ended or QEternity or QE infinity since September 2012

US stocks are being supported by an increase in the Fed’s Reserve assets. 

Last Sunday I showed this M2 chart. The current update reveals that the M2 has reaccelerated steeply and has broken beyond January highs, which proves my thesis that “any weakness may be temporary.”

M2’s rise has also been reflected on the high powered money via the monetary base which has been sky bound.

Record stocks also translates to near record margin debt (ETF Daily News)

The current economic growth which is supposed to be happening has been underpinned by credit expansions as seen Bank Loans (higher pane and commercial industrial loans (lower pane) [charts of M2, Monetary Base, and the above from St. Louis Federal Reserve]

Credit booms end up in a bust, if not a currency crisis. 

Pay heed to the warnings of the great Austrian economist Ludwig von Mises

The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market. But it could not last forever even if inflation and credit expansion were to go on endlessly. It would then encounter the barriers which prevent the boundless expansion of circulation credit. It would lead to the crack-up boom and the breakdown of the whole monetary system.

There is no such thing as free lunch even from central banks. Party times can last...until it can't 

The Philippine Casino Bubble

Those bullish with the casino industry should learn of the risks involved.

One example from the Yahoo News Singapore

High-rollers get lavish treatment and hefty credit lines at Singapore's two casinos, like any other gaming house in the world. But here, more of them skip town without paying their debt, a matter of increasing concern for investors.

Three years after Singapore allowed casinos to open, Genting Singapore PLC's Resorts World Sentosa and Las Vegas Sands Corp's Marina Bay Sands have become the world's most profitable. Chinese nationals account for around half of the VIP gaming volume at their tables.

An examination of court documents by Reuters and a series of interviews with lawyers and industry executives reveal that several of the gamblers have run up millions of dollars in debt and then scampered back to China, where they are effectively untouchable.

Resorts World sued Chinese gambler Kuok Sio Kun in Singapore last year to recover S$2.2 million (1.1 million pounds). But more than six months on, the casino has not even managed to serve court papers to the Macau-based woman.

After several letters of demand went unanswered for months, it tapped a Singapore law firm to sue the 46-year-old, court documents show.

The lesson from the above is that casinos are highly sensitive to economic performances.

To show more examples, US casinos suffered losses during the last recession.  Some continue to bleed. Indian tribes in the US recently asked for bailout after a casino they owned suffered losses. The defunct Las Vegas Sahara has been bought by foreigners and will operate under a new name.  Here is a watch ‘death’ list of Las Vegas casinos

A study showed that diminishing disposable income in the Eurozone has led to the losses of Belgian casinos.

In addition, casinos are subject to competition, both from the real estate peers and from online providers.

The Philippines has opened one major casino project (Solaire) this year, whose expansion will be financed by Php 14 billion from 3 banks. Such loans will add up to the systemic debt being rapidly incurred via yield chasing dynamics in the property sector. 

There are reportedly three more major projects slated to open in the coming years: SM’s Belle Corp and Macau’s Melco Crown Entertainment’s Belle Grande, the joint project between Japanese billionaire Kazuo Okada and the Gokongwei group on the Manila Bay Resorts ($2 billion) and also the tie up between Andrew Tan’s Alliance Global Group and Malaysia’s Genting Corp on Resorts World Bayshore ($1.1 billion).

I would venture a guess that bank loans will also be the major source of finance for the industry, again swiftly adding to the country’s debt levels.

All these have been sold to the public as entailing growth in the tourism industry, which is an illusion.

The mainstream ignores the fact that these casinos will be competing with the regional counterparts for essentially the same (regional) market. 

On the supply side, the growing numbers of casinos in the region may eventually reach saturation point (even assuming no recession).  The Philippine gaming industry has reportedly been growing at a CAGR of 28% (!!!), which is about THRICE 3x growth rate of developing Asia, the fastest in the region. (chart from ADB)

On the demand side, the fragile state of the global economy may mean that demand may evaporate when a crisis emerges. Remember Asia has a credit bubble.

And the loses suffered by Singapore casino operators from unscrupulous bettors are just signs from the periphery, particularly the vulnerable Chinese economy, of the possible things to come.

As a side note Fitch ratings just downgraded China’s local government debt. Local governments have racked up an estimated US$2.1 trillion which is equivalent of 25% of GDP.  This makes the Chinese bettor market equally fragile.

And worst, such cumulative bullishness comes in the backdrop of artificially lowered rates, which industry operators and the unwitting public presume will be everlasting.

And even with the employ of hundreds of so-called experts, hardly anyone sees the risks from the above. Rose colored glasses seems to be the general consensus, especially promoted by media, in the presumption that this time is different.

At the end of the day, basic economic logic says that all these yield chasing activities (whether the shopping mall, casino, housing and vertical projects) will end badly.

But these politically connected behemoths are most likely to be bailed out, when fortunes reverse.

Forewarned is Forearmed.

Amazing Volatility: Gold, Bitcoins and JGBs Hammered

The volatility of today’s financial markets has simply been breathtaking. 

As US stocks reached new record territory, gold prices had been slammed hard yesterday. Such irony comes in the face of the broadening confiscation of people’s savings by governments

Reports say that proposed liquidations by Cyprus and other crisis stricken euro nations in an attempt to raise funds.

From Reuters:

Gold posted its biggest one-day drop in nearly 2 months on Wednesday after Cyprus was forced to sell most of its gold reserves, but analysts said strong bullion buying by other central banks should underpin the price of the metal.

Investor fears over more gold sales by other debt-stricken euro zone members such as Portugal and Greece sent spot bullion prices down 1.7 percent on Wednesday, within striking distance of a 10-month low…

Cyprus, one of euro zone's smallest economies, has to sell excess gold reserves to raise around 400 million euros (341.2 million pounds) to help finance its part of its bailout, an assessment of Cypriot financing needs prepared by the European Commission showed.

As I have been saying all these liquidations narrative are just really part of the gold suppression scheme.

Analyst Alasdair Macleod points to studies which show that “substantial amounts of gold have been supplied into the markets by Western governments and their central banks” and on the Bank of England’s real holdings of gold as “only 60% of the gold in the Bank’s custody is actually monetary gold”

The genuine intent has been to justify more inflationism, such as the recent advice by the IMF to central bankers, in order  to preserve the untenable political status quo.

The capital flight and yield chasing phenomenon has also battered bitcoins, which has recently gone parabolic

Such selloffs from the recent frothy upswing as shown in the above chart should account for as normal profit taking—consequence from extreme yield chasing activities.

But since bitcoin is a virtual or digital currency and has been a product of decentralized spontaneous market order via technological innovations, they are likely subject to volatility from technology diffusion cycle or the S-Curve.

Unless structural deficiencies of the system will be exposed or if government successfully hacks into the system to adulterate, sabotage or control it, then diffusion cycle means that the bitcoin’s adaption will take time. The chart above demonstrates of the technology diffusion process or cycle.

So current bitcoin's volatility could be a symptom of the resistance to change from the marketplace or even attacks from mainstream, aside from of course, the outcome from intensive yield chasing brought about by distortions from financial repression.

And I would further add that so-called boom from Kuroda’s doubling of monetary base by 2014 has not been smooth sailing as seen by apologists. 

Japanese Government Bonds or JGBs have also been plagued by sharp gyrations.

JGBs have seen a sharp spike in yields over the last few days following an earlier boom. (charts from Bloomberg)

While I expect the bond boom to continue over the interim, eventually the BoJ's massive inflationism will force up interest rates that will make Japan's unwieldy debt loads susceptible to a crisis.

 

Such steep fluctuations reveal how global financial markets have been operating in a very treacherous environment.

Quote of the Day: The Myth of Public Interest

The gist of it is that public servants, so called--politicians, bureaucrats, and their colleagues--tend to promote goals of their own even as they claim to be serving the public interest.  And this is not very difficult to grasp.  

The public is, after all, a vast number of citizens whose interests vary enormously so it is a pure myth that there is a public interest that can be served by public servants.  Given this plain fact, whose interest will public servants serve?  The interest they consider important. 

In the last analysis the so called public interest is really the private interests public officials like best.  Even the democratic process cannot sort out what the public interest is. (The best approximation is put forth by Thomas Jefferson in the Declaration of Independence where he identifies securing the protection of our basic rights as the purpose for which government is established, i.e., the public interest.)

Despite the hopelessness of pursuing and serving the public interest, politicians and their cheerleaders keep pretending that they have managed to overcome the hurdles facing them and assert that they are public servants instead of folks whose objectives are determined by lobbyists who represent innumerable, often conflicting, private and special interests.

That’s from professor Tibor Machan on the much overlooked Public Choice Theory on his blog.