US Stock Markets: The Incompatibility of Rising Stocks and Rising Bond Yields

Facts do not cease to exist because they are ignored. ― Aldous Huxley, Proper Studies

The seeming irony is that gains in the US financial markets appear to be narrowing down to the stock markets.

As previously explained[1] in 2009-2011, global stock markets, bond markets and commodities synchronically boomed. This broad based Risk ON environment started falling apart as BRICs began to weaken in 2011. This has been followed by swooning commodity prices over the same year.

Recently, market infirmities have spread to the global bond markets and ex-US stock markets.

As US stocks surged Friday due to “strong jobs”, which had been accompanied by a huge spike in bond yields, select American benchmarks such as Canada’s S&P TSX, Brazil’s Bovespa, Mexico’s IPC and Argentina’s Merval index took on the opposite direction[2].

Instead of cheering along with Wall Street, these ex-US American markets seem to be haunted by soaring bond yields.

In the US, rising interest rates seems incompatible with a sustained stock market boom.

I have noted of reactions of the S&P 500 to every incidences of rising 10 year UST yields since the bond bull market began in 1980s.

The Wile E. Coyote Moment

I call rising stock markets, in the face of mounting systemic leverage and rising yields as the Wile E. Coyote moment. When stock markets become objects of rampant and excessive speculation fueled by bubble policies, and whose boom has been financed by leverage, stock markets undergo or endure boom-bust cycles. 

The recent US 2003-2007 bubble cycle should be a noteworthy example. The booming S&P 500 (red) had actually been a symptom of a blossoming mania in the US housing markets. The latter peaked in early 2006. 

Yet the stock market continued its ascent despite increasing signs of cracks in the housing amidst climbing 10 year UST yields (blue line). 

The S&P’s rise has been partly financed by cheap credit as evidenced by the record net margin debt (see below)

Eventually the periphery to the core dynamic via the broadening implosion of the US housing markets slammed the banking system hard. A banking and financial crisis ensued. The S&P got crushed. The one year plus bear market cycle reached its trough in 2009.

Net margin debt (green ellipses) has been in near record territory today as it had been in 2007 and in 2000 or during the dotcom bubble[3]. The two prior episodes of bubble cycles, including today, shares the same characteristic: debt financed stock market boom.

A further implication is that today (or soon) will likely share the similar dynamic as in the past: a forthcoming bubble bust.

When rates of return from speculation are overwhelmed by the cost of servicing margin trading debt, the eventual result is either a margin call or forced liquidations. Boom turns into bust.

I would further add that much of the recent stock market growth has been via stock buybacks which has reached a “record”[4].

And a lot of these buybacks has been financed via the bond markets due to distortions from tax laws and from the allure of easy money, as previously discussed[5]

Rising bond yields will put to test the interdependence of stock markets with the bond markets. 

In the dotcom bubble days[6], again the same dynamic can be seen: rising stocks powered by expanding debt eventually had been terminated by elevated 10 year bond rates.

The dotcom bubble bust bottomed in 2002 two years after the bear market cycle surfaced.

A more interesting case is the Black Monday stock market crash of October 19, 1987[7]. This fateful day occurred just a little over two month after the assumption of Mr. Alan Greenspan as former US Federal Reserve chairman in August of 1987[8]. Mr. Greenspan’s action of cutting down Fed Fund Rates to produce negative real yield became the operating standard of financial market rescues that earned such policy, the moniker of the “Greenspan Put[9]”

Prior to the crash, the S&P soared along with the 10 year UST yield. The end result was a horrific one day 22% crash for the Dow Jones Industrials.

According to an investigative study by the US Federal Reserve on the 1987 crash[10]: (bold mine)

However, the macroeconomic outlook during the months leading up to the crash had become somewhat less certain. Interest rates were rising globally. A growing U.S. trade deficit and decline in the value of the dollar were leading to concerns about inflation and the need for higher interest rates in the U.S. as well

A case of déjà vu?

In short, rising stocks and rising bond yields again signify as a deadly cocktail mix.

Not every incidence of rising yields led to a stock market crash though.

1994 was known for a harrowing bond market crash. 10 year yields fell by more than 200 bps. Because there has hardly been a preceding stock market boom, there was neither a bear market cycle nor a stock market crash. The S&P traded sideways then.

What the bond market crash instead claimed had been Mexico’s Tequila or 1994 economic crisis[11], California’s Orange County bankruptcy[12] and partly the culmination of the Savings & Loans Crisis[13].

Nonetheless the post bond market collapse fuelled a trailblazing run in the stock market.

Finally, the conclusion of the stagflation days of the 1980s ushered in the golden days of US financial asset markets as both bonds and stocks boomed for three and two decades respectively.

When former Fed chief Paul Volcker wrung out inflation in the system by reducing money supply which sent 10 year UST yields to over 15%, the stock markets tanked as the US economy succumbed to a recession.

The S&P rallied by almost 70% from late 1982-84. Unfortunately rising UST yields again took a toll on stock market which went on a brief downside mode. And as 10 year yields fell, the S&P 500 took off.

Lessons of History

As pointed out in last week, we can get some clues from history since cycles are products of people’s short memory.

As English writer Aldous Huxley once wrote in the “Case of Voluntary Ignorance in Collected Essays (1959)”

Most human beings have an almost infinite capacity for taking things for granted. That men do not learn very much from the lessons of history is the most important of all the lessons of history.

Today is different from the past.

Global debt levels are at unprecedented scale and continues to compound. G-4 central bank expansion of balance sheets has gone way past $10 trillion as central bankers turn dovish in the face of rising yields.

Just last week, Mario Draghi, the president of the European Central Bank tossed out his non-committal stance and declared that interest rates would “remain at present or lower levels for an extended period of time” and further signalled a “downward bias” in interest rate. 

Meanwhile, Mark J. Carney’s inaugural act, as governor of the Bank of England was to introduced a supposedly new tool called “forward guidance”. And in an official statement Mr. Carney declared that “any expectations that interest rates would rise soon from their current record low level were misguided”[14]

And like Pavlov’s drooling dogs, steroid starved markets swung heavily to the upside…until the US jobs reports, which offset much of the earlier gains.

In the past, it took a few months for central bankers to weave their magic in tempering bond yields. Now the honeymoon seems to take just a day. UK (left), French (middle) and German (right) 10 Year yield soar along with US yields even as the ECB and BoE says that interest rates are bound to go lower.

The bond vigilantes appear to be in open defiance against central bankers!

One can see how Friday’s bond market rout has affected Europe and the US[15]. Since Europe’s market closed earlier than the US, my guess is that selling pressures in Europe has been subdued as US yields soared at the close of the trading session.

If Asia should carryover the bond market carnage, then it is likely that the meltdown should persist in Europe.

Nevertheless given the oversold conditions a temporary pullback should be expected.

Notice too how bond yields in all American and European has surged strongly over a month.

The lessons of history are that rising yields have largely been incompatible with sustained stock market booms. Both may concomitantly rise but the eventual outcome has been a bear market cycle (2007-2008, dotcom bubble), stock market crash (1987) or a quasi-bear markets (1983-1984 or 1981-1982).

The relationship has hardly been statistical but causal—rising rates eventually prick unsustainable debt financed bubbles.

Yet a stock market boom can be engineered by governments that could destroy historical precedents. Venezuela should be an example. Venezuela’s stock market has been up a stratospheric 160% year to date. This translates to star bound 460% in one and a half years. But Venezuela’s deceiving outperformance comes at a heavy toll: the collapse of her currency the Bolivar which means rising stocks are symptoms of hyperinflation.

Again rioting bond markets as expressed through rising yields (which are indicative of higher policy rates) seems like the proverbial ‘sword of Damocles’[16] which hangs over the heads of the stock markets.

Differently put, unless bond markets stabilize, rising stock markets in the US or elsewhere, looks like an accident waiting to happen.

Risk is high.

Trade with utmost caution.

---

[1] See Phisix Meltdown: A Reality Check on the Bullish Dogma June 10, 2013

[2] Yahoo.com Major World Indices

[3] Doug Short NYSE Margin Debt: Was April a Cyclical Peak? June 28, 2013

[4] Businessinsider.com Stock Buyback Announcements Have Gone Parabolic, May 29, 2013

[5] See How Tax Distortions Contribute to the Boom Bust Cycles May 2, 2013

[6] Wikipedia.org Dot-com bubble

[7] Wikipedia.org Black Monday (1987)

[8] Wikipedia.org Alan Greenspan Chairman of the Federal Reserve

[9] Wikipedia.org Greenspan put

[10] Mark Carlson A Brief History of the 1987 Stock Market Crash Board of Finance and economics Discussion Series Divisions of Research & Statistics and Monetary Affairs Federal Reserve Board, November 2006. Pointer from Zero Hedge

[11] Edwin M. Truman The Mexican Peso Crisis: Implications for International Finance US Federal Reserve 1996

[12] New York Times ORANGE COUNTY'S BANKRUPTCY: THE OVERVIEW; Orange County Crisis Jolts Bond Market December 18, 1994

[13] Wikipedia.org Savings and loan crisis

[14] New York Times 2 Central Banks Promise to Keep Rates Low July 4, 2013

[15] Bloomberg, Rates & Bonds

[16] Wikipedia.org Sword of Damocles

Egypt’s People Power-Coup: Same Dog, Different Collars

The ouster of the Egypt’s Mohammed Morsi has been glorified by some as People Power 2 while critics call it a coup

Regardless of the nature of revolt, events in Egypt has signified as a power shift from one dictator to another. I call this the same dog in different collars

The prolific Simon Black of the Sovereign Man in his originally published article in September 7, 2011 about the farcical revolt has been validated: (bold mine)

Revolution. It’s a funny word when you think about it. In political terms, ‘revolution’ conjures images of heroes battling tyrants, of all-out forcible insurrection in the name of freedom and change.

From a celestial perspective, however, ‘revolution’ denotes one complete orbit of a planetary body around its center, as in the earth’s revolution around the sun. In other words, after a revolution, you end up right back where you started.

Same word, two completely different meanings– on one hand you have change, and on the other you have more of the same. This is exactly what has happened after Egypt’s revolution this year.

Sure, Hosni Mubarak is now standing trial after 3-decades of looting and pillaging his country’s wealth. For most Egyptians, this is viewed as a major victory; there is a feeling of intense optimism here on the streets of Cairo, and even though nothing is fundamentally different, expectations are high.

Mubarak was a symbol of tyranny, and a great deal of blood was shed to topple his regime. Unfortunately, Egyptians have essentially replaced one form of dictatorship with another.

There is now one person in charge of Egypt– military Supreme Commander Mohamed Hussein Tantawi. Tantawi was Mubarak’s Minister of Defense, and as the man in charge of roughly one million soldiers, sailors, and airmen in a country with no political system, Tantawi has absolute authority.

He’s not shy about using it either. Just ask any of the thousands of Egyptians who have been tried and sentenced by despotic military tribunals over the last several months.

Many of these ‘criminals’ were bloggers like Maikel Nabil Sanad– found guilty of insulting the Egyptian military establishment. Sanad is currently serving a three-year sentence after a rubber-stamp tribunal convicted him five months ago. Several other bloggers and public figures have been jailed or detained as well.

Despite all the song and dance about freedom in Egypt, their revolution has brought them right back to where they started– an autocratic dictatorship.

When you think about it, this is how things usually work out in politics. How many people have campaigned on the ‘change’ platform, only to end up following the same path as the last guy? As the saying goes, ‘the more things change, the more they stay the same.’

Egypt is due to hold parliamentary elections in a few months’ time. It’s questionable whether Tantawi will give up his supreme, unchecked power… but whatever happens, one thing is clear: a new power elite will emerge in Egypt that helps itself to wealth and privilege at the expense of everyone else.

This is the great weakness in any political system: ‘government’ is based on the idea that some individual or organization is awarded power than no human being should possess– the power to kill, to declare war, to steal, to defraud, to counterfeit.

All of these powers are considered immoral by man, but perfectly acceptable for government… and no matter how much they dress it up as being good for the people, any political system makes full use of its authority in order to maintain the status quo and keep the ruling elite in power.

Egypt underscores an important lesson from history: with rare exception, even when you topple the ruling elite, someone else will simply step up to fill the void… just as the French traded Louis XVI for Maximilien Robespierre’s Reign of Terror in the 1790s.

This is why advocating for political change, while virtuous and noble in deed, is ultimately a wasted effort. Power-hungry megalomaniacs and their sycophantic yes-men will always rise to the top, conning the masses along the way that ‘change is coming’. It’s all a big snow job.

Bottom line- politicians are in it for their own benefit, not for yours. We only have a finite amount of resources available– time, money, and energy. It’s far better to allocate those resources to improving your own situation rather than some politician’s chances of reelection.

The power to kill, to declare war, to steal, to defraud, to counterfeit are universal traits of governments in any form.

Yet the same dog in different collars from the global intelligence outfit Stratfor (bold mine)

The irony of the Egyptian Arab Spring is that while it brought forth new players, it has not changed the regime or the fundamental architecture of Egyptian politics. The military remains the dominant force, and while it is prepared to shape Egypt cleverly, what matters is that it will continue to shape Egypt.

Therefore, while it is legitimate to discuss a military coup, it is barely legitimate to do so. What is going on is that there is broad unhappiness in Egypt that is now free to announce its presence. This unhappiness takes many ideological paths, as well as many that have nothing to do with ideology. Standing on stage with the unhappiness is the military, manipulating, managing and containing it. Everyone else, all of the politicians, come and go, playing a short role and moving on -- the military and the crowd caught in a long, complex and barely comprehensible dance.

Ironically the Philippine government lauded Egypt’s people power I in 2011 in the misplaced assumption of a Philippine style democracy.

The Real Nature of MWSS Privatization Program: Crony Capitalism

Like in the contemporary movies, in the world of politics, life is shown as either existing in black or white, or a choice between good or evil or taking sides between oppressor and the oppressed.

Media’s populist moralism can be seen in today’s headlines where supposed iniquities has been committed by private sector concessionaires, whom had been alluded to as 'greedy' since these firms profit from society by passing their costs to the consumers.

From the inquirer.net

A long list of expenses, including those for foreign trips, entertainment and recreation as well those for advertising, gifts, flowers and other tokens for all occasions, had been passed on to customers of the two water concessionaires in Metro Manila and nearby areas, according to a consumer advocacy group.

The Water for the People Network (WPN) said these expenses were on top of the P15.3 billion in income taxes that Maynilad Water Services Inc. and Manila Water Co. had passed on to consumers from 2008 to 2012.

WPN said the two concessionaires “have effectively turned water service into a profitable business while consumers shoulder the burden of onerous charges and taxes.”

Sonny Africa, executive director of Ibon Foundation, one of WPN’s convenors, called on regulators to disallow the recovery from consumers of such expenses and to thumb down proposals for rate increases.

“We are sure these same items are included in the business proposals of Maynilad and Manila Water for the next rate rebasing (cycle),” Africa said.

Maynilad wants a P5.83 per cubic meter increase in its basic charge while Manila Water plans to raise its rates to P8.58/cu. m. from 2013 to 2017. The concessionaires are allowed to seek an increase every five years.

Maynilad currently charges P48/cu. m. and Manila Water, P38/cu. m.

The Metropolitan Waterworks and Sewerage System (MWSS) allowed the recovery of income tax through tariffs in a resolution issued in 2004.

And so it seems.

Lost within the controversial article is the foundational relationship between the principal, Metropolitan Waterworks and Sewerage System (MWSS) and two water concessionaires

In another article, the Office of the Government Corporate Counsel (OGCC) recently clarified that these concessionaires are “agents of a public utility” and not public utilities. 

The fact is that the MWSS is a creation of the Philippine Congress via REPUBLIC ACT No. 6234 in 1971 and is regulated by the 5-man Board of Trustees, three of whom including the Chairman are appointed by the Office of the President but with the consent of the Commission of Appointments.

The government agency’s General Manager is also appointed by “the President of the Philippines with the consent of the Commission on Appointments”. Assistant managers are also appointed by the board, “with the approval of the President”.

In 1997, MWSS had been transformed into an agency empowered to privatize the provision of water services via RA 8041 via the Water Crisis Act.

The price setting function by MWSS have been determined by the Board of MWSS, where a sitting majority comprises appointees of the President

According to Wikipedia.org

Water tariffs in Manila are adjusted on the basis of four mechanisms:

First, tariffs are adjusted automatically on the basis of exchange rate fluctuations applied to the company's debt. This mechanism is revenue-neutral. Initially this mechanism was applied with a lag, but after a contract amendment it is now applied every three months.

Second, tariffs are adjusted annually on the basis of inflation (indexing to the consumer price index).

Third, tariffs are adjusted every five years to guarantee a certain rate of return to the private concession holder (rate rebasing). The company's performance vis a vis regulatory targets is also considered in determining the tariff.

Fourth, extraordinary price adjustments can also be granted, but only in spefific circumstances such as a change in law or force majeure.

Tariffs are set by the Board of MWSS upon recommendation of its regulatory office.

In short, the pricing mechanism by the highly politicized water industry has not been set by the markets but according to the interests of the political leaders.

Nonetheless, legalistically the regulator and the people running MWSS have all been protégés of the President. 

Thus, it seems a logical corollary that these private contractors would have to be in good or cordial standings with today’s political leaders or else…lose their political-economic privileges 

This is a neat example of the functional relationship of public partnership partnership (PPP).

As I previously wrote,

PPP’s signifies as politically privileged economic rent/concessions to favoured private entities that will undertake the operations in lieu of the government. They will come in the form of monopolies, cartels or subsidies that will benefit only the politically connected.

Since the private partner partnerships aren’t bound by the profit and loss discipline from the consumers, the interest of the private partners will most likely be prioritized or aligned to please the whims of the new political masters.

And because of it, much of the resources that go into these projects will not only be costly or priced above the market to defray on the ‘political’ costs, but likewise, they will be inefficiently allocated.

Moreover, PPPs risk becoming ‘milking cows’ for these politically entitled groups and could be a rich source of corruption.

And considering the politicized nature of these public utility sub-agencies, aside from regulatory limitations on profit, as I pointed out in the case of Meralco (bold original)

In a world where profits will be deemed as inconsistent with political interests, the owners of Meralco will likely wring profits out through other mechanisms, e.g. off balance sheet transactions, loans or contracts to affiliated parties, transfer pricing and etc.

So whatever alleged padding of expenses as enumerated by the article appears as natural offshoots to the politicized nature of operations between, on the one hand, the MWSS and the Office of the President, and on the other, the privileged private sector contractors.

What has been seen as privatization program has in reality been a form of rent seeking crony capitalism. This can also be described as the localized version of privatization of profits and socialization of losses.

Contra media, such imbalances has hardly been about good or evil but about the (anti-competition-protectionist) political-legal-institutional framework from which the domestic political economic environment operates on.

Changing concessionaires or increasing regulations on them will hardly alter the essence of their relationship.

Of course the alternative or the populist innuendo has been to ‘socialize’ water services.

But there is no such thing as free lunch as subsidized water or subsidized anything else would have to be financed by higher taxes and inflation (loss of purchasing power). 

Moreover, subsidies lead to waste, misallocations, and eventual shortages. Indonesia’s recent riots, for instance, has been due to the lifting of unsustainable subsidies on oil which has brought about huge unwieldy fiscal deficits.

In my view, the answer to cheaper water is to de-politicize the industry by encouraging competition by abolishing legal obstacles, and by promoting decentralized and spontaneously driven self-organized governance system (Common Pool Resources)

Obviously mainstream would have none of them.

China’s Government Hides, Deletes and Censors Economic Data

When China’s government resorts to what seems as equivocating data in the face of a  cash or liquidity squeeze and a reported deepening manufacturing slowdown, this only arouses suspicions of a large scale cover-up of the real economic and financial conditions.

Today, the Bloomberg reports of China’s  selective statistical reporting or hiding of data sets:

China suspended the release of industry-specific data from a monthly survey of manufacturing purchasing managers, with an official saying there’s limited time to analyze the large volume of responses.

“We now have 3,000 samples in the survey, and from a technical point of view, time is very limited -- there are many industries, you know,” Cai Jin, vice president of the China Federation of Logistics & Purchasing, which compiles the data with the National Bureau of Statistics, told reporters yesterday in Beijing.

The disappearance of data on industries including steel adds to issues hampering analysis of the world’s second-biggest economy, after fake invoices inflated trade numbers this year. The manufacturing Purchasing Managers’ Index also omitted readings on export orders, imports and inventories without any explanation from the government.

Earlier China has been reported to have been deleting data, from another Bloomberg article:

An official report on China’s manufacturing in June omitted numbers for export orders, imports and inventories of finished goods, without any explanation for the gaps.

Five of 12 sub-indexes usually released with the Purchasing Managers’ Index were absent from today’s releases from the National Bureau of Statistics and the China Federation of Logistics and Purchasing. The others were for backlogs of work and quantities of purchases. The statistics bureau didn’t immediately respond to e-mailed questions asking for comment.

Analysts seeking a fuller picture of China’s economy could turn to an English-language version of the report released in Hong Kong by the Fung Business Intelligence Center, which included the missing numbers. Inflated trade figures this year highlighted flaws and omissions in data that investors rely on for assessing the strength of the world’s second-biggest economy.

The objective of data manipulation is to conceal or suppress the truth, thus the above won’t be complete without censorship.

And censorship it has been...as the Zero Hedge reports: (bold original)

FT reports that with (the extensively reported here) cash crunch roiling the Chinese economy, "propaganda authorities have told local media to tone down their reporting to help stabilise financial markets. In a directive written last week and transmitted over the past few days to newspapers and television stations, local propaganda departments of the Communist party instructed reporters to stop “hyping the so-called cash crunch” and to spread the message that the country’s markets are well stocked with money."

So far, China’s major equity benchmark, the Shanghai index, appears to have nonchalantly rebounded along with the orchestrated smoothing out of what has been uninspiring economic performance.

The 64 gazillion renminbi question: will all these attempts to smokescreen reality be sustainable? Or will economic gravity prevail?

The Japan’s central bank, the Bank of Japan (BoJ) considers developments in China as the “biggest risk” to recovery, according to the Wall Street Journal.

While this may be partly true, the BoJ appears to be shifting the blame of the potential unintended consequences from their bold ‘Abenomics’ policies to extraneous forces.

The point being: there seems to be too many potential flashpoints for a global debt crisis to occur...anytime.

Quote of the Day: Jefferson is weeping

The government the Framers gave us was not one that had the power and ability to decide how much freedom each of us should have, but rather one in which we individually and then collectively decided how much power the government should have. That, of course, is also recognized in the Declaration, wherein Jefferson wrote that the government derives its powers from the consent of the governed.

To what governmental powers may the governed morally consent in a free society? We can consent to the powers necessary to protect us from force and fraud, and to the means of revenue to pay for a government to exercise those powers. But no one can consent to the diminution of anyone else’s natural rights, because, as Jefferson wrote and the Congress enacted, they are inalienable.

Just as I cannot morally consent to give the government the power to take your freedom of speech or travel or privacy, you cannot consent to give the government the power to take mine. This is the principle of the natural law: We all have areas of human behavior in which each of us is sovereign and for the exercise of which we do not need the government’s permission. Those areas are immune from government interference.

That is at least the theory of the Declaration of Independence, and that is the basis for our 237-year-old American experiment in limited government, and it is the system to which everyone who works for the government today pledges fidelity.

Regrettably, today we have the opposite of what the Framers gave us. Today we have a government that alone decides how much wealth we can retain, how much free expression we can exercise, how much privacy we can enjoy…

The litany of the loss of freedom is sad and unconstitutional and irreversible. The government does whatever it can to retain its power, and it continues so long as it can get away with it. It can listen to your phone calls, read your emails, seize your DNA and challenge your silence, all in violation of the Constitution. Bitterly and ironically, the government Jefferson wrought is proving the accuracy of Jefferson’s prediction that in the long march of history, government grows and liberty shrinks. Somewhere Jefferson is weeping.

This is the fourth of July message from Judge Andrew P. Napolitano writing at the lewrockwell.com

Is Stem Cell therapy the cure for HIV?

I am a fan of technology. For me, advances in technology serves as the foundation for the great transition: From the mass based top-bottom social phenomenon known as the industrial age to the niche and specialization based bottom-up dynamic called the information age-digital economy. 

So when I encounter what appears as potential breakthroughs, I post them here.

Is Stem Cell therapy the cure for HIV?

From Reuters:

Two men with HIV have been off AIDS drugs for several months after receiving stem-cell transplants for cancer that appear to have cleared the virus from their bodies, researchers reported on Wednesday.

Both patients, who were treated in Boston and had been on long-term drug therapy to control their HIV, received stem-cell transplants after developing lymphoma, a type of blood cancer.

Since the transplants, doctors have been unable to find any evidence of HIV infection, Timothy Henrich of Harvard Medical School and Brigham and Women's Hospital in Boston told an International AIDS Society conference in Kuala Lumpur.

While it is too early to say for sure that the virus has disappeared from their bodies altogether, one patient has now been off antiretroviral drug treatment for 15 weeks and the other for seven weeks.

Last July Henrich first reported that the two men had undetectable levels of HIV in their blood after their stem-cell treatment, but at that time they were still taking medicines to suppress HIV.

Using stem-cell therapy is not seen as a viable option for widespread use, since it is extremely expensive, but the latest cases could open new avenues for fighting the disease, which infects about 34 million people worldwide.

There are many implications from these developments whether social, moral, commercial and etc…, nonetheless stem cell technology could just one be significant area for advances in healthcare.

Video: Should the Government Subsidize...Silly Walks?

At the Learn Liberty, Professor Art Carden talks about the essence of government subsidies

Portugal Bond Yield Spikes on Worsening Political Squabbles

I have been saying that in the face of rising interest rates, the risks of a debt crisis can emerge out of multiple potential flashpoints. 

Portugal could just be one candidate as seen by the unfolding developments in the political spectrum

From Bloomberg;

Portuguese borrowing costs topped 8 percent for the first time this year after two ministers quit, signaling the government will struggle to implement further budget cuts as its bailout program enters its final 12 months.

Secretary of State for Treasury Maria Luis Albuquerque replaced Vitor Gaspar at the Ministry of Finance. That prompted Paulo Portas, who leads the smaller CDS party in the coalition government, to quit, saying the new minister would offer “mere continuity” of the country’s deficit-cutting plans…

Portugal’s 10-year (GSPT10YR) bond yield jumped to 8 percent earlier today, the highest level since Nov. 27, and was hovering at 7.65 percent as of 11:10 a.m. London time. The nation pays an average 3.2 percent for loans it received as part of the aid package.

Prime Minister Pedro Passos Coelho is battling rising unemployment and a deepening recession as he cuts spending and increases taxes to meet terms of a 78 billion-euro ($101 billion) rescue plan monitored by the European Union, the International Monetary Fund and the European Central Bank, known as the Troika. Coelho announced measures on May 3 intended to generate savings of about 4.8 billion euros through 2015 that include reducing the number of state workers…

The difference in yield that investors demand to hold 10-year Portuguese bonds instead of German bunds is about 600 basis points, exceeding this year’s average of 461. The gap is down from a euro-era record of 16 percentage points in January 2012.

The political turmoil in Portugal, which seems representative for most of the crisis stricken Eurozone, has been about the resistance to reform and the struggle to preserve the unsustainable privileges of the political class via the welfare-bureaucratic state.

The failure of the economy to recover has been falsely blamed on “austerity”.

The reality is that there hardly has been “austerity” 

The % change of government expenditures in Portugal as well as most of the European countries (with the exception Ireland and Hungary) has been mostly positive from 2007-2012. 

What has been happening is a decline in the rate of increases rather than a net decline of expenditures.

The same can be seen in % change in debt/gdp.

Yet the preferred path of more regulations and higher taxes (amidst cosmetic reduction of government spending) punishes rather than provides the incentives for the real economy to grow. Thus the austerity strawman.

Such resistance to reform will amplify the risk of a credit event which has presently been reflected on the bond markets. Charts from Zero Hedge. 

While the political class thinks that there is an inexhaustible Santa Claus fund, the markets are saying otherwise.

As of this writing European stocks are trading significantly lower (Bloomberg)

US S&P futures are moderately down. (investing.com)

It remains to be seen if the current deterioration in Europe’s political landscape will worsen market conditions elsewhere

In the meantime, 10 year JGB yields has been trading on the upper bound (.88-.90%) of the current range. A spike beyond the 90s would likely put even pressure on global markets.

China’s Shopping Mall Bubble: Free Rents to Attract Tenants

In China, a massive oversupply of shopping malls has led to significant vacancy rates that has prompted developers to offer select tenants free rents.

From Bloomberg:

Chinese landlords are forgoing rent and paying to outfit stores for mass-market fashion brands including Zara and H&M, a bid to blunt the impact of a boom in shopping-mall construction that threatens to push up vacancies.

Preferential leasing terms were reserved until recently for luxury brands such as Louis Vuitton and Gucci, which are coveted because they bring shoppers into malls. Now moderately priced labels are being enticed with offers as landlords work harder to fill shops, according to Cushman & Wakefield Inc. and RET Property Consultancy Ltd.

Consumer demand is cooling as China’s economy slows and President Xi Jinping reins in lavish spending by officials. Big mall operators, including China Resources Land Ltd. (1109)and Hang Lung Properties Ltd. (101), can withstand the slowdown at the expense of smaller ones such as Golden Eagle Retail Group Ltd. (3308), according to Credit Suisse Group AG and Haitong International Securities Ltd. Landlords focused on lower-tier markets will be under more pressure as smaller cities add retail space at a faster rate than larger ones.

The race to build malls have been based on the same flawed premise of inexhaustible funds by consumers:

Chinese developers built more malls and expanded into smaller cities as consumer spending and incomes grew, elevating China’s economy to the largest in the world after the U.S.

Half of the 32 million square meters (344 million square feet) of shopping centers under construction around the world are in China, according to CBRE Group Inc. (CBG) About 21 million square meters of retail space is expected to be completed by next year, a 38 percent increase in supply, according to broker Cushman, which tracks 20 cities in China.

Hardly mentioned here is how  developers were misled into projecting an eternal boom: negative real rates.

I would also suspect that many developers may be owned or affiliated with State Owned Enterprises (SOE) or even local government owned corporate vehicles as part of the political race to pad up localized economic growth via statistics.

Now, the stunning surge of vacancy rates:

Second-tier cities, including Chengdu, Shenyang, Hangzhou and Qingdao, may be stuck with the highest vacancy rates in 2014, according to Cushman. The financial hub of Shanghai, the capital Beijing and the southern industrial cities of Guangzhou and Shenzhen are considered the first-tier cities.

Vacancy rates in some less affluent cities could surge to more than 30 percent by next year from as low as 6.8 percent in the first quarter this year, Cushman forecasts.

There has been no mention of the mechanics of the financing of China’s shopping mall building spree. Although I would suspect that both the banking and the shadow banking system played a big role.

And rising vacancies points to growing risks of insolvencies or bankruptcies that would hit developers, banks and shadow banks, as well as, the many other industries connected to them. If the leash effect becomes large enough, then this may metastasize into a crisis.

The hissing sound from China’s shopping mall bubble looks like a neat guidepost for the Philippine version.

Quote of the Day: State democracy is a limited monopolistic democracy

Today's democracy is a qualified democracy. Let us call it "state democracy". It is a democracy entirely linked to and emanating from the concept of a single state as the sole sovereign political unit. All the rights just mentioned have to do with the "citizen" of a state and a political system equated with that state and its machinery. A citizen is not a person with free choice of a social-political-legal system. A citizen is a designation of a state-limited and state-defined set of rights that each person finds he has, whether he likes it or not…

State democracy is based on the principle of state sovereignty. The state’s power prevails. The citizens as a group and linked by particular political arrangements are associated with this sovereignty. Whatever the basis of this sovereignty is, nothing can stand in its way when a law or rule is formulated, passed and enforced. There is no check and balance from outside the system. One can only exercise the limited rights of protest, voting, moving and running for office that the state allows. State democracy is a limited democracy. It is a monopolistic democracy.

The incentive for individuals living in state democracy is to gain control over the machinery of government and to use it to one’s personal advantage by forming coalitions that pass laws that one wants

This is from retired finance pofessor Michael Rozeff at the lewrockwell.com

The End of the France’s “bel époque” (beautiful era)?

I see France as one of the most critical countries that may trigger a global debt crisis, as well as, the end of the European Union project that could also incite a regional, if not world war III.

Historian Eric Margolis at Lew Rockwell asks if the current developments would mark the end of the French Belle Époque “beautiful era” or a “period characterized by optimism, peace at home and in Europe, new technology and scientific discoveries” attributed to the epoch of 1871 (Third French Republic) until 1914 (World War I);  (bold mine)

Now, the bad news. Glorious, beautiful, well-run France may be facing the end of its "bel époque." French industry has been ruined by overly powerful unions and their political allies in the Socialist Party.

One would be crazy these days to open a factory in France with its absurd 35-hour work week, endless vacations, surly unions, strikes, and social costs that add 50% to worker’s salaries. Laying off workers during downturns or closing plants involves siege warfare, with posturing socialist politicians fighting employers at every turn.

In an ominous new development, French have taken to comparing their economic malaise to Germany’s vibrant economy where past tough structural reforms in the labor market modernized and made its industry competitive.

Thanks to German’s intelligent system of vocational training for youth, its youngsters are at work while 45% of young French are unemployed. No wonder. French universities keep churning out unemployable graduates in social anthropology, sociology, and film-making.

Government in France employs 56% of all workers, an unsustainable cost that, with retirement at 60 and unemployment benefits – now 32% of GDP – is bleeding the economy to death. Even President Francois Holland’s recent tax increases will not save the economy from ruin – and France from a possible euro crisis.

The problem is that many French know their gravy train must slow down but they can’t bear to change. "La vie en rose" is just too seductive. Special interests – farmers, teachers, truckers, transport unions – demand the "rich" pay the bill. They can shut down France.

But there are not enough "rich" to foot France’s big bills – or America’s, for that matter. Many wealthy French are moving out of the country, like Gerard Depardieu, or quietly moving assets to more friendly locales. French fear that the desperate socialists will slap more and higher taxes on citizens and even on foreign residents. Louis XVI had similar cash problems.

France’s media is full of alarms all about how the industrious Germans are pulling way ahead, as if Germans were somehow a threat to France. This is potentially a very dangerous notion. The Franco-German entente is the rock upon which united Europe is built. Nothing must be allowed to endanger this architecture – particularly not envy, nationalism, and blaming the Teutons for France’s self-inflicted wounds.

What France urgently needs is another Charles De Gaulle who had the courage and strength to end the bitter war in Algeria in 1962 and bring stable government. A new De Gaulle must force drastic cuts in social welfare and spending, and force French to learn a new work ethic.

Socialists eventually run out of money said former UK Prime Minister M. Thatcher, France looks like a noteworthy example.

 

The Argentina Government Plays a US Dollar Con Game

Running out of US dollar reserves, the increasingly desperate regime of Argentina President Cristina Fernandez de Kirchner plans to tap on the US dollars held by their informal economy by issuing US dollar based IOUs

From Bloomberg: (bold mine)

President Cristina Fernandez de Kirchner’s wish of being able to print dollars is coming true as the central bank begins issuing dollar-denominated certificates today that trade in pesos.

Argentina is issuing the certificates, known as Cedines, as part of a tax amnesty plan to attract undeclared cash back into the economy. The nation’s foreign reserves have fallen at the fastest pace in more than a decade to a six-year low of $37.2 billion, as Argentina uses the money to pay debt instead of borrowing dollars at interest rates that are more than double the 5.95 percent average in emerging markets.

Fernandez, who said last year that it was unfortunate she didn’t have a “little machine” to print dollars, is trying to tap some of the estimated $160 billion held by Argentines under mattresses or in bank accounts abroad, to ease dollar demand stoked by more than 30 measures that she has imposed since 2011 to restrict access to foreign currency. While the measure is designed to provide individuals dollar-backed claims that can be used for real estate and energy projects, Empiria Consultores says Argentines will just exchange them back for U.S. currency.

More from the same article:

The reference value for every $100 of Cedines, is 90 for purchase and 93 for sale, for an implied exchange rate of 7.2 pesos per dollar, according to a recently created website called Cedin Trading.

That rate would be weaker than the official rate of 5.3903 and stronger than the black market where Argentines pay as much as 8 per dollar. A fourth rate used for financial transactions by swapping bonds and stocks was 7.8257 at 4:26 p.m. in Buenos Aires….

Fernandez is seeking to reverse a rout in property transactions after her ban on buying foreign currency almost paralyzed the dollar-based market.

Undeclared dollars can also be traded for a government-issued bond maturing in 2016 that will pay a 4 percent annual interest rate that will be used to finance the energy industry and state-run YPF SA.

First the Argentine government prevents her constituents from transacting in US dollars, so the public kept them outside of the grasp of the government and from the government controlled banking system.

Now that such confiscatory policies has backfired, the Kirchner regime hopes to usurp people’s savings held in foreign currency via unfunded US dollar based IOUs or certificates which is why this program looks like a sting or a con game.

Yet Argentina’s fiscal intemperance will only mean higher inflation and economic stagnation ahead.

As Simon Black of the Sovereign Man expounds: (bold mine)

Inflation here is completely out of control. The government figures say 10%, but the street level is several times that.

Curiously, even Cristina acknowledges that prices are way too high. But rather than rein in spending and stop the money printing, she’s digging her high heels in even further by launching a new clothing line.

This new brand– NYP (Nacional Y Popular) will be owned and run by the government, selling everything from jeans to shirts to shoes at prices below 100 pesos (less than $20 officially).

In every instance, they just keep going further down the rabbit hole of more government control, more central planning. It’s like living inside the pages of Atlas Shrugged.

In a world where capital seems to be shrinking as evidenced by the ongoing bond market rout, the global governments appear as likely to increasingly resort to political, economic and financial repression measures in order to fulfill the whims of their political leaders and to preserve the status quo or the privileges of the political class.

Developments in Argentina and Venezuela seem as the proverbial writing on the wall.

Egypt’s Arab Spring: From Tyranny to Tyranny

How events can move so swiftly.

In Egypt, following the overthrow of ousted President Hosni Mubarak in a popular ‘Arab Spring’ protests in 2011, today it would seem that the same fate will befall the incumbent Mohamed Morsi.

From New York Times:

Egypt’s top generals on Monday gave President Mohamed Morsi 48 hours to respond to a wave of mass protests demanding his ouster, declaring that if he did not, then the military leaders themselves would impose their own “road map” to resolve the political crisis.

Their statement, in the form of a communiqué read over state television, plunged the military back into the center of political life just 10 months after it handed full power to Mr. Morsi as Egypt’s first democratically elected leader.

The communiqué was issued following an increasingly violent weekend of protests by millions of Egyptians angry with Mr. Morsi and his Muslim Brotherhood backers. It came hours after protesters destroyed the Brotherhood’s headquarters in Cairo.

In tone and delivery, the communiqué echoed the announcement the Supreme Council of the Armed Forces issued 28 months ago to oust President Hosni Mubarak and seize full control of the state. But the scope and duration of the military’s latest threat of political intervention — and its consequences for Egypt’s halting transition to democracy — were not immediately clear, in part because the generals took pains to emphasize their reluctance to take over and the inclusion of civilians in any next steps.

For Mr. Morsi and his Islamist allies in the Muslim Brotherhood, however, a military intervention would be an epic defeat. It would deny them the chance to govern Egypt that the Brotherhood had struggled 80 years to finally win, in democratic elections, only to see their prize snatched away after less than a year.

“We understand it as a military coup,” one adviser to Mr. Morsi said, speaking on condition of anonymity to discuss confidential deliberations. “What form that will take remains to be seen.”

The military’s ultimatum seemed to leave Mr. Morsi few choices: cut short his term as president with a resignation or early elections; share significant power with a political opponent in a role such as prime minister; or attempt to rally his Islamist supporters to fight back for power in the streets.

Populist revolts that results to a powershift from one tyrant to another has been no stranger in the world of democratic politics. This applies even to the Philippines (which had two popular revolts) 

Lord of the Ring’s Gollum’s image 

In a letter to Bishop Creighton, the great historian and writer John Emerich Edward Dalberg, popularly known as the Lord Acton, captured the essence of politics: (bold mine)

I cannot accept your canon that we are to judge Pope and King unlike other men, with a favourable presumption that they did no wrong. If there is any presumption it is the other way, against the holders of power, increasing as the power increases. Historic responsibility has to make up for the want of legal responsibility. Power tends to corrupt, and absolute power corrupts absolutely. Great men are almost always bad men, even when they exercise influence and not authority, still more when you superadd the tendency or the certainty of corruption by authority. There is no worse heresy than that the office sanctifies the holder of it.