PBoC Tapers: China’s Interest Rate Markets Under Pressure

The consensus has basically downplayed almost all forms of risks in the face of a US inspired global stock market melt UP.

Yet the resurfacing turmoil in the interest rates markets in the Chinese economy suggests otherwise.

Newswires say that the Chinese central bank, the PBoC, has re-initiated a tightening of the monetary noose following the recent reports of a rise in ‘inflation’ [euphemism for the runaway credit fueled property bubble].

From yesterday’s Bloomberg:

China’s benchmark money-market rate jumped the most since July as the central bank refrained from adding funds to markets and corporate tax payments drained cash.

The seven-day repurchase rate, a gauge of funding availability in the banking system, surged 47 basis points, or 0.47 percentage point, to 4.05 percent as of 4:21 p.m. in Shanghai, according to a weighted average compiled by the National Interbank Funding Center. That was the biggest advance since July 29. The overnight repo rate jumped 72 basis points, the most since June 20, to 3.80 percent.

The People’s Bank of China has suspended selling reverse-repurchase contracts since Oct. 17, leading to a net withdrawal of 44.5 billion yuan ($7.3 billion) from the financial system last week. The authority asked commercial banks to submit orders today for 28-day repurchase contracts, 91-day bills, and 14-day reverse repos planned for tomorrow, according to a trader at a primary dealer required to bid at the auctions…

The PBOC may lean toward tightening should there be an acceleration in consumer-price gains, Song Guoqing, a central bank academic adviser, said over the weekend. Inflation was 3.1 percent in September, the fastest pace since February.

Today China’s repo rates opened at 4.8% from yesterday’s 4.79%

The interest rate squeeze in the repo markets have likewise put pressure on the yields of China’s 10 year sovereign bonds (investing.com). Yields have reached 4.23% as of this writing from 4.2%.

According to a fresh Wall Street Journal report.

The yield on the benchmark 10-year bond hit 4.20% Thursday, the highest since it reached 4.60% in November 2007.

"Rising inflationary pressures, a rebound in economic growth and the central bank's shift toward a slightly more hawkish monetary policy have led to tighter liquidity conditions," said Chen Long, an analyst at Bank of Dongguan. "These have made bonds less attractive to investors."

The article blames ‘inflation’ partly to the recent surge in capital flows.

The PBOC's move also reflects an intention to offset the inflationary pressures created by surging capital flows into China, said Peng Wensheng, chief economist at China International Capital Corp.

China's central bank and financial institutions bought a net 126.4 billion yuan of foreign currency in September, compared with 27.32 billion yuan in August, according to calculations by The Wall Street Journal based on central bank data issued Monday. These figures are viewed by most analysts as a proxy for inflows and outflows of foreign capital, as foreign currency entering the country is generally sold to the central bank. September is the second straight month of net purchase—after two months of net sales—suggesting continuing capital inflows.

Consumer Price ‘Inflation’, which are symptoms of credit fueled asset bubbles, essentially signifies a domestic dynamic as explained here. Existing bubble conditions have only lured foreign money or local money based overseas to piggyback on yield chasing activities.

Notice too that since the liquidity crunch last June, yields of Chinese bonds has been steadily rising.

Yet this comes in the face soaring debt levels and runaway property bubbles. In short, the Chinese economy looks very vulnerable.

And my guess is that the Chinese political leadership have been aware of this and could be trying to put a brake on her homegrown bubbles since they have already accomplished attaining their statistical growth targets. (chart from FT Alphaville).

The June liquidity crunch has also been ventilated on China’s equity benchmark, the Shanghai Index.

Since the PBoC’s action during the last few days, the Shanghai index has once again manifested signs of renewed weakening.

Japan’s equity benchmark, the Nikkei 225’s sharp decline last June has also coincided with the China interest rate spike. We can note of a seeming resemblance today as the Nikkei has demonstrated signs of weakness. 

As of this writing the Nikkei has been down by more than 2% while China’s stock markets are also in deep red (table from Bloomberg).

Bottom line: Underneath many complacent markets are many potential flashpoints (or booby traps) for a black swan event.

Also policymakers hold global financial markets by their necks. One moment policymakers decide to inject money to the system which incites a boom, the next moment the same policymakers withdraw money from the system that prompts for a selloff.

In other words, financial market’s mini-boom bust cycles reveal how they have been hostaged to the whims of political agents.

Humor: Krugman teaches Gilligan the broken window (fallacy)

(source: Austrian economist Bob Murphy) 

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Quote of the Day: Economics isn’t, and will never be, a science

I wonder how Chetty would use those tools to provide compelling answers to the following questions:

1. What is the expected rate of economic growth in conjunction with a 4 percent federal funds rate?

2. What is the effect on inflation of a 300 percent increase in the monetary base?

3. What is the effect -- the multiplier -- of a $1 increase in government spending on output?

4. What is the nonaccelerating inflation rate of unemployment, or the jobless rate that triggers rising prices?

5. What is the wealth effect from a 20 percent increase in the major stock indexes? What about a 100 percent increase?

The answer to all five questions is, it depends. And that’s one of the main reasons that economics isn’t, and will never be, a science.

Isaac Newton, the English physicist, mathematician and philosopher, pretty much explained the fundamental difference between economics and the hard sciences more than 300 years ago. With the physical sciences, we observe what happens in nature. Then we try to quantify it. An apple falls from the tree to the ground with increasing velocity. Water boils at 100 degrees Celsius at sea level. Light travels faster than sound. Each observation yields the same result. It’s why mathematicians end their proofs with QED -- “quod erat demonstrandum,” or that which was to be demonstrated -- and economists don’t.

Or, to paraphrase Newton: The same results are always obtainable under the same conditions. It is the repetitive duplication of a result that defines what are called laws of nature.

A law of nature, when properly measured, will yield duplicate results. A law of economics, even if properly measured, will not.

This is from Bloomberg’s columnist Caroline Baum explaining the difference between science and economics.

Saudi Arabia Cuts Ties with the US over Syria-Iran

After the US government has been forced by the public, aided by Russian President Vladmir Putin’s appeal, to stand down against attacking Syria,  Saudi Arabia reportedly severed ties with the US.

Writes the Daily Mail, (hat tip Mises Blog)

Upset at President Barack Obama's policies on Iran and Syria, members of Saudi Arabia's ruling family are threatening a rift with the United States that could take the alliance between Washington and the kingdom to its lowest point in years.

Saudi Arabia's intelligence chief is vowing that the kingdom will make a 'major shift' in relations with the United States to protest perceived American inaction over Syria's civil war as well as recent U.S. overtures to Iran, a source close to Saudi policy said on Tuesday.

Prince Bandar bin Sultan told European diplomats that the United States had failed to act effectively against Syrian President Bashar al-Assad and the Israeli-Palestinian conflict, was growing closer to Tehran, and had failed to back Saudi support for Bahrain when it crushed an anti-government revolt in 2011, the source said.

'The shift away from the U.S. is a major one,' the source close to Saudi policy said. 'Saudi doesn't want to find itself any longer in a situation where it is dependent.'

It was not immediately clear whether the reported statements by Prince Bandar, who was the Saudi ambassador to Washington for 22 years, had the full backing of King Abdullah.

The growing breach between the United States and Saudi Arabia was also on display in Washington, where another senior Saudi prince criticized Obama's Middle East policies, accusing him of 'dithering' on Syria and Israeli-Palestinian peace.

A US attack on Syria means a likely involvement of Iran which the Saudi leadership also desires the US to go to war with.

Syria and Iran signed a defense pact in 2006 “for military cooperation against what they called the "common threats" presented by Israel and the United States” (Wikipedia)

Aside from the Syrian stand down, Iran seem to be warming up to the US to improve diplomatic relations. Both parties including intermediaries have reportedly been conducting talks for the lifting of economic sanctions against Iran. This further got the goat of the Saudi leadership. 

The prospect of Mideast peace has influenced oil prices. WTIC oil has been on a downward trek.

Yet falling oil prices also imperils the welfare state of many Mideast political economies as previously discussed. 

Latest estimates suggest that Saudi’s budget has been equivalent to $64-67 bbl oil

And high oil prices to keep the welfare state afloat could also be one reason why Saudi’s leadership demands the US to take on Iran.

As a side note, Iran has higher oil price requirements for her welfare state, but obviously economic sanctions poses as a bigger danger or threat. For instance, Iran experienced an episode of hyperinflation in about a year ago

And since the Shale oil revolution, the US has been least dependent on oil imports. In fact, US oil production has surpassed Saudi last April, according to Professor Mark Perry.

This also means lesser influence by Saudi on American foreign policy, which may also have irked the Saudi political leadership

But aside from the geopolitics of oil, the other aspect of Saudi’s demand for the US to go to war with Syria-Iran may have been about regional power

As historian Eric Margolis explains:

But what will happen if punishing US-engineered sanctions against Iran are eased? Oil-rich Iran will rebuild its ravaged economy and infrastructure, and quietly enhance its military power. A key priority for Tehran will be modernizing its decrepit civilian air fleet that routinely crashes from mechanical problems or pilot error. Good news for Boeing and Airbus, as well as US energy companies.

If Iran regains its former role as a major Mideast power, this important development will run head-on into current US strategy to keep it weak and isolated until a pro-US government comes to power in Tehran. A strengthening Iran will generate fear and anxiety in Saudi Arabia and some of the less flexible Gulf states, and increase Tehran’s influence over Iraq.

An Iran with the capability of producing a few nuclear weapons within a year also deeply alarms Washington, its Arab allies, and Israel. An Iran with even a few nukes, like North Korea, would sharply limit US Mideast power and its ability to use military forces against Iran.

Israel knows that Iran has no intention of launching a nuclear attack on the Jewish state, which is a major world nuclear power with an invulnerable triad of land, sea and air-launched nuclear weapons.

But Israel’s constant alarms about Iran’s so far non-existent nuclear weapons serves to distract attention from its rapid absorption of the West Bank and Golan, and generate potent political and financial support from its North American partisans. Or maybe Israel’s leader, Benyamin Netanyahu has actually come to believe his own Jeremiads about Tehran’s supposed suicidal “mad mullahs.”

Today, Israel has no serious enemies in the Arab world: Egypt has been bought off; Iraq and Syria destroyed. Saudi Arabia is in secret alliance with Israel. The only nation that can hope to challenge Israel’s increasingly dominant role in the Mideast is Iran. That puts Israel, Iran and Saudi Arabia in a three-way competition for regional hegemony.

Mideast politics is surely a complicated one.

Taper Poker Bluff Called: Global Central Banks Back on an Easing Spree

The so-called “tapering” has all been a poker bluff.  And that bluff has been called as global central banks take on an increasingly dovish stance.

From Bloomberg:

The era of easy money is shaping up to keep going into 2014.

The Bank of Canada’s decision yesterday to drop language about the need for future interest-rate increases unites it with other central banks reinforcing rather than retracting loose monetary policy. The Federal Reserve delayed a pullback in its monthly asset purchases, while emerging markets from Hungary to Chile cut borrowing costs in the past two months

“We are at the cusp of another round of global monetary easing,” said Joachim Fels, co-chief global economist at Morgan Stanley in London.

Policy makers are reacting to another cooling of global growth, led this time by weakening in developing nations while inflation and job growth remain stagnant in much of the industrial world. The risk is that continued stimulus will inflate asset bubbles central bankers will have to deal with later. Already, talk of unsustainable home-price increases is spreading from Germany to New Zealand, while the MSCI World Index of developed-world stock markets is near its highest level since 2007.

Easy money has hardly produced the desired effects, yet the stubborn insistence by central bankers to do the same thing over and over yet expecting different results. 

The economic payoff has been limited. The International Monetary Fund this month lopped its forecast for global economic growth to 2.9 percent in 2013 and 3.6 percent in 2014, from July’s projected rates of 3.1 percent this year and 3.8 percent next year. It also sees inflation across rich countries already short of the 2 percent rate favored by most central banks.

Central bankers are on guard to keep low inflation from turning into deflation, a broad-based decline in prices that leads households to hold off purchases and companies to postpone investment and hiring.

Promoting debt has gone global.

Some central banks in emerging markets are already acting. Chile unexpectedly lowered its benchmark rate by a quarter point to 4.75 percent on Oct. 17, pointing to weaker growth, inflation and the global outlook. Israel on Sept. 23 surprised analysts when it cut its key rate a quarter point to 1 percent, the lowest in almost four years.

“With the dollar much weaker in recent days and weeks, you’ll see central banks that were reluctant to ease start to do that now,” said Thierry Wizman, global interest rates and currencies strategist at Macquarie Group Ltd. in New York. “They can be less worried about capital flight if the Fed isn’t tightening policy, and the strength in their currencies is probably imparting some disinflation into their economies, giving them a window to cut rates.”

Hungary, Latvia, Romania, Serbia, Sri Lanka, Egypt and Mexico have also eased since the start of September although Indonesia, Pakistan, Uganda and India tightened with the latter softening the blow by relaxing liquidity curbs in the banking system at the same time.

Yet cheap credit equals asset bubbles

The cheap cash may come at a price that policy makers will have to pay later if it inflates asset bubbles. Germany’s Bundesbank said this week that apartments in the country’s largest cities may be overvalued by as much as 20 percent. In the U.K., BOE officials are rebutting commentary about a housing bubble as prices in London jumped 10.2 percent in October from the prior month.

Swedish and Norwegian property markets are also proving a concern to their central bankers, and policy makers in New Zealand and Singapore have already sought to cool demand. Meantime, U.S. stocks are heading toward the best year in a decade with about $4 trillion added to U.S. share values this year.

As I have repeatedly been pointing out here, easy money regime represents a transfer of resources from the real economy to the cronies of the banking-finance and to the political class and cronies of the welfare-warfare state and the bureaucracy. Such has been enabled, intermediated and facilitated by the global central banks via asset bubbles.

Also such asset bubbles have been financed by a massive build up of debt.

Global debt has been estimated at $223 trillion last May 2013—313% (!!!) global gdp…and growing fast.

According to the Wall Street real time economics blog

In a comprehensive report on global indebtedness, economists at ING found that debt in developed economies amounted to $157 trillion, or 376% of GDP. Emerging-market debt totaled $66.3 trillion at the end of last year, or 224% of GDP.

The $223.3 trillion in total global debt includes public-sector debt of $55.7 trillion, financial-sector debt of $75.3 trillion and household or corporate debt of $92.3 trillion. (The figures exclude China’s shadow finance and off-balance-sheet financing.)

Again easy money promotes interests of political agents. Credit easing policies has produced an explosion of central bank assets as government debts skyrockets.

 This comes as global GDP shrinks.

I pointed out last week of the growing imbalance between the growth of debt and GDP  in the US. I wrote “since 2008, the US acquired $7 of debt for every $1 of statistical economic growth”

The other way to look at this is to ask; how will $1 of growth pay for $7 of debt?   

Dr. Marc Faber  at the Daily Reckoning writes

Moreover, the Fed wants to stimulate credit growth with its artificially low interest rates. But again, credit growth has largely lost its impact on the real economy. The multiplier on GDP of an additional dollar of debt is now negligible.

So Central Banks are caught in a ‘loop the loop’ or ‘cul de sac’ trap. To maintain the illusion of sustainability credit easing policies must exist in perpetuity. However, the easy money environment further inflates systemic debt thus intensifying systemic fragility or vulnerability to a crisis. And so the feedback loop.

Yet at the end of the day economist Herbert Stein’s law “If something cannot go on forever, it will stop” will prevail. 

And the great Austrian economist Ludwig von Mises warned (bold mine) 

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.

Has the Fed’s Taper Talk induced foreign selling, swap and bilateral currency deals?

Has the Fed’s tapering inspired a foreign sell off in US assets and for countries to increase swaps and bilateral currency deals?

From Bloomberg:

Foreign investors were net sellers of U.S. long-term portfolio assets in August as China reduced its holdings of Treasuries to a six-month low.

The net long-term portfolio investment outflow was $8.9 billion after a revised $31 billion inflow in July, the Treasury Department said in a statement today in Washington. Net sales of U.S. equities by official holders abroad were a record $3.1 billion, and China lowered its holdings of U.S. government debt for the second time in three months, the department said…

Today’s report showed China remained the biggest foreign owner of U.S. Treasuries in August even as its holdings dropped $11.2 billion to $1.27 trillion. Japan, the second-largest holder, increased its share by $13.7 billion to $1.15 trillion, the figures showed.

Based on updated TIC data (prior to June are unrevised), the Japanese (both investors and the government) have aggressively been buying USTs since Abenomics (must be signs of capital flight for private sector). 

However, the debt ceiling standoff has reportedly prompted for a net selling of USTs in early October.

On the other hand, China has posted a sustained decline in UST holdings since April.

Various Asian countries have undertaken ex-US dollar deals.

From Wall Street Journal Blog

On Tuesday, China and Singapore announced they would introduce direct trading between their currencies. Beijing also said it would allow Singapore-based investors to take yuan funds raised in the city-state and invest them in mainland securities markets.

Singapore follows in the footsteps of London – which gained so-called RQFII status last week – and Hong Kong. The move, designed to promote use of the yuan and broaden the investor base in China’s markets, builds on other measures taken recently that aim to reduce Asia’s dependence on the U.S. dollar.

Earlier this month China signed a 100 billion yuan ($16.4 billion) swap deal with Indonesia. It has existing pacts with Australia, South Korea and a number of European countries.

South Korea this month signed currency-swap agreements with Indonesia, Malaysia and the United Arab Emirates worth around $20 billion. Officials say they’re considering more such deals, in addition to existing pacts with China and Japan.

Swap agreements – in which central banks pledge to provide each other with currency, usually on a short-term basis – often are enacted during periods of financial turmoil, but more recently have taken on a greater role in trade and diplomacy.

The arrangements are small compared to use of the dollar for international transactions, which accounted for foreign-exchange turnover of around $4.65 trillion a day, or 87% of the global total, according to triennial survey conducted by the Bank for International Settlements in April.

Still, the swap deals help insulate Asian currencies a bit from the whims of speculative investors, and make it more likely their movements will reflect trade needs or economic fundamentals. China and South Korea got off relatively lightly during the market turmoil this summer, but some of those they’ve signed swap deals with — such as Indonesia — were hit hard as investors fled emerging markets.

It is true that currency swaps or bilateral domestic currency trades have been small, nonetheless such deals means that many Asian governments have been gradually redirecting or decreasing their exposures on the US dollar. As Chinese philosopher Laozi once said, a journey to a thousand miles begins with a single step.

China and Thailand have even undertaken a project to build a railway connection between the two countries, where Thailand will for pay for her share in the cost of railway construction via barter, particularly rice and rubber.

Also currency swaps are not a free pass or license for bubbles. They serve as possible cushion from currency based tail events. Mismanagement by governments will result to market crashes or crisis regardless of swaps.

And speculators don’t just drive markets up or down according to “whims”, but through perceived profit opportunities mainly based on changing expectations of fundamental conditions of specific political economies.

In other words, meltdowns don’t happen because of confidence alone, but because of perceived (rightly or wrongly) dramatic negative or adverse changes in fundamentals that incites an abrupt loss of confidence of market participants whose actions are ventilated on the markets via a stampede or panic.

All these foreign selling of US assets, swaps and bilateral trade or barter deals have been evident in the continued fall of the US dollar.

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Quote of the Day: Good Samaritan duty

There is a long tradition in the common law that refuses to recognize a legal duty to help strangers in emergency situations: the so-called Good Samaritan duty. It is not because the common law judges were heartless and did not recognize moral duties. It is because they recognized that state compulsion or legal liability should be used sparingly. They also recognized a whole host of practical problems in enforcing Good Samaritan duties.

Not to recognize a distinction between the moral obligations of individuals and the role of the state is an error of profound consequences.

This is from New York University Associate Professor Mario Rizzo at the comment section of his article on Free Market Moralism, published at the NYU’s Think Markets Blog

A Rejoinder on Cuervo’s (non) response on my Philippine Property Bubble article

My article expounding on the possibility of an inflection point on the Philippine real industry, particularly Cracks in the Philippine Property Bubbles has elicited an industry response. 

I would like to thank Cuerve Property Advisors for citing my article as example of the property boom contrarians.

However, the Cuervo article seems to have sidestepped on the issues or the risks that I have raised. They mostly regurgitated on the 'positive' angles of the article I earlier questioned.  

(hat tip to my libertarian colleague Lemuel Goltiao)

Cuervo did not answer the following:

1. Has there has been an existing imbalance between demand and supply in the property sector?

The supply side which I questioned reported an average of 30% growth annualized for condominiums since 2005.

But how about demand?

A. Domestic Demand

In the second quarter, Philippine statistical economic growth was reported at 7.5% (constant prices).

Household demand or the HIFE was at 6.6% constant prices, where housing (along with water, electricity and etc) expenditures grew by 5.9%, according to the National Statistical Coordination Board.

For the sake of Occam Razor’s parsimony of logic rule, 30% (supply) minus 7.5% (demand) translates to 22.5% surplus. Yet not all consumer demand is about real estate as the table above shows.

B. BPO. The BPO industry grew by 18% in 2012 (but has averaged 46% since 2006 mostly due to what I see as the low base effect changes or from Wikipedia.org, the “tendency of a small absolute change from a low initial amount to be translated into a large percentage change”).

The Industry targets a near doubling of revenues at $25 billion in 2016 from $13 billion in 2012 or an average growth of 48% or cagr of 17.76%. There are only about 800,000 (777,000) people employed in the industry

However there are impediments to such aggressive growth target.

There haven’t been enough qualified employees, the Cebu BPO industry Blog notes that “According to the Business Processing Association of the Philippines (BPAP), out of every 100 applicants to call centers in Cebu and other cities, 95 of them are turned down. The companies just can’t find the right people for the number of jobs offered.”

Further there has been growing obstacles on labor regulation, notes China Daily Asia,

There were also concerns related to investment incentives and the legal and regulatory framework.

For instance, some foreign investors are surprised that employees cannot simply be let go, and that termination of employment needs to follow a particular procedure, otherwise the dismissal could be considered unlawful,” the law firm wrote. “Other new companies offer significant compensation packages at the very start of operations, not realizing that they may not be able to scale these back later on because of the local legal regime’s principle of non-diminution of benefits.

While I think BPOs will continue to grow strongly my impression is that the pace of growth will decelerate.

So if I simplistically refer to 2012 growth at 18%, real estate demand from BPO will not be enough. To the contrary BPO demand will translate to also a deficit of 12% (30%-18%). 

And even if we use the 46% benchmark, considering that the BPO is a small (but rapidly growing) industry yet, the 16% surplus will unlikely cover the deficits from the rest.

Yet benefits from the growth in the BPO industry won’t be all about real estate spending.

C. Remittance. Remittances reportedly grew at 7.4% in August. 

The World Bank in my earlier article notes remittance trend may slow due to “Stricter Implementation of the migrant workers’ bill of rights; -Political uncertainties in host countries; and -The slowdown in the advanced economies” which the Cuervo article seem to have overlooked.

Remittance growth trends have been on a decline since 2010 as shown by the World Bank Chart.

So again in simplistic deduction, demand from remittances represented by the 7.4% growth will also translate to a deficit (22.6%). Again not all of remittances will be directed to real estate.

The focus on remittances as main drivers of real estate (17-18% of total demand as assessed by a top property firm) seems misplaced. I have dealt with this here. Whatever happened to the 82-83%?

D. Foreign Demand. The global economy grew by 3% in 2012. IMF expects growth to further slip this year to 2.9% and 3.16% for 2014. 

The problem is the global economy has been materially slowing as shown above.

In addition, foreign demand for properties, whether for investment or for use, are subject to competition within the region.

Foreign demand is also subject to price and yield changes or the law of economics

And one should notice that BPO, remittances and foreign demand for local properties are sensitive to changes in the conditions of the global economy. Notes the World Bank from their (p.39) PHILIPPINE ECONOMIC UPDATE May 2013

However, the sources of growth can also become the sources of risk. A real estate sector driven by OFW sales and BPO leasing is vulnerable to shocks in the global economy. The low interest rate regime is also a source of risk. As lenders and developers compete for higher yields, lending requirements may be relaxed beyond prudent levels.

(bold mine) 

So it would be misguided to look at domestic developments in exclusion of external developments. The domestic economy has been materially entwined with the global economy. So even domestic demand is likewise sensitive to exogenous forces.

E. Informal Economy. Cuervo didn’t even tap the informal economy which the ILO estimates that between 40-80% of Philippine employment. [As a side note, the reason for the wide estimates is that the informal sectors are invisible to government statistical data] 

However, the Philippine Department of Labor and Employment estimates 41.1% of the Philippine labor force as informal, as of 2011

While the informal sector may not be buyers of high end projects, they are potential buyers of the middle to low cost housing. The informal economy also includes the 30-40% informal channel for remittance flows.

But these sectors are highly vulnerable to price inflation (whether food, energy or rents). Rent is a key component of poor and non-poor household spending as of 2003.

2. The company didn’t explain of the possible risks from potential oversupply and the risks of overleveraging of the industry. They seem to only assume that like stocks, property prices are headed only in one direction; up up and away.

3. They didn’t address how higher property prices will affect consumer affordability, disposable income and consequently demand.

4. The company also failed to explain how rising property prices will affect competitiveness, productivity and profitability of the general industries (including BPOs) when input costs led by rents go up.

At the end of the day the Cuervo analyst delivers the most important gist of their defense…which the late investing guru Sir John Templeton calls as the “four deadliest words in investing”:

As an experienced Appraiser, Real Estate Broker and Consultant, my opinion is now different.

This time is different.

US Stock Markets: UP UP and Away!

There is only one direction for stock markets in the US or elsewhere. That is UP UP and AWAY!

Good news equals rising stock markets. Bad news also equals rising stock markets.

Bad news is good news, from Bloomberg

Speculation slower growth in hiring will extend Federal Reserve stimulus lifted U.S. stocks and pushed the annual advance in the Standard & Poor’s 500 Index within a percentage point of the best yearly gain in a decade.

The S&P 500 rallied as much as 0.8 percent today, boosted by speculation the Fed will delay curtailing its monetary stimulus after payrolls in the U.S. climbed by less than forecast in September, indicating the economy had little momentum leading up to the 16-day shutdown of the federal government. The jobless rate fell to an almost five-year low.

Bad news is good news because of the chronic addiction to debt-inducing stimulus.

Record S&P 500

Record small cap Russell 2000

Up, up and away extrapolates to a parabolic climb for both the S&P and Russell 2000

US PE ratios as discussed last weekend. From the Wall Street Journal:

Skyrocketing P over E. Shrinking dividend yields. 

So how can things ever go wrong?

As the great Ludwig von Mises warned:

For the naive mind there is something miraculous in the issuance of fiat money. A magic word spoken by the government creates out of nothing a thing which can be exchanged against any merchandise a man would like to get. How pale is the art of sorcerers, witches, and conjurors when compared with that of the government's Treasury Department! The government, professors tell us, "can raise all the money it needs by printing it."  Taxes for revenue, announced a chairman of the Federal Reserve Bank of New York, are "obsolete."  How wonderful! And how malicious and misanthropic are those stubborn supporters of outdated economic orthodoxy who ask governments to balance their budgets by covering all expenditures out of tax revenue!

Regime Uncertainty: Why a French Economic Recovery is a Mirage

I recently pointed how France serves a critical example of the many parallel universes—or detachment between asset prices and economic reality—operating today, as consequence from the politicization of the markets.

Yet the mainstream rationalizes (or misrepresents) such dynamics as ‘economic growth recovery’.

While government statistics may show ‘growth’, real world developments in France suggests otherwise.

From this excellent article by Telegraph’s Anne Elizabeth Moutet (hat tip LewRockwell.com) [bold mine]

A poll on the front page of last Tuesday’s Le Monde, that bible of the French Left-leaning Establishment (think a simultaneously boring and hectoring Guardian), translated into stark figures the winter of François Hollande’s discontent.

More than 70 per cent of the French feel taxes are “excessive”, and 80 per cent believe the president’s economic policy is “misguided” and “inefficient”. This goes far beyond the tax exiles such as Gérard Depardieu, members of the Peugeot family or Chanel’s owners. Worse, after decades of living in one of the most redistributive systems in western Europe, 54 per cent of the French believe that taxes – of which there have been 84 new ones in the past two years, rising from 42 per cent of GDP in 2009 to 46.3 per cent this year – now widen social inequalities instead of reducing them.

Three  observations here:  

One, taxes have begun to affect the public’s confidence level and opinion of policies. 

Second, taxes induce social inequalities rather than reducing them, which goes contrary to the outcome conceived by populist politics of 'social justice' redistribution. 

And third, the increasingly repressive  tax regime has forced many capitalist out of France or has turned them into ‘tax exiles’.

Why French politicians resort to increasingly repressive taxes? The article continues

By 2014, France’s public expenditure will overtake Denmark’s to become the world’s highest: 57 per cent of GDP. In effect, just to keep in the same place, like a hamster on a wheel, and ensure that the European Central Bank in Frankfurt isn’t too unhappy with us, Hollande now needs cash. Technocrats, MPs and ministers have been instructed to find every euro they can rake in – in deferred benefits, cancelled tax credits, extra levies. As they ignore the notion of making some serious cuts (mooted at regular intervals by the IMF, the OECD and even France’s own Cour des Comptes), the result can be messy.

The answer is that the French government has been growing immensely far faster than the real economy. 

And instead of promoting productive enterprises, the government has resorted to bigger confiscation of the resources from the private sector.

So the political class (parasites) benefits at the expense of their shrinking (private sector) hosts who are now pushing back.

And taxes influence people’s incentives and the corollary, people’s action. The article again gives a lucid example

Take last year’s famous 75 per cent supertax, on individuals earning over one million euros a month. This has still not been implemented. First, it got struck down by France’s Constitutional Council on a technicality. Leaks suggested the rate would fall to 66 per cent. They were confirmed, then denied. Hollande eventually vowed that the tax would be paid by the targeted individuals’ employers, for daring to offer such “obscenely” high salaries. This has just been approved by the National Assembly, and must still pass the Senate. So far, it is only supposed to apply to 2013 and 2014 income, but no one knows if the bill will be prolonged, killed or transformed.

What we do know is that this non-existent (so far) tax has been the clincher that sent hundreds, possibly thousands of French citizens abroad: not just “the rich”, whom Hollande, during his victorious campaign, said he personally “disliked”, and who now are pushing up house prices in South Kensington and fighting bitterly over the Lycée Charles de Gaulle’s 1,200 new places; but also the ambitious young, who feel that their own country will turn on them the minute they achieve any measure of personal success…

“It’s not only that people don’t like to be treated like criminals just because they’re successful,” says a French banker friend who has recently moved to London. “But this uncertainty in every aspect of the tax system means it is impossible to do business: you don’t know what your future costs are, or your customer’s. You can’t buy, you can’t sell, you can’t hire, you can’t fire.”

This is a wonderful example of what Austrian economist Robert Higgs calls as the regime uncertainty or [bold mine]

a form of uncertainty related to the public’s—especially the private investors’—confidence in the future security of private property rights, which can be impaired by future regulatory changes (e.g., Dodd-Frank and Obamacare regulations), court decisions, administrative twists and turns, tax increases in various forms (e.g., Obamacare penalties enforced through the income-tax system), monetary-policy changes that threaten the dollar’s purchasing power and distort the allocation of credit, and personnel changes in the government’s corps of executives, judges, and assorted capos.

The likely effects of 84 new taxes and more coming plus a battery of regulations are...

First, these promotes insecurity of the French property rights regime “don’t like treated like criminals”, 

Second, such obscures economic calculation “you don’t know what your future costs are, or your customer’s” and 

Finally the same policies obstructs or impedes on the economic coordination process “You can’t buy, you can’t sell, you can’t hire, you can’t fire”

With an environment like this, real economic activities will shrivel as political consumption lords over private sector production. 

Diminishing real output means lesser taxes, bigger deficits (as above) and increasing reliance on more debt to fund current political spending programs

French government debt has now reached 93.5% of the statistical gdp according to countryeconomy.com. I suspect that this could be larger as statistical economy tends to inflate output.

So again while French politicians and their cronies benefits, the rest of the nation suffers—thus the wider incidence of inequality (as consequence of political inequality)

There will be a point where creditors will come to question on the quality of French debts, which I believe should be sooner than later. 

So no matter the recent 'sanguine' reaction by the French stock-bond market or how government statistics say “growth”, unless the French government realizes that economic growth emanates from productive enterprises, and not from confiscation, the French economy will remain in stagnation if not in depression.

Even ECB president Mario Draghi recently admitted of the limitations of central bank interventions. As quoted by Reuters:(bold mine)

The ECB has done as much as it can to stabilise markets and support the economy. Now governments and parliaments need to do all they can to raise growth potential.

Monetary policy cannot create real economic growth. If growth is stalling because the economy is not producing enough or because firms have lost competitiveness, this is beyond the power of the central bank to fix.

Well said.