JGB Watch: Takatoshi Ito Advice to Japan’s Pension Fund: Sell JGB’s Now

Interesting twist of events. 

The chairman of the advisory group to Japan’s Government Pension Investment Fund (GPIF), the world largest retirement pool of retirement savings, advocates that the pension fund substantially reduce their holdings of Japanese Government Bonds (JGB) holdings by selling now.

From the Bloomberg (bold mine) 

The world’s biggest retirement fund needs to cut local debt holdings now because Japan’s government will follow an advisory panel’s recommendation that the wealth manager seek higher returns, the panel’s head said. Bonds fell.

The 124 trillion yen ($1.22 trillion) Government Pension Investment Fund should pare domestic debt immediately to 52 percent of assets, its lower limit, in part by selling to the Bank of Japan, said Takatoshi Ito, chairman of the advisory group. The investments comprised 58 percent of the fund’s holdings as of Sept. 30.

“GPIF needs to start reducing bonds as soon as possible,” Ito said in an interview in Tokyo today. “Now is the right time to sell, while the BOJ is buying.”

The comments show a rift between Ito, an academic handpicked by Prime Minister Shinzo Abe to help overhaul Japan’s state-backed pension plans, and Takahiro Mitani, president of GPIF since 2010. The central bank, which is buying more than 7 trillion yen of bonds a month, will fail in its goal of spurring 2 percent inflation and the risk of owning so much domestic debt was overstated by Ito’s panel, Mitani said this week.

And here is the kicker: (bold mine)

Mitani said in a Dec. 4 interview with Bloomberg News that inflation is less of a risk to GPIF than many people, including Ito, assume, because the fund is a long-term investor and can hold bonds until redemption. Consumer-price increases will probably stay between 0.1 percent and 1 percent, missing the BOJ’s 2 percent target, he said.

Mitani “doesn’t seem to understand that it’s about mark-to-market valuation,” Ito said today.

If GPIF doesn’t start reducing its holdings before inflation takes root in Japan, the fund will exacerbate a slump in bond prices by needing to sell as demand from other investors wanes, Ito said.

“If inflation reaches 2 percent, and yields rise to 3 percent, and then they start trying to sell domestic bonds, we’ll see disaster in the markets,” he said.

10 year JGBs appear to have reacted dramatically to the above comments with a sharp spike in yields.

Meanwhile the yen fell hard (above is the USD-Yen)…

…as Japan’s equity benchmark the Nikkei 225 “celebrated” the yen’s fall ending the session higher by .81%

Even people close to Japan's powers-that-be acknowledge that JGBs signify a ticking time bomb.This also reveals how vulnerable the global financial system is.

More Media Spin on the Philippine Statistical Bubble Economy

Perhaps in an attempt to recoup lost glory from recent political setbacks from the Pork barrel scam and Typhoon Yolanda debacle, the Philippine government’s PR campaign machinery may be working overtime.

Here is an example of a media spin romanticizing the supposed accomplishments from this government, from Bloomberg

Aquino has achieved this transformation by pruning a record $7 billion budget deficit in 2010 to $2.3 billion in the first nine months of 2013, declaring war on rampant corruption, announcing plans to more than double state spending on public works to $19 billion -- or about 5 percent of GDP -- by 2016, and exploiting Filipinos’ English-language skills to promote industries as diverse as casinos and call centers.

Reference points always matter in framing explanations.

The incumbent Philippine President assumed office in June of 2010, which means this administration has been half responsible for the spike in the government budget- GDP ratio during the same year (red arrow). 

So the article implies, first balloon the deficit, then reduce them and then call them “transformation”. Duh.

Second government spending is part of the calculation of GDP so we have a circular logic at work. A boost in government spending bloats GDP (or the denominator) which diminishes the impact of the budget (numerator) thus a lower budget-gdp ratio. 

Based on the above reasoning all this government has to do is keep throwing money at the Philippine economy for the “transformation” to continue.

And throwing money comes with no cost, no risks of higher future taxes, no risks of increase in debt, and no risks of inflation. There exists an endless pool of money to tap. Free lunch lives!

A far better measure would be to look at the Philippine government budget in nominal peso currency terms

Here is the so-called “transformation” of the administration (data based from National Statistical Coordination Board).

We have nominal deficits above pre-2010 levels as of 2012. This has emerged as the rate of government spending far outpaces tax revenue collection. And to consider, we are supposedly in boom days.

Look at the first chart. Government spending has constantly been rising since 1996 whereas tax revenues has been volatile. So what happens when the statistical economy slows? 

Here is a guess: the so-called “transformation” would mean an explosion of budget deficit. Remember the uptrend in government spending has been constant and even accelerating, whereas tax revenues have been gyrating.

So the current administration needs to keep pumping the debt driven statistical bubble in order to look good.

As a reminder, the above data are from the government which hardly anyone tries to vet.

And of course those deficits has been revealed in the country’s rapidly expanding debt levels based in nominal peso terms. Since 2010 total (foreign and local) debt has grown by over 15%. Data above are from NSCB and the Bureau of Treasury

So while the debt to gdp ratio may seem as moderate, largely due to the puffed up denominator from credit bubble in the property and allied industries and from government spending, seen in the context of debt in nominal terms (not as a ratio) debt levels have been expanding rapidly.

The government has been shifting the debt profile from external to internally generated debt.

So what happens if the statistical economy slows? Here is another guess, as budget deficit explodes so will the debt levels.

As for call centers, here is what the British Philippine Outsourcing says “BPO has been one of the fastest growing sectors in the Philippines in the past 7 years”

2013 minus 2010 equals 3 years. The administration is 3 years old, BPO’s have rapidly been advancing for the last 7 years. Thus attributing the triumph of BPOs to the administration's “exploiting Filipinos’ English-language skills to promote industries as diverse as casinos and call centers” represents a rather hyperbolic claim.

As for casinos while I see the industry as a necessary part of leisure, for many patrons, casino can be a vice. As for how vices can signify a boon to long term productivity to an economy signifies another bizarre allegation.

Besides the domestic casino industry appear to be part of the bubble propagation.

Oh by the way, “transformation” seems as another (this time is different) byword, catchphrase or slogan that gives me goose bumps.

English novelist and author Eric Arthur Blair popularly known for his pen name George Orwell warned us on the perversion of thoughts in “Politics and the English Language”

But if thought corrupts language, language can also corrupt thought.

Bitcoin prices almost equal to Gold

Bitcoin closed at 1,236 yesterday

Gold closed at 1,242.5

The gold bitcoin spread has narrowed to amazingly only USD $6.5 from more that $1k just a few months back

While this may look like a bitcoin to gold rotation, this has not been clear.

There has been an ongoing fascinating impassioned debate (especially in the Austrian school of economics) on bitcoin as money and as investment. 

For me since bitcoin is a product of the spontaneous market process and of the information age, whose present role appears to be as an "alternative currency", the markets will ultimately determine bitcoin’s viability and potential role as medium of exchange, in spite of intervention from various governments. Perhaps even a gold-bitcoin tie up could emerge.

As I have been saying the information age will deliver decentralized products, and services (even new financial services such as payment and settlement methods) that will immensely alter the way we do things. This is part of the manifold revolutionary innovations brought about by rapid advances in technology which will be met intuitively by resistance to change. 

Incidentally, Bitcoin seems to have the first mover advantage of the dramatically growing world of cryptocurrencies. It remains unclear how bitcoin will fare against competition over the long run.

But even if I had a bitcoin wallet today, I wouldn’t be buying bitcoin at current prices. Looks like the easy money policy yield chasing induced wild speculation has spread to bitcoin.

Video: Hunger Games' Catching Fire: Is Katniss a Modern-Day Spartacus?

My daughter wanted to watch Hunger Games: Catching Fire, so my wife and I accompanied her. I haven't seen the first episode The Hunger Games in its entirety (I saw only the last segment on cable TV) but headed to the movie with a general idea of the plot. Nonetheless, I came out quite impressed by the second series.  Reason? The movie seem like an allegorical portrayal of real world politics; freedom versus despotic political power

Learn liberty has a video explaining the popular appeal of Hunger Games and related movies: (hat tip Cafe Hayek)

Literature and legend often reflect their culture. Some themes, like that of rulers imposing coercive power, or of individuals rising up against tyrants, are as relevant today as they were in antiquity. Suzanne Collins drew on Greek mythology's story of the Minotaur and on the legend of Spartacus in ancient Rome as she created the Hunger Games series. Her hero, like the heroes in these stories, does not seek her own power or profit but is standing up against a violent and tyrannical government. "People everywhere yearn for the freedom to pursue their own goals and dreams," says Prof. Amy Sturgis. Even though the themes are ancient, stories like the Hunger Games resonate with readers because the anxieties and fears they portray are real and relevant. "These stories aren't just entertainment," Sturgis says. "They are reflections of who and what we are." Do the themes in these stories resonate with you? Why?

Video: This Time is Different 1999 edition: Magical environment for the stock market

The following video interview conducted during the peak of the dotcom bubble or in December 1999 (chart of the Nasdaq below from bigcharts.com), is a classic example of how mainstream ‘experts’ anticipate markets so badly and how the mania mentality (this time is different) operates at the climax of a bubble. 

A reminder of the “this time is different” mindset from Harvard’s Carmen Reinhart and Kenneth Rogoff in their discourse of the 250+ crisis since 1800: (bold mine)

The essence of the this-time-is-different syndrome is simple. It is rooted in the firmly held belief that financial crises are things that happen to other people in other countries at other times; crises do not happen to us, here and now. We are doing things better, we are smarter, we have learned from past mistakes. The old rules of valuation no longer apply. The current boom, unlike the many booms that preceded catastrophic collapses in the past (even in our country), is built on sound fundamentals, structural reforms, technological innovation, and good policy. Or so the story goes

The four deadliest words of investing comes in different variations such as “permanently high plateau”, “As long as the music is playing, you’ve got to get up and dance,” and more…

In the video this has been embodied by “Magical environment for the stock market”

Learning from history, it gives me a creep when I hear personalities publicly declare phrases that resembles the above such as: “Rising Star of Asia”, “We have the kind of economy that every country dreams of” and etc…

(hat tip Zero Hedge)

The Pope and Populist Politics

Pope Francis plays populist politics by supposedly taking on an economic stand.

Some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world,” Francis wrote in the papal statement. “This opinion, which has never been confirmed by the facts, expresses a crude and naive trust in the goodness of those wielding economic power and in the sacra­lized workings of the prevailing economic system.

Harvard’s Greg Mankiw’s reaction (hat tip Mark Perry)

First, throughout history, free-market capitalism has been a great driver of economic growth, and as my colleague Ben Friedman has written, economic growth has been a great driver of a more moral society.

Second, "trickle-down" is not a theory but a pejorative used by those on the left to describe a viewpoint they oppose.  It is equivalent to those on the right referring to the "soak-the-rich" theories of the left.  It is sad to see the pope using a pejorative, rather than encouraging an open-minded discussion of opposing perspectives.

Third, as far as I know, the pope did not address the tax-exempt status of the church.  I would be eager to hear his views on that issue. Maybe he thinks the tax benefits the church receives do some good when they trickle down.

Wall Street’s Mary O’Grady on Venezuela as example of the Pope’s model.

Heavy state intervention was supposed to produce justice for the poor in the breadbasket of South America. We all know how that turned out.

No Christian can doubt the love expressed in the pope's message, which aims to shepherd the flock away from materialism. But the charge that grinding poverty in the world is the outgrowth of "the absolute autonomy of the marketplace" ignores reality. To be sure, even prosperous economies regulate markets. But those that have a lighter touch do better. Human history clearly demonstrates that when men and women, employing their free will and God-given talents, are able to innovate, produce, accumulate capital and trade even the weakest and most vulnerable are better off.

Instead the pope trusts the state, "charged with vigilance for the common good." Why is it then that the world's most desperate poor are concentrated in places where the state has gained an outsize role in the economy specifically on just such grounds?

…

Venezuelans need a moral authority that defends their rights to run a business, make a living, own property and preserve the purchasing power of what they earn. In short, they need a champion for a rule of law that will limit the power of the state over their person. Mother Church ought to be that voice. In siding with Mr. Maduro, however inadvertently, she harms her cause in the region.

New York Stern Professor Mario Rizzo on the Pope’s omission of the scientific dimensions of social policies.

If we move beyond Jesus’ exhortations to individuals about their moral behavior to papal exhortations about government policies to achieve the goal of eliminating or reducing avoidable human suffering, a scientific dimension is added. Policies have consequences, often unintended. The social interaction of people is more than the acts of people taken individually.  There are complexities in these cases subject to scientific analysis.

The ultimate normative goals of action can be based on a religious insight or commitment. (I prefer to say on ethics.) But the means chosen to attain those goals are in large part a scientific question. Thus the proximate goals of action are largely in the domain of science. (An exception is where the means are considered intrinsically evil.)

The point is that policies are means to ends. They are not decrees about how the world should be. They can succeed or fail to achieve the desired moral ends. They can have consequences more undesirable than the problems they purport to solve. It is hard to see what the Church can authoritatively add to these discussions.  Issues like income redistribution, globalization and financial speculation, however, are either above or below the papal pay grade. As Jeremy Bentham said about the state, the job is basically to “be quiet.”

Obviously, for a Church wanting to be relevant in its growth areas in poor, less developed countries, this might not be enough. And yet there is more it can say about the state’s use of coercion, of its violation of the basic principles of just conduct in the creation of crony “capitalist” economies, of its secrecy and lack of accountability, of the use of torture, of trafficking in slaves, and war. The Church has to its credit tackled many of these. It will be seen, I suggest, that in most of these areas governments or others are violating the fundamental principles of individual just conduct: lying, cheating, stealing, physically harming innocent individuals, failing to aid others in distress (as opposed to failing to coerce people to aid others in distress), and even the use of force where turning the other cheek would be appropriate.

But where social policy is concerned, fundamentally scientific issues are crucially involved and the Church has no greater teaching authority than the rest of us. To confuse matters by combining superficial scientific analysis with strictly moral teaching does neither the Church nor the world much good.

Uttering feel good noble sounding populist political rhetoric with hardly a good understanding of the real social consequences from proposed repressive policies will do little to help society. For me, the Pope's major gaffe has been the failure to understand that the state is run by human beings who shares the same vulnerabilities as the rest.

As the great dean of the Austrian school of economics Murray Rothbard admonished:

It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a "dismal science." But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.

Philippine Politics: Low Inflation? LPG Prices Skyrockets

I was stunned to discover that local LPG prices has risen steeply—by over 20%. So I checked on the web to verify, and found this.

From the Inquirer:

Retail prices of liquefied petroleum gas (LPG) grew to as much as P14.30 per kilogram starting on Monday, amid long lines at distribution hubs in Batangas. Tight supply would also lead to price hikes for gasoline and diesel.

More on the coming oil and energy price hikes. From the Philstar.com (bold mine)

Oil prices, meanwhile, are expected to go up again this week as local petroleum players track movements in the global crude market.

The price of diesel is expected to increase by P1.10 per liter while gasoline prices are projected to climb by 30 to 50 centavos per liter, marking the first adjustment for the month of December and the third price hike in three weeks.

Electricity rates are also expected to increase this month and in January 2014 because of the Malampaya shutdown.

“Malampaya is currently on shutdown because it needs maintenance,” Petilla explained.

Manila Electric Co. (Meralco) is expected to announce today the power rates for the month of December.

Electricity rates for the month of November went up by P1.24 per kilowatt-hour (kwh) on the back of maintenance shutdown of the Malampaya Deep Water Gas-to-Power project, which supplies natural gas to three power plants in Luzon. The maintenance shutdown started from Nov. 11 and will run up to Dec. 10.

Petilla said that during the shutdown, Malampaya plants would run on diesel, which is the “most expensive.”

It’s a wonder how the BSP can come up with a CPI of 2.9% to 3.6% when prices of basic goods appear to be running berserk.

Next oil and energy prices are hardly tracking movements in the global energy markets.

US WTIC crude has been in a decline.

Europe’s Brent crude has been drifting sideways albeit a recent uptick.

US Natural gas also reveals a sideways movement. However recent developments exhibit a bounce.

US gasoline has also been in a decline, again with a near term rally.

Again hardly any of the above exhibits the dynamic where domestic energy price inflation are supposed to be reflecting on global developments. 

Instead, “maintenance shutdown” on power generators have been local developments.

Moreover, the article explains partly the supply side aspects without delving deeper into demand-supply relationship.

Be reminded that while fuel, energy and transportation costs may be secondary to food and rental in terms of price sensitivity to domestic consumers (chart from ADB’s Hyun H. Son), we should expect that the former variables to have a spillover effect on food prices. 

I have already previously noted of how the Philippine property bubble has been raising rental prices that will eventually impact “consumer affordability, disposable income and consequently demand.”

So domestic consumers appear to be facing price pressures on these three fronts. The next will be on wages.

The real reason we are seeing incipient signs of the renaissance of the inflation monster has been due to the BSP’s policies. M3 growth has been exploding over the last one year and a half.

We can sum up the above as:

One, this has been a domestic dynamic

Two, domestic consumers are highly price sensitive to food, rental and energy costs.

Three, rising input costs will eventually impede profitability and reduce commercial activities

Four, thanks to the BSP’s policies, exploding M3 means those with access to the banking system have been benefiting more than those without access. Increased demand funded by credit has led to higher CPI.

Rising CPI means growing inequality as the poor will suffer from higher prices of basic goods. 

Fifth, higher CPI is a manifestation of the loss of purchasing power of the peso

Finally, sustained increases in CPI will postulate to greater risks of stagflation that implodes the bubble economy and markets.

As I wrote in 2011 

 

Consumer price inflation which is politically unpalatable especially for the Philippine setting, where the Philippines is shown as the most sensitive to food inflation in Asia (see chart from businessinsider.com), would eventually compel government to drastically tighten.

When this happens depends on the level or degree of rate of increases in consumer price inflation which will likewise be reflected in the interest rates.

But before that happens, expect the private sector to bear the brunt as the principal scapegoat for alleged economic 'greed', when the main culprit is no other than political greed.

And this will be met by a gamut of price controls which only exacerbates the situation.

Like in the 70s, negative real rate regime eventually leads to stagflation.

As the great Austrian economist Ludwig von Mises warned

The problems the world must face today are those of runaway inflation. Such an inflation is always the outcome of a deliberate government policy. The government is on the one hand not prepared to restrict its expenditure. On the other hand it does not want to balance its budget by taxes levied or by loans from the public. It chooses inflation because it considers it as the minor evil. It goes on expanding credit and increasing the quantity of money in circulation because it does not see what the inevitable consequences of such a policy must be. 

Quotation of the Day: Which is more dangerous, inequalities of wealth or concentrations of power?

Those who want to "spread the wealth" almost invariably seek to concentrate the power. It happens too often, and in too many different countries around the world, to be a coincidence. Which is more dangerous, inequalities of wealth or concentrations of power?

This is from American economist, philosopher and author Thomas Sowell in his "Random Thoughts" article at the Townhall.com. 

Bubbles Everywhere: Australian Banks fret over credit fueled property bubble

No, I am not saying this, the Australian banks are.

From the Bloomberg:

Australia’s biggest banks, whose lending standards helped the nation avoid a property crash during the global credit crisis, are raising concern with home loans helping to fuel record house prices.

The proportion of mortgages that represented more than 80 percent of a home’s value -- the loan-to-value ratio -- rose in the third quarter to the highest since the second quarter of 2009,data from the banking regulator show. Mortgages in which borrowers pay only interest also increased to the highest in at least five years, according to the figures.

The Reserve Bank of Australia’s 2.25 percentage points rate reduction in the past two years is luring buyers counting on home prices, which jumped the most in three years in the 12 months through Oct. 31, to extend gains. As the proportion of risky loans climbs -- allowing some people to purchase homes who otherwise couldn’t -- lenders, home-buyers and mortgage insurers are more exposed to any decline in prices.

To give a perspective on what the article have been saying; when Australia’s interest rates had been 'pushed to the floor' in 2008, domestic credit provided by the banking sector markedly jumped.

Bank credit stands at 145.76% of GDP as of 2011 according to Trading Economics, this must be much higher today (update: 154.4% as per World Bank data 2012)

More signs of bubbles; Australian properties have have been transformed into objects of rampant speculation

From the same article. (bold mine)

Mortgages with loan-to-value ratios higher than 80 percent rose to 35 percent as of Sept. 30 at Australia’s four big banks -- Commonwealth Bank of Australia, Australia & New Zealand Banking Group (ANZ) Ltd., Westpac Banking Corp. (WBC) and National Australia Bank Ltd. (NAB) -- the highest since June 2009, according to the Australian Prudential Regulation Authority.

The average ratio at the major banks rose to 67 percent in the third quarter from 65 percent a year earlier and a low of 63 percent in the second quarter of 2009, according to Digital Finance Analytics, the data company.

“It’s not that we’ve changed any of our policies, but the mix of demand is changing,” Phil Chronican, chief executive officer of ANZ’s Australian business, said in an interview in Sydney on Nov. 27. “More people are trading up and people who trade up tend to go for higher loan-to-value ratios.”

ANZ’s average ratio increased to 70 percent in the six months to Sept. 30, from 64 percent a year earlier, according to regulatory filings.

The big four banks held 85 percent of the country’s A$1.2 trillion ($1.1 trillion) of outstanding mortgages in September, according to the banking regulator…

Aside from existing home owners trading up, investors are also piling in. In New South Wales, the country’s most populous state, investor mortgage approvals accounted for about 40 percent of all home loans by value, the highest since 2004, the RBA said in its semi-annual Financial Stability Review on Sept. 25. The average LVR on loans to this group has risen to about 80 percent from about 60 percent in 2009, according to Digital Finance.

Investors are betting on further capital gains after house prices started to rise in early 2013.

Australia’s property bubble (as measured by the NSW Sydney index as of March 2013) has coincided with a firming of the Aussie dollar…

This has partly been due to foreign funds chasing the property bubble…

 

The latter two charts represents the survey of foreign flows and the distribution of foreign flows in Australia based on a report conducted by the Financial Services Council and The Trust Company (2011)

And the property boom has been overvaluing the domestic factors of production. This has partly been manifested by the soaring of producer’s prices. The growth in Australia’s producer prices have been magnified since 2008

Australian productivity has grown by only 24% since 1998…

however, Australian wages has nearly doubled over the same period.

The differentials can be construed as the bloating of wage rates engendered by Australia’s bubble policies.

It’s not just a property bubble but could be a stock market bubble as well. The Aussie S&P ASX 200 now drifts at near recent highs post 2007. If measured by the ASX Ltd. or the Australian stock exchange, the firm's PE ratio stands at a dear 18.84 in the backdrop of zero bound rates

Properties and stocks which are titles to capital goods have been the main beneficiaries of credit inflation.

Bubbles can last until it collapses on its own weight or when the inadequacy of resources will get reflected on interest rates.

Yields of Australia’s 10 year bonds have been on an uptrend since Bernanke’s QE 3.0 in September of 2013

So Australia's banks have been right to worry, a sustained insurrection by global bond vigilantes threatens to expose on Australia’s massive malinvestments.

Bond Vigilantes: US Banks hoard Cash, shuns US Treasuries

Another very interesting development. US banks have reportedly shunned US Treasuries in favor of stashing cash.

From Bloomberg:

Never before have America’s banks been so wary of risking their cash deposits on U.S. government debt.

After holdings of U.S. debt surged to a record $1.89 trillion in 2012, lenders from Citigroup Inc. to Bank of America Corp. and Wells Fargo & Co. (WFC) are culling for the first time in six years and amassing dollars. Banks’ $1.8 trillion of the bonds now equal less than 70 percent of their cash, the least since the Federal Reserve began compiling the data in 1973.

With net interest margins falling to the lowest since 2006, banks are spurning Treasuries and hoarding unprecedented amounts of cash on prospects that loan demand will revive as a strengthening economy leads the Fed to reduce its own debt purchases. Five years of cheap-money policies also have depressed yields and made it less attractive for banks to buy Treasuries as a way to bolster income.

Lowest government bond holdings on record…

Banks’ stakes of Treasuries and federal agency bonds have declined more than $80 billion in 2013, data compiled by the Fed show. That would be the first annual decrease since 2007. At the same time, cash held by banks has surged by a record $882 billion this year to an all-time high of $2.59 trillion.

Government bonds now represent 69 percent of banks’ cash, which would be the lowest on record and the first time lenders ended a year with a smaller proportion of U.S. debt relative to cash since 1980, the data show. Banks’ holdings of assets consisting primarily of municipal bonds, asset-backed securities, company debt and equity investments have also risen.

Some observations

US Banks have now been lending to Wall Street at a record pace. 

Banks holdings have rotated from USTs into cash but also partly into equities.

Banks appear to be sensing trouble with the US treasury markets as indeed cash assets of all commercial banks have spiked to unprecedented levels.

US treasuries (USTs) have mainly been supported by foreigners (mostly by the Chinese and the Japanese) which has staved off a bond market rout. (Data from the US Treasury TIC)

I argue that the behind the controversial Senkaku island dispute has been the politics of US Treasury holdings by China and Japan or the financing of the US government spending.

You see Japanese and Chinese record holding of USTs comes amidst a partial recovery from a near term decline in the overall purchases of USTs by foreigners. This means that in terms of foreign holdings, USTs has been essentially a Chinese-Japanese affair. 

Yet if the Chinese government makes good on her threat to trim holdings of USTs, along with a continuing decline of UST holdings by most of foreigners (ex-Japan), and if US banks persist to reduce exposure then this leaves the US Federal Reserve as the buyer of last resort.

The Fed now owns a third or 32.47% of the 10 year UST equivalent according to the Zero Hedge

This tell us that there will hardly be any taper, because a taper means a dearth of buyer of USTs which also extrapolates to a bond market disaster.

Lastly the above report seems as partial vindication to what I wrote on USTs 2 weeks back

Mr. Bernanke’s tapering bluff was called last September.

Aside from tapering expectations, rising rates of US treasuries (USTs) have been partly reflecting on a combination of the following factors

-inflationary boom gaining traction which has spurred accelerating demand for credit thus pushing up interest rates.

-erosion of real savings or the diminishment of wealth generators or growing scarcity of real resources due to the massive misallocation of resources prompted by central bank inflationist policies.

-diminishing returns of central bank policies where continued monetary pumping has led to higher rates.

-inflation premium, despite relatively low statistical CPI. Perhaps markets have been pricing inflation of asset bubbles

-growing credit risks of the US government

-Triffin Dilemma or Triffin Paradox where improving US trade deficits have been reducing US dollar liquidity flows into the global economy.

Any astute observer will realize that a single policy mistake can bring--the entire house of cards standing on a credit bubble--crumbling down.

US Black Friday Sale Disappoints

Very interesting. Stocks zoom to record levels as Black Friday holiday sales disappoints.

From Bloomberg:

The average U.S. shopper spent less during the Black Friday weekend than last year, according to a survey commissioned by the National Retail Federation.

Consumers spent $407.02 on average, a 3.9 percent decline from $423.55 last year, Washington-based NRF said in an e-mailed statement. From Thanksgiving Day through planned trips today, the number of Americans who shopped at stores and websites rose 1.4 percent to 141 million for total spending of $57.4 billion, according to the survey of more than 4,400 people by Prosper Insights & Analytics.

More signs of parallel universes brought about by central bank policies