Crashing Oil Prices: OPEC Deadlock, Shale Bubble, Global Liquidity and Philippine OFWs

I recently pointed out that October brought upon us the reality of real time crashes—a dynamic we have not seen since 2008.

In spite of the ECB-PBOC-BOJ fueled stock market boom, crashes seem to be still haunting global markets

From Reuters:

Saudi Arabia blocked calls on Thursday from poorer members of the OPEC oil exporter group for production cuts to arrest a slide in global prices, sending benchmark crude plunging to a fresh four-year low.

Brent oil fell more than $6 to $71.25 a barrel after OPEC ministers meeting in Vienna left the group's output ceiling unchanged despite huge global oversupply, marking a major shift away from its long-standing policy of defending prices.

This outcome set the stage for a battle for market share between OPEC and non-OPEC countries, as a boom in U.S. shale oil production and weaker economic growth in China and Europe have already sent crude prices down by about a third since June.

The sustained crash in oil prices (WTI left, Brent right) has just been amazing

On the one hand, we see record stocks in developed economies backed by record debt. On the other hand, we see crashing commodities led by oil prices. So the world has been in a stark divergence in terms of market actions. 

Prior to the US prompted global crisis of 2008, divergence in the US housing and stocks heralded the (2008) crash.  US housing began to decline in 2006 as stock markets soared to record highs. When the periphery (housing) hit the core (banking and financial system), the entire floor caved in.

Today’s phenomenon (crashing commodities as well as crashing Macau stocks and earnings) runs parallel to the 2008 crash, except that this comes in a global dimension.

Bulls rationalize that lower oil price benefit consumption. This is true. Theoretically. But what they didn’t explain is why oil prices have collapsed and now nears the 2008 levels. Has this been because of slowing demand (which ironically means diminishing consumption)? If so why the decline in consumption (which contradicts the premise)? 

Or has this been because of excessive supply? Or a combination of both? Or has a meltdown in oil prices been a symptom of something else--deflating bubbles?

Yet how will consumption be boosted? Is consumption all about oil?

If economies like Japan-Eurozone and China have been floundering because of too much debt or have been hobbled by balance sheet problems that necessitates for central bank interventions, how will low oil prices improve demand? Well my impression is that low oil prices may alleviate only the consumer’s position, but this won’t justify a consumption based boom. 

Again the problem seems to be why prices are at current levels?

From the production side, what collapsing oil prices means is that oil producing emerging markets will likely get hit hard…

The above indicates nations dependent on oil revenues.

Oil production share of GDP won’t be much a concern if not for the role of domestic political spending (welfare state) which oil revenues finance…

At current levels, almost every fiscal position (welfare state) of oil producing nations will be in the red.

This simply means several interrelated variables, namely, economies of these oil producing nations will see a sharp economic slowdown, the ensuing economic downturn will bring to the limelight public and private debt problems thereby magnifying credit risks (domestic and international), a downshift in the economy would mean growing fiscal deficits that will be reflected on their respective currencies where the former will be financed and the latter defended by the draining of foreign exchange reserves or from external borrowing and importantly prolonged low oil prices and expanded fiscal deficits would eventually extrapolate to increased incidences of Arab Springs or political turmoil.

But the implications extend overseas.

I have pointed out in the past that any attempt to use oil prices as ‘weapon’ (predatory pricing) to weed out market based competitors, particularly Shale oil, will fail over long term

But over the interim, collapsing oil prices will have nasty consequences for the US energy sector, particularly the downscaling, reduction or cancellation of existing projects and most importantly growing credit risks from the industry's overleveraging.

The Shale industry has been a part of the US Fed inflated bubble.

Notes the CNBC: (bold mine)

Employment in the oil and gas sector has grown more than 72 percent to 212,200 in the last decade as technology such as horizontal drilling and hydraulic fracturing have made it possible to reach fossil fuels that were previously too expensive to extract. In order to fund the rapid growth, exploration and production companies have borrowed heavily. The energy sector accounts for 17.4 percent of the high-yield bond market, up from 12 percent in 2002, according to Citi Research.

Falling oil prices will increase credit risks of US energy producers, from the Telegraph

Based on recent stress tests of subprime borrowers in the energy sector in the US produced by Deutsche Bank, should the price of US crude fall by a further 20pc to $60 per barrel, it could result in up to a 30pc default rate among B and CCC rated high-yield US borrowers in the industry. West Texas Intermediate crude is currently trading at multi-year lows of around $75 per barrel, down from $107 per barrel in June.

Collapsing oil prices will thus prick on the current Shale oil bubble.

But the basic difference between oil producing welfare states and debt financed market based Shale oil producers have been in the political baggage that the former carries. 

The current bubbles seen in the energy sector implies that inefficient producers today will simply be replaced by more efficient producers overtime. The industry will experience a painful market clearing adjustment process but Shale energy won’t go away.

The damage will be magnified in terms of political dimensions of welfare states of oil producing nations.

And as previously noted, the non-cooperation or perceived persecution of rival oil producing nations will have geopolitical consequences. There may be attempts by rogue groups financed by rival nations to disrupt or sabotage production lines in order to forcibly reduce supplies. This will only heighten geopolitical risks.

In addition, since forex reserves of producing nations will be used to finance domestic welfare state and defend the currency, such will reduce liquidity in the system

As the Zero Hedge duly notes: (bold italics original)

As Reuters reports, for the first time in almost two decades, energy-exporting countries are set to pull their "petrodollars" out of world markets this year, citing a study by BNP Paribas (more details below). Basically, the Petrodollar, long serving as the US leverage to encourage and facilitate USD recycling, and a steady reinvestment in US-denominated assets by the Oil exporting nations, and thus a means to steadily increase the nominal price of all USD-priced assets, just drove itself into irrelevance.

A consequence of this year's dramatic drop in oil prices, the shift is likely to cause global market liquidity to fall, the study showed.

This decline follows years of windfalls for oil exporters such as Russia, Angola, Saudi Arabia and Nigeria. Much of that money found its way into financial markets, helping to boost asset prices and keep the cost of borrowing down, through so-called petrodollar recycling.

But no more: "this year the oil producers will effectively import capital amounting to $7.6 billion. By comparison, they exported $60 billion in 2013 and $248 billion in 2012, according to the following graphic based on BNP Paribas calculations."

In short, the Petrodollar may not have died per se, at least not yet since the USD is still holding on to the reserve currency title if only for just a little longer, but it has managed to price itself into irrelevance, which from a USD-recycling standpoint, is essentially the same thing.

According to BNP, Petrodollar recycling peaked at $511 billion in 2006, or just about the time crude prices were preparing to go to $200, per Goldman Sachs. It is also the time when capital markets hit all time highs, only without the artificial crutches of every single central bank propping up the S&P ponzi house of cards on a daily basis. What happened after is known to all...

"At its peak, about $500 billion a year was being recycled back into financial markets. This will be the first year in a long time that energy exporters will be sucking capital out," said David Spegel, global head of emerging market sovereign and corporate Research at BNP.

Spegel acknowledged that the net withdrawal was small. But he added: "What is interesting is they are draining rather than providing capital that is moving global liquidity. If oil prices fall further in coming years, energy producers will need more capital even if just to repay bonds."

In other words, oil exporters are now pulling liquidity out of financial markets rather than putting money in. That could result in higher borrowing costs for governments, companies, and ultimately, consumers as money becomes scarcer.

It’s interesting to note how some major oil producers have seen some major selling pressures in their stock markets…

Kuwait Stock Exchange

Saudi Arabia’s Tadawul

Oman’s MSM

Nigerian stock Exchange

The pressures have likewise been reflected on their currencies: USD-Kuwait Dinar, USD-Saudi Riyal and Nigeria’s Naira.

For the populist Philippine G-R-O-W-T-H story, if the Middle East runs into economic and financial trouble or if the collapse in oil prices triggers the region’s bubble to deflate, then how will this translate into OFW “remittance” growth? The largest deployment of OFWs  has been in the Middle East. Or is it that OFWs are immune to the region’s woes?

Interesting.

Geopolitical Risk Theater Links: US Aid to Ukraine Army Revealed; the Sinatra Doctrine, Drone War Math, and more

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See Quote of the Day: Wall Streeters are there to help themselves make money

Once again some updates on the geopolitical sphere.

1 The proxy battle for Ukraine: Hacked US Documents Said To Reveal Extent Of Undisclosed US "Lethal Aid" For Ukraine Army Zero Hedge November 25, 2014

2 Surgical or indiscriminate bombing? U.S. Drone Strike Math – 41 Terrorists Targeted, 1,147 People Killed Liberty Blitzkreig November 25, 2014

3 Has the ISIS momentum stalled or does the following mark an inflection point? ISIS On The Backfoot? Iraqi Troops Regain Control Of Two Towns In Eastern Iraq From Islamic State Inquisitur November 24, 2014

Also ISIS fails to take Iraq’s oil-rich Kirkuk Alrabiya.net November 26, 2014

4 Russia in isolation? Or has Putin been getting more allies? Hungarian turn towards Russia causing “dismay” in Poland, conservative former PM Buzek reportedly says Politics.hu November 24, 2014

5 Tit for Tat? ; Swedish Spyplane “caught” flying off Russia’s Kaliningrad Oblast The Aviationist November 24, 2014

6 Russia’s Artic deployment; Putin: Russia’s Artic Command to Become Operational in December Sputniknews.com November 24, 2014

7 Will F-22 be enough to strike fear into China’s military? U.S. Air Force deploys F-22 stealth jets to Japan as a deterrence to North Korea and as a show of force to China The Aviationist November 25, 2014

8 More word war on SEA territorial disputes. China Blasts US Comments on Spratlys Project as 'Irresponsible' Defensenews.com November 24, 2014

9 Abenomics has been about the economic theory based on spend spend spend, so what better way to justify these than to raise scapegoat; These Are The High Tech Military Systems Japan Is Purchasing To Counter China Business Insider.com November 26, 2014

10 Putin’s psy war?; Putin Is Waging An 'Ambiguous' War And We've Got No Idea How To Handle It November 26, 2014 Business Insider.com

11 NATO commander itching for a showdown?; Nato commander warns Russia could control whole Black Sea November 26, 2014 Business Insider.com

12 Protectionism represents economic war: How sanctions against Russia are hitting UK businesses BBC.com November 27, 2014

13 Mainland China to unify Taiwan via socio-political means? Special Report - How China's shadowy agency is working to absorb Taiwan Reuters.com November 27, 2014

14 Russia and China’s Sinatra Doctrine? As the U.S. retreats, how far will Russia and China threaten Israel? November 27, 2014 Haaretz.com

How does Frank Sinatra become involved? Rachman notes that the Russian and Chinese exercises come as the Russians and communist Chinese are “pushing for a broader reordering of world affairs, based around the idea of ‘spheres of influence.’” They reckon that they should have what Rachman characterizes as “veto rights” about “what goes on in their immediate neighbourhoods.” Hence the Kremlin’s antsiness at a Ukraine allied with the Free World. Hence communist China’s declaration of an “air defense identification zone” in the East China Sea.

The Obama administration, Rachman notes, has set itself against the idea of spheres of influence….

Against all this America is rolling out what the Financial Times’ columnist likens to the “Sinatra doctrine.” That’s a phrase once used in 1989 by the spokesman for the foreign ministry of a dying Soviet Union. The spokesman, Gennadi Gerasimov, went on the ABC News program “Good Morning America” to declare, “We now have the Frank Sinatra doctrine. He has a song, ‘I Did It My Way.’ So every country decides on its own which road to take.”

15 Cementing the Russia-China alliance, yet more spend spend spend on unproductive killing machines: Russia ready to supply 'standard' Su-35s to China, says official November 25, 2014

Bundesbank Warns of Excessive Risk Taking from Low Interest Rates

More example of what  I call as:   

...global political or mainstream institutions or establishments, CANNOT deny the existence of bubbles anymore. So their recourse has been to either downplay on the risks or put an escape clause to exonerate them when risks transforms into reality

Well, it appears that Germany's central bank, the Bundesbank, has joined the chorus

 

From the Economic Times:

Low interest rates are prompting investors to take too many risks in some asset classes, the German central bank or Bundesbank warned Tuesday.

"There are incentives for investors to engage in riskier behaviour in the current low-interest-rate environment," Bundesbank deputy president Claudia Buch told a news conference on the presentation of the German central bank's annual financial stability report.

If in case one hasn’t noticed, these sort of admonitions from international political agencies have become quite too frequent. 

Why?

Hot: Reversion to the Mean? Philippine 3Q GDP Falls to 5.3%!

Didn’t I warned about this last June?

Let me add to my act as the unpopular spoiler of this boom.

In near unanimity, the public has acquiesced to the narrative that the slowdown in 1Q 2014 annualized growth rates have been an aberration as explained above.

Unfortunately for popular wisdom, there is a possible non-economic, but financial-statistical force lurking behind the shadows. This is called the regression/reversion to the mean.

I also noted that 2Q 6.4% GDP represent an interim bounce: 

And this also means that the reversion to the mean is still in play, as I earlier wrote: if the laws of the regression/reversion to the mean will be followed (even without economic interpolation) then statistical economic growth will most likely surprise the mainstream NEGATIVELY as economic growth are south bound in the coming one or two years, with probable interim bounces.

Of course it's more than just mean reversion, but this would be a topic for another post.

From Bloomberg:

Philippine growth unexpectedly slowed to the weakest pace since 2011 as government spending fell, countering gains in private consumption and industrial production. Stocks slipped.

Gross domestic product increased 5.3 percent in the three months through September from a year earlier, the Philippine Statistics Authority said in Manila today, after rising 6.4 percent in the previous quarter. That is lower than all estimates of 24 economists in a Bloomberg survey.

“lower than all estimates of 24 economists”—when everyone thinks the same then no one is thinking.

Quote of the Day: Wall Streeters are there to help themselves make money

If you have money, you will know one thing about the financial industry. It is largely parasitic.

A parasite attaches itself to you and drains you of your blood. Its interests are at odds with yours.

The stockbroker, for example, wants to encourage you to buy and sell – when that is precisely what you shouldn’t do.

And the fund manager, the dealmaker and the structured products engineer – they all make their money by encouraging you to spend yours… often on things that make little sense.

Wall Street sells dreams… hopes… and pies in the sky.

Sure, its labor force tends to dress well. They often go to the best schools. They are smart. They are presentable. But get close enough, and you will see they struggle to mask the moral strain of flogging hopeless investments to people who they believe were “born yesterday.”

Wall Streeters are not bad people. They are not dumb people. Neither saints nor sinners, they are just like the rest of us. But their industry encourages a huge fraud: That they are there to help you make money.

They are not. They are there to help themselves make money.

How?

By taking it from YOU.

The financial industry is very large and very profitable. The service it pretends to provide is helping to match worthwhile investment projects with the capital they need. The service it actually provides is separating fools from their money.

But the financial industry isn’t equally bad to all comers. It reserves a special zeal for the “suckers.”

(bold and italics original)

This is from Agora Publishing’s founder and president Bill Bonner published at the Wall Street Daily. 

The above is an example of the principal-agent problem or the agency problem as previously discussed. Of course the participants are not just direct intermediaries mentioned above as this should include Wall Street appendages or indirect participants (e.g. information intermediaries etc.), but most importantly it involves the major beneficiaries of "separating fools from their money": specifically governments and publicly listed companies supported by their patron: again the government.

Insider Trading in Chinese Stock Markets? More on Chinese government’s blowing of her Stock Market Bubble

Chinese stocks reportedly surged prior to the announcement of interest rate cuts.

Has this been out of luck or from insider trading? 

The Wall Street Journal reports

A sudden surge in China’s stocks hours before Beijing cut interest rates on Friday has drawn complaints from some investors who suspect that word of the central bank’s surprise move was leaked to the market ahead of time.

Authorities have in recent years sought to crack down on insider trading in the country’s volatile stock markets. But the unusual rally adds to worries the illegal practice remains, giving big profits to those in the know but leaving an unfair playing field for other investors.

Shanghai’s benchmark index started the Friday morning session virtually flat, but after the midday break climbed 1.4% to just shy of its three-year high despite a lack of substantial market-moving news. Trading volume jumped 31% from the previous day.

The cut to borrowing costs was announced at 6:30 p.m. local time in Shanghai, three-and-a-half hours after the market’s close. Stocks in Shanghai rallied a further 1.9% Monday.

It could be combination of luck, momentum and insider trading.

 

But the following paragraph gives us a clue why the Chinese government has been inflating a stock market bubble. (bold mine)

Retail investors, who account for more than 80% of all transactions in China’s stock markets, have long complained that information appears to be disclosed unevenly. Beijing’s policy on approvals for new share offerings, which favors state-run enterprises rather than more profitable and innovative private firms, has attracted criticism as well.

Given that the housing markets have been on a steep decline, the Chinese government hopes that by providing “gains” on speculative activities to retail investors in the stock market, such would create “demand” for housing, thereby cushioning the current pressures on the housing markets. Of course Chinese retail investors have been noted to use levered money in order to speculate on stocks.

So the Chinese government’s cure to the housing oversupply financed by overleverage has been to entice the retail sector to lever up in order to pump a stock market bubble.

Such manipulated boom has been channeled directly via price controls of the IPO markets, and the HK-China stocks connect, and indirectly via stimulus and bailouts

The Chinese government’s push to stoke a stock market bubble via the IPO market can be seen via additional measures--the announced ‘liberalization’ of fund flows from IPOs conducted abroad. 

Notes the Bloomberg:

China scrapped some approval procedures related to initial public offerings, part of government efforts to cut red tape and spur private-sector investment.

Chinese companies no longer need a go-ahead from the foreign-exchange regulator to bring back money raised in overseas share sales, according to a State Council statement posted on the central government website today and dated Oct. 23. The government will also cancel the certification process for sponsor representatives, a qualification for investment bankers overseeing domestic IPOs, the statement shows.

Making it easier for companies to send proceeds back home may encourage more overseas share sales, easing the backlog of applications for domestic listings

As one would note, the Chinese government has been so desperate to secure funds that they now resort to “liberalization”, which unfortunately when things fail, will get the blame. 

In addition, given the colossal debt by local governments (estimated at $3 trillion as of June 2013) inflating stocks in favor of state-run enterprises as I noted last weekend is a sign that “Chinese government wishes to find alternative avenues for overleveraged companies to access funds”

China’s State owned enterprises according to Wikipedia are “governed by both local governments and, in the central government, the national State-owned Assets Supervision and Administration Commission” or are owned by the local, provincial, and national governments.

The thrust  of the Chinese government hasn’t been to generate real economic growth, but as signs of desperation, to inflate substitute bubbles in the hope to buy time, to meet political goals in the context of statistical growth and of a miracle.

Essentially, the Chinese government’s therapy to the problem of addiction has been to provide more of the substances which one has been addicted to. Doing the same thing (in a slightly different form) over and over again

Oh, those charts above shows resemblance with the “afternoon delight” in the Philippine stock exchange. The difference is that the above may have been a one day event in the Middle Kingdom but in the Philippines has become a norm. 

As a side note: Philippine stock operators have been visibly hurt in their plans to break the 7,350 from a ‘dump’ by an unexpected participant/s at the last minute, so they have come back with vengeance this morning with a relentless raw emotion driven manic buying episode to push index above 7,350. 

As historian Charles Kindleberger once noted of the hallmarks of manias (or market tops): The propensities to swindle and be swindled run parallel to the propensity to speculate during a boom…And the signal for panic is often the revelation of some swindle, theft, embezzlement or fraud. 

How germane this has been today.

Geopolitical Risk Theater Links: Iran Talks Extended, Defense Sec Hagel Fired, Neo-Nazi Risk? and more...

To my valued email subscribers 

The following  posts will not be included in your mailbox. So if you wish to read them kindly pls just click on the links

-ADB Warns (Again) on Rising Risks!

-Doubling Down on Hope Based Policies: EU Plans to Turn $26 Billion Into $390 Billion

Back to regular programming

Some interesting geopolitical articles:

1 Small progress between US-Iran: Iran Nuclear Talks Extended 7 Months; $700 Million In Monthly Sanctions Lifted November 24, 2014 Zero Hedge

2 China as galvanizing force? : India-Pakistan Sparring Opens Door for China in South Asia Bloomberg.com November 25, 2014

3 NATO encirclement strategy: NATO Jets Surrounding Russia: Before And After November 24, 2014 Zero Hedge

4 Europe’s tinderbox: Mapping Recent "Incidents" Between Russia And NATO November 24, 2014 Zero Hedge

5 Testing ASEAN’s response: China Said to Turn Reef Into Airstrip in Disputed Water New York Times November 23, 2014

6 War is business; UK approved Israeli arms deals worth £7mn in lead-up to Gaza conflict RT.com November 24, 2014. It’s really more of a racket.

7 Russia seals pact with Georgia’s breakway region. Getting more allies to counter NATO?: Pact Tightens Russian Ties With Abkhazia New York Times November 24, 2014

8 Despite some aerial incursions by Russian jet, Finland to stay neutral: Finland joining NATO would alienate Russia – President Niinisto RT.com November 25, 2014

9 Neo Nazis are a threat?: Ukrainian neo-Nazism threatens to spread across Europe – Russian diplomat RT.com November 24, 2014

10 Indian government itching to have a stealth fifth-generation fighter aircraft (FGFA); Can not keep waiting for stealth fighter, India tells Russia The Times of India November 25, 2014

11 The military oligarchy prevails as the risk of a world at war heightens: Secretary of Defense Chuck Hagel Fired Mises Blog November 24, 2014;

Writes Ryan McMaken

Now it appears that the truly important players in US defense policy — the weapons manufacturers and financiers who benefit most from an "active" foreign policy — have gotten their way. Hagel, of course, knows that the United States is broke and relying largely on monetized debt to pay the bills. At the same time, it's his job to keep the military bureaucrats who lobby continuously for endless spending (i.e., the "generals") while also pleasing "private" contractors like Lockheed Martin who live fat and happy off the sweat of taxpayers.

Hagel was expected to be something of a budget "cutter," (the DC version of "cuts" which are slight reductions in spending growth) and it was he who presided over the DoD during the final days of the sequestration debate during which the military and its private sector allies howled over tiny reductions in military growth rates.  The "cuts" seemed politically necessary at the time since Hagel came into office during a transition period when there was not a clear global bogeyman for the US to use to justify unchecked government spending. Now, the generals and corporate lobbyists at Boeing, et al have breathed a sigh of relief as because the so-called Islamic State is the gift that keeps on giving and will allow the military-industrial complex to advocate for utterly unrestrained spending.

Of course, the taxpayers, who were once were fleeced to create and arm  ISIS at first, will now be charged to disarm it (or so the administration says).  

The landscape has greatly improved from the perspective of military spending, and Hagel can now be replaced with someone more adept at shoveling cash to powerful interest groups whom we will later be told we must thank for defending freedom.

Phisix: Marking the Close: A dose of own medicine

Someone or some entities decided to give stock market “bull” operators the proverbial dose of one’s own medicine 

The ritualistic modus to massage stocks higher after the lunch-break or what I call the ‘afternoon delight’ was in motion once again.

For most of the AM session, the Phisix had been down by about the same degree as with the session’s end.

In the PM session, the massaging of the domestic index peaked at the last minute, which was the highest level for the PM session and second highest for the day.

Then, I expected the Phisix to close by at least 7,350 given their previous actions.

To my surprise, someone or some entities unloaded a huge amount of index issues, not only to reverse the gains, but importantly to drive back the index to the session’s low. 

Today’s volume was at a hefty Php 15.9 billion based on PSE’s quote with a miniscule of special block sales. 

Today had been a reverse of marking the close...in favor of sellers! (chart from technistock)

During the index guidance 'afternoon delight' phase only the holding and the property sectors were in the red (marginally). By the session's close, all sectors, except for the mining and oil, in losses.

What’s even more remarkable has been the conduct of the index management.

BDO Unibank BDO took the biggest load of the push, gained about an astounding 4.5% at the peak. 

BDO’s share of the index at the close of the session has been at 5.47%  (chart from colfinancial)

The unknown seller/s simply disgorged BDO’s record high shares to erase the bulk (80%) of today’s gains. BDO still closed up .92%

Complimenting BDO had been the  two consumer favorites (and two of the most expensive issues) Jollibee Foods (JFC) and Universal Robina (URC).

Ironically, what went up came down fast. Both shares made a round trip to close significantly down by 1.16% and 1.55% respectively.

And the show won’t be complete without the participation of the biggest property company, Ayala Land (ALI). ALI rallied from the depths but stayed down (.28%) for the day. ALI wasn’t a participant in the rare seller incited “marking the close”.

All four companies accounted for 22.45% of the Phisix basket (based on today's closed).

This is interesting because the last two days marked the fourth attempt this year (since September) by the bulls to infringe into the 7,300-7,400 territory only to be pushed back.

This won’t likely be the last though. Given the global risk ON environment, I expect more attempts to be made. Expectations, for instance, of the 3Q GDP figures by the week’s end will likely spur such activities.

Whether or not a successful breach occurs isn’t the issue. This isn't about boundaries. Rather the  primary concern is the degree of risks from overvaluations, overleveraging and overconfidence—in short, a mania.

As the BSP chief recently warned of irrational exuberance: “While we have not seen broad-based asset mis-valuations, the BSP remains cognizant that keeping rates low for too long could result in mis-appreciation of risks in certain segments of the market, including the real estate sector and the stock market as markets search for yield.”

And as I have pointed out before, the past secular stock market cycles (1965-1985 and 1986-2003) have shown breakouts from major resistance levels from the most recent highs during market tops, had only been followed by collapses. This time won’t be different.

The lesson of which is: the higher the Phisix the greater the crash. 

Add to this manic phase has been the growing incidences to engage in market control, which signifies also a crucial sign of overtrading.

Nonetheless it’s a curiosity to see today’s index engineering scheme upended.

Japan 2014 Elections: PM Abe’s Crafty Strategy to Win Elections

Last weekend, I noted that Japan’s PM Shinzo Abe wanted to portray that by winning the snap elections in December, his victory would represent a popular mandate on Abenomics. 

Yet any such victory would represent a cunning skullduggery of the average Japanese.

With reference to the 3Q GDP I wrote, (bold original)

the lift from government spending means BIGGER BUDGET DEFICITS—(see right window from the Ministry of Finance) as tax revenues swoon due to recession while public spending surges.

And this would pressure Japanese politicians to impose even HIGHER TAXES in the FUTURE.

And this is why PM Abe has opted to dissolve the parliament last week where elections are likely to be held possibly in mid-December. PM Abe has emphasized that the elections will be a mandate on Abenomics: "I want to make it clear through the debates during this general election, whether our economic policies are right or wrong, or if there is no other choice available to us" he said, "I will step down if we fail to keep our majority because that would mean our 'Abenomics' is rejected," the prime minister added.

The idea for the swift or snap elections may be to reduce campaign period for the opposition. So PM Abe will rely on his machinery and from his residual political capital to get a mandate. PM Abe seems confident to win from a campaign blitz against disorganized opposition.

Here is how the Japanese elections has been shaping up as pointed out by the International Business Times:

1 Uninterested electorates 

Japanese voters may stay home for the Dec. 14 snap parliamentary elections called by Prime Minister Shinzo Abe last week, which many see as a referendum on his “Abenomics” economic policy. The election's timing has confounded some Japanese. Experts said Abe called the “referendum” to catch the opposition off guard and strengthen his justification for the policies before he and Abenomics became too unpopular to win another election.

Only 65 percent of voters in a poll published Sunday by the Yomiuri daily newspaper were interested in voting in the mid-December elections, according to Reuters.

This just goes to show how PM Abe will ram Abenomics down the throats of the unfortunate citizenry. This is a sign of desperation. This also gives a clue why those tax promises--delay in sales tax and cutting corporate taxes--may not be fulfilled once PM Abe gets his mandate.

2 PM Abe’s Pearl Harbor strike against the opposition

Abe’s Liberal Democratic Party heads into the election with the support of 37 percent of voters who participated in a poll by the Nikkei Business Daily and TV Tokyo over the weekend, despite Abe’s low approval ratings. Just over half of Japanese voters oppose Abe’s economic policy and only a third support it.

Japanese voters have few alternatives. The LDP’s main opposition party, the liberal Democratic Party of Japan, had the support of only 10 percent of polled. The surprise call for election has caught Abe's opposition unprepared to launch a proper campaign, experts said.

Still, 45 percent of voters in the Nikkei and TV Tokyo poll were undecided, possibly indicating they still need to be convinced of Abenomics, which Abe undertook following his appointment in 2012. The Japanese economy contracted 0.4 percent in the third quarter of this year following a second-quarter shrink of nearly 2 percent.

PM Abe exudes overconfidence. 

The most likely part of the grand insidious scheme to secure such mandate would be for the administration to continue to push higher Japan’s stock market in order to generate popular appeal.

But as pointed out in the past, only about 20% of Japan’s population are likely to benefit from this, which comes at the expense of a much larger segment of society who suffers from a weaker yen and more importantly a reduction of purchasing power.

The distribution of popularity numbers above seem to indicate on this (more than half opposed, a third support).

And notice too that in terms of elections undecided voters have been reported at 45%. If accurate, then this would account for  a substantial number. What if the  “over half of Japanese voters” who “oppose Abe’s economic policy” make up the gist of undecided voters? What if the current recession deepens enough to influence these undecided to vote against the administration despite the unpopular opposition? This choice between the devil and the deep blue sea signifies a huge gambit for Abenomics.

So PM Abe will have to increasingly depend on his machinery to “do whatever it takes” to get the job done and secure his desired mandate.

This should be a wonderful example of how elections are about egregious manipulation of the public.

As New York University’s Mario Rizzo wrote: The will of the people is a construct that is quite malleable to the political purposes of whichever group is better at manipulation

Yet despite PM Abe’s overconfidence and the consensus expectations of  a status quo--back to the yen and stocks--what happens if a black swan event happens—where PM Abe losses? Will there be a financial earthquake in Japan that may spillover to the world?

ADB Warns (Again) on Rising Risks!

More example of what  I call as:  global political or mainstream institutions or establishments, CANNOT deny the existence of bubbles anymore. So their recourse has been to either downplay on the risks or put an escape clause to exonerate them when risks transforms into reality

I posted that the Asian Development Bank issued a sugarcoated and timid warning on the risk environment last September. 

TODAY, again the ADB discreetly raise the issue of RISING debt loads in the face of GROWING risk in their press release of ADB's Asia's Quarterly bond report: (bold mine)

Emerging East Asia’s local currency bond markets are resilient but a faster-than-expected US interest rate hike and a stronger dollar could pose problems, says the Asian Development Bank’s (ADB) latest Asia Bond Monitor.

“Higher US rates and a stronger dollar could prove to be a challenge given increased foreign holdings of Asia’s bonds, which could easily reverse, and record US dollar bond issuance by the region’s companies,” said Iwan J. Azis, head of ADB’s Office of Regional Economic Integration.

US dollar debt becomes more expensive to service in local currency terms when the dollar appreciates.

The quarterly report notes other challenges from tightening liquidity in the region’s corporate bond markets as Basel III requirements deter banks from holding large bond inventories, and a weaker property market in the People’s Republic of China (PRC), given many property developers there are highly indebted.

Markets are currently anticipating that the US Federal Reserve will increase interest rates in June 2015 but recent economic data suggest the economy is improving faster than anticipated. The US dollar, meanwhile, has appreciated against most emerging East Asian currencies recently, and monetary tightening would likely see it rise further. The Korean won has depreciated the most, falling 5.7% versus the US dollar between 1 July and 31 October.

Foreign holdings remained stable in most of emerging East Asia in the third quarter of the year although they ticked up in Malaysia and hit record highs in Indonesia. At the end of June, the share of foreign investment in Malaysia’s government bonds was 32.0% versus 30.8% at the end of March. In Indonesia, foreign investors held 37.3% of outstanding sovereign bonds at the end of September, up from 35.7% at the end of June.

Translation for the last paragraph: Beware the precipitate change of sentiment that could result to a portfolio foreign exodus stampede 

Rising Risk as emerging Asia’s Debt Balloons:

Despite the risks, emerging East Asia’s local currency bond markets continue to expand. By 30 September, there were $8.2 trillion in such bonds outstanding, 3.1% higher than at the end of June and 11.3% more than a year earlier. The fastest-growing markets on a quarterly basis were Singapore, the PRC, and Indonesia.

As I previously noted: So the ADB reluctantly joins the "warning" chorus, most probably intended as an escape outlet. So if a black swan event happens the ADB can easily say, see "I warned about this"!

As Aldous Huxley once warned: Facts do not cease to exist because they are ignored

Doubling Down on Hope Based Policies: EU Plans to Turn $26 Billion Into $390 Billion

The other day I wrote:

Finally, observe that the Eurozone’s current ferocious stock market rally comes in the face of a frantic doubling down on policies by the ECB—two interest rate cuts, negative deposit rates, TLRO, QE based on covered bonds and asset bonds with promises to include corporate bonds and sovereign debt.

While stock markets have been on a sizzling winning streak, EU politicians-bureaucrats have been working round the clock to “jumpstart” the region's faltering economic growth by throwing “free money” and by promising to dispatch even more money at the privileged segments of the economy.  

Funny but aren’t stocks supposed to function as discounting mechanism on future income streams? Apparently this doesn’t seem to be the case anymore, as bad fundamentals or news has now become a fodder for manic buying.  This means stock markets, like Pavlov’s dogs, have become “conditioned” or programmed to exercise reflex buying in response to HOPE from political canard. Stock markets have become propaganda tools for the government.

And yet again we see dangling of even more HOPE based policies in the face of economic deterioration.

From the Bloomberg:

The European Union is planning a 21 billion-euro ($26 billion) fund to share the risks of new projects with private investors, two EU officials said.

The new entity is designed to have an impact of about 15 times its size, making it the anchor of the EU’s 300 billion-euro investment program, according to the officials, who asked not to be named because the plans aren’t final. European Commission President Jean-Claude Juncker is due to announce the three-year initiative this week.

The commission will pledge as much as 16 billion euros in guarantees for the vehicle, which will also include 5 billion euros from the European Investment Bank, the officials said. Loans, lending guarantees and stakes in equity and debt will be part of its toolbox, with the goal to jumpstart private risk-taking so that stalled projects can get off the ground.

Juncker’s investment plan aims to combine EU resources and regulatory changes “to crowd in more private investment in order to make real investments a reality,” EU Vice President Jyrki Katainen said on Nov. 14 in Bratislava. The plan is one element of the EU’s economic strategy and “not a magic wand with which we will be able to miraculously invest ourselves out of a difficult economic climate,” he said.

Europe is struggling to spur economic growth as it emerges only slowly from waves of crisis. The 18-nation euro area is forecast to see growth of just 0.8 percent this year, according to EU forecasts, while the region’s unemployment rate of 11.5 percent masks rates of about 25 percent in Greece and in Spain.

The question is where will the money come from? Who will finance such grandiose plans? And by how?

Analyst David Stockman aptly explains why such political turning lead into gold is just another debt financed flimflam or a “Keynesian paint-by-the numbers” “shell game” (bold mine) [bold mine, italic original]

Are they kidding? Thanks to the Draghi Put (“whatever it takes”) and the hedge fund gamblers who have gone all-in front running the promised ECB bond-buying campaign, this very morning the corrupt and bankrupt government of Spain can borrow all the money it could possibly need for infrastructure at hardly 2.0% for ten years. And any healthy German exporter or machinery maker can borrow at a small spread off the German 10-year bond which is trading at 73 basis points. For all intents and purposes, sovereigns of any stripe and reasonably healthy businesses in most parts of Europe can access capital at central bank repressed rates which are tantamount to free money.

And, yet, these fools want to bring coals to Newcastle. Well, its actually worse than that because not only does Newcastle not need any coal, but the impending “Juncker Plan” doesn’t include any new coal, anyway!

In fact, not a penny of the $400 billion is new EU cash: Its all about leverage and sleight-of-hand. Thus, having apparently failed to notice that most of the sovereigns which comprise the EU are already bankrupt, the Brussels bureaucrats plan to conjure this new “stimulus” money at a 15:1 leverage ratio. That is to say, the actual “capital” under-pinning approximately $375 billion in new EU borrowings amounts to only $26 billion.

But wait. The EU is self-evidently broke—that’s why its dunning Mr. Cameron and even its Greek supplicants for back taxes—so where is it going to get the $26 billion of “capital”? Needless to say, an empty treasury has never stopped Keynesian bureaucrats from dispensing the magic elixir of “stimulus” money.

Thus, it turns out that $20 billion of the Juncker Plan “capital” will consist of member state “guarantees”, not cash in hand. And the remaining $6 billion will consist of already existing European Investment Bank (EIB) funds—–money that is available only because the EIB’s  balance sheet is also “guaranteed” by the same bankrupt member-states which don’t have another nickel to send to Brussels in the first place.

This is called a circle jerk in less polite company. And a pointless one at that.

According to the attached Bloomberg story, the $400 billion pot of stimulus will be used for “seeding investment in infrastructure”  and “to share the risks of new projects with private investors”.

Let’s see.  Can even the duplicitous apparatchiks in Brussels believe that the continent is parched for public infrastructure and that this explains Europe’s stagnation? After all, the peripheral countries are not only buried in debt, but also have been inundated over the past two decades with every manner of highways, public transit and other public facilities that EU funds and their own bloated government budgets could buy.

Spain has world class roads going everywhere on the Peninsula, for example, but its problem is want of loaded trucks to utilize them. The same is true in Italy, which has splendid roads, rails, airports and seaports from the Alps to the tip of the boot, but a private economy that is suffocating in taxes, regulation and corruption. Nor can it be gainsaid that France’s high-speed rail system, Germany’s autobahns or Holland’s canals and dykes have been neglected.

Indeed, to a substantial degree Europe’s sovereign debt crisis is owing to the fact that under the tutelage of its Keynesian policy apparatus, it has been absolutely profligate in building infrastructure owned by the public or subsidized in behalf of crony capitalist “partners”. So why at this late stage of the game does Brussels feel compelled to launch a giant financial shell game designed to generate even more unaffordable infrastructure?

The same question holds for private investment. The very idea that the European economies are “under-invested” in private production capacity is truly laughable. What actually occurred after the mid-1990s, as the single market and single currency went into full swing, was a tsunami of private borrowing and investment. 

Between 1996 and 2011, for example, euro bank loans to the private sector nearly tripled, rising at a 7.0% compound rate and leaping from 55% of GDP to 95% during the period. Nor does that include the additional trillions which were raised in the euro and dollar bond markets by business’ located in the EC.

The plateauing since then is self-evidently not owing to the scarcity of capital or borrowers being rationed out of the market by punitively high interest rates. No, the problem is that there are few credit worthy borrowers left who actually need funds for projects that will generate profitable returns.

In short, the “Juncker Plan” is just another installment of the state-driven financialization that has been 180 degrees off-target, and has actually compounded Europe’s economic malaise. The real problem is statist economics—-that is, welfare state subsidies for inefficiency and non-production, dirigisme and financialization.

Bottom line: Government debt financed "investment" guarantees are merely redistribution of resources for the benefit of political authorities and their cronies at the cost of the taxpayer. It is growth for the political institutions and their cronies and hardly for the economy.

More Ghost Projects? China’s $350 million ‘Bridge to Nowhere’

From a post I wrote a few hours back

Last week I noted that state owned companies have been taking over property activities in Guangzhou which should add to the existing glut of inventories. The same article says that: Big-ticket spending is already picking up: Since mid-October, Chinese authorities have approved railway and airport projects valued at 845 billion yuan ($138 billion).

It is unclear whether this has been part of the announced mini stimulus. In the past the Chinese government has vehemently denied that this will be in the same amount of the 2008 stimulus at $586 billion. But when one begins to add up spending here and there, injections here and there, these may eventually lead up even more than 2008

Yet again the Chinese government will be expanding ghost projects just to attain their 7+% statistical growth target.

Well, it  appears that China has a $350 million 'bridge to nowhere'.

According to the New York Post

The bridge was supposed to be a key link for trade and travel between China’s underdeveloped northeast provinces and a much-touted special economic zone in North Korea — so key that Beijing sank more than $350 million into it.

Now, it is beginning to look like Beijing has built a bridge to nowhere.

An Associated Press Television News crew in September saw nothing but a dirt ramp at the North Korean end of the bridge, surrounded by open fields. No immigration or customs buildings could be seen. Roads to the bridge had not been completed.

The much-awaited opening of the new bridge over the Yalu River came and passed on Oct. 30 with no sign the link would be ready for business anytime soon. That prompted an unusually sharp report in the Global Times — a newspaper affiliated with the Chinese Communist Party — quoting residents in the Chinese city of Dandong expressing anger over delays in what they had hoped would be an economic boom for their border city.

The report suggested the opening of the mammoth, 3-kilometer bridge has been postponed “indefinitely.”

While the 'bridge to nowhere' may have a geopolitical component—"Foreign analysts have suggested the apparent lack of progress might indicate wariness in Pyongyang over China’s economic influence in the country, which has been growing substantially in recent years as Pyongyang has become more isolated from other potential partners over its nuclear program, human rights record and other political issues"—it doesn’t negate the fact that taxpayer money and resources had been squandered from central planning miscalculation and from the reckless use of the other people's money.

Also this adds to the growing list of China’s malinvestments or ghost projects.