Phisix 7,700: Deepening Signs of Exhaustion

You can be mostly a marketing firm, or you can be mostly an investment firm.  But you cannot serve both masters at the same time.  Whatever you give to the one priority, you must take away from the other. The fund industry is a fiduciary business; I recognize that that’s a two-part term.  Yes, you are fiduciaries; and yes, you also are businesses that seek to make and maximize profits.  And that’s as it should be.  In the long run, however, you cannot survive as a business unless you are a fiduciary emphatically first. In the short term, it pays off to be primarily a marketing firm, not an investment firm.  But in the long term, that’s no way to build a great business.  Today, tomorrow, and forever, the right question to ask yourselves is not “Will this sell?” but rather “Should we be selling this?”  —Jason Zweig

In this issue

Phisix 7,700: Deepening Signs of Exhaustion

-Phisix: Tepid Signs of Profit-Taking Yet

-Philippine Bonds Rally as Growth Rate of Banking Loans and Liquidity Measures Plummets

-Falling Inflation? Philippine Student Protestors Disagree!

-Hissing Bubbles: Malaysia’s 1MDB, China’s PBoC Panics Again, Yellen’s Irrational Exuberance

-Shopping Mall Vacancies: An Analogy of Denial

Phisix 7,700: Deepening Signs of Exhaustion

Following NINE consecutive weeks of gains the domestic benchmark finally succumbed to ‘profit-taking’. The Phisix gave back 1.21% over the week, reducing year to data returns to 6.92%.

Phisix: Tepid Signs of Profit-Taking Yet

Of course this profit taking dynamic didn’t come without sustained efforts to prop up or massage the index. A day prior to the first decline, index managers used about 4-5 issues to pump the index at the last minute to ensure a fresh record close at 7,800+.

Even Friday’s follow-up profit taking session had a two company pump from the Industrial sector (right window). Friday’s “marking the close” may have been intended to reduce the headline losses of the domestic equity benchmark (left window). (charts from Colfinancial)

What makes this week’s profit-taking week interesting has been that of the remarkable shift in the market’s leadership and some divergence from within the Phisix basket.

The holding sector essentially bore the brunt of the selling.

Early sharp gains from the property sector offset the losses from the 2 day selling. The opposite direction of the property and holding sectors enabled the former to seize leadership.

And because six of the biggest market cap firms (SM, AC, JGS, AEV, AGI and GTCAP) have been from the holding sector, thus the seeming concentration of losses within the top 15 issues.

And save for a few big losers, the latter 15 didn’t seem to share the sentiment of the leaders yet. The latter halve has 8 issues posting gains relative to 7 decliners.

And paradoxically, the biggest property issues posted substantial gains over the week, which meant, again, a takeover of market leadership and at the same time has reduced the intensity of profit taking activities as seen on the headline numbers.

So last week’s profit taking mode looks half-hearted.

Another interesting development has been that charts of many of the major issues have been exhibiting signs of “exhaustion” from near vertical runs.

In the past, parabolic ramps as revealed by forty five or more degree slopes of the three major issues, namely SM, SMPH and AC had been followed by substantial period of declines. 

Property major ALI, on the other hand, appears to be forming a bearish rising wedge pattern. Those wild pumping and pushing seems to have reached their boundaries.

I pointed out last week of the considerable drop in the average peso volume and the average daily trades. Again such points to signs of ‘exhaustion’.

Another market breadth indicator as shown by the advance decline spread has been telling the same story.

Of the 17 trading days prior to Thursday and Friday’s selloff, days where decliners led advancers have dominated by 10 to 6. There was a day which posted a neutral or a zero balance between advancers and decliners.

Now if we include the activities of the last two days, February’s tally would be 12 days where decliners led advances as against 6 in favor of the advancers.

Yet both the charts and market internals tells of the same story, as stated last week, “the bulls have been losing steam”

The overextended push to 7,800 has rendered the Phisix vulnerable to possibly a big correction phase.

It’s a wonder, can the index managers prevent this or defy market forces? Or will they be able to keep the correction stage moderate?

Finally, this week’s tepid profit taking activities hardly changes or dents on the incredibly mispriced securities of the Phisix’s 15 largest companies as revealed by their stratospheric PERs.

What you see in the above are securities priced for perfection with NO margin for errors.

Philippine Bonds Rally as Growth Rate of Banking Loans and Liquidity Measures Plummets

This week’s correction by the Phisix ironically comes with rallies in Philippine bonds and the peso.

Perhaps the bond guys have been reading me so they wanted to prove that everything have been A-OK.

So following last week’s selloff they appear to have embarked on buying activities that has foisted somewhat a reversal of the recent trends.

Yields of short term (3 month and 6 month) bills narrowed steeply while the longer end posted marginal decline in yields. Said different, Philippine bonds rallied with the substance of the rally being at the shorter end.

Nonetheless the result has been to skew the actions of yield curve. While some segment of the yield spread has exhibited signs of modest steepening others remain at status quo.

What makes this even more interesting has been that this week’s rally comes in the light of a sharp downturn in banking system’s loan activities and a further slump in liquidity as measured by the money supply growth rate.

Banking system’s loan activities to the economy continues with its downtrend. Banking loans have dropped by over 2% to 16.01% in January from a revised 18.66% last December. The former December data was at 15.37%. In % terms, this implies that December data has ballooned by 21.4%! This magnifies the decline.

Of the bubble sectors, real estate loans posted slight gains while the manufacturing sector registered a modest increase loan growth, the rest recorded a downturn.

Additionally, monetary liquidity as measured by M3 continues with its freefall. From the BSP[1]: Preliminary data show that domestic liquidity (M3) grew by 7.7 percent year-on-year in January to reach P7.5 trillion. This was slower than the 11.3-percent (revised) expansion recorded in December 2014. On a month-on-month seasonally-adjusted basis, M3 increased by 1.4 percent. Money supply continued to increase due largely to sustained demand for credit. Domestic claims grew by 10.8 percent in January from 17.8 percent (revised) in the previous month as credits to the private sector expanded at a slower pace

Again the revised December data was at 9.6%, thus ballooning the month’s numbers by 17.7%! Like the Banking system loans, the upgrade in December data amplifies the downturn.

It’s just amazing how the BSP makes substantial statistically significant revision.

We’re done with the data, now for the exegesis via the following questions.

Has the effects of the steepened flattening of the yield curve been manifesting itself in domestic credit activities?

What has been the implication of a sustained slowdown by domestic liquidity?

If “Money supply continued to increase due largely to sustained demand for credit” has been a manifestation of a downdraft in the demand for credit, then how will sectors heavily dependent on credit (including the statistical GDP) continue to post G-R-O-W-T-H considering the current trend? Statistical massaging?

If banking profits have been weighted on loans then what if aggregate loans to the clients of the banking system continues to shrivel? Will profits increase or decrease?

How will a sustained slowdown in monetary liquidity support asset inflation? Will asset inflation be funded from savings or loans from non-banking channel? How will a downshift in asset inflation bolster the non-loan aspects of bank revenues or at least maintain them at current rates?

How about bank clients? Have they accumulated enough cash flow and retained earnings or corporate savings to finance current capital expenditures? Or have they been resorting to nonbanking loans (domestic or foreign bonds, intra corporate loans, private placements, offshore banking and non-banking ‘affiliate’ loans) or equity issuance for financing?

Or have these numbers been suggesting of an ongoing material downshift in investment activities?

How about credit quality? Have current cash flows been sufficient to cover existing levels of debt servicing? Despite the slowdown in loans, current rate of loan growth have still been above 2013 levels. Where has all the freshly issued money—which is supposed to represent new purchasing power to finance ‘aggregate demand’—been flowing? Has new loans been about debt rollovers than capex? If not, what explains the downtrend in liquidity growth? Or why has liquidity been shrinking?

The basic question is how has current G-R-O-W-T-H dynamics been financed? The logic presented here simply has been based on ‘follow the money trail’.

Yet haven’t all these hysteric pumping and pushing of financial assets been about expectations of a single directional trajectory for G-R-O-W-T-H? Yet credit and liquidity activities seem to indicate otherwise. Which has been wrong: the current credit and liquidity dynamics or market expectations?

What about the bond markets? Has last week’s rally been about current credit activities? And or has it been about market expectations that the BSP will cut rates given the backdrop of what the mainstream sees as the growing risk of ‘deflation’ menace here and abroad? Will last week’s actions be sustainable?

Falling Inflation? Philippine Student Protestors Disagree!

Philippine CPI numbers have been falling. This may be true for some food and mostly energy related items. But this has certainly been false in terms of education.

Inflation doesn’t seem to be under control when students engage in flash mob dance or skip classes or get involved in various forms of protest against tuition fee hikes. Media says that in 2014 the average tuition fee hike approved by the government (CHED) has been at 8.5%. For this year, media speculates increases from a range of 6% to 13%. My youngest daughter’s tuition increase has been in the upper bound, and that’s for the yearend 2014. The 2015 bill has yet to come.

Yet BSP’s January CPI data shows that education inflation has been at 5.1% year on year based on 2006 prices. Since I have no access to a domestic inflation calculator I can’t make a meaningful comparison because the numbers cited by media are nominal (current) prices. In the US, the Bureau of Labor of Statistics has an inflation calculator.

Nonetheless what I oppose against the BSP data has been that education spending accounts for ONLY 3.36% of their inflation basket. 3.36???!!! I may be wrong, but BSP’s methodology seems to give weight on household education spending based on children enrolled in public schools.

And BSP’s data will hardly reflect on reality for the households who send their children to private schools. In my case, direct education spending accounts for over 20% of my budget even if my burden has been partly mitigated due to a very generous sponsor. Although with my eldest daughter graduating (and possibly joining the workforce…I say possibly because she has been considering to take up postgraduate studies) this year, such onus should decline (but may be offset by coming tuition increases). While I may not represent the average, I suspect a wide divergence between reality and statistics. 

In short, the street protests exposes on the inaccuracies of government statistics.

Importantly this shows of the relative impact of consumer price inflation to households.

Inflation in consumer prices will all depend on the subjective distribution of spending by individuals or by households. Tuition fee increases negatively affects households, like me, where education accounts for a larger share of the budget. So tuition fee hikes essentially absorb or divert whatever ‘savings’ from diminished pressures on food and energy prices which alternatively means pressure on disposable income. Again with spending transferred to ‘needs’ rather than ‘wants’, such price increases will have pernicious effects on spending on leisure activities or even investments.

And this is where nasty effects of inflation takes hold—in the conflicting dimension of expectations between consumers (demand) and the industry (supply) brought about by relative price distortions from previous monetary policies.

With little or no increase in household income, price increases in the “needs” based goods and services, again, means lesser resources to finance “want” activities, such as shopping, eating out, traveling, sports, or gambling, buying real estate or cars or even investing in stocks or bonds or in real business…

This comes as the bubble industries continue with its frantic race to build capacity in expectations of ‘robust’ household activities. This means that the supply side, whose expectations clashes with real developments at the household level, will be competing intensely over a shrinking peso.

And such competition, which has been prompted by continuing price distortions that has been inflating capacity due to entrepreneurial miscalculations, will lead to losses, excess capacity and eventually credit woes and the grand unveiling of the accumulated imbalances.

Of course another likely negative impact from tuition fee hikes will be more dropouts and diminished enrollments. Yet this will put more pressure on public schools to soak up on this disadvantaged group. Consequently, this means pressures on the taxpayers. With the government edict, the Expanded Government Assistance to Students and Teachers in Private Education, or GASTPE, that forces the subcontracting of public school students to the private school in exchange for a paltry subsidy as I previously discussed, this means more tuition fee hikes overtime and subsequently lesser education for the populace.

So the vicious feedback loop between price pressures—from monetary policies AND political interventions—and its ramifications, the subsequent loss of education (qualitative and quantitative) and political pressure suggests that the current dilemma will only spiral.

Sad to say the imbalances in the education frontier will be also exposed when the bubble busts.

Hissing Bubbles: Malaysia’s 1MDB, China’s PBoC Panics Again, Yellen’s Irrational Exuberance

Another interest development: Asian currencies appear to be diverging. Most Asian currencies rallied strongly this week, this has been led by South Korea’s won 1.27%, the Malaysian ringgit 1.17%, Taiwan dollar .9%, Thai baht .65%, Indian rupee .61% and the Philippine peso .34%.

Meanwhile the Indonesia’s rupiah fell .84% to a record low against the US dollar as the Chinese currency the yuan fell .21% to a one year low.

What makes lots of things so interesting has been that some ASEAN currencies have exhibited turmoil as stock markets soar.

This applies to record Indonesian stocks which apparently like the Phisix, backed off the fresh record highs.

Malaysian stocks , as measured by the FTSE KLSE, which has earlier been under pressure has been up 3.4% year to date. Despite the big rally of the ringgit this week, the rally came in response to last week’s collapse (1.89%). The ringgit currently trades at 2008 levels.

Yet Malaysia’s state fund, the 1Malaysia Development Bershad (1MDB) a supposed strategic long term economic development fund, which I wrote about in the past and which carries a debt cross of $11.6 billion, continues to bleed profusely. The 1MDB now has to rely on the Malaysia’s Finance Ministry for debt financing, media expects the government to inject $823 million.

But the above reports was before a fresh exposé that has been out just a few hours back where a well connected tycoon has reportedly masterminded and siphoned out US $700 billion from the company through a joint venture project with Arabian company PetroSaudi.

According to Free Malaysia Today[2] (FMT.com)

The entire joint venture project was conceived, managed and driven through by the Prime Minister’s associate and family friend the party-loving billionaire tycoon, Jho Low,” Sarawak Report said.

Based on a trove of leaked company documents and emails, Sarawak Report said the documents proved that an amount of USD$700 million, supposedly a PetroSaudi loan repayment, “was in fact directed into the Swiss bank account of a company called Good Star, which is controlled by Jho Low”

What makes the coming days interesting will be that of the possible consequences from the coming corruption investigation from the divulged crony deal.

If the financing of the 1MDB will be deferred or ceased entirely, we could possibly see tremors in the credit markets of Malaysia that will be reflected on both the currency and eventually the asset markets. Now the question is, will there be contagion effects through the region?

Additionally, as I pointed out yesterday, China’s property markets seem to have been unraveling faster than the US counterpart that paved way for crisis that culminated with the Lehman bankruptcy in 2008. Although China’s political economy has been distinct from the US, they share one thing, over indebtedness to the extremes.

So the US pre-Lehman episode could serve as a potential roadmap for China’s debt problems. And if there will be some resemblance to it, China might fall into a recession by mid 2016. Of course this is just a guess. There are so many complex developments like serial global easing that could either prolong the day of reckoning or even accelerate it. 

I have also been saying here contra the mainstream belief that Chinese authorities have been massaging the yuan lower to allegedly promote exports, I have been suspecting that the faltering yuan represents signs of capital flight.

Last week, the newspaper of China’s central bank warned that the nation has been “dangerously close to slipping into deflation”, the article talks of the “increasing nervousness in policymaking circles as a sputtering economy struggles to pick up speed despite a raft of stimulus steps”[3]

As I have noted two weeks back, the PBoC seems as in a panic mode. The PBoC has been furiously injecting money into the system and announced the easing bank reserve requirements.

Apparently in the dilemma to either protect the yuan or to keep the bubble from imploding, the Chinese government via the People’s Bank of China panicked again to choose the latter

The PBoC cut interest rate again…yesterday.

Let me quote the Wall Street Journal[4]

China’s central bank cut interest rates for the second time in less than four months, in a fresh sign that the country’s leadership is becoming more aggressive in trying to arrest flagging economic growth.

The rate cut by the People’s Bank of China, announced Saturday, came sooner than some analysts and investors had expected and reflects growing worries over the world’s second-largest economy as it struggles with an array of ills: a slumping property market, more money being sent offshore and growing risks of falling prices that, in effect, are pushing up borrowing costs for businesses.

“Deflationary risk and the property market slowdown are two main reasons for the rate cut this time,” said a central bank official in an interview late Saturday.

There is this misimpression that cutting rates and record stocks have been about growth. Yet the previous series of easing measures hasn’t prevented the “deflationary risk and the property market slowdown” which prompted for the current response. 

What previous actions has done has been to spur a debt financed mania in stocks. What the current easing process will do will be to exacerbate the current predicament as debt will continue to balloon from more debt financed debt rollovers and from asset speculation. All these will hit a wall.

China’s central bank is in a panic. The sentiment has been expressed in the unofficial statement. If deflationary risk and the property market slowdown continues to intensify, expect the PBoC to lose credibility that will be vented on the markets.

Remember, according to the Bank for International Settlements[5], China has become by far the largest EME borrower for BIS reporting banks. Outstanding cross-border claims on residents of China totalled $1.1 trillion at end-June 2014

So the PBOC is confronted by two demons: domestic debt and foreign debt. The PBoC has thrown its dice…domestic debt it will be.

And warnings have not been limited to China.

Despite Ms. Janet Yellen’s optimistic view of the US economy, buried in her Monetary Policy report to the joint US Congress has been 7 paragraphs containing 837 words to warn about the markets irrational exuberance. Her warnings, which curiously have been much lengthier than the 2014 version, have not just been about stocks but also about select credit markets and commercial real estate.

Record stocks in the face of record imbalances at the precipice.

The obverse side of every mania is a crash.

Shopping Mall Vacancies: An Analogy of Denial

Last week I wrote,

Yet shopping malls have become a catechism for many, particularly the participants of the relentless pump and push of asset prices, whereby any criticism has been viewed as impiety thus will be subject to denial or vehemently objected upon without dealing with the basics.

The dilemma has been simple and elementary: what needs to be shown is the balance between the demand and supply side. Said differently, income has to grow faster or at least match the growth rate of credit and supply side.

Let me offer two numbers. Ten and two. If we use the two numbers as relative measurement, you will probably agree with me that ten is larger than two or stated in a reverse lens, two is smaller than ten.

Of course, those numbers have social applications. And such applications will have implications.

Let us apply this to the popular pump and push issues: the shopping mall

Ten… represents the growth rates (at current prices) of the trade industry particularly 9.7% 2013 and 9.1% in 2014. Based on retail trade, 10.8% 2013 and 8.6% 2014. Data from the NSCB.

If you look at the capex plans of major developers and operators expected growth rates have been at least 10% as I pointed out in 2013.

For this discussion, let me grant the oversimplistic popular notion of the “public park model” or traffic equals profits of shopping malls.

Two…represents the growth rate of the Philippine population. Table above from Index Mundi, NSCB data here exhibits the population growth rate.

Because the law of scarcity applies not only to resources but likewise to physical, spatial and time limitations, this means that every second I spend in Mall 1 represents time and effort that will NOT be spent in Mall 2, Mall 3 to Mall nth.

This even applies to stores within the same mall. Every second I spend in store 1 of Mall 1 represents time and effort that will NOT be spent on store 2, store 3 to store nth.

The idea is since people have no supernatural power of omnipresence, there will be opportunity costs. Such opportunity costs will serve as fundamental limits to mall/store traffic.

The above numbers tell us that 2% population growth will mean lesser traffic for the shopping mall industry growing at more than 2%, especially at 5 times the rate of population or 10%.

Or given the above growth rates, the population or traffic density for each mall will grow smaller for every additional mall built.

Here population or traffic density will mean the number of people per mall.

The above table accounts for a mathematical representation of a 5 year population/ traffic density calculated from a population base of 10 million and 10 malls growing at a compounded rate of 10% and 2% respectively (given all things constant—ceteris paribus). 

As one would note by year 5, traffic density will fall by 31.45%!

Perhaps domestic malls will have to rely on tourist. But tourists are also subject to opportunity costs. There are many nations competing to have tourists. And tourist can only appear at one place a given time.

International visitor arrivals grew by 11.28% in 2011, 9.07% 2012, 9.56% in 2013 and 3.25% in 2014. If my eyes are telling me correctly, the trend has been in a decline. Besides, tourism has reportedly accounted for only 4.2% of GDP and if to consider indirect contribution 11.3% of the GDP in 2013 according to WTTC. 11.3% is big but 88.7% is bigger. Yet about half of tourism is from domestic tourists.

Don’t forget that every person at the beach or at the mountains will not be at a shopping mall. So shopping malls will need to get shopping mall tourists and not just tourists.

The numbers and the logic above says that tourism will unlikely support traffic density conditions for malls.

The other alternative is to spike the population. However, current trends suggest for a decline in population growth rates to even fertility rates. Again you may use the government’s estimates for this and see the same trends.

Maybe the mall occult should go forth and multiply quickly. And they should do this fast before time runs out and vacancies geometrically expands.

Yet why should the two numbers become irrelevant if we apply them to the bubble industries like the shopping mall? Because people from the industry say so? Because the politicians say so? Because free lunch can last forever and are immune from even basic math?

Bottom line: For as long as the above dynamics as signified by the two numbers remain as the driving force behind the shopping mall economics, the US dead malls and China’s ghost malls will function as an inevitable prototype for the Philippines.

Let me conclude with the allusion that ‘renovations’ has accounted for the current string vacancies as pointed out by a populist crowd in citation of an opinion by an ivory tower expert from one of the bubble industry.

Such quality of response can be analogized by the following:

Here are two senior citizens in a discussion about age.

Senior citizen Pedro: You know, both of us are growing old so…

Senior citizen Juan (interjects and cuts off Pedro): …Me growing old? You must be kidding? You’re wrong. Don’t you see… My hair is still black!

---

[1] Bangko Sentral ng Pilipinas Domestic Liquidity Growth Eases in January February 27, 2015

[2] Free Malaysia Today Revealed: Jho Low’s hand in 1MDB PetroSaudi deal March 1, 2015 FMT.com

[3] Reuters.com China central bank newspaper warns of rising deflation risk February 23, 2015

[4] Wall Street Journal China’s Central Bank Cuts Interest Rates February 28, 2015

[5] Bank for International Settlements Highlights of the BIS international statistics BIS Quarterly Review December 2014, December 7, 2014

Chart of the Day: China’s Housing Bubble Unraveling Faster than pre Lehman US Housing Episode

Great chart from Fathom Consulting at the Alpha Now Thomson Reuters with the following observation: (bold mine)

Data published on last week showed that house prices have now fallen for nine months in a row – the longest run on record, under this relatively new measure. Mudanjiang, one of the 67 Chinese cities that registered house prices falls over the past twelve months for second-hand residential buildings, experienced a 13.9% fall. The US entered recession around two years after house price inflation had peaked. After nine months of recession, Lehman Brothers collapsed. As our chart illustrates, house price inflation in China has slowed from its peak in January 2014 at least as rapidly as it did in the US.

Should the US housing bubble bust experience serve as a model, then a sustained housing deflation in China means that the latter's economy may fall into recession by mid 2016. 

But if the rate of the unwinding of the Chinese housing bubble accelerates, then this may shorten the time window. 

However, the Chinese government has been preemptively easing. The Chinese government has been joined by many other global central banks who appears to have also been frantically easing. 

Will such joint actions help extend or delay the process? Hmmmm.

It’s a complex world with manifold factors. But the writing is clearly on the wall.

Record stocks in the face of record imbalances at the precipice.

Japan’s “Where is the Recovery” As Seen From Today’s Economic Numbers

Just a few days back I posted here that despite the Japanese equity benchmark,  the Nikkei 225, drifting at fresh 15 year highs and a supposed 4Q 2014 turnaround, an overwhelming number of Japanese—based on a recent survey—have shown skepticism of the much touted “recovery”.

I guess that the skepticism from the ‘man in the street’ can be seen in today’s government economic numbers

All data are from investing.com

Japanese household spending month on month has been on a sharp decline since the BOJ’s pump last November 2014

The decline in Household spending year on year seems at even worst degree than from the Lehman incited global financial crisis in 2008

And the poor showing of household spending chimes with retail activities.  Retail sales (y-o-y) has been sluggish since the 2Q 2014

The deliberate attempt to combust inflation and to tax consumers has led to the distortion of (core) consumer prices…

...that has also been manifested in National CPI

On a month on month basis, only Food has considerably increased (+1.6%). Four out of ten categories posted declines, namely clothes and footwear (-5%), culture and recreation and transportation according to the latest data from the statistics bureau of the Ministry of Internal Affairs and Communications. The rest had zero or marginal increases.

Such are signs of depressed leisure activities from the average Japanese.

And unemployment has spiked in January. Officials rationalize this as “a rise in the number of people seeking jobs”

Nonetheless there seem as one good news.

Industrial production (month on month) rose to its highest level since 1q 2014

However as seen from a longer time frame, since the introduction of Abenomics, industrial production growth rates have been sharply oscillating. In addition, growth expectations for February has been at only .2% and at –3.2% in March, thus hardly a basis for optimism.

Bottom line: Abenomics continues to drive a wider wedge between the real economy and financial assets—a parallel economy.

The above will only add pressures for the BoJ to ease from vested interest groups.

Yet the latest promise by BoJ’s Kuroda to further stimulate has pacified the recent rebellion in the JGB markets. But question is how long will bond vigilantes be kept sidelined without real actions by the BoJ?

Record stocks in the face of record imbalances at the precipice.

Central Bank Easing and Record Stocks: Two different responses to divergent perceptions

There are about 20 national central banks that just eased via cut rates (17), lower reserve requirements, QEs et. al.

Just to be make clear what the streak of central bank rates have been about, I posted below some of the news covering these actions

[all bold mine]

India (January 2015)

From BBC

The RBI cited a "sharper-than-expected decline" in the price of fruits and vegetables since September last year as one reason for the policy shift.

It also said "ebbing price pressures in respect of cereals and the large fall in international commodity prices, particularly crude oil" had played a part in the move.

The RBI has been under pressure from government and businesses to reduce its interest rate to give the struggling economy a boost.

China (February 2015)

Reuters:

China's central bank made a system-wide cut to bank reserve requirements on Wednesday, the first time it has done so in over two years, to unleash a fresh flood of liquidity to fight off economic slowdown and looming deflation.

The announcement cuts reserve requirements - the amount of cash banks must hold back from lending - to 19.5 percent for big banks, a reduction of 50 basis points that would free up 600 billion yuan ($96 billion) or more held in reserve at Chinese banks - which could then inject 2-3 trillion yuan into the economy after accounting for the multiplying effect of loans.

Indonesia (February 2015)

Bloomberg:

The country’s economy shrank last quarter from the previous three months, capping the weakest year since at least the global financial crisis on falling commodity prices and cooling investment. Policy makers are cutting borrowing costs before potential interest-rate increases in the U.S. this year raise the risk of fund outflows from emerging markets….

“The policy is in line with efforts by Bank Indonesia to manage the deficit in the current account toward a healthier level,” the central bank said in its statement. “The recovery of the global economy is expected to still be ongoing, although uneven.”

Russia (January 2015)

New York Times:

The rate cut suggested that Russia viewed the banking troubles as a more pressing worry than the high inflation caused by the declining value of the ruble. Inflation is now about 13 percent.

“Today’s decision,” said Elvira Nabiullina, the governor of the Bank of Russia, “is intended to balance the goal of curbing inflation and restore economic growth.”

Russia is fighting a swirl of forces. The oil-dependent economy has been battered by the low price of crude, which is down more than 50 percent since this summer. Western sanctions over the Ukraine crisis only complicate matters, particularly for Russia’s banks. The economy is expected to fall into recession this year.

Israel (February 2015)

Bloomberg:

The Bank of Israel is pushing rates toward zero and considering alternative tools as it seeks to revive an economy growing at the slowest pace for five years, and halt the decline in consumer prices. Last year’s growth rate of 2.9 percent was the weakest since 2009, and the country has experienced several months of deflation, with consumer prices falling 0.5 percent in 12 months through January.

The rate cut “is a preventative measure meant to avoid a slide into a deflationary reality,” Yaniv Pagot, chief strategist at Ayalon Group Ltd. in Ramat Gan, said by phone. “Quantitative easing steps in the not so distant future cannot be discounted.”

Turkey (February 2015)

Bloomberg:

Prime Minister Ahmet Davutoglu said the reduction should have been bigger, extending the feud between the country’s politicians and technocrats that has unnerved investors.

The bank in Ankara reduced its benchmark one-week repo and overnight borrowing rates by 25 basis points each on Tuesday, to 7.50 percent and 7.25 percent respectively. It trimmed the overnight lending rate by 50 basis points to 10.75 percent, according to a statement on its website. Analysts had forecast cuts to all three rates, according to Bloomberg surveys.

The government has persistently called for Basci to lower borrowing costs to boost economic growth since the bank more than doubled the main rate in an emergency meeting in January last year, to halt a run on the currency. Basci has so far only partially unwound that increase, saying that a cautious policy stance is necessary until there is a marked improvement in the inflation outlook.

Denmark (February 2015)

Wall Street Journal

Denmark’s central bank scrambled to defend its currency peg Thursday, cutting its benchmark interest rate for the fourth time in less than three weeks.

The krone’s peg to the euro has been under strain since the European Central Bank announced a large-scale bond-buying program in January, sending the shared currency spiraling downward.

Singapore

Bloomberg/Bangkok Post

"Since the last Monetary Policy Statement in October, developments in the global and domestic inflation environment have led to a significant shift in Singapore's CPI inflation outlook for 2015," the MAS said. "MAS has assessed that it is appropriate to adjust the prevailing monetary policy stance."

The central bank guides the local dollar against a basket of currencies within an undisclosed band and adjusts the pace of appreciation or depreciation by changing the slope, width and centre of the band. Singapore's consumer prices fell for a second straight month in December.

Singapore will keep a "modest and gradual appreciation" in its currency policy band, the central bank said. It made no change to the width and level at which it is cantered.

"This measured adjustment to the policy stance is consistent with the more benign inflation outlook in 2015 and appropriate for ensuring medium-term price stability in the economy," the MAS said.

Has the above easing measures been about responses to ‘strong’ economic growth or to ‘slowing’ economic growth? 

Has the above easing measures been about responses to the risk of inflation (defined by media as rising consumer prices) or deflation (falling consumer prices)?

Record high stocks have spawned an ocean of misimpression that such dynamic has been about G-R-O-W-T-H and the ebbing of risk. 

But on the other hand, the rush to ease by many central banks extrapolate that these monetary institutions have seemingly been in a panic mode. Insufficient G-R-O-W-T-H has been exposing credit risks that have only been pressuring central banks to lower the cost of servicing debt through policies.

Two different responses to divergent perceptions.

Remember that the global central banks has largely been on an easing trend since 2008. And like narcotics, financial markets have become totally addicted to it.

Yet global debt has swelled by $57 trillion from 2007 to reach 286% of the global GDP in 2Q 2014 based on estimates by McKinsey Quarterly. The mainstream belief has been that debt is a free lunch

So one of this divergent perceptions will be proven wrong. Perhaps soon.

For Many Greeks, Taxes have been seen as Theft…

…and thus massive tax avoidance and the huge informal economy.

The Wall Street Journal explains: (bold mine)

Of all the challenges Greece has faced in recent years, prodding its citizens to pay their taxes has been one of the most difficult.

At the end of 2014, Greeks owed their government about €76 billion ($86 billion) in unpaid taxes accrued over decades, though mostly since 2009. The government says most of that has been lost to insolvency and only €9 billion can be recovered.

Billions more in taxes are owed on never-reported revenue from Greece’s vast underground economy, which was estimated before the crisis to equal more than a quarter of the country’s gross domestic product.

The International Monetary Fund and Greece’s other creditors have argued for years that the country’s debt crisis could be largely resolved if the government just cracked down on tax evasion. Tax debts in Greece equal about 90% of annual tax revenue, the highest shortfall among industrialized nations, according to the Organization for Economic Cooperation and Development.

Greece’s new government, scrambling to secure more short-term funding, agreed on Tuesday to make tax collection a top priority on a long list of measures. Yet previous governments have made similar promises, only to fall short.

Tax rates in Greece are broadly in line with those elsewhere in Europe. But Greeks have a widespread aversion to paying what they owe the state, an attitude often blamed on cultural and historical forces.

During the country’s centuries long occupation by the Ottomans, avoiding taxes was a sign of patriotism. Today, that distrust is focused on the government, which many Greeks see as corrupt, inefficient and unreliable.

“Greeks consider taxes as theft,” said Aristides Hatzis, an associate professor of law and economics at the University of Athens. “Normally taxes are considered the price you have to pay for a just state, but this is not accepted by the Greek mentality.”

The above article manifests of rich political economic insights.

 

One, the typical approach by political agents in addressing economic disorders has mainly been to focus on superficiality or the immediacy—in particular “could be largely resolved if the government just cracked down on tax evasion”. 

Political solutions that fail to understand the incentives guiding the average Greeks has been the reason why tax policies continue to falter.

Two, just to be sure that non-payment of taxes hasn’t been the reason why Greeks have been struggling…

Nominal government spending based on tradingeconomics.com and Eurostat data

The above represents Greek’s government spending relative to GDP

Greece’s government debt relative to GDP (tradingeconomics and Eurostat)

Greece and Europe’s welfare state in % of GDP based on OECD data

As one can see in the above, the controversial “austerity” exists only in the mindset of the statist occult. The Greek government continues to spend at a rate more than the statistical economy and thus the ballooning debt which consequently translates to heightened economic burden on the Greek society.

Three, Greece’s (and the Eurozone’s) boom bust cycle have only exposed on the chink in the armor of Greece’s big government.

The dilemma facing Greece today exemplifies the paragon of radical changes in fiscal conditions when the bust phase of the boom cycle emerges.

This can be seen from the article: (bold mine) 

The reason isn’t just political, but economic. The country’s depression has already pushed many small businesses to the brink of collapse. Forcing them to pay more in taxes would put even more out of business—and more Greeks out of work.

“The Greek economy would collapse if the government were to force these people to pay taxes,” one senior government official said.

So the above data shows why many Greeks see their government as “corrupt, inefficient and unreliable” for them to “consider taxes as theft”

It doesn’t require a libertarian of the Rothbardian persuasion to see how taxes are theft. 

All it takes is for one to see with two eyes the real nature of how governments operates. This has been best described in the article as “corrupt, inefficient and unreliable”. 

Nonetheless here is the dean of Austrian Economics, the great Murray N. Rothbard on taxes. (For A New Liberty, The Libertarian Manifesto, p.30 )

Take, for example, the institution of taxation, which statists have claimed is in some sense really “voluntary.” Anyone who truly believes in the “voluntary” nature of taxation is invited to refuse to pay taxes and to see what then happens to him. If we analyze taxation, we find that, among all the persons and institutions in society, only the government acquires its revenues through coercive violence. Everyone else in society acquires income either through voluntary gift (lodge, charitable society, chess club) or through the sale of goods or services voluntarily purchased by consumers. If anyone but the government proceeded to “tax,” this would clearly be considered coercion and thinly disguised banditry. Yet the mystical trappings of “sovereignty” have so veiled the process that only libertarians are prepared to call taxation what it is: legalized and organized theft on a grand scale.

For the Greeks, the logical solution would seem as to dramatically pare down government spending and taxes or real austerity. These should ease tax burdens on the entrepreneurs or the productive agents that would allow them to channel resources to productive means. This should entail real economic growth.

In doing so, the informal economy should flourish and grow for the latter to integrate with the formal economy voluntarily.

But it’s not just taxes, there is the exigency to incentivize entrepreneurial activities via liberalization from excessive politicization of economic activities, specifically regulations, mandates, controls and all other politically erected anti-competition obstacles favoring entrenched interests. 

Importantly, the Greeks should embrace sound money by preventing the government from tinkering with interest rates, and the currency via the central bank and allow real competition in both the currency and the banking system.

Of course, given the size of the debt burden, debt that had benefited politicians and cronies of the past, such debt has to be defaulted on. Creditors who took the risk in financing the previous government excesses should pay their dues.

But of course, parasites would not want to end their privileges so this will hardly be the route taken. 

Politicians will continue to sell free lunch politics in order to get elected and stay the course. 

So after winning on such populist platform, the Tsipras government’s sellout to the Troika and the Eurogroup reinforces this dynamic

But since Greek’s problem has been about economics, the solution will always be about economics. Yet political solutions that fails to address the real (and not statistical) economic issues will have inevitable economic consequences.

I am reminded by this gem from author and professor Thomas Sowell:

The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.

Yet my ideal solution is the Rothbard solution; end organized theft.

Phisix: Profit Taking now is a Taboo

I have repeatedly been pointing out here that given the recent sharp run up, the Phisix have been exhibiting signs of ‘exhaustion’ where normal profit taking should take hold. But apparently corrections now appear to be a taboo. Index managers see any downside as intolerable. The Philippine benchmark has now been engineered to move in a single direction! And this applies to everyday activities!

For the day, following a strong start, the Phisix found itself succumbing to profit taking thus has been in the red through most of the session. That’s until the pre-run off period where again the ‘marking the close’ not only virtually reversed the day’s losses but importantly, set another fresh high record session for the domestic benchmark!(charts from technistock.net and colfinancial.com)

Again the modus remains the same. The pump revolves around 3-5 biggest market caps whose weights add up to about 20% of the Phisix basket. 

Those significant last minute major pumps can be seen in three sectors, service, property and finance. The holding sector also contributed but to a lesser degree compared to the above.

These are the top 20 most active issues of the day based on the table from the PSE. Some of the above have been subjects of the closing session pump.

Peso volume was only about Php 7.6 billion but the special block sales from AC (Php 7.5 billion) and SM (Php 1.6 billion) bloated the day’s volume to Php 17.234 billion.

As evidence of the profit taking mode, aside from sluggish (ex-special block sales) peso volume  decliners led advancers by about 20 issues. Even the top 20 traded issues reveal of 9 decliners relative to 8 advancers and 3 unchanged.

Additionally, today’s number of trades fell below 50,000. This means less churning activities compared to the average bristling pace of 50-60k a day from December 2014 onwards.

Since February, the advance decline spread seems to favor decliners (10 days against 7 days for advancers), hence emitting signals for ‘correction’.

But again correction has now become a taboo.

Yet this reveals of the lamentable quality of record highs.

US Fed Chief Janet Yellen’s Irrational Exuberance Warnings 2015 Edition

In July 2014, in reporting to both houses of the US Congress, US Federal Reserve chairwoman Ms. Janet Yellen mimicked Alan Greenspan’s "irrational exuberance" warning in 1996, with an admonition that some segments of the equity markets have been “substantially overstretched”.

Given that stocks have reached record upon record highs after this appearance, this only means the markets has been ignoring or fighting the FED. 

Another way to see this is that the FED has “lost control” over the asset bubbles.

Yet in the same appearance before the US congress, yesterday, Ms. Yellen reiterates her irrational exuberance warning for 2015.

From Ms. Yellen’s Monetary Policy Report to the US Congress dated February 24

From page 22 (bold and italics mine)

Over the second half of 2014 and early 2015, broad measures of U.S. equity prices increased further, on balance, but stock prices for the energy sector declined substantially, reflecting the sharp drops in oil prices (figure 32). Although increased concerns about the foreign economic outlook seemed to weigh on risk sentiment, the generally positive tone of U.S. economic data releases as well as declining longer-term interest rates appeared to provide support for equity prices. Overall equity valuations by some conventional measures are somewhat higher than their historical average levels, and valuation metrics in some sectors continue to appear stretched relative to historical norms. Implied volatility for the S&P 500 index, as calculated from options prices, increased moderately, on net, from low levels over the summer.

From page 24

The financial vulnerabilities in the U.S. financial system overall have remained moderate since the previous Monetary Policy Report. In the past few years, capital and liquidity positions in the banking sector have continued to improve, net wholesale shortterm funding in the financial sector has decreased substantially, and aggregate leverage of the private nonfinancial sector has not picked up. However, valuation pressures are notable in some asset markets, although they have eased a little on balance. Leverage at lower-rated nonfinancial firms has become more pronounced. Recent developments in Greece have rekindled concerns about the country defaulting and exiting the euro system. 

With regard to asset valuations, price-to-earnings and price-to-sales ratios are somewhat elevated, suggesting some valuation pressures. However, estimates of the equity premium remain relatively wide, as the long-run expected return on equity exceeds the low real Treasury yield by a notable margin, suggesting that investors still expect somewhat higher-than-average compensation relative to historical standards for bearing the additional risk associated with holding equities. Risk spreads for corporate bonds have widened over recent months, especially for speculative-grade firms, in part because of concerns about the credit quality of energy-related firms, though yields remain near historical lows, reflecting low term premiums. Residential real estate valuations appear within historical norms, with recent data pointing to some cooling of house price gains in regions that recently experienced rapid price appreciation. However, valuation pressures in the commercial real estate market may have increased in recent quarters as prices have risen relative to rents, and underwriting standards in securitizations have weakened somewhat, though debt growth remains moderate

The private nonfinancial sector credit-to-GDP ratio has declined to roughly its level in the mid-2000s. At lower-rated and unrated nonfinancial businesses, however, leverage has continued to increase with the rapid growth in high-yield bond issuance and leveraged loans in recent years. The underwriting quality of leveraged loans arranged or held by banking institutions in 2014:Q4 appears to have improved slightly, perhaps in response to the stepped up enforcement of the leveraged lending guidance. However, new deals continue to show signs of weak underwriting terms and heightened leverage that are close to levels preceding the financial crisis.

As a result of steady improvements in capital and liquidity positions since the financial crisis, U.S. banking firms, in aggregate, appear to be better positioned to absorb potential shocks—such as those related to litigation, falling oil prices, and financial contagion originating abroad—and to meet strengthening credit demand. The sharp decline in oil prices, if sustained, may lead to credit strains for some banks with concentrated exposures to the energy sector, but at banks that are more diversified, potential losses are likely to be offset by the positive effects of lower oil prices on the broader economy. Thirty-one large bank holding companies (BHCs) are currently undergoing their annual stress tests, the results of which are scheduled to be released in March.

Leverage in the nonbank financial sector appears, on balance, to be at moderate levels. New securitizations, which contribute to financial sector leverage, have been boosted by issuance of commercial mortgage-backed securities (CMBS) and collateralized loan obligations (CLOs), which remained robust amid continued reports of relatively accommodative underwriting standards for the underlying assets. That said, the risk retention rules finalized in October, which require issuers to retain at least 5 percent of any securitizations issued, have the potential to affect market activity, especially in the private-label residential mortgage-backed securities, non-agency CMBS, and CLO sectors.

Reliance on wholesale short-term funding by nonbank financial institutions has declined significantly in recent years and is low by historical standards. However, prime money market funds with a fixed net asset value remain vulnerable to investor runs if there is a fall in the market value of their assets. Furthermore, the growth of bond mutual funds and exchange-traded funds (ETFs) in recent years means that these funds now hold a much higher fraction of the available stock of relatively less liquid assets—such as high yield corporate debt, bank loans, and international debt—than they did before the financial crisis. As mutual funds and ETFs may appear to offer greater liquidity than the markets in which they transact, their growth heightens the potential for a forced sale in the underlying markets if some event were to trigger large volumes of redemptions.

Again we see authorities dishing out warnings after warnings on asset bubbles albeit on a sanitized basis—there is a growth in the risk environment but the economy is strong yada yada yada…

And for me, current imbalances have been so apparent that it can't be ignored anymore. And these warnings seem more about escape outlets, so that when the real thing occurs, authorities will jump in defense: I saw and warned about it...so it is not my fault—a veneer.

And speaking of former Fed chief Alan Greenspan. At one of the latest investment conference, Alan Greenspan had a dire outlook for the markets.

Here is Mac Slavo on Alan Greenspan’s gloomy predictions (bold and italics original)

Greenspan recently joined veteran resource analyst Brien Lundin at the New Orleans Investment Conference to share some of his thoughts. According to Lundin, the former Fed chairman made it clear that the central bank is facing a serious problem and one that will have significant ramifications in the future.

We asked him where he thought the gold price will be in five years and he said “measurably higher.”

In private conversation I asked him about the outstanding debts… and that the debt load in the U.S. had gotten so great that there has to be some monetary depreciation. Specially he said that the era of quantitative easing and zero-interest rate policies by the Fed… we really cannot exit this without some significant market event… By that I interpret it being either a stock market crash or a prolonged recession, which would then engender another round of monetary reflation by the Fed.

He thinks something big is going to happen that we can’t get out of this era of money printing without some repercussions – and pretty severe ones – that gold will benefit from. 

Record stocks in the face of record imbalances and record warnings from authorities

While Asia Central Bankers Need to Go Easy on Rate Cuts, They will Cut Rates Anyway

Frederic Neumann co-head of HSBC’s Asian economic research counsels Asian monetary authorities to go slow with interest rate cuts. Writing at the Nikkei Asia “Asia needs to go easy on rate cuts”, he provides three reasons: (bold mine)

The trouble is, it will prove only mildly effective and, in some cases, possibly counterproductive. That interest rate cuts help to ease the debt servicing burden of indebted consumers and companies is not in doubt. But, in most economies, it seems unlikely they will exert a lift through their second, more potent channel: faster credit growth. Take India. State banks, which dominate the financial system, are saddled with non-performing loans. Many large companies, too, are stuck with too much debt. Rate cuts alone, therefore, may not boost spending. Thailand, Malaysia and South Korea face similar challenges.

Translation: When company balance sheets have been hocked to the eyeballs with debt, borrowing will about debt rollovers rather than capex. And that's if there will be borrowings at all. You can lead the horse to the water, but you cannot make it drink.

The second point is that rate cuts, to the extent that they spur lending, may fuel growing imbalances that could ultimately push economies deeper into a disinflationary, if not deflationary, trap. Leverage in Thailand, for example, is already high, especially among consumers. Cutting interest rates could provide a temporary boost to spending, but at the cost of driving debt ratios even higher. In Australia, too, further easing will add fuel to the booming housing market without curing the underlying problem: a deflating mining investment boom. China also comes to mind, with blanket easing doing little to correct imbalances.

Translation: When company balance sheets have been hocked to the eyeballs with debt, borrowing will about debt rollovers rather than capex. More companies will resort to Hyman Minsky’s Ponzi financing. With insufficient cash flows for debt servicing, companies become heavily reliant on using debt to service existing debt. Asset sales function as a compliment. In short, Ponzi finance=Debt IN debt OUT + asset sales. And this is why the need to spike asset values as they provide bridge financing for debt.

Unfortunately as Mr. Neumann rightly points out, increasing use of Ponzi finance signifies heightens the risk of ‘debt’ deflationary trap.

Third: Easing monetary policy exposes countries to greater financial volatility down the road. The Fed, of course, may raise rates only gradually in the coming years. But the dollar looks set to strengthen further. In itself, this may not be enough to drive capital out of the region. Still, if local central banks overplay their hand and ease too aggressively, especially with no improved growth prospects to show for it, investor jitters might return. The "taper tantrum" of 2013, when investors dumped risky assets, was a painful reminder of the vulnerability of emerging markets when the Fed starts to move. Indonesia, especially, looks exposed.

Translation: In a financial and economic landscape where asset sales become complimentary to debt IN debt OUT, today’s asset market pump have likely been about the use of inflation in asset markets to generate cash flows to service debt.

And because asset market inflation are unsustainable this leads to “greater financial volatility”. 

In addition, a general use of Ponzi financing can become a systemic issue. 

From Wikipedia (bold mine): If the use of Ponzi finance is general enough in the financial system, then the inevitable disillusionment of the Ponzi borrower can cause the system to seize up: when the bubble pops, i.e., when the asset prices stop increasing, the speculative borrower can no longer refinance (roll over) the principal even if able to cover interest payments. As with a line of dominoes, collapse of the speculative borrowers can then bring down even hedge borrowers, who are unable to find loans despite the apparent soundness of the underlying investments.

So even mainstream can see what I am seeing.

While the advise to monetary authorities of the diminished use of zero bound rates has been commendable, I doubt if such will be heeded.

Reasons?

Political agenda will dictate on monetary policies. Incumbent political leaders would not want to see volatilities happen during their tenure, so they are likely to pressure monetary authorities to resort to actions that will kick the can down the road. Here is an example, Turkish central bank yielded to the Prime Minister’s repeated demand for interest rate cuts. The Turkish  central bank trimmed 25 basis points for both overnight lending and borrowing rates yesterday

In short, authorities are likely to be concerned with short term developments. And political agenda will most likely revolve around popularity ratings and or the next election—or simply preserving or expanding political power.

Next, there is the social desirability bias factor. Monetary authorities won’t also want to be seen as “responsible” for a volatile environment. They don’t like to be subject to public lynching from market volatilities.

Third, there is the appeal to majority and path dependency. Since every central banker has been doing it and have long been doing it, they think that they might as well do it and blame external factors for any untoward outcomes. Again the cuts of central banks of Turkey and the record low rates by Israel two days back brings a tally of 21 nations on an easing path in 2015. 25 actions if we consider the multiple actions by some countries (Romania and Denmark) as I noted last weekend.

Asian central bankers are likely to embrace the “sound banker” escape hatchet as propagated by their political economic icon—JM Keynes: 

A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him.

So expect more rate cuts ahead.

As a side note: Indonesia "vulnerable"? Hasn't Indonesian stocks been at record upon record highs? Has record highs not been about a risk free environment? Of course, opposite record high stocks have been a milestone high USD-Indonesian rupiah.

15 year High Nikkei , 4Q GDP 2014 Recovery: Survey says 81% of Japanese asks “Where’s the Recovery?”

Since February 18th, Japan’s equity bellwether the Nikkei 225 has been drifting at a 15 year high. Additionally the Japanese government recently released data that the economy has been pulled out of the recession in the 4Q.

Yet the man on the street remains puzzled of the so-called recovery. A poll conducted last weekend says that 81% of the average Japanese who participated in the survey have been wondering where the headline recovery has taken hold?

From Nikkei Asia

The recovery in Japan's economy has yet to reach the public, according to Nikkei Inc.'s latest opinion poll, with 81% of respondents saying they have not sensed any tangible improvement.

Merely 13% said that the economic recovery has been felt in their daily lives. The weekend survey was conducted jointly with TV Tokyo.

Preliminary figures for the October-December quarter point to the Japanese economy having expanded for the first time since last April's consumption tax hike.

"The economy is expected to recover on the strength of private-sector demand," says Akira Amari, minister of state for economic and fiscal policy.

Support for the cabinet of Prime Minister Shinzo Abe edged 1 point lower from the January poll to 50%, while those expressing disapproval climbed 1 point to 34%. Among the cabinet supporters, 73% said that an improvement in the economy has not been felt, with 23% indicating that they have sensed a recovery. For those dissatisfied with the cabinet, the percentages came to 96% and 3%.

If the survey has been accurate, then such divergence would be an example of the difference between statistical economy and real economic performance.

It’s also an example of the ongoing parallel universe—surging stocks in the light of a struggling and stagnating real economy

Japan’s stock market penetration level tells us that only about 20% of Japanese households have been invested in stocks according the 2014 Fact Book by Japanese Securities Dealers Association as of 2013

As a share of financial assets, equities represented only 9.4% of the household balance sheet according to the BOJ’s fund flows based on the 3Q 2014 report.

And if one accounts for the latest activities, it appears that Japanese households have been NET SELLERS of equity securities consistently during the past 3 years (2012-14), again based on data from Japanese Security Dealers Association.

The implication is that Japanese households have hardly been beneficiaries of the latest stock market run. This reveals that based on demonstrated preference or actions by market participants, Japanese households have hardly been positive about Abenomics.

Instead because of the deliberate attempt to crash the Japanese currency, the yen, as part of the Abenomics three arrows, Japanese households have been in a capital flight as seen by the jump in the holdings of outward investments in securities and investment trusts according to the BoJ as of the 3Q. 

These outflows or capital flight seem to affirm my predictions way back in 2012-13

So the biggest beneficiaries of the 15 year high Nikkei have mostly been foreigners, followed by domestic investment trusts and financial institutions. And this has been why Abenomics seems to be having a field day with international cheerleaders.

Abenomics’ attempt to push stocks to record upon record levels has only widened the disparities between financial assets and real economic performance. And such divergences has been revealed by the street survey.

Thus, whatever recovery that will be seen in the future will mostly be about statistics and hardly about progress in the real economy

Price distortions from sustained currency debasement will continue to have an adverse impact on the domestic entrepreneurs' economic calculation thereby filtering to the process of economic coordination or allocation of resources. Redistribution via inflationism won’t create economic value added but instead increases the misallocation of resources which results to the erosion of productivity and capital consumption.

Additionally Abenomics seem as in trouble. A reported rift between PM Shinzo Abe and BoJ Kuroda may be brewing.

From another NIkkei Asia report: (bold mine)

It is hard to say what, exactly, is going on between Prime Minister Shinzo Abe and Bank of Japan Gov. Haruhiko Kuroda, but one thing is clear: The once rock-solid relationship between the nation's leader and its central banker is starting to crack.

Signs of this strain were evident during a Feb. 12 meeting of the Council on Economic and Fiscal Policy.

Kuroda, in an unusual move, requested permission to speak and offered straightforward advice for the prime minister, according to a person informed about the matter. The BOJ governor stressed that interest rates could soar in the future if the fiscal credibility of the government is called into doubt.

But the minutes of the meeting, released five days later, included little of what Kuroda actually said. Only vague phrases such as "We need to have serious discussions [on fiscal rehabilitation]" were left in the document.

The report speculates that the split may have been due to the differences in views of tax policies. I am not here to speculate on this

Nonetheless, such development seems to coincide with the latest spike by the Japanese Government Bonds across the curve.

From a record low of .207% January 19 2015, yield of the 10 year JGB soared to .45% on February 16 as shown by the chart above from investing.com

I have noted this weekend that BoJ’s assurances of more easing may have temporarily quashed the JGB rebellion. Thus the yield has recently backed off.

Yet more signs of fissures between the two political leaders, the principal architects of Abenomics, could possibly mean a revival of the JGB rebellion.

And if this happens big trouble looms, not just in the financial markets but in the real economy, and more importantly, raises risks of Japan’s precarious fiscal conditions as well. Japan's outstanding national debt has reached 1,029 trillion yen ($8.62 trillion) as of 2014 according to the Asahi Shimbun

And such trouble will have transmission links abroad.

Record stocks stares at the face of record imbalances.