Why San Miguel Corporation Looks Vulnerable

Has rising markets really reduced risks in the economy?

I see the mainstream, including so called experts and industry people, use their emotions or talk their interests rather than assess risks objectively or be candid to their constituencies. They generally talk of a risk free world even as the markets undergo bouts of excessive volatility.

I have noted earlier how San Miguel Corporation’s business model has radically been altered into a virtual debt financed hedge fund, which arbitrages on industries that have been heavily politicized or regulated[1],

San Miguel’s new business model allows political outsiders to get into these economic concessions through Mr. Ang’s political intermediations which it legitimately conducts via “asset trading”. SMC’s competitive moat, thus, has been in the political connections sphere.

I came across San Miguel’s cash flow statements and was surprised by a cash flow statement discovery.

A post Keynesian economist Hyman Minsky introduced what he calls as Ponzi finance[2].

For Ponzi units, the cash flows from operations are not sufficient to fulfill either the repayment of principle or the interest due on outstanding debts by their cash flows from operations. Such units can sell assets or borrow. Borrowing to pay interest or selling assets to pay interest (and even dividends) on common stock lowers the equity of a unit, even as it increases liabilities and the prior commitment of future incomes. A unit that Ponzi finances lowers the margin of safety that it offers the holders of its debts.

When any entity with insufficient funds from operations borrows money and or sells assets to finance existing liabilities, such is called Ponzi financing.

As of the 1^st semester of 2012[3], San Miguel’s generated 10.8 billion pesos excess cash from operations (upper red rectangle).

The company used 53.73 billion pesos to acquire new assets. The company paid for existing liabilities of short term 440.443 billion pesos, long term 60.043 billion pesos and finance lease liabilities 9.414 billion pesos. Total payments to these (short, long term and finance lease) liabilities amounted to 509.9 billion pesos (lower red rectangle).

The company also paid dividends of 9.363 billion pesos to controlling and non-controlling shareholders (green rectangle). 

So given the inadequate 10.8 billion of free cash from operations, how did SMC go about paying off the massive 509.9 billion pesos debt? By borrowing money. SMC raised 539.975 billion pesos in short term and long term borrowings.

Cash from SMC operations has not been sufficient to pay for existing principal and interest on debt. It has resorted to borrowing money to pay for existing debt as well as sales of assets, e.g. Meralco. The company also uses borrowed money to pay for dividends and acquisitions. San Miguel’s operations seem to fit Minsky’s definition of Ponzi finance.

And this has not just been a 2013 dynamic, SMC’s recourse of borrowing to pay for existing debt has been the new model since 2010, based on the 2012 annual report[4] (p 36-37).

In the August 2013 Investor’s Briefing presentation[5] the company disclosed interest bearing debt of 424.5 billion pesos and noted that net debt to 12-month rolling ebitda (earnings before interest, taxes, depreciation and amortization) at 3.64x and total assets at 1,129.6 billion.

But net debt to EBITDA or earnings or other data seems really meaningless because as shown above SMC’s financing operation has been primarily debt IN and debt OUT.

And one would wonder how much of those 1.129 trillion pesos assets have been attached as lien to creditors and how much of these assets have been priced under the current inflationary boom environment. 

In other words, supposedly huge assets may mask a firm’s vulnerability from overexposure to debt.

Yet according to the SMC’s June report, interest rate breakdown for peso denominated local liabilities “range from 1.9% to 4.2% and 0.5% to 4.3% as of June 30, 2013 and December 31, 2012, respectively. Meanwhile for foreign denominated liabilities “discount rates used for foreign currency-denominated loans range from 0.3% to 2.5% and 0.2% to 0.8% as of June 30, 2013 and December 31, 2012, respectively.”[6]

This implies how SMC has been heavily dependent on central banking FED-BSP subsidies.

60.66% of San Miguel’s long term liabilities (p 15) have been denominated in foreign currency. This means a substantial segment of SMC’s loan portfolio have been exposed to currency risk.

Also 46.17% of SMC long term debt has been in floating rates which means the company has material exposure to interest rate risk.

SMC's huge loan portfolio by itself seems vulnerable to credit risk where any loss of confidence from existing creditors may trigger refusal to rollover debt or deny the company access to new debt that may lead to a credit event. 

I am talking about risk here and am not forecasting for this to occur.

Yet both SMC’s currency and interest rate variables depends on a Risk ON environment (strong peso, low interest rates, sustained inflation of asset prices) from which a sustained radical change in any one of the 3 factors can lead to increased risk of a credit event.

And proof of such vulnerability has been the 10.2 billion pesos loss incurred during the first semester reportedly due to foreign exchange losses[7]. My suspicion is that the May-June meltdown has mostly been responsible for this.

SMC has not disclosed the breakdown of the Finance lease liabilities which accounts for the other big portion of the 400+ billion loans. This seems a red flag.

What appears to be a Ponzi financing scheme embraced by SMC indeed “lowers the equity of a unit” and likewise “lowers the margin of safety that it offers the holders of its debts” as noted by Mr. Minsky.

While San Miguel looks like a fragile company highly sensitive to changing conditions, what matters for me is the risk of a contagion; particularly the companies, banks and entities whom are creditors to SMC’s 400+ billion loans.

While 400+ billion pesos seems like a drop in a bucket in a system flushed presently with 5.7 trillion pesos of liquidity, the domino effect from a potential SMC credit event may in a snap of finger—the bang moment—turn abundance into scarcity.

And it has also been wonder how the domestic market continues to aggressively bid up on listed banking and financial firms as if the system’s loan portfolio will remain immaculate given the massive accumulation of systemic debt, as SMC conditions reveal, and on what also seems as an underlying assumption that prices of securities are bound to rise forever.

Sure markets may continue to rise, but should there be more fragile firms like SMC out there, and once conditions change to drastically impair their financial conditions, rising markets may extrapolate to a bigger fall.

---

[1] See Phisix: The Myth of the Consumer ‘Dream’ Economy July 20, 2013

[2] Hyman P. Minsky The Financial Instability Hypothesis The Jerome Levy Economics Institute of Bard College

[3] San Miguel Corporation Quarterly report (SEC 17-Q) for the period June 30, 2013

[4] San Miguel Corporation Annual Report 2012

[5] San Miguel Corporation Investor’s Briefing of San Miguel Group August 12, 2013

[6] San Miguel Corporation June report 2013 p. 32

Long-term Debt, Finance Lease Liabilities and Other Noncurrent Liabilities. The fair value of interest-bearing fixed-rate loans is based on the discounted value of expected future cash flows using the applicable market rates for similar types of instruments as of reporting date. Discount rates used for Philippine peso-denominated loans range from 1.9% to 4.2% and 0.5% to 4.3% as of June 30, 2013 and December 31, 2012, respectively. The discount rates used for foreign currency-denominated loans range from 0.3% to 2.5% and 0.2% to 0.8% as of June 30, 2013 and December 31, 2012, respectively. The carrying amounts of floating rate loans with quarterly interest rate repricing approximate their fair values. P.30

[7] Manila Standard SMC registers P10.2-b loss August 13, 2013

More Gold and Silver ATMs in China

I posted in the introduction of Gold ATM in Beijing China in August 2011.

It appears that Beijing's precious metals ATMs will be expanding.

From WantChinaTimes: (hat tip Charleston Voice)

People in Beijing can now buy gold or silver coins at ATMs after the Beijing-based Hua Xia Bank introduced five of the machines earlier this month, according to Hong Kong's We Wei Po.

The bank installed the five machines at its branches across the city in Xidan, Fangzhuang, Zhongguancun, Dongdan and on Qingnian Road.

The ATMs look like ordinary teller machines but have an additional compartment to dispense the gold and silver coins. The machines currently offer panda souvenir gold or silver coins and Year of the Snake silver coin and plate sets.

A single 1-oz panda silver coin priced at 268 yuan (US$40) is the cheapest item available, while the panda gold coin set is the most expensive at 23,800 yuan (US$3,800).

Buyers can purchase the coins using their bank cards. After they place their orders using the machine's touchscreen, their payments are verified through bank card organization China UnionPay and they can pick up their purchased items through the opening on the lower part of the machine.

Gold ATMs have also been introduced in Germany in 2009

Despite the recent crash in Gold prices, the introduction of Gold-Silver ATMs, which means more people will have access to physical gold, reinforces signs of the growing divergence between Wall Street “paper” gold and “real” gold: where paper gold’s inventory from the West have sizably diminished and have been converted into physical gold and flown to the East (Comex inventories chart from Seeking Alpha)

As the great Ludwig von Mises wrote, (bold emphasis mine)

Under the gold standard gold is money and money is gold. It is immaterial whether or not the laws assign legal tender quality only to gold coins minted by the government. What counts is that these coins really contain a fixed weight of gold and that every quantity of bullion can be transformed into coins. Under the gold standard the dollar and the pound sterling were merely names for a definite weight of gold, within very narrow margins precisely determined by the laws. We may call such a sort of money commodity money.

Horse Racing Inflation

For the mainstream, price inflation has been seen as inexistent because the CPI indices tells them so.  Government data for them is seen as inviolable or sacrosanct even when real world experience suggest otherwise.  

They ignore the fact that money flows into the economy have been in a relative manner: different stages, different industries at distinct levels, speed and degree, such that the consequence of monetary policies has been a relative price inflation (chart courtesy of Doug Short).

Never mind too that record high stock markets and surging property prices have been emblematic of price inflation on the asset markets.

And that money flowing into asset markets have likewise led to bubbles in art and to other collectible markets.

Well add to this collection of bubbles, the thoroughbred racehorses. From CNBC

The market for racehorses took a big spill during the recession and didn't look ready for a comeback anytime soon. But suddenly, Thoroughbred prices are charging ahead.

The Keeneland September Yearling Sale—the nation's premiere Thoroughbred auction—is just winding down, and the numbers resemble those from precrisis boom times.

Keeneland said 18 yearlings sold for $1 million or more. That's the highest total since 2008 and more than twice last year's total. The most expensive sale was $2.5 million. Though that's below the top-horse price in 2006, which topped $11 million, it's more than double last year's.

Sales this year total over $264 million, up 23 percent from last year and the highest since 2008. The average price of $130,780 is up 31 percent from 2012.

The ballooning prices of "toys for the big boys", amidst tepid economic growth (chart from Zero Hedge)  are signs of the inequitable distribution of wealth—a subsidy to rich at the expense of society—brought about by central bank’s current zero bound rates and QE policies.

Quote of the Day: On the New Keynesian Liquidity Trap: Every law of economics seems to change sign at the zero bound

New-Keynesian models produce some stunning predictions of what happens in a "liquidity trap" when interest rates are stuck at zero.  They predict a deep recession. They predict that promises work: "forward guidance," and commitments to keep interest rates low for long periods, with no current action, stimulate the current level of consumption.  Fully-expected future inflation is a good thing. Growth is bad. Deliberate destruction of output, capital, and productivity raise GDP. Throw away the bulldozers, let them use shovels. Or, better, spoons. Hurricanes are good. Government spending, even if financed by current taxation, and even if completely wasted, of the digging ditches and filling them up type, can have huge output multipliers.

Even more puzzling, new-Keynesian models predict that all of this gets worse as prices become more flexible.  Thus, although price stickiness is the central friction keeping the economy from achieving its optimal output, policies that reduce price stickiness would make matters worse.

In short, every law of economics seems to change sign at the zero bound. If gravity itself changed sign and we all started floating away, it would be no less surprising.

From University of Chicago Professor John H. Cochrane at his blog: The Grumpy Economist

Video: Murray Rothbard: The Government is not Us

As excerpted from the Murray N. Rothbard's "For A New Liberty The Libertarian Manifesto" p.60-64.

From the Liberty Pen (hat tip Bob Wenzel)

Video: David Stockman: From “Bubble” Ben Bernanke to “Calamity” Janet Yellen

Strident criticism of Janet Yellen, the likely replacement of Fed Chairman Ben Bernanke, by author, former Congressman and Director of the Office of the Management Bureau David Stockman in a Bloomberg interview (zero hedge)

She has no clue how to wean Wall Street from this pathetic addiction to this massive stimulus, easy money that’s been going on for this entire century…

She spent her whole life as a monetary bureaucrat in the Fed system, has no clue what honest capitalism what genuine free markets are about. Believes that the entire system has to be run by a monetary politburo turning over the dials…short-term interest rate, yield curve and the entire financial system.

She is part of the groupthink. She is part of the Keynesian consensus that 12 people running $16 trillion economy. They are delusional. The market is simply trading the word clouds in this daily injections that comes from the out of control central bank

Did the Fed bailout Emerging Markets?

Has Turkey been bailed out by the Fed, the Zero Hedge inquires? (bold original)

Following the Fed's decision to not Taper, Turkish stocks were the world's best performing asset overnight. Jumping almost 8% today, the main Turkish stock index is now up over 26% in the last 3 weeks, back above its 200DMA and in bull-market territory as BAML notes "the Fed decision amounts to a bailout for Turkey." While the fundamental adjustment in current account imbalances remains unfinished, in the near term gross bearish positioning and the dovish FOMC decision are likely to support Turkey bonds... once again removing any pressure for a politician to make any hard decision anywhere in the world. How do you say "thank-you, Ben" in Turkish? (or Indonesian, Indian, Malaysian, or Thai?)

In addition to Turkey, other EM bourses has been buoyed by the FED (including those of EM Asia as mentioned).

Brazil’s Bovespa

Russia’s MICEX

Indonesia’s JCI

Malaysia’s KLCI

Thailand’s SETI

The Philippine Phisix

And another biggest beneficiary from the Fed's actions seems to be India, whose BSE-SENSEX has reached a 2011 high! See no risks of a crisis. The Fed’s magic wand shooed them away.

The near sweeping bailout of emerging markets can be seen via the iShares Emerging Markets (EEM)

The bailout has not just been an EM affair, it has extended to developed Asia Pacific…

Such as Singapore’s STI

and Australia ASX 200 (at record highs)

The above equity markets began to rally in anticipation of a modest tapering by the FED. Besides with other assets down, equity markets became the only alternative or magnet for yield chasers. And the Fed's "UNtaper" served as the icing on the cake.

The only “fundamental” thing relevant to the current financial markets has been central banking bailouts.

Yet for every artificially generated boom there is eventually a corresponding...

Video: Ron Paul on the Fed's Untaper: Prepare for the destruction of the US dollar and crash of the bond markets

The great Ron Paul interviewed by Fox Business (hat tip Lew Rockwell Blog)

The untaper says Dr. Paul is a "bad sign" and that the "Fed is really worried about the economy", despite the "deception out there that everything is doing good". But "markets like it". 

In view of rising markets, Dr. Paul further asks why does the Fed have "to punish the elderly who save money?"

Asked about what to expect from Bernanke's replacement Janet Yellen, Dr Paul's response "Just prepare for the destruction of the US dollar and crash of the bond market one day" (1:48) 

He says that the "bond bubble is already weakening" and that interest rates will go up, the dollar is going to weaken, prices are going up and standard of living is going down. 

Dr. Paul also says that the "worse political problem" is the growing "discrepancy between the poor and the middle class"

Asked about housing as beneficiary of Fed Policies, Dr. Paul responds, "as long as the interest rates are artificial I think you are going to get malinvestments misdirected investments and people are going to make mistakes and you don’t when they are until the correction has to come"

It's not all bad news though, Dr. Paul is optimistic over the long term: "I think there is a lot to be optimistic about on the long run, but on the short run I think we are gonna have to go through some tough times"

Quote of the Day: The Sanctity of US Government Debts

The notion that the US government won’t default on its debt is simply historically inaccurate.

As recently as 1979 in the midst of another debt-ceiling debacle, the government failed to pay on $120 million in Treasuries according to stated terms, resulting in a class-action lawsuit Barton vs. United States.

And in 1934, FDR unilaterally abrogated the repayment terms for Liberty Bonds that were supposed to have been paid back in gold… or at least gold-backed currency.

Roosevelt refused to repay the bonds in gold, then devalued the dollar by as much as 40%, paying back bondholders in worthless paper.

But probably the most ignorant economic postulate is that the debt doesn’t matter because ‘we owe it to ourselves…’

It is accurate that only a third of the official US debt is owed to foreigners. The rest is owed to intragovernmental agencies like the Social Security Trust Fund, or to the US Federal Reserve.

But I’m mystified at how people find this comforting.

The US government fails to collect enough tax revenue to meet its mandatory entitlement spending and interest on the debt. In other words, they have to borrow more money just to be able to pay interest on what they already owe.

At some point, the music is going to stop and one of these major stakeholders will be left without a chair.

If they default on foreigners, it would destroy the foundation of the global financial system and shut the US government out of international debt markets.

But if they default on the Federal Reserve, then it would create an unprecedented currency crisis that the United States hasn’t seen since the Confederate Dollar collapsed in 1864.

If they default on the Social Security Trust Fund, then everyone in the Land of the Free who currently receives a public pension is going to get screwed.

It’s astounding that people think this doesn’t matter, as if we could just ‘default on ourselves’ and everything will be OK.

Yet, again, through sheer repetition, this has become the truth. It’s sacrosanct. And to challenge the truth is tantamount to blasphemy. Anyone who does challenge it is ridiculed and branded a lunatic.

Such close-mindedness is dangerous, especially in economics. People’s lives and livelihoods depend on an objective understanding of the facts, not this altered reality.

This from Sovereign Man’s Simon Black

Video: Khan Academy on the Difference between Credit Easing (US) and Quantitative Easing (Japan)

For Bernanke, according to the Khan Academy, the difference between quantitative easing and credit easing is the intent and where you direct the extra money you printed. For Japan, printing money  aimed at getting money in circulation. For Bernanke’s Fed, printing money has been targeted to increase demand for some types of securities where there is a credit logjam (Portfolio Balance channel) 

This is simply the same dog with different collar.

Quote of the Day: FED Policies: Hope is not a strategy

But the reality is that the economy will never regain true health as long as the stimulus is being delivered. Despite trillions already administered, the workforce is shrinking, energy usage is down, the trade balance is weakening, savings are down, inflation is showing up in inconvenient places, debt is up, and wages are flat. So while QE has succeeded in hiding the truth, it hasn't accomplished anything of substance. Unfortunately, the Fed is only interested in the headlines.

We also must understand that even if the Fed were to deliver a small reduction in bond purchases, such a move would change nothing. The Fed would still be adding continuously to its enormous balance sheet while presenting no credible plans to actually withdraw the liquidity. As I have pointed out many times, it simply can't do so without pushing the economy back into recession. Although this would be the right thing to do, you can rest assured that it won't happen.

We should also recall where this all began. When QE1 was first launched Bernanke talked about an exit strategy. At the time I maintained the Fed had no exit strategy as it had checked into a monetary Roach Motel. But now questions about an exit strategy have been replaced by much more delicate taper talk. But easing up on the accelerator without ever hitting the brakes will not stop the car or turn it around.

Bernanke has maintained that his purchases of government bonds should not be considered "debt monetization" because the Fed intends to only hold the bonds temporarily. In recent years however talk of actively selling bonds in the portfolio have given way to more passive plans to simply hold the bonds to maturity. But this is a convenient fiction. When the bonds mature, the Fed will have little choice but to roll the principal back into Treasury debt, as private bond buyers could not easily absorb the added selling that would be required to repay the Fed in cash. Judged by his own criteria then, Bernanke is now an admitted debt monetizer.

Following this playbook, the Fed will likely maintain the pretense that tapering is a near term possibility and that it has a credible plan on the shelf to bring an end to QE. In reality the Fed is stalling for time and hoping that the economy will inexplicably roar back to life. Unfortunately, hope is not a strategy.

This is from financial analyst and investment broker Peter Schiff at his company’s (Euro Pacific) blog

Asian Markets Jump on the FED’s 'Untapering' or QE extension

The mainstream meme has always been that stock market prices are driven by so-called backward looking “fundamentals” or "earnings"

So what explains today’s massive concomitant jump in the prices of many of Asian-ASEAN equity benchmarks? (chart from Bloomberg)

Or how about the enormous rallies  by Asian-ASEAN currencies? (Bloomberg)

Their economies suddenly boomed overnight?

Yet all these seem as in response to the FED’s calling of the taper Poker Bluff.

The reality is that all these stock market-currency market movements have been representative of the pricing of distortions brought about by FED and other central bank policies that has nurtured the market's addiction to low interest rates environment and the subsequent credit fueled asset boom that has largely little to do with “fundamentals” or the real economy.

Europe’s parallel universe should be a prime example.

What really has been a bubble has been misconstrued as a boom. Eventually booms end up in busts and crises as have been through history. 

Video: Canadian Billionaire Investor Ned Goodman: The dollar is about to be dethroned as the world’s de facto currency

In a recent speech Canadian billionaire, President and CEO of US $ 9.6 billion Dundee Capital markets sees the end of the US dollar standard. He sees a period of that would be “very inflationary” and where “Things are likely to become quite ugly”.

He believes that there is an excellent chance the “US will soon be determined in a recession” which he believes is probably here

Through history political entities (kings emperors or elected parliamentarians etc..) have “used magic money to acquire things or wage wars. And it just doesn’t work”

So far we are having asset inflation. But eventually like Mr. Goodman, I share the view that we will transition to "stagflation".  The rest will rely on how the feedback loop mechanism between political actions and market responses and vice versa. (hat tip Zero hedge)

Video: Marc Faber: The Endgame Is A Total Collapse, But From A Higher Diving Board Now

In the following video, the Bloomberg interviews Gloom Boom and Doom report’s Dr. Marc Faber on the US Federal Reserve’s largely unexpected dithering from the Taper

Dr Faber quotes (via the Zero Hedge) 

Taper as the Wall Street-Government Subsidy

My view was that they would taper by about $10 billion to $15 billion, but I'm not surprised that they don't do it for the simple reason that I think we are in QE unlimited. The people at the Fed are professors, academics. They never worked a single life in the business of ordinary people. And they don't understand that if you print money, it benefits basically a handful of people maybe--not even 5% of the population, 3% of the population. And when you look today at the market action, ok, stocks are up 1%. Silver is up more than 6%, gold up more than 4%, copper 2.9%, crude oil 2.68%, and so forth. Crude oil, gasoline are things people need, ordinary people buy everyday. Thank you very much, the Fed boosts these items that people need to go to their work, to heat their homes, and so forth and at the same time, asset prices go up, but the majority of people do not own stocks. Only 11% of Americans own directly shares.

Same logic applies elsewhere as in the Philippines

In a deft rebuttal to the issue raised by the interviewer who cited that mortgage and car activities as supposed beneficiaries from the FED’s actions, Dr. Faber didn’t mince words

On September 14, 2012, when the Fed announced QE3, that was then extended into QE4, and now basically QE unlimited, the bond markets had peaked out. Interest rates had bottomed out on July 25, 2012--a year ago--at 1.43% on the 10-year Treasury note. Mr. Bernanke said at that time at a press conference, the objective of the Fed is to lower interest rates. Since then, they have doubled. Thank you very much. Great success.

In short the bond vigilantes has been the unintended consequence from Fed QE3

On the endgame or consequence from total dependence on QE:

Well, the endgame is a total collapse, but from a higher diving board. The Fed will continue to print and if the stock market goes down 10%, they will print even more. And they don't know anything else to do. And quite frankly, they have boxed themselves into a corner where they are now kind of desperate.

The FED will continue to engage in Poker bluffing but will refrain from acting out ‘exit’ or even tapering measures because they have been cognizant of the dangers or the risks of high interest rates on a debt laden and debt dependent economy

On Janet Yellen as successor to Bernanke:

She will make Mr. Bernanke look like a hawk. She, in 2010, said if could vote for negative interest rates, in other words, you would have a deposit with the bank of $100,000 at the beginning of the year and at the end, you would only get $95,000 back, that she would be voting for that. And that basically her view will be to keep interest rates in real terms, in other words, inflation-adjusted. And don't believe a minute the inflation figures published by the bureau of labor statistics. You live in New York. You should know very well how much costs of living are increasing every day. Now, the consequences of these monetary policies and artificially low interest rates is of course that the government becomes bigger and bigger and you have less and less freedom and you have people like Mr. De Blasio, who comes in and says let's tax people who have high incomes more. And, of course, immediately, because in a democracy, there are more poor people than rich people, they all applaud and vote for him. That is the consequence.

Inflationism represents just one of the many slippery slope towards more interventionism (price controls, foreign exchange and capital controls, wage and labor controls, trade controls, border controls and more) and even risks of wars.

On the direction of gold prices:

When I look at the market action today, I would like to see the next few days, because it may be a one-day event. The markets are overbought. The Feds have already lost control of the bond market. The question is when will it lose control of the stock market. So, I'm a little bit apprehensive. I would like to wait a few days to see how the markets react after the initial reaction."

On the direction of the 10-year yields:

I will confess to you, longer-term, I am of course, negative about government bonds and i think that yields will go up and that eventually there will be sovereign default. But in the last few days, when yields went to 2.9% and 3% on the 10-year for the first time in years i bought some treasuries because I have the view that they overshot and that they could ease down to around 2.2% to 2.5% because the economy is much weaker than people think…I think in the next three months or so.

My take is that if the “Feds have already lost control of the bond market” and if bond markets may not just be signaling the conditions of the economy but also as backlash from FED (and other major central bank) policies “the objective of the Fed is to lower interest rates. Since then, they have doubled”, then muting the actions of bond vigilantes (which has become a global phenomenon) may not be as deep as Dr. Faber thinks.

On why the need to buy gold:

I always buy gold and I own gold. I don't even value it. I regard it as an insurance policy. I think responsible citizens should own gold, period.

Poker Bluff Called: US Federal Reserve Balks at Taper

I have been saying so. The supposed taper talk, like all the rest of “exit” talks since 2010, has all been but a poker bluff.

Given the entrenched dependency relationship by the mortgage markets and by the US government on the US Federal Reserve, the Fed’s QE program can be interpreted as a quasi-fiscal policy whose major beneficiaries have been the political class and the banking class. Thus, there will be little incentives for FED officials to downsize the FED’s actions, unless forced upon by the markets. Since politicians are key beneficiaries from such programs, Fed officials will be subject to political pressures.

This is why I think the “taper talk” represents just one of the FED’s serial poker bluffs.

The US Federal Reserve today called the bluff. The FOMC announced that they will refrain from tapering until supposed evidence will warrant it.

From Bloomberg:

Chairman Ben S. Bernanke and his policy making colleagues refrained from paring record accommodation as rising borrowing costs show signs of slowing the four-year expansion. Treasury yields have jumped since May, when Bernanke first outlined a possible timetable for a reduction in the asset purchases.

“The Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases,” the Federal Open Market Committee said today at the conclusion of its two-day meeting in Washington. While “downside risks” to the outlook have diminished, “the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement.”

The FOMC has been debating how to scale back its $85 billion in monthly purchases of Treasury and mortgage debt aimed at stoking economic growth and reducing unemployment that was 7.3 percent in August. The Fed has held the main interest rate near zero since December 2008 and pushed its balance sheet to a record $3.66 trillion through three rounds of bond buying.

The so-called awaiting for "more evidence that progress will be sustained" seems like forever waiting for Godot who never arrives. 

The global system has been acutely hooked on steroids which will only be given up when forced upon by the markets. Such dependency will even be more entrenched.

Such actions by the FED also runs in contradiction to supposed claims of economic recovery as the Zero Hedge rightly observed (italics and bold original)

It seems the Fed is so scared about something (despite every long-only asset manager telling us day after day that the economy is recovering and the US doesn't need crisis support... oh and can withstand higher rates) that they have gone against consensus and decided that Tapering now is premature:

• *FED REFRAINS FROM QE TAPER, KEEPS MONTHLY BUYING AT $85 BLN
• *FED: RISE IN MORTGAGE RATES, FISCAL POLICY RESTRAIN GROWTH
• *FED: `TIGHTENING OF FINANCIAL CONDITIONS' COULD SLOW GROWTH
• *MOST FED OFFICIALS SEE FIRST INTEREST-RATE RISE IN 2015
  

And since FED policy represents a subsidy or transfer of resources to Wall Street and the government diverted from the main street, the economy will hardly post a robust real recovery. And worse, such transfers encourage malinvestments and consumption of capital.

 

Naturally markets addicted to the FED steroids went into a bacchanalia. 

The markets has turned into a full Risk ON mode

The taper bluff reinforces the record run for the S&P 500

…and similarly a near record for the Dow Jones

The manic phase of the US stock market bubble continues to balloon and should do so over the interim. This should resonate to stock markets around the globe.

The calling of taper bluff saw a big rally in US Treasuries (Yields of 10 year notes fell).

Even depressed prices of gold posted a huge one day reversal of 4.22% gains.

Rising stocks, bonds and commodities is an expression of a full risk ON mode.

QEternity in September 2012 had a 3 month effect of the tempering of bond yields. I believe that today’s confirmation of QEternity will have a shorter duration of impact. In other words, the bond vigilantes will be having a short vacation but they will back soon, perhaps in less than a month.

The vacation break by the bond vigilantes will allow for a short term continuation of the risk ON mode.   Yes current environment transforms the market into short term punters given the wild volatilities in either direction.

Nevertheless as market bubbles inexorably inflate, which will be pumped up by even more credit, markets risk will correspondingly surge.

Trade cautiously.

Thomas Sowell: Why the minimum wage isn’t compassion for the poor

Snippets from economist Thomas Sowell’s article entitled Minimum Wage Madness  at the lewrockwell.com

Minimum wage hurt the young and the minority:

Unemployed young people lose not only the pay they could have earned but, at least equally important, the work experience that would enable them to earn higher rates of pay later on.

Minorities, like young people, can also be priced out of jobs. In the United States, the last year in which the black unemployment rate was lower than the white unemployment rate — 1930 — was also the last year when there was no federal minimum wage law. Inflation in the 1940s raised the pay of even unskilled workers above the minimum wage set in 1938. Economically, it was the same as if there were no minimum wage law by the late 1940s.

In 1948 the unemployment rate of black 16-year-old and 17-year-old males was 9.4 percent. This was a fraction of what it would become in even the most prosperous years from 1958 on, as the minimum wage was raised repeatedly to keep up with inflation.

Some “compassion” for “the poor”!

Minimum wages as instruments for racial discrimination

Minimum wage laws can even affect the level of racial discrimination. In an earlier era, when racial discrimination was both legally and socially accepted, minimum wage laws were often used openly to price minorities out of the job market.

In 1925, a minimum wage law was passed in the Canadian province of British Columbia, with the intent and effect of pricing Japanese immigrants out of jobs in the lumbering industry.

A well regarded Harvard professor of that era referred approvingly to Australia’s minimum wage law as a means to “protect the white Australian’s standard of living from the invidious competition of the colored races, particularly of the Chinese” who were willing to work for less….

People whose wages are raised by law do not necessarily benefit, because they are often less likely to be hired at the imposed minimum wage rate.

Minimum wage discriminates non labor union workers and promotes the interests of union members

Labor unions have been supporters of minimum wage laws in countries around the world, since these laws price non-union workers out of jobs, leaving more jobs for union members.

Feel good policies are likely to backfire

People who are content to advocate policies that sound good, whether for political reasons or just to feel good about themselves, often do not bother to think through the consequences beforehand or to check the results afterwards.

Read the rest here

As a proverb says “the road to hell is paved with good intentions”

Video: How a Romanian Internet Campaign Undermined a UK Anti Immigration Propaganda

Cool stuff demonstrative of epic government blunder.

The British government launches a ridiculous discriminatory anti immigration campaign against Romanians and Bulgarians. In response, a Romanian company ingeniously used the internet to turn the tables on the UK government until the latter capitulates. Amusing

(hat tip Gary North) You tube GMP Bucharest link

European Economic Recovery? Car Sales Plunges to Record Low

We have been told that the Eurozone will be one major force in alleviating the plight of Asia and emerging markets. Unfortunately, it seems that Eurozone will have to fix their problems first before assisting anyone.

Despite positive surveys and all that, what people say and people actually do have been different. In the Eurozone, cars sales fell to the “lowest on record” last August. 

This compounds on the significant decline in July’s Industrial output which has been oceans away from consensus expectations

From Bloomberg: (bold mine)

European car sales fell in August, bringing deliveries this year to the lowest since records began in 1990, as record joblessness in the euro region hurt deliveries at Volkswagen AG (VOW), PSA Peugeot Citroen (UG) and Fiat SpA. (F)

Registrations dropped 4.9 percent to 686,957 vehicles from 722,458 cars a year earlier, the Brussels-based European Automobile Manufacturers’ Association, or ACEA, said today in a statement. Eight-month sales declined 5.2 percent to 8.14 million autos.

The economy of the 17 countries using the euro emerged from a record six-quarter recession in the three months through June. Aftereffects such as a jobless rate in the area that held at 12.1 percent in July led industry leaders at the International Motor Show in Frankfurt a week ago, including Peugeot Chief Executive Officer Philippe Varin, to stick to predictions of a sixth consecutive annual car-market contraction in 2013.

"Record low" car sales appear to be undermining the supposed re-emergence from “a record six-quarter recession”.

And to think that “record recession” means soaring stock markets where the Stoxx 50 has been in the proximity of “record highs”. Economic growth drives the stock market? Duh.

Rising stocks provide mainstream media the delusion of a perpetual “recovery” that has gone amiss as signified by “record recession”. 

The reality has been that the Draghi Put (“do whatever it takes” OMT etc…) or guarantees on the markets, has been shifting resources from the main street to Europe’s Wall Street. So Europe's Wall Street feasts on the subsidies provided by the ECB. The real economy then goes only for the morsels.

Yet recent gains in car sales have been misinterpreted by the mainstream and the officialdom as sustainable. 

The European car market rose 4.9 percent in July to 1.02 million vehicles. The gain was the second this year, following a 1.7 percent increase in April that marked the first growth in European car sales in 19 months. The trade group releases July and August sales figures simultaneously each September.

One can call this a “head fake” or in chart lingo a “dead cat’s bounce”.

The car recession has not only been deep but has been widespread.

Four of Europe’s five biggest automotive markets shrank last month. Deliveries in top-ranked Germany dropped 5.5 percent to 214,044 vehicles. That compared with a 2.1 percent increase in July. The U.K. market, the region’s second biggest, expanded 11 percent to 65,937 cars in August.

Don’t worry be happy. The consensus will keep on piling onto the stock markets which it should drive to stratospheric highs, since all other alternatives (bonds, commodities and the real economy) have been down. 

As ex-Citigroup chief executive Charles O. Prince haughtily expressed during the 2007 mania:

When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.

Despite signs of the music stopping as manifested by rising global bond yields, let’s keep dancing.