Phisix: ASEAN Equity Markets Continue to Lag

It has been a curiosity for me to see ASEAN equity markets, with the exception of Malaysia, fail to rev up along with high octane US and some European markets as the German Dax, considering an environment of falling US dollar and a reprieve from the bond vigilantes.

Global Trade Woes?

Could it be because of growing concerns on global trade particularly from export dependent Asia?

According to a Bloomberg report[1],

The Hague-based CPB Netherlands Bureau for Economic Policy Analysis estimated global trade volume fell 0.8 percent in August, eroding a 1.8 percent jump of the previous month. It was the weakest performance since a 1.1 percent decline in February and left the three-month average lagging its historical pace.

While global merchandise trade remains slightly off record highs, the rate of gains has been on a decline (quarter on quarter—left) and (quarter from a year ago—right)[2],

Much of the failing trade has been attributed to the ‘lack of demand’ from emerging markets. But the article did not bother to explain further.

Unlike mainstream view, the slowing growth in emerging markets has mainly been a product of internal bubbles, many of whom have been approaching their inflection points. The threat by the US Fed to “taper” last May only exposed on these vulnerabilities. 

In addition, the adverse consequences from the largely unseen redistribution of resources from US Federal Reserve policies which has been embraced as the de facto operating standard by global central banks seem as becoming more evident.

Credit easing policies such as zero bound rates has gradually been eroding on the real savings of many Asian nations who adapted such schemes. Borrowing demand from the future financed by debt has come home to roost.

And since inflationism has been designed to transfer resources to privileged constituents or to protect certain interest groups at the expense of the rest, the corollary inequalities have led to politically charged atmosphere.

And in the realm of politics, the intuitive and the best way to divert the public’s attention from the real issue have been to blame the foreigners. 

In doing so, inflationism which usually is followed by price controls eventually spawns trade, finance and labor protectionism.

So the next political actions we should expect would be travel or social mobility restrictions, higher tariffs or more non-tariff trade barriers and capital controls.

The same article suggests that we are headed in such direction.

Protectionism is also on the rise despite pledges to avoid it by the Group of 20 leading industrial and developing economies, according to Evenett. He estimates 337 measures have been imposed worldwide so far this year after 503 in 2012.

However, near record high New Zealand stocks and record high Malaysian and Australian stocks can hardly explain the global trade factor.

Credit Concerns?

The other factor causing such divergence could be slowing credit growth.

As pointed out above, internal bubbles have served as an internal hindrance to expanding credit growth.

A survey from the Institute of International Finance[3] (IIF) on Emerging Markets suggests that “bank lending conditions continued to tighten in emerging economies for the second quarter in a row.”

And while demand for loans in Asia seem to have improved, credit standards, funding conditions and trade finance have all meaningfully slowed.

The IIF data actually mostly reflects on the credit conditions of the Philippine banking system, based on the BSP data from the start of the year until August. Except that credit growth in August appear to have rebounded, despite the “Ghost Month” which curiously the BSP incorporates as “economic” analysis.

[As a side note, the BSP’s stubborn insistence to use “Ghost Month”[4] assumes that whether Filipino or Chinese or foreign non-Chinese, all subscribe to such superstition. Based on such logic, perhaps ‘paranormal’ forces had been responsible for the credit growth last August]

I have no data yet for September to see whether the August loan rebound has been sustained or had been a blip.

I have yet to access credit data conditions for Malaysia, Australia and New Zealand, but have been limited by time constraints

Capricious Credit Rating Agencies

Credit rating agency Fitch has revised their outlook on Malaysia to Negative from Stable in July, they further warned about the growing pressure on credit profiles of Asia-Pacific Sovereigns[5]

The Standard & Poors seem to have seconded such concerns where “positive trend of Asia-Pacific sovereign ratings”, said KimEng Tan, senior director for Standard & Poor’s Ratings Services in an interview[6], “over much of the past decade looks likely to break in the next one or two years. We do not see a high likelihood of a sovereign rating upgrade during that period. Instead, three sovereign ratings in the region currently carry negative outlooks – India, Japan and Mongolia. We do not have any Asia-Pacific sovereign on a positive outlook.” (bold mine)

It is ironic how Malaysia’s July downside revision has led to new record high stocks while the trifecta of credit rating upgrades have still left the Phisix midway from the distance of the recent historic highs and the meltdown lows.

Importantly both credit rating agencies appear to be “playing safe”, such that in the event that another market meltdown episode, they would have the leeway to immediately initiate downgrades.

As pointed out before[7], credit rating agencies have essentially been reactionary. They respond to market events rather than take action in antecedence. They hardly see risks coming. Two market meltdowns appear to have altered their sanguine viewpoints on the region. Yet as a sign of dithering, they refrain from actual downgrades but instead float trial balloons by verbalizing their concerns.

In the case of the S&P, they have placed on negative outlook, for instance the S&P on India, Japan and Mongolia. Paradoxically, like Fitch on Malaysia, India’s stocks are also a breath away off from the recent landmark highs.

This also reveals of the narrowness of the span of vision of credit rating agencies has for their subjects, or in this case the sovereigns, such that they easily change sentiments.

The above also suggests of the extreme volatility of the markets as they become detached with fundamentals.

The China Wild Card: Has Inflation Reached a Critical State?

It is hard to see the Chinese card on ASEAN when Australian stocks are at record territories and when the Australian dollar have strengthened (except for the past three days)

But again, it’s hard to see a straight connection based on economic fundamentals when financial markets have been heavily distorted by excessive politicization.

My goal here will not be explain past stock market actions, but rather to anticipate the potential actions given the recent events.

The Chinese government has reportedly suspended three consecutive sessions of reverse repurchase operations.

This has supposedly impelled a spike in the Chinese interest rate markets. Shibor rates (Shanghai Interbank Offered Rates[8]) interest rates representing unsecured short term interbank money markets have soared across the maturity spectrum. The overnight (left most), the 6 months (middle) and 1 year (right most)[9] have all surged.

Friday, yields of China’s 10 year bonds hit 4.23% but closed back at 4.16% the highest since November 2007 when it peaked at 4.6%[10]

Part of the cause has been attributed to “financial and tax paid in October” which contributed to tightening conditions.

While the Chinese government has taken new steps to liberalize interest rates last week where banks rather than the PBOC would set benchmark[11], I don’t think the new interest rate regime has anything to do with the turmoil.

One domestic google translated English article[12] noted that the market is said to be worried about "money shortage", since “excessive tightening of liquidity could lead to systemic risk”. The article mentioned money shortage thrice.

Another google translated English article[13] noted of the same “market money shortage recurrence concerns”, but this time, the quoted expert raised inflation rate and housing prices as contributing to the tightening.

When people complain about “shortages of money”, they could be expressing signs of acceleration of inflation, where changes in the supply of money have been deemed as insufficient to meet changes in money prices. Put differently such represents an advance phase of inflationism.

As the dean of the Austrian school of economics, Murray Rothbard explained[14] (bold mine)

At first, when prices rise, people say: "Well, this is abnormal, the product of some emergency. I will postpone my purchases and wait until prices go back down." This is the common attitude during the first phase of an inflation. This notion moderates the price rise itself, and conceals the inflation further, since the demand for money is thereby increased. But, as inflation proceeds, people begin to realize that prices are going up perpetually as a result of perpetual inflation. Now people will say: "I will buy now, though prices are `high,' because if I wait, prices will go up still further." As a result, the demand for money now falls and prices go up more, proportionately, than the increase in the money supply. At this point, the government is often called upon to "relieve the money shortage" caused by the accelerated price rise, and it inflates even faster. Soon, the country reaches the stage of the "crack-up boom," when people say: "I must buy anything now--anything to get rid of money which depreciates on my hands." The supply of money skyrockets, the demand plummets, and prices rise astronomically. Production falls sharply, as people spend more and more of their time finding ways to get rid of their money. The monetary system has, in effect, broken down completely, and the economy reverts to other moneys, if they are attainable--other metal, foreign currencies if this is a one-country inflation, or even a return to barter conditions. The monetary system has broken down under the impact of inflation.

If the Chinese government really thinks that inflation has gotten out of control then the thrust to tighten may continue. However such tightening could mean bursting of many highly leveraged businesses. This also means that credit woes will spread via the periphery to the core dynamic, given China’s highly leveraged the formal and informal banking system. In short boom could turn into a massive bust.

It is unclear how determined and how much pain and pressures the Chinese political leadership can withstand.

But if it is true that China’s system has reached an advanced phase in terms of inflation and if the Chinese government accommodates the demand for money to ease the shortages then China may experience a Venezuela.

This has been the second time the Chinese government has attempted to curb liquidity.

The first time was in June where China’s credit turmoil caused a stir in Asian markets (blue lines).

While global markets as Australia appears to have discounted the Chinese turbulence as perhaps just another typical quirk, we will have to see or ascertain if the economic conditions has really deteriorated. Japan’s Nikkei appears to be weakening again coincidental with the Chinese benchmark.

The following days will be critical.

If the problems in China have turned unwieldy then another round of a market meltdown can’t be discounted.

As I have been lately saying, there are many flashpoints or minefields around the world that could spell the difference between one’s return ON investments as against return OF investments.

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[1] Bloomberg.com Global Trade Flows Show Exports Are No Magic Bullet October 26, 2013

[2] CPB Memo CPB Netherlands Bureau for Economic Policy Analysis October 23, 2013

[3] Institute of International Finance Emerging Markets Bank Lending Conditions Survey - 2013Q3 October 24, 2013

[4] BSP.gov.ph Foreign Portfolio Investments Yield Net Inflows in September October 17, 2013

[5] Reuters.com Asia-Pacific Sovereigns Face Growing Pressure on Credit Profiles October 17, 2013

[6] FinanceAsia.com Credit outlook cooling for Asia-Pacific sovereigns as risks endure October 16, 2013

[7] See Phisix: Moody’s Sees Bubbles as Structural Shift to Higher Growth October 7, 2013

[8] Wikipedia.org Shanghai Interbank Offered Rate

[9] Shibor.org Shanghai Interbank Offered Rate

[10] See PBoC Tapers: China’s Interest Rate Markets Under Pressure, October 25, 2013

[11] Bloomberg.com China Starts Prime Loan Rate as New Benchmark in Market Push October 25, 2013

[12] Stockstar.com Shibor rose 102.2 basis points, said the industry shortage of money will not come again October 26, 2013

[13] China times "Highlights of the newspaper" bank money shortage trouble? Shanghai jumped Shibor, October 26, 2013

[14] Murray N. Rothbard, 2. The Economic Effects of Inflation Government Meddling With Money What Has Government Done to Our Money?

Amidst Hyperinflation, Venezuelan Government Decrees a ‘Happiness’ Ministry

In Venezuela, “happiness” will now be imposed by fiat.

The Venezuelan government has announced a new bureaucracy called the Vice Ministry of Supreme Social Happiness

From Telegraph/AP

A new Vice Ministry of Supreme Social Happiness has been created by Nicolas Maduro, the Venezuelan president, in an attempt to coordinate all the "mission" programmes created by Hugo Chavez to alleviate poverty.

"I have decided to create this Vice ministry and I have given it this name to honour Chávez and Bolívar," Mr Maduro announced on Thursday in a televised speech made from the presidential palace. He said that the Vice ministry aimed to take care of the most "sublime, vulnerable and delicate, to those who are most loved by anyone who calls themselves a revolutionary, a Christian and Chavista."

Oil-rich Venezuela is chronically short of basic goods and medical supplies. Annual inflation is running officially at near 50 per cent and the US dollar now fetches more than seven times the official rate on the black market.

The creation of the ministry sparked widespread mirth and mocking in the streets and on social media.

In a state of hunger, shortages and hyperinflation, the Venezuelan government will force their citizenry to be “happy”. Maybe frowning, sulking or crying in public or in households will be prohibited.

In reality, the only entities who will be "happy" are the political leadership and the bureaucracy who will be spending more of other people money, and who will virtually dictate on lives of their constituencies to conform with the conceit of their leaders. “Be happy! Or else….”

Well in my view this fits Australia's Walk Free Foundation definition of “modern day slavery” which according to the Los Angeles Times, takes many forms, and is known by many names. Whether it is called human trafficking, forced labor, slavery or slavery-like practices … victims of modern slavery have their freedom denied, and are used and controlled and exploited by another person for profit, sex or the thrill of domination." (bold mine)

Happiness can never be imposed. Happiness is subjective and comes from the individual's inner self. 

As the great Austrian economist Ludwig von Mises explained, (Liberalism p.46)  [bold mine]

Whoever wants to see the world governed according to his own ideas must strive for dominion over men's minds. It is impossible, in the long run, to subject men against their will to a regime that they reject. Whoever tries to do so by force will ultimately come to grief, and the struggles provoked by his attempt will do more harm than the worst government based on the consent of the governed could ever do. Men cannot be made happy against their will

Happiness as a social policy is an example of the height of statist lunacy.

But as Mises warned Venezuela’s Happiness Ministry will eventually "grieve" or have its pretentiousness exposed.

More Statistical Hocus Focus in EU, Emerging Asia and Japan?

Have governments been desperate enough to resort to statistical trickery to boost up economic growth or downplay risks? 

Europe’s data management from Wall Street Real Times Economic Blog: (bold mine)

Sometimes, the absence of data is a data point itself.

Take, for example, a paper published Friday on transparency trends in the International Monetary Fund’s surveillance.

The paper — see Table 4 — reveals that the European Union and its member countries deleted sensitive information about their financial sector in more than a quarter of the IMF’s reports on their economies last year.

Emerging Asia also previously engaged in the same data mining activities…

It also shows that emerging Asian countries are more confident about public scrutiny of their exchange-rate policies than they were in 2010, when they deleted sensitive references to their exchange rates in nearly one-fifth of the IMF’s country reports on the region’s emerging market economies.

The fund’s annual reports on member countries’ economic policies—called Article IVs in a reference to the specific IMF bylaw that created them–are a hallmark of the global lending institution’s analysis. The reports are designed to ensure both domestic and international economic stability.

IMF’s justification of statistical data "management"….

Member countries have the right, however, to delete material in the reports they deem too sensitive, delay publishing of reports, and even prevent the IMF from publishing reports altogether. The deletions are to help rid surveillance reports of market-sensitive and potentially market-damaging data and preserve the IMF’s role as a trusted adviser. (See Table 8 for publication lags.)

See, when statistical data doesn’t fit with the political agenda, then data management have been rationalized or justified as “market-sensitive and potentially market-damaging data”. This means hiding, censoring or editing or data mining by governments, similar to the Chinese government experience, so as to purportedly “ensure both domestic and international economic stability”

We achieve “stability” by misrepresenting data? 

The logical relations flows the other way around. Phony or inaccurate data, which most likely underpins politically induced imbalances, motivates more mismanagement by politicians. And despite censorship, a continued buildup of such misallocation of resources will eventually reach a tipping point or a critical mass that will then be vented on the marketplace. Economic reality will expose on such whitewashed data.

And it may not just be about EU, emerging Asia and China.

Has Japan been managing statistical data too?

From another Wall Street Real Times Economic Blog:

In recent months, the government has been proudly trumpeting rises in consumer prices, including energy, as proof of its success in ending deflation. Yet non-believers have said that’s cheating, as the yen’s 11% fall against the dollar this year has naturally pushed up prices of imported energy.

The following quote on statistics attributed to Prussian born Austrian surgeon and amateur musician Theodore Billroth says it best…

Statistics are like women; mirrors of purest virtue and truth, or like whores to use as one pleases.

Quote of the Day: Law is the unconscious creation of society

Law is not a body of commands imposed upon society from without, either by an individual sovereign or superior, or by a sovereign body constituted by representatives of society itself.  It exists at all times as one of the elements of society springing directly from habit and custom.  It is therefore the unconscious creation of society, or in other words, a growth.

This is from page 21 of the American Bar Association’s publication of James C. Carter’s 1890 essay “The Ideal and the Actual in the Law“. The source of the above quote Café Hayek’s prolific blogger and economic professor Don Boudreaux expounds on the James Carter quote

Legislators are legislation-makers; they are not lawmakers.

True law can no more be consciously designed and created outside of the myriad social interactions that give rise to true law than can a true price be consciously chosen outside of the myriad economic interactions that give rise to true prices.  Commands that look to some people like law can be, and are, consciously designed and created.  But these are not law.  And because commands typically run against the spontaneous forces that give rise to law, such commands are typically against the law – just as a government-imposed price (or price control) results in something that looks like a price but is, in fact, not a true price at all.

PBoC Tapers: China’s Interest Rate Markets Under Pressure

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

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

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

From yesterday’s Bloomberg:

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

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

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

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

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

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

According to a fresh Wall Street Journal report.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Humor: Krugman teaches Gilligan the broken window (fallacy)

(source: Austrian economist Bob Murphy) 

!

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

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

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

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

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

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

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

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

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

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

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

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

Saudi Arabia Cuts Ties with the US over Syria-Iran

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

Writes the Daily Mail, (hat tip Mises Blog)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

As historian Eric Margolis explains:

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

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

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

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

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

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

Mideast politics is surely a complicated one.

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

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

From Bloomberg:

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

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

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

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

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

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

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

Promoting debt has gone global.

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

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

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

Yet cheap credit equals asset bubbles

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

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

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

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

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

According to the Wall Street real time economics blog

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

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

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

 This comes as global GDP shrinks.

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

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

Dr. Marc Faber  at the Daily Reckoning writes

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

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

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

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

The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market. But it could not last forever even if inflation and credit expansion were to go on endlessly. It would then encounter the barriers which prevent the boundless expansion of circulation credit. It would lead to the crack-up boom and the breakdown of the whole monetary system.

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

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

From Bloomberg:

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

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

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

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

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

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

Various Asian countries have undertaken ex-US dollar deals.

From Wall Street Journal Blog

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

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

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

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

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

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

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

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

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

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

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

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

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

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