Has the Middle East Stock Market Bubble been Popped?

Has the escalating violence in Iraq popped the Middle East stock market bubble? Have investors been cashing in to seek safehaven from  further deterioration in region's social conditions?  Or has the current abrupt declines been about raising funds to finance parties engaged in the sectarian war? Or has the Iraq war served as an aggravating factor to a bubble naturally set to bust? 

The following charts are from Bloomberg and referenced from a 3 year perspective

The Bloomberg GCC  200 Index or BGC200 or the “capitalization weighted index of the top 200 equities in the GCC region”. GCC stands for Gulf Cooperation Council or the “regional intergovernmental political and economic union consisting of all Arab states of the Persian Gulf, except for Iraq. Its member states are the Islamic monarchies of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates” (Wikipedia)

The Bahrain Bourse all Share index (BHSEASI). Despite the recent decline, the BHSEASI remains up 14.89% year to date.

The Kuwaiti Stock Exchange Index (KWSEIDX) –8.07% y-t-d

Oman’s Muscat Securities (MSM30) +1.5% y-t-d

Qatar Exchange Index (DSMID) +19.98 y-t-d

Saudi Arabia’s Tadawul All Share (SASEIDX) +13.04% y-t-d

Finally the United Arab Emirates Dubai Financial Market General Index (DFMGI) +36.31% y-t-d

Are these writing on the wall for global stock markets? 

We will see how these will play out.

Stay tuned.

Quote of the Day: The ISIS as evidence to theories of the state’s origins

How does ISIS spend the money it collects? This too sheds light on how a state embeds itself with a population and creates its own particular equation of sources and uses of funds. Every state (and organization of any kind) by definition has this equation: sources of funds = uses of funds.

“‘It’s assumed that ISIS pays the foreign fighters in its ranks, but perhaps it pays all its troops,’ according to Charles Lister. ‘In the areas under ISIS control, the organization subsidizes bread, water, and fuel, and also finances the maintenance and operation of basic public services. All that costs money.’”

ISIS has three main uses of funds: military + goods to the population + support of government administration. The “population goods” keep its subjects quiet. The military provides the force and threat to be able to extract the taxes and other resources from looting. The support of government pays for the government officials, tax collectors and bureaucracies. Every state, not only ISIS, is the same. The equation, in simplified terms as exemplified by ISIS, looks like this:

TAXES = MILITARY SPENDING + GOODS TO THE POPULATION + GOVERNMENT ADMINISTRATION

(TAXES includes all forms of looting, and I’ve omitted charitable giving as a source because it is typically not a continuing major source for states. It can be a significant startup source.)

Since taxes are necessarily higher than goods returned to the population, the subjects of any state continually incur a loss. They supply the funds that go to the military that keeps them under the rule of the state. That and the resources that go to government administration are a deadweight monetary loss. (There are other losses. There is a loss in utility or happiness because the taxes do not go to goods that the citizens want. There are losses from the disincentive effects of taxes and government rules.)

ISIS, now a proto-state and seeking to become a state, began in violence and conquest. This is how states begin according to Franz Oppenheimer and Albert Jay Nock, among others. ISIS provides further evidence consistent with their theories of the state’s origins.

This excerpt is from former economics and finance Professor Michael S. Rozeff at the lewrockwell Blog

Swiss Politics: The Birth of a Libertarian Party UP!, “Unabhängige Partei”

Global financial strategist George Dorgan of the SNBCHF blog writes: (bold original)

On June 18th, 2014, the new radical libertarian party UP!, “Unabhängige Partei”, Independent Party was founded, a party that is independent of the state, independent of the prevailing corporatism and collectivism, independent of the new Big Brother System that is built to preserve the feudal power of existing collectives.

UP! is neither left nor right. It is simply radically libertarian.

UP! wants

-A radical dismantling of the power of the state

-Less and more simple taxes

-Stronger tax competition and therefore an abolishment of the inter-cantonal fiscal equalisation scheme

-Reduction of debt

-Reduction of public services, of social security systems and of the public redistribution

-A gradual replacement of the public pension system (AHV)  

Neutral Switzerland without restrictions on immigration and trade 

-An independent and neutral Switzerland

-A Swiss entry in EU or NATO are no option.

-Abolishment of foreign aid, that wastes resources, but an unilateral introduction of free trade

-Free migration (without access to social security systems)

-Privatisation of the asylum system   

Self-determined life 

-Legalisation of all drugs

-No infantilizing of the individual: Against curfews, against bans on gambling, on advertising, on “killer games”, on alcohol in public places

-Easier access to euthanasia

-Abolishment of the universal military conscription No taxes for the promotion of culture   

UP’s current campaigns are:

-Abolishment of TV license fees - No Billag

-Against the Big Brother State, against the BÜPF - www.buepf.ch.

Good luck to the “UP Schweiz”!

Graphics of the Day: The 5 things they don't tell you about economics

Read the explanation from Zero Hedge.

Listverse: 10 Outrageous Broadcasts That Caused Mayhem

Listverse.com enumerates 10 broadcasts (from error, prank or publicity gimmickry) which sparked episodes of turmoil. [hat tip Lew Rockwell.com]

My favorite three…

#9 Sea Monster Attacks Tokyo
May 20, 1947

In a scene straight out of Godzilla, the US army’s radio station WVTR announced that a giant sea monster had risen off the coast of Tokyo and was rampaging its way toward the capital. Although the perpetrators intended the broadcast as a humorous part of their station’s anniversary celebration, it instead sparked panic among the local populace and the occupying forces, with US personnel and Japanese police mobilizing to track down the monster.

One British officer called to verify the station’s reports because his men were demanding weapons to fight the beast. According to one station member, even MacArthur himself called in to confirm their broadcast.

After the hoax was revealed, the US army’s top brass lambasted the perpetrators and removed them from the station. Although their fates were not announced after the debacle, they were likely sent to Korea afterward as punishment.

#7 The Sibuxiang Beast
September 19, 1994

Residents of Taiyuan in China’s north erupted into panic when a TV station reported that a terrible animal known as the “Sibuxiang Beast” was nearing their city. The frightened populace locked themselves up at home while others frantically called the authorities for help. Eventually, the beast did arrive—only in the form of a new brand of liquor.

The “Sibuxiang Beast” TV spot had been an ad. But viewers used to commercials mundanely narrating and presenting products had taken it as an actual news report.

Although Jing Huiwen, the owner of the advertising firm behind the commercial, was later forced to apologize and pay a fine, the overwhelming publicity turned the Sibuxiang brand into a household name and quadrupled the firm’s roster of clients. Foreign analysts hailed the event as the beginning of capitalist creativity in China. 

#1 War Of The Worlds (Ecuadorian Edition) 

February 12, 1949 

Residents of the Ecuadorian capital of Quito rioted after local station Quito Radio aired a Spanish dub of Orson Welles’s famous broadcast. People panicked in the streets, some running to the nearest church to hear a last service. However, fear quickly turned to rage after they realized that they had been hoodwinked. Consequently, a mob formed and set fire to the building that housed the radio station. They also ganged up on staff members who tried to escape the blaze.

The station suffered more than $300,000 in damages, and an estimated 6–20 people died. Only the arrival of the police and military ended the chaos.

In true urban legend fashion, it was said that the announcer who aired the broadcast, Leonardo Paez, was last seen standing on top of the burning building before disappearing. His daughter, however, later revealed that Paez understandably went under the radar for a while before having his case reviewed—and ultimately dismissed—by a court. After that, he relocated to Venezuela.

Pls read the entire list here.

Aside from the amusement aspect, the article demonstrates of the frailties of crowd psychology and their vulnerability to ‘trusted’ sources of information. 

Prior to the internet age, where information dissemination has been mostly centralized, it is easy to understand the public’s sensitivity to centralized information.

In the information age, this should unlikely be the case.

But not for the Philippines which has a cameo role here...

#3 Philippines Flesh-Eating Disease Hoax
February 24, 2014

In a classic case of mass hysteria with a modern twist, residents of the Philippines province of Pangasinan and netizens erupted into hysteria after linking an Indian preacher’s April 2013 prophecy about a flesh-eating disease to two patients with a “mysterious illness.” It didn’t help that that the country’s leading news station, ABS-CBN, investigated the incident and had its reporter wear full protective gear while interviewing the patients.

While local residents understandably panicked, the response took on epic proportions on the Internet, as evidenced by 80,000 Twitter users who hashtagged “#PrayforPangasinan.”

Eventually, health authorities who closely examined the two patients disclosed that they were suffering from nothing more than leprosy and psoriasis respectively. This revelation forced the news station to issue an apology, although they also stated that they really just wanted to find out if the flesh-eating disease was real or not.

The internet age should have provided the public opportunities to investigate on the validity of such sensationalist claims. Unfortunately, this “classic case of mass hysteria with a modern twist” looks like a sorry state of affair where social media has functioned instead as loudspeakers for misinformation. This also reveals of the gullibility of the so-called local netizens to populist-tabloid journalism.

As British essayist Gilbert Keith Chesterton once wrote

Journalism is popular, but it is popular mainly as fiction. Life is one world, and life seen in the newspapers another; the public enjoys both, but it is more or less conscious of the difference.

Iraq War: Dick Cheney’s predictions come true

Mises Academy director Daniel Sanchez at the lewrockwell.com evaluates the predictions of former US VP Dick Cheney

In a 1994 interview, Cheney was taken to task over this “missed opportunity” by the neocon American Enterprise Institute. Cheney defended the decision using the following predictions:

Once you got to Iraq and took it over, took down Saddam Hussein’s government, then what are you going to put in its place? That’s a very volatile part of the world, and if you take down the central government of Iraq, you could very easily end up seeing pieces of Iraq fly off: part of it, the Syrians would like to have to the west, part of it — eastern Iraq — the Iranians would like to claim, they fought over it for eight years. In the north you’ve got the Kurds, and if the Kurds spin loose and join with the Kurds in Turkey, then you threaten the territorial integrity of Turkey.

Let’s look at the events of this past week, and see how clear Cheney’s crystal ball was.

Cheney predicted Syrians taking over western Iraq. Western Iraq, including oil-rich Mosul (the second-largest city in the country), has indeed been taken over by a force entering from Syria: namely, ISIS (the Islamic State of Iraq and Syria), an Al Qaeda splinter group (and beneficiary of American military aid to the rebel forces in the Syrian civil war). True, it’s not the Syrian state, and only partially consists of Syrian people. But he got the geography right, and the demographics partially right. 

Check.

Cheney predicted the Iranians taking eastern Iraq. The U.S. war that overthrew Saddam’s Sunni Muslim regime put the government and the capital in the east, Baghdad, into the hands of a Shi’ite regime allied with Shi’ite Iran, who backed the election of the current prime minister. And now Iran has actually deployed troops to combat ISIS into Iraq from the east. With the U.S. ground presence already mostly gone, and now rapidly evacuating, and Iraqi government soldiers stripping off their uniforms and abandoning their U.S.-supplied weapons to ISIS at the first sight of them, the Iranian troops are becoming the only serious ground force in the east.

Check. 

Finally, Cheney predicted the Kurds spinning loose and being a threat in the north. The Kurds have indeed become autonomous, and recently seized the northern city of Kirkuk for themselves, after it was abandoned by Iraqi government forces fleeing the oncoming ISIS forces.

Check. That’s 3 for 3. 

Pls read the rest here

Middle East Crisis: The geopolitics of my enemy’s enemy has become my friend’s enemy

The current crisis in the Middle East has really been a product of the politics of imperialism of which the unraveling political conditions of Iraq represents just one of the many emerging and potential symptoms.  

Iraq emerged as part of the territorial allocation (divisions of spoils from war) awarded to Britain, taken from the vanquished Ottoman Empire, via the Sykes-Picot treaty/agreement (a secret agreement of United Kingdom and France with the assent of Russia in defining their sphere of influence), following the close of World War I. This makes Iraq an artificial nation bound by deep ethnic and religious divide. And US government meddling in the region has only opened up old wounds and complicated highly sensitive relationships.

The Middle East geopolitics of "no permanent friends and only permanent interests" as explained historian Eric Margolis.

The late Saddam Hussein was certainly right when he predicted that America’s invasion of Iraq would become “the Mother of All Battles.” Eleven years later, it continues….

ISIS is a combination of Sunni jihadist groups fighting the Shia-backed Damascus government of Bashar Assad( a US enemy backed by Shia Iran), and resurgent units of Saddam’s old Ba’athist army, led by Izzat Ibrahin al-Douri, the last surviving member of Saddam’s inner circle, and a handful of al-Qaida in Iraq.

They are battling to overthrow the US-installed Shia regime in Baghdad of Nuri al-Maliki, an Iranian ally. There are suspicions ISIS may be secretly financed by Sunni Saudi Arabia, a US ally.

Wait a minute. My enemy’s enemy is my friend, as the old Mideast saying goes. The US is trying to overthrow Syria’s secular government to undermine its ally, Iran. The US has been using brutal jihadist groups against the Assad regime in Damascus. But now these jihadists in Syria have mostly fallen under the sway of ISIS – which is chewing up the US-backed regime in Baghdad. Confusing, is it not? My enemy’s enemy has become my friend’s enemy.

The major beneficiary from the Middle East Crisis….

Following the time-tested Roman imperial formula of ‘divide et impera’ (divide and rule), Washington played Iraq’s long downtrodden Shia against its Sunni minority, igniting a wider Sunni-Shia conflict in the Arab world, notably in Syria. In fact, Israel emerged as the sole strategic victor of the Bush/Cheney war against Iraq.

That war, so far, has cost the US 4,500 soldiers killed, 35,700 wounded, 45,000 sick and over $1 trillion. Iraq lies in ruins, likely shattered beyond all attempts to put it back together. No senior American or British official has faced trial for this disastrous, trumped-up war.

The blowback on Sykes-Picot

Interestingly, efforts by ISIS to forge an Islamic state in a merged Syria and Iraq is one of the first major challenges to the foul Sykes-Picot agreement of 1916 under which the British and French Empires secretly colluded to divide up the moribund Ottoman Empire’s Mideast domains. Today’s artificial Mideast borders were drawn by the Anglo-French imperialists to impose their rule on the region. Iraq and Syria were the most egregious examples.

ISIS appears set on erasing the British-French borders and re-creating the unified Ottoman province (Turkish: vilyat) of Syria, Lebanon and Iraq. In the West, the neocon-dominated commentariat calls ISIS terrorists. In the Mideast, many see them as anti-colonial fighters struggling to reunite the Arab world sundered and splintered by the western powers. The western powers are now preparing to strike back.

Read the entire article here

If the conditions in the Middle East spreads and deteriorates, such poses a substantial risk on the stability of the region. Aside from the potential impact on oil prices which will compound on the growing global inflationary pressures, a regional conflict will destabilize global trade and economy (e.g. OFWs)

Don't worry be happy, stocks will rise forever.

Street Talk: Reactions of Philippine Residents to the current surge in consumer price Inflation rates

The Wall Street Journal Interactive took a small sample of reactions by Philippine residents on the recent surge in consumer price inflation.

Very interesting comments or responses to the question by the Wall Street Journal on “How do you offset rising prices?” (bold mine)

-We cut off our family Sunday dinners in restaurants. I seldom spend on clothes, since I get these from my relatives abroad. I stopped buying accessories and pieces of jewelry. We now skip buying treats like pizza and ice cream.

-We changed our shopping habits. Before [prices rose], we would go out on pay day. Now, we stay at home during the weekends and cook two kilos of fried chicken every pay day.

-I reduce my costs by not shopping for women’s luxuries, like accessories.

-I concentrate on basic needs. Traveling is no longer a necessity but a privilege. In the 1990’s when I was studying, the jeepney fare was 1.50 pesos. Then, while I was in college, I spent 6 pesos daily. In the past, price increases were not drastic. Today, we are experiencing price fluctuations.

-Buying new clothes and accessories are costly and unnecessary. I decided to stop buying those.

Here is what I wrote last March (bold original)

Given that the Philippines has been relatively significantly less productive economy (as revealed by the huge informal economy and the lack of depth in both formal banking and capital markets) the average populace are likely to be more prone or highly sensitive to price inflation compared to her much wealthier neighbors.

Price increases in energy, food, rentals and transportation will effectively reduce the average resident’s disposable income as spending will be diverted to essentials. This is the income effect.

And should there be residual disposable income, rising prices may impel the average consumer to conserve resources by switching into the more affordable alternatives. This is the substitution effect.

Sustained price pressures on basic goods would imply that the forces of the income and the substitution effects will increasingly come into play.

The above is a basic demonstration of rising consumer price inflation's impact on demand via the income effect (reduced or stop buying...) and the substitution effect (changed shopping habits...stay at home) in motion. 

Soaring property prices combined with accelerating consumer price inflation in food that has spread to a broader base of consumer and even to producers goods (e.g. cement as shown signs of increase in black market activities) will serve as a lethal cocktail mix to the "this time is different" credit financed boom. The adverse impact will not only affect demand but likewise negatively impact incomes (jobs), earnings (profits) and eventually asset valuations.

The same forces will expose on the myth of the supposed "transformational" Philippine consumer economy which has underpinned the Shopping mall bubble.

Government Failure: Thailand’s Rice Subsidies

File this under another grand moment of government failure: Thailand’s rice subsidies

From the Wall Street Journal Real Times Economic Blog (bold mine)

Under the program, the government offered to buy rice from local farmers for up to 50% above the market rate in a bid to boost incomes and spending among a key constituency. The premise was that by hoarding rice Thailand would be able to force up rice prices globally, reaping a larger profit when the stocks were eventually sold.

But the program backfired as India and Vietnam ramped up their own rice exports, knocking Thailand from its spot as the world’s top producer and forcing prices down.

State warehouses were flooded with an estimated 10-15 million tons of rice that Ms. Yingluck’s administration was forced to sell in order to pay farmers after the plan’s financing became unsustainable, driving down prices further. Still, many farmers went unpaid for months, and a few committed suicide after finding themselves unable to pay off debts.

This seems like a wonderful depiction of central planning failure and of the political economic lesson called “There is no such as a free lunch”

The former populist governments of Thailand bought the farmers votes by providing rice subsidies. That’s because about 2/3 of Thai’s population have reportedly been rice farmers. The government eventually came to realize that their grand scheme of influencing world markets backfired which is classic example of the fatal conceit from central planning. 

And most importantly, the government eventually awakened to the reality that taxpayer resources has LIMITS!!!

So the parasitical dependency relationship which had been nurtured from Thai’s rice politics caused financial havoc to many farmers where many were left unpaid which prompted a few to commit suicide.

Thai’s rice politics seem to ring a bell with the Philippine setting whose very costly counterpart carries a slogan “rice self-sufficiency” program. Like in Thailand, spending by the government continues to bulge, part of which has been financed by ballooning debt.

The article’s intent has been to report that the junta government has “officially confirmed” the end of the controversial subsidy program under its regime. This should be a welcome development. But the military government said that the decision for its continuance “could be left to the new interim government”. This means for now Thai's rice subsidy has conditionally been placed in the backburner subject to future political exigencies. Politics has always been about smoke and mirrors.

Bernanke’s Dogma in Action: Global Central Banks Secretly Acquired $29 trillion of Equities!

Recently I wrote, “when Ben Bernanke, yet as a university professor wrote a “smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse”, which became a social policy, popularly known as the Bernanke/Greenspan PUT, this translates to an implicit subsidy to equity market owners, financed by the ordinary citizens.” 

Such dogma, which turned out as real social policies, became much more than just about manipulating yield curves via zero bound rates and asset purchases on bonds and mortgages, central banks have stealthily made $29 trillion of direct interventions in the stock markets 

From the Financial Times (hat tip Zero Hedge) [bold mine]

Central banks around the world, including China’s, have shifted decisively into investing in equities as low interest rates have hit their revenues, according to a global study of 400 public sector institutions.

“A cluster of central banking investors has become major players on world equity markets,” says a report to be published this week by the Official Monetary and Financial Institutions Forum (Omfif), a central bank research and advisory group. The trend “could potentially contribute to overheated asset prices”, it warns.

Central banks are traditionally conservative and secretive managers of official reserves. Although scant details are available of their holdings Omfif’s first “Global Public Investor” survey points out they have lost revenues in recent years as a result of low interest rates – which they slashed in response to the global financial crisis.

The report, seen by the Financial Times, identifies $29.1tn in market investments, including gold, held by 400 public sector institutions in 162 countries.

Who has been buying? Some clues from the FT:

A chapter in the report on Chinese foreign investment trends argues Safe’s interest in Europe is “partly strategic” because it “counters the monopoly power of the dollar” and reflects Beijing’s global financial ambitions.

In Europe, the Swiss and Danish central banks are among those investing in equities. The Swiss National Bank has an equity quota of about 15 per cent. Omfif quotes Thomas Jordan, SNB’s chairman, as saying: “We are now invested in large, mid- and small-cap stocks in developed markets worldwide.” The Danish central bank’s equity portfolio was worth about $500m at the end of last year.

Overall, the Omfif report says “global public investors” have increased investments in publicly quoted equities “by at least $1tn in recent years” – without saying from what level, or how the figure is split between central banks and other public sector investors such as sovereign wealth funds and pension funds.

At what costs does this interventions come with?

Growth in countries’ official reserves has increased fears about potential risks to global financial stability. In a contribution to the Omfif report, Ted Truman, a senior fellow at the Peterson Institute for International Economics, writes: “Reforms are urgently needed to enhance the domestic and international transparency and accountability for this activity – in the interests of a better-functioning world economy.”

He adds: “Changes, real or rumoured, in the asset or currency composition of foreign exchange reserves have the potential to destabilise exchange rate and financial markets.”

Central banks around the world have foregone between $200bn and $250bn in interest income as a result of the fall in bond yields in recent years, Omfif calculates, without giving details. “This has been partly offset by reduced payments of interest on the liabilities side of the balance sheets,” it adds.

The same equity market interventions can be seen in the Philippines mostly coursed through government pension funds.

Oh by the way here is one unintended cost, in Europe, equity valuations have been stretched to a decade high

From Bloomberg:

The two-year rally that has restored more than $4 trillion to European share prices is sending equity valuations to levels not seen in a decade just as investors turn away from record low bond yields.

Gains have pushed the StoxxEurope 600 Index to 17.5 times annual earnings, the highest since 2002, data compiled by Bloomberg show…

The advance in the Stoxx 600 since June 2012 has pushed the gauge up 48 percent and sent its price-earnings ratio 26 percent above its decade average relative to reported earnings, according to Bloomberg data.

Through repeated central bank interventions which function as guarantees, the mainstream have become deeply addicted to the magic wand of inflationism which they believe can boost stocks (and DEBT) forever. They hardly realize that central bank actions has unintended social-economic and political consequences that will ultimately backfire.

The thought provoking question is: what happens to central bank balance sheets when the current stock market boom turns into bust?  A follow through question is what happens to the currencies supporting these inflated balance sheets? Interesting.

Daddy’s Day [Abridged] Edition: Phisix: The Climaxing Philippine Property Bubble!

Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.—Milton Friedman

Happy Fathers Day!!!

In this issue

Daddy’s Day [Abridged] Edition: Phisix: The Climaxing Philippine Property Bubble!

Bonus: Chart of the Day: Russell 2000

Daddy’s Day [Abridged] Edition: Phisix: The Climaxing Philippine Property Bubble!

I am not supposed to be writing again this week, but recent developments have been so compelling for this unpopular causal-realist analyst to resist from doing his work of calling a spade a spade.

The Global Property Guide noted that the high end vertical residential markets in the Philippines have recently been skyrocketing. (bold mine)

In the Philippines, the average price of 3-bedroom condominium units in Makati CBD rose by 8.95% in Q1 2014 from a year earlier, a sharp improvement from the annual growth of 2.32% during the same period last year.

Look at the numbers again: 8.95% 1Q 2014 against 2.32% 1Q 2013; this indicates a breathtaking almost THREE times leap in the rate of growth! If such explosive pace of growth will be carried through the year, annualized, this means high end property inflation of 35% percent!!! To repeat, THIRTY FIVE percent property inflation, Yikes!!! In 2013, the same company reported a 10.56% jump in growth rates for the same sector, which has been slightly above the 1Q 2013 annualized growth rate.

And this spectacular surge in the high end property inflation rate almost mirrors the equally fantastic money supply growth rate! 

I believe that much of the other property segments will reveal an almost similar frenetic pace of price escalation. To consider, as I previously tallied, the top publicly traded property developers alone have allotted at the very least $250 billion in capex for 2014 which will be funded mostly by debt. 

So with all these new money coming into the economic stream, mostly raised from banking system, these implies a massive chasing of limited supply of land-property which ensures a chimerical spike in land and property prices, now obviously seen via the stupendous 8.95% growth rate in Makati CBD condos.

Oh by the way, the average banking loans during the first quarter to the real estate sector, construction industry, trade, financial intermediation and hotel has been at 19.09%, 46.64%, 19.05%, 11.96% and 41.94% respectively, numbers which are far far far off the statistical growth data! These figures are very supportive of, or consonant to the latest surge in the property prices.

And like outrageously overvalued and mispriced stocks (PERs of 30,40,50,60 and PBVs of 4,5,6,7,8 which are ABOVE pre-Asian crisis levels, which I pointed out here, as well as standard deviations of 5 sigma for some stocks based on 4 year eps), property prices have been manifesting signs of a manic blowoff top. 

Such has been symptoms of mindless chasing or pushing up of financial assets financed by credit encouraged, prodded and abetted by monetary policies.

Because these assets are titles to capital goods, both are highly sensitive to changes in interest rates. So by forcing the public into frenzied speculative activities, the financial repression policy of negative real rates has massively been distorting the valuations of these assets, income and earnings. Unfortunately, the consensus construes these as ‘sustainable’, yet they never come to question why the BSP has been so averse to raise rates? Will rising rates foil the “transformation” dream?

Also, the rate of property inflation reinforces my discernment that the BSP’s measure of CPI inflation rate has hardly been reflective of real conditions.

This also means that current financial market prices (peso, bonds and stocks) have hardly been accurately discounting or have priced in such a spike in implied inflation.

Despite these, blinded by illusions of the boom phase of every bubble, the mainstream still has NOT come to reckon that these are signs of financial instability or a bubble!!! It is understandable that industries benefiting from these invisible transfers, operating on a principal-agent dynamic, will staunchly deny such risks by selling to the public HOPE instead of the real balance of risks from current the political economic environment.

And yes, such deeply held optimism has all been grounded on political hopes. But again no one dares question why the BSP has exhibited steadfast reluctance to apply real “macro prudential” policies of tightening.

BSP officials have chosen instead to ignore self imposed rules (e.g. BSP’s circular 600), would rather massage the financial markets, and resort to policy gimmickry (e.g. raise reserve requirements) and on publicity hype via statistical smokescreens such as calling the 1q 2014 GDP slump as a one-off effects from Typhoon Yolanda (even when the coconut industry have been the only direct link) or could even be likely understating that Banking system’s loan portfolio exposure on the real estate industry which they say grew by only 4.5% in 2013 even when their other figures covering the supply and demand side (for banking loans on the property sector) have posted an astounding annualized 23.64% and 21.34% growth rates!

Just give it a thought: In the 1Q 2014, Makati high end condos rose by a whopping 8.95% even as the statistical GDP slipped to 5.7%. The latter has largely been due to a decline in (-.9%) private construction.

What does this entail? Instead of going into construction activities, a lot of freshly issued bank credit money found their way into boosting Makati’s high end properties and properties where the credit issuance dynamic operates on.

Yet how will an annualized 35% increase in high end property prices, which is about 5x GDP, be sustained if the statistical formal economy slows or remains at current level or even marginally improves? Or how will such rate of growth continue if banking and other credit activities fall?

So while publicly declaring war against financial instability, the monetary politburo has been taking actions that has been buttressing on such risks. In short, via financial repression policies of negative real rates, the Philippine economy may have become guinea pigs for the top BSP Nomenklatura to dabble with.

Just a reminder on the economic and political ramifications of a property bubble:

Property bubbles will hurt both productive sectors and the consumers. Property bubbles increases input costs which reduces profits thereby rendering losses to marginal players but simultaneously rewarding the big players, thus property bubbles discourage small and medium scale entrepreneurship. Property bubbles can be seen as an insidious form of protectionism in favor of the politically privileged elites.

Property bubbles also reduces the disposable income of marginal fixed income earners who will have to pay more for rent and likewise reduces the affordability of housing for the general populace.

To consider, it’s only a matter of time when such rate of price increases will spillover to Makati’s rental markets covering other residential and commercial sectors. This will affect household affordability and business viability of commercial tenants. The diffusion will also spread first within the metropolis then outside to mostly urban areas, again where the credit money will flow.

People hardly realize that property bubbles will drive a deep political wedge between property owners and the non-property owners or even between big property owners relative to the small property owners. Add to this the widening chasm between the elite relative to the middle and lower class, where the former has unbounded access to central bank subsidy, in terms of easy money or bank and capital market credit, where easy money speculations not only drive up the elite’s financial assets but will likely facilitate the acquisition of properties from those with less access to the formal credit sector. This means not only of invisible redistributions but a concentration of risks and benefits to those few entities with access to the formal credit system. No bubble eh?

As a side note, the subsidy hasn’t been restricted to financial flows. There has also been transfer of risks to hapless retail depositors. Much of the conventional finance managers recklessly deploy depositor’s savings to the aggressive expansions by politically connected elite companies in the hope of generating returns from such overvalued levels. In reality, such exposures will hardly even generate “low” returns at current price levels, but instead assumes on a high degree of risks through excessively valued collaterals or indentures that are convertible to overpriced securities. 

In short, due to the seeming foolhardy management of fiduciary pool of funds from retail depositors by conventional or mainstream financial institutions, savers are at a severe risk of losses stemming from not only nominal based capital but likewise real (inflation adjusted) capital, as well as, opportunity costs. 

Yet all these accruing inflation in asset markets will eventually fuel outcries over “inequality”. Such has already been the political landscape in Singapore.

Property bubbles are simply NOT sustainable.

Rising general inflation rates have already been indicating of a coming reversal. Couple this with the sharp slowdown in money supply growth rate which began this January that will be manifested this July; a possible sign that the biggest borrowers may have hit their natural saturation point of imbuing debt.

The consensus will be faced with a harsh awakening pretty much soon.

Voltaire [François Marie Arouet] (1694-1778) was imputed to have said "Prejudices are what fools use for reason."

Beware the prejudice based merely on faith; especially faith predicated on political promises that has been PROVEN economically unfeasible and unsustainable as shown throughout history.

Bonus: Chart of the Day: Russell 2000

Though I started as a chart technician I am not really a fan of pattern seeking analysis.

Technical analysis for me is the layperson’s equivalent of econometrics—the attempt to see or understand prices in the frame of mathematical models, via a multitude of variegated mathematically constructed indicators such as moving averages, trading bands, oscillators, momentum, patterns, waves and etc., presented in the context of price based patterns.

They somehow represent what psychologists call as the heuristics of the “law of least effort” as they don’t require exhaustive examination of the real determinants of prices—subjective values of people expressed through actions. 

In my view, the usefulness of technical analysis is in the understanding of how the public uses them rather than of the tools itself.

Here is the chart of the small cap US benchmark the Russell 2000. As of June 13, 2014, the Russell 2000 has been priced at 82.71 PER based on Wall Street Journal’s trailing 12 months.

Will the bearish Head and Shoulders formation materialize or be falsified?

Questions: What if the NEGATIVE (-.1%) 1Q US GDP turns out NOT an anomaly but carried through the 2^nd Q? This would mean an official recession for the US economy even when stocks (US and elsewhere are at record highs).

Three follow up questions: How will the record mispriced US stock markets react to an official recession? How will the US officialdom react to such an outcome? Will the US Federal Reserve cease or reverse from current “tapering”? Given that today’s financial markets have been deeply reliant on central bank actions, to which course of actions will global financial markets give weight to?

We are looking forward to a very interesting second half of the year.

China Bubble: No Money Down Housing Proliferates, Echoes US Subprime Loans

In desperation to sell an oversupply of properties, Chinese developers have evaded regulations to offer "no money down" housing loans which the Bloomberg associates with the risks of US subprime loans

China’s home buyers are being offered no-money-down purchases in an echo of the subprime lending that triggered a U.S. economic meltdown and the global financial crisis.

Deals skirting government requirements for minimum 30 percent down payments have emerged this year from Guangzhou and Shenzhen in the south to Beijing in the north as real-estate sales slump, according to state media and statements by government agencies and developers.

Loosening down-payment requirements could erode China’s financial stability by adding to risks for property companies, lenders and an economy already heading for the weakest growth in 24 years. Government warnings to consumers indicate that officials will strive to limit such arrangements, a sign of stress in a property market with a glut of homes.

Well, this has not just been an exclusive Chinese affair, Sovereign Man’s Simon Black points to the same financially destabilizing risks of NO money loans down in the Philippines.

Going back to China, the earlier stimulus of “additional spending on railways, upgraded housing for low-income households and tax relief for struggling small businesses” plus the central bank, the PBOC’s calls for “nation’s biggest lenders to accelerate the granting of mortgages” or the political way to solve debt problems with even more debt, appears to have delayed an economic meltdown as banking loans and money supply growth recovered in May.

From another Bloomberg article: (bold mine)

Local-currency loans were 870.8 billion yuan ($140 billion), the People’s Bank of China said on its website yesterday, higher than 42 out of 43 analyst estimates in a Bloomberg News survey. M2, the broadest measure of money supply, rose 13.4 percent, compared with a median projection for 13.1 percent…

Aggregate financing, China’s broadest measure of new credit was 1.4 trillion yuan in May, matching the median analyst estimate in a Bloomberg News survey. The figure, which includes bank lending, corporate bond issuance and shadow-banking products like entrusted loans, compared with 1.55 trillion yuan in April and 1.19 trillion yuan in May last year. 

New yuan loans accounted for 62.2 percent of aggregate financing in May, up from 50 percent in April and 56.1 percent a year earlier, central bank data show.

Chart of China’s M2 and New Loans can be seen here.

Despite the rhetoric to control the shadow banks, the Chinese government continues to flush the system with liquidity. In mid-May, the PBoC injected 44 billion yuan ($7.1 billion). Yesterday the central bank added 104 billion to the interbank system for the 5th consecutive net weekly injection. This is a sign of how worried authorities are with the financial-economic system

While favoring the formal banking system, growth in May loans reveals that credit activities in shadow banks continue to swell.

So obviously all these measures have been meant to buy time. 

Today, Chinese equity markets as represented by the Shanghai Composite Index had been jubilant—as they have been up by about 1% (specifically .93%) on reported economic improvements.

From Bloomberg:

China’s industrial output rose 8.8 percent in May from a year earlier and retail sales gained 12.5 percent, the National Bureau of Statistics said on its website today.

Fixed-asset investment excluding rural households increased 17.2 percent in the first five months of the year, the Beijing-based agency said.

What you see depends on where you stand.

Fixed Asset investment has still been declining but yielded better than expected ‘forecast’

Industrial Production remains stagnant 

It's only retail sales that has shown slight improvement

Except for retail sales which looks like a dead cat’s bounce, both industrial production and fixed investment hardly points to a ‘recovery’. Recovery has been more a wishful thinking.

Nonetheless, in today’s credit addicted world, governments aim to keep the unsustainable party going by spiking the punch bowl with even more toxic credit, China's political response has been no exception.

Watch Out, Surging Oil Prices will COMPOUND on Inflation Risks!

Low-flation eh?

From Reuters:

Oil prices jumped to nine-month highs on Thursday, as concerns mounted that escalating violence in Iraq could disrupt oil supplies from the second-largest OPEC producer.

Sunni Islamist militants, who took over Iraq's second-biggest city Mosul earlier this week, extended their advance south toward Baghdad and surrounded the country's largest refinery in the northern town of Baiji on Thursday.

Let us see these via charts.

The US crude benchmark the WTIC just had a breakout!

US gasoline likewise posted a seeming breakout, which will likely be confirmed or falsified during the coming sessions.

This will ADD to the growing inflation pressures in the US which will jeopardize the stock market bubble.

Even Europe's Brent Crude seems as testing a critical resistance level.

The question is will troubles in Iraq signify a temporary event or will these escalate?

The recent twist of events reveals how the US Bush-Obama war on Iraq has not only been a dramatic failure of US interventionist policies, but a blowback, as the so-called terrorists seemingly beating back the Americans at their own game.  Talk about Karma.

These also seem as the unintended consequence of the confused and self contradictory imperial policies by the US government in the region.

Paradoxically, the client state or the US sponsored Iraq government has been fighting off insurgents whom has relations with US backed rebels in Syria!

From the PBS Frontline (May 2014): The interviews are the latest evidence that after more than three years of warfare, the United States has stepped up the provision of lethal aid to the rebels. In recent months, at least five rebel units have posted videos showing their members firing U.S.-made TOW anti-tank missiles at Syrian positions…many both inside and out of government fear U.S.-provided weapons could make their way into extremist hands, particularly in a place like Syria, where alliances and foes change with breakneck fluidity. Moderate rebel groups have worked closely with the al Qaida-aligned Nusra Front and the Islamic Front, one of whose factions, Ahrar al Sham, includes al Qaida members among its founders."

Now Iraq’s rebels could be using some of the US provided weapons in their war to take control of Iraq via Baghdad. 

Al Qaida-inspired militants from ISIS, the Islamic State of Iraq and al-Sham, have reportedly seized US Black Hawk helicopters, looted 500 billion Iraqi dinars - the equivalent of $429m (£256m) - from Mosul's central bank, has now laid siege or surrounded Iraq's largest refinery in Baiji, and may have unleashed a sectarian war.

Reports the Zero Hedge: As the WSJ reports, after hard core Al Qaeda spin off ISIS (no relation to Sterling Archer) took over Saddam's home town of Tikrit yesterday, Iraq edged closer to all-out sectarian conflict on Thursday as Kurdish forces took control of a provincial capital in the oil-rich north and Sunni militants vowed to march on two cities revered by Shiite Muslims.  Kurdish militia known as peshmerga said they had taken up positions in key government installations in Kirkuk, as forces of the Shiite-dominated government of Prime Minister Nouri al-Maliki abandoned their posts and fled in fear of advancing Sunni militants, an official in the office of the provincial governor said.

Cumulative years of US interventions seem to have triggered a regional conflagration.

Yet the US government will continue to intervene as wars signifies as good business for the politically influential military industrial complex. President Obama has pledged to support the incumbent Iraq government, but did not offer ground troops.

Aside from the renewed outbreak violence in Iraq, one ramification of the US –Russia proxy civil war in Ukraine has been a test of mettle between two major military powers: The US government acknowledged that they have scrambled jet fighters to intercept 4 Russian bombers who flew nearly 50 miles off the California Coast. Wow! Russians frontally testing the US.

As geopolitical risks have been simmering, the effects of which has been to disrupt supply chains (as oil), thereby compounding on pressures to global consumer price inflation.

But for the don’t worry be happy crowd, whether in the Philippines or the US or elsewhere, various additional risks aside from inflation, such as protectionism or war should be dismissed because stocks are bound to rise forever, based on the kooky idea of "don't fight the FED" or central banks! Maybe they think that central banks can print oil too.