Asian Stocks Smashed led by Indonesia’s JCI and Japan’s Nikkei

Risk OFF seems back!

Last night, bubbly US stocks got clobbered across the broad as seen by the table from stockcharts.com.  Such dour sentiment may have diffused into the Asian region.

About a few days back, the steep fall of Asian currencies vis-a-vis the US dollar, which ironically left high flying Asian stocks unscathed, prompted me to ask, “This hasn't been a one day event, though yesterday punctuated on the firming US dollar-falling Asian currencies dynamic which in tradition highlighted a risk OFF environment…Yet will the region’s high flyers, India’s Sensex, Indonesia’s JCI, the Philippine Phisix,Thailand’s SET and the New Zealand 50 be immune to a seeming transition towards a risk OFF environment?”

I guess today’s market action provides a clue; the contagion dynamic has still been alive and kicking, although its character exhibits some subtle differences..

Indonesia’s JCI, which tanked by 2.73% led the region’s losers today. The Nikkei 225 plummeted 420 points or 2.61% took second spot. Thailand’s SET dropped 1.11% after a last minute push. Singapore’s STI fell 1.08% 

Meanwhile the Philippine “G-R-O-W-T-H” Phisix slipped by only .99% 

Most of the region closed the day in the red except for Vietnam, Pakistan, Sri Lanka and Laos

Bourses closed due to holidays are India (Gandhi‘s Birthday), China (national Day) and Hong Kong (Chung Yeung Festival)

The difference of the rising US dollar in the June 2013 due to the taper tantrum has been of the swift adverse market response. Today, the impact to stocks has been gradual or incremental

Among the three ASEAN bourses aspiring to exceed the May 2013 highs, Indonesia’s JCI has been the first to make landmark crossover early September.

The Philippine Phisix was next to top 7,400. Thailand has yet to make such an attempt.

Apparently since, Indonesia's JCI has been struggling to hold that hallowed ground and today has faltered big. I drew a blue line on the chart of the JCI to show where it closed today.

The weakness in Asian stocks appears to be spreading and intensifying.

And it's a wonder how Asian markets would respond to Hong Kong's deteriorating political climate.

Additionally in the US markets, remember the brewing divergence in the performances of small, mid and large caps which looks like signs of progressing market internal decay (see chart here)? And which I noted as a probable sign of the periphery to core dynamic?

Well it appears that divergence has been transformed into convergence where all three have been falling.  Small caps have indeed contaminated the large caps or signs of periphery to the core.

Among the US major benchmarks, the small cap Russell 2000 appears to be the first to have broken its long term trend line (chart from zero hedge). Will the rest follow?

The Gavekal Team sees yesterday’s US small cap Russell 2000 ‘head and shoulder” breakdown as portentous sign “look out below”: “With another weak performance by the Russell 2000 today (it was down 1.48%), the small cap proxy index has just completed a bearish pattern known by market technicians as a Head & Shoulders pattern. The pattern is formed when the price of an asset makes a high, retraces to some nearby support level, rebounds from support to make a new higher high, retreats again to that same support level, attempts to make a new higher high but fails, and finally retraces all the way back to and through the old support level. In simpler words, the price action goes out of it's way to define support and resistance levels and support is eventually broken to the downside, portending further losses. It is said that the longer the pattern takes to develop the more meaningful it becomes. The Head & Shoulders pattern for the Russell 2000 has been under construction for most of the year, so it's completion is definitely something to watch.”

Have current events merely signified a “correction”? Or could these be signs that spreading decay in the periphery has now reached the core? If the latter is true, then a big event should not be discounted.

Very interesting developments. Caveat emptor.

Has the Hong Kong Protests been Part of the US Pivot to Asia?

The Russian government accuses her US contemporary of plotting Hong Kong’s pro-democracy protests...

First, here is a spectacular coverage of the rally by a drone (source vox)

Next, the alleged orchestration from the US government. From the Wall Street Journal

Russian state news outlets have begun airing reports casting the pro-democracy protests in Hong Kong as a U.S.-organized plot, echoing previous Russian coverage of similar demonstrations that have cropped up far closer to home.

The coverage reflected the Kremlin's contention that pro-democracy protests in Moscow and Kiev in recent years amounted to Western schemes designed to undermine the Russian government, as opposed to bona fide outpourings of popular discontent.

On Monday, when the demonstrations in Hong Kong dominated headlines around the world, Russia's main news broadcast on the state-controlled First Channel skipped the story. State-controlled NTV aired a brief report on the protests and little more. But by Tuesday, state-controlled channels—the primary source of news for the vast majority of Russians—were presenting the Hong Kong protesters as agents of a U.S.-organized revolt just like their counterparts in Kiev.

"According to the Chinese press, the leaders of the movement received special training from the American intelligence services," the anchor on state-owned Rossiya 24 said during a segment on the Hong Kong protests.

Later in the day, the anchor on state-controlled First Channel introduced the report from Hong Kong by suggesting the U.S. was behind the protests. "Beijing has said the protest organizers are linked to the American State Department," the anchor said. The Chinese government, however, hasn't explicitly made such an accusation.

Are these connected to the US imperial policy known as the “pivot to Asia” or the encirclement strategy or the setting up of military bases surrounding powers that have been opposed to the US hegemony? 

The Business Insider gives us some clues (bold mine) 

But China still has a military presence on the island. The protest movement is driven by concern over the mainland rolling back Hong Kong's autonomy — but in terms of hard power, Beijing has already established some crucial facts on the ground.

Beijing has had its military Hong Kong from the moment Great Britain handed the island over to China in 1997 — Beijing sent 21 armored personnel carriers and 4,000 soldiers carrying assault rifles into the territory the morning of the handover.

China has been making efforts to build up its military infrastructure in Hong Kong, including Beijing's approval of a controversial naval port in Victoria Harbor this past February. But from a purely strategic perspective, Beijing's garrison of Hong Kong might serve more as a statement of Chinese sovereignty than as a real base of operations.

We'd never know what the Chinese government's strategic perspective is.

Nevertheless, Daniel McAdams at the Lew Rockwell Blog sees more US fingerprints (bold mine)

Nevertheless, it seems Washington may have decided to execute that pivot after all — while keeping its other foot precariously planted in the Middle East and Europe. But it appears the pivot has begun in an unexpectedly aggressive manner: a US-backed full frontal assault on Chinese rule in Hong Kong.

A student protest in Hong Kong has finished its first week, taking on all the appearances of the numerous US-backed color revolutions that have unseated governments with which Washington has a beef from Georgia to Ukraine to Egypt and beyond. The protesters demand that existing portions of the Basic Law agreed upon when Hong Kong was handed back to China from former British imperial control be changed to allow sooner direct election of the chief executive of the Hong Kong Special Administrative Region.

As with previous color revolutions, protesters represent a tiny minority of the actual population yet they claim to speak with the voice of “the people.”

These voices of the people again seem to have been trained by Washington, however.

As the Moon of Alabama blog has pointed out, the US government-funded National Endowment for Democracy — AKA “regime-change central” — has poured hundreds of thousands of dollars into stoking the regime change flame in Hong Kong. For example, in 2012 alone the US government sent half a million dollars to support these regime-change movements in Hong Kong. Here is the grant listing:

National Democratic Institute for International Affairs
$460,000
To foster awareness regarding Hong Kong’s political institutions and constitutional reform process and to develop the capacity of citizens – particularly university students – to more effectively participate in the public debate on political reform, NDI will work with civil society organizations on parliamentary monitoring, a survey, and development of an Internet portal, allowing students and citizens to explore possible reforms leading to universal suffrage.

In addition, Joshua Wong, the 17 year-old leader of main student group Scholarism has beenaccused of maintaining close US government ties, including regular meetings at the US Consulate in Hong Kong.

The US Consulate and other US government bodies also fund the Hong Kong-America Center, which is run by a former US diplomat and brings Chinese students to the United States to “study” about democracy (and perhaps how to launch a color revolution?). The Ford Foundation, long associated with the US Central Intelligence Agency, is also a major sponsor of the organization’s student exchange programs.

As pointed out by color revolution observer Tony Cartalucci, leaders of the main Hong Kong protest group, Occupy Central, have long ties to US government regime change money.Writes Cartalucci:

Occupy Central’s self-proclaimed leader, Benny Tai, is a law professor at the…University of Hong Kong and a regular collaborator with the NDI-funded Centre for Comparative and Public Law (CCPL)…

Recent events in Hong Kong follow a pattern of US-engineered regime change operations, where naive students and other youth are encouraged to be the public face of protests, which start out preaching non-violence only to be very soon shunted aside by far more radical elements who provide the real muscle behind the regime change. This happened in Egypt, with the US-sponsored April 6 Movement, it happened in Syria with the initial peaceful protests soon taken over by armed (and also US-backed) radicals, and it happened in Ukraine, where the Maidan protests soon gave way to violent, armed groups sporting neo-nazi tattoos and radical ideologies.

If the pattern is repeating in Hong Kong, we will soon see an uptick in violence, meant to provoke authorities into a crackdown. This will be followed by strong condemnation from the United States government, which urges foreign authorities to refrain from what US police routinely do during such situations: exercise extreme violence. US sanctions may follow if the situation can approach terminal velocity.

And, because Color Revolutions 2.0 have adopted extreme violence as a critical element, look for a great deal of bloodshed. Finally, some observers have said that the Chinese government would never let this situation get out of hand. Don’t be fooled. The exercise is well practiced. The sclerotic Chinese authorities will likely not see what has hit them. Nobody expects regime change.

Remember, the HKMA have already raised “risks” concerns on their economy from “rising interest rates” due to “historic credit growth”. This means the ongoing protests may serve as a trigger for her domestic bubble to burst as her economy goes into a standstill. 

And bursting of Hong Kong’s bubble will ricochet to the mainland thereby aggravating China’s struggling debt burdened economy that may lead to the mainland’s economic and financial disaster.

If this has been part of the covert “low intensity conflict” being waged by Washington’s war mongers, then they may be underestimating the catastrophic impact from a possible Hong Kong-China economic collapse, which is likely spread not only to the region but to the world.

Given the vulnerability of the global markets and economy to risks, an escalation of Hong Kong’s protest may lead to the global Black Swan event.

More importantly, if the Chinese government will be convinced that the US has a hand on these, then we may expect more indirect reprisals via increased heated confrontations in South China Sea thereby increasing risks of war.

Nonetheless, the US has an indirect hand in the inflation of Hong Kong’s bubble, as I recently noted “Interest rate increases would only expose on the massive malinvestments spawned, nurtured and accumulated from the US Fed’s zero bound rates which has been imported by Hong Kong’s economy and financial markets via the US dollar peg.”

And Hong Kong’s property bubble has been part of the protesters agenda which reveals how bubbles weigh on social stability.

From another Wall Street Journal article: "another frequent gripe among Hongkongers, and especially young residents, is that property prices are too high and are inflated by money from mainland Chinese investors"

Bubbles lead to social instability and become fertile grounds for manipulations from external political forces

No Middle of the Road between Capitalism and Socialism and between Individualism and Collectivism

In the past I have pointed out why there can be no compromise between capitalism and socialism. This is for the simple reason that every bargain or accommodation for interventionism of various flavors leads to MORE socialism than LESS. Problems that emerges from each intervention would incite for more intervention which eventually leads to total government control. In the political context, "it’s never enough!"

This is specially pronounced during crisis. Austrian economist Robert Higgs calls this the “ratchet effect”. As per FEE.org (bold mine)

The problem in governance that arises when government intervention increases during crises such as wars, natural disasters, or economic depressions.  After the crisis government meets resistance in reversing the intervention, creating a situation where government intervention rarely returns to pre-crisis levels, which lead to a constant ratcheting up effect in growth of government intervention over time.

Expect an explosion of interventions in the coming crisis.

Yet interventionist transitions has almost always been a slippery slope process. Such transition can be seen in two ways. The great Austrian economist Ludwig von Mises explained: (bold mine)

There are two methods available for the transformation of capitalism into socialism. One is to expropriate all farms, plants, and shops and to operate them by a bureaucratic apparatus as departments of the government. The whole of society, says Lenin, becomes "one office and one factory, with equal work and equal pay,"  the whole economy will be organized "like the postal sytem."  The second method is the method of the Hindenburg plan, the originally German pattern of the welfare state and of planning. It forces every firm and every individual to comply strictly with the orders issued by the government's central board of production management. Such was the intention of the National Industrial Recovery Act of 1933 which the resistance of business frustrated and the Supreme Court declared unconstitutional. Such is the idea implied in the endeavors to substitute planning for private enterprise…

The middle-of-the-road policy is not an economic system that can last. It is a method for the realization of socialism by installments.

Yet it is not just in the realm of economics but in metaethics too. The great free market champion Ayn Rand said the same: There is no middle of the road between individualism and collectivism.

From Ms Rand’s Textbook of Americanism (fee.org) [bold mine]

The mark of an honest man, as distinguished from a Collectivist, is that he means what he says and knows what he means.

When we say that we hold individual rights to be inalienable, we must mean just that. Inalienable means that which we may not take away, suspend, infringe, restrict or violate — not ever, not at any time, not for any purpose whatsoever.

You cannot say that "man has inalienable rights except in cold weather and on every second Tuesday," just as you cannot say that "man has inalienable rights except in an emergency," or "man's rights cannot be violated except for a good purpose." 

Either man's rights are inalienable, or they are not. You cannot say a thing such as "semi-inalienable" and consider yourself either honest or sane. When you begin making conditions, reservations and exceptions, you admit that there is something or someone above man's rights who may violate them at his discretion. Who? Why, society — that is, the Collective. For what reason? For the good of the Collective. Who decides when rights should be violated? The Collective. If this is what you believe, move over to the side where you belong and admit that you are a Collectivist. Then take all the consequences which Collectivism implies. There is no middle ground here. You cannot have your cake and eat it, too. You are not fooling anyone but yourself. 

Do not hide behind meaningless catch-phrases, such as "the middle of the road." Individualism and Collectivism are not two sides of the same road, with a safe rut for you in the middle. They are two roads going into opposite directions. One leads to freedom, justice and prosperity; the other to slavery, horror and destruction. The choice is yours to make. 

The growing spread of Collectivism throughout the world is not due to any cleverness of the Collectivists, but to the fact that most people who oppose them actually believe in Collectivism themselves. Once a principle is accepted, it is not the man who is half-hearted about it, but the man who is whole-hearted that's going to win; not the man who is least consistent in applying it, but the man who is most consistent. If you enter a race, saying: "I only intend to run the first ten yards," the man who says: "I'll run to the finish line," is going to beat you. When you say: "I only want to violate human rights just a tiny little bit," the Communist or Fascist who says "I'm going to destroy all human rights" will beat you and win. You've opened the way for him.

By permitting themselves this initial dishonesty and evasion, men have now fallen into a Collectivist trap on the question of whether a dictatorship is proper or not. Most people give lip-service to denunciations of dictatorship. But very few take a clear-cut stand and recognize dictatorship for what it is: an absolute evil in any form, by anyone, for anyone, anywhere, at any time and for any purpose whatsoever.

A great many people now enter into an obscene kind of bargaining about differences between "a good dictatorship" and a "bad dictatorship," about motives, causes, or reasons that make dictatorship proper. For the question: "Do you want dictatorship?" the Collectivists have substituted the question: "What kind of dictatorship do you want?" They can afford to let you argue from then on; they have won their point. 

A great many people believe that a dictatorship is terrible if it's "for a bad motive," but quite all right and even desirable if it's "for a good motive." Those leaning toward Communism (they usually consider themselves "humanitarians") claim that concentration camps and torture chambers are evil when used "selfishly," "for the sake of one race," as Hitler did, but quite noble when used "unselfishly," "for the sake of the masses," as Stalin does. Those leaning toward Fascism (they usually consider themselves hard-boiled "realists") claim that whips and slave-drivers are impractical when used "inefficiently," as in Russia, but quite practical when used "efficiently," as in Germany.

(And just as an example of where the wrong principle will lead you in practice, observe that the "humanitarians," who are so concerned with relieving the suffering of the masses, endorse, in Russia, a state of misery for a whole population such as no masses have ever had to endure anywhere in history. And the hard-boiled "realists," who are so boastfully eager to be practical, endorse, in Germany, the spectacle of a devastated country in total ruin, the end result of an "efficient" dictatorship.)

When you argue about what is a "good" or a "bad" dictatorship, you have accepted and endorsed the principle of dictatorship. You have accepted a premise of total evil — of your right to enslave others for the sake of what you think is good. From then on, it's only a question of who will run the Gestapo. You will never be able to reach an agreement with your fellow Collectivists on what is a "good" cause for brutality and what is a "bad" one. Your particular pet definition may not be theirs. You might claim that it is good to slaughter men only for the sake of the poor; somebody else might claim that it is good to slaughter men only for the sake of the rich; you might claim that it is immoral to slaughter anyone except members of a certain class; somebody else might claim that it is immoral to slaughter anyone except members of a certain race. All you will agree on is the slaughter. And that is all you will achieve.

Once you advocate the principle of dictatorship, you invite all men to do the same. If they do not want your particular kind or do not like your particular "good motive," they have no choice but to rush to beat you to it and establish their own kind for their own "good motive," to enslave you before you enslave them. A "good dictatorship" is a contradiction in terms.

The issue is not: for what purpose is it proper to enslave men? The issue is: is it proper to enslave men or not? 

There is an unspeakable moral corruption in saying that a dictatorship can be justified by "a good motive" or "an unselfish motive." All the brutal and criminal tendencies which mankind — through centuries of slow climbing out of savagery — has learned to recognize as evil and impractical, have now taken refuge under a "social" cover. Many men now believe that it is evil to rob, murder, and torture for one's own sake, but virtuous to do so for the sake of others. You may not indulge in brutality for your own gain, they say, but go right ahead if it's for the gain of others. Perhaps the most revolting statement one can ever hear is: "Sure, Stalin has butchered millions, but it's justifiable, since it's for the benefit of the masses." Collectivism is the last stand of savagery in men's minds.

Do not ever consider Collectivists as "sincere but deluded idealists." The proposal to enslave some men for the sake of others is not an ideal; brutality is not "idealistic," no matter what its purpose. Do not ever say that the desire to "do good" by force is a good motive. Neither power-lust nor stupidity are good motives.

So Capitalism-Individualism (freedom) are diametric opposites to collectivism-socialism (slavery). This hasn't been a false choice. Real life developments reveal such dynamic at work.

Simon Black of the Sovereign Man tacitly expounds on the consequences of the Middle of the Road policies in the US via his article “America isn’t Communist, It’s only 70% communist” (bold mine)

Within his 1848 Communist Manifesto, Marx outlined a list of ten short-term demands. These, he thought, would be the precursor to the ideal stateless, classless communist society.

Ironically in today’s world, Marx’s demands look pretty much mainstream.

That is because nearly every single item on the list has been implemented to varying degrees in the United States.

Think that couldn’t be possible in the Land of the Free? Just take a look.

Topping Marx’s list is the abolition of private property.

True, private property exists, but only until the state wants to take it. With its powers of eminent domain, the government can and does confiscate people’s property when it wants for public use.

Your property isn’t unconditionally yours. Just think of property taxes, for example.

If it’s actually YOUR private property, then why would you need to pay tax on it? And why do they have the authority to take it from you if you don’t pay?

Likewise, while we haven’t seen the complete abolition of inheritance (another Marx demand), the government can take up to 40% of your estate when you die.

So ultimately your estate is not your own. You don’t get to control what happens to your wealth and possessions when you die. It’s just a matter of proportion.

Marx also demanded the centralization of transportation and communication. Check, and check.

Try broadcasting over the airwaves in the Land of the Free without a license and special permission.

Practically the entire electromagnetic spectrum is tightly controlled by the state, centralized by a handful of government agencies.

Same with the network of roads and highways. Because, after all, without government, who would build the roads…

Another point of Marx is state-guided agricultural production and combination of agriculture and manufacturing.

And the Land of the Free does not disappoint. Though its activities may not be as prominent in the news, the US Department of Agriculture is easily one of the busiest government departments.

With a budget of $146 billion a year, and much more for subsidies, USDA tirelessly works to dictate every major and miniscule activity in the sector.

Next on the list, is equal liability of all to labor. If you have at any point wondered, as I have, why politicians are always pushing jobs for the sake of jobs, rather than value and wealth creation—now you know why.

Between minimum wage laws and the constant stream of legislation that promises jobs for all, it is clear that politicians have wholly internalized this Marxian ideal.

Now, you might think that this is just a fluke, just a coincidence that some US policies resemble what’s on Marx’s list of demands.

But then you see these demands, which have not only been fully implemented in the US already, but are thoroughly entrenched in the national psyche:

First, there’s free education for all children, to enable the uniformity of thought. Check.

Then there’s a heavy progressive income tax. Yep, I’m pretty sure you’re familiar with this one, which has actually become so mainstream, that to have any system other than this would be considered revolutionary. Check.

Third, is the confiscation of the property of emigrants (expatriates) and rebels.

Between the IRS bullying of political opposition groups and the imposition of exit taxes for those that renounce their citizenship, the United States is firmly set up to discourage dissent and escape. Check.

And last but not least, the centralization of credit in the hands of the state, by means of a national bank. Check.

Remember, Karl Marx thought central banking was a great idea—the same guy who thought that individual success and private property were evil.

Think about that the next time the Federal Reserve comes up with a plan to help businesses and fix the economy.

So now you know, America isn’t communist. It’s only about 70% communist. No reason to worry.

Slippery slope indeed.

Infographic: 23 Effects of Alcohol on the Body

For alcohol afficionados out there, Healthline.com explains of the 23 effects of alcohol in one's body

Asian Currencies Tumbles Led by New Zealand dollar and Indonesian Rupiah, Philippine Peso Falls to 45

September 29 has been another fascinating trading day for Asian financial markets as most ASIAN ASEAN currencies have been battered 

As of 5 pm, the biggest losers among Asian currencies has been the New Zealand dollar which got hammered by over 1% as well as the Indonesian rupiah which dived by 1%. Most of the Asian currencies has been down by over .5%. Incredible sight

This hasn't been a one day event, though yesterday punctuated on the firming US dollar-falling Asian currencies dynamic which in tradition highlighted a risk OFF environment.

 The New Zealand dollar (USDNZD) has spiked beyond the early 2014 highs 

The USD-Aussie dollar has nearly reached January 2014 highs

The ongoing pressures on Asian currencies has also affected the Singapore dollar (USDSGD)

The Taiwan dollar (USDTWN)

The South Korean won (USDKRW)

The Malaysian ringgit (USDMYR)

Meanwhile, the Indonesian rupiah (USDIDR) is once again approaching the January 2014 "turbulent" highs.

The Philippine peso officially closed at 44.995 on September 29. I have already elaborated on the plight of the peso.

The last time Asian currencies tumbled (late 2013 to early 2014), Asian stocks came under selling pressure as seen by the MSCI iShares All country Asia Index (AAXJ).

The same dynamic appears to be re-emerging. Some of the biggest contributors to the recent regional stock market decline has been Australia’s S&P/ASX, the Taiwan Stock Exchange, the Malaysian KLCI and the Hong Kong’s Hang Seng (I know this has been partly due to riots). 

Meanwhile the Asian contagion appears to be spreading to other bourses as seen in the Singapore Strait Times, the Vietnam Ho Chi Minh index and the South Korean KOSPI.

The above dynamic highlights on going changes at the margins.

Yet will the region’s high flyers, India’s Sensex, Indonesia’s JCI, the Philippine Phisix, Thailand’s SET and the New Zealand 50 be immune to a seeming transition towards a risk OFF environment?

Don’t forget that the two of the current regional stars has been labeled as part of the ‘fragile five’ last year or as per Morgan Stanley “troubled emerging market currencies under the most pressure against the U.S. dollar” due to “high inflation, weakening growth, large external deficits, and in some cases exposure to the China slowdown, and high dependence on fixed income inflows”

Very interesting developments indeed.

Phisix: The Untold Story of the Two Faces of the 7,400 Historic Highs

Sometimes people hold a core belief that is very strong. When they are presented with evidence that works against that belief, the new evidence cannot be accepted. It would create a feeling that is extremely uncomfortable, called cognitive dissonance. And because it is so important to protect the core belief, they will rationalize, ignore and even deny anything that doesn't fit in with the core belief. ― Frantz Fanon, psychiatrist, philosopher and writer

In this issue

Phisix: The Untold Story of the Two Faces of the 7,400 Historic Highs

-The Financial Market Warning Bandwagon: G-20, HKMA, ADB Joins Club

-The Pavlovian Orgasmic Scramble to September 2014’s 7,400

-The Two Faces of 7,400

-Has The Stock Market Permanently Lost Its Fundamental Function As A Discounting Mechanism?

Phisix: The Untold Story of the Two Faces of the 7,400 Historic Highs

I am not supposed to be writing this weekend but developments have been so compelling enough for me to resist sharing my contrarian and unorthodox thoughts.

The Financial Market Warning Bandwagon: G-20, HKMA, ADB Joins Club

Times have been indeed changing. There has clearly been an aura of intensifying apprehension which has been spreading to international political institutions.

Political agencies appear to be in a rush to issue warnings against market risks; although these alarm bells come with varying character.

The striking question is why the seeming concerted actions??

Remember I noted that the in their paper to the G-20 the IMF warned of “Valuations in virtually all major asset classes are stretched relative to past norms”[1]? I guess the G-20 has only partly assimilated the IMF’s position.

Here is the G-20’s official communique[2] (bold mine): We welcome the stronger economic conditions in some key economies, although growth in the global economy is uneven and remains below the pace required to adequately generate much needed jobs. Downside risks persist, including in financial markets and from geopolitical tensions. The global economy still faces persistent weaknesses in demand, and supply side constraints hamper growth…We are mindful of the potential for a build-up of excessive risk in financial markets, particularly in an environment of low interest rates and low asset price volatility. We will monitor these risks and continue to strengthen macroeconomic, structural, and financial policy frameworks, and other complementary measures, as the best response to managing risks, and meet our G20 exchange rate commitments.

In contrast to the IMF who made a declarative statement, the G-20 injected the adjective “potential” in their official statement which essentially downplays or sterilizes the risk dimension.

This would look natural from the standpoint of a conglomeration of mostly central bankers whom have been responsible for the current low interest rates regime.

Yet this validates my point when I wrote (bold and italics original)[3]: “The point is the IMF, like many other global political or mainstream institutions or establishments, CANNOT deny the existence of bubbles anymore. So their recourse has been to either downplay on the risks or put an escape clause to exonerate them when risks transforms into reality which is the IMF position.”

The admission of bubbles may not be direct, as they focus mostly on symptoms.

And a further point is that central bankers would have indulged in self-incrimination had they adapted the IMF’s position. Additionally a hardline stance would have compelled the G-20 monetary planners to reverse the current monetary zero bound policies, policies which most of them would hardly surrender.

And it has not just been the G-20, the ADB has jumped on the bandwagon with their version of sanitized financial market sirens. 

Here is the ADB as I earlier noted[4]: Emerging East Asian local currency (LCY) bond markets continued to perform well as global financial conditions have remained relatively benign thus far in 2014. The region, however, should prepare for possibly tighter liquidity as United States (US) quantitative easing is expected to end in October. More expansionary monetary actions from the eurozone and Japan could offset some of the impact on liquidity conditions caused by the end of US quantitative easing. While the region’s LCY bond markets have been calm in 2014, the risks are rising, including (i) earlier-than-expected interest rate hikes by the US Federal Reserve (ii) geopolitical tensions that push up oil prices; and  (iii) a slowdown in the People’s Republic of China’s (PRC) property market.

The ADB doesn’t seem to explain how Asian bond markets should be at risk from tighter liquidity. Here is my two cents, Asian economies have become overleveraged.

Credit Bubble Bulletin’s ever meticulous Doug Noland provides some of the details[5] (emphasis mine)

Total EM International (“external”) Borrowings increased almost $1.9 TN (59%) in five years to surpass $5.0 TN. Never have EM governments, corporations and banks piled on so much debt, much of it denominated in dollars or other foreign currencies. And keep in mind that this borrowing and lending binge unfolded in a world anticipating aggressive Federal Reserve stimulus, ongoing dollar devaluation, rising commodity prices and a general global reflationary backdrop. It just didn’t play out as expected, so there will now be a huge price to pay.

Looking first to Asian data, outstanding Asia (ex-Japan) external bonds jumped 112% in five years to $921bn. By country, we see China’s external bonds were up $194bn, or 421%, to $240bn. Including bank international forex borrowings, total China external debt jumped $642bn, or 310%, since the end of 2008 to $849bn. Hong Kong external bonds jumped $49bn, or 71%, to $117bn (total up $223bn, 63%). Elsewhere in Asia, Indonesian external bonds jumped 197% to $70bn (total up $67bn, 101%), Singapore 82% to $93bn, Malaysia 59% to $53bn, South Korea 58% to $179bn and India 73% to $74bn (total up $86bn, 54%).

That’s just bonds alone.

And ADB’s concerns have partly been manifested by the Hong Kong Monetary Authority (HKMA) who curiously has also piggybacked on the warning chorus stating at the Hong Kong economy faces “very high" risks from rising interest rates. 

The HKMA’s apparent aversion to increases in interest rates once again validates the central bank conundrum which I analogize as “I recognize the problem of addiction but a withdrawal syndrome would even be more cataclysmic.”

HKMA’s problem hasn’t really been high interest rates, but rather the “near-historic levels of credit growth”. 

Interest rate increases would only expose on the massive malinvestments spawned, nurtured and accumulated from the US Fed’s zero bound rates which has been imported by Hong Kong’s economy and financial markets via the US dollar peg.

As I recently wrote[6]:

Zero bound rates has allowed marginal unviable projects, that would have NOT existed under normal conditions, to exist. In short, zero bound has democratized credit activities which has spread to include a vast number of subprime or less credit worthy borrowers.

And because subprime borrowers have been DEPENDENT on zero bound, an increase in interest rates will expose on such financial vulnerability.

And when credit concerns become an issue on a wider scale (or affects many firms), this may cause systemic liquidity to ebb as borrowers delay payments or if they default, while lenders suffer balance sheet and capital losses.

So the HKMA problem has been one of credit risk, where raising rates will undermine marginal subprime borrowers that causes a liquidity contraction that risks a spillover to the other parts of the economy.

And why wouldn’t the HKMA be disturbed? About a year ago they raised the issue of deteriorating quality of the fast expanding corporate debt[7]. That’s even at zero bound. What more when interest rates increase!

Hong Kong’s property bubbles are taking toll not just in finance, but most importantly in social stability terms. Bubbles have recently fueled anti-market sentiment, and as of this writing the once peaceful city state has now been rattled by violent riots, as the Hong Kong government attempts to quash the swelling pro-democracy movement.

Why the torrent of warning from the establishment?

I guess since we are talking of political institutions as well as their technocratic supranational supporters, the increasing account of cautionary communications, aside from escape valve function, can also be interpreted as manifestations of increasing apprehension from the politically influential financial elites.

Here’s a clue, a recent report suggests that world billionaires have been hoarding boatloads of cash. Notes the CNBC[8]: According to the new Billionaire Census from Wealth-X and UBS, the world's billionaires are holding an average of $600 million in cash each—greater than the gross domestic product of Dominica. That marks a jump of $60 million from a year ago and translates into billionaires' holding an average of 19 percent of their net worth in cash…Indeed, billionaires' cash holdings far exceed their investments in real estate. Their real-estate holdings average $160 million per billionaire, or about one-fifth of their cash holdings… "The apparent safety of cash, reinforced by the painful psychological experience of the 2008-09 global financial crisis and the subsequent troubles within the European Monetary Union, likely reinforces the tendency to favor this cautious allocation strategy," Smiles said in the report.

Increased uncertainty functions as the crucial incentive for people to hold onto cash. As Austrian economist Hans-Hermann Hoppe[9] explains: If a person then adds to his cash balance, he does so because he is confronted with a situation of (subjectively perceived) increased uncertainty regarding his future. The addition to his cash balance represents an investment in presently felt certainty vis-à-vis a future perceived as less certain. In order to add to his cash balance, a person must restrict his purchases or increase his sales of nonmoney goods (producer or consumer goods). In either case, the outcome is an immediate fall in certain nonmoney goods' prices.

So if world billionaires have been giving us hints on the direction of financial markets or of the real economy, then optimism, which the Pavlovian consensus expects, isn’t likely the outcome.

And perhaps acting as proxies, the political establishment has been expressing the elite’s sentiments.

If you haven’t noticed, it’s odd that more and more of the establishment have been jumping into my bandwagon. Eventually these concerns will be parlayed into policy actions. Changes always happens at the margins

Oh by the way, the BSP chief in a speech last week[10], once again raised sanitized alarm bells on the domestic financial markets and the economy with foreigners being conditioned as scapegoat: “Having said these, I will be the first to say that risks to growth remain.  External factors -- including the uneven growth in major economies, uncertainties surrounding monetary policy in the advanced countries, and  geopolitical concerns  --  could impact the Philippine economy through trade and volatilities in domestic financial markets.  Here at home, weather disturbances and recurring concerns about power rates and supply could also affect growth.”

The BSP governor’s consistent warnings looks very much like the G-20 statement above, e.g. “global economy is uneven” and “downside risks persist, including in financial markets and from geopolitical tensions”. Has this been scripted?

And given the increasing frequency of the citation of a heightened risk environment, is the BSP chief really expecting fireworks soon???

The Pavlovian Orgasmic Scramble to September 2014’s 7,400

In referring to the Pavlovian classical conditioning response, which I analogized with World War Z zombies, I explained that instead of zombies having been conditioned to seek out humans for them to infect through the latter’s noise, the conditioning for domestic stock market participants has been to hear the utterance of G-R-O-W-T-H from public officials or from industry leaders to spark a buying stampede.

As I recently wrote[11],

Market participants has not only been disregarding risks and flagrantly overpaying for excessively overvalued securities predicated on the “g-r-o-w-t-h” signals, importantly markets appear to have been conditioned to believe that prices will not only rise forever but will EXPLODE to the firmament soon. At any rate, the snowballing psychology from the 'fear-of-missing out' has been prompting for an orgasmic scramble to bid up prices AT ANY LEVEL!

Wednesday’s actions look very much like a Pavlovian World War Z zombie stampede.

Perhaps all it took was for mainstream media to air articles of a major property developer announcing another expansion coupled with a bullish outlook on the real estate industry issued by an industry representative. These G-R-O-W-T-H themed literatures essentially fired up a Pavlovian property led buying hysteria or “orgasmic scramble to bid up prices AT ANY LEVEL”!

The one day 1.15% post lunch break push practically brought the bulls near the May 2013 threshold historic high of 7,400.

Given that the 7,400 target was virtually on the horizon, the buying panic was carried over the following day during the early session. Yet after 16 long months of wait, the intraday record high of 7,413 was finally reached but then profit taking prevailed through the end of the session.

It has been interesting to see that the one day (plus the carry over) push had essentially been again led by the property sector, buttressed by the Industrial and Holding sectors. This means that the bidding frenzy was hardly an across the board phenomenon but a seemingly concerted action targeted at some heavyweight market caps leaders of the said sectors. Yet the following day, selling had been broad based.

And the most interesting development was the day’s fantastic irony— yes the Phisix finally touched the 7,400 level anew alright, but at the same day, the peso endured a .7% meltdown!

Because most of the region’s currencies fell modestly, this may be partly attributed to the rising dollar. But the peso was the day’s worst performer by a mile! And the gist of this week’s loss came also from the day the Phisix reclaimed the old highs.

This is just one of the many paradoxes between the 7,400 highs of May 2013 and September 2014.

The Two Faces of 7,400

It’s interesting to see that Phisix 7,400 in September 2014 has starkly been different with its earlier counterpart May 2013.

The daily quote from the PSE of the two milestones sheds some light on the character of the recent stock market blitz, particularly on the peso volume.

In May 15 when 7,403 was reached, the traded volume was at a stunning Php 21.4 billion. Last week’s ramp to 7,413 had only Php 9.5 billion. This represents only 44% of the May 2013 highs!

The path towards these landmark highs shares the same story. The volume of the current run has been significantly less than its antecedent as I previously observed[12], “The average Daily Peso volume has been about 30-35% off the 2013 average.”

Think of it, if those who bought at the previous (2013) peak haven’t sold and awaits for the 7,400 level to be reached before they sell just to even out, then this would translate to a massive resistance level.

And based on the closing prices of 15 May 2013 and 25 September 2014, it appears that only two sectors that has gone beyond or surpassed May 2013 levels.

This gives us two insights on the quality of the journey to Phisix 7,400:

First, between the two highs only two sectors, the Industrials and the Service have outclassed its predecessors. This means that the Phisix 7,400 circa September 2014 has largely been due to them.

And like the 24 September Pavlovian one day vault, 7,400 has been reached because of targeted actions on some key heavyweight issues.

This isn’t a conspiracy theory but the numbers (volume, sectoral performances or even the increased frequency or even the regularity of “marking the close”) implies that 7,400 may have been stage managed. Why the concentration? Why the fixation on some key market index heavyweight issues?

As of Friday’s close, the year to date the sectoral returns are as follows

Finance	18.63%
Industrial	31.2%
Holding	17.4%
Property	29.34%
Service	16.7%
Mining	48.35%
All Shares	19.01%
Composite	23.29%

Those numbers are a fantastic sight. Yet only the mining, industrial and property sector have generated returns above the composite index which means the industrials and the property have been responsible for September’s Phisix 7,400. The outperformance of the mining industry has been in a response to last year’s crash, so I wouldn’t include them, besides they have a miniscule weighting in the PSE basket.

Yet if we match the year to date returns with that of the 7,400s of May 2013-September 2014 performance, the damage caused by the June 2013 bear market strike has been striking! Except for the industrials, those marvelous year to date returns have hardly filled the void caused by the bear market as finance, holding and ironically even the property sector still has underperformed the May 2013 run. You see, more ironies.

Alternative to the concentration of gains perspective, the current 7,400 exposes the underbelly of the current run-up a weak market breadth relative to the 2013.

I would add that if one looks at the disparity in the performance of the service sector between two time frames, one may discern that the sector’s outperformance vis-à-vis May 2013 has been a result of its underperformance during the first romp to 7,400.

So we have substantially low volume plus underperformance by major sectors suggesting of the inferior quality of the September 7,400 with that of its May 2013 counterpart.

I mentioned earlier that the peso has been pummeled even as 7,400 has been reached.

When the May 2013 milestone 7,400 high was crafted, the peso, which was largely on a firming trend, closed on the same day at 41.2 relative to the US dollar. (see upper window)

Based on Friday’s official close of USD PHP 44.72, between the two Phisix highs of 7,400 in 2013 and 2014, today’s peso has been down by about 8% against the May 2013 version! Just amazing. But that's an example of divergence or one of the many other ironies between the two 7,400s.

While the correlation has not been perfect, the Phisix used to rise ALONG with the peso. This has been true even during 2014 (see lower window). Since September when the peso came under duress, such correlation appears to have been ‘broken’, as the Phisix hit 7,400 on a WEAK peso. Strange.

It is as if a weak peso WON’T have any impact on earnings and profits or the economy. Juxtaposed with still hefty money supply growth, the weak peso serves as a one-two punch that would compound on domestic inflationary pressures whose nasty side effect includes a demand slowdown and higher business costs. Add to this the issue of debt servicing where more peso will be required to finance foreign denominated liabilities.

In a hysteric world of G-R-O-W-T-H who cares about reasoning.

Has The Stock Market Permanently Lost Its Fundamental Function As A Discounting Mechanism?

And speaking of peso and inflation, the May 2013 high was carved out of declining official inflation rates. Today’s run up has been the opposite, the Phisix has ascended in the face of official inflation rates at the upper end of official target.

Additionally, in the May 2013 highs such era highlighted on falling interest rates. Today the BSP has been panicking to tighten, two weeks back the BSP imposed its sixth and seventh tightening measure in only SIX months[13].

Additionally the proxy to interest rates, yields of 10 year government local currency bonds then set NEW record LOWS, today yields have been going up!

All these reveal of the antipodal nature of the 7,400 of September 2014 and May 2013. In 2013 the Phisix rose on the tailwind of EASY money as against TODAY’s relatively TIGHTENING monetary environment. I would bet on the former and not the latter, as the former signifies a key ingredient for an asset bubble collapse.

Meanwhile the inability to push many major caps back to the former highs has instead prompted for wild punts across second and third tier issues. The average daily trades reveals of the increased turnovers by participants on lower volume relative to 2013.

Average total traded issues suggest of the breadth of the euphoric wagering which has bulged to include many illiquid issues. This reveals of the intensity of the build up of the adrenaline to gamble

The 2013 7,400 was mainly due to major caps. The 2014 7,400 was mainly due to SELECT major caps PLUS second and third tier euphoric mindless scramble for yields.

Finally the 7,400 September 2014 edition has been part of the manic transition process which I called the “denial rally” and the déjà vu

During the appearance of the bear in June I wrote[14], “Denial” rallies are typical traits of bear market cycles. They have often been fierce but vary in degree. Eventually relief rallies succumb to bear market forces. The denial rally of 2007 virtually erased the August bear market assault but likewise faltered and got overwhelmed.

And as the 2014 rally progressed early in the year to take a similar shape of the early 2013 dynamic I observed[15], Well, actions in the Philippine stock exchange seem like a déjà vu of the manic phase of February to early March of 2013

The consensus may think that a crossover of the 7,400 marks a nirvana pillared by “this time is different”, history tells us this isn’t so.

	Old high	New high	% gains	2014 equivalent (base: 7,400)
August 1969-January 1979	482.24	531.13	10.14	8,150
Jan 6, 1994-Feb 3, 1997	3,293.33	3,447.6	4.68	7,746
July 5 2007-October 9, 2007	3,791.42	3,873.5	2.16	7,560

The two generational or secular highs (1969-79 and 1994-97) during the topping process showed how previous highs had been exceeded. The cyclical top of 2007 likewise reveals of the same dynamic but at a more muted dimension.

As I have been saying the issue is about financial instability rather than of reaching specific price levels. The two generational/secular stock market bubble cycles did not only result to a stock market crash but metastasized into financial crises.

The cyclical top of 2007 only resulted to a stock market crash but not to an economic event. But the 2007 top which has been a cyclical phenomenon has connected with current developments from which originated in 2003. 2003-2014 marks the secular bull market to the topping phase.

In the economic context, 2014 has been associated with 2007 because the policies implemented then (automatic stabilizers) to forestall a recession on the formal economy and the ensuing shift to aggregate demand (monetary easing)[16] paved way for both the 7,400s of 2013 and 2014 undergirded by the property and property related bubbles.

In short, the higher the price levels, the greater the financial instability. 

Logic also tells us why the current stock market conditions are unsustainable: Has the stock market permanently lost its fundamental function as a discounting mechanism for it to permit or tolerate a perpetual state of severe mispricing as seen by excessive valuations of securities???

If the answer is YES, then PEs of 30, 40,50, 60 and PBVs 3,4,5,6,7 can reach, in the words of cartoon Toy Story character Buzz Lightyear “to infinity and beyond”!!! 

If the answer is NO, then the obverse side of every mania is a crash.

My bet is on theory, logic and history.

---

[1] See Phisix: ASEAN Currencies Dive as the BIS, IMF, OECD Warns About Bubbles! September 22, 2014

[2] G-20 Communiqué Meeting of G20 Finance Ministers and Central Bank Governors Cairns, 20-21 September 2014

[3] See Phisix: Will the Global Black Swan Be Triggered by Economic Sanctions? August 11, 2014

[4] See ADB Warns on Rising Risk Environment September 23, 2014

[5] Doug Noland, What We Know Credit Bubble Bulletin Prudentbear.com September 26, 2014

[6] See Hong Kong Monetary Authority Warns of High Risk from Interest Rate Hikes September 25, 2014

[7] See Hong Kong Regulators Worry Over Growing Risk from Corporate Debt September 26, 2013

[8] CNBC.com Billionaires are hoarding piles of cash September 22, 2014

[9] Hans-Hermann Hoppe "The Yield from Money Held" Reconsidered May 14, 2009 Mises.org

[10] Governor Amando M. Tetangco, Jr. Banking on Social Safety Nets Bangko Sentral ng Pilipinas September 25, 2014

[11] see Phisix: As Risks Mounts, PANIC BUYING Grips the PSE! September 8, 2014

[12] See Phisix: 7,000 Breaks on Regional Melt-UP; The Natural Limits of Inflationism August 18, 2014

[13] See Phisix: BSP Panics, Raises BOTH Official and SDA Rates!!!! September 15, 2014

[14] See Phisix: Don’t Ignore the Bear Market Warnings June 30, 2013

[15] See Phisix: A Deeper Look at the Philippine and Indonesian Stock Market Mania March 17, 2014

[16] See Phisix: In 2009, the BSP Engineered a Crucial Pivot to a Bubble Economy April 14, 2014