ASEAN Credit Default Swap (CDS) Spreads Spike!

Credit default Swaps (CDS) are the cost to insure debt from default risks.

It appears that ASEAN’s CDS spreads has spiked this week. In other words, market’s perception of ASEAN default risks has sharply risen (all charts below from Deutsche Bank—based on recovery rate of 40%).

Philippine CDS fast approaches the October highs! Yields of 10 year peso government bonds climbed 17.6 bps week-on-week. More importantly, short term yields have been soaring for three successive weeks. Has the dramatically flattening yield curve been the reason behind the CDS ramp? Or has this been due to a EM contagion or a combo?

Malaysian CDS passed October levels and now swiftly nears the January 2014 highs, or then, during the climax of the EM taper tantrum turmoil. Yields of Malaysian 10 ringgit bonds marginally slipped this week, but still drifts at the highs of the 2010 levels

Has current pressures in Malaysian’s currency and stock markets functioned as the trigger? 

Indonesia CDS have reached October highs. Yields of 10 year rupiah bonds closed the week marginally changed but had a short bout of sharp intraweek volatility. 10 Year yields are just off the January taper tantrum highs. Has the CDS spike been perhaps due to the record low of the rupiah and or contagion?

Thailand CDS has also passed October 2014 highs, but has partly backed off the past days. Yields of 10 year baht climbed by some 10 bps this week. However current yield levels remain at the lows equivalent to 2010 levels.

Aside from the baht drifting at January levels, Thai’s stock markets just suffered a stunning intraday crash last Monday which it had mostly recovered this week.

If debt markets continues to price in higher ASEAN default risks, will this be positive for stocks?  Those January 2014 CDS peaks coincided with the stock market lows during the EM taper tantrum that commenced in May 2013. Will this time be different?

We truly live in interesting times!

Ex-BIS Chief Economist William White Warns “The system is dangerously unanchored”

Here are juicy excerpts from an interview of former Bank for International Settlements chief, William White, by Finanz and Wirtschaft where the former expresses alarm bells over the Swiss SNB’s negative deposit rates and the de facto global easing policies. (all bold mine; italics interviewer) [hat tip zero hedge] 

By the way, Mr. White predicted the crisis of 2008. [note this isn't to say past is the future, rather, Mr. White's ability to foresee the future has been grounded on relatively "sound" analysis compared with the mainstream]

Will the rate cut of the SNB lower the domestic interest rate level in Switzerland even further?

WW: Maybe yes, maybe no. One argument is, if you lower the rate set by the central bank, then all the other rates will follow. My reaction is: Not so fast, my friend! The Swiss banks are now suffering losses on their reserves at the SNB. Banks could reduce interest rates on deposits to recoup these losses. But this has clear limits: People do not have to hold money at banks, they can ask for their money in notes. The banks could also recoup their losses in a different way, and this is something to be concerned about: They could raise the rates on loans. Far from encouraging lending and spending, negative interest rates at the central bank might work in the opposite direction.

So negative interest rates could actually increase the cost of borrowing?

WW:When interest rates cannot go lower anymore, when they hit the Zero Lower Bound, monetary policy might work like quantum mechanics. Take this simple example from the world of physics: Classical Newtonian mechanics only work when the mass of a body is big enough. When the mass is too small, you are in quantum mechanics. These are completely different ways of looking at the world. The Zero Lower Bound might be the quantum mechanics of monetary policy. Things just do not operate in the same fashion. If you think things do operate the same way, you might make a very dangerous mistake.

But will Swiss banks really increase loan rates now?

WW: I do not know. The banks might swallow the losses for some time. They may decide, as the SNB likes them to, to put their money in some other currency in which they do get a positive return.

By holding a one-sided peg of the Franc to the Euro, the SNB has in effect linked its monetary policy to the ECB. How will the SNB ever be able to decouple from the ECB?

The hope is that at some time the pressure on the Franc will come off, when interest rates rise elsewhere. Then the SNB could gradually reduce their exposure to the Euro. That may be a while.

Do you have an idea who will win or lose from negative interest rates?

WW: The banks will lose as they have to pay rates on their excess reserves they hold at the central bank. The public sector, the SNB, will gain. If the banks do not push down deposit rates, but increase the loan rates, the borrowers will pay the price. And when interest rates go down, savers will suffer.

The SNB has to follow the ECB in its monetary policy. Is it not dangerous when the monetary policy of one country affects another?

WW: Currently we have an international monetary non-system. Nobody has to follow any rules. Everybody does what they consider is in their own short-term best interest. The real difficulty is: What is in their short-term interest – for example, following ultra-easy monetary policy – could well backfire somewhere. It might be not in their long-term best interest. And as the easy monetary policy influences the exchange rates, it influences other countries. Almost every country in the world is in easing mode, following the Fed, and we have absolutely no idea how it will end up. We are in absolutely uncharted territory here. This worries me the most. The SNB has been doing well in what it was forced to do by this international monetary non-system. The Swiss have to do the best they can, because that is what everybody else is doing.

What are the risks of this non-system?

WW: There is no automatic adjustment of current account deficits and surpluses, they can get totally out of hand. There are effects from big countries to little ones, like Switzerland. The system is dangerously unanchored. It is every man for himself. And we do not know what the long-term consequences of this will be. And if countries get in serious trouble, think of the Russians at the moment, there is nobody at the center of the system who has the responsibility of providing liquidity to people who desperately need it. If we have a number of small countries or one big country which run into trouble, the resources of the International Monetary Fund to deal with this are very limited. The idea that all countries act in their own individual interest, that you just let the exchange rate float and the whole system will be fine: This all is a dangerous illusion.

I interpret Mr.White’s point as one of saying that 

-central bankers have indulged in a grand gambit with the monetary system from which they have been pushing these monetary tools to the limits (“we are in absolutely uncharted territory here”), 

-the average citizens are guinea pigs (in the case of the SNB's negative deposit rates; banks, borrowers and savers lose as the public sector gains--arbitrary confiscation that benefits a few at the cost of many), 

-that such gambit has signified an act of desperation (“forced to do”) predicated on path dependency and the bandwagon effect (“because that is what everybody else is doing”) and 

-that central banks have entirely been clueless of the risks and ramifications of their actions, where the policy trend have been focused on short term fixes (“The system is dangerously unanchored. It is every man for himself. And we do not know what the long-term consequences of this will be”)

Stocks may be at record levels for NOW, but at what costs in the future?

The Current Dramatic Flattening of the Philippine Yield Curve Means Risk Ahead!

I’m not making any formal writing anymore until 2015.

Anyway here is the weekend update of the Philippine yield curve.

The above represents the entire yield curve based on Friday’s quote for the past 6 weeks. 

As one would note, the short end of the curve has been rapidly ascending relative to the long end. This means that the domestic yield curve has been dramatic flattening.

A better expression of the curve would be the spread between the long end and the short end, where I compare the yields of 10 and 20 year minus the 1 year.

Again a dramatic flattening has been in place for the past 6 weeks for either the 10 or the 20 year curves.

There are two ways to look at this. First, why has there been a sharp rise in the short end?

The second is what are the implications?

I offer an answer to the WHY.

The fundamental premise is that current highly leveraged firms or institutions who have been starved of cash could be desperately borrowing at higher rates to fund operational financing gaps in order to maintain current projects or positions. And this applies to both stock market speculators/market manipulators and entities which mostly belong to the bubble industries.

Remember, Philippine treasuries essentially represent a tightly held or controlled markets by the government and the domestic banking system (see above from ADB’s November Bond Monitor at ASIAN Bonds Online). 

As argued before, this is why both have used the bond markets to drive down rates towards a convergence with US treasury yields. I called this the “convergence trade”. 

Financial repression policies led to the corralling of resources of depositors enrolled in the formal banks through zero bound rates. Most importantly, such invisible transfer also covered the currency holders or mostly the informal economy.

Thus, these policies represented subsidies to both banks (and their clients) and the government at the expense of the average resident.

This has been a wonderful example of what inflationism does: By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. (JMKeynes)

Resources, intermediated by the banking system, have been funneled to the real economy via a “pump” on bubble industries to mostly firms of elites where G-R-O-W-T-H happened. 

The subsidy to the banks and their clients inflated tax revenues that bankrolled ballooning government spending, thus an indirect subsidy to government. 

Additionally by repressing interest rates, maintaining government liabilities had been below market rates. Thus the two-pronged subsidies in favor of the government.

The above represents the insatiable spending appetite by the Philippine government as exhibited by the 2015 budget, which was recently passed. 

The second chart signifies the historical revenues, expenditures and deficits as of 2013. 

Despite the boom deficits continue, wait until the slowdown occurs and deficits and public debt will swell!

There is a third non-financial or political benefit: high public approval ratings. This allows the incumbent to impose more populist political whims.

Just think of all the recent colossal bond issuance from major companies that practically returned nearly zero (or even negative) to investors, net of inflation and taxes. Those surreptitious transfers not only meant free money for banks, bubble industries and the government, they also translated to a massive transfer of risk.

This implies that a substantial segment of depositor’s resources have now been exposed to various risk factors: interest rate, market, and credit. For foreign based loans, currency risks.

In a nutshell, for any strains in Philippine treasuries to emerge means that some formal economy institutions, perhaps in the financial sector, have already been feeling pressures.

So despite all the hallelujahs from government statistics, the bond market has been implying of developing cracks in the credit driven phony boom.

I also wrote of the possible implications: higher short term financing costs, a symptom of liquidity squeeze and could even signify seminal indications of a developing credit crunch!

Yet there is more: pressure on banking system’s balance sheets.

A flattening yield curve discourages borrowing short and lending long or the maturity transformation or profits from asset-liability mismatch arbitrages. A flattening of the yield curve may squeeze on interest rate margins. This means that credit expansion will slow or at worst, could even grind to a halt.

Since the Philippine G-R-O-W-T-H story has been one pillared by credit expansion (as previously discussed), any slowing of the credit boom extrapolates to a slowdown in statistical G-R-O-W-T-H.

And as the credit expansion fades, credit risk rises. If statistical G-R-O-W-T-H slows where will levered firms get money to pay for newly acquired loans? Here’s a guess: by borrowing more.

This could already be happening which is why short term bond yields have spiked.

Look at the Philippine banking system’s income statement from BSP data. Domestic banks are heavily dependent on interest rate income which accounts for about 2/3 of the banking system’s income. 

A flattening of the yield curve may likely put a squeeze on domestic bank’s interest rate margins. So slowing credit growth and prospective decline in interest income will eventually hurt bank’s profits.

Additionally even if we are to look at the banking system’s non –interest income; fees and commissions almost accounts for half. So the banking system’s non-interest income indirectly depends on the sustained G-R-O-W-T-H in bubble industries and in asset markets (specifically stock markets) which ironically depends on credit growth!

So the yield curve says that credit growth will slow, thereby affecting G-R-O-W-T-H and increasing risks of banking system’s loan portfolio which accounts for half of banking system’s total assets!

Take away the illusions from credit growth, the entire house of cards crumbles

So unless there will be material improvements in the yield curve soon, the one way trade mentality held by the consensus will get another sting!

But if the yield curve continues to materially flatten or even exhibit inversion, then big big big trouble lies ahead.

Don’t worry be happy. Perhaps when economic Typhoon Yolanda arrives, affected banks may be bailed out  by the government financed by the average citizenry through higher taxes and inflations. So stocks will rise forever!

But as the great Austrian economist Ludwig von Mises warned

But the boom cannot continue indefinitely. There are two alternatives. Either the banks continue the credit expansion without restriction and thus cause constantly mounting price increases and an ever-growing orgy of speculation, which, as in all other cases of unlimited inflation, ends in a “crack-up boom” and in a collapse of the money and credit system. Or the banks stop before this point is reached, voluntarily renounce further credit expansion and thus bring about the crisis. The depression follows in both instances.

Have a great weekend!

Russia’s Collapsing Ruble is a Textbook Example of Fiat Inflation

Last February I noted that “Russia suffers from both property bubble fuelled by credit inflation and runaway local government debt”, such that a domestic turmoil had already been occurring even outside the current collapse of crude oil (which began last July) and sanctions imposed by Western nations. Economic sanctions came a month after. 

The Russian ruble has already been plagued by capital flight from residents rather than from foreigners. I warned too “The point worth repeating is that every conditions are unique and that there are no “line in the sand” or specific thresholds before a revulsion on domestic credit occurs”

Presently, as the ruble collapse continues, the average Russians have reportedly been concerned over the risks of  bank runs

At the Mises Blog, Carmen Elena Dorobăț lucidly explains the growing risk of what  I warned earlier as “revulsion on domestic credit” on Russia as textbook symptom of fiat inflation (bold mine)

In January 2014, 33 Russian rubles exchanged for one US dollar. In December 2014, the amount has more than doubled, reaching 77.2 rubles per dollar on December 16^th, a day some dubbed Russia’s Black Tuesday. Russian central bankers raised interest rates by 6.5% overnight, and spent $2 billion to stave off the depreciation. In total, propping up the currency has cost $10 billion since the beginning of the month, and $70 billion since the beginning of the year.

In spite of it all—or because of it all—Russia’s problems are far from over. Default looms closer, as its foreign (public and private) debt is estimated at around $600 billion, and foreign-currency reserves only at $300 billion. The government appealed to the public to be ‘calm and rational’, stressing the need to keep rubles and sell foreign currency. Russians did however go to buy more durable goods, such as cars and home appliances; and although there’s no flight into real goods yet, the tendency is forming in that direction.

The media, economists, and Putin himself blamed Western financial sanctions over the Ukraine conflict—together with other ‘nuisances’ such as oil prices—for Russia’s woes. Indeed, these factors precipitated the slide in purchasing power: sanctions made many local companies unable to refinance their dollar debts, and low oil prices drained some of Russia’s foreign currency reserves. With fewer (and more expensive) imports, rubles were spent and re-spent on domestic goods, where they bid up prices and led to double-digit inflation. But at the bottom of it lie, as you’d expect, mainly monetary factors. Over the last 16 years, the Bank of Russia’s balance sheet rose from about 9 billion rubles to 2.1 trillion this month (an all-time high), while monetary aggregates increased up to a factor of 30 over the same period. Part of the new money was printed to directly fund (military) industries or state-owned companies.

In this light, Russia’s case isn’t special, but just a textbook example of currency collapse due to fiat inflation. It resembles the more recent experiences in Argentina or Venezuela, as well as a possible future of the United States, if for some reason or another the dollar can no longer make its way into foreign (Chinese) bank vaults. But it is nevertheless an interesting development for two reasons. First, it shows just how important international central bank cooperation is for the inflationary policies of national governments. At the moment, Russia cannot rely on other monetary authorities to pressure their banking systems into rolling over its debts. Nor can it rely on an IMF loan, as it did in the 1998 emerging market crisis. Its tensioned political relations have left it alone to pick up the pieces of its reckless monetary policy.

Second, it would seem that both the media and the general public are most disillusioned with a government that loses control over the monetary system. As a result, this week has been perhaps the only time over the last year when Putin’s grip on power has been in doubt. It’s no surprise, however, given that in a world of fiat currencies, bank notes are only backed by other bank notes, and by a fickle, passing trust.

As I wrote below “Take away credit and liquidity, confidence dissipates which means that the whole structure collapses.” This applies not only to stocks but to the incumbent monetary system.

"Patient" Fed and SNB's Negative Rates Sparks Monster Stock Market Rally as Oil Prices Crumble

So who says stock markets have been about G-R-O-W-T-H?

From CNBC: (all bold emphasis on articles quoted are mine)

A surging U.S. stock market rallied to its best two-day gains in three years Thursday.

The monster rally, which kicked off Wednesday after Federal Reserve Chairwoman Janet Yellen assured the markets that the central bank would be patient about lifting interest rate, burst into an all-out bull run late in Thursday trading.

The move caps a two-day charge higher, bringing the Dow back to within shouting distance of 18,0000, after rocky trading days.

The Dow Jones Industrial Average DJIA, +2.43%  soared 421 points, or 2.4%, to 17,778.15, its biggest one-day gain in three years, a day after the Federal Reserve said it “can be patient” about the timing of its first rate hike, signalling increases will be slow and steady.

From Bloomberg:

After their biggest six-day tumble in three years, European shares have regained more than half of their losses, jumping the most since November 2011 today.

The Stoxx Europe 600 Index rallied 3 percent to 339.05 at the close of trading in London, with banks contributing the most to the advance. The Swiss Market Index (SMI) posted its biggest jump since January 2013 after the nation’s central bank introduced its first negative deposit rate since the 1970s. The announcement came after Chair Janet Yellen said the Federal Reserve will probably hold rates near zero at least through the first quarter and that they may not return to more normal levels until 2017.

From Reuters:

Global equities markets rallied on Thursday, with Wall Street surging nearly 2.5 percent, as investors buoyed by policy comments from the U.S. Federal Reserve moved into riskier holdings.

The Swiss franc tumbled after the country's central bank announced a surprise charge on deposits, wary of a flood of money exiting Russia and likely inflows from the euro zone if the European Central Bank starts full-scale money printing early next year.

Wall Street powered higher, with the S&P 500 putting up its best two days of gains since November 2011, according to Reuters data. Health and technology shares were among the strongest U.S. sectors..SPLRCT .SPXHC

All these rallies comes in the face of crumbling oil prices  WTIC –1.65% and Brent -3.21%

This reminds me of 2006-7.  Then, US housing markets markets diverged from US stocks. US housing markets deteriorated as stocks soared.  Subprime housing loans which used to signify just a minor share of overall loans eventually contaminated the entire spectrum. Then the crisis surfaced. Today will the energy sector serve as the US housing subprime equivalent?

Anyway the above just reveals how, like Pavlovian dogs, central banks triggers manic delirium episodes on financial markets.

As I previously discussed, stocks are about liquidity and credit and the (false) confidence it spawns. Take away credit and liquidity, confidence dissipates which means that the whole structure collapses.

And that’s why from ECB to BoJ-GPIF to PBoC and now to the SNB and the FED, tenuous confidence has to be maintained by sustained assurances of liberal access to credit and guarantees of abundance of central bank provided liquidity via financial repression policies in the form of different tools—interest rate cuts, QEs, outright support on stock markets  (Japan’s GPIF), negative deposit rates or even merely assurances to implement them.

Rigged financial markets means castles built on sands. Eventually the ocean tide will wash them away.

Phisix: A Rollercoaster Session Backed by the Return of Index Managers as Short Term Yields Soar (again)!

What a day!

Today’s market volatility has been fantastically a rare event!

First, yields of Philippine short term treasuries continue to spike!

It’s a second day of the week where yields of 3 month, 6 month (above charts) and 1 year (below left, 1 month included but not in charts) Philippine treasuries have moved sharply upwards. Current two day gains add to the previous two weeks of yield expansion.

Surging yields effectively translates to higher short term financing costs, a symptom of liquidity squeeze and could even signify seminal indications of a developing credit crunch!

As one would note, yield levels of short term government papers have breached June 2013 taper tantrum highs. Then, the spike in yield signaled a contagion from a mostly emerging market selloff. This time, it has been a domestic affair.

Additionally, with short term yields increasing more than the longer spectrum, there has been a dramatic flattening of the Philippine yield curve. Yield of 10 year Philippine peso bonds even declined today (right window).

And even from a mainstream perspective, I previously noted that flattening yield curves have been precursor to an economic growth slowdown.

Even more, if the current rate of the yield increases will be sustained, then this could lead to a yield curve inversion—where short term rates will be higher than the longer term—a reliable indicator of recessions.

Yesterday I wrote of how this could be reached.

The fundamental premise is that current highly leveraged firms or institutions who have been starved of cash could be desperately borrowing at higher rates to fund operational financing gaps in order to maintain current projects or positions. And this applies to both stock market speculators/market manipulators and entities which mostly belong to the bubble industries.

If my suspicions are right, then not only will stock market manipulators have impaired balance sheets, but they will be NET sellers of stocks (at vastly lower prices)!

The same liquidations will be resorted to by cash strapped bubble industries (keep an eye on casinos, and the property industry)

So the populist G-R-O-W-T-H theme will transmogrify into LOSSES and eventual LIQUIDATIONS.

Yet the feedback loop between accruing losses and increasing credit strains will extrapolate to higher demand for short term loans which should drive short term yields to even higher levels relative to the longer end.

If such dynamic is sustained then this will eventually lead to a yield curve inversion. The inversion will now signal a recession, if not a crisis!

So current Philippine yield curve conditions have likely been signaling emerging perils in the real economy.

Even more exciting today has been the activities in the domestic stock market.

The Philippine Stock Exchange today experienced a really wild rollercoaster ride which may be one for the books.

Today’s session had been marked by two roundtrips (see right window from technistock.net) and the spectacular return of the market riggers!

Following last night’s Fed chair Janet Yellen sponsored stock market party, where US stocks surged to its “best session of the year as investors celebrated…the Federal Reserve's pledge to be patient in raising interest rates” (CNBC) the Phisix gapped up to an early morning peak with gains of 111.04 points or 1.6%!

About a little more than an hour’s time, the entire 1.6% of gains shockingly evaporated! This marks the first roundtrip.

Not only has gains dissipated, the Phisix broke the 6,950 and 6,900 levels in the late morning dump! The dump translated to a maximum loss of 84 points or a 1.2% decline!

Yet following lunch break, the “afternoon delight” aspect of OPLAN Phisix 7,400 went on stream. Operators coupled with domestic bulls went on a bidding mania, where the 84 points or 1.2% morning loss had been entirely recovered through the last minute. This marks the second roundtrip. 

A minute towards the run off, the Phisix was up by only 4.71 points. (see left window from colfinancial) Yet at the closing bell, the Phisix surged by 63.07 points or .91%!

What an incredible day. The two roundtrips meant that the Phisix moved by 453 points or a staggering 6.5%!!! Importantly, almost the entire of the gains of the day, specifically 92.5% of the .91%, was due to the marking the close!

Given the wild pendulum swings, volume was relatively heavy at Php 9.47 billion. With special block sales this expanded to Php 10.98 billion. (PSE Quote)

Foreigners sold a sizeable net Php 1.095 billion worth of shares.

Decliners beat advancers by almost 2:1 or by 121 to 68. This signifies another sign that the Phisix wanted to correct but which the desperate market manipulators will not permit.

Today’s index manipulation has basically been a three industry rendition.

While all 5 sectoral indices posted pumps at different degrees, the biggest came from the holdings, the all-time favorite property, and the services sector (see above)

And the bulk of those last minute panic buying came from SM, AEV and SMPH.

Last minute pumps are hardly about profits. Rather they are about setting impressions.

Yet market manipulators continue to accumulate severely overvalued securities at record prices or near record high prices in the hope that some “greater fools” would buy what they will sell.

The problem is what happens if the markets go down?  These operators function with no margin for errors.

Former Morgan Stanley analyst and now hedge fund manager Stephen Jen recently warned of a coming emerging market crisis. He says that today’s experts have little knowledge of 1990s.

From Bloomberg,

If the 48-year-old native of Taiwan, with a PhD from Massachusetts Institute of Technology, sounds a little jaded now, it’s not without some reason. He says he worries that many emerging-market analysts are too young to remember the late 1990s. Instead they learned the ropes in an era dominated by the rise of Brazil, Russia, India and China -- a supposed one-way bet to prosperity.

“Many became EM specialists after the term ‘BRIC’ was coined in 2001 and don’t know any serious crisis,’’ says Jen, who now runs the London-based hedge fund SLJ Macro Partners LLP.

The youngsters are about to be schooled. Jen says echoes of 1997-1998 may be at hand.

I believe that his warnings will also apply to the “youngsters” of the Philippine markets, who may be part of team OPLAN Phisix 7,400 or if not the lemmings enamored with easy money or those who merely find comfort by running with horde and prioritize social signaling (particularly those in the internet circles). 

A lot of them will also get "schooled".

Swiss Central Bank Imposes Negative Deposit Rates!

The Keynesian euthanasia of the rentier policies of abolishing interest rates has been intensifying.

Today, the Swiss National Bank joins the ECB (June 2014) and Sweden (2009) to implement negative deposit rates supposedly intended to discourage capital flows.

From Bloomberg:

The Swiss National Bank (SNBN) imposed the country’s first negative deposit rate since the 1970s as the Russian financial crisis and the threat of further euro-zone stimulus heaped pressure on the franc.

A charge of 0.25 percent on sight deposits, the cash-like holdings of commercial banks at the central bank, will apply as of Jan. 22, the Zurich-based central bank said in a statement today. That’s the same day as the European Central Bank’s first decision of 2015.

The SNB move follows Russia’s surprise interest-rate increase this week and hints at the investment pressures that resulted after that decision failed to stem a run on the ruble. Swiss officials acted as the turmoil, along with the imminent threat of quantitative easing from the ECB, kept the franc too close to its 1.20 per euro ceiling for comfort.

As one would notice, the SNB’s has supposedly been responding to unintended consequences from previous interventions

And since every interventions create unintended economic and financial dislocations, these has prompted policymakers to apply even more interventions which furthers the imbalances. Thus one intervention begets another. The ramification of which is a massive accumulation of distortions, or malinvestments pillared on the destruction of savings or capital consumption that eventually results to a crisis

As great Austrian economist Ludwig von Mises warned in his magnum opus the Human Action (bold mine)

The age-old disapprobation of interest has been fully revived by modern interventionism. It clings to the dogma that it is one of the foremost duties of good government to lower the rate of interest as far as possible or to abolish it altogether. All present-day governments are fanatically committed to an easy money policy. As has been mentioned already, the British Government has asserted that credit expansion has performed "the miracle...of turning a stone into bread." A Chairman of the Federal Reserve Bank of New York has declared that "final freedom from the domestic money market exists for every sovereign national state where there exists an institution which functions in the manner of a modern central bank, and whose currency is not convertible into gold or into some other commodity." Many governments, universities, and institutes of economic research lavishly subsidize publications whose main purpose is to praise the blessings of unbridled credit expansion and to slander all opponents as illintentioned advocates of the selfish interests of usurers.

The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

And why does it seem that we are in a crisis for central banks to resort to unprecedented emergency measures?

Naturally Wall Street love such invisible transfers—policies which confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some—as they are one of the key beneficiaries.

And so today’s continuing party.

Phisix Crushed as Yields of Short Term Philippine Treasuries Soar!

Readers of this post has repeatedly been warned: market crashes and magnified volatility has been occurring real time. And this has been a global phenomenon which appears to be spreading and intensifying.

The consensus G-R-O-W-T-H theme seems in SERIOUS jeopardy. They are in BIG trouble not because the local stock markets slumped BIG today. They are in BIG trouble because today’s spike in short term yields in the domestic bond markets which adds to last week’s surge, may have more than been indicative of tightening liquidity or a mad dash for cash, they are in BIG trouble because today’s spike looks like manifestations of embryonic signs of a developing CREDIT CRUNCH!

Yields of 1 month, 3 month, 6 month and 1 year have substantially jumped today as shown above.

Yields of these short term domestic treasuries have either vaulted to past June “taper tantrum” highs in 2013 or have reached such levels. Remember that the June “taper tantrum” sent the Phisix into bear market levels.

Yields of 10 year treasuries climbed too. But the uptick has been less than the short term yields. This indicates of a dramatic flattening of the yield curve.

I wrote about this last week:

From this perspective I offer a different explanation. The two week spike in short term yields represents a scramble for liquidity!

The short term rates 3 month, 6 month and 1 year have all reached June 2013 highs. To recall, June 2013 was when the taper tantrum PLUS BoJ’s QE 1.0 triggered turbulence in global financial markets, so the spike in short term rates then has been consistent with concerns over liquidity. 

There have been little signs of turmoil (yet). The peso has been nearly unchanged for the year even as the neighboring currencies have been severely buffeted on likely heavy interventions by the BSP. The Phisix remains above 7,000. Despite failing to meet consensus expectations, statistical growth remains above 5%. In addition, media and experts continue to serenade economic hallelujahs even as neighboring financial markets have been roiling from weak currencies.

So this, in my view, may have been about debt IN debt OUT that may have reached proportions whereby demand for short term loans have become greater than long term loans, thus the spiraling demand equates to the public willing to pay for higher short term rates. And demand for such short term loans may have been reflected on the yields of short term treasuries.

And demand may have originated from cash constrained borrowers who may be competing to secure funds to oversee the completion of their capital intensive based projects on mostly bubble sectors, and or from highly levered asset speculators (real estate and stock markets) who may be jostling to acquire short term funds in order to settle existing liabilities as returns have not been sufficient to cover levered positions. Could this be the reason behind the obsession over managing of the stock market index?

The sharply expanding bank credit growth in the light of steeply decelerating money supply growth as statistical economic growth slows seems to dovetail with the greater demand for short term funds; the highly levered sectors of the economy haven’t been generating enough cash from a growth slowdown and from untenable debt levels so the dash for loans from the banking system to pay existing debt even at higher rates. 

It remains to be seen if the current developments represent an aberration or if my suspicions are right where short term yields have been about emergent signs of liquidity strains.

But if my suspicions are correct, where short term rates continue to climb, this will affect many businesses via higher financing costs. There will be a cut back in expansions as losses will mount.

And if the rise in short-term yields engenders an inverted yield curve–where short term rates are higher than longer term rates—then the consensus will even be more startled because inverted yield curves have mostly been reliable indicators of recessions! 

An inversion will likely occur when a credit crunch has become evident. 

I asked in the above “Could this be the reason behind the obsession over managing of the stock market index?”

In support of the index, market manipulators have been buying stocks at either record highs or near record highs, so with the market’s recent declines, losses have been mounting.

If taxpayer money has been used, then political agencies will soon see losses and deficits. Losses will also hound private institutions even if they used only surplus/reserve cash for stock market speculation. 

Yet the more important factor is leverage. If the market manipulator/s pumped up stocks with credit, then current losses will render them, not only losses, but with inadequate funds to pay the existing debt. The lack of funds will compel levered institutions to scramble to borrow short term money even at higher rates.

I think this applies also to heavily geared ‘bubble’ institutions (real estate, shopping malls, hotel and financial intermediaries) or levered firms that have not been generating enough cash flows.

So these cash flow deficient heavily leveraged firms may have been desperately competing to borrow money to cover the funding gaps that has sent yields to the present 2013 taper tantrum levels!

If my suspicions are right, then not only will stock market manipulators have impaired balance sheets, but they will be NET sellers of stocks (at vastly lower prices)!

The same liquidations will be resorted to by cash strapped bubble industries (keep an eye on casinos, and the property industry)

So the populist G-R-O-W-T-H theme will transmogrify into LOSSES and eventual LIQUIDATIONS.

Yet the feedback loop between accruing losses and increasing credit strains will extrapolate to higher demand for short term loans which should drive short term yields to even higher levels relative to the longer end.

If such dynamic is sustained then this will eventually lead to a yield curve inversion. The inversion will now signal a recession, if not a crisis!

The consensus better supplicate from the Almighty that these short term rates be immediately tempered or pacified soon otherwise hell may break loose.

It’s also important to emphasize that magnified volatility won’t merely signify as contagion from external events but also in response from internal imbalances generated by credit fueled artificial booms from financial repression policies channeled through zero bound rates.

Perhaps foreigners smells something fishy with current conditions, thus today’s stock market plunge.

The Phisix got crushed by 2.71%! 

Apparently stock market operators seems to have lost control. They had been repelled yesterday, where the Phisix tanked 1.58% and today. And for the second successive day stock market operators had been treated with a dose of their own medicine. Or might I say karma.

Attempts to shield the Phisix from reality by rigging the index seem to have only worsen the profit taking activities or the market slump. 

This index management had been most evident when the domestic market surged higher in the face of a regional and global selloff.

The portrayal that domestic stocks would be immune to global events has been demolished by the actions of the last two days.

The two day loss, which accrues to 4.29%, sends the Phisix to about the October lows. A breakdown from October lows will trigger the bearish portent from the double top formation.

The intense selloff today had been broad based. All sectors except the mining industry suffered losses of 1.8% and above. Peso volume at Php 10.99 billion was heavier compared to the days of the index pumping. Total volume inclusive of block sales reached Php 11.37 billion.

Today’s stock market bloodbath comes with heavy foreign selling which amounted to P 2.035 billion. This marks the third day of heavy (Php 1 billion above) net foreign selling. Again, are foreigners sensing the trouble from the sharp increases in short term yields and from the drastically flattening yield curve?

Again this isn’t just about contagion but also about domestic imbalances that are about to unravel.

Misery loves company. The Phisix today has been accompanied by another rout in Vietnam’s equity market. The freefalling Ho Chi Minh Index sank 3.16% and may be the first regional equity benchmark to reach a bear market having been down 19% since the September highs.

As a final note, the Philippine Stock Exchange announced the imposition of a maintenance fee of 50,000 pesos a month on all inactive trading participants which will commence in January 2015.

Given that the shorting facilities have hardly been functional but mostly symbolical, this leaves trading participants to rely on bullmarkets to become "active". 

Yet such ruling assumes stock markets only go up! That’s because in bear markets volume usually dries up. So trading participants will have to either sell false (bull market) premises just to induce "active" trading or pay fines. 

No wonder the principal-agent problem that beleaguers the industry.