ECB Waffles, Stocks Vacillate; ECB Divisions Mount

The much awaited moment of salvation from the ECB came with an initial disappointment

The impact has been to trigger sharp vacillation which led to sharp declines in European stocks (from Bloomberg) and modest loss in the US contemporaries. 

European stocks had sharply been up during the opening. The German DAX beat its June highs to carve a new record high before retrenching.

Here is how the newswires puts the US stock market loss (Bloomberg): ECB President Mario Draghi said policy makers will wait until next quarter before assessing if additional stimulus measures are needed. His comments damped speculation the central bank was poised to start a program of sovereign-debt purchases known as quantitative easing, or QE.

The BBC’s version: The European Central Bank (ECB) has "stepped up" plans for more stimulus measures aimed at revitalising the eurozone economy, bank president Mario Draghi has said. His comments came after the ECB held interest rates at 0.05%. Mr Draghi added the bank would assess the impact of its current stimulus measures early next year. He also gave his strongest indication yet that the ECB was willing to buy government debt. ECB staff "have stepped up the technical preparations for further measures, which could, if needed, be implemented in a timely manner," he said.

European stocks got rattled from the QE no-show. 

But in realizing that stocks must not be allowed to fall, the ECB made a U-Turn a few hours later. 

Shunting aside ambiguity, the ECB proposed that in January 2014 to buy all assets except gold.

From another Bloomberg article: The European Central Bank’s Governing Council expects to consider a package of broad-based asset purchases including sovereign debt next month, two euro-area central-bank officials familiar with the deliberations said… ECB President Mario Draghi said today that policy makers “won’t tolerate” a prolonged period of low inflation, and that officials discussed “all assets but gold” as potential targets for purchases. The council asked internal committees last month to design new unconventional stimulus measures to help fuel growth and inflation.

Yet the same article raises a key hurdle for ECB’s proposed QE: The European Court of Justice will deliver a non-binding ruling on Jan. 14 about the legality of the ECB’s OMT program, which was credited with stopping a rout in European government bonds in 2012 by pledging to buy debt of countries signing up to reforms. A negative judgment by the court could ultimately impinge on the ECB’s freedom to intervene in sovereign-debt markets.

It figures that there has been a reason for the ECB’s dithering, German media reports that the ECB President Super Mario Draghi has lost his majority hold on the central bank.

German’s Die Welt as quoted by the Zero Hedge (bold original)

The outlooks for growth and inflation are bleak. Mario Draghi will therefore open the gmoneyates - and is met with increasing resistance. And on the ECB's Executive Board, he has just lost the majority.

....

According to information obtained by "Die Welt", internal resistance to Draghi is now larger than previously thought. He can no longer count on a majority within the Board currently. In the vote on the official opinion of the Governing Council on monetary policy are for information of the "world" three of the six directors supported by the President to the original tune.

In addition to Sabine Lautenschlager and Yves Mersch, who had already previously expressed skepticism about bond purchases, one can now add the Frenchman Benoît Coeuré who is against Draghi's course.  ...There had been dissenting voices within the Board on several occasions, but there was always a majority behind the President.

After a few hours Super Mario vented his outrage and promised to deliver QE in spite of the opposition. 

From Reuters: The European Central Bank will decide early next year whether to take further action to revive the euro zone's economy, its president said on Thursday, signalling that he would not allow opposition from Germany or anyone else to stop it. In his clearest language yet, Mario Draghi underlined the central bank's commitment to supporting the ailing economy of the 18-country bloc, and argued the case for printing fresh money to buy assets such as state bonds.

So all these push-and-pull by the ECB and Super Mario sends US stocks on a pendulum (chart from the Zero Hedge)

The complete intraday picture of last night’s action by the S&P as shown above from stockcharts.com

Super Mario seems dead set to send stocks to the galaxy. As I recently wrote: The ECB seems dogged determined “do whatever it takes” to proceed with QE, even if it means running the Eurozone economies to the ground. What a sign of desperation!!!

The problem is there are natural limits to money printing, as I warned before: There is no free lunch even for the ECB. Germany’s domestic politics will function as natural constraint to Merkel’s accommodation of ECB’s Draghi. That’s aside from the court case filed before the European Court of Justice.  Should the ECB lose Germany’s total support, then perhaps all hell may break loose in the EU.

So when has stock market pricing, in the era of QE by central banks, been about real fundamentals? 

Interesting developments.

Phisix: Marking the Close in Reverse, the Typhoon Ruby scapegoat and Philippine Casino Stocks Crushed!

Stock markets must rise forever. That’s what  stock market operators wanted to demonstrate…

…and so the almost regular routine of “managing” of the index.

Tuesday (left) and Wednesday’s (right) sessions reveal of marking the close again. 

Tuesday headed towards an almost neutral close but operators decided to bring the Phisix nearer to the all time highs.

Wednesday had the Phisix on a steady intraday decline only to be offset by the same underhanded tactic.

Breadth for those days had been negative: On Tuesday declining issues led advancing issues by 91-83 and on Wednesday the spread widened decidedly in favor of declining issues 105-68

In other words, during the last two days the Phisix wanted to correct, but operators would have none of it. The show, for them, must go on.

Operators also seem to have an innovative approach to ensure that project Phisix 7,400 would be met: They would do the push the index gradually with the aim of attaining 7,400 incrementally or to bring 7,400 within a striking distance for a major move to ensure a decisive breakthrough.

Well it appears that such plans have been foiled again (for now). But this won’t stop them from trying.

The Phisix posted a hefty . 83% decline today…apparently by the same methods operators used to administer project Phisix 7,400.  Sellers poured the brunt of the liquidation during the session’s end (charts from technistock)

In short, the markets, which had been wanting to profit take, prevailed.

And it’s odd that in groping for an explanation, media and their favorite experts jumped the gun on Typhoon Ruby as responsible for today’s action

The idea is that the coming Typhoon might cause devastation as to hamper G-R-O-W-T-H, thereby affecting stocks.

Didn't G-R-O-W-T-H just turned lower in 3Q even without a Typhoon? Then why does the Phisix continue to rise? What's the relationship between G-R-O-W-T-H and stock pricing?

Yet claims that Typhoons move stocks have been proven as unfounded. 

While there had been knee jerk reactions, market’s typical response have been based on the dominant trend.

 

As I wrote before: This means that natural disasters have mostly been a non-event, especially today when stock price movement have become highly sensitive to central bank policies.

In short, when markets have been trending upwards, typhoons hardly pose an obstacle!

 

And based on mainstream logic, given that the  property  sector closed in the positive, then the property sector may even benefit from the typhoon!

Among the major issues, BDO (+2.83%) and PLDT (+1.61%) led the decline.

If we apply mainstream’s logic then bank rivals Metrobank which closed positive ( +.24) and BPI which was unchanged today means that maybe BDO only will be materially affected by the Typhoon! 

Meanwhile, since PLDT rival Globe Telecoms was also .46% up today this possibly entails that Typhoon Ruby will hurt PLDT to the benefit of Globe!

That’s mainstream logic for you, supposedly expert opinion based on available bias and post hoc assertions. 

But here is the most interesting part: casino operators Bloomberry, PLC and Melco Crown  dived  7.55%, 4.29% and 2.39% respectively (the former two I emphasized with light blue rectangles that had been among the most traded issues today). 

Such crash has also been because of Typhoon Ruby? Melco’s City of Dream have reportedly been slated to have a soft opening on December 14, that would be a few days past the Typhoon.

Yet I offer a different explanation…

Foreigners stampeded out of casino stocks. Why? Because foreigners sense that since Macau’s casino stocks had been smashed yesterday there is a risk of contagion!

Yet such contagion will serve as the mainstream's black swan.

Infographics: The ECB’s Big Bazookas (TLTRO & QE)

Tonight supposedly should be the ‘BIG night’ or the much awaited moment of glory of salvation. 

The Pavlovian dogs have all been anticipating the confirmation of the ECB's earlier hints to unleash the Big Bazooka which has been why global stocks have virtually gone parabolic. (aside from actions by the BoJ and the PBoC)

The Big Bazookas has been and will be part of the series of bailout measures adapted and implemented by the ECB that has failed to meet their goals. So it's like doing the same thing over and over again; but this time on a larger scale from which they expect different results

As I recently explained: 

Yet the ECB has been easing since 2008. The ECB has pared down interest rate from 4.25% in 2008 to merely .05% today. The ECB cut the Eurozone’s interest rate twice this year.

Not only that, the ECB has imposed negative deposit rates on banks last June in order to “stimulate lending”. Along with the negative deposit rates, the ECB likewise pumped liquidity to the banking system to promote loans to small and medium enterprises via the Targeted Long Term Re-financing Operations (TLTRO). The ECB expected at least €100 billion to be availed of by the banking system. Unfortunately, last September the first tranche of TLTRO only induced €82.6 billion worth of borrowings from 255 banks.

Obviously all these hasn’t worked, so despite interest rate cuts, negative deposit rates and the TLTRO, the ECB finally embarked on asset purchases initially involving covered bonds andasset backed securities (ABS) during the height of October’s selloff. In realization that that markets has been unsatisfied, the ECB floated the idea to include corporate bond

Below Visual Capitalist and Saxo Bank presents a splendid infographic of the ECB's highly expected QE.

First, here is the Visual Capitalist take on the ECB's road to QE (bold mine)

The Eurozone is on the rocks again. In November, business activity fell to its lowest point in 16 months as the Purchasing Managers Index (PMI) dropped to 51.1. The Euro is at a 27 month low against the dollar. Unemployment is stuck at 11.5%.

Making matters worse, deflation is also knocking on the door. In November, prices rose just 0.3% from the previous year, which is far below the 2% target. Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, says, “the data show(s) that the Japanification of the Eurozone remains apace.”

To combat this, The European Central Bank (ECB) has decided to pull out the big guns. The first big gun, in some of the best “Fedspeak” we’ve seen yet is called Targeted Long-Term Refinancing Operations (TLTRO). Banks are able to borrow from the ECB at very low rates if the money is eventually lent to companies, and not for mortgages or buying government debt.

However, since the TLTROs started, results have not been as the ECB has hoped. This is why Mario Draghi and his counterparts have hinted at a bigger bazooka, quantitative easing (QE), over the last few weeks. Tomorrow (Dec 4th) they may decide to finally pull the trigger at the ECB meeting, but some feel that is premature.

“Much like an elementary school student putting off their weekend homework in hopes of a ‘miracle’ snow day canceling school on Monday, the ECB can still hang it’s hopes on the mid-December TLTRO auction as a possible savior,” said Matt Weller, senior technical analyst at Forex.com, in a note.

Notice today’s raging bull markets haven’t been about "growth" but from momentum pillared by HOPES that money printing (credit and liquidity expansion) will prove to be the elixir to all economic ailments! Bad new IS good news!

Now for the infographics:

Courtesy of: Visual Capitalist

Quote of the Day: Conspicuous consumption should not be the goal of a prosperous society

Someone once said that the wealth of nations comes not from what we spend but from what we sow (actually, I wrote that several years ago). Like the farmer, a nation has to plant seeds in the spring to reap a good harvest in the fall, which is how Chauncey Gardiner, the fictional hero of Jerzy Kozinski's Being There, might have put it. For the rest of us, it's called investing in the future.

Just imagine if mom and dad, grams and gramps, doubled up on their holiday spending on toys and other tchotchkes for the kids. Spending would go up, GDP would go up, and toymakers would have to increase production to replenish their inventory. They might even hire a few new workers. The increased demand for toys would trickle down to suppliers, including manufacturers of plastics and other materials.

Then what? Tomorrow's growth is a function of what we invest today. It is investment in plants and equipment that expands productive capacity, increases efficiency, lowers prices, leads to higher real wages and enables the economy to expand at a faster rate in the future. There is no free lunch, but productivity growth is about as close as it gets.

So unless you think Barbie holds the key to a higher standard of living, conspicuous consumption—as it was known when Americans were being encouraged to save—should not be the goal of a prosperous society.

Consumer spending does send an important signal to producers as to how to best allocate scarce resources. Not that entrepreneurs are listening. Alexander Graham Bell didn't need consumer demand to encourage him to invent a piece of equipment that would transmit speech electrically. Nor did Steve Jobs wait for iPhone demand before creating Apple's incredibly popular smart phone. Entrepreneurs invent things because they anticipate a market for, and profit from, their product. If they change the world in the process, so be it. They don't need encouragement or validation—seed capital will suffice—before they create something the public didn't know it wanted or needed.

This is from former Bloomberg columnist Caroline Baum at the Economics21.org

Wow. Macau’s Casino Stocks Crushed!

Dear most valued email subscribers 

The following posts won’t be included in your mailbox

-Infographics: The Myth of the Successful Money Manager

-US Consumers: Statistical World versus the Real World (Survey, Black Friday Crash, Slower Cyber Monday Sales)

If interested kindly pls just click on the link above

***

I have been saying that market crashes have become real time phenomenon.

So far, these crashes have been concentrated in oil and mineral related markets and in the gambling industry, particularly for the latter in Macau as I explained many times such as here and here but also in Singapore and in the US. 

Ironically the stimulus from the BOJ-ECB-PBOC has done little to forestall such crashes from occurring.

The skyrocketing Chinese stocks have also done little to alleviate the plight of Macau’s Casinos. 

Two days back Macau casinos via the autonomous government’s Gaming Inspection and Coordination Bureau reported a 19.6% slump in revenues which marks the 6th successive monthly hemorrhage

Today, Macau’s blue chip casinos had been pulverized.

MGM China Holdings (HK:2282)

Galaxy Entertainment Group (HK:27)

Melco Crown Entertainment (HK: 6883)

Sands China Ltd. (HK: 1928)

Wynn Macau Ltd. (HK: 1128)

SJM Holdings Ltd. (HK:880) owner of Grand Lisboa

Today's carnage deepens their respective bear markets.

Singapore’s Genting (G13.SI) operator of Resorts World Sentosa was off by only .88%.

Interesting.

Polish Central Bank Warns of Domestic Commercial Property Bubble

More example of what  I call as:  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

From Bloomberg: (bold mine)

Poland’s commercial property market faces “growing imbalances” as developers add new projects even as supply outstrips demand, the central bank said.

Commercial real-estate prices in the European Union’s biggest eastern economy continued to decline “slowly” in the third quarter, while the vacancy rate in rented office space has increased to almost 14 percent in Warsaw, the Polish central bank said in a report today.

“The office market has experienced a boom in space growth, which has led to a significant vacancy rate,” the bank said. Even so, “developers continue to build new offices.”

Poland, the only EU member to avoid recession after the global financial crisis in 2008, has attracted a flurry of real-estate investment in recent years. Warsaw trails only Paris, London and Moscow among European markets for new office development, Los Angeles-based consultancy CB Richard Ellis Inc. said in a report.

Office stock in Poland’s capital stands at 4.4 million square meters with more than 660,000 square meters under construction in the third quarter, CBRE said. The biggest projects include Warsaw Spire, developed by Belgium’s privately-held Ghelamco Group CVA, and Warsaw-listed Echo Investment SA’s Q22.

How this CRE boom has been funded has not been indicated in the above article, but my guess is that this has been channeled through the banking system. 

Poland’s economy nearly suffered a recession in 4Q 2012, so the Polish central bank implemented aggregate demand policies by aggressively slashing policy rates from 4.75% to 2.5%. This has boosted statistical GDP in 2013 but given that negative inflation rates has recently emerged (possibly reflecting on the slowdown of the property sector as well as a deceleration or even possibly an inflection point in GDP), the central bank cut official rate again in Sept 2014.

The banking sector’s balance sheet continues to expand especially over the past few months, and this seem to have been reflected on money supply growth.

Given the downturn in real estate demand as measured by property prices and an increase in vacancy rates, the typical reaction should have been to ease on the build up of supply.  But developers continue to intensely build. This may be due to hopes for a recovery and or that this may be about Ponzi finance dynamics.

For the latter, in order for leverage companies to have access to funds they would need to show financing companies that they are embarking on new projects from which the latter would fund. Developers get the money and payback interest rate charges and use the rest for the new project. Of course, developers hope that demand eventually picks up where they can unload existing inventories. Financers, on the other hand, would need to keep financing them otherwise any partial souring of loans can transform into wholesale default. This what constitutes as a debt trap.

I am not familiar with Poland so this is just a conjecture from what seems a divergence—slowing demand for real estate market, but booming loans and inventory accumulation. 

Well it’s not just a slowdown in the CRE market but also the housing market.

And here is the most interesting portion. Almost half of Poland’s home mortgage have been financed from foreign currency loans.

From the ever bullish despite all the risks, Global Property Guide:

The foreign currency-denominated proportion of housing loans (including Swiss franc loans) rose from 9% in 1999, to 50% in 2001, and remained at 47% at end-July 2014, according to Polish central bank, Narodowy Bank Polski.

However, foreign currency-denominated loans have been decreasing in recent months. In July 2014, foreign currency loans dropped 6.8% y-o-y, while Polish zloty loans increased by 15.9%.

The number of the total outstanding loans in July 2014 increased by 3.9% to 343,502. Of which, 180,849 (or 53%) were Polish zloty-denominated; and 162,653 (or 47%) were foreign currency-denominated.

Impaired loans rose 10.61% to 10,876 in July 2014 compared to a year earlier. Of which, 6,677 were Polish zloty-denominated (which increased by 3.2% y-o-y); and 4,198 were foreign currency-denominated (which increased by 24.9%).

Iceland’s crisis has been partly due to the banking system’s massive exposure to housing mortgages financed in foreign currency.

As of the moment, the Polish zloty has been weakening against the US dollar (since July 2014), has been rangebound with the euro  and the Swiss franc (since 2012; the franc is pegged to the euro at 1.2)

If impaired loans has already been rising in domestic currency terms, how much more if currency volatility gets magnified?

The alarm bell sounded off by the Polish central bank hardly represents a bullish sign but one of an environment of rising risks already being resonated by many other political agencies worldwide.

Chinese Government Sticks to the IPO Route to Inflate Stock Market Bubble

It appears that the Chinese government sees the current melt-UP in stocks as a wonderful development.

Since the “targeted easing” in June combined by the IPO price controls which I reported last August, the Shanghai Composite Index has gone parabolic—up by about a fantastic 38% as of yesterday (still up today)

The Nikkei Asia on the government’s sustained IPO price controls or stock market management (bold mine)

Chinese authorities are telling companies planning initial public offerings to keep prices low in an attempt to avert a broader market decline, a factor that is fueling the overheating of IPO stocks.

Because the China Securities Regulatory Commission makes the final call on whether a company can go public here, businesses have no choice but to heed its wishes.

And because artificially priced IPOs have been seen by the public “sure profit source”, demand for IPO has basically gone berserk.

From another Nikkei Asia report (bold mine)

Investors placed about 1.43 trillion yuan ($232 billion) in bids for initial public offerings in China between Nov. 24-28, a nearly five-year high on a weekly basis, in a rush to profit from the underpriced issues.

New public issues are sold to individuals mainly through the Internet. The majority of the investors hail from the wealthier classes and have previous trading experience. The larger the bid, the higher the chance of winning it, and many go so far as to borrow money to inflate their offers.

Retail investors lever up on manic-hysteric stock market speculation. So to resolve China’s gigantic debt-property bubble means to induce the same people to rack up more debt to speculate on stocks!

More affirmation of my theory of the politics of monetary easing policies: I recognize the problem of addiction but a withdrawal syndrome would even be more cataclysmic.

Of course it’s not just IPOs but a string of interventions that has juiced up Chinese stock market hysteria, as I earlier noted: the Chinese government has launched “targeted easing” last June, has resorted to selective bailouts of firms which almost defaulted last July, imposed price controls on stock market IPOs last August, injected $125 billion over the last two months. Last week, November 17, the much ballyhooed China-Hong Kong connect went on stream.

One can add the streamlining of foreign proceeds from overseas IPOs plus the latest non-sterilization of recently injections of funds

Mainstream seem to recognize these. Again the Nikkei Asia

The heightened demand for cash from these IPOs is also affecting monetary policy. The People's Bank of China injected about 50 billion yuan into the market on Nov. 21, and said it will supply liquidity through various policies in a statement that day.

The bank then skipped its open-market operations on Nov. 27 for the first time since July, opting to satisfy the short-term demand for cash instead of draining the market.

So the PBOC feeds on the bubble by providing even more liquidity (access to credit).

The PBoC solemnly abides by what their inflation deity has prescribed or ordered (bold added): Thus the remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the so-called boom to last. The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom.(JM Keynes, The General Theory of Employment, Interest and Money)

Unfortunately all quasi-booms morphs into bubble busts.

Stocks are not about economic or earnings growth anymore as these have mutated or deformed to reflect on government's policies of credit and liquidity expansion designed to stimulate the "animal spirits" based on "HOPE" of economic salvation from free lunch policies.

So it's really sad to see how the Chinese government continues to lure the average citizenry to chase one bubble after another (from stocks to properties to shadow banks back to stocks) where their citizenry will eventually end up substantially poorer.

This is a sign of desperation rather than a sound boom from economic recovery.  It's a recipe for a total economic collapse.

Again for the Chinese government, HOPE has become the only policy strategy.

Infographics: The Myth of the Successful Money Manager

Reversion to the mean, the knowledge problem and the natural limits to profits applies to fund management, even to Warren Buffett's flagship Berkshire Hathaway. 

The infographic below from the Visual Capitalist argues that Successful Money Managers are a myth.

Courtesy of: Visual Capitalist

US Consumers: Statistical World versus the Real World (Survey, Black Friday Crash, Slower Cyber Monday Sales)

It’s one thing to "live" in a world of statistics (virtual reality), and it’s another to live in "reality".

It’s been said that US consumers have been vibrant because confidence has been “high” while inflation remains “low”. (chart from Wall Street Journal)

Well that’s what Wall Street likes to tell the public in order to justify the manic bidding up of stocks.

But again recent surveys reveal (like Philippines self-rated poverty and anecdotal accounts), that the average American consumers have been struggling. 

On the one side, the average Americans  have reportedly been buffeted by stagnant income.

On the other, inflation’s substitution and income effects have likewise burdened consumption by reducing disposable income.

As I explained before

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

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

Now the plight of the average US consumers

From the Wall Street Journal (bold mine)

The American middle class has absorbed a steep increase in the cost of health care and other necessities as incomes have stagnated over the past half decade, a squeeze that has forced families to cut back spending on everything from clothing to restaurants. 

Health-care spending by middle-income Americans rose 24% between 2007 and 2013, driven by an even larger rise in the cost of buying health insurance, according to a Wall Street Journal analysis of detailed consumer-spending data from the Bureau of Labor Statistics.

That hit has been accompanied by increases in spending on other necessities, including food eaten at home, rent and education, as well as the soaring cost of staying connected digitally via cellphones and home Internet service.

With income growth sluggish, discretionary spending on things like clothing and movies, live shows and amusement parks has given way…

To see how it has moved, the Journal analyzed Labor Department data on 2013 out-of-pocket spending for the middle 60% of the population by income—households earning between about $18,000 and $95,000 a year, before taxes. 

The data show they are losing ground. Overall spending for the group rose by about 2.3% over the six-year period from 2007, even as inflation totaled about 12%. At the same time, income for the group stagnated, rising less than half a percent. 

With health care and other costs rising, these consumers spent less on furniture, entertainment, clothing and even child care, the Journal analysis found.

“Part of the story is that your income growth is slowing,” said Steven Fazzari, an economist and chairman of the sociology department at Washington University in St. Louis. “They’re spending more on necessities, cutting back on other types.”

As spending on necessities increase, this includes adaption from technological changes telephone to wireless/internet…

Spending on mobile-phone service, meanwhile, has soared, rising nearly 50% since 2007, the year the iPhone came out and data plans became more commonplace…

Similarly, spending on home Internet service has soared by more than 80%. Last year, it made up about 0.8% of spending for middle income households, up from 0.4% six years earlier. Despite talk of “cord cutting,” spending on cable and satellite television is still up 24% from 2007.

...discretionary spending has either been reduced or eliminated

Spending on housing was up just 2.4%. But that masked big declines in spending on home purchases and mortgage interest, reflecting lower levels of homeownership and low interest rates. Spending on rent soared 26%, as some families lost their homes and rising demand for apartments helped push up monthly rents.

Restaurant spending fell slightly, while outlays on food eaten at home rose 12.5%.

To make up the difference, middle income Americans have cut costs where they can. Spending on event admission and fees has fallen 16.5%, while spending for a broad category that includes boats, motor-homes, cameras and party rentals has fallen 31%.

Spending on household textiles, including bath and bed linens, has fallen 26.5%. Spending on care for children and the elderly has fallen 25%…

A variety of factors can affect spending in a category. The 6.5% decline in spending on new cars and trucks, for example, likely reflects a combination of delayed car purchases as well as a shift to less expensive vehicles, or even used ones, for which spending is up 2%. Lower apparel spending—down 11.5% overall, but down 18% for women 16 years old and over—likely reflects a combination of fewer clothing purchases and a preference for less expensive clothes, as well as aggressive discounting by retailers jockeying for business.

Spending on electricity is up 11% since 2007, according to the Labor Department data.

The middle class spending squeeze has been visible in the latest 11% crash in the much ballyhooed Black Friday sales:

From the Bloomberg: (bold mine)

Even after doling out discounts on electronics and clothes, retailers struggled to entice shoppers to Black Friday sales events, putting pressure on the industry as it heads into the final weeks of the holiday season.

Spending tumbled an estimated 11 percent over the weekend from a year earlier, the Washington-based National Retail Federation said yesterday. And more than 6 million shoppers who had been expected to hit stores never showed up.

Consumers were unmoved by retailers’ aggressive discounts and longer Thanksgiving hours, raising concern that signs of recovery in recent months won’t endure. Retailers also were targeted by protesters, who called on consumers to boycott Black Friday to make a statement about police violence. Still, the NRF cast the decline in a positive light, saying it showed shoppers were confident enough to skip the initial rush for discounts…

Consumer spending fell to $50.9 billion over the past four days, down from $57.4 billion in 2013, according to the NRF. It was the second year in a row that sales declined during the post-Thanksgiving Black Friday weekend, which had long been famous for long lines and frenzied crowds…

This year, many shoppers stayed home. The NRF had predicted that 140.1 million customers would visit retailers last weekend. Instead, only 133.7 million showed up. The slow start may make it harder for retailers to hit sales targets over the next month. The NRF had predicted a 4.1 percent sales gain for November and December -- the best performance since 2011. (the latter paragraph grafted from the bloomberg article below)

Not even Cyber Monday promos helped, from another Bloomberg article

Cyber Monday sales growth is slowing as consumers embrace the convenience of online shopping, spreading out their purchases instead of being lured by one-day specials.

Internet holiday shopping rose 8.5 percent on Cyber Monday yesterday, typically the busiest day for Web shopping as people return to their desks after the U.S. Thanksgiving holiday weekend. That compares with online sales growth of 20.6 percent posted on the same day a year earlier, according to a report by International Business Machines Corp.

Record stocks backed by questionable statitics and reality has gone in different directions. One of them is wrong, which means current conditions won’t last.

Such is a splendid example of the baneful effects from the invisible Fed facilitated arbitrary confiscation and redistribution process: 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. (Keynes, The Economic Consequence of Peace)

Updated to add: There is one aspect I didn't include above: it's consumer credit. 

Let me quote Austrian economist Mark Thornton at the Mises Blog (bold mine)

In aggregate American have done some minor repairs on their balance sheets. However, looking below the aggregates we find American getting less mortgage debt but even more consumer credit and credit card debt. Consumer debt peaked at almost $2.7 trillion during the Housing Bubble. This dropped back to about $2.5 trillion during the recession. However, since that lull in consumer borrowing consumer debt has expanded to $3.15 trillion. This represents a 25% increase since the recession and an all time high. 

If consumers have already been laboring under lackluster income growth AND higher prices of necessities, yet recent consumption has been financed by RECORD debt, then then how much more debt can consumers absorb to sustain their current spending patterns?

Interesting no?

 

Chinese Stocks Skyrockets on STIMULUS HOPES, European Stocks follow China’s Footsteps

Who says stocks are about economic and earnings growth? In today’s era of modern central banking, stocks have really been all about credit and liquidity expansion designed to rev up confidence (animal spirits) based on “hopes” from government’s free lunch magic.

It’s why bad news have become 'good news' for stock speculators. 

China's Shanghai index catapulted to new 3-year highs following today’s 3.1% surge.

From Bloomberg Businessweek: (bold  mine)

China’s stocks jumped the most in 15 months, sending the benchmark index to a three-year high, as a surge in trading boosted the outlook for brokerage profits and investors bet the central bank will ease monetary policy…

The Shanghai Composite Index (SHCOMP) advanced 3.1 percent to 2,763.55 at the close. Hong Kong’s Hang Seng China Enterprises Index (HSCEI) rebounded from the steepest plunge in nine months, adding 2.8 percent. Data yesterday showing slower-than-forecast growth in manufacturing increased speculation the central bank will follow up on last month’s cut in interest rates with a reduction in lenders’ reserve-requirement ratios.

See? Bad news (slower than forecasted growth) has now become fodder for manic bidding up of securities because the PBoC will come to the rescue (follow up on last month's interest rate cut).

The PBoC suspended sterilization via open market operations again yesterday which means allowing recently injected liquidity to stay within the system.

I’ve repeatedly saying here that the Chinese government has been engineering a stock market bubble. The reason for this could most likely be to camouflage her deflating property bubble, as well as, to find alternative avenues for overleveraged companies to access funds.

Here is what I wrote of the stock market veneer from China's deflating property bubble:

Given that the housing markets have been on a steep decline, the Chinese government hopes that by providing “gains” on speculative activities to retail investors in the stock market, such would create “demand” for housing, thereby cushioning the current pressures on the housing markets.

It figures that there could be a third reason: divert the average Chinese from shadow banking into the stock market.

From the Wall Street Journal:  (bold mine)

Chinese investors have long chased the best-performing assets. They dumped stocks to buy into a property boom before the global financial crisis, and when the housing market cooled about two years ago, they piled into high-yield but risky bank loans packaged as wealth-management and trust products…

But Beijing has been seeking to reduce use of these products. The trust industry, a pillar of the country’s large but poorly regulated informal lending system, has come under the spotlight in recent years after a few high-profile incidents when investors suffered losses from missed or delayed interest or principal payments…

“I used to buy some trust products with returns of more than 10%, but I have lost some money recently. I am staying away from that risky business and putting more money into stocks now,” said Ralph Lv, a 41-year-old retail investor in Nanjing in eastern China.

Sad to see how Chinese government’s financial repression policies have led the average citizenry to chase bubbles after bubbles— “dumped stocks to buy into a property boom” then “piled into high-yield but risky bank loans packaged as wealth-management and trust products” and now back to chasing stocks.

In short, desperate to generate returns from savings and given the few alternatives amidst a zero bound regime, the average Chinese has tacitly been goaded by government policies to gamble their savings away. 

Also the average speculators have known to leverage their bets on the stock market, so Chinese debt problem will likely surge, perhaps shifting from shadow banks to brokerages and financial houses. So China's debt problem will only balloon.

Again the Wall Street Journal

Such a speculative mentality is evident within the stock market itself. In contrast to the losses last year on the blue-chip-heavy Shanghai bourse, the ChiNext board, the Nasdaq -style marketplace for startup firms on the smaller Shenzhen stock exchange, rose 83% last year as investors piled into more volatile tiny stocks. The Shanghai index fell 6.8% last year.

The idea that the 21st century will be a China century will only be a dream if current bubble blowing policies will continue. The Chinese have been consuming or depleting their savings from chasing bubbles after bubbles.

In today’s actions, it’s not just Chinese stocks. European stocks have been up (as of this writing) reportedly for the same reason as the Chinese: expectations of bailout.

From the Bloomberg (bold mine)

European stocks rose, snapping two days of losses, amid an increase in mergers-and-acquisitions activity, and as investors weighed stimulus prospects before the European Central Bank meets this week.

The Stoxx Europe 600 Index added 0.4 percent to 346.95 at 8:07 a.m. in London. The benchmark gauge lost 0.5 percent yesterday as a decline in oil prices, and factory data in China and Europe stoked concern about slowing inflation and global growth. The gauge gained 3.1 percent last month as ECB President Mario Draghi said the lender may broaden its asset-buying program to include government bonds, while central banks in Japan and China boosted stimulus measures.

The ECB’s next policy meeting is on Dec. 4. More than half the economists in a Bloomberg survey expect the central bank to buy government bonds if it expands its stimulus program.

Good news—stocks go up. Bad news—stocks also go up. Stocks can only go up forever. 

That’s if you believe in the fantasy called "free lunch".

Moody’s Downgrades Japan’s Credit Ratings, Stocks Rally

As proof that financial instability risk awareness have become mainstream, apparently a US credit ratings agency, Moody’s, decided to take action on Japan.

From the Bloomberg, (bold mine)

Moody’s Investors Service cut Japan’s credit rating, a setback to Prime Minister Shinzo Abe a day before today’s campaign start for an election that he wants to focus on the economy.

Moody’s reduced the rating for the world’s third-biggest economy one level to A1, the same as Bermuda, Israel, Oman and the Czech Republic, it said in a statement yesterday in Tokyo. The yen dropped to a seven-year low, then reversed the decline, while Japanese government bonds were little changed.

The ratings company cited uncertainty over whether Japan will achieve its deficit-reduction goals and succeed in boosting growth, two weeks after Abe postponed an increase in the nation’s sales tax. The Bank of Japan is buying record amounts of JGBs issued by a government that’s already burdened by the world’s heaviest public debt load.

Moody’s worried of Japanese government bond (JGB) market…

The cut by Moody’s was the first downgrade for Japan by one of the top-three ratings companies since Abe came to power in December 2012. Moody’s had rated the country in line with South Korea, Saudi Arabia and Taiwan before yesterday’s move.

There are increasing risks of a rise in bond yields that could make it harder for Japan to manage its debt, according to Moody’s, even as yields on 10-year government securities hover at less than 0.5 percent.

Most of Japan’s debt is owned by domestic investors, with foreigners holding 8.54 percent at the end June, according to the BOJ. The central bank became the biggest single creditor to the government for the first time on record in the first quarter.

The BOJ buys 8 trillion to 12 trillion yen ($101 billion) of Japanese government bonds per month, giving it room to absorb the 10 trillion yen in new bonds that the Ministry of Finance sells in the market each month.

Japan’s fantastic debt levels amidst record low rates exemplifies what I recently wrote “how financial markets have been entirely deformed from central bank policies”.

And part of such deformation has even been the emergence of NEGATIVE yields. 

Last Friday, some of JGB’s had produced negative yields for the “first time ever”

Why negative yields? The Wall Street Journal Real Time Economic blog explains (bold mine)

Japan’s negative rates stem largely from the BOJ’s massive bond-buying program aimed at lifting the nation out of deflation. After the bank’s move to expand its easing measures last month, the BOJ is now buying roughly the equivalent of all new debt issued by the government.

After the latest BOJ move, traders had expected the negative rate to come sooner rather than later, and were largely unfazed by Friday’s development.

Some traders said the normal functioning of the bond market didn’t appear to be among the central bank’s main objectives.

As the BOJ has put more priority on achieving its 2% inflation target than preserving market function and liquidity, “someone has to get the short end of the stick,” said Makoto Yamashita, chief Japan interest rate strategist at Deutsche Securities.

Others said the latest development shows the bank’s easing measures are hitting their limits.

“The negative rate indicates that the BOJ’s monetary easing is reaching a dead end,” said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance. “The market is drying up as the BOJ continues to snap up government bonds,” he added.

In short, JGBs are being sucked out of the markets. 

JGBs exhibit negative yields even today according to another Bloomberg report

For now this should be good news for the Japanese government because they have been financing their untenable debt levels with suppressed interest rates. 10 year yields continue to plumb to new lows. Today’s downgrade seems to only have marginally increased the yields.

The trouble will be in the future, particularly how banks and financial institutions will address on the system’s collateral issues.

Meanwhile the reported “BOJ is now buying roughly the equivalent of all new debt issued by the government” seem to validate my earlier suspicion that QE 2.0 has hardly been about boosting inflation but to ensure the financing of the fiscal deficits

Anticipating a recession, I wrote:

And speaking of recession, I believe that the BoJ’s has positioned itself to cover the added fiscal deficits from a possible economic downturn. This is what the BoJ’s QE 2.0 has been about. The 2% inflation rate target is just a camouflage.

With fiscal deficits expected to widen, where debt servicing is now equivalent to 25% of government budget and where the difference between taxes and social spending leaves Japan’s 2015 budget in a 7 trillion yen hole…all of which has been based on optimistic expectations, this leaves the BoJ as the only major source of financing for government or their JGBs.

So the BoJ may have expanded her QE to accommodate more monetization of fiscal deficits aside from possibly including the possible shift by GPIF out of domestic bonds. Of course the latter could function as a decoy as to shield the Japanese government from revealing its anxieties. Time will tell.

The Bloomberg article also says that changes in ratings have usually been ignored by the markets.

Investors routinely ignore ratings companies’ decisions. In almost half the instances, yields on government bonds fall when a rating action by Moody’s and Standard & Poor’s suggests they should climb, or they increase even as a change signals a decline, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as the 1970s.

I’d suspect that this really depends on the conditions when changes are made. If changes in the ratings confirm the prevailing bias then they are likely to magnify the sentiment. But if the changes run contradictory to mainstream sentiment, then they are likely to be ignored.

The initial response by Japanese stocks has been a slight downside but seems to have reversed or seems back on the green.

This means “who cares about downgrades?”, stocks can only go higher!

With the kick off in the Parliamentary elections today, stock market punters will definitely go for Abe and his Frankenstein policy called “Abenomics”!