Pork Barrel Scam Saga: Ferreting Out Corruption with Corruption

It’s is of no puzzle for me to see how the supposed corruption-free ‘good governance’ has been all the while a rigmarole or “smoke and mirrors”.

From today’s headlines at the Inquirer.net:

Former Sen. Joker Arroyo on Sunday accused Malacañang of attempting to deceive the public by lumping him together with 19 senators who received additional pork barrel amounting to P1.107 billion a few months after the Senate voted to convict then Chief Justice Renato Corona last year.

Arroyo found it strange that Budget Secretary Florencio Abad would now claim that the former senator’s office received P47 million worth of projects in February, eight months after Corona was ousted by the Senate sitting as an impeachment court.

Along with Senators Miriam Defensor-Santiago and Ferdinand Marcos Jr., Arroyo voted to acquit Corona of charges of betrayal of public trust and culpable violation of the Constitution for dishonesty in his statements of assets, liabilities and net worth.

Extending pecuniary favors to political allies from the Senate to the House of Representatives, from another Inquirer headline article:

Members of the House of Representatives received what senators got in extra lump sum funds from the Disbursement Allocation Program (DAP), albeit in smaller amounts.

Budget Secretary Florencio Abad said on Saturday that each representative received last year between P10 million and P15 million in DAP, a little known lump-sum budgetary item that pooled savings from unused budgetary items or lower-than-expected expenses of state agencies.

“The same accommodation we extended to the senators we also extended to the House representatives,” Abad said in a series of text messages to the Inquirer…

In the 15th Congress, there were 285 representatives. If 200 got P10 million to P15 million each, the total amount would be P2 billion to P3 billion.

A total of 188 House members (or twice the minimum one-third vote or 95 signatures needed) impeached Corona on Dec. 12, 2011. Some lawmakers complained that Majority Leader Neptali Gonzales II had told them to just put their name on the complaint although they hadn’t read the articles of impeachment against Corona.

Two days later, the Senate convened itself into an impeachment court. On May 29, 2012, 20 senators found Corona guilty of betrayal of public trust and culpable violation of the Constitution largely because he was untruthful in his financial declaration.

If true, then the Renato Corona ouster or impeachment of ex-Supreme court Chief justice, has all been about the proverbial “pot calling the kettle black” or ferreting out corruption with corruption or the rewarding of political constituencies with earmarks “extra lump sums” who voted or towed along with the President's desires. 

The end of such actions served nothing more than to raise poll rating approvals or populist politics in order to justify the administration’s expansionary government and political control over society.

This is just a validation of what I have been saying about the sham of ‘good governance’ from a new administration.

Commons sense tells me that immense elections expenses will need to be recovered and that the political baggage from assorted horse trading and backroom dealing with different and ideologically opposed political groups will suggest more of the same policies, but with a subtle difference-the distribution of power will be based according to the degree of political debts as perceived by the new leaders.

In other words, the only “changes” I expect to see post elections are personalities involved in dispensing public funds and controlling power (and not in the system dominated by cronyism and client-patron relations).

And the Pork barrel has been used as one of THE instruments for “assorted horse trading and backroom dealing” again from another article of mine:

So essentially, the Pork Barrel culture reinforces the patron-client relations from which the Patron (politicos) delivers doleouts and subsidies, which is squeezed from the Pork Barrel projects, to the clients who deliver the votes and keeps the former in power. Hence, the Pork Barrel system is essentially a legitimized source of corruption and abuse of power seen from almost every level of the nation’s political structure, an oxymoron from its original “moralistic” intent (unintended consequences). As the saying goes “the road to hell is paved with good intentions”.

The great the French classical liberal Claude Frédéric Bastiat warned at the Law of the mass delusions espoused by the public on the worship of the state-law-legislature (p.43)

One of the strangest phenomena of our time, and one that will probably be a matter of astonishment to our descendants, is the doctrine which is founded upon this triple hypothesis: the radical passiveness of mankind,—the omnipotence of the law,—the infallibility of the legislator: this is the sacred symbol of the party that proclaims itself exclusively democratic

Unless there will be massive orchestrated and coordinated coverups or whitewashing, expect to see the deepening and broadening of the scandal and a possible dramatic change in the sentiment of "radial passiveness" of domestic politics.

Yet the public should clamor for an independent non-partisan audit on earmarks (Pork barrel) of all incumbent officials (which should include previous tenures or positions) beginning with the highest to the lowest ranking. 

But this would signify a Herculean task of cleaning up the Aegean stable that would be met by stiff resistance and would likely extrapolate to a wholesale expose of how filthy the local political system operates.

Let me add that should today's inflationary boom be faced with economic reality, then this will compound on political woes endured by this supposed puritanical administration from the unraveling Pork Barrel scam saga. 

The Pork barrel scam is really peanuts to the stealth plunder from an inflationary boom which has in fact partly financed the Pork Barrel via zero bound rates

Video: Dot.com boom’s “New Economy” that never was

Reminiscent of American economist Irving Fisher’s infamous call, who thought that stock market boom during the “roaring twenties” hit a “permanently high plateau”, this 1999 CNN video during the glory days of the dot.com boom exhibits the same “this time is different” mania outlook we seem to be witnessing today.

As the Zero Hedge points out: (bold original)

In an effort to bring back some of that "memory" - and dispel the inevitable recency bias (and cognitive dissonance) as even the Fed is admitting markets are frothy, we bring you 1999's CNN Special "The New Economy - Boom Without End."

A brief clip from the archives full of internet dreams, globalization hopes, growth without inflation, and most importantly productivity gains. It seems we weren't that far off 14 years ago as Ed Yardeni notes, the internet is an inherently price-deflating animal (in its global competition exposing ways) which means - for firms to maintain profits (and stock prices), they must increase productivity... or in the modern parlance cut costs and lay off workers. "The economy has changed for good..." sums up the 'it's different this time' view of the 90s bubble.

Stephen Roach notes at the time - "if we are not in a new economy and the 'old rules' come into play from time to time, then much of what has happened in the 1990s will ultimately be challenged." Indeed Stephen...

___

Fait accompli

This is how Wikipedia describes the dot.com’s transition towards the bubble bust: (bold mine)

Over 1999 and early 2000, the U.S. Federal Reserve increased interest rates six times, and the economy began to lose speed. The dot-com bubble burst, numerically, on March 10, 2000, when the technology heavy NASDAQ Composite index, peaked at 5,048.62 (intra-day peak 5,408.60), more than double its value just a year before. The NASDAQ fell slightly after that, but this was attributed to correction by most market analysts; the actual reversal and subsequent bear market may have been triggered by the adverse findings of fact in the United States v. Microsoft case which was being heard in federal court. The conclusions of law, which declared Microsoft a monopoly, were widely expected in the weeks before their release on April 3. The following day, April 4, the NASDAQ fell from 4,283 points to 3,649 and rebounded back to 4,223, forming an intraday chart that looked like a stretched V. At the time, this represented the most volatile day in the history of the NASDAQ.

On March 20, 2000, after the NASDAQ had lost more than 10% from its peak, financial magazine Barron's shocked the market with its cover story "Burning Up". Sean Parker stated: "During the next 12 months, scores of highflying Internet upstarts will have used up all their cash. If they can't scare up any more, they may be in for a savage shakeout. An exclusive survey of the likely losers". The article pointed out that "America's 371 publicly traded Internet companies have grown to the point that they are collectively valued at $1.3 trillion, which amounts to about 8% of the entire U.S. stock market".

By 2001 the bubble was deflating at full speed. A majority of the dot-coms ceased trading after burning through their venture capital, many having never made a profit. Investors often referred to these failed dot-coms as "dot-bombs"

Again monetary tightening emerged to expose on the delusions of "this time is different" brought about by a antecedent inflationary boom.

And as the chart above shows (bigcharts), the bursting of the dotcom came with a furious denial phase (red ellipse)

The dot.com has been a product of a series of easing monetary policies—the Plaza and Louvre Accord, BoJ easing which spurred the Yen “carry trade”, and the Fed’s lowering of interest rates—all of which piggybacked on the ‘displacement’ brought by the internet revolution, as Mises Wiki describes here.

The mania character of "This time is different" has been etched in the history of crises, Harvard’s Carmen Reinhart and Kenneth Rogoff admonishes:

The essence of the this-time-is-different syndrome is simple. It is rooted in the firmly held belief that financial crisis is something that happens to other people in other countries at other times; crises do not happen here and now to us. We are doing things better, we are smarter, we have learned from past mistakes. The old rules of valuation no longer apply. The current boom, unlike the many previous booms that preceded catastrophic collapses (even in our country), is built on sound fundamentals, structural reforms, technological innovation, and good policy. Or so the story goes…

Inflationary permanent quasi-booms all end up the same way...

Quote of the Day: Financialization of US Households is a product of experimental monetary policy

Household Net Worth (assets less liabilities) has become a focal point of my Macro Credit Analysis. For the quarter, Household Net Worth inflated another $1.342 TN, or 7.3% annualized, to a record $74.821 TN. At 449% of GDP, Household Net Worth is within striking distance of the record 470% of GDP back at the 2007 peak of the mortgage finance Bubble. Over the past year, Household Net Worth jumped $7.690 TN, or 11.5%. Net Worth rose a notable $13.388 TN, or 21.8%, over two years. In arguably the single most pertinent macro data point, Household Net Worth has surged $17.607 TN, or 30.8%, since the end of 2008. 

It’s worth our time to dig just a little into the composition of Household Assets. At the end of Q2, Financial Assets accounted for 70%, and Non-Financial Assets 30%, of Total Assets. This compares to a 65%/35% split at the end of 2008. In nominal dollars, Financial Assets increased $15.237 TN, or 33%, since 2008, while Non-Financial Assets gained $1.684 TN, or 7% to $26.516 TN (Real Estate, at $21.123 TN, comprises about 80% of Non-Financial Assets).

Even more striking is the growth divergence between Household Financial Asset categories since 2008. In particular, safer “money”-like holdings have notably lagged the historic expansion in “risk assets.” Total Deposits (bank and money market), the bedrock of perceived safe and liquid “money,” increased $982bn since the end of 2008, or 12%, to $9.026 TN. Treasury holdings rose about a Trillion to $1.2 TN, and agency securities increased $597bn to $1.65 TN. In total, deposits, Treasuries and agencies rose $2.58 TN, or 28%, to $11.865 TN.

Meanwhile, since ’08 Household holdings of mutual funds and equities have surged $10.640 TN, or 85%, to $23.191 TN. Pension Fund Entitlements jumped $4.675 TN, or 33%, to $18.737 TN. It’s no longer true that American households have the majority of their wealth in savings and real estate. These days, and much the product of experimental monetary policy, Household perceived wealth is wrapped up in the risk markets.

(bold mine)

This perspicacious quote is from Credit Bubble Bulletin author Doug Noland at the PrudentBear.com

This is a striking observation on the deepening dependence of US household on the inflation financial assets as a source of “wealth”, as indicated by the data from the US Flow of Funds.

The so-called gains on prosperity of US households have less been from value added real economic activities but from increased speculation and of the sustained inflation of asset prices which alternatively means that US households have been imbuing more market risks in response to the FED’s grand experimental bubble blowing policies.

More importantly or more tellingly, this reveals of the US Federal Reserve’s direction of policy making or why the orgy of inflationism will remain as main instrument to bloat up artificial wealth.

Yet the bigger the boom, the greater the bust.

No Financial-Stock Market Commentary

I will spend my weekend away from the computer to be with my family to celebrate a special day. This also seems an opportune time to get some relief…

from the Johari window of libertarianism…

So there will be no financial stock market commentary this weekend.

Thanks for your patronage.

Have a great weekend.

Remembering Ludwig von Mises on his 132nd Birthday

September 29, 2013 will mark the 132nd birthday of my mentor (via his works) and inspiration Ludwig von Mises. 

It has been through the works of Mr. von Mises and the Austrian school of economics who opened my eyes to reality or the truth amidst a world seemingly lobotomized of reason and a world seemingly governed by deception, manipulation, indoctrination, repression, oppression and untruths.

It is interesting to know that Nazi Germany even hunted down Mr. von Mises as his trenchant tirades against inflation and interventionism meant that "both fascists and communists hated him" according to Austrian economist Dr. Richard Ebeling.

Mr. von Mises, narrowly escaped the Gestapo dragnet in Vienna during the German occupation by fleeing to Switzerland. Nonetheless volumes of Mr. Mises work had been captured but luckily enough had not been destroyed and had been recovered in a Moscow archive 1996—decades after the Soviets “liberated” Bohemia.  

The Huffington Post writes of the recovery of the treasure troves of Dr. von Mises work here.

Read Ludwig von Mises’ biography here.

Here is a compilation of Mr. von Mises works at the Mises Institute.

My tribute to Mr. Mises ends with this excerpt from his magnum opus, Human Action (p.239)

Theism and Deism of the Age of Enlightenment viewed the regularity of natural phenomena as an emanation of the decrees of Providence. When the philosophers of the Enlightenment discovered that there prevails a regularity of phenomena also in human action and in social evolution, they were prepared to interpret it likewise as evidence of the paternal care of the Creator of the universe. This was the true meaning of the doctrine of the predetermined harmony as expounded by some economists. The social philosophy of paternal despotism laid stress upon the divine mission of kings and autocrats predestined to rule the peoples. The liberal retorted that the operation of an unhampered market, on which the consumer—i.e., every citizen—is sovereign, brings about more satisfactory results than the decrees of anointed rulers. Observe the functioning of the market system, they said, and you will discover in it too the finger of God

Quote of the Day: Governments rely on indirect coercion

Governments rely on indirect coercion because direct coercion seems brutal, unfair, and wrong.  If the typical American saw the police bust down a stranger's door to arrest an undocumented nanny and the parents who hired her, the typical American would morally side with the strangers.  If the typical American saw regulators confiscate a stranger's expired milk, he'd side with the strangers.  If the typical American found out his neighbor narced on a stranger for failing to pay use tax on an out-of-state Internet purchase, he'd damn his neighbor, not the stranger.  Why?  Because each of these cases activates the common-sense moral intuition that people have a duty to leave nonviolent people alone.

Switching to indirect coercion is a shrewd way for government to sedate our moral intuition.  When government forces CostCo to collect Social Security taxes, the typical American doesn't see some people violating their duty to leave other people alone.  Why?  Because they picture CostCo as an inhuman "organization," not a very human "bunch of people working together."  Government's trick, in short, is to redirect its coercion toward crucial dehumanized actors like business (and foreigners, but don't get me started).  Then government can coerce business into denying individuals a vast array of peaceful options, without looking like a bully or a busy-body.

This is from George Mason University Professor and Author Bryan Caplan at the Library of Economics and Liberty Blog

Warren Buffett & co. Abandons ‘Buy India’ Theme

Former value investor and now Obama crony Warren Buffett cut losses from his investments in India along with other major investors.

From the Bloomberg: (bold mine)

Little more than two years after Warren Buffett labeled India a “dream market,” the economy is expanding at the slowest pace in a decade and the nation’s debt ratings are at risk of being cut to junk.

In the last three months, ArcelorMittal (MT) and Posco scrapped plans for $12 billion of investments, while global funds pulled $12.6 billion from Indian stocks and bonds. The exodus drove the rupee to a record low and caused short-term borrowing costs to soar, sending the government’s two-year bond yield to the biggest premium to the 10-year rate in Bloomberg data going back to 2001. Even Buffett packed up and left, with Berkshire Hathaway Inc. (BRK/A) exiting an insurance distribution venture.

Earlier the legendary investor Jim Rogers said that he has shorted India, while Greed and Fear author CLSA’s Chris Wood sees India as highly vulnerable to a sovereign debt crisis.

Despite the sharp rebound of India’s markets, India’s problems has been structural, has been intensifying and has been highly dependent on a risk ON environment

From the same Bloomberg article: (bold mine)

Investors see little prospect of India tackling budget and current-account deficits that drove the rupee down 20 percent in two years as Prime Minister Manmohan Singh boosts food subsidies to woo voters before a May 2014 election. Standard & Poor’s said this month there is more than a one-in-three chance the nation will lose its investment-grade rating within two years, while Pacific Investment Management Co. sees a “large” chance of a cut in as little as 12 months. Last year’s economic growth of 5 percent compares with an average 7.6 percent in the previous decade…

Weakened by corruption scandals and the loss of allies, Singh’s government has passed the fewest bills ever by an administration sitting a five-year term. That is allowing imbalances to build in Asia’s third-largest economy.

The current-account deficit widened to a record 4.8 percent of gross domestic product in the fiscal year ended March 31, while the 4.9 percent shortfall in public finances was the highest among the four largest developing nations. The World Bank estimates more than 800 million people live on less than $2 per day in India, where consumer-price inflation has held close to 10 percent for more than a year.

Data this month showed gains in wholesale prices unexpectedly accelerated to a six-month high of 6.1 percent in August. Every 10 percent decline in the rupee adds as much as 80 basis points, or 0.80 percentage point, to wholesale-price inflation, Nomura Holdings Inc. estimates show.

The emergence of bond vigilantes has only exposed on the structural defects of highly politicized economies as India. 

India’s war on gold for instance is a symptom of shrinking real markets due to expansive political controls.

Yet fickle foreign funds stampede in and out of Indian markets

Raghuram Rajan outlined a plan to give concessional swaps for banks’ foreign-currency deposits when he took charge as the 23rd governor of the Reserve Bank of India on Sept. 4. That, along with the U.S. Federal Reserve’s decision this month to continue monetary stimulus that has buoyed emerging-market assets, has helped the rupee pare some losses. Foreign funds have bought a net $2.04 billion worth of Indian shares in September and outflows from debt have slowed to $594.6 million.

The rupee has rallied 5.8 percent in September, after a 14 percent slide in the previous three months that was the worst performance among 24 emerging-market currencies tracked by Bloomberg. The S&P BSE Sensex (SENSEX) of local shares has climbed 6.8 percent this month as Rajan’s measures and the Fed’s policy boosted inflows. It fell 5.8 percent in the June-August period.

Those ‘financial tourist dollars’ flowing into India of late represents the throng of frantic yield chasing players, in the words of CLSA’s Chris Wood "crowded into quality, albeit expensive stocks that have outperformed".

And proof of this has been the wide divergence between blue chips and small companies, again from Bloomberg:

India’s smallest companies are trailing its biggest corporations by the most since 2006 in the stock market. The S&P BSE Small-Cap Index, a gauge of 431 companies with a median market value of $91 million, has tumbled 26 percent this year, compared with a 2.4 percent advance in the Sensex, where the median value of 30 firms is $16.9 billion, data compiled by Bloomberg show.

The most important development has been in India’s bond markets, which appears to be signaling a forthcoming recession or even a crisis via an inverted yield curve, again from the Bloomberg (bold mine)

A cash crunch created by the RBI to shore up the exchange rate caused short-term interest rates to exceed long-term ones, inverting the yield curve that gauges the length of investment against returns. Three-month government debt costs jumped to as high as 12 percent at the end of August, from 7.31 percent three months earlier. Two-year bond yields exceeded 10-year rates by as much as 272 basis points on July 31. Notes due in a decade pay 8.72 percent, compared with 2.63 percent in the U.S., 0.69 percent in Japan and 3.98 percent in China. 

Inverted yield curves typically reflect investors’ lack of confidence in an economy and presaged bailouts in Europe in the past three years. Greece’s two-year debt started paying more than 10-year securities a month before the government sought financial aid for the first time in 2010, while Portugal’s curve inverted a week before it sought a rescue.

Inverted yield curves are manifestations of the transition from policy induced inflationary boom to a deflationary bust.

As Austrian economist Gary North explains (bold original)

This monetary inflation has misallocated capital: business expansion that was not justified by the actual supply of loanable capital (savings), but which businessmen thought was justified because of the artificially low rate of interest (central bank money). Now the truth becomes apparent in the debt markets. Businesses will have to cut back on their expansion because of rising short-term rates: a liquidity shortage. They will begin to sustain losses. The yield curve therefore inverts in advance.

On the demand side, borrowers now become so desperate for a loan that they are willing to pay more for a 90-day loan than a 30-year, locked in-loan.

On the supply side, lenders become so fearful about the short-term state of the economy -- a recession, which lowers interest rates as the economy sinks -- that they are willing to forego the inflation premium that they normally demand from borrowers. They lock in today's long-term rates by buying bonds, which in turn lowers the rate even further.

An inverted yield curve is therefore produced by fear: business borrowers' fears of not being able to finish their on-line capital construction projects and lenders' fears of a recession, with its falling interest rates and a falling stock market.

An inverted yield curve normally signals a recession, which begins about six months later. The stock market usually begins to fall six months prior to any recession. So, the appearance of an inverted yield curve normally is followed very shortly by a falling stock market. Fact: The inverted yield curve is an anomaly, happens rarely,and is almost always followed by a recession.

So while the yield chasing manic crowd may drive India’s frothy markets to even higher levels, the emergence of the inverted yield curve implies of a escalating risk of a market shock.

India epitomizes what has been going on globally; manic yield chasing punts pushing up markets, even as unsustainable imbalances have become more evident and more prone to violent adjustments.

US Debt Ceiling Showdown: Price to Insure U.S. Government Debt Soars

Threats over an alleged US government shutdown, which has become the centerpiece focus of the debt ceiling debate, has sent cost of insuring debt higher this week

chart from Deutsche Bank

Notes the Wall Street Journal:

The cost of insuring against a U.S. default for a year has risen sixfold in the past week, reaching its highest level since 2011, reflecting investor bets that the government could fall behind on its debt payments in the coming weeks.

The Treasury Department said on Wednesday that by Oct. 17 it would have only $30 billion left to pay bills, and that money is only expected to last one or two more weeks unless Congress raises the so-called debt ceiling, which limits U.S. borrowing. Many Republicans have said they would approve such a move only in exchange for a long list of demands, such as changes to the White House's health-care law and lower tax rates. The White House has said it won't negotiate with Republicans at all and wants the debt ceiling raised immediately.

The stark political divisions have led many lawmakers, analysts and investors to wonder whether policy makers will be able to reach an agreement in time.

This has driven the annual cost to insure $10 million of U.S. government debt for one year using derivatives called credit-default swaps, or CDS, to €31,000 ($41,930), according to Markit data. That is up from about €5,000 as recently as last Friday and is the highest it has been since August 2011, the month in which U.S. debt was downgraded from the highest level by Standard & Poor's Ratings Services.

Default protection on U.S. Treasurys is quoted in euros, just as European sovereign CDS contracts are quoted in dollars, sparing investors the risk the hedge will fall in value at the same time as the currency itself.

Actions of the CDS markets have hardly been consistent with the bond markets.

As shown above, the 1 year (UST1Y) 3 year (UST3Y) and 6 months (UST6M) has recently been rallying (falling yields) mostly from the FED’s UNtaper—a deliberate tactic conducted by the FED similar to the Pearl Harbor surprise bombing equivalent of the bond vigilantes. 

This means that while cost of insuring of US debt has meaningfully risen, the treasury markets (particularly the short maturities) have been saying otherwise.

Yet rising CDS (default risks) will be used as political leverage to justify the call for raising the debt ceiling. (Have the CDS markets been stage managed?)

Americans have been deeply hooked on entitlements. More than 70% of Federal Spending has been due to dependency programs and growing.

This means that despite the hullabaloo in the US Congress, which really is just a vaudeville, as congress people will fear the wrath of losing political power and privileges from entitlement dependent-parasitical voters, eventually the debt ceiling will be raised. (charts from the Heritage Foundation).

Like actions of central banks led by the US Federal Reserve, America’s welfare state will be pushed to the brink of a crisis or will fall into a crisis first, before real reforms will be made.

In the world of politics, cost-benefit tradeoffs has been reduced to short term expediencies.

Updated to add: 

Including "housing, other loan guarantees, deposit insurance, actions taken by the Federal Reserve, and government trust funds”,  economist James Hamilton estimates at over $70 trillion or 6 times official debt (RT.com)

Meanwhile Boston University Laurence Kotlikoff has even far staggering figure. He pins the fiscal gap which includes unfunded liabilities at $222 trillion or 20 times bigger than official figures. 

Mr. Kotlikoff as quoted by Real Clear Policy: 

The official debt is something that has to be repaid, and the government is committed to principal and interest payments. But the government has other commitments, like Social Security payments, health care and Medicare payments, Medicaid payments, and defense expenditures. And it also has negative commitments, namely taxes. So you want to put everything on even footing. Most of the liabilities the government has incurred in the postwar period have been kept off the books because of the way we’ve labeled our receipts and payments. The government has gone out of its way to run up a Ponzi scheme and keep evidence of that off the books by using language to make it appear that we have a small debt.

European Recovery? Greece Reservist Calls for Coup

Mainstream pundits keep saying that Europe has been on the mend mostly relying on surveys to backup such calls. They suggest that a European economic recovery will ripple and support economic conditions of Emerging markets amidst the Fed Taper-Untaper conundrum.

Yet recent real events such as industrial production and car sales have defied such promising outlook. 

In fact, just yesterday loans to the private sector in the EU reportedly contracted again in August led by Germany. German's private sector loans dropped nearly 4% (month-on-month) and 4.7% (year on year)

We have been told too that the crisis shattered Greece economy has shown signs of recovery. This has been supported by buoyant financial markets.

The Greek equity bellwether the Athens index has been ascendant… 

…as Greek government bonds have been rallying (falling yields), whose late rally has coincided by the Fed’s UN-taper

Since economics drives politics, a call for a putsch by reservists of the Greek army hardly evinces signs of ‘recovery’, despite the above.

From the Guardian

No country has displayed more of a "backslide in democracy" than Greece, the British thinktank Demos has said in a study highlighting the crisis-plagued country's slide into economic, social and political disarray.

Released on the same day that judicial authorities ordered an investigation into a blog posting by a group of reservists in the elite special forces calling for a coup d'etat, the study singled out Greece and Hungary for being "the most significant democratic backsliders" in the EU.

"Researchers found Greece overwhelmed by high unemployment, social unrest, endemic corruption and a severe disillusionment with the political establishment," it said. The report, commissioned by the European parliament, noted that Greece was the most corrupt state in the 28-nation bloc and voiced fears over the rise of far-right extremism in the country.

The report was released as the fragile two-party coalition of the prime minister, Antonis Samaras, admitted it was worried by a call for a military coup posted overnight on Wednesday on the website of the Special Forces Reserve Union. "It must worry us," said a government spokesman, Simos Kedikoglou. "The overwhelming majority in the armed forces are devoted to our democracy," he said. "The few who are not will face the consequences."

Today the yield chasing mania, where falsehoods have been interpreted as truths, has made the markets anesthetized to risk. In other words, central bank induced parallel universes or divergent real events vis-à-vis financial markets, have become ubiquitous.

Hong Kong Regulators Worry Over Growing Risk from Corporate Debt

The Hong Kong’s monetary board, the Hong Kong Monetary Authority (HKMA) seems in a conundrum over what appears to be shifting of credit bubble from real estate to private sector loans.

From the Wall Street Journal Real Economics Blog (bold mine)

Demand for residential real estate has gone flat, so it appears banks are lending to the corporate sector instead.

The ability of Hong Kong companies to pay their debts has “showed a marked deterioration” according to the Hong Kong Monetary Authority’s latest monetary and financial stability report. “There are some initial signs that the credit risk of banks’ corporate exposures may be building up.”

The HKMA calculates that interest coverage ratios, or the ability of companies to pay debt service with the revenues they generate, have gotten worse the past three years. That’s because of a combination of more and more debt, and business performance not keeping pace. Company’s leverage ratios, or the value of a company’s assets on their balance sheet to their debt has also eroded.

Lending to corporations jumped 13.2% in the first half, from 3% growth in the second half of last year. Loans to companies make up 70% of Hong Kong banking loans, whereas mortgage lending is 21.5%. Meanwhile, mortgage lending grew just 3.1% in the first half of 2013, a slowdown from 5% in the second half of last year.

The HKMA figures the banks it regulates have enough capital to weather a storm. But the HKMA is worried as the Fed eventually does cut back on its monetary stimulus, Hong Kong will feel it.

Hong Kong’s credit bubble continues to inflate.

Loans to the private sector rose by 12% over two years.

But Hong Kong’s housing index has been plateauing. This should compound on the system’s credit risks as property developers who took on leverage for their projects are now faced with declining demand for housing.

Yet the banking sector’s loan exposure accounts for over 211% of Hong Kong GDP or Domestic Credit Provided By Banking Sector in 2011 and 200% in 2012 (World Bank)

Yield chasing by the banks in luring more companies to take on more credit comes in the face of rising yields. Hong Kong’s 10 year yields have likewise been affected by the bond vigilantes.

Rising yields have likewise been a factor in the deteriorating quality of corporate loans, aside from growing use of ponzi finance via a "combination of more and more debt, and business performance not keeping pace"

While Hong Kong has still huge forex reserves (US $303 billion) in spite of the recent decline, and previously a trend of current account surpluses (which has now turned slightly negative), the HKMA acknowledges that a FED taper will affect Hong Kong, unlike those institutions bearing delusions of decoupling. 

Nonetheless, Hong Kong’s stock markets as benchmarked by the Hang Seng has ignored on such risks and has almost recovered the losses from the supposed FED taper scare last May-June. 

The don't worry be happy manic crowd seem to embrace the idea that willful ignorance is bliss.

Indonesian Rupiah Knocking at New Lows?

Don’t look now but Indonesia’s rupiah as of this writing seems to be knocking at the September 5 low of 11,701.

At the moment, the USD-Rupiah pair trades at 11,535.

And I find it bizarre on what grounds the Indonesia’s central bank predicts zero inflation this September when the rupiah seems on a renewed meltdown mode.

Yet markets appear to be complacently ignoring this development when a continued run on the rupiah could trigger a regional crisis.

Quote of the Day: Government Shutdown Mean Boondoggle Shutdown

the words “government shutdown” do not mean “government shutdown.” They mean “boondoggle shutdown.” They mean “special-interest-group-subsidy shutdown.”

What about the Post Office? Will it get shut down? No.

What about the CIA? Will it get shut down? No.

What about the NSA? Will it get shut down? No.

What about the TSA? Will it get shut down? No.

What about the Department of Homeland Security? Will it get shut down? No.

My suggestion: stop worrying about a government shutdown. Instead, keep worrying about the government staying open . . . just like you did before.

From the Tea Party Economist Gary North

ADB on the Impact of the Bond Vigilantes on Asian Bonds

From the Asian Development Bank (ADB): (bold mine)

At the end of June, there were $6.8 trillion in local currency bonds outstanding in emerging East Asia, which is comprised of the People’s Republic of China (PRC); Hong Kong, China; Indonesia; the Republic of Korea; Malaysia; the Philippines; Singapore; Thailand; and Viet Nam. That was 1.7% more than at the end of March, but a slower growth rate than the 2.9% expansion seen in the first quarter of 2013 with investors now more cautious in the wake of the May announcement from the US Federal Reserve that it will soon start reducing its bond purchases.

Local currency bond issuance also continued in emerging East Asia, but still at a slow pace as some borrowers held back in the face of higher funding costs around the region. There were $827 billion in new bonds sold between April and June, 4.0% more than in January through March, largely thanks to a 26.8% increase in issuance by central governments and agencies. Corporate issuance slumped 20.1% quarter-on-quarter to $168 billion as new bond sales by PRC companies tumbled 48.8%. Excluding the PRC, corporate issuance ticked up 1.4%.

Turmoil in the global financial markets has also made it harder and more expensive for emerging East Asian companies, particularly lower-rated firms, to borrow in the key foreign currencies – US dollars, euros, or yen. After $81 billion in issuance in the first five months of 2013, June and July saw a total of just $7.5 billion raised.

Compared with 1997-1998 when Asia suffered a financial crisis, governments and companies now hold more of their debt in local rather than foreign currency and the debt is now longer-dated than it was, meaning they are less vulnerable to currency depreciation and sudden shifts in borrowing costs and investor appetite.

But domestic sourcing of ballooning debt is an illusion of stability. Increasing accumulation of debt are symptom of bubbles regardless the currency configuration of the debt structure.

As Harvard’s Carmen Reinhart and Kenneth Rogoff pointed out (bold mine)

This brings us to our central theme—the “this time is different syndrome.” There is a view today that both countries and creditors have learned from their mistakes. Thanks to better-informed macroeconomic policies and more discriminating lending practices, it is argued, the world is not likely to again see a major wave of defaults. Indeed, an often-cited reason these days why “this time it’s different” for the emerging markets is that governments there are relying more on domestic debt financing.

Yet the preliminary impact on bond returns

Market returns on Asian bonds have fallen sharply so far this year with the iBoxx Pan Asian Index falling 3.5% in US dollar, unhedged terms. Losses were largest in Indonesia, down 17.8% and Singapore, down 7.8%. Only the Philippines and the PRC markets saw gains of 7.5% and 3.1% respectively.

I say preliminary because should the onslaught of the bond vigilantes continue, expect this to be a global contagion. Expectations of decoupling-insulation will be eventually exposed as grand delusions.

Video: Peter Schiff Was Right (Again) - 'Taper' Edition

hat tip EPJ

China’s Beige Book exhibits why official statistics can’t be trusted

Two weeks back I expressed doubts on the supposed recovery of the Chinese economy as partly a statistical mirage. I noted

I am not comfortable with statistics from the Chinese government in the recognition of the hiding, censoring and editing of data which has not fitted with the government’s agenda

Well more signs that the Chinese government has been data mining their economic figures

From Bloomberg (bold mine, hat tip zero hedge)

China’s economy slowed this quarter as growth in manufacturing and transportation weakened in contrast with official signs of an expansion pickup, a private survey showed.

Increases in business-investment and real estate revenue also slowed, while service industries picked up and employees became tougher to find, the survey from New York-based China Beige Book International said yesterday. The report is based on responses from 2,000 people from Aug. 12 to Sept. 4 as well as 32 in-depth interviews conducted later in September.

The quarterly report, which began last year and is modeled on the U.S. Federal Reserve’s Beige Book business survey, diverges from government figures showing faster factory-output gains in July and August that have spurred analysts from Citigroup Inc. to Deutsche Bank AG to raise expansion estimates. Nomura Holdings Inc. is among banks skeptical that any rebound will be sustained next year.

The results “show the conventional wisdom of a renewed, strong economic expansion in China to be seriously flawed,” China Beige Book President Leland Miller and Craig Charney, research and polling director, said in a statement.

The data “reveal weakening gains in profits, revenues, wages, employment and prices, all showing slipping growth on-quarter -- no disaster, but certainly not the powerful expansion suggested by the consensus narrative.”

It seems that the recent rise in China’s equity markets, as measured by the Shanghai Index, may have been designed as part of the campaign to create the impression of ‘recovery’. 

I say designed because the Shanghai index recently experienced a “flash spike” which the government blamed on fat finger (trading error) by a state owned firm rather than from what I suspect as a botched attempt at manipulation.

And copper has not chimed with a supposed recovery in China’s fixed investment

Nonetheless whatever stealth stimulus--that the government has been applying to boost her statistical economy that will lead to more debt--is likely to be limited.

That's because rising yields of 10 year China’s sovereign bond are likely to impact her already precarious debt position.

Stephen Roach: Fed is courting an increasingly treacherous endgame at home and abroad

More economist expressing of the baneful effects and depraved ethics of QE.

Here is former chairman Morgan Stanley, Stephen Roach, at the Project Syndicate entitled 'Occupy QE' (bold mine) [hat tip zero hedge]

The Federal Reserve continues to cling to a destabilizing and ineffective strategy. By maintaining its policy of quantitative easing (QE) – which entails monthly purchases of long-term assets worth $85 billion – the Fed is courting an increasingly treacherous endgame at home and abroad.

By now, the global repercussions are clear, falling most acutely on developing economies with large current-account deficits – namely, India, Indonesia, Brazil, Turkey, and South Africa. These countries benefited the most from QE-induced capital inflows, and they were the first to come under pressure when it looked like the spigot was about to be turned off. When the Fed flinched at its mid-September policy meeting, they enjoyed a sigh-of-relief rally in their currencies and equity markets.

But there is an even more insidious problem brewing on the home front. With its benchmark lending rate at the zero-bound, the Fed has embraced a fundamentally different approach in attempting to guide the US economy. It has shifted its focus from the price of credit to influencing the credit cycle’s quantity dimension through the liquidity injections that quantitative easing requires. In doing so, the Fed is relying on the “wealth effect” – brought about largely by increasing equity and home prices – as its principal transmission mechanism for stabilization policy.

There are serious problems with this approach. First, wealth effects are statistically small; most studies show that only about 3-5 cents of every dollar of asset appreciation eventually feeds through to higher personal consumption. As a result, outsize gains in asset markets – and the related risks of new bubbles – are needed to make a meaningful difference for the real economy.

Second, wealth effects are maximized when debt service is minimized – that is, when interest expenses do not swallow the capital gains of asset appreciation. That provides the rationale for the Fed’s zero-interest-rate policy – but at the obvious cost of discriminating against savers, who lose any semblance of interest income.

Third, and most important, wealth effects are for the wealthy. The Fed should know that better than anyone. After all, it conducts a comprehensive triennial Survey of Consumer Finances (SCF), which provides a detailed assessment of the role that wealth and balance sheets play in shaping the behavior of a broad cross-section of American consumers.

In 2010, the last year for which SCF data are available, the top 10% of the US income distribution had median holdings of some $267,500 in their equity portfolios, nearly 16 times the median holdings of $17,000 for the other 90%. Fully 90.6% of US families in the highest decile of the income distribution owned stocks – double the 45% ownership share of the other 90%.

Moreover, the 2010 SCF shows that the highest decile’s median holdings of all financial assets totaled $550,800, or 20 times the holdings of the other 90%. At the same time, the top 10% also owned nonfinancial assets (including primary residences) with a median value of $756,400 – nearly six times the value held by the other 90%.

All of this means that the wealthiest 10% of the US income distribution benefit the most from the Fed’s liquidity injections into risky asset markets. And yet, despite the significant increases in asset values traceable to QE over the past several years – residential property as well as financial assets – there has been little to show for it in terms of a wealth-generated recovery in the US economy.

This essentially validates my latest outlook where I noted “a significant share of stock ownership have been in the upper ranges of the income bracket”.

The basic error of QE, again from Stephen Roach

This underscores yet another of QE’s inherent contradictions: its transmission effects are narrow, while the problems it is supposed to address are broad. Wealth effects that benefit a small but extremely affluent slice of the US population have done little to provide meaningful relief for most American families, who remain squeezed by lingering balance-sheet problems, weak labor markets, and anemic income growth.

In short, using macro tools to solve micro problems are not only  incompatible they are bound to generate unintended adverse consequences

The injustice from QE:

Lost in the angst over inequality is the critical role that central banks have played in exacerbating the problem. Yes, asset markets were initially ecstatic over the Fed’s decision this month not to scale back QE. The thrill, however, was lost on Main Street.

As I wrote:

Such stealth transfer of wealth enabled and facilitated by central bank policies are not only economically unsustainable, they are reprehensively immoral.