Saturday, September 20, 2014

US and European Stock Markets Exhibit Decay in Market Internals

Despite major US stock market indices at record highs, I posted about the seeming deterioration in market breadth/internals by the technology heavy index Nasdaq, where 47% of composite firms have reportedly been in ‘bear markets’ (20% loss from the apex). 

Additionally, perhaps this weakening of market internals applies to the small cap Russell 2000, whose price chart has seemingly traversed into a bearish indicator, the ‘death cross’. 

In short, even largest of the small cap firms may be experiencing price pressures.


Bespoke Invests’ chart of the advance decline ratio (advancing issues minus declining issues) of small, mid and large cap indices partly reveals of this unfolding diverging trends. 

The rally in small caps appear to be fading (S&P 600) while Mid caps (S&P 400) seems to have plateaued. It's only the large cap firms (S&P 500) that continues to sprint ahead.

The ongoing deviation of market internals or a likely weakening of the current bullmarket seem as also a European phenomenon…

image two thirds of the firms constituting the MSCI Europe have dropped by 10% or more.

In the past, as the blue line has gone down (representing a rise in the percentage of companies with falling prices), the MSCI Europe (red line) has also fallen.  While the overall index declined in the month of July, it has since stabilized-- in spite of more constituents generating increasingly negative performance.  It seems only logical to conclude that there is decent potential for a more broad-based sell-off in European equities on the horizon.
Signs of things to come?

Friday, September 19, 2014

Infographic: Uncle Sam's Missing Money

From Masters In Missing Money
Image compliments of Masters in Accounting Degrees

Abenomics: Government Economic Downgrade Sends the Nikkei Flying

Bad news IS good news. That’s a symptom of how price discovery in financial markets has been shattered from repeated monetary interventions. 

Like Pavlov’s dogs (or even zombies from World War Z) financial markets have been conditioned to see negative developments as paving way for more monetary heroin, thus goosing up risk assets. 

So if bad news is good news and good news is also good news for stocks then this means stocks can only go up forever.

Anyway the bad news from Nasdaq:
Japan downgraded its overall assessment of the economy in September for the first time in five months, as poor summer weather weighed on consumption, raising further questions over the viability of pushing ahead with a second sales-tax increase after the first one in April hurt demand and stalled growth.

In its monthly economic report released Friday, the government cut its assessment of private consumption, saying it appeared "to be pausing recently" as typhoons and record downpours pummeled Japan this summer. While it said the economy was still on the path to a "moderate recovery, " attention should be paid to the lingering impact of the April 1 tax increase to 8% from 5%.


The announcement set fire the major equity bellwether the Nikkei 225 as seen from the intra-day chart from Zero Hedge


The Nikkei 225 closed with an astounding 1.58% advance. Today's close marks a milestone, the Nikkei technically tops the December 30, 2013 high of 16,291 and is on path towards the 2007 levels.

Yet Sovereign Man’s Simon Black has the updated numbers on Japan fiscal conditions:
In the recently proposed budget for fiscal year 2015, the Japanese government earmarked 31.7 trillion yen for social security, welfare and health spending.

This is the largest item in the budget, consuming 31.2% of all planned government spending.

And it’s only getting larger.

It doesn’t help that Japan is essentially already bankrupt.

The second largest item in Japanese government’s budget is interest.

While social security, welfare and health spending has increased by 3% from the current budget, debt servicing is up by 11% and now amounts to 25.8 trillion yen, or an incredible 25% of Japan’s budget.

So just between pensions and interest, they’re spending 57.5 trillion yen. Last year they only collected 50 trillion in tax revenue.

So before they spend a single yen on anything else in government… anything at all… they’re already 7 trillion yen (about $70 billion) in the hole. They have to borrow the rest.

Bear in mind, this is coming at a time when interest rates for 10-year Japanese bonds are 0.5%, and even closer to zero on shorter notes.

If interest rates rise to just 1%, which is historically still very low, Japan will spend almost all of its tax revenue just to service the debt!

You can’t make this stuff up. It’s a screaming indicator that this system can’t possibly last.

Europe, the US and Japan, three of the biggest economies in the world, are all on a similar inevitable trend—they’re in debt up to their eyeballs, with absolutely no arithmetic possibility of ever getting out of the hole unscathed.

Japan is just worst of them all.
The above simply implies that Japan’s government have now become totally dependent on Debt IN Debt OUT or monetizing her deficits to survive…temporarily. Even at zerobound, the incessant growth of her debt levels will eventually reach a critical tipping point

Japan’s deteriorating fiscal conditions alone have been on route to a crisis. The ramifications of the above extrapolates to either an eventual default or a complete destruction of the yen in a not so distant future. 


Yet rising stocks benefit little of Japan’s society where stocks account for ONLY 9.1% of the financial assets of the Japanese household as of the 1Q 2014 according to the Bank of Japan.

So the HOPE has been to inflate a stock market bubble enough to jumpstart the “animal spirits” in the real economy which is presently being battered both from price distortions from monetary interventions and by tax hikes. Also the HOPE implies of a spillover of the “animal spirits” to the real economy which would translate to higher tax revenues (from G-R-O-W-T-H) that would help sustain unceasing growth in Japan’s welfare economy. Add to this the warfare economy

As been repeated here, stock markets have become propaganda tools by the government.

The problem is hope has never been a good strategy especially if it runs in contrary to economic reality.

Interesting Bitcoin Charts

Bitcoin, the new digital currency, remains a mystery to many. There is no better way to lift the fog surrounding bitcoin than to let the data speak. And data speaks loudest through charts. Yes, topological analysis is often the best route to comprehension.

I have constructed – with my assistant, Mazin Al-Rayes – a series of charts that contain illuminating data about bitcoins and brief directions for use following each chart.

How to interpret: Currently there are 13.235 million bitcoins in circulation. The issuance of new bitcoins will halt when the total number of bitcoins “mined” (read: in circulation) reaches 21 million.


How to interpret: This chart shows the total revenue in USD of bitcoin miners (See: the formula at the bottom of the chart for the calculation). A bitcoin miner can be anyone with a computer and a connection to the internet. Miners lend their computers’ processing power to the bitcoin network and are compensated with new bitcoins.  Many miners use hardware designed specifically for mining, others simply use their home computers - pooling their processing power via the internet and sharing the rewards. 


How to interpret: This chart shows the estimated number of giga-hashes per second that the bitcoin network is performing. It’s clear that the processing power of the bitcoin network increased over time. The hash rate increased for a myriad of reasons: an increased number of miners, collaboration of miners in pools and hardware capacity.  


How to interpret: New bitcoins are created at a predictable rate. This rate is a function of both the difficulty level of a bitcoin miner’s mathematical operation and the processing power of a miner’s hardware. 


How to interpret: This chart shows the bitcoin market capitalization. This is calculated by multiplying the total number of bitcoins by the market price of a bitcoin in USD.


How to interpret: This chart shows the trade volume in USD from the largest bitcoin exchanges.
Read the rest here.

Bitcoin is a child of the information age. Bitcoin embodies deepening trends towards technology based decentralization. Bitcoin represents an alternative financial system from the current centralized framework. Bitcoin’s evolution will remain volatile as it faces resistance to change. Eventually though, despite sustained harassment from political authorities I expect bitcoin to become mainstream.

The charts above account for as manifestations of such a transition process.

Thursday, September 18, 2014

How Abenomics' Yen Devaluation Destroys Corporate Profits

At the start of the year I noted that Abenomics’ inflationism via the yen devaluation will eventually take a bite out of Japan’s corporate profits:
In short, corporations appear to be very hesitant to raise prices perhaps in fear of demand slowdown. Thereby this means a squeeze in corporate profits. Abenomics has only worsened such existing conditions.
The distortion of the pricing system means that the entrepreneur's economic calculation process has been skewered. Now pressure on profits will affect the production process thereby presenting a structural constraint on real economic growth.

Such signs are becoming more apparent. From the Bloomberg: (bold mine)
Business leaders in Western Japan warned central bank chief Haruhiko Kuroda that the yen’s slide to a six-year low is boosting costs of imported raw materials and fuel and may spell trouble for the economy.

Companies in the industrial city of Osaka report that their profit margins are deteriorating as they can’t pass along the higher costs even as sales rise, Osaka Chamber of Commerce and Industry Chairman Shigetaka Sato told Kuroda at a gathering yesterday. Kansai Economic Federation Chairman Shosuke Mori said the rise in fuel costs warrants close monitoring.
Real growth requires a stable currency system for the same reason: economic calculation
The president of Japanese auto parts maker Exedy Corp., Haruo Shimizu, urged Kuroda to strive for a stable currency. Companies increasingly source goods from suppliers overseas after manufacturers shifted production offshore during the period of yen strength and the currency’s decline means this is now more costly than buying from domestic suppliers, he said.
So for as long as the perversion of the pricing mechanism holds, there will hardly be any meaningful real economic growth regardless of what statistics say.

Abenomics has been nothing new. It’s just another modern day adaption of the age old mercantilist/protectionist dogma. Such short term snake oil fixes signifies doing the same thing over and over again while expecting different results. 

The great Austrian economist Ludwig von Mises warned of its disorderly domestic economic adjustments.
Sooner or later, the prices of all domestic goods and services will adjust to the change in value of money, and the advantages that a devalued currency offers to production, and the obstacles that an overvalued one sets against production, will disappear.
Since devaluation has been about the political picking of winners and losers, and more importantly, the invisible transfer of resources to these politically advantage groups, the great Mises adds that 
Every attempt to promote a single interest group through selective changes in the value of money must inherently fail, ignoring all other reasons, because the economic effects of this kind of measure are only temporary; in order to maintain those effects there would have to be a continuing increase of the notes. This could, however, end in no other way than with a complete devaluation of the money in circulation (emphasis added)
Of course inflationistas always think in the frame of their (domestic) actions while discounting the actions of the others. 

Yet even any short term boon may even neutralized by the response of other governments to also devalue. Again Professor Mises (bold added)
If one looks at devaluation not with the eyes of an apologist of government and union policies but with the eyes of an economist, one must first of all stress the point that all its alleged blessings are temporary only. Moreover, they depend on the condition that only one country devalues while the other countries abstain from devaluing their own currencies. If the other countries devalue in the same proportion, no changes in foreign trade appear. If they devalue to a greater extent, all these transitory blessings, whatever they may be, favor them exclusively.


Almost every major (and even EM) central banks today has tinkered with devaluation (inflationism) as seen through the massive expansion of their balance sheets. (chart from Zero Hedge).

This means that to sustain a global race to devalue would be disastrous. (bold mine). Mises concludes
A general acceptance of the principles of the flexible standard must therefore result in a mutual overbidding between the nations. At the end of this race is the complete destruction of all nations' monetary systems.
Global central banks have been in the uncharted experimental process of testing the supposed magic of inflationism (devaluation) to its economic limits. Abenomics has been the lead model in terms of aggressiveness.

But don't worry be happy, as part of the invisible redistribution process, central banks will ensure that "this time is different"! Thus stocks are bound to rise forever!

Wednesday, September 17, 2014

The Lessons from Babson’s Warnings

Analyst Jeff Thomas of the International Man shares the lessons from Babson’s 1929 warning
[A] crash is coming, and it may be terrific. .... The vicious circle will get in full swing and the result will be a serious business depression. There may be a stampede for selling which will exceed anything that the Stock Exchange has ever witnessed. Wise are those investors who now get out of debt.
The above words could easily have been stated by me or another of the (very) few others who currently predict the coming of crashes in the markets.

But they were not. The statements above were made by investor Roger Babson at a speech at the Annual Business Conference in Massachusetts on 5th September, 1929.

Mr. Babson’s prediction was not a sudden one. In fact, he had been making the same prediction for the previous two years, although he, in September of 1929, felt the crash was much closer.

News of his speech reached Wall Street by mid-afternoon, causing the market to retreat about 3%. The sudden decline was named the “Babson Break.”

The reaction from business insiders was immediate. Rather than respond by saying, “Thanks for the warning—we’ll proceed cautiously,” Wall Street vilified him. The Chicago Tribune published numerous rebuffs from a host of economists and Wall Street leaders. Even Mr. Babson’s patriotism was taken into question for making so rash a projection. Noted economist Professor Irving Fisher stated emphatically, “There may be a recession in stock prices, but not anything in the nature of a crash.” He and many others repeatedly soothed investors, advising them that a resumption in the boom was imminent. Financier Bernard Baruch famously cabled Winston Churchill, “Financial storm definitely passed.” Even President Herbert Hoover assured Americans that the market was sound.

But, 55 days after Mr. Babson’s speech, on 29th October, 1929, the market suddenly went into a free-fall, dropping 12% in its first day.

Today, most people have the general impression that on Black Friday, the market crashed and almost immediately, there were breadlines. Not so. In the Great Depression, as in any depression, the market collapsed in stages. The market did not reach its bottom of 89% losses until July of 1932.

Along the way, thousands of banks and lending institutions went belly-up. Thirteen million jobs disappeared.

And of course, the political leaders of the day did their bit. They implemented knee-jerk “solutions” that actually worsened the situation. Restrictive tariffs, gold confiscation, and a more dominant government were employed, just as they will be this time around.

So, as the market tumbled, we would imagine that Babson came to be praised by Wall Street for his insight, but in fact, the opposite occurred. Having accused him of being utterly incorrect in September, they later accused him of having caused the depression.

So, was Babson’s prediction a lucky guess? Did he simply observe the bull market and arbitrarily predict the opposite of the trend of the day to see what would happen? Not at all.

Such predictions are not guesswork, nor are they attributable to a vision seen in some crystal ball. Such crashes are entirely predictable. When any major bull market becomes overbought; when too many investors begin buying on margin because they can’t come up with the purchase price for stocks; when they then become even more obsessive and borrow money to buy on margin, the market has become a house of cards, waiting for the slightest breeze to come along.
Read the rest here

China’s New Stealth 500 billion yuan Stimulus Sends US Stocks to Recent Record Levels

In the US and elsewhere, the equivalent is for authorities to declare Q-E or S-T-I-M-U-L-U-S

So all it takes for the major US benchmarks to basically erase recent corrections is for the Chinese government to announce another system wide bailout via a QE

China is providing 500 billion yuan ($81.4 billion) of liquidity to the country’s five biggest banks as Premier Li Keqiang steps up stimulus to support economic growth, reported yesterday.

The People’s Bank of China yesterday started providing the banks with 100 billion yuan each through standing lending-facilities with tenor of three months, the news website said, citing banking analyst Qiu Guanhua at Guotai Junan Securities Co. The PBOC will complete the process today, it said.

“This is like ‘printing money’ as base money is created,” Shen Jian-guang, Hong Kong-based chief Asia economist at Mizuho Securities Asia Ltd., said in an e-mail. “The immediate impact is similar to an RRR cut of 50 basis points to all banks.” RRR is banks’ required reserve ratio; cutting it increases the amount they have available to lend.

The June-July stimulus hardly “boosted” the (really deteriorating) economy. 

It has been in stocks where the stimulus has had a positive effect. The government added spice to the stock market boom by intervening in the IPO market which has incited a debt financed retail based IPO frenzy.

This paucity of the initial stimulus to the real economy plus perhaps a –1.82% slump in the Shanghai index yesterday may have prompted for the new government support. The rationale could be if stocks come unglued and confidence falls apart in the face of fragility from an overdose of debt, misallocated resources and a fumbling economy, then a crisis may just emerge, so actions must be taken.

And in perspective if we add June and yesterday’s announcement this will constitute 43% of the 2008-9 stimulus at $586.  So if the QE lite installments will be continued this will eventually lead to the size of 2008-9.


The last major stimulus in 2008-9 spawned a debt monster. This has been manifested by the fantastic growth in the banking sector with banking assets now significantly above or higher than US counterparts.

But with the debt monster flailing, the Chinese government thinks that they must continue to feed on it in order to keep up with those targeted statistical 7.5% data for political reasons. This is regardless of whether policy induced diversion of wealth to unproductive activities will mean a further draining of the real economy which has already been burdened by too much debt and malinvestments

So this is basically doing the same thing over again and expecting different results. That’s the way of politics.

And unlike the Philippines where monetary authorities have been panicking to tighten, for the Chinese government, the panic has been to stoke more credit expansion.

Yet here is the intraday price response by the S&P and Australian dollar:Japanese yen pair, according to the Zero Hedge.


Like the Philippines, US stocks has become a one way street.

Profit taking is now considered taboo and thus corrections have become shallower which reinforces the manic phase.

Governments around the world continue to use asset markets as signal channeling tool to impress upon public that everything has been A-okay. This by sustaining the invisible transfer of resources to the government’s favored parties, Wall Streets of the world, elites, cronies, the bureaucracy and the welfare-warfare state.

Unfortunately the real economy is guided by the law of scarcity, which means such illusions won’t last.

Tuesday, September 16, 2014

Scotland’s Independence Referendum: What will Hayek Say?

What would be the likely insight of the great Austrian economist and Nobel Prize winner Friedrich von Hayek on the coming Scotland independence referendum? 

At the Lew Rockwell Blog, Austrian economist Thomas DiLorenzo lifts a quote from Mr. Hayek’s masterpiece the Road to Serfdom (Chapter 15, pp. 257-258) for a cue:
We shall not rebuild civilization on the large scale.  It is no accident that on the whole there was more beauty and decency to be found in the life of the small peoples, and that among the large ones there was more happiness and content in proportion as they had avoided the deadly blight of centralization.  Least of all shall we preserve democracy or foster its growth if all the power and most of the important decisions rest with an organization far too big for the common man to survey or comprehend.  Nowhere has democracy ever worked well without a great measure of local self-government, providing a school of political training for the people at large as much as for their future leaders.  It is only where responsibility can be learned and practiced in affairs with which most people are familiar, where it is the awareness of one’s neighbor rather than some theoretical knowledge of the needs of other people which guides action, that the ordinary man can take a real part in public affairs because they concern the world he knows.  Where the scope of the political measures becomes so large that the necessary knowledge is almost exclusively possessed by the bureaucracy, the creative impulses of the private person must flag.  I believe that here the experience of the small countries like Holland and Switzerland contains much from which even the most fortunate larger countries like Great Britain can learnWe shall all be the gainers if we can create a world fit for small states to live in.” 
(Emphasis by Mr. DiLorenzo).

Ron Paul: Will The Swiss Vote to Get Their Gold Back?

Will the Swiss referendum on gold reserves serve as a catalyst for a global movement to put check on arbitrary and abusive monetary and banking policies around the world?

The great Ron Paul writing at the Ron Paul Institute gives a clue (bold mine)
On November 30th, voters in Switzerland will head to the polls to vote in a referendum on gold. On the ballot is a measure to prohibit the Swiss National Bank (SNB) from further gold sales, to repatriate Swiss-owned gold to Switzerland, and to mandate that gold make up at least 20 percent of the SNB's assets. Arising from popular sentiment similar to movements in the United States, Germany, and the Netherlands, this referendum is an attempt to bring more oversight and accountability to the SNB, Switzerland's central bank.

The Swiss referendum is driven by an undercurrent of dissatisfaction with the conduct not only of Swiss monetary policy, but also of Swiss banking policy. Switzerland may be a small nation, but it is a nation proud of its independence and its history of standing up to tyranny. The famous legend of William Tell embodies the essence of the Swiss national character. But no tyrannical regime in history has bullied Switzerland as much as the United States government has in recent years.

The Swiss tradition of bank secrecy is legendary. The reality, however, is that Swiss bank secrecy is dead. Countries such as the United States have been unwilling to keep government spending in check, but they are running out of ways to fund that spending. Further taxation of their populations is politically difficult, massive issuance of government debt has saturated bond markets, and so the easy target is smaller countries such as Switzerland which have gained the reputation of being “tax havens.” Remember that tax haven is just a term for a country that allows people to keep more of their own money than the US or EU does, and doesn't attempt to plunder either its citizens or its foreign account-holders. But the past several years have seen a concerted attempt by the US and EU to crack down on these smaller countries, using their enormous financial clout to compel them to hand over account details so that they can extract more tax revenue.

The US has used its court system to extort money from Switzerland, fining the US subsidiaries of Swiss banks for allegedly sheltering US taxpayers and allowing them to keep their accounts and earnings hidden from US tax authorities. EU countries such as Germany have even gone so far as to purchase account information stolen from Swiss banks by unscrupulous bank employees. And with the recent implementation of the Foreign Account Tax Compliance Act (FATCA), Swiss banks will now be forced to divulge to the IRS all the information they have about customers liable to pay US taxes.

On the monetary policy front, the SNB sold about 60 percent of Switzerland's gold reserves during the 2000s. The SNB has also in recent years established a currency peg, with 1.2 Swiss francs equal to one euro. The peg's effects have already manifested themselves in the form of a growing real estate bubble, as housing prices have risen dangerously. Given the action by the European Central Bank (ECB) to engage in further quantitative easing, the SNB's continuance of this dangerous and foolhardy policy means that it will continue tying its monetary policy to that of the EU and be forced to import more inflation into Switzerland. 

Just like the US and the EU, Switzerland at the federal level is ruled by a group of elites who are more concerned with their own status, well-being, and international reputation than with the good of the country. The gold referendum, if it is successful, will be a slap in the face to those elites. The Swiss people appreciate the work their forefathers put into building up large gold reserves, a respected currency, and a strong, independent banking system. They do not want to see centuries of struggle squandered by a central bank. The results of the November referendum may be a bellwether, indicating just how strong popular movements can be in establishing central bank accountability and returning gold to a monetary role.
A “Yes” vote may also extrapolate to higher gold prices and possibly along with it the Swiss Franc.

Drifting at Record Highs, 47% of Nasdaq firms are in Bear Markets

The milestone highs of the US technology heavy equity benchmark Nasdaq doesn’t seem to be revealing of its real conditions.

From the Bloomberg: (bold mine)
Beneath the U.S. stock market’s record-setting gains, trouble is stirring.

About 47 percent of stocks in the Nasdaq Composite (CCMP)Index are down at least 20 percent from their peak in the last 12 months while more than 40 percent have fallen that much in the Russell 2000 Index and the Bloomberg IPO Index. That contrasts with the Standard & Poor’s 500 Index (SPX), which has closed at new highs 33 times in 2014 and where less than 6 percent of companies are in bear markets, data compiled by Bloomberg show
This looks like a developing divergence or a possible deterioration in breadth or market internals of US equity markets as more issues from the Russell and the Nasdaq go into or enter ‘bear markets’. 

This means that the milestone highs seen at the benchmark must have been brought about mostly by index heavyweights, which has masked the deterioration over the broader markets. 

This also means of a developing divergence between blue chips (on one hand) and small caps and technology stocks (on the other). 

A healthy bullmarket would conventionally see a “rising tide lifts all boats” dynamic. 


Here is the Nasdaq’s chart…


And the Russell 2000 chart (for chartists, watch the RUT’s the making of a 'death cross')

Has these stocks been reacting to the closing of the QE 3.0 and the expected interest rate increases in 2015 or a rising US dollar? 

Has the latest phenomenon signified a healthy correction?  Or has this been the writing on the proverbial wall?


Monday, September 15, 2014

Phisix: BSP Panics, Raises BOTH Official and SDA Rates!!!!

If you would be a real seeker after truth, it is necessary that at least once in your life you doubt, as far as possible, all things.—Rene Descartes (1596-1650) French philosopher

In this issue:

Phisix: BSP Panics, Raises BOTH Official and SDA Rates!!!!
-BSP Panics! Implements Sixth and Seventh Tightening Moves in Six Months!
-Understanding Markets via the Business Cycle
-Credit and Stock Market Cycles Converge
-The Obverse Side Of Every Mania Has Been A Crash
-Will The Firming US Dollar Index Usher In The Tetangco Moment?
-The Difference between Money Illusion and Statistical REAL GDP
-Petron Corp’s Money Illusion

Phisix: BSP Panics, Raises BOTH Official and SDA Rates!!!!

BSP Panics! Implements Sixth and Seventh Tightening Moves in Six Months!

Shocking! The BSP raised simultaneously official rates and the SDA rates last week by 25 bps apiece[1]. These marks the second rate increases for both. Incidentally, this represents the SIXTH and SEVENTH policy actions in just SIX months!!!

The BSP’s path to tightening commenced at the end of March with an increase in reserve requirements[2] as baptism. The second adjustment in reserve requirements was in May[3]. Then the BSP called for a banking stress test and upped the SDA rates in June[4]. Prior to this week’s activities, the initial official rate hike was announced at the end of July[5].

Ever wonder WHY these BSP’s drastic measures and the seeming acts of desperation??? Or why has the BSP been PANICKING???

So while domestic stock market has been in a panic buying spree[6], the BSP has been in a panic to tighten! Both of these forces are antipodal as seen from discounted cash flow analysis[7]. So who will eventually be right, the stock market bulls or the BSP?

Yet who among the mainstream domestic and international analysts covering the Philippines has seen this???

Prior to the first policy action (reserve requirement) last March, I transcribed my expectations on BSP’s possible moves[8] (bold original):
The BSP has been BOXED into a corner.

Option 1. If the BSP tightens then the whole phony credit fueled statistical economic boom collapses. So will be the destiny of free lunch for the Philippine government.

Option 2. If the BSP maintains current negative real rates or invisible subsidies via financial repression to the government through a banking financed boom, then stagflation will deepen and spur higher interest rates despite the BSP’s King Canute rhetoric.

So we are most likely to end up with Option 1 where economic reality via the markets will force the BSP to eventually tighten, or else God forbid, the Philippines suffer even a far worst fat tailed disaster: hyperinflation.
So as predicted, the BSP appears to have taken the route of Option 1, they have been “forced” to tighten—in a rather…distressed manner

And it does seem like BSP Governor Amando M Tetangco Jr. meant “real business” when he recently warned of “complacency” and on “chasing the market” as I previously noted[9] (bold original)
And if the Governor Tetangco truly means what he has warned about, or if he is true to his word, then the public should expect that this caveat will get to be transmitted into monetary policies via HIGHER policy rates. If not, then all these have merely been about political and moral posturing.

Either way, market risks have now gone mainstream!!!
So why should a supposedly “sound” boom be accompanied by symptoms of overvaluations and consumer price pressures? Why the need to tighten if the predicament has been one of supply side pressures where liberalization of imports would be the simple and commonsensical answer to address price pressures? What is the relationship of tightening (money) with supply side (real economy) constraints? What is the relationship of tightening (money) with massive asset overvaluations (financial assets)? 

Since the BSP’s message has become repeatedly been opaque, evasive, contradictory and non-transparent, I provide the answer: Credit. 

The outcome of monkeying around with interest rates has been to fuel a credit boom. Since current banking based credit expansion represents spending unbacked by savings, the deluge of new money which has entered the economic stream, as evidenced by 9 consecutive months of 30%++ money supply growth rate, has prompted for systematic price distortions that has resulted to imbalances in both the real economy and in financial assets. So we see the symptoms of excessive mispricings or financial asset overvaluations compounded by consumer price pressures.

The BSP’s panic has basically accounted for as attempts to curb and to control the unintended vices (credit based speculative orgies or the inflation Godzilla) that has been spawned and unleashed from the previous thrust to boost ‘aggregate demand’ to spike the statistical economy via the manipulation of interest rates. 

The so-called transformational boom has signified as the sweet spot from such policies. Since every policy carries with it a political dimension, the credit boom implicitly has been intended to support ambitious government spending programs as well as to generate popular approval for the populist incumbent administration.

Now that the economic backlash from unsustainable policies has surfaced, the BSP has been ‘forced’ to impose a partial reversal of such policies. Interestingly, some in the media portrays BSP’s actions as the ‘most aggressive’. They never ask, if everything has been hunky dory, then why the need for “aggressiveness”? So it’s more about desperation from a topsy-turvy condition.

Yet again since the current economic growth model has mutated to a “debt drives growth”, then what happens to G-R-O-W-T-H when the BSP succeeds at easing on credit expansion?

And since the current credit boom translates to intensive leveraging of the balance sheets of entities with access to the formal banking system and to the capital markets, the current BSP actions eventually shifts the risk equation from inflation to levered balance sheets.

Remember, only 20+ out of 100 households have bank access[10], whereas the cargo of debt have mostly been in the balance sheets of the companies owned by plutocrats or the politically connected economic elites who not only controls over 80+% of the stock market capitalization, has almost exclusive access to the bond markets—as of 1Q 2014 only 4 of the 30 largest local currency bonds[11] are from unlisted entities. Yet some of these has connections with listed firms—and most importantly whose firms constitutes about three fourths of the economy’s output[12]. In short, there is concentration of credit risk from mostly heavily levered firms.

These dynamics are ingredients to a crisis.

With their current actions, the BSP now wishes that the domestic economic and financial entities will be sturdy enough to such absorb rate increases. Yet the BSP fails to understand that her previous policies have been pivotal to the structural deformation of the nation’s economic model. Profits, earnings, income and demand have mostly become dependent on the supply side growth financed by debt. Thus, the archetype of “debt drives growth”, borrowed from policies of the US Federal Reserve, has been heavily dependent on zero bound rates. Take these foundations away will only lead to disorderly adjustments given the legacies of debt.

So hope now has become a part of BSP’s policies.

Yet even from the perspective of BSP actions alone, the chicken has come home to roost.

As one would note, things don’t just “occur” as most people think it is. Actions have consequences. Today’s events and the BSP responses have been due to previous actions.

Today’s BSP’s seemingly desperate recourse to tighten has been a scenario that I have warned about in November 2012[13]
Next year when price inflation (stagflation) becomes a real economic and market risks, will the Philippine government own up to their mess or will they simply pass the blame on the markets for these?
Oh, by the way, who in the mainstream has seen the current problems being addressed by the BSP coming?

Of course the BSP actions come way too late as the mania has taken off. Current rate increases are still benign as they remain in a negative real rate environment—consumer price inflation remains higher than the nominal official interest rates.

In Indonesia, the five rate increases totaling 175 bps in 2013 has only spurred an astonishing speculative ramp (both in stocks and in properties) financed by even more credit binge. The JKSE popped over the May 2013 highs but has fallen back. 

I expect the same reaction here.

Understanding Markets via the Business Cycle

As a money manager, it is important for me to know of the risk environment. Knowledge of the risk environment enables one to assess the risk-reward tradeoff and the probability payoff from one’s portfolio allocation.

And in the understanding that people’s actions are purposeful, where actions have been responses to incentives, the same actions underpin voluntary exchanges or the markets. Markets thus are a process of human interaction of voluntary exchanges guided by incentives.

As the great Austrian economist Ludwig von Mises once wrote[14], The market process is a daily repeated voting in which every penny gives a right to vote.

Financial markets are no different. And cycles are prominent features in the financial markets. Cycles essentially represent patterns of reactions by people to certain similar conditions.

For instance, government tampering with interest rates leads to boom bust cycles according to the Austrian Business Cycle Theory (ABCT). So if we follow the ABCT, all one needs to know is the whereabouts of the bubble cycle.

For instance in September 2010 I enumerated on why and how Philippine property markets will reach a euphoric stage[15]: (bold added)
The current “boom” phase will not be limited to the stock market but will likely spread across domestic assets.

This means that over the coming years, the domestic property sector will likewise experience euphoria.

For all of the reasons mentioned above, external and internal liquidity, policy divergences between domestic and global economies, policy traction amplified by savings, suppressed real interest rate, the dearth of systemic leverage, the unimpaired banking system and underdeveloped markets—could underpin such dynamics.

Thus the environment of low leverage and prolonged stagnation in property values is likely to get a structural facelift from policy inducements, such as suppressed interest rates which are likely to trigger an inflation fuelled boom by generating massive misdirection of resources-or malinvestments.

Of course many would argue on a myriad of tangential or superficial reasons: economic growth, rising middle class, urbanization and etc... But these would mainly signify as mainstream drivels, as media and the experts will seek to rationalize market action on anything that would seem fashionable.
Using the end of September 2010 as basis, as of Friday’s close the Phisix returned +75.65%. This has been led by holdings sector +103.17%, banking and financials +80.95% the property sector +74.33%, industrials +72.08%, mining 45.18% and services 37.03%. 

In the real sector, property euphoria has already been reached with the Philippines topping the global list of housing price gains in Q4 2013 based on IMF-Global Property Guide-OECD-Haver benchmark. The world’s hottest housing market! How can these not be euphoria??

These price gains have indeed been pillared by “a structural facelift from policy inducements” as bank credit to the property sector ballooned from 2007-2013 and outpaced other sectors. Other bubble industries such as trade, financial intermediation and construction likewise posted hefty growth in bank credit over the same period.

And indeed a “myriad of tangential or superficial reasons” have been used to justify current conditions: economic transformation, strong external position (forex reserves! forex reserves! forex reserves!), low public debt, good governance and etc…

Practically all that I have enunciated here—from market response to credit growth to media rationalization—has occurred exactly as defined.

The boom bust cycle can be analogized as the following:

Person X earns 100,000 currency units (CU) a year. Let us say Person X borrows 900,000 (CU) at zero interest rates amortized 10 years. Let us further assume that Person X will spend all the amount on consumption and leisure. At Year ZERO, Person X obtains fresh spending power from newly issued credit by a bank. Over the same period, in spending all the new money Person X will experience a consumption spending boom. As legendary investor Jim Rogers in an interview last year said, Give Me A Trillion Dollars And I'll Show You A Really Good Time!

Unfortunately after the spending boom, debt needs to be repaid. So unless Person X’s income grows, only 10,000 of annual income will be left for Person X’s personal sustenance. Thus the frontloading of debt based spending creates a temporary boom which eventually morphs into a depression.

The reason I use general currency unit is to emphasize that the law of economics are universally applicable, which means they applicable everywhere.

So even at zero bound there are limits to debt acquisition.

What if banks/ developer via in house financing offer another 100,000 currency unit loan for Person X to acquire a property at zero rates with 10 year amortization? Will Person X take it? The answer is a likely no because Person X will be left with no sustenance for survival.


In the US according to a study by the New York Federal Reserve, renters haven’t been buying homes because of too much debt, low savings/income and or deficient credit rating[16]. Has the problem been about a lack of liquidity? The answer is no, the problem has been about the renter’s balance sheet constrains.

So Person X will not have the capacity to borrow because he/she has been overleveraged.

Several lessons from here:

Today’s (short term) gains from consumption financed by debt can be tomorrow’s (long term) depression.

Having too much unproductive debt leads to LOWER growth. The Philippine economy has been heavily gorging on debt since 2009 on mostly speculative activities. This will eventually weigh on, if not collapse, real and even statistical growth.

Having high levels of unproductive debt INCREASES credit risks. The BSP’s raising of interest rates will eventually expose or bring into the spotlight unfeasible speculative or capital consuming projects made viable only BECAUSE of zero bound rates. Non Performing Loans (NPLs) which are coincident if not lagging indicators will eventually reflect on this. Philippine consumer loans on real estate and auto loans have already revealed emergent signs of rising NPLs in 1Q 2014[17].

You can lead a horse to a water fountain but you CANNOT make him drink. Once balance sheet problems have been exposed, no amount of stimulus would make balance sheet impaired entities take on credit until their respective balance sheets have been repaired.

Once credit problems surfaces in the Philippine setting, those expecting a revival from bailouts will be disappointed. The Philippines is quite sensitive to inflation pressures given that food has a significant weighting on the household budget. So government stimulus would only raise inflation risks that could lead to social instability.

Lastly, contra mainstream, things don’t happen “just because”. Rather things happen out of human responses to incentives. Former relatively clean balance sheets or as I said in 2010 “an environment of low leverage” enabled Philippines firms to wolf down on debt from zero bound rates, thus having to amplify the so-called transformational boom.

This means that the BSP’s present dramatic response may not only imply the addressing of the risks from price inflation or from asset overvaluation but from risks that system-wide private sector debt may have reached PRECARIOUS levels!

Credit and Stock Market Cycles Converge

What cyclical stage are we at from the other perspective?

First the credit cycle. The credit cycle, according to, involves access to credit by borrowers. Credit cycles first go through periods in which funds are easy to borrow; these periods are characterized by lower interest rates, lowered lending requirements and an increase in the amount of available credit. These periods are followed by a contraction in the availability of funds. During the contraction period, interest rates climb and lending rules become more strict, meaning that less people can borrow. The contraction period continues until risks are reduced for the lending institutions, at which point the cycle starts again[18].

The credit boom has been accompanied by the patent lowering of lending standards. There have already been signs of financial institutions offering “no money down loans”[19]. This means the race to issue loans comes with deteriorating quality therefore increasing credit risks.

As noted last week, the domestic shadow banking industry has been bulging along with the formal banking credit growth. The shadow banking sector’s growth has mostly been through in-house financing from the property sector and also from intra-corporate loans. Part of the shadow banking activities has been in response to government regulations where shadow banks circumvent or go around them. If the formal banking system has been emitting indications of tolerating greater credit risks in order to scrimp for yields, how much more for the in-house financing of property developers in order to artificially goose up sales? So shadow banks pose as another source of loose lending practice risk.

Even the formal banking sector appears to be dabbling with financial engineering via securitization. This means domestic financial institutions may be experimenting to package into investment instruments, pools of mortgages with various risk quality aimed at the transfer of credit risk to yield starved investors. The transfer of credit risk will likely induce more hazardous risk taking by financial institutions.

Companies like SMC practice what looks like a Hyman Minsky’s Ponzi financing scheme[20] which the banking system continues to facilitate. SMC’s rolling debt in and debt out of mostly short term debt in 2013 has reached nearly 10% of the Philippine banking system’s total resources. Rising rates will magnify SMC’s debt burden and raise SMC’s portfolio’s risk with banks.

Also based on my estimates of credit to GDP from banking sector loans alone, given the accelerating rate of bank credit growth for 2014, the ratio must have surpassed by a wide margin the pre-Asian crisis levels.

The stock market valuations perspective.

As noted last week, based on Warren Buffett’s favorite metric the market cap to gdp, the ratio has already eclipsed the pre-Asian crisis levels signaling massive overvaluation. This is unsustainable for the simple reason that markets cannot continually outgrow the economy.

It’s not only market cap, price earnings and book values have already exceeded the pre-Asian crisis highs! Even the BSP’s tracking of the PSE’s PE ratio at 21.44 for July has been vastly higher than the 19 and 20 PER during 1995 and 1996

When the legendary investor the late Sir John Templeton, noted of the market cycle as “Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria”, he was referring to the dominant sentiment of the marketplace in each phase of the cycle.

For the current landscape, it has been obvious that the maturity phase of optimism has passed. The wild and frenetic churning of domestic stocks by domestic retail investors underscores euphoria, even if peso volume has been lower than that of during the 7,400 highs of May 2013.

The fear of being left out appears to govern the mindset of the current set of players whom have been incited to bouts of panic buying episodes regardless of valuations or risks. Again media’s shouting of g-r-o-w-t-h has been the conditioning signal trigger to such actions.

The “everybody is a genius” dynamic has undergirded the ONE way trade mentality. And any opposition to “stocks and economy has nowhere to go but up” religion has been treated with contempt if not with irreverence.

From the character of the dominant players, smart money dominates every stealth phase of a bubble. The entry of institutional investors reinforces the upside trend of a bubble. The next phase is the bandwagon effect from the public which turns stocks into a casino that culminates with a blow off phase. 

Yet each time the bulls are hurt by the appearance of the bears, the former fights back with ferocity as we are seeing today. 

The Obverse Side Of Every Mania Has Been A Crash

History gives us valuable clues, especially of our mistakes or even the flaws of our ancestors.

I am not a fan of patterns, although patterns exist. To anticipate a prospective repetition of a pattern, this requires important parallels in the fundamental sphere.

At 11 years old, the current bullmarket phase in the Philippine stock exchange (2003-2014; right) is as old as its predecessor (1986-1997; left). This implies that the current bullmarket may most likely be aging.

Interestingly, today’s underlying conditions (debt, valuations) appear to be even worse than that of the pre-Asian Crisis forebears. I don’t have data to compare with in the context of sentiment.


Over the past 28 years every single chapter of manias, expressed by parabolic price movements, has been followed by crashes.

In other words, the obverse side of every mania has been a crash

The two cyclical bear markets amidst the 1986-1997 bullmarkets exhibit the phenomenon: what goes up fast, goes down fast.


The 1994 top transitioned into an incredible saga of stock market volatility which had been characterized by 3 bear market strikes until the end of 1995. The Phisix lost 33% from top to the trough of 1995 where the bulls got second wind.

The final 1996-97 manic run ended the animated bull-bear battle since 1993 with a crash. The crash preceded the Asian Crisis by about 5 months.


The 2007 top played out a little bit different.

The September-October rebound from the bear market strike of July-August, was resolved by a drip, drip, drip then a flood or a slomo downhill before a collapse.

Remember, the Philippines hardly had economic fundamental weakness except through the contagion (which was vented on asset markets and on exports). 

Yet record (forex reserves!, forex reserves!, forex reserves!) didn’t stop the stock market or the peso from cratering. 

This brings us to the 2013 mania, which if everyone recalls also suffered from a bear market strike. 

Yet the 2014 manic drama remains unresolved.

So if price patterns, fundamentals and sentiment (now even policy actions) have been converging, and if the obverse side of every mania has been a crash, then a crash cannot be discounted to happen anytime.

Because I am neither a seer nor a tarot card reader, I don’t know what will be the trigger (external or internal). I don’t know when it may happen. What I know is that history’s insights plus current events reveal that this has been the destiny, regardless of popular sentiment.

Remember confidence is fickle and can change in an instant.

Will The Firming US Dollar Index Usher In The Tetangco Moment?

As a final note on markets, the US dollar index has been firming of late. Since July 1, the US dollar index has been up by 5%!

The basket of the US dollar index consist of the euro (57.6%), the Japanese yen (13.6%), British pound (11.9%), the Canadian loonie (9.1%), the Swedish Krona (4.2%) and the Swiss franc (3.6%). 

Their individual charts reveal that the US dollar has been rising broadly and sharply against every single currency in the basket during the past 3 months.

This may have been due to a combination of myriad complex factors: ECB’s QE, expectations for the Bank of Japan to further ease, Scotland’s coming independence referendum, or expectations for the US Federal Reserve to raise rates in 1H 2015 (this has led to a sudden surge in yields of US treasuries last week), escalating Russian-US proxy war in Ukraine and now in Syria (as US Obama has authorized airstrikes against anti-Assad rebels associated with ISIS, but who knows if US will bomb both the Syrian government and the rebels?) more signs of a China slowdown and more.

Yet a rising US dollar has usually been associated with de-risking or a risk OFF environment. Last June 2013’s taper tantrum incident should serve an example.

There have been cracks in the EM space. Commodities have been guttered this week. Equities and currencies of Brazil and Turkey got slammed.

So far, the adverse impact from the rising US Dollar index on Asian-ASEAN markets has been marginal. But I wouldn’t rule out a spreading of a risk OFF environment, if the US dollar index continues to soar.

And as I have been saying here, the BSP chief has consistently been warning about the risks of market volatility from capital flight as consequence of exogenous events. Yet I have countered that foreigners are being conditioned publicly as scapegoats to what truly has been an internal imbalance problem only camouflaged by inflated statistics.

Nonetheless, will the firming US dollar index usher in the Tetangco Moment???

The Difference between Money Illusion and Statistical REAL GDP

I have been excoriated for supposedly not using “real” GDP during my discourse last week on the “money illusion”. That’s because “real” GDP, it has been held, represents the more accurate indicator of ‘g-r-o-w-t-h’.

I guess my message didn’t sink in, so let me clarify.

The intent of the money illusion treatise has been mainly to illustrate on the distortive effects of inflationism on prices and output and therefore the economy. This specifically can be seen from this excerpt (bold original) “And even if output declines, for as long as the decline will not be equal or be more than the inflation rates, the numbers will reveal “growth”. You can apply this to a firm, an industry, or a nation”. 

The mention of “a firm, an industry, or a nation” signifies of the general effects from the money illusion principle.

I applied the money illusion principle exercise to my analysis of the 2Q GDP (bold original): “All told, outside manufacturing, there has been little support to the 2Q statistical economy except through the bubble sectors, particularly trade and real estate. Thus the kernel of 2Q 2014 6.4% growth must have been through the money illusion.”[21]

Perhaps the failure to connect the dots between the money illusion and the statistical GDP has incited the reaction to readily dismiss the relationship and instead offer “real” GDP as supposedly a superior metric for economic analysis.

This represents a typical reaction from bubble worshippers where the mechanical impulse has been to resort to the citation of statistics in defense against information opposed to their beliefs.

But for me, such intuitive response represent what I call the “Talisman effect” of screaming incantations (applied here—statistics) in order to do away “evil spirits” (applied here—any contradictory information against popularly held beliefs).

Also such objection can be deemed as the attribution substitute heuristic—where such mental abbreviations represent the sidestepping of complex issues by shifting to what is seen as ‘easily calculable’, or in this case the short cut is to ‘shout’: real GDP!

But sole dependence on official statistics (whether Philippines or from multilateral institutions) extrapolates to its incontrovertibility. In other words, such assumptions are predicated on “faith” on the data provider.

But that’s where I differ. I do NOT trust or have faith on these figures!

Because of blind faith, the consensus hardly raises any questions on the methodology or the accuracy of the numbers behind official statistics or even its implications. They swallow hook line and sinker the numbers as “facts”

Let us use BSP’s current actions as example. As a matter of proportionality, official inflation figures are not only below economic growth figures but have allegedly been within the target range although at the upper limits. So logic leads us to question why should 4.9% statistical inflation rate metastasize into a nationwide based political issue? Why has CPI of 4.9% compelled the BSP to panic with 6+1 policy actions in 6 months??? Why have the BSP chief warned on “chasing the markets”??? All these seemingly desperate moves because official numbers reflects on real social conditions????

Yet the official figures are merely estimates mostly from surveys constructed by political agencies. Since people act in accordance to the individual’s underlying incentives, which applies to political agents as well, what has largely been underappreciated or has been unseen by the public is that of the incentives guiding the political institution’s calculation as previously explained at length.

As in the case of Soviet Union, present day Argentina and Venezuela, such ‘growth’ numbers neither represents reality nor substitutes for truth. In the case of USSR, even the late celebrity economist Paul Samuelson had been fooled by growth statistics as to endorse the Soviet political economic framework only to see the communist nation state disbanded 3 years after!!! What happened to ‘g-r-o-w-t-h’? Recently, due to accounting magic, Nigeria’s statistical growth DOUBLED overnight[22]! So one can have statistical ‘growth’, even while many people have been starving!

Yet more signs of massaging of statistical g-r-o-w-t-h data. In July 2013, the Chinese government admitted to selective statistical reporting or hiding of data sets at the industry level[23]. In October of the same year, since the padding of growth data has mostly been at the local level, the national government of China vowed a crackdown on ‘falsified data’[24]. In Italy, sagging economic growth has impelled the government to include the illegal drug sales, smuggling and prostitution in the gross domestic product calculation in order to buoy the statistical economy[25] in May 2014. How does one get to compute “illegal” into GDP? Beats me. The United Kingdom also followed to include the sex and drug industry[26] also in their GDP late May 2014.

As the late British economist Ronald Coase once wrote[27], “If you torture the data enough, nature will always confess”.

So to correlate “money illusion” with real GDP is either to blur/confuse or to severely miscomprehend on the issue.

Applied to the Philippines, as I recently posited, “the possible understatement of the deflator, the PCE (denominator), may have boosted “growth” story”[28]. The point is, one can easily boost GDP figures by simply underreporting estimated inflation figures or by tweaking numbers that have been based mostly on surveys.

I also previously pointed out[29] that even BSP Deputy Governor Diwa C Guinigundo in a paper to the Bank of International Settlements admitted to the limitations of domestic official statistical ‘inflation’ data (bold mine): “Excluding asset price components from headline inflation also has little effect. Currently, the CPI includes only rent and minor repairs. The rent component of the CPI is, however, not reflective of the market price because of rent control legislation. The absence of a real estate price index (REPI) reflects valuation problems, owing largely to the institutional gaps in property valuation and taxation. While the price deflator derived from the gross value added from ownership of dwellings and real estate could represent real property price, it is also subject to frequent revisions, making it difficult to forecast inflation.”

Even from the government’s lens, their own actions have functioned as an impediment to the ‘accurate’ representation of (market priced based) statistical data.

So why should I trust the government’s data when the government themselves even concede of its structural deficiencies? So why should I rely on ‘real’ GDP when inherent problems in the official ‘inflation’ data makes the price deflator ‘difficult to forecast inflation’?

Can bubble worshippers do a better job than the good BSP Deputy Governor and his team of econometricians to prove on the objective accuracy of these estimated numbers established by the government (say the PCE deflator)?

Yet my view is different from the establishment. Since there is no constancy in human action (or where the only constant is change) and where human action is subjective, accuracy of statistical economic data represents no more than a statist’s fantasy.

As the great dean of the Austrian school of economics, Murray N Rothbard wrote (bold mine)[30],
Econometrics not only attempts to ape the natural sciences by using complex heterogeneous historical facts as if they were repeatable homogeneous laboratory facts; it also squeezes the qualitative complexity of each event into a quantitative number and then compounds the fallacy by acting as if these quantitative relations remain constant in human history. In striking contrast to the physical sciences, which rest on the empirical discovery of quantitative constants, econometrics, as Mises repeatedly emphasized, has failed to discover a single constant in human history. And given the ever-changing conditions of human will, knowledge, and values and the differences among men, it is inconceivable that econometrics can ever do so.
And from this, I am on the side of the engineer of Hong Kong’s economic boom via economic freedom, the late British Finance Minister of Hong Kong, Sir John Cowperthwaite, who reportedly was averse to statistics because for him these represent tools for political interventions. 

As per the Le Quebecois Libre[31] (bold mine): Asked what is the key thing poor countries should do, Cowperthwaite once remarked: "They should abolish the Office of National Statistics." In Hong Kong, he refused to collect all but the most superficial statistics, believing that statistics were dangerous: they would led the state to to fiddle about remedying perceived ills, simultaneously hindering the ability of the market economy to work”

It’s not just statistical massaging but likewise public indoctrination of inflated statistics.

Yet here is an example of how media warps a statistical economic g-r-o-w-t-h story.

It has been reported that exports grew by 12.4% year on year in July. The time reference point of the framing matters. Month on month export growth SLOWED from June’s 21.3%. In nominal terms, Philippine exports have steadied or plateaued over the past three months from May to July 2014. The noted article has been silent on the latter two.

In short, the same number can provide different stories as seen from different angles, yet media’s presentation has been to slant information towards the popular appeal while at the same time ignoring all other dimensions. So every positive media slant from statistically inflated numbers reinforces the bias of every uncritical bubble lemming. Media says follow my lips and say G-R-O-W-T-H! Audience in a Zombie/robot like manner respond: G-R-O-W-T-H! Nice.

And this is the kind of “Talisman effect” which the consensus employs when dealing with knowledge opposite to their entrenched one way trade beliefs—they quibble from the basis of numbers that favors them (selective perception). It’s like arguing over head or tails but essentially such disagreement stems from looking at the same coin, without asking whether the coin is a counterfeit or not! Or simply said, the consensus tactic has been to debate the numbers (superficiality) rather than scrutinize over reasoning or logic behind those numbers and or the theories that has backed the origins of the statistical methodologies.

Does slavish devotion to numbers or faith based dependence on official statistics manifest an exercise of prudence or of sloppy analysis?

Petron Corp’s Money Illusion

Meanwhile, here is a real time application of the money illusion principle at the company level. Let me cite Petron Corp’s [PSE: PCOR] 1H 2014 financial standings as an example.

In a presentation from parent San Miguel to investors[32], PCOR’s net sales (total revenue less cost of sales, returns, allowances, and discounts) jumped by 18% even as volume underpinning the sales grew by only 8%. This represents a whopping 10% disparity! [To be clear, companies use current prices to calculate for financial statements hence no deflators involved] This implies that most of PCOR’s top line gains (55%) have likely been from price differentials easily attributable to the money pumped into the system from the banking system via the successive 9 months of 30% money supply growth.

Given that the bulk of Petron’s revenues come from crude, fuel and lubricants sold to distributors or resellers, the BSP’s wholesale price index over the same period appears to reflect on these dynamics. And much of those top line gains from price differentials dynamics have apparently spilled over to become ‘profits’.

In short, PCOR’s 1H 2014 financial standings exhibit how inflationism artificially boosts revenues, earnings and profits. That’s aside from the subsidies provided by zero bound interest rates that has depressed the cost of servicing existing liabilities (PCOR, like the parent, has a heavily leveraged balance sheet with 6.41 debt/Ebitda in 2014 based on estimates), and from the continuing use of credit to finance operation and expansion.

Yet in order for PCOR’s financials to continue to expand at this rate, the oil firm would need the BSP to sustain her accommodative policies. But again inflationism is no free lunch, since there are wide ranging natural—social, economic and political—costs on these.

And don’t forget the BSP has launched its second official rates increase PLUS second SDA rate increase, thereby partially withdrawing subsidies to these subsidy dependent firms

Regardless of the merits of historical official data, here is the more important question: What happens, or what will statistics or financial data eventually reveal, once the effects of money illusion fade away? This applies to official statistics both nominal and real GDP, as well as to profits earned by Petron and by other levered firms and most especially the government whom has been the primary beneficiary of financial repression policies, as seen through relatively ‘low’ debt levels and from inflated taxes brought about by the subsidies from the same zero bound policies.

Does the consensus know??? To give a hint: Since inflationism has not been on their radar screens, once a reversal of this phenomenon emerges, not only will they be jolted, but they may likely experience financial angst. In short, the consensus won’t like it.

I’ll end this note with a germane quote from Samuel Langhorne Clemens popularly known by his pen name Mark Twain
It is easier to fool people than to convince them that they have been fooled.

[1] Bangko Sentral ng Pilipinas Monetary Board Hikes Policy Rates Anew by 25 Basis Points September 11, 2014

[11] Asian Bonds Online ASIA BOND MONITOR June 2014

[14] Ludwig von Mises IX Are the Cooperatives Democratic? 18. Observations on the Cooperative Movement Money, Method, and the Market Process

[16] Wall Street Journal Real Times Economics Blog Why More Renters Aren’t Buying (Hint: Weak Incomes, Savings) September 8, 2014

[18] Credit Cycle

[27] Ronald Coase "How should economists choose?" (1981) p.27 Wikiquote

[30] Murray N Rothbard Section One Method Economic Controversies p.74-75

[31] Alex Singleton SIR JOHN COWPERTHWAITE, THE MAN WHO BROUGHT FREEDOM TO HONG KONG Le Quebecois Libre February 8, 2006