Friday, March 06, 2015

Phisix: Another Record courtesy of Marking the Close

Last weekend I asked: It’s a wonder, can the index managers prevent this or defy market forces? Or will they be able to keep the correction stage moderate?

For this week, they seem to have provided an answer: Profit taking is taboo! There is no such thing as risk or valuations! Domestic stocks can only go up forever!!!


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Today, they ensured that the record high of the other week had to be surpassed...so the last minute pump. 

Mission accomplished. The chart has been made.

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Basically a three industry pump for the day.

Such has been a rare phenomenon in the first run up  to 7,400 in 2013, but became rampant from 4Q 2014 onwards. Especially now where marking the close has almost been a daily affair.

Perhaps the decline of last week caught these managers by surprise, so they started the week (Monday March 2nd) with a full scale assault…

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Marking the close had been more broadbased then than today…

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...where almost every sector had been pumped.
 
But then the following day, they decided instead to a last minute dump…

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Curiously, this week's pump had an average weekly peso volume that has been the second lowest since the week ending November 21, 2014.

All these are just signs of the quality of the so-called record run. It’s not just about wild or unbridled or hysteric speculations but of the gaming the index to ensure that the flow speculation is maintained.

For now this won’t be an issue because it benefits the establishment. But like anywhere else when the cycle turns, my guess is that this will be an issue.


Japan’s Financial Nemawashi Debt Powder Keg

SovereignMan’s Simon Black on Japan’s financial nemawashi powder keg (bold mine)
Japan is a land of irony and dichotomy. It is one of the most conservative cultures in the world, while simultaneously being one of the most perverted.

Business culture here is yet another thing that seems totally alien. Creativity and innovation are constrained by process and procedure. The individual is never celebrated, and dutiful compliance is everything.

In Japanese corporate culture, business meetings follow a strict agenda. New ideas, no matter how valuable, are simply not welcome.

They actually have a term here called nemawashi, which is a meeting before a meeting. The idea being that if you have an idea to present at a meeting, you need to discuss it first so that nobody’s caught off guard or embarrassed by not having a prepared response.

This is a cultural nuance that is completely lost on most Westerners. It stems from this mindset that everyone has an obligation to make sure that nobody else looks bad.

This carries over especially into Japan’s economic and financial situation. As a percentage of GDP the government here is carrying more debt than anyone else on the planet.

At one quadrillion yen, the debt level is so high that it now takes the government 43% of its central tax revenue just to pay interest this year.

The percentage of tax revenue to service the debt has been rising for years and is absurdly unsustainable. Yet large Japanese businesses have dutifully continued to hold Japanese government bonds as part of their obligation to make sure that the government doesn’t look bad.

It’s like a financial nemawashi, saving their counterparty from embarrassment.

This, however, is starting to change. Through its policy of aggressively seeking to create inflation, the government is now guaranteeing that anyone who holds Japanese government bonds will lose money.

This makes government bonds no longer an investment or a store of value, but a charity case. At best it’s just another tax.

Throughout history governments have often overestimated how much their citizens are willing to accept.

Japan has a beautiful stoic culture that has been able to endure tremendous suffering. That said, everyone has a breaking point.

And that’s when you see that there’s a big difference between love of country and love of government.

Bottom line—it’s already starting to unravel.

Every time I’m in Singapore now, as I was just last week, my banking contacts report exponential growth in Japanese customers. Businesses, entrepreneurs, and investors are all moving money out of Japan and into Singapore.

Even Japanese banks are aggressively expanding, following the money out of their own country.

This is precisely when capital controls end up being imposed—when a trickle of capital fleeing turns into a flood.

We’re seeing the same things right now in many places around the world, with most of the attention now focused on Greece and other parts of southern Europe.

However, as Japan has the third largest economy in the world and is the most woefully indebted, it’s really the one to watch.

When the powder keg goes off that sets the global financial system ablaze, it will most likely be in Japan where the match is lit.
In my March 3 post I pointed out that Japanese residents’ portfolio holdings of foreign currency assets has reached record highs. This are signs of intensifying capital flight. 

It’s also proof that the man in the street has been direly affected by the grand interventionist experiment called Abenomics of using of financial, economic and political nemawashi to save not only the face but of the interests of Japan’s ruling class and their allies. 

And as posted on February 24, a survey showed that a vast majority or 81% of the average Japanese questioning “where is the recovery?”. 

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This is what Mr.Black has been talking about where the Japanese government’s national debt service have been devouring a large share of tax revenues.

The above budget estimates has been sourced from Japan’s Ministry of Finance under Japan’s fiscal condition as of January 2015

What’s truly remarkable has been that the budget has been premised on a very optimistic light. The Japanese government expects the burden of debt payment to get reduced from 51.46% and 46.54% in 2013 and 2014 to only 43% this year. This comes as tax revenues has been expected to grow 16.02% in 2014 and 9.4% in 2015.

Meanwhile government spending has been expected to grow 3.53% in and 4.7% in 2015.

The difference is that while government spending represents allocated spending, money that will be spent as part of the budget, tax revenues mainly depends on economic performance, and secondarily, administrative tax collection efforts

But remember the Japanese statistical economy fell into a technical recession in 2014. Granted that even if we consider the rebound during the last quarter where annualized gdp q-o-q jumped by 2.2%, that number is unlikely to raise the government’s projection of 16% tax revenue growth.

As an aside, Japan has three ways of looking at the statistical GDP. The GDP annual growth rate still shows Japan in a recession.

Importantly as I recently pointed out, the 4Q bounce was all about statistical growth and not real economic growth
Mediocre investment activities, consumption boost from BoJ’s devaluation, and a big boost from government spending means Japan’s 4Q GDP represents no less than a government statistical pump—or growth only in statistics.
Another important factor, bond dependency ratio or the use of bond financing as % of revenues. Since taxes have been insufficient to finance government expenditures, the government has become almost entirely dependent on bond financing. 

Yet due to rosy expectations on tax revenue growth, the Japanese government projects this bond ratio to fall from 46.3% in 2013 to 38.3% this year. I don’t think this target will be met. Not with the current data. Japan’s nemawashi finance looks very much like Ponzi financing—debt in debt out.

Some mainstream experts recently cheered that wage inflation has appeared. Unfortunately, wage inflation has been lower than the CPI. 

From Bloomberg-Japan Times: Increases in the cost of living outpaced annual earnings that rose for the first time in four years in 2014 as the Abe administration sought to reflate the economy. Average earnings climbed 0.8 percent last year while pay, adjusted for inflation, fell 2.5 percent, the labor ministry said Wednesday. Base wages excluding overtime and bonuses were unchanged in 2014, ending eight years of decline, preliminary data showed. Earnings that trail inflation crimp the spending power of households, undermining the sustainability of price gains. Prime Minister Shinzo Abe and the Bank of Japan are pumping unprecedented stimulus into the economy in an effort to end two decades of stagnation.

Adding to the Japan’s woes, last week Japan’s government announced unemployment rate last January increased to 3.6%.

So despite the money pumping and fiscal stimulus what the economy has shown has been sustained stagnation where fiscal imbalances signify a hole which the Japanese government keeps digging deeper.

Japan is in a debt TRAP. Japan can hardly grow out of its way from the current debt levels. Also, the Japanese government's policies have become an impediment to real economic growth. Instead of promoting the incentives for productive agents to flourish, distortion from interventions only foists uncertainty, e.g. devaluation distorts pricing system. 

So the government's aim has now been about showbiz, manipulating markets to show buoyancy.

Yet these policies will accelerate Japan's path to a credit event.

If inflation does go up, due to G-R-O-W-T-H, this would mean “guaranteeing that anyone who holds Japanese government bonds will lose money” then interest rate will spike and expose the fragility of the government’s mountain of debt.

On the other hand, if stagnation persist, or if Japan's financial bubble goes bust, those colossal debt levels will eventually be seen by the markets as susceptible to credit events.

Either way, the future of Japan’s debt is either default or a debt jubilee. It’s a question of when not an if.

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For now the BoJ’s policies has monetized much of the government spending. (chart from Zero Hedge)

The BoJ’s monetization process comes with future consequences. As I recently wrote:
According to Japan Macro Advisors: In terms of the BoJ's market share in the JGB market, it renewed its new peak. In January 2015, the BoJ owned 25.6% of the JGB market, measured in value, and 20.9% measured in aggregate duration risk. We expect BoJ's market share will exceed 30% by the end of 2015, and approach 40% by the end of 2016.

So by siphoning liquidity out of the JGB markets, the ramifications of BoJ’s actions has been to increase volatility. Such volatility has emerged in the form of reduced demand for JGBs that has spiked yields. Current events may signify as the unintended long term consequences from the BoJs inflationary policies.
The recent spike by yields of 10 year JGBs has been pushed back by the BoJ’s assurances of more easing.

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But it appears that this has not been enough (chart from investing.com as of yesterday’s close). The yields are back testing the recent highs.

Japan’s Nikkei trades at 15 year high. Such milestone highs have not come in the favor of locals as households have been net sellers. It’s only foreigners and domestic institutions whom are being rewarded from the political redistribution.

But record stocks come in the face of record imbalances at the precipice.

Again Simon Black
When the powder keg goes off that sets the global financial system ablaze, it will most likely be in Japan where the match is lit.
Japan may just be one of the matches.

Thursday, March 05, 2015

Governments in a Panic Mode: India and Poland Cut Rates as China’s Lowers GDP Growth Targets to 7%!

Record high stocks have spawned an ocean of misimpression that such dynamic has been about G-R-O-W-T-H and the ebbing of risk.

But on the other hand, the rush to ease by many central banks extrapolate that these monetary institutions have seemingly been in a panic mode. Insufficient G-R-O-W-T-H has been exposing credit risks that have only been pressuring central banks to lower the cost of servicing debt through policies.

Two different responses to divergent perceptions.
Yesterday India’s central bank unexpectedly cut interest rates for the second time this year.

RBI governor Raghuram Rajan explained his decision to cut rates ahead of the central bank’s next scheduled monetary-policy meeting in April, saying: “The still-weak state of certain sectors of the economy as well as the global trend toward easing suggest that any policy action should be anticipatory.”

With its latest move, the RBI joined a dozen central banks, from Singapore to Switzerland, which have cut rates since January to stimulate economic growth and stave off deflation. The People’s Bank of China lowered rates Saturday for the second time in less than four months.

But jumping on the easy-money bandwagon carries risks for India and other emerging markets. If the U.S. Federal Reserve starts tightening, developing economies could face large capital outflows…

Mr. Rajan said he moved in part because “disinflation is evolving along the path set out by the Reserve Bank in January 2014 and, in fact, at a faster pace than earlier envisaged.”
Ah disinflation, euphemism for deflation risk. Too much debt which leads to depressed economic activities that subsequently heightens credit risk.

As I previously said, central bank creed of the euthanasia of the rentier will dominate the sphere of monetary policy making. This will be complimented by political pressures, social desirability bias and path dependency.

Last night Poland also jumped into the easing bandwagon.

From Reuters:
Poland ended its monetary-easing cycle on Wednesday with a deeper-than-expected rate cut intended to curb deflation and prevent excessive zloty gains as the euro zone begins a massive stimulus programme.

The central bank's Monetary Policy Council cut the benchmark rate 50 basis points to 1.50 percent, a record low. Most analysts polled by Reuters had expected a 25-basis-point reduction.

The zloty weakened after the decision, then reversed losses and gained up to 0.9 percent after the bank said its easing cycle was over.

"There is never a situation that the promise of the MPC in any country is carved in stone," Governor Marek Belka said. "But taking into account the current economic situation ... I cannot see room for further rate cuts and expectations thereof."

Belka said the European Central Bank's bond-buying programme was one factor leading to the reduction.

"If a major currency ... is a subject to a quantitative easing at a significant scale, then one can expect appreciation pressure at currencies surrounding the euro," he said at a conference following the decision.
Same dynamics with India but with an added dimension. One intervention begets another intervention. The snowballing rate of interventions will bring about unintended consequences such as swelling rate of government securities having negative yields and record stocks.

By the way, India and Poland’s actions accounts for 20 central banks cutting rates (Central Bank Rates). And this is aside from other easing measures, lowering reserve requirements, QE and etc…

So financial markets continues to rise even as real economic fundamentals deteriorate from which central banks respond to with amplified easing

And as proof of worsening of economic conditions, the Chinese government just announced a lowering of economic growth targets to 7%

China lowered its economic growth forecast to about 7% this year at the opening of the country’s biggest political event of the year, ushering in what leaders have dubbed a “new normal” of slower growth in the world’s second-largest economy.

Premier Li Keqiang ’s speech on the economy opened the National People’s Congress, China’s annual legislative session. Last year’s goal was “about 7.5%” though when actual growth came in at 7.4%—the slowest in more than two decades—officials disputed that it represented a miss…

In recent weeks, Beijing has unveiled increasingly dramatic moves to spur bank lending in a bid to rekindle economic momentum. But such moves could set back its efforts to shift away from excessive reliance on exports, a bloated property market and government spending.

What strategy Chinese leaders pick matters on a global level. A plan that emphasizes short-term growth could give a boost to a world economy suffering from Europe’s malaise and an unsteady recovery in the U.S., but it could also raise questions about China’s long-term role as a global economic growth engine.

At home, leaders face pressure for more action. Many businesses say they don’t want to borrow or expand given weak demand. Smaller companies that do say banks are holding back credit because of worries about bad loans.
The trajectory of declining economic growth rate aligns with the hissing credit and property bubble trends. And symptoms of balance sheet problems have been apparent; as noted above, businesses don't want to borrow or expand due to weak demand. You can lead the horse to the water but you can't make it drink. And for those who do, banks are withholding access to credit for the same reasons: balance sheet problems...worries about bad loans. 

As I recently noted, if the US experience should serve as a paragon, China could be consumed by a recession in mid 2016. Yet domestic and international policy actions could play a wild card, they could either buy time or even accelerate the process.

Going back to central bank actions. Harvard economist and former chairman of the Council of Economic Advisers under ex-US president Ronald Reagan, Martin Feldstein, explains at the Project Syndicate why central bank easing to combat deflation signifies a 'bogeyman'. For now, this unsustainable arrangement has camouflaged a massive build up of systemic risks.
Why, then, are so many central bankers so worried about low inflation rates?

One possible explanation is that they are concerned about the loss of credibility implied by setting an inflation target of 2% and then failing to come close to it year after year. Another possibility is that the world's major central banks are actually more concerned about real growth and employment, and are using low inflation rates as an excuse to maintain exceptionally generous monetary conditions. And yet a third explanation is that central bankers want to keep interest rates low in order to reduce the budget cost of large government debts.

None of this might matter were it not for the fact that extremely low interest rates have fueled increased risk-taking by borrowers and yield-hungry lenders. The result has been a massive mispricing of financial assets. And that has created a growing risk of serious adverse effects on the real economy when monetary policy normalizes and asset prices correct.
Again, two different responses to divergent perceptions.

The Natural Limits of Profit Growth: Berkshire Hathaway Edition

A year back, I explained that profit growth are constrained by natural economic forces: in particular, the law of compounding, competition, changes in  the risk environment, changes in the production process (lengthening or shortening), boom bust cycles, and government interventions (e.g.taxation and deficit spending).

Warren Buffett's flagship Berkshire Hathaway should serve as a great example.


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In terms of prices, while Berkshire Hathaway had, in the past, outclassed the S&P by a wide margin especially during its maiden years, that magic appears to be ebbing.

Since 1999, Berkshire returns appears to be growing at a rate similar to that of the S&P. In conventional perspective, this makes Mr. Buffett's company a seeming proxy for the S&P.
The crux is that natural economic barriers to profit growth has been eroding on the foundations of Berkshire’s profit growth rates as reflected by stock prices as shown by the chart above from Businessinsider

Now the growth aspect. Agora publishing’s Bill Bonner at the Daily Reckoning says that in realization of this phenomenon, Mr. Buffett seems to be moving his goal post to in order to embellish his social position : (bold mine, italics original)
This focus on quality over price is what turned Berkshire Hathaway into such a money machine for Buffett and his partner, Charlie Munger. For 36 years, the duo tossed their coins and got heads every year.

But in 2000, the tails began to appear. You may say that Buffett and Munger “changed their strategy.” Or they “made a mistake.” But if their success were based on skill, why would they suddenly forget how to make money?

“Berkshire’s investment portfolio performance has been extremely poor for at least the last 14 years,” writes colleague Porter Stansberry.

Between 1970 and 2000, the lowest 10-year annualized return on Berkshire’s investment portfolio was 20.5%.

Starting in 2000, however, the wheels come off. Between 2000 and 2010, the annualized return was 6.6%. And, after never recording an annual decrease in book value, Buffett lost money twice in the 10-year period (2001 and 2008).
note here of the effect of boom bust cycles on Berkshire's balance sheets…
Relative to the S&P 500, these numbers haven’t gotten better since 2010.

In 2011, Berkshire’s portfolio return was 4%. (The S&P 500 was up 2.1%.) In 2012, Berkshire’s portfolio return was 15.7%. (The S&P 500 was up 16%.) In 2013, Berkshire’s portfolio was up 13.6%. (The S&P 500 was up 32.4%.) In 2014, Berkshire’s portfolio was up 8.4%. (The S&P 500 was up 13.7%.)

Last week, Buffett moved the goalposts. Instead of reporting Berkshire’s results in terms of book value only, he showed how well the company did in terms of share price.

Why he did this is a matter of some controversy.

Did he do it, as he claimed, because book value no longer gives an accurate picture of the value of his “sprawling conglomerate”?

Or did he do it because the gods have turned against him; his book value increases have underperformed the S&P 500 for the last 14 years and it is becoming embarrassing?

Barron’s offers an opinion:

Buffett probably can be faulted for not being forthright in the letter about the disappointing performance of the Berkshire equity portfolio that he oversees.

Of the company’s big four holdings, American Express, IBM, Coca-Cola and Wells Fargo, only Wells Fargo has been a notable winner in recent years. […]

Buffett tends to manage the portfolio’s largest and longest-standing investments. Two managers who help run the rest, Todd Combs and Ted Weschler, have outperformed Buffett in the past few years.
If the law of economics has affected the world's greatest investor, why do you think others will be immune?  

In the Philippine context, those stratospheric valuations justified on supposedly perpetual headline G-R-O-W-T-H will be faced with reality soon.

Wednesday, March 04, 2015

What’s the Link between Hong Kong’s Slumping Retail Sales and Crashing Macau’s Casino Stocks?

A few weeks back I wrote,
Interestingly, Hong Kong’s tourism seems as suffering from a facelift. Chinese tourists have become dominated by ‘Day Trippers’ which now accounts for a record 60%of Chinese tourists. According to a report from Bloomberg, Day-trippers spent an average of around HK$2,700 ($350) per capita in Hong Kong in 2013, compared with about HK$8,800 by overnight tourists, according to government data.

Wow, that’s a 69% collapse in spending budget by tourists! And this has resulted to a slump in luxury brand sales but a surge in medicine and cosmetic sales! What the report suggests has been that China’s economic slowdown and the government’s anti-corruption drive (political persecution) have changed the character of Hong Kong based Chinese tourists.

Well if the trend continues, then this will radically shake up the Hong Kong economy!
It appears that the tourism ‘facelift’ has resulted to the cratering of retail sales down by 14.6% in January on a year and year basis!

This is how mainstream media explains the slump, from the South China Morning Post:
A slump of 14.6 per cent in retail sales ahead of the Lunar New Year is the worst since a 2003 outbreak of severe acute respiratory syndrome, putting businesses and concern groups at loggerheads over whether to curb the inflow of mainland visitors.

Sales in January fell to HK$46.6 billion from a year ago, the Census and Statistics Department said yesterday.

It is the first decline in any January since 2007, when sales dipped 1.6 per cent.

The Retail Management Association reacted strongly, saying the data reflected retail difficulties in the face of slowing growth in cross-border arrivals. The association would object to limiting visitor numbers, chairwoman Caroline Mak Sui-king said.

That stance will put the industry in conflict with political parties and anti-mainland protesters that advocate caps on a multiple-entry visa scheme granting permanent Shenzhen residents unlimited trips to Hong Kong.
As one would note this has been blamed on mainland tourist flows.

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Chart from Investing.com 

I would like to point out that rate of growth of Hong Kong’s retail industry has been on a downtrend since its peak in the 1Q of 2013. It plunged to a negative in the 2Q 2014, bounced slightly during the 4Q and has retrenched again to its biggest loss since, as stated above, 2003.

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What’s been interesting has been that changes in mainland visits to China has been volatile. As the chart above from Quartz pointed out, the Umbrella protests has even induced more arrivals from both mainland and ex-China tourists.

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And if one looks at Hong Kong’s January 2015 tourist arrivals, it’s been growth from Asian visitors that has exhibited negative (-.4%). This has been led by Indonesia (-19%) Singapore (-5.3%) and Japan (-3.5%).  

Mainland tourists have been up by only 3.3% which is at the lower level of the 2014 growth trend. 

Thus what explains the slump in retail sales has been the change in the character of mainland tourists (or the Day Trippers with limited spending power) and partly, the slack of growth from Asian visitors.

As of 2013, based on Hong Kong Census and Statistic Department, wholesale and retail trade account for 5.3% of Hong Kong’s statistical GDP while accommodation and food services account for 3.6%. 

So a slump in retail sales will have some effect on the economy.

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And what’s even more interesting has been that slumping Hong Kong Retail sales seems to coincide with activities in Macau’s casinos.

Macau’s gambling revenues HALVED last February. Monthly gross revenues fell 48.6% while accumulated gross revenues collapsed by 35.1% according to Gaming Inspection and Coordination Bureau Macao SAR

Nikkei Asia on the culprit: Beijing's crackdown on corruption and a move toward a full smoking ban are just two sources of concern. Late last month, it was reported that the Macau government was weighing restrictions on the entry of mainland tourists.

Note that negative numbers of Macau's casinos appeared in the 3Q 2014, almost a quarter after Hong Kong’s retail sales turned negative.

Yet another article from Bloomberg reinforces the changing character of Chinese tourists affecting Macau’s tourism and casino business which seem to resonate with Hong Kong's dynamics (bold mine)
The recent wave of mainland Chinese visitors also spend less than before, a further blow to the fine-dining eateries, luxury retail malls, and high-end hotels that casinos have set up next to their gambling halls. Excluding gambling, per-capita shopping expenses by Chinese tourists dipped 32.8 percent to 1,079 patacas in the fourth quarter of 2014, according to data from the Macau government.

Average occupancy at 3-star to 5-star hotels for the so-called Golden Week period of Chinese holiday, which ran from Feb. 18 to 24, fell 6.9 percentage points to 87.5 percent, while average room rates declined 15.4 percent, the Macau Government Tourist Office announced on Feb. 26.
While crackdown corruption may be a factor, this has been more of epiphenomenon (or secondary phenomenon) or a contributing force. 

The changing character of Chinese spending in Hong Kong and Macau has been reflecting more about economic conditions of China.

And note the hit in Macau’s revenues have been affecting malls and hotels.

Just to show an update of the 3 year charts of Macau’s major casinos

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Sands China Ltd. (HK: 1928)

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Wynn Macau Ltd. (HK: 1128)

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

What goes up MUST come down!

Again it’s not just Macau, Singapore’s casinos have likewise been taking a beating.

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Singapore’s Genting (G13.SI) operator of Resorts World Sentosa reported a 30% crash in net profits in 4Q according to Reuters. So the grueling bear market in her stocks.

Meanwhile Marina Bay Sands operated by Las Vegas reportedly doubled profits in 4Q 2014 due to non recurring tax benefits and from a statistical sigma event from higher-than-usual win percentage at its tables according to Channel News Asia

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That doubling of profits have left the markets unconvinced as shown in the charts of Las Vegas Sands from stockchart.com

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The trend flows of LVS mirrors the activities of the US Dow Jones Gambling index.

Incidentally, a unit of US casino operator Caesar Entertainment filed for bankruptcy for Chapter 11 last January. Such are just signs that casino troubles have not been limited to Macau, Singapore but also the US. 

Have the Chinese government been able to 'crackdown' on Chinese gamblers in the US?

So if Chinese tourist spending have been down, and if Chinese high rollers have been curtailed by their government's crackdown where will the casinos of the Philippines, Vietnam,South Korea and others get their clientele base, especially that they have been in a frantic race to build capacity?

Will the casino crash in Macau prompt for a shift by Chinese gamblers to Manila?

Yet if economic factors have been the main drivers of crashing casino stocks in Macau and Singapore and of Hong Kong retail activities, that declared shift looks like wishful thinking. And as noted above, there are other countries likewise competing for Chinese money. 

So essentially a shrinking market in the face of a massive buildup in capacity.

Remember, for the local industry, there have been about Php 57.22 billion of debt backing this race with the region. And a failure of expectations will not just mean losses and surplus supply, but importantly credit problems.

Yet many media reports look like company press releases that have been anchored on hopium.

Tuesday, March 03, 2015

Europe’s Negative Yields on Government Bonds Inflate to $1.9 Trillion!

Water now flows uphill.

From Bloomberg:
The European Central Bank’s imminent bond-buying plan has left $1.9 trillion of the euro region’s government securities with negative yields.

Germany sold five-year notes at an average yield of minus 0.08 percent on Wednesday, a euro-area record, meaning investors buying the securities will get less back than they paid when the debt matures in April 2020.

By the next day, German notes with a maturity out to seven years had sub-zero yields, while rates on seven other euro-area nations’ debt were also negative. While some bonds had such yields as far back as 2012, the phenomenon has gathered pace since the ECB’s decision to cut its deposit rate to below zero last year.

Even when investors extend maturities, and move away from the region’s core markets, returns are becoming increasingly meager. Ireland’s 10-year yield slid below 1 percent for the first time this week, Portugal’s dropped below 2 percent, while Spanish and Italian rates also tumbled to records….

Eighty-eight of the 346 securities in the Bloomberg Eurozone Sovereign Bond Index have negative yields, data compiled by Bloomberg show. Euro-area bonds make up about 80 percent of the $2.35 trillion of negative-yielding assets in the Bloomberg Global Developed Sovereign Bond Index, the data show.
Traditionally borrowers pay creditors and savers interests (positive yields). Negative yields means that this relationship has been overturned, borrowers are now paid by savers and creditors to borrow.

The reason for this; because of the promise to buy government securities, bond punters have been front-running the ECB to drive rates at subzero levels.

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This chart is from February 2 when negative yields constituted $1.7 trillion. This means an 11.7% increase of bonds with negative yields since.

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With ECB’s promise to monetize a significant number of debt which Zero Hedge estimates as possibly 100%, bond market liquidity will likely shrink and thus risking an upsurge of volatility.

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One may have the impression that perhaps immaculate balance sheets may have prompted the public to pay government to borrow. But as shown above, except for Germany, the Bloomberg’s debt chart reveals that debt from European countries has materially been inflating even from a one year basis.

Negative yields implies that credit risks has almost been totally eliminated!

See water flows uphill now.

The ECB has provided colossal subsidies (or resource transfer) to the banking system, bond holders and the government.

Financial analyst David Stockman at his website the Contra Corner has an incisive treatise on this.

Here is an excerpt: (bold mine)
That investors anywhere in this age of fiscal profligacy would pay to own the notes and bonds of sovereign states is a testament to the financial deformations of modern central banking. But the fact that nearly $2 trillion of debt issued by European governments is currently trading at negative yields——now that’s a flat-out derangement.  After all, the aging, sclerotic economies of the EU have been making a bee line toward fiscal insolvency for most of the last decade.

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So it goes without saying that this giant agglomeration of pay-to-own government debt is not reflective of an outbreak of fiscal rectitude or any other rational economic development. It’s purely an artificial trading result stemming from central bank destruction of every semblance of honest price discovery. In this case, the impending ECB purchase of $70 billion of government debt and other securities per month for the next two years has transformed the financial casinos of Europe and elsewhere into a front runner’s paradise.

As today’s Bloomberg piece tracking Europe’s $2 trillion of exuberant irrationality makes clear, sovereign bond prices are soaring because traders are accumulating, not selling, in anticipation of the ECB’s big fat bid hitting the market in the weeks ahead:

“It is something that many would not have pictured a year ago,” said Jan von Gerich, chief strategist at Nordea Bank AB in Helsinki. “It sounds very awkward in a sense, but if you look at it more, the central bank has a deposit rate in negative territory, and there’s a huge bond-buying program coming. People are holding on to these bonds and so you don’t have many willing sellers.”

Needless to say, this is the opposite of at-risk price discovery; it amounts to shooting fish in a barrel. Never before have speculators been gifted with such stupendous, easily harvested windfalls. And these adjectives are not excessive. The hedge fund buyers who came to the game early after Draghi’s “anything it takes”ukase have enjoyed massive price appreciation, but have needed to post only tiny slivers of their own capital, financing the balance at essentially zero cost in the repo and other wholesale funding venues.

Indeed, the more risk, the bigger the windfall. German yields have now been driven below the zero bound on all maturities through seven years, emboldening speculators to move out on the risk curve. So doing, they have gorged on peripheral nation debt and have been generously rewarded. In the case of the 10-year bond of Ireland—-a state which was on the edge of bankruptcy only a few years ago—-leveraged speculator gains are now deep into three figures.
Continue with the rest of the article here 
 
The obverse side of every money manipulation stoked financial asset mania is a crash.

Intensifying Capital Flight by Japanese Residents as Revealed by Record Accumulation of Foreign Assets

When the BoJ’s arrow of Abenomics was launched I wrote: (bold added)
Mr. Kuroda’s “shock and awe” opening salvo will be channeled through a grand experiment of doubling of the monetary base in 2 years by aggressive asset purchases by the Bank of Japan mostly through bonds. Such aggressive policy is likely to stoke a massive yen carry trade, or a euphemism for capital flight…

However rapid diminution of the yen (-3.51% w-o-w, 11.11% y-t-d) will also mean that aside from asset bubbles, resident Japanese will likely seek shelter through foreign currencies in order to preserve their savings, thus, such policies entails greater risks of capital flight.

So instead of promoting investments and economic competitiveness, currency devaluation will lead to distortions in economic calculation, increased uncertainty, lesser investments and a lower standard of living.
Well, the capital flight dressed up as foreign investments as noted today by Nikkei Asia
Japanese households' foreign-currency-denominated holdings of stocks, bonds and other financial assets have reached an all-time high as ultralow domestic interest rates and a weak yen have driven investors to seek higher yields abroad

The tally briefly topped 46 trillion yen ($383 billion) earlier this year, up 7 trillion yen from the end of 2013, estimates based on market activity show. Bank of Japan statistics put the previous high, reached in September 2007, at 45 trillion yen.

Investment trust holdings account for some 30 trillion yen of the total, with direct investments in foreign securities making up about 10 trillion yen and foreign-currency deposits about 6 trillion yen. More than half of the total is denominated in dollars.
Despite all the media's hosannas on Japan's booming stock market, has it been a wonder why Japan’s economy continues to stagnate as reflected on street level sentiment and even from recent economic data?   

The above represents evidence of why political redistribution, channeled through money manipulation, will not lead to real economic growth. As Austrian economist Patrick Barron rightly pointed out:
Monetary debasement does NOT result in an economic recovery, because no nation can force another to pay for its recovery. 

Sunday, March 01, 2015

Phisix 7,700: Deepening Signs of Exhaustion

You can be mostly a marketing firm, or you can be mostly an investment firm.  But you cannot serve both masters at the same time.  Whatever you give to the one priority, you must take away from the other. The fund industry is a fiduciary business; I recognize that that’s a two-part term.  Yes, you are fiduciaries; and yes, you also are businesses that seek to make and maximize profits.  And that’s as it should be.  In the long run, however, you cannot survive as a business unless you are a fiduciary emphatically first. In the short term, it pays off to be primarily a marketing firm, not an investment firm.  But in the long term, that’s no way to build a great business.  Today, tomorrow, and forever, the right question to ask yourselves is not “Will this sell?” but rather “Should we be selling this?”  Jason Zweig

In this issue

Phisix 7,700: Deepening Signs of Exhaustion
-Phisix: Tepid Signs of Profit-Taking Yet
-Philippine Bonds Rally as Growth Rate of Banking Loans and Liquidity Measures Plummets
-Falling Inflation? Philippine Student Protestors Disagree!
-Hissing Bubbles: Malaysia’s 1MDB, China’s PBoC Panics Again, Yellen’s Irrational Exuberance
-Shopping Mall Vacancies: An Analogy of Denial

Phisix 7,700: Deepening Signs of Exhaustion

Following NINE consecutive weeks of gains the domestic benchmark finally succumbed to ‘profit-taking’. The Phisix gave back 1.21% over the week, reducing year to data returns to 6.92%.

Phisix: Tepid Signs of Profit-Taking Yet

Of course this profit taking dynamic didn’t come without sustained efforts to prop up or massage the index. A day prior to the first decline, index managers used about 4-5 issues to pump the index at the last minute to ensure a fresh record close at 7,800+.


Even Friday’s follow-up profit taking session had a two company pump from the Industrial sector (right window). Friday’s “marking the close” may have been intended to reduce the headline losses of the domestic equity benchmark (left window). (charts from Colfinancial)


What makes this week’s profit-taking week interesting has been that of the remarkable shift in the market’s leadership and some divergence from within the Phisix basket.

The holding sector essentially bore the brunt of the selling.

Early sharp gains from the property sector offset the losses from the 2 day selling. The opposite direction of the property and holding sectors enabled the former to seize leadership.


And because six of the biggest market cap firms (SM, AC, JGS, AEV, AGI and GTCAP) have been from the holding sector, thus the seeming concentration of losses within the top 15 issues.

And save for a few big losers, the latter 15 didn’t seem to share the sentiment of the leaders yet. The latter halve has 8 issues posting gains relative to 7 decliners.

And paradoxically, the biggest property issues posted substantial gains over the week, which meant, again, a takeover of market leadership and at the same time has reduced the intensity of profit taking activities as seen on the headline numbers.

So last week’s profit taking mode looks half-hearted.


Another interesting development has been that charts of many of the major issues have been exhibiting signs of “exhaustion” from near vertical runs.

In the past, parabolic ramps as revealed by forty five or more degree slopes of the three major issues, namely SM, SMPH and AC had been followed by substantial period of declines. 

Property major ALI, on the other hand, appears to be forming a bearish rising wedge pattern. Those wild pumping and pushing seems to have reached their boundaries.



I pointed out last week of the considerable drop in the average peso volume and the average daily trades. Again such points to signs of ‘exhaustion’.

Another market breadth indicator as shown by the advance decline spread has been telling the same story.

Of the 17 trading days prior to Thursday and Friday’s selloff, days where decliners led advancers have dominated by 10 to 6. There was a day which posted a neutral or a zero balance between advancers and decliners.

Now if we include the activities of the last two days, February’s tally would be 12 days where decliners led advances as against 6 in favor of the advancers.

Yet both the charts and market internals tells of the same story, as stated last week, “the bulls have been losing steam”

The overextended push to 7,800 has rendered the Phisix vulnerable to possibly a big correction phase.

It’s a wonder, can the index managers prevent this or defy market forces? Or will they be able to keep the correction stage moderate?


Finally, this week’s tepid profit taking activities hardly changes or dents on the incredibly mispriced securities of the Phisix’s 15 largest companies as revealed by their stratospheric PERs.

What you see in the above are securities priced for perfection with NO margin for errors.

Philippine Bonds Rally as Growth Rate of Banking Loans and Liquidity Measures Plummets

This week’s correction by the Phisix ironically comes with rallies in Philippine bonds and the peso.

Perhaps the bond guys have been reading me so they wanted to prove that everything have been A-OK.

So following last week’s selloff they appear to have embarked on buying activities that has foisted somewhat a reversal of the recent trends.

Yields of short term (3 month and 6 month) bills narrowed steeply while the longer end posted marginal decline in yields. Said different, Philippine bonds rallied with the substance of the rally being at the shorter end.


Nonetheless the result has been to skew the actions of yield curve. While some segment of the yield spread has exhibited signs of modest steepening others remain at status quo.

What makes this even more interesting has been that this week’s rally comes in the light of a sharp downturn in banking system’s loan activities and a further slump in liquidity as measured by the money supply growth rate.

Banking system’s loan activities to the economy continues with its downtrend. Banking loans have dropped by over 2% to 16.01% in January from a revised 18.66% last December. The former December data was at 15.37%. In % terms, this implies that December data has ballooned by 21.4%! This magnifies the decline.



Of the bubble sectors, real estate loans posted slight gains while the manufacturing sector registered a modest increase loan growth, the rest recorded a downturn.

Additionally, monetary liquidity as measured by M3 continues with its freefall. From the BSP[1]: Preliminary data show that domestic liquidity (M3) grew by 7.7 percent year-on-year in January to reach P7.5 trillion. This was slower than the 11.3-percent (revised) expansion recorded in December 2014. On a month-on-month seasonally-adjusted basis, M3 increased by 1.4 percent. Money supply continued to increase due largely to sustained demand for credit. Domestic claims grew by 10.8 percent in January from 17.8 percent (revised) in the previous month as credits to the private sector expanded at a slower pace

Again the revised December data was at 9.6%, thus ballooning the month’s numbers by 17.7%! Like the Banking system loans, the upgrade in December data amplifies the downturn.

It’s just amazing how the BSP makes substantial statistically significant revision.

We’re done with the data, now for the exegesis via the following questions.

Has the effects of the steepened flattening of the yield curve been manifesting itself in domestic credit activities?

What has been the implication of a sustained slowdown by domestic liquidity?

If “Money supply continued to increase due largely to sustained demand for credit” has been a manifestation of a downdraft in the demand for credit, then how will sectors heavily dependent on credit (including the statistical GDP) continue to post G-R-O-W-T-H considering the current trend? Statistical massaging?


If banking profits have been weighted on loans then what if aggregate loans to the clients of the banking system continues to shrivel? Will profits increase or decrease?

How will a sustained slowdown in monetary liquidity support asset inflation? Will asset inflation be funded from savings or loans from non-banking channel? How will a downshift in asset inflation bolster the non-loan aspects of bank revenues or at least maintain them at current rates?

How about bank clients? Have they accumulated enough cash flow and retained earnings or corporate savings to finance current capital expenditures? Or have they been resorting to nonbanking loans (domestic or foreign bonds, intra corporate loans, private placements, offshore banking and non-banking ‘affiliate’ loans) or equity issuance for financing?

Or have these numbers been suggesting of an ongoing material downshift in investment activities?

How about credit quality? Have current cash flows been sufficient to cover existing levels of debt servicing? Despite the slowdown in loans, current rate of loan growth have still been above 2013 levels. Where has all the freshly issued money—which is supposed to represent new purchasing power to finance ‘aggregate demand’—been flowing? Has new loans been about debt rollovers than capex? If not, what explains the downtrend in liquidity growth? Or why has liquidity been shrinking?

The basic question is how has current G-R-O-W-T-H dynamics been financed? The logic presented here simply has been based on ‘follow the money trail’.

Yet haven’t all these hysteric pumping and pushing of financial assets been about expectations of a single directional trajectory for G-R-O-W-T-H? Yet credit and liquidity activities seem to indicate otherwise. Which has been wrong: the current credit and liquidity dynamics or market expectations?

What about the bond markets? Has last week’s rally been about current credit activities? And or has it been about market expectations that the BSP will cut rates given the backdrop of what the mainstream sees as the growing risk of ‘deflation’ menace here and abroad? Will last week’s actions be sustainable?

Falling Inflation? Philippine Student Protestors Disagree!

Philippine CPI numbers have been falling. This may be true for some food and mostly energy related items. But this has certainly been false in terms of education.

Inflation doesn’t seem to be under control when students engage in flash mob dance or skip classes or get involved in various forms of protest against tuition fee hikes. Media says that in 2014 the average tuition fee hike approved by the government (CHED) has been at 8.5%. For this year, media speculates increases from a range of 6% to 13%. My youngest daughter’s tuition increase has been in the upper bound, and that’s for the yearend 2014. The 2015 bill has yet to come.

Yet BSP’s January CPI data shows that education inflation has been at 5.1% year on year based on 2006 prices. Since I have no access to a domestic inflation calculator I can’t make a meaningful comparison because the numbers cited by media are nominal (current) prices. In the US, the Bureau of Labor of Statistics has an inflation calculator.

Nonetheless what I oppose against the BSP data has been that education spending accounts for ONLY 3.36% of their inflation basket. 3.36???!!! I may be wrong, but BSP’s methodology seems to give weight on household education spending based on children enrolled in public schools.

And BSP’s data will hardly reflect on reality for the households who send their children to private schools. In my case, direct education spending accounts for over 20% of my budget even if my burden has been partly mitigated due to a very generous sponsor. Although with my eldest daughter graduating (and possibly joining the workforce…I say possibly because she has been considering to take up postgraduate studies) this year, such onus should decline (but may be offset by coming tuition increases). While I may not represent the average, I suspect a wide divergence between reality and statistics. 

In short, the street protests exposes on the inaccuracies of government statistics.

Importantly this shows of the relative impact of consumer price inflation to households.

Inflation in consumer prices will all depend on the subjective distribution of spending by individuals or by households. Tuition fee increases negatively affects households, like me, where education accounts for a larger share of the budget. So tuition fee hikes essentially absorb or divert whatever ‘savings’ from diminished pressures on food and energy prices which alternatively means pressure on disposable income. Again with spending transferred to ‘needs’ rather than ‘wants’, such price increases will have pernicious effects on spending on leisure activities or even investments.

And this is where nasty effects of inflation takes hold—in the conflicting dimension of expectations between consumers (demand) and the industry (supply) brought about by relative price distortions from previous monetary policies.

With little or no increase in household income, price increases in the “needs” based goods and services, again, means lesser resources to finance “want” activities, such as shopping, eating out, traveling, sports, or gambling, buying real estate or cars or even investing in stocks or bonds or in real business…

This comes as the bubble industries continue with its frantic race to build capacity in expectations of ‘robust’ household activities. This means that the supply side, whose expectations clashes with real developments at the household level, will be competing intensely over a shrinking peso.

And such competition, which has been prompted by continuing price distortions that has been inflating capacity due to entrepreneurial miscalculations, will lead to losses, excess capacity and eventually credit woes and the grand unveiling of the accumulated imbalances.

Of course another likely negative impact from tuition fee hikes will be more dropouts and diminished enrollments. Yet this will put more pressure on public schools to soak up on this disadvantaged group. Consequently, this means pressures on the taxpayers. With the government edict, the Expanded Government Assistance to Students and Teachers in Private Education, or GASTPE, that forces the subcontracting of public school students to the private school in exchange for a paltry subsidy as I previously discussed, this means more tuition fee hikes overtime and subsequently lesser education for the populace.

So the vicious feedback loop between price pressures—from monetary policies AND political interventions—and its ramifications, the subsequent loss of education (qualitative and quantitative) and political pressure suggests that the current dilemma will only spiral.

Sad to say the imbalances in the education frontier will be also exposed when the bubble busts.

Hissing Bubbles: Malaysia’s 1MDB, China’s PBoC Panics Again, Yellen’s Irrational Exuberance

Another interest development: Asian currencies appear to be diverging. Most Asian currencies rallied strongly this week, this has been led by South Korea’s won 1.27%, the Malaysian ringgit 1.17%, Taiwan dollar .9%, Thai baht .65%, Indian rupee .61% and the Philippine peso .34%.

Meanwhile the Indonesia’s rupiah fell .84% to a record low against the US dollar as the Chinese currency the yuan fell .21% to a one year low.

What makes lots of things so interesting has been that some ASEAN currencies have exhibited turmoil as stock markets soar.

This applies to record Indonesian stocks which apparently like the Phisix, backed off the fresh record highs.

Malaysian stocks , as measured by the FTSE KLSE, which has earlier been under pressure has been up 3.4% year to date. Despite the big rally of the ringgit this week, the rally came in response to last week’s collapse (1.89%). The ringgit currently trades at 2008 levels.

Yet Malaysia’s state fund, the 1Malaysia Development Bershad (1MDB) a supposed strategic long term economic development fund, which I wrote about in the past and which carries a debt cross of $11.6 billion, continues to bleed profusely. The 1MDB now has to rely on the Malaysia’s Finance Ministry for debt financing, media expects the government to inject $823 million.

But the above reports was before a fresh exposé that has been out just a few hours back where a well connected tycoon has reportedly masterminded and siphoned out US $700 billion from the company through a joint venture project with Arabian company PetroSaudi.

According to Free Malaysia Today[2] (FMT.com)
The entire joint venture project was conceived, managed and driven through by the Prime Minister’s associate and family friend the party-loving billionaire tycoon, Jho Low,” Sarawak Report said.

Based on a trove of leaked company documents and emails, Sarawak Report said the documents proved that an amount of USD$700 million, supposedly a PetroSaudi loan repayment, “was in fact directed into the Swiss bank account of a company called Good Star, which is controlled by Jho Low”
What makes the coming days interesting will be that of the possible consequences from the coming corruption investigation from the divulged crony deal.

If the financing of the 1MDB will be deferred or ceased entirely, we could possibly see tremors in the credit markets of Malaysia that will be reflected on both the currency and eventually the asset markets. Now the question is, will there be contagion effects through the region?

Additionally, as I pointed out yesterday, China’s property markets seem to have been unraveling faster than the US counterpart that paved way for crisis that culminated with the Lehman bankruptcy in 2008. Although China’s political economy has been distinct from the US, they share one thing, over indebtedness to the extremes.

So the US pre-Lehman episode could serve as a potential roadmap for China’s debt problems. And if there will be some resemblance to it, China might fall into a recession by mid 2016. Of course this is just a guess. There are so many complex developments like serial global easing that could either prolong the day of reckoning or even accelerate it. 

I have also been saying here contra the mainstream belief that Chinese authorities have been massaging the yuan lower to allegedly promote exports, I have been suspecting that the faltering yuan represents signs of capital flight.

Last week, the newspaper of China’s central bank warned that the nation has been “dangerously close to slipping into deflation”, the article talks of the “increasing nervousness in policymaking circles as a sputtering economy struggles to pick up speed despite a raft of stimulus steps”[3]

As I have noted two weeks back, the PBoC seems as in a panic mode. The PBoC has been furiously injecting money into the system and announced the easing bank reserve requirements.

Apparently in the dilemma to either protect the yuan or to keep the bubble from imploding, the Chinese government via the People’s Bank of China panicked again to choose the latter

The PBoC cut interest rate again…yesterday.

Let me quote the Wall Street Journal[4]
China’s central bank cut interest rates for the second time in less than four months, in a fresh sign that the country’s leadership is becoming more aggressive in trying to arrest flagging economic growth.

The rate cut by the People’s Bank of China, announced Saturday, came sooner than some analysts and investors had expected and reflects growing worries over the world’s second-largest economy as it struggles with an array of ills: a slumping property market, more money being sent offshore and growing risks of falling prices that, in effect, are pushing up borrowing costs for businesses.

“Deflationary risk and the property market slowdown are two main reasons for the rate cut this time,” said a central bank official in an interview late Saturday.
There is this misimpression that cutting rates and record stocks have been about growth. Yet the previous series of easing measures hasn’t prevented the “deflationary risk and the property market slowdown” which prompted for the current response. 

What previous actions has done has been to spur a debt financed mania in stocks. What the current easing process will do will be to exacerbate the current predicament as debt will continue to balloon from more debt financed debt rollovers and from asset speculation. All these will hit a wall.

China’s central bank is in a panic. The sentiment has been expressed in the unofficial statement. If deflationary risk and the property market slowdown continues to intensify, expect the PBoC to lose credibility that will be vented on the markets.

Remember, according to the Bank for International Settlements[5], China has become by far the largest EME borrower for BIS reporting banks. Outstanding cross-border claims on residents of China totalled $1.1 trillion at end-June 2014

So the PBOC is confronted by two demons: domestic debt and foreign debt. The PBoC has thrown its dice…domestic debt it will be.

And warnings have not been limited to China.

Despite Ms. Janet Yellen’s optimistic view of the US economy, buried in her Monetary Policy report to the joint US Congress has been 7 paragraphs containing 837 words to warn about the markets irrational exuberance. Her warnings, which curiously have been much lengthier than the 2014 version, have not just been about stocks but also about select credit markets and commercial real estate.

Record stocks in the face of record imbalances at the precipice.

The obverse side of every mania is a crash.

Shopping Mall Vacancies: An Analogy of Denial

Last week I wrote,
Yet shopping malls have become a catechism for many, particularly the participants of the relentless pump and push of asset prices, whereby any criticism has been viewed as impiety thus will be subject to denial or vehemently objected upon without dealing with the basics.

The dilemma has been simple and elementary: what needs to be shown is the balance between the demand and supply side. Said differently, income has to grow faster or at least match the growth rate of credit and supply side.
Let me offer two numbers. Ten and two. If we use the two numbers as relative measurement, you will probably agree with me that ten is larger than two or stated in a reverse lens, two is smaller than ten.

Of course, those numbers have social applications. And such applications will have implications.

Let us apply this to the popular pump and push issues: the shopping mall

Ten… represents the growth rates (at current prices) of the trade industry particularly 9.7% 2013 and 9.1% in 2014. Based on retail trade, 10.8% 2013 and 8.6% 2014. Data from the NSCB.

If you look at the capex plans of major developers and operators expected growth rates have been at least 10% as I pointed out in 2013.

For this discussion, let me grant the oversimplistic popular notion of the “public park model” or traffic equals profits of shopping malls.

Two…represents the growth rate of the Philippine population. Table above from Index Mundi, NSCB data here exhibits the population growth rate.

Because the law of scarcity applies not only to resources but likewise to physical, spatial and time limitations, this means that every second I spend in Mall 1 represents time and effort that will NOT be spent in Mall 2, Mall 3 to Mall nth.

This even applies to stores within the same mall. Every second I spend in store 1 of Mall 1 represents time and effort that will NOT be spent on store 2, store 3 to store nth.

The idea is since people have no supernatural power of omnipresence, there will be opportunity costs. Such opportunity costs will serve as fundamental limits to mall/store traffic.

The above numbers tell us that 2% population growth will mean lesser traffic for the shopping mall industry growing at more than 2%, especially at 5 times the rate of population or 10%.

Or given the above growth rates, the population or traffic density for each mall will grow smaller for every additional mall built.

Here population or traffic density will mean the number of people per mall.


The above table accounts for a mathematical representation of a 5 year population/ traffic density calculated from a population base of 10 million and 10 malls growing at a compounded rate of 10% and 2% respectively (given all things constant—ceteris paribus). 

As one would note by year 5, traffic density will fall by 31.45%!

Perhaps domestic malls will have to rely on tourist. But tourists are also subject to opportunity costs. There are many nations competing to have tourists. And tourist can only appear at one place a given time.

International visitor arrivals grew by 11.28% in 2011, 9.07% 2012, 9.56% in 2013 and 3.25% in 2014. If my eyes are telling me correctly, the trend has been in a decline. Besides, tourism has reportedly accounted for only 4.2% of GDP and if to consider indirect contribution 11.3% of the GDP in 2013 according to WTTC. 11.3% is big but 88.7% is bigger. Yet about half of tourism is from domestic tourists.

Don’t forget that every person at the beach or at the mountains will not be at a shopping mall. So shopping malls will need to get shopping mall tourists and not just tourists.

The numbers and the logic above says that tourism will unlikely support traffic density conditions for malls.

The other alternative is to spike the population. However, current trends suggest for a decline in population growth rates to even fertility rates. Again you may use the government’s estimates for this and see the same trends.

Maybe the mall occult should go forth and multiply quickly. And they should do this fast before time runs out and vacancies geometrically expands.

Yet why should the two numbers become irrelevant if we apply them to the bubble industries like the shopping mall? Because people from the industry say so? Because the politicians say so? Because free lunch can last forever and are immune from even basic math?

Bottom line: For as long as the above dynamics as signified by the two numbers remain as the driving force behind the shopping mall economics, the US dead malls and China’s ghost malls will function as an inevitable prototype for the Philippines.

Let me conclude with the allusion that ‘renovations’ has accounted for the current string vacancies as pointed out by a populist crowd in citation of an opinion by an ivory tower expert from one of the bubble industry.

Such quality of response can be analogized by the following:

Here are two senior citizens in a discussion about age.
Senior citizen Pedro: You know, both of us are growing old so…

Senior citizen Juan (interjects and cuts off Pedro): …Me growing old? You must be kidding? You’re wrong. Don’t you see… My hair is still black!



[1] Bangko Sentral ng Pilipinas Domestic Liquidity Growth Eases in January February 27, 2015

[2] Free Malaysia Today Revealed: Jho Low’s hand in 1MDB PetroSaudi deal March 1, 2015 FMT.com


[4] Wall Street Journal China’s Central Bank Cuts Interest Rates February 28, 2015

[5] Bank for International Settlements Highlights of the BIS international statistics BIS Quarterly Review December 2014, December 7, 2014