Saturday, November 30, 2013

Charts: US Stocks and The Greater Fool Theory; No Weekend Stock Market Commentary

I’m taking this week off from my weekly stock market outlook.

In gratitude to my readers, I will leave something for you to ponder on this weekend: Important charts depicting what seems as the greater fool theory in motion at the US stock markets. Remember, what happens to the US will most likely have a domino effect to the world.

Greater fool theory—buying assets in the hope that greater fools will buy the same assets at a much higher price—or as per Wikipedia.org—”a situation where the price of an object is not being driven by intrinsic values, but by expectations that irrational bidders for limited assets or commodities, will set the price”

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Bullishness in investor sentiment has now reached extreme levels (Zero Hedge). The sustained upside movement has only strengthened the convictions of the bulls and the fools, luring more and more of them into a bidding spree.

Yet this appear to be signs of a ‘crowded trade’ where everybody’s "all in" and everyone's expecting higher prices from more fools buying at higher prices (endowment bias). 

Question is but what if there are lesser number of fools to sell to?

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Who could be the fools?

Record US stocks have been driven mostly by retail/household punters (in billion of dollars).

Household buying of US stocks have also reached milestone highs, drifting slightly above the 2000 and 2007 levels (Yardeni.com).

The last 2 times US households furiously stampeded into the stock markets, bear markets followed (see pink rectangles). Remember the crash from the dot.com bubble bust and the US housing mortgage bubble bust? Again household buying has reached "peak" levels of 2000 and 2007.

Question is could the Bernanke-Yellen policies have transformed stocks into a “permanently high plateau” (to borrow from the late economist Irving Fisher)? 

Will this time be different?

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What has financed such bidding frenzy from the bulls and the fools? The short answer is DEBT.

Record US stocks have now coincided with record margin debt.

Margin ‘real inflation-adjusted’ debt has currently surpassed the 2000 levels but has been slightly off the 2007 record highs.

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Margin debt including free cash accounts and credit balances in margin accounts or Credit Balance as the sum of Free Credit Cash Accounts and Credit Balances in Margin Accounts minus Margin Debt  as per Doug Short, which are also at record levels, reveals how punters have increasingly used leveraged to push up stocks to record territory. 

It's more than just margin debt and investor credit. 

Systemic leverage in order to chase yields have been intensifying and broadening, from bond issuance to finance stock buybacks, near record consumer and industrial loans, stratospheric unprecedented levels for commercial real estate lending and more.

What have the bulls and the fools been buying?

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Record stocks comes amidst declining EPS (Business Insider)…
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…as well as record negative over positive eps announcements (Zero Hedge).

All these means that the fools have been chasing multiples rather than eps growth with escalating debt.

Will the current bonanza via a “don’t worry be happy” trade remain in favor of the stock market bulls and the fools?

Perhaps. Depending on how many more fools can be seduced into the frenzied pile up. Mania phases can have an extended period of euphoria. Manias signify the "peak" of the bubble cycles where convictions have been the strongest.

Nevertheless the farther the height of the serial increases, the bigger the accumulation of risk via more debt, the greater the fall.


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Based on the “log periodic” pattern designed by economist Didier Sornette where bubbles reflect on “a widening gap between the increasingly extrapolative expectations of market participants and the prospective returns that can be estimated through present-value relationships linking prices and likely cash flows” current momentum indicates of an accelerating odds of a text-book stock market crash, according to fund manager John Hussman

Well such risks will be discarded and the ignored by the bulls and their fools because stock markets, for them, have been perceived as a one way street: "up, up, up and away!"—courtesy of the Greenspan-Bernanke-Yellen Put, which some believe have worked as an elixir.

At the end of the day, let us see who will be holding the proverbial bag.

Thursday, November 28, 2013

Indonesia Crisis Watch: USD-Rupiah Pierces 12,000 level

The US-Indonesia rupiah pierced on the 12,000 psychological threshold today

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Intraday, the US-IDR closed at the highest level

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Indonesia’s LCY 10 year bonds also fell again at the last minute.

Indonesia’s officials dismissed concern over the rupiah’s unhinging noting that this would “help local manufacturers increase their exports”

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Unfortunately Indonesia’s stock markets hardly seemed to agree as the JCI slipped, albeit modestly.

The falling rupiah which means higher CPI inflation also extrapolates to a significant distortion of economic calculation for commercial or business enterprises. For instance in response to popular clamor, the Indonesian government pushed up minimum wages significantly, although varying at local levels.

Higher minimum wages means an increase in input costs which erodes on any advantage from a weaker currency.

This hasn’t just been an Indonesian story.

Thailand surprisingly cut interest rates yesterday which spiked up local stocks yesterday.

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Unfortunately the zero bound rates policy appears to have only an overnight magical impact as the Thai SET fell by 1% today.

The good news is that the IDR plunge has not triggered a panic. Yet it remains to be seen how ASEAN financial markets will react if the rupiah and or if Thai’s stocks continue to substantially decline. 

Risks remains very high.

Senkaku Islands Dispute: The Risks from Political Brinkmanship

The US, Japan and China appears to be playing a dangerous geopolitical brinkmanship game.

From today’s headlines at the Inquirer.net
Days after China asserted greater military control over a swath of the East China Sea to bolster claims to a cluster of disputed islands, the US defied the move Tuesday as it flew two B-52 bombers through the area.

China, however, insisted Wednesday it has the capacity to enforce its controversial newly declared air zone over islands disputed with Japan, despite Beijing’s reluctance to intervene after American B-52 bombers flouted its rules.

The US said what it described as a training mission was not flown to respond to China’s latest military maneuver, yet the dramatic flights made clear that the US will not recognize the new territorial claims that Beijing laid out over the weekend.
There are several angles I see here

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One these nations have been attempting to promote “nationalism” in order to justify government spending in their respective military industry, to “pump prime” their fragile economies.

If this is true then, then all these has been a smokescreen in favor of pushing the interests of the military industrial complex. (charts above from the Economist)

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Second, since China’s central bank recently signaled that they may be scaling back on purchases of US treasuries (euphemism for financing of the US government which includes the military) because these “does not benefit any more from increases in its foreign-currency holdings”, the US taunting of China’s government at the disputed Senkaku islands could have been implicit threat on the Chinese to sustain such such financing arrangement or else…

As one would note, both Japan and China has been providing support to the US government by cushioning the impact of the bond vigilantes through record UST accumulations.

Based on the US Treasury’s TIC September data, Japan holdings of USTs has spiked to record levels while China’s drifts at record levels

So while we see these countries posture and debate on media, behind the scenes Japan and China appear as coordinating their support to the US government via the bond markets against the bond vigilantes.

So we have a strange case of Dr. Jekyll and Mr. Hyde.

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Third, the three crisis prone governments have earnestly been trying to divert the public’s attention from the real issue.

As shown above (via the Zero Hedge) despite the so-called 7+% economic growth in China, the PBoC has been rapidly expanding her balance sheet faster than the US.

And with unfulfilled expectations for real economic growth, despite the huge ballooning of central bank assets, governments need schemes to distract the public. And geopolitical brinkmanship with major political economies looks like a convenient way to achieve this.

Of course, it could all be a combination of the above


The problem is when games transform into reality.

Philippine statistical ‘bubble’ economy grows as expected

In discussing the convergence trade, here is what I wrote two weeks back (bold original)
The surge in banking loans was equally reflected on domestic liquidity or M3 which grew by 31% year on year.

So the BSP will achieve a $32k per capita income by continually inflating of bubbles via a massive build-up of debt or by borrowing tomorrow’s spending today.

This also means that statistical economic growth for the third quarter will likely remain at 7% or above.
Let us see where the latest (3rd Quarter) statistical growth has been attributed to… [note I will not depend on the NSCB's narration but rather on the data they presented.]

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From the NSCB’s breakdown of the statistical economy based on expenditure type (at constant prices), durable goods powered growth…

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In the durable equipment sector, transportation equipment has been instrumental in the attainment of this quarter’s 'strong' statistical economic growth.

The Transportation sector accounts for 57.8% of the gross capital formation category based on 3rd quarter output. Air Transports reported a stunning 23.9x (times) growth. Meanwhile railway transports posted a 25.2% growth rate and road vehicles grew by a modest 12.9%. Although the above numbers appear to be different here and here

Since the NSCB’s sources of data for transportation and communications are from National Statistics Office (NSO), Land Transportation Office (LTO), Philippine National Railways (PNR), Light Rail Transit Authority (LRTA), Philippine Postal Office (PPO), Philippine Air Lines (PAL), Philippine Ports Authority (PPA) and Department of Transportation and Communication (DOTC), my guess is that airline companies may have added new planes or that the government has acquired non-military planes that has contributed to gist of the growth in the “fixed capital formation”.

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On growth based on industry type, the services sector has again delivered the substance of this quarter’s statistical growth. 

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The services sector has largely been fueled by Financial Intermediation and Real Estate Renting & Business Activities

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Remember this chart where we saw a vibrant revival of banking loans to the same industries during August-September?

Meanwhile the agricultural sector has taken the second spot mainly led by fishing.

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But what of the industry sector which trailed services and agriculture?  (note all of the above are based on constant 2000 prices)

The growth in the construction sector eased while manufacturing took leadership.

Now go back to the chart above from the BSP. One would note of a two month spike in manufacturing loans while construction loans 'dived' over the same period. Trends in the loan growth dynamic have been manifested on statistical growth.


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I’d also like to point out that despite the so-called moderation in the growth rate of construction activities in the 3rd quarter, based on 1st up to 3rd quarter for the past 3 years, slope of growth in the construction activities has been ascending in a near vertical fashion.

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The table above which represents the NSCB’s breakdown on the quarter on quarter growth in construction sector reveals the numbers.

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How about household consumption? Well again, household consumption (via the HFCE), which represents the final demand, has grown less than the overall statistical growth.

In other words, supply-side growth continues significantly outpace demand. The continuing dynamic essentially leads to a widening of the chasm between supply side and demand side growth which extrapolates to an accumulation of more imbalances, brought about by a credit boom from zero bound rates

No bubble?

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The Phisix (chart from technistock) appears to be celebrating what seems much of an expected outcome.

As I said last weekend:
Well the oversold markets will surely experience bounce. Mr Pacquiao’s victory or the coming announcement on Philippine GDP which I expect to be in line with the mainstream’s expectations given the late spurt of credit growth will have little do with it.
Again I’d rather watch what is happening to our neighbors.

The Inflation of Airline Frequent Flyer Miles

In response to the Fed policies, Airline companies in the US have been giving away less services by inflating frequent flyer miles. Or simply put; indirect price increases.

Simon Black of the Sovereign Man explains
Today, millions of passengers in the Land of the Free will take off their shoes and assume the “I surrender” pose inside a radiation machine that provides negligible benefit and maximal cost to taxpayers.

Our modern security theater is a stark contrast to the past. But there’s been something else happening over the last several decades that is even more insidious… and far less obvious.

In 1979, Texas International Airlines (the precursor to Continental) introduced the first modern frequent flier program. American Airlines soon followed, launching their AAdvantage frequent flier program in 1981.

When the program launched, you could upgrade to a first class seat on the Concorde for 20,000 miles (something that you couldn’t even do today). Today, an upgrade to first class between the US and Europe would set you back 50,000 miles, plus $900 in fees.

In fact, just about every mileage award category has been getting more ‘expensive’, particularly among the major US carriers. The majority of the increases have taken place in the last several years.

United Airlines, for example, is raising the number of miles required for most of its awards starting February 1st. The steepest is an 87% increase for first class award seats on United’s partner airlines flights to the Middle East.

A United economy class ticket to Hawaii will increase by ‘only’ 12%. And business class to Europe and Japan will increase 20%.

Just like central bankers with paper currencies, airlines are devaluing their miles.

They have created trillions of miles in the system, many of these through special gimmick promotional giveaways. We’ve probably all seen the ‘sign up for the new credit card and receive 25,000 bonus miles’.

But just like the real economy, rapidly increasing the money supply (airline miles) devalues the currency and creates inflation.

That’s exactly what’s happening here. Airline miles are worth less and less.

Thanksgiving Treat: The Turkey Inflation

In the US and elsewhere, media and their ivory tower experts allege that statistical CPI inflation has been “low”.

But not for the Turkey which will grace the dinner tables of Americans in celebration of Thanksgiving day…

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Notes the Zero Hedge: (bold original)
While shoppers will perceive the discounts on Black Friday as 'saving' them fortunes, the cost of the 2013 Thanksgiving Day dinner may be the most expensive ever. As the gorging commences, despite an entirely benign inflation in the eyes of the Federal Reserve, the prices of everything from chocolate chip cookies to ice cream are on the rise. But it is the centerpiece of the meal that is weighing on pocket-books. As Bloomberg's Michael McDonough notes, Americans are paying the most for whole frozen turkeys since the Bureau of Labor Statistics began publishing data on the series in 1980.
Happy Thanksgiving.

Tuesday, November 26, 2013

Guest Post: Per Bylund on Sweden’s Great Depression

Many myths beholds Sweden’s success story. Some say devaluation has saved Sweden from the crisis in the 1990s, others say it has been the welfare state. Much of the popular misimpressions have left out the most important ingredient: the Sweden’s largely ignored free markets.

During the recent financial crisis, Sweden has emerged as one of very few financially sound economies. The country’s strong position, setting it apart from Western nations, makes it an interesting example of what could—or should—have been done. Indeed, Paul Krugman, the economist and Nobel Prize laureate, has repeatedly pointed approvingly at how the Swedes handled their depression in the early 1990s as the reason for their recent success. Specifically, he notes the nationalization of some banks at the time of the crisis. While he misses the point by focusing exclusively on a narrow selection of short-term measures rather than longer-term changes, as is the hallmark of a Keynesian, Krugman is right that Sweden has done some things right.

In September of 1992 the Riksbank, Sweden’s central bank, raised the interest rate to five hundred (500) percent in a vain attempt to save the fixed exchange rate of the Swedish krona (Sweden’s currency). This drastic measure was taken in conjunction with large spending cuts and tax increases to address the free-fall of the nation’s economy.

The economic meltdown was the culmination of two full decades of decline, and it fundamentally changed the political situation in Sweden.

Since that time, Sweden has, across the board, seen consistent government cutbacks while increasing restrictions on welfare policies, deregulating markets, and privatizing former government monopolies. The country has instituted an overall new incentive structure in society making it more favorable to work. The national debt tumbled from almost 80 percent of GDP in 1995 to only 35 percent in 2010.

In other words, the country successfully rolled back its unsustainable but world renowned welfare state. Despite Krugman’s wishful thinking, this is the real reason for Sweden’s success in riding out the present financial crisis.

The Rise and Fall of the Welfare State

Sweden experienced a century of high economic growth from approximately 1870 to 1970, which literally made one of Europe’s poorest countries into the world’s fourth richest. The first half of this period of growth was marked by extensive free-market reform, and the latter half is notable for Sweden’s staying out of both world wars and thus benefiting from intact industrial infrastructure when the rest of Europe lay in ruins. While a welfare state was established and expanded during the post-war period, it was generally built around capitalist institutions and therefore had limited impact on economic growth.

But the political situation changed. The 1970s and 1980s saw a welfare state run amok with a greatly expanded scope with new government benefits, the introduction of very rigid labor market regulations, active propping up of stagnating sectors of the economy, and drastic increases in tax rates with some marginal rates in excess of 100 percent. In an attempt to fully nationalize the economy, löntagarfonder (“employees’ funds”) instituted in 1983 to “reinvest” private companies’ profits in stock ownership and to be administered by the national labor unions.

During this period government deficits abounded and the national debt increased almost ten-fold from 1975 to 1985. Sweden also saw high price inflation, a situation aggravated by repeated devaluations of the currency’s exchange rate to boost exports: in 1976 by 3 percent; in 1977 by 6 percent at first, and then an additional 10 percent; in 1981 by 10 percent; and in 1982 by 16 percent.

Overall, the rapid expansion of the welfare state can be illustrated by the ratio between tax-financed and private sector employment, which rose from 0.386 in 1970 to 1.51 in 1990. Sweden was heading for disaster.

Explaining Sweden’s Great Depression

A popular explanation of the meltdown in the 1990s blames deregulation of the financial markets that occurred during November 1985. But as our research (still in progress) suggests, deregulation was an attempt to solve increasing problems to finance the Swedish government’s already weak and deteriorating financial situation. In the fiscal year 1984–85 alone, the interest payments on Sweden’s national debt amounted to 29 percent of tax revenue—equal to the government’s total spending on social security. The country’s unsustainable financial situation made deregulation necessary.

The increased access to financial markets made a desperate situation somewhat more tenable. But Sweden then experienced an immense increase in credit. Our numbers show that the volume of bank loans to non-financial businesses increased from 180 billion in late 1985 to 392 billion in late 1989, an increase of 117 percent total or 21 percent annually Where did all this money come from? Some of it can be explained by deregulation and the inflow of funds that followed. But it was also made possible by monetary inflation.

Several factors were at work during the 1986–1990 credit-infused boom that ended in the depression of 1990–1994. Some factors had no inflationary effect or even a deflationary effect, but other factors, especially those that relate to government policy, or are driven by government policy, were strongly inflationary and quite substantial

These include increases in the Riksbank’s advances to banks (a 975-percent increase from 1985 to 1989) and purchases of government debt and securities (a 47-percent increase from 1985 to 1987, followed by a 7-percent decrease from 1987 to 1989).

Sweden is an interesting case to study. We do indeed, as Krugman repeatedly tells us, have much to learn from it: from the long-lasting era of economic growth thanks to free markets to the rise and fall of the welfare state. The country’s recently (re)gained financial strength and its ability to resist a global recession are due, not to a strong welfare state as Krugman claims, but to the long-term rolling back of the expansive welfare that Keynesians so often praise

Indonesia Crisis Watch: Rupiah Falls to New Lows, JCI drops 2.3%

The 11,730 USD-rupiah resistance level didn’t hold for long.

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Today the US dollar-rupiah closed to a fresh 5 year high at 11,765 after hitting 11,798 intraday.
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The yield of the Indonesia’s sovereign 10 year bonds was marginally up (one basis point) though.

But activities in the domestic bond market barely explained of the weakness of the rupiah.

Early today, Indonesia’s government reportedly failed to raise a targeted $450 million in dollar bond sales. The government settled with only $190 million. This comes even when coupon yields had been priced higher or “at a weighted average yield of 3.51671%, about half a percentage point higher than a bond with a similar maturity that Indonesia had earlier sold overseas” according to the Wall Street Journal

This meant that the markets expected much higher yields than what the Indonesian government had been willing to offer. So the failed expectations by Indonesia's bond market may have been vented on the rupiah (via outflows).

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Meanwhile the weak rupiah seems to have been transmitted to Indonesia’s stocks where the benchmark JCI got bludgeoned by 2.3%. And as shown above, the gist of the losses by the JCI occurred at the session’s close.

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ASEAN stocks has been largely mixed today amidst the rupiah's weakness.

The Phisix ended its 6 day losing streak with a last minute rally. 

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After spending most of the day on the red, the Phisix closed .35% higher. Curiously, opposite to the JCI, gains in the Phisix had been due to a last minute spike (technistock.net)

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Given the lopsided advance (51) decline (111) spread (-60) and the mixed sectoral performance (PSE), today’s rebound appears to have been ‘centered’ on a few heavyweights. This may have been due to entities desperate to see a higher Phisix. 

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Incidentally the Philippine bellwether closed 1.32% Monday a day after Manny Pacquiao’s victory.

A win by the legendary Pacquiao supposedly would have lifted the market’s sentiments. Yet despite the statistical data used to “prove” such postulations where Pacquiao’s triumph should have meant higher stocks since stocks rose by 73% of the time (frequency) backed by .5% gains (scale), apparently Pacquiao’s win became a black swan or an outlier event.

This validates my view of the tendency by so-called experts to use the current events--via the availability heuristic, resorting to pattern seeking methods and appealing to emotions--to justify personal biases and to satisfy public demand for simplistic explanations.

Yet such events turn about to be largely irrelevant or diversionary noises.

Monday, November 25, 2013

Video: Mark Thornton on Real Economic Growth versus Statistical Economic Growth


"Don't be fooled by GDP (3:17)...you've got to be leery of statistics (4:14)"


Phisix: Are ASEAN Markets Signalling Trouble?; More on Typhoon Yolanda

My concluding statement in the epilogue section of last week’s reports looks prophetic. I wrote[1],
If the Philippine market does experience a convulsion in response to a possible deterioration of regional conditions, expect Typhoon Yolanda to be a favorite scapegoat.
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Equity benchmarks of the region had been mostly lower this week, with Thailand’s SET and the Philippine Phisix posting losses of over 4%.

The Typhoon Yolanda Bogeyman

Yet some examples[2] of Typhoon Yolanda as post hoc scapegoat “Investors were on profit-taking mode following the downgrade of the country's economic outlook because of the impact of Typhoon 'Yolanda'” ; “adding to those worries was the gradual stream of reports indicating the cost of damage due to Typhoon Yolanda” and “Typhoon has provided overseas investors a good excuse to continue taking profit.”

The other issue rationalized as contributing to the loss in the Phisix has supposedly been concerns over the Fed’s “tapering”.

As an update, estimated damages tallied by the National Disaster Risk Reduction and Management Council has now reached P22,659,851,383.76[3]. This would represent 53.7% of the Php 42.2 billion economic costs by the reigning “most destructive” storm to hit the Philippines, Typhoon Pablo. Typhoon Yolanda currently ranks third after Typhoon Pablo (December 2, 2012) and Typhoon Pepeng (October 2-10, 2009). My guess is that we will know whether Typhoon Yolanda will surpass the degree of devastation by Typhoon Pablo possibly by next week which I believe should spotlight the peak of the damage assessments.

Despite the “Typhoon equals lower stocks” meme, as I have pointed out last week and two weeks back, empirical evidences exhibits a smidgen or an iota of causal relationship between Typhoons and the stock market performance or even the economy[4].

But obviously, conducting meaningful investigations to establish realistic representations has hardly been a concern for “experts”, instead the same “experts” simply feed on the public’s desire for popular convenient excuses regardless if such relationship stands on tenuous grounds.

In the context of behavioral science, ‘experts’ employ availability bias[5]—ranking of importance of information based on easiest to be recalled—to satisfy the demand for confirmation bias of the gullible public.

Nevertheless Typhoon Yolanda has snared the lead from Typhoon Uring (November 4-7, 1991) as the “deadliest” of all Typhoons to have hit the Philippines. As of the latest count, Typhoon Yolanda has claimed 5,235 lives with 1,613 missing[6]. If we add missing to the death count this adds to 6,848.

As far as Typhoon classification goes, “deadliest” has not necessarily equated to “destructive”, so far only Typhoon Yolanda has been running consistent on both categories.

More Politicization of Typhoon Yolanda

Last week, I also pointed out how the popularity addicted Philippine President scoffed at projections of 10,000 casualties from the storm saying that such estimates have been ‘too much’. At an interview with a foreign media outfit, he publicly insisted on a range of 2,000-2,500 as maximum fatality count. He even sacked the Police officer who gave the initial estimates.

Within the week, the National Disaster Risk Reduction and Management Council (NDRRMC) reportedly stopped the death count due to changes in “the policy on accounting”[7] as the death estimates surpassed the 4,000 level, but immediately reversed this on public clamor. The NDRRMC chief denied “receiving orders to stop releasing the death toll” or the involvement of politics[8].

Has insisting on a statistical threshold and the sacking of the Police officer not been an act of politics?

With the death count careening farther away from the President’s estimates and fast approaching the 10,000 estimates, will the Philippine President reinstate the Police officer and or make a public apology? How about if the deaths reach 10,000, will the President resign?

By publicly announcing a threshold level, not only does this reveal of the administration’s PR Public Relations gaffe, this unfortunate and sordid event exposes on the administration’s obsession for approval ratings, where as noted above, reports showed of an attempt at the suppression of the official death count via censorship.

This essentially highlights the administrations use of Joseph Stalin’s “a single death is a tragedy a million death a statistic”. 

Where every death is a tragedy, even more tragic is the use of disasters to promote political self-interests.

And politicization hasn’t been exclusively the realm of the Presidency, this applies to other officials such as the Vice President as well as spouse of an incumbent official whom have reportedly used political “branding” in the distribution of relief goods[9].

ASEAN Currencies: Signs of Trouble Ahead?

Also in the closing segment of last week’s report I warned that instead of focusing Typhoon Yolanda we should rather be vigilant on the activities within the region
I would rather be watching two neighbors, Indonesia and China, who seem to be experiencing re-emergent signs of financial market ‘tremors’ which poses as potential risks for a shock…

The last time the rupiah hit a milestone this coincided with the turmoil in the ASEAN financial markets.
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Figure 1: ASEAN-4 Currencies

ASEAN currencies have been enduring re-emergent signs financial pressures see figure 4.

Within the week, the USD-Indonesian rupiah (via one year chart, see Figure 1) breached the September highs to set fresh milestone. Last Friday, the USD rupiah closed at a 5-year high.

The Philippine peso has also manifested signs of renewed weakening against the US dollar. The Peso fell .4% this week and closed Friday at June highs. The peso has been in consolidation since the Fed’s UN-taper from September through the first week of November.

The Malaysian ringgit and the Thai baht has equally been losing ground against the US dollar.

Going back to the Peso, the Bangko Sentral ng Pilipinas reported net foreign portfolio inflows in October at US$969 million which has been “much higher than the US$683 million recorded in September and US$40 million a year ago.”[10] Foreign money flowed into PSE-listed securities (52.6 percent), Peso GS (44.0 percent) and Peso time deposits (3.4 percent).

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Figure 2: Net Foreign Portfolio Flows (BSP)

The data I accumulate via daily PSE quotes reveals of net selling (Php 7.545 billion) which varies from the BSP October figures. Given the benefit of the doubt that my data may not be reliable, it’s seems unusual to see the Peso firming by a marginal .75% in October when in September a much smaller portfolio inflow resulted to a 2.4% gain in the Peso. The red circle shows of the net foreign portfolio flow last October (Figure 2) at US $969 million as against the $682.72 million last September.

Aside from statistical reporting difference or anomalies, could this underperformance by the peso have been due to the BSP’s selling of US dollar Gross International Reserves in October (which resulted to a lower US $.1 billion to $83.4 billion[11]) or could the private sector residents accumulated on US dollars to enough offset these alleged substantial foreign net inflows?

The recent bout of infirmities in the peso has already began to hamper “earnings growth” conditions of many publicly listed firms such as San Miguel Corporation[12], Aboitiz Power[13] and parent Aboitz Equity Ventures[14], PLDT[15], JG Summit[16], Philex Petroleum[17], Cebu Pacific[18], Energy Development Corp[19] and Atlas Corporation[20]

Though the extent of impact varies from company to company, earnings impairment from foreign currency losses—due to one quarter of currency volatility—exposes on the vulnerabilities of these companies to currency risks due to foreign currency debts. As I have been pointing out, zero bound rates have impelled many publicly listed companies to increase leverage exposure, many of them on foreign exchange debentures.

The 64 billion peso question is what if the peso continues to fall further? How will these impact the earnings of these companies? Will the recourse be more borrowing to offset the losses and hope for a peso recovery? What if foreign liabilities become substantial enough to put credit quality on the line?

The ASEAN 4’s currency frailties signify just one of the aspects.

Bond Vigilantes Harries ASEAN Bond Markets

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Figure 3: ASEAN-4 10 Year Local Currency Bonds

The global bond vigilantes have been romping at the ASEAN 4 except the Philippines.

The 5 year high in the rupiah has been reflected on Indonesia’s sovereign 10 year bonds whose yield fast approaches (24 basis points away from) the September highs.

Malaysia’s 10 year bond yield has just been 5 basis points away from the July high at 4.14%.

Yields of Thailand’s 10 year bonds have likewise been soaring and now signify just 19 basis points away from the August highs.

Philippine 10 year bonds remain in a temporary tranquil state.

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Figure 4: ASEAN Debt Outstanding

And with ASEAN debt inflation as the principal engine of economic growth, rising rates will increase the cost of servicing debt, prove to be an obstacle to present debt based growth dynamic (by slowing expansion and diminishing demand) while at the same time increasing credit risks.

Let me cite an example. The third quarter rampage by the bond vigilantes in Thailand has tellingly slowed the Thai statistical economy which grew 2.7% on an annualized basis.

From the Wall Street Journal Real Time Blog[21]
The NESDB — the government’s economic planning agency — blamed the weaker-than-expected results on falling household spending and consumption after the expiration of the government’s First Car tax rebate last December resulted in a significant drop in auto purchases. Declining farm income and weaker consumer confidence also hurt consumption.

Growth was also hurt by a slowdown in construction, a fall in machinery and equipment investment, a slow recovery in global demand for Thai goods and sluggish shrimp production owing to an unresolved spread of a disease among shrimp stocks.
Go look at the Thai bond yields during the 3rd quarter on figure 3. Rising yields and the falling Thai baht or the volatility spike in Thai’s financial market has apparently crimped on the Thai economy. The article omits mentioning this.

And ASEAN’s debt profile as shown in Figure 4[22] reveals that the region’s debt distribution has been asymmetric. 

While Thailand and Malaysia have been both vulnerable to household debt, the risks to the Philippines have been in the financial sector which has been the primary source of funding for the government and non-financial institutions while household debt represents a speck of the overall. 

As a side commentary, this is what the mainstream fails to see: How the banking and financial system in the Philippines have been ‘concentrated’ to a few, given the still low penetration levels of banking access and credit access in the household level, despite the so-called boom.

So when the Philippine government issues statistical growth, they tend to exaggerate economic activities in the formal sector as representative of the whole. These numbers hardly account for the huge part of the Philippine economy which remains informal.

Based on the definition of the informal sector by Wikipedia, “not taxed, monitored by any form of government, or included in any gross national product (GNP), unlike the formal economy”[23], this means that many segments of the Philippine economic data are subject to substantial statistical errors.

Meanwhile, Indonesia which presently has been the focal point of ASEAN’s weakness, oxymoronically has generally, the smallest exposure on debt. 

Two insights we can see from the recent developments.

One the level of debt tolerance has not been relatively based, as fallaciously argued by some officials and mainstream experts defending the current credit boom, but on creditor—per country relationship basis.

Two, while Indonesia may function as catalyst for a potential crisis, Thailand and Malaysia appear to be even more vulnerable to a sudden shift in the confidence levels of creditors.

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Figure 5 ASEAN LCY Bond Foreign Ownership

Figure 5 reveals how fragile or how ASEAN bonds are sensitive to foreign sentiment, given the substantial level of foreign ownership of local currency bonds. Foreign money accounts for nearly 30% of local currency bonds in Indonesia and Malaysia while Thailand has about 15%.

Given today’s global wild and rampant yield or momentum chasing activities, combined with massive cumulative build-up of economic distortions from central bank policies, sudden shifts in foreign sentiment may spur extensive dislocations in the marketplace again exposing all the amassed imbalances.

The Philippine contemporary, as previously discussed has been a relatively closed and illiquid market. As I wrote in September[24]
The investor profile of the domestic bond market reveals of a seeming proportional distribution of the outstanding bonds between the resident private sector institutions and various domestic government agencies. In other words, the Philippine government and their private sector allies have been able to ‘manage’ bond markets.
This doesn’t mean that closed and illiquid markets serve as free passes for bubbles. If ASEAN markets will undergo sustained turbulence, there will most likely be a spillover to Philippine bond and financial markets. Since the Philippine bond markets have been grotesquely mispriced, I expect the volatility in the bond markets to be magnified.

ASEAN’s financial turmoil will be evinced by extended episodes of liquidity shortages that will expose on accrued malinvestments concealed by the recent boom. Companies desperate for funding will frantically compete from the diminishing pool of supply amidst dramatically receding confidence and a shift to fear. Such dynamic will eventually force up domestic bond yields at a rate even faster than the more liquid counterparts.
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Figure 6 Indonesia’s yield curve

Indonesia’s rapidly flattening yield curve seems like a good example see figure 6[25].

Above, I pointed on how Indonesia’s 10 year yield seems to be swiftly approaching September highs. But the flattening yield curve reveals that short term yields have been rising more hastily than the longer end. This is a sign of an advancing stage of a liquidity crunch. The liquidity crunch will be magnified when yield curve inverts. Inverted yield curves have usually been accurate indicators of recessions or crisis. 


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Figure 7: ASEAN Default Probabilities

Indonesia’s rising bond yields and speedily falling rupiah have also been reflected on the default risks via 5 year Credit Default Swaps (CDS) Probability of Default (PD)[26].

While Indonesia’s annualized probability of default 3.3% (based on recovery rate of 40%) is far from Argentina (15.6%) or Venezuela (12.8%), we seem to be seeing a formative upside move. 

Meanwhile ASEAN’s bond vigilantes have yet to influence the CDS default probabilities of Thailand, Malaysia and the Philippines. Nonetheless ASEAN’s CDS probabilities remain elevated relative to the pre-Abenomics levels which demonstrate languishing concerns over financial stress.

ASEAN Stock Markets: Patterns and Pairs

This leads us to the stock markets.

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Figure 8: Clustering Illusions? Phisix-SET and the Nikkei

I bring up again the peculiar similarities in figure 8 first between the Philippine Phisix (upper left window) and Thailand’s SETI (upper right window).  Since the start of the year the Phisix-SET has acted in an uncanny resemblance with each other. This can be identified through their recent inflection points (green arcs). Well this week’s near identical fall 4+% seems even creepier. 

A second bizarre pattern can be traced to the similitude of the Phisix-SET with Japan’s Nikkei 225 during the latter’s boom bust transition over a 10 year period (red rectangle). While the Nikkei’s pattern may not be as precise as the Phisix-SET, the Nikkei’s chart exudes of a full scale bear market that followed a manic boom.

The likeness of the Phisix-SET and the Nikkei can be seen via the major inflection points as highlighted by the green arcs.

While I hardly am a believer in chart patterns, my question is will a repetition of the Nikkei’s pattern be expressed via the Phisix-SET? Considering the similarities in the extensive build up of systemic debt (although distinctly distributed), I guess the answer will entirely depend on the bond vigilantes.

And compared to the earlier surges in ASEAN bond yields, where ASEAN stocks responded forcefully as seen via sharp volatilities, today’s stock market actions seem to be more subtle and partially different.

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Figure 9 ASEAN stocks: Malaysia’s KLCI Indonesia’s JCI and Singapore STI

Aside from the seemingly steep deterioration in the nearly self-same Phisix-SETI, Indonesia’s JCI seems to be in a slow but steady decline see figure 9

ASEAN stocks go against Malaysia’s KLCI, ASEAN’s odd man out, which recently even etched record highs. Malaysia’s flagging bond markets and the falling ringgit have only dented the KLCE marginally.

Meanwhile the ASEAN developed economy equity market benchmark of Singapore, via the STI, uncharacteristically seems to approximate movements of Indonesia’s JCI. The inflection points of JCI-STI again reveals of the noteworthy similarities

So ASEAN equities appear to trade in pairs: Singapore’s STI-Indonesia’s JCI and Philippine Phisix-Thailand SETi

As a side note Singapore’s 10 year bond markets and currency, the Singapore Dollar, seem to also exhibit signs of relapse.

Will Malaysia’s KLCI lead the rest of ASEAN out of the woods? Or will the bond vigilantes spoil the KLCI’s party and bring her to tow the line along with the rest of her neighbors?

ASEAN’s Fed Taper Bugaboo

Aside from the Typhoon Yolanda bogeyman, I find comments by highly paid local “experts” attributing the relative underperformance of ASEAN equities on the Fed’s taper as signs of cluelessness.

When outgoing Fed chief Ben Bernanke surprised the markets heavily expecting a tapering with an UN-taper last mid-September[27], the rebound in ASEAN markets failed to keep pace with advances counterparts in the US, Europe and Japan and eventually faltered. Then tapering was off the table but ASEAN markets floundered and disappointed.

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Figure 10: Yardeni.com Retail Investors Leads the Yield Chasing Momentum[28]

Recently incoming Fed Chairwoman Janet Yellen has signalled continuity of Bernanke’s dovish policies or the retention of easy money environment. This has been celebrated by stock market participants who pumped US stocks to a Wile E Coyote running off the cliff momentum[29]. Unfortunately ASEAN markets fumbled anew

Retail investors have been piling up on US stocks see figure 10

While there have recent been chatters over the Fed’s taper, “tapering” will hardly be a reality soon, particularly for a steroid asset bubble dependent economy. This also means the Fed’s taper has hardly been the current source of ASEAN’s sustained underperformance.

As far as June 2013[30], I have been saying that the Fed’s tapering signifies a “poker bluff”, as yields of US treasuries have been rising since July 2012. Even Mr. Bernanke’s QE 3.0 in September 2012 failed to stem the rising yields.

Here is what I wrote[31]
But treasury yields have been rising since July 2012. Treasury yields have been rising despite the monetary policies designed to suppress interest rates such as the US Federal Reserve’s unlimited QE in September 2012, Kuroda’s Abenomics in April 2013 and the ECB’s interest rate cut last May.

Rising treasury yields accelerated during the second quarter of this year, which has now been reflected on yields of major economies, not limited to G-4.
Mr. Bernanke’s tapering bluff was called last September.

Aside from tapering expectations, rising rates of US treasuries (USTs) have been partly reflecting on a combination of the following factors 

-inflationary boom gaining traction which has spurred accelerating demand for credit thus pushing up interest rates.

-erosion of real savings or the diminishment of wealth generators or growing scarcity of real resources due to the massive misallocation of resources prompted by central bank inflationist policies.

-diminishing returns of central bank policies where continued monetary pumping has led to higher rates.

-inflation premium, despite relatively low statistical CPI. Perhaps markets have been pricing inflation of asset bubbles

-growing credit risks of the US government

-Triffin Dilemma or Triffin Paradox[32] where improving US trade deficits have been reducing US dollar liquidity flows into the global economy.

As for the underperformance by ASEAN, such has been partly been in response to the above dynamics combined with the possible peaking of internally generated “homegrown” bubbles as manifested by the unsustainable convergence trade[33]

I even find signs of massive denials and intensifying desperation by experts to even seek a Manny Pacquiao victory in the hope that such would boost the domestic stock market[34].

Well the oversold markets will surely experience bounce. Mr Pacquiao’s victory or the coming announcement on Philippine GDP which I expect to be in line with the mainstream’s expectations given the late spurt of credit growth will have little do with it.

As shown above the actions of the Phisix appear to be anchored to the developments of her neighbors. This means that the region recovers and the Phisix will rise with the tide or a tsunami will sink all boats.

In my view risks seems very high and will continue to do so for sometime.






[4] See Typhoon Yolanda and the Phisix November 11, 2013







[10] Bangko Sentral ng Pilipinas Foreign Portfolio Investments Yield Net Inflows in October November 14, 2013

[11] Bangko sentral ng Pilipinas End-October 2013 GIR Stand at US$83.4 Billion November 7, 2013

[12] Businessworld Online Forex losses weigh on San Miguel November 11, 2013


[14] Inquirer.net Aboitiz reports 8% decline in net income October 30, 2013

[15] Businessworld Online PLDT profit growth sustained as of Sept. November 5, 2013

[16] Manila Bulletin Forex losses trim JGS’ net income November 11, 2013





[21] Wall Street Journal Real Times Economic Blog Thai Economy Disappoints and More Risk Ahead, November 19,2013

[23] Wikipedia.org Informal sector





[28] Yardeni.com US Flow of Funds: Equities November 22, 2013