Monday, December 14, 2015

Phisix 6750: Update on the Seven Reasons Why the PSEi is Headed South! Why The Popular Clamor for a Strongman Rule is a Bubble

The key to understanding fascism is this: It preserves the despotic ambitions of socialism while removing its most politically unpopular elements. In an atmosphere of fear and loathing, it assures the population that it can keep its property, religion, and faith — provided all these elements are channeled into a grand national project under a charismatic leader of high competence. — Jeffrey A Tucker

In this issue
Phisix 6750: Update on the Seven Reasons Why the PSEi is Headed South! Why The Popular Clamor for a Strongman Rule is a Bubble
-Phisix 6,750: Worsening Technical Damage
0Shriveling Peso Volume and Market Breadth Risk Aversion!
-The Liquidity Factor: Bond Yield Inversion Spreads
-Headline Fissures: Manufacturing and Export Recession
-Philippine GIRs Bolstered by Swaps? Official Labor Market Improves as Online Jobs Dive!
-External Influences: Asian Currencies Wilt as China’s Yuan Revalues, Global Stocks Tank
-External Influences: Stampede Out of US Junk Bonds Spur Suspension of Client Redemptions in Two Funds!
-Philippine Politics: Why the Popular Clamor for a Strongman Rule is a Bubble

Phisix 6750: Update on the Seven Reasons Why the PSEi is Headed South! Why The Popular Clamor for a Strongman Rule is a Bubble
At the close of September, I enumerated SEVEN reasons why mainstream’s wishful thinking of a Santa Claus rally represents a delusion1: massive technical chart damage, thinning volume unsupportive of bids at present levels, deterioration in market breadth, shriveling market liquidity, foundering headlines, flagging Asian currencies and global stocks under selling pressure.
This has not been meant to be a gloat but have been intended to provide an update of the conditions as stated above.
First some quick numbers. PSEi weekly performance as of December 11th: Down 2.7%. Year to date: NEGATIVE 6.85%. From April 10’s 8,127.48: NEGATIVE 17.13%. From the close of September at 6,893.98: Down 2.35%
There are still about 10 trading days left until the close of the year, so anything can still happen.
So let me revert to the 7 premises.
Phisix 6,750: Worsening Technical Damage
First, Grave Technical Damage.
The two week pattern of running in circles or a very tight range marked by strong opening and weak closing was apparently broken this week.
For the entire week, the domestic benchmark found itself plodding to maintain the 6,800-6,900 levels in the face of rapidly thinning volume. Eventually, the low volume sessions paved way for the buyers to relinquish to selling pressures.
Interestingly, not even buoyant US markets of the previous Friday inspired the bids at the week’s start.


So with anemic bids, the sellers ruled. With this week’s 2.7% drop, the PSEi now trades at July 2014 levels! (So much for the three month short lived raucous ranting and crowing about ‘this time is different’ pipe dream celebrations especially at the internet circles)
As I have been stating here, I am not a fan of charts. But because charts have served as key guiding instruments for most retail and institutional accounts then understanding their psychology matters.
Yet the PSEi chart above points to critical conjunctional foreboding developments. Or developments that seem to converge to herald a MASSIVE topping process.
First of all, trading range breakdown.
The three month and two weeks old trading range marked by the 7,285 resistance and the 6,790 support appears to have been encroached upon for the second time in barely month. The initial test was on November 16 when the PSEi closed at 6,772.92.

Yet at Friday’s 6,735, the second infringement has considerably been deeper. And a sustained breakdown of which risks large downside price movements. The difference between the resistance 7,285 and support 6,790, or 495 points will serve as the next guide for the new low—6,295!

Second, what seems as this week’s trading range breakdown, was apparently highlighted by a HUGE descending triangle pattern!
Since April’s 8,127.48, the PSEi has carved out a series of lower highs while finding its ephemeral base at 6.790 following the August 24 meltdown (see red trend lateral and horizontal trend lines).
Investopedia notes that a breakdown of descending triangles signifies “a clear indication that downside momentum is likely to continue or become stronger”2

 Moreover, as clue to depth of the intensifying downside momentum, Investopedia adds that the “most common price targets are generally set to equal the entry price minus the vertical height between the two trendlines.”
So the difference between 8,127 and 6,790 or 1,337 would account for the vertical height. Hence, the price target, according to the descending triangle pattern, would be 6,790 (breakdown price) MINUS 1,337 (vertical height) for the PSEi to crash at 5,453!!!

5,500! That’s if the pattern will self-fulfill or materialize.
Third, portentous HEAD and Shoulders (H&S) patterns plague the headline chart.

I see two possible H&S formation: a minor (the recent 3 month old) and a major one (one year and 5 months) as noted by the green curves.
As bearish indicator, the H&S simply suggests of the failure of momentum, represented by the right shoulder, to bring about new heights relative to the previous highs (Head).

And the breakdown of the neckline or the crucial line that connects the two recent lows, translates to bearish momentum taking over from the failed upside dynamic.
And according to Stockcharts.com3, “The slope of the neckline will affect the pattern's degree of bearishness—a downward slope is more bearish than an upward slope.” 
This week’s actions have yet to break the necklines marked by the violet downtrends. I estimate the neckline of the major H&S at 6,720 and the minor one at 6,675.
But the necklines are characterized by downslopes—degree of bearishness—with the minor neckline having a steeper downslope.
Additionally, price targets following a break of the H&S neckline, as described by stockcharts.com, “After breaking neckline support, the projected price decline is found by measuring the distance from the neckline to the top of the head. This distance is then subtracted from the neckline to reach a price target. Any price target should serve as a rough guide, and other factors should be considered as well.”
Hence, a breakdown from neckline entails that the two distances (top minus neckline): 1,407 (major) and 610 (minor) would translate to the Phisix at 5,383 and 6,180!
The Phisix major H&S neckline would have already been broken had it not been for the price fixers or market manipulators, whom pumped Ayala Land by a stunning 1.6% (lower left column from colfinancial) during the last minute, to mitigate the headline losses for the day. With a market share cap of 8.93% (as of December 11), ALI represents the second biggest PSEi component.
The ALI ‘marking the close pump’ lifted the Phisix, which was down by about 101 points or 1.5%, to close by only 1.25% lower (right chart from Bloomberg). On Friday, ALI closed up 2.6%, which means 61% of the day’s gains came from ‘marking the close’ actions of price fixers!
Yes, price fixers continue to plow on their resources, which are likely fiduciary money owned by third party entities, to what seems as a losing cause. Yet the lower the PSEi, the bigger the losses, the lesser access to new money for headline manipulations.
Curiously the ALI marking the close pump came even as stock prices of the lesser peers suffered a brutal carnage: Robinsons Land (RLC) was clobbered 4.63% on Friday, crashed by 10.12% for the week, while Megaworld (MEG) got smoked by 3.23% and tanked by 7.49% over the week.
And the irony: RLC suddenly found itself at the portal of the bear market just after having a new record high at 31.9 just last October 27 or 1 month and 2 weeks after!
All these suggest that since end of September, the technical picture of the headline index appears to be worsening.
And current developments CONFIRM on my warnings during post August 24 meltdown where I noted that crashes have not been isolated events and would lead to new lows similar to 20134:
 ONE day panics have not usually signified an isolated incident.
One day panics are usually followed by another crash, or a string of crashes or by an eventual weakening or a combination thereof.
Shriveling Peso Volume and Market Breadth Risk Aversion!
SECOND, volume in support of the bids at present levels continues to substantially attenuate, and THIRD, despite the wild pumps on SOME third tier issues, general market breadth remains tilted towards risk aversion!
As I have been repeatedly been pounding here, crashes hardly occur because they are random events, instead crashes happen because they represent drastic responses to embedded imbalances in the system. Those fantastically or ridiculously mispriced assets such as PBVs, as I showed last week, have signified one of the many symptoms of deep seated imbalances.
The reversal of the easy money environment PLUS changes in expectations brought about by increasing recognition of these factors has helped reduce risk appetites from which has been revealed through market actions, aside from prices, through volume, and market breadth.
As the left chart in the above shows, the average daily Peso volume has been in a steady decline since the start of the year! Paradoxically, April’s new record at 8,127.48 came even as Peso volume had been suffering from chronic erosion!

Peso volume last Friday has dropped to Php 5.293 billion, the lowest for the year and a level seen last in January 2014.

Dwindling volume in the face of this week’s losses means that the bids have been losing ground in support of prices at previous 6,800-6,900.

And for current levels to hold, this has to be matched by a material increase in volume, or else, more downside can be expected.
Market breadth has also been in a marked deterioration from the start of the year. The blue rectangle in the right chart above shows that the advance decline spread provided NO support to April’s new record at 8,127.48. That’s because, except for few instances, the advance decline spread hardly moved in favor of advancers. Instead, declining issues dominated BOTH pre-April and post April records.

And those selective spikes of advancing issues during the post record have only manifested severely oversold general conditions.
And further proof of this has been that about HALF of the issues were in bear markets when the new milestone had been attained. And because there had been a few participants, the April record had then been a product of rotational pumps of 10 of the 15 biggest market cap issues.

In short, the April record was a mostly a product of manipulation, thereby a phony landmark high.
It was a record designed to achieve headline effects (even as most of the PSE universe had been in a swoon)! Perhaps this may have been done to put into spotlight the Philippine president’s visit to the PSE.
Apparently market manipulations have become so addictive that such that even through the current downturn, price fixers continue to with their chores…unfortunately against their designs.
And as belatedly discovered, when the PSE hit a new record last April, the lackluster performance of the broader market essentially reflected on the contraction of both PSE’s 2Q NGDP and income!
Such facts, being politically incorrect, had been censored, purged and denied out of existence by the PSE and by the mainstream media.

Yes, the topline performance of the PSE contradicts government data on GDP (specifically NGDP)!
Yet last week’s rout only reinforced an existing dynamic.
All sectors, except the property sector helped by the ALI pump, were in a FREE FALL.
Yet the service sector bore the brunt of last week’s losses. And this was due to the hemorrhaging of Telco companies, PLDT (-7.85%) and GLO (-9.04%), the port management titan ICT 9-2.57%) and casino BLOOM (-14.86%)

Among the 30 composite issues only 4 registered gains this week. That’s against 26 firms which posted losses. So the 26-4 signifies a lopsided performance in favor of the sellers.
The PSE’s spectrum of listed issues also shared the same sentiment. Losers trounced gainers by a huge margin of 271, the second largest for the year. All 5 trading days had been dominated by sellers.
So through the end of September—from chart formations to price actions to market internals—ongoing developments at the PSE points to further degradations. That’s unless volume increases in support of price actions, helped by the broader participation to represent the return of risk appetite.
The Liquidity Factor: Bond Yield Inversion Spreads
FOURTH, overall market liquidity has been shrinking…
 

Risk aversion has likewise been reflected on other market activities. The growing slack in peso volume, predicated on slumping prices, have also been manifestations of shrinking liquidity. And when sentiment languishes and expressed through actions, these can be seen on other market activities such as daily trades and traded issues. Both factors can be seen as in corrosion.
The above represents PSE liquidity.
The more important variable is FINANCIAL liquidity which has underpinned the G-R-O-W-T-H illusions that has pillared the current asset bubbles.

ADB’s favorite indicator the spread of 10yr-2yr has fallen to a mere FOUR basis points. Or four basis points shy of a critical inverted curve.

More importantly, stunningly the inverted 10yr-3yr spread has been THREE weeks old! Why haven’t the manipulators been forcing a widening of its spreads???
Notice that this HAS NOT been a HOLIDAY induced phenomenon as some would like to think. Both spreads have been on a downtrend since November 2014, when I started gathering the data. Though both spreads has somewhat widened during mid-2015, to peak in July for 10yr-3yr and in August for 10yr-2yr, both have swiftly relapsed to their current respective flattening trends. And worst, they are in the process of inversion!
Such flattening to inversion process can be extended to the Philippine Treasury bills!
Both 10yr-6months and 10yr-1 month bills have been narrowing since November 2014. Apparently interventions which began in April have forced volatility in the activities of both spreads.

Unfortunately, those intrusions or manipulations have once again failed to accomplish a sustained widening. Instead, 10yr-6months spreads have dropped to its lowest level as indicated on the charts. My impression is that the spread has reached its lowest level for quite sometime.

In addition, this week’s 76 bps spike in the yield of 1 month has compressed spreads with the 10 yr benchmark to similar levels reached in August, September, October and November.

In short, none of this represents an anomaly but rather a progressing dynamic.

I have been warning on the flattening-inversion dynamic since late last year. I have noted that yield flattening and inversions have represented symptoms of the Business Cycle.
As the Phisix was being pumped on its way to strings of new records, I wrote last February5,
Loan portfolios constitute about half or 50% of the banking system’s assets Php 11.159 trillion as of December based on BSP data. This implies that much of the earnings growth from the banking system has been derived from loans. Thus a slowdown in loan activities will eventually hurt bank earnings mostly through the loan channel. 
Additionally, financial assets comprise about 20% of the banking system’s balance sheets. Since values of financial assets have mostly been a product of surging credit growth, reduced credit activities postulates to eventual pressures on the values of financial assets. Once financial assets reveal signs of strains, ancillary activities related to financial assets such as commissions or fees will also backtrack. Thus a slowdown in loan activities will also eventually hurt bank earnings through the financial assets channel.
And because of the previous torrid pace of the rate of growth of credit activities mostly from the banking system, “short-term loans growing more expensive” should imply a tightening of credit.
And such tightening extrapolates to likely increases in the incidences of Non-Performing Loans (NPLs) or expose on the deterioration of credit conditions in the banking system’s portfolio. The rise in NPLs will impact banking and financial system’s balance sheets. And this comes as loan conditions stagnate. Aggravating such conditions will be a downturn in other banking and finance activities anchored on sustained inflation of financial assets.
For banks, the flattening dynamic should eventually filter into general earnings conditions.
And for stocks, a concise way to say this is that a continuing yield flattening dynamic means that the fuel to the present record stocks has been draining fast.
So a slowdown in credit activities as consequence from a continuing flattening dynamic will be transmitted to economic, financial market and credit risk conditions.
Bank profits have already been underperforming. And this has already been acknowledged by some in the media.

And the marginal pickup in banking loans last October have signified signs of desperation by the banking sector to generate growth through volume at the expense of quality. As I remarked last week6,
Remarkably, with the intensifying compression of net interest margin, this means the banking system must be substituting spreads for volume. 
If BSP statistics have been accurate, then this means that the banking system has been immensely lowering or sacrificing its credit standards to issue more debt to offset the ongoing retrenchment in spreads. So the banking system must be so desperate as to seek margins by gambling away depositor and equity holder’s resources through the assimilation of more credit risks by lending to entities with poor or subprime credit ratings.
As for the lagged effect of the yield curve on stocks and earnings, they have apparently surfaced. This is why the Phisix has been off 17% from its April peak, has been down -6.85% year to date, and why 2Q PSE NGDP have slumped.
Current developments or the recent abrupt path towards inversions hardly provide comfort for any meaningful recovery. To the contrary since this has fundamentally been about balance sheets conditions, current developments presage on the escalation of current conditions.
The proverbial chicken has come home to roost.
Eventually, the effects of the yield curve will become too powerful enough for the Philippine government to be able to conceal through statistical prestidigitations.
Headline Fissures: Manufacturing and Export Recession
The FIFTH factor, receding liquidity entails that the headlines will unlikely be supportive of a major upside move
Remember how some mainstream experts try to put up a silver lining or a positive spin on the manufacturing data? I wrote7,

So they cherry pick on statistics that makes GDP to supposedly look good. Say manufacturing, despite a negative August data, they will instead cite ‘volume’ which grew by 3.7%. It’s really disconcerting, if not pathetic, to see people brandish numbers even when official GDP computation of manufacturing is about Gross Value Added or the measure of value of goods and services of a sector in the economy. And yet they call themselves experts. Apparently, experts at manipulating numbers.
To add, given the CONTRACTION in bank credit or loans to the manufacturing sector, I guessed that manufacturing output would be worse than expected?8

September’s credit collapse seems as harbinger of an even deeper downturn on the activities (hiring and output) and prices of the said sector.


Well, I have been lucky! I made the right call!
From the PSA on value of production9: (bold added) Value of Production Index (VaPI) for total manufacturing went down as it posted a decrement of 9.2 percent in October 2015 compared with a year ago growth of 8.0 percent, according to the preliminary results of the Monthly Integrated Survey of Selected Industries (MISSI). The decreases in 11 major sectors pulled down the VaPI. Five major sectors exhibiting two-digit decreases in VaPI were noted in the following: petroleum products (-35.2%), furniture and fixtures (-30.5%), wood and wood products (-29.4%), food manufacturing (-15.6%) and beverages (-13.2%). (see top and bottom left chart)
Based on volume of production, the PSA makes a rather bizarre report: Volume of Production Index (VoPI) made a turnaround as it posted a minimal annual decline of 1.8 percent in October 2015 from an increase of 8.7 percent during the same month last year. This was mainly influenced by the decrements noted in eight major sectors, offsetting the increases reported by 12 major sectors. Four major sectors that registered two-digit decreases in VoPI were as follows: petroleum products (-20.3%), beverages (-19.7%), food manufacturing (-15.7%) and wood and wood products
The top and bottom charts of value of production shows of the magnitude of the decline: at -9.2% October’s data was a collapse!
It was the largest decline for the year. Also it had been the biggest decline since 2013, 2011 and 2009 (lower right charts).
Sectors that posted declines were a lot larger than those that those that posted increases.

But October’s manufacturing collapse had a different story than the previous years. 2009 represented a dramatic reaction to global developments. 2011’s decline was an offshoot to the upsurge in manufacturing growth in 2010 which was concomitant with the BSP’s policy shift in 2009. 2013 appeared to be an anomaly. While 2015 has signified a DOWNTREND since last quarter 2014 (a consequence of 10 consecutive months of 30++% money supply growth)
Since manufacturing has been down for 7 straight months or more than two quarters then this should signify already a manufacturing recession.
Not even industrial volume was exempted. Industrial volume had been previously been used by the mainstream to spin G-R-O-W-T-H. Current data has locked out on this option.
However, what’s bizarre has been the PSA’s claim of a “turnaround” when data tells us otherwise. Volume decline has been as large as February 2015!
Moreover, look at the net sales in terms of value and volume (top right). Both have been down by MOST since September 2014!
Now let us move on to exports.

The same government agency tells the public that export growth contracted by 10.8% last October on a broad based decline: The     Philippines’     export   sales   totaled  $4.590 billion in October 2015, a 10.8 percent decrease from $5.148 billion recorded value in October of 2014.  The negative growth was mainly brought about by the decreases in seven major commodities out of the top ten commodities for the month.  These include articles of apparel and clothing accessories (-53.6%), other mineral  products (-50.2%), chemicals (-40.3%),  metal   components (-35.9%),  coconut   oil  (-31.2%),   other   manufactures (-30.0%), and machinery & transport equipment (-18.0%).
On the other hand, merchandise   exports   for the ten-month period of 2015 registered a 6.2 percent drop, that is from $52.124 billion in 2014 to $48.871 billion in same period of 2015.10
It’s the second consecutive month for a 10%+ decline. It’s the third month for the year that scored 10% growth deficits. October’s contraction represents the seventh straight month of losses, and 10 months of negative growth over an 11 month period.
From a nominal basis, exports sit at a critical juncture (see right from tradingeconomics.com) which seems vulnerable to a breakdown.
Moreover, note that the losses incurred had not only been by the broader industry but that the losses have been substantial in degree.

Importantly, ALL major export markets posted negative growth: Japan -7.7% (22.6% share), USA -13.1% (14.7% share), Hong Kong -4.3% (10.8%), China 31.6%!! (9.3%) and Singapore -8.9% (7.4%)
So along with manufacturing, given the string of months with negative growth, the export industry has likewise been in a recession.


Philippine GIRs Bolstered by Swaps? Official Labor Market Improves as Online Jobs Dive!
And with the exports in deep red, while growth in OFW remittances in seeming stagnation, it has been a wonder where the BSP gets support for its GIRs.

The BSP reported that November GIRs have been down by a marginal US $.53 billion to US $80.57 billion.

Yet ironically BSP forex holdings have skyrocketed almost alongside the USD-Php (see bottom pane). Forex holdings have surged 496% year on year and 451% from April as the USD Php recoiled upwards.
Could it be that the BSP have mimicked China’s use of the swap markets to borrow dollars and sell these to the spot markets, backed by forward contracts to hedge such positions to keep a status quo or a façade on the GIRs?

Yet if true, then eventually those borrowed dollars will have to be repaid.

So time will tell if government’s GIR has been another hall of mirrors.
Finally, latest government data indicates that NGDP for manufacturing and exports have been in recession.

Meanwhile, OFWs have been relegated by government statisticians to benchwarmers since remittances have now become insignificant to consumer spending. Well that’s the way the government has presented 3Q GDP.
In short, three major economic forces have been rendered as being of less importance to the statistical economy.
Such omission can partly be seen in the recent jobs data.

The government announced that unemployment has fallen to 5.6% last October from 6% a year ago (see left upper window).

On the other hand, employment rate improved by 94.3% (excluding Leyte) from 94% a year ago.
The distribution of jobs per industry: 29.6% agriculture, 15.9% industry and 54.5% industry
So what current government data implies has been that any weakness in the manufacturing sector and stagnation in agriculture have been MORE than offset by G-R-O-W-T-H from the service sector.
At the same time, this G-R-O-W-T-H from the service sector has emerged with little contribution from OFWs.
You see the government makes many assumptions that appear unsupported by real accounts. They look very much statistical artifacts.
Additionally, the supposed G-R-O-W-T-H in jobs runs in contradiction to job opening numbers as indicated at the three online websites
The job numbers have hardly recovered from their recent losses.
For instance, Monster.com’s September employment index recorded an almost halving (-16%) of the losses from August’s (-31%). (see upper right window) It’s still a loss but substantially lesser loss than the previous month.

An online job website, which used to be owned by a major publicly listed holding company, similarly reflected the same September bounce. Unfortunately, the rebound seemed momentary, as the weekly numbers went into a tailspin! From September through last week, job openings have dived!
A third online jobs website also recorded sharp declines in job openings. From April 21st job openings have crashed by a shocking 79%!
Perhaps employers have resorted to the traditional medium of newspaper based advertisement, which should be more costly, and more inefficient in drawing audiences or candidate employees.

Or perhaps employers have resorted to direct hiring via viral networking, without media advertisements.
Or perhaps job openings have really been dwindling.
Nonetheless based on online job openings the government’s statistical numbers have been unsubstantiated.
I would like to construct a Beveridge curve (statistical representation which compares unemployment relative to job vacancy rate). However, if one starts with wrong assumption and false data set, one gets a flawed diagnosis or a distorted picture of reality.
Government’s job report seems like another case of down is UP, low is HIGH, less is MORE.
As one would note, headlines have become more about propping up of statistical numbers which is a sign of desperation.
Yet in spite of the headline embellishments, some real events as manufacturing and exports have become too obvious to ensconce.

External Influences: Asian Currencies Wilt as China’s Yuan Revalues, Global Stocks Tank
And it is not just internal developments, external dynamics will have influence too. This represents my sixth and final reasons why markets are likely headed lower.
As previously noted…SIXTH, a significant domestic stock market rally will unlikely occur if Asian currencies continue to get clobbered…and SEVENTH, a significant domestic stock market rally will unlikely occur if global stocks will remain under selling pressure.
The USD Php officially closed the week up .26% to Php 47.235 from last Friday’s Php 47.105

Intriguingly, the pesos’ losses came as the Chinese yuan fell by .83% last week (or the USD CNY increased by .85%). Currencies of East Asian economies fell considerably this week (right chart).
Based on unofficial rates, the peso closed at 47.31 (Bloomberg). Yahoo and google finance sees the USD peso trading at Php 47.43 at the start of the week. So if the USD will hold on its gains through the day’s end, then the USD-php will break resistance levels by next week.
Chinese exports fell 6.8% in November to record its fifth straight monthly annual decline. Export growth has been negative in 8 out of the last nine months. Meanwhile November imports fell 8.7% year on year to post 13 straight months of annual contraction.
Importantly, the Chinese government’s foreign exchange reserves plummeted by $87.2 billion in November to $3.44 trillion! November GIRs have dropped to February 2013 lows where this year’s reduction has accrued to $405 billion according to Bloomberg.

The weakening yuan has hardly been about promoting exports which should signify a subsidiary objective. Instead, depreciation of the yuan has mainly been a manifestation of the Chinese government’s soft peg currency policy which has come under pressure from her economy’s imploding internal bubbles.

And a symptom of popping bubbles has been the intensification of capital flight.

As I noted during the August revaluation11.
Defending the US dollar soft peg required access to US dollars. Unfortunately, such window has been closing for the Chinese economy. Moreover, outflows and or capital flight have been compounding on the supply conditions of an already scarce US dollar. Finally, domestic credit expansion to save the stock markets translates to relatively more money supply vis-a- vis the US dollar (whether the Fed tightens or keeps policies at current levels). This implies supply side influences on the yuan’s weakness.
Hence, inflationism PLUS the scarcity of US dollar supply reveals why the US CNY soft peg cannot be sustained. Acting like a relief valve, China’s central bank, the PBOC, simply relented on the building pressures on the peg. The PBoC responded by allowing the markets to partially revalue the yuan. Hence the devaluation!
Yet the current surge of missing business executives, which this week has included China’s version of ‘Warren Buffett’ Guo Guangchang, the billionaire chairman of Fosun International Ltd., as part of intensifying political repression campaign will likely compound on capital flight woes.
And it may not just be about capital flight but likewise, imploding bubbles should translate to money supply destruction. And this can be seen through the slack in money supply (M2) growth, slumping growth of CPI and deepening deflation in manufacturing input prices or the PPI

Importantly, considering China’s immense US dollar debt exposure, borrowing to pay back debt will only reduce US dollar supply. How much more when highly leverage companies default?

And this compounds on the US dollar dilemma which has now become a global phenomenon.
So while the USD CNY’s advance may not have been as steep as last August, the USD-CNY broke out from its allotted bandwidth.

The last time the USD-CNY materially advanced (again last August), the USD Php spiked, and global financial markets tremored.

To recall, two weeks after the USD CNY revaluation, the Phisix suffered a meltdown on August 24th.



And it is probably more than a coincidence to see yuan’s decline juxtaposed with a nosedive in major equity benchmarks of the world as oil prices plumb to 7 year lows!
So it will be interesting to know if the USD-CNY will continue to ascend. And at what pace will this be?

And if so, will history repeat?
External Influences: Stampede Out of US Junk Bonds Spur Suspension of Client Redemptions in Two Funds!
And another thing, the US Federal Open Market Committee (FOMC) will be holding its meeting next week (December 15-16), with markets heavily anticipating its first rate hike since June 2006.

This comes even as financial markets have shown increased signs of anxieties anew.

In the US, its more than just falling stocks but yields of junk bonds have been rocketing!

And more than that, spiking yields have been accompanied by a stampede towards the exit doors!

Junk bonds reported $3.8 billion in outflows, the largest in 15 weeks according to Marketwatch. And with a surge in defaults and downgrades, liquidity has dried up as junk bond returns have turned negative
And the surge in outflows has prompted mutual fund Third Avenue Management to halt investor redemptions this week! Third Avenue Management has quickly been followed by distressed debt hedge fund Stone Lion Capital Partners LP which likewise announced a suspension of client redemptions. Such deferment of client redemptions marks the first since 2008! It’s a creepy deja vu to know that Stone Lion’s founders are veterans of the defunct Bear Stearns!
As one would note, whether external or internal, there have hardly been any factors supportive for a yearend rally. And perhaps if current conditions prevail OR even worsen, then there will hardly be any New Year’s celebration either.
Philippine Politics: Why the Popular Clamor for a Strongman Rule is a Bubble
As I have been saying here, everything is connected.
This applies to even to politics.

Apparently bubble behavior in the markets and in the economy has spread to contaminate populist politics.
Financial Bubbles which are the belief in something out of nothing, can traced to have spilled over to the du jour politics in the form of the strongman rule.
The strongman rule bubble evinces of the desire to solve social economic and political problems with the arbitrary use of force.
The strongman rule bubble believes that such arbitrary use of force will serve to benefit the populace.

The strongman rule bubble believes such arbitrary use of force will be applied platonically on perceived popular moral grounds.
The strongman rule bubble believes in the oxymoron that the democracy, a government by the people, is inferior to and should be substituted for a reign of absolute power—dictatorship. Essentially people who adore the strongman rule bubble have really been against democracy. Not only have they have been incoherent, they must be petty tyrants.
The strongman rule bubble believes everyone has to conform with strongman’s values, preferences, tastes, perception and priorities.
The strongman rule bubble believes that rule of law will have to give way to the rule of men.
Said differently, the strongman rule bubble represents a fixation toward short term elixirs at the cost of the long term. See? Something for nothing.


This fantastic graphic from the creative genius Jessica Hagy shows us why the strongman rule is a bubble (see left).

It says that when the problem is ignored we get vastly reduced probability of a salutary outcome.
How?

For one, the strong man bubble depends on a leader, which for Lord Acton (John Dalberg-Acton, 1st Baron Acton) will be corrupted by power or “Absolute Power Corrupts Absolutely”.
Another, dictatorship depends on leaders whom are unfettered by social compulsion such that the great FA Hayek says that the “Worst Get on Top”.
Such totalitarian leaders will take on the task that are “ruthless ready to disregard the barriers of accepted morals can execute”12. Such task essentially attracts sociopaths, sadists and morally insensitive people.
Third, Eugen Richter a German politician saw totalitarians as “born bad”. Why? Economist, author and Professor Bryan Caplan explain13:
Richter: they are idealists, but their ideal is totalitarian. Deluded zealots who sincerely believe in their cause but their cause from the outset is one that involves doing terrible things to people. Consistent with Lenin, Castro, people who you could have believed and many did believe were idealists and altruists, but they were quick to destroy and kill. Very often people assume that if you are not corrupt, then you are good. So Stalin, for example, by all accounts lived an extremely modest life, slept on a cot; but he murdered millions of people. 
In a modern dictatorship where you have to fight to get to the top, those who get to the top have to kill; whereas in a hereditary monarchy, you actually do eventually have a chance of getting lucky. King Leopold situation: one dividing line people make between sociopaths and simple murderers is that sociopath doesn't mind doing horrible things to people who are well known to him. Stalin a sociopath in this sense; Hitler really was not. Stalin enjoyed putting the wives of people he worked with in prison. Hitler, while he was willing to do things to millions of strangers, with people he knew, he really had to work himself up. The decision made to kill Ernst Roehm, he spent several hours trying to convince himself it would be all right. Probably similar for King Leopold--easier to kill people far away.
In short, dictatorship depends on leaders who are largely malignant narcissist, who would not hesitate to “kill, murder, hurt anyone who gets into their way”—to please their egos.
So throughout history, the strongman rule has undermined rather than promoted society’s welfare. Millions have needlessly died out of the whimsical desire to impose an arbitrary totalitarian rule on their constituents.

And this is why it is a bubble. It serves as misperception or confuses reality with fantasies. It sees politics as a superhero type of saving the damsels in distress.
Fourth, the strongman rule bubble believes that politics is superior to economics. So by curtailing economic activities which will either be substituted by government ownership of the factors of production (socialism) or by private ownership of the same factors but at the command of the state or state directed (economic fascism), the strong man rule bubble will entail of the shrinkage of the real economy. Hence, real economic activities will be substituted for political debt and inflation.
The last strongman rule was essentially designed as a transfer of economic power from domestic oligarchs to the strongman and his cronies, according to the US government communication as revealed by WikiLeaks.
Such Philippine strongman rule caused the meltdown of the peso (USD Php soared 660% over 21 years). The strongman rule essentially laid the seeds for the exports of residents or a diaspora which now have been hailed as “heroes”
So a strongman rule should mean a collapse of the peso.

Politics signifies a theater of the absurd.

So it’s not even clear if the strongman rule has merely been a marketing ploy to get elected or if candidate/s pandering to the strongman rule crowd have really been a double entry (or diversion) to stealthily favor for another candidate.

You see, the strongman rule, which advocates expanded use of violence to facilitate a unilateral transfer of power, would likely be met with vehement, if not violent, resistance by entrenched vested interest groups whose powers or privileges will likely be at risk, even prior to the elections.

So violence may beget violence. In the Middle East, violence as solution to spread democracy got a response: a Blowback, the surge of terrorism.
Or politics represents just a comedy of errors.
It’s December. So I would suggest relevant contemporary movies on the strongman rule bubble: The Hunger Games—Mocking Jay Series and the Star Wars Saga.
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2 Investopedia.com Descending Triangle
9 Philippine Statistics Authority, Monthly Integrated Survey of Selected Industries : October 2015 December 10, 2015
10 Philippine Statistics Authority Merchandise Export Performance : October 2015 December 10, 2015
13 Bryan Caplan Econotalk Caplan on Hayek, Richter, and Socialism Russ Russell Econotalk June 28 2010

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