Vainglorious ‘experts’ and many market ‘knowledgeable’ people have frequently resorted to rationalizing price actions with historical ‘fundamentals’. They try to “reason from price changes” as one popular monetary economist puts it.
So when they see skyrocketing share prices, they associate this with (delusional) prosperity. They tend to see things or numbers selectively by eschewing all the negatives and embracing all the positives which they attribute to such price actions.
And when offered the prospects of a crash, the frequent excuse is to ask “what will drive it?” Because prices are up and fundamentals look (selectively) rosy, they would automatically deny the probability of such an outcome.
Experts of such quality are afflicted by the recency bias. They look at the ticker tape or headline news which they extrapolate into the future. They hardly have theories to back them up except to rely on statistics (past data) to constitute their presuppositions of the economy.
Yet markets function as a discounting mechanism. Because they are a discounting mechanism, markets tend to reflect on fundamentals way ahead or even before they become apparent.
Take a few examples.
The Phisix peaked in February 1997, a few months before the Asian Crisis surfaced into the open (July 1997).
The Phisix responded to the Great Recession months ahead before early 2008, when people began suspecting that the US had fallen into a deep economic downturn. To repeat the Phisix crashed in August 2007. Rallied back to recover all the losses, only to crash again in October.
The National Bureau of Economic Research (NBER) belatedly dated the US Great Recession in December 2007.
It’s easy to make explanations ex-post. That’s because hindsight is 20/20.
Yet what explains the two crashes in the Phisix in 2015 and January 2016?
Following the run to April’s 8,127.48 record, the Phisix began to wilt in prices and in the context of internal actions. I have been pounding on this at my prudent investor weekly outlook.
When the China’s yuan depreciated in August, this proved to be a secondary order effect or the event risk trigger (aggravating circumstance) which further escalated on the already debilitating Phisix.
The Phisix hardly recovered from the August debacle and weakened further through December. It broke 7,000 by the year end to close at 6,952. By January 2016, the downside actions accelerated. This again climaxed with the yuan’s second significant weakening. The Phisix dropped to 6,084. Then came the G-7’s implicit Shanghai Accord plus the BSP’s silent stimulus which arrested the decline.
In gist, developing conditions at the PSE caused its vulnerability. Hence, weak conditions made it ripe the for two crash events to transpire which external events exposed (via China’s yuan depreciation).
At present, if there is anything the market has repeatedly been signaling, it has been that the gamut of hysteric or panic buying or the mania phase has only been masking an internal degradation process. The BOOM itself signifies the disease!
That’s because the credit based artificial boom has been erected on unsound foundations. And from tenuous grounds, such temporary boom will eventually be fated to a reversion to the mean. Or the markets will clear.
All the financial and economic imbalances and maladjustments from economic distortions brought about by the political tinkering with money prices through interest rates will have to readjust to conform with economic reality. Borrowing from the future will entail of future and present costs. There is no free lunch.
Signs of the costs of imbalances have already existed: Faltering growth in tax revenues, downside pressures on the top line and earnings of PSE firms, manufacturing stagnation, export recession, jobless boom, soaring education prices, and incipient signs of strains even at the heart of the boom—real estate. Agriculture has been also down (partly from politically induced economic distortion and partly from weather).
Don’t forget people employed in the manufacturing, agriculture and exports account for a big segment of the population. They comprise about 40% of the work force. So weak output in these industries should translate to lower spending and less jobs.
Add to this the race to build capacity by the key engine of the Philippine economy—the bubble sectors—which implies the likelihood of lesser investments when surpluses vent itself through corporate profits.
And all these have occurred, despite the government’s smokescreen of inflating the GDP numbers. In short, real economic indicators have been moving against survey based aggregated statistics.
What has the repeated crashes (majors: May 2013, August 2015 and January 2016; minors: October and December 2014) have been telegraphing to us?
The answer: Whatever boom in the Philippine economy, it has been finding itself mired into an increasingly fragile state!
Just think of what the supposed boom did to politics. Has it not been due to a perceived popular ‘protest vote’ that the new administration was elected from? Why would 16.6 million people see themselves as expressive of dissatisfaction and dissent when GDP continues to scintillate at elevated levels?
Even from a standpoint of misperception, popular politics REINFORCES symptoms of economic contortions. Think of just what 10 months of 30%+++ of money supply growth in 2013-2014 did to the purchasing power of the average citizenry. Had I not warned that this would create popular discontent?
Essentially, the popular ‘protest vote’ not only represented a backlash against, and the supposed repudiation of the outgoing administration’s policies, it most likely have been a sign that the Philippine bubble has been pricked!
Yes it may be true that some of the discontent has been on social burdens as traffic, crime, drugs and etc., but which of them have been isolated from the economy or from economics?
As a side note, think about all the surveys conducted by the government (particularly by the BSP) stating how satisfied consumers had been, prior to the elections. Also think about the privately done poll, which came up with the bizarre, risible and outrageous findings that a-third of the population had actually thought that the Philippines had attained developed economy status. The self-identified ‘protest vote’ essentially demolished all these as nothing more than a myth, if not propaganda. This represents another noteworthy example of demonstrated or revealed preference or people expressing themselves through actions rather through words.
Yet by rationalizing popular politics as an extension of the previous boom, the establishment has been fighting wildly and furiously to camouflage the bubble from bursting through the deepening of the manic phenomenon at the domestic financial markets!
Let us do some follow the money trail or examine how the vertical run may have been financed.
Falling credit growth has coincided with the recent decline of the PSEi seen both from a quarterly (upper window) and from the monthly basis (middle window).
Because the PSEi fell to 6,084, and when compared to the trek towards 8,127 over the same period in 2015, the first quarter of 2016 posted huge losses in terms of relative or comparative growth (upper window).
But because some unknown entity forcibly steepened, on what has been a sustained trend of flattening to inverting yield curve, banking credit growth did a magnificent turnaround and significantly ballooned in 1Q 2016!
So bank credit growth soared as the PSEi recovered.
YET three factors may have forced the unseen intervenor to act or deploy a silent stimulus:
1. The masquerade of falling price levels (as measured by the government) which has inflated GDP is unsustainable. The government’s statistical artifices will be exposed if prices will not recover. And prices can only recover through the bank credit channel.
Since GDP is about money based spending and since bank credit growth accounted for more than 70% of money supply growth, then this means that the core segment of GDP has accrued from bank credit growth. In short, bank credit growth is the quintessence of GDP performance.
So the target of reversing the decline in credit growth trend may have been intended to boost statistical GDP.
2. Election spending. There is no such thing as a free lunch. Election campaigns and vote buying will need to be financed.
And banks did most of it! This can be seen in the growth of the money via M1, which consists of currency in circulation (or currency outside depository corporations) and peso demand deposits (BSP), have only been accelerating since 4Q 2015. And this intensified further in the first four months of 2016! (lowest window)
So bank credit growth may have been targeted directly or indirectly to fund election spending.
Question: how will these resources, which were directed through unproductive means, be repaid?
3. Sustained crash of the PSEi.
The surge in bank lending growth seems to have powered the recent run at the PSE!
Aside from the 1Q 2016’s 16.12% surge in overall bank lending, at 18.5%, banking loans to the financial sector in April nearly doubled in terms of growth rate when compared to March’s 10.59% and tripled to that of February’s 6.33% and January’s 5.25%!
As the PSEi moved higher so did bank loans to the financial sector!
Yet how much of those vertical ‘panic buying’ moves have been bank financed?
What happens to such loan portfolios when the ultra-expensive equity prices unravel?
So the surge in bank credit growth may have been intended to indirectly bailout entities and institutions that have been heavily exposed to the stock markets.
If true, then what even happens more if financial institutions suffer from credit problems? More bailouts? And if true, then such bailouts simply strengthen indications of existing or incumbent problems unseen by the public.
So up to what point before more of such invisible stimulus will be forced out into the open?
Yet government’s own measures of prices have already been signaling dangers ahead. While April’s CPI was at 1.1%, the government’s measure of retail price index soared to 1.6% a high almost at the April 2015 level at 1.8%. Sustained substantial increases in credit growth will likely distill into CPI too.
Again higher economy (goods and services) prices will smite the already strained consumer spending or the pesos’ purchasing power! Think of what this will do to people (mostly employees) involved to sectors (agriculture, export and manufacturing) already suffering from an economic stagnation?
And higher prices will affect business input while having little power to pass cost increases to the consuming public. Yet a recipe for more profit squeeze!
So the secret stimulus may have spiked the PSEi, GDP and elections, but the drawback has also surfaced. There is no free lunch.
If the secret stimulus will prevail, then the risk is that there will be another outbreak of inflation (very soon). This again will force the BSP to tighten monetary conditions. But doing so, will only lead to the same outcome as we had seen in the recent past but at a worst degree. Remember the difference has been that leverage today has been larger than that of 2013-14 and that the real economy has been a lot weaker (despite the government numbers).
And if the secret stimulus program will cease, then the recent boom will once again deflate. And again, Remember the difference has been that leverage today has been larger than that of 2013-14 and that the real economy has been a lot weaker (despite the government numbers).
Such the Keynesian monetary parlor tricks have reached its climax.
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