Showing posts with label bubble cycles. Show all posts
Showing posts with label bubble cycles. Show all posts

Sunday, February 11, 2024

What Surprise is in Store for the 2024 Year of the Wooden Dragon?

 

I cannot find a single convincing argument that tells me that astrologers won’t do better than economists…The problem is the arrogance of these economists, they’re making people rely on theories that have not worked, do not work, and are really dangerous—Nassim Nicholas Taleb

 

In this issue

What Surprise is in Store for the 2024 Year of the Wooden Dragon?

I. Year of the Dragon: Leap Years, US Presidential Elections, Culmination and Escalation of Global Conflicts

II. Year of the Dragon:  Eve of the Great Depression and the Year of the Dotcom Bubble Bust

III. Year of the Dragon’s Impact on the Philippines: GDP and CPI

IV. Year of the Dragon’s Impact on the Philippines: USD and the PSE

 

What Surprise is in Store for the 2024 Year of the Wooden Dragon?


Will the Wood Dragon roar in 2024?

 

From The Chinese Zodiac: The Year of the Wood Dragon 2024 is also known as Yang Wood on Dragon, or Jia Chen 甲辰 in Chinese. The fixed element of the Dragon (Chen) is Earth (Wu 戊), which represents stability, honesty and loyalty. The variable element of the Dragon in 2024 is Yang Wood, or Jia 甲, representing growth, creativity and flexibility. The Wood Dragon is the most creative and visionary of the dragons. They are optimistic, ambitious and adventurous. They like to explore new ideas and challenge themselves. They are also generous, compassionate and loyal to their friends. Therefore, the Year of the Dragon in 2024 is expected to be a time of visionary leaders, innovators and problem solvers. 2024 is also predicted to be a great year to start new projects, explore new opportunities and create value for yourself and others. (bold original)

 

I. Year of the Dragon: Leap Years, US Presidential Elections, Culmination and Escalation of Global Conflicts

 

Leap years are an outstanding feature of the Year of the Dragon. 

 

Further, they are associated with US presidential elections.  From 1952 to 2012, the distribution of Presidential victors had been even: 3 Republicans (Eisenhower 1952, Bush Sr. 1988, and Bush 2000) and 3 Democrats (Johnson 1964, Carter 1976 and Obama 2012).  But a Democrat, Lyndon Johnson, won in the last Wooden Dragon in 1964.  Will a Democrat President prevail this year?

 

We're no believers in astrology, but they occasionally provide propitious or serendipitous clues.  

 

For instance, we cited the possibility of an outbreak of war in 2022, which included a buildup of Russia-Ukraine tensions.    A month later, Russia launched its Special Military Operation against Ukraine, which remains ongoing.

 

The Year of the Dragon highlights both the end and escalation of conflicts.  The Treaty of Taipei, signed and ratified in 1952, ended the Second Sino-Japanese War.  The Soviet Union also withdrew from Afghanistan in 1988.

 

World War 2, which began in 1939, escalated in 1940 with the widening of the theater of war, which included the Battle of France, Netherlands, Belgium, and others.

 

In 1964, newly elected President Lyndon Johnson escalated U.S. involvement in the Vietnam War following the Gulf of Tonkin incident.

 

Also, the US military causalities in the fateful Afghan War reached a milestone of 2,000 in September 2012 and concluded in 2021 with a Taliban victory.

 

Applying to current events, could the Russia-Ukraine War culminate this year of the Dragon...with a Russian victory?

 

Will the Israel-Palestine War expand into a regional, if not a global war?   The US and its allies have started to strike at Iranian-supported targets in Yemen, Syria, and Iraq even before the year of the Dragon.

 

The former US Presidential advisor, Ms. Pippa Malmgren, recently wrote that World War III is already here but unfolding in an unconventional process. (bold added)

 

People strangely assumed that WWIII would have to look and feel like WWII. They could not make allowances for the fact that technology had evolved and the domains of warfare have changed. As the Pentagon said last week, space is now the most important warfighting domain, and “space-based missions are essential to the U.S. way of war.” The war in Ukraine and the attacks from and in Gaza are only possible because of satellites. But, the media needs visuals and a storyline to explain conflict. Ukraine and Gaza are easy for the media because they fulfill the old requirements. There are dead humans, and there are shocking photo ops. The old rule still applies, “if it bleeds, it leads.” These events reinforced the idea of what a war looks like. It provided clear symbols of war, including tanks, troops, and bombings. Both are also land wars, which makes them easy to report on. You can send a journalist there. However, the actual war we are in is vastly larger and more serious, but it is in places the public can’t see and where there are no journalists – space, above and below the open oceans, in the realm of technology and cyberwar. The actual war between the superpowers and their proxies has been, until now, invisible. It has had no overarching framework in the media that a regular person can comprehend. So, the sudden warnings from a range of senior NATO Commanders that the public must be ready for war matter because the gap between the invisible war, and the visible war is finally closing. Spectators can start to see the invisible war now. (Malmgren, 2023)

 

Let us see.

 

February 2022: Russian-Ukraine War

October 2023: Israel-Palestine War

 

If the year of the Dragon spotlights escalation, will a third "major" front open in 2024?  Where? The Middle East? Central Asia? East Asia? South Asia? Southeast Asia? The Arctic region? Europe? South America?

 

We carry over the same conclusion as last year.

 

Today, there are barely any signs that primary participants in the "hegemonic war" will sue for peace. 

 

The lack of interest in negotiations by opposing parties, the sustained shipment of arms, the continued provocations and counter provocations, the widening coverage of the war to include economic and trade protectionism, and the weaponization of finance (US dollar) and commodities, and intensifying political propaganda—all point to mounting risks of escalation (nuclear exchange). 

 

While trade protectionism has been on the rise, the war aggravated it.

 

Further, with the global economy skating on thin ice, wars serve as a convenient scapegoat to extend or expand the political tenures of the leaders. 

 

Even worse, with expanding vested interests of the politically influential "triumvirate" sectors, perhaps the backbone of the deep state—the military-industrial complex, oil and energy, and finance industries—benefiting immensely from the "proxy" conflict, amicable settlement becomes less of an option for their political leaders.

 

The surprising path that may end the war this year is when one party succeeds in subjugating the other.  (Prudent Investor, 2023)

 

Will the outcome of the US elections alter their incumbent foreign policy framework?


II. Year of the Dragon:  Eve of the Great Depression and the Year of the Dotcom Bubble Bust

 

It is not just about geopolitics.  The Year of Dragon played a pivotal role in ushering in economic eras.

 

1928 (Year of the Dragon) represented the climax, the inflection point, or the eve of the Great Depression of 1929. 

 

2000 also saw the implosion of the Dotcom bubble.

Figure 1


Today, while global debt spirals into unprecedented heights, the leveraged speculative asset bubbles have intensified.  (Figure 1, upper chart)

 

For the first time, global asset bubbles have conjointly been inflating spurring mania in AI, FANG, and meme stocks, cryptos, and several national equity benchmarks have morphed into the "everything bubble," anchored on hopes of support from credit easing policies by central banks.  (Figure 2, lower graph)

 

These are symptoms of the worsening monetary disorder.

 

So, if history should rhyme, and if the zeitgeist of this Chinese horoscope prevails, the Year of the Dragon could showcase either an implosion of this massively inflating bubble or see its culmination.

 

III. Year of the Dragon’s Impact on the Philippines: GDP and CPI

 

How did the Philippines do under the previous Year of the Dragon?

 

Nota Bene:  Because of the uniqueness of different periods, past performance does not guarantee future results.

Figure 2


In the Year of the Dragon, headline GDP fluctuated from a low of 3.4% in 1964—the year of the Wooden Dragon as today—to a high of 8.8% in 1976.  The average GDP in the last 6 Dragon years was 6.04%. (Figure 2, upper chart)

 

The CPI helped shape the GDP.   The dragon years captured the upside trend of the CPI cycle, which culminated with 13.9% in 1988, and equally the downside. (Figure 2, middle and lowest diagrams)

 

In the Wooden Dragon of 1964, the CPI was 7.3%.  The average CPI of the last five dragon years was 8.06%.

 

IV. Year of the Dragon’s Impact on the Philippines: USD and the PSE

Figure 3


In the last four years of the dragon, the USD-Php increased in two and decreased in the other two.  But because of the outsized 24% return of the end-of-the-year (BSP) quote in 2000, the average USD-Php payoff was 4.9%.

Figure 4

 

Domestic stock market returns have been volatile during the Year of the Dragon. 

 

Caught with the bursting dotcom bubble, the PSEi 30 cratered by 30.3% in 2000 but soared by 21% in 1976 (pre-Presidential Referendum 1977) and 33% in 2012 (post-Great Recession and 2010 Philippine elections).   Thus, the average 5-year return was 7%.  Nonetheless, the PSEi 30 rose in four of the last five dragon years.

 

But when adjusted for inflation, the average 5-year "real" return was a deficit of 1.1% from the sharp plunge in "real" returns in 2000.

 

Despite a lower than the government target GDP in 2023, the PSEi 30 raced to a 6.2% return in the first six weeks of 2024 or on the eve of the Year of the Dragon. 

 

Will global and domestic financial conditions remain favorable to the bulls?

 

Or will the "problem-solving" Dragon help inflate local and international asset bubbles to its climax?

 

 

____

References

 

Pippa Malmgren, WWIII: An Update for Taylor Swifties and Other "Mere Spectators”, Dr. Pippa’s Pen & Podcast, February 4, 2024

 

Prudent Investor Newsletter, What Surprise is in Store for the 2022 Year of the Water Tiger? January 23, 2022

 

 

Tuesday, December 27, 2022

PLDT’s "Budget Overrun" Issue in the Eyes of Historian Charles Kindleberger

 

Crashes and panics are often precipitated by the revelation of some misfeasance, malfeasance or malversation (the corruption of officials) that occurred during the mania. The inference from the historical record is that swindles are a response to the greedy appetite for wealth stimulated by the boom; the Smiths want to keep up with the Joneses and some Smiths engage in fraudulent behavior. As the monetary system gets stretched, institutions lose liquidity and unsuccessful swindles are about to be revealed, the temptation to take the money and run becomes virtually irresistible—Charles P. Kindleberger 

 

PLDT’s "Budget Overrun" Issue in the Eyes of Historian Charles Kindleberger 

  

Using extended quotes from the media, the following is a chronicle on the surfacing controversies surrounding PLDT, one of the Philippines’ leading telco companies. (all bold mine)

 

I. The Excess Capital Spending 

 

First, the telco company announced that it embarked on an internal investigation into a so-called "budget overrun."  

 

Inquirer.net, December 17, 2022: Tycoon Manuel Pangilinan, who chairs the country’s largest telecommunications firm, was initially apprised of the preliminary discovery of as much as P130 billion in financial anomalies in PLDT Inc. two months ago, before this number was trimmed to the P48 billion the telco announced on Friday. 

 

Businessworld/Bloomberg, December 19, 2022: The budget overrun is almost equivalent to PLDT’s combined 2020 and 2021 net income. It’s also more than twice the P21.46 billion of cash and cash equivalents that PLDT had at the end of last quarter. While PLDT hasn’t given details, Mr. Pangilinan said in a Philippine Daily Inquirer report that as much as P130 billion in undocumented purchases were made from 2019 through 2022 and an audit lowered the “questionable deals” to P48 billion. 

 

Next, internal financial forensics, which the company embarked on, provided some details. 

 

Inquirer.net, December 17, 2022: The announcement follows weeks of rumors of an internal probe at the country’s biggest integrated telecommunications provider over supposed financial anomalies.  Complaints were also raised by some of the company’s suppliers during the probe, sources told the Inquirer. PLDT stressed in the disclosure that it had so far found no fraudulent transactions, procurement anomalies, or loss of assets arising from the capital spending overruns. It was also in negotiations with suppliers and vendors to cut the unexpected spending increase. “Our vendors continue to be committed to their partnership with PLDT and have expressed flexibility with our commercial requests involving reduction of outstanding work,” PLDT said. The overruns covered capital spending (capex) over four years from 2019 through 2022, the telco giant said. “In the face of the pandemic, and especially at its height, PLDT and Smart continued its capex spend, resulting in enhanced connectivity for our people, and better customer experience,” it said. “While these substantial capex investments were key to meeting PLDT’s goals, they came at a price—capex investments for these four years aggregated to P379 billion, including an estimated budget overrun of no more than P48 billion,” PLDT said. PLDT said the estimate was based on an ongoing internal forensics mandated by the board and its audit committee and discussions with principal vendors. In a disclosure on Friday, the telco giant led by Manuel V. Pangilinan said the excess amount represented 12.7 percent of the total P379-billion capex spending for the period. “PLDT is undertaking a management reorganization process and has initiated improvements on its processes and systems to address weaknesses that allowed such budget overruns to occur,” the listed company said. The capex was allocated to multi-year projects including LTE and 5G rollout, Fiber-to-the-home investments, fiber, submarine cable expansion and tower upgrades, PLDT noted. The major telecommunications player said its major revenue streams have remained “healthy and robust” despite the billions-worth of additional expenses. The wireless, home and enterprise businesses were shielded from the capex overrun, PLDT assured. 

 

Then, because of such overspending, the telco declared a cut in future CAPEX, and it would reorganize the management and improve its systems. 

 

Businessworld, December 23, 2022: PLDT INC. on Thursday said it will cut its capital expenditure budget starting next year, as it grapples with the fallout from the P48-billion budget overrun that  sparked a sell-off and a probe by regulators… The PLDT chairman said the company’s ongoing review has uncovered “no fraud, no anomalies, no evidence of overpricing, and no unrecorded transactions in relation to the overrun.” PLDT expects to exceed its P85-billion capex guidance for 2022, as the company hopes to keep its projects, including the hyperscale data center in Sta. Rosa, Laguna, on track. 

 

The firm also emphasized that "no fraud" was involved in the four years of unauthorized capital overspending. 

 

They also publicly underscored that the excessive CAPEX allocation had been on "necessary network equipment to boost connectivity."  Or it justified the expenditures. 

 

CNN Philippines, December 22, 2022:  "PLDT’s business overall remains healthy and robust even as it continues to address its elevated capex spend and undergoes a comprehensive process review," the company said in a disclosure. Pangilinan reiterated that the company’s investigation of the budget overrun that covered four years found no anomalies or unrecorded deals. He said "bulk" of the controversial amount involved purchasing necessary network equipment to boost connectivity, particularly PLDT's 5G push for mobile and fiber rollout"There will be no write-off of these assets," he said. PLDT President and CEO Alfredo S. Panlilio also said there was a "confluence of factors," which includes the following: - underinvestment in capex - threats of then President Rodrigo Duterte against incumbents - heightened competition in the market following DITO Telecommunity's entry and Converge's strengthened position in the fiber space - the COVID-19 pandemic and continual lockdowns under the Duterte administration pushing up demands for fiber connectivity at homes "However, to the extent of the capex ordered, we plan to reduce fresh capex starting in 2023. Thereafter, we expect capex to reduce steadily. 2023 will be a year of consolidation as we continue to strengthen and grow the business. We strive to be better," said Panlilio. 

 

The firm likewise enumerated the possible "confluence of factors" behind such a critical financial lapse. 

 

II. Why the Ruckus over the Capex? PSE Investigates "PLDT" Pre-Closing Dump? 

 

Here is the thing.  

 

Whether through replacement, maintenance, upgrades, or expansion, the primary role of capital expenditures is to magnify profitability through enhanced productivity.  In this case, the "bulk" of the CAPEX involved network equipment. 

 

And the controversy can't solely be about accounting metrics, such as depreciation.  The simple reason is that improvements through lower costs in the other areas of operations should offset the former over time.    

 

Besides, how and why would such a seismic lapse occur in the face of the firm's armies of internal and external managers, accountants, financial analysts, auditors, and lawyers, aside from the officers from other relevant departments? 

 

So, if there have been "no anomaly or fraudulent transactions," and if the allotments of the CAPEX meet business objectives, then why the ruckus over it? And why the violent reactions to its share prices in the stock market? 


Nevertheless, this event raises credibility concerns about the company's Financial Statements. 

 


In any case, authorities have launched investigations that followed the share price meltdown of the telco firm.  PLDT shares plunged 17% on its announcement. 


Though PLDT share prices have rallied from the March 2020 lows to a May 2022 peak, a bearish "rounding top" appears to hound its chart even before the revelation of the "budget overrun."

 

Businessworld, December 20, 2022: According to the Securities and Exchange Commission (SEC), it is closely monitoring issues that have arisen from the announcement of PLDT regarding the budget overrun as well “selloff in shares” prior to the disclosure on Friday last week. These are “areas of concern for the commission being the regulator of the securities market and the champion of investor protection in the country,” the SEC said in a statement on Monday, “In this light, the SEC has immediately commenced an inquiry into the matter,” the regulator said. At the same time, the SEC said that PLDT needs to clarify its disclosures to the commission and The Philippine Stock Exchange, Inc. (PSE) in relation to statements attributed by the media to the company and its officers, especially with regard to the nature of the P48-billion expenditure. “The SEC has likewise directed PSE and Capital Markets Integrity Corp. (CMIC) to submit initial reports on their investigation into the trading activities that have resulted in the sudden and sharp decline in the share prices of PLDT before the official disclosure of the ‘budget overruns,’ among others,” the regulator noted. CMIC serves as the independent audit, surveillance and compliance arm of PSE. 

 

Interestingly, the PSE raised the issue of the pre-closing dump of PLDT shares. (!) 

 

Inquirer.net, December 18, 2022: The Philippine Stock Exchange will investigate the trading activity on shares of PLDT Inc. — the oldest blue chip stock on the bourse — after regulators noticed heavy selling minutes before the market closed last Friday and about an hour before a P48-billion financial anomaly within the telecommunications firm was officially disclosed to the investing public…Monzon was referring to the 4.5-percent decline in PLDT’s share price in the last few minutes of trading last Friday. That selloff brought PLDT’s price down from P1,548 to P1,478 just four minutes later, wiping out more than P18 billion in market capitalization during that short span of time. 

 

To repeat: "referring to the 4.5-percent decline in PLDT’s share price in the last few minutes of trading." 

 

But pre-closing pumps and dumps have become a prominent or even commonplace feature of the domestic equity benchmark, the PSEi 30!  The activities of this benchmark translate to excessive volatilities in the share prices of several market cap heavyweights at the transition to the closing bell: The price float from pre-closing to the runoff period.  

 

So how will this stand as a sound basis for inquiry on unscrupulous trading practices? 

 

III. Kindleberger’s "Panic" Stage, The Erosion of Confidence and the Cockroach Theory 

 

And it's not just casuistic trading. It is about the entire financial system. 

 

Here is an excerpt from this author's 2017 blog. 

 

Instead, speculative mania has embedded a sense of entitlement that free lunches are the path to prosperity.  And so, the pivot to such desperate unscrupulous measures.   

  

If institutions could "game" the markets with impunity, could their financial statements have been grounded on the same outlook/mentality? (Prudent Investor, 2017) 

 

The late historian Charles P. Kindleberger wrote that unscrupulous financial activities tend to grow with the propensity to speculate (mania) and get exposed during signs of mounting economic or financial stress (panic). 

 

There are many forms of financial felony. In addition to stealing, misrepresentation, and lying, other dubious practices include diversion of funds from the stated use to another, paying dividends out of capital or with borrowed funds, dealing in company stock on inside knowledge, selling securities without full disclosure of new knowledge, using company funds for noncompetitive purchases from or loans to insider interests, taking orders but not executing them, altering the company’s books. 

 

 

 

The revelation of swindles, frauds, and defalcation, and the arrests and punishment of those who violate trust are important signals that economic euphoria has been overdone and that there will be significant social consequences (Kindleberger & Aliber, 2005) 

 

That’s not all. 

 

In a November 2020 tweet, economic professor and confidence-driven decision-making researcher Peter Atwater theorized the inverse relationship between confidence and scrutiny. 

 

Scrutiny and confidence are inversely related. At peaks in confidence no one sees any reason to check anything. There is no scrutiny. None. 

 

In another tweet, Mr. Atwater further observed that the loss in financial trust signifies a product of falling confidence. 

 

Auditors don't find fraud. Falling confidence reveals them as heightened self-interest, greater scrutiny and focus shine a light on missteps taken amid eras of overconfidence. 

 

Furthermore, aside from fear and greed, confidence and its erosion, another concept compliment this narrative: the cockroach theory. 

  

According to businessprofessor.com, the cockroach theory means that "a piece of bad news in the market indicates that there is much more bad news."  The underlying premise: "the appearance of one (cockroach) in an area signals the presence of many others.  The cockroach theory posits that the announcement of one negative news means many more negative events will occur to a company or an industry." 

 

To emphasize.  This post is not about the involvement of legal irregularities in PLDT's multi-billion "budget overrun."  That's the role of the credit rating agencies and regulators, who seemed asleep on the wheels.  

 

Instead, the PLDT episode falls into one of the inflection phases of Mr. Kindleberger's cycle of "Manias, Panics, and Crashes." 

 

The vehement stock market reaction to the CAPEX controversy infers a process of falling confidence and eroding trust. 

 

Aside from the recent default risk from Udenna, the fuss over PLDT's CAPEX could be a "canary in the coal mine" or the first among the many "cockroaches." 

 

It likely represents a pivotal sign of reversal from the era of speculative mania, financial excesses, operational and legal complacency, and market overconfidence.  

 

Instead of a renascence, it signifies a persistent deterioration of the financial system and the economy. 


As a side note, do you know that the so-called exorbitant spending of Php 48 billion represents 72.25% of Megaworld's 'full market capitalization' as of December 23rd?  As of this date, MEG has the smallest market cap, which should show the scale of "overspending." Also, Php 48 billion represents about 18% of PLDT's market cap. 

 

IV. The Capex Furor as Justification for More Debt? 

 

 


Yet, no one seems to be asking the right question.  How has the capital "overspending" of PLDT been financed? 

 

Edge PSE December 23, 2022: "We confirm the statement of PLDT Inc.’s President and Chief Executive Officer, Mr. Alfredo S. Panlilio (“Mr. Panlilio”), that the Company may incur additional debt in the short term. His statement, however, does not include the impact on the Company’s reported income. The plan to borrow P35-45 billion in the next two years is for general corporate purposes including, but not limited to, payment of CAPEX and dividends." 

 

Could the furor over "budget overrun" have been about justifying to the public and its creditors its desire to imbue more debt? 

 

Aside from its mounting debt, will the telco firm raise cash to cover unwanted expenditures by selling more of its productive assets?  This year, PLDT sold and leased back more than half, or 6,500, of its 12,000 cell towers for about Php 86 billion, according to the Inquirer. 

 

 

Of course, PLDT represents a component of the PSEi 30, where the benchmark's only growth area has been debt.  

 

The current conditions suggest heightened systemic fragility from financial excesses, malinvestments, excessive complacency, trust, and confidence issues.   

 

____ 

Prudent Investor May 14th: The Biggest Ever Rescue of the PSYEi 30! May 17,2017 

 

Kindleberger, Charles P. and Aliber, Robert Z. Manias, Panics, and Crashes A History of Financial Crises, p. 195 and 202, Fifth Edition, 2005, Wiley & Sons, delong.typepad.com