Showing posts with label emerging markets. Show all posts
Showing posts with label emerging markets. Show all posts

Sunday, July 07, 2019

Charts of the Week: Negative Bond Yield Spreads as Global yields fall to record, China’s Shibor rates plunge to 2009 lows as Hong Kong’s HIBOR rates spike!


Charts of the Week: Negative Bond Yield Spreads as Global yields fall to record, China’s Shibor rates plunge to 2009 lows as Hong Kong’s HIBOR rates spike!
As negative-yielding sovereigns spread with the entire Swiss curve in the negative, Germany’s 30-year yield remains the only positive.
Global bond yields hit record low prior to the payroll reports.

German bunds fell below the ECB’s deposit rates for the first time ever!
Hong Kong’s 1-week interbank lending rate (HIBOR) raced to 2008 levels to highlight symptoms of liquidity squeeze!
In the meantime, China’s overnight interbank lending rate (SHIBOR) falls to 2009 lows last Thursday, to signify panic hoarding by banks.
Finally, when the public refuses to borrow, just forced them to. Nigeria’s central bank orders banks to lend money 

You can lead the horse to the water, but you can’t make it drink.

Unfortunately, that’s the only thing central banks know of.

Sunday, April 12, 2015

Phisix 8,100: A Story of 10 of the 15 Biggest Market Cap Heavyweights and the Combustion of the Global Risk ON Moment

Humans are not wired to take the road less traveled. They continually look for the safety and security that is provided by being a member of a larger group. Being part of the consensus crowd doesn’t mitigate the risk of loss or prevent failure, but it does go a long way to easing the mind and the wrath of clients, in the event of failure. Human beings tend to believe mistakes are valid if so many others make the same mistake. This herd mentality overrides rationality and common sense and changes the motives behind our decision making process. As investors demonstrate this phenomena, they end up harboring a greater concern of acting differently and lose focus of the risks they bear. The predominant difference on this occasion as compared with the two previous market bubbles (2000/2008) is the Federal Reserve’s role as an agent encouraging such reckless group-think.-- 720 Global Courage

In this issue:

Phisix 8,100: A Story of 10 of the 15 Biggest Market Cap Heavyweights and the Combustion of the Global Risk ON Moment

-Massive Interventions at the Short End of Philippine Treasury Markets Repulsed!

-The Coming Surprise from the Sharp Flattening of the Yield Curve

-The Global Risk ON Moment as Financial Markets Diverge from Economies; The Incredible China Stock Market Bubble Goes Berserk!

-Bubble Risks Spreads into Mainstream Thinking

-Phisix 8,100: A Story Of 10 of the 15 Biggest Market Cap Heavyweights
A) Inequality of Returns
B) Inequality of Valuations via PERs

-Record Phisix and Market Internal Divergences Reveals More Signs of Index Rigging

Phisix 8,100: A Story of 10 of the 15 Biggest Market Cap Heavyweights and the Combustion of the Global Risk ON Moment

Massive Interventions at the Short End of Philippine Treasury Markets Repulsed!

While everyone seems fixated on record Phisix 8,100, a tremendous earthshaking activity shook the Philippine treasury markets last week which mainstream or the consensus seems to have entirely missed out.

I have been saying here that the Philippine treasury have represented a tightly held or controlled market by the government and their agents the banking system.

To the point that they have been tightly controlled, I have long expected dramatic interventions to occur given the incipient signs of funding pressures and of the sustained and accelerated flattening of the yield curve since late last year.



April 7 Tuesday, my long held suspicion became a reality.

Faceless treasury bulls launched a broad based orchestrated strike against the bears to massively pull down yields of practically all of the short term yields—from 1 month to 2 years.

The scale of the price or yield change has been so intense where one can infer such phenomenon as a high sigma or a fat tail event! Yields have crashed by 97 bps for 1 month bills, 60 bps for 3 months, 75 bps for 1 year and 65 bps for 2 years!

There had been minor changes at the long end.

Such actions appear directed at fomenting a steepening of the yield curve and to project an image of easing of funding pressures.

Yet here are some reasons why I believe the tail event intervention took place.


First, the growth trend of banking loans continues to slump!   

February’s banking data from the BSP marked the sixth consecutive decline in the banking loans to the general economy (left) which peaked last July 2014. 

The growth rate of system wide banking loans has decelerated to December 2013 levels.

It’s a wonder, has activities in the trade sector picked up in 1Q 2015?

Wholesale and retail lending growth rate continues to plunge (right); they have now descended to January 2014 levels.

If loan conditions to the very popular sector have been retrenching then how will inventory restocking and retail spending be financed? Will consumers yank savings out of their pockets, jars or bank savings accounts? Or will they expand the use of bank credit? 

But bank credit has severely been limited to the few with access to the formal banking system? Besides growth in consumer loans appear to be plateauing. The thrust of consumer loans appear to have been funneled into auto loans which has been surging at a spectacular clip.

As an aside, has the surge in auto loans been due to the uber effect and other online taxi apps?

On the other hand, has the slump OFWs growth rate of remittances suddenly reversed and zoomed? Or has income growth been magnified to offset the decline in credit activities? But where will income growth come from?

Has the decline in loans to the trade industry also reflect on the surplus inventories racked up during 4Q 2014?

If loan conditions to the trade sector serve as indication of its health condition, then what does slumping credit activities mean…a growth revival or a sustained deepening slack?

As I will repeat here, the government can arbitrarily create numbers which they think would necessitate to paint whatever scenario they intend to exhibit for political purposes. But those numbers will not put food on the table or will not be representative of real economic developments.


Second, while the BSP noted that February domestic liquidity data produced an M3 rebound to 7.7% and a month on month gain of 1.4%, statistical inflation eased once again to 2.4% year on year last March.

On a month on month basis, BSP’s statistical inflation relapsed to negative .1%—DEFLATION!!! CPI deflation for the second time in six months (see right chart from tradingeconomics.com)!!

Given the continued weakness in banking loan growth, has the M3 performance of February represented a dead cat’s bounce?

I posted Austrian economist Frank Shostak’s explanation of the relationship between money supply, prices and economic activity to punctuate such development[1]: (bold mine)
While increases in the money supply result in a monetary surplus, a fall in the money supply for a given level of economic activity leads to a monetary deficit.

Individuals still demand the same amount of services from the medium of exchange. To accommodate this they will start selling goods, thus pushing their prices down.

At lower prices the demand for the services of the medium of exchange declines and this in turn works toward the elimination of the monetary deficit.

A change in liquidity, or the monetary surplus, can also take place in response to changes in economic activity and changes in prices.
Has record upon record Phisix been representative of the transition process towards the elimination of the residual ‘monetary surplus’ from the previous 30+% money supply growth through the asset pricing mechanism, while simultaneously signifying the emergence of declining in economic activity that eventually leads to a ‘monetary deficit’? 

In short, has current intertwined dynamics of money supply, prices, and economic activities been a manifestation of a major inflection point?

Besides hasn’t it been that the BSP chief remains transfixed with the risks of ‘deflation’ as revealed via his various recent speeches? So could the interventions at the Philippine treasury been the handiwork of the BSP?

If so, then whom has the BSP been attempting to bailout? Hmmm.

I thought that such interventions would hold on for awhile. Apparently my expectations would be frustrated.

The interventions seemed to have speedily been unwound. 

Friday, Treasury bears mounted a much profound counterstrike than the offensive earlier launched by the bulls.

The powerful counterattack has instead sent short term rates to milestone highs!!! The reversal comes with the exception of 6 month bills.

Yields of 1 and 3 month bills skyrocketed by an astounding 125 bps and 82 bps! Yields of 1 and 2 year treasuries also vaulted by an equally dazzling 134 bps and 73 bps!

Yields of the aforementioned treasuries have all cleared through the taper tantrum levels in May 2013! 


The intended effect of the intervention has been to force up or widen the spread of the yield curve as shown by the 10 and 20 year minus 6 months (right). 

However the unintended consequence had been a fantastic collapse in 10 and 20 year minus 1 year spreads! If we include the 1 and 3 months into the equation, the dramatic flattening would have been accentuated and widespread!

The yield disparity between the 10 and 20 year and 2 year has likewise flatten but at a tempered pace.

At the end of the day, the intervention resulted to what seems an anomaly. The unwinding of the intervention had missed out yield spread between 6 month and 10 and 20 years, though generally short term spreads against 10 and 20 year have all narrowed, with 1 year, 1 month and 3 months in what seems as a collapse mode.

The Coming Surprise from the Sharp Flattening of the Yield Curve

Stock market bulls, particularly the index manipulators, seem to have an enormous problem. 

They have been fiercely trying to prop up the index to show that the Philippine economy has been impregnable from risks whether internal or external.

However, actions at the bond markets which have been dominated by establishment financial institutions seem to have, behind the scenes, been vehemently pushing back. There are 18 accredited PDS Treasury (PDST) fixing banks responsible for domestic bond market transactions

In short, Philippine treasuries and domestic stocks continue to walk on opposite directions. Considering that the diametric flow from these financial assets will have influence to the real economy, eventually one of which will be proven wrong.

Yet those milestone highs of short term rates have most likely represented symptoms of intensifying short term funding pressures.

The accelerated flattening of the yield curve have also likely most evinced symptoms of liquidity tightening as a result from developing balance sheet impairments, presently and most likely being shielded through accounting flimflam. The declining banking loan growth trend appears to manifest such dynamics in motion.

Nevertheless magnified demand for short term funding seems as being reflected on the soaring yields of short term treasuries.

Also the flattening of the yield curve signifies as an “excellent indicator of a possible recession”.

The yield curve according to the New York Fed[2], “significantly outperforms other financial and macroeconomic indicators in predicting recessions two to six quarters ahead.”

So while the government can churn out whatever statistics to broadcast what they intend the public to see, yet if the current hastening pace of the yield curve flattening continues, then the bulls will get a surprise of their lifetime.

To extend the quote of Austrian economist Frank Shostak from the same post who warned, (bold mine)
The effect of previously rising liquidity can continue to overshadow the effect of currently falling liquidity for some period of time. Hence the peak in the stock market emerges once declining liquidity starts to dominate the scene.
Rings a bell?

The Global Risk ON Moment as Financial Markets Diverge from Economies; The Incredible China Stock Market Bubble Goes Berserk!

Now back to the record Phisix

In context, it’s not just the Phisix, rather the world has been witnessing a renewed risk ON moment.

Numerous national benchmarks have recently reached various record or milestone highs. 


Hong Kong’s Hang Seng has spearheaded this week’s Asian stock market ramp. The Hang Seng index has been up by an astounding 7.9%, as Chinese mainlanders have reportedly been stampeding to bid up share prices not only of Chinese benchmarks, but likewise of stocks in Hong Kong.

Chinese stocks as measured by the Shanghai index also soared by 4.4%!

Yet valuations of Chinese stocks would make Philippine stocks “cheap” by comparison!

Chinese technology stocks reportedly posted PERs of 220 from reported profits to dwarf the US equivalent, the 1997-2000 US dotcom, where PERs had been priced at 156!!! The Nasdaq version of the Chinese stocks, the ChiNext, a benchmark which comprises a basket of technology and other small and medium scale businesses has an average PER of a fantastic 100 for member firms!!![3]

The broad based buying which has reported to include housewives and uneducated traders has even massively pumped Macau’s casino stocks which soared by 10% or more this week. Macau’s casinos stocks has surged even as March earnings continue with its horrific collapse!

Analyst from Deutsche Bank adds a comment on the deepening absurd valuations of Chinese stocks[4]
Bubble watchers point out median earnings multiples for Chinese technology stocks are twice US peer valuations at their dot.com peak. More worrying perhaps is a health-goods-from-deer-antlers producer on 70 times, the seamless underwear manufacturer on 90 times or those school uniform and ketchup makers on 330 times!
And more signs of insane levels of Chinese stocks; the median company forward PER for Shanghai has been at 30x and 39x for Shenzhen! 

To add, in Shenzhen, half of stocks have a forward PE above 50 while 18% of stocks have a forward PE above 100(analyst estimates)! In Shanghai, over a third of stocks have a forward PE above 50 (analyst estimates) while a tenth of stocks have a forward PE above 100!

Philippine index managers must be frothing over the prospects of China’s celestial valuation levels!

The government sponsored stock market mania has been attracting retail participants like a bee swarming over a beehive. 

Based on my compilation of data from the China Securities Depository and Clearing Corporation Limited (CSDC), there have been 4.3 million new accounts over the past 3 weeks, and 8.725 million neophyte punters from the start of the year. This year to date number is about to surpass the 9.028 million new accounts for the entire 2014!

In addition, the pace of which Chinese stocks has been drawing new participants seem to almost match the momentum of the growth rate of the Shanghai bubble which peaked in October 2007. The Chinese stock market bubble then inflated by about 5x before imploding. The ensuing bubble bust erased 66% of the gains from the peak! 

At 4,034, the Shanghai index has still been off by 31% from the October 2007 pinnacle. This is not to suggest that Shanghai index will reach the said levels.

But even with the deluge of enrollments on stocks, equity assets only account for 20% of financial assets of Chinese households compared with cash and bank deposits at 45% based on Charles Schwab survey released last January according to a report Bloomberg.

It would be a mistake to extrapolate that underexposure by Chinese population on stocks would equate to a free lunch for a stock market bubble. As 2007 and its ramification shows, people gravitate to stocks until a certain point where the levels of stocks and or the level credit exposure would weigh on bubble for it to implode on its own weight. Of course government policies like tightening can serve as a prick to any bubble.

Yet I believe that this represents the last straw which the Chinese government has been desperately clinging to. What they have done has been to replace one bubble after another.

The Chinese government seems to be hoping that the stock market boom may provide the economy an alternative of finance. They must be hoping that equity may replace credit as a source of financing for credit trouble firms, thus the stock market frantic pump matched by an avalanche of IPOs.

In addition, rising stocks could have been seen by the Chinese government as having the “wealth effect” enough to ameliorate the downturn in the property sector, spur consumer spending and create the impression that the Chinese economy has been recovering.

Little have they learned from their recent experience that the same credit bubble on the property sector has only incited for a huge imbalances. Huge imbalances that has to be paid for, which has been the reason for the recent downturn in the economy.

Yet once the Chinese stock market bubble crash, such will only aggravate and accelerate the ongoing downswing in the property bubble. 

The lesson is: Two wrongs don’t make a right.


Asia’s magnificent gains have actually been overshadowed by those in Europe’s, where the latter’s advances have made China’s Shanghai index year to date advance of 24.72% look only like a median. 

Week on Week, a big segment of European stocks basking from the ECBs QE has inflated by 3% or more. Year to date, gains of many European stocks has ranged from 18% to over 25%.

Curiously the Institute of International Finance, a trade association of global finance and banking institutions reckoned that the current market sanguinity has hardly been matched by the economic indicators.

They point out that Emerging Market (EM) coincident indicators fell to 1.8% in Q1, the “slowest quarterly growth rate since early 2009 and continues the slowdown of last year when growth fell to 3.6%q/q, saar in Q4 from 4.4% in Q3.”[5]

They also say that except for financial markets, overall growth trend has been disappointing, “trade data declined sharply across regions, industrial production was mixed but generally weak, and business sentiment took a big turn for the worse.”

In addition Manufacturing PMIs has fallen below the 50-threshold mark which means contraction. This has largely been due to “Sharp declines in Brazil, Russia, Turkey and Indonesia contributed to this decline and more than half of the countries we track now have PMI readings below 50”, with an exception of a supposed few bright spot which includes India and CEE (central or eastern Europe) economies.

Finally, the global stock market boom has been propagating euphoria to the extremes. Now publications have been wildly celebrating record breaking stocks. See the pictures here.

I am reminded by the late legendary investor, Sir John Templeton who once said
Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.
Those pictures seem portentous of things to come.

Bubble Risks Spreads into Mainstream Thinking

By the way, there seems to be growing recognition from the mainstream of the heightened risks of a global crisis.

JP Morgan’s Jaime Dimon predicts a coming crisis

Pimco’s former founder and now Allianz chief economic adviser, Mohamed El Erian likewise sees rampant bubbles everywhere from central bank policies which is why he says he is mostly into cash.

Finally, US President Obama’s major crony, the former value investor Warren Buffett, denies a US stock market bubble

Yet paradoxically his flagship Berkshire Hathaway has been amassing cash at the fastest rate since 2003. Also Mr. Buffett recently warned in his recent annual report that “Indeed, borrowed money has no place in the investor’s tool kit: Anything can happen anytime in markets.” Curiously the US stock market has been afflicted by the immense absorption of borrowed money! Yet no bubble! Another progressive thinking characterized by "Do as I say, not as I do".

Phisix 8,100: A Story Of 10 of the 15 Biggest Market Cap Heavyweights
A) Inequality of Returns

At the local front, there’s more than meets the eye for the record-after-record Phisix.

Record Phisix 8,100 has really been more about headline number than representative of the whole market sentiment. 

To emphasize, headline numbers have usually been intended exhibit form or symbolism rather than of substance.

Let us go through the numbers.

Based on market cap weighted Phisix, the year to date return this week has been 12.4%.

Of the top 15 issues, 10 or two third has delivered 12.4% or more. 

Of the next 15 issues, only 5 or one third generated 12.4% or more.

Overall, one half of the issues delivered gains at par or more than 12.4% while the other half produced lower than the benchmark returns.

Let us dive deeper into the details.

Of the half that outperformed, the average returns had been a stunning 20.3%! Of the half that underperformed the average returns had been at a shocking only 1.96%! So the average returns for the 30 composite members of Phisix registered only 11.124% compared to the 12.4% market weighted returns

The huge disparity (20.3% vis-à-vis 1.96%) represents a sign of growing concentration of trading activities!!!

And for the 10 outperforming issues from the upper 15 bracket, returns have been at an average of 18.43%! The average returns of the top 15 Phisix members had been at 13.6% relative to the latter half of 8.7%.

This means that Phisix 8,100 has mostly been a story of the 10 issues from the 15 biggest market cap heavyweights!!! The other 5 issues at the lower half of the Phisix have merely played a complimentary role.

And for those with the impression that blindly investing in any of the Phisix members would generate returns equal to the Phisix will be up for a big disappointment; that’s because as the above shows “inequality” dominates the distribution of returns!

Despite 8,100, the rising tide has apparently not lifted all boats.

B) Inequality of Valuations via PERs

The distribution of Price Earning Ratios (PER) confirms on the huge tilt in trading activities and price actions towards the most popular issues.

The average PERs of the upper strata of the Phisix has been at a whopping 31.06 as against a still expensive 21.94 of the latter half!

The average PERs of the outperformers from the overall index has been at a staggering 30.59 as against the underperformers at which has been at a dear 22.44. (note I omitted in my calculation Bloombery due to negative PERs so denominator has been reduced to 14 for the latter half)

The average PERs of the 10 top performers from the upper level of the Phisix has been at a colossal 32.9! The distribution of which are as follows: 3 issues with PERs of 20+ (AGI, GTCAP and SM), 3 with 30+(SMPH, ICT and AC) and 4 with PERs at an incredible 45-50 (JGS, ALI, URC, JFC)!

Record Phisix and Market Internal Divergences Reveals More Signs of Index Rigging

Nonetheless, Phisix 8,100 appears to have been divergent from actions of general market activities.

For this year, there has only been one week where advancers took complete command of the stock markets. 

In general, of the 14 weeks through April 10, 2015, declining issues dominated 64% (9/14) weekly trading. 

From this perspective, record Phisix 8,100 implies less support from the broader market than has been conveyed by the headline numbers.

Also such signify as signs that the general market has been looking for a correction from which have been written off by the index managers.

Additionally, the serial record after record stocks has been accompanied by a material decline in peso volume trade (left). 

This week’s the average daily Peso volume has ranked the fourth lowest of the year considering that Friday Php 12.873 billion has helped pumped up this week’s numbers.

As you would notice, record highs have been accompanied by falling volume—this seems hardly signs of broad based optimism.

And I would suspect that the bulk of the daily peso volume may have been cornered by these elite issues.

If only I have time to get the total volume of the 10 issues relative to the overall market from 2014 to date. This would have likely shown the share weights and depict of the influence of these issues on the PSE.

And foreign buying has hardly been a factor in driving the serial record highs.

Based on my tabulation of daily PSE quotes, foreign net buying has been diminishing; specifically January Php 23.6 billion, February Php 16.4 billion and March Php 7.5 billion. As of April 10, net foreign buying posted only Php 940.4 million. In total, net foreign buying accounted for Php 48.444 billion, or a paltry 7.13% of the total peso volume of Php 679.263 billion. 

Also a big portion of foreign buying seems to signify special block sales than from regular board transactions.

So record 8,100 Phisix has been a story of mostly local investors pumping up select issues for the seeming purpose of symbolism.

Working alone gives me little time to delve or pry into more detailed data such as issues above or below 50-day moving averages or number of issues at record highs versus number of issues in bear markets or peso volume per issue relative to total volume. This perspective would surely have added depth to this insight.

Bottom line: Market breadth generally in favor of declining issues, peso volume on a seeming downtrend, measly foreign buying, the deepening concentration of trade activities towards popular issues comprising 10 of the 15 largest market cap which has been supported by increasingly grotesque valuations via PERs on mostly the same issues implies that Phisix 8,100 hardly seems about broad based optimism but about the consolidation of trading and price pumping activities from actions of the index managers.

And such increasing compression of trading activities towards popular issues underscores, matches, and partially affirms my earlier point that the popular perception about sustained generalized phenomenal earnings has been outrageously overrated or exaggerated and instead represents the representative bias, the survivorship bias and the fallacy of composition than from real developments.

Three of the four trading days this week had minor “marking the close” which again reveals of the rampancy of stock market rigging.

So while in the past the bullmarket had almost been a purely market phenomenon, today, record after record Phisix has accounted for the mutation of the Philippine stock market into brazen market manipulation.




[2] Arturo Estrella and Frederic S. Mishkin, The Yield Curve as a Predictor of U.S. Recessions Federal Reserve Bank of New York June 1996

[4] James MacKintosh This is *really* nuts. When’s the crash? FT Alphaville April 10, 2015

Monday, December 01, 2014

Phisix: Mean Reversion Prevails: Philippine 3Q Growth Rate Falls to 5.3%!

Fools and their money are soon parted, but economists are always with us. They are there to encourage the next generation of fools. That’s the way the world works.—Gary North

In this issue

Phisix: Mean Reversion Prevails: Philippine 3Q Growth Rate Falls to 5.3%!
-Financial Instability Warnings from the ADB (Again), the Germany’s Bundesbank, and Singapore’s MAS
-ECB’s Draghi on Bubbles: Who Cares? QE Must Prevail; World Billionaires Dump Stocks, Hoard Cash
-Bipolar World: Record Stocks, Crashing Commodities
-Collapsing Oil Prices Signify the Periphery-to-the-Core Bubble Dynamics
-Slowing EM and DM Growth Compounds on China’s $6.8 Trillion ‘Wasted’ Investments
-Reversion to the Mean: Philippine 3Q Growth Rate Falls to 5.3%!
-1 Household Growth Remains on a Downtrend
-2 Investments Picked UP; Construction and Finance as 3Q Leaders
-3 Why Statistical Growth Will Decline: Surging Credit Intensity!


Phisix: Mean Reversion Prevails: Philippine 3Q Growth Rate Falls to 5.3%!

We do live in interesting times.

As each day passes, the world appears to be headed in opposite directions.

But this isn’t what you will glean from the consensus literature.

Financial Instability Warnings from the ADB (Again), the Germany’s Bundesbank, and Singapore’s MAS

While most developed economy stock markets continue with their seeming implacable push to the upside, international political authorities seem to be ringing the alarm bells with increasing alacrity.

Last week, I pointed[1] to UK’s PM David Cameron’s open letter stating that red warning lights of global financial instability have been flashing once again. I also noted that current conditions seem to be ripe for a ‘debt trap’ as the general manager of the central bank of central banks, the Bank for International Settlements, Mr. Jaime Caruana warned in a recent speech. Meanwhile on a localized dimension, the central bank of Australia, Reserve Bank of Australia, headed by Governor Glen Stevens expressed concerns over a housing boom-bust cycle. And in a more subtle way, the US Federal Reserve Open Market Committee (FOMC), while maintaining optimism at current developments indicated disquietude over a build-up of “asset valuation pressures” as well as a “loosening of underwriting standards” in the debt markets at their minutes.

Understand that in today’s deeply connected world, problems in one country can be transmitted to become a contagion.

For this week, like her peers and for the second time this year the Asian Development Bank (ADB) has issued sanitized words of caution in the press release of their publication of November’s edition of the Asian Bond Monitor. The ADB aired their concerns over sustained expansion of foreign denominated bonds by Emerging Asian nations where from January to September, the amount of bonds issued have already surpassed the entire 2013. This robust bond growth comes in the face of what ADB sees as rising risks, particularly “a faster-than-expected US interest rate hike and a stronger dollar” aside from “other challenges from tightening liquidity in the region’s corporate bond markets as Basel III requirements deter banks from holding large bond inventories, and a weaker property market in the People’s Republic of China (PRC), given many property developers there are highly indebted.”[2] Also amidst the current risk climate, the ADB mentioned of the record holdings of foreign holdings of Indonesian bonds. The ADB, to my construal, probably sees this as a potential source for financial market disturbance.

[As a side note, capital flight, which frequently has been used by the consensus as scapegoat and pinpointed as the cause of instability, only represents a symptom of an underlying disease—domestic bubbles which has been magnified by international carry trades]

Germany’s central bank, Bundesbank, likewise counsels of the amplifying risks from low interest rates in fueling “risky behavior”. Bundesbank Vice President Claudia Buch at the bank’s annual presentation of financial stability report was quoted by the Bloomberg (bold mine)[3]: “Signs of an excessive search for yield are particularly evident in the corporate-bond and syndicated-loan markets…The longer the period of low interest rates lasts, the greater the risk of exaggerations in certain market segments.”

Well, massive economic maladjustments and severe mispricing risks from zero bound have indeed become mainstream. They reinforce what I have been observed and have been pounding on the table here for quite sometime.

On a domestic perspective, Singapore’s central bank, the Monetary Authority of Singapore (MAS), this week conveyed of serious misgivings over the ballooning of the financial system’s debt, viz. corporate debt and household debt. According to the MAS, Singapore’s debt-to-gdp ratio has inflated to 78% in 2Q 2014 as against only 52% in 2Q 2008. Household debt-to-income has also bulged from 1.9x in 2008 to 2.3x in 2Q 2014.

The MAS is concerned that “an interest rate hike combined with an earnings shock could increase the number of financially distressed corporates and households,” and likewise frets over the still-elevated property prices and increasing cross-border banking exposure[4].

In short, the MAS validates on my theory of the politics of monetary easing policies: I recognize the problem of addiction but a withdrawal syndrome would even be more cataclysmic.

Yet the MAS can do something. They can choose to short circuit the credit cycle by nipping the bubble in the bud or they can keep inflating it until it snaps. Either way the bubble will burst.

The difference is who will do the job? Will the markets forcibly do it? Or will they do it? It’s a choice between current pain and a much larger and more agonizing unraveling overtime. That’s because the longer the wait, the bigger, the malinvestments.

It’s obvious that the MAS dreads the implosion of unproductive debt as revealed by their statement “an interest rate hike combined with an earnings shock could increase the number of financially distressed corporates and households”, yet paradoxically they claim that their banking system has been sound. Perhaps. Relatively. But inconsistency stands between official concerns and the declared resiliency of the system.

If the banking system has been truly sound, then “shocks” from financially distressed firms—from interest rate hikes or from allowing interest rates to be priced at market levels—can fully be absorbed by the banks without much turmoil. The test to real stability is the ability for the institutions to take on volatility. The proof of the pudding is in the eating.

Yet an ounce of prevention is better than a pound of cure. After all, banks took the gambit, so they should be held responsible for their portfolios. Taxpayers should play no role in the bank’s activities. For political purposes, the MAS may take shelter the depositors but should hold equity and bondholders liable. So why the sustained subsidies via zero bound?

Subsidies which has reduced if not eliminated the Profit and Loss discipline for such institutions based on the moral hazard only encourages risk taking. [Personally there should be no privatize gains and socialize losses]

Yet the MAS haven’t been alone with this ploy. Almost all central banks, including the Philippine BSP, will claim using a wall of statistics or stress tests of the “stability or soundness” of their banking system. However they have been mostly averse to raise interest rates.

Aside from the questionable stability, could it be that the recalcitrance towards altering or weaning away from zero bound policies has been the issue of chronic addiction to the privileges from political redistribution in favor political agents and their cronies?

ECB’s Draghi on Bubbles: Who Cares? QE Must Prevail; World Billionaires Dump Stocks, Hoard Cash

Such addiction to zero bound can be seen via the ECB’s declared policies.

The risks of bubbles will not stand in the way of the ECB determined to combust inflation.

The Reuters quotes ECB President Mario Draghi[5]: If we see that a certain real estate market or corporate bond market, for example, shows signs of having a bubble, would this be enough to justify a different monetary policy where we would raise interest rates, when the monetary policy stance based on considerations of price stability would not justify that? The answer is 'No'," Draghi said in Helsinki.

Stoking inflation is promoting price stability? Reducing purchasing power of consumers through arbitrary confiscation and redistribution to the elites produces wealth?

It is not clear if Mr. Draghi was emotionally responding to the Bundesbank’s warnings. The Bundesbank and Mr. Draghi have reportedly not been in good terms. The Bundesbank continues to oppose the ECB. ECB member and Bundesbank president Jens Weidmann early this week reemphasized that “monetary policy alone can’t create growth and must be based on higher productivity and policy reforms”[6]. And that was followed by Bundesbank VP Ms. Buch warnings. Mr. Weidmann also rejected clamors of stimulus for Germany after Mr. Draghi’s blasts against bubble warnings.

Yet bubbles equate not only to price fluctuations on asset prices but to financial system instability as well.

This simply means to ignore the risk from bubbles is to tolerate or even promote financial and economic dislocations. The ECB seems dogged determined “do whatever it takes” to proceed with QE, even if it means running the Eurozone economies to the ground. What a sign of desperation!!!

Yet these warnings have also a private sector component.

A global capital markets (lobby?) group, the International Capital Market Association (ICMA) composed of a broad range of capital market interests, e.g. investment banks, regional banks, asset managers et.al., predicted of a meltdown in global credit markets which they see as “inevitable” and where the only question is the timing and the catalyst for it.

Reasons? Regulations has resulted to a massive concentration of bond ownership and to far less liquidity for the global bond markets or a “combination of larger bond markets, with fewer, larger investment firms, and a weakened capacity for bank intermediation,” “largely fuelled by a wave of cheap central bank money and the unquenchable thirst for yield”…“all make for the perfect storm”[7].

Finally, while developed economy stock and bond markets have been at record or milestone highs, smart money appears to be seeking safehaven.

A poll covering veteran investors from United States, Europe, Britain and Japan have reportedly been dumping stocks, adding to bonds and importantly raising cash.

And a more interesting story has been of the actions of the world’s growing numbers of ultra-wealthy investors or new ultra high net worth (UHNW) with $30 million and above in assets. These financial elites have reportedly been not only shunning stocks and curiously even bonds! They are hoarding record cash due to perceived mounting uncertainties.

The CNBC quotes a UBS Wealth Management study[8] (bold mine): Nonetheless, Simon Smiles, chief investment officer at UBS Wealth Management, warned of the risks the wealthy few face. "This report finds that UHNW individuals hold nearly 25 percent -- an extremely high proportion – of their net worth in cash," he said in Wednesday's accompanying press release. Fearing that their millions are being eroded away with inflation, Smiles also said that holding government bonds from Germany and the U.S. is no longer safe. The return outlook for these fixed income assets is highly and negatively "asymmetric," he added.

This shows two things. First, that smart money has been playing increasingly defensive, and second, zero bound has made cash a worthy alternative.

Nonetheless has warning signals from political authorities been echoing the concerns of the financial elites? Or has this been the other way around?

Bipolar World: Record Stocks, Crashing Commodities

Bipolarity has enveloped global financial markets.

On the one hand we are seeing record stocks and bonds mostly in developed economies.

Financial Viagra has sent US stock market benchmarks to record highs, specifically the Dow Industrials, S&P, biotechs, transports, S&P Mid-caps…or at near record highs, e.g. Nasdaq, Russell 2000. German Dax also on a stunning vertical climb since the bottom of Mid-October closed the week at near the June record highs. Japan’s Nikkei has been fast approaching the May 2007 highs. The astounding 7.89% meltup in the Chinese Shanghai Composite index this week lifts the benchmark to a 3 year high. India’s sensex continues to post record after record highs.

Even more amazing has been the record low bond yields across Europe as seen by the 10 year yields of Germany, Italy, Austria, Belgium, Netherlands, Finland, France, Ireland Spain and Portugal.

Much of these low yields have been due to bond speculators whom have been front running the ECB. The latter has broadcasted their intention to include sovereign bonds as part of their asset purchasing program. So the ECB, functioning as the greater fool, will be buying grotesquely overpriced bonds from a few financial market participants. This would serve as a wonderful example of transferring of risks from private bond holders to the taxpayers. It would be a fantastic Christmas gift to the financial elites courtesy of Europe’s and most especially Germany’s taxpayers.

Remember much of Europe has been stagnating, which is why the ECB asset purchasing programs came into existence in the first place. To demonstrate the absurdity of bond pricing, 10 year yields of crisis afflicted Eurozone peripheries as Spain (1.9%) and Italy (2.03%), as of Friday, have even been vastly LOWER than the US (2.194%)! Italy, for instance, still has been stuck in a recession, as unemployment rates continues to ascend to record levels! Also non-performing loans of Italy, Spain and Portugal have been at its highest watermark since the millennium or even relative to the height of Europe’s financial crisis. Yet the region’s government debt (aside from world’s overall debt) has been one of the highest in the world. In short, bond speculators have totally been dismissed credit risks!

It’s simply incredible to see how financial markets have been entirely deformed from central bank policies.

Yet there has been a dark side, which has been ignored by the mainstream or has been rationalized as positive.

Yields of US 10 year treasuries are presently at levels when October ‘correction’ occurred. Ironically stocks remain on record highs. What has transformed such correlations?

Friday, as OPEC the deadlock persisted, oil prices crashed! West Texas Crude collapsed 10.18% and Europe’s Brent dived 9.77%! Friday’s meltdown compounded on the losses of oil prices for the week, specifically at 13.98% and 12.95% respectively!

Oil producing Norway’s all share index missed the region’s risk ON boat and instead got walloped by 7.13% this week.

GCC states, whose markets were closed during oil collapse, have already been drubbed due to prior oil price weakness. For the week, Saudi’s Tadawul plummeted 3.75%, UAE’s DFM sank 1.5%, Qatar’s Qatar Exchange plunged 3.72%, and Oman’s Muscat fell 2%.

This week, gold also got hit by 2.97%, silver by 6.46% and copper by 5.6% to its lowest level since 2010. The Bloomberg Commodity Index which incorporates 22 raw materials dropped as much as 2.3% to 114.8341, last Friday, the lowest since July 2009.

Some emerging market currencies had been clobbered. For the week, the Russian ruble dived 7.3% to a record low, Brazil’s real and the Mexican peso had been trounced by a similar 1.9%, the latter has been at the lowest level since 2012. The Colombian peso got hit by 3.2% so did Columbian stocks (the COLCAP index) which plummeted by 4.56%. In Asia, the Malaysian ringgit fell .83% to a five year low.

Over at the bond markets, Russian 10 year yields reportedly jumped 43 bps to 10.53%; civil war torn Ukraine 10 year equivalent soared 297 bps to a record 19.43% which according to Bloomberg was “the worst week on record”, while Greek 10 year yields surged 42 bps to defy the Eurozone’s record low rates[9].

Actions by the ECB-PBOC-BoJ have apparently failed to reflate global markets. To the contrary, market crashes are once again a real time phenomenon.

Collapsing Oil Prices Signify the Periphery-to-the-Core Bubble Dynamics

The entrenched consensus view has been inflation is good while deflation is bad. So they support central activism to promote inflation.

Now that oil prices have crashed, the consensus seems to have rediscovered that deflation hasn’t been bad after all. They have recently chimed to claim that low oil prices are good for the consumers. It’s a splendid example of cognitive dissonance or grasping at anything to justify the unsustainable speculative boom.

While indeed low prices should be good for the consumers, they didn’t explain why oil prices have been collapsing which now stands at 2009 levels in the first place. Has this been because of slowing demand (which ironically means diminishing consumption)? If so, why has there been a decline in consumption (which contradicts the premise)?

Or has this been because of excessive supply? Or a combination of both? Or has a meltdown in oil prices been a symptom of something else—deflating bubbles?

Consumption is derived mainly from income (which includes profits, rents, dividends, interests, and wages) from production and from savings, such that if the productive activities have been depressed or savings has been drained, then this will reflect on consumption that will also get manifested in the demand for oil.

OPEC has cut its forecast for both global economic growth and demand for oil.

Why? Obviously because economies like Japan-Eurozone and China have been floundering out of overcapacity, too much debt, or have been hobbled by balance sheet problems for political authorities to require and implement central bank interventions. So how will low oil prices improve demand?

Bluntly put, how can low oil prices overwhelm staggering burdens from a debt overload acquired to finance the previous booms?

This is not to deny of the marginal benefits that may accrue to the consumers, and even to the financial conditions of the non-energy industry but for the consensus to expect a consumption boom from low oil prices should signify a fairy tale.

Yet what is the impact to the energy producing sectors and nations how will they affect the world?

For oil producing states, as I have previously noted[10]: economies of these oil producing nations will see a sharp economic slowdown, the ensuing economic downturn will bring to the limelight public and private debt problems thereby magnifying credit risks (domestic and international), a downshift in the economy would mean growing fiscal deficits that will be reflected on their respective currencies where the former will be financed and the latter defended by the draining of foreign exchange reserves or from external borrowing and importantly prolonged low oil prices and expanded fiscal deficits would eventually extrapolate to increased incidences of Arab Springs or political turmoil.

Political turmoil should be expected for oil dependent welfare based political system which constitutes most oil producing nations.

The Zero Hedge estimates that Oil and gas exporting EMs account for 26% of total EM GDP and 21% of external bonds[11].

Well that’s not all. As pointed out above ex-oil commodities have also been slammed.

So to blame the problem on an OPEC stalemate would be misguided—OPEC doesn’t have control over other (non-oil) commodities. If the current predicament has been solely an oil dynamic then there would be no crashes in other commodities.

So the economic turbulence will extend to both commodity producers and exporters not limited to oil.

This suggests of a serious downturn in terms of EMs economic performance, as well as, the attendant prospective surge in credit risks for EM.

EM have been exposed to ballooning foreign currency debt where in the first nine months issuance posted $942 billion or just $162 billion off from last year’s $1 trillion mark according to Bloomberg[12]. Emerging Asia accounted for 84% of debt sold. And as previously explained, EM’s other fault lines has been in the concentration of Asset Under Management (AUM) and of their similar strategies as well as record Cross Border Lending based on BIS data[13].

Yet this represents part of the periphery to core feedback loop process between Emerging Markets and Developed Markets which I previously explained[14]:
If EM growth affects DM, so will there be a causal chain loop, or DM growth will also have an impact to EM growth!

Doing so would extrapolate to a contagion process, as the slowdown feedback mechanism in both EM and DM will self-reinforce the path towards a global recession!
So with slowing economic growth along with debt burdens surfacing, those record global foreign exchange reserves will start coming down. And the decline in foreign reserves will translate to diminishing global liquidity that should pressure respective EM currencies as well as to imply monetary tightening of EM economies.

Thus the 2013 Taper Tantrum opened the Pandora’s box of debt deflation (bubble bust) where EM got the first taste via market turmoil and slowing economy of what is to come. This has been transmitted to DM via economic growth which has boomeranged on EM economies dependent on oil exports…first.

The contagion process will intensify and accelerate.

As a side note, I also pointed out earlier that it would be interesting to see how the collapsing oil prices will affect the US credit markets given that the energy sector’s share of high-yield bond markets has been estimated at 17.4%. How much of energy borrowings will mutate into bad debts? Will the troubles in the energy market spread to others?

Slowing EM and DM Growth Compounds on China’s $6.8 Trillion ‘Wasted’ Investments

With world economic growth to decelerate further, despite the interim rebounds from “stimulus”, just how for instance will China be able to cope up with her debt problems?

A study recently revealed how the Chinese government supposedly “wasted” $ 6.8 trillion of investments from 2009-2013 which accounts for “nearly half the total invested in the Chinese economy”.[15] Those wasted investments allegedly “went directly into industries such as steel and automobile production that received the most support from the government”. The authors say that “ultra-loose monetary policy, little or no oversight over government investment plans and distorted incentive structures for officials were largely to blame for the waste”. The author also blames corruption where Communist Party officials with direct responsibility for boosting growth through investments “stole” a significant portion of China's post-crisis stimulus.

In the recent years, much of these investments have been has been “funneled into real estate projects” where industries grew to feed them as steel, glass and cement, have been awash with overcapacity

One can argue with the top line (statistical) numbers but this would be irrelevant.

Yet the above account should serve as a great example of how zero bound compounded by government interventions misallocates resources. It’s not just losses from government spending but more importantly how a chain link of industries grew behind the boom. All these firms, which originally looked like productive enterprises during the boom, transformed into excess capacity when boom metastasized into a bust.

Now much of China’s “wasted” or “idle” resources are considered as sunk costs or consumed capital—because these have no economic use. Those resources would have to be significantly repriced for these to be reallocated to where consumer preferences are—that’s if markets are allowed to do the adjustments. 

But spent capital on these resources had been financed, and they have financed by debt—from banks, shadow banks, domestic and external debt. So much of these debts would have to also be repriced for them to reflect on consumed capital also via the market process.

Such repricing process has already been ongoing. Rating companies have been reported to scoff at the PBOC’s rate cut since they would do little to prevent “worsening record debt downgrades”. A Bloomberg reports says that Chinese credit assessors slashed grades on 83 firms this year, already matching the record number in all of 2013”, and that in the first half of 2015 a huge 2.1 trillion yuan ($342 billion) would have to be raised to pay off creditors[16].

As I have been saying even at zero rates, if any entity would not have enough money to pay for the principal, then there would be a debt problem. Zero bound isn’t free lunch.

More importantly, this shows of the predicament of the Chinese political economy which comes from both external and internal developments.

In terms of internal factors, the real economy having been faced with excess capacity and onerous debt means that only a few resources have been left unencumbered and free for investments. Consequent to these has been that the Middle Kingdom’s real economic growth is headed for a meaningful decline, regardless of what government statistics say.

True the Chinese economy may benefit from lower commodity prices. But much of what the Chinese imported in the past accounted for as feedstock for bubble industries. Chinese gargantuan appetite for commodities has been previously predicated on a debt financed property boom, with the property sector deflating, demand for commodities has evidently followed suit.

So current collapsing commodity prices are likely more evidence of a deepening Chinese economic slowdown.

On the external side, with EM and DM bound for a slowdown, which likewise means pressure on Chinese exports, what will the Chinese government do? Will they devalue? But how about their massive foreign debt exposures?

Also about 63% of China’s overseas investments of $53 billion in 2013 have been in metals and energy sectors[17]. Crashing commodity prices may translate to more “wasted” investments.

For now the Chinese government has adapted the US Fed, Bank of Japan and the ECB’s formula for growth. Engineer a stock market boom by easing, (this week, the PBoC recently refrained from sterilizing by refusing repo sales) and by further promises to ease to generate the “wealth effect”—intended to support prices as discussed last week, to provide additional avenues for financial access for debt constrained firms to tap, and importantly to disguise her intensifying credit problems.

Actions in the Chinese stocks provide evidence that modern day stock markets are NOT driven by economic growth but by hope provided by political authorities through promises and accommodation of credit, liquidity provision and confidence.

Reversion to the Mean: Philippine 3Q Growth Rate Falls to 5.3%!

In contradiction to the deeply embedded popular opinion, Philippine statistical growth in 3Q 2014 decelerated to 5.3%.

This is interesting for me, because virtually NOT ONE from the mainstream experts as surveyed by Bloomberg[18] has seen this coming. Experts seem to have taken only one side of the trade. When everyone crowds into a single side of a small boat what happens? The boat capsizes. Such are the stuff which crises are made of.

Let me repeat a favorite quote from Harvard’s Ms. Carmen Reinhart and Mr. Kenneth Rogoff[19] (bold mine)
The essence of the this-time-is-different syndrome is simple. It is rooted in the firmly held belief that financial crisis is something that happens to other people in other countries at other times; crises do not happen here and now to us. We are doing things better, we are smarter, we have learned from past mistakes. The old rules of valuation no longer apply. The current boom, unlike the many previous booms that preceded catastrophic collapses (even in our country), is built on sound fundamentals, structural reforms, technological innovation, and good policy. Or so the story goes …
What the mainstream have overlooked is what I have warned about last June—based on two theories: reversion to the mean and the business cycle[20].

Let me add to my act as the unpopular spoiler of this boom… 
If the laws of the regression/reversion to the mean will be followed (even without economic interpolation) then statistical economic growth will most likely surprise the mainstream NEGATIVELY as economic growth are south bound in the coming one or two years, with probable interim bounces.

Another way to look at this is if history does rhyme, then it means a big, big, big disappointment for the consensus bearing exceptionally high expectations.

Oh yes, the inflation (stagflation) story alone represents a huge headwind to real economic growth. Compounded with a bubble cycle, these twin lethal forces would fluidly dovetail with the reversion to the mean.
I noted that 1Q GDP 5.6% wasn’t anomaly but rather a statistical phenomenon known as reversion to the mean. Statisticians should know this. 

Back then, experts rationalized the 1Q slowdown to Typhoon Yolanda. I pushed back.

I also chronicled how statistical outliers particularly large growth numbers eventually fell back significantly to establish historical averages. 



I showed the past chart here. The above is the updated chart which includes the 3Q 2014 data. 3Q GDP seems fast approaching the mean. Trading Economics says that the average has been at 5.02%. Yet this doesn’t suggest that once the statistical GDP hits the “mean” it stops and rises again. What this implies is that statistical GDP will likely fall to levels where the historical average may be derived. This means statistical GDP at much lower than 5%.

This doesn’t suggest too that statistical GDP will fall in a straight line. Since hardly any trend goes in a straight line there will bounces as the chart above demonstrates. History does share some invaluable insights.

So I have also previously noted that the 2Q GDP of 6.4% represented such a bounce.

So why can’t there be a mean reversion? Because of the illusion of “this time is different”? Because statistical gazing mainstream experts say so? Because economics is about “Vox populi, Vox dei”? Because politicians and their favorite business people declare so? Because credit booms have vanquished basic economic laws for euphoria to last forever?

It’s funny but mainstream experts expected strong growth from consumers suffering from vastly reduced purchasing power due to the 9 month 30+% money supply growth which led to a sharp rise even in statistical official inflation. They probably expected robust growth in the industry, which for them, should have translated to wage growth or at least more formal work that would have offset inflation pressures.

And perhaps because these lucky highly paid ivory tower experts don’t feel the brunt and angst of shrinking purchasing power in the same way the minimum wage earners and those employed in the informal sectors (which comprises about half of the labor force) does, they simply ignored the man on the streets. 

But the writing was clearly on the wall, surveys on self-rated poverty revealed such quandary for consumers. Libyan OFWs caught in the crossfire refused to return to their native land despite the boom due to “better chances of surviving”. In addition consumer price inflation had been elevated to a media and political sensation.

1 Household Growth Remains on a Downtrend


As measured by Household Final Consumption Expenditures (HFCE), resident household growth has been sharply decelerating since Q3 of 2013 or a year ago (left). That’s even before the 30% money growth fueled CPI surge in 1H 2014.

Declining growth rate of household consumption squares with the performance of retail trade (right). Retail trade has been in a slowdown since Q4 2013. 2Q-3Q posted marginal growth, but that’s after a big data revision in Q2. In general, this household measure of activity “Trade and repair of Motor Vehicles, Motor cycle, Personal and household goods” has been rangebound since Q2 2013.

From the household perspective, unless we see significant improvements, the current decline in household growth trend points to even more reduced statistical GDP overtime. In 3Q, household contributed to 68.3% of statistical GDP. There’s no Typhoon Yolanda to blame now and OFW remittances continue to grow strongly, so what’s been the hitch? Media blames it on government spending on construction which I say is a good thing.

And an even more troubling trend has been the divergence between household growth and the elaborate expansion plans by bubble industries. Such divergence will only lead to excess supply. Yet what makes them critical has been they have been funded by debt.

For now those expansions look very productive, wait until we see a reversal.

2 Investments Picked UP; Construction and Finance as 3Q Leaders

In my previous analysis of 2Q GDP I noted of the bizarre silence by the consensus in taking notice of the ‘contraction’ of investments. The NSCB even described it as “plunge”. I realized that for as long as the top line number met the mainstream expectations this wouldn’t be an issue.

Well it is important for me, why?
Because investments drive growth. Business spending represents future income, earnings, demand, consumption, jobs, wages, innovation, dividends, capital gains or what we call as growth.

This also means that if the downturn in investments represents an emergent trend, then current rebound may just be temporary and would hardly account for as resumption to “high trajectory growth”.



In 3Q, key investment areas of construction, capital formation and durable goods broadly bounced. So this could be good news. If investments continue to recover then statistical GDP should bounce too. Question is where has investments been directed at?

A look at what I call the bubble sectors reveals that growth rates of trade, real estate and hotel output has steeply declined. It’s only the financial sector that has been markedly up. Additionally while I don’t consider manufacturing as generally bubble, there are sectors that have piggybacked on bubble industries. Yet manufacturing output has likewise sharply declined.


Construction activities from private sector rebounded strongly (left). This marks the third consecutive quarter of increase, with the 3Q providing the statistical 11.9% growth heft (right). Yet it’s a question whether the 3Q surge in private construction can be sustained. 

For the real estate sector, both growth output plus banking loan growth seem to have slowed. This implies that the construction boom may have been due to private sector activities on government infrastructure or Public Private Partnership (PPP).

If I am right where construction boom has been in infrastructure projects then this explains the decline in public construction.

Yet for the consensus which sees government spending as growth omits the fact where government funds come from. While government spending translates to statistical growth, in the real economy extraction of funds from productive agents for social spending consumption activities whether welfare, infrastructure or military et.al., reduces growth. You cannot multiply wealth by dividing it. So the pullback in government spending should be positive for the real economy overtime.

Meanwhile the average banking system’s loan growth to the construction sector while still at an astounding 39.14% in 3Q has been decelerating compared to 41.05% in 2Q and 46.64% in 1Q. The declining but still extraordinarily high loan credit growth suggest of a slowdown but still strong pace of output construction for 4Q.

The GDP numbers by industry (right) only reveals a small part of the 3Q GDP story. Basically among the major contributors (share of sector contribution to GDP; fourth column from the right), 3Q GDP has been a story of construction and finance. Both sectors have been on the upside while the rest has turned lower. Yet both have been funded by strong credit activities. The share of bubble sectors (real estate, trade, hotel, construction and finance) to GDP has grown to 42.97% compared 42.22% last year. Again such is based on the outperformance of these two sectors which more than negated the declines of the others.

For financial intermediation, where has the activities been directed to? The stock market? Has the repeated index management via the ‘afternoon delight’ and ‘marking the close’ been part of the banking loan to statistical ‘growth’ output?

As a side note, I also find it pretty much peculiar for banking loans to the fishing industry soar ever since the second semester of 2013 where the average loan growth for 15 months (ending September 2014) has been 31.98% while for the credit growth for the first 9 months of the year has averaged 40.13%. Yet the fishing industry’s output for the past 4 consecutive quarters has been NEGATIVE (from Q413 to Q314 in %: -4.4, -3.1, -1.6 and -.4, respectively). Why the sustained pace of incredible increase in the banking sector’s loan portfolio to the fishing industry? Where has all the money been going? Why hasn’t there been a surge in NPLs here?

3 Why Statistical Growth Will Decline: Surging Credit Intensity!


And finally here is the main reason why mainstream’s growth expectations for sustained 6%-8% growth rate will be frustrated. The answer lies in the evolving spectacular disproportionate growth rates between banking loans and the statistical GDP

I call this the diminishing returns of debt, while others call this ‘credit intensity’. The ratio’s usefulness is simple: how much credit growth has been used to produce every peso growth in output.

For instance, it took 3.68% growth in bank credit to generate 1% of statistical growth 3Q 2014 (see right window). The bubble sectors reveal of the remarkable credit intensity which implies of the increasing degree of leverage used.

In other words, those numbers tell us that the Philippine formal economy has been gorging increasingly humungous amount of debts that has been generating declining output.

Yet remember, given the low penetration level of the populace on the banking system, this implies two things: One) bank debt per capita, not applied to general populace but to the loan clients of the banking industry, should be exceedingly high and or, Two) there has been a concentration of leverage mainly to a few supply side companies.

Since debt represents the frontloading of spending, having too much debt or overleveraging is in and on itself a financial burden for the simple reason that cash flows from the future are uncertain. So if there is no margin for errors to deal with uncertainty, having too much debt can lead to insolvency. 

And unless offset by income growth, overleveraging reduces the ability to spend or consume in the future. This applies whether debt/loan is commercial or consumer.

So current Philippine debt dynamics not only underwrites the lower than expected future economic growth, it also reveals of the extent of credit risks that has been building beneath the surface. This despite the wall of statistics erected by the government to ease the concerns of credit risk. In short, the sustained buildup of debt makes the Philippines vulnerable to a credit shock or credit event.

Yet just look at the opposite routes taken by banking loan growth and the statistical economic growth (left)

The lift off in banking sector loans in Q2 2013 seems almost like a hockey stick. Yet the ascent in bank loan growth comes as statistical GDP has been declining. Simply said debt goes up, growth goes down.

Soaring banking loans in Q2 2013 almost mirrors the money supply growth rate which rocketed on the 3Q of 2014.



However M3 and banking loan growth parted ways after in 2Q 2014. M3’s growth has collapsed even as the banking sector’s credit growth continues to swell at a fantastic rate. 

Why hasn’t the fabulous bank credit growth rate been translated to M3? What happened to all those fresh spending power from credit expansion? What happened to ‘aggregate demand’? Has it been because much of the borrowed money today has been merely been used to pay off existing liabilities or debt in debt out?

You see, to ignore risk is to become blind to risk. Blindness leads to erroneous decisions.







[6] Wall Street Real Times Economic Blog, ECB’s Weidmann: Monetary Policy Alone Can’t Create Growth November 24, 2014

[7] Financial Times Traders’ credit market concerns grow November 25, 2014


[9] Doug Noland The King of Dollar Pegs Credit Bubble Bulletin PrudentBear.com November 29, 2014








[17] Wall Street Journal China's Global Mining Play Is Failing to Pan Out September 15, 2014


[19] Carmen Reinhart and Kenneth Rogoff From Financial Crash to Debt Crisis Harvard University